<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 April 30, 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)
The Company's former address was 23999 Northwestern Hwy., Southfield, MI 48075
(Former Name, Former Address, and Former Fiscal
Year, if Changed Since Last Report)
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 o the latest practicable date:
As of April 30, 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
April 30, 1998 January 31,
(Unaudited) 1998
-------------- -----------
<S> <C> <C>
Cash $ 2,329,241 $ 1,533,143
Land contracts held for resale 10,837,523 20,741,228
Mortgages held for resale 111,199,507 102,190,985
Accounts receivable - mortgages sold 85,524,675 69,994,544
Accounts receivable 25,276,366 10,878,886
Accounts receivable - related parties 7,666,917 7,480,642
Mortgage servicing rights, net 3,016,735 3,270,904
Residual interests in securitizations 35,204,206 27,036,087
Investments 3,002,443 2,907,235
Property and office equipment, net 6,134,534 5,940,988
Deferred charges and other assets 8,656,743 7,038,120
------------ ------------
Total assets $298,848,890 $259,012,762
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $201,396,570 $178,438,476
Subordinated debentures 16,775,538 16,054,000
Subordinated notes payable 45,000,000 15,000,000
Accounts payable 15,254,732 29,064,099
Accounts payable-related parties 1,599,185 921,913
Accrued interest and other expenses 4,470,877 4,440,564
Deferred federal income tax 1,479,000 1,479,000
------------ ------------
Total liabilities 285,975,902 245,398,052
------------ ------------
COMMITMENTS AND CONTINGENCIES - -
REDEEMABLE COMMON STOCK STOCKHOLDERS EQUITY 278,261 278,261
------------ ------------
Common Stock
Authorized 3,750,000 shares
No par, stated value $.01 each
Issued and outstanding 544,312 shares at
January 31, 1998 and April 30, 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 April 30, 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 April 30, 1998 3,366,190 3,366,190
Additional paid-in capital 4,007,854 4,007,854
Retained earnings 3,185,020 3,926,742
------------ ------------
Total stockholders equity 12,594,727 13,336,449
------------ ------------
Total liability and stockholders equity $298,848,890 $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
Ended Ended
April 30, 1998 April 30, 1997
-------------- --------------
REVENUES
<S> <C> <C>
Gain on sale of land contracts $ 1,584,652 $ 533,006
Gain on sale of real estate - 185,745
Gain on sale of real estate-related parties 946,217 959,930
Gain on bulk sales of servicing rights 1,573,637 1,327,868
Mortgage origination fees and gain on
sale of mortgages 13,461,524 8,930,573
Servicing fees 615,499 1,661,398
Interest income 4,495,829 2,377,365
Other income 535,563 536,609
------------ ------------
Total revenues 23,212,921 16,512,494
------------ ------------
EXPENSES
Payroll 7,371,425 4,907,286
Interest 5,547,467 3,034,937
Commissions 4,120,998 2,442,399
Professional services 678,614 956,272
Depreciation 208,701 165,944
Amortization 708,921 550,226
General and administrative 5,497,098 3,946,057
------------ ------------
Total expenses 24,133,224 16,003,121
------------ ------------
INCOME <LOSS> BEFORE
FEDERAL INCOME TAXES (920,303) 509,373
(Provision) credit for federal
income taxes 300,000 (200,000)
------------ ------------
NET INCOME <LOSS> $ (620,303) $ 309,373
============ ============
Earning <loss> per share $ (1.36) $ .37
============ ============
Weighted average number of
shares outstanding 544,312 505,281
============ ============
</TABLE>
See notes to consolidated financial statements
<PAGE> 4
MCA FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN COMPONENTS OF STOCKHOLDER'S EQUITY
(Unaudited)
Three Months Ended April 30, 1998 and 1997
<TABLE>
<CAPTION>
Additional
Common Preferred Paid-In Retained
Stock Stock Capital Earning 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 - - - 309,373 309,373
Issuance of common stock - - - - -
Preferred stock dividends - - - (121,419) (121,419)
------ ---------- ---------- ----------- ------------
Balance, April 30, 1997 $5,033 $5,396,410 $3,664,976 $ 1,770,338 $ 10,836,757
====== ========== ========== =========== ============
Balance, January 31, 1998 $5,443 $5,396,410 $4,007,854 $ 3,926,742 $ 13,336,449
Net income - - - (620,303) (620,303)
Issuance of common stock - - - - -
Preferred stock dividends - - - (121,419) (121,419)
------ ---------- ---------- ----------- ------------
Balance, April 30, 1998 $5,443 $5,396,410 $4,007,854 $ 3,185,020 $ 12,594,727
====== ========== ========== =========== ============
</TABLE>
See notes to consolidated financial statements
<PAGE> 5
MCA FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
April 30, 1998 April 30, 1997
----------------- -----------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
<S> <C> <C>
Net income $ (620,303) $ 309,373
Adjustment to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 917,622 1,241,170
(Increase) decrease in land contracts held for resale 9,903,705 (4,797,866)
Increase in mortgages held for resale (9,008,522) (24,835,179)
Decrease in mortgages sold (15,530,131) (2,144,303)
Decrease in accounts receivable 6,014,126 8,173,721
(Increase) decrease in accounts receivable -
related parties (186,275) (262,134)
Decrease in interest spread receivable (8,168,119) (7,350,974)
(Increase) decrease in deferred charges
and other assets (2,327,544) (78,130)
Decrease in accounts payable (13,809,367) (357,453)
(Increase) decrease in accounts payable -
related parties 677,272 (635,056)
Increase (decrease) in accrued expenses 30,313 296,484
------------- -------------
Net cash used in operating activities (32,107,223) (30,440,347)
------------- -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Sale (purchase) of purchased rights 254,169 (35,114)
Capital expenditures (402,247) (348,874)
(Increase) decrease in investments (95,208) (45,000)
------------- -------------
Net cash provided by (used in)
investing activities (243,286) (428,988)
------------- -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from notes payable 302,666,137 219,316,430
