<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 December 31, 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 (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 January 31, 1997, there were 8,226,600 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
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HOMECAPITAL INVESTMENT CORPORATION
Index to Form 10-QSB
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements.
Consolidated Balance Sheet (Unaudited)
As of December 31, 1996 3
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended December 31, 1996
and 1995 4
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended December 31, 1996
and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or
Plan of Operation 21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
2
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HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1996
(Unaudited)
ASSETS
Cash $ 931,263
Cash deposits, restricted 468,108
Loans held for sale, net 5,967,814
Excess servicing receivable 10,521,807
Prepaid and other assets 551,962
Furniture, fixtures and equipment, net 817,514
Deferred tax assets 300,590
-------------
Total assets $ 19,559,058
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 133,340
Revolving lines of credit 8,437,870
Capital lease obligations 11,456
Accrued expenses and other liabilities 1,219,831
Allowance for credit losses on loans sold 375,000
Income taxes payable 1,259,473
-------------
Total liabilities 11,436,970
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000
shares authorized; 1,500,000 shares of
cumulative convertible Series A stock issued
and outstanding(liquidation value
of $2,250,000) 15,000
Common stock, $.01 par value; authorized
100,000,000 shares; 7,986,364 shares
issued and outstanding 79,863
Additional paid-in capital 4,724,028
Retained earnings 3,360,448
Notes receivable for stock (57,251)
---------------
Total stockholders' equity 8,122,088
---------------
Total liabilities and $ 19,559,058
stockholders' equity ===============
The accompanying notes are an integral part of the
consolidated financial statements.
3
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HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended December 31, 1996 and 1995
(Unaudited)
1996 1995
------------ ------------
Revenues:
Gain on sale of loans $ 4,787,120 $ 1,368,231
Interest - loans 364,443 100,922
Interest - other 1,235 1,141
Loan servicing income 422,482 13,056
Other income 37,069 42,748
------------ ------------
Total revenues 5,612,349 1,526,098
------------ ------------
Costs and Expenses:
Salaries and employee benefits 779,949 510,158
Servicing costs 179,909 9,725
Loan costs 340,828 58,560
General and administrative 497,625 352,316
Occupancy 111,325 65,283
Interest 243,476 86,194
------------ ------------
Total costs and expenses 2,153,112 1,082,236
------------ ------------
Income before income taxes 3,459,237 443,862
Provision for income taxes 1,215,077 --
------------ ------------
Net income $ 2,244,160 $ 443,862
============ ============
Income per common and common equivalent share:
Primary:
Earnings per common share $ .26 $ .06
============ ============
Weighted average number of common
and common equivalent shares
outstanding 8,217,626 7,502,965
============ =============
Fully Diluted:
Earnings per common share $ .23
============
Weighted average number of
fully diluted common shares
outstanding 9,757,910
============
The accompanying notes are an integral part of the
consolidated financial statements.
4
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HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended December 31, 1996 and 1995
(Unaudited)
1996 1995
--------------- ---------------
Cash flows from operating activities:
Net income $ 2,244,160 $ 443,862
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities:
Depreciation and amortization 265,108 58,068
Deferred tax benefit (110,088) --
Provision for credit losses 200,000 --
Gain on sales of loans (4,787,120) (1,368,231)
Proceeds from sales of loans 36,258,086 21,199,478
Purchase and origination of loans (38,618,789) (19,770,036)
Change in operating assets and
liabilities:
Decrease in cash deposits, restricted 237,646 --
(Increase) decrease in accrued
interest receivable 10,289 (5,911)
Increase in prepaid and other assets (323,698) (77,254)
Increase in accrued expenses and
other liabilities 109,988 93,291
--------------- ---------------
Net cash provided by (used in)
operating activities (4,514,418) 573,267
--------------- ---------------
Cash flows from investing activities:
Purchase of furniture, fixtures and
equipment (218,075) (87,348)
--------------- ---------------
Cash flows from financing activities:
Increase (decrease) in revolving
lines of credit 4,373,690 (406,883)
Payments on notes payable (24,999) (24,999)
Proceeds from exercise of Series A
Warrants 949,831 --
Proceeds from exercise of other
Warrants 92,700 --
Payments on capital lease obligations (2,896) (8,229)
Preferred stock dividends (68,054) --
--------------- ---------------
Net cash provided by financing
activities 5,320,272 (440,111)
--------------- ---------------
Increase in cash 587,779 45,808
Cash, beginning of period 343,484 25,715
--------------- ---------------
Cash, end of period $ 931,263 $ 71,523
=============== ===============
The accompanying notes are an integral part of the
consolidated financial statements.
5
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HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
THE COMPANY AND SUBSIDIARY
HomeCapital Investment Corporation, a public holding company, ("Company,"
or "HomeCapital") 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.
DESCRIPTION OF OPERATIONS
The Company through its loan correspondents and home improvement
contractors originates and purchases home improvement loans ("Loans") and
is approved to engage in lending activities under the Department of Housing
and Urban Development ("HUD") Title I Program. As such, the Company is
subject to regulation and examination by this agency. Pursuant to that
program, 90% of the principal balances of the Loans are U.S. Government
insured ("Title I Loans").
6
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HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ADJUSTMENTS TO INTERIM FINANCIAL STATEMENT
The interim financial statements of the Company at December 31, 1996 and
for the three months ended December 31, 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.
CASH DEPOSITS, RESTRICTED
Restricted cash represents unremitted funds received in connection with the
servicing of Loans sold with servicing retained that have not been remitted
to the purchasers of such Loans as of December 31, 1996. The liability for
these unremitted funds is included in the balance sheet under the caption
of accrued expenses and other liabilities.
LOANS HELD FOR SALE, NET
Loans held for sale are carried at the lower of aggregated cost or market
value in the accompanying balance sheet. Loans held for sale at December
31, 1996 have been either originated by the Company or purchased from its
Loan Correspondents. The Company funds these Loans primarily through its
warehouse line of credit. Purchase premiums, discounts, loan origination
fees and related direct origination costs are included in the stated cost
of Loans held for sale, and are deferred until the related Loans are sold.
Provision for credit losses relating to Loans held for sale is charged to
income in amounts sufficient to maintain the allowance at a level
considered adequate to provide for anticipated losses resulting from
liquidation of outstanding Loans. The provision for credit losses is based
upon periodic analysis of the portfolio, economic conditions and trends,
historical credit loss experience, borrowers' ability to repay, collateral
values and giving effect to estimated Federal Housing Administration
("FHA") Insurance recoveries on Title I Loans.
REVENUE RECOGNITION
Gain on sale of Loans is recognized upon delivery of Loans to investors.
