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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 September 30, 1994
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 9, 1994; 9,716,517 shares of Homeplex Mortgage Investments
Corporation common stock were outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1 Financial Statements
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED BALANCE SHEETS
As Of September 30, 1994 and December 31, 1993
(Dollars In Thousands Except Per Share Data)
(Unaudited)
Sept. 30, Dec. 31,
1994 1993
-------- --------
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . $ 11,024 $ 16,247
Real estate loans . . . . . . . . . . . . . . . . . . . 4,865 320
Residual interest certificates . . . . . . . . . . . . 8,568 14,025
Funds held by Trustee . . . . . . . . . . . . . . . . . 6,853 8,761
Interests relating to mortgage
participation certificates . . . . . . . . . . . . . 2,937 3,710
Other assets . . . . . . . . . . . . . . . . . . . . . 912 819
-------- --------
Total Assets . . . . . . . . . . . . . . . . . . . . . $ 35,159 $ 43,882
======== ========
LIABILITIES
Long-term debt . . . . . . . . . . . . . . . . . . . . $ 12,927 $ 19,926
Accounts payable and other liabilities . . . . . . . . 1,106 1,093
Accrued interest payable . . . . . . . . . . . . . . . 126 194
Dividend payable . . . . . . . . . . . . . . . . . . . - 292
-------- --------
Total Liabilities . . . . . . . . . . . . . . . . . . . 14,159 21,505
-------- --------
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 . . . . . . . . . . . . . . . . . . (21,690) (20,330)
Cumulative dividends . . . . . . . . . . . . . . . . . (41,045) (41,045)
Treasury stock - 159,138 shares in 1994
and 143,938 shares in 1993 . . . . . . . . . . . . . (410) (393)
-------- --------
Total Stockholders' Equity . . . . . . . . . . . . . . 21,000 22,377
-------- --------
Total Liabilities and Stockholders' Equity . . . . . . $ 35,159 $ 43,882
======== ========
See notes to consolidated financial statements.
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF NET INCOME (LOSS)
For The Three And Nine Months Ended September 30, 1994 and 1993
(Dollars In Thousands Except Per Share Data))
(Unaudited)
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
--------------- ---------------
1994 1993 1994 1993
---- ---- ---- ----
INCOME (LOSS) FROM MORTGAGE ASSETS
Interest income on real
estate loans . . . . . . . $ 297 $ - $ 698 $ -
Income (loss) from residual
interest certificates . . . 457 (2,672) (529) (12,367)
Income (loss) from interests
relating to mortgage
participation certificates. 172 (585) 509 (7,939)
Other income . . . . . . . . 133 141 220 452
--------- --------- --------- ---------
1,059 (3,116) 898 (19,854)
Interest Expense . . . . . . 314 532 1,106 1,793
--------- --------- --------- ---------
Income (Loss) Before
Other Expenses. . . . . . . 745 (3,648) (208) (21,647)
--------- --------- --------- ---------
OTHER EXPENSES
General and administrative. . 336 354 1,056 1,284
Hedging expense . . . . . . . - 48 96 91
--------- --------- --------- ---------
Total Other Expenses. . . . . 336 402 1,152 1,375
--------- --------- --------- ---------
Net Income (Loss) . . . . . . $ 409 $ (4,050) $ (1,360) $ (23,022)
========= ========= ========= =========
SHARE DATA
Net Income (Loss) Per Share . $ .04 $ (.42) $ (.14) $ (2.37)
========= ========= ========= =========
Weighted Average Number Of
Shares Of Common Stock And
Common Stock Equivalents
Outstanding . . . . . . . . 9,716,517 9,731,717 9,721,977 9,732,170
========= ========= ========= =========
See notes to consolidated financial statements.
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For The Nine Months Ended September 30, 1994
(Dollars In Thousands)
(Unaudited)
Additional Cumulative
Number Par Paid-In Net Income Cumulative Treasury
Of Shares Value Capital (Loss) Dividends Stock Total
--------- ----- ---------- ---------- ---------- -------- -----
Balance at
December 31, 1993 . . . 9,875,655 $99 $84,046 $(20,330) $(41,045) $(393) $22,377
Treasury stock acquired -
15,200 shares . . . . . - - - - - (17) (17)
Net loss . . . . . . . . - - - (1,360) - - (1,360)
--------- --- ------- -------- -------- ----- -------
Balance at
September 30, 1994. . . 9,875,655 $99 $84,046 $(21,690) $(41,045) $(410) $21,000
========= === ======= ======== ======== ===== =======
See notes to consolidated financial statements.
