U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
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[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
WESTMARK GROUP HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Commission file number: 0-18945
DELAWARE 84-1055077
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
355 N.E. FIFTH AVENUE 33483
(Address of Principal Executive Office) (Zip Code)
561-243-8010
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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/A or any amendment to this Form 10-KSB/A. [ ]
Issuer's revenues for the 12 months ended December 31, 1996 were $2,933,173.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the average bid and ask price on the OTC Electronic
Bulletin Board on April 11, 1997 was $3,853,650. As of April 11, 1997 registrant
has 4,833,002 shares of Common Stock outstanding.
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TABLE OF CONTENTS
ITEMS PAGE
PART I
ITEM 1. BUSINESS.........................................................3
ITEM 2. PROPERTIES.......................................................9
ITEM 3. LEGAL PROCEEDINGS................................................9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.............................................12
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................12
ITEM 7. FINANCIAL STATEMENTS............................................18
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................19
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT............................................................19
ITEM 10. EXECUTIVE COMPENSATION..........................................21
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT..................................................22
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................23
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K................................24
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PART I
ITEM 1. BUSINESS
The Company is a financial services company that, through its wholly-owned
subsidiary Westmark Mortgage, is engaged in the business of originating,
purchasing and selling mortgage loans secured primarily by single family,
multi-family and condominium residences. Investors purchase conforming loans
(generally those borrowers with perfect or good credit) and non-confirming loans
(generally below average and delinquent credit). Westmark Mortgage is registered
and/or licensed to originate, purchase closed loans, underwrite, fund or sell
residential mortgage loans in the states of Arizona, California, Colorado,
Florida, Georgia, Hawaii, Idaho, Indiana, Iowa, Kansas, Kentucky, Michigan,
Mississippi, Missouri, Montana, Ohio, Oklahoma, Oregon, South Carolina,
Tennessee, Utah, Washington, and Wyoming. The Company pools and sells loans to
third-party institutional investors. The primary non-conforming investor is
Household Financial Services which provided 65% of the Company's revenues from
gain on sale in 1996.
The Company was incorporated in Colorado during 1986 under the name Eagle
Venture Acquisitions, Inc. From inception until May 1990, the Company was
engaged in business operations unrelated to its current business strategy. In
May 1990, the Company changed its name to Network Real Estate of California,
Inc. and commenced providing a variety of real estate services through its
wholly-owned subsidiary, Network Real Estate, Inc. ("Network Real Estate"),
including real estate brokerage, mortgage banking services and insurance
services. In July 1992, the Company changed its name to Network Financial
Services, Inc. From May 1990 through August 1993, the Company conducted
substantially all of its business operations through its subsidiary, Network
Real Estate.
In August 1993, the Company acquired Westmark Mortgage from Primark
Corporation, an unaffiliated third party ("Primark"). Westmark Mortgage was
engaged in essentially the same business as it is today, except that the Company
serviced certain originated mortgage loans. In August 1994, Freddie Mac agreed
to the sale by the Company of the mortgage servicing portfolio. In September
1994, the Company sold its entire mortgage servicing portfolio to Crown Bank.
In 1993, the Company ceased operating Network Capital Group, a
wholly-owned mortgage banking subsidiary, in a transaction that had no
significant impact on the Company's financial condition. In an April 1994
agreement, effective December 31, 1993, the Company sold Network Real Estate to
a former president of the Company.
While the Company is primarily a financial services business operation, in
July 1996, the Company acquired Green World Technologies, Inc. ("Green World"),
a wholly owned subsidiary that markets, nationally and internationally the Talon
Refrigerant Management System ("Talon"), an energy saving add-on to air cooled
condensers found in air conditioners, heat pumps and refrigeration systems. The
marketing campaign consists of establishing dealer networks and warehousing. In
addition, testing is currently underway with several manufacturers for the
purpose of having the Talon included as an other equipment manufacturer ("OEM")
in these manufacturers product lines. The business operations of Green World
constitute an insignificant portion of the Company's business. The Company does
not anticipate entering into any further diversified lines of business.
In June 1994, the Company changed its name to Westmark Group Holdings,
Inc. Currently, the Company conducts its business through two operating
subsidiaries, Westmark Mortgage and Green World, and references to the Company
or Westmark include Westmark Mortgage and Green World, unless otherwise
indicated. The principal executive office of the Company is located at 355 N.E.
Fifth Avenue, Delray Beach, Florida 33483 and its telephone number is (561)
243-8010.
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RECENT DEVELOPMENTS
GREEN WORLD ACQUISITION
Effective July 21, 1996, the Company and GTB Company entered into an
agreement whereby the Company acquired all of the issued and outstanding capital
stock of Green World in consideration for (i) 130,000 shares of Series E
Preferred Stock, stated value $10.00 per share, which preferred stock is
convertible into Common Stock at the option of the holder at any time prior to
July 21, 1997, at a conversion price of $.45 per share of Common Stock, and (ii)
payment of royalties of 14% of the gross sales of Green World for a period of
two years from the date of this agreement, which payments are to be made on a
quarterly basis. Green World is in the business of refrigerant management
systems for energy savings. GTB Company had acquired Green World from Medical
Industries, of America, Inc., formerly known as Heart Labs of America, Inc.
("MIOA"), for the following consideration: (i) it discharged a note executed by
MIOA payable to GTB Company in the amount of $700,000, (ii) executed a
non-interest bearing promissory note in the amount of $380,000, and (iii) agreed
to a royalty payment of 7% of the gross sales of Green World until July 1988,
and 5% until July 1999. Within one month of acquiring Green World, GTB Company
sold it to the Company for the above-captioned terms and conditions. The Company
acquired Green World pursuant to a prior corporate strategy to diversify its
business operations. Management has determined not to pursue any further
diversification strategies at this time, and intends to focus its resources on
its mortgage operations. As the date hereof, the board of directors of the
Company has determined to spin-off a minimum of 51% and a maximum of 100% of the
Green World capital stock the Company owned by the Company. As of the date of
this Prospectus, neither the record date or the amount of capital stock to be
spun-off has been determined. The timing in terms of the spin-off will be
disclosed through appropriate SEC filings when determined.
Green World is a nationwide marketer of Talon, an energy-saving add-on
to air-cooled condensers found in air conditioners, heat pumps and refrigeration
systems. Green World has been establishing a dealer network to market its
products. Green World has executed an exclusive contract for the sales of its
Talon with Trane Specialty A/C Products ("Trane"). The contract calls for Trane
to purchase no less than 7,125 units over the next 24 months, with 2,535 units
in the first 12 months and 4,800 the remaining 12 months and is renewable for an
additional 24 months. Additionally, the contract allows the distributor the
exclusive right to market in 16 California counties including those counties in
the San Francisco Bay area.
The Company's decision to acquire Green World was based upon management's
concern with the effect of fluctuating interest rates. Management believes that
increased interest rates will result in a number of applications for new "A"
mortgages, such interest rate having a more adverse effect upon the "A" mortgage
market than the "B/C" mortgage market. In an attempt to diversify the business
in order to off-set the potential cyclical nature of the "A" mortgage market,
the Company embarked on a two-prong diversification strategy. The Company (i)
entered into the Green World acquisition with the purpose of developing a
revenue stream from a less cyclical business and (ii) determined to aggressively
process loan applications in the "B/C" mortgage market. In 1995 the Company
determined that the "B/C" mortgage market was not as particularly interest-rate
sensitive s the "A" mortgage market and after results of operations were
analyzed in the 1996 fiscal year, management determined that the "B/C" mortgage
market resulted in a better yields for the Company than mortgages originated in
the "A" mortgage market. During 1996 the Company met with numerous financing
sources in order to obtain funds to be better able to take advantage of
participating in the "B/C" mortgage market as well as to develop the Green World
business opportunity. In connection with pursuing such financing, potential
investor response led management to conclude that the Company was better able to
take advantage of a "B/C" mortgage market than the Green World opportunity,
management elected in 1997 to spin-off the Green World business and to
concentrate on originating, purchasing and selling "B/C" mortgage loans.
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In connection with the acquisition of Green World by GTB Company from
MIOA and the subsequent acquisition of Green World by the Company from GTB
Company, the sole shareholder of GTB Company was Charles Chillingworth, who for
a brief period prior to the Green World transaction was corporate counsel for
the Company and MIOA. In the Green World transaction, Mr. Chillingworth solely
represented the interest of GTB Company in its dealing with both MIOA and the
Company. Mr. Birmingham was an officer and director of the Company at the time
of the Green World acquisition and currently serves in those positions with the
Company. During the Green World acquisition by MIOA, Mr. Birmingham was an
officer and director of MIOA, and upon the sale of Green World to GTB Company,
Mr. Birmingham was only a director of MIOA. In August 1996, Mr. Birmingham
resigned as a director of MIOA. Mr. Morrel was an officer and director of MIOA
at the time of the acquisition and prior to the acquisition was an officer and
director of the Company. Mr, Birmingham abstained from voting on the proposed
sale of Green World by MIOA to GTB Company and abstained from voting on the
Green World acquisition by the Company from GTB Company. The board of directors
of the Company believes that the transaction to acquire Green World was
conducted on an arms'-length basis.
WESTMARK-GTB AGREEMENT
In February 1997, the Company and GTB entered into an agreement effective
the date of this Prospectus in which GTB agreed to convert all of its Series D
Preferred Stock into 2,888,889 shares of Common Stock, forgave other rights it
was entitled, and received 15% of the capital stock of Green World
("Westmark-GTB Agreement"). The Company entered into this agreement in order to
clarify certain obligations by and between GTB and the Company arising from the
Green World acquisition
WESTMARK-MEDICAL INDUSTRIES AGREEMENT
The Company and MIOA entered into an agreement dated January 23, 1997
("Westmark-Medical Industries Agreement") which was amended March 31, 1997,
effective the date of this prospectus contained in the SB-2 registration
statement, No. 333-00569 ("Prospectus"). MIOA presently owns 1,667,284 shares of
Company Common Stock, and 200,000 shares of the Company's Series C Preferred
Stock ($3.50 stated valued). A contractual right provided to MIOA upon issuance
of a portion of its shares of Common Stock afforded MIOA the right to maintain a
49% ownership interest in the Company. At December 31, 1996, the Company owed
MIOA $1,727,569. MIOA has agreed to return all of its shares of capital stock in
the Company and forego the 49% anti-dilution protection in exchange for the
Company retiring a $3,953,000 note payable to MIOA upon the following terms. The
Company will pay MIOA $1,500,000 from the proceeds of the Reisert Financing
(defined herein) and will execute a promissory note amortized over a period of
ten years, the principal balance of which shall be $1,803,000. Interest on the
promissory note accrues at 10% per annum. The principal balance of the
promissory note and all accrued interest is due and payable in January 2000. The
promissory note is secured by property, consisting of various strips of 25-30
foot and 50 foot (perimeter) platted road rights of way located in Palm Beach
County, totaling approximately 1,366,450 square feet with an approximate value
of $1.3 million. In addition, the Company has agreed to return to MIOA 200,000
shares of MIOA Convertible Preferred Stock with an estimated value of
approximately $2,000,000.
Upon receipt of the Company's shares of capital stock from MIOA, the
Company has agreed to issue MIOA a certificate for 70,000 shares of Company
Common Stock. In addition, the Company is obligated to issue 40,000 shares of
Company Common Stock concurrent with each $100,000 payment on the promissory
note in excess of $1,000,000 received by MIOA, until MIOA is in receipt of
400,000 shares of Company Common Stock.
In the event the Company sells any assets or capital stock of Green
World, the principal balance of the promissory note shall be reduced by
$500,000, and any notes receivable received by the Company as part of the sale
shall be pledged to MIOA as additional security in an amount up to the
outstanding principal balance of the promissory note. The Company has entered
into general negotiations with respect to a potential sale of Green World;
however, there can be no assurance that such sale will occur in the future.
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REISERT FINANCING
The Company has entered into a financing agreement with J. Michael
Reisert, Inc. (the "Reisert Financing"), to close on the date of the Prospectus,
for the sale of up to 3,000,000 units of the Company's Series G Convertible
Redeemable Preferred Stock ("Series G Preferred Stock") sold to a limited number
of accredited investors. Each unit consists of two shares of Series G Preferred
Stock and one redeemable five-year warrant to purchase one share of Company
Common Stock at an exercise price of $1.25 (the "Reisert Warrants"). The Company
has agreed to issue five-year warrants to purchase 300,000 units at an exercise
price of $2.20 per unit, (the "Reisert Placement Agent Warrants") to the
placement agent in connection with the financing.
Assuming the maximum subscription of units, the Company expects to
receive approximately $5,455,000 in proceeds which the Company intends to
allocate as follows: $1.5 million to be paid to MIOA pursuant to the
Westmark-Medical Industries Agreement, $1.1 million for the redemption of
outstanding preferred stock, $300,000 for the payment of certain creditors, and
$2,555,000 for working capital.
HOLLENBECK CONVERSION
In December 1996, Mr. Drew Hollenbeck relinquished his right to force the
Company to redeem the Series A Preferred Stock. In December 1996 Mr. Drew
Hollenbeck agreed to convert the 100,000 shares of Series A Preferred Stock
convertible into 800,000 shares of Common Stock effective upon the date of the
Prospectus.
BUSINESS STRATEGY-MORTGAGE OPERATION
The Company has historically been a wholesale mortgage lender providing a
full range of mortgage lending services which include conventional,
governmental, jumbo (large loan amounts) and non-conforming ("B/C") home
mortgage loans. The majority of the Company's loans are made to owners of single
family, multi-family and condominium residences who use the loan proceeds for
purchasing new homes or refinancing existing home mortgages. Westmark provides
funds to approved mortgage brokers and correspondent lenders who originate the
mortgage for the consumer. Westmark closes and funds the loan through approved
correspondent mortgage brokers and lenders. Westmark solicits these brokers for
business, competing with other wholesale lenders.
Westmark provides products to its approved mortgage broker customers
related to home loans. In general, Westmark offers brokers products for their
clients who have credit from "A" (perfect and good credit) to "D" (below average
and delinquent) and who desire conventional loans, government loans, conforming
loans, and non-conforming loans. All mortgage products are secured by the
property the borrower used as collateral for the mortgage.
Mortgage brokers submit loan packages to a Westmark representative for
review and approval. After the mortgage loan is closed, Westmark packages the
loans into groups and sells the loans to mortgage lending conduits. Westmark
determines to whom it will sell the loans based on the conduits price and
service at the time the specific loans are sold. Westmark does not retain the
rights to service the mortgage loans it closes or loans purchased from approved
correspondent lenders.
BUSINESS STRATEGY-GREEN WORLD OPERATION
Green World will continue to market the Talon Refrigerant Management
Systems through a network of dealers and expand marketing in a direct to retail
approach. The Company may divest itself of all or a portion of Green World as
conditions warrant. Green World constitutes an insignificant portion of the
Company's business.
PRODUCTION
Westmark's 1996 closed loan production was $76 million. Of this,
approximately $35 million was conforming conventional mortgage home loans
(otherwise referred to as "A" product) and approximately $41 million in
non-conforming mortgage home loans (otherwise referred to as "B/C" product).
Total loan dollar amount originated in 1996 reflected a 52% decrease over 1995.
The total number of loans originated decreased 40% to 855 from 1,432
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loans. The decrease resulted primarily from a shift to B/C production. Of the
total production, approximately 90% was originated from Florida and California.
