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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 March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-9977
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Maryland 86-0611231
(State or Other Jurisdiction) (I.R.S.Employer
of Incorporation or Organization) Identification No.)
5333 North 7th Street,Suite 219 85014
Phoenix, Arizona (Zip Code)
(Address of Principal Executive Offices)
(602) 265-8541
(Registrant's Telephone Number,Including Area Code)
Not Applicable
Former Name,Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No .
As of May 7, 1996; 9,716,517 shares of Homeplex Mortgage Investments Corporation
common stock were outstanding.
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1 Financial Statements
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
As Of March 31, 1996 and December 31, 1995
(Dollars In Thousands Except Per Share Data)
(Unaudited)
March 31, Dec. 31,
1996 1995
-------- --------
ASSETS
Real estate loans .................................. $ 3,599 $ 4,048
Short-term investments ............................. 9,082 8,969
Funds held by Trustee .............................. 5,249 5,638
Residual interests ................................. 4,985 5,457
Cash and cash equivalents .......................... 3,091 3,347
Other assets ....................................... 517 357
-------- --------
Total Assets ....................................... $ 26,523 $ 27,816
======== ========
LIABILITIES
Long-term debt ..................................... $ 6,828 $ 7,819
Accounts payable and other liabilities ............. 1,097 1,182
Accrued interest payable ........................... 66 76
Dividend payable ................................... -- 291
-------- --------
Total Liabilities .................................. 7,991 9,368
-------- --------
Contingencies
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share;
50,000,000 shares authorized;
issued and outstanding - 9,875,655 shares ........ 99 99
Additional paid-in capital ......................... 84,046 84,046
Cumulative net loss ................................ (23,673) (23,757)
Cumulative dividends ............................... (41,530) (41,530)
Treasury stock - 159,138 shares .................... (410) (410)
-------- --------
Total Stockholders' Equity ......................... 18,532 18,448
-------- --------
Total Liabilities and Stockholders' Equity ......... $ 26,523 $ 27,816
======== ========
See notes to consolidated financial statements.
2
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF NET INCOME
For The Three Months Ended March 31, 1996 and 1995
(Dollars In Thousands Except Per Share Data)
(Unaudited)
1996 1995
---------- ----------
INCOME
Interest income on real estate loans ................. $ 190 $ 575
Income from residual interests ...................... 248 415
Other income ......................................... 196 113
---------- ----------
Total Income ......................................... 634 1,103
---------- ----------
EXPENSES
Interest ............................................. 162 250
General, administrative and other .................... 388 391
---------- ----------
Total Expenses ....................................... 550 641
---------- ----------
Net Income ........................................... $ 84 $ 462
========== ==========
SHARE DATA
Net Income Per Share ................................. $ .01 $ .05
========== ==========
Weighted Average Number Of Shares Of Common Stock
And Common Stock Equivalents Outstanding ........... 9,819,354 9,725,490
========== ==========
See notes to consolidated financial statements.
3
<PAGE>
<TABLE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For The Three Months Ended March 31, 1996
(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, 1995 9,875,655 $ 99 $ 84,046 $ (23,757) $ (41,530) $ (410) $ 18,448
Net income ................. -- -- -- 84 -- -- 84
--------- --------- --------- --------- --------- --------- ---------
Balance at March 31, 1996 .. 9,875,655 $ 99 $ 84,046 $ (23,673) $ (41,530) $ (410) $ 18,532
========= ========= ========= ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Three Months Ended March 31, 1996 and 1995
Increase (Decrease) In Cash
(Dollars In Thousands)
(Unaudited)
1996 1995
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................... $ 84 $ 462
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
(Increase) decrease in other assets ................... (179) 42
Decrease in accounts payable and other liabilities .... (85) (10)
Amortization of debt costs ............................ 19 30
Decrease in accrued interest payable .................. (10) (10)
------- -------
Net Cash Provided By (Used In) Operating Activities ...... (171) 514
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments received on real estate loans ......... 499 --
Amortization of residual interests ....................... 472 553
Decrease in funds held by Trustee ........................ 389 209
Increase in short-term investments ....................... (113) --
Real estate loans funded ................................. (50) (2,039)
------- -------
Net Cash Provided By (Used In) Investing Activities ...... 1,197 (1,277)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments made on long-term debt ................ (991) (991)
Dividends paid ........................................... (291) (194)
------- -------
Net Cash Used In Financing Activities .................... (1,282) (1,185)
------- -------
Net Decrease In Cash ..................................... (256) (1,948)
Cash And Cash Equivalents At Beginning Of Period ......... 3,347 6,666
------- -------
Cash And Cash Equivalents At End Of Period ............... $ 3,091 $ 4,718
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest ................................... $ 153 $ 230
======= =======
See notes to consolidated financial statements.
