SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
___________ TO ____________
Commission File No. 0-18605
MONTEREY HOMES CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 86-0611231
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6613 North Scottsdale Road, Suite 200, Scottsdale, Arizona 85250
(Address of principal executive offices) (Zip Code)
(602) 998-8700
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
At March 21, 1997, the aggregate market value of common stock held by
non-affiliates of the Registrant was $17,075,000.
The number of shares outstanding of the Registrant's common stock on
March 21, 1997 was 4,580,611.
DOCUMENTS INCORPORATED BY REFERENCE
Portions from the Registrant's Proxy Statement relating to the 1997
Annual Meeting of Stockholders to be held on May 29, 1997 have been incorporated
by reference into Part III, Items 10, 11, 12 and 13.
Exhibit Index at page 61
Total pages 311
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TABLE OF CONTENTS
Page
----
PART I ........................................................................4
Item 1. Business........................................................4
Item 2. Properties.....................................................21
Item 3. Legal Proceedings..............................................21
Item 4. Submission of Matters to a Vote of Security Holders............21
PART II ......................................................................24
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters............................................24
Item 6. Selected Financial and Operating Data..........................25
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................27
Item 8. Financial Statements and Supplementary Data....................41
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures......................................59
PART III .....................................................................59
Item 10. Directors and Executive Officers of the Registrant.............59
Item 11. Executive Compensation.........................................59
Item 12. Security Ownership of Certain Beneficial Owners and
Management.....................................................59
Item 13. Certain Relationships and Related Transactions.................60
PART IV ......................................................................60
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.......................................................60
SIGNATURES ..................................................................S-1
3
PART I
Item 1. Business
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., an Arizona
corporation ("MHC II"), and Monterey Homes Arizona II, Inc., an Arizona
corporation ("MHA II") (collectively, the "Monterey Entities" or "Monterey"),
with and into the Company. MHC II and MHA II were privately owned homebuilders
with operations in the Phoenix and Tucson, Arizona metropolitan areas. The
Merger was effective 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.
Prior to the Merger, the Company had elected to be taxed as a real
estate investment trust ("REIT") pursuant to Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, the Company
generally was not subject to tax on its income to the extent that it distributed
at least 95% of its taxable earnings to stockholders and maintained its
qualification as a REIT. As part of the Merger, however, the Company
discontinued its status as a REIT because it would no longer be able to meet
certain tests with respect to the nature of its assets, share ownership and the
amount of distributions, among other things, which are required to be met in
order to qualify as a REIT. As a result, any future distributions to the
Company's stockholders will not be deductible by the Company in computing its
taxable income. In that regard, the Company's Board of Directors 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.
Overview of Pre- and Post-Merger Business
Prior to the Merger, the Company was engaged in the business of making
short-term and intermediate-term mortgage loans on improved and unimproved real
property ("Real Estate Loans") and owned mortgage assets. In 1993, the Company
decided to shift its focus to making Real Estate Loans from the ownership of
mortgage assets consisting of mortgage instruments,
4
including residential mortgage loans and mortgage certificates representing
interest in pools of residential mortgage loans ("Mortgage Instruments") and
mortgage interests, commonly known as residual interests, representing the right
to receive the net cash flows on Mortgage Instruments ("Mortgage Interests").
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, mortgage pass-through certificates, or
other mortgage securities issued by various institutions.
The Company's business has changed substantially as a result of the
Merger. The Company will no longer be engaged primarily in the business of
making Real Estate Loans, but instead will be engaged primarily in the
homebuilding business -- the business engaged in by Monterey. Accordingly, the
"Business" section of this Annual Report on Form 10-K will focus primarily on
the operations of Monterey for the year ended December 31, 1996.
The Company is a Maryland corporation headquartered in Scottsdale,
Arizona. The Company's principal executive offices are now located at 6613 North
Scottsdale Road, Suite 200, Scottsdale, Arizona 85250, and its telephone number
is (602) 998-8700.
This Annual Report on Form 10-K 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 Securities and Exchange 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 of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. 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 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. Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying the forward-looking statements. Statements in this Annual
Report, including the Notes to the Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," describe factors, among others, that could contribute to or cause
such differences. Additional factors that could cause actual results to differ
materially from those expressed in such forward-looking statements are set forth
in "Business" and "Market for the Registrant's Common Stock and Related
Stockholder Matters" in this Annual Report.
5
Homebuilding Operations of Monterey
Monterey designs, builds, and sells single-family, move-up and
semi-custom, luxury homes in the Phoenix and Tucson, Arizona metropolitan areas.
Monterey achieved revenue growth from $20.4 million in 1991 to $86.8 million in
1996 and achieved pre-tax income of $6 million in 1996. Monterey attributes this
growth principally to the market knowledge and experience of its management team
and strong economic conditions in the Phoenix metropolitan area. For the year
ended December 31, 1996, Monterey closed 307 homes generating revenues of $86.8
million and as of that date had a backlog of 120 homes under contract.
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. Monterey 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
Monterey's business strategy is to provide its customers with quality
move-up and semi-custom, luxury homes in prime locations while catering to
customers' desires to customize Monterey's offered floor plans. Monterey seeks
to distinguish itself from other production homebuilders by offering homes that
it believes have distinctive designs and by offering custom home features at
prices that offer a better value than generally available.
Monterey's business strategy focuses on the following elements:
Quality Product - Distinctive Design Features. Monterey seeks to
maximize customer satisfaction by offering homes that are built with quality
materials and craftsmanship, exhibit distinctive design and are situated in
premium locations. Its competitive edge in the selling process focuses on the
home's features, design and available custom options. Monterey believes that its
homes generally offer higher quality and more distinguished designs within a
defined price range or category than those built by its competitors.
6
Service. Monterey 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.
Product Breadth. Monterey has two major product lines: luxury and
move-up. The luxury market segment is characterized by unique communities in
which Monterey builds semi-custom homes. Monterey rarely duplicates its
semi-custom floor plans from one community to another, providing customers
within each specific community distinctive luxury homes. The move-up market
segment is characterized by lower-priced production homes for which floor plans
can be used from community to community. Monterey'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.
