<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1996.
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ________ to ________.
Commission File Number: 0-9774
HOMECAPITAL INVESTMENT CORPORATION
(Exact Name of Small Business Issuer as Specified in its Charter)
NEVADA 95-3614463
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6836 AUSTIN CENTER BLVD.
SUITE 280
AUSTIN, TEXAS 78731
(Address of Principal Executive Offices)
(512) 343-8911
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
As of August 9, 1996, there were 7,225,683 shares of common stock of the
issuer outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
The Exhibit Index appears on page 27.
1
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION
Index to Form 10-QSB
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C> <C>
Item 1. Financial Statements.
Consolidated Balance Sheet (Unaudited)
As of June 30, 1996 3
Consolidated Statements of Operations (Unaudited)
For the Nine Months Ended June 30, 1996
and 1995 4
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended June 30, 1996
and 1995 5
Consolidated Statements of Cashflows (Unaudited)
For the Nine Months Ended June 30, 1996
and 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or
Plan of Operation 17
PART II. OTHER INFORMATION
Item 2. Changes in Securities 25
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
</TABLE>
2
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
------
Current assets:
<S> <C>
Cash and cash equivalents $ 1,106,372
Loans held for sale 4,143,442
Accrued interest receivable 36,986
Prepaid and other assets 90,186
-----------
Total current assets 5,376,986
Capitalized excess servicing receivable 1,095,462
Furniture, fixtures and equipment, net 543,801
Other assets 15,793
-----------
Total assets $ 7,032,042
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Note payable $ 183,338
Revolving line of credit 2,743,854
Current portion of capital lease obligations 17,725
Accrued expenses and other liabilities 1,170,543
-----------
Total current liabilities 4,115,460
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock,Series A;$.01 par
value, 1,500,000 shares issued and outstanding 15,000
Common Stock, $.01 par value; authorized
100,000,000 shares; 7,225,683 shares
issued and outstanding 72,257
Additional paid-in capital 3,386,105
Accumulated deficit (492,524)
Notes receivable for stock (64,256)
-----------
Total stockholders' equity 2,916,582
-----------
Total liabilities and stockholders' equity $ 7,032,042
===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
3
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months Ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
-------------- ------------
<S> <C> <C>
Revenues:
Gain on sales of loans $ 5,741,591 $ 2,812,427
Interest income - loans 322,394 239,359
Interest income - other 5,500 27,775
Servicing fee income 12,713 -
-------------- ------------
Total revenues 6,082,198 3,079,561
Expenses:
Personnel costs 1,552,811 1,214,387
Loan related expense 1,743,036 688,802
General and administrative 1,137,023 793,780
Occupancy costs 226,406 133,753
Interest expense 280,504 226,745
------------ ------------
Total expenses 4,939,780 3,057,467
------------ ------------
Income before income taxes 1,142,418 22,094
Income taxes 330,000 -
------------ ------------
Net income $ 812,418 $ 22,094
============ ============
Income per common share and common
equivalent share (Note 1) $ .103 $ .004
============ ============
Weighted average number of common and
common equivalent shares outstanding 7,812,984 5,957,165
============ ============
Income per common share -
assuming full dilution (Note 1) $ .102 $ .003
============ ============
Weighted average number of fully
diluted common shares outstanding 7,884,132 6,823,003
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
4
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
-------------- ------------
Revenues:
<S> <C> <C>
Gain on sales of loans $ 2,223,307 $ 1,084,365
Interest income - loans 147,481 81,304
Interest income - other 3,191 12,675
Servicing fee income 6,716 -
------------ ------------
Total revenues 2,380,695 1,178,344
Expenses:
Personnel costs 543,652 432,415
Loan related expense 743,715 210,806
General and administrative 392,251 269,612
Occupancy costs 92,010 44,380
Interest expense 112,191 82,929
------------ ------------
Total expenses 1,883,819 1,040,142
------------ ------------
Income before income taxes 496,876 138,202
Income taxes 330,000 -
------------ ------------
Net income $ 166,876 $ 138,202
============ ============
Income per common share and common
equivalent share (Note 1) $ .02 $ .02
============ ============
Weighted average number of common and
common equivalent shares outstanding 7,979,202 6,556,475
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
5
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
-------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 812,418 $ 22,094
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities:
Depreciation and amortization 257,183 114,976
Provision for credit losses 20,000 -
Gain on sales of loans with recourse (5,741,591) (2,812,427)
Proceeds from sales of loans with
recourse 69,406,353 46,091,211
Purchase of loans (66,110,468) (43,269,850)
Change in operating assets and
liabilities:
(Increase) decrease in capitalized
excess servicing receivable (1,132,852) -
(Increase) decrease in accrued
interest receivable (22,043) (10,147)
(Increase) decrease in prepaid and
other assets (179,149) (178,942)
Increase (decrease) in accrued
expenses and other liabilities 913,430 (56,832)
-------------- ------------
Net cash provided by (used in)
operating activities (1,776,719) (99,917)
-------------- ------------
Cash flows from investing activities:
Purchase of furniture, fixtures and
equipment (275,239) (76,205)
-------------- ------------
Cash flows from financing activities:
Increase in revolving line of credit 1,245,797 127,025
Proceeds from note payable 200,000 100,810
Payments on notes payable (150,000) -
Payments on capital lease obligations (24,183) (27,228)
Bank overdraft - 14,489
Proceeds from sale of preferred stock 1,861,000 (20)
Dividends paid on preferred stock - (38,954)
-------------- ------------
Net cash provided by financing
activities 3,132,614 176,122
-------------- ------------
Increase in cash 1,080,656 0
Cash, beginning of period 25,716 0
-------------- ------------
Cash, end of period $ 1,106,372 $ 0
============== ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
6
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNT POLICIES:
The Company
HomeCapital Investment Corporation, a public holding company, ("Company,"
"issuer" or "registrant") was incorporated in the state of Nevada on
October 8, 1980. As a result of a reverse acquisition transaction with
HomeOwners Mortgage & Equity, Inc. ("Home") in August 1994 (the "Home
Transaction"), Home became the wholly-owned subsidiary of the Company, and
the previous shareholders of Home held approximately 83% of the outstanding
common stock of the Company. The Company currently conducts its business
entirely through Home. Home originates and purchases home improvement
loans and is approved to engage in lending activities under the Department
of Housing and Urban Development ("HUD") Title I program. As such, Home is
subject to regulation and examination by that agency.
As of the date of the Home Transaction, the Company was a public company
with no business operations and net liabilities of $7,500. The reverse
acquisition was accounted for as a recapitalization with carryover basis of
assets and liabilities. The financial statements reflect the financial
condition and results of operations of Home consolidated with the Company.
All intercompany transactions and balances have been eliminated in the
accompanying consolidated financial statements.
Adjustment of Interim Financial Statements
The interim financial statements of the Company at June 30, 1996 and for
the nine months and three months ended June 30, 1996 and 1995,
respectively, reflect all adjustments (consisting solely of normal
recurring adjustments), which in the opinion of management, are necessary
to make the financial statements not misleading.
Revenue Recognition
All fees earned (including origination fees) and direct expenses incurred
(including premiums paid and any volume bonuses paid for the loan) in
connection with the closing and funding of a loan are recognized at the
time of origination or purchase of the loan. The Company records each loan
at its principal amount less the cost allocated to any excess servicing
receivable. The Company generates revenue from the sale of loans for cash
at a premium over the face amount of the loan. The difference between cash
received on sale and the basis in the loan represents the gain on sale.
7
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Revenue Recognition, continued
The Company also retains the right to service loans it sells to others for
which it receives a servicing fee expressed as a percent of the loan amount
(e.g. 1.00% or 100 basis points). The Company is presently able to
subcontract the loan servicing activities for a normal subservicing fee
(e.g. 0.75% or 75 basis points) that is less than the Company receives.
The present value of the difference (e.g. 0.25% or 25 basis points)
computed over the life of loan is recorded as an excess servicing
receivable. When the Company initiated its loan servicing activities in
October, 1995, it became subject to Financial Accounting Standards Board
Statement No. 122, "Accounting for Mortgage Servicing Rights." The
statement requires the Company to capitalize and amortize the excess
servicing receivable over the estimated life of the loans sold. At the
time of origination of the loan, the Company's total basis in the loan
(usually its face amount) must be allocated between loans held for sale and
the capitalized excess servicing receivable.
The Company periodically reviews capitalized servicing fees receivable for
impairment. This review is performed on a disaggregated basis for the
predominant risk characteristics of the underlying loans which are loan
type, term and credit quality. The Company generally makes loans to
individuals whose borrowing needs may not be met by traditional financial
institutions due to credit exceptions. The Company has found that these
borrowers are payment sensitive rather than interest rate sensitive.
Consequently, the Company does not consider interest rates a predominant
risk characteristic for purposes of impairment. Impairment is recognized
in a valuation allowance in the period of impairment.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
8
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Loans Held For Sale
Home originates, purchases and sells home improvement and other secondary
mortgage loans. The majority of Home's loan originations are home
improvement loans insured by the Federal Housing Administration ("FHA")
under Title I of the National Housing Act of 1934 ("Title I loans"),
whereby FHA insures 90% of qualified loans against loss upon borrower
default. Under Title I, homeowners may borrow 100% of home improvement
costs up to $25,000 with a maximum term of 20 years. Approximately 80% of
Home's Title I loans are to borrowers who would be classified as having
less than the highest credit rating. In addition to Title I loans, Home
originates conventional second mortgage home improvement loans which are
pre-approved for purchase by institutional mortgage purchasers upon
closing.
Home originated approximately $60,000,000 and $65,800,000 of Title I loans
during the year ended September 30, 1995, and the nine months ended June
30, 1996, respectively, of which the weighted average interest rate
(coupon) was 14.01% and 13.84%, respectively, and the weighted average
stated maturity was 16.5 years and 18.0 years, respectively. Since
inception Home has sold its loan originations as whole loans for which it
receives a one time cash premium, and all other future economic benefits,
except for loan servicing where retained by the Company, pass to the loan
purchaser. Home generally sells all Title I loans within 30 days of
origination and all conventional home improvement loans within 15 days of
origination.
Loans held for sale at June 30, 1996, have been either originated by Home
directly or through a network of home improvement contractors ("dealers"),
or purchased from other mortgage companies, commercial banks or finance
companies ("correspondents"). Home funds these loans primarily through its
warehouse line of credit. The market value of loans held for sale at June
30, 1996 was approximately $4,371,000, as determined, on an aggregate loan
basis, by sale of such loans subsequent to June 30, 1996. Loans sold by
Home are sold with limited recourse (see Note 9). These transactions are
accounted for as sales because (i) Home surrenders control of the future
economic benefit of the loans, (ii) the obligation under the recourse
provisions can be reasonably estimated and (iii) the purchaser cannot
require the Company to repurchase the loans except pursuant to the recourse
provision. Home provides an estimate for future credit losses related to
this recourse provision. Such amounts are based on management's best
estimate of future credit losses likely to be incurred over the period
subject to recourse.
9
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost less accumulated
depreciation. Expenditures for major renewals and improvements are
capitalized, while minor replacements, maintenance and repairs which do not
improve or extend the life of such assets are charged to expense as
incurred. Asset and accumulated depreciation accounts are relieved for
dispositions with resulting gains or losses reflected in the results of
operations.
Depreciation is computed using the straight-line method over the estimated
useful lives of the depreciable assets.
Federal Income Taxes
The Company and Home each file separate federal income tax returns. The
liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws.
Earnings Per Share
The computation of primary earnings per share is based on the weighted
average number of common and common stock equivalent shares outstanding for
each period presented. The weighted average shares outstanding for each
period include common equivalent shares attributable to outstanding
warrants (456,170) and outstanding stock options (409,668) using the
treasury stock method. For the nine months ended June 30, 1996, earnings
per common share on a fully diluted basis was determined assuming the
Company's 1,500,000 outstanding preferred shares were converted at the date
of issuance of the preferred shares.
2. ALLOWANCE FOR CREDIT LOSSES
The activity in the allowance for credit losses for the quarter ending June
30, 1996 was as follows:
<TABLE>
<CAPTION>
<S> <C>
Beginning allowance $ 80,000
Provision 20,000
Charge-offs -
----------
Ending allowance $ 100,000
==========
</TABLE>
10
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. CAPITALIZED EXCESS SERVICING RECEIVABLE
For loans sold where the Company retains servicing, an excess servicing
receivable (the "Receivable") is established for an amount equal to the
estimated fair market value of the excess servicing fees retained.
The amount represents the unamortized net present value of the difference
between the servicing fee spread retained by the Company and the normal
servicing fee determined by the Company taking into account several factors
including industry practices. The amount capitalized is amortized over the
estimated lives of the loans sold, after considering an estimated rate of
prepayments of the underlying loans sold.
The activity in the Receivable is summarized as follows for the three
months ended June 30, 1996:
<TABLE>
<CAPTION>
<S> <C>
Balance at beginning of period $ 376,024
Excess servicing additions 743,905
Excess servicing collected
(net of amortization) (24,467)
------------
Balance at end of period $ 1,095,462
============
</TABLE>
4. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consisted of the following at June 30,
1996:
<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures $ 134,142
Equipment 237,851
Leasehold improvements 65,776
Capitalized data processing costs 264,645
------------
702,414
Accumulated depreciation
and amortization (158,613)
------------
$ 543,801
============
</TABLE>
11
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. NOTE PAYABLE
Note payable consisted of the following at June 30, 1996:
Note payable to bank, guaranteed
by certain stockholders of the
Company, due on demand, or if
no demand is made, due April 5,
1998, accruing interest at prime
rate plus 2% (10.25% at June 30, 1996) $183,338
========
The note payable to financial institutions is collateralized by assets and
personal guarantees of certain stockholders of the Company.
6. REVOLVING LINE OF CREDIT
Home finances its loans held for sale through a $5,000,000 revolving line
of credit which matures July 29, 1996, and had an outstanding balance of
$2,743,854 at June 30, 1996. Home receives funding for 100% of the
principal on each loan it originates or purchases through the warehouse
line. The outstanding principal is collateralized by the mortgages and
repaid upon their sale. Interest accrues at the prime rate plus 2.00%
(10.25% at June 30, 1996) and is due monthly.
In July 1996, Home entered into a $10,000,000 revolving line of credit
agreement with another financial institution which matures January 31,
1997. Home receives funding for approximately 98% of the principal on each
loan it originates or purchases through this warehouse line of credit.
Borrowing against the line of credit will be secured by such mortgages and
will bear interest at the lower of 350 basis points over the Federal Funds
rate or 150 basis points over the prime interest rate (8.25% at June 30,
1996.)
