<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: FEBRUARY 29, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM: _________ TO _________
COMMISSION FILE NUMBER: 0-21689
ALTIVA FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 88-0286042
(STATE OR OTHER JURISDICTION OF (I. R. S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1000 PARKWOOD CIRCLE, SUITE 600, ATLANTA, GEORGIA 30339
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(770) 952-6700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of April 28, 2000, there were 10,269,055 shares of Common Stock,
$.01 par value per share, of the Registrant outstanding.
================================================================================
<PAGE> 2
ALTIVA FINANCIAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Statements of Financial Condition at August 31, 1999
and February 29, 2000 ......................................................................
Condensed Consolidated Statements of Operations for the Six Months Ended
February 28, 1999 and February 29, 2000.....................................................
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
February 28, 1999 and February 29, 2000.....................................................
Condensed Consolidated Statements of Stockholders' Equity for the Six Months Ended
February 29, 2000 ..........................................................................
Notes to Condensed Consolidated Financial Statements........................................
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................................
Item 3. Quantitative and Qualitative Disclosure About Market Risk...................................
PART II OTHER INFORMATION
Item 1. Legal Proceedings..........................................................................
Item 4. Matters Submitted to a Vote of Security Holders............................................
Item 5. Other Information..........................................................................
Item 6. Exhibits and Reports on Form 8-K...........................................................
SIGNATURE...............................................................................................
</TABLE>
i
<PAGE> 3
ALTIVA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
FEBRUARY 28,
AUGUST 31, 2000
1999 (UNAUDITED)
------------- ------------
(thousands of dollars, except
ASSETS per share amounts)
<S> <C> <C>
Cash and cash equivalents $ 10,475 $ (173)
Cash in transit to warehouse 101 3,275
Cash deposits, restricted 2,903 2,559
Loans held for sale, net of
valuation allowance of $3,462 and $1,841 54,844 56,505
Mortgage related securities, at fair value 31,757 31,009
Other receivables 5,260 5,302
Property and equipment, net of accumulated depreciation of $1,793
and $2,338 3,068 2,569
Prepaid debt expenses 2,207 706
Deferred federal income tax asset 11,229 11,531
Deferred state income tax asset 1,053 1,133
Goodwill 11,463 11,330
Other assets 1,026 596
--------- ---------
Total assets $ 135,386 $ 126,342
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse line $ 61,513 $ 55,589
Secured revolving credit lines 12,478 17,793
Notes and contracts payable 1,499 1,165
Accounts payable and accrued liabilities 8,054 8,893
Subordinated debt 30,724 19,795
--------- ---------
Total liabilities 114,268 103,235
--------- ---------
Stockholders' equity:
Convertible Preferred Stock, $.01 par value per share
(Authorized--5,000,000 shares; 1 1
Issued and outstanding - 62,500 at August 31, 1999
and 56,925 at February 29, 2000)
Common Stock, $.01 par value per share
(Authorized--400,000,000 shares;
Issued and outstanding--3,656,426 at August 31, 1999
and 4,397,894 at February 29, 2000) 37 41
Additional paid-in capital 125,412 125,408
Accumulated deficit (104,332) (102,343)
--------- ---------
--
Total stockholders' equity 21,118 23,107
--------- ---------
Total liabilities and stockholders' equity $ 135,386 $ 126,342
========= =========
</TABLE>
See notes to condensed consolidated financial statements and recent events.
1
<PAGE> 4
ALTIVA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED FEBRUARY 29, ENDED FEBRUARY 29,
----------------------------- -----------------------------
1999 2000 1999 2000
----------- ------------ ----------- ------------
(thousands of dollars, except (thousands of dollars, except
per share amounts) per share amounts)
<S> <C> <C> <C> <C>
REVENUE:
Gain (loss) on sale of loans $ 220 $ 2,157 $ 392 $ 6,398
Net unrealized gain (loss) on mortgage related
securities (439) (1,481) (169) (2,105)
Loan servicing income, net 92 47 332 144
Interest income 1,741 3,176 3,343 6,352
Less: interest expense (2,302) (2,266) (4,067) (5,493)
---------- ---------- ---------- ----------
Net interest income (expense) (561) 910 (724) 859
---------- ---------- ---------- ----------
Total net revenues (expenses) (688) 1,633 (169) 5,296
---------- ---------- ---------- ----------
COST AND EXPENSES:
Net provision for credit losses (340) -- (297) --
Depreciation and amortization 245 494 460 928
Other interest 21 23 63 50
General and administrative:
Payroll and benefits 1,627 3,830 3,606 8,229
Supplies and postage 66 209 137 465
Rent and lease expenses 309 499 668 1,038
Professional services 789 607 1,753 1,259
Insurance 165 111 350 302
Sub-servicing fees 78 82 100 120
Taxes and licensing fees 64 143 126 204
Communications 118 214 237 422
Bank and wire fees 89 46 226 114
Travel and entertainment 127 174 236 446
Legal settlement 1,186 -- 1,186 --
Other 11 436 187 932
---------- ---------- ---------- ----------
Total costs and expenses 4,555 6,868 9,038 14,509
---------- ---------- ---------- ----------
(LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (5,243) (5,235) (9,207) (9,213)
INCOME TAX (BENEFIT) BEFORE
EXTRAORDINARY ITEM (2,120) (1,972) (3,590) (3,460)
---------- ---------- ---------- ----------
NET (LOSS) BEFORE EXTRAORDINARY ITEM (3,123) (3,263) (5,617) (5,753)
EXTRAORDINARY ITEM, NET OF TAXES 4,812 7,743 4,812 7,743
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 1,689 $ 4,480 $ (805) $ 1,990
========== ========== ========== ==========
EARNINGS PER COMMON SHARE:
Basic:
Net income (loss) $ 0.55 $ 1.11 $ (0.26) $ 0.51
========== ========== ========== ==========
Weighted-average number of common shares 3,056,666 4,050,487 3,056,666 3,925,815
========== ========== ========== ==========
Diluted:
Net income (loss) $ 0.55 $ 1.11 $ (0.26) $ .51
========== ========== ========== ==========
Weighted-average number of common shares and
assumed conversions 3,056,666 4,050,487 3,056,667 3,925,815
========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements and recent events.
