As filed with the Securities and Exchange Commission on October 8, 1997
Registration No. 333-15937
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
POST-EFFECTIVE AMENDMENT NO. 2 TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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MONTEREY HOMES CORPORATION
(Exact name of registrant as specified in its charter)
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Maryland _______1531__________ 86-0611231
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
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6613 North Scottsdale Road, Suite 200
Scottsdale, Arizona 85250
(602) 998-8700
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
----------------
Larry W. Seay
Vice President and Chief Financial Officer
Monterey Homes Corporation
6613 North Scottsdale Road, Suite 200
Scottsdale, Arizona 85250
(602) 998-8700
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
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Copies to:
Steven D. Pidgeon
Snell & Wilmer L.L.P.
One Arizona Center
400 E. Van Buren
Phoenix, Arizona 85004-0001
(602) 382-6000
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Approximate date of commencement of proposed sale to public: From time to time
after this Registration Statement becomes effective.
If the securities being registered on this Form are to be offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [_]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 8, 1997
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256,345 SHARES
MONTEREY HOMES CORPORATION
COMMON STOCK
This Prospectus relates to the offering from time to time by Monterey
Homes Corporation, a Maryland corporation (the "Company"), of up to 256,345
shares, (the "Shares") of its common stock, par value $.01 per share (the
"Common Stock"), upon the exercise of 212,398 warrants (the "Warrants"). In
connection with the merger (the "Merger"), effective December 31, 1996, of
Monterey Homes Construction II, Inc., an Arizona corporation ("MHC II"), and
Monterey Homes Arizona II, Inc., an Arizona corporation ("MHA II" and
collectively with MHC II, the "Monterey Entities" or "Monterey"), with and into
Homeplex Mortgage Investments Corporation, a Maryland corporation ("Homeplex"),
with Homeplex surviving and changing its name to Monterey Homes Corporation,
warrants of Monterey that were previously outstanding were converted into the
Warrants. See "The Merger." The number of Shares obtainable upon exercise of the
Warrants are subject to increase or decrease under certain antidilution
provisions. The Warrants became exercisable on the effective date of the Merger
and will continue to be exercisable at any time on or prior to October 15, 2001
or such earlier date upon the liquidation, dissolution or winding up of the
Company. Each Warrant may be exercised for the purchase of 1.2069 shares of
Common Stock at an exercise price of $4.0634 per Warrant. See"The Merger - The
Merger Consideration" and "Description of Capital Stock."
The Company will not receive any of the proceeds from the exercise of
the Warrants. William W. Cleverly and Steven J. Hilton (the "Monterey
Stockholders") will receive proceeds of $863,058 if all of the Company Warrants
(defined herein to include the Warrants) are exercised. See "Prospectus Summary"
and "The Merger The Merger Consideration." The cost of registering the Shares is
being borne by the Company.
The Company's Common Stock is traded on the NYSE under the symbol
"MTH." On September 29, 1997, the closing sale price for the Common Stock as
reported by the NYSE was $13 3/4 per share. See "Price of Common
Stock and Dividend Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OFFERED HEREBY IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
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ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is October __, 1997.
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TABLE OF CONTENTS
Page
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Available Information..........................................................1
Forward-Looking Statements.....................................................1
Prospectus Summary.............................................................2
Risk Factors...................................................................4
Use of Proceeds................................................................8
The Merger.....................................................................9
The Legacy Acquisition........................................................14
Unaudited Pro Forma Consolidated Financial Information........................17
Selected Financial and Operating Data.........................................23
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................23
Business of the Company.......................................................34
Properties....................................................................47
Description of Capital Stock..................................................47
Price of Common Stock and Dividend Policy.....................................51
Legal Matters.................................................................52
Experts .....................................................................52
Index to Consolidated Financial Statements...................................F-1
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") Post-Effective Amendment No. 2 to a Registration Statement on Form
S-4 (herein, together with all amendments and exhibits thereto, referred to as
the "Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the securities offered hereby. This
Prospectus, which forms a part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement and the exhibits
and schedules thereto, certain parts of which are omitted in accordance with the
rules and regulations of the Commission. For further information with respect to
the Company and securities offered hereby, reference is made to the Registration
Statement.
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements, information statements,
and other information with the Commission. The Registration Statement and the
exhibits thereto, and the reports, proxy statements, information statements, and
other information, filed by the Company with the Commission pursuant to the
Exchange Act may be inspected and copied at the public reference facilities of
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street N.W., Washington,
D.C. 20549 and at the Commission's regional offices at Seven World Trade Center,
13th Floor, New York, New York 10048, and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates, and can also be
obtained electronically through the Commission's Electronic Data Gathering,
Analysis and Retrieval system at the Commission's Web Site (http://www.sec.gov).
The Company's Common Stock is listed on the NYSE and copies of the Registration
Statement and the exhibits thereto, and of such reports, proxy statements,
information statements, and other information, can also be inspected at the
offices of the NYSE at 20 Broad Street, 17th Floor, New York, New York 10005.
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements. Additional written
or oral forward-looking statements may be made by the Company from time to time
in filings with the Commission or otherwise. The words "believe," "expect,"
"anticipate," and "project," and similar expressions identify forward-looking
statements, which speak only as of the date the statement was made. Such
forward-looking statements are within the meaning of that term in Section 27A of
the Securities Act and Section 21E of the Exchange Act. Such statements may
include, but not be limited to, projections of revenues, income or loss, home
sales, housing permits, backlog, inventory, capital expenditures, plans for
acquisitions, plans for future operations, financing needs or plans, the impact
of inflation, and plans relating to products or services of the Company, as well
as assumptions relating to the foregoing. The Company undertakes no obligation
to publicly update or revise any forward-looking statements, whether as a result
of new information, future events, or otherwise.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Potential risks
and uncertainties include such factors as the strength and competitive pricing
environment of the single-family housing market, changes in the availability and
pricing of residential mortgages, changes in the availability and pricing of
real estate in the markets in which the Company operates, demand for and
acceptance of the Company's products, the success of planned marketing and
promotional campaigns, and the ability of the Company and acquisition candidates
to successfully integrate their operations. Future events and actual results
could differ materially from those set forth in, contemplated by, or underlying
the forward-looking statements. Statements in this Prospectus, including under
the headings "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" below, describe additional
factors, among others, that could contribute to or cause such differences.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information appearing elsewhere in
this Prospectus.
The Company
The Company designs, builds and sells single family homes in Arizona
and Texas. The Company builds move-up and semi-custom, luxury homes in the
Phoenix and Tucson, Arizona metropolitan areas, and entry-level and move-up
homes in the Dallas/Fort Worth, Austin and Houston, Texas metropolitan areas.
The Company has undergone significant growth in recent periods and is pursuing a
strategy of diversifying its product mix and the
geographic scope of its operations.
The Company was originally formed as a real estate investment trust
("REIT"), investing in mortgage-related assets and, to a lesser extent, selected
real estate loans. On December 31, 1996, the Company acquired by merger (the
"Merger") the homebuilding operations of various entities operating under the
Monterey Homes name ("Monterey"), and essentially discontinued the Company's
mortgage-related operations. Monterey has been building homes in Arizona for
over 10 years, specializing in semi-custom, luxury homes and move-up homes. In
connection with the acquisition by the Company, the management of Monterey
assumed effective control of the Company.
As part of a strategy to diversify its operations, on July 1, 1997, the
Company acquired (the "Legacy Acquisition") the homebuilding operations of
several entities operating under the name Legacy Homes ("Legacy"). Legacy has
been operating in the Texas market since 1988, and designs, builds and sells
entry-level and move-up homes. In connection with the acquisition, John R.
Landon, the founder and Chief Executive Officer of the Legacy Homes entities,
joined senior management and the Board of Directors of the Company, and
continues to oversee the operations of Legacy Homes.
During 1996, the Company recorded pro forma revenues (including net
income of Monterey) of $87.8 million and pro forma pre-tax income (including net
income of Monterey) of $6.9 million on 307 home closings. During the same
period, Legacy closed 623 homes generating revenues of $85.1 million and pre-tax
income of $8.8 million. For the six months ended June 30, 1997, the Company
generated revenues of $38.6 million, and pre-tax income of $2.5 million, and
Legacy recorded revenues of $40.0 million, and pre-tax income of $5.6 million.
The historical financial results of these companies may not be indicative of
their combined results of operations in the future.
As a result of losses from operations by the Company during its
operation as a REIT, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $50 million at June 30, 1997.
Accordingly, the Company currently pays limited income taxes.
The Company is a Maryland corporation headquartered in Scottsdale,
Arizona. The Company's principal executive offices are located at 6613 North
Scottsdale Road, Suite 200, Scottsdale, Arizona 85250, and its telephone
number is (602) 998-8700.
In connection with the Merger, the Company effected, and all share
information herein reflects, a three-for-one reverse stock split.
For additional information concerning the Company, see "Unaudited Pro
Forma Consolidated Financial Information," "Business of the Company,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the financial statements included herein.
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The Offering
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Securities Offered....................... 256,345 Shares of Common Stock, including the Contingent Stock
issuable upon exercise of the Warrants, subject to adjustment under
certain antidilution provisions under the document governing the
Warrants. The Shares are equal to approximately 4.88% of the
outstanding Common Stock of the Company, after giving effect to the
exercise of the Warrants but not to the exercise or conversion of
any other stock options, convertible securities, or warrants.
Transfer Restrictions.................... Certain transfer restrictions apply to the ownership of Common
Stock of the Company and will also apply to the ownership of the
Warrants. See "The Merger - Amendment to the Articles of
Incorporation" and "The Merger - NOL Carryforward" for a
description of such restrictions.
Warrants Outstanding..................... 212,398 Warrants are outstanding.
Common Stock Outstanding................. As of September 29, 1997, 5,253,481 shares of Common Stock were
outstanding.
Use of Proceeds.......................... There will be no proceeds to the Company from the sale of the
Shares upon exercise of the Warrants. Upon the exercise of the
Warrants, the Company will remit the exercise price of $4.0634 per
Warrant (subject to adjustment), or aggregate gross proceeds of
approximately $863,058 if all of the Warrants are exercised, to the
Monterey Stockholders. See "Use of Proceeds" and "The Merger."
Description of Warrants:
Expiration of Warrants................... October 15, 2001 or such earlier date upon the liquidation,
dissolution, or winding up of the Company.
Exercise................................. Each Warrant entitles the holder thereof to purchase 1.2069 shares
of Common Stock for $4.0634 (subject to adjustment as described
herein). The Warrants may be exercised at any time on or prior to
the Expiration Date.
Adjustments.............................. The number of shares of Common Stock for which a Warrant is
exercisable and the purchase price thereof are subject to
adjustment from time to time upon the occurrence of certain events,
including, among other things, certain issuances of stock, options,
or other securities, liquidating distributions, and certain
subdivisions, combinations, and reclassifications of the Common
Stock. A Warrant does not entitle the holder thereof to receive any
dividends paid on Common Stock.
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For additional information concerning the Warrants, see "The Merger - The Merger
Consideration" and "Description of Capital Stock." For additional information
concerning the Shares, see "Description of Capital Stock."
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RISK FACTORS
The Company's future operating results and financial condition are
dependent on the Company's ability to successfully design, develop, construct
and sell homes that satisfy dynamic customer demand patterns. Inherent in this
process are a number of factors that the Company must successfully manage in
order to achieve favorable future operating results and financial condition. In
addition, the price of the Company's Common Stock and the Warrants could be
affected not only by such operating and financial conditions, but also by other
factors. Potential risks and uncertainties that could affect the Company's
future operating results and financial condition and the performance of its
Common Stock and the Warrants include, without limitation, the factors discussed
below.
Possible Volatility of Securities Prices. The market price of the
Company's Common Stock and Warrants could be subject to significant fluctuations
in response to certain factors, such as, among others, variations in anticipated
or actual results of operations of the Company or other companies in the
homebuilding industry, earnings estimates by analysts and changes in those
estimates, changes in conditions affecting the economy generally, and general
trends in the industry, as well as other factors unrelated to the Company's
operating results.
Restrictions on Transfer; Influence by Principal Stockholders. In order
to preserve maximum utility of certain net operating loss carryforwards, the
Company's charter, among other transfer limitations, precludes (i) any person
from transferring shares of Common Stock or rights to acquire Common Stock if
the effect thereof would be to make any person or group an owner of 4.9% or more
of the outstanding shares of Common Stock, or (ii) an increase in the ownership
position of any person or group that already owns 4.9% or more of such
outstanding shares. As a result of the foregoing factors, Messrs. Cleverly,
Hilton and Landon should have working control of the Company for the foreseeable
future. One or more of the foregoing factors could delay or prevent a future
change of control of the Company, which could depress the price of the Common
Stock. In addition, such restrictions will also apply to the Warrants. Ownership
of the Warrants will be aggregated with ownership of shares of Common Stock
otherwise held by a holder of Warrants to determine if the allowable ownership
percentage is exceeded. See "The Merger - Amendment to Articles of
Incorporation" and "The Merger - NOL Carryforward."
Homebuilding Industry Factors. The homebuilding industry is cyclical
and is significantly affected by changes in national and local economic and
other conditions, such as employment levels, availability of financing, interest
rates, consumer confidence and housing demand. Although the Company believes
that certain of its customers (particularly purchasers of luxury homes) are
somewhat less price sensitive than generally is the case for other homebuilders,
such uncertainties could adversely affect the Company's performance. In
addition, homebuilders are subject to various risks, many of which are outside
the control of the homebuilders, including delays in construction schedules,
cost overruns, changes in government regulation, increases in real estate taxes
and other local government fees, and availability and cost of land, materials,
and labor. Although the principal raw materials used in the homebuilding
industry generally are available from a variety of sources, such materials are
subject to periodic price fluctuations. There can be no assurance that the
occurrence of any of the foregoing will not have a material adverse effect on
the Company.
Customer demand for new housing also impacts the homebuilding industry.
Real estate analysts predict that new home sales in the Phoenix metropolitan
area may slow significantly during 1997 and 1998 and that such sales in the
Tucson metropolitan area will remain relatively flat in 1997. In the Dallas/Fort
Worth, Houston and Austin metropolitan areas, predictions are that new home
sales will remain relatively flat or show a moderate increase for 1997. Any
slowing in new home sales in any of the principal markets in which the Company
operates could have a material adverse affect on the Company's business and
operating results.
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The homebuilding industry is subject to the potential for significant
variability and fluctuations in real estate values, as evidenced by the changes
in real estate values in recent years in Arizona and Texas. Although the Company
believes that its projects are currently reflected on its balance sheet at
appropriate values, no assurance can be given that write-downs of some or all of
the Company's projects will not occur if market conditions deteriorate, or that
such write-downs will not be material in amount.
The success of the Company's operations is dependent upon its ability
to maintain an appropriate inventory of lots and projects under development. As
a result of significant sales of lots at projects in the Scottsdale metropolitan
area in recent periods, the Company is currently seeking to acquire additional
land for development in this area. The inability of the Company to acquire land
to replenish its existing inventory as quickly as needed or at competitive
prices could adversely affect the Company's results of operations and financial
condition.
Fluctuations in Operating Results. Monterey and Legacy historically
have experienced, and in the future the Company expects to continue to
experience, variability in home sales and net earnings on a quarterly basis.
Factors expected to contribute to this variability include, among others (i) the
timing of home closings and land sales, (ii) the Company's ability to continue
to acquire additional land or options to acquire additional land on acceptable
terms, (iii) the condition of the real estate market and the general economy in
Arizona and Texas and in other areas into which the Company may expand its
operations, (iv) the cyclical nature of the homebuilding industry and changes in
prevailing interest rates and the availability of mortgage financing, (v) costs
or shortages of materials and labor, and (vi) delays in construction schedules
due to strikes, adverse weather conditions, acts of God or the availability of
subcontractors or governmental restrictions. As a result of such variability,
Monterey's and the Legacy's historical financial performance may not be a
meaningful indicator of the Company's future results.
Interest Rates and Mortgage Financing. The Company believes that
certain of its customers (particularly purchasers of luxury homes) have been
somewhat less sensitive to interest rates than many homebuyers. However, many
purchasers of the Company's homes finance their acquisition through third-party
lenders providing mortgage financing. In general, housing demand is adversely
affected by increases in interest rates and housing costs and the unavailability
of mortgage financing. If mortgage interest rates increase and the ability of
prospective buyers to finance home purchases is consequently adversely affected,
the Company's home sales, gross margins, and net income may be adversely
impacted and such adverse impact may be material. In any event, the Company's
homebuilding activities are dependent upon the availability and costs of
mortgage financing for buyers of homes owned by potential customers so those
customers ("move-up buyers") can sell their homes and purchase a home from the
Company. Any limitations or restrictions on the availability of such financing
could adversely affect the Company's home sales. Furthermore, changes in federal
income tax laws may affect demand for new homes. From time to time, proposals
have been publicly discussed to limit mortgage interest deductions and to
eliminate or limit tax-free rollover treatment provided under current law where
the proceeds of the sale of a principal residence are reinvested in a new
principal residence. Enactment of such proposals may have an adverse effect on
the homebuilding industry in general, and on demand for the Company's products
in particular. No prediction can be made whether any such proposals will be
enacted and, if enacted, the particular form such laws would take.
Competition. The homebuilding industry is highly competitive and
fragmented. Homebuilders compete for desirable properties, financing, raw
materials, and skilled labor. The Company competes for residential home sales
with other developers and individual resales of existing homes. The Company's
competitors include large homebuilding companies, some of which have greater
financial resources than the Company, and smaller homebuilders, who may have
lower costs than the Company. Competition is expected to continue and become
more intense and there may be new entrants in the markets in which the Company
currently operates. Further, the Company will face a variety of competitors in
other new markets it may enter in the future.
Lack of Geographic Diversification; Limited Product Diversification.
The Company recently concluded an acquisition that has expanded its geographic
and product markets (see "The Legacy Acquisition"). However, the Company's
operations remain geographically limited primarily to the Phoenix and Tucson
metropolitan areas in the
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state of Arizona and the Dallas/Fort Worth, Austin, and Houston metropolitan
areas in the state of Texas. In addition, the Company currently operates in two
primary market segments in Arizona: the semi-custom, luxury market and the
move-up buyer market; and in two primary market segments in Texas: the move-up
buyer market and the entry-level home market. Failure to be more geographically
or economically diversified by product line in its various markets could have an
adverse impact on the Company if the homebuilding markets in Arizona or Texas
should decline. See "Risk Factors - Homebuilding Industry Factors."
Additional Financing; Limitations. The homebuilding industry is capital
intensive and requires significant up-front expenditures to acquire land and
begin development. Accordingly, the Company incurs substantial indebtedness to
finance its homebuilding activities. At December 31, 1996 and June 30, 1997, the
Company's debt totaled approximately $30.5 million and $23.8 million,
respectively, without regard to the Legacy Acquisition. After giving pro forma
effect to the Legacy Acquisition, the Company's total debt was $41.1 million at
June 30, 1997. The Company may be required to seek additional capital in the
form of equity or debt financing from a variety of potential sources, including
bank financing and/or securities offerings. In addition, lenders are
increasingly requiring developers to invest significant amounts of equity in a
project both in connection with origination of new loans as well as the
extension of existing loans. If the Company is not successful in obtaining
sufficient capital to fund its planned capital and other expenditures, new
projects planned or begun may be delayed or abandoned. Any such delay or
abandonment could result in a reduction in home sales and may adversely affect
the Company's operating results. There can be no assurance that additional debt
or equity financing will be available in the future or on terms acceptable to
the Company.
In addition, the amount and types of indebtedness that the Company can
incur is limited by the terms and conditions of its current indebtedness. The
Company must comply with numerous operating and financial maintenance covenants
and there can be no assurance that the Company will be able to maintain
compliance with such financial and other covenants. Failure to comply with such
covenants would result in a default and resulting cross defaults under the
Company's other indebtedness, and could result in acceleration of all such
indebtedness. Any such acceleration would have a material adverse affect on the
Company.
Government Regulations; Environmental Considerations. The Company is
subject to local, state, and federal statutes and rules regulating certain
developmental matters, as well as building and site design. In addition, the
Company is subject to various fees and charges of governmental authorities
designed to defray the cost of providing certain governmental services and
improvements. The Company may be subject to additional costs and delays or may
be precluded entirely from building projects because of "no growth" or "slow
growth" initiatives, building permit allocation ordinances, building
moratoriums, or similar government regulations that could be imposed in the
future due to health, safety, welfare, or environmental concerns. The Company
must also obtain licenses, permits, and approvals from government agencies to
engage in certain of its activities, the granting or receipt of which are beyond
the Company's control.
The Company and its competitors are subject to a variety of local,
state, and federal statutes, ordinances, rules, and regulations concerning the
protection of health and the environment. Environmental laws or permit
restrictions may result in project delays, may cause the Company to incur
substantial compliance and other costs, and may also prohibit or severely
restrict development in certain environmentally sensitive regions or areas. In
addition, environmental regulations can have an adverse impact on the
availability and price of certain raw materials such as lumber.
Recent Expansion and Future Expansion. The Company recently concluded a
significant acquisition in the Texas market (see "The Legacy Acquisition"), and
the Company may continue to consider expansion into other areas of the Sunbelt
states. The magnitude, timing and nature of any future acquisitions will depend
on a number of factors, including suitable acquisition candidates, the
negotiation of acceptable terms, the Company's financial capabilities, and
general economic and business conditions. Acquisitions by the Company may result
in the incurrence of additional debt and/or amortization of expenses related to
goodwill and intangible assets
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that could adversely affect the Company's profitability. Acquisitions could also
result in potentially dilutive issuances of the Company's equity securities.
However, because the issuance of equity securities in the near term could impair
the Company's use of its NOL carryforwards, it does not anticipate issuing any
of its equity securities for the foreseeable future in connection with
acquisitions. In addition, acquisitions involve numerous risks, including
difficulties in the assimilation of operations of the acquired company, the
diversion of management's attention from other business concerns, risks of
entering markets in which the Company has had no or only limited direct
experience and the potential loss of key employees of the acquired company.
There can be no assurance that the Company will be able to expand into new
markets on a profitable basis or that it can successfully manage its expansion
into Texas or any additional markets.
Dependence on Key Personnel. The Company's success is largely dependent
on the continuing services of certain key persons, including William W.
Cleverly, Steven J. Hilton and John R. Landon, and the ability of the Company to
attract new personnel required to continue the development of the Company. The
Company has entered into employment agreements with each of Messrs. Cleverly,
Hilton and Landon. A loss by the Company of the services of Messrs. Cleverly,
Hilton or Landon, or certain other key persons, could have a material adverse
effect on the Company.
Dependence on Subcontractors. The Company conducts its business only as
a general contractor in connection with the design, development and construction
of its communities. Virtually all architectural and construction work is
performed by subcontractors of the Company. As a consequence, the Company is
dependent upon the continued availability and satisfactory performance by
unaffiliated third-party subcontractors in designing and building its homes.
There is no assurance that there will be sufficient availability of such
subcontractors to the Company, and the lack of availability of subcontractors
could have a material adverse affect on the Company.
Mortgage Asset Considerations. As of December 31, 1996 and June 30,
1997, the Company's portfolio of residual interests had a net balance of
approximately $3,909,000 and $3,856,000, respectively. The Company sold selected
residual interests on July 31, 1997, and is considering the sale of additional
interests. The prevailing interest rates at the date of such sale may influence
the gain or loss recognized by the Company. The results of the Company's
operations will depend, in part, on the level of net cash flows generated by the
Company's mortgage assets. 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.
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 Risk. 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. Prepayment experience also may be affected by the geographic
location of the mortgage loan 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.
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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's 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). 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 from its mortgage assets. Conversely, decreases in short-term
interest rates decrease the interest cost on the variable rate mortgage
securities and, thus, tend to increase such net cash flows. 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 decrease in mortgage interest rates. 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 vice 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 from the
Company's mortgage assets.
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.
Inability to Predict Effects of Market Risks. Because none of the above
factors, including changes in prepayment rates, interest rates, expenses and
borrowing costs, are susceptible to accurate projection, the net cash flows
generated by the Company's mortgage assets cannot be predicted.
USE OF PROCEEDS
There will be no proceeds to the Company from the sale of the Shares
upon exercise of the Warrants. Upon the exercise of the Warrants and the
issuance of the Shares, the Company will remit the exercise price of $4.0634 per
Warrant, or aggregate gross proceeds of approximately $863,058 if all of the
Warrants are exercised, to the Monterey Stockholders. See "The Merger - The
Merger Consideration." The Monterey Stockholders may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act with
respect to the Shares.
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THE MERGER
The Company was initially formed to operate as a REIT, investing in
mortgage related assets and selected real estate loans. The Company suffered
significant losses several years ago and determined to try to acquire a home
builder that could utilize its cash balances and other assets, as well as take
advantage of its net operating loss carryforwards. On September 13, 1996, the
Company entered into an Agreement and Plan of Reorganization (the "Merger
Agreement"), by and among Homeplex Mortgage Investments Corporation ("Homeplex")
and Monterey Homes Arizona II, Inc. and Monterey Homes Consruction II, Inc.
(collectively, "Monterey"), and William W. Cleverly and Steven J. Hilton
(collectively, the "Monterey Stockholders"). On December 31, 1996, Homeplex and
Monterey were merged. As a result of the Merger, the Company's status as a REIT
was terminated and its prior operations essentially discontinued, the Company's
name was changed to Monterey Homes Corporation and its NYSE ticker symbol was
changed to MTH. In addition, a one-for-three reverse stock split of the
Company's issued and outstanding Common Stock was effected. The share
information contained herein reflects the one-for-three reverse stock split.
The Merger Consideration
Prior to the Merger, all of the outstanding common stock of Monterey
was owned by the Monterey Stockholders. As consideration for the Merger, the
Monterey Stockholders received 1,288,726 shares of Common Stock of the Company
(the "Exchange Shares"), such number being equal to (i) the book value of
Monterey on the effective date of the Merger ($2.5 million after certain
distributions) determined in accordance with generally accepted accounting
principles ("GAAP") consistent with the historical combined financial statements
of Monterey, but reflecting adjustments for certain costs and reserves agreed to
by the parties, multiplied by (ii) a factor of 3.0, and divided by (iii) the
fully diluted book value per share of Homeplex common stock on the effective
date of the Merger (after giving effect to outstanding stock options, whether
vested or not, which were dilutive to book value and after consideration of
amounts accrued for related dividend equivalent rights), determined in
accordance with GAAP consistent with the historical consolidated financial
statements of Homeplex.
Prior to the Merger, Monterey had issued and outstanding warrants to
purchase 133,334 shares of common stock of such companies (the "Monterey
Warrants") at an exercise price of $18.75 per share. The Monterey Warrants
represented approximately 16.5% of the fully diluted capitalization of Monterey
(809,259 shares). On the effective date of the Merger, the Monterey Warrants
were converted into the Company Warrants (which include the Warrants covered by
this Prospectus) based on a formula that would allow the Company Warrants to
purchase a number of shares of Common Stock of the Company determined by
multiplying 133,334 by the ratio of (i) the total number of Exchange Shares
issued in the Merger (as calculated above) divided by (ii) 809,259 (the "Warrant
Conversion Ratio"). The exercise price of the Company Warrants was adjusted by
dividing the exercise price of the Monterey Warrants immediately prior to the
Merger by the Warrant Conversion Ratio. In addition, the exercise price of the
Company Warrants was adjusted by a factor designed to compensate for certain
distributions made to the Monterey Stockholders prior to the Merger. Following
completion of audited financials for the year ended December 31, 1996, the
Company established the number of Company Warrants as 212,398. Each Warrant may
be exercised for the purchase of 1.2069 shares of Common Stock at an exercise
price of $4.0634 per Company Warrant or 250,000 shares, approximating 16.5% of
the Exchange Shares and Contingent Stock as discussed below.
Although all of the Exchange Shares were issued in the name of the
Monterey Stockholders, the Company will hold approximately 16.5%, or 212,398, of
the Exchange Shares issued in the names of the Monterey Stockholders for release
to holders of the Company Warrants upon exercise of the Company Warrants, and
the Company will remit the exercise price paid upon such exercises to the
Monterey Stockholders. Upon expiration of unexercised Company Warrants, the
Company will distribute the appropriate amount of Exchange Shares to the
Monterey Stockholders. The Monterey Stockholders are entitled to vote the
Exchange Shares issued in their names but allocated to the Company Warrants,
prior to the time the Company Warrants are exercised. Including the Exchange
Shares allocated to the Company Warrants, Mr. Cleverly owns 647,696 shares or
12.33% of the outstanding Common Stock of the
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Company and Mr. Hilton owns 644,363 shares or 12.27%. If all of the Company
Warrants were exercised, Mr. Cleverly would own 541,497 shares or 10.31% of the
outstanding Common Stock of the Company and Mr. Hilton would own 538,164 shares
or 10.25% of the outstanding Common Stock of the Company. These numbers exclude
the Employment Options and the Contingent Stock described below.
In addition to the Exchange Shares, the Company has reserved for
issuance 266,667 shares of common stock, subject to certain contingencies (the
"Contingent Stock"). Of such stock, approximately 16.5% (the "Contingent Warrant
Stock") or 43,947 shares are being reserved pending exercise of the Company
Warrants. When a Company Warrant is exercised, the holder will receive not only
the Exchange Shares into which the Company Warrant is exercisable, but also his
proportionate share of the Contingent Warrant Stock. The remaining approximately
83.5% of the original 266,667 shares of Contingent Stock are to be issued to the
Monterey Stockholders only if certain Common Stock average trading price
thresholds are reached at any time during the five years following the effective
date of the Merger as described below, provided that at the time of any such
issuance to a Monterey Stockholder, such Monterey Stockholder is still employed
with the Company. The average trading price thresholds and employment
restrictions will not apply to the Contingent Warrant Stock. The Contingent
Stock will be issued to the Monterey Stockholders as follows:
(i) if the closing price of the Common Stock on the NYSE (the
"Stock Price") averages $5.25 or more for twenty consecutive
trading days at any time during the five year period following
the effective date of the Merger, then 44,943 shares of the
Contingent Stock will be issued but only after the first
anniversary of such effective date;
(ii) if the Stock Price averages $7.50 or more for twenty
consecutive trading days at any time during the five year
period following the effective date of the Merger, then an
additional 88,888 shares of the Contingent Stock will be
issued but only after the second anniversary of such effective
date; and
(iii) if the Stock Price averages $10.50 or more for twenty
consecutive trading days at any time during the five year
period following the effective date of the Merger, then the
remaining 88,889 shares of the Contingent Stock will be issued
but only after the third anniversary of such effective
date.