5
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
NOTE 1 - ORGANIZATION
Homeplex Mortgage Investments Corporation, a Maryland corporation, (the
Company) commenced operations in July 1988. As described in Note 4 the Company
has purchased interests in mortgage certificates securing collateralized
mortgage obligations (CMOs) and interests relating to mortgage participation
certificates (MPCs) (collectively residual interests). Since December 1993 the
Company has originated various loans secured by real estate (see Note 3).
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 months ended March 31, 1996 and 1995
are not necessarily indicative of the results that may be expected for the
entire year. These financial statements should be read in conjunction with the
December 31, 1995 financial statements and notes thereto.
NOTE 2 - GENERAL AND SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Homeplex
Mortgage Investments Corporation and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Income Taxes
The Company has elected to be taxed as a real estate investment trust
(REIT) under the Internal Revenue Code. As a REIT, the Company must distribute
annually at least 95% of its taxable income to its stockholders.
At December 31, 1995, the Company has available, for income tax purposes,
a net operating loss carryforward of approximately $57,000,000. Such loss may be
carried forward, with certain restrictions, for up to 14 years to offset future
taxable income, if any. Until the tax loss carryforward is fully utilized or
expires, the Company will not be required to pay dividends to its stockholders
except for income that is deemed to be excess inclusion income.
The income reported in the accompanying financial statements is different
than taxable income because some income and expense items are reported in
different periods for income tax purposes. The principal differences relate to
the amortization of residual interests and the treatment of stock option
expense.
Residual Interests
Interests relating to mortgage participation certificates and residual
interest certificates are accounted for as described in Note 4.
6
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and certificates of
deposit with maturities of less than three months.
Net Income Per Share
Primary net income per share is calculated using the weighted average
shares of common stock outstanding and common stock equivalents. Common stock
equivalents consist of dilutive stock options. Net income per share is the same
for both primary and fully diluted calculations.
Short-Term Investments
At March 31, 1996, short-term investments consist of a Treasury Bill with
a face amount of $9,129,000, maturity date of May 9, 1996 and an estimated yield
to maturity of 5.00%.
NOTE 3 - REAL ESTATE LOANS
The following is a summary of real estate loans at March 31, 1996:
<TABLE>
<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 $ 1,327,000
41 acres of land in Gilbert, due October 18, 1996; may be
Arizona. extended for one year under cer-
tain terms and conditions.
First Deed of Trust on 16% Interest only monthly, principal 2,272,000
33 acres of land in due November 21, 1995; extended
Tempe, Arizona. for one year on November 21,
1995 under the same terms and
conditions.
-----------
$ 3,599,000
===========
</TABLE>
- ------------------------------------
(1) Also represents cost for federal income tax purposes.
At March 31, 1996, both of the Company's loans are secured by properties
located in Arizona. As a result of this geographic concentration, unfavorable
economic conditions in Arizona could increase the likelihood of defaults on
these loans and affect the Company's ability to protect the principal and
interest on such loans following foreclosures upon the real properties securing
such loans.
7
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1996
(Unaudited)
NOTE 4 - RESIDUAL INTERESTS
The Company owns residual interests in collateralized mortgage
obligations (CMOs) and residual interests in mortgage participation certificates
(MPCs) (collectively residual interests) with respect to which elections to be
treated as a real estate mortgage investment conduit (REMIC) have been made.
Residual Interest Certificates
The Company owns 100% of the residual interest certificates representing
the residual interests in five series of CMOs secured by mortgage certificates
and cash funds held by trustee. The CMOs have been issued through Westam
Mortgage Financial Corporation (Westam) or American Southwest Financial
Corporation (ASW). The mortgage certificates securing the CMOs all have fixed
interest rates. Certain of the classes of CMOs have fixed interest rates and
certain have interest rates that are determined monthly based on the London
Interbank Offered Rates (LIBOR) for one month Eurodollar deposits, subject to
specified maximum interest rates.
Each series of CMOs consists of several serially maturing classes
collateralized by mortgage certificates. Generally, principal payments received
on the mortgage certificates, including prepayments on such mortgage
certificates, are applied to principal payments on the classes of CMOs in
accordance with the respective indentures. Scheduled payments of principal and
interest on the mortgage certificates securing each series of CMOs and
reinvestment earnings thereon are intended to be sufficient to make timely
payments of interest on such series and to retire each class of such series by
its stated maturity. Certain series of CMOs are subject to redemption according
to specific terms of the respective indentures.
