-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WYQaf94d8HZfnqhRx5c4JBWhZXMKm3f7x1rkD5cPINSQHq7kPv3qw/7/KO7DsAu4 v6gDqktLr4ey7jb6QH9q2w== 0000950124-97-003067.txt : 19970522 0000950124-97-003067.hdr.sgml : 19970522 ACCESSION NUMBER: 0000950124-97-003067 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970131 FILED AS OF DATE: 19970521 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCA FINANCIAL CORP /MI/ CENTRAL INDEX KEY: 0000880935 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 383014001 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 033-98644 FILM NUMBER: 97612510 BUSINESS ADDRESS: STREET 1: 23999 NORTHWESTERN HWY CITY: SOUTHFIELD STATE: MI ZIP: 48075 BUSINESS PHONE: 8103585555 10-K405/A 1 FORM 10-K405/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended January 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to _______ Commission File No. 33-98644 MCA FINANCIAL CORP. (Exact name of registrant as specified in its charter) MICHIGAN 38-3014001 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 23999 NORTHWESTERN HWY. SOUTHFIELD, MICHIGAN 48075 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (810) 358-5555 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the registrant's outstanding voting stock held by non-affiliates as of April 1, 1997, computed by reference to the book value of the Company's common stock as of January 31, 1997 (because there is no market for the Registrant's common stock) was $1,314,870. At April 1, 1997, there were outstanding 523,283 shares of the registrant's common stock (including shares subject to forfeiture). Documents Incorporated By Reference: None. 2 This amendment is the first amendment to the Registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1997, and is being filed to correct errors in Items 1 and 6 and in the Registrant's Consolidated Statements of Operations and in Note 15 of the Notes to Consolidated Financial Statements. Specifically, the amounts of delinquent loans shown for fiscal 1997 in Table 7 were incorrect, the per share earnings (loss) amounts shown in the Selected Financial Data (Item 6), on the Consolidated Statements of Operations and in Note 15 were incorrect. Corrected information is filed herewith. ITEM 1. BUSINESS. GENERAL MCA Financial Corp. ("MCAFC" or the "Company") is a holding company which, through its principal subsidiaries and certain affiliates, engages in mortgage banking, land contract and mortgage syndication, loan originating and servicing and real estate acquisitions, rehabilitation, leasing and sales. MCAFC is a Michigan corporation which was formed in 1989 and was inactive until 1991 when it became a holding company for its principal subsidiaries. Currently, MCAFC operates through the following wholly-owned subsidiaries: - MCA Mortgage Corporation ("MCA Mortgage") is a Michigan corporation that was incorporated in 1985 and has conducted a mortgage banking business since that date. It was known as Primary Mortgage Corporation until that date and was known as Mortgage Corporation of America from August 1985 until March 1993. - Mortgage Corporation of America ("MCA") is a Michigan corporation that was incorporated in 1984 and has conducted a mortgage banking business since that date. It was known as First American Mortgage Corporation, Inc. until September 1989 and as First American Mortgage Associates, Inc. from September 1989 until October 1993. - RIMCO Realty & Mortgage Company, doing business as MCA Realty Corporation ("MCA Realty"), is a Michigan corporation that was incorporated in 1993 and was acquired by MCAFC on January 31, 1995. MCA Realty is engaged in the purchase and sale of residential real estate. - Mortgage Corporation of America, Inc. ("MCA-Ohio") is an Ohio Corporation that was incorporated in 1993 and has conducted a mortgage banking business, emphasizing non-conforming loans, since that date. It was known as Charter 1st Mortgage Banc, Inc. from May 1993 until July 1995 when it was acquired by MCA. MCAFC has two other subsidiaries, Complete Financial Corporation and Securities Corporation of America, both Michigan corporations, which are currently inactive. Unless otherwise indicated, MCAFC and its subsidiaries are hereinafter collectively referred to as the "Company." MORTGAGE BANKING Mortgage banking is the business of acting as a financial intermediary in the origination of mortgage loans, the holding or warehousing of such loans, the subsequent marketing of such loans to investors and the ongoing management or servicing of such loans during the repayment term. Mortgage bankers earn revenue 2 3 in each of the four phases of the mortgage banking process: origination, warehousing, marketing, and servicing. Origination. The origination of mortgage loans produces revenue through fees paid by the borrower upon applying for a loan and at the loan closing. The origination process involves providing competitive mortgage loan rates, soliciting loan applications, performing title and credit review and funding loans at closing. The Company originates mortgage loans through direct solicitation of borrowers by its own sales force and through referrals from real estate brokers, builder-developers and others (commonly referred to as retail origination). In connection with the origination of each loan, the Company prepares mortgage documentation, conducts credit checks, has the property appraised by independent appraisers and closes the loan. The Company's underwriting standards and procedures with respect to loans it originates, as described above, conform to the requirements of its mortgage loan investors. Referrals from real estate brokers account for the largest portion of the Company's originated loans. In addition, advertising is used in the local markets where offices are located and generates additional origination activity. The following table sets forth the aggregate amount of retail loans and the percentage of such retail loans that related to properties in the various states in which the Company operates.
TABLE 1 Year State $ Amount of Retail Loans Percentage of Retail Loans - ---- ----- ------------------------ -------------------------- 1997 Michigan $ 247 million 40% Indiana 72 million 12% Florida 103 million 17% Ohio 35 million 6% Illinois 82 million 13% 1996 Michigan $ 193 million 39% Indiana 57 million 11% Florida 85 million 17% Ohio 46 million 9% Illinois 55 million 11% 1995 Michigan $ 234 million 59% Indiana 51 million 13% Washington 31 million 8% Ohio 48 million 12%
The remaining retail loans for fiscal 1997, 1996 and 1995 related to properties located in various other states. The Company currently purchases a substantial portion of its originated mortgage loans through "wholesale" operations. Wholesale operations involve the origination of loans by unrelated mortgage companies which prepare the necessary documentation, but leave the credit evaluation, property appraisal and loan funding functions for the Company to perform. The standards of loan documentation by such unrelated mortgage company originators may not be as stringent as the standards applied by the Company on its own direct originations. For each wholesale loan the Company's credit evaluation and property appraisal procedures are the same as for its retail originations. 3 4 The following table sets forth the aggregate amount of wholesale loans and the percentage of such wholesale loans that related to properties in the various states in which the Company operates.
TABLE 2 Year State $ Amount of Wholesale Loans Percentage of Wholesale Loans - ---- ----- --------------------------- ----------------------------- 1997 Florida $ 33 million 17% Michigan 61 million 31% Illinois 34 million 18% Ohio 41 million 21% 1996 Florida $ 11 million 8% Michigan 66 million 47% Illinois 28 million 20% Ohio 25 million 18% 1995 Florida 45 million 33% Michigan 35 million 25% Indiana 17 million 12% Oregon 9 million 7%
The remaining wholesale loans for fiscal 1997, 1996 and 1995 related to properties located in various other states. The Company is engaged in the origination of conventional mortgage loans, secured by one- to four-family residential properties (including condominiums), that conform to the requirements for sale to either the Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The Company also originates non-conforming conventional loans that exceed the maximum amounts qualifying for sale to Freddie Mac or Fannie Mae (currently $214,600) but that otherwise conform to their requirements ("jumbo loans"). The Company's principal mortgage banking subsidiary, MCA Mortgage, is an approved seller/servicer for Freddie Mac, the Government National Mortgage Association ("Ginnie Mae") and Fannie Mae, while its other principal subsidiary, MCA, is an approved seller/servicer for Freddie Mac. In addition, MCA Mortgage and MCA are qualified to originate mortgage loans insured by the Federal Housing Administration ("FHA") and mortgage loans partially guaranteed by the Veterans Administration ("VA"), which qualify for pooling by Ginnie Mae and qualify for sale to other institutional investors. The Company also originates loans which do not conform to Freddie Mac or Fannie Mae requirements. These "non-conforming" loans are typically made to self-employed individuals and others unable to meet the underwriting standards for conventional lending. Generally, these loans carry higher interest rates and fees commensurate with the additional credit risk. These loans are typically sold on the secondary market to a different group of investors than the conventional loans originated by the Company. The Company expanded its originations in this market through the acquisition of MCA-Ohio in July 1995, a company which has been engaged in this type of lending since 1993. 4 5 The following table sets forth for the periods indicated the number, dollar volume and percentage of total volume of the Company's loan production: TABLE 3
FISCAL YEAR ENDED JANUARY 31, -------------------------------- 1997 1996 1995 ---- ---- ---- (DOLLARS IN THOUSANDS EXCEPT AVERAGE LOAN BALANCES) RETAIL LOANS - ------------ Conventional Loans: Number of Loans. . . . . . . . . . . . . 3,076 2,715 2,241 Volume of Loans. . . . . . . . . . . . . $ 272,943 $ 243,154 $ 186,452 Percent of Total Volume . . . . . . . . . 33.71% 38.47% 33.04% FHA/VA Loans: Number of Loans. . . . . . . . . . . . . 3,765 2,669 2,681 Volume of Loans. . . . . . . . . . . . . $ 291,601 $ 202,803 $ 186,136 Percent of Total Volume . . . . . . . . 36.01% 32.07% 32.99% Non-Conforming Loans: Number of Loans . . . . . . . . . . . . 418 581 1,425 Volume of Loans . . . . . . . . . . . . $ 32,012 $ 34,133 $ 42,301 Percent of Total Volume . . . . . . . . 3.96% 5.40% 7.50% Jumbo Loans Number of Loans . . . . . . . . . . . . 68 40 41 Volume of Loans . . . . . . . . . . . . 17,491 $ 11,478 $ 11,397 Percent of Total Volume . . . . . . . . 2.16% 1.81% 2.02% Average Loan Balance . . . . . . . . . . . . $ 83,806 $ 81,860 $ 66,732 Total Volume of Loans . . . . . . . . . . . . $ 614,047 $ 491,568 $ 426,286 WHOLESALE LOANS(1) - --------------- Conventional Loans: Number of Loans . . . . . . . . . . . . 546 617 655 Volume of Loans . . . . . . . . . . . . $ 48,048 $ 60,590 $ 54,740 Percent of Total Volume . . . . . . . . 5.93% 9.58% 9.70% FHA/VA Loans: Number of Loans . . . . . . . . . . . . 427 309 1,059 Volume of Loans . . . . . . . . . . . . $ 37,904 $ 27,158 $ 73,746 Percent of Total Volume . . . . . . . . 4.68% 4.30% 13.07% Non-Conforming Loans: Number of Loans . . . . . . . . . . . . 1,803 995 122 Volume of Loans . . . . . . . . . . . . $ 108,928 $ 52,485 $ 9,463 Percent of Total Volume . . . . . . . . 13.45% 8.30% 1.68% Jumbo Loans Number of Loans . . . . . . . . . . . . 4 2 * Volume of Loans . . . . . . . . . . . . $ 829 $ 480 * Percent of Total Volume . . . . . . . . 10% 07% * Average Loan Balance . . . . . . . . . . . . $ 70,400 $ 73,174 $ 75,136 Total Volume of Loans(1) . . . . . . . . . . $ 195,709 $ 140,713 $ 137,949 TOTAL LOANS - ----------- Number of Loans . . . . . . . . . . . . . . . 10,107 7,928 8,224 Volume of Loans . . . . . . . . . . . . . . . $ 809,756 $ 632,281 $ 564,235 Average Loan Balance . . . . . . . . . . . . $ 80,118 $ 79,753 $ 68,608 - -------------
