<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 1996
REGISTRATION NO. 33-94882
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 7
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
HOMEOWNERS FINANCIAL CORP.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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<TABLE>
<S> <C> <C>
DELAWARE 6162 13-2747380
(STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
</TABLE>
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<TABLE>
<S> <C>
MR. CHRISTIAN W. PFLUGER, III
PRESIDENT
HOMEOWNERS FINANCIAL CORP. HOMEOWNERS FINANCIAL CORP.
2075 West Big Beaver Road 2075 WEST BIG BEAVER ROAD
Suite 550 SUITE 550
Troy, Michigan 48084 TROY, MICHIGAN 48084
(800) 723-6001 (800) 723-6001
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S (NAME, ADDRESS AND TELEPHONE
PRINCIPAL NUMBER OF AGENT FOR SERVICE)
EXECUTIVE OFFICES AND PRINCIPAL PLACE OF
BUSINESS)
COPIES TO:
RICHARD FEINER, ESQ. LAWRENCE NUSBAUM, ESQ.
JOHN B. LOWY, P.C. GUSRAE, KAPLAN & BRUNO
645 Fifth Avenue 120 Wall Street
Suite 403 11th Floor
New York, New York 10022 New York, New York 10005
Phone (212) 371-7799 Fax (212) 371-8527 Phone (212) 269-1400 Fax (212) 809-5449
(COUNSEL FOR REGISTRANT) (COUNSEL FOR UNDERWRITER)
</TABLE>
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Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED OCTOBER 30, 1996
HOMEOWNERS FINANCIAL CORP.
A MINIMUM OF 550,000 SHARES
A MAXIMUM OF 1,270,000 SHARES AND 1,270,000 A WARRANTS
OFFERING PRICE: $5.50 PER SHARE AND $.15 PER A WARRANT
Homeowners Financial Corp. (the "Company") is offering hereby up to
1,270,000 shares of the common stock of the Company, $.01 par value (the "Common
Stock") and redeemable warrants to purchase up to 1,270,000 shares of Common
Stock (the "A Warrants"). The Common Stock and A Warrants are sometimes
hereinafter referred to as the "Securities." The Common Stock and A Warrants are
not being sold as a Unit. The A Warrants are separately tradeable upon issuance.
Each A Warrant entitles the registered holder thereof to purchase one share of
Common Stock at a price of $ , subject to adjustment in certain
circumstances, at any time until , 2001 (five years from the
date of this Prospectus). The A Warrants are redeemable by the Company at any
time commencing , 1997 (one year from the date of this
Prospectus)(or earlier with the consent of the Underwriters), upon notice of not
less than 30 days, at a price of $.15 per A Warrant, provided that the closing
bid quotation of the Common Stock for a period of 15 consecutive trading days
ending on the third day prior to the day on which the Company gives notice has
been at least $7.50 per share (subject to adjustment). See "Description of
Securities -- A Warrants."
The Common Stock currently trades sporadically in the over-the-counter
market under the symbol "HOFC." On October 29, 1996, the closing bid quotation
of the Common Stock was $3.50. See "Market Price of Securities." Prior to this
offering (the "Offering"), there has been no public market for the A Warrants
and there can be no assurance that any sustained public market will develop for
the Common Stock or the A Warrants. The Company has applied for listing of the
Common Stock and A Warrants for quotation on the Nasdaq SmallCap Market
("Nasdaq") under the symbols "HOFC" and "HOFCW," respectively. The offering
prices of the Common Stock and A Warrants offered hereby, and the exercise price
of the A Warrants, were determined pursuant to negotiations between the Company
and Toluca Pacific Securities Corporation (the "Underwriter") and do not
necessarily relate to the Company's book value or other established criteria of
value. For a discussion of the factors considered in determining the offering
prices, see "Risk Factors -- No Public Market for the Common Stock or Warrants;
Arbitrary Determination of the Offering Price; Possible Price Volatility."
THESE SECURITIES ARE SPECULATIVE, INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY ANYONE WHO CANNOT
AFFORD THE LOSS OF HIS OR HER ENTIRE INVESTMENT. SEE "RISK FACTORS"
(PAGE 5) AND "DILUTION" (PAGE 17).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) COMMISSION(2) COMPANY(3)
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Per Share............................... $ $ $
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Per A Warrant........................... $ $ $
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Total Minimum Shares -- 550,000
Shares................................ $ $ $
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Total Maximum Shares -- 1,270,000
Shares................................ $ $ $
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Total Maximum Warrants -- 1,270,000 A
Warrants.............................. $ $ $
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</TABLE>
(SEE NOTES ON FOLLOWING PAGE)
PAYMENT FOR THE SECURITIES IS TO BE MADE BY CHECK OR MONEY ORDER PAYABLE TO
"ATLANTIC BANK OF NEW YORK, ESCROW AGENT -- HOMEOWNERS FINANCIAL CORP."
TOLUCA PACIFIC SECURITIES CORPORATION
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE> 3
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(1) The Underwriter has agreed, subject to the terms and conditions of the
Underwriting Agreement, to offer the Securities as agent for the Company on
a "best efforts, 550,000 share minimum -- 1,270,000 share and 1,270,000 A
Warrant maximum " basis. There is no minimum number of A Warrants that must
be sold. Pending the sale of at least 550,000 shares, all proceeds of the
Offering will be held in escrow in a non-interest bearing account with
Atlantic Bank of New York, Escrow Agent. Unless at least 550,000 shares of
Common Stock are sold within 120 days of the date of this Prospectus, or 210
days if extended by mutual consent of the Company and Underwriter, this
Offering will terminate and all funds will be promptly returned to
subscribers without interest thereon or deduction therefrom (see
"Underwriting"). Closing of the Offering could take place as late as ten
business days after the maximum 210 day offering period, to permit clearance
of funds. Once subscriptions for 550,000 shares of Common Stock ($ )
have been escrowed, there will be an initial closing after which the
Offering will continue for the remaining 720,000 shares of Common Stock and
1,270,000 A Warrants on a "best efforts" basis subject to subsequent
closings. There can be no assurance that any or all of the Securities being
offered will be sold.
(2) Does not include the Underwriter's non-accountable expense allowance equal
to three (3.0%) percent of the public offering price ($ per share and
$. per A Warrant), of which $5,000 has been prepaid. If the entire
Offering is sold, the Underwriter will receive a non-accountable expense
allowance of $ ; if the minimum Offering is sold, the Underwriter will
receive a non-accountable expense allowance of $ . These figures do not
include additional compensation to the Underwriter in the form of warrants
to purchase up to 127,000 shares of Common Stock of the Company and warrants
entitling the Underwriter to purchase up to 127,000 warrants (collectively,
the "Underwriter's Warrants") at a price of $ per share and $. per
warrant, respectively; and (c) a five year right to designate one nominee
for election to the Company's Board of Directors. Further, the Company will
indemnify the Underwriter against certain liabilities, including liabilities
arising under the Securities Act of 1933, as amended. See "Underwriting."
(3) The proceeds to the Company set forth in the table on the cover page of the
Prospectus have been computed before deduction of expenses that will be
incurred in connection with this Offering, including filing, printing,
legal, accounting, transfer agent and other fees estimated at $ . The
net proceeds to the Company, after deducting all commissions and expenses in
connection with the Offering, are estimated to be $ if the minimum
Offering is sold and $ if the maximum Offering is sold.
The Securities are offered by the Underwriter as agent for the Company,
subject to prior sale, acceptance of an offer to purchase, withdrawal,
cancellation or modification of the Offering without notice. The Company and the
Underwriter reserve the right in their sole discretion to reject any
subscription in whole or in part, for the purchase of any of the Securities
offered hereby.
ii
<PAGE> 4
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus is a part) on
Form SB-2 (File No. 33-94882) (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Act"), with respect to the Securities
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement, certain portions of which have been omitted
as permitted by the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement and to the
schedules and exhibits thereto. Statements contained in this Prospectus as to
the content of any contract or other document are not necessarily complete, and
in each instance reference is made to a copy of such contract or other document
filed as an exhibit to the Registration Statement or otherwise filed with the
Commission, each such statement being qualified in all respects by such
reference.
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Reports, and other
information filed by the Company can be inspected and copied at the public
reference facilities of the Commission at its principal office at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the
Commission's regional offices at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and at 7 World Trade Center, 13th
Floor, New York, New York 10048. Copies of each such document may be obtained at
prescribed rates from the Public Reference Section of the Commission at its
principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Commission. The Commission's Web site
is located at http://www.sec.gov.
iii
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and the
financial statements, including the notes thereto, appearing elsewhere in this
Prospectus and as part of the Registration Statement and Exhibits attached
thereto. All of the information in this Prospectus assumes initial offering
prices of $5.50 per share of Common Stock and $.15 per A Warrant and an A
Warrant exercise price of $6.00 per share. These figures are subject to change.
Each prospective investor is urged to read this Prospectus in its entirety.
THE COMPANY
Homeowners Financial Corp. (the "Company") is a full service mortgage
banking company that services, originates, acquires and markets mortgage loans
secured primarily by residential properties located in 48 states and the
District of Columbia. All of the Company's substantive operations are conducted
by Developers Mortgage Corp. ("DMC"), a wholly-owned subsidiary, and by Home
Owners Funding Corp. of America ("HOFCA"), a subsidiary of FIS, Inc. ("FIS").
FIS is a wholly-owned subsidiary of the Company. During the nine months ended
June 30, 1996 and the year ended September 30, 1995, the Company's primary
sources of revenues were mortgage loan servicing (78.7% and 84.9%, respectively)
and mortgage loan originations (9.8% and 3.1%, respectively). During the nine
months ended June 30, 1996 and the year ended September 30, 1995, the Company
realized net losses of $.4 million and $.9 million, respectively, on revenues of
$2.4 million and $2.7 million, respectively.
The Company's principal business activities are mortgage loan servicing and
mortgage loan origination. Mortgage loan servicing includes collecting and
processing homeowners' monthly mortgage loan payments, remitting payments of
principal and interest to the investors who invested in the mortgages ("Mortgage
Investors"), maintaining escrow accounts for the payment of taxes and insurance
on behalf of borrowers, processing loan defaults and other general
administrative functions.
As of June 30, 1996, the Company's mortgage loan servicing portfolio
aggregated approximately $614.0 million in unpaid principal balance.
During the nine months ended June 30, 1996 and the year ended September 30,
1995, mortgage loans originated by the Company totalled $16.2 million and $12.4
million, respectively.
The Company originates mortgage loans on a retail and wholesale basis. The
Company receives an origination fee for each retail loan it closes and also
earns fees for other origination functions. The Company sells the mortgage loans
it originates to Mortgage Investors in the secondary mortgage market ("Secondary
Market") and, from time to time, retains the servicing rights associated with
the loans. The Company does not speculate on fluctuations in interest rates and,
therefore, uses forward sales commitments to hedge against such fluctuations.
When the Company retains mortgage loan servicing rights, the rights are then
added to the Company's mortgage loan servicing portfolio, and the Company
receives mortgage loan servicing income over the life of the loans. The Company
typically holds the loans for 7 to 90 days prior to delivering them to Mortgage
Investors in the Secondary Market and generally earns a net interest spread on
the loans during that time period.
The Company's strategy in the mortgage banking area is to increase the
size, diversity and quality of its mortgage loan servicing portfolio and to
expand its origination operations. The Company's acquisition of DMC (see "The
Reorganization") is consistent with this strategy. The Company plans to increase
the size of its mortgage loan servicing portfolio by selectively acquiring
mortgage loan servicing rights and by retaining the servicing rights on a
portion of the loans it originates. Management believes that the Company
currently has the loan servicing capacity to increase the size of its mortgage
loan servicing portfolio by an additional 40,000 loans without incurring
significant additional capital expenditures or fixed costs. By increasing the
size of the mortgage loan servicing portfolio and consolidating the mortgage
loan servicing operations of DMC and HOFCA into DMC's Troy, Michigan facility,
management believes that the Company can enhance its mortgage loan servicing
efficiency and become profitable. Moreover, the Company believes that increasing
the size, diversity, type and quality of its mortgage loan servicing portfolio
will enable it to reduce the effects of unanticipated prepayments resulting from
fluctuations in interest rates and defaults resulting from regional economic
downturns.
1
<PAGE> 6
The Company has allocated approximately $400,000 (minimum offering) up to
$4.0 million (maximum offering) from the net proceeds of this offering to expand
its mortgage loan servicing portfolio (see "Use of Proceeds"). Management
anticipates that such funds will enable the Company to purchase servicing rights
to mortgage loans with between $40 million (minimum offering) and $400 million
(maximum offering) in principal balances.
The Company has begun the process of expanding its origination activities
by acquiring DMC and by purchasing and reselling whole loan portfolios while
retaining the servicing rights. Through the acquisition and expansion of DMC's
origination operations and whole loan activity, the Company hopes to increase
the volume of new loan originations to a level where originations exceed the
volume of prepayments experienced in its mortgage loan servicing portfolio.
If significantly less than all of the Securities offered herein are sold,
the Company most likely will require additional financing (see "Risk
Factors-Possible Need for Additional Financing").
THE OFFERING
Securities Offered
Minimum .............550,000 shares of Common Stock and no A Warrants.
Maximum .............1,270,000 shares of Common Stock and 1,270,000 A
Warrants. The Common Stock and A Warrants may be
purchased separately and are immediately separately
tradeable.
Shares of Common Stock
Outstanding:
Prior to the
Offering................4,131,213 Shares.
After the
Offering(1).............
4,681,213 (minimum) Shares.
5,401,213 (maximum) Shares.
A Warrants
A Warrants to be
outstanding after
this offering.........Up to 1,270,000 A Warrants.
Exercise Terms........Each A Warrant is exercisable immediately, to purchase
one share of Common Stock at a price of $ per
share, subject to adjustment in certain circumstances,
including in the event of a stock dividend,
recapitalization, reorganization, merger or
consolidation of the Company. See "Description of
Securities-A Warrants."
Expiration Date....... , 2001, five years from the date of this
Prospectus, subject to extension in the Company's
discretion.
Redemption............Redeemable by the Company at any time commencing
, 1997 (one year from the date of this
Prospectus) (or earlier with the consent of the
Underwriter), upon notice of not less than 30 days, at a
price of $.15 per A Warrant, provided that the closing
bid quotation of the Common Stock for a period of 15
consecutive trading days ending on the third day prior
to the day on which the Company gives notice has been at
least $7.50 per share (subject to adjustment). See
"Description of Securities-A Warrants."
Use of Proceeds.........To purchase mortgage loan servicing rights, retire
preferred stock, retire a bank loan and for working
capital. See "Use of Proceeds."
2
<PAGE> 7
Risk Factors............These Securities are speculative, involve a high degree
of risk and immediate substantial dilution and should
not be purchased by anyone who cannot afford the loss of
his or her entire investment. Among the principal risk
factors to be considered by investors are: default on a
term loan and warehousing facility; possible need for
additional financing; dilution; interest rate
fluctuations; economic and default risk; competition;
liability under representations and warranties to
mortgage investors, insurers and others; possible
fluctuations in quarterly performance; regulatory
compliance; risks associated with sales of mortgage
loans; federal programs and related agreements;
seasonality; and dependence on management. See "Risk
Factors" and "Dilution."
Proposed NASDAQ
Symbols(2)..............Common Stock... HOFC
...A Warrants......... HOFCW
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(1) Does not include: (i) up to 254,000 shares of Common Stock issuable upon the
exercise of the Underwriter's Warrants and the warrants contained therein;
(ii) 354,429 shares of Common Stock issuable upon exercise of Incentive
Stock Options pursuant to the Company's 1994 Incentive Stock Option Plan and
other outstanding options and warrants; (iii) 680,000 shares of Common Stock
issuable upon exercise of existing Class C and Class B warrants; and (iv)
approximately 58,608 shares of Common Stock issuable upon conversion of
Series C Preferred Stock. See "Description of Securities" and
"Underwriting."
(2) The Company has applied for listing of the Common Stock and A Warrants on
the NASDAQ SmallCap Market. However, no assurance can be given that the
listings will be granted or maintained. See "Risk Factors-Offering and
Market Related Considerations-Low Stock Prices; Possible Inability To Sell
in the Secondary Market."
3
<PAGE> 8
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following tables set forth summary consolidated financial information
with respect to the Company (Successor) and, prior to April 30, 1994, HOFCA
(Predecessor) for the periods indicated and should be read in conjunction with
the Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
The summary consolidated financial information as of the nine months June
30, 1996, was derived from the unaudited consolidated financial statements
included elsewhere herein and is not necessarily representative of operations
for an entire year.
As discussed elsewhere herein, FIS acquired HOFCA in April 1994; and the
Company acquired FIS in September 1994. Due to the foregoing acquisitions and
the resulting changes in cost bases as required by Generally Accepted Accounting
Principles ("GAAP"), the financial information included herein for the periods
and specific year stated is not comparable.
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 30, 1994 PERIOD FROM
NINE MONTHS YEAR ENDED TO OCTOBER 1, 1993
ENDED SEPTEMBER 30, SEPTEMBER 30, TO APRIL 29,
JUNE 30, 1996 1995 1994 1994
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<S> <C> <C> <C> <C>
(SUCCESSOR) (SUCCESSOR) (SUCCESSOR) (PREDECESSOR)
OPERATING DATA:
Total revenue.............. $ 2,404 $ 2,674 $ 1,923 $ 4,318
Total expenses(A).......... 2,770 3,573 1,383 2,776
Net income/(loss).......... (366) (899) 540 1,542
Preferred dividends paid... 96 192 16 --
Per common share
income/(loss)............ (.11) (.27) .32 *
OTHER DATA:
Loan Originations.......... $ 16,200 $ 12,400 $ -- $ --
Servicing portfolio at end
of period................ $614,008 $ 688,500 $ 64,200 $ 132,758
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------
SEPTEMBER 30, ADJUSTED(B)
------------------
1995 ACTUAL MINIMUM MAXIMUM
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<S> <C> <C> <C> <C>
FINANCIAL CONDITION DATA:
Total assets............................ $ 8,035 $9,981 $10,483 $14,094
Purchased mortgage servicing rights..... 5,825 5,032 6,180 9,780
Loans held for sale..................... 478 2,657 2,657 2,657
Notes payable........................... 5,089 4,139 3,444 3,444
Stockholders equity..................... 1,960 2,200 3,397 7,008
</TABLE>
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(A) Includes income taxes.
(B) Adjusted to reflect the sale of 550,000 shares of Common Stock (minimum) and
1,270,000 shares of Common Stock and 1,270,000 A Warrants (maximum) and the
application of $748,000 of working capital. This available working capital
results from the recovery from the gross proceeds of the Offering of
$748,000 which represents offering expenses advanced through June 30, 1996.
See "Use of Proceeds."
* Share information is neither comparable nor meaningful as a result of the
April 29, 1994 acquisition.
4
<PAGE> 9
RISK FACTORS
THE SECURITIES BEING OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND,
THEREFORE, ARE SPECULATIVE IN NATURE. THEY SHOULD NOT BE PURCHASED BY PERSONS
WHO CANNOT AFFORD THE POSSIBILITY OF THE LOSS OF THEIR ENTIRE INVESTMENT.
PROSPECTIVE INVESTORS SHOULD READ THE ENTIRE PROSPECTUS AND CAREFULLY CONSIDER,
AMONG OTHER FACTORS AND FINANCIAL DATA DESCRIBED HEREIN, THE FOLLOWING RISK
FACTORS INHERENT IN AND AFFECTING THE BUSINESS OF THE COMPANY. PROSPECTIVE
INVESTORS ARE ADVISED TO CONSULT THEIR OWN LEGAL, TAX AND FINANCIAL ADVISORS IN
RELATION TO THIS OFFERING.
THE COMPANY AND MORTGAGE BANKING OPERATIONS
Default On First Term Loan and Warehousing Facility. The Company was in
default of the following three minimum financial requirements under its credit
agreement with First Bank ("First Credit Agreement") concerning the Company's
term loan ("First Term Loan") and its warehousing facility ("First Warehousing
Facility") with First Bank: Adjusted Tangible Net Worth ("ATNW"), Adjusted
Leverage Ratio ("ALR") and Debt Service Coverage Ratio ("DSCR"). The Company
continues to be in default under the minimum DSCR requirement. The Company's
ATNW (as defined in the First Credit Agreement) was $2.8 million at September
30, 1995. The minimum ATNW required under the First Credit Agreement at that
time was $3.0 million. The maximum ALR allowed under the First Credit Agreement
was 3.25 to 1.00. At February 29, 1996, the Company's ALR was 3.41 to 1.00. The
minimum DSCR (as defined in the First Credit Agreement) was required to be 1.20
to 1.00. The Company's DSCR at December 31, 1995, March 31, 1996 and June 30,
1996 was .44 to 1.00, 0.72 to 1.00 and 1.07 to 1.00, respectively. In March
1996, the Company converted $503,000 of debt to equity in the form of Series B
Preferred Stock ("B Preferred") (see "Certain Transactions"). As a result of
this conversion, as of March 31, 1996 and June 30, 1996, the Company was in
compliance with the minimum ATNW and ALR requirements. In May 1996, the Company
received a waiver of the conditions of default until September 30, 1996 and
First Bank lowered the minimum ATNW from $3.0 million to $2.7 million and
increased the maximum ALR from 3.25 to 1.00 to 4.0 to 1.00. As a condition to
granting the waiver, First Bank required the Company to suspend payments of all
preferred stock dividends, approximately $69,000 on a quarterly basis, until the
Company is in full compliance with all terms and provisions of the First Credit
Agreement. The Company's management has reviewed with First Bank different cost
reduction measures and additional sources of revenue to bring the DSCR condition
of default into compliance, including consolidation of offices, staffing
adjustments and cash management changes to reduce bank charges and increase
interest income. No assurance can be given that the Company will be able to
effect sufficient cost savings and find additional sources of revenue to cure
the DSCR condition of default. Management believes that First Bank will continue
to work with the Company. If the Company is unable to cure the DSCR condition of
default and First Bank refuses to grant an additional waiver, First Bank may
elect to demand full payment of the outstanding balances of the First Term Loan
and the First Warehouse Facility, $3.2 and $1.1 million, respectively, at
October 28, 1996. If First Bank elects to demand full payment under the Credit
Agreement, and the Company is unable to refinance its debt to First Bank, the
Company's business would be materially adversely affected. See "Management's
Discussion And Analysis Of Financial Condition And Results Of
Operations-Liquidity and Capital Resources."
Possible Need for Additional Financing. If significantly less than all of
the Securities offered herein are sold, the Company will most likely require
additional funding to purchase mortgage loan servicing rights, operate at a
profitable level and meet all of its financial obligations. If such additional
funds are needed, the Company would seek to raise funds through bank financing
or one or more additional equity and/or debt offerings. Even assuming sale of
all of the Securities offered herein and the receipt of the net proceeds
therefrom, the Company may need additional funds for the acquisition of
additional mortgage loan servicing rights and the expansion of its loan
origination activities (see "Use of Proceeds"). It also will need additional
funds if it determines to pursue the acquisition of a bank. The Company plans to
obtain the additional funds through bank financing and, possibly, exercise of
warrants. If the Company decides to acquire a bank, it will most likely attempt
to raise funds through an additional public offering. No assurance can be given
that the
5
<PAGE> 10
Company will be able to obtain any additional financing, if needed. If
additional financing is required but unavailable, the Company's operations most
likely will be materially and adversely affected.
Interest Rate Fluctuations. As part of the loan origination process, an
interest rate may be established for a mortgage loan at any time between the
acceptance of the borrower's application and the closing of the mortgage loan,
typically 45 to 90 days. A gain or loss on the subsequent sale of that loan may
occur in the event that interest rates change during the period between the
establishment of the interest rate and discount points the borrower will pay on
the loan and the commitment by the Mortgage Investor to a purchase price for the
loan. To hedge against this risk, the Company enters into forward commitments to
sell loans where the borrowers have signed an agreement establishing their
interest rate and discount points. These forward commitments are on a best
efforts basis at no cost to the Company.
In periods of declining interest rates, such as occurred from 1991 through
1993, mortgage loan originations typically increase due in part to increased
prepayments of existing mortgages. In periods of rising interest rates, however,
mortgage loan originations tend to decline. These fluctuations in origination
volume may adversely affect the Company's results of operations to the extent
that its existing origination capacity exceeds that which is required in a
rising interest rate environment, which may cause revenues from loan origination
activities to decline more rapidly than the related expenses. The Company's
management addresses this risk in its mortgage loan origination operations
through several measures, including (i) consideration of the underlying economic
conditions and trends in markets in which the Company currently operates and in
new markets prior to entry; and (ii) centralized loan processing and closing in
its branch locations.
Mortgage loan servicing revenue may also be affected by a change in
interest rates. As interest rates decline, the number of prepayments may
increase, leading to a faster than expected runoff of the Company's mortgage
loan servicing portfolio. Faster than expected prepayments of loans serviced by
the Company result in increased current operating costs, a reduction of future
mortgage loan servicing income on such prepaid loans and increased non-cash
expenses relating to amortization of purchased mortgage loan servicing rights.
Management anticipates that, as the amount of unscheduled prepayments increases
due to declining interest rates, the volume of loan originations through the
Company's origination activities should increase, resulting in higher
origination fees and, if the Company sells the mortgage loans retaining the loan
servicing rights, the addition of new mortgage loan servicing rights on lower
interest rate loans to the Company's mortgage loan servicing portfolio. However,
at present, the Company's warehousing facility is limited to an aggregate of $5
million. Should prepayments in full increase significantly beyond that
anticipated by management, the Company would need to increase the size of its
warehousing facility and origination volume before increased revenues from
origination activity might negate the decline in servicing revenues. No
assurance can be given that the Company would be able to adequately increase its
warehousing facility and origination volume. The Company's inability to increase
its warehousing facility and mortgage loan originations in the event of
significant unexpected prepayments most likely would have a material adverse
impact on the Company's results of operations. Generally, mortgages carrying
lower interest rates are less subject to prepayment risk and, therefore, the
servicing rights associated with such mortgages are more valuable.
The value of portfolios of mortgage loan servicing rights the Company
acquires may also be adversely affected by unexpected declines in interest
rates. The Company purchases mortgage loan servicing rights based upon certain
assumptions with respect to, among other things, the prepayment rates on the
loans underlying the mortgage loan servicing rights. To the extent the loans are
prepaid earlier than expected, the mortgage loan servicing income received over
the life of the acquired mortgage loan servicing portfolio would be less than
expected and the related amortization of such purchased mortgage loan service
contracts would increase proportionately.
Economic and Default Risk. Economic downturns can have a negative impact
on a mortgage banker's profitability as default ratios increase. The Company's
liability for default risk on the mortgage loans it sells to Mortgage Investors
is limited to liability under representations and warranties (see "Risk
Factors-Liabilities Under Representations and Warranties"). In some cases, the
Mortgage Investors will retain the option to require repurchase of a mortgage
loan if it becomes delinquent within a specified, limited period of time
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following purchase. The Company may sustain a loss if proceeds from the
foreclosure and disposition of property securing one of the loans for which it
retains default risk are less than the remaining principal balance of the loan
plus carrying and other costs. The Company's management addresses these default
risks through: (i) its selection of markets in which to originate and acquire
mortgage loan servicing rights; (ii) the implementation of controls, including
strict underwriting guidelines and a quality control program, in the origination
process to lessen the possibility of origination errors; and (iii) systems and
management controls established in the servicing system to ensure compliance
with Mortgage Investors' servicing requirements.
Notwithstanding the foregoing, mortgage bankers retain exposure to default
risk on certain loans in their mortgage loan servicing portfolios. The Federal
National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage
Corporation ("FHLMC") and the Government National Mortgage Association ("GNMA")
(collectively, the "Agencies") and some private Mortgage Investors may require a
servicer to advance delinquent principal and interest payments, certain escrow
disbursements and other expenditures for prudent default processing activities.
These advances and payments are not always fully reimbursed. Mortgage insurance
and guarantees provided by the Federal Housing Administration ("FHA"), the
Department of Veterans Affairs ("VA") and certain other government agencies
typically cover most of the foreclosure expenses and advances of the servicer
for defaulted government loans. Private mortgage insurance companies provide
similar reimbursement for insured conventional loans. FHA covers 100% of the
principal balance of any insured loan, but typically does not cover certain
delinquent interest advances and legal fees (generally two months interest and
one-third of the legal fees). A VA loan guarantee typically covers the lesser of
(i) 25% of the original loan balance or (ii) $46,000 for loans which exceed
$144,000 and were originated since 1989 or $27,500 for loans originated prior to
1989. Despite this contractual limit, the VA historically had purchased a
foreclosed property that it guaranteed at 100% of the remaining loan balance
plus accrued interest. Since 1985, however, the VA in some cases elected to
remit the maximum liability under its guarantee rather than to purchase the
foreclosed property (known as a "VA No-Bid"). Accordingly, the Company and other
mortgage servicers are subject to increased foreclosure risk with regard to VA
loans in their mortgage loan servicing portfolios. VA loans comprised,
approximately $10.5 million (1.7%) of the total principal balance of the
Company's mortgage loan servicing portfolio at June 30, 1996. With regard to
acquired loans, the Company attempts to negotiate indemnification from the
seller for VA No-Bids for a period of time following the servicing transfer
date. The Company utilizes a strategy to minimize its losses on defaulted VA
loans. See "Business-Delinquency Management." Private mortgage insurers
generally cover 25% of the original loan balance, but typically reimburse
advances and other foreclosure expenses.
Included in the Company's mortgage loan servicing portfolio at June 30,
1996 was approximately $1.8 million, or 0.3% of loans serviced, for which there
is recourse or limited recourse against the Company in the event of foreclosure.
HOFCA's seasoned servicing portfolio of recourse loans has declined 97.0% since
September 30, 1993 because of the sale of $64.0 million of the portfolio
(manufactured housing loan servicing). As a result, taking into account
recoveries on foreclosed loans, there were no foreclosure losses relating to
these loans for the nine months ended June 30, 1996 or the year ended September
30, 1995. The remaining $612.2 million of the Company's current mortgage loan
servicing portfolio is serviced on a nonrecourse basis without risk of loss to
the Company; however, the Company is generally required to advance certain
payments for the loans it services, as described above.
A determination of estimated losses in the mortgage loan servicing
portfolio (on an undiscounted basis) based on the prevailing level of loan
delinquencies is made as of the end of each reporting period. The Company
maintained general reserves for servicing related losses of $182,000 at June 30,
1996. While management believes that adequate reserves have been established,
there can be no assurance that such a level of reserves will continue to be
adequate in the future.
Competition. The mortgage banking business is highly competitive. The
Company competes with financial intermediaries, such as other mortgage bankers,
commercial banks, savings associations, credit unions, loan brokers and
insurance companies in the origination of mortgage loans. The Company competes
primarily by offering a broad menu of mortgage loan products with competitive
features, by emphasizing the quality of its service and by pricing its range of
products at competitive rates. Competition for loan servicing is equally
diverse. Mortgage bankers, commercial banks and savings associations all engage
in mortgage loan
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servicing activities, either for themselves or in sub-servicing arrangements for
others, and each participates in the competitive bidding process associated with
acquisitions of mortgage loan servicing portfolios. To the extent that market
pricing becomes more aggressive, the Company may be unable to achieve its
planned level of acquisitions at the desired cost. The Company plans to address
this risk by expanding its origination activities as a source of additions to
the mortgage loan servicing portfolio, although no assurance can be given that
it will be able to do so (see "Business-Expansion Plans").
Liability Under Representations and Warranties. Mortgage bankers
customarily make certain representations and warranties to Mortgage Investors,
Agencies or insurers of loans originated or purchased and sold by them relating
to originating and servicing the loans in substantial conformance with state and
federal law and the applicable Mortgage Investor guidelines and similar
representations and warranties regarding the underlying servicing rights.
In connection with purchases of mortgage loan servicing rights, mortgage
bankers typically assume responsibility for the representations and warranties
made by the originators or prior servicers of such mortgage loans. Generally,
the Company's mortgage loan servicing purchase agreements obligate the sellers
from whom it purchases loans and loan servicing rights to make similar
representations and warranties to the Company and to provide indemnification or
repurchase protection in the event a claim is made against the Company. However,
the Company is subject to the risk that such sellers may not have the financial
capacity to repurchase loans when requested to do so or to otherwise respond to
demands made by the Company with respect to other contractual remedies. When
selling mortgage loan servicing rights from its own portfolio, the Company
typically negotiates a limit to the indemnification period under which a breach
may be claimed. Although the Company has policies and procedures designed to
ensure its ability to make and assume accurate representations and warranties,
in the event of a material, incurable breach, the Company may become obligated
to repurchase a loan or indemnify the purchaser against any losses, costs or
expenses incurred by the purchaser as a result of a material, incurable breach.
Significant obligations resulting from material breaches could have a material
adverse effect on the Company's business.
Possible Fluctuations in Quarterly Performance. The Company's quarterly
operating results can fluctuate significantly as a result of a number of
factors, including but not limited to the volume of mortgage loan originations,
interest rates, changes in expected prepayment rates and the timing and level of
sales of mortgage loan servicing rights.
Regulatory Risk. The Company is subject to the rules and regulations of,
and examinations by, FNMA, FHLMC, GNMA, FHA, HUD and state regulatory
authorities with respect to originating, processing, underwriting, selling,
securitizing and servicing residential mortgage loans. In addition, there are
other federal and state statutes and regulations affecting the Company's
activities. These rules and regulations, among other things, impose licensing
obligations on the Company, establish eligibility criteria for mortgage loans,
prohibit discrimination, provide for inspections and appraisals of properties,
require credit reports on prospective borrowers, regulate the assessment,
collection, foreclosure and claims handling, regulate investment and interest
payments on escrow balances, regulate payment features, mandate certain
disclosures and notices to borrowers and, in some cases, fix maximum interest
rates, fees and mortgage loan amounts. Failure to comply with these requirements
can lead to loss of approved status, termination or suspension of mortgage loan
servicing contracts without compensation to the servicers, demands for
indemnification or mortgage loan repurchases, certain rights of rescission for
mortgage loans, class action lawsuits and administrative enforcement actions.
Although the Company believes that it has systems and procedures to insure
compliance with these requirements and believes that currently it is in
compliance in all material respects with applicable local, state and federal
laws, rules and regulations, there can be no assurance of full compliance with
current laws, rules and regulations or that more restrictive laws, rules and
regulations will not be adopted in the future that could make compliance more
difficult or expensive. In the event that the Company is unable to comply, its
business may be materially adversely affected.
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Certain states that the Company operates in require that interest must be
paid to mortgagors on funds deposited by them in custodial accounts to cover
mortgage-related payments such as property taxes and insurance premiums. See
"Business-Government Regulations."
Risks Associated with Sales of Mortgage Loans; Federal Programs and Related
Agreements. The Company funds its mortgage loan production operations
ultimately by selling or exchanging all mortgage loans that it originates and
acquires in the Secondary Markets to Mortgage Investors. The Company's ability
to sell mortgage loans in the Secondary Market is largely dependent upon the
continuation of programs administered by the Agencies, which facilitate the
pooling of those mortgage loans into mortgage-backed securities (either through
directly purchasing mortgage loans from the Company or exchanging
mortgage-backed securities for the Company's mortgage loans), as well as the
Company's continued eligibility to participate in such programs. The
discontinuation of or a significant reduction in, the eligibility to participate
in such programs would have a material adverse effect on the Company's
operations. The Company expects that it will continue to remain eligible to
participate in these programs but any significant impairment of such eligibility
would also materially adversely affect its operations. In addition, the products
offered under these programs may be changed from time to time by the sponsor.
The profitability of specific products may vary depending on a number of
factors, including the administrative costs to the Company of originating these
products.
The Company is also dependent upon private Mortgage Investors other than
the Agencies for the sales of mortgage loans that do not qualify (primarily as a
result of limitations as to maximum loan size) for programs conducted by these
Agencies. To the extent that private Mortgage Investors reduce their purchases,
the price and level of the market for those mortgage loans will be negatively
affected, which would materially adversely impact the Company's mortgage loan
production volume and, potentially, its profitability.
Seasonality. The mortgage banking business is generally subject to
seasonal trends which reflect the pattern of home sales. These sales typically
peak during the spring and summer and decline to lower levels from November
through February. As a result, management anticipates that the Company's
mortgage origination revenues and earnings typically will be higher in the
second and third quarters of each calendar year than in the first and fourth
quarters. Other aspects of the Company's business, such as servicing and
acquisitions, are less affected by seasonality, except to the extent that the
growth of the servicing portfolio is generally higher in periods of higher
production.
Dependence Upon Management. The Company is dependent upon the personal
efforts and abilities of Christian W. Pfluger, III, the Company's President and
Chief Executive Officer (see "Management"). The loss of Mr. Pfluger's services
or the services of other key personnel could have a materially adverse effect on
the Company's business. There is no employment agreement between the Company and
Mr. Pfluger. The Company has key man insurance on the life of Mr. Pfluger in the
amount of $2.0 million.
OFFERING AND MARKET RELATED CONSIDERATIONS
Possible Restrictions on Market-Making Activities in the Company's
Securities. The Underwriter has advised the Company that it may make a market
in the Company's Securities. Rule 10b-6 under the Exchange Act prohibits the
Underwriter from engaging in any market-making activities with regard to the
Company's Securities for the period from nine business days (or such other
applicable period as Rule 10b-6 may provide) prior to the commencement of this
Offering until the final closing or termination of the Offering. Rule 10b-6 also
may prohibit the Underwriter from engaging in any market-making activities with
regard to the Company's Securities for the period from nine business days (or
such other applicable period as Rule 10b-6 may provide) prior to any
solicitation by the underwriter of the exercise of A Warrants until the later of
the termination of such solicitation activity or the termination (by waiver or
otherwise) of any right that the Underwriter may have to receive a fee for the
exercise of A Warrants following such solicitation. As a result, the Underwriter
may be unable to act as a market-maker for the Company's Securities during
certain periods while the A Warrants are exercisable. Any temporary cessation of
such market-making activities could have an adverse effect on the market price
of the Company's Securities. See "Underwriting."
No Public Market for the Common Stock or A Warrants; Arbitrary
Determination of the Offering Price; Possible Price Volatility. Prior to this
offering, there has been no sustained public market for the Company's
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Common Stock and no public market for the Company's A Warrants, and there can be
no assurance that an active trading market for the Common Stock or A Warrants
will develop or be sustained after this offering. The initial public offering
prices of the Common Stock and A Warrants and the exercise price of the A
Warrants have been determined arbitrarily by negotiations between the Company
and the Underwriter and are not necessarily related to the Company's asset
value, net worth, results of operations or any other established criteria of
value and should not be considered to be indicative of the prices that may
prevail in the public market. In addition, factors such as quarterly variations
in the Company's actual or anticipated results of operations may cause the
market price of the Common Stock and A Warrants to fluctuate significantly.
Furthermore, the stock market may experience extreme price and volume
fluctuations. These broad market fluctuations may adversely affect the market
price of the Company's Common Stock and A Warrants. See "Underwriting."
Limited Experience of Underwriter. While certain of the officers of the
Underwriter have significant experience in corporate finance and the
underwriting of securities, the Underwriter has previously underwritten only
four public offerings. No assurance can be given that the Underwriter's
inexperience in public offerings will not adversely affect the Offering and the
subsequent development of a trading market for the Common Stock and Warrants, if
any.
Immediate Substantial Dilution. As of June 30, 1996, the net tangible book
value of the Company's Common Stock was $.30 per share, substantially less than
the $5.50 per share to be paid by public investors, giving no value to the A
Warrants. Upon completion of this offering, the net tangible book value per
share will have decreased by approximately $4.72 per share (85.8%) if the
minimum offering is sold and $4.15 per share (75.5%) if the maximum offering is
sold (giving no effect to the A Warrants), as compared to the price paid by the
public investors. See "Dilution."
Best Efforts Offering; Escrow of Investors' Funds for up to 210 Days. This
Offering is being made on a "Best efforts, 550,000 share minimum" basis. Unless
and until 550,000 shares of Common Stock ($ ) are sold, the Offering
will not close. No assurance can be given that the Underwriter will be able to
sell the minimum offering. Consequently, investors may tie up their funds for up
to 210 days, if the Offering Period is extended. Although the proceeds will be
escrowed and will not be subject to loss during the Offering Period, there will
be no interest paid on the escrowed funds.
Effect of Outstanding Options and Warrants. As of the date of this
Prospectus, there are outstanding private options and warrants to purchase an
aggregate of 884,429 shares of Common Stock at prices between $1.75 and $3.50
per share. In addition, there are outstanding warrants to purchase 150,000
shares at $ per share [the exercise price of the A Warrants] which
shares may be freely tradable commencing 41 days after their issuance. To the
extent that these outstanding stock options and warrants are exercised, dilution
of the percentage ownership of the Company's shareholders will occur, and, any
sales in the public market of the Common Stock underlying options and warrants
may adversely affect the market prices for the Common Stock. See "Description of
Securities - Common Stock Warrants and Options."
Shares Available for Future Sale; Possible Depressive Effect on Market
Price. 3,782,601 of the 4,131,213 issued and outstanding shares of the
Company's Common Stock presently issued and outstanding as of the date hereof
are "restricted securities" as that term is defined under the Securities Act of
1933 (the "Act") and in the future may be sold in compliance with Rule 144 of
the Act or pursuant to a registration statement filed under the Act. Rule 144
provides, in essence, that a person holding restricted securities for a period
of two (2) years may sell those securities in unsolicited brokerage transactions
or in transactions with a market-maker, in an amount equal to one (1%) percent
of the Company's outstanding Common Stock every three (3) months. Additionally,
Rule 144 requires that there be available adequate current public information
with respect to the issuer. Such information is deemed available if the issuer
satisfies the reporting requirements of sections 13 or 15(d) of the Exchange Act
and of Rule 15c2-11 thereunder. Rule 144 also permits, under certain
circumstances, the sale of shares of Common Stock by a person who is not an
affiliate of the Company and who has satisfied a three year holding period
without any quantity limitation and whether or not there is adequate current
public information available. 2,838,000 of the issued and outstanding shares are
eligible for sale pursuant to Rule 144, subject to the above limitations and
public information requirements. However, the Company's officers, directors and
certain other stockholders who own in the
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aggregate approximately 3,000,000 shares of Common Stock, have agreed not to
offer, sell or otherwise dispose of any of the shares owned by them, without the
written consent of the Underwriter, for a period of 12 months after the final
closing date of this offering. In addition, the Company has sold 58,608 shares
of Series C Preferred Stock ("C Preferred") which are now convertible into
approximately a like number of freely tradable shares of Common Stock and
150,000 warrants that will be convertible into a like number of shares of Common
Stock which shares will be freely tradable commencing 41 days after their
issuance (see "Certain Transactions"). Purchasers should be aware that sales
under Rule 144, pursuant to a registration statement filed under the Act,
pursuant to the conversion of Series C Preferred and/or pursuant to exercise of
the aforementioned warrants may have a depressive effect on the market price of
the Company's securities.
Significant Number of Authorized But Unissued Preferred Shares; Possible
AntiTakeover Effect. The Board of Directors has total discretion in the
issuance and the determination of the rights and privileges of any shares of
Preferred Stock which may be issued in the future, which rights and privileges
may be detrimental to the holders of the Common Stock of the Company. The Board
of Directors could issue shares of Preferred Stock with such rights and
preferences that could discourage attempts by others to obtain control of the
Company through merger, tender offer, proxy contest or otherwise by making such
attempts more difficult to achieve or more costly. The Company is authorized to
issue 1,000,000 shares of its Preferred Stock (only 60,861 shares of which are
presently issued and outstanding and a portion of which are to be redeemed with
the proceeds of this Offering). See "Description of Securities-Preferred Stock"
and "Description of Securities-Delaware Anti-Takeover Law."
Potential Adverse Effect of Redemption of A Warrants. Commencing one year
following the date of the Prospectus, the A Warrants are subject to redemption
by the Company, at a redemption price of $.15 per A Warrant, on 30 days' written
notice; provided that the closing bid quotation of the Common Stock for a period
of 30 consecutive trading days ending on the third day prior to the date on
which the Company gives notice has been at least $7.50 per share (subject to
adjustment). Redemption of the A Warrants could force the holders (i) to
exercise the A Warrants and pay the exercise price therefor at a time when it
may be disadvantageous for the holders to do so; (ii) to sell the A Warrants at
the then current market price when they might otherwise wish to hold the A
Warrants; or (iii) to accept the nominal redemption price which, at the time the
A Warrants are called for redemption, is likely to be substantially less than
the market value of the A Warrants. Although the Warrant Agreement (as defined
herein) requires the Company to have in effect a current prospectus under the
Act, relating to the securities underlying the A Warrants, as of the date of
redemption (if and when the A Warrants become redeemable by the terms thereof),
the Company will not be required to qualify the underlying securities for sale
under all applicable state securities laws prior to exercising its redemption
rights. See "Description of Securities - A Warrants."
Low Stock Prices; Possible Inability to Sell in the Secondary
Market. Management has applied to have the Company's Common Stock and A
Warrants listed on the NASDAQ SmallCap Market and believes, but cannot assure,
that the Company will meet the initial listing requirements for NASDAQ upon the
closing of the minimum portion of this Offering and that NASDAQ will approve
such listing application. Assuming that the Company's listing application is
approved, the trading of the Company's Securities on NASDAQ is conditioned upon
the Company meeting certain asset, capital surplus and stock price tests. To
maintain eligibility on NASDAQ the Company is required to maintain total assets
in excess of $2,000,000, capital and surplus in excess of $1,000,000 and
(subject to certain exceptions) a bid price of $1.00 per share. If the Company
fails any of these tests, the Securities may be delisted from trading on NASDAQ.
The effects of delisting or failure to obtain initial listing include the
limited release of the market price of the Company's Securities and limited news
coverage of the Company. Delisting may restrict investors' interest in the
Company's Securities and materially adversely affect the trading market and
prices for such Securities and the Company's ability to issue additional
securities or to secure additional financing. In addition to the risk of
volatility of stock prices and possible delisting, low price stocks are subject
to the additional risks of additional federal and state regulatory requirements
and the potential loss of effective trading markets. In particular, if the
Securities are not listed or subsequently were delisted from trading on NASDAQ
and the trading price of the Common Stock or A Warrants dropped below $5.00 per
security, the Securities could be subject to Rule 15g-9 under the Exchange Act
which, among other things, requires that broker/dealers satisfy special sales
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<PAGE> 16
practice requirements, including making individualized written suitability
determinations and receiving any purchaser's written consent prior to any
transaction. In such case, the Company's Securities could also be deemed penny
stocks under the Securities Enforcement and Penny Stock Reform Act of 1990,
which would require additional disclosure in connection with trades in the
Company's Securities, including the delivery of a disclosure schedule explaining
the nature and risks of the penny stock market. Such requirements could severely
limit the liquidity of the Company's Securities and the ability of purchasers in
this Offering to sell their Securities in the secondary market.
Necessity for Continuing Registration. The shares of Common Stock issuable
upon exercise of the A Warrants offered hereby can be publicly sold only
pursuant to an effective registration statement and a current prospectus under
the Act. There is no assurance that the Company will be able to keep the
Registration Statement of which this Prospectus is a part current or pay the
legal and related costs of doing so. In addition, it is a condition to the
Company's ability to issue the securities underlying the A Warrants that such
securities remain qualified for issuance under the securities laws of the states
in which holders of A Warrants reside, and there is no assurance that such
securities will remain so qualified (see "Risk Factors-Non-Registration in
Certain Jurisdictions of Securities Issuable Upon Exercise of The A Warrants").
If the Prospectus ceases to be current with respect to such securities, the
holders of the A Warrants may be prevented from exercising their A Warrants.
Non-Registration in Certain Jurisdictions of Securities Issuable Upon
Exercise of the A Warrants. The A Warrants are immediately separately
tradeable. Although the Securities will not knowingly be sold to purchasers in
jurisdictions in which the Securities are not registered or otherwise qualified
for sale, persons may buy Securities in any aftermarket which may develop or may
move to jurisdictions in which the Securities are not so registered or qualified
during the period which the A Warrants are exercisable. In this event, the
Company would be unable to issue the underlying shares of Common Stock to those
persons desiring to exercise their A Warrants unless and until such securities
could be qualified for sale in jurisdictions in which such purchasers reside, or
an exemption to such qualification exists in such jurisdiction. No assurances
can be given that the Company will be able to effect any required registration
or qualification. Moreover, the Company is under no obligation to register
underlying shares of Common Stock in any states to which warrant holders may
move or in which persons may purchase A Warrants in the aftermarket.
THE COMPANY
Homeowners Financial Corp. is a full service mortgage banking company that
services, originates, acquires and markets mortgage loans secured primarily by
residential properties located in 48 states and the District of Columbia. All of
the Company's substantive operations are conducted by its wholly-owned
subsidiary, DMC, and by HOFCA. During the nine months ended June 30, 1996 and
the year ended September 30, 1995, the Company's primary sources of revenues
were mortgage loan servicing (78.7% and 84.9%, respectively) and mortgage loan
originations (9.8% and 3.1%, respectively).
The Company acquired HOFCA's parent, FIS (and thus acquired HOFCA) on
September 30, 1994. The Company acquired DMC from Inter Savings Bank, fsb, a
Federal savings bank ("ISB") and certain mortgage loan servicing rights and
fixed assets from Aurora Service Corp., formerly, Developers Service Corp.
("ASC") on April 28, 1995.
Unless the text indicates otherwise: (i) all references herein to the
Company, include its two subsidiaries and HOFCA; and (ii) all data related to
mortgage banking operations includes the operations of HOFCA and DMC and the
mortgage loan servicing rights acquired from ASC (the servicing rights acquired
from ASC are hereinafter referred to as "ASC-PMSR") even though the foregoing
companies and assets were not necessarily owned by the Company for all or part
of the periods discussed.
The Company's executive offices are located at the facilities of DMC, 2075
West Big Beaver Road, Suite 550, Troy, Michigan 48084, with telephone (800)
723-6001. See "Business -- Facilities."
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THE REORGANIZATION
The Company was incorporated in the state of Delaware in 1973 as By-Word
Corporation, and changed its name to B W Group, Inc. in 1984. From inception
through 1984, the Company provided interpretive systems to museums and historic
sites. The interpretive systems are devices (receivers) that picked up
recordings (i.e., music and specific information) as a spectator nears a
specific exhibit. The Company sold all of its assets to a competitor in 1984 and
remained dormant until its reverse acquisition of FIS.
On December 17, 1993, Christian W. Pfluger, III incorporated FIS in the
state of Texas for the purpose of acquiring HOFCA.
On September 30, 1994, the Company acquired by reverse acquisition all of
the Common Stock and Preferred Stock of FIS and changed its corporate name to
its current name (see "Certain Transactions").
HOFCA was incorporated on October 10, 1984 under the laws of the State of
Massachusetts. Until February 1992, HOFCA was a wholly-owned subsidiary of
Knutson Mortgage Corporation, a mortgage banking company headquartered in
Minnesota, which was a wholly-owned subsidiary of Home Owners Savings Bank
F.S.B. ("Home Owners Savings") headquartered in Massachusetts. In April 1990,
the Office of Thrift Supervision ("OTS") appointed the Resolution Trust
Corporation ("RTC") as conservator of HOFCA's ultimate parent at that time, Home
Owners Savings. As a result, RTC took possession of Home Owners Savings and
succeeded to all rights, titles, powers and privileges of Home Owners Savings,
including ownership of all of the outstanding stock of HOFCA. In September 1990,
the OTS declared Home Owners Savings to be insolvent and appointed RTC as sole
receiver of Home Owners Savings. In February 1992, RTC, as receiver of Home
Owners Savings, sold all of the issued and outstanding shares of Common Stock of
HOFCA to NLI, Inc., a corporation wholly-owned by the then senior management of
HOFCA. Effective November 1992, HOFCA changed its corporate structure as
follows: two of HOFCA's subsidiaries were sold to the stockholders of HOFCA, two
other HOFCA subsidiaries were merged into HOFCA, and a downstream merger between
HOFCA and its former parent, NLI, Inc., occurred. The acquisition by NLI was
unassisted by the RTC; NLI received no monetary assistance or representations or
warranties outside of the scope of normal business operations in the industry
from the RTC.
On April 29, 1994, FIS acquired all of the issued and outstanding shares of
HOFCA Common Stock for $1.5 million. The purchase price takes into account the
distribution of approximately $10.1 million in assets to HOFCA's prior
stockholders immediately prior to the effectuation of the acquisition of HOFCA
by FIS. Pursuant to the HOFCA acquisition agreement, HOFCA entered into
employment agreements with HOFCA's seven principals. Each employment agreement
was for a term of one year, unless terminated earlier, and provided for annual
compensation of $100,000, a minimum annual performance bonus of $50,000 and
certain benefits (e.g. health). In the event of early termination, each employee
is to have been guaranteed to have received a minimum of $75,000 in compensation
under the employment agreements. Between June 1994 and January 1995, all seven
employees resigned. Subsequent legal proceedings between the Company and these
seven former employees were settled in February 1996 (see "Legal Proceedings").
On April 28, 1995, the Company acquired: (i) all of the issued and
outstanding stock of DMC, a Maryland corporation engaged in mortgage origination
and servicing; (ii) certain servicing rights of ISB's parent, ASC, with regard
to mortgage servicing rights with an aggregate principal balance as of April 28,
1995 of approximately $129.8 million (these ASC servicing rights are hereinafter
referred to as "ASC-PMSR"); (iii) accounts receivable related to the ASC-PMSR;
(iv) certain furniture, fixtures and equipment and any contracts or leases
related thereto; and (v) ASC's lease for the facilities in Troy, Michigan. The
Company also acquired the right to subservice certain mortgages held by ISB. The
ASC-PMSR were transferred to DMC immediately prior to the Company's acquisition
of DMC. As of April 28, 1995, DMC's mortgage servicing portfolio, which included
the ASC-PMSR, totalled $363.0 million.
The definitive purchase price for DMC, the ASC-PMSR and certain fixed
assets of ASC was approximately $2.89 million. The Company had the right, within
one year, to require the repurchase or correction of any loans acquired in the
transaction that do not meet certain Agency eligibility standards. The
13
<PAGE> 18
Company has filed a timely repurchase notice with ASC. As of the date hereof,
management believes that approximately $500,000 of the loans acquired do not
meet agency eligibility standards.
The Company obtained a portion of the funds used to purchase DMC and the
other assets discussed above from two loans - a $695,489 loan from Barnett Bank
("Barnett") and a $675,000 loan from ISB. The Barnett loan accrues interest at
.75% over Barnett's prime rate; interest only is payable monthly and the
principal was due and payable on or before April 27, 1996. In April 1996, August
1996 and September 1996, the Company obtained extensions of the Barnett loan due
date in consideration of the payment of fees by the Company equal to .25% of the
loan amount on each extension date ($5,217 in the aggregate). The Barnett loan
now expires on December 27, 1996. The Company intends to pay off the loan with a
portion of the proceeds of this offering (see "Use of Proceeds"). The Barnett
loan is principally secured by specific assets (bonds, certificates of deposit,
treasury notes and shares of stock) of certain stockholders of the Company (see
"Description of Securities-Common Stock Warrants and Options"). The ISB loan
accrued interest at the rate of 10% per annum. All of the principal and accrued
interest under the ISB loan were repaid on August 30, 1995. Management paid the
balance of the purchase price and repaid the ISB loan from the proceeds of a
$4.0 million term loan from First Bank National Association ("First Bank"). See
Management's Discussion and Analysis of Financial Condition and Results of
Operation-Liquidity and Capital Resources."
On April 10, 1995, the Company executed an agreement to purchase all of the
issued and outstanding shares of Common Stock of ISB, a Federal Savings Bank
organized under the laws of the United States, from ASC. In November 1995, the
Company terminated that agreement. While the Company may acquire ISB or another
bank in the future, the Company has decided to concentrate on its mortgage
banking activities (see "Risk Factors-Possible Need for Additional Financing").
The Company had paid $50,000 towards the ISB purchase price.
14
<PAGE> 19
USE OF PROCEEDS
The net proceeds to be received by the Company, after deducting all of the
expenses of the Offering, will total approximately $1,681,750 if the minimum
Offering is sold, and $5,292,685 if the maximum Offering is sold. Such proceeds
shall be applied approximately and generally in the order presented.
<TABLE>
<CAPTION>
ASSUMING ASSUMING
MINIMUM SOLD MAXIMUM SOLD
----------------------- -----------------------
APPROXIMATE APPROXIMATE
AMOUNT PERCENT AMOUNT PERCENT
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Retirement of Barnett Loan....................... $ 695,500 41.4% $ 695,500 13.1%
Retirement of Preferred Stock(1)................. $ 484,500 28.8% $ 484,500 9.2%
Purchase of Mortgage Loan
Servicing Rights(2)............................ $ 400,000 23.8% $ 4,000,000 75.6%
Working Capital.................................. $ 101,750 6.0% $ 112,685 2.1%
---------- ----- ---------- -----
Total.................................. $ 1,681,750 100.0% $ 5,292,685 100.0%
========== ===== ========== =====
</TABLE>
- ---------------
(1) The Company's 1,750 issued shares of B Preferred are redeemable by the
Company upon 30 days notice at 102% of the liquidation preference value,
plus accrued and unpaid dividends to the date of redemption. The Company and
its B Preferred Stockholders have agreed to the redemption of a portion of
the Preferred Stock. See "Description of Securities-Preferred Stock."
(2) See "Business-Expansion Plans."
Although the Company does not contemplate any material changes in the
proposed use of proceeds, the Company may change an application or adjust an
amount to the extent that the Company finds that such a change or adjustment is
required by reason of then existing business conditions. Material conditions or
contingencies which may arise in the future and which may require such a change
or adjustment include a significant downward shift in interest rates making it
inadvisable to acquire additional mortgage loan servicing rights or whole loan
portfolios. If market conditions are such that it is inadvisable to purchase
additional mortgage loan servicing rights, funds allocated for that purpose
might be reallocated to increasing mortgage loan origination operations.