As of September 5, 1997, each of the three thresholds described above
had been achieved. Therefore, on January 1, 1998 or as soon thereafter as is
practicable, 44,943 shares of Contingent Stock will be issued to the Monterey
Stockholders; on January 1, 1999 or as soon thereafter as is practicable, 88,888
shares will be issued to the Monterey Stockholders; and on January 1, 2000 or as
soon thereafter as is practicable, the remaining 88,889 shares will be issued to
the Monterey Stockholders, but in each case only if the Monterey Stockholders
remain employed with the Company at such times.
Monterey Stockholder Employment Agreements and Employment Options
In connection with the Merger, the Company and the Monterey
Stockholders executed employment agreements (the "Employment Agreements"), each
with a term ending on December 31, 2001 and providing for an initial base salary
of $200,000 per year (increasing by 5% of the prior year's base salary per
year), and an annual bonus for the first two years of the lesser of 4% of the
pre-tax consolidated net income of the Company or $200,000. Thereafter, the
bonus percentage payout of consolidated net income would be determined by the
then-existing compensation committee of the board of directors of the Company,
provided that in no event will the bonus payable in any year exceed $200,000 for
each Monterey Stockholder. Under the Employment Agreements, the Monterey
Stockholders will serve as co-Chief Executive Officers and will also serve as
Chairman and President. If a Monterey Stockholder voluntarily terminates his
employment or is discharged for "Cause," the Company will have no obligation to
pay him any further salary or bonus. If a Monterey Stockholder is terminated
during the term of the Employment Agreement without "Cause" or as a result of
his death or permanent disability, the Company will be obligated to pay such
Monterey Stockholder (a) his then current annual salary through the term of the
Employment Agreement if
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terminated without "Cause," or for six months after termination in the event of
death or disability, plus (b) a pro rated bonus. "Cause" is defined to mean only
an act or acts of dishonesty by a Monterey Stockholder constituting a felony and
resulting or intended to result directly or indirectly in substantial personal
gain or enrichment at the expense of the Company.
The Employment Agreements contain non-compete provisions that restrict
the Monterey Stockholders until December 31, 2001, from, except in connection
with the performance of their duties under the Employment Agreements, (i)
engaging in the homebuilding business, (ii) recruiting, hiring, or discussing
employment with any person who is, or within the past six months was, an
employee of the Company, (iii) soliciting any customer or supplier to
discontinue its relationship with the Company, or (iv) except solely as a
limited partner with no management or operating responsibilities, engaging in
the land banking or lot development business; provided, however, the foregoing
provisions do not restrict (A) the ownership of less than 5% of a
publicly-traded company, or (B) in the event the employment of such Monterey
Stockholder is terminated under the Employment Agreement, engaging in the custom
homebuilding business, engaging in the production homebuilding business outside
a 100 mile radius of any project of the Company or outside Northern California,
or engaging in the land banking or lot development business. The non-compete
provisions will survive the termination of the Employment Agreement unless such
Monterey Stockholder is terminated by the Company without Cause.
The Employment Agreements also provide for the grant to each Monterey
Stockholder of options to purchase an aggregate of 166,667 shares of Common
Stock per Monterey Stockholder at an exercise price of $5.25 per share (the
"Employment Options"). The Employment Options expire on December 31, 2002 and
vest annually over three years in equal increments beginning on the first
anniversary of the effective date of the Merger; provided, however, the
Employment Options will vest in full and will be exercisable upon a change of
control of the Company prior to the third anniversary of the effective date of
the Merger. If a Monterey Stockholder voluntarily terminates his employment with
the Company, the Employment Options will be exercisable for a period of six
months following such termination. If a Monterey Stockholder is terminated
without Cause, the Employment Options will be immediately vested in full and
will be exercisable until December 31, 2002. If a Monterey Stockholders'
employment with the Company is terminated as a result of death or disability,
the Employment Options will be exercisable for a period of one year following
such termination. If the Company terminates a Monterey Stockholders' employment
for Cause, the Employment Options will terminate immediately.
For a description of certain amendments to the Employment Agreements,
see "The Legacy Acquisition - June 24, 1997 Letter Agreement."
Registration Rights
The Company has entered into a Registration Rights Agreement dated
December 31, 1996 with each of the Monterey Stockholders (the "Registration
Rights Agreements") pursuant to which it granted registration rights to the
Monterey Stockholders with respect to the Exchange Shares, the Contingent Stock,
and the Common Stock underlying the Employment Options. Pursuant to such rights,
subject to certain conditions and limitations, at any time after the first
anniversary of the effective date of the Merger, the Monterey Stockholders may
require the Company to register such shares under the Securities Act for resale
by the Monterey Stockholders. The Company has also agreed to take any action
required to be taken under applicable state securities or "blue sky" laws in
connection with such registration. The Company will pay all expenses relating to
the registration of shares pursuant to the Registration Rights Agreements. Each
Monterey Stockholder will pay any fees and expenses of counsel to the
stockholder, underwriting discounts and commissions, and transfer taxes, if any,
relating to the resale of the Monterey Stockholder's Common Stock.
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Board of Directors
The board of directors of the Company currently consists of William W.
Cleverly, Steven J. Hilton, Alan Hamberlin, John R. Landon, Robert G. Sarver,
and C. Timothy White. In connection with the Merger, the Articles of
Incorporation of the Company were amended to, among other things, provide for
two classes of its directors, designated as Class I and Class II. Each Class
will consist of one-half of the directors or as close an approximation thereto
as possible. The Class I directors were elected in December of 1996 for a
two-year term. The Class II directors were elected in September of 1997 for a
two-year term. Messrs. Cleverly, Hilton, and Hamberlin are Class I directors and
Messrs. Landon, Sarver and White are Class II directors. At each subequent
annual meeting of stockholders, each of the successors to the directors of the
Class whose term has expired at such annual meeting will be elected for a term
running until the second annual meeting next succeeding his or her election and
until his or her successor is duly elected and qualified.
Pursuant to the Merger Agreement, if any of the current board members
of the Company cease to serve as a director of the Company at any time prior to
the first anniversary of the effective date of the Merger, the vacancy will be
filled by the remaining board members then serving as directors of the Company.
However, if either of the Monterey Stockholders ceases to serve as a director,
the vacancy will be filled by a person selected by the remaining Monterey
Stockholder.
Amendment to Hamberlin Stock Options
Pursuant to an employment agreement entered into on December 21, 1995,
in lieu of an annual base salary in cash, Homeplex and Mr. Hamberlin entered
into a Stock Option Agreement dated December 21, 1995 (the "Hamberlin Stock
Option Agreement") pursuant to which Homeplex granted an option to Mr. Hamberlin
to purchase 250,000 shares of Homeplex common stock at $4.50 per share, which
was the fair market value per share on December 21, 1995 (the "Hamberlin Stock
Options"). The Hamberlin Stock Options vest as follows: (i) 66,666 on December
21, 1995, (ii) 91,667 on December 21, 1996 and (iii) 91,667 on December 21,
1997; provided, however, all options will vest in full if a change in control
occurs on or before December 20, 1998 that has not been unanimously agreed to by
the board of directors or upon a termination of Mr. Hamberlin's employment
(without his consent) by the Company for any reason other than death,
disability, or "Cause." "Cause" means an act or acts of dishonesty by Mr.
Hamberlin constituting a felony and resulting or intended to result directly or
indirectly in substantial gain or personal enrichment at the expense of the
Company. In addition, the Hamberlin Stock 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. An
amendment to the Hamberlin Stock Option Agreement was executed in connection
with the Merger to eliminate the acceleration of vesting of the Hamberlin Stock
Options that may otherwise have resulted upon consummation of the Merger. The
Hamberlin Stock Options are exercisable until December 21, 2000. In addition,
Mr. Hamberlin has also been granted other options to purchase 103,101 shares of
Common Stock of the Company.
Amendment to Articles of Incorporation
In connection with the Merger, the Articles of Incorporation of the
Company were amended to, among other things, (i) change the name of Homeplex to
"Monterey Homes Corporation," (ii) reclassify and change each share of Homeplex
common stock issued and outstanding into one-third of a share of Common Stock,
(iii) amend and make more restrictive the limitations on the transfer of Common
Stock to preserve maximum utility of the Company's net operating loss
carryforward (the "NOL Carryforward") (see "NOL Carryforward" below), and (iv)
provide for the Class I and Class II Directors (see "Board of Directors" above).
With respect to the restrictions on transfer of the Common Stock, the
Articles of Incorporation of the Company generally prohibit concentrated
ownership of the Company which might jeopardize its NOL Carryforward. The
amended transfer restrictions generally preclude for a period of up to five
years any person from transferring
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shares of Common Stock (or any other subsequently issued voting or participating
stock) or rights to acquire Common Stock, if the effect of the transfer would be
to (a) make any person or group an owner of 4.9% or more of the outstanding
shares of such stock (by value), (b) increase the ownership position of any
person or group that already owns 4.9% or more of the outstanding shares of such
stock (by value), or (c) cause any person or group to be treated like the owner
of 4.9% or more of the outstanding shares of such stock (by value) for tax
purposes. Direct and indirect ownership of Common Stock and rights to acquire
Common Stock are taken into consideration for purposes of the transfer
restrictions. These transfer restrictions will not apply to (i) the exercise of
any stock option issued by the Company that was outstanding on the effective
date of and immediately following the Merger, (ii) exercise of the Hamberlin
Stock Options, (iii) issuance of the Contingent Shares, or (iv) exercise of the
Employment Options. The board of directors of the Company has the authority to
waive the transfer restrictions under certain conditions. The board of directors
may also accelerate or extend the period of time during which such transfer
restrictions are in effect or modify the applicable ownership percentage that
will trigger the transfer restrictions if there is a change in law making such
action necessary or desirable. The board of directors also has the power to make
such other changes not in violation of law as may be necessary or appropriate to
preserve the Company's tax benefits. The transfer restrictions discussed herein
will apply to the transfer and exercise of the Company Warrants. Ownership of
Company Warrants will be aggregated with shares of Common Stock otherwise owned
by a holder to determine if the applicable ownership percentage has been
exceeded. The transfer restrictions described herein may impede a change of
control of the Company.
NOL Carryforward
At June 30, 1997, the Company had a federal income tax net operating
loss carryforward of approximately $50 million, which expires at various times
beginning in 2007 and ending in 2009. It is anticipated that future income taxes
paid by the Company will be minimized and will consist primarily of state income
taxes (since utilization of the Company's state net operating loss may be
significantly limited) and the federal alternative minimum tax.
The ability of the Company to use the NOL Carryforward to offset future
taxable income would be substantially limited under Section 382 of the Code if
an "ownership change," within the meaning of Section 382 of the Code has
occurred or occurs with respect to the Company before expiration of the NOL
Carryforward. The Company believes that (i) there was not an "ownership change"
of the Company prior to the effective date of the Merger, (ii) the Merger did
not cause an "ownership change", and (iii) the Legacy Acquisition did not cause
an "ownership change." The amendments to the Articles of Incorporation of the
Company, which became effective on the effective date of the Merger, include
restrictions on the transfer of Common Stock designed to prevent an "ownership
change" with respect to the Company after the Merger. See "Amendment to Articles
of Incorporation" above. Pursuant to Section 384 of the Code, the Company may
not be permitted to use the NOL Carryforward to offset taxable income resulting
from sales of assets owned by the Monterey Entities at the time of the Merger to
the extent that the fair market value of such assets at the time of the Merger
exceeded their tax basis. There is no assurance that the Company will have
sufficient earnings after the Merger to fully utilize the NOL Carryforward.
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Indemnification Rights
The Company and its officers, directors, and agents are entitled to
indemnification for damage, loss, liability, and expense (collectively, the
"Losses") incurred or suffered by such parties arising out of any action, suit,
claim, or demand arising out of, relating to, or based on the Monterey Entities'
or the Monterey Stockholders' breach or failure to perform in any material
respect any of their representations, warranties, covenants, or agreements under
the Merger Agreement or the transactions contemplated thereby; provided,
however, that such action, suit, claim, or demand must be first asserted prior
to the second anniversary of the effective date of the Merger. The Monterey
Stockholders are entitled to indemnification for their pro rata share of any
Loss incurred or suffered by the Monterey Stockholders arising out of any
action, suit, claim, or demand arising out of, relating to, or based on the
Company's breach or failure to perform in any material respect any of its
representations, warranties, covenants, or agreements under the Merger Agreement
or the transactions contemplated thereby; provided, however, that such action,
suit, claim or demand must be first asserted prior to the second anniversary of
the effective date of the Merger.
A committee to be comprised of the independent directors of the Company
serving after the effective date of the Merger (the "Committee") was appointed
irrevocably pursuant to the Merger Agreement to exercise the Company's
indemnification rights and was authorized to act, as the Committee may deem
appropriate, as the Company's agent in respect of receiving all notices,
documents, and certificates and making all determinations required with respect
to the indemnification provided for in the Merger Agreement.
The maximum aggregate amount of indemnification that may be required of
the Monterey Stockholders, on the one hand, and the Company, on the other,
pursuant to the Merger Agreement is $500,000 each. The Company retained from the
Merger consideration 70,176 of the Exchange Shares issued in the names of the
Monterey Stockholders, equal to $500,000 divided by the average closing price
for the last five trading days ending with the effective date of the Merger,
such shares to be utilized as security for the indemnification obligations in
favor of the Company under the Merger Agreement (the "Indemnification Fund").
The Indemnification Fund is the sole and exclusive source of reimbursement and
indemnification for the amount of any Loss or claim of the Company. The
Indemnification Fund will be adjusted each six months to maintain its $500,000
value less any amount previously applied to a loss. Cash can be deposited with
the Company at any time by the Monterey Stockholders to replace all or any
portion of the Common Stock in the Indemnification Fund. Amounts remaining in
the Indemnification Fund will be released to the Monterey Stockholders on the
second anniversary of the effective date of the Merger; provided, that if the
Monterey Stockholders are notified prior to the second anniversary of the
effective date of the Merger of a loss or claim, the amount of which is
uncertain or contingent, the Company will be entitled to retain an amount of
cash or a number of Exchange Shares that would be adequate to indemnify and hold
harmless the Company for each such loss or claim. The Monterey Stockholders will
be entitled to vote the shares of Common Stock held in the Indemnification Fund.
Holders of the Company Warrants will not bear a pro rata portion of any
reduction in Exchange Shares resulting from an indemnification claim.
THE LEGACY ACQUISITION
In an effort to further diversify the Company's homebuilding
operations, pursuant to the terms of an Agreement of Purchase and Sale of
Assets, dated May 29, 1997, by and among the Company, Legacy Homes, Ltd., Legacy
Enterprises, Inc., and John and Eleanor Landon and a related Agreement and Plan
of Merger dated June 25, 1997 (collectively with the Agreement of Purchase and
Sale of Assets, the "Acquisition Agreement"), among the Company, John and
Eleanor Landon, Texas Home Mortgage Corporation, and Monterey Mortgage
Acquisition Corp. (collectively, Legacy Homes, Ltd., Legacy Enterprises, Inc.
and Texas Home Mortgage Corporation shall be referred to as "Legacy"), the
Company acquired substantially all of the operations and assets of Legacy, a
Texas-based homebuilder with related mortgage brokerage operations. The
transaction closed on July 1, 1997. The Company has contributed these assets to
a wholly-owned limited partnership and related entities (collectively, the
"Texas Division").
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The Legacy Acquisition Consideration
The consideration for the Legacy Acquisition consisted of $1,553,004 in
cash, 666,667 shares of Company Common Stock and deferred contingent payments
for the four years following the close of the transaction (the "Contingent
Payments"). In addition, the Company assumed substantially all of the
liabilities of Legacy including indebtedness that was incurred prior to the
closing of the transactions to fund distributions to the partners of Legacy
Homes that reduced its book value to less than $200,000.
The Contingent Payments are payable for the five consecutive earn-out
periods following the Effective Date. The first earn-out period commenced on
July 1, 1997, and ends on December 31, 1997. The remaining earn-out periods
refer to the calendar years 1998, 1999 and 2000, and the last earn-out period
refers to the period from January 1, 2001 to June 30, 2001. The Contingent
Payments will equal twenty percent (20%) of the net income of the Texas Division
before income taxes, determined in accordance with GAAP and subject to certain
adjustments, plus twelve percent (12%) of the Company's net income (without
regard to the NOL Carryforward) before income taxes, determined in accordance
with GAAP and as reported in or consistent with the Company's audited financial
statements. In no event will the total of the Contingent Payments exceed $15
million nor will an Contingent Payment exceed $5 million in any one earn-out
period. In the event an Contingent Payment would exceed $5 million in an
earn-out period, the excess of $5 million will accrue interest at the rate of
ten percent (10%) per annum and such excess plus accrued interest will be paid
with the next succeeding Contingent Payment. Any Contingent Payments due shall
be subject to the Company's rights of set-off under the Indemnification
Agreement by and among the parties.
Landon Employment Agreement and Employment Options
In connection with the Legacy Acquisition, the Company and John R.
Landon entered into an employment agreement (the "Landon Employment Agreement"),
with a term ending June 30, 2001 and providing for an initial base salary of
$200,000 per year (increasing by five percent (5%) of the prior year's base
salary per year), and an annual bonus for calendar years 1997 and 1998 equal to
the lesser of four percent (4%) of the pre-tax consolidated net income of the
Company or $200,000. Thereafter, the bonus percentage payout of consolidated net
income will be determined by the then-existing compensation committee of the
board of directors of the Company, provided that in no event will the bonus
payable in any year exceed $200,000. Under the Landon Employment Agreement, John
R. Landon will serve as Co-Chief Executive Officer and Chief Operating Officer
of the Company and as President and Chief Executive Officer of the Texas
Division.
If Mr. Landon voluntarily terminates his employment without "Good
Reason" or is discharged for "Cause," the Company will have no obligation to pay
him any further salary or bonus. In addition, the Company will be obligated to
pay Mr. Landon the Contingent Payments, but will have the option to make the
payments as scheduled over the term of the agreement or in one lump sum, based
on the pre-tax income of the Company and the pre-tax income of the Texas
Division for the twelve month period ending with the fiscal quarter immediately
preceding his termination, less a 25% reduction. If Mr. Landon is terminated
without "Cause" or as a result of death or disability or if he resigns for "Good
Reason", the Company will be obligated to pay Mr. Landon (i) his then current
base salary through the end of the stated term of employment in the event of
termination by the Company without "Cause" or resignation by Mr. Landon for
"Good Reason," or for six months after termination in the event of death or
disability and (ii) a pro rated bonus. If Mr. Landon is terminated without
"Cause" or resigns for "Good Reason," Mr. Landon will have the option to receive
the Contingent Payments as scheduled or in one lump sum based on the pre-tax
income of the Company and the Texas Division for the twelve month period ending
with the fiscal quarter immediately preceding his termination. If Mr. Landon's
employment is terminated due to death or disability, Mr. Landon or his estate
may elect to have the Contingent Payments continue as scheduled over the term of
the agreement or have the remainder paid out in one lump sum, based upon the
pre-tax income of the Company of the Texas Division for the twelve month period
ending with the fiscal quarter immediately preceding termination, less a 25%
reduction.
15
<PAGE>
"Cause" under the Landon Employment Agreement is defined to mean an act
or acts of dishonesty constituting a felony and resulting or intended to result
directly or indirectly in substantial personal gain or enrichment at the expense
of the Company, and willful disregard of the employee's primary duties to the
Company. "Good Reason" under the Landon Employment Agreement is defined to
include (i) assignment of duties inconsistent with the scope of the duties
associated with Mr. Landon's titles or positions or which would require Mr.
Landon to relocate his principal residence outside the Dallas-Fort Worth, Texas
metropolitan area; (ii) failure by the Company to elect Mr. Landon as a director
of the Company on or before June 30, 1998; (iii) failure by the Company to pay
any part of the Contingent Payments under the Legacy Asset Agreement; (iv)
termination of Mr. Landon for Cause and it is later determined that Cause did
not exist; or (v) failure of the Company to permit the Texas Division to utilize
its equity to obtain financing or to provide certain other monies due to the
Texas Division.
The Landon Employment Agreement contains a non-compete provision that,
until June 30, 2001, restricts John R. Landon from, except in connection with
the performance of his duties under the Landon Employment Agreement (i) engaging
in the homebuilding business and the mortgage brokerage or banking business,
(ii) recruiting, hiring or discussing employment with any person who is, or
within the past six months was, an employee of the Company, (iii) soliciting any
customer or supplier of the Company for a competing business or otherwise
attempting to induce any customer or supplier to discontinue its relationship
with the Company, or (iv) except solely as a limited partner with no management
or operating responsibilities, engaging in the land banking or lot development
business; provided, however, the foregoing provisions do not restrict (A) the
ownership of less than 5% of a publicly-traded company, or (B) in the event the
employment of Mr. Landon is terminated under his employment agreement, engaging
in the custom homebuilding business, engaging in the production homebuilding
business, or engaging in the land banking or lot development business outside a
100 mile radius, in each case, of any project of the Company. The non-compete
provisions under the Landon Employment Agreement will survive termination of the
Landon Employment Agreement unless Mr. Landon is terminated without Cause or he
resigns for "Good Reason."
The Landon Employment Agreement also provides for the grant to John R.
Landon of an option to purchase an aggregate of 166,667 shares of Company Common
Stock at an exercise price of $5.25 per share (the "Landon Employment Option").
The Landon Employment Option is exercisable as follows: 55,555 shares on July 1,
1998, 55,556 shares on July 1, 1999, 55,556 on July 1, 2000; provided, however,
that the Landon Employment Option shall become exercisable in full if there is a
change of control of the Company prior to July 1, 2000. If the Company
discharges Mr. Landon for Cause, the Landon Employment Option will terminate
immediately. If Mr. Landon voluntarily terminates his employment with the
Company or if his employment is terminated as a result of his death or
disability, then the Landon Employment Option (all 166,667 shares) will be
exercisable for a period of six months following such termination. If Mr. Landon
is terminated without Cause, the Landon Employment Option (all 166,667 shares)
will be immediately exercisable until July 1, 2001.
Registration Rights
The Company has entered into a Registration Rights Agreement, dated
July 1, 1997 (the "Landon Registration Rights Agreement") with Legacy Homes,
Ltd., Legacy Enterprises, Inc., and John and Eleanor Landon (Legacy Homes, Ltd.,
Legacy Enterprises, Inc., and John and Eleanor Landon shall be collectively
referred to as the "Holder"), pursuant to which it granted registration rights
to the Holder with respect to the shares acquired by the Holder in connection
with the Acquisition Agreement and the Landon Employment Option. Pursuant to
such rights, subject to certain conditions and limitations, at any time after
December 31, 1997, the Holder may require the Company to register such shares
under the Securities Act for resale by the Holder. The Company has also agreed
to take any action required to be taken under applicable state securities or
"blue sky" laws in connection with such registration. The Company will pay all
expenses relating to the registration of shares pursuant to the Landon
Registration Rights Agreement. The Holder will pay any fees and expenses of
counsel of Holder, underwriting discounts and commissions, and transfer taxes,
if any, relating to the resale of the Holder's Common Stock.
16
<PAGE>
Board of Directors
The Landon Employment Agreement required the Company to use its
reasonable best efforts to elect Mr. Landon as a director of the Company.
Mr.Landon was elected as a Class II director at the Annual Meeting of
Stockholders held on September 25, 1997.
June 24, 1997 Letter Agreement
In connection with the Legacy Acquisition, William W. Cleverly, Steven
J. Hilton, John R. Landon and Eleanor Landon entered into a letter agreement,
dated June 24, 1997 (the "Letter Agreement"), pursuant to which each of the
parties agreed that he or she will not directly or indirectly acquire or dispose
of beneficial ownership of any shares of voting securities of the Company
("Voting Securities") or rights to acquire Voting Securities which would
adversely affect the use of the Company's NOL Carryforward. See "The Merger-NOL
Carryforward." Subject to the notice provision in the immediately following
sentence, each party further agreed that for a period of five years following
the Effective Date, he or she will not purchase Voting Securities which would
cause his or her beneficial ownership of Voting Securities to exceed the
greatest number of shares beneficially owned by any other party to the Letter
Agreement. The party desiring to purchase Voting Securities agreed to provide
the other parties to the Letter Agreement at least seven days written notice of
his or her intent to purchase Voting Securities. Each other party would then be
permitted to purchase the same number of Voting Securities.
In connection with the Letter Agreement, the Employment Option
Agreements of William W. Cleverly, Steven J. Hilton and John R. Landon were
amended (the "Amended Employment Options"). The Amended Employment Options
provide for the deferment of the exercise of the option to acquire 15,000 shares
of Company Common Stock, otherwise exercisable on December 31, 1997, to January
30, 2000 for Messrs. Cleverly and Hilton, and with respect to Mr. Landon,
options to acquire 15,000 shares of Company Common Stock, otherwise exercisable
on July 1, 1998, to July 31, 2000.
Indemnification Rights
The Company and its officers, directors, and agents are entitled to
indemnification for Losses incurred or suffered by such parties arising out of
any action, suit, claim, or demand arising out of, relating to, or based on
Legacy's or its stockholders' (the "Legacy Stockholders") breach or failure to
perform in any material respect any of their representations, warranties,
covenants, or agreements under the Acquisition Agreement or the transactions
contemplated thereby; provided, however, that, in most instances, such action,
suit, claim, or demand must be first asserted prior to the second anniversary of
the closing. The Legacy Stockholders are entitled to indemnification for their
pro rata share of any Loss incurred or suffered by the Legacy Stockholders
arising out of any action, suit, claim, or demand arising out of, relating to,
or based on the Company's breach or failure to perform in any material respect
any of its representations, warranties, covenants, or agreements under the
Acquisition Agreement or the transactions contemplated thereby; provided,
however, that such action, suit, claim or demand must be first asserted prior to
the second anniversary of the effective date of the Merger.
Subject to various exceptions, the maximum aggregate amount of
indemnification that may be required of the Legacy Stockholders, on the one
hand, and the Company, on the other, pursuant to the Acquisition Agreement is
$500,000 each (unless there are breaches of representations relating to
environmental obligations, in which case the indemnity cap applicable to Legacy
may increase to $1,000,000). The Company may offset against Contingent Payment
amounts due with respect to the indemnifications of Legacy and the Legacy
Shareholders.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The Unaudited Pro Forma Condensed Combined Balance Sheet set forth
below presents the results of operations of the Company, assuming the Legacy
Acquisition had occurred on June 30, 1997. The Unaudited Pro Forma Condensed
Combined Income Statements set forth below presents the results of operations of
the Company, assuming the Merger and Legacy Acquisition had occurred on January
1, 1996. Adjustments necessary to reflect these
17
<PAGE>
assumptions and to restate historical combined balance sheets and results of
operations are presented in the Pro Forma Adjustments columns, which are further
described in the Notes to the Unaudited Pro Forma Consolidated Financial
Information.
The financial information for the Company is derived from the audited
consolidated financial statements of the Company as of and for the year ended
December 31, 1996, and the unaudited consolidated financial statements of the
Company as of and for the six months ended June 30, 1997, as adjusted for pro
forma results of the Merger for 1996. The financial information for Legacy is
derived from the audited financial statements of Legacy as of and for the year
ended December 31, 1996, and unaudited financial statements of Legacy as of and
for the six months ended June 30, 1997. The accounts of Legacy include Legacy
Homes, Ltd., Legacy Enterprises, Inc. and Texas Home Mortgage Corporation.
Because the accounts of Legacy Enterprises, Inc. and Texas Home Mortgage
Corporation are immaterial, separate historical financial statements of these
entities are not included.
The following information does not purport to present the financial
position or results of operations of the Company, including Monterey and Legacy,
had the Merger and the Legacy Acquisition and other events assumed therein
occurred on the dates specified, nor is it necessarily indicative of the results
of operations of the Company, Monterey and Legacy as they may be in the future
or as they may have been had the Merger and the Legacy Acquisition and such
other events been consummated on the dates shown. The Unaudited Pro Forma
Consolidated Financial Information is based on certain assumptions and
adjustments described in the related Notes to Unaudited Pro Forma Condensed
Combined Financial Information and should be read in conjunction with "The
Merger," "The Legacy Acquisition," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the audited and unaudited
historical financial statements and notes thereto of the Company, Monterey and
Legacy included elsewhere herein.
