<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 17, 1998
REGISTRATION NO. 333-39949
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
MPEL HOLDINGS CORP.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NEW YORK 6162 22-1842747
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NUMBER)
</TABLE>
6851 JERICHO TURNPIKE
SUITE 246
SYOSSET, NEW YORK 11791
(516) 364-2700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
STEVEN M. LATESSA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
6851 JERICHO TURNPIKE
SUITE 246
SYOSSET, NEW YORK 11791
(516) 364-2700
(516) 364-2876 (FAX)
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
NORMAN M. FRIEDLAND, ESQ.
SCOTT W. GOODMAN, ESQ.
RUSKIN, MOSCOU, EVANS
& FALTISCHEK, P.C.
170 OLD COUNTRY ROAD
MINEOLA, NEW YORK 11501
(516) 663-6600
(516) 663-6642 (FAX)
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
---------------
CALCULATION OF REGISTRATION FEE
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- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF NUMBER OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE SHARES TO OFFERING PRICE PER AGGREGATE OFFERING PRICE REGISTRATION
REGISTERED BE REGISTERED SHARE (1) (2) FEE
- - --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value................... 2,400,000(1) $2.50 $6,000,000 $3,540.00
- - --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
Total Fee...................................................... $3,540.00(3)*
</TABLE>
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(1) Includes 1,100,000 shares being sold for the account of Selling
Stockholders.
(2) Estimated solely for purposes of calculating the registration fee.
*(3) On November 12, 1997, the Registrant filed its initial Registration
Statement (for a total of 1,265,000 shares) and paid a filing fee of
$2,116.69. An additional registration fee of $1,423.31 was paid in
connection with a total of 1,100,000 new shares of Common Stock that was
registered in the Pre-Effective Amendment No. 1 filed on March 17, 1998.
This Amendment has decreased the Proposed Maximum Aggregate Offering
Price; accordingly, at this time, no additional fee is due.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- - -------------------------------------------------------------------------------
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<PAGE>
PROSPECTUS
MPEL HOLDINGS CORP.
1,300,000 SHARES OF COMMON STOCK
OFFERED BY THE COMPANY
----------------
1,100,000 SHARES OF COMMON STOCK OFFERED BY SELLING STOCKHOLDERS
MPEL Holdings Corp. (the "Company") is hereby offering (the "Offering")
1,300,000 shares of its common stock, $.01 par value per share (the "Common
Stock") at $2.50 per share.
Certain stockholders of the Company (the "Selling Stockholders") also offer
hereby 1,100,000 shares of Common Stock at an offering price of $2.50 per
share. Such shares will be offered for sale by the Selling Stockholders
concurrently with the offering of Common Stock by the Company, subject to the
sale of 1,300,000 shares of Common Stock by the Company, and the Selling
Stockholders may be deemed to be underwriters under the federal securities
laws. The Company will not receive any proceeds from the sale of Common Stock
by the Selling Stockholders. The Selling Stockholders' Common Stock has been
deposited with an escrow agent, and will not be released for sale until the
Company has completed the sale of 1,300,000 shares of Common Stock. See "Risk
Factors--Shares Available for Future Sale; Restrictions on Selling
Stockholders", "Principal and Selling Stockholders" and "Plan of
Distribution."
Prior to the Offering, there has been a very limited public market for the
Common Stock, which is traded on the NASDAQ Stock Market Over-The-Counter-
Bulletin Board ("OTCBB") under the symbol "MPEH". The total volume of trading
of the Company's Common Stock on the OTCBB since January 1, 1998 has been 100
shares at $.25 per share and 19,200 shares of Common Stock at prices that
average approximately $2.50 per share. There can be no assurance that any
market will develop after the closing of the Offering or that, if developed,
it will be sustained. The offering price of the Common Stock was arbitrarily
determined by the Company and the Selling Stockholders and does not
necessarily bear any direct relationship to the Company's assets, earnings,
book value or other generally accepted criteria of value. See "Risk Factors--
Arbitrary Determination of Public Offering Price". It is intended that the
offering price of the Common Stock will be $2.50 per share. See "Plan of
Distribution" for information relating to the determination of the offering
price. Upon sale of the 1,300,000 shares of Common Stock offered hereby, the
Company intends to submit an application to list the Common Stock eligible for
quotation on the NASDAQ SmallCap Market, under the symbol "MPEH", in the event
that the price of the Common Stock reaches the price required for listing
(i.e., $4.00 per share) and the Company meets the other listing requirements
of the NASDAQ SmallCap Market. Accordingly, until the Common Stock is listed
on the NASDAQ SmallCap Market, it will continue to be traded on the OTCBB.
There can be no assurance that the Common Stock will be approved for listing
on the NASDAQ SmallCap Market. See "Risk Factors--No Assurance of NASDAQ
SmallCap Market Listing; Risk of Application of Penny Stock Rules".
The Company proposes to offer the 1,300,000 shares of Common Stock to the
public on a best efforts basis directly through its directors and executive
officers; however, the Company may engage one or more registered brokers or
dealers to assist in the sale of the securities offered hereby, at a maximum
compensation of 10%. All of the proceeds received in connection with the sale
of Common Stock by the Company will be deposited and held in escrow until
subscriptions for all 1,300,000 shares of Common Stock have been received. The
Company has received an indication of interest from a hedge fund for the
purchase of the entire issue of 1,300,000 shares of Common Stock. As a result,
investor funds may be unavailable for use for as long as sixty days after the
effective date (i.e., until July 14, 1998) without being invested in the
Company's shares of Common Stock. If subscriptions for the purchase of
1,300,000 shares of Common Stock have not been received on or before July 14,
1998, the offering of the Common Stock by the Company will be terminated and
all subscription payments held in escrow will be promptly returned to
investors. No existing stockholders, and no affiliates thereof, will purchase
any offered shares of Common Stock so as to enable the Company to meet the
requirement that 1,300,000 shares be sold as a condition to closing. No
interest will accrue or be paid in amounts held in escrow, regardless of
whether the Offering is consummated or not. See "Summary of Escrow Agreement"
and "Plan of Distribution."
----------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 8 AND "DILUTION"
ON PAGE 19.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THE OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS PROCEEDS TO PROCEEDS TO SELLING
PRICE TO PUBLIC AND COMMISSIONS (1) COMPANY (2)(4) STOCKHOLDERS(3)
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share (by Company)..... $2.50 $-- $2.50 $--
- - -------------------------------------------------------------------------------------------------------
Total by Company
(1,300,000 Shares)........ $3,250,000 $-- $3,250,000 $--
- - -------------------------------------------------------------------------------------------------------
Per Share (by Selling
Stockholders).............. $2.50 $-- $ -- $2.50
- - -------------------------------------------------------------------------------------------------------
Total (by Selling
Stockholders).............. $ -- $-- $ -- $2,250,000
- - -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Although the Company intends to offer the Common Stock directly to the
public through its directors and executive officers, it may engage and pay
compensation at customary rates (up to 10%) to registered brokers or
dealers. See "Plan of Distribution."
(2) Before deducting estimated expenses of $325,000 payable by the Company.
(3) Before deducting estimated expenses of $32,500 payable by the Selling
Stockholders.
(4) The Company will not receive any of the proceeds from the sale of the
shares of Common Stock by the Selling Stockholders.
The date of this Prospectus is June 17, 1998
<PAGE>
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus. Unless otherwise indicated herein, the information in this
Prospectus does not give effect to up to 700,000 shares of Common Stock
reserved for issuance to employees upon exercise of options which may be
granted pursuant to the Company's 1995 Stock Option Plan (the "1995 Plan"),
270,000 of which have been granted to date or up to 888,888 shares of Common
Stock issuable pursuant to a warrant granted to FC Capital Corp., as described
in "Certain Transactions". No options have been or will be granted to officers
of the Company under the 1995 Plan. The information herein reflects the
consummation of the Merger (as hereafter defined). As used herein, the term
"Company" refers to MPEL Holdings Corp., a New York corporation, and its
wholly-owned subsidiary, Mortgage Plus Equity and Loan Corporation ("Mortgage
Plus"), a New York corporation.
This Prospectus contains certain forward-looking statements that involve
certain risks and uncertainties. The Company's actual results could differ
materially from those anticipated in such forward-looking statements as a
result of certain factors, including those set forth in "Risk Factors."
THE COMPANY
The Company, through its wholly owned subsidiary, Mortgage Plus, is a full
service retail mortgage banking company providing a broad range of residential
mortgage products (including first mortgages, second mortgages and home equity
loans) to (i) prime, or "A" credit, borrowers who qualify for conventional
mortgages (including loans which conform to the standards of certain
institutional investors, such as Federal National Mortgage Association ("FNMA")
and Federal Home Loan Mortgage Corporation ("FHLMC")), (ii) borrowers who are
classified as sub-prime, or "B/C" credit, borrowers, and (iii) borrowers who
qualify for mortgages insured by the Federal Housing Administration ("FHA") or
guaranteed by the Veterans Administration ("VA"). The Company is headquartered
in Long Island, New York and has a total of 15 retail branches (the "Branch
Network") in nine (9) states, including Arkansas (1), Connecticut (1), Florida
(1), Illinois (1), Missouri (3), New Jersey (1), New York (4), Ohio (1),
Pennsylvania (1), and the Commonwealth of Puerto Rico (1). The Company is also
a licensed mortgage banking company in seven (7) additional states.
From Mortgage Plus' inception in 1987 until mid-1994, Mortgage Plus operated
as a licensed mortgage broker, principally in New York. Since obtaining its
mortgage banking license in New York in 1994, Mortgage Plus, originated $43.3
million, $58.0 million, $108.2 million, and $133.5 million of mortgage loans
for the years ended December 31, 1994, 1995, 1996, and 1997, respectively. This
growth has been due primarily to Mortgage Plus' expansion into additional
geographic markets, Mortgage Plus' focus, since mid-1996, on mortgage products
for "B/C" credit-rated borrowers and a substantial increase in loans to FHA/VA
borrowers. Mortgage Plus' "B/C" and FHA/VA loan volume has grown steadily since
1995, with loans to "B/C" borrowers accounting for 39.5%, of Mortgage Plus'
total loan origination volume for the year ended December 31, 1997, compared to
7.4% for the year ended December 31, 1995, and loans to FHA/VA borrowers
accounting for 25.0% of Mortgage Plus' total loan origination volume for the
year ended December 31, 1997, compared to 9.2% for the year ended December 31,
1995. There can be no assurance that Mortgage Plus' historical rate of growth
will continue in future periods.
The Company's growth strategy, through Mortgage Plus, includes the following
elements, which are subject to risk factors, as set forth in "Risk Factors",
beginning on page 8 hereof:
. Increasing mortgage originations to sub-prime borrowers through
recruiting experienced loan officers, increasing telemarketing and
direct mail to target audiences;
. Expanding the Company's operations in its geographic markets through
developing strategic alliances with financial institutions and mortgage
bankers and brokers; and
3
<PAGE>
. Expanding the Company's geographic coverage for mortgage originations
generally, through additions to the Branch Network, through developing
strategic alliances with financial institutions, mortgage bankers and
brokers and possible acquisitions.
The Company is an active originator of prime, sub-prime and FHA/VA
residential mortgages in its markets to individual borrowers on a retail basis.
Loan officers within the Branch Network deal directly with mortgage customers
who are initially identified through telemarketing operations, advertising,
direct mail, promotional materials and educational seminars or who are referred
by local real estate agents, builders, accountants, financial planners,
attorneys and mortgage brokers.
The growth of Mortgage Plus' mortgage lending to "B/C" credit borrowers
reflects (i) Mortgage Plus' focus on such customers since mid-1996, (ii)
Mortgage Plus' prompt and responsive service to its customers, (iii) the
increased market demand for sub-prime mortgage products, (iv) the availability
to Mortgage Plus of capital for these mortgage banking products in the form of
warehouse lines of credit, and (v) the development, on an industry-wide basis,
of a large secondary market of institutional investors who compete to purchase
mortgages from Mortgage Plus and other mortgage originators. Most "B/C" credit
borrowers have impaired credit, although "B/C" credit borrowers also include
individuals whose credit histories are not impaired but are seeking to expedite
the mortgage process or persons, such as the self-employed, who have difficulty
verifying their income. The Company is seeking to make "B/C" credit-rated loans
an even greater percentage of its total loan originations since such loans,
have generated greater revenue to the Company than "A" credit-rated loans.
Furthermore, the Company believes that the demand for loans by "B/C" credit
borrowers is less sensitive to general levels of interest rates or home sales
and therefore less cyclical than demand for loans by "A" credit-rated
borrowers. Nevertheless, the Company's "B/C" mortgage lending activities are
subject to significant risks, including risks related to the competition from
an increasing number of lenders who are also seeking "B/C" credit borrowers
(see "Risk Factors--Competition"), and the risks associated with lending to
credit impaired borrowers (see "Risk Factors--Risks of Loan Delinquencies and
Defaults").
For the year ended December 31, 1997, Mortgage Plus revenues were $8.0
million compared to $6.0 million for the year ended December 31, 1996. Mortgage
Plus experienced a net loss of $76,702 for the year ended December 31, 1997 and
a net loss of $223,340 for the year ended December 31, 1996, respectively. For
the year ended December 31, 1996, Mortgage Plus revenues were $6.0 million,
compared to $3.0 million for the year ended December 31, 1995. Mortgage Plus
revenues are generated from the fees it charges borrowers on the origination of
mortgage loans, the premiums paid by institutional investors when they purchase
the loans from Mortgage Plus and interest earned during the period (generally
less than 30 days) the loans are held for sale to institutional investors.
There is no assurance that Mortgage Plus' historical rate of growth will
continue in future periods. Mortgage Plus does not obtain commitments from
Purchasers of loans prior to origination. Mortgage Plus does not sell mortgage
loans in "securitization" transactions, but rather sells loans either on an
individual "whole loan" basis or pooled in groups to financial institutions at
fixed prices, usually on a non-recourse basis for a cash premium. Mortgage Plus
sells its mortgages to institutional investors on a "servicing-released" basis,
i.e., the purchaser assumes the obligations of servicing the loan and thereby
avoids the administrative expenses of managing a servicing portfolio, and the
foreclosures, delinquencies and resale of residential real estate associated
with servicing of loans. Mortgage Plus is subject to loan delinquencies and
defaults in those cases where it is required to repurchase such loans due to a
breach of representation or warranty in connection with the "Whole Loan Sale".
See Risk of Loan Delinquencies and Defaults.
THE MERGER
On March 5, 1998, Mortgage Plus merged (the "Merger") with a wholly-owned
subsidiary of Computer Transceiver Systems, Inc. ("CTS"), a New York
corporation, in a transaction that resulted in (i) Mortgage Plus stockholders
receiving a total of 8,056,000 shares of CTS (representing 97% of all of the
issued and outstanding
4
<PAGE>
shares of CTS) and (ii) Mortgage Plus becoming a wholly-owned subsidiary of
CTS. Immediately following the Merger, the directors of CTS became Steven M.
Latessa, Cary Wolen and Jon Blasi, who remain directors of Mortgage Plus, and
CTS' name was changed to MPEL Holdings Corp. Prior to the Merger, CTS and its
wholly-owned subsidiary had no employees, engaged in no business activity and
had only nominal assets and liabilities. At the time of the Merger, the 338,142
shares of CTS' Common Stock were owned by approximately 745 holders (the "Pre-
Merger Holders") of record, CTS' Common Stock was traded on the OTCBB under the
symbol CPTT, and the high/low price through the date of the Merger was $.25 per
share. Since March 5, 1998, the volume of trading of the Company's Common Stock
(which is now traded on the OTCBB under the symbol "MPEH") has been 19,300
shares, with one trade (100 shares) at a price of $.25 per share and trades for
a total of 19,200 shares of Common Stock at prices that average approximately
$2.50 per share.
The principal executive office of the Company is located at 6851 Jericho
Turnpike, Suite 246, Syosset, New York 11791 and its telephone number is (516)
364-2700.
RISK FACTORS
Prior to making an investment decision, prospective investors should
carefully consider all of the information set forth in this Prospectus, and, in
particular, should evaluate the factors set forth in "Risk Factors", beginning
on page 8.
5
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock Offered by the Company............... 1,300,000 shares
Common Stock Offered by the Selling Stockholders.. 1,100,000 shares
Common Stock Outstanding Prior to the Offering.... 8,394,142 shares
Common Stock to be Outstanding After the Offering. 9,694,142 shares.(/1/)(/2/)
Use of Proceeds................................... Funding mortgage loans,
expanding the Branch
Network; expanding mortgage
banking operations in its
geographic markets;
increasing telemarketing
and advertising; upgrading
information systems;
repaying indebtedness; and
general working capital
purposes. The Company will
not receive any proceeds
from the sale of Common
Stock by the Selling
Stockholders.
OTCBB Symbol...................................... MPEH
</TABLE>
- - --------
(1) The foregoing excludes an aggregate of up to 700,000 shares of Common Stock
reserved for issuance to employees upon the exercise of options which may be
granted pursuant to the 1995 Plan, 270,000 of which have been granted to
date, and up to 888,888 shares of Common Stock issuable pursuant to a warrant
granted to FC Capital Corp., as described in "Certain Transactions". The
outstanding options and warrants, and the average exercise prices thereof,
are as follows: for the 888,888 shares of Common Stock issuable pursuant to
the warrant granted to FC Capital Corp., the purchase price for each share
(the "Share Price") on or after the date of the Offering shall be an amount
equal to 85% of the price at which a share of Common Stock is sold in the
Offering.
(2) The prices of the 270,000 options issued are as follows:
(i) 35,000 were issued at One ($1.00) Dollar per share, of which 8,750
are vested; and
(ii) 235,000 options were issued at Three ($3.00) Dollars per share, of
which none are vested.
Following the Offering, the remaining options shall be granted at fair
market value on the date of grant.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................................ $ 5,970,675 $ 8,000,587
Net Loss........................................... (223,340) (76,702)
Net Loss per share................................. (.03) (.01)
Weighted Average Number of Shares Outstanding...... 7,002,732 8,025,315
OPERATING DATA:
Mortgage loans originated
Conventional....................................... $ 48,102,840 $ 47,428,400
FHA/VA............................................. 24,810,101 33,324,400
Sub-Prime.......................................... 35,290,148 52,748,500
------------ ------------
Total........................................... $108,203,089 $133,501,300
Number of Loans..................................... 1,073 1,585
Average Principal Balance........................... $ 100,841 $ 84,228
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
--------------------------------------
ACTUAL PROFORMA(1) AS ADJUSTED (2)
BALANCE SHEET DATA: ---------- ----------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents................ $ 377,709 $ 377,709 $2,092,709
Total assets............................. 16,216,833 16,219,885 18,234,885
Borrowings............................... 12,845,830 12,845,830 11,967,830
Stockholders' equity..................... 595,581 598,633 3,523,633
</TABLE>
- - --------
(1) Adjusted to give effect to the Merger with CTS' subsidiary on March 5,
1998, and there being 338,142 shares of CTS Common Stock outstanding
immediately prior to the Merger.
(2) Adjusted to give effect to the sale of 1,300,000 shares of Common Stock by
the Company at an assumed initial public offering price of $2.50 per share
and the application of the net proceeds therefrom. See "Use of Proceeds."
7
<PAGE>
RISK FACTORS
An investment in the Common Stock of the Company involves a high degree of
risk and should not be purchased by persons who cannot afford the loss of
their entire investment. Prospective investors should carefully consider the
following risk factors, in addition to other information set forth in this
Prospectus, before purchasing the Common Stock offered hereby. This Prospectus
contains certain forward looking statements that are based on current
expectations, estimates and projections about the business of the Company and
the industry in which the Company operates, management's beliefs and
assumptions made by management. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," variations on such words
and similar expressions are intended to identify such forward looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions which are difficult to
predict. The Company's actual results could differ materially from those
expressed or forecasted in these forward-looking statements as a result of
certain factors, including those set forth under "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business" and
elsewhere in this Prospectus. Historical references to the Company herein mean
Mortgage Plus Equity and Loan Corporation prior to the Merger.
HISTORY OF OPERATING LOSSES; POSSIBLE NEED FOR ADDITIONAL FINANCING
The Company experienced a net loss of $76,702 for the year ended December
31, 1997, which was reduced by income of $1,000,000 resulting from proceeds to
be received from an officer's life insurance policy. The Company experienced
net losses of $223,340 and $601,313 for the years ended December 31, 1996 and
1995, respectively. The Company's accumulated deficit was $76,702 at December
31, 1997. Such losses were principally the result of the Company's expansion
of the Branch Network and increased personnel, marketing and administrative
start-up costs associated with the commencement of lending operations to "B/C"
credit-rated borrowers. There can be no assurance that the Company will not
continue to experience operating losses in future periods. Based on the
Company's currently proposed plans and assumptions relating to the
implementation of its business strategy, the Company anticipates that the net
proceeds of this Offering will be sufficient to satisfy its contemplated cash
requirements for at least twelve months following the consummation of this
Offering. In the event that the Company's plans change or its assumptions
prove to be inaccurate (due to unanticipated expenses, difficulties, delays or
otherwise) or the proceeds of this Offering otherwise prove to be insufficient
to fund the implementation of the Company's business strategy and working
capital requirements, the Company could be required to seek additional
financing. The Company has no commitments for any future funding, and there
can be no assurance that the Company will be able to obtain additional capital
in the future. The type, timing and terms of such funding (if it is available)
will be determined by prevailing conditions in the financial markets and the
Company's financial condition, among other factors. If the Company requires
additional capital and is unable to obtain the necessary capital, it may be
required to significantly curtail its activities which would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
DEPENDENCE ON WAREHOUSE FINANCING; PRIOR DEFAULT UNDER WAREHOUSE FINANCING
The Company currently borrows substantially all of the funds which it uses
to originate mortgage loans pursuant to a warehouse financing facility (the
"Warehouse Facility") which provided up to $12 million through April 30, 1998,
and currently provides for $10 million through July 31, 1998, with a
commercial bank. These borrowings are, in turn, repaid with the proceeds
received by the Company from selling such loans in pools or individual whole
loan sales to institutional investors, usually within 30 days of when the loan
is originated. The Company does not obtain commitments from purchasers of
loans prior to origination. The Warehouse Facility expires on July 31, 1998.
The borrowings thereunder are collateralized by specific mortgage loans held
for sale to institutional investors. The amount outstanding under the
Warehouse Facility at December 31, 1997 was $10,532,994. The amount
outstanding under the Warehouse Facility at May 1, 1998 was $13,842,968.
Interest is variable based on the bank's prime rate, depending on the type of
loan financed, and ranged from 8.25% to 8.75% at December 31, 1997. In April,
1998 the Warehouse Lender determined that the Company was in default, but
8
<PAGE>
waived the default and extended the expiration date of the Warehouse Facility
to July 31, 1998. The Warehouse Facility is personally guaranteed by Steven
Latessa and Cary Wolen, the Company's President and Chief Operating Officer,
respectively. Any failure to renew or obtain adequate funding under its
current Warehouse Facility, or any substantial reduction in the size of or
increase in the cost of such facility, would have a material adverse effect on
the Company's business, financial condition and results of operations because
it would limit or reduce the Company's ability to originate mortgage loans.
The Company has obtained an additional $5 million Warehouse Facility as of
March 20, 1998.
The Warehouse Facility contains numerous affirmative and negative covenants,
including maintenance of minimum tangible net worth, a limitation on the
Company's total indebtedness and certain financial ratios. In April 1997, the
Company determined that as of December 31, 1996, it was not in compliance with
the tangible net worth requirement of the Warehouse Facility ($900,000 at
December 31, 1996). The bank providing the Warehouse Facility waived the
Company's event of default and revised the Warehouse Facility to include the
Company's subordinated debt, obtained in the first quarter of 1997, as part of
the Company's tangible net worth.
