SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-9977 HOMEPLEX MORTGAGE INVESTMENTS CORPORATION (Exact Name of Registrant as Specified in Its Charter) Maryland 86-0611231 (State or Other Jurisdiction) (I.R.S.Employer of Incorporation or Organization) Identification No.) 5333 North 7th Street,Suite 219 85014 Phoenix, Arizona (Zip Code) (Address of Principal Executive Offices) (602) 265-8541 (Registrant's Telephone Number,Including Area Code) Not Applicable Former Name,Former Address and Former Fiscal Year, if Changed Since Last Report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No --- --- As of August 12, 1996; 9,716,517 shares of Homeplex Mortgage Investments Corporation common stock were outstanding. PART I. FINANCIAL INFORMATION ITEM 1 Financial Statements HOMEPLEX MORTGAGE INVESTMENTS CORPORATION CONSOLIDATED BALANCE SHEETS As Of June 30, 1996 and December 31, 1995 (Dollars In Thousands Except Per Share Data) (Unaudited)
June 30, Dec. 31, 1996 1995 -------- --------- ASSETS Short-term investments............................................................... $ 8,988 $ 8,969 Residual interests................................................................... 4,625 5,457 Real estate loans.................................................................... 3,852 4,048 Cash and cash equivalents............................................................ 1,865 3,347 Other assets......................................................................... 422 357 Funds held by Trustee................................................................ - 5,638 -------- --------- Total Assets......................................................................... $ 19,752 $ 27,816 ======== ========= LIABILITIES Accounts payable and other liabilities............................................... $ 1,072 $ 1,182 Long-term debt....................................................................... - 7,819 Dividend payable..................................................................... - 291 Accrued interest payable............................................................. - 76 -------- --------- Total Liabilities.................................................................... 1,072 9,368 -------- --------- Contingencies STOCKHOLDERS' EQUITY Common stock, par value $.01 per share; 50,000,000 shares authorized; issued and outstanding - 9,875,655 shares.......................................... 99 99 Additional paid-in capital........................................................... 84,046 84,046 Cumulative net loss.................................................................. (23,525) (23,757) Cumulative dividends................................................................. (41,530) (41,530) Treasury stock - 159,138 shares ..................................................... (410) (410) -------- ---------- Total Stockholders' Equity........................................................... 18,680 18,448 -------- --------- Total Liabilities and Stockholders' Equity........................................... $ 19,752 $ 27,816 ======== =========
See notes to consolidated financial statements. 2 HOMEPLEX MORTGAGE INVESTMENTS CORPORATION CONSOLIDATED STATEMENTS OF NET INCOME For The Three and Six Months Ended June 30, 1996 and 1995 (Dollars In Thousands Except Per Share Data) (Unaudited)
Three Months Six Months Ended June 30, Ended June 30, -------------- -------------- 1996 1995 1996 1995 ---- ---- ---- ---- INCOME Interest income on real estate loans......... $ 175 $ 622 $ 366 $ 1,197 Income from residual interests............... 277 335 525 750 Other income................................. 183 121 379 234 ---------- --------- --------- ---------- Total Income................................. 635 1,078 1,270 2,181 ---------- --------- --------- ---------- EXPENSES Interest..................................... 75 228 238 478 General, administrative and other............ 263 515 651 905 ---------- --------- --------- ---------- Total Expenses............................... 338 743 889 1,383 ---------- --------- --------- ---------- Income Before Extraordinary Loss From Early Extinguishment Of Debt............... 297 335 381 798 Extraordinary loss from early extinguishment of debt..................... (149) - (149) - ---------- --------- --------- ---------- Net Income................................... $ 148 $ 335 $ 232 $ 798 ========== ========= ========== ========== SHARE DATA Income Before Extraordinary Loss From Early Extinguishment Of Debt Per Share.............................. $ .03 $ .03 $ .04 $ .08 Extraordinary Loss From Early Extinguishment Of Debt Per Share............ (.02) - (.02) - ---------- --------- ---------- ---------- Net Income Per Share......................... $ .01 $ .03 $ .02 $ .08 ========== ========= ========== ========== Weighted Average Number Of Shares Of Common Stock And Common Stock Equivalents Outstanding.............. 9,951,894 9,736,320 9,885,624 9,730,905 ========= ========= ========= ========= See notes to consolidated financial statements.