18
<PAGE>
Unaudited Pro Forma Condensed Combined Balance Sheet
June 30, 1997
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
--------- ---------
Legacy The Company Combined Adjustments Combined
------ ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Assets
Cash and cash equivalents .... $ 1,307 $ 7,263 $ 8,570 $ (1,553)(a) $ 7,017
Real estate under development 18,728 45,107 63,835 -- 63,835
Real estate loan and other
receivables .............. 2,040 1,571 3,611 -- 3,611
Option deposits .............. 812 1,319 2,131 -- 2,131
Residual interests ........... -- 3,856 3,856 -- 3,856
Other assets ................. 568 800 1,368 (350)(a) 1,018
Deferred tax asset ........... -- 6,783 6,783 3,621 (b) 10,404
Goodwill -- 1,719 1,719 1,519 (b) 3,238
-------- -------- -------- -------- --------
Total Assets ........ $ 23,455 $ 68,418 $ 91,873 $ 3,237 $ 95,110
======== ======== ======== ======== ========
Liabilities
Accounts payable and accruals $ 4,970 $ 7,344 $ 12,314 $ -- $ 12,314
Home sale deposits ........... 976 7,697 8,673 -- 8,673
Notes payable ................ 17,346 23,839 41,185 -- 41,185
-------- -------- -------- -------- --------
Total Liabilities ... 23,292 38,880 62,172 -- 62,172
-------- -------- -------- -------- --------
Stockholders' Equity
Common stock ................. -- 46 46 7(c) 53
Additional paid-in capital ... 163 92,990 93,153 3,230(c) 96,383
Retained earnings (loss) ..... -- (63,088) (63,088) -- (63,088)
Treasury stock ............... -- (410) (410) -- (410)
-------- -------- -------- -------- --------
Total Equity ........ 163 29,538 29,701 3,237 32,938
-------- -------- -------- -------- --------
Total Liabilities and
Stockholders Equity $ 23,455 $ 68,418 $ 91,873 $ 3,237 $ 95,110
======== ======== ======== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Information
19
<PAGE>
Unaudited Pro Forma Condensed Combined Income Statement
For the Six Months Ended June 30, 1997
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
The Pro Forma Pro Forma
Legacy Company Combined Adjustments Combined
------ ------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Home and land sales ........ $ 39,728 $ 37,117 $ 76,845 $ -- $ 76,845
Cost of home and land sales 32,959 31,829 64,788 757(d) 65,545
---------- ---------- ---------- ------------- ----------
Gross margin ............... 6,769 5,288 12,057 (757) 11,300
Selling, general and
administrative expense ..... 1,512 4,274 5,786 70(e) 6,017
138(g)
23(f)
Operating income ........... 5,257 1,014 6,271 (988) 5,283
Other income, net ........ 333 1,456 1,789 -- 1,789
---------- ---------- ---------- ------------- ----------
Income before income taxes . 5,590 2,470 8,060 (988) 7,072
Income tax expense ......... 224 224 236(h) 460
---------- ---------- ---------- ------------- ----------
Net income ................. $ 5,590 $ 2,246 $ 7,836 $ (1,224) $ 6,612
========== ========== ========== ============= ==========
Net income per share: $ 1.20
==========
Weighted average common
shares outstanding 5,520,000
==========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Information
20
<PAGE>
Unaudited Pro Forma Condensed Combined Income Statement
For the Year Ended December 31, 1996
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Pro Forma Pro Forma Pro Forma
Legacy Company Combined Adjustments Combined
------ ------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Home and land sales ....... $ 85,114 $ 87,754 $ 172,868 $ -- $ 172,868
Cost of home and land sales 67,715 75,099 142,814 1,513(d) 144,327
----------- ----------- ----------- -------------- -----------
Gross margin .............. 17,399 12,655 30,054 (1,513) 28,541
Selling, general and
administrative expense .... 8,550 7,777 16,327 191(e) 16,895
275(g)
102(f)
Operating income .......... 8,849 4,878 13,727 (2,081) 11,646
Other income, net ....... (248) 1,998 1,750 -- 1,750
----------- ----------- ----------- -------------- -----------
Income before income taxes 8,601 6,876 15,477 (2,081) 13,396
Income tax expense ........ 756 756 115(h) 871
----------- ----------- ----------- -------------- -----------
Net income ................ $ 8,601 $ 6,120 $ 14,721 $ (2,196) $ 12,525
=========== =========== =========== ============== ===========
Net income per share: $ 2.27
===========
Weighted average common
shares outstanding 5,520,000
===========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Information
Notes to Unaudited Pro Forma Condensed Combined Financial Information
1. Overview. The Unaudited Pro Forma Condensed Combined Balance Sheet
is presented assuming the Legacy Acquisition had occurred on June 30, 1997. The
Unaudited Pro Forma Condensed Combined Income Statements are presented as if the
Merger and the Legacy Acquisition had occurred on January 1, 1996. The
combinations of Monterey and Legacy were recorded as purchases in accordance
with generally accepted accounting principles and, accordingly, the assets and
liabilities of the acquired entity (Monterey or Legacy, as appropriate) are
presented at their estimated fair values as of the date of acquisition.
The financial information for the Company is derived from the audited
consolidated financial statements of the Company as of and for the year ended
December 31, 1996, and the unaudited consolidated financial statements of the
Company as of and for the six months ended June 30, 1997, as adjusted for pro
forma results of the Merger for 1996. The financial information for Legacy is
derived from the audited financial statements of Legacy as of and for the year
ended December 31, 1996, and unaudited financial statements of Legacy as of and
for the six months ended June 30, 1997. The accounts of Legacy include Legacy
Homes, Ltd., Legacy Enterprises, Inc. and Texas Home Mortgage Corporation.
Because the accounts of Legacy Enterprises, Inc. and Texas Home Mortgage
Corporation are immaterial, separate historical financial statements of these
entities are not included.
21
<PAGE>
Pursuant to an Employment Agreement entered into in connection with the
Legacy Acquisition, John R. Landon, Co-Chief Executive Officer and Chief
Operating Officer of the Company and President and Chief Executive Officer of
Legacy, was granted options to purchase 166,667 shares of Common Stock at an
exercise price of $5.25, which will vest over the three years following the
acquisition and expire June 30, 2001. The value of the options are considered
compensation expense for the combined entity which will be recognized over the
three-year vesting period.
The pro forma information does not purport to present the financial
position or results of operations of the Company, including Monterey and Legacy,
had the Merger and the Legacy Acquisition and other events assumed therein
occurred on the dates specified, nor is it necessarily indicative of the results
of operations of the Company, Monterey and Legacy as they may be in the future
or as they may have been had the Merger and the Legacy Acquisition and other
such events been consummated on the dates shown. The Unaudited Pro Forma
Condensed Combined Financial Data should be read in conjunction with "The
Merger," "The Legacy Acquisition," "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" and the audited and unaudited
financial statements and notes thereto of the Company, Monterey and Legacy
included elsewhere in this Prospectus.
2). Pro Forma Condensed Combined Balance Sheet Adjustments at June
30, 1997.
a) To record payment for Legacy, transfer of cash and
$350,000 in transaction costs.
b) To record goodwill and the increase in deferred tax
asset associated with the Legacy Acquisition.
c) To record the effects of issuance of Common Stock to
Legacy and John and Eleanor Landon and additional
paid-in capital resulting from the Legacy
Acquisition.
3). Pro Forma Condensed Combined Income Statement Adjustments for
the Year Ended December 31, 1996 and the Six Month Period
Ended June 30, 1997.
d) To record interest expense related to an additional
$17.8 million borrowing in connection with the Legacy
Acquisition.
e) To record amortization of goodwill.
f) To record compensation expense incurred in connection
with the issuance of options to purchase 166,667
shares of Common Stock to John R. Landon.
Compensation expense is recognized over a three year
graded vesting period.
g) To adjust for additional compensation expense
expected to be incurred as specified in the
Employment Agreement with Mr. Landon.
h) To record income taxes, which has been estimated at
6.5% of income before income taxes.
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected historical consolidated
financial data of the Company for the six months ended June 30, 1997 and June
30, 1996, and each of the years in the five-year period ended December 31, 1996.
The selected annual historical consolidated financial data for 1996 is derived
from the Company's Consolidated financial statements audited by KPMG Peat
Marwick LLP, independent auditors. The selected annual historical consolidated
financial data for 1995, 1994, 1993 and 1992 is derived from the Company's
Consolidated Financial Statements audited by Ernst & Young LLP, independent
auditors. For additional information, see the Consolidated Financial Statements
included elsewhere in this Prospectus. Due to the Merger and the Legacy
Acquisition, the historical results of the Company are not indicative of future
results. Certain pro forma financial information reflecting the Merger is set
forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Pro-Forma Results of Operations." For additional
financial and pro forma results of operations relating to the Merger as well as
the Legacy Acquisition, see "Unaudited Pro Forma Consolidated Financial
Information."
22
<PAGE>
Historical Consolidated Financial Data
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Six Months
ended Years Ended December 31,
June 30, ------------------------
(Unaudited)
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Home sales (net) ............................ $ 5,288 -- -- -- -- -- --
Income (loss) from mortgage assets .......... 1,150 $ 891 $ 2,244 $ 3,564 $ (1,203) $(21,814) $(14,068)
Interest expense ............................ -- 238 238 868 1,383 2,274 2,750
General, administrative and other expense ... 4,192 272 1,710 1,599 1,938 1,822 2,315
-------- -------- -------- -------- -------- -------- --------
Income (loss) before effect of accounting
change and extraordinary loss ............... 2,246 381 296 1,097 (4,524) (25,910) (19,133)
Cumulative effect of accounting change(1) ... -- -- -- -- -- (6,078) --
Extraordinary loss(2) ....................... -- (149) (149) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) ........................... $ 2,246 $ 232 $ 147 $ 1,097 $ (4,524) $(31,988) $(19,133)
======== ======== ======== ======== ======== ======== ========
Income (loss) per share before effect of
accounting change/extraordinary loss ........ $ .48 $ .12 $ 0.09 $ 0.34 $ (1.40) $ (7.98) $ (5.79)
Cumulative effect of accounting change per
share ....................................... -- -- -- -- -- (1.89) --
Extraordinary loss per share ................ -- (.05) (.05) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) per share ................. $ .48 $ .07 $ 0.04 $ 0.34 $ (1.40) $ (9.87) $ (5.79)
======== ======== ======== ======== ======== ======== ========
Cash dividends per share(3) ................. -- -- $ 0.06 $ 0.09 $ 0.06 $ 0.09 $ 1.20
======== ======== ======== ======== ========
At June 30, At December 31,
(Unaudited) ---------------
1997 1996(4) 1996(4) 1995 1994 1993 1992
---- ------ ------ ---- ---- ---- ----
Balance Sheet Data:
Real estate under development ............... $ 45,107 35,991 $ 1,696 -- -- -- --
Residual interests .......................... 3,856 $ 4,625 3,909 $ 5,457 $ 7,654 $ 17,735 $ 66,768
Total assets ................................ 68,418 19,752 72,821 27,816 31,150 43,882 87,063
Notes payable ............................... 23,839 -- 30,542 7,819 11,783 19,926 31,000
Total liabilities ........................... 38,880 1,072 45,876 9,368 13,508 21,505 32,357
Stockholders' equity ........................ 29,538 18,680 26,945 18,448 17,642 22,377 54,706
</TABLE>
- ---------------
(1) Reflects the cumulative effect of adoption of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities."
(2) Reflects extraordinary loss from early extinguishment of long-term
debt.
(3) For any taxable year in which the Company qualified and elected to be
treated as a REIT under the Code, the Company was not subject to
federal income tax on that portion of its taxable income that was
distributed to stockholders in or with respect to that year. Due to the
Merger, the Company did not qualify as a REIT in 1996.
(4) Reflects the Merger consummated on December 31, 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company was originally formed as a real estate investment trust
("REIT"), investing in mortgage-related assets and, to a lesser extent, selected
real estate loans. On December 31, 1996, the Company acquired by merger (the
"Merger") the homebuilding operations of various entities operating under the
Monterey Homes name ("Monterey") and essentially discontinued the Company's
mortgage-related operations. As part of a strategy to diversify its operations,
on July 1, 1997, the Company acquired the Texas-based homebuilder operations of
several entities operating under the name Legacy Homes ("Legacy").
The following sets forth a discussion and analysis of the financial
condition and results of operation for the Company for the prior three years,
reflecting primarily the Company's operation as a REIT. To facilitate an
understanding of the Company after the Merger, also included is a discussion and
analysis of the pro forma results of operations of the Company giving effect to
the Merger as if it had occurred on January 1, 1996. For financial and
23
<PAGE>
pro forma results of operations relating to the Legacy Acquisition, see the
information under the caption "Unaudited Pro Forma Financial Information" and
the Consolidated Financial Statements included herein.
Historical Results of Operations
Six Months Ended June 30, 1997 Compared to 1996
The Company had net income of $2,246,406 or $.48 per share for the six
months ended June 30, 1997, compared to net income of $232,988 or $.07 per share
for the comparable period in 1996. The increase in 1997 was caused by the
addition of the homebuilding operations during 1997. Results for the six months
ended June 30, 1996, include an extraordinary loss from the early extinguishment
of debt of $148,433, or $.05 per share. Home sales revenue, cost of home sales,
commissions and other sales costs all increased in 1997, reflecting the addition
of the homebuilding operations in December of 1996.
General, administrative and other costs were $2,275,469 for the first
half of 1997 and $650,834 for the first half of 1996. The increase was caused by
higher corporate costs resulting from the addition of homebuilding operations,
including compensation expense relating to stock options and contingent stock
issued in the Merger. All interest incurred was capitalized in 1997 with
$420,000 amortized through cost of home sales. Interest cost was expensed in
1996, reflecting the Company's operation as a REIT during that period.
Year Ended December 31, 1996 Compared to 1995
The Company had net income of $147,000, or $.04 per share, in 1996
compared to income of $1,097,000, or $.34 per share, in 1995. Results for the
year ended December 31, 1996 include an extraordinary loss from the early
extinguishment of debt of $148,000, or $.05 per share.
The Company's income from mortgage assets was $2,244,000 in 1996
compared to income of $3,565,000 in 1995. Interest income on real estate loans
decreased from $1,618,000 in 1995 to $571,000 in 1996 due to the reduction of
the Company's real estate lending program.
The Company's interest expense declined from $868,000 in 1995 to
$238,000 in 1996 due to a reduction in the Company's aggregate long-term debt.
Year Ended December 31, 1995 Compared to 1994
The Company had net income of $1,097,000, or $.34 per share, in 1995
compared to a net loss of $4,523,000, or $1.40 per share, in 1994.
The Company's income from mortgage assets was $3,565,000 in 1995
compared to a loss of $1,202,000 in 1994. The 1994 loss included a net charge of
$3,343,000 to the write down of several of its residual interests.
Interest income on real estate loans increased from $1,112,000 in 1994
to $1,618,000 in 1995 due to the expansion of the Company's real estate lending
program.
The Company's interest expense declined from $1,383,000 in 1994 to
$868,000 in 1995 due to a reduction in 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.
24
<PAGE>
Liquidity, Capital Resources, and Commitments
The following discusses the liquidity, capital resources, and
commitments of the combined Company as a result of the Merger.
The Company's principal uses of working capital are land purchases and
lot development. The Company uses a combination of borrowings and funds
generated by operations to meet its working capital requirements.
Operating activities used cash flows of $7.2 million for the six months
ended June 30, 1997, and provided cash flows of $813,204 for the six months
ended June 30, 1996. Operating activities provided $2.4 million for the year
ended December 31, 1996. Investing activities provided cash flows of $5.7
million for the six months ended June 30, 1997, and $5.8 for the six months
ended June 30, 1996. Investing activities provided cash flows of $18 million for
the year ended December 31, 1996. Financing activities consumed $7.3 million for
the six months ended June 30, 1997, and $1.9 for the six months ended June 30,
1996. Financing activities consumed $8.1 million for the year ended December 31,
1996.
The cash flow for each of the Company's communities can differ
substantially from reported earnings, depending on the status of the development
cycle. The early stages of development or expansion require significant cash
outlays for, among other things, land acquisitions, obtaining plat and other
approvals, and construction of amenities, which may include community tennis
courts, swimming pools and ramadas, model homes, roads, certain utilities, and
general landscaping. Since these costs are capitalized, this can result in
income reported for financial statement purposes during those early stages
significantly exceeding cash flow. After the early stages of development and
expansion when these expenditures are made, cash flow can significantly exceed
income reported for financial statement purposes, as cost of sales includes
charges for substantial amounts of previously expended costs.
At June 30, 1997, the Company had available a $30 million short-term,
secured, revolving construction loan facility and a $20 million acquisition and
development guidance facility, of which $11.6 million and $3.8 million were
outstanding, respectively. An additional $7.9 million of unborrowed funds
remained available under its credit facilities at such date. Borrowings under
the credit facilities are subject to the inventory collateral position of the
Company and a number of other conditions, including the Company's minimum net
worth, maximum debt to equity ratio and debt coverage. The Company also has
outstanding $8 million in unsecured, senior subordinated notes due October 15,
2001 (the "Notes"), which were issued in October 1994.
In the first six months of 1997, the Company used $8.2 million in cash
to purchase land for future development at the Gainey Ranch site in Scottsdale,
Arizona. The Company added this property to its acquisition and development
guidance facility, generating $4.3 million in available but unborrowed funds
under its revolving construction loan facility.
At December 31, 1996, the Company had $7.3 million outstanding under
its revolving construction loan. The Company also had approximately $9.6 million
in other secured construction loans outstanding at December 31, 1996.
The Indenture relating to the Notes and the Company's various loan
agreements contain restrictions which could, depending on the circumstances,
affect the Company's ability to obtain additional financing in the future. If
the Company at any time is not successful in obtaining sufficient capital to
fund its then-planned development and expansion costs, some or all of its
projects may be significantly delayed or abandoned. Any such delay or
abandonment could result in cost increases or the loss of revenues and could
have a material adverse effect on the Company's results of operation and ability
to repay its indebtedness.
25
<PAGE>
NOL Carryforward
At June 30, 1997 and December 31, 1996, the Company had a net operating
loss carryforward, for federal income tax purposes, of approximately $50.0
million and $53.0 million, respectively. This tax loss may be carried forward,
with certain restrictions, through 2009 to offset future taxable income, if any.
Pro Forma Results of Operations
As a result of the Merger, the primary business of the Company has
shifted from investing in mortgage-related assets and making real estate loans
to homebuilding. To assist in the understanding of those new operations,
management has prepared pro forma condensed combined operating results for the
periods discussed below which focus on the operations of Monterey prior to the
Merger. These results are not meant to be indicative of future results of
operations. They do not include information regarding Legacy.
The Company's results of operations for any period are affected by many
factors such as the number of development projects under construction, the
length of the development cycle of each project, product mix and design,
weather, availability of financing, suitable development sites, material and
labor, and national and local economic conditions. The Company has operated
primarily in the semi-custom, luxury market of the homebuilding industry and has
expanded into the move-up segment of the market, resulting in product mix and
design becoming more influential factors affecting the average home sales price
and gross margins. The Company experiences greater competition from other
homebuilders in the move-up segment of the market that can affect its ability to
increase sales prices even if costs are rising. The average sales price of homes
is further influenced by home size and desirability of project locations. See
"Risk Factors" above.
During the past several years the demand for homes and availability of
capital for land acquisition, development and home construction in Arizona has
increased. In response to these conditions, the Company has expanded its
operations to acquire additional sites for development of new projects. As of
June 30, 1997, the Company was actively selling homes in eleven communities, was
sold out in one community, and was preparing to open for sales in one community.
There can be no assurance that the favorable conditions in Arizona will
continue. Start up costs incurred in the Tucson area and Merger related costs
negatively impacted the Company's net income in 1996.
The continuation of the Company's past revenue and profitability levels
is dependent on its ability to identify and obtain competitively priced and well
located replacement land inventory. As a result of significant sales of lots and
projects in the Scottsdale metropolitan area in recent periods, the Company is
currently seeking to acquire additional land for development in this area. The
inability of the Company to acquire land to replenish its existing inventory as
quickly as needed or at competitive prices could adversely affect the Company's
results of operations and financial condition.
Results Of Operations for the Six Months
Ended June 30, 1997 and 1996 (Pro Forma)
Management has prepared pro forma condensed combined operating results
for the six months ended June 30, 1996, which reflect the impact of combining
Monterey and Homeplex as though the Merger had taken place on
January 1, 1996.
26
<PAGE>
Results of Operations
For the Six Months ended June 30,
---------------------------------
1996
1997 (Pro Forma)
(Dollars in thousands,
except per share data)
---------------------------------
Home sales revenue $37,117 $31,492
Cost of home sales 31,829 27,545
------- -------
Gross profit 5,288 3,947
Selling, general and administrative 4,274 3,954
------- -------
Income (loss) from home sales 1,014 (7)
Other income 1,456 1,805
------- -------
Earnings before income taxes 2,470 1,798
Income tax expense 224 198
------- -------
Net earnings $ 2,246 $ 1,600
======= =======
Earnings per share $ .48 $ .34
======= =======
Key assumptions in the pro forma results of operations include:
(1) The transaction was consummated on January 1, 1996.
(2) Compensation expense was adjusted to add the new employees'
cost and to deduct the terminated employees' cost.
(3) The net operating loss was utilized to reduce the maximum
amount of taxable income possible.
The following discussion and analysis provides information regarding
results of operations of the Company and its subsidiaries for the six months
ended June 30, 1997 and 1996 (pro forma). All material balances and transactions
between the Company and its subsidiaries have been eliminated. This discussion
should be read in conjunction with the consolidated financial statements
contained elsewhere in this Prospectus. In the opinion of management, the
unaudited interim data reflects all adjustments, consisting only of normal
recurring adjustments, necessary to fairly present the Company's financial
position and results of operations for the periods presented. The results of
operations for any interim period are not necessarily indicative of results to
be expected for a full fiscal year.
Home Sales Revenue
Home sales revenue for any period is the product of the number of units
closed during the period and the average sales price per unit. The following
table presents comparative first half 1997 and 1996 housing revenues:
Six Months Dollar/Unit Percentage
(Dollars in Thousands) Ended June 30, Increase Increase
1997 1996 (Decrease) (Decrease)
---- ---- ---------- ----------
Dollars .................... $37,117 $31,492 $ 5,625 17.9%
Units Closed ............... 105 125 (20) (16%)
Average Sales Price ........ $ 353.5 $ 251.9 $ 101.6 40.3%
The revenue increase of $5.6 million during the first half of 1997 over
the first half of 1996 was caused primarily by an average sales price that was
approximately 40% higher than that of the previous year, offset in part
by fewer units sold.
27
<PAGE>
Gross Profit
Gross profit equals home sales revenue, net of housing cost of sales,
which include developed lot costs, unit construction costs, amortization of
common community costs (such as the cost of model complex and architectural,
legal, and zoning costs), interest, sales tax, warranty, construction overhead,
and closing costs. The following table presents comparative first half 1997 and
1996 housing gross profit:
Six Months
(Dollars in Thousands) Ended June 30, Percentage
1997 1996 Increase Increase
---- ---- -------- --------
Dollars ........................ $ 5,288 $ 3,947 $ 1,341 34.0%
Percent of Housing Revenues .... 14.2% 11.2% 3.0% 26.8%
The increase in gross profit in the six months ended June 30, 1997 over the same
period of the previous year is primarily contributable to a 17.9% increase in
revenues along with a 26.8% increase in gross profit margin.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses, which include
advertising, model and sales office, sales administration, commissions, and
corporate overhead costs, were $4.3 million for the first half of 1997, as
compared to $4.0 million for the same period in 1996, an increase of 7.5%. This
change was caused mainly by increased advertising and model home expenses, and
higher administrative, corporate and public company costs in 1997 than
in 1996.
Development Projects
At June 30, 1997, the Company had 14 subdivisions under various stages
of development. The Company was actively selling in 11 subdivisions, was sold
out in one subdivision, and was in various stages of preparation to open for
sales in one subdivision. The Company owns the underlying land in seven
subdivisions subject to bank acquisition financing, and the underlying land in
two subdivisions free from any acquisition financing. The lots in the remaining
five subdivisions are purchased from developers on a rolling option basis.
During the first six months of 1997, the Company purchased one new subdivision
and entered into one new rolling lot option contract to increase the lots
available to the Company in one existing subdivision. Depending on market
conditions, management may elect to make additional selective property
acquisitions throughout the remainder of the current year.
Net Orders
Net orders for any period represent the number of units ordered by
customers (net of units canceled) multiplied by the average sales price per
units ordered. The following table presents comparative first half 1997 and
1996 net orders:
(Dollars in Thousands) Six Months Ended June 30, Dollar/Unit Percentage
1997 1996 Increase Increase
---- ---- -------- --------
Dollars .................... $53,941 $38,091 $15,850 41.6%
Units Ordered .............. 169 133 36 27.1%
Average Sales Price ........ $ 319.2 $ 286.4 $ 32.8 11.4%
The dollar volume of net orders for the first half of 1997 increased by
41.6% over the first half of 1996 due primarily to an increase in average sales
price and a higher number of units ordered. The increase in average sales price
was due to greater activity in higher priced subdivisions than in 1996, which
included a condominium
project.
The Company does not include sales which are contingent on the sale of
the customer's existing home as orders until the contingency is removed.
Historically, the Company has experienced a cancellation rate of less than 16%
of gross sales.
28
<PAGE>
Net Sales Backlog
Backlog represents net orders of the Company which have not closed. The
following table presents comparative June 30, 1997 and 1996 net sales backlog:
(Dollars in Thousands) June 30, Dollar/Unit Percentage
1997 1996 Increase Increase
---- ---- -------- --------
Dollars ......................... $67,177 $45,985 $21,192 46.1%
Units in Backlog ................ 184 152 32 21.1%
Average Sales Price ............. $ 365.1 $ 302.5 $ 62.6 20.7%
Dollar backlog increased 46.1% for the first half of 1997 over the
first half of 1996 due to an increase in units in backlog and by an increase in
average sales price. Average sales price has increased due to the sell out in
1996 of the lower priced Vintage Condominium subdivision and sales in 1997 of a
higher priced semi-custom subdivision, Lincoln Place. Units in backlog have
increased 21.1% over the prior year due to the increase in net orders.
Seasonality
The Company has historically closed more units in the second half of
the fiscal year than in the first half, due in part to the slightly seasonal
nature of the market for its semi-custom, luxury product homes. Management
expects that this seasonal trend will continue in the future, but may change
slightly as operations expand within the move-up and entry-level segment of the
market.
29
<PAGE>
Pro Forma Results of Operations for the Years Ended
December 31, 1996 and 1995
To assist in the understanding of the Company in light of the
operations of Monterey, management has prepared pro forma condensed combined
operating results for the years ended December 31, 1996 and 1995 that reflect
the impact of the Merger as though it occurred on January 1, 1995. These results
are not meant to be indicative of future results of operations.
Pro Forma Results of Operations
For the Year Ended December 31,
-------------------------------
1996 1995
(Dollars in thousands,
except per share data)
---------------------------------
Sales revenue $87,754 $71,491
Cost of sales 75,099 60,557
------- -------
Gross profit 12,655 10,934
Selling, general and administrative 7,777 6,792
------- -------
Income from home sales 4,878 4,142
Other income 1,998 2,836
------- -------
Earnings before income
taxes 6,876 6,978
Income tax expense 756 768
------- -------
Net earnings $6,120 $6,210
====== ======
Earnings per share $ 1.27 $ 1.28
====== ======
Key assumptions in the pro forma results of operations include:
(1) The transaction was consummated on January 1, 1995.
(2) Compensation expense was adjusted to add the new employees'
cost and to deduct the terminated employees' cost.
(3) The net operating loss was utilized to reduce the maximum
amount of taxable income possible.
Home Sales Revenue
The following table presents comparative 1996 and 1995 home sales
revenue.
Year Ended Dollar/Unit Percentage
(Dollars in Thousands) December 31, Increase Increase
1996 1995 (Decrease) (Decrease)
---- ---- ---------- ----------
Dollars ..................... $ 86,829 $ 67,926 $ 18,903 27.8%
Units Closed ................ 307 239 68 28.5%
Average Sales Price ......... $ 282.8 $ 284.2 ($ 1.4) (1.0%)
The increase in revenues of approximately $19 million during 1996 over
the previous year was caused by the increase in unit closings, partially offset
by lower average sales prices. The average sales price decreased from the prior
year due to an increase in closings produced by the Company's lower priced
move-up subdivisions, which made up approximately 55% of the homes closed in
1996. During these periods, the average sales price of the Company's luxury,
semi-custom product line exceeded $300,000 and the Company's move-up product
line averaged
30
<PAGE>
$205,000. Unit closings increased due to the growth in the number of
subdivisions producing home closings from nine in the prior year to fifteen in
1996.
Land Sales Revenue
The Company closed one land sale during 1996, which produced revenue of
$925,000 and gross profit of $506,000, and sold one land parcel during 1995,
which produced revenue of $3,565,000 and gross profit of $433,000.
Gross Profit
The following table presents comparative 1996 and 1995 gross profit.
Year Ended Percentage
(Dollars in Thousands) December 31, Increase Increase
1996 1995 (Decrease) (Decrease)
---- ---- ---------- ----------
Dollars ........................ $ 12,665 $ 10,934 $ 1,721 15.7%
Percent of Housing Revenues .... 14.6% 16.1% (1.5%) (9.3%)
The increase in gross profit is primarily attributable to a 27.8%
increase in dollar revenues offset slightly by a 1.5% decrease in the gross
profit margin. The gross profit margin decreased slightly mainly due to higher
lot costs and capitalized interest in cost of sales which was mostly offset by
lower direct construction costs and
construction overhead.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses were approximately $7.8
million for the year ended December 31, 1996 compared to approximately $6.8
million for 1995. Sales commissions paid in 1996 were $2,581,000 compared to
$2,039,000 in 1995, an increase of 27%, based on greater sales volume. There
were also increased advertising and overhead expenses generated in supporting a
greater number of active subdivisions.
Net Earnings
Net earnings decreased to approximately $6.1 million for the year ended
December 31, 1996 from approximately $6.2 million for the prior year. This
decrease is primarily the result of a $1 million decrease in interest income
from real estate loans along with increased selling, general, and administrative
expenses offset by greater gross
profit recognized from housing revenues.
Net Orders
The following table presents comparative 1996 and 1995 net orders.
(Dollars in Thousands) Year Ended
December 31, Dollar/Unit Percentage
1996 1995 Increase Increase
---- ---- -------- --------
Dollars ...................... $90,182 $59,933 $30,249 50.5%
Units Ordered ................ 283 241 42 17.4%
Average Sales Price .......... $ 318.6 $ 248.7 $ 69.9 28.1%
The dollar volume of net orders increased by 50.5% over the prior year
due to an increase in average sales prices and higher unit sales. The average
sales price increased due to an increase in sales of semi-custom luxury homes in
1996. The increase in net orders is primarily attributable to the greater number
of subdivisions in 1996.
31
<PAGE>
Net Sales Backlog
The following table presents comparative 1996 and 1995 net sales
backlog.
(Dollars in Thousands) Dollar/Unit Percentage
December 31, Increase Increase
1996 1995 (Decrease) (Decrease)
---- ---- ---------- ----------
Dollars .................... $42,661 $37,891 $ 4,770 12.6%
Units Ordered .............. 120 144 (24) (16.7%)
Average Sales Price ........ $ 355.5 $ 263.1 $ 92.4 35.1%
Dollar backlog increased 12.6% over the December 31, 1995 amount due to
an increase in average sales price. Average sales price increased due to the
sell out in 1996 of the Company's lower-priced Vintage Condominium subdivision
and greater sales in other higher priced, move-up communities.
