<PAGE> 1
PURSUANT TO RULE 424(b)(1)
REGISTRATION FILE NO. 333-4837
PROSPECTUS
$6,000,000
MCA FINANCIAL CORP.
11% SUBORDINATED DEBENTURES, SERIES 1996
DUE JUNE 30, 2002
MCA Financial Corp., a Michigan corporation ("MCAFC"), is hereby offering
$6,000,000 in aggregate principal amount of 11% Subordinated Debentures,
Series 1996, Due June 30, 2002 (the "Series 1996 Debentures"). Interest on the
Series 1996 Debentures will be payable quarterly on March 31, June 30,
September 30 and December 31 of each year, from the date the Series 1996
Debentures are issued or from the most recent interest payment date on which
interest has been paid or duly provided for. The Series 1996 Debentures will
be issued in fully registered form, without coupons and in denominations of
$1,000 and integral multiples thereof, and will be dated on their Date of
Issue. The Series 1996 Debentures are subordinated unsecured obligations of
MCAFC. The unsecured obligations of MCAFC, including the Series 1996
Debentures, are subordinate in right of payment to all current and future
Senior Indebtedness of MCAFC and will rank on an equal basis with MCAFC's
outstanding 11% Asset-Backed Subordinated Debentures Due 1997 (the "1992
Debentures") and MCAFC's outstanding 11% Asset-Backed Subordinated Debentures
Due 2000 (the "1994 Debentures" and together with the 1992 Debentures the
"Prior Debentures") except insofar as such Debentures are secured by specific
collateral. The issuance of Senior Indebtedness by MCAFC is not restricted by
the Indenture. See "Description of Series 1996 Debentures."
MCAFC is a holding company which, through its principal subsidiaries, MCA
Mortgage Corporation and Mortgage Corporation of America, engages in the
mortgage banking business.
FOR INFORMATION THAT SHOULD BE CONSIDERED
BY PROSPECTIVE INVESTORS, SEE "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
(continued)
<PAGE> 2
(Cover page continued)
<TABLE>
<CAPTION>
Price to Sales Proceeds to
the Public(1) Commissions(2) Company(1)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note .................. 100% 6.5% 93.5%
Total ..................... $ 6,000,000 $390,000 $5,610,000
</TABLE>
- ---------------
(1) The Series 1996 Debentures will bear interest from their Date of Issue,
which will be the date on which subscription monies are accepted by the
Company. Accordingly, no accrued interest will be charged to purchasers. See
"Plan of Distribution." Before deduction of expenses of this offering (the
"Offering"), estimated at $80,000, which are payable by MCAFC.
(2) The Offering is being made on a "best efforts" basis. There is no assurance
as to the amount of Series 1996 Debentures that will be sold. Participating
broker-dealers will be paid a commission of 6.5%, provided, however, that if a
broker-dealer sells $250,000 or more of the Series 1996 Debentures it will be
paid a commission of 7.0% on all sales, and if a broker-dealer sells $500,000
or more of the Series 1996 Debentures it will be paid a commission of 8.0% on
all sales.
--------------------------
This Offering will continue until all Series 1996 Debentures are sold or until
May 31, 1997, whichever is earlier; however MCAFC may elect to extend the
Offering until all of the Series 1996 Debentures offered hereby are sold, as
permitted under applicable securities laws and regulations. MCAFC may reject a
subscription for any reason or for no reason whatever, and may terminate the
Offering at any time.
The date of this Prospectus is June 12, 1996
<PAGE> 3
STATEMENT OF AVAILABLE INFORMATION
MCAFC is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information filed by
MCAFC with the Commission can be inspected and copied at the office of the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, or at
its Regional Offices located at Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661-2511; and 7 World Trade Center, Suite 1300, New York, New York
10048, and copies of such material can be obtained from the Public Reference
Section of the Commission, at 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates.
A Registration Statement on Form S-1 relating to the Series 1996
Debentures offered hereby has been filed by MCAFC with the Commission in
Washington, D.C. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits thereto. For further
information with respect to MCAFC and the Series 1996 Debentures offered
hereby, reference is made to the Registration Statement and exhibits.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. A copy of the Registration Statement, including
exhibits, may be inspected without charge at the Commission's principal offices
in Washington, D.C. or at the Commission's regional offices, and copies of all
or any part thereof may be obtained from the Commission's principal office in
Washington, D.C. upon the payment of the fees prescribed by the Commission.
Annual Reports will not be sent to the security holders of MCAFC.
i
<PAGE> 4
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus, including information contained under the caption "Risk
Factors." Reference is made to, and this summary is qualified in its entirety
by, the more detailed information and consolidated financial statements,
including the notes thereto, contained elsewhere in this Prospectus.
THE COMPANY
MCA Financial Corp. ("MCAFC" or the "Company") is a holding company which,
through its principal subsidiaries and certain affiliates, engages in mortgage
banking, land contract and mortgage syndication, loan originating and servicing
and real estate acquisitions, rehabilitation, leasing and sales. MCAFC is a
Michigan corporation which was formed in 1989 and was inactive until 1991 when
it became a holding company for its principal subsidiaries.
Currently, MCAFC operates through the following wholly-owned subsidiaries:
- MCA Mortgage Corporation ("MCA Mortgage") is a Michigan
corporation that was incorporated in 1985 and has conducted a
mortgage banking business since that date. It was known
as Primary Mortgage Corporation until that date and was known
as Mortgage Corporation of America from August 1985 until
March 1993.
- Mortgage Corporation of America ("MCA") is a Michigan corporation
that was incorporated in 1984 and has conducted a mortgage
banking business since that date. It was known as First American
Mortgage Corporation, Inc. until September 1989 and as First
American Mortgage Associates, Inc. from September 1989 until
October 1993.
- RIMCO Realty & Mortgage Company, doing business as MCA Realty
Corporation ("MCA Realty") is a Michigan corporation that was
incorporated in 1993 and was acquired by MCAFC on January 31,
1995. MCA Realty is engaged in the purchase and sale of
residential real estate.
- Mortgage Corporation of America, Inc. ("MCA-Ohio") is an Ohio
Corporation that was incorporated in 1993 and has conducted a
mortgage banking business, emphasizing non-conforming loans,
since that date. It was known as Charter 1st Mortgage Banc, Inc.
from May 1993 until July 1995 when it was acquired by MCA.
MCAFC has two other subsidiaries, Complete Financial Corporation and
Securities Corporation of America, both Michigan corporations, which are
currently inactive. Unless otherwise indicated, MCAFC and its subsidiaries are
hereinafter collectively referred to as the "Company."
1
<PAGE> 5
As of January 31, 1996, the Company operated 35 offices in the states of
Michigan, Idaho, Illinois, Indiana, Kentucky, Maryland, Ohio, Florida, West
Virginia and Pennsylvania which are engaged in mortgage and land contract
origination. The Company's principal executive offices are located at 23999
Northwestern Highway, Southfield, Michigan 48075, and the telephone number is
(810) 358-5555.
THE OFFERING
Securities Offered: $6,000,000 of 11% Subordinated Debentures, Series 1996,
Due June 30, 2002. The Series 1996 Debentures are
subordinated unsecured obligations of the Company. The
minimum Subscription amount which the Company will accept
in this Offering is $1,000.
Redemption: The Series 1996 Debentures are redeemable prior to
maturity, at the option of the Company, on or after July 1,
1998, in whole or in part, at the prices set forth
herein, plus accrued interest to the date of redemption.
Such redemption is subject to the payment of or receipt of
waivers from all Senior Indebtedness of the Company and is
subject to the Company's financial ability to engage in
such a redemption. In addition, commencing March 31, 1998,
an individual Holder may request the Company to redeem up
to $25,000 of Series 1996 Debentures per year, with
priority given to requests made on behalf of deceased
Holders, but only up to an aggregate of $100,000 per
calendar year for all Holders. See "Description of Series
1996 Debentures - Right of Redemption."
Subordination: The Series 1996 Debentures are subordinated in
right of payment to all Senior Indebtedness of the
Company, which as of the date hereof totalled
approximately $30.6 million, and will rank on an equal
basis with the Company's outstanding 1992 Debentures and
1994 Debentures (except insofar as such Prior Debentures
are secured by specific collateral), of which as of the
date hereof, there were outstanding $10.9 million in
principal amount. As of the date hereof, the Company's
subsidiaries had outstanding indebtedness which totalled
approximately $98.2 million, which the Company has
guaranteed. There are no limitations on the amount of
Senior Indebtedness that may be issued or incurred in the
future and since the Company is a holding company, its
rights and, indirectly, the rights of the holders of the
Series 1996 Debentures, to participate in any distribution
of assets of its subsidiaries will be limited. See
"Description of Series 1996 Debentures - Subordination."
2
<PAGE> 6
Acceleration: If an Event of Default occurs, then the Trustee or
Holders of not less than 25% in principal amount of the
Series 1996 Debentures may declare the principal of all
Series 1996 Debentures immediately due and payable. Such
acceleration would be subject to the payment of or receipt of
waivers from all Senior Indebtedness of the Company and is
subject to the Company's financial ability to comply with
such obligation. See "Description of Series 1996 Debentures
- Event of Default; - Subordination."
Consolidation: The Company may not consolidate with, merge with or transfer
all or substantially all of its assets to another entity
unless such other entity assumes the Company's obligations
under the Indenture, regardless of whether the transaction is
a leveraged buyout initiated or supported by the Company, its
management or any of their affiliates. Neither the Company
nor the Trustee has the right to waive this covenant. See
"Description of Series 1996 Debentures - Consolidation,
Merger or Transfer."
Trading Market: No market exists at the present time for the Series 1996
Debentures and it is likely that no trading market will
develop. As a result, investors will remain as investors for
a substantial period of time. See "Risk Factors - Limited
Market for Series 1996 Debentures."
Use of Proceeds: The net proceeds of the Offering will be used by the Company
to redeem, at maturity on March 15, 1997, up to $4.92 million
of its 1992 Debentures and for general corporate purposes,
which will include providing advances to its subsidiaries and
certain of its affiliates. See "Use of Proceeds."
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth a summary of selected historical financial
data of the Company for each of the periods indicated in the five-year period
ended January 31, 1996, which were derived from the audited consolidated
financial statements of the Company for the periods in the five-year period
ended January 31, 1996. The audited consolidated financial statements of the
Company for each of the periods in the three-year period ended January 31, 1996
are included elsewhere in this Prospectus. This table should be read in
conjunction with such consolidated financial statements of the Company and the
notes thereto.
3
<PAGE> 7
<TABLE>
<CAPTION>
Year Ended January 31
-----------------------------------------------------
1996 1995(1) 1994 1993 1992
-------- --------- ------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME DATA:
Revenues...............................$ 41,951 $ 33,371 $ 29,534 $ 14,393 $ 9,432
Expenses............................... 40,823 33,547 28,562 13,477 9,022
Income (loss) before
federal income taxes.............. 1,128 (176) 972 916 410
Net income (loss)...................... 616 (278) 551 586 273
Net income (loss)
per share......................... 1.44 (.69) 1.60 2.15 1.24
Ratio of earnings
over fixed charges
-historical (2)................... 1.13x -- 1.20x 1.82x 1.41x
-pro forma (3).................... 1.01x -- -- -- --
Earnings (deficiency
of earnings) over
fixed charges..................... 1,128 (176) 972 916 410
</TABLE>
<TABLE>
<CAPTION>
At January 31
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- ------- -------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Mortgages held for
resale...............................$ 63,306 $ 15,702 $ 39,250 $ 14,084 $ 7,154
Total assets.............................. 135,191 77,112 76,845 28,632 15,764
Notes payable(4).......................... 86,598 44,843 54,549 13,824 8,058
11% Subordinated
Debentures due 1997.................. 4,921 4,938 4,938 3,171 --
11% Subordinated
Debentures due 2000.................. 4,253 -- -- -- --
Total liabilities......................... 125,030 67,822 67,982 23,460 13,148
Stockholders' equity...................... 10,161 9,290 8,563 4,872 2,316
</TABLE>
<TABLE>
<CAPTION>
At January 31
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- ------- -------- ----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Loan production:
Number of loans
originated............................ 7,928 8,224 8,910 2,448 1,185
Average loan balance......................$ 80 $ 69 $ 77 $ 83 $ 70
Total loans originated....................$632,281 $564,235 $687,484 $203,087 $82,708
Number of full-time
employees............................. 412 336 448 202 149
</TABLE>
(1) On July 19, 1994, the Company purchased substantially all of the revenue
producing activities of Liberty National Mortgage Corporation. See Note
15 of Notes to Consolidated Financial Statements.
(2) The ratio of earnings to fixed charges was computed by dividing (a) net
income (loss) for the period plus fixed charges by (b) fixed charges,
which consist of interest expense, amortization of debt expense and that
portion of rentals that represents interest. The ratio of earnings over
fixed charges and preferred dividends was 1.12x, 1.19x, 1.79x and 1.41x for
the years ended January 31, 1996, 1994, 1993 and 1992, respectively.
Earnings were insufficient to cover fixed charges for the year ended
January 31, 1995. The deficiency of earnings over fixed charges and
preferred dividends was $.6 million for the year ended January 31, 1995.
(3) The pro forma data reflects the Series 1996 Debenture interest expense,
assuming all such debentures are sold, and reflects the amortization of
debt issuance costs over a five year period using the interest method.
(4) See Note 3 of Notes to Consolidated Financial Statements.
4
<PAGE> 8
RISK FACTORS
The Offering is being made on a best efforts basis and there is no
assurance as to the amount of Series 1996 Debentures that will be sold. In
addition, the purchase of the Series 1996 Debentures involves a number of
significant risk factors, and each prospective investor should consider the
following:
ABILITY TO SERVICE DEBT; SUBSTANTIAL LEVERAGE
The Company is highly leveraged. The Company has current obligations
relating to its outstanding securities as follows: (i) the holders of its
Series A Preferred Stock are entitled to receive annual cumulative dividends of
approximately $183,000 ($0.90 per share on 203,022 outstanding shares), (ii)
the holders of its Series B Preferred Stock are entitled to receive annual
cumulative dividends of approximately $303,000 ($0.90 per share on 336,619
outstanding shares), (iii) the holders of its 1992 Debentures are entitled to
receive annual interest of approximately $541,860, on $4.92 million aggregate
principal amount outstanding, and (iv) the holders of its outstanding 1994
Debentures are entitled to receive annual interest of approximately $468,000,
on $4.25 million aggregate principal amount subscribed for as of January 31,
1996 (such annual interest will be $1.1 million if all 1994 Debentures are
sold). The Company is also obligated to pay interest with respect to
indebtedness due to certain financial institutions at rates ranging from the
LIBOR rate plus 1.5% (currently 6.8%) to 12.0%. The amount of this
indebtedness at January 31, 1996 was $86.6 million. In addition to this
indebtedness, the Company has a commitment from Bank One, Texas N.A., to
provide a $30 million warehousing line of credit and a commitment from the
Policemen and Firemen Retirement System of the City of Detroit to lend the
Company $15 million in subordinated debt to expand its non-conforming lending
business.
At the then-current interest rates, the Company would be obligated to pay
$6.39 million in annual interest on its existing indebtedness as of January 31,
1996. The obligations with respect to the preferred stock dividends are
subordinate to the Company's obligations with respect to the Series 1996
Debentures. However, the dividend and other obligations of the Company
represent significant leverage and financial risk and the annual interest
expense on the Series 1996 Debentures, $660,000 if all Series 1996
Debentures are sold, will be additional leverage and financial risk with
respect to the Company. Prospective investors should note that the Series 1996
Debentures, which are due on June 30, 2002, do not provide for periodic
repayment of principal through a sinking fund provision. Thus, the Company
will be required to make substantial cash payments on this debt at the time it
matures. The Company's ability to withstand adverse market conditions may not
be as great as that of competitors who are not as highly leveraged. Failure to
make payments when due will result in default under and possible acceleration
of one or more of the Company's debt instruments. A substantial portion of the
Company's cash flow from operations will be required to pay the Company's
interest expense and principal repayment obligations. Although management
believes that the cash flow generated from the operations of MCA
5
<PAGE> 9
Mortgage and MCA will provide the Company with sufficient resources to meet the
Company's present and foreseeable liquidity and capital needs for the next
fiscal year, including those arising from debt obligations, there can be no
assurance that the Company will generate earnings in any future period
sufficient to cover its fixed charges. In the event the Company's cash flow so
generated is insufficient for these purposes, the Company may be required to
dispose of assets, refinance its indebtedness or raise additional capital.
There is no assurance that the Company will be able to complete such
transactions if required to do so.
RANKING OF SERIES 1996 DEBENTURES
The Series 1996 Debentures are subordinated unsecured obligations of MCAFC
and are subordinate in right of payment to all current and future Senior
Indebtedness of MCAFC. See "Description of Series 1996 Debentures -
Subordination." The Series 1996 Debentures will rank on an equal basis with
the Prior Debentures, however, unlike the Prior Debentures, the Series 1996
Debentures are unsecured obligations of MCAFC.
HOLDING COMPANY STRUCTURE
Holders of the Series 1996 Debentures will be creditors of MCA Financial
Corp., but not creditors of MCA Mortgage, MCA or any other subsidiary of the
Company. Certain of the net proceeds from this Offering may be invested in MCA
Mortgage and MCA, and may also be invested in other subsidiaries of the
Company. The Company's assets consist primarily of its ownership of MCA
Mortgage, MCA, MCA Realty, MCA-Ohio and two other subsidiaries which are
currently inactive. As of the date hereof, the Company and its subsidiaries
have $139.7 million of indebtedness outstanding. Since the Company has limited
operations, its cash flow and ability to service its debt are dependent upon
the earnings of its subsidiaries and their ability to distribute those earnings
to the Company through the payment of dividends, repayment of loans or other
distributions of funds. The Company's subsidiaries are limited with respect to
the distributions they may make to the Company as a result of various financial
covenants contained in loan documents to which they are parties and as a result
of minimum net worth requirements imposed by various mortgage investors and
government agencies. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business - Regulation." Furthermore,
the Company's right and, indirectly, the right of the Debenture holders, as
creditors, to participate in the assets of MCA Mortgage, MCA, MCA Realty,
MCA-Ohio or the Company's other subsidiaries in the event of their liquidation
or reorganization, will be subordinate to the claims of any and all other
creditors of MCA Mortgage, MCA, MCA Realty, MCA-Ohio or the Company's other
subsidiaries.
LIMITED MARKET FOR SERIES 1996 DEBENTURES
The Company can provide no assurances as to whether a market for the
Series 1996 Debentures will develop. If such a market were to exist in the
future, the Series 1996 Debentures could trade at prices higher or lower than
their initial public offering price depending on many factors, including
6
<PAGE> 10
prevailing interest rates, the Company's operating results and the market for
similar securities. Investors who do not wish, or who are not financially
able, to remain as investors for a substantial period of time are advised
against purchasing Series 1996 Debentures.
REGULATION
The Company is subject to various federal and state rules and regulations
with respect to the processing, origination and purchase, sale and servicing of
mortgage loans and land contracts. MCA Mortgage is an approved seller/servicer
for the Federal Home Loan Mortgage Corporation ("Freddie Mac"), the Federal
National Mortgage Association ("Fannie Mae") and the Government National
Mortgage Association ("Ginnie Mae"). MCA is an approved seller/servicer for
Freddie Mac, and both MCA Mortgage and MCA are registered with the Commissioner
of the Michigan Financial Institution Bureau as a mortgage broker, lender and
servicer. The failure of these subsidiaries to meet the requirements of such
federal and state agencies, which might result in the loss of Freddie Mac,
Fannie Mae, Ginnie Mae or U.S. Department of Housing and Urban Development
("HUD") approvals, would have a material adverse impact on the Company's
ability to carry on its current business. MCA Realty is a licensed real estate
broker in the State of Michigan. See "Business - Regulation."
SUBSTANTIAL COMPETITION
The Company competes with numerous other mortgage banking firms, state and
national banks, thrift institutions and insurance companies for loan
originations and purchases. Many of such companies are well-established with
greater financial and personnel resources and significantly more offices with a
greater market presence than the Company. See "Business - Competition."
CONFLICTS OF INTEREST
The Company and its subsidiaries have entered into various contracts and
other transactions with corporations, limited partnerships and other persons
affiliated with the Company and its officers and directors. The terms and
conditions of such transactions were not negotiated at arm's length and may not
have been as favorable to the Company as terms and conditions that would have
been obtained with unaffiliated parties. This is particularly true with
respect to certain real estate transactions with affiliates of the Company.
Future dealings between the Company and such affiliated entities, if any, may
not be at arm's length. The Company currently does not have any standards,
policies or procedures for dealing with such transactions but it expects to
establish a procedure whereby the approval of a majority of disinterested
directors would be required for any such transactions. The Company, through
certain affiliates, engages in the purchase and rehabilitation of real estate
which is syndicated through affiliated partnerships of the Company. A decrease
in this revenue would have an adverse impact on the Company. See "Selected
Consolidated Financial Data" and "Compensation Committee Interlocks and Insider
Participation."
7
<PAGE> 11
DEPENDENCE UPON MORTGAGE INVESTORS
The vast majority of the mortgage loans originated by the Company are
currently purchased by Freddie Mac or Fannie Mae or are pooled to form Ginnie
Mae mortgage-backed securities which are sold to institutional investors.
These conventional loans must comply with the particular mortgage investor's
guidelines and underwriting standards. During fiscal 1996, Freddie Mac
purchased $228.6 million of conventional mortgage loans from the Company,
Fannie Mae purchased $56.5 million of conventional mortgage loans from the
Company and $224 million of conventional mortgage loans of the Company were
converted into Ginnie Mae mortgage-backed securities and sold to various
institutional investors. During fiscal 1995, Freddie Mac purchased $199
million of conventional mortgage loans from the Company, Fannie Mae purchased
$8.2 million of conventional mortgage loans from the Company and $225 million
of conventional mortgage loans of the Company were converted into Ginnie Mae
mortgage-backed securities and sold to various institutional investors. The
price each mortgage investor will pay the Company for loans fluctuates on a
daily basis and is finally determined when the mortgage investor has committed
to purchase a loan from the Company. In general, the Company sells these
conventional loans to mortgage investors on a "non-recourse" basis, which means
that the Company has no liability to the mortgage investor if there is a
default on the loan unless (i) the Company has breached its representations and
warranties to the mortgage investor, (ii) the Company fails to deliver the
appropriate documentation with respect to the loan, (iii) the loan does not
comply with applicable laws or (iv) the borrower defaults on payment of the
loan within varying periods of up to six months after the loan is made. In any
such event, the Company generally will be required to repurchase the loan by
paying the principal, accrued interest, late charges, servicing release
premiums, escrow deficiencies and any other amounts associated with the loan.
Although the Company is approved as a correspondent with nine conventional
mortgage investors, the Company anticipates that the majority of its originated
conventional mortgages will be purchased by Freddie Mac or Fannie Mae or
through Ginnie Mae programs. Management of the Company believes that the loss
of the Freddie Mac or Fannie Mae seller/servicer approval would have a material
adverse effect on the Company. See Note 11 of Notes to Consolidated Financial
Statements.
In addition, the Company has made bulk sales of non-conforming mortgages
of approximately $86.6 million in fiscal 1996 to five different non-conforming
mortgage investors. None of the non-conforming mortgage investors has
purchased more than 30% of the aggregate non-conforming mortgage bulk sales to
date. During fiscal 1995, the Company sold $51.8 million of non-conforming
mortgages to these investors. Non-conforming mortgages are defined as
mortgages which do not comply with the guidelines and underwriting standards of
Freddie Mac, Fannie Mae or Ginnie Mae. Non-conforming mortgages are
responsible for a significant portion of the Company's mortgage banking income.
