<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
__________
AMENDMENT NO. 1
__________
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934 For the quarterly period ended June 30, 1997.
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the transition period from to .
---------- -----------
Commission File Number: 0-9774
HOMECAPITAL INVESTMENT CORPORATION
(Exact Name of Small Business Issuer as Specified in its Charter)
NEVADA 95-3614463
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6836 AUSTIN CENTER BLVD.
SUITE 280
AUSTIN, TEXAS 78731
(Address of Principal Executive Offices)
(512) 427-5200
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 July 31, 1997, there were 8,226,883 shares of common stock of the
issuer outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X .
--- ---
The Exhibit Index appears on page 36.
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION
Index to Form 10-QSB/A
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements.
Consolidated Balance Sheet (Unaudited)
As of June 30, 1997 3
Consolidated Statements of Operations (Unaudited)
For the Nine Months Ended June 30, 1997
and 1996 4
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended June 30, 1997
and 1996 5
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended June 30, 1997
and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or
Plan of Operation. 26
PART II. OTHER INFORMATION
Item 2. Changes in Securities. 35
Item 6. Exhibits and Reports on Form 8-K. 36
SIGNATURES 37
2
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
June 30, 1997
(Unaudited)
ASSETS
Cash $ 366,616
Cash deposits, restricted 1,167,835
Loans held for sale, net 4,449,762
Mortgage-backed securities 21,746,641
Interest-only strip receivable 15,170,988
Prepaid and other assets 1,109,049
Furniture, fixtures and equipment, net 1,278,627
Deferred tax assets 437,320
------------
Total assets $ 45,726,838
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable $ 83,342
Revolving lines of credit 25,951,678
Payable under securities loan agreements 4,026,000
Capital lease obligations 47,262
Accrued expenses and other liabilities 2,261,656
Allowance for credit losses on loans sold 619,315
Income taxes payable 2,219,721
------------
Total liabilities 35,208,974
============
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized;
1,500,000 shares of cumulative convertible Series A stock
issued and outstanding(liquidation value of $2,250,000)
15,000
Common stock, $.01 par value; 100,000,000 shares authorized;
8,226,883 shares issued and outstanding 82,269
Additional paid-in capital 5,733,710
Retained earnings 4,981,603
Valuation allowance for securities available for sale (237,467)
Notes receivable for stock (57,251)
------------
Total stockholders' equity 10,517,864
------------
Total liabilities and stockholders' equity $ 45,726,838
============
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months Ended June 30, 1997 and 1996
(Unaudited)
1997 1996
------------ -----------
Gain on sale of loans and mortgage-backed
securities $ 10,498,745 $ 4,098,255
Net unrealized gain on valuation of
investment Securities 1,862,559 --
Interest - loans 844,551 324,370
Interest - investments 1,634,379 3,524
Loan servicing income 422,482 147,022
Other income 168,722 102,102
------------ ------------
Total revenues 15,431,438 4,675,273
------------ ------------
Costs and Expenses:
Salaries and employee benefits 3,377,389 1,552,810
Servicing costs 701,142 134,309
Loan costs 1,175,582 201,402
General and administrative 2,649,577 1,138,223
Occupancy 442,871 226,406
Interest 923,895 279,705
------------ ------------
Total costs and expenses 9,270,456 3,532,855
------------ ------------
Income before income taxes 6,160,982 1,142,418
Provision for income taxes 2,161,778 330,000
------------ ------------
Net income $ 3,999,204 $ 812,418
============ ============
Income (loss) per common and common equivalent share:
Primary:
Earnings (loss) per common share $ .44 $ (.313)
============ =============
Weighted average number of common and common
equivalent shares outstanding 8,602,901 7,014,924
============ =============
Fully Diluted:
Earnings per common share $ .40
------------
Weighted average number of fully diluted
common shares outstanding 10,106,157
============
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 1997 and 1996
(Unaudited)
1997 1996
------------ -----------
Revenues:
Gain on sale of loans and mortgage-backed
securities $ 1,879,977 $ 1,538,602
Net unrealized gain on valuation of
investment Securities 1,434,584 --
Interest - loans 150,135 149,457
Interest - investments 855,650 1,215
Loan servicing income -- 86,896
Other income 70,010 27,590
------------ ------------
Total revenues 4,390,356 1,803,760
------------ ------------
Costs and Expenses:
Salaries and employee benefits 1,504,609 543,652
Servicing costs 282,462 80,179
Loan costs 367,031 86,601
General and administrative 1,336,403 392,251
Occupancy 184,388 92,011
Interest 391,845 112,190
------------ ------------
Total costs and expenses 4,066,738 1,306,884
------------ ------------
Income before income taxes 323,618 496,876
Provision for income taxes 113,266 330,000
------------ ------------
Net income $ 210,352 $ 166,876
============ ============
Income (loss) per common and common equivalent share:
Primary:
Earnings (loss) per common share $ .02 $ (.397)
============ =============
Weighted average number of common and common
equivalent shares outstanding 8,846,758 7,155,173
============ =============
Fully Diluted:
Earnings per common share $ .02
============
Weighted average number of fully diluted
common shares outstanding 10,346,758
============
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended June 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,999,204 $ 812,418
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation and amortization 1,127,536 122,222
Deferred tax benefit (246,818) --
Provision for credit losses 775,000 20,000
Gain on sales of loans and mortgage-backed securities (10,498,745) (4,098,255)
Unrealized gain from valuation of investment securities (1,862,559) --
Proceeds from sales of loans and mortgage-backed securities 94,249,216 68,630,165
Purchase and origination of loans (115,157,183) (68,110,468)
Change in operating assets and liabilities:
Increase in cash deposits, restricted (462,081) (295,065)
Increase in accrued interest receivable (150,608) (22,043)
Increase in prepaid and other assets (764,664) (62,189)
Increase in accrued expenses and other liabilities 2,162,062 913,430
--------------- ---------------
Net cash used in operating activities (26,829,640) (2,089,785)
--------------- ---------------
Cash flows from investing activities:
Purchase of furniture, fixtures and equipment (777,624) (257,239)
--------------- ---------------
Cash flows from financing activities:
Increase in revolving lines of credit 21,887,498 1,245,797
Increase in payable under securities loan agreements 4,026,000 --
Proceeds from notes payable -- 200,000
Payments on notes payable (74,997) (150,000)
Proceeds from exercise of Series A Warrants 1,911,919 --
Proceeds from exercise of other Warrants 92,700 --
Proceeds from sale of preferred stock -- 1,861,000
Payments on capital lease obligations (10,779) (24,183)
Preferred stock dividends (201,945) --
Net cash provided by financing activities 27,630,396 3,132,614
--------------- ---------------
Increase in cash 23,132 785,590
Cash, beginning of period 343,484 25,716
--------------- ---------------
Cash, end of period $ 366,616 $ 811,306
=============== ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
--------------------
THE COMPANY AND SUBSIDIARY
--------------------------
HomeCapital Investment Corporation, a public holding company, ("Company,"
or "HomeCapital") was incorporated in the state of Nevada on October 8,
1980. As a result of a reverse acquisition transaction with HomeOwners
Mortgage & Equity, Inc. ("Home") in August 1994 (the "Home Transaction"),
Home became the wholly-owned subsidiary of the Company, and the previous
shareholders of Home held approximately 83% of the outstanding common stock
of the Company. The Company currently conducts its business entirely
through Home.
The reverse acquisition was accounted for as a recapitalization with
carryover basis of assets and liabilities. The financial statements
reflect the financial condition and results of operations of Home
consolidated with the Company. All intercompany transactions and balances
have been eliminated in the accompanying consolidated financial statements.
DESCRIPTION OF OPERATIONS
-------------------------
The Company through wholesale and retail sources originates and purchases
home improvement loans, and other second lien mortgage loans ("Loans").