Target Market. Particularly in its luxury home operations, Monterey
focuses on the affluent buyer, including professionals and those purchasing
second homes and who may live in the Phoenix or Tucson metropolitan areas on a
part-time basis. Because of its customer profile and the nature of the
semi-custom, luxury segment of the market, Monterey believes that the demand for
this product is less cyclical and less sensitive to the adverse effects of
interest rate fluctuation than other segments of the homebuilding industry, and
somewhat less affected by economic downturns. For the year ended December 31,
1996, approximately 45% and 55% of Monterey's revenues were derived from the
sale of move-up and semi-custom, luxury homes, respectively. For the year ended
December 31, 1995, approximately 32% and 68% of Monterey's revenues were derived
from the sale of its move-up and semi-custom, luxury homes, respectively. For
the year ended December 31, 1994, approximately 15% and 85% of Monterey's
revenues were derived from the sale of move-up and semi-custom, luxury homes,
respectively. Although semi-custom, luxury home sales as a percentage of the
Company's total revenues have declined over the last three years due to a
greater emphasis on increasing sales of move-up homes, the Company currently
expects to continue to derive a significant portion of its revenues from sales
of semi-custom, luxury homes.
Penetration of New Markets. Depending on existing market conditions,
Monterey may explore expansion opportunities in other parts of the Western and
Southwestern United States. Its strategy in this regard will be to expand first
into similar market niches in areas where it perceives an ability to exploit a
competitive advantage. The expansion may be effected through acquisitions of
homebuilders operating in such geographic markets.
Conservative Land Acquisition Policy. Monterey 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
7
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, Monterey has not speculated in raw
land held for investment.
Markets and Products
Overview. Monterey's operations primarily serve Scottsdale, Northeast
Phoenix and Fountain Hills, Arizona (the "Scottsdale Area") and, beginning in
the first half of 1996, Tucson and Oro Valley, Arizona (the "Tucson Area").
Monterey believes that both of these areas represent attractive homebuilding
markets with opportunity for long-term growth. Monterey also believes that its
operations in Scottsdale are well established and that it has developed a
reputation for building quality move-up and semi-custom, luxury homes with
distinctive designs.
Monterey's semi-custom, luxury homes are single-story, two to five
bedroom homes, ranging in base price from approximately $244,900 to $505,900.
Basements are available on some plans. 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.
Monterey 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 $169,900 to $227,900. 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.
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. For 1995 and prior years, Monterey derived its
revenues from operations in the Scottsdale Area. Scottsdale is a relatively
affluent city within the Phoenix metropolitan area. In addition, Scottsdale has
developed detailed master planning and zoning regulations and the Scottsdale
Area has typically appealed to the type of higher-income buyer which Monterey
generally targets.
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. Moreover, 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
significantly in 1997 and 1998. Any such slowing in new home sales could have a
material adverse affect on the Company's operating results.
8
The following table presents information relating to the current
communities in the Scottsdale Area served by the Company.
Number of Number of Number of Number
Homes Homes Homes in of Homes Estimated
Total Sold as of Closed at Backlog Remaining Average
Number of December 31, December 31, at December 31, at December 31, Sales
Community Home Sites 1996 1996 1996 1996(1) Price(2)
--------- ---------- ------------ ------------ --------------- --------------- ----------
Luxury:
Canada Vistas 41 25 17 8 16 $294,400
Eagle Mountain 29 7 1 6 22 $432,900
Lincoln Place 56 23 0 23 33 $439,150
Portales 72 67 63 4 5 $357,900
Scottsdale Country Club 23 21 17 4 2 $379,900
(Estates)
Scottsdale Country Club 43 43 41 2 0 $307,600
(Fairway)
SunRidge Canyon 88 24 8 16 64 $297,100
Tierra Bella 35 15 4 11 20 $379,600
56th St. and Dynamite(3) 143 0 0 0 143 --
--- ---- ---- ---- ---
Luxury Subtotal: 530 225 151 74 305
--- ---- ---- ---- ---
Move-up:
Grayhawk 147 54 43 11 93 $205,500
Palos Verdes 72 41 29 12 31 $192,900
--- ---- ---- ---- ---
Move-up Subtotal: 219 95 72 23 124
--- --- --- --- ---
Total Scottsdale Area: 749 320 223 97 429
=== === === === ===
- ---------------------------
(1) The "Number of 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 Monterey.
(2) "Estimated Average Sales Price" is the current average base sales price of
homes offered for sale in each respective community.
(3) Sales currently scheduled to open in the third quarter of 1997.
(4) In February 1997, the Company entered into an agreement to purchase
additional land adjacent to Gainey Ranch in the Scottsdale Area which the
Company intends to develop into a 176 lot community, with sales currently
expected to open in the third quarter of 1997.
Tucson, Arizona. Monterey began offering homes for sale in the Tucson
Area in April 1996. The Tucson Area also has experienced growth over the last
five years. Annual building permits issued for single-family residential units
in the Tucson Area increased moderately from
9
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 Tucson Area served by the Company.
Number of Number of Number of Number
Homes Homes Homes in of Homes Estimated
Total Sold as of Closed at Backlog Remaining Average
Number of December 31, December 31, at December 31, at December 31, Sales
Community Home Sites 1996 1996 1996 1996(1) Price(2)
--------- ---------- ------------ ------------ --------------- --------------- ----------
The Lakes at Castle
Rock (The Estates) 46 11 6 5 35 $354,200
The Lakes at Castle
Rock (The Park) 66 12 8 4 54 $290,700
The Lakes at Castle
Rock (The Retreat) 56 31 17 14 25 $193,300
Rancho Vistoso(3) 144 0 0 0 144 --
--- -- -- --- ---
Total Tucson 312 54 31 23 258
=== == == == ===
Area:
- -----------------------------------
(1) The "Number of 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 Monterey.
(2) "Estimated Average Sales Price" is the current average base sales price of
homes offered for sale in each respective community.
(3) Sales currently scheduled to open in the second quarter of 1997.
Land Acquisition and Development
Most of the land acquired by Monterey is purchased only after necessary
entitlements have been obtained so that Monterey 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, Monterey 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, Monterey may consider purchasing untitled property where it perceives an
opportunity to build on such property in a manner consistent with its business
strategy.
10
Monterey 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. Monterey 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.
Due to the strong market in the Scottsdale Area, the availability of land
in the Scottsdale 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 in the Scottsdale Area on favorable terms
could have a material adverse effect on the Company's business and operating
results.
Monterey effects its land acquisition through purchases and rolling
option contracts. Purchases are financed through traditional bank financing or
through working capital. To control its investment in land and land acquisition
costs, Monterey often utilizes non-recourse, rolling option contracts. Under the
terms of such rolling option contracts, Monterey generally pays a non-refundable
deposit of approximately 10% of the total option price at the inception of the
option and an additional non-refundable deposit each time it purchases lots in a
particular subdivision in the form of lot purchase price premiums above the
contractual lot purchase price for a certain number of the lots in the
development. Under all of its option contracts, Monterey is required to purchase
a certain number of lots on a monthly or quarterly basis. In this way, Monterey
pays the non-refundable deposit over time as it purchases lots under its option.
