UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ______________________
Commission file number 0-18945
WESTMARK GROUP HOLDINGS, INC.
(name of small business issuer in its charter)
DELAWARE 84-1055077
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
8000 NORTH FEDERAL HIGHWAY
BOCA RATON, FLORIDA 33487
(Address of principal executive offices)(Zip Code)
(561) 526-3300
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the
Exchange Act:
NONE
Securities registered under Section 12(g) of the
Exchange Act:
COMMON STOCK, $0.005 PAR VALUE
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. Yes [] No [X]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference to Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
<PAGE>
Issuer's revenues for the 12 months ended December 31, 1999: $23,408,448.
Nasdaq delisted the Company's common stock on June 29, 2000, after suspending
trading of the Company's common stock on March 30, 2000. The Company's common
stock is no longer listed on any exchange, nor is it quoted on the National
Association of Securities Dealers, Inc. Automated Quotation System. There is no
established trading market now for the Common Stock, which may be traded
infrequently in the over-the-counter market under the symbol "WGHI" on the "pink
sheets" issued by the National Quotation Bureau, Inc. As of August 4, 2000, the
last reported trade of the Company's common stock took place at $0.11 per share.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant based on the last reported sales price for such stock of $0.10 per
share on August 16, 2000 was: $264,093.
The number of shares outstanding of each of the registrant's classes of common
stock, as of August 8, 2000: 3,730,708 (one class).
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format: Yes [ ] No [XX]
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TABLE OF CONTENTS
<TABLE>
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ITEMS PAGE
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PART I
<S> <C> <C>
ITEM 1. BUSINESS............................................................................................. 1
ITEM 2. PROPERTIES........................................................................................... 3
ITEM 3. LEGAL PROCEEDINGS.................................................................................... 3
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................................. 5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................................ 5
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................ 6
ITEM 7 FINANCIAL STATEMENTS................................................................................. 10
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNT AND FINANCIAL DISCLOSURE.................... 10
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(A) OF THE EXCHANGE ACT EXECUTIVE OFFICERS AND DIRECTORS........................................... 10
ITEM 10. EXECUTIVE COMPENSATION............................................................................... 11
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................... 14
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................................... 15
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K..................................................................... 17
SIGNATURES............................................................................................................... 22
</TABLE>
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PART I
ITEM 1. BUSINESS
On July 22, 2000, we suspended operations of our wholly owned mortgage
banking subsidiary, Westmark Mortgage Corporation . Those operations were our
sole operations. Our value as a shell, if any, is limited. Potential and actual
claims against us, arising both from the ordinary course of our former business
and from misstatements in our 1999 quarterly reports filed on Form 10-QSB
described below, may significantly reduce our value as a shell company.
Until July 22 2000, we were in the business of underwriting,
originating, and purchasing sub-prime mortgage loans through Westmark Mortgage
Corporation. The capital to fund our new loans and loan purchases came mostly
from institutional lenders under lines of credit which allowed us to "warehouse"
loans until we could sell them to our investors.
As of June 2000, all of our institutional lenders except one had
stopped extending us credit under their warehouse lines because of the financial
issues described below. Our only remaining lender, Household Commercial
Financial Services, Inc., stopped extending us credit on June 30, 2000, forcing
us to suspend all of our operations except our California operations.
We were able to continue operating our California branch until July 21,
2000 under an interim financing agreement with First NLC Financial Services,
LLC. On July 21, 2000, we sold the assets of our California branch to G.I.E.,
Inc. for $125,000.
On August 2, 2000, Household Financial Services, Inc. acquired
approximately $12.4 million of loans in an ordinary course of business sale.
Also on August 2, 2000, Household Commercial Financial Services, Inc. acquired
all of our remaining loans, including all related foreclosed upon real estate or
real estate taken back in lieu of foreclosure, which had been funded using our
Household warehouse line of credit. These remaining loans and real estate were
acquired in exchange for an amount equal to our outstanding balance on our
Household warehouse line of credit. We and Westmark Mortgage Corporation also
executed a settlement agreement with Household Financial Services and Household
Commercial Financial Services on August 2, 2000 in which we agreed to release to
Household all mortgage loan files and documents in our loan portfolio relating
to loans financed under Household's warehouse line of credit. The settlement
agreement included mutual general releases. Under the settlement agreement, we
remain responsible for any act or omission of Westmark Mortgage Corporation
related to its servicing of the loans. We are also required to remit to
Household any payments on the related mortgage loans we receive on or after
August 1, 2000.
We have also delivered approximately $2.3 million of loans funded by
our other former warehouse lenders back to those lenders.
As of August 9, 2000, we have liquidated substantially all of our
portfolios of mortgage loans and related foreclosed real estate and real estate
taken back in lieu of foreclosure.
In the process of conducting our audit for the year ending December 31,
1999, we discovered that during 1999 the value of our loan inventory was
substantially overstated and the amount of our operating expenses was
substantially understated. This inaccurate information was reflected in our
quarterly reports filed on Form 10-QSB during 1999. If our financial resources
permit, we intend to file an amended Form 10-QSB for each of the first three
quarters of 1999.
We issued a press release on March 30, 2000 stating that we expected to
report a net loss of approximately $5 million for fiscal 1999. Nasdaq suspended
trading of our common stock that day and delisted our common stock on June 29,
2000. Our common stock is now traded infrequently in the over-the-counter market
on the "pink sheets" issued by the National Quotation Bureau, Inc.
Our actual net loss for 1999 was ($6,815,739) consisting of the
following:
o a net operating loss of $3,882,663
o litigation settlement costs of approximately $920,000
o reduction of the carrying value of various platted road
rights of way land strips we own by $300,000 to their
estimated net realizable value of $0
o reduction of the carrying value of stock we hold in a former
subsidiary by $76,528 to its estimated net realizable value
of $0
o payroll tax penalties of $400,000 due to late filing of
payroll tax returns, late payment of payroll taxes, and
failure to use electronic funds transfer to make payroll
tax payments - we are negotiating the amount of these
penalties and expect to substantially reduce them, and
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o reduction of the carrying value of our deferred tax asset
by $1,275,000 to its estimated net realizable value of $0
as of December 31, 1999, due to the uncertainty of our
ability to earn enough future taxable income to utilize
the deferred tax asset.
During 2000, we were unable to deliver the promissory notes underlying
approximately $7,300,000 of mortgage loans we sold to at least two institutional
investors. This is because we were unable to repay the warehouse line lenders
who funded the mortgage loans, and who have physical possession of the
promissory notes as security for repayment of their warehouse lines. We have
satisfied $5.5 million of that liability to one of the warehouse lenders,
Household Finance, through a settlement agreement, but Household Finance is
still retaining physical possession of the related promissory notes. We have
additional potential significant liability for deficiencies and accrued interest
to our other former warehouse line lenders. The only warehouse line lender we
have executed a settlement agreement with is Household Commercial Financial
Services.
Before ceasing operations, we attempted to secure financing that would
have allowed us to continue our business. We were unsuccessful.
On May 15, 2000, we executed a non-binding letter of intent with First
NLC Financial Services, LLC, providing for First NLC to acquire all of the stock
or assets of Westmark Mortgage Corporation. The letter of intent called for
First NLC to pay $6,000,000 to Westmark Mortgage Corporation at the closing of
the contemplated transaction. The letter of intent provided that the $6,000,000
would be used to satisfy our obligations under our warehouse lines of credit. It
also provided for First NLC, upon closing, to grant us an option with a 90 day
term to acquire 5% of First NLC for $925,000. The transaction was conditioned
upon a number of items, including:
o completion of due diligence by First NLC,
o First NLC securing third party investments in First NLC,
totaling $7.7 million,
o approval by First NLC's warehouse lenders,
o receipt of other third party or governmental approvals,
including the assignment of material contracts, and
o execution of a definitive agreement.
We were also negotiating the terms of a separate agency agreement with
First NLC that would have allowed us to act as a loan processor and underwriter
for First NLC pending closing of the transaction contemplated under the
non-binding letter of intent. We anticipated acting as First NLC's agent under
this agreement in Florida and other states where we might no longer be licensed
to operate as a mortgage lender because of our financial condition.
We were unable to conclude the proposed agreements with First NLC.
On June 1, 2000, we signed an agreement with Generation Capital
Associates, providing for us to issue Generation Capital 3,500,000 shares of our
preferred stock in exchange for $2,000,000. The preferred stock would be
convertible into the greater of 48% of our common stock on a fully diluted basis
or 3,500,000 shares of our common stock. The holders of the preferred stock
would have had one vote per one share voting rights on the same basis as holders
of our common stock. The agreement was conditioned upon a number of items,
including:
o closing of the above-described transaction with First NLC on
or before July 31, 2000,
o our net worth increasing to $2,200,000 upon sale of the
preferred stock,
o maintenance of our listing on the Nasdaq Small Cap Stock
Market,
o authorization of our subsidiary, Westmark Mortgage USA, to
originate and purchase mortgage loans, and
o approval of the agreement by our stockholders.
We were unable to sell the preferred stock to Generation Capital
because we were unable to satisfy these conditions.
Because of our current financial situation, our inability to secure
additional financing, and our loss of our warehouse lenders, we were unable to
remain in the mortgage loan business. We are now in the process of liquidating
Westmark Mortgage Corporation's assets, including its existing loan portfolio,
with a small workout team.
Employees
As of December 31, 1999, we had 124 full-time administrative employees
and 64 full-time production and operations employees. Due to our financial
condition and the suspension of our operations, we have reduced our work force
to a staff of 12 as of August 8, 2000.
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Green World Sale
Effective July 1996, we acquired all of the issued and outstanding
capital stock of Green World Technologies, Inc., a provider of air conditioner
enhancement products, from GTB Company. GTB had recently acquired Green World
from Medical Industries of America, Inc. (now known as Cyber-Care, Inc.), an
affiliate of the Company. We subsequently decided to focus our resources
exclusively on our mortgage operations. In December 1997, we divested
substantially all of our interest in Green World pursuant to an exchange
agreement between us, GTB and Green World. As a result of the Exchange
Agreement, we have reduced our ownership interest in Green World to Green World
Series A Preferred Stock. The preferred stock represents approximately 18.5% of
Green World's capital stock on a fully diluted basis. This 18.5% interest in
Green World is reflected in our financial statements as an investment in
preferred stock. At the end of 1999, we wrote down the value of our investment
in Green World from $76,778 to $0.
Westmark - Cyber-Care Agreement
On October 20, 1998, we executed an exchange agreement with our largest
equity and debt holder, Cyber-Care, Inc., formerly known as Medical Industries
of America, Inc., settling pending litigation with Cyber-Care and resolving all
outstanding issues relating to our stock and debt held by Cyber-Care. The
agreement supersedes all prior agreements entered into between us and
Cyber-Care.
The agreement, among other things, provided for: (1) the conversion of
200,000 shares of Westmark Series C Convertible Preferred Stock ($3.50 stated
value per share) held by Medical Industries into 350,000 shares of our common
stock, at a conversion ratio of $2.00 per share - as a result, Cyber-Care now
owns 587,615 shares of our common stock, or approximately 15.8% of our 3.730
million shares of common stock outstanding at June 8, 2000; (2) the issuance to
Cyber-Care of two-year warrants to buy 100,000 shares of our common stock at
$3.25 per share; (3) elimination of Cyber-Care's claim to a guaranteed 49%
ownership interest in us; (4) satisfaction of our Promissory Note payable to
Cyber-Care with a principal balance as of September 30, 1998 of approximately
$1,707,555 in exchange for the return by us to Cyber-Care of 172,750 shares of
Cyber-Care's Series B Convertible Preferred Stock with a $10.00 stated value per
share, and payment of $112,500 to Cyber-Care; and (5) our waiver of the right to
payment of approximately $350,000 of Cyber-Care's Series B Convertible Preferred
Stock accrued dividends, and waiver by Cyber-Care of the right to payment of
approximately $179,000 of Westmark Series C Preferred Stock accrued dividends.
The agreement provides us the right to repurchase our common stock held
by Cyber-Care at varying prices. The agreement also provided for our obligation
to repurchase $666,667 of our stock at $5.73 per share from Cyber-Care, because
our fully diluted earnings per share, excluding non-recurring gains and losses,
were less that $0.45 per share in the first half of 1999 and less than $0.55 per
share in the second half of 1999. We have repurchased $549,177 of our common
stock held by Cyber-Care. We have a remaining obligation to purchase $117,490 of
our common stock from Cyber-Care.
ITEM 2. PROPERTIES
We maintain our executive and production offices in 27,000 square feet
of leased space at 8000 North Federal Highway, Boca Raton, Florida 33487. Lease
expense is $41,753.20 per month. We have made lease payments for this office
through June 2000.
We also leased space for our satellite offices in Santa Ana, California
(4,819 square feet), Schaumberg, Illinois (5,378 square feet), and Kennesaw,
Georgia (6,215 square feet). The total lease expense for these offices is
approximately $25,927.80 per month which is considered market We have closed
these facilities. G.I.E., Inc. has assumed the lease on our Santa Ana office. We
are negotiating with the landlord for early termination of the Schaumberg and
Kennesaw offices. The Schaumberg lease expires under its terms on June 30, 2002
and has a monthly lease payment of $7,955. The Kennesaw lease expires under its
terms on January 31, 2004 and has a monthly lease payment of $8,403.20. We have
made lease payments for both the Schaumber and Kennesaw offices through April,
2000.
ITEM 3. LEGAL PROCEEDINGS
We were a plaintiff in NETWORK FINANCIAL SERVICES, INC. V. MCCURDY
RAICHE, RYALS, NASH & MOSS LAND COMPANY, filed March 1993 in Monterey County,
California Superior Court, Case No. 95887. The Cross-Complaint filed by
cross-defendants McCurdy and Moss Land Company was dismissed by the Court and
the cross-defendants filed an appeal from the trial court order. On March 6,
2000, the Court of Appeal of the State of California for the 6tah Appellate
District affirmed the lower Court's judgment, dismissing the cross-defendants'
action against us.
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We are a defendant in HOMESIDE VS. WESTMARK filed on December 15, 1997,
in Palm Beach County, Florida, Case #CL97-11164-AE. Plaintiff contends that
Westmark Mortgage is obligated to repurchase four loans previously sold to
Homeside Lending, Inc. due to various borrower deficiencies. Protracted
discovery is ongoing and the extent of our liability, if any, cannot be
ascertained until further discovery has been completed.
We are a defendant in CROWN BANK VS. WESTMARK MORTGATE CORPORATION
filed on March 25, 1998 in the Circuit Court of Seminole County, Florida, Case
#98625CA15A. Plaintiff alleges that Westmark Mortgage is obligated to repurchase
multiple loans. Protracted discovery is ongoing and the extent of our liability,
if any, cannot be ascertained until further discovery has been completed.
We are a defendant in IMPERIAL CREDIT INDUSTRIES, INC. VS. WESTMARK
MORTGAGE CORPORATION, American Arbitration Association Case #804880004597X filed
in Irvine, California on December 2, 1996. Plaintiff alleges that Westmark
Mortgage is obligated to repurchase various loans. This matter is currently
scheduled for arbitration from June 27 through June 30, 2000. Protracted
discovery is ongoing but inconclusive with respect to our potential liability.
We were a defendant in RICHARD J. KRENN VS. WESTMARK GROUP HOLDINGS,
INC., filed in the Circuit Court in Palm Beach County, Florida, Case
#98-007190AN on August 12, 1998. The case was resolved by settlement pursuant to
which we paid the plaintiff a settlement amount of $30,000. Plaintiff delivered
a general release and the case was dismissed with prejudice on February 25,
2000.
We were a defendant in WHITEHALL FINANCIAL SERVICES, INC. VS. WESTMARK
GROUP HOLDINGS, INC. filed on October 2, 1998 in the Circuit Court of the
Fifteenth Judicial District in and for Palm Beach County, Florida, Case
#988770AD. The case was resolved by settlement pursuant to which the Plaintiff
gave us a certificate for 100,000 shares of our preferred stock in exchange for
us delivering a certificate for 190,000 shares of our common stock. We paid
$25,000 in consideration for satisfaction of a mortgage on certain property at
issue in the lawsuit and paid the Plaintiff $137,500. All of the requirements of
the settlement were satisfied on or about January 22, 2000, and a stipulation of
dismissal with prejudice was filed and a order of dismissal with prejudice was
signed by the Court on March 24, 2000.
We were named as a respondent in TED BRISTOW and GARY PHILLIPPE VS.
