SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File
MARCH 31, 1996 NO. 0-18945
WESTMARK GROUP HOLDINGS, INC.
COLORADO 84-1055077
(State of Incorporation) (I.R.S. Employment Identification No.)
355 N.E. Fifth Avenue
Delray Beach, Florida 33483
(407)243-8010
(Address of Principal Executive Offices. Include
Zip Code and Telephone Number)
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 [ ]
THE NUMBER OF SHARES OUTSTANDING OF THE ISSUER'S COMMON STOCK AS OF
MAY 22, 1996 WAS 2,810,478.
[X] TRADITIONAL SMALL BUSINESS DISCLOSURE FORMAT.
<PAGE>
WESTMARK GROUP HOLDINGS, INC.
FORM 10-QSB REPORT INDEX
10-QSB PART AND ITEM NO.
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated balance sheet as of
March 31, 1996..................................... 3
Consolidated statement of operations for the three
months ended March 31, 1996 and 1995............... 4
Consolidated statement of cash flows for the three
months ended March 31, 1996........................ 5
Notes to consolidated financial statements................ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 7
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS......................................... 10
ITEM 2. CHANGES IN SECURITIES..................................... 10
ITEM 3. DEFAULTS UPON SENIOR SECURITIES........................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 10
ITEM 5. OTHER INFORMATION......................................... 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................... 10
SIGNATURES......................................................... 11
2
<PAGE>
PART 1 FINANCIAL INFORMATION
WESTMARK GROUP HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1996 1995
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents .................. $ 263,947 $ 311,916
Accounts receivable, net of reserve ........ 8,664 382,225
Mortgage loans held for sale ............... 7,266,724 19,480,029
Other current assets ....................... 69,799 32,500
------------ ------------
Total Current Assets ........................... 7,609,134 20,206,671
------------ ------------
Fixed Assets:
Office Equipment and leasehold improvements 820,588 820,588
Equipment under Capital leases ............. 16,477 16,477
------------ ------------
837,065 837,065
Less Depreciation .................... (458,223) (434,411)
------------ ------------
Total Fixed Assets ............................. 378,843 402,655
------------ ------------
Other Assets:
Investments ................................ 4,115,000 4,115,000
Goodwill, net of amortization .............. 761,104 785,833
------------ ------------
Total Other Assets ............................. 4,876,104 4,900,833
TOTAL ASSETS ................................... 12,864,081 25,510,158
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Fees and accounts payable .................. $ 773,226 $ 1,234,199
Warehouse line of credit ................... 7,057,297 18,625,866
Interest payable ........................... 141,783 227,619
Settlement liability ....................... 419,348 419,348
Capital lease obligations .................. 5,756 8,101
Other notes payable ........................ 707,318 717,818
Notes payable - related party .............. 90,000 --
Other current liabilities .................. 645,132 987,680
------------ ------------
Total current liabilities ...................... 9,839,860 22,220,631
------------ ------------
Long-Term Liabilities:
Notes payable, long term ................... 1,000,000 1,000,000
Other long-term liabilities ................ 698,323 698,323
------------ ------------
Total Long-Term Liabilities .................... 1,698,323 1,698,323
------------ ------------
TOTAL LIABILITIES .............................. 11,538,183 23,918,954
------------ ------------
STOCKHOLDER'S EQUITY:
Preferred stock, no par value, 1,000,000
shares authorized; 200,000 shares issued
and outstanding at March 31, 1996 ............. 700,000 --
Common stock, no par value, 3,333,333 shares
authorized; 2,637,772 shares issued and
outstanding at March 31, 1996 ................. 22,475,937 23,165,937
Additional Paid in capital from
outstanding options and warrants .............. 1,153,688 1,153,688
Accumulated deficit ............................ (23,003,727) (22,728,421)
------------ ------------
TOTAL STOCKHOLDER'S EQUITY ..................... 1,325,898 1,591,204
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ..... $ 12,864,081 $ 25,510,158
============ ============
See accompanying notes.
