UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number.: 0-3825
MPEL HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
New York 22-1842747
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 MELVILLE PARK ROAD, MELVILLE, NY 11747
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 364-2700
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [ ]
As of March 24, 1999, the Company had 11,201,142 shares of common stock,
par value $.01 per share (the "Common Stock"), outstanding. The shares of Common
Stock represent the Company's only class of Common Stock. The Company's revenues
for its most recent fiscal year were $10,712,786.
<PAGE>
Forward Looking Information
The statements included in this Annual Report on Form 10-KSB regarding
future financial performance and results and other statements that are not
historical facts are forward-looking statements. The words "expect," "project,"
"estimate," "predict," "anticipate," "believes" and similar expressions are also
intended to identify forward-looking statements. Such statements are subject to
numerous risks, uncertainties and assumptions, including but not limited to, the
uncertainties relating to industry and market conditions and other risks and
uncertainties described in this Annual Report on Form 10-KSB and in MPEL Holding
Corp.'s other filings with the Securities and Exchange Commission. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual outcomes may vary materially from those
indicated.
PART I
ITEM 1. BUSINESS
General
MPEL Holdings Corp. ("MPEL"), through its wholly owned subsidiary, Mortgage
Plus Equity & Loan Corporation ("Mortgage Plus", and together with MPEL, the
"Company"), is a full service retail mortgage banking company which provides 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 Melville, New York and has a total of 8 retail
branches (the "Branch Network") in 5 states: Connecticut (1), New Jersey (1),
New York (3), Missouri (1), Ohio (1), and the Commonwealth of Puerto Rico (1).
The Company is also a licensed mortgage banking company in 9 additional states.
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 shares of CTS) and (ii) Mortgage Plus becoming a
wholly-owned subsidiary of CTS. Immediately following the Merger, Steven M.
Latessa, Cary Wolen and Jon Blasi were elected to the Board of Directors of CTS
and CTS changed its name 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 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 $0.25 per share. Immediately
following the Merger, the Company changed its ticker symbol and began trading on
the OTCBB under the symbol MPEH. At present, the Company's Board of Directors
consists of Steven M. Latessa, Cary Wolen and Daniel Intemann.
<PAGE>
On June 19, 1998, the Company completed a public offering of 1.3 million
shares of Common Stock at a price of $2.50 per share (the "Offering"). After
paying the costs of the Offering of approximately $700,000, the Company received
approximately $2.7 million. The Company uses these net proceeds: (a) for
telemarketing and advertising, (b) to repay indebtedness, (c) to purchase
computers and equipment, (d) to increase its mortgage originations, and (e) for
general working capital purposes.
From its inception in 1987 through 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, the Company has experienced growth in its
mortgage banking activities, originating $43.3 million, $58.0 million, $108.2
million, $133.5 and $164.2 million in mortgage loans for the years ended
December 31, 1994, 1995, 1996, 1997 and 1998 respectively. This growth has been
due primarily to Mortgage Plus' expansion into additional geographic markets,
its focus, since mid-1996, on mortgage products for "B/C" credit-rated
borrowers, and a substantial increase in loans to FHA/VA borrowers. "B/C" and
FHA/VA loan volume has grown steadily since 1995, with loans to "B/C" borrowers,
accounting for 34.5% of total loan origination volume for the year ended
December 31, 1998, compared to 7.4% for the year ended December 31, 1995, and
loans to FHA/VA borrowers accounted for 22.2% of total loan origination volume
for the year ended December 31, 1998 as 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, and the risks associated with lending to credit impaired
borrowers.
<PAGE>
For the year ended December 31, 1998, the Company had revenues of $10.7
million, compared to $8.0 million for the year ended December 31, 1997 and $6.0
million for the year ended 1996. 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 fewer 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 resales of residential real estate.
Growth Strategy
The Company's growth strategy includes the following elements:
o Increasing mortgage originations to sub-prime borrowers through
recruiting experienced loan officers, increasing telemarketing and direct mail
to target audiences;
o Expanding the Company's operations in the Commonwealth of Puerto Rico by
developing strategic alliances with financial institutions and mortgage bankers
and brokers; and
o Expanding the Company's geographic coverage for mortgage originations
through additions to the Branch Network, the development of strategic alliances
with financial institutions, mortgage bankers and brokers and possible
acquisitions.
Expansion through Controlled Growth
Over the next 3 years, the Company's primary focus will be to increase
profits through controlled growth. The Company will continue to develop and grow
its niche programs while focusing on higher profit margin loans. The Company
fully expects to increase the productivity level of each office and each
individual loan officer. After completing the current cost containment programs,
the Company intends to maintain the optimum number of employees and increase
operating efficiencies.
Expansion through Strategic Alliances and Acquisitions
The Company has expanded its loan origination capabilities through internal
growth. In the future, the Company intends to grow through the creation of
strategic alliances with other retail mortgage lenders and through acquisitions.
The Company believes that acquisitions will help the Company accelerate its rate
of growth and will enable the Company to realize significant economies of scale
in the mortgage business. The Company intends to aggressively pursue
acquisitions which complement its existing business. As of this date, the
Company has not entered into any commitments for any strategic alliance or
acquisition.
This strategy is intended to create synergies between several non-related
companies serving the same customer base. Management believes that such strategy
will significantly add to shareholder value.
<PAGE>
One of the Company's primary strategies for growth is to create a financial
services holding company, which the Company anticipates will:
o Provide one-stop shopping for all financial products;
o Create operational and financial economies of scale;
o Substantially improve profit margins by consolidating overhead;
o Enhance the Company's ability to cross-sell financial products to a
growing customer base;
o Promote customer loyalty;
o Provide investment diversity and protection from market fluctuations; and
o Enhance the internal rate of return and capital appreciation to
shareholders.
Geographic Expansion
The Company currently has a Branch Network of 8 retail branch offices in 5
states and the Commonwealth of Puerto Rico ("Puerto Rico") as of the date
hereof. The Company is currently licensed as a mortgage banking company and
doing business in 9 additional states, with applications to become licensed
pending in an additional state. 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 6 years and are managed by personnel either
trained at the Company's headquarters in Melville, 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 continuous in-state or related state expansion, while others
are intended to compliment 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 90% of all of the mortgage loans originated by the Company for the
year end December 31, 1998 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.
Puerto Rico. In November 1996, the Company opened a sales office in the
Commonwealth of Puerto Rico to originate loans to "A" credit-rated borrowers.
The sub-prime credit-rated mortgage originations in Puerto Rico are 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
such mortgages in the Continental United States. The Company believes that
Puerto Rico offers an opportunity to increase its sub-prime mortgage
originations, since Puerto Rico has high levels of home ownership and there is
currently a lack of competition from other lenders for sub-prime credit
mortgages. For the 14 month period through December 31, 1997, the Puerto Rico
office originated mortgage loans totaling $4,350,425. In the 12 month period
ending December 31, 1998, the Puerto Rico office originated $8,035,080 in closed
loan volume.