Gain on sale of Loans is calculated based upon the difference between the
net sales proceeds and the carrying amount of the Loans sold, together with
excess servicing receivable determined on the date of sale.
7
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HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
REVENUE RECOGNITION, CONTINUED
The Company 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. The
servicing fee ranges from 1.00% up to a maximum of 5.00% of the outstanding
principal balance of the serviced loans. The Company presently subcontracts
the loan servicing activities for a fee of 0.75%, which the Company
believes is a normal servicing fee.
EXCESS SERVICING RECEIVABLE
The excess servicing receivable is calculated based upon the present value
of the estimated future servicing revenues after considering the effects of
the estimated prepayments, defaults, servicing costs and other costs. The
discount rate utilized is based upon the assumptions that market
participants would use for similar financial instruments subject to
prepayments, defaults, collateral value and interest rate risks. The
carrying value of the excess servicing receivable is amortized in
proportion to and over the period of estimated net future excess servicing
fee income, for which the amortization is recorded as a charge against
servicing fee income.
The estimated future servicing cash flows were discounted using rates that
averaged 12.5% for the three months ended December 31, 1996. The Company
has developed its prepayment and default assumptions based on experience
with its own portfolio, available market data and information from
regulatory agencies. In determining expected cash flows, management
considers economic conditions at the date of sale.
The Company periodically reviews the excess servicing 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, if any, is
recognized through a valuation allowance in the period of impairment.
There were no material adjustments to the carrying value of the excess
servicing receivable during the three month period ended December 31, 1996.
8
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HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
ALLOWANCE FOR CREDIT LOSSES ON LOANS SOLD
Loans sold by the Company are sold with limited recourse. These
transactions are accounted for as sales because 1) the Company surrenders
control of the future economic benefits of the loans, 2) the obligation
under the recourse provision can be reasonably estimated and 3) the
purchaser cannot require the Company to repurchase the loans except
pursuant to the recourse provision. The Company provides an estimate for
credit losses related to this recourse provision. Such amounts are
incurred over the period subject to recourse.
Recourse to the Company on sales of Loans is governed by the agreements
between the purchasers and the Company. The allowance for credit losses on
Loans sold represents the Company's best estimate of its probable future
credit losses to be incurred over the life of the Loans, giving effect to
estimated FHA Insurance recoveries on Title I Loans. The allowance for
losses on Loans sold with recourse is shown separately as a liability on
the Company's balance sheet.
LOAN SERVICING INCOME
Fees for servicing Loans originated or acquired by the Company and sold
with servicing rights retained are generally based on a stipulated
percentage of the outstanding principal balance of such Loans and are
recognized when earned. Interest received on Loans sold, less amounts paid
to investors, is reported as loan servicing income. Excess servicing
receivable is amortized systematically to reduce loan servicing income to
an amount representing normal servicing income and the present value
discount. Late charges and other ancillary income are recognized when
collected.
FURNITURE, FIXTURES AND EQUIPMENT, NET
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. Gains or
losses on disposal of fixed assets are reflected in operations.
Depreciation is computed using the straight-line method over the estimated
useful lives of the depreciable assets, ranging from 5 to 7 years.
Leasehold improvements are depreciated over the term of the lease, ranging
from 1 to 5 years.
9
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HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
FEDERAL AND STATE INCOME TAXES
The Company and Home file separate Federal and state 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 measured using the enacted tax rates and laws.
CREDIT CONCENTRATIONS
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash, Loans held for
sale and excess servicing receivable. Concentration of credit risk and
mitigating factors regarding Loans and excess servicing receivable are
described above. The Company places its cash in several major financial
institutions thereby limiting the Company's exposure to concentrations of
credit risk. The operating accounts of the Company exceeded the amount
insured by the Federal Deposit Insurance Corporation by an aggregate of
$1,641,690 at December 31, 1996.
The Company is party to financial instruments with off-balance sheet credit
risk in the normal course of business. These financial instruments include
commitments to extend credit to borrowers and commitments to purchase loans
from others. As of December 31, 1996, the Company had outstanding
commitments to extend credit or purchase loans in the amounts of
approximately $33,993,000.
IMPAIRMENT OF LONG-LIVED ASSETS
Effective October 1, 1996 the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived and Long Lived Assets to be Disposed Of".
SFAS No. 121 prescribes that an impairment loss is recognized in the event
that facts and circumstances indicate that the carrying amount of an asset
may not be recoverable, and an estimate of future undiscounted cash flows
is less than the carrying amount of the asset. Impairment is recorded based
on an estimate of future discounted cash flows as identified at the lowest
level for which there are identifiable cash flows for a particular group of
assets. The Company concluded through analysis of these cashflows that
there was no impairment of long lived assets recorded on the financial
statements at December 31, 1996.
10
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HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 1995, the FASB issued SFAS No. 122 which requires that upon sale or
securitization of servicing-retained finance contracts, the Company
capitalize the cost associated with the right to service the finance
contracts based on their relative fair values. Fair value is determined by
the Company based on the present value of estimated net future cash flows
related to servicing income. The cost allocated to the servicing right is
amortized in proportion to and over the period of estimated net future
servicing fee income. SFAS No. 122 became effective for the Company on
October 1, 1996. There was no effect on the financial statements from the
adoption because the Company's existing practice of cost capitalization of
servicing rights is consistent with the provision.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 establishes
fair value-based financial accounting and reporting standards for all
transactions in which a company acquires goods or services by issuing its
equity instruments or by incurring a liability to suppliers in amounts
based on the price of its common stock or other equity instruments. The
Company will continue to account for stock-based compensation as prescribed
by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" and will make the required disclosures which include the
proforma effect on the income statement in its 1997 fiscal year-end
financial statements.
The FASB has issued SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." This statement
provides new accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. This statement
also provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings
and requires that liabilities and derivatives incurred or obtained by
transferors as part of a transfer of financial assets be initially measured
at fair value. It also requires that servicing assets be measured by
allocating the carrying amount between the assets sold and retained
interests based on their relative fair values at the date of transfer.
Additionally, this statement requires that the servicing assets and
liabilities be subsequently measured by (a) amortization in proportion to
and over the period of estimated net servicing income and (b) assessment of
impairment or increased obligation based on their fair values. The Company
has not adopted the new standard for the current period, but must adopt the
new requirements for transactions occurring on or after January 1, 1997.
The Company has not determined the effect on results of operations or
financial condition in the period of adoption.
