SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q-SB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
Commission File Number: 0-25744
HOMEOWNERS FINANCIAL CORP.
(Exact name of the small business issuer as specified in its charter)
DELAWARE 13-2747380
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2075 West Big Beaver Road, Suite 550, Troy, Michigan 48084
(Address of principal executive offices)
Issuer's telephone number, including area code: (800) 723-6001
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No ______
Indicate the number of shares outstanding of each of issuer's classes of Common
Stock, as of the latest practicable date.
Class Outstanding at March 31, 1997
----- -----------------------------
Common Stock, par value 4,691,589 Shares
$.01 per share
Transitional Small Business Format
(check one); YES ______ NO X
<PAGE>
HOMEOWNERS FINANCIAL CORP.and SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements: P. 3
Condensed Consolidated Statements P. 4
of Financial Condition as of
March 31, 1997 and September 30, 1996.
Condensed Consolidated Statements P. 5
of Operations for the six and three months
ended March 31, 1997 and March 31, 1996.
Condensed Consolidated Statement of P. 6
Stockholders' Equity for the six months
ended March 31, 1997.
Condensed Consolidated Statements of P. 7-8
Cash Flows for the six months ended
March 31, 1997 and December 31, 1996.
Notes to Condensed Consolidated Financial Statements. P. 9-10
Item 2. Management's Discussion and Analysis of Financial P. 11-15
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings P. 16
Item 2. Change in Securities P. 16
Item 3. Defaults Upon Senior Securities P. 16
Item 4. Submission of Matters to a Vote of Security Holders P. 16
Item 5. Other Information P. 16
Item 6. Exhibits and Reports on Form 8-K P. 16
Signatures P. 17
Financial Data Schedule P. 18
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying financial statements are unaudited for the interim
periods, but include all adjustments (consisting only of normal recurring
accruals) which management considers necessary for the fair presentation of
results for the six months and three months ended March 31, 1997 .
Moreover, these financial statements do not purport to contain complete
disclosure in conformity with generally accepted accounting principles and
should be read in conjuction with the Company's audited financial statements at,
and for the fiscal year ended September 30, 1996.
The results reflected for the six months and three months ended March 31,
1997 are not necessarily indicative of the results for the entire fiscal year.
3
<PAGE>
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
March September
31, 30,
1997 1996
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 96 $ 203
Cash - restricted 259 259
Mortgage loans held for sale 4,178 2,986
Mortgage loans held for sale-related party - 157
Purchased mortgage servicing rights-net 4,615 5,173
Accrued income and servicing receivables 502 557
Property, premises and equipment-net 111 94
Deferred stock issuance costs - 926
Other assets 974 609
----------- ------------
$ 10,735 $ 10,964
=========== ============
LIABILITIES AND STOCK HOLDERS' EQUITY
Liabilities
Accounts payable and other liabilities $ 1,076 $ 1,089
Repurchase agreements 1,401 1,513
Notes payable 5,554 6,384
Notes payable to related parties 13 18
---------- ------------
8,044 9,004
---------- ------------
Stockholders' equity
Preferred stock, $.10 par value 1,000,000 shares authorized,
Series A, 1,750 shares issued and outstanding, * *
Series B, 503 shares issued and outstanding, ** **
Series C, 58,608 shares issued and outstanding, 6 6
Common stock, $.01 par value, 10,000,000 shares authorized,
4,691,589 and 4,133,313 shares issued and outstanding, 47 41
Additional paid-in capital 4,575 3,210
Accumulated deficit (1,937) (1,297)
---------- ------------
2,691 1,960
---------- ------------
$ 10,735 $ 10,964
=========== ============
<FN>
* Preferred stock amount prior to rounding to thousands was $175.