3
<PAGE>
WESTMARK GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
--------------------------
March 31, March 31,
1996 1995
---------- ----------
REVENUES:
Loan origination and gain from sale
of servicing ............................ 987,222 662,894
Other ..................................... 4,170 8,825
---------- ----------
TOTAL REVENUES ................................. 991,392 671,719
---------- ----------
EXPENSES:
Loan origination costs .................... 373,224 381,090
Servicing sale adjustments ................ (70,000) --
General and admin ......................... 916,089 1,324,547
Marketing and advertising ................. 22,656 62,474
Goodwill amortization ..................... 24,729 24,729
---------- ----------
TOTAL EXPENSES ................................. 1,266,698 1,792,840
---------- ----------
Loss before income taxes ....................... (275,306) (1,121,121)
Provision for income taxes
---------- ----------
NET LOSS ....................................... (275,306) (1,121,121)
========== ==========
NET LOSS PER SHARE ............................. (0.10) (1.80)
========== ==========
4
<PAGE>
WESTMARK GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Consolidated net income/(loss) .................................. $ (275,306) $(1,121,121)
Adjustments to reconcile consolidated net income/(loss)
to net cash used by operating activities:
Depreciation and amortization ............................... 23,812 26,754
Stock issued for services ................................... 0 203,425
Stock issued for settlement of litigation ................... 0 174,250
Goodwill amortization ....................................... 24,729 24,729
------------ ----------
Cash provided/(used) in operations before working capital changes (226,765) (691,963)
------------ ----------
(Increase)/Decrease in accounts receivable .................. 373,561 426,085
(Increase)/Decrease in other current assets ................. (37,299) (200,740)
(Increase)/Decrease in mortgage loans held for sale ......... 12,213,305 (5,960,691)
(Increase)/Decrease in REO loans ............................ 0 62,050
(Increase)/Decrease in other long term assets ............... 0 200,792
(Increase)/Decrease in capital lease ........................ (2,345) 0
Increase/(Decrease) in accounts payable ..................... (460,973) (53,518)
Increase/(Decrease) in interest payable ..................... (85,836) 56,196
Increase/(Decrease) in other current liabilities ............ (342,548) 174,197
------------ ---------
Cash provided/(used) by operating activities .................... 11,431,100 6,335,986
------------ ---------
INVESTING ACTIVITIES
Purchase of fixed assets and improvements ................... 0 (14,714)
Cash provided/used in investing activities ...................... 0 (14,704)
FINANCING ACTIVITIES
Net Increase/(Decrease) in warehouse line of credit ......... (11,568,569) 5,893,118
Allowances from related party ............................... 790,000 0
Repayments of notes payable ................................. (10,500) 0
Repurchase of stock ......................................... (700,000) 0
Sale of stock for cash ...................................... 10,000 371,666
Cash provided/(used) by financing activities .................... (11,479,069) 6,264,784
------------ ---------
Net Increase/(Decrease) in cash ................................. (47,969) (85,906)
Cash and cash equivalents, beginning of period .................. 311,916 107,573
Cash and cash equivalents, end of period ........................ 263,947 21,667
============ =========
Cash Paid for interest .......................................... $ 309,770 $ 113,432
============ =========
Cash paid for income taxes ...................................... $ 0 $ 0
============ =========
</TABLE>
5
NOTE A: BASIS OF PRESENTATION
The accompanying un-audited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
Item 610b of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended March 31, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's audited annual report on Form 10-KSB for the year ended December 31,
1995.
NOTE B: FIRST QUARTER FINANCING ACTIVITY
The Company received $790,000 in advances from Heart Labs of America,
Inc. ("Heart Labs") which were used to fund a stock repurchase commitment of
$700,000, as well as for working capital purposes. A total of $700,000 of these
advances were converted to 10% convertible preferred stock, with the remainder
in the form of one-year 10% promissory notes totaling $90,000.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto.
FINANCIAL RESULTS OF OPERATIONS
On a consolidated basis, total revenues increased to $991,392 in the
quarter ended March 31, 1996 from $671,719 in the quarter ended March 31, 1995,
an increase of 48%. The increase is a result of greater profit margins on the
bulk sale of B/C paper along with the flow sales on "A" paper. This increase in
revenue is a combination of the increased marketing efforts in the B/C loan area
along with investor commitments to buy bulk loan packages.