32
<PAGE>
Financial and Operating Data of Monterey Prior to the Merger
As a result of the Merger, management believes that the Combined
Financial Data for Monterey for the year ended December 31, 1996, and for each
of the years in the five-year period then ended, are also relevant in evaluating
the Company's operating results on a going forward basis. Accordingly, the table
below sets forth certain financial and operating data regarding Monterey for the
five year period ended December 31, 1996.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Statement Data:
Total revenues .................................. $ 87,754 $ 71,491 $ 60,941 $ 40,543 $ 35,111
Cost of sales ................................... 74,874 60,332 50,655 34,664 29,544
Selling, general and administrative expenses .... 6,863 4,899 4,123 3,267 3,383
-------- -------- -------- -------- --------
Operating income ................................ 6,017 6,260 6,163 2,612 2,184
Other income (expense) .......................... (49) 141 102 (92) 32
-------- -------- -------- -------- --------
Net earnings(1) ................................. $ 5,968 $ 6,401 $ 6,265 $ 2,520 $ 2,216
======== ======== ======== ======== ========
Year Ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Operating Data: (Unaudited)
Unit sales contracts (net of cancellations) ..... 283 241 243 167 151
Units closed .................................... 307 239 201 142 133
Units in backlog at end of period ............... 120 144 142 100 75
Aggregate sales value of homes in backlog ....... $ 42,661 $ 37,891 $ 43,981 $ 30,826 $ 19,970
Average sales price per home closed ............. $ 283 $ 284 $ 299 $ 285 $ 264
At December 31,
1996(2) 1995 1994 1993 1992
------- ---- ---- ---- ----
Balance Sheet Data:
Real estate under development ................... $ 36,501 $ 33,929 $ 17,917 $ 13,736 $ 9,553
Total assets .................................... 45,741 42,654 28,820 19,227 12,366
Notes payable ................................... 30,542 24,316 12,255 7,632 3,463
Stockholders' equity ............................ 1,783 9,108 6,898 3,121 2,193
</TABLE>
- ----------------------
(1) Prior to the Merger, Monterey was a Subchapter S corporation and had no
income tax liability at the corporate level.
(2) Does not reflect the Merger consummated on December 31, 1996
33
<PAGE>
BUSINESS OF THE COMPANY
History of the Company
The Company designs, builds and sells single family homes in Arizona
and Texas. The Company builds move-up and semi-custom, luxury homes in the
Phoenix and Tucson, Arizona metropolitan areas, and entry-level and move-up
homes in the Dallas/Fort Worth, Austin and Houston, Texas metropolitan areas.
The Company has undergone significant growth in recent periods and is pursuing a
strategy of diversifying its product mix and the geographic scope of its
operations.
The Company was originally formed as a real estate investment trust
("REIT"), investing in mortgage-related assets and, to a lesser extent, selected
real estate loans. On December 31, 1996, the Company acquired through the Merger
the homebuilding operations of various entities under the Monterey Homes name,
and essentially discontinued the Company's mortgage-related operations. As part
of a strategy to diversify its operations, on July 1, 1997, the Company acquired
the homebuilding operations of several entities operating under the name Legacy
Homes ("Legacy"). Legacy has been operating in the Texas market since 1988, and
designs, builds, and sells entry-level and move-up homes.
During 1996, the Company recorded pro forma revenues of $87.8 million
and pro forma pre-tax income of $6.9 million on 307 home closings. During the
same period, Legacy closed 623 homes generating revenues of $85.1 million and
pre-tax income of $8.8 million. For the six months ended June 30, 1997, the
Company generated revenues of $38.6 million, and pre-tax income of $2.5 million,
and Legacy recorded revenues of $40.0 million, and pre-tax income of $5.6
million. The historical financial results of these companies may not be
indicative of their combined results of operations in the future.
As a result of losses from operations by the Company during its
operation as a REIT, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $50 million at June 30, 1997.
Accordingly, the Company currently pays limited income taxes.
Industry
The homebuilding industry is highly competitive and extremely
fragmented, and is greatly affected by a number of factors, on both a national
and regional level. Among the most vital factors on a national level are
interest rates and the influence of the Federal Reserve Board on interest rates.
The homebuilding industry's sensitivity to interest rate fluctuations is
two-pronged: an increase or decrease in interest rates affects (i) the
homebuilding company directly in connection with its cost of borrowed funds for
land and project development and working capital and (ii) home buyers' ability
and desire to obtain long-term mortgages at rates favorable enough to service a
long-term mortgage obligation. The Company believes that the availability of
less expensive mortgage financing vehicles such as variable rate mortgage loans
have encouraged potential home buyers moving to high growth areas to be more
willing to purchase a new home now and refinance at a later date.
Business Strategy
The Company seeks to distinguish itself from other production
homebuilders through a business strategy focusing on the following elements:
Superior Design and Quality. Monterey seeks to maximize customer
satisfaction by offering homes that, within their market segment, are built with
quality materials and craftsmanship, exhibit distinctive design, and are
situated in premium locations. In Arizona, its competitive edge in the selling
process focuses on the home's features, design, and available custom options. In
Texas, its competitive edge focuses on the design and quality of its entry-level
and move-up homes. The Company believes that its homes generally offer higher
quality and more distinctive designs within their defined price range or
category than those built by its competitors.
34
<PAGE>
Product Breadth. The Company offers homes for a wide variety of
consumers. In Arizona, the Company addresses the luxury and move-up homebuyers'
markets. The luxury market segment is characterized by unique communities and
distinctive luxury homes. The Company's expansion into the move-up buyer segment
of the market reflects its desire to increase its share of the overall housing
market in the Phoenix and Tucson metropolitan areas. In Texas, the Company
focuses on the entry-level and move-up homebuyers markets.
Highest Level of Service. In the semi-custom, luxury market, the
Company attempts to involve the customer in every phase of the building process
through a series of conferences with the sales staff, project managers, and
construction superintendents. This procedure is designed to give the buyer the
opportunity to add custom design features and monitor development of the home,
creating a sense of participation in and control over the end product.
Conservative Land Acquisition Policy. The Company has historically
pursued, and will continue to pursue, a conservative land acquisition policy. It
generally purchases land subject to complete entitlement, including zoning and
utilities services, focusing on development sites which it expects will have
less than a three-year inventory of lots. These strategies reduce the risks
associated with investments in land. Moreover, it controls lots on a
non-recourse, rolling option basis in those circumstances in which it is
economically advantageous to do so. To date, the Company has not speculated in
raw land held for investment.
Penetration of New Markets. Depending on existing market conditions,
the Company may explore expansion opportunities in other parts of the Sunbelt
states, targeting its market niches in areas where it perceives an ability to
exploit a competitive advantage. Expansion may be effected through acquisitions
of other existing homebuilders or through internal growth.
Markets and Products
Overview. The Company's Arizona operations primarily serve Scottsdale,
Northeast Phoenix and Fountain Hills, Arizona ("Scottsdale") and, beginning in
the first half of 1996, Tucson and Oro Valley, Arizona ("Tucson"). In Texas, the
Company's operations are focused in the Dallas/Fort Worth, Austin and Houston
metropolitan areas. The Company believes that these areas represent attractive
homebuilding markets with opportunity for long-term growth. The Company also
believes that its operations in certain markets, such as Scottsdale and
Dallas/Fort Worth, are well established and that it has developed a reputation
for building quality homes with distinctive designs within the market segments
served in these communities.
Arizona Markets
In its Arizona markets, the Company's semi-custom, luxury homes are
single-story, two to five-bedroom homes, ranging in base price from
approximately $220,000 to over $500,000. The homes vary in size from 2,540
square feet to 4,530 square feet and are constructed on lots ranging from 5,500
square feet to one acre. The Company also builds single-family, move-up homes on
subdivided lots. These are one and two-story detached homes, with two to five
bedrooms, ranging in base price from approximately $120,000 to over $200,000.
The homes range from 1,970 square feet to 3,050 square feet and are constructed
on lots ranging from 6,500 square feet to 10,000 square feet.
In its Arizona markets, the average sales price for homes closed by the
Company during the first half of 1997 was $377,600. At June 30, 1997, the
Company had a total of 184 home purchase contracts in backlog in Arizona
totaling $67.2 million, with an average sales price of $365,100. The average
sales price for all homes closed during 1996 and 1995 was $282,800 and $284,200,
respectively. At December 31, 1995, Monterey had a total of 144 home purchase
contracts in backlog totaling $38 million, with an average sales price of
$263,100, while at December 31, 1996, Monterey had 120 home purchase contracts
in backlog totaling $43 million, with an average sales price of $355,500.
Scottsdale, Arizona. The Company derives substantial revenues from
sales of homes in the Scottsdale area. Scottsdale is a relatively affluent city
within the Phoenix metropolitan area. Scottsdale has developed detailed master
35
<PAGE>
planning and zoning regulations and the Scottsdale area has typically appealed
to the type of higher-income buyer which the Company generally targets in this
market.
From 1995 to 1996, permits issued for single-family residential units
in the City of Scottsdale decreased 3% from 3,194 to 3,077. Permits issued in
the Phoenix metropolitan area increased 8.6% from 24,697 to 26,811 for the same
time period. Although single-family housing permits in the Phoenix metropolitan
area were at record levels in 1996, real estate analysts are predicting that new
home sales in the Phoenix metropolitan area will slow in 1998. Any such slowing
in new home sales could have a material adverse affect on the Company's
operating results.
Tucson, Arizona. The Company began offering homes for sale in Tucson in
April 1996. Tucson also has experienced growth over the last five years. Annual
building permits issued for single-family residential units in Tucson increased
moderately from approximately 5,000 in 1995 to approximately 5,200 in 1996, a 4%
increase. Real estate analysts are predicting that new home sales in the Tucson
metropolitan area will remain relatively flat in 1997.
The following table presents information relating to the current
communities in the Scottsdale and Tucson areas served by the Company for and as
of June 30, 1997:
<TABLE>
<CAPTION>
Number of Number Homes Base
Number of Homes of Homes in Homes(1) Price Range (2)
Home Sites Sold Closed Backlog Remaining (in thousands)
---------- ---- ------ ------- --------- --------------
SCOTTSDALE
<S> <C> <C> <C> <C> <C> <C> <C>
Semi-custom, luxury(3) 758 309 205 104 449 $219-$522
Move-up 219 133 100 33 86 $187-$231
--- --- --- --- ---
Total 977 442 305 137 535
--- --- --- --- ---
TUCSON
Semi-custom, luxury 112 42 22 20 70 $245-385
Move-up 200 57 32 25 143 $120-$219
--- --- --- --- ---
Total 312 99 54 45 213
--- --- --- --- ---
Total Arizona 1,289 541 359 182 748
===== === === === ===
</TABLE>
(1) "Homes Remaining" is the number of homes that could be built on both
the remaining lots available for sale and land to be developed into
lots as estimated by the Company.
(2) "Base Price Range" is the current average base sales price of homes
offered for sale .
(3) Includes 207 lots on which escrow closed in the third quarter of 1997
and marketing is currently expected to begin in the third or fourth
quarter of 1997.
Texas Markets
In the Texas market, the Company's move-up homes are one and two-story,
three to four-bedroom homes, ranging in base price from approximately $130,000
to $150,000. The homes vary in size from 1,800 square feet to 3,000 square feet.
The Company also builds single-family, entry-level homes on subdivided lots in
Texas. These are one and two-story detached homes with three to four bedrooms,
ranging in base price from approximately $90,000 to $120,000. The homes range
from 1,600 square feet to 2,400 square feet.
The average sales price for all homes closed in the first half of 1997
by Legacy was $144,600. At June 30, 1997, Legacy had a total of 303 home
purchase contracts in backlog totaling $42.7 million, with an average sales
price of $140,900. The average sales price for all homes closed during 1996 and
1995 by Legacy was $136,600 and $130,400, respectively. At December 31, 1995,
Legacy had a total of 243 home purchase contracts in backlog totaling $32
36
<PAGE>
million, with an average sales price of $133,000, while at December 31, 1996,
Legacy had 197 home purchase contracts in backlog totaling $29 million, with an
average sales price of $145,000.
Dallas, Texas. During 1997, housing starts have increased in the Dallas
area and home closings are at their highest level in approximately ten years.
Real estate analysts are predicting that sales will remain strong through the
end of 1997 but may slow in 1998. The Company is currently selling homes in
fourteen move-up and two entry-level communities in the Dallas area.
Fort Worth, Texas. The Fort Worth area is predicted to have solid sales
results through the rest of 1997, although the outlook for 1998 may be
relatively flat due to increasing land prices. Job growth in the area is
expected to remain strong. The Company is currently selling homes in three
entry-level and one move-up community in the Fort Worth area.
Austin, Texas. New jobs in the Austin area are predicted to increase
2.5% in 1997 over 1996 levels. Homes selling for less than $125,000 have shown
an increase on a year-to-year comparison. There were 4,341 single family
residential starts in the first half of 1997, which reflected a slight decrease
from 4,763 starts in the first half of 1996. The Company has four active move-up
communities and one starter community active in the Austin area.
Houston, Texas. The Company began offering homes for sale in the Houston
area in mid-1997, and currently has two active move-up communities there.
Building permits issued in Houston have increased 21% from July 1996 to July
1997, and in June of 1997, sales of new homes were up 18% over the previous
year. Analysts predict a slight acceleration in job growth in 1997, as companies
with headquarters in the area continue to expand.
37
<PAGE>
The following table presents information relating to the current
communities served by Legacy for and as of June 30, 1997:
<TABLE>
<CAPTION>
Number of Number of Number of Homes In Homes Prime Range
Home Sites Homes Sold Homes Closed Backlog Remaining(1) (in 000s)(2)
---------- ---------- ------------ ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
DALLAS
Move-up 1,476 874 713 161 602 $135 - $170
Entry-level 277 153 123 30 124 $115 - $130
----- ---- ---- ---- ---
Total 1,753 1,027 836 191 726
FORT WORTH
Move-up 77 15 3 12 62 $110 - $140
Entry-level 317 101 45 56 216 $95 - $110
----- ---- ---- ---- ---
Total 394 116 48 68 278
AUSTIN
Move-up 452 310 271 39 142 $130 - $170
Entry-level 64 5 0 5 59 $110 - $130
----- ---- ---- ---- ---
Total 516 315 271 44 201
HOUSTON
Move-up 76 0 0 0 76 $130 - $170
----- ---- ---- ---- ---
Total Texas 2,739 1,458 1,155 303 1,281
===== ===== ===== === =====
</TABLE>
(1) Homes Remaining" is the number of homes that could be built on both the
remaining lots available for sale and land to be developed into lots as
estimated by the Company.
(2) "Base Price Range" is the current average base sales price of homes
offered for sale
Land Acquisition and Development
Most of the land acquired by the Company is purchased only after necessary
entitlements have been obtained so that the Company has certain rights to begin
development or construction as market conditions dictate. The term
"entitlements" refers to development agreements, tentative maps, or recorded
plats, depending on the jurisdiction within which the land is located.
Entitlements generally give the developer the right to obtain building permits
upon compliance with conditions that are usually within the developer's control.
Even after entitlements are obtained, the Company is still required to obtain a
variety of other governmental approvals and permits during the development
process. The process of obtaining such governmental approvals and permits can
substantially delay the development process. In certain situations in the
future, the Company may consider purchasing unentitled property where it
perceives an opportunity to build on such property in a manner consistent with
its business strategy.
The Company selects land for development based upon a variety of factors,
including (i) internal and external demographic and marketing studies; (ii)
suitability of the projects, which generally are developments with fewer than
150 lots; (iii) suitability for development within a one to three year time
period from the beginning of the development process to the delivery of the last
house; (iv) financial review as to the feasibility of the proposed project,
including projected profit margins, return on capital employed, and the capital
payback period; (v) the ability to secure governmental approvals and
entitlements; (vi) results of environmental and legal due diligence; (vii)
proximity to local traffic corridors and amenities; and (viii) management's
judgment as to the real estate market, economic trends, and experience in a
particular market. The Company may consider purchasing larger properties
consisting of 200 to 500 lots or more if it deems the situation to have an
attractive profit potential and acceptable risk limitation.
38
<PAGE>
Due to the strong market in the Scottsdale area, the availability of land
in that area has decreased and the cost of such land has increased. There can be
no assurance that the Company will be able to continue to acquire land in the
Scottsdale area on terms that are favorable to the Company. The Company's
inability to acquire land on favorable terms could have a material adverse
effect on the Company's business and operating results.
The Company acquires land through purchases and rolling option contracts.
Purchases are financed through traditional bank financing or through working
capital. The Company generally utilizes rolling option contracts that are
non-recourse and require nonrefundable deposits. In Texas, the Company acquires
land almost exclusively through such rolling option contracts.
Once the land is acquired, the Company undertakes, where required,
development activities, through contractual arrangements with subcontractors,
that include site planning and engineering, as well as constructing road, sewer,
water, utilities, drainage, and recreational facilities, and other amenities.
The Company often builds homes in master planned communities with home
sites that are along or close in proximity to a major amenity, such as a golf
course. These master planned communities are designed and developed by major
land developers who develop groups of lots commonly referred to as "super pads"
which are sold to a single homebuilder. The Company typically purchases super
pads which contain between 60 and 100 fully entitled lots which are roughly
graded and have all utilities and paving brought up to the boundaries of the
super pad. The Company completes the development of each super pad by finishing
paving, final grading, and installing all utilities.
The Company strives to develop a design and marketing concept for each of
its projects, which includes determination of size, style, and price range of
the homes, layout of streets, size and layout of individual lots, and overall
community design. The product line offered in a particular project depends upon
many factors, including the housing generally available in the area, the need of
a particular market, and the Company's cost of lots in the project.
The Company has occasionally used partnerships or joint ventures to
purchase and develop land where such arrangements were necessary to acquire the
property or appeared to be otherwise economically advantageous to Monterey. The
Company may continue to consider such arrangements where management perceives an
opportunity to acquire land upon favorable terms, minimize risk, and exploit
opportunities through seller financing.
39
<PAGE>
The following table sets forth by project the Company's land inventory in
Arizona as of June 30, 1997.
<TABLE>
<CAPTION>
Land Under
----------
Land Owned Contract or Option
---------- ------------------
Lots Under Lots Under
Finished Development Finished Development
Projects Lots (estimate) Lots (estimate) Total
-------- ---- ---------- ---- ---------- -----
<S> <C> <C> <C> <C> <C>
SCOTTSDALE AREA
Semi-Custom, luxury 120 176 15 241(1) 552
Move-up 61 -- 58 -- 119
--- ---- --- ---- ---
Total 181 176 73 241 671
--- --- --- --- ---
TUCSON AREA
Semi-Custom, luxury 47 -- 43 -- 90
Move-up 104 55 9 -- 168
--- --- --- ---- ---
Total 151 55 52 -- 258
--- --- -- ---- ---
Total Arizona 332 231 125 241 929
=== === === === ===
</TABLE>
(1) Escrow closed on 143 lots in the third quarter of 1997, and marketing
currently is expected to begin in the third or fourth quarter of 1997
on those lots.
The following table sets forth by project Legacy's land inventory as
of June 30, 1997.
<TABLE>
<CAPTION>
Land Under
----------
Land Owned Contract or Option
---------- ------------------
Lots Under Lots Under
Finished Development Finished Development
Projects Lots (estimate) Lots (estimate) Total
-------- ---- ---------- ---- ---------- -----
<S> <C> <C> <C> <C> <C>
DALLAS AREA
Entry Level -- -- 92 31 123
Move-up 82 -- 318 163 563
--- -- --- --- ----
Total 82 -- 410 194 686
--- -- --- --- ----
FORT WORTH AREA
Entry Level 86 91 94 -- 271
Move-up 7 -- 67 -- 74
--- -- --- --- ----
Total 93 91 161 -- 345
--- -- --- --- ----
AUSTIN AREA
Entry Level 6 -- 58 -- 64
Move-up 25 -- 156 -- 181
--- -- --- --- ----
Total 31 -- 214 -- 245
--- -- --- --- ----
HOUSTON AREA
Entry Level -- -- -- -- --
Move-up -- -- -- 76 76
--- -- --- --- ----
Total -- -- -- 76 76
--- -- --- --- ----
Total Texas 206 91 785 270 1352
=== == === === ====
</TABLE>
40
<PAGE>
Construction
The Company acts as the general contractor for the construction of its
projects. Subcontractors typically are retained on a subdivision-by-subdivision
basis in Arizona and on a geographic area basis in Texas, to complete
construction at a fixed price. Agreements with subcontractors and materials
suppliers are generally entered into after competitive bidding on an individual
basis. The Company obtains information from prospective subcontractors and
suppliers with respect to their financial condition and ability to perform their
agreements prior to commencement of the formal bidding process. From time to
time, the Company enters into longer term contracts with subcontractors and
suppliers if management believes that more favorable terms can be secured.
Contracts are awarded to subcontractors, who are supervised by the
Company's project managers and field superintendents. Such project managers and
field superintendents coordinate the activities of subcontractors and suppliers,
subject their work to quality and cost controls, and assure compliance with
zoning and building codes.
The Company specifies that quality, durable materials be used in
constructing its homes. The Company does not maintain significant inventory of
construction materials. When possible, the Company negotiates price and volume
discounts with manufacturers and suppliers on behalf of subcontractors to take
advantage of its volume of production. Generally, access to The Company's
principal subcontracting trades, materials, and supplies continue to be readily
available in each of its markets; however, prices for these goods and services
may fluctuate due to various factors, including supply and demand shortages
which may be beyond the control of the Company or its vendors. The Company
believes that its relations with its suppliers and subcontractors are good.
The Company generally clusters the homes sold within a project, which
management believes creates efficiencies in land development and construction
and improves customer satisfaction by reducing the number of vacant lots
surrounding a completed home. Typically, the construction of a home by the
Company in Arizona is completed within four to eight months from commencement of
construction, and within 100 days of commencement of construction in Texas,
although schedules may vary depending on the availability of labor, materials
and supplies, product type, and location. The Company strives to design homes
which promote efficient use of space and materials, and to minimize construction
costs and time.
The Company generally provides a one-year limited warranty on workmanship
and building materials with each of its homes. The Company's subcontractors
generally provide an indemnity and a certificate of insurance prior to receiving
payments for their work and, therefore, claims relating to workmanship and
materials are usually the primary responsibility of The Company's
subcontractors.
Historically, the Company has not incurred any material costs relating to
any warranty claims or defects in construction.
Marketing and Sales
The Company believes that it has an established reputation for developing
high quality homes, which helps generate interest in each new project. In
addition, the Company makes extensive use of advertising and other promotional
activities, including magazine and newspaper advertisements, brochures, direct
mail, and the placement of strategically located sign boards in the immediate
areas of its developments.
The Company uses model homes as a tool in demonstrating the competitive
advantages of its home designs and features to prospective home buyers. The
Company generally employs or contracts with interior designers who are
responsible for creating an attractive model home for each product line within a
project which is designed to appeal to the preferences of potential home buyers.
The Company generally builds between one and four model homes for each active
community depending upon the number of homes to be built within each community
and the product to be offered. At June 30, 1997, the Company owned one model
home in the Scottsdale area, with no model units under construction. There were
three model homes under construction and none owned in the Tucson area at June
30, 1997. Legacy owned
41
<PAGE>
twenty-three model homes and had one model home under construction at June 30,
1997. The Company's Arizona division attempts, to the extent possible, to sell
its model homes and to lease them back from purchasers who own the models for
investment purposes or who do not intend to live in the home immediately, either
because they are moving from out of state or for other reasons. At June 30,
1997, Monterey had sold and was leasing back 24 model homes at a total monthly
lease amount of $66,800.
In its Arizona markets, the Company tailors its product offerings,
including size, style, amenities, and price, to attract higher income home
buyers. In these markets, the Company offers a broad array of options and
distinctive designs and provides home buyers with the option of customizing many
features of their new home.
Most of the Company's homes are sold by full-time, commissioned sales
employees who typically work from the sales office located in the model homes
for each project. The Company's goal is to ensure that its sales force has
extensive knowledge of the Company's operating policies and housing products. To
achieve this goal, all sales personnel are trained and attend periodic meetings
to be updated on sales techniques, competitive products in the area, the
availability of financing, construction schedules, marketing and advertising
plans, and the available product lines, pricing, options, and warranties offered
by Company. The Company also requires its sales personnel to be licensed real
estate agents where required by law. Further, the Company utilizes independent
brokers to sell its homes and generally pays a sales commission on the base
price of the home.
From time to time, the Company offers various sales incentives, such as
landscaping and certain interior home improvements, in order to attract buyers.
The use and type of incentives depends largely on prevailing economic conditions
and competitive market conditions.
Backlog
A significant majority of the homes sold by the Company are made pursuant
to standard sales contracts entered into prior to commencement of construction.
Such sales contracts are usually subject to certain contingencies such as the
buyer's ability to qualify for financing. Homes covered by such sales contracts
but not yet closed are considered as "backlog." The Company does not recognize
revenue on homes covered by such contracts until the sales are closed and the
risk of ownership has been legally transferred to the buyer. The Company
generally constructs one or two homes per project in advance of obtaining a
sales contract. These homes are not included in backlog until they are subject
to a sales contract.
The Company's backlog in number of units decreased to 120 at December 31,
1996 from 144 at December 31, 1995. The dollar value of such backlog, however,
increased to $42.7 million at December 31, 1996 from $37.9 million at December
31, 1995. The Company's backlog in number of units increased to 184 at June 30,
1997 from 152 at June 30, 1996. The dollar value of such backlog increased to
$67.2 million at June 30, 1997 from $46.0 million at June 30, 1996. The increase
in the number of units in backlog at June 30, 1997 is due to strong first half
1997 sales.
Legacy's backlog in number of units decreased to 197 at December 31, 1996
from 243 at December 31, 1995. The dollar value of such backlog was $28.6
million in 1996 and $32.3 million in 1995. The Legacy backlog in number of units
decreased to 303 with a dollar value of $42.7 million at June 30, 1997 from 380
units with a dollar value of $52.8 million at June 30, 1996.
Customer Financing
With respect to those purchasers requiring financing, the Company seeks to
assist home buyers in obtaining such financing from unaffiliated mortgage
lenders offering qualified buyers a variety of financing options. The Company
provides mortgage banking services to its customers in its Texas markets through
a related mortgage lending company, Texas Home Mortgages Corporation. The
Company may pay a portion of the closing costs and discount mortgage points to
assist home buyers with financing. Since many home buyers utilize long-term
mortgage financing to purchase a home,
42
<PAGE>
adverse economic conditions, increases in unemployment, and high mortgage
interest rates may deter and/or reduce the number of potential home buyers.
Customer Relations and Quality Control
Management believes that strong customer relations and an adherence to
stringent quality control standards are fundamental to the Company's continued
success. The Company believes that its commitment to customer relations and
quality control have significantly contributed to its reputation as a high
quality builder.
Generally, for each development, representatives of the Company, who may be
a project manager or project superintendent, and a customer relations
representative, oversee compliance with the Company's quality control standards.
These representatives allocate responsibility for (i) overseeing home
construction; (ii) overseeing performance by subcontractors and suppliers; (iii)
reviewing the progress of each home and conducting formal inspections as
specific stages of construction are completed; and (iv) regularly updating each
buyer on the progress of his or her home.
In its luxury home group, the Company strives to inform and involve the
customer in all phases of the building process in most of its communities. The
Company usually holds a pre-construction conference with the customer, sales
person, and construction superintendent to review the house plans and design
features selected by the customer. A second conference is held at the completion
of the framing of the house to review the progress and answer any questions the
customer may have. Upon completion of the house, a new home orientation manager
meets with the customer for a new home orientation.
Competition and Market Factors
The development and sale of residential property is a highly competitive
and fragmented industry. The Company competes for residential sales with
national, regional, and local developers and homebuilders, resales of existing
homes, and, to a lesser extent, condominiums and available rental housing. Some
of the homebuilders with whom Monterey competes have significantly greater
financial resources and/or lower costs than the Company. Competition among both
small and large residential homebuilders are based on a number of interrelated
factors, including location, reputation, amenities, design, quality, and price.
The Company believes that it compares favorably to other homebuilders in the
markets in which it operates due primarily to (i) its experience within its
specific geographic markets which allows it to develop and offer new products to
potential home buyers which reflect, and adapt to, changing market conditions;
(ii) its ability, from a capital and resource perspective, to respond to market
conditions and to exploit opportunities to acquire land upon favorable terms;
and (iii) its reputation for outstanding service and quality products.
The homebuilding industry is cyclical and affected by consumer confidence
levels, prevailing economic conditions in general, and by job availability and
interest rate levels in particular. A variety of other factors affect the
homebuilding industry and demand for new homes, including changes in costs
associated with home ownership such as increases in property taxes and energy
costs, changes in consumer preferences, demographic trends, the availability of
and changes in mortgage financing programs, and the availability and cost of
land and building materials. Real estate analysts are predicting that new home
sales in the Phoenix metropolitan area may slow significantly in 1997 and 1998
and that sales in the Tucson metropolitan area will remain relatively flat in
1997. In the Dallas-Fort Worth, Houston and Austin metropolitan areas,
predictions are that new home sales will remain relatively flat or show a
moderate increase, depending on the market, for 1997. Such a slowing in new home
sales would increase competition among homebuilders in these areas. There can be
no assurance that the Company will be able to compete successfully against other
homebuilders in its current markets in a more competitive business environment
that would result from such a slowing in new home sales or that such increased
competition will not have a material adverse affect on the Company's business
and operating results.
43
<PAGE>
Government Regulation and Environmental Matters
Most of the Company's land is purchased with entitlements, providing for
zoning and utility service to project sites and giving it the right to obtain
building permits and begin construction almost immediately upon compliance with
specified conditions, which generally are within the Company's control. The
length of time necessary to obtain such permits and approvals affects the
carrying costs of unimproved property acquired for the purpose of development
and construction. In addition, the continued effectiveness of permits already
granted is subject to factors such as changes in policies, rules, and
regulations, and their interpretation and application. To date, the government
approval processes discussed above have not had a material adverse effect on the
development activities of the Company. There can be no assurance, however, that
these and other restrictions will not adversely affect the Company in the
future.