The 1996 average loan amount for conforming "A" production was $95,000 compared
to $86,000 for 1995. The 1996 average loan amount for conforming "A" production
was $110,000 and the average loan amount for non-conforming "B/C" production was
$88,000.
Westmark's 1995 closed loan production was $158 million. Of this,
approximately $133 million was conforming conventional mortgage home loans
(otherwise referred to as "A" product) and approximately $25 million in
non-conforming mortgage home loans (otherwise referred to as "B/C" product).
Westmark's 1994 production was $155 million all in conforming conventional
mortgage home loans. Total loan dollar amount originated in 1995 reflected a 2%
increase over 1994. However, the total number of loans originated increased 30%
from 1,095 to 1,432 loans. The increase resulted primarily from B/C production.
Of the total production, approximately 91% was originated from Florida and
California. The 1995 average loan amount for conforming "A" production was
$114,272 compared to $141,701 for 1994. The 1995 average loan amount for
non-conforming "B/C" production was $92,551. In 1996, B/C Production totaled
approximately $41 million and total production was $76 million.
Management's strategy is to expand its geographical production to
additional states, while intensifying sales efforts in its home state of
Florida. Management's strategy is to expand both the "A" and "B/C" business in
California, Florida, Georgia, Hawaii, Missouri, Oregon, Washington, and
developing new markets by utilizing Westmark's inside sales representatives.
Westmark has hired six (6) account executives in Florida and two (2) account
executives in Georgia focusing on the "B/C" business. In addition, Westmark has
hired a national sales manager. Westmark's goal is to build upon its existing
sales force every sixty to ninety days with growth into the states where it is
currently licensed or approved to conduct business.
"B/C" MORTGAGES
In January 1995, the Company began marketing its non-conforming ("B/C")
mortgage loan products. These mortgages are available for borrowers with credit
histories that fall below the guidelines of conforming "A" mortgage loans. The
Company believes that the "B/C" mortgage market is a growing segment of the
mortgage industry for two reasons: (i) because of the weaker credit ratings,
banks and savings and loans typically have not entered this arena; and (ii) the
secondary market for securities and selling "B/C" mortgages has become more
prevalent. As demand increases, Westmark believes it can take advantage of this
opportunity. Typically, these loans generate a greater gain on sale compared to
their conforming "A" loan counterparts. In 1996, "B/C" loans accounted for
approximately 54% of the Company's production as compared to approximately 15%
of the Company's production in 1995. Management expects the "B/C" loans to
account for over 90% of the Company's 1997 production and revenue.
PIPELINE
The loan pipeline ("Pipeline") is the volume of loans ("A" and "B/C") in
the Company's system that have met all of the Company's preliminary
qualification criteria and are consequently eligible for funding. These loans
have been preapproved and are awaiting final review. Generally, between 60% to
65% of the loans in the Pipeline successfully pass the final review and are
funded. The majority of loans that fund will do so within 60 days from entrance
into the Pipeline. The total loan Pipeline at December 31, 1996 was $18,364,143
with in excess of 90% of the pipeline consisting of B/C loans.
The loans generated by the Company can be sold on an individual loan
basis (flow) or sold in package form (bulk). A bulk package contains as little
as $500,000 in mortgage loans up to an unlimited amount. The Company can form
one package or several packages in any given month, depending on the best
execution (highest price). Loans sold on a flow (i.e., one at a time) can be
sold rapidly and loans sold in bulk generally require more time to assemble,
often 15 to 30 days from funding.
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OPERATIONS
Westmark's operations are centralized in the Delray Beach office. In
January 1995, Westmark Mortgage had two operation centers located in Florida and
California. In 1996, Westmark centralized its operations to Florida, creating
more efficiency and lowering overhead. With this centralization, management
initiated a new program to create greater profits from the sale of loans.
Historically, closed loans have been sold one by one to institutional investors.
Westmark began to participate in the "bulk sale" loan process whereby loans are
packaged into a group and sold in one transaction. This results in expanded
revenue opportunities over typical loan by loan sales and has created greater
economies of scale in the operations delivery of closed loans.
MARKETING
Traditionally, Westmark has marketed its products and services through
field sales representatives ("account executives") who are responsible for
building relations with brokers in a geographical region. A typical account
executive visits prospective clients in a particular territory and reviews
specific loans. If the loan can be funded or purchased by Westmark, the account
executive obtains the mortgage documentation and provides this to the
underwriters.
In addition to field representatives, Westmark has an inside sales group.
These employees usually cover less densely populated states and territories,
utilizing telemarketing to prospect for Westmark business. If an opportunity
exists, the broker will send the loan application into the operations division
directly. Management believes this process is more cost effective for sparsely
populated areas.
Westmark also markets its products at national and regional industry
trade shows, utilizing a sales booth and sending representatives to meet new and
existing clients. This effort provides continued market recognition for the
Westmark account executives and inside sales representatives, as well as the
Company. Westmark obtains this information and inputs the data in its computers
for marketing use. These new contacts are distributed to the appropriate sales
representatives who make sales calls while at the same time the central
marketing department sends out marketing literature by mail or facsimile to
enhance market recognition of the Company and its products. This process assists
the sales representatives in developing new prospects.
COMPETITION
The Company competes against savings and loan associations, thrifts,
commercial banks, consumer finance companies and other mortgage bankers in the
origination of single-family, multi-family and condominium residential mortgage
loans. Even though some of the competition is large and operates on a nationwide
scope, management believes that no single firm controls more than 5% of this
market. Furthermore, management believes that mortgage bankers, in general,
control more than 55% of the national market. The Company competes on the basis
of quality of services along with the relationships established by the sales and
operations staff.
REGULATION
The Company's business is subject to extensive regulation, supervision
and licensing by federal, state and local governmental authorities and is
subject to various laws and judicial and administrative decisions imposing
requirements and restrictions on part or all of its operations. The Company is
subject to the rules and regulations of, and examinations by, HUD and state
regulatory authorities with respect to originating, processing, underwriting and
selling loans. 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 loan applicants, regulate assessment, collection,
foreclosure and claims handling, investments and interest payments on escrow
balances and 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 demands for
indemnifications or mortgage loan repurchases, certain rights of rescission for
mortgage loans, class action lawsuits and administrative enforcement actions.
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The exceptions are that the required corporate tax returns for 1994 and
1995 have not been filed nor have the state returns for which these federal
documents must be attached. Further, the Company is in arrears on payment of
1996 employment related taxes of approximately $62,000.
The Company has petitioned the Internal Revenue Service for a change is
its tax year to a calendar year end to match its current year end for all other
regulatory authorities for which periods certified audits have been prepared.
The Company believes there is a reasonable chance for approval is in the second
quarter of 1997 of this change.
Except as set forth above, the Company believes that it is in compliance
is in all material respects with applicable federal and state laws and
regulations.
EMPLOYEES
As of December 31, 1996, the Company employed 10 full-time administrative
employees and 35 full-time production and operations employees. To date, the
Company has been able to recruit and retain sufficient qualified personnel. None
of the Company's employees are represented by a labor union. The Company has not
experienced any work stoppages and considers its relations with its employees to
be good.
ITEM 2. PROPERTIES
The Company maintains its executive offices and a production branch at
355 N.E. Fifth Avenue, Suite #4, Delray Beach, Florida 33483. Suite 4 is
comprised of Units 2,3, and 4. This total space consists of 7,800 square feet
and is leased through April 30, 1998 at an average monthly net rental of $2,300
per month over the term of the lease, which lease amount is considered
consistent with the surrounding market rates. Suite 4 is in a building owned by
a consultant and former officer and director of the Company. In 1994, the
Company acquired from an unaffiliated third party ownership of Unit #7 (1,100
square feet) in the same complex which is occupied primarily by the loan
production department. In 1995, Unit 5 was acquired by the Company from an
unaffiliated third party for use by the operations staff, and the mortgage
payment is $2,807 per month until maturity in 1998. The Company also operates a
1,500 square foot satellite office in California at a cost of $1,098 per month.
The lease expired in March 1997. The Company rented 1,400 square feet in Valley
Springs, California at a cost of $1,800 per month.
The Company has also entered into an agreement to acquire Unit #1,
approximately 1,200 square feet, which is located in the same complex for
$83,000, which amount is believed to be consistent with the surrounding market
rates. To date, the Company has not closed on that unit.
ITEM 3. 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 an 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 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.
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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 no 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.
Extensive discovery has been undertaken by plaintiff and defendants and
the Company has filed a Motion for Summary Judgement which will be calendared
for hearing at the conclusion of discovery, anticipated to be during the month
of May 1997. The Company does not anticipate any liability with respect to this
litigation.
In the matter of SAXON MORTGAGE V. WESTMARK, Saxon Mortgage obtained a
judgment in the amount of $419,348, in connection with various repurchase
obligations. An amount of $61,788 has been paid, and the remaining liability of
$407,560 is accrued. The Company has reached a settlement which calls for
monthly payments of $11,788 for 36 months.
Counsel for the Company anticipates a further amendment to the stipulated
judgement wherein all monthly payments are suspended in consideration for which
the Company will secure the obligation to Saxon Mortgage with a portion of the
real property acquired from PBF. The Company would remain obligated for the full
payment of $407,560 on July 15,1998 and would be entitled to a full release and
final settlement upon payment of the sum of $318,261 on or before June 27,1997.
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. (aka 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, 1996.
Plaintiffs were recently sanctioned by the Superior Court for failing to
file appropriate pleadings and until such time as Plaintiff's Amended Complaint
if filed, no discovery will be undertaken. The Company believes that there is
only a remote possibility of liability.
The Company is a 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
of 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.
A settlement has been negotiated wherein and whereby both the Complaint
and Cross-Complaint will be dismissed and no monetary compensation paid by
either party. The Company has requested several modifications to the proposed
settlement agreement.
The Company is a 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 indicated 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, 1996.
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The Company and plaintiffs entered into an agreement wherein and whereby
the subject litigation was dismissed without prejudice. The case was refiled in
Orange County, California Superior Court on October 29, 1996. The Company does
not anticipate any liability with respect to this litigation.
The Company is a defendant in ORTEGA V. MICHAEL SANTA MARIA ET AL filed
in Orange County Superior Court of the State of California. The complaint is
based upon a contention by the Borrower Ortega that Santa Maria, individually
and as a owner/manager/broker of Bann Cor Mortgage made false presentations of
material fact to plaintiffs. The Company acquired this loan from Bann Cor and
subsequently sold the loan to Imperial Credit Industries. A preliminary
determination indicates that the basis for the dispute is between Santa Maria
and Bann Cor. However, the Company has been named as a party defendant. Westmark
generally and specifically denies each and every allegation contained in the
complaint. The Company considers the risk of loss in this matter to minimal and
fully intends to defend this action.
The Company filed a Demurrer to plaintiff's Complaint and was dismissed
from the suit. However, the Company remains as a defendant in a cross-complaint
for indemnification filed by Imperial Credit Industries.
One of the Company's wholly owned subsidiaries, Green World has been
named, together with other defendants, in SHAPE UP AMERICA V. PHILLIPPE ET AL.,
filed is in Alameda County, California Superior Court on August 19, 1996. The
Complaint alleges breach of contract, conspiracy, fraud, and quantum meruit. The
basic premise to plaintiff's Complaint is that plaintiff claims to be entitled
to various forms of compensation based upon the sale of certain licensing,
patent and marketing rights to the Talon Refrigerant Management System. It is
anticipated that venue for this action will be transferred to Sacramento County
and to date, no discovery has been undertaken. Based upon a preliminary review
of relevant documentation, the Company does not anticipate any liability.
Management does not believe that any of these proceedings, individually
or in the aggregate, will materially impact the Company's financial condition or
results of operations. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is listed on the Nasdaq SmallCap Market under
the symbol "WGHI." The following table sets forth the high and low last sales
prices of the Common Stock for the periods indicated and reflect inter-dealer
prices, without retail mark-up, mark-down or commission::
PRICE RANGE
FISCAL YEAR HIGH LOW
1995
First Quarter ................................. $11.40 $3.60
Second Quarter ................................ 8.40 3.60
Third Quarter ................................. 8.50 5.40
Fourth Quarter ................................. 6.50 1.62
1996
First Quarter.................................. $3.23 $2.13
Second Quarter................................. 1.75 .81
Third Quarter.................................. 1.44 .53
Fourth Quarter................................. 1.375 .47
On April 11, 1997, the last sales price for the Common Stock was $.75,
and the Company believes there were approximately 674 beneficial owners of its
Common Stock.
The Company has not paid, and the Company does not currently intend to
pay, cash dividends on its Common Stock. The current policy of the Company's
Board of Directors is to retain earnings, if any, to provide funds for operation
and expansion of the Company's business. Such policy will be reviewed by the
Board of Directors of the Company from time to time in light of, among other
things, the Company's earnings and financial position.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and accompanying Notes to the
Consolidated Financial Statements.
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GENERAL
The Company is primarily a mortgage banking company engaged in the
business of originating, purchasing and selling mortgage loans secured primarily
by one-to-four family residences. The Company primarily generates income from
(i) gains recognized from premiums on loans sold through whole loan sales to
institutional purchasers, (ii) investment income earned on loans held for sale,
and (iii) origination fees and related revenue received as part of loan
closings. Gain on sale of loans, which represents the sales price in excess of
loan acquisition and related costs from whole loan sales, constituted 65% and
50% of total revenues in 1996 and 1995, respectively. Investment income earned
on loans held for sale constituted 20% and 30% of total revenues in 1996 and
1995, respectively. Loan origination fees and related revenue represented 12%
and 18% of total revenues in 1996 and 1995, respectively.
The Company currently has purchase agreements with Fleet Mortgage
Corporation, Household Financial Services, The Money Store, and various
non-conforming mortgage conduits whereby the Company originates and sells loans
to them. The Company sells virtually all of the loans it originates. These
agreements are for specific terms or are open ended, and require the loans to
satisfy the underwriting criteria described therein. During 1996 and 1995, the
Company sold loans totaling $89.5 million and $158 million, respectively. The
Company does not service any of the loans it originates and sells all loans
primarily in whole loan sales. The gain on sale of loans was $1,881,068 and
$1,544,556 in 1996 and 1995, respectively.
Loans held for sale were comprised of 78% "A" (conforming) loans and 22%
"B/C" (non-conforming) loans at December 31, 1995 and 10% "A" loans and 90%
"B/C" loans at December 31, 1996. When the Company commits to fund loans, the
parties agree upon an interest rate. Until the Company obtains a commitment to
sell the loan to an investor, the Company is subject to interest-rate
fluctuations. Typically, the Company obtains commitments for the sale of "A"
loans to investors concurrently with making such loan commitment to the
borrower. Interest rate commitments are not typically made to B/C borrowers
until the loan funds. In order to mitigate interest-rate fluctuations, the
Company's strategy in committing to make "B/C" loans has been to negotiate a 30
day forward commitment containing minimum pricing by credit class of loans by
investor.
Investment income earned on loans held for sale is derived primarily from
interest payments on loans in inventory. Certain fixed rate "B/C" loans
generally carry a note rate in excess of the cost to borrow. This results in a
positive revenue differential between cost to borrow (at the time the loan
funds) and the loan sale. Management's strategy is to sell those loans in whole
loan sales and in bulk sales as quickly as practicable in order to optimize cash
flow from the sale of the loans. In addition, the Company realizes revenue from
loan origination fees and certain loan discount fees.