The Company is an approved lender under the Department of Housing and Urban
Development ("HUD") Federal Housing Administration ("FHA") Title I Program,
which provides FHA insurance against losses on eligible property
improvement and manufactured housing loans ("Title I Loans"). As an FHA
approved lender, the Company is subject to regulation and examination by
HUD. Under the program, the FHA insures 90% of the principal balance of
each Title I Loan and certain interest costs, subject to the amount of
insurance available in the Company's reserve account maintained by the FHA.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
ADJUSTMENTS TO INTERIM FINANCIAL STATEMENTS
-------------------------------------------
The interim financial statements of the Company at June 30, 1997 and for
the nine month periods and quarters ended June 30, 1997 and 1996, reflect
all adjustments (consisting solely of normal recurring adjustments), which
in the opinion of management, are necessary to present fairly the results
of operations and financial position. The results of operations of any
interim period are not necessarily indicative of the results of operations
for a full year.
7
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
-----------------------------------------------------
CASH DEPOSITS, RESTRICTED
-------------------------
Restricted cash represents funds received in connection with the servicing
of Loans sold on a servicing retained basis that have not been remitted to
the purchasers of such Loans as of June 30, 1997. The liability for these
unremitted funds is included in the Balance Sheet under the caption of
accrued expenses and other liabilities.
LOANS HELD FOR SALE, NET
------------------------
Loans held for sale are carried at the lower of aggregated cost or market
value in the accompanying Balance Sheet. Loans held for sale at June 30,
1997 have been either originated by the Company or purchased from its loan
correspondents. The Company funds these Loans primarily through its
warehouse lines of credit. Purchase premiums, discounts, loan origination
fees and related direct origination costs are included in the stated cost
of Loans held for sale, and are deferred until the related Loans are sold.
MORTGAGE-BACKED SECURITIES
--------------------------
Mortgage-backed securities consists entirely of Federal National Mortgage
Association ("Fannie Mae") Mortgage-backed securities that have been
created and issued by Fannie Mae in exchange for Home's Title I Loans.
These Mortgage-backed securities represent interest-bearing, marketable
obligations of Fannie Mae, which at June 30, 1997 are classified as trading
securities pursuant to SFAS No. 65, "Accounting for Certain Mortgage
Banking Activities".
REVENUE RECOGNITION
-------------------
Gain on sale of Loans and Mortgage-backed securities is recognized upon
transfer of Loans or Mortgage-backed securities to investors. The transfer
or sale of Loans is deemed not to have occurred with respect to Loans that
have been exchanged for Fannie Mae Mortgage-backed securities that have
been retained by the Company. The gain on sale of Loans and Mortgage-
backed securities is calculated based upon the difference between the net
proceeds from sale and the allocated carrying amounts of Loans or Mortgage-
backed securities sold, plus an Interest-only strip receivable derived from
the excess servicing fee on the Loans. The allocated carrying values are
based upon the relative fair value of Loans or Mortgage-backed securities
sold and the Interest-only strip receivable retained.
8
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
-----------------------------------------------------
REVENUE RECOGNITION, CONTINUED
------------------------------
Unrealized gain on investment securities includes the unrealized gain on
the Fannie Mae Mortgage-backed securities held for sale at the Balance
Sheet date and the Interest-only strip receivables derived from Loans sold
by the Company. The unrealized gain on Mortgage-backed securities held for
sale represents the excess of fair value over the allocated carrying value
of the securities. The fair value of the Mortgage-backed securities is
determined based upon independent market quotes.
INTEREST-ONLY STRIP RECEIVABLE
------------------------------
The Company adopted Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS No. 125) as of January 1, 1997. SFAS
No. 125 provides new accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. This
statement also provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured
borrowings and requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be
initially measured at fair value.
As a result of adopting the statement, the Excess servicing receivable
previously shown on the Balance Sheet as of December 31, 1996 has been
renamed as Interest-only strip receivable, and classified as "available for
sale" securities. The difference between the fair value and allocated
carrying amounts for securities classified as available for sale is
included as a component of stockholders' equity. In calendar 1997, the
Interest-only strip receivable arising from sale of Loans, including Loans
sold on a whole loan basis or through the sale of Mortgage-backed
securities are classified as "trading" securities. The Company recorded as
revenue, a net unrealized gain of $55,449 on the valuation of the Interest-
only strip receivable for such Loans and Mortgage-backed securities sold in
the quarter ended June 30, 1997.
The fair value of the Interest-only strip receivable is calculated based
upon the present value of the estimated future servicing income after
considering the effects of estimated prepayments, defaults and future
expenses. The discount rate utilized is based upon assumptions that market
participants would use for similar financial instruments subject to
prepayments, defaults, collateral value and interest rate risks.
9
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
-----------------------------------------------------
INTEREST-ONLY STRIP RECEIVABLE, CONTINUED
-----------------------------------------
For Loans and Mortgage-backed securities sold during calendar 1997, the
estimated fair value of cash flows were discounted using rates that
averaged 11%. The Company has developed its prepayment and default
assumptions based on experience with its own portfolio, available market
data and information from regulatory agencies. In determining fair value
of expected cash flows, management considers economic conditions at the
date of sale.
The Company periodically reviews the fair value of the Interest-only strip
receivable. Changes in the fair value of securities accounted for as
available for sale are recognized as an adjustment to stockholders' equity
and changes in the fair value of securities accounted for as trading
securities are reflected in operations.
ALLOWANCE FOR CREDIT LOSSES ON LOANS SOLD
-----------------------------------------
Loans sold by the Company are sold with limited recourse. The Company
provides an estimate for credit losses related to this recourse provision.
Such amounts are incurred over the period subject to recourse. Recourse to
the Company on sales of Loans is governed by the agreements between the
purchasers and the Company. The allowance for credit losses on Loans sold
with recourse represents the Company's best estimate of its probable future
credit losses to be incurred over the life of the Loans, giving effect to
estimated FHA insurance recoveries on Title I Loans and is shown separately
as a liability on the Company's Balance Sheet.
Provision for credit losses relating to Loans held for sale is charged to
income in amounts sufficient to maintain the allowance at a level
considered adequate to provide for anticipated losses resulting from
liquidation of outstanding Loans. The provision for credit losses is based
upon periodic analysis of the portfolio, economic conditions and trends,
historical credit loss experience, borrowers' ability to repay, collateral
values and giving effect to estimated FHA insurance recoveries on Title I
Loans.
10
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
-----------------------------------------------------
FURNITURE, FIXTURES AND EQUIPMENT, NET
--------------------------------------
Furniture, fixtures and equipment are stated at cost less accumulated
depreciation. Expenditures for major renewals and improvements are
capitalized while minor replacements, maintenance and repairs which do not
improve or extend the life of such assets are charged to expense. Gains or
losses on disposal of fixed assets are reflected in operations.
Depreciation is computed using the straight-line method over the estimated
useful lives of the depreciable assets, ranging from 5 to 7 years.
Leasehold improvements are depreciated over the term of the lease, ranging
from 1 to 5 years.
FEDERAL AND STATE INCOME TAXES
------------------------------
The Company and Home file separate Federal and state income tax returns.
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets and
liabilities and measured using the enacted tax rates and laws.
CREDIT CONCENTRATIONS
---------------------
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, Loans held for
sale, Mortgage-Backed Securities, and Interest-only strip receivable.
Concentration of credit risk and mitigating factors regarding Loans,
Mortgage-Backed Securities, and Interest-only strip receivable are
described above. The Company places its cash in various major financial
institutions thereby limiting the exposure of the Company's cash to
concentrations of credit risk.
The Company is party to financial instruments with off-balance sheet credit
risk in the normal course of business. These financial instruments include
commitments to extend credit to borrowers and commitments to purchase loans
from others. As of June 30, 1997, the Company had outstanding commitments
to extend credit or purchase loans in the amounts of approximately
$30,443,000.
11
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
-----------------------------------------------------
IMPAIRMENT OF LONG-LIVED ASSETS
-------------------------------
Effective October 1, 1996 the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived and Long Lived Assets to be Disposed Of".