Because most of the Company's land is entitled, construction moratoriums
generally would only adversely affect the Company if they arose from health,
safety, and welfare issues, such as insufficient water or sewage facilities.
Local and state governments also have broad discretion regarding the imposition
of development fees for projects in their jurisdiction. These fees are normally
established when the Company receives recorded final maps and building permits.
However, as the Company expands it may also become increasingly subject to
periodic delays or may be precluded entirely from developing communities due to
building moratoriums, "slow-growth" initiatives, or building permit allocation
ordinances which could be implemented in the future in the states and markets in
which the Company may then operate.
The Company is also subject to a variety of local, state, and federal
statutes, ordinances, rules, and regulations concerning the protection of health
and the environment. In the Scottsdale market, the Company is subject to several
environmentally sensitive land ordinances which mandate open space areas with
public easements in housing developments. The Company must also comply with
flood plain concerns in certain desert wash areas, native plant regulations, and
view restrictions. These and similar laws may result in delays, cause the
Company to incur substantial compliance and other costs, and prohibit or
severely restrict development in certain environmentally sensitive regions or
areas. To date, however, compliance with such ordinances has not materially
affected the Company's operations. No assurance can be given that such a
material adverse effect will not occur in the future.
Bonds and Other Obligations
The Company generally is not required, in connection with the development
of its projects, to obtain letters of credit and performance, maintenance, and
other bonds in support of its related obligations with respect to such
development. Such bonds are usually provided by subcontractors.
Employees and Subcontractors
At June 30, 1997, Monterey had 93 employees, of which 17 were in management
and administration, 25 in sales and marketing, and 51 in construction
operations. The employees are not unionized and the Company believes that its
relations with its employees are good. The Company acts solely as a general
contractor and all of its construction operations are conducted through project
managers and field superintendents who manage third party subcontractors. The
Company utilizes independent contractors for construction, architectural, and
advertising services.
At June 30, 1997, Legacy and its related entities had 70 employees, of
which 24 were in administration, 18 in sales and marketing, and 28 in
construction operations.
Real Estate Loan Business Prior to Merger
Prior to the Merger, the Company made or acquired 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.
44
<PAGE>
In the latter half of 1995, in anticipation of a potential acquisition
transaction, the Company slowed its origination of Real Estate Loans. The
following table sets forth information relating to the Company's only
outstanding Real Estate Loan at December 31, 1996 and March 31, 1997.
<TABLE>
<CAPTION>
Amount Amount
Interest Outstanding at Outstanding at
Description Rate Payment Terms December 31, 1996 June 30, 1997
----------- ---- ------------- ----------------- -------------
<S> <C> <C> <C>
First Deed of Trust on 41 acres 16% Interest only monthly, principal $1,696,000 $649,000
of land in Gilbert, Arizona, due October 18, 1997.
face value of $2,800,000.
</TABLE>
The above loan was current at June 30, 1997. The Company does not
intend to make any additional Real Estate Loans in the future.
Mortgage Assets Acquired Prior to Merger
Prior to the Merger, the Company acquired a number of 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"), mortgage pass-through certificates
("MPCs"), 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 trusts in which the
Company has a beneficial interest to the extent of distributions to the Company
as the owner of such beneficial interest.
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-collateralization
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 payments.
Certain classes of the Mortgage Securities will be subject to redemption at the
option of the issuer of such series or upon the instruction of the Company (as
the holder of the residual interest in the REMICs with respect to the other
Mortgage 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
45
<PAGE>
the Mortgage Securities are invested after the payment of principal and interest
on the related Mortgage Securities and the payment of expenses.
As of June 30, 1997, Monterey owned mortgage interests with respect to
eight separate series of Mortgage Securities with a net amortized cost balance
of approximately $856,000. This cost represents 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.
On July 31, 1997, the Company sold one of its mortgage securities for
$3.1 million, resulting in a gain of $2.7 million. The security sold was a
Series I - Collateralized Bond issued by Westam Mortgage Financial Corporation.
The cash proceeds from the sale will be reinvested in the Company's homebuilding
business.
As a result of the Merger and the termination of the Company's REIT
status, the Company does not intend to acquire any additional mortgage assets.
The Company may elect in the future to (i) hold the mortgage assets to maturity,
(ii) redeem the mortgage assets on or after the allowable redemption dates
specified in the controlling agreement, or (iii) sell the mortgage assets. The
impact of each of the foregoing actions on the Company's operating results is
set forth under "Risk Factors -- Mortgage Asset Considerations" above.
Facilities
The Company leases approximately 11,000 square feet of office space for
its corporate headquarters from a limited liability company ("LLC") owned by
Messrs. Cleverly and Hilton in an approximately 14,000 square foot office
building in Scottsdale, Arizona. The Company leases the space on a five-year
lease (ending September 1, 1999), net of taxes, insurance and utilities, at an
annual rate which management believes is competitive with lease rates for
comparable space in the Scottsdale area. Rents paid to the LLC totaled $173,160
and $164,394 during fiscal years 1996 and 1995, respectively. For the first
quarter of 1997, rent paid to the LLC totaled $46,011. The Company has an option
to expand its space in the building and to renew the lease for additional terms
at rates which are competitive with those in the market at such time. Management
believes that the terms of the lease are no less favorable than those which it
could obtain in an arm's length negotiated transaction. The Company leases
approximately 1,500 square feet of office space in Tucson, Arizona. The lease
term is for 37 months commencing on October 1, 1995 at an initial annual rent of
$13.74 per square foot, increasing during the term of the lease to an ending
rate of $15.74 per square foot.
The Company leases approximately 13,000 square feet of office space in
Plano, Texas from a partnership owned by John and Eleanor Landon. The annual
rent under the lease is $163,175. The lease expires May 15, 2002. Management
believes that the terms of the lease are no less favorable than those which it
could obtain in an arm's length negotiated transaction. The Company also leases
approximately 1,134 square feet of office space in Austin, Texas at an annual
rent of $20,412, with the lease expiring on March 31, 1998, and approximately
934 square feet of office space in Houston, Texas at an annual rent of $9,527,
and with an expiration date of July 1, 1998.
The Company also leases, on a triple net basis, 24 model homes. Such
leases are for terms ranging from 2 months to 27 months, with renewal options
ranging from 30 days to over 1 year, on a month-to-month basis. The lease rates
are typically equal to 7% to 12% of the sales price of the homes per annum.
Legal Proceedings
The Company is involved in various routine legal proceedings incidental
to its business. Management believes that none of these legal proceedings,
certain of which are covered by insurance, will have a material adverse impact
on the financial condition or results of operations of the Company.
46
<PAGE>
PROPERTIES
The Company leases approximately 11,000 square feet of office space for
its corporate headquarters from a limited liability company ("LLC") owned by
Messrs. Cleverly and Hilton in an approximately 14,000 square foot office
building in Scottsdale, Arizona. Monterey leases the space on a five-year lease
(ending September 1, 1999), net of taxes, insurance and utilities, at an annual
rate which management believes is competitive with lease rates for comparable
space in the Scottsdale area. Rents paid to the LLC totaled $173,160 and
$164,394 during fiscal years 1996 and 1995, respectively. For the first quarter
of 1997, rent paid to the LLC totaled $46,011. The Company has an option to
expand its space in the building and to renew the lease for additional terms at
rates which are competitive with those in the market at such time. Management
believes that the terms of the lease are no less favorable than those which it
could obtain in an arm's length negotiated transaction. The Company leases
approximately 1,500 square feet of office space in Tucson, Arizona. The lease
term is for 37 months commencing on October 1, 1995 at an initial annual rent of
$13.74 per square foot, increasing during the term of the lease to an ending
rate of $15.74 per square foot.
The Company leases approximately 13,000 square feet of office space in
Plano, Texas from a partnership owned by John and Eleanor Landon. The annual
rent under the lease is $163,175. The lease expires May 15, 2002. Management
believes that the terms of the lease are no less favorable than those which it
could obtain in an arm's length negotiated transaction. The Company also leases
approximately 1,134 square feet of office space in Austin, Texas at an annual
rent of $20,412, with the lease expiring on March 31, 1998, and approximately
934 square feet of office space in Houston, Texas at an annual rent of $9,527,
and with an expiration date of July 1, 1998.
The Company also leases, on a triple net basis, 24 model homes. Such
leases are for terms ranging from 2 months to 27 months, with renewal options
ranging from 30 days to over 1 year, on a month-to-month basis. The lease rates
are typically equal to 7% to 12% of the sales price of the homes per annum.
DESCRIPTION OF CAPITAL STOCK
The following summary of certain provisions of the Company's capital
stock describes material provisions of, but does not purport to be complete and
is subject to, and qualified in its entirety by, the Company's articles of
incorporation and by-laws and by the provisions of applicable law.
Common Stock
The Company is authorized to issue up to 50,000,000 shares of Common
Stock, $0.01 par value. As of September 5, 1997, there were 5,251,195 shares of
Common Stock outstanding, held of record by 517 holders. Holders of Common Stock
are entitled to one vote for each share held on all matters submitted to a vote
of stockholders and do not have cumulative voting rights. Accordingly, holders
of a majority of the shares of Common Stock entitled to vote in any election of
directors may elect all of the directors standing for election. Holders of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared by the board of directors out of funds legally available therefor,
subject to any preferential dividend rights of any outstanding preferred stock.
Upon the liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to receive ratably the net assets of the Company
available after the payment of all debts and other liabilities and subject to
the prior rights of any outstanding preferred stock. Holders of Common Stock
have no preemptive (other than as determined in the sole discretion of the board
of directors of the Company), subscription, redemption or conversion rights. The
outstanding shares of Common Stock are, and the shares subject to Warrants will
be, when issued and paid for, fully-paid and nonassessable. The rights,
47
<PAGE>
preferences, and privileges of holders of Common Stock are subject to, and may
be adversely affected by, the rights of the holders of shares of any series of
preferred stock which the Company may issue in the future. The Company is not
currently authorized to issue preferred stock under its articles of
incorporation.
The Company's articles of incorporation contain a provision allowing
action to be authorized by the affirmative vote of the holders of a majority of
the total number of shares of Common Stock outstanding and entitled to vote
thereon notwithstanding any provision of law requiring the authorization of the
action by a greater proportion than such a majority. This provision may allow
authorization of certain extraordinary transactions and amendment of the
Company's articles of incorporation, including an amendment changing the terms
or contract rights of any of its outstanding Common Stock by classification,
reclassification, or otherwise, by the affirmative vote of the holders of a
majority of the shares of Common Stock outstanding. But for such provision,
under Maryland law, such extraordinary transactions and amendment of the
articles of incorporation of the Company, with certain limited exceptions, would
require the affirmative vote of the holders of two-thirds of the outstanding
Common Stock entitled to vote thereon. The Common Stock is also subject to
significant restrictions on transfer. See "The Merger - Amendment to Articles of
Incorporation" and "The Merger -NOL Carryforward."
Warrants
The Warrants were issued in October 1994 and are governed by the
Warrant Agreement effective as of October 17, 1994 (the "Warrant Agreement")
between the Company and Norwest Bank Minnesota, N.A. (the "Warrant Agent").
Holders of Warrants are referred to the Warrant Agreement which is included as
an exhibit to the Registration Statement for a complete statement of the terms
of the Warrants. The following summary does not purport to be complete and is
qualified in its entirety by reference to all of the provisions of the Warrant
Agreement. Capitalized terms used in this "Description of the Warrants" and not
defined herein have the meanings given to them in the Warrant Agreement. The
description of the Warrants herein will also apply to the Company Warrants.
Each Warrant entitles the holder to purchase one share of the Company's
Common Stock for $4.0634 per share (the "Purchase Price"), subject to adjustment
as described herein. At the time of exercise of a Warrant, the Warrant holder
will also receive an additional .2069 shares of the Contingent Warrant Stock for
each Warrant exercised, without the payment of any additional consideration or
exercise price. See "The Merger - The Merger Consideration." The Company
Warrants currently entitle the holders thereof to acquire, in the aggregate and
including the Contingent Warrant Stock that will be acquired on exercise of the
Company Warrants, 256,345 shares of Common Stock. The Warrants became
exercisable on the effective date of the Merger and will continue to be
exercisable through October 15, 2001 except as provided in the following
sentence. In the event that notice is given in accordance with the Warrant
Agreement in connection with the liquidation, dissolution, or winding up of the
Company, the right to exercise the Warrants will expire at the close of business
on the third full business day before the date specified in such notice as the
record date for determining registered holders entitled to receive any
distribution upon such liquidation, dissolution, or winding up. The Company may
not redeem the Warrants.
On the effective date of the Merger, the Monterey Warrants were
converted into Warrants of the Company, and the Company assumed all of the
rights and obligations of the Monterey Entities under the Warrant Agreement.
The Warrants may be exercised in whole or in part by surrendering at
the office of the Warrant Agent in Minneapolis, Minnesota, the Warrant
Certificate evidencing such Warrants, together with a subscription in the form
set forth on the reverse of the Warrant Certificate, duly executed and
accompanied by payment of the Purchase Price, in U.S. dollars, by tender of
federal funds or a certified or bank cashier's check, payable to the order of
the Warrant Agent. As soon as practicable after such exercise, the Company will
cause to be issued and delivered to the holder or upon his order, in such name
or names as may be directed by him, a certificate or certificates for the number
of full shares of Common Stock to which he is entitled. If fewer than all of the
Warrants evidenced by a Warrant Certificate are exercised, the Warrant Agent
will deliver to the exercising Warrant holder a new Warrant Certificate
representing the unexercised portion of the Warrant Certificate. Fractional
shares will not be issued upon exercise of a Warrant, and in lieu thereof,
48
<PAGE>
the Company will pay to the holder an amount in cash equal to such fraction
multiplied by the Current Market Price Per Share, determined in accordance with
the Warrant Agreement.
The person in whose name the certificate is to be issued will be deemed
to have become the holder of record of the stock represented thereby on the date
when the Warrant Certificate with the subscription duly executed and completed
is surrendered and payment of the Purchase Price is made, unless the stock
transfer books of the Company are closed on such date, in which case, such
person will be deemed the record holder of the shares at the close of business
on the next succeeding date on which the stock transfer books are opened.
No service charge will be made for registration of transfer or exchange
of any Warrant Certificate. The Company may require payment of a sum sufficient
to cover any stamp or other tax or governmental charge that may be imposed in
connection with any registration of transfer or exchange of Warrant
Certificates.
Subject to certain conditions and limitations, the number of Warrant
Shares issuable upon the exercise of the Warrants and/or the Purchase Price are
subject to adjustment in certain events including: (i) the issuance of Common
Stock (including in certain cases the issuance in a public offering of any
stock, securities, obligation, option, or other right or warrant that may be
converted into, exchanged for, or satisfied in shares of Common Stock) for
consideration per share less than the Purchase Price prior to such issue, (ii)
the declaration of a dividend on Common Stock payable in Common Stock or the
subdivision, combination, or issuance of capital stock in connection with a
reclassification of Common Stock, (iii) any distribution of the Company's assets
upon or with respect to its Common Stock as a liquidating or partial liquidating
dividend, and (iv) the issuance of stock, securities, rights, options, or
warrants to all holders of the Common Stock or in an integrated transaction
where more than 99% of such instruments or securities are acquired by persons
who, prior to the transaction, were security holders of the Company, entitling
them to subscribe for or purchase Common Stock or securities convertible into
Common Stock at a price per share less than the Current Market Price Per Share
on the record date for the issuance of such securities, instruments, or rights
or the granting of such securities, options, or warrants. The Current Market
Price Per Share of the Company's Common Stock on any date is determined in
reference to (i) the average of the daily closing prices (or if no sale is made
on any trading date, the average of the closing bid and asked prices) for the
thirty consecutive trading days commencing thirty-five trading days before such
date, if the Company's Common Stock is listed on an exchange, (ii) the average
of the last reported sale price or prices or the mean of the last reported bid
and asked prices reported by the National Association of Securities Dealers
Automated Quotations System ("NASDAQ"), or if not so quoted on NASDAQ, as quoted
on the National Quotations Bureau, Inc., for the thirty consecutive trading days
commencing thirty-five days before such date, or (iii) if neither (i) or (ii) is
applicable, the fair market value of the Common Stock as determined in good
faith by the Board of Directors of the Company.
In the event that the Company consolidates with, merges with or into,
or sells all or substantially all of its assets (for a consideration consisting
primarily of securities) to, another corporation, each Warrant thereafter shall
entitle the holder to receive upon exercise, the number of shares of common
stock or other securities or property which the holder would have received had
the Warrant been exercised immediately prior to the consolidation, merger, or
sale of assets.
In the event a bankruptcy or reorganization is commenced by or against
the Company, a bankruptcy court may hold that unexercised Warrants are executory
contracts which may be subject to rejection by the Company with approval of the
bankruptcy court. As a result, holders of the Warrants may not be entitled to
receive any consideration or may receive an amount less than they would be
entitled to if they had exercised their Warrants prior to the commencement of
any such bankruptcy or reorganization.
The holders of unexercised Warrants are not entitled, by virtue of
being holders, to exercise any rights as stockholders of the Company.
Subject to certain requirements, from time to time the Company and the
Warrant Agent, without the consent of the holders of the Warrants, may amend or
supplement the Warrant Agreement for certain purposes, including curing
49
<PAGE>
ambiguities, defects, inconsistencies, or manifest errors, provided that such
amendments and supplements are not prejudicial to the rights of the Warrant
holders as indicated by the general intent of the original language.
Maryland Law and Certain Charter Provisions
The Company is incorporated in Maryland and is subject to the
provisions of the Maryland General Corporations Law (the "MGCL"), certain of
which provisions are discussed herein.
Business Combinations. The MGCL prohibits certain "business
combinations" (including, in certain circumstances and subject to certain
exceptions, a merger, consolidation, share exchange, asset transfer, issuance of
equity securities, or reclassification of securities) between a Maryland
corporation and an Interested Stockholder or any affiliate of an Interested
Stockholder. Subject to certain qualifications, an "Interested Stockholder" is a
person (a) who beneficially owns 10% or more of the voting power of the
corporation's shares after the date on which the corporation had 100 or more
beneficial owners of its stock, or (b) is an affiliate or associate of the
corporation and was the beneficial owner of 10% or more of the voting power of
the corporation's shares, at any time within the two-year period immediately
prior to the date in question and after the date on which the corporation had
100 or more beneficial owners of its stock. Unless an exemption applies, such
business combinations are prohibited for five years after the most recent date
on which the Interested Stockholder became an Interested Stockholder. Unless an
exemption applies, any business combination that is not so prohibited must be
recommended by the board of directors and approved by the affirmative vote of at
least (a) 80% of the votes entitled to be cast by outstanding voting shares of
the corporation, and (b) 66 2/3% of the votes entitled to be cast by the holders
of voting shares of the corporation, other than voting shares held by the
Interested Stockholder, or an affiliate or associate of the Interested
Stockholder, with whom the business combination is to be effected. The MGCL
specifies a number of situations in which the business combination restrictions
described above would not apply. For example, such restrictions would not apply
to a business combination with a particular Interested Shareholder that is
approved or exempted by the board of directors of a corporation prior to the
time that the Interested Stockholder becomes an Interested Stockholder. A
Maryland corporation also may adopt an amendment to its charter electing not to
be subject to the special voting requirements of the foregoing legislation. Any
such amendment would have to be approved by the affirmative vote of the same
percentages and groups of the outstanding shares of voting stock of the
corporation as described above for approval of a business combination. No such
amendment to the charter of the Company has been effected.
Control Share Acquisitions. The MGCL provides that "control shares" of
a Maryland corporation acquired in a "control share acquisition" have no voting
rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast on the matter, excluding shares of stock owned by the
acquiror or by officers or directors who are employees of the corporation.
"Control shares" are voting shares of stock which, if aggregated with all other
shares of stock previously acquired by such a person or which that person is
entitled to vote (other than by revocable proxy), would entitle the acquiror to
exercise voting power in electing directors within one of the following ranges
of voting power: (a) 20% or more but less than 331/3%; (b) 331/3% or more but
less than a majority; or (c) a majority of all voting power. Control shares do
not include shares of stock an acquiring person is entitled to vote as a result
of having previously obtained stockholder approval. A control share acquisition
means, subject to certain exceptions, the acquisition of, ownership of, or the
power to direct the exercise of voting power with respect to, control shares.
A person who has made or proposed to make a "control share
acquisition," upon satisfaction of certain conditions (including an undertaking
to pay expenses), may compel the Board of Directors to call a special meeting of
stockholders to be held within 50 days of demand therefor to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders' meeting.
If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as permitted by the
statute, then, subject to certain conditions and limitations, the corporation
may redeem any or all of the control shares (except those for which voting
rights have previously been approved) for fair value determined, without regard
to voting rights, as of the date of the last acquisition of control shares by
the acquiring person in a control
50
<PAGE>
share acquisition or if any meeting of stockholders was held at which the rights
of such shares were considered, as of the date of such meeting. If voting rights
for "control shares" are approved at a stockholders' meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the stock as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiring person in the control share
acquisition, and certain limitations and restrictions otherwise applicable to
the exercise of dissenters' rights do not apply in the context of a "control
share acquisition."
The control share acquisition statute does not apply to stock acquired
in a merger, consolidation or stock exchange if the corporation is a party to
the transaction, or to acquisitions previously approved or excepted by a
provision in the charter or bylaws of the corporation. Neither the Company's
charter nor its Bylaws has provisions exempting any
control share acquisitions.
Limitation of Liability and Indemnification of Directors. Under the
MGCL, a corporation's articles may, with certain exceptions, include any
provision expanding or limiting the liability of its directors and officers to
the corporation or its stockholders for money damages, but may not include any
provision that restricts or limits the liability of its directors or officers to
the corporation or its stockholders to the extent that (i) it is proved that the
person actually received an improper benefit or profit in money, property, or
services for the amount of the benefit or profit in money, property, or services
actually received; or (ii) a judgment or other final adjudication adverse to the
person is entered in a proceeding based on a finding in the proceeding 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 in the
proceeding. The Company's charter contains a provision limiting the personal
liability of officers and directors to the Company and its stockholders for
money damages to the fullest extent permitted under Maryland law.
In addition, with certain exceptions, the MGCL permits a corporation to
indemnify its present and former directors and officers, among others, against
liability incurred, unless it is established that (i) the act or omission of the
director or officer was material to the matter giving rise to the proceeding and
was committed in bad faith or was the result of active and deliberate
dishonesty, or (ii) the director or officer actually received an improper
personal benefit in money, property, or services, or (iii) in the case of any
criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. The Company's charter provides that it
will indemnify (i) its directors to the full extent allowed under Maryland law,
(ii) its officers to the same extent it shall indemnify its directors, and (iii)
its officers who are not directors to such further extent as shall be authorized
by the board of directors and be consistent with law.
Warrant Agent, Transfer Agent and Registrar
The warrant agent is Norwest Bank Minnesota, N.A. and its address is
Norwest Center, Sixth and Marquette, Minneapolis, Minnesota 55479-0069. The
transfer agent and registrar for the Company's Common Stock is ChaseMellon
Shareholder Services, 50 California Street, San Francisco, California 94111.
PRICE OF COMMON STOCK AND DIVIDEND POLICY
Price of Common Stock
The Company's Common Stock is publicly traded on the NYSE under the
ticker symbol "MTH." The following table sets forth the high and low closing
sales prices, adjusted for stock splits, of the Common Stock, as reported by the
NYSE, for the periods indicated below.
High Low
---- ---
1997
Third Quarter (through September 29, 1997) $14 3/4 $8 1/2
Second Quarter 8 3/4 4 3/8
51
<PAGE>
First Quarter 7 1/4 5 1/2
1996
Fourth Quarter 7 7/8 6 3/4
Third Quarter 8 1/4 6
Second Quarter 8 5/8 4 7/8
First Quarter 6 4 1/8
1995
Fourth Quarter 5 5/8 4 1/8
Third Quarter 6 3/8 4 1/2
Second Quarter 6 3/8 3 3/4
First Quarter 5 1/4 3
On September 29, 1997, the closing sales price of the Company's Common
Stock as reported by the NYSE was $13 3/4 per share. At that date, the number of
stockholder accounts of record of the Company's Common Stock was 517. The
Company believes that there are approximately 3,800 beneficial owners of Common
Stock.
Dividend Policy
Cash dividends per share paid by the Company were $.06 in 1996, $.09 in
1995, $.06 in 1994, $.09 in 1993, and $1.20 in 1992, representing distributions
of taxable income arising out of the Company's status as a REIT. The foregoing
amounts reflect the one-for-three reverse stock split which occurred on December
31, 1996. The Company's loan and debt agreements contain certain covenants that
restrict the payment of dividends if the financial condition, results of
operation, and capital requirements of the Company fail to meet certain
specified levels. In addition, the Company's board of directors has indicated
that the Company will not pay any permitted cash dividends for the foreseeable
future. Instead, the Company's board intends to retain earnings to finance the
growth of the Company's business. The future payment of cash dividends, if any,
will depend upon the financial condition, results of operations, and capital
requirements of the Company, as well as other factors deemed relevant by the
board.
LEGAL MATTERS
The validity of the issuance of the Shares has been passed on for the
Company by Hughes & Luce, L.L.P., Dallas, Texas.
EXPERTS
The consolidated financial statements of Monterey Homes Corporation as
of December 31, 1995 and for each of the two years in the period ended December
31, 1995 included in this Prospectus have been audited by Ernst & Young, LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
The consolidated financial statements of Monterey Homes Corporation and
subsidiaries as of December 31, 1996 and for the year then ended have been
included herein in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein and upon
the authority of said firm as experts in accounting and auditing.
The financial statements of Legacy Homes, Ltd. as of December 31, 1995
and 1996 and for each of the three years in the period ended December 31, 1996,
included in this Prospectus have been audited by Ernst & Young LLP independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
52
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Monterey Homes Corporation
<TABLE>
<S>
<C>
Annual Audited Financial Statements: Monterey Homes Corporation (formerly Homeplex Mortgage Investment Corporation)
Report of Independent Auditors..................................................................................F-3
Report of Independent Auditors..................................................................................F-4
Consolidated Balance Sheets as of December 31, 1996 and 1995....................................................F-5
Consolidated Statements of Operations for the Years ended December 31, 1996, 1995 and 1994......................F-6
Consolidated Statements of Cash Flows for the Years ended December 31, 1996, 1995 and 1994......................F-7
Consolidated Statement of Stockholders' Equity for the Years ended December 31, 1996, 1995 and 1994.............F-8
Notes to Consolidated Financial Statements......................................................................F-9
Interim Unaudited Consolidated Financial Statements: Monterey Homes Corporation (formerly Homeplex Mortgage Investment
Corporation)
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996..........................................F-21
Consolidated Statements of Earnings for the Six Months ended June 30, 1997 and 1996............................F-22
Consolidated Statements of Cash Flows for the Six Months ended June 30, 1997 and 1996..........................F-23
Notes to Consolidated Financial Statements.....................................................................F-24
Annual Audited Financial Statements: Monterey Homes Corporation (pre-Merger)
Report of Independent Auditors.................................................................................F-29
Combined Balance Sheet as of December 31, 1994 and 1995........................................................F-30
Combined Statement of Earnings for Years ended December 31, 1993, 1994 and 1995................................F-31
Combined Statements of Cash Flows for Years ended December 31, 1993, 1994 and 1995.............................F-32
Combined Statements of Shareholders' Equity for Years ended December 31, 1993, 1994 and 1995...................F-33
Notes to Combined Financial Statements.........................................................................F-34
Interim Unaudited Combined Financial Statements: Monterey Homes Corporation (pre-Merger)
Combined Balance Sheets as of December 31, 1995 and December 30, 1996..........................................F-39
Combined Statements of Earnings for Periods ended December 31, 1995 and December 30, 1996......................F-40
Combined Statements of Cash Flows for Periods ended December 31, 1995 and December 30, 1996....................F-41
Notes to Interim Unaudited Combined Financial Statements.......................................................F-42
Annual Audited Financial Statements: Legacy Homes, Ltd.
Report of Independent Auditors ................................................................................F-44
Balance Sheets as of December 31, 1995 and 1996................................................................F-45
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Statements of Income for the Years ended December 31, 1994, 1995 and 1996......................................F-46
Statements of Changes in Partners Capital for the Years ended December 31, 1994, 1995 and 1996.................F-47
Statement of Cash Flows for Years ended December 31, 1994, 1995 and 1996.......................................F-48
Notes to Financial Statements...................................................................................F-49
Interim Unaudited Financial Statements: Legacy Homes, Ltd.