2
<PAGE> 5
ALTIVA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FEBRUARY 29,
-----------------------
1999 2000
--------- ---------
(thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ 805 $ 1,990
--------- ---------
Adjustments to reconcile net loss to net cash used in operating
activities:
Loans originated for sale, net of loan fees (32,501) (180,283)
Proceeds from sale of loans 27,031 179,655
Payments on loans held for sale 1,040 701
Lower of cost or market adjustment (9,169) (1,734)
Net provisions (benefit) for estimated credit losses (297) --
Market valuation of mortgage related securities 645 1,711
Additions to mortgage related securities (1,125) --
Accretion of residual interest on mortgage related securities (1,260) (1,551)
Payments on mortgage related securities 870 421
Amortization of mortgage related securities -- 167
Amortization of mortgage servicing rights 7 --
Proceeds from sale of mortgage servicing rights 76 --
Depreciation and amortization expense 460 928
Additions to prepaid debt expense -- 985
Amortization of prepaid debt expense 388 516
Changes in operating assets and liabilities:
Cash deposits, restricted 507 (2,830)
Deferred income taxes (benefit) 221 (382)
Other assets, net (3,572) 431
Other receivables, net -- (42)
Goodwill -- (249)
Accounts payable and accrued liabilities (10,159) 838
--------- ---------
Total adjustments (26,838) (718)
--------- ---------
Net cash used in operating activities (26,033) 1,272
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,308) (48)
--------- ---------
Net cash used in investing activities (1,308) (48)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on notes and contracts payable 22,871 226,191
Payments on notes and contracts payable (5,752) (227,133)
Repurchase of subordinated debt (11,867) (10,878)
Amortization of premium on subordinated debt (33) (52)
--------- ---------
Net cash provided by financing activities 5,219 (11,872)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (23,723) (10,648)
--------- ---------
CASH AND CASH EQUIVALENTS--BEGINNING OF PERIOD 36,404 10,475
--------- ---------
CASH AND CASH EQUIVALENTS--END OF PERIOD $ 12,681 $ (173)
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,021 $ 3,563
========= =========
State income taxes $ 94 $ --
========= =========
</TABLE>
See notes to condensed consolidated financial statements and recent events.
3
<PAGE> 6
ALTIVA FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK RETAINED
$.01 PAR VALUE $.01 PAR VALUE ADDITIONAL EARNINGS
------------------------ ------------------------- PAID-IN -----------
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------------ ------------ ------------ ------------ ----------- ----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1999 62,500 $ 1 3,656,426 $ 37 $125,412 $(104,332) $21,118
Conversion of Preferred to Common Stock (5,595) -- 406,873 4 (4)
Net gain for the six months ended
February 29, 2000 -- 1,990 1,990
------ ------- --------- ------- -------- --------- -------
Balance at February 29, 2000 56,905 $ 1 4,063,299 $ 41 $125,408 $(102,342) $23,108
====== ======= ========= ======= ======== ========= =======
</TABLE>
4
<PAGE> 7
ALTIVA FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999 AND FEBRUARY 29, 2000
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, when read in conjunction with the audited
Financial Statements for the years ended August 31, 1998 and 1999 contained in
Form 10-K of Altiva Financial Corporation (the "Company") filed with the
Securities and Exchange Commission for the fiscal year ended August 31, 1999,
the accompanying unaudited Condensed Consolidated Financial Statements contains
all of the information necessary to present fairly the financial condition of
the Company at February 29, 2000, the results of its operations for the six
months ended February 28, 1999 and February 29, 2000, the change in
stockholders' equity for the six months ended February 29, 2000, and the cash
flows for the six months ended February 28, 1999 and February 29, 2000. Certain
reclassifications have been made to conform prior periods with the current
period presentation.
The preparation of financial statements, in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosures 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. In the
opinion of management, all material adjustments, which are normal and recurring
in nature, necessary for the fair presentation of these statements have been
included herein. The results of operations for the six months ended February 30,
1999 are not necessarily indicative of the results to be expected for the full
year.
The Company records gain on sale of loans as required by Statement of
Financial Accounting Standards No. 125 ("SFAS 125") which, among other things,
requires management to estimate the fair value of certain mortgage related
securities and servicing assets utilizing future prepayment and loss
assumptions. Such assumptions will differ from actual results and the
differences could be material. Management utilizes assumptions based on a
variety of factors including historical trends, consultation with its financial
advisors and assumptions utilized by its peers. Historical trends may not be an
indication of future results, which may be affected by changes in interest
rates, credit quality, availability of alternative financing options and general
economic conditions. The application of SFAS 125 is required for all entities
with certain mortgage banking activities including originators and sellers of
mortgage loans. Management believes that its assumptions are similar to those
utilized by other subprime mortgage loan originators.
Capitalized terms not defined herein are defined in the Company's
audited Financial Statements that are contained in the Form 10-K/A of Mego
Mortgage Corporation, the Company's former name, filed with the Securities and
Exchange Commission for the fiscal year ended August 31, 1998 and the Form 10-K
of Altiva Financial Corporation for the fiscal year ended August 31, 1999.
2. RECENT EVENTS
On March 3, 2000, the Company announced that it had received the $4.0
million balance of the $7.0 million associated with its recapitalization. The
Company also received a subscription from over 92% of its old 12 1/2%
subordinated debt holders who will exchange their old notes in the principal
amount of over $28 million for new secured notes in the principal amount of
approximately $17 million, a portion of which were converted into common
stock, upon shareholder approval, which was obtained at the Company's annual
meeting on March 9, 2000.
The recapitalization referred to above is more specifically detailed as
follows: the Company sold $14,000,000 principal amount of 12 1/2% Secured
Convertible Senior Notes of the Company due 2006 (the "New Notes"). The
consideration received for such New Notes consisted of $4.0 million cash and the
tendering to the Company of $10.0 million principal amount of previously issued
12% Secured Convertible Notes due 2006. In addition, the company received a
binding commitment from over 92% of the beneficial owners of its currently
outstanding 12 1/2% Subordinated Notes due 2001 (the "Subordinated Notes") to
exchange their Subordinated Notes
5
<PAGE> 8
(approximately $28,000,000) for new 12% Secured Convertible Senior Notes due
2006 (the "Exchange Notes") in the principal amount of approximately
$17,000,000. Approximately, one-third (1/3) of the Exchange Notes will be
mandatorily convertible into the Company's common stock at $1.00 per share upon
shareholder approval, which was obtained March 9, 2000.
On March 24, 2000, the Company announced that it completed its
previously announced exchange offer for its outstanding 12 1/2 % Subordinated
Notes due 2001. The holders of over 96.5% of the Subordinated Notes, or
approximately $28.5 million in principal amount, participated in the exchange
offer. The participants will receive, in the aggregate, approximately $12.5
million principal amount of 12% Secured Convertible Senior Notes due 2006 and
6.2 million shares of common stock.
During early April 2000, Altiva Financial Corporation, and its
wholly-owned subsidiary. The Money Centre, Inc., suffered severe liquidity
problems resulting from lower than anticipated loan production and inability to
realize sufficient revenues from whole loan sales to pay the Company's and its
subsidiary's expenses when due.