<PAGE>
The trend towards purchasing single-family homes and the market pricing
structure has greatly benefited from Puerto Rico's mortgage banking market. The
growth in single-family housing is being driven by Puerto Rico's favorable
demographics, limited available terrain and historical infrastructure
investment. A comprehensive study prepared for the Puerto Rico Bankers
Association (in March 1994) concluded that Puerto Rico faced a significant
housing deficit of 88,571 units and strong annual demand for over 18,000 units.
Puerto Rico's favorable demographics include a strong predisposition
towards home ownership. The above-mentioned study revealed that Puerto Ricans
may prefer to use real estate, as opposed to financial securities, for savings
purposes. The local government also encourages home ownership by providing
low-income and affordable housing programs, as well as property tax exemptions.
These factors have resulted in Puerto Rico having a higher home ownership
percentage than the Continental United States (72.1% vs. 64%).
The limited supply of land suitable for development also fuels the housing
market. Puerto Rico is very mountainous and a great portion of the total
population lives in the northern section of the island in the corridor covering
Arecibo to Fajardo and Caguas. Sixty five percent of the population resides in
San Juan, Carolina and Bayamon. The impact of geography is clearly evidenced by
Puerto Rico's substantially higher population density. Puerto Rico has 1,029
inhabitants per square mile, as compared to 69 for the Continental United
States, according to 1990 census figures. These factors have combined to produce
a healthy appreciation in single-family home prices.
Infrastructure investment (or lack thereof) has also played a role in
strengthening Puerto Rico's housing market. In 1985, the U.S. District Court for
Puerto Rico decided to restrict connections to 38 water treatment plants that it
found to be operating above capacity. This decision resulted in infrastructure
bottlenecks for many housing projects. Construction in Puerto Rico was, to some
extent, artificially restricted while the Puerto Rico Aqueducts and Sewers
Authority made significant investments in new capacity. The restrictions were
lifted in 1993, and developers are now making up for lost time.
The Puerto Rican economy continued to be strong in 1998. The gross domestic
product continued to grow, and housing prices increased. About 72% of Puerto
Rican families are homeowners as reported by the Puerto Rico Chamber of
Commerce. Traditional family values continue to be based, in part, on home
ownership. Real estate values are stable in Puerto Rico due to a significant
scarcity of land for future development and the demand for new housing, which is
derived from new generations of young Puerto Ricans entering the housing market
and step-up buyers looking for higher living standards for their families.
The Company began originating sub-prime mortgages in January 1997. This
initiative was fostered by the Puerto Rico government's decision to relax
interest rate ceilings on conventional mortgages in mid-1996. These loans
typically carry coupons in the 12% to 13% range, with an average loan-to-value
ratio of 60%. The Company, given its origination experience with FHA/VA
borrowers, is perfectly positioned to take advantage of this opportunity.
Management is actively exploring the possibility of selling these originations
to lenders on a correspondent basis or in the secondary market in the
Commonwealth of Puerto Rico or the Continental United States. Furthermore, in
1998 the Company entered into a sub-servicing agreement with Banco Popular, the
largest bank lender and the largest branch network on Puerto Rico. This alliance
is extremely important for 3 reasons: (i) 80 to 90% of mortgagors on Puerto Rico
pay their mortgage each month in person; (ii) this may enable the Company to
eventually securitize these loans which will generate additional fee income to
the Company; and (iii) this will allow the Company to position itself as a key
originator of sub-prime mortgages.
<PAGE>
In addition, the emergence of construction loans has opened new
opportunities for mortgage lenders. The government of Puerto Rico is committed
to building and delivering 2,000 new living units by the end of 1999. To do so,
the government has enacted special laws allowing the private sector to develop
turn key products of low cost housing units. Through this program, a developer
builds a project which is already sold to the participant, who in turn executes
individual mortgages for the acquisition of their individual units.
The Company has developed key government and commercial relationships in
Puerto Rico with parties involved in building thousands of low-to-moderate
income housing units. The Company estimates that these projects alone will add
an incremental $100 million in annual loan originations per year by 2000.
Products and Services
Through its Branch Network of 8 offices, the Company offers a broad array
of mortgage products to "FHA/VA", "A" and "B/C" 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 5 or 7 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 5 days prior to closing.
<PAGE>
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: (i) 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; (ii) the limited income documentation program, pursuant to which a
prospective borrower's income is evaluated based on bank statements and profit
and loss statements; (iii) the stated income program, pursuant to which a
prospective borrower's employment, rather than income, is verified; and (iv) 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 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 15 or 30 years.
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.
<PAGE>
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, 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.
<PAGE>
The following table shows mortgage loan origination volume by type of loan
for each of the 5 years ended December 31, 1994, 1995, 1996, 1997 and 1998.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------------------------------
1994 1995 1996 1997 1998
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Conventional Loans:
Volume $43,293,573 $48,366,929 $48,102,840 $47,428,400 $71,103,963
Percentage of total volume 100.0% 83.4% 44.5% 35.5% 43.3%
FHA/VA Loans:
Volume -- $5,323,313 $24,810,101 $33,324,400 $36,448,166
Percentage of total volume -- 9.2% 22.9% 25.0% 22.2%
Sub-Prime Loans:
Volume * $4,284,375 $35,290,148 $52,748,500 $56,649,594
Percentage of total volume * 7.4% 32.6% 39.5% 34.5%
Total Loans:
Volume $43,293,573 $57,974,617 $108,203,089 $133,501,300 $164,201,723
Number of loans 329 503 1,073 1,585 1,787
Average Loan Size $131,591 $115,257 $100,841 $84,228 $91,887
</TABLE>
* For the referenced periods, sub-prime loans represented less than two percent
of the Company's loan originations and are included in the Company's
conventional loans.
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
45 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 24 telemarketers, who utilize telephone lists from
various sources.
<PAGE>
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 forwarded to Melville, New
York for processing, underwriting and closing. This centralization allows the
Company to maintain efficiency and uniformity in processing, as well as quality
control over all 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 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 has a $10 million
warehouse line of credit expiring September 1, 1999, 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. This warehouse line of credit is personally guaranteed by the
Company's principal shareholders and contains certain covenants requiring, among
other things, minimum adjusted net worth.
The Company has a warehouse line of credit with a commercial bank, expiring
March 1999. The Company does not anticipate the renewal of this warehouse line
of credit. The Company does not anticipate the expiration of this warehouse line
of credit to have a significant impact on the Company's liquidity since the
Company recently acquired a new $10 million warehouse line in February 1999. As
of December 31, 1998, $1,574,689 was outstanding and guaranteed by the Company's
principal stockholders.
On February 10, 1999, the Company entered into an additional $10 million
warehouse line of credit with another 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.
<PAGE>
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 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 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 have been repaid in any year has
been less than $40,000.