Balance Sheets as of December 31, 1996 and June 30, 1997........................................................F-51
Income Statements for the Six Months ended June 30, 1996 and 1997...............................................F-52
Statements of Cash Flows for the Six Months ended June 30, 1996 and 1997........................................F-53
Notes to Unaudited Financial Statements.........................................................................F-54
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Monterey Homes Corporation
We have audited the accompanying consolidated balance sheet of Monterey
Homes Corporation and subsidiaries (previously known as Homeplex Mortgage
Investments Corporation and subsidiaries) as of December 31, 1996 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above, present fairly in all material respects, the financial position of
Monterey Homes Corporation and subsidiaries as of December 31, 1996, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Phoenix, Arizona
February 21, 1997
F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Monterey Homes Corporation
We have audited the accompanying consolidated balance sheet of Monterey Homes
Corporation and subsidiaries (previously known as Homeplex Mortgage Investments
Corporation and subsidiaries) as of December 31, 1995 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two 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 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
Monterey Homes Corporation and subsidiaries as of December 31, 1995 and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Phoenix, Arizona
February 13, 1996
F-4
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 15,567,918 $ 3,347,243
Short-term investments (Note 3) 4,696,495 8,969,100
Real estate loans and other receivables (Note 4) 2,623,502 4,047,815
Real estate under development (Note 5) 35,991,142 --
Option deposits 546,000 --
Residual interests (Note 6) 3,909,090 5,457,165
Other assets 940,095 356,684
Funds held by Trustee -- 5,637,948
Deferred tax asset (Note 11) 6,783,000 --
Goodwill (Note 10) 1,763,488 --
------------ ------------
$ 72,820,730 $ 27,815,955
============ ============
LIABILITIES
Accounts payable and accrued liabilities $ 10,569,872 $ 1,549,481
Home sale deposits 4,763,518 --
Notes payable (Note 7) 30,542,276 7,818,824
------------ ------------
Total Liabilities 45,875,666 9,368,305
------------ ------------
STOCKHOLDERS' EQUITY (Notes 8 and 10)
Common stock, par value $.01 per share; 50,000,000
shares authorized; issued and outstanding -
4,580,611 shares at December 31, 1996, and
3,291,885 shares at December 31, 1995 45,806 32,919
Additional paid-in capital 92,643,658 84,112,289
Accumulated deficit (65,334,117) (65,287,275)
Treasury stock - 53,046 shares (410,283) (410,283)
------------ ------------
Total Stockholders' Equity 26,945,064 18,447,650
------------ ------------
Commitments and contingencies (Notes 9 and 12)
$ 72,820,730 $ 27,815,955
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income (loss) from Mortgage Assets
Interest income on real estate loans $ 571,139 $1,618,308 $ 1,112,445
Income (loss) from residual interests (Note 6) 1,039,247 1,283,045 (2,662,734)
Other income 633,449 663,343 347,882
---------- ---------- -----------
2,243,835 3,564,696 (1,202,407)
---------- ---------- -----------
Expenses
Interest 237,945 868,414 1,382,951
General, administration and other 1,683,407 1,599,157 1,938,047
---------- ---------- -----------
1,921,352 2,467,571 3,320,998
---------- ---------- -----------
Income (loss) before income tax expense and
early extinguishment of debt 322,483 1,097,125 (4,523,405)
Income tax expense (Note 11) 26,562 -- --
---------- ---------- -----------
Income (loss) before extraordinary loss from early
extinguishment of debt 295,921 1,097,125 (4,523,405)
Extraordinary loss from early extinguishment of debt (Note 7) (148,433) -- --
---------- ---------- -----------
Net Income (loss) $147,488 $1,097,125 ($4,523,405)
========== ========== ===========
Earnings (loss) per share:
Income before extraordinary loss from early
extinguishment of debt $0.09 $0.34 ($1.40)
Extraordinary loss from early extinguishment of debt (0.05) -- --
---------- ---------- -----------
Net Income (loss) $0.04 $0.34 ($1.40)
========== ========== ===========
Dividends declared per share $0.06 $0.09 $0.06
========== ========== ===========
Weighted average common shares outstanding 3,334,562 3,245,767 3,240,204
========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 147,488 $1,097,125 ($4,523,405)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Extraordinary loss from early extinguishment of debt 148,433 -- --
Depreciation and amortization 38,300 122,970 332,429
Amortization of residual interests 1,548,076 2,196,394 6,738,000
(Increase) decrease in other assets 153,350 370,454 (361,675)
Increase (decrease) in accounts payable and accrued
liabilities 317,094 (272,828) 243,789
Net write-downs and non-cash losses on residual interests -- -- 3,342,773
---------- ---------- -----------
Net cash provided by operating activities 2,352,741 3,514,115 5,771,911
---------- ---------- -----------
Cash flows from investing activities:
Cash acquired in Monterey Merger (Note 10) 6,495,255 -- --
Cash paid for Merger costs (Note 10) (779,097) -- --
Principal payments received on real estate loans 3,710,000 9,114,000 670,000
Real estate loans funded (1,358,457) (3,902,000) (9,610,000)
(Increase) decrease in short term investments 4,272,605 (8,969,100) --
Decrease in funds held by Trustee 5,637,948 1,082,549 2,040,528
---------- ---------- -----------
Net cash provided by (used in) investing activities 17,978,254 (2,674,551) (6,899,472)
---------- ---------- -----------
Cash flows from financing activities:
Repayment of borrowings (7,818,824) (3,964,000) (8,143,532)
Distributions to shareholders (291,496) (194,330) (291,952)
Repurchases of common stock, net of common stock issuances -- -- (17,480)
---------- ---------- -----------
Net cash used in financing activities (8,110,320) (4,158,330) (8,452,964)
---------- ---------- -----------
Net increase (decrease) in cash and cash equivalents 12,220,675 (3,318,766) (9,580,525)
Cash and cash equivalents at beginning of year 3,347,243 6,666,009 16,246,534
---------- ---------- -----------
Cash and cash equivalents at end of year $15,567,918 $3,347,243 $6,666,009
========== ========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $286,276 $804,113 $1,245,952
========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Additional
Number Common Paid-in Accumulated Treasury
of Shares Stock Capital Deficit Stock Total
--------- ----- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 3,291,885 $32,919 $84,112,289 ($61,375,169) ($392,802) 22,377,237
Treasury stock acquired - 5,067 shares -- -- -- -- (17,481) (17,481)
Net loss -- -- -- (4,523,405) -- (4,523,405)
Dividend declared -- -- -- (194,330) -- (194,330)
--------- ------- ----------- ------------ --------- ----------
Balance at December 31, 1994 3,291,885 32,919 84,112,289 (66,092,904) (410,283) 17,642,021
Net income -- -- -- 1,097,125 -- 1,097,125
Dividend declared -- -- -- (291,496) -- (291,496)
--------- ------- ----------- ------------ --------- ----------
Balance at December 31, 1995 3,291,885 32,919 84,112,289 (65,287,275) (410,283) 18,447,650
Net income -- -- -- 147,488 -- 147,488
Dividend declared -- -- -- (194,330) -- (194,330)
Shares issued in connection with Merger
(Note 10) 1,288,726 12,887 8,531,369 -- -- 8,544,256
--------- ------- ----------- ------------ --------- ----------
Balance at December 31, 1996 4,580,611 $45,806 $92,643,658 ($65,334,117) ($410,283) $26,945,064
========= ======= =========== ============= ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Monterey Homes Corporation (previously Homeplex Mortgage Investments
Corporation), the Company, commenced operations in July 1988. Prior to the
Merger (see Note 10), the Company's main line of business was investing in
mortgage certificates securing collateralized mortgage obligations (CMOs),
interests relating to mortgage participation certificates (MPCs) (collectively
residual interests) and loans secured by real estate (see Notes 4 and 3,
respectively).
The combined entities intend to continue with Monterey Homes' building
operations as its main line of business. The operations are currently conducted
primarily in the Phoenix, Scottsdale and Tucson, Arizona markets, which are
significantly impacted by the strength of surrounding real estate markets and
levels of interest rates offered on home mortgage loans. The Arizona real estate
market is currently experiencing strong growth and current home mortgage
interest rates are favorable for home buyers and sellers, although recent
reports project a slowing in housing demand in the metropolitan Phoenix area,
and housing permits in the Tucson metropolitan area have increased only slightly
from 1995 to 1996. A decline in the Arizona real estate market or an increase in
interest rates could have a significant impact on the Company's operating
results and estimates made by management. The Company utilizes various suppliers
and subcontractors and is not dependent on individual suppliers or
subcontractors.
Basis of Presentation
The consolidated financial statements include the accounts of Monterey
Homes Corporation and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Upon consummation of the Merger a one-for-three reverse stock split of
the Company's issued and outstanding common stock, $.01 par value per share, was
effected. Except as otherwise indicated, the share information contained herein
reflects the one-for-three reverse stock split.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all short-term investments purchased with an original maturity of
three months or less to be cash equivalents. Cash and cash equivalents of
approximately $856,000 at December 31, 1996, is restricted as collateral for the
payment of the Company's short-term credit facility (Note 7).
Real Estate Under Development
Real estate under development includes undeveloped land and developed
lots, homes under construction in various stages of completion and completed
homes. The Company values its real estate under development in accordance with
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
Accordingly, amounts are carried at cost unless expected future net cash flows
(undiscounted and without interest) are less than cost and then amounts are
carried at estimated fair value less cost to sell. Adoption of this Statement
did not have a material impact on the Company's financial position, results of
operations or liquidity. Costs capitalized include direct construction costs for
homes, development period interest and certain common costs which benefit the
entire subdivisions. Cost of sales include land acquisition and development
costs, direct construction costs of the home, development period interest and
closing costs, and an allocation of common costs.
F-9
<PAGE>
Common costs are allocated on a subdivision by subdivision basis to residential
lots based on the number of lots to be built in the subdivision, which
approximates the relative sales value method.
Deposits paid related to options to purchase land are capitalized and
included in option deposits until the related land is purchased. Upon purchase
of the land, the related option deposits are transferred to real estate under
development.
Residual Interests
Interests relating to mortgage participation certificates and residual
interest certificates are accounted for as described in Note 6.
Property and Equipment
Property and equipment are recorded at cost, net of accumulated
depreciation. Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets, which range from three to five years. Net
property and equipment was $268,096 and $11,195 at December 31, 1996 and 1995,
respectively, and is included in other assets in the accompanying consolidated
balance sheets for those years.
Goodwill
Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, is amortized on a straight-line basis over 20 years,
which is the expected period to be benefited. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. The amount
of goodwill impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's average cost
of funds. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under the asset and liability method of SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in future years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the consolidated statement of operations as an adjustment to the
effective income tax rate in the period that includes the enactment date.
Net Income (Loss) Per Share
For 1996 and 1995, primary net income per share is calculated using the
weighted average number of common and common stock equivalent shares outstanding
during the year. Common stock equivalents of 92,224 and 6,928 in 1996 and 1995,
respectively, consist of dilutive stock options and contingent stock. Net loss
per share for 1994 is calculated using the weighted average number of common
shares outstanding during the year.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amount of revenues and expenses during the reporting
period to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from these
estimates.
F-10
<PAGE>
Fair Value of Financial Instruments
The carrying amounts of the Company's receivables, cash and cash
equivalents, option deposits, accounts payable and accrued liabilities and home
sale deposits approximate their estimated fair values due to the short maturity
of these assets and liabilities. The fair value of the Company's short-term
investments and residual interests is discussed in Notes 3 and 6, respectively.
The carrying amount of the Company's notes payable approximates fair value
because the notes are at interest rates comparable to market rates based on the
nature of the loans, their terms and the remaining maturity. Considerable
judgment is required in interpreting market data to develop the estimates of
fair value. Accordingly, these fair value estimates are not necessarily
indicative of the amounts the Company would pay or receive in actual market
transactions.
Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
Reclassifications
Certain 1995 and 1994 amounts have been reclassified to conform with the
1996 financial statement presentation.
NOTE 3 - SHORT-TERM INVESTMENTS
At December 31, 1996, short-term investments, recorded at fair value,
consist of three CMO PAC bonds with a combined principal balance of
approximately $4,700,000, estimated yields to maturity of approximately 5.2% to
5.4% and estimated maturities of approximately two to four months. At December
31, 1995, short-term investments consisted 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%. Short-term investments are restricted as collateral for the
payment of the Company's short-term credit facility (Note 7).
F-11
<PAGE>
NOTE 4 - REAL ESTATE LOANS AND OTHER RECEIVABLES
The following is a summary of the real estate loans and other receivables
outstanding at December 31:
<TABLE>
<CAPTION>
Interest Payment Principal and
Description Rate Terms Carrying Amount (1)
----------- ---- ----- ----------------------
1996 1995
---- ----
<S> <C> <C> <C> <C>
First Deed of Trust on 41
acres of land in Gilbert,
Arizona, face amount of Interest only monthly, principal
$2,800,000. (2) 16% due October 18, 1997. $1,696,272 $1,277,413
First Deed of Trust on 33
acres of land in Tempe,
Arizona. 16% Paid in full in 1996. - 2,272,402
First Deed of Trust on 21.4
acres of land in Tempe,
Arizona. 16% Paid in full in 1996. - 498,000
Other receivables consisting
primarily of sales commission
advances and home closing
proceeds due from title
companies. - - 927,230 -
---------- ----------
$2,623,502 $4,047,815
========== ==========
</TABLE>
(1) Principal payments on real estate loans were $3,710,000 in 1996, and
loan draws were $1,358,457 in 1996.
(2) Loan was current at December 31, 1996.
NOTE 5 - REAL ESTATE UNDER DEVELOPMENT
The components of real estate under development at December 31, 1996 are
as follows:
Homes in production................................ $22,839,500
Finished lots and lots under development........... 13,151,642
----------
$35,991,142
===========
NOTE 6 - RESIDUAL INTERESTS
The Company owns residual interests in collateralized mortgage
obligations (CMOs) and in mortgage participation certificates (MPCs)
(collectively residual interests). The residual interests are accounted for
using the prospective net level yield method, in which the interest is recorded
at cost and amortized over the life of the related CMO or MPC issuance.
The projected yield and estimated fair value of the Company's residual
interests are based on prepayment, interest rate and fair value assumptions.
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.
At December 31, 1996, the estimated prospective net level yield of the
Company's residual interests, in the aggregate, is 29% without early redemptions
or terminations being considered and 121% if early redemptions or
F-12
<PAGE>
terminations are considered. Based on discussions with brokers and investors who
trade residual interests, Management believes that the estimated fair value of
the Company's residual interests, in the aggregate, is approximately $7,000,000
at December 31, 1996 ($5,500,000 at December 31, 1995). This estimated fair
value is based on prevailing market interest rates at December 31, 1996. Should
interest rates increase in the future, the fair value amount could decrease
significantly.
Interests In Residual Interest Certificates
The Company owns residual interest certificates representing the residual
interests in five series of CMOs secured by fixed interest rate mortgage
certificates and cash funds held by trustee. The classes of CMOs have either
fixed interest rates or 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.
The 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 real estate mortgage investment conduits ("REMICs"). The Company also has
the right, under certain conditions, to cause an early redemption of the CMOs,
in which the mortgage certificates are sold at the then current market price and
the CMOs repaid at par value, with any excess cash flowing to the Company.
Generally, the remaining outstanding CMO balance must be less than 10% of the
original balance before early redemption can take place.
Interests In Mortgage Participation Certificates
The Company owns residual interests in REMICs with respect to three
separate series of Mortgage Participation Certificates (MPCs). These residual
interests entitle the Company to receive its proportionate share of the excess,
if any, of payments received from the fixed rate 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 related
administrative expenses and does not have the right to elect early termination
of any of the MPC classes. The classes of the MPCs either have fixed interest
rates or interest rates that are determined monthly based on LIBOR or based on
the Monthly Weighted Average Cost of Funds Index (COFI) for Eleventh District
Savings Institutions as published by the Federal Home Loan Bank of San
Francisco, subject to specified maximum interest rates. At December 31, 1996,
LIBOR was 5.35% and COFI was 4.84%.
F-13
<PAGE>
The following summarizes the Company's investment in residual interests
at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
Series Type of Company's Amortized Costs Company's %
Investments 1996 1995 Ownership
----------- ---- ---- ---------
<S> <C> <C> <C> <C>
Westam 1 Residual Interest Certificate $ 386,192 $ 702,918 100.00%
Westam 3 Residual Interest Certificate 24,495 29,923 100.00%
Westam 5 Residual Interest Certificate 157,385 204,033 100.00%
Westam 6 Residual Interest Certificate 1,845 11,731 100.00%
ASW 65 Residual Interest Certificate 1,996,601 2,520,574 100.00%
FHLMC 17 Interest in MPCs 93,112 140,035 100.00%
FNMA 1988-24 Interest in MPCs 762,510 1,220,418 20.20%
FNMA 1988-25 Interest in MPCs 486,950 627,533 45.07%
------- -------
$3,909,090 $5,457,165
========== ==========
</TABLE>
NOTE 7 - NOTES PAYABLE
In December 1996, Monterey consolidated its outstanding construction,
acquisition and development ("A&D") and term loan notes to various banks into a
single revolving credit agreement. The components of this loan are (i) a
revolving $20,000,000 line of credit to finance construction, (ii) a revolving
$20,000,000 guidance line facility to finance acquisition and development, and
(iii) a $6,052,000 term loan to refinance an existing note. Both the
construction and A&D lines of credit are secured by first deeds of trust on
land. The term loan is cross-collateralized with the credit facility and is
secured by cash and short-term investments.
<TABLE>
<CAPTION>
Notes payable consist of the following at December 31:
1996 1995
---- ----
<S> <C> <C>
Construction line of credit to bank, interest payable monthly approximating
prime (8.25% at December 31, 1996) plus .25%, payable at the earlier of
close of escrow, maturity date of individual homes within the line or
June 19, 2000........................................................ $7,251,958 N/A
Guidance line of credit to bank for acquisition and development interest
payable monthly approximating prime plus .5%, payable at the earlier of
funding of construction financing, the maturity date of individual
within the line or June 19, 2000..................................... 9,628,993 N/A
Short-term credit facility to bank maturing in August 1997, annual interest
of prime plus .5%, principal payments of $500,000 plus interest payable
monthly with remaining principal and interest payable at maturity
date................................................................. 5,552,500 N/A
Senior subordinated notes payable, maturing October 15, 2001, annual
interest of 13%, payable semi-annually, principal payable at maturity
date with a put to the Company at June 30, 1998, unsecured
8,000,000............................................................ 8,000,000 N/A
F-14
<PAGE>
Notes payable to institutional investment group, secured by residual
interests and by funds held by Trustee, annual interest of 7.81%. Note
balance paid in full May 15, 1996, resulting in extraordinary loss of
approximately $149,000 from prepayment penalties and the write-off of
unamortized debt costs.............................................. 0 $7,818,824
Other........................................................................ 108,825 N/A
------------ ------------
Total................................................................... $30,542,276 $7,818,824
=========== ==========
</TABLE>
The principal payment requirements on notes payable, as of December 31,
1996 are as follows:
Year ending
December 31,
-----------
1997.................................................... $15,653,873
1998.................................................... 6,888,403
1999.................................................... -
2000.................................................... -
2001 and thereafter..................................... 8,000,000
-----------
$30,542,276
===========
A provision of the senior subordinated bond indenture provides the
bondholders with the option, at June 30, 1998, to require the Company to buy
back the bonds at 101% of face value. Also, approximately $2,800,000 of the
bonds are held by the Co-Chief Executive Officers of the Company.
NOTE 8 - STOCK OPTIONS
At December 31, 1996, the Company has one stock based compensation plan
which is described below. The per share weighted average fair value of stock
options granted during 1996 and 1995 was $1.63 on the date of grant using the
Black Scholes pricing model with the following weighted average assumptions;
expected dividend yield 1.40%, risk-free interest rate of 5.85% and an expected
life of five years. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plans. No compensation cost has been
recognized for its stock based compensation plan (which is a fixed stock option
plan). Had compensation cost for the Company's stock based compensation plan
been determined consistent with FASB Statement No. 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
1996 1995
---- ----
Net income (loss) As reported $147,488 $1,097,125
Pro forma ($151,345) $988,458
Earnings (loss) per share As reported $.04 $.34
Pro forma ($.05) $.30
F-15
<PAGE>
The Company's Stock Option Plan 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
145,833 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.
At December 31, 1996, 148,498 options, including dividend equivalent
rights, were exercisable at effective exercise prices ranging from $3.63 per
share to $13.32 per share. At December 31, 1996 and 1995, 119 common shares were
available for future grants.
Optionholders also receive, at no additional cost, dividend equivalent
rights (DER's) 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, 1996 and 1995 accounts
payable and accrued 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, canceled 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.
The following summarizes stock option activity under the Stock Option
Plan:
For the Year ended December 31, 1996 1995 1994
- ------------------------------ ---- ---- ----
Options granted.................................. - 24,667 -
Exercise price per share of options granted...... - 4.50 -
DER's granted.................................... 1,249 2,909 2,593
Options canceled (including DER's)............... - 11,424 -
Options exercised (including DER's).............. - - -
At December 31, 1996 1995
- -------------- ---- ----
Options outstanding.............................. 95,256 95,256
DER's outstanding................................ 54,385 53,136
------ ------
Total options and DER's outstanding.............. 149,641 148,392
======= =======
F-16
<PAGE>
In addition to the above referenced options, in December 1995, in
connection with the renegotiation of the prior Chief Executive Officer's
Employment Agreement, the Company replaced his annual salary of $250,000 plus
bonus with 250,000 non-qualified stock options which become fully vested at
December 21, 1997. The exercise price of the options is $4.50 per share which
was equal to the closing market price of the common stock on grant date. The
options will expire in December 2000.
At the 1997 Annual Meeting of Stockholders to be held in the third
quarter of 1997, a new stock option plan will be submitted for stockholder
approval. It is currently anticipated that 225,000 shares of the Company's
common stock will be reserved for issuance upon the exercise of stock options
granted under the new plan. The plan will be administered by the Compensation
Committee of the Board of Directors and will provide for grants of incentive
stock options to key employees and non-qualified stock options to Directors and
key employees. The purpose of this new plan is to provide a means of
performance-based compensation in order to attract and retain key personnel
whose job performance affects the Company.
NOTE 9 - LEASES
The Company leases office facilities, model homes and equipment under
various operating lease agreements.
The following is a schedule of approximate future minimum lease payments
for noncancellable operating leases as of December 31, 1996:
Year Ending
December 31,
1997....................................... $937,981
1998....................................... 363,927
1999....................................... 201,907
Thereafter................................. 0
----------
$1,503,815
==========
Rental expense was $22,639 and $21,780 for the years ended December 31,
1995 and 1996, respectively.
NOTE 10 - HOMEPLEX / MONTEREY MERGER
On December 23, 1996, the stockholders of Homeplex Mortgage Investments
Corporation, now known as Monterey Homes Corporation (the "Company"), approved
the Merger (the "Merger") of Monterey Homes Construction II, Inc. and Monterey
Homes Arizona II, Inc., both Arizona corporations (collectively, the "Monterey
Entities" or "Monterey"), with and into the Company. The Merger was effective on
December 31, 1996, and the Company will focus on homebuilding as its primary
business. Also, ongoing operations of the Company will be
managed by the two previous stockholders of Monterey, who at the time of the
Merger, became Co-Chief Executive Officers with one serving as Chairman and the
other as President. At consummation of the Merger, 1,288,726 new shares of
common stock, $.01 par value per share, were issued equally to the Co-Chief
Executive Officers.
Monterey, in connection with an $8,000,000 subordinated debt private
placement that occurred during October 1994, issued warrants to the bondholders
to purchase approximately 16.48% of Monterey. Accordingly, of the 1,288,726
shares issued in the Merger, 132,749 are held by the Company on behalf of the
Co-Chief Executive Officers, to be
F-17
<PAGE>
delivered to the warrantholders upon payment of the warrant exercise price to
the Co-Chief Executive Officers. Upon expiration of the warrants, any of the
remaining 132,749 will be delivered to the Co-Chief Executive Officers.
In addition, up to 266,667 shares of contingent stock will be issued
equally to the Co-Chief Executive Officers provided that certain stock trading
price thresholds are met and that the Officer is still an employee of the
Company at the time of issuance. The price thresholds are $5.25, $7.50 and
$10.50 for dates after the first, second and third anniversaries of the Merger,
respectively, and the prices must be maintained for 20 consecutive trading days.
The number of contingent shares issued would be 44,943, 88,888 and 88,889,
respectively. Included in the above mentioned 266,667 contingent shares are
43,947 shares (approximately 16.48%) issuable to the Company's warrantholders,
upon exercise of the warrants. Such shares are not subject to meeting certain
stock trading price thresholds or employment of the Co-Chief Executive Officers.
Upon expiration of unexercised warrants, any of the remaining 43,947 contingent
shares will be issued to the Co-Chief Executive Officers.
The total consideration paid by the Company for the net assets of
Monterey Homes was $9,323,353. This amount included 1,288,726 shares of the
Company's common stock valued at $8,544,256 and $779,097 of transaction costs.
The purchase method of accounting was used by the Company, and the purchase
price was allocated among the Monterey net assets based on their estimated fair
market value at the date of acquisition, resulting in goodwill of $1,763,488
which will be amortized over 20 years.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company as if the Merger had occurred
at January 1, 1995, with pro forma adjustments together with related income tax
effects. The pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of the results of operations that would
actually have resulted had the combination been in effect on the date indicated.
Years ended December 31,
(Unaudited)
1996 1995
---- ----
Total revenues.............................. $ 89,990 $ 75,195
Net income.................................. $ 6,120 $ 6,210
Net earnings per common share............... $ 1.27 $ 1.28
NOTE 11 - INCOME TAXES
Current income tax expense for the year ended December 31, 1996 was
$26,562 and was attributed to federal estimated tax of $18,700 and state
estimated tax of $7,862. No current income tax was recorded in 1995 and deferred
income tax was -0- in 1996 and 1995.
Deferred Tax Assets
The net deferred tax asset at December 31, 1996 was recorded as part of
the Homeplex/Monterey Merger purchase accounting (Note 10).
Deferred tax assets have been recorded in the December 31, 1996
consolidated balance sheet due to temporary differences and carryforwards as
follows:
F-18
<PAGE>
Net operating loss carryforward.................... $21,200,000
Residual interests basis differences............... 2,100,000
Real estate basis differences...................... 400,000
Debt issuance costs................................ 266,000
Other.............................................. 85,000
-----------
24,051,000
Valuation Allowance................................ (17,268,000)
-----------
Deferred tax liabilities........................... 0
-----------
Net Deferred Tax Asset...................... $ 6,783,000
===========
Management of the Company believes it is more likely than not that the
results of future operations will generate sufficient taxable income to realize
the net deferred tax asset.
Carryforwards
For federal and state income tax purposes, at December 31, 1996 the
Company had a net operating loss carryforward of approximately $53 million that
expires beginning in 2007.
NOTE 12 - CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
Company's financial statements taken as a whole.
F-19
<PAGE>
NOTE 13 - QUARTERLY FINANCIAL DATA (Unaudited)
(In Thousands Except Per Share Amount)
Net Net Income (Loss)
Revenue Income (Loss) Per Share
------- ------------- ---------
1996
First........................... $ 635 $ 84 $ .03
Second (1)...................... 636 148 .04
Third........................... 530 314 .09
Fourth.......................... 443 (399) (.12)
1995
First........................... $ 1,103 $ 462 $ .15
Second.......................... 1,078 335 .10
Third........................... 707 58 .02
Fourth.......................... 677 242 .07
(1) Net income in the second quarter of 1996 includes an extraordinary charge
of $148,000, or $.05 per share, to record the result of early
extinguishment of debt.
[End of Notes to Consolidated Financial Statements]
F-20
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
(Unaudited) December 31,
June 30, 1997 1996
----------- ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 7,262,648 $ 15,567,918
Short-term investments 0 4,696,495
Real estate loans and other receivables 1,571,530 2,623,502
Real estate under development (Notes 2 & 4) 45,106,664 35,991,142
Option deposits 1,319,241 546,000
Residual interests 3,855,755 3,909,090
Other assets 799,947 940,095
Deferred tax asset 6,783,000 6,783,000
Goodwill (Note 5) 1,719,581 1,763,488
------------ ------------
$68,418,366 $72,820,730
============ ============
LIABILITIES
Accounts payable and accrued liabilities $7,344,153 $10,569,872
Home sale deposits 7,697,170 4,763,518
Notes payable (Note 3) 23,838,847 30,542,276
------------ ------------
Total Liabilities 38,880,170 45,875,666
------------ ------------
STOCKHOLDERS' EQUITY (Note 5)
Common stock, par value $.01 per share; 50,000,000 shares
authorized; issued and outstanding - 4,580,611 shares 45,806 45,806
Additional paid-in capital 92,990,384 92,643,658
Accumulated deficit (63,087,711) (65,334,117)
Treasury stock - 53,046 shares (410,283) (410,283)
------------ ------------
Total Stockholders' Equity 29,538,196 26,945,064
------------ ------------
$68,418,366 $72,820,730
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Six Months Ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
REVENUES
<S> <C> <C>
Home sales (Notes 1 and 5)................................................ $37,116,944 --
Residual interest and real estate loan interest income.................... 1,150,112 $ 890,950
Other income.............................................................. 305,748 379,250
----------- ----------
38,572,804 1,270,200
----------- ----------
COSTS AND EXPENSES
Cost of home sales (Notes 1 and 5)........................................ 31,828,546 --
Commissions and other sales costs (Notes 1 and 5)......................... 1,998,710 --
General, administrative and other......................................... 2,275,469 650,834
Interest................................................................. -- 237,945
----------- ----------
36,102,725 1,888,779
----------- ----------
Income before income tax expense and extraordinary loss from early
extinguishment of debt.................................................... 2,470,079 381,421
Income tax expense........................................................ 223,673 --
----------- ----------
Income before extraordinary loss from early extinguishment of debt........ 2,246,406 381,421
Extraordinary loss from early extinguishment of debt...................... -- (148,433)
----------- ----------
Net income................................................................ $2,246,406 $232,988
========== ========
EARNINGS PER SHARE
Income before extraordinary loss for
early extinguishment of debt.......................................... $.48 $.12
Extraordinary loss from early
extinguishment of debt................................................ -- (.05)
----------- ----------
Net Income $.48 $.07
=========== ==========
Weighted average common shares outstanding................................ 4,644,488 3,295,208
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-22
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 2,246,406 $ 232,988
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Increase in real estate under development (9,115,522) --
Depreciation and amortization 431,224 89,020
Amortization of residual interest 53,335 832,605
Increase in other assets (669,440) (154,704)
Decrease in accounts payable and accrued liabilities (97,737) (186,705)
------------ ----------
Net cash provided by (used in) operating activities (7,151,734) 813,204
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments received on real estate loans 1,476,000 498,402
Real estate loans funded (428,272) (302,275)
(Increase) decrease in short-term investments 4,696,495 (18,900)
Decrease in funds held by Trustee -- 5,637,948
------------ ----------
Net cash provided by investing activities 5,744,223 5,815,175
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings 20,940,662 --
Repayment of borrowings (27,644,091) (7,818,824)
Distributions to stockholders (194,330) (291,496)
------------ ----------
Net cash used in financing activities (6,897,759) (8,110,320)
------------ ----------
Net decrease in cash and cash equivalents (8,305,270) (1,481,941)
Cash and cash equivalents at beginning of period 15,567,918 3,347,243
------------ ----------
Cash and cash equivalents at end of period $ 7,262,648 $1,865,302
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Monterey Homes Corporation (previously Homeplex Mortgage Investments
Corporation), the Company, commenced operations in July 1988. Prior to the
Merger (see Note 5), the Company's main line of business was investing in
mortgage certificates securing collateralized mortgage obligations (CMOs),
interests relating to mortgage participation certificates (MPCs) (collectively
residual interests) and loans secured by real estate.