As a result, Monterey's risk is limited to having paid a higher price in the
form of an additional deposit for the lots which it has purchased if it
determines not to exercise its option to purchase the remaining lots subject to
the option agreement. Monterey's failure to purchase the lots as required under
such agreements would result only in Monterey having paid a lot premium in the
form of an additional deposit for those lots purchased as of the date of the
contract's termination. At December 31, 1996, Monterey was buying lots under
five rolling option contracts totaling 336 lots. The option contracts have
expiration dates ranging from June 30, 1997, to August 9, 1999.
Once the land is acquired, Monterey undertakes, where required,
development activities, through contractual arrangements with subcontractors,
that include site planning and engineering,
11
as well as constructing road, sewer, water, utilities, drainage and recreational
facilities, and other amenities.
Monterey 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. Monterey 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. Monterey
completes the development of each super pad by finishing paving, final grading
and installing all utilities.
Monterey also develops its own subdivisions by purchasing entitled
property and commencing site planning and development activities. In such cases,
its employees supervise the land development process.
Monterey 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. Monterey 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.
Monterey 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 needs
of a particular market and Monterey's cost of lots in the project. Monterey has
utilized an extensive number of floor plans throughout the years, but has
offered only about 30 plans in any one year.
At December 31, 1996, Monterey owned 214 finished lots and had no lots
under development in the Scottsdale Area. Monterey also had under contract or
subject to the satisfaction of purchase contingencies, 127 finished lots and 185
lots under development in the Scottsdale Area.
At December 31, 1996, Monterey owned 56 finished lots and 144 lots under
development in the Tucson Area. At December 31, 1996, Monterey also had under
contract or subject to the satisfaction of purchase contingencies, 81 finished
lots in the Tucson Area.
The following table sets forth by project Monterey's land inventory as of
December 31, 1996.
12
Land Under
Land Owned Contract or Option
---------- ------------------
Lots Under Lots Under
Finished Development Finished Development
Projects Lots (estimate) Lots (estimate) Total
-------- ---- ---------- ---- ---------- -----
Scottsdale Area:
- ---------------
Canada Vistas 24 - - - 24
Eagle Mountain 7 - 21 - 28
Grayhawk 23 - 81 - 104
Lincoln Place 56 - - - 56
Palos Verdes 43 - - - 43
Portales 9 - - - 9
Scottsdale Country
Club (Estates) 6 - - - 6
Scottsdale Country
Club (Fairway) 2 - - - 2
SunRidge Canyon 13 - 25 42 80
Tierra Bella 31 - - - 31
56th Street and Dynamite(1) 0 - 0 143 143
--- --- --- --- ---
Total Scottsdale Area: 214 0 127 185 526
--- -- --- --- ---
Tucson Area:
The Lakes at Castle Rock
(The Estates) 40 - - - 40
The Lakes at Castle Rock
(The Park) 4 - 54 - 58
The Lakes at Castle Rock
(The Retreat) 12 - 27 - 39
Rancho Vistoso - 144 - - 144
--- --- --- --- ---
Total Tucson Area: 56 144 81 0 281
--- --- --- -- ---
Total: 270 144 208 185 807
=== === === === ===
- --------------------------
(1) Escrow is scheduled to close in May 1997, and sales currently are expected
to open in the third quarter of 1997.
In February 1997, the Company entered into an agreement to purchase
additional land adjacent to Gainey Ranch in the Scottsdale Area which the
Company intends to develop into a 176 lot community, with sales currently
expected to open in the third quarter of 1997.
At December 31, 1996, and excluding the 56th Street and Dynamite Project
which is not yet available for sale, the Company's land inventory was lower than
it has been historically. Although the Company is actively attempting to
increase its land inventory, there can be no
13
assurance that the Company will be able to do so on terms that are favorable to
the Company, especially in light of the decreased availability and increased
cost of land in the Scottsdale Area. To the extent it is not offset by
additional purchases of land, the low level of land inventory could have a
material adverse effect on the Company's operating results in 1997 and,
potentially, 1998.
Construction
Monterey acts as the general contractor for the construction of its
projects. Subcontractors typically are retained on a subdivision-by-subdivision
basis to complete construction at a fixed price. Agreements with subcontractors
and materials suppliers are generally entered into after competitive bidding on
an individual basis. Monterey 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, Monterey 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 Monterey'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.
Monterey specifies that quality, durable materials be used in
constructing its homes. Monterey does not maintain significant inventory of
construction materials. When possible, Monterey negotiates price and volume
discounts with manufacturers and suppliers on behalf of subcontractors to take
advantage of its volume of production. Generally, access to Monterey'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 Monterey or its vendors. Monterey believes that its
relations with its suppliers and subcontractors are good.
Monterey 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 Monterey
is completed within four to eight months from commencement of construction,
although construction schedules may vary depending on the availability of labor,
materials and supplies, product type and location. Monterey strives to design
homes which promote efficient use of space and materials, and to minimize
construction costs and time.
Monterey generally provides a one-year limited warranty on workmanship
and building materials with each of its homes. Monterey'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 Monterey's subcontractors.
14
Historically, Monterey has not incurred any material costs relating to any
warranty claims or defects in construction.
Marketing and Sales
Monterey believes that it has an established reputation for developing
high quality homes, which helps generate interest in each new project. In
addition, Monterey 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.
Monterey believes that the effective use of model homes plays an integral
part in demonstrating the competitive advantages of its home designs and
features to prospective home buyers. Monterey 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. Monterey generally builds between two 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 December 31,
1996, Monterey owned five model homes in the Scottsdale Area, with no model
units under construction. There were no model homes under construction nor any
owned in the Tucson Area at December 31, 1996. Monterey 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 December 31, 1996, Monterey had sold and was leasing back 25 model
homes at a total monthly lease amount of $68,067.
Monterey tailors its product offerings, including size, style, amenities
and price, to attract higher income home buyers. Monterey offers a broad array
of options and distinctive designs and provides a home buyer with the option of
customizing many features of their new home.
Most of Monterey'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. Monterey's goal is to ensure that its sales force has
extensive knowledge of Monterey'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 Monterey. Monterey also requires its sales personnel to be licensed real
estate agents where required by law. Further, Monterey utilizes independent
brokers to sell its homes and generally pays approximately a 3% sales commission
on the base price of the home.
