SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-9977
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Maryland 86-0611231
(State or Other Jurisdiction) (I.R.S.Employer
of Incorporation or Organization) Identification No.)
5333 North 7th Street,Suite 219 85014
Phoenix, Arizona (Zip Code)
(Address of Principal Executive Offices)
(602) 265-8541
(Registrant's Telephone Number,Including Area Code)
Not Applicable
Former Name,Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No .
---
As of November 3, 1995; 9,716,517 shares of Homeplex Mortgage Investments
Corporation common stock were outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1 Financial Statements
<TABLE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
As Of September 30, 1995 and December 31, 1994
(Dollars In Thousands Except Share Data)
(Unaudited)
<CAPTION>
Sept. 30, Dec. 31,
1995 1994
--------- --------
<S> <C> <C>
ASSETS
Real estate loans.................................................................... $ 4,177 $ 9,260
Short-term investments............................................................... 9,962 -
Residual interests................................................................... 5,995 7,654
Funds held by Trustee................................................................ 5,958 6,720
Cash and cash equivalents............................................................ 2,081 6,666
Other assets......................................................................... 432 850
--------- ---------
Total Assets......................................................................... $ 28,605 $ 31,150
======== ========
LIABILITIES
Long-term debt....................................................................... $ 8,810 $ 11,783
Accounts payable and other liabilities............................................... 1,211 1,416
Accrued interest payable............................................................. 86 115
Dividend payable..................................................................... - 194
---------- ---------
Total Liabilities.................................................................... 10,107 13,508
-------- --------
Contingencies
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; 50,000,000 shares authorized;
issued and outstanding - 9,875,655 shares.......................................... 99 99
Additional paid-in capital........................................................... 84,046 84,046
Cumulative net loss.................................................................. (23,998) (24,854)
Cumulative dividends................................................................. (41,239) (41,239)
Treasury stock - 159,138 shares ..................................................... (410) (410)
--------- ---------
Total Stockholders' Equity........................................................... 18,498 17,642
-------- ---------
Total Liabilities and Stockholders' Equity........................................... $ 28,605 $ 31,150
======== =========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF NET INCOME (LOSS)
For The Three and Nine Months Ended September 30, 1995 and 1994
(Dollars In Thousands Except Per Share Data)
(Unaudited)
<CAPTION>
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
--------------- ---------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME
Interest income on real estate loans.............. $ 223 $ 297 $ 1,420 $ 698
Income (loss) from residual interests............. 275 629 1,025 (20)
Other income...................................... 209 133 443 220
--------- --------- ---------- ---------
Total Income (Loss)............................... 707 1,059 2,888 898
--------- --------- ---------- ---------
EXPENSES
Interest.......................................... 206 314 684 1,106
General, administrative and other................. 443 336 1,348 1,152
----------- ---------- ---------- ---------
Total Expenses.................................... 649 650 2,032 2,258
----------- ---------- ---------- ---------
Net Income (Loss)................................. $ 58 $ 409 $ 856 $ (1,360)
=========== ========= ========== =========
SHARE DATA
Net Income (Loss) Per Share....................... $ .01 $ .04 $ .09 $ (.14)
=========== ========== =========== ==========
Weighted Average Number Of Shares
Of Common Stock And Common
Stock Equivalents Outstanding................... 9,747,514 9,716,517 9,736,441 9,721,977
=========== ========== ========== ==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For The Nine Months Ended September 30, 1995
(Dollars In Thousands)
(Unaudited)
<CAPTION>
Additional Cumulative
Number Par Paid-In Net Income Cumulative Treasury
Of Shares Value Capital (Loss) Dividends Stock Total
--------- ----- ------- ---------- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994.......... 9,875,655 $99 $84,046 $(24,854) $(41,239) $(410) $17,642
Net income............................ - - - 856 - - 856
--------- ---- ------- -------- -------- ----- -------
Balance at September 30, 1995......... 9,875,655 $99 $84,046 $(23,998) $(41,239) $(410) $18,498
========= === ======= ======== ======== ===== =======
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Nine Months Ended September 30, 1995 and 1994
Increase (Decrease) In Cash
(Dollars In Thousands)
(Unaudited)
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................................................... $ 856 $ (1,360)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
(Increase) decrease in other assets............................................... 337 (369)
Increase (decrease) in accounts payable and other liabilities..................... (205) 13
Amortization of debt costs........................................................ 81 180
Decrease in accrued interest payable.............................................. (29) (68)
Net write-downs on residual interests............................................. - 1,244