*Indicates that these types of loans were not originated by the Company during the applicable period. (1) During fiscal 1997, no single company was responsible for greater than 10% of the Company's wholesale originations. During fiscal 1996, Watson Financial Group ("Watson") was responsible for 13% of the Company's wholesale originations. Watson is not affiliated with the Company. During fiscal 1995, no single company was responsible for greater than 10% of the Company's wholesale originations. At January 31, 1997, the Company had applications in process for approximately 2,022 mortgage loans, aggregating approximately $154 million. At January 31, 1996, the Company had applications in process for approximately 1,947 mortgage loans, aggregating approximately $186 million. Based on experience, the Company anticipates that 75% to 80% of the loan applications will close within 45 to 90 days. 5 6 Warehousing. Warehousing is the term used to describe the process of holding mortgage loans pending their sale to investors (typically financial institutions) or into the secondary market. During the warehousing period the Company earns income equal to the difference between the interest received on the mortgage loans and the interest paid on short-term advances from banks which are used typically to fund the mortgage loans. During periods when short-term warehouse borrowing rates exceed long-term mortgage lending rates, the warehousing of mortgage loans can result in a loss. Pending sale and delivery to investors, the Company's mortgage loans are funded almost entirely by borrowings under warehousing lines of credit from banks. The Company typically holds mortgage loans for a period of up to 60 days after closing in order to prepare them for sale. Borrowed funds are repaid when the Company receives payment upon the sale of the loans. Accordingly, the Company is dependent on loan sales to free warehousing credit lines in order that new loans can be closed. Among its short-term financing sources, the Company maintains a loan agreement with Texas Commerce Bank N.A. and a mortgage loan agreement with Paine Webber Real Estate Securities. As is customary in the industry, these credit facilities can be terminated on demand or upon relatively short notice. In such an event, the Company would seek replacement or new credit facilities from other lenders for these existing lines of credit on terms at least as favorable. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Marketing. The offering, sale, packaging and delivery of closed mortgage loans to investors is the activity which distinguishes a mortgage banker as a financial intermediary from a portfolio lender or permanent investor. Marketing mortgage loans is the most complex aspect (both financially and operationally) of the mortgage banking business. It requires matching the needs of the retail origination market (consisting of home buyers and homeowners seeking new mortgages) with the needs of the secondary market for mortgage loans (consisting of securities broker-dealers, depository institutions, insurance companies, pension funds and other investors). Conventional mortgage loans (i.e., those not guaranteed or insured by agencies of the federal government), which are secured by one-to-four family residential properties (including condominiums) and which comply with applicable requirements, are packaged for direct sale to mortgage investors. In addition, there is an active private market for mortgage loans which have not been pooled or securitized. Factors which may influence the market value of packaged loans include the general level of interest rates, the types of loans (e.g., conventional mortgage loans or larger jumbo loans), interest payment and principal amortization schedules (e.g., self-amortizing or balloon, fixed-rate or indexed adjustable-rate, equal monthly payment or adjustable payment), type of mortgaged property (e.g., one-to four family detached, row or townhouse, condominium or planned unit development), 6 7 ratio of loan proceeds to appraised property value, property location, credit profile, and whether loans are packaged into pools (represented by securities) or sold separately on a whole loan basis. The following table sets forth for the periods indicated, the Company's loan production by type of interest payment and principal amortization schedule as well as loan to value ratio information (dollars in thousands): TABLE 4
FISCAL YEAR ENDED JANUARY 31, ----------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- 30-year Fixed Rate: Number of Loans . . . . . . 6,092 5,349 4,569 5,084 818 Volume of Loans . . . . . . . . $492,949 $424,994 $339,394 $448,762 $ 94,297 Percent of Total Volume . . 60.88% 67.22% 60.15% 65.28% 46.43% 15-year Fixed Rate: Number of Loans . . . . . . 785 611 844 1,953 678 Volume of Loans . . . . . . $49,149 $ 40,137 $ 49,536 $142,340 $ 50,985 Percent of Total Volume . . 6.07% 6.35% 8.78% 20.70% 25.11% Adjustable Rate ("ARMS"): Number of Loans . . . . . . 1,487 1,239 1,217 299 248 Volume of Loans . . . . . . . . . $143,453 $114,619 $108,983 $ 34,073 $ 26,534 Percent of Total Volume . . 17.71% 18.13% 19.32% 4.96% 13.07% Other (1): Number of Loans . . . . . . 0 69 352 194 245 Volume of Loans . . . . . . 0 $ 5,225 $ 6,154 $ 3,121 $ 3,408 Percent of Total Volume . . 0% 0.82% 1.09% 0.45% 1.68% Balloon Payment: Number of Loans . . . . . 1743 660 1,242 1,380 464 Volume of Loans . . . . . $124,205 $ 47,306 $ 60,167 $ 59,188 $ 27,863 Percent of Total Volume . . 15.34% 7.48% 10.66% 8.61% 13.71% Total Number of Loans . . . 10,107 7,928 8,224 8,910 2,448 Total Volume . . . . . . . . $809,756 $632,281 $564,235 $687,484 $203,087 Total Loan to Value Percent. 84.13% 83.8% 90.5% 94.5% n/a*
- ------------------------------------- *n/a = not available for this period. (1) This category represents mortgages and land contracts with other than 15 or 30 year terms, which have no balloon payment. 7 8 The following table sets forth for the periods indicated, the number, dollar volume and percent of total volume of the Company's loan production by occupancy status and type of mortgaged property (dollars in thousands): TABLE 5
FISCAL YEAR ENDED JANUARY 31, ----------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Detached - Single Family - ------------------------ Owner Occupied: Number of Loans . . . . . . . . . . 8,939 6,943 6,916 7,441 1,864 Volume of Loans . . . . . . . . . . $ 724,011 $ 578,154 $ 506,714 $ 636,440 $ 178,515 Percent of Total Volume . . . . . . 89.41% 91.44% 89.81% 92.58% 87.90% Non-owner occupied: Number of Loans . . . . . . . . . . 442 133 947 1,088 447 Volume of Loans . . . . . . . . . . $ 20,733 $ 6,121 $ 28,603 $ 23,441 $ 14,427 Percent of Total Volume . . . . . . 2.56% 0.97% 5.07% 3.41% 7.11% Other (1): Number of Loans . . . . . . . . . . 76 66 39 64 9 Volume of Loans . . . . . . . . . . $ 6,022 $ 5,929 $ 3,310 $ 4,894 698 Percent of Total Volume . . . . . . 0.75% 0.94% 0.59% 0.71% 0.34% Multi-Unit and Commercial - ------------------------- Owner Occupied: Number of Loans . . . . . . . . . . 523 360 262 265 101 Volume of Loans . . . . . . . . . . $ 52,489 $ 28,919 $ 19,909 $ 18,895 $ 7,655 Percent of Total Volume . . . . . . 6.48% 4.57% 3.53% 2.75% 3.77% Non-owner occupied: Number of Loans . . . . . . . . . . 127 426 60 52 27 Volume of Loans . . . . . . . . . . $ 6,501 $ 13,158 $ 5,699 $ 3,814 $ 1,792 Percent of Total Volume . . . . . . 0.80% 2.08% 1.00% 0.55% 0.88%
_____________________ (1) Includes second homes and vacant land. The sale of mortgage loans produces a net gain or loss equal to the sum of (i) the difference between the principal amount of the loans and the net price at which the loans are sold (the cash gain or loss on sales) and (ii) the present value of the difference (the "premium on sale of mortgage loans"), if any, between the stated interest rate collected by the mortgage banker from the mortgage loan borrowers and the interest rate paid by the mortgage banker to the purchasers of the loans, net of a normal servicing fee. The Company typically holds its mortgage loans for up to 60 days before selling them to investors. The Company sells conforming loans either directly on a loan-by-loan basis to Freddie Mac, Fannie Mae or other financial institutions, or by a process of "securitization" of loan pools. Conforming loans and loans qualifying for securitization through Ginnie Mae programs may be grouped in pools and assigned to Freddie Mac, Fannie Mae or Ginnie Mae, as applicable, which issues a mortgage-backed security ("MBS") representing an undivided interest in the loan pool. For issuing the MBS, Freddie Mac, Fannie Mae or Ginnie Mae receives an annual fee, up to 0.50% of the declining principal amount of the loan 8 9 pool. The Company, through investment bankers, may then sell these MBSs to investors or hold them for investment. Loan pools may be sold to Freddie Mac or Fannie Mae, or securitized in the form of Ginnie Mae mortgaged-backed securities and sold to institutional investors with or without recourse in the event of default by the borrowers. If a loan pool is sold without recourse, Freddie Mac will typically charge a fee for issuing the MBS which is .05% to .07% higher than if such loan pool were sold with recourse. The Company decides to sell loan pools with or without recourse based primarily upon capital market conditions and perceived risks of the terms of such mortgage loan documents. To date all of the loan pools sold by the Company to Freddie Mac or Fannie Mae or through Ginnie Mae programs have been sold on a non-recourse basis. Mortgage loans are also sold on a loan-by-loan basis to banks, mortgage companies and other private investors and, in the case of conforming loans, may be sold to Freddie Mac or Fannie Mae. Such individual loan sales are typically made by the Company on a non-recourse basis. During fiscal 1997, 1996 and 1995, the Company made $809.8 million, $632.3 million and $564.2 million of non-recourse loans, respectively, and did not sell any loans with recourse. Loans underwritten and sold may be subject to repurchase if the underwriting standards of the investor are not met, potentially resulting in actual loss and/or the limitation of the Company's liquidity. The Company packages substantially all of its FHA-insured and VA-guaranteed mortgage loans into pools of loans sold in the form of pass-through mortgage-backed securities guaranteed by Ginnie Mae. With respect to loans secured through Ginnie Mae programs, the Company is insured against foreclosure loss by the FHA or partially guaranteed against foreclosure loss by the VA (at present generally 25% to 100% of the loan). Since the Company is not an end investor in these types of loans, its risk with respect to these loans is minimal. FHA-insured and VA-guaranteed mortgage loans represent approximately 33% of the Company's originations in any given year. The discontinuance of these programs would have a limited impact upon the Company due to the Company's ability to originate a substantial volume of conventional loans which enables the Company to market mortgage loans to Freddie Mac, Fannie Mae or other investors. The Company commits to sell loans in an amount equal to the closed loans held in inventory, plus a portion of the loans that the Company has committed to make but has not yet closed. This enables the Company to mitigate the interest rate risk resulting from the fact that market interest rates may change between the time that the Company commits to make or purchase a loan and the time the Company commits to sell or sells such loans. The portion of loans that have not yet closed which the Company commits to sell depends on numerous factors, including the total amount of the Company's outstanding commitments to make loans, the portion of such loans that is likely to close, the timing of such closings and anticipated changes in interest rates. The Company 9 10 constantly monitors these factors and adjusts its commitments position accordingly. The Company's commitment position may consist of mandatory forward commitments on mortgage-backed securities or mortgage loans, options on mortgage-backed securities or treasury futures contracts, or outright futures contracts. See Note 9 of Notes to Consolidated Financial Statements for a discussion of financial instruments with off-balance-sheet risk. Non-conforming loans are sold to a different group of investors. They are typically packaged with other similar loans and sold servicing released, in bulk, to obtain a more favorable price. In the fourth quarter, the Company entered into an agreement with another party to sell substantial portions of the Company's non-conforming production for purposes of securitization. This entitles the Company to the difference between the weighted average coupon rate of the loan it originated and the security's stated yield, less a normal servicing fee and certain other fees. Servicing. At January 31, 1997, the Company owned servicing rights for mortgages with outstanding balances of approximately $1.48 billion and to land contracts with outstanding net balances of approximately $117 million. The Company intends to increase significantly its servicing of residential mortgage loans, and to maintain a mortgage and land contract servicing system that emphasizes cash management and compliance with investor servicing requirements. To this end, the Company intends to purchase conventional mortgage loan servicing rights from other unaffiliated loan servicers. The Company also obtains additional servicing through the retention of servicing with respect to mortgages and land contracts that it originates and sells to others. For residential mortgage loans which it originates, the Company retains the servicing related to most of these loans temporarily, then sells the servicing rights from time to time on the open market. The Company intends to restrict its purchases of mortgage servicing to servicing that can be purchased at a price that provides targeted rates of return, and is compatible with the Company's systems and processes. During fiscal 1997, the Company purchased servicing with respect to approximately $830 million of mortgage loans and has sold servicing with respect to approximately $1.8 billion of mortgage loans. A loan servicing portfolio creates an earning asset in the form of income created from servicing fees, which range generally from 0.25% to 0.50% per year for mortgage loans and from 0.25% to 2.5% per year for land contracts, based on the declining principal balance of the mortgage loans or the declining net principal balances of land contracts serviced, and the potential interest earnings on escrow funds held until the time payment for taxes and insurance must be made. Based upon current market conditions, the Company estimates that servicing rights for residential mortgage loans and land contracts have a market value from 1.25% to 2.5% and from 1.25% to 4.0%, respectively, of the principal balance of the 10 11 mortgage loans and the declining net principal balances of land contracts serviced. One of the Company's strategies is to build and retain its servicing portfolio. The Company believes that it has developed systems that enable it to service mortgage and land contract loans efficiently and therefore enhance the returns it can earn from investments in servicing rights. In addition, the Company believes that the earnings from its servicing portfolio may to some extent offset the effect of interest rate fluctuations on loan origination revenue. In general, the value of the Company's loan servicing portfolio may be adversely affected as mortgage interest rates decline and expected loan prepayments increase. Income generated from the Company's loan servicing portfolio also may decline in such an environment. On the other hand, these effects may be offset somewhat by an increase in originations and servicing income attributable to new loans which historically increase in periods of declining mortgage interest rates. However, there can be no assurance that low mortgage rates will result in increased loan originations, particularly during periods of slow or negative economic growth. As of January 31, 1997, the weighted average rate on mortgages serviced by the Company but owned by others was 8.04% and the weighted average rate on mortgages and land contracts serviced by the Company but owned by MCA Mortgage or MCA-sponsored pass-through pools was 10.98%. 