In December, 1997, the Company obtained $1,500,000 from FC Capital
Corporation ("FC Corp.") as a secured borrowing (the "Secured Borrowing") to
supplement the Warehouse Facility. This Secured Borrowing is repayable
monthly, commencing on February 5, 1998 at the greater of $100,000 per month
or 50% of the income generated from the Company's sale of qualified mortgage
loans to FC Corp., and is secured by the Company's assets not otherwise
pledged under the Warehouse Facility. Additionally, the Company borrowed, in
January, 1998 an additional $250,000 from FC Corp. under a working capital
facility agreement. The Company's agreements with FC Corp. pursuant to which
it obtained the secured borrowing and the working capital loan require the
Company to comply with various operating and financial covenants.
In October 1996, the Company obtained a financing, in addition to its
Warehouse Facility, with another bank to borrow up to an additional $6 million
to fund loan originations. This facility contained substantially the same
covenants and restrictions as the Warehouse Facility, including a $1 million
tangible net worth requirement. Upon being notified of the default by the
Company of the net worth requirement as of December 31, 1996, this lender
elected not to waive this default and notified the Company that it was
terminating the line of credit, requiring the Company to repay the amount
outstanding, which was fully repaid as of October 24, 1997.
While the Company believes it is now in full compliance with all of its loan
covenants under the Warehouse Facility and its agreements with FC Corp., there
can be no assurances that in future periods the Company will continue to
adhere to all covenants contained in these agreements. The Company's failure
to comply with the tangible net worth covenant or with any other covenants in
such agreements could again cause the Company to be in default under the
Warehouse Facility and its agreements with FC Corp. and have a material
adverse effect on the Company's business, financial condition and results of
operations.
RISKS ASSOCIATED WITH SALES OF MORTGAGE LOANS; MORTGAGE LOAN PURCHASES BY A
LIMITED NUMBER OF INSTITUTIONS; FEDERAL PROGRAMS
The Company generates revenue by regularly selling loans it originates for
cash, at a premium, usually within 30 days after it originates the loans, to
institutional investors. There can be no assurance that such investors will
continue to purchase loans or will be willing to purchase loans on terms which
they have historically purchased. To the extent that institutional investors
who purchase "A" and/or "B/C" credit-rated loans reduce their purchases, the
price and level of the market for the Company's mortgage loans could be
negatively affected which, in turn, could materially adversely affect the
Company's mortgage loan origination volume and, potentially, its
profitability. Further, adverse conditions in the mortgage-backed
securitization market could negatively impact the ability of the Company to
complete loan sales, as many of the Company's loan purchasers securitize the
loans they purchase from the Company.
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For the year ended December 31, 1996 and for the year ended December 31,
1997, the Company sold 59% and 84%, respectively, of the mortgage loans it
originated (by volume) to three institutional investors and 5 institutional
investors, respectively. Three of the investors in each of these periods were
the same. There can be no assurance that such institutional investors will
continue to purchase the Company's loans and to the extent that the Company
could not successfully replace such loan purchasers, the Company's business,
financial condition and results of operations could be materially and
adversely affected. Pursuant to the Company's agreements with FC Corp. for the
Secured Borrowings, the Company expects to sell a substantial percentage of
its mortgage loans to FC Corp., or an affiliate or designee thereof, although
there can be no assurance that it will, in fact, do so.
The Company's ability to sell "A" credit-rated mortgage loans to
institutional investors is dependent upon the continuation of programs
administered by government sponsored agencies such as the FHA and VA programs,
which facilitate the pooling of those mortgage loans into mortgage-backed
securities, as well as the Company's continued eligibility to participate in
these programs. The discontinuation of, or the loss of eligibility to
participate in, such government programs could have a material adverse effect
on the Company's business, financial condition and results of operations.
CONCENTRATION OF OPERATIONS IN MID-ATLANTIC REGION AND MISSOURI
For the year ending December 31, 1997, approximately 91% of the mortgage
loans originated by the Company were to borrowers in New York, New Jersey and
Missouri. Although the Company is attempting to expand its Branch Network
outside these regions, the Company's origination business is likely to contain
a high concentration in such areas for the foreseeable future. Consequently,
the Company's results of operations and financial condition are dependent upon
general trends in the economy and the residential real estate market in the
aforementioned areas.
ECONOMIC CONDITIONS
The Company's business will be adversely affected by periods of economic
slowdown or recession which may be accompanied by decreased demand for
consumer credit and declining real estate values. Any material decline in real
estate values reduces the ability of borrowers to use home equity to support
borrowings by negatively affecting loan-to-value ratios of the home equity
collateral. To the extent that loan-to-value ratios of the home equity
collateral of prospective borrowers do not meet the Company's underwriting
criteria, the volume of loans originated by the Company could decline. A
decline in loan origination volumes would have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, changes in the level of consumer confidence, real estate values and
prevailing interest rates, each of which tend to be affected by an economic
slowdown, could adversely affect the level and amount of consumer borrowing.
Furthermore, investment returns of investors purchasing mortgages are affected
by, among other things, the actual rates of delinquencies and foreclosures of
the mortgages they purchase, which could make mortgage loans less attractive
to investors during periods when such delinquencies and foreclosures are
increasing.
INTEREST RATE RISK
The Company's profitability may be directly affected by the levels of and
fluctuations in interest rates, which affect the Company's ability to earn a
spread between interest received on loans and the Company's costs of
borrowing. In 1996 and 1997, fixed rate mortgages accounted for 86.4% and
88.2%, respectively of all mortgage loans originated. Adjustable rate
mortgages for 1996 and 1997 accounted for 13.6% and 11.8%, respectively of all
mortgage loans originated. The operations and profitability of the Company are
likely to be adversely affected during any period of unexpected or rapid
changes in interest rates. For example, a substantial or sustained increase in
interest rates could adversely affect the ability of the Company to originate
loans and would reduce the value of loans that were originated prior to such
increase.
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RISK OF LOAN DELINQUENCIES AND DEFAULTS
The Company is exposed to the risk of loan delinquencies and defaults from
the time the loan is made until such loan is sold to institutional investors,
typically a 30 day period. After the Company originates a loan, the loan is
usually held by the Company as part of a portfolio of loans, to be sold either
on a pool or "whole loan" basis. The Company is also subject to loan
delinquencies and defaults in those cases where it is required to repurchase
such loan due to a breach of a representation or warranty by the Company in
connection with the "whole loan" sale.
Since mid-1996, the Company has focused on increasing mortgage originations
for "B/C" or "sub-prime" credit classified borrowers. For the year ended
December 31, 1997, approximately 39.5% of the total principal amount of loans
originated by the Company were to borrowers in these credit classifications.
Loans made to such borrowers entail a higher risk of delinquency and higher
losses than loans made to borrowers who have higher credit classifications.
Since the date of its Incorporation the Company has never had to repurchase a
loan from mid-1996 to December 31, 1997. Although the Company sells these
mortgages (as well as other mortgages) on a "servicing released" basis to
investors, usually on a non-recourse basis (thereby limiting its exposure to
the risk of delinquency or default), at prices which reflect the credit risk
associated with such borrowers, any sustained period of increased
delinquencies, foreclosures or losses on such loans after the loans are sold
could adversely affect the pricing of the Company's future loan sales and/or
the willingness of investors to purchase such loans from the Company in the
future. During these periods from mid-1996 to December 31, 1997 there has been
no material adverse effect on the pricing of the Company's loans. In 1997
mortgage loans that were offered under so-called "low document" programs
(i.e., programs that do not require a borrower to fully substantiate all
information furnished in the mortgage application process) accounted for
approximately 10% of the Company's total mortgage originations (approximately
$13,000,000 of mortgage originations). As of December 31, 1997 approximately
$630,000 of so-called "low document" loans were held by the Company for sale
to investors, and as of the date hereon, all such loans had been sold.
RISKS ASSOCIATED WITH RAPID GROWTH
The Company has expanded into new geographic regions, increasing the number
of retail branch offices to 15 as of the date of this Prospectus. The Company
anticipates that it will continue to open several additional branch offices,
in part, with a portion of the proceeds of this Offering, (and as a result
expects to substantially increase its expenses, with no assurance that it will
increase revenue.) As of December 31, 1996 and 1997, there were 13 and 15
retail branches, respectively. It takes approximately 8-12 months for a new
office to become profitable. The Company's continued growth and expansion will
place additional pressures on the Company's personnel and systems. Any future
growth may be limited by, among other things, the Company's (i) need for
continued funding sources and access to capital markets, (ii) ability to
attract and retain qualified personnel, (iii) ability to maintain appropriate
procedures, policies and systems to ensure that the Company's loans have an
acceptable level of credit risk and loss and (iv) ability to establish new
relationships and maintain existing relationships with mortgage holders and
borrowers in states where the Company is active and in states where the
Company is seeking to commence operations. The Company's need for additional
operating procedures, personnel and facilities is expected to increase as a
result of further growth which the Company anticipates over the near term. The
Company anticipates opening an additional 2-4 branches over the next 12 months
at an approximate cost of $150,000-$200,000 per branch. The Company is
assessing the purchase of new systems and software to support its operations,
and plans to continue to procure hardware and software that will require
additional corresponding investments in training and education. There can be
no assurance that the Company will successfully obtain or apply the human,
operational and financial resources needed to manage a developing and
expanding business. Failure by the Company to manage its growth effectively,
or to sustain its historical levels of performance in underwriting with
respect to its increased loan origination volume, could have a material
adverse effect on the Company's business, financial condition and results of
operations and financial condition. See "Business--Growth Strategy."
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RISKS ASSOCIATED WITH MORTGAGE BANKING ACTIVITIES IN PUERTO RICO
In November 1996, the Company opened a mortgage office in Puerto Rico, and
has focused the activities of that office since mid-1997 on sub-prime
borrowers. In 1997 approximately $4,300,000 in loans were originated in Puerto
Rico, of which the Company still held approximately $1,600,000 at the year end
as loans held for sale. As of the date hereof, approximately 40% of such loans
had been sold. Operationally, mortgage originations to sub-prime borrowers for
properties in Puerto Rico are essentially similar to mortgage originations for
properties located in the continental United States, and are expected to
remain so notwithstanding the referendum on the future status of Puerto Rico
as a Commonwealth of the United States. However, the Company does not believe
that the secondary market of institutional investors purchasing mortgage loans
originated in Puerto Rico is as developed as the secondary market for mortgage
loans originated in the continental United States. This less developed
secondary market may adversely affect the premium which the Company receives
on the sale of mortgages originated in Puerto Rico. To date, the Company has
had very limited experience in the sale of mortgages originated in Puerto
Rico. Although the Company believes that there will be a number of
institutions willing to purchase mortgages the Company originates in Puerto
Rico on a regular basis, in the event that the Company cannot find
institutional investors to purchase these loans, the Company will be forced to
raise additional capital to fund and hold the loans. There can be no assurance
that the Company will be able to find institutional investors for its mortgage
loans originated in Puerto Rico, which could cause a material adverse effect
on the Company's business and financial condition.
Section 936 of the U.S. Internal Revenue Code ("Section 936") has
historically provided incentives for U.S. corporations to invest in Puerto
Rico by granting a credit to qualifying corporations ("936 Corporations")
against a portion of the U.S. income tax payable from the active conduct of a
trade or business in Puerto Rico and 100% of certain qualifying investment
income derived in Puerto Rico. Section 936 together with complementary Puerto
Rican laws have provided incentives for 936 Corporations and financial
intermediaries receiving funds from 936 Corporations to invest in mortgage
loans and mortgage-backed securities originated in Puerto Rico. Section 936
has helped, in the past, to create a pool of lower cost funds in Puerto Rico
that has historically been used by banks to fund mortgage loans. On August 20,
1996, the Small Business Job Protection Act of 1996 (the "Small Business Job
Protection Act") was signed into law. That Act provides for the elimination of
the special U.S. federal income tax benefits available under Section 936 to
U.S. corporations operating and investing in Puerto Rico. The Act repeals
Section 936, subject to a ten-year grandfather rule for 936 Corporations that
were engaged in the active conduct of a trade or business on October 13, 1995
and that qualified for and elected the benefits of Section 936 for the
corporation's taxable year which includes such date.
While the final impact of a repeal of Section 936 on the Company's
prospective business in Puerto Rico cannot be determined at this time, the
repeal of Section 936 could have an adverse effect on the general economic
condition of Puerto Rico by reducing incentives for investment in Puerto Rico.
Any such adverse effect on the general economy of Puerto Rico could lead to a
reduction in the level of residential construction and demand for mortgage
loans. The elimination of Section 936, particularly the elimination of the
credit for investment income, could also lead to a decrease in the amount of
funds invested in the Puerto Rico financial market by 936 Corporations ("936
Funds), thereby increasing funding costs and decreasing liquidity for Puerto
Rico mortgage products. The impact of any such changes on the Company's
prospective business in Puerto Rico cannot be determined at this time.
COMPETITION
The mortgage banking business is highly competitive. The Company competes
with financial institutions, such as mortgage bankers, commercial banks,
savings associations, credit unions, loan brokers and insurance companies in
the origination of mortgage loans. Competition can take many forms, including
convenience in obtaining a loan, customer service, marketing and distribution
channels and interest rates and origination fees charged to borrowers.
Competition may be affected by, among other things, fluctuations in interest
rates and general economic conditions. Although the Company believes that its
competitive advantage lies primarily with the Company's offering of a broad
menu of mortgage loan products with competitive features, its emphasis on
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the quality of its service, and the pricing of its range of products at
competitive rates, there can be no assurance that the Company will be able to
compete effectively in this industry, which could materially adversely affect
the Company's financial conditions and results of operations. In addition, to
the extent that market pricing becomes more aggressive, the Company may be
unable to achieve its planned level of growth. The Company has become aware
that certain large national finance companies and conventional mortgage
originators are implementing plans to or have announced their intention to
allocate resources to the origination of loans to sub-prime credit-rated
borrowers. The entrance of these competitors into the Company's market could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Competition."
REGULATORY AND LEGISLATIVE RISK
The Company's business is subject to extensive and complex rules and
regulations of, and examinations by, various federal, state and local
government authorities. These rules and regulations impose obligations and
restrictions on the Company's loan originations, credit activities and secured
transactions. In addition, these rules limit the interest rates, finance
charges and other fees the Company may assess, mandate extensive disclosure to
the Company's customers, prohibit discrimination and impose multiple
qualification and licensing obligations on the Company. The Company's loan
origination activities are subject to the laws and regulations in each of the
states in which those activities are conducted and are also subject to various
federal laws, including the Federal Truth-in-Lending Act and Regulation Z
promulgated thereunder, the Homeownership and Equity Protection Act of 1994,
the Federal Equal Credit Opportunity Act and Regulation B promulgated
thereunder, the Fair Credit Reporting Act of 1970, the Real Estate Settlement
Procedures Act of 1974 and Regulation X promulgated thereunder, the Fair
Housing Act, the Home Mortgage Disclosure Act and Regulation C promulgated
thereunder and the Federal Debt Collection Practices Act, as well as other
Federal and State statutes and regulations affecting the Company's activities.
These rules and regulations, among other things, impose licensing
obligations on the Company, establish eligibility criteria for mortgage loans,
prohibit discrimination, provide for inspections and appraisals of properties,
require credit reports on prospective borrowers, regulate payment features,
mandate certain disclosures and notices to borrowers and, in some cases, fix
maximum interest rates, fees and mortgage loan amounts. Failure to comply with
these requirements can lead to revocation of its mortgage banking license in
the states where the Company is licensed and loss of approved status for
participation in government sponsored programs (such as the FHA and VA loans),
demands for indemnification or mortgage loan repurchases, certain rights of
rescission for mortgage loans, class action lawsuits and administrative
enforcement actions by federal and state governmental agencies. See
"Business--Government Regulation."
Although the Company believes that it has systems and procedures to insure
compliance with these requirements and believes that it is currently in
compliance in all material respects with applicable federal, state and local
laws, rules and regulations, there can be no assurance of full compliance with
current laws, rules and regulations or that more restrictive laws, rules and
regulations will not be adopted in the future that could make compliance
substantially more difficult or expensive. In the event that the Company is
unable to comply with such laws or regulations, its business, prospects,
financial condition and results of operations may be materially adversely
affected.
Members of Congress, government officials and political candidates have from
time to time suggested the elimination of the mortgage interest deduction for
federal income tax purposes, either entirely or in part, based on borrower
income, type of loan or principal amount. Because many of the Company's loans,
the interest on which may be currently tax deductible, are made to borrowers
for the purpose of consolidating consumer debt or financing other consumer
needs, some of the competitive advantage of such loans when compared with
alternative sources of financing, could be eliminated or seriously impaired by
such government action. Accordingly, the reduction or elimination of these tax
benefits could have a material adverse effect on the demand for mortgage loans
of the kind offered by the Company.
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POSSIBLE ENVIRONMENTAL LIABILITIES
Although to date, the Company has not re-acquired any properties pursuant to
any foreclosure action against any borrowers, it is possible that the Company
may, in the future, foreclose on properties securing mortgage loans. The
Company has not taken any action in regard to inspections before commitments,
obtaining waivers or insurance, to protect the Company from possible
environmental liabilities. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real estate may be required to investigate and clean up hazardous
or toxic substances or chemical releases at such property and may be held
liable to a governmental entity or to third parties for property damage,
personal injury, and investigation and clean up costs incurred by such parties
in connection with the contamination. Liability under such laws has been
interpreted to be joint and several unless the harm is divisible, and there is
a reasonable basis for allocation of responsibility. Although the Company has
not incurred losses in any material respect as a result of liabilities under
environmental laws, there can be no assurance that the Company will not
experience such losses in the future.
DEPENDENCE UPON MANAGEMENT
The Company is dependent upon the personal efforts and abilities of three
executive officers, Steven Latessa, the Company's President and Chief
Executive Officer, Cary Wolen, the Company's Chief Operating Officer,
Secretary and Treasurer, and Jon Blasi, the Company's Chief Operating Officer
for the "B/C" Lending Division. The loss of the services of either Messrs.
Latessa, Wolen or Blasi could have a materially adverse effect on the
Company's business and operations. Messrs. Latessa, Wolen and Blasi have
entered into employment agreements with the Company that expire in September
2000. In addition, the Company has obtained a $1 million key man, term life
insurance policy on each of the lives of Messrs. Latessa, Wolen and Blasi.
BENEFITS TO AFFILIATED PARTIES
The Company will use approximately $298,000 (10.2%) of the net proceeds of
this Offering to pay an unsecured subordinated debenture held by a corporation
owned by Messrs. Latessa, Wolen and the Estate of Anthony Saffotti, a former
officer of the Company. In addition, upon completion of this Offering, Messrs.
Latessa and Wolen are expected to be released as personal guarantors under the
Company's Warehouse Facility and an equipment lease.
The Company has entered into employment agreements with Steven Latessa, Cary
Wolen and Jon P. Blasi. Each of the employment agreements expires on September
30, 2000, unless sooner terminated for death, physical or mental incapacity or
cause (which is defined as the uncured refusal to perform, or habitual neglect
of, the performance of the officer's duties, willful misconduct, dishonesty or
breach of trust which causes the Company to suffer any loss, fine, civil
penalty, judgment, claim, damage or expense, a material breach of the
employment agreement, or a felony conviction), or terminated by either party
with thirty (30) days' written notice, and are automatically renewed for an
additional three year term, unless cancelled at least one year prior to
expiration of the existing term. Each employment agreement provides that all
of such executive's business time be devoted to the Company. In addition, each
of the employment agreements also contain: (i) non-competition provisions that
preclude each employee from competing with the Company for a period of two
years from the date of the termination of his employment of the Company, (ii)
non-disclosure and confidentiality provisions that specify that all
confidential information developed or made known during the term of employment
shall be exclusive property of the Company, and (iii) non-interference
provisions whereby, for a period of two years after his termination of
employment with the Company, the executive shall not interfere with the
Company's relationship with its customers or employees.
Each of the employment agreements provides that the executive will receive
an initial base salary of $150,000 per annum, subject to increases of 4% per
year, commencing in 1998. Each of the executives will also be eligible for a
bonus of up to 5% of all pre-tax earnings (net income before taxes) of the
Company.
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Each of the employment agreements provides that if the executive officer is
terminated for reasons other than for cause, the Company will continue to pay
his total base salary for the remainder of the term of the employment
agreement or one year, whichever is greater.
VOTING CONTROL BY MAJORITY SHAREHOLDERS
Following the completion of the Company's sale of 1,300,000 shares of Common
Stock offered hereby, Steven Latessa, Cary Wolen and Jon Blasi will
beneficially own an aggregate of 5,800,000 shares (see "Principal and Selling
Shareholders") of the Company's outstanding Common Stock, which will represent
approximately 58.3% of the total number of shares of the Company's outstanding
Common Stock. As a result of their stock ownership, Messrs. Latessa, Wolen and
Blasi will have effective control of the Company, and will continue to have
the power to control the election of all of the members of the Company's Board
of Directors and to direct the Company's management and policies. Such persons
will be able to control all decisions on matters requiring the vote of
shareholders, which include the amendment of the Company's Certificate of
Incorporation and certain provisions of the By-Laws and the approval of
fundamental corporate transactions. See "Principal and Selling Stockholders"
and "Description of Securities--Common Stock."
ARBITRARY DETERMINATION OF PUBLIC OFFERING PRICE
Prior to the Offering there has been a very limited public market for the
Common Stock. There can be no assurance that an active trading market will
develop, or if developed, be sustained in the Common Stock after the Offering.
The price of the Common Stock offered by the Company and the Selling
Stockholders was arbitrarily determined, and, because of the limited trading
volume, was not based upon the OTCBB's price of stock. The Offering price of
the Common Stock by the Company and the Selling Stockholders does not bear any
relationship to the Company's asset value, net worth or other established
criteria of value. Accordingly, the offering price of the Common Stock may not
be indicative of the price that may prevail at any time or from time to time
in the public market for the Common Stock following the Offering. See "Price
Range of Common Stock" and "Plan of Distribution."
LISTING ON OTCBB; RISK OF APPLICATION OF PENNY STOCK RULES
The Company's Common Stock is quoted on the OTCBB, a NASD sponsored and
operated inter-dealer automated quotation system for equity securities. The
Company intends to submit its application for listing on the NASDAQ SmallCap
Market in the event that the price of the Common Stock reaches the price
required for listing (i.e., $4.00 per share) and the Company meets the other
listing requirements of the NASDAQ SmallCap Market; however, no assurance can
be given that such listing will be obtained. Accordingly, until the Common
Stock is listed on the NASDAQ SmallCap Market, it will continue to be traded
on the OTCBB. In the event that the Common Stock is listed on the NASDAQ
SmallCap Market, the Board of Governors of the National Association of
Securities Dealers, Inc. has established certain maintenance standards for the
continued listing of a security on the NASDAQ SmallCap Market, which require,
among other things, that an issuer have net tangible assets of at least
$2,000,000; that the minimum bid price for the listed securities be $1.00 per
share; that the minimum market value of the public float be at least
$1,000,000; and that there be at least two market makers for the issuer's
securities. It is not a condition of the Escrow Agreement and not a condition
of closing that the Company will be listed on NASDAQ SmallCap Market. If the
Company has not engaged at least two market makers at the time of the closing
of the Offering, then it could be denied listing by NASDAQ. A deficiency in
either the market value of the public float or the bid price maintenance
standard will be deemed to exist if the issuer fails the individual stated
requirement for ten consecutive trading days. There can be no assurance that
the Company, if it is listed, will continue to satisfy the requirements for
maintaining a NASDAQ SmallCap Market listing. If the Common Stock is denied
listing or is delisted from the NASDAQ SmallCap Market trading, if any, in the
Common Stock would thereafter continue to be conducted in the OTCBB, and it
would be more difficult to dispose of, or to obtain as favorable a price for,
the Common Stock. Thus, the liquidity of the Common Stock could be impaired
not only in the number of shares of Common Stock that could be bought and sold
at a given price, but also through delays in the timing of transactions. In
addition, there could be a reduction in security
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analysts' and the news media's coverage of the Company, which could result in
lower prices for the Common Stock than might otherwise be attained and in a
larger spread between the bid and asked prices for the Common Stock.