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 currently pool and sell its mortgage originations as
asset-backed securities. However, the Company believes that a securitization
specific to Puerto Rico offers the Company an entry into the securitization
market. In addition, securitizations for Puerto Rico can probably be done at the
$25 to $50 million level, versus about $100 million for the United States.
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.
<PAGE>
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 Melville 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 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.
<PAGE>
Year 2000 Compliance
The Company recognizes the need to ensure that its operations and systems
(including information technology ("IT") and non-information technology
("non-IT") systems will not be adversely affected by Year 2000 ("Y2000")
hardware and software issues. The Y2000 problem is the result of the computer
programs being written using two digits (rather than four) to define the
applicable years. Any of the Company's programs that have time-sensitive
software may recognize the date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures. The Y2000
problem affects the Company's installed computer systems, software applications
and other business systems that have time sensitive programs.
The Company has conducted a review of its IT and non-IT systems to identify
those systems that could be affected by the Y2000 problem. Modifications to the
Company's systems as a result of the findings have been completed. Testing of
these modifications will be completed by September 1999. If the Company's major
suppliers, or others, with whom the Company does business, experience problems
related to the Y2000 issue, the Company's business, financial condition or
results of operations could be materially adversely affected. Based on its
current estimates and on information currently available, the Company does not
anticipate that the costs associated with Y2000 compliance issues will be
material to the Company's financial position or results of operation.
The Company believes that its Y2000 project will allow it to be Y2000
compliant in a timely manner. There can be no assurances, however, that the
Company's information systems or those of a third party on which the Company
relies will be Y2000 compliant by the year 2000. An interruption of the
Company's ability to conduct its business due a Y2000 readiness problem could
have a material adverse affect on the Company's business, operations or
financial condition. There can be no guarantee that the Company's Y2000 goals or
expense estimates will be achieved, and actual results could differ.
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.
<PAGE>
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, 1998, the Company had approximately 116 employees, of
which 96 were full-time and 20 were part-time employees. Of these, approximately
62 were employed at the Company's Melville, New York headquarters, and 47 were
employed at the Company's branch offices. Approximately 45 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.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company maintains 8 leased locations in 5 states and the Commonwealth
of Puerto Rico. All of the Company's leases are for terms of 6 years or less in
order to minimize capital requirements and retain operating flexibility. The
table below provides details as to each location.
<TABLE>
<CAPTION>
City/State Location Square Feet Current Cost Per Lease Office Type
Monthly Sq.Ft. Terms
Lease Cost
<S> <C> <C> <C> <C> <C> <C>
Connecticut (1)
Torrington 16 School Street 1,944 $2,000.00 12.35 7/1/98 - 6/3/01 Branch
Missouri (1)
St. Charles 2001 Golfway Dr. 1,900 $1084.00 6.84 4/1/97 - 2/28/01 Branch
New Jersey (1)
Fairfield 100 Passaic Ave. 9,143 $14,476.00 19.00 4/1/98 - 3/31/04 Branch
New York (3)
Melville 25 Melville Park Rd. 20,688 $28,446.00 16.50 8/1/98 - 7/31/04 Headquarters
Lake Grove 2800 Middle Country Rd. 1,100 $2,000.00 21.82 1/1/99 - 2/28/04 Branch
Staten Island 1667 Richmond Road 400 $1,300.00 39.00 1/1/98 - 12/31/99 Branch
Puerto Rico (1)
Hato Rey Royal Bank Center 750 $1,262.00 20.19 8/1/97 - 7/31/00 Branch
Ohio (1)
Cleveland 925 Euclid Avenue 1,193 $1,292.00 13.00 1/15/98 - 1/14/01 Branch
SUBLEASES
New York (2) 25 Melville Park Road 2,151 $2,868.00 16.00 10/1/98 - 9/30/01 JCM
25 Melville Park Road 1,500 $2,000.00 16.00 10/15/98 - 10/14/99 Jan Kabas
New Jersey (1) 100 Passaic Avenue 6,643 $10,000.00 18.06 1/1/99 - 2/29/04 12 Holding Co.
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
In May 1997, two former employees initiated litigation against the Company
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.
In the normal course of business, the Company is subject to various
lawsuits involving matters generally incidental to its business. Management is
of the opinion that the ultimate liability, if any, resulting from any pending
actions or proceedings will not have material effect on the financial position
or results of operations of the Company.
<PAGE>
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the Fourth Quarter of the fiscal year covered by this report, the
Company did not submit any matters to a vote of security holders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MPEL's Common Stock is listed on the Over-the-Counter Electronic Bulletin
Board of the National Association of Security Dealers, Inc. (the "Bulletin
Board") under the symbol "MPEH".
1998 Common Stock
High Low
1st Quarter $2.50 $0.25
2nd Quarter 7.00 0.25
3rd Quarter 3.43 1.00
4th Quarter 1.375 0.375
There are approximately 720 shareholders of the Company's Common Stock.
On December 4, 1998, the Company filed a Form 8-K with the Commission with
regard to the Company's authorization to repurchase up to 500,000 shares of its
Common Stock over a 3 year period. As of December 31, 1998, the Company had not
repurchased any shares of its Common Stock.
On December 30, 1998, the Company sold 2,200,000 unregistered shares of
Common Stock for $440,000 to a group of 8 accredited investors pursuant to
Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act").
The Company's belief concerning the status of the investors as accredited
investors was based upon financial statements and information supplied to the
Company by the investors in connection with the sale.
<PAGE>
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 shares of CTS) and (ii) Mortgage Plus becoming a
wholly-owned subsidiary of CTS. Immediately following the Merger, Steven M.
Latessa, Cary Wolen and Jon Blasi were elected to the Board of Directors of CTS
and CTS changed its name 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 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 $0.25 per share. Immediately
following the Merger, the Company changed its ticker symbol and began trading on
the OTCBB under the symbol MPEH. At present, the Company's Board of Directors
consists of Steven M. Latessa, Cary Wolen and Daniel Intemann.
On June 19, 1998, the Company completed a public offering of 1.3 million
shares of Common Stock at a price of $2.50 per share (the "Offering"). After
paying the costs of the Offering of approximately $700,000, the Company received
approximately $2.7 million. The Company uses these net proceeds: (a) for
telemarketing and advertising, (b) to repay indebtedness, (c) to purchase
computers and equipment, (d) to increase its mortgage originations, and (e) for
general working capital purposes.
As of the close of business on March 26, 1999, the last sale price of the
Company's Common Stock (as reported on the Bulletin Board) was $1.53 per share.
Dividend Policy
The Company has never paid or declared dividends on its Common Stock. The
payment of cash dividends, if any, in the future is within the discretion of the
Board of Directors and will depend upon the Company's earnings, its capital
requirements, financial condition and other relevant factors. The Company
intends, for the foreseeable future, to retain future earnings for use in the
Company's business.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Results of Operations
Years Ended December 31, 1998 and December 31, 1997
Total revenues increased $2.7 million, or 34% to $10.7 million for the year
ended December 31, 1998 from $8.0 million for the year ended December 31, 1997.