Management believes that the net proceeds from the maximum offering
combined with anticipated revenues should be sufficient to sustain the Company's
operations for at least the next 12 months. If significantly less than all of
the Securities offered herein are sold, the Company will most likely require
additional funding to purchase mortgage loan servicing rights, operate at a
profitable level and meet all of its financial obligations. If such additional
funds are needed, the Company would seek to raise funds through bank financing
or one or more additional equity and/or debt offerings. No assurance can be
given that such funding would be available or, if available, that such funding
would be available on terms acceptable to the Company. If such additional
funding were not available, the Company's operations most likely would be
materially and adversely affected. See "Risk Factors-Possible Need For
Additional Financing" and "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations." None of the proceeds will be used for
compensation of officers and directors.
Pending their utilization, the net proceeds may be invested temporarily in
certificates of deposit, insured savings accounts, short term commercial paper,
money market funds or government securities. The Company does not intend to
register under the Investment Company Act of 1940 and, therefore, will be
limited as to the types of investments which may be temporarily made with the
proceeds.
15
<PAGE> 20
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of June 30, 1996, and as adjusted to give effect to the sale of the 550,000
shares of Common Stock (minimum) and 1,270,000 shares of Common Stock and
1,270,000 A Warrants (maximum) offered herein and the application of the
estimated net proceeds therefrom. The table should be read in conjunction with
the Financial Statements and notes thereto included elsewhere in this
Prospectus. All dollar amounts are in thousands, except share and per share
amounts.
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------------
AS ADJUSTED(1)
-------------------------------
ACTUAL MINIMUM MAXIMUM
------- ------- -------
<S> <C> <C> <C>
Long-term debt(2).............................................. $ 3,400 $ 3,400 $ 3,400
Stockholders' Equity:
Preferred Stock $.10 par value; 1,000,000 shares authorized,
1,750
designated as Series A, 1,750 issued and outstanding, and
1,275
issued and outstanding, as adjusted; 1,000 designated as
Series B, * ** **
503 issued and outstanding and issued and outstanding as
adjusted; *** *** ***
65,000 designated as Series C, 58,608 shares issued and
outstanding and issued and outstanding as adjusted........ 6 6 6*
Common Stock $.01 par value; 10,000,000 shares authorized,
4,131,213 issued and outstanding, and 4,681,213 (minimum)
and 5,401,213 (maximum) issued and outstanding, as
adjusted.................................................. 41 47 54
Additional paid-in capital................................... 3,166 4,357 7,961
Retained Earnings (Deficit).................................. (1,013) (1,013) (1,013)
------ -------
Stockholders' Equity......................................... $ 2,200 $ 3,397 $ 7,008
------ -------
Total Capitalization................................. $ 5,600 $ 6,797 $10,408
====== =======
</TABLE>
- ---------------
* Amount prior to rounding was $175.
** Amount prior to rounding was $128.
*** Amount prior to rounding was $50.
(1) Does not include: (i) up to 1,270,000 shares of Common Stock issuable upon
exercise of the A Warrants; (ii) up to 254,000 shares of Common Stock
issuable upon the exercise of the Underwriter's Warrants and the warrants
contained therein; (iii) 354,429 shares of Common Stock issuable upon
exercise of Incentive Stock Options pursuant to the Company's 1994 Incentive
Stock Option Plan and other outstanding options and warrants; and (iv)
680,000 shares of Common Stock issuable upon exercise of existing Class B
and Class C warrants. See "Description of Securities" and "Underwriting."
(2) Includes current portion of long-term debt in the amount of $.8 million.
16
<PAGE> 21
DILUTION
The net tangible book value of the Company as of June 30, 1996 was
$1,228,000. Net tangible book value consists of the net tangible assets of the
Company (total assets less total liabilities and intangible assets) (see
"Financial Statements"). As of June 30, 1996, there were 4,131,213 shares of the
Company's Common Stock outstanding. Therefore, the net tangible book value of
the Company's Common Stock as of that date was approximately $.30 per Share.
In the event that all of the Securities offered hereby are sold, the net
tangible book value of the Common Stock as of June 30, 1996 would be
approximately $7,269,685 or approximately $1.35 per share. In the event that the
minimum number of Securities (550,000 shares) offered hereby are sold, the net
tangible book value of the Common Stock as of June 30, 1996 would be $3,658,750
or approximately $.78 per share. These figures give effect to the deduction of
all of the estimated expenses, including filing, printing, legal, accounting,
transfer agent and other fees. The net tangible book value per share will have
increased by approximately $1.05 per share to the present stockholders, and
decreased by approximately $4.15 per share to the public investors if the entire
Offering is sold; and, if the minimum Offering is sold, the net tangible book
value will have increased by approximately $.48 per share to the present
stockholders and decreased by approximately $4.72 per share to the public
investors.
Dilution represents the difference between the public offering price and
the net tangible book value per share immediately after the completion of the
public offering. Dilution arises from the decision by the Company and the
Underwriter as to the offering price per share. Dilution of the value of the
shares purchased by the public in this offering will also be due, in part, to
the far lower book value of the shares presently outstanding, and in part, to
expenses incurred in connection with the public offering.
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
------- -------
<S> <C> <C>
Public Offering Price Per Share...................... $5.50 $5.50
Net Tangible Book Value Per Share Before
Offering...................................... $ .30 $ .30
Increase Per Share Attributable to Payment by
Public
Investors..................................... $ .48 $1.05
-----
Net Tangible Book Value Per Share After Offering..... $ .78 $1.35
=====
Dilution Per Share to Public Investors............... $4.72 $4.15
=====
</TABLE>
17
<PAGE> 22
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following tables set forth selected consolidated financial information
with respect to the Company (Successor) and, prior to April 30, 1994, HOFCA
(Predecessor) for the periods indicated and should be read in conjunction with
the Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operation"
included elsewhere in this Prospectus.
The selected consolidated financial information as of and for the nine
months ended June 30, 1996 was derived from the unaudited consolidated financial
statements included elsewhere herein and is not necessarily representative of
operations for an entire year.
As discussed elsewhere herein, FIS acquired HOFCA in April 1994 and the
Company acquired FIS in September 1994. Due to the foregoing acquisitions and
the resulting changes in cost bases as required by Generally Accepted Accounting
Principles ("GAAP"), the financial information included herein is presented for
the periods and specific year stated and is not comparable.
<TABLE>
<CAPTION>
YEAR PERIOD FROM
ENDED APRIL 30, 1994 TO
SEPTEMBER 30, 1995 SEPTEMBER 30, 1994
NINE MONTHS ------------------ ------------------
ENDED
JUNE 30, 1996 (SUCCESSOR) (SUCCESSOR)
-------------- PERIOD FROM
OCTOBER 1, 1993
(SUCCESSOR) TO APRIL 29, 1994
-----------------
(PREDECESSOR)
<S> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Revenues:
Net operating interest
income..................... $ 136 $ 93 $ 123 $ 435
Origination income........... 234 83 -- --
Loan servicing and
subservicing............... 1,891 2,269 701 1,452
Gain on sale of loans........ 17 178 157 837
Gain on sale of mortgage
servicing rights........... 38 51 942 --
Amortization of net assets in
excess of acquisition
cost....................... -- -- -- 1,594
Other........................ 88 -- -- --
------- ------- ------- -------
Total Revenue........... 2,404 2,674 1,923 4,318
Total expenses(A)................. 2,770 (3,573) (1,383) (2,776)
------- ------- ------- -------
Net income (loss)................. (366) (899) 540 1,542
Cumulative preferred stock
dividends....................... (96) (192) (16) --
------- ------- ------- -------
Income/(loss) attributable to
common stock.................... $ (462) $ (1,091) $ 524 $ 1,542
------- ------- ------- -------
Per common share income/(loss).... $ (.11) $ (.27) $ .32 $ *
------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, APRIL 29,
------------------------- 1994
1995 1994 -------------
JUNE 30, ----------- -----------
1996 (PREDECESSOR)
----------- (SUCCESSOR) (SUCCESSOR)
(SUCCESSOR)
<S> <C> <C> <C> <C>
FINANCIAL CONDITION DATA
Total assets................................... $ 9,981 $ 8,035 $ 5,442 $ 5,026
Purchased mortgage servicing rights............ 5,032 5,825 678 85
Notes payable.................................. 4,139 5,089 -- 2,298
Stockholders equity............................ 2,200 1,960 2,881 (6,659)
OTHER DATA
Servicing portfolio............................ $ 614,008 $ 688,500 $64,200 $ 132,758
Number of loans serviced(B).................... 9,960 12,248 2,481 7,689
Average loan size(B)........................... 61,647 56,210 25,900 17,266
</TABLE>
- ---------------
* Share information is neither comparable nor meaningful as a result of the
April 29, 1994 acquisition.
(A) Includes income taxes.
(B) Actual, not rounded in thousands.
18
<PAGE> 23
HOMEOWNERS FINANCIAL CORP.
PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
JUNE 30, 1996
(UNAUDITED)
The following unaudited Pro Forma Consolidated Balance Sheet is presented
as if the stock offering and the related use of proceeds had occurred on June
30, 1996. It should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this document.
This unaudited Pro Forma Consolidated Balance Sheet is not necessarily
indicative of what the actual financial position would have been at June 30,
1996, nor does it purport to represent the future financial position of the
Company.
<TABLE>
<CAPTION>
EFFECTS OF OFFERING PRO FORMA
COMPANY ------------------- -------------------
HISTORICAL MINIMUM MAXIMUM MINIMUM MAXIMUM
---------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Cash and restricted cash............... $ 286 $ 102 (a) $ 113 (a) $ 388 $ 399
Receivables............................ 417 -- -- 417 417
Mortgage loans held for sale........... 2,657 -- -- 2,657 2,657
Purchased mortgage servicing rights.... 5,032 1,148 (b) 4,748 (b) 6,180 9,780
Property and equipment................. 153 -- -- 153 153
Goodwill............................... 189 -- -- 189 189
Deferred Stock Issuance Costs.......... 748 (748 )(c) (748 )(c) -- --
Other assets........................... 499 -- -- 499 499
------- ------ ------ ------- -------
$ 9,981 $ 502 $4,113 $10,483 $14,094
======= ====== ====== ======= =======
Notes payable.......................... $ 4,139 $ (695 )(d) $ (695 )(d) $3,444 $3,444
Repurchase agreement................... 2,624 -- -- 2,624 2,624
Accounts payable and other
liabilities.......................... 1,018 -- -- 1,018 1,018
------- ------ ------ ------- -------
7,781 (695 ) (695 ) 7,086 7,086
------- ------ ------ ------- -------
Stockholders' equity
Preferred stock...................... 6 * (e) * (e) 6 6
Common stock......................... 41 6 (f) 13 (f) 47 54
Paid-in capital...................... 3,166 1,191 (g) 4,795 (g) 4,357 7,961
Accumulated deficit.................. (1,013) -- -- (1,013 ) (1,013 )
------- ------ ------ ------- -------
2,200 1,197 4,808 3,397 7,008
------- ------ ------ ------- -------
$ 9,981 $ 502 $4,113 $10,483 $14,094
======= ====== ====== ======= =======
</TABLE>
- ---------------
* Preferred stock adjustment prior to rounding to thousands was $48.
See accompanying notes on the next page.
19
<PAGE> 24
HOMEOWNERS FINANCIAL CORP.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
The pro forma adjustments represent adjustments necessary to present the
Pro Forma Consolidated Balance Sheet as if the stock offering and the related
use of proceeds had occurred on June 30, 1996.
(a) Represents the net cash proceeds of the offering after the
expected use of the proceeds discussed herein.
(b) Represents the use of stock offering proceeds and available
working capital of $748,000 to acquire residential mortgage servicing
rights. This available working capital results from the recovery from the
gross proceeds of the Offering of $748,000 which represents offering
expenses advanced through June 30, 1996.
(c) Represents the reclassification of the carrying value of deferred
stock issuance costs to additional paid-in capital.
(d) Represents the retirement of the Barnett loan bank debt.
(e) Represents the par value redemption of the 475 shares of the
cumulative callable preferred stock.
(f) Represents the issuance of 550,000 shares (minimum)/1,270,000
shares (maximum) in this offering with a par value of $.01 per
share.
(g) Represents the paid-in capital from this offering's proceeds,
$1,681,750 (minimum)/5,292,685 (maximum), less the paid-in capital
of the preferred stock redeemed, $484,500.
20
<PAGE> 25
HOMEOWNERS FINANCIAL CORP.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NINE MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
The following unaudited Pro Forma Consolidated Statement of Operations is
presented as if the Offering and the related use of proceeds had occurred on
October 1, 1995. It should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere in this document.
This unaudited Pro Forma Consolidated Statement of Operations is not
necessarily indicative of what the actual results of operations of the Company
would have been, nor does it purport to represent the results of operations for
future periods.
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS PRO FORMA
COMPANY ------------------------- -----------------------
HISTORICAL MINIMUM MAXIMUM MINIMUM MAXIMUM
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net operating interest income
(expense):
Interest income.............. $ 136 $ -- $ -- $ 136 $ 136
Interest expense............. 155 (50)(a) (50)(a) 105 105
--------- --------- --------- --------- ---------
(19) 50 50 31 31
--------- --------- --------- --------- ---------
Non interest income:
Loan servicing............... 1,891 272(b) 1,122(b) 2,163 3,013
Origination income........... 234 -- -- 234 234
Other........................ 143 -- -- 143 143
--------- --------- --------- --------- ---------
2,268 272 1,122 2,540 3,390
--------- --------- --------- --------- ---------
Expenses:
Compensation................. 1,029 -- -- 1,029 1,029
Occupancy.................... 147 -- -- 147 147
Depreciation and
amortization.............. 846 164(c) 677(c) 1,010 1,523
Professional fees............ 98 -- -- 98 98
Loan servicing............... 152 41(d) 169(d) 193 321
Office....................... 269 -- -- 269 269
General, administration and
other..................... 74 -- -- 74 74
--------- --------- --------- --------- ---------
2,615 205 846 2,820 3,461
--------- --------- --------- --------- ---------
Net income (loss) before income
taxes........................ (366) 117 326 (249) (40)
Income tax benefit (expense)... -- -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss).............. (366) 117 326 (249) (40)
Less cumulative preferred
stock dividends........... (96) -- -- (96) (96)
--------- --------- --------- --------- ---------
Income (loss) attributable to
common stock.............. $ (462) $ 117 $ 326 $ (345) $ (136)
========= ========= ========= ========= =========
Net income (loss) per common
share........................ $ (.11) $ .21 $ .26 $ (.07) $ (.03)
========= ========= ========= ========= =========
Weighted average number of
common shares................ 4,126,669 550,000 1,270,000 4,672,125 5,392,125
========= ========= ========= ========= =========
</TABLE>
See accompanying notes on the next page.
21
<PAGE> 26
HOMEOWNERS FINANCIAL CORP.
NOTES TO PRO FORMA CONSOLIDATED STATEMENT
OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
The pro forma adjustments represent adjustments necessary to present the
Pro Forma Consolidated Statement of Operations as if the Offering and the
related use of proceeds had occurred on October 1, 1995.
a. Represents the reduction of interest expense attributable to the
retirement of the Barnett loan of $695,489 with proceeds from this
Offering. Interest accrues on the Barnett loan at an annual rate
equal to Barnett's prime rate, currently 8.25%, plus .75%. The
adjustment was rounded to the nearest ten thousand.
b. Represents incremental loan service fee income earned at an annual
rate of .315% from the acquisition of residential mortgage loan
servicing rights on $115 million (minimum)/$475 million (maximum)
of outstanding principal balances to be funded with proceeds from
this Offering and $748,000 of available working capital.
c. Represents amortization at an annual rate equal to 19.0% of the
$1.15 million (minimum)/$4.75 million (maximum) purchase price of
the residential mortgage loan servicing rights on $115 million
(minimum)/$475 million (maximum) of outstanding principal loan
balances to be funded with proceeds from this Offering and $748,000
of available working capital. The amortization rate is equivalent
to an average loan life of approximately 5.25 years.
d. Represents incremental loan servicing operating costs of $45 per
loan associated with the acquisition of the residential mortgage
loan servicing rights, approximately 1,200 loans (minimum/5,000
loans (maximum), to be funded with the proceeds of this Offering.
22
<PAGE> 27
HOMEOWNERS FINANCIAL CORP.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
FISCAL YEAR ENDED SEPTEMBER 30, 1995
(UNAUDITED)
The following unaudited Pro Forma Consolidated Statement of Operations is
presented as if the acquisition of DMC, the Offering and related use of proceeds
had occurred on October 1, 1994. It should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
document.
This unaudited Pro Forma Consolidated Statement of Operations is not
necessarily indicative of what the actual results of operations of the Company
would have been, nor does it purport to represent the results of operations for
future periods.
<TABLE>
<CAPTION>
EFFECTS OF OFFERING
PRO FORMA ADJUSTMENTS PRO FORMA
COMPANY DMC ----------------------- -------------------------
(A) (B) MAXIMUM MINIMUM MAXIMUM MINIMUM
--------- ------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net operating interest income
Interest income.............. $ 93 $ 148 -- -- $ 241 $ 241
Interest expense............. 191 123 (60)(c) (60)(c) 254 254
------- ------ -------- ---------- ---------- ----------
(98) 25 60 60 (13) (13)
------- ------ -------- ---------- ---------- ----------
Noninterest income:
Loan servicing............... 2,269 267 362(d) 1,496(d) 2,898 4,032
Gain on sale of loans........ 261 460 -- -- 721 721
Gain on sale of mortgage
servicing rights.......... 51 -- -- -- 51 51
Other........................ -- 81 -- -- 81 81
------- ------ -------- ---------- ---------- ----------
2,581 808 362 1,496 3,751 4,885
------- ------ -------- ---------- ---------- ----------
Expenses:
Compensation................. 1,272 949 -- -- 2,221 2,221
General, administrative and
other..................... 828 406 54(e) 225(e) 1,288 1,459
Occupancy.................... 322 85 -- -- 407 407
Professional fees............ 464 33 -- -- 497 497
Provision for losses......... 53 -- -- -- 53 53
Amortization of mortgage
servicing rights.......... 504 173 218(f) 902(f) 895 1,579
------- ------ -------- ---------- ---------- ----------
3,443 1,646 272 1,127 5,361 6,216
------- ------ -------- ---------- ---------- ----------
Net income (loss) before income
taxes........................ (960) (813) 150 429 (1,623) (1,344)
Income tax (expense) benefit... 61 -- -- -- 61 61
------- ------ -------- ---------- ---------- ----------
Net income (loss).............. (899) (813) 150 429 (1,562) (1,283)
Less cumulative preferred
stock dividends........... (192) -- -- -- (192) (192)
------- ------ -------- ---------- ---------- ----------
Income (loss) attributable to
common stock.............. $ (1,091) $ (813) $ 150 $ 429 $ (1,754) $ (1,475)
------- ------ -------- ---------- ---------- ----------
Net income (loss) per common
share........................ $ (.27) NA $ .27 $ .34 $ (.38) $ (.27)
------- ------ -------- ---------- ---------- ----------
Weighted average number of
common shares................ 4,087,875 NA 550,000 1,270,000 4,646,125 5,366,125
------- ------ -------- ---------- ---------- ----------
</TABLE>
See accompanying notes on the next page.
23
<PAGE> 28
HOMEOWNERS FINANCIAL CORP.
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1995
(UNAUDITED)
The pro forma adjustments represent adjustments necessary to present the
Pro Forma Consolidated Statement of Operations as if the acquisition of DMC, the
offering and related use of proceeds had occurred on October 1, 1994. It should
be read in conjunction with the Consolidated Financial Statements and Notes
thereto included elsewhere in this document.
a. The historical information of the Company represents the results of
operations for the Company from October 1, 1994 to September 30, 1995,
including the results of DMC from April 29, 1995 (its effective date of
acquisition by the Company) to September 30, 1995.
b. The historical information of DMC represents the results of operations
for DMC from October 1, 1994 to April 29, 1995 (its effective date of
acquisition by the Company).
c. Represents the reduction of interest expense attributable to the
retirement of the Barnett loan of $695,489 with proceeds from this
offering. Interest accrues on the Barnett loan at an annual rate equal
to Barnett's prime rate, currently 8.25%, plus .75%. The adjustment was
rounded to the nearest ten thousand.
d. Represents incremental loan service fee income earned at an annual rate
of .315% from the acquisition of residential mortgage loan servicing
rights on $115 million (minimum)/$475 million (maximum) of outstanding
principal balances to be funded with proceeds from this offering and
$748,000 of available working capital.
e. Represents incremental loan servicing operating costs of $45 per loan
associated with the acquisition of the residential mortgage loan
servicing rights, approximately 1,200 loans (minimum)/5,000 loans
(maximum), to be funded with the proceeds of this offering.
f. Represents amortization at an annual rate equal to 19.0% of the $1.15
million (minimum)/$4.75 (maximum) purchase price of the residential
mortgage loan servicing rights on $115 million (minimum)/$475 million
(maximum) of outstanding principal loan balances to be funded with
proceeds from this Offering and $748,000 of available working capital.
The amortization rate is equivalent to an average loan life of
approximately 5.25 years.
24
<PAGE> 29
MARKET PRICE OF SECURITIES
The principal U.S. market in which the Company's Common Stock ($.01 par
value, all of which are one class) is traded is in the over-the-counter market
(Bulletin Board Symbol: "HOFC"). The Company has applied to list the Common
Stock and A Warrants on NASDAQ under the symbols HOFC and HOFCW, respectively.
Management anticipates, but cannot assure, that such NASDAQ listing will be
approved on or before the date of this Prospectus.
The following table sets forth the range of high and low bid prices for the
Company's Common Stock on a quarterly basis for the last nine quarters ended
September 30, 1996, as reported by the National Quotation Bureau (which reflect
inter-dealer prices, without retail mark-up, markdown, or commission and may not
necessarily represent actual transactions). According to the National Quotation
Bureau, during at least the seven quarters prior thereto, the Common Stock was
unpriced. As of October 29, 1996, the closing bid price for the Company's Common
Stock was $3.50 per share. The foregoing and following information should not be
taken as an indication of the existence of an established public trading market
for the Company's Common Stock.
<TABLE>
<CAPTION>
BID PRICES
----------------
HIGH LOW
------ ------
<S> <C> <C>
Quarter ended September 30, 1994*....................... 1/16 1/16
October 3, 1994 - October 17, 1994*..................... 3/8 1/16
October 18, 1994 - December 30, 1994.................... $ 3.50 $ 3.00
Quarter ended March 31, 1995............................ $4 1/8 $ 1.00
Quarter ended June 30, 1995............................. $ 3.50 $ 1.00
Quarter ended September 30, 1995........................ $ 4.25 $ 2.00
Quarter ended December 31, 1995......................... $ 6.00 $ 2.00
Quarter ended March 31, 1996............................ $ 6.00 3/4
Quarter ended June 30, 1996............................. $ 6.50 $4 7/8
Quarter ended September 30, 1996........................ $5 5/8 $ 4.75
</TABLE>
- ---------------
* Does not take into account the reverse split of the Company's Common Stock on
a one-for-seven basis effected on October 14, 1994.
The approximate number of record holders of the Company's Common Stock as
of October 28, 1996 was 238, inclusive of those brokerage firms and/or clearing
houses holding the Company's common shares for their clientele (with each such
brokerage house and/or clearing house being considered as one holder).
25
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS(1)
HOFCA and DMC are the Company's only operating entities. The Company has no
material operations other than those of HOFCA and DMC. FIS, a wholly-owned
subsidiary of the Company, also has no substantive operations other than those
of HOFCA.
The following discussion of the results of operations and financial
condition should be read in conjunction with the audited financial statements
and related notes appearing subsequently under the caption "Financial
Statements."
GENERAL
Effect Of Interest Rate Fluctuations. Long-term interest rates declined
throughout the period from 1991 into 1993 and reached historically low levels in
1993. That interest rate environment generally favored loan origination
activities. Such low interest rates normally expand the market demand for new
loan financing, and increase mortgage loan activity and revenue associated with
such operations. However, partly because of competition, the net interest margin
earned on a given loan held for sale usually decreases in such an environment.
Commencing in late 1993, interest rates increased until approximately mid-1995
and then generally declined until late February 1996. Since February 1996,
long-term interest rates have increased approximately 100 basis points. While
current interest rates are not high by historical standards, the increase in
interest rates had a materially negative effect on loan origination volume
throughout the industry during 1994 and early 1995. If interest rates continue
to increase, it is uncertain whether the Company will be able to maintain it's
origination volume. If interest rates decrease, the Company's origination volume
should increase.
Lower interest rates generally have the effect of increasing prepayments in
the Company's servicing portfolio because they tend to stimulate a higher level
of home purchases and refinancing of existing mortgage debt. However, with the
expansion of it's mortgage loan servicing rights acquisition activities, the
Company has been able to add a significant volume of servicing rights to it's
servicing portfolio. These acquisitions have served to offset the sale of
manufactured housing loan servicing. If origination and acquisitions activity
cannot continue to replace prepayments, future loan servicing revenues will
decline. Higher levels of loan prepayments also increase the Company's
amortization of purchased mortgage servicing rights to reflect a shorter
expected life of loans serviced. The Company's servicing portfolio carries a
weighted average interest rate of approximately 8.04% resulting in stable and
expected prepayment levels for the Company.
Higher interest rates historically slow prepayments in the Company's
servicing portfolio because they tend to decrease the level of home purchases
and refinancing of existing mortgage debt. Although interest rates had until
recently dropped, management believes that the decline was not sufficient, in
light of the recent historically low interest rates, to affect levels of loan
prepayments. See "Amortization of Mortgage Loan Servicing Contracts."
Variations in interest rates may also impact revenue from the sale of
servicing rights. To the extent that it's origination volume varies, the Company
may have more or less servicing rights available for sale or retention. Market
expectations regarding future mortgage loan prepayments and other supply and
demand factors may influence the price the Company receives for servicing
rights. At June 30, 1996, the principal
- ---------------
(1) Financial information for the year ended September 30, 1994 is
presented combining the results of operations of HOFCA (the predecessor) from
October 1, 1993 through April 29, 1994 with that of the Company from April 30,
1994 through September 30, 1994. All adjustments necessary to reflect the
predecessor's operations on the same basis of accounting as that of the Company
have been made. Any material results of operations related to the predecessor's
basis of accounting prior to April 29, 1994 have been adequately discussed. In
addition, DMC's results of operations from April 28, 1995, the date of the
Company's acquisition of DMC, through September 30, 1995 are included in the
Company's Results of Operations for the year ended September 30, 1995 in
accordance with the purchase method of accounting. Any material variances caused
by such inclusion have been appropriately discussed.
26
<PAGE> 31
balance of mortgage loans in the Company's servicing portfolio were primarily
located in the states of California (31.5%), Maryland (12.1%), Virginia (11.1%),
New York (9.6%) and Washington (7.6%) (see the "Geographic Distribution of
Mortgage Loan Servicing Portfolio" table in "Business-Mortgage Loan Servicing").
Economic slow downs in the states in which the Company's business is conducted,
may result in a decline in the Company's results of operations in the future to
the extent such decline affects loan origination volumes or levels of loan
delinquency and defaults.
Effect of Inflation. The Company's mortgage banking operations are affected by
inflation primarily through its impact on interest rates. See above.
Accounting for Mortgage Banking Activities. For the year ended September 30,
1995 and all prior years, the cost of purchased mortgage servicing rights
("PMSR") is capitalized and amortized over the estimated remaining life of the
related loans proportionate to the estimated discounted net servicing income on
a disaggregated basis. The Company monitors changes in interest rates,
prepayment and default experience on the mortgage loans underlying its PMSR's
and, to the extent unanticipated mortgage prepayments and/or defaults occur,
adjusts the anticipated amortization on a prospective basis. To the extent that
unanticipated mortgage prepayments result in the carrying value of purchased
servicing rights exceeding estimated discounted future net servicing income, a
write-down of the PMSRs would be made through a charge to current earnings. The
PMSR portfolio is disaggregated by (i) investor type; (ii) remittance type;
(iii) term of loans; (iv) average loan balance; (v) weighted average interest
rate; (vi) weighted average servicing fee; (vii) average custodial account
balances; and (viii) credit worthiness, to include delinquencies, foreclosures
and bankruptcies. Since November 1994, when the Company made its first bulk
purchase of PMSRs, the Company's PMSR portfolio has not experienced any
impairment from higher than anticipated prepayments or defaults. See "Effect Of
Interest Rate Fluctuations" above and "Risk Factors-Interest Rate Fluctuations"
and "Risk Factors-Economic and Default Risk."
In May 1995, FASB issued SFAS No.122 "Accounting for Mortgage Servicing
Rights, an amendment of FASB Statement No. 65" issued for fiscal years beginning
after December 15, 1995. The Company has adopted SFAS No. 122 for the year
ending September 30, 1996. Under SFAS No. 122, when an enterprise purchases or
originates mortgage loans, and the enterprise sells or securitizes the loans and
retains the servicing rights ("MSR"), the enterprise should allocate the cost of
the mortgage loans to the MSRs and the loans based upon their relative fair
values. Currently, because of the small volume of mortgage loan originations,
the majority of the Company's originations are sold with mortgage loan servicing
released to the purchasers. As a result, management does not anticipate any
material effect resulting from the adoption of SFAS No. 122 on the Company's
financial condition or statement of operations for the fiscal year ending
September 30, 1996. However, as the Company increases its origination activity
in the future, management anticipates that a proportionately larger share of the
mortgage loan servicing rights will be retained and not sold. At such time, the
adoption of SFAS No. 122 may have an impact on the Company's financial condition
and statement of operations. As these effects are directly related to future
interest rates and future expenses, as well as management's internal decisions
regarding retention of such rights, it is currently impossible to quantify the
impact of such events.
SFAS No.122 also requires establishment of a valuation allowance for the
excess of the carrying amount of capitalized MSRs over estimated fair value.
Since the beginning of the fiscal year ending September 30, 1996, on a periodic
basis for purposes of measuring impairment, MSRs are disaggregated and
stratified on predominant risk characteristics, primarily loan type, interest
rate and investor type. Management does not anticipate any material effect
resulting from the adoption of SFAS No. 122 on the Company's financial condition
or statement of operations for the fiscal year ending September 30, 1996.
Organization. In December 1993, FIS was incorporated for the purpose of
acquiring and operating a mortgage/financial services company. Shortly
thereafter, FIS raised $1.75 million through a private offering of securities
for the purpose of acquiring all of the outstanding shares of HOFCA.
On April 29, 1994, FIS purchased all the capital stock of HOFCA from
unrelated individuals. The acquisition was accounted for as a purchase and
accordingly, the basis of the assets and liabilities of HOFCA were restated to
fair value. As a result, the statements of operations for the fiscal year ended
September 30,
27
<PAGE> 32
1993, and the seven months ended April 29, 1994 are not directly comparable to
the subsequent periods primarily due to a substantial difference in the basis of
the assets, liabilities, and the capital structure of HOFCA in the pre and post
sale period.
On September 30, 1994, the Company (then known as BW Group, Inc.) acquired
FIS, in a reverse acquisition stock exchange. The transaction was accounted for
as a recapitalization of FIS because the stockholders of FIS received a majority
interest (approximately 97%) in the Company in the transaction. Immediately
after the acquisition, the Company changed it's name to Homeowners Financial
Corp.
On April 28, 1995, the Company acquired 100% of the outstanding stock of
DMC, the ASC-PMSR and related assets. The financial statements for the nine
month period ended June 30, 1996 include the results of operations of DMC for
the entire period. However, the financial statements for the year ended
September 30, 1995 include the results of operations of DMC only for the period
from May 1, 1995 through September 30, 1995. Accordingly, the results of
operations of the Company for the nine months ended June 30, 1996 and for the
year ended September 30, 1995 are not directly comparable to prior periods. See
"The Reorganization."
RESULTS OF OPERATIONS
The Company is a diversified residential mortgage banker which services,
originates and, in most cases, sells mortgage loans secured by one-to-four
family residences. The Company provides a range of mortgage loan products
including, but not limited to fixed rate and adjustable rate loans with a
variety of terms.
In April 1994, as part of the transaction in which FIS acquired HOFCA,
HOFCA distributed approximately $10.1 million in assets to former shareholders.
Thereafter, current management undertook a program of consolidation and expense
reduction, including office closures and staff reductions. In this regard, the
Company has closed operating offices in Waltham, Massachusetts, Charlotte, North
Carolina, and Dallas, Texas, and consolidated those operations into the Troy,
Michigan office. See "Personnel Costs" and "Occupancy, Office and Professional
Expenses" below.
In addition, HOFCA undertook to change its focus from a manufactured home
loan servicer and lender to a one-to-four family residential mortgage loan
servicer and lender. Historically, HOFCA originated a large volume of
manufactured housing loans and income therefrom was significant prior to April
1994. During the period from April 1994 through September 1994, HOFCA ceased
such activities and sold most of its manufactured housing loans and servicing
rights. As a result, the revenue from manufactured housing loan originations and
servicing has substantially decreased.
The majority of the revenue from operations for the Company currently is
derived from mortgage servicing operations (see "Business - Mortgage Loan
Servicing"). From April 1994 through September 1994, only approximately 36.5% of
the income of the Company was the result of mortgage loan servicing. During the
nine months ended June 30, 1996 and the fiscal year ended September 30, 1995,
mortgage loan servicing represented approximately 78.7% and 84.9%, respectively,
of the Company's income.
Also during the period from April 29, 1994 through September 30, 1994, the
Company reported revenue from sale of mortgage loan servicing rights amounting
to approximately 49.0% of the revenue of the Company. While the Company does
routinely sell certain mortgage loan servicing rights, the majority of this
revenue resulted from the sale of manufactured housing loan servicing rights.
The sale of these rights was consistent with the closing of the manufactured
housing loan operation. The sale transaction produced revenue of approximately
$.9 million during this period. Had the transaction not taken place the results
of operations for the period from April 1994 through September 1994 would have
been substantially different. The Company had revenue of $38,000 from the sale
of servicing rights during the nine months ended June 30, 1996 and had revenue
of approximately $319,000 from the sale of $37.1 million of GNMA servicing
rights during the fiscal year ended September 30, 1995.
The Company's current loan originations are financed through a warehousing
facility from First Bank. Advances under the Facility may not exceed 100% of the
"Warehouse Collateral Value" of the eligible mortgage loans. The maximum amount
of such borrowing under the current revolving facility is $5.0 million. Interest
is charged based upon one of the following three methods: "Fixed Rate,"
"Reference Rate" or
28
<PAGE> 33
"Floating Eurodollar Rate." The applicable method of interest calculation is at
the option of the Company. See "Liquidity and Capital Resources" and
"Business -- Mortgage Loan Origination -- Funding of Mortgage Originations and
Purchases."
During the fiscal year ended September 30, 1994, the Company entered into
definitive agreements to acquire approximately $355.0 million of single family
mortgage loan servicing rights. These rights were acquired to replace
manufactured housing rights sold during the year. All servicing acquisitions
contemplated under these definitive agreements were completed in the first
quarter of fiscal 1995. On April 28, 1995, the Company acquired DMC and the
ASC-PMSR, which increased the single family mortgage loan servicing portfolio by
approximately $363 million.
NINE MONTHS ENDED JUNE 30, 1996 COMPARED WITH NINE MONTHS ENDED JUNE 30, 1995
Overview. The Company's net loss for the nine months ended June 30, 1996 was
$366,000 before preferred dividends of $96,000 as compared to a net loss of
$747,000 before preferred dividends of $144,000 for the nine months ended June
30, 1995, a decrease in loss of $381,000, approximately 51.0%. The decrease in
loss was primarily attributable to additional loan origination income of
$201,000 and an increase in mortgage servicing and subservicing income of
$87,000 net of amortization for purchased mortgage servicing rights.
Loan Servicing. Mortgage servicing and subservicing income increased from $1.3
million for the nine months ended June 30, 1995 to $1.9 million for the nine
months ended June 30, 1996. This increase in mortgage loan servicing income of
$580,000, approximately 44.2%, was primarily the result of servicing fees from
the DMC and ASC-PMSR portfolios.
During the nine months ended June 30, 1996, loans paid in full were $39.1
million which represents an annualized prepayment rate of approximately 7.6%.
During the nine months ended June 30, 1995, loans paid in full were $24.8
million which represents an annualized prepayment rate of approximately 7.8%.
Regular principal reductions, transfers, bulk sales, other reductions and
foreclosures during the nine months ended June 30, 1996 were $80.5 million as
compared to $35.3 million during the nine months ended June 30, 1995, an
increase of $45.2 million, approximately 128.0%. The increase is primarily
attributable to the transfer of the ISB portfolio and a private investor
portfolio to another servicing company.
At June 30, 1996, mortgage loans serviced were $614.0 million as compared
to $712.4 million at June 30, 1995, a decrease of $98.4 million, approximately
13.8%. This decrease primarily results from loans paid in full and the transfer
of the ISB portfolio and a private investor portfolio to another servicing
company.
For the nine months ended June 30, 1996 and 1995, foreclosures were $.65
million and $.26 million, an increase of $390,000.
Loan Origination. Loan origination revenue, which includes the fees associated
with the origination process and the net gains or losses on the sale of loans,
was $234,000 for the nine months ended June 30, 1996 compared with $33,000 for
the nine months ended June 30, 1995. This increase of $201,000 reflected nine
months of origination activity during the 1996 period compared to two months of
origination activity during the 1995 period.
ANALYSIS OF LOAN ORIGINATION REVENUES
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
JUNE 30,
----------------
1996 1995
------ ---
<S> <C> <C>
($000)
Loan origination fees...................................... $234 $33
Net Marketing gains........................................ $ 17 $52
------ ---
Loan origination revenues.................................. $251 $85
====== ===
</TABLE>
29
<PAGE> 34
Net Interest. The Company's net interest cost for the nine months ended June
30, 1996 was $19,000 compared with a net interest cost of $36,000 for the nine
months ended June 30, 1995. The decrease of $17,000 was primarily due to an
increase in interest income on mortgage loans held for sale.
Because the Company generally holds loans in inventory for less than 90
days, the rate of interest earned by the Company generally trends up or down
with changes in prevailing mortgage interest rates. The cost of the related debt
used to fund mortgage loans generally trends with movements in short term
interest rates, but is less sensitive to these changes due to the level of
compensating balances maintained by the Company at its creditor banks.
<TABLE>
<CAPTION>
BREAKDOWN OF NET
INTEREST MARGIN
---------------------
NINE MONTHS ENDED
JUNE 30,
---------------------
1996 1995
------- -------
<S> <C> <C>
($000)
Net Interest margin:
Interest income...................................... $ 136 $ 29
Interest expense on warehouse and other operating
debt.............................................. $ (155) $ (65)
------- -------
Net interest (cost).................................. $ (19) $ (36)
======= =======
</TABLE>
Gain on Sale of Mortgage Loans Held For Sale. Gain on the sale of mortgage
loans held for sale was $40,000 for the nine month period ended June 30, 1996
and $52,000 for the nine months period ended June 30, 1995. The $12,000 decrease
in the gain on sale of mortgage loans held for sale resulted from a $5.0 million
whole loan sale transaction during the 1995 period.
Gain on Sale of Mortgage Loan Servicing Rights. Gain on the sale of mortgage
loan servicing rights was $15,000 for the nine month period ended June 30, 1996.
There was no gain on the sale of mortgage servicing rights for the nine months
period ended June 30, 1995. The gain for the 1996 period resulted primarily from
the sale of approximately $20 million of land contract servicing rights.
Other Income. Other income was $88,000 for the nine month period ended June 30,
1996. There was no other income for the nine month period ended June 30, 1995.
Other income for the 1996 period primarily represented recoveries in excess of
amounts previously charged off for costs and expenses related to the servicing
of foreclosure loans with partial recourse to the Company.
Personnel Costs. Personnel costs for the nine months ended June 30, 1996 were
$1.0 million compared to $912,000 for the nine months ended June 30, 1995, an
increase of $117,000 or approximately 12.8%. This increase reflects the
Company's growth in personnel due to the DMC and ASC-PMSR acquisitions,
partially offset by staff reductions resulting from the closing of the Company's
servicing office in Dallas, Texas. Approximately $42,000 in commissions were
paid during the nine months ended June 30, 1996, no commissions were paid during
the nine months ended June 30, 1995 and approximately $18,000 in commissions
were paid during the fiscal year ended September 30, 1995. Commissions are
generally calculated as a percentage of the loan origination fee, and, the
percentage is based upon the volume of business produced monthly by the loan
officer. This allows the Company to match more closely the origination fee
income with the related commission expense. The payment of commissions does not
reflect a change in Company policy. No commissions were paid during 1994 because
loan origination volume during this period did not meet the minimum volume
required for the payment of commissions. The Company does not anticipate that
the amount of commissions to be paid in future periods will be material to
either its financial condition or its results of operations.
Occupancy, Office and Professional Expenses. Occupancy, office and professional
expenses decreased to $514,000 for the nine months ended June 30, 1996 from
$787,000 for the nine months ended June 30, 1995. The decrease of $273,000,
approximately 34.7%, was primarily due to the consolidation of the DMC and HOFCA
loan servicing facilities.
30
<PAGE> 35
Provision for Loan Losses. There was no additional provision for loan losses
for the nine months ended June 30, 1996 and for the nine month period ended June
30, 1995. The provision is determined by analysis of such factors as the
prevailing level of loan delinquencies, anticipated reinstatement rates from the
various stages of delinquency, and loss experience on similar loans serviced.
The Company acts as the agent for the Mortgage Investor in filing the
foreclosure action, and is indemnified for all costs, losses and claims
resulting from the foreclosure process. Management believes that the reserve of
approximately $182,000 remaining on the Company's books is sufficient to cover
the limited amount of recourse exposure in the loan servicing portfolio.
Essentially all of the Company's loan originations were sold with servicing
released to the purchaser. The Company does not require a loan loss reserve for
origination activities because, generally, it retains neither the loans nor the
servicing rights of the loans originated. The Company's purchase during the
three months ended December 31, 1994 of $355.0 million in loan servicing rights
resulted in the Company acquiring from a private, non-RTC seller, servicing
rights to a residential mortgage loan portfolio with no delinquency or
foreclosure recourse to the Company. The DMC and ASC-PMSR portfolios were
essentially without recourse to the Company. The Mortgage Investors for whom the
portfolios are serviced by the Company are responsible for all costs, losses and
claims resulting from the servicing of the loans, including loan delinquencies
and foreclosure actions. Therefore, no additional provision for loan losses is
required for the $355.0 million acquisition of loan servicing rights and the DMC
and ASC-PMSR portfolios. In the future, as the Company increases originations
with servicing rights retained, the Company will review and adjust its provision
for loan losses as required by its analysis of prevailing risk factors.
Amortization of Mortgage Loan Servicing Contracts. Amortization of mortgage
loan servicing contracts was $810,000 for the nine months ended June 30, 1996
compared to $317,000 for the nine months ended June 30, 1995. The increase of
$493,000, approximately 155.5%, is due to the acquisition of $355.0 million of
mortgage loan servicing rights in November 1994 and the acquisition of DMC and
the ASC-PMSR loan servicing portfolios.
Management expects that prepayment rates for servicing rights will remain
constant or increase slightly. The effect of lower interest rates, resulting in
potentially greater prepayment risk, is counterbalanced by the economic threat
posed by inflation, which stabilizes or increases interest rates, thereby
reducing prepayment risk. The Company anticipates that long-term interest rates
will range between 7.50% and 8.50%. The overall weighted average interest rate
for the Company's portfolio is approximately 8.04%, therefore, management
believes that any material increase in prepayments would not take place until
mortgage interest rates reach or drop below 7.00%. Currently long-term mortgage
interest rates are approximately 8.25%.
Nationwide, prepayment speeds for interest rates of 9.00% or more increased
more than 40% during calendar year 1995 and prepayment speeds on interest rates
of 8.00% or less remained constant. Results of operations and liquidity for the
Company are not likely to be affected materially by changes in prepayment speeds
unless mortgage interest rates decline to the 7.00% level. Management believes
that, if interest rates were to fall to a level where increased prepayment
speeds materially impact results of operations and liquidity, increased loan fee
income from the Company's Minnesota office could significantly offset the
negative impact on results of operations and liquidity (see "Risk
Factors-Interest Rate Fluctuations"). The Company could seek to refinance that
portion of its portfolio that was most susceptible to prepayment, retaining the
servicing rights on the refinanced loans. During periods of declining interest
rates, the Company would seek to refinance that portion of its servicing
portfolio that was most susceptible to prepayment, retaining the loan servicing
rights on the refinanced loans.
The $355 million servicing rights acquisition and the DMC and ASC-PMSR
portfolios were not purchased directly from RTC. The Company has not experienced
and does not anticipate any significant or extraordinary servicing costs or
problems including delinquencies from these portfolios.
Other Operating Expenses. Other operating expenses for the nine months ended
June 30, 1996 were $262,000 compared to $163,000 for the nine months ended June
30, 1995. This increase of $99,000, is primarily attributable to servicing
expenses connected with the consolidation of the loan servicing operations in
Troy, Michigan.
31
<PAGE> 36
Income Taxes. There was no income tax expense or benefit for the nine months
ended June 30, 1996 because of the Company's net operating loss of $366,000. For
the nine months ended June 30, 1995, there was an income tax benefit of $72,000
resulting from the Company's net operating loss carryforward against intangible
assets.
FISCAL YEAR ENDED SEPTEMBER 30, 1995 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER
30, 1994.
Overview. The Company's net loss for the fiscal year ended September 30, 1995
was $899,000 before preferred dividends of $192,000 as compared with net income
of $2.1 million for the fiscal year ended September 30, 1994 before preferred
dividends of $16,000. Net Income for the fiscal year ended September 30, 1994
included $1.6 million of income from amortization of net assets in excess of
acquisition costs (commonly referred to as negative goodwill); excluding
negative goodwill, HOFCA had net income of $488,000. The elimination of
amortization of negative goodwill of $1.6 million, a reduction in the gain on
sale of servicing rights of approximately $891,000, from $942,000 during fiscal
1994 to $51,000 during fiscal 1995, a 94.6% reduction, and a reduction in gains
on sale of loans held for sale of $733,000 from $994,000 during fiscal 1994 to
$261,000 during fiscal 1995, a 73.7% reduction, resulted in a net loss of
$899,000 during fiscal 1995, as compared to $2.1 million in net income during
fiscal 1994.
Loan Servicing. Mortgage loan servicing revenue increased from $2.2 million for
the fiscal year ended September 30, 1994 to $2.3 million for the fiscal year
ended September 30, 1995. This increase in mortgage loan servicing revenue of
$116,000, approximately 5.4%, was primarily the result of additional servicing
fee income from the DMC and ASC-PMSR portfolios, partially offset by the sale of
manufactured housing servicing rights. During the fiscal year ended September
30, 1995, the Company replaced the $64.0 million in manufactured housing loan
servicing rights that it sold during the fiscal year ended September 30, 1994
with $355.0 million of single family mortgage loan servicing rights and the DMC
and ASC-PMSR Portfolios. The majority of the $355.0 million of mortgage loan
servicing rights were acquired by purchase. The acquisition of these mortgage
loan servicing rights was delayed approximately 60 days because of the sellers'
inability to deliver proper title to such rights. During this time, the Company
had in place systems and personnel necessary to service such loans. The Company
would have realized approximately $175,000 in additional revenue during the year
ended September 30, 1995 had the transfer of such mortgage loan servicing rights
taken place as originally scheduled. Costs attributed to personnel, occupancy
and systems incurred during this period were expensed as period costs.
During the fiscal year ended September 30, 1995, loans paid in full were
$35.9 million which represents an annualized prepayment rate of approximately
5.9%. During the fiscal year ended September 30, 1994, loans paid in full were
$16.9 million which represents an annualized prepayment rate of approximately
12.0%. The lower prepayment rate for fiscal 1995 resulted from a larger
servicing portfolio base in 1995 due to the acquisition of $355.0 million in
bulk PMSRs and the DMC and ASC-PMSR portfolios in fiscal 1995.
Regular principal reductions, transfers, bulk sales, other reductions and
foreclosures during fiscal 1995 were $113.6 million as compared to $75.4 million
during fiscal 1994, an increase of $38.2 million, approximately 50.7%. The
increase is primarily attributable to the acquisition of $355.0 million in bulk
PMSRs and the DMC and ASC-PMSR portfolios in fiscal 1995.
At September 30, 1995, mortgage loans serviced were $688.5 million as
compared to $64.2 million at September 30, 1994, an increase of $624.3 million,
approximately 972%. The significant increase results from the fact that the
Company sold most of its manufactured housing loan servicing rights during
fiscal 1994 and acquired the $355.0 million in bulk PMSRs and the DMC and
ASC-PMSR portfolios in fiscal 1995.
For the fiscal years ended September 30, 1995 and 1994, foreclosures were
$.4 million and $1.2 million, a decrease of $.8 million, approximately 67.0%.
The decrease is primarily attributable to the sale of the Company's manufactured
housing loan servicing rights and the acquisition of single family mortgage loan
servicing rights which traditionally have a lower foreclosure rate.
Loan Origination. Loan origination revenue, which includes the fees associated
with the origination process and the net gains or losses on the sale of loans,
was $261,000 for the fiscal year ended September 30, 1995
32
<PAGE> 37
compared with $994,000 for the same period in 1994. This decrease of $733,000,
approximately 73.7%, reflects the discontinuation of manufactured housing
originations, partially offset by loan origination revenue of $83,000 from the
operations of DMC for the period from May through September 1995.
ANALYSIS OF LOAN ORIGINATION REVENUES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30,
-------------------
1995 1994
------ ------
<S> <C> <C>
($000)
Loan origination fees................................... $ 83 $-0-
Net Marketing gains..................................... 178 994
------ ------
Loan origination revenues............................... $261 $994
====== ======
</TABLE>
Net Interest. The Company's net interest cost before interest expense on
non-operating debt for the fiscal year ended September 30, 1995 was $98,000
compared with $427,000 of net interest income for the fiscal year ended
September 30, 1994. The significant decrease was due to lower interest income
resulting from a decline in mortgage loans held for sale to $478,000 at
September 30, 1995 from $1.1 million at September 30, 1994, partially offset by
increased warehouse balances. Interest expense on non-operating debt increased
from $131,000 for the fiscal year ended September 30, 1994 to $191,000 for the
same period in 1995. The increase of $60,000 in non-operating interest expense
is primarily due to debt associated with the purchase of mortgage loan servicing
rights and the DMC and the ASC-PMSR acquisitions.
Interest spread on loans held for sale average 6.1% and 12.50% for the
fiscal year ended September 30, 1995 and 1994, respectively. Because the Company
generally holds loans in inventory for less than 90 days, the rate of interest
earned by the Company generally trends up or down with changes in prevailing
mortgage interest rates. The cost of the related debt used to fund mortgage
loans generally trends with movements in short term interest rates, but is less
sensitive to these changes due to the level of compensating balances maintained
by the Company at its creditor banks. While the 1994 interest spread is high
industry wide, management believes that the 1994 interest spread, which
primarily reflects manufactured housing loans (most of which have been sold)
which were internally funded, is reasonable for the manufactured housing loan
segment of the market.
<TABLE>
<CAPTION>
BREAKDOWN OF NET
INTEREST MARGIN
---------------------
YEAR ENDED
SEPTEMBER 30,
---------------------
1995 1994
------- -------
<S> <C> <C>
($000)
Net Interest margin:
Interest income...................................... $ 93 $ 558
Interest expense on warehouse and other operating
debt.............................................. (191) (131)
------- -------
Net interest margin (cost)........................... $ (98) $ 427
======= =======
</TABLE>
Personnel Costs. Personnel costs for the fiscal year ended September 30, 1995
were $1.3 million compared to $2.1 million for fiscal 1994, a decrease of
$803,000, approximately 38.7%. This decrease largely reflects the Company's down
sizing of its loan origination and servicing operations during 1994 and 1995. No
Commissions were paid on loan originations during 1994 and approximately $18,000
in commissions were paid during the fiscal year ended September 30, 1995.
Commissions are generally calculated as a percentage of the loan origination
fee, and, the percentage is based upon the volume of business produced monthly
by the loan officer. This allows the Company to match more closely the
origination fee income with the related commission expense. The payment of
commissions does not reflect a change in Company policy. No commissions were
paid during 1994 because loan origination volume during this period did not meet
the minimum volume required for the payment of commissions. The Company does not
anticipate that the
33
<PAGE> 38
amount of commissions to be paid in future periods will be material to either
its financial condition or its results of operations.
Occupancy, Office and Professional Expenses. Occupancy, office and
professional expenses increased $186,000, or approximately 21.6%, from $861,000
during fiscal 1994 to $1.0 million for during fiscal 1995, primarily due to the
acquisition of DMC and the ASC-PMSR, partially offset by the closure of HOFCA
branch offices.
Provision for Loan Losses. Provisions for loan losses for the fiscal year
ended September 30, 1995 were $53,000 compared with $277,000 for fiscal 1994.
The decrease of $224,000 represented approximately 80.9%. The provision is
determined by analysis of such factors as the prevailing level of loan
delinquencies, anticipated reinstatement rates from the various stages of
delinquency, and loss experience on similar loans serviced. The Company acts as
the agent for the Mortgage Investor in filing the foreclosure action, and is
indemnified for all costs, losses and claims resulting from the foreclosure
process. Management believes that the reserve remaining on the Company's books
is sufficient to cover the limited amount of recourse exposure in the loan
servicing portfolio. Essentially all of the Company's loan originations were
sold with servicing released to the purchaser. The Company does not require a
loan loss reserve for origination activities because it retained neither the
loans nor the servicing rights of the loans originated during 1994 and 1995. The
Company's purchase of $355.0 million in loan servicing rights resulted in the
Company acquiring from a private, non-RTC seller servicing rights to a
residential mortgage loan portfolio with no delinquency or foreclosure recourse
to the Company. The DMC and ASC-PMSR portfolios were essentially without
recourse to the Company. The investors for whom the portfolios are serviced by
the Company is responsible for all costs, losses and claims resulting from the
servicing of the loans, including loan delinquencies and foreclosure actions.
Therefore no additional provision for loan losses is required. In the future, as
the Company increases originations with servicing rights retained, the Company
will review and adjust its provision for loan losses.
Amortization of Mortgage Loan Servicing Contracts. Amortization of
mortgage loan servicing contracts was $504,000 for the fiscal year ended
September 30, 1995 compared with $50,000 for the same time period in 1994. The
difference is due to the acquisition of $355.0 million of mortgage loan
servicing rights during the first quarter of the fiscal year ended September 30,
1995 and the acquisition of DMC and the ASC-PMSR on April 28, 1995.
Management expects that prepayment rates for servicing rights will remain
constant or increase slightly. The effect of lower interest rates, resulting in
potentially greater prepayment risk, is counterbalanced by the economic threat
posed by inflation, which stabilizes or increases interest rates, thereby
reducing prepayment risk. The Company anticipates that the long-term interest
rates will range between 7.50% and 8.50%. The overall weighted average interest
rate for the Company's portfolio is approximately 7.85%, therefore, management
believes that any material increase in prepayments would not take place until
mortgage interest rates reach and remain below 7.00% for a sustained period.
Nationwide, prepayment speeds for interest rates of 9.00% or more have
increased more than 40% during calendar year 1995, prepayment speeds on interest
rates of 8.00% or less have remained constant. Results of operations and
liquidity for the Company are not likely to be affected materially by changes in
prepayment speeds unless mortgage interest rates decline to or below the 7.00%
level for a sustained period. Management believes that, if interest rates were
to fall to the level where prepayment speeds increase to the level where results
of operations and liquidity are affected, increased fee income from loan
origination volume from the Company's Minnesota office would significantly
offset the impact on results of operations and liquidity. The Company would seek
to refinance that portion of its servicing portfolio that was most susceptible
to prepayment, retaining the loan servicing rights on the refinanced loans (see
"Risk Factors -- Interest Rate Fluctuations").
The $355.0 million servicing rights acquisition and the DMC and ASC-PMSR
portfolios were not directly purchased from RTC. The Company has not experienced
and does not anticipate any significant or extraordinary servicing costs or
problems including delinquencies from these portfolios.
34
<PAGE> 39
Other Operating Expenses. Other operating expenses were $567,000 during
fiscal 1995 compared with $628,000 during fiscal 1994, decrease of $61,000, or
approximately 9.7%. This is reflective of increases in loan origination and
servicing expenses attributable to the acquisition of DMC and the ASC-PMSR.
Income Taxes. Income tax expense reflected a tax benefit of $61,000 for
the fiscal year ended September 30, 1995 compared to an income tax provision of
$137,000 for the fiscal year ended September 30, 1994. The difference between
the effective tax rate and the statutory rate is principally due to the
application of net operating losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary short-term liquidity requirements are for its
mortgage loan fundings and advances that it is required to make related to its
obligations as a servicer of loans. These requirements are generally met through
short-term warehouse borrowings, other short-term borrowings and from cash flow
from operations. The Company also has longer term liquidity requirements,
principally related to acquired mortgage loan servicing contracts, which are
funded with longer term debt.
During the nine months ended June 30, 1996 and the nine months ended June
30, 1995, the Company had a net decrease in cash and cash equivalents of $13,000
and $1.7 million, respectively. Net cash used in operating activities of $2.9
million for the nine months ended June 30, 1996 and net cash provided by
operating activities of $173,000 during the nine months ended June 30, 1995,
reflected net losses of $366,000 and $747,000, respectively, plus adjustments to
the net losses of $2.6 million and $920,000, respectively, which consisted of
noncash amortization of mortgage loan servicing contracts, an increase in
accrued income and servicing receivables and purchase and sale of mortgage loans
held for sale and the proceeds from such sales. Net cash provided by investing
activities was $137,000 for the nine months ended June 30, 1996 and net cash
used in investing activities was $5.0 million for the nine months ended June 30,
1995. Net cash provided by financing activities of $2.8 million and $3.1
million, respectively, was primarily due to a repurchase agreement financing
transaction and an increase in term debt, respectively.