So long as the Common Stock is traded on the OTCBB, the Common Stock is
subject to certain penny stock rules promulgated by the Securities and
Exchange Commission (the "Commission"). The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt
from the rules, to deliver a standardized risk disclosure document prepared by
the Commission that provides information about penny stocks and the nature and
level of risks in the penny stock market. The broker-dealer also must provide
the customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held
in the customer's account. In addition, the penny stock rules require that,
prior to a transaction in a penny stock not otherwise exempt from such rules,
the broker-dealer must make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the purchaser's
written agreement to the transaction. These disclosure requirements may have
the effect of reducing the level of trading activity in the secondary market
for a stock that becomes subject to the penny stock rules. So long as the
Common Stock remains subject to the penny stock rules, investors in the
Offering may find it more difficult to sell their shares of Common Stock.
IMMEDIATE AND SUBSTANTIAL DILUTION
As of December 31, 1997 the pro forma net tangible book value of the Common
Stock assuming the merger between Mortgage Plus and CTS had taken place at
such date was $0.06 per share. Upon completion of this Offering, assuming
1,300,000 shares of Common Stock are sold, the net pro forma tangible book
value would have been approximately $0.35 per share, representing dilution to
the public investors of approximately $2.15 or 86.0%. As a result, purchasers
of shares in the Offering will incur immediate and substantial dilution. In
addition, since the holders of Common Stock have no pre-emptive rights,
significant additional dilution may occur. There are 8,750 shares subject to
option that have vested and if all of the dilutive securities currently
exercisable were to be exercised, there would be no impact on dilution. See
"Dilution."
HOLDING COMPANY STRUCTURE
The Company is a holding company which will conduct all its operations
through its wholly-owned subsidiary, Mortgage Plus. All of the capital stock
of Mortgage Plus is owned by the Company. Therefore, the Company's rights to
participate in the assets of Mortgage Plus upon such subsidiary's liquidation
or recapitalization will be subject to the prior claims of the subsidiary's
creditors, except to the extent that the Company may itself be a creditor with
recognized claims against the subsidiary.
DIVIDENDS
The Company has not paid any cash dividends on its Common Stock since its
inception (except that prior to December 31, 1996, Mortgage Plus made S
corporation distributions to its then existing stockholders) and does not
currently anticipate paying dividends on its Common Stock in the foreseeable
future. Since the Company conducts substantially all of its operations through
its subsidiary, Mortgage Plus, the Company's ability to pay dividends will be
dependent upon the ability of Mortgage Plus to make cash distributions to the
Company. The Warehouse Facility (which is with Mortgage Plus) provides that
Mortgage Plus may declare and pay dividends provided that the payment of such
dividends will not result in a violation of the financial covenants of the
Warehouse Facility. See "Dividend Policy."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock may experience fluctuations that are
unrelated to the Company's operating performance. In particular, the price of
the Common Stock may be affected by general market price
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movements as well as developments specifically related to the consumer finance
industry such as, among other things, interest rate movements. In addition,
the Company's financial results are significantly dependent upon the
successful completion of the Company's loan sales in the market, and the
Company's inability to complete these transactions in a particular quarter may
have a material adverse effect on the Company's results of operations for that
quarter and could, therefore, negatively impact the price of the Common Stock.
SHARES AVAILABLE FOR FUTURE SALE
The sale, or availability for sale, of a substantial number of shares of
Common Stock in the public market subsequent to this Offering, pursuant to
Rule 144 under the Securities Act ("Rule 144") or otherwise, could materially
adversely affect the market price of the Common Stock and could impair the
Company's ability to raise additional capital through the public or private
sale of its securities. Except for (i) 1,100,000 shares of Common Stock owned
by Selling Stockholders and registered for resale; (ii) a total of 112,714
shares of Common Stock held by the holders of the Company's stock prior to the
Merger which may be immediately saleable; and 227,001 shares of Common Stock
held by Vertex Industries, Inc. ("Vertex") (a holder of the Company's stock
prior to the Merger) which cannot be sold prior to September 3, 1998, a total
of 6,956,000 shares of Common Stock currently outstanding are "restricted
securities" as that term is defined in Rule 144 and may, under certain
circumstances, be sold without registration under the Securities Act. The
availability of Rule 144 to the holders of restricted securities of the
Company would be conditioned on, among other factors, the availability of
certain public information concerning the Company. In addition, shares
issuable upon exercise of options granted under the 1995 Plan, pursuant to
Rule 701 under the Securities Act, could be sold publicly commencing 90 days
after the Company becomes a reporting company under the Exchange Act. Vertex,
has agreed not to, directly or indirectly, issue, offer, agree to sell, sell,
grant an option for the purchase or sale of, transfer, pledge, assign,
hypothecate, distribute, or otherwise dispose of, or encumber any of its
227,001 shares of Common Stock or options, rights, warrants, or other
securities convertible into, or exercisable or exchangeable for, or evidencing
any right to purchase or subscribe for, shares of Common Stock, whether or not
beneficially owned by such person, or any beneficial interest therein for a
period of 6 months from the date of this Prospectus.
There are 270,000 options, of which there are a total of 8,750 options that
are currently exercisable. Additionally, there are currently 888,888 warrants
outstanding, which are held by FC Capital Corporation and have registration or
piggyback rights as follows: At any time commencing one year after the
Offering, if the Company proposes to register any of its securities under the
1933 Act for its own account for sale for cash (other than a registration on
Form S-4 or Form S-8, or any successor or similar forms), it will each such
time promptly give written notice to the Holder. Upon the written request of
the Holder made within 15 days after the receipt of any such notice (which
request shall specify the Registrable Securities intended to be disposed of by
such Holder and the intended method of distribution thereof), the Company will
use its reasonable efforts to effect the registration under the 1933 Act of
all Registrable Securities which the Company has been required to register by
the Holder in accordance with the intended methods of distribution specified
in such request; provided that (i) if at any time after giving written notice
of its intention to register any securities and prior to the effective date of
the registration statement filed in connection with such registration, the
Company determines for any reason not to register such securities, the Company
may, at its election give written notice of such determination to the Holder
and, thereupon, will be relieved of its obligation to register any Registrable
Securities in connection with such registration, and (ii) in case of a
determination by the Company to delay registration of its securities, the
Company will be permitted to delay the registration of Registrable Securities
for the same period as the delay in registering such other securities.
Pursuant to an agreement dated May 1, 1998, (the "Saffiotti Agreement"), the
Estate of Anthony Saffiotti (the "Estate") has one demand registration right
for a period commencing one (1) year after the date of the Saffiotti
Agreement, but not later than three (3) years from such date. Under the
Saffiotti Agreement, the Estate may compel the Company, upon written request,
and so long as the Estate owns at least fifty (50%) percent of the shares of
the Common Stock of the Company held on the date hereof, to prepare and file
with the Commission a registration statement covering the registrable
securities which are the subject of such request.
17
<PAGE>
USE OF PROCEEDS
After deducting the estimated expenses of this offering, the net proceeds
for the sale by the Company of the Common Stock offered hereby are estimated
to be approximately $2,925,000
The following table sets forth the Company's anticipated use of proceeds:
<TABLE>
<CAPTION>
1,300,000
COMMON STOCK
---------------
<S> <C> <C>
Gross Proceeds........................................... 3,250,000 (100%)
Less: Offering Expenses.................................. 325,000 10%
--------- -----
Net Proceeds............................................. 2,925,000 (90%)
========= =====
Use of Proceeds:
Fund Mortgage Loans.................................... 448,500 (13.8%)
Expand Branch Network.................................. 282,750 (8.7%)
Expand Mortgage Banking Operations in Puerto Rico...... 279,500 (8.6%)
Telemarketing: Advertising............................. 279,500 (8.6%)
Upgrade Information Systems............................ 81,250 (2.5%)
Repay Indebtedness..................................... 910,000 (28%)
Working Capital(1)..................................... 643,500 (19.8%)
--------- -----
Total Use of Proceeds................................ 2,925,000 (90%)
========= =====
</TABLE>
- - --------
(1) The Company anticipates using Working Capital for general corporate
purposes, which may include strategic alliances and/or acquisitions, loan
product development and general marketing expenses.
The indebtedness to be repaid with a portion of the proceeds consists of an
aggregate principal amount of $878,000 subordinated debentures, with an
interest rate of 14% per year. Of this amount, $778,000 principal amount of
the debentures, plus interest, is payable to a corporation owned by Steven
Latessa, Cary Wolen and the Estate of Anthony Saffiotti. In addition, personal
guarantees of Messrs. Latessa and Wolen under the Company's Warehouse Facility
and an equipment lease are expected to be released upon consummation of this
Offering.
The Company is dependent upon the proceeds of this Offering of 1,300,000
shares to implement its business strategy and finance its working capital
requirements. Based on the Company's currently proposed plans and assumptions
relating to the implementation of its business strategy, the Company
anticipates that the net proceeds of this Offering will be sufficient to
satisfy its contemplated cash requirements for at least twelve months
following the consummation of this Offering. In the event that the Company's
plans change or its assumptions prove to be inaccurate (due to unanticipated
expenses, difficulties, delays or otherwise) or the proceeds of this Offering
otherwise prove to be insufficient to fund the implementation of the Company's
business strategy and working capital requirements, the Company could be
required to seek additional financing. Exact application of the net proceeds
and timing of use will vary depending upon numerous factors, including market
and competitive issues. Due to the number and variability of factors that may
effect the Company's use of the net proceeds, the Company will retain
significant discretion over the actual application of the net proceeds.
Accordingly, there can be no assurance that actual application will not vary
substantially from the Company's current expectation.
Pending use for the purposes specified above or otherwise, the net proceeds
received by the Company in the Offering may be invested in short-term,
investment grade, interest bearing securities.
18
<PAGE>
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock since its
inception (except that prior to December 31, 1996, Mortgage Plus made S
corporation distributions to its then existing stockholders) and does not
currently anticipate paying dividends on its Common Stock in the foreseeable
future. Since the Company conducts substantially all of its operations through
its subsidiary, Mortgage Plus, the Company's ability to pay dividends is also
dependent upon the ability of Mortgage Plus to make cash distributions to the
Company. The Warehouse Facility (which is with Mortgage Plus) provides that
Mortgage Plus may declare and pay dividends provided that the payment of such
dividends will not result in a violation of the financial covenants of the
Warehouse Facility.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock, prior to the Merger, has been listed on the
OTCBB under the symbol "CPTT". Since at least January 1, 1997, there has been
limited trading in the Common Stock. As a result, prices reported for the
Common Stock $.01 to $.02 reflect the relative lack of liquidity. Since March
5, 1998, the volume of trading of the Company's Common Stock (which is now
traded on the OTCBB under the symbol "MPEH") has been 19,300 shares, with one
trade (100 shares) at a price of $.25 per share and trades for a total of
19,200 shares of Common Stock at prices that average approximately $2.50 per
share.
As of March 1, 1998 there were approximately 745 stockholders of record of
the Company's Common Stock.
DILUTION
As of December 31, 1997, the Company had a net pro forma tangible book value
after giving effect to the merger of approximately $476,350 (or $0.06 per
share). Net tangible book value equals the tangible net worth of the Company
(tangible assets less total liabilities) divided by the aggregate number of
shares of Common Stock outstanding. After giving effect to the sale by the
Company of 1,300,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $2.50 per share and the assumed offering
costs of $325,000, the pro forma net tangible book value of the Company as of
December 31, 1997, would be approximately $3,401,350 (or $0.35 per share).
This represents an immediate increase in pro forma net tangible book value of
$0.29 per share to current stockholders and an immediate dilution of $2.15 per
share to new investors. There are 8,750 shares subject to option that have
vested, and if all of the dilutive securities currently exercisable were to be
exercised, there would be no impact on dilution. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price........................... $2.50
Net tangible book value before offering....................... $0.06
Increase attributable to new investors........................ 0.29
-----
Pro forma net tangible book value after offering................ 0.35
-----
Dilution to new investors....................................... $2.15
=====
</TABLE>
The following table sets forth, as of December 31, 1997, adjusted for the
338,142 shares of Common Stock issued in connection with the Merger in March
1998, the difference between the existing stockholders of the Company and the
new investors with respect to the aggregate number of shares of Common Stock
purchased from the Company, the total cash consideration paid and the average
cash price per share paid:
<TABLE>
<CAPTION>
TOTAL CASH
SHARES PURCHASED CONSIDERATION PAID AVERAGE
----------------- ------------------ CASH PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 8,394,142 86.6% $1,056,000 24.5% $0.13
New Investors................... 1,300,000 13.4% $3,250,000 75.5% $2.50
--------- ------ ---------- ------
Total....................... 9,694,142 100.00% $4,036,000 100.00%
========= ====== ========== ======
</TABLE>
19
<PAGE>
CAPITALIZATION
The following table sets forth the debt and capitalization of the Company as
of December 31, 1997 pro forma giving effect to the merger and as adjusted to
give effect to the sale by the Company of 1,300,000 shares of Common Stock at
an assumed public offering price of $2.50 per share, and the application by
the Company of the net proceeds therefrom as described under "Use of
Proceeds." This table should be read in conjunction with the Consolidated
Financial Statements, including the Notes thereto, included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------
AS
ACTUAL PRO FORMA(1) ADJUSTED(2)
----------- ------------ -----------
<S> <C> <C> <C>
Debt:
Warehouse lines of credit.............. $10,532,994 $10,532,994 $10,532,994
Subordinated debt...................... 878,000 878,000 --
Notes payable.......................... 1,241,652 1,241,652 1,241,652
Obligation under capital lease......... 193,184 193,184 193,184
----------- ----------- -----------
Total Debt.............................. $12,845,830 $12,845,830 $11,967,830
Stockholders' equity:
Common stock, $.01 par value,
15,000,000 shares authorized,
8,056,000 shares outstanding actual,
8,394,142 shares outstanding pro forma
and 9,694,142 shares outstanding, as
adjusted.............................. 8,056 8,394 9,694
Additional paid-in-capital............. 664,227 666,941 3,590,641
Accumulated deficit.................... (76,702) (76,702) (76,702)
----------- ----------- -----------
Total stockholders' equity............. 595,581 598,633 3,523,633
----------- ----------- -----------
Total capitalization................ $13,441,411 $13,444,463 $15,491,463
=========== =========== ===========
</TABLE>
- - --------
(1) Adjusted to give affect to the acquisition of CTS on March 5, 1998.
(2) Adjusted for the sale of 1,300,000 shares of Common Stock and application
of the estimated net proceeds therefrom as described under "Use of
Proceeds."
(3) See "Description of Securities" for description of the relative rights of
the Common Stock.
20
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below under the caption "Statement of
Operations Data" and "Balance Sheet Data" for and as of December 31, 1997 and
for each of the years in the two year period then ended are derived from the
financial statements of the Company appearing elsewhere herein. The
information set forth below should be read in conjunction with such financial
statements and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The selected financial data
presented below (other than the operating Statistics) as of December 31, 1997
and for each of the years in the two year period then ended has been derived
from audited financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................................. $ 5,970,675 $ 8,000,587
Commissions, wages and benefits..................... 3,715,169 5,549,795
Selling and administrative.......................... 1,770,894 2,567,371
Interest expense.................................... 707,952 967,123
Net Loss (Pro forma for 1996)....................... (190,340) (76,702)
Net Loss Per Share (Pro forma for 1996)............. (.03) (.01)
Weighted Average Number of Shares Outstanding....... 7,002,732 8,025,315
OPERATING STATISTICS:
Mortgage originations
Conventional...................................... $ 48,102,840 $ 47,428,400
FHA/VA............................................ 24,810,101 33,324,400
Sub-Prime......................................... 35,290,148 52,748,500
------------ ------------
Total........................................... $108,203,089 $133,501,300
Number of Loans..................................... 1,073 1,585
Average Principal Balance........................... $ 100,841 84,228
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
------------------------
<S> <C>
BALANCE SHEET DATA:
Mortgage loans held for sale........................... $ 6,300,764
Total assets........................................... 16,216,833
Borrowings............................................. 12,845,830
Stockholders' equity................................... 595,581
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the preceding
Selected Financial Data and the Company's Financial Statements and the Notes
thereto included elsewhere in this Prospectus.
GENERAL
Overview. The Company's revenues are generated from the fees it charges
borrowers on the origination of mortgage loans, the premiums paid by
institutional investors when they purchase the loans from the Company and
interest earned during the period (generally less than 30 days) the loan is
held for sale to institutional investors. The fees charged by the Company to
its borrowers in connection with the origination of the loans and the premium
on sales of loans to third parties, less transaction costs associated with
origination of the loans, are categorized as mortgage origination revenue and
are recognized when the loans are sold. The Company sells all of its mortgage
loans (together with servicing rights) to institutional investors, usually on
a non-recourse basis, in most instances within 30 days of origination. By
selling its mortgages to institutional investors on a "servicing-released"
basis, the Company avoids the administrative and collection expenses of
managing a servicing portfolio, and is not faced with foreclosures,
delinquencies and re-acquiring and disposing of residential real estate. The
Company does not sell mortgage loans in "securitization" transactions, but
rather sells loans to financial institutions, either on a pooled or individual
"whole-loan" basis, at fixed prices on a non-recourse basis.
MORTGAGE ORIGINATIONS
The following table summarizes the Company's mortgage loan originations for
the periods shown.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1994 1995 1996 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
CONVENTIONAL LOANS:
Volume....................... $43,293,573 $48,366,929 $ 48,102,840 $ 47,428,400
Percentage of total volume... 100.0% 83.4% 44.5% 35.5%
FHA/VA LOANS:
Volume....................... -- $ 5,323,313 $ 24,810,101 $ 33,324,400
Percentage of total volume... -- 9.2% 22.9% 25.0%
SUB-PRIME LOANS:
Volume....................... -- $ 4,284,375 $ 35,290,148 $ 52,748,500
Percentage of total volume... -- 7.4% 32.6% 39.5%
TOTAL LOANS:
Volume....................... $43,293,573 $57,974,617 $108,203,089 $133,501,300
Number of Loans.............. 329 503 1,073 1,585
Average Loan Size............ $ 131,591 $ 115,257 $ 100,841 $ 84,228
</TABLE>
The Company increased its mortgage loan origination volume to $133.5 million
during 1997 from $108.2 million during 1996, an increase of 23.4%. This
increase in mortgage loan origination volume was primarily due to the
expansion of the Company's Missouri operations, which accounted for $48.6
million of mortgage originations in 1997 compared to $27.6 million in 1996 and
the growth in most areas where the Company does business of "B/C" and FHA/VA
loan originations.
For the year ended December 31, 1996 and for the year ended December 31,
1997, the Company sold 59% and 84%, respectively, of the mortgage loans it
originated (by volume) to three institutional investors and 5 institutional
investors, respectively. Three of the investors in each of these periods were
the same.
22
<PAGE>
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996.
Total revenues increased $2.0 million, or 33.3%, to $8.0 million for the
year ended December 31, 1997 from $6.0 million for the year ended December 31,
1996. During the same period, the Company's total expenses increased $2.9
million, or 46.8%, to $9.1 million from $6.2 million. In addition in 1997 the
Company recognized other income of $1,000,000.00 resulting from proceeds to be
received from an officer's life insurance policy. The Company's net loss
decreased by 65.7% from $223,000 ($.03 per share) for the year ended December
31, 1996 to $76,702 ($.01 per share) for the year ended December 31, 1997. The
Company incurred large expenses in both 1997 and 1996 related to the expansion
of its Branch Network and the introduction of "B/C" credit-rated mortgage
loans. These activities and related expenses were the primary contributor to
the Company's losses in 1997 and 1996.
Revenues. The following table sets forth the components of the Company's
revenues for the periods shown.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1996 1997
---------- ----------
<S> <C> <C>
Revenues:
Mortgage origination............. $5,307,353 $7,147,183
Interest earned.................. 663,322 860,424
---------- ----------
Total Revenues................ $5,970,675 $8,007,607
========== ==========
</TABLE>
Mortgage origination revenue increased $1.8 million, or 34.0% to $7.1
million for the year ended December 31, 1997 from $5.3 million for the year
ended December 31, 1996. The increase primarily attributable to substantial
increases in "B/C" and FHA/VA mortgage originations during the 1997 period.
Interest earned increased $197,000, or 29.7%, to $860,000 for the year ended
December 31, 1997 from $663,000 for the year ended December 31, 1996. The
increase in interest earned was primarily due to a higher average balance of
loans held for sale throughout the year ended December 31, 1997 which resulted
from the increased loan origination value during such period, and a higher
balance of loans held for sale at the beginning of such period as compared to
the corresponding period in 1996.
Expenses. The following table sets forth the components of the Company's
expenses for the periods shown.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
---------------------
1996 1997
---------- ----------
<S> <C> <C>
Expenses:
Commissions, wages and benefits.. $3,715,169 $5,549,795
Selling and administrative....... 1,770,894 2,567,371
Interest expense................. 707,952 967,123
---------- ----------
Total Expenses................ $6,194,015 $9,084,289
========== ==========
</TABLE>
Commissions, wages and benefits increased $1.8 million, or 48.6%, to $5.5
million for the year ended December 31, 1997 from $3.7 million for the year
ended December 31, 1996. The increase in commissions, wages and benefits was
primarily due to an increase in sales staff and administrative personnel
required to process the increased volume of mortgage loan originations. As of
December 31, 1997, the Company had 127 employees as compared to 103 employees
as of December 31, 1996. Included within commissions, wages and benefits for
the year ended December 31, 1997 was $417,000 attributable to new branch
start-up expenses, as compared to $331,000 in new branch start-up expenses for
the year ended December 31, 1996. During the year ended December 31, 1997, the
Company opened three new branches, including one in Missouri, one in
Connecticut and one in Arkansas, compared to five new branches in the year
ended December 31, 1996, including two in New York, two in Missouri and one in
Puerto Rico. As a percentage of revenue, commissions and benefits represent
62.2% and 69.3% for the years ended December 31, 1996 and 1997, respectively.
23
<PAGE>
Selling and administrative expenses, which consist of occupancy, marketing
supplies, selling and other expenses, increased $800,000, or 44.4%, to $2.6
million for the year ended December 31, 1997 from $1.8 million for the year
ended December 31, 1996. Included within selling and administrative expenses
for the years ended December 31, 1997 was $237,000 attributable to new branch
start up expenses, as compared to $225,000 for the year ended December 31,
1996. As a percentage of revenue, selling and administrative expense
represented 29.7% and 32.1% for the years ended December 31, 1996 and 1997,
respectively.
