As filed with the Securities and Exchange Commission on August 15, 1997
Registration No. 333-05569
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------------------
AMENDMENT NO. 6
TO
FORM SB-2
Registration Statement
Under the Securities Act of 1933
------------------------------------
WESTMARK GROUP HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 6531 84-1055077
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification Number)
organization) Code Number)
355 N.E. FIFTH AVENUE MARK SCHAFTLEIN
DELRAY BEACH, FLORIDA 33483 WESTMARK GROUP HOLDINGS, INC.
(561) 243-8010 355 N.E. FIFTH AVENUE
(Address and telephone DELRAY BEACH, FLORIDA 33483
number of principal (561) 243-8010
executive offices) (Name, address and
telephone number of
agent for service)
COPIES TO:
THOMAS C. PRITCHARD
BREWER & PRITCHARD, P.C.
1111 BAGBY, 24TH FLOOR
HOUSTON, TEXAS 77002
PHONE (713) 659-1744
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number of earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act number of the earlier effective registration statement for the same
offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X] -----------------------
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Title of Each Class of Amount Maximum Maximum Amount of
Securities To Be Being Offering Price Aggregate Registration
Registered Registered Per Share(1) Offering Price(1) Fee
====================================================================================================================================
Resale of Shares Underlying Preferred Stock (2)...... 4,841,904 $.53(3) $ 2,566,209 $ 778
Resale of Shares Underlying Warrants (2)............. 1,608,188 $.89(3) $ 1,431,287 $ 434
Resale of Shares Underlying Convertible Debt......... 444,326 $.62(3) $ 275,482 $ 78
Outstanding Shares of Common Stock to be Resold...... 4,442,442 $.59(4) $ 2,621,040 $ 794
TOTAL 11,336,860 - - $ 2,084(5)
====================================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) This registration statement also covers any additional securities which may
become issuable pursuant to adjustment provisions.
(3) Based upon the average conversion price for the Preferred Stock and
convertible debt and the average exercise price for the warrants.
(4) Based on the closing bid price of Common Stock as reported by Nasdaq on July
30, 1997.
(5) The amount of $2,606 was paid in original filing.
-------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
---------------------
i
WESTMARK GROUP HOLDINGS, INC.
Cross-Reference Sheet
showing location in the Prospectus of
Information Required by Items of Form SB-2
FORM SB-2 ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
1. Front of Registration Statement and
Outside Front Cover of Prospectus....................... Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus..................................... Inside Front Cover Page; Outside Back
Cover Page
3. Summary Information and Risk Factors.................... Prospectus Summary; Risk Factors; The
Company
4. Use of Proceeds......................................... Use of Proceeds
5. Determination of Offering Price......................... Outside Front Cover Page; Risk Factors;
Plan of Distribution and Selling
Stockholders
6. Dilution................................................ *
7. Selling Security-Holders................................ Plan of Distribution and Selling
Stockholders
8. Plan of Distribution.................................... Outside Front Cover Page; Risk Factors;
Plan of Distribution and Selling
Stockholders
9. Legal Proceedings....................................... Business
10. Directors, Executive Officers, Promoters
and Control Persons..................................... The Company; Management -- Executive
Officers and Directors
11. Security Ownership of Certain Beneficial
Owners and Management................................... Principal Stockholders
12. Description of Securities............................... Description of Capital Stock
13. Interest of Named Experts and Counsel................... Experts
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................................. *
15. Organization Within Last Five Years..................... The Company
16. Description of Business................................. Business
17. Management's Discussion and Analysis
or Plan of Operation.................................... Management's Discussion and Analysis of
Financial Condition and Results of
Operations
18. Description of Property................................. Business
19. Certain Relationships and Related
Transactions............................................ Management -- Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters..................................... Risk Factors; Description of Capital Stock;
Shares Eligible for Future Sale; Price
Range of Common Stock and Dividend
Policy
21. Executive Compensation.................................. Management -- Executive Compensation
22. Financial Statements.................................... Financial Statements
23. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure.............................................. Experts
- -----------------------------
(*) None or Not Applicable
ii
SUBJECT TO COMPLETION, DATED August 15, 1997
WESTMARK GROUP HOLDINGS, INC.
RESALE OF 11,336,860 SHARES OF COMMON STOCK
This Prospectus relates to the resale of 11,336,860 shares of Common
Stock which may be sold by the holders thereof ("Selling Stockholders") from
time to time as market conditions permit in the market, or otherwise, at prices
and terms then prevailing or at prices related to the then current market price,
or in negotiated transactions. The shares of Common Stock to be resold include
4,442,442 shares currently issued and outstanding and up to 6,894,418 shares to
be issued upon (i) exercise of warrants outstanding to purchase an aggregate of
1,608,188 shares ("Warrants"), (ii) conversion of outstanding shares of the
Company's Series A, Series B, Series D, Series E and Series F Preferred Stock
(collectively, "Preferred Stock") presently convertible to purchase an aggregate
of 4,841,904 shares, subject to adjustment, and (iii) conversion of $274,501 of
debt for 444,326 shares ("Convertible Debt"). Shares offered by the Selling
Stockholders may be sold by one or more of the following methods without
limitation: (i) ordinary brokerage transactions in which a broker solicits
purchases; and (ii) face to face transactions between the Selling Stockholders
and purchasers without a broker-dealer. A current prospectus must be in effect
at the time of the sale of the shares of Common Stock to which this Prospectus
relates. Each Selling Stockholder or dealer effecting a transaction in the
registered securities, whether or not participating in a distribution, is
required to deliver a current prospectus upon such sale. See "Management--Stock
Options," "--Certain Transactions," "Description of Capital Stock--Preferred
Stock" and "Plan of Distribution and Selling Stockholders." The Company will
retain all proceeds from the exercise of the Warrants, regardless of the number
exercised. Such proceeds (a maximum amount of approximately $1,812,965) will be
used for working capital and general corporate purposes. The Company will not
receive any proceeds from the resale of Common Stock by the Selling Stockholders
or upon conversion of the Preferred Stock or upon conversion of the Convertible
Debt. The Company's Common Stock is traded on the Nasdaq SmallCap Market under
the symbol "WGHI." On July 30, 1997, the last sales price of the Common Stock as
reported by Nasdaq was $.59.
--------------------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE
A HIGH DEGREE OF RISK AND SHOULD NOT BE PURCHASED BY
ANYONE WHO CANNOT AFFORD THE LOSS OF HIS ENTIRE
INVESTMENT. THE MARKET FOR THE COMMON STOCK
IS LIMITED, SPORADIC AND HIGHLY VOLATILE.
SEE "RISK FACTORS" ON PAGE 5.
----------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------------------
The date of this Prospectus is August __, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
1
TABLE OF CONTENTS
PAGE
Available Information...................................................... 2
Prospectus Summary......................................................... 3
Risk Factors............................................................... 5
The Company................................................................ 11
Use of Proceeds........................................................... 13
Price Range of Common Stock and Dividend Policy........................... 14
Capitalization............................................................ 15
Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 15
Business................................................................... 22
Management................................................................. 27
Principal Stockholders..................................................... 33
Description of Capital Stock............................................... 33
Plan of Distribution and Selling Stockholders.............................. 37
Legal Matters.............................................................. 46
Experts.................................................................... 46
Index to Financial Statements............................................. F-1
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OFFERED HEREBY, OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OFFERED HEREBY TO OR FROM ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE BUSINESS OR AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION IN THIS PROSPECTUS IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE AS OF WHICH SUCH INFORMATION IS
FURNISHED.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and, in accordance
therewith, files periodic reports, proxy materials and other information with
the Securities and Exchange Commission ("Commission"). Such reports, proxy
materials and other information are available for inspection at, and copies of
such materials may be obtained upon payment of the fees prescribed therefor by
the Commission from, the Commission at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
as well as the following regional offices: 7 World Trade Center, New York, New
York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
The Company has filed a registration statement on Form SB-2
("Registration Statement") under the Act with respect to the securities being
registered. This Prospectus does not contain all the information set forth in
the Registration Statement and the exhibits and schedules thereto, to which
reference is hereby made. Copies of the Registration Statement and its exhibits
are on file at the offices of the Commission and may be obtained upon payment of
the fees prescribed by the Commission or may be examined, without charge, at the
public reference facilities of the Commission. The Company will provide without
charge to each person who receives a copy of this Prospectus, upon written or
oral request of such person, a copy of any of the information that is
incorporated by reference in this Prospectus (not including exhibits to the
information that is incorporated by reference unless the exhibits are themselves
specifically incorporated by reference). Such request should be directed to the
Company, attention Mr. Schaftlein, at 355 N.E. Fifth Avenue, Delray Beach,
Florida 33483.
The Commission maintains a Web site on the Internet that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Commission. The address of the site is
http://www.sec.gov. Visitors to the site may access such information by
searching the EDGAR data base on the site.
2
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED INFORMATION AND FINANCIAL DATA (INCLUDING FINANCIAL STATEMENTS AND
NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT
TO (I) A 1-FOR-30 REVERSE STOCK SPLIT EFFECTED IN JULY 1995, AND (II) THE
REINCORPORATION OF THE COMPANY IN DELAWARE IN JUNE 1996, WHICH RESULTED IN THE
NUMBER OF AUTHORIZED SHARES OF COMMON STOCK INCREASING TO 50,000,000, $.001 PAR
VALUE, AND THE NUMBER OF AUTHORIZED SHARES OF PREFERRED STOCK INCREASING TO
10,000,000, $.001 PAR VALUE.
THE COMPANY
The Company is primarily a financial services company that, through
its wholly-owned subsidiary Westmark Mortgage Corporation ("Westmark Mortgage"),
is engaged in the business of originating, purchasing and selling mortgage loans
secured primarily by single family, multi-family and condominium residences.
Investors purchase conforming loans (generally those borrowers with perfect or
good credit) and non-confirming loans (generally below average and delinquent
credit). Westmark Mortgage is registered and/or licensed to originate, purchase
closed loans, underwrite, fund or sell residential mortgage loans in the states
of Arkansas, California, Florida, Georgia, Illinois, Indiana, Kansas, Michigan,
Missouri, Montana, Tennessee, Utah and Washington. The Company pools and sells
loans to third-party institutional investors. The primary non-conforming
investors are Household Financial Services which provided 65%, of the Company's
revenue from gain on sale in 1996 and The Money Store.
While the Company is primarily a financial services business
operation, in July 1996, the Company acquired Green World Technologies, Inc.
("Green World"), a wholly owned development-stage subsidiary that markets,
nationally and internationally, the Talon Refrigerant Management System
("Talon"), an energy-saving add-on to air-cooled condensers found in air
conditioners, heat pumps and refrigeration systems. The marketing campaign
consists of establishing dealer networks and warehousing. In addition, testing
is currently underway with several manufacturers for the purpose of having the
Talon included as an other equipment manufacturer ("OEM") in these
manufacturers' product lines. The business operations of Green World constitute
an insignificant portion of the Company's business. Results of operations of
Green World for the period after acquisition by the Company (July 18, 1996)
through September 30, 1996 (its fiscal year-end) are as follows: (i) revenue of
$29,221; (ii) cost of goods sold of $10,311; and (iii) general and
administrative expenses of $85,496, selling expenses of $24,651 and research and
development expenses of $21,919. The Company does not anticipate entering into
any further diversified lines of business. See "The Company-Recent Developments
- - Green World Acquisition".
THE OFFERING
Common Stock Outstanding
Prior to Offering.................................... 9,523,082 (1)
Common Stock Outstanding
After Offering, Assuming Exercise
and Conversion of the Derivative Securities
of which the resale of the underlying Common
Stock is being registered hereby...................... 16,417,500 (2)
Common Stock, the Resale of Which is
Being Registered Hereby............................... 11,336,860 (2)
Use of Proceeds........................................ Working capital and
general corporate
purposes. See "Use
of Proceeds."
Risk Factors........................................... Prospective
purchasers are
urged to carefully
review the factors
set forth in
"Risk Factors."
Nasdaq Symbol.......................................... WGHI
- ---------------------
(1) Does not include (i) 1,608,188 underlying the Warrants, (ii) 4,841,904
shares underlying outstanding shares of Preferred Stock, (iii) shares of
Common Stock underlying currently exercisable options ("Options"), (iv)
444,326 shares issuable upon conversion of Convertible Debt, and (v)
1,000,000 shares underlying options that are not currently exercisable. See
"Company-Recent Developments," "Management -- Certain Transactions,"
"Description of Capital Stock - Warrants," and " Preferred Stock".
(2) Includes (i) the resale of 1,608,188 shares underlying the Warrants, (ii)
the resale of 4,841,904 shares underlying outstanding shares of Preferred
Stock, and (iii) the resale of 444,326 shares underlying Convertible Debt.
3
SUMMARY FINANCIAL INFORMATION
(In thousands, except per share data)
YEAR ENDED DECEMBER 31 PERIOD ENDED
(AUDITED) JUNE 30
(UNAUDITED)
STATEMENTS OF INCOME DATA: 1996 1995 1997 1996
------- -------- ------- -------
Total revenues ........................................ $ 2,933 $ 3,107 $ 3,157 $ 1,401
Total expense ......................................... 6,972 10,595 3,460 2,364
Loss from continuing operations ....................... (4,038) (7,488) (303) (963)
Provisions for income tax benefit ..................... 39 180 -- --
Gain on extinguishment of debt (1) .................... -- 270 69 --
Net loss .............................................. (3,801) (7,038) (234) (963)
Net loss per share .................................... (1.04) (6.50) (0.04) (0.33)
Weighted average
shares outstanding ................................. 3,660 1,082 5,581 3,016
BALANCE SHEET DATA:
DECEMBER 31, JUNE 30,
1996 1997
(AUDITED)(UNAUDITED)
Working capital deficit ................................ (5,079) (1,776)
Total assets (2) ....................................... 10,325 8,918
Long-term obligations (3) .............................. -- --
Stockholders' equity ................................... 201 1,613
(1) Includes non-cash compensation items of $1,153,318 and $1,099,000 in 1996
and 1995, respectively.
(2) Net of tax of $39,000 at December 31, 1996 and $180,000 at December 31,
1995.
(3) Includes investment in loans in process of $4,995,193 at December 31, 1996
and $19,480,029 at December 31, 1995.
4
RISK FACTORS
AN INVESTMENT IN THE COMPANY COMMON STOCK INVOLVES CERTAIN RISKS.
PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW THE FOLLOWING FACTORS TOGETHER
WITH THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS PRIOR TO MAKING AN
INVESTMENT DECISION.
CONTINUING OPERATING LOSSES; ACCUMULATED DEFICIT
The Company had losses from continuing operations before provision
for income tax and other extraordinary items of ($3,898,366) and ($7,488,060)
for the years ended December 31, 1996 and 1995, respectively, and ($233,944) for
the six months ended June 30, 1997. At December 31, 1996 and June 30, 1997, the
Company had an accumulated deficit of ($26,655,416) and ($26,997,731),
respectively. The Company's prospects, therefore, must be considered in light of
the risks, expenses and difficulties frequently encountered in operating a
business in a highly competitive industry. There can be no assurance that the
Company will experience profitability in the future, if at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CAPITAL REQUIREMENT; LIMITED SOURCES OF LIQUIDITY; NEED FOR ADDITIONAL CAPITAL;
QUALIFIED OPINION REGARDING FINANCIAL STATEMENTS; WEAKNESS IN ACCOUNTING
CONTROLS
The Company requires substantial capital to pursue its operating
strategy. To date, the Company has relied primarily upon net cash provided by
financing activities to fund its capital requirements. Net cash provided by
financing activities, exclusive of transactions on its line of credit, was
$1,704,445 and $3,431,298 for the years ended December 31, 1996 and 1995,
respectively, and $833,812 for the six months ended June 30, 1997. Net cash used
by operating activities before working capital changes was $2,487,936 and
$5,198,712 for the years ended December 31, 1996 and 1995, respectively, and net
cash provided before working capital changes was $833,812 for the six months
ended June 30, 1997. The Company expects that operations before working capital
changes will not generate significant cash flow until the Company has net
income. These results will continue to impact the Company's capital position and
cause continued reliance upon external sources of liquidity for at least the
near future. There can be no assurance the Company will generate sufficient cash
in future periods to satisfy the Company's capital requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation."
At December 31, 1996 and June 30, 1997, the Company had a working
capital deficit of $5,079,003 and $1,776,153, respectively. The Company
maintains a $10 million warehouse line of credit with Princap Mortgage, Inc., a
$5 million Warehouse line of credit with The Money Store, and a $5 million
Warehouse line of credit with Household Financial Services, Inc. secured by the
mortgages purchased by the Company from these warehouse lines of credit
("Warehouse Facilities"). The terms of the Princap line of credit are prime +
2%, $140 per loan transaction fee and funding at 98% of the loan amount. At
December 31, 1996 and June 30, 1997, the Company had $4,748,021 and $4,559,687,
respectively, outstanding under the Princap Warehouse Facility. Pursuant to The
Money Store Warehouse Facility, the Company has available a $5 million line of
credit with an interest rate of 1.5% above prime and no transaction fee.
Pursuant to Household Financial Services Warehouse Facility, the Company has
available a $5 million line of credit with an interest rate of 2% above prime
and a $100 transaction fee. The Company does not have any other external lines
of credit for financing. At June 30, 1997, the Company had total short-term
indebtedness (exclusive of the warehouse line of credit) of $2,377,058, and
long-term indebtedness of $1,760,778 of which $1,727,569 and $192,222,
respectively, is owed to Medical Industries of America Inc., formerly known as
Heart Labs of America, Inc. ("MIOA"). See "The Company-Recent Developments" for
a description of the terms of the Westmark-Medical Industries Agreement pursuant
to which this sum will be paid. The Company funds substantially all of the loans
which it originates and purchases through borrowings under its Warehouse
Facilities. These borrowings are in turn repaid with the proceeds received by
the Company from selling such loans either through whole loan sales or bulk
sales. Any failure to renew or obtain adequate funding under this Warehouse
Facilities, or other borrowings, or any substantial reduction in the size of or
pricing in the markets for the Company's loans, could have a material adverse
effect on the Company's operations. To the extent that the Company is not
successful in maintaining or replacing its Warehouse
5
Facilities, it would have to curtail its loan production activities or sell
loans earlier than is optimal, thereby having a material adverse effect on the
Company's results of operations and financial conditions. The Company may need
additional capital to satisfy future capital requirements. There can be no
assurance that the Company will obtain any additional financing or that the
Company will be able to raise needed capital from other sources on terms
favorable to the Company, if at all. If the Company is unable to secure
sufficient capital in the future, its ability to pursue its business strategy
and result of operations for future periods may be impaired. The Company has not
established any other lines of credit or other similar financial arrangements
with any lenders. If it appears at any time in the future that the Company is
again approaching a condition of cash deficiency, the Company will be required
to seek additional debt or equity financing, sell assets or otherwise bring cash
flow in balance. There can be no assurance that the Company will be able to
obtain external sources for liquidity on acceptable terms, if at all. Management
does not have any firm commitments for significant financing. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The Company's internally generated cash flows from operations have
historically been insufficient for cash needs. The Company's independent
accountants have qualified their opinion with respect to the Company's financial
statements for the year ended December 31, 1996 to reflect that incurred losses
from operations, a deficit in working capital and insufficient equity for
contractual commitments, have raised substantial doubt about the ability of the
Company to continue as a going concern. Furthermore, the financial statements do
not include any adjustments that might result from the outcome of such
uncertainty.
In 1993, the Company was advised by its independent auditors that
there were material weaknesses in its system of internal accounting controls.
Since that time, the Company has continued to exhibit material weaknesses in
accounting practices relating to timing of revenue and expense recognition,
consistent and timely performance of monthly closing procedures including
appropriate account reconciliations, recognition of non-cash compensation, and
the recording of other significant non-cash transactions. Effective in 1997,
management adopted a corrective action plan to its system of accounting controls
which includes the following elements: (i) monthly closing procedures, including
systematic account reconciliations and internal review are documented and
consistently applied; (ii) interim financial statements are produced monthly and
are reviewed on a timely basis by responsible parties including upper
management; (iii) quarterly reporting has been automated to ensure consistency
both between quarters and as compared to year end; and (iv) appropriate
consideration is given to proper accounting treatment of significant, unusual
and non-cash transactions, including the requirement for consultation with
experts, as necessary see "Financial Statements."
ABILITY TO MAINTAIN NASDAQ LISTING AND PUBLIC MARKET
The Company Common Stock is currently listed for quotation on the
Nasdaq SmallCap Market. The trading market for the Common Stock is sporadic,
limited and highly volatile. In order for the Common Stock to be eligible for
continued listing on the Nasdaq SmallCap Market, the Company must (i) have total
assets of at least $2 million, (ii) total capital and surplus of at least $1
million, and (iii) maintain a minimum bid price of $1.00 or, if the minimum bid
price is less than $1.00, the Company must maintain capital and surplus of $2
million and a market value of the public float of its securities of not less
than $1 million. Nasdaq recently proposed new criteria for listing on the Nasdaq
SmallCap Market. The requirements for continued inclusion under the proposed
standards include: (i) net tangible assets of at least $2 million, or net income
of $500,000 in two of the last three years, or a market capitalization of at
least $35 million and (ii) maintain a minimum bid price of $1.00. In May 1997,
the Company was notified that it would be de-listed from Nasdaq for failure to
maintain listing requirements. The Company appealed the decision, and was
granted a temporary exception until August 31, 1997 to meet the minimum bid
price requirement and to have its Common Stock trade with a minimum bid price of
$1.00 for a period of 10 days. During that time the stock symbol shall be
"WGHIC." In order to meet the minimum $1.00 bid price requirement, the Company
has requested its shareholders to approve a minimum of a 3-for-1 reverse split
of its issued and outstanding Common Stock prior to August 31, 1997. Disclosure
in this Prospectus does not give effect to any contemplated reverse split. Even
if the Company is successful in meeting the terms of the exception, there can be
no assurances that it will be able to maintain its listing once the proposed new
criteria are adopted. If the Company is unsuccessful in maintaining its listing,
trading, if any, in the securities would be conducted in the over-the-counter
market of the National Quotation Bureau, Inc., or
6
on the OTC Electronic Bulletin Board. There can be no assurance that any trading
market will continue to exist for the Common Stock. See "Price Range of Common
Stock and Dividend Policy."
SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL DEPRESSION EFFECT ON MARKET
Of the 9,523,082 shares of Common Stock issued and outstanding, the
Company is registering the resale of the 4,442,442 issued and outstanding shares
of Common Stock. Substantially all of the balance of the shares of Common Stock
outstanding are freely tradeable as such shares were issued pursuant to
registration statements registering the issuance of such shares under the Act or
such shares have been outstanding for over one year and can be sold pursuant to
Rule 144 promulgated under the Act. Generally, under Rule 144, each person
holding restricted securities for a period of one year may, every three months,
sell through ordinary brokerage transactions or to market makers an amount of
shares up to the greater of 1% of the Company's then outstanding stock or the
average weekly trading volume for the four weeks prior to the proposed sale. The
sale of a substantial amount of restricted and unrestricted Common Stock by
shareholders of the Company under Rule 144, or even the potential for such
sales, could have an depressive effect on the market price of the shares of
Common Stock and could impede the Company's ability to raise additional capital
through the sale of its equity securities. A depressive effect on the market
price of the Common Stock could require the Company to issue additional shares
of Common Stock to its creditors or make additional cash payments to creditors
pursuant to settlement agreements for which the resale of 1,254,002 shares of
Common Stock under this Prospectus is being provided for. See "Management
Discussion and Analysis of Financial Conditions and Results of Operations --
Liquidity and Capital Resources" for a discussion of the terms under which
additional shares may be issued to creditors. See "Plan of Distribution and
Selling Stockholders."
ECONOMIC CONDITIONS THAT MAY ADVERSELY EFFECT BUSINESS OPERATIONS
GENERAL
The Company's business may be adversely affected by periods of
economic slowdown or recession which may be accompanied by decreased demand for
consumer credit and declining real estate values. Any material decline in real
estate values reduces the ability of borrowers to use home equity to support
borrowings and increases the loan-to-value ratios of loans previously made by
the Company, thereby weakening collateral coverage and increasing the
possibility of a loss in the event of default. Further, delinquencies,
foreclosures and losses generally increase during economic slowdowns or
recessions. Because of the Company's focus on borrowers who are unable or
unwilling to obtain mortgage financing from conventional mortgage sources, the
actual rates of delinquencies, foreclosures and losses on such loans could be
higher under adverse economic conditions than those currently experienced in the
mortgage lending industry in general. Any sustained period of such increased
delinquencies, foreclosures or losses could adversely affect the pricing of the
Company's loan sales. While the Company believes the underwriting criteria and
collection methods it employs enable it to mitigate the higher risks inherent in
loans made to these borrowers, no assurance can be given that such criteria or
methods will afford adequate protection against such risks.
The success of Company's business is predicated upon the use of its
services in connection with the purchase or refinancing of residential real
estate. The mortgage origination market and real estate market are often
adversely effected, usually on a short-term basis, by unusual climatic events in
any single geographic area such as hurricanes, earthquakes and tornadoes. The
happening of such events or recurrence of such events in a particular area may
increase the rates for mortgage and homeowners insurance causing a decline in
the number of home purchasers and mortgage borrowers. Since 1994, the Company
has undertaken a geographic expansion to avoid concentration in any single
geographic location.
EFFECT OF FLUCTUATING INTEREST RATES
Fluctuations in interest rates and increases and decreases of the
prime rate may directly impact the mortgage market and the ability of the
Company to attract "A" or "B/C" or other classes of mortgage loans. If interest
rates should rise, the number of applications for new mortgages may fall.
Management believes that the "B/C" mortgage market is
7
not as particularly interest-rate sensitive as is the "A" mortgage market. The
"A" mortgage market is primarily composed of borrowers who are
interest-rate-driven or for purchasing homes; that is, "A" mortgage borrowers
refinance current mortgages for ones with lower interest rates and terms. As
interest rates increase, such refinancing diminishes purchase activities and the
number of loan applications in that "A" market decreases. The "B/C" market is
primarily composed of borrowers who are payment-driven with a use of the
mortgage loan as a source of equity. Often a common goal of the "B/C" borrower
is to leverage available equity for immediate use, and despite increases in
interest rates, the "B/C" borrower focuses primarily on the monthly payment.
Thus, the decrease in loan applications in the "B/C" market which may occur when
interest rates increase, is typically not as significant as in the "A" mortgage
market. However, there can be no assurances that interest rates will not rise
and negatively impact the Company's financial position by causing fewer "B/C"
mortgages to be processed by the Company.
RISKS OF "B/C" MORTGAGE MARKET AS COMPARED WITH "A" MORTGAGE MARKET
The Company has diversified its mortgage banking strategy to include
lending to additional categories of borrowers, such as the "B/C" mortgage
market, a nationally growing segment of the mortgage industry. The "B/C"
mortgage market serves borrowers whose credit history or amount of debt
increases the risk associated with mortgage loans and puts such loans outside
the guidelines established by Fannie Mae and Freddie Mac. Thus, the "B/C"
mortgage loans cannot be resold to those institutions and the Company must
locate buyers outside that established market. The Company's strategy in
reducing its risk associated with funding "B/C" loans is to obtain commitments
from outside investors for the resale to them of such "B/C" loan mortgages
before the Company funds such mortgages. The "B/C" mortgage loan is particularly
dependent on the accuracy of the appraisal of the underlying property because of
the higher risk of lack of repayment and the consequent mortgage originator's
increased reliance on such underlying mortgage assets. Because of such risk in
funding, "B/C" mortgages require the borrower to place a larger down payment on
the purchased property which permits a higher-debt-to-income ratio. In addition,
because of the inherent risks, the "B/C" loan originator charges greater loan
origination fees and mortgage rates generating a higher yield than those of the
"A" mortgage market. Consequently, the profit margins that can be realized by
the Company on the resale of such "B/C" loans is greater than those realizable
from the "A" loan mortgage market. There is no assurance that the Company will
be able to continue to achieve a higher profit margin from the resale of its
loans or will be able to continue to locate buyers from such "B/C" loan
packages. Occasionally, as part of such resale of the mortgages, the Company
issues certain representations to repurchase defective loans, but only as to
defective loans arising from an incidence of fraud. While there can be no
assurance that the Company will not be required to repurchase a significant
amount of such loans, this has not traditionally been a serious consideration
for the Company. In fiscal 1995, the Company paid a total of $480,000 for
repurchased defective loans, or .3038% of its total loan originations, which
amount related to loans originated prior to the purchase of Westmark Mortgage by
the Company. As of June 30, 1997 the portfolio of loans Household Financial
Services, Inc. purchased from Westmark totaled approximately $19 million. The
portfolio had a delinquency rate of less than 1%, an amount well within its
established guideline.
CONTINGENT RISKS OF LOAN SALES
Although the Company sells substantially all loans which it
originates and purchases on a nonrecourse basis, the Company retains some degree
of risk on substantially all loans sold. During the period of time that loans
are held pending sale, the Company is subject to the various business risks
associated with the lending business including the risk of borrower default, the
risk of foreclosure and the risk that a rapid increase in interest rates would
result in a decline in the value of loans to potential purchasers.
In the ordinary course of its business, the Company is subject to
claims made against it by borrowers and private investors arising from, among
other things, losses that are claimed to have been incurred as a result of
alleged breaches of fiduciary obligations, misrepresentations, errors and
omissions of employees, officers and agents of the Company (including its
appraisers), incomplete documentation and failures by the Company to comply with
various laws and regulations applicable to its business. The Company believes
that liability with respect to any currently
8
asserted claims or legal actions is not likely to be material to the Company's
consolidated results of operation or financial condition; however, any claims
asserted in the future may result in legal expenses or liabilities which could
have a material adverse effect on the Company's results of operations and
financial condition.
Likewise with the repurchase scenario discussed above, the Company at
any one time is potentially subject to past portfolio liabilities, particularly
from the conforming business. Periodically, the Company will receive demands for
repurchase from various investors. Though the Company has been successful in
having individual requests rescinded or cured, there can be no assurance that
individual defects will be cured. Management does not feel that this risk could
seriously impair the Company's ability to operate.
RELATED PARTY INVOLVEMENT IN GREEN WORLD ACQUISITION
The prior shareholder of Green World is currently a beneficial
principal stockholder of the Company. In connection with the acquisition of
Green World by GTB Company from MIOA and the subsequent acquisition of Green
World by the Company from GTB Company, the sole shareholder of GTB Company was
Charles Chillingworth, who for a brief period prior to the Green World
transaction was corporate counsel for the Company and MIOA. In the Green World
transaction, Mr. Chillingworth solely represented the interest of GTB Company in
its dealing with both MIOA and the Company. Mr. Birmingham was an officer and
director of the Company at the time of the Green World acquisition and currently
serves in those positions with the Company. During the Green World acquisition
by MIOA, Mr. Birmingham was an officer and director of MIOA, and upon the sale
of Green World to GTB Company, Mr. Birmingham was only a director of MIOA. In
August 1996, Mr. Birmingham resigned as a director of MIOA. Mr. Morrell was an
officer and director of MIOA at the time of the acquisition and prior to the
acquisition was an officer and director of the Company. Mr. Birmingham abstained
from voting on the proposed sale of Green World by MIOA to GTB Company. Upon
such acquisition, the board of directors of the Company believed that the
transaction to acquire Green World was conducted on an arms'-length basis. See
"The Company-Recent Development-Green World Acquisition."
DEPENDENCE UPON KEY PERSONNEL
The Company's success depends, in part, upon a number of key
managerial personnel and employees, including Mark Schaftlein and Payton Story,
the loss of whom could adversely affect the Company. The Company believes that
its future success depends in part on its ability to continue to attract and
retain highly skilled employees. The Company has entered into employment
agreements with Messrs. Schaftlein, Birmingham, and Story.
REGULATORY COMPLIANCE
Members of Congress and government officials have from time to time
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. Because many of the Company's loans are made to borrowers
for the purpose of consolidating consumer debt or financing other consumer
needs, the competitive advantages of tax deductible interest, when compared with
alternative sources of financing, could be eliminated or seriously impaired by
such government action. Accordingly, the reduction or elimination of these tax
benefits could have a material adverse effect on the demand for loans of the
kind offered by the Company.
The Company's domestic business is subject to extensive regulation,
supervision and licensing by federal, state and local governmental authorities
and is subject to various laws and judicial and administrative decisions
imposing requirements and restrictions on part or all of its operations. The
Company is subject to the rules and regulations of, and examinations by HUD and
state regulatory authorities with respect to originating, processing,
underwriting and selling loans. These rules and regulations, among other things,
impose licensing obligations on the Company, establish eligibility criteria for
mortgage loans, prohibit discrimination, provide for inspections and appraisals
of properties, require credit reports on loan applicants, regulate assessment,
collection, foreclosure and claims handling, investment and interest payments on
escrow balances and payment features, mandate certain disclosures and notices to
borrowers
9
and, in some cases, fix maximum interest rates, fees and mortgage loan amounts.
Failure to comply with these requirements can lead to demands for
indemnifications or mortgage loan repurchases, certain rights of rescission for
mortgage loans, class action lawsuits and administrative enforcement actions.
Although the Company believes that it has systems and procedures to
facilitate compliance with these requirements and believes that it is in
compliance in all material respects with applicable local, state and federal
laws, rules and regulations, there can be no assurance that more restrictive
laws, rules and regulations will not be adopted in the future that could make
compliance more difficult or expensive.
INTENSE COMPETITION FACED BY COMPANY
As a marketer of mortgage loans, the Company faces intense
competition, primarily from mortgage banking companies, commercial banks, credit
unions, thrift institutions, and finance companies. Many of these competitors
are substantially larger and have more capital and other resources than the
Company. Competition can take many forms, including convenience in obtaining a
loan, customer service, marketing and distribution channels and interest rates.
Furthermore, the current level of gains realized by the Company and its
competitors on the sale of the type of loans they originate and purchase is
attracting additional competitors into this market with the possible effect of
lowering gains that may be realized on the Company's future loan sales.
Competition may be affected by fluctuations in interest rates and general
economic conditions. During periods of rising rates, competitors which have
"locked in" low borrowing costs may have a competitive advantage. During periods
of declining rates, competitors may solicit the Company's customers to refinance
their loans. During economic slowdowns or recessions, the Company's borrowers
may have new financial difficulties and may be receptive to offers by the
Company's competitors.
The Company depends largely on independent mortgage brokers,
financial institutions and other mortgage bankers for its originations and
purchases of new loans. The Company's competitors also seek to establish
relationships with the Company's independent mortgage brokers, financial
institutions and other mortgage bankers, none of whom is obligated by contract
or otherwise to continue to do business with the Company. In addition, the
Company expects the volume of wholesale loans purchased by the Company to
increase and the relative proportion of wholesale loans to total loans
originated and purchased by the Company to expand. The Company's future results
may become more exposed to fluctuations in the volume and cost of its wholesale
loans resulting from competition from other purchasers of such loans, market
conditions and other factors.
SIGNIFICANT NUMBER OF AUTHORIZED BUT UNISSUED PREFERRED STOCK; POSSIBLE
ANTI-TAKEOVER EFFECT
The Board of Directors has total discretion in the issuance and the
determination of the rights and privileges of any shares of Preferred Stock
which may be issued in the future, which rights and privileges may be
detrimental to the holders of the Common Stock of the Company. The Board of
Directors could issue shares of Preferred Stock with such rights and preferences
that could discourage attempts by others to obtain control of the Company
through merger, tender offer, proxy contest or otherwise by making such attempts
more difficult to achieve or more costly. The Company is authorized to issue 10
million shares of its Preferred Stock, and only 739,897 shares of which are
presently issued and outstanding. Additionally, the Board of Directors has been
authorized to issue up to 50 million shares of Common Stock, of which only
9,523,082 shares are issued and outstanding as of the date of this Prospectus.
See "Description of Capital Stock."
NECESSITY FOR CONTINUING REGISTRATION
The resale of the registered shares hereby, as well as the resale of
the shares issuable upon exercise of the Warrants, Options and Preferred Stock
registered hereby, can be publicly sold only pursuant to an effective
registration statement and a current Prospectus under the Act. There is no
assurance that the Company will be able to keep the registration statement of
which this Prospectus is a part current or pay the legal and related costs of
doing so. In addition, it is a condition to the Company's ability to issue
free-trading shares of Common Stock upon such resale that such securities remain
qualified for resale under the securities laws of the states in which holders of
such securities
10
reside, and there is no assurance that such securities will remain so qualified.
If a holder moves, or subsequent purchaser resides, in a jurisdiction in which
the Company has not registered the transactions set forth in this Prospectus,
the benefits of this Prospectus may not be available. If the Prospectus ceases
to be current with respect to such securities, the Company may be precluded from
issuing free-trading shares of Common Stock upon resale.
THE COMPANY
The Company is a financial services company that, through its
wholly-owned subsidiary Westmark Mortgage, is engaged in the business of
originating, purchasing and selling mortgage loans secured primarily by single
family, multi-family and condominium residences. Investors purchase conforming
loans (generally those borrowers with perfect or good credit) and non-confirming
loans (generally below average and delinquent credit). Westmark Mortgage is
registered and/or licensed to originate, purchase closed loans, underwrite, fund
or sell residential mortgage loans in the states of Arkansas, California,
Florida, Georgia, Illinois, Indiana, Kansas, Michigan, Missouri, Montana,
Tennessee, Utah and Washington. The Company pools and sells loans to third-party
institutional investors. The primary non-conforming investor is Household
Financial Services which provided 65% of the Company's revenues from gain on
sale in 1996.
The Company was incorporated in Colorado during 1986 under the name
Eagle Venture Acquisitions, Inc. From inception until May 1990, the Company was
engaged in business operations unrelated to its current business strategy. In
May 1990, the Company changed its name to Network Real Estate of California,
Inc. and commenced providing a variety of real estate services through its
wholly-owned subsidiary, Network Real Estate, Inc. ("Network Real Estate"),
including real estate brokerage, mortgage banking services and insurance
services. In July 1992, the Company changed its name to Network Financial
Services, Inc. From May 1990 through August 1993, the Company conducted
substantially all of its business operations through its subsidiary, Network
Real Estate.
In August 1993, the Company acquired Westmark Mortgage from Primark
Corporation, an unaffiliated third party ("Primark"). Westmark Mortgage was
engaged in essentially the same business as it is today, except that the Company
serviced certain originated mortgage loans and was heavily concentrated in
conforming "A" paper. In August 1994, Freddie Mac agreed to the sale by the
Company of the mortgage servicing portfolio. In September 1994, the Company sold
its entire mortgage servicing portfolio to Crown Bank.
In 1993, the Company ceased operating Network Capital Group, a
wholly-owned mortgage banking subsidiary, in a transaction that had no
significant impact on the Company's financial condition. In an April 1994
agreement, effective December 31, 1993, the Company sold Network Real Estate to
a former president of the Company.
While the Company is primarily a financial services business
operation, in July 1996, the Company acquired Green World which markets,
nationally and internationally, the Talon Refrigerant Management System
("Talon"), an energy saving add-on to air cooled condensers found in air
conditioners, heat pumps and refrigeration systems. The marketing campaign
consists of establishing dealer networks and warehousing. In addition, testing
is currently underway with several manufacturers for the purpose of having the
Talon included as an OEM in these manufacturers product lines. The business
operations of Green World constitute an insignificant portion of the Company's
business. The Company does not anticipate entering into any further diversified
lines of business. See "- Recent Developments Green World Acquisition."
In June 1994, the Company changed its name to Westmark Group
Holdings, Inc. Currently, the Company conducts its business through two
operating subsidiaries, Westmark Mortgage and Green World, and references to the
Company or Westmark include Westmark Mortgage and Green World, unless otherwise
indicated. The principal executive office of the Company is located at 355 N.E.
Fifth Avenue, Delray Beach, Florida 33483 and its telephone number is (561)
243-8010.
11
RECENT DEVELOPMENTS
GREEN WORLD ACQUISITION
Effective July 21, 1996, the Company and GTB Company entered into an
agreement which was amended August 22,1996 whereby the Company acquired all of
the issued and outstanding capital stock of Green World in consideration for (i)
130,000 shares of Series E Preferred Stock, stated value $10.00 per share, which
Preferred Stock is convertible into 2,888,889 shares of Company Common Stock,
and (ii) payment of royalties of 14% of the gross sales of Green World for a
period of two years from the date of this agreement and payment of royalties of
12% of the gross sales of Green World for a period of three years from the date
of this agreement, which payments are to be made on a quarterly basis. Green
World is in the business of refrigerant management systems for energy savings.
GTB Company had acquired Green World from MIOA, for consideration including (i)
the executed non-interest bearing promissory note in the amount of $380,000, and
(ii) the agreement to a royalty payment of 7% of the gross sales of Green World
until July 1998, and 5% until July 1999. Within one month of acquiring Green
World, GTB Company sold it to the Company for the above-captioned terms and
conditions. The Company acquired Green World pursuant to a prior corporate
strategy to diversify its business operations. Management has determined not to
pursue any further diversification strategies at this time, and intends to focus
its resources on its mortgage operations. As of the date hereof, the board of
directors of the Company has determined to spin-off a minimum of 51% and a
maximum of 100% of the Green World capital stock owned by the Company. As of the
date of this Prospectus, neither the record date or the amount of capital stock
to be spun-off has been determined. The timing in terms of the spin-off will be
disclosed through appropriate SEC filings when determined.
Green World is a nationwide marketer of Talon, an energy-saving
add-on to air-cooled condensers found in air conditioners, heat pumps and
refrigeration systems. Green World has been establishing a dealer network to
market its products. Green World has executed an exclusive contract for the
sales of its Talon with Trane Specialty A/C Products ("Trane"). The contract
calls for Trane to purchase no less than 7,125 units over the next 24 months,
with 2,535 units in the first 12 months and 4,800 the remaining 12 months and is
renewable for an additional 24 months. Additionally, the contract allows the
distributor the exclusive right to market in 16 California counties including
those counties in the San Francisco Bay area. In July 1997, the Company gave
Trane its thirty (30) day notice to terminate the contract.
The Company's decision to acquire Green World was based upon
management's strategy of diversification. In an attempt to diversify the
business in order to off-set the potential cyclical nature of the "A" mortgage
market, the Company embarked on a two-prong diversification strategy. The
Company (i) entered into the Green World acquisition with the purpose of
developing a revenue stream from a less cyclical business and (ii) determined to
aggressively process loan applications in the "B/C" mortgage market. In 1995,
the Company determined that the "B/C" mortgage market was not as particularly
interest-rate sensitive as the "A" mortgage market and after results of
operations were analyzed in the 1996 fiscal year, management determined that the
"B/C" mortgage market resulted in a better yields for the Company than mortgages
originated in the "A" mortgage market. During 1996, the Company met with
numerous financing sources in order to obtain funds to be better able to take
advantage of participating in the "B/C" mortgage market as well as to develop
the Green World business opportunity. In connection with pursuing such
financing, potential investor response led management to conclude that the
Company was better able to take advantage of a "B/C" mortgage market than the
Green World opportunity, management elected in 1997 to spin-off the Green World
business and to concentrate on originating, purchasing and selling "B/C"
mortgage loans.