11 12 The following table sets forth information about the Company's retail and wholesale loan origination and servicing activities: TABLE 6
FISCAL YEAR ENDED JANUARY 31, -------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT AVERAGE LOAN BALANCE) Beginning loan servicing portfolio . . . . . . . . . . . . . $ 2,206,460 $ 1,303,628 $ 1,105,534 $ 234,743 $ 44,380 Add: Loans purchased and originated by the Company for resale . . . . . . . . 727,007 632,281 536,881 687,484 203,087 Loans purchased by the Company for syndication . . . . . 20,849 25,597 27,354 19,188 16,475 Mortgage servicing purchased (net of sales) . . . . . (862,569) 618,780 (166,577) 471,587 98,808 ----------- ----------- ----------- ----------- -------- $ 2,091,747 $ 2,580,286 $ 1,503,192 $ 1,413,002 $362,750 Less: Amortization . . . . . . . . . . . (53,761) (43,491) (43,228) (36,832) (1,146) Prepayments of loans . . . . . . . (237,196) (172,100) (107,571) (210,305) (7,773) Loans sold with servicing sold. . . (199,748) (158,235) (48,765) (60,331) (119,088) ----------- ----------- ----------- ----------- -------- Ending loan servicing portfolio . . . $ 1,601,042 $ 2,206,460 $ 1,303,628 $ 1,105,534 $234,743 =========== =========== =========== =========== ======== Number of loans serviced (end of period) . . . . . . . . 21,248 27,357 16,372 15,900 4,063 Average loan balance . . . . . . . . $ 75,350 $ 80,650 $ 79,625 $ 69,530 $ 57,776
The following table sets forth, for the periods indicated, the mortgage delinquency rate of the Company's loan servicing portfolio and information relating to foreclosed properties: TABLE 7
FISCAL YEAR ENDED JANUARY 31, --------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Delinquent mortgage loans at-- Period end: 30 days: Number of loans . . . . . . . . 684 227 359 259 157 Percent of total loans . . . . . 3.22% 0.83% 2.19% 1.87% 3.86% 60 days: Number of loans . . . . . . . . 188 49 97 77 26 Percent of total loans . . . . . 0.88% 0.18% 0.59% 0.56% 0.64% 90 days or more: Number of loans . . . . . . . . 339 75 143 43 45 Percent of total loans . . . . . 1.60% 0.27% 0.87% 0.31% 1.11% Total delinquencies: Number of loans . . . . . . . . 1,211 351 599 379 228 Percent of total loans . . . . . 5.70% 1.28% 3.65% 2.74% 5.61% Foreclosed Properties: Beginning inventory . . . . . . . 122 84 83 84 34 Properties acquired . . . . . . . 106 136 89 122 162 Ending inventory . . . . . . . . 113 122 84 83 84 Aggregate carrying value, net (-000's) . . . . . $ 2,576 $ 2,288 $ 1,500 $ 1,495 $ 1,701 Average carrying value . . . . . . $ 22,798 $ 18,754 $17,854 $ 18,012 $ 20,246
12 13 OTHER BUSINESS ACTIVITIES Securitization and Syndication of Real Estate Interests. The Company is involved in marketing real estate interests in the form of pass-through securities which represent the ownership of undivided fractional interests in a defined pool of real estate related loans and loan participations. The Company's primary objective in marketing these securities is to provide investors with consistent high income without undue risk of loss. To accomplish this, the Company has developed a program of acquiring for resale real estate related investments consisting primarily of land contract seller's interests and real estate mortgage notes. The Company emphasizes investments in land contract seller's interests because of the traditional absence of competition from financial institutions in this market, which generally results in higher yields, and the belief that legal rights and remedies available to land contract sellers are more flexible and lead to collection of delinquent accounts with greater success than can be realized with respect to mortgage notes. In addition, a land contract may be used only as an instrument facilitating the sale and exchange of real property. Therefore, the nature of the debt owed by the land contract purchaser is a result of the purchaser's desire to own, through installment payments, the realty involved. Through January 31, 1997, the Company had sponsored 114 offerings of pass-through certificates. For each offering, a subsidiary acts as the sponsor and servicing agent for the land contracts, mortgages and other real estate interests which are held for the benefit of the certificate holders. Pursuant to the master pooling and servicing agreement relating to the pools, the sponsor is obligated to purchase all outstanding participation certificates held by investors in that pass-through pool at such time as the aggregate net receivable balance of each pass-through pool is less than 10% of the original face amount. At January 31, 1997, the maximum amount of these future purchase commitments totaled approximately $9.4 million. The sponsor can satisfy its repurchase obligation for such a paid-down pool by arranging a purchase of the underlying real estate interests by another pass-through pool or a mortgage investor. 13 14 The following table shows the growth of the Company's originations and purchases of loans for syndication in pass-through pools during the fiscal years indicated: TABLE 8
FISCAL YEAR ENDED JANUARY 31, ---------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Number of Land Contracts purchased for syndication . . . . . 855 933 1,002 798 308 Average balance . . . . . . . . . . . $ 24,418 $ 23,485 $ 22,453 $ 17,759 $ 31,413 Total amount of Land Contracts purchased for syndication . . . . . . . . . . . . $ 20,877,360 $ 21,911,707 $ 22,498,079 $ 14,172,104 $ 9,675,388 Number of Mortgage Notes purchased for syndication . . . . . 46 78 212 344 260 Average loan balance. . . . . . . . . $ 62,930 $ 47,246 $ 22,906 $ 14,580 $ 26,152 Total amount of Mortgage Notes purchased for syndication . . . . . . . . . . . . $ 2,894,797 $ 3,685,207 $ 4,856,239 $ 5,015,723 $ 6,799,612 Total number of loans purchased for syndication . . . . . 901 1,011 1,214 1,142 568 Average loan balance . . . . . . . . $ 6,384 $ 25,318 $ 22,513 $ 16,802 $ 29,005 Total amount purchased for syndication . . . . . . . . . . . . $ 23,772,157 $ 25,596,914 $ 27,354,318 $ 19,187,827 $ 16,475,000
Purchase and Resale of Real Property. The Company purchases and sells income-producing real estate, with sales made primarily to limited partnerships for which an affiliated company acts as general partner. This activity produces income to the Company in the form of gains on the sale of such real estate. In addition, MCA Realty purchases distressed residential real estate, which is rehabilitated and sold to non-related individuals. During the year ended January 31, 1997, the Company acquired and sold 820 single family homes for a total gain of $8.2 million, $7.5 million of which represented sales to the limited partnerships described above. During fiscal 1996, 1995, and 1994, the Company acquired and sold 723, 735, and 415 single-family homes for total gains of $7.3 million, $7.4 million, and $4.9 million, respectively, of which $6.5 million, $7.3 million and $4.8 million, respectively, represented sales to related parties. See Note 14 of Notes to Consolidated Financial Statements for a summary of selected consolidated segment financial information. The income producing real estate which is purchased by the Company and its affiliates is acquired through the assistance of both affiliated and unaffiliated real estate brokers. Approximately 60% and 40%, respectively, is acquired through affiliated and nonaffiliated brokers. There appears to be increased competition for these income-producing real estate properties as real estate values continue to escalate and the economy continues to grow. Most of the income-producing real estate is sold by the Company and its affiliates on land contracts to limited partnerships controlled by an affiliate of the Company. These transactions are not arm's length transactions with independent third party appraisals. The land contracts are then sold by the Company to real estate pass-through pools of which 14 15 MCA is the sponsor of the pools. The remaining balance of income-producing real estate is sold to unrelated third parties. Because most of the income-producing real estate sales are directed to affiliated partnerships, the normal real estate concerns associated with purchasers and fluctuating market values are not applicable. These partnerships are engaged in the business of renting income producing properties to individuals. The day-to-day real estate rental concerns are those of the syndicated real estate limited partnerships of the affiliates and not those of the Company. However, the payments to the Company pursuant to the land contract receivables are dependent upon the ability of these partnerships to generate rental income. Other. During fiscal 1996, the Company made a common stock investment of approximately $1.0 million in a Delaware Limited Liability Company. This start-up company participates in the used vehicle retail industry through providing floor plan financing and joint venture activities with existing dealers. The Company's investment in the Class B Securities issued by this Limited Liability Company provides it the right to participate in earnings and distributions, if any, subject to the preferential right of certain other shareholders. COMPETITION The Company competes with other mortgage bankers, state and national banks, thrift institutions and insurance companies for loan originations and purchases. While there are several dominant competitors in the industry, the Company believes it is a mid-range mortgage company in its markets. Many of its competitors have substantially greater resources than the Company. However, the Company believes that it offers a more diversified and, in some cases, unique product line to its customers. The Company competes, in part, through print and electronic media advertising campaigns, by motivating its sales force through incentive compensation based on volume of loan originations, by maintaining a network of branch locations designed to provide sales support for its originators and by maintaining close relationships with real estate brokers and builder-developers. REGULATION The Company is subject to the rules and regulations of, and examinations by, Freddie Mac, Fannie Mae, Ginnie Mae and the Department of Housing and Urban Development ("HUD") with respect to the processing, origination and purchase, sale and servicing of mortgage loans and contracts. These rules and regulations prohibit discrimination, provide for inspection and appraisals of properties, require credit reports on prospective borrowers and, in some cases, fix maximum interest rates, fees and loan amounts. The Company is required to meet certain financial requirements and to submit certified financial statements to these agencies annually. Mortgage loan origination activities are subject to the Equal Credit Opportunity Act, Federal Truth-in-Lending Act, Real Estate Settlement Procedures Act and the regulations promulgated 15 16 thereunder which prohibit discrimination and require the disclosure of certain information to borrowers concerning credit and settlement costs. Mortgage loans, other than first mortgages, are also subject to the usury statutes of the states in which the Company does business. Additionally, there are various state laws affecting the Company's mortgage banking operations, including licensing requirements and substantive limitations on the interest and fees that may be charged. MCA Mortgage and MCA are registered with the Commissioner of the Michigan Financial Institutions Bureau under the Michigan Mortgage Brokers, Lenders, and Servicers Licensing Act and are subject to the provisions of such law. MCA Realty is a licensed real estate broker in the state of Michigan. Expansion of the Company's operations has subjected it to similar regulations in the states of Indiana, Illinois, Idaho, Kentucky, Maryland, Ohio, Florida, West Virginia, California, North Carolina and Pennsylvania. EMPLOYEES At January 31, 1997, 452 individuals were employed by the Company, of which 433 were full-time employees, including 157 mortgage and land contract originators and mortgage and land contract servicers. The remaining full-time employees are administrative and management personnel. None of the Company's employees is represented by a bargaining agent. The Company believes its relations with its employees are good. ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth selected historical financial data of the Company for each of the periods indicated in the five-year period ended January 31, 1997, which were derived from the audited consolidated financial statements of the Company. The audited consolidated financial statements of the Company for each of the periods in the three-year period ended January 31, 1997 are included elsewhere in this Annual Report on Form 10-K. This table should be read in conjunction with the audited consolidated financial statements of the Company and the notes thereto.