** Preferred stock amount prior to rounding to thousands was $50.
</FN>
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
March 31, March 31,
(unaudited) (unaudited)
1997 1996 1997 1996
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
INCOME
Mortgage servicing and subservicing income $ 1,009 $ 1,233 $ 488 $ 631
Origination income 153 154 83 83
Interest 118 60 56 56
Gain on sale of mortgage loans held for sale 42 17 11 17
Gain on sale of purchased mortgage servicing rights
5 38 5 38
Other income 15 59 13 30
------------- ------------ ------------- -------------
1,342 1,561 656 855
------------- ------------ ------------- -------------
EXPENSES
Compensation and benefits 703 707 364 349
Office occupancy 118 96 62 49
Office supplies and expenses 212 124 110 66
Professional services 65 61 56 34
Interest 153 100 56 59
Provision for estimated losses on loans serviced - - - -
Amortization of mortgage loan servicing rights 450 540 225 270
Other 281 236 159 114
------------- ------------ ------------- -------------
1,982 1,864 1,032 941
------------ ------------- -------------
NET LOSS BEFORE PROVISION FOR
INCOME TAXES (640) (303) (376) (86)
INCOME TAX (PROVISION) BENEFIT - - - -
------------- ------------ ------------- -------------
NET LOSS (640) (303) (376) (86)
Less cumulative preferred stock dividends - (96) - (48)
------------- ------------ ------------- -------------
Loss attributable to common stock $ (640) $ (399) $ (376) $ (134)
============= ============ ============= =============
Loss per share $ (.15) $ (.10) $ (.08) $ (.03)
------------- ------------ ------------- -------------
Weighted average shares 4,317,305 4,126,299 4,503,397 4,125,299
------------- ------------ ------------- -------------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except shares outstanding)
(unaudited)
<TABLE>
<CAPTION>
Shares Outstanding Par Value
Preferred A Preferred B Preferred C Common Preferred A Preferred B Preferred C Common
----------- ----------- ----------- ------ ----------- ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1996 1,750 503 58,608 4,131,213 $ * $ ** $ 6 $ 41
Issued for services - - - 2,100 - - - -
Issued for cash - - - 558,276 - - - 6
Net loss - - - - - - - -
----- --- ------ --------- ----- ----- ----- -----
Balance at March 31, 1997 1,750 503 58,608 4,691,589 $ * $ ** $ 6 $ 47
----- --- ------ --------- ----- ----- ----- -----
Additional
Paid-in Accumulated
Capital Deficit Total
------- ------- -----
$ 3,210 $ (1,297) $ 1,960
- - -
1,365 - 1,371
- (640) (640)
--------- --------- ---------
$ 4,575 $ (1,937) $ 2,691
--------- --------- ---------
<FN>
*Preferred "A" stock amount prior to rounding to thousands was $175.
**Preferred "B" stock amount prior to rounding to thousands was $50.
</FN>
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months
Ended
March 31,
<S> <C> <C>
1997 1996
-------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (640) $ (303)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 474 564
Common stock issued for services 10 -
Gain on sale of mortgage loans held for
sale (41) -
Purchases of mortgage loans held for sale (14,227) (4,465)
Proceeds from sale of mortgage loans held
for sale 15,364 1,711
Recoveries (losses) on mortgage loans
serviced and held for sale 2 -
Change in assets- (increase) decrease
Accrued income and servicing receivable 55 (718)
Other assets (365) 216
Deferred stock issuance costs (1,103) -
Change in liabilities-increase (decrease)
Accounts payable and other liabilities (13) 61
------------------------------
Net cash (used in)
operating activities (484) (2,934)
------ -------
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
HOMEOWNERS FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months
Ended
March 31,
<S> <C> <C>
1997 1996
---- ----
CASH FLOWS FROM INVESTING ACTIVITIES
Receipts from other loans - 137
Purchases of mortgage servicing
rights (102) -
Purchases of property, premises and equipment (17) -
---------- -----------
Net cash (used in ) provided by
investing activities (119) 137
----- ---
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of repurchase agreements (742) -
Proceeds from borrowings 21,554 4,456
Repayments of borrowings (21,953) (2,104)
Payment of dividends - (96)
Net proceeds from sale of stock 1,637 503
----------- ------------
Net cash provided by financing
activities 496 2,759
----------- ------------
Net (decrease) in cash and cash
equivalents (107) (38)
Cash and cash equivalents at beginning of period
203 44
----------- ------------
Cash and cash equivalents at end of period $ 96 $ 6
======= =======
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
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 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 HOFCA and DMC.