GREEN WORLD TECHNOLOGIES, INC. ("Green World"), MEDICAL INDUSTRIES OF AMERICA,
INC., and WESTMARK GROUP HOLDINGS, INC., Case #74-160-00629-99, filed with the
American Arbitration Association in California on May 10, 1999. Mr. Bristow and
Mr. Phillippe were employed by Green World, a former affiliate of ours, under
alleged employment agreements containing an arbitration provision. We were not a
party to the employment agreements. Mr. Bristow and Mr. Phillippe alleged they
were terminated by Green World in August of 1997, and that they are entitled to
severance compensation from us as a result of those terminations.
When we refused to participate in arbitration, a California state court
action was filed by Mr. Bristow and Mr. Phillippe to compel us to arbitrate in
California. We removed the action to United States District Court for the
Eastern District of California and were successful in obtaining a ruling from
the California Court dismissing the California action against us for lack of
personal jurisdiction, and deferring to the Florida court on the issues relating
to arbitration.
Prior to the service by Mr. Bristow and Mr. Phillippe of the California
action to compel arbitration, we had filed a complaint in the Circuit Court of
Palm Beach County, Florida on June 24, 1999, Case #CL 99-6201 AO, seeking a
judicial determination that we are not bound to arbitrate this matter. The
Circuit Court denied Mr. Bristow and Mr. Phillippe's motion to dismiss for lack
of jurisdiction and an order was entered permanently staying the arbitration
proceedings against us. Our amended complaint filed in the Florida state court
also seeks a declaration by the Court that the we are not obligated to Mr.
Bristow or Mr. Phillippe for the amounts claimed relating to the alleged
termination of employment. Mr. Bristow and Mr. Phillippe have filed an answer to
the complaint, as well as a counterclaim for alleged breach of the employment
agreements or alleged guarantees or assumptions thereof. We are filing an answer
denying any obligation to Mr. Bristow and Mr. Phillippe. The case is set on a
six-week jury trial docket commencing September 4, 2000. However, we were also
sued separately on February 29, 2000 by Tom Stoermer, Palm Beach County Circuit
Court Case #CL 00-211 AI. The complaint in that case mirrors the allegations of
the counterclaim in the Phillippe/Bristow action. Therefore, we believe the
Stoermer case should be transferred to the division in which the
Phillippe/Bristow case is pending and consolidated with that case. In that
event, the Phillippe/Bristow case should be removed from the trial docket, as
the Stoermer case is not at issue. A motion to dismiss is pending in that case.
Discovery is in preliminary stages and the probable outcome of the suits cannot
be determined at this time.
We are a defendant in ROBERT DAVIS V. WESTMARK MORTGAGE CORPORATION
filed on August 18, 1999 in the Circuit Court of the Fifteenth Judicial District
in and for Palm Beach County, Florida, Case # CL 99-7928 AN. Mr. Davis, a former
employee of Westmark Mortgage, alleges breach of the employment agreement he had
with us. We have filed an answer and affirmative defenses and are vigorously
defending the action on the basis that Mr. Davis was sexually and otherwise
harassing various of our employees. Discovery is proceeding and the extent of
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our liability, if any, cannot be ascertained until further discovery has been
completed. The case was set for trial, but Mr. Davis asked for a continuance.
The case is not currently set on any trial docket.
We are a defendant in BLOUNT VS. WESTMARK MORTGAGE CORPORATION filed
February 24, 2000, in the Circuit Court of Hinds County, Mississippi First
Judicial District, Case #25100218. The plaintiff alleges that Westmark Mortgage
Corporation violated the Real Estate Settlement Procedures Act arising out of
certain compensation paid to real estate brokers with regard to the origination,
closing and funding of mortgage loans in the State of Mississippi. We have
recently been served with a summons and complaint and have not had an
opportunity to determine our potential liability nor have we filed an answer to
the complaint. Counsel for us has obtained an open extension of time to respond
to the complaint.
We are a defendant in VOGLER VS. WESTMARK MORTGAGE CORPORATION filed on
April 7, 1999 in the Circuit Court of Camden County, Missouri, Case No.
CV199-208CC. The complaint alleges that we failed to disburse a portion of loan
proceeds payable to creditors of plaintiff, Eva Janell Vogler. We have filed an
answer to the complaint as well as a cross-claim against Eagle Title Company,
the entity responsible for receipt and distribution of loan proceeds. We do not
anticipate any liability with respect to this matter.
Our securities transactions during 1999 may be subject to rescission.
Because of material misstatements of our earnings and financial condition as
presented in the quarterly reports filed on Form 10-QSB during 1999, any
purchasers of our common or preferred stock during 1999 may have the right to
rescind their purchase or acceptance in settlement those shares of our common or
preferred stock. During 1999, we completed a private placement offering of
Series H convertible preferred shares. A total of 367,147 shares were sold for
total gross proceeds of $1,156,500. We also issued 190,000 shares of our common
stock in settlement of a law suit. These shares were valued based upon their
market value at date of settlement of $237,500. The potential rescission of
these transactions could result in us having to pay $1,394,000 plus interest,
costs, or other related penalties, if any, that might be incurred in connection
with any rescission. We have deducted $1,394,000 of proceeds received by us from
the purchasers of our common and preferred stock during 1999 from stockholders'
deficiency and reflected them separately on the consolidated balance sheet under
the caption "Common and Preferred Stock Subject to Potential Rescission." We
have not provided for interest and other costs, if any, that may be incurred in
connection with any rescission. We have received a letter from counsel for the
placement agent of $1,156,500 of our preferred stock during 1999 advising us to
place our directors and officers liability insurance carrier on notice of a
potential claim.
The aggregate expense of these claims had a material effect on our
financial condition and results of operations in 1999 and may continue to do so.
From time to time, we are a defendant, actual or threatened, in certain lawsuits
encountered in the ordinary course of our business, the resolution of which, in
the opinion of our management, should not have a material adverse affect on our
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Nasdaq suspended trading of our common stock effective March 30, 2000,
and delisted our common stock on June 29, 2000. Until then, our common stock had
been traded since June 1992 on the NASDAQ Small Cap Stock Market under the
symbol "WGHI". Prior to June 1992, there was no public market for our common
stock. The following table sets forth the range of high and low closing sale
prices for our common stock as reported on the NASDAQ Small Cap Stock Market
during each of the quarters presented. The quotations shown below are
inter-dealer quotations, without retail mark-ups, mark-downs or commissions and
do not necessarily represent actual transactions.
COMMON STOCK[1]
QUARTERLY PERIOD ENDED HIGH LOW
March 31, 1999 $3.50 $1.50
June 30, 1999 $3.063 $1.844
September 30, 1999 $2.50 $1.344
December 31, 1999. $2.125 $1.031
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[1] Our common stock is no longer listed on any exchange, nor is it quoted on
the National Association of Securities Dealers, Inc. Automated Quotation System.
There is no established trading market now for our common stock, which may be
traded infrequently in the over-the-counter market under the symbol "WGHI" on
the "pink sheets" issued by the National Quotation Bureau, Inc. As of August 16,
2000, a reported trade of our common stock took place at $0.10 per share.
As of August 8, 2000, there were approximately 661 holders of record of
our Common Stock. This number does not include beneficial owners of the Common
Stock whose shares are held in the names of various dealers, clearing agencies,
banks, brokers and other fiduciaries.
We have never declared or paid any cash dividends. We currently have no
operations and do not anticipate paying any cash dividends in the foreseeable
future.
Issuance of Unregistered Securities
In July 1999, we issued 5,882 shares of our common stock to one of our
creditors in satisfaction of $12,000 in debt, pursuant to Section 4(2) of the
Securities Act of 1933.
In September 1999, in connection with the conversion of 100,000 shares
of Series G Preferred Stock, we issued 123,212 shares of our common stock to
Sterling Bank and Trust, the successor to MCA Financial Corp., pursuant to
Section 4(2) of the Securities Act of 1933.
In December 1999, in connection with the settlement agreement between
us and Whitehall Financial Services described under Item 1 of this Form 10-KSB,
we issued 190,000 shares of common stock, pursuant to Section 4(2) of the
Securities Act of 1933.
In February 2000, in connection with modifications to an existing
convertible promissory note held by Generation Capital Associates, we issued a
warrant to Generation Capital that expires June 30, 2003 to purchase up to
150,000 shares of our common stock at an exercise price of 1.0625 per share,
pursuant to Section 4(2) of the Securities Act of 1933.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS
This Annual Report on Form 10-KSB contains forward-looking statements.
For this purpose, any statements contained in it that are not statements of
historical fact should be regarded forward-looking statements. For example, the
words "believes," "anticipates," "plans," and "expects" are intended to identify
forward-looking statements. There are a number of important factors that could
cause our actual results to differ materially from those indicated by such
forward-looking statements. These factors include, those shown at the end of
this section under the caption "Certain Factors That May Affect Future Results."
The following discussion of our results of operations and financial
condition should be read along with our Consolidated Financial Statements listed
in Item 7 and the Notes to them appearing elsewhere in this Form 10-KSB.
General
Westmark Mortgage, our wholly-owned subsidiary, was a mortgage banking
company engaged in the business of funding, purchasing and selling mortgage
loans secured primarily by one-to-four family residences. We primarily generated
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 72% and
79% of total revenues in 1999 and 1998, respectively. Investment income earned
on loans held for sale constituted 16% and 11% of total revenues in 1999 and
1998, respectively. Loan origination fees and related revenue represented 12%
and 10% of total revenues in 1999 and 1998, respectively.
In the process of conducting our audit for the year ending December 31,
1999, we discovered that during 1999 the value of our loan inventory was
substantially overstated and the amount of our operating expenses was
substantially understated. This inaccurate information prevented management from
acting swiftly to curtail rising operating losses. This inaccurate information
was also reflected in our quarterly reports filed on Form 10-QSB during 1999. If
our financial resources permit, we intend to file an amended Form 10-QSB for
each of the first three quarters of 1999.
6
<PAGE>
We issued a press release on March 30, 2000 stating that we expected to
report a net loss of approximately $5 million for fiscal 1999. Nasdaq suspended
trading of our common stock that day and delisted our common stock on June 29,
2000. Our common stock is now traded infrequently in the over-the-counter market
on the "pink sheets" issued by the National Quotation Bureau, Inc.
Our actual net loss for 1999 was ($6,815,739) consisting of the
following:
o a net operating loss of $3,882,663
o litigation settlement costs of approximately $920,000
o reduction of the carrying value of various platted road
rights of way land strips we own by $300,000 to their
estimated net realizable value of $0
o reduction of the carrying value of stock we hold in a former
subsidiary by $76,528 to its estimated net realizable value
of $0
o payroll tax penalties of $400,000 due to late filing of
payroll tax returns, late payment of payroll taxes, and
failure to use electronic funds transfer to make payroll
tax payments - we are negotiating the amount of these
penalties and expect to substantially reduce them, and
o reduction of the carrying value of our deferred tax asset
by $1,275,000 to its estimated net realizable value of $0
as of December 31, 1999, due to the uncertainty of our
ability to earn enough future taxable income to utilize
the deferred tax asset.
During 2000, we were unable to deliver the promissory notes underlying
approximately $7,300,000 of mortgage loans we sold to at least two institutional
investors. This is because we were unable to repay the warehouse line lenders
who funded the mortgage loans, and who have physical possession of the
promissory notes as security for repayment of their warehouse lines. We have
satisfied $5.5 million of that liability to one of the warehouse lenders,
Household Finance, through a settlement agreement, but Household Finance is
still retaining physical possession of the related promissory notes. We have
additional potential significant liability for deficiencies and accrued interest
to our other former warehouse line lenders. The only warehouse line lender we
have executed a settlement agreement with is Household Commercial Finance.
Before ceasing operations, we attempted to secure financing that would
have allowed us to continue our business. We were unsuccessful.
We attempted to sell all of the loans we funded when we were operating,
generally within 30 to 60 days of origination. The loans were sold through
purchase agreements with Household Financial Services, Residential Financing
Corp, Bank One, Conseco Mortgage Services, Associates Home Equity Services,
Inc., and various non-conforming mortgage conduits. These agreements were for
specific terms or are open ended, and required the loans to satisfy the
underwriting criteria described therein. During 1999 and 1998, we sold loans
totaling $432 million and $276 million, respectively. We did not retain the
servicing rights for any of the loans we sold, and sold all loans primarily in
whole loan sales. The gain on sale of loans was $16,791,605 and $13,592,080 in
1999 and 1998, respectively.
On July 22, 2000, we suspended operations of our wholly owned mortgage
banking subsidiary, Westmark Mortgage Corporation . Those operations were our
sole operations. Our value as a shell, if any, is limited. Potential and actual
claims against us, arising both from the ordinary course of our former business
and from misstatements in our 1999 quarterly reports filed on Form 10-QSB
described above, may significantly reduce our value as a shell company.
See Notes to Consolidated Financial Statements of the Company (included
in Item 7) for further discussion of accounting policies and other significant
items.
Results of Operations
We incurred a net operating loss of ($3,882,663) in 1999 compared to
net operating income of $1,716,647 in 1998.
Loan production increased 54% to $447,210, 216 in 1999 compared to
$290,154,464 in 1998. Loan sales increased 56% to $431,772,845 in 1999 compared
to $276,938,431 in 1998. Total revenues increased 35% to $23,408,448 in 1999
from $17,300,099 in 1998. This increase was primarily due to the Company's
increased ability to acquire and sell non-conforming mortgages.
Gain on sale of loans, all of which was derived from premiums on whole
loan sales, increased 24% to $16,791,605 in 1999 from $13,592,080 in 1998. This
increase was the result of an increase in sales volume of $154,834,414 in 1999
compared to 1998. Beginning in October 1998 margins on the sale of loans and the
rate of growth of our whole loan sales were both reduced. This was the result of
many investors deciding to invest in more liquid securities with higher yields.
At the same time several investors who historically had acquired mortgage loans
7
<PAGE>
for resale in credit enhanced and non-enhanced packages went out of business or
lost their funding sources. Premiums on whole loan sales declined to 3.9% in
1999 compared to 4.9% in 1998.
Loan origination fees increased 67% to $2,747,859 in 1999 from
$1,650,143 in 1998. This increase is primarily due to increased loan volume and
management adjusting the loan origination pricing structure to provide for an
increase in per loan origination fees.
Investment income, comprised primarily of interest earned on loans held
for sale, increased 106% to $3,868,984 in 1999 from $1,881,755 in 1998. This
increase is due primarily to more loan production in 1999 as compared with 1998
and an increase in interest charged to borrowers.
Although total revenues only increased 35% in 1999, total expenses
increased 75% to $27,291,111 in 1999 from $15,583,452 in 1998 and 6.1% as a
percent of production in 1999 compared to 5.4% in 1998.
Direct loan fee expenses increased 39% to $5,772,088 in 1999 from
$4,154,060 in 1998 (1.3% of production in 1999 compared to 1.4% in 1998), due
primarily to the increase in loan production, fees paid to brokers and loan
processing fees charged by our warehouse lenders.
Interest expense increased 105% to $3,710,088 in 1999 from $1,811,529
in 1998 (.8% of production in 1999 compared to .6% in 1998), due primarily to
the increased volume of whole loan production, increased borrowing cost
associated with our Warehouse Facilities and loans staying on warehouse
facilities for longer periods.
General and administrative expense increased 81% to $16,537,715 in 1999
from $9,127,825 in 1998, due primarily to increased personnel costs of $10.9
million in 1999 compared to $6.2 million in 1998. We had increased our personnel
in anticipation of increased loan volume and in order to staff our new retail
and correspondent loan programs. Our retail and correspondent loan programs have
now been terminated and we have reduced our staff.
We acquired defaulted mortgage loans and real estate properties in
connection with problem loans repurchased during 1999. The loans and properties
are reported at the lower of aggregate cost or estimated net realizable value.
We established an allowance at December 31, 1999 in the amount of $1,045,000 for
estimated losses to reduce these assets to estimated net realizable value.
Liquidity and Capital Resources
We had a net loss of ($6,815,739) in 1999 and net income of $1,186,718
in 1998. As of December 31, 1999, we had negative working capital of
approximately ($4,600,000) and a stockholders' deficiency of approximately
($4,800,000), compared to working capital of approximately $771,000 and
stockholders' equity of approximately $2,500,000 at December 31, 1998.
In addition to our net operating loss of ($3,882,663) in 1999, we
incurred approximately $3 million of the following non-operating expenses:
o litigation settlement costs of approximately $920,000
o reduction of the carrying value of various platted road
rights of way land strips we own by $300,000 to its estimated
net realizable value of $0
o reduction of the carrying value of stock we hold in a former
subsidiary by $76,528 to its estimated net realizable value
of $0
o payroll tax penalties of $400,000 due to late filing of
payroll tax returns, late payment of payroll taxes, and
failure to use electronic funds transfer to make payroll
tax payments - we are negotiating the amount of these
penalties and expect to substantially reduce them, and
o reduction of the carrying value of our deferred tax asset
by $1,275,000 to its estimated net realizable value of $0
as of December 31, 1999, due to the uncertainty of our
ability to earn enough future taxable income to utilize
the deferred tax asset.