On April 12, 2000 Altiva Financial Corporation halted trading of the
Company's stock on the Nasdaq Small Cap Market. Altiva Financial previously
announced that it had sold $14.0 million principal amount of 12% Secured
Convertible Senior Notes due 2006, with net cash proceeds to Altiva Financial
of $4.0 million and that it had refinanced most of the $30.4 million principal
amount of its outstanding 12 1/2% Subordinated Notes due 2001. While these
events generated additional liquidity for Altiva Financial, the viability of
Altiva Financial's operations remained dependent on improving loan production
by The Money Centre, Inc., Altiva Financial's wholly-owned operating
subsidiary, and upon selling the Company's existing loan inventory at prices
above cost. During the calendar quarter ended March 31, 2000, loan production
by The Money Centre, Inc. was significantly below levels that the Company
expected. In addition, as of March 31, 2000, the sale price of loans sold
during the period were lower than the Company expected. These events contributed
to a significant deterioration in Altiva Financial's available cash and its
inability to obtain an additional cash infusion resulted in the Company
releasing substantially all its staff on Friday, April 14, 2000. The issues
leading to the Company's current liquidity crisis have required significant
focus by Senior Management.
Subsequent to the quarter ending February 29, 2000, three of the
Company's five directors resigned, including Spencer I. Browne, Hubert M.
Stiles, Jr. and David J. Vida, Jr. Messrs. Stiles and Vida each represented
major investors and creditors of the Company. Mr. Browne was one of the
Company's two outside directors.
The liquidity crisis and reported downsizing has caused the Company to
be in breach of certain debt covenants, including covenants contained in its
warehouse borrowing facilities. As a result, certain of the Company's secured
creditors have taken possession of the collateral securing their loans,
including a portion of the Company's potentially income-producing assets, such
as loans held for sale. The Company is also in default on most of its lease
obligations and is negotiating with its landlords to resolve such defaults. As
a result of the announced downsizing, director resignations and winding up of
the Company's business, certain of the regulatory authorities granting the
Company's licenses and/or qualifications to do business have requested that the
Company update its filing with them and/or surrender its licenses. The Company
is attempting to comply with the requests of its licensing authorities to the
extent that it has funds available to pay the requisite update filing fees and
to retain staff necessary to handle the work related to the authorities'
compliance requests.
The Nasdaq Stock Market has notified the Company of its intent to
delist the Company's stock from the Nasdaq Stock Market if the Company failed to
file its report Form 10-Q with the Securities and Exchange Commission by April
25, 2000. At the time the Company received such notice, the Company was
attempting to comply with an earlier communication from Nasdaq requesting
additional information from the Company no later than April 28, 2000. Effective
May 1, 2000, the Company delisted its stock on the Nasdaq Small Market. This
report of subsequent events is in the substance of that additional information
requested by Nasdaq.
The Company has not sought protection under the United States
Bankruptcy Code and is proceeding with an orderly cessation of business.
However, it is possible that actions of the Company's creditors or other
unanticipated events may force the Company to seek protection under the United
States Bankruptcy Code.
6
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations section contains certain forward-looking
statements and information relating to the Company that are based on the beliefs
of management as well as assumptions made by and information currently available
to management. Such forward-looking statements include, without limitation, the
Company's expectations and estimates as to the Company's business operations,
including the introduction of new loan programs and products and future
financial performance, including growth in revenues and net income and cash
flows. In addition, included herein the words "anticipates," "believes,"
"estimates," "expects," "plans," "intends" and similar expressions, as they
relate to the Company or its management, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company's management with respect to future events and are subject to certain
risks, uncertainties and assumptions. Also, the Company specifically advises
readers that the factors listed under the caption "Liquidity and Capital
Resources" could cause actual results to differ materially from those expressed
in any forward-looking statement. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated or expected.
The following discussion and analysis should be read in conjunction
with the Condensed Financial Statements, including the notes thereto, contained
elsewhere herein and in the Company's Annual Report on Form 10-K for the fiscal
year ended August 31, 1999. (SEE RECENT EVENTS)
GENERAL
Altiva Financial Corporation, (the "Company") is a specialized consumer
finance company that makes sub-prime residential mortgage loans for the purpose
of debt consolidation or creating liquidity from the borrower's home equity
secured by deeds of trust. The Company sells these consumer loans to other
financial institutions. The Company's borrowers generally do not qualify for
traditional "A" credit mortgage loans. Typically, their credit histories, income
or other factors do not conform to the lending criteria of government-chartered
agencies (including GNMA, FHMA, FHLMC) that traditional lenders rely on in
evaluating whether to make loans to potential borrowers.
The Company's current loan products are first mortgage loans and home
equity loans ("Home Equity loans") typically secured by first liens, and in some
cases by second liens, on the borrower's residence. In making Home Equity loans,
the Company relies primarily on the appraised values of the borrower's
residences. The Company determines the loan amount based on the appraised values
and the creditworthiness of the borrowers.
In prior years, the Company also made high loan-to-value loans ("Equity
+ loans") based on the borrowers' credit. These loans typically were secured by
second liens on the borrowers' primary residences. The Company exited the home
improvement and Equity + loan markets because these loans failed to meet
targeted returns and after-market liquidity.
The Company's loans are produced by its wholesale and retail
origination platforms. The wholesale platform represents the Company's largest
source of loan production. Through its wholesale platform, the Company funds
loans originated through a nationwide network of licensed mortgage brokers. The
wholesale platform conducts operations from Atlanta, Georgia and Charlotte,
North Carolina. The Company has one wholly-owned operating subsidiary, The Money
Centre, Inc. headquartered in Charlotte, North Carolina.