In connection with the acquisition of Green World by GTB Company from
MIOA and the subsequent acquisition of Green World by the Company from GTB
Company, the sole shareholder of GTB Company was Charles Chillingworth, who for
a brief period prior to the Green World transaction was corporate counsel for
the Company and MIOA. In the Green World transaction, Mr. Chillingworth solely
represented the interest of GTB Company in its dealing with both MIOA and the
Company. Mr. Birmingham was an officer and director of the Company at the time
of the Green World acquisition and currently serves in those positions with the
Company. During the Green World acquisition by MIOA, Mr. Birmingham was an
officer and director of MIOA, and upon the sale of Green World to
12
GTB Company, Mr. Birmingham was only a director of MIOA. In August 1996, Mr.
Birmingham resigned as a director of MIOA. Mr. Morrell was an officer and
director of MIOA at the time of the acquisition and prior to the acquisition was
an officer and director of the Company.
WESTMARK-MEDICAL INDUSTRIES AGREEMENT
The Company and MIOA entered into an agreement dated January 23, 1997
("Westmark-Medical Industries Agreement") which was amended March 31, 1997, and
June 26, 1997. MIOA presently owns 1,667,284 shares of Company Common Stock, and
200,000 shares of the Company's Series C Preferred Stock ($3.50 stated value). A
contractual right provided to MIOA upon issuance of a portion of its shares of
Common Stock afforded MIOA the right to maintain a 49% ownership interest in the
Company. At June 26, 1997, the Company owed MIOA $1,953,000, less interest in
the sum of $47,000 which represents interest forgiveness for the second quarter.
MIOA agreed to the termination of the 49% anti-dilution protection. Payment of
the indebtedness shall be made upon the following terms. The Company executed a
three year promissory note in the sum of $1,953,000, bearing interest at 10% per
annum, with monthly payments in the amount of $25,000 which commenced June 30,
1997. In the event the Company receives additional capitalization of a minimum
amount of $300,000 and a maximum amount of $1.5 million, MIOA shall be entitled
to receive the first $300,000. In the event the additional capitalization
exceeds $1.5 million, MIOA will be entitled to receive the first $500,000 of
additional capitalization in excess of $1.5 million. In the event additional
capitalization exceeds $3 million, MIOA shall be entitled to receive 50% of the
excess until the above captioned indebtedness is paid in full.
In addition, MIOA shall be entitled to 15% of the net cash of the
Company in excess of operating expenses and settlement payments on a
consolidated basis during the calendar year 1997, and 20% of said net cash flow
in the calendar year 1998. In the event the Company should sell or spin-off
either of its subsidiaries, MIOA shall be entitled 50% of the cash proceeds
received by the Company resulting from the sale or spin-off up to the maximum of
their indebtedness. Pursuant to a separate agreement, MIOA is also entitled to
demand registration rights for its shares of Common Stock.
HOLLENBECK CONVERSION
In March 1996, Mr. Hollenbeck agreed with the Company to provide for
the redemption of his 290,000 shares of Common Stock based on the then market
price in exchange for, among other consideration, a two-year consulting
agreement providing for the payment of $75,000 in the first year and $90,000 in
the second year, $400,000 cash, and the issuance of 100,000 shares of Series A
Preferred Stock in April 1996. The Company also agreed to obtain written consent
from Mr. Hollenbeck prior to the issuance of any convertible preferred stock or
other debt or equity security convertible into Common Stock, and to pay certain
of Mr. Hollenbeck's legal fees. In December 1996, Mr. Hollenbeck relinquished
his right to force the Company to redeem the Series A Preferred Stock. In
addition, Mr. Hollenbeck agreed to convert 35,500 shares of the Series A
Preferred Stock contingent upon the Company receiving minimum additional
capitalization of $3,000,000 and the payment to Mr. Hollenbeck of $64,000 in
attorneys' fees and costs. The Company is currently in default in the payment of
legal fees to Mr. Hollenbeck and payment of interest on the shares of Series A
Preferred Stock (which in the aggregate is approximately $100,000) and in
obtaining the necessary consent to issue debt or equity securities convertible
into Common Stock subsequent to March 1996.
USE OF PROCEEDS
Assuming exercise of all the Warrants, the Company will receive aggregate
proceeds of approximately $1,812,965, prior to deducting estimated offering
expenses of approximately $200,000. The Company will use these proceeds for
working capital and general corporate purposes and will have broad discretion in
the application of such proceeds. As there are no commitments from the holders
of the Warrants to exercise such securities, there can be no assurance that the
Warrants will be exercised. The Company will receive no proceeds from the resale
of shares by the Selling Stockholders upon conversion of the Preferred Stock or
upon conversion of the Convertible Debt. See "Plan of Distribution and Selling
Stockholders."
13
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is listed on the Nasdaq SmallCap Market
under the symbol "WGHI." The following table sets forth the high and low last
sales prices of the Common Stock for the periods indicated:
PRICE RANGE
----------------
FISCAL YEAR HIGH LOW
------ -------
1995
First Quarter .................... $11.40 $ 3.60
Second Quarter ................... 8.40 3.60
Third Quarter .................... 8.50 5.40
Fourth Quarter ................... 6.50 1.62
1996
First Quarter .................... $ 3.23 $ 2.13
Second Quarter ................... 1.75 .81
Third Quarter .................... 1.44 .53
Fourth Quarter ................... 1.37 .47
1997
First Quarter .................... 1.34 .62
Second Quarter ................... 1.00 .53
On July 30, 1997, the last sales price for the Common Stock was $.59,
and the Company believes there were approximately 759 beneficial owners of its
Common Stock.
The Company has not paid, and the Company does not currently intend
to pay, cash dividends on its Common Stock. The current policy of the Company's
Board of Directors is to retain earnings, if any, to provide funds for operation
and expansion of the Company's business. Such policy will be reviewed by the
Board of Directors of the Company from time to time in light of, among other
things, the Company's earnings and financial position.
14
CAPITALIZATION
The following table sets forth the capitalization of the Company at
June 30, 1997 and on a pro-forma basis to reflect the Westmark-Medical
Industries Agreement This table should be read in conjunction with the Company's
financial statements and notes thereto that are included elsewhere in this
Prospectus.
JUNE 30, 1997
-------------
ACTUAL
Liabilities
Current Liabilities ............................... $ 5,544,413
Long-Term Debt, Less
Current Portions ................................ --
Stockholders' equity:
Preferred stock (1) (2) (3) ....................... 2,459,755
Common stock (4) ....................................... 9,523,082
Additional Paid-In Capital and
Other Equity ...................................... 27,733,111
Accumulated deficit ................................. (26,997,731)
Total stockholders' equity ............................. 1,612,723
Total capitalization ................................... $ 8,912,914
============
- -----------------------
(1) At June 30, 1997 consists of (i) 118,750 shares of Series A Preferred Stock,
(ii) 123,125 shares of Series B Preferred Stock, (iii) 200,000 shares of
Series C Preferred Stock, (iv) 6,722 shares of Series D Preferred Stock, (v)
130,000 shares Series E Preferred Stock and (vi) 80,000 shares of Series F
Preferred Stock.
(2) Subsequent to June 30, 1997, 18,750 shares of Preferred Stock converted
to150,000 shares of Common Stock.
(3) Series G Preferred Stock. See description of Capital Stock - Preferred
Stock.
(4) Does not include (i) 1,608,188 shares issuable upon exercise of the
Warrants, (ii) 355,917 issuable upon the exercise of currently exercisable
options, and (iii) 6,241,904 shares issuable upon conversion of outstanding
shares of Preferred Stock. See "Description of Capital Stock Warrants," and
" - Preferred Stock."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and accompanying Notes to the
Consolidated Financial Statements.
GENERAL
The Company is primarily a mortgage banking company engaged in the
business of originating, purchasing and selling sub-prime "B/C" mortgage loans
secured primarily by one-to-four family residences. The Company primarily
generates income from (i) gains recognized from premiums on loans sold through
whole loan sales to institutional purchasers, (ii) investment income earned on
loans held for sale, and (iii) origination fees and related revenue received as
part of loan closings. Gain on sale of loans, which represents the sales price
in excess of loan acquisition and related costs from whole loan sales,
constituted 65% and 50% of total revenues in 1996 and 1995, respectively.
Investment income earned on loans held for sale constituted 20% and 30% of total
revenues in 1996 and 1995, respectively. Loan origination fees and related
revenue represented 12% and 18% of total revenues in 1996 and 1995,
respectively.
The Company currently has purchase agreements with Household Financial
Services, The Money Store, Greentree Mortgage, Southern Pacific and various
non-conforming mortgage conduits whereby the Company originates and sells loans
to them. The Company sells virtually all of the loans it originates. These
agreements are for specific terms or are open ended, and require the loans to
satisfy the underwriting criteria described therein. During 1996 and
15
1995, the Company sold loans totaling $89.5 million and $158 million,
respectively. The Company does not service any of the loans it originates and
sells all loans primarily in whole loan sales. The gain on sale of loans was
$1,881,068 and $1,544,556 in 1996 and 1995, respectively.
Loans held for sale were comprised of 78% "A" (conforming) loans and
22% "B/C" (non-conforming) loans at December 31, 1995 and 10% "A" loans and 90%
"B/C" loans at December 31, 1996. When the Company commits to fund loans, the
parties agree upon an interest rate. Until the Company obtains a commitment to
sell the loan to an investor, the Company is subject to interest-rate
fluctuations. Interest rate commitments are not typically made to B/C borrowers
until the loan funds. In order to mitigate interest-rate fluctuations, the
Company's strategy in committing to make "B/C" loans has been to negotiate a 30
day forward commitment containing minimum pricing by credit class of loans by
investor.
Investment income earned on loans held for sale is derived primarily
from interest payments on loans in inventory. Certain fixed rate "B/C" loans
generally carry a note rate in excess of the cost to borrow. This results in a
positive revenue differential between cost to borrow (at the time the loan
funds) and the loan sale. Management's strategy is to sell those loans in whole
loan sales and in bulk sales as quickly as practicable in order to optimize cash
flow from the sale of the loans. In addition, the Company realizes revenue from
loan origination fees and certain loan discount fees.
The Company was advised by its independent auditors that there were
material weaknesses in its system of accounting controls, and has implemented a
corrective action plan. For a complete description of the plan, see "Financial
Statements."
SIGNIFICANT ACCOUNTING POLICIES
Mortgage loans are originated to be sold to investors and are reported
at the lower of cost or market. Loans covered by commitments are valued as
specified in the commitment. Loans not covered by commitments are valued at
market, as determined by reference to the Company's normal market outlets. Loan
origination fees and certain direct costs are deferred and reflected in
operations when the underlying loan is sold. Investment income on loans held for
sale is recognized as earned. Sales and expenses of Green World are recognized
as incurred.
INVESTMENT IN REAL ESTATE AND PREFERRED STOCK
In July 1995, the Company settled certain pending litigation arising
out of a claim by Dolan Development Partners, Ltd. and related parties ("Dolan")
that the Company defaulted on certain promissory notes. The settlement reduced
the amount of principal and interest payable by the Company to Dolan pursuant to
two promissory notes from $1.5 million to approximately $1 million. The Company
owned a 50% interest in the property securing the payment of the notes and
Dolan, the payee, owns the remaining 50% undivided interest in the property. The
Company's interest in this real estate at December 31, 1995 was valued at
$2,115,000. The balance on the note payable to Dolan, secured by such property,
was $1 million as of December 31, 1995. This note bears interest at the rate of
9.75% per annum and matures, with principal payable in one lump sum, on June 1,
1998. The modifications of the amount owed to Dolan resulted in a pre-tax gain
of extinguishment of debt of $450,000 in 1995.
On July 10,1996, the Company sold all of its capital stock of Network
Capital Group, Inc. to PBF Land Company ("PBF"), an affiliate of GTB Company, in
exchange for various parcels of real property in Florida with a market value
appraised at $1,298,000 (Parcel A). In addition, PBF placed an attorney's
opinion letter of title for Quit Claim Deeds for additional parcels (Parcel B)
valued at up to $5 million into escrow. In exchange for the additional property,
the Company placed preferred stock with a stated value of $5 million into
escrow. The preferred stock may be convertible into Common Stock beginning April
1, 1997. The minimum conversion price is $1 and no more than a cumulative total
of $200,000 worth of preferred stock may be converted per quarter. For any
additional shares to be issued, certain sales by PBF must be completed. Further
due diligence regarding appraisal, title and legal issues are necessary in order
for the Company to exercise the option to acquire the additional parcels.
16
The subject property consists of various strips of 25-30 foot and 50
foot (perimeter) platted road rights of way, located in Palm Beach County.
Parcel 1 contains 165,00 square feet ($2.25/sq.ft.), Parcel 2 contains 51,300
square feet ($3.50/sq.ft.) and Parcel 3 contains 1,150,150 square feet
($.60/sq.ft.), combined, these rights of way total 1,366,450 square feet for a
total value of $1.3 million. The Company valued for accounting purposes, the
strips at a cost of $1.0 million. The Company has received an attorney's opinion
letter of title.
Whitehall Financial Services, Inc. claimed a third party beneficial
interest in and to the PBF agreement. PBF agreed to return 88,963 shares of
Company Common Stock to the Company which was issued to Whitehall in full and
final settlement of all claims.
The Company received an unsolicited offer to buy the capital stock of
Network Capital Group which owned developed and undeveloped land in California,
in exchange for undeveloped property located within a 30-mile radius of the
Company's headquarters. Management determined that it lacked the technical and
financial resources to monitor the property as well as the complicated and
ever-changing land use and regulatory laws affecting the California real estate
and believed that it was more prudent to own and operate real estate within a
30-mile radius of its corporate headquarters. Moreover, the property in
California was subject to a foreclosure action. Management weighed the tax
factors with the proximity of the Florida real estate, causing management to
effect the trade in Network Capital Group with the underdeveloped property
previously owned by PBF.
RECENT FINANCING
In July 1997, the Company entered into a financing agreement with MCA
Financial Corp. ("MCA") whereby MCA agreed to pay the Company $500,000 in
exchange for the issuance to MCA of 100,000 shares of series G convertible
redeemable preferred stock ("Series G Convertible Preferred Stock") having a
stated value of $5 per share and more particularly described in "Description of
Capital Stock-Preferred Stock" and the delivery of certain loan packages to MCA.
Payment of the $500,000 shall be made in installments through January 30, 1998
and are conditioned upon the loan packages eligible to be purchased having
certain aggregate principle balances. The Company's obligation to deliver loans
to MCA terminates immediately upon the effective date of the Company's
redemption of the Series G Preferred Stock.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30,
1996
On a consolidated basis, total revenues increased to $3,087,459 in the
six months ended June 30,1997 from $1,330,772 in the six months ended June 30,
1996, an increase of 132%. The increase is a result of substantial growth in
loan volume and loan sales as well as the addition of sales from a subsidiary.
The net profit margins on loan sales have increased to an average of 4.19% from
an average of 1.04% for the respective periods an increase of 303%. This
increase is due to the completion of the shift from originating conforming "A"
loans to the more profitable non-conforming B/C mortgages. Interest income rose
even with the reduction of holding periods prior to sale because of the
increased rates charged on non-conforming loans.
Expenses for the six months ended June 30, 1997 increased to
$3,460,379 from $2,364,470 for the six months ended June 30, 1996, a 46%
increase. The primary reasons for the increases were the expenses incurred for
startup in a subsidiary and the costs of professional services as well as costs
associated with securing financing and the resulting need for increased public
relations expenses. Loan origination costs decreased 678% to $73,549 for the six
months ended June 30, 1997 from $572,747 in the six months ended June 30, 1996.
General and administrative expenses increased 167% to $1,933,846 for the six
months ended June 30, 1997 from $722,085 for the six months ended June 30, 1996.
Marketing and advertising expense decreased 129% to $13,959 for the six months
ended June 30, 1997 from $32,053 for the six months ended June 30, 1996.
17
A net loss resulted for the six months ended June 30, 1997 of
$233,944 or $0.04 per share as compared to a net loss of $963,698 or $.33 per
share for the six months ended June 30, 1996. This decreased loss is due
primarily to an increase in net revenues for Westmark Mortgage Corporation. The
profit/loss breakdown is as follows: Westmark Mortgage Corporation $.16, Green
World $(.05) WGHI $(.15).
During the period ended June 30, 1997, the Company continued to focus
its business to funding non-conforming, B/C paper with approximately 94% of all
closed loan volume being B/C loan fundings. Total B/C loan fundings increased
from $14.4 million in the six months ended June 30, 1996 to $49.4 million for
the six months ended June 30, 1997, an increase of 191%.
The Company expanded its B/C lending program through bulk sales
during the last year and saw record revenue generated in the first six months of
1997 from this expansion. B/C loans are for borrowers with credit histories that
fall below the guidelines set forth by Fannie Mae and Freddie Mac. The Company
is focusing its marketing efforts in the B/C loan market due to the perceived
enhanced returns. The increase in the B/C loans has come primarily from an
increased market share in Florida and California. Management intends to continue
its marketing strategy in additional states where licensing and/or sales
activities began or expanded this period. Further expansion is expected in the
Northwestern and Midwestern sections of the country in the third and fourth
quarters of 1997.
The Company continues to sell loan origination's on a
"servicing-released" basis to investors in the normal course of business. The
Company's bulk sales program for B/C paper in which loans are pooled and sold in
packages ranging from $500,000 to $4,000,000 remains an integral key to future
growth. During the first quarter, bulk sales deliveries were completed
successfully with institutional investors, such as Household Financial Services,
Inc., The Money Store, MorCap, Inc., Greentree Mortgage and Aames Capital
Corporation. The Company anticipates further growth of interested institutional
buyers and is negotiating for participation into loan securitization pools to
further enhance revenue. The expansion of the warehouse line of credit is
integral for participation in the securitization pools.
FISCAL 1996 COMPARED TO FISCAL 1995
Total revenues decreased 6% to $2,933,173 in 1996 from $3,106,900 in
1995. This was primarily due to a shift in focus to originating non-conforming
mortgages and the disposal of previously unsold loans whose gain on sales were
minimal. In particular, $15,000,000 of 1995 ending inventory was sold for a net
gain of 60 basis points. This inventory comprised 20% of total sales in 1996.
Gain on sale of loans, all of which was derived from premiums on whole
loan sales, increased 20% to $1,881,068 in 1996 from $1,544,556 in 1995. This
increase was due as a result of management's decision to originate and sell
"B/C" loans along with increased premiums on "A" whole loan sales. Management
intends to continue to originate and sell "B/C" loans as part of its overall
strategy. The volume of "B/C" loans sold during 1996 was approximately $41
million compared to $25 million in 1995. Generally, the "A" loans provide less
income to the Company than "B/C" loans. Due to the Company's strategy of selling
loans prior to the first payment, management believes that there is no greater
substantive risk in original "B/C" loans than "A" loans.
Loan origination fees decreased 35% to $355,255 in 1996 from $544,386
in 1995. This decrease is primarily due to originating fewer government-backed
loans, resulting in less loan origination fees. Traditionally, conforming "A"
and non-conforming "B/C" loans, at the wholesale level, do not contain loan
origination fees. Management has adjusted the loan origination pricing structure
to provide for an increase in per loan origination fees on non-conforming "B/C"
product. Initially, this change could reduce the cash requirements at the time
of loan funding, thereby possibly reducing gain on sale of these loans; however,
management's goal is to increase the volume of loans, creating larger pools of
loans to sell to investors, which should allow the Company to maintain its
current premium rate on ultimate gain on sale of loans.
18
Investment income, comprised primarily of interest earned on loans
held for sale, decreased 38% to $584,399 in 1996 from $938,657 in 1995. This
decrease is due primarily to a more rapid sale of loans in 1996 as compared with
1995.
Total expenses decreased 34% to $6,971,539 in 1996 from $10,594,920 in
1995. This decrease is primarily due to (i) a decrease in general and
administrative expenses and (ii) non-recurring expenses incurred in 1995
financial transactions.
Direct loan fee expenses increased 104% to $432,425 in 1996 from
$212,309 in 1995, due primarily to the fact that the Company incurred
substantial loan fees on its warehouse facilities during the entire twelve
months of 1996 compared to two months in 1995. In April 1997, the Company
obtained a warehouse line of credit with The Money Store, which does not charge
loan transaction fees.
Interest expense decreased 4% to $1,172,852 in 1996 from $1,223,875 in
1995, due primarily to the increased volume of whole loan sales and the
borrowing cost associated with the Company's Warehouse Facility.
General and administrative expense decreased 42% to $3,930,199 from
$6,775,395 in 1995, due primarily to a cost containment measure in personnel,
overhead and marketing expenses. In March 1996, the Company consolidated its
operations to Delray Beach, Florida. In connection with this consolidation, the
Company sublet excess rental space in Costa Mesa, California and in Hawaii and
negotiated the termination of its San Jose, California lease. The closing of the
Hawaii office in March 1996 resulted in a savings of approximately $3,400 per
month, the sublease of office space in Costa Mesa in March 1996 resulted in a
savings of approximately $8,500 per month, the termination of the San Jose
office in October 1996 resulted in savings of approximately $3,500 per month,
and where appropriate accruals were established on the income statement.