SFAS No. 121 prescribes that an impairment loss is recognized in the event
that facts and circumstances indicate that the carrying amount of an asset
may not be recoverable, and an estimate of future undiscounted cash flows
is less than the carrying amount of the asset. Impairment is recorded based
on an estimate of future discounted cash flows as identified at the lowest
level for which there are identifiable cash flows for a particular group of
assets. The Company has concluded through analysis of these cashflows that
there was no impairment of long lived assets recorded on the financial
statements at June 30, 1997.
ACCOUNTING FOR STOCK-BASED COMPENSATION
---------------------------------------
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 establishes
fair value-based financial accounting and reporting standards for all
transactions in which a company acquires goods or services by issuing its
equity instruments or by incurring a liability to suppliers in amounts
based on the price of its common stock or other equity instruments. The
Company continues to account for stock-based compensation as prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and will make the required disclosures which include the
proforma effect on the income statement in its 1997 fiscal year-end
financial statements.
EARNINGS (LOSS) PER SHARE
-------------------------
The computation of primary earnings (loss) per share is based on the
weighted average number of common shares outstanding during the period
plus, when dilutive, common equivalent shares which includes stock options
and stock warrants (see notes 13 and 14) using the treasury stock method.
Net earnings used in the computation of primary earnings per share are
reduced by preferred stock dividend requirements. Fully diluted earnings
per share additionally assumes conversion of the Company's 1,500,000
outstanding shares of Preferred Stock, Series A.
12
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
-----------------------------------------------------
EARNINGS (LOSS) PER SHARE, CONTINUED
------------------------------------
Previously reported earnings per share for the three- and nine-month
periods ended June 30, 1996, has been restated pursuant to newly
publicized interpretations issued in March 1997 of existing accounting
regulations. Net earnings used in the computation of earnings (loss) per
share have been reduced by the intrinsic value of the beneficial conversion
feature on preferred stock, which is defined as the difference between the
conversion price and the market value of the common shares on the date of
issuance. On June 18, 1996, the issuance date of the Preferred Stock, the
market value of the Company's common stock was $3.50 per share. The
conversion price of the Preferred Stock is $1.50 per share. The Preferred
Stock was convertible into the Company's common stock at the date of
issuance. Thus the intrinsic value of the beneficial conversion feature on
the 1,500,000 shares of Preferred Stock, which amounts to $3,000,000 in
total, has been deducted from net earnings available for common
shareholders in the calculation of earnings (loss) per common share for the
three- and nine-month periods ended June 30, 1996. Previously reported
primary earnings per common share for such periods was $0.02 and $0.103,
respectively.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share." SFAS No.
128 specifies the computation, presentation, and disclosure requirements
for earnings per share. The Company will adopt this pronouncement to
report results of operations for the first quarter of fiscal 1998 and for
the year ended September 30, 1998. Previously reported earnings per share
will be restated at that time to conform to SFAS 128. This adoption is not
expected to have a material impact on earnings per share as currently
presented by the Company.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATIONS
-----------------
Certain accounts and balances in the financial statements for the nine
months and quarter ended June 30, 1996 have been reclassified to be
consistent with the 1997 account classifications.
13
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
-----------------------------------------------------
FAIR VALUES OF FINANCIAL INSTRUMENTS
------------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments" ("SFAS No. 107"), requires disclosure of
fair value information about financial instruments, whether or not
recognized in the balance sheet. Fair values are based on estimates using
present value or other valuation techniques in cases where quoted market
prices are not available. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future
cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument.
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate
fair value amounts presented do not represent the underlying value of the
Company.
Estimated fair values, carrying values and various methods and assumptions
used in valuing the Company's financial instruments at June 30, 1997 are
set forth below.
<TABLE>
<CAPTION>
Carrying Estimated Fair
Value Value
---------------- ----------------
<S> <C> <C>
Financial Assets:
Cash (a) $ 366,616 $ 366,616
Loans held for sale (b) 4,449,762 4,678,417
Mortgage-backed securities (c) 21,746,641 21,746,641
Interest-only strip receivable (d) 15,170,988 15,170,988
Financial Liabilities:
Debt obligations (e) 30,108,282 30,108,282
</TABLE>
___________
(a) The carrying value of cash is considered to be a reasonable estimate of
fair value.
(b) The fair value is estimated by using current investor yields or
outstanding commitments from investors after consideration of non-
qualified loans and the collateral securing such Loans.
(c) The fair value is based on quotes from independent market sources.
(d) The fair value is estimated by discounting expected future cash flows
(as adjusted for Loan delinquencies, defaults and prepayments) using
rates available for instruments with similar risks, terms and remaining
maturities.
(e) The debt obligations are primarily adjustable rate instruments and
indexed to the prime rate, LIBOR or Federal Funds rate; therefore,
carrying value is a reasonable estimate of fair value. Capitalized
equipment leases have implicit fixed interest rates ranging from 12.4%
to 25.6%, which approximate fair value in the aggregate.
14
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
-----------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
----------------------------------------------
The fair value estimates made at June 30, 1997 were based upon pertinent
market data and relevant information on the financial instruments at that
time. These estimates do not reflect any premium or discount that could
result from a single sale of the entire portion of the financial
instrument. Because no market exists for a portion of the financial
instruments, fair value estimates may be based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-and-off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. In addition, the tax
implications related to the realization of the unrealized gains and losses
can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
3. LOANS HELD FOR SALE
-------------------
Loans held for sale consisted of the following at June 30, 1997:
<TABLE>
<CAPTION>
<S> <C>
Title I Loans $ 4,239,755
Conventional loans 195,405
Commercial loans 18,547
Capitalized loan origination fees and
Costs, net 246,055
--------------
4,699,762
Allowance for credit losses (250,000)
--------------
Total $ 4,449,762
==============
</TABLE>
15
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. ALLOWANCE FOR CREDIT LOSSES
---------------------------
Changes in the allowance for credit losses for Loans consisted of the
following:
<TABLE>
<CAPTION>
<S> <C>
Balance at April 1, 1997 $ 642,805
Provisions for credit losses 225,000
Credit losses recovered 1,510
-----------------
Balance at June 30, 1997 $ 869,315
=================
Components of Allowance:
Allowance for credit losses on Loans held for sale $ 250,000
Allowance for credit losses on Loans sold 619,315
-----------------
$ 869,315
=================
</TABLE>
5. INTEREST-ONLY STRIP RECEIVABLE
------------------------------
The activity in the Interest-only strip receivable is summarized as
follows for the three months ended June 30, 1997:
<TABLE>
<S> <C>
Balance, April 1, 1997 $ 14,379,230
Additions 1,220,339
Reduction for cash received (390,431)
Change in fair value (38,150)
-----------------
Balance, June 30, 1997 $ 15,170,988
=================
</TABLE>
The serviced Loan portfolio, which includes Loans sold to investors on a
servicing retained basis and Loans retained by the Company, aggregated
approximately $186,889,000 at June 30, 1997.
16
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. FURNITURE, FIXTURES AND EQUIPMENT
---------------------------------
Furniture, fixtures and equipment consisted of the following at June 30,
1997:
<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures $ 388,044
Equipment 785,462
Leasehold improvements 54,427
Software cost 410,257
------------------
1,638,190
Accumulated depreciation (359,563)
------------------
$ 1,278,627
==================
</TABLE>
7. REVOLVING LINES OF CREDIT
-------------------------
The Company finances certain of its Loans held for sale through a
$15,000,000 revolving line of credit agreement, effective September 17,
1996, which matures January 31, 1998, and had an outstanding balance of
$792,356 at June 30, 1997. The Company receives funding for approximately
98% of the principal on each Loan it originates or purchases through the
warehouse line. The outstanding principal is collateralized by the
original notes and mortgages and repaid upon their sale. Interest accrues
at the lower of 350 basis points over the Federal Funds rate (6.87% at June
30, 1997) or 150 basis points over the prime interest rate (8.50%, at June
30, 1997) and is due monthly. The agreement stipulates that the bank will
hold the original notes and mortgages for all loans funded under the line
as collateral. Upon sale of the loans, the purchaser will fund the bank
directly and the collateral will be released.