Amortization of hedging costs..................................................... - 96
--------- ---------
Net Cash Provided by (Used In) Operating Activities.................................. 1,040 (264)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in short-term investments................................................... (9,962) -
Principal payments received on real estate loans..................................... 7,708 433
Real estate loans funded............................................................. (2,625) (4,978)
Amortization of residual interests................................................... 1,659 4,986
Decrease in funds held by Trustee.................................................... 762 1,908
--------- ---------
Net Cash Provided By (Used in) Investing Activities.................................. (2,458) 2,349
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments made on long-term debt............................................ (2,973) (6,999)
Dividends paid....................................................................... (194) (292)
Repurchases of common stock.......................................................... - (17)
--------- ---------
Net Cash Used In Financing Activities................................................ (3,167) (7,308)
--------- ---------
Net Decrease In Cash................................................................. (4,585) (5,223)
Cash And Cash Equivalents At Beginning Of Period..................................... 6,666 16,247
--------- ---------
Cash And Cash Equivalents At End Of Period........................................... $ 2,081 $ 11,024
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest............................................................... $ 632 $ 994
========= =========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(Unaudited)
NOTE 1 - ORGANIZATION
Homeplex Mortgage Investments Corporation, a Maryland corporation, (the
Company) commenced operations in July 1988. As described in Note 4 the Company
has purchased interests in mortgage certificates securing collateralized
mortgage obligations (CMOs) and interests relating to mortgage participation
certificates (MPCs) (collectively residual interests). Since December 1993 the
Company has originated various loans secured by real estate (see Note 3).
The accompanying interim financial statements do not include all of the
information and disclosures generally required for annual financial statements.
In the opinion of management, however, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three and nine months ended September 30,
1995 and 1994 are not necessarily indicative of the results that may be expected
for the entire year. These financial statements should be read in conjunction
with the December 31, 1994 financial statements and notes thereto.
NOTE 2 - GENERAL AND SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Homeplex
Mortgage Investments Corporation and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Income Taxes
The Company has elected to be taxed as a real estate investments trust
(REIT) under the Internal Revenue Code. As a REIT, the Company must distribute
annually at least 95% of its taxable income to its stockholders.
At December 31, 1994, the Company has available, for income tax purposes,
a net operating loss carryforward of approximately $58,000,000. Such loss may be
carried forward, with certain restrictions, for up to 15 years to offset future
taxable income, if any. Until the tax loss carryforward is fully utilized or
expires, the Company will not be required to pay dividends to its stockholders
except for income that is deemed to be excess inclusion income.
The income (loss) reported in the accompanying financial statements is
different than taxable income (loss) because some income and expense items are
reported in different periods for income tax purposes. The principal differences
relate to the amortization of residual interests and the treatment of stock
option expense.
Residual Interests
Interests relating to mortgage participation certificates and residual
interest certificates are accounted for as described in Note 4.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and certificates of
deposit with maturities of less than three months.
Amortization of Hedging
The cost of the Company's LIBOR ceiling rate agreements (see Note 7) were
amortized using the straight-line method over the lives of the agreements. Other
expense includes $96,000 related to amortization of hedging costs for the nine
months ended September 30, 1994.
Net Income (Loss) Per Share
Primary net income (loss) per share is calculated using the weighted
average shares of common stock outstanding and common stock equivalents. Common
stock equivalents consist of dilutive stock options. Net income (loss) per share
is the same for both primary and fully diluted calculations.
Short-Term Investments
At September 30, 1995, short-term investments consist of a Treasury Bill
with a face amount of $10,000,000, maturity date of October 26, 1995 and an
estimated yield to maturity of 5.54%.
Reclassification
Certain balances in the prior year have been reclassified to conform to
the current year's presentation.
NOTE 3 - REAL ESTATE LOANS
<TABLE>
The following is a summary of real estate loans at September 30, 1995:
<CAPTION>
Interest Payment Principal and
Description Rate Terms Carrying Amount (1)
----------- -------- ----------------------------- -------------------
<S> <C> <C> <C>
First Deed of Trust on 16% Interest only monthly, principal $ 940,000
33 acres of land in due October 31, 1996; may be
Scottsdale, Arizona. extended for one year under cer-
tain terms and conditions.
First Deed of Trust on 16% Interest only monthly, principal 2,272,000
33 acres of land in due November 21, 1995.
Tempe, Arizona.
First Deed of Trust on 16% Interest only monthly, principal 965,000
21.4 acres of land in due January 6, 1996; may be ex-
Tempe, Arizona. tended for one year under certain
terms and conditions.