3 HOMEPLEX MORTGAGE INVESTMENTS CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For The Six Months Ended June 30, 1996 (Dollars In Thousands) (Unaudited)
Additional Cumulative Number Par Paid-In Net Income Cumulative Treasury Of Shares Value Capital (Loss) Dividends Stock Total --------- ----- --------- ------------- ----------- ------- ------ Balance at December 31, 1995.......... 9,875,655 $99 $84,046 $(23,757) $(41,530) $(410) $18,448 Net income............................ - - - 232 - - 232 --------- --- ------- -------- -------- ----- ------- Balance at June 30, 1996.............. 9,875,655 $99 $84,046 $(23,525) $(41,530) $(410) $18,680 ========= === ======= ======== ======== ===== =======
See notes to consolidated financial statements. 4 HOMEPLEX MORTGAGE INVESTMENTS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For The Six Months Ended June 30, 1996 and 1995 Increase (Decrease) In Cash (Dollars In Thousands) (Unaudited)
1996 1995 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income........................................................................... $ 232 $ 798 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary loss from early extinguishment of debt.............................. 149 - (Increase) decrease in other assets............................................... (147) 250 Decrease in accounts payable and other liabilities................................ (111) (122) Decrease in accrued interest payable.............................................. (76) (19) Amortization of debt costs........................................................ 28 57 ----------- -------- Net Cash Provided By Operating Activities............................................ 75 964 ----------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Decrease in funds held by Trustee.................................................... 5,638 474 Amortization of residual interests................................................... 832 1,100 Principal payments received on real estate loans..................................... 499 5,790 Real estate loans funded............................................................. (303) (2,625) Increase in short-term investments................................................... (19) - ----------- -------- Net Cash Provided By Investing Activities............................................ 6,647 4,739 ----------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments, including prepayment penalty of $94 in 1996, made on long-term debt............................................................. (7,913) (1,982) Dividends paid....................................................................... (291) (194) ----------- -------- Net Cash Used In Financing Activities................................................ (8,204) (2,176) ----------- -------- Net Increase (Decrease) In Cash...................................................... (1,482) 3,527 Cash And Cash Equivalents At Beginning Of Period..................................... 3,347 6,666 ----------- -------- Cash And Cash Equivalents At End Of Period........................................... $ 1,865 $ 10,193 =========== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest............................................................... $ 286 $ 440 =========== ========
See notes to consolidated financial statements. 5 HOMEPLEX MORTGAGE INVESTMENTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1996 (Unaudited) NOTE 1 - ORGANIZATION Homeplex Mortgage Investments Corporation, a Maryland corporation, (the Company) commenced operations in July 1988. As described in Note 4 the Company has purchased interests in mortgage certificates securing collateralized mortgage obligations (CMOs) and interests relating to mortgage participation certificates (MPCs) (collectively residual interests). Since December 1993 the Company has originated various loans secured by real estate (see Note 3). In June 1996, the Company announced that it had signed a letter of intent to merger with Monterey Homes (see Note 8). The accompanying interim financial statements do not include all of the information and disclosures generally required for annual financial statements. In the opinion of management, however, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 1996 and 1995 are not necessarily indicative of the results that may be expected for the entire year. These financial statements should be read in conjunction with the December 31, 1995 financial statements and notes thereto. NOTE 2 - GENERAL AND SUMMARY OF ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of Homeplex Mortgage Investments Corporation and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Income Taxes The Company has elected to be taxed as a real estate investment trust (REIT) under the Internal Revenue Code. As a REIT, the Company must distribute annually at least 95% of its taxable income to its stockholders. At December 31, 1995, the Company has available, for income tax purposes, a net operating loss carryforward of approximately $57,000,000. Such loss may be carried forward, with certain restrictions, for up to 14 years to offset future taxable income, if any. Until the tax loss carryforward is fully utilized or expires, the Company will not be required to pay dividends to its stockholders except for income that is deemed to be excess inclusion income. The income reported in the accompanying financial statements is different than taxable income because some income and expense items are reported in different periods for income tax purposes. The principal differences relate to the amortization of residual interests and the treatment of stock option expense. Residual Interests Interests relating to mortgage participation certificates and residual interest certificates are accounted for as described in Note 4. 