Note 2. BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with the instructions for Form 10Q-SB and Regulation
SB 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 Statements of
Financial Condition at March 31, 1997 and September 30, 1996, Condensed
Consolidated Statements of Operations for the six months ended March 31, 1997
and March 31, 1996, Condensed Consolidated Statement of Stockholders' Equity for
six months ended March 31, 1997 and Condensed Consolidated Statements of Cash
Flows for the six months ended March 31, 1997 and March 31, 1996. 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 whole.
Note 3. NOTES RECEIVABLE
In January, 1997 the Company loaned $165,000 to a related party. This is an
unsecured Note bearing 8% percent interest payable quarterly. On September 30,
1997 the Note is due in full.
Note 4. NOTES PAYABLE
The Company was not in compliance with certain provisions of the term note
and the amended credit facility as of September 30, 1996 through March 31, 1997.
On January 23, 1997 the Company, as result of closing on the sale of its public
offering of common stock and warrants, was in compliance with all provisions of
the term note and amended credit facility except for one provision for which
compliance has not been waived. (See Note 5)
Note 5. COMMITMENTS AND CONTINGENCIES
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 the Company under its
agreements with GNMA. Management believes that this claim is 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 claim 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-servicing agreements. Management believes that there
will be no material impact from the uncertainty pursuant to SFAS No. 5.
9
<PAGE>
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.
General Corporate
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 6. NOTES PAYABLE
On December 27, 1996, the $695,000 note payable matured and was not paid.
No extension of the due date was requested. The note payable and accrued
interest was paid in full on January 24, 1997 with proceeds from the sale of the
Company's common stock and warrants offering and operating capital.
Note 7. REPURCHASE AGREEMENT
In January 1997, the Company repurchased and sold approximately $742,000 of
the repurchase agreement mortgage loans and remitted the repurchase price plus
accrued interest to the lender.
In February 1997, the lender extended the maturity date of the repurchase
agreement until April 30, 1997. All other terms and conditions remained the
same.
Note 8. INITIAL PUBLIC OFFERING
On January 23, 1997, the Company closed its initial public offering,
selling an aggregate of 558,276 shares of Common Stock and 1,263,601 Class A
Common Stock purchase warrants. The Company received approximately $2,981,000 in
proceeds from the offering. Shortly after the closing of the offering, Toluca
Pacific Corporation, the underwriter of the offering, ceased operations. This
resulted in a delay in the delivery of security certificates to purchasers. It
also means that Toluca Pacific Securities Corporation will not be a market maker
in the Company's Securities. The Company is attempting to complete the listing
process with NASDAQ to have the Company's Common Stock and Class A Warrants
listed on the NASDAQ SmallCap Market; however, as a result of the foregoing
events and the current bid price of the Company's Common Stock, no assurance can
be given as to if or when NASDAQ listing will be achieved.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Effect of Interest Rate Fluctuations. Low interest rates generally favor 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, fee
income and the net interest margin earned for each loan originated usually
decreases in such an environment. While current interest rates are not high by
historical standards, any sustained increase in interest rates will likely have
a materially negative effect on loan origination volume throughout the industry.
The Company's loan origination volume historically has declined as a result of
increases in interest rates. If interest rates 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.
Low interest rates generally have the effect of increasing prepayments in
the Company's servicing portfolio because they tend to stimulate both a higher
level of home purchases and the refinancing of existing mortgage debt. If
origination and acquisition activity cannot replace prepayments, transfers and
sales, 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 7.79% 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 reduce the volume of home purchases and
the refinancing of existing mortgage debt. While interest rates are not high by
historical standards, management believes that the current level of interest
rates, approximately 7.5%, are at a level where prepayment levels will not be
affected.