During the same period, the Company's total expenses increased $3.4 million, or
37% to $12.5 million from $9.1 million. The Company's net loss increased by $1.7
million from $77,000 ($0.01 per share) for the year ended December 31, 1997 to
$1.8 million ($0.20 per share) for the year ended December 31, 1998. In 1997,
the Company recognized other income of $1,000,000 resulting from proceeds to be
received from an officer's life insurance policy. In addition, in 1998 the
Company incurred large expenses related to the expansion when expenses grew
faster than revenue.
Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:
Years Ended December 31,
------------------------------------
1998 1997
----------- -----------
Mortgage Origination 9,614,874 7,147,183
Interest earned 1,097,912 860,424
----------- -----------
Total revenues $10,712,786 $8,007,607
=========== ===========
Mortgage origination increased $2.5 million, or 35%, to $9.6 million for
the year ended December 31, 1998 from $7.1 million for the year ended December
31, 1997. This increase was primarily due to (a) increased loan originations and
loan sales from the Company's existing retail offices, and (b) loan originations
and sales by the Company's wholesale division. Mortgage loan originations were
$164 million and $134 million for the years ended December 31, 1998 and 1997,
respectively. Although there can be no assurance thereof, the Company expects
mortgage originations to increase and therefore believes its gains on sales of
mortgage loans will increase.
Interest earned increased $240,000 or 27%, to $1.1 million, for the year
ended December 31, 1998 from $860,000 for the year ended December 31, 1997. This
increase was primarily due to increased mortgage originations during 1998.
<PAGE>
Expenses. The following table sets forth the Company's expenses for the
periods indicated:
Years Ended December 31,
---------------------------------
1998 1997
---------------------------------
Commissions, wages and benefits $7,113,593 5,549,795
Interest expense 1,690,311 967,123
Selling and administrative 3,680,277 2,567,371
----------- ----------
Total expenses $12,484,181 $9,084,289
============ ===========
Commissions, wages and benefits increased $1.6 million, or 29% to $7.1
million, for the year ended December 31, 1998, from $5.5 million for the year
ended December 31, 1997. This increase was primarily due to increased sales
salaries and commissions which are based substantially on mortgage loan
originations. Administrative and support personnel decreased from 97 employees
at December 31, 1997 to 64 at December 31, 1998. Administrative and support
personnel varied greatly during the year due to a number of internal changes. In
the first two quarters of the year, the Company was still in an expansion mode
with regard to offices and staff, whereas towards the end of the third quarter
and into the fourth quarter, the Company was consolidating and centralizing all
operations out of the Melville office. These factors facilitated a decrease in
staff to 64 by year-end 1998. Commissions, wages and benefits include a $341,000
compensation charge relating to shares acquired by the principal stockholders.
This one time charge was recorded in the second quarter of 1998.
Interest expense increased $723,000, or 75% to $1.7 million for the year
ended December 31, 1998 from $967,000 for the year ended December 31, 1997. The
increase in interest expense is primarily due to an increase in the average
balance of mortgages held for sale and amounts due from investors during 1998,
which resulted from the increase in originations. Additionally, approximately
$288,000 of this increase was attributable to the amortization of the discount
on a note with which the Company had issued warrants.
Selling and administrative expense increased $1.1 million or 42%, to $3.7
million for the year ended December 31, 1998 from $2.6 million for the year
ended December 31, 1997. In the first and second quarters of 1998 the Company
incurred large expenses in connection with the growth in the operations of the
Company. In the third and fourth quarters of 1998 the Company reduced the rate
of increase in other general and administrative expenses by closing unprofitable
branches and consolidating operations.
<PAGE>
Years Ended December 31, 1997 and 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 ($0.03 per share) for the year ended December
31, 1996 to $77,000 ($0.01 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:
Year Ended December 31,
1997 1996
Revenues:
Mortgage origination . . . . . . . . . $7,147,183 $5,307,353
Interest earned . . . . . . . . . . . 860,424 663,322
Total Revenues . . . . . . . . . . . . $8,007,607 $5,970,675
========== ==========
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 was primarily attributable to substantial
increases in "B/C" and FHA/VA mortgage originations during the 1997 period.
Mortgage loan originations were $134 million and $108 million for the years
ended December 31, 1997 and 1996, respectively.
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.
<PAGE>
Expenses. The following table sets forth the components of the Company's
expenses for the periods shown:
Year Ended December 31,
1997 1996
Expenses:
Commissions, wages, and benefits. . . . . $5,549,795 $3,715,169
Selling and administrative . . . . . . . 2,567,371 1,770,894
Interest expense . . . . . . . . . . . . 967,123 707,952
------------ -----------
Total Expenses . . . . . . . . . . . $9,084,289 $6,194,015
============ ===========
<PAGE>
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 commission, 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 3 new branches, including 1 in Missouri, 1 in Connecticut and 1 in
Arkansas, compared to 5 new branches in the year ended December 31, 1996,
including 2 in New York, 2 in Missouri and 1 in Puerto Rico. As a percentage of
revenue, commissions, wages and benefits represent 62.2% and 69.3% for the years
ended December 31, 1996 and 1997, respectively.
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 expenses 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 balances 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
compensation 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.
Loan Funding and Borrowing Arrangements. The Company has a $10 million
warehouse line of credit expiring September 1, 1999, 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. This warehouse line of credit is personally guaranteed by the
Company's principal shareholders and contains certain covenants requiring, among
other things, minimum adjusted net worth.
<PAGE>
The Company has a warehouse line of credit with a commercial bank, expiring
March 1999. The Company does not anticipate the renewal of this warehouse line
of credit. The Company does not anticipate the expiration of this warehouse line
of credit to have a significant impact on the Company's liquidity since the
Company recently acquired a new $10 million warehouse line in February 1999. As
of December 31, 1998, $1,574,689 was outstanding and guaranteed by the Company's
principal stockholders.
On February 10, 1999, the Company entered into an additional $10 million
warehouse line of credit with another 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.
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.
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. As of December 31, 1998, the balance of this
loan was $400,000. The Company's agreement requires that it comply with various
operating and financial covenants. As of December 31, 1998, the Company was in
default of certain restrictive covenants in the agreement. However, as of March
11, 1999, the unpaid principal balance was $100,000, which the Company
anticipates paying when due in April 1999.
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.
On June 19, 1998, the Company completed a public offering of 1.3 million
shares of Common Stock at a price of $2.50 per share (the "Offering"). After
paying the costs of the Offering of approximately $700,000, the Company received
approximately $2.7 million. The Company uses these net proceeds: (a) for
telemarketing and advertising, (b) to repay indebtedness, (c) to purchase
computers and equipment, (d) to increase its mortgage originations, and (e) for
general working capital purposes.
On December 31, 1998, the Company sold 2,200,000 shares of its Common Stock
in a private placement for the sum of $440,000. Through March 11, 1999, the
Company has received $430,000 in connection with this private placement.