Changes in the level of mortgage loans held for sale and the related
warehouse debt reflect, among other factors, the general level of, and trends
in, mortgage interest rates, the seasonality of home purchase activity and the
discontinuance of manufactured home lending activities and the shift to
one-to-four family residential mortgage lending.
In order to finance a portion of the acquisition of the $355.0 million in
mortgage loan servicing rights, on November 18, 1994, the Company entered into a
nonrevolving 36-month term loan agreement with Franklin Federal Bancorp
("Franklin") in the amount of $2.0 million which enabled the Company to finance
the purchase of the mortgage loan servicing rights. The Franklin term loan was
refinanced with part of the proceeds from a term loan from First Bank (see
below). The remainder of the $3.3 million purchase price for the $355.0 million
in mortgage loan servicing rights was funded from proceeds from the sale of
manufactured housing servicing rights and funds on hand (primarily from the
proceeds of FIS' private offering of preferred stock, common stock and
warrants).
On April 28, 1995, the Company acquired all of the issued and outstanding
stock of DMC, the ASC-PMSR and related assets for approximately $2.89 million.
The Company had the right, within one year, to require the repurchase or
correction of any loans acquired in the transaction that do not meet certain
Agency eligibility standards. The Company has filed a timely repurchase notice
with ASC. As of the date hereof, management believes that approximately $500,000
of the loans acquired do not meet such standards.
The Company obtained a portion of the funds used to purchase DMC and the
other assets discussed above from two loans - a $695,489 loan from Barnett Bank
("Barnett") and a $675,000 loan from ISB. The Barnett loan accrues interest at
.75% over Barnett's prime rate; interest only is payable monthly and the
principal was due and payable on or before April 27, 1996. In April 1996, August
1996 and September 1996, the Company obtained extensions of the Barnett loan due
date in consideration of the payment of fees by the Company equal to .25% of the
loan amount on each extension date ($5,217 in the aggregate). The Barnett loan
now expires on December 27, 1996. The Company intends to pay off the loan with a
portion of the
35
<PAGE> 40
proceeds of this offering (see "Use of Proceeds"). The Barnett loan is
principally secured by specific assets (bonds, certificates of deposit, treasury
notes and shares of stock) of certain stockholders of the Company (see "The
Reorganization" and "Description of Securities-Common Stock Warrants and
Options"). The ISB loan accrued interest at the rate of 10% per annum. All of
the principal and accrued interest under the ISB loan were repaid on August 30,
1995. Management paid the balance of the purchase price and repaid the ISB loan
from the proceeds of a $4.0 million term loan from First Bank (see below).
On August 30, 1995, the Company entered into a credit agreement with First
Bank, pursuant to which First Bank committed to loan the Company up to $4.0
million ("First Term Loan") and provide a warehousing facility to the Company of
up to $5.0 million ("First Warehousing Facility").
As of October 28, 1996, the Company's outstanding principal balance under
the First Term Loan is $3.2 million. The Company used the proceeds from this
loan to pay the balance of the purchase price for DMC, the ASC-PMSR and related
assets, to repay the ISB loan and repay the Franklin term loan. Principal under
the First Term Loan accrues interest at the fixed rate of 2.75%. Interest is
payable monthly and five percent of the original principal balance ($200,000) is
payable quarterly. All remaining principal and accrued interest is payable on or
before August 30, 2000 or sooner in the event of a default. Events of default
include failure to make required payments, breaches of the terms,
representations or warranties under the First Credit Agreement and related
documents, insolvency and material judgments. The Company must also maintain the
following minimum financial criteria (as defined in the First Credit Agreement
as amended): "Adjusted Tangible Net Worth" ("ATNW") must be at least $2.7
million; the "Adjusted Leverage Ratio" ("ALR") must be no greater than
4.0-to-1.0; the "Debt Service Coverage Ratio" ("DSCR") must be at least 1.2-to-
1.0; the aggregate principal balance of mortgage loans serviced must be at least
$500 million; and the report of independent auditor in the Company's audited
consolidated financial statements cannot contain a "going concern" explanatory
paragraph.
The Company was in default of the following three minimum financial
requirements under the First Credit Agreement concerning the First Term Loan and
the First Warehousing Facility: ATNW, ALR and DSCR, and continues to be in
default under the minimum DSCR requirement. The Company's ATNW (as defined in
the First Credit Agreement) was $2.8 million at September 30, 1995. The minimum
ATNW required under the First Credit Agreement at that time was $3.0 million.
The maximum ALR allowed under the First Credit Agreement was 3.25 to 1.00. At
February 29, 1996, the Company's ALR was 3.41 to 1.00. The minimum DSCR (as
defined in the First Credit Agreement) was required to be 1.20 to 1.00. The
Company's DSCR at June 30, 1996 was 1.07 to 1.00. In March 1996, the Company
converted $503,000 of debt to equity in the form of Series B Preferred Stock
(see "Certain Transactions"). As a result of this conversion, as of March 31,
1996 and June 30, 1996, the Company was in compliance with the minimum ATNW and
ALR requirements. In May 1996, the Company received a waiver of the conditions
of default until September 30, 1996 and First Bank amended the First Credit
Agreement in which it lowered the minimum ATNW from $3.0 million to $2.7 million
and increased the maximum ALR from 3.25 to 1.00 to 4.0 to 1.00. As a condition
to granting the waiver, First Bank required the Company to suspend payments of
all preferred stock dividends, approximately $69,000 on a quarterly basis, until
the Company is in full compliance with all terms and provisions of the First
Credit Agreement. The Company's management has reviewed with First Bank
36
<PAGE> 41
different cost reduction measures and additional sources of revenue to bring the
DSCR condition of default in to compliance, including consolidation of offices,
staffing adjustments and cash management changes to reduce bank charges and
increase interest income. No assurance can be given that the Company will be
able to effect sufficient cost savings and find additional sources of revenue to
cure the DSCR condition of default. Management believes that First Bank will
continue to work with the Company. If the Company is unable to cure the DSCR
condition of default and First Bank refuses to grant an additional waiver, First
Bank may elect to demand full payment of the outstanding balances of the First
Term Loan and the First Warehouse Facility, $3.2 million and 1.1 million,
respectively, at October 28, 1996. If First Bank elects to demand full payment
under the Credit Agreement, and the Company is unable to refinance its debt to
First Bank, the Company's business would be materially adversely affected. See
"Risk Factors-Default On First Term Loan and Warehousing Facility."
Payment under the First Term Loan is secured by all of the assets of the
Company, including all servicing rights owned by the Company and securities
owned by the Company and FIS. The Company is required to make additional
payments of principal when the outstanding principal balance on the First Term
Loan exceeds the "Qualified Servicing Portfolio Collateral Value" (the lesser of
65% of the value of qualified servicing rights or one percent of the aggregate
principal amount of Mortgage Loans serviced).
The First Warehousing Facility permits the Company to finance mortgage loan
acquisitions and originations up to an aggregate of $5.0 million. Advances under
the Facility may not exceed 100% of the "Warehouse Collateral Value" of the
eligible mortgage loans ("WCV"). The WCV is the lesser of: (a) 98% of the lesser
of the origination or acquisition price of the mortgage loan; the weighted
average purchase price under a Firm or Standby Take-Out Commitment (a commitment
from an investor to purchase a mortgage loan within a specific time period,
under which commitment, respectively, the Company is obligated or has the right
to sell the mortgage loan); or the fair market value of the mortgage loan; and
(b) 100% of the remaining unpaid principal balance of the pledged mortgage loan.
A mortgage loan will be deemed to have no value WCV if: (i) more than 90 days
elapse from the date the mortgage loan was pledged; (ii) more than 45 days
elapse from the date the mortgage loan was delivered to an investor for
examination and purchase; (iii) more than 21 days elapse from the date certain
Collateral documents were delivered to an investor for correction or completion;
(iv) a delinquency of at least 60 days has occurred on the mortgage loan; (v)
the mortgage loan ceases to be an eligible mortgage loan (i.e., it is not
entirely owned by the Company, it does not qualify as an Agency eligible
mortgage loan or it does not qualify for purchase under an existing Take-Out
Commitment); or (vi) First Bank notifies the Company that, in its reasonable
opinion, the mortgage loan is not marketable. Interest is charged based upon one
of the following three methods: "Fixed Rate," "Reference Rate" or "Floating
Eurodollar Rate." The applicable method of interest calculation is at the option
of the Company. The Fixed Rate is a rate equal to 2.75% for the Term Loan and
1.875% for the Warehouse Loan. The Company must maintain at First Bank
unencumbered deposit balances equal to one hundred percent (100%) of the loan
balances outstanding, plus, regulatory reserve requirements, in order to obtain
the Fixed Rate. The Company maintains sufficient balances as of the date hereof
to obtain the Fixed Rate. In the event that deposit balances drop below one
hundred percent (100%) of the loan balances outstanding, the Company will pay a
fee on the deficiency at a floating per annum rate which is tied to the "Libor
rate." The Reference Rate is equal to the bank's published rate for its
customers, more commonly known as the "prime rate." The Floating Eurodollar
Rate, more commonly known as the "Libor rate," is based on the daily London
Interbank Bank Offered Rates as published in the Wall Street Journal, plus
1.875% for borrowings against the Warehouse Loan and 2.75% for borrowings
against the Term Loan. The Company also pays a monthly facility fee of
approximately $1,000. All principal and accrued interest is payable on or before
May 29, 1997 or sooner in the event of a default (as discussed above). The
Company must also maintain the above discussed minimum financial criteria.
Payment under the First Warehousing Facility is secured by all of the assets of
the Company.
Immediately upon acquisition of DMC and the assets and operations of ASC,
the Company effected significant cost reductions, including the following: (i)
reducing staff by approximately 80% in the Minnesota office of DMC, the effect
of such actions was to reduce monthly personnel expenses by approximately
$60,000 without affecting origination income; (ii) closing the Dallas, Texas
servicing center and consolidating
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<PAGE> 42
servicing operations in Troy, Michigan, effective June 1, 1995, thereby saving
the Company approximately $75,000 in monthly personnel and other operating
expenses; (iii) replacing the Company's mainframe servicing software with a less
expensive and more efficient computer network system, as a result of which, the
system support staff for the mainframe based system was no longer needed and
these positions were eliminated. The effect of these cost savings has reduced
expenses to a level at which the Company's management believes that the Company
can operate profitably.
In addition to the cost cutting activities mentioned above and in "Results
of Operations" above, the Company's refinancing of the Franklin debt with First
Bank resulted in additional savings. Interest on the First Bank debt is
calculated at 2.75% on a fixed rate basis, resulting in an annual savings of
approximately $35,000. The term of the loan has been extended to sixty (60)
months, resulting in annual cash savings of approximately $225,000. The First
Term Loan also provided funding for the balance of the purchase price due DMC
and refinanced the ISB loan. Annual cash savings resulting from refinancing the
Franklin debt is equal to approximately fifty (50) percent of the annual debt
service for the balance of the term loan, which was used to refinance the ISB
loan and to fund the balance due on the DMC acquisition.
On September 1, 1995, the Company sold mortgage loan servicing rights on
outstanding principal balances of approximately $37.1 million of residential
mortgage loans. The sale generated approximately $300,000 of working capital for
the Company.
In April 1996, DMC acquired the servicing rights to residential mortgage
loans with an aggregate outstanding principal balance of approximately $23.6
million pursuant to a pooling and servicing agreement between Homeowner's
Financial Structured Finance Corporation ("HFSFC"), DMC and the Bank of New
York, as Trustee. HFSFC is a special purpose corporation, incorporated in
Delaware by the Company solely for the purpose of issuing mortgage pass-through
securities. The Company anticipates that it will receive approximately $100,000
annually in additional servicing fee revenue from the servicing of mortgages
under the pooling and servicing agreement.
On June 26, 1996, the Company entered into an agreement to sell
approximately $2.6 million of residential mortgage loans to another mortgage
corporation and to repurchase the residential mortgage loans within one hundred
eighty (180) days. This transaction, commonly called a "repurchase" or "repo",
is a form of short-term borrowing permitted under the terms of the First Credit
Agreement, providing, for an interim period of time, additional loan funding
capacity in excess of that allowed under the First Warehousing Facility. The
Company continues to service the residential mortgage loans during the repo
period, receiving a monthly fee of $10 per loan from the mortgage company who
purchased the loans. The other mortgage company in turn receives a financing fee
equal to 10.25% on an annual basis calculated on the outstanding balance of the
residential mortgage loans purchased. This fee is essentially offset by the
interest collected from the mortgage payments by the Company.
The Company is currently generating sufficient cash flow from operations to
cover the principal and interest payments due on the First Term Loan and the
interest payment due on the Barnett loan. If long term interest rates remain
above 7.00%, the Company's management believes that net cash flows from
operations will continue to be sufficient to cover principal and interest
payments due on the First Term Loan and interest payments due on the Barnett
loan for a minimum additional twelve month period. Proceeds of the Offering will
be used to retire the Barnett Loan (see "Use of Proceeds"). The Barnett loan is
due by December 27, 1996. If the Company is unable to timely repay the loan or
obtain an extension, the Company would have to raise sufficient additional
capital to retire the Barnett loan (see above).
Pursuant to an agreement between the Company and GNMA that was in effect
prior to February 1992, the Company was required to establish two restricted
cash accounts totaling $1.0 million. Prior to September 30, 1994 and in
accordance with the terms of this agreement, the Company had withdrawn
approximately $300,000. In February 1995, GNMA reduced the restrictions placed
on these Company cash accounts thus releasing approximately $700,000 in funds to
the Company for use in its operations.
The Company continues to maintain a restricted cash account in the amount
of $255,000 which was established as the result of a loan sale and servicing
agreement entered into in July 1992. The Company can
38
<PAGE> 43
only use these funds to reimburse itself as servicer for expenses it advances in
collection, bankruptcy and collateral protection concerning these loans.
Additionally, the purchaser of the loans has a security interest in these
accounts and may make claim to them to reimburse purchaser for losses
attributable to loan defaults. The Company believes that this restricted cash
amount is sufficient to cover any future collection, bankruptcy and collateral
protection losses and expenses related to these loans.
Potential Liability. HOFCA has received informal notice from GNMA of a
potential claim wherein the Company, under its former ownership and management,
allegedly overcharged GNMA under the terms of certain sub-servicing Agreements.
Management believes that these claims are essentially without merit and special
counsel to the Company has reviewed the claim and the relevant transactions and
has informed the Company of its belief that there are reasonable defenses to
GNMA's claims in any amount which might be material to the Company. However, if
this matter results in substantial liability, the Company's business could be
materially adversely affected. See "Legal Proceedings."
Expansion Plans. The Company's strategy in the mortgage banking area is to
increase the size, diversity and quality of its mortgage loan servicing
portfolio and to expand its origination operations. The Company's acquisition of
DMC is consistent with this strategy. The Company plans to increase the size of
its mortgage loan servicing portfolio by selectively acquiring mortgage loan
servicing rights and by retaining the servicing rights on a portion of the loans
it originates. Management believes that the Company currently has the loan
servicing capacity to increase the size of its mortgage loan servicing portfolio
by an additional 40,000 loans without incurring significant additional capital
expenditures or fixed costs. By increasing the size of the mortgage loan
servicing portfolio and consolidating the mortgage loan servicing operations of
DMC and HOFCA into DMC's Troy, Michigan facility, management believes that the
Company can enhance its mortgage loan servicing efficiency and become
profitable. Moreover, the Company believes that increasing the size, diversity,
type and quality of its mortgage loan servicing portfolio will enable it to
reduce the effects of unanticipated prepayments resulting from fluctuations in
interest rates and defaults resulting from regional economic downturns.
The Company has allocated approximately $400,000 (minimum)/up to $4.0
million (maximum) from the net proceeds of this Offering to expand its mortgage
loan servicing portfolio. Management anticipates that such funds will enable the
Company to purchase servicing rights to mortgage loans with between $40 million
(minimum) and $400 million (maximum) in principal balances. Management believes
that it will be able to purchase additional mortgage loan servicing rights with
approximately $75 million of outstanding principal balances using working
capital of approximately $748,000 resulting from the recovery to the Company
from the gross proceeds of the Offering of funds expended through June 30, 1996
for expenses related to the Offering.
The Company has begun the process of expanding its origination activities
by acquiring DMC and by purchasing and reselling whole loan portfolios while
retaining the servicing rights. Through the acquisition and expansion of DMC's
origination operations and whole loan activity, the Company hopes to increase
the volume of new loan originations to a level where originations exceed the
volume of prepayments experienced in its mortgage loan servicing portfolio.
If significantly less than all of the Securities offered herein are sold,
the Company most likely will require additional funding to purchase mortgage
loan servicing rights, operate at a profitable level and meet all of its
financial obligations. If such additional funds are needed, the Company would
seek to raise funds through bank financing or one or more additional equity
and/or debt offerings. No assurance can be given that such funding would be
available or, if available, that such funding would be available on terms
acceptable to the Company. If such additional funding were not available, the
Company's operations would most likely be materially and adversely affected. See
"Risk Factors -- Possible Need For Additional Financing."
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<PAGE> 44
DMC
RESULTS OF OPERATIONS2
SEVEN MONTHS ENDED APRIL 28, 1995 COMPARED WITH SEVEN MONTHS ENDED APRIL 30,
1994
Overview. DMC's net loss was $.8 million for the period ended April 28, 1995
compared with a net loss of $.3 million for the period ended April 30, 1994.
Total revenues of $.8 million decreased $4.2 million from total revenues of $5.0
million for the period ended April 30, 1994, while expenses of $1.6 million
decreased $3.7 million from the $5.3 million reported in the period ended April
30, 1994. These decreases reflect the decrease in combined retail and wholesale
origination volumes of $193.9 million or 93.3% from $207.9 million in the period
ended April 30, 1994 to $14.0 million for the period ended April 28, 1995. This
decrease was the result of a decrease in production volume and the sale of the
Virginia operations on November 30, 1994.
Net Interest Income. Net interest income decreased by $.22 million or 88% from
$.25 million for the period ended April 30, 1994, to $.03 million for the period
ended April 28, 1995. This decrease reflects the significant decrease in
origination volumes which resulted in substantially lower outstanding balances
of loans held for sale during 1995.
The following table provides a summary of the components of net interest
income for the periods indicated:
<TABLE>
<CAPTION>
PERIODS ENDED
APRIL 30, 1994
AND APRIL 28,
1995
-------------------
1994 1995
------ ------
<S> <C> <C>
($000) ($000)
Interest Income:
Mortgage loans held for sale.............................. $1,022 128
Loans receivable.......................................... 3 20
------ ------
1,025 148
Interest expense:
Warehouse borrowings...................................... 739 104
Other borrowings.......................................... 40 19
------ ------
779 123
------ ------
Net interest income......................................... $ 246 25
====== ======
</TABLE>
Non-Interest Income. Non-interest income for DMC decreased $3.4 million or 85%,
from $4.0 million for the period ended April 30, 1994 to $.6 million for the
period ended April 28, 1995. The decrease consisted of a decrease in gains on
sales of mortgage loans held for sale of $3.2 million and a decrease in mortgage
banking related fees of $.3 million offset by a $.1 million gain recognized on
the sale of the Virginia operations in the period ended April 28, 1995. The
decrease in non-interest income is primarily related to the decrease in the
origination volumes experienced by DMC between these periods.
Gains on sales of mortgage loans held for sale, which include the
origination fee collected at origination and the net marketing gains and losses
on the sales of the related loans, were $.5 million for the period ended April
28, 1995 compared with $3.7 million for the period ended April 30, 1994. This
decline reflects the decrease in originations experienced during the 1995
period.
Mortgage banking related fees include servicing fees net of sub-servicing
and guarantee fees, amortization of purchased servicing rights and miscellaneous
fees collected on the origination of loans. Mortgage banking related fees
decreased $.31 million or 77.5% from $.4 million for the period ended April 30,
1994 to $.09 million for the period ended April 28, 1995. The decrease primarily
relates to a decrease in mortgage production volumes.
- ---------------
2 Information subsequent to April 28, 1995 has not been included in this section
because that information is consolidated with and included in the Results of
Operations of the Company. For a discussion of liquidity and capital
resources, see "Liquidity and Capital Resources" above.
40
<PAGE> 45
Gain on Sale of Servicing Rights. DMC completed one bulk sale of servicing
rights relating to approximately $46.0 million in mortgage loans during the
period ended April 30, 1994. This resulted in a gain of $.4 million recognized
on the sale. During the period ended April 28, 1995, there were no sales of
servicing rights.
Compensation and Benefits. Compensation and benefits decreased $1.9 million or
65.5%, from $2.9 million for the period ended April 30, 1994 to $1.0 million for
the period ended April 28, 1995. The decrease primarily resulted from the
reduction in commissions paid to loan officers and a reduction in the number of
employees due to the decrease in origination volumes during 1995.
Occupancy. Occupancy costs decreased by $.18 million or 69.2%, from $.26
million for the period ended April 30, 1994 to $.08 million for the period ended
April 28, 1995. The decrease primarily reflects the leases terminated as a
result of closing three branch offices of the Virginia operations during 1994.
These decreases were partially offset by the addition in lease expense of the
Minnesota operations.
Other Non-Interest Expenses. Other non-interest expenses decreased $1.0 million
or 71.4%, from $1.4 million for the period ended April 30, 1994 to $.4 million
for the period ended April 28, 1995. The decrease primarily relates to the
general decline in expenses relating to the lower production volumes in the 1995
period.
Income Tax Expense. Income tax expense was $0 for the period ended April 28,
1995. The $0 tax expense was due to the net loss for the period whereby the
recognition of a benefit from net operating loss carryforwards was offset by the
valuation allowance on deferred tax assets.
YEAR ENDED SEPTEMBER 30, 1994 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1993.
Overview. DMC's net loss was $1.3 million for the year ended September 30, 1994
compared with earnings of $.7 million for the year ended September 30, 1993.
Total revenues of $6.5 million decreased $2.7 million from revenues of $9.2
million for the prior year, while expenses of $7.7 million decreased $.5 million
from the $8.2 million reported in 1993. These decreases reflect the decrease in
combined retail and wholesale origination volumes of $114.3 million or 29.8%,
from $384.1 million in the year ended September 30, 1993 to $269.8 million for
the year ended September 30, 1994. This decrease was the result of a decrease in
production volume due to the rise in interest rates during 1994. These decreases
were slightly offset by the originations of the Minnesota based production
operations which were acquired through the purchase of Evergreen Mortgage, Inc.
These operations originated $33.5 million from January 1, 1994 through September
30, 1994.
Net Interest Income. Net interest income decreased by $.25 million or 72.2%,
from $.35 million for the year ended September 30, 1993, to $.1 million for the
year ended September 30, 1994. This decrease reflects the significant decrease
in origination volumes which resulted in substantially lower outstanding
balances of loans held for sale during 1994.
41
<PAGE> 46
The following table provides a summary of the components of net interest
income for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
-------------------
1994 1993
------ ------
<S> <C> <C>
($000) ($000)
Interest Income:
Mortgage loans held for sale................................ $1,084 $2,015
Loans receivable............................................ 14 18
------ ------
1,098 2,033
Interest Expense:
Warehouse borrowings........................................ 934 1,575
Other borrowings............................................ 67 109
------ ------
1,001 1,684
------ ------
Net interest income......................................... $ 97 $ 349
====== ======
</TABLE>
Non-Interest income. Non-interest income for DMC decreased $1.8 million or
25.0%, from $7.2 million for the year ended September 30, 1993 to $5.4 million
for the year ended September 30, 1994. The decrease consisted of a decrease in
gains on sales of mortgage loans held for sale of $.4 million, a decrease in
mortgage banking related fees of $.7 million and a decrease in the gains on
sales of servicing of $.6 million. These decreases are primarily related to the
decrease in the origination volumes experienced by DMC between these periods.
Gains on sales of mortgage loans held for sale, which include the
origination fee collected at origination and the net marketing gains and losses
on the sales of the related loans, were $4.5 million for the year ended
September 30, 1994 compared with $4.9 million for the year ended September 30,
1993. This decline reflects the decrease in originations experienced during 1994
offset by a decrease in the percentage of production sold with servicing rights
retained during 1994. Mortgage loans sold with the servicing rights retained
decreased $107.5 million or 72.8% from $147.6 million or 38.4% of total
production during 1993 compared with servicing retained during 1994 of $40.1
million or 14.9% of total production. Accordingly, net marketing gains as a
percentage of origination volumes during these periods increased from 1.28% for
1993 to 1.67% for 1994.
Mortgage banking related fees include servicing fees net of sub-servicing
and guarantee fees, amortization of purchased servicing rights and miscellaneous
fees collected on the origination of loans. Mortgage banking related fees
decreased $.6 million or 53.0%, from $1.2 million for the year ended September
30, 1993 to $.6 million for the year ended September 30, 1994. The decrease
primarily relates to a decrease in miscellaneous fees of $.3 million or 28.4%,
from $1.0 million for the year ended September 30, 1993 to $.7 million for the
comparable period in 1994 due to the decline in mortgage production volumes.
Servicing fees decreased $3,000 or 1.0% from $.3 million for the year ended
September 30, 1993 to $.3 million for the comparable period in 1994. The total
amortization of purchased servicing rights netted against mortgage banking fee
income was $.45 million and $.33 million for the years ended September 30, 1994
and 1993, respectively. The increase primarily relates to an additional charge
of $.12 million in amortization of purchased mortgage servicing rights taken
during 1994 due to greater than expected run-off in the servicing portfolio.
Gain on Sale of Servicing Rights. DMC completed one bulk sale of servicing
rights relating to approximately $46.0 million in mortgage loans during the year
ended September 30, 1994. This resulted in a gain of $.4 million recognized on
the sale. During the year ended September 30, 1993, DMC completed three bulk
sales relating to approximately $205.4 million in mortgage loans which resulted
in net gains of $1.1 million.
Compensation and Benefits. Compensation and benefits decreased $.34 million or
7.3%, from $4.7 million for the year ended September 30, 1993 compared to $4.4
million for the year ended September 30, 1994. The decrease primarily resulted
from the reduction in commissions paid to loan officers and a reduction in the
42
<PAGE> 47
number of employees due to the decrease in origination volumes during 1994.
Commission expense decreased $.4 million or 28.3%, from $1.5 million for the
year ended September 30, 1993 to $1.1 million for 1994.
Occupancy. Occupancy costs increased by $.16 million or 46.4%, from $.34
million for the year ended September 30, 1993 to $.5 million for the year ended
September 30, 1994. The increase primarily reflects the lease termination
expenses recorded as a result of closing three branch offices of the Virginia
operations at the end of fiscal 1994 and the addition in lease expense of the
Minnesota operations. These increases were offset somewhat by a reduction in the
lease expense during 1994 for the main location of the Virginia operations.
Other Non-Interest Expenses. Other non-interest expenses increased $.3 million
or 20%, from $1.5 million for the year ended September 30, 1993 to $1.8 million
for the year ended September 30, 1994. The increase primarily relates to the
addition of the Minnesota operations during 1994 of $.4 million offset by the
general decline in expenses relating to the lower production volumes in 1994.
Income Tax Expense. Income tax expense decreased by $.14 million, or 48.6%,
from $.3 million for the year ended September 30, 1993, to $.15 million for the
year ended September 30, 1994. The decrease was due to the net loss for fiscal
1994 whereby the recognition of a benefit from filing as a consolidated taxpayer
with ISB was offset by the write-off of net deferred tax assets.
43
<PAGE> 48
BUSINESS
THE COMPANY
Homeowners Financial Corp. (the "Company") is a full service mortgage
banking company that services, originates, acquires and markets mortgage loans
secured primarily by residential properties located in 48 states and the
District of Columbia. All of the Company's substantive operations are conducted
by Developers Mortgage Corp. ("DMC"), its wholly-owned subsidiary, and by Home
Owners Funding Corp. of America ("HOFCA"), a wholly-owned subsidiary of FIS,
Inc. ("FIS"). FIS is a wholly-owned subsidiary of the Company. During the nine
months ended June 30, 1996 and the year ended September 30, 1995, the Company's
primary sources of revenues were mortgage loan servicing (78.7% and 84.9%,
respectively) and mortgage loan originations (9.8% and 3.1%, respectively).
The Company acquired HOFCA's parent, FIS (and thus acquired HOFCA) on
September 30, 1994. The Company acquired DMC from ISB and certain mortgage loan
servicing rights and fixed assets from ASC on April 28, 1995.
Unless the text indicates otherwise: (i) all references herein to the
Company, include its two subsidiaries and HOFCA; and (ii) all data related to
mortgage banking operations includes the operations of HOFCA and DMC and the
ASC-PMSR, even though the foregoing companies and assets were not necessarily
owned by the Company for all or part of the periods discussed.
MORTGAGE LOAN SERVICING
Mortgage loan servicing primarily consists of receiving payments from
mortgagors on mortgage loans; remitting principal and interest to various
Mortgage Investors; receiving, escrowing and paying real estate taxes and
homeowner's insurance; monitoring escrow accounts on certain loans and adjusting
monthly payments to reflect changes in amounts required to be escrowed and, with
regard to adjustable rate mortgages ("ARMs"), changes in interest rates. The
Company also acts to rectify payment delinquencies through collection and, if
necessary, foreclosure.
Mortgage Investors include Agencies (FNMA, FHLMC and GNMA) and other
private investors that include, but are not limited to, brokerage houses, banks,
savings and loan associations, insurance companies and other institutional and
individual financial investors.
Servicing of mortgage loans is generally done in accordance with the terms
of a servicing agreement (or in the case of servicing done on behalf of
Agencies, Seller/Servicer agreements) ("Servicing Agreements"). Servicing
Agreements provide the general terms and framework under which loan servicing is
to be performed and provide mechanisms for reporting the results of, among other
things, each month's mortgage loan servicing activity to the Mortgage Investors.
Servicing Agreements also delineate the compensation available to the Company
for servicing the loans, including but not limited to servicing fees, late
charges and other forms of ancillary income, as well as the expenses which the
Company is responsible for and any risk of loss to which the Company has
accepted exposure. Such Agreements may give the Mortgage Investor certain rights
to seize, without compensation to the Company, the mortgage loan servicing
rights for violations and/or breaches in the Agreement.
44
<PAGE> 49
The following represents information with regard to loan servicing
activities for the major Mortgage Investors as of June 30, 1996.
<TABLE>
<CAPTION>
UNPAID PRINCIPAL PERCENTAGE
INVESTOR NAME BALANCE (UPB) OF UPB
---------------------------------------------- ----------------- -------
<S> <C> <C>
($000,000)
FHLMC......................................... $ 318.6 51.89%
FNMA.......................................... 117.8 19.18%
Riggs......................................... 44.4 7.23%
Virginia Housing.............................. 32.6 5.31%
MAGNA Funding................................. 23.3 3.79%
GNMA.......................................... 0.6 0.10%
Other......................................... 76.7 12.50%
--------
Total............................... $ 614.0 100.00%
========
</TABLE>
As of June 30, 1996, the Company's mortgage loan servicing portfolio
aggregated approximately $614.0 million in unpaid principal balance and
consisted of the following:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
UNPAID PRINCIPAL NUMBER AVERAGE AVERAGE REMAINING
BALANCE 6/30/96 OF LOANS LOAN SIZE INTEREST TERM
- ----------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
($000,000) ($000)
$ 614.0 9,960 $ 61.6 8.04% 246.9
</TABLE>
Mortgage loan servicing fees consist of a small portion of the interest
collected on the outstanding principal balances on the mortgages being serviced.
Excluded from such fees are additional income derived from late charges and
charges for other ancillary mortgage loan servicing activities. The Company also
received revenues from interest income earned on mortgage loans while they are
held pending sale to Mortgage Investors in the secondary market (as hereinafter
defined), gains on the bulk sale of mortgage loans and gains from the bulk sale
of mortgage servicing rights. Such service fees are collected as part of regular
mortgage payments.
As of June 30, 1996, the Company's mortgage loan servicing fees (in basis
points) averaged as follows:
<TABLE>
<CAPTION>
MANUFACTURED 1-4 SINGLE MULTI-
HOUSING FAMILY RESIDENCES FAMILY
- ------------- ------------------ -------
<S> <C> <C>
146.9 33.0 7.9
</TABLE>
The Company analyzes the rate at which it anticipates the various
underlying mortgage loans may prepay. If loans prepay faster than anticipated,
the Company will realize less income over time than it anticipates. When
analyzing loan portfolios for purchase, the time which a loan can be expected to
produce income is an important factor in determining the value of those rights.
Generally, loans with a shorter life have less value than those with a longer
expected life.
In an attempt to determine the estimated life of a specific loan or group
of loans (sometimes referred to as pools or portfolios), the Company reviews
established criteria regarding such prepayments as made available from various
brokerage houses for such loan groups as FNMA, GNMA, FHLMC and others. These
brokerage houses estimate the speed at which loans will prepay based on, among
other things, interest rate changes ("Speeds"). Speeds are calculated from
mathematical algorithms based upon, in many cases, actual experience of the
portfolio or in others, assumed portfolio characteristics. These estimated
Speeds are then useful in determining the length of time that the income stream
will be available after purchase of the mortgage loan servicing rights.
Sub-Servicing. Sub-servicing consists of providing certain loan administration
services on behalf of another entity that has ownership of the mortgage loan
servicing rights and primary servicing responsibility for specified loans.
Sub-servicing fees are usually agreed to be paid on a per loan basis calculated
as a monthly or annual dollar amount, rather than as a percentage of monthly
loan collections. Although sub-servicing fees are
45
<PAGE> 50
typically less than would be received for primary servicing, such arrangements
can be attractive for several
reasons. First, no capitalized expense or third-party financing is normally
required to acquire such sub-servicing rights. Second, sub-servicing can be used
to employ otherwise under-utilized servicing capacity, and third, risk of
default and liability for advances is generally borne by the primary servicer.
Currently, non-affiliated sub-servicing does not provide a significant portion
of the Company's revenues. Through April 1995, servicing rights retained by ISB
on mortgage loans originated by ISB were subserviced by ASC. Since May 1995, the
Company has been providing such subservicing.
SELECTED MORTGAGE SERVICING PORTFOLIO DATA
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF SEPTEMBER 30, AS OF SEPTEMBER 30,
1996 1995 1994
----------------------- ----------------------- -----------------------
AGGREGATE % OF AGGREGATE % OF AGGREGATE % OF
PRINCIPAL BAL TOTAL PRINCIPAL BAL TOTAL PRINCIPAL BAL TOTAL
-------------- ------ -------------- ------ -------------- ------
<S> <C> <C> <C> <C> <C> <C>
(IN $000) (IN $000) (IN $000)
Loan Type:
FHA.................. $ 59,147.8 9.63% $ 64,472.1 9.36% $ 6,981.4 10.87%
VA (subserviced)..... 10,487.4 1.71% 14,034.2 2.04% 1,618.3 2.52%
Multi family......... 52,737.2 8.59% 53,176.0 7.72% -- --
Land contracts....... 0.0 0.00% 21,579.7 3.13% -- --
Conventional......... 491,636.0 80.07% 535,196.4 77.75% 55,649.6 86.61%
------- ------- -------
- - -
---------- ---------- ----------
Total Servicing
Portfolio............... $614,008.4 100.00% $688,458.4 100.00% $ 64,249.3 100.00%
========== ======== ========== ======== ========== ========
Number of Loans................... 9,960 12,248 2,481
Avg. Loan Size.................... $61,647 $56,210 $25,897
Weighted Avg. Interest Rate....... 8.04% 7.85% 9.85%
Weighted Avg. Remaining
Maturity........................ 246.9 240.2 168
</TABLE>
The Company is a nationwide servicer with loans in 48 states and the
District of Columbia. At June 30, 1996, the servicing portfolio included
predominantly fixed rate loans, with ARMs making up only 5.4% of the total
number of loans and 6.9% of the outstanding principal balance. Other loan types
(buydowns, graduated payment mortgages, call/balloon loans and government
subsidy loans) represented 2.0% of the total number of loans and 3.7% of the
outstanding principal balance.
The following table sets forth certain information regarding the interest
rate composition of the Company's servicing portfolio at June 30, 1996.
BREAKDOWN BY INTEREST RATE OF
MORTGAGE SERVICING PORTFOLIO
<TABLE>
<CAPTION>
PERCENT PERCENT
LOAN OF PRINCIPAL OF PRINCIPAL
INTEREST RATE COUNT LOAN BALANCE BALANCE
- ------------------------------------------- ------ ------ ---------- -------------
<S> <C> <C> <C> <C>
($000,000)
0.00 to 6.99%............................ 1,600 16.06% $120.3 19.59%
7.00 to 7.99%............................ 2,635 26.46% 257.8 41.99%
8.00 to 8.99%............................ 2,310 23.19% 117.9 19.20%
9.00 to 9.99%............................ 1,255 12.60% 57.9 9.43%
10.00 to 10.99%............................ 538 5.40% 22.7 3.70%
11.00 and over............................. 1,622 16.29% 37.4 6.09%
-------
-
------ ------- -
Total............................ 9,960 100.00% $614.0 100.00%
======== ====== ========
</TABLE>
46
<PAGE> 51
To lessen the risks associated with geographic concentration, management
seeks to maintain diversification in the composition of its servicing portfolio.
The following table provides certain information regarding the geographic
distribution of the Company's servicing portfolio at June 30, 1996.
GEOGRAPHIC DISTRIBUTION
OF MORTGAGE SERVICING PORTFOLIO
AS OF JUNE 30, 1996
<TABLE>
<CAPTION>
PERCENT PERCENT
LOAN OF PRINCIPAL OF PRINCIPAL
STATE COUNT LOAN BALANCE BALANCE
- --------------------------------------------- ------ ------ ---------- -------------
<S> <C> <C> <C> <C>
($000,000)
California................................... 1,719 17.26% $193.6 31.54%
Maryland..................................... 196 1.97% 74.4 12.11%
Virginia..................................... 744 7.47% 68.5 11.16%
New York..................................... 1,656 16.63% 59.0 9.60%
Washington................................... 549 5.51% 46.9 7.64%
Minnesota.................................... 1,207 12.12% 23.1 3.76%
Texas........................................ 473 4.75% 27.3 4.45%
North Dakota................................. 501 5.03% 12.3 2.01%
Illinois..................................... 195 1.96% 13.4 2.19%
Florida...................................... 238 2.39% 10.8 1.75%
Michigan..................................... 793 7.96% 11.2 1.82%
Colorado..................................... 76 0.76% 4.5 0.73%
Others....................................... 1,613 16.19% 69.0 11.24%
-------
-
------ ------- -
Total.............................. 9,960 100.0% $614.0 100.0%
======== ====== ========
</TABLE>
The seasoning of a servicing portfolio can be a factor contributing to
prepayment risk. The following table sets forth certain information regarding
the age of the mortgage servicing portfolio at June 30, 1996.
BREAKDOWN BY AVERAGE AGE OF
MORTGAGE SERVICING PORTFOLIO
<TABLE>
<CAPTION>
PERCENT PERCENT
LOAN OF PRINCIPAL OF PRINCIPAL
ORIGINATION YEAR COUNT LOAN BALANCE BALANCE
- -------------------------------------------- ------ ------ ---------- -------------
<S> <C> <C> <C> <C>
($000,000)
PRE 1986.................................... 3,307 33.20% $111.2 18.10%
1986........................................ 326 3.27% 13.5 2.20%
1987........................................ 271 2.72% 14.1 2.30%
1988........................................ 168 1.69% 12.6 2.05%
1989........................................ 153 1.54% 8.0 1.30%
1990........................................ 196 1.97% 8.8 1.44%
1991........................................ 234 2.35% 12.0 1.95%
1992........................................ 576 5.78% 51.6 8.41%
1993........................................ 2,326 23.35% 256.9 41.84%
1994........................................ 1,528 15.34% 95.7 15.59%
1995........................................ 484 4.86% 17.0 2.77%
1996........................................ 391 3.93% 12.6 2.05%
-------
-
------ ------- -
Total............................. 9,960 100.00% $614.0 100.00%
======== ====== ========
</TABLE>
47
<PAGE> 52
The following table sets forth information regarding the sources of
additions and reductions in the servicing portfolio:
ADDITIONS AND REDUCTIONS TO
MORTGAGE SERVICING PORTFOLIO
<TABLE>
<CAPTION>
NINE MONTHS ENDED FISCAL YEAR ENDED
JUNE 30, SEPTEMBER 30,
1996 ------------------------
----------------- 1995 1994
($000) -------- --------
($000) ($000)
<S> <C> <C> <C>
Beginning Balance............................. $ 688,458 $ 64,249 $140,765
Additions..................................... 45,219 773,688 15,754
Reductions:
Loans Paid Off........................... (39,135) (35,871) (16,871)
Foreclosures............................. (646) (408) (1,208)
Sales and Transfers...................... (64,179) (100,565) (62,610)
Payments................................. (15,709) (12,635) (11,581)
-------- -------- --------
Total Reductions.................... (119,669) (149,479) (92,270)
-------- -------- --------
Ending Balance................................ $ 614,008 $688,458 $ 64,249
======== ======== ========
</TABLE>
Mortgage Loan Servicing Acquisitions
The Company actively pursues selective acquisitions of mortgage loan
servicing rights through bulk acquisitions. Overall, the Company utilizes
acquisitions as a means to increase the size of its mortgage loan servicing
portfolio in order to take advantage of economies of scale in servicing mortgage
loans, to diversify the risks associated with geographic concentration and to
enhance the revenue generating capacity of the Company's operations. In
considering potential acquisitions, the Company examines each mortgage loan
servicing portfolio's individual characteristics as well as its effect upon the
composition of the Company's overall mortgage loan servicing portfolio. The
Company focuses its acquisition activities on residential mortgage loan
servicing rights, however it might on rare occasions acquire a small volume of
commercial mortgage loan servicing rights in conjunction with the purchase of a
larger mortgage loan servicing portfolio.
The Company bases the prices it pays for mortgage loan servicing rights on
the net present value of the estimated future cash flows of the mortgage loan
servicing assets being acquired. The Company employs a computer simulation model
to project and value cash flow streams after management has evaluated each
mortgage loan servicing portfolio. Some of the factors that determine mortgage
loan servicing value include servicing portfolio-specific characteristics such
as principal balance, geographic dispersion, weighted average interest rate,
weighted average remaining maturity, custodial balances and weighted average
servicing fee rate. The model also incorporates projections for future
prepayment rates and delinquency ratios. The Company bases its assumptions for
these factors on historical and expected experience rather than on conditions
prevailing at any one point in time. Management determines an acceptable
discount rate to apply to projected cash flows after considering mortgage loan
servicing portfolio risk, market conditions and the Company's own internal
return requirements.
The Company conducts a due diligence review of each party with whom it
contracts to purchase mortgage loan servicing rights. The procedure includes a
financial review, verification of information regarding the product being
purchased and a review of the seller's origination, marketing and servicing
procedures, as applicable. Purchase contracts require sellers to provide
representations and warranties relative to the mortgage loans and prior
servicing activities at least as comprehensive as those the Company must make to
the applicable Mortgage Investor. In the event such representations or
warranties are breached, the Company requires the seller to repurchase the
affected loan at its current principal balance plus other charges and expenses
or to indemnify the Company against any losses or costs associated with the
breach whichever is applicable under Mortgage Investor or Agency guidelines.
These contractual remedies reduce the Company's exposure to losses on acquired
mortgage loan servicing rights.
48
<PAGE> 53
Subsequent to entering into a definitive agreement to purchase a specific
portfolio, the Company, together with the seller, usually must request in
accordance with standardized procedures permission from the Mortgage Investor to
transfer the mortgage loan servicing rights from the seller to the Company. Each
Mortgage Investor has its own criteria for evaluation of such transfers,
including the Company's current status as a "Seller/Servicer" for the particular
Mortgage Investor. Such approval must be received prior to effecting the
transfer of mortgage loan servicing rights.
Most of the larger Mortgage Investors grant approval to be a
Seller/Servicer on a national basis, without geographic restrictions. Generally,
for a company to become a Seller/Servicer for a Mortgage Investor that company
must: (i) have as its principal business purpose, the origination and servicing
of mortgage loans; (ii) have demonstrated a proven ability to originate and
service mortgage loans; (iii) be properly licensed or authorized to originate
and service mortgage loans in the jurisdictions in which it does business; and
(iv) meet various net worth requirements as set by Mortgage Investors.
Additionally, a Seller/Servicer must: (v) maintain quality control and
management systems to evaluate and monitor the overall quality of its loan
production and servicing activities; (vi) have in effect a fidelity bond and
errors and omissions coverages that meet certain coverage requirements; and
(vii) agree to maintain, after approval as a Seller/Servicer, certain net worth
standards. Seller/Servicers are required to provide Mortgage Investors with
annual audited financial statements together with, in the case of GNMA, FNMA,
and FHLMC, computations of required net worth and evidence of required insurance
described in (vi) above. All Mortgage Investors require written agreements
between the company and the Mortgage Investor detailing the requirements and
duties of the parties. The Agencies, GNMA, FNMA and FHLMC, generally require a
net worth of $250,000 plus additional net worth that represents a small
percentage (for example, .20% for FNMA) of the outstanding principal balance of
the loan portfolio serviced for the particular Mortgage Investor. As of the date
hereof, the Company is in compliance with the requirements of Mortgage
Investors, including those of GNMA, FNMA and FHLMC. No assurance can be given
that the Company will continue to be in compliance with such minimum
requirements.
Bulk Acquisitions. The Company makes selective bulk purchases of mortgage
servicing rights from other mortgage bankers and financial institutions.
Management believes the Company can continue to be a successful acquiror of bulk
servicing packages by focusing on mortgage loan servicing portfolios that
complement its servicing expertise. As a nationwide servicer, the Company has an
advantage over smaller, regional mortgage bankers in bidding for geographically
diverse mortgage loan servicing portfolios. The Company also has the systems,
experienced personnel and financial resources needed to close and transfer
mortgage loan servicing portfolios quickly. Finally, the Company's data
processing systems give it the ability to efficiently service a wide variety of
loan types under assorted Mortgage Investor reporting and remittance
requirements. The Company acquired no bulk loan servicing during the nine months
ended June 30, 1996.
Flow Acquisitions. Under flow acquisition agreements, the Company may
enter into contracts to purchase specific volumes of mortgage loans and
servicing rights with certain specified characteristics over a set period of
time at a pre-agreed price. The Company has developed the capacity for automated
transfers for flow deliveries. However, The Company did not make any flow
acquisitions during the nine months ended June 30, 1996 or the fiscal year ended
September 30, 1995. Management evaluates the flow market on an ongoing basis for
opportunities and may enter into flow agreements in the future.
Delinquency Management
The Company collects servicing fees by deducting them from the interest
portion of mortgage payments as they are received. When a loan is delinquent or
foreclosed, such fees are not received and administrative expenses relative to
that loan increase. With respect to loans serviced for Agencies and certain
private Mortgage Investors, the Company generally must advance mortgage payments
to the Mortgage Investor whether or not they are received from borrowers and
advance other expenses relating to the foreclosure and disposition of the
collateral. The Company is reimbursed for such advances out of foreclosure or
liquidation proceeds or by the Agencies or private mortgage insurers that insure
or guarantee the loans. At its option, the Company may purchase foreclosed loans
out of mortgage-backed securities ("MBS") pools prior to receipt of liquidation
proceeds or proceeds of insurance claims which, in effect, limit the amount of
principal and interest
49
<PAGE> 54
advances that must be made. The Company funds such advances, including
foreclosure expenses, not covered by Mortgage Investors from working capital.
The Company utilizes a non-proprietary automated collection and delinquency
control system and has formulated comprehensive policies and procedures for the
management of loans in default within the parameters set by Mortgage Investor
and insurer guidelines. Collection efforts may begin when a loan is as few as
nine days delinquent. The system maintains status information, records of
mortgagor contacts and loan service reports. Historical collection activity for
each loan is retained on-line and is available to all loan counselors. The
system has the ability to automatically generate timely notices, letters and
reports which comply with regulatory requirements on a state by state basis.
FHA mortgage insurance and VA guarantees typically cover most of the
foreclosure expenses and advances of the servicer for defaulted government
loans. Private mortgage insurance companies provide similar coverage for insured
conventional loans. FHA covers 100% of the principal balance of any insured
loan, but typically does not cover two months of interest advances and
approximately one-third of the legal fees associated with the foreclosure.
Private mortgage insurers generally cover 25% of the original principal balance,
but typically reimburse advances and other foreclosure expenses. A VA loan
guarantee typically covers the lesser of: (i) 25% of the original loan balance
or (ii) $46,000 for loans which exceed $144,000 and were originated since 1989
or $27,500 for loans originated prior to 1989. Notwithstanding this contractual
limit, the VA historically had purchased a foreclosed property that it
guaranteed at 100% of the remaining loan balance plus accrued interest.
Beginning in 1985, however, the VA has occasionally elected to remit the maximum
lability under its guarantee rather than to purchase the foreclosed property
(known as a "VA No-Bid"). Accordingly, the Company is subject to increased
foreclosure risk with regard to the VA loans in its mortgage loan servicing
portfolio. During September 1995, the Company sold virtually all of the VA loans
serviced by it with servicing rights released to the purchaser. When the VA
issues a No-Bid for a defaulted loan in the Company's mortgage loan servicing
portfolio, the Company acquires ownership of that property upon completion of
the foreclosure sale.
Property acquired through the foreclosure process and which is not conveyed
to the FHA, VA or the Mortgage Investor is known as "real estate owned" or
"REO." If the Company is forced to foreclose on a mortgaged property, it then
must liquidate the property at an amount which in many cases results in a loss.
Losses occur with respect to REOs primarily when sale proceeds of the property
underlying the defaulted loan are less than the outstanding principal balance of
the loan and the costs of holding and disposing of property. VA No-Bids are a
common source of REOs. In some cases, however, the Company is able to avoid a VA
No-Bid and the resulting transfer to REO by paying a portion of the outstanding
principal balance of a defaulted VA loan on behalf of the borrower to the point
it qualifies for conveyance to the VA (a "VA Buydown"). This procedure allows
the Company to minimize its losses on such defaulted loans. By utilizing a VA
Buydown, the Company is able to reduce the loss it might otherwise experience in
connection with a VA No-Bid because the Company is able to avoid taking the
property as a REO and incurring the carrying costs, marketing costs and
administration costs associated with selling the property. The Company executes
this procedure in every case where it believes that it is cost effective to do
so.
The Company's losses in connection with VA-Buydowns, or REOs from VA
No-Bids and other sources (primarily comprised of unreimbursed interest
expenses, legal fees and losses from the liquidation of related property) were
as follows for the nine months ended June 30, 1996 the fiscal year ended
September 30, 1995:
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30, 1996 FISCAL YEAR ENDED SEPTEMBER 30, 1995
----------------------------------- -------------------------------------
TOTAL AVERAGE TOTAL AVERAGE
LOSSES NUMBER LOSS LOSSES NUMBER LOSS
OF VA OF LOANS PER LOAN OF VA OF LOANS PER LOAN
---------- -------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
($000) ($000) ($000) ($000)
$ -- -- $ -- $53.4 6 $ 8.9
</TABLE>
50
<PAGE> 55
The Company's mortgage loan servicing portfolio consists primarily of loans
which it services on a non-recourse basis. At June 30, 1996 the Company had the
following recourse and partial recourse loans:
<TABLE>
<CAPTION>
LOANS WITH COMPLETE RECOURSE AS TO PRINCIPAL
----------------------------------------------------------------
TOTAL PERCENTAGE OF
TOTAL LOAN NUMBER RECOURSE NUMBER TOTAL
PORTFOLIO OF LOANS LOANS OF LOAN PORTFOLIO
---------- -------- ------------- --------- -------------
<S> <C> <C> <C> <C>
($000) ($000)
$614.0 9,960 $ .6 73 .09%
</TABLE>
<TABLE>
<CAPTION>
LOANS WITH PARTIAL RECOURSE AS TO PRINCIPAL
----------------------------------------------------------------
PARTIAL PERCENTAGE OF
TOTAL LOAN NUMBER RECOURSE NUMBER TOTAL
PORTFOLIO OF LOANS LOANS OF LOAN PORTFOLIO
---------- -------- ------------- --------- -------------
<S> <C> <C> <C> <C>
($000) ($000)
$614.0 9,960 $ 1.2 90 .19%
</TABLE>
The remaining loan servicing portfolio is serviced on a non-recourse basis
without risk of loss to the Company other than expenses related to FHA and VA
loans described above. As of June 30, 1996, the Company maintained allowances
for uncollectible advances and other payments made with regard to servicing such
loans as follows:
<TABLE>
<CAPTION>
TOTAL LOAN PERCENTAGE OF
PORTFOLIO TOTAL
---------- PORTFOLIO
($000) -------------
ALLOWANCES ($000)
FOR LOSSES
-------------
($000)
<S> <C> <C>
$614.0 $ .18 .03%
</TABLE>
BREAKDOWN OF LOAN DELINQUENCY RATES OF
MORTGAGE SERVICING PORTFOLIO
AT JUNE 30, 1996
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
LOAN TOTAL PRINCIPAL PRINCIPAL
DELINQUENCY STATUS COUNT LOANS BALANCE BALANCE
------ ---------- -------- ----------
<S> <C> <C> <C> <C>
($000)
30 Day..................................... 383 3.85% $17,252.2 2.81%
60 Day..................................... 129 1.30% 5,810.0 0.95%
90 Day..................................... 61 0.61% 2,340.4 0.38%
120 Day.................................... 111 1.11% 1.958.1 0.32%
------ ----- -------- -----
Net Delinquency............................ 684 6.87% $27,360.7 4.46%
====== ========== ======== ==========
Foreclosure................................ 59 0.59% $3,668.9 0.59%
Delinquent Bankruptcy...................... 26 0.26% $1,150.0 0.18%
</TABLE>
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<PAGE> 56
The following table sets forth the Company's average delinquency rates
expressed as a percentage of the number of loans in the mortgage loan servicing
portfolio for the time periods indicated:
BREAKDOWN OF LOAN DELINQUENCY RATES OF
MORTGAGE SERVICING PORTFOLIO
<TABLE>
<CAPTION>
AS OF AS OF SEPTEMBER 30,
JUNE 30, ---------------------
DELINQUENCY STATUS 1996 1995 1994
------------ ------ ------
<S> <C> <C> <C>
30 Day................................... 3.91% 3.33% 4.59%
60 Day................................... 1.03% 0.76% 0.89%
90 Day................................... 0.61% 0.32% 0.28%
120 Day.................................. 1.44% 0.88% 0.24%
----- ------ ------
Net Delinquency.......................... 6.99% 5.29% 6.00%
============ ====== ======
Foreclosure.............................. 0.34% 0.26% 0.44%
Delinquent Bankruptcy.................... 0.26% 0.51% 1.17%
</TABLE>
The Company maintains a reserve for estimated future foreclosure losses
associated with the Company's responsibilities as servicer for loans. The
required level of reserves is determined by monthly analysis of such factors as
loan delinquencies, anticipated reinstatement rates from the various stages of
delinquency and loss experience on similar loans serviced. The reserve is
increased by provisions charged to earnings and by purchase price adjustments on
certain acquisitions of mortgage loan administration contracts. The reserve is
reduced by charge-offs, net of recoveries. The Company's reserve was $182,000 at
June 30, 1996. While management believes that adequate reserves have been
established, there can be no assurance that such a level of reserves will
continue to be adequate in the future.
REO is recorded at the lower of cost or fair value, less estimated selling
cost, on its acquisition date and at the lower of such initial amount or current
fair value, less estimated selling cost, thereafter. Differences between the
carrying amount and fair value, less estimated selling cost, are charged to
earnings through provision for foreclosure costs.
Funding of the Purchase of Mortgage Loan Servicing Rights
The acquisition of the $355.0 million in mortgage loan servicing rights was
funded by a $2.0 million nonrevolving 36-month term loan from Franklin, from
proceeds from the sale of manufactured housing servicing rights and funds on
hand (primarily from the proceeds of FIS' private offering of preferred stock,
common stock and warrants). The Franklin term loan was refinanced with part of
the proceeds from a term loan from First Bank. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation -- Liquidity and
Capital Resources."
The Company has allocated approximately $400,000 (minimum)/$4.0 million
(maximum) from the net proceeds of this Offering to expand its mortgage loan
servicing portfolio. Management anticipates that such funds will enable the
Company to purchase servicing rights to mortgage loans with between $40 million
(minimum) and $400 million (maximum) in principal balances. The $4.0 million
will represent 100% of the price of such servicing rights. Management believes
that it will be able to purchase additional mortgage loan servicing rights with
approximately $75 million of outstanding principal balances using working
capital of approximately $748,000 resulting from the recovery to the Company
from the gross proceeds of the Offering of funds expended through June 30, 1996
for expenses related to the Offering.
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<PAGE> 57
MORTGAGE LOAN ORIGINATION
The Company originates residential loans on a retail and wholesale basis,
which, during the nine months ended June 30, 1996, consisted of $16.2 million in
originations. The Company's originations primarily occurred in two
states-Florida (22.8%) and Minnesota (66.7%).
Loan origination volume has been as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
NINE MONTHS 1994
ENDED 6/30/96 1995 LOANS LOANS
ORIGINATIONS ORIGINATIONS ORIGINATIONS
------------- ----------- ---------
<S> <C> <C>
($000,000) ($000,000) ($000,000)
$16.2 $12.4 $ -0-
</TABLE>
During the nine months ended June 30, 1996, mortgage loans originated by
the Company consisted of:
<TABLE>
<CAPTION>
TOTAL LOANS MANUFACTURED MULTI- 1-4 SINGLE
ORIGINATIONS HOUSING FAMILY FAMILY HOUSING
----------- ----------- --------- ---------------
<S> <C> <C> <C>
($000,000) ($000,000) ($000,000) ($000,000)
$16.2 $ -0- $ -0- $16.2
</TABLE>
During the year ended September 30, 1995, mortgage loans originated by the
Company consisted of:
<TABLE>
<CAPTION>
TOTAL LOANS MANUFACTURED MULTI- 1-4 SINGLE
ORIGINATIONS HOUSING FAMILY FAMILY HOUSING
----------- ----------- --------- ---------------
<S> <C> <C> <C>
($000,000) ($000,000) ($000,000) ($000,000)
$12.4 $ -0- $ -0- $12.4
</TABLE>
During the year ended September 30, 1994*, mortgage loans originated by the
Company consisted of:
<TABLE>
<CAPTION>
TOTAL LOANS MANUFACTURED MULTI- 1-4 SINGLE
ORIGINATIONS HOUSING* FAMILY FAMILY HOUSING
----------- ----------- --------- ---------------
<S> <C> <C> <C>
($000,000) ($000,000) ($000,000) ($000,000)
$ -0- $ -0- $ -0- $ -0-
</TABLE>
- ---------------
* During the year ended September 30, 1994, HOFCA stopped originating
manufactured housing loans and sold substantially all of its manufactured
housing loan servicing rights. Includes HOFCA from April 29, 1994, the date of
its acquisition by the Company.