On November 8, 1996 the Company entered into a separate working capital
line of credit (servicing collateralized) for $3,000,000 (increased to
$5,000,000 effective January 1, 1997 and increased to $6,800,000 effective
July 25, 1997) which matures January 31, 1998. The interest rate on the
working capital line of credit is prime plus 2.25%.
In connection with the above borrowings, the Company has agreed to certain
financial covenants regarding tangible net worth, leverage ratios, and
liquidity. The Company is permitted to pay dividends as long as the
financial ratios are maintained.
17
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. REVOLVING LINES OF CREDIT, CONTINUED
------------------------------------
As part of the arrangement to exchange Title I Loans for Fannie Mae
Mortgage-backed securities, Fannie Mae has provided short-term warehouse
funding to Home, on an uncommitted basis, for its Title I Loans and
Mortgage-backed securities exchanged for such Loans. Generally the funding
facilities require repayment with a cost of funds based on 30 day LIBOR
rate, plus 30 basis points to 90 basis points, depending upon whether the
funding is provided for Title I Loans or Mortgage-backed securities.
The composition of the revolving lines of credit was as follows at June 30,
1997:
<TABLE>
<CAPTION>
<S> <C>
Payable to financial institution, warehouse line $ 792,356
Payable to Fannie Mae, funding facilities 20,159,322
Payable to financial institution, working capital line 5,000,000
--------------
$ 25,951,678
==============
</TABLE>
7. PAYABLE UNDER SECURITIES LOAN AGREEMENTS
----------------------------------------
Amounts payable under securities loan agreements represent secured
borrowings used to finance certain Fannie Mae Mortgage-backed securities
held by the Company. At June 30, 1997, the agreements were scheduled to
mature in 25 days with the ability to renew for another 30 days at the
option of the secured lender. The interest rate for the financing is
variable based upon LIBOR. At June 30, 1997 the borrowing rate was 5.95%.
These borrowings were collateralized by Mortgage-backed securities having
an aggregate market value of $4,202,226 as of June 30, 1997.
9. PREFERRED STOCK
---------------
On June 18, 1996, the Company issued 1,500,000 shares of Preferred Stock,
Series A, par value $.01 per share ("Series A Preferred Stock), for the
purchase price of $1.50 per share or an aggregate of $2,250,000. A total
of 1,000,000 shares of the Series A Preferred Stock was purchased by an
unaffiliated entity pursuant to a Preferred Stock Purchase Agreement, dated
May 3, 1996, as amended.
The Series A Preferred Stock has a cumulative annual preferred dividend of
$.18 per share, payable quarterly before any distribution to holders of
Common Stock, with mandatory payment of dividends required for the first
year after issue, and shares of Series A Preferred Stock are convertible at
any time into Common Stock at a conversion rate, subject to certain
18
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
9. PREFERRED STOCK, CONTINUED
--------------------------
adjustments, of one share of Common Stock for each share of Series A
Preferred Stock. The Series A Preferred Stock is redeemable at par, plus
accrued, unpaid dividends, at the option of the Company, at any time after
two years from the date of issuance. Each share of Series A Preferred Stock
is entitled to one vote with respect to all matters submitted to a vote of
the stockholders of the Company, and holders of Series A Preferred Stock
are entitled to vote as a class as provided by law in connection with any
amendment to the Articles of Incorporation or Bylaws of the Company, or any
other corporate action that would adversely affect the holders of Series A
Preferred Stock. Shares of Series A Preferred Stock are entitled to a
liquidation preference of $1.50 per share, plus any accrued, unpaid
dividends, before any distribution to holders of Common Stock upon
dissolution of the Company.
Holders of the Series A Preferred Stock were granted "piggyback"
registration rights covering the shares of Common Stock into which the
Series A Preferred Stock is convertible after nine months from the date of
issuance of the Series A Preferred Stock, which rights terminate after
three years from the date of issuance of the Series A Preferred Stock.
10. INCOME TAXES
------------
The provision (benefit) for income taxes for the three months ended June
30, 1997 is comprised of the following:
<TABLE>
<CAPTION>
<S> <C>
Current:
Federal $ 158,152
State 8,314
-------------
166,466
Deferred benefit (53,200)
-------------
Provision for income taxes $ 113,266
=============
</TABLE>
19
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. INCOME TAXES, CONTINUED
-----------------------
The components of deferred tax assets and liabilities were as follows at
June 30, 1997:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax liabilities:
Depreciation and amortization $ (57,827)
--------------
Deferred tax assets:
Net operating loss carry forwards 73,230
Allowance for credit losses 295,054
Unrealized gain 200,093
--------------
568,377
Valuation allowance (73,230)
--------------
Total deferred tax assets 495,147
Net deferred tax assets $ 437,320
==============
</TABLE>
The reconciliation between the income tax provision and the income tax
expense using the Federal statutory rate for the three months ended June
30, 1997 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Federal tax at statutory rate of 34% $ 110,030
State income taxes, net of federal tax benefit 3,236
-----------
Total income tax provision $ 113,266
===========
</TABLE>
11. GAIN ON SALE OF LOANS
---------------------
Gain on sale of Loans, as defined in Note 2, and the related cost is as
follows for the three month period ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
<S> <C> <C>
Gain on sale of Loans and Mortgage-backed securities $ 1,988,853 $ 1,451,811
Interest-only strip gain 635,896 743,905
------------------ ------------------
2,624,749 2,195,716
Premiums, net (742,751) (657,114)
Transaction costs (2,021) --
------------------ ------------------
Gain on sale of Loans and Mortgage-backed securities $ 1,879,977 $ 1,538,602
================== ==================
</TABLE>
20
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company leases its office space at its corporate headquarters and
eleven branch offices through operating leases expiring through 2001. Rent
expense for the three month periods ended June 30, 1997 and 1996 totaled
$135,885 and $73,137, respectively.
The Company also leases certain office equipment under various capital
leases. The economic substance of these leases is that the Company is
financing the acquisition of the assets through the leases. Required
minimum rental payments for the remaining terms of the leases are as
follows:
<TABLE>
<CAPTION>
Years Ending Capital Leases Operating Leases
------------ --------------- -------------------
<S> <C> <C>
1997 remaining $ 5,348 $ 116,369
1998 30,708 506,399
1999 17,179 506,042
2000 -- 505,487
2001 -- 385,389
Less amount representing interest (5,973) --
--------------- -------------------
$ 47,262 $ 2,019,686
=============== ===================
</TABLE>
The Loans sold by the Company are sold with limited recourse. In the event
that the borrower defaults on its first payment or the Company defaults on
certain customary loan representations and warranties, the Company is
committed to repurchase the Loan. Subject to the availability of FHA
insurance in Home's reserve account as maintained by the FHA, the Company
will submit a claim for 90% of the principal amount and certain interest
and costs of such defaulted Loan to HUD under the Title I program after
exhausting collection efforts as required under the program. The Company
bears the loss for the remaining uninsured 10% portion of the Loan plus any
uncovered interest and costs. See "Allowance for Credit Losses on Loans
Sold" above.
The Company is a party to various lawsuits from time to time, which arise
during the normal course of business. In the opinion of management, the
potential claims against the Company from the lawsuits would not materially
affect the Company's financial position, results of operations, or cash
flows.
Home is required to maintain adjusted net worth, as defined by HUD,
amounting to $250,000. At June 30, 1997, Home had adjusted net worth of
$10,641,113.
21
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
13. STOCK OPTIONS
-------------
In June of 1993, Home issued options to purchase 555 shares of its common
stock at $120 per share to one of its employees. As a result of the
acquisition of HomeCapital, these options were converted into options to
purchase 409,668 shares of HomeCapital stock at $.16 per share. The
options, which are fully exercisable as of June 30, 1997, expire in the
year 2001. No options have been exercised.
Effective March 21, 1996, the Board of Directors of the Company adopted the
HomeCapital Investment Corporation 1996 Stock Option Plan, which was
ratified by stockholder vote on August 16, 1996. The Stock Option Plan
provides that up to 500,000 shares of Common Stock may be issued upon
exercise of options granted under the Stock Option Plan, subject to
adjustment to reflect stock splits, stock dividends, mergers and similar
transactions. At June 30, 1997, options to purchase an aggregate of
490,000 shares of Common Stock had been granted under the Stock Option
Plan. Exercise prices per share range from $3.50 to $11.00.