6 HOMEPLEX MORTGAGE INVESTMENTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) June 30, 1996 (Unaudited) Cash and Cash Equivalents Cash and cash equivalents include demand deposits and certificates of deposit with maturities of less than three months. Net Income Per Share Primary net income per share is calculated using the weighted average shares of common stock outstanding and common stock equivalents. Common stock equivalents consist of dilutive stock options. Net income per share is the same for both primary and fully diluted calculations. Short-Term Investments At June 30, 1996, short-term investments consist of a Treasury Bill with a face amount of $9,000,000, maturity date of July 11, 1996 and an estimated yield to maturity of 4.92%. NOTE 3 - REAL ESTATE LOANS The following is a summary of real estate loans at June 30, 1996:
Interest Payment Principal and Description Rate Terms Carrying Amount (1) ----------- -------- ----------------------------- ------------------- First Deed of Trust on 16% Interest only monthly, principal $ 1,580,000 41 acres of land in Gilbert, due October 18, 1996; may be Arizona. extended for one year under cer- tain terms and conditions. First Deed of Trust on 16% Interest only monthly, principal 2,272,000 33 acres of land in due November 21, 1995; extended Tempe, Arizona. for one year on November 21, 1995 under the same terms and conditions. ----------- $ 3,852,000 ===========
- --------------------------------------------------- (1) Also represents cost for federal income tax purposes. At June 30, 1996, both of the Company's loans are secured by properties located in Arizona. As a result of this geographic concentration, unfavorable economic conditions in Arizona could increase the likelihood of defaults on these loans and affect the Company's ability to protect the principal and interest on such loans following foreclosures upon the real properties securing such loans. 7 HOMEPLEX MORTGAGE INVESTMENTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) June 30, 1996 (Unaudited) NOTE 4 - RESIDUAL INTERESTS The Company owns residual interests in collateralized mortgage obligations (CMOs) and residual interests in mortgage participation certificates (MPCs) (collectively residual interests) with respect to which elections to be treated as a real estate mortgage investment conduit (REMIC) have been made. Residual Interest Certificates The Company owns 100% of the residual interest certificates representing the residual interests in five series of CMOs secured by mortgage certificates and cash funds held by trustee. The CMOs have been issued through Westam Mortgage Financial Corporation (Westam) or American Southwest Financial Corporation (ASW). The mortgage certificates securing the CMOs all have fixed interest rates. Certain of the classes of CMOs have fixed interest rates and certain have interest rates that are determined monthly based on the London Interbank Offered Rates (LIBOR) for one month Eurodollar deposits, subject to specified maximum interest rates. Each series of CMOs consists of several serially maturing classes collateralized by mortgage certificates. Generally, principal payments received on the mortgage certificates, including prepayments on such mortgage certificates, are applied to principal payments on the classes of CMOs in accordance with the respective indentures. Scheduled payments of principal and interest on the mortgage certificates securing each series of CMOs and reinvestment earnings thereon are intended to be sufficient to make timely payments of interest on such series and to retire each class of such series by its stated maturity. Certain series of CMOs are subject to redemption according to specific terms of the respective indentures. The Company's residual interest certificates entitle the Company to receive the excess, if any, of payments received from the pledged mortgage certificates together with reinvestment income thereon over amounts required to make debt service payments on the related CMOs and to pay related administrative expenses of the REMICs. The Company also has the right, under certain conditions, to cause an early redemption of the CMOs. Under the early redemption feature, the mortgage certificates are sold at the then current market price and the CMOs repaid at par value. The Company is entitled to any excess cash flow from such early redemptions. The conditions under which such early redemptions may be elected vary but generally cannot be done until the remaining outstanding CMO balance is less than 10% of the original balance. Interests In Mortgage Participation Certificates The Company owns residual interests in REMICs with respect to three separate series of Mortgage Participation Certificates (MPCs) issued by the Federal Home Loan Mortgage Corporation (FHLMC) or by the Federal National Mortgage Association (FNMA). The Company's MPC residual interests entitle the Company to receive its proportionate share of the excess (if any) of payments received from the mortgage certificates underlying the MPCs over principal and interest required to be passed through