Since January 1, 1997, the operation of the Company has focused on
homebuilding, and the combined entities intend to continue with Monterey Homes'
building operations as its main line of business. These operations are currently
conducted primarily in the Phoenix, Scottsdale and Tucson, Arizona markets.
Basis of Presentation
The consolidated financial statements include the accounts of Monterey
Homes Corporation and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain prior period amounts have been reclassified to be consistent with
current financial statement presentation. In the opinion of Management, the
unaudited consolidated financial statements reflect all adjustments, consisting
only of normal recurring adjustments, necessary to fairly present the Company's
financial position and results of operations for the periods presented. The
results of operations for any interim period are not necessarily indicative of
results to be expected for a full fiscal year.
Upon consummation of the Merger a one-for-three reverse stock split of the
Company's issued and outstanding common stock, $.01 par value per share, was
effected. Except as otherwise indicated, the share information contained herein
reflects the one-for-three reverse stock split.
NOTE 2 - REAL ESTATE UNDER DEVELOPMENT
The components of real estate under development at June 30, 1997 and
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Homes in production................................................ $27,095,194 $22,839,500
Finished lots and lots under development........................... 18,011,470 13,151,642
---------------- -----------
$45,106,664 $35,991,142
================ ===========
</TABLE>
F-24
<PAGE>
NOTE 3 - NOTES PAYABLE
Notes payable consist of the following at June 30, 1997 and December 31,
1996:
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1997 December 31, 1996
---------------------- -----------------
<S> <C> <C>
Construction line of credit to bank, interest payable monthly
approximating prime (8.5% at June 30, 1997) plus .25%
payable at the earlier of close of escrow or maturity date
of individual homes within the line or June 19, 2000 $11,576,606 $7,251,958
Guidance line of credit to bank for acquisition and
development, interest payable monthly approximating
prime plus .5%, payable at the earlier of funding of
construction financing, the maturity date of individual
projects within the line or June 19, 2000 3,791,295 9,628,993
Short-term credit facility to bank, paid in full, June 1997 0 5,552,500
Senior subordinated notes payable, maturing October 15,
2001, annual interest of 13%, payable semi-annually,
principal payable at maturity date with a put to the
Company at June 30, 1998, unsecured 8,000,000 8,000,000
Other 470,946 108,825
----------- ----------
Total $23,838,847 $30,542,276
=========== ===========
</TABLE>
A provision of the senior subordinated bond indenture provides the
bondholders with the option, at June 30, 1998, to require the Company to buy
back the bonds at 101% of face value. Approximately $2,700,000 of the bonds were
held equally by the Chairman and President of the Company at June 30, 1997.
NOTE 4 - CAPITALIZED INTEREST
The Company capitalizes interest costs incurred on homes in production and
lots under development. This capitalized interest is allocated to unsold lots,
and included in cost of home sales in the accompanying statements of earnings
when the units are delivered. The following tables summarize interest
capitalized and interest expensed (dollars in thousands):
Six Months Ended June 30,
1997 1996
---- ----
Beginning unamortized capitalized interest $ -- $ N/A
Interest 1,586 N/A
Amortized - cost of home sales (420) N/A
---- ----
Ending unamortized capitalized interest $ 1,166 N/A
Interest incurred $ 1,586 $ 238
Interest capitalized 1,586 N/A
--------- -----
Interest expensed $ -- $ 238
========= =====
F-25
<PAGE>
NOTE 5 - HOMEPLEX / MONTEREY MERGER
On December 23, 1996, the stockholders of Homeplex Mortgage Investments
Corporation, now known as Monterey Homes Corporation (the "Company"), approved
the Merger (the "Merger") of Monterey Homes Construction II, Inc. and Monterey
Homes Arizona II, Inc., both Arizona corporations (collectively, the "Monterey
Entities" or "Monterey"), with and into the Company. The Merger was effective on
December 31, 1996, and the Company will focus on homebuilding as its primary
business. Also, ongoing operations of the Company will be managed by the two
previous stockholders of Monterey, who at the time of the Merger, became
Co-Chief Executive Officers with one serving as Chairman and the other as
President. At consummation of the Merger, 1,288,726 new shares of common stock,
$.01 par value per share, were issued equally to the Chairman and President.
Monterey, in connection with an $8,000,000 subordinated debt private
placement that occurred during October 1994, issued warrants to the bondholders
to purchase approximately 16.48% of Monterey. Accordingly, of the 1,288,726
shares issued in the Merger, 132,749 are held by the Company on behalf of the
Chairman and President, to be delivered to the warrantholders upon payment of
the warrant exercise price to the Chairman and President. Upon expiration of the
warrants, any of the remaining 132,749 will be delivered to the Chairman and
President.
In addition, up to 266,667 shares of contingent stock will be issued
equally to the Chairman and President provided that certain stock trading price
thresholds are met and that the Officer is still an employee of the Company at
the time of issuance. The price thresholds are $5.25, $7.50 and $10.50 for dates
after the first, second and third anniversaries of the Merger, respectively, and
the prices must be maintained for 20 consecutive trading days. The number of
contingent shares issued would be 44,943, 88,889 and 88,889, respectively, and
as of August 15, 1997, the first two price thresholds have been met. Included in
the above mentioned 266,667 contingent shares are 43,947 shares (approximately
16.48%) issuable to the Company's warrantholders, upon exercise of the warrants.
Such shares are not subject to meeting certain stock trading price thresholds or
employment of the Chairman and President. Upon expiration of unexercised
warrants, any of the remaining 43,947 contingent shares will be issued to the
Chairman and President.
The total consideration paid by the Company for the net assets of
Monterey Homes was $9,323,353. This amount included 1,288,726 shares of the
Company's common stock valued at $8,544,256 and $779,097 of transaction costs.
The purchase method of accounting was used by the Company, and the purchase
price was allocated among the Monterey net assets based on their estimated fair
market value at the date of acquisition, resulting in goodwill of $1,763,488
which will be amortized over 20 years.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company as if the Merger had occurred
at January 1, 1996, with pro forma adjustments together with related income tax
effects. The pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of the results of operations that would
actually have resulted had the combination been in effect on the date indicated.
Six Months
Ended June 30,
(Actual) (Pro Forma)
1997 1996
---- ----
Total revenues $33,572,804 33,714,234
Net income $ 2,246,406 $1,600,097
Net earnings per share $.48 $.34
NOTE 6 - INCOME TAXES
Deferred tax assets of approximately $6.8 million have been recorded in
the June 30, 1997 and December 31, 1996 balance sheet due to temporary
differences and carryforwards. For federal and state income tax purposes at June
30,
F-26
<PAGE>
1997 and at December 31, 1996, the Company had a net operating loss carryforward
of approximately $50 million and $53 million, respectively, that expires
beginning in 2007.
Income tax expense for the six months ended June 30, 1997 was $223,673,
which represents state income taxes. No income tax was recorded in the first two
quarters of 1996, due to the Company's status as a real estate investment trust
in that year.
NOTE 7 - SUBSEQUENT EVENTS
Legacy Homes Acquisition
On May 29, 1997, the Company signed a definitive agreement with Legacy
Homes, Ltd., Legacy Enterprises, Inc., and John and Eleanor Landon (together,
"Legacy Homes"), to acquire the homebuilding and related mortgage service
business of Legacy Homes, Ltd. and its affiliates. This transaction was
effective on July 1, 1997. Legacy Homes is a builder of entry-level and move-up
homes headquartered in Dallas/Fort Worth metropolitan area and was founded in
1988 by its current President, John R. Landon. In 1996 Legacy Homes had pre-tax
income of $8.8 million on sales of $84 million, compared to pre-tax income of
$5.7 million on sales of $62 million in 1995. Legacy Homes closed escrow on 623
homes in 1996, a 32% increase over 1995, a year in which Legacy was recognized
as one of the top ten homebuilders in the Dallas/Fort Worth area.
The consideration for the approximately $23 million in assets and stock
acquired consisted of approximately $1.6 million in cash, 666,667 shares of the
Company's Common Stock and deferred contingent payments for the four years
following the close of the transaction. The deferred contingent payments will be
equal to 12% of the pre-tax income of the Company and 20% of the pre-tax income
of the Texas division of the Company. In no event will the total deferred
contingent payments exceed $15 million. In addition, the Company assumed
substantially all of the liabilities of Legacy Homes, including indebtedness
that was incurred prior to the closing of the transaction to fund distributions
to the stockholders of Legacy Homes that reduced its book value to less than
$200,000.
In connection with the transactions, John R. Landon entered into a
four-year employment agreement with the Company. He was appointed Chief
Operating Officer and Co-Chief Executive Officer of the Company and President
and Chief Executive Officer of the Company's Texas division. Mr. Landon was also
granted an option to purchase 166,667 shares of the Company's common stock. In
addition, the Company has agreed to use reasonable best efforts to cause Mr.
Landon to be elected to its Board of Directors.
Sale of Residual Interests
On July 31, 1997, the Company sold one of its Mortgage Securities for
$3.1 million, creating a gain of $2.7 million. The security sold was a Series I
- - Collateralized Bond issued by Westam Mortgage Financial Corporation, and was
one of eight mortgage assets obtained by the Company in its December 31, 1996
merger with Homeplex Mortgage Corporation. The cash proceeds from the sale will
be reinvested in the Company's homebuilding business.
NOTE 8 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
(Statement 128), which establishes standards for computing and presenting
earnings per share (EPS). It replaces the presentation of primary and fully
diluted EPS with a presentation of basic and diluted EPS. Statement 128 is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. Earlier application is not permitted. After adoption,
all prior period EPS dates should be restated to conform to Statement 128.
The Company will adopt Statement 128 in the fourth quarter of 1997. The
pro forma impact of Statement 128 on the three months ended June 30,1997 would
have been basic and diluted EPS of $.43 and $.40 respectively. The pro
F-27
<PAGE>
forma impact on the six months ended June 30, 1997, would have been basic and
diluted EPS of $.50 and $.47, respectively.
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Boards of Directors
Monterey Homes Corporation
Monterey Management, Inc.
Monterey Homes - Tucson Corporation and
Monterey Management - Tucson, Inc.:
We have audited the accompanying combined balance sheets of Monterey Homes
Corporation, Monterey Management, Inc., Monterey Homes - Tucson Corporation and
Monterey Management Tucson, Inc. (collectively Monterey Homes) as of December
31, 1995 and 1994 and the related combined statements of earnings, shareholders'
equity and cash flows for each of the years in the three year period ended
December 31, 1995. These combined financial statements are the responsibility of
the management of Monterey Homes. Our responsibility is to express an opinion on
these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Monterey Homes
Corporation, Monterey Management, Inc., Monterey Homes -Tucson Corporation and
Monterey Management - Tucson, Inc. as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1995 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
January 26, 1996
F-29
<PAGE>
MONTEREY HOMES
Combined Balance Sheets
December 31, 1994 and 1995
<TABLE>
<CAPTION>
1994 1995
----------------------------------------
Assets
<S> <C> <C>
Real estate under development (notes 2 and 4) $17,917,832 $33,929,278
Receivables 539,596 860,807
Cash and cash equivalents 7,398,414 4,889,947
Option deposits 984,762 1,694,908
Reacquisition costs 754,183 14,297
Deferred subordinated debt costs 945,897 887,784
Property and equipment, net (note 3) 212,339 244,484
Other assets 67,242 132,579
---------------- ------------------
$28,820,265 $42,654,084
================ ==================
Liabilities and Shareholders' Equity
Accounts and subcontractors payable (note 7) $3,660,529 $4,589,325
Accrued liabilities 683,073 824,055
Home sale deposits 5,324,072 3,816,659
Notes payable (note 4) 12,255,058 24,315,568
---------------- ------------------
Total liabilities 21,922,732 33,545,607
---------------- ------------------
Shareholders' equity (note 6):
Common stock of Monterey Homes Corporation, no par value; 10,000,000 shares
authorized; $.00017 stated value;
1,155,832 shares issued and outstanding 200 200
Preferred stock of Monterey Homes Corporation, $.01 par value,
1,000,000 shares authorized, none outstanding -- --
Common stock of Monterey Management, Inc., no par
value; 10,000,000 shares authorized; $.0007 stated value; 871,944
shares issued and outstanding 610 610
Preferred stock of Monterey Management, Inc., $.01 par
value; 1,000,000 shares authorized; none outstanding -- --
Common stock of Monterey Homes - Tucson Corporation,
$1 par value; 1,000,000 shares authorized; 2,000 shares
issued and outstanding -- 2,000
Common stock of Monterey Management - Tucson, Inc.,
$1 par value; 1,000,000 shares authorized; 2,000 shares
issues and outstanding -- 2,000
Additional paid-in capital 8,517 8,517
Retained earnings 6,888,206 9,095,150
---------------- ------------------
Total shareholders' equity 6,897,533 9,108,477
Commitments and contingencies (notes 4, 5 and 8)
---------------- ------------------
$28,820,265 $42,654,084
================ ==================
</TABLE>
See accompanying notes to combined financial statements.
F-30
<PAGE>
MONTEREY HOMES
Combined Statement of Earnings
Years ended December 31, 1993, 1994 and 1995
<TABLE>
<CAPTION>
1993 1994 1995
---------------- --------------- ---------------
<S> <C> <C> <C>
Revenues $40,543,168 $60,941,390 $71,490,561
Cost of sales 34,663,827 50,654,526 60,332,436
---------------- --------------- ---------------
Gross Margin 5,879,341 10,286,864 11,158,125
Selling, general and administrative expenses 3,267,125 4,123,696 4,897,794
---------------- --------------- ---------------
Operating earnings 2,612,216 6,163,168 6,260,331
Other income (expense):
Minority interest (225,524) -- --
Miscellaneous net 132,869 101,636 140,613
---------------- --------------- ---------------
Net earnings $2,519,561 $6,264,804 $6,400,944
================ =============== ===============
Net earnings per common share $ 1.24 3.09 3.15
================ =============== ===============
Weighted average common shares
outstanding 2,027,776 2,027,776 2,029,776
================ =============== ===============
</TABLE>
See accompanying notes to combined financial statements.
F-31
<PAGE>
MONTEREY HOMES
Combined Statements of Cash Flows
Years ended December 31, 1993, 1994 and 1995
<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings $ 2,519,561 $ 6,264,804 $ 6,400,944
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities:
Minority interest in earnings 225,524 -- --
Depreciation and amortization 56,078 66,692 129,462
Net gain on sales of property and equipment -- (9,517) --
Increase in real estate under development (4,183,310) (4,181,682) (16,011,446)
Increase (decrease) in receivables 297,519 (310,740) (321,211)
Increase in option deposits (128,431) (344,753) (710,146)
Decrease in preacquisition costs -- -- 739,886
Increase in other assets (77,190) (1,588,889) (67,534)
Increase (decrease) in accounts and subcontractors payable 215,534 (47,643) (928,796)
Increase in accrued liabilities 135,948 279,050 140,982
Increase (decrease) in home sale deposits 1,297,184 1,151,261 (1,507,413)
------------ ------------ ------------
Net cash provided by (used in) operating activities 358,417 1,278,583 (10,277,680)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (67,301) (106,850) (102,279)
Proceeds from sales of equipment -- 26,000 984
------------ ------------ ------------
Net cash used in investing activities (67,301) (80,850) (101,295)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of commons stock -- -- 4,000
Borrowings 18,425,166 30,531,668 37,270,591
Repayment of borrowings (14,257,026) (25,908,200) (25,210,083)
Distributions to shareholders (1,591,190) (2,488,500) (4,194,000)
Distributions to minority interests (109,375) (189,252) --
------------ ------------ ------------
Net cash provided by financing activities 2,467,575 1,945,716 7,870,508
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 2,758,691 3,143,449 (2,508,467)
Cash and cash equivalents at beginning of year 1,496,274 4,254,965 7,398,414
------------ ------------ ------------
Cash and cash equivalents at end of year $ 4,254,965 $ 7,398,414 $ 4,889,947
============ ============ ============
</TABLE>
See accompanying notes to combined financial statements.
F-32
<PAGE>
MONTEREY HOMES
Combined Statements of Shareholders' Equity
Years ended December 31, 1993, 1994 and 1995
<TABLE>
<CAPTION>
Monterey
Monterey Homes-
Homes Monterey Tucson Monterey
Corporation Management, Corporation Management-
common Inc. common common Tucson, Inc.
stock stock stock common stock
----------------- ------------------ ---------------- -------------------
<S> <C> <C> <C> <C>
Balances, $ 200 $ 610 -- --
December 31, 1992
Net earnings -- -- -- --
Distributions to
shareholders -- -- -- --
----------------- ------------------ ---------------- -------------------
Balances,
December 31, 1993 200 610 -- --
Net earnings -- -- -- --
Distribution to
shareholders -- -- -- --
----------------- ------------------ ---------------- -------------------
Balances,
December 31, 1994 200 610 -- --
Proceeds from
issuance of stock -- -- $ 2,000 $ 2,000
Net earnings -- -- -- --
Distributions to
shareholders -- -- -- --
----------------- ------------------ ---------------- -------------------
Balances,
December 31, 1995 $ 200 $ 610 $ 2,000 $ 2,000
================= ================== ================ ===================
Additional
paid-in Retained
capital earnings Total
----------- ----------- -----------
Balances, $ 8,517 $ 2,183,531 $ 2,192,858
December 31, 1992
Net earnings -- 2,519,561 2,519,561
Distributions to
shareholders -- (1,591,190) (1,591,190)
----------- ----------- -----------
Balances,
December 31, 1993 8,517 3,111,902 3,121,229
Net earnings -- 6,264,804 6,264,804
Distribution to
shareholders -- (2,488,500) (2,488,500)
----------- ----------- -----------
Balances,
December 31, 1994 8,517 6,888,206 6,897,533
Proceeds from
issuance of stock -- -- 4,000
Net earnings -- 6,400,944 6,400,944
Distributions to
shareholders -- (4,194,000) (4,194,000)
----------- ----------- -----------
Balances,
December 31, 1995 $ 8,517 $ 9,095,150 $ 9,108,477
=========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-33
<PAGE>
MONTEREY HOMES
Notes to Combined Financial Statements
Years ended December 31, 1993, 1994 and 1995
(1) Summary of Significant Accounting Policies
Basis of Presentation
The combined financial statements include the accounts of Monterey Homes
Corporation, Monterey Management, Inc., Monterey Homes - Tucson Corporation,
Monterey Management - Tucson, Inc., and Monterey at Mountain View collectively
Monterey Homes (the Company), which are subject to common ownership. Monterey at
Mountain View (the Partnership) was a limited partnership in which Monterey
Management, Inc. owned 82.5% and served as the general partner. The Partnership
sold all remaining homes during 1993 and was dissolved during 1994. All material
balances and transactions between the combined entities have been eliminated.
In June 1995, the Company began operations in Tucson, Arizona. Monterey
Management - Tucson, Inc. was incorporated June 1, 1995 for the purpose of
performing all construction and development activity in Tucson. Monterey Homes -
Tucson Corporation was incorporated June 1, 1995 for the purpose of performing
all sales and marketing activity in Tucson. Prior to January 9, 1992, Monterey
Management, Inc. conducted all phases of the home-building activities from
acquiring and developing real estate to the construction and sale of finished
homes. Effective with the incorporation of Monterey Homes Corporation on January
9, 1992, the responsibility for all marketing and selling activity was assumed
by Monterey Homes Corporation.
The Company currently conducts home building operations solely in the
Phoenix and Tucson, Arizona markets, which is significantly impacted by the
strength of the surrounding real estate market and level of interest rates
offered on home mortgage loans. The Arizona real estate market is currently
experiencing strong growth and current home mortgage interest rates are
favorable for home buyers and sellers. However, a sudden decline in the Arizona
real estate market or an increase in interest rates could have a significant
impact on the Company's operating results and estimates made by management. The
Company utilizes various suppliers and subcontractors and is not dependent on
individual suppliers or subcontractors.
Real Estate Under Development
Real estate under development includes undeveloped land and developed lots,
homes under construction in various stages of completion and completed homes and
is stated at the lower of cost or net realizable value. Costs capitalized
include direct construction costs for homes, development period interest and
certain common costs which benefit the entire subdivision. Cost of sales include
land acquisition and development costs, direct construction costs of the home,
development period interest and closing costs, and an allocation of common
costs. Common costs are allocated on a subdivision by subdivision basis to
residential lots based on the number of lots to be built in the subdivision,
which approximates the relative sales value method. During the years ended
December 31, 1995, 1994 and 1993, the Company incurred interest costs of
$2,243,901, $1,131,880, and $728,274, respectively, of which $2,240,756,
$1,123,251, and $689,334, respectively, was capitalized. Interest paid amounted
to $2,242,956, $915,213 and $588,806 during 1995, 1994 and 1993 respectively.
Deposits paid related to options to purchase land are capitalized and
included in option deposits until the related land is purchased. Upon purchase
of the land, the related option deposits are transferred to real estate under
development.
Preacquisition Costs
Preacquisition costs include architecture, engineering, and feasibility
study costs incurred, as well as earnest money deposits on potential development
projects of the Company. These costs are capitalized until the related project
begins development or a decision is made not to pursue further development of
the project. Upon commencement of development, the costs are transferred to real
estate under development. If a decision is made not to pursue development of the
project, the costs are expensed in the period in which the decision is made.
F-34
<PAGE>
Deferred Subordinated Debt Costs
Deferred subordinated debt costs include legal, underwriting, accounting
and other related costs incurred in connection with the $8,000,000 subordinated
debt private placement offering issued on October 17, 1994. The costs are being
amortized on a straight-line basis over the term of the notes which mature
October 15, 2001.
Revenue Recognition
Revenues applicable to homes sold are recognized upon the close of escrow
and transfer of title. The Company requires an initial deposit with the signing
of a sales contract. All deposits are recorded as home sale deposits and, upon
close of escrow and transfer of title, the appropriate amount of revenue is
recorded.
Property and Equipment, Net
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets, which
range from three to five years.
Income Taxes
Monterey Homes Corporation, Monterey Management, Inc., Monterey Homes -
Tucson Corporation, and Monterey Management - Tucson, Inc. have elected to be
taxed as S Corporations for federal and state income tax purposes. As such, the
liability for taxes arising from the transactions of the respective companies is
the responsibility of the shareholders and no provision for income taxes has
been made in the accompanying financial statements.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
short-term investments purchased with a maturity of three months or less to be
cash equivalents.
Shareholders' Equity
The Company presents shareholders' equity on a combined basis. Actual
shareholders' equity by combining company is as follows:
1994 1995
----------------- -----------------
Monterey Homes Corporation $ 5,197,505 $ 7,578,236
Monterey Management, Inc. 1,700,028 1,755,363
Monterey Homes - Tucson Corporation - (106,115)
Monterey Management - Tucson, Inc. - (119,007)
----------------- -----------------
$ 6,897,533 $ 9,108,477
================= =================
F-35
<PAGE>
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the combined financial
statements and the reported amount of revenues and expenses during the reporting
period to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 Disclosures about Fair
Value of Financial Instruments (Statement 107), requires that a company disclose
the estimated fair values for its financial instruments. Statement 107 defined
the fair value of a financial instrument as the amount at which the instrument
could be exchanged in a current transaction between willing parties.
The carrying amounts of the Company's receivables, cash and cash
equivalents, option deposits, accounts payable, accrued liabilities and home
sale deposits approximate their estimated fair values because of the short
maturity of these assets and liabilities. The carrying amount of the Company's
notes payable approximates fair value because the notes are at interest rates
comparable to market rates based on the nature of the loans, their terms and the
remaining maturity. Considerable judgment is required in interpreting market
data to develop the estimates of fair value. Accordingly, these fair value
estimates are not necessarily indicative of the amounts the Company pay or
receive in actual market transactions.
(2) Real Estate Under Development
The components of real estate under development at December 31 are as
follows:
1994 1995
-------------------- ------------------
Homes in production $ 14,715,223 $ 21,064,718
Land held for future development 3,202,609 12,864,560
-------------------- ------------------
$ 17,917,832 $ 33,929,278
==================== ==================
(3) Property and Equipment
Property and equipment consists of the following at December 31:
1994 1995
-------------------- ------------------
Computer equipment $ 103,424 $ 147,811
Vehicles 88,594 88,594
Furniture and equipment 173,126 229,423
-------------------- ------------------
365,144 465,828
Less accumulated depreciation 152,805 221,344
-------------------- ------------------
$ 212,339 $ 244,484
==================== ==================
F-36
<PAGE>
(4) Notes Payable
Notes payable consists of the following at December 31:
<TABLE>
<CAPTION>
1994 1995
------------------- --------------------
<S> <C> <C>
Various construction notes to banks, original maturities of
less than one year, interest approximating prime (8.5% at December
31, 1994 and 1995) plus 1% and prime plus .75%, payable at the
earlier of close of escrow or maturity date, secured by first deeds of
trust on land and personal guarantees of the shareholders and a
spouse of one of the shareholders. $ 2,221,105 $ 9,032,246
Senior subordinated notes payable to private investment
group, maturing October 15, 2001, annual interest of 13%, payable
semi-annually, principal payable at maturity date, unsecured. 8,000,000 8,000,000
Various acquisition and development notes to banks, and
the Arizona State Land Department, maturing on dates from May
1997 to December 1999, interest ranging from 6-7/8% to prime
(8.5% at December 31, 1995 and 1994) plus 1%, payable at the
earlier of funding of construction financing or maturity date, secured
by first deeds of trust on land and personal guarantees of the
shareholders and a spouse of one of the shareholders. 1,997,201 7,012,737
Other 46,752 270,585
------------------- --------------------
$12,255,058 $24,315,568
=================== ====================
</TABLE>
A provision of the senior subordinated debt agreement and related bond indenture
requires the Company to file a shelf registration statement for the debt with
the Securities and Exchange Commission by July 31, 1996. If the debt is not
registered by July 31, 1996, the Company will be required to pay liquidated
damages to the note holders in an amount equal to 1% of the outstanding
principal of the notes, which shall be payable at the same time and manner as
interest on such debt.
The principal payment requirements on notes payable at December 31, 1995 are as
follows:
1996 $ 9,319,726
1997 6,691,808
1998 9,969
1999 294,065
2000 and thereafter 8,000,000
------------
$24,315,568
============
Available unused commitments under lines of credit amounted to
approximately $11,569,000 at December 31, 1995.
(5) Leases
The Company leases office facilities, model homes and equipment under
various operating lease agreements.
The following is a schedule of approximate future minimum lease
payments for noncancelable operating leases as of December 31, 1995:
F-37
<PAGE>
1996 $ 266,059
1997 211,084
1998 211,366
1999 129,437
---------
$ 817,946
=========
Rental expense was $434,914, $335,805 and $204,919 for the years ended
December 31, 1995, 1994, and 1993, respectively.
On September 1, 1994, the Company entered into a lease agreement to
lease office space from a limited liability company with common ownership
interest. During the year ended December 31, 1995, 1994, and 1993 the Company
paid rent to the related party company of $162,394, $53,244, and $0,
respectively.
(6) Common Stock
Prior to 1994, shareholders' equity consisted of one class of common
stock of Monterey Management, Inc. and one class of common stock of Monterey
Homes Corporation. Each share of stock had an interest in the net assets of the
individual company that issued the stock. As of December 31, 1995 and 1994, the
same two shareholders each held the same amount of stock for both companies.
On August 9, 1994, the board of directors of Monterey Homes Corporation
approved an increase in the authorized shares of common stock from 1,000,000 to
10,000,000 and approved a 5,779.16-for-one stock split to shareholders of record
on August 11, 1994. In addition, the board of directors authorized the issuance
of one million shares of preferred stock, none of which is currently issued.
Concurrent with these transactions, the par value of common stock was changed
from $1 per share to no par value. However, the stated value of common shares
was reduced such that there was no impact on the book value of outstanding
common shares.
On August 9, 1994, the board of directors of Monterey Management' Inc.
approved an increase in the authorized shares of common stock from 200,000 to
10,000,000 and approved a 5,812.96-for-one stock split to shareholders of record
on August 11, 1994. In addition, the board of directors authorized the issuance
of one million shares of preferred stock at $.01 par value per share, none of
which is currently issued. Concurrent with these transactions, the stated value
of the common shares was reduced from $4.07 per share to $.0007 per share, such
that there was no effect on the book value of the outstanding common shares.
In connection with the $8,000,000 subordinated debt private placement
memorandum issued on October 11, 1994 by Monterey Management, Inc., 400,000
common stock purchase warrants were issued with each warrant being exercisable
to purchase one common share of Monterey Management, Inc. stock for $6.25 per
share. The warrants have no readily available public market and are exercisable
only upon an initial public offering of Monterey Management, Inc. or its
successor. As of December 31, 1995 management had no intentions to initiate or
complete an initial public offering and no public market existed for such
warrants. As a result no value was given to the common stock purchase warrants
as of December 31, 1995.
(7) Related Party Transactions
A partner in the Monterey at Mountain View Partnership, which was
dissolved in 1994, was also a home building subcontractor for the Company. The
Company owed this subcontractor a total of $205,885 and $280,213 at December 31,
1994 and 1993, respectively, which is included in accounts and subcontractors
payable.
(8) Contingencies
The Company is subject to legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position or results of operations of the Company.
F-38
<PAGE>
MONTEREY HOMES
Combined Balance Sheets
December 31, 1995 and December 30, 1996
<TABLE>
<CAPTION>
(Unaudited)
Assets 1995 1996
----------- -----------
<S> <C> <C>
Real estate under development $33,929,278 $36,501,144
Receivables 860,807 927,229
Cash and cash equivalents 4,889,947 6,495,256
Option deposits 1,694,908 546,000
Other assets 1,279,144 1,271,684
----------- -----------
$42,654,084 $45,741,313
=========== ===========
Liabilities and Shareholders' Equity
Accounts and subcontractors payable $ 4,589,325 $ 7,218,323
Accrued liabilities 824,055 1,433,706
Home sale deposits 3,816,659 4,763,517
Notes payable 24,315,568 30,542,276
----------- -----------
Total liabilities 33,545,607 43,957,822
----------- -----------
Shareholders' equity
Common stock 4,810 4,810
Additional paid-in capital 8,517 8,517
Retained earnings 9,095,150 1,770,164
----------- -----------
Total shareholders' equity 9,108,477 1,783,491
----------- -----------
$42,654,084 $45,741,313
=========== ===========
</TABLE>
See accompanying notes to unaudited combined financial statements.