SIGNIFICANT ACCOUNTING POLICIES
Mortgage loans are originated to be sold to investors and are reported at
the lower of cost or market. Loans covered by commitments are valued as
specified in the commitment. Loans not covered by commitments are valued at
market, as determined by reference to the Company's normal market outlets. Loan
origination fees and certain direct costs are deferred and reflected in
operations when the underlying loan is sold. Investment income on loans held for
sale is recognized as earned. Sales and expenses of Green World are reorganized
as incurred.
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INVESTMENT IN REAL ESTATE AND PREFERRED STOCK
In July 1995, the Company settled certain pending litigation arising out
of a claim by Dolan Development Partners, Ltd. and related parties ("Dolan")
that the Company defaulted on certain promissory notes. The settlement reduced
the amount of principal and interest payable by the Company to Dolan pursuant to
two promissory notes from $1.5 million to approximately $1 million. The Company
owned a 50% interest in the property securing the payment of the notes and
Dolan, the payee, owns the remaining 50% undivided interest in the property. The
Company's interest in this real estate at December 31, 1995 was valued at
$2,115,000. The balance on the note payable to Dolan, secured by such property,
was $1 million as of December 31, 1995. This note bears interest at the rate of
9.75% per annum and matures, with principal payable in one lump sum, on June 1,
1998. The modifications of the amount owed to Dolan resulted in a pre-tax gain
of extinguishment of debt of $450,000 in 1995.
On July 10,1996, the Company sold all of its capital stock of Network
Capital Group, Inc. to PBF Land Company ("PBF"), an affiliate of GTB Company, in
exchange for various parcels of real property in Florida with a market value
appraised at $1,298,000 (Parcel A). In addition, PBF placed an attorney's
opinion letter of title for Quit Claim Deeds for additional parcels (Parcel B)
valued at up to $5 million into escrow. In exchange for the additional property,
the Company placed preferred stock with a stated value of $5 million into
escrow. The preferred stock may be convertible into common stock beginning April
1, 1997. The minimum conversion price is $1 and no more than a cumulative total
of $200,000 worth of preferred stock may be converted per quarter. For any
additional shares to be issued, certain sales by PBF must be completed. Further
due diligence regarding appraisal, title and legal issues are necessary in order
for the Company to exercise the option to acquire the additional parcels.
The subject property consists of various strips of 25-30 foot and 50 foot
(perimeter) platted road rights of way, located in Palm Beach County. Parcel 1
contains 165,00 square feet ($2.25/sq.ft.), Parcel 2 contains 51, 300 square
feet ($3.50/sq.ft.) and Parcel 3 contains 1,150,150 square feet ($.60/sq.ft.),
combined, these rights of way total 1,366,450 square feet for a total value of
$1.3 million. The Company valued for accounting purposes, the strips at a cost
of $1.0 million. The Company has received an attorney's opinion letter of title.
Whitehall Financial Services, Inc. claimed a third party beneficial
interest in and to the PBF agreement. PBF agreed to return 88,963 shares of
Company Common Stock to the Company which was issued to Whitehall in full and
final settlement of all claims.
The Company received an unsolicited offer to buy the capital stock of
Network Capital Group which owned developed and undeveloped land in California,
in exchange for undeveloped property located within a 30-mile radius of the
Company's headquarters. Management determined that it lacked the technical and
financial resources to monitor the property as well as the complicated and
ever-changing land use and regulatory laws affecting the California real estate
and believed that it was more prudent to own and operate real estate within a
30-mile radius of its corporate headquarters. Moreover, the property in
California was subject to a foreclosure action. Management weighed the tax
factors with the proximity of the Florida real estate, causing management to
effect the trade in Network Capital Group with the underdeveloped property
previously owned by PBF.
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RESULTS OF OPERATIONS
FISCAL 1996 COMPARED TO FISCAL 1995
Total revenues decreased 6% to $2,933,173 in 1996 from $3,106,900 in 1995.
This was primarily due to a shift in focus to originating non-conforming
mortgages and the disposal of previously unsold loans whose gain on sales were
minimal. In particular, $15,000,000 of 1995 ending inventory was sold for a net
gain of 60 basis points. This inventory comprised 20% of total sales in 1996.
Gain on sale of loans, all of which was derived from premiums on whole
loan sales, increased 20% to $1,881,068 in 1996 from $1,544,556 in 1995. This
increase was due as a result of management's decision to originate and sell
"B/C" loans along with increased premiums on "A" whole loan sales. Management
intends to continue to originate and sell "B/C" loans as part of its overall
strategy. The volume of "B/C" loans sold during 1996 was approximately $41
million compared to $25 million in 1995. Generally, the "A" loans provide less
income to the Company than "B/C" loans. Due to the Company's strategy of selling
loans prior to the first payment, management believes that there is no greater
substantive risk in original "B/C" loans than "A" loans.
Loan origination fees decreased 35% to $355,255 in 1996 from $544,386 in
1995. This decrease is primarily due to originating fewer government-backed
loans, resulting in less loan origination fees. Traditionally, conforming "A"
and non-conforming "B/C" loans, at the wholesale level, do not contain loan
origination fees. Management has adjusted the loan origination pricing structure
to provide for an increase in per loan origination fees on non-conforming "B/C"
product. Initially, this change could reduce the cash requirements at the time
of loan funding, thereby possibly reducing gain on sale of these loans; however,
management's goal is to increase the volume of loans, creating larger pools of
loans to sell to investors, which should allow the Company to maintain its
current premium rate on ultimate gain on sale of loans.
Investment income, comprised primarily of interest earned on loans held
for sale, decreased 38% to $584,399 in 1996 from $938,657 in 1995. This decrease
is due primarily to a more rapid sale of loans in 1996 as compared with 1995.
Total expenses decreased 34% to $6,971,539 in 1996 from $10,594,920 in
1995. This decrease is primarily due to (i) a decrease in general and
administrative expenses and (ii) non-recurring expenses incurred in 1995
financial transactions.
Direct loan fee expenses increased 104% to $432,425 in 1996 from $212,309
in 1995, due primarily to the fact that the Company incurred substantial loan
fees on its warehouse facilities during the entire twelve months of 1996
compared to two months in 1995. In April 1997, the Company obtained a warehouse
line of credit with The Money Store, which does not charge loan transaction
fees.
Interest expense decreased 4% to $1,172,852, 1996 from $1,223,875 in
1995, due primarily to the increased volume of whole loan sales and the
borrowing cost associated with the Company's Warehouse Facility.
General and administrative expense decreased 42% to $3,930,199 from
$6,775,395 in 1995, due primarily to a cost containment measure in personnel,
overhead and marketing expenses. In March 1996, the Company consolidated its
operations to Delray Beach, Florida. In connection with this consolidation, the
Company sublet excess rental space in Costa Mesa, California and in Hawaii and
negotiated the termination
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of its San Jose, California lease. The closing of the Hawaii office in March
1996 resulted in a savings of approximately $3,400 per month, the sublease of
office space in Costa Mesa in March 1996 resulted in a savings of approximately
$8,500 per month, the termination of the San Jose office in October 1996
resulted in savings of approximately $3,500 per month, and where appropriate
accruals were established on the income statement.
In July 1995, the Company entered into a letter of intent to acquire
certain assets of Greentree. The aggregate purchase price was $1,575,000 payable
in installments with the remaining unpaid purchase price payable from the
proceeds of the Company's proposed offering of convertible debentures. The
Company paid $100,000 cash and issued 16,667 shares of its Common Stock valued
at $125,000 in anticipation of the acquisition. In November 1995, the Company
abandoned the proposed convertible debenture offering and terminated the
Greentree acquisition. The Company's $225,000 investment in Greentree was
charged to expense in 1995. The acquisition agreement provided for Greentree to
retain all sums previously paid and required the Company to register the resale
of the 16,667 shares of Company Common Stock. The Company failed to register the
resale of such shares, providing Greentree with the option of retaining such
shares or demanding an additional $125,000 payment. The parties agreed to settle
the $125,000 obligation for $35,000, payable through the issuance of shares
which, when sold by Greentree, will net $35,000, and a three-year warrant to
purchase 150,000 shares of Company Common Stock at $2.62 a share.
Depreciation and amortization expenses decreased to $185,277 in 1996 from
$194,543 in 1995, primarily due to the age of the equipment and the disposal of
certain California based assets and was adversely affected by the Green World
amortization.
Net loss decreased to $3,800,995 in 1996 from $7,038,060 in 1995,
resulting in a net loss per share of $1.04 in 1996 compared with $6.50 in 1995.
GREEN WORLD RESULTS OF OPERATIONS
Green World is a development-stage company which began marketing the
Talon Refrigerant Management System in February 1996. The results of operations
discussed hereafter are for the period after acquisition by Westmark Group
Holdings, Inc. from July 18, 1996 through September 30, 1996 per audit. Revenue
for the periods was $29,221 while cost of goods sold was $10,311. The expenses
of the operation consisted of general and administrative of $85,496, selling
expenses of $24,651 and research and development costs of $21,919. There is no
comparative data for prior years available.
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 Facility to meet
its working capital needs. The Company's cash requirements include the funding
of loan originations, purchases, payment of interest expenses, operating
expenses, taxes and capital expenditures, along with settlement agreements
negotiated during 1996.
On December 31, 1996, the Company had a working capital deficit of
$5,079,003 and total stockholders equity of $200,527. Net cash provided by
operating activities was $11,893,769 in 1996 compared with net cash used by
operating activities of $16,665,858 for 1995. The reason for the significant
change is that the Company decreased the amount of mortgage loans held for sale
by approximately $14 million at the 1996 year end, as compared to the 1995 year
end. The use of operating cash is offset by funds provided by the Princap
Warehouse Facility. Net cash used by financing activities was $12,173,400
compared with net cash
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provided from financing activities of $16,971,281 in 1995, which relates
approximately to the amount outstanding pursuant to the Princap Warehouse
Facility at the respective year ends. Net cash used in investing activities was
($13,752) in 1996 compared with ($101,080) in 1995.
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 the Warehouse Facility with Princap
Mortgage, Inc., The Money Store and Household Financial Services, Inc. Pursuant
to the Princap Warehouse Facility, the Company has available a secured revolving
credit line of $10 million to finance the Company's origination or purchase of
loans, pending sale to investors. The line of credit, pursuant to the Princap
Warehouse Facility, has collateral of the assignment and pledge of eligible
mortgage loans, and bears interest at an annual rate of 2% above prime, payable
at the time of purchase by the permanent investor. This arrangement allows the
Company to utilize interest received from the borrower during the period prior
to the sale of the loan. The Princap 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. At December 31, 1996, the balance outstanding, pursuant to
this Princap Warehouse Facility, totaled $4,748,021. In 1997, the Company
entered into warehouse lines o credit with The Money Store and Household
Financial Services, Inc. Pursuant to the Money Store Warehouse Facility, the
Company has available a $5 million line of credit with an interest rate of 1.5 %
above prime and no transaction fee. Pursuant to the Household Financial Services
Warehouse Facility, the Company has available a $5 million line of credit with
an interest rate of 2% above prime and a $100 loan transaction fee. The Company
does not have any other external lines of credit for financing.
From December 31, 1994 through November 22, 1995, the Company had a
warehouse agreement with Lomas Mortgage USA, Inc. ("Lomas") in the amount of $15
million. In August 1995, Lomas gave notice of the termination of its commitment
with the Company and subsequently declared bankruptcy under Chapter 11 of the
United States Bankruptcy Code. Prior to filing for protection, Lomas notified
the Company of its assignment of its repurchase agreement with the Company to
PSB. Shortly thereafter, the Company obtained its current Warehouse Facility. At
December 31, 1995, the outstanding balance on the line of credit with PSB was
$3,333,763, which line was closed in the first quarter of 1996 when all
remaining loans, that collateralized this line of credit, were sold.
Historically, the Company has obtained financing through the issuance of
its Common Stock and borrowings on a negotiated basis. During 1996, the Company
issued a total of 2,815,046 shares for services rendered and converted $700,000
of indebtedness owed to MIOA into 200,000 shares of series C preferred stock
with a stated value of $3.50 per share. During 1995, the Company issued
1,958,167 shares of Common Stock for cash and for other consideration as
follows: (i) 1,298,388 of Company Common Stock was issued for $1,210,000 of cash
and MIOA preferred stock; (ii) an aggregate of 338,000 shares of Common Stock
were issued in private placements grossing approximately $875,000; and (iii)
322,167 shares of Common Stock were issued for general corporate purposes and
for services rendered. In May and June 1995, the Company raised $600,000 cash
through the issuance of convertible promissory notes in the principal amount of
$600,000 and warrants entitling holders to purchase the securities contemplated
to have been issued in the failed 1995 convertible debenture offering. 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 with a stated value of
$600,000.
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In addition, MIOA advanced the Company an aggregate amount of $790,000
during the 1996 first quarter (of which $700,000 was converted into 200,000
shares of series C preferred stock with a stated value of $3.50 per share) and
$1,503,000 in the second quarter of 1996, primarily to fund outstanding
obligations and working capital needs. During 1996, the Company reached
agreements to settle approximately $848,714 of outstanding indebtedness through
the sale of Common Stock issued to the creditors. In connection therewith, the
Company issued these creditors 1,019,019 shares as a settlement. In the event
that the sale of shares is insufficient to reach $848,714, the Company is
obligated to issue additional shares in order to net the required cash payments
or pay the balance in cash. The creditors are obligated to return any excess
shares which are not required to be sold once they have received their full
payment. The Company has received additional debt capital from external sources
in 1996, as it has not relied on any additional capital from MIOA since June
1996. During the second, third and fourth quarters of fiscal 1996, the Company
borrowed an aggregate of $379,000 from various individuals for working capital
purposes. During the first quarter of 1997, the Company borrowed $192,000 from
various individuals for working capital purposes.
The Company's internally generated cash flows from operations has
historically been and continues to be insufficient for its cash needs. It is
expected that internal sources of liquidity will improve during 1997. However,
until such time as the Company achieves positive cash flow before working
capital changes, the Company will continue to rely on external sources for
liquidity. At December 31, 1996, the Company had short-term indebtedness of
$2,484,263 of which $1,727,569 is owed to MIOA. Pursuant to the terms of the
Westmark-Medical Industries Agreement, this amount will be forgiven in
consideration for, among other obligations, the payment of $1.5 million and the
execution of a $1,803,000 promissory note. This note is amortized over a ten
year period, bearing interest at the rate of 10% per annum, with a three year
balloon payment. The Company expects to receive approximately $5,455,000 in net
proceeds from the Reisert Financing which the Company intends to allocate as
follows: $1.5 million to be paid to MIOA pursuant to the Westmark-Medical
Industries Agreement, $1.1 million for the redemption of outstanding Preferred
Stock, $300,000 for the payment of certain creditors, and $2,555,000 for working
capital. The Company has not established any other lines of credit or other
similar financial arrangements with any lenders. 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, sell
assets, or otherwise bring cash flow in balance. The board of directors of the
Company has determined to spin-off a minimum of 51% and a maximum of 100% of the
Green World capital stock it owns as a dividend to its shareholders. By
spinning-off all or a substantial interest in Green World, Green World will
operate as a separate entity, will seek its own public or private financing
(debt or equity) in order to support its operations, and will partially or
wholly cease to be an asset of the Company.
