<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended December 31, 1997.
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
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 January 31, 1998, there were 8,271,860 shares of common stock of the
issuer outstanding.
Transitional Small Business Disclosure Format (check one): Yes_____
No X
---
The Exhibit Index appears on page 25.
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION
Index to Form 10-QSB
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheet
As of December 31, 1997 (Unaudited) 3
Consolidated Statements of Operations
For the Three Months Ended December 31, 1997
and 1996 (Unaudited) 4
Consolidated Statements of Cash Flows
For the Three Months Ended December 31, 1997
and 1996 (Unaudited) 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis or
Plan of Operation. 16
PART II. OTHER INFORMATION
Item 2. Changes in Securities. 25
Item 6. Exhibits and Reports on Form 8-K. 25
SIGNATURES
</TABLE>
2
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash $ 4,202
Cash deposits, restricted 579,745
Loans held for sale, net 11,613,355
Mortgage-backed securities 14,009,680
Interest-only strip receivables 27,405,521
Retained interest in securitized assets 1,358,544
Prepaid expenses and other assets 3,541,463
Furniture, fixtures and equipment, net 1,342,180
---------------------
Total assets $ 59,854,690
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank overdraft $ 1,888,942
Note payable 33,344
Revolving lines of credit 36,877,050
Capital lease obligations 34,532
Accrued expenses and other liabilities 4,297,649
Allowance for credit losses on loans sold 1,519,315
Income taxes payable 64,198
Deferred tax liabilities 2,788,918
---------------------
Total liabilities 47,503,948
=====================
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; 1,458,333 shares of cumulative
convertible Series A stock issued and outstanding
(liquidation value of $2,187,500) 14,583
Common stock, $.01 par value; 100,000,000 shares
authorized; 8,268,527 shares issued and
outstanding 82,685
Additional paid-in capital 6,215,054
Retained earnings 7,331,741
Valuation of securities available for sale, net of tax (1,237,821)
Notes receivable for stock issued (55,500)
---------------------
Total stockholders' equity 12,350,742
---------------------
Total liabilities and
stockholders' equity $ 59,854,690
=====================
</TABLE>
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 Three Months Ended December 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
-------------------- -----------------
Revenues:
<S> <C> <C>
Gain on sale of loans and mortgage-backed securities $ 4,961,613 $ 4,787,120
Net unrealized gain on valuation of investment
securities 2,482,301 -
Interest - loans 870,434 364,443
Interest - investments 917,554 1,235
Loan servicing income - 422,482
Other income 165,818 37,069
---------------------- -------------------
Total revenues 9,397,720 5,612,349
---------------------- -------------------
Costs and Expenses:
Salaries and employee benefits 3,144,891 779,949
Servicing costs 416,267 179,909
Loan costs 893,577 340,828
General and administrative 1,545,604 497,625
Occupancy 196,589 111,325
Interest 1,093,192 243,476
---------------------- -------------------
Total costs and expenses 7,290,120 2,153,112
---------------------- -------------------
Income before income taxes 2,107,600 3,459,237
Provision for income taxes 800,888 1,215,077
---------------------- -------------------
Net income $ 1,306,712 $ 2,244,160
====================== ===================
Income per common share:
Basic:
Earnings per common share $ .15 $ .29
====================== ===================
Weighted average number of common shares
outstanding 8,247,711 7,627,365
====================== ===================
Diluted:
Earnings per common share $ .13 $ .23
====================== ===================
Weighted average number of common shares
outstanding 10,217,567 9,738,657
====================== ===================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended December 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
-------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,306,712 $ 2,244,160
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 146,846 265,108
Deferred tax (benefit) provision 1,121,802 (110,088)
Provision for credit losses 600,000 200,000
Issuance of warrants and options 81,345 -
Gain on sales of loans and mortgage-backed securities (4,961,613) (4,787,120)
Unrealized gain from valuation of trading account
securities (2,576,689) -
Loss on impairment of interest-only strip receivables 94,388 -
Proceeds from sales of loans and mortgage-backed
securities 64,009,605 36,258,086
Purchase and origination of loans (57,529,273) (38,618,789)
Change in operating assets and liabilities:
Decrease in cash deposits, restricted 1,044,037 237,646
Decrease in accrued interest receivable 114,985 10,289
Increase in prepaid and other assets (1,162,728) (323,698)
Increase in accrued expenses and other liabilities 639,670 109,988
------------------ ------------------
Net cash provided by (used in) operating activities 2,929,087 (4,514,418)
------------------ ------------------
Cash flows from investing activities:
Purchase of furniture, fixtures and equipment (96,494) (218,075)
Payments received on interest-only strip receivables 1,101,162 -
------------------ ------------------
Net cash provided by (used in) investing activities 1,004,668 (218,075)
------------------ ------------------
Cash flows from financing activities:
Increase in revolving lines of credit 2,484,467 4,373,690
Decrease in payable under securities loan agreements (7,673,000) -
Payments on note payable (16,666) (24,999)
Proceeds from exercise of Series A warrants - 949,831
Proceeds from exercise of other warrants - 92,700
Bank overdraft 1,345,420 -
Payments on capital lease obligations (5,921) (2,896)
Preferred stock dividends (68,055) (68,054)
------------------- ------------------
Net cash provided by (used in) financing activities (3,933,755) 5,320,272
------------------- ------------------
Increase in cash - 587,779
Cash, beginning of period 4,202 343,484
--------------------- --------------------
Cash, end of period $ 4,202 $ 931,263
===================== ====================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
--------------------
THE COMPANY AND SUBSIDIARY
--------------------------
The consolidated financial statements include the accounts of HomeCapital
Investment Corporation, a public holding company, ("HomeCapital"),
incorporated in the state of Nevada on October 8, 1980, and its wholly-
owned subsidiary, HomeOwners Mortgage & Equity, Inc. ("Home", collectively,
the "Company").