7. PREFERRED STOCK
On September 28, 1995, the Company issued 2,000 shares of non-voting
preferred stock at $100 per share in preference to its common stock. After
January 16, 1996, each preferred share was convertible into 160 common
shares of the Company at the option of the holder. The holders of the
preferred stock are entitled to a 10% annual cumulative dividend on the
face amount of the stock. The preferred stock is redeemable at the
Company's option at any time prior to January 16, 1996, at a redemption
price of $100 per share plus accrued and unpaid dividends. Effective April
18, 1996, all outstanding shares of preferred stock were converted,
together with all accrued and unpaid dividends thereon, into 337,708 shares
of newly issued common stock.
12
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. PREFERRED STOCK, CONTINUED:
As of June 18, 1996, the Company issued 1,500,000 shares of Preferred
Stock, Series A, $.01 par value per share, for the purchase price of $1.50
per share or an aggregate gross amount of $2,250,000. A total of 1,000,000
shares of the Series A Preferred Stock was purchased by an unaffiliated
entity pursuant to a Preferred Stock Purchase Agreement, dated May 3, 1996,
as amended.
The Series A Preferred Stock has a cumulative annual preferred dividend of
$.18 per share, payable quarterly before any distribution to holders of
Common Stock, with mandatory payment of dividends required for the first
year after issue, and shares of Series A Preferred Stock are convertible at
any time into Common Stock at a conversion rate, subject to certain
adjustments, of one(1) share of Common Stock for each share of Series A
Preferred Stock. The Series A Preferred Stock is redeemable at par plus
accrued, unpaid dividends, at the option of the Company, at any time after
one(1) year from the date of issuance, and holders of a majority of the
outstanding shares of Series A Preferred Stock may require redemption at
any time after three(3) years at par plus any accrued, unpaid dividends.
Each share of Series A Preferred Stock is entitled to one(1) vote with
respect to all matters submitted to a vote of the Stockholders of the
Company, and holders of Series A Preferred Stock are entitled to vote as a
class as provided by law in connection with any amendment to the Articles
of Incorporation or Bylaws of the Company, or any other corporate action
that would adversely affect the holders of Series A Preferred Stock.
Shares of Series A Preferred Stock are entitled to a liquidation preference
of $1.50 per share, plus any accrued, unpaid dividends, before any
distribution to holders of Common Stock upon dissolution of the Company.
Holders of all shares of Series A Preferred Stock purchased in the Series A
Preferred Stock Placement were granted conjunctive or "piggyback"
registration rights covering the shares of Common Stock into which the
Series A Preferred Stock is convertible after nine(9) months from the date
of issuance of the Series A Preferred Stock which rights terminate after
three(3) years from the date of issuance of the Series A Preferred Stock.
No fees, commissions or other special compensation was paid for placement
of the shares in connection with the Series A Preferred Stock Placement.
A total of 166,667 shares of the Series A Preferred Stock was issued in
payment and discharge of an aggregate $250,000 principal amount of loans
payable to certain common stockholders of the Company.
13
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INCOME TAXES
The Company and Home have consolidated net operating loss carryforwards of
approximately $55,000 at June 30, 1996. Such carryforwards are available
to reduce future taxable income, and expire in the year 2010. The use of
the loss carryforwards to reduce future income tax obligations will be
limited in any given year due to restrictions defined in the Internal
Revenue Code related to change in ownership control.
For the nine months ended June 30, 1996, net operating loss carryforwards
were recognized as a benefit against the provision for income taxes. The
provision for income taxes was estimated using an annual effective tax rate
of approximately 29%.
9. COMMITMENTS AND CONTINGENCIES
The Company leases its office space at its corporate headquarters and
seven(7) branch offices. The Company also leases office equipment under
various capital leases. The economic substance of the equipment leases is
that the Company is financing the acquisition of the equipment through the
leases. Required minimum rental payments for the remaining terms of all
leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
Years Ending Leases Leases
------------ --------------- ----------------
<S> <C> <C>
1997 $ 13,395 $ 127,357
1998 6,081 9,020
1999 1,380 1,892
---------- ------------
20,856
Amount representing interest 3,131
---------- ------------
$ 17,725 $ 138,269
=========== ============
</TABLE>
Loans sold by Home are sold with limited recourse. Upon sale of Title I
loans, the loan purchaser assumes the obligation for loan losses other than
first payment defaults and fraud on the part of Home in originating the
loan. In the event that the borrower defaults on the first payment, Home
is committed to repurchase the loan. In most instances, Home has a
correspondent contract under which the dealer or correspondent who
originated the loan to Home is obligated to repurchase the loan from Home.
In the event the dealer or correspondent is unwilling or unable to
repurchase the loan,
14
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. COMMITMENTS AND CONTINGENCIES, CONTINUED:
Home submits a claim for 90% of the principal amount of the loan to HUD
under the Title I insured loan program for such repurchased loans after
exhausting collection efforts as required under the program. The remaining
10% of the loan is, therefore, unsecured. Home accrues a reserve for
estimated loan losses, if any, from such repurchases, which amounted to
$100,000 at June 30, 1996, based on management estimates based on
historical experience with first payment Title I loan defaults. Home is
required to maintain adjusted net worth, as defined by HUD, amounting to a
minimum of $250,000.
10. STOCK WARRANTS
At June 30, 1996 the Company had 59,708,658 Series A Warrants and 2,668
Series B Warrants outstanding. Holders of Series A Warrants are entitled
to purchase one share of the Company common stock at $4 per share for each
100 warrants. In addition, upon exercise of Series A Warrants, the holder
is issued one Series B Warrant for each Series A Warrant exercised.
Holders of Series B Warrants are entitled to purchase one(1) share of the
Company common stock at $75 per share for each 100 Warrants. Both the
Series A and B Warrants expire December 31, 1996.
In addition, 456,170 warrants issued by Home prior to the Home Transaction
are outstanding as of June 30, 1996. Each of these warrants entitles the
holder to purchase one(1) share of the Company common stock for $.20 per
share and expire January 19, 1999.
11. STOCK OPTIONS
In June 1993, Home issued options to purchase 555 shares of its common
stock at $120 per share to one(1) of its employees. As a result of the
Home Transaction, these options were converted into options to purchase
409,668 shares of the Company common stock at $.16 per share of which 100%
are exercisable as of June 30, 1996. These options expire in the year
2001. No options have been exercised.
Effective March 21, 1996, the Board of Directors of the Company adopted the
HomeCapital Investment Corporation 1996 Stock Option Plan and directed that
it be submitted for approval by the stockholders of the Company in
connection with the next proceedings of stockholders of the Company. The
Stock Option Plan provides that up to 500,000 shares of Common Stock may be
issued upon exercise of options granted under the Stock Option Plan,
subject to adjustment to reflect stock splits, stock dividends and similar
capital stock transactions. At June 30, 1996, options to purchase an
aggregate of 200,000 shares of Common Stock had been granted
15
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. STOCK OPTIONS, CONTINUED:
under the Stock Option Plan with an exercise price of $3.50 per share.
12. SERVICING PORTFOLIO
The total servicing portfolio of loans was approximately $65,000,000 at
June 30, 1996.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
As a result of the Home Transaction consummated in August, 1994, the Company
became a holding company with Home as its sole operating subsidiary. As of the
acquisition date, the Company was a public company with no business operations
and net liabilities of $7,500. The Home Transaction has been treated as a
reverse acquisition, with the former stockholders of Home acquiring
approximately 83% of the outstanding common stock of the Company, and has been
accounted for as a recapitalization with carryover basis of the assets and
liabilities of Home. Except for debt service on a bank loan and nominal
overhead expenses, the Company has no independent operations or activities.
Accordingly, the following discussion regarding the consolidated financial
statements of the Company primarily reflects the financial condition and results
of operations of Home.
Home is a consumer finance company engaged in the business of originating,
purchasing, selling and servicing residential remodeling and other second
mortgage loans. Home commenced loan production in March 1993 and, as a result,
has limited operating history upon which stockholders may base their evaluation
of the Company's performance. The Company has experienced significant growth in
revenues and expenses in fiscal 1994 and 1995 and the first nine months of
fiscal 1996. As a result of the Company's limited operating history and revenue
growth, period-to-period comparisons of operating results may not be meaningful
and results of operations may not be indicative of future results. The
following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and the notes thereto.
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1996 ("1996 PERIOD"), COMPARED TO NINE MONTHS ENDED
JUNE 30, 1995 ("1995 PERIOD"):
The substantial increase in Company revenues for the nine months ended June
30, 1996, and corresponding increase in expenses, over the nine months ended
June 30, 1995, primarily reflects increased loan production resulting from
market expansion and enhanced funding during the 1996 period. The Company's
total loan production increased from $44,813,948 in the 1995 period to
$68,106,217 for the 1996 period, an increase of 52%. Title I loan production
increased from $43,435,435 in the 1995 period to $65,837,447 in the 1996 period,
an increase of 52%, while conventional loan production increased from $1,378,513
in the 1995 period to $2,268,770 in the 1996 period, an increase of 65%.
Moreover, the Company was able to generate net income of $812,418 ($.103 per
common share) in the 1996 period as compared to net income of $22,094 ($.004 per
share) for the 1995 period largely because of (i) increased loan volume, (ii)
increased interest rate margins and fees realized on loan sale transactions in
the 1996 period (iii) gain from sale of loans, and (iv) revenue generated from
loan servicing initiated by Home in the 1996 period. Gain from sale of loans,
including fees and other charges, increased from $2,812,427 for the 1995 period
to $5,741,591 for the 1996 period, an increase 104%. The increase in the gain
from sale of
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loans reflects the overall increase in loan production in the 1996
period as compared to the 1995 period. During the 1995 period total loan sales
aggregated $43,962,506 as compared to total loan sales in the 1996 period of
$63,664,761, an increase of 45%.
Home has experienced a significant increase in the average cash premium
received on loans sold. Since inception Home has sold its loans to third parties
as whole loans, where Home receives a one time premium on sale and has no
further economic interest in the loans after sale. As overall interest rates
have declined from period to period, the premium that purchasers have been
willing to pay for Home's loans has increased. From the 1995 period to the 1996
period the average premium increased by 50%.
Home has also experienced a significant increase in competition for Title I
loan purchases in both its dealer and correspondent lending divisions. For
dealer loan production, the result of increased competition was a reduction in
origination fees Home was able to collect from the dealers and a reduction in
the market level of interest rates that Home could charge on its loans. From the
1995 period to the 1996 period the average origination fee on dealer loans
declined from 4.1% to 2.8%, a decrease of 31%, while the weighted average
interest rate on dealer loan originations declined from 14.19% to 13.96%.
Correspondent loans are purchased from other mortgage companies which originate
Title I loans, keep the origination fees and resell the loans at a premium to
par (face amount) to purchasers such as Home. During the 1996 period, Home's
competitors continued to significantly increase the premiums offered for loan
purchases (varying with the coupon rate on the loans). While the weighted
average interest rate on correspondent loans purchased has remained relatively
constant, increased competition has resulted in an increase in the average
premium paid by Home. The average premium paid by Home on correspondent loans
for the 1996 period was 3.07% and 1.81% for the 1995 period, an increase of 70%.
Home has not significantly increased its standard premium offered for
correspondent purchases. Principally, the increase in average premium has
resulted from volume bonus premiums paid by Home to its high volume
correspondents. Although Home's volume bonus premium strategy has, to date,
proven of significant benefit in retaining existing and attracting prospective
correspondents, it is anticipated that the market for correspondent Title I
loans will remain extremely competitive, and Home anticipates that for the
remainder of fiscal 1996 and beyond its premium cost will substantially exceed
premiums paid in prior periods.
The Company also initiated Title I loan servicing in October, 1995.
Prior to that time the Company had sold its Title I loans on a servicing-
released basis, where the loan servicing was transferred to the loan purchaser.
By retaining servicing the Company has the obligation to perform all loan
servicing activities and is paid an annual stated servicing fee. This servicing
fee consists of (i) a normal servicing fee (as currently standard in the
industry) and (ii) an excess servicing fee representing the difference between
the stated servicing fee and the normal servicing fee. On all loans serviced,
the Company presently collects a fee, calculated on the outstanding principal
balance of loans serviced, of 1% per annum, paid monthly. The
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Company has contracted with a third-party to perform the servicing activity at a
fee of 0.75% per annum (the normal servicing fee). At the time of loan
origination the Company allocates, based on fair market value, the total direct
cost of originating a loan between (i) the loan (assuming a normal servicing
fee) and (ii) the excess servicing fee to be received over the life of the loan.
The cost allocation has the effect of reducing the cost in the loan with normal
servicing and, upon sale of the loan, increasing the gain on sale of the loan.
In March 1996, Home was approved to sell loans to the Federal National Mortgage
Association ("FNMA") and to service those loans under a Mortgage Selling and
Servicing Contract. Home began selling loans to and servicing loans for FNMA in
June, 1996. The effect of this arrangement provides for a stated annual
servicing fee in excess of 1%. Total loans sold to FNMA in the 1996 period
totaled approximately $3.6 million.
For the nine months ended June 30, 1996, the gain on sale of loans from the
excess servicing fees was $1,132,852, which is included in Gain on Sale of Loans
in the Consolidated Statement of Operations.
REVENUES. The Company's total revenues increased from approximately
$3,079,600 for the 1995 period to approximately $6,082,000 for the 1996 period,
an increase of 97%, primarily due to increased profit margins and fees realized
on increased loan originations and sales during the 1996 period. Meanwhile,
total expenses increased $1,882,300 or 62% from approximately $3,057,500 in the
1995 period to approximately $4,939,800 in the 1996 period. As a percentage of
total revenues, total expenses decreased from 99% in the 1995 period to 81% in
the 1996 period.
As a result of the improved revenues, the Company's net operating results
improved from a net income of $22,094 for the 1995 period to $812,418 for the
1996 period. The Company's gain on the sale of loans increased from
approximately $2,812,400 during the 1995 period, to approximately $5,741,600 for
the 1996 period, an increase of 104%. The gain on sale of loans for each period
approximates the difference between the proceeds from sale of loans less the
cost of purchase and origination of loans. Gain on the sale of loans includes
both (i) loan fees and charges, (ii) the cash gain on sale of loans purchased
and originated, and (iii) the capitalized excess servicing receivable realized
upon the sale of loans. Gain on sale of loans increased from $1,939,900 to
$5,206,800, during the 1996 period over the 1995 period, an increase of 168%.
Loan fees and charges decreased from $871,700 to $534,700, during the 1996
period over the 1995 period, a decrease of 39%, due to the decrease in volume of
dealer and direct Title I loans and the decrease in the level of average fees
collected on dealer loans.