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Nine Months Ended September 30, 1994 and 1993
Increase (Decrease) In Cash
(Dollars In Thousands)
(Unaudited)
1994 1993
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . $ (1,360) $ (23,022)
Adjustments to reconcile net loss to net cash
used in operating activities:
Write-downs and non-cash losses on residual
interest certificates . . . . . . . . . . . . . 1,244 12,367
Increase in other assets . . . . . . . . . . . . (369) (138)
Amortization of debt costs . . . . . . . . . . . 180 149
Amortization of hedging costs . . . . . . . . . . 96 91
Increase (decrease) in accrued interest payable . (68) 139
Increase (decrease) in accounts payable and
other liabilities . . . . . . . . . . . . . . . 13 (151)
Write-downs on interests relating to
mortgage participation certificates . . . . . . - 7,939
--------- ---------
Net Cash Used In Operating Activities . . . . . . . . (264) (2,626)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Real estate loans funded. . . . . . . . . . . . . . . (4,978) -
Amortization of residual interest certificates. . . . 4,213 11,816
(Increase) decrease in funds held by Trustee. . . . . 1,908 (4,741)
Amortization of interests relating to mortgage
participation certificates. . . . . . . . . . . . . 773 4,708
Principal payments received on real estate loans. . . 433 -
--------- ---------
Net Cash Provided By Investing Activities . . . . . . 2,349 11,783
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments made on long-term debt . . . . . . (6,999) (6,411)
Dividends paid. . . . . . . . . . . . . . . . . . . . (292) -
Repurchases of common stock . . . . . . . . . . . . . (17) (49)
--------- ---------
Net Cash Used In Financing Activities . . . . . . . . (7,308) (6,460)
--------- ---------
Net Increase (Decrease) In Cash . . . . . . . . . . . (5,223) 2,697
Cash And Cash Equivalents At Beginning Of Period. . . 16,247 14,172
--------- ---------
Cash And Cash Equivalents At End Of Period. . . . . . $ 11,024 $ 16,869
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest. . . . . . . . . . . . . . . . $ 994 $ 1,505
========= =========
See notes to consolidated financial statements.
HOMEPLEX MORTGAGE INVESTMENTS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1994
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Homeplex Mortgage Investments Corporation, a Maryland Corporation (the
Company) commenced operations in July 1988. As described in Notes 2, 3 and
4, the Company has purchased interests in mortgage certificates securing
collateralized mortgage obligations (CMOs) and interests relating to
mortgage participation certificates (MPCs) (collectively Mortgage
Interests). Since December 1993, the Company has originated four real
estate loans secured by various First Deeds of Trust on real properties
located in Arizona (see Note 2).
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, 1994 and 1993 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, 1993
financial statements and notes thereto.
NOTE 2 - GENERAL AND SUMMARY OF ACCOUNTING POLICIES
Basis Of Presentation
The consolidated financial statements include the accounts of the
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.
No provision has been made for income taxes in the accompanying financial
statements as the Company believes it will not be subject to any significant
income taxation.
At December 31, 1993, the Company had available, for income tax
purposes, a net operating loss carryforward of approximately $49,300,000.
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 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 Mortgage Interests and the
treatment of stock option expense.
Real Estate Loans
Real estate loans consist of four separate loans secured by various
First Deeds of Trust on real properties located in Arizona. Such loans bear
interest at rates between 16% and 24% per annum, payable monthly, with all
principal due within one year. Two of the loans, aggregating $236,000, may
be extended for one year under certain conditions.
Interests Relating To Mortgage Participation Certificates and Residual
Interest Certificates
Interests relating to mortgage participation certificates and residual
interest certificates are accounted for as described in Notes 3, 4 and 7.
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 agreement (see Note 6) is
amortized using the straight-line method over the life of the agreement.
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.
Reclassifications
Certain balances in prior periods have been reclassified to conform to
the current year's presentation.
NOTE 3 - RESIDUAL INTEREST CERTIFICATES
The Company owns 100% of the residual interest certificates in five
real estate mortgage investment conduits (REMICs). The assets of these five
REMICs consist of mortgage certificates, accrued interest thereon and cash
funds held by a Trustee. The liabilities consist of collateralized mortgage
obligations (CMOs), accrued interest thereon and administrative expenses
payable. 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 the specific terms of the respective indentures.