There can be no assurance that the Company will be able to obtain external
sources for liquidity.
INFLATION
Although the Company believes that inflation has not had any material
effect on operating results, it cannot be assured that its business will not be
affected by inflation in the future.
ITEM 7. FINANCIAL STATEMENTS
Information with respect to this item is set forth in the "Index" to
Consolidate Financial Statements on Page F-1.
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNT AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
NAME AGE POSITION
Mark Schaftlein 39 President, Chief Executive Officer and
Director of the Company
Norman J. Birmingham 42 Chief Financial Officer and Director
Todd Walker 37 Secretary and Director
Louis Resweber 35 Director
Payton Story, III 50 Senior Vice-President and Director
MR. SCHAFTLEIN has served as president and chief executive officer of
Westmark Mortgage since February 1996. Mr. Schaftlein has served as a director
of the Company since January 1996. From February 1995 until February 1996, Mr.
Schaftlein was director of the non-conforming division of Westmark Mortgage,
managing the transition of Westmark Mortgage from a conforming to a
non-conforming lender. Mr. Schaftlein established the bulk loan sales with
Household Finance Corp. and The Money Store, which the Company presently
utilizes. Prior thereto, Mr. Schaftlein was a senior vice president with
National Lending Center, Inc., from September 1993 until February 1995. During
this time, Mr. Schaftlein expanded operations into multiple states and assisted
in their expansion of B/C lending. From January 1993 until September 1993, Mr.
Schaftlein served as vice president of Fleet Finance and was responsible for
developing a new wholesale division in the non-conforming (B/D) credit market.
From 1984 to January 1993, Mr. Schaftlein served as vice president at Citicorp.
In 1996, Mr. Schaftlein also served as president of the Gold Coast chapter of
the Florida Association of Mortgage Brokers.
MR. BIRMINGHAM has served as a director since April 1996. Mr. Birmingham
served as president from November 1995 to September 1996. Mr. Birmingham has
served as chief financial officer since December 1996. Since July 1995, Mr.
Birmingham has served as chief operating officer, president, and
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as a director of MIOA, whose securities are registered under Section 12 of the
Exchange Act. Mr. Birmingham resigned as an officer of MIOA in June 1996 and as
a director in August 1996. Mr. Birmingham has been engaged in an accounting and
tax practice since 1986.
MR. STORY has served as senior vice-president of Lending since May 1996.
Formerly, Mr. Story was chief executive officer and president of West Coast
Mortgage Services, Inc. from July 1985 to April 1996. Mr. Story was the
marketing director of Beneficial Management Corporation in Peapock, New Jersey
from January 1969 to July 1985. Additionally, Mr. Story has served as president
of the Florida Association of Mortgage Brokers-Gulf Coast in 1984. Currently,
Mr. Story is a certified mortgage consultant of Florida and National Association
of Mortgage Brokers.
MR. WALKER has served as a director since January, 1996. In 1987, Mr.
Walker founded, and presently serves as president of Southern Import
Distributors, Inc. ("SIDI") On behalf of SIDI, Mr Walker co-founded Tampa
Convention Hotel Associates, Inc., Divot Development Corporation, Herr Damm,
Inc., and Mad Dogs & Englishmen. Prior to forming SIDI, Mr. Walker was a tax
consultant with Arthur Anderson & Company for two years. Mr. Walker is a
graduate of Tulane University (1981) and received his Masters of Business
Administration degree (1985) and Juris Doctorate degree (1985) from the Tulane
Graduate Business School and Tulane Law School, respectively.
MR. RESWEBER has served as a director since December 1996. Additionally,
Mr. Resweber serves as president and chief executive officer of Network
Acquisition Corporation and as executive vice president and senior advisor to
the Board of Network Long Distance, Inc. Formerly, Mr. Resweber served as senior
vice president, Equity Markets for United Companies Financial Corp. Mr. Resweber
has over 15 years' experience in finance, M&A, capital markets, strategic
planning and investor relations as part of the management teams of a number of
publicly traded companies.
Directors serve until the expiration of their term at the annual meeting
of stockholders. All officers serve at the discretion of the Board of Directors,
subject to employment agreements. Effective February 1996, each non-employee
director is entitled to receive $500 per month, and all directors are entitled
to reimbursement of out-of-pocket expenses to attend Board meetings and 15,000
option upon becoming director and 12,000 options on the first day of each new
year provided for in the 1994 Employee Stock Option Plan.
BOARD COMMITTEES
The Board of Directors has appointed a compensation committee and an
audit committee. The members of the compensation committee are Messrs.
Schaftlein and Walker. The compensation committee reviews and recommends to the
Board of Directors all forms of remuneration for directors and management of the
Company and has the authority to administer the Company's 1994 stock option
plan. The members of the audit committee are Messrs. Birmingham , Story and
Walker. The audit committee reviews and reports to the Board on the financial
results of the Company's operations and the results of the audit services
provided by the Company's independent accountants, including the fees and costs
for such services.
20
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10 percent of the Company's
common stock, to file reports of ownership and changes of ownership with the
securities and Exchange Commission. Copies of all filed reports are required to
be furnished to the Company pursuant to Section 16(a). Based solely on the
reports received by the Company, the Company believes that the directors,
executive officers, and greater than ten percent beneficial owners complied with
all applicable filing requirements during the fiscal year ended December 31,
1996.
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
Mark Schaftlein served as the chief operating officer of the Company
since September 11, 1996. Norman J. Birmingham served as chief executive officer
of the Company from January 1, 1996 through September 10, 1996. The following
table sets forth the information with respect to the chief executive officers
during fiscal 1996. No other executive officer of the Company received total
annual salary and bonus for the 1996 fiscal year in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------- ------------------------------------
NAME AND PRINCIPAL FISCAL OTHER ANNUAL STOCK OPTIONS AND ALL OTHER
POSITION YEAR SALARY COMPENSATION ISSUANCES WARRANTS COMPENSATION
-------- ---- ------ ------------ --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Mark Schaftlein, ......... 1996 $143,353(1) $ 3,353 -- 90,000(2) --
Chief Executive ........ 1995 $100,685 -- -- 1,500 --
Officer ................ 1994 -- -- -- -- --
Norman J. Birmingham, .... 1996 $ 87,500 -- -- 90,000(2) --
Chief Financial ........ 1995 -0- -- -- -- --
Officer ................ 1994 -- -- -- -- --
Michael F. Morrell ....... 1996 -- -- -- -- --
Chief Executive ....... 1995 55,518 14,220 16,204(3) 69,000 148,167
Officer ............... 1994 90,000 14,220 -- 60,000 80,833
</TABLE>
- --------------------
(1) Includes $3,353 in other annual compensation comprised of a car allowance.
(2) Only 45,000 of these options have vested.
(3) These shares were issued in lieu of $25,000 accrued salary in 1995.
- --------------
EMPLOYMENT AGREEMENTS
In April 1996, Mr. Birmingham entered into a three-year employment
agreement with the Company which provides for an annual base salary of $100,500.
Additionally, Mr Birmingham was issued a warrant to purchase 90,000 shares,
45,000 of which are currently exercisable over a five-year term at $2.25 per
share, and 45,000 of which vest in full if the Company's net income in 1996,
1997 or 1998 is $480,000 (and vest on a pro-rata basis if a lesser amount of net
income is earned in those periods), exercisable during a five year term from the
date of vesting in full. In the event an employment agreement is terminated
other than for "just cause," such terminated employee would be entitled to
receive one-year's salary. Additionally, Mr. Birmingham has deferred $18,227 of
his salary.
21
<PAGE>
In March of 1997, Mr. Schaftlein entered into a three-year employment
agreement which provides for an annual base salary of $150,000 the first year,
$162,000 the second year and $174,000 the third year and an aggregate of 600,000
incentive stock options vesting as soon as April 1998 and as late as April 2000,
exercisable for a five-year period from vesting at exercise prices ranging from
$1.00 to $2.00 per share. Additionally, Mr. Schaftlein was issued a warrant to
purchase 90,000 shares, 45,000 of which are currently exercisable over a
five-year term at $2.25 per share, and 45,000 of which vest in full if the
Company's net income in 1996, 1997 or 1998 is $480,000 (and vest on a pro-rata
basis if a lesser amount of net income is earned in those periods), exercisable
during a five-year term from the date of vesting in full. In the event an
employment agreement is terminated other than for "just cause," such terminated
employee would be entitled to receive one-year's salary. Additionally, Mr.
Schaftlein has deferred $45,416 of his 1995 and 1996 salaries.
In March of 1997, Mr. Story entered into a three-year employment
agreement which provides for an annual base salary of $126,000 the first year,
$138,000 the second year and $150,000 the third year, and an aggregate of
400,000 incentive stock options vesting as soon as April 1998 and as late as
April 2000, exercisable for a five-year period from vesting at exercise prices
ranging from $1.00 to $2.00.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents certain information regarding the beneficial
ownership of all shares of Common Stock at April 4, 1997 by (i) each person who
owns beneficially more than five percent of the outstanding shares of Common
Stock, (ii) each director of the Company, (iii) each named executive officer and
(iv) all directors and officers as a group.
SHARES OF PERCENT OF
NAME AND ADDRESS(1) COMMON STOCK VOTING POWER(2)(3)
- ---------------------------- ------------------- -----------------------
GTB Company ................ 2,888,889(4) 31.1%
Louis Resweber ............. 250,000(5) 2.7%
Mark Schaftlein ............ 49,667(6) *
Norman Birmingham .......... 46,000(7) *
Todd Walker ................ -- --
Payton Story ............... -(8) --
All officers and directors
as a group (five persons) 345,667(9) 3.2%
- ----------
* Less than one percent.
(1) The address for the above referenced stockholders is 355 N.E. Fifth
Avenue, Delray Beach, FL 334831, except for Medical Industries of
America, Inc., which is 1903 S. Congress Avenue, #400, Boynton Beach, FL
33426.
(2) Gives effect to 400,000 shares of Common Stock issued pursuant to the
Westmark-Medical Industries Agreement, 2,888,889 shares of Common Stock
issued pursuant to the GTB conversion and 800,000 shares of Common Stock
issued pursuant to the Hollenbeck conversion.
(3) Does not give effect to the the issuance of 1,799,486 shares upon
exercise of warrants, conversion of 2,018,892 shares of preferred stock,
and conversion of convertible debt into 812,351 shares the issuance
and/or resale of which is being registered in the Prospectus.
(4) Issued pursuant to Westmark-GTB Agreement.
(5) Includes a warrant to purchase 250,000 shares of Common Stock.
22
<PAGE>
(6) Includes options and warrants currently exercisable to purchase an
aggregate of 46,500 shares of Common Stock, but excludes option to
purchase 600,000 shares that vest no earlier than April 1998.
(7) Includes an option presently exercisable to purchase 45,000 shares of
Common Stock.
(8) Excludes options to purchase an aggregate of 400,000 shares of stock that
vest no earlier than April 1998.
(9) Includes options and warrants to purchase an aggregate of 342,500 shares
of Common Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective November 1995, MIOA purchased 1,298,388 shares of Common Stock
for a purchase price of $3,210,000, comprised of $1,210,000 cash and cash
equivalents, and the issuance of 200,000 shares of MIOA series B convertible
preferred stock with a stated value of $10 per share. The stock purchase
agreement provides that MIOA ownership position, equal to 49% of the shares of
Company Common Stock actually outstanding, shall not be diluted below 49%, with
additional shares to be issued to MIOA to maintain such ownership position. In
May 1996, the Company issued MIOA 368,896 shares of Common Stock in order to
maintain such percentage ownership. As additional shares of Common Stock are
issued by the Company, out of the new issuances or on exercise of outstanding
warrants and options and conversion of outstanding Preferred Stock, additional
adjustments will be made resulting in additional shares issued to MIOA in order
to maintain such 49% ownership interest. Subsequent to the November 1995
purchase agreement, MIOA has loaned the Company an aggregate of $2,293,000
pursuant to one-year notes, bearing interest at the rate of 10% per annum.
Effective 1996, MIOA converted $700,000 of this indebtedness into 200,000 shares
of series C preferred stock with a stated value of $3.50 per share. In January
1997, the Company and MIOA entered into an agreement whereby the Company agreed
to pay MIOA $3,953,000 in exchange for the return of Company capital stock held
by MIOA, the relinquishment of anti-dilution protection, and the agreement to
reissue an aggregate of 400,000 shares of Company Common Stock to MIOA in
conjunction with certain of the cash payments.
The then officers of the Company, Messrs. Morrell and Gardener and Linda
Moore resigned as officers and Mr. Morrell resigned as a director in November
1995. Subsequent to their resignations, Mr. Morrell and Ms. Moore entered into
to termination agreements and consulting agreements with the Company. Various
disputes arose in connection with the performance of those agreements, and in
January 1997, the parties entered in to a settlement agreement. The settlement
agreement provides that the Company shall pay unpaid salary to Mr. Morrell in
the sum of $115,000 contemporaneously with the close of any transaction by which
the Company shall receive additional capitalization in the minimum sum of
$3,000,000. If no such capitalization is received, the $115,000 shall be paid
through the issuance of shares registered pursuant to form S-8. In addition, Mr.
Morrell was paid $114,000 through the issuance of shares registered pursuant to
form S-8. Interest in the sum of $31,000 is to be satisfied by the partial
assignment of a promissory note receivable or shares of common stock of Green
World received by the Company in connection with the spin-off of Green World to
its shareholders. Mr. Morrell was reimbursed $1,000 for business expenses in
February 1997. The Company leases certain of its facilities from Mr. Morrell at
rates it believes reflect fair market value. In February 1997, Mr. Morrell was
paid $13,800 for past due rental obligations. In January 1997, Mr. Morrell was
paid $45,000 in delinquent consulting fees through the issuance of shares
registered pursuant to form S-8, and the Company and Mr. Morrell agreed that the
remaining monthly consulting fees in the amount of $7,500 per month for 22
months would be paid in cash or through the issuance of shares registered
pursuant to form S-8. The Company reimbursed Mr. Morrell $5,400 for automobile
lease expenses, and Mr. Morrell returned the vehicle to the Company in February
1997. Mr. Morrell was issued a one year option to purchase 125,000 shares of
common stock at an exercise price of $1 per share, and a one year warrant to
purchase 100,000 shares of common stock at an exercise price of $.81 per share.
Ms. Moore is to receive unpaid salary in the
23
<PAGE>
sum of $40,000 contemporaneously with the close of any transaction by which the
Company shall receive additional capitalization in the minimum sum of
$3,000,000. If no such capitalization is received, the $40,000 shall be paid
through the issuance of shares registered pursuant to form S-8. In addition, Ms.
Moore was paid $40,000 through the issuance of shares registered pursuant to
form S-8. Interest in the sum of $9,000 is to be satisfied by the partial
assignment of a promissory note receivable or shares of common stock of Green
World received by the Company in connection with the spin-off of Green World to
its shareholders. In January 1997, Ms. Moore was paid $24,000 in delinquent
consulting fees through the issuance of shares registered pursuant to form S-8,
and the Company and Ms. Moore agreed that the remaining monthly consulting fees
in the amount of $4,000 per month for four months would be paid in cash or
through the issuance of shares registered pursuant to form S-8. Ms. Moore was
issued a one year option to purchase 67,000 shares of common stock at an
exercise price of $1 per share, and a one year warrant to purchase 53,333 shares
of common stock at an exercise price of $.81 per share. Mr. Gardner was issued
25,000 shares of Common Stock and severance compensation in the amount of
$54,000.