Interest expense increased $259,000 or 36.6%, to $967,000 for the year ended
December 31, 1997 from $708,000 for the year ended December 31, 1996. The
increase in interest expense was attributable to the interest costs and
borrowing by the Company to fund the higher balance of loans originated during
the year ended December 31, 1997 and higher average balances of loans held for
sale and amounts due from investors during 1997. As a percentage of revenue,
interest expense represented 11.9% and 12.1% for the years ended December 31,
1996 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary operating cash requirements include the funding or
payment of: (i) loan originations; (ii) interest expense incurred on
borrowings under its Warehouse Facility; (iii) capital expenditures; (iv)
personnel and commission costs; and (v) other operating and administrative
expenses. The Company generates cash flow from fees received from its
borrowers for mortgage originations, the sale of mortgage loans into the
secondary market and interest income on loans held for sale.
Since July, 1993, the Company has maintained the Warehouse Facility with a
commercial bank. This credit facility expires on July 31, 1998 and is
generally renewable on an annual basis. On April 28, 1998, in connection with
the lender's waiver of default of certain covenants as of December 31, 1997,
the lender reduced the warehouse line of credit from $12 million to $10
million and extended the expiration date to July 31, 1998. All borrowings
under the Warehouse Facility are secured by the mortgage loans originated by
the Company through this facility. The Warehouse Facility is guaranteed by
Steven Latessa and Cary Wolen. The Company is required to comply with various
operating and financial covenants as defined in the Warehouse Facility
including, but not limited to, maintenance of certain financial ratios and
minimum tangible net worth. The Company has received a waiver from the
commercial bank of the minimum tangible net worth requirement as of December
31, 1996 and a modification for future periods which allows the Company to
include its subordinated debt in the calculation of tangible net worth. The
continued availability of funds provided under the Warehouse Facility is
subject to the Company's compliance with the modified covenants. The Company
expects to renew or replace the Warehouse Facility when the current term
expires. The Company has obtained an additional Warehouse Facility, with a
maximum borrowing limit of $5 million, as of March 20, 1998.
On October 7, 1996 the Company entered into a Mortgage Loan Warehousing and
Security Agreement with another commercial bank. This credit facility was for
a maximum borrowing limit of $6 million. All borrowings under this credit
facility were secured by the mortgage loans originated by the Company through
this facility. The Mortgage Loan Warehousing and Security Agreement was
guaranteed by Messrs. Latessa and Wolen. The Company was required to comply
with various operating and financial covenants as defined in the Mortgage Loan
Warehousing and Security Agreement including, but not limited to, maintenance
of certain financial ratios and a minimum tangible net worth. As with the
Warehouse Facility, the Company was not in compliance with the net worth
covenant at December 31, 1996. The commercial bank notified the Company on May
16, 1997 that new loans would not be added to this warehouse line of credit
subsequent to June 15, 1997 and that this warehouse line of credit could not
be utilized subsequent to August 15, 1997. The Company has repaid all amounts
under this credit facility. The Company does not believe the unavailability of
this warehouse line of credit has had an impact on the Company's ability to
originate and sell mortgage loans due to the amount of credit available under
the $12 million Warehouse Facility. See "Risk Factors--Dependence on Warehouse
Financing; Prior Default under Warehouse Financing."
In December, 1997, the Company and FC Capital Corporation ("FC Corp.")
entered into an agreement (the "Term Loan Agreement") pursuant to which the
Company borrowed $1,500,000 (which, together with
24
<PAGE>
interest, is called the "Borrowed Amount") based upon the Company's commitment
to repay the Borrowed Amount, on a monthly basis beginning in February, 1998,
at the greater of either $100,000 or 50% of the income generated from the
Company's sale to FC Corp. (or its designated affiliate) of qualified mortgage
loans. To secure the Company's repayment of the Borrowed Amount, the Company
granted FC Corp. a security interest in all its assets, subject to the prior
interest of the Warehouse Facility in certain mortgage loans. In addition to
the Term Loan Agreement, FC Corp. loaned $250,000 to the Company pursuant to a
Working Capital Financing Agreement, which amount, together with interest
thereon, is due and payable on the first anniversary of the Company's
borrowing under the Working Capital Financing Agreement.
The Company's business requires continual access to short-term sources of
funds. While management believes that it has sufficient funds to finance its
operations and that it will be able to refinance or otherwise repay its debt
in the normal course of business, there can be no assurance that the Warehouse
Facility can be extended or that funds generated from operations will be
sufficient to satisfy such obligations. Future financing may involve the
issuance of debt or equity securities. The Company's cash requirements may be
significantly influenced by possible acquisitions or strategic alliances,
although no particular acquisition or strategic alliance has been agreed upon
or become the subject of any letter of intent or agreement in principle.
In 1997, the Company borrowed $878,000, of which $778,000 was borrowed from
SWL, Inc., a corporation controlled by Messrs. Latessa, Wolen and the Estate
of Anthony Saffiotti. The borrowings were in the form of unsecured
subordinated debentures bearing interest rates ranging from 9% to 14% per
year, payable quarterly in arrears, with the final payment due on March 31,
1998. These loans were made for general working capital purposes. The Company
intends to use approximately $910,000 of the proceeds of this Offering to
repay these loans, with accrued interest.
In December 1996, the Company sold an aggregate of 1,000,000 shares of its
Common Stock at $1.00 per share, of which 900,000 shares were sold to Melville
Ventures & Associates, L.P., an investment partnership, and 100,000 shares
were sold to two additional investors.
In November, 1997, upon the death of Anthony Saffiotti ("Saffiotti"), a
stockholder who owned 1,620,220 shares of the Company's Common Stock, the
Company became obligated to purchase from Saffiotti (through his estate) and
the estate of Saffiotti became obligated to sell to the Company, all 1,620,220
shares of Common Stock at book value, which, at December 31, 1997, was $.055
per share (approximately $89,112). Pursuant to an agreement dated May 1, 1998,
the estate of Anthony Saffiotti has waived its rights under the Shareholders
Agreement. (See "Certain Transactions.")
The Company may be able to increase its production of mortgage loan
originations through, among other things, increased advertising and promotion,
expanded telemarketing capabilities and continued expansion into new markets.
This possible increase in mortgage loan originations is expected to be funded
by additional borrowings under the Warehouse Facility and, if available, one
or more other borrowing arrangements which the Company believes might be
available to it following the Offering. To the extent that additional
borrowings under the Warehouse Facility or other arrangements are not
available on satisfactory terms, the Company will explore alternative means of
financing, including raising capital through additional offerings of
securities.
25
<PAGE>
BUSINESS
GENERAL
The Company, through its wholly owned subsidiary, Mortgage Plus, is a full
service retail mortgage banking company providing a broad range of residential
Mortgage Products (including first mortgages, home equity loans and second
mortgages) to (i) prime, or "A" credit borrowers who qualify for conventional
mortgages (including loans which conform to the standards of certain
institutional investors, such as Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC")), (ii) borrowers
who are classified as sub-prime, or "B/C" credit, borrowers, and (iii)
borrowers who qualify for mortgages insured by the Federal Housing
Administration ("FHA") or guaranteed by the Veterans Administration ("VA").
The Company is headquartered in Long Island, New York and has a total of 15
retail branches (the "Branch Network") in nine states, including Arkansas (1),
Connecticut (1), Florida (1), Illinois (1), Missouri (3), New Jersey (1), New
York (4) and Cleveland (1), and the Commonwealth of Puerto Rico (1). The
Company is also a licensed mortgage banking company in seven additional states
and anticipates becoming licensed in 11 additional states during the first
quarter of 1998.
From the Company's inception in 1987 until mid-1994, the Company operated as
a licensed mortgage broker, principally in New York. Since obtaining its
mortgage banking license in New York in 1994, the Company has grown
significantly, originating $43.3 million, $58.0 million, $108.2 million and
133.5 million of mortgage loans for the years ended December 31, 1994, 1995,
1996 and 1997, respectively. This growth has been due primarily to the
Company's expansion into additional geographic markets, the Company's focus,
since mid-1996, on mortgage products for "B/C" credit-rated borrowers and a
substantial increase in loans to FHA/VA borrowers. The Company's "B/C" and
FHA/VA loan volume has grown steadily since 1995, with loans to "B/C"
borrowers accounting for 39.5%, of the Company's total loan origination volume
for the year ended December 31, 1997, compared to 7.4% for the year ended
December 31, 1995, and loans to FHA/VA borrowers accounting for 25.0% of the
Company's total loan origination volume for the year ended December 31, 1997,
compared to 9.2% for the year ended December 31, 1995.
The Company is an active originator of prime, sub-prime and FHA/VA
residential first mortgages in its markets to individual borrowers on a retail
basis. Loan officers within the Branch Network deal directly with mortgage
customers who are initially identified through telemarketing operations,
advertising, direct mail, promotional materials and educational seminars or
who are referred by local real estate agents, builders, accountants, financial
planners, attorneys and mortgage brokers.
The growth of the Company's mortgage lending to "B/C" credit borrowers
reflects (i) the Company's focus on such customers since mid-1996, (ii) the
Company's prompt and responsive service to its customers, (iii) the demand for
sub-prime mortgage products, (iv) the availability to the Company of capital
for these mortgage banking products in the form of warehouse lines of credit,
and (v) the development, on an industry-wide basis, of a large secondary
market of institutional investors who compete to purchase mortgages from the
Company and other mortgager originators. Most "B/C" credit borrowers have
impaired credit, although "B/C" credit borrowers also include individuals
whose credit histories are not adverse but are seeking an expedited mortgage
process or persons such as the self-employed, who have difficulty verifying
their income. The Company expects that "B/C" credit-rated loans will become an
even greater portion of its total loan originations since such loans, have
generated greater revenue to the Company than "A" credit-rated loans.
Furthermore, the Company believes that the demand for loans by "B/C" credit
borrowers is less sensitive to general levels of interest rates or home sales
and therefore less cyclical than demand for loans by "A" credit-rated
borrowers. Nevertheless, the Company's "B/C" mortgage lending activities are
subject to significant risks, including risks related to the competition from
an increasing number of lenders who are also seeking "B/C" credit borrowers
(see "Risk Factors--Competition"), and the risks associated with lending to
credit impaired borrowers (see "Risk Factors--Risks of Loan Delinquencies and
Defaults").
For the year ended December 31, 1997, the Company had revenues of $8.0
million, compared to $6.0 million for the year ended December 31, 1996 and
$3.0 million for the year ended 1995. The Company's
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revenues are generated from the fees it charges borrowers on the origination
of mortgage loans, the premiums paid by institutional investors when they
purchase the loans from the Company and interest earned during the period
(generally less than 30 days) the loans are held for sale to institutional
investors. The Company does not sell mortgage loans in "securitization"
transactions, but rather sells loans either on an individual "whole loan"
basis or pooled in groups to financial institutions at fixed prices, usually
on a non-recourse basis for a cash premium. The Company sells its mortgages to
institutional investors on a "servicing-released" basis, i.e. the purchaser
assumes the obligations of servicing, the loan and thereby avoids the
administrative expenses of managing a servicing portfolio, and the associated
foreclosures, delinquencies and resale of residential real estate.
GROWTH STRATEGY
The Company's growth strategy includes the following elements:
. Increasing mortgage originations to sub-prime borrowers through
recruiting experienced loan officers, increasing telemarketing and
direct mail to target audiences;
. Expanding the Company's operations in the Commonwealth of Puerto Rico
through developing strategic alliances with financial institutions and
mortgage bankers and brokers; and
. Expanding the Company's geographic coverage for mortgage originations
generally, through additions to the Branch Network, through developing
strategic alliances with financial institutions, mortgage bankers and
brokers and possible acquisitions.
PRODUCTS AND SERVICES
The Company offers, through its Branch Network currently consisting of 15
offices, a broad array of mortgage products to "A" credit-rated borrowers, the
borrower who can qualify for an FHA/VA mortgage, or individuals seeking home
mortgages who are classified as "B/C" credit-rated, or sub-prime, borrowers.
The Company's mortgage products include fixed rate and adjustable rate loans
for the purchase and/or refinancing of residential properties.
Loan Originations to Borrowers. The Company's mortgage products are designed
to respond to consumer needs and competitive factors as well as the
requirements mandated by prospective purchasers of these loans. These products
include fixed-rate 15-year and 30-year mortgages offered in several formats.
The Company also offers various adjustable rate mortgages ("ARMS"), including
loans with balloon payments and various amortization schedules. Accordingly,
some loans may have relatively short maturity dates (such as five or seven
years) with longer amortization schedules (such as 25 to 30 years). Applicants
have a choice of electing to "lock-in" their interest rates as of the
application date or thereafter or to accept a prevailing interest rate at
closing. A prevailing interest rate is subject to change in accordance with
market interest rate fluctuations and is set by the Company three to five days
prior to closing.
The Company's mortgage products are tailored (with varying down payment
requirements, loan-to-value ratios ("LTV") and interest rates) based upon the
borrower's particular credit classification and the borrower's willingness or
ability to meet varying income documentation standards. These document
standards include the full income documentation program pursuant to which a
prospective borrower's income is evaluated based on tax returns, W-2 forms and
pay stubs; the limited income documentation program pursuant to which a
prospective borrower's income is evaluated based on bank statements and profit
and loss statements; the stated income program pursuant to which a prospective
borrower's employment, rather than income, is verified; or the no ratio loan
program pursuant to which a prospective borrower's credit history and
collateral values, rather than income or employment, are verified. These loan
variations give the Company the flexibility to loan funds to a wider range of
borrowers.
Mortgages Insured or Guaranteed by Government Agencies. The Company has been
designated by the U.S. Department of Housing and Urban Development ("HUD") as
a direct endorser of loans insured by the
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FHA and an automatic endorser of loans partially guaranteed by the VA, and can
offer FHA or VA mortgages to qualified borrowers. As a direct or automatic
endorser, the Company can originate loans insured or guaranteed by those
agencies without prior approval. Generally, FHA and VA mortgages are available
to borrowers with low/middle incomes and impaired credit classifications for
properties within a specific price range. FHA mortgages must be underwritten
within specific governmental guidelines, which include income verification,
borrower asset, borrower credit worthiness, property value and property
condition. Because these guidelines require that borrowers seeking FHA-insured
mortgages submit more extensive documentation and the Company perform a more
detailed underwriting of the mortgage than prime credit mortgages, the
Company's origination fees for these mortgages are generally higher than a
comparable sized mortgage from a prime credit-rated borrower. FHA/VA loans are
available on terms of fifteen or thirty years.
The Company also offers Title I home improvement loans, representing loans
to homeowners, a portion of which is guaranteed by the FHA, for the purpose of
certain pre-qualified home improvements.
FNMA/FHLMC Mortgages. The Company offers mortgage products that conform to
the underwriting guidelines of FNMA and FHLMC. Although the Company does not
currently sell these mortgages directly to FNMA and FHLMC, the Company
attempts to conform substantially all of the conventional loans which it
originates to their guidelines because they are readily marketable to
institutional investors.
Sales of Mortgage Loans
The Company follows a strategy of selling for cash, generally within 30 days
following the date of a mortgage origination, all of the loans it originates
(and related servicing rights) to institutional investors, usually on a non-
recourse basis. This strategy allows the Company to (i) generate cash revenues
(which includes, in most cases, a premium over the face amount of the loans to
be sold), (ii) reduce the Company's exposure to interest rate fluctuations,
and (iii) substantially reduce any potential expense or loss in the event the
loan goes into default after the first month of its origination. The non-
recourse nature of the Company's loan sales does not, however, entirely
eliminate the Company's default risk since the Company may be required to
repurchase a loan from the investor or indemnify an investor if the borrower
fails to makes its first mortgage payment or if the loan goes into default and
the Company is found to be negligent in uncovering fraud in connection with
the loan origination process.
SPECIFIC CLASSIFICATIONS OF VARIOUS MORTGAGE LOANS
Mortgage loans are classified by the Company according to a number of
factors related to the borrower and to the underlying property to be financed.
These factors are based on government, industry and institutional standards
and experience, and are widely employed by mortgage lenders as well as
mortgage investors in the secondary trading market. Government agencies
classify mortgage loans in order to assess those which qualify for certain
government-sponsored programs and enable purchasers of mortgages to resell
them in the form of asset-backed securities. These classifications help create
and maintain a substantial liquid secondary market for these financial assets.
This liquidity in turn ensures that lenders and borrowers will be able to
access the mortgage market.
The Company's underwriters follow guidelines established by various
government agencies and institutional investors. Loan applications are
classified according to certain characteristics such as collateral, loan size,
various debt ratios, LTV, credit history and term of the loan. Loan applicants
with less than favorable credit ratings may be offered loans with higher
interest rates, lower LTV ratios, and higher origination fees than applicants
with more favorable credit ratings. These higher fees reflect the somewhat
higher risks associated with these loans.
The Company has established classifications with respect to the credit
profiles of loans to sub-prime borrowers based on certain of the applicant's
characteristics. Each applicant for a sub-prime loan is placed into one of
three letter credit risk categories, credit grade "A" through "C." Ratings are
based upon a number of factors, including the applicant's credit history, the
value of the property and the applicant's employment status,
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<PAGE>
and are subject to the discretion of the Company's underwriting staff. Terms
of loans made by the Company, as well as the maximum LTV and debt service-to-
income coverage (calculated by dividing fixed monthly debt payments by gross
monthly income), vary depending upon the classification of the borrower.
Borrowers with lower credit ratings generally pay higher interest rates and
loan origination fees.
The general criteria currently used by the Company's underwriting staff in
classifying "B/C" credit-rated loan applicants are as set forth below.
UNDERWRITING CRITERIA FOR SUB-PRIME LENDING
<TABLE>
<CAPTION>
"A" RISK "B" RISK "C" RISK
-------- -------- --------
<S> <C> <C> <C>
General Repayment....... Has repaid Has generally repaid May have experienced
installment or installment or credit significant past
revolving debt problems credit problems
Existing mortgage loans. Current at Current at May not be current at
application time application time and application time and
and a maximum of a maximum of three a maximum of four 30-
two 30-day late 30-day late payments day late payments and
payments in the in the last 12 months one 60-day late
last 12 months payment in the last
12 months
Non-mortgage credit..... Minor derogatory Some prior defaults Significant prior
items allowed with allowed but major delinquencies may
a letter of credit or installment have occurred, but
explanation; no debt paid as agreed major credit or
open collection may offset some installment debt paid
accounts or charge- delinquency; open as agreed may offset
offs, judgments or charge-offs, some delinquency
liens judgments or liens obligations in the
are permitted on a future
case-by-case basis
Bankruptcy filings...... Discharged more Discharged more than Discharged more than
than four years two years prior to one year prior to
prior to closing closing and credit closing and credit
and credit reestablished reestablished
reestablished
Debt service-to-income Generally 38% or Generally 45% or less Generally 50% or less
ratio.................. less
Maximum loan-to-value
ratio:
Owner-occupied.......... Generally 80% (or Generally 80% (or Generally 75% (or 80%
90%*) for a one-to 85%*) for a one-to for first liens*) for
two-family two-family residence a one-to two-family
residence; 75% for residence; 65% for a
a condominium condominium; 60% for
a three-to four-
family residence
Non-owner-occupied...... Generally 70% for a Generally 70% for a Generally 60% for a
one-to four-family one-to two-family one-to two-family
residence residence residence
</TABLE>
- - --------
* On an exceptional basis
The Company uses the foregoing credit grading criteria as guidelines only.
On a case-by-case basis, the Company may determine that the prospective
borrower warrants an exception. Exceptions may generally be allowed if the
application reflects certain compensating factors such as loan-to-value ratio,
debt ratio, length of employment and other factors. For example, a higher debt
ratio may be acceptable with a lower loan-to-value ratio. Accordingly, the
Company may classify in a more favorable credit grade category certain
mortgage loans that, in the absence of such compensating factors, would
satisfy only the criteria of a less favorable risk category.
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MORTGAGE ORIGINATION
The following table shows mortgage loan origination volume by type of loan
for each of the four years ended December 31, 1994, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1994 1995 1996 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
CONVENTIONAL LOANS:
Volume..................... $43,293,573 $48,366,929 $ 48,102,840 $ 47,428,400
Percentage of total volume. 100.0% 83.4% 44.5% 35.55%
FHA/VA LOANS:
Volume..................... -- $ 5,323,313 $ 24,810,101 $ 33,324,400
Percentage of total volume. -- 9.2% 22.9% 25.0%
SUB-PRIME LOANS:
Volume..................... -- $ 4,284,375 $ 35,290,148 $ 52,748,500
Percentage of total volume. -- 7.4% 32.6% 39.5%
TOTAL LOANS:
Volume..................... $43,293,573 $57,974,617 $108,203,089 $133,501,300
Number of Loans............ 329 503 1,073 1,585
Average Loan Size.......... $ 131,591 $ 115,257 $ 100,841 $ 84,228
</TABLE>
GEOGRAPHIC EXPANSION
The Company has expanded its Branch Network from 7 branches in four states
in December 1995, to 15 retail branch offices in 8 states and the Commonwealth
of Puerto Rico as of the date hereof. The Company is currently licensed as a
mortgage banking company and doing business in seven additional states with
applications to become licensed pending in an additional 11 states. The
Company plans to continue the expansion of its Branch Network as opportunities
present themselves. Additional branch offices will allow the Company to focus
on developing contacts with individual borrowers, local brokers and referral
sources, such as accountants, attorneys and financial planners, with a view
toward expanding its direct consumer loan business. In addition, the Company's
expansion strategy involves: (i) targeting cities where the population density
and economic indicators are favorable for lending; and (ii) testing the target
market prior to the establishment of a branch office, where local regulations
permit, via newspaper, radio and direct mail advertising.
New locations are carefully selected. Most are in close proximity to offices
of prominent local realtors. All of the offices are operated under leases
which have terms of less than 5 years and are managed by personnel either
trained at the Company's headquarters in Syosset, New York or who possess
prior industry experience. The amount of space under these leases is based on
projected short to intermediate term needs, rather than committing Company
resources for an excessively long term. New locations are carefully selected
to provide either for contiguous in-state or related state expansion, while
others are intended to accommodate new state licenses and/or new markets.
The Company carefully evaluates several criteria as new offices are
considered, including income trends, employment data, housing affordability,
median sales prices of homes, single-family permits, local contacts,
management availability, and other housing-related characteristics.
Notwithstanding the Company's expansion of its Branch Network, approximately
91% of all of the mortgage loans originated by the Company for the year end
December 31, 1997 were to borrowers in New York, New Jersey and Missouri and
the Company's origination business is likely to contain a high concentration
in such areas for the foreseeable future.
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Puerto Rico. In November 1996, the Company opened a sales office in Puerto
Rico, initially to originate loans to "A" credit-rated borrowers, and
commenced sub-prime credit-rated mortgage originations in June 1997. It is
anticipated that the majority of mortgage originations in Puerto Rico in the
future will consist of loans to sub-prime credit-rated borrowers. These sub-
prime credit-rated mortgage originations are essentially similar to the
mortgage originations in the continental United States although the secondary
market for sub-prime mortgages is not as developed as the market for these
mortgages in the continental United States. The Company believes that Puerto
Rico offers an opportunity for the Company to increase its sub-prime mortgage
originations because Puerto Rico has high levels of home ownership and lack of
competition from other lenders for sub-prime credit mortgages. Through
December 31, 1997, the Puerto Rico office originated mortgage loans totaling
$4,350,425.
Expansion Through Strategic Alliances and Acquisitions. To date, the Company
has expanded its loan origination capabilities through internal growth.
However, in the future, it may also grow through creating strategic alliances
with other retail mortgage lenders and through acquisitions. The Company
believes that acquisitions will help the Company accelerate its pace of
growth, and will enable the Company to realize significant economies of scale
in the mortgage business. The Company will seek out candidates for alliances
and/or acquisitions which operate in geographic and product areas that
complement its existing business. As of the date of this Offering, the Company
has not entered into any commitments for any strategic alliance or
acquisition.