The Company offers a broad menu of mortgage loan programs to borrowers. The
staff maintains pricing matrices which include various product, rate and lock
period combinations and has safeguards to ensure adherence to the Company's
pricing standards and its underwriting guidelines. Branch personnel cannot
commit to a loan that falls outside the parameters set on the pricing matrix.
The Company's senior management can add, delete or adjust any program, rate,
lock period or price at any time and has the sole authority to approve loans
that do not conform to prevailing parameters.
In addition, senior management is actively involved in the monitoring and
setting of the various loan programs offered and related pricing structures.
At present, the Company maintains one retail origination office located in
Minnesota.
Sales of Loans - Secondary Marketing; Risk Management
The Company sells the mortgage loans it originates through its retail
operation in the Secondary Market in the form of whole loans and MBS. The
Secondary Market consists of all mortgage transactions that occur after the
original lender closes a loan. The Secondary Market matches excess demand for
mortgage funds in
53
<PAGE> 58
one area with an excess supply in another and is a vehicle for linking the
mortgage market with the broader capital market. Secondary Market transactions
can involve two private lenders, a private lender and an Agency or a private
lender and a private conduit company.
The Company employs several methods of selling loans in the Secondary
Market. FHA, VA and conventional conforming loans are typically pooled to form
MBS issued or guaranteed by the Agencies. The Company then sells the securities
it receives for the loans to investment banking firms that are primary dealers
in government securities. The Company also sells conventional conforming whole
loans to either FNMA or FHLMC for cash or to private Mortgage Investors when
pricing conditions are favorable. Non-conforming conventional loans are sold
directly to private Mortgage Investors, often servicing released.
The Company's express policy is to hedge against, rather than speculate on,
fluctuations in interest rates. The Company manages the interest rate risk
associated with the origination of mortgage loans using hedging strategies,
primarily forward sales of mortgage loans.
The Company has identified fluctuations in interest rates as one of the
most significant risks affecting the income potential of its mortgage loan
origination activities.
Interest risk management is putting into place hedging methodologies to
budget and manage loss on the sale of loan production. The success of this risk
management function rests on the ability to identify and monitor exposure as
loans move through the origination process. The origination process is divided
into two stages: the production stage - the time between the taking of the loan
application from the borrower through the time of the loan closing; and the
inventory stage - the time between the loan closing and the sale of the loan
into the Secondary Market.
The risk on loans which are already closed and warehoused is different than
that of loans which have not closed or may not close. A determination of the
precise amount of interest rate risk is made through the monitoring of the
production stages of each loan and is based on such factors as whether the
interest rate is locked, floating, fixed or adjustable; the maturity date; and
the type of transaction (purchase/refinance). The estimated closing date as well
as the scheduled delivery requirements of a particular product type and/or
Mortgage Investor are additional determinants in this process. The Company's
inventory control system tracks the loans in process and provides detailed
information about the Company's loan production and loan status. This breakdown
allows the Company to monitor both fallout and rate risk.
Fallout risk is the risk of a borrower withdrawing the loan or having the
loan rejected during the underwriting stage. During the production stage,
fallout will manifest itself as the percentage of loans which fail to close. The
primary reason applications are withdrawn is unexpected movements in interest
rates. The loans in process will experience other fallout due to credit,
appraisals, employment and deposit reasons. Fallout is monitored monthly through
an inventory control system to compare rate lock-in and closing percentages.
Currently, in order to minimize interest rate risk and manage loan pipeline
fallout, the Company sells its loan production using individual loan-by-loan
forward sale commitments under which the terms of the sale to the Mortgage
Investor are determined prior to funding of the various loans.
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<PAGE> 59
The following tables represent the information relative to loan fallout for
the calendar years ended 1995 and 1994 for the Company:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1994*
- ------------------------------------------ ------------------------------------------
<S> <C> <C> <C> <C> <C>
<CAPTION>
(NUMBERS OF LOANS)
TOTAL LOANS TOTAL FALLOUT PERCENTAGE TOTAL LOANS TOTAL FALLOUT PERCENTAGE
PROCESSED ALL REASONS FALLOUT PROCESSED ALL REASONS FALLOUT
- ------------ -------------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
355 7 2.0% 3,461 20 0.6%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1994
- ------------------------------------------ ------------------------------------------
<S> <C> <C> <C> <C> <C>
<CAPTION>
($000,000)
TOTAL LOANS TOTAL FALLOUT PERCENTAGE TOTAL LOANS TOTAL FALLOUT PERCENTAGE
PROCESSED ALL REASONS FALLOUT PROCESSED ALL REASONS FALLOUT
- ------------ -------------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
$ 35.4 $ .5 1.4% $144.0 $1.6 1.1%
</TABLE>
- ---------------
* Consists of activity during the calendar year by HOFCA prior to the Company's
acquisition of HOFCA.
Price risk, the risk of declining prices, is the most familiar type of risk
because it accurately reflects the exposure of the Company in a rising interest
rate environment. This risk is created in the application stage of the loan,
during loan origination, based on the terms of the lock-in agreements offered to
the borrowers. The period of time that "un-locked" loans spend between the time
loan documents are drawn and the loan is closed and is ready to ship to the
Secondary Market, is also where rate risk must be estimated and hedged. The
Company has established a delivery date system that allows it to match precise
delivery dates of the loan to the settlement securities, Secondary Market or
Mortgage Investors. Management believes that the production function;
processing, underwriting, closing and disbursement activities of the Company,
can play a major role in the control, management and the timing of loan closing.
There are several pricing factors that are considered on a daily basis such
as the type of loans, e.g. conventional or government, fixed rate or ARM, 15
year or 30 year terms. Loan lock-ins are closely monitored by the Company to
insure the lock-in rates are in line with daily rates in the Secondary Market.
In the event that the interest rate market experiences significant price and/or
rate movement during the day, the Company reserves the right to change posted
daily rates as required by market conditions. The Company may also limit
lock-ins during periods of severe rate increases.
The sale of mortgage loans may generate a gain or loss to the Company
primarily as a result of two factors. First, the Company may make a loan to a
borrower at a price (interest rate plus discount points) which is higher or
lower than the Company would receive if it immediately sold the loan in the
Secondary Market. These pricing differences occur most often as a result of
competitive conditions in a market area. Second, gains or losses may result from
changes in interest rates which affect the market value of the loan from the
time a price commitment is given to a borrower until than loan is committed to
an Mortgage Investor, which typically is a period of 7 to 90 days.
To limit losses associated with borrower default, it is the Company's
policy to sell all loans without recourse. As is customary in the industry, the
Company makes representations and warranties relating to compliance with laws,
regulations and program standards and to accuracy of information in the
origination process. The Company may be required to repurchase a loan or
indemnify the Mortgage Investor in the event of a material, incurable breach of
such a representation or warranty. The Company historically has repurchased only
a nominal number of loans and is often successful in correcting any deficiencies
associated with a repurchased loan to enable remarketing and sale. During the
nine months ended June 30, 1996 and the year ended September 30, 1995, the
Company did not repurchase any loans.
To assure salability in the Secondary Market of loans that the Company
plans to originate, the Company reviews retail loan documentation for credit
worthiness and adequate security before funding or purchase. The Company has
developed its own underwriting guidelines, which conform to or exceed the
requirements set forth by the FHA, VA, FNMA, FHLMC, GNMA or private Mortgage
Investors, as applicable.
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<PAGE> 60
The Company uses a non-proprietary software program known as Mortgage Flex
to manage many of the mortgage loan origination functions. The pipeline system
monitors the loan pipeline and warehouse, maintaining an inventory of pertinent
data on each loan. The commitment control system tracks master forward sale
commitments and individual trades with Mortgage Investors.
UNDERWRITING
All mortgage loan applications must be approved by the Company in
accordance with its underwriting criteria, including loan-to-value ratios,
borrower income qualifications, Mortgage Investor requirements, necessary
insurance coverage and property appraisal requirements. Because a substantial
majority of the individual mortgage loans originated by the Company may be sold
directly to the FNMA or FHLMC, or pooled and exchanged for FNMA or FHLMC MBS,
the Company's underwriting criteria for conventional conforming mortgage loans
follow FNMA and FHLMC guidelines. The Company's underwriting standards for
conventional mortgage loans that exceed the mortgage loan size limit established
by FNMA and FHLMC (commonly referred to as "conventional nonconforming mortgage
loans" or "Jumbo Loans") are designed to meet criteria established by private
Mortgage Investors and the standards employed by the private mortgage insurers
that the Company uses to insure those mortgage loans. Where conventional
mortgage loans originated by the Company have a loan-to-value ratio greater than
80% at origination, that portion in excess of 80% is covered by private mortgage
insurance.
QUALITY CONTROL
The Company's quality control is performed by contract with Commonwealth
Mortgage Assurance Corporation ("CMAC"), an unaffiliated company. The objective
of quality control is to monitor overall mortgage loan quality to ensure that
mortgage loan originations comply with the Company's quality standards as well
as those of Mortgage Investors and mortgage insurers. CMAC re-underwrites and
independently reverifies pertinent information and documentation used in the
underwriting decision, reviews documentation for adequacy and accuracy and
performs a desk review of the appraisal for each mortgage loan selected for
review. CMAC reviews approximately 10% of the mortgage loans originated by the
Company. Mortgage loans are selected for review based on a number of criteria,
including loan-to-value ratios, self-employment, non-owner occupied and cash-out
refinancing. The quality review includes a full underwriting and regulatory
compliance review as well as a reverification of credit, employment, income and
source of funds. All material findings are submitted to the Company for
response. A monthly summary report of quality control findings and trends is
prepared for the Board of Directors and senior management. Quality control
reports from CMAC since May 1995, when CMAC commenced quality control functions
for the Company, revealed no material or reportable exceptions in the mortgage
loan origination operations of the Company.
Notwithstanding the foregoing, there can be no assurance that the Company's
quality control procedures will prevent losses on the mortgage loans originated
by the Company.
MORTGAGE LOAN ORIGINATION REVENUES AND EXPENSES
The Company receives fees from borrowers for the origination of retail
mortgage loans, generally in the range of one to two percent of the principal
amount of the mortgage loan. The Company receives smaller fees in connection
with the origination of wholesale mortgage loans because the originating
institutions retain the majority of fees collected from mortgage loan applicants
as compensation for their origination efforts. The Company may charge additional
fees depending upon market conditions or the Company's objectives concerning
mortgage loan origination volume and pricing ("points"). The Company incurs
certain costs in originating mortgage loans, including commissions, overhead,
out-of-pocket costs and, where the mortgage loans are subject to a purchase
commitment from private Mortgage Investors, related commitment fees.
FUNDING OF MORTGAGE ORIGINATIONS AND PURCHASES
The First Warehousing Facility permits the Company to finance mortgage loan
acquisitions and originations up to an aggregate of $5.0 million. Advances under
the Facility may not exceed 100% of the
56
<PAGE> 61
"Warehouse Collateral Value" of the eligible mortgage loans (see ""Management's
Discussion and Analysis of Financial Condition and Results of
Operation-Liquidity and Capital Resources"). Interest is charged based upon one
of the following three methods: "Fixed Rate," "Reference Rate" or "Floating
Eurodollar Rate." The applicable method of interest calculation is at the option
of the Company (see "Management's Discussion and Analysis of Financial Condition
and Results of Operation-Liquidity and Capital Resources"). The Company also
pays a monthly facility fee of approximately $1,000. All principal and accrued
interest is payable on or before May 29, 1997 or sooner in the event of a
default. Events of default include failure to make required payments, breaches
of the terms, representations or warranties under the First Credit Agreement and
related documents, insolvency and material judgments. The Company must also
maintain the following minimum financial criteria (as defined in the First
Credit Agreement): "Adjusted Tangible Net Worth" ("ATNW") must be at least $2.7
million; the "Adjusted Leverage Ratio" must be no greater than 4.0-to-1.0; the
"Debt Service Coverage Ratio" ("DSCR") must be at least 1.2-to-1.0; the
aggregate principal balance of mortgage loans serviced must be at least $500
million; and the report by an independent auditor in the Company's audited
consolidated financial statements cannot contain a "going concern" explanatory
paragraph.
The Company was in default of the minimum ATNW, ALR and DSCR financial
criteria. As of March 31, 1996 and June 30, 1996, the Company was only in
default under the minimum DSCR financial criteria. See "Risk Factors-Default On
First Term Loan and Warehousing Facility" and "Management's Discussion and
Analysis of Financial Condition and Results of Operation-Liquidity and Capital
Resources." Payment under the First Warehousing Facility is secured by all of
the assets of the Company.
DMC funded its loan origination activities primarily through its former
parent, ISB, until April 28, 1995, the date DMC was sold to the Company. Since
then, DMC established tablefunding arrangements with its primary Mortgage
Investors whereby these investors provide the funds at the mortgage closing and
thereby substantially eliminate the concern over the liquidity requirements of
loan fundings. The Company, with one exception, has phased out DMC's
tablefunding arrangements. As a subsidiary of the Company, DMC now uses the
First Warehousing Facility and, in addition, on June 26, 1996, the Company
entered into a "repo" transaction to provide for an interim period additional
loan funding capacity (see "Management's Discussion and Analysis of Financial
Condition and Results of Operation-Liquidity and Capital Resources").
EXPANSION PLANS
The Company's strategy in the mortgage banking area is to increase the
size, diversity and quality of its mortgage loan servicing portfolio and to
expand its origination operations. The Company's acquisition of DMC is
consistent with this strategy. The Company plans to increase the size of its
mortgage loan servicing portfolio by selectively acquiring mortgage loan
servicing rights and by retaining the servicing rights on a portion of the loans
it originates. In addition, the Company may use acquisitions to balance the mix
of loan products in its mortgage loan servicing portfolio. Generally, new
originations and selected acquisitions also contribute to increased portfolio
quality through the addition of loans with higher principal balances, lower
interest rates or other characteristics which are favorable to those of the
existing mortgage loan servicing portfolio. Management believes that the Company
currently has the loan servicing capacity to increase the size of its mortgage
loan servicing portfolio by an additional 40,000 loans without incurring
significant additional capital expenditures or fixed costs. By increasing the
size of the mortgage loan servicing portfolio, management believes that the
Company can continue to enhance its mortgage loan servicing efficiency and
profitability. Moreover, the Company believes that increasing the size,
diversity, type and quality of its mortgage loan servicing portfolio will enable
it to reduce the effects of prepayments resulting from fluctuation in interest
rates and defaults resulting from regional economic downturns.
The Company has allocated approximately $400,000 (minimum)/$4.0 million
(maximum) from the net proceeds of this Offering to expand its mortgage loan
servicing portfolio. Management anticipates that such funds will enable the
Company to purchase servicing rights to mortgage loans with between $40 million
(minimum) and $400 million (maximum) in principal balances. Management believes
that it will be able to purchase additional mortgage loan servicing rights with
approximately $75 million of outstanding principal
57
<PAGE> 62
balances using working capital of approximately $748,000 resulting from the
recovery to the Company from the gross proceeds of the Offering of funds
expended through June 30, 1996 for expenses related to the Offering.
The Company has begun the process of expanding its origination activities
by acquiring DMC and by purchasing and reselling whole loan portfolios while
retaining the servicing rights. Through the acquisition and expansion of DMC's
origination operations and whole loan activity, the Company hopes to increase
the volume of new loan originations to a level where originations exceed the
volume of prepayments experienced in its mortgage loan servicing portfolio.
If significantly less than all of the Securities offered herein are sold,
the Company will most likely require additional funding to purchase mortgage
loan servicing rights, operate at a profitable level and meet all of its
financial obligations. If such additional funds are needed, the Company would
seek to raise funds through bank financing or one or more additional equity
and/or debt offerings. No assurance can be given that such funding would be
available or, if available, that such funding would be available on terms
acceptable to the Company. If such additional funding were not available, the
Company's operations would most likely be materially and adversely affected. See
"Risk Factors-Possible Need For Additional Financing."
MANAGEMENT INFORMATION SYSTEMS
The Company maintains an in-house data processing system and uses
non-proprietary software. The Mortgage System and Problem Loan Servicer are all
on-line, real-time, integrated systems which give the Company control over work
flow and the flexibility to respond to changing operating and market conditions.
On June 1, 1995, DMC converted to the Company's data processing system.
The Company operates a Data General Aviion 5225 computer complex running
under the UNIX-VIS operating systems and the CICS teleprocessing monitor for
mortgage banking applications. The high reliability and growth potential of this
computer are key factors in management's future plans for expansion of the
mortgage loan servicing portfolio and origination activities. Management
believes that its MIS are capable of supporting a mortgage loan servicing
portfolio increase of approximately 80,000 loans without a significant increase
in capital expenditures.
The Company has a Disaster Recovery Plan pursuant to which it stores
back-up materials and files on a daily basis. The Company routinely tests the
plan to ensure that it can restore its data systems within minimal time periods
if events so require.
COMPETITION
The mortgage banking business is highly competitive. The Company competes
with financial intermediaries, such as other mortgage bankers, commercial banks,
savings associations, credit unions, loan brokers and insurance companies in the
origination of mortgage loans. The Company competes primarily by offering a
broad menu of mortgage loan programs with competitive features, by emphasizing
the quality of its service and by pricing its range of programs at competitive
rates. Competition for mortgage loan servicing is equally diverse. Mortgage
bankers, commercial banks and savings associations all engage in mortgage loan
servicing activities, either for themselves or in subservicing arrangements for
others, and each participates in the competitive bidding process associated with
acquisitions of mortgage loan servicing portfolios. To the extent that market
pricing becomes more aggressive, the Company may be unable to achieve its
planned level of acquisitions at the desired cost. The Company plans to address
this risk by expanding its origination activities as a source of additions to
the mortgage loan servicing portfolio.
GOVERNMENT REGULATIONS
The Company is subject to the rules and regulations of, and examinations
by, FNMA, FHLMC, GNMA, FHA and VA (collectively for this discussion, the
"Agencies"). The Company must obtain Agency and Mortgage Investor approvals to
originate and/or service mortgage loans, and it is subject to various state
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<PAGE> 63
licensing requirements. The Company is currently eligible and expects to remain
eligible to participate in such programs; however, any significant impairment of
its eligibility could have a material adverse impact on its operations. In
addition, the Company is subject to regulation at the state and federal level
with respect to specific origination, selling and servicing practices. Failure
to comply, or to cure non-compliance, with these requirements can lead to loss
of approved status to originate and/or service, termination of servicing
contracts without or with limited compensation to the servicer, demands for
indemnification or loan repurchase and class action suits by borrowers and
administrative enforcement actions, including punitive damages.
The Company maintains current records of regulatory requirements,
disseminates such requirements to appropriate parties and reviews the procedures
and controls implemented by the Company in response to regulatory requirements.
Although the Company has systems, personnel and procedures to insure compliance
with these requirements and believes that currently it is in compliance in all
material respects with applicable requirements, significant and incurable
noncompliance could have a material adverse effect on the financial condition
and operating results of the Company. In addition, there can be no assurance
that laws, rules and regulations will not be adopted or interpreted or cases
decided in the future which could make regulatory compliance more difficult
and/or more expensive. See "Risk Factors-Regulatory Risk."
A material failure to service mortgage loans in accordance with contractual
requirements may lead to termination of servicing rights without the payment of
any compensation. Since the incorporation of HOFCA in October 1984 and DMC in
1976, to current management's knowledge, with one possible exception (see "Legal
Proceedings") there have been no terminations of servicing rights by Mortgage
Investors because of a material failure to service according to contractual
obligations.
The payment of interest to borrowers on escrow balances is regulated at the
state level, with most states not requiring the mortgage servicer to make any
such payment. Federal legislation has been proposed that would establish uniform
requirements with respect to payment of interest to borrowers on escrow balances
and would otherwise regulate escrow accounts. Similar legislation was proposed
in 1991 but was not enacted. If this or similar federal legislation is enacted
in the future, it could have a material adverse effect on the Company's results
of operations.
The continuation of programs administered by FNMA, FHLMC and GNMA that
facilitate the issuance of MBS materially impacts the Company's ability to
generate funds by sale of mortgage loans or MBS. A significant portion of the
Company's business is also dependant upon the continuation of various programs
administered by FHA and VA. Although the Company is not aware of any proposed
discontinuation of, or significant reduction in, the operation of such programs,
any such action could have a material adverse effect on the Company's results of
operations.
SEASONALITY
The mortgage banking business is generally subject to seasonal trends which
reflect the pattern of home sales. These sales typically peak during the spring
and summer and decline to lower levels from November through February. As a
result, management anticipates that the Company's mortgage origination revenues
and earnings typically will be higher in the second and third quarters of each
calendar year than in the first and fourth quarters. Other aspects of the
Company's business, such as servicing and acquisitions, are less affected by
seasonality, except to the extent that the growth of the servicing portfolio is
generally higher in periods of higher production.
EMPLOYEES
The Company currently has 30 employees consisting of three executive
officers, 20 mortgage loan servicing personnel, five loan origination personnel
and two administrative assistants. The Company presently leases its employees
from a professional employer organization. There are no unions and management
believes that employee relations are good. The Company anticipates that its
current staff level is sufficient for its needs for the near future.
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<PAGE> 64
FACILITIES
The Company's executive offices are located at the facilities of DMC, 2075
West Big Beaver Road, Suite 550, Troy, Michigan 48084, and consist of
approximately 4,600 square feet of office space and approximately 938 square
feet of storage space. The facilities are leased from an unaffiliated party
pursuant to a lease that expires on October 31, 1998. The Company maintains an
origination office at 7825 Washington Ave. South, Bloomington Minnesota 55439.
The Bloomington office consists of approximately 3,700 square feet and is sublet
from ISB.
The Company had offices in Waltham, Massachusetts, Charlotte, North
Carolina, and Boca Raton, Florida. However, as part of the Company's
restructuring, these offices were closed, respectively, in September 1994,
October 1994 and June 1995. The Massachusetts lease termination was settled for
$12,000. The North Carolina lease expired in March 1995 and the Florida lease
was on a month-to-month basis (the Company has opened a new office in Boca
Raton). In addition, the Company closed its former principal office in Dallas,
Texas in August 1995. The Company had negotiated a partial termination of the
Dallas lease (which expires in August 1997); however, the landlord recently
commenced suit against HOFCA for the remaining rent due under the lease (see
"Legal Proceedings").
PRIOR OPERATIONS - MANUFACTURED HOUSING LOANS
On April 29, 1994, when FIS acquired HOFCA, HOFCA was servicing
approximately 6,017 manufactured housing loans (with an aggregate principal
balance of approximately $75.8 million), approximately 255 of which were owned
(approximately $4.8 million in principal balance). Approximately 5,762 of the
loans were not owned by HOFCA but were serviced by HOFCA under contract.
As of the date hereof, HOFCA owns no manufactured housing loans and is
servicing about 507 loans with an aggregate principal balance of approximately
$6.9 million.
LEGAL PROCEEDINGS
Except as described below, the Company is not presently a party to any
material litigation.
In October 1994, HOFCA commenced an action in Texas District Court, Dallas
County, for declaratory judgment against Messrs. Stouder, Wilson, Wyant,
Dressler and Alderman (collectively "Former Principals"), the five former
principals of HOFCA. The action was for a declaratory judgment relieving HOFCA
of its obligations under employment agreements between HOFCA and the Former
Principals due to breach of the employment agreements (see "The
Reorganization"). In December 1994, three of the Former Principals answered the
complaint; counterclaimed for declaratory judgment to the effect that HOFCA
breached the employment agreements; and demanded damages as a result thereof.
The other two Former Principals denied jurisdiction of the Texas Court and
commenced actions against HOFCA in North Carolina Superior Court for damages for
breach of the employment agreements. The Texas counterclaims did not specify the
amount of damages sought. The North Carolina complaints each sought
approximately $31,000 in damages plus "bonus compensation" under the agreements
and liquidated damages in an amount equal to all of the foregoing damages. In
February 1996, the parties settled all of the law suits. The Company had accrued
a sufficient amount for this liability in the September 30, 1995 Consolidated
Financial Statements. See Note 16 to the Company's Consolidated Financial
Statements.
In June 1996, Crescent Real Estate Fund, HOFCA's former landlord in Dallas,
Texas, commenced an action in Texas District Court, Dallas County, for past due
rent. The amount sought is not determinable from the complaint, but may be in
excess of $200,000. HOFCA filed an answer denying the allegations and had the
action removed to the U.S. Federal Court for the Northern District of Texas,
Dallas Division. HOFCA disputes the amount owed and intends to vigorously defend
the action. Management believes that there are a number of valid setoffs and
does not expect this action to have a material adverse impact on the financial
position or operations of the Company. The Company has accrued $30,000 to settle
this action, which amount represents its estimate of the balance due to the
former landlord at the time that the lease was terminated.
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<PAGE> 65
The Company has been informed by GNMA of a potential claim wherein the
Company, under its former ownership and management, allegedly overcharged GNMA
under the terms of certain sub-servicing Agreements. The claim alleges
approximately $3.1 million in potential liability; however, the potential
liability was projected based upon a review of only about one percent of the
records of transactions performed by HOFCA under its agreements with GNMA.
Management believes that these claims are essentially without merit and special
counsel to the Company has reviewed the claim and the relevant transactions and
has informed the Company of its belief that there are reasonable defenses to
GNMA's claims in any amount which might be material to the Company. As of the
date of this Prospectus, GNMA has made no formal claim or demand for payment or
reimbursement under these terminated sub-service agreements. In the event that
GNMA makes formal demand and the Company is required to pay a substantial
amount, the Company's business may be materially adversely affected.
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<PAGE> 66
MANAGEMENT
The names of the directors and executive officers of the Company and their
respective ages and positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- -----------------------------------------
<S> <C> <C>
President, Chief Executive Officer and
Christian W. Pfluger, III(1).............. 43 Director
Henry B. Leshman.......................... 65 Chairman of the Board of Directors
Joseph W. Traxler......................... 48 Treasurer and Chief Financial Officer
Mori A. Schweitzer........................ 63 Secretary and a Director
Leonard Rosen............................. 62... Director
Stephen M. Savage......................... 54 Director
Wayne B. Kight............................ 45 Vice President
</TABLE>
- ---------------
(1) May be deemed a founder of the Company.
Directors are elected to serve until the next annual meeting of
stockholders and until their successors have been elected and have qualified.
Officers are appointed to serve until the meeting of the Board of Directors
following the next annual meeting of stockholders and until their successors
have been elected and have qualified. The Managing Underwriter has a five year
right to designate one nominee for election to the Company's Board of Directors
(see "Underwriting").
A summary of the business experience for each officer and director of the
Company is as follows:
CHRISTIAN W. PFLUGER III, has been President, Chief Executive Officer and a
Director of the Company since September 1994 and of HOFCA since April 1994. He
has been President and a Director of FIS since inception. Since June 1991, he
has been President and owner of Great Hills Mortgage Co., Inc. ("GHM") in
Austin, Texas. GHM was a mortgage loan origination and brokerage company until
April 1994 and is currently inactive. From September 1990 to June 1991, Mr.
Pfluger was a consultant to financial institutions, primarily savings banks and
insurance companies. From December 1989 to September 1990, he was Chief Lending
Officer of Bluebonnet Savings Bank, FSB in Dallas, Texas. At Bluebonnet, Mr.
Pfluger was involved in the management of single family origination and
servicing, consumer origination and servicing, construction lending, wholesale
banking operations and commercial lending. From 1976 to 1989, Mr. Pfluger was
President and Chief Executive Officer of Taylorbanc Savings Association
("Taylorbanc") in Taylor, Texas. In August 1989, the RTC placed Taylorbanc in
conservatorship due to the insolvency of that institution. Mr. Pfluger received
a B.A. in Business Finance from Southwest Texas State University in 1975.
HENRY LESHMAN has been the Chairman of the Board of Directors of the
Company since August 1995, Secretary and a Director of HOFCA since April 1994
and Treasurer and a Director of FIS since April 1994. From September 1994 to
August 1995, he was Treasurer a Director of the Company. Mr. Leshman spent 30
years in the aluminum business as an executive with Alside, Inc., a division of
U.S. Steel in sales and marketing. He retired to Boca Raton, Florida in 1984 to
become active as a private investor and as co-owner of a Bubbies Ruggies, Inc.,
a commercial bakery, and Shifco, Inc., a seafood distributor.
JOSEPH W. TRAXLER has been Treasurer and Chief Financial Officer of the
Company since August 1995 and is currently the Chief Financial Officer of DMC.
Mr. Traxler has more than twenty-five years of management experience in the
mortgage banking and financial services industries. From July 1993 to May 1995,
Mr. Traxler was employed as a consultant to HUB, Inc., a Minneapolis based
investment banking firm. From September 1990 to July 1993, Mr. Traxler was a
Principal and served as Chief Financial Officer of Sandia Mortgage Corporation
(a public company). From October 1988 to August 1990, Mr. Traxler was a Senior
Vice President and the Chief Financial Officer of Paragon Mortgage Corporation.
From December 1987 to September 1988, Mr. Traxler was a Senior Vice President
and the Chief Financial Officer of Bright Mortgage Company. From 1982 to October
1987, Mr. Traxler was employed by Knutson Mortgage Corporation in a number of
management positions, including Executive Vice President and Chief Financial
Officer. Mr. Traxler is a member of the Minnesota and Illinois Societies of
CPA's. Mr. Traxler received a BS
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degree in accounting from the University of Illinois at Chicago in 1970 and a
MBA degree in Finance from DePaul University in 1979.
LEONARD L. ROSEN has been a Director of the Company since September 1994,
and of HOFCA and FIS since April 1994. Since graduating from City College of New
York in 1954, he has been the owner and operator of J. Rosen Furs, Inc., New
York, New York. He is also President of nine other companies that sell furs in
the New York area.
MORI A. SCHWEITZER has been a Director of the Company since September 1994,
and of HOFCA and FIS since April 1994. He has been Secretary of FIS since April
1994. Mr. Schweitzer is a retired attorney and an investor. Since 1990, he also
has been a Director of IDM Environmental, Inc., a public company. Mr. Schweitzer
received a Law Degree from Brooklyn Law School in 1956.
STEPHEN M. SAVAGE has been a Director of the Company since August 1995.
Since 1962, he has been a private investor and manager of real estate. From 1980
to 1987, Mr. Savage was an Arbitrator for the Better Business Bureau
specializing in HUD cases and automobile "lemon law" disputes. Mr. Savage
received a Law Degree from the University of Baltimore in 1965.
WAYNE B. KIGHT has been Vice President for the Company since September
1994. From 1992 to 1993, he was a Loan Officer for Paine Webber Mortgage
Finance, Inc. (Mortgage Company) in Columbia, Maryland. From 1982 to 1992, Mr.
Kight was President of Bertram & Daniels, Inc., Financial & leasing consultants,
in Coral Springs, Florida. Mr. Kight received a law degree from Woodrow Wilson
College of Law, Atlanta, Georgia in 1978 and a B.A. in Business Administration,
from Georgia State University of Atlanta, Georgia, in 1974.
REMUNERATION
The following table shows all the cash compensation paid or to be paid by
the Company, as well as certain other compensation paid or accrued, during the
fiscal years indicated, to the Chief Executive Officer ("CEO") for such period
in all capacities in which he served. Except for the CEO, no Executive Officer
received total annual salary and bonus in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------------------------
AWARDS
ANNUAL COMPENSATION -------------------- PAYOUTS
-------------------------------------------- ----------------------------
(E) (F)
(A) --------------- ---------- (G) (H) (I)
- ------------------------ (B) (C) (D) OTHER RESTRICTED ------- ---------- ---------------
NAME AND PRINCIPAL ---- -------- -------- ANNUAL STOCK OPTIONS LTIP ALL OTHER
POSITION YEAR SALARY BONUS($) COMPENSATION($) AWARD($) SARS PAYOUTS($) COMPENSATION(I)
- ------------------------ ---- -------- -------- --------------- ---------- ------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Christian Pfluger,
III................... 1995 $100,000 $12,980
CEO 1994 $ 41,667 --
1993 N/A N/A
</TABLE>
There are no employment agreements with executive officers.
1994 INCENTIVE STOCK OPTION PLAN
In December 1994, the Company's stockholders authorized the 1994 Incentive
Stock Option Plan (the "ISO Plan") to encourage ownership of shares of Common
Stock by key Employees, non-employee directors and advisors. The ISO Plan covers
an aggregate of 200,000 shares of the Company's stock. Incentive Stock Options
to purchase an aggregate of 24,500 shares at an exercise price of $3.50 per
share have been granted to date. 14,000 of these options have expired due to
employment termination.
Administration
The ISO Plan provides for its administration by the Company's Board of
Directors or a Compensation Committee (the "Committee") appointed by the Board
of Directors. The Committee currently consists of
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<PAGE> 68
Messrs. Pfluger, Rosen and Leshman. The Board of Directors or the Committee, as
appropriate, has discretionary authority (subject to certain restrictions) to
determine: the individuals to whom and the time at which incentive stock options
("ISOS") will granted; whether the ISOs will be incentive stock options within
the meaning of Section 422 of the Code ("SOS") or non-statutory options
("NSOS"); and the number of shares subject to such options. The Board of
Directors or the Committee may interpret the ISO Plan and may prescribe, amend
and rescind rules and regulations relating thereto.
Eligibility
Each Participant receiving a SOS must be a key employee (as defined in the
ISO Plan) of the Company or of an affiliate at the time of grant. NSOS may be
granted to key employees, non-key employees, non-employee directors, advisors or
independent contractors.
Option Price
The option price of the common shares subject to an ISO may not be less
than the fair market value of the shares on the date the option is granted. In
the case of an optionee receiving SOS who owns more than 10% of the outstanding
shares of the Company of all classes or any parent or subsidiary thereof (a
"Significant Stockholder"), the option price of the shares may not be less than
110% of the fair market value of the Company's shares on the date the option is
granted. If the common shares are not then quoted on any exchange or quotation
medium at the time the option is granted, then the Board of Directors or the
Committee will use its discretion in selecting a good faith value believed to
represent fair market value.
Termination and Amendment
No ISO's may be granted under the ISO Plan after December 17, 2004. The ISO
Plan may be amended consistent with applicable laws and regulations, suspended
or terminated at any time by the board of Directors. However, stockholder
approval will be necessary to increase the aggregate number of shares covered by
the ISO Plan, and no amendment, suspension or termination may affect any
outstanding option without the written consent of the optionee.
Duration and Exercise of Options
ISO's granted under the ISO Plan may be of such duration as shall be
determined by the Board of Directors or the Committee, but no NSOS may be
exercised more that 11 years after the date of grant and no SOS may be exercised
more that 10 years after the date of grant (which term is limited to 5 years in
the case of any Significant Stockholder).
In the event of the termination of employment of an optionee, all ISO's
previously granted to that employee shall expire within 30 days to six months
after such termination, depending upon the cause of such termination.
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<PAGE> 69
CERTAIN TRANSACTIONS
Between August 1994 and September 1994, FIS sold an aggregate of 1,750
shares of its Preferred Stock, 700,000 shares of its Common Stock and warrants
to purchase an aggregate of 700,000 shares of its Common Stock in a private
offering (the "FIS Private Offering"). FIS received an aggregate of $1.75
million from the sale of the foregoing securities.
On September 30, 1994, the Company took the following corporate actions:
(a) changed its name from B W Group, Inc. to Homeowners Financial Corp.; (b)
authorized a reverse split of its 887,270 previously outstanding shares of
Common Stock on a one-for-seven basis (effected on October 14, 1994); and (c)
acquired all of the issued and outstanding shares of Common and Preferred Stock
of FIS.
The Company acquired the FIS shares in exchange for a total of 3,720,000
post-reverse split shares of Common Stock and 1,750 shares of Series A Preferred
Stock. By agreement with the Company's Preferred Stockholders, 475 of the Series
A Preferred Stock will be redeemed with a portion of the net proceeds from this
Offering (see "Use of Proceeds" and "Description of Securities-Preferred
Stock"). The Company also increased its authorized capitalization to 10,000,000
shares of Common Stock, $.01 par value, and 1,000,000 shares of Preferred Stock,
$.10 par value. See "Description of Securities."
At the closing of the acquisition of FIS, the previous management of the
Company resigned, and the designees of FIS were elected (see "Management").
Pursuant to the FIS acquisition agreement, five Company stockholders owning
an aggregate of 127,315 post reverse split shares agreed not to sell such shares
without the prior written consent of FIS for a one year period ending September
30, 1995 and, thereafter, not to publicly sell in excess of 25% of their
individual holdings within any three month period without the prior written
consent of FIS.
In December 1994, the Company authorized the issuance of an aggregate of
25,000 shares of Common Stock to GHM, a company owned and controlled by
Christian W. Pfluger III, and certain creditors of GHM in cancellation of a
$60,000 debt to GHM. The $60,000 represents the last unpaid portion of a May
1994 $220,000 loan from GHM to HOFCA. The shares were issued in March 1995.
On September 12, 1994, Messrs. Pfluger and Schweitzer, Officers and
Directors of the Company, and James O'Leary, a former Director of the Company,
executed a voting trust agreement ("VTA") with regard to their shares of FIS.
The agreement was amended on February 17, 1995 to apply to shares of the
Company. Pursuant to the VTA, the parties thereto agree to vote all shares owned
by them for the election of Messrs. Pfluger, O'Leary and Schweitzer to the Board
of Directors and to vote all shares owned by them as a unit as agreed to by
them. In the event that the parties cannot agree on the desired vote, all
parties agree to vote in accordance with the instructions of the parties holding
a majority of the shares covered by the VTA. Upon his resignation from the Board
of Directors, Mr. O'Leary released the other two parties to the VTA from their
obligations to him thereunder.
In October 1995, Mori A. Schweitzer, a Director of the Company, loaned the
Company $50,000. Interest accrued at the rate of 11% per annum and principal and
all accrued interest were payable on January 9, 1996. As further consideration
for the loan, the Company granted Mr. Schweitzer two year warrants to purchase
up to 20,000 shares of the Company's Common Stock at $2.00 per share. The
proceeds of the loan were used to pay certain of the expenses of this Offering.
In March 1996, Mr. Schweitzer converted the principal and accrued interest on
this loan into Series B Preferred Stock at the rate of $1,000 per share.
In February 1996, Stephen M. Savage, a Director of the Company, loaned the
Company $75,000. Interest accrued at the rate of 10% per annum and principal and
all accrued interest were payable after 90 days. In March 1996, Mr. Savage
converted the principal amount of this loan into Series B Preferred Stock at the
rate of $1,000 per share.
Between January 1996 and March 1996, GHM, a company owned and controlled by
Christian W. Pfluger III, President, Chief Executive Officer and a Director of
the Company, loaned the Company varying amounts of money pursuant to a multiple
advance note ("MA Note"). Interest accrues at the rate of 8% per annum and
principal and all accrued interest are payable on demand or on or before
December 31, 1996, which ever is
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<PAGE> 70
sooner. As of March 20, 1996, principal and accrued interest aggregated
approximately $208,000. On March 20, 1996, GHM converted $200,000 of this loan
into Series B Preferred Stock at the rate of $1,000 per share. As of October 28,
1996, principal and accrued interest aggregated approximately $15,200.
In March 1996, certain of the Company's debtors, including Messrs Pfluger
(GHM), Schweitzer and Savage (see above) and two stockholders converted an
aggregate of $503,000 of loans into Series B Preferred Stock at the rate of
$1,000 per share. These conversions were effectuated to correct two of the
Company's deficiencies under the First Credit Agreement. See "Risk
Factors-Default On First Term Loan and Warehousing Facility" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operation-Liquidity and Capital Resources."
In May 1996, the Company issued 58,608 shares of C Preferred Stock and
warrants to purchase 150,000 shares of Common Stock to a foreign investor for
$200,000. The C Preferred is convertible into shares of Common Stock. The
Company used the proceeds of this offering primarily to pay certain expenses of
the Offering herein. See "Description of Securities-Preferred Stock" and "Risk
Factors-Shares Available for Future Sale; Possible Depressive Effect on Market
Price."
All ongoing and future affiliated transactions will be made or entered into
on terms no less favorable to the Company than those obtained from unaffiliated
third parties.
See also "Description of Securities-Common Stock Warrants and Options."
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<PAGE> 71
PRINCIPAL SECURITY HOLDERS
The following table sets forth, as of the date of this Prospectus, the
ownership of the Company's Common Stock, by (a) each of the Company's directors
and executive officers individually; (b) all directors and executive officers,
as a group; and (c) each person who is known by the Company to own of record or
beneficially more than 5% of the Company's Common Stock. Percentages are given
to reflect ownership by each before and after the issuance of the securities
offered hereby.
<TABLE>
<CAPTION>
PERCENT OF STOCK
-----------------------------------
AFTER
NUMBER OFFERING(3)
OF BEFORE -------------------
NAME AND ADDRESS SHARES(1) OFFERING(2) MINIMUM MAXIMUM
- ------------------------------------------------ --------- ----------- ------- -------
<S> <C> <C> <C> <C>
Christian W. Pfluger, III....................... 1,224,250(4)(5)(6)(8) 29.3% 25.9% 22.5%
2075 West Big Beaver Road
Suite 550
Troy, MI 48084
James A. O'Leary III............................ 400,000(6)(7)(9) 9.7% 8.5% 7.4%
11811 N. Tatum Blvd.
Phoenix, AZ 85028
Henry B. Leshman................................ 280,000(5)(6)(7)(8) 6.7% 5.9% 5.1%
7508 LaPaz Ct.
Boca Raton, FL 33433
Leonard L. Rosen................................ 146,250(5)(6)(7)(8) 3.5% 3.1% 2.7%
22659 Esplanada Cir W.
Boca Raton, FL 33433
Mori A. Schweitzer.............................. 238,000(4)(5)(6)(7) 5.7% 5.1% 4.4%
5300 Longbay Rd.
Red Hook, St. Thomas
U.S. Virgin Islands 00801
Stephen M. Savage............................... 62,500(5)(6)(7)(8) 1.5% 1.3% 1.1%
7220 Montrico Drive
Boca Raton, FL 33433
Wayne Kight..................................... 23,500(6)(7) * * *
3279 Clint Moore Rd.
Boca Raton, FL 33496
Joseph W. Traxler............................... -0-(6) * * *
7825 Washington Ave. South
Suite 650
Bloomington, Minnesota 55439
All officers and directors as a group (8 2,374,500(5)(6)(7)(8) 54.4% 48.3% 42.2%
persons)......................................
</TABLE>
- ---------------
* Less than one percent.
(1) All such shares are owned beneficially and of record by the individual or
groups indicated, except as otherwise noted in the footnotes to this table.
See "Certain Transactions."
(2) Based upon 4,131,213 shares issued and outstanding as of the date hereof.
(3) Based on 4,681,213 (minimum)/5,401,213 (maximum) shares outstanding after
completion of the offering.
(4) The voting rights to these shares are subject to a voting trust agreement
("VTA") between Messrs. Pfluger and Schweitzer. Pursuant to the VTA as
amended, the parties thereto agree to vote all shares owned by them for the
election of Messrs. Pfluger and Schweitzer to the Board of Directors and to
vote all shares owned by them as a unit as agreed to by them. In the event
that the parties cannot agree on the desired vote, all parties agree to vote
in accordance with the instructions of the parties holding a majority of the
shares covered by the VTA. See "Certain Transactions."
(5) Excludes an aggregate of 350 shares of Series A Preferred Stock owned by
Messrs. Pfluger, Leshman, Rosen and Savage and an aggregate of 328 shares of
Series B Preferred Stock owned by Messrs. Pfluger, Schweitzer and Savage.
See "Description of Securities."
(6) Executive Officer and/or Director. Includes James A. O'Leary III who
resigned as Chairman of the Board of Directors in June 1995.
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<PAGE> 72
(7) For Messrs. O'Leary, Leshman, Rosen, Schweitzer, Savage and Kight, includes,
respectively, 10,000 shares, 20,000 shares, 10,000 shares, 30,000 shares,
17,500 shares and 3,500 shares issuable upon exercise of options and/or
warrants.
(8) For Messrs. Pfluger, Leshman and Rosen includes 40,000 shares each, and for
Mr. Savage includes 20,000 shares, all of which shares are issuable upon
exercise of Class C and Class B warrants.
(9) Includes shares owned by Mr. O'Leary's wife and children.
DESCRIPTION OF SECURITIES
The following summary description of the Company's securities is qualified
in its entirety by reference to the Company's Articles of Incorporation and its
Bylaws, copies of which have been filed as exhibits to the Registration
Statement of which this Prospectus is a part.
COMMON STOCK
The Company is authorized to issue 10,000,000 shares of Common Stock, $.01
par value per share, of which 4,131,213 shares are issued and outstanding as of
the date of this Prospectus. Each outstanding share of Common Stock is entitled
to one vote, either in person or by proxy, on all matters that may be voted upon
by the owners thereof at meetings of the stockholders.
Subject to the rights of the Preferred Stock, the holders of Common Stock
(i) have equal ratable rights to dividends from funds legally available
therefor, when, and if declared by the Board of Directors of the Company, after
payment of dividends to Preferred Stockholders; (ii) are entitled to share
ratably in all of the assets of the Company available for distribution to
holders of Common Stock upon liquidation, dissolution or winding up of the
affairs of the Company after payment to Preferred Stockholders; (iii) do not
have preemptive, subscription or conversion rights, or redemption or sinking
fund provisions applicable thereto; and (iv) are entitled to one non-cumulative
vote per share on all matters on which stockholders may vote at all meetings of
stockholders. This means that holders of more than 50% of the shares voting for
the election of directors can elect all of the directors if they choose to do
so, and in such event, the holders of the remaining less than 50% of the shares
voting for the election of directors will not be able to elect any person or
persons to the Board of Directors.
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of Preferred Stock,
$.10 par value, 1,750 of which are designated Series A Preferred Stock, 1,000 of
which are designated Series B Preferred Stock and 65,000 of which are designated
Series C Preferred Stock. As of the date hereof, there are 1,750 shares of
Series A Preferred Stock, 503 shares of Series B Preferred Stock and 58,608
shares of Series C Preferred Stock issued and outstanding.
Each share of Series A Preferred Stock has a $1,000 liquidation preference
value; votes as if each share is one share of Common Stock; bears a cumulative
annual dividend equal to eleven percent (11%) of the liquidation preference
value; and is redeemable by the Company upon 30 days notice at 102% of the
liquidation preference value, plus accrued and unpaid dividends to the date of
redemption. Upon the completion of this Offering, 475 of the 1,750 shares of
Series A Preferred Stock will be redeemed by the Company. Included in the 475
shares to be redeemed are an aggregate of 100 shares owned by Messrs. Leshman
and Rosen. See "Use of Proceeds."
Each share of Series B Preferred Stock has a $1,000 liquidation preference
value; has no voting rights; bears a cumulative annual dividend equal to twelve
percent (12%) of the liquidation preference value; and is redeemable by the
Company upon 30 days notice at 102% of the liquidation preference value, plus
accrued and unpaid dividends to the date of redemption. The rights of holders of
Series B Preferred Stock are subordinate to those of the holders of Series A
Preferred Stock. In addition, holders of Series B Preferred Stock have agreed to
subordinate their liquidation and dividend payment preferences to the holders of
C Preferred Stock.
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<PAGE> 73
Each share of Series C Preferred Stock has a $3.41 liquidation preference
value; has no voting rights; bears a cumulative annual dividend equal to twelve
percent (12%) of the liquidation preference value; is redeemable by the Company
upon 30 days notice at the liquidation preference value, plus accrued and unpaid
dividends to the date of redemption; and is convertible into shares of Common
Stock. The number of shares of Common Stock into which the C Preferred Stock is
convertible is determined by valuing each C Preferred share at $3.41 (the
"Value"), adding the aggregate Value of the C Preferred shares and all accrued
but unpaid dividends thereon and dividing the sum by the Value. The rights of
holders of Series C Preferred Stock are subordinate to those of the holders of
Series A and B Preferred Stock.
The Board of Directors has total discretion in the issuance and the
determination of the rights and privileges of any shares of Preferred Stock or
Common Stock which may be issued in the future, which rights and privileges may
be detrimental to the holders of the Common Stock of the Company. See "Risk
Factors-Offering and Market Related Considerations-Shares Available For Future
Sale; Possible Depressive Effect on Market Price."
A WARRANTS
Each A Warrants offered hereby will entitle the registered holder thereof
to purchase one share of Common Stock, at a price of $ , subject to adjustment
in certain circumstances, at any time until 5:00 p.m., Eastern Time, on
, 2001 (five years from the date of this Prospectus). Upon notice
to the holders of the A Warrants, the Company has the right to extend the
expiration date or reduce the exercise price of the A Warrants.
The A Warrants are redeemable by the Company, at any time commencing on
, 1997 [one year from the date of this Prospectus] (or earlier
with the consent of the Underwriter), upon notice of not less than 30 days, at a
price of $.15 per A Warrant, provided that the closing bid quotation for the
Common Stock for a period of 15 consecutive trading days ending on the third day
prior to the day on which the Company gives notice has been at least $7.50 per
share (subject to adjustment). The holder of the A Warrants will have the right
to exercise their A Warrants until the close of business on the date fixed for
redemption.
The A Warrants will be issued in registered form under an A warrant
agreement by and among the Company, Continental Stock Transfer & Trust Company,
as warrant agent (the "Agent"), and the Underwriter (the "A Warrant Agreement").
The exercise price and the number of shares of Common Stock or other securities
issuable on exercise of the A Warrants are subject to adjustment in certain
circumstances, including in the event of a stock dividend, recapitalization,
reorganization, merger or consolidation of the Company. However, the A Warrants
are not subject to adjustments for issuances of Common Stock at prices at or
below the exercise price of the A Warrants or the subsequent market price of the
Common Stock. Reference is made to the A Warrant Agreement (which has been filed
as exhibit to the Registration Statement of which the Prospectus forms a part)
for a complete description of the terms and conditions therein (the description
herein contained being qualified by references thereto.)
The A Warrants may be exercised upon surrender of the A Warrant certificate
on or prior to the expiration date at the offices of the Agent, with the
exercise form on the reverse side of the A Warrant Certificate completed and
executed as indicated, accompanied by full payment of the exercise price (by
certified check or bank draft payable to the Company) to the Agent for the
number of A Warrants being exercised. The holders of A Warrants do not have the
rights or privileges of holders of Common Stock.
No A Warrant will be exercised unless, at the time of exercise, the Company
has filed current registration statements with the Commission covering the
shares of Common Stock issuable upon exercise of such A Warrant and such shares
have been registered or qualified or deemed to be exempt from registration or
qualification under the securities law of the state of residence of the holder
of such A Warrants. The Company will use its best efforts to have all such
shares so registered or qualified and to maintain a current prospectus relating
thereto until the expiration of the A Warrants, subject to the terms of the A
Warrant Agreement. While it is the Company's intention to do so, there can be no
assurance that it will be able to do so.
No fractional shares will be issued upon exercise of the A Warrants.
However, if a warrantholder exercises all A Warrants then owned of record by
him, the Company will pay to such warrantholder, in lieu of
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<PAGE> 74
the issuance of any fractional shares which is otherwise issuable, an amount in
cash based on the market value of the Common Stock on the last trading day prior
to the exercise date.
As of the date of this Prospectus, aside from options and warrants noted
below, there are no warrants outstanding.
Upon the completion of this Offering the Company will issue warrants to the
Underwriter (see "Underwriting").
COMMON STOCK WARRANTS AND OPTIONS
An aggregate of 350,000 "A" warrants and 350,000 "B" warrants were issued
in exchange for the Class A and Class B FIS Warrants issued in the FIS Private
Offering. The Company has redesignated these "A" warrants as "C" warrants to
avoid confusion with the public A Warrants being offered herein. See "Certain
Transactions."
To date, options to purchase an aggregate of 24,500 shares at an exercise
price of $3.50 per share have been granted under the Company's ISO Plan. 14,000
of these options have expired due to employment termination. See
"Management-1994 Incentive Stock Option Plan."
In May 1995, the Company issued five-year options to Messrs. Leshman,
Rosen, Schweitzer and O'Leary, Directors of the Company at that time, to
purchase an aggregate of 40,000 shares (10,000 shares each) at an exercise price
of $3.00 per share. In August 1995, the Company issued five-year options to Mr.
Savage, a new Director of the Company, to purchase up to 10,000 shares at an
exercise price of $4.00 per share.
Certain stockholders of the Company pledged assets as security for the
Company's $695,489 loan from Barnett (see "The Reorganization"). In May 1995,
the Company issued three-year options to these stockholders to purchase an
aggregate of 80,000 shares of Common Stock at $3.00 per share, as compensation
for pledging the collateral. In September 1995, one of these stockholders
transferred options to purchase an aggregate of 7,500 shares to Stephen M.
Savage, a Director of the Company.
In May 1996, the Company issued warrants expiring May 31, 1999 to purchase
150,000 shares of Common Stock at $ per share [the A Warrant exercise
price] in conjunction with the sale of 58,608 shares of C Preferred Stock (see
"Certain Transactions").
In addition, there are options to purchase: an aggregate of 37,500 shares
of Common Stock at $3.50 per share through December 16, 1997; an aggregate of
21,429 shares of Common Stock at $1.75 per share through July 16, 1997; and an
aggregate of 15,000 shares of Common Stock at $3.00 per share through September
30, 1997.
LIMITATION OF DIRECTOR LIABILITY
The General Corporation Law of the State of Delaware contains provisions
entitling directors and officers of the Company to indemnification by the
Company for liability arising out of certain actions. Additionally, the
Company's By-Laws provide for indemnification of Directors and Officers to the
fullest extent permitted by the Delaware General Corporation Law. Insofar as
indemnification for liabilities arising under the Act may be permitted to
directors, officers and controlling persons of the Company pursuant to the
foregoing provisions, or otherwise, the Company has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the Securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
DELAWARE ANTI-TAKEOVER LAW
Under Section 203 of the Delaware Corporation Law (the "Delaware
anti-takeover law"), certain "business combinations" are prohibited between a
Delaware corporation, the stock of which is generally
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<PAGE> 75
publicly traded or held of record by more than 2,000 stockholders, and an
"interested stockholder" of such corporation for a three-year period following
the date that such stockholder became an interested stockholder, unless (i) the
corporation has elected in its certificate of incorporation not to be governed
by the Delaware anti-takeover law (the Company has not made such an election),
(ii) the business combination was approved by the board of directors of the
corporation before the other party to the business combination became an
interested stockholder, (iii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the commencement of the transaction (excluding voting stock owned
by directors who are also officers or held in employee benefit plans in which
the employees do not have a confidential right to tender or vote stock held by
the plan), or (iv) the business combination was approved by the board of
directors of the corporation and ratified by 66 % of the voting stock which the
interested stockholder did not own. The three-year prohibition also does not
apply to certain business combinations proposed by an interested stockholder
following the announcement or notification of certain extraordinary transactions
involving the corporation and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of a majority of the corporation's directors. The
term "business combination" is defined generally to include mergers or
consolidations between a Delaware corporation and an interested stockholder,
transactions with an interested stockholder involving the assets or stock of the
corporation or its majority-owned subsidiaries, and transactions which increase
an interested stockholder's percentage ownership of stock. The term "interested
stockholder" is defined generally as those stockholders who become beneficial
owners of 15% or more of a Delaware corporation's voting stock.
These provisions, together with the ability of the Company's Board of
Directors to issue Preferred Stock could delay or frustrate the removal of
incumbent directors or a change in control of the Company. The provisions also
could discourage, impede, or prevent a merger, tender offer or proxy contest,
even if such event would be favorable to the interests of stockholders. See
"Risk Factors-Offering and Market Related Considerations-Significant Number of
Authorized But Unissued Preferred Shares; Possible Anti-Takeover Effect."
DIVIDENDS
The payment by the Company of dividends on its Common Stock, if any, in the
future, rests within the discretion of its Board of Directors. Current
management believes that the Company has not declared any cash dividends on its
Common Stock since its inception, and has no present intention of paying any
cash dividends on its Common Stock in the foreseeable future. Moreover,
dividends on Preferred Stock must be paid prior to any dividends on Common
Stock. The Company's Series A Preferred Stock bears a cumulative annual dividend
equal to eleven percent (11%) of the liquidation preference value ($1,000 per
share). During the fiscal year ended September 30, 1995, the Company paid
$192,000 in Dividends on the Series A Preferred Stock. During the nine months
ended June 30, 1996, the Company paid $96,000 in Dividends on the Series A
Preferred Stock. The Company's Series B Preferred Stock bears a cumulative
annual dividend equal to twelve percent (12%) of the liquidation preference
value ($1,000 per share). The rights of holders of Series B Preferred Stock are
subordinate to those of the holders of Series A Preferred Stock. The Company's
Series C Preferred Stock bears a cumulative annual dividend equal to twelve
percent (12%) of the liquidation preference value ($3.41 per share). At the
request of First Bank, the Company has suspended payments of all preferred stock
dividends since March 1, 1996, approximately $69,000 on a quarterly basis, until
the Company is in full compliance with all terms and provisions of the First
Credit Agreement. See "Risk Factors-Default On First Term Loan and Warehousing
Facility" and "Management's Discussion and Analysis of Financial Condition and
Results of Operation-Liquidity and Capital Resources.
