<PAGE> 1
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the Quarterly Period ended July 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the Transition Period -----------to-----------
Commission File Number 33-98644
MCA FINANCIAL CORP.
(Exact name of Registrant as specified in its charter)
Michigan 38-3014001
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
24700 Northwestern Hwy., 7th Floor, Southfield, MI 48075
(Address of principal executive offices)
(248) 358-5555
(Registrant's Telephone Number, including area code)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or, for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [XX] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
As of July 31, 1998, there were 622,413 shares of the issuer's common stock
outstanding (including shares subject to forfeiture).
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
MCA FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
July 31, 1998 January 31,
(Unaudited) 1998
------------ ------------
<S> <C> <C>
Cash $ 2,438,288 $ 1,533,143
Land contracts held for resale 19,957,853 20,741,228
Mortgages held for resale 131,002,358 102,190,985
Accounts receivable - mortgages sold 73,878,371 69,994,544
Accounts receivable 12,938,568 10,878,886
Accounts receivable - related parties 7,788,594 7,480,642
Mortgage servicing rights, net 2,664,235 3,270,904
Residual interests in securitizations 38,429,976 27,036,087
Investments 3,118,081 2,907,235
Property and office equipment, net 6,787,836 5,940,988
Deferred charges and other assets 8,514,962 7,038,120
------------ ------------
Total assets $307,519,122 $259,012,762
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $212,013,396 $178,438,476
Subordinated debentures 17,729,538 16,054,000
Subordinated notes payable 45,000,000 15,000,000
Accounts payable 12,919,866 29,064,099
Accounts payable-related parties 1,817,677 921,913
Accrued interest and other expenses 4,139,789 4,440,564
Deferred federal income tax 1,729,000 1,479,000
------------ ------------
Total liabilities 295,349,266 245,398,052
------------ ------------
COMMITMENTS AND CONTINGENCIES - -
REDEEMABLE COMMON STOCK 278,261 278,261
------------ ------------
STOCKHOLDERS EQUITY
Common Stock
Authorized 3,750,000 shares
No par, stated value $.01 each
Issued and outstanding 544,312 shares at
January 31, 1998 and July 31, 1998 5,443 5,443
Preferred Stock (Series A)
Authorized 500,000 shares, $10 stated value
Issued and outstanding 203,022 shares at
January 31, 1998 and July 31, 1998 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, 1998 and July 31, 1998 3,366,190 3,366,190
Additional paid-in capital 4,007,854 4,007,854
Retained earnings 2,481,888 3,926,742
------------ ------------
Total stockholders equity 11,891,595 13,336,449
------------ ------------
Total liability and stockholders equity $307,519,122 $259,012,762
============ ============
</TABLE>
See notes to consolidated financial statements
<PAGE> 3
MCA FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
July 31, 1998 July 31, 1997 July 31, 1998 July 31, 1997
------------- ------------- ------------- -------------
REVENUES
<S> <C> <C> <C> <C>
Gain on sale of land contracts $ 1,909,285 $ 804,766 $ 3,493,937 $ 1,337,772
Gain on sale of real estate - 119,376 - 305,121
Gain on sale of real estate-related parties 2,590,516 1,063,963 3,536,733 2,023,893
Gain on bulk sales of servicing rights 1,606,472 1,810,892 3,180,109 3,138,760
Mortgage origination fees and gain on
sale of mortgages 15,340,315 13,818,708 28,801,839 22,703,838
Servicing fees 468,719 1,303,428 1,084,218 2,964,826
Interest income 7,001,127 2,187,712 11,496,956 4,565,077
Other income 1,385,455 229,089 1,921,018 765,698
------------ ------------ ------------ ------------
Total revenues 30,301,889 21,337,934 53,514,810 37,804,985
------------ ------------ ------------ ------------
EXPENSES
Payroll 9,176,443 4,514,159 16,547,868 9,421,445
Interest 8,601,912 3,332,482 14,149,379 6,367,419
Commissions 3,754,599 3,123,721 7,875,597 5,566,120
Professional services 780,783 1,110,778 1,459,397 2,067,050
Depreciation 309,147 190,130 517,848 356,074