to the holders of such MPCs. The Company is not entitled to reinvestment income earned on the underlying mortgage certificates, is not required to pay any administrative expenses related to the MPCs and does not have the right to elect early termination of any of the MPC classes. The mortgage certificates underlying the MPCs all have fixed interest rates. Certain of the classes of the MPCs have fixed interest rates and certain have interest rates 8 HOMEPLEX MORTGAGE INVESTMENTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) June 30, 1996 (Unaudited) that are determined monthly based on LIBOR or based on the Monthly Weighted Average Cost of Funds (COFI) for Eleventh District Savings Institutions as published by the Federal Home Loan Bank of San Francisco, subject to specified maximum interest rates. The following summarizes the Company's investment in residual interests at June 30, 1996:
Type Of Company's Company's Percentage Series Investments Amortized Cost Ownership ------ ----------- -------------- -------------------- (In Thousands) Westam 1 Residual Interest Certificate $ 508 100.00% Westam 3 Residual Interest Certificate 27 100.00% Westam 5 Residual Interest Certificate 171 100.00% Westam 6 Residual Interest Certificate 2 100.00% ASW 65 Residual Interest Certificate 2,224 100.00% FHLMC 17 Interest in MPCs 112 100.00% FNMA 1988-24 Interest in MPCs 1,015 20.20% FNMA 1988-25 Interest in MPCs 566 45.07% ------ $4,625 ======
The following summarizes the Company's proportionate interest in the aggregate assets and liabilities of the eight residual interests at June 30, 1996 (in thousands):
Assets: Outstanding Principal Balance of Mortgage Certificates.......................... $ 313,305 Funds Held By Trustee and Accrued Interest Receivable........................... 11,063 --------- $ 324,368 ========= Range of Stated Coupon of Mortgage Certificates................................. 9.0% - 10.5% Liabilities: Outstanding Principal Balance of CMOs and MPCs: Fixed Rate ................................................................ $ 286,003 Floating Rate - LIBOR Based................................................... 29,225 Floating Rate - COFI Based.................................................... 3,787 --------- Total........................................................... 319,015 Accrued Interest Payable........................................................ 2,159 --------- $ 321,174 ========= Range of Stated Interest Rates on CMOs and MPCs................................. 0% to 9.9%
9 HOMEPLEX MORTGAGE INVESTMENTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) June 30, 1996 (Unaudited) The average LIBOR and COFI rates used to determine income from residual interests were as follows:
Three Months Ended Six Months Ended June 30 At June 30, 1996 1996 1995 1996 1995 ---------------- ---- ---- ---- ---- LIBOR............. 5.44% 6.08% 5.47% 6.07% 5.44% COFI.............. 4.90% 5.00% 4.98% 4.78% 4.84%
The Company accounts for residual interests using the prospective net level yield method. Under this method, a residual interest is recorded at cost and amortized over the life of the related CMO or MPC issuance. The total expected cash flow is allocated between principal and interest as follows: 1. An effective yield is calculated as of the date of purchase based on the purchase price and anticipated future cash flows. 2. In the initial accounting period, interest income is accrued on the investment balance using the effective yield calculated as of the date of purchase. 3. Cash received on the investment is first applied to accrued interest with any excess reducing the recorded principal balance of the investment. 4. At each reporting date, the effective yield is recalculated based on the amortized cost of the investment and the then-current estimate of the remaining future cash flows. 5. The recalculated effective yield is then used to accrue interest income on the investment balance in the subsequent accounting period. 6. The above procedure continues until all cash flows from the investment have been received. At the end of each period, the amortized balance of the investment should equal the present value of the estimated cash flows discounted at the newly-calculated effective yield. If a residual interest is determined to have other than temporary impairment, the residual interest is written down to fair value. At June 30, 1996, the estimated prospective net level yield of the Company's residual interests, in the aggregate, is 30% without early redemptions or terminations being considered and 77% if early redemptions or terminations are considered. At June 30, 1996, the estimated fair value of the Company's residual interests, in the aggregate, is estimated to be between $5 million and $7 million. The projected yield and estimated fair value of the Company's residual interests are based on prepayment and interest rate assumptions at June 30, 1996. There will be differences, which may be material, between the projected yield and the actual yield and the fair value of the residual interests may change significantly over time. 10 HOMEPLEX MORTGAGE INVESTMENTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) June 30, 1996 (Unaudited) NOTE 5 - LONG-TERM DEBT On December 17, 1992, a wholly owned, limited purpose subsidiary of the Company issued $31,000,000 of Secured Notes under an Indenture to a group of institutional investors. The Notes bore interest at 7.81% and required quarterly