Loan that funds would be disbursed from the escrow account other (and more
favorably to the obligor) than as provided in the Mortgage Loan documents.
Disbursements have not been made in accordance with such alleged
representations. After originating the Mortgage Loan, HCMC sold the Mortgage
Loan on the day of closing and sold the rights to service the Mortgage Loan in
December 1994. In a draft petition attached to the December 17 letter, Quarters'
attorney sought an accounting and alleged that HCMC is guilty of fraudulent
misrepresentation, breach of contract, fraudulent withholding of funds, breach
of fiduciary duty and conversion. The draft petition sought damages caused by
the obligor's inability to obtain disbursements from the escrow account,
including lost profits and legal fees and expenses. In a written response to
Quarters, HCMC denied that its representatives made any misrepresentations to
Quarters. After HCMC sent such written response, Quarters filed the petition
attached to the December 17 letter, naming HCMC and others as defendants, in
District Court in Dallas County, Texas. HCMC has retained counsel and is
defending itself in such action. Management of the Company does not believe that
this claim will have a material adverse effect on the Company's financial
condition and results of operations.
The IRS has proposed a tax deficiency against HCP arising from HCP's
treatment of certain alleged employees as independent contractors for tax
purposes. HCP is currently negotiating a closing agreement with the IRS and has
accrued approximately $122,000 (at December 31, 1996) to pay any amount that is
agreed or determined to be due. HCP has recently adjusted its accrued liability
to $100,000 (at June 30, 1997) based on a revised settlement offer received from
the IRS. This settlement offer requires HCP to treat the individuals in question
as employees going forward. If HCP accepts this settlement offer, which it
intends to do, the treatment of the individuals as employees will require HCP to
withhold income and employment taxes from payments made to them and to make
certain matching employment tax payments. Management of the Company does not
believe that this proposed tax deficiency will have a material adverse effect on
the Company's financial condition and results of operations.