UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) December 31, 1996
-------------------------------
MONTEREY HOMES CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 1-9977 86-0611231
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
6613 North Scottsdale Road, Suite 200, Scottsdale, Arizona 85250
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (602) 998-8700
--------------
Homeplex Mortgage Investments Corporation
5333 North Seventh Street, Suite 219, Phoenix, Arizona 85014
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE>
Items 1 and 2. Change of Control and Acquisition or Disposition of Assets.
On December 23, 1996, the shareholders of Homeplex Mortgage Investments
Corporation, now known as Monterey Homes Corporation (the "Company"), approved
the merger (the "Merger") of Monterey Homes Construction II, Inc., an Arizona
corporation ("MHC II"), and Monterey Homes Arizona II, Inc., an Arizona
corporation ("MHA II"), with and into the Company. MHC II and MHA II were
privately owned homebuilders with operations in Phoenix, Scottsdale and Tucson,
Arizona. The Merger was effective as of the close of business on December 31,
1996, and was completed pursuant to the terms of an Agreement and Plan of
Reorganization, dated September 13, 1996, by and among the Company, MHC II, MHA
II and William W. Cleverly and Steven J. Hilton, the shareholders of MHC II and
MHA II (the "Merger Agreement").
Upon consummation of the Merger, the Company's name was changed to
Monterey Homes Corporation and the Company's New York Stock Exchange ticker
symbol was changed to MTH. In addition, 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.
Under the terms of the Merger Agreement, the Company issued 642,971
shares of its Common Stock to each of William W. Cleverly and Steven J. Hilton
(the "Exchange Shares"). Each of Messrs. Cleverly and Hilton also may acquire up
to 133,333 shares of Common Stock if certain stock price targets are achieved
(the "Contingent Shares"). In addition, Messrs. Cleverly and Hilton each were
granted options to purchase 166,667 at an exercise price of $5.25 (the "Option
Shares"). Messrs. Cleverly and Hilton now beneficially own approximately 28.5%
of the Company's issued and outstanding Common Stock. The Company financed the
Merger by issuing shares of Common Stock.
Concurrently with the Merger, William W. Cleverly was elected to serve
as Chairman of the Board of Directors and Co-Chief Executive Officer of the
Company and Steven J. Hilton was elected to serve as a Director, President and
Co-Chief Executive Officer of the Company. The Company's Board of Directors now
consists of William W. Cleverly, Steven J. Hilton, Alan Hamberlin, the former
Chairman of the Board of Directors of the Company, and two new outside
directors, Robert G. Sarver and C. Timothy White. The Company issued a press
release describing the Merger, a copy of which is attached hereto as Exhibit 99.
As a result of the Merger, William W. Cleverly and Steven J. Hilton may
be deemed to have acquired control of the Company. Prior to the Merger, no
person owned more than 9.8% of the Company's Common Stock because the Company's
charter prohibited persons from owning 9.8% or more of the Company's Common
Stock. Such ownership restriction was necessary to preserve the Company's status
as a Real Estate Investment Trust (a "REIT"). Because the Company's REIT status
was terminated as a consequence of the Merger, the 9.8% ownership restriction is
no longer necessary. However, to preserve the net operating loss carryovers,
capital
2
<PAGE>
loss carryovers and built-in losses to which the Company is entitled, the
Company's charter has been amended to prohibit persons from acquiring 4.9% or
more of the Company's Common Stock. Persons who owned more than 4.9% on the date
of the Merger are permitted to keep the shares of the Company's Common Stock
that they owned on the date of the Merger, but are prohibited from increasing
their respective ownership interests in the Company. Further, this 4.9%
ownership restriction does not apply to the acquisition by Messrs. Cleverly and
Hilton of the Exchange Shares, the Contingent Shares and the Option Shares. The
4.9% ownership restriction will have the effect of impeding any future change of
control of the Company.
The Company anticipates that it will incur approximately $780,000 of
transaction costs in connection with the Merger which will be capitalized and
accounted for as a component of the purchase price for MHC II and MHA II and
approximately $300,000 of additional transaction costs, consisting of certain
change of control and severance payments, which will be expensed in the quarter
ended December 31, 1996. In addition, as a result of the Merger, the Company
will incur goodwill in the approximate amount of $1,686,000 which will amortized
on a straight line basis over 20 years and will adversely affect the Company's
net income. MHC II and MHA II anticipate that they will incur approximately
$516,000 of transaction costs associated with the Merger which will be expensed
by MHC II and MHA II in the quarter ended December 31, 1996.