YEAR ENDED JANUARY 31, -------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Income Data: Revenues-- Gain on sale of land contracts . . . . . . $ 3,438 $ 2,981 $ 2,983 $ 1,753 $ 1,433 Gain on sale of real estate. . . . . . . . . 708 751 -- 67 299 Gain on sale of real estate-related parties . . . . . . . . . . 7,539 6,530 7,365 4,811 3,249 Gain on bulk sales of servicing rights . . . . . . . . . . . . . 5,231 4,726 7,475 5,579 997 Mortgage origination fees and gain on sale of mortgages . . . . . . . . . 24,862 14,339 5,584 11,282 6,280 Servicing fees . . . . . . . . . . . . . . . 8,499 6,244 4,617 1,917 851 Interest income . . . . . . . . . . . . . . 8,168 5,903 5,106 3,948 856 Other . . . . . . . . . . . . . . . . . . . 481 478 241 177 482 -------- --------- --------- --------- --------- Total revenues . . . . . . . . . . . . . . 58,926 41,951 33,371 29,534 14,393 Expenses . . . . . . . . . . . . . . . . . . 57,522 40,823 33,547 28,562 13,477 -------- --------- --------- --------- --------- Income (loss) before federal income taxes . . . . . . . . . . . . . . 1,404 1,128 (176) 972 916 Provision for federal income taxes. . . . . . . . . . . . . . . . 639 512 102 421 330 -------- --------- --------- --------- ---------
16 17 Net income (loss). . . . . . . . . . . . $ 765 $ 616 $ (278) $ 551 $ 586 ======== ========= ========= ========= ========= Net income (loss) per share . . . . . . . . . $ 0.59 $ 0.30 $ (1.80) $ 0.98 $ 2.01 Ratio of earnings over fixed charges (2) . . . . . . . . . . . . . . . . 1.11x 1.13x n/a 1.20x 1.82x Earnings (deficiency of earnings) over fixed charges . . . . . . . . . . . . 1,404 1,128 (176) 972 916 Balance Sheet Data: Assets-- Cash . . . . . . . . . . . . . . . . . . . $ 3,097 $ 2,730 $ 2,931 $ 4,782 $ 3,699 Mortgages held for resale . . . . . . . . 54,430 63,306 15,702 39,250 14,084 Other . . . . . . . . . . . . . . . . . . 87,465 69,155 58,479 32,813 10,849 -------- --------- --------- --------- --------- Total assets . . . . . . . . . . . . . . $144,992 $ 135,191 $ 77,112 $ 76,845 $ 28,632 ======== ========= ========= ========= ========= Liabilities-- Notes payable(3) . . . . . . . . . . . . . $ 83,975 $ 86,598 $ 44,843 $ 54,549 $ 13,824 11% Subordinated Debentures due 1997, 2000 and 2002 . . . . . . . . 15,542 9,174 4,938 4,938 3,171 10% Subordinated Notes Payable . . . . . . 15,000 --- --- --- --- Other . . . . . . . . . . . . . . . . . . . 19,570 29,258 18,041 8,495 6,465 -------- --------- --------- --------- --------- Total liabilities . . . . . . . . . . . $134,087 $ 125,030 $ 67,822 $ 67,982 $ 23,460 Redeemable Common Stock(4) . . . . . . . . 256 --- --- 300 300 Stockholders' equity . . . . . . . . . . . 10,649 10,161 9,290 8,563 4,872 -------- --------- --------- --------- --------- Total liabilities and stockholders' equity . . . . . . . . . $144,992 $ 135,191 $ 77,112 $ 76,845 $ 28,632 ======== ========= ========= ========= ========= Operating Data: Loan production-- Number of loans originated . . . . . . . . 10,107 7,928 8,224 8,910 2,448 Average loan balance . . . . . . . . . . . $ 80 $ 80 $ 69 $ 77 $ 83 Total loans originated . . . . . . . . . . $809,756 $ 632,281 $ 564,235 $ 687,484 $ 203,087 Number of full-time employees . . . . . . . . 433 412 336 448 202
- ------------------- (1) On July 19, 1994 the Company purchased substantially all of the revenue producing activities of Liberty National Mortgage Corporation. See Note 15 of Notes to Consolidated Financial Statements. (2) The ratio of earnings to fixed charges was computed by dividing (a) net income (loss) for the period plus fixed charges by (b) fixed charges, which consist of interest expense, amortization of debt expense and that portion of rentals that represents interest. The ratio of earnings over fixed charges and preferred dividends was 1.12x, 1.12x, 1.19x, and 1.79x for the years ended January 31, 1997, 1996, 1994, 1993, respectively. Earnings were insufficient to cover fixed charges for the year ended January 31, 1995. The deficiency of earnings over fixed charges and preferred dividends was $0.6 million for the year ended January 31, 1995. (3) See Note 3 of Notes to Consolidated Financial Statements. (4) See Note 5 of Notes to Consolidated Financial Statements ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Financial Statements, Schedules and Exhibits The financial statements and related information filed with this amendment are listed on page F-1, immediately following this page. 17 18 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Certified Public Accountants F-2 Consolidated Balance Sheets as of January 31, 1997 and 1996 F-3 Consolidated Statements of Operations for the years ended January 31, 1997, 1996 and 1995 F-4 Consolidated Statements of Stockholders' Equity for the years ended January 31, 1997, 1996 and 1995 F-5 Consolidated Statements of Cash Flows for the years ended January 31, 1997, 1996 and 1995 F-6 Notes to Consolidated Financial Statements F-9
F-1 19 Report of Independent Certified Public Accountants To the Board of Directors of MCA FINANCIAL CORP. We have audited the accompanying consolidated balance sheets of MCA Financial Corp. and Subsidiaries as of January 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended January 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of MCA Financial Corp. and its Subsidiaries as of January 31, 1997 and 1996, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended January 31, 1997, in conformity with generally accepted accounting principles. As described in Note 1, in February 1996, the Company adopted Statement of Financial Accounting Standards No. 122, "Accounting for Certain Mortgage Servicing Rights". Moore Stephens Doeren Mayhew, P.C. Grant Thornton LLP Troy, Michigan Detroit, Michigan April 28, 1997 (except for earnings per share data as discussed in Note 1, as to which the date is May 14, 1997) F-2 20 MCA FINANCIAL CORP. CONSOLIDATED BALANCE SHEETS ASSETS
JANUARY 31, 1997 1996 ------------ ------------ Cash $ 3,096,993 $ 2,730,408 Land contracts held-for-resale 10,351,425 11,484,877 Mortgages held-for-resale 54,430,155 63,306,372 Accounts receivable - mortgages sold 15,489,908 - Accounts receivable 16,997,311 9,722,527 Accounts receivable - related parties 6,827,285 8,256,090 Mortgage servicing rights - net 16,324,263 27,293,358 Excess interest spread receivable 7,987,053 - Investments 2,571,750 2,492,816 Property and office equipment 5,582,612 4,856,330 Deferred charges and other assets 5,333,058 5,047,863 ------------ ------------ Total assets $144,991,813 $135,190,641 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Notes payable $ 83,975,834 $ 86,597,703 Subordinated debentures 15,542,000 9,174,000 Subordinated notes payable 15,000,000 - Accounts payable 15,705,913 25,206,687 Accounts payable - related parties 1,043,842 1,693,311 Accrued interest and other expenses 2,419,048 2,058,080 Deferred federal income tax 400,000 300,000 ------------ ------------ Total liabilities 134,086,637 125,029,781 ------------ ------------ COMMITMENTS AND CONTINGENCIES - - REDEEMABLE COMMON STOCK 256,373 - STOCKHOLDERS' EQUITY Common stock Authorized 3,750,000 shares at January 31, 1997 and 1996. No par, stated value $.01 each. Issued and outstanding, 503,281 shares at January 31, 1997 and 448,617 shares at January 31, 1996 5,033 4,486 Preferred stock (Series A) Authorized 350,000 shares, $10 stated value, issued and outstanding 203,022 shares at January 31, 1997 and 1996 2,030,220 2,030,220 Preferred stock (Series B) Authorized 750,000 shares, $10 stated value, issued and outstanding 336,619 shares at January 31, 1997 and 1996 3,366,190 3,366,190 Additional paid-in capital 3,664,976 1,457,251 Retained earnings 1,582,384 1,302,713 ------------ ------------ Total stockholders' equity 10,648,803 10,160,860 ------------ ------------ Total liabilities and stockholder's equity $144,991,813 $135,190,641 ============ ============
See accompanying notes to consolidated financial statements F-3 21 MCA FINANCIAL CORP. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JANUARY 31, 1997 1996 1995 ---------- ----------- ----------- REVENUES Gain on sale of land contracts $ 3,437,662 $ 2,981,138 $ 2,983,022 Gain on sale of real estate 707,754 750,800 -- Gain on sale of real estate - related parties 7,539,447 6,529,708 7,365,199 Gain on bulk sales of servicing rights 5,231,163 4,725,872 7,475,444 Mortgage origination fees and gain on sale of mortgages 24,861,881 14,339,220 5,584,454 Servicing fees 8,499,396 6,243,748 4,616,738 Interest income 8,167,899 5,902,714 5,106,041 Other income 481,138 477,810 240,783 ---------- ---------- ---------- Total revenues 58,926,340 41,951,010 33,371,681 ---------- ---------- ---------- EXPENSES Payroll 15,775,097 11,955,536 10,985,576 Interest 11,426,082 7,565,044 6,018,518 Commissions 8,257,703 5,929,844 4,591,079 Professional services 1,879,525 1,447,810 1,511,215 Depreciation 687,333 554,904 351,964 Amortization 4,869,475 3,259,131 1,924,872 General and administrative 14,626,787 10,111,211 8,163,619 ---------- ---------- ---------- Total expenses 57,522,002 40,823,480 33,546,843 ---------- ---------- ---------- INCOME (LOSS) BEFORE FEDERAL INCOME TAXES 1,404,338 1,127,530 (175,162) PROVISION FOR FEDERAL INCOME TAXES 639,000 512,000 102,384 ---------- ---------- ---------- NET INCOME (LOSS) $ 765,338 $ 615,530 $ (277,546) ========== ========== ========== EARNINGS (LOSS) PER SHARE $ 0.59 $ 0.30 $ (1.80) ========== ========== ==========
See accompanying notes to consolidated financial statements F-4 22 MCA FINANCIAL CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEAR ENDED JANUARY 31, 1997, 1996 AND 1995
PREFERRED ADDITIONAL STOCK COMMON PREFERRED PAID-IN RETAINED SUB- STOCK STOCK CAPITAL EARNINGS SCRIPTIONS TOTAL ------ --------- ---------- -------- ---------- ----- Balance - February 1, 1994 $4,023 $4,698,870 $2,848,350 $1,897,815 $(886,000) $ 8,563,058 Net loss -- -- -- (277,546) -- (277,546) Issuance of common stock 26 -- 28,211 -- -- 28,237 Issuance of preferred stock -- 697,540 (159,531) -- 886,000 1,424,009 Preferred stock dividends -- -- -- (447,446) -- (447,446) ------ ---------- ---------- ---------- ---------- ----------- Balance - January 31, 1995 4,049 5,396,410 2,717,030 1,172,823 -- 9,290,312 Net income -- -- -- 615,530 -- 615,530 Issuance of common stock 444 -- 764,300 -- -- 764,744 Repurchase of common stock (7) -- (24,079) -- -- (24,086) Preferred stock dividends -- -- -- (485,640) -- (485,640) ------ ---------- ---------- ---------- ---------- ----------- Balance - January 31, 1996 4,486 5,396,410 3,457,251 1,302,713 -- 10,160,860 Net income -- -- -- 765,338 -- 765,338 Issuance of common stock 547 -- 207,725 -- -- 208,272 Preferred stock dividends -- -- -- (485,667) -- (485,667) ------ ---------- ---------- ---------- ---------- ----------- Balance - January 31, 1997 $5,033 $5,396,410 $3,664,976 $1,582,384 $ -- $10,648,803 ====== ========== ========== ========== ========== ===========
See accompanying notes to consolidated financial statements F-5 23 MCA FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JANUARY 31, 1997 1996 1995 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 765,338 $ 615,530 $ (277,546) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 5,556,808 3,814,035 2,276,836 Stock award compensation 207,970 165,744 28,237 Decrease (increase) in land contracts held-for-resale 1,133,452 (2,175,379) (5,439,497) Origination and purchase of mortgages held-for-resale (794,266,291) (632,281,000) (564,235,000) Sale of mortgages held-for-resale 803,142,508 585,277,031 587,782,628 Increase in accounts receivable - mortgages sold (15,489,908) -- -- Decrease (increase) in accounts receivable (7,274,784) 4,432,277 (7,325,104) Decrease (increase) in accounts receivable - related parties 1,428,805 (986,951) (1,333,086) Increase in excess interest spread receivable (7,987,053) -- -- Increase in deferred charges and other assets (1,104,199) (2,123,743) (1,538,268) Increase (decrease) in accounts payable (9,500,774) 9,852,602 9,047,933 Increase (decrease) in accounts payable - related parties (649,469) 193,729 194,211 Increase in accrued interest and other expenses 360,968 1,071,831 205,166 Increase in deferred Federal income taxes 100,000 100,000 20,000 ------------- ----------- ----------- Net cash provided by (used in) operating activities (23,576,629) (32,044,294) 19,406,510