The Company's marketing strategies are typical of those used in retail
production including: telemarketing, direct mail, television and radio
advertising, third-party loan programs and consumer trade shows. A Company
website is currently under construction and may be used to provide consumer loan
applications and information to the public about the Company's products and
services. The retail production platforms are located in Las Vegas, Nevada and
Charlotte, North Carolina. (SEE RECENT EVENTS)
7
<PAGE> 10
LOAN PRODUCTION
The following table sets forth certain data regarding loans produced by
the Company during the six months ended February 28, 1999 and February 29, 2000:
<TABLE>
<CAPTION>
SIX MONTHS ENDED FEBRUARY 29,
---------------------------------------------
1999 2000
------------------- --------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Principal balance of loans produced:
Wholesale:
Equity + loans $ 7,009 20.9% $ -- 0.0%
Home equity 20,537 61.2 158,076 79.7
------- ----- -------- -----
Total wholesale 27,546 82.1 158,076 79.7
------- ----- -------- -----
Retail:
Equity + loans 2,748 8.2 -- --
Home equity 3,259 9.7 40,216 20.3
------- ----- -------- -----
Total retail 6,007 17.9 40,216 20.3
------- ----- -------- -----
Total principal amount of loans produced $33,553 100.0% $198,292 100.0%
======= ===== ======== =====
</TABLE>
LOAN SALES
The following table sets forth the principal amount of loans sold and
related gain (loss) on sale for the six months ended February 28, 1999 and
February 29, 2000.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FEBRUARY 29,
-----------------------
1999 2000
--------- ---------
(dollars in thousands)
<S> <C> <C>
Principal Amount of Loans Sold(1):
Title I $ 3,446 $ --
Equity + 14,164 2,701
Home Equity 9,421 168,710
--------- ---------
Total $ 27,031 $ 171,411
========= =========
Gain on sale of loans $ 392 $ 6,398
========= =========
Net unrealized gain (loss) on mortgage related securities $ (169) $ (2,105)
========= =========
Gain on sale of loans as a percentage of principal balance of loans sold 1.5% 3.7%
========= =========
Gain on sale of loans plus net unrealized loss on mortgage related
securities as a percentage of principal balance of loans sold 0.8% 2.5%
========= =========
</TABLE>
- -----------------------
As part of its current business strategy, the Company is no longer
pursuing securitization transactions but is instead, selling its whole loans
produced.
Sales of loans in securitization transactions had historically been the
main source of the Company's revenue and income. In a securitization
transaction, a specific group of the Company's mortgage loans having similar
characteristics, (loan type and loan amounts) were pooled for sale.
The gain on sale of loans can vary for several reasons, including the
relative amounts of Equity +, Home Equity and Title I Loans, each of which type
of loan has different (i) estimated prepayment rates, (ii) weighted-average
interest rates, (iii) weighted-average maturities and (iv) estimated future
default rates. Typically, the gain on sale of loans through securitizations is
higher than on whole loan sales; however, engaging in securitizations requires
an up-front cash expenditure and can have an adverse effect on a company's
financial condition due to unanticipated write downs in the value of the
residual securities retained by the Company which may be caused by, among other
things, unanticipated changes in prepayment and default rates assumed by the
company. The Company entered into no securitizations during the six months ended
February 28, 1999 and February 29, 2000.
As the holder of residual securities issued in securitizations, the
Company is entitled to receive certain excess cash flows. These excess cash
flows are calculated as the difference between (a) principal and interest paid
by borrowers and (b) the sum of (i) pass-through interest and principal to be
paid to the holders of the regular securities and interest only securities, (ii)
trustee fees, (iii) third-party credit enhancement fees, (iv) servicing fees and
(v) estimated loan pool losses. The Company's right to receive the excess cash
flows is subject to the satisfaction of certain reserve or
over-collateralization requirements that are specific to each securitization and
are used as a means of credit enhancement.
8
<PAGE> 11
LOAN DELINQUENCIES
The following table sets forth the Equity + and Home Equity loan
delinquencies as of the dates indicated.
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 29,
1999 2000
------------ ------------
(dollars in thousands)
<S> <C> <C>
Home Equity and Equity (1):
31-60 days past due 7.23% 4.73%
61-90 days past due 2.24 1.70
91 days and over past due 13.50 9.99
----- -----
Total past due 22.97% 16.42%
</TABLE>
(1) Represents the dollar amount of delinquent loans as a percentage of the
total dollar amount of loans.
9
<PAGE> 12
RESULTS OF OPERATIONS
Six Months Ended February 29, 2000 Compared to Six Months Ended February 28,
1999
In the first months of fiscal 1999, the Company focused on (1)
liquidating its loan portfolio for cash to reduce its indebtedness while it
explored alternatives to raise new capital and (2) initiating new strategic
initiatives to return the Company to profitability. The Company did not begin to
produce significant loan volume until July 1999. Such volume was attributable to
production by The Money Centre, Inc. which was acquired by the Company in July
1999. As a result, the Company does not believe that its results for the six
months ended February 2000, are comparable to the Company's results for the six
months ended February 1999.
Total Revenues. Total revenues increased $5.5 million to $5.3 million
during the six months ended February 29,2000 from a loss of $169,000 during the
six months ended February 28, 1999. The increase was attributable to loan
production by The Money Centre, Inc.
Gain on sale of loans increased $6.0 million to $6.4 million during the
six months ended February 29, 2000 from $392,000 during the six months ended
February 28, 1999. The increase was primarily the result of an increase in the
volume of loans sold in the six months ended February 29, 2000 compared to the
six months ended February 28, 1999.
Net unrealized loss on mortgage related securities increased to a loss
of $2.1 million during the six months ended February 29, 2000 from a loss of
$169,000 during the six months ended February 28, 1999, a change of $1.9
million. This is attributed to the mark to market adjustment being greater
during the six months ended February 29, 2000.
Loan servicing income, net, decreased $188,000 to $144,000 during the
six months ended February 29, 2000 from $332,000 during the six months ended
February 28, 1999. This decrease was a result of the reduction in loan
prepayment penalties earned during the six months ended February 28, 1999.
Interest income, net of interest expense, increased $1.6 million, from
a net expense of $724,000 to a net income of $859,000 during the six months
ended February 29, 2000. The increase was primarily the result of increased
interest income on loans produced by The Money Centre, Inc., partially offset by
increased interest expense on the warehouse lines due to increased loan
origination volume as compared to the six months ended February 28, 1999.
Total General and Administrative Expenses. General and administrative
expenses increased $4.7 million to $13.5 million for the six months ended
February 29, 2000 from $8.8 million for the six months ended February 28, 1999.
The increase is a result of the inclusion of the expenses incurred at The Money
Centre, Inc., acquired by the Company during the fourth quarter of fiscal 1999.
Payroll and benefits expense increased $4.6 million to $8.2 million for
the six months ended February 29, 2000 from $3.6 million for the six months
ended February 28, 1999. This increase can be attributed to an increase in staff
due to the acquisition of The Money Centre, Inc.
Supplies and postage expense increased $328,000 to $465,000 during the
six months ending February 29, 2000 from $137,000 during the six months ended
February 28, 1999. This increase can be attributed to the increase in business
between the two periods due to the acquisition of The Money Centre, Inc.
Professional service expense decreased $494,000 to $1.3 million during
the six months ended February 29, 2000 from $1.7 million during the six months
ended February 28, 1999. This decrease is attributed to reduced expenditures of
contractual services and a decrease in legal and audit fees.
10
<PAGE> 13
During the six months ending February 29, 2000, travel and
entertainment expenses increased $210,000, from $236,000 during the six months
ending February 28, 1999, to $446,000 during the six months ended February 29,
2000. This increase can be attributed the travel necessary for corporate support
relative to technology, human resources, compliance and general management.