TRANSFER AGENT
The Transfer Agent for the Company's Common Stock is Continental Stock
Transfer & Trust Company, 2 Broadway, New York, NY 10004.
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<PAGE> 76
UNDERWRITING
The Company has entered into an Underwriting Agreement with Toluca Pacific
Securities Corporation, 3500 West Olive Avenue, Toluca Lake, California 91505
("Underwriter"). Pursuant to the Underwriting Agreement, the Company has
retained the Underwriter as its exclusive agent and the Underwriter has agreed
to use its best efforts to offer the Securities to the public. The Securities
are offered on a "best efforts 550,000 share minimum -- 1,270,000 share and
1,270,000 A Warrant maximum" basis. There is no minimum number of A Warrants
that must be sold. The purchase prices are $ per share and $ per A Warrant.
Unless at least 550,000 shares are sold within 120 days of the date of this
Prospectus, or 210 days if extended by mutual consent of the Company and
Underwriter, this Offering will terminate and all funds will be promptly
returned to subscribers without interest thereon or deduction therefrom. Closing
of the Offering could take place as late as ten business days after the maximum
210 day Offering period solely for the purpose of permitting funds to clear.
Once subscriptions for 550,000 shares ($ ) have been escrowed and
cleared, there may be an initial closing after which the Offering will continue
for the remaining Securities on a "best efforts" basis subject to subsequent
closings. The Underwriter has made no commitment to purchase or take down all or
any part of the Securities offered hereby.
Subscribers should make their subscription checks payable to "Atlantic Bank
of New York, Escrow Agent-Homeowners Financial Corp." All funds received by the
Underwriter as subscriptions for the Securities will be immediately deposited in
an escrow account with Atlantic Bank of New York ("Escrow Agent") by noon of the
next business day after receipt. In the event that at least 550,000 shares are
not sold within the designated period, the funds in escrow will be promptly
refunded to the subscribers in full without deduction therefrom or interest
thereon. Moreover, during the period of escrow, subscribers will not be entitled
to a refund of their subscriptions. The Securities will be sold fully paid only.
Stock certificates and Warrant certificates will be issued to purchasers only if
the proceeds from the sale of at least 550,000 shares are released to the
Company. Until such time as the funds have been released by the Escrow Agent,
such purchasers, if any, will be deemed subscribers and not stockholders. The
funds in escrow will not bear interest, will be held for the benefit of those
subscribers until released to the Company and will not be subject to creditors
of the Company or the expenses of this Offering.
The Underwriter is to receive a cash commission of ten percent (10%) of the
gross Offering price per Security sold ($ ) if the minimum Offering is
sold up to $ if the maximum Offering is sold). In addition, the Company
has agreed to pay the Underwriter a non-accountable expense allowance equal to
three (3%) percent of the public offering price ($. per share and $. per A
Warrant), of which $5,000 has been prepaid. If the entire Offering is sold, the
Underwriter will receive a non-accountable expense allowance of $ ; if the
minimum Offering is sold, the Underwriter will receive a non-accountable expense
allowance of $ .
The Underwriter has the right to offer the Securities through members of
the National Association of Securities Dealers, Inc. ("NASD"), and will pay such
dealers a concession out of its commissions of up to six percent (6%) of the
public offering price for any Securities sold by it.
The Company and/or its principal stockholders and their associates may
provide the Underwriter with the names of persons whom they believe may be
interested or who have contacted the Company with interest in purchasing the
Securities. The Underwriter may sell the Securities to such persons if they
reside in a state in which the Securities may be sold and in which the
Underwriter is permitted to sell the Securities. The Underwriter is not
obligated to sell any Securities to any such persons.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriter against certain liabilities in connection with
the Registration Statement of which this Prospectus forms a part, including
liabilities under the Securities Act. To the extent this section may purport to
provide exculpation from possible liabilities arising under the federal
securities laws, it is the opinion of the Securities and Exchange Commission
that such indemnification is against public policy and is therefore
unenforceable.
The Company has also agreed to sell to the Underwriter or its designees at
a price of $10.00, the Underwriter's Warrants to purchase up to 127,000 shares
of Common Stock and/or 127,000 A Warrants,
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respectively (the "Underwriter's Warrant"). The Underwriter's Warrants will be
exercisable for a period of four years, commencing one year after the date this
is consummated, at an initial exercise price of $ per share and $ per
Warrant [120% of the respective offering price]. The Underwriter's Warrants
cannot be transferred, assigned, or hypothecated for one year from the date of
their issuance, except that they may be assigned, in whole or in part, to any
successor or officer of the Underwriter. The Underwriter's Warrants will contain
anti-dilution provisions providing for appropriate adjustment of the number of
Securities which may be purchased upon exercise upon the occurrence of certain
events, including issuances below market prices.
The Company has agreed that it will, on any one occasion during the
four-year period commencing one year from the date hereof, register the
securities underlying the Underwriter's Warrants at the Company's expense, at
the request of holders of a majority of the securities underlying Underwriter's
Warrants. The Company has also agreed, during the six-year period commencing one
year from the date hereof, to register on a "piggy-back" basis, the securities
underlying the Underwriter's Warrants if and when the Company files a
registration statement on an appropriate form.
During the term of the Underwriter's Warrants, the holders are given, at a
nominal cost, the opportunity to profit from a rise in the market price for the
shares of Common Stock and Warrants. To the extent that the Underwriter's
Warrants are exercised, dilution of the interests of the Company's shares will
occur. Further, the terms under which the Company could obtain additional
capital may be materially adversely affected since the holders of the
Underwriter's Warrants can be expected to exercise them at a time when the
Company would, in all likelihood, be able to obtain needed capital by a new
offering of its securities on terms more favorable than those provided by the
Underwriter's Warrants.
The Company has also agreed, for the five-year period commencing upon
consummation of this Offering, at the request of the Underwriter, to nominate
and use its best efforts (including solicitation of proxies) to elect a designee
of the Underwriter to the Board of Directors of the Company. No designee has
been chosen as of the date hereof.
The Company has agreed not to effect any sales of Common Stock at prices
below the Exercise Price of the A Warrants, during the twenty-four months
following the date of this Prospectus without the prior written consent of the
Underwriter, which consent shall not be unreasonably withheld.
The foregoing discussion of the material terms and provisions of the
Underwriting Agreement is qualified in its entirety by reference to the detailed
provisions of the Underwriting Agreement, the form of which has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
While certain of the officers of the Underwriter have significant
experience in corporate finance and the underwriting of securities, the
Underwriter has previously underwritten only four public offerings. No assurance
can be given that the Underwriter's inexperience in public offerings will not
adversely affect the Offering and the subsequent development of a trading market
for the Common Stock and Warrants, if any. See "Risk Factors -- Limited
Experience of Underwriter."
Prior to the Offering, there has been no sustained public market for the
shares of Company Stock and no public market for the A Warrants. Consequently,
the offering price of the Securities and the exercise price and other terms of
the A Warrants have been determined by the Company and the Underwriter and are
not necessarily related to the Company's asset value, earnings, book value or
other such criteria of value. Factors considered in determining the offering
price of the Securities and the exercise price and other terms of the A Warrants
include principally, the prospects for the industry in which the Company
operates, the Company's management, the general condition of the securities
markets and the demand for securities in similar industries.
LEGAL MATTERS
The validity of the Securities being offered hereby will be passed upon for
the Company by John B. Lowy, P.C., New York, New York. Certain legal matters
will be passed upon for the Underwriters by Gusrae, Kaplan & Bruno, New York,
New York.
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EXPERTS
The consolidated balance sheets of the Company as of September 30, 1995 and
1994, and the related statements of operations, stockholders' equity and cash
flows for the fiscal year ended September 30, 1995 and the period from April 30,
1994 to September 30, 1994; and the statements of operations, stockholders'
equity and cash flows of HOFCA for the period October 1, 1993 to April 29, 1994,
appearing in this Prospectus and Registration Statement have been audited by
Wallace Sanders & Company, independent certified public accountants, as
indicated in their report with respect thereto and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing.
The statements of operations, stockholder's equity and cash flows for DMC
for the years ended September 30, 1994 and 1993 have been included herein and
elsewhere in the registration statement in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing. The report of KPMG Peat Marwick LLP contains an explanatory paragraph
regarding the uncertainty of the ability of DMC to continue as a going concern
and that the financial statements do not include any adjustments that might
result from the outcome of that uncertainty. The report also refers to the
change in DMC's method of accounting for income taxes.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Statement of Financial Condition as of June 30, 1996........... F-2
Condensed Consolidated Statements of Operations for the Nine Months Ended June 30,
1996 and 1995....................................................................... F-3
Condensed Consolidated Statement of Stockholders' Equity.............................. F-4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30,
1996 and 1995....................................................................... F-5
Notes to Condensed Consolidated Financial Statements.................................. F-7
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report.......................................................... F-9
Consolidated Balance Sheets as of September 30, 1995 and 1994......................... F-10
Consolidated Statements of Operations for
The Year Ended September 30, 1995 (Successor);
The Period from April 30, 1994 to September 30, 1994 (Successor); and
The Period from October 1, 1993 to April 29, 1994 (Predecessor)..................... F-11
Consolidated Statements of Stockholders' Equity....................................... F-12
Consolidated Statements of Cash Flows for
The Year Ended September 30, 1995 (Successor);
The Period from April 30, 1994 to September 30, 1994 (Successor); and
The Period from October 1, 1993 to April 29, 1994 (Predecessor)..................... F-13
Notes to Consolidated Financial Statements............................................ F-15
DEVELOPERS MORTGAGE CORPORATION
FINANCIAL STATEMENTS (UNAUDITED)
Statement of Operations for the Period from October 1, 1994 to April 28, 1995......... F-31
Statement of Stockholder's Equity for the Period from October 1, 1994 to April 28,
1995................................................................................ F-32
Statement of Cash Flows for the Period from October 1, 1994 to April 28, 1995......... F-33
Notes to Financial Statements......................................................... F-34
DEVELOPERS MORTGAGE CORPORATION
FINANCIAL STATEMENTS
Independent Auditors' Report.......................................................... F-35
Statements of Operations for the Fiscal Years Ended September 30, 1994 and 1993....... F-36
Statements of Stockholder's Equity for the Fiscal Years Ended September 30, 1994 and
1993................................................................................ F-37
Statements of Cash Flows for the Fiscal Years Ended September 30, 1994 and 1993....... F-38
Notes to Financial Statements......................................................... F-39
</TABLE>
F-1
<PAGE> 80
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
1996
-----------
(UNAUDITED)
<S> <C>
ASSETS
Cash and cash equivalents........................................................ $ 31
Cash -- restricted............................................................... 255
Mortgage loans held for sale..................................................... 2,657
Purchased mortgage servicing rights-net.......................................... 5,032
Accrued income and servicing receivables......................................... 417
Property, premises and equipment-net............................................. 153
Deferred stock issuance costs.................................................... 748
Other assets..................................................................... 688
-----------
$ 9,981
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable and other liabilities........................................... $ 1,018
Repurchase agreements............................................................ 2,624
Notes payable.................................................................... 4,139
-----------
7,781
-----------
Stockholders' equity
Preferred stock, $.10 par value, 1,000,000 shares authorized, 1,750 shares issued
and outstanding, designated as Series A........................................ *
503 shares issued and outstanding designated as Series B....................... **
58,608 shares issued and outstanding designated as Series C.................... 6
Common stock, $.01 par value, 10,000,000 shares authorized, 4,131,213 shares
issued and outstanding...................................................... 41
Additional paid-in capital....................................................... 3,166
Accumulated deficit.............................................................. (1,013)
-----------
2,200
-----------
$ 9,981
=========
</TABLE>
- ---------------
* Preferred stock amount prior to rounding to thousands was $175.
** Preferred stock amount prior to rounding to thousands was $50.
See accompanying notes to condensed consolidated financial statements.
F-2
<PAGE> 81
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
-------------------
1996 1995
------ ------
(UNAUDITED)
<S> <C> <C>
INCOME
Mortgage servicing and subservicing income............................. $1,891 $1,311
Origination income..................................................... 234 33
Interest............................................................... 136 29
Gain on sale of mortgage loans held for sale........................... 40 52
Gain on sale of mortgage loan servicing rights......................... 15 --
Other income........................................................... 88 --
------ ------
2,404 1,425
------ ------
EXPENSES
Compensation and benefits.............................................. 1,029 912
Office occupancy....................................................... 147 111
Office supplies and expenses........................................... 269 405
Professional services.................................................. 98 271
Interest............................................................... 155 65
Provision for estimated losses on loans serviced....................... -- --
Amortization of mortgage loan servicing rights......................... 810 317
Other.................................................................. 262 163
------ ------
2,770 2,244
------ ------
NET LOSS BEFORE PROVISION FOR INCOME TAXES............................. (366) (819)
INCOME TAX (PROVISION) BENEFIT......................................... -- 72
------ ------
NET LOSS............................................................... (366) (747)
Less cumulative preferred stock dividends.............................. (96) (144)
------ ------
Loss attributable to common stock...................................... $ (462) $ (891)
====== ======
Loss per share......................................................... $ (.11) $ (.22)
====== ======
Weighted average shares................................................ 4,126,669 4,080,158
------ ------
------ ------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-3
<PAGE> 82
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARES OUTSTANDING)
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES OUTSTANDING PAR VALUE ADDITIONAL
------------------------------------------------ --------------------------------------------- PAID-IN
PREFERRED A PREFERRED B PREFERRED C COMMON PREFERRED A PREFERRED B PREFERRED C COMMON CAPITAL
----------- ----------- ----------- --------- ----------- ----------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30,
1995.......... 1,750 -- -- 4,122,125 $ * $ -- $ -- $ 41 $2,470
Stocks issued
for
services.... -- -- -- 9,088 -- -- -- *** --
Stockholders
debt
converted to
preferred
stock....... -- 503 -- -- -- ** -- 502
Stock issued
for cash.... -- -- 58,608 -- -- -- 6 -- 194
Dividends..... -- -- -- -- -- -- -- -- --
Net Loss...... -- -- -- -- -- -- -- -- --
----- --- --------- ----- --- --- ----- - ---- - ------
Balance at June
30, 1996...... 1,750 503 58,608 4,131,213 $ * $ ** $ 6 $ 41 $3,166
===== === ========= ===== === === ====== ===== ======
<CAPTION>
(ACCUMULATED
DEFICIT) TOTAL
------------ ------
<S> <<C> <C>
Balance at
September 30,
1995.......... $ (551) $1,960
Stocks issued
for
services.... -- --
Stockholders
debt
converted to
preferred
stock....... -- 502
Stock issued
for cash.... -- 200
Dividends..... (96) (96)
Net Loss...... (366) (366)
Balance at June
30, 1996...... $ (1,013) $2,200
</TABLE>
- ---------------
* Preferred "A" stock amount prior to rounding to thousands was $175.
** Preferred "B" stock amount prior to rounding to thousands was $50.
*** Common stock amount prior to rounding to thousands was $91.
See accompanying notes to condensed consolidated financial statements.
F-4
<PAGE> 83
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
JUNE 30,
-------------------
1996 1995
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................................. $ (366) $ (747)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization.......................................... 846 377
Provision for losses................................................... -- --
Common stock issued for services....................................... -- --
Gain on disposal of property, premises and equipment................... -- --
Gain on sale of mortgage loans held for sale........................... (40) --
Gain on sale of purchased mortgage servicing rights.................... (5) --
Reduction of deferred tax allowance.................................... -- --
Purchases of mortgage loans held for sale.............................. (4,509) (2,437)
Proceeds from sale of mortgage loans held for sale..................... 1,893 3,514
Recoveries (losses) on mortgage loans serviced and held for sale....... -- 72
Change in assets -- (increase) decrease
Accrued income and servicing receivables............................... (122) (412)
Other assets........................................................... (67) (30)
Deferred stock issuance costs.......................................... (412) (73)
Change in liabilities -- increase (decrease)
Accounts payable and other liabilities................................. 32 (33)
Income taxes payable................................................... -- (58)
------- -------
Net cash (used in) provided by operating activities............ (2,750) 173
------- -------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-5
<PAGE> 84
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
JUNE 30,
-------------------
1996 1995
------- -------
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Cash -- restricted..................................................... -- 703
Origination of other loans............................................. -- --
Receipts from other loans.............................................. -- 50
Proceeds from sale of purchased mortgage servicing rights.............. -- --
Purchases of purchased mortgage servicing rights....................... (40) (5,689)
Proceeds from sale of property, premises and equipment................. -- --
Purchases of property, premises and equipment.......................... -- (76)
Acquisition of businesses.............................................. -- --
------- -------
Net cash provided by (used in) investing activities............ (40) (5,012)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from repurchase agreements.................................... 2,624 --
Repayments of repurchase agreements.................................... -- (1,488)
Proceeds from borrowings............................................... 3,872 4,921
Repayments of borrowings............................................... (4,407) (157)
Proceeds from affiliate borrowings..................................... 584 --
Repayments of affiliate borrowings..................................... (503) --
Distributions to stockholders.......................................... -- --
Payment of dividends................................................... (96) (144)
Net proceeds from issuance of stock.................................... 703 --
------- -------
Net cash provided by financing activities...................... 2,777 3,132
------- -------
Net decrease in cash and cash equivalents................................ (13) (1,707)
Cash and cash equivalents at beginning of period......................... 44 1,707
------- -------
Cash and cash equivalents at end of period............................... $ 31 $ --
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-6
<PAGE> 85
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ORIGINATION AND NATURE OF BUSINESS
Homeowners Financial Corp. (the "Company"), through its wholly-owned
subsidiaries, FIS, Inc. ("FIS") and FIS' wholly-owned subsidiary, Home Owners
Funding Corp. of America ("HOFCA") and Developers Mortgage Corporation ("DMC"),
is a full service mortgage banking company that services, originates, acquires
and markets mortgage loans secured primarily by residential properties located
in 48 states and the District of Columbia. All of the Company's substantive
operatio ns are conducted by HOFCA and DMC.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with Regulation S-B and in the opinion of management
of the Company include all information and footnotes necessary for a fair
presentation of financial position, results of operations, stockholders equity
and cash flows in conformity with generally accepted accounting principles. The
information furnished, in the opinion of management, reflects all adjustments
(consisting only of normal recurring accruals) necessary to present fairly the
Condensed Consolidated Statement of Financial Condition at June 30, 1996,
Condensed Consolidated Statements of Operations for the nine months ended June
30, 1996 and June 30, 1995, Condensed Consolidated Statement of Stockholders'
Equity for the nine months ended June 30, 1996 and Condensed Consolidated
Statements of Cash Flows for the nine months ended June 30, 1996 and June 30,
1995. The results of operations of interim periods are not necessarily
indicative of results which may be expected for any other interim period or for
the year as a whole.
Results for the nine months ended June 30, 1996 as reflected in the
accompanying unaudited Condensed Consolidated Financial Statements include
activity of the Company as it is currently organized. The results for the nine
months ended June 30, 1995 reflect the operations of the Company prior to the
acquisition of DMC and the ASC-PMSR from October 1, 1994 through April 27, 1995,
and reflect the operations of the Company as it is currently organized for the
period from April 28, 1995 through June 30, 1995.
NOTE 3. NOTES PAYABLE
At December 31, 1995, March 31, 1996 and June 30, 1996, the Company was not
in compliance with the provisions of the Debt Service Coverage Ratio ("DSCR") of
the First Term Loan Agreement. The minimum DSCR as defined in the First Term
Loan Agreement is 1.20 to 1.00. The Company's DSCR at December 31, 1995 was .44
to 1.00, at March 31, 1996 was .72 to 1.00 and at June 30, 1996 was 1.07 to
1.00. The Company continues to be in default under the minimum DSCR requirement.
The Company requested a waiver of the compliance condition and had discussed
with First Bank alternative actions to bring the Company into compliance with
all provisions of the First Term Loan Agreement. The Company and First Bank have
agreed to suspend payments of all preferred stock dividends, approximately
$69,000 on a quarterly basis, until the Company is in full compliance with all
terms and provisions of the First Term Loan Agreement. On May 31, 1996, the
Company entered into the First Amendment to the Credit Agreement whereby the
Company received a waiver of the noncompliance condition relating to the DSCR.
In addition, First Bank adjusted certain provisions of the term note and
warehouse credit facility and extended the Warehouse Termination Date, as
defined, to May 29, 1997. As of October 29, 1996, the bank indicated to the
Company that it will consider a waiver of default until March 31, 1997. However,
no such waiver has yet been finalized or approved by the bank. The outstanding
balance of the First Term Loan and the outstanding balance of the First
Warehouse Facility were $3.4 million and $44,000, respectively, at June 30, 1996
and $3.2 million and $1.1 million, respectively, as of October 28, 1996.
NOTE 4. CONTINGENCIES
In June 1996, Crescent Real Estate Fund, the Company's former landlord in
Dallas, Texas, commenced an action in Texas District Court, Dallas County, for
past due rent from August 1995 forward. The amount
F-7
<PAGE> 86
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
sought is not determinable from the complaint, but may be in excess of $200,000.
The Company disputes the amount owed, has responded to the complaint and has had
the action removed to the U.S. Federal District Court for the Northern District
of Texas, Dallas Division. The Company intends to vigorously contest the action.
The Company's management does not expect this action to have a material adverse
impact on the financial position or operations of the Company. The Company has
accrued $30,000 to settle this action, which amount represents its estimate of
the balance due to the former landlord at the time that the lease was
terminated.
The Company is involved in various lawsuits and claims stemming from
foreclosure proceedings, bankruptcy and reorganization proceedings, mechanics'
liens and other matters which are incidental to its business. Such claims are
generally on behalf of investors for whom the Company acts as servicing agent
and, in the opinion of the Company's management, the resolution of these matters
will not have a material adverse effect on the financial position or operations
of the Company.
NOTE 5. RELATED PARTY TRANSACTIONS
Subsequent to September 30, 1995, the Company borrowed $200,000 from
certain directors and a shareholder. Such borrowings were at a rate of 11%. In
consideration for a portion of these advances, a director received stock
warrants expiring on October 10, 1997 for 20,000 shares of common stock
exercisable at $2.00 per share. In March 1996, the directors and shareholder
converted their principal and accrued interest on their loans into Series B
Preferred Stock, $.10 par value, at a rate of $1,000 per share.
On December 29, 1995, The Company executed a multiple advance promissory
note for $250,000 with a corporation controlled by the President of the Company.
The Company borrowed $208,000 at a rate of 8% per annum maturing on demand but
no later than December 31, 1996. In March 1996, $200,000 of this loan was
converted into Series B Preferred Stock, $.10 par value, at a rate of $1,000 per
share.
In March 1996, a Company shareholder converted a $100,000 loan to the
Company into Series B Preferred Stock, $.10 par value, at a rate of $1,000 per
share.
NOTE 6. STOCK TRANSACTIONS
In March 1996, the Board of Directors approved the issuance of 4,174 shares
of common stock to an attorney in exchange for legal services provided. The
amount of common stock issued approximated a fair market value of $16,000.
NOTE 7. SUBSEQUENT EVENTS
MODIFICATION OF NOTE PAYABLE
On April 11, 1996, the note payable to a bank, in the amount of $695,489,
was modified in order to extend the maturity date, April 27, 1996, to July 26,
1996. The Company paid an extension fee of .25% of the loan amount ($1,739), to
the bank in order to extend the maturity date of the note payable. In August
1996, in consideration of the payment of an extension fee by the Company equal
to .25% of the loan amount ($1,739), the bank extended the due date of the loan
to September 27, 1996. In October 1996, in consideration of the payment of an
extension fee by the Company equal to .25% of the loan amount ($1,739), the bank
extended the due date of the loan to December 27, 1996. All other terms of the
note payable remain in effect as if the note was not modified.
F-8
<PAGE> 87
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Homeowners Financial Corp.
We have audited the accompanying consolidated balance sheets of Homeowners
Financial Corp. and Subsidiaries ("Successor") as of September 30, 1995 and
1994, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year ended September 30, 1995 and the period from
April 30, 1994 to September 30, 1994 ("Successor Periods") and the statements of
operations and cash flows for the period from October 1, 1993 to April 29, 1994
("Predecessor Period") of Home Owners Funding Corp. of America ("Predecessor").
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 audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Homeowners
Financial Corp. and Subsidiaries as of September 30, 1995 and 1994, and the
results of their operations and their cash flows for the successor periods and
predecessor period in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
April 29, 1994, all of the outstanding stock of Home Owners Funding Corp. of
America was acquired in a business combination accounted for as a purchase. As a
result of the acquisition, the consolidated financial statements as of and for
the Successor Periods are presented on a different cost basis than that for the
Predecessor Period and, therefore, are not comparable.
/s/ WALLACE SANDERS & COMPANY
--------------------------------------
Wallace Sanders & Company
Dallas, Texas
January 18, 1996, except for Note 1 and
Note 10, as to
which the date is April 12, 1996; and
Note 4,
and Note 14, as to which the date is
June 26, 1996;
and Note 2, as to which the date is
September 6, 1996;
and Note 6 and Note 16, as to which
the date is
October 21, 1996.
F-9
<PAGE> 88
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1995 1994
------ ------
<S> <C> <C>
ASSETS
Cash and cash equivalents.................................................. $ 44 $1,707
Cash -- restricted......................................................... 255 975
Mortgage loans held for sale............................................... 478 1,144
Other loans -- net of allowance of $153 and $0, respectively............... -- 207
Purchased mortgage servicing rights -- net................................. 5,825 678
Accrued income and servicing receivables................................... 295 97
Property, premises and equipment -- net.................................... 181 142
Deferred stock issuance costs.............................................. 336 --
Other assets............................................................... 621 492
------ ------
$8,035 $5,442
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable and other liabilities................................... $ 986 $1,013
Repurchase agreements.................................................... -- 1,488
Notes payable............................................................ 5,089 --
Note payable to related party............................................ -- 60
------ ------
6,075 2,561
------ ------
Commitments and contingencies.............................................. -- --
Stockholders' equity
Preferred stock, $.10 par value, 1,000,000 shares authorized, 1,750 * *
shares issued and outstanding.........................................
Common stock, $.01 par value, 10,000,000 shares authorized, 4,122,125 and 41 41
4,061,825 shares issued and outstanding, respectively.................
Additional paid-in capital............................................... 2,470 2,300
Retained earnings (accumulated deficit).................................. (551) 540
------ ------
1,960 2,881
------ ------
$8,035 $5,442
====== ======
</TABLE>
- ---------------
* Preferred stock amount prior to rounding to thousands was $175.
See accompanying notes to consolidated financial statements.
F-10
<PAGE> 89
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
------------------------------- -----------
PERIOD FROM PERIOD FROM
APRIL 30, OCTOBER 1,
YEAR ENDED 1994 TO 1993 TO
SEPTEMBER 30, SEPTEMBER 30, APRIL 29,
1995 1994 1994
------------- ------------- -----------
<S> <C> <C> <C>
INCOME
Mortgage servicing and subservicing income -- net..... $ 2,269 $ 701 $ 1,452
Interest.............................................. 93 123 435
Gain on sale of mortgage loans held for sale.......... 261 157 837
Gain on sale of purchased mortgage servicing rights... 51 942 --
Amortization of net assets in excess of acquisition -- -- 1,594
costs...............................................
------------- ------------- -----------
2,674 1,923 4,318
------------- ------------- -----------
EXPENSES
Compensation and benefits............................. 1,272 526 1,549
Office occupancy...................................... 322 91 250
Office supplies and expenses.......................... 261 111 176
Professional services................................. 464 125 108
Interest.............................................. 191 130 1
Provision for estimated losses on loans serviced...... 53 39 238
Amortization of purchased mortgage servicing rights... 504 37 13
Other................................................. 567 187 441
------------- ------------- -----------
3,634 1,246 2,776
------------- ------------- -----------
NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES... (960) 677 1,542
INCOME TAX (PROVISION) BENEFIT........................ 61 (137) --
------------- ------------- -----------
NET INCOME (LOSS)..................................... (899) 540 1,542
Less cumulative preferred stock dividends............. (192) (16) --
------------- ------------- -----------
Income (loss) attributable to common stock............ $ (1,091) $ 524 $ 1,542
========== ========== =========
Earnings (loss) per share............................. $ (.27) $ .32 *
========== ========== =========
Weighted average shares............................... 4,087,875 1,655,000 *
========== ========== =========
</TABLE>
- ---------------
* Earnings per share and average number of shares is neither comparable nor
meaningful as a result of the April 29, 1994 acquisition.
See accompanying notes to consolidated financial statements.
F-11
<PAGE> 90
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARES OUTSTANDING)
<TABLE>
<CAPTION>
SHARES OUTSTANDING PAR VALUE ADDITIONAL RETAINED
--------------------- ------------------ PAID-IN EARNINGS
PREFERRED COMMON PREFERRED COMMON CAPITAL (DEFICIT) TOTAL
--------- --------- --------- ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Post-Acquisition April 29, 1994 Balance... -- 1,000 $ -- $ 1 $ -- $ -- $ 1
Stock split and change in par value..... -- 1,142,750 -- 11 (11) -- --
Stock issued for cash and debt
conversion........................... -- 1,876,250 -- 19 482 -- 501
Stock issued for debt conversion........ 750 300,000 * 3 747 -- 750
Stock issued for cash................... 1,000 400,000 ** 4 996 -- 1,000
Stock issuance costs to related
parties.............................. -- -- -- -- (158) -- (158)
Stock issued in connection with
recapitalization..................... -- 341,825 -- 3 244 -- 247
Net income.............................. -- -- -- -- -- 540 540
-------- -------- -------- ----- -------- ------- ------
Balance at September 30, 1994............. 1,750 4,061,825 *** 41 2,300 540 2,881
Stock issued for debt conversion........ -- 25,000 -- **** 60 -- 60
Stock issued for services............... -- 35,300 -- ***** 110 -- 110
Dividends............................... -- -- -- -- -- (192) (192)
Net loss................................ -- -- -- -- -- (899) (899)
-------- -------- -------- ----- -------- -------- ------
Balance at September 30, 1995............. 1,750 4,122,125 $ *** $ 41 $2,470 $ (551) $1,960
======== ======== ======== ===== ======== ======== ======
</TABLE>
- ---------------
* Preferred stock amount prior to rounding to thousands was $75.
** Preferred stock amount prior to rounding to thousands was $100.
*** Preferred stock amount prior to rounding to thousands was $175.
**** Common stock amount prior to rounding to thousands was $250.
***** Common stock amount prior to rounding to thousands was $353.
See accompanying notes to consolidated financial statements.
F-12
<PAGE> 91
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR
----------------------------- PREDECESSOR
PERIOD FROM PERIOD FROM
APRIL 30, OCTOBER 1,
YEAR ENDED 1994 TO 1993 TO
SEPTEMBER 30, SEPTEMBER 30, APRIL 29,
1995 1994 1994
------------- ------------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................................ $ (899) $ 540 $ 1,542
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 533 72 35
Provision for losses...................................... 53 39 238
Common stock issued for services.......................... 110 -- --
Gain on disposal of property, premises and equipment...... (9) (8) --
Gain on sale of mortgage loans held for sale.............. (261) (157) (837)
Gain on sale of purchased mortgage servicing rights....... (51) (942) --
Reduction of deferred tax allowance....................... -- 64 --
Purchases of mortgage loans held for sale................. (6,656) (2,797) (21,922)
Proceeds from sale of mortgage loans held for sale........ 7,584 3,816 24,951
Recoveries (losses) on mortgage loans serviced and held
for sale................................................ 248 (344) (835)
Amortization of net assets in excess of acquisition
costs................................................... -- -- (1,594)
Change in assets -- (increase) decrease
Accrued income and servicing receivables.................. 319 82 519
Other assets.............................................. (129) (122) 261
Deferred stock issuance costs............................. (336) -- --
Change in liabilities -- increase (decrease)
Accounts payable and other liabilities.................... (469) (327) (221)
-------- -------- --------
Net cash provided by (used in) operating
activities......................................... 37 (84) 2,137
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE> 92
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR
----------------------------- PREDECESSOR
PERIOD FROM PERIOD FROM
APRIL 30, OCTOBER 1,
YEAR ENDED 1994 TO 1993 TO
SEPTEMBER 30, SEPTEMBER 30, APRIL 29,
1995 1994 1994
------------- ------------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Cash -- restricted........................................... 719 298 15
Origination of other loans................................... -- (54) --
Receipts from other loans.................................... 54 -- 13
Proceeds from sale of purchased mortgage servicing rights.... 254 942 --
Purchases of purchased mortgage servicing rights............. (3,294) (98) (27)
Proceeds from sale of property, premises and equipment....... 25 20 --
Purchases of property, premises and equipment................ (84) (3) (2)
Acquisition of businesses.................................... 24 (751) --
-------- -------- --------
Net cash provided by (used in) investing
activities......................................... (2,302) 354 (1)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from repurchase agreements.......................... -- 606 2,298
Repayments of repurchase agreements.......................... (1,488) (1,265) --
Proceeds from borrowings..................................... 13,505 1,450 --
Repayments of borrowings..................................... (11,223) (400) --
Proceeds from affiliate borrowings........................... 100 220 --
Repayments of affiliate borrowings........................... (100) (160) --
Distributions to stockholders................................ -- -- (6,463)
Payment of dividends......................................... (192) -- --
Net proceeds from issuance of stock.......................... -- 893 --
Proceeds from reverse acquisition/recapitalization stock
issuance.................................................. -- 93 --
-------- -------- --------
Net cash provided by (used in) financing
activities......................................... 602 1,437 (4,165)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........... (1,663) 1,707 (2,029)
Cash and cash equivalents at beginning of period............... 1,707 -- 2,790
-------- -------- --------
Cash and cash equivalents at end of period..................... $ 44 $ 1,707 $ 761
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE> 93
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND NATURE OF BUSINESS AND
SIGNIFICANT DEVELOPMENTS
On December 17, 1993, FIS, Inc. ("FIS") was incorporated for the purpose of
acquiring a business operating in the mortgage banking industry and commenced
business operations on April 30, 1994 after its acquisition of 100% of the
common stock of Home Owners Funding Corp. of America ("HOFCA") at the end of the
business day, April 29, 1994. HOFCA operates in the mortgage banking industry as
an originator and servicer of mortgage loans.
The acquisition has been accounted for by the purchase method of
accounting, and accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based on the estimated fair values at the
date of acquisition. Acquisition costs of $63,000 were capitalized and included
in goodwill. The fair values (which did not exceed recorded values) of assets
and liabilities acquired are summarized as follows (in thousands):
<TABLE>
<S> <C>
Cash, including restricted................................................. $ 2,034
Loans held for sale........................................................ 1,900
Purchased mortgage servicing rights........................................ 617
Other assets............................................................... 414
Property and equipment..................................................... 212
Goodwill................................................................... 268
Liabilities assumed:
Accounts payable and other liabilities................................... (1,230)
Repurchase agreements.................................................... (1,928)
Notes payable............................................................ (370)
Accrued loan servicing losses............................................ (405)
-------
Purchase price............................................................. $ 1,512
=======
</TABLE>
As of September 30, 1995 and 1994, the goodwill has been included in other
assets net of accumulated amortization of approximately $10,000 and $4,000,
respectively, and of the tax benefit of a pre-acquisition loss carryforward
realized during the period of April 30, 1994 to September 30, 1994 of
approximately $64,000. There were no identifiable intangible assets acquired.
The operating results of HOFCA, subsequent to April 29, 1994 (its date of
acquisition), are included in the successor results of operations. Pro forma
information is not presented since FIS is a nonoperating shell corporation.
HOFCA's pre-acquisition operating results and financial condition are presented
as predecessor information.
Under its new management, HOFCA has shifted its operational emphasis from
manufactured housing to single family mortgages. As of September 30, 1994, HOFCA
had disposed of substantially all of its Government National Mortgage
Association ("GNMA") servicing for manufactured housing.
On September 30, 1994, FIS entered into an acquisition agreement with B.W.
Group, Inc. ("BWG"), a dormant shell corporation. Under the terms of the
agreement, BWG acquired 100% of the outstanding shares of FIS common and
preferred stock in exchange for common and preferred stock of BWG. This stock
exchange resulted in the shareholders of FIS owning approximately 97% and 100%
of BWG's common and preferred stock, respectively. Simultaneously with the
acquisition, BWG changed its name to Homeowners Financial Corp. ("HFC").
For accounting purposes, the acquisition has been treated as a
recapitalization of FIS, or a reverse acquisition, that is, as if FIS had
acquired BWG in exchange for 130,325 shares of common stock. Such stock
represents the post-acquisition shares owned by BWG's pre-acquisition
stockholders. In addition, 211,500
F-15
<PAGE> 94
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares of common stock were issued in payment of stock issuance costs related to
the recapitalization. The stockholders' equity reflects the capital structure of
FIS recording the acquisition of BWG as an issuance of stock for assets.
On March 31, 1995, HFC entered into an agreement to purchase from Inter
Savings Bank, fsb ("ISB"), 100% of the outstanding stock of Developers Mortgage
Corporation ("DMC") and certain other assets of ISB's parent for approximately
$2,894,000. The acquisition, financed primarily with debt, was consummated on
April 28, 1995.
The purchase price has been allocated as follows (in thousands):
<TABLE>
<S> <C>
Cash.............................................................. $ 112
Purchased mortgage servicing rights............................... 2,503
Other assets...................................................... 518
------
3,133
Liabilities assumed............................................... (239)
------
$2,894
======
</TABLE>
The operating results of this acquisition are included in the Company's
consolidated results of operations from the date of acquisition. The following
unaudited pro forma summary presents the consolidated results of operations as
if the acquisition had occurred on October 1, 1994, after giving effect to
certain adjustments, primarily depreciation. These pro forma results have been
prepared for comparative purposes only and do not purport to be indicative of
what would have occurred had the acquisition been made as of that date or of
results which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1995
-------------
<S> <C>
Revenue......................................................... $ 3,057
=======
Net loss........................................................ $(1,869)
=======
Net loss per share.............................................. $ (.46)
=======
</TABLE>
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements labeled as "Successor" include the
accounts of Homeowners Financial Corp. and its wholly owned subsidiaries, DMC
and FIS, and FIS's wholly owned subsidiary, HOFCA (collectively referred to as
the "Company"). The consolidated financial statements labeled as "Predecessor"
include the pre-acquisition accounts of HOFCA. All significant inter-company
accounts and transactions are eliminated.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include unrestricted cash on hand and investments
with original maturities of three months or less. Cash balances having
restrictions as to withdrawals and usage are recorded in the balance sheet as
restricted cash.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of cost or market
determined on a net aggregate basis.
F-16
<PAGE> 95
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER LOANS
Other loans consist of commercial loans carried at their unpaid principal
balance, net of any allowance for loan losses.
INVESTMENT IN FORECLOSURES
Manufactured homes acquired through foreclosure are carried at the lower of
cost or fair value at the time of foreclosure. Subsequently, the carrying values
of foreclosed assets are periodically evaluated and adjustments are made to net
realizable value, when appropriate.
Foreclosed real estate is carried at the lower of cost or fair value minus
estimated selling costs.
ALLOWANCE FOR LOSSES
Possible losses on loan portfolios serviced are provided for based on
management's evaluation of each situation, including the determination of
collectibility and net realizable value of the asset or underlying collateral.
PURCHASED MORTGAGE SERVICING RIGHTS
For the years ended September 30, 1995, the cost of purchase mortgage
servicing rights ("PMSR") is capitalized and amortized over the estimated
remaining life of the related loans proportionate to the estimated discounted
net servicing income on a disaggregated basis. The Company monitors changes in
interest rates, prepayment and default experience on the mortgage loans
underlying its PMSR's and, to the extent unanticipated mortgage prepayments and
defaults occur, adjusts amortization on a prospective basis. To the extent that
unanticipated mortgage prepayments result in the carrying value of purchased
servicing rights exceeding estimated discounted future net servicing income, a
write-down of the PMSR's would be made through a charge to current earnings. The
PMSR portfolio is disaggregated by (i) investor type, (ii) remittance type,
(iii) term of loans, (iv) average loan balance, (v) weighted average interest
rate; (vi) weighted average servicing fee, (vii) average custodial account
balances; and (viii) credit worthiness, to include delinquencies, foreclosures
and bankruptcies.
In May 1995, FASB issued SFAS No. 122 "Accounting for Mortgage Servicing
Rights, an amendment of FASB Statement No. 65" issued for fiscal years beginning
after December 15, 1995. The Company has adopted SFAS No. 122 for the year
ending September 30, 1996. Under SFAS No. 122, when an enterprise purchases or
originates mortgage loans, and the enterprise sells or securitizes the loans and
retains the servicing rights ("Mortgage Servicing Rights" or "MSR"), the
enterprise should allocate the cost of the mortgage loans to the MSRs and the
loans based upon their relative fair values. Currently, because of the small
volume of mortgage loan originations, the majority of the Company's originations
are sold with mortgage loan servicing released to the purchasers. However, as
the Company increases its originations activity in the future, management
anticipates that a proportionately larger share of the mortgage loan servicing
rights will be retained and not sold. SFAS No. 122 also requires establishment
of a valuation allowance for the excess of the carrying amount of capitalized
MSR's over estimated fair value. On a periodic basis for purposes of measuring
impairment, MSRs are disaggregated and stratified on predominant risk
characteristics, primarily loan type, interest rate and investor type.
Management does not anticipate any material effect resulting from the adoption
of SFAS No. 122 on the Company's financial condition or statement of operations
for the fiscal year ended September 30, 1996.
EXCESS SERVICING FEES
Excess servicing fees are recorded when mortgage loans are sold with
servicing retained and represent the approximate present value of the actual
servicing rate in excess of the normal servicing rate. Excess servicing
F-17
<PAGE> 96
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fees are amortized over the estimated remaining life of the related loans. The
unamortized cost of the excess servicing fees receivable and the amortization
thereon is periodically evaluated in relation to estimated future net servicing
revenues, taking into consideration changes in interest rates, current
prepayment rates, and expected future cash flows. The Company evaluates the
carrying value of the servicing portfolio by estimating the discounted future
net excess servicing income of the portfolio based on management's best estimate
of remaining loan lives. To the extent that unanticipated mortgage prepayments
result in the carrying value of excess servicing rights exceeding estimated
future excess servicing income, a write-down of the asset would be made through
a charge to current earnings. It is the Company's policy to sell mortgage loans
with a normal servicing fee. The Company has no excess servicing rights at
September 30, 1995 and 1994 (see Note 4).
DEPRECIATION AND AMORTIZATION
Depreciation expense for property, premises and equipment is provided using
the straight-line method over the estimated useful lives of the related assets.
Leasehold improvements are amortized over their estimated useful lives or the
lease term, whichever is shorter.
Goodwill acquired in the April 29, 1994 acquisition of HOFCA by FIS is
amortized over 25 years and is included in other assets. The Company assesses
the recoverability of this acquired intangible by determining whether the
amortization of the asset balance over its remaining life can be recovered
through the undiscounted future operating cash flows of the acquired operation.
The amount of impairment, if any, is measured based on projected discounted
future operating cash flows. The Company believes that no impairment has
occurred and that no reduction of the estimated useful life is warranted.
DEFERRED STOCK ISSUANCE COSTS
During 1995, the Company has incurred and capitalized accounting, legal,
printing, and other expenses of $336,000 as deferred stock issuance costs in
connection with a proposed public offering of its common stock. On the date the
proposed public offering becomes effective these deferred stock issuance costs
will be charged to additional paid-in capital. If the public offering were to be
abandoned, the deferred stock issuance costs would be charged to operations.
SALES OF SERVICING RIGHTS
The Company recognizes gain or loss on the sales of servicing rights when
all risks and rewards have irrevocably passed to the purchasers and there are no
significant unresolved contingencies.
Gains or losses on servicing rights are recognized when the servicing
rights are sold based upon the difference between the selling prices and the
carrying amount of the related servicing rights sold.
REPURCHASE AGREEMENTS
The Company enters into agreements to sell and repurchase certain mortgage
loans held for sale. Due to the agreements to repurchase, the sales of these
mortgage loans are not recorded and the agreements to repurchase are reported as
borrowings collateralized by an approximate equivalent amount of mortgage loans.
Interest on the underlying mortgage loans is passed directly through to the
other party.
NET ASSETS IN EXCESS OF ACQUISITION COST
Prior to its acquisition by FIS, HOFCA was acquired by another unrelated
entity from the Resolution Trust Corporation. The excess of net assets acquired
over the acquisition cost represents the excess after the carrying values of all
long-term assets have been reduced to zero. This deferred credit is amortized
straight line over five years.
F-18
<PAGE> 97
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MORTGAGE SERVICING
Fees received for servicing mortgage loans owned by investors are generally
based on a stipulated percentage of the outstanding monthly principal balance of
such loans and are payable only out of interest collected from mortgagors.
Servicing fees, late charges and miscellaneous other fees collected from
mortgagors and others are recognized as income when collected. Servicing costs
are charged to expense as incurred.
ESCROW, AGENCY AND FIDUCIARY FUNDS
The Company maintains certain cash balances on behalf of its servicing
customers and investors as part of its servicing operations. These funds are
held in trust, generally in noninterest bearing bank accounts which are excluded
from the corporate assets and liabilities of the Company.
INCOME TAXES
For the period October 1, 1993 to April 29, 1994, HOFCA elected to be taxed
under the Internal Revenue Code as an S Corporation. Accordingly, the Company
was not subject to Federal income taxes as income or loss flowed through
directly to the stockholders of HOFCA for inclusion in their individual tax
returns.
As a result of the April 29, 1994 acquisition, the S Corporation election
of HOFCA was terminated. This resulted in Federal and state income taxes after
April 29, 1994 being provided in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under
SFAS 109, the deferred tax assets and liabilities are determined based on the
difference between the financial reporting and tax basis of assets and
liabilities at enacted tax rates that will be in effect for the years in which
the differences are expected to reverse.
HOFCA files state income tax returns in each state in which it operates and
provides for state income tax expense for financial reporting purposes at the
applicable rates. Deferred state income taxes result from timing differences in
the treatment of income and expense items for tax and financial statement
purposes and are insignificant.
CREDIT CONCENTRATIONS
As of September 30, 1995, a significant portion of the Company's servicing
portfolio is secured by single-family and manufactured homes located in 48
states with the heaviest loan concentrations (in terms of principal amount) in
the states of California, Maryland, New York and Virginia. The Company's
exposure to credit loss, limited to manufactured housing loans subserviced for
GNMA and serviced for others with limited recourse, may be affected by, among
other things, a downturn in regional local economic conditions.
The Company's cash balances (excluding escrow, agency and fiduciary funds)
in financial institutions in excess of depository insurance was approximately
$131,000 at September 30, 1995.
MORTGAGE LOAN INVENTORY AND ORIGINATION PIPELINE HEDGES
In order to offset the risk that a change in interest rates will result in
a decrease in the value of the Company's current mortgage loan inventory or its
commitments to purchase or originate mortgage loans ("Committed Pipeline"), the
Company enters into hedging transactions. The Company's hedging policies
generally require that substantially all of its inventory of conforming and
government loans and the maximum amount of its Committed Pipeline that may close
be hedged with nonmandatory forward delivery contracts. The Company's policy is
to enter into forward delivery contracts on a best efforts basis whereby the
Company is not required to pay any fees for the forward commitment contracts
received from purchasers of the
F-19
<PAGE> 98
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's mortgage loans. These contracts are nonbinding to the Company but
obligate the purchasers to take delivery should the Company desire to complete
the transaction.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISKS
At September 30, 1995, the Company's commitments to originate loans
approximated $1,600,000, substantially all of which had been committed for sale
to investors.
The Company is required to make guaranteed principal and interest payments
to investors of the GNMA portfolio subserviced regardless of actual collection
from the mortgagee. In certain instances, the Company is required to buy
foreclosed loans out of a pool and either attempt to have them reinstated or
foreclose upon the manufactured housing collateralizing the loan. A portion of
these advances on GNMA loans are not recoverable and the Company has accrued a
liability (see Note 6) for such losses to be incurred. Loans subjecting the
Company to this kind of risk approximated $720,000 at September 30, 1995.
In addition, the Company is servicing approximately $1,470,000 in limited
recourse loans at September 30, 1995 that relate to servicing purchased from
third parties. The Company is required to absorb certain losses upon these loans
up to $255,000.
These financial instruments are collateralized by single-family and
manufactured homes and the Company does not expect losses, if any, in excess of
those accrued to have a material effect upon the Company's financial position.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year's financial
statements to conform to the September 30, 1995 presentation.
NOTE 3. CASH -- RESTRICTED
Pursuant to an agreement with the GNMA that was in effect prior to February
20, 1992, HOFCA was required to establish two restricted cash accounts; each in
the original amount of $500,000. These accounts can only be used to make
advances to security holders and to liquidate loans from GNMA pools. At
September 30, 1994, these accounts approximated $703,000. GNMA released the
balance of the accounts to the Company on February 7, 1995.
As a result of a loan sale and servicing agreement entered into in July
1992, HOFCA was required to establish two restricted cash accounts in the
original amounts of $50,000 and $300,000 and grant the purchaser a security
interest in such accounts. These accounts can only be used to reimburse the
purchaser for losses attributable to loan defaults and reimburse the Company as
servicer for expenses it advances in collection, bankruptcy and collateral
protection efforts. At September 30, 1995, these accounts approximated $255,000.
F-20
<PAGE> 99
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. PURCHASED MORTGAGE SERVICING RIGHTS AND EXCESS SERVICING RIGHTS
Changes in PMSRs were as follows (in thousands):
<TABLE>
<CAPTION>
SUCCESSOR
------------------------------- PREDECESSOR
PERIOD FROM --------------
APRIL 30, PERIOD FROM
YEAR ENDED 1994 TO OCTOBER 1,
SEPTEMBER 30, SEPTEMBER 30, 1993 TO
1995 1994 APRIL 29, 1994
------------- ------------- --------------
<S> <C> <C> <C>
Beginning balance........................... $ 678 $ 85 $ 71
Purchase accounting allocation.............. 2,559 532 --
Additions................................... 3,294 98 27
Sale of PMSR's.............................. (202) -- --
Amortization -- scheduled................... (504) (37) (13)
------ ---- ----
$ 5,825 $ 678 $ 85
====== ==== ====
</TABLE>
For the two years under examination, the Company did not originate, nor
sell mortgage loans with retained servicing that would have excess servicing
rights. For fiscal years ended September 30, 1995 and 1994, the Company
originated and retained servicing for loans with normal servicing fees. There
were no such assets acquired in the acquisition of HOFCA and DMC.
NOTE 5. PROPERTY, PREMISES AND EQUIPMENT
Property, premises and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED SEPTEMBER 30, SEPTEMBER 30,
USEFUL LIVES 1995 1994
------------ ------------- -------------
<S> <C> <C> <C>
Land......................................... -- $ 50 $ 50
Furniture, fixtures and equipment............ 3 - 5 years 173 114
Leasehold improvements....................... 3 - 7 years 9 9
---- ----
232 173
Less: Accumulated depreciation and
amortization........................... (51) (31)
---- ----
$ 181 $ 142
==== ====
</TABLE>
F-21
<PAGE> 100
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. NOTES PAYABLE
The following is a summary of notes payable (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1995 1994
------ ------
<S> <C> <C>
Note payable to a bank at prime plus .75%, collateralized by personal
assets of certain shareholders of the Company, and due on April 27, 1996.
The note was modified in April 1996, August 1996, and again in September
1996 in order to extend the maturity date to July 26, 1996, September 27,
1996 and December 27, 1996, respectively. All other terms remain in
effect as if the note was not modified (see Note 16). ................... $ 695 $ --
Term note payable to a bank at a variable rate of interest, collateralized
by substantially all of the assets of the Company, and due at various
dates through August 30, 2000. On May 31, 1996, the First Amendment to
Credit Agreement was executed amending certain provisions to this
note. ................................................................... 3,867 --
Warehouse credit facility from a bank at a variable rate of interest,
collateralized by substantially all of the assets of the Company, and due
at Warehousing Termination Date, as defined, or August 28, 1996. On May
31, 1996, the First Amendment to Credit Agreement was executed amending
certain provisions to this warehouse credit facility including the
Warehouse Termination Date to May 29, 1997. ............................. 427 --
Note payable to shareholder, unsecured. In March 1996, this loan was
converted into Series B Preferred Stock at $1,000 per share. ............ 100 --
------ ------
$5,089 $ --
====== ======
</TABLE>
At September 30, 1995, future required payments on notes payable are (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30,
------------------------------------------------------------
<S> <C>
1996........................................................ $1,802
1997........................................................ 773
1998........................................................ 773
1999........................................................ 773
2000........................................................ 968
------
$5,089
======
</TABLE>
At September 30, 1995, the Company's warehouse credit facility was for an
aggregate $5,000,000 of borrowings of which $4,573,000 was unused. The credit
facility is available to fund origination of mortgage loans and purchase loans
from third party originators. The term note payable and warehouse credit
facility restrict the payment of dividends except for the annual preferred stock
dividend of approximately $192,000.
The term note and warehouse credit facility are charged interest based upon
one of the following three methods, the selection of which is at the option of
the Company:
Fixed Rate: At the per annum rate of 1.875% for the warehousing credit
facility and 2.75% for the term loan. For any interest calculation period
in which the aggregate weighted average daily balances maintained on
deposit with the bank by the Company are less than an amount equal to the
weighted average daily aggregate unpaid principal balance owed to the bank,
then the Company will pay a fee on the deficiency at a floating per annum
rate which is tied to LIBOR.
F-22
<PAGE> 101
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reference Rate: At the per annum rate which is most recently publicly
announced by the bank as its "reference rate", which may be a rate at,
above or below, which the bank lends to other persons plus 0% for
warehousing credit facility advances and 1% for term loan borrowings.
Floating Eurodollar Rate: At a per annum floating rate which is tied to
LIBOR plus 1.875% for warehousing credit facility advances and 2.75% for
term loan borrowings.
The Company was not in compliance with certain provisions of the term note
and warehouse credit facility as of September 30, 1995, October 31, 1995,
November 30, 1995, December 31, 1995, January 31, 1996, February 29, 1996, and
March 31, 1996. The Company applied for a waiver of such compliance provisions
and in May 1996 the Company entered into the First Amendment to Credit Agreement
whereby the Company received, among other things, a waiver of the conditions of
default until September 30, 1996. Additionally, the bank adjusted certain
provisions of the term note and warehouse credit facility and extended the
Warehouse Termination Date, as defined, to May 29, 1997. As of October 21, 1996,
the bank indicated to the Company that it will consider a waiver of the
conditions of default until March 31, 1997. However, no such waiver has yet been
finalized or approved by the bank.
NOTE 7. ALLOWANCE FOR LOSSES
Activity in the allowance account was as follows (in thousands):
<TABLE>
<CAPTION>
SUCCESSOR
------------------------------- PREDECESSOR
PERIOD FROM --------------
APRIL 30, PERIOD FROM
YEAR ENDED 1994 TO OCTOBER 1,
SEPTEMBER 30, SEPTEMBER 30, 1993 TO
1995 1994 APRIL 29, 1994
------------- ------------- --------------
<S> <C> <C> <C>
Beginning balance........................... $ 100 $ 405 $3,517
Purchase accounting allocation.............. 55 -- --
Provision (benefit) for losses.............. (100) 39 238
Net recoveries (charge-offs)................ 128 (344) (835)
Other changes -- net........................ -- -- (300)
----- ----- -----
$ 183 $ 100 $2,620
===== ===== =====
</TABLE>
The allowances for losses were allocated as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
------------- -------------
<S> <C> <C>
Accrued loan servicing losses............................. $ 120 $ 100
Servicing receivables..................................... 63 --
---- ----
$ 183 $ 100
==== ====
</TABLE>
NOTE 8. BENEFIT PLAN
The Company has a 401(k) savings plan in which substantially all employees
are eligible to participate. Eligible employees are entitled to contribute up to
15% of salary and the Company makes a discretionary matching contribution equal
to a percentage of the employee's contribution limited to 6% of salary. The
expense attributable to the Company's contributions was approximately $29,000
and $14,000 for the period from October 1, 1993 to April 29, 1994 and the period
from April 30, 1994 to September 30, 1994, respectively, and $11,081 for the
year ended September 30, 1995.
F-23
<PAGE> 102
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. INCOME TAXES
The provision for income taxes consists of the following components (in
thousands):
<TABLE>
<CAPTION>
SUCCESSOR
------------------------------- PREDECESSOR
PERIOD FROM --------------
APRIL 30, PERIOD FROM
YEAR ENDED 1994 TO OCTOBER 1,
SEPTEMBER 30, SEPTEMBER 30, 1993 TO
1995 1994 APRIL 29, 1994
------------- ------------- --------------
<S> <C> <C> <C>
Current provision (benefit)................. $ (61) $ 73 *
Tax benefit of loss carryforward applied
against intangible assets................. -- 64 *
Provision for valuation allowance........... -- -- *
----- ----
$ (61) $ 137
===== ====
</TABLE>
- ---------------
* Not applicable as a result of HOFCA's Subchapter S election to pass through
profit and losses to be taxed at the stockholder level.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at September 30, 1995 are
presented below (in thousands):
<TABLE>
<S> <C>
Tax loss carryforwards............................................. $ 2,837
Less valuation allowance........................................... (2,837)
-------
$ --
=======
</TABLE>
The increase in the valuation allowance was $965,000 and $1,872,000 for the
year ended September 30, 1995 and the period from April 30, 1994 to September
30, 1994, respectively.
As of September 30, 1995, the Company has approximately $8,343,000 of tax
loss carryforwards presented below (in thousands):
<TABLE>
<CAPTION>
AVAILABLE
THROUGH
-------------
<S> <C> <C>
HOFCA pre-acquisition net operating loss....................... $3,061 2009
HOFCA pre-acquisition built-in losses.......................... 2,445 Indefinitely
DMC pre-acquisition net operating loss......................... 1,966 2010
Current year net operating loss................................ 871 2010
------
$8,343
======
</TABLE>
As a result of the changes in control resulting from the HOFCA and DMC
acquisitions, the pre-acquisition tax loss carryforwards are subject to annual
utilization limits of approximately $130,000 for HOFCA and $188,000 for DMC.