MARKETING AND SALES
The principal target of the Company's marketing programs are residential
home owners and home buyers. The Company uses a combination of direct
marketing and third party contacts through real estate professionals, such as
real estate brokers, attorneys, accountants, and financial planners to develop
new business.
The Company's marketing programs, at both the corporate and the branch
office level, include market-sensitive advertising in key newspapers and other
publications, public relations, promotional materials customized for consumers
and real estate professionals, collateral materials supporting particular
product promotions, educational seminars, trade shows, telemarketing, and
sponsoring or promoting other special events. The Company also conducts
seminars in conjunction with other real estate professionals, targeting
potential home buyers. All of the Company's loan representatives, consisting
of approximately 30 commissioned salespersons, support these activities with
extensive personal contact.
Telemarketing. In January, 1997, the Company formed its Retail/Telemarketing
Division to solicit loans directly from prospective borrowers. The Company
believes that the Retail/Telemarketing Division represents a significant
opportunity to expand origination volume by marketing directly to borrowers.
The division currently employs 20 telemarketers, who utilize telephone lists
from various sources.
Customer Service. A key element of the Company's marketing strategy, as well
as its operational philosophy, is to provide outstanding service to its
customers. The Company emphasizes promptness and professionalism in all its
dealings with customers. The Company believes that its ability to quickly
process loan applications provides an advantage over many banks, finance
companies, other mortgage banking firms and mortgage brokers. The Company
believes that its response to a potential mortgage customer, from the
Company's receipt of a loan application to its issuance of a final lending
commitment, is among the quickest in the industry. This capability, together
with the breadth of the Company's product offerings, has enabled the Company
to distinguish itself in a competitive market and thereby achieve growth in
revenues and profits.
OPERATIONS
Loan Approval Process. All loan applications are, depending on the type of
loan sought, forwarded to either Syosset, New York or St. Charles, Missouri
(for "A" credit-rated) or to Fairfield, New Jersey (for "B/C" credit-rated)
for processing, underwriting and closing. This centralization allows the
Company to maintain efficiency and uniformity in processing, as well as
quality control over all such loans.
The Company's review of a loan application and the related underwriting
process leading to loan approval generally includes matters such as
verification of an applicant's income and bank deposits, review of a credit
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<PAGE>
report from a credit reporting agency, receipt of a preliminary title report,
receipt of a real estate appraisal, verification of the accuracy of the
applicant's information, and compliance with the Company's underwriting
criteria and those of either FHA, VA and/or institutional investors. After
underwriting approval of an "A" credit-rated loan, the Company issues a
written loan commitment to the applicant which sets forth, among other things,
the loan amount, interest rate, fees, funding conditions and approval
expiration dates. After underwriting approval of a sub-prime credit-rated
loan, the Company issues a pre-approval letter subject to completion of
underwriting conditions.
Loan Funding and Borrowing Arrangements. The Company's mortgage loan
originations are funded by borrowings under the Warehouse Facility in the
amount of $12 million, provided by a commercial bank. The Warehouse Facility
expires on April 15, 1998, is renewable annually and is collateralized by
specific mortgage loans held for sale. The Warehouse Facility requires the
Company to repay the amount it borrows to fund a loan origination generally
within 60 days after the loan is closed or when the Company receives payment
from the sale of the funded loan, whichever occurs first. Until such sale
closes, the Warehouse Facility provides that the funded loan is pledged to
secure the outstanding borrowings.
The amount outstanding under the Warehouse Facility at December 31, 1996 was
$7,657,362 and at December 31, 1997 was $10,532,994. The amount outstanding
under the Warehouse Facility at March 11, 1998 was $10,902,705. The interest
rate on funds borrowed pursuant to the Warehouse Facility depends on the type
of mortgage financed, and is based on the bank's prime rate minus 25 basis
points for "A" credit-rated mortgage loans, and prime rate plus 25 basis
points for sub-prime credit-rated loans. At December 31, 1997, interest ranged
from 8.25% to 8.75%. The Warehouse Facility provides that the commercial bank
fund 98% of the principal amount of "A" credit-rated loans and 95% of the
principal amount of "B/C" credit-rated loans. The Warehouse Facility is
personally guaranteed by Messrs. Latessa and Wolen and contains certain
covenants requiring, among other things, maintenance of certain financial
ratios and minimum tangible net worth. In June, 1997, the Company received a
waiver from the lender of the minimum tangible net worth requirement which was
$900,000 at the time of default and modifications thereof. (See "Risk
Factors--Dependence on Warehouse Financing; Prior Default under Warehouse
Facility."). See "Use of Proceeds." The Company expects to be able to renew or
replace the Warehouse Facility when its current terms expire.
From October 1996 through June 1997, the Company had an additional $6
million warehouse line of credit with a commercial bank which was
collateralized by specific mortgage loans held for sale. The amount
outstanding under this warehouse line of credit at December 31, 1996 was
$1,936,333. Interest was variable based on prime and was 8.5% at December 31,
1996. This warehouse line of credit was personally guaranteed by Messrs.
Latessa and Wolen and contained certain covenants requiring, among other
things, maintenance of certain financial ratios and minimum tangible net
worth. The Company was not in compliance with minimum tangible net worth
requirement at December 31, 1996. The bank notified the Company that it could
not add new loans to the warehouse line of credit subsequent to June 15, 1997
and that the warehouse line of credit would be terminated subsequent to August
15, 1997. As of October 27, 1997, the Company has paid off all amounts
outstanding under this line of credit. The management of the Company does not
believe that the unavailability of this warehouse line of credit has had an
impact on the Company's ability to originate or sell mortgage loans due to the
amount available under the Warehouse Facility.
The Company continues to investigate and pursue alternative and
supplementary methods of funding its operations through the public and private
capital markets. There can be no assurances, however, that the Company will be
successful in identifying these alternatives, or in consummating any such
funding transactions with such alternative sources.
Sale of Loans. The Company markets and sells loans it originates to various
financial institutions, including, but not limited to, insurance companies,
banks, savings and loans, finance companies and finance companies, in the
secondary market. "A" credit-rated loans are sold individually or in small
groups of less than 10 loans. Sub-prime, or "B/C" credit-rated loans are sold
in pools of $1 to $2 million face amount of mortgages. Both "A" and "B/C"
credit-rated loans are sold in privately-negotiated transactions. The Company
is not required to deliver any preset amount of loans to any of its investors,
and therefore does not have any fixed
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<PAGE>
dollar commitments to any investor. However, the Company has arrangements with
certain of its institutional investors that require the investor to purchase
all loans which meet that investors guidelines for originating "A" credit-
rated loans.
The Company sells its loans to institutional investors with customary
representations and warranties covering loans sold. The Company, may be
required to repurchase loans pursuant to its representations and warranties.
The Company also may be obligated to repurchase a loan if a default occurs
within the first month following the date it was originated or if the loan
documentation is alleged to contain fraudulent misrepresentations made by the
borrower. To date, the Company has never been required to repurchase a loan.
In addition, in certain circumstances, if a loan is repaid within the first 12
months of the sale of the loan, the Company may be responsible for a partial
repayment of premiums. To date, the amount of premiums that had to be repaid
in any year has been less than 1% of the Company's total revenue.
Revenue Generated Upon Sale of the Loan. The Company's sale of mortgage
loans, together with servicing rights, to institutional investors generates
revenues based on the difference between the value of the loan to the
investors (which includes a servicing release premium, which is typically
between 1% and 2 1/2% of the mortgage's principal amount) and the Company's
cost basis for such loan, which is generally the principal amount of the loan
funded by the Company adjusted for origination fees and costs. The Company
attempts to maximize its revenue on loan sales by closely monitoring
institutional purchasers' requirements and focusing on originating the types
of mortgage loans for which institutional purchasers tend to pay higher
prices.
The Company does not combine and sell its mortgage originations to investors
in private placements or in public offerings as asset-backed securities.
Quality Control. A significant element of the Company's quality control
process is that the Company's underwriting personnel function independently of
the Company's loan officers. The Company believes that the implementation and
enforcement of its comprehensive underwriting guidelines and its quality
control program are a significant element in the Company's ability to
originate quality loans that are attractive to the secondary market. The
Company's quality control process examines branch offices and approximately
10% of all loans that were originated in order to enhance the ongoing
evaluation of the loan processing function. In conducting branch examinations,
the quality control process reviews the loan applications for compliance with
federal and state and any institutional lending standards, which may involve
reverifying employment and bank information and obtaining separate credit
reports and property appraisals. The quality control reports are submitted
directly to an executive officer of the Company.
The Company has a training program for its sales and loan production
personnel through in-house classes which cover all aspects of making a loan.
Supervisory and other key personnel at the various branch offices are often
brought to the Syosset headquarters for extensive training; they in turn
conduct appropriate training at the local office level.
COMPETITION
The mortgage banking industry is highly competitive across the United States
and within the states where the Company conducts business. The Company's
competitors include financial institutions, such as other mortgage bankers,
state and national commercial banks, savings and loan associations, credit
unions, insurance companies, and other finance companies. Most of these
competitors are substantially larger and have considerably greater financial,
technical, and marketing resources than the Company. In addition, many
financial service organizations have formed networks for loan origination.
Competition in the mortgage banking industry can take many forms, including
convenience in obtaining a loan, customer service, marketing and distribution
channels, amount and term of the loan, and interest rates. The Company
believes that it is able to compete on the basis of providing prompt and
responsive service and offering competitive loan programs to borrowers. The
Company's underwriters have the flexibility to deviate from the
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<PAGE>
Company's underwriting guidelines when an exception or upgrade is warranted by
a particular loan applicant's situation, such as evidence of a strong mortgage
repayment history relative to a weaker overall consumer-credit repayment
history.
Since there are significant costs involved in establishing a network of
retail branches, such as the Company's Branch Network, there are potential
barriers to market entry for any company seeking to provide a full range of
mortgage banking services. No single lender or group of lenders has, on a
national level, achieved a dominant or even a significant share of the market
with respect to loan originations.
INFORMATION SYSTEMS
The Company continues to design and integrate into its operations the
ability to access critical information for management on a timely basis. The
Company uses various software programs designed specifically for the mortgage
lending industry. Each branch office provides headquarters and senior
management with productivity and other key data. The information system
provides weekly and monthly detailed information on loans in process, fees,
commissions, closings, detailed monthly financial statements and all other
aspects of running and managing the business. The Company anticipates using
proceeds of the Offering for upgrades and improvements of the information
system, including the capability to obtain loan and other information from
branches on a daily basis. The cost of implementing these upgrades and
improvements is estimated to be $300,000 including both software, hardware and
management information systems personnel for all locations.
PROPERTY
The Company maintains 15 leased locations in nine states and the
Commonwealth of Puerto Rico. All of the Company's leases are for terms of 5
years or less in order to minimize capital requirements and retain operating
flexibility. The table below provides details as to each location.
FACILITY LEASE DATA
<TABLE>
<CAPTION>
CURRENT
SIZE IN MONTHLY COST
CITY/STATE LOCATION SQUARE FEET LEASE COST SQ. FT. LEASE TERM OFFICE TYPE
- - ---------- ---------------------- ----------- ---------- ------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C>
ARKANSAS (1)
Little Rock, AR........ 100 N. Rodney Parham 1100 $1,500 $16.36 2/1/97-1/31/2000 Branch
CONNECTICUT (1)
Torrington, CT......... 760 East Main Street 800 675 10.13 7/1/97-6/30/98 Branch
FLORIDA (1)
Ft. Meyers, FL 10051 McGregor 800 809 9.45 11/3/98-12/1/99 Branch
ILLINOIS (1)
Shattuc, IL............ 38 Harbor Drive 400 500 10.50 7/1/96-8/31/99 Branch
MISSOURI (3)
St. Charles, MO........ 2001 Golfway Dr 2,000 1,172 7.03 4/1/97-2/28/2001 Branch
Des Peres, MO.......... 1181 Manchester Rd 2,000 1,675 13.28 6/1/96-5/31/2001 Branch
Hannibal, MO........... 1239 N. Main Street 700 650 11.25 4/97-1/31/98 Branch
NEW JERSEY (1)
Sub-prime Lending
Fairfield, NJ.......... 100 Passaic 4,000 5,821 17.46 12/1/95-12/21/2001 Headquarters/Branch
NEW YORK STATE (4)
Corporate
Syosset, NY............ 6851 Jericho Tpke 6,623 6,700 15.40 6/1/96-6/30/99 Headquarters/Branch
Hauppauge, NY.......... 517 Rt. 111 1,270 1,482 14.00 3/1/96-2/28/98 Branch
Centereach, NY......... 2367 Middle Country Rd 1,000 1,300 15.60 10/1/96-11/30/99 Branch
Staten Island, NY...... 1667 Richmond Rd 400 1,300 19.19 1/1/98-12/31/99 Branch
PENNSYLVANIA (1)
Scranton, PA........... 538 Spruce St. 700 700 12.00 10/1/97-9/30/98 Branch
PUERTO RICO (1)
Hato Rey, PR........... Royal Bank Center 750 1,262 19.20 8/1/97-7/31/2000 Branch
OHIO (1)
Cleveland, OH.......... 925 Euclid Ave. 1193 1,292 13.00 1/1/98-1/31/2001 Branch
</TABLE>
34
<PAGE>
GOVERNMENT REGULATIONS
The Company's business is subject to extensive and complex rules and
regulations of, and examinations by, various federal, state and local
government authorities. These rules and regulations impose obligations and
restrictions on the Company's loan originations, credit activities and secured
transactions. In addition, these rules limit the interest rates, finance
charges and other fees the Company may assess, mandate extensive disclosure to
the Company's customers, prohibit discrimination and impose multiple
qualification and licensing obligations on the Company. The Company's loan
origination activities are subject to the laws and regulations in each of the
states in which those activities are conducted and are also subject to various
federal laws, including the Federal Truth-in-Lending Act and Regulation Z
promulgated thereunder, the Homeownership and Equity Protection Act of 1994,
the Federal Equal Credit Opportunity Act and Regulation B promulgated
thereunder, the Fair Credit Reporting Act of 1970, the Real Estate Settlement
Procedures Act of 1974 and Regulation X promulgated thereunder, the Fair
Housing Act, the Home Mortgage Disclosure Act and Regulation C promulgated
thereunder and the Federal Debt Collection Practices Act, as well as other
Federal and State statutes and regulations affecting the Company's activities.
These rules and regulations, among other things, impose licensing
obligations on the Company, establish eligibility criteria for mortgage loans,
prohibit discrimination, provide for inspections and appraisals of properties,
require credit reports on prospective borrowers, regulate payment features,
mandate certain disclosures and notices to borrowers and, in some cases, fix
maximum interest rates, fees and mortgage loan amounts. Failure to comply with
these requirements can lead to revocation of its mortgage banking license in
the states where the Company is licensed and loss of approved status for
participation in government sponsored programs (such as the FHA and VA loans),
demands for indemnification or mortgage loan repurchases, certain rights of
rescission for mortgage loans, class action lawsuits and administrative
enforcement actions by federal and state governmental agencies. See
"Business--Government Regulation."
Although the Company believes that it has systems and procedures to insure
compliance with these requirements and believes that it is currently in
compliance in all material respects with applicable federal, state and local
laws, rules and regulations, there can be no assurance of full compliance with
current laws, rules and regulations or that more restrictive laws, rules and
regulations will not be adopted in the future that could make compliance
substantially more difficult or expensive. In the event that the Company is
unable to comply with such laws or regulations, its business, prospects,
financial condition and results of operations may be materially adversely
affected.
Members of Congress, government officials and political candidates have from
time to time suggested the elimination of the mortgage interest deduction for
federal income tax purposes, either entirely or in part, based on borrower
income, type of loan or principal amount. Because many of the Company's loans,
the interest on which may be currently tax deductible, are made to borrowers
for the purpose of consolidating consumer debt or financing other consumer
needs, some of the competitive advantage of such loans when compared with
alternative sources of financing, could be eliminated or seriously impaired by
such government action. Accordingly, the reduction or elimination of these tax
benefits could have a material adverse effect on the demand for mortgage loans
of the kind offered by the Company.
EMPLOYEES
As of December 31, 1997 the Company had 127 employees, substantially all of
whom were full-time employees. Of these, approximately 45 were employed at the
Company's Syosset, New York headquarters, and 82 were employed at the
Company's branch offices. Approximately 30 of the Company's employees are
commission-based loan officers. None of the Company's employees are
represented by a union. The Company considers its relations with its employees
to be satisfactory.
35
<PAGE>
LEGAL PROCEEDINGS
The Company is a defendant in a legal proceeding brought by two former
employees, alleging breach of contract in connection with establishing and
operating a branch office. This action is captioned as Stanton v. Mortgage
Plus Equity and Loan Corp., and was brought in the Supreme Court of the State
of New York, Nassau County. The plaintiffs sought a preliminary injunction and
damages in the amount of $1,257,000 plus costs and disbursements. The
preliminary injunction has been denied, but the remaining claims are still
pending. This action is currently in the discovery stage, which is tentatively
scheduled to be completed by the end of April, 1998. The Company believes that
the action is without merit and the Company is vigorously defending this
action.
Apart from the proceeding described above, in the ordinary course of its
business, the Company is from time to time subject to various legal
proceedings. The Company does not believe that any of these legal proceedings
arising in the ordinary course, individually or in the aggregate, will have a
material adverse effect on the business, financial condition or results of
operations of the Company.
36
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of the Company's directors
and persons nominated to become directors and executive officers and the
positions they hold with the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Steven M. Latessa 42 Chief Executive Officer, President and
Chairman of the Board of Directors
Cary Wolen 36 Chief Operating Officer, Secretary,
Treasurer and Director
Jon P. Blasi 41 Chief Operating Officer B/C Lending
Division and Director
Daniel Intemann 38 Nominee for Director
</TABLE>
STEVEN M. LATESSA co-founded the Company in 1987 and is the Company's Chief
Executive Officer, President and Chairman of the Board of Directors.
CARY WOLEN co-founded the Company in 1987 and is the Company's Chief
Operating Officer, Chief Financial Officer and Director.
JON P. BLASI has been Chief Operating Officer of the Company's "B/C" Lending
Division since March 1996 and from November 1995 through March 1996, Mr. Blasi
was its Executive Vice President. In January 1998, Mr. Blasi was appointed as
a Director. From January 1991 through November 1995, Mr. Blasi was Director of
Northeast Operations for New Jersey Mortgage and Investment Corporation. From
1987 through 1991, Mr. Blasi was President of Jordan Construction &
Development, a construction company, and Jordan Interests, a finance company,
both located in New Jersey. From 1983 through 1987, Mr. Blasi was President of
Credit Company of America, Inc., a real estate investment and management firm
("CCA"). In January 1988, in connection with the sale of promissory notes by
CCA, Mr. Blasi entered a plea of nolo contendere to a violation of the Texas
State Securities Act. In March 1996, after making full restitution to the note
purchasers in the amount of $30,000, the violation was dismissed.
DANIEL INTEMANN has been nominated to become a director of the Company upon
the consummation of the Offering. From March 1996 through the present, Mr.
Intemann is Vice President--New York Regional Sales Manager for Chase
Manhattan Bank. From July 1995 through March 1996, Mr. Intemann was Vice
President--Sales Production of Greenpoint Bank. From April 1993 through July
1995, Mr. Intemann was Vice President for Barclay's American Mortgage. From
September 1987 through April 1993, Mr. Intemann was Vice President--Lender
Express at Prudential Home Mortgage Company, Inc. Mr. Intemann received a B.A.
in Economics from the State University of New York at Oneonta in 1981.
BOARD OF DIRECTORS
The Board of Directors currently consists of Messrs. Latessa, Wolen and
Blasi. Upon completion of the Offering, the Company expects to appoint Daniel
Intemann, as a member of its Board of Directors, and, possibly, another
independent director.
Executive officers of the Company are elected annually by the Board of
Directors and serve until their successors are duly elected and qualified.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors will establish an Audit Committee prior to the
commencement of this Offering. The Audit Committee will make annual
recommendations to the Board of Directors concerning the appointment of the
independent public accountants of the Company and will review the results and
scope of the audit and other services provided by the Company's independent
auditors. A majority of the members of the Audit Committee will be independent
directors. Upon consummation of the Offering, the Board of Directors expects
to appoint Daniel Intemann and the additional independent director to the
Audit Committee.
37
<PAGE>
EXECUTIVE COMPENSATION
The following table shows all the cash and other compensation paid or to be
paid by the Company, as well as certain other compensation paid or accrued,
during the fiscal years indicated, to the Chief Executive Officer ("CEO") and
the other most highly compensated executive officers whose compensation
exceeded $100,000 in the year ended December 31, 1997.
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OTHER
--------------------------- ---- ---------- --------- -----
<S> <C> <C> <C> <C>
Steven M. Latessa........................ 1997 $130,000 $15,000
Chief Executive Officer, President 1996 $130,000 $10,000
1995 $104,920 $18,900
1994 $ 66,380 0
Cary Wolen............................... 1997 $132,080 $10,000
Chief Operating Officer, Secretary, 1996 $132,080 $ 5,000
Treasurer 1995 $113,660 $15,240
1994 $ 72,840 0
Jon P. Blasi............................. 1997 $149,999
1996 $ 47,999
1995 $ 12,500
</TABLE>
KEY MAN LIFE INSURANCE
The Company is the beneficiary of $1,000,000 key man term life insurance
policies on each of the lives of Steven Latessa, Cary Wolen and Jon P. Blasi.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation of the Company (the "Certificate") provides
that a director shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except: (i) for any breach of the director's duty of loyalty to the Company or
its stockholders; (ii) for acts or omissions not in good faith or which
involve intentional misconduct or knowing violations of law; (iii) for
liability under Section 174 of the Delaware General Corporation Law (relating
to certain unlawful dividends, stock repurchases or stock redemptions); or
(iv) for any transaction from which the director derived any improper personal
benefit. The effect of this provision in the Certificate is to eliminate the
rights of the Company and its stockholders (through stockholders' derivative
suits on behalf of the Company) to recover monetary damages against a director
for breach of the fiduciary duty of care as a director (including breaches
resulting from negligent or grossly negligent behavior) except in certain
limited situations. This provision does not limit or eliminate the rights of
the Company or any stockholder to seek non-monetary relief such as an
injunction or rescission in the event of a breach of a director's duty of
care. These provisions will not alter the liability of directors under federal
securities laws.
The Company's By-Laws provide that the Company shall indemnify each director
and such of the Company's officers, employees and agents as the Board of
Directors shall determine from time to time to the fullest extent provided by
the laws of the State of Delaware.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company receive no compensation for
service as members of the Board. It is expected that directors who are not
employees of the Company will receive, out of the 1995 Plan, options to
purchase 5,000 shares of Common Stock immediately following each annual
meeting of stockholders so long as they continue to serve as directors
following such meeting, and reimbursement of expenses incurred in connection
with attendance of Board and/or committee meetings.
38
<PAGE>
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Steven Latessa, Cary
Wolen and Jon P. Blasi. Each of the employment agreements expires on September
30, 2000, unless sooner terminated for death, physical or mental incapacity or
cause (which is defined as the uncured refusal to perform, or habitual neglect
of, the performance of the officer's duties, willful misconduct, dishonesty or
breach of trust which causes the Company to suffer any loss, fine, civil
penalty, judgment, claim, damage or expense, a material breach of the
employment agreement, or a felony conviction), or terminated by either party
with thirty (30) days' written notice, and are automatically renewed for an
additional three year term, unless cancelled at least one year prior to
expiration of the existing term. Each employment agreement provides that all
of such executive's business time be devoted to the Company. In addition, each
of the employment agreements also contain: (i) non-competition provisions that
preclude each employee from competing with the Company for a period of two
years from the date of the termination of his employment of the Company, (ii)
non-disclosure and confidentiality provisions that specify that all
confidential information developed or made known during the term of employment
shall be exclusive property of the Company, and (iii) non-interference
provisions whereby, for a period of two years after his termination of
employment with the Company, the executive shall not interfere with the
Company's relationship with its customers or employees.