Net Income (Loss). Net income increased $2.8 million to $2.0 million
during the six months ended February 29, 2000 from a loss of ($805,000) during
the six months ended February 28, 1999. This increase is attributed to the
addition of The Money Centre, Inc. during the last quarter of fiscal year 1999.
Three Months Ended February 29, 2000 Compared to Three Months Ended February 28,
1999
In the first months of fiscal 1999, the Company focused on (1)
liquidating its loan portfolio for cash to reduce its indebtedness while it
explored alternatives to raise new capital and (2) initiating new strategic
initiatives to return the Company to profitability. The Company did not begin to
produce significant loan volume until July 1999. Such volume was attributable to
production by The Money Centre, Inc. which was acquired by the Company in July
1999. As a result, the Company does not believe that its results for the three
months ended February 2000, are comparable to the Company's results for the
three months ended February 1999.
Total Revenues. Total revenues increased $2.3 million to $1.6 million
during the three months ended February 29, 2000 from a loss of $688,000 during
the three months ended February 28, 1999. The increase was attributable to loan
production by The Money Centre, Inc.
Gain on sale of loans increased $2.0 million to $2.2 million during the
three months ended February 29, 2000 from $220,000 during the three months ended
February 28, 1999. The increase was primarily the result of an increase in the
volume of loans sold in the three months ended February 29, 2000 compared to the
three months ended February 28, 1999.
Net unrealized loss on mortgage related securities increased to a loss
of $1.5 million during the three months ended February 29, 2000 from a loss of
$439,000 during the three months ended February 28, 1999, a change of $1.0
million. This is attributed to the mark to market adjustment being greater
during the three months ended February 29, 2000.
Loan servicing income, net, decreased $45,000 to $47,000 during the
three months ended February 29, 2000 from $92,000 during the three months ended
February 28, 1999. This decrease was a result of the reduction in loan
prepayment penalties earned during the three months ended February 28, 1999.
Interest income, net of interest expense, increased $1.4 million, from
a net expense of $561,000 to a net income or $910,000 during the three months
ended February 29, 2000. The increase was primarily the result of increased
interest income on loans produced by The Money Centre, Inc., partially offset by
increased interest expense on the warehouse lines due to increased loan
origination volume as compared to the three months ended February 28, 1999.
Total General and Administrative Expenses. General and administrative
expenses increased $1.7 million to $6.3 million for the three months ended
February 29, 2000 from $4.5 million for the three months ended February 28,
1999. The increase is a result of the inclusion of the expenses incurred at The
Money Centre, Inc., acquired by the Company during the fourth quarter of fiscal
1999.
Payroll and benefits expense increased $2.2 million to $3.8 million for
the three months ended February 29, 2000 from $1.6 million for the three months
ended February 28, 1999. This increase can be attributed to an increase in staff
due to the acquisition of The Money Centre, Inc.
Supplies and postage expense increased $143,000 to $209,000 during the
three months ending February 29, 2000 from $66,000 during the three months ended
February 28, 1999. This increase can be attributed to the increase in business
between the two periods due to the acquisition of The Money Centre, Inc.
Professional service expense decreased $182,000 to $607,000 during the
three months ended February 29, 2000 from $789,000 during the three months ended
February 28, 1999. This decrease is attributed to reduced expenditures of
contractual services and a decrease in legal and audit fees.
Net Income. Net income increased $2.8 million to $4.4 million during
the three months ended February 29, 2000 from an income of $1.7 million during
the three months ended February 28, 1999. This increase is attributed to the
addition of The Money Centre, Inc. during the last quarter of fiscal year 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were ($173,000) at February 29, 2000 compared
to $10.5 million at August 31, 1999. The Company's principal cash requirements
arise from loan production and payments of operating and interest expenses.
The Company currently has three significant sources of financing and
liquidity: (1) a warehouse line of $25.0 million with Sovereign Bancorp (the
"Sovereign Warehouse Line"); (2) a warehouse line of $25 million with First
Collateral; and (3) sales of loans in the institutional whole loan market. The
Company has sufficient remaining facilities to fund its production through the
current period.
In order to improve its liquidity situation, the company effected a
recapitalization, which was completed on February 29, 2000, and in conjunction
therewith, certain elements relative to stock ownership were approved by the
shareholders at the Company's annual meeting on March 9, 2000. The
recapitalization improved the Company's liquidity by:
- Providing for a $7.0 million cash infusion paid during the period
December 31, 1999 to March 3, 2000 by issuing $7.0 million of
additional 125 Convertible Secured Notes.
- Exchanging approximately $28.0 million of the Company's 12 1/2%
Subordinated Debentures due December 2001 for approximately $12.0
million of new 12% Secured Notes due August 2006.
- Waving of payment of approximately $1.9 million of accrued interest
payable due December 1999 to participating Subordinated debenture
holders.
- Deferring interest payments on the above debt until June 15, 2001.
- Modifying the convenants in the 12 1/2% Subordinated Debenture due
December 2001 to remove, among other things, the limitations on
borrowings and maintenance of net worth provisions.
The ultimate source of liquidity continues to be based on the company's
ability to control expenses and produce loans at a sufficient volume that create
revenues at least equal to the Company's expenses. Additionally, there is no
guarantee that the Company will not suffer additional unforeseen events that
will cause further liquidity shortages.
Specific transactions and loan facilities, which impact the Company's
liquidity, are detailed as follows:
- In order to improve its liquidity situation, the Company obtained
commitments from the holders of approximately $28 million principal amount of
its outstanding New Notes to exchange such outstanding Subordinated Debentures
for approximately $12.0 million principal amount of new 12% Secured Notes due
August 2006 (the "Exchange Notes") and for the equivalent of 22 1/2% of the
Company's outstanding Common Stock based on the number of fully-diluted shares
of Common Stock (excluding out-of-the money options). In addition, the holders
of such New Notes have agreed to waive the payment of approximately $1.9 million
of accrued interest payable to them in December 1999 under the terms of the Old
Indenture governing the Old Notes. (Under the terms of the New Indenture, no
interest will be payable to the holders of the New Notes by Altiva until June
15, 2001, although interest will accrue from the date of issuance.) The issuance
of Common Stock to the current holders of Old Notes requires the approval of the
Company's stockholders under the rules of the NASDAQ Stock Market. The approval
was granted during the stockholders meeting on March 9, 2000. Altiva expects
that the discount in the principal amount of notes outstanding and the waiver of
the interest payment will result in the reduction of the Company's projected
cash expenditure by $3.4 million over the next twelve months.