payments of principal and interest with the balance due on February 15, 1998. In connection with the financing, the Company paid fees of $635,000 which were included in other assets in the accompanying consolidated balance sheet and were amortized to interest expense over the life of the financing. The Notes were secured by the Company's residual interests in Westam 1, Westam 3, Westam 5, Westam 6, ASW 65, FNMA 1988-24 and FNMA 1988-25 (see Note 4), and by Funds held by the Note Trustee. The Company used $3,100,000 of the proceeds to establish a reserve fund. The reserve fund, which had a specified maximum balance of $7,750,000, was to be used to make the scheduled principal and interest payments on the Notes if the cash flow available from the collateral was not sufficient to make the scheduled payments. Depending on the level of certain specified financial ratios relating to the collateral, the cash flow from the collateral was required to either prepay the Notes at par, increase the reserve fund up to its $7,750,000 maximum or was remitted to the Company. On May 15, 1996 the Company repaid the remaining outstanding Note balance of $6,828,000 plus accrued interest. The Company paid prepayment penalty fees of $94,000 and wrote off the remaining unamortized balance of $55,000 of capitalized debt costs in connection with such repayment resulting in an extraordinary loss of $149,000 from the early extinguishment of debt. NOTE 6 - COMMON STOCK AND STOCK OPTIONS The Company has a Stock Option Plan which is administered by the Board of Directors. The plan provides for qualified stock options which may be granted to key personnel of the Company and non-qualified stock options which may be granted to the Directors and key personnel of the Company. The purpose of the plan is to provide a means of performance-based compensation in order to attract and retain qualified personnel whose job performance affects the Company. Options to acquire a maximum (excluding dividend equivalent rights) of 437,500 shares of the Company's common stock may be granted under the plan. The exercise price may not be less than the fair market value of the common stock at the date of grant. The options expire ten years after date of grant. Optionholders also receive, at no additional cost, dividend equivalent rights which entitle them to receive, upon exercise of the options, additional shares calculated based on the dividends declared during the period from the grant date to the exercise date. At June 30, 1996 accounts payable and other liabilities in the accompanying consolidated balance sheets, include approximately $850,000 related to the Company's granting of dividend equivalent rights. This liability will remain in the accompanying consolidated balance sheets until the options to which the dividend equivalent rights relate are exercised, cancelled or expire. Under the plan, an exercising optionholder also has the right to require the Company to purchase some or all of the optionholder's shares of the Company's common stock. That redemption right is exercisable by the optionholder only with respect to shares (including the related dividend equivalent rights) that the optionholder has acquired by exercise of an option under the Plan. Furthermore, the optionholder can only exercise his redemption rights within six months from the last to expire of (i) the two year period commencing 11 HOMEPLEX MORTGAGE INVESTMENTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) June 30, 1996 (Unaudited) with the grant date of an option, (ii) the one year period commencing with the exercise date of an option, or (iii) any restriction period on the optionholder's transfer of the shares of common stock he acquires through exercise of his option. The price for any shares repurchased as a result of an optionholder's exercise of his redemption right is the lesser of the book value of those shares at the time of redemption or the fair market value of the shares on the original date the options were exercised. At June 30, 1996, there were 445,177 of options (including dividend equivalent rights) outstanding of which 438,376 were currently exercisable at effective exercise prices ranging from $1.22 per share to $4.48 per share. Additionally, in December 1995, in connection with the renegotiation of the Chief Executive Officer's Employment Agreement, the Company replaced his annual salary of $250,000 plus bonus with 750,000 non-qualified stock options which vest over the three year term of the new Employment Agreement. The exercise price of the options is $1.50 per share which is equal to the closing market price of the common stock on grant date. As of June 30, 1996, 200,000 of the options were vested, with 275,000 vesting in December 1996 and the remaining 275,000 vesting in December 1997. The options will immediately vest upon a change in control, as defined. The options will expire in December 2000. These stock options are subject to stockholder approval. In the event the stock options are not approved by the stockholders, the Employment Agreement provides that the options will be converted into phantom stock rights (PSRs). Such PSRs have the same vesting provisions, exercise price and expiration date as the related stock options, except that upon exercise of a PSR no stock is actually issued. Instead, the Company will make a cash payment to the holder equal to the difference between the market value of the stock on the exercise date and the exercise price