In July 1995, the Company entered into a letter of intent to acquire
certain assets of Greentree. The aggregate purchase price was $1,575,000 payable
in installments with the remaining unpaid purchase price payable from the
proceeds of the Company's proposed offering of convertible debentures. The
Company paid $100,000 cash and issued 16,667 shares of its Common Stock valued
at $125,000 in anticipation of the acquisition. In November 1995, the Company
abandoned the proposed convertible debenture offering and terminated the
Greentree acquisition. The Company's $225,000 investment in Greentree was
charged to expense in 1995. The acquisition agreement provided for Greentree to
retain all sums previously paid and required the Company to register the resale
of the 16,667 shares of Company Common Stock. The Company failed to register the
resale of such shares, providing Greentree with the option of retaining such
shares or demanding an additional $125,000 payment. The parties agreed to settle
the $125,000 obligation for $35,000, payable through the issuance of shares
which, when sold by Greentree, will net $35,000, and a three-year warrant to
purchase 150,000 shares of Company Common Stock at $2.62 a share.
Depreciation and amortization expenses decreased to $185,277 in 1996
from $194,543 in 1995, primarily due to the age of the equipment and the
disposal of certain California based assets and was adversely affected by the
Green World amortization.
Net loss decreased to $3,800,995 in 1996 from $7,038,060 in 1995,
resulting in a net loss per share of $1.04 in 1996 compared with $6.50 in 1995.
GREEN WORLD RESULTS OF OPERATIONS
Green World is a development-stage company which began marketing the
Talon Refrigerant Management System in February 1996. The results of operations
discussed hereafter are for the period after acquisition by Westmark Group
Holdings, Inc. from July 18, 1996 through September 30, 1996 per audit. Revenue
for the periods was $29,221 while cost of goods sold was $10,311. The expenses
of the operation consisted of general and administrative of $85,496, selling
expenses of $24,651 and research and development costs of $21,919. There is no
comparative data for prior years available.
19
LIQUIDITY AND CAPITAL RESOURCES
The Company uses its cash flow from whole loan sales, loan origination
fees, net interest income and borrowings under its Warehouse Facility to meet
its working capital needs. The Company's cash requirements include the funding
of loan originations, purchases, payment of interest expenses, operating
expenses, taxes and capital expenditures, along with settlement agreements
negotiated during 1996 and 1997.
On December 31, 1996 and June 30, 1997, the Company had a working
capital deficit of $5,079,003 and $1,776,153, respectively, and total
stockholders equity of $200,527 and $1,612,723, respectively. Net cash provided
by operating activities was $11,893,769 in 1996 compared with net cash used by
operating activities of $16,665,858 for 1995. The reason for the significant
change is that the Company decreased the amount of mortgage loans held for sale
by approximately $14 million at the 1996 year end, as compared to the 1995 year
end. The use of operating cash is offset by funds provided by the Princap
Warehouse Facility. Net cash used by financing activities was $12,173,400
compared with net cash provided from financing activities of $16,971,281 in
1995, which relates approximately to the amount outstanding pursuant to the
Princap Warehouse Facility at the respective year ends. Net cash used in
investing activities was ($13,752) in 1996 compared with ($101,080) in 1995.
Adequate credit facilities and other sources of funding, including the
ability of the Company to sell loans, are essential to the continuation of the
Company's ability to originate and purchase loans. The Company borrows funds on
a short term basis to support the accumulation of loans prior to sale. These
short-term borrowings are made under the Warehouse Facilities with Princap
Mortgage, Inc., The Money Store and Household Financial Services, Inc. Pursuant
to the Princap Warehouse Facility, the Company has available a secured revolving
credit line of $10 million to finance the Company's origination or purchase of
loans, pending sale to investors. The line of credit, pursuant to the Princap
Warehouse Facility, has collateral of the assignment and pledge of eligible
mortgage loans, and bears interest at an annual rate of 2% above prime, payable
at the time of purchase by the permanent investor. This arrangement allows the
Company to utilize interest received from the borrower during the period prior
to the sale of the loan. The Princap Warehouse Facility provides for a
transaction charge of $140 per loan and requires the Company to possess a
minimum net worth of $250,000 and a compensating cash balance on deposit in the
amount of $5,000. At December 31, 1996, the balance outstanding, pursuant to
this Princap Warehouse Facility, totaled $4,748,021. In 1997, the Company
entered into warehouse lines of credit with The Money Store and Household
Financial Services, Inc. Pursuant to the Money Store Warehouse Facility, the
Company has available a $5 million line of credit with an interest rate of 1.5 %
above prime and no transaction fee. Pursuant to the Household Financial Services
Warehouse Facility, the Company has available a $5 million line of credit with
an interest rate of 2% above prime and a $100 loan transaction fee. At June 30,
1997, the balance outstanding, pursuant to these facilities and lines of credit,
totaled $3,167,355. The Company does not have any other external lines of credit
for financing.
From December 31, 1994 through November 22, 1995, the Company had a
warehouse agreement with Lomas Mortgage USA, Inc. ("Lomas") in the amount of $15
million. In August 1995, Lomas gave notice of the termination of its commitment
with the Company and subsequently declared bankruptcy under Chapter 11 of the
United States Bankruptcy Code. Prior to filing for protection, Lomas notified
the Company of its assignment of its repurchase agreement with the Company to
PSB. Shortly thereafter, the Company obtained its current Warehouse Facility. At
December 31, 1995, the outstanding balance on the line of credit with PSB was
$3,333,763, which line was closed in the first quarter of 1996 when all
remaining loans, that collateralized this line of credit, were sold.
Historically, the Company has obtained financing through the issuance
of its Common Stock and borrowings on a negotiated basis. During the first two
quarters of 1997, the Company issued a total of 860,680 shares for services
rendered. During 1996, the Company issued a total of 2,815,046 shares for
services rendered and converted $700,000 of indebtedness owed to MIOA into
200,000 shares of Series C Preferred Stock with a stated value of $3.50 per
share. See "The Company - Recent Developments" and "Management - Certain
Transactions." During 1995, the Company issued 1,958,167 shares of Common Stock
for cash and for other consideration as follows: (i) 1,298,388 of Company Common
Stock was issued for $1,210,000 of cash and MIOA preferred stock; (ii) an
aggregate of 338,000 shares of Common Stock were issued in private placements
grossing approximately $875,000; and (iii) 322,167 shares of
20
Common Stock were issued for general corporate purposes and for services
rendered. In May and June 1995, the Company raised $600,000 cash through the
issuance of convertible promissory notes in the principal amount of $600,000 and
warrants entitling holders to purchase the securities contemplated to have been
issued in the failed 1995 convertible debenture offering. In April 1996, the
Company and all these investors agreed to restructure the investment and the
Company paid such investors an aggregate amount of $600,000 and issued such
investors 300,000 shares of Series B Preferred Stock with a stated value of
$600,000. See "Description of Capital Stock - Preferred Stock" for a description
of the Series B Preferred Stock.
In addition, MIOA advanced the Company an aggregate amount of $790,000
during the 1996 first quarter (of which $700,000 was converted into 200,000
shares of Series C Preferred Stock with a stated value of $3.50 per share) and
$1,503,000 in the second quarter of 1996, primarily to fund outstanding
obligations and working capital needs. During 1996, the Company reached
agreements to settle approximately $848,714 of outstanding indebtedness through
the sale of Common Stock issued to the creditors. In connection therewith, the
Company issued these creditors 1,254,002 shares as a settlement. In the event
that the sale of shares is insufficient to reach $848,714, the Company is
obligated to issue additional shares in order to net the required cash payments
or pay the balance in cash. The creditors are obligated to return any excess
shares which are not required to be sold once they have received their full
payment. The Company has received additional debt capital from external sources
in 1996, as it has not relied on any additional capital from MIOA since June
1996. During the second, third and fourth quarters of fiscal 1996, the Company
borrowed an aggregate of $379,000 from various individuals for working capital
purposes. During the first and second quarter of 1997, the Company borrowed
$192,000 from various individuals for working capital purposes. See "Description
of Capital Stock-Convertible Debt". The Company's internally generated cash
flows from operations has historically been insufficient for its cash needs.
Until such time as the Company achieves positive cash flow before working
capital changes, the Company will continue to rely on external sources for
liquidity. MIOA presently owns 1,667,284 shares of Company Common Stock, and
200,000 shares of the Company's Series C Preferred Stock ($3.50 stated value). A
contractual right provided to MIOA upon issuance of a portion of its shares of
Common Stock afforded MIOA the right to maintain a 49% ownership interest in the
Company. At June 30, 1997, the Company owed MIOA $1,953,000, less interest in
the sum of $47,000 which represents interest forgiveness for the second quarter.
MIOA agreed to the termination of the 49% anti-dilution protection. Payment of
the indebtedness shall be made upon the following terms. The Company executed a
three year promissory note in the sum of $1,953,000, bearing interest at 10% per
annum, with monthly payments in the amount of $25,000 which commenced June 30,
1997. The Company intends to fund the debt servicing through cash flow, however
there can be no assurance that it will be able to meet the required monthly
payments. In the event the Company receives additional capitalization of a
minimum amount of $300,000 and a maximum amount of $1.5 million, MIOA shall be
entitled to receive the first $300,000. In the event the additional
capitalization exceeds $1.5 million, MIOA will be entitled to receive the first
$500,000 of additional capitalization in excess of $1.5 million. In the event
additional capitalization exceeds $3 million, MIOA shall be entitled to receive
50% of the excess until the above captioned indebtedness is paid in full. In
addition, MIOA shall be entitled to 15% of the net cash of the Company in excess
of operating expenses and settlement payments on a consolidated basis during the
calendar year 1997, and 20% of said net cash flow in the calendar year 1998
until the above captioned indebtedness is paid in full. In the event the Company
should sell or spin-off either of its subsidiaries, MIOA shall be entitled 50%
of the cash proceeds received by the Company resulting from the sale or spin-off
up to the maximum of their indebtedness. If it appears at any time in the future
that the Company is again approaching a condition of cash deficiency, the
Company will be required to seek additional debt or equity financing, sell
assets, or otherwise bring cash flow in balance. The board of directors of the
Company has determined to spin-off a minimum of 51% and a maximum of 100% of the
Green World capital stock it owns as a dividend to its shareholders. By
spinning-off all or a substantial interest in Green World, Green World will
operate as a separate entity, will seek its own public or private financing
(debt or equity) in order to support its operations, and will partially or
wholly cease to be an asset of the Company. There can be no assurance that the
Company will be able to obtain external sources for liquidity.
21
INFLATION
Although the Company believes that inflation has not had any material
effect on operating results, it cannot be assured that its business will not be
affected by inflation in the future.
BUSINESS
The Company is a diversified financial holdings company that, through
its wholly-owned subsidiary Westmark Mortgage, is engaged in the business of
originating, purchasing and selling mortgage loans secured primarily by single
family, multi-family and condominium residences. Westmark Mortgage is registered
and/or licensed to originate, purchase closed loans, underwrite, fund or sell
residential mortgage loans in the states of Arkansas, California, Florida,
Georgia, Illinois, Indiana, Kansas, Michigan, Missouri, Montana, Tennessee, Utah
and Washington. The Company pools and sells loans to third-party investors. The
primary non-conforming investor is Household Financial Services which provided
65% of the Company's revenues from gain on sale in 1996.
BUSINESS STRATEGY-MORTGAGE OPERATION
The Company has historically been a wholesale mortgage lender
providing a full range of mortgage lending services which include conventional,
governmental, jumbo (large loan amounts) and non-conforming ("B/C") home
mortgage loans. The majority of the Company's loans are made to owners of single
family, multi-family and condominium residences who use the loan proceeds for
purchasing new homes or refinancing existing home mortgages. Westmark provides
funds to approved mortgage brokers and correspondent lenders who originate the
mortgage for the consumer. Westmark closes and funds the loan through approved
correspondent mortgage brokers and lenders. Westmark solicits these brokers for
business, competing with other wholesale lenders.
Westmark provides products to its approved mortgage broker customers
related to home loans. In general, Westmark offers brokers products for their
clients who have credit from "A" (perfect and good credit) to "D" (below average
and delinquent) and who desire conventional loans, government loans, conforming
loans, and non-conforming loans. All mortgage products are secured by the
property the borrower used as collateral for the mortgage.
Mortgage brokers submit loan packages to a Westmark representative for
review and approval. After the mortgage loan is closed, Westmark packages the
loans into groups and sells the loans to mortgage lending conduits. Westmark
determines to whom it will sell the loans based on the conduits price and
service at the time the specific loans are sold. Westmark does not retain the
rights to service the mortgage loans it closes or loans purchased from approved
correspondent lenders.
BUSINESS STRATEGY-GREEN WORLD OPERATION
Green World Technologies, Inc. will continue to market the Talon
Refrigerant Management Systems through a network of dealers and expand marketing
in a direct to retail approach. The Company may divest itself of all or a
portion of Green World as conditions warrant. Green World constitutes an
insignificant portion of the Company's business.
PRODUCTION
Westmark's 1996 closed loan production was $76 million. Of this,
approximately $35 million was conforming conventional mortgage home loans
(otherwise referred to as "A" product) and approximately $41 million in
non-conforming mortgage home loans (otherwise referred to as "B/C" product).
Total loan dollar amount originated in 1996 reflected a 52% decrease over 1995.
The total number of loans originated decreased 40% to 855 from 1,432 loans. The
decrease resulted primarily from a shift to B/C production. Of the total
production, approximately 90% was originated from Florida and California. The
1996 average loan amount for conforming "A" production was $95,000 compared
22
to $86,000 for 1995. The 1996 average loan amount for conforming "A" production
was $110,000 and the average loan amount for non-conforming "B/C" production was
$88,000.
Westmark's 1995 closed loan production was $158 million. Of this,
approximately $133 million was conforming conventional mortgage home loans
(otherwise referred to as "A" product) and approximately $25 million in
non-conforming mortgage home loans (otherwise referred to as "B/C" product).
Westmark's 1994 production was $155 million all in conforming conventional
mortgage home loans. Total loan dollar amount originated in 1995 reflected a 2%
increase over 1994. However, the total number of loans originated increased 30%
from 1,095 to 1,432 loans. The increase resulted primarily from B/C production.
Of the total production, approximately 91% was originated from Florida and
California. The 1995 average loan amount for conforming "A" production was
$114,272 compared to $141,701 for 1994. The 1995 average loan amount for
non-conforming "B/C" production was $92,551. In 1996, B/C Production totaled
approximately $41 million and total production was $76 million.
Management's strategy is to expand its geographical production to
additional states, while intensifying sales efforts in its home state of
Florida. Management's strategy is to expand both the "A" and "B/C" business in
Arkansas, California, Florida, Georgia, Missouri and Washington, and developing
new markets by utilizing Westmark's inside sales representatives. Westmark has
hired six (6) account executives in Florida and two (2) account executives in
Georgia focusing on the "B/C" business. In addition, Westmark has hired a
national sales manager. Westmark's goal is to build upon its existing sales
force every sixty to ninety days with growth into the states where it is
currently licensed or approved to conduct business.
"B/C" MORTGAGES
In January 1995, the Company began marketing its non-conforming
("B/C") mortgage loan products. These mortgages are available for borrowers with
credit histories that fall below the guidelines of conforming "A" mortgage
loans. The Company believes that the "B/C" mortgage market is a growing segment
of the mortgage industry for two reasons: (i) because of the weaker credit
ratings, banks and savings and loans typically have not entered this arena; and
(ii) the secondary market for securities and selling "B/C" mortgages has become
more prevalent. As demand increases, Westmark believes it can take advantage of
this opportunity. Typically, these loans generate a greater gain on sale
compared to their conforming "A" loan counterparts. In 1996, "B/C" loans
accounted for approximately 54% of the Company's production as compared to
approximately 15% of the Company's production in 1995. Management expects the
"B/C" loans to account for over 90% of the Company's 1997 production and
revenue.
PIPELINE
The loan pipeline ("Pipeline") is the volume of loans ("A" and "B/C")
in the Company's system that have met all of the Company's preliminary
qualification criteria and are consequently eligible for funding. These loans
have been preapproved and are awaiting final review. Generally, between 60% to
65% of the loans in the Pipeline successfully pass the final review and are
funded. The majority of loans that fund will do so within 60 days from entrance
into the Pipeline. The total loan Pipeline at June 30, 1997 was $17 million with
in excess of 98% of the pipeline consisting of B/C loans.
The loans generated by the Company can be sold on an individual loan
basis (flow) or sold in package form (bulk). A bulk package contains as little
as $500,000 in mortgage loans up to an unlimited amount. The Company can form
one package or several packages in any given month, depending on the best
execution (highest price). Loans sold on a flow (i.e., one at a time) can be
sold rapidly and loans sold in bulk generally require more time to assemble,
often 15 to 30 days from funding.
23
OPERATIONS
Westmark's operations are centralized in the Delray Beach office. In
January 1995, Westmark Mortgage had two operation centers located in Florida and
California. In 1996, Westmark centralized its operations to Florida, creating
more efficiency and lowering overhead. With this centralization, management
initiated a new program to create greater profits from the sale of loans.
Historically, closed loans have been sold one by one to institutional investors.
Westmark began to participate in the "bulk sale" loan process whereby loans are
packaged into a group and sold in one transaction. This results in expanded
revenue opportunities over typical loan by loan sales and has created greater
economies of scale in the operations delivery of closed loans.
MARKETING
Traditionally, Westmark has marketed its products and services through
field sales representatives ("account executives") who are responsible for
building relations with brokers in a geographical region. A typical account
executive visits prospective clients in a particular territory and reviews
specific loans. If the loan can be funded or purchased by Westmark, the account
executive obtains the mortgage documentation and provides this to the
underwriters.
In addition to field representatives, Westmark has an inside sales
group. These employees usually cover less densely populated states and
territories, utilizing telemarketing to prospect for Westmark business. If an
opportunity exists, the broker will send the loan application into the
operations division directly. Management believes this process is more cost
effective for sparsely populated areas.
Westmark also markets its products at national and regional industry
trade shows, utilizing a sales booth and sending representatives to meet new and
existing clients. This effort provides continued market recognition for the
Westmark account executives and inside sales representatives, as well as the
Company. Westmark obtains this information and inputs the data in its computers
for marketing use. These new contacts are distributed to the appropriate sales
representatives who make sales calls while at the same time the central
marketing department sends out marketing literature by mail or facsimile to
enhance market recognition of the Company and its products. This process assists
the sales representatives in developing new prospects.
COMPETITION
The Company competes against savings and loan associations, thrifts,
commercial banks, consumer finance companies and other mortgage bankers in the
origination of single-family, multi-family and condominium residential mortgage
loans. Even though some of the competition is large and operates on a nationwide
scope, management believes that no single firm controls more than 9% of this
market. Furthermore, management believes that mortgage bankers, in general,
control more than 55% of the national market. The Company competes on the basis
of quality of services along with the relationships established by the sales and
operations staff.
REGULATION
The Company's business is subject to extensive regulation, supervision
and licensing by federal, state and local governmental authorities and is
subject to various laws and judicial and administrative decisions imposing
requirements and restrictions on part or all of its operations. The Company is
subject to the rules and regulations of, and examinations by, HUD and state
regulatory authorities with respect to originating, processing, underwriting and
selling loans. These rules and regulations, among other things, impose licensing
obligations on the Company, establish eligibility criteria for mortgage loans,
prohibit discrimination, provide for inspections and appraisals of properties,
require credit reports on loan applicants, regulate assessment, collection,
foreclosure and claims handling, investments and interest payments on escrow
balances and payment features, mandate certain disclosures and notices to
borrowers and, in some cases, fix maximum interest rates, fees and mortgage loan
amounts. Failure to comply with these requirements can lead to demands for
indemnifications or mortgage loan repurchases, certain rights of rescission for
mortgage loans, class action lawsuits and administrative enforcement actions.
24
The exceptions are that the required corporate tax returns for 1994
and 1995 have not been filed nor have the state returns for which these federal
documents must be attached. Further, the Company is in arrears on payment of
1996 employment related taxes of approximately $62,000.
Except as set forth above, the Company believes that it is in
compliance is in all material respects with applicable federal and state laws
and regulations.
EMPLOYEES
As of June 30, 1997, the Company employed 10 full-time administrative
employees and 43 full-time production and operations employees. To date, the
Company has been able to recruit and retain sufficient qualified personnel. None
of the Company's employees are represented by a labor union. The Company has not
experienced any work stoppages and considers its relations with its employees to
be good.
FACILITIES
The Company maintains its executive offices and a production branch at
355 N.E. Fifth Avenue, Suite #4, Delray Beach, Florida 33483. Suite 4 is
comprised of Units 2,3, and 4. This total space consists of 7,800 square feet
and is owned by the Company. Suite 4 was purchased from a consultant and former
officer and director of the Company, Michael Morrell, for a purchase price of
$275,000, an amount believed to be consistent with the surrounding market rate.
In 1994, the Company acquired from an unaffiliated third party ownership of Unit
7 (1,100 square feet) in the same complex which is occupied primarily by the
loan production department. In 1995, Unit 5 was acquired by the Company from an
unaffiliated third party for use by the operations staff, and the mortgage
payment is $2,807 per month until maturity in 1998. The Company also operates a
1,500 square foot satellite office in California at a cost of $1,098 per month.
The Company rented 800 square feet in Valley Springs, California at a cost of
$575 per month. The Company leases Unit #1, approximately 1,200 square feet, at
a monthly rate of approximately $700.
LEGAL PROCEEDINGS
In the matter of SAXON MORTGAGE VS. WESTMARK, Saxon Mortgage obtained
a judgment in the amount of $419,348, in connection with various repurchase
obligations. An amount of $61,788 has been paid, and the remaining liability of
$407,560 is accrued. The Company has reached a settlement which calls for
monthly payments of $11,788 for 36 months.