Payments on notes payable (279,708,043) (187,248,478)
Proceeds from subordinated notes payable 9,588,394 -
Net proceeds from subordinated debentures 721,538 (2,796,000)
Increase in redeemable common stock - 85,500
Dividends on preferred stock (121,419) (121,419)
------------- -------------
Net cash provided by financing activities 33,146,607 29,236,033
------------- -------------
Net decrease in cash 796,098 (1,633,302)
Cash at beginning of period 1,533,143 3,096,993
------------- -------------
Cash at end of period 2,329,241 $ 1,463,691
============= =============
</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 April 30, 1998 and the related consolidated
statements of operations, changes in components of stockholders' equity and cash
flows for the three months ended April 30, 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 April 30, 1998 and for the three 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. 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 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. Interest on bank borrowings are based on LIBOR plus
0.85% to 2.5%, depending on the type of loan. Mortgages held for resale are
pledged as collateral. The Company also has a
<PAGE> 8
$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 April 30, 1998 a total of $184 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. The debenture offering completed in April 1993 was
terminated March 17, 1997. The credit facility, which is currently at $28.5
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 April 30,
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 $620,303 for the three months
ended April 30, 1998 as compared to net income of $309,373 for the three months
ended April 30, 1997. During the first quarter of fiscal 1999 loan closing
volumes increased substantially. The Company believes the increased revenues
associated with these closing were offset by the Company's expansion during this
period. The Company opened a total of 16 branch offices in the first quarter of
fiscal 1999.
REVENUES
Total revenues increased 36% to $23.2 million from $16.5 million for
the three months ended April 30, 1998 as compared to April 30, 1997. Gain on
sales of land contracts increased $1.1 million from $0.5 million for the first
quarter of fiscal 1998 as compared to fiscal 1999. This increase resulted from
closing volume increases associated with the expanded branch network. Gain on
sales of real estate were consistent at $0.9 million for the three months ended
April 30, 1998 as compared to $1.1 million for the three months ended April 30,
1997. The Company recognized gain on bulk sales of servicing rights of $1.6
million during the first quarter of fiscal 1999 a 23% increase over the first
quarter of fiscal 1998. This increase corresponded to the 26% increase in
conforming loan originations to $152 million from $121 during the first quarter
of fiscal 1999 and 1998, respectively. The 51% increase in mortgage origination
fees and gain on sale of mortgages from $8.9 million to $13.5 million
corresponded with the 42% increase in mortgage loan originations from $207
million to $293 million during the three months ended April 30, 1997 and 1998,
respectively. The additional increase in revenue can be attributed to closing a
greater percentage of higher margin non-conforming mortgages. Servicing fees
decreased to $0.6 million from $1.7 million, or 65%, during the first quarter of
fiscal 1999 as compared to fiscal 1998 and is attributed to the Company's sale
of a significant portion of its servicing portfolio. The Company recorded $4.5
million in interest income in the three months ended April 30, 1998 as compared
to $2.4 million in the three months ended April 30, 1997. This resulted
primarily from increased production in general and, specifically, production in
non-conforming loans that were held prior to resale. These loans typically carry
interest rates that are higher than rates on conforming loans.
<PAGE> 10
EXPENSES
Payroll and commissions increased 68% to $12.9 million for the quarter
ended April 30, 1998 from $7.3 million for the quarter ended April 30, 1997.
Payroll and commissions as a percentage of revenue increased to 56% from 43%.
This increase resulted from the addition of nearly 150 employees in the 16 new
branches. New branches typically require at least three months to break even.
The Company recorded $5.5 million in expense income in the first quarter of
fiscal 1999 as compared to $3.0 million in the first quarter of fiscal 1998.
This 83% increase results from increased volume of mortgage loan originations
and the higher interest rate the Company is required to pay its warehouse
lenders on non-conforming mortgages. General and administrative expenses
increased $1.6 million, or 41%, to $5.5 million form $3.9 million for the three
months ended April 30, 1998 and 1997, respectively. As a percentage of revenue,
general and administrative expenses were consistent at 24% during the above
periods.
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 April
30, 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: June 14, 1998 By: /s/ Patrick D. Quinlan
-----------------------------------
Patrick D. Quinlan,
Chairman
(Principal Executive Officer)
Date: June 14, 1998 By: /s/ Keith D. Pietila
-----------------------------------
Keith D. Pietila
Executive Vice President
(Principal Financial and
Accounting Officer)
<PAGE> 12
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATION 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> 3-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> APR-30-1998
<CASH> 2,329
<SECURITIES> 0
<RECEIVABLES> 25,276
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 9,056
<DEPRECIATION> 2,921
<TOTAL-ASSETS> 298,849
<CURRENT-LIABILITIES> 0
<BONDS> 16,776
0
5,396
<COMMON> 5
<OTHER-SE> 7,194
<TOTAL-LIABILITY-AND-EQUITY> 290,849
<SALES> 0
<TOTAL-REVENUES> 23,213
<CGS> 0
<TOTAL-COSTS> 24,133
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,547
<INCOME-PRETAX> (920)
<INCOME-TAX> 300
<INCOME-CONTINUING> (620)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (620)
<EPS-PRIMARY> (1.36)
<EPS-DILUTED> (1.36)
</TABLE>