15
From time to time, Monterey 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
Although Monterey generally constructs one or two homes per project in
advance of obtaining a sales contract, Monterey's homes are generally offered
for sale in advance of their construction. The vast majority of the homes sold
but not closed in fiscal year 1996 were sold 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." For a detailed itemization of Monterey's
backlog at December 31, 1996, see "Business--Homebuilding Operations of Monterey
- - Markets and Products." Monterey 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'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 $42,661,000 at December 31, 1996 from $37,891,000 at December 31,
1995. The decrease in the number of units in backlog at December 31, 1996, due
to strong fourth quarter 1996 deliveries may result in lower closings in the
first quarter of 1997, which will have an adverse effect on the Company's
operating results in that quarter.
Customer Financing
With respect to those purchasers requiring financing, Monterey seeks to
assist home buyers in obtaining such financing from unaffiliated mortgage
lenders offering qualified buyers a variety of financing options. Monterey 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, 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 Monterey's continued
success. Monterey 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 Monterey, who may be
a project manager or project superintendent, and a customer relations
representative, oversee compliance with Monterey's quality control standards.
These representatives allocate responsibility for (i)
16
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.
Monterey strives to inform and involve the customer in all phases of the
building process in most of its communities. Monterey 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. Monterey 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 Monterey. Competition among both small and
large residential homebuilders are based on a number of interrelated factors,
including location, reputation, amenities, design, quality and price. Monterey
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.
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 the Phoenix and Tucson
metropolitan areas 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.
17
Government Regulation and Environmental Matters
Most of Monterey'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 Monterey'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 Monterey. There can be no assurance, however, that
these and other restrictions will not adversely affect Monterey in the future.
Because most of Monterey's land is entitled, construction moratoriums
generally would only adversely affect Monterey 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 Monterey receives recorded final maps and building permits.
However, as Monterey 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
Monterey may then operate.
Monterey 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 principal market of Scottsdale, Monterey is subject
to several environmentally sensitive land ordinances which mandate open space
areas with public easements in housing developments. Monterey 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
Monterey 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 Monterey's operations. No assurance can be given that such a material
adverse effect will not occur in the future.
Bonds and Other Obligations
Monterey 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.
18
Employees and Subcontractors
At December 31, 1996, Monterey had 92 employees, of which 11 were in
management and administration, 25 in sales and marketing, and 56 in construction
operations. The employees are not unionized, and Monterey believes that its
relations with its employees are good. Monterey 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.
Monterey utilizes independent contractors for construction, architectural and
advertising services.
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.
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.
Interest Amount
Description Rate Payment Terms Outstanding
- ------------------------------- --- ------------------------------------------------ -----------
First Deed of Trust on 41 acres 16% Interest only monthly, principal due October 18, $1,696,000
of land in Gilbert, Arizona, 1997.
face value of $2,800,000.
The above loan was current at December 31, 1996. 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
19
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 the Mortgage Securities are
invested after the payment of principal and interest on the related Mortgage
Securities and the payment of expenses.
As of December 31, 1996, the Company owned mortgage interests with
respect to eight separate series of Mortgage Securities with a net amortized
cost balance of approximately $3,909,000. 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.
20
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 "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Factors That May Affect Future Results and Financial
Condition of the Company -- Mortgage Asset Considerations."
Item 2. 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. 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 also leases, on a triple net basis, 25 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.
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security Holders
The 1996 Annual Meeting of the Company's stockholders was held on
December 23, 1996. The proposals voted upon at the meeting and the votes cast
for such proposals are set forth below. The share numbers in this Item 4 have
not been adjusted for the one-for-three reverse stock split effectuated upon
consummation of the Merger.
21
(1) To approve the merger of the Monterey Entities with and into the
Company and to approve the transactions related to the Merger; including the
issuance of up to 4.7 million shares of Common Stock, $.01 par value per share,
to William W. Cleverly and Steven J. Hilton, the two stockholders of the
Monterey Entities (collectively, the "Monterey Stockholders").
5,535,660 votes were cast in favor of the Merger and related
transactions, while 1,792,909 were cast against the merger and related
transactions. There were 132,830 abstentions and no broker non-votes.
(2) To approve an amendment to the Company's Articles of Incorporation
to, among other things, (a) change the Company's name to "Monterey Homes
Corporation," (b) reclassify and change each share of Common Stock issued and
outstanding into one-third of a share of Common Stock, (c) amend and make more
strict the restrictions on the transfer of Common Stock to preserve the
Company's net operating loss carry forward and (d) provide for a classified
Board of Directors, with one class being elected for a two-year term (the "Class
I Directors"), and the other class of directors (the "Class II Directors") being
elected for a one-year term (the "Charter Amendment").
5,206,434 votes were cast in favor of the Charter Amendment to the
Articles of Incorporation while 2,118,685 votes were cast against the Charter
Amendment. There were 136,280 abstentions and no broker non-votes.
(3) To elect (a) a five-member classified Board of Directors consisting
of an existing director of Homeplex Alan D. Hamberlin, and William W. Cleverly,
Steven J. Hilton, Robert G. Sarver and C. Timothy White (collectively, the
"Post-Merger Directors") to hold office upon the effectiveness of the Merger to
the next annual meeting and until their successors are elected, and (b) a
five-member non-classified Board of Directors (the "Pre-Merger Directors") to
hold office until the Merger is consummated or if for any reason the Merger is
not consummated, to the next annual meeting and until their successors are
elected. The results of the vote for and withheld from each of the Post-Merger
Directors and Pre-Merger Directors were as follows:
22
POST MERGER DIRECTORS FOR WITHHELD
- --------------------- --- --------
William W. Cleverly 5,643,428 1,817,971
Steven J. Hilton 5,640,903 1,820,496
Alan D. Hamberlin 5,634,453 1,826,946
Robert G. Sarver 5,651,178 1,810,221
C. Timothy White 5,650,653 1,810,746
PRE MERGER DIRECTORS
- --------------------
Alan D. Hamberlin 5,641,578 1,819,821
Jay R. Hoffman 5,651,978 1,809,421
Larry E. Cox 5,648,178 1,813,221
Mark A. McKinley 5,648,278 1,813,121
Gregory K. Norris 5,652,978 1,808,421
(4) To approve the issuance of stock options covering 750,000 shares of
Homeplex Common Stock to Alan D. Hamberlin, a director and the Chief Executive
Officer of Homeplex, pursuant to an existing employment agreement and related
stock option agreement between Homeplex and Alan D. Hamberlin (the "Hamberlin
Stock Options").
4,424,566 votes were cast in favor of the Hamberlin Stock Options and
2,727,839 against. There were 273,679 abstentions and 35,315 broker non-votes.
(5) To approve amendments to Homeplex's existing stock option plan and
related stock option agreements between Homeplex and certain senior executive
officers and directors of Homeplex to extend the exercise period after an
optionee ceases to be a director or employee of Homeplex from three months to
two years after cessation of employment or service as a director (the "Stock
Option Extension").