The following summarizes the Company's investment at September 30,
1994:
Company's Amortized
CMO Series Cost (See Note 7)
---------- --------------------
(In Thousands)
Westam 1 . . . . . . . . . . . . . . $ 1,353
Westam 3 . . . . . . . . . . . . . . 212
Westam 5 . . . . . . . . . . . . . . 317
Westam 6 . . . . . . . . . . . . . . 37
ASW 65 . . . . . . . . . . . . . . . 6,649
--------
$ 8,568
========
The following summarizes the combined assets and liabilities of the five
REMICs at September 30, 1994 (in thousands):
Assets:
Outstanding Principal Balance of
Mortgage Certificates . . . . . . . . . $ 307,397
Funds Held By Trustee . . . . . . . . . 10,855
Accrued Interest Receivable . . . . . . 2,463
---------
$ 320,715
=========
Range of Stated Coupon Rate of Mortgage
Certificates . . . . . . . . . . . . . 9.0%-10.5%
Liabilities:
Outstanding Principal Balance of CMOs:
Fixed Rate . . . . . . . . . . . . . . $264,304
Floating Rate - LIBOR Based . . . . . . 49,781
--------
Total CMO Principal Balance . . . . . $ 314,085
Accrued Interest Payable . . . . . . . 2,932
$ 317,017
=========
Range of Stated Interest Rates on
CMOs . . . . . . . . . . . . . . . .
0% to 9.9%
The Company's 100% residual interests entitle the Company to receive
the excess 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
effected until the remaining outstanding CMO balance is less than 10% of
the original balance.
Effective December 31, 1993, the Company adopted the prospective
net level yield method with respect to these investments (see Note 7). The
cumulative effect of the change was recorded as of December 31, 1993.
Income for the three and nine months ended September 30, 1994 has been
determined using the prospective net level yield method. The consolidated
financial statements have been reclassified on a basis consistent with the
prospective net level yield method, with no effect on previously reported
net income (loss).
Prior to December 31, 1993 (see Note 7), the Company accounted for
its investment in these five REMICs using the equity method of accounting.
Accordingly, the Company consolidated the financial statements of the REMICs
in its financial statements and included the respective REMICs income or
loss in its consolidated statement of net income (loss). In the event the
undiscounted estimated future net cash flows from the residual interest were
less than the Company's financial reporting basis, the residual interest was
considered to be impaired and the Company established a reserve for the
difference. The reserves were then amortized to income as the loss actually
occurred. Because of the continuing low interest rate environment,
beginning in the quarter ended September 30, 1993, the Company incorporated
redemption proceeds into the undiscounted cash flow estimates used to
establish reserves. The estimated redemption proceeds were adjusted each
quarter as part of the Company's undiscounted cash flow estimates. These
redemption proceeds estimates were calculated assuming that the current
interest rate environment exists at the time redemptions are possible.
The following summarizes the Company's combined income (loss) from these
REMICs for the three and nine months ended September 30, 1993 (in thousands)
prior to the cumulative effect of the change in accounting principle
described in Note 7:
Sept. 30, 1993
--------------
Three Mo. Nine Mo.
Ended Ended
----- -----
Interest income, including amortization of
mortgage premium or discount and reinvestment
income from mortgage collateral . . . . . . . . $ 13,504 $ 45,130
CMO interest, including amortization of debt
discount, and administration expense . . . . . (18,984) (52,790)
Writedown of investment to estimated
undiscounted cash flows, net of amortization . 2,808 (4,707)
-------- --------
Income (loss) from residual interest certificates $ (2,672) $(12,367)
======== ========
The average LIBOR-reset rates on the floating rate CMO classes were
4.65% and 3.19%, respectively, for the three months ended September 30,
1994 and 1993 and 3.99% and 3.19%, respectively, for the nine months ended
September 30, 1994 and 1993. At September 30, 1994, LIBOR was 5.00%.