-----------
$ 4,177,000
===========
(1) Also represents cost for federal income tax purposes.
</TABLE>
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(Unaudited)
At September 30, 1995, all of the Company's loans are secured by
properties located in Arizona. As a result of this geographic concentration,
unfavorable economic conditions in Arizona could increase the likelihood of
defaults on these loans and affect the Company's ability to protect the
principal and interest on such loans following foreclosures upon the real
properties securing such loans.
NOTE 4 - RESIDUAL INTERESTS
The Company owns residual interests in collateralized mortgage
obligations (CMOs) and residual interests in mortgage participation certificates
(MPCs) (collectively residual interests) with respect to which elections to be
treated as a real estate mortgage investment conduit (REMIC) have been made.
Residual Interest Certificates
The Company owns 100% of the residual interest certificates representing
the residual interests in five series of CMOs secured by mortgage certificates
and cash funds held by trustee. The CMOs have been issued through Westam
Mortgage Financial Corporation (Westam) or American Southwest Financial
Corporation (ASW). The mortgage certificates securing the CMOs all have fixed
interest rates. Certain of the classes of CMOs have fixed interest rates and
certain have interest rates that are determined monthly based on the London
Interbank Offered Rates (LIBOR) for one month Eurodollar deposits, subject to
specified maximum interest rates.
Each series of CMOs consists of several serially maturing classes
collateralized by mortgage certificates. Generally, principal payments received
on the mortgage certificates, including prepayments on such mortgage
certificates, are applied to principal payments on the classes of CMOs in
accordance with the respective indentures. Scheduled payments of principal and
interest on the mortgage certificates securing each series of CMOs and
reinvestment earnings thereon are intended to be sufficient to make timely
payments of interest on such series and to retire each class of such series by
its stated maturity. Certain series of CMOs are subject to redemption according
to specific terms of the respective indentures.
The Company's residual interest certificates entitle the Company to
receive the excess, if any, of payments received from the pledged mortgage
certificates together with reinvestment income thereon over amounts required to
make debt service payments on the related CMOs and to pay related administrative
expenses of the REMICs. The Company also has the right, under certain
conditions, to cause an early redemption of the CMOs. Under the early redemption
feature, the mortgage certificates are sold at the then current market price and
the CMOs repaid at par value. The Company is entitled to any excess cash flow
from such early redemptions. The conditions under which such early redemptions
may be elected vary but generally cannot be done until the remaining outstanding
CMO balance is less than 10% of the original balance.
Interests In Mortgage Participation Certificates
The Company owns residual interests in REMICs with respect to three
separate series of Mortgage Participation Certificates (MPCs) issued by the
Federal Home Loan Mortgage Corporation (FHLMC) or by the Federal National
Mortgage Association (FNMA). The Company's MPC residual interests entitle the
Company to receive its proportionate share of the excess (if any) of payments
received from the mortgage certificates underlying the MPCs over principal and
interest required to be passed through to the holders of such MPCs. The Company
is not entitled to reinvestment income earned on the underlying mortgage
certificates, is not required to pay any administrative expenses related to the
MPCs and does not have the right to elect early termination of any of the MPC
classes. The mortgage certificates underlying the MPCs all have fixed interest
rates. Certain of the classes of the MPCs have fixed interest rates and certain
have interest rates that are determined monthly based on LIBOR or based on the
Monthly Weighted Average Cost of Funds (COFI) for Eleventh District Savings
Institutions as published by the Federal Home Loan Bank of San Francisco,
subject to specified maximum interest rates.