14. STOCK WARRANTS
--------------
In May 1997, the Board of Directors authorized the issuance of warrants to
acquire 150,000 shares of common stock of the Company at a price of $9.50
per share. The stock warrants were issued to affiliates of an investment
banking firm in connection with the termination by the Company of its
service relationship with the investment banking firm. The warrants are
exercisable upon issuance and expire in May 2002.
15. SEGMENT INFORMATION
--------------------
For the three month periods ended June 30, 1997 and 1996, Title I Loan
origination and production (exclusive of paydowns and repurchases) is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------- ----------------------------
Source of Loan Production Amount % Amount %
----------------------------- -------------- --------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
Correspondent Loans $ 29,948,043 88.4 $ 21,995,430 85.2
Dealer Loans 365,475 1.1 2,280,532 8.8
Direct Loans 3,562,866 10.5 1,534,934 6.0
---------------- ------- ----------------- -------
Total Title I Loans $ 33,876,384 100 $ 25,810,896 100
================ ======= ================= =======
</TABLE>
22
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
15. SEGMENT INFORMATION, CONTINUED
-------------------------------
The Company also originates conventional home improvement and other second
mortgage Loans through arrangements with other lenders on a pre-approved
basis. Total conventional loans originated for the three months ended June
30, 1997 and 1996 were $4,609,262 and $95,285, respectively. At June 30,
1997 and 1996, $195,405 and $37,495, respectively, of conventional loans
were held for sale under firm purchase commitments.
Prior to October 1995, the Company sold all of its loans held for sale on a
servicing released basis. In October 1995, the Company commenced selling
the majority of its loan production to its then warehouse lender on a
servicing retained basis. Subsequently, the Company was approved as a
Seller/Servicer with Fannie Mae to sell Title I Loans to Fannie Mae, and in
June 1996, began selling the majority of its Title I Loans to Fannie Mae on
a servicing retained basis. In March 1997, the Company began exchanging
the majority of its Title I Loans for Fannie Mae Mortgage-backed securities
and, until May 1997, the Company simultaneously sold these Mortgage-backed
securities through Fannie Mae to secondary market investors. In May 1997,
the Company began to retain these Fannie Mae Mortgage-backed securities
after exchanging its Title I Loans. The following is a summary of Loans
and Mortgage-backed securities sold during the three month periods ended
June 30, 1997 and 1996:
<TABLE>
<CAPTION>
Title I Loans Sold:
1997 1996
-------------------------------------- ----------------- -----------------
<S> <C> <C>
Servicing released $ 678,900 $ --
Servicing retained:
Financial institutions -- 22,623,956
Fannie Mae--Whole loan sales 438,899 3,573,462
Fannie Mae--Mortgage-backed
securities sold 12,172,337 --
----------------- -----------------
12,611,236 26,197,418
Total Title I Loans Sold $ 13,290,136 $ 26,197,418
================= =================
</TABLE>
23
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
15. SEGMENT INFORMATION, CONTINUED
------------------------------
The principal balance of Loans and Mortgage-backed securities serviced at
June 30, 1997 totaled approximately $186,889,000, representing 9,051
underlying Title I Loans. The Company began servicing loans in October
1995. The servicing function is performed by a non-affiliate of Home at a
negotiated fee. The following table summarizes the delinquency experience
of the Title I Loan portfolio serviced by Home:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------
Dec. 31 1997
----------------------------------------
DELINQUENCY DATA: 1996 Mar. 31 June 30
------------ --------------- -------------
<S> <C> <C> <C>
Delinquencies in Serviced Loan
Portfolio
(at period end):
31-60 days .......................... 2.23% 2.89% 3.26%
61-90 days .......................... 1.21 1.22 1.36
91 days and over..................... 1.88 1.71 2.00
------------ -------------- -------------
Total 5.32% 5.82% 6.62%
============ ============ =============
Serviced Loan Portfolio
at period end (dollars in thousands) $ 126,194 $ 158,259 $ 186,889
</TABLE>
The above delinquency information excludes Loans that are in the claims
pending status. At June 30, 1997, claims were pending on 368 loans with an
approximate balance of $8,033,000.
The preceding table generally indicates that Home is experiencing
increasing delinquency rates on its serviced loan portfolio as a whole.
Although such increases to date have been within the parameters anticipated
by Home, there can be no assurance that such rates will not continue to
increase.
Because delinquencies and losses typically occur months or years after a
loan is originated, data relating to delinquencies and losses as a
percentage of the current portfolio can understate the risk of future
delinquencies, losses or defaults. There is no assurance that the
delinquency, default and loss experience with respect to any of the Loans
serviced will be comparable to the experience reflected above for assets
originated and serviced by Home. The rate of delinquencies, defaults and
losses with respect to the Loans will also be affected by, among other
things, interest rate fluctuations and national and regional economic
conditions.
24
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
16. SUBSEQUENT EVENTS
-----------------
The Company's shares of common stock were approved for listing on the
Nasdaq SmallCap Market and began trading on this market on July 17, 1997.
On August 6, 1997, the Company completed a bulk acquisition of $15.8
million principal amount of Title I Loans from Title West Mortgage, Inc.
The majority of these Title I Loans have been exchanged by the Company for
Fannie Mae Mortgage-backed securities that have been retained by the
Company. This bulk acquisition of loans represents the first transaction of
this type and size for the Company, and has provided the Company with an
immediate increase in its current portfolio of Title I Loans and Mortgage-
backed securities. The Company obtained the working capital to complete
this bulk acquisition from its existing financing sources.
25
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The Company conducts its operations entirely through its wholly-owned
subsidiary, HomeOwners Mortgage and Equity, Inc. ("Home"). See Note 1 to Notes
to Financial Statements.
Home is a specialized consumer finance company organized in 1993 to originate,
purchase, sell and service home improvement loans and other second mortgage
loans secured by residential property. Home primarily finances Title I home
improvement loans ("Title I Loans") and conventional consumer and home equity
loans that may fund a variety of borrower needs ("Conventional Loans"). Loans
originated or purchased by Home are financed through warehouse credit lines and
then sold to the Federal National Mortgage Association ("Fannie Mae"), secondary
market mortgage investors and other financial institutions. Home originates and
purchases its loans through two primary sources: wholesale (i.e., "Correspondent
Loans"), and retail (i.e., "Direct Loans"). Home purchases Correspondent Loans
through a national network of mortgage company loan correspondents
("Correspondents"). Home originates Direct Loans through direct mail
solicitation of individual homeowners ("Direct Loans"), through referrals from
home improvement contractors, located principally in the Southwestern and
Western regions of the United States, and through special marketing arrangements
with home improvement supply and installation firms ("Corporate Alliances") to
provide loans to customers of these firms.
In November 1996, Home entered into a Corporate Alliance with Builders Square,
Inc., under a marketing agreement which provides for Home to market, on an
exclusive basis, its loan products through the Builders Square stores. The
agreement provided for the initial implementation of Home's marketing efforts in
a limited number of Builders Square stores during a test period of nine months.
Effective May 31, 1997, Home and Builders Square agreed to an early conclusion
of the test period and to proceed under the marketing agreement with a 3-year
term and the implementation of Home's marketing efforts on a national basis to
Builders Square customers in its 162 stores in the United States.
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1997 ("1997 PERIOD"), COMPARED TO NINE MONTHS ENDED
JUNE 30, 1996 ("1996 PERIOD"):
A comparison of results of operations of the 1997 period to the 1996
period reflects the significant growth the Company has attained during the past
year in both loan production volume and geographical diversity of its area of
operations. The Company produced $114.0 million of loans during the 1997 period
compared to $68.1 million of loans during the 1996 period, an increase of 67%.