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.
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. 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. 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 ended 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. The
Company has not experienced any material effect resulting from the adoption of
SFAS No. 122 on the Company's financial condition or statement of operations for
the six month and three month periods ended March 31, 1997. However, as the
Company increases its origination volume in the future, management anticipates
that a larger volume of the mortgage loan servicing rights will be retained. At
11
<PAGE>
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 loan servicing rights, it is
currently impossible to quantify the impact of such events.
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.
Six Months and Three Months Ended March 31, 1997
Compared with Six and Three Months Ended March 31, 1996
Overview. The Company's net losses for the six and three months ended March 31,
1997 and March 31, 1996 were $640,000 and $376,000, respectively, as compared to
a net losses of $303,000 and $86,000, respectively, for the six and three months
ended March 31, 1996, before preferred dividend payments of $96,000 and $48,000,
respectively, during the six months and three months ended March 31, 1996. The
increase in net losses in the amounts of $337,000 and $290,000 for the six and
three months ended March 31, 1997 compared to the six and three months ended
March 31, 1996 resulted primarily from reductions in loan servicing and
subservicing income and increased office expenses.
Loan Servicing. Mortgage loan servicing revenue decreased from $1.2 million and
$631,000 to $1.0 million and $488,000 for the six and three months ended March
31, 1997 compared to the six and three months ended March 31, 1996. The
reductions in loan servicing income were primarily the result of a reduction in
the volume of loans serviced to $535.0 million as of March 31, 1997 from $648.5
million as of March 31, 1996.
Loan Origination. Loan origination revenue, which includes the fees associated
with the origination process and the net gains on the sale of loans, was
$153,000 and $83,000 for the six and three months ended March 31, 1997 compared
to $154,000 and $83,000 for the six and three months ended March 31, 1996.
Net Interest. The Company's net interest cost for the six and three months ended
March 31, 1997 was $35,000 and $0, respectively, compared with a net interest
cost of $40,000 and $3,000 for the six and three months ended March 31, 1996.
<TABLE>
<CAPTION>
Net Interest Cost Net Interest Cost
Six Months Ended Three Months Ended
March 31, March 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
($000) ($000)
Net interest cost:
Interest income.................................. $ 118 $ 60 $ 56 $ 56
Interest expense on warehouse and other
debt.............................................$ 153 $ 100 $ 56 $ 59
------ ------ ------ ------
Net interest cost.................................$ (35) $ (40) $ 0 $ (3)
====== ====== ====== ======
</TABLE>
12
<PAGE>
Other Income. Other income was $15,000 and $13,000 for the six and three months
ended March 31, 1997 compared to $59,000 and $30,000 for the six and three
months ended March 31, 1996.
Personnel Costs. Personnel costs for the six and three months ended March 31,
1997 were $703,000 and $364,000 compared to $707,000 and $349,000 for the six
and three months ended March 31, 1996.
Occupancy, Office and Professional Expenses. Occupancy, office and professional
expenses were $395,000 and $228,000 for the six and three months ended March 31,
1997 compared to $281,000 and $149,000 for the six and three months ended March
31, 1996. The increases of $114,000 and $79,000, respectively, were primarily
attributable to increased office expenses.
Provisions for Loan Losses. There were no additional provisions for loan losses
for either the six and three month periods ended March 31, 1997 or the six and
three month periods ended March 31, 1996. 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 $183,000 remaining on the Company's
books is sufficient to cover the limited amount of recourse exposure in the loan
servicing portfolio.
Amortization of Mortgage Loan Servicing Rights. Amortization of mortgage loan
servicing rights was $450,000 and $225,000 for the six and three months ended
March 31, 1997 compared to $540,000 and $270,000 for the six and three months
ended March 31, 1996. The decreases of $90,000 and $45,000, resulted from
decreased prepayments in the Company's loan servicing portfolio.