Item 4. Changes in Registrant's Certifying Accountant.
On January 14, 1997, the Company's Board of Directors decided to
dismiss its current independent accountants, Ernst & Young LLP, and to replace
them with KPMG Peat Marwick LLP. KPMG Peat Marwick LLP served as the independent
accountants for MHC II and MHA II prior to the Merger described above. KPMG Peat
Marwick LLP will perform the audit of the Company's financial statements for the
year ended December 31, 1996.
Ernst & Young LLP rendered unqualified reports with respect to the
financial statements of the Company for the two fiscal years ended December 31,
1995 and 1994. In addition, during the two fiscal years ended December 31, 1995
and 1994 and the subsequent period from December 31, 1995 (the date of the
Company's last audited financial statements) to January 14, 1997 (the date Ernst
& Young LLP was dismissed as the Company's independent accountants), there were
no disagreements between the Company and Ernst & Young LLP with respect to any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure.
3
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits.
(a) Financial Statements.
---------------------
MHC II's and MHA II's Combined Balance Sheets as of December 31, 1995 and 1994,
as well as their Combined Statements of Earnings and Cash Flows for each of the
periods in the three-year period ended December 31, 1995 are incorporated by
reference to the Registration Statement on Form S-4 filed by Homeplex Mortgage
Investments Corporation on November 12, 1996 (File No. 333-15937). MHC II's and
MHA II's Unaudited Combined Balance Sheet as of September 30, 1996 and Unaudited
Combined Statements of Earnings and Cash Flows for the nine-month periods ended
September 30, 1996 and 1995 are set forth below.
4
<PAGE>
INDEX TO INTERIM UNAUDITED
COMBINED FINANCIAL STATEMENTS
MONTEREY HOMES
Unaudited Combined Balance Sheets as of September 30, 1996
and December 31, 1995 ........................................................ 6
Unaudited Combined Statements of Earnings for the Three
and Nine Months Ended September 30, 1996 and 1995..............................7
Unaudited Combined Statements of Cash Flows for the
Nine Months Ended September 30, 1996 and 1995..................................8
Notes to Unaudited Combined Financial Statements...............................9
5
<PAGE>
MONTEREY HOMES
Combined Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
----------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $2,386,436 4,959,930
Real estate under development 44,495,598 33,929,278
Receivables 559,924 790,823
Option deposits 493,500 1,694,908
Property and equipment, net 202,766 244,484
Other assets 1,084,077 1,034,661
----------------- -----------------
Total assets $49,222,301 42,654,084
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable $3,159,573 4,589,325
Accrued liabilities 882,926 824,055
Home sale deposits 5,326,359 3,816,659
Notes payable:
Construction, A & D and working capital notes 31,684,335 16,315,568
Subordinated debt 8,000,000 8,000,000
----------------- -----------------
Total liabilities 49,053,193 33,545,607
----------------- -----------------
Shareholders' equity:
Common stock 4,810 4,810
Paid in capital 8,517 8,517
Retained earnings 155,781 9,095,150
----------------- -----------------
Total shareholders' equity 169,108 9,108,477
----------------- -----------------
Total liabilities and shareholders' equity $49,222,301 42,654,084
================= =================
</TABLE>
See accompanying notes to interim unaudited combined financial statements.
6
<PAGE>
MONTEREY HOMES
Combined Statements of Earnings
For the Three and Nine Months ended September 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine Months ended September 30,
1996 1995 1996 1995
--------------------- -------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Housing revenue $19,419,155 13,769,873 50,910,796 40,214,322
Land sale revenue -- 3,565,000 925,000 3,565,000
Total Revenue --------------------- --------------------- --------------------- ---------------------
19,419,155 17,334,873 51,835,796 43,779,332
--------------------- -------------------- --------------------- ---------------------
Housing cost of sales 16,144,516 11,341,904 43,463,390 34,392,058
Land sale cost of sales -- 3,131,686 418,980 3,131,686
Total Cost of Sales --------------------- --------------------- --------------------- ---------------------
16,144,516 14,473,590 43,882,370 37,523,744
--------------------- -------------------- --------------------- ---------------------
Gross margin 3,274,639 2,861,283 7,953,426 6,255,578
--------------------- -------------------- --------------------- ---------------------
Selling, general and administrative
expense 1,390,328 1,044,933 4,127,350 3,250,506
--------------------- -------------------- --------------------- ---------------------
Operating earnings 1,884,311 1,816,350 3,826,076 3,005,072
Other income (expense) 41,162 (20,832) 68,555 93,059
--------------------- -------------------- --------------------- ---------------------
Net earnings $1,925,473 1,795,518 3,894,631 3,098,131
===================== ==================== ===================== =====================
Net earnings per common share $.95 .89 1.92 1.53
===================== ==================== ===================== =====================
Weighted average common shares
outstanding 2,027,776 2,027,776 2,027,776 2,027,776
===================== ==================== ===================== =====================
</TABLE>
See accompanying notes to interim unaudited combined financial statements.