<PAGE>
Quarterly Information
<TABLE>
<CAPTION>
Quarters Ended
March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
1998:
Total revenue 2,378,044 2,637,529 2,481,862 3,215,351
Net Income (loss) (488,074) (751,353) (611,131) 79,163
Income (loss) per share (0.06) (0.09) (0.07) 0.01
1997:
Total revenue 1,862,359 2,219,364 1,902,616 2,023,248
Net Income (loss) (400,336) 540,405 181,882 (398,653)
Income (loss) per share (0.05) 0.07 0.02 (0.05)
</TABLE>
Quarterly net income (loss) reflects the impact of revised deferred
origination costs. As originally filed, net losses for the 1998 quarters ended
March 31, June 30 and September 30 were $625,433 ($0.08 per share), $1,073,014
($0.13 per share) and $948,131 ($0.10 per share), respectively.
ITEM 7. FINANCIAL STATEMENTS
The response to this item is set forth at the end of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
Name Age Position
Steven M. Latessa 43 Chief Executive Officer, President
and Chairman of Board of Directors
Cary Wolen 37 Chief Operating Officer, Secretary,
Treasurer and Director
Daniel Intemann 39 Director
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 and Director.
Daniel Intemann Became a director of the Company since the consummation of
Company's public offering. From March 1996 through the present, Mr. Intemann has
been 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
Intemann. 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 expects to establish an Audit Committee in the near
future. 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.
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table shows all the cash compensation paid or to be paid by
the Company, as well as certain other compensation paid or accrued, during the
last three fiscal years, to the Chief Executive Officer ("CEO") and the most
highly compensated executive officers whose aggregate cash compensation exceeded
$100,000.
Annual Compensation
Name and Principal Position Year Salary Bonus
Steven M. Latessa 1998 $130,000 0
Chief Executive Officer, President 1997 130,000 $15,000
1996 130,000 $10,000
Cary Wolen 1998 142,080 0
Chief Operating Officer, Secretary 1997 132,080 10,000
Treasurer 1996 132,080 5,000
Michael Moran 1998 138,456
Regional Vice President 1997 102,954
1996 76,896
Preston Haglin 1998 228,960
Regional Vice President 1997 203,078
1996 161,936
Compensation of Directors
Directors who are employees of the Company receive no compensation for
their service as members of the Board. It is expected that directors who are not
employees of the Company will receive options to purchase 10,000 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.
<PAGE>
Employment Agreements
The Company has entered into employment agreements with Steven Latessa and
Cary Wolen. 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 30 days'
written notice, and are automatically renewed for an additional 3 year term,
unless canceled 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 2 years from the date of the
termination of his employment with 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 2 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. Messrs. Wolen and Latessa waived their increase and remaining unpaid
compensation for 1998.
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.
Equity Incentive Plan
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 ("Incentive Options") which may be granted for a maximum of 10 years
pursuant to the Plan. The Plan provides primarily for the granting of Incentive
Options to certain key employees and exercise prices at not less than the
estimated fair market value at the date of grant. Under the Plan, 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 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. As of the date hereof, Incentive
Options to purchase an aggregate of 95,000 shares have been granted under the
Plan with an exercise price of $0.56 per share. Currently, there are no
Incentive Options or other awards outstanding to any of the Company's executive
officers under the Plan.
In 1998, 175,000 options were canceled under the Plan. In addition, the
remaining 95,000 options were repriced on December 2, 1998 to $0.56 per share,
the fair market value of the Common Stock on the close of business of such date.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 24, 1999, the security ownership of certain beneficial owners
and management of the Company are as follows:
Name and Address Amount and Nature of Percentage*
of Beneficial Owner Beneficial Ownership
Cary Wolen** 2,553,500 22.8%
c/o MPEL Holdings Corp.
25 Melville Park Road
Melville, New York 11747
Steven M. Latessa** 2,553,500 22.8%
c/o MPEL Holdings Corp.
25 Melville Park Road
Melville, New York 11747
Estate of Anthony Saffiotti 1,200,000 10.7%
c/o Karen Saffiotti
63 Amherst Road
Albertson, New York 11507
Melville Ventures & Associates, LP 900,000 8.0%
201 North Service Road
Melville, New York 11747
Scofield Dennison 900,000 8.0%
130 Shore Road
Port Washington, New York 11050
- - ---------------------------
* Does not include 693,000 shares which were previously owned by Jon P.
Blasi and Lydia Blasi which were redeemed by the Company pursuant to an
agreement dated February 24, 1999.
** Includes beneficial ownership of 420,220 shares owned by the WLB general
partnership.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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
market value of the Company's Common Stock at the grant date. Under an agreement
dated May 1, 1998 (the "May 1 Agreement") options to acquire 126,138 shares were
canceled. In February 1999, the remaining options to acquire 252,276 shares were
canceled.
Pursuant to the May 1 Agreement, the estate of Anthony Saffiotti (the
"Estate") sold to the WLB general partnership, a partnership consisting of the
Company's principal stockholders (who are also officers of the Company) ("WLB"),
420,220 shares of Common Stock for a total consideration of $551,646, including
$136,000 owed to the Company by the Estate.
In February 1999, the Company entered into an agreement with Jon Blasi, a
former officer of the Company, and his spouse, Lydia Blasi (together, the
"Blasis"). The Blasis agreed to exchange 693,000 shares of the Company's Common
Stock and to cancel options to acquire 252,276 shares from the principal
stockholders in exchange for certain obligations due to the Company from the
Blasis, and in connection therewith, Jon Blasi resigned as a general partner of
WLB.
The Company subleases certain of its offices from an affiliate. Total
related party lease expense paid was approximately $148,000 and $158,000 for the
years ended December 31, 1998 and 1997, 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 1998 and 1997, the Company accrued, but did not pay, approximately
$49,000 of interest expense on the $278,000 of subordinated debt due to related
parties.
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are hereby incorporated by reference from the
corresponding exhibits filed under the Company's Form SB-2 under Commission File
#333-39949:
Exhibit
Number Description
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 Representatives' 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 & Loan Corp.
10.10 -- Term Loan and Security Agreement between FC Capital Corporation
and Mortgage Plus
<PAGE>
10.11 -- Warrant Agreement between FC Capital Corporation and Mortgage Plus
Equity & Loan Corp.
10.12 -- Mortgage Warehouse Loan and Security Agreement between Conti
Mortgage Corporation and Mortgage Plus Equity & 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 Corp., Vertex Industries Inc. and Computer Transceiver Systems,
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
23.3 -- Consent of Ruskin, Moscou, Evans & Faltischek, P.C. (included in
Exhibit 5.1)
23.4 -- Consent of Daniel Intemann
24.1 -- Power of Attorney (included on signature page)
- - ----------
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.