NOTE 4 - INTERESTS RELATING TO MORTGAGE PARTICIPATION CERTIFICATES
The Company owns 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 certificates entitle the Company to receive its
proportionate share of the excess (if any) of payments received from the
mortgage certificates underlying the MPCs overamounts required to make
principal and interest payments on such MPCs. The Company is not entitled
to reinvestment income earned on the underlying mortgage certificates, is
not required to pay any administrative expenses of the MPCs and does not
have the right to elect early redemption 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 Company accounts for its interests relating to these mortgage
participation certificates using the prospective net level yield method as
described in Note 7. In the event the undiscounted estimated future net
cash flows from the MPC Series are less than the Company's financial
reporting basis, the Company reduces its financial reporting basis. The
Company took charges of $585,000 and $7,939,000, respectively, for the three
and nine months ended September 30, 1993 to reduce the MPC Series to their
undiscounted estimated future net cash flows. Effective December 31, 1993,
the Company changed its method of accounting for impairment on these
investments to the method described in Note 7. The following summarizes the
Company's investment relating to MPCs at September 30, 1994:
Company's Amortized Cost Company's Percentage Ownership
MPC Series At Sept. 30, 1994 Of Interests Relating To MPCs
---------- ------------------------ ------------------------------
(In Thousands)
FHLMC 17 $ 237 100.00%
FNMA 1988-24 1,852 20.20%
FNMA 1988-25 848 45.07%
-------
$ 2,937
=======
The following summarizes the Company's proportionate interest in the
aggregate mortgage certificates and MPCs at September 30, 1994 (in
thousands):
Mortgage Certificates Underlying MPCs:
Outstanding Principal Balance . . . . $136,951
Range of Stated Coupon Rates . . . . 9.5%-10.0%
MPCs:
Outstanding Principal Balance:
Fixed Rate . . . . . . . . . . . . $123,100
Floating Rate - LIBOR Based . . . . 8,241
Floating Rate - COFI Based . . . . 5,610
--------
$136,951
Total MPCs Principal Balance
Range of Stated Interest Rates
on MPCs . . . . . . . . . . . . . . 3.72%-9.9%
The average LIBOR and COFI rates used to determine income from the
interests relating to the above MPCs were as follows:
Three Months Nine Months
Ended Sept. 30, Ended Sept. 30,
--------------- ---------------
1994 1993 1994 1993
---- ---- ---- ----
LIBOR . . . . . . . . . . . . . . . 4.65% 3.19% 3.99% 3.19%
COFI . . . . . . . . . . . . . . . . 3.80% 4.05% 3.75% 4.24%
The LIBOR and COFI rates as of September 30, 1994 were 5.00% and 3.95%,
respectively.
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 and ASW 65 (see Note
3), by the Company's Interests relating to mortgage participation
certificates FNMA 1988-24 and FNMA 1988-25 (see Note 4), and by Funds held
by 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, 1994, Funds held by Trustee consisted of $5,929,000 in the
reserve fund and $924,000 of other funds pledged under the Indenture.
NOTE 6 - 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 has a
term of two years beginning July 1, 1992, requires 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) exceeds 9.0%. LIBOR remained under 9.0% during
the term of the agreement and, accordingly, no amounts were paid under the
agreement.
NOTE 7 - ACCOUNTING MATTERS
Accounting principles and disclosure practices for Mortgage Interests
have historically varied throughout the industry. At a May 1990 meeting,
the Emerging Issues Task Force (EITF) reached a consensus (Issue Number 89-
4) that certain Mortgage Interests should be accounted for using a
prospective net level yield method.
Under this method, a Mortgage Interest would be recorded at cost and
amortized over the life of the related CMO issuance. The total expected
cash flow would be 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 the event that the yield is negative,
the investment is to be written down to an amount equal to the undiscounted
estimated future cash flows.
As described in Note 4, the Company's investments in the REMICs
relating to three separate series of MPCs (FHLMC 17, FNMA 24 and FNMA 25)
entitle the Company to receive its proportionate share of the excess (if
any) of the payments received from the mortgage certificates underlying MPCs
over amounts required to pass through principal and interest 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 administrative
expenses of the MPCs and does not have the right to elect early termination
of any of the MPC classes. The Company's investments in FHLMC 17, FNMA 24
and FNMA 25 are accounted for using the prospective net level yield method.
As described in Note 3, the Company's residual interest certificates
with respect to five separate series of CMOs (Westam 1, 3, 5, 6 and ASW 65)
entitle the Company to receive 100% of the excess of payments received from
the pledged mortgage certificates together with reinvestment income thereon
over amounts required to make debt service payment on such CMOs and to pay
related administrative expenses relating to such CMOs. The Company also has
the right, under certain conditions, to cause an early redemption of the
CMOs. The Company previously used the equity method of accounting for its
investments in Westam 1, 3, 5, 6 and ASW 65 and consolidated the accounts of
these REMICs in the Company's consolidated financial statements. Effective
December 31, 1993, the Company adopted the prospective net level yield
method with respect to these investments to be consistent with the change in
accounting for impaired assets as described below. The consolidated
financial statements have been reclassified on a basis consistent with the
prospective net level yield method, with no effect on previously reported
net income (loss).