7
<PAGE>
MONTEREY HOMES
Combined Statements of Cash Flows
For the Nine Months ended September 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Nine Months ended September 30,
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings 3,894,631 3,098,131
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization 54,002 75,949
Increase in real estate under construction (10,566,320) (17,543,208)
(Increase) decrease in receivables 230,899 (1,099,648)
(Increase) decrease in option deposits 1,201,408 (447,280)
(Increase) decrease in other assets (49,417) 651,250
Decrease in accounts payable (1,429,752) (1,063,188)
Increase in accrued liabilities 58,871 175,306
Increase in home sale deposits 1,509,700 2,623,349
------------- -------------
Net cash used in operating activities (5,095,978) (13,529,339)
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (12,283) (79,481)
------------- -------------
Cash flows from financing activities:
Borrowings 41,017,859 26,205,742
Repayment of borrowings (25,649,092) (13,562,656)
Issuance of Common Stock -- 4,000
Distributions to shareholders (12,834,000) (3,994,000)
------------- -------------
Net cash provided by financing activities 2,534,767 8,653,086
------------- -------------
Net decrease in cash and cash equivalents (2,573,494) (4,955,734)
Cash and cash equivalents at beginning of period 4,959,930 7,398,414
------------- -------------
Cash and cash equivalents at end of period 2,386,436 2,442,680
============= =============
</TABLE>
See accompanying notes to interim unaudited combined financial statements.
8
<PAGE>
MONTEREY HOMES
Notes to Interim Combined Financial Statements
September 30, 1996 and 1995
(Unaudited)
(1) Summary of Significant Accounting Policies
Basis of Presentation
The interim combined financial statements include the accounts
of Monterey Homes Arizona II, Inc. (MHA II) and Monterey Homes
Construction II, Inc. (MHC II), (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 Monterey
Management, Inc. (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 Monterey
Homes Corporation (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. Monterey Management -
Tucson, Inc. (MM-TI) was incorporated June 1, 1995 for the purpose of
performing all construction and development activity in Tucson. Monterey
Homes - Tucson Corporation (MH-TC) was incorporated June 1, 1995 for the
purpose of performing all sales and marketing activity in Tucson.
On September 11, 1996, MMI merged into MM-TI and MM-TI changed
its name to Monterey Homes Construction II, Inc., and MHC merged into
MH-TC and MH-TC changed its name to Monterey Homes Arizona II, Inc.
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, although recent
reports show a slowing in housing demand in the metropolitan Phoenix area
and housing permits in the Tucson metropolitan area have remained
relatively flat 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.
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.
9
<PAGE>
MONTEREY HOMES
Notes to Interim Combined Financial Statements, Continued
(Unaudited)
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 historical cost unless expected
future net cash flows (undiscounted and without interest charges) are
less than such cost; in which case, the inventories would be written down
to estimated fair value less costs to sell. Effective January 1, 1996,
the Company adopted Statement of Financial Accounting Standard No. 121,
which had no material impact on the financial statements. 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 nine months ended September
30, 1996 and 1995 the Company incurred interest costs of approximately
$2,543,000 and $1,407,000, respectively, of which approximately
$2,515,000 and $1,402,000, respectively, was capitalized. Capitalized
interest expensed through cost of sales was approximately $1,484,000 and
$915,000 for the nine months ended September 30, 1996 and 1995,
respectively. Interest paid amounted to approximately $2,284,000 and
$1,082,000 during the nine months ended September 30, 1996 and 1995,
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.
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, and are included in
other assets in the accompanying combined balance sheet.
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.
10
<PAGE>
MONTEREY HOMES
Notes to Interim Combined Financial Statements, Continued
(Unaudited)
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
MHA II and MHC II (and their predecessors) 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 combined statements of cash flows, the
Company considers all short-term investments purchased with a maturity of
three months or less to be cash equivalents.
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 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 defines 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 approximate 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.
11
<PAGE>
MONTEREY HOMES
Notes to Interim Combined Financial Statements, Continued
(Unaudited)
Reclassifications
Certain December 31, 1995 amounts have been reclassified to conform
with the September 30, 1996 financial statement presentation.