DESCRIPTION OF OPERATIONS
-------------------------
The Company, through wholesale and retail sources, originates and purchases
home improvement loans, and other second lien mortgage loans ("Loans") and
disposes of such Loans through direct sale, securitization or conversion to
Mortgage-backed securities. 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. The Company also holds approval from
HUD under the FHA Title II Program; however the Company had not originated
any Loans pursuant to that Program as of December 31, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
ADJUSTMENTS TO INTERIM FINANCIAL STATEMENTS
-------------------------------------------
The interim financial statements of the Company at December 31, 1997 and
for the three month periods ended December 31, 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.
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, Retained interest, and Interest-only
strip receivables. Concentration of credit risk and mitigating factors
regarding Loans, Mortgage-backed securities, Retained interest, and
Interest-only strip receivables are described in the Notes to the Financial
Statements included in the annual report of the Company on Form 10-KSB for
the year ended September 30, 1997.
6
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
-----------------------------------------------------
The Company places its cash in various major financial institutions thereby
limiting the exposure of the Company's cash to concentrations of credit
risk. See Note 11.
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 December 31, 1997, the Company had outstanding
commitments to extend credit or purchase loans in the amounts of
approximately $26,739,000.
Credit concentrations of the Company's loans serviced which give rise to
Interest-only strip receivables are discussed in Note 11.
EARNINGS PER SHARE
------------------
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS
No. 128 specifies the computation, presentation, and disclosure
requirements for earnings per share. SFAS No. 128 is effective for periods
ending after December 15, 1997, thus the Company adopted SFAS No. 128 for
the three month period ended December 31, 1997. Previously reported
earnings per share have been restated to conform to SFAS No. 128.
The computation of basic earnings per share is based on the weighted
average number of common shares outstanding during the period. Net earnings
used in the computation of basic earnings per share are reduced by
preferred stock dividend requirements. Diluted earnings per share assumes
conversion of the Company's 1,458,333 outstanding shares of Preferred
Stock, Series A, and the exercise of outstanding stock options and stock
warrants.
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.
RISKS AND UNCERTAINTIES
-----------------------
The Company's Interest-only strip receivables are based upon estimates of
future cash flows, which consider assumptions as to rates of prepayment and
defaults of Title I Loans. There is a reasonable possibility that changes
in the value of the Interest-only strip receivables could occur in the
short-term and that the changes could be material to the Company's
financial statements.
7
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. LOANS HELD FOR SALE
-------------------
Loans held for sale consisted of the following at December 31, 1997:
<TABLE>
<S> <C>
Title I Loans $ 9,663,738
Conventional loans 1,662,099
Capitalized loan origination fees
and costs, net 537,518
--------------------
11,863,355
Allowance for credit losses (250,000)
--------------------
Total $ 11,613,355
====================
</TABLE>
4. ALLOWANCE FOR CREDIT LOSSES
---------------------------
Combined changes in the allowance for credit losses for Loans held for sale
and Loans sold consisted of the following for the three months ended
December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Balance at beginning of period $ 1,169,315
Provisions for credit losses 600,000
-------------------
Balance at end of period $ 1,769,315
===================
Components of the allowance at December 31:
Allowance for credit losses on Loans held for sale $ 250,000
Allowance for credit losses on Loans sold 1,519,315
-------------------
$ 1,769,315
===================
</TABLE>
8
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. INTEREST-ONLY STRIP RECEIVABLE
------------------------------
The activity in Interest-only strip receivables is summarized as follows
for the three month period ended December 31:
<TABLE>
<CAPTION>
1997
-------------------
<S> <C>
Balance, October 1 $ 21,720,249
Additions 6,661,368
Payment received, net of amortization (1,101,162)
Unrealized gains on trading securities 913,529
Write-down for impairment (94,388)
Valuation allowance on available for
sale securities (694,075)
-------------------
Balance, December 31 $ 27,405,521
===================
</TABLE>
The components of Interest-only strip receivables at December 31, 1997, are
classified as follows:
<TABLE>
<CAPTION>
1997
-------------------
<S> <C>
Available for sale securities $ 13,044,586
Trading securities 14,360,935
-------------------
Total $ 27,405,521
===================
</TABLE>
Net income for the three month period ended December 31, 1997 includes a
pre-tax charge of $94,388 relating to an impairment loss on Interest-only
strip receivables. The impairment loss on Interest-only strip receivables
resulted from increased rates of principal prepayments and defaults on
certain loan pools serviced by the Company.
The serviced Loan portfolio, which includes Loans sold to investors on a
servicing retained basis and Loans retained by the Company, aggregated
approximately $268,351,000 at December 31, 1997.