GTB Company is controlled by Charles Chillingworth, the sole stockholder,
officer and director. Bradley Ray is a creditor of GTB Company, but is not a
controlling party of GTB Company. PBF is controlled by Charles Chillingworth,
the sole stockholder, officer and director. For a description of the
transactions involving PBF and the Company, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -Investment in Real
Estate and Preferred Stock." In September 1996, Mr. Chillingworth was issued
36,551 unrestricted shares of Common Stock, registered pursuant to a
registration statement on form S-8, for services rendered. In January 1997, Mr.
Chillingworth was issued 21,000 shares of common stock for services rendered,
the resale of which is being registered hereby. In June 1996, Mr. Ray was issued
150,000 unrestricted shares of Common Stock, registered pursuant to a
registration statement on form S-8, for services rendered, pursuant to a January
1996 consulting agreement. Furthermore, an affiliate of Mr. Chillingworth loaned
the Company $150,000 pursuant to notes that mature in June 1997, bear interest
at the rate of 10% per annum and are convertible at a conversion price of $.69
per share. Mr. Ray loaned the Company $61,251 in July 1996, which note matures
in July 1997, bears interest at the rate of 10% per annum payable quarterly, and
is non-convertible.
In March 1997, PBF loaned the Company $150,000 pursuant to a note that
matures in March 1998, bears interest at a rate of 10% per annum and is
currently convertible at a conversation price of $.87.
In March 1996, Mr. Hollenbeck agreed with the Company to provide for the
redemption of his 290,000 shares of Common Stock based on the then market price
in exchange for, among other considerations, a two-year consulting agreement
providing for the payment of $75,000 in the first year and $90,000 in the second
year, $400,000 cash, and the issuance of 100,000 shares of Series A Preferred
Stock in April 1996. In December 1996, Mr. Drew Hollenbeck relinquished his
right to force the Company to redeem the Series A Preferred Stock. Series A
Preferred Stock convertible into 800,000 shares of Common Stock upon the
effective date of the Form SB-2 Registration Statement, Registration Number
333-05569.
ITEM 13. EXHIBITS
The following exhibits are to be filed as part of the Registration Statement:
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
2.1(3) Form of Merger between Colorado and Delaware Companies
3.1(1)(2) Articles of Incorporation of the Company and
24
<PAGE>
Amendments thereto
3.2(3) Certificate of Incorporation of the Company, filed in the office of
the Secretary of State of Delaware on May 10, 1996, and incorporated
herein by reference
3.3(1) By-Laws of the Company
4.1(3) Form of specimen Common Stock
4.2(3) Series A Preferred Stock Designation
4.3(3) Series B Preferred Stock Designation
4.4(3) Series C Preferred Stock Designation
4.5(3) Series D Preferred Stock Designation
4.6(3) Series E Preferred Stock Designation
4.7(3) Series F Preferred Stock Designation
10.1(3) Green World Stock Purchase Agreement
10.2(3) Mortgage Warehouse and Security Agreement between the Company and
Princap Mortgage Warehouse, Inc. dated October 26, 1995
10.3(3) Purchase and Sale Agreement between the Company and MIOA dated
November 1995, as amended.
10.5(3) Rodger Stubbs Termination Agreement
10.6(3) Michael Morrell Termination Agreement
10.7(3) Linda Moore Termination Agreement
10.8(3) Norman J. Birmingham Employment Agreement
10.9(3) Mark Schaftlein Employment Agreement
10.10(3) Payton Story Employment Agreement
10.11(3) Louis Resweber Director Agreement
10.12(3) Norman J. Birmingham Warrant
10.13(3) Mark Schaftlein Warrant
10.14(3) 1990 Non-Qualified Stock Option Plan
10.15(3) 1993 Non-Qualified Stock Option Plan
10.16(3) 1994 Non-Qualified Stock Option Plan
25
<PAGE>
10.17(3) Settlement Agreement between the Company and Greentree Mortgage
Company dated April 19, 1996
10.18(3) Settlement Agreement between the Company and First American Flood
Data, Inc. dated March 29, 1996
10.19(3) Note Modification Agreement between the Company and Dolan
Development Partners, Inc. dated July 12, 1995
10.20(3) Form of Settlement Agreement between the Company and Each Party to
the Bridge Financing dated April 1, 1996
10.21(3) Settlement Agreement between the Company and James S. Hull dated
April 25, 1996
10.22(3) Settlement Agreement between the Company and Svarna Offshore Fund
dated March 21, 1996
10.23(3) Settlement Agreement between the Company and Drew Hollenbeck dated
March 21, 1996
10.24(3) Settlement Agreement between the Company and Nationwide Computer
Corporation dated March 26, 1996
10.25(3) Settlement Agreement between the Company and Teletrend
Communications dated March 27, 1996
10.26(3) Settlement Agreement between the Company and Mortgage Quality
Management, Inc. dated March 27, 1996
10.27(3) Settlement Agreement between the Company and Hakman & Company dated
March 27, 1996
10.28(3) Settlement Agreement between the Company and Republic Indemnity
dated February, 1996
10.29(3) Settlement Agreement between the Company and Jackson,
Tufts, Cole & Black dated February 22, 1196
10.30(3) Settlement Agreement between the Company and Cassidy & Associates
10.31(3) Settlement Agreement between the Company and Howard Rice dated
March 26, 1996
10.32(3) Settlement Agreement between the Company and M.S. Farrell & Company,
Inc. dated May 29, 1996
10.33(3) Settlement Agreement between the Company and Ahmad F. Moradi
10.34(3) Settlement Agreement between the Company and Grubb & Ellis
10.35(3) Settlement Agreement between the Company and Ousley, Inc.
26
<PAGE>
10.36(3) Settlement Agreement between the Company and Curci-England
10.37(3) Agreement between the Company and GTB Company
10.38(3) Agreement between the Company and PBF Land Company
10.39(3) Settlement Agreement between the Company and Medical Industries of
America, Inc., and Amendment thereto.
10.40(3) Drew Hollenbeck Conversion Notification
11.1(3) Statement Re: Computation of Per Share Earnings
21.1(3) List of Subsidiaries
- ---------------------
(1) The information required by this exhibit is incorporated by reference to
the exhibits filed in connection with the Company's prior Registration
Statement on Form S-18 (Commission File No. 33-16715-D)
(2) The Articles of Amendment to the Articles of Incorporation dated July 11,
1994, were attached to the December 31, 1994 Form 10-KSB.
(3) The information required by this exhibit is incorporated by reference to
the exhibits filed in connection with the Company's prior Registration
Statement on Form SB-2 (Commission File No. 333-05569).
27
<PAGE>
WESTMARK GROUP HOLDINGS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We have audited the accompanying consolidated balance sheet of Westmark Group
Holdings, Inc. as of December 31, 1996, and the related consolidated statements
of operations, changes in stockholders' equity, and cash flows for the years
ended December 31, 1996 and 1995. These consolidated financial statements are
the responsibility of the Company's management. Our repsonsiblity is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our 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 consolidated 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 to above present
fairly, in all material respects, the financial position of Westmark Group
Holidings, Inc. as of December 31, 1996, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 1996,
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As more fully described in footnote 2, the
Company has incurred repeated operating losses, has a deficit in working
capital, and insufficient equity for certain contractual commitments. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The Company's plans with respect to these conditions are also
described in footnotes 2 and 9. The accompanying financial statements do not
include any adjustments which might be necessary should the Company be unable to
accomplish its plans.
Aurora, Colorado
March 11, 1997
COMISKEY & COMPANY
PROFESSIONAL CORPORATION
F-1
<PAGE>
WESTMARK GROUP HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
ASSETS
Current Assets
Cash and Cash equivalents .............................. $ 18,533
Mortgage Loans Held for Sale ........................... 4,995,193
Inventory .............................................. 41,008
Accounts Receivable .................................... 18,711
------------
Total current assets ................................... 5,073,445
Property and Equipment
Office buildings ....................................... 167,560
Office furniture and equipment ......................... 429,951
------------
597,511
Accumulated depreciation ............................... 299,429
------------
Property and equipment, net ............................ 298,082
Other assets
Investment in preferred stock .......................... 2,000,000
Investment in land ..................................... 1,000,000
Goodwill, net of amortization .......................... 1,753,044
Dividends receivable ................................... 140,000
Deposits and other assets .............................. 60,272
------------
Total other assets ..................................... 4,953,316
------------
Total assets ........................................... 10,324,843
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Warehouse line payable ................................. 4,748,021
Accounts payable ....................................... 1,645,413
Notes payable - related party .......................... 1,727,569
Notes payable .......................................... 756,694
Accrued settlement obligation .......................... 407,560
Accrued misc. liabilities .............................. 290,639
Dividends payable ...................................... 126,000
Accrued payroll taxes .................................. 105,728
Accrued interest ....................................... 241,692
------------
Total current liabilities .............................. 10,049,316
Callable preferred stock - Series A -
18,750 shares outstanding .................................... 75,000
Stockholders' equity
Preferred stock, $0.001 par value, 10,000,000
shares authorized, 780,000 shares issued
and outstanding ........................................ 3,250,000
Common stock, $0.001 par value, 50,000,000
shares authorized, 4,833,002 shares issued
and outstanding ........................................ 4,833
Additional paid-in capital ............................. 24,801,364
Accumulated deficit .................................... (26,655,416)
------------
1,400,781
Stock issued but unearned/unpaid ....................... (1,200,254)
------------
Total stockholders' equity ............................. 200,527
------------
Total liabilities and stockholders' equity ................... 10,324,843
============
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE>
WESTMARK GROUP HOLDINGS, INC.
STATEMENT OF LOSS AND ACCUMULATED DEFICIT
For the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
For the year ended Dec. 31,
------------------------
1996 1995
---------- -----------
<S> <C> <C>
REVENUES
Loan origination fees ....................... 355,255 544,386
Gain on sale of loans ....................... 1,881,068 1,569,559
Investment income - mortgages ............... 584,399 938,657
Sales - refrigeration units ................. 29,252 --
Other ....................................... 83,199 54,298
---------- -----------
2,933,173 3,106,900
EXPENSES
Direct loan fees ............................ 432,425 212,309
Interest expense ............................ 1,172,852 1,223,875
Non-cash compensation ....................... 1,153,318 1,099,000
General and administrative .................. 3,930,199 6,775,395
Costs and expenses - refrigeration division . 97,488 --
Loss on write-down of REO's ................. -- 124,654
Loss on write-down of servicing receivable .. -- 179,663
Depreciation ................................ 74,393 95,627
Amortization ................................ 110,864 98,916
Bad debts ................................... -- 80,521
Loss on investment in Greentree ............. -- 225,000
Repurchase losses ........................... -- 480,000
---------- -----------
Total expenses .............................. 6,971,539 10,594,960
Net operating loss ..................................... (4,038,366) (7,488,060)
Other income (expense)
Dividend income ............................. 140,000 --
---------- -----------
Loss from continuing operations before income tax ...... (3,898,366) (7,488,060)
Provision for income tax benefit ....................... 39,000 180,000
---------- -----------
Net loss before extraordinary items .................... (3,859,366) (7,308,060)
Extraordinary items
Gain on extinguishment of debt, (net of
tax of $180,000) ........................... -- 270,000
Gain on disposal of subsidiary (net of
tax of $39,000) ............................ 58,371 --
---------- -----------
Net Loss .................................... (3,800,995) (7,038,060)
========== ===========
Per share amounts
Loss from continuing operations ............. (1.06) (6.75)
Extraordinary items ......................... 0.02 0.25
---------- -----------
Net loss per share .......................... (1.04) (6.50)
========== ===========
Weighted average number of shares outstanding 3,660,340 1,082,371
========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
WESTMARK GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
DECEMBER 31, 1996 and 1995
<TABLE>
<CAPTION>
For the year ended Dec. 31,
-----------------------------------
1996 1995
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Consolidated net loss ........................................................... (3,800,995) (7,038,060)
Adjustments to reconcile net loss to net cash
flows from operations
Depreciation and amortization ........................................... 185,256 194,543
Non-cash compensation and stock for services ............................ 1,153,318 1,745,151
Loss on disposal of assets .............................................. 71,856 124,654
Loss on investment in Greentree ......................................... -- 225,000
Pre-tax extraordinary gains ............................................. (97,371) (450,000)
----------- ------------
Net cash used by operations before working
capital changes ................................................. (2,487,936) (5,198,712)
Net (increase) decrease in accounts receivable .......................... 365,717 466,498
(increase) decrease in other current assets ............................. (41,008) 368,693
(increase) decrease in mortgage loans held for sale ..................... 14,484,836 (14,208,495)
(increase) decrease in dividend receivable .............................. (140,000) --
(increase) decrease in other assets ..................................... 20,581 1,020,004
Increase (decrease) in accounts payable ................................. (131,292) 860,895
Increase (decrease) in current liabilities .............................. (177,129) 25,259
----------- ------------
Net cash provided (used) by operations .............................. 11,893,769 (16,665,858)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash invested in Greentree Mortgage ............................................. -- (100,000)
Purchase of fixed assets and improvements ....................................... (13,752) (50,133)
Proceeds from sale of real estate ............................................... -- 49,053
----------- ------------
Net cash used by investing activities ............................... (13,752) (101,080)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on line-of-credit .................................................... 73,633,630 158,020,868
Repayments on line-of-credit .................................................... (87,511,475) (144,480,885)
Sale of stock for cash .......................................................... 920,000 1,725,081
Repurchases of common stock ..................................................... (802,000) --
Proceeds from issuance of notes payable ......................................... 1,661,988 1,808,500
Payments on line-of-credit and other notes payable .............................. (75,543) (102,283)
----------- ------------
Net cash provided (used) by financing activities .................... (12,173,400) 16,971,281
----------- ------------
Net decrease in cash and cash equivalents ........................... (293,383) 204,343
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR .................................... 311,916 107,573
----------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR .......................................... 18,533 311,916
=========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-4
<PAGE>
WESTMARK GROUP HOLDINGS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Non-Callable
Preferred stock Common stock
--------------------------- --------------------------------
# shares amount # shares amount
------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 .......................... -- -- 674,605 17,271,983
Issuance of common stock
January 1995 - December 1995 ........................ -- -- 1,958,167 5,893,954
Paid in capital from option
arrangements ........................................ -- -- -- --
Net Loss ............................................ -- -- -- --
------- --------- ---------- -----------
Balance December 31, 1995 ........................... -- -- 2,632,772 23,165,937
Repurchase and retirement
of common shares
April 1996 .......................................... -- -- (240,000) (802,000)
Issuance of common stock
for services and debt conversions
March 1996 - October 1996 ........................... -- -- 2,420,230 1,798,572
Issuance of common stock for cash ................... -- -- 20,000 20,000
Issuance of Non-Callable
Series B Preferred Shares
for cancellation of warrants
April 1996 .......................................... 300,000 600,000 -- --
Issuance of Non-Callable
Series C Preferred Shares
for cash
April 1996 .......................................... 200,000 700,000 -- --
Issuance of Non-Callable
Series D Preferred Shares
for subscription receivable
August 1996 ......................................... 50,000 250,000 -- --
Issuance of Non-Callable
Series E Preferred Shares
for cash and acquisition of
Green World Technology
July 1996 ........................................... 130,000 1,300,000 -- --
Reclassification of 400,000 shares
of preferred A to non-callable to
reflect the relinquishment of the
call provision by the holder in
December, 1996 ...................................... 100,000 400,000 -- --
Cumulative preferred dividends
payable ............................................. -- -- -- --
Non cash compensation recognized
for warrant issuances ............................... -- -- -- --
Adjustment to reflect
reincorporation in Delaware and
change from no par value common
stock to par value common stock ..................... -- -- -- (24,177,676)
Net loss ............................................ -- -- -- --
------- --------- ---------- -----------
Balance, December 31, 1996 .......................... 780,000 3,250,000 4,833,002 4,833
======= ========= ========== ===========
<CAPTION>
Additional Other Total
Paid In equity Accumulated Stockholders'
Capital reductions Deficit Equity
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 ........................... 54,688 -- (15,690,361) 1,636,310
Issuance of common stock
January 1995 - December 1995 ......................... -- -- -- 5,893,954
Paid in capital from option
arrangements ......................................... 1,099,000 -- -- 1,099,000
Net Loss ............................................. -- -- (7,038,060) (7,038,060)
----------- ---------- ----------- ----------
Balance December 31, 1995 ............................ 1,153,688 -- (22,728,421) 1,591,204
Repurchase and retirement
of common shares
April 1996 ........................................... -- -- -- (802,000)
Issuance of common stock
for services and debt conversions
March 1996 - October 1996 ............................ -- (950,254) -- 848,318
Issuance of common stock for cash .................... -- -- -- 20,000
Issuance of Non-Callable
Series B Preferred Shares
for cancellation of warrants
April 1996 ........................................... (600,000) -- -- --
Issuance of Non-Callable
Series C Preferred Shares
for cash
April 1996 ........................................... -- -- -- 700,000
Issuance of Non-Callable
Series D Preferred Shares
for subscription receivable
August 1996 .......................................... -- (250,000) -- --
Issuance of Non-Callable
Series E Preferred Shares
for cash and acquisition of
Green World Technology
July 1996 ............................................ -- -- -- 1,300,000
Reclassification of 400,000 shares
of preferred A to non-callable to
reflect the relinquishment of the
call provision by the holder in
December, 1996 ....................................... -- -- -- 400,000
Cumulative preferred dividends
payable .............................................. -- -- (126,000) (126,000)
Non cash compensation recognized
for warrant issuances ................................ 70,000 -- -- 70,000
Adjustment to reflect
reincorporation in Delaware and
change from no par value common
stock to par value common stock ...................... 24,177,676 -- -- --
Net loss ............................................. -- -- (3,800,995) (3,800,995)
----------- ---------- ----------- ----------
Balance, December 31, 1996 ........................... 24,801,364 (1,200,254) (26,655,416) 200,527
=========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
WESTMARK GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Westmark Group Holdings, Inc. ("the Company") is a financial services
company that, through its wholly owned subsidiary, Westmark Mortgage
Corporation ("Westmark Mortgage") is engaged in the business of
originating, purchasing and selling mortgage loans. The Company sells
both conforming loans (generally those borrowers with perfect or good
credit) and non-conforming loans (generally below average and delinquent
credit). Originally incorporated in Colorado in 1986, the Company
reincorporated in the state of Delaware in June 1996.