Each of the employment agreements provides that the executive will receive
an initial base salary of $150,000 per annum, subject to increases of 4% per
year, commencing in 1998. Each of the executives will also be eligible for a
bonus of up to 5% of all pre-tax earnings (net income before taxes) of the
Company.
Each of the employment agreements provides that if the executive officer is
terminated for reasons other than for cause, the Company will continue to pay
his total base salary for the remainder of the term of the employment
agreement or one year, whichever is greater.
1995 PLAN
The 1995 Plan, which was adopted on September 1, 1995, is an equity
incentive plan pursuant to which shares of common stock may be issued to
employees in the form of stock options, appreciation rights, performance
shares, or other forms of equity-based awards. The 1995 Plan was adopted to
provide long-term incentives to employees and for them to participate in the
long-term growth and success of the business. 700,000 shares of Common Stock
have been reserved for issuance upon exercise of options and other awards
which may be granted under the 1995 Plan. As of the date hereof, options to
purchase an aggregate of 270,000 shares have been granted under the 1995 Plan
with exercise prices ranging from $1 per share to $3 per share. There have
been no options or other awards granted to any of the Company's executive
officers under the 1995 Plan.
401(K) PLAN
The Company does not have a pension plan. The Company has a 401(k) plan
which it put in place in 1991. The plan provides for the Company to make
annual discretionary contributions.
39
<PAGE>
CERTAIN TRANSACTIONS
Certain of the Company's offices are sub-leased from Mattituck, Inc., a
company which is owned by Messrs. Latessa, Wolen and the Estate of Anthony
Saffioti. Total lease expense paid to Mattituck for the years ended
December 31, 1997 and 1996 was approximately $158,000 and $134,000,
respectively. Rent expense paid to Mattituck, Inc. was equal to the aggregate
amount of lease payments between Mattituck, Inc. and the respective lessors.
During the period October 1, 1995 through September 30, 1996, the Company
processed and closed approximately $24.7 million of residential mortgage loans
by borrowers whose loan applications were submitted to the Company by a joint
venture, which was 50% owned by the Company and 50% owned by a non-affiliate
of the Company. The joint venture transactions did not involve any affiliates
of the Company. The Company received revenues from those loans of
approximately $92,000 and $31,000 for the years ended December 31, 1996 and
1995, respectively. The Company ended this activity on September 30, 1996.
In December 1996, the Company sold an aggregate of 1,000,000 shares of its
Common Stock at $1.00 per share, of which 900,000 shares were sold to Melville
Ventures & Associates, L.P., an investment partnership, and 100,000 shares
were sold to an additional two investors.
In March 1997, SWL, Inc., a company owned by Messrs. Latessa, Wolen and
Anthony Saffiotti, loaned the Company $278,000, at an interest rate of 14% per
year, due on March 31, 1998. In October 1997, SWL Inc. loaned the Company an
additional $500,000 at an annual rate of 9% due April 1998.
In February 1997, Messrs. Latessa and Wolen granted Jon Blasi options to
purchase an aggregate of 252,276 shares of Common Stock of the Company, one-
third of which are exercisable at $1.00 per share commencing on February 15,
1998, one-third of which are exercisable at $1.25 per share commencing
February 15, 1999, and the remaining one-third of which are exercisable at
$1.50 per share commencing on February 15, 2000. The options are exercisable
until February 15, 2000 so long as Mr. Blasi remains employed by the Company.
In October, 1997, Anthony Saffiotti, a shareholder owning 1,620,220 shares
(the "Saffiotti Shares") of Mortgage Plus, died and, pursuant to a Restated
Shareholder's Agreement (which, by its terms, was terminated upon the Merger),
his estate (the "Estate") was obligated to sell, and the Company was obligated
to purchase, all the Saffiotti Shares at a price (the "Price") that reflected
the per share book value at the time of death. Pursuant to an agreement dated
May 1, 1998, the estate of Anthony Saffiotti has agreed to waive its rights
under the Shareholders Agreement.
In December, 1997, the Company and FC Capital Corporation ("FC Corp.")
entered into an agreement (the "Term Loan Agreement") pursuant to which the
Company borrowed $1,500,000 (which, together with interest, is called the
"Borrowed Amount") based upon the Company's commitment to repay the Borrowed
Amount, on a monthly basis beginning in February, 1998, at the greater of
either $100,000 or 50% of the income generated from the Company's sale to FC
Corp. (or its designated affiliate) of qualified mortgage loans. To secure the
Company's repayment of the Borrowed Amount, the Company granted FC Corp. a
security interest in all its assets, subject to the prior interest of the
Warehouse Facility in certain mortgage loans. In addition to the Term Loan
Agreement, FC Corp. loaned $250,000 to the Company pursuant to a Working
Capital Financing Agreement, which amount, together with interest thereon, is
due and payable on the first anniversary of the Company's borrowing under the
Working Capital Financing Agreement.
In connection with the Term Loan and the Working Capital Financing
Agreement, the Company granted FC Corp. a warrant to purchase up to 888,888
shares of its Common Stock at an exercise price of $2.125 per share. The
exercise period for this warrant is for three years, commencing on the
effective date.
40
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of May 1, 1998,
concerning the beneficial ownership of the Company's Common Stock by: (i) each
person known by the Company to be the beneficial owner of more than five
percent of the outstanding Common Stock, (ii) each director and each executive
officer named in the Summary Compensation Table contained in this Prospectus,
(iii) each Selling Stockholder and (iv) all directors and executive officers
of the Company as a group. The Selling Stockholders may be deemed to be
underwriters under the federal securities laws. Each person named has sole
voting and investment power with respect to the shares indicated, except as
otherwise stated in the notes to the table:
The address of each person listed below is 6851 Jericho Turnpike, Syosset,
NY 11791 unless otherwise indicated.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO OWNED AFTER THE
OFFERING(1)(7) OFFERING(6)
----------------- SHARES BEING -----------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
------------------------ ------ ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Melville Ventures & Associates
LP(3)(4)..................... 900,000 10.7% 900,000 0 0
New Millenium(5)(4)........... 50,000 .6% 50,000 0 0
Cary Wolen(4)................. 2,343,390 27.9% 50,000 2,293,390 23.7%
Steven Latessa(4)............. 2,343,390 27.9% 50,000 2,293,390 23.7%
Jon Blasi(2)(4)............... 1,113,220 13.3% 50,000 1,063,220 11.0%
Daniel Intermann.............. -- -- -- -- --
Estate of Anthony Saffiotti... 1,200,000 14.3% -- 1,200,000 12.4%
All officers and directors as
a group...................... 5,800,000 69.1% 150,000 5,650,000 58.3%
</TABLE>
- - --------
(1) Beneficial ownership is determined in accordance with the Rule 13d-3 of
the Securities Exchange Act of 1934 and generally includes voting and
investment power with respect to securities, subject to community property
laws, where applicable. A person is deemed to be the beneficial owner of
securities that can be acquired by such person within 60 days from the
date of this Prospectus upon exercise of options or warrants. Each
beneficial owner's percentage ownership is determined by assuming that
options or warrants that are held by such person (but not those held by
any other person) and that are exercisable within 60 days from the date of
this Prospectus have been exercised. Unless otherwise noted, the Company
believes that all persons named in the table have sole voting and
investment power with respect to all shares of Common Stock beneficially
owned by them.
(2) Does not include 252,276 shares of Common Stock issuable upon exercise of
options granted to Mr. Blasi by Messrs. Latessa and Wolen. See "Certain
Transactions."
(3) Address is 201 North Service Road, Melville, New York 11747.
(4) WLB beneficially owns 420,220 shares of Common Stock. Notwithstanding that
Steven Latessa, Cary Wolen and Jon Blasi are the three (3) general
partners of WLB, Jon P. Blasi is the only general partner who has voting
and investment power with respect to the Common Stock.
(5) Address is 1 Roosevelt Ave., Port Jefferson Station, NY 11776.
(6) Does not include 888,888 shares issuable to FC Corp. pursuant to an option
to purchase such shares at $2.125 per share, commencing on May 14, 1998.
(See "Certain Transactions")
41
<PAGE>
DESCRIPTION OF SECURITIES
The following summary description of the Company's securities is qualified
in its entirety by reference to the Company's Certificate of Incorporation and
its By-Laws, copies of which have been filed as exhibits to the Registration
Statement of which this Prospectus is a part.
COMMON STOCK
The Company is authorized to issue 15,000,000 shares of Common Stock, of
which 8,394,142 shares are issued and outstanding as of the date of this
Prospectus. Each outstanding share of Common Stock is entitled to one vote,
either in person or by proxy, on all matters that may be voted upon by the
owners thereof at meetings of the stockholders.
The holders of Common Stock (i) have equal ratable rights to dividends from
funds legally available therefore, when, and if declared by the Board of
Directors of the Company, after payment of dividends to holders of preferred
stock, if any; (ii) are entitled to share ratably in all of the assets of the
Company available for distribution to holders of Common Stock upon
liquidation, dissolution or winding up of the affairs of the Company; (iii) do
not have preemptive, subscription or conversion rights, or redemption or
sinking fund provisions applicable thereto; and (iv) are entitled to one non-
cumulative vote per share on all matters on which stockholders may vote at all
meetings of stockholders. This means that holders of more than 50% of the
shares voting for the election of directors can elect all of the directors if
they choose to do so. The outstanding shares of Common Stock are, and the
shares of Common Stock offered by the Company hereby when issued will be,
fully paid and nonassessable.
Any person who seeks to acquire 10% or more of the Company's Common Stock
has to file for approval with the New York State Banking Department for
approval for Change of Control, in accordance with New York State Banking
Department regulations.
CERTAIN ANTI-TAKEOVER EFFECTS
The provisions of the Certificate and the By-laws of the Company summarized
in the succeeding paragraphs may be deemed to have anti-takeover effects and
may delay, defer or prevent a tender offer or takeover attempt that a
shareholder might consider to be in such shareholder's best interest,
including those attempts that might result in a premium over the market price
for the shares held by shareholders.
AUTHORIZED BUT UNISSUED STOCK
The authorized but unissued shares of Common Stock are available for future
issuance without shareholder approval. These additional shares may be utilized
for a variety of corporate purposes, including future public offerings to
raise additional capital, corporate acquisitions and employee benefit plans.
Except as disclosed in this Prospectus, there are no present plans,
understandings, agreements or arrangements concerning the issuance of Common
Stock.
The existence of authorized but unissued and unreserved Common Stock may
enable the Board of Directors to issue shares which could render more
difficult or discourage any attempt to obtain control of the Company by means
of proxy contest, tender offer, merger, or otherwise, and thereby protect the
continuity of the Company's management.
42
<PAGE>
NUMBER OF DIRECTORS
The By-laws provide that the number of directors shall be fixed from time to
time by resolution adopted by a majority of the directors then in office, but
may not consist of fewer than three nor more than seven members. Following the
Offering, the size of the Board of Directors is expected to be set at four
members.
REMOVAL OF DIRECTORS AND FILLING VACANCIES
The By-laws provide that a director may be removed by shareholders only for
cause with the approval of the holders of at least 66 2/3% of the total voting
power of all outstanding securities of the Company then entitled to vote
generally in the election of directors, voting together as a single class.
The Certificate and By-laws provide that, all vacancies on the Board of
Directors, including those resulting from an increase in the number of
directors, may be filled solely by a majority of the remaining directors, even
if they do not constitute a quorum. When one or more directors resign from the
Board of Directors effective at a future date, a majority of directors then in
office, including the directors who are to resign, may vote on filling the
vacancy.
LIMITATIONS ON SHAREHOLDER ACTION BY LESS THAN UNANIMOUS WRITTEN CONSENT AND
LIMITATIONS ON CALLING SHAREHOLDER MEETINGS
Under New York law, any shareholder action required or permitted to be taken
by shareholder vote may be taken with the unanimous written consent of
shareholders. The certificate of incorporation may provide, to the extent not
inconsistent with New York law, that such shareholder action may be taken upon
the written consent of less than all outstanding shares. The Certificate does
not provide for written consent by less than all the outstanding Common
Shares. Under New York law, special meetings of shareholders may be called by
the Board of Directors and such person or persons as so authorized by the
certificate of incorporation or the By-laws. In addition, the New York
Business Corporation Law ("NYBCL") provides that if, for a period of one month
after the date fixed by or under the By-laws for the annual meeting, there is
a failure to elect a sufficient number of directors to conduct the business of
the corporation and the Board of Directors fails to call a special meeting for
the election of directors, holders of 10 percent of the shares entitled to
vote in an election of directors may require the call of a special meeting for
the election of directors. The By-laws provide that special meetings of
shareholders may be called at any time by the Board of Directors, the Chairman
of the Board or the President of the Company. Shareholders are not permitted
to call a special meeting or to require that the Board of Directors call a
special meeting of shareholders. Such provision may have the effect of
delaying consideration of a shareholder proposal until the next annual meeting
unless a special meeting is called by the Board of Directors, the Chairman of
the Board or the President of the Company.
AMENDMENT OF CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
The Certificate provides that the affirmative vote of the holders of at
least 50% of the total voting power of all outstanding securities of the
Company then entitled to vote generally in the election of directors, voting
together as a single class, is required to amend provisions of the Certificate
or the By-laws, including provisions contained in the By-laws relating to the
number, election and term of directors; the removal of directors and the
filling of vacancies; the limitations on the calling of a special meeting of
shareholders; the prohibition on cumulative voting by shareholders;
indemnification of directors, officers and others; and certain supermajority
voting requirements. These voting requirements will have the effect of making
more difficult any amendment by shareholders, even if a majority of the
Company's shareholders believes that such amendment would be in their best
interests.
LIMITATION OF LIABILITY OF DIRECTORS
The Certificate provides that a director will not be personally liable for
damages to the Company or its shareholders for breach of duty as a director,
except to the extent such exemption for liability or limitation thereof
43
<PAGE>
is not permitted under the NYBCL (i.e., liability (i) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (ii) for any transaction from which he was not legally
entitled, (iii) for paying a dividend in violation of Section 510 of the NYBCL
(which, among other things, requires that dividends be paid only out of earned
surplus and prohibits dividend payments when a corporation is insolvent or
would thereby be made insolvent) or approving a stock repurchase in violation
of Section 513 of the NYBCL (which, among other things, prohibits a
corporation from purchasing or redeeming its shares out of surplus if the
corporation is insolvent or would thereby be made insolvent and places certain
restrictions on the purchase price payable by a corporation in purchasing or
redeeming its shares), (iv) for the distribution of assets to shareholders
after dissolution without provision for all known liabilities, or (v) for
making any loan to directors other than loans authorized by vote of
shareholders as required by Section 714 of the NYBCL).
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate provides that each person (and the heirs, executors, or
administrators of such person) who was or is a party or is threatened to be
made a party to, or is involved in any threatened pending or completed action,
suit or proceeding, whether civil, criminal, administrative, or investigative,
by reason of the fact that such person is or was a director or officer of the
Company or is or was serving at the request of the Company as a director or
officer of another corporation, partnership, joint venture, trust or other
enterprise, will be indemnified and held harmless by the Company to the
fullest extent permitted by the NYBCL. The Certificate further provides that
the right to indemnification includes the right to be paid by the Company for
expenses incurred in connection with any such proceeding in advance of its
final disposition to the fullest extent permitted by the NYBCL, and the right
to indemnification conferred thereunder is a contract right.
The Certificate further provides that the Company may, by action of its
Board of Directors, provide indemnification to such of the employees and
agents of the Company and such other persons serving at the request of the
Company as employees or agents of another corporation, partnership, joint
venture, trust or other enterprise to such extent and to such effect as is
permitted by the NYBCL and the Board of Directors.
Pursuant to the NYBCL, the Company has the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the Company, or is was serving at the request of the Company as a
director, officer, employee or agent of the Company against any expense,
liability or loss incurred by such person in any such capacity or arising out
of his or her status as such, whether or not the Company would have the power
to indemnify such person against such liability under the NYBCL.
The Certificate provides that (i) the rights and authority described above
are not exclusive of any other right that any person otherwise may have or
acquire and (ii) no amendment, modification or repeal of the Certificate, or
adoption of any additional provision of the Certificate or the Bylaws or, to
the fullest extent permitted by the NYBCL, any amendment, modification or
repeal of law will eliminate or reduce the effect of the provisions in the
Certificate limiting liability or indemnifying certain persons or adversely
affect any right or protection then existing thereunder in respect of any acts
or omissions occurring prior to such amendments, modification, repeal or
adoption.
BUSINESS COMBINATIONS
The Certificate of the Company contains a provision expressly electing not
to be governed by Section 912 of the NYBCL, which relates to limitations on
certain business combinations by interested shareholders.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.
44
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The 1,300,000 shares of Common Stock sold in the Offering will be freely
transferable without restriction or further registration under the Securities
Act of 1933 ("Securities Act") unless acquired by an "affiliate" of the
Company within the meaning of the Securities Act. Upon completion of the
Offering, the existing stockholders of the Company will own 6,850,000 shares
of Common Stock. Of the total of 6,850,000 shares of Common Stock held by the
existing stockholders of the Company upon the completion of the Offering, a
total of 5,650,000 shares of Common Stock currently outstanding are deemed
"restricted securities", as defined by Rule 144 under the Securities Act of
1933, as amended (the "Securities Act"), while a total of 1,100,000 shares of
Common Stock owned by the Selling Stockholders and registered for resale,
227,001 shares of Common Stock held by Vertex (a holder of the Company's stock
prior to the Merger), which cannot be sold prior to September 5, 1998, and a
total of 37,047 shares of Common Stock held by the holders of the Company's
stock prior to the Merger, which may be immediately saleable, are not deemed
"restricted securities".
In general, Rule 144 as currently in effect provides that a person who is an
affiliate of the Company (or persons whose sales are aggregated with an
affiliate), or who has beneficially owned shares for at least one year which
were issued and sold in reliance upon certain exemptions from registration
under the Securities Act ("Restricted Shares"), is entitled to sell, within
any three-month period, a number of shares that does not exceed the greater of
one (1%) percent of the then outstanding shares of Common Stock or the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain manner-
of-sale provisions, notice requirements and the availability of current public
information about the Company. However, a person who has beneficially owned
Restricted Shares for at least two years and who is not an affiliate of the
Company and who has not been an affiliate of the Company for at least three
months immediately preceding the sale may sell such shares under Rule 144
without regard to volume limitations described above.
In addition, subject to certain limitations on the aggregate offering price
of a transaction and other conditions, Rule 701 of the Securities Act ("Rule
701") may be relied upon with respect to the resale of securities originally
purchased from the Company by its employees, directors, officers, consultants
or advisors prior to the date the issuer becomes subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons. The Commission has indicated
that Rule 701 will apply to typical stock options granted by an issuer before
it becomes subject to the reporting requirements of the Exchange Act, along
with the shares acquired upon exercise of such options (including exercises
after the date of this Prospectus). The Company will become subject to the
Exchange Act reporting requirements upon commencement of this Offering.
Securities issued in reliance on Rule 701 are restricted securities and,
subject to the contractual restrictions described below, beginning 90 days
after the date of this Prospectus, may be sold by persons other than
affiliates subject only to the manner of sale provisions of Rule 144 and by
affiliates under Rule 144 without compliance with its one-year minimum holding
period requirements.
Prior to the Offering, although the shares of CTS were traded on the
Bulletin Board there has been only a very limited public market for the Common
Stock, and no predictions can be made as to the effect, if any, that market
sales of Common Stock or the availability of Common Stock for sale will have
on the market price prevailing for the Common Stock from time to time.
Nevertheless, sales of substantial amounts of Common Stock in the public
market could adversely affect prevailing market prices and could impair the
Company's ability in the future to raise additional capital.
45
<PAGE>
PLAN OF DISTRIBUTION
As soon as practicable after the Registration Statement of which this
Prospectus is a part is declared effective by the Securities and Exchange
Commission, the Company intends to commence this offering. If subscriptions
for the purchase of 1,300,000 shares of Common Stock have not been received on
or before sixty (60) days after the effective date of this Prospectus, the
offering of the Shares will be terminated and all subscription payments will
be promptly returned to investors. Subject to the provisions of applicable
federal and state securities law, the Company proposes to offer the shares of
Common Stock to the public on a best efforts basis through its directors and
executive officers. Such persons will not receive any underwriting discount,
commission or other form of remuneration in connection with this offering.
Although the Company has made no arrangements with any brokerage or dealers
concerning the distribution of the securities offered hereby, it may do so in
the future and pay a selling commission or allow a discount up to a maximum of
10% of the Offering in customary amounts. In an offering conducted on a best-
efforts basis, such as the one made pursuant to this Prospectus, the selling
parties are committed to devote their time and attention to the sale of the
offered securities, but have no commitment to sell any securities or to
purchase any securities if there is insufficient investment interest from the
public.
The Selling Stockholders propose to offer shares of the Company's Common
Stock directly to the public concurrently with the offering of shares of
Common Stock by the Company, but subject to the Company's sale of the minimum
number of shares. The Company has agreed to perform certain ministerial acts
necessary to facilitate such offering in an efficient manner. There is no
minimum purchase requirement with respect to the Common Stock offered by the
Selling Stockholders and no arrangements have been made to escrow any portion
of the proceeds from such sale. Immediately upon receipt of a subscription for
the Common Stock offered by the Selling Stockholders, such transaction will be
executed by the Company's Transfer Agent, and a certificate representing the
purchased shares will be mailed by first class mail to the subscriber and the
proceeds of the sale distributed to the Selling Stockholder. Selling
Stockholders may not sell their shares of Common Stock until the Company sells
the 1,300,000 shares required by the Offering.
All securities offered hereby will be sold only for cash. At such time as
the registration statement of which this Prospectus is a part is declared
effective, a written confirmation will be physically mailed, together with a
copy of this Prospectus, to each person who previously submitted an indication
of interest, directing such person to complete, date, sign and return two
copies of the subscription agreement (together with the applicable
subscription payment) to the Escrow Agent.
Within five days of its receipt of a subscription agreement and subscription
payment, a written confirmation will be sent by first class mail to notify the
subscriber of the extent, if any, to which, such subscription has been
accepted; however, no shares of Common Stock will be sold or issued prior to
the receipt of subscriptions for 1,300,000 shares. Not more than ten (10) days
after the offering of 1,300,000 shares of Common Stock has been sold, a
subscriber's Common Stock certificate will be mailed by first class mail. The
Company shall not use the proceeds paid by any investor until the Common Stock
certificate evidencing such investment has been mailed.
SUMMARY OF ESCROW AGREEMENT
The Company intends to enter into an Escrow Agreement with American Stock
Transfer and Trust Company. The following is a summary of certain provisions
of the Escrow Agreement and is not necessarily complete. References are made
to the copy of the Escrow Agreement filed as an exhibit to the Registration
Statement and the following summary is qualified in all respects by such
reference.