The following summarizes the Company's investment in residual interests
at September 30, 1995:
Company's
Type Of Company's Percentage
Series Investments Amortized Cost Ownership
------ ----------- -------------- ----------
(In Thousands)
Westam 1 Residual Interest Certificate $ 819 100.00%
Westam 3 Residual Interest Certificate 34 100.00%
Westam 5 Residual Interest Certificate 238 100.00%
Westam 6 Residual Interest Certificate 28 100.00%
ASW 65 Residual Interest Certificate 2,694 100.00%
FHLMC 17 Interest in MPCs 158 100.00%
FNMA 1988-24 Interest in MPCs 1,350 20.20%
FNMA 1988-25 Interest in MPCs 674 45.07%
------
$5,995
======
The following summarizes the Company's proportionate interest in the
aggregate assets and liabilities of the eight residual interests at September
30, 1995 (in thousands):
Assets:
Outstanding Principal Balance of Mortgage Certificates..........$ 377,057
Funds Held By Trustee and Accrued Interest Receivable........... 11,154
---------
$ 388,211
=========
Range of Stated Coupon of Mortgage Certificates..............9.0% - 10.5%
Liabilities:
Outstanding Principal Balance of CMOs and MPCs:
Fixed Rate ................................................$ 337,024
Floating Rate - LIBOR Based................................... 40,433
Floating Rate - COFI Based.................................... 4,708
---------
Total........................................... 382,165
Accrued Interest Payable........................................ 2,570
---------
$ 384,735
=========
Range of Stated Interest Rates on CMOs and MPCs................0% to 9.9%
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(Unaudited)
The average LIBOR and COFI rates used to determine income from residual
interests were as follows:
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
1995 1994 1995 1994 At Sept. 30, 1995
---- ---- ---- ---- -----------------
LIBOR................ 5.94% 4.65% 6.03% 3.99% 5.88%
COFI................. 5.15% 3.80% 4.91% 3.75% 5.14%
The Company accounts for residual interests using the prospective net
level yield method. Under this method, a residual interest is recorded at cost
and amortized over the life of the related CMO or MPC issuance. The total
expected cash flow is allocated between principal and interest as follows:
1. An effective yield is calculated as of the date of purchase based on
the purchase price and anticipated future cash flows.
2. In the initial accounting period, interest income is accrued on the
investment balance using the effective yield calculated as of the date of
purchase.
3. Cash received on the investment is first applied to accrued interest
with any excess reducing the recorded principal balance of the investment.
4. At each reporting date, the effective yield is recalculated based on
the amortized cost of the investment and the then-current estimate of the
remaining future cash flows.
5. The recalculated effective yield is then used to accrue interest
income on the investment balance in the subsequent accounting period.
6. The above procedure continues until all cash flows from the investment
have been received.
At the end of each period, the amortized balance of the investment should
equal the present value of the estimated cash flows discounted at the
newly-calculated effective yield.
In May 1993 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". SFAS No. 115 is applicable
to debt securities including investments in REMIC residual interests and
requires all investments to be classified into one of three categories: held to
maturity, available for sale, or trading. The Company acquired its residual
interests without the intention to resell the assets. The Company has both the
intent and ability to hold these investments to maturity and believes these
investments meet the "held to maturity" criteria of SFAS No. 115. Under SFAS No.
115, if a residual interest is determined to have other than temporary
impairment, the residual interest is written down to fair value. For the nine
months ended September 30, 1994, the Company incurred net charges of $1,244,000
to record impaired residual interests at fair value. There were no charges for
the nine months ended September 30, 1995.
At September 30, 1995, the estimated prospective net level yield of the
Company's residual interests, in the aggregate, is 23% without early redemptions
or terminations being considered and 49% if early redemptions or terminations
are considered. At September 30, 1995, the estimated fair value of the Company's
residual interests, in the aggregate, approximates the Company's aggregate
carrying value.
The projected yield and estimated fair value of the Company's residual
interests are based on prepayment and interest rate assumptions at September 30,
1995. There will be differences, which may be material, between the projected
yield and the actual yield and the fair value of the residual interests may
change significantly over time.
NOTE 5 - LONG-TERM DEBT
On December 17, 1992, a wholly owned, limited purpose subsidiary of the
Company issued $31,000,000 of Secured Notes under an Indenture to a group of
institutional investors. The Notes bear interest at 7.81% and require quarterly
payments of principal and interest with the balance due on February 15, 1998. In
connection with the financing, the Company paid fees of $635,000 which are
included in other assets in the accompanying consolidated balance sheet and are
being amortized to interest expense over the life of the financing. The Notes
are secured by the Company's residual interests in Westam 1, Westam 3, Westam 5,
Westam 6, ASW 65, FNMA 1988-24 and FNMA 1988-25 (see Note 4), and by Funds held
by the Note Trustee. The Company used $3,100,000 of the proceeds to establish a
reserve fund. The reserve fund, which has a specified maximum balance of
$7,750,000, is to be used to make the scheduled principal and interest payments
on the Notes if the cash flow available from the collateral is not sufficient to
make the scheduled payments. Depending on the level of certain specified
financial ratios relating to the collateral, the cash flow from the collateral
is required to either prepay the Notes at par, increase the reserve fund up to
its $7,750,000 maximum or is remitted to the Company. At September 30, 1995,
Funds held by Trustee consists of $5,419,000 in the reserve fund and $539,000 of
other funds pledged under the Indenture.