(2) Real Estate Under Development
The components of real estate under development at September 30, 1996
and December 31, 1995 are as follows:
September 30, December 31,
1996 1995
----------------- ------------------
Homes in production $ 25,591,167 21,064,718
Land held for future development 18,904,431 12,864,560
----------------- ------------------
$ 44,495,598 33,929,278
================= ==================
(3) Property and Equipment
Property and equipment consists of the following at September 30, 1996
and December 31, 1995:
September 30, December 31,
1996 1995
----------------- ------------------
Computer equipment $ 159,187 147,811
Vehicles 37,794 88,594
Furniture and equipment 255,464 229,423
----------------- ------------------
452,445 465,828
Less accumulated depreciation 249,679 221,344
----------------- ------------------
$ 202,766 244,484
================= ==================
12
<PAGE>
MONTEREY HOMES
Notes to Interim Combined Financial Statements, Continued
(Unaudited)
(4) Notes Payable
Notes payable consist of the following at September 30, 1996 and
December 31, 1995:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
----------------- ------------------
<S> <C> <C>
Various construction notes to banks, original maturities of less
than one year, interest approximating prime (8.25% at September
30, 1996 and 8.5% at December 31, 1995) plus .5% to 1.0%, 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.
$ 13,725,629 9,032,246
Various acquisition and development and working capital notes to
banks maturing on dates from May 1997 to December 1999, interest
ranging from prime (8.25% at September 30, 1996 and 8.5% at
December 31, 1995) plus .5% to 1%, payable at the earlier of
funding of construction financing or maturity date, secured by
first deeds of trust on land and/or personal guarantees of the
shareholders and a spouse of one of
the shareholders. 17,921,745 7,012,737
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
Other 36,961 270,585
----------------- ------------------
$ 39,684,335 24,315,568
================= ==================
</TABLE>
The principal payment requirements on notes payable as of September 30,
1996 are as follows:
1996 $ 10,090,604
1997 17,128,365
1998 4,465,366
1999 -
2000 and thereafter 8,000,000
------------------
$ 39,684,335
==================
13
<PAGE>
MONTEREY HOMES
Notes to Interim Combined Financial Statements, Continued
(Unaudited)
A provision of the senior subordinated bond indenture provides
the bondholders with the option to require the Company to buy back the
bonds at 101% of face value upon the occurrence of a change of control.
The consummation of the merger will constitute a change of control and
allow the bondholders to exercise their buyback option. The Company has
obtained an eighteen month deferral of this waiver from a substantial
majority of the bondholders through the issuance of a consent
solicitation statement.
Additionally, during the nine months ended September 30, 1996,
management of the Company determined that certain defaults of the senior
subordinated bond indenture may exist relating to excessive distributions
made to the shareholders of the Company, intercompany loans made by MMI
and MHC to MM-TC and MH-TC and other matters relating to the certain
interpretations of the bond indenture requirements. In addition, these
defaults may have cross-defaulted substantially all of the Company's
other outstanding indebtedness, which could have resulted in the
acceleration of such indebtedness. During September 1996 the Company
received a waiver of the liquidated damages and the defaults from the
note holders of the senior subordinated notes through the issuance of a
consent solicitation statement.
Available unused commitments under lines of credit amounted to
approximately $22,614,997 at September 30, 1996.
(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 noncancellable operating leases as of September 30,
1996:
1996 $ 194,266
1997 233,832
1998 210,256
1999 145,048
------------------
$ 783,402
==================
Rental expense was $143,262 and $119,799 for the nine months
ended September 30, 1996 and 1995, respectively.
The Company leases office space from a limited liability
company with common ownership interest. During the nine months ended
September 30, 1996 and 1995, the Company paid rent to the related party
company of $127,149 and $119,799, respectively.
14
<PAGE>
MONTEREY HOMES
Notes to Interim Combined Financial Statements, Continued
(Unaudited)
(6) Common Stock
Prior to 1994, shareholders' equity consisted of one class of
common stock of MMI and one class of common stock of MHC. Each share of
stock had an interest in the net assets of the individual Company that
issued the stock.
On August 9, 1994, the board of directors of MHC 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 MMI 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.