(b) Exhibits
27.1 -- Financial Statement Schedule
(c) Reports on Form 8-K
The Company filed Reports on Form 8-K dated October 26, 1998, November 3,
1998, and December 4, 1998 which reported events under Item 5.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: March 31, 1999
MPEL HOLDINGS CORP.
By /s/ Steven M. Latessa
-----------------------
Steven M. Latessa, President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dated indicated.
<TABLE>
<CAPTION>
Signature Title Date
- - --------------------------------------- -------------------------------------------------------- ---------------------
<S> <C> <C>
/s/ Steven M. Latessa President, Chief Executive Officer and Chairman March 31, 1999
- - --------------------------------------- of the Board of Directors
Steven M. Latessa
/s/ Cary Wolen Chief Operating Officer, Secretary, Treasurer March 31, 1999
- - --------------------------------------- Director
Cary Wolen
/s/ Frank Soluri Chief Financial Officer (Principal March 31, 1999
- - --------------------------------------- Accounting Officer)
Frank Soluri
/s/ Daniel Intemann Director March 31, 1999
- - ---------------------------------------
Daniel Intemann
</TABLE>
<PAGE>
MPEL HOLDINGS CORP.
Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Consolidated Financial Statements
Independent auditors' report F-2
Balance sheet as of December 31, 1998 F-3
Statements of operations for the years ended December 31, 1997 and 1998 F-4
Statements of stockholders= equity for the years ended
December 31, 1997 and 1998 F-5
Statements of cash flows for the years ended December 31, 1997 and 1998 F-6
Notes to financial statements F-7
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders
MPEL Holdings Corp.
We have audited the accompanying consolidated balance sheet of MPEL
Holdings Corp. as of December 31, 1998, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the years in the
two year period then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred above
present fairly, in all material respects, the financial position of MPEL
Holdings Corp. as of December 31, 1998 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.
Florham Park, New Jersey
March 11, 1999
F-2
<PAGE>
MPEL HOLDINGS CORP.
Consolidated Balance Sheet
December 31, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash and cash equivalents $86,094
Mortgage loans held for sale 3,418,761
Due from mortgage loan investors 11,323,933
Other receivables and other assets 1,862,794
Stock subscription receivable (received through February 1999) 430,000
Due from related parties 520,104
Property and equipment - net 649,805
------------
$18,291,491
LIABILITIES
Warehouse lines of credit $10,922,185
Loans closed to be disbursed 3,019,800
Notes payable 431,589
Subordinated debt 378,000
Obligation under capital lease 101,897
Accounts payable and accrued expenses 1,150,350
------------
Total liabilities 16,003,821
Commitments (Note 14)
STOCKHOLDERS' EQUITY
Common stock - $.01 par value; authorized 15,000,000 shares; issued and outstanding
11,894,142 shares 118,941
Additional paid-in capital 4,026,826
Accumulated deficit (1,848,097)
Stock subscription receivable (10,000)
------------
Total stockholders' equity 2,287,670
$18,291,491
</TABLE>
See notes to financial statements
F-4
<PAGE>
MPEL HOLDINGS CORP.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1998
<S> <C> <C>
Revenues:
Mortgage origination, net $ 7,147,163 $ 9,614,874
Interest earned 860,424 1,097,912
----------- -----------
Total revenues 8,007,587 10,712,786
----------- -----------
Expenses:
Commissions, wages and benefits 5,549,795 7,113,593
Selling and administrative 2,567,371 3,680,277
Interest expense 967,123 1,690,311
----------- -----------
Total expenses 9,084,289 12,484,181
----------- -----------
Operating loss (1,076,702) (1,771,395)
Other income 1,000,000
Net loss $ (76,702) $ (1,771,395)
========== =========
Basic and diluted loss per share $(0.01) $(0.20)
====== ======
</TABLE>
See notes to financial statements
F-5
<PAGE>
MPEL HOLDINGS CORP.
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Additional Stock
Number of Common Paid-in Accumulated Subscription
Shares Stock Capital Deficit Receivable Total
<S> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1997 8,000,000 $ 80,000 $ 207,394 287,394
Shares issued in payment of interest on a subordinated
debt 56,000 560 55,440 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 80,560 591,723 (76,702) 595,581
Acquisition of Computer Transceiver Systems, Inc. 338,142 3,381 (329) 3,052
Issuance of common stock in a public offering 1,300,000 13,000 2,648,200 2,661,200
Issuance of common stock in a private placement 2,200,000 22,000 418,000 $(10,000) 430,000
Issuance of warrants in connection with a note payable 28,000 28,000
Compensation charge relating to shares acquired by the
principal stockholders 341,232 341,232
Net loss (1,771,395) (1,771,395)
--------- ------ --------- --------- -------- ----------
Balance as of December 31, 1998 11,894,142 118,941 $4,026,826 $(1,848,097) $(10,000) $2,287,670
========== ======= ========== =========== ======= ==========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
MPEL HOLDINGS CORP.
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (76,702) $ (1,771,395)
Adjustments to reconcile net loss to net cash used in operating activities:
Shares issued in payment of interest expense 56,000
Compensation charge relating to shares acquired by the principal
stockholders 341,232
Depreciation 79,773 124,304
Changes in:
Mortgage loans held for sale 4,235,230 2,882,003
Due from mortgage loan investors (6,959,131) (4,364,802)
Other receivables and other assets (1,452,834) (175,066)
Accounts payable and accrued expenses 93,399 190,373
-------------- --------------
Net cash used in operating activities (4,024,265) (2,773,351)
-------------- --------------
Cash flows from investing activities:
Additions to property and equipment (267,167) (265,485)
Advances to related parties (234,084) (256,458)
-------------- --------------
Net cash used in investing activities (501,251) (521,943)
-------------- --------------
Cash flows from financing activities:
Net proceeds from warehouse line of credit 718,349 389,191
Loans closed to be disbursed 1,499,037 1,030,536
Proceeds from subordinated debt 1,278,000
Repayment of subordinated debt (400,000) (500,000)
Proceeds from notes payable 1,171,111 72,000
Repayment of notes payable (91,959) (882,063)
Proceeds from sale leaseback of equipment 275,000
Repayments of obligation under capital lease (81,816) (91,287)
Issuance of common stock, net 2,783,483
Deferred offering costs (122,283)
Issuance of warrants 328,889 28,000
Bank overdraft 173,819
Net cash provided by financing activities 4,574,328 3,003,679
-------------- --------------
Net increase (decrease) in cash and cash equivalents 48,812 (291,615)
Cash and cash equivalents at the beginning of year 328,897 377,709
-------------- --------------
Cash and cash equivalents at the end of year $ 377,709 $ 86,094
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 909,014 $ 1,625,056
</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.
F-7
<PAGE>
MPEL HOLDINGS CORP.
Notes to Financial Statements
December 31, 1998 and 1997
1. Organization and Summary of Significant Accounting Policies
Organization:
MPEL Holdings Corp. (the "Company"), through its wholly-owned subsidiary,
Mortgage Plus Equity & Loan Corp. ("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
both prime and sub-prime borrowers. 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,
Missouri, Connecticut and Ohio.