- In addition, the Company received a commitment from Value Partners,
Ltd. ("Value Partners") to purchase an additional $4.0 million principal amount
of Amended Notes in addition to the Original Secured Notes already purchased.
Consummation of this sale was completed on February 29, 2000 and of the
remaining Secured Notes is subject to the execution of additional mutually
agreed upon amendments to the Secured Note Purchase Agreement between the
parties ("Secured Note Purchase Agreement") and other related agreements
("Related Agreements") which was approved at the Company's annual
meeting on March 9, 2000.
- In addition, there is no guarantee that the Company will not suffer
additional unforeseen events that will cause further liquidity shortages. (SEE
RECENT EVENTS)
- The Company's liquidity and capital resources are impacted by certain
material covenant restrictions existing in the Indenture governing the Company's
outstanding 12 1/2% senior subordinated notes due 2001(the "New Notes"). These
covenants include limitations on the Company's ability to incur certain types of
additional indebtedness, grant liens on its assets and to enter into
extraordinary corporate transactions. The Company may not incur certain
additional indebtedness if, on the date of such incurrence and after giving
effect thereto, the Consolidated Leverage Ratio (as defined therein) would
exceed 1.5:1, subject to certain exceptions. At February 29, 2000, the
Consolidated Leverage Ratio was .8837:1.
11
<PAGE> 14
The Sovereign Warehouse Line had an original termination date of
December 29, 1998 and was renewable, at Sovereign's option, in six-month
intervals for up to five years. During December 1998, the Sovereign Warehouse
Line was renewed at $50.0 million and was reduced to $25.0 million on March 31,
1999 through March 31,1999. The Sovereign Warehouse Line is secured by specific
loans held for sale and includes certain material covenants including
maintaining books and records, providing financial statements and reports,
maintaining its properties, maintaining adequate insurance and fidelity bond
coverage and providing timely notice of material proceedings. As of February 29,
2000, the Company had approximately $22.7 million outstanding under the
Sovereign Warehouse Line.
The Money Centre, Inc. utilizes three warehouse lines with Centura,
First Collateral Bank and the Sovereign Warehouse Line. The Centura Bank
facility provided for a warehouse line of up to $30 million, accrues interest at
prime rate + .5% to 1.75%, depending on the age of the loan, and expired on
November 30, 1999 and was not renewed. The First Collateral facility provides
for a warehouse line of credit of up to $25.0 million, accrues interest at LIBOR
+ 2.25% and Prime +3.75% for loans aged greater than 60 days. The Company is
currently negotiating an extension on the First Collateral warehouse line. There
have been no restrictions on the use of this facility during these negotiations.
The facilities are secured by specific loans held for sale and includes certain
material covenants including maintaining books and records, providing financial
statements and reports, maintaining its properties, maintaining adequate
insurance and fidelity bond coverage and providing timely notice of material
proceedings. The outstanding balance for First Collateral Bank facilities as of
February 29, 2000 totaled $26.4 million.
In April 1997, the Company entered into a pledge and security agreement
with Greenwich Capital Financial Products for a $25.0 million revolving credit
facility. This facility is secured by a pledge of certain of the Company's
interest only and residual class certificates relating to securitizations
carried as mortgage related securities on the Company's Statements of Financial
Condition, payable to the Company pursuant to its securitization agreements. The
agreement, which was originally scheduled to mature in December 1998, was
extended until December 1999. On December 2, 1998, the Company obtained an
amendment to the agreement whereby the financial institution waived its right to
declare an event of default of borrower due to the Company's failure to comply
with the minimum required net worth and the debt to net worth ratio as of August
31, 1998. Additionally, the minimum net worth test was amended such that the
Company is required to maintain a net worth equal to or greater than 75% of the
Company's net worth as of the end of the preceding fiscal quarter. In addition,
the Company agreed to pay down the outstanding borrowings from $10.0 million at
August 31, 1998 to $6.0 million at December 31, 1998 and subsequently agreed to
pay the remaining $6.0 million in equal monthly payments during calendar 1999.
All remaining amounts outstanding under the agreement were paid off in November
1999.
In October 1997, the Company entered into a credit agreement with
Textron Financial which converted into a term loan in May 1998 with monthly
amortization derived from the cash flow generated from the respective mortgage
related securities pledged as collateral. This term loan bears interest at the
prime rate plus 2.5%, and matures in October 2002. The credit agreement includes
certain material covenants, which includes restrictions relating to
extraordinary corporate transactions, maintenance of adequate insurance and
complying with certain financial tests. These tests include complying with a
minimal consolidated adjusted tangible net worth and that the consolidated
adjusted leverage ratio shall not exceed 3:1. As of August 31, 1998, the
Company's consolidated adjusted tangible net worth was $54.1 million below the
minimum required and the consolidated adjusted leverage ratio was 0.53:1. On
December 9, 1998, the parties agreed to temporarily amend the borrowing base
definition for the period from September 30, 1998 through April 30, 1999 by
increasing the borrowing base from 50% to 55%. On May 1, 1999, the borrowing
base returned to 50%. The minimum consolidated tangible net worth covenant was
also adjusted, commencing retroactively, as of September 30, 1998 and the
Company agreed to paydown the line by approximately $405,000 (the amount
exceeding the applicable maximum amount of tranche credit) and pay an
accommodation fee of $10,000. As of February 29, 2000, the Company's
consolidated adjusted tangible net worth was $12.1 million above the minimum
required and the consolidated adjusted leverage ratio was 2.703:1. In February
2000 Textron agreed to amend the consolidated adjusted leverage ratio to exclude
warehouse borrowings. This approval was made at the request of Altiva to
accommodate the reduction of subordinated debt and increased warehouse
borrowings, which would have negatively affected this covenant. Altiva agreed to
amortize the existing principal balance a minimum of $75,000 a quarter for a one
year period beginning February 29, 2000 and $100,000
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<PAGE> 15
a quarter thereafter until a total of $1,000,000 in amortization is reached.
Amortization may be in the form of cash flow generated from the mortgage-related
securities pledged or from company payments.
In August 1999, the Company sold $7.0 million of principal amount of
Convertible Secured Notes. The proceeds were used to acquire The Money Centre,
Inc. The facility is secured by a pledge of certain of the Company's mortgage
related securities. The loan balance under this agreement bears interest at 12%
and matures in August 2006. Interest for this loan is to be paid semi-annually.
The credit agreement includes certain material covenants. These covenants
include restrictions relating to the security, maintenance and existing credit
and servicing agreements. The holders of the notes may, per the provisions
therein, convert to Common Stock at a specified conversion price if such right
is granted at the next annual shareholder meeting. The Company may also, per the
provisions of the agreement, redeem the notes prior to maturity.