Amortization 755,527 556,132 1,464,448 1,060,915
General and administrative 7,805,191 7,010,878 13,302,289 10,956,935
------------ ------------ ------------ ------------
Total expenses 31,183,602 19,838,280 55,316,826 35,795,958
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE
FEDERAL INCOME TAXES (881,713) 1,499,654 (1,802,016) 2,009,027
(Provision) credit for federal
income taxes 300,000 (480,000) 600,000 (680,000)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (581,713) $ 1,019,654 $ (1,202,016) $ 1,329,027
============ ============ ============ ============
Earning (loss) per share $ (1.84) $ 1.75 $ (2.65) $ 2.14
============ ============ ============ ============
Weighted average number of
shares outstanding 544,312 513,283 544,312 508,282
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements
<PAGE> 4
MCA FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN COMPONENTS OF STOCKHOLDER'S EQUITY
(Unaudited)
Six Months Ended July 31, 1998 and 1997
<TABLE>
<CAPTION>
Additional
Common Preferred Paid-In Retained
Stock Stock Capital Earnings Total
------ ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, January 31, 1997 $5,033 $5,396,410 $3,664,976 $ 1,582,384 $ 10,648,803
Net income - - - 1,329,027 1,329,027
Issuance of common stock 100 - 85,917 - 86,017
Preferred stock dividends - - - (242,838) (242,838)
------ ---------- ---------- ----------- ------------
Balance, July 31, 1997 $5,133 $5,396,410 $3,750,893 $ 2,668,573 $ 11,821,009
====== ========== ========== =========== ============
Balance, January 31, 1998 $5,443 $5,396,410 $4,007,854 $ 3,926,742 $ 13,336,449
Net loss - - - (1,202,016) (1,202,016)
Issuance of common stock - - - - -
Preferred stock dividends - - - (242,838) (242,838)
------ ---------- ---------- ----------- ------------
Balance, July 31, 1998 $5,443 $5,396,410 $4,007,854 $ 2,481,888 $ 11,891,595
====== ========== ========== =========== ============
</TABLE>
See notes to consolidated financial statements
<PAGE> 5
MCA FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
July 31, 1998 July 31, 1997
-----------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ (1,202,016) $ 1,329,027
Adjustment to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 1,982,296 4,009,170
Stock award compensation - 86,017
(Increase) decrease in land contracts held for resale 783,375 (2,403,508)
Increase in mortgages held for resale (28,811,373) (38,587,682)
Increase in mortgages sold (3,883,827) (4,348,112)
(Increase) decrease in accounts receivable (2,059,682) 8,790,150
(Increase) decrease in accounts receivable -
related parties (307,952) (1,771,967)
Increase in interest spread receivable (11,393,889) (12,082,710)
(Increase) decrease in deferred charges
and other assets (2,941,290) (1,261,381)
Increase (decrease) in accounts payable (16,144,233) 6,782,502
(Increase) decrease in accounts payable -
related parties 895,764 (164,319)
Increase (decrease) in accrued expenses (300,775) 1,823,047
Increase in deferred Federal income taxes 250,000 -
------------- -------------
Net cash used in operating activities (63,133,602) (37,799,766)
------------- -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Sale (purchase) of purchased rights 606,669 2,380,743
Capital expenditures (1,364,696) (618,408)
(Increase) decrease in investments (210,846) (142,992)
------------- -------------
Net cash provided by (used in)
investing activities (968,873) 1,619,343
------------- -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from notes payable 643,282,150 435,392,628
Payments on notes payable (609,707,230) (398,996,184)
Proceeds from subordinated notes payable 30,000,000 -
Net proceeds from subordinated debentures 1,675,538 (1,588,000)
Dividends on preferred stock (242,838) (242,838)
------------- -------------
Net cash provided by financing activities 65,007,620 34,565,606
------------- -------------
Net decrease in cash 905,145 (1,614,817)
Cash at beginning of period 1,533,143 3,096,993
------------- -------------
Cash at end of period $ 2,438,288 $ 1,482,176
============= =============
</TABLE>
See notes to consolidated financial statements
<PAGE> 6
MCA FINANCIAL CORP.