of $1.50 per share. The PSRs, also, provide that the holder will receive payments equal to the product of the per share dividend amount times the number of PSRs outstanding. NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with requirements of SFAS No. 107, "Disclosures about Fair Values of Financial Instruments". Although management uses its best judgement in estimating the fair value of these instruments, there are inherent limitations in any estimation technique and the estimates are thus not necessarily indicative of the amounts which the Company could realize on a current transaction. The following describes the significant assumptions underlying the estimates of fair value: (a) Real Estate Loans - The Company's real estate loans are both short-term (one year or less) and considered to be fully collectible. The terms and conditions of such loans are the same as would be used by the Company to fund similar type loans at June 30, 1996. As such, fair value approximates cost. (b) Short-Term Investments - Short-term investments consist of a Treasury Bill with a fair value that approximates cost. (c) Cash and Cash Equivalents - Cash and cash equivalents consist of demand deposits and liquid money market funds with fair value approximating cost. (d) Residual Interests - Residual interests and their fair value are described in Note 4 to the financial statements. 12 HOMEPLEX MORTGAGE INVESTMENTS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) June 30, 1996 (Unaudited) Based on these assumptions the Company estimates the fair value of its financial instruments at June 30, 1996 to be as follows (in thousands): Carrying Amount Estimated Fair Value -------- -------------------- Real Estate Loans.................... $ 3,852 $ 3,852 Short-term Investments............... 8,988 8,988 Residual Interests................... 4,625 5,000 to 7,000 Cash and Cash Equivalents............ 1,865 1,865 NOTE 8 - PROPOSED MERGER In June 1996 the Company announced that it had signed a letter of intent to merge with Monterey Homes, a group of privately-held companies engaged in the homebuilding business in Phoenix, Scottsdale and Tucson, Arizona. As currently contemplated the merger would involve the issuance of approximately 3.6 million to 4.0 million shares of Homeplex common stock, depending on the relative book values of the respective companies, in exchange for 100% of the outstanding stock of Monterey Homes. Additionally, up to 800,000 additional shares of Homeplex common stock will be issued in the event that (i) the stock price of Homeplex reaches certain targeted levels of between $1.75 to $3.50 in the five years following the merger and (ii) the two current stockholders of Monterey Homes are still employed by the post-merger company when the stock price reaches the targeted levels. Prior to closing, Monterey Homes, a group of subchapter S corporations, will distribute to their stockholders a significant portion of their previously taxed retained earnings which will reduce the net worth of Monterey Homes to between $2.275 and $2.500 million. It is also currently contemplated that William W. Cleverly and Steven J. Hilton, the current stockholders of Monterey Homes, will become the Chairman and the President, respectively, and co-chief executive officers of the combined company after the closing, and each will enter into a five-year employment agreement providing for additional options to purchase 500,000 shares each of Homeplex common stock at $1.75 per share. Messrs. Cleverly and Hilton will serve on the new Board of Directors along with two new outside directors and one current Homeplex director. Monterey Homes had combined revenue of approximately $61 million and $71 million and pre-tax earnings of approximately $6.3 million and $6.4 million for the years ended December 31, 1994 and 1995, respectively. After the merger, the combined entities would continue with Monterey Homes' building operations as its main line of business. Upon consummation of the merger, it is anticipated that the combined entities will have total assets of approximately $60 million. It is anticipated that Homeplex's $57 million net operating-loss carryforward for income tax purposes would be available to the combined company, and the transaction would require Homeplex to terminate its tax status as a real estate investment trust (REIT). The letter of intent is subject to the due diligence of both parties, negotiation and execution of a definitive agreement, the receipt of an independent fairness opinion, the approval of the Boards of Directors and stockholders of both companies and the consent of various lenders and other third parties, as well as other customary conditions. 