This increase is a result of an increase in the number of active Correspondents,
increase in the level of Direct Loan and Conventional Loan originations and an
expansion in the number of states served. At June 30, 1997, the Company had
approximately 214 approved Correspondents compared to approximately 120 approved
Correspondents at June 30, 1996. As of June 30, 1997, the Company was
authorized by state regulatory agencies for loan originations in 42 states.
This represented an increase of 21 states during the nine months ended June 30,
1997. Additionally, during the nine months ended June 30, 1997, the Company
opened 7 new
26
<PAGE>
branch offices. New offices were opened in Seattle, Denver, Chicago, Pittsburgh,
Cleveland, Las Vegas, and Atlanta. Further, the Phoenix office was expanded to
accommodate direct mail loan solicitations. Of the $114.0 million of loans
produced in the 1997 period, $107.8 million were Title I Loans and $6.2 were
Conventional Loans.
The following table sets forth certain data regarding loans produced
by the Company during the 1997 period and the 1996 period:
<TABLE>
<CAPTION>
Nine Month Period
Ended June 30,
1997 1996
--------------- --------------
<S> <C> <C>
Principal amount of loans:
Correspondents:
Title I $ 95,018,419 $ 50,187,306
Conventional 6,172,986 2,268,771
--------------- --------------
Total Correspondent 101,191,405 52,456,077
Dealers - Title I 4,776,766 12,250,558
Direct - Title I 8,053,689 3,399,582
--------------- --------------
Total $ 114,021,860 $ 68,106,217
=============== ==============
Number of loans:
Correspondents:
Title I 4,062 2,260
Conventional 244 92
--------------- --------------
Total Correspondent 4,306 2,352
Dealers - Title I 372 878
Direct - Title I 467 193
--------------- --------------
Total 5,145 3,423
=============== ==============
</TABLE>
Total revenues increased 230% to $15.4 million for the 1997 period from
$4.7 million for the 1996 period. The increase was primarily the result of the
increased volume of loans produced and a change in the manner in which the
Company disposes of its loans, which during the 1997 period included the sale of
the majority of its Title I Loans to Fannie Mae on a servicing retained basis.
27
<PAGE>
The following table sets forth the principal balance of loans sold and
related gain on sale data for the 1997 period and the 1996 period:
<TABLE>
<CAPTION>
Nine Month Period
Ended June 30,
1997 1996
------------------ ------------------
Principal amount of loans and
Mortgage-backed securities
sold:
<S> <C> <C>
Title I $ 88,069,982 $ 63,335,986
Conventional 6,046,071 2,168,572
------------------ ------------------
Total $ 94,116,053 $ 65,504,558
================== ==================
Gain on sale of loans and Mortgage-
backed securities $ 3,874,384 $ 4,506,637
Interest-only strip gain 10,159,897 1,132,852
----------------- ------------------
14,034,281 5,639,489
Premiums, net (3,524,819) (1,541,234)
Transaction costs (10,717) --
----------------- ------------------
Gain on sale of loans and Mortgage-
backed securities $ 10,498,745 $ 4,098,255
================= ==================
Gain on sale of loans and Mortgage-
backed securities as a percentage
of principal balance of loans sold 11.15% 6.25%
</TABLE>
Gain on sale of loans and Mortgage-backed securities increased 156% to
$10,498,745 during the 1997 period from $4,098,255 during the 1996 period. The
increase in gain on sale of loans and Mortgage-backed securities was primarily
attributable to the increased volume of loans produced and the change in the
disposition strategy for such loans. During the 1997 period, the Company has
primarily disposed of its Title I Loans through either whole loan sales on a
cash basis to Fannie Mae or the exchange or swap of loans for Fannie Mae
Mortgage-backed securities with the simultaneous sale of these securities. In
each case the Company has retained a servicing fee that exceeds the estimated
cost of servicing the loans and has recorded an Interest-only strip receivable
attributable to this excess servicing fee. The estimated fair value from the
creation of this asset is recorded as a component of the total gain on sale in
the Consolidated Statement of Operations.
Prior to January 1, 1997, the cashflows from the servicing of assets were
classified as Loan servicing income. With the adoption of SFAS 125, the
cashflows are allocated to the reduction of the Interest-only strip receivable,
Loan servicing income, and Interest-investments. The Company performs periodic
valuation analysis of its Interest-only strip receivable, which may affect
future income generated by the asset.
28
<PAGE>
On January 1, 1997, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities"--FASB Statement No. 125, became
effective and established new accounting rules regarding the computation of gain
on sale of loans and MBS. SFAS No. 125 requires certain reclassifications of the
Company's balance sheet and statement of operations. As a result of adopting the
statement, the Excess servicing receivable previously shown on the Balance Sheet
as of December 31, 1996 has been renamed as Interest-only strip receivable, and
classified as an "available for sale" security. In calendar 1997, the Interest-
only strip receivables arising from sale of Loans and Mortgage-backed securities
in calendar 1997 are classified as "trading" securities. The Company recorded as
revenue a net unrealized gain of $483,424 on the valuation of the Interest-only
strip receivable for Loans and Mortgage-backed securities sold during the nine
months ended June 30, 1997.
In May 1997, the Company began to retain the Fannie Mae Mortgage-backed
securities created from the exchange or swap of its Title I Loans. At June 30,
1997, approximately $19.8 million in par value of Mortgage-backed securities are
classified as trading securities. The fair value of these securities at June
30, 1997 totaled approximately $21.7 million. An unrealized gain on the
valuation of investment securities of $1,862,559 is reflected in the
Consolidated Statement of Operations for the nine month period ended June 30,
1997 which includes $1,379,135 related to the Mortgage-backed securities that
have been retained by the Company, net of capitalized loan origination cost.
With respect to Loans exchanged for Fannie Mae Mortgage-backed securities that
have been retained by the Company, the Company does not record as additional
revenue the net unrealized gain on the valuation of the Interest-only strip
receivable for those Loans. The Company has retained these Mortgage-backed
securities in anticipation of resecuritizing the majority of them through the
issuance of asset backed securities in the fourth quarter of fiscal 1997.
Following the resecuritization of these Fannie Mae Mortgage-backed securities,
the Company will retain the residual interest and will be entitled to the excess
of the cash flow from these Mortgage-backed securities over the payments on the
asset backed securities issued to prospective investors.
Interest income-loans increased 160% to $844,551 during the 1997 period
from $324,370 during the 1996 period. The increase was primarily the result of
the increase in the size of the portfolio of assets serviced and loans held for
sale.
As a result of the adoption of SFAS No. 125, amounts previously reported as
loan servicing income were reported as Interest-investments beginning January 1,
1997. The investment interest income reflects the accrued income associated with
the Interest-only strip receivable and the interest income associated with
Mortgage-backed securities owned at June 30, 1997. Interest-investments
increased to $1.6 million in the 1997 period primarily due to the increase in
Interest-only receivable and Mortgage-backed securities.
The provision for credit losses increased from $20,000 in the 1996 period
to $775,000 in the 1997 period primarily in relation to the overall increase in
loan production during the 1997 period. The provision for credit losses is
based upon periodic analysis of the portfolio, economic conditions and trends,
historical credit loss experience, the borrowers' ability to repay, collateral
values, and estimated FHA insurance recoveries on loans originated and sold. The
increase in the provision for credit losses was due primarily to the increase in
loan production during the nine
29
<PAGE>
months ended June 30, 1997. Presently, upon sale of loans by Home to investors,
including the exchange by Home of Title I Loans to Fannie Mae for Mortgage-
backed securities, the purchasing investor assumes all credit risk, except for
first payment default, fraud, a breach of customary loan representations and
warranties and certain other limited exceptions. If Home changes, or secondary
market conditions cause Home to change, its loan disposition strategy in a
manner that increases its credit risk, then the provision for credit losses as a
percentage of loans originated can be expected to increase. For example, future
changes to its loan disposition strategy that may subsequently increase Home's
credit risk could include the following possibilities: Home may elect or may be
required to retain the risk of loss on the uninsured portion of Title I Loans
exchanged for Fannie Mae Mortgage-backed securities; Home may securitize its
loans other than through the exchange of loans for Fannie Mae Mortgage-backed
securities; or Home may retain its loans in portfolio for a longer period prior
to their securitization.