The Company is a plaintiff in NETWORK FINANCIAL SERVICES, INC. V.
MCCURDY RAICHE, RYALS, NASH & MOSS LAND COMPANY, filed March 1993 in Monterey
County, California Superior Court. The plaintiff alleges fraud, negligent
misrepresentation, breach of fiduciary duty, negligence, quiet title, RICO
violations and conversion. Defendant McCurdy initiated a cross-complaint naming,
among others, the Company as a cross defendant. The cross-complaint seeks
damages for breach of a stock option agreement, breach of contract, and
declaratory relief. The Company has finalized a settlement with defendants
Raiche and Ryals, wherein defendants Raiche and Ryals transferred 7,166 shares
of the Company's Common Stock to the Company in addition to one-half (1/2)
interest in certain property. The balance of the pending litigation involving
defendant and cross-complaint McCurdy and others is unaffected by the
Raiche/Ryals settlement. Management intends to vigorously defend this
cross-complaint.
A settlement has been negotiated wherein and whereby both the
Complaint and Cross-Complaint will be dismissed and no monetary compensation
paid by either party. The Company has requested several modifications to the
proposed settlement agreement.
The Company is a defendant in KNIGHT V. LOMAS MORTGAGE U.S.A. AND
WESTMARK MORTGAGE CORPORATION. The complaint is based upon a contention by the
Plaintiff that Lomas Mortgage U.S.A. as the servicing agent wrongfully impaired
the credit rating of Plaintiff and breached the written agreement between the
parties. A preliminary determination indicated that the basis for the dispute is
between Lomas U.S.A. and the Plaintiff, but the Company has
25
been named as a party defendant in view of the original contractual relationship
between the Plaintiff and Westmark. The Company considers the risk of loss in
this matter to be remote, and consequently, no amount has been accrued as of
December 31, 1996.
The Company and plaintiffs entered into an agreement wherein and
whereby the subject litigation was dismissed without prejudice. The case was
refiled in Orange County, California Superior Court on October 29, 1996.
The Company does not anticipate any liability with respect to this litigation.
The Company is a defendant in ORTEGA V. MICHAEL SANTA MARIA ET AL
filed in Orange County Superior Court of the State of California. The complaint
is based upon a contention by the Borrower Ortega that Santa Maria, individually
and as a owner/manager/broker of Bann Cor Mortgage made false presentations of
material fact to plaintiffs. The Company acquired this loan from Bann Cor and
subsequently sold the loan to Imperial Credit Industries. A preliminary
determination indicates that the basis for the dispute is between Santa Maria
and Bann Cor. However, the Company has been named as a party defendant. Westmark
generally and specifically denies each and every allegation contained in the
complaint. The Company considers the risk of loss in this matter to minimal and
fully intends to defend this action.
The Company filed a Demurrer to plaintiff's Complaint and was
dismissed from the suit. However, the Company remains as a defendant in a
cross-complaint for indemnification filed by Imperial Credit Industries.
One of the Company's wholly owned subsidiaries, Green World has been
named, together with other defendants, in SHAPE UP AMERICA V. PHILIPPE ET AL.,
filed is in Alameda County, California Superior Court on August 19, 1996. The
Complaint alleges breach of contract, conspiracy, fraud, and quantum meruit. The
basic premise to plaintiff's Complaint is that plaintiff claims to be entitled
to various forms of compensation based upon the sale of certain licensing,
patent and marketing rights to the Talon Refrigerant Management System. It is
anticipated that venue for this action will be transferred to Sacramento County
and to date, no discovery has been undertaken. Based upon a preliminary review
of relevant documentation, the Company does not anticipate any liability.
The Company has received a demand for Arbitration from Amber Capital
Corporation, Universal Solutions, Pyramid Holdings, Inc. and Affiliated
Services, Inc. which claims the Company breached contracts between the parties
and failed to issue and/or register securities pursuant to those contracts and
seeks compensating damages in an undetermined amount and recission of the stock
purchase agreements between the Company and the various parties.
The Company is a defendant in CORESTATES BANK, N.A. VS. WESTMARK
MORTGAGE CORPORATION, filed in the Circuit Court in Broward County, Florida on
June 20, 1997. The Company has reached a settlement of $75,074, to be paid in
twelve installments of approximately $6,000 per month, of which $6,000 has been
paid.
Management does not believe that any of these proceedings,
individually or in the aggregate, will materially impact the Company's financial
condition or results of operations. From time to time the Company is a defendant
(actual or threatened) in certain lawsuits encountered in the ordinary course of
its business, the resolution of which, in the opinion of management, should not
have a material adverse affect on the Company's financial position.
26
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
NAME AGE POSITION
Mark Schaftlein 39 President, Chief Executive Officer and Director
of the Company
Norman J. Birmingham 42 Chief Financial Officer and Director
Todd Walker 38 Secretary and Director
Louis Resweber 35 Director
Payton Story, III 50 President, Westmark Mortgage Corporation and
Director
MR. SCHAFTLEIN has served as president and chief executive officer of
Westmark Group Holdings, Inc., since May 1997. In May 1997, Mr. Schaftlein
became chief executive officer of Westmark Mortgage Corporation ("Westmark
Mortgage"), and served as president of Westmark Mortgage from February 1996
until May 1997. Mr. Schaftlein has served as a director of the Company since
January 1996. From February 1995 until February 1996, Mr. Schaftlein was
director of the non-conforming division of Westmark Mortgage, managing the
transition of Westmark Mortgage from a conforming to a non-conforming lender.
Mr. Schaftlein established the bulk loan sales with Household Finance Corp. and
The Money Store, which the Company presently utilizes. Prior thereto, Mr.
Schaftlein was a senior vice president with National Lending Center, Inc., from
September 1993 until February 1995. During that time, Mr. Schaftlein expanded
operations into multiple states and assisted in their expansion of B/C lending.
From January 1993 until September 1993, Mr. Schaftlein served as vice president
of Fleet Finance and was responsible for developing a new wholesale division in
the non-conforming (B/D) credit market. From 1984 to January 1993, Mr.
Schaftlein served as vice president at Citicorp. In 1996, Mr. Schaftlein also
served as president of the Gold Coast chapter of the Florida Association of
Mortgage Brokers.
MR. BIRMINGHAM has served as a director since April 1996. Mr.
Birmingham served as president from November 1995 to September 1996. Mr.
Birmingham has served as chief financial officer since December 1996. Since July
1995, Mr. Birmingham has served as chief operating officer, president, and as a
director of Medical Industries of America, Inc., ("MIOA"), whose securities are
registered under Section 12 of the Securities Exchange Act of 1934 ("Exchange
Act"). Mr. Birmingham resigned as an officer of MIOA in June 1996 and as a
director in August 1996. Mr. Birmingham has been engaged in an accounting and
tax practice since 1986.
MR. STORY has served as president of Westmark Mortgage since May
1997, prior to that Mr. Story served as senior vice-president of lending since
May 1996. Additionally, Mr. Story has served as a director of Westmark Group
Holdings, Inc., since February 1997. Formerly, Mr. Story was chief executive
officer and president of West Coast Mortgage Services, Inc. from July 1985 to
April 1996. Mr. Story was the marketing director of Beneficial Management
Corporation in Peapock, New Jersey from January 1969 to July 1985. Additionally,
in 1984 Mr. Story served as president of the Florida Association of Mortgage
Brokers-Gulf Coast. Currently, Mr. Story is a certified mortgage consultant of
Florida and National Association of Mortgage Brokers.
MR. WALKER has served as a director since January, 1996. In 1987, Mr.
Walker founded, and presently serves as president of, Southern Import
Distributors, Inc. ("SIDI"). On behalf of SIDI, Mr Walker co-founded Tampa
Convention Hotel Associates, Inc., Divot Development Corporation, Herr Damm,
Inc., and Mad Dogs & Englishmen. Prior to forming SIDI, Mr. Walker was a tax
consultant with Arthur Anderson & Company for two years. Mr. Walker graduated
from Tulane University in 1981 and received his Masters of Business
Administration degree in 1985 and Juris Doctorate degree in 1985 from the Tulane
Graduate Business School and Tulane Law School, respectively.
27
MR. RESWEBER has served as a director since December 1996, and became
chairman in February 1997. Mr. Resweber has extensive prior experience in the
non-conforming industry, as he has served as senior vice president, capital
markets, for United Companies Financial Corp., a NYSE-listed financial services
company and one of the nation's oldest and largest sub-prime mortgage lenders
whose stock price increased from $16 to $132 per share (pre-splits) during Mr.
Resweber's tenure. Most recently, Mr. Resweber served as president and chief
executive officer of Network Acquisition Corp. from 1995 to 1997, which grew
from $4 million to $110 million in revenues through a series of seventeen
successful merger and acquisition transactions. Altogether, Mr. Resweber has
over fifteen years' experience in corporate finance, capital markets, mergers
and acquisitions, strategic planning, business administration and management,
investor relations and communications as an executive officer, board member
and/or senior consultant to a number of NYSE-listed, Fortune 500 firms including
NorAm Energy, Arkla Gas, Entex, Hill & Knowlton, Exxon USA, Celeron Oil, Cabot
Energy, and Goodyear Tire & Rubber. Mr. Resweber also currently serves on the
Boards of Directors of a number of other companies including Connex
Communications, Inc. and Level Best Golf, Inc.
Directors serve until the expiration of their term at the annual
meeting of stockholders. All officers serve at the discretion of the Board of
Directors, subject to employment agreements. Effective February 1996, each
non-employee director is entitled to receive $500 per month, and all directors
are entitled to reimbursement of out-of-pocket expenses to attend Board meetings
and 15,000 option upon becoming director and 12,000 options on the first day of
each new year provided for in the 1994 Employee Stock Option Plan.
BOARD COMMITTEES
The Board of Directors has appointed a compensation committee and an
audit committee. The members of the compensation committee are Messrs. Resweber
and Walker. The compensation committee reviews and recommends to the Board of
Directors all forms of remuneration for directors and management of the Company
and has the authority to administer the Company's 1994 stock option plan. The
members of the audit committee are Messrs. Birmingham, Story and Walker. The
audit committee reviews and reports to the Board on the financial results of the
Company's operations and the results of the audit services provided by the
Company's independent accountants, including the fees and costs for such
services.
EXECUTIVE COMPENSATION
Mark Schaftlein served as the chief operating officer of the Company
since September 11, 1996. Norman J. Birmingham served as chief executive officer
of the Company from January 1, 1996 through September 10, 1996. Michael Morrell
served as chief executive officer from January 1995 through November 1995. The
following table sets forth the information with respect to the chief executive
officers during fiscal 1996. No other executive officer of the Company received
total annual salary and bonus for the 1996 fiscal year in excess of $100,000.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------- --------------------------
NAME AND PRINCIPAL FISCAL OTHER ANNUAL STOCK OPTIONS AND ALL OTHER
POSITION YEAR SALARY COMPENSATION ISSUANCES WARRANTS COMPENSATION
- ---------------------------- --------------------- ------------------- --------- -------- ------------
Mark Schaftlein 1996 $ 143,353(1) 3,353 - 90,000 (2)
Chief Executive 1995 $ 100,685 - - 1,500 -
Officer 1994 - - -
Norman J. Birmingham 1996 $ 87,500 - - 90,000 (2) -
Chief Financial 1995 - - - - -
Officer 1994 - - - - -
28
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------- --------------------------
NAME AND PRINCIPAL FISCAL OTHER ANNUAL STOCK OPTIONS AND ALL OTHER
POSITION YEAR SALARY COMPENSATION ISSUANCES WARRANTS COMPENSATION
- ---------------------------- --------------------- ------------------- --------- -------- ------------
Michael F. Morrell 1996 - - - - -
Chief Executive 1995 55,518 14,220 16,204 (3) 69,000 148,167
Officer 1994 90,000 14,220 - 60,000 80,833
- --------------------
(1) Includes $3,353 in other annual compensation comprised of a car allowance.
(2) Only 45,000 of these options have vested.
(3) These shares were issued in lieu of $25,000 accrued salary in 1995.
EMPLOYMENT AGREEMENTS
In April 1996, Mr. Birmingham entered into a three-year employment
agreement with the Company which provides for an annual base salary of $100,500.
Additionally, Mr Birmingham was issued a warrant to purchase 90,000 shares,
45,000 of which are currently exercisable over a five-year term at $2.25 per
share, and 45,000 of which vest in full if the Company's net income in 1996,
1997 or 1998 is $480,000 (and vest on a pro-rata basis if a lesser amount of net
income is earned in those periods), exercisable during a five year term from the
date of vesting in full. In the event Mr. Birmingham's employment agreement is
terminated other than for "just cause," he would be entitled to receive
one-year's salary.
In March of 1997, Mr. Schaftlein entered into a three-year employment
agreement which provides for an annual base salary of $150,000 the first year,
$162,000 the second year and $174,000 the third year and an aggregate of 600,000
incentive stock options vesting as soon as April 1998 and as late as April 2000,
exercisable for a five-year period from vesting at exercise prices ranging from
$1.00 to $2.00 per share. Additionally, Mr. Schaftlein was issued a warrant to
purchase 90,000 shares, 45,000 of which are currently exercisable over a
five-year term at $2.25 per share, and 45,000 of which vest in full if the
Company's net income in 1996, 1997 or 1998 is $480,000 (and vest on a pro-rata
basis if a lesser amount of net income is earned in those periods), exercisable
during a five-year term from the date of vesting in full. In the event an
employment agreement is terminated other than for "just cause," such terminated
employee would be entitled to receive one-year's salary.
In March of 1997, Mr. Story entered into a three-year employment
agreement which provides for an annual base salary of $126,000 the first year,
$138,000 the second year and $150,000 the third year, and an aggregate of
400,000 incentive stock options vesting as soon as April 1998 and as late as
April 2000, exercisable for a five-year period from vesting at exercise prices
ranging from $1.00 to $2.00.
STOCK OPTIONS AND WARRANTS
The following table provides information on options granted under the
Company's 1994 Stock Option Plan in fiscal 1996 and warrants granted in fiscal
1996 to Messrs. Schaftlein and Birmingham :
29
INDIVIDUAL GRANTS
PERCENT OF
TOTAL
OPTIONS/WARRANTS EXERCISE OR
SHARES UNDERLYING GRANTED TO BASE PRICE
OPTIONS/WARRANTS EMPLOYEES IN PER EXPIRATION
NAME GRANTED FISCAL YEAR SHARE DATE
- ---- ------- ------------- --------- -------
Mark Schaftlein 90,000(1) 50% $2.25 4/01
Norman J. Birmingham 90,000(1) 50% $2.25 4/01
- ---------------
(1) For terms of these warrants, see "--Employment Agreements" above.
Additionally, as of December 31, 1996, non-executive officers held
options to purchase an aggregate of 218,483 shares of Common Stock at exercise
prices ranging from $2 to $45 per share. See "--Employment Agreements" for a
discussion of warrants issued to current executive officers in April 1996.
The Company has not established, nor does it provide for, long-term
incentive plans or defined benefit or actuarial plans. The Company does not
grant any stock appreciation rights.
CERTAIN TRANSACTIONS
Effective November 1995, MIOA purchased 1,298,388 shares of Common
Stock for a purchase price of $3,210,000, comprised of $1,210,000 cash and cash
equivalents, and the issuance of 200,000 shares of MIOA series B convertible
preferred stock with a stated value of $10 per share. The stock purchase
agreement provides that MIOA ownership position, equal to 49% of the shares of
Company Common Stock actually outstanding, shall not be diluted below 49%, with
additional shares to be issued to MIOA to maintain such ownership position. In
May 1996, the Company issued MIOA 368,896 shares of Common Stock in order to
maintain such percentage ownership. Subsequent to the November 1995 purchase
agreement, MIOA loaned the Company an aggregate of $2,388,593 pursuant to
one-year notes, bearing interest at the rate of 10% per annum. In March 1996,
MIOA converted $700,000 of this indebtedness into 200,000 shares of Series C
Preferred Stock with a stated value of $3.50 per share. MIOA presently owns
1,667,284 shares of Company Common Stock, and 200,000 shares of the Company's
Series C Preferred Stock ($3.50 stated value). A contractual right provided to
MIOA upon issuance of a portion of its shares of Common Stock afforded MIOA the
right to maintain a 49% ownership interest in the Company. At June 26, 1997, the
Company owed MIOA $1,953,000, less interest in the sum of $47,000 which
represents interest forgiveness for the second quarter. MIOA agreed to the
termination of the 49% anti-dilution protection. Payment of the indebtedness
shall be made upon the following terms. The Company executed a three year
promissory note in the sum of $1,953,000, bearing interest at 10% per annum,
with monthly payments in the amount of $25,000 which commenced June 30, 1997. In
the event the Company receives additional capitalization of a minimum amount of
$300,000 and a maximum amount of $1.5 million, MIOA shall be entitled to receive
the first $300,000. In the event the additional capitalization exceeds $1.5
million, MIOA will be entitled to receive the first $500,000 of additional
capitalization in excess of $1.5 million. In the event additional capitalization
exceeds $3 million, MIOA shall be entitled to receive 50% of the excess until
the above captioned indebtedness is paid in full. In addition, MIOA shall be
entitled to 15% of the net cash of the Company in excess of operating expenses
and settlement payments on a consolidated basis during the calendar year 1997,
and 20% of said net cash flow in the calendar year 1998. In the event the
Company should sell or spin-off either of its subsidiaries, MIOA shall be
entitled 50% of the cash proceeds received by the Company resulting from the
sale or spin-off up to the maximum of their indebtedness. For a more complete
description of the agreement, see "The Company - Recent Developments."
Messrs. Morrell and Gardener and Linda Moore resigned as officers and
Mr. Morrell resigned as a director in November 1995. Subsequent to their
resignations, Mr. Morrell and Ms. Moore entered into to termination agreements
and consulting agreements with the Company. Various disputes arose in connection
with the performance of those agreements, and in January 1997, the parties
entered into a settlement agreement. The settlement agreement
30
provides that the Company shall pay unpaid salary to Mr. Morrell in the sum of
$115,000 contemporaneously with the close of any transaction by which the
Company shall receive additional capitalization in the minimum sum of
$3,000,000. If no such capitalization is received, the $115,000 shall be paid
through the issuance of shares registered pursuant to form S-8. In addition, Mr.
Morrell was paid $114,000 through the issuance of shares registered pursuant to
form S-8. Interest in the sum of $31,000 is to be satisfied by the partial
assignment of a promissory note receivable or shares of common stock of Green
World received by the Company in connection with the spin-off of Green World to
its shareholders. Mr. Morrell was reimbursed $1,000 for business expenses in
February 1997. The Company acquired certain of its facilities from Mr. Morrell
at rates it believes reflect fair market value. See "Business - Facilities." In
February 1997, Mr. Morrell was paid $13,800 for past due rental obligations. In
January 1997, Mr. Morrell was paid $45,000 in delinquent consulting fees through
the issuance of shares registered pursuant to form S-8, and the Company and Mr.
Morrell agreed that the remaining monthly consulting fees in the amount of
$7,500 per month for 22 months would be paid in cash or through the issuance of
shares registered pursuant to form S-8. The Company reimbursed Mr. Morrell
$5,400 for automobile lease expenses, and Mr. Morrell returned the vehicle to
the Company in February 1997. Mr. Morrell was issued a one year option to
purchase 125,000 shares of Common Stock at an exercise price of $1 per share,
and a one year warrant to purchase 100,000 shares of Common Stock at an exercise
price of $.81 per share. Ms. Moore is to receive unpaid salary in the sum of
$40,000 contemporaneously with the close of any transaction by which the Company
shall receive additional capitalization in the minimum sum of $3,000,000. If no
such capitalization is received, the $40,000 shall be paid through the issuance
of shares registered pursuant to form S-8. In addition, Ms. Moore was paid
$40,000 through the issuance of shares registered pursuant to form S-8. Interest
in the sum of $9,000 is to be satisfied by the partial assignment of a
promissory note receivable or shares of Common Stock of Green World received by
the Company in connection with the spin-off of Green World to its shareholders.
In January 1997, Ms. Moore was paid $24,000 in delinquent consulting fees
through the issuance of shares registered pursuant to form S-8, and the Company
and Ms. Moore agreed that the remaining monthly consulting fees in the amount of
$4,000 per month for four months would be paid in cash or through the issuance
of shares registered pursuant to form S-8. Ms. Moore was issued a one year
option to purchase 67,000 shares of Common Stock at an exercise price of $1 per
share, and a one year warrant to purchase 53,333 shares of Common Stock at an
exercise price of $.81 per share. Mr. Gardner was issued 25,000 shares of Common
Stock (the resale of which is being registered under the Act hereby) and
severance compensation in the amount of $54,000.
GTB Company is controlled by Charles Chillingworth, the sole
stockholder, officer and director. Bradley Ray is a creditor of GTB Company. For
a description of the transactions involving GTB Company and the Company, see
"The Company-Recent Developments." PBF is controlled by Charles Chillingworth,
the sole stockholder, officer and director. For a description of the
transactions involving PBF and the Company, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Investment in Real
Estate and Preferred Stock." In September 1996, Mr. Chillingworth was issued
36,551 unrestricted shares of Common Stock, registered pursuant to a
registration statement on form S-8, for services rendered. In January 1997, Mr.