13 HOMEPLEX MORTGAGE INVESTMENTS CORPORATION ITEM 2. Management' Discussion and Analysis of Financial Condition, Results ----------------------------------------------------------------------- of Operations and Interest Rates and Other Information ------------------------------------------------------ Results of Operations For The Three And Six Months Ended March 31, 1996 and 1995 - -------------------------------------------------------------------------------- The Company had net income of $148,000 or $.01 per share, and $232,000 or $.02 per share, respectively, for the three and six months ended June 30, 1996 compared to net income of $335,000, or $.03 per share and $798,000 or $.08 per share for the comparable periods in 1995. Results for the three and six months ended June 30, 1996 include an extraordinary loss from the early extinguishment of debt of $149,000, or $.02 per share. The Company's income from mortgage assets was $635,000 and $1,270,000, respectively, for the three and six months ended June 30, 1996 as compared to income of $1,078,000 and $2,181,000 for the comparable periods in 1995. Interest income on real estate loans decreased from $622,000 and $1,197,000, respectively, for the three and six months ended June 30, 1995 to $175,000 and $366,000, respectively, for the comparable periods in 1996 due to a reduction of the Company's real estate lending programs. See "Liquidity, Capital Resources and Commitments". The Company's interest expense declined from $228,000 and $478,000, respectively, for the three and six months ended June 30, 1995 to $75,000 and $238,000 for the comparable periods in 1996 as a result of the Company reducing its long-term debt. Liquidity, Capital Resources and Commitments - -------------------------------------------- The Company raised $80,593,000 in connection with its initial public offering on July 27, 1988. The proceeds were immediately utilized to purchase residual interests. Subsequently, through October 1988, the Company purchased an additional $59,958,000 of residual interests which were initially financed using a combination of borrowings under repurchase agreements and the Company's bank line of credit. The Company has not purchased any residual interests since October 1988. Since December 1993, the Company has originated real estate loans secured by various first deeds of trust on real properties located in Arizona. The Company's loan program seeks higher returns by targeting loan opportunities to which the Company can respond on a more timely basis than traditional real estate lenders. At June 30, 1996, both of the Company's loans are secured by properties located in Arizona. As a result of this geographic concentration, unfavorable economic conditions in Arizona could increase the likelihood of defaults on these loans and affect the Company's ability to protect the principal and interest on such loans following foreclosures upon the real properties securing such loans. The Company may, in the future, make loans on properties located outside of Arizona. In the latter half of 1995, in anticipation of a potential acquisition transaction, the Company slowed its origination of real estate loans. At June 30, 1996 the Company's real estate loans outstanding total $3,852,000 and bear interest at 16%, payable monthly, with all principal due within one year. On December 17, 1992, a wholly owned limited-purpose subsidiary of the Company issued $31,000,000 of Secured Notes under an Indenture to a group of institutional investors. The Notes bore interest at 7.81% and required quarterly payments of principal and interest with the balance due on February 15, 1998. The Notes were secured by the Company's residual interests in Westam 1, Westam 3, Westam 5, Westam 6, ASW 65, FNMA 1988-24 and FNMA 1988-25 and by funds held by the Note Trustee. The Company used $3,100,000 of the proceeds to establish a reserve fund. The reserve fund had a specified maximum balance 14 HOMEPLEX MORTGAGE INVESTMENTS CORPORATION of $7,750,000 and was to be used to make the scheduled principal and interest payments on the Notes if the cash flow available from the collateral was not sufficient to make the scheduled payments. Depending on the level of certain specified financial ratios relating to the collateral, the cash flow from the collateral is required to either repay the Notes at par, increase the reserve fund up to its $7,750,000 maximum or was remitted to the Company. On May 15, 1996 the Company repaid the remaining outstanding Note balance of $6,828,000 plus accrued interest. The Company paid prepayment penalty fees of $94,000 and wrote off the remaining unamortized balance of $55,000 of capitalized debt costs in connection with such repayment resulting in an extraordinary loss of $149,000 from the early extinguishment of debt. At June 30, 1996, the Company does not have any used or unused short-term debt or line of credit facilities. As a real estate investment trust (REIT), the Company is not subject to income tax at the corporate level as long as it distributes 95% of its taxable income to its stockholders. At December 31, 1995, the Company has a net operating loss carryforward, for income tax purposes, of approximately $57,000,000. This tax loss may be carried forward, with certain restrictions, for up to 14 years to offset future taxable income, if any. Until the tax loss carryforward is fully utilized or expires, the Company will not be required to distribute dividends to its stockholders except for income that is deemed to be excess inclusion income. In June 1996 the Company announced that it had signed a letter of intent to merge with Monterey Homes, a group of privately-held companies engaged in the homebuilding business in Phoenix, Scottsdale and Tucson, Arizona. As currently contemplated the merger would involve the issuance of approximately 3.6 million to 4.0 million shares of Homeplex common stock, depending on the relative book values of the respective companies, in exchange for 100% of the outstanding stock of Monterey Homes. Additionally, up to 800,000 additional shares of Homeplex common stock will be issued in the event that (i) the stock price of Homeplex reaches certain targeted levels of between $1.75 to $3.50 in the five years