NOTE 10. MORTGAGE SERVICING
In August 1994, the Company sold substantially all of its GNMA manufactured
housing servicing representing approximately $64,000,000 of manufactured housing
loans or 50% of the Company's servicing portfolio at that time. As a result of
the sale, the Company recognized a gain of approximately $942,000. In September
1995, the Company sold approximately $38,000,000 of the GNMA residential
mortgage loan servicing that was acquired in the DMC acquisition and which
represented approximately 5% of the Company's servicing portfolio. The Company
recognized a gain of approximately $51,000 as a result of
the sale.
F-24
<PAGE> 103
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's servicing portfolio is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
------------- -------------
<S> <C> <C>
Manufactured housing loans:
Serviced for GNMA....................................... $ 720 $ 2,006
Serviced with limited recourse.......................... 1,408 1,725
Serviced -- FHA insured................................. 3,303 1,985
Serviced with no recourse............................... 4,014 4,529
-------- -------
Subtotal.................................................. 9,445 10,245
Residential mortgage loans with no recourse............... 619,704 54,004
Residential mortgage loans -- FHA insured................. 59,309 --
-------- -------
$ 688,458 $64,249
======== =======
</TABLE>
For GNMA loans and other loans with recourse, upon foreclosure the property
is conveyed to the Company and the Company assumes the market risk of disposing
of the property.
Escrow, agency and fiduciary funds maintained in connection with the
foregoing loan servicing were approximately $9,300,000 and $2,200,000 at
September 30, 1995 and 1994, respectively.
In certain instances, the Company will buy foreclosed loans out of a pool
and either attempt to have them reinstated or foreclose upon the secured
properties. A portion of these advances on GNMA loans may not be recoverable and
estimated losses have been recognized in accrued loan servicing losses.
NOTE 11. RELATED PARTY TRANSACTIONS
In May 1994, the Company borrowed an aggregate $220,000 from an entity
affiliated by common ownership. At September 30, 1995 and 1994, the outstanding
unpaid amount was $0 and $60,000, respectively (see Note 12). The borrowing
earned interest at 8% payable monthly, was unsecured and due upon demand.
During the period from April 30, 1994 to September 30, 1994, the Company
incurred, with related parties, approximately $158,000 in direct costs related
to the issuance of common stock.
In connection with the September 30, 1994 recapitalization of FIS, $10,000
of fees was paid to a BWG stockholder.
During the year ended September 30, 1995, the Company borrowed $100,000
from a director and repaid the borrowing prior to year end with $641 of
interest.
NOTE 12. STOCK TRANSACTIONS
On September 1, 1994, prior to the issuance of any preferred stock, FIS
effected a stock split of 1,143,750 for 1,000 shares. An amount equal to the par
value of the shares issued has been transferred from additional paid-in capital
to the common stock account. Simultaneously, 1,876,250 shares of common stock
were issued in exchange for debt conversions and cash approximating $501,000.
On September 1, 1994, FIS issued 1,750 shares of preferred stock which
bears an 11% cumulative dividend. The preferred stock is redeemable at the
Company's option upon 30 days notice, payment of all cumulative dividends and at
102% of cost.
In accordance with the subscription agreement and its amendments, for each
share of preferred stock issued, the preferred stockholders also received 400
shares of common stock.
F-25
<PAGE> 104
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As discussed in Note 1, all of FIS's outstanding common and preferred
shares were exchanged for common and preferred shares of BWG on September 30,
1994.
On December 17, 1994, 25,000 shares of common stock were issued as
repayment of affiliate debt totaling $60,000.
On March 15, 1995 and August 2, 1995, 1,000 and 4,300 shares, respectively,
of common stock were issued in payment of legal fees aggregating $20,048.
On August 2, 1995, 90,000 shares of common stock were issued in payment of
consulting services.
RESCISSION OFFER
In April 1995, the Company made a rescission offer to its preferred
stockholders. A possible effect of such offer would have been the repayment to
any electing stockholders of their original investment plus accrued cumulative
dividends through the offer date. The repayment was to be 10% in cash with the
balance in the form of a 36-month note bearing interest at 11%. The amount of
stockholders' equity subject to the rescission offer was $1,750,000 and all
affected stockholders elected not to accept the offer.
NOTE 13. STOCK OPTIONS AND WARRANTS
In December 1994, the Company instituted an incentive stock option plan
("Plan") covering key employees, nonemployee directors and advisors. The Plan
has authority to issue an aggregate of 200,000 shares of the Company's stock.
Stock option transactions (incentive and nonincentive) were as follows:
<TABLE>
<CAPTION>
EXPIRATION EXERCISE NUMBER
MONTH PRICE OF SHARES
--------------- -------- ---------
<S> <C> <C> <C>
Options outstanding at beginning........................ --
Granted in connection with the BWG acquisition.......... July 1997 $ 1.75 21,429
September 1997 3.00 15,000
December 1997 3.50 27,500
---------
Options outstanding at September 30, 1994............... 63,929
Granted to shareholder for services..................... December 1997 $ 3.50 10,000
Granted to employees under the incentive stock option $ 3.50 14,000
plan.................................................. December 1999
Granted to directors for services....................... May 1999 $ 3.00 40,000
Granted to shareholders in exchange for the $ 3.00 80,000
shareholders' providing collateral on borrowings...... May 1998
---------
Options outstanding at September 30, 1995............... 207,929
=======
</TABLE>
No options have been exercised as of September 30, 1995. During the year
ended September 30, 1995, incentive stock options representing 10,500 shares
were canceled due to employee separations.
The estimated fair market value of the Company's stock on the effective
issuance date of the options was less than the option exercise price.
Consequently, no compensation expense has been recognized with respect to
options during the period.
In connection with the issuance of the preferred stock, the Company issued
type "A" and "B" warrants to its preferred stockholders. The "A" warrants were
for an aggregate 350,000 shares of common stock, exercisable at $2.00 per share
and were to expire on September 30, 1995. The "B" warrants were for an aggregate
350,000 shares of common stock, exercisable at $3.00 per share and expire on
September 30, 1997.
F-26
<PAGE> 105
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In September 1995, 20,000 of the "A" warrants were retired and the
remaining 330,000 "A" warrants were redesignated as "C" warrants with their
expiration date extended to September 30, 1997. At the same time, 330,000 of the
"B" warrants had their exercise price reduced to $2.00 per share.
NOTE 14. COMMITMENTS AND CONTINGENCIES
LEASES
The Company is obligated under non-cancelable leases for office space, all
of which are accounted for as operating leases. The leases expire at various
dates with options for renewals. The leases contain escalation clauses which
provide for increased rental expense, primarily based upon increases in the
consumer price index and real estate taxes. Rent expense approximated $214,000,
$134,000 and $181,000 for the year ended September 30, 1995, the period from
April 30, 1994 to September 30, 1994 and the period from October 1, 1993 to
April 29, 1994, respectively.
Minimum annual rental commitments on non-cancelable operating leases for
premises are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30,
------------------------------------------------------------
<S> <C>
1996........................................................ $327
1997........................................................ 252
1998........................................................ 98
1999........................................................ 8
2000 and thereafter......................................... --
----
$685
====
</TABLE>
GNMA CLAIMS
In March 1995, the Company was informed by GNMA of a potential claim
wherein the Company, under its former ownership and management, allegedly
overcharged GNMA under the terms of certain sub-servicing agreements. The claim
alleges an approximate $3,100,000 projected liability based upon a review of
only about one percent of the transactions performed by HOFCA under its
agreements with GNMA. Management believes that these claims are essentially
without merit and special counsel to the Company has reviewed the claim and the
relevant transactions and has informed the Company of its belief that there are
reasonable defenses to GNMA's claims in any amount which might be material to
the Company. GNMA has made no formal claim or demand for payment or
reimbursement under these terminated sub-service agreements. Management believes
that there will be no material impact from the uncertainty pursuant to SFAS No.
5.
F-27
<PAGE> 106
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15. SUPPLEMENTAL CASH FLOW INFORMATION
The following is a presentation of supplemental cash flow information and
noncash investing and financing activities (in thousands):
<TABLE>
<CAPTION>
SUCCESSOR
--------------------------------
PREDECESSOR
PERIOD FROM --------------
APRIL 30, PERIOD FROM
YEAR ENDED 1994 TO OCTOBER 1,
SEPTEMBER 30, SEPTEMBER 30, 1993 TO
1995 1994 APRIL 29, 1994
------------- ------------- --------------
<S> <C> <C> <C>
Cash paid for interest...................... $ 177 $ 113 $ 1
==== ====== ===
Cash paid for taxes......................... $ -- $ 35 $ --
==== ====== ===
Conversion of borrowings to capital......... $ 60 $ 1,200 $ --
==== ====== ===
</TABLE>
In connection with the acquisitions of DMC during the year ended September
30, 1995 and HOFCA and BWG during the period from April 30, 1994 to September
30, 1994, the Company had the following transactions (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, PERIOD FROM APRIL 30, 1994
1995 TO SEPTEMBER 30, 1994
------------- -----------------------------
DMC HOFCA BWG TOTAL
------------- ------- ----- -------
<S> <C> <C> <C> <C>
Assets acquired................................... $ 3,133 $ 5,445 $ 255 $ 5,700
Liabilities assumed............................... (239) (3,933) (8) (3,941)
Debt financing.................................... (2,806) -- -- --
Common stock issued............................... -- -- (247) (247)
------- ------- ----- -------
Cash paid......................................... 88 1,512 -- 1,512
Less cash acquired................................ (112) (761) (93) (854)
------- ------- ----- -------
Net cash paid (received).......................... $ (24) $ 751 $ (93) $ 658
======= ======= ===== =======
</TABLE>
In connection with the acquisition of DMC, the Company incurred debt of
$2,806,000.
NOTE 16. SUBSEQUENT EVENTS
SUBSEQUENTLY ISSUED ACCOUNTING STANDARDS
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage
Servicing Rights," which is effective for years beginning after December 15,
1995. This standard requires the allocation of loan origination costs to the
originated loans themselves and to the mortgage servicing rights.
Presently, the Company originates a relatively small volume of loans which
are then sold primarily with the loan servicing rights retained. Should the loan
origination volume not increase significantly, management does not anticipate
any material effect resulting from the adoption of SFAS No. 122 on the Company's
financial condition or results of operations. However, should the Company's loan
origination activity increase in the future, it is anticipated that SFAS No. 122
will have an impact on the Company's future financial condition and results of
operations. SFAS No. 122 also requires establishment of a valuation allowance
for the excess of the carrying amount of capitalized mortgage servicing rights
("MSR") over estimated fair value. On a periodic basis for purposes of measuring
impairment, MSR's are disaggregated and stratified on predominant risk
characteristics, primarily loan type, interest rate and investor type.
Management does not anticipate any
F-28
<PAGE> 107
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
material effect resulting from the adoption of SFAS No. 122 on the Company's
financial condition or statement of operations for the fiscal year ended
September 30, 1996.
RELATED PARTY BORROWINGS AND CONVERSION TO EQUITY
Subsequent to September 30, 1995, the Company borrowed $200,000 from
certain directors and a shareholder. Such borrowings were at a rate of 11%. In
consideration for a portion of these advances, a director received stock
warrants expiring on October 10, 1997 for 20,000 shares of common exercisable at
$2.00 per share. In March 1996, the directors and shareholder converted their
principal and accrued interest on their loans into Series B Preferred Stock,
$.10 par value, at $1,000 per share.
On December 29, 1995, the Company executed a multiple advance promissory
note for $250,000 with Great Hills Mortgage Co., Inc., a company owned and
controlled by the President of the Company. The Company borrowed $208,000 at a
rate of 8% per annum maturing on demand but no later than December 31, 1996. In
March 1996, $200,000 of this loan was converted into Series B Preferred Stock at
$1,000 per share.
In March 1996, a Company shareholder converted a $100,000 loan to the
Company into Series B Preferred Stock at a rate of $1,000 per share.
SETTLEMENT AGREEMENT AND RELEASE
In 1994, the Company commenced legal actions against five of the seven
former owners of HOFCA in order to seek relief from its obligations under
employment agreements with the individuals due to their alleged breach of such
agreements. The former owners filed countersuits seeking damages and "bonus
compensation." The Company had accrued the remaining payments due under the
employment agreements at September 30, 1995. The litigation went to mediation
during November 1995. On February 22, 1996, the Company and the seven former
owners entered into a Settlement Agreement and Release. This Settlement
Agreement and Release constitutes full settlement of and release from all claims
of both the former owners and the Company. The economic effect of the Settlement
is appropriately reflected in the balance sheet at September 30, 1995.
ISSUANCE OF COMMON STOCK FOR SERVICES RENDERED
In March 1996, the Board of Directors approved the issuance of 4,174 shares
of common stock to an attorney in exchange for legal services provided. The
amount of common stock issued approximated a fair market value of $16,000.
NOTES PAYABLE
The Company was not in compliance with certain provisions of the term note
and warehouse credit facility (see Note 6. "Notes Payable") as of September 30,
1995, October 31, 1995, November 30, 1995, December 31, 1995, January 31, 1996,
February 29, 1996, and March 31, 1996. The Company applied for a waiver of such
compliance provisions and in May 1996 the Company entered into the First
Amendment to Credit Agreement whereby the Company received, among other things,
a waiver of the conditions of default until September 30, 1996. Additionally,
the bank adjusted certain provisions of the term note and warehouse credit
facility and extended the Warehouse Termination Date, as defined, to May 29,
1997. As of October 21, 1996, the bank indicated to the Company that it will
consider a waiver of the conditions of default until March 31, 1997. However, no
such waiver has yet been finalized or approved by the bank.
As a condition to granting the waiver, the bank has required the Company to
suspend payments of all preferred stock dividends until the Company is in full
compliance with all terms and provisions of the term note and warehouse credit
facility.
F-29
<PAGE> 108
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MODIFICATION OF NOTE PAYABLE
In April 1996, August 1996 and September 1996, the Company obtained
extensions of the Barnett loan due date in consideration of the payment of fees
by the Company equal to .25% of the loan amount on each extension date ($5,217
in the aggregate). The Barnett loan now expires on December 27, 1996. All other
terms of the note payable remain in effect as if the note was not modified.
ISSUANCE OF PREFERRED STOCK
In May 1996, the Company issued 58,608 shares of C Preferred Stock and
warrants to purchase 150,000 shares of common stock to a foreign investor for
$200,000. The C Preferred Stock is convertible into shares of common stock.
HOMEOWNER'S FINANCIAL STRUCTURED FINANCE CORPORATION
In April 1996, DMC acquired the servicing rights to residential mortgage
loans with an aggregate outstanding principal balance of approximately $23.6
million pursuant to a pooling and servicing agreement between Homeowner's
Financial Structured Finance Corporation ("HFSFC"), DMC and the Bank of New
York, as Trustee. HFSFC is a special purpose corporation incorporated in
Delaware by the Company solely for the purpose of issuing mortgage pass-through
securities.
LEGAL PROCEEDINGS
In June 1996, Crescent Real Estate Fund, the Company's former landlord in
Dallas, Texas, commenced an action in Texas District Court, Dallas County, for
past due rent from August 1995 forward. The amount sought is not determinable
from the complaint, but may be in excess of $200,000. The Company disputes the
amount owed, has responded to the complaint and has had the action removed to
the U.S. Federal District Court for the Northern District of Texas, Dallas
Division. The Company intends to vigorously contest the action. The Company's
management does not expect this action to have a material adverse impact on the
financial position or operations of the Company. The Company has accrued $30,000
to settle this action, which amount represents its estimate of the balance due
to the former landlord at the time that the lease was terminated.
F-30
<PAGE> 109
DEVELOPERS MORTGAGE CORPORATION
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM OCTOBER 1, 1994 TO APRIL 28, 1995
(UNAUDITED)
<TABLE>
<S> <C>
Interest income:
Mortgage loans held for sale................................................... $ 127,884
Loans receivable............................................................... 20,002
----------
147,886
----------
Interest expense:
Warehouse borrowings........................................................... 104,434
Other borrowings............................................................... 18,491
----------
122,925
----------
Net interest income......................................................... 24,961
Provision for loan losses........................................................ 0
----------
Net interest income after provision for loan losses......................... 24,961
----------
Noninterest income:
Gain on sale of Virginia operations............................................ 80,790
Gain on sale of mortgage loans held for sale................................... 459,539
Mortgage banking related fees.................................................. 93,629
----------
633,958
----------
Noninterest expense:
Compensation and benefits...................................................... 949,460
General and administrative..................................................... 302,901
Occupancy...................................................................... 85,431
Professional fees.............................................................. 33,178
Data processing................................................................ 18,504
Depreciation................................................................... 35,886
Amortization of goodwill....................................................... 46,643
----------
1,472,003
----------
Loss before income tax expense.............................................. (813,084)
Income tax expense............................................................... 0
----------
Net loss.................................................................... $ (813,084)
==========
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE> 110
DEVELOPERS MORTGAGE CORPORATION
STATEMENT OF STOCKHOLDER'S EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS TOTAL
COMMON PAID-IN (ACCUMULATED STOCKHOLDER'S
STOCK CAPITAL DEFICIT) EQUITY
------ ---------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at September 30, 1994..................... $400 $3,099,600 $ (595,827) $ 2,504,173
Capital contribution............................ 0 307,455 0 307,455
Net loss........................................ 0 0 (813,084) (813,084)
---- --------- ---------- ---------
Balance at April 28, 1995......................... $400 $3,407,055 $ (1,408,911) $ 1,998,544
==== ========= ========== =========
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE> 111
DEVELOPERS MORTGAGE CORPORATION
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM OCTOBER 1, 1994 TO APRIL 28, 1995
(UNAUDITED)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss..................................................................... $ (813,084)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization............................................. 208,069
Amortization of goodwill.................................................. 46,643
Proceeds from sales of mortgage loans held for sale....................... 14,844,547
Originations of mortgage loans held for sale.............................. (14,000,952)
Gain on sale of mortgage loans held for sale.............................. (459,539)
Decrease in accrued expenses and other liabilities........................ (346,713)
Decrease in accounts receivable........................................... 1,191,512
Decrease in prepaid expenses and other assets............................. 157,966
------------
Net cash provided by operating activities............................ 828,449
------------
Cash flows from investing activities:
Net change in loans receivable............................................... 182,868
Purchases of property and equipment.......................................... (62,139)
Decrease in real estate, net................................................. 31,607
Purchases of servicing rights................................................ (622,745)
------------
Net cash used by investing activities................................ (470,409)
------------
Cash flows from financing activities:
Repayment of note payable.................................................... (100,000)
Decrease in due to Bank...................................................... (1,215,647)
------------
Net cash used by financing activities................................ (1,315,647)
------------
Net change in cash and cash equivalents.............................. (957,607)
Cash and cash equivalents at beginning of period............................... 943,725
------------
Cash overdraft at end of period................................................ $ (13,882)
============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.................................................................. $ 122,925
Income taxes.............................................................. 0
Non-cash financing activities:
Capital contribution from Bank resulting from forgiveness of amounts due
to Bank.................................................................. $ 307,455
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE> 112
DEVELOPERS MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Developers Mortgage Corporation (DMC) is a wholly owned subsidiary of Inter
Savings Bank, fsb (the Bank). Its principal business activities are mortgage
loan origination and marketing.
The accompanying unaudited financial statements do not include all
information and notes necessary for a complete presentation of the financial
statements in conformity with generally accepted accounting principles. However,
in the opinion of management, these financial statements include all
adjustments, which consist only of normal recurring adjustments, necessary for
fair presentation of DMC's interim financial statements. The statement of
operations for the period from October 1, 1994 to April 28, 1995 is not
necessarily indicative of the results which may be expected for the entire year.
(2) PURCHASED MORTGAGE SERVICING RIGHTS
The following provides a summary of purchased servicing rights for the
period from October 1, 1994 to April 28, 1995:
<TABLE>
<S> <C>
Balance, beginning of period............................................. $ 938,674
Purchases................................................................ 622,745
Amortization............................................................. (172,183)
----------
Balance, end of period................................................... $1,389,236
==========
</TABLE>
(3) CAPITAL CONTRIBUTION
The Bank forgave $307,455 owed by DMC to the Bank. DMC recorded the
forgiveness of debt by its parent as a capital contribution.
(4) SALE OF BUSINESSES
On November 30, 1994, DMC sold certain assets and operations for
approximately $247,000. The assets sold included prepaid rent, miscellaneous
employee receivables, and fixed assets of $116,504 for book value and the loan
application pipeline for $130,000. This amount approximated 1% of loan
applications. Additionally, the buyer assumed the continuing operations relating
to DMC's operations in the state of Virginia including all employees, certain
leases and operating expenses subsequent to the sale date of November 30, 1994.
As a result of the transaction, DMC recorded a gain of $80,790, net of
transaction costs.
On March 31, 1995, the Bank entered into an agreement to sell the
outstanding stock of DMC. The Bank was responsible for the severance for
substantially all of DMC's employees who elected to leave upon completion of the
sale. The sale was completed on April 28, 1995.
F-34
<PAGE> 113
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Developers Mortgage Corporation:
We have audited the accompanying statements of operations, stockholder's
equity and cash flows of Developers Mortgage Corporation (DMC) (a wholly owned
subsidiary of Inter Savings Bank, fsb) for the years ended September 30, 1994
and 1993. These financial statements are the responsibility of DMC'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 results of operations and cash flows of Developers
Mortgage Corporation for the years ended September 30, 1994 and 1993 in
conformity with generally accepted accounting principles.
As discussed in note 3 to the financial statements, DMC changed its method
of accounting for income taxes as of October 1, 1992 to adopt the provisions of
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes.
The accompanying financial statements have been prepared assuming that
Developers Mortgage Corporation will continue as a going concern. As described
in note 2 to the financial statements, Aurora Service Corporation, the parent
company of Inter Savings Bank, fsb, incurred a significant net loss for the year
ended September 30, 1994 and is not in compliance with certain debt convenants
associated with a note payable which makes the note payable at the option of the
lender. Aurora Service Corporation has not received a waiver with respect to the
debt convenants. These circumstances raise substantial doubt about DMC's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in note 2. The accompanying financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
KPMG PEAT MARWICK LLP
Minneapolis, Minnesota
November 23, 1994, except for note 2
which is as of July 7, 1995 and note 11
which is as of April 28, 1995
F-35
<PAGE> 114
DEVELOPERS MORTGAGE CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
----------- ----------
<S> <C> <C>
Interest income:
Mortgage loans held for sale..................................... $ 1,083,745 $2,014,756
Loans receivable................................................. 14,184 18,645
----------- ----------
1,097,929 2,033,401
----------- ----------
Interest expense:
Warehouse borrowings............................................. 933,885 1,575,576
Other borrowings................................................. 67,267 108,758
----------- ----------
1,001,152 1,684,334
----------- ----------
Net interest income...................................... 96,777 349,067
Provision for loan losses.......................................... 0 0
----------- ----------
Net interest income after provision for loan losses...... 96,777 349,067
----------- ----------
Noninterest income:
Gain on sale of servicing rights................................. 430,553 1,071,245
Gain on sale of mortgage loans held for sale..................... 4,453,728 4,863,567
Mortgage banking related fees.................................... 563,837 1,227,745
----------- ----------
5,448,118 7,162,557
----------- ----------
Noninterest expense:
Compensation and benefits........................................ 4,376,448 4,719,133
General and administrative....................................... 1,464,466 1,256,696
Occupancy........................................................ 507,907 347,262
Professional fees................................................ 91,849 76,711
Data processing.................................................. 65,007 73,847
Depreciation..................................................... 88,933 81,678
Amortization of goodwill......................................... 59,970 0
----------- ----------
6,654,580 6,555,327
----------- ----------
Income (loss) before income tax expense.................. (1,109,685) 956,297
Income tax expense................................................. 150,405 292,034
----------- ----------
Net income (loss)........................................ $(1,260,090) $ 664,263
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE> 115
DEVELOPERS MORTGAGE CORPORATION
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS TOTAL
COMMON PAID-IN (ACCUMULATED STOCKHOLDER'S
STOCK CAPITAL DEFICIT) EQUITY
------ ---------- ------------ --------------
<S> <C> <C> <C> <C>
Balance at September 30, 1992.............. $400 $3,099,600 $ 0 $ 3,100,000
Net income............................ 0 0 664,263 664,263
---- --------- ---------- ----------
Balance at September 30, 1993.............. 400 3,099,600 664,263 3,764,263
Net loss.............................. 0 0 (1,260,090) (1,260,090)
---- --------- ---------- ----------
Balance at September 30, 1994.............. $400 $3,099,600 $ (595,827) $ 2,504,173
==== ========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE> 116
DEVELOPERS MORTGAGE CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................... $ (1,260,090) $ 664,263
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................ 543,695 411,273
Amortization of goodwill................................. 59,970 0
Gain on sale of servicing rights......................... (430,553) (1,071,245)
Deferred income taxes.................................... 400,107 101,689
Proceeds from sales of mortgage loans held for sale...... 310,246,727 389,351,235
Purchases of mortgage loans held for sale................ (56,965,539) (95,792,830)
Originations of mortgage loans held for sale............. (212,862,353) (288,283,901)
Gain on sale of mortgage loans held for sale............. (4,453,728) (4,863,567)
Decrease in accrued expenses and other liabilities....... (361,833) (492,608)
Decrease (increase) in accounts receivable............... 234,131 (62,128)
Decrease (increase) in prepaid expenses and other
assets................................................. (91,948) 211,584
------------- -------------
Net cash provided by operating activities........... 35,058,586 173,765
------------- -------------
Cash flows from investing activities:
Net change in loans receivable.............................. 62,467 (245,335)
Purchases of property and equipment......................... (43,093) (30,971)
Increase in real estate, net................................ (31,607) 0
Purchases of servicing rights............................... (256,896) (647,402)
Proceeds from sales of servicing rights..................... 787,569 3,481,328
Acquisition of Evergreen, net of cash and cash equivalents
acquired................................................. (417,634) 0
------------- -------------
Net cash provided by investing activities........... 100,806 2,557,620
------------- -------------
Cash flows from financing activities:
Decrease in warehouse and other borrowings.................. (35,523,965) (194,206)
Repayment of subordinated debt.............................. (900,000) 0
Repayment of note payable................................... (287,132) (1,699,485)
Proceeds from issuance of note payable...................... 100,000 0
Increase in due to parent company........................... 1,523,102 0
------------- -------------
Net cash used by financing activities............... (35,087,995) (1,893,691)
------------- -------------
Net change in cash and cash equivalents............. 71,397 837,694
Cash and cash equivalents at beginning of year................ 872,328 34,634
------------- -------------
Cash and cash equivalents at end of year...................... $ 943,725 $ 872,328
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest................................................. $ 1,231,149 $ 1,723,654
Income taxes............................................. 0 292,034
</TABLE>
See accompanying notes to financial statements.
F-38
<PAGE> 117
DEVELOPERS MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Developers Mortgage Corporation (DMC) is a wholly owned subsidiary of Inter
Savings Bank, fsb (the Bank). Its principal business activities are mortgage
loan origination and marketing.
On September 30, 1992, the outstanding stock of DMC and a related company,
Developers Service Corporation (Developers), was acquired by RFI, Inc. for
$3,100,000. The acquisition was accounted for as a purchase and, accordingly,
the purchase price was allocated to the acquired assets and liabilities of
Developers and DMC based on their estimated fair values. The combined net fair
value of the assets and liabilities of Developers and DMC approximated the
purchase price. Accordingly, no goodwill or other intangibles, except for the
fair value of the acquired servicing rights, was recorded.
On January 29, 1993, the assets and liabilities of Developers were merged
into DMC and RFI, Inc. was renamed Developers Service Corporation. All financial
information included herein has been restated as if the merger had been
effective on September 30, 1992. Developers Service Corporation subsequently
changed its name to Aurora Service Corporation (ASC).
On November 17, 1993, ASC received approval to become a bank holding
company. Effective October 31, 1993 ASC acquired all of the outstanding stock of
the Bank. The Bank operates as a wholly owned subsidiary of ASC. Additionally,
ASC contributed DMC to the Bank as a wholly owned operating subsidiary effective
October 31, 1993.
The Bank is a federally chartered savings bank with deposits insured by the
Federal Deposit Insurance Corporation through the Savings Association Insurance
Fund. The Bank and its subsidiaries are subject to the regulations of certain
federal agencies and undergoes periodic examinations by those regulatory
authorities.
Effective December 31, 1993, DMC acquired the common stock of Evergreen
Mortgage, Inc. (Evergreen). Subsequent to the acquisition, Evergreen's
operations were merged into DMC (see note 4).
NOTE 2. CURRENT OPERATING ENVIRONMENT
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. For the year ended September 30,
1994, ASC incurred a net loss of $2,337,497 which reduced stockholders' equity
to $1,427,407 at September 30, 1994. In addition, ASC is not in compliance and
has not received waiver with respect to certain debt covenants of their note
payable of $4,500,000 at September 30, 1994 which makes the note payable at the
option of the lender. Accordingly, there is substantial doubt about ASC's and
DMC's ability to continue as a going concern. ASC's and DMC's ability to
continue in operation is dependent upon management's ability to achieve
profitability. The financial statements do not include any adjustments that
might result should ASC and DMC be unable to continue as a going concern.
The debt covenants with which ASC is not in compliance with relate to the
minimum earnings and return on assets expected from the consolidated Bank and
the minimum amount of servicing to be performed by ASC.
Management has attempted to address the earnings of the Bank, including the
sale of certain operations and DMC as described in note 11.
On April 29, 1993, the Bank entered into a Supervisory Agreement with the
Office of Thrift Supervision (OTS) (the Supervisory Agreement). The Supervisory
Agreement required the Bank to: (i) comply with certain laws and regulations and
safe and sound banking practices; (ii) appoint a compliance officer who reported
at least monthly to the Chairman of the Board of Directors and the managing
officer of the Bank; (iii) refrain from purchasing any loans or loan
participations unless prior approval was given in writing by the Regional Deputy
Director of the OTS (the Deputy Director); (iv) develop new policies and
procedures with
F-39
<PAGE> 118
DEVELOPERS MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
respect to the operations of the Board of Directors of the Bank; (v) analyze the
Bank's staffing needs; (vi) develop a business plan and submit it to the OTS for
approval; (vii) make no modification or deviation from its business plan without
prior consent of the OTS; (viii) make certain changes to the Bank's loan
origination, loan servicing policies and delinquency policies; (ix) adopt and/or
amend its policies related to valuation allowances, asset classification,
appraisal, mortgage lending, consumer lending and conflicts of interest; and (x)
analyze and engage in strategic planning concerning the Bank's capital level and
interest rate risk, and take certain other actions deemed necessary by the OTS.
On August 29, 1994, the OTS terminated the majority of the provisions of
the Supervisory Agreement. The Bank remains obligated under the Supervisory
Agreement to refrain from purchasing any loans or loan participations (except
from the Bank's own operating subsidiary) without prior approval of the Deputy
Director. The Bank is also required to maintain its compliance activities and
maintain compliance with certain laws, regulations and safe and sound banking
practices.
On July 7, 1995, the Bank entered into a new Supervisory Agreement (the
Agreement) with the OTS, replacing the existing Supervisory Agreement. The
Agreement: (i) requires ASC to reimburse the Bank for certain common employee
expenses; (ii) prohibits the Bank from engaging in any further transactions with
the acquirer (see note 11) or affiliates of the acquirer unless approved by the
Deputy Director; (iii) requires preparation of a revised annual business plan
and quarterly comparisons with operating results; (iv) prohibits the Bank from
purchasing any loans or loan participations, unless approved by the Deputy
Director; (v) prohibits the sale or transfer of the Bank assets with a fair
market value of $250,000 or more, except for one-to-four family residential
loans to be sold on the secondary market; (vi) requires development of a
contingency plan in the event of a default by the acquirer on its loan or the
hold-back on the sale of DMC (the loan and hold-back have since been paid);
(vii) requires development and implementation of a commercial lending policy;
and (viii) requires compliance with other regulations regarding maintenance of
books and records, lending limits, transactions with affiliates, changes in
management or their terms of employment and third party contracts. Although the
Bank's management believes that these matters will be resolved, there is no
assurance that any regulatory concerns will be resolved or that the terms of
resolution will not unduly restrict the Bank. There is no assurance that the OTS
will not pursue further enforcement action against the Bank or
institution-affiliated parties of the Bank or require additional undertakings or
commitments by the Bank that adversely affect the Bank's operations or business
plans.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following sets forth the more significant accounting policies DMC
follows in preparing and presenting its financial statements:
MATERIAL ESTIMATES
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the valuation allowance relating to deferred tax
assets and the carrying value of purchased mortgage servicing rights.
LOANS RECEIVABLE
Loans receivable are considered long-term investments and, accordingly, are
carried at their unpaid principal balances less unearned discounts and net
deferred loan fees.
F-40
<PAGE> 119
DEVELOPERS MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Interest income is recognized on an accrual basis except when
collectibility is in doubt. When loans are placed on a nonaccrual basis,
previously accrued but unpaid interest is reversed from income. Interest is
subsequently recognized as income to the extent cash is received when, in
management's judgment, principal is collectible.
Loan origination fees and certain related direct costs are deferred and
amortized to interest income using the interest method over the estimated terms
of the loans.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale consist of fixed and adjustable rate
single-family residential real estate loans carried at the lower of cost or
market determined on an aggregate basis. DMC enters into mortgage origination
commitment agreements as part of its normal mortgage origination operations in
which the interest rate of the loan to be originated is locked in. As a hedge
against the risk of changes in market rates for the loans to be originated, DMC
enters into sales commitments to deliver the loans, or securities backed by the
loans, to investors at specified yields. Realized and unrealized gains and
losses on the sales commitments are recognized as part of the valuation of
mortgage loans held for sale.
Gain on sales of mortgage loans includes the aggregate gains (net of any
losses) on sales of loans to the secondary market, which includes servicing
release premiums, excess servicing fees, if any, and net gains/ losses from
hedging activities. Such revenue is recognized when the loans are sold. Deferred
origination fees are recognized at the time the related loans are sold.
Excess servicing fees are recorded when mortgage loans are sold with
servicing retained and represent the approximate present value of the actual
servicing rate in excess of the normal servicing rate. Excess servicing fees are
amortized over the estimated remaining life of the related loans. The carrying
value of excess servicing fees is periodically evaluated for impairment which is
recognized in the statement of operations during the period in which impairment
occurs. The amounts capitalized and the amortization thereon is based, in part,
on certain prepayment assumptions of the underlying loans. If, in the future,
actual prepayments exceed the assumptions, adjustments to the carrying value may
be required.
PURCHASED MORTGAGE SERVICING RIGHTS
The cost of purchased mortgage servicing rights is capitalized and
amortized over the estimated remaining life of the related loans proportionate
to the estimated net servicing income. DMC monitors prepayment experience on the
mortgage loans underlying its purchased servicing rights and, to the extent
unanticipated mortgage prepayments occur, adjusts amortization on a prospective
basis. To the extent that unanticipated mortgage prepayments result in the
carrying value of purchased servicing rights exceeding estimated future net
servicing income, a write-down of the purchased mortgage servicing rights asset
would be made through a charge to current earnings.
Gains or losses on sales of servicing rights are recognized when the
servicing rights are sold based upon the difference between the selling price
and the carrying amount of the related servicing rights sold.
REAL ESTATE
Real estate owned or expected to be acquired in settlement of loans is
recorded at the lower of the unpaid balance plus settlement costs or estimated
fair value less selling costs at the time of foreclosure. After acquisition,
costs of capital improvements made to facilitate sales are capitalized as
incurred. Costs incurred for holding properties after the redemption period are
expensed in the period incurred. The carrying value of individual properties is
periodically evaluated and reduced to the extent cost exceeds estimated fair
value less selling costs. Gains on the sales of such real estate are recorded at
the time of closing.
F-41
<PAGE> 120
DEVELOPERS MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
GOODWILL
Goodwill resulting from DMC's acquisition of Evergreen is being amortized
on a straight-line basis over five years.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the related assets
primarily using the straight-line method. Leasehold improvements are amortized
on a straight-line basis over the lease term.
INCOME TAXES
DMC files federal and state income taxes on a consolidated basis with its
parent. Income taxes are allocated between DMC and the Bank under a tax sharing
agreement whereby DMC is given an income tax benefit up to an amount equal to
the net reduction in income taxes of its affiliates for the period. The computed
tax payable or benefit receivable is recorded in the inter-company payable
account.
Deferred taxes are provided for temporary differences between the financial
reporting carrying values and tax bases of DMC's assets and liabilities.
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
DMC adopted SFAS No. 109 and elected to apply the provisions prospectively
beginning October 1, 1992, the date DMC was acquired by ASC. Under the asset and
liability method of SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date. The effect of the application of SFAS No. 109 as of October 1,
1992, was to recognize a deferred tax asset of $501,795. This was recorded as a
purchase accounting adjustment to reduce purchased servicing rights.
RECLASSIFICATIONS
Certain amounts in the 1993 financial statements have been reclassified to
conform to the 1994 presentation.
NOTE 4. ACQUISITION OF EVERGREEN
Effective December 31, 1993, DMC completed the acquisition of Evergreen for
the purchase price of $600,000. Evergreen is a Bloomington, Minnesota based
mortgage broker whose operations were merged into DMC's. Operations of Evergreen
are included in the statement of operations since January 1, 1994.
The purchase price was allocated as follows:
<TABLE>
<S> <C>
Cash and cash equivalents......................................... $182,366
Accounts receivable............................................... 73,612
Prepaid expenses.................................................. 13,521
Property and equipment............................................ 90,519
Goodwill.......................................................... 399,800
Accrued expenses.................................................. 159,818
--------
$600,000
========
</TABLE>
F-42
<PAGE> 121
DEVELOPERS MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. PURCHASED MORTGAGE SERVICING RIGHTS
During 1994, DMC completed one bulk sale of mortgage servicing rights
relating to approximately $46,000,000 of mortgage loans. The sale resulted in a
gain of approximately $431,000.
During 1993, DMC completed three bulk sales of mortgage servicing rights
relating to approximately $205,398,000 of mortgage loans. The purchased
servicing rights and capitalized excess servicing fees relating to these
mortgage servicing rights were approximately $1,931,000 and $479,000,
respectively, and resulted in gains of approximately $1,071,000.
The 1993 sale amount includes mortgage servicing rights relating to
approximately $88,385,000 of mortgage loans having a book value of approximately
$1,361,000 which were committed for sale as of September 30, 1992. The sale
resulted in a loss of approximately $80,000 which was recorded in DMC's 1992
financial statements.
The following provides a summary of purchased servicing rights for the
years ended September 30, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Balance, beginning of year.................................. $1,506,242 $3,620,864
Purchases................................................... 256,896 647,402
Less:
Sales..................................................... (369,702) (1,930,634)
Amortization.............................................. (454,762) (329,595)
SFAS No. 109 adoption..................................... 0 (501,795)
---------- ----------
Balance, end of year........................................ $ 938,674 $1,506,242
========= =========
</TABLE>
The amount of loans serviced for others by DMC aggregated $163,139,000 and
$243,460,000 at September 30, 1994 and 1993, respectively.
NOTE 6. COMMITMENTS
DMC has entered into several noncancelable operating leases for office
space and equipment. Future minimum lease payments under these leases are as
follows:
<TABLE>
<S> <C>
1995.............................................................. $419,432
1996.............................................................. 113,793
--------
$533,225
========
</TABLE>
Rent expense was $507,907 and $352,862 for the years ended September 30,
1994 and 1993, respectively.
As described in note 11, DMC sold certain assets and operations subsequent
to year end. As a result of this transaction future minimum lease payments
included in the above schedule will be reduced by $307,964 and $113,793 in 1995
and 1996, respectively.
NOTE 7. WAREHOUSE PAYABLE
On April 22, 1994, the existing warehouse line of credit facility was
modified whereby DMC's parent, the Bank, became the borrower under the line.
Accordingly, DMC no longer recorded mortgage loans held for sale financed
through the warehouse line on its financial statements. However, DMC recorded
all interest income related to the mortgage loans held for sale and the interest
expense related to the warehouse line under a loan participation agreement with
the Bank. Interest on this line is payable monthly at prime plus 1/2% less any
benefit from compensating balances with a bank that became a participant in this
line. The compensating
F-43
<PAGE> 122
DEVELOPERS MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
servicing escrow balances, which are placed on deposit with the participating
bank, after deductions to cover various service charges, allows the Bank to
borrow at an effective rate of 2.5% on a pro rata portion of the line not to
exceed $15 million. The compensating balances available to the Bank were
approximately $1,900,000 at September 30, 1994 and averaged approximately
$3,000,000 during 1994.
On September 30, 1992, DMC entered into a $30 million warehouse line of
credit facility which was renewed and increased to $40 million in July 1993.
Interest on this line was payable monthly at prime plus 1% less credit received
for excess compensating servicing escrow balances on deposit with a bank that
became a participant in the line when it was renewed. The compensating servicing
escrow balances were placed on deposit with the participating bank by ASC which,
after deductions to cover various service charges, allowed DMC to borrow at an
effective rate of 3% on a pro rata portion of the line not to exceed $15
million. The compensating balances available to DMC averaged approximately $4.7
million per month during 1993.
NOTE 8. INCOME TAXES
Federal and state income tax expense (benefit) for the years ended
September 30, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
1994 1993
--------- --------
<S> <C> <C>
Current:
Federal..................................................... $(183,121) $141,106
State....................................................... (66,581) 49,239
--------- --------
Total current....................................... (249,702) 190,345
--------- --------
Deferred:
Federal..................................................... 329,500 75,399
State....................................................... 70,607 26,290
--------- --------
Total deferred...................................... 400,107 101,689
--------- --------
Total tax expense................................... $ 150,405 $292,034
========= ========
</TABLE>
The actual income tax expense differs from the "expected" income tax
expense (benefit) computed by applying the federal corporate tax rate to income
(loss) before income taxes as follows:
<TABLE>
<CAPTION>
1994 1993
--------- --------
<S> <C> <C>
Statutory federal rate........................................ $(377,293) $325,141
State income taxes, net of federal benefit.................... (2,657) 49,849
Change in deferred tax valuation allowance.................... 533,199 (101,688)
Other, net.................................................... (2,844) 18,732
--------- --------
$ 150,405 $292,034
========= ========
</TABLE>
F-44
<PAGE> 123
DEVELOPERS MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of significant temporary differences that give rise to the
deferred tax assets and liabilities at September 30, 1994 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Intangible assets amortizable for tax........................... $321,775
Operating loss carryforwards.................................... 262,048
Purchased servicing rights...................................... 127,300
Other........................................................... 90,908
--------
Total gross deferred tax assets......................... 802,031
Valuation allowance............................................... 802,031
--------
Net deferred tax assets................................. $ 0
========
</TABLE>
The valuation allowance for deferred tax assets as of September 30, 1994
was $802,031. The net change in the valuation allowance for the year ended
September 30, 1994 was an increase of $533,199. In assessing the realizability
of deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. In 1994 DMC increased the valuation allowance to eliminate
the net deferred tax asset because of the operating losses incurred in 1994.
Income tax expense for the year ended September 30, 1993 differs from
amounts payable because certain revenues are reported in the statement of
operations in periods that are different from those in which they are subject to
taxation. The principal timing difference between the statement of operations
and taxable income involves the recognition of income received on certain
assets.
NOTE 9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
DMC is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to originate mortgages and to deliver mortgages
and mortgage securities, recourse agreements in certain FNMA servicing
agreements and requirements for pool advances to certain investors.
DMC is at risk with respect to commitments to purchase and deliver
mortgages to the extent that outstanding commitments are not filled, leaving DMC
with either mortgages to sell without firm delivery commitments, or delivery
commitments to fill without mortgages to deliver into them. DMC obtains delivery
commitments to cover the origination commitments together with all closed
mortgages pending delivery. DMC does not expect nonperformance by the
counterparties to the mortgage delivery commitments.
The contract or notional amounts of those instruments reflect the extent of
involvement DMC has in these financial instruments. At September 30, 1994 and
1993 DMC had firm commitments outstanding to originate approximately $19,608,000
and $95,475,000, respectively, in mortgage loans. In relation to these
origination commitments and DMC's mortgage loans held for sale, DMC had
mandatory delivery commitments in the amount of approximately $4,470,000 and
$38,600,000 and nonmandatory delivery commitments in the amount of approximately
$15,138,000 and $32,643,000 at September 30, 1994 and 1993, respectively.
DMC is at risk with respect to FNMA securities serviced with recourse to
DMC in the event of mortgagor default of approximately $87,000 and $88,000 at
September 30, 1994 and 1993, respectively. DMC is also at risk for the
nonguaranteed portion of GNMA mortgage-backed securities serviced for investors.
The nonguaranteed portion of the GNMA mortgage-backed securities is related to
both VA non-bids, if any, and certain foreclosure costs on FHA loans which
collateralize the GNMA mortgage-backed securities aggregat-
F-45
<PAGE> 124
DEVELOPERS MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ing approximately $2,019,000 and $37,364,000 at September 30, 1994 and 1993,
respectively. DMC is also required to submit to certain investors scheduled
principal and interest payments regardless of actual collection of principal and
interest from mortgagors. The mortgages underlying these securities carry either
government or private mortgage insurance and are collateralized by the
underlying properties. DMC does not expect losses due to claims on the
securities for servicing and foreclosure losses to be material to DMC's
financial position.
NOTE 10. EMPLOYEE BENEFIT PLANS
On October 1, 1993, ASC initiated an employee savings/profit sharing plan
(the Plan). The Plan allows participants to contribute up to 11% of their salary
on a tax-deferred basis pursuant to section 401(k) of the Internal Revenue Code.
ASC matches the employee's contribution at the rate of 33 cents per dollar, with
a maximum employer contribution of 5% of the employee's salary. During the year
ended September 30, 1994 approximately $17,000 was expensed.
NOTE 11. SALE OF BUSINESSES
On November 30, 1994, DMC sold certain assets and operations for
approximately $247,000. The assets sold included prepaid rent, miscellaneous
employee receivables, and fixed assets of $116,504 for book value and the loan
application pipeline for $130,000. This amount approximated 1% of loan
applications. Additionally, the buyer assumed the continuing operations relating
to DMC's operations in the state of Virginia including all employees, certain
leases and operating expenses subsequent to the sale date of November 30, 1994.
As a result of the transaction, DMC recorded a gain of $80,790, net of
transaction costs.
On March 31, 1995, the Bank entered into an agreement to sell the
outstanding stock of DMC. The Bank was responsible for the severance for
substantially all of DMC's employees who elected to leave upon completion of the
sale. The sale was completed on April 28, 1995,
F-46
<PAGE> 125
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER 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. 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 OR IMPLY THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
ANY OFFER TO BUY IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION MAY NOT
LAWFULLY BE MADE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. iii
Prospectus Summary.................... 1
Risk Factors.......................... 5
The Company........................... 12
The Reorganization.................... 12
Use of Proceeds....................... 15
Capitalization........................ 16
Dilution.............................. 17
Selected Financial Data............... 18
Pro Forma Consolidated Balance
Sheet............................... 19
Pro Forma Consolidated Statement of
Operations.......................... 21
Market Price of Securities............ 25
Management's Discussion And Analysis
of Financial Condition And Results
of Operations....................... 26
Business.............................. 43
Legal Proceedings..................... 59
Management............................ 61
Certain Transactions.................. 64
Principal Security Holders............ 66
Description of Securities............. 67
Underwriting.......................... 71
Legal Matters......................... 73
Experts............................... 74
Index to Financial Statements......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
A MAXIMUM OF
1,270,000 SHARES
OF COMMON STOCK AND
1,270,000 CLASS A WARRANTS
A MINIMUM OF 550,000 SHARES
OF COMMON STOCK
OFFERING PRICE: $ PER SHARE
$ PER WARRANT
HOMEOWNERS
FINANCIAL
CORP.
------------------------
PROSPECTUS
, 1996
------------------------
TOLUCA PACIFIC SECURITIES
CORPORATION
------------------------------------------------------
------------------------------------------------------
<PAGE> 126
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION*
<TABLE>
<S> <C>
Filing fee -- Securities and Exchange Commission**................ $ 6,945
NASD Filing Fee**..................................... $ 2,514
Accountants' fee*................................................. $360,000
Legal fees and expenses*.......................................... $380,000
Blue sky fees and expenses*....................................... $ 75,000
Printing and engraving expenses*.................................. $ 90,000
Transfer Agent expenses*.......................................... $ 10,000
Miscellaneous*.................................................... $ 25,541
TOTAL*.................................................. $950,000
</TABLE>
- ---------------
* Estimated.
** Non-refundable amount paid.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. Exhibits
The Exhibits filed with the Registration Statement are as follows:
<TABLE>
<C> <S>
1.a Revised Form of Underwriting Agreement
1.b Revised Form of Underwriter's Warrant
3.a Certificate of Incorporation of Company(1)
3.b Amendments to Certificate of Incorporation of Company(1)
3.c Certificate of Designations -- Series B Preferred Stock(2)
3.d Certificate of Designations -- Series C Preferred Stock*
3.e By-Laws of Company(1)
5.a Opinion and Consent of John B. Lowy, P.C.*
6.a The 1994 Incentive Stock Option Plan(1)
10.a Acquisition Agreement with FIS(1)
10.b Warehouse Credit Agreement with Franklin Federal Bancorp(1)
10.c Servicing Loan Agreement with Franklin Federal Bancorp(1)
10.d Lease Agreement-Dallas(1)
10.e ISB Stock Purchase Agreement*
10.f DMC Purchase and Sale Agreement*
10.g Lease Agreement-Troy*
10.h Agreement-FIS acquisition of HOFCA*
10.i Barnett Bank Promissory Note*
10.j ISB Loan Documents*
10.k Voting Trust Agreement and Amendment*
10.1 Credit Agreement with First Bank National Association*
10.m Warrant Agent Agreement*
10.n Bank Escrow Agreement
</TABLE>
II-1
<PAGE> 127
<TABLE>
<C> <S>
21.a Specimen of Common Stock Certificate*
21.b Specimen of Class A Common Stock Purchase Warrant Certificate*
23.a Consent of Wallace Sanders & Company, Certified Public Accountants
23.b Consent of KPMG Peat Marwick LLP, Certified Public Accountants
23.d Consent of John B. Lowy, P.C. (included in Exhibit 5.a)
24.e Powers of Attorney*
</TABLE>
- ---------------
* Previously filed.
(1) Previously filed as an Exhibit to the Company's Registration Statement on
Form 10-SB, SEC File No. 0-25744, filed with the Commission on or about
March 24, 1995, and incorporated herein by reference.
(2) Previously filed as an Exhibit to the Company's Annual Report on Form
10-KSB, SEC File No. 0-25744, filed with the Commission on or about April
26, 1996, and incorporated herein by reference.
b. Financial Statement Schedules
All schedules have been omitted because they are inapplicable or not
required, or the information is included elsewhere in the financial statements
or notes thereto.
II-2
<PAGE> 128
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 6 to the Registration Statement on Form SB-2
to be signed on its behalf by the undersigned, thereunto duly authorized in the
State of Michigan, City of Troy, on the 25th day of October, 1996.
HOMEOWNERS FINANCIAL CORP.
By /s/ CHRISTIAN W. PFLUGER III
------------------------------------
Christian W. Pfluger III, President,
Chief Executive Officer
By /s/ JOSEPH W. TRAXLER
------------------------------------
Joseph W. Traxler, Treasurer
(Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------------------------------------- ------------------------------ -------------------
<S> <C> <C>
/s/ CHRISTIAN W. PFLUGER III Director October 25, 1996
- ----------------------------------------
Christian W. Pfluger III
* Director October 25, 1996
- ----------------------------------------
Henry B. Leshman
* Director October 25, 1996
- ----------------------------------------
Mori A. Schweitzer
* Director October 25, 1996
- ----------------------------------------
Leonard L. Rosen
* Director October 25, 1996
- ----------------------------------------
Stephen M. Savage
*By: /s/ CHRISTIAN W. PFLUGER III
-----------------------------------
Christian W. Pfluger III
(Attorney-in-fact)
</TABLE>
<PAGE> 129
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
---------------------------------------------------------------------- ------------
<C> <S> <C>
1.a Revised Form of Underwriting Agreement................................
1.b Revised Form of Underwriter's Warrant.................................
10.n Bank Escrow Agreement.................................................
23.a Consent of Wallace Sanders & Company, Certified Public Accountants....
23.b Consent of KPMG Peat Marwick LLP, Certified Public Accountants........
</TABLE>
<PAGE> 1
HOMEOWNERS FINANCIAL CORP.
1,270,000 Shares of Common Stock
and 1,270,000 Redeemable
Class A Common Stock Purchase Warrants
UNDERWRITING AGREEMENT
________________, 1996
Toluca Pacific Securities Corporation
3500 West Olive Avenue, 11th Floor
Toluca Lake, California 91505
Dear Sirs:
Homeowners Financial Corp., a Delaware corporation (the "Company"),
hereby confirms its agreement with Toluca Pacific Securities Corporation (the
"Underwriter") as follows:
1. Description of Units.
The Company agrees to retain the Underwriter as the exclusive
agent of the Company to publicly offer and sell, pursuant to the terms of this
Underwriting Agreement, an aggregate of 1,270,000 shares of common stock, $.01
par value per share ("Common Stock"), and 1,270,000 redeemable class A common
stock purchase warrants ("Class A Warrants" or the "Warrants"). Each Class A
Warrant shall entitle the holder to purchase one share of Common Stock at $____,
subject to adjustment. The Common Stock and Class A Warrants shall be offered on
a "best efforts, all of none" basis with respect to the first 550,000 shares of
Common Stock, and a "best efforts" basis with respect to the remaining 720,000
shares of Common Stock and 1,270,000 Class A Warrants. The offering of Common
Stock and Class A Warrants contemplated hereby may sometimes be referred to as
the "Offering."
(a) The Warrants.
The Class A Warrants are exercisable for a five year
period commencing on the effective date of the Registration Statement, as
defined in Paragraph 2(a) (the "Effective Date") until their expiration five
years after the Effective Date, subject to prior redemption by the Company. The
Class A Warrants will be exercisable at $4.50 per share and expire on
__________, 2001. The shares of Common Stock issuable upon the exercise of the
Warrants are hereinafter referred to as the "Warrant Shares."
<PAGE> 2
During the exercise period of the Warrants, the
Warrants will be redeemable at a price of $.15 per Warrant, upon prior written
notice of not less than 30 days after 15 consecutive trading days ending on the
tenth day prior to the date on which the Company gives notice of redemption on
which the Common Stock maintains a per share closing high bid price (or closing
sales price if principally traded on an exchange) at least equal to $7.50 per
share, and subject to the right of the holder to exercise his purchase rights
thereunder until redemption.
(c) Underwriter's Warrants.
At the closing of the sale referred to in Section 4,
the Company will sell to the Underwriter, for a total purchase price of $10.00,
(i) warrants ("Underwriter's Share Warrants") to purchase 1 Share for every 10
Shares actually sold at a price equal to $ per Share purchased, and (ii)
warrants ("Underwriter's Warrant Warrants") to purchase 1 Warrant for every 10
Warrants actually sold at a price equal to $ per Warrant purchased. The
Underwriter's Share Warrants and the Underwriter's Warrant Warrants shall be
non-exercisable and non-transferable other than to (i) officers of the
Underwriter, and (ii) members of the selling group and their officers or
partners, for a period of 12 months following the Effective Date. Thereafter,
they are exercisable and transferable for a period of four years. If the
Underwriter's Share Warrants and the Underwriter's Warrant Warrants are not
exercised during their term, they shall, by their terms, automatically expire.
The Underwriter's Share Warrants and Underwriter's Warrant Warrants, and the
Warrants and Common Stock issuable thereunder, shall be registered for sale to
the public and shall be included in the Registration Statement filed in
connection with the Offering.
2. Representations and Warranties of the Company.
The Company represents and warrants to the Underwriter that:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission"), a registration statement on Form SB-2 (File No.
33-94882), including any related preliminary prospectus ("Preliminary
Prospectus"), for the registration of the Common Stock and Warrants under the
Securities Act of 1933 (the "Act"). The Company will file further amendments to
said registration statement in the form to be delivered to you and will not,
before the registration statement becomes effective, file any other amendment
thereto to which you shall have objected in writing after having been furnished
with a copy thereof. Except as the context may otherwise require, such
registration statement, as amended, on file with the Commission at the time the
registration statement becomes effective (including the prospectus, financial
statements, exhibits and all other documents filed as a part thereof or
incorporated therein), is hereinafter called the
2
<PAGE> 3
"Registration Statement" and the prospectus, in the form filed with the
Commission pursuant to Rule 424(b) of the General Rules and Regulations of the
Commission under the Act (the "Regulations") or, if no such filing is made, the
definitive prospectus used in the Offering, is hereinafter called the
"Prospectus." The term "Preliminary Prospectus" shall mean any Prospectus
included in the Registration Statement prior to the time the same is declared
effective by the Commission. The Company has delivered to you copies of each
Preliminary Prospectus as filed with the Commission and has consented to the use
of such copies for purposes permitted by the Act.
(b) The Commission has not issued any orders preventing or
suspending the use of any Preliminary Prospectus, and each Preliminary
Prospectus has conformed in all material respects with the requirements of the
Act and has not included any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, subject to the provisions set forth below.
(c) When the Registration Statement becomes effective under
the Act and at all times subsequent thereto including the Closing Date
(hereinafter defined) and for such longer periods as a Prospectus is required to
be delivered in connection with the sale of the Common Stock and Warrants by the
Underwriter, the Registration Statement and Prospectus, and any amendment
thereof or supplement thereto, will contain all material statements which are
required to be stated therein in accordance with the Act and the Regulations,
and will in all material respects conform to the requirements of the Act and the
Regulations and neither the Registration Statement nor the Prospectus, nor any
amendment or supplement thereto, will contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; provided, however, that this
representation and warranty does not apply to statements or omissions made in
reliance upon and in conformity with information furnished to the Company by
you, for use in connection with the preparation of the Registration Statement or
Prospectus, or in any amendment thereof or supplement thereto. It is understood
that (i) the statements set forth under the heading "Underwriting" in the
Prospectus with respect to the amounts of the selling concession and
reallowance; and (ii) the identity of counsel to the Underwriter under the
heading "Legal Matters" constitute the only information furnished in writing by
or on behalf of the Underwriter for use in connection with the preparation of
the Registration Statement and Prospectus.