11
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HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
EARNINGS PER SHARE
The computation of primary earnings per share is based on the weighted
average number of common shares outstanding during the period plus, when
dilutive, common equivalent shares which includes stock options (see Note
14) using the treasury stock method. Fully diluted earnings per share
additionally assumes conversion of the Company's 1,500,000 outstanding
shares of Preferred Stock, Series A. The number of contingent shares used
in the fully diluted calculation is based on the market price of the
Company's common stock as of December 31, 1996. Net earnings used in the
computation of primary earnings per share are reduced by preferred stock
dividend requirements.
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.
RECLASSIFICATIONS
Certain accounts and balances in the financial statements for the three
month period ended December 31, 1995, have been reclassified to be
consistent with the 1996 account classifications
3. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments" ("SFAS No. 107"), requires disclosure of
fair value information about financial instruments, whether or not
recognized in the balance sheet. Fair values are based on estimates using
present value or other valuation techniques in cases where quoted market
prices are not available. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future
cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument.
12
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HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. FAIR VALUES OF FINANCIAL INSTRUMENTS, CONTINUED
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate
fair value amounts presented do not represent the underlying value of the
Company.
Estimated fair values, carrying values and various methods and assumptions
used in valuing the Company's financial instruments at December 31, 1996
are set forth below.
Carrying Estimated Fair
Value Value
----------------------------
Financial Assets:
Cash (a) $ 931,263 $ 931,263
Loans held for sale (b) 5,967,814 6,700,468
Excess servicing receivable (c) 10,521,807 10,521,807
Financial Liabilities:
Debt obligations (d) 8,582,666 8,582,666
(a) The carrying value of cash is considered to be a reasonable
estimate of fair value.
(b) The fair value is estimated by using current investor yields or
outstanding commitments from investors after consideration of
non-qualified loans and the collateral securing such Loans.
(c) The fair value is estimated by discounting future cash flows
using rates available for instruments with similar risks, terms
and remaining maturities.
(d) The debt obligations are primarily adjustable rate instruments
and indexed to the prime rate or Federal Funds rate; therefore,
carrying value is a reasonable estimate of fair value.
Capitalized equipment leases have implicit fixed interest rates
ranging from 14.4% to 25.6%, which approximate fair value in the
aggregate.
The fair value estimates made at December 31, 1996 were based upon
pertinent market data and relevant information on the financial instruments
at that time. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the entire portion of the
financial instrument. Because no market exists for a portion of the
financial instruments, fair value estimates may be based on judgments
regarding future expected loss experience, current economic conditions,
risk characteristics of various financial instruments and other factors.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on-and-off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. In addition, the tax
implications related to the realization of the unrealized gains and losses
can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
13
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HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. LOANS HELD FOR SALE
Loans held for sale consisted of the following at December 31, 1996:
1996
---------------
Title I Loans $ 5,769,634
Conventional loans 60,385
Commercial loans 26,620
Capitalized loan origination fees
and costs, net 234,684
---------------
6,091,323
Allowance for credit losses (123,509)
---------------
Total $ 5,967,814
===============
The serviced Loan portfolio which includes Loans sold to investors and
Loans retained by the Company aggregated approximately $126,193,780 at
December 31, 1996.
5. ALLOWANCE FOR CREDIT LOSSES
Changes in the allowance for credit losses for Loans consisted of the
following:
1996
---------------
Balance at October 1, 1996 $ 300,000
Provisions for credit losses 200,000
Credit losses incurred (1,491)
---------------
Balance at December 31, 1996 $ 498,509
===============
Components of Allowance:
Allowance for credit losses on Loans
held for sale $ 123,509
Allowance for credit losses on Loans sold 375,000
6. EXCESS SERVICING RECEIVABLE
The activity in the excess servicing receivable is summarized as follows
for the three months ended December 31, 1996:
Balance, October 1, 1996 $ 5,078,584
Excess servicing additions 5,659,559
Amortization (216,336)
---------------
Balance, December 31, 1996 $ 10,521,807
===============
14
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HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consisted of the following at
December 31:
1996
--------------
Furniture and fixtures $ 278,751
Equipment 413,619
Leasehold improvements 23,661
Software cost 338,395
--------------
1,054,426
Accumulated depreciation (236,912)
--------------
$ 817,514
==============
At December 31, 1996, furniture and fixtures includes $55,523 of assets
under capital lease with an associated accumulated depreciation of $25,541.
8. REVOLVING LINES OF CREDIT
The Company finances its loans held for sale through a $15,000,000
revolving line of credit agreement, effective September 17, 1996, which
matured January 31, 1997, (extended to February 28, 1997) and had an
outstanding balance of $5,249,067 at December 31, 1996. The Company
receives funding for approximately 98% of the principal on each loan it
originates or purchases through the warehouse line. The outstanding
principal is collateralized by the original notes and mortgages and repaid
upon their sale. Interest accrues at the lower of 350 basis points over
the Federal Funds rate (6.26% at December 31, 1996) or 150 basis points
over the prime interest rate (8.25%, at December 31, 1996) and is due
monthly. The agreement stipulates that the bank will hold the original
notes and mortgages for all loans funded under the line as collateral.
Upon sale of the loans, the purchaser will fund the bank directly and the
collateral will be released.
On November 8, 1996 the Company entered into a separate working capital
line of credit (servicing collateralized) for $3,000,000 which matures
November 7, 1997. The interest rate on the working capital line of credit
is prime plus 2.25%.
In connection with the above borrowings, the Company has agreed to certain
financial covenants regarding tangible net worth, leverage ratios, and
liquidity. The Company is permitted to pay dividends as long as the
financial ratios are maintained.
15
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HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
8. REVOLVING LINES OF CREDIT, CONTINUED
The composition of the revolving lines of credit was as follows at
December 31:
1996
--------------
Payable to financial institution,
warehouse line $ 5,249,067
Payable to financial institution,
working capital line 3,000,000
Payable to financial institution,
matured July 31, 1996 188,803
--------------
$ 8,437,870
==============
9. PREFERRED STOCK
On June 18, 1996, the Company issued 1,500,000 shares of Preferred Stock,
Series A, par value $.01 per share ("Series A Preferred Stock), for the
purchase price of $1.50 per share or an aggregate 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 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
two years from the date of issuance. Each share of Series A Preferred Stock
is entitled to one 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 the Series A Preferred Stock were granted "piggyback"
registration rights covering the shares of Common Stock into which the
Series A Preferred Stock is convertible after nine months from the date of
issuance of the Series A Preferred Stock, which rights terminate after
three years from the date of issuance of the Series A Preferred Stock.