9
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. REVOLVING LINES OF CREDIT
-------------------------
The Company finances certain of its Loans held for sale through a
$20,000,000 revolving line of credit agreement, which matures June 30,
1998, and had an outstanding balance of $3,601,920 at December 31, 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 300 basis points over the federal
funds rate (5.84% at December 31, 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 funds the bank directly and the collateral is released.
The Company also has a working capital line of credit (servicing
collateralized) for up to $16,666,600 which matures June 30, 1998, and had
an outstanding balance of $15,320,468 at December 31, 1997. The agreement
requires interest only payments monthly. At December 31, 1997, the interest
rates on the two components of the working capital line ranged from 9.5%
(30 day LIBOR plus 375 basis points) to 10.25% (30 day LIBOR plus 450 basis
points). The weighted average interest rate for this facility at December
31, 1997, was 9.81%.
Under terms of the working capital line of credit, the bank determines at
its sole discretion the collateral value as of the end of each fiscal
quarter using information provided by an outside consulting firm. As of
December 31, 1997, the lender determined, based upon such information, that
a principal repayment of approximately $940,000 was required under terms of
its credit agreement. The lender has agreed to be repaid an initial payment
of $300,000 which was made on February 12, 1998, and with the balance due
on or before March 31, 1998.
In connection with both borrowings, the Company has agreed to certain
covenants, including without limitation, regarding tangible net worth,
adjusted tangible net worth, leverage ratios, and liquidity. The Company is
permitted to pay dividends as long as the financial ratios are maintained.
As of December 31, 1997, the Company was in violation of certain financial
covenants which have been waived by the bank.
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.
10
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. REVOLVING LINES OF CREDIT, CONTINUED
------------------------------------
The composition of the revolving lines of credit was as follows at December
31, 1997:
<TABLE>
<S> <C>
Payable to financial institution, warehouse line $ 3,601,920
Payable to Fannie Mae, funding facilities 17,954,662
Payable to financial institution, working capital line 15,320,468
-----------------
$ 36,877,050
=================
</TABLE>
7. 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. Cash
dividends on the Series A Preferred Stock have been paid on the first full
four quarters since the issuance date of the Series A Preferred Stock. At
December 31, 1997, dividends in the amount of $143,512 are in arrears and
payable.
During the three month period ended December 31, 1997, 41,667 shares of
Series A Preferred Stock were converted to Common Stock.
8. INCOME TAXES
------------
The reconciliation between the income tax provision and the income tax
expense using the federal statutory rate is as follows for the three month
periods ended December 31:
<TABLE>
<CAPTION>
1997 1996
------------------- -----------------
<S> <C> <C>
Federal tax at statutory rate of 34% $ 716,584 $ 1,176,141
State income taxes, net of federal tax benefit 78,662 37,270
Expenses not deductible for tax purposes 5,642 1,666
------------------- -----------------
Total income tax provision $ 800,888 $ 1,215,077
=================== =================
</TABLE>
9. GAIN ON SALE OF LOANS
---------------------
Gain on sale of Loans and the related cost is as follows for the three
month periods ended December 31:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Gain on sale of Loans and Mortgage-backed securities:
Cash $ 659,430 $ 326,131
Interest-only strip gain 4,764,249 5,659,559
----------------- -----------------
5,423,679 5,985,690
Premiums, net (2,532,723) (1,293,154)
Origination fees 2,095,071 103,281
Transaction costs (24,414) (8,697)
----------------- -----------------
Gain on sale of Loans and Mortgage-backed securities $ 4,961,613 $ 4,787,120
================= =================
</TABLE>
11
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
9. GAIN ON SALE OF LOANS, CONTINUED
--------------------------------
During the three month period ended December 31, 1997, the Company
completed a securitization of Fannie Mae Mortgage-backed securities. HOME
Securitization Trust I, a Delaware business trust, issued and sold
$39,193,258 of Asset Backed Bonds at 7.261% directly to an investor. The
Bonds are collateralized by $39,589,150 of Fannie Mae Mortgage-backed
securities with an average pass-through rate of 12.24%. The Company
retained the residual interest from the securitization and is entitled to
the excess spread from the interest received on the Fannie Mae Mortgage-
backed securities over the interest paid on the Bonds, as well as any
remaining Mortgage-backed securities after the Bonds are paid in full. In
addition, the Company earns an interest spread from the FHA Title I loans
underlying the Mortgage-backed securities. Also during the same period, the
Company sold $6.9 million of Fannie Mae Mortgage-backed securities with an
average interest rate of approximately 9.7% for total sales proceeds of
approximately $7.5 million.
10. STOCK OPTIONS
-------------
HomeCapital issued options to an employee in June 1993 to purchase 409,668
shares of Common Stock at $0.16 per share. The options, which are fully
exercisable as of December 31, 1997, expire in the year 2001. None of these
options have been exercised.
Effective March 21, 1996, the Board of Directors of HomeCapital adopted the
HomeCapital Investment Corporation 1996 Stock Option Plan, which was
ratified by stockholder vote on August 16, 1996. The 1996 Stock Option Plan
was amended in September 1997, to increase the number of shares reserved
for issuance under the Plan. The Stock Option Plan provides that up to
1,000,000 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 December 31,
1997, options to purchase an aggregate of 879,500 shares of Common Stock
had been granted and are outstanding under the Stock Option Plan, including
options to purchase an aggregate of 404,500 shares of Common Stock that
were granted in October, 1997. Exercise prices per share range from $3.50
to $11.00. No options have been exercised.