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 and equity securities including investments in REMICs 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 interest certificates and interests relating to mortgage
participation certificates 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.
The primary difference between SFAS No. 115 and the method of
accounting previously used by the Company relates to accounting for
impairment of both residual interest certificates (see Note 3) and interests
relating to mortgage participation certificates (see Note 4) (collectively
Mortgage Interests). Previously, if the undiscounted estimated future net
cash flows from these Mortgage Interests were less than the Company's
financial reporting basis, the Mortgage Interest was considered to be
impaired and the Company would establish a reserve for the difference so
that the Mortgage Interest's projected yield would be 0%. Under SFAS No.
115, if a security is determined to have other than temporary impairment,
the security is to be written down to a fair value. The Company reviewed
all of its impaired Mortgage Interests and recorded a charge of $6,078,000
to record impaired Mortgage Interests at their fair value at December 31,
1993 in accordance with SFAS No. 115. For the nine months ended September
30, 1994, the Company recorded an additional charge of $1,244,000 to
record impaired Mortgage Interests at their fair value. Under SFAS No.
115, net income (loss) of prior years or periods is not restated. In
determining fair value, the Company considered that the market for Mortgage
Interests is volatile and thinly traded. Moreover, the Company acquired its
Mortgage Interests without intention to resell those assets. Generally,
Mortgage Interests are priced by discounting projected net cash flows from
the Mortgage Interests at an assumed internal rate of return. Projected net
cash flows have been estimated using the Public Securities Association
median projected prepayment speeds and using current short-term interest
rates in effect for floating rate CMO or MPC classes and assuming such
short-term rates will stay in effect over the lives of the floating rate
classes. The internal rates of return then used to discount the cash flows
vary but management believes a reasonable rate for its Mortgage Interests at
September 30, 1994 to be 32% if early redemptions are not considered. Using
these assumptions, a comparison of the amortized cost and estimated fair
value of the Company's Mortgage Interests at September 30, 1994, is as
follows (in thousands):
Amortized Estimated Fair
Cost Value
-------- -------------
Residual Interest Certificates . . . . $ 8,568 $ 6,700
Interests Relating to Mortgage
Participation Certificates . . . . . 2,937 2,500
Total Mortgage Interests . . . . . . . $11,505 $ 9,200
The estimated prospective net level yield at September 30, 1994 of
the Company's Mortgage Interests based on the amortized cost balance of
$11,505,000, in the aggregate, is 20% without early redemptions being
considered and 27% if early redemptions are considered. The timing and
amount of redemption cash flows is highly uncertain because it is dependent
upon levels of prepayments, interest rates and other factors.
The assumptions used in calculating the above estimated fair value,
net cash flows and the prospective net level yield were the September 30, 1994
LIBOR and COFI rates of 5.00% and 3.95%, respectively, and the September 30,
1994 Public Securities Association Prepayment median projected prepayment
speeds for particular collateral as follows:
Prepayment Assumptions
- ----------------------------------------------------------------------------
Mortgage Interest Collateral Coupon PSA%
------------------ ---------- ------ ----
Westam 1 GNMA I 10.5% 269
Westam 3 GNMA I 9.5% 190
Westam 5 GNMA I 9.0% 158
Westam 6 GNMA I 9.5% 190
ASW 65 GNMA I 10.0% 230
FHLMC 17 FHLMC 10.0% 268
FNMA 24 FNMA 10.0% 268
FNMA 25 FNMA 9.5% 241
The projected yield and discounted present values of projected net
cash flows are based on the assumptions at September 30, 1994 as described
above. There will be differences, which may be material, between the
projected yields and the actual yields and between the present values of
projected net cash flows and the present values of actual net cash flows.
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 And Nine Months Ended September 30, 1994
and 1993
The Company had net income of $409,000 or $.04 per share and incurred
a net loss of $1,360,000 or $.14 per share, respectively, for the three
and nine months ended September 30, 1994 compared to net losses of
$4,050,000 or $.42 per share and $23,022,000 or $2.37 per share for the
comparable periods in 1993.