Interest income from loans increased from $239,400 during the 1995 period,
to $322,400 during the 1996 period, an increase of 35%. This increase
principally related to increased average balances of loans held prior to resale
using Home's warehouse lending facilities. Home did not experience significant
variation in the average loan coupon rate on loans produced in the 1996 period
compared to the 1995 period.
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The increase in servicing fee income from zero in the 1995 period to
$12,713 in the 1996 period is due to the fact that Home initiated loan servicing
operations during the 1996 period. At June 30, 1996, the Company's loan
servicing portfolio was approximately $65,000,000. It is anticipated that as the
loan servicing portfolio grows over time, servicing fee income will be an
increasingly important element of the Company's earnings and cash flow.
EXPENSES. Increases in Company expenses for the 1996 period, compared with
the 1995 period, generally corresponded to increased loan production and loan
market expansion.
Personnel costs increased from $1,214,400 in the 1995 period to $1,552,800
during the 1996 period, an increase of 28%. This increase resulted from the
hiring of additional personnel for the home office and the opening of five (5)
new offices for dealer loan production, including six (6) additional offices in
Texas and new offices in Phoenix, Arizona and Miami Lakes, Florida subsequent to
the end of the 1995 period.
Loan related expenses increased from $688,800 to $1,743,000 during the 1996
period, an increase of 151%. This increase principally resulted from increased
loan volume and increased premium paid to correspondents for Title I loans
purchased.
General and administrative expenses increased from $793,800 in the 1995
period to $1,137,000 during the 1996 period, an increase of 43%, principally due
to increased loan volume requiring additional back office personnel, the costs
of the additional offices opened in 1996 and costs associated with improvements
to Home's computer systems. Occupancy costs also increased from $133,800 to
$226,400 from period to period, an increase of 69%, due to expansion of Home's
executive office facility and the opening of five (5) new loan production
offices.
Interest expense increased from $226,700 in the 1995 period to $280,500
during the 1996 period, an increase of 24%. This increase related to (i)
increased amounts of loans held in Home's warehouse lending facilities and (ii)
the interest on loans from Company stockholders which was outstanding during the
1996 period.
At September 30, 1995, the Company and Home had combined tax loss
carryforwards of approximately $1,002,000. During the 1996 period, substantially
all of the carryforwards will be utilized and it is estimated that the Company
and Home will have consolidated taxable income for the year ending September 30,
1996. In that regard, it is estimated that the applicable effective income rate
for 1996 will be approximately 29%. Income tax expense of $330,000 was provided
for the three month period ended June 30, 1996.
The Company's net income for the period ended June 30, 1996, was $812,418
compared to net income of $22,094 for the period ended June 30, 1995. The
increase in net income was principally related to (i) economies of scale
achieved as loan production increased, (ii) the increased profitability of loan
production and sales as the average premium on loan sales was significantly
20
<PAGE>
increased in the 1996 period compared to the 1995 period, and (iii) the
additional gain on sale of loans generated from excess servicing revenues due to
initiation of loan servicing and loan sales to FNMA.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996 the Company had working capital of $1,261,526 as compared
to a working capital deficit of $605,422 at June 30, 1995. The Company
eliminated the cash deficiency represented by a bank overdraft of $95,229 at
June 30, 1995. At June 30, 1996, the Company had a cash balance of $1,106,372.
The improvements in liquidity and working capital were primarily attributable to
financing activities: (i) increase in revolving line of credit, and (ii)
proceeds from the sale for cash of $2,000,000 of convertible preferred stock in
June, 1996.
Since June 30, 1995, in addition to the liquidity demands from ongoing
operations, the Company incurred significant liquidity demands from nonrecurring
payments related to the development of the Company's proprietary LOT$PRO
automated loan origination and tracking system. During this period the Company
paid approximately $225,000 toward the cost of development of the LOT$PRO
system. The Company anticipates final completion of the design and
implementation of the LOT$PRO system in October, 1996.
For the nine months ended June 30, 1996, the Company funded an additional
$275,239 in furniture, fixtures and equipment purchases. This increase was due
to (i) the expansion of the home office, additional offices in Texas, Arizona
and Florida, and (ii) additional investment in hardware and software to expand
Home's computer capabilities. The expanded computer capabilities include the
LOT$PRO system which Home commenced implementation in March 1996. It is
anticipated that this system will significantly reduce future personnel costs
related to loan underwriting, document processing and loan tracking, and will
give Home a significant competitive advantage by allowing Home to provide to its
dealers and correspondents automated document preparation and processing at
minimal cost, thereby allowing the dealers and correspondents to eliminate or
avoid the expenditure for back office processing of loans.
The Company's operations require continued access to financing. The
Company's primary operating cash requirement include the funding of loan
originations and purchases and ongoing administrative and other operating
expenses. Adequate credit facilities and other sources of funding, which permit
the Company to sell loans in the secondary market, are essential to the
continuation of the Company's ability to originate and purchase loans. After
utilizing the available working capital, the Company borrows money to fund its
loan originations and purchases, and repays these borrowings as loans are sold.
Upon sale of loans and subsequent repayment of the borrowings, the Company's
working capital and warehouse line of credit then become available to fund
additional loan originations and purchases.
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Historically, because of the Company's lack of capital and liquidity, and
in a continual effort to generate cash for operations and loan production, the
Company disposed of its loans through the sale of whole loans. Whole loan sales
have, heretofore, yielded the greatest liquidity to the Company at the expense
of generating less ultimate profit than the Company would realize under a loan
disposition strategy, where the Company could retain a portion of the ongoing
residual value of the loans it sells and loan fees for servicing the loans, such
as a securitization of loans or a sale to FNMA under its seller/servicer loan
purchase program. Under a securitization program or Fannie Mae loan sale
strategy, the Company would be able to retain an excess servicing fee, or
interest rate spread, for the life of a pool of loans, instead of the one-time
premium or fee received from whole loan sales. From inception through September
30, 1995, substantially all the Title I loans sold by the Company have been
securitized by the third-party purchasers of the Company loans. Commencing in
October 1995, Home began selling loans with servicing retained to an investor
and in June 1996, the Company began selling loans to FNMA under the
seller/servicer loan program.
In order to provide for additional capital investment in the Company, the
Board of Directors of the Company authorized and designated a new class of its
$.01 par value preferred stock in accordance with the Articles of Incorporation
of the Company consisting of an aggregate of 1,500,000 shares of preferred stock
to be known as Preferred Stock, Series A, of the Company ("Preferred Stock").
The Preferred Stock bears the following terms: (i) cumulative annual preferred
dividend of $.18 per share, payable quarterly before any distribution to holders
of Common Stock, with mandatory payment of dividends required for the first year
after issue; (ii) convertible at any time into Common Stock at a conversion
rate, subject to certain adjustments, of one (1) share of Common Stock for each
share of Preferred Stock; (iii) the Preferred Stock is redeemable, at the option
of the Company, at anytime after one (1) year from the date of issuance, and
holders of a majority of the shares of Preferred Stock may require redemption at
any time after three (3) years at a redemption price, in each case, of $1.50 per
share plus any accrued, unpaid dividends before any distribution to holders of
Common Stock; and (iv) each share of Preferred Stock is entitled to one (1) vote
with respect to all matters submitted to a vote of the stockholders of the
Company, and holders of Preferred Stock are entitled to vote as a class as
provided by law and in connection with any amendment to the Articles of
Incorporation or Bylaws of the Company, or any other corporate action that would
adversely affect the holders of Preferred Stock. Payments of dividends or upon
redemption are subject to the legal availability of funds.
The private placement of 1,500,000 shares of Preferred Stock, Series A was
completed in June, 1996. The proceeds of sale of the stock were approximately
$2,111,000, net of issuance expenses, and included the conversion of $250,000
principal amount of outstanding stockholder loans into an aggregate of 166,667
shares of Preferred Stock.
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In addition to new capital, the transition to a FNMA loan sale strategy
required approval as a seller/servicer. Home obtained approval as a
seller/servicer and entered into a seller/servicer agreement with FNMA dated
March 1, 1996. Upon initiation of loan servicing, the Company adopted Financial
Accounting Standards Board ("FASB") Statement No. 122 "Accounting for Mortgage
Servicing Rights." This statement requires the capitalization of servicing
related costs associated with mortgage loans that are originated for sale, and
to create servicing assets for such loans. Upon initiation of FNMA sales, the
retention of a significantly larger excess servicing receivable than has been
achieved in the past, accounted for under FASB No. 122, resulted in a material
increase in the profitability and results of operations of the Company.
Home's current warehouse line of credit facility with First National Bank
of Keystone, N.A. ("Keystone Bank") in the amount of up to $5,000,000, which is
secured by Title I loans originated or purchased by Home, expires on July 29,
1996. Interest is payable monthly and accrues at two percent (2%) per annum over
the lender's prime rate. Borrowings on each advance are limited to 100% of the
face amount of each loan securing the credit. At June 30, 1996, approximately
$2,743,854 was outstanding under this line of credit.
In July 1996, Home entered into a $10,000,000 revolving line of credit
agreement with another financial institution which matures January 31, 1997.
Home receives funding for approximately 98% of the principal on each loan it
originates or purchases through this warehouse line of credit. Borrowing against
the line of credit will be secured by mortgages and will bear interest at the
lower of 350 basis points over the Federal Funds rate or 150 basis points over
the Prime interest rate (8.25% at June 30, 1996.)
On September 28, 1995, certain stockholders of the Company purchased
2,000 shares of $.01 par value preferred stock of the Company for $200,000. The
preferred stock bore a dividend rate of 10% per annum and, after January 16,
1996, was convertible, at the option of the holder, into Common Stock of the
Company at a conversion price of $.625 per share of Common Stock. The Company
declined to exercise its right, exercisable prior to January 16, 1996, to redeem
the preferred stock at $100 per share plus accrued dividends. Effective April
19, 1996, the holders of all 2,000 outstanding shares of preferred stock
converted the preferred stock and accrued and unpaid dividends thereon into
337,708 newly issued shares of the Company's Common Stock. On January 29, 1996,
certain stockholders of the Company made unsecured advances to the Company in
the principal amount of $200,000 ("stockholder loans"). These advances were
non-interest bearing and were utilized by the Company to increase the equity
capitalization of its wholly owned subsidiary, Home, so that Home could achieve
the level of capitalization required by FHA to allow Home to approve, without
submission to FHA, new correspondents and dealers. The Company discharged
$125,000 principal amount of the stockholder loans in exchange for shares of
Preferred Stock in connection with the
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Preferred Stock placement and $75,000 principal amount of the stockholder loans
was repaid out of the proceeds from the sale of shares of Preferred Stock in
connection with the Preferred Stock placement.
24
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PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
PREFERRED STOCK, SERIES A
In order to provide for additional capital investment in the Company, the
Board of Directors of the Company has authorized and designated a new class of
its $.01 par value preferred stock in accordance with the Articles of
Incorporation of the Company consisting of an aggregate of 1,500,000 shares of
preferred stock to be known as Preferred Stock, Series A, of the Company
("Preferred Stock"). A Certificate of Designation of Preferred Stock, Series A,
dated May 3, 1996, has been filed with the Secretary of State of Nevada and
became effective June 14, 1996.
The Preferred Stock has a cumulative annual preferred dividend of $.18 per
share, payable quarterly before any distribution to holders of Common Stock,
with mandatory payment of dividends required for the first year after issue.
Shares of Preferred Stock are convertible at any time into Common Stock at a
conversion rate, subject to certain adjustments, of one (1) share of Common
Stock for each share of Preferred Stock. The Preferred Stock is redeemable at
$1.50 per share, plus accrued, unpaid dividends, at the option of the Company,
at any time after one (1) year from the date of issuance, and holders of a
majority of the outstanding shares of Preferred Stock may require redemption at
any time after three (3) years at $1.50 per share, plus any accrued, unpaid
dividends. Each share of Preferred Stock is entitled to one (1) vote with
respect to all matters submitted to a vote of the stockholders of the Company,
and holders of Preferred Stock are entitled to vote as a class as provided by
law in connection with any amendment to the Articles of Incorporation or Bylaws
of the Company, or any other corporate action that would adversely affect the
holders of Preferred Stock. Shares of Preferred Stock are entitled to a
liquidation preference of $1.50 per share, plus any accrued, unpaid dividends,
before any distribution to holders of Common Stock upon dissolution of the
Company.
Effective June 18, 1996, all 1,500,000 shares of Preferred Stock have been
sold in a private placement (the "Preferred Stock Placement"), more particularly
described under the caption "Preferred Stock Placement" in Item 5 hereof, to
which reference is hereby made for a description of certain other voting rights
and covenants in favor of holders of Preferred Stock that may be considered to
affect the rights of holders of Common Stock.
25
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ITEM 5. OTHER INFORMATION.
PREFERRED STOCK PLACEMENT
As of June 18, 1996, the Company sold and issued an aggregate of 1,500,000
shares of its Preferred Stock, Series A, $.01 par value per share, for the
purchase price of $1.50 per share or an aggregate gross consideration of
$2,250,000, most of which was purchased by certain directors and officers of the
Company and Home, and affiliates of such persons (the "Preferred Stock
Placement"). An aggregate of 1,000,000 shares of the Preferred Stock was
purchased by HCI Equity Partners, L.P., a Texas limited partnership ("HCI"),
pursuant to the Preferred Stock Purchase Agreement, dated May 3, 1996, as
amended, between the Company and HCI ("HCI Agreement"). The HCI Agreement
provides, among other things, that the Board of Directors of the Company will
not exceed nine (9) members and that holders of the majority of the shares of
Preferred Stock purchased by HCI shall be entitled to designate two (2) nominees
to the Company's Board of Directors, as a separate class, as long as at least
fifty percent (50%) of the shares of Preferred Stock purchased by HCI remain
outstanding. Messrs. Charles R. Leone, III and Robert R. Neyland, who are
affiliates of the general partners of HCI, have been elected to the Board of
Directors of the Company pursuant to director-election provisions of the HCI
Agreement. In addition, the HCI Agreement imposes certain covenants upon the
Company and Home, including maintenance of the eligibility of Home under the
Fannie Mae seller/servicer loan purchase program, maintenance of the FHA
insurance of Home for Title I loans (with certain exceptions), compliance by the
Company and Home with other material contracts and loans, and delivery of annual
and periodic reports by the Company to holders of the shares of Preferred Stock
purchased by HCI, among other things.
A total of 150,000 shares of the Preferred Stock was issued in the
Preferred Stock Placement to Peter A. Pyhrr in payment and discharge of an
aggregate of $225,000 principal amount of loans by Mr. Pyhrr to the Company and
an additional 36,495 shares of the Preferred Stock were purchased by or for the
benefit of members of Mr. Pyhrr's family. An aggregate of 16,667 shares of
Preferred Stock was issued to SDP Investments, Ltd., an affiliate of Stephen D.