Principles of Consolidation
For all periods presented, the consolidated financial statements include
the accounts of the Company, and its wholly owned subsidiaries, Westmark
Mortgage Corporation and Green World Technologies, Inc. Until its
disposal in July 1996, Network Capital Group (an inactive wholly owned
subsidiary with an interest in real property) is included in the
consolidation. Intercompany transactions have been eliminated in
consolidation.
Mortgage Loans Held for Sale
Mortgage loans are originated by retail brokers and purchased by the
Company to be sold to investors. The loans are reported at the lower of
cost or market. Loans covered by commitments are valued as specified in
the commitment. Loans not covered by specific commitments are valued at
market, as determined by reference to the Company's normal market
outlets.
At December 31, 1996, loans held for sale were valued at cost, which was
lower than market. Anticipated prepayments on principal amounts of loans
are not considered significant, since all loans are sold to investors,
are generally held for a period of 60 days or less before the sale
occurs, and are sold along with the related servicing rights.
Real Estate Acquired in Settlement of Loans Repurchased
Real estate acquired in settlement of loans repurchased (REO property)
is recorded at the lower of cost of market.
Revenue Recognition
Premiums associated with the rights to service loans, fees for loan
origination, the associated retail correspondent costs, and direct costs
of originating loans are deferred and reflected in operations when the
underlying loan is sold.
Non-Cash Compensation
Equity instruments issued to acquire goods and services from
nonemployees have been accounted for based on the fair value of the
consideration received, or the fair value of the equity instruments
issued, whichever is more reliably measurable. Shares issued in
consideration of services to be performed in future periods are
considered unearned, and are shown as a deduction from shareholders'
equity.
Property and Equipment
Property and equipment is recorded at cost less accumulated
depreciation. Depreciation is computed on a straight line basis over
estimated useful lives ranging from 4 to 7 years for office furnishings
and equipment and 30 years for buildings.
Investment in Real Estate
The Company's investment in real estate is carried at the lower of cost
or estimated fair
F-6
<PAGE>
WESTMARK GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
value determined with respect to outside appraisal. This property is
considered available for sale.
Compensated absences
Compensated absences are accrued as earned.
Earnings per share
Primary earnings per share have been computed using the weighted average
shares outstanding. Fully diluted earnings per share has not been
presented, since the effect of common share equivalents would be
anti-dilutive.
Goodwill
Goodwill is being amortized over ten years using the straight-line
method. Goodwill is evaluated periodically in accordance with the
provisions of SFAS 121- Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of.
Income taxes
Income taxes are allocated among subsidiaries in the ratio that each
subsidiary contributes to the consolidated liability. Deferred taxes
result from temporary differences in the recognition of income and
expense for financial and income tax reporting purposes and as a result
of non-benefitted net operating loss carryforwards.
Cash equivalents
For the purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents.
Financial instruments
The fair values of financial instruments closely approximate their
carrying values in the accompanying financial statements with the
exception of the Company's loans held for sale. Market value of loans
held for sale, determined with reference to existing commitments, was
$5,579,162.
Reclassifications
Certain reclassifications have been made to the 1995 consolidated
financial statements to conform to the 1996 presentation.
Use of Estimates
The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results could differ
from those estimates.
2.COMMITMENTS AND CONTINGENCIES
Classification as a going concern
The Company has incurred significant and recurring operating losses,
including $3.8 million in 1996 and $7.0 million in 1995. It has
historically supplemented its operating cash flows with financing from
outside sources. At December 31, 1996, the Company had negative working
capital of $4.9 million, including $2.5 million in notes currently due
by their terms or scheduled to come due in 1997. In addition, the
Company has negotiated several settlement agreements with its creditors
to settle its outstanding obligations through the issuance of stock. To
date, the Company has been unsuccessful in registering the shares
F-7
<PAGE>
WESTMARK GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
underlying many of these settlement agreements, and consequently various
settlement defaults have resulted in unsatisfied judgments against the
Company.
The Company is required to maintain $1,000,000 in stockholders equity to
remain listed for quotation on the NASDAQ SmallCap Market. With total
stockholders' equity of $200,000 the Company does not meet this
requirement. If the Company is unable to satisfy the requirements for
continued listing with NASDAQ, trading, if any, in the securities listed
thereon would be conducted in the over-the-counter market of the
National Quotation Bureau or on the OTC Bulletin Board. This could
significantly curtail the trading market for the Company's common stock.
In the absence of a trading market for the Company's common stock, the
Company will be unable to effect equity settlements for its outstanding
debt or to satisfy existing settlement agreements though the issuance of
shares.
As further described in footnote 10, the Company has entered into an
agreement to conduct a best efforts offering of preferred stock for a
minimum of $3 million and a maximum of $6 million gross proceeds.
Concurrently with and contingent upon the success of this offering is an
agreement to defer or repay $ 1.7 million in outstanding debt payable to
Medical Industries of America, Inc. (formerly Heart Labs of America,
Inc.), a significant shareholder. Since the offering is conducted on a
best efforts all-or-none minimum basis, there can be no guarantee that
the offering will be successful and that the related restructuring of
debt will be accomplished. Failure to obtain sufficient outside
financing will have a direct, material adverse effect on the future
operations of the Company.
The Company believes that even in the event that the minimum amount of
this offering is sold, the proceeds would be sufficient to restructure
the Company's existing debt in such a way as to make possible its
repayment with internally generated cash flows in the ordinary course of
business. In addition, the restructuring is intended to result in
improvements to the financial position of the Company which would allow
for continuing inclusion on the NASDAQ SmallCap Market quotation system.
Antidilution agreement
The Company has an agreement with Medical Industries of America, Inc.,
(MIOA) a 49% shareholder of the Company, to issue shares to MIOA which
will be sufficient to maintain its 49% interest in the Company. As of
December 31, 1996, the Company has not issued all of these shares. In
the transaction more fully described in footnote 10, MIOA has agreed to
relinquish its right to receive these shares as part of a restructuring
of its ownership in WGHI and the renegotiation of certain debt advances
by MIOA to WGHI.
Off Balance Sheet Risk
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments represent commitments to fund
loans and involve, to varying degrees, elements of interest-rate risk
and credit risk in excess of the amount recognized in the balance sheet.
The interest-rate risk is mitigated by the Company's commitments to sell
loans to investors. The credit risk is mitigated by the Company's
evaluation of the creditworthiness of potential borrowers on a
case-by-case basis.
At December 31, 1996, there were no interest rate commitments on loans
in the pipeline, since the majority of the pipeline was comprised of B/C
loans which are not typically locked by the borrower. The Company had
interest rate commitments (rate locks) totaling $1.6 million at December
31, 1995. The total loan pipeline at those dates was $18,364,000 and
$33,718,000, respectively. It is impractical to estimate market value of
the
F-8
<PAGE>
WESTMARK GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
portfolio at December 31, 1996, since its value is dependent on interest
rates, time of closing, turndown ratio, and other variables which cannot
be determined with any reasonable certainty at this time.
At December 31, 1996, loans held for sale was comprised of 10% "A"
(conforming) loans and 90% "B/C" (non-conforming) loans. At December 31,
1995, the breakdown was 78% "A" loans and 22% "B" loans.
Litigation in Process
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. 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 an alleged breach of such employment
agreement. Greentree disputes the allegations of the complaint. The
Company believes that there is no legal justification for the joinder of
the Company and Mr. Morrell as defendants in the pending dispute between
the plaintiff and Greentree, and that the likelihood of loss in this
matter is remote. Consequently, no amount has been accrued in this
matter at December 31, 1996.
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. (AKA
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 at December 31, 1996.
The Company is a 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. 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, 1996.
The Company is a defendant in Ortega v. Michael Santa Maria et al filed
in Orange County Superior Court of the State of California. The
complaint is based upon a contention by the Borrower Ortega that Santa
Maria, individually and as an owner/manager/broker of Bann Cor Mortgage
made false presentations of material fact to the plaintiffs. The Company
acquired this loan from Bann Cor and subsequently sold the loan to
Imperial Credit Industries. A preliminary determination indicates that
the basis for the dispute is between Santa Maria and Bann Cor. However,
the Company has been named as a party defendant. The Company considers
the risk of loss in the matter to be remote, and consequently, no
provision for loss has been accrued at December 31, 1996.
One of the Company's wholly owned subsidiaries, Green World
Technologies, Inc. has been named, together with other defendants, in
Shape Up America v. Phillippe et al,. The Complaint alleges breach of
contract, conspiracy, fraud, and quantum meruit. The Plaintiff claims to
be entitled to various forms of compensation based upon the
F-9
<PAGE>
WESTMARK GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
sale of certain licensing, patent and marketing rights to the Talon
Refrigerant Management System. Based upon a preliminary review of this
information, the Company considers the risk of loss in this matter to be
minimal, and consequently, no amount has been accrued at December 31,
1996.
The Company is a defendant in Tula Business Inc., Pokras, Inc., Dovasar,
S.A., Rafoel Lapidus and Eli Itzinger v. Medical Industries of America,
Inc. et al. This action was initiated by certain shareholders of MIOA
alleging fraud, misappropriation of funds and various securities
violations. The Company is named as a peripheral defendant in view of
various loans from MIOA to the Company and the position of MIOA as a 49%
shareholder of the Company. It is anticipated that the company will have
no liability whatsoever and that the matter will be resolved without the
necessity of the Company's participation. Consequently, no loss amount
has been accrued at December 31, 1996.
See subsequent event footnote #10.
The Company has entered into a series of settlement agreements with
various creditors. Various settlement defaults have resulted in
unsatisfied judgments. All amounts owed pursuant to ongoing settlements
and defaulted amounts have been recorded at their full settlement
amounts at December 31, 1996.
Outstanding Settlement Agreements in Progress
The Company currently has outstanding settlement agreements with various
creditors totaling $882,000. These settlement agreements provide for
periodic issuances of an estimated 1,020,000 common shares which will be
sold at the prevailing fair market value to satisfy the claims of
creditors. Shares remaining unsold, if any, after full satisfaction of
these claims will be returned to the Company's treasury. Should the
market price of the Company's stock decline, it is possible that the
number of shares reserved to settle the claims of creditors would prove
to be insufficient, and the Company would be required to satisfy the
remaining liabilities in cash. The Company is in the process of
preparing an SB-2 registration statement for the shares underlying these
settlement agreements.
Land Purchase Commitment
The Company has agreed to place $5,000,000 of preferred stock in escrow
to secure an option to purchase additional land parcels similar to the
Company's current investment in land. The preferred stock may be
convertible by the landowner into common stock at a minimum conversion
price of $1.00 beginning in April 1997. The Company is contractually
obligated to purchase $1,000,000 of land, which contractual obligation
will be satisfied through the release of $1,000,000 in preferred shares
from escrow. Additional shares of stock will be released through
conversion to common equity only in the event that land sales net
proceeds to the Company in excess of $1,000,000. The Company is not
obligated to issue any additional shares of prefered stock until and if
the Company receives $1 million of gross proceeds from the sale of the
land acquired from PBF Land Company. When and if the Company receives
gross proceeds in excess of $1 million from the sale of the land
acquired by PBF Land Company, the Company is obligated to issue
additional shares of Series F Preferred Stock or cash at a rate of $.50
per $1 of gross proceeds received by the Company from the sale of such
land.
3.RELATED PARTY TRANSACTIONS
Effective November 1995, and through the year ended December 31, 1996,
the Company owned a $2,000,000 investment in the preferred stock of
Medical Industries of America, Inc. ("MIOA"). MIOA in turn owned
approximately 49% of the outstanding common stock of the Company. In the
transaction more fully described in Note 10, these shareholdings will be
exchanged to eliminate all significant commonality of ownership between
the two companies.
From February 1996 to May 1996, MIOA advanced the Company a total of
$1,727,569 for which the Company issued various 10% promissory notes
payable between February 13, 1997 and May 1, 1997. The promissory notes
are secured by Series C preferred
F-10
<PAGE>
WESTMARK GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
stock of the Company which is convertible at 84% of the bid price on the
date of the conversion. As more fully discussed in Note 10, this debt is
to be refinanced on a long term basis, subject to the receipt by the
Company of a minimum of $3,000,000 in equity financing.