The Company's management believes that the loss of its non-conforming mortgage
investors would have a material adverse effect on the Company.
8
<PAGE> 12
AVAILABILITY OF FUNDING SOURCES
The Company finances its land contract and mortgage operations through a
program of selling participation interests in pools of land contracts and
mortgage interests and through various lines of credit, which currently total
$66 million, to support financing of mortgages and land contracts pending sale.
The Company has a commitment from Bank One, Texas N.A., to provide an
additional $30 million that is expected to close in June 1996. To the extent
that the Company is not successful in arranging financing, or if the Company
experiences difficulty in selling its mortgages or pass-through securities, it
may have to curtail its mortgage origination and purchasing activities, which
would have a material adverse effect on the Company's operations, profitability
and its ability to service debt.
In addition, the Company has a second credit facility, currently $28.5
million, with Comerica Bank that is secured by a stand-by Note Purchase
Agreement between Comerica Bank and a third-party pension fund whereby the
pension fund has agreed to provide payment to Comerica Bank upon the occurrence
of certain events of default by the Company. This facility is utilized by the
Company to increase its servicing portfolio, which provides collateral under
the facility. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
MCA Mortgage also has $3.0 million available under two $1.5 million credit
facilities with commercial banks for the acquisition and rehabilitation of
residential real property prior to resale.
The Policemen and Firemen Retirement System of the City of Detroit has
committed to provide the Company $15 million in subordinated debt to expand its
non-conforming originations. This facility is expected to close in June 1996.
RELIANCE ON CERTAIN WAREHOUSE LENDING ARRANGEMENTS
Among its short-term financing sources, MCA Mortgage has loan arrangements
with PNC Mortgage Bank, N.A., as described in "Availability of Funding Sources"
above, and with DLJ Mortgage Capital, Inc., pursuant to which they have agreed
to lend MCA Mortgage up to $25 million and $30 million, respectively, to fund
mortgage loans until they are sold to Freddie Mac, Fannie Mae, to certain
institutional investors through Ginnie Mae mortgage-backed securities, or to
other approved mortgage investors. The Company also has a similar $10 million
warehousing line of credit with Paine Webber Real Estate Securities, Inc. In
addition, the Company has a short-term revolving loan facility with Comerica
Bank, pursuant to which it may borrow up to $1.5 million, $1 million of which
is available to fund land contract purchases, with the remaining amount
available for general working capital. If for any reason these lending
arrangements are terminated, MCA Mortgage's ability to fund mortgages and land
contracts will be adversely impacted. This would also adversely impact the
Company's operations, cash flow, profitability and ability to service debt.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
9
<PAGE> 13
INTEREST RATE RISKS
The Company's ability to originate mortgages in volume is affected by
prevailing market interest rates. These rates affect consumers' decisions to
obtain new loans or refinance existing loans. Recent declining interest rates,
for example, generally increase the level of loan origination activity, whereas
the rise in interest rates from April 1994 to October 1994 caused a decline in
the amount of loan originations during the Company's 1995 fiscal year. The
Company's mortgage origination fees, which include gains and losses from loan
resale transactions, decreased from $11.3 million for fiscal 1994 to $5.6
million for fiscal 1995 and increased to $14.3 million for fiscal 1996.
Included in the decrease from fiscal 1994 to fiscal 1995 are reductions in
gains from loan resale transactions amounting to $6.6 million. Included in the
increase for fiscal 1996 are $4.2 million of additional gains from loan resale
transactions. The Company's originations decreased from approximately $687
million for fiscal 1994 to approximately $501 million for fiscal 1995 and
increased to $632 million for fiscal 1996. The rise in interest rates during
the period from April 1994 to October 1994 also caused a slowdown in
refinancings from approximately $498 million for fiscal 1994 to approximately
$173 million for fiscal 1995, which also adversely affected mortgage
origination fees. In fiscal 1996, interest rates experienced a slight decline
and refinancings remained steady at approximately $172 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."
Interest rate changes can also directly affect the Company's operating
results. An increase in rates would adversely affect the value of existing
mortgage loans held directly by the Company, as well as any commitments to make
loans at fixed interest rates which are not covered by third-party commitments
to purchase the loans. The Company's general policy is to minimize the amount
of uncovered loans and loan commitments. Declining interest rates, while
likely to increase loan origination and refinancing activity, can also lead to
more prepayments of outstanding fixed-rate loans with relatively higher
interest rates. The prepayment of such loans results in (i) a decrease in the
value of servicing rights and (ii) the elimination of the associated servicing
income and a resulting increase in charges against earnings from the
acceleration of the amortization of any loan premiums reflected as income and
capitalized when the loans were made. See "Business - Mortgage Banking."
Furthermore, variations in the relationship between short-term rates and
long-term rates for mortgages can affect the Company's ability to earn net
interest income on loans held for sale.
POSSIBLE OBLIGATION TO REPURCHASE LOANS
When the Company sells loans which it has originated or which its loan
correspondents have originated, it will attempt to sell them on a non-recourse
basis. However, under limited circumstances the Company may sell loans with
recourse. In those cases, any significant adverse economic developments in the
Company's service area (primarily Michigan, Indiana, Ohio, Florida and
Washington) could result in an increase in defaults or delinquencies that the
Company would then be required to satisfy. In those cases where the Company
sells its loans on a non-recourse basis but retains
10
<PAGE> 14
the servicing rights, a loan default would increase the cost of servicing the
loan and cause the Company to incur the costs of going through a foreclosure
and subsequent liquidation of the property. Most of these costs may, however,
be recouped when the property is sold, assuming the property maintains its
value. In addition, when the Company sells loans into the secondary market, it
will make representations and warranties concerning the accuracy of the
information contained in the loan documentation which concern such items as
property appraisal values and borrower qualifications. If a buyer of a loan
discovers a breach of these representations and warranties after the sale of a
loan, the Company could be required to repurchase the loan. The Company
employs strict due diligence and quality control standards to minimize this
risk. With respect to loans originated by the Company's loan correspondents,
the Company's general practice will be to attempt to pass on this risk to the
loan correspondent. However, if the correspondent is unwilling or unable to
perform, the Company will remain liable. For additional information relating
to the Company's experience with respect to delinquencies and losses, see
"Business - Mortgage Banking - Servicing."
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
A significant portion of the Company's revenues consists of gains
recognized upon the sales of mortgage loans, mortgage servicing rights and real
estate interests. As a result, the timing of such mortgage loan, servicing
right, and real estate interest sales has a significant effect on the Company's
results of operations, and the results of one quarter are not necessarily
indicative of results for the next quarter. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
GENERAL BUSINESS RISKS
The Company's business is subject to various business risks. The level of
the Company's revenues is dependent upon demand for the type of mortgage loan
purchased, sold and serviced by the Company from both potential borrowers and
investors. Future declines in real estate values, changes in prevailing
interest rates and changes in the availability of attractive returns on
alternative investments each could make mortgage loans of the type originated
and purchased by the Company less attractive to borrowers and investors.
IMPACT OF ECONOMIC CYCLES
The business risks associated with the Company's business become more
acute in an economic slowdown. Such an environment is generally characterized
by decreased demand for real estate and declining real estate values in many
areas of the country. Delinquencies, foreclosures and loan losses generally
increase during economic slowdowns or recessions, and any such future slowdowns
could adversely affect future operations of the Company.
11
<PAGE> 15
ANNUAL REPORTS
The Company will not send Annual Reports to the holders of its Series 1996
Debentures. Each holder of Series 1996 Debentures may obtain a copy of the
Company's Annual Report on Form 10-K, as filed with the Securities and Exchange
Commission, and its interim Quarterly Reports on Form 10-Q, as filed with the
Securities and Exchange Commission, upon written request to Lee P. Wells at
23999 Northwestern Highway, Southfield, Michigan 48075, telephone number (810)
358-5555.
THE COMPANY
MCA Financial Corp. ("MCAFC" or the "Company") is a holding company which,
through its principal wholly-owned subsidiaries MCA Mortgage and MCA, is
principally engaged in the business of mortgage banking, which includes
mortgage originating, lending and servicing. MCAFC was founded in 1989 and
became a holding company for MCA Mortgage and MCA in 1991. Through its
subsidiaries, MCAFC currently originates and purchases conventional mortgage
loans secured by one-to-four family residential properties that comply with the
requirements for sale to Freddie Mac or Fannie Mae, mortgage loans which
qualify for sale in the form of mortgage-backed securities guaranteed by Ginnie
Mae as well as non-conforming loans that do not conform to Freddie Mac or
Fannie Mae requirements and sells these mortgages to certain financial
institutions and investor-owned pass-through pools sponsored by MCA. Unless
otherwise indicated, MCAFC and its subsidiaries are hereinafter collectively
referred to as the "Company."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Series 1996
Debentures is estimated to be $5,530,000 if all Series 1996 Debentures offered
are sold, after deducting expenses of the Offering and an assumed 6.5% sales
commission. The Company intends to use the net proceeds from the Offering,
regardless of the amount of Series 1996 Debentures sold, to redeem up to $4.92
million of its outstanding 1992 Debentures, which bear an annual interest rate
of 11% and mature March 15, 1997, and for general corporate purposes, which
includes providing advances to its subsidiaries and certain of its affiliates,
as well as the possible acquisition of mortgage servicing rights and the
business of one or more unaffiliated mortgage companies. If a sufficient
amount of Series 1996 Debentures are not sold in order to allow for the
redemption of all outstanding 1992 Debentures, the Company may be required to
seek alternative refinancing alternatives. See "Compensation Committee
Interlocks and Insider Participation."
12
<PAGE> 16
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of January 31, 1996, and as adjusted to give effect to the sale of
the Series 1996 Debentures offered hereby:
<TABLE>
<CAPTION>
January 31, 1996
----------------------------
Actual As Adjusted
--------- -------------
<S> <C> <C>
Long-term debt:
Capitalized Lease Obligations (1)............ $ 1,250,162 $ 1,250,162
11% Subordinated Debentures Due 1997......... 4,921,000 4,921,000
11% Subordinated Debentures Due 2000(2) ..... 4,253,000 4,253,000
11% Subordinated Debentures Due 2002,
offered hereby........................... -- 6,000,000
----------- -----------
Total long-term debt ..................... $10,424,162 $16,424,162
----------- -----------
Stockholders' equity:
Common stock, 3,750,000 shares authorized;
448,617 shares issued and
outstanding .............................. 4,486 4,486
Series A Preferred Stock, 350,000
shares authorized; 203,022 shares
issued and outstanding ................... 2,030,220 2,030,220
Series B Preferred Stock, 750,000
shares authorized; 336,619 shares
issued and outstanding ................... 3,366,190 3,366,190
Additional paid in capital................... 3,457,251 3,457,251
Retained earnings ........................... 1,302,713 1,302,713
----------- -----------
Total stockholders' equity ................. 10,160,860 10,160,860
----------- -----------
Total capitalization ............................. $20,585,022 $26,585,022
=========== ===========
</TABLE>
- ---------------
(1) See Note 10 of Notes to Consolidated Financial Statements.
(2) An aggregate of $10,000,000 in principal amount of debentures
is currently being offered, which offering has not yet been completed.
13
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical financial data of the
Company for each of the periods indicated in the five-year period ended January
31, 1996 which were derived from the audited consolidated financial statements
of the Company for the periods in the five-year period ended January 31, 1996.
The audited consolidated financial statements of the Company for each of the
periods in the three-year period ended January 31, 1996 are included elsewhere
in this Prospectus. This table should be read in conjunction with the audited
consolidated financial statements of the Company and the notes thereto.
<TABLE>
<CAPTION>
Year Ended January 31
---------------------------------------------------------
Income Data: 1996 1995(1) 1994 1993 1992
---------- ---------- -------- -------- ----------
Revenues: (Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Gain on sale of land
contracts................ $ 2,981 $ 2,983 $ 1,753 $ 1,433 $ 1,846
Gain on sale of real
estate................... 751 -- 67 299 94
Gain on sale of real
estate-related parties 6,530 7,365 4,811 3,249 1,948
Gain on bulk sales of
servicing rights......... 4,726 7,475 5,579 997 --
Mortgage origination fees and
gain on sale of mortgages 14,339 5,584 11,282 6,280 3,802
Servicing fees............ 6,244 4,617 1,917 851 572
Interest income........... 5,903 5,106 3,948 856 865
Other..................... 477 241 177 428 305
-------- -------- ------- ------- -------
Total revenues........ 41,951 33,371 29,534 14,393 9,432
Expenses................... 40,823 33,547 28,562 13,477 9,022
-------- -------- ------- ------- -------
Income (loss) before
federal income taxes..... 1,128 (176) 972 916 410
Provision for federal
income taxes............. 512 102 421 330 137
-------- -------- ------- ------- -------
Net income (loss)..... $ 616 $ (278) $ 551 $ 586 $ 273
======== ======== ======= ======= =======
Net income (loss) per share $ 1.44 $ (.69) $1.60 $2.15 $1.24
Ratio of earnings over fixed
charges
-historical (2).......... 1.13x -- 1.20x 1.82x 1.41x
-pro forma (3)........... 1.01x -- -- -- --
Earnings (deficiency of
earnings) over
fixed charges............. 1,128 (176) 972 916 410
</TABLE>
<TABLE>
<CAPTION>
At January 31
---------------------------------------------------------
Balance Sheet Data: 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Assets:
Cash.................. $ 2,730 $ 2,931 $ 4,782 $ 3,699 $ 3,160
Mortgages held for resale.. 63,306 15,702 39,250 14,084 7,154
Other................. 69,155 58,479 32,813 10,849 5,450
-------- ------- ------- ------- -------
Total assets....... $135,191 $77,112 $76,845 $28,632 $15,764
======== ======= ======= ======= =======
Liabilities:
Notes payable(4)...... $ 86,598 $44,843 $54,549 $13,824 $ 8,058
11% Subordinated Debentures
due 1997............. 4,921 4,938 4,938 3,171 --
11% Subordinated Debentures
due 2000............. 4,253 -- -- -- --
Other................. 29,258 18,041 8,495 6,465 5,090
-------- ------- ------- ------- -------
Total liabilities.. $125,030 $67,822 $67,982 $23,460 $13,148
Redeemable Common Stock(5) -- -- 300 300 300
Stockholders' equity....... 10,161 9,290 8,563 4,872 2,316
-------- ------- ------- ------- -------
Total liabilities and
stockholders' equity.. $135,191 $77,112 $76,845 $28,632 $15,764
======== ======= ======= ======= =======
</TABLE>
14
<PAGE> 18
<TABLE>
<CAPTION>
At January 31
------------------------------------------------------
Operating Data: 1996 1995 1994 1993 1992
--------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Loan production:
Number of loans originated 7,928 8,224 8,910 2,448 1,185
Average loan balance... $ 80 $ 69 $ 77 $ 83 $ 70
Total loans originated... $632,281 $564,235 $687,484 $203,087 $82,708
Number of full-time
employees................ 412 336 448 202 149
</TABLE>
- ------------------
(1) On July 19, 1994 the Company purchased substantially all of the revenue
producing activities of Liberty National Mortgage Corporation. See Note
15 of Notes to Consolidated Financial Statements.
(2) The ratio of earnings to fixed charges was computed by dividing (a) net
income (loss) for the period plus fixed charges by (b) fixed charges,
which consist of interest expense, amortization of debt expense and that
portion of rentals that represents interest. The ratio of earnings over
fixed charges and preferred dividends was 1.12x, 1.19x, 1.79x and 1.41x
for the years ended January 31, 1996, 1994, 1993 and 1992, respectively.
Earnings were insufficient to cover fixed charges for the year ended
January 31, 1995. The deficiency of earnings over fixed charges and
preferred dividends was $.6 million for the year ended January 31, 1995.
(3) The pro forma data reflects the Series 1996 Debenture interest expense,
assuming all such debentures are sold, and reflects debt issuance costs
over a five year period using the interest method.
(4) See Note 3 of Notes to Consolidated Financial Statements.
(5) These shares were redeemed in April 1994. See Note 5 of Notes to
Consolidated Financial Statements.
15
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary financing needs are for mortgage banking activities,
loan funding activities, operating cash flows and the purchase of mortgage
servicing rights.
Loan funding activities are primarily financed through the use of mortgage
warehouse lines of credit with commercial banks. See Note 3 of Notes to
Consolidated Financial Statements. The Company also provides funding for loans
by using a technique known as "table funding", which is common in the mortgage
banking industry. In this case, funds are advanced directly to the title
company for closing from a third party source of funds, typically another
mortgage bank or a financial institution. This technique avoids the use of the
Company's warehouse lines of credit, but proves less profitable as a result of
fees charged by the third party provider of funds. For the past year, the
Company financed approximately 93% of its mortgage originations using its
warehouse lines of credit and approximately 7% with table funding sources.
The Company currently has a $25 million warehousing line of credit,
through MCA Mortgage, with PNC Mortgage Bank, N.A. This revolving warehousing
line of credit provides financing for funding and originating residential
mortgage loans. Interest on bank borrowings are based on the bank's prime
rate. Mortgage loans held for sale are pledged as collateral. This facility
is scheduled to expire on July 1, 1996. The Company also has a $30 million
Whole Loan Financing Facility, through MCA Mortgage, with DLJ Mortgage Capital,
Inc. This facility also provides financing for funding and originating
residential mortgage loans. Interest on borrowings under this facility are
based on the federal funds rate plus 1.50%. Mortgage loans held for sale are
pledged as collateral and this facility may be terminated upon short notice.
This facility is scheduled to expire on June 15, 1996. The Company also has a
$10 million warehousing line of credit with Paine Webber Real Estate
Securities, Inc. ("Paine Webber"). Interest on borrowings under this facility
are based on Libor plus 1.5%. This facility is scheduled to expire on November
1, 1996. Aside from the DLJ Mortgage Capital, Inc. facility, the Company
expects to renew these warehousing lines of credit upon their respective
expirations. At January 31, 1996 a total of $63.2 million was outstanding
under these facilities. The Company also has a commitment from Bank One, Texas
N.A. to provide a $30 million warehousing line of credit. The Company expects
to close on this agreement in June 1996, however, there is no assurance that
this transaction will be completed.
The Company also utilizes mortgage loan repurchase agreements with Paine
Webber pursuant to which Paine Webber purchases mortgage loans until such time
as the loans are pooled for resale to an end investor at which time the Company
repurchases such loans. Such agreements provide for interest payments based on
the federal funds rate. These agreements can be terminated on demand.
16
<PAGE> 20
The Company utilizes a strategy of retaining servicing rights on a portion
of its loan originations in order to provide a steady stream of servicing
revenue and cash flow in future years and as a hedge against inflation and
rising interest rates. To help facilitate this strategy, the Company utilizes
three funding sources: proceeds from its $4.9 million 1992 Debenture offering
that was completed in July 1993, a bank credit facility, which was first made
available to the Company in April 1993 and proceeds from its $10 million 1994
Debenture offering, of which $4.25 million principal amount was outstanding as
of January 31, 1996. Each series of Prior Debentures, as well as the credit
facility are collateralized by certain of the Company's servicing rights and
rights to servicing income. The credit facility, which is currently at $28.5
million, is with Comerica Bank and is enhanced by a stand-by Note Purchase
Agreement between Comerica Bank and the Policemen and Firemen Retirement System
of the City of Detroit (the "Fund") whereby the Fund has agreed to provide
payment to Comerica Bank upon the occurrence of certain events of default by
the Company. This credit enhancement permits the Company to obtain a more
favorable interest rate and collateralization terms from the lending bank. In
consideration for the credit enhancement provided, the Company agreed to pay
certain fees to the Fund and provide it with an option to purchase up to 5% of
the Company's outstanding common stock, at 70% of the public offering price per
share, if the Company completes a firm commitment underwritten sale of its
common stock prior to April 30, 2000. At January 31, 1996, $28.5 million was
outstanding under the Comerica Bank credit facility.
During the years ended January 31, 1996 and 1995, mortgage servicing
rights with respect to approximately 75% and 91%, respectively, of loan
originations, or $474 million and $488 million principal amount, respectively,
were retained by the Company and financed primarily through operations, the
debenture offerings and the Comerica Bank credit facility. The Company intends
to continue the level of retained servicing and also to purchase additional
mortgage servicing rights.
As in mortgage banking, the Company also has a need to finance loan
funding activities with respect to its land contract and mortgage syndication
until such time as the loans are packaged and sold to investors. The principal
sources of this financing are two limited partnerships which have been
established in order to provide up to $4 million for this purpose. These
partnerships will terminate in December 1997. The Company is considering
several alternatives to extend or replace these financing sources at the time
of their respective terminations. There is no assurance that the Company will
be successful in extending or replacing these financing sources, however.
The Company has $3.0 million available under two $1.5 million credit
facilities with commercial banks for the acquisition and rehabilitation of
residential real property prior to resale. At January 31, 1996, $1.9 million
was outstanding under these facilities. See Note 3 of Notes to Consolidated
Financial Statements.
The Company also has $1 million available under a $1.5 million credit
facility with a commercial bank which is similar in structure to a mortgage
warehouse line of credit. This portion of the credit facility is used
exclusively for the warehousing of land contracts. The additional $0.5
17
<PAGE> 21
million is available for working capital. At January 31, 1996, $1.5 million
was outstanding under this facility. See Note 3 of Notes to Consolidated
Financial Statements.
On April 11, 1996, the Company received a commitment from the Policemen
and Firemen Retirement System of the City of Detroit to lend the Company $15
million in subordinated debt to expand its non-conforming lending business.
There is no assurance that the Company will successfully complete this
financing transaction.
During fiscal 1996, the Company's operating activities used $31.7 million.
Of this net amount, $47.0 million was used to fund the increase in mortgage
loans held for resale. The decrease in accounts receivable, primarily
receivables related to bulk sales of servicing rights, provided $4.4 million.
The Company's investing activities during fiscal 1996 used $13.5 million.
Investments in purchased servicing rights used $12.1 million. Financing
activities provided the Company $45.0 million during fiscal 1996. The Company
used proceeds from notes payable of $548.9 million to fund mortgage loans and
invest in purchased servicing rights. Proceeds from sales of mortgage loans
and investments in purchased servicing rights of $507.7 million were used to
make payments on notes payable. Sales of the Company's Series 1996 Debentures
provided $4.2 million.