16
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. INCOME TAXES
The provision for income taxes for the three months ended December 31, 1996
is comprised of the following:
1996
-------------
Current:
Federal $ 1,268,695
State 56,470
-------------
1,325,165
Deferred (benefit) provision (110,088)
-------------
Provision for income taxes $ 1,215,077
=============
The components of deferred tax assets and liabilities were as follows at
December 31:
1996
-------------
Deferred tax liabilities:
Depreciation and amortization $ (43,226)
Deferred tax assets:
Net operating loss carry forwards 73,230
Allowance for credit losses 138,883
Unrealized gain 204,933
-------------
417,046
Valuation allowance (73,230)
-------------
Total deferred tax assets 343,816
Net deferred tax assets $ 300,590
=============
The reconciliation between the income tax provision and the income tax
expense using the Federal statutory rate is as follows:
1996
--------------
Federal tax at statutory rate of 34% $ 1,176,141
State income taxes, net of federal tax benefit 37,270
Expenses not deductible for tax purposes 1,666
--------------
Total income tax provision $ 1,215,077
==============
There was no income tax provision at December 31, 1995 due to the
carryforward of net operating losses from prior years and accordingly no
rate reconciliation is provided.
17
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
11. GAIN ON SALE OF LOANS
Gain on sale of Loans, as defined in Note 2, and the related cost is as
follows for the three month period ended December 31, 1996 and 1995:
1996 1995
------------ ------------
Gain on whole Loan sales $ 429,412 $ 1,539,523
Excess servicing gain 5,659,559 180,742
------------ ------------
6,088,971 1,720,265
Premiums, net (1,293,154) (352,039)
Transaction costs (8,697) --
------------ ------------
Gain on sale of Loans $ 4,787,120 $ 1,368,231
============ ============
12. COMMITMENTS AND CONTINGENCIES
The Company leases its office space at its corporate headquarters and
eleven branch offices through operating leases expiring through 2001.
Rent expense for the three month periods ended December 31, 1996
and 1995 totaled $82,227 and $58,478, respectively.
The Company also leases certain office equipment under various capital
leases. The economic substance of these leases is that the Company is
financing the acquisition of the assets through the leases. Required
minimum rental payments for the remaining terms of the leases are as
follows:
Years Ending Capital Leases Operating Leases
------------ -------------- ----------------
1997 remaining $ 6,716 $ 246,740
1998 6,124 278,155
1999 472 277,912
2000 -- 208,615
2001 -- 177,619
Less amount representing interest (1,856) --
-------------- ----------------
$ 11,456 $ 1,189,041
============== ================
The Loans sold by the Company are sold with limited recourse. In the event
that the borrower defaults on its first payment, the Company is committed
to repurchasing the loan. The Company 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 uninsured.
18
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. COMMITMENTS AND CONTINGENCIES, CONTINUED
The Company is a party to various lawsuits from time to time which arise
during the normal course of business. In the opinion of management, the
potential claims against the Company from the lawsuits would not materially
affect the Company's financial position, results of operations, or cash
flows.
Home is required to maintain adjusted net worth, as defined by HUD,
amounting to $250,000. At December 31, 1996, Home had adjusted net worth
of $8,283,310.
13. STOCK WARRANTS
At December 31, 1996, HomeCapital had 5,233,932 Series A Warrants
outstanding. Holders of Series A Warrants are entitled to purchase one
share of HomeCapital common stock at $4 per share for each 100 warrants.
All Series B Warrants expired effective December 31, 1996. The Series A
Warrants which were scheduled to expire December 31, 1996, were extended to
January 31, 1997.
In addition, 456,170 warrants issued by Home prior to the acquisition of
HomeCapital were exercised during the three month period ended December 31,
1996. Each of these warrants entitled the holders to purchase one share of
HomeCapital common stock for $.20 per share.
14. STOCK OPTIONS
In June of 1993, Home issued options to purchase 555 shares of its common
stock at $120 per share to one of its employees. As a result of the
acquisition of HomeCapital, these options were converted into options to
purchase 409,668 shares of HomeCapital stock at $.16 per share. The
options, which are fully exercisable as of December 31, 1996, expire in the
year 2001. No shares have been exercised.
Effective March 21, 1996, the Board of Directors of the Company adopted the
HomeCapital Investment Corporation 1996 Stock Option Plan, which was
ratified by stockholder vote on August 16, 1996. 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, mergers and similar
transactions. At December 31, 1996, options to purchase an aggregate of
425,000 shares of Common Stock had been granted under the Stock Option
Plan, including 225,000 options granted in the first quarter of fiscal
1997, with exercise prices ranging from $3.50 to $6.125 per share.
19
<PAGE>
HOMECAPITAL INVESTMENT CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, CONTINUED
15. SEGMENT INFORMATION
For the three month periods ended December 31, 1996 and 1995, Title I Loan
origination and production (exclusive of paydowns and repurchases) is
summarized as follows:
1996 1995
-------------------- --------------------
Source of Loan Production Amount % Amount %
------------------------- ------------- ---- ------------ ----
Correspondent Loans $ 33,268,968 86.7% $ 12,260,596 64.3%
Dealer Loans 2,644,339 6.9 5,878,810 30.8
Direct Loans 2,437,524 6.4 919,842 4.8
------------- ---- ------------- ----
Total Title I Loans $ 38,350,831 100% $ 19,059,248 100%
============= ==== ============= ====
The Company also originates conventional home improvement Loans through
several arrangements with other home improvement lenders on a pre-approved
basis. Total conventional loans originated in the 1996 period and 1995
period were $477,529 and $695,770, respectively. At December 31, 1996 and
1995, $60,385 and $0, respectively, of conventional loans were held for
sale under firm purchase commitments.
Prior to October 1995, the Company sold all of its loans held for sale on a
servicing released basis. In October 1995, the Company commenced selling
the majority of its loan production to its warehouse lender on a servicing
retained basis. Additionally, effective March 1, 1996, the Company was
approved as a Seller/Servicer with Fannie Mae to sell Title I Loans to
Fannie Mae with servicing retained. The Company began selling Title I
Loans to Fannie Mae in June 1996. Following is a summary of loans sold
during the three month periods ended December 31, 1996 and 1995:
Title I Loans Sold: 1996 1995
------------------- ------------- -------------
Servicing released $ 3,381,867 $ 1,955,889
Servicing retained:
Financial institutions -- 18,056,100
Fannie Mae 34,204,839 --
-------------- -------------
34,204,839 18,056,100
-------------- -------------
Total Title I Loans Sold $ 37,586,706 $ 20,011,989
============== =============
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
HomeOwners Mortgage and Equity, Inc. ("Home") was organized as a Delaware
corporation in May 1993 to originate, purchase, sell and service home
improvement and other consumer loans secured by liens on improved property. On
August 26, 1994, the founders of Home, which currently conducts all of the
Company's mortgage lending activities, acquired, in a reverse acquisition,
approximately 83% of the outstanding common stock of the Company, a publicly
owned corporate shell then named Andromeda Capital Corporation ("Andromeda") and
organized in Nevada in 1980, in exchange for all of the issued and outstanding
common stock of Home, and changed its name to HomeCapital Investment
Corporation. In connection with such acquisition, all of the former officers
and directors of Andromeda resigned and were replaced by the management of Home.