Under the 1996 Stock Option Plan, the Company may grant incentive and non-
qualified options to eligible participants that vest in accordance with a
vesting schedule, as determined in the sole discretion of the Compensation
Committee of the Company's Board of Directors. The 1996 Stock Option Plan
provides for a term of 10 years. All of the options have an exercise price
equal to or greater than the fair market value of the stock at grant date.
The options granted vest ratably over a period of three to five years
beginning on the first anniversary of the date of grant.
12
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. STOCK OPTIONS, CONTINUED
------------------------
In addition to the employee stock options described above, HomeCapital
granted 250,000 stock options in fiscal 1997 to nonemployees rendering
financial advisory services to the Company. The options vested upon
issuance, have a five-year term, an exercise price of $8.125, and are
outstanding as of December 31, 1997. The fair value of the stock options of
$655,000 was determined under the Black-Scholes option-pricing model and
will be amortized into expense in equal monthly installments over a two-
year period. During the three month period ended December 31, 1997, a total
of $81,345 was charged to operations.
In addition to the 1996 Stock Option Plan, in September 1997, HomeCapital
established the Non-Employee Director Compensation Plan ("Director Plan").
The Director Plan provides cash compensation and options to purchase Common
Stock of HomeCapital for persons who serve as members of the Board of
Directors of either or both of HomeCapital and Home ("Directors") and who
are not otherwise employed by HomeCapital or Home ("Participants"). The
Director Plan provides for an annual retainer of $10,000 payable each year
immediately following the annual election of a participant as a Director,
or upon the initial election of the Participant as a Director, if not at an
annual meeting of stockholders. Participants will also receive a fee of
$1,000 and reimbursement for accountable expenses in connection with each
meeting of the board of directors attended.
The Director Plan also provides for the granting of non-qualified stock
options to each Participant. The Director Plan authorized the issuance of
options to purchase 15,000 shares of Common Stock of HomeCapital to each
Participant as of the date of election to the Board of Directors and an
annual award of options to purchase 3,000 shares of Common Stock
immediately following the election of each Participant as a Director on the
date of the annual meeting of stockholders.
Options granted under the Director Plan have an exercise price equal to the
fair market value of the Common Stock on the date that the options are
granted. The Director Plan contains provisions for adjustment of the
number of shares available for options and subject to unexercised options
under the Director Plan in the event of stock splits, dividends payable in
Common Stock, business combinations or certain other events. The Board of
Directors has initially reserved up to 250,000 shares of Common Stock for
issuance under the Director Plan.
Each option granted under the Director Plan is exercisable as to 20% of the
shares subject to the option each year for five (5) consecutive years
following the date of grant. Unexercised options shall expire ten (10)
years after the date of grant, and within 180 days after termination of
service as a Director, disability or death of the Participant.
13
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. STOCK OPTIONS, CONTINUED
------------------------
At December 31, 1997, 120,000 options have been granted under this Plan
with an exercise price of $8.375.
11. CONCENTRATIONS
---------------
For the three month periods ended December 31,1997 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>
Correspondent Loans $ 37,704,415 92.6% $ 33,268,968 86.7%
Dealer Loans 9,000 - 2,644,339 6.9
Direct Loans 2,986,095 7.4 2,437,524 6.4
---------------- ------ ---------------- ------
Total Title I Loans $ 40,699,510 100% $ 38,350,831 100%
================ ====== ================ ======
</TABLE>
The Company also originates coventional 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
December 31, 1997 and 1996 were $16,825,327 and $477,529, respectively. At
December 31, 1997 and 1996, $1,662,099 and $60,385, 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 after exchanging its Title I Loans. The following is a summary
of Loans and Mortgage-backed securities sold or created during the three
month periods ended December 31, 1997 and 1996.
14
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
11. CONCENTRATIONS, CONTINUED
-------------------------
<TABLE>
<CAPTION>
Title I Loans Sold or Exchanged: 1997 1996
-------------------------------------------------------------------- -----------------------
<S> <C> <C>
Servicing released $ 691,500 $ 3,381,867
Servicing retained:
Fannie Mae - Whole loan sales 576,605 34,204,839
Fannie Mae - Mortgage-backed
securities sold 7,292,371 -
Fannie Mae - Loans exchanged
for Mortgage-backed securities 12,346,634 -
Asset-backed Securitizations 39,589,150 -
----------------------- -----------------------
59,804,760 34,204,839
----------------------- -----------------------
Total Title I Loans Sold or Exchanged $ 60,496,260 $ 37,586,706
======================= =======================
</TABLE>
As of December 31, 1997, the aggregate outstanding principal balance of all
Title I Loans serviced by HOME totaled approximately $268,351,000,
representing 12,588 loans.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
HomeCapital Investment Corporation, a Nevada corporation (the
"Company" or "Registrant"), is a holding company, which conducts its business
entirely through a wholly-owned subsidiary, HomeOwners Mortgage & Equity, Inc.,
a Delaware corporation ("Home"). All references herein to the Company include
Home, unless the context otherwise requires.