RESULTS OF OPERATIONS
Revenue for the year ended January 31, 1996, increased by 25.7% to $42.0
million as compared to $33.4 million for the fiscal year ended January 31,
1995. Revenue for the year ended January 31, 1995 had increased by 13.2% as
compared to $29.5 million for the fiscal year ended January 31, 1994. Net
earnings increased by 321.8% to net earnings of $615,530 for fiscal 1996 as
compared to a net loss of $277,546 in fiscal 1995. Net earnings decreased by
$829,186 to a net loss of $277,546 for fiscal 1995 as compared to net earnings
of $551,640 in fiscal 1994. The increase in revenue during fiscal 1996 was the
result of increased mortgage origination fees, including gains on sale from
loan resale transactions, to $14.34 million in fiscal 1996 as compared to $5.58
million in fiscal 1995. Servicing fees also increased to $6.24 million in
fiscal 1996 from $4.62 million in fiscal 1995. The only revenue item to
substantially decrease was gain on bulk sales of servicing rights which
declined to $4.73 million in fiscal 1996 as compared to $7.48 million in fiscal
1995. The higher level of revenue during fiscal 1995 as compared to fiscal
1994 resulted primarily from increases in servicing fees from $1.92 million in
fiscal 1994 to $4.62 million in fiscal 1995, gain on sales of servicing rights
from $5.58 million in fiscal 1994 to $7.48 million in fiscal 1995 and
increases in sales of real estate from $4.87 million in fiscal 1994 to $7.37
million in fiscal 1995. These increases were partially offset by increases in:
(i) operating expenses from $5.2 million in fiscal 1994 and $8.16 million in
fiscal 1995 to $10.11 million in fiscal 1996, (ii) interest expense from $4.43
million in fiscal 1994 and $6.02 million in fiscal 1995 to $7.57 million in
fiscal 1996 and (iii) commissions paid to loan originators from $8.29 million
in fiscal 1994 and $4.59 million in fiscal 1995 to $5.93 million in fiscal
1996. The increase in earnings during fiscal 1996 is
18
<PAGE> 22
attributable to a general decline in interest rates during the year resulting
in increased originations, gains on loan resale and increased non-conforming
originations. The net loss during fiscal 1995 was due to significant increases
in long-term interest rates during the first six months of the year. This
severely curtailed mortgage refinancings and increased competitive pressures in
the market. The slight decrease in earnings during fiscal 1994 was primarily
due to the substantially higher than normal prepayment rate for the mortgages
included in the Company's servicing portfolio. The mortgage prepayment rate
was 36.1%, 8.9% and 9.8% during fiscal 1994, 1995 and 1996, respectively. The
increased prepayment rate in fiscal 1994 is attributable to increased
refinancing activity caused by lower interest rates over the period and the
fact that a substantial portion of the increased servicing portfolio in fiscal
1993 occurred late in the year. The amount of refinancing activity was $498
million during fiscal 1994, $173 million during fiscal 1995 and $172 million
during fiscal 1996.
Mortgage origination fees, including gains on sale from loan resale
transactions, for fiscal 1996 increased to $14.34 million as compared to $5.58
million for fiscal 1995, an increase of 157.0%. Such mortgage origination fees
had decreased in fiscal 1995 to $5.58 million as compared to $11.28 million for
fiscal 1994, a decrease of 50.6%. The total dollar volume of loans originated
increased by 12.1% to $632 million, for fiscal 1996, up from $564 million for
fiscal 1995 which represented a decrease of 17.9% down from $687 million for
fiscal 1994. The total number of loans produced decreased 3.6% from 8,224 in
fiscal 1995 to 7,928 in fiscal 1996. The total number of loans produced
decreased 7.7% from 8,910 in fiscal 1994 as compared to 8,224 in fiscal 1995.
The average loan balance decreased 11.1% from $77,159 to $68,608 from fiscal
1994 to fiscal 1995 and increased 16.2% from $68,608 to $79,753 from fiscal
1995 to fiscal 1996. The increase in the dollar volume of loan originations
during fiscal 1996 resulted from the general decline in long-term interest
rates and the continuity in production from the branches opened in fiscal 1995
for a full year. The decrease in loan originations during fiscal 1995 resulted
from significant increases in long-term interest rates which slowed refinancing
activity, as described above. Competitive pressures in the mortgage market
also increased substantially during this period, which caused a significant
decline in profit margins on a per-loan basis. Included in mortgage
origination fees are gains and losses on sale from loan resale transactions of
$3.77 million in fiscal 1996, $(.43) million in fiscal 1995 and $6.18 million
in fiscal 1994. The losses on sale from loan resale transactions during fiscal
1995 were primarily due to rising interest rates from April 1994 to October
1994, which is the Company's peak season.
During fiscal 1994, MCA opened five branch offices in Michigan and one in
Ohio. The 1994 branch additions were opened at the end of the fourth quarter
and did not affect fiscal 1994 operations. The branches opened at the end of
fiscal 1994 originated approximately $41 million in principal amount of loans
in fiscal 1995. Branches opened at the end of fiscal 1993 originated
approximately $68 million in principal amount of loans during fiscal 1994 and
$42 million in fiscal 1995. In fiscal 1995, 18 branches were opened or
acquired and originated approximately $91.2 million in principal amount of
loans during fiscal 1995 and $190.7 million in fiscal 1996. In fiscal 1996, 17
branches were opened or acquired and originated approximately $131.1 million in
principal amount of loans during fiscal 1996.
19
<PAGE> 23
In fiscal 1994, wholesale originations totalled approximately $207.76
million, in fiscal 1995, approximately $137.95 million and in fiscal 1996,
approximately $140.71 million. The decrease in wholesale originations from
fiscal 1994 to fiscal 1995 was due to a decreased supply of product that was
available from mortgage brokers due to interest rate increases. The increase
in wholesale originations from fiscal 1995 to fiscal 1996 was a result of the
Company focusing its wholesale efforts on non-conforming wholesale originations
which increased to $52.49 million in fiscal 1996 from $9.46 million in fiscal
1995. Conforming wholesale origination dropped accordingly.
Mortgage origination revenue as a percent of total mortgage origination
volume increased to 2.3% in fiscal 1996 compared to 1.0% in fiscal 1995 which
represented a decrease as compared to 1.6% in fiscal 1994. The increase from
fiscal 1995 to fiscal 1996 reflects an easing in the competitive pressures
experienced in fiscal 1995 resulting from the decline in interest rates,
increased production volume in non-conforming mortgages, which typically have
higher margins, and increased gains from loan resale transactions. These gains
represented .6% of mortgage origination revenue as a percent of total
origination volume in fiscal 1995. The decrease from fiscal 1994 to fiscal
1995 reflects the loss of gains on sale from loan resale transactions resulting
from increased interest rates. These gains represented 0.9% of mortgage
origination revenue as a percent of total origination volume in fiscal 1994.
For fiscal 1994, retail originations totalled approximately $479.73 million, in
fiscal 1995, approximately $426.29 million and in fiscal 1996, approximately
$491.57 million.
During fiscal 1996, the Company recorded revenues of $4.73 million (11.3%
of total revenues) from the sale of bulk servicing rights to approximately $940
million of mortgage loans; during fiscal 1995, the Company recorded revenues of
$7.48 million (22.4% of total revenues) from the sale of bulk servicing rights
to approximately $1.7 billion of mortgage loans and during fiscal 1994, the
Company recorded revenues of $5.58 million (18.9% of total revenues) from the
sale of bulk servicing rights to approximately $446 million of mortgage loans.
Gain on bulk sales of servicing rights as a percent of servicing rights sold
increased to 0.5% in fiscal 1996 from 0.4% in fiscal 1995, which had decreased
from 1.3% in fiscal 1994. The increase in fiscal 1996 was primarily due to the
net effect of a decrease to $500 million of the bulk sales involving servicing
previously purchased and a slight decline in market prices due to declining
interest rates. The gain on bulk sales of this bulk-purchased servicing is
lower because the Company's basis in these servicing rights is much greater
than in originated mortgages. The decrease in fiscal 1995 was primarily
attributable to $1.2 billion of the bulk sales involving servicing which was
previously purchased by the Company in bulk.
Interest income increased from $3.95 million in fiscal 1994 to $5.11
million in fiscal 1995, an increase of 29.4%, and increased to $5.90 million in
fiscal 1996, an increase of 15.6% as compared to fiscal 1995. Interest income
is earned primarily on loans held by the Company pending resale in the
secondary market. The increase in fiscal 1996 resulted from increased
production volumes in general and specifically increased non-conforming
production volumes which typically carry higher interest rates. The increase
in fiscal 1995 resulted from increased interest rates and loan-holding periods
averaging 43 days as compared to 38 days in fiscal 1994.
20
<PAGE> 24
Servicing fee revenue increased from $1.92 million in fiscal 1994 to $4.62
million in fiscal 1995, an increase of 140.63%, and increased to $6.24 million
in fiscal 1996 an increase of 35.2% as compared to fiscal 1995. For fiscal
1995 as compared to fiscal 1996, the Company's servicing portfolio increased
from $1.3 billion to $2.2 billion and from 16,372 loans serviced to 27,357
loans serviced. For fiscal 1994 as compared to fiscal 1995, the Company's
servicing portfolio increased from $1.1 billion to $1.3 billion and from 15,900
loans serviced to 16,372 loans serviced. Most of the increase in the servicing
portfolio over these periods was due to the addition of servicing for Freddie
Mac and Fannie Mae mortgages. At January 31, 1996, the Company was servicing
mortgages owned by Freddie Mac and Fannie Mae with outstanding balances of
approximately $2.1 billion. The addition of Freddie Mac and Fannie Mae
servicing resulted in a higher average loan balance in the servicing portfolio,
which increased from $69,530 at fiscal year end 1994 to $79,625 at fiscal year
end 1995 and $80,650 at fiscal year end 1996. Average servicing revenue per
loan increased from $192 per loan for fiscal 1994 to $286 per loan for fiscal
1995 and decreased to $228 per loan for fiscal 1996. These variances are
primarily due to the timing of bulk sales and purchases of mortgage servicing
rights. In fiscal 1996 and 1994, the majority of bulk purchases occurred late
in the year, thus decreasing the average servicing revenue per loan. Servicing
fees, measured in terms of an average percentage applied to the amount of the
outstanding mortgage, have not materially changed from year to year.
The increase in the Company's servicing portfolio over the past five years
reflects the Company's strategy of developing a larger servicing portfolio.
During fiscal 1996, 1995 and 1994, the Company retained servicing rights with
respect to approximately $474 million, $488 million and $626 million of
mortgages it originated and sold to others and purchased, during fiscal 1996
and 1994, approximately $619 million and $472 million of servicing rights from
other institutions, net of servicing rights sold to other institutions. During
fiscal 1995, the Company sold servicing rights in excess of servicing rights
purchased in the amount of $166 million. This strategy of increasing the
Company's servicing portfolio is intended to result in a counter-cyclical
source of cash flow and profits in the future. Furthermore, with current
mortgage interest rates fairly stable and historically rather low, management
believes that the probability of future refinancing of currently-originated
mortgages is low. This anticipated decline in refinancing activity will, in
management's opinion, increase the value of the Company's mortgage servicing
rights and afford the Company a lower-risk opportunity to pursue such a
strategy.
The aggregate of gains on the sale of real estate-related parties and
gains on the sale of real estate increased from approximately $4.9 million in
fiscal 1994 to $7.4 million in fiscal 1995 and decreased to $7.3 million in
fiscal 1996. Of these amounts, gains on the sale of real estate-related
parties represented approximately $4.8 million in fiscal 1994, $7.4 million in
fiscal 1995 and $6.5 million in fiscal 1996. This reflects the Company's
strategy to develop its business of real estate limited partnership
syndications through a former subsidiary. During fiscal 1996, 1995 and 1994,
723, 735 and 415 income producing properties were sold. Typically, these
properties are acquired in distressed situations, requiring rehabilitation
expenditures or having substantial tax delinquencies which need to be paid.
21
<PAGE> 25
Gains on the sale of land contracts were stable during fiscal 1996 and
fiscal 1995, remaining approximately $3.0 million for both years. Gains on the
sale of land contracts increased during fiscal 1995, as compared to
approximately $1.8 million in fiscal 1994. This reflects an increase in the
number of loan originators employed by the Company and increased marketing
efforts. In fiscal 1996, the Company syndicated 15 pass-through pools of real
estate related loans with a total of $21.9 million of loans, as compared to 15
pools with a total of $22.5 million of loans in fiscal 1995 and 13 pools with a
total of $14.2 million of loans in fiscal 1994. Gains as a percentage of total
syndication amounts increased from 12.3% to 13.3% from fiscal 1994 to fiscal
1995 and increased to 13.6% in fiscal 1996. These percentages are consistent
with past results.
Expenses for fiscal 1996 increased by $7.3 million over fiscal 1995, from
a total of $33.5 million to a total of $40.8 million; an increase of 21.8%.
Expenses for fiscal 1995 increased by $5.0 million over fiscal 1994, from a
total of $28.6 million to a total of $33.5 million; an increase of 17.5%.
These increases were in line with the overall increase in revenue during these
three years. Higher expenses resulted from increases in virtually every
category of expense, reflecting the Company's overall growth to meet increases
in production levels and the number of loans serviced. As a percentage of
revenue, however, payroll and commissions dropped from 52.2% to 46.7% and 42.6%
for fiscal 1994, fiscal 1995 and fiscal 1996, respectively. This increased
productivity reflects systems enhancements from improved technology and the
replacement of key managers in many operational areas. General and
Administrative expense increased from 17.6% to 24.5% as a percentage of revenue
from fiscal 1994 to fiscal 1995 and decreased to 24.1% as a percentage of
revenue for fiscal 1996. In fiscal 1995, refinancings, which increase payroll
and commissions but not fixed overhead, dropped significantly as compared to
fiscal 1994 and the Company was forced to open a number of branches and carry
branches that would normally be closed to maintain production levels. During
fiscal 1996, the Company opened 17 new branches and closed 12 underperforming
locations. The Company did not receive the benefit of a full year's production
for the new branches and continued to carry some of the closed branches' costs
resulting in historically high general and administrative expenses.
Amortization expense decreased from $2.01 million in fiscal 1994 to $1.92
million in fiscal 1995 due primarily to a significant drop in refinancings,
that was partially offset by the increased size of the portfolio. In fiscal
1996, amortization increased to $3.3 million. This results from the increased
size of the servicing portfolio and the corresponding runoff and increased
amortization of certain deferred charges and other assets.
The Company is party to financial instruments with off-balance-sheet risk
in the normal course of business through the production and sale of mortgage
loans and the management of interest rate risk. These financial instruments
include commitments to extend credit and forward contracts to deliver and sell
loans to investors. The Company is exposed to credit loss in the event of
nonperformance by the counter-parties. However, the Company does not
anticipate such nonperformance and the Company's exposure to credit risk with
respect to commitments to extend credit are limited due to the non-recourse
nature of the loans upon sale to investors meeting certain
22
<PAGE> 26
requirements. At January 31, 1994, 1995 and 1996, respectively, the Company
had approved loans that had not yet closed amounting to approximately $31.84
million, $23.08 million and $74.3 million. See Note 9 of Notes to Consolidated
Financial Statements.
INFLATION
Inflation affects the Company primarily in the mortgage banking operations
as a result of its impact on interest rates. Historically, interest rates have
increased during periods of high inflation and this has had a negative impact
on the Company's mortgage origination volume. Conversely, during periods of
low inflation interest rates have also been low and this has had a positive
impact on mortgage originations.
The total dollar volume of land contracts originated decreased to $21.9
million, for fiscal 1996, as compared to $22.5 million in fiscal 1995, which
represented an increase as compared to $14.2 million, in fiscal 1994. The
Company's land contract originations volume tends to run counter-cyclical to
the mortgage origination cycle described above. As mortgage interest rates
increase, especially above 11%, the use of land contract financing increases
and has a positive impact on land contract originations. As interest rates
decrease, mortgage financing activity increases and land contract originations
tend to decrease.
The Company's strategy of increasing its servicing portfolio may also act
as an inflationary hedge. As interest rates increase, prepayments decrease,
which decreases amortization expense and increases the earnings potential of
the servicing portfolio. However, during periods of low inflation and
decreasing interest rates, prepayments increase, which increases amortization
expense and results in a decrease in the earnings potential of the servicing
portfolio.
SEASONALITY
The mortgage banking industry is usually subject to an unpredictable
degree of seasonal trends. These trends reflect the general pattern of
nationwide home sales. Such sales typically peak during the spring and summer
seasons and decline to lower levels from October through January. In an effort
to mitigate this, the Company has opened eight branch offices in Florida.
BUSINESS
MORTGAGE BANKING
Mortgage banking is the business of acting as a financial intermediary in
the origination of mortgage loans, the holding or warehousing of such loans,
the subsequent marketing of such loans to investors and the ongoing management
or servicing of such loans during the repayment term. Mortgage bankers earn
revenue in each of the four phases of the mortgage banking process:
origination, warehousing, marketing, and servicing.
23
<PAGE> 27
Origination. The origination of mortgage loans produces revenue through
fees paid by the borrower upon applying for a loan and at the loan closing.
The origination process involves providing competitive mortgage loan rates,
soliciting loan applications, performing title and credit review and funding
loans at closing. The Company originates mortgage loans through direct
solicitation of borrowers by its own sales force and through referrals from
real estate brokers, builder-developers and others (commonly referred to as
retail origination). In connection with the origination of each loan, the
Company prepares mortgage documentation, conducts credit checks, has the
property appraised by independent appraisers and closes the loan. The
Company's underwriting standards and procedures with respect to loans it
originates, as described above, conform to the requirements of its mortgage
loan investors. Referrals from real estate brokers account for the largest
portion of the Company's originated loans. In addition, advertising is used in
the local markets where offices are located and generates additional
origination activity. During fiscal 1996, retail loans aggregating
approximately $193 million (39% of all retail loans) related to properties
located in Michigan, $57 million (11% of all retail loans) related to
properties located in Indiana, $85 million (17% of all retail loans) related to
properties located in Florida, $46 million (9% of all retail loans) related to
properties located in Ohio, $55 million (11% of all retail loans) related to
properties in Illinois and the remaining retail loans related to properties
located in various other states. During fiscal 1995, retail loans aggregating
approximately $234 million (59% of all retail loans) related to properties
located in Michigan, $51 million (13% of all retail loans) related to
properties located in Indiana, $31 million (8% of all retail loans) related to
properties located in Washington, $48 million (12% of all retail loans) related
to properties located in Ohio, and the remaining retail loans related to
properties located in various other states. By comparison, during fiscal 1994,
retail loans aggregating approximately $289.37 million (59% of all retail
loans) related to properties located in Michigan, $96.26 million (19% of all
retail loans) related to properties located in Indiana, $54.23 million (11% of
all retail loans) related to properties located in Washington and $33.70
million (7% of all retail loans) related to properties located in Ohio, and the
remaining retail loans related to properties located in various other states.
The Company currently purchases a substantial portion of its originated
mortgage loans through "wholesale" operations. Wholesale operations involve
the origination of loans by unrelated mortgage companies which prepare the
necessary documentation, but leave the credit evaluation, property appraisal
and loan funding functions for the Company to perform. The standards of loan
documentation by such unrelated mortgage company originators may not be as
stringent as the standards applied by the Company on its own direct
originations. For each wholesale loan the Company's credit evaluation and
property appraisal procedures are the same as for its retail originations.
During fiscal 1996, wholesale loans aggregating approximately $11 million (8%
of all wholesale loans) related to properties located in Florida, loans
aggregating approximately $66 million (47% of all wholesale loans) related to
properties located in Michigan, loans aggregating approximately $28 million
(20% of all wholesale loans) related to properties located in Illinois, loans
aggregating approximately $25 million (18% of all
24
<PAGE> 28
wholesale loans) related to properties located in Ohio and the remaining
wholesale loans related to properties located in various other states. During
fiscal 1995, wholesale loans aggregating approximately $45 million (33% of all
wholesale loans) related to properties located in Florida, loans aggregating
approximately $35 million (25% of all wholesale loans) related to properties
located in Michigan, loans aggregating approximately $17 million (12% of all
wholesale loans) related to properties located in Indiana, loans aggregating
approximately $9 million (7% of all wholesale loans) related to properties
located in Oregon and the remaining wholesale loans related to properties
located in various other states. By comparison, during fiscal 1994, 1,220
wholesale loans aggregating approximately $85.42 million (41% of all wholesale
loans) related to properties located in Florida, 718 loans aggregating
approximately $46.69 million (22% of all wholesale loans) related to properties
located in Michigan, 513 loans aggregating approximately $30.8 million (15% of
all wholesale loans) related to properties located in Indiana and 198 loans
aggregating approximately $12.87 million (6% of all wholesale loans) related to
properties located in Oregon, and the remaining wholesale loans related to
properties located in various other states.
The Company is engaged in the origination of conventional mortgage loans,
secured by one- to four-family residential properties (including condominiums),
that conform to the requirements for sale to either the Federal National
Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage
Corporation ("Freddie Mac"). The Company also originates non-conforming
conventional loans that exceed the maximum amounts qualifying for sale to
Freddie Mac or Fannie Mae (currently $207,000) but that otherwise conform to
their requirements ("jumbo loans"). The Company's principal mortgage banking
subsidiary, MCA Mortgage, is an approved seller/servicer for Freddie Mac, the
Government National Mortgage Association ("Ginnie Mae") and Fannie Mae, while
its other principal subsidiary, MCA, is an approved seller/servicer for Freddie
Mac. In addition, MCA Mortgage and MCA are qualified to originate mortgage
loans insured by the Federal Housing Administration ("FHA") and mortgage loans
partially guaranteed by the Veterans Administration ("VA"), which qualify for
pooling by Ginnie Mae and qualify for sale to other institutional investors.
The Company also originates loans which do not conform to Freddie Mac or
Fannie Mae requirements. These "non-conforming" loans are typically made to
self-employed individuals and others unable to meet the underwriting standards
for conventional lending. Generally, these loans carry higher interest rates
and fees commensurate with the additional credit risk. These loans are
typically sold on the secondary market to a different group of investors than
the conventional loans originated by the Company. The Company expanded its
originations in this market through the acquisition of MCA-Ohio in July 1995, a
company which has been engaged in this type of lending since 1993. In fiscal
1997, the Company hopes to aggressively expand its originations of
non-conforming loans by employing the $15 million committed to the Company by
the Policemen and Firemen Retirement System of the City of Detroit to recruit
loan officers with non-conforming lending experience, open non-conforming
lending branches and potentially acquire other non-conforming lenders.
25
<PAGE> 29
The following table sets forth for the periods indicated the number,
dollar volume and percentage of total volume of the Company's loan production
(dollars in thousands except Average Loan Balances):
<TABLE>
<CAPTION>
Year ended January 31,
-------------------------------------
1996 1995 1994
-------- -------- ----------
<S> <C> <C> <C>
RETAIL LOANS
Conventional Loans:
Number of Loans. . . . . . 2,715 2,241 1,792
Volume of Loans. . . . . . $243,154 $186,452 $225,111
Percent of Total Volume. . 38.47% 33.04% 32.74%
FHA/VA Loans:
Number of Loans. . . . . . 2,669 2,681 3,181
Volume of Loans. . . . . . $202,803 $186,136 $215,146
Percent of Total Volume. . 32.07% 32.99% 31.30%
Non-Conforming Loans:
Number of Loans. . . . . . 581 1,425 1,142
Volume of Loans. . . . . . $ 34,133 $ 42,301 $ 19,188
Percent of Total Volume. . 5.40% 7.50% 2.79%
Jumbo Loans
Number of Loans. . . . . . 40 41 61
Volume of Loans. . . . . . $ 11,478 $ 11,397 $ 20,281
Percent of Total Volume. . 1.81% 2.02% 2.95%
Average Loan Balance . . . . . . $ 81,860 $ 66,732 $ 74,830
Total Volume of Loans(1) . . . . $491,568 $426,286 $479,726
WHOLESALE LOANS(2)
Conventional Loans:
Number of Loans. . . . . . 617 655 1,664
Volume of Loans. . . . . . $ 60,590 $ 54,740 $133,310
Percent of Total Volume. . 9.58% 9.70% 19.39%
FHA/VA Loans:
Number of Loans. . . . . . 309 1,059 1,066
Volume of Loans. . . . . . $ 27,158 $ 73,746 $ 73,428
Percent of Total Volume. . 4.30% 13.07% 10.68%
Non-Conforming Loans:
Number of Loans. . . . . . 995 122 *
Volume of Loans. . . . . . $ 52,485 $ 9,463 *
Percent of Total Volume. . 8.30% 1.68% *
Jumbo Loans
Number of Loans. . . . . . 2 * 4
Volume of Loans. . . . . . $ 480 * $ 1,020
Percent of Total Volume. . .07% * .15%
Average Loan Balance . . . . . . $ 73,174 $ 75,136 $ 75,990
Total Volume of Loans(1) . . . . $140,713 $137,949 $207,758
</TABLE>
26
<PAGE> 30
<TABLE>
<CAPTION>
TOTAL LOANS
<S> <C> <C> <C>
Number of Loans. . . . . . 7,928 8,244 8,910
Volume of Loans. . . . . . $632,281 $564,235 $687,484
Average Loan Balance . . . $ 79,753 $ 68,608 $ 77,159
</TABLE>
- ---------------
*Indicates that these types of loans were not originated by the Company during
the applicable period.