The Company's income from mortgage assets was $1,059,000 and $898,000,
respectively, for the three and nine months ended September 30, 1994 as
compared to losses of $3,116,000 and $19,854,000 for the comparable periods
in 1993. The above amounts include charges of $1,244,000 for the nine
months ended September 30, 1994 and charges of $3,257,000 and $20,306,000,
respectively, for the three and nine months ended September 30, 1993 to
writedown the Company's investments in several of its Mortgage Interests.
Writedowns on Mortgage Interests declined in 1994 as compared to 1993
because of a decrease in the average balance of Mortgage Interests owned by
the Company and also a decline in projected mortgage prepayment rates. See
"Interest Rates and Prepayments".
The Company's interest expense declined from $532,000 and $1,793,000,
respectively, for the three and nine months ended September 30, 1993 to
$314,000 and $1,106,000 for the comparable periods in 1994 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 Mortgage Interests. Subsequently, through October 1988, the
Company purchased an additional $59,958,000 of Mortgage 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 Mortgage Interests since October
1988.
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 and ASW 65 (see Note 3
to the financial statements), by the Company's interests relating to
mortgage participation certificates FNMA 1988-24 and FNMA 1988-25 (see Note
4 to the financial statements), and by funds held by 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, 1994,
$6,853,000 of funds held by Trustee are pledged under the Indenture.
At September 30, 1994, the Company did not have any used or unused
short-term debt or line of credit facilities.
The Company has historically used its cash flow from operations for
payment of dividends, operating expenses and payment of interest and
principal on its short and long-term indebtedness. As a real estate
investment trust (REIT), the Company is not subject to income tax at the
corporate level so long as it distributes 95% of its taxable income to its
shareholders. The Company has, in the past, distributed 100% of its taxable
income to its stockholders. However, primarily as a result of the
significant mortgage refinancing activity in both 1992 and 1993 (see
"Interest Rates and Prepayments") the Company has accumulated a net
operating loss carryforward, for income tax purposes, of approximately
$49,300,000 as of December 31, 1993. 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, 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.
Since December 1993, the Company has originated four separate real
estate loans secured by various First Deeds of Trust on real properties
located in Arizona. Such loans bear interest at rates between 16% and 24%
per annum, payable monthly, with all principal due within one year. Two of
the loans, aggregating $236,000, may be extended for one year under certain
conditions.
At September 30, 1994, the Company had $11,024,000 of cash and cash
equivalents available for investment purposes.
Interest Rates and Prepayments
One of the Company's major sources of income is its income from
Mortgage Interests which consists of the Company's net investment in eight
real estate mortgage investment conduits ("REMICs') as described in Notes 3
and 4 to the financial statements. The Company's cash flow and return on
investment from its Mortgage 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, 1994, the Company's proportionate share of floating-
rate CMOs and MPCs in the eight REMICs was $58,022,000 in principal amount
that pays interest based on LIBOR and $5,610,000 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,
--------------- ---------------
1994 1993 1994 1993
---- ---- ---- ----
LIBOR . . . . . . . . . . 4.65% 3.19% 3.99% 3.19%
COFI . . . . . . . . . . . 3.80% 4.05% 3.75% 4.24%
The LIBOR and COFI rates as of September 30, 1994 were 5.00% and
3.95%, respectively.
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) exceeds 9.0%. LIBOR remained under 9.0% during
the term of the agreement and, accordingly, no amounts were paid under the
agreement.
The Company's cash flow and return on investment from Mortgage
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 from
Mortgage Interests, and faster prepayment rates will tend to decrease the cash
flow and return on investment from Mortgage 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.
The national average contract interest rate for major lenders on
purchase of previously occupied homes, as published by the Federal Housing
Finance Board, decreased from an average of 9.04% in 1991 to an average of
7.84% in 1992 to an average of 6.96% in 1993. This resulted in a
significant increase in refinancing activity beginning in the fourth quarter
of 1991 and continuing throughout 1992 and 1993. As a result, the Company
incurred charges of $20,306,000 to writedown its Mortgage Interests for the
nine months ended September 30, 1993. This mortgage interest rate has
subsequently risen from 6.65% in December 1993 to 7.57% in September 1994
and projected prepayment rates have declined. However, actual prepayments
have been declining slower than projected and, as a result, the Company has
incurred an additional charge of $1,244,000 for the nine months ended
September 30, 1994 to writedown its Mortgage Interests.
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 - None
(b) Reports on Form 8-K - None
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
November 9, 1994 By JAY R. HOFFMAN
- ----------------- ---------------------------------
Jay R. Hoffman, Vice President,
Treasurer, Chief Financial
and a Duly Authorized Officer