4,432,815 votes were cast in favor of the Stock Option Extension and
2,705,494 against. There were 285,709 abstentions and 37,381 broker non-votes.
23
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
General
The Company's Common Stock is publicly traded on the New York Stock
Exchange ("NYSE") under the 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
1996 ---- ---
First Quarter 6 4 1/8
Second Quarter 8 5/8 4 7/8
Third Quarter 8 1/4 6
Fourth Quarter 7 7/8 6 3/4
1995
First Quarter 5 1/4 3
Second Quarter 6 3/8 3 3/4
Third Quarter 6 3/8 4 1/2
Fourth Quarter 5 5/8 4 1/8
On March 20, 1997, the closing sales price of the Company's Common
Stock as reported by the NYSE was $5 7/8 per share. At that date, the number of
stockholder accounts of record of the Company's Common Stock was 544. The
Company believes that there are approximately 5,000 beneficial owners of Common
Stock.
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.
24
Factors That May Affect Future Stock Performance
The performance of the Company's Common Stock is dependent upon several
factors, including those set forth below and in "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors that May
Affect Future Results and Financial Condition."
Restrictions or Transfer; Influence by Principal Stockholders. In order
to preserve certain net operating loss carryforwards, the Company's charter
precludes (i) any person from transferring such shares 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 and Hilton 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.
Possible Volatility of Stock Price. The market price of the Company's
Common Stock 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,
changes in conditions affecting the economy generally, analysts' reports or
general trends in the industry, as well as other factors unrelated to the
Company's operating results.
Item 6. Selected Financial and Operating Data
The following table sets forth selected historical consolidated
financial data of the Company for each of the years in the five-year period
ended December 31, 1996. The selected annual historical consolidated financial
data for 1996 are 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 are derived
from the Company's Consolidated Financial Statements audited by Ernst & Young
LLP, independent auditors. For additional information, see the Consolidated
Financial Statements of the Company included elsewhere in this Annual Report.
The following table should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations." Due to the
Merger, the historical results are not indicative of future results. 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."
25
Historical Consolidated Financial Data
(Dollars in Thousands, Except Per Share Data)
Years Ended December 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ------------ ------------ ------------ -------------
Income Statement Data:
Income (loss) from mortgage assets................. $2,244 $ 3,564 $ (1,203) $ (21,814) $ (14,068)
Interest expense................................... 238 868 1,383 2,274 2,750
General, administrative and other expense.......... 1,710 1,599 1,938 1,822 2,315
Income (loss) before effect of accounting change
and extraordinary loss............................ 296 1,097 (4,524) (25,910) (19,133)
Cumulative effect of accounting change(1).......... -- -- -- (6,078) --
Extraordinary loss(2).............................. (149) -- -- -- --
--------- ---------- ---------- ------------ ------------
Net income (loss).................................. $ 147 $ 1,097 $ (4,524) $ (31,988) $ (19,133)
========= ========== ========== ============ ============
Income (loss) per share before effect of
accounting change/extraordinary loss............... $ .09 $ .34 $ (1.40) $ (7.98) $ (5.79)
Cumulative effect of accounting change per share... -- -- -- (1.89) --
Extraordinary loss per share....................... (.05) -- -- - --
--------- ---------- ---------- ------------ ------------
Net income (loss) per share........................ $ .04 $ .34 $ (1.40) $ (9.87) $ (5.79)
========= ========== ========== ============ ============
Cash dividends per share(3)........................ $ .06 $ .09 $ .06 $ .09 $ 1.20
========= ========== ========== ============ ============
At December 31,
------------------------------------------------------------------------
1996(4) 1995 1994 1993 1992
------------ ------------ ------------ ------------ -----------
Balance Sheet Data:
Real estate loans.................................. $1,696 $ 4,048 $ 9,260 $ 320 $ 0
Residual interests................................. 3,909 5,457 7,654 17,735 66,768
Total Assets....................................... 72,821 27,816 31,150 43,882 87,063
Notes Payable...................................... 30,542 7,819 11,783 19,926 31,000
Total liabilities.................................. 45,876 9,368 13,508 21,505 32,357
Stockholders' equity............................... 26,945 18,448 17,642 22,377 54,706
- -------------------------------
(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. Regardless of such
distributions, however, the Company may be subject to tax on certain types
of income. Due to the Merger, the Company did not qualify as a REIT in
1996.
(4) Reflects the Merger consummated on December 31, 1996.
26
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
As a result of the Merger, the primary business of the Company has
changed from the making of real estate loans to homebuilding. Accordingly, this
Annual Report on Form 10-K includes discussion and analysis of the financial
condition and results of operation for the Company, as well as a discussion and
analysis of the pro forma results of operations of the Company reflecting the
Merger as though the Merger was consummated on January 1, 1995.
Historical Results of Operations
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 of the average 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 write down the Company's investments in 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 of the average aggregate long-term debt.
General and administrative expenses in 1994 include $340,000 of legal
and investment banking expenses related to merger negotiations with a privately
held company which were subsequently terminated.
27
Liquidity, Capital Resources and Commitments
Liquidity, capital resources and commitments should be viewed for the
combined Company in light of the Merger. As a result, the following discusses
the liquidity, capital resources and commitments of the combined Company as a
result of the Merger.
The Company uses a combination of existing cash, unused borrowing
capacity, internally generated funds and customer deposits to meet its working
capital requirements. At December 31, 1996, the Company had $20.0 million in
short-term, secured, revolving construction loan agreements of which
approximately $7.3 million was outstanding. The Company also had outstanding
approximately $9.6 million at December 31, 1996 of secured construction loan
agreements.
The Indenture relating to the Company's 13% Senior Subordinated 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.
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 acquisition, obtaining plat and other
approvals, 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 December 31, 1996, the Company had a net operating loss
carryforward, for income tax purposes, of approximately $53,000,000. This tax
loss may be carried forward, with certain restrictions, for up to 13 years to
offset future taxable income, if any.
Impact of Inflation
Periods of high inflation can have a negative impact on the operations
of the Company. Real estate and residential housing demand are affected by
inflation, which can cause increases
28
in interest rates, the price of land, raw materials and subcontracted labor. An
increase in interest rates corresponds with higher construction and financing
costs, which can result in lower gross margins or in losses. High mortgage
interest rates may also make it more difficult for the Company's potential
customers to finance the purchase of a new home or to sell an existing home.
Unless costs are recovered through greater sales prices, gross margins will
decrease and losses may be incurred. A prospective buyer's ability to afford new
housing may also be affected by an increase in sales price, whether the result
of inflation or demand.