We funded our operations during 1999 primarily with our warehouse lines
of credit All our warehouse lender have ceased extending us credit, forcing us
to stop operations as of July 27, 2000.
8
<PAGE>
Year 2000 Compliance
We completed a comprehensive review of our computer-based systems to
determine if they would be affected by resulting Year 2000 related compliance
issues, that is whether those systems had Year 2000 related "computer bugs." The
review revealed no material Year 2000 related compliance issues. Because we had
developed or purchased most of our computer hardware and software systems within
the last four years, we did not incur any material Year 2000 compliance related
costs. We reviewed confirmation from outside vendors, financial institutions and
others that they were Year 2000 compliant. We believe we devoted the necessary
resources to timely address all Year 2000 compliance issues and have encountered
no Year 2000 problems.
Certain Factors That May Affect Future Results
Our independent accountants have qualified their opinion with respect
to our financial statements for the year ended December 31, 1999 to reflect that
it is subject to certain significant risks and uncertainties, including a
substantial net loss and negative cash flows from operating activities. Our
consolidated financial position reflects a significant balance of negative
working capital and stockholders' deficiency. We are also experiencing other
events which have had a significant negative effect upon us, including the
halting of trading in our common stock by Nasdaq and material noncompliance with
debt covenants. These conditions raised substantial doubt about our ability to
continue as a going concern. We have, in fact, ceased all of our operations as
of July 27, 2000.
Our common stock has been delisted by Nasdaq. On March 30, 2000, Nasdaq
halted trading of our common stock, and delisted our common stock on June 29,
2000. Trading in those securities is now conducted in the over-the-counter
market on the "pink sheets" issued by the National Quotation Bureau, Inc.
Trading in our securities is now subject to the "penny stock" regulations. As a
result, an investor may find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of our common stock. In addition, our
common stock cannot trade in the NASD OTC Electronic Bulletin Board
over-the-counter market until we file amended Form 10-QSB quarterly reports for
each of the first three quarters of 1999, and a Form 10-QSB for the first
quarter of 2000. Trading in our common stock in the over-the-counter market may
be halted if we declare bankruptcy.
Our value as a shell, if any, is limited. Potential and actual claim
against us, arising both from the ordinary course of our former business and
from the misstatements in our 1999 quarterly reports filed on Form 10-QSB, may
significantly reduce our value as a shell company.
We may declare bankruptcy. Due to our poor financial condition as
reflected in our consolidated financial statements listed in Item 7 and the
notes to them appearing elsewhere in this Form 10-KSB, we are considering
liquidating our company under Chapter 7 of the Bankruptcy Code. If we do, it
would materially adversely effect the value of our stock.
Our securities transactions in 1999 during 1999 may be subject to
rescission. Because our earnings and financial condition as presented in the
quarterly reports filed on Form 10-QSB during 1999 were misstated, purchasers of
our common or preferred stock during 1999 may have the right to rescind their
purchase or acceptance in settlement those shares of our common or preferred
stock. During 1999, we completed a private placement offering of Series H
convertible preferred shares. A total of 367,147 shares were sold for which we
received gross proceeds of $1,156,500. We also issued 190,000 shares of our
common stock in settlement of a law suit. These shares were valued based upon
their market value at date of settlement of $237,500. The potential rescission
of these transactions could result in us having to pay $1,394,000 plus interest,
costs, or other related penalties, if any, that might be incurred in connection
with any rescission.
We have significant potential liability related to our former warehouse
line of credit lenders. During 2000, we were unable to deliver the promissory
notes underlying approximately $7,300,000 of mortgage loans we sold to at least
two institutional investors. This is because we were unable to repay the
warehouse line lenders who funded the mortgage loans, and who have physical
possession of the promissory notes as security for repayment of their warehouse
lines. We have additional potential significant liability for deficiencies and
accrued interest to our other former warehouse line lenders. The only warehouse
line lender we have executed a settlement agreement with is Household Finance.
We could incur significant liabilities or legal expenses as a result of
claims against us related to the misstatements in our quarterly reports filed on
Form 10-QSB during 1999. During 1999, the value of our loan inventory was
substantially overstated and the amount of operating expenses was substantially
understated. As a result, our earnings and financial condition as presented in
the quarterly reports filed on Form 10-QSB during 1999 were misstated. Because
of these misstatements, third parties may make claims against us. These claims
could result in legal expenses or judgments which could have a material adverse
effect on us.
We could incur significant liabilities or legal expenses as a result of
claims against us arising in the ordinary course of our former business. In the
ordinary course of doing business with us, borrowers and investors who purchased
our loans may continue to make claims against us and sue us. They may claim, for
9
<PAGE>
example, that our employees, officers, appraisers and other agents are
responsible for losses caused by breach of fiduciary duties, misrepresentations,
incomplete documents, or failure to comply with applicable regulations. These
claims could result in legal expenses or judgments which could have a material
adverse effect on us.
Our Certificate of Incorporation requires us to indemnify any of our
directors, officers, employees or agents for expenses incurred in actions, suits
or proceedings relating to us. This indemnification includes attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably
incurred. It applies if the director, officer, employee or agent is named, or
threatened to be named in any action, suit or proceeding because he or she
serves as a director, officer, employee or agent of ours, or served or serves,
at our request, as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise.
ITEM 7. FINANCIAL STATEMENTS
Information with respect to this item is set forth in the "Index" to
Consolidated Financial Statements on Page F-1 through F-25.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNT AND FINANCIAL
DISCLOSURE
Comiskey & Company resigned as our independent certified public
accountants effective January 2, 1998. There were no disagreements between us
and Comiskey & Company on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure in connection
with the audits of the fiscal years ended December 31, 1994, 1995, and 1996, and
all subsequent interim periods. Rachlin, Cohen & Holtz was engaged on January 2,
1998 as our independent certified public accountants. This change in accountants
was previously reported in our Form 8-K filed on January 6, 1998, our 1997 Form
10-KSB filed on March 31, 1998 and our 1998 Form 10-KSB filed on March 30, 1999.
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 following information is provided with respect to each director and
officer of ours as of August 1, 2000, and business experience of all five:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Mark D. Schaftlein 42 President, CEO and Chairman of the Board of Directors
Payton Story, III 53 President of Westmark Mortgage Corporation and Director
Allan C. Sorensen 62 Outside Director
John O. Hopkins 40 Outside Director
Dori Carpinello 49 Outside Director
</TABLE>
Mr. Schaftlein has been our President and Chief Executive Officer of
the Company and Chief Executive Officer of Westmark Mortgage Corporation since
May 1997, and Chairman of the Board since June 1998. From February 1996 until
May 1997, he served as President of Westmark Mortgage Corporation. Mr.
Schaftlein has been a Director of the Company since January 1996. From February
1995 until February 1996, he was Director of the Non-conforming Division of
Westmark Mortgage Corporation, managing the transition of Westmark Mortgage
Corporation from a conforming to a non-conforming lender. He established the
bulk loan sales programs with Household Finance Corp. and The Money Store which
the Company utilized. From September 1993 until February 1995, Mr. Schaftlein
was a Senior Vice President with National Lending Center, Inc., where he oversaw
expansion of operations into multiple states and assisted in development of the
non-conforming loan program. From January 1993 until September 1993, he served
as Vice President of Fleet Finance and was responsible for developing a new
wholesale division in the non-conforming credit market. From 1984 to January
1993, he was a Vice President at Citicorp. In 1996, he was the President of the
Gold Coast Chapter of the Florida Association of Mortgage Brokers.
Mr. Story has been President and Director of Westmark Mortgage since
May 1997. From May 1996 until May 1997, he was Senior Vice-President of Lending.
10
<PAGE>
He has served as a Director of the Company since February 1997. From July 1985
to April 1996, he was Chief Executive Officer and President of West Coast
Mortgage Services, Inc. From January 1969 to July 1985, he was the Marketing
Director of Beneficial Management Corporation in Peapock, New Jersey. In 1992,
he was President of the Florida Association of Mortgage Brokers-Gulf Coast. He
is a certified mortgage consultant of the Florida and National Associations of
Mortgage Brokers.
Mr. Hopkins has been an outside director of the Company since February,
1998. He has served as President and Managing Director of his own law firm for
over ten years, which specializes in corporate and commercial transactions, real
estate law and commercial litigation. He is a member of the Florida Bar as well
as the United States District Court for the Southern District of Florida and the
South Palm Beach County Bar Association. He is also a licensed Florida Real
Estate Broker and Mortgage Broker. From March 1983 until December 1986 he served
as President of a retail mortgage organization company that specialized in
residential financing. He has been a Director and Vice-President of Professional
Golf Advertising, Inc. since May 1997. Mr. Hopkins has been involved in various
other outside business ventures.
Mr. Sorensen has been an outside director of the Company since
February, 1998. From April 1967 until October 1997, he served in various
capacities, including President, Chief Executive Officer, Chairman of the Board
of Directors of Interim Services, Inc., a New York Stock Exchange company. Since
October 1997, he has been a Director and Vice Chairman of Interim HealthCare,
Inc., a spin-off of Interim Services, Inc. He has been a Director of Let's Talk
Cellular & Wireless, Inc. since October 1994. Let's Talk Cellular & Wireless
successfully completed an initial public offering in November 1997. He has also
been a director of Republic Services, Inc., a New York Stock Exchange company,
since November 1998.
Ms. Carpinello has been an outside director of the Company since July
2000. From January 1990 to the present, she has served as President and Chief
Executive Officer of Whitehall Financial Services, Inc., a privately held
concern specializing in workouts and turnarounds of distressed companies. From
February 1983 to January 1990 she served in various other capacities with
Whitehall Financial Services. From November 1981 to February 1983, she served as
Director of New Market Development at Tropical Shipping Company, a major
containerized shipping company wholly owned by NICOR (NYSE:GAS). From June 1976
to November 1981, she served in various other capacities with Tropical Shipping.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers, and any persons who
beneficially own ten percent or more of the Company's Common Stock, to file with
the Securities and Exchange Commission (the "Commission") initial reports of
beneficial ownership and reports of changes in beneficial ownership of Common
Stock. Such persons are required by regulations of the Commission to furnish the
Company with copies of all Section 16(a) forms they file. Based solely upon a
review of (i) copies of section 16(a) filings received by the Company during or
with respect to the 1998 fiscal year and (ii) certain written representations of
its officers and directors with respect to the filing of annual reports of
changes in beneficial ownership, the Company believes that each filing required
to be made pursuant to Section 16(a) of the Exchange Act during the 1999 fiscal
year has been filed in a timely manner.
ITEM 10. EXECUTIVE COMPENSATION
All directors hold office until the next annual meeting of shareholders
and the election and qualification of their successors. Directors who are not
employees and do not otherwise receive compensation from the Company are
entitled upon appointment to the Board of Directors to receive an option to
purchase 5,000 shares of Common Stock of the Company at an exercise price equal
to or above market value at the date of grant, $1,000 per full day meeting
attended, $500 per half-day meeting attended (other than telephonic meetings),
and $250 per committee meeting of the Board of Directors attended (which are not
held in conjunction with a meeting of the full Board of Directors), in addition
to the reimbursement of reasonable expenses incurred to attend any meetings.
SUMMARY OF COMPENSATION.
The following table sets forth the annual and long term compensation
paid by the Company for services performed on the Company's behalf for fiscal
years ended December 31, 1997, December 31, 1998 and December 31, 1999, with
respect to those persons who were, as of December 31, 1999, (i) the Company's
Chief Executive Officer and (ii) Company executive officers who earned in excess
of $100,000 in salary and bonus during 1999 (the "Named Executive Officers").*
11
<PAGE>
<TABLE>
<CAPTION>
Long-Term Compensation
--------------------------------------------------- --------------------------------------------
Annual Compensation Awards Payouts
--------------------------------------------------- --------------------------------------------
Securities
Underlying
Name and Principal Options
------------------- Other Annual ---------- LTIP All Other
Position Year Salary Bonus Compensation (Number of Shares) Payouts Compensation
-------- ---- ------ ----- ------------ ------------------ ------- ------------
($) ($)
<S> <C> <C> <C> <C> <C> <C> <C>
Mark D. Schaftlein, 1997 $181,281 $ 38,531 $ 0 135,000 $ 0 $ 0
President and Chief 1998 $222,692 $ 169,906 $ 7,800 [1] 0 $ 0 $ 0
Executive Officer, and 1999 $245,002 $ 0 $ 7,200 [3] 15,000 $ 0 $ 0
Chairman of the Board
Payton Story, III 1997 $152,745 $ 0 $ 15,300 [2] 115,000 $ 0 $ 0
President of the 1998 $215,980 $ 169,906 $ 7,800 [1] 0 $ 0 $ 0
Company's wholly owned 1999 $240,411 $ 0 $ 7,200 [3] 15,000 $ 0 $ 0
subsidiary Westmark
Mortgage Corporation
and Director
Irving H. Bowen4, 1997 $ 60,000 $ 0 $ 3,600 [2] 80,000 $ 0 $ 0
former Chief Financial 1998 $199,230 $ 91,401 $ 6,900 [1] 0 $ 0 $ 0
Officer and Director 1999 $216,972 $ 0 $ 7,200 [3] 15,000 $ 0 $ 0
</TABLE>
----------
1 Consists of consulting fees.
2 Consists of $7,500 automobile allowance and $7,800 in consulting fees.
3 Consists of $7,200 automobile allowance.
4 Mr. Bowen resigned from his positions as one of our officers and directors on
March 29, 2000.
*See "Employment Agreements" for a detailed description of
the Employment Agreements for the Named Executive Officers. See "Certain
Relationships and Related Transactions" for a description of the Consulting
Agreements with (i) Harry C. Coolidge, a beneficial owner of over 5% of the
Company's Common Stock, who earned in excess of $100,000 for services
performed for the Company during 1999, (ii) Louis J. Resweber, a former
Company Director and consultant, who earned in excess of $100,000 for
services performed for the Company during 1999, and Irving H. Bowen, a former
Company Director and employee, who is a beneficial owner of over 5% of the
Company's Common Stock, and who earned in excess of $100,000 for services
performed for the Company during 1999.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth all grants of options for the Company's
Common Stock to our Named Executive Officers during fiscal 1999. In addition,
the table shows the hypothetical gains or "option spreads" that would exist for
the respective options. These gains are based on assumed rates of annual
compound stock price appreciation of 5% and 10% from the date the options were
granted over the full option terms.
12
<PAGE>
Option and Warrant Grants For Year Ended December 31, 1999
<TABLE>
<CAPTION>
Individual Grants
Potential Realizable
Value at Assumed Annual
Number of Rates of Stock Price
Securities Exercise or Appreciation for Option
Underlying Base Price Term[1]
Name Options ($/Share) Expiration Date 5% 10%
---- -------- --------- --------------- -- ---
<S> <C> <C> <C> <C> <C>
Mark D. Schaftlein 15,000 2.32 June 30, 2004 $ 9,754 $21,765
------ ------- -------
Payton Story 15,000 2.32 June 30, 2004 $ 9,754 $21,765
Irving H. Bowen[2] 15,000 2.32 June 30, 2004 $ 9,754 $21,765
------ ------- -------
TOTAL 45,000 $29,262 $62,295
====== ======= =======
</TABLE>
(1) The dollar amounts under these columns represent the potential tangible
value, before income taxes, of each option assuming that the market price
of the Common Stock appreciates in value from fair market value at the
date of grant to the end of the option term at 5% and 10% annual rates and
therefore are not intended to forecast possible future appreciation, if
any, of the price of the Common Stock. All grants of options have been
made with exercise prices equal to fair value at date of grant.
(2) Mr. Bowen resigned from his positions as one of our officers and directors
on March 29, 2000.
<TABLE>
<CAPTION>
Aggregated Option and Warrant Exercises in Year Ended December 31, 1999
and Year-End Option and Warrant Values
Number of Securities Value of Unexercised
Underlying Unexercised Options In-The-Money Options1
Name at December 31, 1999 at December 31, 1999
---- -------------------- --------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Mark D. Schaftlein 168,000 0 $ 0 $ 0
Payton Story, III 130,000 0 $ 0 $ 0
Irving H. Bowen[2] 95,000 0 $ 0 $ 0
======= ------------- ----------- ------------
TOTAL: 393,000 0 $ 0 $
======= ============= =========== ============
</TABLE>
(1) The dollar value of the unexercised options has been calculated by
determining the difference between the fair market value of the securities
underlying the options and the exercise or base price of the option at
exercise or fiscal year-end, respectively.