See Note 1 to Notes to Consolidated Financial Statements.
Home is a specialized consumer finance company organized in 1993 to originate,
purchase, sell and service home improvement and other second mortgage loans
secured by residential property. Home primarily finances Title I home
improvement loans ("Title I Loans") and conventional consumer and home equity
loans that may fund a variety of borrower needs ("Conventional Loans"). Loans
guaranteed or purchased by Home are financed through bank warehouse credit lines
and then sold to the Federal National Mortgage Association ("Fannie Mae"),
secondary mortgage market investors and other financial institutions. Home
originates its loans primarily through pre-qualified home improvement
contractors ("Dealers") principally in the Southwestern and Western regions of
the United States, and through a national network of mortgage company loan
correspondents ("Correspondents"). The Company has recently initiated special
arrangements for loans to customers of home improvements supply and installation
firms ("Corporate Alliances").
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1996 ("1996 PERIOD"), COMPARED TO THREE MONTHS
ENDED DECEMBER 31, 1995 ("1995 PERIOD"):
A comparison of results of operations of the 1996 period to the 1995
period reflects the substantial shift of the business from cash loan sales to
sales of loans to Fannie Mae servicing retained. It also reflects the
significant growth the Company has attained during the past year. The Company
originated $38.8 million of loans during the 1996 period compared to $19.8
million of loans during the 1995 period, an increase of 96%. This increase is a
result of an increase in the number of active Correspondents and Dealers and an
expansion in the number of states served. At December 31, 1996, the Company had
approximately 116 active Correspondents and 28 active Dealers, compared to
approximately 55 active Correspondents and 105 active Dealers at December 31,
1995. Of the $38.8 million of loans originated in the 1996 period, $38.3
million were Title I Loans and $.5 were Conventional Loans.
21
<PAGE>
The following table sets forth certain data regarding loans originated
by the Company during the 1996 period and the 1995 period:
Three Month Period
Ended December 31
1996 1995
------------- ------------
Principal amount of loans:
Correspondents:
Title I $ 33,268,968 $ 12,260,596
Conventional 477,529 695,770
------------- -------------
Total Correspondent 33,746,497 12,956,366
Dealers - Title I 2,644,339 5,878,810
Direct - Title I 2,437,524 919,842
------------- -------------
Total $ 38,828,360 $ 19,755,018
============= =============
Number of loans:
Correspondents:
Title I 1,441 559
Conventional 34 28
------------- -------------
Total Correspondent 1,475 587
Dealers - Title I 196 405
Direct - Title I 146 54
------------- -------------
Total 1,817 1,046
============= =============
Total revenues increased 268% to $5.6 million for the 1996 period from $1.5
million for the 1995 period. The increase was primarily the result of the
increased volume of loans originated and the sale of such loans, servicing
retained.
The following table sets forth the principal balance of loans sold and
related gain on sale data for the 1996 period and 1995.
Three Month Period
Ended December 31,
1996 1995
------------- -------------
Principal amount of
loans sold:
Title I $ 37,117,100 $ 19,316,219
Conventional 469,606 695,770
------------- -------------
Total $ 37,586,706 $ 20,011,989
============= ============
Gain on sale of loans $ 4,787,120 $ 1,368,231
Gain on sale of loans as
a percentage of principal
balance of loans sold 12.7% 6.8%
22
<PAGE>
Gain on sale of loans, as a percentage of the principal balance of loans
sold, increased in the 1996 period over the 1995 period, primarily due to the
excess servicing component of the gain in the 1996 period. The increase in gain
on sale of loans increased from $1.4 million in the 1995 period to $4.8 million
in the 1996 period. The excess servicing component of the gain totaled $5.7
million in the 1996 period.
Loan servicing income, which commenced in the year ended September 30,
1996, totaled $422,482 for the 1996 period. Such income was derived from
servicing on approximately $126 million of loans sold with servicing retained
and is net of amortization of excess servicing receivable through December 31,
1996. Loan servicing cost totaled $179,909 in the 1996 period.
Interest income on loans held for sale increased 261% to $364,443 during
the 1996 period from $100,922 during the 1995 period. The increase was
primarily the result of the increase in the average size of the portfolio of
loans held for sale.
The provision for credit losses increased from zero in the 1995 period to
$200,000 in the 1996 period. The provision for credit losses is based upon
periodic analysis of the portfolio, economic conditions and trends, historical
credit loss experience, the borrowers' ability to repay, collateral values, and
estimated FHA insurance recoveries on loans originated and sold. The increase in
the provision for credit losses was due primarily to the increase in loan
production during the three months ended December 31, 1996. Presently, upon
sale of loans by Home the purchaser assumes all credit risk, except for first
payment default, fraud and certain other limited exceptions. If Home changes
its loan disposition strategy in ways that increase its credit risk by
securitizing or otherwise holding the loans longer in portfolio, then the
provision for credit losses as a percentage of loans originated can be expected
to increase.
Salaries and employee benefits increased 53% to $779,949 for the 1996
period from $510,158 for the 1995 period, primarily as a result of an increase
in the pay rates of employees and the increase in hiring professionals required
for growth.
Loan costs, consisting primarily of costs for credit reports, flood
reports, title reports, inspection fees, and the provision for credit losses,
increased 482% to $340,828 for the 1996 period from $58,560 for the 1995 period
due primarily to the provision for credit losses of $200,000 as well as the
increase in loan production of $19.3 million from the 1995 period to 1996.
Total general and administrative expenses increased 41% to $497,625 for the
1996 period from $352,316 for the 1995 period. The increase was primarily as a
result of increases in postage and courier costs, telecommunication costs,
stationary and office supplies expenses, travel costs, advertising expenses, and
depreciation expense. The increase in these costs was primarily attributable to
the increased volume of loan originations and loans serviced.
Interest expense increased 182% to $243,476 for the 1996 period from
$86,194 for the 1995 period. The increase was the direct result of increased
loan originations and the corresponding increase in the average outstanding
balance of the warehouse credit line.