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. The Company
expects that this seasonal trend will continue in the future, but may change
slightly as operations expand within the move-up segment of the market.
29
Pro Forma Results of Operations
The analysis of the activities and operations of the Company should be
considered in light of the operations of Monterey. To assist in the
understanding of those operations management has prepared pro forma condensed
combined operating results for discussion purposes. Those results are presented
for the years ended December 31, 1996 and 1995 and they reflect the impact of
combining Monterey with the Company as though the acquisition occurred on
January 1, 1995. These results are presented only for purposes of analysis and
they are not meant to be indicative of future results of operations, nor are
they meant to be considered for purposes other than additional information.
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
------ ------
Operating income 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
===== =====
- --------------------
The key assumptions in the pro forma results of operations relate to
the following:
(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.
General
Monterey'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
30
project, product mix and design, weather, availability of financing, suitable
development sites, material and labor, and national and local economic
conditions. Historically, Monterey has operated primarily in the semi-custom,
luxury segment of the homebuilding industry. Monterey's expansion into the
move-up segment of the market has resulted in product mix and design becoming
more influential factors affecting the average home sales price and gross
margins. Monterey 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.
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, Monterey has expanded its operations
to acquire additional sites for development of new projects. As of December 31,
1996, Monterey was actively selling homes in twelve communities and preparing to
open for sales in one new community. At December 31, 1995, Monterey was actively
selling homes in five communities. There can be no assurance that the favorable
conditions in Arizona will continue, and although housing demand in the Phoenix
metropolitan area during 1996 was at record levels, recent reports indicate that
there will be a significant slowing in new home sales in the Phoenix
metropolitan area and that new home sales in the Tucson metropolitan area will
remain relatively flat in 1997. In addition, housing permits in the Tucson
metropolitan area remained relatively flat from 1995 to 1996.
Due to faster than anticipated sales and closing rates occurring in
certain Monterey subdivisions during 1995 and the slower than anticipated
completion of lot development in four new subdivisions in late 1995, Monterey's
inventory of finished lots entering 1996 was lower than expected. In spite of
the low beginning lot inventory, Monterey was able to complete and begin sales
of these lots in 1996, and along with sales in new communities, increased unit
sales and home closing revenue in the Scottsdale Area in 1996. Start up costs
incurred by in the Tucson Area and merger related costs negatively impacted
Monterey's net income in 1996. The continuation of Monterey's past revenue and
profitability levels is dependent on its ability to identify and obtain
competitively priced and well located replacement land inventory. Strong fourth
quarter 1996 deliveries will result in a lower than usual number of home
closings in the first quarter of 1997, which will have a material adverse effect
on the Company's operating results in the first quarter of 1997.
Year Ended December 31, 1996 Compared to 1995
Home Sales Revenue. Monterey's housing sales revenue for any period is
the product of the number of units closed during the period and the average
sales price per unit.
31
The following table presents comparative 1996 and 1995 housing sales
revenue.
Dollar/Unit Percentage
(Dollars in Thousands) Year Ending 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 Monterey's lower priced move-up
subdivisions, which made up approximately 55% of the homes closed in 1996. The
average sales price of Monterey's luxury, semi-custom product line is in excess
of $300,000 and Monterey's move-up product line averages $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 the current year.
Land Sales Revenue. Monterey 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. Gross profit equals sales revenue, net of 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 1996 and 1995 gross profit.
Dollar/Unit Percentage
(Dollars in Thousands) Year ending 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.
32
Interest incurred and capitalized by Monterey was $3,700,000 and
$2,240,000 in 1996 and 1995, respectively. Interest amortized and included in
cost of sales in 1996 was $2,600,000 compared to $1,700,000 in 1995. As a
percentage of revenue the amortized amounts in 1996 and 1995 were 3.0% and 2.4%,
respectively.
Selling, General and Administrative Expenses. The selling, general and
administrative expenses category includes advertising, model and sales office,
sales administration, commissions and corporate overhead costs. 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 and general and
administrative expenses offset by greater gross profit recognized from housing
revenues.
Other Operating Matters
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 1996 and 1995 net orders.
(Dollars in Thousands) Dollar/Unit Percentage
Year Ending December 31, Increase Increase
1996 1995 (Decrease) (Decrease)
---- ---- -------- --------
Dollars............................. $90,182 $59,933 30,249 50.5%
Units Ordered....................... 283 241 42 17.4%
Average Sales....................... $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 a greater portion of sales occurring in Monterey's
lower-priced move-up communities during the prior year. The increase in net
orders is primarily attributable to a greater number of subdivisions open for
sale.
Monterey does not include sales which are contingent upon the sale of
the customer's existing home as orders until the contingency is removed.
Historically Monterey has experienced a cancellation rate of less than 16% of
gross sales.
33
Net Sales Backlog. Backlog represents net orders of Monterey which have
not closed.
The following table presents comparative 1996 and 1995 net sales
backlog.
(Dollars in Thousands) Dollar/Unit Percentage
Year Ending 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....................... $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 has increased due to the
sell out of Monterey's lower-priced Vintage Condominium subdivision and greater
sales in the other move-up communities. Units in backlog decreased due to
seasonal fluctuations which cause year-end backlog to typically be lower than at
other times during the year.
34
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.
Monterey Combined Financial Data
(Dollars In Thousands, Except Per Share Data)
Year Ended December 31,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ------------ ------------ ------------
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....................................... $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(1) 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
- ----------------------
(1) Does not reflect the Merger consummated on December 31, 1996
35
Factors That May Affect Future Results
and Financial Condition of the Company
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.
Potential risks and uncertainties that could affect the Company's future
operating results and financial condition include, without limitation, the
factors discussed below.
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 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. Any such slowing
in new home sales would have a material adverse affect on the Company's business
and operating results.
The homebuilding industry further 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. 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.
Fluctuations in Operating Results. Monterey historically has
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 in other areas into which the Company
36
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 historical financial performance may not be a
meaningful indicator of the Company's future results.
Expansion into Tucson Market. The Company began operations in the
Tucson, Arizona area in April 1996. Such operations are in the early stage and,
accordingly, there can be no assurance that the Company's Tucson operations will
be successful.
Interest Rates and Mortgage Financing. The Company believes that 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, Limited Product Diversification. The Company's
operations are presently localized in the metropolitan Phoenix, Arizona area,
particularly in the City of
37
Scottsdale. The Company began operations in Tucson, Arizona in April 1996. The
Company currently operates in two primary market segments: the semi-custom,
luxury market and the move-up buyer market. Failure to be geographically or
economically diversified could have a material adverse impact on the Company if
the homebuilding market in Arizona should decline, because there would not be a
balancing opportunity in a healthier market in other geographic regions or
market segments. In this regard, although housing permits in the Phoenix
metropolitan area were at record levels during 1996, real estate analysts
predict that new home sales will slow significantly during 1997 and 1998.