Net cash used in the Company's operating activities for the six months
ended February 28, 1999 and February 29, 2000 was $27.6 million and $1.3
million, respectively. During the six months ended February 30, 1998 and 1999,
net cash provided (used) by financing activities amounted to $13.8 million and
$(1.9) million, respectively.
SEASONALITY
The Company's production of residential mortgages is seasonal to the
extent that borrowers use the proceeds for home improvement contract work. The
Company's production of loans for this purpose tends to build during the spring
and early summer months, particularly where the proceeds are used for pool
installations. This change in seasons also precipitates the need for new siding,
window and insulation contracts. Production declines dramatically from the
holiday season (February and December) through the winter months. While the
Company does not have substantial experience making loans to borrowers who
intend to use the proceeds to purchase a residence, management believes that the
market for such loans will follow the home sale cycle, higher in the spring
through early fall than during the remainder of the year.
YEAR 2000 ISSUE
The Company previously recognized the material nature of the business
issues surrounding computer processing of dates into and beyond the Year 2000
and began taking corrective action. Management believes the Company has
completed all of the activities within its control to ensure that the Company's
systems are Year 200 compliant and the Company has experienced no interruptions
to normal operations due to the start of the Year 2000.
The Company's Year 2000 readiness costs were approximately $99,000 to
purchase or upgrade its own hardware/software. The Company does not currently
expect to apply any further funds to address Year 2000 issues.
As of February 29, 2000, the Company has not experienced any material
disruptions of its internal computer systems or software applications and has
not experienced any problems with the computer systems or software applications
of its third party vendors, suppliers or service providers. The Company will
continue to monitor these third parties to determine the impact, if any, on the
business of the Company and the actions the Company must take, if any, in the
event of non-compliance by any of these third parties. Based upon the Company's
assessment of compliance by third parties, there appears to be no material
business risk posed by any such non-compliance.
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<PAGE> 16
RECENT DEVELOPMENTS
As previously announced, Altiva Financial Corporation, and its
wholly-owned subsidiary, The Money Center, Inc. during April 2000 suffered
severe liquidity problems resulting from lower than anticipated loan
production and inability to realize sufficient revenues from whole loan sales
to pay the Company's and its subsidiary's expenses when due.
Subsequent to the consummation of the Company's recent
recapitalization that was completed on February 29, 2000, a lack of cash and
its inability to obtain an additional cash infusion resulted in the Company
releasing substantially all its staff on Friday, April 14, 2000. The issues
leading to the Company's current liquidity crisis have required significant
focus by Senior Management.
Subsequent to the quarter ending February 29, 2000, three of the
Company's five directors resigned, including Spencer I. Browne, Hubert M.
Stiles, Jr. and David J. Vida, Jr. Messrs. Stiles and Vida each represented
major investors and creditors of the Company. Mr. Browne was one of the
Company's two outside directors.
The liquidity crisis and reported downsizing has caused the Company to
be in breach of certain debt covenants, including covenants contained in its
warehouse borrowing facilities. As a result, certain of the Company's secured
creditors have taken possession of the collateral securing their loans,
including a portion of the Company's potentially income-producing assets, such
as loans held for sale. The Company is also in default on most of its lease
obligations and is negotiating with its landlords to resolve such defaults. As
a result of the announced downsizing, director resignations and winding up of
the Company's business, certain of the regulatory authorities granting the
Company's licenses and/or qualifications to do business have requested that the
Company update its filing with them and/or surrender its licenses. The Company
is attempting to comply with the requests of its licensing authorities to the
extent that it has funds available to pay the requisite update filing fees and
to retain staff necessary to handle the work related to the authorities'
compliance requests.
The Nasdaq Stock Market has notified the Company of its intent to
delist the Company's stock from the Nasdaq Stock Market if the Company filed to
file its report Form 10-Q with the Securities and Exchange Commission by April
25, 2000. At the time the Company received such notice, the Company was
attempting to comply with an earlier communication from Nasdaq requesting
additional information from the Company no later than April 28, 2000. This
report of subsequent events is in the substance of that additional information
requested by Nasdaq.
The Company has not sought protection under the United States
Bankruptcy Code and is proceeding with an orderly cessation of business.
However, it is possible that actions of the Company's creditors or other
unanticipated events may force the Company to seek protection under the United
States Bankruptcy Code.
14
<PAGE> 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's various business activities generate liquidity, market
and credit risk:
- Liquidity risk is the possibility of being unable to meet all
present and future financial obligations in a timely manner.
- Market risk is the possibility that changes in future market
rates or prices will make the Company's positions less
valuable.
- Credit risk is the possibility of loss from a customer's
failure to perform according to the terms of the transaction.
Compensation for assuming these risks is reflected in interest income
and fee income. Although the Company is exposed to credit loss in the event of
non-performance by the borrowers, this exposure is managed through credit
approvals, review and monitoring procedures and to the extent possible,
restricting the period during which unpaid balances are allowed to accumulate.
As of February 29, 2000 the net fair value of all financial instruments
held by the Company with exposure to interest rate risk was approximately $31.8
million. The potential decrease in fair value resulting from a hypothetical 5%
increase in interest rates would be approximately $23.8 million.
There are certain shortcomings inherent to the Company's sensitivity
analysis. The model assumes interest rate changes are instantaneous parallel
shifts in the yield curve. In reality, changes are rarely instantaneous.
Although certain assets and liabilities may have similar maturities or periods
to repricing, they may not react in line with changes in market interest rates.
Also, the interest rates on certain types of assets and liabilities may
fluctuate with changes in market interest rates while interest rates on other
types of assets may lag behind changes in market rates. Prepayments on the
Company's mortgage related instruments are directly affected by a change in
interest rates. However, in the event of a change in interest rates, actual loan
prepayments may deviate significantly from the Company's assumptions. Further,
certain assets, such as adjustable rate loans, have features, such as annual and
lifetime caps that restrict changing the interest rates both on a short-term
basis and over the life of the asset. Finally, the ability of certain borrowers
to make scheduled payments on their adjustable rate loans may decrease in the
event of an interest rate increase.