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 or
exchanged for Fannie Mae Mortgage-backed securities. 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 by direct mail solicitation of
individual homeowners, 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.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED DECEMBER 31, 1997 ("1997 PERIOD"), COMPARED TO THREE MONTHS
ENDED DECEMBER 31, 1996 ("1996 PERIOD"):
A comparison of results of operations of the 1997 period to the 1996
period reflects the substantial shift of the business from cash loan sales to
sales of loans to, and creating Mortgage-backed Securities from, Fannie Mae,
with the retention of servicing of the underlying loans. It also 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 $57.5 million of loans during the 1997 period compared to $38.8
million of loans during the 1996 period, an increase of 48%. This change is
primarily a result of an increase in the number of active Correspondents, and
increases in the level of Direct Loan originations and Conventional Loan
originations in the Phoenix direct marketing office. Of the $57.5 million of
loans produced in the 1997 period, $40.7 million were Title I Loans and $16.8
were Conventional Loans. At December 31, 1997, the Company had approximately 214
approved Correspondents compared to approximately 116 approved Correspondents at
December 31, 1996. As of December 31, 1997, the Company was authorized by state
regulatory agencies for loan originations in 44 states.
16
<PAGE>
The following table sets forth certain data regarding loans originated
and purchased by the Company during the three month periods ended December 31,
1997 and 1996:
<TABLE>
<CAPTION>
Three Month Period Ended December 31,
1997 1996
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Principal amount of loans:
Correspondents - Title I $ 37,704,415 65.5% $ 33,268,968 85.7%
Dealers - Title I 9,000 - 2,644,339 6.8
Direct - Title I 2,986,095 5.2 2,437,524 6.3
Conventional 16,825,327 29.3 477,529 1.2
---------------------- ------------ ----------------------- -----------
Total $ 57,524,837 100% $ 38,828,360 100%
====================== ============ ======================= ===========
</TABLE>
Total revenues increased 67% to $9,397,720 for the 1997 period from
$5,612,349 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. Included in revenues for the 1997 period is
$2,482,301 representing the net unrealized gain on valuation of investment
securities, of which $1,663,160 relates to the valuation of Mortgage-backed
securities held at December 31, 1997.
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>
Three Month Period Ended December 31,
1997 1996
----------------------- -----------------------
<S> <C> <C>
Principal amount of loans and
Mortgage backed securities sold:
Title I $ 48,149,627 $ 37,117,100
Conventional 15,332,106 469,606
----------------------- -----------------------
Total $ 63,481,733 $ 37,586,706
======================= =======================
Gain on sale of Loans and Mortgage-
backed securities:
Cash $ 659,430 $ 326,132
Interest-only strip gain 4,764,249 5,659,559
----------------------- -----------------------
Subtotal 5,423,679 5,985,691
Premiums, net (2,532,723) (1,293,154)
Origination fees 2,095,071 103,280
Transaction costs (24,414) (8,697)
----------------------- -----------------------
Gain on sale of Loans and Mortgage-
backed securities $ 4,961,613 $ 4,787,120
======================= =======================
</TABLE>
Gain on sale of loans and Mortgage-backed securities increased 3.6% to
$4,961,613 during the 1997 period from $4,787,120 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 originated. 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-
17
<PAGE>
backed securities and the subsequent securitization of those securities. In each
case the Company has retained an excess interest spread that exceeds the
estimated cost of servicing the loans and has recorded an Interest-only strip
receivable attributable to this excess interest spread. 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. During the 1997 period the
Company originated $16,825,327 in conventional second mortgage loans which
generated in excess of $2 million in fee income. The conventional second
mortgage loans are generally sold to investors on a servicing released basis.
In May 1997, the Company began retaining the Fannie Mae Mortgage-
backed securities created from the exchange or swap of its Title I Loans. The
Company is holding these Mortgage-backed securities in anticipation of an asset
backed securitization in the fourth quarter of fiscal 1997. At December 31,
1997, approximately $14.0 million in Mortgage-backed securities were classified
as trading securities. An unrealized gain on the valuation of investment
securities of $2,482,301 is reflected in the Consolidated Statement of
Operations for the three month period ended December 31, 1997, which includes
$1,663,160 related to the Mortgage-backed securities that have been retained by
the Company, net of capitalized loan origination cost. 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 second quarter of
fiscal 1998. 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 139% to $870,434 during the 1997
period from $364,443 during the 1996 period. The increase was primarily the
result of the increase in the amount of Mortgage-backed securities 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 receivables and the interest
income associated with Mortgage-backed securities owned at December 31, 1997.
Interest-investments increased to $917,554 in the 1997 period primarily due to
the increase in Interest-only strip receivables and Mortgage-backed securities.
The provision for credit losses increased from $200,000 in the 1996
period to $600,000 in the 1997 period primarily in relation to the overall
increase in loan production during the 1997 period and the increase in loan
delinquency rates and first payment defaults 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. 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 by securitizing
or otherwise holding the loans longer in portfolio, 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
18
<PAGE>
of loans for Fannie Mae Mortgage-backed securities; or Home may retain its loans
in portfolio for a longer period prior to their securitization.
The delinquency experience of the Company's loan servicing portfolio
at the respective dates is set forth below.