Expenses for the quarter ended March 31, 1996 decreased 30% to
$1,266,698 from $1,792,840 for the quarter ended March 31, 1995. Loan
origination costs decreased 2% to $373,224 for the current quarter from $381,090
in the comparable prior year quarter ending March 31, 1995. General and
Administrative expenses decreased 31% to $916,090 from $1,324,547 for the
quarter ended March 31, 1995. Marketing and Advertising expense decreased 64% to
$22,656 from $62,474 for the quarter ended March 31, 1995.
A net loss resulted for the current quarter of $275,306 or $0.10 per
share as compared to a net loss of $1,121,121 or $1.80 per share for the quarter
ended March 31, 1995. This decreased loss is due to significant cost cutting
efforts by management in areas of General and Administrative through salary
reductions, lease termination and operational consolidations, as well as
increased margins on the sale of loans.
BUSINESS OPERATIONS
During the first quarter of 1996, the Company continued increased loan
volumes in B/C paper. B/C loan fundings increased from $2.75 million in the 3
months ending March 31, 1995 to $4.79 million for the three months ended March
31, 1996, an increase of 74% and the B/C loan pipeline from $7.8 million on
March 31, 1995 to $13.4 million on March 31, 1996. The loan pipeline is a
leading indictor of loan fundings and revenue and management believes that will
increase in the second quarter of 1996.
The Company officially launched its B/C lending program during the first
quarter of 1995. B/C loans are for borrowers with credit histories that fall
below the guidelines set forth by Fannie Mae and Freddie Mac. Although the B/C
division is only 1 year old, 33% of the Company's loan fundings during the 1st
quarter of 1996 were from B/C loans and over 60% of revenues realized were from
B/C loans. The Company is focusing its marketing efforts in the B/C loan market.
The Company is now registered and/or licensed to lend in 20 states. While the
increase in the B/C loan pipeline has come primarily from an increased market
share in Florida, management intends to continue its marketing strategy in
additional states, including California, Georgia, Washington, Hawaii, Idaho,
Montana, and Missouri.
The Company continues to sell loan origination's on a
"servicing-released" basis to investors in the normal course of business. The
Company is continuing to seek additional warehouse lines to accommodate
anticipated increase in originations. The increase in
7
origination's will be created by Westmark's geographic expansion and increase in
market share. The Company instituted a bulk sales program for B/C paper in which
loans are pooled and sold in packages ranging from $500,000 to $3,000,000.
During the first quarter, the bulk sales delivery was completed successfully
with 3 institutional investors purchasing Westmark non-conforming origination's.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses its cash flow from whole loan sales, loan origination
fees, net interest income and borrowings under its warehouse line of credit to
meet its working capital needs. The Company's cash requirements include the
funding of loan origination's, purchases, payment of interest expenses,
operating expenses, taxes and capital expenditures.
On March 31, 1996, the Company had a working capital deficit of
$2,230,726 and total stockholders equity of $1,325,898. Adequate credit
facilities and other sources of funding, including the ability of the Company to
sell loans, are essential to the continuation of the Company's ability to
originate and purchase loans. The Company borrows funds on a short term basis to
support the accumulation of loans prior to sale. These short term borrowings are
made under a warehouse line of credit with Princap Mortgage, Inc. ("Warehouse
Facility"). Pursuant to the Warehouse Facility, the Company has available a
secured revolving credit line of $15 million to finance the Company's
origination or purchase of loans, pending sale to investors. The line of credit,
pursuant to the Warehouse Facility, has collateral of the assignment and pledge
of eligible mortgage loans, bears interest at an annual rate of 2% above prime,
payable at the time of purchase by the permanent investor. The Warehouse
Facility provides for a transaction charge of $140 per loan and requires the
Company to possess a minimum net worth of $250,000 and a compensating cash
balance on deposit in the amount of $5,000. On March 31, 1996, the balance
outstanding , pursuant to this Warehouse Facility, totaled $7,057,297. The
Company does not have any other external lines of credit for financing.
Historically, the Company has obtained financing through the issuance of
its common stock and borrowings on a negotiated basis. During the first quarter
of 1996, the Company issued 5,000 shares of Common Stock for services rendered.