Pyhrr, in payment and discharge of $25,000 principal amount of a loan by SDP
Investments, Ltd. to the Company, and an additional 24,833 shares of the
Preferred Stock were purchased by members of Mr. Stephen Pyhrr's family. Messrs.
Peter Pyhrr and Stephen Pyhrr are Directors of the Company and Home. An
aggregate of 90,333 shares of the Preferred Stock was purchased by or in behalf
of officers and employees of the Company and Home and members of their families.
Holders of all shares of Preferred Stock purchased in the Preferred Stock
Placement were granted conjunctive or "piggyback" registration rights covering
the shares of Common Stock into which the Preferred Stock is convertible in
connection with any registered public offering of Common Stock by the Company
after
26
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nine (9) months from the date of issuance of the Preferred Stock which rights
terminate after three (3) years from the date of issuance of the Preferred
Stock.
No fees, commissions or other special compensation was paid for placement
of the shares in connection with the Preferred Stock Placement. The Company has
entered into a consulting agreement with representatives of HCI providing for
fees aggregating $60,000 over a one (1)-year period, including $20,000 to each
of Messrs. Leone and Neyland, Directors of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit 4 Certificate of Designation of Preferred
Stock, Series A, Dated May 3, 1996
Exhibit 10 Preferred Stock Purchase Agreement,
dated May 3, 1996, between the Company
of HCI Equity Partners, L.P.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K: None
27
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HOMECAPITAL INVESTMENT CORPORATION
(Registrant)
Date: August 9, 1996 By: /s/ John W. Ballard
-----------------------------
JOHN W. BALLARD, President,
Chairman of the Board of
Directors, Chief Executive
Officer
Date: August 9, 1996 By: /s/ Tommy M. Parker
-----------------------------
TOMMY M. PARKER, Executive
Vice President and Chief
Financial Officer
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EXHIBIT 4
HOMECAPITAL INVESTMENT CORPORATION
CERTIFICATE OF DESIGNATION
OF
PREFERRED STOCK, SERIES A
HOMECAPITAL INVESTMENT CORPORATION, a Nevada corporation (the "Corporation"),
DOES HEREBY CERTIFY:
That, pursuant to the authority conferred upon the Board of Directors of the
Corporation by virtue of its Articles of Incorporation, as amended, and in
accordance with the Revised Statutes of the State of Nevada, the Board of
Directors of the Corporation has duly adopted the following resolution on and as
of May 3, 1996, for the purpose of establishing and designating a series of
Preferred Stock, par value $.01 per share, of the Corporation and fixing the
voting powers, preferences, limitations, restrictions and relative rights
thereof:
"RESOLVED, that pursuant to the authority vested in the Board of Directors of
the Corporation by the Articles of Incorporation, as amended, of the
Corporation, the Board of Directors hereby authorizes and provides for the issue
of a series of Preferred Stock, $.01 par value per share, of the Corporation to
be designated as Preferred Stock, Series A, consisting of 1,500,000 shares, and
does hereby fix, state and express the designations, voting powers, preferences
and relative, participating, optional and other special rights, and the
qualifications, limitations and restrictions thereof as follows:
SECTION 1. DESIGNATION. The series of Preferred Stock having the rights,
preferences, privileges, and restrictions set forth herein shall be designated
and known as the "Preferred Stock, Series A" of the Corporation (hereinafter
referred to as "Series A Stock"). Each share of Series A Stock shall be
identical in all respects with all other shares of Series A Stock.
SECTION 2. NUMBER OF SHARES. The number of shares constituting all of the
Series A Stock shall be 1,500,000. Shares of Series A Stock that are redeemed,
purchased or otherwise acquired by the Corporation or converted into Common
Stock of the Corporation shall be cancelled and shall revert to authorized but
unissued shares of Preferred Stock undesignated as to series.
SECTION 3. DIVIDENDS. The holders of shares of Series A Stock shall be
entitled to receive, when, as and if declared by the Board of Directors, which
declaration shall be made by the Board of Directors and dividends shall be paid
for each of the first four full quarterly periods following the issuance of the
Series A Stock, but only in each case out of funds legally available therefor,
cumulative cash dividends at the annual rate of $.18 per share, and no more,
payable quarterly on the first days of March, June, September and December,
respectively, in each year, commencing September 1, 1996, with respect to the
quarterly dividend period (or portion thereof) ending on the day preceding such
respective dividend payment date, to holders of record on the respective date,
not more than sixty (60) nor less than ten (10) days preceding such dividend
payment date, fixed for such purpose by the
<PAGE>
Board of Directors in advance of payment of each particular dividend. So long
as any share of Series A Stock remains outstanding, no dividend whatever shall
be paid or declared and no distribution shall be made on any junior stock, other
than a dividend payable solely in junior stock, and no shares of junior stock
shall be purchased, redeemed or otherwise acquired for consideration by the
Corporation, directly or indirectly (other than as a result of a
reclassification of junior stock, or the exchange or conversion of one share of
junior stock, in each case, for or into another share of junior stock), unless
all accrued dividends on all outstanding shares of Series A Stock for all past
quarterly dividend periods shall have been paid and the full dividend thereon
for the then current quarterly dividend period shall have been paid or declared
and set apart for payment. Subject to the foregoing, and not otherwise, such
dividends (payable in cash, stock or otherwise) as may be determined by the
Board of Directors may be declared and paid on any junior stock from time to
time out of any funds legally available therefor, and the shares of Series A
Stock shall not be entitled to participate therein. No interest or penalty
shall be payable on accrued dividends of Series A Stock.
SECTION 4. LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or
winding up of the Corporation, either voluntary or involuntary, the holders of
shares of Series A Stock shall be entitled to be paid out of the assets of the
Corporation legally available for distribution to its stockholders, before any
payment or declaration and setting apart for payment of any amount shall be made
in respect of the Common Stock, an amount equal to $1.50 per share of Series A
Stock, plus an amount equal to any accrued dividends, and no more. If upon the
occurrence of such event the assets distributable among the holders of Series A
Stock shall be insufficient to permit the payment of the full preferential
amounts for the Series A Stock, then the entire assets and funds of the
Corporation legally available for distribution to its stockholders shall be
distributed among the holders of Series A Stock then outstanding ratably per
share in proportion to the full preferential amounts per share to which they are
respectively entitled. After the holders of Series A Stock have received
payment or distribution of their full preferential amounts, the remaining assets
of the Corporation available for distribution to its stockholders shall be
distributed ratably to the holders of the outstanding shares of Common Stock,
except to the extent otherwise provided in the designation of any series of
capital stock. For the purposes of this Section 4, the consolidation or merger
of the Corporation with any other corporation shall not be deemed to constitute
a liquidation, dissolution or winding up of the Corporation.
SECTION 5. REDEMPTION.
(a) The shares of Series A Stock may be redeemed, in whole or in part, at
any time from time to time or on or after May 31, 1997, at the option of the
Corporation out of funds legally available therefor, at a redemption price of
One and 50/100 Dollars ($1.50) per share plus accrued dividends ("Redemption
Price"). In case of redemption of a part only of the shares of Series A Stock
at the time outstanding, the redemption may be either pro rata or by lot. The
Board of Directors shall have full power and authority, subject to the
provisions herein contained, to prescribe the terms and conditions upon which
shares of Series A Stock shall be redeemed from time to time.
2
<PAGE>
(b) Notice of redemption of Series A Stock shall be mailed by first class
mail, postage prepaid, addressed to the holders of record of shares of the
Series A Stock at the last addresses as they shall appear on the books of the
Corporation ("Redemption Notice") at least 10 days and not more than 30 days
prior to the redemption date (the "Redemption Date"). Any notice which is
mailed in the manner herein provided shall be conclusively presumed to have been
duly given, whether or not the stockholder receives such notice, and failure
duly to give such notice by mail, or any defect in such notice, to any holder of
shares of Series A Stock designated for redemption shall not affect the validity
of the proceedings for the redemption of any other shares of Series A Stock.
The Redemption Notice shall set forth the Redemption Price and the place where
holders of shares of Series A Stock may receive the Redemption Price upon
tendering certificates for shares of Series A Stock in the manner set forth in
the Redemption Notice.
(c) On or after June 1, 1999, upon written demand made by holders of more
than fifty percent (50%) of the maximum number of shares of Series A Stock
originally issued and outstanding for mandatory redemption of all or any portion
of the shares of Series A Stock, the Corporation shall, within thirty (30) days
after the receipt by the Corporation of such notice ("Mandatory Redemption
Date") redeem and pay to the holders of shares of Series A Stock tendered for
redemption a mandatory redemption price equal to $1.50 per share plus all
accrued dividends thereon, out of and to the extent that funds of the
Corporation are legally available therefor. The Corporation shall provide a
notice of mandatory redemption to all holders of Series A Stock in the same
manner as a Redemption Notice.
(d) If on or before the Redemption Date (which for purposes of this
paragraph shall include a Mandatory Redemption Date) all funds necessary for
such redemption shall have been set aside by the Corporation, separate and apart
from its other funds, in trust for the pro rata benefit of the holders of Series
A Stock, so as to be and continue to be available therefor, then from and after
the Redemption Date, notwithstanding that any certificate for shares of Series A
Stock shall not have been surrendered for cancellation, the shares represented
thereby shall no longer be deemed outstanding, and all rights with respect to
shares of Series A Stock shall forthwith on the Redemption Date cease and
terminate except only as to the right of the holders thereof to receive the
redemption price of such shares so to be redeemed. Any funds so set aside or
deposited by the Corporation which shall not be required for such redemption
because of the exercise of any right of conversion or exchange subsequent to the
date of such deposit shall be released or repaid to the Corporation forthwith.
Any moneys so set aside by the Corporation and unclaimed at the end of three (3)
years from the Redemption Date shall revert to the general funds of the
Corporation.
SECTION 6. CONVERSION RIGHTS. The holders of shares of Series A Stock shall
have the right, at their option, to convert all or any part of the shares of
Series A Stock into shares of Common Stock at any time on and subject to the
following terms and conditions.
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(a) Shares of Series A Stock shall be convertible at the office of the
Corporation, or, if the Corporation shall then have a transfer agent for Common
Stock, at the office of such transfer agent, into one (1) fully paid and
nonassessable share of Common Stock for each share of Series A Stock (the
"Conversion Rate"), subject to adjustment as provided in this Section 6. Upon
conversion of any shares of Series A Stock and at the time of delivery of
certificate for shares of Common Stock into which the shares of Series A Stock
is converted ("Conversion Common Stock"), the Corporation, at its option, shall
either (i) pay to the holder in cash by bank check drawn on immediately
available funds the amount of any accrued but unpaid dividends, or (ii) issue
additional shares of Conversion Common Stock to the holder of the Series A Stock
in payment and discharge of accrued dividends at the Dividend Conversion Price
(as hereinafter defined) per share of Common Stock.
(b) Before any holder shall be entitled to convert shares of Series A Stock
into shares of Common Stock, such holder shall: (i) surrender the certificate
or certificates representing shares of Series A Stock to be converted, duly
endorsed or assigned to the Corporation or in blank, at the office of the
Corporation, or, if the Corporation shall then have a transfer agent for the
Common Stock, at the office of such transfer agent; (ii) give written notice to
the Corporation at such office, attention to its Secretary, that such holder
elects to convert Series A Stock into Common Stock; and (iii) state in such
written notice the number of shares of Series A Stock to be converted and the
denominations in which such holder wishes the certificate or certificates for
Common Stock to be issued. The Corporation will, as soon as practicable
thereafter, cause to be issued and delivered to such holder certificates for the
number of full shares of Common Stock and Series A Stock to which such holder
shall be entitled as aforesaid, together with payment of any accrued dividends
to be paid in cash and payment in lieu of any fraction of a share, as
hereinafter provided. Such conversion shall be deemed to have been made as of
the close of business on the date the certificate or certificates representing
shares of Series A Stock to be converted are surrendered and received at the
office of the Corporation, or, if the Corporation shall then have a transfer
agent for the Common Stock, at the office of such transfer agent (the close of
business on such date being herein called the "Conversion Date"), so that the
rights of such holder as to such shares of Series A Stock shall cease at such
time, and the holder shall be entitled to receive the shares of Common Stock
upon conversion of such shares of Series A Stock and shall be treated for all
purposes as having been the record holder of such shares of Common Stock at such
time, and such conversion shall be at the Conversion Rate in effect at such
time. In case shares of Series A Stock are called for redemption, the right to
convert such shares shall cease and terminate at the close of business on the
third full business day prior to the date fixed for redemption, unless default
shall be made in payment of the Redemption Price.
(c) No fractional shares of Common Stock shall be issued upon conversion of
shares of Series A Stock, but, instead of any fraction of a share which would
otherwise be issuable, the Corporation shall pay a cash adjustment in respect of
such fraction in an amount equal to the same fraction of the Dividend Conversion
Price on the Conversion Date.
4
<PAGE>
(d) In the event that, while any shares of Series A Stock shall remain
outstanding, the Corporation shall at any time (i) subdivide its outstanding
Common Stock into a greater number of shares, or (ii) combine the outstanding
shares of Common Stock into a smaller number of shares, or (iii) issue
additional shares of Common Stock as a dividend or other distribution on the
Common Stock, the Conversion Rate in effect immediately prior to such
subdivision or combination or stock dividend or stock distribution shall be
proportionately adjusted so that, with respect to each such subdivision of
shares or stock dividend or stock distribution, the number of shares of Common
Stock deliverable upon conversion of each share of Series A Stock shall be
increased in proportion to the increase in the number of then outstanding shares
of Common Stock resulting from such subdivision of shares of stock dividend or
stock distribution, and with respect to each such combination of shares, the
number of shares of Common Stock deliverable upon conversion of each share of
Series A Stock shall be decreased in proportion to the decrease in the number of
then outstanding shares of Common Stock resulting from such combination of
shares. Any such adjustment in the Conversion Rate shall become effective, in
the case of any subdivision or combination of shares, at the close of business
on the effective date thereof, and, in the case of any such stock dividend or
stock distribution, at the close of business on the record date fixed for the
determination of stockholders entitled thereto or on the first business day
during which the stock transfer books of the Corporation shall be closed for the
purpose of such determination, as the case may be. Whenever the Conversion Rate
shall be adjusted pursuant to this Section 6(d), and the Corporation shall have
a transfer agent for the Common Stock, the Corporation shall, within thirty (30)
days after such adjustment becomes effective, file a notice of the Conversion
Rate, as adjusted, with such transfer agent.