Other Expenses. Other expenses for the six and three months ended March 31, 1997
were $281,000 and $159,000 compared to $236,000 and $114,000 for the six and
three months ended March 31, 1996.
Income Taxes. There was no income tax expense or benefit for the six and three
months ended March 31, 1997 or the six and three months ended March 31, 1996
because of the Company's net operating losses during these periods.
Liquidity and Capital Resources
The Company's primary short-term liquidity requirements are for mortgage
loan fundings and for 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 rights, which are funded
with longer term debt.
During the six and three months ended March 31,1997 and six and three
months ended March 31, 1996, the Company had a net decrease in cash and cash
equivalents of $107,000 and $38,000, respectively. Net cash used in operating
activities of $484,000 for the six months ended March 31, 1997 and net cash used
in operating activities of $2.9 million for the six months ended March 31, 1996,
reflect net losses of $640,000 and $303,000, respectively, plus adjustments to
the net losses of $156,000 and $2.6 million, respectively, which consisted of
non-cash amortization of mortgage loan servicing rights, an increase in other
assets and the purchase and sale of mortgage loans held for sale and the
proceeds from such sales. Net cash used in investing activities was $119,000 for
the six months ended March 31, 1997 and net cash provided by investing
activities was $137,000 for the six months ended March 31, 1996. Net cash
provided by financing activities was $496,000 for the six months ended March 31,
1997 and net cash provided by financing activities was $2.8 million for the six
months ended March 31, 1996.
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").
13
<PAGE>
As of March 31, 1997, the Company's outstanding principal balance under the
First Term Loan is $2.8 million. The Company used the proceeds from this loan to
pay the balance of the purchase price for DMC, including mortgage servicing
rights and related assets, and, to repay debt. Principal under the First Term
Loan accrues interest at the fixed rate of 2.75%. Interest is payable monthly
and five percent of the principal balance 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 the independent
auditor in the Company's audited consolidated financial statements cannot
contain a "going concern" explanatory paragraph.
The Company was in default under the ATNW, ALR and the DSCR financial
requirements of its credit agreement with First Bank ("First Credit Agreement")
concerning the First Term Loan and the First Warehousing Facility as of
September 30, 1996 through December 31, 1996. At September 30, 1996, October 31,
1996, November 30, 1996 and December 31, 1996 the financial requirements of the
Company were as follows:
September 30, October 31, November 30, December 31,
1996 1996 1996 1996
---- ---- ---- ----
ATNW $1.5 million $1.5 million $1.5 million $1.1 million
ALR 5.81 to 1.0 5.84 to 1.0 5.04 to 1.0 8.64 to 1.0
DSCR .51 to 1.0 NA NA .32 to 1.0
As a result of the receipt of funds from the Company's closing on the sale of
its IPO which closed on January 23, 1997, the Company's ATNW was $3.5 million
and the Company's ALR was 2.59 to 1.0. First Bank has not waived compliance with
the DSCR financial requirement.
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, Inc. 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 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.
14
<PAGE>
A mortgage loan will be deemed to have no 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 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 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 equal to .25% of the First Warehousing Facility
commitment. The Company must also maintain the above discussed minimum criteria.
Payment under the First Warehousing Facility is secured by all assets of the
Company.
The Company filed a registration statement with the Securities and Exchange
Commission to register shares of its common stock and common stock purchase
warrants for sale to the public. The registration statement was declared
effective as of November 12, 1996.The Company raised approximately $2.98 million
in proceeds from the IPO which closed on January 23, 1997.
Potential Liability. The Company 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 this claim is 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 claim 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.
15
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
The Company was not in compliance with a provision of its credit
agreement as of March 31, 1997, and as of the date of this filing.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registration has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOMEOWNERS FINANCIAL CORP.
Dated: July 22, 1997 /s/ Kenneth Germain
..........................
Kenneth Germain, President
Chief Executive Officer
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