During 1995, the Company issued 956,162 shares of common stock for cash and
other consideration. In June and October 1995, the Company raised $600,000 cash
through the issuance of convertible promissory notes in the principal amount of
$600,000 and the warrants entitling holders to purchase certain securities
("Bridge Financing"). In April 1996, the Company and all these investors agreed
to restructure the investment and the Company paid such investors an aggregate
amount of $600,000 and issued such investors 300,000 shares of Series B
Preferred Stock ("Series B Preferred Stock") with a stated value of $600,000.
The Series B Preferred Stock has a liquidation preference of $600,000, plus
accrued and unpaid dividends, is redeemable by the Company at a redemption price
of $600,000, plus accrued and unpaid dividends from the date of redemption,
subject to adjustment in the event of certain circumstances, and is convertible
into shares of Common Stock at a conversion price equal to the lessor of $2.00
or 84% of the closing bid price prior to the date of conversion (subject to
further adjustment). In November 1995, Heart Labs purchased 1,298,000 shares of
Company common stock in exchange for $1,210,000 cash and cash equivalents, which
was utilized for working capital purposes, and the issuance of 200,000 shares of
Heart Labs Series B Convertible Preferred Stock with the stated value of $10 per
share.
8
In addition, Heart Labs advanced the Company an aggregate amount of
$790,000 during the first quarter of 1996, of which $700,000 was converted to
200,000 shares of Series C Preferred Stock with a stated value of $3.50 per
share. In the second quarter of 1996, Heart Labs has advanced, to date,
$1,353,000. These fundings were utilized to discharge outstanding debts,
including an agreement to repurchase shares of Common Stock for $700,000, and
for working capital purposes. The Company is dependent on Heart Labs in order to
satisfy certain debt obligations and working capital needs for the first and
second quarter of 1996. The Company's internally generated cash flows from
operations has historically been and continue to be insufficient for its cash
needs. It is expected that internal sources of liquidity will improve when net
cash is provided by operating activities and, until such time, the Company will
rely on external sources for liquidity. The Company has not established any
other lines of credit or other similar financial arrangements with any lenders,
and it continues to rely on Heart Labs for assistance to meet immediate working
capital needs. If it appears at any time in the future that the Company is again
approaching a condition of cash deficiency, the Company will be required to seek
additional debt or equity financing or bring cash flows in balance. Management
does not anticipate the need for any such action and, therefore, has no specific
plans or commitments with respect thereto for the Company. However, if such
action was required, there is no assurance that the Company will be successful
in any such effort.
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in Robert J. Conover vs. Greentree Mortgage
Co., L.P. and Greentree Management Corporation (collectively, "Greentree"),
Westmark Group Holdings, Inc., Westmark Mortgage Corporation and Michael F.
Morrell, Superior Court of New Jersey, Chancery Division, Burlington County,
filed September 25, 1995. The plaintiff served as president and chief financial
officer of Greentree pursuant to an employment agreement between the plaintiff
and Greentree. Plaintiff was discharged from those positions in September 1995.
Plaintiff brought this action for compensatory damages based upon alleged breach
of such employment agreement. Plaintiff seeks, among other things, damages
against Westmark and Mr. Morrell based upon an allegation of intentional
interference with contractual obligations and a third party beneficiary claim
with respect to the Company. Mr. Morrell is indemnified by the Company.
On October 27, 1995, the plaintiff sought a temporary restraining order
and preliminary injunction enjoining the Company from the acquiring Greentree.
Such request was denied as the Court found that, among other things, the
applicable test requiring plaintiff to show a likelihood of success on the
merits was not met. The Company has terminated negotiations with Greentree.
Greentree has agreed to maintain a minimum net worth of $1,000,000. Management
believes that this obligation does not transfer in any way to the Company in
connection with its attempted purchase of certain assets of Greentree. Greentree
disputes the allegations of the complaint. The Company believes that there is
not legal justification for the joinder of the Company and Mr. Morrell as
defendants in the pending dispute between the plaintiff and Greentree, and
intends to vigorously defend this allegation.