23
<PAGE>
The provision for income taxes in the 1996 period was $1,215,077. Prior to
June 30, 1996, the Company recorded no tax provisions due to net accumulated
operating losses. For the three month period ended December 31, 1996, the
Company had income before income taxes of $3.5 million as compared to $443,862
for the three month period ended December 31, 1995. A valuation allowance of
$73,230 on deferred tax assets remains at the end of the 1996 period due to net
operating loss carryforwards generated by the Company which it may not be able
to utilize in future periods. The Company and Home file separate Federal and
state income tax returns.
The effective income tax provision for the 1996 period was 35%. This
percentage differs from the federal statutory rate of 34% due primarily to the
effect of state income taxes.
As a result of the foregoing, net income increased to $2.2 million ($.26
per share) for the 1996 period from $443,862 ($.06 per share) for the 1995
period.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements arise from the cost of loan originations
and payments of operating expenses, interest and income taxes. Loan
originations are initially funded principally through the Company's warehouse
line of credit pending the sale of loans in the secondary market. Substantially
all of the loans originated by the Company are sold. Net cash provided by (used
in) the Company's operating activities for the three months ended December 31,
1996 and 1995 was approximately ($4.5 million) and $0.6 million, respectively.
The net cash from the Company's operating activities resulted primarily from the
proceeds from the sale of loans totaling $36.3 million and $21.2 million for the
three month periods ended December 31, 1996 and 1995, respectively.
Adequate credit facilities and other sources of funding, including the
ability of the Company to sell loans in the secondary market, are essential for
the continuation of the Company's loan origination operations. At December 31,
1996, the Company had a $15 million warehouse line of credit (the "Warehouse
Line"). The Warehouse Line matured January 31, 1997, (extended to February 28,
1997), at which time it is expected to be renewed to January 31, 1998. At
December 31, 1996, $5.2 million was outstanding under the Warehouse Line and
$9.8 million was available. The Warehouse Line, as amended, bears interest at
the lower of prime plus 1.5% per year or the Federal funds rate plus 3.5% per
year and is collateralized by loans held for sale. The agreement with the
lender requires the Company to maintain a minimum adjusted tangible net worth of
$7.2 million. In addition, the Company secured a $3.0 million working capital
line of credit (the "Working Capital Line") on November 8, 1996 from the same
lender, which is collateralized by a pledge of the Company's excess servicing
receivable. The Working Capital Line has a 12-month revolving credit period,
bears interest, payable monthly, at prime plus 2.25% per year, and requires the
Company to maintain a minimum adjusted tangible net worth of $7.2 million.
Borrowings under the Working Capital Line cannot exceed the lesser of (i) the
book value of the excess servicing receivable or, (ii) 50% of the appraised
value of the excess servicing receivable as determined by the lender. While the
Company believes that it will be able to maintain its existing credit facilities
and obtain replacement financing as its credit
24
<PAGE>
arrangements mature and obtain additional financing, if necessary, there can be
no assurance that such financing will be available on favorable terms, or at
all.
Until October 1995, the Company's principal source of liquidity was the
sale of whole loans, servicing released. While this enabled the Company to meet
its operating cash requirements, it limited the Company's growth potential and
return on its loan originations. To remedy this situation, the Company embarked
on a strategy in fiscal 1995 that would enable the Company to position itself to
retain the servicing rights associated with its loan originations and look to
various other sources to securitize its loan production, such as sales to Fannie
Mae under the Title I Loan program and the securitized sale of loan pools in
the secondary market. The Company was approved as a Seller/Servicer under the
Fannie Mae Title I Loan purchase program in March 1996 and required to obtain
expanded warehouse financing and additional capital to support loan sales to
Fannie Mae. During the three month period ended December 31, 1996, the Company
sold $34.2 million in loans to Fannie Mae, retaining all servicing rights. The
Company intends to continue selling substantially all of its qualified Title I
Loans to Fannie Mae until it is able to privately assemble and securitize such
loans in the secondary market on a cost effective basis. Any such
securitization program would necessarily entail its own liquidity demands,
including without limitation, funding of reserves and other credit enhancements,
income taxes and significant issuance costs, and require larger warehouse lines
of credit and additional capital to meet rating agency requirements and the
increased liquidity demands.
While the increase in its Warehouse Line, Working Capital Line, and
additional capital have enabled the Company to significantly increase its loan
originations and sales to Fannie Mae, such sales, with servicing retained,
create additional short-term cash requirements. Sales to Fannie Mae are
generally made at a lower premium, and include the retention for the life of the
loan of up to 500 basis points of the initial spread between the coupon rate of
the loans and the pass-through rate to Fannie Mae, and must be accounted for on
a basis, as described above, that generates a much larger gain on sale for tax
purposes. This gain is subject to federal and state income tax currently
payable, even though the cash from the related loan sales will be received over
the life of the loans. Accordingly, in order for the Company to continue to
grow its loan originations and servicing portfolio, it must constantly raise
additional capital through the sale of debt and/or equity securities until the
servicing portfolio is large enough to be self-funded.
As an alternative to whole loan sales to Fannie Mae, the Company is
reviewing the FHA Title I Mortgage-Backed Securities Program ("MBS Program")
recently announced by Fannie Mae. Under the MBS Program, the Company would
deliver qualifying Title I Loans to Fannie Mae and mortgage-backed securities
would be created. This MBS Program would allow a servicing fee of up to 250
basis points to be retained by the Company and result in a mortgage-backed
security that could be held by the Company or sold in the secondary market for
cash. Initial discussions with potential purchasers indicate prices of 104 to
106 for the mortgage-backed securities. This possible disposition strategy
would provide additional cash from the sale of loans.
25
<PAGE>
During the 1996 period, the Company used $218,075 in investing activities,
primarily for furniture, fixtures and equipment, including $45,000 for the
further development of the Lot$Pro computer system, and provided $5.3 million in
financing activities through increasing usage of its revolving lines of credit
and the issuance of Common Stock through the exercise of warrants.
The Company expects to spend approximately $375,000 for additional
furniture, fixtures and equipment through the remainder of fiscal 1997 for the
expansion of its lending network, and approximately $100,000 for additional
upgrades and enhancements to its computer system.
The Company believes that it will need to raise approximately $10 million
in debt and/or equity funds to support its anticipated growth in fiscal 1997.
There can be no assurance that the Company will be able to raise such funds.
The failure to raise such funds may impair the Company's ability to implement
its business strategy and grow its business, and may have a material adverse
effect on the financial condition, results of operations and liquidity of the
Company.
26
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit 10 Fourth Amendment to the Loan Agreement dated as of
January 31, 1997, among the Company, Home, and
Guaranty Federal Bank, F.S.B.