(1) The total volume of retail loans for each of fiscal 1993 and 1992 was
$151.14 million and $98.98 million, respectively. The total volume of
wholesale loans for each of fiscal 1993 and 1992 was $51.95 million and
$67.84 million, respectively. Further detail for fiscal 1993 and 1992 is
not available.
(2) During fiscal 1996, Watson Financial Group ("Watson") was responsible for
13% of the Company's wholesale originations. Watson is not affiliated
with the Company. During fiscal 1995, no single company was responsible
for greater than 10% of the Company's wholesale originations. During
fiscal 1994, Residential Mortgage Services, Inc. ("Residential") was
responsible for 21% of the Company's wholesale originations. Residential
was responsible for 563 loans aggregating approximately $43.1 million.
Residential is not affiliated with the Company.
27
<PAGE> 31
At January 31, 1996, the Company had applications in process for
approximately 1,947 mortgage loans, aggregating approximately $186 million.
By comparison, on January 31, 1995, the Company had applications in process for
approximately 1,387 mortgage loans aggregating approximately $163 million. The
Company anticipates, based on past history, that 80% to 85% of the loan
applications will close within 45 to 90 days.
Warehousing. Warehousing is the term used to describe the process of
holding mortgage loans pending their sale to investors (typically financial
institutions) or into the secondary market. During the warehousing period the
Company earns income equal to the difference between the interest received on
the mortgage loans and the interest paid on short-term advances from banks
which are used typically to fund the mortgage loans. During periods when
short-term warehouse borrowing rates exceed long-term mortgage lending rates,
the warehousing of mortgage loans can result in a loss.
Pending sale and delivery to investors, the Company's mortgage loans are
funded almost entirely by borrowings under warehousing lines of credit from
banks. The Company typically holds mortgage loans for a period of up to 60
days after closing in order to prepare them for sale. Borrowed funds are
repaid when the Company receives payment upon the sale of the loans.
Accordingly, the Company is dependent on loan sales to free warehousing credit
lines in order that new loans can be closed.
Among its short-term financing sources, the Company maintains a mortgage
warehousing line of credit with PNC Mortgage Bank, N.A. and a mortgage loan
financing facility with DLJ Mortgage Capital, Inc. As is customary in the
industry, these credit facilities can be terminated on demand or upon
relatively short notice. In such an event, the Company would seek replacement
or new credit facilities from other lenders for these existing lines of credit
on terms at least as favorable. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
Marketing. The offering, sale, packaging and delivery of closed mortgage
loans to investors is the activity which distinguishes a mortgage banker as a
financial intermediary from a portfolio lender or permanent investor.
Marketing mortgage loans is the most complex aspect (both financially and
operationally) of the mortgage banking business. It requires matching the
needs of the retail origination market (consisting of home buyers and
homeowners seeking new mortgages) with the needs of the secondary market for
mortgage loans (consisting of securities broker-dealers, depository
institutions, insurance companies, pension funds and other investors).
Conventional mortgage loans (i.e., those not guaranteed or insured by agencies
of the federal government), which are secured by one-to-four family residential
properties (including condominiums) and which comply with applicable
requirements, are packaged for direct sale to mortgage investors. In addition,
there is an active private market for mortgage loans which have not been pooled
or securitized.
28
<PAGE> 32
Factors which may influence the market value of packaged loans include the
general level of interest rates, the types of loans (e.g., conventional
mortgage loans or larger jumbo loans), interest payment and principal
amortization schedules (e.g., self-amortizing or balloon, fixed-rate or indexed
adjustable-rate, equal monthly payment or adjustable payment), type of
mortgaged property (e.g., one-to four family detached, row or townhouse,
condominium or planned unit development), ratio of loan proceeds to appraised
property value, property location, credit profile, and whether loans are
packaged into pools (represented by securities) or sold separately on a whole
loan basis.
The following table sets forth for the periods indicated, the Company's
loan production by type of interest payment and principal amortization schedule
as well as loan to value ratio information (dollars in thousands):
<TABLE>
<CAPTION>
Year ended January 31,
--------------------------------
1996 1995 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
30-year Fixed Rate:
Number of Loans . . . . . 5,349 4,569 5,084 818
Volume of Loans . . . . . $424,994 $339,394 $448,762 $ 94,297
Percent of Total Volume . 67.22% 60.15% 65.28% 46.43%
15-year Fixed Rate:
Number of Loans . . . . . 611 844 1,953 673
Volume of Loans . . . . . $ 40,137 $ 49,536 $142,340 $ 50,985
Percent of Total Volume . 6.35% 8.78% 20.70% 25.11%
Adjustable Rate ("ARMS"):
Number of Loans . . . . . 1,239 1,217 299 248
Volume of Loans . . . . . $114,619 $108,983 $ 34,073 $ 26,534
Percent of Total Volume . 18.13% 19.32% 4.96% 13.07%
Other (1):
Number of Loans . . . . . 69 352 194 245
Volume of Loans . . . . . $ 5,225 $ 6,154 $ 3,121 $ 3,408
Percent of Total Volume . 0.82% 1.09% 0.45% 1.68%
Balloon Payment:
Number of Loans . . . . 660 1,242 1,380 464
Volume of Loans . . . . $ 47,306 $ 60,167 $ 59,188 $ 27,863
Percent of Total Volume . 7.48% 10.66% 8.61% 13.71%
Total Number of Loans(2) . . . 7,928 8,224 8,910 2,448
Total Volume(2) . . . . . . . $632,281 $564,235 $687,484 $203,087
Total Loan to Value Percent. . 83.8% 90.5% 94.5% *
</TABLE>
- ---------------
*Indicates that the information is not available for this period.
(1) This category represents mortgages and land contracts with other than 15 or
30 year terms, which have no balloon payment.
(2) The total number of loans for fiscal 1992 was 2,121 and the total volume of
loans for fiscal 1992 was $166,822. Further detail for fiscal 1992 is not
available.
29
<PAGE> 33
The following table sets forth for the periods indicated, the number,
dollar volume and percent of total volume of the Company's loan production by
occupancy status and type of mortgaged property (dollars in thousands):
<TABLE>
<CAPTION>
Year ended January 31,(1)
------------------------------------------
1996 1995 1994 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Detached - Single Family
Owner Occupied:
Number of Loans. . . . . 6,943 6,916 7,441 1,864
Volume of Loans. . . . . $578,154 $506,714 $636,440 $178,515
Percent of Total Volume. 91.44% 89.81% 92.58% 87.90%
Non-owner occupied:
Number of Loans. . . . . 133 947 1,088 447
Volume of Loans. . . . . $ 6,121 $ 28,603 $ 23,441 $ 14,427
Percent of Total Volume. 0.97% 5.07% 3.41% 7.11%
Other (2):
Number of Loans. . . . . 66 39 64 9
Volume of Loans. . . . . $ 5,929 $ 3,310 $ 4,894 $ 698
Percent of Total Volume. 0.94% 0.59% 0.71% 0.34%
Multi-Unit and Commercial
Owner Occupied:
Number of Loans. . . . . 360 262 265 101
Volume of Loans. . . . . $ 28,919 $ 19,909 $ 18,895 $ 7,655
Percent of Total Volume. 4.57% 3.53% 2.75% 3.77%
Non-owner occupied:
Number of Loans. . . . . 426 60 52 27
Volume of Loans. . . . . $ 13,158 $ 5,699 $ 3,814 $ 1,792
Percent of Total Volume. 2.08% 1.00% 0.55% 0.88%
</TABLE>
- ---------------
(1) This information is not available for fiscal 1992.
(2) Includes second homes and vacant land.
The sale of mortgage loans produces a net gain or loss equal to the sum of
(i) the difference between the principal amount of the loans and the net price
at which the loans are sold (the cash gain or loss on sales) and (ii) the
present value of the difference (the "premium on sale of mortgage loans"), if
any, between the stated interest rate collected by the mortgage banker from the
mortgage loan borrowers and the interest rate paid by the mortgage banker to
the purchasers of the loans, net of a normal servicing fee.
The Company typically holds its mortgage loans for up to 60 days before
selling them to investors. The Company sells conforming loans either directly
on a loan-by-loan basis to Freddie Mac, Fannie Mae or other financial
institutions, or by a process of "securitization" of loan pools. Conforming
loans and loans qualifying for securitization through Ginnie Mae programs may
be grouped in pools and assigned to Freddie Mac, Fannie Mae or Ginnie Mae, as
applicable, which issues a mortgage-backed security ("MBS") representing an
undivided interest in the loan pool. For issuing the MBS, Freddie Mac, Fannie
Mae or Ginnie Mae receives an annual fee, up to .50% of the declining principal
amount of the loan pool. The Company, through investment bankers, may then
sell these MBSs to investors or hold them for investment.
30
<PAGE> 34
Loan pools may be sold to Freddie Mac or Fannie Mae, or securitized in the
form of Ginnie Mae mortgaged-backed securities and sold to institutional
investors with or without recourse in the event of default by the borrowers.
If a loan pool is sold without recourse, Freddie Mac will typically charge a
fee for issuing the MBS which is .05% to .07% higher than if such loan pool
were sold with recourse. The Company decides to sell loan pools with or
without recourse based primarily upon capital market conditions and perceived
risks of the terms of such mortgage loan documents. To date all of the loan
pools sold by the Company to Freddie Mac or Fannie Mae or through Ginnie Mae
programs have been sold on a non-recourse basis.
Mortgage loans are also sold on a loan-by-loan basis to banks, mortgage
companies and other private investors and, in the case of conforming loans, may
be sold to Freddie Mac or Fannie Mae. Such individual loan sales are typically
made by the Company on a non-recourse basis. During fiscal 1996, 1995, 1994
and 1993, the Company made $632.3 million, $564.2 million, $687.4 million and
$203.1 million of non-recourse loans, respectively, and did not sell any loans
with recourse. Loans underwritten and sold may be subject to repurchase if the
underwriting standards of the investor are not met, potentially resulting in
actual loss and/or the limitation of the Company's liquidity.
The Company packages substantially all of its FHA-insured and
VA-guaranteed mortgage loans into pools of loans sold in the form of
pass-through mortgage-backed securities guaranteed by Ginnie Mae. With respect
to loans secured through Ginnie Mae programs, the Company is insured against
foreclosure loss by the FHA or partially guaranteed against foreclosure loss by
the VA (at present generally 25% to 100% of the loan). Since the Company is
not an end investor in these types of loans, its risk with respect to these
loans is minimal. FHA-insured and VA-guaranteed mortgage loans represent
approximately 33% of the Company's originations in any given year. The
discontinuance of these programs would have a limited impact upon the Company
due to the Company's ability to originate a substantial volume of conventional
loans which enables the Company to market mortgage loans to Freddie Mac, Fannie
Mae or other investors.
The Company commits to sell loans in an amount equal to the closed loans
held in inventory, plus a portion of the loans that the Company has committed
to make but has not yet closed. This enables the Company to mitigate the
interest rate risk resulting from the fact that market interest rates may
change between the time that the Company commits to make or purchase a loan and
the time the Company commits to sell or sells such loans. The portion of loans
that have not yet closed which the Company commits to sell depends on numerous
factors, including the total amount of the Company's outstanding commitments to
make loans, the portion of such loans that is likely to close, the timing of
such closings and anticipated changes in interest rates. The Company
constantly monitors these factors and adjusts its commitments position
accordingly. The Company's commitment position may consist of mandatory
forward commitments on mortgage-backed securities or mortgage loans, options on
mortgage-backed securities or treasury futures contracts, or outright futures
contracts. See Note 9 of Notes to Consolidated Financial Statements for a
discussion of financial instruments with off-balance-sheet risk.
31
<PAGE> 35
Servicing. At January 31, 1996, the Company owned servicing rights for
mortgages with outstanding balances of approximately $2.1 billion and to land
contracts with outstanding net balances of approximately $97 million. The
Company intends to increase its servicing of residential mortgage loans, and to
maintain a mortgage and land contract servicing system that emphasizes cash
management and compliance with investor servicing requirements. To this end,
the Company intends to purchase conventional mortgage loan servicing rights
from other unaffiliated loan servicers.
The Company also obtains additional servicing through the retention of
servicing with respect to mortgages and land contracts that it originates and
sells to others. For residential mortgage loans which it originates, the
Company retains the servicing related to most of these loans temporarily, then
sells the servicing rights from time to time on the open market. The Company
intends to restrict its purchases of mortgage servicing to servicing that can
be purchased at a price that provides targeted rates of return, and is
compatible with the Company's systems and processes. During fiscal 1996, the
Company has purchased servicing for a total of approximately $1.4 billion of
mortgage loans and has sold servicing for a total of approximately $700 million
of mortgage loans.
A loan servicing portfolio creates an earning asset in the form of income
created from servicing fees, which range generally from 0.25% to 0.50% per year
for mortgage loans and from 0.25% to 2.5% per year for land contracts, based on
the declining principal balance of the mortgage loans or the declining net
principal balances of land contracts serviced, and the potential interest
earnings on escrow funds held until the time payment for taxes and insurance
must be made. Based upon current market conditions, the Company estimates that
servicing rights for residential mortgage loans and land contracts have a
market value from 1.25% to 2.5% and from 1.25% to 4.0%, respectively, of the
principal balance of the mortgage loans and the declining net principal
balances of land contracts serviced.
One of the Company's strategies is to build and retain its servicing
portfolio. The Company believes that it has developed systems that enable it
to service mortgage and land contract loans efficiently and therefore enhance
the returns it can earn from investments in servicing rights. In addition, the
Company believes that the earnings from its servicing portfolio may to some
extent offset the effect of interest rate fluctuations on loan origination
revenue. In general, the value of the Company's loan servicing portfolio may
be adversely affected as mortgage interest rates decline and expected loan
prepayments increase. Income generated from the Company's loan servicing
portfolio also may decline in such an environment. On the other hand, these
effects may be offset somewhat by an increase in originations and servicing
income attributable to new loans which historically increase in periods of
declining mortgage interest rates. However, there can be no assurance that low
mortgage rates will result in increased loan originations, particularly during
periods of slow or negative economic growth. As of January 31, 1996, the
weighted average rate on mortgages serviced by the Company but owned by others
was 7.9% and the weighted average rate on mortgages and land contracts serviced
by the Company but owned by MCA Mortgage or MCA-sponsored pass-through pools
was 10.9%.
32
<PAGE> 36
The following table sets forth information about the Company's retail and
wholesale loan origination and servicing activities:
<TABLE>
<CAPTION>
Year ended January 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- -------- -------- --------
(dollars in thousands, except average loan balance)
<S> <C> <C> <C> <C> <C>
Beginning loan
servicing portfolio ..... $1,303,628 $1,105,534 $ 234,743 $ 44,380 $ 21,547
Add:
Loans purchased and
originated by the
Company for resale...... 632,281 536,881 687,484 203,087 166,822
Loans purchased by the
Company for syndication. 25,597 27,354 19,188 16,475 8,934
Mortgage servicing
purchased (net of sales) 618,780 (166,577) 471,587 98,808 --
---------- ---------- ---------- --------- ---------
$2,580,286 $1,503,192 $1,413,002 $ 362,750 $ 197,303
Less:
Amortization ............... (43,491) (43,228) (36,832) (1,146) --
Prepayments of loans ....... (172,100) (107,571) (210,305) (7,773) (3,023)
Loans sold with
servicing sold.......... (158,235) ( 48,765) (60,331) (119,088) (149,900)
---------- ---------- ---------- --------- ---------
Ending loan servicing
portfolio .......... $ 2,206,460 $1,303,628 $1,105,534 $ 234,743 $ 44,380
=========== ========== ========== ========= =========
Number of loans serviced
(end of period) ..... 27,357 16,372 15,900 4,063 1,576
Average loan balance ...... $ 80,650 $ 79,625 $ 69,530 $ 57,776 $ 28,160
</TABLE>
The following table sets forth, for the periods indicated, the mortgage
delinquency rate of the Company's loan servicing portfolio and information
relating to foreclosed properties:
<TABLE>
<CAPTION>
Year ended January 31,
-------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Delinquent mortgage loans at
Period end:
30 days:
Number of loans ....... 227 359 259 157 83
Percent of total loans 0.83% 2.19% 1.87% 3.86% 5.27%
60 days:
Number of loans ....... 49 97 77 26 19
Percent of total loans 0.18% 0.59% 0.56% 0.64% 1.21%
90 days or more:
Number of loans ....... 75 143 43 45 53
Percent of total loans 0.27% 0.87% 0.31% 1.11% 3.36%
Total delinquencies:
Number of loans ....... 351 599 379 228 155
Percent of total loans 1.28% 3.65% 2.74% 5.61% 9.84%
Foreclosed Properties:
Beginning inventory ..... 84 83 84 34 7
Properties acquired ..... 136 89 122 162 44
Ending inventory ........ 122 84 83 84 34
Aggregate carrying
value, net (-000's)..... $ 2,288 $ 1,500 $ 1,495 $ 1,701 $ 458
Average carrying value .. $ 18,754 $17,854 $18,012 $20,246 $13,465
</TABLE>
33
<PAGE> 37
OTHER BUSINESS ACTIVITIES
Securitization and Syndication of Real Estate Interests. The Company is
involved in marketing real estate interests in the form of pass-through
securities which represent the ownership of undivided fractional interests in a
defined pool of real estate related loans and loan participations. The
Company's primary objective in marketing these securities is to provide
investors with consistent high income without undue risk of loss. To
accomplish this, the Company has developed a program of acquiring for resale
real estate related investments consisting primarily of land contract seller's
interests and real estate mortgage notes. The Company emphasizes investments
in land contract seller's interests because of the traditional absence of
competition from financial institutions in this market, which generally results
in higher yields, and the belief that legal rights and remedies available to
land contract sellers are more flexible and lead to collection of delinquent
accounts with greater success than can be realized with respect to mortgage
notes. In addition, a land contract may be used only as an instrument
facilitating the sale and exchange of real property. Therefore, the nature of
the debt owed by the land contract purchaser is a result of the purchaser's
desire to own, through installment payments, the realty involved.
Through January 31, 1996, the Company had sponsored more than 100
offerings of pass-through certificates. For each offering, a subsidiary acts
as the sponsor and servicing agent for the land contracts, mortgages and other
real estate interests which are held for the benefit of the certificate
holders. Pursuant to the participation and servicing agreement relating to
each pass-through pool ("Participation and Servicing Agreement"), the sponsor
is obligated to purchase all outstanding participation certificates held by
investors in that pass-through pool at such time as the aggregate net
receivable balance of each pass-through pool is less than 10% of the original
face amount. At January 31, 1996, the maximum amount of these future purchase
commitments totalled approximately $8.0 million. The sponsor can satisfy its
repurchase obligation for such a paid-down pool by arranging a purchase of the
underlying real estate interests by another pass-through pool or a mortgage
investor.
34
<PAGE> 38
The following table shows the growth of the Company's originations and
purchases of loans for syndication in pass-through pools during the fiscal
years indicated:
<TABLE>
<CAPTION>
Year ended January 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
----- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Number of Land Contracts
syndicated in pools ... 933 1,002 798 308 399
Average balance ............ $ 23,485 $ 22,453 $ 17,759 $ 31,413 $ 18,152
Total amount of Land
Contracts syndicated .. $21,911,707 $22,498,079 $14,172,104 $ 9,675,388 $7,242,840
Number of Mortgage Notes
syndicated in pools ... 78 212 344 260 67
Average loan balance ....... $ 47,246 $ 22,906 $ 14,580 $ 26,152 $ 29,266
Total amount of Mortgage
Notes syndicated ...... $ 3,685,207 $ 4,856,239 $ 5,015,723 $ 6,799,612 $1,960,826
Total number of loans
syndicated in pools ... 1,011 1,214 1,142 568 466
Average loan balance ....... $ 25,318 $ 22,513 $ 16,802 $ 29,005 $ 19,171
Total amount syndicated .... $25,596,914 $27,354,318 $19,187,827 $16,475,000 $8,933,666
</TABLE>
Purchase and Resale of Real Property. The Company purchases and sells
income-producing real estate, with sales made primarily to limited partnerships
for which an affiliated company acts as general partner. This activity
produces income to the Company in the form of gains on the sale of such real
estate. In addition, MCA Realty purchases distressed residential real estate,
which is rehabilitated and sold to non-related individuals. During the year
ended January 31, 1996, the Company acquired and sold 723 single family homes
for a total gain of $7.3 million, $6.5 million of which represented sales to
the limited partnerships described above. During fiscal 1995, 1994 and 1993,
the Company acquired and sold 735, 415 and 268 single-family homes for total
gains of $7.4 million, $4.9 million and $3.5 million, respectively, of which
$7.3 million, $4.8 million and $3.2 million, respectively, represented sales to
related parties. See Note 14 of Notes to Consolidated Financial Statements for
a summary of selected consolidated segment financial information.
The income producing real estate which is purchased by the Company and its
affiliates is acquired through the assistance of both affiliated and
unaffiliated real estate brokers. Approximately 60% and 40%, respectively, is
acquired through affiliated and nonaffiliated brokers. There appears to be
increased competition for these income-producing real estate properties as real
estate values continue to escalate and the economy continues to grow.
Most of the income-producing real estate is sold by the Company and its
affiliates on land contracts to limited partnerships controlled by an affiliate
of the Company. These transactions are not arm's length transactions with
independent third party appraisals. The land contracts are then sold by the
Company to real estate pass-through pools of which MCA is the sponsor of the
pools. The remaining balance of income-producing real estate is sold to
unrelated third parties.
35
<PAGE> 39
Because most of the income-producing real estate sales are directed to
affiliated partnerships, the normal real estate concerns associated with
purchasers and fluctuating market values are not applicable. These
partnerships are engaged in the business of renting income producing properties
to individuals. The day-to-day real estate rental concerns are those of the
syndicated real estate limited partnerships of the affiliates and not those of
the Company. However, the payments to the Company pursuant to the land
contract receivables are dependent upon the ability of these partnerships to
generate rental income.
Other. During fiscal 1996, the Company made a common stock investment of
approximately $1.0 million in a Delaware Limited Liability Company. The
Company's passive investment in the Class B Securities issued by this Limited
Liability Company provides it the right to participate in earnings and
distributions, if any, subject to the preferential right of certain other
shareholders. This type of investment is similar to other passive investments
made by the Company. See Note 1 - "Investments" - of Notes to Consolidated
Financial Statements.