The Escrow Agreement will be entered into for the express purpose of
complying with the provisions of Rule 10b-9 of the Exchange Act. Promptly
following its receipt thereof, the Company will deposit with the Escrow Agent
all of the proceeds received by the Company with respect to the Offering until
1,300,000 shares of Common Stock have been sold. Until 1,300,000 shares are
sold, all offering proceeds will be deposited by the Escrow Agent into a
separate bank account established and maintained by the Escrow Agent for the
sole and exclusive benefit of the purchasers of the Shares offered hereby. No
interest will be paid on amounts deposited with the Escrow Agent.
46
<PAGE>
All shares of Common Stock held under the Escrow Agreement will be treated
as authorized but unissued shares of the Common Stock of the Company.
Purchasers will not have any rights as stockholders of the Company until the
conditions of the escrow are fulfilled. While held under the Escrow Agreement,
no transfer or other disposition of the shares of Common Stock or any interest
relating thereto, is permitted other than by will or by the laws of descent
and distribution or pursuant to a qualified domestic relations order as
defined by the Internal Revenue Code of 1986, as amended, or Title I of the
Employee Retirement Income Security Act, or the rules thereunder.
All offering proceeds held in the Escrow Account will be released by the
Escrow Agent to the Company and certificates representing the shares of Common
Stock will be issued and delivered to the persons entitled thereto immediately
upon the receipt by the Escrow Agent of a signed representation from the
Company together with such other evidence acceptable to the Escrow Agent that
the offering of 1,300,000 shares of Common Stock has been completed.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Ruskin, Moscou, Evans & Faltischek, P.C., Mineola, New
York.
EXPERTS
The financial statements of Mortgage Plus Equity and Loan Corp., as of
December 31, 1997 and for each of the two years in the period then ended
included elsewhere in the Prospectus, have been audited by Richard A. Eisner &
Company, LLP, independent auditors, as set forth in their report thereon
appearing herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the United States Securities and Exchange
Commission (the "Commission") a Registration Statement on Form SB-2 (the
"Registration Statement") under the Securities Act with respect to the shares
of Common Stock offered hereby. This Prospectus, which forms a part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and such exhibits and
schedules, which may be inspected without charge at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at Northwestern Atrium Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661-2511 or Seven World Trade Center, New York, New York
10048. Copies of such material may also be obtained at prescribed rates from
the Public Reference Section of the Commission in Washington, D.C. 20549.
Statements contained in the Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance,
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference. The Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding the
Company; the address of such site is http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and such interim reports as it deems
appropriate or as may or may not be required by law.
The Company will provide without charge to each person who receives this
Prospectus, upon written or oral request of such person, a copy of the
Registration Statement (excluding exhibits) by contacting the Company at 6851
Jericho Turnpike, Suite 246, Syosset, New York 11791, telephone (516) 364-
2700, attention: Chief Financial Officer.
47
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Independent Auditors' Reports......................................... F-2
Financial Statements:
Balance Sheet at December 31, 1997.................................. F-3
Statements of Operations for the years ended December 31, 1996 and
1997............................................................... F-4
Statements of Stockholders' Equity/Capital Deficiency for the years
ended December 31, 1996 and 1997................................... F-5
Statements of Cash Flows for the years ended December 31, 1996 and
1997............................................................... F-6
Notes to Financial Statements......................................... F-7-F-17
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Mortgage Plus Equity and Loan Corp.
We have audited the accompanying balance sheet of Mortgage Plus Equity and
Loan Corp. as of December 31, 1997, and the related statements of operations,
stockholders' equity/capital deficiency and cash flows for each of the years
in the two year period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements enumerated above present fairly, in
all material respects, the financial position of Mortgage Plus Equity and Loan
Corp. as of December 31, 1997 and the results of its operations and its cash
flows for the each of the years in the two year period then ended, in
conformity with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
Florham Park, New Jersey
February 6 , 1998
With respect to Note 16
March 25, 1998
With respect to Note 17
May 1, 1998
With respect to Note 7
June 10, 1998
F-2
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN CORP.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents....................................... $ 377,709
Mortgage loans held for sale.................................... 6,300,764
Due from mortgage loan investors................................ 6,959,131
Other receivables and other assets.............................. 1,684,676
Due from stockholders........................................... 263,646
Deferred offering costs......................................... 122,283
Property and equipment--net..................................... 508,624
-----------
$16,216,833
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Warehouse line of credit........................................ $10,532,994
Loans closed to be disbursed.................................... 1,989,264
Notes payable................................................... 1,241,652
Subordinated debt............................................... 878,000
Obligation under capital lease.................................. 193,184
Accounts payable and accrued expenses........................... 786,158
-----------
Total liabilities........................................... 15,621,252
-----------
Commitments (Note 16)
Stockholders' equity:
Preferred stock--$.001 par value; authorized 1,000,000 shares,
issued and outstanding none..................................
Common stock--$.001 par value; authorized 20,000,000 shares;
issued and outstanding 8,056,000 shares...................... 8,056
Additional paid-in capital.................................... 664,227
Accumulated deficit........................................... (76,702)
-----------
Total stockholders' equity.................................. 595,581
-----------
$16,216,833
===========
</TABLE>
See notes to financial statements
F-3
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
REVENUES:
Mortgage origination, net............................ $5,307,353 $7,147,163
Interest earned...................................... 663,322 860,424
---------- ----------
Total revenues..................................... 5,970,675 8,007,587
---------- ----------
EXPENSES:
Commissions, wages and benefits...................... 3,715,169 5,549,795
Selling and administrative........................... 1,770,894 2,567,371
Interest expense..................................... 707,952 967,123
---------- ----------
Total expenses..................................... 6,194,015 9,084,289
---------- ----------
OPERATING LOSS......................................... (223,340) (1,076,702)
OTHER INCOME........................................... 1,000,000
---------- ----------
NET LOSS............................................... (223,340) (76,702)
========== ==========
Basic loss per share................................. $ (0.03) $ (0.01)
========== ==========
Pro forma for 1996:
Historical net loss shown above...................... (223,340)
Pro forma benefit for income taxes for the period
prior to the termination of the S corporation sta-
tus................................................. (33,000)
----------
PRO FORMA NET LOSS .................................... $ (190,340)
==========
Pro forma basic loss per share......................... $ (0.03)
==========
</TABLE>
See notes to financial statements
F-4
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN CORP.
STATEMENT OF STOCKHOLDERS' EQUITY/CAPITAL DEFICIENCY
<TABLE>
<CAPTION>
ADDITIONAL
NUMBER OF COMMON PAID-IN ACCUMULATED
SHARES STOCK CAPITAL DEFICIT TOTAL
--------- ------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE AS OF JANUARY 1,
1996...................... 7,000,000 $7,000 $(363,611) $(356,611)
Shares transferred by a
principal stockholder to
an officer................ $ 41,000 41,000
Issuance of common stock... 1,000,000 1,000 868,903 869,903
S corporation distribution. (43,558) (43,558)
Net loss................... (223,340) (223,340)
Transfer of S corporation
cumulative loss to
additional paid-in capital
upon the Company's change
to C corporation status... (630,509) 630,509
--------- ------ -------- --------- ---------
BALANCE AS OF DECEMBER 31,
1996...................... 8,000,000 8,000 279,394 -- 287,394
Shares issued in payment of
interest on a subordinated
debt...................... 56,000 56 55,944 56,000
Issuance of warrants in
connection with a note
payable................... 328,889 328,889
Net loss................... (76,702) (76,702)
--------- ------ -------- --------- ---------
BALANCE AS OF DECEMBER 31,
1997...................... 8,056,000 $8,056 $664,227 $ (76,702) $ 595,581
========= ====== ======== ========= =========
</TABLE>
See notes to financial statements
F-5
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN CORP.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................. $ (223,340) $ (76,702)
Adjustments to reconcile net loss to net cash used in
operating activities:
Shares issued in payment of interest expense......... 56,000
Shares transferred by a principal stockholder to an
officer............................................. 41,000
Depreciation......................................... 39,996 79,773
Changes in:
Mortgage loans held for sale........................ (4,781,181) 4,235,230
Due from mortgage loan investors.................... (6,959,131)
Other receivables and other assets.................. (189,614) (1,452,834)
Accounts payable and accrued expenses............... (85) 93,399
---------- ----------
Net cash used in operating activities.............. (5,113,224) (4,024,265)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment................... (253,890) (267,167)
Advances to stockholders.............................. (29,562) (234,084)
---------- ----------
Net cash used in investing activities............... (283,452) (501,251)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from warehouse lines of credit........... 4,062,670 718,349
Loans closed to be disbursed.......................... 490,227 1,499,037
Proceeds from subordinated debt....................... 1,278,000
Repayment of subordinated debt........................ (400,000)
Proceeds from notes payable........................... 30,000 1,171,111
Repayment of notes payable............................ (25,000) (91,959)
Proceeds from sale leaseback of equipment............. 275,000
Repayments of obligation under capital lease.......... (81,816)
S corporation distribution............................ (43,558)
Issuance of common stock, net......................... 869,903
Issuance of warrants.................................. 328,889
Deferred offering costs............................... (122,283)
---------- ----------
Net cash provided by financing activities........... 5,384,242 4,574,328
---------- ----------
NET INCREASE (DECREASE) IN CASH........................ (12,434) 48,812
Cash and cash equivalents at the beginning of year.... 341,331 328,897
---------- ----------
CASH AND CASH EQUIVALENTS AT THE END OF YEAR........... $ 328,897 $ 377,709
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.............................................. $ 649,706 $ 909,014
========== ==========
</TABLE>
Supplemental non-cash disclosures:
In 1997, the Company issued 56,000 shares of common stock in settlement of
interest aggregating $56,000 on certain subordinated debt.
See notes to financial statements
F-6
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN CORP.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization:
Mortgage Plus Equity and Loan Corp. (the "Company") organized in 1987, is
primarily engaged in the business of originating and selling first mortgages
collateralized by single family residences. From its inception through 1993,
the Company operated as a mortgage broker. The Company, in 1994, became a
mortgage banker and in 1995, the Company commenced originating and selling
sub-prime residential first mortgages. The Company is an approved
nonsupervised mortgagee for the U.S. Department of Housing and Urban
Development, and originates substantially all of its mortgage loans in New
York, New Jersey and Missouri.
Subsequent to year-end, the Company became a wholly owned subsidiary of MPEL
Holdings Corp. (See Note 17).
Cash equivalents:
The Company considers cash equivalents to consist of short term investments
with an initial maturity of three months or less. Management mitigates credit
risk by investing in or through large financial institutions.
Revenue recognition:
The Company sells whole mortgage loans and pools of mortgage loans,
servicing released, on a non-recourse basis. Mortgage origination fees, net of
direct loan origination costs, are deferred and included in mortgage loans
held for sale, until the loans are sold. Revenue recognition from the sale of
mortgage loans on a non-recourse basis occurs when the loans are shipped to
investors pursuant to existing sales commitments. Mortgage origination revenue
is the differential between the sales proceeds including premium, if any, and
the carrying amount of the mortgage. Based upon the amount of mortgage loans
subject to recapture of premiums and the amounts the Company has previously
paid to investors as recapture of premium, management provides an allowance
for premium recapture (See Note 16).
Mortgage loans held for sale:
Mortgage loans held for sale are collateralized residential real estate
loans with a weighted average interest rate of approximately 13% as of
December 31, 1997 and are carried at the lower of cost or market on an
aggregate basis.
Included in mortgage loans held for sale are deferred origination fees of
$160,000 and deferred origination costs of $155,000.
Property and equipment:
Property and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation is provided using the straight line method over the
estimated useful lives of the assets. Leasehold improvements are amortized
over the lesser of the useful life of the asset or the remaining lease period.
Expenditures for maintenance and repairs are charged to expense; major
replacements and betterments are capitalized.
If an asset is identified as impaired, the Company estimates future cash
flows (undiscounted and without interest) which are expected to result from
the use of the asset and its eventual disposition. If the sum of the future
cash flows is less than the carrying amount of the asset, the Company
recognizes an impairment loss. No such losses have been required to be
recognized.
Loans closed to be disbursed:
Loans closed to be disbursed generally represents the amounts for which
mortgagors have signed loan and mortgage documents in order to refinance
existing mortgage obligations where, since the three day recission period has
not expired, the Company has not disbursed any funds. Upon disbursement of
funds, the mortgage loan is typically pledged as collateral under a warehouse
line of credit.
F-7
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income taxes:
Through December 30, 1996, the Company had elected for both federal and
state purposes to be treated as an S corporation and incurred only minimum
taxes at the state level. Consequently, the net earnings of the Company were
taxed directly to the stockholders rather than the Company. Effective as of
December 31, 1996, the Company terminated its S corporation status and will be
taxed as a C corporation.
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be
realized. Income tax expense is the tax payable for the period and the change
during the period in deferred tax assets and liabilities. (See Note 11).
Advertising expenses:
The Company expenses advertising costs which consist primarily of
promotional items and print media. Total advertising expense for the years
ended December 31, 1997 and 1996 was $232,000 and $133,000, respectively.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Stock-based compensation:
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("FAS 123") allows companies to either expense the
estimated fair value of employee stock options or to continue to follow the
intrinsic value method set forth in Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees" ("APB 25") but disclose the pro
forma effects on net income (loss) had the fair value of the options been
expensed. The Company has elected to apply APB 25 in accounting for its
employee stock options incentive plans.
Per share data:
Basic loss per share was computed based on the net loss (pro forma in 1996)
and the weighted average number of shares of common stock outstanding during
the year. Diluted loss per share is not shown since it would be anti-dilutive.
The weighted average number of shares outstanding for the years ended December
31, 1997 and 1996 was 8,025,315 and 7,002,732, respectively.
F-8
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. OTHER RECEIVABLES AND ASSETS
Other receivables and assets as of December 31, 1997 consist of:
<TABLE>
<S> <C>
Officer's life insurance receivable (see Note 15)................ $1,000,000
Deferred origination costs on loans in process (see Note 1 reve-
nue recognition)................................................ 269,641
Due from employees............................................... 150,538
Mortgage fees receivable......................................... 146,853
Other............................................................ 117,644
----------
$1,684,676
==========
</TABLE>
3. DUE FROM STOCKHOLDERS
At December 31, 1997, certain stockholders had been advanced $263,646. These
advances are non-interest bearing and due on demand.
4. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1997 consist of :
<TABLE>
<CAPTION>
ASSET
LIVES
----------
<S> <C> <C>
Equipment and furniture................................. 5-10 Years $177,284
Equipment subject to capital lease...................... 5 Years 300,389
Leasehold improvements.................................. 5 Years 196,690
--------
674,363
Accumulated depreciation and amortization............... (165,739)
--------
$508,624
========
</TABLE>
Included in depreciation expense for the year ended December 31, 1997 is
depreciation expense on equipment under capital lease of $45,000.
5. WAREHOUSE LINE OF CREDIT
The Company has a $12 million warehouse line of credit expiring April 15,
1998, with a commercial bank which is renewable annually and collateralized by
specific mortgage loans held for sale and amounts due from mortgage loan
investors. Interest is variable based on the prime rate and type of collateral
and ranged from 8-1/4% to 8-3/4% as of December 31, 1997. This warehouse line
of credit is personally guaranteed by the Company's principal shareholders and
contains certain covenants requiring, among other things, maintenance of
certain financial ratios and minimum tangible net worth. As of December 31,
1997, the Company has received a waiver from the lender of certain defaults of
restrictive covenants in the credit agreement (See Note 17).
As of December 31, 1997, based upon the most restrictive covenants, the
Company is precluded from declaring or paying any cash dividends.
6. DEFERRED OFFERING COSTS:
The Company has incurred $122,000 in incremental costs in connection with a
proposed initial public offering of common stock. Upon consummation of the
offering, the deferred costs will be charged against the gross proceeds of the
offering or, if not consummated, they will be charged to expense. The Company
will incur substantial additional offering costs.
F-9
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. NOTES PAYABLE
Notes payable as of December 31, 1997 consists of:
<TABLE>
<S> <C>
Note payable in monthly installments of the greater of $100,000
or 50% of the premiums on mortgages sold to the lender, plus
interest at the prime rate plus 1% per annum (9-1/2% as of
December 31, 1997) due April 1999 and collateralized by all
unencumbered assets (a)....................................... $1,171,111
Note payable in monthly installments of $2,083 plus interest at
the prime rate plus 2% per annum (10-1/2% at December 31,
1997), due March 1999. Guaranteed by the principal stockhold-
ers and collateralized by a $50,000 cash account.............. 37,006
Note payable in monthly installments of $4,104 plus interest at
the prime rate plus 2% per annum (10-1/2% as of December 31,
1997) due October 1998........................................ 33,535
----------
$1,241,652
==========
</TABLE>
- - --------
(a) In connection with this note payable, which was issued in December 1997,
the Company issued warrants to purchase 888,888 shares of common stock.
These warrants are exercisable the earlier of August 1998 or the effective
date of a public offering and expire three years later. The exercise price
is $1.00 per share prior to the public offering and, subsequently, 85% of
the public offering price. Based on an anticipated public offering price
of $5.00 per share the Company originally valued the warrants at $666,666.
Prior to any sale of shares which were registered with the SEC on May 15,
1998, the Company on June 10, 1998 filed a post effective amendment to the
registration statement reducing the offering price to $2.50 per share. As
a result thereof, the Company has lowered the value of the warrants to
$328,889 and has adjusted the accompanying financial statements to reflect
such value. Accordingly, the note payable has been reduced by the $328,889
discount and additional paid-in capital increased by the same amount. The
imputed interest rate on the note is 46% per annum. In January 1998 the
Company borrowed an additional $250,000 under the working capital
facility. The Company's agreement requires that it comply with various
operating and financial covenants.
Minimum principal payments on the notes payable during the years ended
December 31, 1998 and 1999 are $857,824 and $383,828, respectively.
8. SUBORDINATED DEBT
In March 1997, the Company borrowed $778,000 ($313,000 from affiliates of
certain of the Company's principal stockholders). These borrowings, due March
1998, are not collateralized and are subordinated to the notes payable and the
warehouse line. Interest on these notes is 14% per annum. In July 1997, the
Company issued 28,000 shares of its common stock to a note holder in
satisfaction of the interest due at maturity on $400,000 of this debt. The
shares were valued at $56,000, representing the interest due on this
obligation based upon its stated maturity date. In December 1997, the $400,000
obligation was repaid with a portion of the proceeds of the $1,500,000 note
payable (see Note 7). In October 1997, the Company borrowed $500,000 from an
affiliate of certain principal stockholders. This borrowing, due July 1998, is
collateralized by the officer's life insurance claim receivable and is
subordinated to the notes payable and warehouse line. Interest is 9% per
annum.
F-10
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. OBLIGATION UNDER CAPITAL LEASE
As of December 31, 1997, the future minimum lease payments under a capital
lease expiring December 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1998.............................................................. $108,024
1999.............................................................. 108,024
--------
216,048
Less amount representing interest................................. (22,864)
--------
$193,184
========
</TABLE>
This obligation is guaranteed by the Company's principal stockholders. The
obligation under capital lease is the result of the Company entering into a
sale leaseback transaction. Since the lease covers substantially all of the
economic life of the equipment, it has been recorded as a capital lease and no
gain or loss on the sale has been recognized.
10. RELATED PARTY TRANSACTIONS
The Company subleases certain of its offices from an affiliate (see Note
16). Total related party lease expense paid approximated $158,000 and $134,000
for the years ended December 31, 1997 and 1996, respectively. The Company pays
rent to the affiliate based on its proportionate share of the amount paid by
the affiliate to the ultimate lessor.
During 1997, the Company accrued, but did not pay, approximately $33,000 of
interest expense on the subordinated debt due to related parties (see Note 8).
The liability is included in accounts payable and accrued expenses.
During 1996, the Company processed and closed approximately $18.3 million of
residential mortgage loans for an affiliate for which it received fees of
approximately $92,000. The Company ended this activity on September 30, 1996.
11. INCOME TAXES
The components of deferred tax assets and liabilities as of December 31,
1997 are as follows:
<TABLE>
<S> <C>
Deferred tax asset:
Deferred mortgage origination fees................................ $ 67,100
Net operating loss carryforward................................... 564,500
Other............................................................. 8,400
--------
Total deferred tax asset......................................... 640,000
Deferred tax liability--deferred mortgage origination costs........ (113,200)
--------
Net deferred tax asset............................................. 526,800
Valuation allowance................................................ 526,800
--------
$ --
========
</TABLE>
F-11
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. INCOME TAXES (CONTINUED)
As a result of the Company becoming a C corporation for income tax purposes
as of December 31, 1996, it recognized a deferred tax asset valuation
allowance of $99,000 as of such date. In 1997, the valuation allowance
increased by $427,800.
The difference between the tax benefit computed at the statutory federal
income tax rate on the Company's net loss and the Company's effective tax rate
benefit for the years ended December 31, 1996 (on a pro forma basis) and 1997
is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
----- ------
<S> <C> <C>
Statutory federal income tax rate........................... (34.0)% (34.0)%
Increase in valuation allowance............................. 11.8 438.8
Non-deductible meals and entertainment...................... 4.1 24.3
Non-taxable proceeds from officer's life insurance claim.... (443.3)
Other....................................................... 3.3 14.2
----- ------
Effective income tax rate benefit........................... (14.8)% --
===== ======
</TABLE>
As of December 31, 1997, the Company had a net operating loss carryforward
of $1,300,000 expiring in 2012.
12. STOCKHOLDER'S EQUITY/CAPITAL DEFICIENCY
Common stock:
During 1996, a principal stockholder of the Company transferred 693,000
shares to an officer of the Company. The estimated fair value of $41,000 was
charged to operations and credited to additional paid-in capital.
On December 31, 1996, the Company issued 1,000,000 shares of common stock in
a private placement at a price of $1.00 per share to an unaffiliated investor.
Net proceeds of this private placement were approximately $869,000 which were
used for Company operations.
The Company has reserved 1,288,888 shares of its common stock for issuance
upon exercise of incentive stock options and warrants issued in connection
with a note payable.
Stock options:
On December 31, 1995, the Board of Directors approved the Equity Incentive
Plan (the "Plan") and, as amended, authorized the issuance of up to 700,000
shares of common stock of the Company upon the exercise of incentive stock
options ("options") which may be granted for a maximum of ten years pursuant
to the Plan. The Plan provides primarily for the granting of options to
certain key employees and exercise prices at not less than the estimated fair
value at date of grant.
On November 1, 1996, 185,000 options were granted. The options were issued
at exercise prices equal to estimated fair value of the Company's common stock
on the grant date of $1.00 per common share. These options vest ratably on the
anniversary of the date of grant through November 1, 2000 (46,250 shares on
each of November 1, 1997, 1998, 1999 and 2000). The option's maximum term is
ten years. No options were forfeited or exercised during 1996 or 1997. No
options were canceled during 1996, however, options for 150,000 shares were
canceled in 1997.
In February 1998 the Company granted options to purchase 235,000 shares at
an exercise price of $3 per share.
F-12
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
12. STOCKHOLDER'S EQUITY/CAPITAL DEFICIENCY (CONTINUED)
On February 15, 1997, the principal stockholders of the Company granted an
officer options to acquire up to 378,414 shares of the Company's common stock
owned by the stockholders at exercise prices not less than the estimated fair
value of the Company's common stock at the grant date (see Note 17). The
following table summarizes information about these options which expire in
February 2000:
<TABLE>
<CAPTION>
NUMBER
OF EXERCISE
SHARES PRICE VESTING DATE
------ -------- ------------
<S> <C> <C>
126,138 $1.00 February 15, 1998
126,138 1.25 February 15, 1999
126,138 1.50 February 15, 2000
</TABLE>
The fair value of each option granted in 1996 and 1997 has been estimated on
the date of grant using the Black-Scholes options pricing model with the
following assumptions; no dividend yield, expected volatility of 0%, risk-free
interest rate of 6%, and expected lives of approximately four years for the
1996 options and three years for the 1997 options. The fair value of options
granted during 1996 and 1997 were $0.21 and $0.06 per share, respectively.