Housing permits in the City of Scottsdale decreased moderately from 1995 to
1996. Housing permits in the Tucson metropolitan area have remained relatively
flat from 1995 to 1996, and are expected to remain flat in 1997. In addition,
the Company's limited product line could have an adverse impact on the Company
compared to homebuilders who might have a variety of homes in different price
ranges such that the results in one product line could offset changes in
another.
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, the Company's
liabilities totaled approximately $45,876,000. 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
38
that could be imposed in the future due to health, safety, welfare, or
environmental concerns. The Company must also obtain certain licenses, permits,
and approvals from certain government agencies to engage in certain of its
activities, the granting or receipt of which are beyond the Company's control.
Monterey 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.
Planned Expansion. The Company may in the future expand into other
areas of the Southwestern and Western United States. To date, the Company has
had no operating experience in areas other than its current markets. Operations
in new locations may result in certain operating inefficiencies and higher
costs. Further, the Company may experience problems with certain matters in new
markets which it has not historically had, such as zoning matters, environmental
matters, other regulations and higher costs. There can be no assurance that the
Company can expand into new markets on a profitable basis or that it can
successfully manage its expansion in such new markets, if any.
Future Acquisitions. The Company may acquire other homebuilding
companies to expand its operations. There is no assurance that the Company will
identify acquisition candidates that would result in successful combinations or
that any such acquisitions will be consummated on acceptable terms. 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. Any future acquisitions by the Company may result in
potentially dilative issuances of equity securities, the incurrence of
additional debt and amortization of expenses related to goodwill and intangible
assets that could adversely affect the Company's profitability. 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.
Dependence on Key Personnel. The Company's success is largely dependent
on the continuing services of certain key persons, including William W. Cleverly
and Steven J. Hilton, and the ability of the Company to attract new personnel
required to continue the development of the Company. The Company has entered
into five-year employment agreements with each of Messrs. Cleverly and Hilton. A
loss by the Company of the services of Messrs. Cleverly or Hilton, or certain
other key persons, could have a material adverse effect on the Company.
39
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, the Company's
portfolio of residual interests had a net balance of approximately $3,909,000.
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.
No assurance can be given as to the actual prepayment rate of mortgage
loan 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
40
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. As stated above,
increases in mortgage interest rates generally tend to increase the Company's
net cash flows by reducing mortgage prepayments, and decreases in mortgage
interest rates generally tend to decrease the Company's net cash flows by
increasing mortgage prepayments. Therefore, the negative impact on the Company's
net cash flows of an increase in short-term interest rates generally will be
offset in whole or in part by a corresponding decrease in mortgage interest
rates. However, although short-term interest rates and mortgage interest rates
normally change in the same direction and therefore generally offset each other
as described above, they may not change proportionally or may even change in
opposite directions during a given period of time with the result that the
adverse effect from an increase in short-term interest rates may not be offset
to a significant extent by a favorable effect on prepayment experience and visa
versa. Thus, the net effect of changes in short-term and mortgage interest rates
may vary significantly between periods resulting in significant fluctuations in
net cash flows 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.
Item 8. Financial Statements and Supplementary Data
Financial Statements of the Company as of December 31, 1996 and for the
year then ended, together with related notes and the Report of KPMG Peat Marwick
LLP, independent auditors, and financial statements of the Company as of
December 31, 1995 and for each of the years in the two-year period ending
December 31, 1995, together with related notes and the Report of Ernst & Young
LLP, independent auditors, are set forth on the following pages. Other required
financial information set forth herein is more fully described in Item 14
hereof.
41
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
42
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
43
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
1996 1995
------------ ------------
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
============ ============
See accompanying notes to consolidated financial statements.
44
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
----------- ----------- -----------
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
extraordinary loss from 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
=========== =========== ===========
See accompanying notes to consolidated financial statements.
45
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994
1996 1995 1994
------------ ------------ ------------
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 (used in) by 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) (291,951)
Repurchases of common stock, net of common stock issuances -- -- (17,481)
------------ ------------ ------------
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
============ ============ ============
See accompanying notes to consolidated financial statements.
46
MONTEREY HOMES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
Additional
Number Common Paid-in Accumulated Treasury
of Shares Stock Capital Deficit Stock Total
---------- -------- ------------ ------------ ---------- ------------
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
========== ======== ============ ============ ========== ============
See accompanying notes to consolidated financial statements.
47
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
48
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. 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.
49
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.
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).
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:
50
Interest Payment Principal and
Description Rate Terms Carrying Amount (1)
----------- -------- ----------------------------- ---------------------------
1996 1995
---- ----
First Deed of Trust on 16% Interest only monthly, principal $1,696,272 $1,277,413
41 acres of land in Gilbert, due October 18, 1997.
Arizona, face amount of
$2,800,000. (2)
First Deed of Trust on 33 16% Paid in full in 1996. - 2,272,402
acres of land in Tempe,
Arizona.
First Deed of Trust on 21.4 16% Paid in full in 1996. - 498,000
acres of land in Tempe,
Arizona.
Other receivables consisting - - 927,230 -
primarily of sales commission
advances and home closing
proceeds due from title com-
panies.
---------- ----------
$2,623,502 $4,047,815
========== ==========
(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 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.
51
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%.
The following summarizes the Company's investment in residual interests
at December 31, 1996 and 1995.
Type Of Company's Amortized Costs Company's Percentage
Series Investments 1996 1995 Ownership
------ ------------------------------ ---- ---- --------------------
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
========== ==========
52
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.
Notes payable consist of the following at December 31:
1996 1995
------- ------
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 indivi-
dual projects 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 N/A
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
=========== ==========
53
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
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.
54
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, cancelled or expire.
Under the plan, an exercising optionholder also has the right to require
the Company to purchase some or all of the optionholder's shares of the
Company's common stock. That redemption right is exercisable by the optionholder
only with respect to shares (including the related dividend equivalent rights)
that the optionholder has acquired by exercise of an option under the Plan.
Furthermore, the optionholder can only exercise his redemption rights within six
months from the last to expire of (i) the two year period commencing with the
grant date of an option, (ii) the one year period commencing with the exercise
date of an option, or (iii) any restriction period on the optionholder's
transfer of the shares of common stock he acquires through exercise of his
option. The price for any shares repurchased as a result of an optionholder's
exercise of his redemption right is the lesser of the book value of those shares
at the time of redemption or the fair market value of the shares on the original
date the options were exercised.