(d) The Company and each of its subsidiaries, if any,
are, and at the Closing Date will be, corporations duly organized,
3
<PAGE> 4
validly existing and in good standing under the laws of their respective
jurisdictions of incorporation. The Company and each of its subsidiaries are
duly qualified or licensed and in good standing as foreign corporations in each
jurisdiction in which their ownership or leasing of any properties or the
character of their operations requires such qualification or licensing, except
those jurisdictions in which the failure to so qualify would not have a material
adverse effect on the Company. The Company and each of its subsidiaries have all
requisite corporate powers and authority, and the Company, its subsidiaries, and
its employees have all material and necessary authorizations, approvals, orders,
licenses, certificates and permits of and from all governmental regulatory
officials and bodies to own or lease their properties and conduct their business
as is described in the Prospectus and the Company and its subsidiaries are doing
business and have been doing business during the period described in the
Registration Statement in compliance with all such material authorizations,
approvals, orders, licenses, certificates and permits and all material federal,
state and local laws, rules and regulations concerning the business in which the
Company and its subsidiaries are engaged. The disclosures in the Registration
Statement concerning the effects of federal, state and local regulation on the
Company's business and that of its subsidiaries, as currently conducted and as
contemplated are correct in all material respects and do not omit to state a
material fact. The Company and its subsidiaries have all necessary corporate
power and authority to enter into this Agreement and carry out the provisions
and conditions hereof, and all consents, authorizations, approvals and orders
required in connection therewith have been obtained or will have been obtained
prior to the Closing Date.
(e) This Agreement has been duly and validly authorized and
executed by the Company. The Common Stock and the Warrants, the shares of Common
Stock issuable upon exercise of the Warrants (the "Warrant Shares"), the
Underwriter's Share Warrants and the Underwriter's Warrant Warrants to be issued
and sold by the Company pursuant to this Agreement, the Common Stock and
Warrants issuable upon exercise of the Underwriter's Share Warrants and the
Underwriter's Warrant Warrants and payment therefor, and the Warrant Shares,
have been duly authorized (and, in the case of the Common Stock and the Warrant
Shares, have been duly reserved for issuance) and, when issued and paid for in
accordance with this Agreement (and, in the case of the Warrant Shares, upon
exercise of the Warrants and payment to the Company of the exercise price
therefor), the Common Stock and Warrant Shares will be validly issued, fully
paid and non-assessable; the Common Stock, Warrants, Warrant Shares,
Underwriter's Share Warrants, Underwriter's Warrant Warrants and Underwriter's
Warrants Shares are not and will not be subject to the preemptive rights of any
stockholder of the Company and conform, and at all times up to and including
their issuance will conform, in all material respects to all statements with
regard thereto contained in the Registration Statement and
4
<PAGE> 5
Prospectus; and all corporate action required to be taken for the authorization,
issuance and sale of the Common Stock, Warrants, Warrant Shares and
Underwriter's Share Warrants and the Underwriter's Warrant Warrants has been
taken, and this Agreement constitutes a valid and binding obligation of the
Company, enforceable in accordance with its terms, to issue and sell, upon
exercise in accordance with the terms thereof, the number and kind of securities
called for thereby.
(f) The consummation of the transactions contemplated by this
Agreement and the fulfillment of the terms hereof will not result in a breach or
violation of any of the terms or provisions of, or constitute a default under,
the Articles of Incorporation or Bylaws of the Company or of any evidence of
indebtedness, lease, contract or other agreement or instrument to which the
Company is a party or by which the Company or any of its properties is bound, or
under any applicable law, rule, regulation, judgment, order or decree of any
government, professional advisory body, administrative agency or court, domestic
or foreign, having jurisdiction over the Company or its properties, or result in
the creation or imposition of any lien, charge or encumbrance upon any of the
properties or assets of the Company; and no consent, approval, authorization or
order of any court or governmental or other regulatory agency or body is
required for the consummation by the Company of the transactions on its part
herein contemplated, except as may be required under the Act, the Securities
Exchange Act of 1934 (the "Exchange Act") or under state securities or blue sky
laws.
(g) Subsequent to the date hereof, and prior to the Closing
Date, the Company will not issue or acquire any equity securities, except that
the Company may make short-term investments as contemplated in the "Use of
Proceeds" section of the Prospectus and except that the Company may issue Common
Stock in satisfaction of outstanding options and warrants, as described in the
Registration Statement. Except as described in the Registration Statement, the
Company does not have, and at the Closing Date will not have, outstanding any
options to purchase or rights or warrants to subscribe for, or any securities or
obligations convertible into, or any contracts or commitments to issue or sell
shares of its Preferred Stock or Common Stock, or any such options, warrants,
convertible securities or obligations.
(h) The financial statements and notes thereto included in the
Registration Statement and the Prospectus fairly present the financial position
and the results of operations of the Company at the respective dates and for the
respective periods to which they apply; and such financial statements have been
prepared in conformity with generally accepted accounting principles,
consistently applied throughout the periods involved.
5
<PAGE> 6
(i) Except as set forth in the Registration Statement, the
Company is not, and at the Closing Date will not be, in violation or breach of,
or in default of, the due performance and observance of any term, covenant or
condition of any indenture, mortgage, deed of trust, note, loan or credit
agreement, or any other agreement or instrument evidencing an obligation for
borrowed money, or any other agreement or instrument to which the Company is a
party or by which the Company may be bound or to which any of the property or
assets of the Company is subject, which default or defaults, singularly or in
the aggregate, would have a material adverse effect on the Company. The Company
has not and will not have taken any action in material violation of the
provisions of the Articles of Incorporation or the Bylaws of the Company or any
statute or any order, rule or regulation of any court or regulatory authority or
governmental body having jurisdiction over or application to the Company, its
business or properties.
(j) The Company has, and at the Closing Date will have, good
and marketable title to all properties and assets described in the Prospectus as
owned by it, free and clear of all liens, charges, encumbrances, claims,
security interests, restrictions and defects of any material nature whatsoever,
except such as are described or referred to in the Prospectus and liens for
taxes not yet due and payable. All of the material leases and subleases under
which the Company is the lessor or sublessor of properties or assets or under
which the Company holds properties or assets as lessee as described in the
Prospectus are, and will on the Closing Date will be in full force and effect,
and except as described in the Prospectus, the Company is not and will not be in
default in respect to any of the terms or provisions of any of such leases or
subleases (which would have a material adverse effect on the business, business
prospects or operations of the Company taken as a whole), and no claim has been
asserted by anyone adverse to rights of the Company as lessor, sublessor, lessee
or sublessee under any of the leases or subleases mentioned above, or affecting
or questioning the right of the Company to continue possession of the leased or
subleased premises or assets under any such lease or sublease except as
described or referred to in the Prospectus, and the Company owns or leases all
such properties as are necessary to its operations as now conducted and, except
as otherwise stated in the Prospectus, as proposed to be conducted set forth in
the Prospectus.
(k) The authorized, issued and outstanding capital stock of
the Company as of June 30, 1996 and as of the date of the Prospectus is as set
forth in the Prospectus under "Capitalization;" the shares of issued and
outstanding capital stock of the Company set forth thereunder have been duly
authorized, validly issued and are fully paid and non-assessable; except as set
forth in the Prospectus, no options, warrants or other rights to purchase,
agreements or other obligations to issue, or agreements or other rights to
convert any obligation into, any
6
<PAGE> 7
shares of capital stock of the Company have been granted or entered into by the
Company; and the Common Stock, the Warrants and all such options and warrants
conform, in all material respects, to all statements relating thereto contained
in the Registration Statement and Prospectus.
(l) Except as described in the Prospectus, the Company does
not own or control any capital stock or securities of, or have any proprietary
interest in, or otherwise participate in, any other corporation, partnership,
joint venture, firm, association or business organization; provided, however,
that this provision shall not be applicable to the investment, if any, of the
net proceeds from the sale of the Common Stock and Warrants sold by the Company
in certificates of deposits, savings deposits, short-term obligations of the
United States Government, money market instruments or other short-term
investments.
(m) Wallace Sanders & Company has reported on the financial
statements of the Company for the years ended September 30, 1995 and the nine
months ended June 30, 1996, all of which are filed with the Commission as a part
of the Registration Statement, and are independent accountants as required by
the Act and the Regulations.
(n) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, and except as may
otherwise be indicated or contemplated herein or therein, the Company has not
(i) issued any securities or incurred any liability or obligation, direct or
contingent, for borrowed money; or (ii) entered into any transaction other than
in the ordinary course of business; or (iii) declared or paid any dividend or
made any other distribution on or in respect to its capital stock.
(o) There is no litigation or governmental proceeding pending
or to the knowledge of the Company threatened against, or involving the
properties or business of the Company which might materially and adversely
affect the value, assets or the operation of the properties or the business of
the Company, except as referred to in the Prospectus. Further, except as
referred to in the Prospectus, there are no actions, suits or proceedings
related to environmental matters or related to discrimination on the basis of
age, sex, religion or race, nor is the Company charged with or, to its
knowledge, under investigation with respect to any violation of any statutes or
regulations of any regulatory authority having jurisdiction over its business or
operations, and no labor disturbances by the employees of the Company exist or,
to the knowledge of the Company, have been threatened.
(p) The Company has, and at the Closing Date will have, filed
all necessary federal, state and foreign income and franchise tax returns or has
requested extensions thereof (except in any case
7
<PAGE> 8
where the failure to so file would not have a material adverse effect on the
Company), and has paid all taxes which it believes in good faith were required
to be paid by it, except for any such tax that currently is being contested in
good faith or as described in the Prospectus.
(q) The Company has not at any time (i) made any contribution
to any candidate for political office, or failed to disclose fully any such
contribution, in violation of law, or (ii) made any payment to any state,
federal, foreign governmental or professional regulatory agency, officer or
official or other person charged with similar public, quasi-public or
professional regulatory duties, other than payments or contributions required or
allowed by applicable law.
(r) Except as set forth in the Registration Statement, to the
knowledge of the Company, neither the Company nor any officer, director,
employee or agent of the Company has made any payment or transfer of any funds
or assets of the Company or conferred any personal benefit by use of the
Company's assets, or received any funds, assets or personal benefit in violation
of any law, rule or regulation, which is required to be stated in the
Registration Statement or necessary to make the statements therein not
misleading.
(s) On the Closing Date all transfer or other taxes, if any
(other than income tax), which are required to be paid, and are due and payable,
in connection with the sale and transfer of the Common Stock and Warrants by the
Company to the Underwriter, will have been fully paid or provided for by the
Company as the case may be, and all laws imposing such taxes will have been
fully complied with.
(t) There are no contracts or other documents of the Company
which are of a character required to be described in the Registration Statement
or Prospectus or filed as exhibits to the Registration Statement which have not
been so described or filed.
(u) The Company intends to apply the proceeds from the sale of
the Common Stock and Warrants sold by it for the purposes and in the manner set
forth in the Registration Statement and Prospectus under the heading "Use of
Proceeds."
(v) The Company owns or possesses the requisite licenses or
rights to use all material trademarks, service marks, service names, trade names
and patents necessary to conduct its business. Except as set forth in the
Prospectus, there is no claim or action by any person pertaining to or
proceeding pending, or to the knowledge of the Company, threatened, which
challenges the exclusive right of the Company with respect to any material
trademarks, service marks, service names, trade names and patents used in the
conduct of the Company's business.
8
<PAGE> 9
(w) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (1) transactions are
executed in accordance with management's general or specified authorizations;
(2) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (3) access to assets is permitted only in
accordance with management's general or specific authorizations; and (4) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(x) Except as set forth in the Prospectus, no holder of any
securities of the Company has the right to require registration of any
securities because of the filing or effectiveness of the Registration Statement.
(y) The Company has not taken and at the Closing Date will not
have taken, directly or indirectly, any action designed to cause or result in,
or which has constituted or which might reasonably be expected to constitute,
the stabilization or manipulation of the price of the Common Stock or the
Warrants to facilitate the sale or resale of such securities.
(aa) There are no claims for services in the nature of a
finder's origination fee with respect to the sale of the Common Stock and
Warrants hereunder, except as set forth in the Prospectus.
(bb) No right of first refusal exists with respect to any sale
of securities by the Company, except as contained in this agreement.
(cc) No statement, representation, warranty or covenant made
by the Company in this Agreement or made in any certificate or document required
by this Agreement to be delivered to you was, when made, or as of the Closing
Date will be, materially inaccurate, untrue or incorrect.
3. Covenants of the Company.
The Company covenants and agrees that:
(a) It will deliver to the Underwriter, without charge, two
fully signed copies of the Registration Statement and of each amendment or
supplement thereto, including all financial statements and exhibits.
(b) The Company has delivered to the Underwriter, without
charge, as many copies as the Underwriter has requested of each Preliminary
Prospectus heretofore filed with the Commission in accordance with and pursuant
to the Commission's Rule 430 under the
9
<PAGE> 10
Act, and will deliver to the Underwriter and to any Selected Dealer (as
hereinafter defined), without charge, on the Effective Date of the Registration
Statement, and thereafter from time to time during such reasonable period as the
Underwriter may request if, in the opinion of counsel for the Underwriter, the
Prospectus is required by law to be delivered in connection with sales by an
Underwriter or a dealer, as many copies of the Prospectus (and, in the event of
any amendment of or supplement to the Prospectus, of such amended or
supplemented Prospectus) as the Underwriter may request for the purposes
contemplated by the Act. The Company will take all necessary actions to furnish
to whomever the Underwriter directs, when and as requested by the Underwriter,
all necessary documents, exhibits, information, applications, instruments and
papers as may be reasonably required or, in the opinion of counsel to the
Underwriter are desirable in order to permit or facilitate the sale of the
Common Stock and Warrants.
(c) The Company has authorized the Underwriter to use, and
make available for use by prospective dealers, the Preliminary Prospectus, and
authorizes the Underwriter, all dealers selected by the Underwriter in
connection with the distribution of the Common Stock and Warrants (the "Selected
Dealers") to be purchased by the Underwriter and all dealers to whom any of such
Common Stock and Warrants may be sold by the Underwriter or by any Selected
Dealer, to use the Prospectus, as from time to time amended or supplemented, in
connection with the sale of the Common Stock and Warrants in accordance with the
applicable provisions of the Act, the applicable Regulations and applicable
state law, until completion of the distribution of the Common Stock and Warrants
and for such longer period as the Underwriter may request if the Prospectus is
required under the Act, the applicable Regulations or applicable state law to be
delivered in connection with sales of the Common Stock and Warrants by the
Underwriter or the Selected Dealers.
(d) The Company will use its best efforts to cause the
Registration Statement to become effective and will notify the Underwriter
immediately, and confirm the notice in writing: (i) when the Registration
Statement or any post-effective amendment thereto becomes effective; (ii) of the
issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceedings for that purpose; (iii) of the suspension of the
qualification of the Common Stock and Warrants and the Underwriter's Share
Warrants and the Underwriter's Warrant Warrants, or underlying securities, for
offering or sale in any jurisdiction or of the initiating, or the threatening,
of any proceeding for that purpose; and (iv) of the receipt of any comments from
the Commission. If the Commission shall enter a stop order at any time, the
Company will make every reasonable effort to obtain the lifting of such order at
the earliest possible moment.
10
<PAGE> 11
(e) During the time when a prospectus is required to be
delivered under the Act, the Company will comply with all requirements imposed
upon it by the Act and the Exchange Act, as now and hereafter amended and by the
Regulations, as from time to time in force, as necessary to permit the
continuance of sales of or dealings in the Common Stock and Warrants in
accordance with the provisions hereof and the Prospectus. If at any time when a
prospectus relating to the Common Stock and Warrants is required to be delivered
under the Act, any event shall have occurred as a result of which, in the
opinion of counsel for the Company and counsel for the Underwriter, the
Prospectus as then amended or supplemented includes an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it is necessary at any time to
amend the Prospectus to comply with the Act, the Company will notify the
Underwriter promptly and prepare and file with the Commission an appropriate
amendment or supplement in accordance with Section 10 of the Act and will
furnish to the Underwriter copies thereof.
(f) The Company will endeavor in good faith, in cooperation
with the Underwriter, at or prior to the time the Registration Statement becomes
effective, to qualify the Common Stock and Warrants for offering and sale under
the securities laws or blue sky laws of such jurisdictions as the Underwriter
may reasonably designate. In each jurisdiction where such qualification shall be
effected, the Company will, unless the Underwriter agrees that such action is
not at the time necessary or advisable, file and make such statements or reports
at such times as are or may reasonably be required by the laws of such
jurisdiction.
(g) The Company will make generally available to its security
holders, as soon as practicable, but in no event later than the first day of the
fifteenth full calendar month following the Effective Date of the Registration
Statement, an earnings statement of the Company, which will be in reasonable
detail but which need not be audited, covering a period of at least twelve
months beginning after the Effective Date of the Registration Statement, which
earnings statements shall satisfy the requirements of Section 11(a) of the Act
and the Regulations as then in effect. The Company may discharge this obligation
in accordance with Rule 158 of the Regulations.
(h) During the five year period commencing on the Effective
Date of the Registration Statement, the Company will furnish to its stockholders
an annual report (including financial statements audited by its independent
public accountants), in reasonable detail, and, at its expense, furnish the
Underwriter if so requested (i) within 105 days after the end of each fiscal
year of the Company, a consolidated balance sheet of the Company and its then
consolidated subsidiaries and a separate balance sheet of each
11
<PAGE> 12
subsidiary of the Company the accounts of which are not included in such
consolidated balance sheet as of the end of such fiscal year, and consolidated
statements of operations, stockholder's equity and cash flows of the Company and
its consolidated subsidiaries and separate statements of operations,
stockholder's equity and cash flows of each of the subsidiaries of the Company
the accounts of which are not included in such consolidated statements, for the
fiscal year then ended, all in reasonable detail and all certified by
independent accountants (within the meaning of the Act and the Regulations),
(ii) within 50 days after the end of each of the first three fiscal quarters of
each fiscal year, similar balance sheets as of the end of such fiscal quarter
and similar statements of operations, stockholder's equity and cash flows for
the fiscal quarter then ended, all in reasonable detail, and subject to year end
adjustment, all certified by the Company's principal financial officer or the
Company's principal accounting officer as having been prepared in accordance
with generally accepted accounting principles applied on a consistent basis,
(iii) as soon as available, each report furnished to or filed with the
Commission or any securities exchange and each report and financial statement
furnished to the Company's shareholders generally and (iv) as soon as available,
such other material as the Underwriter may from time to time reasonably request
regarding the financial condition and operations of the Company and its
subsidiaries.
(i) For a period of three years from the Closing Date, the
Company, at its expense, shall cause its regularly engaged independent certified
public accountants to consult with the Company concerning the Company's
financial statements for each of the first three quarters prior to the
announcement of quarterly financial information, the filing of the Company's
10-Q (or 10Q-SB) quarterly report and the mailing of quarterly financial
information to stockholders. The purpose of such consultation is to obtain the
assistance and input of such accountants so that each of such financial
statements will comply in all material respects with the applicable accounting
requirements of the Exchange Act and the regulations promulgated thereunder and
will be fairly presented in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of the then
most recently audited financial statements of the Company. It is not the
intended purpose of this provision that such accountant's audit or review such
financial statements within the meaning of the AICPA's Statement on Auditing
Standards or that such accountants issue any report to the Company or the
Underwriter.
(j) Prior to the Closing Date, the Company will not issue,
directly or indirectly, without the Underwriter's prior written consent and that
of counsel for the Underwriter, which consent shall not be unreasonably
withheld, any press release or other public announcement or hold any press
conference with respect to the Company or its activities with respect to this
Offering, other than promotion of its products in the ordinary course of
12
<PAGE> 13
business; provided, however, that if a press release is required as a matter of
law or prudent corporate disclosure posture, the Company may make said press
release without consent.
(k) It will deliver to the Underwriter prior to filing, any
amendment or supplement to the Registration Statement or Prospectus proposed to
be filed after the Effective Date of the Registration Statement and will not
file any such amendment or supplement to which the Underwriter shall reasonably
object after being furnished such copy.
(l) During the period of 120 days commencing on the date
hereof, the Company will not at any time take, directly or indirectly, any
action designed to, or which will constitute or which might reasonably be
expected to cause or result in stabilization or manipulation of the price of the
Common Stock and Warrants to facilitate the sale or resale of any of the Common
Stock and Warrants.
(m) The Company will not, without the Underwriter's prior
written consent, issue or sell, or contract to sell or otherwise dispose of any
of its securities, except sales of the Common Stock and Warrants (and the Common
Stock underlying the Warrants) pursuant to this Agreement and except for stock
options under the Company's stock option plan and outstanding warrants, or as
otherwise described in the Prospectus for a period of 120 days after the
commencement of the Offering.
(n) The Company will apply the net proceeds from the Offering
received by it in a manner consistent with the application described in "Use of
Proceeds" in the Prospectus.
(o) Counsel for the Company, the Company's accountants, and
the officers and directors of the Company will, respectively, furnish the
opinions, the letters and the certificates referred to in subsections of
Paragraph 9 hereof, and, in the event that the Company shall file any amendment
to the Registration Statement relating to the offering of the Common Stock and
Warrants or any amendment or supplement to the Prospectus relating to the
offering of the Common Stock and Warrants subsequent to the Effective Date of
the Registration Statement, whether pursuant to subsection (j) herein or
otherwise, such counsel, such accountants, such officers and directors will, at
the time of such filing or at such subsequent time as the Underwriter shall
specify, so long as securities being registered by such amendment or supplement
are being underwritten by the Underwriter, respectively, furnish to the
Underwriter such opinions, letters and certificates, each dated the date of its
delivery, of the same nature as the opinions, the letters and the certificates
referred to in said Paragraph 9, respectively, as the Underwriter may reasonably
request, or, if any such opinion or letter or certificate cannot be furnished by
reason of the fact that such counsel or such accountants or any such
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<PAGE> 14
officer or director believes that the same would be inaccurate, such counsel or
such accountants or such officer or director will furnish an accurate opinion or
letter or certificate with respect to the same subject matter.
(p) The Company will comply with all of the provisions of any
undertakings contained in the Registration Statement.
(q) The Company will reserve and keep available for issuance
that maximum number of its authorized but unissued Shares which are issuable
upon exercise of the Warrants and issuable upon exercise of the Underwriter's
Share Warrants and Underwriter's Warrant Warrants (including the underlying
securities) outstanding from time to time.
(r) Following the Effective Date and from time to time
thereafter, so long as the Warrants are outstanding, the Company will timely
prepare and file at its sole cost and expense one or more post-effective
amendments to the Registration Statement or a new registration statement as
required by law as will permit Warrant holders to be furnished with a current
prospectus in the event Warrants are exercised, and to use its best efforts and
due diligence to have same be declared effective. Such post-effective amendments
or new registration statements shall also register the Underwriter's Share
Warrants and Underwriter's Warrant Warrants and all the securities underlying
such Underwriter's Share Warrants and Underwriter's Warrant Warrants as provided
in the Underwriter's Share Warrants and Underwriters Warrant Warrant's. The
Company will deliver a draft of each such post-effective amendment or new
registration statement to the Underwriter at least ten days prior to the filing
of such post-effective amendment or registration statement.
(s) Following the Effective Date and from time to time
thereafter so long as any of the Warrants remain outstanding, the Company will
timely deliver and supply to its warrant agent sufficient copies of the
Company's current Prospectus, as will enable such warrant agent to deliver a
copy of such Prospectus to any Warrant or other holder where such Prospectus
delivery is by law required to be made.
(t) So long as any of the Warrants remain outstanding, the
Company shall continue to employ the services of a firm of independent certified
public accountants acceptable to the Underwriter in connection with the
preparation of the financial statements to be included in any registration
statement to be filed by the Company hereunder, or any amendment or supplement
thereto. Notwithstanding the foregoing, Wallace Sanders & Company, or any
accounting firm of national recognition shall be acceptable to the Underwriter.
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<PAGE> 15
(u) So long as any of the Warrants remain outstanding, the
Company shall continue to appoint a warrant agent for the Warrants, who shall be
reasonably acceptable to the Underwriter.
(v) INTENTIONALLY LEFT BLANK.
(w) Commencing on the Effective Date, the Company shall have
entered into a mergers and acquisitions agreement (the "Mergers and Acquisitions
Agreement") with the Underwriter in form reasonably satisfactory to the
Underwriter.
(x) The Common Stock and Warrants shall be listed on the
NASDAQ system not later than the Closing Date. After the Closing Date, the
Company will effect and use its best efforts to maintain such NASDAQ listing
(unless the Company is acquired or is listed on either the New York Stock
Exchange or American Stock Exchange) for at least five years from the date of
this Agreement.
(y) The Company has applied for listing in Standard and Poors
Corporation Reports and shall use its best efforts to have the Company included
in such publications for at least five years after the Effective Date.
(z) The Company agrees not to file a registration statement on
Form S-8 or any similar form currently in effect or which may be hereafter
adopted pursuant to the Act, during the twenty-four months following the
Effective Date without prior written consent of the Underwriter.
(aa) The Company agrees not to effect any sales of Common
Stock at prices below the Exercise Price of the Class A Warrants, during the
twenty-four months following the Effective Date without prior written approval
of the Underwriter, which consent shall not be unreasonably withheld.
4. Appointment of Agent to Sell the Units.
(a) Subject to the terms and conditions of this Agreement, and
upon the basis of the representations, warrants and agreements herein contained,
the Company hereby appoints the Underwriter as its exclusive agent for a period
of 120 business days from the Effective Date, subject to an extension by mutual
agreement of the Company and the Underwriter for an additional period not to
exceed 90 business days, to sell the Common Stock and Class A Warrants, and the
Underwriter, on the basis of the representations and warranties of the Company
herein, accepts such appointment on a "best efforts, all or none" basis with
respect to the first 550,000 shares of Common Stock, and a "best efforts" basis
with respect to the remaining 720,000 shares of Common Stock and 1,270,000 Class
A Warrants. The price at which the Underwriter shall sell the Common Stock and
Warrants to the public, as agent for the Company, shall be $__ per share of
Common Stock and $__
15
<PAGE> 16
per Class A Warrant, and the Company shall pay a commission of $ in respect of
such shares of Common Stock and Class A Warrants sold on behalf of the Company
by the Underwriter.
(b) Provided that 550,000 of the shares of Common Stock are
sold and paid for, the Company agrees to pay the Underwriter a non-accountable
expense allowance equal to 3% of the gross proceeds of the offering, subject to
Paragraph 8 herein.
(c) It is a condition of this Agreement that the Underwriter
shall use its best efforts to sell the shares of Common Stock and Class A
Warrants on behalf of the Company, that the Underwriter will instruct investors
to make all remittances payable to the Escrow Agent (hereinafter defined) and
that any and all funds received from such sale, without any deduction therefrom
whatsoever, including, but not limited to, any underwriting commission or any
dealer concession or otherwise, shall be forthwith deposited in a non-interest
bearing escrow account with Atlantic Bank of New York, as Escrow Agent, pursuant
to the terms of an Escrow Agreement entered into by and among the Company, the
Underwriter and the Escrow Agent, no later than 12 noon of the next business day
after receipt. In the event at least 550,000 shares of Common Stock are not sold
within 120 business days from the Effective Date, or following the expiration of
an additional 90 business days if so agreed in writing by the Company and the
Underwriter (with an additional ten business days to permit clearance of the
funds in escrow), all funds will be promptly refunded to the subscribers in
full, without deduction therefrom or interest thereon. During the period of
escrow, subscribers will not have the right to demand a refund of their
subscriptions. Certificates will be issued to purchasers only if proceeds from
the sale of at least 550,000 shares of Common Stock are released from escrow to
the Company or as directed by the Company. Until such time as the funds have
been released, such purchasers, if any, will be deemed subscribers and not
shareholders. The funds in escrow will be held for the benefit of those
subscribers until released to the Company and will not be subject to creditors
of the Company or for the expenses of this offering.
(d) In the event of the sale of at least 550,000 shares of
Common Stock such concessions from the public offering price may be allowed to
selected dealers and members of the National Association of Securities Dealers,
Inc. ("NASD") as you determine, within the limits set forth in the Prospectus.
5. Delivery and Payment.
(a) Delivery of the shares of Common Stock and Class A
Warrants against payment therefor shall take place at the offices of Toluca
Pacific Securities Corporation, (or at such other place as may be designated by
you) at 10:00 A.M., New York time, on such date after the Registration Statement
has become effective as the
16
<PAGE> 17
Underwriter shall designate, such time and date of payment for and delivery of
the shares of Common Stock and Class A Warrants being herein called the "Closing
Date".
(b) The Company will make the certificates for the shares of
Common Stock and Class A Warrants to be sold hereunder available to the
Underwriter for inspection at least two full business days prior to the Closing
Date at the offices of the Company's transfer agent. The certificates shall be
in such names and denominations as you may request, at least two full business
days prior to the Closing Date.
6. Offering the Common Stock and Class A Warrants On Behalf
of the Company.
It is understood that you propose to offer the Common Stock
and Class A Warrants to the public, solely as agent for the Company, upon the
terms and conditions set forth in the Registration Statement. The Underwriter
shall commence making such offer as agent for the Company on the Effective Date
or as soon thereafter as you deem advisable.
7. Selected Dealers.
The Underwriter may offer and sell the Common Stock and Class
A Warrants for the Company's account through Selected Dealers registered with
the NASD, as selected by the Underwriter in accordance with a form of Selected
Dealer Agreement, pursuant to which the Underwriter may allow a concession (out
of the underwriting commission in the event of the sale of al least 550,000
shares of Common Stock within the limits to be set forth in the Prospectus, but
all such sales by Selected Dealers shall be made by the Company, acting through
the Underwriter as agent, and not for the account of the Underwriter.
8. Payment of Expenses.
(a) Whether or not the sale of the Common Stock and Class A
Warrants is consummated, the Company will pay and bear all costs, fees, taxes
and expenses incident to the performance of this Agreement by the Company,
including but not limited to: (i) the issuance, offer, sale and delivery of the
Common Stock and Warrants, including all expenses and fees incident to the
preparation, printing, filing and mailing (including the payment of postage with
respect to such mailing) of the Registration Statement (including all exhibits
thereto), each Preliminary Prospectus, the Prospectus, and amendments and
post-effective amendments thereof and supplements thereto, and this Agreement
and related documents, Preliminary and Final Blue Sky Memoranda, including the
cost of preparing and printing all copies thereof to be printed by a financial
printer selected by the Underwriter in quantities deemed necessary by the
Underwriter; (ii) the preparing and printing of
17
<PAGE> 18
one "Tombstone" advertisement in the Wall Street Journal (iii) the printing,
engraving, issuance and delivery of the Common Stock, Warrants, Warrant Shares,
Underwriter's Share Warrants and Underwriter's Warrant Warrants and the
securities underlying the Underwriter's Share Warrant and Underwriter's Warrant
Warrants, including any transfer or other taxes payable thereon in connection
with the original issuance thereof; (iv) the qualification of the Common Stock
and Warrants under the state or foreign securities or "Blue Sky" laws selected
by the Underwriter and the Company, and disbursements and reasonable fees of
counsel for the Underwriter in connection therewith plus the filing fees for
such states; (v) fees and disbursements of counsel and accountants for the
Company; (vi) the filing fees payable to the Commission and the National
Association of Securities Dealers, Inc. ("NASD"); (vii) any other expenses
incurred on behalf of the Company; (viii) any listing of the Common Stock and
Warrants on the NASDAQ; and (ix) the cost of preparing and delivering to the
Underwriter and its counsel three (3) bound volumes containing copies of all
documents and appropriate correspondence filed with or received from the
Commission and the NASD, and all closing documents.
(b) In addition to the expenses to be paid and borne by the
Company referred to in Paragraph 8(a) above, if 550,000 shares of Common Stock
are sold as provided by this Agreement, the Company shall reimburse the
Underwriter at closing for expenses incurred by the Underwriter in connection
with the Offering (for which the Underwriter need not make any accounting of),
in the amount of 3% of the price to the public of each share of Common Stock and
Class A Warrant sold in the Offering. This 3% non-accountable expense allowance
shall cover the fees of the Underwriter's legal counsel, but shall not include
any expenses for which the Company is responsible under Paragraph 8(a) above,
including the reasonable fees and disbursements of the Underwriter's legal
counsel with respect to Blue Sky matters. As of the date hereof, $30,000 has
been advanced by the Company to the Underwriter with respect to such
non-accountable expense allowance.
(c) If the transactions contemplated hereby are not
consummated for any reason whatsoever, or in the event that the Company does not
or cannot, for any reason whatsoever, expeditiously proceed with the Offering,
or if any of the representations, warranties or covenants contained in this
Agreement are not materially correct or cannot be complied with by the Company,
or business prospects or obligations of the Company are adversely affected and
the Company does not commence or continue with the Underwriting at any time or
terminates the proposed transaction prior to the closing of this Agreement, the
Company shall reimburse the Underwriter on an accountable basis for all
out-of-pocket expenses actually incurred in connection with the Underwriting,
this Agreement and all of the transactions hereby contemplated, including,
without limitation, the Underwriter's
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<PAGE> 19
legal fees and expenses, up to an aggregate total of $30,000 less such sums
which have already been paid.
9. Conditions of Underwriter's Obligations.
The Obligations of the Underwriter to consummate the
transactions contemplated by this Agreement shall be subject to the continuing
accuracy of the representations and warranties of the Company contained herein
as of the date hereof and as of the Closing Date, the accuracy of the statements
of the Company and its officers and directors made pursuant to the provisions
hereof, and to the performance by the Company of its covenants and agreements
hereunder and under each certificate, opinion and document contemplated
hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 P.M., New York time, on the date following the date of this
Agreement, or such later date and time as shall be consented to in writing by
the Underwriter and, on or prior to the Closing Date, no stop order suspending
the effectiveness of the Registration Statement or the qualification or
registration of the Common Stock and Warrants under the securities laws of any
jurisdiction shall have been issued and no proceedings for that purpose shall
have been instituted or shall be pending or to the Underwriter's knowledge or
the knowledge of the Company, shall be contemplated by the Commission or any
such authorities of any jurisdiction and any request on the part of the
Commission or any such authorities for additional information shall have been
complied with to the reasonable satisfaction of the Commission or such
authorities and counsel to the Underwriter and after the date hereof no
amendment or supplement shall have been filed to the Registration Statement or
Prospectus without the Underwriter's prior consent.
(b) The Registration Statement or the Prospectus or any
amendment thereof or supplement thereto shall not contain an untrue statement of
a fact which is material, or omit to state a fact which is material and is
required to be stated therein or is necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
(c) Between the time of the execution and delivery of this
Agreement and the Closing Date, there shall be no litigation instituted against
the Company or any of its officers or directors and between such dates there
shall be no proceeding instituted or, to the Company's knowledge, threatened
against the Company or any of its officers or directors before or by any
federal, state or county commission, regulatory body, administrative agency or
other governmental body, domestic or foreign, in which litigation or proceeding
an unfavorable ruling, decision or finding would have a material adverse effect
on the Company or its business, business
19
<PAGE> 20
prospects or properties, or have a material adverse effect on the financial
condition or results of operations of the Company.
(d) Each of the representations and warranties of the Company
contained herein and each certificate and document contemplated under this
Agreement to be delivered to the Underwriter shall be true and correct at the
Closing Date as if made at the Closing Date, and all covenants and agreements
contained herein and in each such certificate and document to be performed on
the part of the Company, and all conditions contained herein and in each such
certificate and document to be fulfilled or complied with by the Company at or
prior to the Closing Date shall be fulfilled or complied with.
(e) At the Closing Date, the Underwriter shall have received
the opinion of John B. Lowy, P.C., counsel to the Company, dated such Closing
Date, addressed to the Underwriter and in form and substance satisfactory to
counsel to the Underwriter, and such counsel may rely upon certificates given to
them from such persons that they deem appropriate, to the effect that:
(i) The Company and each of its subsidiaries are
corporations duly organized, validly existing and in good standing under the
laws of their respective jurisdictions of incorporation, with full corporate
power and authority, and all necessary and material licenses, permits,
certifications, registrations, approvals, consents and franchises of and from
all government and regulatory officials and bodies to own or lease and operate
their properties and to conduct their business as described in the Registration
Statement. Such licenses, permits, certifications, registrations, approvals,
consents and franchises are in full force and effect and the Company is in
compliance therewith in all material respects. The Company and each of its
subsidiaries are duly qualified to do business as foreign corporations and are
in good standing in all jurisdictions wherein such qualification is necessary
and failure so to qualify could have a material adverse effect on the financial
condition, results of operations, business or properties of the Company and its
subsidiaries;
(ii) The Company has full corporate power and
authority to execute, deliver and perform the Underwriting Agreement, the
Mergers and Acquisitions Agreement, the Warrant Agreement and the Underwriter's
Share Warrants and the Underwriter's Warrant Warrants and to consummate the
transactions contemplated thereby. The execution, delivery and performance of
the Underwriting Agreement, the Mergers and Acquisitions Agreement, the Warrant
Agreement and the Underwriter's Share Warrants and the Underwriter's Warrant
Warrants by the Company, the consummation by the Company of the transactions
therein contemplated and the compliance by the Company with the terms of the
Underwriting Agreement, the Mergers and Acquisitions Agreement, the Warrant
Agreement and the Underwriter's Share Warrants and the
20
<PAGE> 21
Underwriter's Warrant Warrants have been duly authorized by all necessary
corporate action, and each of the Underwriting Agreement, the Mergers and
Acquisitions Agreement, the Warrant Agreement and the Underwriter's Share
Warrant and the Underwriter's Warrant Warrants has been duly executed and
delivered by the Company. Each of the Underwriting Agreement, the Mergers and
Acquisitions Agreement, the Warrant Agreement and the Underwriter's Share
Warrants and the Underwriter's Warrant Warrants is a valid and legally binding
obligation of the Company, enforceable in accordance with their respective
terms, subject, as to enforcement of remedies, to applicable bankruptcy,
insolvency, reorganization, moratorium and other laws affecting the rights of
creditors generally and the discretion of courts in granting equitable remedies
and except that enforceability of the indemnification provisions and the
contribution provisions set forth in the Underwriting Agreement may be limited
by the federal securities laws or public policy underlying such laws;
(iii) The execution, delivery and performance of the
Underwriting Agreement, the Mergers and Acquisitions Agreement, the Warrant
Agreement and the Underwriter's Share Warrants and the Underwriter's Warrant
Warrants by the Company, the consummation by the Company of the transactions
therein contemplated and the compliance by the Company with the terms of the
Underwriting Agreement, the Mergers and Acquisitions Agreement, the Warrant
Agreement and the Underwriter's Share Warrants and the Underwriter's Warrant
Warrants do not, and will not, with or without the giving of notice or the lapse
of time, or both, (A) result in a violation of the certificate of incorporation
or by-laws of the Company or any of its subsidiaries, (B) to the best of such
counsel's knowledge, result in a breach of, or conflict with, any terms or
provisions of or constitute a default under, or result in the modification or
termination of, or result in the creation or imposition of any lien, security
interest, charge or encumbrance upon any of the properties or assets of the
Company or any of its subsidiaries pursuant to, any indenture, mortgage, note,
contract, commitment or other material agreement or instrument to which the
Company or its subsidiaries is a party or by which the Company or its
subsidiaries or any of its properties or assets are or may be bound or affected;
(C) to the best of such counsel's knowledge violate any existing applicable law,
rule or regulation or judgment, order or decree known to such counsel of any
governmental agency or court, domestic or foreign, having jurisdiction over the
Company or its subsidiaries or any of its properties or business; or (D) to the
best of such counsel's knowledge, have any material adverse effect on any
material permit, certification, registration, approval, consent, license or
franchise necessary for the Company or its subsidiaries to own or lease and
operate its properties and to conduct its business or the ability of the Company
or its subsidiaries to make use thereof;
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(iv) To the best of such counsel's knowledge, no
authorization, approval, consent, order, registration, license or permit of any
court or governmental agency or body (other than under the Act, the Regulations
and applicable state securities or Blue Sky laws) is required for the valid
authorization, issuance, sale and delivery of the Common Stock, the Warrants,
the Warrant Shares, or the Underwriter's Share Warrants and the Underwriter's
Warrant Warrants, and the consummation by the Company of the transactions
contemplated by the Underwriting Agreement, the Mergers and Acquisitions
Agreement, the Warrant Agreement or the Underwriter's Share Warrants and the
Underwriter's Warrant Warrants;
(v) The Registration Statement was declared effective
under the Act on ______________, 1996; to the best of such counsel's knowledge,
no stop order suspending the effectiveness of the Registration Statement has
been issued, and no proceedings for that purpose have been instituted or are
pending, threatened or contemplated under the Act;
(vi) The Registration Statement and the Prospectus,
as of the Effective Date (except for the financial statements and other
financial data included therein or omitted therefrom, as to which such counsel
expresses no opinion), comply as to form in all material respects with the
requirements of the Act and Regulations and the conditions for use of a
registration statement on Form SB-2 have been satisfied by the Company;
(vii) The description in the Registration Statement
and the Prospectus of statutes, regulations, contracts and other documents have
been reviewed by such counsel, and, based upon such review, are accurate in all
material respects and present fairly the information required to be disclosed,
and there are no material statutes or regulations, or, to the best of such
counsel's knowledge, material contracts or documents, of a character required to
be described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement, which are not so described or filed as
required.
None of the material provisions of the contracts or
instruments described above violates any existing applicable law, rule or
regulation or judgment, order or decree known to such counsel of any United
States governmental agency or court having jurisdiction over the Company or its
subsidiaries or any of its assets or businesses;
(viii) The outstanding Common Stock, Options and
Warrants have been duly authorized and validly issued. The outstanding Common
stock is fully paid and nonassessable. None of the outstanding Common Stock has
been issued in violation of the preemptive rights of any shareholder of the
Company. None of the holders of the outstanding Common Stock is subject to
personal
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<PAGE> 23
liability solely by reason of being such a holder. The offers and sales of the
outstanding Common Stock were at all relevant times either registered under the
Act and the applicable state securities or Blue Sky laws or exempt from such
registration requirements. The authorized Common Stock conforms to the
description thereof contained in the Registration Statement and Prospectus. To
the best of such counsel's knowledge, except as set forth in the Prospectus, no
holder of any of the Company's securities has any rights, "demand," "piggyback"
or otherwise, to have such securities registered under the Act;
(ix) The issuance and sale of the Common Stock, the
Warrants, the Warrant Shares and the Underwriter's Share Warrants and the
Underwriter's Warrant Warrants have been duly authorized and when issued and
paid for, will be validly issued, fully paid and nonassessable, and the holders
thereof will not be subject to personal liability solely by reason of being such
holders. The Common Stock is not subject to preemptive rights of any stockholder
of the Company. The certificates representing the securities are in proper legal
form;
(x) The issuance and sale of the Warrants, the
Warrant Shares and the Underwriter's Share Warrants and the Underwriter's
Warrant Warrants have been duly authorized and, when paid for, issued and
delivered pursuant to the terms of the Warrant Agreement, the Underwriting
Agreement or the Underwriter's Share Warrants and Underwriter's Warrant
Warrants, as the case may be, the Warrants, the Warrant Shares and the
Underwriter's Share Warrants and the Underwriter's Warrant Warrants will
constitute the valid and binding obligations of the Company, enforceable in
accordance with their terms, to issue and sell the Warrants, the Warrant Shares
and/or Underwriter's Share Warrants and Underwriter's Warrant Warrants. All
corporate action required to be taken for the authorization, issuance and sale
of the securities has been duly, validly and sufficiently taken. The Warrants,
the Warrant Shares and the Underwriter's Share Warrants and Underwriter's
Warrant Warrants conform to the descriptions thereof contained in the
Registration Statement and Prospectus;
(xi) The Underwriter will acquire good title to the
Common Stock and Warrants, free and clear of all liens, encumbrances, equities,
security interests and claims, provided that the Underwriter is a bona fide
purchaser as defined in Section 8-302 of the Uniform Commercial Code;
(xii) INTENTIONALLY LEFT BLANK.
(xiii) To the best of such counsel's knowledge, there
are no claims, actions, suits, proceedings, arbitrations, investigations or
inquiries before any governmental agency, court or tribunal, foreign or
domestic, or before any private arbitration tribunal, pending or threatened
against the Company or its
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subsidiaries, or involving their properties or business, other than as described
in the Prospectus, such description being accurate, and other than litigation
incident to the kind of business conducted by the Company which, individually
and in the aggregate, is not material, and, except as otherwise disclosed in the
Prospectus and the Registration Statement, the Company and its subsidiaries are
not in violation of any applicable federal and state laws, statutes and
regulations concerning its business;
(xiv) The Company has federal registrations of the
trademarks/servicemarks as set forth in the Registration Statement. To the best
of such counsel's knowledge, the Company and its subsidiaries have not infringed
and are not infringing with the rights of others with respect to such
intangibles; and, to the best of such counsel's knowledge, except as otherwise
disclosed in the Prospectus, the Company and its subsidiaries have not received
any notice of conflict with the asserted rights of others with respect to
intangibles which might, singly or in the aggregate, materially adversely affect
their business, results of operations or financial condition;
(xv) Such counsel has participated in reviews and
discussions in connection with the preparation of the Registration Statement and
the Prospectus, and although such counsel is not passing upon and does not
assume any responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement and the Prospectus (except as
otherwise set forth in the opinion), in the course of such reviews and
discussions and such other investigation as they deemed necessary, no facts came
to their attention which lead them to believe that (A) the Registration
Statement (except as to the financial statements and other financial data
contained therein, as to which such counsel expresses no opinion), on the
Effective Date, contained any untrue statement of a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
that (B) the Prospectus (except as to the financial statements and other
financial data contained therein, as to which such counsel expresses no opinion)
contains any untrue statement of a material fact or omits to state any material
fact necessary in order to make the statements therein not misleading;
(f) INTENTIONALLY LEFT BLANK.
(g) On or prior to the Closing Date, counsel for the
Underwriter shall have been furnished such documents, certificates and opinions
as they may reasonably require for the purpose of enabling them to review the
matters referred to in subparagraph (e) of this Paragraph 9, or in order to
evidence the accuracy, completeness or satisfaction of any of the
representations, warranties or conditions herein contained.
24
<PAGE> 25
(h) Prior to the Closing Date:
(i) There shall have been no material adverse change
in the condition or prospects or the business activities, financial or
otherwise, of the Company, other than as contemplated in the Registration
Statement, from the latest dates as of which such condition is set forth in the
Registration Statement and Prospectus;
(ii) There shall have been no transaction, outside
the ordinary course of business, entered into by the Company from the latest
date as of which the financial condition of the Company is set forth in the
Registration Statement and Prospectus which is material to the Company, which is
either (x) required to be disclosed in the Prospectus or Registration Statement
and is not so disclosed, or (y) likely to have material adverse effect on the
Company's business or financial condition;
(iii) The Company shall not be in default under any
material provision of any instrument relating to any outstanding indebtedness;
(iv) No material amount of the assets of the Company
shall have been pledged, mortgaged or otherwise encumbered, except as set forth
in the Registration Statement and Prospectus;
(v) No action, suit or proceeding, at law or in
equity, shall have been pending or to its knowledge threatened against the
Company or affecting any of its properties or businesses before or by any court
or federal or state commission, board or other administrative agency wherein an
unfavorable decision, ruling or finding would materially and adversely affect
the business, operations, prospects or financial condition or income of the
Company, taken as a whole, except as set forth in the Registration Statement and
Prospectus; and
(vi) No stop order shall have been issued under the
Act and no proceedings therefor shall have been initiated or, to the Company's
knowledge, threatened by the Commission.
(vii) Each of the representations and warranties of
the Company contained in this Agreement and in each certificate and document
contemplated under this Agreement to be delivered to the Underwriter was, when
originally made and is at the time such certificate is dated, true and correct.
(i) Concurrently with the execution and delivery of this
Agreement and at the Closing Date, the Underwriter shall have received a
certificate of the Company signed by the Chief Executive Officer of the Company
and the principal financial officer of the Company, dated as of the Closing
Date, to the effect that the conditions set forth in subparagraph (g) above have
been satisfied
25
<PAGE> 26
and that, as of the Closing Date, the representations and warranties of the
Company set forth in Paragraph 2 herein and the statements in the Registration
Statement and Prospectus were and are true and correct. Any certificate signed
by any officer of the Company and delivered to the Underwriter or counsel for
the Underwriter shall be deemed a representation and warranty by the Company to
the Underwriter as to the statements made therein.
(j) At the time this Agreement is executed, and at the Closing
Date, the Underwriter shall have received letters, addressed to the Underwriter
and in form and substance satisfactory in all respects (including the
nonmaterial nature of the changes or decreases, if any, referred to in clause
(iii) below) to the Underwriter and counsel for the Underwriter, from Wallace,
Sanders & Company and KPMG Peat Marwick, dated as of the date of this Agreement
and as of the Closing Date:
(i) Confirming that they are independent public
accountants with respect to the Company and Developers Mortgage Corporation
("DMC"), respectively, within the meaning of the Act and applicable regulations
thereunder;
(ii) Stating that in their opinion the audited
consolidated financial statements of the Company and DMC, respectively, included
in the Registration Statement and Prospectus for the year ended September 30,
1995 and the nine months ended June 30, 1996, and the year ended September 30,
1994 and the seven months ended April 28, 1995, respectively, comply as to form
in all material respects with the applicable accounting requirements of the Act
and the Regulations thereunder with respect to registration statements on Form
SB-2;
(iii) Stating that, with respect to the period from
June 30, 1996 (Company) and April 28, 1995 (DMC) to a specified date (the
"Specified Date") not earlier than five days prior to the date of such letter,
they have read such interim unaudited consolidated financial data of the Company
and DMC, respectively, for the period from June 30, 1996 and April 28, 1995,
respectively, through the Specified Date as are available on the date of such
letter, read the minutes of the stockholders and board of directors of the
Company and DMC, respectively, for the period from June 30, 1996 and April 28,
1995, respectively, through the Specified Date (or, to the extent that they are
advised by the Company and DMC, respectively, that final minutes of any such
meeting are not available on the date of such letter, a draft thereof furnished
by the Company and DMC, respectively), and made inquiries of officers of the
Company and DMC, respectively, responsible for financial and accounting matters
as to whether (I) at the specified date there was any change in the capital
stock or long-term liabilities of the Company and DMC, respectively, or any
decrease in the net current assets or net assets of the Company and DMC,
respectively, as compared with the amounts shown on the June 30, 1996 and April
28,
26
<PAGE> 27
1995 balance sheets filed with and as part of the Prospectus, or (II) for the
period from June 30, 1996 (Company) and April 28, 1995 (DMC) to the Specified
Date, there were any increases, as compared with the corresponding period in the
preceding year, in the total or per share amounts of net loss (or, as the case
may be, any decrease in net income), and further stating that while such
procedures and inquiries do not constitute an examination made in accordance
with generally accepted auditing standards, nothing came to their attention
which caused them to believe that there was any such change other than as
disclosed or contemplated by the Prospectus or, if any such change has occurred,
fully explaining the nature of such change and its effect on the financial
position of the Company and DMC, respectively.
(iv) Stating that they have carried out certain
specified procedures (specifically set forth in such letter or letters) as
specified by the Underwriter not constituting an audit, with respect to certain
tables, statistics and other financial data in the Prospectus specified by the
Underwriter and compared them with, either the audited financial statements
filed with and as a part of the Prospectus and covered by their report included
therein, or other financial data, specified by the Underwriter, not included in
the Prospectus but from which information in the Prospectus is derived, and
which have been obtained directly from the general accounting records of the
Company and DMC, respectively, or indirectly from such accounting records by
analysis or computation, and having compared such tables, statistics and other
financial data with such audited financial statements or the accounting records
of the Company and DMC, respectively, stating that they have found such tables,
statistics and other financial data to agree therewith; and
(v) Stating such other matters incident to the
transaction contemplated hereby as the Underwriter may reasonably request.
(k) All proceedings taken in connection with the
authorization, issuance or sale of the Common Stock, Warrants, Warrant Shares,
the Underwriter's Share Warrants and Underwriter's Warrant Warrants and the
Underwriter's Warrant Shares as herein contemplated shall be satisfactory in
form and substance to the Underwriter and to counsel to the Underwriter, and the
Underwriter shall have received from such counsel an opinion, dated as the
Closing Date with respect to such of these proceedings as the Underwriter may
reasonably require.
(l) The Company shall have furnished to the Underwriter such
certificates, additional to those specifically mentioned herein, as the
Underwriter may have reasonably requested in a timely manner as to the accuracy
and completeness, at the Closing Date, of any statement in the Registration
Statement or the Prospectus, as to the accuracy, at the Closing Date, of the
27
<PAGE> 28
representations and warranties of the Company herein and in each certificate and
document contemplated under this Agreement to be delivered to the Underwriter,
as to the performance by the Company of its obligations hereunder and under each
such certificate and document or as to the fulfillment of the conditions
concurrent and precedent to the Underwriter's obligations hereunder.
(m) The obligation of the Underwriter to purchase Common Stock
and Warrants hereunder is subject to the accuracy of the representations and
warranties of the Company contained herein on and as of the Closing Date.
(n) On the Closing Date there shall have been duly tendered to
the Underwriter for the Underwriter's account the appropriate number of shares
of Common Stock and Warrants.
10. Indemnification and Contribution.
(a) Subject to the conditions set forth below, the Company
agrees to indemnify and hold harmless the Underwriter and each person, if any,
who controls the Underwriter ("controlling person") within the meaning of either
Section 15 of the Act or Section 20 of the Exchange Act, against any and all
losses, liabilities, claims, damages, actions and expenses or liability, joint
or several, whatsoever (including but not limited to any and all expense
whatsoever reasonably incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever), joint or
several, to which it or such controlling persons may become subject under the
Act, the Exchange Act or under any other statute or at common law or otherwise
or under the laws of foreign countries, arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any Preliminary Prospectus or the Prospectus (as from
time to time amended and supplemented); in any post-effective amendment or
amendments or any new registration statement and prospectus in which is included
the Warrant Shares of the Company issued or issuable upon exercise of the
Warrants, or Underwriter's Warrant Shares upon exercise of the Underwriter's
Share Warrants and Underwriter's Warrant Warrants; or in any application or
other document or written communication (in this Paragraph 10 collectively
called "application") executed by the Company or based upon written information
furnished by the Company filed in any jurisdiction in order to qualify the
Common Stock, Warrants, Warrant Shares, Underwriter's Share Warrants and
Underwriter's Warrant Warrants and Underwriter's Warrant Shares (including the
Shares issuable upon exercise of the Warrants underlying the Underwriter's
Warrant Warrants) under the securities laws thereof or filed with the Commission
or any securities exchange; or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
therein not misleading (in the case of the Prospectus, in the light of the
28
<PAGE> 29
circumstances under which they were made), unless such statement or omission was
made in reliance upon or in conformity with information furnished to the Company
as provided in Section 2(c) hereof with respect to the Underwriter by or on
behalf of the Underwriter expressly for use in any Preliminary Prospectus, the
Registration Statement or Prospectus, or any amendment or supplement thereof, or
in application, as the case may be. Notwithstanding the foregoing, the Company
shall have no liability under this Paragraph 10(a) if any such untrue statement
or omission made in a Preliminary Prospectus, is cured in the Prospectus and the
Underwriter failed to deliver to the person or persons alleging the liability
upon which indemnification is being sought, at or prior to the written
confirmation of such sale, a copy of the Prospectus. This indemnity will be in
addition to any liability which the Company may otherwise have.
(b) The Underwriter agrees to indemnify and hold harmless the
Company and each of the officers and directors of the Company who have signed
the Registration Statement and each other person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, to the same extent as the foregoing indemnity from the Company to
the Underwriter in Paragraph 10(a), but only with respect to any untrue
statement or alleged untrue statement of any material fact contained in, or any
omission or alleged omission to state a material fact required to be stated in,
any Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment or supplement thereof or necessary to make the statements therein not
misleading or in any application made solely in reliance upon, and in conformity
with, information furnished to the Company by the Underwriter as provided in
Section 2(c) hereof expressly for use in the preparation of such Preliminary
Prospectus, the Registration Statement or Prospectus. This indemnity agreement
will be in addition to any liability which the Underwriter may otherwise have.
Notwithstanding the foregoing, the Underwriter shall have no liability under
this Paragraph 10(b) if any such untrue statement or omission made in a
Preliminary Prospectus is cured in the Prospectus, and the Prospectus is
delivered to the person or persons alleging the liability upon which
indemnification is being sought.
(c) If any action is brought against the Underwriter or
controlling person in respect of which indemnity may be sought against the
Company pursuant to the foregoing, the Underwriter shall promptly notify the
Company in writing of the institution of such action and the Company shall
assume the defense of the action, including the employment and fees of counsel
(reasonably satisfactory to the Underwriter) and payment of expenses. The
Underwriter or controlling person shall have the right to employ its or their
own counsel in any such case, but the fees and expenses of such counsel shall be
at the expense of the Underwriter or such controlling person unless the
employment of such counsel
29
<PAGE> 30
shall have been authorized in writing by the Company in connection with the
defense of such action. If the Company shall have employed counsel to have
charge of the defense or shall previously have assumed the defense of any such
action or claim, the Company shall not thereafter be liable to any Underwriter
or controlling person in investigating, preparing or defending any such action
or claim. Each indemnified party shall promptly notify the Underwriter of the
commencement of any litigation or proceedings against the Company or any of its
officers or directors or controlling persons in connection with the issue and
sale of the Common Stock, Warrants, Warrants Shares, Underwriter's Share
Warrants and Underwriter's Warrant Warrants or Underwriter's Warrant Shares or
in connection with the Registration Statement or Prospectus.