F-39
<PAGE>
MONTEREY HOMES
Combined Statements of Earnings
Periods ended December 31, 1995 and December 30, 1996
(Unaudited)
1995 1996
----------- -----------
Revenues $71,490,561 $87,753,724
Cost of sales 60,332,436 74,873,937
----------- -----------
Gross margin 11,158,125 12,879,787
Selling, general and administrative expenses 4,897,794 6,862,842
----------- -----------
Operating earnings 6,260,331 6,016,945
Miscellaneous income (expense), net 140,613 (49,104)
----------- -----------
Net earnings $ 6,400,944 $ 5,967,841
=========== ===========
See accompanying notes to unaudited combined financial statements.
F-40
<PAGE>
MONTEREY HOMES
Combined Statements of Cash Flows
Periods ended December 31, 1995 and December 30, 1996
<TABLE>
<CAPTION>
(Unaudited)
1995 1996
------------ ------------
Cash flows from operating activities:
<S> <C> <C>
Net earnings $ 6,400,944 $ 5,967,841
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Depreciation and amortization 129,462 296,724
Increase in real estate under development (16,011,446) (2,571,866)
Increase in receivables (321,211) (66,422)
(Increase) decrease in option deposits (710,146) 1,148,908
Decrease (increase) in other assets 672,352 (210,817)
Increase in accounts and subcontractors payable 928,796 2,628,998
Increase (decrease) in home sale deposits (1,507,413) 946,858
Increase in accrued liabilities 140,982 609,651
------------ ------------
Net cash provided by (used in) operating activities (10,277,680) 8,749,875
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (102,279) (130,356)
Proceeds from sales of equipment 984 51,909
------------ ------------
Net cash used in investing activities (101,295) (78,447)
------------ ------------
Cash flows from financing activities:
Borrowings 37,270,591 52,857,120
Repayments of borrowings (25,210,083) (46,630,412)
Distributions to shareholders (4,190,000) (13,292,827)
------------ ------------
Net cash provided by (used in) financing activities 7,870,508 (7,066,119)
------------ ------------
Net increase (decrease) in cash and cash equivalents (2,508,467) 1,605,309
Cash and cash equivalents at beginning of period 7,398,414 4,889,947
------------ ------------
Cash and cash equivalents at end of period $ 4,889,947 $ 6,495,256
============ ============
</TABLE>
See accompanying notes to unaudited combined financial statements.
F-41
<PAGE>
MONTEREY HOMES
Notes to Combined Financial Statements
December 31, 1995 and December 30, 1996 (unaudited)
(1) Summary of Significant Accounting Policies
Basis of Presentation
The unaudited combined financial statements include the accounts of
Monterey Homes Corporation (MHC), Monterey Management, Inc. (MMI),
Monterey Homes - Tucson Corporation (MH-TC), and Monterey Management -
Tucson, Inc. (MM-TI) (collectively, the "Company"), which are subject to
common ownership. All material balances and transactions between the
combined entities have been eliminated.
The Company began operations during 1985 with MMI conducting all phases
of the home-building activities from acquiring and developing real estate
to the construction and sale of finished homes. Effective with the
incorporation of MHC on January 9, 1992, the responsibility for all
marketing and selling activity was assumed by MHC. In June 1995, the
Company began operations in Tucson, Arizona. MM-TI was incorporated June
1, 1995 for the purpose of performing all construction and development
activity in Tucson. MH-TC was incorporated June 1, 1995 for the purpose
of performing all sales and marketing activity in Tucson.
Amounts included in the accompanying combined statements of earnings and
cash flows for the periods ended December 31, 1995 and December 30, 1996
include activity from January 1, 1995 to December 31, 1995 and from
January 1, 1996 to December 30, 1996, respectively. The Company merged
with Homeplex Mortgage Investments Corporation on December 31, 1996 (see
note 2).
The Company currently conducts home building operations solely in the
Phoenix and Tucson, Arizona markets, which is significantly impacted by
the strength of the surrounding real estate market and level of interest
rates offered on home mortgage loans. The Arizona real estate market is
currently experiencing strong growth and current home mortgage interest
rates are favorable for home buyers and sellers. However, a sudden
decline in Arizona real estate market or an increase in interest rates
could have a significant impact on the Company's operating results and
estimates made by management. The Company utilizes various suppliers and
subcontractors and is not dependent on individual suppliers or
subcontractors.
In the opinion of management, the unaudited interim data reflects all
adjustments, consisting only of normal adjustments, necessary to fairly
present the Company's financial position and results of operations for
the periods presented. The results of operations for any interim period
are not necessarily indicative of results to be expected for a full
fiscal year.
Revenue Recognition
Revenues applicable to homes sold are recognized upon the close of escrow
and transfer of title. The Company requires an initial deposit with the
signing of a sales contract. All deposits are recorded as home sales
deposits and, upon close of escrow and transfer of title, the appropriate
amount of revenue is recorded.
F-42
<PAGE>
MONTEREY HOMES
Notes to Combined Financial Statements
December 31, 1995 and December 30, 1996 (unaudited)
Income Taxes
The Company has elected to be taxed as an S Corporation for federal and
state income tax purposes. As such, the liability for taxes arising from
the transactions of the combined entities is the responsibility of the
shareholders and no provision for income taxes has been made in the
accompanying financial statements.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the combined financial
statements and the reported amount of revenues and expenses during the
reporting period to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ
from those estimates.
(2) Subsequent Event
On December 23, 1996, the stockholders of Homeplex Mortgage Investments
Corporation, now known as Monterey Homes Corporation (the "Merged
Company"), approved the Merger (the "Merger") of Monterey Homes with and
into the merged Company. The Merger was effective on December 31, 1996,
and the merged Company will focus on homebuilding as its primary
business. Also, ongoing operations of the merged Company will be managed
by the two previous stockholders of Monterey Homes, who at the time of
the Merger, became Co-Chief Executive Officers with one serving as
Chairman and the other as President.
F-43
<PAGE>
Report of Independent Auditors
The Board of Directors
Legacy Homes, Ltd.
We have audited the accompanying balance sheets of Legacy Homes, Ltd., as of
December 31, 1995 and 1996, and the related statements of income, changes in
partner's capital and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Legacy Homes, Ltd. at December
31, 1995 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Dallas, Texas
April 15, 1997, except for Note 6, as
to which the date is July 1, 1997
F-44
<PAGE>
LEGACY HOMES, LTD.
BALANCE SHEETS
December 31, 1995 and 1996
1995 1996
---- ----
ASSETS
Cash and cash equivalents .......................... $ 3,710,690 $ 3,201,007
Due from title companies ........................... 285,527 27,400
Note receivables ................................... -- 503,825
Other receivables .................................. 199,962 453,938
Inventories:
Finished homes and construction in progress 9,657,959 13,991,188
Developed residential lots ................ 1,306,216 3,169,411
Land under development .................... 1,650,702 469,467
Model homes ............................... 2,051,640 2,273,000
----------- -----------
14,666,517 19,903,066
Prepaid expenses and other ......................... 15,307 18,460
Furniture and equipment, net ....................... 301,860 486,683
----------- -----------
Total assets ....................................... $19,179,863 $24,594,379
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Trade payables ..................................... $ 2,621,098 $ 2,969,136
Due to affiliate for land under development ........ 1,277,647 --
Accrued expenses ................................... 1,626,987 1,673,224
Customer deposits .................................. 659,409 720,546
Notes payable ...................................... -- 4,458,378
Notes payable - related parties .................... 3,459,350 3,380,000
Partners' capital .................................. 9,535,372 11,393,095
----------- -----------
Total liabilities and partners' capital ............ $19,179,863 $24,594,379
=========== ===========
See accompanying notes to financial statements
F-45
<PAGE>
LEGACY HOMES, LTD.
STATEMENTS OF INCOME
Years Ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Revenues.................................................. $55,982,719 $61,554,098 $85,114,000
Cost of sales............................................. 45,153,087 49,219,011 67,715,026
---------- ---------- ----------
10,829,632 12,355,987 17,398,974
Selling, general and administrative expenses.............. 5,814,800 6,592,151 8,550,038
--------- --------- ---------
5,014,832 5,742,936 8,848,936
Other:
Interest income.................................. 207,189 201,513 106,722
Interest expense................................. (167,377) (241,519) (354,952)
-------- -------- --------
39,812 (40,006) (248,230)
------ ------- --------
Net income $5,054,644 $5,702,930 $8,600,706
========== ========== ==========
</TABLE>
See accompanying notes to financial statements
F-46
<PAGE>
LEGACY HOMES, LTD.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
Years ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1993.......................... $7,621,438
Net income................................... 5,054,644
Partners' distribution....................... (2,699,504)
----------
Balance at December 31, 1994.......................... 9,976,578
Net income................................... 5,702,930
Partners' distributions...................... (6,144,136)
----------
Balance at December 31, 1995.......................... 9,535,372
Net income................................... 8,600,706
Partners' distributions...................... (6,742,983)
----------
Balance at December 31, 1996.......................... $11,393,095
===========
</TABLE>
See accompanying notes to financial statements
F-47
<PAGE>
LEGACY HOMES, LTD.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $5,054,644 $5,702,930 $8,600,706
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.................................... 152,128 195,064 246,998
Loss on disposal of fixed assets - - 8,633
Changes in operating assets and liabilities:
Due from title companies................ (446,387) 160,860 258,127
Other receivables....................... 192,775 (138,929) (253,976)
Inventories............................. 1,049,300 (3,536,577) (5,236,549)
Prepaid expenses and other.............. (152,460) 181,122 (3,153)
Trade payables.......................... (259,626) 907,103 348,038
Due to affiliate........................ - 1,277,647 (1,277,647)
Accrued expenses........................ 92,055 863,195 46,237
Customer deposits....................... (157,761) 38,687 61,137
---------- ---------- ----------
Net cash provided by operating activities................. 5,524,668 5,651,102 2,798,551
INVESTING ACTIVITIES
Purchase of furniture and equipment....................... (96,597) (191,124) (440,454)
Advanced on note receivable............................... - - (605,000)
Payments received on note receivable...................... - - 101,175
---------- ---------- ----------
Net cash used in investing activities..................... (96,597) (191,124) (944,279)
FINANCING ACTIVITIES
Proceeds from notes payable............................... 30,917,209 30,829,124 54,939,532
Payments on notes payable................................. (32,021,429) (37,468,213) (50,481,154)
Payments from notes payable - related parties............. 1,360,140 3,380,000 -
Payments on notes payable - related parties............... (1,254,668) (255,040) (79,350)
Partners' distributions................................... (2,699,504) (6,144,136) (6,742,983)
---------- ---------- ----------
Net cash used in financing activities..................... (3,698,252) (9,658,265) (2,363,955)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents.......... 1,729,819 (4,198,287) (509,683)
Cash and cash equivalents at beginning of year............ 6,179,158 7,908,977 3,710,690
---------- ---------- ----------
Cash and cash equivalents at end of year.................. $7,908,977 $3,710,690 $3,201,007
========== ========== ==========
</TABLE>
See accompanying notes to financial statements
F-48
<PAGE>
Legacy Homes, Ltd.
Notes to financial Statements
December 31, 1995 and December 31, 1996
1. Summary of Significant Accounting Policies
Organization
The Partnership is primarily engaged in the construction and sale of residential
housing in Dallas/Fort Worth and Austin. The Partnership designs, builds and
sells single-family homes on finished lots which it purchases ready for home
construction or which it develops.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Revenue Recognition
Revenue is recognized at the time of the closing of a sale, when title to and
possession of the property transfers to the buyer.
Cash Equivalents
The Partnership considers all highly liquid investments with an initial maturity
of three months or less when purchased to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (specific identification method) or
net realizable value. In addition to direct land acquisition and housing
construction costs, inventory costs include interest and real estate taxes,
which are capitalized in inventory during the development and construction
periods.
Furniture and Equipment
Furniture and equipment are stated on the basis of cost. Depreciation is
computed by the straight-line method based on estimated useful lives.
Accumulated depreciation at December 31, 1995 and 1996 was $708,235 and
$448,252, respectively.
Income Taxes
The Partnership is not subject to federal income taxes as its income is reported
on the partners' income tax returns. Accordingly, no provision for federal
income tax liability has been recorded in the financial statements.
Advertising
Advertising costs are expensed when incurred. Advertising expense was $419,092,
$518,710 and $616,935 in 1994, 1995 and 1996, respectively.
F-49
<PAGE>
Legacy Homes, Ltd.
Notes to Financial Statements (continued)
2. Notes Payable
Notes payable at December 31, 1996 consisted of interim construction loans
payable to financial institutions under a master note agreement which was
amended in 1996. The Partnership may borrow up to $30 million at prime, and the
obligation is secured by inventory and guaranteed by the general partner. The
master note agreement contains various covenants, including net worth
requirements, debt to home completion values, liabilities to net worth ratios
and restrictions on the payment of distributions. The master note agreement has
a one year term, due on July 31, 1997, but is reviewed annually for renewal.
Interest costs for the year ended December 31, 1994, 1995 and 1996 are:
1994 1995 1996
---- ---- ----
Capitalized $581,161 $518,577 $608,375
Not capitalized 167,377 241,519 354,952
-------- -------- --------
Total incurred $748,538 $760,096 $963,327
======== ======== ========
Paid $718,820 $817,275 $920,829
======== ======== ========
3. Related Party Transaction
The Partnership has notes payable to related parties. These loans bear interest
at prime and are due on demand or at various dates during 1997. Interest on
these loans amounted to $55,716, $47,100 and $285,870 for 1994, 1995 and 1996,
respectively.
During 1995, the Partnership purchased land for approximately $1,600,000 from a
related party. During 1996, the Partnership developed and sold 56 lots from this
land. There were 58 lots in ending inventory at December 31, 1996 related to the
land purchased in 1995.
The Partnership leased its administrative office space from an affiliate under a
short term rental agreement for approximately $20,000, $27,000 and $34,000
during 1994, 1995 and 1996, respectively.
4. Profit Sharing Plan
The Partnership has a 401(k) savings plan for all eligible employees. Under the
plan, the Partnership matches employees' voluntary contributions up to a maximum
of 1.8 % of each participant's earnings. The Partnership has the option to make
discretionary contributions to the plan. Amounts charged to expense for the plan
approximated $15,000, $24,000 and $34,000 during 1994, 1995 and 1996,
respectively.
5. Lot Options
To ensure the future availability of various developed lots in the ordinary
course of business, the Partnership enters into option agreements to purchase
developed lots.
6. Disposition of Assets
On May 29, 1997, the Partnership signed a definitive agreement to sell
substantially all of its assets to Monterey Homes Corporation. The transaction
became effective as of July 1, 1997.
F-50
<PAGE>
LEGACY HOMES, LTD.
BALANCE SHEETS
December 31, 1996 and June 30, 1997
<TABLE>
<CAPTION>
June 30, 1997
1996 (Unaudited)
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents.................................... $ 3,201,007 $ 1,275,168
Due from title companies..................................... 27,400 1,088,645
Advances to partners......................................... -- 650,000
Notes and other receivables.................................. 957,763 206,623
Real estate under development ............................... 19,903,066 18,727,774
Other assets................................................. 505,143 1,379,650
------------- -------------
$ 24,594,379 $ 23,327,860
============= =============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued liabilities..................... $ 4,642,360 $ 4,950,103
Home sale deposits .......................................... 720,546 941,582
Notes payable ............................................... 7,838,378 17,345,628
------------- -------------
Total liabilities ......................................... 13,201,284 23,237,313
------------- -------------
Partners' capital............................................ 11,393,095 90,547
------------- -------------
$ 24,594,379 $ 23,327,860
============= =============
</TABLE>
See accompanying notes to financial statements
F-51
<PAGE>
LEGACY HOMES, LTD.
STATEMENTS OF INCOME
Six Months ended June 30, 1996 and June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Six Months ended June 30,
1996 1997
---- ----
<S> <C> <C>
Revenues ....................................................... $ 36,209,614 $ 39,727,991
Cost of Sales .................................................. 30,843,043 32,958,779
-------------- ------------
5,366,571 6,769,212
Selling, general and administrative............................. 2,760,869 1,511,996
-------------- ------------
2,605,702 5,257,216
Other income ................................................... 726,419 332,836
-------------- ------------
Net income......................................... $ 3,332,121 $ 5,590,052
============== ============
</TABLE>
See accompanying notes to financial statements
F-52
<PAGE>
LEGACY HOMES, LTD.
STATEMENTS OF CASH FLOWS
Six Months ended June 30, 1996 and June 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES 1996 1997
---- ----
<S> <C> <C>
Net income........................................................... $ 3,332,121 $ 5,590,052
Depreciation and amortization........................................ 77,651 126,353
Increase in due from title companies................................. -- (1,061,245)
(Increase) decrease in other receivables............................. (612,687) 247,315
(Increase) decrease in real estate under development ................ (6,108,053) 1,175,292
Increase in option deposits.......................................... -- (812,281)
Decrease in other assets............................................. (6,066,460) (188,579)
Increase (decrease) in accounts payable and accrued liabilities...... (1,339,332) 528,779
------------ -------------
Net cash provided by (used in) operating activities (10,716,760) 5,605,686
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Advances to partners................................................. -- (650,000)
Payment received on note receivables................................. -- 503,825
Payments on loans (7,808) --
------------ -------------
Net cash used in investing activities................................ (7,808) (146,175)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings........................................................... 29,428,848 30,769,151
Repayment of borrowings.............................................. (18,889,564) (21,261,901)
Partner capital distributions........................................ -- (16,892,600)
------------ -------------
Net cash provided by (used in) financing activities.................. 10,539,284 (7,385,350)
------------ -------------
Net decrease in cash and cash equivalents (185,284) (1,925,839)
------------ -------------
Cash and cash equivalents at beginning of period..................... 3,996,216 3,201,007
Cash and cash equivalents at end of period........................... $ 3,810,932 $ 1,275,168
============ =============
</TABLE>
See accompanying notes to financial statements
F-53
<PAGE>
LEGACY HOMES, LTD.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 1996 and 1997
1. Summary of Significant Account Policies
Organization and Basis of Presentation
The Partnership is primarily engaged in the construction and sale of residential
housing in Dallas/Fort Worth, Austin and Houston, Texas. The Partnership
designs, builds and sells single-family homes on finished lots which it
purchases ready for home construction or which it develops. Certain prior period
amounts have been reclassified to be consistent with current financial statement
presentation. In the opinion of management, the unaudited financial statements
reflect all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the Company's financial position and results of
operations for the periods presented. The results of operations for any interim
period are not necessarily indicative of results to be expected for a full
fiscal year.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Revenue Recognition
Revenue is recognized at the time of the closing of a sale, when title to and
possession of the property transfers to the buyer.
Cash Equivalents
The Partnership considers all highly liquid investments with an initial maturity
of three months or less when purchased to be cash equivalents.
Real Estate Under Development
Real estate under development includes finished lots under development, homes
under construction in various stages of completion and completed homes. The
Company values its real estate under development in accordance with Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Accordingly,
amounts are carried at cost unless expected future set cash flows (undiscounted
and without interest) are less than cost and then amounts are carried at
estimated fair value less cost to sell. Costs capitalized include land and
direct construction costs for homes, development period interest and certain
common costs which benefit the entire subdivisions. Common costs are allocated
on a subdivision by subsivision basis to residential lots based on the number of
lots to be built in the subdivison, which approximates the relative sales value
method.
Deposits paid related to options to purchase land are capitalized and included
in option deposits until the related land is purchased. Upon purchase of the
land, the related option deposits are transferred to real estate under
development.
Income Taxes
The Partnership is not subject to federal income taxes as its income is reported
on the partners' income tax returns. Accordingly, no provision for federal
income tax liability has been recorded in the financial statements.
F-54
<PAGE>
2. Notes Payable
Notes payable at June 30, 1997 consisted of interim constructin loans
payable by Legacy Homes, Ltd. to financial institutions under a master note
agreement. Legacy Homes, Ltd. may borrow up to $30 million at the prime interest
rate, and the obligation is secured by real estate under development and
guaranteed by the general partner. The master note agreement contains various
covenants, including net worth requirements, debt to home completion values,
liabilities to net worth ratios and restrictions on the payment of
distributions. The master note agreement is due July 31, 1998.
3. Disposition of Assets.
On May 29, 1997, the Partnership signed a definitive agreement to sell
substantially all of its assets to Monterey Homes Corporation. The transaction
became effective as of July 1, 1997.
F-55
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the provisions of the Maryland General Corporation Law, a
corporation's articles may, with certain exceptions, include any provision
expanding or limiting the liability of its directors and officers to the
corporation or its stockholders for money damages, but may not include any
provision that restricts or limits the liability of its directors or officers to
the corporation or its stockholders to the extent that (i) it is proved that the
person actually received an improper benefit or profit in money, property, or
services for the amount of the benefit or profit in money, property, or services
actually received; or (ii) a judgment or other final adjudication adverse to the
person is entered in a proceeding based on a finding in the proceeding 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 in the
proceeding. The Company's charter contains a provision limiting the personal
liability of officers and directors to the Company and its stockholders to the
fullest extent permitted under Maryland law.
In addition, the provisions of the Maryland General Corporation Law
permit a corporation to indemnify its present and former directors and officers,
among others, against liability incurred, unless it is established that (i) the
act or omission of the director or officer was material to the matter giving
rise to the proceeding and was committed in bad faith or was the result of
active and deliberate dishonesty, or (ii) the director or officer actually
received an improper personal benefit in money, property, or services, or (iii)
in the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. The Company's charter
provides that it will indemnify its directors, officers, and others so
designated by the Board of Directors to the full extent allowed under Maryland
law.
Insofar as indemnification for liability arising under the Securities
Act 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 Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
<TABLE>
<CAPTION>
Exhibit Page or
Number Description Method of Filing
- ------ ----------- ----------------
<S> <C> <C>
2 Agreement and Plan of Reorganization, dated Incorporated by reference to
as of September 13, 1996, by and among Exhibit 2 of the Form S-4
Homeplex, the Monterey Merging Companies Registration Statement No.
and the Monterey Stockholders. 333-15937 ("S-4 #333-
15937").
2.1 Agreement of Purchase and Sale of Assets, dated Incorporated by reference to
as of May 29, 1997, by and among Monterey, Exhibit 2 of the Form 8-K/A
Legacy Homes, Ltd., Legacy Enterprises, Inc., dated June 18, 1997
and John and Eleanor Landon
3.1 Restated Articles of Incorporated by reference to
Incorporation of the Company Exhibit 3.1 of Post-Effective
Amendment No. 1 to Registration
Statement on Form No. 33-29737
("S-1/A #33-29737")
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C> <C>
3.2 Articles of Merger Incorporated by reference to
Exhibit 3.2 to the Form 10-K for
the year ended December 31, 1996.
3.3 Amended and Restated Bylaws of the Company Incorporated by reference to
Exhibit 3.3 of S-1/A #33-29737
3.4 Amendment to the Bylaws Incorporated by reference to
Exhibit 3.4 to the Form 10-K for
the year ended December 31, 1996.
4.1 Specimen of Common Stock Certificate Incorporated by reference to
Exhibit 4 to the Form 10-K for
the year ended December 31, 1996.
4.2 Warrant Agreement dated as of October 17, Previously Filed
1994 among Monterey and the Warrant Agent
4.3 Assumption Agreement dated as of December 31, Previously Filed
1996 modifying the Warrant Agreement
in certain respects, and relating to the assumption
of the Warrant Agreement by the Company and
certain other matters
4.4 Specimen Warrant Certificate Previously Filed
5.1 Opinion of Hughes & Luce, L.L.P. Previously Filed
re: Legality
5.2 Opinion of Hughes & Luce, L.L.P. Previously Filed
re: Certain Tax Matters
10.1 Subcontract Agreement between Homeplex Incorporated by reference
and American Southwest Financial Services, to Exhibit 10(b) of S-11
Inc. #33-22092.
10.2 Form of Master Servicing Agreement Incorporated by reference
to Exhibit 10(c) of S-11
#33-22092.
10.3 Form of Servicing Agreement Incorporated by reference
to Exhibit 10(d) of S-11
#33-22092.
10.4 Indenture dated October 17, 1994, as Incorporated by reference to
amended, relating to 13% Senior Subordinated Exhibit 10(j) of the S-4 # 333-
Notes Due 2001 15937.
10.5 Master Revolving Line of Credit by and Incorporated by reference to
between Norwest Bank Arizona, N.A. and the Exhibit 10.5 to the Form 10-K for
Company the year ended December 31, 1996.
10.6 Revolving Model Home Lease Back Incorporated by reference to
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C> <C>
Agreement between AMHM-1, L.P. and the Exhibit 10.6 to the Form 10-K for
Company the year ended December 31, 1996.
10.7 Stock Option Plan* Incorporated by reference
to Exhibit 10(d) of Form
10-K for the fiscal year
ended December 31, 1995
("1995 Form 10-K").
10.8 Amendment to Stock Option Plan* Incorporated by reference
to Exhibit 10(e) of
the 1995 Form 10-K.
10.9 Amendment to Stock Option Plan dated as of Previously Filed
December 31, 1996*
10.10 Monterey Homes Corporation Stock Incorporated by reference to
Option Plan * Exhibit 10.9 to the Form 10-K for
the year ended December 31, 1996.
10.11 Employment Agreement between the Incorporated by reference to
Company and William W. Cleverly* Exhibit 10.10 to the Form 10-K
for the year ended December 31,
1996.
10.12 Employment Agreement between the Incorporated by reference to
Company and Steven J. Hilton* Exhibit 10.11 to the Form 10-K
for the year ended December 31,
1996.
10.13 Employment Agreement between Incorporated by reference to
the Company and William W. Cleverly* Exhibit 10.12 to the Form 10-K
for the year ended December 31,
1996.
10.14 Stock Option Agreement between the Incorporated by reference to
Company and Steven J. Hilton* Exhibit 10.13 to the Form 10-K
for the year ended December 31,
1996.
10.15 Registration Rights Agreement between Incorporated by reference to
the Company and William W. Cleverly* Exhibit 10.14 to the Form 10-K
for the year ended December 31,
1996.
10.16 Registration Rights Agreement between Incorporated by reference to
the Company and Steven J. Hilton* Exhibit 10.15 to the Form 10-K
for the year ended December 31,
1996.
10.17 Escrow and Contingent Stock Agreement Incorporated by reference to
Exhibit 10.16 to the Form 10-K
for the year ended December 31,
1996.
10.18 Amended and Restated Employment Incorporated by reference to
Agreement and Addendum between the Exhibit 10(g) of the 1995
Company and Alan D. Hamberlin* Form 10-K.
10.19 Stock Option Agreement between the Incorporated by reference to
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C> <C>
Company and Alan D. Hamberlin* Exhibit 10(h) of the 1995
Form 10-K
21 List of Subsidiaries Previously File
23.1 Consent of KPMG Peat Marwick LLP Filed herewith
23.2 Consent of Ernst & Young LLP Filed herewith
23.3 Consent of Ernst & Young LLP Filed herewith
23.4 Consent of Hughes & Luce, L.L.P. Included in Exhibits No. 5.1
and 5.2
24 Powers of Attorney See signature page
</TABLE>
- ---------------------
* Indicates a management contract or compensation plan.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) above do not apply
if the registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-4
<PAGE>
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 ("Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
has duly caused this post-effective amendment to the registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Phoenix, State of Arizona, on October 7, 1997.
MONTEREY HOMES CORPORATION
By: /s/ Larry W. Seay
----------------------------------------
Larry W. Seay
Vice President - Finance and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints William W. Cleverly, Steven J. Hilton and Larry
W. Seay, and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this registration statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
* Chairman of the Board and Co- October 7, 1997
- --------------------------------------- Chief Executive Officer (Co-
William W. Cleverly Principal Executive Officer)
and Director
* President and Co-Chief Executive October 7, 1997
- --------------------------------------- Officer (Co-Principal Executive
Steven J. Hilton Officer) and Director
* Chief Operating Officer and Co- October 7, 1997
- --------------------------------------- Chief Executive Officer (Co-
John R. Landon Principal Executive Officer) and
Director
/s/ Larry W. Seay Vice President - Finance and Chief October 7, 1997
- --------------------------------------- Financial Officer (Principal
Larry W. Seay Financial Officer and
Principal Accounting Officer)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
* Director October 7, 1997
- -----------------------------------
Alan D. Hamberlin
* Director October 7, 1997
- -----------------------------------
Robert G. Sarver
*
- -----------------------------------
C. Timothy White Director October 7, 1997
* By: /s/ Larry W. Seay
------------------------------
Larry W. Seay
Attorney-in-Fact
</TABLE>
CONSENT OF KPMG PEAT MARWICK LLP
The Board of Directors
Monterey Homes Corporation:
We consent to the use of our report included herein and to the reference to our
firm under the headings "Experts" and "Selected Financial and Operating Data" in
the prospectus.
KPMG Peat Marwick LLP
Phoenix, Arizona
October 6, 1997
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Experts" and
Selected Financial and Operating Data" and to the use of our report dated
February 13, 1996, in the Registration Statement (Form S-4 No. 333-15937) and
related prospectus of Monterey Homes Corporation (formerly Homeplex Mortgage
Investments Corporation) for the registration of 256,345 shares of common stock.
ERNST & YOUNG LLP
Phoenix, Arizona
October 6, 1997
Consent of Independent Auditors
We consent to the reference of our firm under the caption "Experts" and to the
use of our report dated April 15, 1997, except for note 6, as to which the date
is July 1, 1997, with respect to the financial statements of Legacy Homes, Ltd.
included in the Post-Effective Amendment No. 2 to the Registration Statement
(Form S-4 No. 333-15937) and related Prospectus of Monterey Homes Corporation
filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Dallas, Texas
October 7, 1997