See accompanying notes to consolidated financial statements F-6 24 MCA FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1997 1996 1995 ------- ------ ------ Net cash provided by (used in) operating activities - total from previous page $ (23,576,629) $(32,044,294) $ 19,406,510 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of MCA Realty Corporation - - 163,341 Investment in mortgage servicing rights-net 7,175,299 (12,125,632) (10,645,117) Decrease (increase) in investments (78,934) 36,912 (224,702) Capital expenditures (1,207,774) (1,073,420) (232,962) ------------- ------------ -------------- Net cash provided by (used in) investing activities 5,888,591 (13,162,140) (10,939,440) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable 814,899,838 548,960,490 529,181,111 Payments on notes payable (817,727,548) (597,680,156) (540,175,700) Proceeds from subordinated debentures 6,368,000 4,236,000 - Proceeds from subordinated notes payable 15,000,000 - - Redemption of common stock - - (300,000) Repurchase of common stock - (25,086) - Proceeds from issuance of preferred stock - - 1,583,540 Preferred stock issuance costs - - (159,531) Dividends on preferred stock (485,667) (485,640) (447,446) ------------- ------------ -------------- Net cash provided by (used in) financing activities 18,054,623 45,005,608 (10,318,026) ------------- ------------ -------------- NET INCREASE (DECREASE) IN CASH 366,585 (200,826) (1,850,956) CASH - BEGINNING 2,730,408 2,931,234 4,782,190 ------------- ------------ -------------- CASH - ENDING $ 3,096,993 $ 2,730,408 $ 2,931,234 ============= ============ ==============
See accompanying notes to consolidated financial statements F-7 25 MCA FINANCIAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
YEAR ENDED JANUARY 31, 1997 1996 1995 ----------- ---------- ---------- Cash paid during the period for: Interest $10,950,833 $7,435,339 $5,943,047 =========== ========== ========== Income taxes $ 412,000 $ 66,506 $ 325,878 =========== ========== ==========
During the year ended January 31, 1997, the Company issued 24,467 shares of common stock to employees and recognized $207,970 in compensation expense. The Company also issued 30,197 shares of redeemable common stock as part of a loan agreement with The Board of Trustees of the Policemen and Firemen Retirement System of the City of Detroit and recorded $256,675 in deferred charges. Capital leases totaling $205,841 were entered into for the purchase of various property and equipment during the year ended January 31, 1997. During the year ended January 31, 1996, the Company issued 24,410 shares of common stock to employees and recognized $164,744 in compensation expense. The Company also issued 20,000 shares of common stock to a stockholder/director of the Company in exchange for $600,000 in notes receivable. Prior to January 31, 1996, the notes receivable were assigned to Investor Pass-Through Trusts in satisfaction of amounts due the Trust by MCAFC. In December of 1995, the Company exchanged a $1,000,000 investment in a real estate partnership acquired from a related party in exchange for a reduction in amounts due the Company for an interest in a limited liability company whose primary activity involves providing financing for automobile dealerships. During the year ended January 31, 1996, capital leases totaling $474,077 were entered into for the purchase of various property and equipment. During the year ended January 31, 1995, the Company issued 2,567 shares of common stock to employees and recognized $28,237 in compensation expense. The Company also entered into capital lease arrangements for the purchase of various property and equipment in the amount of $767,145. On January 31, 1995, the Company acquired MCA Realty Corporation (see note 15) in a non-cash transaction. The following assets and liabilities were acquired in exchange for a $945,117 net reduction in accounts receivable from RIMCO Financial Corporation: Cash $ 163,341 Accounts receivable 414,126 Property and equipment 947,967 Deferred charges and other 18,918 Notes payable (521,634) Accounts payable (77,601) --------- $ 945,117 =========
See accompanying notes to consolidated financial statements F-8 26 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements at January 31, 1997, 1996 and 1995 include the accounts of MCA Financial Corp. (MCAFC) and its wholly owned subsidiaries MCA Mortgage Corp. (MCAMC), Mortgage Corporation of America (MCA), MCA Realty Corporation (MRC) and Complete Financial Corp. (CFC). Mortgage Corporation of America - Ohio (MCA-Ohio) is a wholly owned subsidiary of MCA. Intercompany accounts and transactions are eliminated in consolidation. NATURE OF OPERATIONS MCAFC and its subsidiaries (the Company) is a diversified mortgage banking and real estate services enterprise. The Company generates revenue from four primary sources including mortgage banking, land contract syndication, loan servicing and real estate sales. The Company originates first mortgage loans on residential properties. Loans are delivered, primarily on a pre-sold basis, to various institutional investors throughout the United States. These mortgage loans are typically sold on a non-recourse basis. Loans underwritten and sold may be subject to repurchase if the underwriting standards of the investor are not met. These transactions are accounted for as sales of loans since the Company is able to estimate its obligation under the recourse provisions, which historically have been immaterial. Gains and losses from loan sale transactions are recognized when the mortgage loans are sold and amount to approximately $12,513,000, $6,068,000 and $430,000 for the years ending January 31, 1997, 1996 and 1995, respectively. MCA purchases land contracts and mortgage notes at a discount from face value and packages (securitizes) these real estate investments into Investor Pass-through Trusts. MCA is the sponsor of the Trusts, which are sold as securities to investors by independent security broker-dealers. The Trusts hold the entire interest, including any residual, in the transferred loans. Gain on sale is recognized when the Trusts have broken escrow (investor funds have been received). F-9 27 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED NATURE OF OPERATIONS -- CONTINUED -------------------- MCAMC and MCA service the land contracts and mortgages for various investors. Servicing revenues are recognized monthly according to the servicing contracts related to the various portfolio interests. MCAFC, MCA and MRC purchase residential and commercial income properties which are sold to limited partnerships. Revenues related to limited partnership sales are recognized when the sales are closed. Substantially all of the real estate and land contracts held by the limited partnerships and Investor Pass-through Trusts are located in, or relate to, properties located in the greater Detroit, Michigan metropolitan area. LAND CONTRACTS HELD-FOR-RESALE ------------------------------ Land contracts held-for-resale are recorded at the lower of cost or market and consisted of the following at:
JANUARY 31, 1997 1996 --------- --------- Land contracts receivable $11,684,696 $12,158,775 Discount (197,796) (416,418) Senior liens payable (1,135,475) (257,480) ----------- ----------- $10,351,425 $11,484,877 =========== ===========
MORTGAGES HELD-FOR-RESALE ------------------------- Mortgages held-for-resale are recorded at the lower of cost or market which is determined by the aggregate method (unrealized losses are offset by unrealized gains). Cost approximated market value, therefore, no valuation allowance was necessary at January 31, 1997 and 1996. F-10 28 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED ACCOUNTS RECEIVABLE - MORTGAGES SOLD Accounts receivable - mortgages sold represents amounts due from the purchaser on sales of non-conforming mortgages. Management believes the outstanding balance is fully collectible at January 31, 1997, and accordingly no allowance for doubtful accounts has been provided. ACCOUNTS RECEIVABLE Accounts receivable consisted of the following at:
JANUARY 31, 1997 1996 ----------- ---------- Accounts receivable - sales of mortgage servicing rights $14,136,266 $5,912,243 Accrued fees and commissions 919,155 1,505,378 Accounts receivable - syndication sales 154,352 662,577 Accounts receivable - escrows on closed loans 983,971 563,061 Accounts receivable - stockholders 233,342 182,679 Accrued interest 181,420 211,843 Employee commission draws 128,178 113,799 Other 260,627 570,947 ----------- ---------- $16,997,311 $9,722,527 =========== ==========
Accounts receivable - related parties consist mainly of non-interest bearing advances and other administrative charges to Investor Pass-through Trusts and limited partnerships sponsored by the Company, and other related entities. Included in accounts receivable - related parties at January 31, 1997 and 1996, respectively, are approximately $571,000 and $793,000 due from an entity owned by certain directors and stockholders of the Company; $1,674,000 and $1,676,000 due from Property Corporation of America (PCA), an entity owned by certain directors and stockholders of the Company, and $3,384,000 and $4,568,000 due from investor pass-through trusts and limited partnerships is substantially dependent upon successful syndication of partnership interests and operating cash flows generated by rental operations. The Company uses the allowance method to account for possible losses of accounts receivable, and no allowance was deemed necessary at January 31, 1997 and 1996. F-11 29 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED MORTGAGE SERVICING RIGHTS In February 1996, the Company adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights". This requires the capitalization of a mortgage servicing asset for every origination whether it be originated or purchased. SFAS No. 122 also dictates prescribed rules for the amortization, periodic valuation, and the required valuation adjustment. As discussed in Note 1, the Company adopted SFAS 122 in February 1996. The effect of the adoption was to increase earnings by approximately $.73 million for Fiscal 1996 or $1.54 per share. Prior to adoption, a value was capitalized for purchased mortgage servicing rights. This capitalization was in accordance with SFAS Statement of Financial Accounting Standards No. 65, "Accounting for Certain Mortgage Banking Practices". The following is an analysis of the changes in mortgage servicing rights: Balance - January 31, 1994 $ 8,257,305 Additions 22,145,428 Scheduled amortization (1,334,724) Amortization due to changes in prepayment and other assumptions -- Sales (11,500,311) ----------- Balance - January 31, 1995 17,567,698 Additions 25,711,919 Scheduled amortization (1,991,974) Amortization due to changes in prepayment and other assumptions (468,007) Sales (13,526,278) ----------- Balance - January 31, 1996 27,293,358 Additions 10,780,600 Scheduled amortization (3,699,194) Amortization due to changes in prepayment and other assumptions -- Sales (18,050,501) ----------- Balance - January 31, 1997 $16,324,263 ===========