(2) Mr. Bowen resigned from his positions as one of our officers and directors
on March 29, 2000.
EMPLOYMENT AGREEMENTS
MARK D. SCHAFTLEIN
Mr. Schaftlein entered into an employment agreement on April 25, 1997
pursuant to which he serves as President and Chief Executive Officer of Westmark
Group Holdings, Inc. and Chief Executive Officer of Westmark Mortgage
Corporation. The agreement was amended on August 27, 1997 and March 31, 1998.
The term of employment ended on April 25, 2000. The agreement provided for an
initial annual salary of $150,000, increasing to $162,000 the second year, and
$174,000 the third year. On February 21, 1998, the Board of Directors increased
Mr. Schaftlein's annual salary to $225,000. Mr. Schaftlein's salary was
increased to $245,000 per year commencing April 1, 1999. In addition, the
agreement provided Mr. Schaftlein with options to purchase 120,000 shares of
common stock of Westmark Group Holdings, Inc. The options are fully vested, are
exercisable at $2.50 per share, and terminate in June 2004. The vested options
may be exercised on or after the following dates: 30,000 shares on 3/31/98;
15,000 on 10/31/98; 30,000 shares on 3/31/99; 15,000 shares on 10/31/99; and
30,000 shares on 3/31/00. In the event of a sale, divestiture, spin-off or
transfer of all or substantially all of the assets or stock of Westmark Mortgage
Corporation, all options shall immediately become exercisable, provided,
however, that no option shall be exercisable after the expiration of ten years
from the date of grant.
PAYTON STORY, III
Mr. Story entered into an employment agreement on April 25, 1997
pursuant to which he serves as the President of the Company's wholly-owned
subsidiary, Westmark Mortgage Corporation. The agreement was amended on August
27, 1997 and March 31, 1998. The term of employment ended on April 25, 2000. The
agreement provided for an initial annual salary of $126,000, increasing to
$138,000 the second year, and $150,000 the third year. On February 21, 1998, the
Board of Directors increased Mr. Story's annual salary to $225,000. Mr. Story's
salary was increased to $245,000 per year commencing April 1, 1999. In addition,
the agreement provided Mr. Story with options to purchase 100,000 shares of
Common Stock of Westmark Group Holdings, Inc. The options are fully vested, are
exercisable at $2.50 per share, and terminate in June 2004. The vested options
13
<PAGE>
may be exercised on or after the following dates: 25,000 shares on 3/31/98;
15,000 on 10/31/98; 25,000 shares on 3/31/99; 15,000 shares on 10/31/99; and
25,000 shares on 3/31/00. In the event of a sale, divestiture, spin-off, or
transfer of all or substantially all of the assets or stock of Westmark Mortgage
Corporation, all options shall immediately become exercisable, provided,
however, that no option shall be exercisable after the expiration of ten years
from the date of grant.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below is based on information obtained from the persons named
below with respect to the shares of Common Stock beneficially owned, as of
August 8, 2000, by (i) each person known by the Company to be the owner of more
than 5% of the outstanding shares of Common Stock, (ii) each director and
nominee for director, (iii) each executive officer included in the Summary
Compensation Table and (iv) all executive officers and directors of the Company
as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT AND NATURE OF OUTSTANDING SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP[1] OWNED[2]
---------------------------------------------------- ------------------------------ -----------------------
<S> <C> <C>
Dori Carpinello 757,111 20.3%
Whitehall Financial Services, Inc.[3]
644 Cypress Key Drive
Atlantis, Florida 33462
Cyber-Care, Inc.[4] 687,615 18.0%
1903 S. Congress Avenue, #400
Boynton Beach, Florida 33426
Generation Capital Associates[5] 520,427 12.3%
1085 Riverside Trace
Atlanta, Georgia 30328
Mark D. Schaftlein[6] 340,289 8.7%
8000 North Federal Highway
Boca Raton, Florida 33487
Payton Story, III[7] 273,334 7.1%
8000 North Federal Highway
Boca Raton, Florida 33487
Harry C. Coolidge, Esq.[8] 256,821 6.7%
Twin Palms Financial Center
1260 41st Avenue, Suite N
Capitola, California 95010
Irving H. Bowen 94,334 2.5%
333 Sunset Drive, Apt. 407
Fort Lauderdale, Florida 33301
Allan C. Sorensen[9] 30,000 0.8%
8000 North Federal Highway
Boca Raton, Florida 33487
John O. Hopkins[10] 27,048 0.7%
8000 North Federal Highway
Boca Raton, Florida 33487
All executive officers and directors as a 1,527,843 36.8%
group (5 persons) [11]
</TABLE>
(1) The number of shares of common stock beneficially owned by each person
is determined under the rules of the Securities and Exchange
Commission, and the information is not necessarily indicative of
beneficial ownership for any other purpose. Under such rules,
beneficial ownership includes any shares as to which the holder has
sole or shared voting power or investment power and also any shares of
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common stock which the holder has the right to acquire within 60 days
after June 8, 2000 through the exercise of any stock option or other
right. The inclusion in this table of any shares of common stock deemed
beneficially owned does not constitute an admission of beneficial
ownership of those shares. Unless otherwise indicated in the footnotes
to this table, the persons named in this table have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them.
(2) Percentage of outstanding shares owned is calculated on the basis of
the amount of outstanding shares plus, for each person or group, any
shares that person or group has the right to acquire within 60 days
after August 8, 2000, pursuant to options, warrants, conversion
privileges, or other rights.
(3) Includes 190,000 shares owned by Whitehall Financial Services, Inc.
Also includes 567,111 shares for which Whitehall Financial Services,
Inc. has a limited proxy until June 30, 2001 from Cyber-Care, Inc. to
vote the shares only for the election of our directors. Dori
Carpinello, one of our directors, is the president of Whitehall
Financial Services.
(4) Includes 100,000 shares that may be issued upon the exercise of
outstanding warrants.
(5) Includes: (i) 240,498 shares that may be issued upon the conversion of
50,005 shares of the Company's Series B Convertible Preferred Stock
plus accrued dividends; ii) 60,518 shares that may be issued upon the
conversion of convertible debt; and (iii) 189,555 shares that may be
issued upon the exercise of outstanding warrants. Generation Capital
has agreed not to convert the Series B Convertible Preferred Stock it
holds if the conversion would result in Generation Capital owning more
than 5% of our outstanding stock. This restriction does not prevent
Generation Capital from obtaining more than 5% of our common stock
through other means.
(6) Includes: (i) 150,000 shares that may be issued upon the exercise of
outstanding options; and (ii) 18,000 shares that may be issued upon the
exercise of outstanding warrants.
(7) Includes 130,000 shares that may be issued upon the exercise of
outstanding options.
(8) Includes 104,500 shares that may be issued upon the exercise of
outstanding options.
(9) Includes 20,000 shares that may be issued upon the exercise of
outstanding option.
(10) Includes 20,000 shares that may be issued upon the exercise of
outstanding options.
(11) See footnotes (1) through (11) above.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Whitehall Financial Services, Inc.
We were the defendant in a lawsuit filed against us by Whitehall
Financial Services, Inc. in 1998. The case was settled by January 2000 under the
terms of a settlement agreement pursuant to which Whitehall Financial gave us a
certificate for 100,000 shares of our preferred stock in exchange for us
delivering a certificate for 190,000 shares of our common stock. We paid $25,000
in consideration for satisfaction of a mortgage on certain property at issue in
the lawsuit and paid Whitehall Financial $137,500. In addition to the 190,000
shares of ours it received pursuant to the lawsuit settlement, Whitehall
Financial also has a limited proxy until June 30, 2001 from Cyber-Care, Inc. to
vote 567,111 of our shares only for the election of our directors. Dori
Carpinello, the President and Chief Executive Officer of Whitehall Financial
Services, became an outside director on our board of directors in July 2000.
Green World Sale
Effective July 1996, we acquired all of the issued and outstanding
capital stock of Green World Technologies, Inc., a provider of air conditioner
enhancement products, from GTB Company. GTB had recently acquired Green World
from Medical Industries of America, Inc. (now known as Cyber-Care, Inc.), an
affiliate of the Company. We subsequently decided to focus our resources
exclusively on our mortgage operations. In December 1997, we divested
substantially all of our interest in Green World pursuant to an exchange
agreement between us, GTB and Green World. As a result of the exchange
agreement, we have reduced our ownership interest in Green World to Green World
Series A Preferred Stock. The preferred stock represents approximately 18.5% of
Green World's capital stock on a diluted basis. This 18.5% interest in Green
World is reflected in our financial statements as an investment in preferred
stock. At the end of 1999, we wrote down the value of our investment in Green
World from $76,778 to $0.
Westmark-Cyber-Care, Inc. Agreement
On October 20, 1998, we executed an exchange agreement with our largest
equity and debt holder, Cyber-Care, Inc., formerly known as Medical Industries
of America, Inc., settling pending litigation with Cyber-Care and resolving all
outstanding issues relating to our stock and debt held by Cyber-Care. The
agreement supersedes all prior agreements entered into between us and
Cyber-Care.
The agreement, among other things, provided for: (1) the conversion of
200,000 shares of Westmark Series C Convertible Preferred Stock ($3.50 stated
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value per share) held by Medical Industries into 350,000 shares of our common
stock, at a conversion ratio of $2.00 per share - as a result, Cyber-Care now
owns 587,615 shares of our common stock, or approximately 15.8% of our 3.730
million shares of common stock outstanding at June 8, 2000; (2) the issuance to
Cyber-Care of two-year warrants to buy 100,000 shares of our common stock at
$3.25 per share; (3) elimination of Cyber-Care's claim to a guaranteed 49%
ownership interest in us; (4) satisfaction of our Promissory Note payable to
Cyber-Care with a principal balance as of September 30, 1998 of approximately
$1,707,555 in exchange for the return by us to Cyber-Care of 172,750 shares of
Cyber-Care's Series B Convertible Preferred Stock with a $10.00 stated value per
share, and payment of $112,500 to Cyber-Care; and (5) our waiver of the right to
payment of approximately $350,000 of Cyber-Care's Series B Convertible Preferred
Stock accrued dividends, and waiver by Cyber-Care of the right to payment of
approximately $179,000 of Westmark Series C Preferred Stock accrued dividends.
The agreement provides us the right to repurchase our common stock held
by Cyber-Care at varying prices. The agreement also provided for our obligation
to repurchase $666,667 of our stock at $5.73 per share from Cyber-Care, because
our fully diluted earnings per share, excluding non-recurring gains and losses,
were less that $0.45 per share in the first half of 1999 and less than $0.55 per
share in the second half of 1999. We have repurchased $549,177 of our common
stock held by Cyber-Care. We have a remaining obligation to purchase $117,490 of
our common stock from Cyber-Care.
Harry C. Coolidge
Mr. Coolidge, a beneficial owner of over 5% of the Company's Common
Stock, entered into a Consulting Services Agreement (the "Agreement") effective
January 24, 1996 pursuant to which he provides consulting services to Westmark
Group Holdings, Inc. and Westmark Mortgage Corporation. Pursuant to a February
4, 1997 amendment to the Agreement, Mr. Coolidge was appointed Corporate Counsel
for us effective February 1, 1997. The Agreement was further amended on August
27, 1997 and March 31, 1998. The term of the Agreement ended on April 24, 2000.
The Agreement initially provided for compensation consisting of $9,000 per month
and the issuance of common stock of Westmark Group Holdings, Inc. with a net
value of $6,000 per month. On February 21, 1998, our Board of Directors
increased Mr. Coolidge's annual compensation to $180,000 per year commencing
April 1, 1998, payable $10,000 per month in cash and $15,000 quarterly in
arrears in cash or restricted shares of Company Common Stock. In addition to the
$180,000 in annual compensation, Mr. Coolidge receives $6,000 per month in cash
to cover his operating expenses. In addition, the Agreement provided Mr.
Coolidge with options to purchase 80,000 shares of common stock of Westmark
Group Holdings, Inc. The options are fully vested, are exercisable at $2.50 per
share, and terminate in June 2004. The vested options may be exercised on or
after the following dates: 20,000 shares on 3/31/98; 10,000 on 10/31/98; 20,000
shares on 3/31/99; 10,000 shares on 10/31/99; and 20,000 shares on 3/31/00. In
the event of a sale, divestiture, spin-off or transfer of all or substantially
all of the assets or stock of Westmark Mortgage Corporation, all options shall
immediately become exercisable, provided, however, that no option shall be
exercisable after the expiration of ten years from the date of grant.
Louis J. Resweber
Mr. Resweber resigned his positions as a director and consultant of
ours on July 5, 2000. He had entered into a consulting agreement effective July
1, 1998 pursuant to which he provided consulting services to us with regard to
investor relations and capital markets. The term of the agreement ended on June
30, 1999. The agreement provided for annual compensation of $120,000, payable
$10,000 per month in two equal installments. Mr. Resweber receiveD an additional
$6,000 per month in cash to cover his business expenses and was eligible for an
annual bonus as determined by our Compensation Committee and Board of Directors
based upon performance. Mr. Resweber acted as an independent contractor in the
performance of his duties under the Agreement. The employment agreement entered
into between Westmark Group Holdings, Inc. and Mr. Resweber on July 1, 1997, as
amended, was terminated upon execution of the consulting agreement. Previous
stock options granted to Mr. Resweber pursuant to said Employment Agreement were
to continue in full force and effect. The employment agreement provided Mr.
Resweber with options to purchase 30,000 shares of common stock of Westmark
Group Holdings, Inc. The options are fully vested, are exercisable at $2.50 per
share, and terminate in June 2004. The vested options may be exercised on or
after the following dates: 10,000 shares on 3/31/98; 4,000 on 10/31/98; 6,000 on
3/31/99; 4,000 shares on 10/31/99; and 6,000 shares on 3/31/00. In the event of
a sale, divestiture, spin-off or transfer of all or substantially all of the
assets or stock of Westmark Mortgage, all options shall immediately become
exercisable, provided, however, that no option shall be exercisable after the
expiration of ten years from the date the options were granted. The foregoing
options are in addition to warrants previously issued to purchase 50,000 shares
of Common Stock of Westmark Group Holdings, Inc. with an exercise price of $2.50
per share, which expire in December 2001.
Irving H. Bowen
Mr. Bowen resigned his positions with us as a Director and Chief
Financial Officer on March 29, 2000. Mr. Bowen continued to serve as a
consultant to us through April 30, 2000. Prior to his resignation, Mr. Bowen
entered into an employment agreement commencing July 1, 1997 pursuant to which
he served as an Advisor to Westmark Group Holdings, Inc. and Westmark Mortgage
Corporation, specifically with regard to corporate finance, mergers and
acquisitions, capital raises, financial audits, accounting due diligence and
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miscellaneous tax and legal matters. The agreement provided for an initial
annual salary of $120,000. The agreement was amended on March 31, 1998 and the
term of employment was extended by mutual agreement for an additional thirty
(30) months. Pursuant to the provisions for an extended term of employment, Mr.
Bowen's annual salary increased to $132,000 the second year, and $144,000 the
third year. On February 21, 1998, the Board of Directors increased Mr. Bowen's
annual salary to $200,000. Mr. Bowen's salary was increased to $215,000
commencing April 1, 1999. In addition, the agreement provided Mr. Bowen with
options to purchase 80,000 shares of common stock of Westmark Group Holdings,
Inc. which expired thirty days after his resignation as one of our officers and
directors.
Advances to Officers and Stock Subscriptions Receivable
Mark D. Schaftlein, our Chief Executive Officer and Chairman of the
Board of Directors, owes us approximately $99,071 in the form of an advance to
officers and a stock subscription receivable in connection with the purchase of
124,510 shares of our common stock by Mr. Schaftlein during 1998. Payton Story,
the President of our operating subsidiary, Westmark Mortgage Corporation, and a
member of our Board of Directors, owes us approximately $130,400 in the form of
an advance to officers and a stock subscription receivable in connection with
the purchase of 124,510 shares of our stock by Mr. Story during 1998. Irving H.
Bowen, our former Chief Financial Officer and former member of our Board of
Directors owes us approximately $96,739 in the form of an advance to officers
and a stock subscription receivable in connection with the purchase of 93,334
shares of our stock by Mr. Bowen during 1998.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
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Exhibit Description
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2.1(a)* Form of Plan and Agreement of Merger by and between
Westmark Group Holdings, Inc., a Colorado Corporation
and Westmark Group Holdings, Inc.-Delaware, a
Delaware corporation (See Exhibit 2.1(a) to Form
10-KSB filed with the Commission on March 31, 1998).