During the period January 1, 1996 to June 28, 1996, Mr. Norman J.
Birmingham served as president of MIOA. From November 1995 to September
1996, Mr. Birmingham served as president of the Company, and in December
1996, he was named as chief financial officer of the Company. Mr.
Birmingham owns 8,000 shares of MIOA (which is less than 1% of the total
outstanding shares) and approximately 1,000 shares of the Company.
The Company purchased its investment in land from PBF Land Co. PBF Land
Co. is owned and controlled by Mr. Charles Chillingsworth II.
The Company purchased its investment in Green World Technologies, Inc.
from GTB Company is owned and controlled by Mr. Charles Chillingsworth.
For the period January 1996 through March 1996, Mr. Chillingsworth
provided consultant services to the company totalling $78,000. For the
period November 1995 through May 1996, Mr. Chillingsworth also provided
legal services to MIOA. Mr. Chillingsworth owns no shares of MIOA, but
is a party to a settlement agreement with the Company entitling him to
36,551 shares of the Company.
In June 1996, the Company issued 150,000 shares of WGHI common stock
with a fair value of $187,000 to Mr. Bradley T. Ray. Mr. Ray was a
consultant to and held shares in MIOA through June 1996. The maximum
aggregate number of shares of MIOA owned by Mr. Ray totaled 12,450 (on a
post-split basis) which amount equates to approximately 12% of the then
outstanding shares of MIOA.
The Company is leasing its headquarters from a shareholder and former
officer of the Company, Mr. Michael J. Morell for approximate monthly
payments of $2,300 through April 1998. Mr. Morell is currently an
officer and director of MIOA.
4.OUTSTANDING DEBT
Warehouse Lines
As of December 31, 1996, Westmark Mortgage Corporation has a warehouse
agreement with Princap Mortgage Warehouse, Inc. totaling $15,000,000
through November , 1997. The line is fully collateralized by the
assignment and pledge of eligible mortgage loans. Interest on the line
is payable at the time of purchase by the permanent investor at an
annual rate of 2.0% above the prime rate of interest (10.25% at December
31, 1996). There is a transaction charge of $140 per loan. In addition
the warehouse agreement requires Westmark Mortgage Corporation to
possess minimum net worth of $250,000, and maintain a compensating cash
balance on deposit with a designated financial institution totaling
$5,000. At December 31, 1996, the net worth of Westmark Mortgage
Corporation was $422,577 and the balance outstanding on this
line-of-credit totaled $4,748,021.
Other Notes Payable
The Company is obligated under the following notes payable at December
31, 1996:
10% notes payable to MIOA, face amount $1,727,569,
secured by Series C Preferred Stock of the Company
convertible at 84% of bid price on the date of
conversion. Due at various dates ranging from
February 13, 1997 to May 1, 1997 ................................. 1,727,569
F-11
<PAGE>
WESTMARK GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
12% mortgage loan, secured by building. Face amount
$87,000. Installment payments of $2,807 due monthly with
entire amount due June 1, 1998. Foreclosure actions
initiated in 1995 have been cured in 1996 ........................ 48,005
12.5% unsecured demand note, face amount $25,000,
requiring payments of $3,500 per month pursuant to a 1996
settlement agreement. These payments are in default .............. 19,770
18% unsecured demand note, face amount $22,350, due
on demand ......................................................... 22,350
10% convertible demand note, face amount $29,218, due
April 15, 1997, convertible into the Company's common stock
at a conversion price equal to the closing bid price
on the date of conversion ......................................... 29,218
12% convertible, subordinated, unsecured promissory
notes, face amount $79,750, due thirty days from
issuance and renewable thereafter in thirty day
increments by the holder. Convertible at the option of
the holder into shares of the Company's common stock at
a conversion rate of $0.55 per share .............................. 79,750
10% convertible unsecured promissory notes, face amount
$39,850, due on demand, convertible into shares of the
Company's common stock at prices ranging from $0.42 to
$0.61 per share ................................................... 39,850
10% convertible unsecured promissory notes, face amount
$61,251, due June 30, 1997, convertible into shares of the
Company's common stock at the prevailing market value
in the event of default ........................................... 59,751
10% convertible unsecured promissory note, face
amount $50,000, due June 14, 1996, convertible into
the Company's common stock at $0.81 per share ..................... 30,000
10% convertible unsecured promissory note, face
amount $100,000, due Feb. 28, 1997, convertible into
shares of the Company's common stock at $0.81 per share ........... 100,000
10% unsecured promissory note, face amount $19,000,
due on demand ..................................................... 19,000
13.54% convertible obligation, face amount $229,000,
$115,000 of which shall be payable in cash upon the
closing of a transaction whereby WGHI receives at least
$3,000,000 in additional capitalization, otherwise
payable in shares of the Company's stock. Balance
payable in shares of the Company's common stock by
January 30, 1997 ................................................. 229,000
F-12
<PAGE>
WESTMARK GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
11.25% convertible obligation, face amount $80,000
$40,000 of which shall be payable in cash upon the closing
of a transaction whereby WGHI receives at least
$3,000,000 in additional capitalization, otherwise payable
in shares of the Company's stock. Balance payable in
shares of the Company's common stock by January 30,
1997 ............................................................. 80,000
---------
Total notes outstanding ........................................... 2,484,263
=========
5.LEASES
Beginning in March 1995, the Company is leasing its headquarters from a
consultant and former officer of the company for an average monthly
rental of $2,300 through April 1998. The Company also leases office
equipment for average monthly payments totaling approximately $10,000
through 2001. Future minimum lease payments under non-cancellable
operating leases are as follows:
For the year ended December 31,
1997 125,584
1998 48,288
1999 34,908
2000 33,780
2001 2,345
----------
Future minimum operating lease payments 244,905
==========
During 1996, the Company closed its offices in Costa Mesa, California,
San Jose, California, and Honolulu, Hawaii, and to that end, negotiated
final payments on leases previously extending through 2002. The amount
of accrued rent for terminated leases at December 31, 1996 was $123,000.
In addition, as part of the agreement to terminate the Costa Mesa lease,
the Company agreed to transfer ownership of all furniture and equipment
at that location to the succeeding tenants. The Company's cost basis in
these assets was approximately $70,000 at the time of transfer.
Miscellaneous costs related to the lease termination totaled $12,000.
These amounts have been included in general and administrative expenses
for the year ended December 31, 1996.
Rent expense for the years ended December 31, 1996 and 1995 was $172,950
and $462,117 respectively.
6.EXTRAORDINARY ITEMS
Disposal of Network Capital Group
On July 10, 1996, the Company sold all of its capital stock in Network
Capital Group, Inc. to PBF Land Company (PBF) in exchange for various
parcels of real property in Florida with an appraised value of $1.3
million. At the time of the sale, the recorded amounts of the assets of
Network Capital Group exceeded its liabilities by $902,629. The Company
recorded the real property parcels at $1,000,000, resulting in a gain on
the disposal of Network Capital Group, Inc. of $97,371, ($0.03 per
share) before tax effect of $39,000. As part of the same agreement, the
Company extended a commitment to purchase an additional $1,000,000 in
similar real estate through the issuance of preferred stock to be valued
at $1,000,000.
F-13
<PAGE>
WESTMARK GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Loss from operations of Network Capital Group prior to disposal is
immaterial to these financial statements.
Gain on Extinguishment of Debt
In 1995, the Company settled its litigation with Dolan Development
Partners, Inc., effectively reducing the amount of principal and
interest payable on two promissory notes from $1,500,000 to $1,050,000.
These modifications have resulted in an extraordinary gain of $450,000
($0.42 per share) before tax effect of $180,000.
7.INCOME TAXES
The Company's net operating and capital loss carryforwards are estimated
to be $22 million for federal income tax purposes at December 31, 1996.
The carryforwards expire in various years for 2003 to 2011, with the
majority expiring in 2007 and 2008. These carryforwards are on a
consolidated return basis for the members of the consolidated group and,
thus, the loss carryforwards may have certain separate return
limitations. Use of the Company's net operating and capital loss
carryforwards may also be limited under Internal Revenue Code Section
382.
Deferred taxes result from temporary differences in the recognition of
income and expenses for financial and income tax reporting purposes and
as a result of non-benefited net operating and capital loss
carryforwards. The approximate effect of temporary differences that gave
rise to deferred tax balances at December 31, 1996 were as follows:
Deferred tax assets
Unconsolidated subsidiary ................................. 45,000
Deferred compensation ..................................... 18,000
Non-benefitted losses ..................................... 8,830,000
----------
Total deferred tax assets .............................. 8,893,000
Valuation allowance, deferred tax assets .................. (8,893,000)
----------
Net deferred tax assets ................................... 0
Deferred tax liabilities .................................. 0
----------
Net deferred tax asset .................................... 0
==========
The valuation allowance for deferred tax assets increased 2,129,000
during the year ended December 31, 1996.
The effective tax rate on income before provision for income tax and
extraordinary items varies from the current statutory federal income tax
rate as follows:
December 31,
1996 1995
------- -------
Statutory rate ......................................... 34.00% 34.00%
Non-benefitted losses and temporary differences ........ -34.00% -34.00%
Tax effect of extraordinary items ...................... 1.00% 2.40%
------- -------
Effective tax rate ..................................... 1.00% 2.40%
======= =======
F-14
<PAGE>
WESTMARK GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
8.STOCKHOLDERS' EQUITY
Overview
In June 1996, the Company (formerly a Colorado corporation)
reincorporated in the State of Delaware, which resulted in the number of
authorized shares of common stock increasing to 50,000,000, $0.001 par
value, and the number of authorized shares of preferred stock increasing
to 10,000,000.
In July 1995, the Company underwent a 1 for 30 reverse stock split. All
share and per share amounts in these financial statements reflect this
reverse split.
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("FAS 123"). As permitted by FAS 123, WGHI continues to
apply the recognition and measurement provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB25"). The differences between the recognition and
measurement provisions of FAS 123 and APB 25 are not significant to
WGHI's results of operations for the year ended December 31, 1996.
Stock Option Plans
1994 Stock Option Plan
In May 1994, the shareholders approved the Network Financial Services,
Inc. 1994 Stock Option Plan. The plan is established as a compensatory
plan to attract, retain, and provide equity incentives to selected
persons to promote the financial success of the Company. A total of
333,333 common shares have been reserved for grants under the plan. The
options may be granted as either incentive stock options (ISO's) or
Non-Qualified Stock Options (NQSO's).
1993 Omnibus Stock Option Plan
On May 26, 1993, the shareholders approved the 1993 Omnibus Stock Plan
for the purpose of providing a long-term incentive vehicle to promote
the Company's success under which a variety of stock-based incentives
and other awards may be granted to employees and directors of the
Company and its subsidiaries, and to selected consultants. The maximum
number of 83,333 common shares are available for grants under this plan.
Of this total, 16,667 may be awarded as restricted stock.
1990 Nonqualified Stock Option Plan
In October 1990, the shareholders adopted a Nonqualified Stock Option
Plan (the 1990 NSOP). The 1990 NSOP was adopted in order to permit the
exchange of prior options held by option holders of the Company for the
new options of the Company. The 1990 NSOP provides that options may be
granted at exercise prices equal to or less than the fair market value
of the common shares of the Company on the date of the grant. As of
December 31, 1996, all options issued under this plan had been canceled.
Option plan activity
F-15
<PAGE>
WESTMARK GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
The following summarized the stock option plan activity for the year
ended December 31, 1996:
1990 NSOP
shares price
----- -----------
Beginning Balance ................ 5,387 $15 TO $112
Options granted .................. 0
Options exercised ................ 0
Options canceled ................. 5,387 $15 TO $112
Ending Balance ................... 0 N/A
1993 OMNIBUS
shares price
------ -------------
Beginning Balance .............. 51,682 $45 TO $70.50
Options granted ................ 0
Options exercised .............. 0
Options canceled ............... 38,266 $45 TO $70.50
Ending Balance ................. 13,416 $ 53
1994 Stock Option Plan
shares price
------- ----------
Beginning Balance ............... 323,906 $2 TO $45
Options granted ................. 0
Options exercised ............... 0
Options canceled ................ 130,989 $2 TO $45
Ending Balance .................. 192,917 $ 2
Preferred Stock
Series A Preferred Stock
In April 1996, the Board of Directors established a series of shares
setting forth the preferences, rights and limitations and authorizing
the issuance of up to 200,000 shares of series A cumulative preferred
stock ("Series A Preferred Stock"). An aggregate of 118,750 shares of
series A preferred shares were issued in April, 1996, with an aggregate
stated value of $475,000. Fair value of these shares at issuance was
equal to the stated value, which was determined with respect to the
value of the underlying common shares. The Series A Preferred Stock has
a liquidation preference of $4 per share, plus any accrued unpaid
dividends (at an annual dividend rate of 8%, cumulative whether or not
declared), is redeemable by the Company at a redemption price of $4 per
share plus accrued unpaid dividends to the date of redemption. The
holder may enforce redemption by the Company upon the same redemption
terms that the Company possesses, and has no voting rights. The shares
are convertible into shares of Common stock at the lessor of $1.50 or
84% of the closing bid price on the day prior to conversion.
In December 1996, the holder of 100,000 shares of Series A cumulative
preferred stock waived his contractual right to enforce redemption of
these shares by the Company. Consequently, $400,000 has been
reclassified in these financial statements to non-redeemable preferred
stock and has been included in stockholders' equity at December 31,
1996.
F-16
<PAGE>
WESTMARK GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Series B Preferred Stock
In April 1996, the Board of Directors established a series of shares
setting forth the preferences, rights and limitations and authorizing
the issuance of up to 300,000 shares of series B cumulative preferred
stock ("Series B Preferred Stock"). An aggregate of 300,000 shares of
series B preferred shares were issued in April, 1996, with an aggregate
stated value of $600,000. Fair value of these shares at issuance was
equal to stated value, which was determined with respect to the value of
the underlying common shares. The Series B Preferred Stock has a
liquidation preference of $2 per share, plus any accrued unpaid
dividends (at an annual dividend rate of 10%, cumulative whether or not
declared), is junior in liquidation preference to the Series A preferred
stock, is redeemable by the Company at a redemption price of $2 per
share plus accrued unpaid dividends to the date of redemption, and does
not have any voting rights. The shares are convertible into shares of
Common stock at the lessor of $2.00 or 84% of the closing bid price on
the day prior to conversion, subject to certain adjustments.
Series C Preferred Stock
In March 1996, the Board of Directors established a series of shares
setting forth the preferences, rights and limitations and authorizing
the issuance of up to 500,000 shares of series C cumulative preferred
stock ("Series C Preferred Stock"). An aggregate of 200,000 shares of
series C preferred shares were issued in April, 1996, with an aggregate
stated value of $700,000. Fair value of these shares at issuance was
equal to the stated value, which was determined with respect to the
value of the underlying common shares. The Series C Preferred Stock has
a liquidation preference of $3.50 per share, plus any accrued unpaid
dividends (at an annual dividend rate of 10%, cumulatively, whether or
not declared), is redeemable by the Company at a redemption price of
$3.50 per share plus accrued unpaid dividends to the date of redemption,
and does not have any voting rights. The shares are convertible into
shares of Common stock at the lessor of $1.50 or 84% of the closing bid
price on the day prior to conversion.