COMPETITION
The Company competes with other mortgage bankers, state and national
banks, thrift institutions and insurance companies for loan originations and
purchases. While there are several dominant competitors in the industry, the
Company believes it is a mid-range mortgage company in its markets. Many of
its competitors have substantially greater resources than the Company.
However, the Company believes that it offers a more diversified and, in some
cases, unique product line to its customers. The Company competes, in part,
through print and electronic media advertising campaigns, by motivating its
sales force through incentive compensation based on volume of loan
originations, by maintaining a network of branch locations designed to provide
sales support for its originators and by maintaining close relationships with
real estate brokers and builder-developers.
REGULATION
The Company is subject to the rules and regulations of, and examina- tions
by, Freddie Mac, Fannie Mae, Ginnie Mae and the Department of Housing and Urban
Development ("HUD") with respect to the processing, origination and purchase,
sale and servicing of mortgage loans and contracts. These rules and
regulations prohibit discrimination, provide for inspection and appraisals of
properties, require credit reports on prospective borrowers and, in some cases,
fix maximum interest rates, fees and loan amounts. The Company is required to
meet certain financial requirements and to submit certified financial
statements to these agencies annually. Mortgage loan origination activities
are subject to the Equal Credit Opportunity Act, Federal Truth-in- Lending Act,
Real Estate Settlement Procedures Act and the regulations promulgated
thereunder which prohibit discrimination and require the dis- closure of
certain information to borrowers concerning credit and settlement costs.
Mortgage loans, other than first mortgages, are also subject to the usury
statutes of the states in which the Company does business. Additionally,
there are various state laws affecting the Company's mortgage banking
36
<PAGE> 40
operations, including licensing requirements and substantive limitations on the
interest and fees that may be charged. MCA Mortgage and MCA are registered
with the Commissioner of the Michigan Financial Institutions Bureau under the
Michigan Mortgage Brokers, Lenders, and Servicers Licensing Act and are subject
to the provisions of such law. MCA Realty is a licensed real estate broker in
the state of Michigan. Expansion of the Company's operations has subjected it
to similar regulations in the states of Indiana, Illinois, Idaho, Kentucky,
Maryland, Ohio, Florida, West Virginia and Pennsylvania.
EMPLOYEES
At January 31, 1996, 412 individuals were employed by the Company, of
which 401 were full-time employees, including 162 mortgage and land contract
originators and mortgage and land contract servicers. The remaining full-time
employees are administrative and management personnel. None of the Company's
employees is represented by a bargaining agent. The Company believes its
relations with its employees are good.
PROPERTIES
The Company's executive and administrative offices and its mortgage
banking and real estate operations are located in approximately 35,300 square
feet of leased office space in Southfield, Michigan. The basic annual rent for
the Southfield office space is approximately $423,000. The lease for this
office expires on September 30, 1999. The Company believes that its offices
are adequate for present purposes and for any foreseeable increase in its
business activities. As of January 31, 1996, the Company leased office space
in 34 other locations: 9 in Michigan, 5 in Indiana, 8 in Florida, 3 in Ohio, 3
in Illinois, 2 in Maryland and one in each of Kentucky, Idaho, West Virginia
and Pennsylvania. These locations are used by certain of the Company's
mortgage and land contract originators.
LEGAL PROCEEDINGS
The Company is a party to various routine legal proceedings arising out of
the ordinary course of its business. Management believes that none of these
actions, individually or in the aggregate, will have a material adverse effect
on the financial condition or results of operations of the Company.
37
<PAGE> 41
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information about the directors and executive
officers of MCAFC.
<TABLE>
<CAPTION>
Name and Age Principal Position(s) Held with MCAFC
- ------------------------------- -----------------------------------------------
<S> <C>
Patrick D. Quinlan, 49. . . . . Chairman, Chief Executive Officer and Director
Thomas P. Cronin, 49. . . . . . Vice Chairman and Director
Lee P. Wells, 35. . . . . . . . President, Chief Operating Officer and Director
Keith D. Pietila, 46. . . . . . Executive Vice President and Director
Alexander J. Ajemian, 32. . . . Senior Vice President, Controller and Treasurer
James B. Quinlan, 44. . . . . . Director
C. Thompson Wells, Jr., 55. . . Director
D. Michael Jehle, 46. . . . . . Director
</TABLE>
The Board of Directors is divided into three classes, with each class
serving a three-year term. At each annual meeting of the shareholders,
directors in the class whose term expires are elected to serve a three-year
term. Keith D. Pietila and James B. Quinlan are serving for a term ending at
the annual meeting of shareholders to be held in 1996; Lee P. Wells, and Thomas
P. Cronin are serving for a term ending at the annual meeting of shareholders
to be held in 1997 and Patrick D. Quinlan, C. Thompson Wells and D. Michael
Jehle are serving for a term ending at the annual meeting of shareholders to be
held in 1998.
Executive officers serve at the pleasure of the Board of Directors. The
business experience of each director and executive officer during the past five
years is described below.
PATRICK D. QUINLAN has been Chairman of the Board, Chief Executive Officer and
a director of MCAFC since its inception and served as President of MCAFC from
its inception until July 1995. Mr. Quinlan was a founder and served as
Chairman of the Board, President and a director of MCA Mortgage from 1985 until
July 1992. Mr. Quinlan is the brother of James B. Quinlan. See "Principal
Shareholders."
THOMAS P. CRONIN has been Vice Chairman of MCAFC since July 1995 and a director
of MCAFC since January 1993. Mr. Cronin has been Chief Executive Officer of
MCA Mortgage since November 1993. Mr. Cronin served as President of MCA
Mortgage from October 1992 until November 1993 and has been a director of MCA
Mortgage since August 1992. From October 1990 until October 1992, Mr. Cronin
was an Executive Vice President of MCA. From 1977 until 1990, Mr. Cronin was a
member of the Chicago Board of Trade and a licensed floor broker with the
Commodity Futures Trading Commission.
38
<PAGE> 42
LEE P. WELLS has been President and Chief Operating Officer of MCAFC since July
1995 and has been a director of MCAFC since its inception. Mr. Wells served as
Executive Vice President of MCAFC from its inception until July 1995, and
served as Executive Vice President of MCA Mortgage from 1990 until November
1993 and was a director of MCA Mortgage from 1990 until July 1992. Mr. Wells
is responsible for land contract originations and syndication of land contracts
and mortgages into pass-through pools which are sold to private mortgage
investors. From 1987 until 1990 Mr. Wells was a Vice President of MCA
Mortgage, and served as the Controller of MCA Mortgage from 1987 until 1988.
Mr. Wells is the son of C. Thompson Wells, Jr. See "Principal Shareholders."
KEITH D. PIETILA has been Executive Vice President and Chief Financial Officer
of MCAFC since July 1995 and has been a director of MCAFC since its inception.
Mr. Pietila served as Chief Operating Officer and Vice President of MCAFC from
MCAFC's inception until July 1995. Mr. Pietila also was a Vice President,
Chief Financial Officer and Chief Operating Officer and a director of MCA
Mortgage from 1990 until July 1992. Mr. Pietila has been a Director of U.S.
Mutual Financial Corporation since 1991. From 1982 until 1990, Mr. Pietila was
employed by Acorn Building Components, Inc., and served in several positions,
the last of which was as chief operating officer.
ALEXANDER J. AJEMIAN has been a Senior Vice President of MCAFC since July 1995
and has been Controller and Treasurer of MCAFC since its inception. Mr.
Ajemian served as Vice President of MCAFC from its inception until July 1995,
served as Vice President of MCA Mortgage since November 1992 and has served as
Treasurer of MCA Mortgage since November 1993. Mr. Ajemian was the Controller
of MCA Mortgage from 1990 until July 1992 and was the Vice President and
Assistant Secretary of MCA Mortgage from 1991 until July 1992. From 1986 until
1990, Mr. Ajemian was in the audit department of BDO Seidman, independent
certified public accountants. Mr. Ajemian is a Certified Public Accountant
licensed in Michigan.
JAMES B. QUINLAN has been a director of MCAFC since its inception. Mr. Quinlan
is the President of Standard Home Mortgage, Inc., a residential mortgage broker
located in Grosse Pointe, Michigan. Mr. Quinlan served as Senior Vice
President of MCAFC from 1991 until August 1993. Mr. Quinlan has served as a
director of MCA Mortgage since 1985 and served as a Senior Vice President of
MCA Mortgage from 1985 until August 1993. Mr. Quinlan also served as Treasurer
of MCA Mortgage from 1985 until August 1993. Mr. Quinlan is the brother of
Patrick D. Quinlan and the brother-in-law of David C. Wells. See "Principal
Shareholders."
C. THOMPSON WELLS, JR., has been a director of MCAFC since its inception and
previously served in the same capacity with MCA Mortgage from 1990 until July
1992. Since 1987, Mr. Wells has been the President of Wells' System, Inc., a
consulting firm, and has been involved in child care centers as the Chief
Executive Officer of three primary entities: Discovery Learning Centers,
Discovery Learning Centers Limited Partnership and Kids at Work, operating
through 25 other related secondary entities. Of these entities four filed
bankruptcy petitions in 1991 and 1992. Two entities have completed their
liquidations and the other two entities' petitions under the Bankruptcy laws
have been dismissed. Mr. Wells is also the President and a director of
39
<PAGE> 43
Austin Kids, Inc., which filed a bankruptcy petition in December 1994 and for
which an order confirming its plan of reorganization was entered in April 1995.
C. Thompson Wells, Jr. is the father of Lee P. Wells. See "Principal
Shareholders."
D. MICHAEL JEHLE has been a director of MCAFC since November 1993 and has
served as a director of MCA Mortgage since November 1993. Mr. Jehle served as
President and Chief Operating Officer of MCA Mortgage from November 1993 to
November 1994 and since March 1996 has been the Chairman-Office of Production
for MCA Mortgage. Mr. Jehle served as the President and Chief Executive
Officer of Rimco Financial Corporation from November 1994 to February 1996 and
currently serves as a director of Rimco Financial Corporation. Prior to
joining the Company, Mr. Jehle was employed by First Fidelity Thrift and Loan
in San Diego, California, from 1991 to 1993 in both loan production and
servicing capacities. From 1989 to 1991, Mr. Jehle was self-employed in both
residential and commercial loan originations and prior to that he was President
of ABQ MoneyCenter, Inc., in San Diego, California.
Certain of the directors and executive officers of MCAFC are also directors or
officers of MCAFC's other subsidiaries.
40
<PAGE> 44
COMPENSATION
The following table sets forth, for the fiscal years shown, information
regarding amounts paid to or accrued for the Chief Executive Officer of MCAFC
and the other four most highly compensated executive officers of MCAFC (the
"Named Executive Officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
------------------------------------ Other ------------
Name and Annual Restricted All Other
Principal Fiscal Compen- Stock Compen-
Position Year Salary Bonus sation Awards(1) sation(2)
- ---------------------- ------ ------ ------ -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Patrick D. Quinlan - 1996 $206,458 $ -- $ -- $ -- $16,048
Chairman, 1995 195,000 -- -- -- 16,878
and Chief Executive 1994 183,114 -- -- -- 11,520
Officer
Thomas P. Cronin - 1996 $218,099 $ -- $ -- $ -- $ 9,670
Vice Chairman 1995 204,200 -- -- 110,000 9,670
1994 144,733 43,400 -- -- 4,835
Lee P. Wells - 1996 $159,583 $19,500 $ -- $ -- $ 2,146
President and Chief 1995 117,000 40,000 -- -- $ 1,766
Operating Officer 1994 111,600 21,000 -- -- 1,349
Keith D. Pietila - 1996 $153,333 $25,000 $ -- $ -- $11,552
Chief Financial 1995 124,800 22,000 -- 66,000 10,818
Officer and Executive 1994 114,568 17,000 18,000(3) -- 5,892
Vice President
Alexander J. Ajemian 1996 $ 94,375 $10,000 $ -- $ -- $ --
Senior Vice President 1995 69,600 -- -- 66,000 --
1994 62,461 8,000 -- -- --
</TABLE>
- ---------------
(1) During fiscal 1995, Mr. Pietela was awarded 6,000 shares of restricted
stock with a value of $66,000, with 2,000 shares vesting in each of fiscal
1996, 1997 and 1998. As of January 31, 1996, Mr. Pietela held 4,000
shares of restricted stock with a value of $27,160. During fiscal 1995,
Mr. Cronin was awarded 10,000 shares of restricted stock with a value of
$110,000, with 6,000 shares vesting in fiscal 1996 and 2,000 shares
vesting in each of fiscal 1997 and 1998. As of January 31, 1996, Mr.
Cronin held 4,000 shares of restricted stock with a value of $27,160.
During fiscal 1995, Mr. Ajemian was awarded 6,000 shares of restricted
stock with a value of $66,000, with 2,000 shares vesting in each of fiscal
1996, 1997 and 1998. As of January 31, 1996, Mr. Ajemian held 4,000
shares of restricted stock with a value of $27,160. Dividends are payable
on the restricted stock when paid on the Company's Common Stock.
41
<PAGE> 45
(2) Represents, for each of the Named Executive Officers, premiums paid by
the Company for life insurance for the last fiscal year.
(3) Represents award of 2,000 shares of unrestricted stock valued at $9.00
per share.
The Company paid director's fees of $55,000 during the fiscal year ended
January 31, 1996, including $10,000 paid to James B. Quinlan for serving on the
Board of MCA Mortgage. For the year ending January 31, 1997, the Company will
pay non-employee directors an annual fee of $20,000 and will pay James B.
Quinlan an additional annual fee of $10,000 for serving on the board of MCA
Mortgage. This policy will be subject to review annually.
INDEMNIFICATION AND LIMITATION OF LIABILITY MATTERS
The Company's Restated Articles of Incorporation require the Company to
indemnify its directors, officers, employees and agents to the fullest extent
permitted by law, for expenses, judgments, penalties, fines and amounts paid in
settlement in connection with any pending, threatened or completed action, suit
or proceeding (other than by or in the right of the Company), to which any such
person was made a party by reason of the fact that he or she was acting in such
capacity for the Company or was serving as such for another corporation or
enterprise at the Company's request. Such indemnification will be provided if
such persons acted in good faith and in a manner they reasonably believed to
be in or not opposed to the best interests of the Company or its shareholders,
or in respect to a criminal proceeding, had no reasonable cause to believe such
conduct was unlawful. In actions by or in the right of the Company,
indemnification is limited to expenses and amounts paid in settlement.
The Michigan Business Corporation Act ("MBCA") permits Michigan cor-
porations to limit the personal liability of directors for a breach of their
fiduciary duty. The Company's Restated Articles of Incorporation limit
liability to the maximum extent permitted by law. The Company's Restated
Articles of Incorporation provide that a director of the Company shall not be
personally liable to the Company or its shareholders for monetary damages for
breach of the director's fiduciary duty. However, they do not eliminate or
limit the liability of a director for any of the following (i) a breach of the
director's duty of loyalty to the Company or its shareholders; (ii) acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law; (iii) declaring an unlawful dividend or distribution to
shareholders; (iv) a transaction from which the director derives an improper
personal benefit; and (v) an act or omission occurring prior to the effective
date of the pertinent article. As a result of the inclusion of such a
provision, shareholders of the Company may be unable to recover monetary
damages against directors for actions taken by them which constitute negligence
or gross negligence or which are in violation of their fiduciary duties,
although it may be possible to obtain injunctive or other equitable relief with
respect to such actions. Insofar as indemnification for liabilities arising
under the Securities Act of 1933 (the "Act") may be permitted to directors,
officers and controlling persons of the Company
42
<PAGE> 46
pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Patrick D. Quinlan, Keith D. Pietila and Lee P. Wells served on the
Compensation Committee of the Board of Directors of the Company during the year
ended January 31, 1996. Each of Messrs. Quinlan, Pietila and Wells is a
director and executive officer of the Company. Messrs. Quinlan and Wells are
executive officers and directors of Rimco Financial Corporation and certain of
its subsidiaries and Mr. Jehle is a director of Rimco Financial Corporation.
Messrs. Wells and Pietila are also directors and officers of Property
Corporation of America ("PCA") and Mr. Quinlan is a director of PCA. Mr.
Pietila is an officer and director of U.S. Mutual Financial Corporation.
From time to time, the Company and its subsidiaries have entered into
various contracts and other transactions with affiliates of the Company,
including certain officers and directors of the Company. The terms and
conditions of such transactions were not negotiated at arm's length and may not
have been as favorable to the Company as terms and conditions that would have
been obtained with unaffiliated parties.
During fiscal 1994, the Company purchased 15 single family homes from NML,
Inc., a corporation owned by Patrick D. Quinlan and Lee P. Wells. These
properties had been acquired by NML, Inc. for approximately $175,000. The
Company purchased these properties for $342,000 and subsequently sold them, as
described below, for the same price. These properties, together with other
parcels of real estate purchased from unrelated third parties during fiscal
1994, were sold by the Company to limited partnerships whose general partner is
owned by Patrick D. Quinlan and Lee P. Wells. Gains totaling $4,811,069 were
recognized from such sales during fiscal 1994. During fiscal 1996 and fiscal
1995, the Company recognized a gain of $6,529,708, and $7,365,199,
respectively, on the sale of properties purchased from unrelated third parties
and subsequently sold to such affiliated limited partnerships. During fiscal
1996, fiscal 1995 and fiscal 1994, the Company paid commissions in connection
with the acquisition of these properties totaling $1,735,000, $1,315,000 and
$996,000, respectively, to Rimco Realty and Mortgage, Inc., a former subsidiary
of Rimco Financial Corp. which is owned equally by Patrick D. Quinlan, Lee P.
Wells and Leroy G. Rogers.
The Company provides accounting and administrative services to U.S. Mutual
Financial Corporation ("U.S. Mutual") and receives a base monthly fee of $3,000
plus additional amounts as periodically agreed to by the respective parties.
U.S. Mutual is a publicly-owned corporation; however, Patrick D. Quinlan
together with his wife, Cheryl J. Quinlan, and James B. Quinlan, their brother
John E. Quinlan and their mother Bonnie B. Quinlan collectively own
approximately 15% of the outstanding voting stock of U.S. Mutual, and it is
therefore considered an affiliate of the Company, as defined by the
43
<PAGE> 47
Securities and Exchange Commission. This service arrangement can be terminated
by either party at any time. The Company earned $36,000, $36,000 and $36,000
in management fees for administrative services provided to U.S. Mutual during
fiscal 1996, 1995 and 1994, respectively. Keith D. Pietila is a director of
U.S. Mutual.
During fiscal 1996, the Company retained Consulting Services of America,
Inc. ("CSA") as a consultant for specific long range planning and other
projects. During fiscal 1995 and 1994, the Company retained the Alquin Group,
Inc. ("Alquin") to provide similar services. John E. Quinlan, the brother of
Patrick and James Quinlan, is the principal shareholder and a director and
executive officer of CSA and was a shareholder, director and executive officer
of Alquin. For its services, CSA charges the Company its normal billing rate
of $150 per hour, and receives a minimum retainer of $5,000 per month. During
fiscal 1996, the Company paid $120,200 in consulting fees to CSA and during
fiscal 1995 and 1994, the Company paid $123,080 and $173,000, respectively, in
consulting fees to Alquin.
In February 1993, Patrick D. Quinlan and Lee P. Wells each purchased 500
shares of common stock of Property Corporation of America ("PCA") for $5,000 in
cash, as part of the reorganization of PCA. In connection with such
reorganization, the Company exchanged its PCA common stock for shares of PCA
non-voting preferred stock. As a result of the reorganization, Messrs. Quinlan
and Wells became the owners of all of the outstanding voting common stock of
PCA and the Company's property management subsidiary became a wholly-owned
subsidiary of PCA.
In July 1993, Janet K. Wells, the wife of C. Thompson Wells, Jr. and the
mother of Lee P. Wells, purchased 36,000 shares of common stock of the Company
for $12.50 per share in exchange for promissory notes with an aggregate
principal amount of $450,000, secured by mortgages on certain appraised real
estate. The appraisal was performed by Gary Speier, an employee of Blackacre
Appraisal Corp., an unaffiliated licensed real estate appraisal firm, and the
value of the stock was negotiated by the parties with approval by the Company's
Board of Directors. The notes were subsequently sold by the Company to several
investor pass-through pools for $450,000.
On January 27, 1994, North-Side Homes, Inc., a corporation owned by
Patrick D. Quinlan, Lee P. Wells, Roger Smigiel, David C. Wells, Janet K. Wells
and Leroy G. Rogers transferred certain rental properties to the Company,
subject to related liabilities that were assumed by the Company, which had an
aggregate appraised value (net of the assumed liabilities) of approximately
$979,000, in exchange for 58,400 shares of the Company's common stock, valued
at $16.77 per share. The appraisal was performed by Michigan Certified
Appraisers, Inc., a licensed real estate appraisal firm wholly owned by Dave
Thomas, a brother-in-law of Patrick D. Quinlan, and the value of the stock was
negotiated by the parties with approval by the Company's Board of Directors.
In July 1995, Janet K. Wells purchased 20,000 shares of common stock of
the Company for $30 per share in exchange for promissory notes with an
aggregate principal amount of $600,000, secured by mortgages on certain
44
<PAGE> 48
appraised real estate. The appraisal was performed by the Real Estate
Appraisal Group, an unaffiliated licensed real estate appraisal firm, and the
value of the stock was negotiated by the parties with approval by the Company's
Board of Directors.
From time to time the Company has made working capital loans to related
entities, and these entities have entered into transactions in the ordinary
course of business with the Company pursuant to which the Company accrues net
payables to these entities. At January 31, 1996, 1995 and 1994, the Company's
accounts receivable from these related entities, net of accounts payable to
these entities, were $793,000, $796,000 and $1.63 million, respectively, due
from Rimco Financial Corp., a company owned by Patrick D. Quinlan, Lee P. Wells
and Leroy G. Rogers, and $1.68 million, $1.10 million and $1.07 million,
respectively, due from PCA, the common stock of which is owned by Patrick D.
Quinlan and Lee P. Wells. In addition, there is $4.6 million due from investor
pass-through pools sponsored by MCA Mortgage or MCA and limited partnerships
sponsored by other affiliates of the Company. On January 31, 1995, MCAFC
purchased all of the issued and outstanding common stock of Rimco Realty &
Mortgage Company from Rimco Financial Corp. for $12,918. The payment for such
shares was in the form of a reduction in debt owned by Rimco Financial Corp. to
MCAFC. Rimco Realty & Mortgage Company was engaged in the purchase and sale of
residential real estate and now operates as MCA Realty Corporation.
On October 19, 1994, MCA Mortgage and Rimco Financial Corp. entered into a
$1.5 million line of credit facility with Sterling Bank & Trust, FSB. This
credit facility is collateralized in part through the corporate guaranty of
MCAFC. At January 31, 1996, $1.5 million was outstanding under this facility.
45
<PAGE> 49
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of April 1, 1996,
regarding each person known by the Company to own more than five (5%) percent
of the issued and outstanding shares of Common Stock of the Company, each
current director, each of the Named Executive Officers and all directors and
executive officers of the Company as a group. Unless otherwise noted, each
person is the record owner of the shares indicated and possesses the sole
voting and investment power with respect to such shares. Unless otherwise
noted, the address for each person is 23999 Northwestern Hwy., Southfield,
Michigan 48075.