following the merger and (ii) the two current stockholders of Monterey Homes are still employed by the post-merger company when the stock price reaches the targeted levels. Prior to closing, Monterey Homes, a group of subchapter S corporations, will distribute to their stockholders a significant portion of their previously taxed retained earnings which will reduce the net worth of Monterey Homes to between $2.275 and $2.500 million. It is also currently contemplated that William W. Cleverly and Steven J. Hilton, the current stockholders of Monterey Homes, will become the Chairman and the President, respectively, and co-chief executive officers of the combined company after the closing, and each will enter into a five-year employment agreement providing for additional options to purchase 500,000 shares each of Homeplex common stock at $1.75 per share. Messrs. Cleverly and Hilton will serve on the new Board of Directors along with two new outside directors and one current Homeplex director. Monterey Homes had combined revenue of approximately $61 million and $71 million and pre-tax earnings of approximately $6.3 million and $6.4 million for the years ended December 31, 1994 and 1995, respectively. After the merger, the combined entities would continue with Monterey Homes' building operations as its main line of business. Upon consummation of the merger, it is anticipated that the combined entities will have total assets of approximately $60 million. It is anticipated that Homeplex's $57 million net operating-loss carryforward for income tax purposes would be available to the combined company, and the transaction would require Homeplex to terminate its tax status as a real estate investment trust (REIT). 15 HOMEPLEX MORTGAGE INVESTMENTS CORPORATION The letter of intent is subject to the due diligence of both parties, negotiation and execution of a definitive agreement, the receipt of an independent fairness opinion, the approval of the Board of Directors and stockholders of both companies and the consent of various lenders and other third parties, as well as other customary conditions. Interest Rates and Prepayments One of the Company's major sources of income is its income from residual interests which consists of the Company's investment in eight real estate mortgage investment conduits ("REMICs") as described in Note 4 to the financial statements. The Company's cash flow and return on investment from its residual interests are highly sensitive to the prepayment rate on the related mortgage certificates and the variable interest rates on variable rate CMOs and MPCs. At June 30, 1996, the Company's proportionate share of floating-rate CMOs and MPCs in the eight REMICs is $29,225,000 in principal amount that pays interest based on LIBOR and $3,787,000 in principal amount that pays interest based on COFI. Consequently, absent any changes in prepayment rates on the related mortgage certificates, increases in LIBOR and COFI will decrease the Company's net income, and decreases in LIBOR and COFI will increase the Company's net income. The average LIBOR and COFI rates were as follows:
Three Months Six Months Ended June 30, Ended June 30, At June 30, 1996 -------------- -------------- ---------------- 1996 1995 1996 1995 ---- ---- ---- ---- LIBOR............. 5.44% 6.08% 5.47% 6.07% 5.44% COFI.............. 4.90% 5.00% 4.98% 4.78% 4.84%
The Company's cash flow and return on investment from residual interests also is sensitive to prepayment rates on the mortgage certificates securing the CMOs and underlying the MPCs. In general, slower prepayment rates will tend to increase the cash flow and return on investment on investment from interests. The rate of principal prepayments on mortgage certificates is influenced by a variety of economic, geographic, social and other factors. In general, prepayments of the mortgage certificates should increase when the current mortgage interest rates fall below the interest rates on the fixed rate mortgage loans underlying the mortgage certificates. Conversely, to the extent that then current mortgage interest rates exceed the interest rates on the mortgage loans underlying the mortgage certificates, prepayments of such mortgage certificates should decrease. Prepayment rates also may be affected by the geographic location of the mortgage loans underlying the mortgage certificates, conditions in mortgage loan, housing and financial markets, the assumability of the mortgage loans and general economic conditions. 16 HOMEPLEX MORTGAGE INVESTMENTS CORPORATION PART II. OTHER INFORMATION - --------------------------- ITEM 1. Legal Proceedings ------------------- Not applicable ITEM 2. Changes in Securities ----------------------- Not applicable ITEM 3. Defaults Upon Senior Securities --------------------------------- Not applicable ITEM 4. Submission of Matters to a Vote of Security Holders ----------------------------------------------------- Not applicable ITEM 5. Other Information ------------------- Not applicable ITEM 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits - Exhibit 27, Financial Data Schedule (b) Reports on Form 8-K - None 17 HOMEPLEX MORTGAGE INVESTMENTS CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf by the undersigned thereunto duly authorized. HOMEPLEX MORTGAGE INVESTMENTS CORPORATION August 12, 1996 By \ JAY R. HOFFMAN -------------------------------------- Jay R. Hoffman, President, Treasurer, Chief Financial Officer and a Duly Authorized Officer 18