Chillingworth was issued 21,000 shares of Common Stock for services rendered,
the resale of which is being registered hereby. In June 1996, Mr. Ray was issued
150,000 unrestricted shares of Common Stock, registered pursuant to a
registration statement on form S-8, for services rendered, pursuant to a January
1996 consulting agreement. Furthermore, an affiliate of Mr. Chillingworth loaned
the Company $150,000 pursuant to notes that mature in June 1997, and bear
interest at the rate of 10% per annum. The approximate balance of this note is
$128,000, as $30,000 has been paid. Mr. Ray loaned the Company $61,251 in August
1996, pursuant to a note which bears interest at the rate of 12% per annum
payable quarterly, and is convertible at $.56 per share. The note matured in
December 1996, and to date, the sum of $49,751 remains outstanding. In March
1997, GTB loaned the Company $150,000 pursuant to a note that matures in March
1998 and bears interest at a rate of 10% per annum.
In March 1996, Mr. Hollenbeck agreed with the Company to provide for
the redemption of his 290,000 shares of Common Stock based on the then market
price in exchange for, among other consideration, a two-year consulting
agreement providing for the payment of $75,000 in the first year and $90,000 in
the second year, $400,000 cash, and the issuance of 100,000 shares of Series A
Preferred Stock in April 1996. The Company also agreed to obtain written consent
from Mr. Hollenbeck prior to the issuance of any convertible preferred stock or
other debt or equity security convertible into Common Stock, and to pay certain
of Mr. Hollenbeck's legal fees. In December 1996, Mr. Hollenbeck relinquished
his right to force the Company to redeem the Series A Preferred Stock. In
addition, Mr. Hollenbeck agreed to convert 35,500 shares of the Series A
Preferred Stock contingent upon the Company receiving minimum additional
31
capitalization of $3,000,000 and the payment to Mr. Hollenbeck of $64,000 in
attorneys' fees and costs. The Company is currently in default in the payment of
legal fees to Mr. Hollenbeck and payment of interest on the shares of Series A
Preferred Stock (which in the aggregate is approximately $100,000) and in
obtaining the necessary consent to issue debt or equity securities convertible
into Common Stock subsequent to March 1996.
In December 1996, Mr. Resweber was issued five-year warrants currently
exercisable to purchase 250,000 shares of Common stock in consideration for his
services as a Director of the Company.
In June 1997, Mark Schaftlein converted $45,416 in accrued salary for
1995-1996 into 72,700 shares of Common Stock. In June 1997, Norman Birmingham
converted $21,384 in expenses into 34,000 shares of Common Stock.
LIMITATION ON DIRECTORS' LIABILITY
The Company's Certificate of Incorporation eliminates, subject to
certain exceptions, the personal liability of directors of the Company or its
stockholders for monetary damages for breaches of fiduciary duty of such
directors. The Certificate of Incorporation does not provide for the elimination
of or any limitation on the personal liability of a director for (i) any breach
of the director's duty of loyalty to the Company or its stockholders, (ii) acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) unlawful corporate distributions, or (iv) any
transaction from which such director derives an improper personal benefit. This
provision of the Certificate of Incorporation will limit the remedies available
to the stockholder who is dissatisfied with a decision of the Board of Directors
protected by this provision; such stockholder's only remedy may be to bring a
suit to prevent the action of the Board. This remedy may not be effective in
many situations, because stockholders are often unaware of a transaction or an
event prior to Board action in respect of such transaction or event. In these
cases, the stockholders and the Company could be injured by a Board's decision
and have no effective remedy.
DELAWARE ANTI-TAKEOVER LAW
The Company is not subject to Section 203 of The Delaware General
Corporation Law ("Section 203"), which, subject to certain exceptions, prohibits
a Delaware corporation from engaging in any business combinations with any
interested stockholder for a period of three years following the date that such
stockholder became an interested stockholder, unless (i) before such date the
Board of Directors of the Company approved either the business combination or
the transaction that resulted in the stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the Company outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares that are owned, (iii) by persons who are
directors and also officers and (iv) by employee stock plans in which employee
participants do not have a right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer, or (v) on or
after such date the business combination is approved by the Board of Directors
and authorized at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least 66 2/3% of the outstanding
voting stock which is not owned by the interested stockholder.
Section 203 defines "combination" to include (i) any merger or
consolidation involving the corporation and the interested stockholder, (ii) any
sale, lease, exchange, mortgage, transfer pledge or other disposition involving
the interested stockholder of 10% or more of assets of the Company, (iii)
subject to certain exceptions, any transaction that results in the issuance or
transfer by the Company of any stock of the Company to the interested
stockholder, (iv) any transaction involving the Company that has the effect of
increasing the proportionate share of the stock of any class or series of the
Company beneficially owned by the interested stockholder, or (v) the receipt by
the interested stockholder of the benefit of any loans, advances guarantees,
pledges or other financial benefits provided by or through the Company. Is in
general, Section 203 defines an "interested stockholder" as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the Company
and any entity or person affiliated with or controlling or controlled by such an
entity or person.
32
PRINCIPAL STOCKHOLDERS
The following table presents certain information regarding the
beneficial ownership of all shares of Common Stock at August 15, 1997 by (i)
each person who owns beneficially more than five percent of the outstanding
shares of Common Stock, (ii) each director of the Company, (iii) each named
executive officer and (iv) all directors and officers as a group.
PERCENT OF VOTING POWER
------------------------------------
NAME AND ADDRESS(1) SHARES OF COMMON STOCK BEFORE OFFERING AFTER OFFERING(2)
Medical Industries of America, 3,067,284(3) 28% 17.2%
Inc.
GTB Company 2,888,889(4) 23.3% 17.6%
Drew Hollenbeck 800,000(5) 7.7% 4.9%
Louis Resweber 250,000(6) 2.1% 1.5%
Mark Schaftlein 122,367(7) 1.8% *
Norman Birmingham 80,000(8) * *
Todd Walker - - -
Payton Story -(9) - -
All officers and directors as a
group (five persons) 452,367(10) 4.6% 2.7%
* Less than one percent.
1 The address for the above referenced stockholders is 355 N.E. Fifth Avenue,
Delray Beach, FL 334831, except for Medical Industries of America, Inc.,
which is 1903 S. Congress Avenue, #400, Boynton Beach, FL 33426 and GTB
Company which is 2090 Palm Beach Lakes Blvd., West Palm Beach, Florida
33409.
2 Assumes the issuance of 1,608,188 shares upon exercise of all Warrants,
conversion of 4,841,904 shares of Preferred Stock, and conversion of
Convertible Debt into 444,326 shares.
3 Includes 1,400,000 underlying Series C Preferred Stock.
4 Includes shares underlying Series E Preferred Stock.
5 Includes 800,000 shares of Common Stock issuable upon conversion of Series A
Preferred Stock.
6 Includes a warrant to purchase 250,000 shares of Common Stock.
7 Includes options and warrants currently exercisable to purchase an aggregate
of 46,500 shares of Common Stock, but excludes option to purchase 600,000
shares that vest no earlier than April 1998.
8 Includes an option presently exercisable to purchase 45,000 shares of Common
Stock.
9 Excludes options to purchase an aggregate of 400,000 shares of stock that
vest no earlier than April 1998.
10 Includes options and warrants to purchase an aggregate of 342,500 shares of
Common Stock.
DESCRIPTION OF CAPITAL STOCK
Under the Company's Certificate of Incorporation, the authorized
capital stock of the Company consists of 60 million shares, of which 50 million
shares are Common Stock and 10 million shares are preferred stock. As of the
date of this Prospectus, the Company had outstanding 9,523,082 shares of Common
Stock and 100,000 shares of Series A Preferred Stock, 123,125 shares of Series B
Preferred Stock, 200,000 shares of Series C Preferred Stock, 6,722 shares of
Series D Preferred Stock, 130,000 shares of Series E Preferred Stock, 80,000
shares of Series F Preferred Stock and 100,000 shares of Series G Preferred
Stock. The Company has reserved 355,917 shares for issuance upon exercise of
outstanding Options, 1,000,000 shares for issuance underlying options that
currently have not vested, 1,608,188 shares
33
for issuance upon exercise of Warrants, and a minimum of 6,241,904 shares for
issuance upon conversion of the Preferred Stock, and 444,326 upon conversion of
the Convertible Debt.
The following summary description of the securities of the Company is
qualified in its entirety by reference to the Certificate of Incorporation, a
copy of which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share with
respect to all matters required by law to be submitted to stockholders of the
Company. The holders of Common Stock have the sole right to vote, except as
otherwise provided by law or by the Company's Certificate, including provisions
governing any preferred stock. The Common Stock does not have any cumulative
voting, preemptive, subscription or conversion rights. Election of directors and
other general shareholder action requires the affirmative vote of a majority of
shares represented at a meeting in which a quorum is represented. The
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby will be, upon payment therefor as contemplated herein, validly issued,
fully paid and non-assessable.
Subject to the rights of any outstanding shares of preferred stock,
the holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors out of funds legally available therefor. In
the event of liquidation, dissolution or winding up of the affairs of the
Company, the holders of Common Stock are entitled to share ratably in all assets
remaining available for distribution to them after payment or provision for all
liabilities and any preferential liquidation rights of any preferred stock then
outstanding.
PREFERRED STOCK
The Board of Directors is authorized, without action by the holders
of the Common Stock, to provide for the issuance of the preferred stock in one
or more series, to establish the number of shares to be included in each series
and to fix the designations, powers, preferences and rights of the shares of
each such series and the qualifications, limitations or restrictions thereof.
This includes, among other things, voting rights, conversion privileges,
dividend rates, redemption rights, sinking fund provisions and liquidation
rights which shall be superior to the Common Stock. The issuance of one or more
series of the preferred stock could adversely affect the voting power of the
holders of the Common Stock and could have the effect of discouraging or making
more difficult any attempt by a person or group to attain control of the
Company. The Company has no present plans to issue any additional shares of
preferred stock.
SERIES A PREFERRED STOCK. In April 1996, the Board of Directors
established a series of shares setting forth the preferences, rights and
limitations and authorizing the issuance of up to 200,000 shares of series A
cumulative preferred stock ("Series A Preferred Stock"). In April 1996, an
aggregate of 100,000 shares of Series A Preferred Stock were issued with an
aggregate stated fair market value of $400,000 (stated value of $4.00 per share
which management believes to reflect fair market value) to Mr. Hollenbeck and an
aggregate of 18,750 shares of Series A Preferred Stock were issued to James
Hull. In addition, Mr. Hollenbeck agreed to convert 37,500 shares of the Series
A Preferred Stock contingent upon the Company receiving minimum additional
capitalization of $3,000,000 and the payment to Mr. Hollenbeck of $64,000 in
attorneys' fees and costs. The Series A Preferred Stock has a liquidation
preference of $4 per share, plus any accrued unpaid dividends, is redeemable by
the Company at a redemption price of $4 per share, plus accrued unpaid dividends
to the date of redemption, after October 1, 1996 the holder can force redemption
by the Company upon the same redemption terms that the Company possesses, and
does not have any voting rights. The shares of Series A Preferred Stock are
convertible into shares of Common Stock at the lessor or (i) $1.50 or (ii) 84%
of the closing bid price on the day prior to conversion (subject to adjustment).
In July 1997, Mr. Hull converted 18,750 shares of Series A Preferred Stock
into 150,000 shares of Company Common Stock.
SERIES B PREFERRED STOCK. In April 1996, the Board of Directors
established a series of shares setting forth the preferences, rights and
limitations and authorizing the issuance of up to 300,000 shares of series B
cumulative preferred
34
stock ("Series B Preferred Stock"). In April 1996, an aggregate of 300,000
shares of Series B Preferred Stock were issued with an aggregate stated fair
market value of $600,000 (stated value of $2.00 per share which management
believes to reflect fair market value). The Series B Preferred Stock has a
liquidation preference of $2 per share, plus any accrued unpaid dividends, is
junior in liquidation preference to the Series A Preferred Stock, is redeemable
by the Company at a redemption price of $2 per share, plus accrued unpaid
dividends to the date of redemption, and does not have any voting rights. The
shares of Series B Preferred Stock are convertible by the holders in shares of
Common Stock at the lesser of (i) $2.00 or (ii) 84% of the closing bid price on
the day prior to conversion (subject to adjustment). The shares of Series B
Preferred Stock automatically convert, at the above referenced conversion rate,
into shares of Common Stock in April 1998. In April and May 1997, several Series
B Preferred Stockholders converted 176,875 shares of Series B Preferred Stock
into 1,412,923 shares of Common Stock.
SERIES C PREFERRED STOCK. In March 1996, the Board of Directors
established a series of shares setting forth the preferences, rights and
limitations and authorizing the issuance of up to 500,000 shares of series C
cumulative preferred stock ("Series C Preferred Stock"). Effective March 1996,
an aggregate of 200,000 shares of Series C Preferred Stock were issued with an
aggregate stated fair market value of $700,000 which management believes to
reflect fair market value.
SERIES D PREFERRED STOCK. In August 1996, the Board of Directors
established a series of shares setting forth the preferences, rights and
limitations and authorizing the issuance of up to 1,000,000 shares of series D
convertible preferred stock ("Series D Preferred Stock"). In August 1996, an
aggregate of 200,000 shares of Series D Preferred Stock were issued with an
aggregate stated fair market value of $1,000,000 (stated value $5.00 per share
which management believes to reflect fair market value). The Series D Preferred
Stock pays interest quarterly at 10% per annum. The Series D Preferred Stock has
a liquidation preference of $5 per share, is redeemable by the Company and does
not have any voting rights. The shares of Series D Preferred Stock are
convertible by the holders into shares of Common Stock at 100% of the closing
bid price on the day of conversion, and are junior in liquidation preference to
the Series A and B Preferred Stock. In April and May 1997, several Series D
Preferred Stockholders converted 37,299 shares of Series D Preferred Stock into
259,909 shares of Common Stock. In April and May 1997, several Series D
Preferred Stockholders redeemed 5,784 shares of Series D Preferred Stock for an
aggregate sum of $30,262.
SERIES E PREFERRED STOCK. In July 1996, the Board of Directors
established a series of shares setting forth the preferences, rights and
limitations and authorizing the issuance of up to 130,000 shares of series E
convertible preferred stock ("Series E Preferred Stock"). In July 1996, an
aggregate of 130,000 shares of Series E Preferred Stock were issued with an
aggregate stated fair market value of $1,300,000 which management believes to
reflect fair market value.
SERIES F PREFERRED STOCK. In August 1996, the Board of Directors
established a series of shares setting forth the preferences, rights and
limitations and authorizing the issuance of up to 1,000,000 shares of series F
convertible preferred stock ("Series F Preferred Stock"). In August 1996, an
aggregate of 200,000 shares were issued with an aggregate stated fair market
value of $1,000,000 (stated value $5.00 per share which management believes to
reflect fair market value) and such shares are junior in liquidation preference
to Series A, B and D Preferred Stock. The Series F Preferred Stock has a
liquidation preference of $5 per share, is redeemable by the Company and does
not have any voting rights. The shares of Series F Preferred Stock are
convertible by the holders in shares of Common Stock at the greater of (i) $1.00
or (ii) the average closing bid price for the five days prior to conversion
(subject to adjustment).
SERIES G PREFERRED STOCK. Effective July 1997, the Board of Directors
established a series of shares setting forth the preferences, rights and
limitations and authorizing the issuance of up to 100,000 shares of series G
convertible redeemable preferred stock ("Series G Preferred Stock"). In July
1997, an aggregate of 100,000 shares of Series G Preferred Stock were issued
with an aggregate stated fair market value of $500,000 (stated value $5.00 per
share which management believes to reflect fair market value). The holder of the
Series G Preferred Stock received 10% of the 100,000 shares, the remainder of
which was placed in escrow to be released pending certain contractual
obligations. The Series G Preferred Stock pays interest at 10% per annum. The
Series G Preferred Stock has a liquidation preference of $5 per share, is
redeemable by the Company and does not have any voting rights. The number of
shares of Common Stock the Series G Preferred Stock shall be convertible into
shall equal 5% of the issued and outstanding Company
35
Common Stock, on a fully diluted basis, on January 31, 1998 if all of the Series
G Preferred Stock is converted and a pro rata portion thereof if less than all
of the Series G Preferred Stock is converted. In the event Westmark Group
Holdings, Inc. becomes insolvent, the shares are convertible into shares of
Westmark Mortgage Corporation common stock . The Series G Preferred Stock is
junior in liquidation preference to the Series A, B, C, D, E, and F Preferred
Stock.
WARRANTS
As discussed is in "Management - Employment Agreements," warrants
were issued to Messrs. Birmingham and Schaftlein providing for the issuance of
up to 180,000 shares of Common Stock. Additionally, there are Warrants
outstanding authorizing the holders to purchase an aggregate of 1,608,188 shares
of Common Stock, currently exercisable and expiring between one and eight years
from the date of this Prospectus at exercise prices between $.53 and $9.00.
CONVERTIBLE DEBT
In 1996, Mr. Adelson loaned the Company an aggregate of $100,320
pursuant to convertible notes which are discussed in "Management-Certain
Transactions."
In 1996, an affiliate of Mr. Chillingworth loaned the Company
$150,000 of which $20,000 was repaid in 1996 and $10,000 was repaid in 1997,
leaving an aggregate of $128,715 (principal and interest) pursuant to
convertible notes which are discussed in "Management-Certain Transactions"
In 1996, Eugene Snowden loaned the Company an aggregate of $81,000
pursuant to thirty- day renewable notes, which are presently convertible at a
conversion price of $.45.
In 1996, Ronald Snowden loaned the Company an aggregate of $13,750
pursuant to thirty -day renewable notes, which are presently convertible at a
conversion price of $.45.
In 1996, Bradley Ray loaned the Company $61,251 pursuant to a
convertible note at $.56, of which $11,500 has been repaid.
In 1996, the Timothy J. Murphy Charitable Unitrust loaned the Company
$25,000 which is convertible into 36,000 shares of Company Common Stock should
the Company default on repayment.
TRANSFER AGENT
The Company's transfer agent for the Common Stock is Corporate Stock
Transfer, Inc., Republic Plaza, 370 17th Street, Suite 2340, Denver, Colorado
80202.
36
PLAN OF DISTRIBUTION AND SELLING STOCKHOLDERS
The resale of shares by the Selling Stockholders, of which 4,442,442
are currently issued and outstanding and 6,894,418 will be issued upon (i)
exercise of Warrants to purchase 1,608,188 shares, (ii) conversion of Preferred
Stock to purchase 4,841,904 shares, and (iii) the conversion of Convertible Debt
to purchase 444,326 shares, all of which are subject to adjustment.
This table sets forth information with respect to the resale of
Common Stock by the Selling Stockholders, including the resale of shares of
Common Stock issued upon exercise of outstanding Warrants upon conversion of the
outstanding Preferred Stock, and upon the conversion of Convertible Debt. The
Company will not receive any proceeds from the resale of Common Stock by the
Selling Stockholders for shares currently outstanding or upon conversion of
Preferred Stock or conversion of Convertible Debt; however, the Company will
receive the exercise price per share upon issuance of shares underlying the
Warrants.