F-12 30 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED MORTGAGE SERVICING RIGHTS -- CONTINUED ------------------------- Amortization of purchased servicing rights is based on the ratio of net servicing income received in the current period to total net servicing income projected to be realized from the purchased servicing rights on a discounted basis. Projected net servicing income is determined on the basis of the estimated balance of the underlying mortgage loan portfolio, which declines over time from prepayment and scheduled amortization. The Company estimates future prepayment rates based on current interest rate levels and other economic conditions, as well as relevant characteristics of the servicing portfolio, such as loan types, interest rate stratification and recent prepayment experience. Amortization of purchased servicing rights was $3,699,194, $2,459,981 and $1,334,724 for the years ended January 31, 1997, 1996 and 1995, respectively. Accumulated amortization of purchased servicing rights was $5,806,181, $2,887,705 and $427,704 at January 31, 1997, 1996 and 1995, respectively. Properties securing the mortgage loans in the Company's servicing portfolio are located throughout the United States. At January 31, 1997, the net book value of the mortgage servicing rights portfolio approximated fair value. EXCESS INTEREST SPREAD RECEIVABLE --------------------------------- The Company sells mortgage loans in bulk to a third party for purposes of securitization. By agreement, the Company is entitled to the difference between the weighted average coupon rate of the loans it originated in the security and the security's stated yield, less a normal servicing fee and certain other fees. The Company determines fair value based on a discounted cash flow analysis. The analysis takes into consideration projected prepayments, defaults, interest rate and credit risks. Income is recognized at the time of sale and is included in mortgage origination fees and gain on sale of mortgages. INVESTMENTS ----------- Partnership investments consist of partnership interests in limited partnerships and are accounted for under the equity method. The partnerships invest primarily in residential rental properties. Presented below is summary unaudited financial information for the above limited partnerships as of, and for the year ended: F-13 31 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED INVESTMENTS - CONTINUED
DECEMBER 31, 1996 1995 -------- -------- Total assets $8,586,116 $9,327,310 Total liabilities 2,945,782 2,885,888 Partnership equity 5,640,334 6,441,422 Net income 432,499 510,748
Included in investments at January 31, 1997 and 1996 is a $1,000,000 membership interest investment in a LLC which was made in December 1995. This start-up Company participates in the used vehicle retail industry through providing floor plan financing and participating in joint venture activities with existing dealers. The Company's investment in the Class B interest issued by this LLC provides it the right to participate in earnings and distributions, if any, subject to preferential rights of certain other members. This investment is being accounted for on the cost method. PROPERTY AND OFFICE EQUIPMENT Property and office equipment are recorded at cost. Depreciation is calculated principally using the straight-line method based upon the estimated useful lives of the assets, ranging from seven to ten years. Property and office equipment consisted of the following at:
JANUARY 31, 1997 1996 -------- --------- Property and office equipment under capital lease $ 2,370,809 $ 2,475,010 Property and office equipment 3,729,214 2,653,472 Building and improvements 1,498,614 1,090,714 ----------- ----------- 7,598,637 6,219,196 Less accumulated depreciation (2,016,025) (1,362,866) ----------- ----------- $ 5,582,612 $ 4,856,330 =========== ===========
Depreciation expense for the year ended January 31, 1997, 1996 and 1995 amounted to $687,313, $554,904 and $351,964, respectively. F-14 32 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED REVENUE RECOGNITION Gains on the sale of mortgage servicing rights are recognized when title and all risks and rewards have irrevocably passed to the buyer and there are no significant unresolved contingencies. Mortgage origination fees on loans held-for-sale are recognized as income at the time the loan is sold. FAIR VALUE OF FINANCIAL INSTRUMENTS Statements of Financial Accounting Standards ("SFAS") No. 107 issued by the Financial Accounting Standards Board ("FASB"), "Disclosures About Fair value of Financial Instruments", requires the disclosure of fair value information about financial instruments, whether or not recognized in the statement of financial condition, where it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND CASH EQUIVALENTS For these short-term instruments, the carrying amount is a reasonable estimate of fair value. LAND CONTRACTS HELD-FOR-RESALE This portfolio consists of land contracts held-for-resale underlying single family residential properties. These are valued based on the fair value of obligations with similar credit characteristics. MORTGAGES HELD-FOR-RESALE This portfolio consists of single family mortgage loans held-for-sale and is valued using fair values attributable to similar mortgage loans. F-15 33 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED MORTGAGE SERVICING RIGHTS The fair value of the mortgaged servicing rights is determined using the discounted present value of the net cash flows. Market estimates are used for servicing costs, prepayment speeds and discount rates. EXCESS INTEREST SPREAD RECEIVABLE The fair value is determined by using the discounted present value of the net cash flows. Market estimates are used for servicing costs, prepayment speeds and discount rates. NOTES PAYABLE, SUBORDINATED DEBENTURES AND SUBORDINATED NOTES PAYABLE The carrying amount for these instruments approximates fair value. The following table sets forth the fair value of the Company's financial instruments:
JANUARY 31, 1997 1996 ----------------------- ----------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE -------- ------- -------- ------- Assets: Cash and cash equivalents $ 3,096,993 $ 3,096,993 $ 2,730,408 $ 2,730,408 Land contracts held-for-resale 10,351,425 10,351,425 11,484,877 11,484,877 Mortgage held-for-resale 54,430,155 54,430,155 63,306,372 63,306,372 Mortgage servicing rights 16,324,263 16,324,263 27,293,358 27,293,358 Excess interest spread receivable 7,987,053 7,987,053 -- -- Liabilities: Notes payable, subordinated debentures and subordinated notes payable 114,517,834 114,517,834 95,771,703 95,771,703
F-16 34 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. EARNINGS PER SHARE Earnings per share are computed based on the weighted average number of common and common equivalent shares outstanding during the period. The weighted average number of shares used in the determination of earnings per share was 475,949, 426,762 and 403,622 for the years ended January 31, 1997, 1996 and 1995. Previously reported earnings (loss) per share amounts have been adjusted to give effect to the preferred stock dividends. The effect of this adjustment was to decrease earnings per share by $1.02, $1.14 and $1.11 for the years ended January 31, 1997, 1996 and 1995, respectively. This change had no effect on reported net income (loss) for any of the years presented. RECLASSIFICATION Certain amounts in the prior year's financial statements have been reclassified to conform to the January 31, 1997 presentation. NEW PRONOUNCEMENTS In June 1996, the FASB issued "SFAS No. 125 - Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This statement was to have been effective prospectively from December 31, 1996, but was deferred when the FASB issued "SFAS No. 127 - Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." The effective date of the certain provisions have been deferred one year. The Company adopted certain of the provisions for transactions entered into during January, 1997. The effect of this adoption was not significant to net income. Management does not believe adoption of the remaining provisions will have a material effect on the financial statements. F-17 35 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED NEW PRONOUNCEMENTS - CONTINUED In February 1997, the FASB issued SFAS No. 128. "Earnings Per Share," which replaces the presentation of primary earnings per share ("EPS") with a presentation of basic EPS, requires dual presentation of basic and diluted EPS on the face of the statement of earnings regardless of whether basic and diluted EPS are the same, and requires a reconciliation of the numerator and denominator used in computing basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB Opinion 15. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. This Statement is effective for financial statements issued for periods ending after December 15, 1997, including interim periods, earlier application is not permitted, and requires restatement of all prior period EPS data presented. NOTE 2 - RESTRICTED CASH Included in cash and accounts payable are advance payments by borrowers on loans serviced by the Company in the amount of approximately $511,000 and $378,000, respectively, at January 31, 1997 and 1996. F-18 36 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 3 - NOTES PAYABLE
JANUARY 31, 1997 1996 -------- -------- Note payable under $115 million mortgage warehouse credit facility, subject to renewal on September 3, 1997, interest is computed at LIBOR plus .85% to 2.5% depending on type of loan and payable monthly, principal payable upon sale of mortgage collateral (mortgages held-for-resale) to institutional investors $ 48,369,064 $ - Note payable under $25 million mortgage warehouse credit facility, interest is computed at the bank's prime rate less 1/2% and payable monthly; principal payable upon sale of mortgage collateral (mortgages held-for-resale) to institutional investors or on demand. This facility was terminated January 8, 1997 - 22,557,781 Note payable under $28.5 million revolving credit facility, subject to renewal on October 31, 1997, interest is computed at the Federal Funds rate plus 1.5% (6.8% at January 31, 1997), collateralized by mortgage servicing rights 28,305,175 28,500,000 Note payable under $30 million mortgage warehouse facility, interest is computed at the federal funds rate plus 1.5% and deducted from the proceeds of investor fundings, principal payable upon sale of mortgage collateral (mortgages held-for-resale) to institutional investors or on demand. This facility was terminated August 31, 1996 - 26,554,708 ----------- ----------- Total - this page 76,674,239 77,612,489
F-19 37 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 3 - NOTES PAYABLE - CONTINUED
JANUARY 31, 1997 1996 -------- -------- Total - previous page $ 76,674,239 $ 77,612,489 Note payable under $10 million mortgage warehouse facility, subject to renewal on November 1, 1997, interest is computed at LIBOR plus 1.5% (6.94% at January 31, 1997), principal payable upon sale of mortgage collateral (mortgages held-for-resale) to institutional investors. 4,426,335 3,729,748 Note payable under $1 million line-of-credit for the acquisition and rehabilitation of residential real property subject to renewal on February 1, 1998, interest is computed at the bank's prime rate plus 1% (9.25% at January 31, 1997) collateralized by a first security interest in residential real property 284,200 - Revolving line-of-credit/note payable, $.5 million credit line for working capital, $1 million note payable for purchases of land contracts, interest is computed at the bank's prime rate plus 1% (9.25% at January 31, 1997). Land contracts are assigned to the bank as collateral, personally guaranteed by certain officers of the Company, payable upon sale of collateral. This facility was terminated April 14, 1997 250,000 1,500,000 ---------- ---------- Total-this page 81,634,774 82,842,237