The Company's residual interest certificates entitle the Company to
receive the excess, if any, of payments received from the pledged mortgage
certificates together with reinvestment income thereon over amounts required to
make debt service payments on the related CMOs and to pay related administrative
expenses of the REMICs. The Company also has the right, under certain
conditions, to cause an early redemption of the CMOs. Under the early redemption
feature, the mortgage certificates are sold at the then current market price and
the CMOs repaid at par value. The Company is entitled to any excess cash flow
from such early redemptions. The conditions under which such early redemptions
may be elected vary but generally cannot be done until the remaining outstanding
CMO balance is less than 10% of the original balance.
Interests In Mortgage Participation Certificates
The Company owns residual interests in REMICs with respect to three
separate series of Mortgage Participation Certificates (MPCs) issued by the
Federal Home Loan Mortgage Corporation (FHLMC) or by the Federal National
Mortgage Association (FNMA). The Company's MPC residual interests entitle the
Company to receive its proportionate share of the excess (if any) of payments
received from the mortgage certificates underlying the MPCs over principal and
interest required to be passed through to the holders of such MPCs. The Company
is not entitled to reinvestment income earned on the underlying mortgage
certificates, is not required to pay any administrative expenses related to the
MPCs and does not have the right to elect early termination of any of the MPC
classes. The mortgage certificates underlying the MPCs all have fixed interest
rates. Certain of the classes of the MPCs have fixed interest rates and certain
have interest rates
8
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1996
(Unaudited)
that are determined monthly based on LIBOR or based on the Monthly Weighted
Average Cost of Funds (COFI) for Eleventh District Savings Institutions as
published by the Federal Home Loan Bank of San Francisco, subject to specified
maximum interest rates.
The following summarizes the Company's investment in residual interests
at March 31, 1996:
Type Of Company's Company's Percentage
Series Investments Amortized Cost Ownership
- ------ ----------- -------------- ---------
(In Thousands)
Westam 1 Residual Interest Certificate $ 600 100.00%
Westam 3 Residual Interest Certificate 30 100.00%
Westam 5 Residual Interest Certificate 183 100.00%
Westam 6 Residual Interest Certificate 11 100.00%
ASW 65 Residual Interest Certificate 2,357 100.00%
FHLMC 17 Interest in MPCs 125 100.00%
FNMA 1988-24 Interest in MPCs 1,095 20.20%
FNMA 1988-25 Interest in MPCs 584 45.07%
------
$4,985
======
The following summarizes the Company's proportionate interest in the
aggregate assets and liabilities of the eight residual interests at March 31,
1996 (in thousands):
Assets:
Outstanding Principal Balance of Mortgage Certificates..... $ 336,377
Funds Held By Trustee and Accrued Interest Receivable...... 11,036
---------
$ 347,413
=========
Range of Stated Coupon of Mortgage Certificates............ 9.0%-10.5%
Liabilities:
Outstanding Principal Balance of CMOs and MPCs:
Fixed Rate ........................................... $ 304,704
Floating Rate - LIBOR Based.............................. 32,966
Floating Rate - COFI Based............................... 4,100
---------
Total...................................... 341,770
Accrued Interest Payable................................... 2,310
---------
$ 344,080
=========
Range of Stated Interest Rates on CMOs and MPCs............ 0% to 9.9%
The average LIBOR and COFI rates used to determine income from residual
interests were as follows:
Three Months Ended
March 31, At March 31, 1996
---------------- -------------------
1996 1995
---- ----
LIBOR............... 5.50% 6.06% 5.31%
COFI................ 5.07% 4.57% 4.98%
9
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1996
(Unaudited)
The Company accounts for residual interests using the prospective net
level yield method. Under this method, a residual interest is recorded at cost
and amortized over the life of the related CMO or MPC issuance. The total
expected cash flow is allocated between principal and interest as follows:
1. An effective yield is calculated as of the date of purchase based on
the purchase price and anticipated future cash flows.
2. In the initial accounting period, interest income is accrued on the
investment balance using the effective yield calculated as of the
date of purchase.
3. Cash received on the investment is first applied to accrued interest
with any excess reducing the recorded principal balance of the
investment.
4. At each reporting date, the effective yield is recalculated based on
the amortized cost of the investment and the then-current estimate
of the remaining future cash flows.
5. The recalculated effective yield is then used to accrue interest
income on the investment balance in the subsequent accounting
period.
6. The above procedure continues until all cash flows from the
investment have been received.