RESALE OF COMMON STOCK BY SELLING STOCKHOLDERS
FOR SHARES CURRENTLY OUTSTANDING ("S"),
SHARES TO BE ISSUED UPON EXERCISE OF WARRANTS ("W"),
OPTIONS ("O"), CONVERSION OF PREFERRED STOCK ("P")
AND CONVERTIBLE DEBT ("D")
SHARES AMOUNT SHARES
BENEFICIALLY OFFERED BENEFICIALLY
OWNED (ASSUMING ALL OWNED
BEFORE SHARES IMMEDIATELY AFTER
STOCKHOLDER RESALE SOLD) RESALE PERCENTAGE
----------- ------------ ------------------- ----------- ----------
Albert F. Abree, III and A. Ruth Murray 1,694 1,694P(1) 0 0.0
D. Blair Adams 3,713 3,713 S 0 0.0
Alan Adelson 945 945 S 0 0.0
1,223 1,223 S 0 0.0
7,000 7,000 W(2) 0 0.0
7,000 7,000 W(2) 0 0.0
6,600 6,600 W(2) 0 0.0
6,600 6,600 W(2) 0 0.0
4,500 4,500 W(2) 0 0.0
4,500 4,500 W(2) 0 0.0
7,000 7,000 W(2) 0 0.0
7,000 7,000 W(2) 0 0.0
9,500 9,500 W(2) 0 0.0
9,500 9,500 W(2) 0 0.0
7,000 7,000 W(2) 0 0.0
7,000 7,000 W(2) 0 0.0
2,167 2,167 W(3) 0 0.0
Affiliated Services, Inc. 104,000 104,000 S 0 0.0
Sharon Aitken 1,000 1,000 S 0 0.0
Amber Capital Corporation 51,741 51,741 S 0 0.0
Anacapa Venture Partners 218,522 218,522 S 0 0.0
37
Richard Anderson 1,191 1,191 S 0 0.0
596 596 S 0 0.0
596 596 S 0 0.0
Aqumulate, Ltd. 327 327 S 0 0.0
340 340 S 0 0.0
2,500 2,500 S 0 0.0
Mark Atherstone 2,532 2,532 S 0 0.0
Atlantic Bottled Gas 2,075 2,075 S 0 0.0
Tom Baldwin 596 596 S 0 0.0
Vincent Barras 1,334 1,334 S 0 0.0
Kimberly L. Beller and Robert C. Beller 8,428 8,428 S 0 0.0
Norman J. Birmingham (*) 45,000 45,000 W(4) 0 0.0
45,000 45,000 W(5) 0 0.0
34,000 34,000 S
David Blackman 334 334 S 0 0.0
John Blausey 1,667 1,667 S 0 0.0
6,667 6,667 S 0 0.0
1,334 1,334 S 0 0.0
20,000 20,000 S 0 0.0
20,000 20,000 W(6) 0 0.0
Martha Borman 370 370 S 0 0.0
Kathy J. Bosch 31,650 31,650 S 0 0.0
Thomas Burd 667 667 S 0 0.0
R. Bushey 2,000 2,000 S 0 0.0
Virginia C. Butler 2,000 2,000 S 0 0.0
1,000 1,000 S 0 0.0
Capitol Ventures International 33,334 33,334 S 0 0.0
Caribou Bridge Fund 98,875 98,875 P(7) 0 0.0
Robert and Teresa Caffey 230 230 S 0 0.0
Jeannie Caron 926 926 S 0 0.0
Darren Cassey 1,067 1,067 S 0 0.0
Jill Cather 801 801 S 0 0.0
Tracey Cather 157 157 S 0 0.0
Valerie Cawley 336 336 S 0 0.0
Chez, Inc. 20,000 20,000 S 0 0.0
Ted and Judy Childers 157,680 157,680 S 0 0.0
Charles Chillingworth 36,551 36,551 W(8) 0 0.0
Harry Coolidge 2,218 2,218 S 0 0.0
3,704 3,704 S 0 0.0
21,350 21,350 S 0 0.0
207,000 207,000 S 0 0.0
11,000 11,000 S 0 0.0
11,000 11,000 S 0 0.0
11,000 11,000 S 0 0.0
11,000 11,000 S 0 0.0
11,000 11,000 S 0 0.0
14,000 14,000 S 0 0.0
John S. Copeland 334 334 S 0 0.0
Corbin Trust 1,067 1,067 S 0 0.0
F. Barbara Covington 374 374 S 0 0.0
Griffin Dickerman 1,700 1,700 S 0 0.0
Ilaine Dickerman 1,000 1,000 S 0 0.0
38
John J. Dickerman 1,834 1,834 S 0 0.0
2,000 2,000 S 0 0.0
Mario DiFilippo 3,852 3,852 S 0 0.0
2,000 2,000 S 0 0.0
Louis DiFilippo 1,852 1,852 S 0 0.0
Richard Dillion 1,800 1,800 S 0 0.0
581 581 S 0 0.0
1,784 1,784 S 0 0.0
Joseph Divilio 536 536 S 0 0.0
Dawn Drella 10,000 10,000 S 0 0.0
E.C.S. International, Inc. 8,511 8,511 S 0 0.0
Kelly Eilifritz 1,920 1,920 S 0 0.0
Ray Eilifritz 157 157 S 0 0.0
T. Byron and Dene Estes 1,098 1,098 S 0 0.0
Chuck Everill 156,088 156,088 S 0 0.0
Kathryn Fabian 1,000 1,000 S 0 0.0
Bevan Farber 2,000 2,000 S 0 0.0
Craig Faria 1,127 1,127 P(1) 0 0.0
M.S. Farrell 1,630 1,630 S 0 0.0
1,261 1,261 S 0 0.0
33,333 33,333 W(9) 0 0.0
6,500 6,500 W(3) 0 0.00
William Field 1,191 1,191 S 0 0.0
667 667 S 0 0.0
334 334 S 0 0.0
Charles G. Fink 3,334 3,334 S 0 0.0
Thomas and Marisa Flint 2,593 2,593 S 0 0.0
Donald Fox 9,666 9,666 S 0 0.0
Ellen Friedman 596 596 S 0 0.0
G4, Inc. 1,457 1,457 S 0 0.0
Albert Gardner 3,025 3,025 S 0 0.0
David Gardner 1,167 1,167 S 0 0.0
Generation Capital Associates 328,406 328,406 P(7) 0 0.0
Tarek Ghalwash 741 741 S 0 0.0
Joseph Giglio 1,191 1,191 S 0 0.0
Barry Goodin 871 871 S 0 0.0
George Grahn 1,266 1,266 S 0 0.0
Greentree Mortgage 150,000 150,000 W(10) 0 0.0
GS Seagrass 167 167 S 0 0.0
GTB Company 2,888,889 2,888,889 P(11) 0 0.0
Gerard and Harriet Guitard 1,000 1,000 S 0 0.0
Pamela Haerther 4,400 4,400 S 0 0.0
Lonnie F. Hall 167 167 S 0 0.0
James Hamlet 712 712 S 0 0.0
Charles Hanney 667 667 S 0 0.0
Bradley Hanson 1,334 1,334 S 0 0.0
1,134 1,134 S 0 0.0
Boyd Harden 123,458 123,458 S 0 0.0
Gail Harden 24,691 24,691 S 0 0.0
Graham Harden, II 18,518 18,518 S 0 0.0
Holmes Harden, Jr. 18,518 18,518 S 0 0.0
Robert Harding 5,880 5,880 S 0 0.0
39
The Hayden Group, Inc. 75,000 75,000 S 0 0.0
Martin Heilbraun 2,000 2,000 S 0 0.0
Steve Hembree 11,291 11,291 P(1) 0 0.0
Darol M. Hoffman 7,223 7,223 S 0 0.0
Richard Hofmann 667 667 S 0 0.0
Drew Hollenbeck 800,000 800,000 P(12) 0 0.0
Sheldon Honig 1,000 1,000 S 0 0.0
1,852 1,852 S 0 0.0
Abe Huberman 584 584 S 0 0.0
James S. Hull 150,000 150,000 S 0 0.0
65,247 65,247 S 0 0.0
James S. Hull, Trustee 2,000 2,000 S 0 0.0
Nuge Johnson 1,191 1,191 S 0 0.0
Michael Johnstone 2,591 2,591 S 0 0.0
Ajit Kahaduwe 596 596 S 0 0.0
Richard Klass 2,167 2,167 W(3) 0 0.0
1,223 1,223 S 0 0.0
Richard J. Krenn 32,500 32,500 S 0 0.0
Jakob Krommenhock 1,067 1,067 S 0 0.0
Donald E. and Nancy A. Kuellpier 5,082 5,082 P(1) 0 0.0
Kevin Lam 53,750 53,750 S 0 0.0
Lebanon Valley Auto Racing 52,968 52,968 P(3) 0 0.0
Corporation
Malcolm Lee 3,704 3,704 S 0 0.0
Kent and Julie Leigh 3,065 3,065 S 0 0.0
J. Lamar Lessor 1,068 1,068 S 0 0.0
Mary C. Lessor 1,067 1,067 S 0 0.0
Anna Liselli 334 334 S 0 0.0
Sam Lockwood 596 596 S 0 0.0
Robert and Donna Lopez 2,408 2,408 S 0 0.0
Harold Lowell 834 834 S 0 0.0
Thomas E. Lynch 1,387 1,387 S 0 0.0
Magnum Financial Corporation 31,482 31,482 S 0 0.0
Shirley Mann 1,191 1,191 S 0 0.0
Lorrie McClintock 3,334 3,334 S 0 0.0
Ron McTighe 741 741 S 0 0.0
Medical Industries of America 70,000 70,000 S 0 0.0
David Mihlroth 741 741 S 0 0.0
Christopher Miller 2,000 2,000 S 0 0.0
I.W. Miller 100,000 100,000 W(13) 0 0.0
22,000 22,000 S 0 0.0
140,000 140,000 S 0 0.0
Danny Mills Profit Sharing 1,067 1,067 S 0 0.0
James Mitchell 186 186 S 0 0.0
Kristen and Michael Mitchell 898 898 P(1) 0 0.0
Richard Molinsky 1,786 1,786 S 0 0.0
1,191 1,191 S 0 0.0
Linda Moore 4,815 4,815 S 0 0.0
67,000 67,000 W(14) 0 0.0
Ahmad Moradi 2,223 2,223 S 0 0.0
Harold and Dolores Morrell 2,000 2,000 S 0 0.0
Michael Morrell 16,204 16,204 S 0 0.0
40
100,000 100,000 W(14) 0 0.0
Patrick Morton 312,176 312,176 S 0 0.0
Timothy J. Murphy Charitable Unitrust 31,000 31,000 S 0 0.0
36,000 36,000 D 0 0.0
John Murtha 2,000 2,000 S 0 0.0
John and Ann Murtha 2,000 2,000 S 0 0.0
Edward and Terri Myers 712 712 S 0 0.0
Sharon M. Myers 186 186 S 0 0.0
Shea Harden Naporano 18,518 18,518 S 0 0.0
James Noonan 21,188 21,188 P(3) 0 0.0
Gerald R. Novick 156,088 156,088 P(5) 0 0.0
Theodore J. Orlando 2,667 2,667 S 0 0.0
Renee Ortega 146 146 S 0 0.0
George Paez 1,191 1,191 S 0 0.0
2,917 2,917 S 0 0.0
Palm Beach Farms 200,000 200,000 S 0 0.0
William and Kathleen Papola 1,067 1,067 S 0 0.0
Richard Paull 167 167 S 0 0.0
Petros Petrides 838 838 S 0 0.0
Chris Phelan 2,500 2,500 S 0 0.0
Michael S. Pomerantz 2,000 2,000 S 0 0.0
Piere Pype 2,977 2,977 S 0 0.0
Pyramid Holdings, Inc. 37,037 37,037 S 0 0.0
Ted Ralston 7,408 7,408 S 0 0.0
Jackie Rankin 334 334 S 0 0.0
Red River Cattle Company 201,036 201,036 D(15) 0 0.0
Kay Reese 3,000 3,000 S 0 0.0
Louis Resewber 50,000 50,000 W(16) 0 0.0
200,000 200,000 W(16) 0 0.0
David Rittmueller 596 596 S 0 0.0
David Robbins 1,200 1,200 S 0 0.0
Donald and Joan Rose 1,556 1,556 S 0 0.0
Edward and Martina Russell 712 712 S 0 0.0
Dr. Frank W. Sannella 33,880 33,880 P(1) 0 0.0
Thomas Sauthoff 1,000 1,000 S 0 0.0
James E. and Elaine F. Savage 1,204 1,204 S 0 0.0
Mark Schaftlein (*) 667 667 S 0 0.0
45,000 45,000 W(4) 0 0.0
45,000 45,000 W(5) 0 0.0
72,700 72,700 S 0 0.0
William Schneider 1,191 1,191 S 0 0.0
Christine and Richard Schreier 593 593 S 0 0.0
Marcelo Scigiliano 149 149 S 0 0.0
James Scordo 4,167 4,167 S 0 0.0
William E Schenck 3,388 3,388 P(1) 0 0.0
Michael Sherry 16,000 16,000 S 0 0.0
Frank and Barbara Sirico 5,556 5,556 S 0 0.0
John M. Soldati 596 596 S 0 0.0
Connie Solis 327 327 S 0 0.0
Robert E. Sorenson 1,008 1,008 S 0 0.0
Eugene Snowden 46,667 46,667 W(2) 0 0.0
46,667 46,667 W(2) 0 0.0
41
57,778 57,778 W(2) 0 0.0
57,778 57,778 W(2) 0 0.0
33,333 33,333 W 0 0.0
180,000 180,000 D(17) 0 0.0
Eugene and Ruth Snowden 33,333 33,333 W 0 0.0
33,333 33,333 W 0 0.0
33,333 33,333 W 0 0.0
Ronald Snowden 8,334 8,334 W(2) 0 0.0
8,334 8,334 W(2) 0 0.0
30,556 30,556 D(18) 0 0.0
Ronald and Paulette Snowden 22,222 22,222 W(2) 0 0.0
22,222 22,222 W(2) 0 0.0
Jean and Doug Stettirichs 654 654 S 0 0.0
Jeff and Jan Stoermer 247 247 S 0 0.0
Jeffrey R. Stoermer, Jr. 286 286 S 0 0.0
Roy R. and Ellinore Stoermer 5,128 5,128 S 0 0.0
Tom Stowe 801 801 S 0 0.0
Rodger Stubbs 11,482 11,482 S 0 0.0
Susan L. Suminski 19 19 S 0 0.0
Tissera Overseas Fund, NV 52,968 52,968 P(3) 0 0.0
Gaye Tosi 596 596 S 0 0.0
Westport Capital Partners 141,250 141,250 P(3) 0 0.0
William Vitello 596 596 S 0 0.0
Clifford D. and Annette L. Von Aspern 1,204 1,204 S 0 0.0
Arthur Vorel 926 926 S 0 0.0
Kevin Walsh 596 596 S 0 0.0
Eleanore and Hubert Watson 34 34 S 0 0.0
Jack Webber 1,000 1,000 S 0 0.0
Larry J. Wells 93,653 93,653 S 0 0.0
Larry J. Wells 1,204 1,204 S 0 0.0
Norman Wieselberg 1,191 1,191 S 0 0.0
Whitehall Financial Services, Inc. 200,000 200,000 S 0 0.0
Barbara D. Wilt 167 167 S 0 0.0
Richard C. Wilt III 667 667 S 0 0.0
Sheila B. Williamson 260 260 S 0 0.0
Kevin and Susan Wrenne 5,186 5,186 S 0 0.0
Mike Yankish, Sr. 8,469 8,469 S 0 0.0
Melvin Young 821 821 S 0 0.0
Jackson, Tufts, Cole & Black 169,491 169,491 S(19) 0 0.0
Cassidy & Associates 90,820 90,820 S(20) 0 0.0
Greentree Mortgage 59,322 59,322 S(21) 0 0.0
Brentwood Computers 57,620 57,620 S(22) 0 0.0
Cohen, Brame and Smith 14,407 14,407 S(23) 0 0.0
William Tetsworth 28,000 28,000 S(24) 0 0.0
Teletrend Communications 38,278 38,278 S(25) 0 0.0
Republic Indemnity 29,661 29,661 S(26) 0 0.0
Hakman & Company 31,615 31,615 S(27) 0 0.0
Foster Ousley Conley 19,525 19,525 S(28) 0 0.0
Theodore Orlando 20,000 20,000 S(29) 0 0.0
Howard Rice 33,898 33,898 S(30) 0 0.0
M.S. Farrell & Company, Inc. 9,807 9,807 S(31) 0 0.0
Richard L. Klass 3,116 3,116 S(32) 0 0.0
42
Alan H. Adelson 165,251 165,251 S(33) 0 0.0
James D. Tucker 7,627 7,627 S(34) 0 0.0
Lomas Mortgage USA, Inc. 37,681 37,681 S(35) 0 0.0
Kenny the Printer 7,627 7,627 S(36) 0 0.0
Steve Jizmagian 10,169 10,169 S(37) 0 0.0
Xpedite Systems 35,227 35,227 S(38) 0 0.0
Copelco Capital 4,237 4,237 S(39) 0 0.0
Papola Enterprises 4,461 4,461 S(40) 0 0.0
MFS Intelenet 21,379 21,379 S(41) 0 0.0
Ahmad F. Moradi 60,115 60,115 S(42) 0 0.0
Grubb & Ellis 21,280 21,280 S(43) 0 0.0
Hacienda Property Valuation 27,703 27,703 S(44) 0 0.0
Mediatel 26,259 26,259 S(45) 0 0.0
Ousley 22,246 22,246 S(46) 0 0.0
Charles Chillingworth 50,180 50,180 S(47) 0 0.0
U.S. Milestone 24,000 24,000 S(48) 0 0.0
Lee Danna 48,000 48,000 S(49) 0 0.0
- -------------------------
(*) Is an officer or director of the Company. See "Management-Executive Officers
and Directors."
(1) The Preferred Stock is currently convertible at a conversion price equal to
100% of the closing bid price per share of Common Stock as quoted by Nasdaq.
For purposes of this table, the closing price was $.81 on March 21, 1997,
resulting in a conversion price of $.68. This Prospectus covers additional
shares that may be issued based on adjustments to the conversion price. See
"Description of Capital Stock-Preferred Stock."
(2) Warrant expires December 31, 1997.
(3) Warrant expires July 1, 1998.
(4) Warrant expires January 17, 1998.
(5) Warrant expires depending upon any vesting, on the earlier of April 1, 2002
or April 1, 2004.
(6) Warrant expires April 1, 2001.
(7) The Preferred Stock is currently convertible at a price equal to 60% of the
closing bid price per share of Common Stock as quoted by Nasdaq. For
purposes of this table, the closing price was $.81 on March 21, 1997,
resulting in a conversion price of $.567. This Prospectus covers additional
shares that may be issued based on adjustments to the conversion price. See
"Description of Capital Stock-Preferred Stock."
(8) Warrant expires August 30, 1997.
(9) Warrant expires November 30, 1997.
(10) Warrant expires April 16, 1999.
(11) The Preferred Stock is currently convertible into 2,888,889 shares of
Common stock.
(12) The Preferred Stock is currently convertible at a conversion price equal to
$4.00 divided by 84% of the closing bid price per share of Common Stock as
quoted by Nasdaq. For purposes of this table, the closing price was $.59 on
July 2, 1997, resulting in a conversion price of $.08. This Prospectus
covers additional shares that may be issued based on adjustments to the
conversion price. See "Description of Capital Stock-Preferred Stock."
(13) Warrant expires January 1999.
(14) Warrant expires January 23, 1998.
(15) The preferred stock is currently convertible at a conversion price equal to
$5.00.
(16) Warrant expires January 10, 1998.
(17) The conversion price for this loan in the amount of $92,000 is $.45.
(18) The conversion price for this loan in the amount of $13,750 is $.45.
43
(19) These shares of Common Stock are issued pursuant to a settlement agreement.
The Company has agreed that the shares will be sold to gross to the
creditor $170,000 in the aggregate, to be paid over a period of 10 months.
In the event the number of shares is insufficient to gross that amount, the
Company may be obligated to issue additional shares.
(20) These shares of Common Stock are issued pursuant to a settlement agreement.
The Company has agreed that the shares will be sold to gross to the
creditor $70,308 in the aggregate, to be paid over a period of 12 months.
In the event the number of shares is insufficient to gross that amount, the
Company may be obligated to issue additional shares.
(21) These shares of Common Stock are issued pursuant to a settlement agreement.
The Company has agreed that the shares will be sold to gross to the
creditor $35,000 in the aggregate, to be paid over a period of 7 months. In
the event the number of shares is insufficient to gross that amount, the
Company may be obligated to issue additional shares.
(22) These shares of Common Stock are issued pursuant to a settlement agreement.
The Company has agreed that the shares will be sold to gross to the
creditor $33,996 in the aggregate, to be paid over a period of 6 months. In
the event the number of shares is insufficient to gross that amount, the
Company may be obligated to issue additional shares.
(23) These shares of Common Stock are issued pursuant to a settlement agreement.
The Company has agreed that the shares will be sold to gross to the
creditor $24,720 in the aggregate, to be paid over a period of 6 months. In
the event the number of shares is insufficient to gross that amount, the
Company may be obligated to issue additional shares.
(24) These shares are issued in lieu of a cash payment for services rendered.
(25) These shares of Common Stock are issued pursuant to a settlement agreement.
The Company has agreed that the shares will be sold to gross to the
creditor $22,584 in the aggregate, to be paid over a period of 6 months. In
the event the number of shares is insufficient to gross that amount, the
Company may be obligated to issue additional shares.
(26) These shares of Common Stock are issued pursuant to a settlement agreement.
The Company has agreed that the shares will be sold to gross to the
creditor $17,500 in the aggregate, to be paid over a period of 7 months. In
the event the number of shares is insufficient to gross that amount, the
Company may be obligated to issue additional shares.
(27) These shares of Common Stock are issued pursuant to a settlement agreement.
The Company has agreed that the shares will be sold to gross to the
creditor $18,652.84 in the aggregate, to be paid over a period of 3 months.
In the event the number of shares is insufficient to gross that amount, the
Company may be obligated to issue additional shares.
(28) These shares of Common Stock are issued pursuant to a settlement agreement.
The Company has agreed that the shares will be sold to gross to the
creditor $11,520 in the aggregate, to be paid over a period of 6 months. In
the event the number of shares is insufficient to gross that amount, the
Company may be obligated to issue additional shares.
(29) These shares of Common Stock are issued pursuant to a settlement agreement.
The Company has agreed that the shares will be sold to gross to the
creditor $6,935 in the aggregate, to be paid over a period of three months.
In the event the number of shares is insufficient to gross that amount, the
Company may be obligated to issue additional shares.
(30) These shares of Common Stock are issued pursuant to a settlement agreement.
The Company has agreed that the shares will be sold to gross to the
creditor $20,000 in the aggregate, to be paid over a period of two months.
In the event the number of shares is insufficient to gross that amount, the
Company may be obligated to issue additional shares.
(31) These shares of Common Stock are issued pursuant to a settlement agreement.
(32) These shares of Common Stock are issued pursuant to a settlement agreement.
The Company has agreed that the shares will be sold to gross to the
creditor $1,838.49 no later than sixty days after the effective date of the
Registration Statement. In the event the number of shares is insufficient
to gross that amount the Company may be obligated to issue additional
shares.
(33) These shares are issued pursuant to a settlement agreement.
(34) These shares are issued pursuant to a settlement agreement.
(35) These shares of Common Stock are issued pursuant to a settlement agreement.
The Company has agreed that the shares will be sold to gross to the
creditor $22,232 in the aggregate, to be paid over a period of four months.
In
44
the event the number of shares is insufficient to gross that amount, the
Company may be obligated to issue additional shares.
(36) These shares of Common Stock are issued pursuant to a settlement agreement.
The Company has agreed that the shares will be sold to gross to the
creditor $4,500 in the aggregate, to be paid over a period of four months.
In the event the number of shares is insufficient to gross that amount, the
Company may be obligated to issue additional shares.
(37) These shares of Common Stock are issued pursuant to a settlement agreement.