<TABLE>
<CAPTION>
1997
Dec. 31 -------------------------------------------------------
Delinquency Data: 1996 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Delinquencies in Serviced Loan
Portfolio (At period end):
31-60 days.......................... 2.23% 2.89% 3.26% 5.52% 6.67%
61-90 days.......................... 1.21 1.22 1.36 2.58 3.13
91 days and over.................... 1.88 1.71 2.00 4.67 8.14
----- ---- -------- -------- --------
Total 5.32% 5.82% 6.62% 12.77% 17.94%
===== ==== ======== ======== ========
Serviced Loan Portfolio at period
end (dollars in thousands)
$126,194 $158,259 $186,889 $234,748 $268,351
</TABLE>
Of the $268,351,000 in Title I Loans serviced at December 31, 1997,
$206,574,000 are serviced for Fannie Mae ($77,820,000 Whole loan sales and
$128,754,000 Mortgage-backed securities).
The above delinquency data excludes loans that were pending the
submission of claims for reimbursement under the FHA Title I program, which at
December 31, 1997 included 452 loans with a principal balance of $9,973,000. The
Company calculates its delinquency rates by dividing the amount of delinquent
loans included in the loan servicing portfolio by the aggregate outstanding
principal of the loans in the servicing portfolio. The calculation excludes the
pending claims from the numerator and denominator.
Since the initiation of Title I Loan servicing in October 1995, the
Company has subcontracted with non-affiliated companies to provide all servicing
related activities such as payment collection and processing, investor
reporting, FHA claims filing administration, and workmanship complaint
monitoring.
During fiscal 1997 the Company experienced an increase in the
delinquencies of its serviced loan portfolio, while such loan portfolio was
increasing. In particular, there was a significant increase in the delinquencies
at the end of the fourth quarter of fiscal 1997 in comparison to the third
quarter of fiscal 1997. Accordingly, the Company considered various options to
improve the servicing of its loan portfolio, including the delinquency
performance, and decided to assume the FHA claims filing administration and
workmanship complaint monitoring activities in house. A loan-servicing
department of the Company was established for these activities. In addition, the
Company decided to engage a collection agency to separately perform the
delinquent collection services for all loans that are five days or more
delinquent, and during August 1997 the Company transferred these collection
services from its then existing subservicer to the collection agency. Management
believes that the complexity of transferring these collection services from the
then existing subservicer to the collection agency, including the transfer of
relevant computer data for borrowers, contributed to an increase in
delinquencies during the fourth quarter of fiscal 1997. In addition, management
believes that the separation of the normal payment collection and processing
functions from the delinquent collection functions also contributed to an
increase in delinquencies during the fourth quarter of fiscal 1997.
19
<PAGE>
During the three month period ended December 31, 1997, the Company
reevaluated the separation of the payment processing and delinquent collection
functions and concluded that a new subservicer should be located to perform both
these functions to improve the delinquency performance of the loan portfolio.
Effective December 1, 1997, the Company transferred a majority of its serviced
loan portfolio to a new subservicer to perform these loan-servicing functions.
The Company believes that the transitions related to the transfer of the
collection functions and the subsequent servicing transfer to a new subservicer
have contributed to the increasing delinquencies that have occurred during the
fourth quarter of fiscal 1997 and first quarter of fiscal 1998.
The Company has entered into an incentive servicing fee arrangement
with Litton Loan Servicing, Inc. for collection and processing of loans serviced
by the Company. Litton has significant experience in collecting delinquent
loans, as well as a sophisticated and automated collection process, and will
earn additional fees, if delinquencies in the Company's servicing portfolio are
reduced below specified levels. As a consequence of this arrangement, the
Company believes that improvement in collection results should begin to occur
during the second quarter of fiscal 1998. In the meantime, loan delinquencies
have continued to increase during the first quarter of fiscal 1998, and a
continued period of high delinquencies may occur during the transition period in
which the new subservicer is implementing its collection procedures and
practices with respect to the Company's servicing portfolio.
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.
Salaries and employee benefits increased 303% to $3,144,891 for the
1997 period from $779,949 for the 1996 period, primarily as a result of an
increase in the pay rates of employees, the increase in hiring of professionals
required for growth, and the increase in commissioned sales personnel in the
Phoenix direct marketing office. Commissioned sales personnel costs accounted
for a significant share of the increase in salaries and employment benefits for
the 1997 period. At the end of the 1997 period, the Company had 152 employees,
including 24 commissioned sales personnel, as compared to 66 total employees 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 131% from $179,909 in the 1996 period to $416,267 in
the 1997 period. The increase was a result of increased loans serviced from
6,209 at December 31, 1996 to 12,588 at December 31, 1997, a 103% increase.
Loan costs, consisting primarily of costs for credit reports, flood
reports, title reports, inspection fees, and the provision for credit losses,
increased 162% to $893,577 for the 1997 period from $340,828 for the 1996 period
due primarily to the provision for credit losses of $600,000, as well as the
increase in loan production of $18.7 million from the 1996 period to 1997.
20
<PAGE>
Total general and administrative expenses increased 211% to $1,545,604
for the 1997 period from $497,625 for the 1996 period. The increase was
primarily as a result of increases in legal and professional fees, 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 overall increase in the number of
personnel. Occupancy costs increased to $196,589 in the 1997 period from
$111,325 in the 1996 period, or 77%, due primarily to the expansion of lease
space at the corporate offices, and the expansion of the office space related to
the direct mail solicitation operations.
Interest expense increased 349% to $1,093,192 for the 1997 period from
$243,476 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
receivables and Mortgage-backed securities.
The provision for income taxes in the 1997 period was $800,888 as
compared to $1,215,077 for the 1996 period. For the three month period ended
December 31, 1997, the Company had income before income taxes of $2,107,600 as
compared to $3,459,237 for the three month period ended December 31, 1996.