F-20 38 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 3 - NOTES PAYABLE - CONTINUED
JANUARY 31, 1997 1996 -------- -------- Total - previous page $ 81,634,774 $ 82,842,237 Note payable under $1.5 million line-of-credit for the acquisition and rehabilitation of residential real property interest is computed at 12%, collateralized by residential real property and personally guaranteed by certain officers of the Company, principal payable upon sale of collateral. This facility was terminated December 13, 1996 - 1,448,042 Note payable under $1.5 million line-of-credit for the acquisition and rehabilitation of residential real property, interest is computed at the bank's prime rate plus 3/4%, collateralized by residential real property and personally guaranteed by certain officers of the Company, principal payable upon sale of collateral. This facility was terminated September 17, 1996 - 408,773 Land contracts payable to certain Investor Pass-through Trusts sponsored by the Company for purchase of a building, interest at 11%, collateralized by the building, principal payable based on 30 year amortization, balloon payment required in 10 years 452,898 542,556 Other notes payable, including obligations under capital leases, expiring at various times through 2002 1,888,162 1,356,095 ------------ ------------ $ 83,975,834 $ 86,597,703 ============ ============
F-21 39 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 3 - NOTES PAYABLE - CONTINUED In connection with the $28.5 million credit facility, the Company entered into an arrangement with the Policemen and Firemen Retirement System of the City of Detroit (The "Fund") whereby the Fund has agreed to provide payment upon the occurrence of certain events of default by the Company. In consideration for this, the Company pays certain fees to the Fund, and has provided it with an option to purchase up to five percent of the Company's outstanding common stock, at seventy percent of the public offering price per share, if the Company completes a firm commitment underwritten sale of its common stock prior to April 30, 2000. The above notes payable place certain financial restrictions on the Company. If for any reason the warehouse credit facilities are terminated, the Company's ability to fund mortgage loans will be adversely impacted. The Company anticipates renewal of all of its existing credit facilities. NOTE 4 - SUBORDINATED DEBENTURES In December 1991, the Company began offering up to $7,500,000 of 11% Asset-Backed Subordinated Debentures due March 15, 1997. Interest on the Debentures is payable quarterly. The Debentures are subordinate in right of payment to all current and future senior indebtedness of the Company. Payment of principal and interest on the Debentures is collateralized by a security interest in and lien upon certain existing and future contract rights to service mortgages and land contracts. These rights must at all times have a formula value, as determined by provisions of the Indenture, of at lease 105% of the principal amount of Debentures outstanding. Under certain limited conditions, the Debentures are redeemable commencing June 15, 1993 only up to $25,000 per holder in each calendar year and only up to an aggregate of $100,000 per calendar year for all holders. The right of redemption does not exist if the Company is in default under any senior indebtedness. Through January 31, 1997 there have been $17,000 in redemptions. The Debentures also place restrictions on dividends and certain equity transactions should the Company's consolidated retained earnings fall below $1,000,000. The Debentures are registered with the Securities and Exchange Commission. These debentures were redeemed in full on March 17, 1997. Through January 31, 1997, the Company has incurred approximately $866,000 in fees related to the debenture offering. These costs are included in deferred charges and other assets and are being amortized over the life of the debentures on the straight-line method. Accumulated amortization was $840,000 and $686,000 at January 31, 1997 and 1996. F-22 40 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 4 - SUBORDINATED DEBENTURES - CONTINUED In December 1994, the Company began offering up to $10,000,000 of 11% Asset-Backed Subordinated Debentures due June 30, 2000. Interest on the Debentures is payable quarterly. The Debentures are subordinate in right of payment to all current and future senior indebtedness of the Company. Payment of principal and interest on the Debentures is collateralized by a security interest in and lien upon certain existing and future contract rights to service mortgages and land contracts and specified mortgage notes and land contract vendors' interests relating to one-to-four family residential and commercial real estate. This collateral must at all times have a formula value, as determined by provisions of the Indenture, of at least 105% of the principal amount of Debentures outstanding. Under certain limited conditions, the Debentures are redeemable only up to $25,000 per holder in each calendar year and only up to an aggregate of $100,000 per calendar year for all holders. The right of redemption does not exist if the Company is in default under any senior indebtedness. Through January 31, 1997 there have been no redemptions. The Debentures are registered with the Securities and Exchange Commission. Through January 31, 1997, the Company has incurred approximately $1,513,000 in fees related to the debenture offering. These costs are included in deferred charges and other assets and are being amortized over the life of the debentures on the straight-line method. Accumulated amortization was $405,000 and $109,000 at January 31, 1997 and 1996. In June 1996, the Company began offering up to $6,000,000 of unsecured 11% subordinated debentures due June 30, 2002. Interest on the Debentures is payable quarterly. The debentures are subordinate in right of payment to all current and future indebtedness of the Company. Under certain limited conditions, the Debentures are redeemable only up to $25,000 per holder in each calendar year and only up to an aggregate of $100,000 per calendar year for all holders. The right of redemption does not exist if the Company is in default under any senior indebtedness. The Debentures are registered with the Securities and Exchange Commission. Through January 31, 1997, the Company has incurred approximately $67,000 in fees related to the debenture offering. These costs are included in deferred charges and other assets and are being amortized over the life of the debentures on the straight-line method. Accumulated amortization was $1,000 at January 31, 1997. F-23 41 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 5 -- SUBORDINATED NOTES PAYABLE In July 1996, the Company entered into a loan and financing agreement with The Board of Trustees of the Policemen and Firemen Retirement System of the City of Detroit ("The Fund") to provide the Company $15 million to expand its non-conforming lending business. Interest on this borrowing is 10% and is payable quarterly. Commencing July 1, 2001 equal quarterly installments of principal and interest will be paid until the loan terminates and is repaid in full on June 30, 2006. As a result of this agreement, the Fund was issued 30,197 shares, or 6% of the Company's common stock at the time. Anti-dilution provisions of the agreement may require the Company to issue additional shares in the future. The Fund has the right to "put" these redeemable shares back to the Company, under a number of different scenarios, on August 1, 2006, or upon an event of default with a minimum guaranteed repurchase of $1,400,000. NOTE 6 -- PREFERRED STOCK In March 1992 MCAFC began offering up to 350,000 units consisting of one share of Series A 9%, $10 stated value, cumulative convertible preferred stock and one warrant to purchase one share of common stock of the Company. The stock is convertible only in the event of an initial public offering of the Company's common stock. The warrants are conditional on an initial public offering of the Company's common stock within one year of the redemption of the warrant holders Series A preferred stock. The preferred stock is redeemable at any time at the option of the Company only. Redemption prices per share increase $.20 per year from $10.20 in 1993 to $11 in 1997 and thereafter. Through January 31, 1997 there have been no redemptions. Dividends are payable quarterly. In June 1993, MCAFC began offering up to 750,000 units consisting of one share of Series B 9%, $10 stated value, cumulated convertible preferred stock. The stock is convertible only in the event of an initial public offering of the Company's common stock. The preferred stock is redeemable at any time on or after July 15, 1994 at the option of the Company only at a redemption price of $10 per share. Through January 31, 1997 there have been no redemptions. Dividends are payable quarterly. Through January 31, 1997 the Company has incurred approximately $603,000 in fees related to the preferred stock offering. These costs have been offset against additional paid-in capital. F-24 42 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 7 -- FEDERAL INCOME TAXES Deferred income taxes are provided for on the liability method and reflect the net tax effects of temporary differences between the carrying cost and amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred tax liability are as follows:
January 31, 1997 1996 ----------- ------------ Depreciation of property and office equipment $ 518,000 $ 416,000 Amortization of goodwill (120,000) (108,000) Other 2,000 (8,000) --------- --------- $ 400,000 $ 300,000 ========= =========
Components of income tax expense are:
January 31, 1997 1996 1995 ----------- ----------- ------------ Current $539,000 $412,000 $ 82,384 Deferred 100,000 100,000 20,000 -------- -------- -------- $639,000 $512,000 $102,384 ======== ======== ========
The income tax provision reconciled to the tax computed at the statutory federal rate is as follows for the years ended January 31: Tax (benefit) at statutory rate $478,000 $383,000 $(59,000) Non-deductible items 161,000 169,000 107,000 Adjustment of prior year accrual -- -- 38,000 Other -- (40,000) 16,384 -------- -------- -------- $639,000 $512,000 $102,384 ======== ======== ========