On March 5, 1998, Mortgage Plus 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 of Mortgage Plus in exchange for 8,056,000 shares of
CTSI common stock. The merger has been accounted for as a purchase of CTSI by
Mortgage Plus. The 338,142 shares of CTSI outstanding have been valued at
$1,407,896 with a corresponding charge to additional paid-in capital of
$1,404,844 resulting in an increase in Mortgage Plus' stockholders' equity of
$3,052 which represents the estimated fair value of the net assets of CTSI as of
March 5, 1998. Immediately following the merger CTSI changed its name to MPEL
Holdings Corp.
All significant intercompany balances and transactions have been eliminated
in consolidation.
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 sale 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 14).
Mortgage loans held for sale:
Mortgage loans held for sale are collateralized residential real estate
loans with a weighted average interest rate of approximately 12% as of December
31, 1998 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
$55,780 and deferred origination costs of $101,241.
<PAGE>
Note 1. Organization and Summary of Significant Accounting Policies
(continued)
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.
Income taxes:
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 10).
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, 1998 and 1997 was $194,000 and $232,000, 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, AAccounting for
Stock-Based Compensation@ (AFAS 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,
AAccounting for Stock Issued to Employees@ (AAPB 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.
<PAGE>
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Per share data:
Basic and diluted loss per share was computed based on the net loss and the
weighted average number of shares of common stock outstanding during the year.
Potentially dilutive securities have been excluded from the computation since it
would be anti-dilutive. The weighted average number of shares outstanding for
the years ended December 31, 1998 and 1997 was 8,879,950 and 8,025,315,
respectively.
2. Other Receivables and Other Assets
Other receivables and other assets as of December 31, 1998 consist of:
<TABLE>
<CAPTION>
<S> <C>
Deferred origination costs on loans in process (see Note 1 revenue recognition) $878,902
Due from employees 237,552
Commissions receivable 566,440
Other 179,900
----------------
$1,862,794
</TABLE>
3. Due from Related Parties
As of December 31, 1998, amounts due from related parties are guaranteed by
the principal stockholders of the Company.
4. Property and Equipment
Property and equipment as of December 31, 1998 consist of:
<TABLE>
<CAPTION>
Asset
Lives
---------
<S> <C> <C>
Equipment and furniture 5-10 Years $ 311,042
Equipment subject to capital lease 5 Years 300,389
Leasehold improvements 5 Years 322,604
----------
934,035
Accumulated depreciation and amortization (284,230)
----------
$ 649,805
</TABLE>
Included in depreciation expense for the years ended December 31, 1998 and
1997 is amortization on equipment under capital lease of $45,000 for each of the
years. Accumulated amortization relating to equipment under capital lease
aggregated $90,000 as of December 31, 1998.
5. Warehouse Line of Credit
The Company has a $10 million warehouse line of credit expiring September
1, 1999, 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. This warehouse line of
credit is personally guaranteed by the Company=s principal shareholders and
contains certain covenants requiring, among other things, minimum adjusted net
worth.
5. Warehouse Line of Credit (continued)
The Company also has a warehouse line of credit expiring March 1999. The
Company does not anticipate the renewal of this warehouse line of credit. As of
December 31, 1998, $1,574,689 was outstanding and guaranteed by the Company's
principal stockholders.
6. Notes Payable
Notes payable as of December 31, 1998 consists of:
<TABLE>
<CAPTION>
<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 (8-3/4% as of
December 31, 1998) due April 1999 and collateralized by all
unencumbered assets (a) $359,589
Note payable due March 1999, plus interest at the prime rate plus
2% per annum (9-3/4% as of December 31, 1998 (b) 72,000
---------
$431,589
</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.
The exercise price of the warrants is $2.12 per share and expire June 2001. The
Company valued the warrants at $328,889. Accordingly, the note payable had 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. The
Company's agreement requires that it comply with various operating and financial
covenants. As of December 31, 1998, the Company was in default of certain
restrictive covenants in the agreement. However, as of March 11, 1999, the
unpaid principal balance was $100,000, which the Company anticipates paying when
due in April 1999.
(b) In connection with this note payable, which was issued in December
1998, the Company issued warrants to purchase 100,000 shares of common stock.
These warrants are exercisable January 2000 at $0.56 and expire January 2004.
The Company valued the warrants at $28,000. Accordingly, the note payable has
been reduced by the $28,000 discount and additional paid-in capital increased by
the same amount. The imputed interest rate on the note is 150% per annum. This
obligation is collateralized by 2,343,390 shares of the Company's common stock
owned by the principal stockholders.
7. Subordinated Debt
These borrowings are not collateralized and are subordinated to the notes
payable and the warehouse line. Interest on these notes is 14% per annum. As of
December 31, 1998, $278,000 of subordinated debt is due to affiliates.
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
subordinated 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.
<PAGE>
8. Obligation Under Capital Lease
As of December 31, 1998, the future minimum lease payments under a capital
lease expiring December 1999 are $108,024 of which $16,739 represents interest.
This obligation is guaranteed by the Company=s principal stockholders. The
obligation under the capital lease is the result of the Company entering into a
sale leaseback transaction. Since the lease term 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.
9. Related Party Transactions
The Company subleases certain of its offices from an affiliate (see Note
14). Total related party lease expense paid approximated $148,000 and $158,000
for the years ended December 31, 1998 and 1997, 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 1998 and 1997, the Company accrued, but did not pay, approximately
$49,000 of interest expense on the subordinated debt due to related parties (see
Note 7). The liability is included in accounts payable and accrued expenses.
10. Income Taxes
The components of deferred tax assets and liabilities as of December 31,
1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax asset:
Deferred mortgage origination fees $ 23,400
Net operating loss carryforward 1,514,800
Other 8,400
-------------
Total deferred tax asset 1,546,600
Deferred tax liability - deferred mortgage origination costs (411,600)
-------------
Net deferred tax asset 1,135,000
Valuation allowance (1,135,000)
--------------
$ 0
</TABLE>
The change in valuation allowance for the years ended December 31, 1998 and
1997 was $608,200 and $412,600, respectively.
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
benefit rate for the years ended December 31, 1998 and 1997 is summarized as
follows:
<TABLE>
<CAPTION>
December 31,
1997 1998
<S> <C> <C>
Statutory federal income tax rate (34.0)% (34.0)%
Increase in valuation allowance 438.8 28.5
Non-deductible compensation 6.5
Non-deductible meals and entertainment 24.3 1.0
Non-taxable proceeds from officer=s life insurance claim (443.3)
Other 14.2 (2.0)
------ ------
Effective income tax rate 0 % 0 %
</TABLE>
As of December 31, 1998, the Company had a net operating loss carryforward
of $3,607,000 expiring in 2018.