Notes to Consolidated Financial Statements
NOTE 1 - BASIS OF PRESENTATION
The consolidated balance sheet as of July 31, 1998 and the related consolidated
statements of operations, changes in components of stockholders' equity and cash
flows for the three and six months ended July 31, 1998 and 1997 are unaudited.
In the opinion of management, all adjustments necessary for a fair presentation
of such financial statements have been included. Such adjustments consisted only
of normal recurring items. Interim results are not necessarily indicative of
results for a full year.
The financial statements as of July 31, 1998 and for the three and six months
then ended should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
January 31, 1998.
The accounting policies followed by the Company with respect to the unaudited
interim financial statements are consistent with those stated in the 1998 MCA
Financial Corp. Annual Report on Form 10-K.
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NOTE ON FORWARD-LOOKING INFORMATION
This report includes "forward-looking" statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, which represent the
Company's expectations or beliefs concerning future events. Statements
containing expressions such as "believes", "expects", "should", "anticipates" or
similar terms are intended to identify "forward-looking" statements, which
involve risks and uncertainties. Although the Company believes its expectations
are based on reasonable assumptions with the bounds of its knowledge of its
business and operations, there can be no assurance that actual results will not
differ materially from expected results. All forward-looking statements included
in this report are qualified by factors that could cause actual results to
differ materially from those expressed. Such factors include, but are not
limited to, changes in interest rates and real estate markets generally, the
Company's ability to attract and retain qualified personnel to develop its
non-conforming lending business, the availability and cost of financing sources,
increasing competition in existing markets and businesses and the retention of
key executives and management personnel. Readers are cautioned not to place
undue reliance on forward-looking statements, which speak only as of the date of
this report. The Company undertakes no obligation to publicly release any
revisions of such forward-looking statements to reflect events or circumstances
occurring after the date of this report.
FINANCIAL CONDITION
The Company's primary financing needs are for mortgage banking
activities including loan funding activities, financing residual interest in
securitizations, mortgage servicing rights, and operating cash flows necessary
for growth.
Loan funding activities are primarily financed through the use of
mortgage warehouse lines of credit with commercial banks. See Note 2 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. Table funding involves advancing funds 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 95% of its mortgage originations using its
warehouse lines of credit and approximately 5% with table funding sources.
On October 31, 1997, the Company executed senior secured warehouse
agreements with a syndicate of warehouse lenders totaling $185 million. Texas
Commerce Bank N.A. is the acting warehouse agent. These warehousing lines of
credit provide financing for the funding and origination of a variety of
residential mortgage loans including, but not limited to, conforming mortgages,
non-conforming mortgages, and land contracts. These facilities are scheduled to
expire, October 31, 1998. The Company anticipates the renewal of these
facilities prior to expiration. Interest on bank borrowings are based on LIBOR
plus 0.85% to 2.5%, depending on the type of loan.
<PAGE> 8
Mortgages held for resale are pledged as collateral. The Company also has a $20
million warehousing line of credit with Paine Webber Real Estate Securities,
Inc. Interest on borrowings under this facility are based on LIBOR plus 1.5%.
Mortgages held for resale are pledged as collateral. This facility is scheduled
to expire on November 1, 1998. At July 31, 1998, a total of $ 187.5 million was
outstanding under these facilities.