NOTE 6 - SHORT-TERM BORROWINGS
Under a revolving line of credit agreement with a bank, the Company may
borrow up to $5,000,000, upon payment of a 1/2% commitment fee with interest
payable monthly at prime plus 1/2%. Such advances are to be secured by certain
of the Company's real estate loans with the amount advanced equal to between 40%
to 60% of the principal amount of the real estate loans pledged. Only real
estate loans approved by the bank are eligible for advances. The agreement
contains certain financial covenants and expires on May 5, 1996. Through
September 30, 1995, the Company has not drawn upon the line of credit.
NOTE 7 - HEDGING
On May 12, 1992, the Company entered into a LIBOR ceiling rate agreement
with a bank for a fee of $245,000. The agreement, which had a term of two years
beginning July 1, 1992, required the bank to pay a monthly amount to the Company
equal to the product of $175,000,000 multiplied by the percentage, if any, by
which actual one-month LIBOR (measured on the first business day of each month)
exceeded 9.0%. Through the expiration of the agreement on July 1, 1994, LIBOR
remained under 9.0% and, accordingly, no amounts were paid under the agreement.
ITEM 2. Management's Discussion and Analysis of Financial Condition, Results of
Operations and Interest Rates and Other Information
-----------------------------------------------------------------------
Results of Operations For The Three And Nine Months Ended
September 30, 1995 and 1994
- ---------------------------------------------------------
The Company had net income of $58,000 or $.01 per share and $856,000 or
$.09 per share, respectively, for the three and nine months ended September 30,
1995 compared to net income of $409,000 or $.04 per share and a net loss of
$1,360,000 or $.14 per share, respectively, for the comparable periods in 1994.
The Company's income from residual interests declined from $629,000 for
the three months ended September 30, 1994 to $275,000 for the comparable quarter
in 1995 primarily due to the declining average balance of the Company's residual
interests. The loss from residual interests of $20,000 for the nine months ended
September 30, 1994 was due to a net charge of $1,244,000 in 1994 to write down
the Company's residual interests as a result of significant mortgage refinancing
activity. See "Interest Rates and Prepayments".
Interest income on real estate loans increased from $698,000 for the nine
months ended September 30, 1994 to $1,420,000 for the comparable period in 1995
due to an increase in activity of the Company's real estate lending program. See
"Liquidity, Capital Resources and Commitments".
The Company's interest expense declined from $314,000 and $1,106,000,
respectively, for the three and nine months ended September 30, 1994 to $206,000
and $684,000 for the comparable periods in 1995 as a result of the Company
reducing its long-term debt.
Liquidity, Capital Resources and Commitments
- --------------------------------------------
The Company raised $80,593,000 in connection with its initial public
offering on July 27, 1988. The proceeds were immediately utilized to purchase
residual interests. Subsequently, through October 1988, the Company purchased an
additional $59,958,000 of residual interests which were initially financed using
a combination of borrowings under repurchase agreements and the Company's bank
line of credit. The Company has not purchased any residual interests since
October 1988.
Since December 1993, the Company has originated real estate loans secured
by various first deeds of trust on real properties located in Arizona. The
Company's loan program seeks higher returns by targeting loan opportunities to
which the Company can respond on a more timely basis than traditional real
estate lenders. At September 30, 1995, all of the Company's loans are secured by
properties located in Arizona. As a result of this geographic concentration,
unfavorable economic conditions in Arizona could increase the likelihood of
defaults on these loans and affect the Company's ability to protect the
principal and interest on such loans following foreclosures upon the real
properties securing such loans. The Company may, in the future, make loans on
properties located outside of Arizona. At September 30, 1995 the Company's real
estate loans outstanding total $4,177,000 and bear interest at 16%, payable
monthly, with all principal due within one year.
On December 17, 1992, a wholly owned limited-purpose subsidiary of the
Company issued $31,000,000 of Secured Notes under an Indenture to a group of
institutional investors. The Notes bear interest at 7.81% and require quarterly
payments of principal and interest with the balance due on February 15, 1998.
The Notes are secured by the Company's residual interests in Westam 1, Westam 3,
Westam 5, Westam 6, ASW 65, FNMA 1988-24 and FNMA 1988-25 and by funds held by
the Note Trustee. The Company used $3,100,000 of the proceeds to establish a
reserve fund. The reserve fund has a specified maximum balance of $7,750,000,
and is to be used to make the scheduled principal and interest payments on the
Notes if the cash flow available from the collateral is not sufficient to make
the scheduled payments. Depending on the level of certain specified financial
ratios relating to the collateral, the cash flow from the collateral is required
to either repay the Notes at par, increase the reserve fund up to its $7,750,000
maximum or is remitted to the Company. At September 30, 1995, $5,958,000 is held
by the Note Trustee in the reserve and other funds under the Indenture.