At the end of each period, the amortized balance of the investment should
equal the present value of the estimated cash flows discounted at the
newly-calculated effective yield. If a residual interest is determined to have
other than temporary impairment, the residual interest is written down to fair
value.
At March 31, 1996, the estimated prospective net level yield of the
Company's residual interests, in the aggregate, is 28% without early redemptions
or terminations being considered and 72% if early redemptions or terminations
are considered. At March 31, 1996, 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 March 31,
1996. There will be differences, which may be material, between the projected
yield and the actual yield and the fair value of the residual interests may
change significantly over time.
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
10
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1996
(Unaudited)
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 March 31, 1996, Funds held by Trustee consists of
$4,781,000 in the reserve fund and $468,000 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 expired on May 5, 1996. Through March
31, 1996, the Company had not drawn upon the line of credit.
NOTE 7 - COMMON STOCK AND STOCK OPTIONS
The Company has a Stock Option Plan which is administered by the Board of
Directors. The plan provides for qualified stock options which may be granted to
key personnel of the Company and non-qualified stock options which may be
granted to the Directors and key personnel of the Company. The purpose of the
plan is to provide a means of performance-based compensation in order to attract
and retain qualified personnel whose job performance affects the Company.
Options to acquire a maximum (excluding dividend equivalent rights) of
437,500 shares of the Company's common stock may be granted under the plan. The
exercise price may not be less than the fair market value of the common stock at
the date of grant. The options expire ten years after date of grant.
Optionholders also receive, at no additional cost, dividend equivalent
rights which entitle them to receive, upon exercise of the options, additional
shares calculated based on the dividends declared during the period from the
grant date to the exercise date. At March 31, 1996 accounts payable and other
liabilities in the accompanying consolidated balance sheets, include
approximately $850,000 related to the Company's granting of dividend equivalent
rights. This liability will remain in the accompanying consolidated balance
sheets until the options to which the dividend equivalent rights relate are
exercised, cancelled or expire.
Under the plan, an exercising optionholder also has the right to require
the Company to purchase some or all of the optionholder's shares of the
Company's common stock. That redemption right is exercisable by the optionholder
only with respect to shares (including the related dividend equivalent rights)
that the optionholder has acquired by exercise of an option under the Plan.
Furthermore, the optionholder can only exercise his redemption rights within six
months from the last to expire of (i) the two year period commencing with the
grant date of an option, (ii) the one year period commencing with the exercise
date of an option, or (iii) any restriction period on the optionholder's
transfer of the shares of common stock he acquires through exercise of his
option. The price for any shares repurchased as a result of an optionholder's
exercise of his redemption right is the lesser of the book value of those shares
at the time of redemption or the fair market value of the shares on the original
date the options were exercised.
11
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1996
(Unaudited)
At March 31, 1996, there were 445,177 of options (including dividend
equivalent rights) outstanding of which 438,376 were currently exercisable at
effective exercise prices ranging from $1.22 per share to $4.48 per share.
Additionally, in December 1995, in connection with the renegotiation the
Chief Executive Officer's Employment Agreement, the Company replaced his annual
salary of $250,000 plus bonus with 750,000 of non-qualified stock options which
vest over the three year term of the new Employment Agreement. The exercise
price of the options is $1.50 per share which was equal to the closing market
price of the common stock on grant date. As of March 31, 1996, 200,000 of the
options were vested, with 275,000 vesting in December 1996 and the remaining
275,000 vesting in December 1997. The options will immediately vest upon a
change in control, as defined. The options will expire in December 2000. These
stock options are subject to stockholder approval. In the event the stock
options are not approved by the stockholders, the Employment Agreement provides
that the options will be converted into phantom stock rights (PSRs). Such PSRs
have the same vesting provisions, exercise price and expiration date as the
related stock options, except that upon exercise of a PSR no stock is actually
issued. Instead, the Company will make a cash payment to the holder equal to the
difference between the market value of the stock on the exercise date and the
exercise price of $1.50 per share. The PSRs, also, provide that the holder will
receive payments equal to the product of the per share dividend amount times the
number of PSRs outstanding.
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with requirements of SFAS No. 107,
"Disclosures about Fair Values of Financial Instruments". Although management
uses its best judgement in estimating the fair value of these instruments, there
are inherent limitations in any estimation technique and the estimates are thus
not necessarily indicative of the amounts which the Company could realize on a
current transaction.
The following describes the significant assumptions underlying the
estimates of fair value.
(a) Real Estate Loans - The Company's real estate loans are both
short-term (one year or less) and considered to be fully
collectible. The terms and conditions of such loans are the same as
would be used by the Company to fund similar type loans at March 31,
1996. As such, fair value approximates cost.
(b) Short-Term Investments - Short-term investments consist of a
Treasury Bill with a fair value that approximates cost.