Shareholders' equity of MH-TC and MM-TI each initially
consisted of one class of common stock with 1,000,000 shares authorized
and 2,000 shares issued at $1 par value. Concurrently with the
inter-company mergers of MHC into MHAII (formerly MH-TC) and MMI into
MHCII (formerly MM-TC), the Board of Directors of MHAII and MHCII
approved an increase in the authorized shares from 1,000,000 to 2,000,000
shares and approved a stock split for MHAII increasing the outstanding
shares from 2,000 to 1,155,832 and for MHCII from 2,000 to 871,944. These
changes had the effect of keeping the total outstanding shares of the two
remaining companies the same as the four companies before the
inter-company mergers. As of December 31, 1995 and September 30, 1996,
the same two shareholders each held equal amounts of stock for each
affiliated Company.
In connection with the $8,000,000 subordinated debt private
placement memorandum issued on October 11, 1994 by MMI, 400,000 common
stock purchase warrants were issued with each warrant being exercisable
to purchase one common share of MMI stock for $6.25 per share. The
warrants have no readily available public market and are exercisable only
upon an initial public offering of MMI or its successor. As of September
30, 1996, virtually no value has been given to the common stock purchase
warrants because no current public market exists for such warrants.
(7) 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 of the Company.
15
<PAGE>
MONTEREY HOMES
Notes to Interim Combined Financial Statements, Continued
(Unaudited)
(8) Homeplex Merger
On September 13, 1996, the Company entered into an Agreement
and Plan of Reorganization (the "Merger Agreement") pursuant to which the
Company agreed to merge with and into Homeplex Mortgage Investments
Corporation ("HPX"), a publicly traded real estate investment trust. The
merger was approved by the HPX shareholders on December 21, 1996 and was
consummated as of the close of business on December 31, 1996.
As a result of the merger, the combined entity has continued
the home-building operations of the Company as its primary business and
is gradually converting the assets of HPX into cash for reinvestment in
the home-building business. In addition, the management of the Company is
controlling the ongoing operations of the combined entity.
Upon consummation of the merger, the Company shareholders
received distributions out of the Company equity at an amount such that
the remaining equity value of the Company equaled $2,500,000, as adjusted
for certain related costs. The Company shareholders and warrantholders
received a number of HPX common shares equal to three times the value of
the Company book equity divided by the book value per share of the HPX
common stock (approximately 3,857,000 shares, subject to final
accounting). The 16.5% of total shares that are issuable to the Company
warrantholders are to be released upon exercise of such warrants, with
all proceeds allocated to the Company shareholders. Additionally, another
131,840 shares of HPX common stock will be issued to the Company
warrantholders upon exercise of the warrants. The Company shareholders
may also receive an additional 668,100 shares of HPX common stock, as
defined, which vest over three years, subject to (a) certain stock price
objectives being met during the five years following the merger and (b)
the continued employment of the Company shareholders at the time of
issuance. Also, the Company shareholders received stock options for an
additional 1,000,000 shares of HPX common stock which vest over three
years. All references to share amounts in these Notes to Interim Combined
Financial Statements do not reflect the one-for-three reverse stock split
which occurred concurrently with the merger.
In August 1996, the Company entered into a $7,500,000
unsecured credit facility with one of its principal lenders. The proceeds
from this credit facility, along with available working capital, were
used, in part, to make a $9,500,000 distribution to its shareholders in
September 1996, prior to entering into the Merger Agreement.
16
<PAGE>
(b) Pro Forma Financial Information.
--------------------------------
It is impractical to provide the required pro forma financial
information at the time of filing this report. The required
pro forma financial information will be filed by amendment to
this Form 8-K not later than March 16, 1997.
(c) Exhibits.
---------
<TABLE>
<CAPTION>
Exhibit
Number Description Page
------ ----------- ----
<S> <C> <C>
2 Merger Agreement described in Items 1
and 2 above Incorporated by reference to
Annex A to the Company's
Proxy Statement/ Prospectus
filed with the SEC on
November 13, 1996
99.1 Press Release dated January 3, 1997 Previously Filed
99.2 Letter to the Company from Ernst & Young LLP 19
dated January 22, 1997
</TABLE>
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MONTEREY HOMES CORPORATION
Date: January 22, 1997 By: /s/ Larry W. Seay
----------------------------------------
Larry W. Seay
Vice President of Finance and
Chief Financial Officer
18
[ERNST & YOUNG LLP LETTERHEAD]
January 22, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen:
We have read Item 4 of Form 8K/A1 dated January 22, 1997 of Monterey Homes
Corporation (formerly Homeplex Mortgage Investments Corporation) and are in
agreement with the statements contained in the second paragraph under the
heading "Changes in Registrant's Certifying Accountant" on page 3 therein. We
have no basis to agree or disagree with other statements of the registrant
contained therein.
/s/ Ernst & Young LLP
Ernst & Young LLP