2.1(b)* Exchange Agreement among the Company, GTB Company,
and Green World Technologies, Inc. dated December 14,
1997 (See Exhibit 2.1 to Form 8-K filed with the
Commission on December 30, 1997).
2.1(c)* Exchange Agreement between the Company and Medical
Industries of America, Inc. dated October 20, 1998.
(See Exhibit 99.1 to Form 8-K filed with the
Commission on November 9, 1998).
3.1(a)* Articles of Incorporation of Eagle Venture
Investments, Inc. (See Exhibit 3.1 to Registration
Statement on Form S-18 filed with the Commission on
August 24, 1987).
3.1(b)* Articles of Amendment to Articles of Incorporation of
Eagle Venture Investments, Inc. (See Exhibit 3.1 to
Registration Statement on Form S-18 filed with the
Commission on August 24, 1987).
3.1(c)* Article of Amendment to Articles of Incorporation of
Eagle Venture Acquisitions, Inc. (See Exhibit 3.1(c)
to Form 10-KSB filed with the Commission on March 31,
1998).
3.1(d)* Articles of Amendment to Articles of Incorporation of
Network Real Estate of California, Inc. (See Exhibit
3.1(d) to Form 10-KSB filed with the Commission on
March 31, 1998).
3.1(e)* Articles of Amendment to Articles of Incorporation of
Network Real Estate of California, Inc. (See Exhibit
3.1(e) to Form 10-KSB filed with the Commission on
March 31, 1998).
3.1(f)* Articles of Amendment to Articles of Incorporation of
Network Real Estate of California, Inc. (See Exhibit
3.1(f) to Form 10-KSB filed with the Commission on
March 31, 1998).
3.1 (g)* Articles of Amendment to Articles of Incorporation of
Network Financial Services, Inc. (See Exhibit 3.1 to
Form 10-K405 filed with the Commission on April 14,
1995).
3.1(h)* Articles of Amendment to Articles of Incorporation of
Westmark Group Holdings, Inc. (See Exhibit 3.1(h) to
Form 10-KSB filed with the Commission on March 31,
1998).
3.2(a)* Certificate of Incorporation of Westmark Group
Holdings, Inc.- Delaware (See Exhibit 3.2(a) to Form
10-KSB filed with the Commission on March 31, 1998).
3.2(b)* Certificate of Amendment to Certificate of
Incorporation of Westmark Group Holdings, Inc. (See
Exhibit 3.1 to Form 8-K filed with the Commission on
August 29, 1997).
3.3* By-laws of the Company (See Exhibit 3.3 to Form
10-KSB filed with the Commission on March 31, 1998).
4.1* Form of Specimen Common Stock Certificate (See
Exhibit 4.1 to Form 10-KSB filed with the Commission
on March 31, 1998).
4.2* Series A Preferred Stock Designation (See Exhibit 4.2
to Form 10-KSB filed with the Commission on March 31,
1998).
4.3* Series B Preferred Stock Designation (See Exhibit 4.3
to Form 10-KSB filed with the Commission on March 31,
1998).
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4.4* Series C Preferred Stock Designation (See Exhibit 4.4
to Form 10-KSB filed with the Commission on March 31,
1998).
4.5* Series D Preferred Stock Designation (See Exhibit 4.5
to Form 10-KSB filed with the Commission on March 31,
1998).
4.6* Series E Preferred Stock Designation (See Exhibit 4.6
to Form 10-KSB filed with the Commission on March 31,
1998).
4.7* Series F Preferred Stock Designation (See Exhibit 4.7
to Form 10-KSB filed with the Commission on March 31,
1998).
4.8* Series G Preferred Stock Designation (See Exhibit 4.8
to Form 10-KSB filed with the Commission on March 30,
1999).
4.9* Series H Preferred Stock Designation (See Exhibit 4.1
to Form 10-QSB filed with the Commission on November
12, 1999).
10.1* Warehouse Credit and Security Agreement between the
Company and Princap Mortgage Warehouse, Inc. dated
October 26, 1997 (See Exhibit 10.1 to Form 10-KSB
filed with the Commission on March 31, 1998).
10.2* Warehouse and Security Agreement between the Company
and TMS Mortgage, Inc. dated March 3, 1997 (See
Exhibit 10.2 to Form 10-KSB filed with the Commission
on March 31, 1998).
10.3* Sales and Purchase Agreement between the Company and
TMS Mortgage, Inc. dated March 25, 1995 (See Exhibit
10.3 to Form 10-KSB filed with the Commission on
March 31, 1998).
10.4* $5,000,000 Warehouse Line Revolving Credit Agreement
between the Company and Household Financial Services,
Inc. dated April 7, 1997 (See Exhibit 10.4 to Form
10-KSB filed with the Commission on March 31, 1998).
10.5* Security and Collateral Agency Agreement between the
Company and Household Financial Services, Inc. dated
April 7, 1997 (See Exhibit 10.5 to Form 10-KSB filed
with the Commission on March 31, 1998).
10.6* First Amendment to Credit Agreement and First
Amendment to Revolving Credit Line between the
Company and Household Financial Services, Inc. dated
April 7, 1997 (See Exhibit 10.6 to Form 10-KSB filed
with the Commission on March 31, 1998).
10.7* Continuing Loan Purchase Agreement between the
Company and Household Financial Services, Inc. dated
February 26, 1996 (See Exhibit 10.7 to Form 10-KSB
filed with the Commission on March 31, 1998).
10.8* Mortgage Warehousing and Security Agreement between
the Company and Mortgage Corporation of America (See
Exhibit 10.8 to Form 10-KSB filed with the Commission
on March 31, 1998).
10.9* Master Purchase Agreement between the Company and
Mortgage Corporation of America dated June 2, 1997
(See Exhibit 10.9 to Form 10-KSB filed with the
Commission on March 31, 1998).
10.10* Master Agreement for Sale and Purchase of Mortgages
between the Company and Conti Mortgage Corporation
dated June 3, 1997 (See Exhibit 10.10 to Form 10-KSB
filed with the Commission on March 30, 1999).
10.11* Amendment to Master Agreement for Sale and Purchase
of Mortgages between the Company and ContiMortgage
Corporation dated June 3, 1997 (See Exhibit 10.11 to
Form 10-KSB filed with the Commission on March 30,
1999).
10.12* Mortgage Loan Warehousing Agreement between the
Company and First Union National Bank (See Exhibit
10.1 to Form 10-QSB filed with the Commission on May
14, 1998).
10.13* Security Agreement between the Company and First
Union National Bank (See Exhibit 10.2 to Form 10-QSB
filed with the Commission on May 14, 1998).
10.14* Warehouse Line of Credit and Security Agreement
between the Company and Republic Bank dated October
6, 1998 (See Exhibit 10.14 to Form 10-KSB filed with
the Commission on March 30, 1999).
10.15* Second Amendment to Credit Agreement, Second
Amendment to Revolving Note and First Amendment to
Security Agreement between the Company and Household
Financial Services, Inc. dated October 7, 1998 (See
Exhibit 10.15 to Form 10-KSBfiled with the Commission
on March 30, 1999).
10.16* Third Amendment to Credit Agreement and Second
Amendment to Security Agreement between the Company
and Household Financial Services, Inc. dated February
4, 1999 (See Exhibit 10.16 to Form 10-KSB filed with
the Commission on March 31, 1998).
10.17* Mark Schaftlein Employment Agreement (See Exhibit
10.15 to Form 10-KSB filed with the Commission on
March 31, 1998).
10.18* Mark Schaftlein Amendment to Employment Agreement
(See Exhibit 10.16 to Form 10-KSB filed with the
Commission on March 31, 1998).
10.19* Payton Story Employment Agreement (See Exhibit 10.17
to Form 10-KSB filed with the Commission on March 31,
1998).
10.20* Payton Story Amendment to Employment Agreement (See
Exhibit 10.18 to Form 10-KSB filed with the
Commission on March 31, 1998).
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10.21* Louis Resweber Director Agreement (See Exhibit 10.19
to Form 10-KSB filed with the Commission on March 31,
1998).
10.22* Louis Resweber Employment Agreement (See Exhibit
10.20 to Form 10-KSB filed with the Commission on
March 31, 1998).
10.23* Irving Bowen Employment Agreement (See Exhibit 10.21
to Form 10-KSB filed with the Commission on March 31,
1998).
10.24* Harry Coolidge Amended and Restated Consulting
Agreement (See Exhibit 10.22 to Form 10-KSB filed
with the Commission on March 31, 1998).
10.25* Harry Coolidge Amendment to Consulting Agreement (See
Exhibit 10.23 to Form 10-KSB filed with the
Commission on March 31, 1998).
10.26* Harry Coolidge Second Amendment to Consulting
Agreement (See Exhibit 10.24 to Form 10-KSB filed
with the Commission on March 31, 1998).
10.27* Amendment to Employment Agreement of Mark Schaftlein
dated March 31, 1998 (See Exhibit 10.27 to Form
10-KSB filed with the Commission on March 30, 1999).
10.28* Amendment to Employment Agreement of Payton Story III
dated March 31, 1998 (See Exhibit 10.28 to Form
10-KSB filed with the Commission on March 30, 1999).
10.29* Amendment to Employment Agreement of Louis Resweber
dated March 31, 1998 (See Exhibit 10.29 to Form
10-KSB filed with the Commission on March 30, 1999).
10.30* Amendment to Employment Agreement of Irving H. Bowen
dated March 31, 1998 (See Exhibit 10.30 to Form
10-KSB filed with the Commission on March 30, 1999).
10.31* Amendment to Consulting Agreement of Harry Coolidge
dated March 31, 1998 (See Exhibit 10.31 to Form
10-KSB filed with the Commission on March 30, 1999).
10.32* Stock Purchase Agreement between the Company and Mark
Schaftlein (See Exhibit 10.32 to Form 10-KSB filed
with the Commission on March 30, 1999).
10.33* Stock Purchase Agreement between the Company and
Payton Story, III (See Exhibit 10.33 to Form 10-KSB
filed with the Commission on March 30, 1999).
10.34* Stock Purchase Agreement between the Company and
Irving Bowen (See Exhibit 10.34 to Form 10-KSB filed
with the Commission on March 30, 1999).
10.35* Form of Indemnification Agreement between the Company
and each of its Directors (See Exhibit 10.1 to Form
8-K filed with the Commission on November 9, 1998).
10.36* 1990 Non-Qualified Stock Option Plan (See Exhibit
10.25 to Form 10-KSB filed with the Commission on
March 31, 1998).
10.37* 1993 Non-Qualified Stock Option Plan (See Exhibit
10.26 to Form 10-KSB filed with the Commission on
March 31, 1998).
10.38* 1994 Non-Qualified Stock Option Plan (See Exhibit
10.27 to Form 10-KSB filed with the Commission on
March 31, 1998).
10.39* Settlement Agreement between the Company and Medical
Industries of America, Inc. dated January 23, 1997
(See Exhibit 10.30 to Form 10-KSB filed with the
Commission on March 31, 1998).
10.40* Modification to Settlement Agreement between the
Company and Medical Industries of America, Inc. dated
March 31, 1997 (See Exhibit 10.31 to Form 10-KSB
filed with the Commission on March 31, 1998).
10.41* Amendment to Modified Settlement Agreement between
the Company and Medical Industries of America dated
June 26, 1997 (See Exhibit 10.32 to Form 10-KSB filed
with the Commission on March 31, 1998).
10.42* Revised Settlement Agreement between the Company and
Medical Industries of America, Inc. (See Exhibit
10.33 to Form 10-KSB filed with the Commission on
March 31, 1998).
10.43* Settlement Agreement and Mutual Release of All Claims
between the Company and Harden dated November 3, 1997
(See Exhibit 10.34 to Form 10-KSB filed with the
Commission on March 31, 1998).
10.44* Settlement Agreement by and among the Company and
Michael Morrell and Linda Moore dated January 23,
1997 (See Exhibit 10.35 to Form 10-KSB filed with the
Commission on March 31, 1998).
10.45* Amendment to Settlement Agreement by and among the
Company and Michael Morrell and Linda Moore dated
November 19, 1997 (See Exhibit 10.36 to Form 10-KSB
filed with the Commission on March 31, 1998).
10.46* Green Tree Mortgage Services Correspondent Agreement
between Westmark Mortgage Corporation and Green Tree
Financial Corporation, dated May 21, 1997 (See
Exhibit 10.46 to Form 10-KSB filed with the
Commission on March 30, 1999).
10.47* Master Purchase and Sale Agreement between Westmark
Mortgage Corporation and FC Capital Corporation,
dated November 2, 1998 (See Exhibit 10.47 to Form
10-KSB filed with the Commission on March 30, 1999).
10.48* $150,000 Line of Credit Agreement between the Company
and Northern Trust Bank dated April 29, 1999 (See
Exhibit 10.1 to Form 10-QSB filed with the Commission
on August 12, 1999).
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10.49* Promissory Note between the Company and Northern
Trust Bank dated April 29, 1999 (See Exhibit 10.2 to
Form 10-QSB filed with the Commission on August 12,
1999).
10.50* Guaranty between the Company and Northern Trust Bank
dated April 29, 1999 (See Exhibit 10.3 to Form 10-QSB
filed with the Commission on August 12, 1999).
10.51* Security Agreement between the Company and Northern
Trust Bank Dated April 29, 1999 (See Exhibit 10.4 to
Form 10-QSB filed with the Commission on August 12,
1999).
10.52* Wholesale Loan Agreement between the Company's
wholly-owned subsidiary, Westmark Mortgage
Corporation, and Great Eastern Funding, LLC dated May
28, 1999 (See Exhibit 10.5 to Form 10-QSB filed with
the Commission on August 12, 1999).
10.53* Client Contract between the Company's wholly-owned
subsidiary, Westmark Mortgage Corporation, and
Residential Funding Corporation dated June 8, 1999
(See Exhibit 10.6 to Form 10-QSB filed with the
Commission on August 12, 1999).
10.54* Master Mortgage Loan Purchase Agreement between the
Company's wholly-owned subsidiary, Westmark Mortgage
Corporation and Banc One Financial Services, Inc.
dated December 22, 1998 (See Exhibit 10.7 to Form
10-QSB filed with the Commission on August 12, 1999).
10.55* Warehouse Loan and Security Agreement between the
Company's wholly-owned subsidiary, Westmark Mortgage
Corporation and The Provident Bank dated July 7, 1999
(See Exhibit 10.1 to Form 10-QSB filed with the
Commission on November 12, 1999).
10.56* Broker Origination Agreement between the Company's
wholly-owned subsidiary, Westmark Mortgage
Corporation and WMC Mortgage Corp. dated April 27,
1999 (See Exhibit 10.2 to Form 10-QSB filed with the
Commission on November 12, 1999).
10.57* Master Agreement for Purchase and Sale of Mortgage
Loans between the Company's wholly-owned subsidiary,
Westmark Mortgage Corporation and EquiCredit
Corporation of America dated June 9, 1999 (See
Exhibit 10.3 to Form 10-QSB filed with the Commission
on November 12, 1999).
10.58* Addendum to the Master Agreement for Purchase and
Sale of Mortgage Loans between the Company's
wholly-owned subsidiary, Westmark Mortgage
Corporation and EquiCredit Corporation of America
dated June 25, 1999 (See Exhibit 10.4 to Form 10-QSB
filed with the Commission on November 12, 1999).
10.59* Broker Agreement between the Company's wholly-owned
subsidiary, Westmark Mortgage Corporation and Chase
Manhattan Mortgage Corporation dated July 21, 1999
(See Exhibit 10.5 to Form 10-QSB filed with the
Commission on November 12, 1999).
10.60* Master Commitment between the Company's wholly-owned
subsidiary, Westmark Mortgage Corporation and Merrill
Lynch Credit Corporation dated April 14, 1999 (See
Exhibit 10.6 to Form 10-QSB filed with the Commission
on November 12, 1999).
10.61* Master Loan Purchase and Sale Agreement between the
Company's wholly-owned subsidiary, Westmark Mortgage
Corporation and Merrill Lynch Credit Corporation
dated April 14, 1999 (See Exhibit 10.7 to Form 10-QSB
filed with the Commission on November 12, 1999).
10.62* Master Agreement for Sale and Purchase of Mortgage
Loans between the Company's wholly-owned subsidiary,
Westmark Mortgage Corporation and BankBoston, N.A.
dated August 31, 1999 (See Exhibit 10.8 to Form
10-QSB filed with the Commission on November 12,
1999).
10.63* Mortgage Broker Agreement between the Company's
wholly-owned subsidiary, Westmark Mortgage
Corporation and First Franklin Financial Corporation
dated March 23, 1999 (See Exhibit 10.9 to Form 10-QSB
filed with the Commission on November 12, 1999).