The Company utilizes mortgage loan repurchase agreements with Paine
Webber Real Estate Securities, Inc. ("Paine Webber") and Prudential Securities
Realty Funding Corporation ("Prudential") pursuant to which Paine Webber and
Prudential purchase mortgage loans until the loans are pooled for resale to an
end investor, at which time the Company repurchases such loans. These agreements
provide for interest payments based on the federal funds rate and the agreements
can be terminated on demand.
The Company utilizes four funding sources to finance its residual
interest in securitizations and mortgage servicing rights: proceeds from $4.9
million and $10.0 million debenture offerings that were completed in July 1993
and December 1996; a bank credit facility, which was first made available to the
Company in April 1993; and a subordinated term loan closed in July 1996. The
$4.9 million and the $10 million series of debentures, as well as the credit
facility, are collateralized by certain of the Company's servicing rights and
rights to servicing income. A prior debenture offering was completed in April
1993 and the debentures were paid off in March 1997. The credit facility, which
is currently at $15.0 million, is with Texas Commerce Bank, N.A. and is enhanced
by a stand-by Note Purchase Agreement between Texas Commerce Bank, N.A. and the
Policemen and Firemen Retirement System of the City of Detroit (the "Fund")
whereby the Fund has agreed to provide payment to Texas Commerce Bank, N.A. 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 to
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 July 31, 1998, $12 million was outstanding under the Texas Commerce
Bank, N.A. credit facility. The subordinated term loan, a $15.0 million loan and
financing agreement with the Fund, has been provided to expand the Company's
non-conforming lending business and to finance residual interest in
securitizations. Interest on this borrowing is 10% and is payable quarterly.
Commencing July 1, 2001, equal quarterly installments of principal and interest
will be paid until the loan terminates and is repaid in full on June 30, 2006.
Under conditions of this agreement, the lender was issued 30,197 shares of the
Company's common stock. This represented 6% of the Company's outstanding
unrestricted shares at July 18, 1996. As part of the agreement the lender has
the right to "put" these shares back to the Company on August 1, 2006 or upon
default under a number of different scenarios.
<PAGE> 9
On March 6, 1998, the Company executed a $30.0 million subordinated
term loan with the Fund. This loan has been provided to allow the Company to
continue to expand its non-conforming lending business and to finance residual
interest in securitizations. The loan accrues interest at 12% and is payable
quarterly. Commencing March 1, 2007, equal quarterly payments of principal and
interest will be paid until the loan terminates on January 31, 2010. Upon
execution of the agreement, the Fund was issued warrants convertible to 4% of
the Company's outstanding common shares on a fully diluted basis.
The Company also utilizes proceeds from a $6.0 million debenture
offering completed in December 1997 and a $10.0 million debenture offering
currently being sold, as well as operating cash flows, to finance its expansion
into new markets and products.
RESULTS OF OPERATIONS
OVERVIEW
The Company recognized a net loss of $1,202,016 for the first six
months of fiscal 1999 as compared to net income of $1,329,027 for the first six
months of fiscal 1998. While loan closing volumes and associated revenues have
increased significantly, the costs of opening new lending offices has, as
anticipated, adversely effected the Company's earnings. During the six months
ended July 31, 1998, the Company opened 20 branch offices. The Company does not
anticipate opening more than 4 or 5 new branches in the second half of the year.