(e) In the event that, while any shares of Series A Stock shall remain
outstanding, there shall be any consolidation or merger of the Corporation with
another corporation, or a sale to another corporation of all or substantially
all of the property of the Corporation (otherwise than for a consideration
which, apart from the assumption of liabilities, consists substantially or
entirely of cash), or a reclassification of the Common Stock of the Corporation
into securities including other than Common Stock, holders of Series A Stock
shall thereafter have the right to convert such shares of Series A Stock (or
such other stock or securities) into the kind and amount of shares of stock and
other securities and property receivable upon such consolidation, merger, or
reclassification by a holder of the number of shares of Common Stock into which
such shares of Series A Stock could have been converted immediately prior to
such consolidation, merger, or reclassification. The instruments effecting such
consolidation, merger, or reclassification and, where appropriate, the articles
of incorporation of the surviving or resulting or purchasing corporation shall
provide for such conversion rights and for adjustments which shall be as nearly
as equivalent as practicable to the adjustments provided for in this Section 6,
and the provisions of this Section 6 shall similarly apply to successive
consolidations, mergers, sales, or reclassifications. In case securities or
property other than Common Stock shall be issuable or deliverable upon
conversion as aforesaid, then all references to stock in this Section 6(e) shall
be deemed to apply, so far as appropriate and as nearly as may be, to such other
securities or property.
5
<PAGE>
(f) The issuance of certificates for shares of Common Stock upon conversion
of shares of Series A Stock shall be made without charge to the holders of
Series A Stock for any original issuance tax in respect of the issuance of such
certificates, and such certificates shall be issued in the name of, or in such
name or names as may be directed by, the holders of Series A Stock; provided,
however, that the Corporation shall not be required to pay any transfer tax
which may be payable in respect of any transfer involved in the issuance and
delivery of any such certificate in a name or names other than that of the
holders of Series A Stock and the Corporation shall not be required to issue or
deliver such certificates unless and until the holders of Series A Stock shall
have paid to the Corporation the amount of such tax or shall have established to
the satisfaction of the Corporation that such tax has been paid.
(g) No adjustment in the Conversion Rate shall be required unless such
adjustment would require an increase or decrease of at least 1% in the
Conversion Rate; provided, however, that any adjustments which by reason of this
Section 6(g) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations with respect to this
Section 6 shall be made to the nearest cent or to the nearest 1/100th of a
share, as the case may be. The certificate of any independent firm of public
accountants of recognized standing selected by the Board of Directors shall be
presumptive evidence of the correctness of any computation made under this
Section 6.
(h) In the event of the occurrence of any event or transaction not
contemplated by this Section 6 that would require an adjustment to the
Conversion Rate to remain consistent with the intent and purpose of this Section
6, then the Board of Directors shall make such adjustment to the Conversion Rate
as they shall deem reasonable and consistent with the intentions and purposes of
this Section 6 and general principles of equity. The Board of Directors shall
have the power to resolve any ambiguity or correct any error in this Section 6,
and its action in so doing shall be final and conclusive.
(i) In the event that the shares of Conversion Common Stock, when issued,
shall have not have been registered under the Securities Act of 1933, as amended
("Securities Act"), or applicable state securities laws ("State Laws"), then the
shares of Conversion Common Stock shall be deemed to be "Restricted Shares" and
may not be sold, distributed, assigned, offered, pledged, or otherwise
transferred unless (i) there is an effective registration statement under the
Securities Act and the State Laws covering any such transaction involving the
Conversion Common Stock, (ii) the Corporation receives an opinion of legal
counsel for the holder of the Conversion Common Stock reasonably satisfactory to
the Corporation stating that such transaction is exempt from such registration,
or (iii) the Corporation otherwise satisfies itself that such transaction is
exempt from such registration; and certificates representing any of the
Conversion Common Stock shall bear a legend to the foregoing effect, and the
transfer agent, if any, of the Corporation with respect to Common Stock of the
Corporation shall be given a stop order by the Corporation with respect to any
proposed transfer of Conversion Common Stock that shall be Restricted Shares.
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<PAGE>
SECTION 7. VOTING RIGHTS. Each outstanding share of Series A Stock shall be
entitled to one (1) vote on any matter submitted to a vote of the stockholders
of the Corporation. Notwithstanding the foregoing, however, the consent of the
holders of at least a majority of the outstanding shares of Series A Stock,
voting separately as a single class, shall be necessary to approve an amendment
to the Articles of Incorporation or Bylaws of the Corporation, or an act of the
Corporation, or a transaction involving the Corporation, that would: (i)
increase or decrease the aggregate number of authorized shares of Series A
Stock; (ii) effect an exchange, reclassification, or cancellation of all or part
of Series A Stock; (iii) effect or require an exchange or conversion of all or
any part of the shares of another class of stock into Series A Stock; (iv)
change, in a manner prejudicial to the holders of shares of Series A Stock, the
designations, preferences, limitations, or relative rights of Series A Stock or
shares of any other class of stock; (v) create a new class or enlarge an
existing class of shares of stock having rights or preferences senior or
superior to the Series A Stock, or increase the rights or preferences of any
class of stock having rights or preferences senior or superior to the Series A
Stock; or (vi) authorize the payment of a dividend in the form of shares of
Series A Stock.
SECTION 8. DEFINITIONS. As used herein with respect to Series A Stock, the
following terms shall have the following meanings:
(a) The term "junior stock" shall mean the Common Stock and any other class
or series of stock of the Corporation hereafter authorized over which Series A
Stock has preference or priority in the payment of dividends or in the
distribution of assets on any liquidation, dissolution or winding up of the
Corporation.
(b) The term "accrued dividends," with respect to any share of any class or
series, shall mean an amount computed at the annual dividend rate for the class
or series of which the particular share is a part, from the date on which
dividends on such shares became cumulative to and including the date to which
such dividends are to be accrued, whether or not declared by the Board of
Directors, less the aggregate amount of all dividends theretofore paid thereon.
(c) The term "business day" shall mean each Monday, Tuesday, Wednesday,
Thursday or Friday on which banking institutions in Austin, Travis County,
Texas, are not authorized or obligated by law or executive order to close.
(d) The term "Dividend Conversion Price" on any day shall mean the average
of the average of the reported closing bid and asked prices regular way, in each
case on the New York Stock Exchange, or, if the Common Stock is not listed or
admitted to trading on such exchange, on the American Stock Exchange, or, if the
Common Stock is not listed or admitted to trading on such exchange, on the
principal national securities exchange on which the Common Stock is listed or
admitted to trading, or, if the Common Stock is not listed or admitted to
trading on any national securities exchange, the average of the average of the
closing bid and asked prices in the over-the-counter market as reported by the
National Association of Securities Dealers' Automated Quotation System, or, if
not so reported, as
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<PAGE>
reported by the National Quotation Bureau, Incorporated, or any successor
thereof, or, if not so reported, the average of the average of the closing bid
and asked prices as furnished by any member of that National Association of
Securities Dealers, Inc. selected from time to time by the Corporation for that
purpose, for the five (5) Trading Days (as hereinafter defined) immediately
preceding the determination date; provided, however, that if the shares of
Common Stock to which the Dividend Conversion Price is to be attributable are
Restricted Shares, then, notwithstanding the foregoing, the Dividend Conversion
Price shall be deemed to be and mean a value equal to seventy-five percent (75%)
of the Dividend Conversion Price determined in the foregoing clause.
(e) The term "Trading Day" shall mean a day on which the principal national
securities exchange on which the Common Stock is listed or admitted to trading
is open for the transaction of business or, if the Common Stock is not listed or
admitted to trading on any national securities exchange, a Monday, Tuesday,
Wednesday, Thursday or Friday on which banking institutions in Austin, Travis
County, Texas are not authorized or obligated by law or executive order to
close.
SECTION 9. OTHER RIGHTS. The shares of Series A Stock shall not have any
preemptive right to acquire any other shares of capital stock or other
securities of the Corporation or securities convertible into shares of capital
stock of the Corporation (herein "preemptive rights"), or any other powers,
preferences or relative, participating, optional or other special rights, or
qualifications, limitations or restrictions thereof, other than as set forth
herein; provided that, in the event that the holders of shares of Common Stock
of the Corporation are granted any preemptive rights generally, then the holders
of shares of Series A Stock shall be entitled to exercise the same preemptive
rights in respect of the shares of Series A Stock of such holder as the shares
of Conversion Common Stock into which the Series A Stock may be convertible
would otherwise be entitled.
FURTHER RESOLVED, that the proper officers of the Corporation are hereby
authorized and directed to do all acts and things which be necessary or
advisable to carry into effect the purposes and intent of this and the foregoing
resolutions."
IN WITNESS WHEREOF, HomeCapital Investment Corporation has caused this
certificate to be duly executed this 3rd day of May, 1996.
HOMECAPITAL INVESTMENT CORPORATION
By: /s/ John W. Ballard
--------------------------------------
JOHN W. BALLARD, President
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EXHIBIT 10
PREFERRED STOCK PURCHASE AGREEMENT
BETWEEN
HOMECAPITAL INVESTMENT CORPORATION
AND
HCI EQUITY PARTNERS L.P.
-------------------
May 3, 1996
<PAGE>
PREFERRED STOCK PURCHASE AGREEMENT
TABLE OF CONTENTS
SECTION TITLE PAGE
- ------- ----- ----
1. Purchase and Sale Agreement.................. 1
2. Closing and Delivery......................... 2
3. Representations and Warranties of the Company 2
4. Representations and Warranties of the Buyer.. 4
5. Conditions to Obligations of Buyer........... 8
6. Conditions to Obligations of Company......... 10
7. Post-Closing Covenants of the Company........ 12
8. Indemnification.............................. 14
9. Miscellaneous Provisions..................... 17
SIGNATURES..................................................... 21
EXHIBITS TITLE
- -------- -----
A Certificate of Designation
B Registration Agreement
C Form of Opinion of Company Counsel
D Form of Opinion of Buyer's Counsel
i
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION
PREFERRED STOCK PURCHASE AGREEMENT
This Preferred Stock Purchase Agreement ("Agreement") is entered into on and as
of May 3, 1996 ("effective date"), by and between HOMECAPITAL INVESTMENT
CORPORATION, a Nevada corporation ("Company"), and HCI EQUITY PARTNERS L.P., a
Texas limited partnership ("Buyer").
RECITALS
A. The Company has authorized the sale and issuance of up to 1,500,000 shares
of its $.01 par value Preferred Stock, Series A ("Preferred Stock"). The
Preferred Stock has the rights, privileges and preferences as set forth in the
Certificate of Designation of Preferred Stock, Series A, attached to this
Agreement as Exhibit A ("Certificate of Designation").
B. The Company desires to sell, and Buyer desires to purchase, up to an
aggregate of 1,000,000 shares, but not less than 883,333 shares, of the
Preferred Stock, for the consideration and on the terms set forth in this
Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual and respective
representations, covenants, conditions and agreements set forth herein, the
parties hereto do hereby agree as follows:
SECTION 1. PURCHASE AND SALE AGREEMENT
1.1 Purchase and Sale of Shares. Subject to the terms and conditions hereof,
---------------------------
the Company hereby agrees to issue and sell to the Buyer, and the Buyer hereby
agrees to purchase from the Company, on the Closing Date (as hereinafter
defined) at a price of one dollar and fifty cents ($1.50) per share ("per share
price") up to 1,000,000 shares of Preferred Stock, but not less than 883,333
shares of Preferred Stock. Buyer shall notify the Company at least five (5)
business days prior to the Closing Date of the exact number of shares of
Preferred Stock to be purchased by Buyer (the "Shares"). In the event that
Buyer shall fail to timely provide a notice to the Company of the Shares to be
purchased, then Buyer shall purchase 883,333 Shares at the Closing (hereinafter
defined), or such higher number (though no more than 1,000,000 Shares in the
aggregate) as the Buyer and the Company shall mutually agree on or before the
Closing..
1.2 Purchase Price. Subject to the terms and conditions hereof, at the Closing
--------------
Buyer shall pay to the Company for the Shares an amount equal to the number of
Shares to be purchased by Buyer multiplied by the per share price ("purchase
price").
<PAGE>
SECTION 2. CLOSING AND DELIVERY
2.1 The Closing. The closing of the purchase and sale of the Shares hereunder
-----------
("Closing") shall be held at 10:00 a.m. local time at the offices of the
Company, on May 31, 1996 or on such other date as the Buyer and the Company may
mutually determine, but no later than June 15, 1996 ("Closing Date").
2.2 Delivery and Payment. At the Closing, the Company shall deliver to Buyer a
--------------------
certificate registered in the name of Buyer representing the number of Shares to
be purchased by Buyer at the Closing. At the Closing, Buyer shall pay the
purchase price in cash by cashiers check payable to the order of the Company
drawn on immediately available Austin, Texas funds.
2.3 Registration Agreement. The Company and the Buyer shall enter into a
----------------------
Registration Agreement on or prior to the Closing in substantially the form
attached hereto as Exhibit B ("Registration Agreement").
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to and covenants with Buyer as
follows:
3.1 Organization and Qualification. The Company is a corporation duly
------------------------------
incorporated, validly existing and in good standing under the laws of the State
of Nevada. The Company has requisite corporate power and authority to own,
lease and operate its properties and assets, and to carry on its business as
presently conducted. The Company is duly qualified and authorized to do
business, and is in good standing as a foreign corporation, in each jurisdiction
where the nature of its activities and of its properties (both owned and leased)
makes such qualification necessary and where a failure to so qualify would have
a material adverse effect on its business or properties.
3.2 Corporate Power and Authority. The Company has all requisite corporate
-----------------------------
power and authority to execute and deliver this Agreement and the Registration
Agreement, to sell and issue the Shares of Preferred Stock, to issue the $.01
par value Common Stock of the Company issuable upon conversion of the Shares
("Conversion Common Stock") and to carry out and perform its obligations under
the terms of this Agreement and the Registration Agreement.
3.3 Authorization and Enforcement. All corporate action on the part of the
-----------------------------
Company, its directors and stockholders necessary for the authorization,
execution and delivery of this Agreement and the Registration Agreement by the
Company, the authorization, sale, issuance and delivery of the Shares and, upon
conversion of the Shares, the Conversion Common Stock and the performance of all
of the Company's obligations hereunder and under the Registration Agreement
required to be taken on or prior to Closing, has been taken or will be taken
prior to Closing. Each of this Agreement and, when duly executed
2
<PAGE>
in behalf of the Company, the Registration Agreement constitute a valid and
binding obligation of the Company, enforceable in accordance with its terms
(assuming the valid authorization, execution and delivery of this Agreement and
the Registration Agreement by the Buyer), subject to laws of general application
relating to bankruptcy, insolvency and the relief of debtors and rules of law
governing specific performance, injunctive relief or other general principles of
equity, whether such enforcement is considered in a proceeding in equity or law.