10.64* Master Agreement for Sale and Purchase of Mortgages
between the Company's wholly-owned subsidiary,
Westmark Mortgage Corporation and Bay Financial
Savings Bank, F.S.B. dated February 12, 1999 (See
Exhibit 10.10 to Form 10-QSB filed with the
Commission on November 12, 1999).
10.65* Amendment to Master Agreement for Sale and Purchase
of Mortgages between the Company's wholly-owned
subsidiary, Westmark Mortgage Corporation and Bay
Financial Savings Bank, F.S.B. dated February 12,
1999 (See Exhibit 10.11 to Form 10-QSB filed with the
Commission on November 12, 1999).
10.66 Correspondent Origination and Sales Agreement between
the Company's wholly-owned subsidiary, Westmark
Mortgage Corporation and Chase Manhattan Mortgage
Corporation dated April 27, 1999.
10.67 Addendum to Origination and Sales Agreement between
the Company's wholly-owned subsidiary, Westmark
Mortgage Corporation and Chase Manhattan Mortgage
Corporation dated July 21, 1999.
10.68 Warehouse Credit and Security Agreement between the
Company's wholly-owned subsidiary, Westmark Mortgage
Corporation and National Mortgage Warehouse, LLC
dated October 4, 1999.
10.69 Mortgage Loan Purchase and Sale Agreement between the
Company's wholly-owned subsidiary, Westmark Mortgage
Corporation and EquiCredit Corporation of America
dated March 13, 2000.
10.70 Letter of Intent between the Company and First NLC
Financial Services, LLC dated May 15, 2000.
10.71 Preferred Stock Purchase Agreement between the
Company and Generation Capital Associates dated June
1, 2000.
20
<PAGE>
10.72 Loan Purchase Agreement between the Company's
wholly-owned subsidiary, Westmark Mortgage
Corporation and Bayview Financial Trading Group, L.P.
dated March 16, 2000.
10.73 Settlement Agreement and Mutual Release of All Claims
by and among the Company's wholly-owned subsidiary,
Westmark Mortgage Corporation, the Company and
Household Financial Services, Inc. dated August 2,
2000.
10.74 Memorandum of Sale dated July 21, 2000 regarding
Westmark Mortgage Corporation Asset Sale.
11.1 Statement Re: Computation of Per Share Earnings.
16.1 * Letter on change in certifying accountant (See
Exhibit 1.1 to Form 8-K filed with the Commission on
January 6, 1998).
21.1* List of Subsidiaries (See Exhibit 21.1 to Form 10-KSB
filed with the Commission on March 31, 1998).
23.1 Consent of Rachlin Cohen & Holtz, LLP.
27.1 Financial Data Schedule.
</TABLE>
* The exhibits thus designated are incorporated herein by reference as exhibits
hereto. Following the description of such exhibits is a reference to the copy of
the exhibit heretofore filed with the Commission, to which there have been no
amendments or changes.
(b) REPORTS ON FORM 8-K: None
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WESTMARK GROUP HOLDINGS, INC.
(Registrant)
Date: August 17, 2000 By: /s/ Mark Schaftlein
-----------------------
Mark Schaftlein
President, Chief Executive Officer and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ MARK SCHAFTLEIN President, Chief Executive August 17, 2000
------------------- Officer and Chairman of the Board
Mark Schaftlein of Directors (Principal Executive Officer)
/S/ PAYTON STORY, III Director August 17, 2000
---------------------
Payton Story, III
/S/ ALLAN C. SORENSEN Outside Director August 17, 2000
---------------------
Allan C. Sorensen
/S/ JOHN O. HOPKINS Outside Director August 17, 2000
-------------------
John O. Hopkins
/S/ DORI CARPINELLO Director August 17, 2000
-------------------
Dori Carpinello
</TABLE>
22
<PAGE>
================================================================================
WESTMARK GROUP HOLDINGS, INC. and SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
================================================================================
<PAGE>
WESTMARK GROUP HOLDINGS, INC. and SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
PAGE
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet F-2
Statements of Operations F-3
Statements of Stockholders' Equity (Deficiency) F-4
Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6 - F-25
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
We have audited the accompanying consolidated balance sheet of Westmark Group
Holdings, Inc. and Subsidiary as of December 31, 1999, and the related
consolidated statements of operations, stockholders' equity (deficiency), and
cash flows for the years ended December 31, 1999 and 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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
Holdings, Inc. and Subsidiary as of December 31, 1999, and the results of their
operations and their cash flows for the years ended December 31, 1999 and 1998,
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As described in Note 2 to the
consolidated financial statements, the Company is subject to certain significant
risks and uncertainties, including a substantial net loss and negative cash
flows from operating activities incurred for the year ended December 31, 1999,
which continued in 2000. In addition, as of December 31, 1999, the Company's
consolidated financial position reflects a significant balance of negative
working capital and a stockholders' deficiency. The Company is also experiencing
other significant events, including the halting of trading in the Company's
common stock by NASDAQ and material noncompliance with debt covenants. On July
26, 2000, the Company filed a Form 8-K with the Securities and Exchange
Commission reporting the suspension of the operations of its subsidiary and the
intention to liquidate the assets and existing loan portfolio of that
subsidiary. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are described in Note 2 to the consolidated financial statements. The
consolidated financial statements do not include any adjustments that might
result from the outcome of these significant risks and uncertainties.
RACHLIN COHEN & HOLTZ LLP
Fort Lauderdale, Florida
May 9, 2000, except for the fifth paragraph of Note 2, as to which the date is
July 26, 2000
F-1
<PAGE>
WESTMARK GROUP HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Current Assets:
Cash and cash equivalents $ 3,932,870
Restricted certificate of deposit 213,388
Accounts receivable 2,357,781
Mortgage loans held for sale 29,495,548
Defaulted mortgage loans and property held for sale, net of allowance 3,591,246
Advances to employee/officer/stockholders 221,519
------------
Total current assets 39,812,352
Property and Equipment, Net 1,025,658
Other Assets 289,593
------------
Total assets $ 41,127,603
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
Current Liabilities:
Warehouse lines of credit $ 42,096,467
Notes payable and current maturities of capital leases 449,843
Settlements payable 54,679
Accounts payable 471,654
Accrued liabilities 1,330,731
Income taxes payable 15,400
Dividends payable 36,413
------------
Total current liabilities 44,455,187
------------
Long-Term Portion of Capital Lease Obligations 112,355
------------
Commitments, Contingencies, Subsequent Events and Other Matters --
Common and Preferred Stock Subject to Potential Rescission 1,394,000
------------
Stockholders' Deficiency:
Preferred stock $.001 par value; 10,000,000 shares authorized;
417,152 shares issued and outstanding; stated at liquidation value 100,010
Common stock, $0.005 par value; 15,000,000 shares authorized;
3,579,253 shares issued and outstanding 17,896
Additional paid-in capital 29,286,377
Deficit (34,044,472)
Stock subscriptions receivable (193,750)
------------
Total stockholders' deficiency (4,833,939)
------------
Total liabilities and stockholders' deficiency $ 41,127,603
============
</TABLE>
F-2
<PAGE>
WESTMARK GROUP HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Revenues:
Gain on sale of loans $ 16,791,605 $ 13,592,080
Loan origination fees 2,747,859 1,650,143
Interest income 3,868,984 1,881,755
Other income -- 176,121
------------ ------------
23,408,448 17,300,099
Costs and Expenses:
Direct loan fees 5,772,088 4,154,060
Interest expense, primarily warehouse interest 3,710,088 1,811,529
General and administrative 16,537,715 9,127,825
Provision for estimated losses on property held for sale and
problem loans 1,045,000 --
Common stock issued for services -- 237,500
Depreciation 135,181 153,622
Amortization 91,039 98,916
------------ ------------
27,291,111 15,583,452
Income (Loss) from Operations (3,882,663) 1,716,647
------------ ------------
Other Income (Expense):
Litigation settlements (919,923) --
Dividend income -- 105,000
Provision for estimated impairment in value of investment in preferred stock (76,528) (800,000)
Provision for estimated impairment in value of investment in land strips (300,000) (110,000)
Loss arising from exchange agreement with Cyber-Care (formerly MIOA) -- (349,945)
Other (361,625) (85,768)
------------ ------------
(1,658,076) (1,240,713)
Income (Loss) Before Income Taxes (5,540,739) 475,934
Income Tax Expense (Benefit) 1,275,000 (710,784)
------------ ------------
Net Income (Loss) $ (6,815,739) $ 1,186,718
============ ============
Earnings (Loss) Per Common Share (Basic and Diluted) $ (2.10) $ .37
============ ============
</TABLE>
F-3
<PAGE>
WESTMARK GROUP HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------- ------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 250,005 $ 800,010 2,389,655 $ 11,948
Year Ended December 31, 1998:
Conversion of Series C preferred shares to common stock (200,000) (700,000) 350,000 1,750
Sale of Series G preferred shares and conversion of
common stock into Series G preferred stock 100,000 500,000 (48,624) (243)
Sale of common stock to management -- -- 400,000 2,000
Conversion of debt into common stock -- -- 92,315 469
Cumulative preferred dividends -- -- -- --
Payment of dividend in common stock -- -- 19,634 98
Issuance of common stock for management bonus -- -- 112,930 558
Cancellation of common stock -- -- (20,228) (102)
Exercise of cashless warrant -- -- 20,142 101
Net income -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 1998 150,005 600,010 3,315,824 16,579
Year Ended December 31, 1999:
Conversion of Series G preferred shares to common stock (100,000) (500,000) 123,212 616
Sale of Series H preferred stock 367,147 1,156,500 -- --
Conversion of debt into common stock -- -- 8,390 42
Issuance of common stock for legal settlement -- -- 190,000 950
Purchase of common stock - Cyber-Care, Inc. -- -- (58,173) (291)
Cumulative preferred dividends -- -- -- --
Repayment of stock subscription receivable -- -- -- --
Reclassification of proceeds to common and preferred --
stock subject to potential rescission -- (1,156,500) -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 1999 417,152 $ 100,010 3,579,253 $ 17,896
============ ============ ============ ============
</TABLE>
[RESTUBBED]
<TABLE>
<CAPTION>
Additional Stock
Paid-In Subscriptions
Capital Deficit Receivable Total
------- ------- ---------- -----
<S> <C> <C> <C> <C>
Balance, December 31, 1997 $ 27,496,031 $(28,245,684) $ -- $ 62,305
Year Ended December 31, 1998:
Conversion of Series C preferred shares to common stock 698,250 -- -- --
Sale of Series G preferred shares and conversion of
common stock into Series G preferred stock (193,613) -- -- 306,144
Sale of common stock to management 848,000 -- (250,000) 600,000
Conversion of debt into common stock 206,971 -- -- 207,440
Cumulative preferred dividends -- (70,000) -- (70,000)
Payment of dividend in common stock 44,553 (44,651) -- --
Issuance of common stock for management bonus 236,942 -- -- 237,500
Cancellation of common stock (43,942) -- -- (44,044)
Exercise of cashless warrant (101) -- -- --
Net income -- 1,186,718 -- 1,186,718
------------ ------------ ------------ ------------
Balance, December 31, 1998 29,293,091 (27,173,617) (250,000) 2,486,063
Year Ended December 31, 1999:
Conversion of Series G preferred shares to common stock 499,384 -- -- --
Sale of Series H preferred stock (182,077) -- -- 974,423
Conversion of debt into common stock 9,971 -- -- 10,013
Issuance of common stock for legal settlement 236,550 -- -- 237,500
Purchase of common stock - Cyber-Care, Inc. (333,042) -- -- (333,333)
Cumulative preferred dividends -- (55,116) -- (55,116)
Repayment of stock subscription receivable -- 56,250 56,250
Reclassification of proceeds to common and preferred
stock subject to potential rescission (237,500) -- -- (1,394,000)
Net loss -- (6,815,739) -- (6,815,739)
------------ ------------ ------------ ------------
Balance, December 31, 1999 $ 29,286,377 $(34,044,472) $ (193,750) $ (4,833,939)
============ ============ ============ ============
</TABLE>
F-4
<PAGE>
WESTMARK GROUP HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income ( loss) $ (6,815,739) $ 1,186,718
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation 135,181 153,622
Amortization 91,039 98,916
Deferred income taxes 1,275,000 (742,784)
Provision for estimated losses in property held for sale and problem loans 1,045,000 --
Common stock issued for services -- 237,500
Common stock issued for legal settlement 237,500 --
Loss on disposal of assets -- 105,877
Impairment in value of investment in land and preferred stock 376,528 910,000
Loss on exchange agreement with MIOA -- 349,945
Changes in operating assets and liabilities:
Increase in:
Accounts receivable (1,098,529) (1,234,102)
Mortgage loans held for sale (7,753,991) (13,978,333)
Defaulted mortgage loans and property held for sale (4,424,746) --
Other assets (64,680) (144,145)
Increase (decrease) in:
Accounts payable (195,831) 238,144
Accrued liabilities 1,108,956 (137,512)
Settlements payable (272,805) (424,233)
Warehouse lines of credit 13,089,516 21,273,459
Income taxes payable (16,600) 32,000
------------ ------------
Net cash provided (used) by operating activities (3,284,201) 7,925,072
------------ ------------
Cash Flows from Investing Activities:
Purchases of property and equipment (411,849) (576,373)
Proceeds from sale of buildings -- 394,078
Purchase of restricted certificate of deposit (213,388)
Advances to employee/officer/stockholders (221,519)
Investment in intangible assets -- (171,837)
------------ ------------
Net cash used by investing activities (846,756) (354,132)
------------ ------------
Cash Flows from Financing Activities:
Dividends paid (36,203) --
Sale of preferred stock 974,423 306,144
Proceeds from issuance of notes payable 173,324 346,311
Payments on debt (98,257) (1,812,032)
Sale of common stock -- 600,000
Purchase of retired treasury stock (60,833) --
------------ ------------
Net cash provided (used) by financing activities 952,454 (559,577)
------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (3,178,503) 7,011,363
Cash and Cash Equivalents, Beginning 7,111,373 100,010
Cash and Cash Equivalents, Ending $ 3,932,870 $ 7,111,373
------------ ------------
Supplemental Disclosures:
Cash paid for interest $ 3,602,069 $ 1,654,348
============ ============
Cash paid for income taxes $ 16,609 $ --
============ ============
</TABLE>
F-5
<PAGE>
WESTMARK GROUP HOLDINGS, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
Westmark Group Holdings, Inc. ("Company"), through its wholly-owned
subsidiary, is engaged in the business of purchasing and selling
residential mortgage loans. The Company deals primarily in
non-conforming loans (generally those borrowers outside the
conforming guidelines).
The Company's Articles of Incorporation, as amended, authorize the
Company to issue and have outstanding at any one time 15,000,000
shares of common stock with a par value of $0.005 and 10,000,000
shares of preferred stock with a par value of $0.001. In August
1997, the Company effected a 1 for 5 reverse stock split, decreased
the number of authorized shares of common stock from 50,000,000 to
15,000,000, and adjusted the par value from $.001 to $.005 per
share. This stock split has been given retroactive effect in these
consolidated financial statements.
The Company has established and has issued and has outstanding the
following shares of Preferred Stock Series:
Series B, $2.00 stated value, 10% cumulative, convertible, 300,000
shares authorized, 50,005 shares issued and outstanding.
Convertible into common stock at 42% of the closing bid price on
the day prior to conversion, not to exceed $1.35 per share.
Series H, $3.15 stated value, 10% cumulative, convertible, 367,147
shares authorized, issued and outstanding. Convertible into 367,147
shares of common stock.
Principles of Consolidation
The entities included in these consolidated financial statements
are as follows:
Westmark Group Holdings, Inc. - This company was originally
incorporated under the laws of the State of Colorado in 1986, but
was reincorporated under the laws of the State of Delaware in June
1996.
Westmark Mortgage Corporation ("Westmark") - This wholly-owned
subsidiary, incorporated on September 17, 1979 under the laws of
the State of California, purchases and sells residential mortgage
loans.
All significant intercompany balances and transactions have been
eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with
original maturities of three months or less to be cash equivalents.
F-6
<PAGE>
WESTMARK GROUP HOLDINGS, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Mortgage Loans Held for Sale
Mortgage loans are originated by retail brokers and closed and
purchased by the Company to be sold to investors. The loans are
reported at the lower of aggregate cost or market. The cost of
mortgage loans held for sale is the cost of the mortgage loans,
reduced or increased by the net deferred fees or costs associated
with originating or acquiring the loans. Market value is determined
by outstanding commitments from investors or current investor yield
requirements.
Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets.
Repairs, maintenance and replacements, which do not extend the
lives of the respective assets, are charged to expense as incurred.