The effective income tax provision for the 1997 period was 38%. 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 decreased to $1,306,712 ($.13
per share) for the 1997 period from $2,244,160 ($.23 per 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. For the period ended December 31,
1997, the Company sold for cash certain Mortgage-backed securities which were
not deemed desirable for inclusion in a securitization due to their relatively
low coupon rate. The proceeds of approximately $7.5 million on the sale of these
Mortgage-backed securities enabled the Company to pay-off the financing of those
securities and thus reflect positive cash flow on operations. Net cash provided
by the Company's operating activities for the three month period ended December
31, 1997 was approximately $2.9 million as compared to net cash used for the
three month period ended December 31, 1996 of $4.5 million. The net cash from
the Company's operating activities resulted primarily from the proceeds from the
sale of loans and mortgage-backed securities totaling $64 million and $36.3
million for the three month periods ended December 31, 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 December 31, 1997, the Company had a $20 million
warehouse line of credit with a commercial bank (the "Warehouse
21
<PAGE>
Line"). The Warehouse Line matures June 30, 1998. At December 31, 1997,
approximately $3.6 million was outstanding under the Warehouse Line and $16.4
million was available. The Warehouse Line bears interest at 300 base points over
the federal funds rate and is collateralized by loans pledged under the
Warehouse Line. The agreement with the lender requires the Company to maintain a
minimum adjusted tangible net worth of $7.4 million.
The Company also has a working capital line of credit with the same
lender for up to $16.7 million, which matures June 30, 1998, and had an
outstanding balance of $15.3 million at December 31, 1997. At December 31, 1997,
the interest rates on the two components of the working capital line ranged from
9.5% (30 day LIBOR plus 375 basis points) to 10.25% (30 day LIBOR plus 450 basis
points). The weighted average interest rate for this facility at December 31,
1997, was 9.81%.
Under terms of the working capital line of credit, the lender
determines at its sole discretion the collateral value as of the end of each
fiscal quarter using information provided by an outside consulting firm. As of
December 31, 1997, the lender determined, based upon such information, that a
principal repayment of approximately $940,000 was required under terms of its
credit agreement. The lender has agreed to be repaid with an initial payment of
$300,000 which was made on February 12, 1998, and payment of the balance due on
or before March 31, 1998.
In connection with both borrowings, Home has agreed to certain
covenants, including without limitation, regarding tangible net worth, adjusted
tangible net worth, leverage ratios, and liquidity. The Company is permitted to
pay dividends as long as the financial ratios are maintained. As of December 31,
1997, the Company was in violation of certain covenants which have been waived
by the bank.
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.
In connection with the arrangement with Fannie Mae to exchange Title I
Loans for Mortgage-backed securities, Fannie Mae has provided short-term
repurchase funding to Home, on an uncommitted basis, for Title I Loans and
Mortgage-backed securities exchanged for such loans. Generally the repurchase
facilities with Fannie Mae 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 December 31, 1997,
the principal amount of the Company's obligations to Fannie Mae under these
repurchase facilities was approximately $13.6 million for Mortgage-backed
securities that have been issued with Fannie Mae but not registered under the
Federal Reserve book entry system. There was no principal amount outstanding
with respect to Mortgage-backed securities that have been issued by Fannie Mae
and 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 $14.0 million at December 31, 1997. Fannie Mae also has
provided repurchase funding to the Company for its Title I Loans that are held
for sale and intended for sale to Fannie Mae. At December 31, 1997, the
principal amount of the Company's obligations under this repurchase facility was
approximately $4.3 million for Title I Loans delivered and available for sale to
Fannie Mae.
22
<PAGE>
At December 31, 1997, the Company had a bank overdraft of $1,888,942
which is a result primarily of having funded approximately $1,662,000 in
conventional second mortgage loans that were not warehoused or sold to investors
as of December 31, 1997. Subsequent to December 31, 1997, and at January 31,
1998, the bank overdraft was reduced to approximately $200,000. The bank
overdraft at December 31, 1997, underscores the need for the Company to secure
an additional warehouse facility for conventional second mortgage loans and the
need for additional capital for future securitization transactions, growth, and
operating purposes.
During the three month period ended December 31, 1997, the Company
completed its second securitization of Fannie Mae Mortgage-backed securities.
HOME Securitization Trust I issued and sold $39,193,258 of Asset Backed Bonds,
Series 1997-2, at 7.261% directly to an investor. The bonds are collateralized
by $39,589,150 of Fannie Mae Mortgage-backed securities with an average pass-
through rate of 12.24%. The Company retained and recorded an interest-only strip
receivable from the securitization which entitles it to the excess spread from
the interest received on the Fannie Mae Mortgage-backed securities over the
interest paid on the Bonds, as well as a retained interest that entitles it to
any remaining balances in the Mortgage-backed securities after the Bonds are
paid in full. In addition, the Company recorded an Interest-only strip
receivable from the excess servicing fee interest spread from the Title I Loans
underlying these Mortgage-backed securities. Also during the three month period
ended December 31, 1997, the Company sold $6.9 million of Fannie Mae Mortgage-
backed securities with an average interest rate of approximately 9.7% for total
sales proceeds of approximately $7.5 million.