3.4 Preferred Stock and Conversion Common Stock. Upon filing of the
-------------------------------------------
Certificate of Designation with the Secretary of State of Nevada, the Preferred
Stock will constitute duly authorized unissued capital stock of the Company.
The Shares, when issued in compliance with the provisions of this Agreement, and
the Conversion Common Stock, when issued in compliance with the Certificate of
Designation, will be validly issued, fully paid and nonassessable voting capital
stock of the Company, will be free of any duties or other governmental charges
and will be free of any liens, encumbrances or restrictions, other than any
liens, encumbrances or restrictions created by or imposed upon the holders
thereof pursuant to the Certificate of Designation, this Agreement and the
Registration Agreement and restrictions on resale or transfer under state and
federal securities laws. Except as contemplated herein, the Shares and the
Conversion Common Stock are not subject to any preemptive rights or rights of
first refusal.
3.5 Compliance with Other Instruments. The execution, delivery and performance
---------------------------------
of and compliance with this Agreement and the issuance of the Shares and the
Conversion Common Stock have not resulted and will not result in any violation
of, or conflict with, or constitute a default under, (i) the Company's Articles
of Incorporation or Bylaws or (ii) any loan or credit agreement, indenture or
other material agreement affecting the Company nor result in the creation of, or
mortgage, pledge, lien, encumbrance or charge upon any of the properties or
assets of the Company, or (iii) any order, writ, judgement, decree,
determination or award of any court or governmental authority which affects or
binds the Company, the Shares or the Conversion Common Stock.
3.6 Governmental Consent. No consent, approval or authorization of or
--------------------
designation, declaration or filing with any governmental authority on the party
of the Company is required in connection with the valid execution and delivery
of this Agreement and the Registration Agreement, or the offer, sale or issuance
of the Shares or the Conversion Common Stock or the consummation of any other
transaction contemplated hereby, except (i) filing of the Certificate of
Designation in the office of the Secretary of State of Nevada, and (ii)
qualification (or taking such action as may be necessary to secure an exemption
from qualification, if available) of the offer and sale of the Shares under
applicable federal and state securities laws.
3.7 Third Party Consent. The execution, delivery and performance of this
-------------------
Agreement, the execution and delivery of the Registration Agreement, and the
offer, sale or issuance of
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<PAGE>
the Shares and, upon conversion of the Shares, the Conversion Common Stock, do
not require the consent, authorization, or approval of any creditor or other
third party.
3.8 Disclosure. The Disclosure Documents (hereinafter described), taken as a
----------
whole, together with the representations made by the Company in this Agreement,
include all material information concerning the present business operations and
condition (financial or otherwise) of the Company and do not contain any untrue
statement of a material fact or omit to state a material fact known to the
Company that would be necessary in order to make the statements contained herein
and therein not misleading in the light of the circumstances under which they
were made, except for changes in the financial and other information that may be
reflected in the definitive Private Placement Memorandum ("Memorandum") to be
provided by the Company to Buyer pursuant to this Agreement, or in the quarterly
report of the Company for the quarterly period ended March 31, 1996 ("Second
Quarter Report"), to be provided by the Company to Buyer pursuant to this
Agreement, as and when filed with the Securities and Exchange Commission ("SEC")
on SEC Form 10-QSB, and changes occurring in the ordinary course of business
since March 31, 1996 (none of which changes have had or are likely to have a
material adverse effect on the Company or its business). The Company is not
aware of any fact which has not been, or will not have been when the Memorandum
and the Second Quarter Report are delivered, disclosed to the Buyer which would
have a material adverse effect on the Company's business, prospects, condition,
affairs or operations.
3.9 Exclusivity. Neither the Company nor, to the best of its knowledge, any of
-----------
its officers, directors, employees or representatives has encouraged, solicited,
initiated or participated in any discussions or negotiations with, or provided
any information to, any person or entity (or group thereof), other than the
Buyer and its and the Company's officers, directors, employees and
representatives, concerning the transactions contemplated by this Agreement or
any transaction involving (or which might involve) the sale of all or
substantially all of the Shares to be sold to Buyer pursuant to this Agreement,
except as set forth in the Disclosure Documents, and to other purchasers of
shares of Preferred Stock and their representatives and as otherwise required by
law.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE BUYER
Buyer hereby represents and warrants to and covenants with the Company as
follows:
4.1 Organization. Buyer is a limited partnership duly organized, validly
------------
existing and in good standing under the laws of the State of Texas.
4.2 Power and Authority. The Buyer has all requisite legal and other power and
-------------------
authority to execute and deliver this Agreement and the Registration Agreement
and to carry out and perform its obligations under the terms of this Agreement
and the Registration Agreement.
4
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4.3 Authorization and Enforcement. All action on the part of the general and
-----------------------------
limited partners of Buyer necessary for the authorization, execution, delivery
and performance of all obligations under this Agreement and the Registration
Agreement by Buyer has been duly taken or will be taken prior to Closing. Each
of this Agreement and the Registration Agreement constitute a valid and legally
binding obligation of the Buyer, enforceable in accordance with its terms
(assuming the valid authorization, execution and delivery of this Agreement and
the Registration Agreement by the Company), subject to laws of general
application relating to bankruptcy, insolvency and the relief of debtors and
rules of law governing specific performance, injunctive relief or other general
principals of equity, whether such enforcement is considered in a proceeding in
equity or law.
4.4 Compliance with Other Instruments. The execution, delivery and performance
---------------------------------
of and compliance with this Agreement, and the purchase of the Shares will not
result in any material violation of, or conflict with, or constitute a material
default under, any partnership agreement of Buyer or any of its other material
agreements, nor result in the creation of any mortgage, pledge, lien,
encumbrance or charge against any of the assets or properties of the Company or
the Shares.
4.5 Accredited Investor. Each of Buyer and the partners of Buyer is an
-------------------
"accredited investor" as that term is used and defined in Rule 501(a)of
Regulation D ("Regulation D") promulgated by the SEC under the Securities Act of
1933, as amended ("Securities Act"), or, if not an "accredited investor," is,
together with Buyer and the partners of Buyer, otherwise qualified under
Regulation D to receive an offer and to purchase Shares from the Company
pursuant the exemption from registration of the transaction under the Securities
Act afforded by Rules 505 and 506 of Regulation D; and each of Buyer and the
partners of Buyer, alone or with the assistance of a professional advisor, is a
sophisticated investor, and has substantial experience in evaluating and
investing in private placement transactions of securities in companies similar
to the Company, and is capable of evaluating the merits and risks of the
investment in the Company by Buyer.
4.6 Professional Advice. Buyer, and each partner of Buyer, has obtained, to
-------------------
the extent that such person deems necessary, professional advice with respect to
the risks inherent in acquiring the Shares, the condition of the Company and the
suitability of an investment in the Shares in light of the financial condition
and investment needs of such person.
4.7 Investment. Buyer is acquiring the Shares for investment for its own
----------
account, not as a nominee or agent, and not with the view to, or for resale in
connection with, any distribution thereof. Buyer understands that at the time
of issuance the Shares to be purchased, and the shares of Conversion Common
Stock have not been, and will not be, registered under the Securities Act or the
securities laws of the State of Texas or any other state by reason of specific
exemptions from the registration provisions of the Securities Act and the
securities laws of the State of Texas and other applicable jurisdictions, the
availability of which depends upon, among other things, the accuracy of the
representations as expressed herein with respect to Buyer and each partner of
Buyer. Buyer acknowledges
5
<PAGE>
that the Company has not undertaken to register the Shares for resale at any
time under the Securities Act or applicable state securities laws, and has not
undertaken to register the Conversion Common Stock under the Securities Act or
applicable state securities laws, except as expressly provided in the
Registration Agreement.
4.8 No Public Market. Buyer understands that no public market now exists for
----------------
any of the Shares to be issued by the Company and that the Company has made no
assurances, and it is unlikely, that a public market will ever exist for the
Shares of Preferred Stock of the Company.
4.9 Ability to Bear Risk. Buyer is in a financial position to hold the Shares
--------------------
for an indefinite period of time and is able to bear the economic risk and
withstand a complete loss of investment in the Shares.
4.10 Rule 144. Buyer acknowledges that the shares of Conversion Common Stock to
--------
be issued upon and in the event of conversion of the Shares must be held
indefinitely, unless subsequently registered under the Securities Act pursuant
to the Registration Agreement or unless an exemption from such registration is
available. Buyer is aware of the provisions of Rule 144 promulgated under the
Securities Act which permit limited resale of restricted shares purchased in a
private placement subject to the satisfaction of certain conditions, including,
among other things, the existence of a public market for the shares, the
availability of certain current public information about the issuer, a holding
period of not less than two years after a party has purchased and paid for the
security to be sold, conducting the sale by means of a "broker's transaction" or
in a transaction directly with a "market maker" and limiting the number of
shares being sold during any three-month period. Buyer acknowledges that,
except as specifically set forth in the Registration Agreement, it is not
relying on the Company in any way to satisfy the conditions precedent for
limited resale of shares of Conversion Common Stock pursuant to Rule 144 under
the Securities Act.
4.11 Limitations on Disposition. Without in any way limiting the
--------------------------
representations set forth above, Buyer acknowledges that it may not and
covenants that it will not make any disposition of all or any portion of the
Shares, or any of the shares of Conversion Common Stock into which the Shares
may be converted, unless and until:
(a) There is in effect a Registration Statement under the Securities Act
covering such proposed disposition and such disposition is made in accordance
with the Registration Statement;
(b) (i) Buyer shall have notified the Company of the proposed disposition
and shall have furnished the Company with a detailed statement of the
circumstances surrounding the proposed disposition, and (ii) if reasonably
requested by the Company, Buyer shall have furnished the Company with an opinion
of counsel, reasonably satisfactory to the Company, that such disposition shall
not require registration under the Securities Act; or
6
<PAGE>
(c) With respect to a proposed disposition of shares of Conversion Common
Stock, the Company shall be satisfied that such proposed disposition complies in
all respects with Rule 144 promulgated by the SEC under the Securities Act or
any successor rule providing a safe harbor for such disposition without
registration.
4.12 Legend. Certificates evidencing the Shares, and upon conversion of any of
------
the Shares, certificates evidencing any of the shares of Conversion Common
Stock, may bear a legend substantially as follows:
The Securities evidenced by this certificate have not been registered under
the Securities Act of 1933, as amended (the "Act") or applicable state
securities laws, and no interest therein may be sold, distributed,
assigned, offered, pledged or otherwise transferred unless (i) there is an
effective registration statement under the Act and applicable state
securities laws covering any such transaction involving such securities,
(ii) this Corporation receives an opinion of legal counsel for the holder
of the securities reasonably satisfactory to this corporation stating that
such transaction is exempt from registration, or (iii) this corporation
otherwise satisfies itself that such transaction is exempt from
registration.
4.13 Residency. Buyer, and each partner of Buyer, is a bona fide resident of,
---------
and domiciled in, either the State of Texas or Louisiana.
4.14 Disclosure Documents. Each of Buyer, and each partner of Buyer, has
--------------------
received a copy of (i) the Preliminary Private Offering Memorandum, dated April
25, 1996, of the Company, (ii) the Annual Report of the Company on SEC Form 10-
KSB for the year ended September 30, 1995, and (iii) the quarterly report of the
Company on SEC Form 10-QSB for the quarter ended December 31, 1996 (collectively
the "Disclosure Documents"), and has had the opportunity to review the
Disclosure Documents to the full satisfaction of such person. Buyer
acknowledges that investment in the Shares involves a high degree of risk,
including the risks described in the Disclosure Documents.
4.15 Investigation and Access to Information. To the best of its knowledge,
---------------------------------------
Buyer has been given access to full and complete information regarding the
Company, including, in particular, the current financial condition of the
Company and the risks associated with the business of the Company and an
investment in the Shares, and has utilized such access to its satisfaction for
the purpose of obtaining information about the Company and verifying the
information contained in the Disclosure Documents; in particular, Buyer has
either met with or been given reasonable opportunity to meet with
representatives of the Company for purposes of asking questions of, and
receiving answers from, such representatives concerning the terms and conditions
of this Agreement and to obtain any additional information, to the extent
reasonably available, necessary to verify the information provided concerning
the Company in the Disclosure Documents or otherwise. Buyer has had an
opportunity to discuss the Company's business, management and financial affairs
with its management and
7
<PAGE>
the opportunity to review the Company's financial statements, books and records,
facilities and business plan. Buyer has also had an opportunity to ask
questions of officers of the Company, which questions were answered to its
satisfaction. Buyer has been solely responsible for its own due diligence
investigation of the Company and its business, and its analysis of the merits
and risks of an investment in the Shares being acquired pursuant to this
Agreement, and is not relying on any analysis or investigation of the Company,
its business or the merits or risks of an investment in the Shares, made by any
other person or firm, including without limitation the Company, its officers,
directors, stockholders and agents, other than persons employed specifically by
Buyer for such purpose.
4.16 Brokers or Finders. Buyer has conducted its negotiations with respect to
------------------
this Agreement and all agreements and transactions contemplated hereby directly
with the Company, without the assistance or intervention of any finder, agent or
other person who may be entitled to any commission, fee or other compensation in
connection with the execution and consummation of this Agreement; and the Buyer
has not incurred, and has not authorized any officer, partner or agent of Buyer
or any other person to, and will not, and will not authorize any person in
behalf of Buyer to, incur, directly or indirectly, any liability or obligation,
contingent or otherwise, for brokerage or finders' fees or agents' commissions
or any similar payments in connection with this Agreement.
4.17 Tax Liability. To the extent it deems necessary, Buyer has reviewed with
-------------
its own tax advisors the federal, state, local and foreign tax consequences of
this investment and the transactions contemplated by this Agreement. Buyer is
relying solely on its own advisors and not on any statements or representations
of the Company or any of its agents. Buyer understands that it or its partners
(and not the Company) shall be responsible for any tax liability of Buyer or its
partners that may arise as a result of the investment by Buyer in the Shares or
the transactions contemplated by this Agreement.
4.18 Disclosure. To the best of its knowledge, this Agreement, with the
----------
Exhibits hereto, when taken as a whole, does not contain any untrue statement of
a material fact concerning the Buyer or omit to state a material fact known to
the Buyer that would be necessary in order to make the statements concerning the
Buyer contained herein or therein not misleading in light of the circumstances
under which they were made. The foregoing notwithstanding, nothing contained in
this paragraph shall limit or modify the representations or warranties of the
Company contained in this Agreement or the Disclosure Documents or the
conditions to the obligations of the Buyer contained in Section 5 of this
Agreement.