Gain or loss on disposition of assets is recognized currently.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk are cash and cash equivalents,
accounts receivable, mortgage loans held for sale, and defaulted
mortgage loans.
From time to time during the year, the Company had deposits in
financial institutions in excess of the federally insured limits.
At December 31, 1999, the Company had deposits in excess of
federally insured limits of approximately $4,542,000. The Company
maintains its cash with high quality financial institutions, which
the Company believes limits these risks.
In addition, the Company maintains an investment account with a
financial institution which is not insured by the FDIC. These
funds, which were invested primarily in money market instruments at
December 31, 1999, are subject to insurance by SIPC, Securities
Investor Protection Corporation, subject to various limitations. At
December 31, 1999, approximately $248,000 was held in this account.
Accounts receivable arise from net fees receivable from title
companies for closed loans, interest receivable on mortgage loans
held for sale, and the sale of mortgage loans to investors where
payment in full has not been received as of the date of these
consolidated financial statements. The Company believes risk is
limited by the quality of the investors (see Note 15) and the
short-term nature of the receivables.
Mortgage loans held for sale include amounts due from mortgagees
prior to the sale of the loans to investors which usually occurs
within 30 to 60 days. The Company originates and purchases mortgage
loans based on an evaluation of the mortgagees' financial condition
and based upon an appraisal of the collateral real estate.
Management believes the collateral, coupled with the short holding
period, limits risk.
F-7
<PAGE>
WESTMARK GROUP HOLDINGS, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Material estimates as to which it is reasonably possible
that a change in the estimate could occur in the near term include
allowance for market losses on mortgage loans held for sale and
real estate owned, estimated valuation allowance for deferred tax
assets, estimated fair value of investments in preferred stock and
real estate, and estimated liability for payroll tax penalties.
Although these estimates are based on management's knowledge of
current events and actions it may undertake in the future, they may
ultimately differ from actual results.
Income Taxes
The Company accounts for its income taxes using SFAS No. 109,
Accounting for Income Taxes, which requires the recognition of
deferred tax liabilities and assets for expected future tax
consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference
between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs
incurred for the years ended December 31, 1999 and 1998 were not
material.
Fair Value of Financial Instruments
The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair value. These instruments
include cash, accounts receivable, mortgage loans held for sale,
defaulted mortgage loans, warehouse lines of credit, debt and
capital leases, and accounts and settlements payable. Fair values
were assumed to approximate carrying values for these financial
instruments since they are short-term in nature and their carrying
amounts approximate fair values or they are receivable or payable
on demand.
F-8
<PAGE>
WESTMARK GROUP HOLDINGS, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 130, "Reporting Comprehensive Income" and No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No.
130 establishes standards for reporting and displaying
comprehensive income, its components, and accumulated balances.
SFAS No. 131 establishes standards for the way that public
companies report information about operating segments in annual
financial statements and requires reporting of selected information
about operating segments in interim financial statements issued to
the public. Both SFAS No. 130 and SFAS No. 131 are effective for
periods beginning after December 15, 1997. The Company adopted
these new accounting standards in 1998, and their adoption had no
effect on the Company's financial statements and disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 requires companies to recognize all
derivatives contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as
a hedge, the objective of which is to match the timing of the gain
or loss recognition on the hedging derivative with the recognition
of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the
earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss
is recognized in income in the period of change. SFAS No. 133, as
amended by SFAS 137, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000.
Historically, the Company has not entered into derivatives
contracts to hedge existing risks or for speculative purposes.
Accordingly, the Company does not expect adoption of the new
standard on January 1, 2000 to affect its financial statements.
Reclassifications
Certain reclassifications have been made to the 1998 consolidated
financial statements to conform to the 1999 presentation.
NOTE 2. SIGNIFICANT RISKS AND UNCERTAINTIES
Going Concern Considerations
The accompanying consolidated financial statements have been
presented in accordance with generally accepted accounting
principles, which assume the continuity of the Company as a going
concern.
F-9
<PAGE>
WESTMARK GROUP HOLDINGS, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 2. SIGNIFICANT RISKS AND UNCERTAINTIES (Continued)
Going Concern Considerations (Continued)
As reflected in the consolidated financial statements, the Company
incurred a net loss of approximately $6,800,000 and negative cash
flows from operating activities of approximately $3,300,000 for the
year ended December 31, 1999. As of December 31, 1999, the
Company's consolidated financial position reflects a negative
working capital of approximately $4,600,000 and stockholders'
deficiency of approximately $4,800,000.
Subsequent to December 31, 1999, the Company determined that all
three quarterly reports on Form 10-QSB, filed with the Securities
and Exchange Commission during 1999, were materially misstated.
This was primarily attributed to discrepancies discovered between
reported and actual amounts of mortgage loans held for sale, and
underestimated allowances for losses on defaulted loans and real
estate owned. When the Company notified NASDAQ of this situation,
NASDAQ agreed to suspend trading in the Company's common stock
awaiting further information. The Company intends to file restated
and amended quarterly reports for 1999 as soon as practicable.
The significant loss incurred and the erosion of stockholders'
equity has caused the Company to be in non-compliance with various
covenants of warehouse line agreements, state mortgage lender
licensing requirements and NASDAQ listing requirements. In
addition, the Company's Chief Financial Officer and a member of the
Board of Directors resigned effective March 29, 2000.
On July 26, 2000, the Company filed a Form 8-K with the Securities
and Exchange Commission reporting that the Company had suspended
the operations of its wholly-owned mortgage banking subsidiary, and
that it is in the process of liquidating the subsidiary's assets
and existing loan portfolio (see Note 18).
Issuances of Common and Preferred Stock Subject to Potential Rescission
Due to the material misstatements of Company earnings and financial
condition as presented in the quarterly reports filed with the
Securities and Exchange Commission during 1999, and either
incorporated by reference or included in the private placement
offering documents, any purchasers of common or preferred shares
during 1999 may have the right to rescind their decision to
purchase or accept in settlement those shares of the Company's
common and preferred stock. If the purchasers elect to rescind the
purchase, the Company may have an obligation to refund the purchase
price, including interest, at the applicable rate within the state
of their domicile. Those purchasers that have the right to rescind
would be entitled to receive payment by the Company upon tender of
the underlying shares.
The Company has deducted the amount of proceeds received by the
Company from the purchasers from stockholders' deficiency and
reflected them separately on the consolidated balance sheet under
the caption "Common and Preferred Stock Subject to Potential
Rescission." The Company has not provided for interest and other
costs, if any, that may be incurred relative to the rescission.
F-10
<PAGE>
WESTMARK GROUP HOLDINGS, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 2. SIGNIFICANT RISKS AND UNCERTAINTIES (Continued)
Issuances of Common and Preferred Stock Subject to Potential Rescission
(Continued)
In 1999, the Company completed a private placement offering of
Series H convertible preferred shares. A total of 367,147 shares
were sold for total gross proceeds of $1,156,500. These shares were
issued in June through October 1999.
In addition, in December 1999, the Company issued 190,000 shares of
Company common stock in settlement of certain litigation. These
shares were valued based upon the market value at date of
settlement, a total of $237,500.
If the holder of the 190,000 shares issued in settlement of
litigation returned the shares to the Company in a rescission
transaction, the holder would also have to return approximately
$165,000 in cash received in the same settlement transaction. The
holder and the Company could then attempt to reach a new agreement
with respect to the settlement of the original litigation or
continue the litigation.
Warehouse Lines of Credit
The Company has warehouse agreements with six lending institutions.
The lines of credit vary from $2 to $50 million per lender,
totaling $87.3 million. The outstanding aggregate balance as of
December 31, 1999 was approximately $42,000,000 and, as of March
31, 2000, was approximately $50,000,000. The lines are
collateralized, in part, by the assignment and pledge of funded
mortgage loans. Interest on the lines range from 1 1/2 - 2% above
the prime rate of interest. The warehouse agreements have certain
loan covenants, which require the Company to maintain certain
minimum financial and operating requirements. The Company was
materially not in compliance with most of these covenants at
December 31, 1999. As a result, the lenders may decide not to allow
the Company to continue funding loans through use of these
warehouse lines and may make demand for payment in full. This could
preclude the Company from continuing to operate.
State Licensing
The Company, through its operating subsidiary, is required to be
licensed by every state in which the Company provides mortgage
lending services. Those licenses required certain financial
requirements be maintained. The Company was not in compliance with
those requirements at December 31, 1999. As a result, the Company
may lose its license to provide mortgage lending services in some
or all of the states in which it does business.
F-11
<PAGE>
WESTMARK GROUP HOLDINGS, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 2. SIGNIFICANT RISKS AND UNCERTAINTIES (Continued)
Summary and Management's Plans
The cumulative effect of the matters described in the preceding
paragraphs raise substantial doubt as to the ability of the Company
to continue as a going concern. Management's plans with regard to
these matters include pursuing certain opportunities with other
companies in the same industry to sell its operating subsidiary,
merge with another entity or secure a substantial equity infusion.
Management recognizes that one of these actions is required in
order to cure loan covenant defaults and to qualify for licenses
necessary to continue to operate (see Note 18).
The eventual outcome of the success of management's plans cannot be
ascertained with any degree of certainty. The accompanying
consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
NOTE 3. PROPERTY AND EQUIPMENT
Equipment and furniture $1,630,764
Less accumulated depreciation 605,106
----------
$1,025,658
During 1998, the Company relocated the headquarters of the Company and
sold the buildings it previously occupied. These sales resulted in a
net loss to the Company of approximately $106,000.
In 1998 and 1999, the Company incurred a capital lease obligations of
$58,026 and $170,608, respectively, in connection with the purchase of
furniture and equipment.
NOTE 4. EXCHANGE AGREEMENT - CYBER-CARE, INC.
As of December 31, 1997, the Company owned 200,000 shares of
Cyber-Care, Inc., formerly known as Medical Industries of America, Inc.
("Cyber-Care"), Series B convertible preferred stock. Additionally,
Cyber-Care had an equity investment in the Company, as well as having
advanced the Company funds in exchange for promissory notes. Cyber-Care
owned 333,458 common shares of the Company, as well as 200,000 shares
of the Company's Series C Preferred Stock. The Series C Preferred Stock
had a $3.50 per share stated value, earned a 10% cumulative dividend,
and was convertible into common shares of the Company at the lesser of
$7.50 or 84% of the closing bid on the day prior to conversion.
The Company and Cyber-Care disputed certain rights and obligations
under the various agreements that existed between the Companies and, as
a result, in October 1998, all disputes between the Company and
Cyber-Care were resolved pursuant to an exchange agreement, which
provided the following:
F-12
<PAGE>
WESTMARK GROUP HOLDINGS, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 4. EXCHANGE AGREEMENT - CYBER-CARE, INC. (Continued)
A promissory note of approximately $1,707,555 due to Cyber-Care by
the Company was satisfied in full with the assignment back to
Cyber-Care of 172,750 shares of Series B Cyber-Care preferred stock
and $112,500 in cash;
The 200,000 shares of the Company's Series C preferred stock owned
by Cyber-Care were converted into 350,000 shares of common stock;
Required payment of accrued but unpaid dividends receivable and
payable was waived;
Cyber-Care received a warrant to purchase 100,000 shares of Company
common stock at $3.25 per share, which expires September 30, 2000;
The Company agreed to repurchase up to $1 million dollars of common
stock owned by Cyber-Care at prices ranging from $4.82 to $5.73 per
share if diluted earnings per share criteria, as defined by the
agreement, are not attained.
As a result of this transaction, the Company recorded a loss of
$349,945 as of December 31, 1998, which is presented in the statement
of operations as "loss arising from exchange agreement with
Cyber-Care."
As of June 30, 1999, Cyber-Care exercised its right and the Company
repurchased $333,333 of its common stock. The Company used its
ownership of Cyber-Care preferred stock of $272,500 and cash of $60,833
as payment for the repurchase of the common stock. At December 31,
1999, the Company did not meet the diluted earnings per share criteria,
and Cyber-Care has made demand that the Company repurchase $333,334 of
its common stock. The Company has a certificate of deposit of $213,388
restricted for this purchase. As of December 31, 1999, no additional
demands are available to Cyber-Care which would require the Company to
repurchase additional common shares.
NOTE 5. INVESTMENTS IN PREFERRED STOCK AND LAND STRIPS
Green World Technologies, Inc.
Effective July 1996, the Company entered into an agreement under
which the Company acquired all of the issued and outstanding
capital stock of Green World Technologies, Inc. ("Green World").
In December 1997, the Company divested substantially all of its
interest in Green World pursuant to an exchange agreement between
the Company and Green World (the "Exchange Agreement"). Under the
Exchange Agreement, the Company retained Green World Series A
Preferred Stock representing approximately 18.5% of the capital
stock of Green World on a fully diluted basis.
F-13
<PAGE>
WESTMARK GROUP HOLDINGS, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 5. INVESTMENTS IN PREFERRED STOCK AND LAND STRIPS (Continued)
Green World Technologies, Inc. (Continued)
The Company recorded an allowance for estimated impairment in value
of the investment in Green World capital stock of $800,000 in 1998
and of $76,528 in 1999, reducing its carrying value to its
estimated fair value of $0 at December 31, 1999.
Land Strips
The Company is the owner of various parcels (land strips) of real
property in Florida. The property consists of various strips of
25-30 foot platted road rights of way. The properties have
potential marketability problems due to certain title
considerations. The carrying value of the properties has been
reduced by $300,000 and $110,000 in 1999 and 1998, respectively,
for an estimated impairment in value, to an estimated fair value of
$0 at December 31, 1999.
NOTE 6. DEFAULTED MORTGAGE LOANS AND PROPERTY HELD FOR SALE
Defaulted mortgage loans $3,751,498
Property held for sale 884,748
----------
Total 4,636,246
Less allowance for estimated losses 1,045,000
---------
Net $3,591,246
==========
The Company acquired defaulted mortgage loans and real estate
properties in connection with problem loans repurchased during 1999.
The loans and properties are reported at the lower of aggregate cost or
estimated net realizable value. An allowance in the amount of
$1,045,000 for estimated losses to reduce these assets to estimated net
realizable value has been established as of December 31, 1999 (see Note
18).
NOTE 7. ACQUISITIONS OF ASSETS AND ASSEMBLED WORKFORCE
Prestige Financial Services
In October 1998, the Company acquired selected property and
equipment, a covenant not to compete, and an assembled workforce
from a competitor, Prestige Financial Services Corporation, for a
total of approximately $172,000. The purchase price was allocated
as follows:
Assembled workforce $121,400
Covenant not to compete 40,600
Property and equipment 10,000
---------
172,000
Less accumulated amortization 93,539
---------
$ 78,461
=========
F-14
<PAGE>
WESTMARK GROUP HOLDINGS, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 7. ACQUISITIONS OF ASSETS AND ASSEMBLED WORKFORCE (Continued)
Prestige Financial Services (Continued)
The covenant not to compete is being amortized over the term of the
agreement, one year. The assembled workforce is being amortized
over three years. Amortization of these assets was $93,539 for the
year ended December 31, 1999. The investment in Prestige Financial
Services is included in other assets in the accompanying
consolidated financial statements.
NOTE 8. ACCRUED LIABILITIES
Payroll tax penalties $ 400,000
Interest 368,554
Taxes 280,812
Insurance 147,576
Compensation 125,148
Other 8,641
----------
$1,330,731
==========
NOTE 9. SETTLEMENTS PAYABLE
The Company has negotiated settlement agreements allowing extended
monthly payments with various creditors totaling approximately $3,500
in 1999 and $171,000 in 1998. These agreements resolve prior defaults
and unsatisfied judgments for amounts past due. In addition, the
Company negotiated some settlement agreements with creditors to settle
outstanding obligations through the issuance of common stock.
F-15
<PAGE>
WESTMARK GROUP HOLDINGS, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 10. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
<TABLE>
<CAPTION>
<S> <C>
Capital lease obligation, collateralized by furniture and equipment, interest at 7%
to 14%, with monthly payments totaling approximately $6,800, through February 2005
(a). $192,588
Unsecured demand notes payable with interest at 10% 59,610
Unsecured notes payable, interest at 15% due September 30, 2000 160,000
Line of credit payable to bank, $150,000, interest at prime plus 1% (9.5% at
December 31, 1999), due April 2000, collateralized by a blanket lien on all net
assets. 150,000
--------
Total 562,198
Long-term portion of capital leases 112,355
--------
Current portion $449,843
========
(a) The Company is obligated under leases for equipment through the
year 2005. Future minimum capital lease payments at December 31,
1999 are as follows:
Year ending December 31:
2000 $ 80,233
2001 80,597
2002 43,480
2003 12,708
2004 and after 14,826
--------
Total minimum lease payments 231,844
Less amount representing interest 39,256
--------
Present value of net minimum capital lease payments 192,588
Less current maturities 80,233
--------
Long-term portion $112,355
========
</TABLE>
NOTE 11. COMMITMENTS, CONTINGENCIES, SUBSEQUENT EVENTS AND OTHER MATTERS
Litigation Settlements
The Company entered into a settlement agreement in connection with
litigation in December 1999. The agreement required the Company pay
$400,000, comprised of $162,500 in cash and $237,500 satisfied
through the issuance of 190,000 shares of Company common stock (see
Note 2). In addition, the Company entered into various other
litigation settlements during 1999 with various parties. The total
of the litigation settlements, including related attorney fees,
amounted to approximately $920,000.