The Company applies APB 25 in accounting for its stock option incentive plan
and, accordingly, recognizes compensation expense for the difference between
fair value of the underlying common stock and the grant price of the option at
the date of grant. The effect of applying SFAS No. 123 on 1996 and 1997 pro
forma net loss is not necessarily representative of the effect on reported net
income (loss) in future years due to, among other things (1) the vesting
period of the stock options and (2) the fair value of additional stock options
in future years. Had compensation cost for the Company's stock option plan
been determined based upon the fair value at the grant date for awards granted
under the plan and by stockholders consistent with the methodology prescribed
under SFAS No. 123, the Company's net loss in 1996 and 1997 would have been
approximately $(230,000) and $(97,000), respectively.
The following table summarizes information about stock options outstanding
for which the Company has an obligation to issue shares of common stock as of
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------- ------------------------
WEIGHTED
NUMBER AVERAGE NUMBER
OUTSTANDING REMAINING WEIGHTED EXERCISABLE WEIGHTED
AS OF CONTRACTUAL AVERAGE AS OF AVERAGE
EXERCISE DECEMBER 31, LIFE EXERCISE DECEMBER 31, EXERCISE
PRICE 1997 (IN YEARS) PRICE 1997 PRICE
-------- ------------ ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$1.00 35,000 8.84 $1.00 8,750 $1.00
</TABLE>
13. BRANCH EXPENSE
During the years ended December 31, 1997 and 1996, the Company incurred
expenses of $654,000 and $556,000, respectively, in conjunction with the
expansion of the Company's lending operation through the opening of new
offices. These expenses consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1997
-------- --------
<S> <C> <C>
Commissions, wages and benefits........................... $331,000 $417,000
Selling and administrative expenses....................... 225,000 237,000
</TABLE>
F-13
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
14. RETIREMENT PLAN
The Company has a 401(k) savings plan (the "Plan") which enables employees
to make contributions on a pre-tax salary basis in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. The Plan provides
for a discretionary company contribution to be determined annually. The
Company did not make any contributions for the 1997 and 1996 Plan years.
15. OTHER INCOME
Other income represents proceeds due the Company as beneficiary under an
officer's key man term life insurance policy as a result of the death of the
officer in October 1997.
16. COMMITMENTS AND OTHER
Litigation:
In May 1997, two former employees initiated litigation alleging breach of
contract in connection with establishing and operating a branch office and are
seeking approximately $1,257,000 in damages and sought a preliminary
injunction. While the preliminary injunction has been denied, the remaining
claims are still pending. While the outcome cannot be determined, management
believes that the action is without merit and is vigorously contesting this
matter.
Leases:
The Company has various lease agreements for equipment and office space
extending through March 2004.
The following is a schedule of future minimum rental payments required under
noncancelable leases:
<TABLE>
<CAPTION>
YEARS ENDING RELATED OTHER
DECEMBER 31, PARTY LEASES LEASES
------------ ------------ ----------
<S> <C> <C>
1998................................................ $143,700 $ 205,400
1999................................................ 92,300 446,700
2000................................................ 51,300 479,200
2001................................................ 10,400 511,300
2002................................................ 479,900
Thereafter.......................................... 659,800
-------- ----------
$297,700 $2,782,300
======== ==========
</TABLE>
The Company's rent expense approximated $525,000 and $362,000 for the years
ended December 31, 1997 and 1996, respectively.
Employment agreements:
The Company entered into employment agreements with three key executives
expiring in September 2000. Under the terms of the agreements, the aggregate
initial annual compensation is $150,000 per executive. Additionally, the
agreements, among other things, include provisions for bonuses based on up to
5% of income before provision for income taxes and also provides for increases
in compensation and severance payments, provided that the officer is not
terminated for cause.
Contingency:
The Company has received an assessment from the Internal Revenue Service
(the "IRS") concerning the classification of certain workers by the Company as
independent contractors during the period 1992 through
F-14
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
16. COMMITMENTS AND OTHER (CONTINUED)
1994. This assessment totaled approximately $233,000 for employment taxes as
if the independent contractors were classified as employees during the period.
On March 25, 1998, the Company and IRS reached an agreement whereby the
Company agreed to pay the amount accrued as of December 31, 1997
(approximately $33,000).
Financial instruments with off-balance sheet risk or concentrations of credit
risk:
In the normal course of business, there are various financial instruments
which are properly not recorded in the financial statements. The Company's
risk of accounting loss due to the credit risks and market risks associated
with these off-balance sheet instruments varies with the type of financial
instrument and principal amounts. Credit risk represents the possibility of a
loss occurring from the failure of another party to perform in accordance with
the terms of a contract. Market risk represents the possibility that future
changes in market prices may make a financial instrument less valuable or more
onerous.
Certain of the investors in sub-prime mortgages require the Company to
return a portion of the sale price of the mortgage loan paid to the Company if
the sub-prime mortgagor pays off within one year. During the two years ended
December 31, 1997, the Company incurred costs of approximately $50,000 related
to the early pay-off of sub-prime mortgage loans sold to investors. The
Company does not currently believe any future recapture costs would be
significant and has provided $20,000 as an allowance for estimated future
recapture costs as of December 31, 1997.
The Company had approximately $58.4 million of mortgage loans in various
stages of process as of December 31, 1997 of which approximately $13.4 million
had been committed and rate-locked. For approximately $31.0 million of
mortgage loans held for sale and loans in process, the Company had committed
to sell them to investors. For sub-prime mortgage loans, the Company
accumulates mortgage loans into pools (usually $1 million to $2 million) and
sells the weighted average note rate to an investor. The ultimate amount of
the gain or loss on the sale of the mortgage loan is determined by the
difference between the cost of the loans and the price paid by the investor.
In connection with the sale of loans to the mortgage loan investors, the
Company normally makes representations and warranties (which are customary in
the industry) relating to, among other things, the Company's compliance with
laws, regulations, investor standards and the accuracy of information supplied
by the mortgagor and verified by the Company. In the event of a breach of
these representations and warranties, the Company would be required to
repurchase such loans. The Company did not repurchase any loans during the
period from January 1, 1996 through December 31, 1997.
Fair value of financial instruments:
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Values of Financial Instruments" ("FAS 107") requires disclosure of fair value
information about financial instruments, whether or not recognized on the
balance sheet, for which it is practicable to estimate that value. Because no
market exists for certain of the Company's assets and liabilities, fair value
estimates are based upon judgments regarding credit risk, investor expectation
of economic conditions, normal cost of administration and other risk
characteristics, including interest rate and prepayment risk. These estimates
are subjective in nature and involve uncertainties and matters of judgment and
significantly affect the estimates.
Fair value estimates are based on existing balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. The tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on the fair value
estimates and have not been considered in the estimates.
F-15
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
16. COMMITMENTS AND OTHER (CONTINUED)
The following summarizes the information about the fair value of the
financial instruments recorded on the Company's financial statements in
accordance with FAS 107.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------
CARRYING
VALUE FAIR VALUE
---------- ----------
<S> <C> <C>
Cash.................................................. $ 377,709 $ 377,709
Mortgages held for sale............................... 6,300,764 6,569,960
Due from mortgage loan investors...................... 6,959,131 6,959,131
Loans closed to be disbursed.......................... 1,989,264 1,989,264
Borrowings............................................ 12,996,941 12,996,941
</TABLE>
The methodology and assumptions utilized to estimate the fair value of the
Company's financial instruments, including the off-balance sheet instruments
are as follows:
CASH
The carrying amount of cash approximates fair value.
MORTGAGE LOANS HELD FOR SALE
The Company has estimated the fair values reported based on recent sales.
DUE FROM MORTGAGE LOAN INVESTORS
The carrying value reported approximates fair value due to the short-term
nature of the asset.
BORROWINGS AND LOANS CLOSED BUT NOT DISBURSED
The carrying value reported approximates fair value due to the short-term
nature of a significant portion of the borrowings and the variable interest
rates charged on most borrowings.
COMMITMENTS TO ORIGINATE LOANS AND LOANS IN PROCESS
Typically, the Company does not charge fees for commitments to originate
loans or to rate lock such commitments. Furthermore, the Company does not
receive fees on commitments to sell. In addition, market interest rates as of
December 31, 1997 have not changed significantly since the dates of the
commitments. Accordingly, these off-balance sheet instruments have no
estimated fair value.
Concentrations:
For the year ended December 31, 1997 and 1996, one investor accounted for
41% and five investors accounted for 84%, respectively of mortgages sold.
17. SUBSEQUENT EVENTS
MERGER
On March 5, 1998, the Company merged with a wholly owned subsidiary of
Computer Transceiver Systems, Inc. ("CTSI"), a nonoperating public company
which had 338,142 shares of common stock outstanding prior to the merger after
giving effect to a 1 for 25 reverse stock split on March 3, 1998 and a 2 for 1
stock dividend on March 4, 1998. Pursuant to the merger, CTSI acquired all of
the outstanding common stock
F-16
<PAGE>
MORTGAGE PLUS EQUITY AND LOAN CORP.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
17. SUBSEQUENT EVENTS (CONTINUED)
of the Company in exchange for 8,056,000 shares of CTSI common stock. The
merger has been accounted for as a purchase of CTSI by the Company. The
338,142 shares of CTSI outstanding have been valued at $703,948 (based upon a
$2.50 per share price) with corresponding charge to additional paid in capital
of $700,896 resulting in an increase in the Company's stockholders' equity of
$3,052 represents the estimated fair value of the net assets of CTSI at March
5, 1998. Immediately following the merger CTSI changed its name to MPEL
Holdings Corp.
The following is the pro forma stockholders' equity (unaudited) as of
December 31, 1997 assuming that the merger had taken place on such date:
<TABLE>
<S> <C>
Common stock, 8,394,142 shares outstanding at par value $.001... $ 8,394
Additional paid in capital...................................... 666,941
Accumulated deficit............................................. (76,702)
--------
$598,633
========
</TABLE>
WAREHOUSE LINES OF CREDIT
On March 20, 1998, the Company entered into a $5 million warehouse line of
credit with a lender. This warehouse line of credit is personally guaranteed
by the Company's principal stockholders and may be canceled by the lender upon
30 days notice.
On April 28, 1998, the warehouse line of credit outstanding at December 31,
1997 was reduced from $12 million to $10 million and the expiration date was
extended to July 31, 1998 (see Note 5).
STOCKHOLDERS' EQUITY
In October 1997, a stockholder owning 1,620,220 shares died and under the
terms of the stockholders' agreement, the Company was obligated to repurchase
the stock. In the Company's opinion, the purchase price was the book value of
the shares (approximately $90,000). On March 2, 1998, the Company initiated
the repurchasing of these shares and in connection therewith, such shares have
been placed in an escrow account. Concurrently, the Company declared a stock
dividend and issued 1,620,220 shares of its common stock to the existing
stockholders. The stockholders have agreed, should the Company be required to
pay more than $90,000, to surrender some or all of these shares. Accordingly,
these shares have been placed in an escrow account. In April 1998, the estate
informed the Company that it believed that it was entitled to more than book
value for these shares.
In settlement of the matter, an agreement dated May 1, 1998 was entered into
pursuant to which the stockholders' agreement was terminated and the estate
sold 420,220 shares to the Company's principal stockholders (who are also
officers of the Company) for total consideration of $551,646. Additionally,
options on 126,138 shares of the Company's Common Stock sold by the estate
have been canceled (See Note 12). As a result of this transaction, on May 1,
1998, the Company will recognize a compensation charge and credit to
additional paid in capital of approximately $341,000 representing the excess
of the fair value of the shares (estimated $2.50 per share) acquired by the
officers over the purchase price. In addition on May 1, 1998, the stock
dividend referred to above was rescinded.
F-17
<PAGE>
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY SINCE SUCH DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 18
Dividend Policy........................................................... 19
Price Range of Common Stock............................................... 19
Dilution.................................................................. 19
Capitalization............................................................ 20
Selected Financial Data................................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 26
Management................................................................ 37
Certain Transactions...................................................... 40
Principal and Selling Stockholders........................................ 41
Description of Securities................................................. 42
Shares Eligible for Future Sale........................................... 45
Plan of Distribution...................................................... 46
Summary of Escrow Agreement............................................... 46
Legal Matters............................................................. 47
Experts................................................................... 47
Additional Information.................................................... 47
Index to Financial Statements............................................. F-1
</TABLE>
Until July 27, 1998 (40 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distributions, may be required to deliver a Prospectus.
This is in addition to the obligations of dealers to deliver a Prospectus when
acting as Underwriters with respect to their unsold allotments of
subscriptions.
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
1,300,000 SHARES OF COMMON STOCK
OFFERED BY THE COMPANY
1,100,000 SHARES OF COMMON STOCK
OFFERED BY SELLING STOCKHOLDERS
MPEL HOLDINGS CORP.
COMMON STOCK
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PROSPECTUS
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JUNE 17, 1998
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 721 through 726 of the New York Business Corporation Law ("NYBCL")
provide that a corporation may indemnify any person, including officers and
directors, who are (or who are threatened to be made) parties to any action or
proceeding (except a derivative action), whether civil or criminal, by reason
of their being officers or directors or serving at the request of the
corporation as a director or officer of any other corporation or any
partnership, joint venture, trust, employee benefit plan or other enterprise,
against judgments, fines, amounts paid in settlement and reasonable expenses,
including attorneys' fees; provided that the officer or director acted in good
faith, for a purpose that such officer or director reasonably believed to be
in or, in the case of service for any other corporation or any partnership,
joint venture, trust, employee benefit plan or other enterprise, not opposed
to the best interests of the Corporation. In the case of criminal actions or
proceedings, indemnification is allowed if the officer or director had not
reasonable cause to believe that his conduct was unlawful. An officer or
director who is successful in defense of such civil or criminal action or
proceeding is entitled to indemnification.
A corporation may indemnify any person made (or threatened to be made) a
party to a derivative action by reason of the fact that such person is or was
a director or officer of the corporation or was serving at the request of the
corporation as a director or officer of the corporation of any other
corporation or any partnership, joint venture, trust, employee benefit plan or
other enterprise, against amounts paid in settlement and reasonable expenses,
including attorneys' fees, provided that such director or officer acted in
good faith, for a purpose which he reasonably believed to be in (or, in the
case of service for another corporation or any partnership, joint venture,
trust, employee benefit plan or other enterprise, not opposed to) the best
interests of the corporation, except that no indemnification is permitted in
respect of a threatened action or pending action which is settled or otherwise
disposed of, or in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable to the corporation, except to the
extent that court may otherwise determine.
The Company's Certificate of Incorporation eliminates personal liability of
the fullest extent permitted by NYBCL.
A person who has been successful in the defense of a civil or criminal
action or proceeding of the character described above is entitled to
indemnification to the extent described above. Otherwise, absent court
approval, indemnification in the specific case would have to be authorized
either (i) by the board of directors acting as a quorum consisting of
directors who are not parties to the action or (ii) by the board upon the
opinion of independent legal counsel that indemnification is proper in the
circumstances or (iii) by the shareholders.
A New York corporation may generally purchase insurance, consistent with the
limitations of New York insurance law and regulatory supervision, to
indemnify, in certain circumstances, directors and officers whether or not
they could by statute be indemnified by the corporation, so long as no final
adjudication has established that the directors' or officers' acts of active
and deliberate dishonesty were material to the cause of action so adjudicated
or that the directors or officers personally gained in fact a financial profit
or other advantage.
The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against such
persons in their official capacities if such person acted in good faith and in
a manner that he reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonably cause to believe his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
Company pursuant to the applicable provisions, the Company has been informed
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
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ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses payable by the
Registrant in connection with the sale and distribution of the securities
being registered, other than underwriting discounts and commissions and the
Representative's non-accountable expense allowance. All of the amounts shown
are estimated except the Securities and Exchange Commission registration fee.
<TABLE>
<CAPTION>
TOTAL
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<S> <C>
SEC registration fee............................................... $3,540.00
NASDAQ listing fee................................................. 7,400.00
Blue Sky fees and expenses (including legal fees).................. 58,000.00
Printing and engraving expenses.................................... 55,000.00
Legal fees and expenses............................................ 150,000.00
Accounting fees and expenses....................................... 50,000.00
Transfer agent and registrar fee................................... 7,500.00
Miscellaneous...................................................... 5,000.00
Total............................................................. $336,440.00
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In December 1996, the Company sold an aggregate of 1,000,000 shares of its
Common Stock at $1.00 per share, of which 900,000 shares were sold to Melville
Ventures & Associates, L.P., an investment committee partnership, 50,000
shares were sold to New Millenium, LP, an investment partnership and 50,000
shares were sold to Timothy Mayette, an accredited investor. The Company's
sale of shares of Common Stock to Melville Ventures & Associates, L.P., an
investment committee partnership, to New Millenium, LP, an investment
partnership and to Timothy Mayette was exempt from registration requirements
pursuant to Section 4(2) of the Securities Act, since these shares were sold
to sophisticated and accredited investors who had done business with the
Company on prior occasions.
In December 1997, the Company issued warrants to purchase 888,888 shares of
Common Stock to FC Capital Corporation. These warrants are exercisable the
earlier of August 1998 or the effective date of a public offering, and expire
three (3) years later. The exercise price is 85% of the public offering price,
provided, however, that if the Company has not accomplished a public offering
by August, 1998, the option price drops to $1.00 per share.
In March 1997, the Company borrowed $778,000 ($313,000 from affiliates of
certain of the Company's principal stockholders). These borrowings, due April
1998, are not collateralized and are subordinated to the notes payable and the
warehouse line. Interest on these notes is 14% per annum. In July 1997, the
Company issued 56,000 shares of its common stock to a note holder in
satisfaction of the interest due at maturity on $400,000 of this debt. The
shares were valued at $56,000, representing the interest due on this
obligation based upon its stated maturity date. In December 31, 1997, the
obligation was repaid with a portion of the proceeds of the $1,500,000 note
payable. In October 1997, the Company borrowed $500,000 from an affiliate.
This borrowing due April 1998, is collateralized by the officer's life
insurance claim receivable and is subordinated to all the notes payable and
warehouse line. Interest is 9% per annum. The Company's issuance of these
shares to the note holder is exempt from registration requirements pursuant to
Section 4(2) of the Securities Act, since the Company issued the shares to a
single, accredited, sophisticated investor who had done business with the
Company on prior occasions.
On February 15, 1997, the principal stockholders of the Company granted an
officer an option to acquire up to 378,414 shares of the Company's common
stock owned by the stockholders at exercise prices not less than the estimated
fair value of the Company's common stock at the grant date. The Company's
grant of these options to the officer is exempt from registration requirements
pursuant to Section 4(2) of the Securities Act, since the Company issued the
shares to an officer of the Company, who was single, sophisticated investor.
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ITEM 27. EXHIBITS
<TABLE>
<C> <S>
**1.1 Form of Underwriting Agreement
**1.2 Form of Representative's Warrant Agreement
*3.1 Certificate of Amendment to Certificate of Incorporation of Computer
Transceiver Systems, Inc. changing the name to "MPEL Holdings Corp."
*3.2 By-Laws
*4.1 Form of Common Stock Certificate
**4.2 Form of Representative's Warrant
*5.1 Opinion and Consent of Ruskin, Moscou, Evans & Faltischek, P.C.
*10.1 1995 Stock Option Plan
*10.2 Employment Agreement between the Company and Steven Latessa
*10.3 Employment Agreement between the Company and Cary Wolen
*10.5 Intentionally Omitted
*10.6 Mortgage Loan Warehousing Agreement by and between Mortgage Plus Equity
and Loan Corporation and Summit Bank
*10.7 Employment Agreement between the Company and Jon P. Blasi
*10.8 Restated Shareholders Agreement
*10.9 Working Capital Financing Agreement between FC Capital Corporation and
Mortgage Plus Equity and Loan Corporation
*10.10 Term Loan and Security Agreement between FC Capital Corporation and
Mortgage Plus
*10.11 Warrant Agreement between FC Capital Corporation and Mortgage Plus
Equity and Loan Corporation
*10.12 Mortgage Warehouse Loan and Security Agreement between Contimortgage
Corporation and Mortgage Plus Equity and Loan Corp.
*10.13 Escrow Agreement
*10.14 Melville Ventures & Associates, LP Limited Partnership Agreement
+10.15 Merger and Reorganization Agreement by and among Mortgage Plus Equity
and Loan Corporation, Vertex Industries, Inc. and Computer Transceiver
Systems, Inc., dated March 3, 1998
*10.16 Settlement Agreement, dated May 1, 1998
*21.1 Subsidiaries of Registrant
23.1 Consent of Richard A. Eisner & Company, LLP
Consent of Ruskin, Moscou, Evans & Faltischek, P.C. (included in
*23.3 Exhibit 5.1)
*23.4 Consent of Daniel Intemann
*24.1 Power of Attorney (included on signature page)
*27.1 Financial Statement Schedule
</TABLE>
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* Previously filed.
** Previously filed, but not applicable.
+ Incorporated by reference from Exhibit No. 1 to the Form 8-K filed by
Computer Transceiver Systems, Inc. with the Securities and Exchange
Commission on March 10, 1998.
Schedules other than the ones listed above are omitted for the reason that
they are not required or are not applicable, or the required information is
shown in the financial statements or notes thereto.
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public
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policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issues.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
i. To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
ii. To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) that, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement; and
iii. To include any additional or changed material information
with respect to the plan of distribution.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered that remain unsold at
the termination of the offering.
(4) To provide to the underwriter at the closing specified in the
underwriting agreements certificates in such denominations and
registered in such names as required by the underwriter to permit
prompt delivery to each purchaser.
(5) i. That, for the purpose of determining liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the
Securities Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
ii. That, for the purpose of determining liability under the
Securities Act of 1933, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions or
otherwise, the registrant has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Act, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned thereunto
duly authorized, in Syosset, New York, on June 17, 1998.
MPEL Holdings Corp.
/s/ Steven Latessa
By: ______________________________________
Steven Latessa, President
Pursuant to the requirements of the Act, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated. Each person whose signature appears below hereby authorizes each of
Steven M. Latessa, Cary Wolen and Jon P. Blasi with full power of substitution
to execute in the name of such person and to file any Amendment or Post-
Effective Amendment to this Registration Statement making such changes in this
Registration Statement as the Registrant deems appropriate and appoints each
of Steven M. Latessa, Cary Wolen and Jon P. Blasi with full power of
substitution, attorney-in-fact to sign and to file any amendment and Post-
Effective Amendment to this Registration Statement.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
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<S> <C> <C>
/s/ Steven M. Latessa President, Chief Executive June 17, 1998
____________________________________ Officer, Chairman of the
Board, Director
/s/ Cary Wolen Chief Operating Officer, June 17, 1998
____________________________________ Chief Executive Officer,
Chief Financial Officer,
Secretary, Director
/s/ Jon P. Blasi Chief Operating Officer, B/C June 17, 1998
____________________________________ Lending Division, Director
</TABLE>
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EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this registration statement on Form SB-2 of
our report dated February 6, 1998 (with respect to Note 16, March 25, 1998;
Note 17, May 1, 1998 and Note 7, June 10, 1998), on the financial statements
of Mortgage Plus Equity and Loan Corp. at December 31, 1997 and for each of
the years in the two year period then ended. We also consent to the reference
to our firm under the caption "Experts."
Richard A. Eisner & Company, LLP
Florham Park, New Jersey
June 17, 1998