F-25 43 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 8 - RELATED PARTY TRANSACTIONS The Company purchased various real estate parcels during the years ended January 31, 1997, 1996 and 1995. These parcels purchased from unrelated third parties were subsequently sold to limited partnerships, for which PCA is the general partner. Gains totaling $7,539,447, $6,529,708 and $7,365,199 for the years ended January 31, 1997, 1996 and 1995 were recognized on the sales, respectively. During the years ended January 31, 1997, 1996 and 1995 the Company agreed to pay commissions of $1,968,000, $1,735,000 and $1,315,000, respectively for the acquisition of properties acquired from unrelated third parties to a Company owned by three stockholders of MCAFC. These commissions reduced "Gain on Sale of Real Estate" in the consolidated Statements of Operations. MCA earned $36,000 for management fees for administrative services provided to U.S. Mutual Financial Corporation (USMFC) during each of the years ended January 31, 1997, 1996 and 1995, respectively. Certain stockholders of the Company are directors or major stockholders of USMFC. Included in accounts payable at January 31, 1997 and 1996 are approximately $1,044,000 and $1,500,000 attributable to transactions with partnerships, trusts and other related entities. Such transactions include rental payments received on behalf of these entities and disbursed in subsequent months. F-26 44 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 9 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company is party to financial instruments with off-balance sheet risk in the normal course of business through the production and sale of mortgage loans and the management of interest rate risk. These financial instruments include commitments to extend credit and forward contracts to deliver and sell loans to investors. The Company is exposed to credit loss in the event of nonperformance by the counter-parties to the various agreements. However, the Company does not anticipate nonperformance by the counter-parties. The Company's exposure to credit risk with respect to commitments to extend credit are limited due to the non-recourse nature of the loans upon sale to investors. At January 31, 1997 and 1996, respectively, the Company has approved loans that had not yet closed amounting to approximately $40,081,000 and $74,259,000. The Company manages credit risk with respect to forward contracts by entering into agreements only with investors meeting certain requirements. In the event of default by the counter-party the Company's exposure to credit risk is the difference between the contract price and the current market price. NOTE 10 - LEASE COMMITMENTS The Company leases office space and equipment under long-term capital and operating leases with varying terms which expire through 2002. Rent expense on operating leases approximated $2,282,000, $1,803,000 and $1,251,000 for the years ended January 31, 1997, 1996 and 1995, respectively, and is included in the caption "General and Administrative" expense in the Consolidated Statements of Operations. F-27 45 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 10 -- LEASE COMMITMENTS - CONTINUED As of January 31, 1997, approximate future minimum lease payments under capital leases and future minimum lease payments under operating leases that have initial or remaining noncancelable terms in excess of one year as of follows:
Capital Operating Leases Leases -------- ---------- 1998 $536,145 $1,314,462 1999 164,757 990,970 2000 1,555 645,592 2001 -- 32,679 2002 -- 15,000 -------- ---------- Total minimum lease payments 702,457 $2,998,703 ========== Less: amount representing interest 66,159 -------- Present value of minimum lease payments $636,298 ========
NOTE 11 -- COMMITMENTS AND CONTINGENCIES In accordance with the terms of the investor Pass-through Trust Participation Agreements, the Company is obligated to purchase all outstanding participation certificates held by investors at such time as the aggregate net receivable balances of each Trust is less than 10% of the original face amount of the Trust. At January 31, 1997 and 1996, the maximum amount of these future purchase commitments totaled approximately $9,381,000 and $8,011,000. Although the Company is approved as a correspondent with numerous mortgage investors, three investors purchased substantially all of the Company's mortgage loans originated during fiscal 1997, 1996 and 1995. Management believes that the loss of these investors would have a material adverse effect on the Company. The Company is a party to various routine legal proceedings arising out of the ordinary course of its business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse affect on the financial condition or results of operations of the Company. F-28 46 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 12 -- EMPLOYEE BENEFIT PLAN The Company has a 401(k) plan covering substantially all its employees. The Company has the option of making an annual discretionary profit sharing contribution and is matching each employee's contribution up to a predetermined limit. The Company's combined contribution to the plan amounted to $86,000, $22,000 and $17,000 for the years ended January 31, 1997, 1996 and 1995. NOTE 13 -- RESTRICTED STOCK AWARDS At the discretion of the Board of Directors, shares may be issued to employees and non-employees as incentives for performance. The number of shares awarded, and the terms under which such shares become vested (nonforfeitable), are determined on an individual basis. The Company recognizes the issuance of restricted shares when they become vested. As of January 31, 1997, a total of 20,002 shares have been awarded and remain unvested. The aggregate number of shares and the years in which they become vested in each of the periods succeeding January 31, 1997 are as follows: 1998 12,168 1999 7,834 F-29 47 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 14 - SEGMENT INFORMATION The Company and its subsidiaries operate primarily in two business segments. Operations in mortgage banking involve the origination and purchase of mortgage loans in the secondary mortgage market, servicing of mortgage loans, and the purchase and sale of mortgage servicing rights. Operations in the real estate industry consist of the purchase and resale and the securitization and syndication of real estate interests. The following is a summary of selected consolidated segment information for the mortgage banking and real estate industry segments for the years ended:
JANUARY 31, 1997 1996 1995 --------- --------- --------- REVENUE Mortgage banking $ 46,512,944 $ 31,051,952 $22,512,856 Real estate 12,413,396 10,899,058 10,858,825 ------------ ------------ ----------- Total $ 58,926,340 $ 41,951,010 $33,371,681 ============ ============ =========== INCOME (LOSS) BEFORE INCOME TAXES Mortgage banking $ 824,964 $ (1,195,323) $(3,057,212) Real estate 579,374 2,322,853 2,882,050 ------------ ------------ ----------- Total $ 1,404,338 $ 1,127,530 $ (175,162) ============ ============ =========== IDENTIFIABLE ASSETS Mortgage banking $115,310,484 $104,990,975 $46,523,533 Real estate 19,256,062 27,147,572 23,238,535 Other 10,425,267 3,052,094 7,349,452 ------------ ------------ ----------- Total $144,991,813 $135,190,641 $77,111,520 ============ ============ ===========
F-30 48 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 15 -- BUSINESS ACQUISITION On July 19, 1994, the Company purchased substantially all of the revenue producing activities of Liberty National Mortgage Corporation (Liberty) in a transaction accounted for using the purchase method. These assets included certain furniture and equipment located in Liberty branch offices in Michigan, Maryland, West Virginia and Illinois and the right-to-process and close certain mortgage loans in process originated by Liberty. The purchase price of the furniture and equipment was determined by independent appraisal and payable within 45 days of this agreement. The appraised value was $85,000. At the closing of this agreement a down payment of $350,000 was made as an advance against amounts due as a result of future Liberty branch loan closings. This down payment is included in deferred charges and other assets in the accompanying consolidated balance sheet. Liberty was paid based on a negotiated formula tied to loan closings at Liberty branches over an eighteen month period. The total purchase price, was $885,000. This consists of the $85,000 referred to above which was capitalized and amortized as furniture and equipment, approximately $200,000 for loans-in-process, which upon closing were capitalized and amortized as a cost of the loan origination, and $500,000 for future branch loan closings, $150,000 of which was paid during July and August, 1994 and $350,000, which was paid at the closing. The benefits to be derived from the acquisition of these production offices will extend beyond the eighteen month earn-out period, and, accordingly have been capitalized as goodwill (included in deferred charges and other assets on the balance sheet) and amortized over a five year period, subject to periodic re-evaluation. In connection with the acquisition, the Company acquired approximately $4,000,000 of loans held-for-resale which were funded by the Company's warehouse credit facilities and subsequently purchased by outside investors under terms similar to any Company originated loan. The following unaudited pro-forma summary presents the consolidated results of operations as if the acquisition had occurred at February 1, 1993, after giving effect to certain adjustments. These pro-forma results have been prepared for comparative purposes and do not purport to be indicative of what would have occurred had the acquisition been made as of those dates or of results which may occur in the future. F-31 49 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 15 - BUSINESS ACQUISITION - CONTINUED
YEAR ENDED JANUARY 31, 1995 --------------------------- MCAFC PRO-FORMA MCAFC (HISTORICAL) ADJUSTMENTS (PRO-FORMA) ------------ ----------- ----------- REVENUES Gain on sale of land contracts $ 2,983,022 $ - $ 2,983,022 Gain on sale of real estate 7,365,199 - 7,365,199 Gain on bulk sales of servicing rights 7,475,444(1) 1,737,609 9,213,053 Mortgage origination fees 5,584,454(1) 1,862,821 7,447,275 Servicing fees 4,616,738(1) 429,081 5,045,819 Interest income 5,106,041(1) 245,634 5,351,675 Other income 240,783 128,035 368,818 ----------- ---------- ---------- Total revenues 33,371,681 4,403,180 37,774,861 ----------- ---------- ---------- EXPENSES Payroll 10,985,576(1) 1,705,338 12,690,914 Interest 6,018,518(1) 171,221 6,189,739 Commissions 4,591,079(1) 836,669 5,427,748 Professional services 1,511,215(1) 80,798 1,592,013 Depreciation 351,964(1) 49,275 401,239 Amortization 1,924,872(1)(2) 110,000 2,034,872 General administrative 8,163,619 843,557 9,007,176 ----------- ---------- ---------- Total expenses 33,546,843 3,796,858 37,343,701 ----------- ---------- ---------- INCOME (LOSS) BEFORE FEDERAL INCOME TAXES (175,162) 606,322 431,160 Provision (credit) for Federal income taxes 102,384(3) 206,149 308,533 ----------- ---------- ---------- NET INCOME (LOSS) $ (277,546) $ 400,173 $ 122,627 =========== ========== ========== Loss per share $ (1.80) $ (0.12) $ (0.80) =========== ========== ==========
Summary of Pro-Forma Adjustments: (1) To include historical operating results of the Liberty National Mortgage Corporation for the year ended December 31, 1993 and the period ended May 31, 1994. (Certain amounts have been reclassified to conform to the MCAFC historical presentation.) (2) Amortization of $500,000 of goodwill over five years. (3) Estimated Federal income tax accrual. F-32 50 MCA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1997, 1996 AND 1995 NOTE 15 - BUSINESS ACQUISITION - CONTINUED On January 31, 1995, the Company acquired all of the issued and outstanding common stock of RIMCO Realty & Mortgage from RIMCO Financial Corporation (an entity owned by three stockholder of the Company) in exchange for a $945,117 reduction in amounts due the Company. Amounts assigned in the accompanying consolidated balance sheet to assets purchased and liabilities assumed were based on the seller's historical cost which is less than fair value. F-33 51 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed by the undersigned, thereunto duly authorized. MCA FINANCIAL CORP. By: /S/ KEITH D. PIETILA ----------------------------------------- Keith D. Pietila Executive Vice President and Chief Financial Officer Dated: May 20, 1997 S-1 -----END PRIVACY-ENHANCED MESSAGE-----