<TABLE>
<CAPTION>
Amount and
Nature of Percent
Beneficial of
Name and Address Ownership Class(1)
-------------------- ----------- ------------
<S> <C> <C>
Patrick D. Quinlan 114,135 (2) 23.85%
James B. Quinlan 55,734 (3) 11.64%
17150 Kercheval Ave.
Grosse Pointe, Michigan 48230
C. Thompson Wells, Jr. 86,200 (4) 18.01%
Lee P. Wells 48,372 (2) 10.11%
NML, Inc. 33,700 (2) 7.04%
David C. Wells 27,842 (5) 5.82%
Keith D. Pietila 28,167 (6) 5.88%
Thomas P. Cronin 13,200 (6) 2.76%
D. Michael Jehle 10,000 (6) 2.09%
Janet K. Wells 86,200 (4) 18.01%
3 Sycamore
Grosse Pointe, Michigan 48230
Alexander J. Ajemian 8,280 (6) 1.73%
All executive officers and
directors as a group (8 persons) 397,788(2)(4)(6) 83.11%
</TABLE>
- ---------------
(1) As of April 1, 1996, there were 478,643 shares of Common Stock of the
Company outstanding. This number includes 12,336 shares of Common Stock
which are subject to forfeiture.
(2) Patrick D. Quinlan owns 50% of NML, Inc. and Lee P. Wells owns 50% of
NML, Inc.
(3) These 55,734 shares are held by Standard Home Mortgage, Inc., a
corporation wholly owned by James B. Quinlan. Of these shares, 1,334 are
subject to forfeiture.
46
<PAGE> 50
(4) Janet K. Wells holds 86,200 shares in revocable trust and has voting and
investment power with respect to these shares. Ms. Wells is the wife of
C. Thompson Wells, Jr., who disclaims beneficial ownership of these
shares.
(5) Includes 1,334 shares subject to forfeiture.
(6) Includes the following shares that were issued pursuant to compensation
arrangements and are subject to forfeiture: Mr. Pietila - 2,000 shares;
Mr. Cronin - 2,000 shares; Mr. Jehle - 2,668 shares; Mr. Ajemian - 2,000
shares; and all executive officers and directors as a group - 10,002
shares.
DESCRIPTION OF SERIES 1996 DEBENTURES
General. In this Offering the Company is offering for sale up to
$6,000,000 aggregate principal amount of 11% Subordinated Debentures Series
1996, Due June 30, 2002 (the "Series 1996 Debentures"). The Series 1996
Debentures are unsecured obligations of the Company and are to be issued under
an Indenture (the "Indenture"), between the Company and First Union National
Bank, formerly known as First Fidelity Bank, N.A., as Trustee (the "Trustee"),
a copy of which has been filed as an exhibit to the registration statement of
which this Prospectus forms a part. The following summaries of certain
provisions of the Indenture do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, the provisions of the
Indenture, including the definitions of certain terms in the Indenture.
Wherever particular provisions and definitions of the Indenture are referred
to, such provisions and definitions are incorporated by reference as part of
the statements made, and the statements are qualified in their entirety by
those references. The Indenture has been qualified under the Trust Indenture
Act of 1939, as amended. In the discussion that follows, and unless otherwise
noted, the references to the Company are to MCA Financial Corp. only and do not
include any of its subsidiaries.
Since the Company is a holding company, its rights and, indirectly, the
rights of its creditors, including the holders of the Series 1996 Debentures,
to participate in any distribution of assets of the Company's subsidiaries upon
a liquidation or reorganization of any subsidiary will be subject to the prior
claims of creditors of that subsidiary, except to the extent that the Company
may itself be a creditor with recognized claims against its subsidiaries. In
the event a receiver or trustee is appointed for one or more of the Company's
subsidiaries or in the event of their insolvency, bankruptcy, assignment for
the benefit of creditors, reorganization or any other marshalling of assets and
liabilities of these entities, the Company will not be entitled to participate
or share, ratably or otherwise, in the distribution of the assets of that
subsidiary until all claims of all other present and future creditors of that
subsidiary have been fully satisfied.
The Indenture provides that the Company may issue additional debt during
or after the offering of the Series 1996 Debentures and such debt may be either
superior to, on a par with, or subordinated to the Series 1996 Debentures.
47
<PAGE> 51
The total amount of Series 1996 Debentures that may be issued under the
Indenture and sold by the Company is limited to $6,000,000. Interest on the
Series 1996 Debentures will accrue from the Date of Issue and will be payable
31, June 30, September 30 and December 31 of each year at the rate of 11% per
annum. Interest will be payable to the person in whose name the Series 1996
Debentures are registered at the close of business on the first day of the
calendar month in which falls an Interest Payment Date. The Series 1996
Debentures will mature on June 30, 2002, unless redeemed earlier at the option
of the Company or at the request of a Holder or a Holder's authorized
representative upon the death of a Holder as set forth below. See "- Optional
Redemption" and "- Holders' Right of Redemption."
All interest payments to be made to registered holders of Series 1996
Debentures shall be paid directly by the Company to the Trustee, and the
Trustee shall mail these interest payments on the Interest Payment Date to the
Holders that are listed in the Debenture Register. Principal of the Series
1996 Debentures will be payable at maturity or upon redemption prior to
maturity by the Trustee by check mailed to the person entitled to payment, upon
surrender of the Series 1996 Debentures.
The Company will issue the Series 1996 Debentures only in fully registered
form, without coupons, in denominations of $1,000 and integral multiples
thereof. Holders may transfer or exchange the Series 1996 Debentures by
surrendering them for transfer or exchange at the Corporate Trust Department of
the Trustee, duly endorsed for transfer. The Series 1996 Debentures will be
transferable or exchangeable without service charge, but the Company may
require payment to cover taxes or other government charges. The Series 1996
Debentures must be surrendered to the Trustee in order to receive principal
payments.
Optional Redemption. Under the Indenture, the Company may redeem all of
the Series 1996 Debentures at any time on or after July 1, 1998, or some of
them from time to time on or after July 1, 1998, at the following redemption
prices (expressed in percentages of the principal amount to be redeemed), plus
accrued interest to the redemption date:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
July 1, 1998 through June 30, 1999 .............. 102.0%
July 1, 1999 through June 30, 2000 .............. 101.0%
July 1, 2000 and thereafter ..................... 100.0%
</TABLE>
If the Company elects to redeem the Series 1996 Debentures in whole or in part,
it shall notify the Trustee of the desired redemption date and the principal
amount of Series 1996 Debentures to be redeemed. If less than all of the
Series 1996 Debentures are to be redeemed, the Trustee shall select the Series
1996 Debentures to be redeemed either pro-rata or by lot, as the Trustee in its
sole discretion shall choose. Series 1996 Debentures shall be redeemed only in
denominations of $1,000 or integral multiples thereof.
48
<PAGE> 52
At least 30 days but not more than 60 days prior to a redemption date the
Company shall mail, or shall cause the Trustee to mail, a notice of redemption
by first-class mail to each Holder of Series 1996 Debentures to be redeemed.
The notice shall identify the Series 1996 Debentures to be redeemed and shall
state (1) the redemption date and redemption price, (2) the name and address of
the Paying Agent, (3) in the event that a Debenture is to be redeemed in part
only, the portion of the principal amount thereof to be redeemed, and that on
and after the redemption date, upon surrender of the Series 1996 Debenture a
new Series 1996 Debenture, equal in principal amount to the unredeemed portion
thereof, will be issued, (4) that Series 1996 Debentures called for redemption
must be surrendered to the Paying Agent to collect the redemption price and (5)
that interest on the Series 1996 Debentures to be redeemed ceases to accrue on
and after the redemption date.
Holders' Right of Redemption. The Indenture provides that on each March
31, commencing with March 31, 1998, upon request by a Holder or on behalf of a
deceased Holder, the Company will redeem such Holder's Series 1996 Debentures,
but only up to $25,000 principal amount per Holder in each calendar year and
only up to an aggregate of $100,000 per calendar year for all Holders, without
any premium, provided that (a) the Series 1996 Debentures have been registered
in the name of the Holder or the deceased Holder for a period of at least six
months prior to the date of such request for redemption, (b) the Trustee has
been notified in writing of a request for redemption within one year after a
deceased Holder's death, and (c) the Company is not, or, after giving effect to
such redemption would not be, in default under any Senior Indebtedness. Series
1996 Debentures for which such redemption is requested on behalf of a deceased
Holder will be repaid at 100% of the principal amount thereof, whereas Series
1996 Debentures for which redemption is requested by any other Holder will be
repaid at 95% of the principal amount thereof; in either case, interest accrued
to the Redemption Date will also be paid. Redemption will be made on the March
31 next following a duly made redemption request. Redemption requests shall be
made to the Trustee and contain the following: (i) a written request for
redemption signed by a Holder or the duly authorized representative of a
deceased Holder, which (in the case of a deceased Holder) shall indicate the
name of the deceased Holder and the date of his death and shall indicate the
principal amount of Series 1996 Debentures to be redeemed, up to $25,000, (ii)
the Series 1996 Debentures to be redeemed, and (iii) evidence of the death of a
deceased Holder and of the authority of his representative. After receiving an
initial redemption payment, a Holder or the authorized representative of a
deceased Holder may annually request that the Company redeem additional Series
1996 Debentures in the principal amount of up to $25,000 each year, which the
Company will honor on March 31 of the succeeding year, subject to the further
limitation that Holders other than those representing a deceased Holder may not
have more than $50,000 principal amount of Series 1996 Debentures redeemed in
the aggregate. Authorized representatives of a deceased Holder include
executors, administrators or other legal representatives of an estate, trustees
of a trust, joint owners of Series 1996 Debentures owned in joint tenancy or
tenancy by the entirety, custodians, conservators, guardians,
attorneys-in-fact, and other persons generally recognized as having legal
authority to act on behalf of another.
49
<PAGE> 53
In applying the annual aggregate redemption limit of $100,000, the Trustee
shall give priority in the redemption of Series 1996 Debentures as follows:
first, to requests for redemption received prior to December 31 of each year
made on behalf of deceased Holders on a pro rata basis, and second, to all
other Holders of Series 1996 Debentures, on a pro rata basis.
The death of a Person owning a Series 1996 Debenture in joint tenancy or
tenancy by the entirety with another or others shall be deemed the death of the
Holder of the Series 1996 Debenture, and the entire principal amount of the
Series 1996 Debenture so held shall be subject to redemption, together with
interest accrued thereon to the Redemption Date. The death of a Person owning
a Series 1996 Debenture by tenancy in common shall be deemed the death of a
Holder of a Series 1996 Debenture only with respect to the deceased Holder's
interest in the Series 1996 Debenture so held by tenancy in common; except that
in the event a Series 1996 Debenture is held by husband and wife as tenants in
common, the death of either shall be deemed the death of the Holder of the
Series 1996 Debenture and the entire principal amount of the Series 1996
Debenture so held shall be subject to redemption. The death of a Person who,
during his lifetime, was entitled to substantially all of the beneficial
interests of ownership of a Series 1996 Debenture, will be deemed the death of
the Holder thereof for purposes of this provision, regardless of the registered
holder, if such beneficial interest can be established to the satisfaction of
the Company. Such beneficial interest will be deemed to exist in typical cases
of nominee ownership, ownership under the Uniform Gifts to Minors Act,
community property or other joint ownership arrangements between a husband and
wife, and trust arrangements where one Person has substantially all of the
beneficial ownership interests in the Series 1996 Debenture during his
lifetime.
Subordination. Any payment on the Series 1996 Debentures is subordinated
at all times, including upon liquidation of the Company, to the prior payment
of all "Senior Indebtedness" of the Company due and owing. Senior Indebtedness
is defined in the Indenture to mean all Indebtedness of the Company for money
borrowed from others, whether outstanding on the date of the Indenture or
thereafter created or incurred, which is not by its terms either expressly
subordinate and junior to, or on a parity with, the Series 1996 Debentures. At
January 31, 1996, the Company had $30.4 million of Senior Indebtedness
outstanding. In addition, at January 31, 1996, MCA Mortgage and MCA, the
Company's principal subsidiaries, had $85.8 million aggregate indebtedness
outstanding, including amounts owing under all of their mortgage warehousing
credit facilities, which the Company has guaranteed. Since the Company is a
holding company, its rights and, indirectly, the rights of its creditors,
including the holders of the Series 1996 Debentures, to participate in any
distribution of assets of such subsidiaries upon a liquidation or
reorganization of either of them will be subject to the prior claims of
creditors of that subsidiary, except to the extent that the Company may itself
be a creditor with recognized claims against its subsidiaries. See "-
General."
No payment of the principal of, or interest on, the Series 1996 Debentures
may be made if the Company is at the time in default with respect to any Senior
Indebtedness, or if such payment would cause the Company to be in default with
respect to any Senior Indebtedness, subject to exceptions for
50
<PAGE> 54
the cure or waiver of any such default. Upon any distribution of assets of the
Company upon any dissolution, winding up, liquidation or reorganization of the
Company, as discussed below, all Senior Indebtedness would be required to be
paid in full before any payment of principal or interest on the Series 1996
Debentures may be made. Such subordination will not prevent the occurrence of
any Event of Default (as defined below) under the Indenture.
BY REASON OF THE SUBORDINATION OF THE SERIES 1996 DEBENTURES, IN THE EVENT
OF LIQUIDATION OF THE COMPANY, THE RECOVERY, IF ANY, TO THE HOLDERS OF SERIES
1996 DEBENTURES MAY BE LESS, PROPORTIONATELY, THAN TO HOLDERS OF SENIOR
INDEBTEDNESS. THERE ARE NO LIMITATIONS ON THE AMOUNT OF SENIOR INDEBTEDNESS
THAT MAY BE ISSUED OR INCURRED IN THE FUTURE.
Restrictions on Dividends. So long as the year-end Common Equity (the
aggregate amount of the Common Stock, Additional Paid-in Capital and Retained
Earnings accounts) of the Company is less than $2,000,000, as reflected on the
Company's annual consolidated balance sheet, or if an Event of Default has
occurred and is continuing, the Indenture provides that the Company will not
(i) declare or pay any dividend or make any distribution on its Equity
Securities (other than dividends or distributions payable in shares of Equity
Securities of the Company); (ii) purchase, redeem or otherwise acquire or
retire for value any shares of Equity Securities of the Company; or (iii)
permit any Subsidiary to purchase, redeem or otherwise acquire or retire for
value any shares of Equity Securities of the Company. Otherwise, the Company
may declare and pay dividends on, make distributions on, and purchase, redeem
or otherwise acquire or retire for value shares of its Equity Securities.
Consolidation, Merger or Transfer. The Company may not consolidate with,
merge with, or transfer all or substantially all of its assets to another
entity unless such other entity assumes the Company's obligations under the
Indenture and unless, after giving effect thereto, no event which, after notice
or lapse of time, would become an Event of Default shall have occurred and be
continuing. Any consolidation, merger or acquisition of assets of the Company
is further conditioned on the surviving corporation having a Consolidated Net
Worth equal to or greater than that of the Company and the satisfaction of
certain other requirements. While the concept of "substantially all" of the
assets of a company has not been defined under Michigan law or by any Michigan
judicial decision, counsel has advised the Company that the potential sale of
assets having an aggregate book value of more than 50% of the total book value
of all assets, or the potential sale of assets from which more than 50% of the
Company's gross revenues were derived during the most recent fiscal year, would
be subject to this restriction.
Event of Default. An Event of Default, as defined in the Indenture,
includes: (a) default in the payment of the principal on any Series 1996
Debenture at its Maturity or upon redemption; (b) default in the payment of
interest on any Series 1996 Debenture when it becomes due and payable, and
continuance of such default for a period of ten (10) days after notice of such
default to the Company by the Trustee; (c) a default in the performance, or
breach, of any other covenant or warranty of the Company in the Indenture for a
period of 30 days after receipt of written notice specifying the default and
51
<PAGE> 55
requiring the Company to remedy such default; (d) default in the payment at
stated maturity of certain indebtedness for money borrowed of the Company or
any of its Subsidiaries; (e) appointment of a receiver or conservator of the
Company or any of its Subsidiaries in certain circumstances; and (f) certain
events of insolvency, receivership, conservatorship or reorganization.
Within 90 days after the occurrence of any default, as defined in the
Indenture, the Trustee shall give the Series 1996 Debenture holders notice of
all uncured defaults known to it; provided that, except in the case of a
default in the payment of the principal of or interest on any Series 1996
Debentures, the Trustee shall be protected in withholding such notice if and so
long as it in good faith determines that the withholding of such notice is in
the interests of the Series 1996 Debenture holders.
If an Event of Default occurs and is continuing, the Trustee, in its
discretion may, and, at the written request of holders of a majority in
aggregate principal amount of the Series 1996 Debentures Outstanding and upon
being indemnified to its satisfaction shall, proceed to protect and enforce its
rights and the rights of the Series 1996 Debenture holders. If an Event of
Default occurs and is continuing, then and in every such case the Trustee or
the Holders of not less than 25% in principal amount of the Series 1996
Debentures Outstanding may declare the principal of all the Series 1996
Debentures to be due and payable immediately, by a notice in writing to the
Company, and to the Trustee if given by Series 1996 Debenture holders, and upon
any such declaration such principal will become immediately due and payable,
subject to the limitation on accelerations described below. Prior to
acceleration of maturity of such Series 1996 Debentures, the Holders of a
majority in principal amount of the Series 1996 Debentures Outstanding may
waive an Event of Default resulting in acceleration of such Series 1996
Debentures but only if all Events of Default have been remedied and all
payments due, other than those due as a result of acceleration, have been made.
The Company must furnish annually to the Trustee an Officers' Certificate
stating whether, to the best of the knowledge of the signers, the Company is in
default under any of the provisions of the Indenture, and specifying all such
defaults and the nature thereof of which they have knowledge.
A Holder of any Series 1996 Debenture will not have any right to institute
any proceeding with respect to the Indenture, or for the appointment of a
receiver or trustee, or for any remedy thereunder, unless (i) such Holder has
previously given written notice to the Trustee of a continuing Event of
Default, (ii) the Holders of at least 25% in aggregate principal amount of the
Outstanding Series 1996 Debentures have made a written request, and offered
reasonable indemnity, to the Trustee to institute proceedings in respect of
such Event of Default in its own name as Trustee and (iii) the Trustee has not
received from the Holders of a majority in principal amount of the Outstanding
Series 1996 Debentures a direction inconsistent with such written request and
shall have failed to institute such proceeding within 60 days after its receipt
of such notice, request and offer of indemnity. However, the Holder of any
Series 1996 Debenture will have an absolute right to receive payment of and the
principal of and interest on such Series 1996 Debenture on or after the
respective due dates and to institute suit for the enforcement of any such
payment.
52
<PAGE> 56
Modification and Waiver. With certain limited exceptions which permit
modification of the Indenture by the Company and Trustee only, the Indenture
may be modified by the Company with the consent of Holders of not less than 50%
in principal amount of Outstanding Series 1996 Debentures; provided, however,
that no such changes shall, without the consent of the holder of each
Outstanding Series 1996 Debenture affected thereby (i) change the Stated
Maturity of the principal of, or any installment of interest on any Series 1996
Debenture, (ii) reduce the principal of, or the rate of interest on, any Series
1996 Debenture (iii) change the coin or currency in which any Series 1996
Debenture or the interest thereon is payable, (iv) impair the right to
institute suit for the enforcement of any such payment, (v) reduce the
percentage in principal amount of the Outstanding Series 1996 Debentures, the
consent of whose Holders is required to modify the Indenture, (vi) reduce the
percentage in principal amount of the Outstanding Series 1996 Debentures, the
consent of whose Holders is required for any waiver of compliance with certain
provisions of the Indenture or certain defaults thereunder, (vii) subordinate
the Indebtedness evidenced by the Series 1996 Debentures to any Indebtedness of
the Company other than Senior Indebtedness, or (viii) impair or restrict the
rights of the Holders of the Series 1996 Debentures to redemption of the Series
1996 Debentures prior to the Stated Maturity thereof as provided in the
Indenture. No supplemental indenture shall adversely affect the rights of any
holders of Senior Indebtedness without the consent of such holder.
The Holders of at least 50% in principal amount of the Series 1996
Debentures at the time the Series 1996 Debentures are Outstanding may waive
compliance by the Company with certain restrictive provisions of the Indenture.
DESCRIPTION OF COMMON STOCK
The Company's authorized capital stock consists of 1,250,000 shares of
Preferred Stock and 3,750,000 shares of Common Stock. As of April 1, 1996,
there were 478,643 shares of Common Stock outstanding, including shares subject
to forfeiture. Owners of the Common Stock are entitled to such dividends as
may be declared by the Board of Directors out of the assets legally available
for that purpose, and are entitled to one vote per share on all matters
submitted to a vote of the shareholders of the Company. The holders of shares
of Common Stock do not have cumulative voting rights and therefore holders of
more than fifty (50%) percent of the shares voting for the election of
directors can elect all of the directors and the remaining holders will not be
able to elect any directors. The holders of shares of Common Stock have no
preemptive rights or other rights to subscribe for additional shares. There
are no conversion rights, redemption rights or sinking fund provisions with
respect to shares of Common Stock. All shares of Common Stock now outstanding
are validly issued, fully paid and nonassessable. On liquidation, dissolution
or winding up of the Company, the holders of shares of Common Stock are
entitled to receive, pro rata, the net assets of the Company remaining after
the payment of all creditors and the payment of all accrued and unpaid
dividends and the liquidation value with respect to outstanding shares of
Series A and Series B Preferred Stock.
53
<PAGE> 57
There is no established public trading market for the Company's Common
Stock. At April 1, 1996, there were 50 shareholders of record of the Company's
Common Stock. The Company has never paid a dividend on its Common Stock and
has no present plans to pay dividends in the future. The Company is restricted
in its ability to pay dividends under the terms of certain of its loan
agreements, as well as under the Indentures with respect to the Prior
Indentures and it is restricted under the Indenture with respect to the Series
1996 Debentures.
PLAN OF DISTRIBUTION
The Series 1996 Debentures being offered hereby are being offered by the
Company through certain officers, none of whom will be compensated, directly or
indirectly, in connection with his participation in the Offering. The Company
will rely on Rule 3a4-1 under the Securities Exchange Act of 1934, as amended,
and sales of Series 1996 Debentures will be conducted within the requirements of
Rule 3a4-1 by the Company's officers. In addition, the Company has appointed
East West Capital Corporation, Sigma Financial Corporation, Chapel Hill
Securities, Inc., Martha R. Seger & Associates, Inc. and Sabel Management, Inc.,
each a member of the National Association of Securities Dealers, Inc. ("NASD"),
to act as selling agents in the Offering on a "best efforts" basis. Martha R.
Seger & Associates, Inc. has been an NASD member involved in the general
securities business for approximately three years. The other participating NASD
members have all been in the securities business for over three years. These
participating NASD members will not have any firm commitment for the purchase of
Series 1996 Debentures. As compensation for their services in connection with
this Offering, participating broker-dealers will be paid a selling commission by
the Company of 6.5% of the purchase price of all Series 1996 Debentures sold by
them, provided, however, that if a broker-dealer sells $250,000 or more of the
Series 1996 Debentures it will be paid a commission of 7.0% on all sales, and if
a broker-dealer sells $500,000 or more of the Series 1996 Debentures it will be
paid a commission of 8.0% on all sales. The Company has agreed to indemnify
participating broker-dealers against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, or to contribute to payments the
broker-dealers may be required to make in respect thereof.
For the duration of the Offering, the Company and any participating
broker-dealer will instruct investors to make their investment checks payable
to the Company and will forward all subscription monies promptly to the
Company.