Exhibit 27 Financial Data Schedule (Electronic Filing Only)
(b) Reports on Form 8-K: None
27
<PAGE>
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: February 13, 1997 By: /s/ John W. Ballard
__________________________________
JOHN W. BALLARD, President,
Chairman of the Board of
Directors, Chief Executive Officer
Date: February 13, 1997 By: /s/ Tommy M. Parker
__________________________________
TOMMY M. PARKER, Treasurer
and Chief Financial Officer
28
<PAGE>
EXHIBIT 10
FOURTH AMENDMENT TO THE LOAN AGREEMENT
This FOURTH AMENDMENT TO THE LOAN AGREEMENT ("AGREEMENT") is made
effective as of, although not necessarily on, the 31ST DAY OF JANUARY, 1997, by
and between GUARANTY FEDERAL BANK, F.S.B., a federal savings bank ("BANK") and
HOMEOWNERS MORTGAGE & EQUITY, INC., a Delaware corporation, D/B/A HOME, INC.
("BORROWER") and HOMECAPITAL INVESTMENT CORPORATION, a Delaware corporation
("GUARANTOR").
W I T N E S S E T H :
WHEREAS, on JUNE 1, 1996, Borrower and Bank entered into that certain
Warehouse Loan Agreement (together with all amendments, modifications and
restatements thereof, the "LOAN AGREEMENT") dated of even date therewith
providing for a $2,000,000.00 credit facility (together with all increases,
collectively, the "Loan").
WHEREAS, in connection with the execution of the Loan Agreement,
Borrower executed that certain Promissory Note dated of even date (the "NOTE"),
that certain Security Agreement ("SECURITY AGREEMENT") was executed by Borrower
and Bank and a Financing Statement filed with the Secretary of State of Texas
(the "FINANCING STATEMENT");
WHEREAS, effective as of JULY 9, 1996 Bank and Borrower entered into
that one certain First Amendment to the Loan Agreement whereby the loan amount
was increased $10,000,000.00 and certain other changes were made to the loan
documents;
WHEREAS, effective as of SEPTEMBER 17, 1996 Bank and Borrower entered
into that certain Second Amendment to Loan Agreement;
WHEREAS, Bank, Borrower and Guarantor, effective as of OCTOBER 15,
1996 entered into that certain Third Amendment to Loan Agreement whereby the
loan amount was increased to $15,000,000.00 and certain other changes were made
to the Loan Documents;
WHEREAS, Bank, Borrower and Guarantor desire to amend the Loan
Documents to reflect certain changes to the Loan Agreement. All terms not
defined herein are used as defined in the Loan Agreement.
NOW, THEREFORE, for and in consideration of the premises and the
mutual covenants and agreements contained herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Bank and Borrower hereby agree as follows:
1. LOAN AGREEMENT. The following modifications are hereby made to
the Loan Agreement effective as of the date hereof:
(a) Page 3, the definition of "COMMITMENT TERMINATION DATE" is
hereby modified to read in its entirety:
""COMMITMENT TERMINATION DATE" (or Maturity Date of the Loan)
shall mean FEBRUARY 28, 1997 or such earlier date on which the
Commitment terminates as provided in this Agreement."
2. NOTE. The following modification is hereby made to the Note
effective as of the date hereof:
<PAGE>
(a) The date of "JANUARY 31, 1997" appearing on the fourth
paragraph of Page 1 is hereby changed to "FEBRUARY 28, 1997".
3. ACKNOWLEDGEMENT BY BORROWER. Except as otherwise specified herein,
the terms and provisions of the Loan Documents are ratified and confirmed and
shall remain in full force and effect, enforceable in accordance with their
terms. Borrower hereby acknowledges, agrees and represents that (i) Borrower is
indebted to the Bank pursuant to the terms of the Note; (ii) the liens, security
interests and assignments created and evidenced by the Loan Documents are,
respectively, valid and subsisting liens, security interests and assignments of
the respective dignity and priority recited in the Loan Documents; (iii) the
representations and warranties contained in the Loan Documents are true and
correct representations and warranties of Borrower, as of the date hereof and no
defaults exist under the Loan Documents; and (iv) Borrower has no set-offs,
counterclaims, defenses or other causes of action against the Bank arising out
of the Loan Documents, the modification and extension of the Loan, any documents
mentioned herein or otherwise and to the extent any such set-offs,
counterclaims, defenses or other causes of action may exist, whether known or
unknown, such items are hereby waived by Borrower.
4. ACKNOWLEDGEMENT BY GUARANTOR. Except as otherwise specified
herein, the terms and provisions of the Loan Documents are ratified and
confirmed and shall remain in full force and effect, enforceable in accordance
with their terms. Guarantor hereby acknowledges, agrees and represents that (i)
Guarantor is indebted to the Bank pursuant to the terms of the Note; (ii) the
liens, security interests and assignments created and evidenced by the Loan
Documents are, respectively, valid and subsisting liens, security interests and
assignments of the respective dignity and priority recited in the Loan
Documents; (iii) the representations and warranties contained in the Loan
Documents are true and correct representations and warranties of Guarantor, as
of the date hereof and no defaults exist under the Loan Documents; and (iv)
Guarantor has no set-offs, counterclaims, defenses or other causes of action
against the Bank arising out of the Loan Documents, the modification and
extension of the Loan, any documents mentioned herein or otherwise and to the
extent any such set-offs, counterclaims, defenses or other causes of action may
exist, whether known or unknown, such items are hereby waived by Guarantor.
5. NO WAIVER OF REMEDIES. Nothing contained in this Agreement shall
prejudice, act as, or be deemed to be a waiver of any right or remedy available
to the Bank by reason of the occurrence or existence of any fact, circumstance
or event constituting a default under the Note or the other Loan Documents.
6. COSTS AND EXPENSES. Contemporaneously with the execution and
delivery hereof, Borrower shall pay, or cause to be paid, all costs and expenses
incident to the preparation, execution and recordation hereof and the
consummation of the transaction contemplated hereby, including, but not limited
to, recording fees and reasonable fees and expenses of legal counsel to the
Bank. The attorney's fees and expenses of the Bank's law firm, Jackson & Walker,
L.L.P., shall be paid.
7. ADDITIONAL DOCUMENTATION. From time to time, Borrower shall
execute or procure and deliver to Bank such other and further documents and
instruments evidencing, securing or pertaining to the Loan or the Loan Documents
as shall be reasonably requested by the Bank so as to evidence or effect the
terms and provisions hereof.
8. EFFECTIVENESS OF THE LOAN DOCUMENTS. Except as expressly modified
by the terms and provisions hereof, each of the terms and provisions of the Loan
Documents are hereby ratified and shall remain in full force and effect;
provided, however, that any reference in any of the Loan Documents to the Loan,
the amount constituting the Loan, any defined terms, or to any of the other Loan
Documents shall be deemed, from and after the date hereof, to refer to the Loan,
the amount constituting the Loan, defined terms and to such other Loan
Documents, as modified hereby.