F-16
<PAGE>
WESTMARK GROUP HOLDINGS, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 11. COMMITMENTS, CONTINGENCIES, SUBSEQUENT EVENTS AND OTHER MATTERS
(Continued)
Pending Litigation
The Company is involved in certain litigation arising in the
ordinary course of business, primarily in connection with alleged
losses on loans sold to investors. In the opinion of management, as
supported by legal counsel, the amount and probability of potential
liability resulting from such litigation can not be estimated at
this time. As a result, no provision for those losses, if any, is
provided in these financial statements.
Employment Agreements
The Company has employment agreements with its executive officers,
which expire at various times through April 23, 2000. Such
agreements, which have been revised from time to time, provide for
minimum salary levels, car allowances, incentive stock options and
incentive bonuses which are payable if specified management goals
are attained.
The aggregate commitment for future salaries at December 31, 1999,
excluding bonuses, was $217,000 for the year ending December 31,
2000.
Consulting Agreements
The Company has consulting agreements with certain individuals for
legal and investor relation services. One of these individuals is a
member of the Board of Directors and another is an officer of the
Company. The consulting agreements require monthly payments of
$35,000 and expire at various times through June 2000.
The aggregate future payments at December 31, 1999 for consultants
is $192,000 for the year ending December 31, 2000.
Operating Leases
The Company leases certain of its facilities and equipment under
operating leases. The leases, which expire at various dates through
May 2008, require monthly payments of approximately $79,000. In
addition, the Company is responsible for all taxes, insurance,
maintenance and utilities on the office leases.
F-17
<PAGE>
WESTMARK GROUP HOLDINGS, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 11. COMMITMENTS, CONTINGENCIES, SUBSEQUENT EVENTS AND OTHER MATTERS
(Continued)
Operating Leases (Continued)
Minimum future lease payments on these leases are as follows:
Year Ending December 31:
2000 $ 780,000
2001 766,000
2002 734,000
2003 684,000
2004 484,000
Thereafter 1,769,000
----------
Total $5,217,000
==========
Rent expense was approximately $1,040,000 and $210,000 for 1999 and
1998, respectively.
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.
Payroll Tax Penalties
The Company has received and expects to receive various tax notices
from the Internal Revenue Service assessing penalties and interest
for late filing, failure to make payments electronically, and late
payments in connection with 1999 quarterly payroll tax returns. The
Company has recorded a liability, included in accrued expenses (see
Note 8), of approximately $400,000 at December 31, 1999 related to
these payroll tax penalties.
NOTE 12. STOCK OPTION PLAN AND WARRANTS
Stock Option Plan
In May 1994, the stockholders approved the Stock Option Plan. The
plan was 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 900,000 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).
F-18
<PAGE>
WESTMARK GROUP HOLDINGS, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 12. STOCK OPTION PLAN AND WARRANTS (Continued)
Stock Option Plan (Continued)
As of December 31, 1999, a total of 694,300 options were
outstanding pursuant to this Plan. All the options have an exercise
price which was at least equal to market value at the date of
grant. All options have an expiration date through June 30, 2004.
<TABLE>
<CAPTION>
1999 1998
-------------------------------- -----------------------------
Weighted Weighted
Average Average
Shares Price Shares Price
<S> <C> <C> <C> <C>
Beginning Balance 527,500 $2.50 563,383 $2.94
Options granted 187,500 $2.31 10,000 $2.50
Options exercised - - - -
Options canceled (20,700) $2.50 (45,883) $9.02
------- -------
Ending Balance 694,300 $2.45 527,500 $2.50
======= =======
</TABLE>
Stock-Based Compensation
The Company accounts for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees".
Compensation cost for stock options, if any, is measured as the
excess of the estimated market price of the Company's common stock
at the date of grant, over the amount the recipient must pay to
acquire the common stock.
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," established accounting
and disclosure requirements using a fair-value-based method of
accounting for stock-based employee compensation plans. The Company
has elected to retain its current method of accounting as described
above, and has adopted the disclosure requirements of SFAS No. 123.
Warrants
Warrants have been issued to officers and employees of the Company
providing for the issuance of up to 68,000 shares of common stock
at an exercise price of $2.50 per share. The warrants expire on
various dates through January 2003.
Warrants have been issued to non-employees to purchase a total of
1,173,023 shares of common stock at prices ranging from $2.31 per
share to $5.00 per share. The warrants expire on various dates
through June 2004.
F-19
<PAGE>
WESTMARK GROUP HOLDINGS, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 12. STOCK OPTION PLAN AND WARRANTS (Continued)
Warrants (Continued)
Warrants have been issued to the Series H Preferred stockholders to
purchase 367,147 shares of common stock at $3.75 per share. The
warrants, which were issued in connection with the issuance of the
convertible preferred stock, expire May 31, 2004. The warrants are
considered to have an immaterial fair value and, therefore, have
not been reflected in the accompanying consolidated financial
statements.
Fair Value Disclosures
Had compensation cost for the plan been determined based on the
fair value at the grant date consistent with SFAS No. 123, the
Company's net earnings would have been as follows:
1999 1998
---- ----
Net Income (Loss):
As reported $(6,815,739) $ 1,186,718
=========== ===========
Pro forma $(7,395,761) $ 311,280
=========== ===========
Earnings (Loss) Per Share:
Basic:
As reported $(2.10) $ .37
=========== ===========
Pro forma $(2.21) $ .11
=========== ===========
Diluted:
As reported $(2.10) $ .37
=========== ===========
Pro forma $(2.21) $ .10
=========== ===========
The Company used the Black-Scholes option pricing model to
determine the fair value of grants made in 1999 and 1998. The
following assumptions were applied in determining the pro forma
compensation cost:
1999 1998
---- ----
Risk Free Interest Rate 6.5% 6.0%
Expected Dividend Yield -0- -0-
Expected Option Life 1-5 years 2-3 years
Expected Stock Price Volatility 72% 65%
F-20
<PAGE>
WESTMARK GROUP HOLDINGS, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 13. INCOME TAXES
The income tax provision (benefit) consisted of the following:
1999 1998
---- ----
Current:
Federal $ -- $ 32,000
----------- ----------
Deferred:
Federal 1,173,000 (683,784)
State 102,000 (59,000)
----------- ----------
1,275,000 (742,784)
----------- ----------
Income tax expense (benefit) $ 1,275,000 $ (710,784)
=========== ==========
The following table
reconciles the income
tax provision at the U.S.
Statutory rate to that
in the financial statements:
1999 1998
---- ----
Taxes computed at 37% $(2,050,000) $ 439,086
Net operating loss carryforward -- (439,086)
Valuation allowance change 2,615,000 (742,784)
Alternative minimum taxes - 32,000
Non-deductible penalties 148,000 -
Allowances for unrealized losses 498,000 -
Other 64,000 -
----------- ----------
Income tax provision (benefit) $ 1,275,000 $ (710,784)
=========== ==========
The net tax effects of temporary differences between the carrying
amount of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes are reflected in deferred
income taxes. Significant components of the Company's deferred tax
assets as of December 31, 1999 are as follows:
Benefit of net operating loss carryforwards $5,010,000
Less valuation allowance (5,010,000)
---------
Net deferred tax asset $ --
==========
At December 31, 1999, the Company had net operating loss carryforwards
and capital loss carryforwards for federal income tax purposes of
approximately $13,272,000 and $209,000 which are available to offset
future federal taxable income, if any, through 2019. These
carryforwards are on a consolidated return basis for the members of the
consolidated group and, thus, the loss carryforwards may have certain
separate income tax return limitations.
As of December 31, 1999, sufficient uncertainty exists regarding the
realizability of the full amount of these operating loss carryforwards,
and accordingly, a valuation allowance of $5,010,000 has been
established. During 1998, the carrying value of goodwill was reduced by
approximately $532,000 relating to the reduction in the valuation
allowance in connection with the net operating loss carryforward of the
subsidiary in existence at the time of acquisition.
F-21
<PAGE>
WESTMARK GROUP HOLDINGS, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 13. INCOME TAXES (Continued)
The valuation allowance for deferred tax assets as of December 31, 1999
and 1998 was $5,010,000 and $2,395,000, respectively. The net change in
valuation allowance for the years ended December 31, 1999 and 1998 was
an increase of $2,615,000 and a decrease of $2,305,000, respectively.
In accordance with certain provisions of the Tax Reform Act of 1986, a
change in ownership of greater than 50% of a corporation within a three
year period will place an annual limitation on the corporation's
ability to utilize its existing tax benefit carryforwards. Such a
change in ownership occurred in 1995. As a result, based upon the
amount of the taxable loss incurred to December 31, 1995 (approximately
$7,500,000), the Company estimates that an annual limitation of
approximately $455,000 will apply to approximately $5,000,000 of the
net operating loss carryforward existing as of December 31, 1999. The
Company's utilization of its tax benefit carryforwards may be further
restricted in the event of subsequent changes in the ownership of the
Company.
NOTE 14. EARNINGS (LOSS) PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share." which provides
for the calculation of basic and diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing
income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted earnings per share
assume exercising warrants and options granted and convertible
preferred stock and debt. Earnings per share are computed by dividing
income available to common stockholders by the basic and diluted
weighted average number of common shares. Diluted loss for 1999 is not
presented, as the effect of the conversion is anti-dilutive.
<TABLE>
<CAPTION>
Weighted Average
Number of Shares
----------------
Year Ended December 31, Basic Diluted
----------------------- ----- -------
<S> <C> <C>
1999 3,342,935 3,342,935
1998 2,891,820 3,229,314
Income (Loss) Available to Common Stockholders
1999 1998
---- ----
Basic:
Net income (loss) $(6,815,739) $1,186,718
Cumulative preferred stock dividend ( 217,485) (114,651)
---------- ----------
Basic earnings (loss) available to common stockholders $(7,033,224) 1,072,067
===========
Diluted:
Cumulative preferred stock dividend 114,651
Interest on convertible debt 13,448
----------
Diluted earnings (loss) available to common stockholders $1,200,166
==========
</TABLE>
F-22
<PAGE>
WESTMARK GROUP HOLDINGS, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 15. SIGNIFICANT INVESTORS
The Company currently has purchase agreements with various investors
and non-conforming mortgage conduits whereby the Company purchases
loans and resells them. The Company sells virtually all of the loans it
purchases. These agreements are for specific terms or are open ended,
and require the loans satisfy the underwriting criteria described
therein. During 1999 and 1998, the Company sold loans totaling $431
million and $276 million, respectively. The Company does not retain
servicing rights on any of the loans it sells in whole loan sales.
These purchase agreements are non-recourse except for first payment
default or if the loan is determined to contain fraudulent information.
Two investors accounted for 77% of the outstanding loans sold during
1999, and two investors accounted for 82% of the outstanding loans sold
during 1998.
NOTE 16. SUPPLEMENTAL CASH FLOW INFORMATION
Certain supplemental disclosure of non-cash investing and financing
activities for the years ended December 31, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Non-cash investing and financing activities:
Property and equipment acquired through capital leases $170,608 $ 58,026
Exchange of services for payments on stock subscription
Common stock issued in settlement of debt 10,013 207,440
Common stock issued for legal settlement 237,500 --
Common stock issued for management bonuses -- 232,500
NOTE 17. FOURTH QUARTER ADJUSTMENTS
Adjustment of mortgage loans held for sale to actual amounts $(2,653,000)
Net increase in valuation allowance for deferred tax assets (1,275,000)
Increase in allowance for problem loans and property held for sale (1,045,000)
Recording of payroll tax penalties (400,000)
Recording of estimated impairments of asset value (226,000)
-----------
Total significant fourth quarter adjustments $(5,599,000)
===========
</TABLE>
F-23
<PAGE>
WESTMARK GROUP HOLDINGS, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 18. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED)
Proposed Sale of Wholly-Owned Subsidiary
On May 15, 2000, the Company executed a non-binding letter of
intent with First NLC Financial Services, LLC, providing for First
NLC to acquire all of the stock or assets of Westmark Mortgage
Corporation. The letter of intent called for First NLC to pay
$6,000,000 to Westmark Mortgage Corporation at the closing of the
contemplated transaction. The letter of intent provided that the
$6,000,000 shall be used to satisfy existing obligations under
warehouse lines of credit. It also provided for First NLC, upon
closing, to grant the Company an option with a 90 day term to
acquire 5% of First NLC for $925,000. The transaction was
conditioned upon a number of items, including:
o completion of due diligence by First NLC
o First NLC securing third party investments in First NLC totaling
$7.7 million
o approval by First NLC's warehouse lenders
o receipt of other third party or governmental approvals, including
the assignment of material contracts
o execution of a definitive agreement.
The Company was also negotiating the terms of a separate agency
agreement with First NLC that would allow the Company to act as a
loan processor and underwriter for First NLC pending closing of the
transaction contemplated under the non-binding letter of intent.
The Company anticipated acting as First NLC's agent under this
agreement in Florida and other states where the Company may no
longer be licensed to operate as a mortgage lender because of the
financial condition.
The Company was unable to conclude the proposed agreements with
First NLC.
Proposed Equity Transaction
On June 1, 2000, the Company signed an agreement with Generation
Capital Associates providing the issue to Generation Capital of
3,500,000 shares of preferred stock in exchange for $2,000,000. The
preferred stock would be convertible into the greater of 48% of the
Company common stock on a fully diluted basis or 3,500,000 shares
of common stock. The holders of the preferred stock would have one
vote per one share voting rights on the same basis as holders of
common stock. The agreement was conditioned upon a number of items,
including:
o closing of the above-described transaction with First NLC on or
before July 31, 2000
o the net worth increasing to $2,200,000 upon sale of the preferred
stock
o maintenance of the Company's listing on the Nasdaq Small Cap
Stock Market
o approval of the agreement by stockholders
The Company was unable to sell the preferred stock to Generation
Capital due to not being able to satisfy the above conditions.
F-24
<PAGE>
WESTMARK GROUP HOLDINGS, INC. and SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 18. SUBSEQUENT EVENTS (Continued)
Sale of Loan Portfolio
On August 2, 2000, Household Financial Services, Inc. ("Household")
acquired approximately $12.4 million of loans of the Company.
Household also acquired all of the remaining loans of the Company,
including all related foreclosed upon real estate or real estate
taken back in lieu of foreclosure, which had been funded using the
Company's Household warehouse line of credit. These remaining loans
and real estate were acquired in exchange for an amount equal to
the Company's outstanding balance on the Household warehouse line
of credit. In connection with these transactions, Westmark Mortgage
Corporation executed a settlement agreement with Household, in
which the Company agreed to release to Household all mortgage loan
files and documents in the loan portfolio relating to loans
financed under Household's warehouse line of credit. The settlement
included mutual general releases. Under the settlement agreement,
the Company remains responsible for any act or omission related to
its servicing of the loans. The Company is also required to remit
to Household any payments on the related mortgage loans received on
or after August 1, 2000.
The Company has also delivered approximately $2.3 million of loans
funded by other former warehouse lenders back to those lenders.
Defaults of Debt Agreements
During 2000, all warehouse lenders have suspended warehouse lines
due to defaults under the loan agreements.
During 2000, the Company has been unable to deliver the promissory
notes underlying approximately $7,300,000 of mortgage loans sold to
at least two institutional investors. This is because the Company
has been unable to repay the warehouse line lenders who funded the
mortgage loans, and who have physical possession of the promissory
notes as security for repayment of their warehouse lines.
Significant additional potential liability for deficiencies and
accrued interest exists with the warehouse lenders. The Company has
executed a settlement agreement with only one warehouse lender.
Other Matters
On July 21, 2000, the Company sold the assets of the California
branch of Westmark Mortgage Corporation to G.I.E. for $125,000.
On July 26, 2000, the Company filed a Form 8-K with the Securities
and Exchange Commission reporting the suspension of its subsidiary
and the intention to liquidate the assets and existing loan
portfolio of that subsidiary.
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