Series D Preferred Stock
In November 1996, the Board of Directors established a series of shares
setting forth the preferences, rights and limitations and authorizing
the issuance of up to 1,000,000 shares of series D cumulative preferred
stock ("Series D Preferred Stock"). An aggregate of 50,000 shares of
series D preferred shares were issued in September, 1996, with an
aggregate stated value of $250,000. Fair value of these shares at
issuance was equal to stated value, which was determined with respect to
the value of the underlying common shares. These shares were issued for
the purpose of securing the default in the GTB/Green World transaction.
The Company considers these shares unearned, since a contractual
obligation exists on the part of GTB to indemnify the Company. The
Series D preferred stock has a liquidation preference of $5.00 per
share, plus any accrued unpaid dividends (at an annual dividend rate of
10%, cumulatively, whether or not declared) , is redeemable by the
Company at a redemption price of $5.00 per share plus accrued unpaid
dividends to the date of redemption, and does not have any voting
rights. The shares are convertible into shares of Common stock at 100%
of the closing bid price on the day prior to conversion. The series D
preferred stock is junior in liquidation preference to previous series
of preferred stock.
F-17
<PAGE>
WESTMARK GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Series E Preferred Stock
In November 1996, the Board of Directors established a series of shares
setting forth the preferences, rights and limitations and authorizing
the issuance of up to 130,000 shares of series E cumulative preferred
stock ("Series E Preferred Stock"). An aggregate of 130,000 shares of
series E preferred shares were issued in July, 1996, with an aggregate
stated value of $1,300,000. Fair value of these shares at issuance was
equal to stated value, which was determined with respect to the value of
the underlying common shares. These shares were issued for the purpose
of acquiring the Company's interest in Green World Technologies Inc.,
and for cash. The Series E Preferred Stock has a liquidation preference
of $10.00 per share, is redeemable by the Company at a redemption price
of $10.00 per share, and does not have any voting rights. The shares are
convertible into shares of Common stock at $0.45 per share, except that
the conversion price shall be adjusted in the event that conversion of
these shares will result in the holder receiving more than 49% of the
outstanding common shares of the Company. The series E preferred stock
is junior in liquidation preference to previous series of preferred
stock.
Series F Preferred Stock
In November 1996, the Board of Directors established a series of shares
setting forth the preferences, rights and limitations and authorizing
the issuance of up to 1,000,000 shares of series F cumulative preferred
stock ("Series F Preferred Stock"). An aggregate of 1,000,000 shares of
series F preferred shares are to be placed in escrow to secure the
Company's option to acquire additional parcels of land from PBF Land
Company. The Series F Preferred stock has a liquidation preference of
$5.00 per share, is redeemable by the Company at a redemption price of
$5.00 per share, and does not have any voting rights. The shares are
convertible into shares of common stock at $5.00 divided by the greater
of $1.00 or the average closing bid price for the five days prior to
conversion. No more than $200,000 in fair market value of preferred
stock may be converted to common over the five quarters beginning in the
second calendar quarter of 1997, until such time as the land under
option is sold for gross proceeds of greater than $1 million. The series
F preferred stock is junior in liquidation preference to previous series
of preferred stock.
All conversion prices are considered to be representative of the fair
market value of the underlying stock into which the preferred shares are
convertible, when factors such as market liquidity and trading
restrictions are taken into account. Consequently, no provision for
non-cash compensation has been recorded in connection with conversion
prices included in these preferred shares.
Warrants
In March , 1996, warrants were issued to officers of the company
providing for the issuance of up to 180,000 shares of common stock at an
exercise price of $2.25 per share, 90,000 of which are fully vested
immediately, and 90,000 of which will vest upon the Company's attainment
of certain earnings levels by December 1997.
Warrants issued to non-employees during the year consisted of warrants
to purchase a total of 1,619,485 shares of common stock at prices
ranging from $0.55 per share to $2.38 per share. The warrants expire on
various dates from December 1997 through April 2004. The Company's
policy is to consider warrants issued to acquire common shares at a
strike price within 84% of the trading price on the date of the grant as
issued for the fair market value of the warrant. Up to a 16% reduction
from the trading price of the stock may be contained in the warrant
price due to trading restrictions on the underlying shares as well as
market illiquidity, and not to provide additional compensation to the
non-employee recipient. During 1996, the Company issued warrants at
prices which contained discounts from the trading price of the stock of
more than 16%. The Company recorded a total of $70,000 in non-cash
compensation related to the issuance of these warrants.
F-18
<PAGE>
WESTMARK GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Convertible debt
During 1996, the Company issued debt instruments with conversion prices
equal to 84% of the bid price of the Company's common stock at the date
of issuance. Non-cash compensation has not been recorded, since this
discount is considered to be representative of the fair market value of
the underlying common stock, when factors such as market liquidity and
trading restrictions are taken into account.
Common share repurchases
Effective March 15, 1996, the Company redeemed a total of 240,000 shares
of previously issued common stock for total consideration of $802,000.
Flexible options
During 1995, the company entered into several financing arrangements
which provided for settlement of certain liabilities through the
issuance of the Company's common stock at a price equal to 50% of the
bid price at the date of conversion to equity. Both the debt and the
equity portion of these transactions have been recorded as compensation
expense. A credit to additional paid in capital has been recorded for
the effect of the equity doubler portion of these financing
arrangements. Total amount recorded for equity doublers for 1995 was
$1,074,000, which consisted of debt issue costs of $765,000, and salary
liabilities convertible at 50% of bid, totaling $309,000.
9.INVESTMENTS
Investment in Land
The company is the owner of various parcels of real property in Florida.
The subject property consists of various strips of 25-30 foot and 50
foot (perimeter) platted road rights of way located in Palm Beach
County. The Company acquired the property pursuant to a recorded Quit
Claim Deed from PBF Land Co. The Company has obtained an MAI appraisal
establishing a value of $1.3 million for a fee simple interest in the
property.
There are approximately 170 different parcels comprising the total
property. These platted road rights of way strips are in some cases
included in the adjacent property owners' sites. The Company has been
unable to obtain a policy of title insurance on the property. In order
to identify its rights in the property, the Company has obtained an
attorney's opinion of title, which verifies fee simple title to the
property. The Company has also obtained an affidavit of no liens.
Florida case law has held that property owners hold title to the center
of the road. However, the Company is relying upon the 1995 Federal Court
Case of West Peninsula Title v. Palm Beach County, 41 Federal 3rd, page
1490 which holds that title to the road strips rests with the owner of
the strips.
The Company has discounted the fee simple appraised amount of $1,300,000
to $1,000,000 to reflect potential reduced marketability of these
properties due to title considerations.
Due to the nature of the property (road rights of way) independent
development by the owner is not feasible without acquiring the
surrounding lands. It is not the Company's strategy to acquire and
develop additional properties, but rather, to hold the subject
properties for sale until such time as the surrounding properties are
developed.
F-19
<PAGE>
WESTMARK GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Investment in Green World Technologies, Inc.
In July 1996, the Company acquired 100% of the stock of Green World
Technologies, Inc. from GTB, Inc. for a total purchase price of
$1,300,000, payable through the issuance of 130,000 shares of Series E
preferred stock, with a fair market value of $10 per share. Of this
amount, $200,000 was received in cash, and $1,100,000 was allocated to
the assets and liabilities of Green World Technologies, Inc. These
shares are convertible into common shares of the Company at a rate of
$0.45 per share, which was the fair value of the underlying common stock
at the date of issuance of the preferred shares. The transaction has
been accounted for as a purchase. The purchase price may be increased by
amounts payable under a two year commitment for quarterly payments of
royalties equal to 14% of the gross sales of Green World. These
payments, considered contingent additional consideration for the
acquisition of Green World, will be expensed as incurred. The total cost
of the acquisition exceeded the fair value of net tangible assets of
Green World by $1,078,000, which amount has been recorded as goodwill.
This amount is being amortized on the straight line method over 10
years. Green World is in the business of refrigerant management systems
for energy savings.
In February, 1997, the Company agreed to transfer 15% of its interest in
Green World Technologies to GTB Company in connection with GTB's
agreement to convert 130,000 shares of Series E preferred stock to
common. This transfer and conversion are contingent upon the Company
obtaining outside financing equal to at least $3,000,000 see Note 10.
The agreement also provides for a waiver of the payment of additional
consideration in the form of royalties. It is anticipated that the
transfer of this interest in Green World will be recorded at the fair
market value of Green World at the time of transfer.
In addition, the Board of Directors of the Company voted in February
1997 to spin off as a dividend to its shareholders, a majority of its
remaining interest in Green World. The exact percentage of Green World
to be distributed as a dividend has not yet been determined.
The results of operations of Green World Technologies, Inc., whose
fiscal year end is September 30, 1996, have been included in the
accompanying financial statements for the period July 21, 1996 through
September 30, 1996.
The following summarized financial information portrays the effect on
the results of operations of the Company as if the acquisition of Green
World Technologies, Inc. was made at January 1, 1996. Since Green World
was not in existence in 1995, the effect on the comparative 1995 fiscal
year has not been presented.
Total revenue ............................................ $ 2,947,572
Loss before extraordinary items .......................... $(3,620,453)
Net loss ................................................. $(4,039,908)
Loss per share:
Loss before extraordinary items ....................... $ (0.99)
Net loss .............................................. $ (1.10)
F-20
<PAGE>
WESTMARK GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
The above proforma amounts reflect adjustments for the amoritzation of
goodwill from January 1, 1996.
During the period October 1, 1996 through December 31, 1996, the Company
advanced a total of $52,605 to further fund the operations of Green
World.
Investment in Preferred Stock - MIOA
The Company is the owner of 200,000 shares of Medical Industries of
America, Inc. convertible, redeemable, non- voting preferred stock,
series B. The stock carries a 7% cumulative dividend, payable whether or
not declared, a $10 per share liquidation preference, and is
convertible, for a period of 10 years from the date of issuance into
registered shares of MIOA at the average of the bid and asked price of
the MIOA stock for the thirty days prior to conversion. MIOA may redeem
the shares of preferred stock at any time for $10 per share.
This investment is classified as available for sale under the criteria
established by SFAS No. 115 - Accounting for Investments in Marketable
Securities. Its market value is deemed to be $2,000,000, which is equal
to cost, and which has been determined in reference to the common stock
into which it is convertible. The Company considers current liquidity of
MIOA common stock to be sufficient to sustain this market value. There
were no unrealized holding gains and losses attributable to this
investment in 1996.
This investment will be returned to MIOA in exchange for capital stock
of the Company in the equity restructuring arrangement discussed in Note
10.
10.PROPOSED EQUITY FINANCING AND CAPITAL RESTRUCTURING
Private Placement
The Company is currently pursuing a Private Placement of units on a best
efforts basis for a maximum of $6,000,000 and a minimum of $3,000,000 in
gross proceeds to the Company. The units will consist of one share of
10% convertible preferred stock and one five year warrant to purchase
one share of common stock for every two preferred shares issued. Each
share of Preferred Stock is convertible into one share of the Company's
common. Dividends on the Preferred stock may be paid in 10% Convertible
Preferred Stock or in cash at the Company's option.
Westmark-Medical Industries Agreement
The Company and Medical Industries of America, Inc. ("MIOA") entered
into an agreement dated January 23, 1997 which was amended March 31,
1997. The performance of this agreement are conditioned upon the Company
receiving at least $3,000,000 in the financing transaction mentioned
above by April 21, 1997. MIOA presently owns 1,667,284 shares of the
Company's common stock and 200,000 shares of its Series C Preferred
stock. MIOA also has a contractual right to receive additional shares
sufficient to enable it to maintain up to a 49% ownership interest in
the Company. At December 31, 1996, the Company owes MIOA $1,727,569.
MIOA has agreed to return all of its shares of capital stock in the
company, both common and preferred, and to forego its 49% antidilution
protection in exchange for the transfer by the Company of its $2,000,000
investment in MIOA, and the agreement to pay a total of $3,953,000 upon
the following terms. The Company must make a cash payment to MIOA from
the proceeds of the financing. In the event the Company receives only
$3,000,000, the cash payment shall be $300,000. If the Company receives
F-21
<PAGE>
WESTMARK GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
more than $3,000,000 but not more than $5,000,000, the cash payment
shall be 10% of the financing. If the Company receives more than
$5,000,000 but less than $6,000,000, the payment shall be 10% of the
financing plus the amount of the funds exceeding $5,000,000. The
principal amount of the promissory note to be executed after this
initial cash payment will be reduced by any cash payment made as
previously described. In the event that the cash payment exceeds
$1,000,000, the principal balance will be reduced by $230,000 for every
$100,000 paid in excess of $1,000,000. The note will bear interest at
10%, with principal and interest due January 2000. The note is to be
secured by the Company's land investment.
11.EFFECT OF YEAR END ADJUSTMENTS WHICH ARE MATERIAL TO FOURTH
QUARTER RESULTS
Significant year end adjustments which affect the fourth quarter's
results of operations are summarized as follows:
Disposal of assets for rent settlements ........................ 70,000
Overstatement of revenue ....................................... 150,000
Non-cash compensation not recorded ............................. 470,000
-------
Total effect of fourth quarter adjustments ..................... 690,000
=======
12.SUBSEQUENT EVENTS
Line of credit modifications
In the first fiscal quarter, the Company secured two additional $5
million warehouse lines of credit under the following terms and
conditions: Warehouse line number one charges interest at prime plus
1.5%, will lend 100% of the face amount of the mortgage loan, and
charges no loan fees. Warehouse line number two charges interest at 2%
over prime, funds 100% of the mortgage loan amount, and charges a $100
all inclusive administrative fee per loan.
Concurrently, the Company reduced its existing line of credit from
$15,000,000 to $10,000,000.
In March 1997, 200,000 shares of Series F Preferred stock with a stated
value of $1,000,000 were issued to satisfy the Company's commitment to
purchase additional land parcels.
Effective April 8, 1997, the Company was released from liability in the
matter of Tula Business Inc., et al v. Medical Industries of America,
Inc. et al.
Subsequent to year end, a total of 1,019,019 common shares were placed
in trust pursuant to settlement agreements.
13.SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 1996, the Company issued 110,000
shares of Series E preferred stock to acquire its investment in Green
World Technologies, Inc. The Company traded land valued at approximately
$2.0 million with associated liabilities of approximately $900,000 for
land with a value of $1.0 million. The Company issued stock for services
and debt conversions of approximately $1.8 million in 1996.
F-22
<PAGE>
WESTMARK GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
During the year ended December 31, 1995, the Company issued $2,000,000
in common shares for its investment in preferred stock, issued
$1,053,000 in common shares for debt retirement, and financed the
acquisition of a building for $87,000.
F-23
<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.
Westmark Group Holdings, Inc.
By /s/ MARK SCHAFTLEIN
Mark Schaftlein,
President, Chief Executive
Officer and Director
----------------------------
Pursuant to the requirements of the Securities Act of 1933, this Form
10-KSB has been signed below by the following persons in the capacities and on
the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ MARK SCHAFTLEIN President, Chief Executive Officer April 29, 1997
Mark Schaftlein and Director
/s/ NORMAN J. BIRMINGHAM Director, Chief Financial Officer April 29, 1997
Norman J. Birmingham Chief Accounting Officer
/s/ TODD WALKER Director April 29, 1997
Todd Walker
/s/ LOUIS RESWEBER Director April 29, 1997
Louis Resweber