<PAGE>
11. Stockholders' Equity
Common stock:
Between July 2, 1998 and December 31, 1998, the Company sold, in a public
offering, 1,300,000 shares of its common stock for $2,661,200, which is net of
costs of $660,600.
On December 31, 1998, in a private placement, the Company sold 2,200,000
shares of its common stock for $440,000. Since 50,000 shares have not yet been
paid, the Company has reduced stockholders' equity for the stock subscription
receivable of $10,000.
The Company has reserved 1,688,888 shares of its common stock for issuance
upon exercise of incentive stock options and warrants.
In October 1997, a stockholder owning 1,620,220 shares died and under the
terms of an agreement with the estate dated May 1, 1998, the estate sold 420,220
shares (including 126,138 shares that were subject to an option) to a
partnership consisting of the Company's principal stockholders (who are also
officers of the Company) for total consideration of $551,646. As a result of
this transaction, the Company recognized a compensation charge and credit to
additional paid-in capital of a $341,232 representing the excess of the fair
value of the shares acquired by the officers over the purchase price.
Stock options:
On December 31, 1995, the Board of Directors approved the Equity Incentive
Plan (the APlan@) 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 (Aoptions@) 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 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. Under an agreement with
the stockholder's estate dated May 1998, options to acquire 126,138 shares were
canceled. In February 1999, the remaining options to acquire 252,276 shares were
canceled (see Note 15).
The fair value of each option granted in 1997 and 1998 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% and 50%,
risk-free interest rate of 6% and 4.83% and expected lives of 3 and 8 years for
the 1997 and 1998 options, respectively. The fair values of options granted
during 1997 and 1998 were $0.06 and $0.34 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 exercise price of the
option at the date of grant. The effect of applying SFAS No. 123 on 1997 and
1998 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
under the plan and by stockholders consistent with the methodology prescribed
under SFAS No. 123, the Company=s pro forma net loss in 1997 and 1998 would have
been approximately $(97,000) and $(1,782,000), respectively, and the pro forma
loss per share would have been $0.01 and $0.20, respectively.
<PAGE>
11. Stockholder's Equity (continued)
The following table summarizes stock option transactions under the plan:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1998
-----------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------ --------
<S> <C> <C> <C> <C>
Outstanding options at the beginning of year 185,000 $1.00 35,000 $1.00
Options granted 330,000 0.87
Options canceled (150,000) 1.00 (270,000) 1.00
--------- ------------
35,000 $1.00 95,000 $0.56
========= ============
</TABLE>
On December 2, 1998, the Company repriced all outstanding options to the
then current market value of $0.56 per share.
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, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
as of Remaining Average as of Average
Exercise December 31, Contractual Exercise December 31, Exercise
Price 1998 Life (in years) Price 1998 Price
------------- ------------- -------------- --------- ------------ ---------
$0.56 95,000 7.84 $0.56 17,500 $0.56
</TABLE>
12. Retirement Plan
The Company has a 401(k) savings plan (the APlan@) 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 1998 and 1997 Plan years.
13. Other income
For the year ended December 31, 1997, 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.
14. 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.
<PAGE>
14. Commitments and Other (continued)
In the normal course of business, the Company is subject to various
lawsuits involving matters generally incidental to its business. Management is
of the opinion that the ultimate liability, if any, resulting from any pending
actions or proceedings will not have a material effect on the financial position
or results of operations of the Company.
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>
Amounts to be
Years ending Related Other Received Under
December 31, Party Lease Leases Subleases
------------ ------------ -------- --------------
<S> <C> <C> <C> <C>
1999 $69,100 $ 595,200 $ 173,900
2000 51,400 647,200 185,300
2001 13,800 679,500 170,900
2002 720,000 120,000
2003 752,500 120,000
Thereafter 181,700 30,000
--------------- ------------ --------------
$134,300 $3,576,100 $ 800,100
=============== ============ ============
</TABLE>
The Company's rent expense approximated, $490,000 and $525,000 for the
years ended December 31, 1998 and 1997, respectively.
Employment agreements:
During 1997, 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 for severance payments, provided that the officer
is not terminated for cause. In connection with the February 1999 agreement (see
Note 15), one of the agreements has been canceled.
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.
<PAGE>
14. Commitments and Other (continued)
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 years ended
December 31, 1998 and 1997, the Company incurred costs of approximately $25,000
and $33,000, respectively, related to the early pay-off of sub-prime mortgage
loans sold to investors. The Company does not currently believe that any future
recapture costs would be significant and has provided $20,000 as an allowance
for estimated future recapture costs as of December 31, 1998.
The Company had approximately $129.7 million of mortgage loans in various
stages of process as of December 31, 1998 of which approximately $28.5 million
had been committed and rate-locked. For approximately $30.3 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 pool 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, 1997 through December 31, 1998.
Fair value of financial instruments:
Statement of Financial Accounting Standards No. 107, ADisclosures about
Fair Values of Financial Instruments (AFAS 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.
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.
December 31, 1998
-----------------------------
Carrying Fair
Value Value
------------- ------------
Cash and cash equivalents $ 86,094 $ 86,094
Mortgage loans held for sale 3,418,761 3,768,716
Due from mortgage loan investors 11,323,933 11,323,933
Loans closed to be disbursed 3,019,800 3,019,800
Borrowings 11,833,671 11,902,082
<PAGE>
14. Commitments and Other (continued)
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 and cash equivalents
The carrying amount of cash and cash equivalents 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 to be disbursed
The Company has estimated fair values as the face amount of these
obligations 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, 1998 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, 1998 and 1997, three investors accounted
for 75% and one investor accounted for 41%, respectively of mortgages sold.
15. Subsequent Events
On February 10, 1999, the Company entered into an additional $10 million
warehouse line of credit with another 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.
In February 1999, the Company entered into an agreement with a former
officer and his spouse. The couple agreed to exchange 693,000 shares of the
Company's stock, cancel options to acquire 252,276 shares from the principal
stockholders (see Note 11) and resign as general partner of the partnership in
settlement of $140,000 due to the Company. Additionally, the officer resigned
and his employment contract was terminated.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001048644
<NAME> MPEL HOLDINGS CORP.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 86,094
<SECURITIES> 0
<RECEIVABLES> 14,136,831
<ALLOWANCES> 0
<INVENTORY> 3,418,761
<CURRENT-ASSETS> 0
<PP&E> 649,805
<DEPRECIATION> 0
<TOTAL-ASSETS> 18,291,491
<CURRENT-LIABILITIES> 16,003,821
<BONDS> 0
0
0
<COMMON> 118,941
<OTHER-SE> 2,168,729
<TOTAL-LIABILITY-AND-EQUITY> 18,291,491
<SALES> 0
<TOTAL-REVENUES> 10,712,786
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,793,870
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,690,311
<INCOME-PRETAX> (1,771,395)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,771,395)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,771,395)
<EPS-PRIMARY> (.2)
<EPS-DILUTED> (.2)
</TABLE>