(d) In order to provide for just and equitable contribution
under the Act in any case in which: (i) the Underwriter makes a claim for
indemnification pursuant to Paragraph 10 hereof, but it is judicially determined
(by the entry of a final judgment or decree by a court of competent jurisdiction
and the time to appeal has expired or the last right of appeal has been denied)
that such indemnification may not be enforced in such case notwithstanding the
fact that this Paragraph 10 provides for indemnification of such case; or (ii)
contribution under the Act may be required on the part of the Underwriter in
circumstances for which indemnification is provided under this Paragraph 10,
then, and in each such case, the Company and the Underwriter shall contribute to
the aggregate losses, claims, damages or liabilities to which they may be
subject (after any contribution from others) in such proportion so that the
Underwriter is responsible for the portion represented by dividing the total
compensation received by the Underwriter herein by the total purchase price of
all Common Stock and Warrants sold in the public offering and the Company is
responsible for the remaining portion; provided, that in any such case, no
person guilty of a fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
The foregoing contribution agreement shall in no way affect
the contribution liabilities of any persons having liability under Section 11 of
the Act other than the Company, and the Underwriter. As used in this Paragraph
10, the term "Underwriter" includes any officer, director, or other person who
controls the Underwriter within the meaning of Section 15 of the Act, and the
word "Company" includes any officer, director or person who controls the Company
within the meaning of Section 15 of the Act. If the full amount of the
contribution specified in this paragraph is not permitted by law, then the
Underwriter and each person who controls the Underwriter shall be entitled to
contribution from the Company to the full extent permitted by law. No
contribution shall be requested with regard to the settlement of any matter from
any party who did not consent to the settlement.
30
<PAGE> 31
(e) Within fifteen (15) days after receipt by any party to
this Agreement (or its representative) of notice of the commencement of any
action, suit or proceeding, such party will, if a claim for contribution in
respect thereof is made against another party (the "contributing party"), notify
the contributing party of the commencement thereof, but the omission so to
notify the contributing party will not relieve it from any liability it may have
to any other party other than for contribution hereunder.
In case any such action, suit or proceeding is brought against
any party, and such party notifies a contributing party or his or its
representative of the commencement thereof within the aforesaid fifteen (15)
days, the contributing party will be entitled to participate therein with the
notifying party and any other contributing party similarly notified. Any such
contributing party shall not be liable to any party seeking contribution on
account of any settlement of any claim, action or proceeding effected by such
party seeking contribution without the written consent of such contributing
party. The indemnification provisions contained in this Paragraph 10 are in
addition to any other rights or remedies which either party hereto may have with
respect to the other or hereunder.
11. Representations, Warranties, Agreements to Survive
Delivery.
The respective indemnity and contribution agreements by the
Underwriter and the Company contained in Paragraph 10 hereof, and the covenants,
representations and warranties of the Company set forth in this Agreement, shall
remain operative and in full force and effect regardless of (i) any
investigation made by the Underwriter or on its behalf or by or on behalf of any
person who controls the Underwriter, or by the Company or any controlling person
of the Company or any director or any officer of the Company, (ii) acceptance of
any of the Common Stock and Warrants and payment therefor, or (iii) any
termination of this Agreement, and shall survive the delivery of the Common
Stock and Warrants and any successor of the Underwriter or the Company, or of
any person who controls the Underwriter or the Company or any other indemnified
party, as the case may be, shall be entitled to the benefit of such respective
indemnity and contribution agreements. The respective indemnity and contribution
agreements by the Underwriter and the Company contained in this Paragraph 11
shall be in addition to any liability which the Underwriter and the Company may
otherwise have.
12. Effective Date of This Agreement and Termination Thereof.
(a) This Agreement shall become effective at 10:00 A.M., New
York time, on the first full business day following the day on which the
Underwriter and the Company receive notification that the Registration Statement
became effective.
31
<PAGE> 32
(b) This Agreement may be terminated by the Underwriter by
notifying the Company at any time on or before the Closing Date, if in the
Underwriter's judgment it is impracticable to offer for sale or to enforce
contracts made by the Underwriter for the resale of the Common Stock and
Warrants agreed to be purchased hereunder by reason of (i) the Company having
sustained a material loss, whether or not insured, by reason of fire,
earthquake, flood, accident or other calamity, or from any labor dispute or
court or government action, order or decree, (ii) trading in securities on the
New York Stock Exchange or the American Stock Exchange having been suspended or
limited, (iii) material governmental restrictions having been imposed on trading
in securities generally (not in force and effect on the date herein), (iv) a
banking moratorium having been declared by federal or New York State
authorities, (v) an outbreak of major international hostilities or other
national or international calamity having occurred, (vi) a pending or threatened
legal or governmental proceeding or action relating generally to the Company's
business, or a notification having been received by the Company of the threat of
any such proceeding or action, which could materially adversely affect the
Company, (vii) the Company is merged or consolidated into or acquired by another
company or group or there exists a binding legal commitment for the foregoing or
any other material change of ownership or control occurs, (viii) the passage by
the Congress of the United States or by any state legislative body of similar
impact, or any act or measure, or the adoption of any orders, rules or
regulations by any governmental body or any authoritative accounting institute
or board, or any governmental executive, which is reasonably believed likely by
the Underwriter to have a material impact on the business, financial condition
or financial statements of the Company, (ix) any adverse change in the financial
or securities markets beyond normal market fluctuations having occurred since
the date of this Agreement, or (x) any material adverse change having occurred,
since the respective dates of which information is given in the Registration
Statement and Prospectus, in the earnings, business prospects or general
condition of the Company, financial or otherwise, whether or not arising in the
ordinary course of business.
(c) If the Underwriter elects to prevent this Agreement from
becoming effective or to terminate this Agreement as provided in this Paragraph
12, the Company shall be notified promptly by the Underwriter by telephone or
facsimile, confirmed by letter.
(d) If this Agreement shall not become effective by reason of
an election of the Underwriter pursuant to this Paragraph 12 or if this
Agreement shall not be carried out within the time specified herein by reason of
any failure on the part of the Company to perform any undertaking, or to satisfy
any condition of this Agreement by it to be performed or satisfied, the sole
liability of the Company to the Underwriter, in addition to the obligations
assumed by the Company pursuant to Paragraph 8 herein,
32
<PAGE> 33
will be to reimburse the Underwriter for the following: (i) Blue Sky counsel
fees and expenses to the extent set forth in Paragraph 8(a)(iv); (ii) Blue Sky
filing fees; and (iii) such reasonable out-of-pocket expenses of the Underwriter
(including the fees and disbursements of their counsel), to the extent set forth
in Paragraph 8(c), in connection with this Agreement and the proposed offering
of the Units, but in no event to exceed the sum of $30,000 less such amounts
already paid.
Notwithstanding any contrary provision contained in this
Agreement, any election hereunder or any termination of this Agreement, and
whether or not this Agreement is otherwise carried out, the provisions of
Paragraph 8 and 10 hereof shall not be in any way affected by such election or
termination or failure to carry out the terms of this Agreement or any part
hereof.
13. Notices.
All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and, if sent to the Underwriter,
shall be mailed, delivered or telegraphed and confirmed to Toluca Pacific
Securities Corporation, 3500 West Olive Avenue, 11th Floor, Toluca Lake,
California 91505, Attention: Paul Fiorini with a copy thereof to Martin H.
Kaplan, Esq., Gusrae, Kaplan & Bruno, 120 Wall Street, New York, New York 10005,
and, if sent to the Company, shall be mailed, delivered or telegraphed and
confirmed to the Company at 2075 West Big Beaver Road, Suite 550, Troy, Michigan
48084, Attention: Christian Pfluger, III, with a copy thereof to John B. Lowy,
P.C., 645 Fifth Avenue, New York, New York 10022, Attention: John B. Lowy, Esq.
14. Parties.
This Agreement shall inure solely to the benefit of and shall
be binding upon, the Underwriter, the Company and the controlling persons,
directors and officers referred to in Paragraph 10 hereof, and their respective
successors, legal representatives and assigns, and no other person, shall have
or be construed to have any legal or equitable right, remedy or claim under or
in respect of or by virtue of this Agreement or any provision herein contained.
15. Construction.
This Agreement shall be governed by and construed and enforced
in accordance with the laws of the State of New York and shall supersede any
agreement or understanding, oral or in writing, express or implied, between the
Company and the Underwriter relating to the sale of any of the Common Stock and
Warrants.
33
<PAGE> 34
16. Jurisdiction and Venue.
The Company agrees that the courts of the State of New York
shall have jurisdiction over any litigation arising from this Agreement, and
venue shall be proper in the Eastern District of New York.
17. Counterparts.
This Agreement may be executed in counterparts.
If the foregoing correctly sets forth the understanding between the
Underwriter and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement between
us.
Very truly yours,
HOMEOWNERS FINANCIAL CORP.
By:______________________________
Christian W. Pfluger, III
President
Accepted as of the date first above written:
TOLUCA PACIFIC SECURITIES CORPORATION
By:______________________________
Paul Fiorini, President
34
<PAGE> 1
Exhibit 1b
WARRANTS
UNDERWRITER'S WARRANT
Dated:_____________, 1996
THIS CERTIFIES THAT Toluca Pacific Securities Corporation (the
"Holder") is entitled to purchase from HOMEOWNERS FINANCIAL CORP., a Delaware
corporation (the "Company"), up to 127,000 shares of the Company's common stock,
$.01 par value (the "Shares"), and/or 127,000 redeemable common stock purchase
warrants (the "Redeemable Warrants"; together with the Shares, the "Securities")
to purchase one share of Common Stock at $ per share (the "Redeemable Warrant
Exercise Price") at a purchase price of $ per Share (the "Share Exercise Price")
and $ per Redeemable Warrant (the "Warrant Exercise Price," collectively, with
the Share Exercise Price, the "Exercise Prices"), subject to adjustment as
provided in paragraph 8 hereof, at any time during the 48 month period
commencing 12 months from the effective date of the Registration Statement
(defined below). This Underwriter's Warrant (the "Underwriter's Warrant") is
exercisable to purchase an aggregate of Shares and Redeemable Warrants, issued
pursuant to an Underwriting Agreement dated , 1996, between the Company and
Toluca Pacific Securities Corporation (the "Underwriter") (as defined in the
Underwriting Agreement), in connection with a public offering, through the
Underwriter, of up to 1,270,000 shares of Common Stock and 1,270,000 Redeemable
Warrants as therein described (hereinafter referred to as the "Public
Securities") and in consideration of $10.00 received by the Company for the
Underwriter's Warrant. The Shares and Redeemable Warrants issuable pursuant to
the Underwriter's Warrant shall have same terms and conditions as the shares of
Common Stock and Redeemable Warrants making up the Public Securities, as
described under the caption "Description of Securities" in the Company's
Registration Statement on Form SB-2, File No. 33-94882 (the "Registration
Statement"), except that the Holder shall have registration rights under the
Securities Act of 1933 (the "Act"), for the Underwriter's Warrant, the Shares
and Redeemable Warrants.
1. The rights represented by this Underwriter's Warrant shall be
exercised at the price, subject to adjustment in accordance with paragraph 8
hereof, and during the periods as follows:
(a) During the period from the date hereof to
, 1997 [12 months from the effective date] (the
"Initial Period"), inclusive, the Holder shall have
no right to purchase any Securities hereunder.
(b) Between , 1997 and , 2001 [5
years from the effective date] (the "Expiration
Date") inclusive, the Holder shall have the option to
purchase Shares hereunder at a price of $ per
Share and to purchase Redeemable Warrants at a
<PAGE> 2
price of $ per Redeemable Warrant [120% above the
public offering price of the Shares and Redeemable
Warrants], subject to adjustment as provided in
paragraph 8 hereof.
(c) After the Expiration Date, the Holder shall have no
right to purchase any Securities hereunder.
2. (a) The rights represented by this Underwriter's Warrant may be
exercised at any time within the periods above specified, in whole or in part,
by (i) the surrender of the Underwriter's Warrant (with the purchase form at the
end hereof properly executed) at the principal executive office of the Company
(or such other office or agency of the Company as it may designate by notice in
writing to the Holder at the address of the Holder appearing on the books of the
Company); (ii) payment to the Company of the exercise price then in effect for
the number of Securities specified in the above-mentioned purchase form together
with applicable stock transfer taxes, if any; and (iii) delivery to the Company
of a duly executed agreement signed by the person(s) designated in the purchase
form to the effect that such person(s) agree(s) to be bound by the provisions of
paragraph 6 and subparagraphs (b), (c) and (d) of paragraph 7 hereof. The
Underwriter's Warrant shall be deemed to have been exercised, in whole or in
part to the extent specified, immediately prior to the close of business on the
date the Underwriter's Warrant is surrendered and payment is made in accordance
with the foregoing provisions of this paragraph 2, and the person or persons in
whose name or names the certificates for Shares and/or Redeemable Warrants shall
be issuable upon such exercise shall become the holder or holders of record of
such Shares and Redeemable Warrants at that time and date. Certificates
representing the Shares and Redeemable Warrants so purchased shall be delivered
to the Holder within a reasonable time, not exceeding ten (10) days, after the
rights represented by this Warrant shall have been so exercised.
(b) Notwithstanding anything to the contrary contained in
subparagraph (a) of paragraph 2, the Holder may elect to exercise this
Underwriter's Warrant in whole or in part by receiving Shares and/or Redeemable
Warrants equal to the value (as determined below) of this Underwriter's Warrant
at the principal office of the Company together with notice of such election in
which event the Company shall issue to the Holder a number of Shares and/or
Redeemable Warrants computed using the following formula:
- 2 -
<PAGE> 3
X = Y(A-B)
---------
A
Where: X = the number of Shares and/or Warrants to be
issued to the Holder;
Y = the number of Shares and/or Warrants to be
exercised under this Underwriter's Warrant;
A = the current fair market value of one share of
Common Stock and/or one Warrant (calculated as
described below); and
B = the Share Exercise Price and/or the Warrant
Exercise Price, as the case may be.
As used herein, the current fair market value of one share of
Common Stock shall mean the greater of (x) the average of the closing prices of
the Company's Common Stock sold on all securities exchanges on which the Common
Stock may at the time be listed and the NASDAQ National Market, or, if there
have been no sales on any such exchange or the NASDAQ National Market on such
day, the average of the highest bid and lowest asked price on such day on The
Nasdaq Stock Market or otherwise in the domestic over-the-counter market as
reported by the National Quotation Bureau, Incorporated, or any similar
successor organization (the "Market Price"), on the trading day immediately
preceding the date notice of exercise of this Underwriter's Warrant is given or
(y) the average of the Market Price per share of Common Stock for the five
trading days immediately preceding the date notice of exercise of this
Underwriter's Warrant is given. If on any date for which the Market Price per
share of Common Stock is to be determined the Common Stock is not listed on any
securities exchange or quoted on the NASDAQ National Market or on The Nasdaq
Stock Market or otherwise in the over-the-counter market, the Market Price per
share of Common Stock shall be the highest price per share which the Company
could then obtain from a willing buyer (not a current employee or director) for
shares of Common Stock sold by the Company, from authorized but unissued shares,
as determined in good faith by the Board of Directors of the Company, unless
prior to such date the Company has become subject to a merger, acquisition or
other consolidation pursuant to which the Company is not the surviving party, in
which case the Market Price per share of Common Stock shall be deemed to be the
value received by the holders of the Company's Common Stock for each share
thereof pursuant to the Company's acquisition.
The current fair market value of one Redeemable Warrant shall be
determined in a like manner, with reference to the prices per Redeemable
Warrant.
3. The Underwriter's Warrant shall not be transferred, sold,
assigned, or hypothecated (other than by will or pursuant to the
laws of descent and distribution) for a period of one year
commencing , 1996, except that it may be transferred to
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<PAGE> 4
successors of the Holder, and may be assigned in whole or in part to any person
who is an officer or director of the Holder or to any member of the selling
group and/or the officers/directors or partners thereof during such period. Any
such assignment shall be effected by the Holder by (i) executing the form of
assignment at the end hereof and (ii) surrendering the Underwriter's Warrant for
cancellation at the office or agency of the Company referred to in paragraph 2
hereof, accompanied by a certificate (signed by an officer of the Holder if the
Holder is a corporation), stating that each transferee is a permitted transferee
under this paragraph 3; whereupon the Company shall issue, in the name or names
specified by the Holder (including the Holder) a new Underwriter's Warrant or
Warrants of like tenor and representing in the aggregate rights to purchase the
same number of Securities as are purchasable hereunder.
4. The Company covenants and agrees that all shares of Common Stock
which may be purchased hereunder or upon exercise of the Redeemable Warrants
will, upon issuance against payment of the purchase price therefor, be duly and
validly issued, fully paid and nonassessable, and no personal liability will
attach to the holder thereof. The Company further covenants and agrees that,
during the periods within which the Underwriter's Warrant may be exercised, the
Company will at all times have authorized and reserved a sufficient number of
shares of its Common Stock to provide for the exercise of the Underwriter's
Warrant and the Redeemable Warrants.
5. The Underwriter's Warrant shall not entitle the Holder to
any voting rights or other rights as stockholders of the Company.
6. (a)(i) The Company shall advise the Holder or its transferees,
whether the Holder holds the Underwriter's Warrant or has exercised the
Underwriter's Warrant and holds shares of Common Stock and/or Redeemable
Warrants, by written notice at least four weeks prior to the filing of any
post-effective amendment to the Registration Statement or of any new
registration statement or post-effective amendment thereto under the Act
covering any securities of the Company, for its own account or for the account
of others, except for any registration statement filed on Form S-4 or S-8
(including a Form S-3 related to a Form S-8) and will, for a period of five
years from the Effective Date, upon the request of the Holder, and subject to
subparagraph 6(a)(ii), include in any such post-effective amendment to the
Registration Statement or in any new registration statement such information as
may be required to permit a public offering of the Underwriter's Warrant, the
Common Stock issuable upon the exercise thereof or upon exercise of the
Redeemable Warrants and the Redeemable Warrants (collectively, the "Registrable
Securities"). The Company shall supply prospectuses and such other documents as
the Holder may reasonably request in order to facilitate the public sale or
other disposition of the Registrable Securities, use its best efforts to
register and qualify any of the Registrable Securities for sale in such states
as the Holder designates and do any and all other acts and things which may be
necessary or desirable to enable the Holder to consummate the public sale or
other disposition of the Registrable
- 4 -
<PAGE> 5
Securities, all at no expense to the Holder or the Underwriter, and furnish
indemnification in the manner provided in paragraph 7 hereof. The Holder shall
furnish information and indemnification as set forth in paragraph 7.
(ii) If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holder as a part of the written notice given
pursuant to subparagraph 6(a)(i). If the managing underwriter determines that a
limitation of the number of shares to be underwritten is required, the
underwriter may exclude some or all Registrable Securities from such
registration (the "Excluded Registrable Securities"); provided, however, that no
other security-holder may include any such securities in such Registration
Statement if any of the Registrable Securities have been excluded from such
registration; and further provided that the Company will file a new Registration
Statement covering the Excluded Registrable Securities, at the Company's
expense, within six months after the completion of such underwritten offering.
(b) On any one occasion only, any 50.1% Holder (as defined
below) shall give notice to the Company at any time to the effect that such
Holder desires to register under the Act any or all of the Registrable
Securities under such circumstances that a public distribution (within the
meaning of the Act) of any such securities will be involved, then the Company
will promptly, but no later than eight weeks after receipt of such notice, file
a post-effective amendment to the current Registration Statement or a new
registration statement pursuant to the Act, so that such designated Registrable
Securities may be publicly sold under the Act as promptly as practicable
thereafter and the Company will use its best efforts to cause such registration
to become and remain effective (including the taking of such steps as are
necessary to obtain the removal of any stop order) within 90 days after the
receipt of such notice, provided, that such Holder shall furnish the Company
with appropriate information in connection therewith as the Company may
reasonably request in writing. Inclusive of this demand right shall be that the
50.1% Holder may, at its option, request the filing of a post-effective
amendment to the current Registration Statement or a new registration statement
under the Act, inclusive of the right granted by subparagraph 6(a) on one
occasion only during the four-year period beginning one year from the effective
date of the Registration Statement (the "Effective Date"). The 50.1% Holder may,
at its option, request the registration of the Underwriter's Warrant and/or any
of the securities underlying the Underwriter's Warrant in a registration
statement made by the Company as contemplated by subparagraph 6(a) or in
connection with a request made pursuant to this subparagraph 6(b) prior to
acquisition of the shares of Common Stock and/or Redeemable Warrants issuable
upon exercise of the Underwriter's Warrant. The 50.1% Holder may, at its option,
request such post-effective amendment or new registration statement during the
described period with respect to the Underwriter's Warrant, or separately as to
the Common Stock and/or Redeemable Warrants issuable upon the exercise of the
Underwriter's Warrant, and such
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<PAGE> 6
registration rights may be exercised by the 50.1% Holder prior to or subsequent
to the exercise of this Underwriter's Warrant. Within ten days after receiving
any such notice pursuant to this subparagraph 6(b), the Company shall give
notice to any other Holder of the Underwriter's Warrant, advising that the
Company is proceeding with such post-effective amendment or registration
statement and offering to include therein the securities underlying the
Underwriter's Warrants held by the other Holder, provided that they shall
furnish the Company with such appropriate information (relating to the
intentions of such Holder) in connection therewith as the Company shall
reasonably request in writing. All costs and expenses of the post-effective
amendment or new registration statement shall be borne by the Company, except
that the Holder(s) shall bear the fees of their own counsel and any underwriting
discounts or commissions applicable to any of the securities sold by them. The
Company will maintain such registration statement or post-effective amendment
current under the Act for a period of at least nine months (and for up to an
additional three months if requested by the Holder(s)) from the effective date
thereof. The Company shall provide prospectuses, and such other documents as the
Holder(s) may request in order to facilitate the public sale or other
disposition of the Registrable Securities, use its best efforts to register and
qualify any of the Registrable Securities for sale in such states as such
Holder(s) designate and furnish indemnification in the manner provided in
paragraph 7 hereof.
(c) The term "50.1% Holder" as used in this paragraph 6 shall
mean the Holder(s) of at least 50.1% of the Underwriter's Warrant and/or the
Common Stock underlying the Underwriter's Warrant and the Redeemable Warrants
and shall include any owner or combination of owners of such securities, which
ownership shall be calculated by determining the number of shares of Common
Stock held by such owner or owners as well as the number of shares then issuable
upon exercise of the Underwriter's Warrant and the Redeemable Warrants.
(d) If at any time prior to the effectiveness of the
registration statement filed in connection with an offering pursuant to this
paragraph 6 the 50.1% Holder shall determine not to proceed with the
registration, upon notice to the Company and the payment to the Company by the
50.1% Holder of the Company's expenses, if any, theretofore incurred in
connection with the registration statement, the 50.1% Holder may terminate its
participation in the offering, and the registration statement previously filed
shall not be counted against the number of demand registrations permitted under
this paragraph 6.
(e) Notwithstanding the foregoing, if the Company shall
furnish to such 50.1% Holder a certificate signed by the President of the
Company stating that in the good faith judgment of the Board of Directors it
would be seriously detrimental to the Company or its stockholders for a
registration statement to be filed in the near future containing the disclosure
of material information required to be included therein by reason of the federal
securities laws, then the Company's obligation to use its best efforts to file
- 6 -
<PAGE> 7
a registration statement shall be deferred for a period during which such
disclosure would be seriously detrimental, provided that this period will not
exceed 30 days and provided further, that the Company shall not defer its
obligation in this matter more than once in any 12 month period.
7. (a) Whenever pursuant to paragraph 6 a registration statement
relating to the Underwriter's Warrant or any Common Stock issued or issuable
upon the exercise of the Underwriter's Warrant or the Redeemable Warrants, or
any Redeemable Warrants is filed under the Act, amended or supplemented, the
Company will indemnify and hold harmless each Holder of the securities covered
by such registration statement, amendment or supplement (such Holder being
hereinafter called the "Distributing Holder"), and each person, if any, who
controls (within the meaning of the Act) the Distributing Holder, and each
underwriter (within the meaning of the Act) of such securities and each person,
if any, who controls (within the meaning of the Act) any such underwriter,
against any losses, claims, damages or liabilities, joint or several, to which
the Distributing Holder, any such controlling person or any such underwriter may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities, or actions in respect thereof, arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any such registration statement or any preliminary prospectus or
final prospectus constituting a part thereof or any amendment or supplement
thereto, or arise out of or are based upon the omission or the alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading and will reimburse the Distributing
Holder or such controlling person or underwriter in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in said registration statement, said preliminary prospectus, said
final prospectus or said amendment or supplement in reliance upon and in
conformity with written information furnished by such Distributing Holder or any
other Distributing Holder for use in the preparation thereof.
(b) The Distributing Holder will indemnify and hold harmless
the Company, each of its directors, each of its officers who have signed said
registration statement and such amendments and supplements thereto, and each
person, if any, who controls the Company (within the meaning of the Act) against
any losses, claims, damages or liabilities, joint or several, to which the
Company or any such director, officer or controlling person may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities, or actions in respect thereof, arise out of or are based upon any
untrue or alleged untrue statement of any material fact contained in said
registration statement, said preliminary prospectus, said final prospectus, or
said amendment or supplement, or arises out of or are based upon
- 7 -
<PAGE> 8
the omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in said
registration statement, said preliminary prospectus, said final prospectus or
said amendment or supplement in reliance upon and in conformity with written
information furnished by such Distributing Holder for use in the preparation
thereof; and will reimburse the Company or any such director, officer or
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action.
(c) Promptly after receipt by an indemnified party under this
paragraph 7 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against any indemnifying
party, give the indemnifying party notice of the commencement thereof, but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
paragraph 7.
(d) In case any such action is brought against any indemnified
party, and it notified an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in and, to the extent that it
may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
paragraph 7 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.
8. (a) The Share Exercise Price in effect at any time and the number
and kind of securities purchasable upon the exercise of the Underwriter's
Warrant shall be subject to adjustment from time to time upon the happening of
certain events hereinafter described; provided, however, that no adjustment
shall be required in respect of the shares issuable upon exercise of the
Redeemable Warrants.
(i) In case the Company shall (a) declare a
dividend or make a distribution on its outstanding shares of Common Stock in
shares of Common Stock, (b) subdivide or reclassify its outstanding shares of
Common Stock into a greater number of shares, or (c) combine or reclassify its
outstanding shares of Common Stock into a smaller number of shares, or (d) the
outstanding shares of Common Stock of the Company are at any time changed into
or exchanged for a different number or kind of shares or other security of the
Company or of another corporation through reorganization, merger, consolidation,
liquidation or
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<PAGE> 9
recapitalization, then appropriate adjustments in the number and kind of such
securities subject to this Underwriter's Warrant shall be made and the Share
Exercise Price in effect at the time of the record date for such dividend or
distribution or of the effective date of such subdivision, combination,
reclassification, reorganization, merger, consolidation, liquidation or
recapitalization shall be proportionately adjusted so that the Holder of this
Underwriter's Warrant exercised after such date shall be entitled to receive the
aggregate number and kind of securities which, if this Underwriter's Warrant had
been exercised by such Holder immediately prior to such date, they would have
owned upon such exercise and been entitled to receive upon such dividend,
distribution, subdivision, combination, reclassification, reorganization,
merger, consolidation, liquidation or recapitalization. For example, if the
Company declares a 2 for 1 stock distribution and the Share Exercise Price
immediately prior to such event was $5.00 per Share and the number of Shares
purchasable upon exercise of this Underwriter's Warrant was 110,000, the
adjusted Share Exercise Price immediately after such event would be $2.50 per
Share and the adjusted number of Shares purchasable upon exercise of this
Warrant would be 220,000. Such adjustment shall be made successively whenever
any event listed above shall occur.
(ii) Whenever the Share Exercise Price payable upon
exercise of the Underwriter's Warrant is adjusted pursuant to subparagraphs
8(a)(i), or the Warrant Exercise Price payable upon exercise of the
Underwriter's Warrant pursuant to paragraph 8(b), the number of shares of Common
Stock or Redeemable Warrants, as the case may be, purchasable upon exercise of
this Underwriter's Warrant shall simultaneously be adjusted by multiplying the
number of shares of Common Stock or Redeemable Warrants, as the case may be,
issuable upon exercise of this Underwriter's Warrant by the Share Exercise Price
or Warrant Exercise Price, as the case may be, in effect on the date hereof and
dividing the product so obtained by the Share Exercise Price or Warrant Exercise
Price, as adjusted.
(iii) No adjustment in the Share Exercise Price or
Warrant Exercise Price shall be required (a) in the event of the sale of the
Company's securities in a future bona fide underwritten public offering; or (b)
unless such adjustment would require an increase or decrease of at least five
cents ($0.05) in the Share Exercise Price; provided, however, that any
adjustments which by reason of this subparagraph (iii) are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment required to be made hereunder. All calculations under this paragraph
8(a) shall be made to the nearest cent or to the nearest one-hundredth of a
share, as the case may be. Anything in this Section 8(a) to the contrary
notwithstanding, the Company shall be entitled, but shall not be required, to
make such changes in the Share Exercise Price or Warrant Exercise Price, in
addition to those required by this Section 8(a) or 8(b), as it shall determine,
in its sole discretion, to be advisable in order that any dividend or
distribution in shares of Common Stock or Redeemable Warrants, or any
subdivision, reclassification or
- 9 -
<PAGE> 10
combination thereof, hereafter made by the Company shall not result in any
federal income tax liability to the holders of Common Stock or securities
convertible into Common Stock (including the Redeemable Warrants issuable upon
exercise of the Underwriter's Warrant).
(iv) Whenever the Exercise Prices are adjusted, as
herein provided, the Company shall promptly cause a notice setting forth the
adjusted Exercise Prices and the adjusted number of shares of Common Stock,
Redeemable Warrants or other securities purchasable upon exercise of the
Underwriter's Warrant to be mailed to the Holder, at the addresses listed on the
books of the Company, and shall cause a certified copy thereof to be mailed to
the Company's transfer agent, if any. The Company may retain a firm of
independent certified public accountants selected by the Board of Directors (who
may be the regular accountants employed by the Company) to make any computation
required by this paragraph 8, and a certificate signed by such firm shall be
conclusive evidence of the correctness of such adjustment.
(v) In the event that at any time, as a result of an
adjustment made pursuant to the provisions of this paragraph 8, the Holder of
the Underwriter's Warrant thereafter shall become entitled to receive any
securities of the Company, other than Common Stock and the Redeemable Warrants,
thereafter the exercise price and number of such other securities so receivable
upon exercise of the Underwriter's Warrant shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
number of shares of Common Stock, Redeemable Warrants or other securities
purchasable upon exercise of the Underwriter's Warrant to be mailed to the
Holder, at the addresses listed on the books of the Company, and shall cause a
certified copy thereof to be mailed to the Company's transfer agent, if any. The
Company may retain a firm of independent certified public accountants selected
by the Board of Directors (who may be the regular accountants employed by the
Company) to make any computation required by this paragraph 8, and a certificate
signed by such firm shall be conclusive evidence of the correctness of such
adjustment.
(vi) In the event that at any time, as a result of an
adjustment made pursuant to the provisions of this paragraph 8, the Holder of
the Underwriter's Warrant thereafter shall become entitled to receive any
securities of the Company, other than Common Stock and the Redeemable Warrants,
thereafter the exercise price and number of such other securities so receivable
upon exercise of the Underwriter's Warrant shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in subparagraphs 8(a),
inclusive of this paragraph (vi).
8. (b) In the event of an adjustment in the Share Exercise Price and
the number of Shares of Common Stock issuable upon the exercise of the
Underwriter's Warrant, pursuant to paragraph 8(a),
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<PAGE> 11
then there shall be a proportional adjustment in the Warrant Exercise Price and
the number of Redeemable Warrants issuable upon the exercise of the
Underwriter's Warrant.
9. This Agreement shall be governed by and in accordance
with the laws of the State of New York.
IN WITNESS WHEREOF, HOMEOWNERS FINANCIAL CORP. has
caused this Underwriter's Warrant to be signed by its duly
authorized officers, and this Underwriter's Warrant to be dated as
of the date first above written.
HOMEOWNERS FINANCIAL CORP.
By:__________________________________
Name:
Title:
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<PAGE> 12
PURCHASE FORM
(To be signed only upon exercise of Underwriter's Warrant)
The undersigned, the holder of the foregoing Underwriter's Warrant,
hereby irrevocably elects to exercise the purchase rights represented by such
Warrant for, and to purchase thereunder, Shares of HOMEOWNERS FINANCIAL
CORP., par value $0.01 per share, and/or Redeemable Common Stock Purchase
Warrants to purchase one (1) share of Common Stock, and herewith makes payment
of $ therefor (or hereby surrenders and delivers that portion of the
Underwriter's Warrant having equivalent value (as determined in accordance with
the provisions of subparagraph (d) of paragraph 2 of the Underwriter's
Warrant)), and requests that the certificates for shares of Common Stock and/or
Redeemable Warrants be issued in the name(s) of, and delivered to ,
whose address(es) is (are):
Dated: , 19
Signature_______________________________________
_________________________________________________
(Print name under signature)
(Signature must conform in all respects to the name of
Holder as specified on the face of the Underwriter's
Warrant).
_________________________________________________
(Insert Social Security or Other Identifying Number of
Holder)
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<PAGE> 13
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Warrant)
FOR VALUE RECEIVED___________________________________________________
hereby sells, assigns and transfers unto______________________________________
(Please print name and address of transferee)
this Warrant, together with all right, title and interest therein, and does
hereby irrevocably constitute and appoint Attorney, to transfer the
within Warrant on the books of HOMEOWNERS FINANCIAL CORP., with full power of
substitution.
Dated:
Signature_____________________________________
___________________________________________________
(Print name under signature)
(Signature must conform in all respects to the name of
Holder as specified on the face of the Underwriter's
Warrant.)
___________________________________________________
(Insert Social Security or Other Identifying Number of
Holder)
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<PAGE> 1
then there shall be a proportional adjustment in the Warrant Exercise Price and
the number of Redeemable Warrants issuable upon the exercise of the
Underwriter's Warrant.
9. This Agreement shall be governed by and in accordance
with the laws of the State of New York.
IN WITNESS WHEREOF, HOMEOWNERS FINANCIAL CORP. has
caused this Underwriter's Warrant to be signed by its duly
authorized officers, and this Underwriter's Warrant to be dated as
of the date first above written.
HOMEOWNERS FINANCIAL CORP.
By:__________________________________
Name:
Title:
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<PAGE> 2
PURCHASE FORM
(To be signed only upon exercise of Underwriter's Warrant)
The undersigned, the holder of the foregoing Underwriter's Warrant,
hereby irrevocably elects to exercise the purchase rights represented by such
Warrant for, and to purchase thereunder, Shares of HOMEOWNERS FINANCIAL
CORP., par value $0.01 per share, and/or Redeemable Common Stock Purchase
Warrants to purchase one (1) share of Common Stock, and herewith makes payment
of $ therefor (or hereby surrenders and delivers that portion of the
Underwriter's Warrant having equivalent value (as determined in accordance with
the provisions of subparagraph (d) of paragraph 2 of the Underwriter's
Warrant)), and requests that the certificates for shares of Common Stock and/or
Redeemable Warrants be issued in the name(s) of, and delivered to ,
whose address(es) is (are):
Dated: , 19
Signature_______________________________________
_________________________________________________
(Print name under signature)
(Signature must conform in all respects to the name of
Holder as specified on the face of the Underwriter's
Warrant).
_________________________________________________
(Insert Social Security or Other Identifying Number of
Holder)
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<PAGE> 3
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Warrant)
FOR VALUE RECEIVED___________________________________________________
hereby sells, assigns and transfers unto______________________________________
(Please print name and address of transferee)
this Warrant, together with all right, title and interest therein, and does
hereby irrevocably constitute and appoint Attorney, to transfer the
within Warrant on the books of HOMEOWNERS FINANCIAL CORP., with full power of
substitution.
Dated:
Signature_____________________________________
___________________________________________________
(Print name under signature)
(Signature must conform in all respects to the name of
Holder as specified on the face of the Underwriter's
Warrant.)
___________________________________________________
(Insert Social Security or Other Identifying Number of
Holder)
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<PAGE> 4
Exhibit 10n
ESCROW AGREEMENT
AGREEMENT, made as of the ____ day of October 1996, by and among the
persons and/or entities whose/which names and addresses appear on Schedule "A"
annexed hereto (hereinafter collectively the "Parties") and Atlantic Bank of New
York, 960 Avenue of the Americas, New York, New York 10001 (the "Escrow Agent").
W I T N E S S E T H:
WHEREAS, the Parties propose to establish an escrow with the Escrow
Agent, and the Escrow Agent is willing to establish such escrow on the terms and
subject to the conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants, conditions
and promises herein contained, the Parties hereto hereby agree as follows:
1. INFORMATION SHEET. Schedules "A", "B" and "C" attached
hereto, as hereinafter more particularly defined (sometimes
collectively the "Information Sheet") are incorporated herein and
made a part of this Agreement by reference thereto.
(a) Schedule "A" - Schedule "A" identifies the Parties who
desire to establish the escrow, as more particularly defined herein, with the
Escrow Agent.
(b) Schedule "B" - Schedule "B" sets forth certain terms not
otherwise defined.
(c) Schedule "C" - Schedule "C" defines the amount and manner
of payment of the Escrow Agent's compensation, if any.
2. ESTABLISHMENT OF THE ESCROW ACCOUNT.
2.1 The Escrow Agent shall establish a non-interest-bearing
escrow account at the bank and bearing the designation set forth on the
Information Sheet (the "Escrow Account").
2.2 The Parties by their signature hereto have notified the
Escrow Agent that the commencement date of the Offering Period (the
"Commencement Date") is ___________________________.
2.3 The Offering Period, which shall be deemed to commence on
the Commencement Date, shall consist of the number of calendar days or business
days set forth on the Information Sheet. The Offering Period shall be extended
by an Extension Period only if the Escrow Agent shall have received written
notice thereof at least one (1) business day prior to the expiration of the
Offering Period. The Extension Period, which shall be deemed to commence on the
next calendar day following the expiration of the Offering Period, shall consist
of the number of calendar days or business days set forth on the Information
Sheet. The last day of the
<PAGE> 5
Offering Period, or the last day of the Extension Period (if the Escrow Agent
has received written notice thereof as hereinafter provided), is referred to
herein as the "Termination Date". Except as provided in Subsection 4.3 hereof,
after the Termination Date the Parties shall not deposit, and the Escrow Agent
shall not accept, any additional amounts representing payments by prospective
purchasers. All notices to the Escrow Agent shall be signed by an authorized
representative of the Parties (other than the Escrow Agent).
3. DEPOSITS IN THE ESCROW ACCOUNT.
3.1 All amounts received from prospective purchasers of the
Securities shall be deposited in the Escrow Account, which amounts shall be in
the form of checks or wire transfers representing the payment of money. All
checks deposited into the Escrow Account shall be made payable to, or endorsed
in blank to, "Atlantic Bank of New York, Escrow Agent - Homeowners Financial
Corp." Any check payable or endorsed other than as required hereby shall be
returned to the prospective purchaser if materially defective or returned by the
bank. If the Escrow Agent has insufficient information to return such check,
then the Parties shall supply such information to the Escrow Agent so as to
permit the Escrow Agent to return such check to the prospective purchaser
(together with any Subscription Information, as defined below, or other
documents delivered therewith) by noon of the fifth (5th) business day following
receipt of such check by the Escrow Agent, and such check shall be deemed not to
have been delivered by the Escrow Agent pursuant to the terms of this Agreement.
In the event that any portion of the offering price per share shall be payable
by a promissory note or notes, such notes shall not be delivered to or accepted
by the Escrow Agent, and the Minimum Dollar Amount (as defined in the
Information Sheet) shall be based solely on the cash portion of such offering
price.
3.2 The Escrow Agent shall not be required to accept any
amounts representing payments by prospective purchasers, whether by check or
wire transfer, except during the bank's regular business hours.
3.3 Amounts deposited in the Escrow Account which are
available for withdrawal by the Escrow Agent in accordance with applicable law
are herein referred to as the "Fund".
3.4 The Escrow Agent shall refund any portion of the Fund
prior to disbursement of the Fund in accordance with Section 4 hereof upon
instructions, in writing, signed by the Parties.
4. DISBURSEMENT FROM THE ESCROW ACCOUNT.
4.1 Subject to Section 4.3 below, in the event that at
the close of regular banking hours on the Termination Date the
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amount in the Fund (a) shall be less than the Minimum Dollar Amount, or (b)
shall represent the sale of less than the Minimum Share Amount, as indicated by
the information submitted to the Escrow Agent by the Parties, then, in either
such case, the Escrow Agent shall promptly refund to each prospective purchaser
(based upon information provided by the Parties to the Escrow Agent) the amount
of payment received from such purchaser which is then held in the Fund or which
thereafter becomes available for withdrawal by the Escrow Agent in accordance
with applicable law, without interest thereon and without deduction therefrom,
and the Escrow Agent shall notify the Parties of its distribution of the Fund.
4.2 Subject to Section 4.3 below, in the event that at any
time up to the close of banking hours on the Termination Date, the amount in the
Fund shall be at least equal to the Minimum Dollar Amount and shall represent
the sale of not less than the Minimum Share Amount, the Escrow Agent shall
notify the Parties of such fact, in writing, within a reasonable time
thereafter. The Escrow Agent shall hold the Fund until the Escrow Agent receives
instructions, in writing, signed by the Parties with regard to the disbursement
of the Fund. In addition, the Escrow Agent shall be authorized to return funds
to a subscriber upon receipt of instructions signed by either of the Parties.
4.3 In the event that the Escrow Agent has on hand at the
close of business on the Termination Date any amounts which have not become
available for withdrawal by the Escrow Agent in accordance with applicable law
which when added to the Fund would raise the amount in the Fund to the Minimum
Dollar Amount and result in the Fund representing the sale of the Minimum Share
Amount, then, in such event, a period of ten days may be utilized to allow such
amounts to become available for withdrawal by the Escrow Agent in accordance
with such applicable law (the "Collection Period"). During the Collection
Period, the Issuer shall not deposit, and the Escrow Agent shall not accept, any
additional amounts; provided, however, that such amounts which were received by
either of the Parties by the close of business on the Termination Date may be
deposited with the Escrow Agent's bank by noon of the next business day
following the Termination Date.
If at the close of business on the last day of the Collection
Period an amount sufficient to raise the amount in the Fund to the Minimum
Dollar Amount and which would result in the Fund representing the sale of the
Minimum Share Amount shall not have become available for withdrawal by the
Escrow Agent in accordance with applicable law, then the Escrow Agent shall
notify the Parties, in writing, of such fact and shall return all amounts then
in the Fund, and any amounts which thereafter become available for withdrawal by
the Escrow Agent in accordance with applicable law, to the prospective
purchasers as provided in Subsection 4.1 hereof. If a sufficient amount has
become available for withdrawal by the Escrow Agent by such time as hereinafter
provided in this
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Subsection 4.3, then the Parties shall proceed as provided in Subsection 4.2
hereof without regard to this Subsection 4.3.
4.4 Upon disbursement of the Fund pursuant to the terms of
this Section 4, the Escrow Agent shall be relieved of any and all further
obligations and released from any and all liability under this Agreement. It is
expressly agreed and understood that in no event shall the aggregate amount of
payments made by the Escrow Agent exceed the amount of the Fund.
5. RIGHTS, DUTIES AND RESPONSIBILITIES OF ESCROW AGENT.
It is understood and agreed that the duties of the Escrow Agent are
purely ministerial in nature, and that:
5.1 The Escrow Agent shall not be responsible for or be
required to enforce any of the terms or conditions of this or any other
Agreement.
5.2 The Escrow Agent shall not be required to keep records of
any information with respect to payments deposited by the Parties except as to
the amount of such payments.
5.3 The Escrow Agent shall be under no duty or responsibility
to enforce collection of any check delivered to it hereunder. The Escrow Agent,
within a reasonable time, may return to the Parties any check received which is
dishonored.
5.4 The Escrow Agent shall be entitled to rely upon the
accuracy, act in reliance upon the contents, and assume the genuineness, of any
notice, instruction, certificate, signature, instrument or other document which
is given to the Escrow Agent pursuant to this Agreement without the necessity if
the Escrow Agent verifying the truth or accuracy thereof. The Escrow Agent shall
not be obligated to make any inquiry as to the authority, capacity, existence or
identity of any person purporting to give any such notice or instructions or to
execute any such certificate, instrument or other document. The Escrow Agent
shall not be called upon to advise any party to the wisdom in selling or
retaining or taking or refraining from any action with respect to any funds
deposited hereunder.
5.5 In the event that the Escrow Agent shall be uncertain as
to its duties or rights hereunder or shall receive instructions with respect to
the Escrow Account or the Fund which, in its sole determination, are in conflict
either with other instructions received by it or with any provision of this
Agreement, then, in such event, it shall be entitled to hold the Fund, or a
portion thereof, in the Escrow Account pending the resolution of such
uncertainty to the Escrow Agent's sole satisfaction, by final judgment of a
court or courts of competent jurisdiction or otherwise; or the Escrow Agent, at
its sole option, may deposit the Fund (and any other amounts that thereafter
become part of the
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Fund) with the Clerk of a court of competent jurisdiction in a proceeding to
which all parties in interest are joined. Upon the deposit by the Escrow Agent
of the Fund with the Clerk of any court, the Escrow Agent shall be relieved of
any and all further obligations and released from any and all liability
hereunder.
5.6 The Escrow Agent shall not be liable for any error in
judgement, action taken or omitted hereunder, or for the misconduct of any of
its partners, employees, agent's or attorneys appointed by it, except in the
case of willful misconduct or gross negligence. The Escrow Agent shall be
entitled to consult with counsel of its own choosing, including itself, and
shall not be liable for any action taken, suffered or omitted by it in
accordance with the advice of such counsel.
5.7 The Escrow Agent shall have no responsibility at any time
to ascertain whether or not any security interest exists in the Fund or any part
thereof or to file any financing statement under the Uniform Commercial Code or
any similar regulatory or reporting agency or body used to perfect a security
interest with respect to the Fund or any part thereof.
6. AMENDMENT; RESIGNATION. This Agreement may be altered or amended
only with the written consent of the Parties and the Escrow Agent. The Escrow
Agent may resign for any reason upon thirty (30) days' written notice to the
Parties. Should the Escrow Agent resign as herein provided, it shall not be
required to accept any deposit, make any disbursement or otherwise dispose of
the Fund, but its only duty shall be to hold the Fund for a period of not more
than five (5) business days following the effective date of such resignation, at
which time (a) if a successor escrow agent shall have been appointed and written
notice thereof (including the name and address of such successor escrow agent)
shall have been given to the resigning Escrow Agent, the Escrow Agent shall pay
over to the successor escrow agent the Fund, less any portion thereof previously
paid out in accordance with this Agreement; or (b) if the resigning Escrow Agent
shall not have received written notice signed by the Parties and a successor
escrow agent, then the resigning Escrow Agent shall promptly refund the amount
in the Fund to each prospective purchaser, together without interest thereon or
deduction therefrom, and the resigning Escrow Agent shall notify the Parties, in
writing, of its liquidation and distribution of the Fund; whereupon, in either
case, the Escrow Agent shall be relieved of all further obligations and released
from any and all liability under this Agreement. Without limiting the provisions
of Section 8 hereof, the resigning Escrow Agent shall be entitled to be
reimbursed by the Parties and the Parties shall be liable for any expenses
incurred in connection with the Escrow Agent's resignation, the transfer of the
Fund to a successor escrow agent or the distribution of the Fund pursuant to
this Section 6.
7. REPRESENTATIONS AND WARRANTIES. The Parties, each represent and
warrant to the Escrow Agent that:
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<PAGE> 9
7.1 No party other than the parties hereto and the prospective
purchasers have, or shall have, any lien, claim or security interest in the Fund
or any part thereof.
7.2 No financing statement under the Uniform Commercial Code
is on file in any jurisdiction claiming a security interest in or describing
(whether specifically or generally) the Fund or any part thereof.
7.3 All of the information contained in the Information Sheet
is, as of the date hereof, and will be, at the time of any disbursement of the
Fund, true and correct in all material respects.
8. FEES AND EXPENSES. The Parties shall pay to the Escrow
Agent, the Escrow Agent Fee set forth on Schedule "C". In addition,
the Parties agree to reimburse the Escrow Agent for any reasonable
expenses incurred in connection with this Agreement.
9. INDEMNIFICATION AND CONTRIBUTION.
9.1 The Parties (the "Indemnitors") jointly and severally
agree to indemnify the Escrow Agent and its partners, employees, agents and
attorneys (jointly and severally the "Indemnitees") against, and hold them
harmless of and from, any and all loss, liability, cost, damage and expense,
including, without limitation, reasonable counsel fees and expenses, which the
Indemnitees may suffer or incur by reason of any action, claim or proceeding
brought against the Indemnitees arising out of or relating in any way to this
Agreement or any transaction to which this Agreement relates, unless such
action, claim or proceeding is the result of the willful misconduct or gross
negligence of the Indemnitees.
9.2 If the indemnification provided for in this Section 9 is
applicable, but for any reason is held to be unavailable, the Indemnitors shall
contribute such amounts as are just and equitable to pay, or to reimburse the
Indemnitees for, the aggregate of any and all losses, liabilities, costs,
damages and expenses, including counsel fees, actually incurred by the
Indemnitees as a result of or in connection with, and any amount paid in
settlement of, any action, claim or proceeding arising out of or relating in any
way to any actions or omissions of the Indemnitors.
9.3 The provisions of this Section 9 shall survive any
termination of this Agreement, whether by disbursement of the Fund, resignation
of the Escrow Agent or otherwise.
10. FURTHER ASSURANCE. The Parties, jointly and severally,
agree to do such further acts and things and to execute and deliver
such statements, assignments, agreements, instruments and other
documents as the Escrow Agent from time to time reasonably may
request in connection with the administration, maintenance,
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<PAGE> 10
enforcement or adjudication of this Agreement in order (a) to give the Escrow
Agent confirmation and assurance of the Escrow Agent's rights, powers,
privileges, remedies and interests under this Agreement and applicable law, (b)
to better enable the Escrow Agent to exercise any such right, power, privilege
or remedy, or (c) to otherwise effectuate the purpose and the terms and
provisions of this Agreement, each in such form and substance as may be
acceptable to the Escrow Agent.
11. CUMULATIVE RIGHTS. The rights and remedies granted to the
Escrow Agent in this Agreement are cumulative and not exclusive,
and are in addition to any and all other rights and remedies
granted and permitted under and pursuant to law.
12. NO WAIVER. The failure of any of the signatories hereto
to enforce any provision hereof on any occasion shall not be deemed
to be a waiver of any preceding or succeeding breach of such
provision or any other provision.
13. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement and understanding of the signatories hereto and no
amendment, modification or waiver of any provision herein shall be
effective unless in writing, executed by the party charged
therewith.
14. GOVERNING LAW. This Agreement shall be construed,
interpreted and enforced in accordance with and shall be governed
by the laws of the State of New York without regard to the
principles of conflicts of laws.
15. BINDING EFFECT. This Agreement shall bind and inure to
the benefit of the parties, their successors and assigns.
16. ASSIGNMENT AND DELEGATION OF DUTIES. This Agreement may
not be assigned by the parties hereto. This Agreement is in the
nature of a personal service contract and the duties imposed hereby
are non-delegable.
17. PARAGRAPH HEADINGS. The paragraph headings herein have
been inserted for convenience of reference only, and shall in no
way modify or restrict any of the terms or provisions hereof.
18. NOTICES. Any notice or other communication under the
provisions of this Agreement shall be in writing, and shall be
given by facsimile, or by postage prepaid, registered or certified
mail, return receipt requested, by hand delivery with receipt
acknowledged, or by the express mail service offered by the United
States Post Office, directed to the Parties at the address set
forth in Schedule "A", and to the Escrow Agent at its address set
forth above to the attention of Edward May or to any new address of
which any party hereto shall have informed the others by the giving
of notice in the manner provided herein. Such notice or communica-
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tion shall be effective if shipped by mail, three (3) days after it is mailed
within the continental United States.
19. UNENFORCEABILITY; SEVERABILITY. If any provision of this Agreement
is found to be void or unenforceable by a court of competent jurisdiction, then
the remaining provisions of this Agreement shall, nevertheless, be binding upon
the parties with the same force and effect as though the unenforceable part had
been severed and deleted.
20. NO THIRD PARTY RIGHTS. The representations, warranties and other
terms and provisions of this Agreement are for the exclusive benefit of the
parties hereto, and no other person shall have any right or claim against any
party by reason of any of those terms and provisions or be entitled to enforce
any of those terms and provisions against any party.
21. COUNTERPARTS. This Agreement may be executed in counter-
parts, all of which shall be deemed to be duplicate originals.
22. CONSENT TO JURISDICTION AND WAIVER OF TRIAL BY JURY.
(i) The parties hereto hereby irrevocably agree that they will
not initiate any action or proceeding arising out of or relating to this Escrow
Agreement in any court other than a court of the State of New York sitting in
New York City and any Federal court sitting in New York City and any appellate
court therefrom.
(ii) The parties hereto hereby irrevocably submit to the
jurisdiction of any court of the State of New York sitting in New York City and
any Federal court sitting in New York City and any appellate court therefrom in
any action or proceeding arising out of or relating to this Escrow Agreement.
(iii) The parties hereto hereby irrevocably waive the right to
trial by jury in any action, proceeding, claim or counterclaim whether in
contract or tort, at law or in equity, in any manner connected with this Escrow
Agreement or any transactions hereunder.
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<PAGE> 12
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the day and year first above written.
ATLANTIC BANK OF NEW YORK
By: _______________________________
HOMEOWNERS FINANCIAL CORP.
By: _______________________________
TOLUCA PACIFIC SECURITIES CORPORATION
By: _______________________________
9
<PAGE> 13
SCHEDULE "A"
All parties listed on this Schedule "A" are referred to, collectively
and individually, as "the Parties" throughout this Agreement.
THE PARTIES TO THIS AGREEMENT ARE:
1. Name: Toluca Pacific Securities Corporation
Address: 3500 West Olive Avenue
Toluca Lake, California 91505
Attn: Paul Fiorini,
President
Corporation X Partnership ______ Individual ______
2. Name: Homeowners Financial Corp.
Address: 2075 West Big Beaver Road, Suite 550
Troy, Michigan 48084
Attn: Christian W. Pfluger, III
President
Corporation X Partnership ______ Individual ______
<PAGE> 14
SCHEDULE "B"
1. THE SECURITIES
Description of the Securities to be offered: Up to one million, two
hundred and seventy thousand (1,270,000) Shares of Common Stock, $.01
par value per share and one million, two hundred and seventy thousand
(1,270,000) Reedemable Class A Common Stock Purchase Warrants.
Offering price is $______ per Share and $_______ per A Warrant.
2. MINIMUM AMOUNTS REQUIRED FOR DISBURSEMENT OF THE ESCROW
ACCOUNT
Aggregate dollar amount which must be available for withdrawal by the
Escrow Agent before the Escrow Account may be disbursed to the Issuer
("Minimum Dollar Account"): $
Total number of Shares which must be subscribed for before the
Escrow Account may be disbursed to the Issuer ("Minimum Share
Amount"): 550,000 Shares
There is no minimum number of A Warrants that must be sold.
3. PLAN OF DISTRIBUTION OF THE SECURITIES
Offering Period: One hundred twenty (120) calendar days.
Extension Period, if any: Ninety (90) calendar days.
Collection Period, if any: Ten (10) calendar days.
4. THE ESCROW ACCOUNT
Title of the Escrow Account: Atlantic Bank of New York,
Escrow Agent - Homeowners
Financial Corp.
5. Bank Name and Address: Atlantic Bank of New York
960 Avenue of the Americas
New York, New York 10001
Attn: Edward May
<PAGE> 15
SCHEDULE "C"
ATLANTIC BANK OF NEW YORK, as Escrow Agent under this Agreement, shall
be paid a fee for its services hereunder, as follows:
$2,000 due upon the release of the funds from the first closing.
Additionally, the Parties shall reimburse the Escrow Agent for all
checks, checks returned and other charges, expenses and costs imposed
by the bank.
<PAGE> 1
EXHIBIT 23.A
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in this Amendment No. 7 to the Registration
Statement on Form SB-2 of our report dated January 18, 1996, except for Note 1
and Note 10, as to which the date is April 12, 1996; and Note 4 and Note 14, as
to which the date is June 26, 1996; and Note 2 as to which the date is
September 6, 1996 and, Note 6, and Note 16, as to which the date is October 21,
1996, relating to the consolidated balance sheets of Homeowners Financial Corp.
and Subsidiaries ("Successor") as of September 30, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year ended September 30, 1995 and the period from April 30, 1994
to September 30, 1994 ("Successor Periods") and the statements of operations
and cash flows for the period from October 1, 1993 to April 29, 1994
("Predecessor Period") of Home Owners Funding Corp. of America ("Predecessor"),
and to the reference to our Firm under the caption "Experts" in the Prospectus.
/s/ WALLACE SANDERS & COMPANY
Dallas, Texas
October 28, 1996
<PAGE> 1
EXHIBIT 23.b
[PEAT MARWICK LLP LETTERHEAD]
The Board of Directors
Developers Mortgage Corporation:
We consent to the use of our report on the financial statements of Developers
Mortgage Corporation (DMC) for the years ended September 30, 1994 and 1993
included herein and to the reference to our firm under the heading "Experts" in
the prospectus. Our report contains an explanatory paragraph that states that
Aurora Service Corporation, parent company of DMC, incurred a significant net
loss for the year ended September 30, 1994 and is not in compliance with
certain debt covenants associated with a note payable which makes the note
payable at the option of the lender. These circumstances raise substantial
doubt about DMC's ability to continue as a going concern. The financial
statements of DMC do not include any adjustments that might result from the
outcome of that uncertainty. Our report also refers to the change in DMC's
method of accounting for income taxes.
/s/ KPMG PEAT MARWICK LLP
Minneapolis, Minnesota
October 29, 1996