(c) Cash and Cash Equivalents / Funds Held By Trustee - Cash and cash
equivalents and funds held by Trustee consist of demand deposits and
liquid money market funds with fair value approximating cost.
(d) Residual Interests - Residual interests and their fair value are
described in Note 4 to the financial statements.
12
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1996
(Unaudited)
(e) Fair Value/Long Term Debt - The estimated fair value of the
Company's long-term debt is estimated to be its carrying value at
March 31, 1996 plus the prepayment penalty the Company would be
required to make to repay the debt in its entirety prior to its
scheduled maturity.
Based on these assumptions the Company estimates the fair value of its
financial instruments at March 31, 1996 to be as follows (in thousands):
Carrying Estimated
Amount Fair Value
------ ----------
Real Estate Loans............. $ 3,599 $3,599
Short-term Investments........ 9,082 9,082
Funds held by Trustee......... 5,249 5,249
Residual Interests............ 4,985 4,985
Cash and Cash Equivalents..... 3,091 3,091
Long-term Debt................ (6,828) (6,957)
13
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
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 Months Ended March 31, 1996 and 1995
The Company had net income of $84,000 or $.01 per share for the three
months ended March 31, 1996 compared to net income of $462,000 or $.05 per share
for the three months ended March 31, 1995.
The Company had income from mortgage assets of $634,000 in 1996 as
compared to income of $1,103,000 in 1995. Interest income on real estate loans
decreased from $575,000 in 1995 to $190,000 in 1996 due to the reduction in the
average outstanding balance of real estate loans. See "Liquidity, Capital
Resources and Commitments". Income from residual interests declined from
$415,000 in 1995 to $248,000 in 1996, primarily as a result of the reduction in
the average residual interest balance outstanding as a result of the
amortization of such balance.
The Company's interest expense declined from $250,000 in 1995 to $162,000
in 1996 as a result of the Company reducing its long-term debt.
Liquidity, Capital Resources and Commitments
The Company raised $80,593,000 in connection with its initial public
offering on July 27, 1988. The proceeds were immediately utilized to purchase
residual interests. Subsequently, through October 1988, the Company purchased an
additional $59,958,000 of residual interests which were initially financed using
a combination of borrowings under repurchase agreements and the Company's bank
line of credit. The Company has not purchased any residual interests since
October 1988.
Since December 1993, the Company has originated real estate loans secured
by various first deeds of trust on real properties located in Arizona. The
Company's loan program seeks higher returns by targeting loan opportunities to
which the Company can respond on a more timely basis than traditional real
estate lenders. At March 31, 1996, both of the Company's loans are secured by
properties located in Arizona. As a result of this geographic concentration,
unfavorable economic conditions in Arizona could increase the likelihood of
defaults on these loans and affect the Company's ability to protect the
principal and interest on such loans following foreclosures upon the real
properties securing such loans. The Company may, in the future, make loans on
properties located outside of Arizona. In the latter half of 1995, in
anticipation of a potential acquisition transaction, the Company slowed its
origination of real estate loans. At March 31, 1996 the Company's real estate
loans outstanding total $3,599,000 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
14
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
Company. At March 31, 1996, $5,249,000 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 expired on May 5, 1996. Through March
31, 1996, the Company had 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, 1995, the Company has a net
operating loss carryforward, for income tax purposes, of approximately
$57,000,000. This tax loss may be carried forward, with certain restrictions,
for up to 14 years to offset future taxable income, if any. Until the tax loss
carryforward is fully utilized or expires, the Company will not be required to
distribute dividends to its stockholders except for income that is deemed to be
excess inclusion income.
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 March 31, 1996, the Company's proportionate share of floating-rate
CMOs and MPCs in the eight REMICs is $32,966,000 in principal amount that pays
interest based on LIBOR and $4,100,000 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
Ended March 31, At March 31, 1996
--------------- -----------------
1996 1995
---- ----
LIBOR...................... 5.50% 6.06% 5.31%
COFI ...................... 5.07% 4.57% 4.98%
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,
15
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
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) Exhibits - Exhibit 27, Financial Data Schedule
(b) Reports on Form 8-K - None
16
<PAGE>
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf by the undersigned
thereunto duly authorized.
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
May 7, 1996 By /s/ JAY R. HOFFMAN
--------------------------------------
Jay R. Hoffman, President,
Treasurer, Chief Financial Officer
and a Duly Authorized Officer
17
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