Salaries and employee benefits increased 118% to $3,377,389 for the 1997
period from $1,552,810 for the 1996 period, primarily as a result of an increase
in the pay rates of employees and the increase in hiring professionals required
for growth. During the 1997 period, in order to provide adequate infrastructure
for anticipated future growth, the Company increased the number of new hire
professional staff relative to clerical staff hirings. This decision to increase
the hiring of senior professionals resulted in increased employment costs when
compared to the 1996 period when new hires were predominately clerical
personnel. At the end of the 1997 period, the Company had 103 employees as
compared to 49 at the end of the 1996 period.
Servicing costs consists primarily of the costs related to servicing the
portfolio of Loans sold on a servicing retained basis. The servicing function is
performed by a non-affiliate of the Company at a negotiated fee. Servicing costs
increased 422% from $134,309 in the 1996 period to $701,142 in the 1997 period.
The increase was a result of increased loans serviced from 3,346 at June 30,
1996 to 9,051 at June 30, 1997.
Loan costs, consisting primarily of costs for credit reports, flood
reports, title reports, inspection fees, and the provision for credit losses,
increased 484% to $1,175,582 for the 1997 period from $201,402 for the 1996
period due primarily to the provision for credit losses of $775,000, as well as
the increase in loan production of $45.9 million from the 1996 period to 1997.
Total general and administrative expenses increased 133% to $2,649,577 for
the 1997 period from $1,138,223 for the 1996 period. The increase was primarily
as a result of increases in postage and courier costs, telecommunication costs,
stationary and office supplies expenses, travel costs, advertising expenses, and
depreciation expense. The increase in these costs was primarily attributable to
the increased volume of loan originations, loans serviced, and the new offices
opened.
30
<PAGE>
Occupancy costs increased to $442,871 in the 1997 period from $226,406
in the 1996 period, or 95.6%, due primarily to the expansion of lease space at
the corporate offices, opening of the new branch offices, and the expansion of
the office space related to the direct mail solicitation operations.
Interest expense increased 230% to $923,895 for the 1997 period from
$279,705 for the 1996 period. The increase was the direct result of increased
loan originations, the corresponding increase in the average outstanding balance
of the warehouse credit lines, and the financing of the Interest-only strip
receivable and Mortgage-backed securities.
The provision for income taxes in the 1997 period was $2,161,778 as
compared to $330,000 for the 1996 period. For the nine month period ended June
30, 1997, the Company had income before income taxes of $6,160,982 as compared
to $1,142,418 for the nine month period ended June 30, 1996. A valuation
allowance of $73,230 on deferred tax assets remains at the end of the 1997
period due to net operating loss carryforwards generated by the Company, which
it may not be able to utilize in future periods. The Company and Home file
separate Federal and state income tax returns.
The effective income tax provision for the 1997 period was 35%. This
percentage differs from the federal statutory rate of 34% due primarily to the
effect of state income taxes.
As a result of the foregoing, net income increased to $3,999,204 ($.44 per
common share) for the 1997 period from $812,418 ($(.313) per common share) for
the 1996 period.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's operations require continued access to financing sources.
The Company's primary operating cash requirements arise from the cost of loan
originations and payments of operating expenses, interest and income taxes.
Loan originations are initially funded principally through the Company's
warehouse lines of credit pending the sale of loans in the secondary market or
pending the securitization of Mortgage-backed securities. Substantially all of
the loans originated by the Company are sold. Net cash used in the Company's
operating activities for the nine months ended June 30, 1997 and 1996 was
approximately $26.8 million and $2.1 million, respectively. The net cash from
the Company's operating activities resulted primarily from the proceeds from the
sale of loans totaling $94.2 million and $68.6 million for the nine month
periods ended June 30, 1997 and 1996, respectively.
Adequate credit facilities and other sources of funding, including the
ability of the Company to sell loans or Mortgage-backed securities in the
secondary market, are essential for the continuation of the Company's loan
origination operations. At June 30, 1997, the Company had a $15 million
warehouse line of credit with a commercial bank (the "Warehouse Line"). The
Warehouse Line matures January 31, 1998. At June 30, 1997, approximately $0.8
million was outstanding under the Warehouse Line and $14.2 million was
available. The Warehouse Line bears interest at the lower of prime plus 1.5% per
year or the Federal funds rate plus 3.5% per year and is collateralized by loans
pledged under the Warehouse Line. The agreement with the
31
<PAGE>
lender requires the Company to maintain a minimum adjusted tangible net worth of
$7.3 million. In addition, the Company maintains a $5.0 million working capital
line of credit (the "Working Capital Line", increased to $6.8 million effective
July 25, 1997) with the same lender, which is collateralized by a pledge of the
Company's Interest-only strip receivable. The Working Capital Line has a 12-
month revolving credit period, bears interest, payable monthly, at prime plus
2.25% per year, and requires the Company to maintain a minimum adjusted tangible
net worth of $7.3 million. Borrowings under the Working Capital Line cannot
exceed the lesser of (i) the book value of the Interest-only strip receivable or
(ii) 50% of the appraised value of the Interest-only strip receivable as
determined by the lender. While the Company believes that it will be able to
maintain its existing credit facilities and renew or obtain replacement
financing as its credit arrangements mature and obtain additional financing for
its operations, if necessary, there can be no assurance that such financing will
be available on favorable terms, or at all.
As part of the arrangement with Fannie Mae to exchange Title I Loans for
Mortgage-backed securities, Fannie Mae has provided short-term warehouse funding
to Home, on an uncommitted basis, for Title I Loans and Mortgage-backed
securities exchanged for such Loans. Generally the funding facilities require
repayment with a cost of funds based on a 30 day LIBOR rate plus 30 to 90 basis
points, depending upon whether the funding is provided for Title I Loans or
Mortgage-backed securities. At June 30, 1997, the principal amount of the
Company's obligations to Fannie Mae under these funding facilities was
approximately $4.0 million for Mortgage-backed securities that have been issued
by Fannie Mae and registered under the Federal Reserve book entry system and was
approximately $17.0 million for Mortgage-backed securities that have been issued
with Fannie Mae but not registered under the Federal Reserve book entry system.
These repayment obligations of the Company are secured by Mortgage-backed
securities with a fair value of approximately $21.7 million at June 30, 1997.
Fannie Mae also has provided warehouse funding to the Company for its Title I
Loans held for sale. At June 30, 1997, the principal amount of the Company's
obligations under this funding facility was approximately $3.2 million for Title
I Loans delivered and available for sale to Fannie Mae.
Until October 1995, the Company's principal source of liquidity was the
sale of whole loans on a servicing released basis. While this enabled the
Company to meet its operating cash requirements, it limited the Company's growth
potential and the revenue generated from its loan originations. To remedy this
situation, the Company embarked on a strategy in fiscal 1995 that enabled the
Company to retain the servicing rights and the related servicing fee interest-
only spread from its loan originations and to consider other disposition
strategies for its loan production, such as sales to Fannie Mae under the Title
I Loan program and the securitized sale of loan pools in the secondary market.
The Company was approved as a Seller/Servicer under the Fannie Mae Title I Loan
purchase program in March 1996 and expanded its warehouse financing and raised
additional capital to support loan sales to Fannie Mae.
In March 1997, the Company began selling Title I Loans to Fannie Mae under
the Fannie Mae Title I Mortgage-backed securities program. Under the program,
the Company exchanged its Title I Loans for Mortgage-backed securities and
simultaneously sold these Mortgage-backed securities for a premium through
Fannie Mae. In addition to the cash premium on sale, the Company also recorded
an Interest-only strip receivable derived from the loan servicing fee that
ranged from 125 basis points to 250 basis points. While these "swap and sell"
transactions
32
<PAGE>
generated cash proceeds that in certain instances may be sufficient to satisfy
the current liquidity demands for the Company, these transactions also generate
current tax liability attributable to the net gain recognized from the sale of
the related Title I Loans for federal income tax purposes.