In the matter of Saxon Mortgage v. Westmark, Saxon Mortgage obtained a
judgment in the amount of $469,348 in connection with various repurchase
obligations. An amount of $50,000 has been paid, and the remaining liability of
$419,348 is accrued at December 31, 1995. Negotiations are continuing between
the two parties to settle this matter.
9
The Company is a defendant in Conway et al v. Danna, Network Financial
Services, Inc., et al. The suit alleges Unfair Practices, Fraud (Negligent
Misrepresentations; Intentional Misrepresentations; Concealment); Breach of
Written Contract; Breach of Implied Covenant of Good Faith and Fair Dealing;
Common Count; and Breach of California Securities Statutes against Network
Financial Services, Inc. (a.k.a. Westmark Group Holdings, Inc.) and others. The
company considers the risk of loss in this matter to be remote and,
consequently, no amount has been accrued as of December 31, 1995.
The Company is plaintiff in Network Financial Services, Inc. v. McCurdy,
Raiche, Ryals, Nash & Moss Land Company, filed March 1993 in Monterey County,
California Superior Court. The plaintiff alleges fraud, negligent
misrepresentation, breach of fiduciary duty, negligence, quiet title, RICO
violations and conversion. Defendant McCurdy initiated a cross-complaint naming,
among others, the Company as a cross defendant. The cross-complaint seeks
damages for breach of a stock option agreement, breach of contract, and
declaratory relief. The Company has finalized a settlement with defendants
Raiche and Ryals, wherein defendants Raiche and Ryals transferred 7,166 shares
to the Company's Common Stock to the Company in addition to one-half (1/2)
interest in certain property. The balance of the pending litigation involving
defendant and cross-complaint McCurdy and others is unaffected by the
Raiche/Ryals settlement. Management intends to vigorously defend this
cross-complaint.
The Company is defendant in Knight v. Lomas Mortgage U.S.A. and Westmark
Mortgage Corporation. The complaint is based upon a contention by the Plaintiff
that Lomas Mortgage U.S.A. as the servicing agent wrongfully impaired the credit
rating of Plaintiff and breached the written agreement between the parties. A
preliminary determination indicates that the basis for the dispute is between
Lomas U.S.A. and the Plaintiff, but the Company has been named as a party
defendant in view of the original contractual relationship between the Plaintiff
and Westmark. The Company considers the risk of loss in this matter to be
remote, and consequently, no amount has been accrued as of December 31, 1995.
From time to time the Company is a defendant (actual or threatened) in
certain lawsuits encountered in the ordinary course of its business, the
resolution of which, in the opinion of management, should not have a material
adverse affect on the Company's financial position.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WESTMARK GROUP HOLDINGS, INC.
BY: /s/ DAWN DRELLA
DAWN DRELLA, CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING OFFICER AND DULY
AUTHORIZED OFFICER OF THE REGISTRANT)
BY: /s/ NORMAN J. BIRMINGHAM
NORMAN J. BIRMINGHAM, DIRECTOR, CHAIRMAN,
PRESIDENT & CHIEF EXECUTIVE OFFICER
(DULY AUTHORIZED DIRECTOR & OFFICER OF THE
REGISTRANT)
BY: /s/ MARK D. SCHAFTLEIN
MARK D. SCHAFTLIEN, DIRECTOR & PRESIDENT OF
WESTMARK MORTGAGE CORPORATION
(DULY AUTHORIZED DIRECTOR & OFFICER OF THE
REGISTRANT)
DATED: MAY 17, 1996
11
<TABLE> <S> <C>
<ARTICLE> 5
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 263,947
<SECURITIES> 0
<RECEIVABLES> 7,275,388
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,609,134
<PP&E> 837,065
<DEPRECIATION> 458,223
<TOTAL-ASSETS> 12,864,081
<CURRENT-LIABILITIES> 9,839,860
<BONDS> 0
0
700,000
<COMMON> 22,475,937
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,864,081
<SALES> 0
<TOTAL-REVENUES> 991,392
<CGS> 0
<TOTAL-COSTS> 1,266,698
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (275,306)
<INCOME-TAX> 0
<INCOME-CONTINUING> 407,306
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (275,306)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