-2-
<PAGE>
9. GOVERNING LAW. THE BORROWER HEREBY AGREES THAT THE OBLIGATIONS
CONTAINED HEREIN ARE PERFORMABLE IN DALLAS COUNTY, TEXAS. ALL PARTIES HERETO
AGREE THAT (I) ANY ACTION ARISING OUT OF THIS TRANSACTION MAY BE FILED IN DALLAS
COUNTY, TEXAS, (II) VENUE FOR ENFORCEMENT OF ANY OF THE OBLIGATIONS CONTAINED IN
THE LOAN DOCUMENTS SHALL BE IN DALLAS COUNTY, TEXAS, (III) PERSONAL JURISDICTION
SHALL BE IN DALLAS COUNTY, TEXAS, (IV) ANY ACTION OR PROCEEDING UNDER THIS
AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE COMMENCED AGAINST BORROWER IN DALLAS
COUNTY, (V) SUCH ACTION MAY BE INSTITUTED IN THE COURTS OF THE STATE OF TEXAS
LOCATED IN DALLAS COUNTY, TEXAS OR IN THE UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF TEXAS LOCATED IN DALLAS COUNTY, TEXAS, AT THE OPTION OF THE
BANK AND (VI) THE BORROWER HEREBY WAIVES ANY OBJECTION TO THE VENUE OF ANY SUCH
SUIT, ACTION OR PROCEEDING AND ADDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO BE
SUED ELSEWHERE. NOTHING HEREIN SHALL AFFECT THE RIGHT OF EACH BANK TO ACCOMPLISH
SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.
10. TIME. Time is of the essence in the performance of the covenants
contained herein and in the Loan Documents.
11. BINDING AGREEMENT. This Agreement and the Loan Documents shall be
binding upon the heirs, executors, administrators, personal representatives,
successors and assigns of the parties hereto; provided, however, the foregoing
shall not be deemed or construed to (i) permit, sanction, authorize or condone
the assignment of all or any part of the Collateral or any of Borrower's rights,
titles or interest in and to the Collateral or any rights, titles or interests
in and to Borrower, except as expressly authorized in the Loan Documents, or
(ii) confer any right, title, benefit, cause of action or remedy upon any person
or entity not a party hereto, which such party would not or did not otherwise
possess.
12. HEADINGS. The section headings hereof are inserted for convenience
of reference only and shall in no way alter, amend, define or be used in the
construction or interpretation of the text of such section.
13. CONSTRUCTION. Whenever the context hereof so required, reference
to the singular shall include the plural and likewise, the plural shall include
the singular; words denoting gender shall be construed to mean the masculine,
feminine or neuter, as appropriate; and specific enumeration shall not exclude
the general but shall be construed as cumulative of the general recitation.
14. COUNTERPARTS. To facilitate execution, this Agreement may be
executed in as many counterparts as may be convenient or required. It shall not
be necessary that the signature and acknowledgement of, or on behalf of, each
party or that the signature and acknowledgement of all persons required to bind
any party appear on each counterpart. All counterparts shall collectively
constitute a single document containing the respective signatures and
acknowledgement of, or on behalf of, each of the parties hereto. Any signature
and acknowledgement page to any counterpart may be detached from such
counterpart without impairing the legal effect of the signatures and
acknowledgements thereon and thereafter attached to another counterpart
identical thereto except having attached to it additional signature and
acknowledgement pages.
THIS AGREEMENT AND THE LOAN DOCUMENTS COLLECTIVELY REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
-3-
<PAGE>
EXECUTED as of the date first above written.
BANK:
GUARANTY FEDERAL BANK, F.S.B.,
a federal savings bank
By: /s/ W. James Meintjes
___________________________
W. James Meintjes,
Assistant Vice President
BORROWER:
HOMEOWNERS MORTGAGE & EQUITY, INC.,
a Delaware corporation d/b/a HOME, INC.
By: /s/ Tommy M. Parker
___________________________
Tommy M. Parker,
Executive Vice President
GUARANTOR:
HOMECAPITAL INVESTMENT CORPORATION,
a Delaware corporation
By: /s/ John W. Ballard
___________________________
Name: John W. Ballard
Title: President/CEO
-4-
<PAGE>
STATE OF TEXAS (S)
(S)
COUNTY OF DALLAS (S)
This instrument was ACKNOWLEDGED before me the 30th day of January, 1997,
by W. James Meintjes, Assistant Vice President of GUARANTY FEDERAL BANK, F.S.B.,
a federal savings bank, on behalf of said bank.
/s/ Charlotte Anderton
______________________________
Notary Public - State of Texas
My Commission expires: Charlotte Anderton
1-31-2000 ______________________________
Printed Name of Notary
STATE OF TEXAS (S)
(S)
COUNTY OF TRAVIS (S)
This instrument was ACKNOWLEDGED before me the 29 day of January, 1997, by
Tommy M. Parker, Executive Vice President of HOMEOWNERS MORTGAGE & EQUITY, INC.
d/b/a Home, Inc., a Delaware corporation, on behalf of said corporation.
/s/ Glenda Houchin
______________________________
Notary Public - State of Texas
My Commission expires: Glenda Houchin
1-20-98 ______________________________
Printed Name of Notary
STATE OF TEXAS (S)
(S)
COUNTY OF TRAVIS (S)
This instrument was ACKNOWLEDGED before me the 29 day of January, 1997, by
John W. Ballard, President/CEO of HOMECAPITAL INVESTMENT CORPORATION, a Delaware
corporation, on behalf of said corporation.
/s/ Glenda Houchin
______________________________
Notary Public - State of Texas
My Commission expires: Glenda Houchin
1-20-98 ______________________________
Printed Name of Notary
-5-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AT DECEMBER 31, 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> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 931,263
<SECURITIES> 0
<RECEIVABLES> 16,613,130
<ALLOWANCES> 123,509
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,054,426
<DEPRECIATION> 236,912
<TOTAL-ASSETS> 19,559,058
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
15,000
<COMMON> 79,863
<OTHER-SE> 8,027,225
<TOTAL-LIABILITY-AND-EQUITY> 19,559,058
<SALES> 4,787,120
<TOTAL-REVENUES> 5,612,349
<CGS> 0
<TOTAL-COSTS> 2,153,112
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 200,000
<INTEREST-EXPENSE> 243,476
<INCOME-PRETAX> 3,459,237
<INCOME-TAX> 1,215,077
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,244,160
<EPS-PRIMARY> .26
<EPS-DILUTED> .23
</TABLE>