SECTION 5. CONDITIONS TO OBLIGATIONS OF BUYER
The obligations of Buyer to purchase the Shares at Closing are, at the option of
the Buyer, subject to the fulfillment as of the Closing Date of the following
conditions, unless the Buyer waives any of such conditions in whole or in part
in writing:
8
<PAGE>
5.1 Representations and Warranties. The representations and warranties made by
------------------------------
the Company in Section 3 hereof shall be true and correct at the Closing Date
with the same force and effect as if they had been made on and as of said date.
5.2 Covenants. All covenants, agreements and conditions contained in this
---------
Agreement or in any other agreement executed and delivered by the Company in
connection herewith to be performed by the Company on or prior to the Closing
Date shall have been performed or complied with in all material respects.
5.3 Registration Agreement. The Company, Buyer and each other holder of
----------------------
Preferred Stock prior to the Closing shall have executed and delivered the
Registration Agreement.
5.4 Securities Laws Compliance. The Company shall have taken any and all
--------------------------
actions required under applicable federal and state securities laws necessary to
be taken in connection with the offer and sale of the Shares.
5.5 Certificate of Designation. The Certificate of Designation shall have been
--------------------------
filed with the Secretary of State of Nevada.
5.6 Compliance Certificates. At the Closing, the Company shall have delivered
-----------------------
to the Buyer a certificate of the Company executed by the Chairman or the
President of the Company, dated as of the Closing Date, certifying, among other
things, to the fulfillment of the conditions specified in Sections 5.1, 5.2, 5.4
(subject, in part, to the qualification and accuracy of information provided by
Buyer and its partners), 5.5, 5.10, 5.11 and 5.12 of this Agreement.
5.7 Proceedings and Documents. All material matters of a legal nature which
-------------------------
pertain to this Agreement and the transactions contemplated hereby, shall have
been reasonably approved by the Buyer. All corporate and other proceedings in
connection with the transactions contemplated by the Closing hereby and all
documents and instruments incident to such transaction shall be reasonably
satisfactory in form and substance to the Buyer.
5.8 Board of Directors. The Bylaws of the Company shall have been duly amended
------------------
to increase the number of members of the Board of Directors of the Company to
nine (9) members, and two (2) nominees of Buyer, namely, Messrs. Charles R.
Leone, III, and Robert R. Neyland, shall have been nominated and appointed to
serve as members of the Board of Directors until the next annual meeting of
stockholders of the Company.
5.9 Supplemental Disclosure Documents. The Company shall have delivered to
---------------------------------
Buyer a copy of the definitive Memorandum and a copy of the Second Quarter
Report as filed with the SEC, together with copies of any other reports filed by
the Company with the SEC under the Exchange Act between the effective date of
this Agreement and the Closing Date (collectively, "Supplemental Disclosure
Documents"), and the Buyer shall be satisfied that
9
<PAGE>
the Supplemental Disclosure Documents do not reflect any material adverse change
in the condition (financial or otherwise) of the Company.
5.10 Material Changes. There shall have been no material adverse change in the
----------------
financial condition of the Company since December 31, 1995.
5.11 Consents. The Company shall have obtained all consents necessary to the
--------
consummation of the transactions contemplated hereby.
5.12 Litigation. No suit, action, investigation, inquiry or other proceeding
----------
shall have been instituted or threatened before any court or governmental agency
that challenges the validity or legality of the transactions contemplated
hereby.
5.13 Capitalization of Buyer. Buyer shall have succeeded in placing units of
-----------------------
limited partnership with investors resulting in equity funding of not less than
$1,325,000 contribution to capital of Buyer.
5.14 Opinion of Counsel for the Company. The Company shall have delivered to
----------------------------------
Buyer the opinion of J. Rolfe Johnson, P.C., counsel to the Company, dated as of
the Closing Date, in the form attached hereto as Exhibit C.
5.15 Legal Matters. All material matters of a legal nature which pertain to
-------------
this Agreement, the Registration Agreement and the transactions contemplated
hereby and thereby, shall have been reasonably approved by counsel to the Buyer.
5.16 Qualifications. All authorizations, approvals, or permits, if any, of any
--------------
governmental authority or regulatory body of the United States or of any state
that are required in connection with the lawful sale and issuance of the Shares
pursuant to this Agreement shall have been duly obtained and shall be effective
on and as of the Closing. No stop order or other order enjoining the sale of
the Shares or the proposed issuance of the Conversion Common Stock shall have
been issued and no proceedings for such purpose shall be pending or, to the
knowledge of the Company or Buyer, threatened by the SEC, or any commissioner of
corporations or similar officer of any other state having jurisdiction over this
transaction. At the time of the Closing, the sale and issuance of the Shares
and the proposed issuance of the Conversion Common Stock shall be legally
permitted by all laws and regulations to which the Buyer and the Company are
subject.
SECTION 6. CONDITIONS TO OBLIGATIONS OF COMPANY
The obligations of the Company to sell and issue the Shares on the Closing Date
are subject to the fulfillment as of the Closing Date of the following
conditions, unless the Company waives any of such conditions in whole or in part
in writing:
10
<PAGE>
6.1 Representations and Warranties. The representations and warranties made by
------------------------------
Buyer in Section 4 hereof shall be true and correct at the Closing Date with the
same force and effect as if they had been made on and as of said date.
6.2 Certificate of Designation. The Certificate of Designation shall have been
--------------------------
duly filed with the Secretary of State of Nevada.
6.3 Legal Matters. All material matters of a legal nature which pertain to
-------------
this Agreement, the Registration Agreement and the transactions contemplated
hereby and thereby, shall have been reasonably approved by counsel to the
Company.
6.4 Performance of Obligations. The Buyer shall have performed and complied
--------------------------
with all agreements and conditions herein required to be performed or complied
with by Buyer on or before Closing, including payment of the purchase price
described in Section 1.2 hereof.
6.5 Qualifications. All authorizations, approvals, or permits, if any, of any
--------------
governmental authority or regulatory body of the United States or of any state
that are required in connection with the lawful sale and issuance of the Shares
pursuant to this Agreement shall have been duly obtained and shall be effective
on and as of the Closing. No stop order or other order enjoining the sale of
the Shares or the proposed issuance of the Conversion Common Stock shall have
been issued and no proceedings for such purpose shall be pending or, to the
knowledge of the Company or Buyer, threatened by the SEC, or any commissioner of
corporations or similar officer of any other state having jurisdiction over this
transaction. At the time of the Closing, the sale and issuance of the Shares
and the proposed issuance of the Conversion Common Stock shall be legally
permitted by all laws and regulations to which the Buyer and the Company are
subject.
6.6 Registration Agreement. The Buyer and each holder of Preferred Stock shall
----------------------
have executed and delivered the Registration Agreement.
6.7 Offeree Suitability Questionnaire. Each of Buyer and each partner of Buyer
---------------------------------
shall have duly completed, executed and delivered to the Company an Offeree
Suitability Questionnaire in substantially the form attached to the Memorandum,
confirming that such person is an "accredited investor" as that term in used and
defined in Rule 501(d), or is otherwise qualified under Rules 505 and 506, under
Regulation D promulgated by the SEC under the Securities Act.
6.8 Exchange Act Filings. Buyer, and each partner of Buyer, as appropriate,
--------------------
shall have duly filed a Schedule 13D pursuant to Section 13(d) of the Securities
Exchange Act of 1934, as amended ("Exchange Act") covering the purchase of the
Shares by Buyer, and shall have duly filed a Form 3 in accordance with Section
16(a) of the Exchange Act.
11
<PAGE>
6.9 Compliance Certificate. Buyer shall have delivered a certificate, duly
----------------------
executed by an authorized officer of its general partner, to the effect that the
actions and matters described in Sections 6.1, 6.4, 6.7 and 6.8 above have been
duly fulfilled.
6.10 Opinion of Counsel for Buyer. The Buyer shall have delivered to the
----------------------------
Company an opinion of Locke Purnell Rain Harrell, Attorneys at Law, counsel to
the Buyer, dated as of the Closing Date, in the form attached hereto as Exhibit
D.
SECTION 7. POST-CLOSING COVENANTS OF THE COMPANY
7.1 Board of Directors Representation. The Company covenants and agrees with
---------------------------------
Buyer, as long as Buyer is the holder of fifty percent (50%) or more of the
shares of Preferred Stock purchased from the Company pursuant to this Agreement
at the Closing, as follows:
(a) The number of members of the Board of Directors of the Company authorized
by the Bylaws of the Company or otherwise shall not exceed nine (9), without the
written consent of Buyer. Meetings of the Board of Directors shall be held no
less frequently than quarterly.
(b) Buyer shall be entitled to nominate, and the Company shall cause its
management to propose, unopposed, two (2) members of the Board of Directors
designated by Buyer who shall be elected to serve on the Board of Directors of
the Company in connection with each of the annual proceedings, whether by called
meeting or written consent, of stockholders of the Company subsequent to the
Closing, as long as this covenant is in effect; provided, however, that (i)
Buyer shall duly and timely notify the Company in writing of its two (2)
designated director nominees within any time limit established by the Company
(which shall not be less than ten (10) days) prior to any annual proceedings of
stockholders of the Company by written notice from the Company to Buyer, and
(ii) the persons nominated by Buyer shall qualify and shall not be prohibited
from serving on the Board of Directors of the Company in accordance with
applicable federal and state securities laws and the governing rules of any
over-the-counter market or stock exchange on which securities of the Company may
then be listed for trading and the Bylaws of the Company. The designated
director nominees of Buyer for the annual proceedings of stockholders of the
Company, whether by called meeting or written consent, next following the
Closing are Charles R. Leone, III and Robert R. Neyland.
(c) This covenant shall survive the Closing and consummation of the
transactions contemplated by this Agreement and continue for as long as the
Buyer shall continue to own and hold fifty percent (50%) or more of the Shares
of Preferred Stock purchased by the Buyer from the Company at the Closing, and
shall expire at 5:00 p.m., Austin, Texas time, on the day when the Buyer shall
sell, assign or otherwise dispose of, or give notice of conversion in accordance
with the Certificate of Designation, or the Company shall call for redemption in
the manner provided in the Certificate of Designation, an aggregate of fifty
percent (50%) or more of the Shares, when aggregated with all previous sales,
assignments,
12
<PAGE>
dispositions, conversions and redemptions of the Shares, whereupon without
further action or notice, this covenant shall expire and be of no further force
and effect.
7.2 Financial Covenants. As long as the Buyer is the holder of any of the
-------------------
Shares of Preferred Stock of the Company, the Company agrees with Buyer to
observe and fulfill the following covenants:
(a) The net proceeds from sale of the Shares to Buyer, after payment of
expenses of this transaction and other expenses of sale of shares of Preferred
Stock to persons other than Buyer, shall be added to the general funds of the
Company and employed as working capital and for the payment of indebtedness of
the Company, including indebtedness to stockholders, and other corporate
purposes.
(b) The Company shall timely pay as the same become due in the ordinary course
of business all obligations of the Company, including principal and interest on
loans and lines of credit and shall not permit any material default to occur or
continue beyond any grace period or time to cure in any of its lines of credit
or loan agreements or other material agreements, except for obligations disputed
in good faith.
(c) The Company shall timely file all tax returns and pay, or make provision
for payment of, all taxes that may be required or become due, under federal,
state or local laws or the rules and regulations of taxing authorities, except
for assessments being contested in good faith on the advice of tax counsel to
the Company.
(d) The Company shall maintain its properties, owned and leased, in good
repair, reasonable wear and tear and damage due to the elements excepted.
(e) The Company shall maintain general liability, hazard, workmen's
compensation, health and key-man life insurance in such amounts with reputable
companies as the Board of Directors shall from time to time determine, but shall
maintain no less coverage than the Company has in force and effect on the
effective date of this Agreement, without the written consent of the Buyer.
(f) The Company shall maintain books of account, minute books, stock record
books and other records in accordance with sound business practices and the
requirements of Section 13(b)(2) of the Exchange Act, including the maintenance
of an adequate system of internal controls.
(g) The Company shall comply at all material respects with all laws,
regulations, rules and ordinances of any governmental authority applicable to
the Company or the conduct or operation of its business or the ownership or use
of any of its assets, except for matters of compliance being contested in good
faith on the advice of counsel.
13
<PAGE>
(h) The Company shall maintain its approval as an authorized seller/servicer
pursuant to the Fannie Mae seller/servicer Title I loans purchase and service
program and its corresponding contract of insurance with the FHA, as long as the
Fannie Mae program, or a successor program requiring such approval or insurance,
is in effect and being utilized by the Company for the disposition of its Title
I loans.
(i) The Company shall not increase or decrease the exercise price for the
purchase of shares of Common Stock of the Company under the issued and
outstanding Class A Warrants and Class B Warrants of the Company without the
prior approval of the Buyer or the holders of fifty percent (50%) of the Shares
purchased by the Buyer from the Company at the Closing that may then remain
outstanding.
(j) The Company shall not engage in any transactions with its officers,
directors or holders of ten percent (10%) or more of the issued and outstanding
voting stock of the Company, or affiliates of any such persons as defined in
Rule 405 of the Securities Act, except in accordance with the Revised Statutes
of the State of Nevada, the Articles of Incorporation and Bylaws of the Company,
applicable securities laws and policies adopted and established from time to
time by the Board of Directors of the Company, and in each case, only if the
transaction is fair to the Company and on terms no less favorable than could
reasonably be expected to be obtained from or with unaffiliated persons, except
for (i) transactions with any of such persons existing on the effective date of
this Agreement and that have been duly disclosed in writing in the Disclosure
Documents, the Supplemental Disclosure Documents or this Agreement, (ii)
salaries, wages, expense advances and reimbursements, and other generally
applicable employment welfare benefits and compensation and benefits under
employment contracts, as amended from time to time by approval of the Board of
Directors, and (iii) stock options or purchase rights under plans approved by
the Board of Directors, (iv) home improvement loans made or arranged in the
ordinary course of business of the Company, (v) loans by stockholders, and (vi)
the offering and sale of stock options, warrants or rights as approved from time
to time by the Board of Directors.