While the increase in its Warehouse Line, Working Capital Line, and
Fannie Mae funding facilities have enabled the Company to significantly increase
its loan production and loan sales, Mortgage-backed securities transactions to
Fannie Mae and asset backed securitizations, such transactions, with the
retention of the Interest-only strip receivable and Residual interests, create
additional short-term cash requirements. Accordingly, in order for the Company
to continue the growth of its loan production and servicing portfolio, the
Company will 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 repurchase facilities with
Fannie Mae 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, the Company retains the interest rate risk, which may
affect 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 provided approximately $1 million
in funds from investing activities primarily through the cash flow associated
with the interest-only strips retained by the Company in connection with loan
dispositions; and during the same period the Company used $3.9 million in its
financing activities for the repayment of repurchase facilities which had
financed the Mortgage-backed securities sold. The Company expects to spend
approximately $800,000 for additional furniture, fixtures and equipment through
the remainder
23
<PAGE>
of fiscal 1998 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
- ---------------------
Statements contained in this document other than historical information are
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. Accordingly, actual results and transactions may differ materially from
those projected or anticipated in the forward looking statements. 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.
24
<PAGE>
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
On October 1, 1997, the Company granted options to purchase an
aggregate of 120,000 shares of Common Stock of the Company under the Non-
Employee Director Compensation Plan ("Director Plan"). The options were granted
to the eight non-employee directors of the Company and Home at an exercise price
of $8.375 per share in accordance with the Director Plan.
On October 15, 1997, the Company granted options to purchase an
aggregate of 104,500 shares of Common Stock of the Company under the HomeCapital
Investment Corporation 1996 Stock Option Plan ("Plan"). The options were granted
to officers and employees of Home at an exercise price of $7.50 per share in
accordance with the Plan. On October 31, 1997, the Company granted additional
options to purchase an aggregate of 300,000 shares of Common Stock of the
Company under the Plan. These options were granted to two executive officers of
Home at an exercise price of $6.625 per share in accordance with the Plan.
The options granted under the Director Plan and the Plan are not
transferable, and shares of Common Stock issuable upon exercise of the options
are restricted against transfer in the absence of registration or exemption from
registration pursuant to the Securities Act of 1933 ("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.
During the three month period ended December 31, 1997, a total of
41,667 shares of Preferred Stock, Series A, were converted into an equal number
of shares of Common Stock. Accrued and unpaid dividends associated with the
Preferred Stock, Series A, through the conversion date were paid to each
converting stockholder. Shares of Common Stock issuable upon conversion of the
Preferred Stock, Series A, are restricted against transfer in the absence of
registration or exemption from registration pursuant to the Securities Act of
1933 ("Act"). Issuance of such shares 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit 11 Statement of Computation of Earnings per Share.
Exhibit 27 Financial Data Schedule (Electronic Filing Only).
(b) Reports on Form 8-K: None.
25
<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)
<TABLE>
<CAPTION>
<S> <C>
Date: February 13, 1998 By: /s/ John W. Ballard
---------------------------------------------
JOHN W. BALLARD, President,
Chairman of the Board of
Directors and Chief Executive
Officer
Date: February 13, 1998 By: /s/ Tommy M. Parker
---------------------------------------------
TOMMY M. PARKER,
Principal Accounting Officer
</TABLE>
26
<PAGE>
EXHIBIT 11
HOMECAPITAL INVESTMENT CORPORATION
EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED DECEMBER 31,
1997 1996
--------------------- -----------------
<S> <C> <C>
BASIC EARNINGS PER COMMON SHARE:
Net income $ 1,306,712 $2,244,160
Less preferred stock dividends (66,580) (68,055)
--------------------- -----------------
Net income for common shareholders $ 1,240,132 $2,176,105
===================== =================
Weighted average shares outstanding during
the period 8,247,711 7,627,365
===================== =================
Basic earnings per common share $ 0.15 $ 0.29
===================== =================
DILUTED EARNINGS PER COMMON SHARE:
Net income for common shareholders $ 1,306,712 $2,244,160
===================== =================
Weighted average shares outstanding during
the period 8,247,711 7,627,365
Common stock equivalents 511,523 611,292
Assume conversion of preferred stock 1,458,333 1,500,000
--------------------- -----------------
Weighted average common shares outstanding 10,217,567 9,738,657
===================== =================
Diluted earnings per common share $ 0.13 $ 0.23
===================== =================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AT DECEMBER 31, 1997 AND STATEMENTS OF OPERATIONS FOR THE PERIOD
THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,202
<SECURITIES> 42,773,745
<RECEIVABLES> 11,863,356
<ALLOWANCES> 250,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,938,881
<DEPRECIATION> 596,701
<TOTAL-ASSETS> 59,854,690
<CURRENT-LIABILITIES> 0
<BONDS> 0
82,685
0
<COMMON> 14,583
<OTHER-SE> 12,253,474
<TOTAL-LIABILITY-AND-EQUITY> 59,854,690
<SALES> 4,961,613
<TOTAL-REVENUES> 9,397,720
<CGS> 0
<TOTAL-COSTS> 7,290,120
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 600,000
<INTEREST-EXPENSE> 1,093,192
<INCOME-PRETAX> 2,107,600
<INCOME-TAX> 800,888
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,306,712
<EPS-PRIMARY> .15
<EPS-DILUTED> .13
</TABLE>