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<PAGE> 18
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 23, 1998, an action was filed in the United States District
Court for the Northern District of Georgia by Robert J. Feeney, as a purported
class action against the Company and Jeffrey S. Moore, the Company's former
President and Chief Executive Officer. The complaint alleges, among other
things, that the defendants violated the federal securities laws in connection
with the preparation and issuance of certain of the Company's financial
statements. The named plaintiff seeks to represent a class consisting of
purchasers of the Common Stock between April 11, 1997 and December 18, 1997, and
seeks damages in an unspecified amount, costs, attorney's fees and such other
relief as the court may deem proper. On June 30, 1998, the plaintiff amended the
complaint to add additional plaintiffs, to add as a defendant Mego Financial,
the Company's former parent, and to extend the class period through and
including May 20, 1998. On September 18, 1998, the Company, Jeffrey S. Moore and
Mego Financial filed motions to dismiss the complaint. On April 8, 1999, the
court granted each of these motions. In the court's order dismissing the
complaint, the plaintiffs were permitted, upon proper motions, to serve and file
a second amended and redrafted complaint within 30 days. On May 10, 1999, the
Plaintiffs moved for leave to file and serve the second amended and redrafted
complaint contemplated in the earlier order. The court granted Plaintiffs'
motion and accepted the second amended complaint on June 8, 1999. On July 19,
1999, the Company, Jeffrey S. Moore and Mego Financial filed motions to dismiss
the second amended and redrafted complaint. On March 9, 2000, the court granted
the Company's, Moore's and Mego Financial motions and dismissed the case with
prejudice. The plaintiffs have 30 days to appeal the ruling. The Company
believes that resolution of this matter will not result in a material adverse
effect on the business or financial condition of the Company.
On October 2, 1998, an action was filed in the United States District
Court for the Western Division of Tennessee by Traci Parris, as a purported
class action suit against Mortgage Lenders Association Inc., the Company and
City Mortgage Services, Inc., one of the Company's strategic partners. The
complaint alleges, among other things, that the defendants charged interest
rates, origination fees and loan brokerage commissions in excess of those
allowed by law. The named plaintiff seeks to represent a class of borrowers and
seeks damages in an unspecified amount, reform or nullification of loan
agreements, injunction, costs, attorney's fees and such other relief as the
court may deem just and proper. On October 27, 1998, the Company filed a motion
to dismiss the complaint for lack of jurisdiction, which the court denied on May
18, 1999. On July 6, 1999, the court denied the Company's subsequent motion for
reconsideration, and on the same date granted the Company's request for
interlocutory appeal to the United States Court of Appeals for the Sixth Circuit
on the question of jurisdiction. On July 15, 1999, the Company filed an
interlocutory appeal to the Court of Appeals. On September 28, 1999, the Court
of Appeals agreed to accept the Company's interlocutory appeal on the
jurisdictional question, and docketed the appeal. That interlocutory appeal is
still pending. The Company believes it has meritorious defenses to this lawsuit
and that resolution of this matter will not result in a material adverse effect
on the business of financial condition of the Company.
In the ordinary course of its business, the Company is, from time to
time, named in lawsuits. The Company believes that resolution of these matters
will not have a material adverse effect on the business or financial condition
of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
quarter ended February 29, 2000.
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<PAGE> 19
ITEM 5. OTHER INFORMATION
During April 2000, Altiva Financial Corporation, and its wholly-owned
subsidiary, The Money Centre, Inc. suffered severe liquidity problems resulting
from lower than anticipated loan production and inability to realize sufficient
revenues from whole loan sales to pay the Company's and its subsidiary's
expenses when due.
Subsequent to the consummation of the Company's recent
recapitalization that was completed on February 29, 2000, a lack of cash and
its inability to obtain an additional cash infusion resulted in the Company
releasing substantially all its staff on Friday, April 14, 2000. The issues
leading to the Company's current liquidity crisis have required significant
focus by Senior Management.
Subsequent to the quarter ending February 29, 2000, three of the
Company's five directors resigned, including Spencer I. Browne, Hubert M.
Stiles, Jr. and David J. Vida, Jr. Messrs. Stiles and Vida each represented
major investors and creditors of the Company. Mr. Browne was one of the
Company's two outside directors.
The liquidity crisis and reported downsizing has caused the Company to
be in breach of certain debt covenants, including covenants contained in its
warehouse borrowing facilities. As a result, certain of the Company's secured
creditors have taken possession of the collateral securing their loans,
including a portion of the Company's potentially income-producing assets, such
as loans held for sale. The Company is also in default on most of its lease
obligations and is negotiating with its landlords to resolve such defaults. As a
result of the announced downsizing, director resignations and winding up of the
Company's business, certain of the regulatory authorities granting the Company's
licenses and/or qualifications to do business have requested that the Company
update its filing with them and/or surrender its licenses. The Company is
attempting to comply with the requests of its licensing authorities to the
extent that it has funds available to pay the requisite update filing fees and
to retain staff necessary to handle the work related to the authorities'
compliance requests.
The Nasdaq Stock Market has notified the Company of its intent to
delist the Company's stock from the Nasdaq Stock Market if the Company failed to
file its report Form 10-Q with the Securities and Exchange Commission by April
25, 2000. At the time the Company received such notice, the Company was
attempting to comply with an earlier communication from Nasdaq requesting
additional information from the Company no later than April 28, 2000. This
report of subsequent events is in the substance of that additional information
requested by Nasdaq.
The Company has not sought protection under the United States
Bankruptcy Code and is proceeding with an orderly cessation of business.
However, it is possible that actions of the Company's creditors or other
unanticipated events may force the Company to seek protection under the United
States Bankruptcy Code.
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<PAGE> 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
27.1 Financial Data Schedule (for SEC use only).
<TABLE>
<S> <C>
Form 8-K Filed March 28, 2000
Form 8-K Filed April 17, 2000
Form 8-K Filed April 19, 2000
</TABLE>
18
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALTIVA FINANCIAL CORPORATION
By: /s/ J. RICHARD WALKER
--------------------------------------
J. Richard Walker
Executive Vice President
Chief Financial Officer
Date: May 5, 2000
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 2-29-2000
BALANCE SHEET AND INCOME STATEMENT FOR ALTIVA FINANCIAL CORPORATION AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH SECOND QUARTER 10-Q 2-29-2000.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-2000
<PERIOD-START> SEP-01-1999
<PERIOD-END> FEB-29-2000
<CASH> 3,102
<SECURITIES> 31,009
<RECEIVABLES> 5,302
<ALLOWANCES> (1,041)
<INVENTORY> 37,546
<CURRENT-ASSETS> 4,490
<PP&E> 2,569
<DEPRECIATION> (2,338)
<TOTAL-ASSETS> 126,342
<CURRENT-LIABILITIES> 103,235
<BONDS> 37,588
0
0
<COMMON> 41
<OTHER-SE> 23,066
<TOTAL-LIABILITY-AND-EQUITY> 126,342
<SALES> 0
<TOTAL-REVENUES> 5,296
<CGS> 0
<TOTAL-COSTS> 13,577
<OTHER-EXPENSES> 902
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,213)
<INCOME-TAX> (3,460)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 7,743
<CHANGES> 0
<NET-INCOME> 1,990
<EPS-BASIC> .51
<EPS-DILUTED> .51
</TABLE>