54
<PAGE> 58
LEGAL MATTERS
The validity of the Series 1996 Debentures offered hereby will be passed
on for the Company by Dykema Gossett PLLC, Detroit, Michigan.
EXPERTS
The Company's consolidated balance sheets as of January 31, 1996 and 1995,
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended January 31, 1996 included in this
Prospectus have been audited by Moore Stephens Doeren Mayhew, P.C. and Grant
Thornton LLP acting in a joint capacity, independent certified public
accountants, to the extent and for the periods indicated in their report
thereon appearing elsewhere herein and are included in reliance upon such
reports given upon the authority of said firms as experts in auditing and
accounting.
55
<PAGE> 59
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets
As of January 31, 1996 and 1995 F-3
Consolidated Statements of Operations
For the years ended January 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Stockholders' Equity
For the years ended January 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows
For the years ended January 31, 1996, 1995 and 1994 F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-24
F-1
<PAGE> 60
[GRANT THORNTON LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
MCA Financial Corp.
We have audited the accompanying consolidated balance sheets of MCA Financial
Corp. and subsidiaries as of January 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended January 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MCA Financial
Corp. and its subsidiaries as of January 31, 1996 and 1995, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended January 31, 1996, in conformity
with generally accepted accounting principles.
Moore Stephens
Doeren Mayhew, P.C. Grant Thornton LLP
Moore Stephens Grant Thornton LLP
Doeren Mayhew, P.C. Detroit, Michigan
Troy, Michigan
April 26, 1996
F-2
<PAGE> 61
MCA FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
January 31 January 31
1996 1995
-------------- -------------
<S> <C> <C>
Cash $ 2,730,408 $ 2,931,234
Land contracts held for resale 11,484,877 9,309,498
Mortgages held for resale 63,306,372 15,702,403
Accounts receivable 9,722,527 14,154,804
Accounts receivable, related parties 8,256,090 8,269,139
Purchased servicing rights, net 27,293,358 17,567,698
Investments 2,492,816 1,529,728
Syndication participations 67,903 87,236
Real estate held for resale 392,013 -
Property and office equipment 4,856,330 3,863,737
Deferred charges and other assets 4,587,947 3,696,043
-------------- ------------
$ 135,190,641 $ 77,111,520
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Notes payable $ 86,597,703 $ 44,843,292
Subordinated debentures 9,174,000 4,938,000
Accounts payable 25,206,687 15,354,085
Accounts payable, related parties 1,693,311 1,499,582
Accrued interest and other expenses 2,058,080 986,249
Deferred federal income tax 300,000 200,000
-------------- ------------
125,029,781 67,821,208
-------------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock
Authorized 3,750,000 shares at January 31,
1996 and 1995. No par, stated value $.01
each. Issued and outstanding, 448,617 shares at January 31,
1996 and 404,906 shares at January 31, 1995 4,486 4,049
Preferred stock (Series A)
Authorized 350,000 shares, $10 stated value, issued and
outstanding 203,022 shares at January 31, 1996
and 1995 2,030,220 2,030,220
Preferred stock (Series B)
Authorized 750,000 shares, $10 stated value, issued and
outstanding 336,619 shares at January 31, 1996
and 1995 3,366,190 3,366,190
Additional paid-in capital 3,457,251 2,717,030
Retained earnings 1,302,713 1,172,823
-------------- ------------
10,160,860 9,290,312
-------------- ------------
$ 135,190,641 $ 77,111,520
============== ============
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 62
MCA FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended January 31
1996 1995 1994
---- ---- ----
REVENUES
<S> <C> <C> <C>
Gain on sale of land contracts $ 2,981,138 $ 2,983,022 $ 1,753,043
Gain on sale of real estate 750,800 - 66,967
Gain on sale of real estate-related parties 6,529,708 7,365,199 4,811,069
Gain on bulk sales of servicing rights 4,725,872 7,475,444 5,578,948
Mortgage origination fees and gain on
sale of mortgages 14,339,220 5,584,454 11,282,265
Servicing fees 6,243,748 4,616,738 1,916,662
Interest income 5,902,714 5,106,041 3,948,291
Other income 477,810 240,783 176,976
------------ ------------ ------------
Total revenues 41,951,010 33,371,681 29,534,221
------------ ------------ ------------
EXPENSES
Payroll 11,955,536 10,985,576 7,141,707
Interest 7,565,044 6,018,518 4,428,925
Commissions 5,929,844 4,591,079 8,286,531
Professional services 1,447,810 1,511,215 1,294,889
Depreciation 554,904 351,964 202,599
Amortization 3,259,131 1,924,872 2,009,511
General and administrative 10,111,211 8,163,619 5,197,874
------------ ------------ ------------
Total expenses 40,823,480 33,546,843 28,562,036
------------ ------------ ------------
INCOME (LOSS) BEFORE
FEDERAL INCOME TAXES 1,127,530 (175,162) 972,185
Provision for federal income taxes 512,000 102,384 420,545
------------ ------------ ------------
NET INCOME (LOSS) $ 615,530 $ (277,546) $ 551,640
============ ============ ============
Earnings (loss) per share $1.44 $(.69) $1.60
===== ===== =====
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 63
MCA FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Year Ended January 31, 1996, 1995 and 1994
COMMON PREFERRED ADDITIONAL RETAINED
STOCK STOCK PAID IN CAPITAL EARNINGS
----------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
Balance, February 1, 1993 $ 2,966 $ 1,690,600 $ 1,617,159 $ 1,561,101
Net Income - - - 551,640
Issuance of Common Stock 1,057 - 1,529,810 -
Issuance of Preferred Stock - 3,008,270 (298,619) -
Preferred Stock Dividends - - - (214,926)
----------- ------------ ------------ ------------
Balance, January 31, 1994 4,023 4,698,870 2,848,350 1,897,815
Net Loss - - - (277,546)
Issuance of Common Stock 26 - 28,211 -
Issuance of Preferred Stock - 697,540 (159,531) -
Preferred Stock Dividends - - - (447,446)
----------- ------------ ------------ ------------
Balance, January 31, 1995 4,049 5,396,410 2,717,030 1,172,823
Net Income - - - 615,530
Issuance of Common Stock 444 - 764,300 -
Repurchase of Common Stock (7) - (24,079) -
Preferred Stock Dividends - - - (485,640)
----------- ------------ ------------ ------------
Balance, January 31, 1996 $ 4,486 $ 5,396,410 $ 3,457,251 $ 1,302,713
=========== ============ ============ ============
<CAPTION>
PREFERRED
STOCK
SUBSCRIPTIONS TOTAL
------------- -----
<S> <C> <C>
Balance, February 1, 1993 $ - $ 4,871,826
Net Income - 551,640
Issuance of Common Stock - 1,530,867
Issuance of Preferred Stock (886,000) 1,823,651
Preferred Stock Dividends - (214,926)
----------- ------------
Balance, January 31, 1994 (886,000) 8,563,058
Net Loss - (277,546)
Issuance of Common Stock - 28,237
Issuance of Preferred Stock 886,000 1,424,009
Preferred Stock Dividends - (447,446)
----------- ------------
Balance, January 31, 1995 - 9,290,312
Net Income - 615,530
Issuance of Common Stock - 764,744
Repurchase of Common Stock - (24,086)
Preferred Stock Dividends - (485,640)
----------- ------------
Balance, January 31, 1996 $ - $ 10,160,860
=========== ============
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 64
MCA FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended January 31
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 615,530 $ (277,546) $ 551,640
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 3,814,035 2,276,836 2,212,110
Stock award compensation 165,744 28,237 101,637
Increase in land contracts
held for resale (2,175,379) (5,439,497) (2,409,120)
(Increase) decrease in mortgages held
for resale (47,003,969) 23,547,628 (25,166,053)
(Increase) decrease in accounts receivable 4,432,277 (7,325,104) (5,593,570)
Increase in accounts receivable, related parties (986,951) (1,333,086) (4,616,933)
Increase in deferred charges and other assets (1,751,063) (2,115,825) (754,659)
Increase in accounts payable 9,852,602 9,047,933 1,988,117
Increase (decrease) accounts payable,
related parties 193,729 194,211 (406,000)
Increase in accrued interest and other expenses 1,071,831 205,166 442,248
Increase in deferred Federal income taxes 100,000 20,000 5,600
------------- -------------- ------------
Net cash provided by (used in)
operating activities (31,671,614) 18,828,953 (33,644,983)
------------- -------------- -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of MCA Realty Corporation - 163,341 -
Investment in purchased servicing rights, net (12,125,632) (10,645,117) (8,585,344)
(Increase) decrease in investments 36,912 (224,702) 133,717
Decrease in investments in syndications 19,333 126,424 305,679
Real estate acquisitions (392,013) - -
Proceeds from sale of real estate - 451,133 420,131
Capital expenditures (1,073,420) (232,962) (484,374)
------------- ------------- -------------
Net cash used in investing activities (13,534,820) (10,361,883) (8,210,191)
------------- -------------- -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from notes payable 548,960,490 529,181,111 639,870,762
Payments on notes payable (507,680,156) (540,175,700) (600,308,609)
Proceeds from subordinated debentures 4,236,000 - 1,767,000
Redemption of common stock - (300,000) -
Repurchase of common stock (25,086) - -
Proceeds from issuance of preferred stock - 1,583,540 2,122,270
Preferred stock issuance costs - (159,531) (298,619)
Dividends on preferred stock (485,640) (447,446) (214,926)
------------- -------------- ------------
Net cash provided by (used in) financing
activities 45,005,608 (10,318,026) 42,937,878
------------- -------------- ------------
Net increase (decrease) in cash (200,826) (1,850,956) 1,082,704
Cash at beginning of period 2,931,234 4,782,190 3,699,486
------------- -------------- ------------
Cash at end of period $ 2,730,408 $ 2,931,234 $ 4,782,190
============= ============== ============
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE> 65
MCA FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Year Ended January 31
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Cash paid during the period for:
Interest $7,435,339 $5,943,047 $4,276,624
Income Taxes $ 66,506 $ 325,878 $ 396,445
</TABLE>
During the year ended January 31, 1996 the Company issued 24,410 shares of
common stock to employees and recognized $164,744 in compensation expense. The
Company also issued 20,000 shares of common stock to a shareholder/director of
the Company in exchange for $600,000 in notes receivable. Prior to January 31,
1996 the notes receivable were assigned to Investor Pass-Through Trusts in
satisfaction of amounts due the Trust by MCAFC. In December of 1995, the
Company exchanged a $1,000,000 investment in a real estate partnership acquired
from a related party in exchange for a reduction in amounts due the Company for
an interest in a limited liability company whose primary activity involves
providing financing for automobile dealerships. During the year ended January
31, 1996, capital leases totalling $474,077 were entered into for the purchase
of various furniture and equipment.
During the year ended January 31, 1995 the Company issued 2,567 shares of
common stock to employees and recognized $28,237 in compensation expense. The
Company also entered into capital lease arrangements for the purchase of
various furniture and equipment in the amount of $767,145. On January 31, 1995
the Company acquired MCA Realty Corporation (see Note 15) in a non-cash
transaction. The following assets and liabilities were acquired in exchange
for a $945,117 net reduction in accounts receivable from RIMCO Financial
Corporation:
<TABLE>
<S> <C>
Cash $163,341
Accounts receivable 414,126
Property and office equipment 947,967
Deferred charges and other 18,918
Notes payable (521,634)
Accounts payable (77,601)
---------
$945,117
=========
</TABLE>
During the year ended January 31, 1994 the Company issued 94,400 shares of
common stock to various shareholders/directors of the Company in exchange for
certain real estate and notes receivable valued at $1,428,286. Subsequent to
January 31, 1994 the notes receivable were assigned to Investor Pass-Through
Trusts in satisfaction of amounts due to the Trust by MCAFC. During fiscal
1994 the Company issued 11,293 shares of common stock to employees and
recognized $101,637 in compensation expense. The Company also entered into
capital lease arrangements for the purchase of various furniture and equipment
in the amount of $1,163,121. At January 31, 1994 there were preferred stock
subscriptions outstanding in the amount of $886,000. These amounts were
received in the first quarter of fiscal 1995.
See notes to consolidated financial statements
F-7
<PAGE> 66
MCA FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements at January 31, 1996, 1995 and 1994
include the accounts of MCA Financial Corp. (MCAFC) and its wholly owned
subsidiaries MCA Mortgage Corp. (MCAMC), Mortgage Corporation of America (MCA),
MCA Realty Corporation (MRC) and Complete Financial Corp. (CFC). Mortgage
Corporation of America - Ohio (MCA-Ohio) is a wholly owned subsidiary of MCA.
Intercompany accounts and transactions are eliminated in consolidation.
NATURE OF OPERATIONS
MCAFC and its subsidiaries (the Company) is a diversified mortgage banking and
real estate services enterprise. The Company generates revenue from four
primary sources including mortgage banking, land contract syndication, loan
servicing and real estate sales.
The Company originates first mortgage loans on residential properties. Loans
are delivered, primarily on a pre-sold basis, to various institutional
investors throughout the United States. These mortgage loans are typically
sold on a non-recourse basis. Loans underwritten and sold may be subject to
repurchase if the underwriting standards of the investor are not met. These
transactions are accounted for as sales of loans since the Company is able to
estimate its obligation under the recourse provisions, which historically have
been immaterial. Gains and losses from loan sale transactions are recognized
when the mortgage loans are sold and amount to approximately $3,767,000,
$(430,000) and $6,175,000 for the years ending January 31, 1996, 1995 and 1994
respectively.
MCA purchases land contracts and mortgage notes at a discount from face value
and packages (securitizes) these real estate investments into Investor
Pass-through Trusts. MCA is the sponsor of the Trusts, which are sold as
securities to investors by independent security broker-dealers. The Trusts
hold the entire interest, including any residual, in the transferred loans.
Gain on sale is recognized when the Trusts have broken escrow (investor funds
have been received).
MCAMC and MCA service the land contracts and mortgages for various investors.
Servicing revenues are recognized monthly according to the servicing contracts
related to the various portfolio interests.
MCAFC, MCA and MRC purchase residential and commercial income properties which
are sold to limited partnerships. Revenues related to limited partnership
sales are recognized when the sales are closed.
Substantially all of the real estate and land contracts held by the limited
partnerships and Investor Pass-through Trusts are located in, or relate to,
properties located in the greater Detroit, Michigan metropolitan area.
F-8
<PAGE> 67
MCA FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LAND CONTRACTS HELD FOR RESALE
Land contracts held for resale are recorded at the lower of cost or market and
consisted of the following at:
<TABLE>
<CAPTION>
January 31
1996 1995
----------- ------------
<S> <C> <C>
Land contracts receivable $12,158,775 $11,073,717
Discount (416,418) (749,043)
Senior liens payable (257,480) (1,015,176)
----------- -----------
$11,484,877 $ 9,309,498
=========== ===========
</TABLE>
The fair value of land contracts for resale approximates cost at January 31,
1996.
MORTGAGES HELD FOR RESALE
Mortgages held for resale are recorded at the lower of cost or market which is
determined by the aggregate method (unrealized losses are offset by unrealized
gains). Cost approximated market value, therefore, no valuation allowance was
necessary at January 31, 1996 and 1995.
ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at:
<TABLE>
<CAPTION>
January 31
1996 1995
----------- -----------
<S> <C> <C>
Accounts receivable - sales of servicing rights $5,912,243 $10,480,361
Accrued fees and commissions 1,505,378 1,195,060
Accounts receivable - syndication sales 662,577 910,500
Accounts receivable - escrows on closed loans 563,061 233,714
Accounts receivable - shareholders 182,679 262,020
Accrued interest 211,843 137,333
Employee commission draws 113,799 108,800
Notes receivable - other - 95,000
Other 570,947 732,016
---------- -----------
$9,722,527 $14,154,804
========== ===========
</TABLE>
Accounts receivable - related parties consist mainly of non-interest bearing
advances and other administrative charges to Investor Pass-through Trusts and
limited partnerships sponsored by the Company, and other related entities.
F-9
<PAGE> 68
MCA FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE - CONCLUDED
Included in accounts receivable - related parties at January 31, 1996 and 1995,
respectively, are approximately $793,000 and $796,000 due from an entity owned
by certain directors and shareholders of the Company; $1,676,000 and $1,097,000
due from Property Corporation of America (PCA); and $4,568,000 and $4,995,000
due from investor pass-through trusts and limited partnerships. Collectibility
of the receivables from PCA and from investor pass-through trusts and limited
partnerships is substantially dependent upon the successful syndication of
partnership interests and operating cash flows generated by rental operations.
The Company uses the allowance method to account for possible losses of
accounts receivable, and no allowance was deemed necessary at January 31, 1996
and 1995.
PURCHASED SERVICING RIGHTS
The Company capitalizes the cost of bulk purchases of servicing rights, as well
as the net cost of servicing rights acquired through the purchase of loans
servicing released, which will be sold servicing retained. The purchase price
of loans acquired servicing released is allocated between the servicing rights
and the value of the loans on a servicing retained basis. The portion of the
purchase price that represents the cost of acquiring the servicing rights is
capitalized as purchased servicing. The remainder of the purchase price
represents the cost basis of the loan that will be sold.
The following is an analysis of the changes in purchased servicing rights:
<TABLE>
<S> <C>
Balance, February 1, 1993 $ 1,387,453
Additions 8,585,344
Scheduled amortization (453,764)
Amortization due to changes in
prepayment and other assumptions (1,261,728)
Sales -
-----------
Balance, January 31, 1994 8,257,305
Additions 22,145,428
Scheduled amortization (1,334,724)
Amortization due to changes in
prepayment and other assumptions -
Sales (11,500,311)
-----------
Balance January 31, 1995 17,567,698
Additions 25,711,919
Scheduled amortization (1,991,974)
Amortization due to changes in
prepayment and other assumptions (468,007)
Sales (13,526,278)
-----------
Balance, January 31, 1996 $27,293,358
===========
</TABLE>
F-10
<PAGE> 69
MCA FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PURCHASE SERVICING RIGHTS - (CONCLUDED)
Amortization of purchased servicing rights is based on the ratio of net
servicing income received in the current period to total net servicing income
projected to be realized from the purchased servicing rights on a discounted
basis. The Company periodically evaluates the recoverability on a
disaggregated basis by analyzing each individual bulk purchase
of servicing rights separately and recording any amortization necessary to
adjust the carrying value of each bulk purchase to its net realizable value.
Projected net servicing income is determined on the basis of the estimated
balance of the underlying mortgage loan portfolio, which declines over time
from prepayment and scheduled amortization. The Company estimates future
prepayment rates based on current interest rate levels and other economic
conditions, as well as relevant characteristics of the servicing portfolio,
such as loan types, interest rate stratification and recent prepayment
experience. Amortization of purchased servicing rights was $2,459,981,
$1,334,724, and $1,715,492 for the years ended January 31, 1996, 1995 and 1994,
respectively. Accumulated amortization of purchased servicing rights was
$2,887,705, $427,724 and $1,715,492 at January 31, 1996, 1995 and 1994,
respectively.
Properties securing the mortgage loans in the Company's servicing portfolio are
located throughout the United States.
At January 31, 1996 the net book value of the purchased servicing rights
portfolio approximated fair value.
INVESTMENTS
Partnership investments consist of partnership interests in limited
partnerships and are accounted for under the equity method. The partnerships
invest primarily in residential rental properties. Presented below is summary
unaudited financial information for the above limited partnerships as of, and
for the year ended:
<TABLE>
<CAPTION>
December 31
-----------
1995 1994
---------- ----------
<S> <C> <C>
Total assets $9,327,310 $9,089,000
Total liabilities 2,885,888 2,908,000
Partnership equity 6,441,422 6,181,000
Net income 510,748 322,000
</TABLE>
Included in investments at January 31, 1996 is a common stock investment in a
LLC which was made in December, 1995. This start-up company intends to
participate in the used vehicle retail industry through providing floor plan
financing and participating in joint venture activities with existing dealers.
The Company's investment in the Class B shares issued by this LLC provides it
the right to participate in earnings and distributions, if any, subject to the
preferential rights of certain other shareholders. This investment is being
acounted for on the cost method.
SYNDICATION PARTICIPATIONS
Syndication participations consist of interests in Investor Pass-through Trusts
sponsored by the Company and are recorded at cost. Income earned from the
Company's interest in Pass-through Trusts is included in interest income.
REAL ESTATE HELD FOR RESALE
Real estate held for resale consists mainly of single-family residences at
January 31, 1996 and is recorded at the lower of cost or net realizable value.
F-11
<PAGE> 70
MCA FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)
PROPERTY AND OFFICE EQUIPMENT
Property and office equipment are recorded at cost. Depreciation is calculated
principally using the straight-line method based upon the estimated useful
lives of the assets, ranging from seven to ten years. Property and office
equipment consisted of the following at:
<TABLE>
<CAPTION>
January 31
1996 1995
-------------- -------------
<S> <C> <C>
Property and office equipment under capital leases $ 2,475,010 $ 1,998,546
Property and office equipment 2,653,472 1,896,579
Building and improvements 1,090,714 785,558
------------- ------------
6,219,196 4,680,683
Less: accumulated depreciation (1,362,866) (816,946)
------------- ------------
$ 4,856,330 $ 3,863,737
============= ============
</TABLE>
Depreciation and amortization expense for the year ended January 31, 1996, 1995
and 1994 amounted to $554,904, $351,964 and $202,599, respectively.
REVENUE RECOGNITION
Gains on the sale of servicing rights are recognized when title and all risks
and rewards have irrevocably passed to the buyer and there are no significant
unresolved contingencies. Mortgage origination fees on loans held for sale are
recognized as income at the time the loan is sold.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statements of Financial Accounting Standards ("SFAS") No. 107 issued by the
Financial Accounting Standards Board ("FASB"), "Disclosures about Fair Value of
Financial Instruments", requires the disclosure of fair value information about
financial instruments, whether or not recognized in the statement of financial
condition, where it is practicable to estimate that value. In cases where
quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. SFAS 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used by the Company to estimate the
fair value of each class of financial instruments for which it is practicable
to estimate that value:
Cash and cash equivalents: For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Land Contracts held for resale: This portfolio consists of land contracts held
for resale underlying single family residential properties. These are valued
based on the fair value of obligations with similar credit characteristics.
Mortgage Servicing Rights: The fair value of the mortgaged servicing rights
is determined using the discounted present value of the net cash flows. Market
estimates are used for servicing costs, prepayment speeds and discount rates.
Mortgages held for resale: This portfolio consists of single family mortgage
loans held for sale and is valued using fair values attributable to similar
mortgage loans.
Notes Payable and Subordinated Debentures: The carrying amount for these
instruments approximates fair value.
F-12
<PAGE> 71
MCA FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that effect reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
EARNINGS PER SHARE
Earnings per share are computed based on the weighted average number of common
and common equivalent shares outstanding during the period. The weighted
average number of shares used in the determination of earnings per share was
426,762, 403,622, and 343,893 for the years ended January 31, 1996, 1995 and
1994.
RECLASSIFICATION
Certain amounts in the prior year's financial statements have been reclassified
to conform to the January 31, 1996 presentation.
NEW PRONOUNCEMENTS
In March 1995, the FASB issued "SFAS No. 121 - Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." This statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be
held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. The statement is effective for the year ended January 31,
1997.
In May 1995, the FASB issued SFAS No. 122 - "Accounting for Mortgage Servicing
Rights". This statement requires that a mortgage banking enterprise recognize
as separate assets rights to service mortgage loans for others, however those
servicing rights are acquired. This statement is effective for the year ended
January 31, 1997.