SECTION 8. INDEMNIFICATION
8.1 Indemnity. Subject to the terms and conditions of this Section, each of
---------
the parties hereto, respectively (herein an "Indemnifying Party"), hereby agrees
to indemnify, defend and hold the other party hereto and its officers,
directors, agents, attorneys and affiliates (collectively, "Indemnified
Parties") harmless from and against all losses, claims, obligations, demands,
assessments, penalties, fines, forfeitures, liabilities, costs, damages, and
reasonable attorney's fees and expenses (collectively, "Damages") asserted
against or incurred by reason of, resulting in any manner from, or relating in
any manner to:
(a) Any material misrepresentation, breach of warranty, or breach of any
covenant or agreement on the part of an Indemnifying Party under this Agreement;
and
14
<PAGE>
(b) Any and all actions, causes of action, suits, claims investigations,
demands, audits, judgements, arbitrations, or other proceedings incident to any
of the matters described in Subsection (a) of this Section or to the enforcement
of the rights of any Indemnified Party pursuant to this Section.
(c) In addition, Buyer shall indemnify the Company with respect to any Damages
resulting from any misrepresentation or breach of warranty by any partner of
Buyer contained in the Accredited Investor Questionnaire executed and delivered
to the Company by such partner or any misrepresentation by Buyer to or with
respect to any partner of Buyer.
8.2 Limitation of Damages. An Indemnifying Party shall be liable for Damages
---------------------
only to the extent of the net amount of Damages. The net amount of Damages
shall be the gross amount of Damages reduced by the aggregate value or amount of
any money, other assets, or properties (including proceeds of insurance, related
claims, cross claims, counterclaims, and the like and any material, federal,
state, local or foreign tax benefits calculated on a net after-tax effect for
any loss, expense, or damage based upon the tax calculation) actually realized
or received by the Indemnified Party in connection therewith; provided, however,
in no event shall the Indemnified Party's acceptance of any money, other assets,
or properties as partial compensation or indemnification from any source for the
amount of its Damages prevent the Indemnified Party from seeking compensation or
indemnification from any source for the rest of the entire amount of its
Damages.
8.3 Materiality and Limited Liability. None of the Indemnified Parties shall
---------------------------------
be entitled to assert any claim for indemnification under this Section unless
and only to the extent that all indemnifiable Damages suffered by the
Indemnified Parties exceed $50,000 in the aggregate.
8.4 Conditions of Indemnification.
-----------------------------
(a) If any claim or demand for which an Indemnifying Party would be liable to
an Indemnified Party hereunder is asserted against or sought to be collected
from an Indemnified Party, by a third party, the Indemnified Party shall
promptly notify the Indemnifying Party of such claim or demand, specifying the
nature of such claim or demand and the amount or the estimated amount thereof to
the extent then feasible (which estimate shall not be conclusive of the final
amount of such claim or demand) (the "Claim Notice"). The Indemnifying Party
shall then have ten (10) business days from the date on which the Claim Notice
is given (the "Notice Period") to notify the Indemnified Party (i) whether or
not the Indemnifying Party disputes the liability to the Indemnified Party
hereunder with respect to such claim or demand, and (ii) notwithstanding such
dispute, whether or not the Indemnifying Party desires, at its sole cost and
expense, to defend the Indemnified Party against such claim or demand.
15
<PAGE>
(b) Pending the resolution of any dispute by the Indemnifying Party of its
liability with respect to any such claim or demand, such claim or demand shall
not be settled without the prior written consent of the Indemnified Party.
(c) If the Indemnifying Party notifies the Indemnified Party within the Notice
Period that it desires to defend the Indemnified Party against such claim or
demand, then, except as hereinafter provided, Indemnifying Party shall have the
right to defend the Indemnified Party by appropriate proceedings, which shall be
promptly settled or prosecuted to a final conclusion in such a manner as to
avoid any risk that the Indemnified Party shall become subject to liability for
any other matters; provided, however, that Indemnifying Party shall not, without
the prior written consent of the Indemnified Party, consent to the entry of any
judgement against the Indemnified Party or enter into any settlement or
compromise which does not include, as an unconditional term thereof, a release
by the claimant or plaintiff of the Indemnified Party (such release to be in
form and substance satisfactory to the Indemnified Party) from all liability in
respect of such claim or demand. The Indemnifying Party shall be entitled to
select legal counsel for the defense of such claim or demand, with the approval
of the Indemnified Party, which approval shall not be unreasonably withheld. If
the Indemnified Party desires to participate in, but not control, any such
defense or settlement of such claim or demand, it may do so at its sole cost and
expense. If in the reasonable judgement of the Indemnified Party, any such
claim or demand or the litigation or resolution of any such claim or demand
involves an issue or matter which could have a material adverse effect on the
business, operations, assets, properties, or prospects of the Indemnified Party,
including the administration of any tax returns and responsibilities under tax
laws of the Indemnified Party, then the Indemnified Party shall have the right
to control the defense or settlement of any such claim or demand, and the costs
and expenses of such defense or settlement shall be included as part of the
indemnification obligations of the Indemnifying Party hereunder; provided,
however, that the Indemnified Party shall not settle any such claim or demand
without the prior written consent of Indemnifying Party (which consent shall not
be unreasonably withheld or delayed). If the Indemnified Party should elect to
exercise such right to control the defense or settlement, Indemnifying Party
shall have the right to participate in, but not control, the defense or
settlement of such claim or demand at its sole cost and expense.
(d) If the Indemnifying Party elects not to defend the Indemnified Party
against such claim or demand, whether by not giving the Indemnified Party timely
notice as provided above or otherwise, then the amount of any such claim or
demand, or if the same be defended by the Indemnified Party, then that portion
thereof as to which such defense is unsuccessful, shall conclusively be deemed
to be a liability to the Indemnified Party hereunder, unless Indemnifying Party
disputes its liability to the Indemnified Party hereunder.
(e) If the Indemnified Party shall have a claim against Indemnifying Party
hereunder that does not involve a claim or demand being asserted against or
sought to be collected from it by a third party, the Indemnified Party shall
promptly send a Claim Notice
16
<PAGE>
with respect to such claim to the Indemnifying Party. If Indemnifying Party
does not notify the Indemnified Party within the Notice Period that it disputes
such claim, the amount of such claim shall conclusively be deemed a liability of
Indemnifying Party hereunder.
(f) An Indemnified Party shall have no right to make any claim for indemnity
against the Indemnifying Party with respect to any misrepresentation, breach of
warranty or breach of any covenant of such Indemnifying Party, to the extent
that the Indemnified Party shall have had actual knowledge of such
misrepresentation, breach of warranty or breach of any covenants of such
Indemnifying Party, or all material matters of fact or law with respect thereto,
on or before the Closing, as a result of written information furnished to the
Indemnified Party or its representatives by the Indemnifying Party.
8.5 Payment of Indemnity. Upon the determination of liability under Section
--------------------
8.4 the appropriate party shall pay to the other, as the case may be, within
five (5) Business Days after such determination of the amount of any claim, and
the Indemnifying Party shall be subrogated to the rights of the Indemnified
Party against any person with respect to the subject matter of such claim.
8.6 Exclusive Rights and Remedies. The indemnification rights of the parties
-----------------------------
under this Section are the exclusive rights and remedies of any Indemnified
Party for monetary damages at law or in equity, or otherwise, for any
misrepresentation, breach of warranty, or non-fulfillment of any covenant or
agreement hereunder.
8.7 Survival. Except as otherwise expressly provided herein, all
--------
representations, warranties, covenants and agreements of the parties hereto
contained herein shall survive the execution and delivery hereof and
consummation of the transactions provided for herein for a period of two (2)
years following the Closing.
SECTION 9. MISCELLANEOUS PROVISIONS
9.1 Termination. This Agreement and the transactions contemplated hereby may
-----------
be terminated at any time on or before the Closing Date:
(a) By mutual written agreement of Buyer and the Company;
(b) By Buyer, if there has been a material misrepresentation or breach of
warranty in any of the representations and warranties of the Company set forth
in this Agreement, or if there has been a material failure on the part the
Company to comply with any of its obligations hereunder, or if any of the
conditions precedent to Closing as set forth in Section 5 hereof have not been
fulfilled;
(c) By the Company, if there has been a material misrepresentation or breach
of warranty in any of the representations and warranties of Buyer set forth in
this Agreement or if there has been any material failure on the part of Buyer to
comply with any of its
17
<PAGE>
obligations hereunder, or if any of the conditions precedent to Closing as set
forth in Section 6 hereof have not been fulfilled, or if there has been a
material misrepresentation or breach of warranty by any partner of Buyer in
connection with any Accredited Investor Questionnaire delivered to the Company
pursuant to this Agreement; and
(d) By Buyer or the Company, if the Closing of the transactions contemplated
by this Agreement has not begun by 6:00 p.m. on June 15, 1996 (it being
understood that if the Closing has begun but not been completed by such
deadline, no right of termination shall exist under this Section 7.1(d), unless
the Closing is abandoned or otherwise terminated without consummation).
Upon any termination hereof pursuant to any provision of this Section, this
Agreement shall become void and have no effect, with no further liability on the
part of any of the parties hereto.
9.2 Amendment and Modification. Subject to applicable law, this Agreement may
--------------------------
be amended, modified, or supplemented only by a written agreement signed by the
parties.
9.3 Waiver of Compliance. Any failure of any party to comply with any
--------------------
obligation, covenant, agreement, or condition herein may be waived by the party
entitled to the performance of such obligation, covenant, or agreement or who
has the benefit of such condition, but such waiver or failure to insist upon
strict compliance with such obligation, covenant, agreement, or condition will
not operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
9.4 Notices. All notices, requests, demands, and other communications required
-------
or permitted hereunder will be in writing and will be deemed to have been duly
given when delivered by hand or three (3) days after being mailed by certified
or registered mail, return receipt requested, with first class postage prepaid:
If to the Company to:
John W. Ballard, President
HomeCapital Investment Corporation
6836 Austin Center Boulevard
Suite 280
Austin, Texas 78731
With Copy to:
J. Rolfe Johnson, Esq.
J. Rolfe Johnson, P.C.
1900 West Loop South, Suite 1175
Houston, Texas 77027
18
<PAGE>
If to the Buyer to:
HCI Equity Partners L.P.
C/O Daniel N. Matheson, III, Esq.
Locke Purnell Rain Harrell
515 Congress Avenue, Suite 2500
Austin, Texas 78701
In any case, such notices, requests, demands, and other communications shall be
sent to such other addresses as either party shall notify the other by notice
given in the manner described above.
9.5 Titles and Captions. All section titles or captions contained in this
-------------------
Agreement are for convenience only and shall not be deemed part of the context
nor effect the interpretation of this Agreement.
9.6 Entire Agreement. This Agreement contains the entire understanding between
----------------
and among the parties and supersedes any prior understandings and agreements
between them (including the Letter Agreement dated April 11, 1996) respecting
the subject matter of this Agreement.
9.7 Assignability and Binding Effect. This Agreement shall be binding upon and
--------------------------------
inure to the benefit of the parties hereto and their respective successors and
assigns, provided that neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by either party hereto without the
prior written consent of the other party.
9.8 Attorney Fees. In the event an arbitration, suit or action is brought by
-------------
any party under this Agreement to enforce any of its terms, or in any appeal
therefrom, it is agreed that the prevailing party shall be entitled to
reasonable attorneys fees to be fixed by the arbitrator, trial court, and/or
appellate court.
9.9 Pronouns and Plurals. All pronouns and any variations thereof shall be
--------------------
deemed to include and refer to the masculine, feminine, neuter, singular, or
plural as the identity of the person or persons may require.
9.10 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Texas.
9.11 Presumption. This Agreement or any section thereof shall not be construed
-----------
against any party due to the fact that said Agreement or any section thereof was
drafted by said party.
19
<PAGE>
9.12 Further Action. The parties hereto shall execute and deliver all
--------------
documents, provide all information and take or forbear from all such action as
may be necessary or appropriate to achieve the purposes of the Agreement.
9.13 Parties in Interest. Nothing herein shall be construed to be to the
-------------------
benefit of any third party, nor is it intended that any provision shall be for
the benefit of any third party, except for the reciprocal indemnity of the
parties with respect to third-party claims described in Section 8 hereof.
9.14 Savings Clause. If any provision of this Agreement, or the application of
--------------
such provision to any person or circumstance, shall be held invalid, the
remainder of this Agreement, or the application of such provision to persons or
circumstances other than those as to which it is held invalid, shall not be
affected thereby.
9.15 Confidentiality. Buyer acknowledges that the information received by it
---------------
pursuant hereto is confidential and for its use only, and Buyer will refrain
from using such information or reproducing, disclosing, or disseminating such
information to any other person (other than its employees, affiliates, agents,
or partners having a need to know the contents of such information and its and
its partners' advisors and attorneys), except in connection with the exercise of
rights under this Agreement, unless the Company has made such information
available to the public generally or it is required by a governmental body to
disclose such information publicly.
9.16. Expenses. Except as otherwise expressly provided in this Agreement, each
--------
party to this Agreement shall bear its own expenses incurred in connection with
the preparation, execution and performance of this Agreement and the
transactions contemplated hereby, including all fees and expenses of agents,
representatives, counsel and accountants; provided, however, that if this
Agreement is consummated, then the Company shall reimburse Buyer for the
reasonable costs and expenses incurred by Buyer in connection with this
Agreement in an amount which shall not exceed $15,000 in the aggregate.
20
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed in one or more counterparts, each of which shall constitute an original
and all of which, taken together, shall constitute one instrument effective on
and as of the effective date set forth above.
HOMECAPITAL INVESTMENT HCI EQUITY PARTNERS L.P.
CORPORATION (a Texas limited partnership)
(a Nevada corporation)
By: /s/ John W. Ballard By: PENNTEX INVESTMENTS, INC.
-------------------------------- (general partner)
JOHN W. BALLARD, President
By: /s/ Charles R. Leone, III
--------------------------------
CHARLES R. LEONE, III, President
By: HCIE, L.L.C.
(general partner)
By: /s/ Robert R. Neyland
--------------------------------
ROBERT R. NEYLAND, Member
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AT JUNE 30, 1996 AND STATEMENTS OF OPERATIONS FOR THE PERIODS THEN
ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 1,106,372
<SECURITIES> 0
<RECEIVABLES> 4,143,442
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,376,986
<PP&E> 702,414
<DEPRECIATION> 158,613
<TOTAL-ASSETS> 7,032,042
<CURRENT-LIABILITIES> 4,115,460
<BONDS> 0
0
15,000
<COMMON> 72,257
<OTHER-SE> 2,829,325
<TOTAL-LIABILITY-AND-EQUITY> 7,032,042
<SALES> 5,741,591
<TOTAL-REVENUES> 6,082,198
<CGS> 0
<TOTAL-COSTS> 4,939,780
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 280,504
<INCOME-PRETAX> 1,142,418
<INCOME-TAX> 330,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 812,418
<EPS-PRIMARY> .103
<EPS-DILUTED> .102
</TABLE>