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 cancelled (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
======= =======
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 became fully vested upon
the Merger at December 31, 1996. 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 on May 29, 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.
55
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, 212,398 are held by the Company on behalf of the
Co-Chief Executive Officers, to be 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 212,398 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, 88,889 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
56
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:
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.
57
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.
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.
58
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
On January 14, 1997, the Company's Board of Directors elected 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 the Monterey Entities prior to the Merger.
Ernst & Young LLP rendered unqualified reports with respect to the
financial statements of the Company for the two previous fiscal years. In
addition, during the two previous fiscal years 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.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information respecting continuing directors and nominees of the Company
is set forth under the captions "Election of Directors," "Information Concerning
Directors, Nominees and Officers," and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Registrant's Notice and Proxy Statement relating to
its 1997 Annual Meeting of Stockholders (the "1997 Proxy Statement")
incorporated by reference into this Form 10-K Report. With the exception of the
foregoing information and other information specifically incorporated by
reference into this Form 10-K Report, the Registrant's 1997 Proxy Statement is
not being filed as a part hereof.
Item 11. Executive Compensation
Information respecting executive compensation is set forth under the
captions "Executive Compensation," "Compensation Committee Interlocks and
Insider Participation," "Director Compensation" and "Employment Agreements" in
the 1997 Proxy Statement and is incorporated herein by reference into this Form
10-K report; provided, however, that the information set forth under the
captions "Compensation Committee Report on Executive Compensation" and "Stock
Price Performance Graph" contained in the 1997 Proxy Statement are not
incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information respecting security ownership of certain beneficial owners
and management is included under the caption "Security Ownership of Principal
Stockholders and Management" in the 1997 Proxy Statement and is incorporated
herein by reference.
59
Item 13. Certain Relationships and Related Transactions
Information respecting certain relationships and transactions of
management is set forth under the caption "Certain Transactions and
Relationships" and "Compensation Committee Interlocks and Insider Participation"
in the 1997 Proxy Statement and is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Page or
(a) Financial Statements and Schedules. Method of Filing
----------------
(i) Financial Statements.
(1) Report of KPMG Peat Marwick LLP Page 42
(2) Consolidated Financial Statements and Notes to
Consolidated Financial Statements of the Company,
including Consolidated Balance Sheets as of
December 31, 1996, 1995 and 1994 and related
Consolidated Statements of Operations, Stockholders'
Equity and Cash Flows for each of the years in the Page 44
three-year period ended December 31, 1996
(ii) Financial Statement Schedules.
Schedules have been omitted because of the absence
of conditions under which they are required or
because the required material information is included
in the Consolidated Financial Statements or Notes to
the Consolidated Financial Statements included herein.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of 1996. On
January 14, 1997, the Company filed a Current Report on Form 8-K dated December
31, 1996, reporting the Merger and a resulting change in certifying accountants.
This Form 8-K was amended on January 22, 1997 and March 6, 1997.
60
(c) Exhibits.
Exhibit Page or
Number Description Method of Filing
------ ----------- ----------------
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").
3.1 Amended and Restated Articles of Incorporated by reference to
Incorporation of the Company Exhibit 3(a) of the Registration
Statement on Form S-11 No.
33-22092 ("S-11 #33-22092")
3.2 Articles of Merger Filed herewith
3.3 Bylaws of the Company Incorporated by reference to
Exhibit 3(b) to the Form 10-Q
for the quarter ended June 30,
1995.
3.4 Amendment to the Bylaws Filed herewith
4 Specimen of Common Stock Certificate Filed herewith
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 Filed herewith
between Norwest Bank Arizona, N.A. and the
Company
61
Exhibit Page or
Number Description Method of Filing
------ ----------- ----------------
10.6 Revolving Model Home Lease Back Filed herewith
Agreement between AMHM-1, L.P. and the
Company
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 Monterey Homes Corporation Stock Filed herewith
Option Plan *+
10.10 Employment Agreement between the Filed herewith
Company and William W. Cleverly*
10.11 Employment Agreement between the Filed herewith
Company and Steven J. Hilton*
10.12 Stock Option Agreement between the Filed herewith
Company and William W. Cleverly*
10.13 Stock Option Agreement between the Filed herewith
Company and Steven J. Hilton*
10.14 Registration Rights Agreement between the Filed herewith
Company and William W. Cleverly*
10.15 Registration Rights Agreement between the Filed herewith
Company and Steven J. Hilton*
10.16 Escrow and Contingent Stock Agreement Filed herewith
10.17 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.
10.18 Stock Option Agreement between the Incorporated by reference to
Company and Alan D. Hamberlin* Exhibit 10(h) of the 1995
Form 10-K
16 Letter Regarding Change in Certifying Filed herewith
Accountant
62
Exhibit Page or
Number Description Method of Filing
------ ----------- ----------------
22 List of Significant Subsidiaries Filed herewith
23.1 Consent of KPMG Peat Marwick LLP Filed herewith
23.2 Consent of Ernst & Young LLP Filed herewith
24 Powers of Attorney See signature page
27 Financial Data Schedule Filed herewith
- ----------------------
* Indicates a management contract or compensation plan.
+ To be submitted for stockholder approval at the 1997 Annual Meeting
of Stockholders to be held on May 29, 1997.
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, this 31st
day of March, 1997.
MONTEREY HOMES CORPORATION,
a Maryland corporation
By /s/ William W. Cleverly
----------------------------
William W. Cleverly
Chairman of the Board and
Co-Chief Executive 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 Form 10-K Annual Report, 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 Exchange Act of 1934,
this report on Form 10-K has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/William W. Cleverly Chairman of the Board and Co-Chief March 31, 1997
- ------------------------------------ Executive Officer (Co-Principal
William W. Cleverly Executive Officer)
S-1
Signature Title Date
- --------- ----- ----
/s/Steven J. Hilton President and Co-Chief Executive March 31, 1997
- ------------------------------------ Officer (Co-Principal Executive Officer)
Steven J. Hilton
/s/Larry W. Seay Vice President - Finance and Chief March 31, 1997
- ------------------------------------ Financial Officer, Secretary and
Larry W. Seay Treasurer (Principal Financial and
Accounting Officer)
/s/Alan D. Hamberlin Director March 31, 1997
- ------------------------------------
Alan D. Hamberlin
/s/Robert G. Sarver Director March 31, 1997
- ------------------------------------
Robert G. Sarver
/s/C. Timothy White Director March 31, 1997
- ------------------------------------
C. Timothy White
S-2