Management does not believe the adoption of these standards will have a
material effect on the financial statements.
NOTE 2 - RESTRICTED CASH
Included in cash and accounts payable are advance payments by borrowers on
loans serviced by the Company in the amount of approximately $378,000 and
$421,000, respectively, at January 31, 1996 and 1995.
F-13
<PAGE> 72
MCA FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - NOTES PAYABLE
Notes payable consisted of the following at:
<TABLE>
<CAPTION>
January 31
1996 1995
------------ ------------
<S> <C> <C>
Note payable under $25 million mortgage
warehouse credit facility, subject to renewal
on July 1, 1996, interest is computed
at the bank's prime rate less 1/2% (8.0% at
January 31, 1996) and payable monthly; principal
payable upon sale of mortgage collateral
(mortgages held for resale) to institutional
investors or on demand. $ 22,557,781 $ 7,332,644
Note payable under $28.5 million revolving credit
loan subject to renewal on October 31, 1996 interest is
computed at the bank's prime rate (7.125% at
January 31, 1996), collateralized by purchased servicing
rights. 28,500,000 24,646,708
Note payable under $30 million mortgage warehouse
facility terminating June 15, 1996, interest is computed
at the federal funds rate plus 1.5% (7.47% at
January 31, 1996) and deducted from the proceeds of
investor fundings, principal payable upon sale of mortgage
collateral (mortgages held for resale) to institutional
investors or on demand. 26,554,708 8,203,564
Note payable under $10 million mortgage warehouse
facility, subject to renewal on November 1, 1996, interest is
computed at LIBOR plus 1.5% (7.14% at January 31, 1996),
principal payable upon sale of mortgage collateral (mortgages
held for resale) to institutional investors. 3,729,748 -
Revolving line of credit/note payable, $.5 million credit
line for working capital, $1 million note payable for
purchases of land contracts subject to renewal on
April 30, 1996, interest is computed at the bank's prime
rate plus 1% (9.5% at January 31, 1996). Land
contracts are assigned to the bank as collateral, personally
guaranteed by certain officers of the Company, principal
payable upon sale of collateral. 1,500,000 1,500,000
Note payable under $1.5 million line of credit for the
acquisition and rehabilitation of residential real property
subject to renewal on October 31, 1996, interest is computed
at 12%, collateralized by residential real property and
personally guaranteed by certain officers of the Company,
principal payable upon sale of collateral. 1,448,042 1,199,304
</TABLE>
F-14
<PAGE> 73
MCA FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - NOTES PAYABLE (CONCLUDED)
<TABLE>
<S> <C> <C>
Note payable under $1.5 million line of credit for the
acquisition and reliabilitation of residential real property,
subject to renewal April 1, 1996, interest is computed
at the bank's prime rate plus 3/4%, collateralized by residential
real property and personally guaranteed by certain officers
of the Company, principal payable upon sale of collateral. 408,773 -
Land contracts payable to certain Investor Pass-through
Trusts sponsored by the Company for purchase of a building,
interest at 11%, collateralized by the building, principal
payable based on 30 year amortization, balloon payment
required in 10 years. 542,556 478,881
Other notes payable, including obligations under capital
leases, expiring at various times through 1999. 1,356,095 1,482,191
------------ -------------
$ 86,597,703 $ 44,843,292
============ =============
</TABLE>
In connection with the $28.5 million credit facility, the Company entered into
an arrangement with the Policemen and Firemen Retirement System of The City of
Detroit (The "Fund") whereby the the Fund has agreed to provide payment upon
the occurrence of certain events of default by the Company. In consideration
for this, the Company pays certain fees to the Fund, and has provided it with
an option to purchase up to five percent of the Company's outstanding common
stock, at seventy percent of the public offering price per share, if the
Company completes a firm commitment underwritten sale of its common stock prior
to April 30, 2000.
The above notes payable place certain financial restrictions on the Company.
If for any reason the warehouse credit facilities are terminated, the Company's
ability to fund mortgage loans will be adversely impacted. The Company
anticipates renewal of all of its existing credit facilities.
NOTE 4 - SUBORDINATED DEBENTURES
In December 1991, the Company began offering up to $7,500,000 of 11%
Asset-Backed Subordinated Debentures due March 15, 1997. Interest on the
Debentures is payable quarterly. The Debentures are subordinate in right of
payment to all current and future senior indebtedness of the Company. Payment
of principal and interest on the Debentures is collateralized by a security
interest in and lien upon certain existing and future contract rights to
service mortgages and land contracts. These rights must at all times have a
formula value, as determined by provisions of the Indenture, of at least 105%
of the principal amount of Debentures outstanding. Under certain limited
conditions the Debentures are redeemable commencing June 15, 1993 only up to
$25,000 per holder in each calendar year and only up to an aggregate of
$100,000 per calendar year for all holders. The right of redemption does not
exist if the Company is in default under any senior indebtedness. Through
January 31, 1996 there have been $17,000 in redemptions. The Debentures also
place restrictions on dividends and certain equity transactions should the
Company's consolidated retained earnings fall below $1,000,000. The Debentures
are registered with the Securities and Exchange Commission.
Through January 31, 1996, the Company has incurred approximately $866,000 in
fees related to the debenture offering. These costs are included in deferred
charges and other assets and are being amortized over the life of the
debentures on the straight-line method. Accumulated amortization was $686,000
and $532,000 at January 31, 1996 and 1995.
F-15
<PAGE> 74
MCA FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - SUBORDINATED DEBENTURES (CONCLUDED)
In December 1994, the Company began offering up to $10,000,000 of 11%
Asset-Backed Subordinated Debentures due June 30, 2000. Interest on the
Debentures is payable quarterly. The Debentures are subordinate in right of
payment to all current and future senior indebtedness of the Company. Payment
of principal and interest on the Debentures is collateralized by a security
interest in and lien upon certain existing and future contract rights to
service mortgages and land contracts and specified mortgage notes and land
contract vendors' interests relating to one-to-four family residential and
commercial real estate. This collateral must at all times have a formula
value, as determined by provisions of the Indenture, of at least 105% of the
principal amount of Debentures outstanding. Under certain limited conditions
the Debentures are redeemable only up to $25,000 per holder in each calendar
year and only up to an aggregate of $100,000 per calendar year for all holders.
The right of redemption does not exist if the Company is in default under any
senior indebtedness. Through January 31, 1996 there have been no redemptions.
The Debentures are registered with the Securities and Exchange Commission.
Through January 31, 1996, the Company has incurred approximately $867,000 in
fees related to the debenture offering. These costs are included in deferred
charges and other assets and are being amortized over the life of the
debentures on the straight-line method. Accumulated amortization was $109,000
and $0 at January 31, 1996 and 1995.
NOTE 5 - REDEEMABLE COMMON STOCK
The Company had an arrangement with one shareholder whereby the Company was
required to redeem, at the shareholder's option, any or all of the 14,000
shares covered by the redemption agreement. The redemption price was $21.42
per share. These shares were redeemed during fiscal 1995.
NOTE 6 - PREFERRED STOCK
In March 1992 MCAFC began offering up to 350,000 units consisting of one share
of Series A 9%, $10 stated value, cumulative convertible preferred stock and
one warrant to purchase one share of common stock of the Company. The stock is
convertible only in the event of an initial public offering of the Company's
common stock. The warrants are conditional on an initial public offering of
the Company's common stock within one year of the redemption of the warrant
holders Series A preferred stock. The preferred stock is redeemable at any
time at the option of the Company only. Redemption prices per share increase
$.20 per year from $10.20 in 1993 to $11 in 1997 and thereafter. Through
January 31, 1996 there have been no redemptions. Dividends are payable
quarterly.
In June 1993 MCAFC began offering up to 750,000 units consisting of one share
of Series B 9%, $10 stated value, cumulative convertible preferred stock. The
stock is convertible only in the event of an initial public offering of the
Company's common stock. The preferred stock is redeemable at any time on or
after July 15, 1994 at the option of the Company only at a redemption price of
$10 per share. Through January 31, 1996 there have been no redemptions.
Dividends are payable quarterly.
Through January 31, 1996 the Company has incurred approximately $603,000 in
fees related to the preferred stock offering. These costs have been offset
against additional paid-in capital on the balance sheet.
F-16
<PAGE> 75
MCA FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - FEDERAL INCOME TAXES
Deferred income taxes are provided for on the liability method and reflect the
net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Significant components of the deferred tax liability are
as follows:
<TABLE>
<CAPTION>
January 31
1996 1995
-------- ---------
<S> <C> <C>
Depreciation of property and office
equipment $416,000 $275,000
Deferred gain on sales 23,000 30,000
Non-deductible accruals (31,000) (50,000)
Amortization of goodwill (108,000) (55,000)
-------- --------
$300,000 $200,000
======== ========
</TABLE>
Components of income tax expense include:
<TABLE>
<CAPTION>
Year Ended January 31
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current $412,000 $ 82,384 $414,945
Deferred 100,000 20,000 5,600
-------- -------- --------
$512,000 $102,384 $420,545
======== ======== ========
</TABLE>
The income tax provision reconciled to the tax computed at the statutory
federal rate is as follows for the years ended January 31:
<TABLE>
<CAPTION>
1996 1995
---- -----
<S> <C> <C>
Tax (benefit) at statutory rate $383,000 $(59,000)
Non-deductible items 169,000 107,000
Adjustment of prior year accrual - 38,000
Other (40,000) 16,384
-------- --------
$512,000 $102,384
======== ========
</TABLE>
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company purchased various real estate parcels during the years ended
January 31, 1996, 1995 and 1994. Certain of these parcels during the year
ended January 31, 1994 were purchased for $342,000 from a company owned by two
MCAFC shareholders. These and other parcels purchased from unrelated third
parties were subsequently sold to limited partnerships, for which PCA is the
general partner. Gains totaling $6,529,708, $7,365,199 and $4,811,069 for the
years ended January 31, 1996, 1995 and 1994 were recognized on the sales,
respectively. The Company did not recognize gains on the sale of parcels
acquired from related parties.
During the years ended January 31, 1996, 1995 and 1994 the Company agreed to
pay commissions of $1,735,000, $1,315,000 and $996,000, respectively for the
acquisition of properties acquired from unrelated third parties to a Company
owned by three shareholders of MCAFC. These commissions reduced "Gain on Sale
of Real Estate" in the Consolidated Statements of Operations.
MCA earned $36,000 for management fees for administrative services provided to
U.S. Mutual Financial Corporation (USMFC) during each of the years ended
January 31, 1996, 1995 and 1994, respectively. Certain shareholders of the
Company are directors or major shareholders in USMFC.
Included in accounts payable at January 31, 1996 and 1995 are approximately
$1,693,000 and $1,500,000 attributable to transactions with partnerships,
trusts and other related entities. Such transactions include rental payments
received on behalf of these entities and disbursed in subsequent months.
F-17
<PAGE> 76
MCA FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is party to financial instruments with off-balance sheet risk in
the normal course of business through the production and sale of mortgage loans
and the management of interest rate risk. These financial instruments include
commitments to extend credit and forward contracts to deliver and sell loans to
investors.
The Company is exposed to credit loss in the event of nonperformance by the
counter-parties to the various agreements. However, the Company does not
anticipate nonperformance by the counter-parties. The Company's exposure to
credit risk with respect to commitments to extend credit are limited due to
the non-recourse nature of the loans upon sale to investors. At January 31,
1996 and 1995, respectively, the Company had approved loans that had not yet
closed amounting to approximately $74,259,000 and $23,075,000. The Company
manages credit risk with respect to forward contracts by entering into
agreements only with investors meeting certain requirements. In the event of
default by the counter-party the Company's exposure to credit risk is the
difference between the contract price and the current market
price.
NOTE 10 - LEASE COMMITMENTS
The Company leases office space and equipment under long-term capital and
operating leases with varying terms which expire through 2000. Rent expense on
operating leases approximated $1,803,000, $1,251,000 and $917,000 for the years
ended January 31, 1996, 1995 and 1994, respectively, and is included in the
caption General and Administrative" expense in the Consolidated Statements of
Operations.
As of January 31, 1996, approximate future minimum lease payments under
capital leases and future minimum lease payments under operating leases that
have initial or remaining noncancelable terms in excess of one year are as
follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------------ -----------
<S> <C> <C> <C>
1997 $ 857,641 $ 834,992
1998 447,149 798,058
1999 121,815 549,282
2000 - 282,860
----------- ----------
Total minimum lease payments 1,426,605 $2,465,192
==========
Less:
Amount representing interest 176,443
-----------
Present value of minimum
lease payments $ 1,250,162
===========
</TABLE>
NOTE 11 - COMMITMENTS AND CONTINGENCIES
In accordance with the terms of the Investor Pass-through Trust Participation
Agreements, the Company is obligated to purchase all outstanding participation
certificates held by investors at such time as the aggregate net receivable
balances of each Trust is less than 10% of the original face amount of the
Trust. At January 31, 1996 and 1995, the maximum amount of these future
purchase commitments totalled approximately $8,011,000 and $5,853,000.
F-18
<PAGE> 77
MCA FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Although the Company is approved as a correspondent with numerous mortgage
investors, the Company estimates that three investors purchased substantially
all of the Company's mortgage loans originated during fiscal 1996, 1995 and
1994. Management believes that the loss of these investors would have a
material adverse effect on the Company.
The Company is a party to various routine legal proceedings arising out of the
ordinary course of its business. Management believes that none of these
actions, individually or in the aggregate will have a material adverse affect
on the financial condition or results of operations of the Company.
NOTE 12 - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan covering substantially all its employees. The
Company has the option of making an annual discretionary profit sharing
contribution and is matching each employee's contribution up to a predetermined
limit.
The Company's combined contribution to the plan amounted to $22,000, $17,000
and $48,000 for the years ended January 31, 1996, 1995 and 1994.
NOTE 13 - RESTRICTED STOCK AWARDS
At the discretion of the Board of Directors, shares may be issued to employees
and non-employees as incentives for performance. The number of shares awarded,
and the terms under which such shares become vested (nonforfeitable), are
determined on an individual basis. The Company recognizes the issuance of
restricted shares when they become vested.
As of January 31, 1996, a total of 23,360 shares have been awarded and remain
unvested. The aggregate number of shares and the years in which they become
vested in each of the periods succeeding January 31, 1996 are as follows:
1997 12,358
1998 11,002
F-19
<PAGE> 78
MCA FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - SEGMENT INFORMATION
The Company and it's subsidiaries operate primarily in two business segments.
Operations in mortgage banking involve the origination and purchase of mortgage
loans, sale of mortgage loans in the secondary mortgage market, servicing of
mortgage loans, and the purchase and sale of mortgage servicing rights.
Operations in the real estate industry consist of the purchase and resale and
the securitization and syndication of real estate interests. The following is
a summary of selected consolidated segment information for the mortgage banking
and real estate industry segments for the years ended:
<TABLE>
<CAPTION>
January 31
1996 1995 1994
--------- --------- -----------
<S> <C> <C> <C>
Revenue:
Mortgage banking $ 31,051,952 $22,512,856 $22,508,313
Real estate 10,899,058 10,858,825 7,025,908
------------ ----------- -----------
Total: $ 41,951,010 $33,371,681 $29,534,221
============ =========== ===========
Income (loss) before income
taxes:
Mortgage banking $ (1,195,323) $(3,057,212) $(1,794,175)
Real estate 2,322,853 2,882,050 2,766,360
------------ ----------- -----------
Total: $ 1,127,530 $ (175,162) $ 972,185
============ =========== ===========
Identifiable assets:
Mortgage banking $104,990,975 $46,523,533 $58,341,127
Real estate 27,147,572 23,238,535 15,040,540
Other 3,052,094 7,349,452 3,463,498
------------ ----------- -----------
Total: $135,190,641 $77,111,520 $76,845,165
============ =========== ===========
</TABLE>
F-20
<PAGE> 79
MCA FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - BUSINESS ACQUISITION
On July 19, 1994 the Company purchased substantially all of the revenue
producing activities of Liberty in a transaction accounted for using the
purchase method. These assets included certain furniture and equipment located
in Liberty branch offices in Michigan, Maryland, West Virginia and Illinois and
the right to process and close certain mortgage loans in process originated by
Liberty. The purchase price of the furniture and equipment was determined by
independent appraisal and payable within 45 days of this agreement. The
appraised value was $85,000. At the closing of this agreement a down-payment
of $350,000 was made as an advance against amounts due as a result of future
Liberty branch loan closings. This downpayment is included in deferred charges
and other assets in the accompanying consolidated balance sheet. Liberty was
paid based on a negotiated formula tied to loan closings at Liberty branches
over an eighteen month period. The total purchase price, was $885,000. This
consists of the $85,000 referred to above which was capitalized and amortized
as furniture and equipment; approximately $200,000 for loans-in-process, which
upon closing were capitalized as a cost of the loan origination, and $500,000,
for future branch loan closings, $150,000 of which was paid during July and
August, 1994 and $350,000, which was paid at the closing. The benefits to be
derived from the acquisition of these production offices will to extend beyond
the eighteen month earn-out period, and, accordingly have been capitalized as
goodwill (included in deferred charges and other assets on the balance sheet)
and amortized over a five year period, subject to periodic reevaluation. In
connection with the acquisition, the Company acquired approximately $4,000,000
of loans held for resale which were funded by the Company's warehouse credit
facilities and subsequently purchased by outside investors under terms similar
to any Company originated loan.
The following unaudited pro-forma summary presents the consolidated results of
operations as if the acquisition had occurred at February 1, 1993, after giving
effect to certain adjustments. These pro-forma results have been prepared for
comparative purposes and do not purport to be indicative of what would have
occurred had the acquisition been made as of those dates or of results which
may occur in the future.
F-21
<PAGE> 80
MCA FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - BUSINESS ACQUISITION (CONTINUED)
<TABLE>
<CAPTION>
Year ended January 31, 1994
---------------------------
MCAFC Pro-Forma MCAFC
(Historical) Adjustments (Pro-Forma)
--------------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Gain on sale of land contracts $ 1,753,043 $ - $ 1,753,043
Gain on sale of real estate 4,878,036 - 4,878,036
Gain on bulk sales of servicing rights 5,578,948 1) 1,777,595 7,356,543
Mortgage origination fees 11,282,265 1) 7,893,555 19,175,820
Servicing fees 1,916,662 1) 875,719 2,792,381
Interest income 3,948,291 1) 1,812,194 5,760,485
Other income 176,976 222,193 399,169
----------- --------------- ------------
Total revenues 29,534,221 12,581,256 42,115,477
----------- --------------- ------------
EXPENSES
Payroll 7,141,707 1) 6,220,706 13,362,413
Interest 4,428,925 1) 1,336,167 5,765,092
Commissions 8,286,531 1) 2,002,722 10,289,253
Professional services 1,294,889 1) 167,181 1,462,070
Depreciation 202,599 1) 107,891 310,490
Amortization 2,009,511 1) 2) 253,500 2,263,011
General and administrative 5,197,874 2,908,724 8,106,598
----------- --------------- ------------
Total expenses 28,562,036 12,996,891 41,558,927
----------- --------------- ------------
INCOME (LOSS) BEFORE
FEDERAL INCOME TAXES 972,185 (415,635) 556,550
Provision for federal income taxes 420,545 3) 26,637 447,182
----------- --------------- -----------
NET INCOME $ 551,640 $ (442,272) $ 109,368
=========== =============== ===========
Earnings per share $ 1.60 $ (1.29) $ .31
====== ======= =====
</TABLE>
F-22
<PAGE> 81
MCA FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - BUSINESS ACQUISITION (CONTINUED)
<TABLE>
<CAPTION>
Year ended January 31, 1995
MCAFC Pro-Forma MCAFC
(Historical) Adjustments (Pro-Forma)
------------ ----------- -----------
<S> <C> <C> <C>
REVENUES
Gain on sale of land contracts $ 2,983,022 $ - $ 2,983,022
Gain on sale of real estate 7,365,199 - 7,365,199
Gain on bulk sales of servicing rights 7,475,444 1) 1,737,609 9,213,053
Mortgage origination fees 5,584,454 1) 1,862,821 7,447,275
Servicing fees 4,616,738 1) 429,081 5,045,819
Interest income 5,106,041 1) 245,634 5,351,675
Other income 240,783 128,035 368,818
----------- ------------ -----------
Total revenues 33,371,681 4,403,180 37,774,861
----------- ------------ -----------
EXPENSES
Payroll 10,985,576 1) 1,705,338 12,690,914
Interest 6,018,518 1) 171,221 6,189,739
Commissions 4,591,079 1) 836,669 5,427,748
Professional services 1,511,215 1) 80,798 1,592,013
Depreciation 351,964 1) 49,275 401,239
Amortization 1,924,872 1) 2)110,000 2,034,872
General and administrative 8,163,619 843,557 9,007,176
----------- ------------ -----------
Total expenses 33,546,843 3,796,858 37,343,701
----------- ------------ -----------
INCOME (LOSS) BEFORE
FEDERAL INCOME TAXES (175,162) 606,322 431,160
Provision (credit) for federal income
taxes 102,384 3) 206,149 308,533
----------- ------------ -----------
NET INCOME (LOSS) $ (277,546) $ 400,173 $ 122,627
=========== ============ ===========
Earnings (loss) per share $(.69) $.99 $.30
===== ==== ====
</TABLE>
Summary of Pro-Forma Adjustments:
1) To include historical operating results of the Liberty National
Mortgage Corporation for the year ended December 31, 1993 and the
period ended May 31, 1994. (Certain amounts have been reclassified to
conform to the MCAFC historical presentation.)
2) Amortization of $500,000 of goodwill over five years.
3) Estimated federal income tax accrual.
F-23
<PAGE> 82
MCA FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - BUSINESS ACQUISITION (CONCLUDED)
On January 31, 1995 the Company acquired all of the issued and outstanding
common stock of RIMCO Realty & Mortgage from RIMCO Financial Corporation (an
entity owned by three shareholders of the Company) in exchange for a $945,117
reduction in amounts due the Company. Amounts assigned in the accompanying
consolidated balance sheet to assets purchased and liabilities assumed were
based on the seller's historical cost which is less than fair value.
F-24
<PAGE> 83
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon as having
been authorized by the Company. This Prospectus does not constitute an offer
to sell or the solicitation of an offer to buy Series 1996 Debentures offered
by this Prospectus, nor does it constitute an offer to sell or a solicitation
of any offer to buy Series 1996 Debentures by anyone in any jurisdiction in
which such offer or solicitation is not authorized, or in which the person
making such offeror solicitation is not authorized to do so, or to any person
to whom it is unlawful to make such an offer or solicitation. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof.
TABLE OF CONTENTS
Page
----
Statement of Available
Information ..................
Prospectus Summary ................
Risk Factors ......................
The Company .......................
Use of Proceeds ...................
Capitalization ....................
Selected Consolidated
Financial Data................
Management's Discussion and
Analysis of Financial Condition
Condition and Results of
Operations ...................
Business ..........................
Management ........................
Compensation Committee Interlocks
and Insider Participation.....
Principal Shareholders ............
Description of Series 1996
Debentures ...................
Description of Common Stock .......
Plan of Distribution ..............
Legal Matters .....................
Experts ...........................
Index to Financial Statements .....
MCA FINANCIAL CORP.
$6,000,000
11%
Subordinated Debentures,
Series 1996,
Due June 30, 2002
June 12, 1996