In May 1997, the Company changed its disposition strategy in anticipation
of a resecuritization of the Fannie Mae Mortgage-backed securities. Rather than
"swap and sell" transactions, the Company began to exchange its Title I Loans
for Fannie Mae Mortgage-backed securities and hold the Mortgage-backed
securities for future resecuritization in "swap and hold" transactions. The
Company is seeking to resecuritize the majority of its Fannie Mae Mortgage-
backed securities in a transaction that will not be treated as a sale for
federal income tax purposes, and, therefore, will cause the deferral of federal
and state income tax liability, until the cash interest income attributable to
the retained interest in the Mortgage-backed securities is received over the
term of the resecuritization transaction. At June 30, 1997, Mortgage-backed
securities with a fair value of approximately $21.7 million are being held
primarily for a future resecuritization.
During the nine month period ended June 30, 1997, the Company sold $83.9
million in loans and Mortgage-backed securities to Fannie Mae, retaining
servicing rights and the Interest-only strip receivable. The Company intends to
continue exchanging substantially all of its qualified Title I Loans for Fannie
Mae Mortgage-backed securities that the Company expects to retain and finance
under short-term credit facilities, until it is able to resecuritize such
Mortgage-backed securities. The resecuritization of its Mortgage-backed
securities would necessarily produce additional liquidity demands, including
without limitation, the use of proceeds to satisfy any overcollateralization or
reserve requirements and to pay the issuance costs, and could require additional
financing facilities and additional capital to satisfy any increased liquidity
demands.
While the increase in its Warehouse Line, Working Capital Line, Fannie Mae
funding facilities, and additional capital have enabled the Company to
significantly increase its loan originations and Loan sales and Mortgage-backed
securities transactions to Fannie Mae, such transactions, with the retention of
the Interest-only strip receivable, create additional short-term cash
requirements. Loan sales and "swap and sell" Mortgage-backed securities
transactions, as described above, generate current federal and state tax
liability from the net gain on sale for income tax purposes, even though the
cash interest income from the related Interest-only strip receivable will be
received over the life of the Loans. Accordingly, in order for the Company to
continue the growth of its loan originations and servicing portfolio, the
Company may require additional capital through the sale of debt and/or equity
securities to fund its operating cash requirements .
Although the Mortgage-backed securities currently held by the Company
represent readily marketable securities, the retention of these securities until
they can be resecuritized will increase the short-term liquidity demands on the
Company. The Company is receiving funding under its financing facilities that
generally exceeds the par value of the Mortgage-backed securities, but these
financing proceeds are less than the total value that would otherwise be
received from the current sale of these Mortgage-backed securities. In
addition, during the period of time in which the Company holds the Mortgage-
backed securities, it retains interest-rate risk which may affect
33
<PAGE>
the ultimate gain on disposition from a resecuritization transaction, as well as
the risk associated with a potential margin call on the financing of the
Mortgage-backed securities.
During the 1997 period, the Company used $777,624 in funds for investing
activities primarily for furniture, fixtures and equipment, including $135,000
for the further development of the Company's proprietary computer software,
known as Lot$Pro, and provided $27.7 million in funds from its financing
activities through increased usage of its revolving lines of credit and the
issuance of Common Stock through the exercise of warrants. The Company expects
to spend approximately $250,000 for additional furniture, fixtures and equipment
through the remainder of fiscal 1997 for the expansion of its lending network,
and approximately $100,000 for additional upgrades and enhancements to its
computer system.
There can be no assurance that the Company will continue to have access to
current and future financing facilities and other sources of funding that will
provide the Company with sufficient funding to continue its loan origination
operations and loan disposition strategies. The failure of the Company to have
access to, or to obtain sufficient funding from, these financing and other
funding sources will in all likelihood impair the Company's ability to grow its
business and implement its business strategy, and may have a material adverse
effect on the financial condition, results of operations and liquidity of the
Company.
SAFE HARBOR STATEMENT
- ---------------------
Some of the statements contained in this document that are not historical facts
are forward looking statements. Actual results and transactions may differ
materially from those projected or anticipated in the forward looking
statements. These forward looking statements involve risks and uncertainties,
including but not limited to the following risks: changes in the performance of
the financial markets, in the demand for and market acceptance of the Company's
loan products, and in general economic conditions, including interest rates; the
presence of competitors with greater financial resources and the impact of
competitive products and pricing; the effect of the Company's policies; and the
continued availability to the Company of adequate funding sources. Investors
are also directed to risks discussed elsewhere in this document and in other
documents filed by the Company with the Securities and Exchange Commission.
34
<PAGE>
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
Effective May 6, 1997, the Company issued warrants to purchase an
aggregate of 150,000 shares of the common stock of the Company at an
exercise price of $9.50 per share. The warrants were issued to
affiliates of an investment banking firm in connection with the
termination by the Company of its relationship with the investment
banking firm. The warrants are exercisable upon issuance and expire
on May 6, 2002. Each affiliate has represented to the Company in
writing that the affiliate is an "accredited investor" as defined in
Rule 501(a) under Regulation D promulgated under the Securities Act of
1933 ("Act") and agreed to restrictions on transfer of the warrants,
as well as the shares of common stock issuable upon exercise of the
warrants, in the absence of registration or an exemption from
registration under the Act. Accordingly, the transaction was
considered to be exempt under Sections 3(b), 4(2) and 4(6) of the Act
and Rules 505 and 506 of Regulation D. The Company has agreed, under
certain circumstances, to register the shares of common stock issuable
upon exercise of the warrants in conjunction with the offering of
shares of common stock by the Company pursuant to certain forms of
registration under the Act.
On June 1, 1997, the Company granted options to purchase an aggregate
of 40,000 shares of common stock of the Company under the HomeCapital
Investment Corporation 1996 Stock Option Plan ("Plan"). The options
were granted to an executive officer of the wholly-owned subsidiary of
the Company at an exercise price of $8.875 per share in accordance
with the Plan. The options are not transferable, and shares of common
stock issuable upon exercise the options are restricted against
transfer in the absence of registration or exemption from registration
pursuant to the Act. Issuance of the options was exempt from
registration under the Act pursuant to Sections 3(b), 4(2) and 4(6) of
the Act, and Rules 505 and 506 of Regulation D promulgated under the
Act.
35
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit 10* Sixth Amendment to the Warehouse Loan Agreement, dated
as of May 15, 1997, among the Company, Home, and
Guaranty Federal Bank, F.S.B.
Exhibit 27.1* Financial Data Schedule (Electronic Filing Only)
Exhibit 27.2 Restated Financial Data Schedule for the nine months
ended June 30, 1996 (Electronic Filing Only)
__________
*Filed with Registrant's Quarterly Report on Form 10-QSB for the
period ended June 30, 1997, and incorporated herein by this reference.
(b) Reports on Form 8-K: None.
36
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HOMECAPITAL INVESTMENT CORPORATION
(Registrant)
Date: August 27, 1997 By: /s/ John W. Ballard
--------------------------------------------
JOHN W. BALLARD, President,
Chairman of the Board of
Directors and Chief Executive
Officer
37
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET OF JUNE 30, 1996 AND STATEMENTS OF OPERATIONS FOR THE PERIODS THEN
ENDED.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 1,106,372
<SECURITIES> 0
<RECEIVABLES> 4,143,442
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,376,986
<PP&E> 702,414
<DEPRECIATION> 158,613
<TOTAL-ASSETS> 7,032,042
<CURRENT-LIABILITIES> 4,115,460
<BONDS> 0
0
15,000
<COMMON> 72,257
<OTHER-SE> 2,829,325
<TOTAL-LIABILITY-AND-EQUITY> 7,032,042
<SALES> 5,741,591
<TOTAL-REVENUES> 6,082,198
<CGS> 0
<TOTAL-COSTS> 4,939,780
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 280,504
<INCOME-PRETAX> 1,142,418
<INCOME-TAX> 330,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 812,418
<EPS-PRIMARY> (.313)<F1>
<EPS-DILUTED> 0
<FN>
<F1>Restated for earnings (loss) per common share computation.
</FN>
</TABLE>