Under a revolving line of credit agreement with a bank, the Company may
borrow up to $5,000,000, upon payment of a 1/2% commitment fee with interest
payable monthly at prime plus 1/2%. Such advances are to be secured by certain
of the Company's real estate loans with the amount advanced equal to between 40%
to 60% of the principal amount of the real estate loans pledged. Only real
estate loans approved by the bank are eligible for advances. The agreement
contains certain financial covenants and expires on May 5, 1996. Through
September 30, 1995, the Company has not drawn upon the line of credit.
As a real estate investment trust (REIT), the Company is not subject to
income tax at the corporate level as long as it distributes 95% of its taxable
income to its stockholders. At December 31, 1994, the Company has a net
operating loss carryforward, for income tax purposes, of approximately
$58,000,000. This tax loss may be carried forward, with certain restrictions,
for up to 15 years to offset future taxable income, if any. Until the tax loss
carryforward is fully utilized or expires, the Company will not be required to
distribute dividends to its stockholders except for income that is deemed to be
excess inclusion income.
The Company anticipates that future cash flow from operations will be
used for payment of operating expenses and debt service with the remainder, if
any, available for investment in mortgage or real estate related assets. The
Company is also exploring other strategic options including the possible
termination of the REIT status in conjunction with the possible purchase of an
operating company.
Interest Rates and Prepayments
- ------------------------------
One of the Company's major sources of income is its income from residual
interests which consists of the Company's investment in eight real estate
mortgage investment conduits ("REMICs") as described in Note 4 to the financial
statements. The Company's cash flow and return on investment from its residual
interests are highly sensitive to the prepayment rate on the related mortgage
certificates and the variable interest rates on variable rate CMOs and MPCs.
At September 30, 1995, the Company's proportionate share of floating-rate
CMOs and MPCs in the eight REMICs is $40,433,000 in principal amount that pays
interest based on LIBOR and $4,708,000 in principal amount that pays interest
based on COFI. Consequently, absent any changes in prepayment rates on the
related mortgage certificates, increases in LIBOR and COFI will decrease the
Company's net income, and decreases in LIBOR and COFI will increase the
Company's net income. The average LIBOR and COFI rates were as follows:
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
--------------- ---------------
1995 1994 1995 1994 At Sept. 30, 1995
---- ---- ---- ---- -----------------
LIBOR................ 5.94% 4.65% 6.03% 3.99% 5.88%
COFI................. 5.15% 3.80% 4.91% 3.75% 5.14%
On May 12, 1992, the Company entered into a LIBOR ceiling rate agreement
with a bank for a fee of $245,000. The agreement, which had a term of two years
beginning July 1, 1992, required the bank to pay a monthly amount to the Company
equal to the product of $175,000,000 multiplied by the percentage, if any, by
which actual one-month LIBOR (measured on the first business day of each month)
exceeded 9.0%. Through the expiration of the agreement on July 1, 1994, LIBOR
remained under 9.0% and, accordingly, no amounts were paid under the agreement.
The Company's cash flow and return on investment from residual interests
also is sensitive to prepayment rates on the mortgage certificates securing the
CMOs and underlying the MPCs. In general, slower prepayment rates will tend to
increase the cash flow and return on investment on investment from interests.
The rate of principal prepayments on mortgage certificates is influenced by a
variety of economic, geographic, social and other factors. In general,
prepayments of the mortgage certificates should increase when the current
mortgage interest rates fall below the interest rates on the fixed rate mortgage
loans underlying the mortgage certificates. Conversely, to the extent that then
current mortgage interest rates exceed the interest rates on the mortgage loans
underlying the mortgage certificates, prepayments of such mortgage certificates
should decrease. Prepayment rates also may be affected by the geographic
location of the mortgage loans underlying the mortgage certificates, conditions
in mortgage loan, housing and financial markets, the assumability of the
mortgage loans and general economic conditions.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Changes in Securities
Not applicable
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable
ITEM 5. Other Information
Not applicable
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf by the undersigned
thereunto duly authorized.
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
November 3, 1995
By /s/JAY R. HOFFMAN
--------------------------------------
Jay R. Hoffman
President, Chief Financial Officer
and a Duly Authorized Officer
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