REVENUES
Overall revenues in the first half of fiscal 1999 increased 32% to
$53,514,810 from $40,397,166 for the first half of fiscal 1998. Increased
originations of land contracts increased gain on sale 161% to $3,493,937 from
$1,337,772 for the six months ended July 31, 1998, as compared to the six months
ended July 31, 1997. Historically, the majority of these originations occurred
in Michigan. The Company has continued to educate its entire sales force on this
type of product resulting in increased production. Total gains on sale of real
estate increased to $3,536,733 for the six months ended July 31, 1998, as
compared to $2,329,014 for the six months ended July 31, 1997. This resulted
from a package of 160 homes purchased in bulk that were sold in the second
quarter of fiscal 1999. Gains on sale of servicing rights were consistent at
$3,180,109 and $3,138,760 for the six months ended July 31, 1998 and 1997,
respectively. Mortgage origination fees increased 27% from $22,703,838 for the
two quarters ended July 31, 1997, as compared to $28,801,839 for the two
quarters ended July 31, 1998. This increase corresponded to the increase in
total loan originations from $453 million to $649 million over the same periods,
but was partially offset by a slightly lower average coupon rate on the
originations which negatively effected the sales price received for the product
in the secondary market and higher premiums paid to acquire loans on a wholesale
basis. Revenues recognized for servicing fees decreased 63% to $1,084,218 for
the six months ended July 31, 1998 as compared to $2,964,826 for the six months
ended July 31, 1997. The Company expects servicing fee revenues to continue to
decrease as the Company's conforming servicing portfolio is sold off. Interest
income increased 153% to $11,496,956 from $4,565,077 for the six months ended
July 31, 1998 and 1997, respectively. This resulted from increased production
volumes, particularly
<PAGE> 10
in non-conforming loans, that were held prior to resale. These loans typically
carry interest rates 2% to 5% greater than conforming loans. The holding period
prior to resale also increased as the Company sold more of these non-conforming
loans in bulk for cash as opposed to a securitization.
EXPENSES
Combined payroll and commission expense increased to $24,423,465 for
the two quarters ended July 31, 1998, as compared to $14,987,565 for the two
quarters ended July 31, 1997. This 63% increase related to the 43% increase in
loan origination volume and the 20 branch locations opened in fiscal 1999.
Typically these branches generate little revenue the first 90 days and often
take in excess of 180 days to break-even cumulatively. As a percentage of
revenue, payroll and commissions increased to 46% from 37% for the two quarters
ended July 31, 1998 and 1997, respectively. Interest expense increased
$7,781,960 from $6,367,419 to $14,149,379 for the six months ended July 31, 1997
and 1998, respectively. This increase resulted from the increased volume in
mortgage loan originations, the higher interest rates the Company is required to
pay its warehouse lenders on non-conforming mortgages, and interest on the $30
million of subordinated notes payable. General and administrative expenses
increased 21% or $2,345,354 to $13,302,289 for the six months ended July 31,
1998, as compared to $10,956,935 for the six months ended July 31, 1997. As a
percentage of revenue, general and administrative expenses were consistent at
25% and 28%, respectively.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following exhibit is filed with this
report:
27 - Financial Data Schedule
(b) Reports on Form 8-K:
The Company was not required to file any current
reports on Form 8-K during the quarter ended July 31,
1998.
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MCA FINANCIAL CORP.
Date: September 11, 1998 By: Patrick D. Quinlan
--------------------------------
Patrick D. Quinlan,
Chairman
(Principal Executive Officer)
Date: September 11, 1998 By: Keith D. Pietila
--------------------------------
Keith D. Pietila
Executive Vice President
(Principal Financial and
Accounting Officer)
<PAGE> 12
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ------- --- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND UNAUDITED CONSOLIDATED
BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH UNAUDITED
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 2,438
<SECURITIES> 0
<RECEIVABLES> 20,727
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 10,227
<DEPRECIATION> 3,439
<TOTAL-ASSETS> 307,519
<CURRENT-LIABILITIES> 0
<BONDS> 17,730
0
5,396
<COMMON> 5
<OTHER-SE> 6,491
<TOTAL-LIABILITY-AND-EQUITY> 307,519
<SALES> 0
<TOTAL-REVENUES> 53,515
<CGS> 0
<TOTAL-COSTS> 55,317
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,149
<INCOME-PRETAX> (1,802)
<INCOME-TAX> 600
<INCOME-CONTINUING> (1,202)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,202)
<EPS-PRIMARY> (2.65)
<EPS-DILUTED> (2.65)
</TABLE>