The Company has agreed that the shares will be sold to gross to the
creditor $6,000 plus accrued interest, to be paid over a period of three
months. In the event the number of shares is insufficient to gross that
amount, the Company may be obligated to issue additional shares.
(38) These shares of Common Stock are issued pursuant to a settlement agreement.
The Company has agreed that the shares will be sold to gross to the
creditor $20,784 plus accrued interest, to be paid over a period of seven
months. In the event the number of shares is insufficient to gross that
amount, the Company may be obligated to issue additional shares.
(39) These shares of Common Stock are issued pursuant to a settlement agreement.
The Company has agreed that the shares will be sold to gross to the
creditor $2,500 plus accrued interest, to be paid no later than October 10,
1996.
(40) These shares of Common Stock are issued pursuant to a settlement agreement.
The Company has agreed that the shares will be sold to gross to the
creditor $2,632 plus accrued interest, to be paid over a period of two
months. In the event the number of shares is insufficient to gross that
amount, the Company may be obligated to issue additional shares.
(41) These shares of Common Stock are issued pursuant to a settlement agreement.
The Company has agreed that the shares will be sold to gross to the
creditor $12,619.32 plus accrued interest, to be paid over a period of five
months. In the event the number of shares is insufficient to gross that
amount, the Company may be obligated to issue additional shares.
(42) These shares of Common Stock are issued pursuant to a settlement agreement.
The Company has agreed that the shares will be sold to gross to the
creditor $35,468 plus accrued interest, to be paid over a period of 18
months. In the event the number of shares is insufficient to gross that
amount, the Company may be obligated to issue additional shares.
(43) These shares of Common Stock are issued pursuant to a settlement agreement.
The Company has agreed that the shares will be sold to gross to the
creditor $12,555. In the event the number of shares is insufficient to
gross that amount, the Company may be obligated to issue additional shares.
(44) These shares of Common Stock are issued pursuant to a settlement agreement.
The Company has agreed that the shares will be sold to gross to the
creditor $16,345, to be paid over a period of five months. In the event the
number of shares is insufficient to gross that amount, the Company may be
obligated to issue additional shares.
(45) These shares of Common Stock are issued pursuant to a settlement agreement.
The Company has agreed that the shares will be sold to gross to the
creditor $15,493, to be paid over a period of seven months. In the event
the number of shares is insufficient to gross that amount, the Company may
be obligated to issue additional shares.
(46) These shares of Common Stock are issued pursuant to a settlement agreement.
The Company has agreed that the shares will be sold to gross to the
creditor $13,125, to be paid over a period of six months. In the event the
number of shares is insufficient to gross that amount, the Company may be
obligated to issue additional shares.
(47) These shares of Common Stock are issued pursuant to a settlement agreement.
(48) These shares of Common Stock are issued pursuant to a settlement agreement.
(49) These shares of Common Stock are issued pursuant to a settlement agreement.
The shares offered by the Selling Stockholders may be sold by one or
more of the following methods, without limitation: (i) ordinary brokerage
transactions and transactions in which the broker solicits purchases; and (ii)
face-to-face transactions between sellers and purchasers without a
broker-dealer. In effecting sales, brokers or dealers engaged by the Selling
Stockholders may arrange for other brokers or dealers to participate. Such
brokers or dealers may receive commissions or discounts from the Selling
Stockholders in amounts to be negotiated. Such brokers and dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Act, in connection
45
with such sales. The Selling Stockholder or dealer effecting a transaction in
the registered securities, whether or not participating in a distribution, is
required to deliver a Prospectus.
LEGAL MATTERS
Certain legal matters relating to the issuance and resale of shares
hereby will be passed upon for the Company by Brewer & Pritchard, P.C., Houston,
Texas.
EXPERTS
The financial statements of the Company as of December 31, 1995 and
1996 have been audited by Comiskey & Company, P.C., independent certified public
accountants, for the periods and to the extent as set forth in the reports and
have been included herein is in reliance upon such reports of said firm given on
their authority as experts in accounting and auditing.
In May 1994, Ernst & Young LLP ("E & Y") resigned as auditors. There
were no disagreements with E & Y on any matter of accounting principles or
practices, financial statements disclosure, or auditing scope or procedures, and
reports issued by E & Y on the Company's financial statements did not contain an
adverse opinion, or were modified as to uncertainty, audit scope or accounting
principles. In October 1993, E & Y informed the Company that it needed to
strengthen its internal controls, and management believed that it adequately
addressed this matter in 1993. The Company's current auditors were engaged,
based on the Board of Directors approval, in May 1994.
46
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We have audited the accompanying consolidated balance sheet of Westmark Group
Holdings, Inc. as of December 31, 1996, and the related consolidated statements
of operations, changes in stockholders' equity, and cash flows for the years
ended December 31, 1996 and 1995. These consolidated financial statements are
the responsibility of the Company's management. Our repsonsiblity is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Westmark Group
Holidings, Inc. as of December 31, 1996, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 1996,
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As more fully described in footnote 2, the
Company has incurred repeated operating losses, has a deficit in working
capital, and insufficient equity for certain contractual commitments. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The Company's plans with respect to these conditions are also
described in footnotes 2 and 9. The accompanying financial statements do not
include any adjustments which might be necessary should the Company be unable to
accomplish its plans.
Aurora, Colorado
August 15, 1997
PROFESSIONAL CORPORATION
1
WESTMARK GROUP HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
ASSETS
Current Assets
Cash and Cash equivalents ............................. $ 18,533
--------------
Mortgage Loans Held for Sale .......................... 4,995,193
Inventory ............................................. 41,008
Accounts Receivable ................................... 18,711
Total current assets .................................. 5,073,445
Property and Equipment
Office buildings ...................................... 167,560
Office furniture and equipment ........................ 429,951
--------------
597,511
Accumulated depreciation .............................. 299,429
--------------
Property and equipment, net ........................... 298,082
Other assets
Investment in preferred stock ......................... 2,000,000
Investment in land .................................... 1,000,000
Goodwill, net of amortization ......................... 1,753,044
Dividends receivable .................................. 140,000
Deposits and other assets ............................. 60,272
--------------
Total other assets .................................... 4,953,316
--------------
Total assets .......................................... 10,324,843
==============
2
WESTMARK GROUP HOLDINGS, INC
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Warehouse line payable ................................ 4,748,021
Accounts payable ...................................... 1,645,413
Notes payable - related party ......................... 1,727,569
Notes payable ......................................... 756,694
Accrued settlement obligation ......................... 407,560
Accrued misc. liabilities ............................. 290,639
Dividends payable ..................................... 126,000
Accrued payroll taxes ................................. 105,728
Accrued interest ...................................... 241,692
--------------
Total current liabilities ............................. 10,049,316
Callable preferred stock - Series A -
18,750 shares outstanding ................................. 75,000
Stockholders' equity
Preferred stock, $0.001 par value, 10,000,000
shares authorized, 780,000 shares issued
and outstanding ...................................... 3,250,000
Common stock, $0.001 par value, 50,000,000
shares authorized, 4,833,002 shares issued
and outstanding ...................................... 4,833
Additional paid-in capital ............................ 24,801,364
Accumulated deficit ................................... (26,655,416)
--------------
1,400,781
Stock issued but unearned/unpaid ...................... (1,200,254)
--------------
Total stockholders' equity ............................ 200,527
--------------
Total liabilities and stockholders' equity ................. 10,324,843
==============
The accompanying notes are an integral part of the financial statements.
3
WESTMARK GROUP HOLDINGS, INC.
STATEMENT OF LOSS AND ACCUMULATED DEFICIT
For the years ended December 31, 1996 and 1995
For the year ended Dec. 31,
---------------------------
1996 1995
------------ ------------
REVENUES
Loan origination fees ....................... 355,255 544,386
Gain on sale of loans ....................... 1,881,068 1,569,559
Investment income - mortgages ............... 584,399 938,657
Sales - refrigeration units ................. 29,252 0
Other ....................................... 83,199 54,298
------------ ------------
2,933,173 3,106,900
EXPENSES
Direct loan fees ............................ 432,425 212,309
Interest expense ............................ 1,172,852 1,223,875
Non-cash compensation ....................... 1,153,318 1,099,000
General and administrative .................. 3,930,199 6,775,395
Costs and expenses - refrigeration division . 97,488 0
Loss on write-down of REO's ................. 0 124,654
Loss on write-down of servicing receivable .. 0 179,663
Depreciation ................................ 74,393 95,627
Amortization ................................ 110,864 98,916
Bad debts ................................... 0 80,521
Loss on investment in Greentree ............. 0 225,000
Repurchase losses ........................... 0 480,000
------------ ------------
Total expenses .............................. 6,971,539 10,594,960
Net operating loss ............................... (4,038,366) (7,488,060)
Other income (expense)
Dividend income ............................. 140,000 0
------------ ------------
Loss from continuing operations before income tax (3,898,366) (7,488,060)
Provision for income tax benefit ................. 39,000 180,000
------------ ------------
Net loss before extraordinary items .............. (3,859,366) (7,308,060)
Extraordinary items
Gain on extinguishment of debt,
(net of tax of $180,000) .................. 0 270,000
Gain on disposal of subsidiary
(net of tax of $39,000) ................... 58,371 0
------------ ------------
Net Loss .................................... (3,800,995) (7,038,060)
============ ============
Per share amounts
Loss from continuing operations ............. (1.06) (6.75)
Extraordinary items ......................... 0.02 0.25
------------ ------------
Net loss per share .......................... (1.04) (6.50)
============ ============
Weighted average number of shares
outstanding ............................... 3,660,340 1,082,371
============ ============
The accompanying notes are an integral part of the financial statements.
4
WESTMARK GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
DECEMBER 31, 1996 and 1995
For the year ended Dec. 31,
-----------------------------
1996 1995
------------- -------------
CASH FLOWS FROM OPERATIONS:
Consolidated net loss .................................. (3,800,995) (7,038,060)
Adjustments to reconcile net loss to net
cash flows from operations
Depreciation and amortization ....................... 185,256 194,543
Non-cash compensation and stock for services ........ 1,153,318 1,745,151
Loss on disposal of assets .......................... 71,856 124,654
Loss on investment in Greentree ..................... 0 225,000
Pre-tax extraordinary gains ......................... (97,371) (450,000)
------------- -------------
Net cash used by operations before
working capital changes ...................... (2,487,936) (5,198,712)
Net (increase) decrease in accounts receivable ...... 365,717 466,498
(Increase) decrease in other current assets ......... (41,008) 368,693
(Increase) decrease in mortgage loans held for sale . 14,484,836 (14,208,495)
(Increase) decrease in dividend receivable .......... (140,000) 0
(Increase) decrease in other assets ................. 20,581 1,020,004
Increase (decrease) in accounts payable ............. (131,292) 860,895
Increase (decrease) in current liabilities .......... (177,129) 25,259
------------- -------------
Net cash provided (used) by operations ......... 11,893,769 (16,665,858)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash invested in Greentree Mortgage .................... 0 (100,000)
Purchase of fixed assets and improvements .............. (13,752) (50,133)
Proceeds from sale of real estate ...................... 0 49,053
------------- -------------
Net cash used by investing activities .......... (13,752) (101,080)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on line-of-credit ........................... 73,633,630 158,020,868
Repayments on line-of-credit ........................... (87,511,475) (144,480,885)
Sale of stock for cash ................................. 920,000 1,725,081
Repurchases of common stock ............................ (802,000) 0
Proceeds from issuance of notes payable ................ 1,661,988 1,808,500
Payments on line-of-credit and other notes payable ..... (75,543) (102,283)
------------- -------------
Net cash provided (used) by
financing activities ......................... (12,173,400) 16,971,281
------------- -------------
Net decrease in cash and cash
equivalents .................................. (293,383) 204,343
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ........... 311,916 107,573
------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR ................. 18,533 311,916
============= =============
The accompanying notes are an integral part of the financial statements
5
WESTMARK GROUP HOLDINGS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
Non-Callable
Preferred stock Common stock Additional Other Total
------------------- ------------------------ Paid In equity Accumulated Stockholders'
# shares amount # shares amount Capital reductions Deficit Equity
------- --------- ---------- ----------- ----------- ---------- ----------- ----------
Balance, December 31, 1994 ... 0 0 674,605 17,271,983 54,688 0 (15,690,361) 1,636,310
Issuance of common stock
January 1995 - December 1995 . 0 0 1,958,167 5,893,954 0 0 0 5,893,954
Paid in capital from option
arrangements ................. 0 0 0 0 1,099,000 0 0 1,099,000
Net Loss ..................... 0 0 0 0 0 0 (7,038,060) (7,038,060)
------- --------- ---------- ----------- ----------- ---------- ----------- ----------
Balance December 31, 1995 .... 0 0 2,632,772 23,165,937 1,153,688 0 (22,728,421) 1,591,204
Repurchase and retirement
of common shares
April 1996 ................... 0 0 (240,000) (802,000) 0 0 0 (802,000)
Issuance of common stock for
services and debt conversions
March 1996 - October 1996 .... 0 0 2,420,230 1,798,572 0 (950,254) 0 848,318
Issuance of common stock
for cash ..................... 0 0 20,000 20,000 0 0 0 20,000
Issuance of Non-Callable
Series B Preferred Shares
for cancellation of warrants
April 1996 ................... 300,000 600,000 0 0 (600,000) 0 0 0
Issuance of Non-Callable
Series C Preferred Shares
for cash
April 1996 ................... 200,000 700,000 0 0 0 0 0 700,000
Issuance of Non-Callable
Series D Preferred Shares
for subscription receivable
August 1996 .................. 50,000 250,000 0 0 0 (250,000) 0 0
Issuance of Non-Callable
Series E Preferred Shares
for cash and acquisition of
Green World Technology
July 1996 .................... 130,000 1,300,000 0 0 0 0 0 1,300,000
Reclassification of 400,000
shares of preferred A to
non-callable to reflect the
relinquishment of the call
provision by the holder in
December, 1996 ............... 100,000 400,000 0 0 0 0 0 400,000
Cumulative preferred dividends
payable ...................... 0 0 0 0 0 0 (126,000) (126,000)
Non cash compensation
recognized for warrant
issuances .................... 0 0 0 0 70,000 0 0 70,000
Adjustment to reflect
reincorporation in Delaware
and change from no par value
common stock to par value
common stock ................. 0 0 0 (24,177,676) 24,177,676 0 0 0
Net loss ..................... 0 0 0 0 0 0 (3,800,995) (3,800,995)
------- --------- ---------- ----------- ----------- ---------- ----------- ----------
Balance, December 31, 1996 ... 780,000 3,250,000 4,833,002 4,833 24,801,364 (1,200,254) (26,655,416) 200,527
======= ========= ========== =========== =========== ========== =========== ==========
The accompanying notes are an integral part of the financial statements.
6
WESTMARK GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Westmark Group Holdings, Inc. ("the Company") is a financial services
company that, through its wholly owned subsidiary, Westmark Mortgage
Corporation ("Westmark Mortgage") is engaged in the business of
originating, purchasing and selling mortgage loans. The Company sells both
conforming loans (generally those borrowers with perfect or good credit)
and non-conforming loans (generally below average and delinquent credit).
Originally incorporated in Colorado in 1986, the Company reincorporated in
the state of Delaware in June 1996.
Principles of Consolidation
For all periods presented, the consolidated financial statements include
the accounts of the Company, and its wholly owned subsidiaries, Westmark
Mortgage Corporation and Green World Technologies, Inc. Until its disposal
in July 1996, Network Capital Group (an inactive wholly owned subsidiary
with an interest in real property) is included in the consolidation.
Intercompany transactions have been eliminated in consolidation.
Mortgage Loans Held for Sale
Mortgage loans are originated by retail brokers and purchased by the
Company to be sold to investors. The loans are reported at the lower of
cost or market. Loans covered by commitments are valued as specified in the
commitment. Loans not covered by specific commitments are valued at market,
as determined by reference to the Company's normal market outlets.
At December 31, 1996, loans held for sale were valued at cost, which was
lower than market. Anticipated prepayments on principal amounts of loans
are not considered significant, since all loans are sold to investors, are
generally held for a period of 60 days or less before the sale occurs, and
are sold along with the related servicing rights.
Real Estate Acquired in Settlement of Loans Repurchased
Real estate acquired in settlement of loans repurchased (REO property) is
recorded at the lower of cost of market.
Revenue Recognition
Premiums associated with the rights to service loans, fees for loan
origination, the associated retail correspondent costs, and direct costs of
originating loans are deferred and reflected in operations when the
underlying loan is sold.
Non-Cash Compensation
Equity instruments issued to acquire goods and services from nonemployees
have been accounted for based on the fair value of the consideration
received, or the fair value of the equity instruments issued, whichever is
more reliably measurable. Shares issued in consideration of services to be
performed in future periods are considered unearned, and are shown as a
deduction from shareholders' equity.
Property and Equipment
Property and equipment is recorded at cost less accumulated depreciation.
Depreciation is computed on a straight line basis over estimated useful
lives ranging from 4 to 7 years for office furnishings and equipment and 30
years for buildings.
7
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investment in Real Estate
The Company's investment in real estate is carried at the lower of cost or
estimated fair value determined with respect to outside appraisal. This
property is considered available for sale.
Compensated absences
Compensated absences are accrued as earned.
Earnings per share
Primary earnings per share have been computed using the weighted average
shares outstanding. Fully diluted earnings per share has not been
presented, since the effect of common share equivalents would be
anti-dilutive.
Goodwill
Goodwill is being amortized over ten years using the straight-line method.
Goodwill is evaluated periodically in accordance with the provisions of
SFAS 121- Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of.
Income taxes
Income taxes are allocated among subsidiaries in the ratio that each
subsidiary contributes to the consolidated liability. Deferred taxes result
from temporary differences in the recognition of income and expense for
financial and income tax reporting purposes and as a result of
non-benefitted net operating loss carryforwards.
Cash equivalents
For the purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
Financial instruments
The fair values of financial instruments closely approximate their carrying
values in the accompanying financial statements with the exception of the
Company's loans held for sale. Market value of loans held for sale,
determined with reference to existing commitments, was $5,579,162.
Reclassifications
Certain reclassifications have been made to the 1995 consolidated financial
statements to conform to the 1996 presentation.
Use of Estimates
The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results could differ
from those estimates.
8
2. COMMITMENTS AND CONTINGENCIES
Classification as a going concern
The Company has incurred significant and recurring operating losses,
including $3.8 million in 1996 and $7.0 million in 1995. It has
historically supplemented its operating cash flows with financing from
outside sources. At December 31, 1996, the Company had negative working
capital of $5.0 million, including $2.7 million in notes currently due by
their terms or scheduled to come due in 1997. In addition, the Company has
negotiated several settlement agreements with its creditors to settle its
outstanding obligations through the issuance of stock. To date, the Company
has been unsuccessful in registering the shares underlying many of these
settlement agreements, and consequently various settlement defaults have
resulted in unsatisfied judgments against the Company.
The Company is required to maintain $1,000,000 in stockholders equity to
remain listed for quotation on the NASDAQ SmallCap Market. With total
stockholders' equity of $200,000 the Company does not meet this
requirement. If the Company is unable to satisfy the requirements for
continued listing with NASDAQ, trading, if any, in the securities listed
thereon would be conducted in the over-the-counter market of the National
Quotation Bureau or on the OTC Bulletin Board. This could significantly
curtail the trading market for the Company's common stock. In the absence
of a trading market for the Company's common stock, the Company will be
unable to effect equity settlements for its outstanding debt or to satisfy
existing settlement agreements though the issuance of shares.
As further described in footnote 9, the Company has entered into an
agreement to conduct a best efforts offering of preferred stock for a
minimum of $3 million and a maximum of $6 million gross proceeds.
Concurrently with and contingent upon the success of this offering is an
agreement to defer or repay $ 1.7 million in outstanding debt payable to
Medical Industries of America, Inc. (formerly Heart Labs of America, Inc.),
a significant shareholder. Since the offering is conducted on a best
efforts all-or-none minimum basis, there can be no guarantee that the
offering will be successful and that the related restructuring of debt will
be accomplished. Failure to obtain sufficient outside financing will have a
direct, material adverse effect on the future operations of the Company.
The Company believes that even in the event that the minimum amount of this
offering is sold, the proceeds would be sufficient to restructure the
Company's existing debt in such a way as to make possible its repayment
with internally generated cash flows in the ordinary course of business. In
addition, the restructuring is intended to result in improvements to the
financial position of the Company which would allow for continuing
inclusion on the NASDAQ SmallCap Market quotation system.
Antidilution agreement
The Company has an agreement with Medical Industries of America, Inc.,
(MIOA) a 49% shareholder of the Company, to issue shares to MIOA which will
be sufficient to maintain its 49% interest in the Company. As of December
31, 1996, the Company has not issued all of these shares. In the
transaction more fully described in footnote 9, MIOA has agreed to
relinquish its right to receive these shares as part of a restructuring of
its ownership in WGHI and the renegotiation of certain debt advances by
MIOA to WGHI.
9
2. COMMITMENTS AND CONTINGENCIES (continued)
Off Balance Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments represent commitments to fund loans
and involve, to varying degrees, elements of interest-rate risk and credit
risk in excess of the amount recognized in the balance sheet. The
interest-rate risk is mitigated by the Company's commitments to sell loans
to investors. The credit risk is mitigated by the Company's evaluation of
the creditworthiness of potential borrowers on a case-by-case basis.
At December 31, 1996, there were no interest rate commitments on loans in
the pipeline, since the majority of the pipeline was comprised of B/C loans
which are not typically locked by the borrower. The Company had interest
rate commitments (rate locks) totaling $1.6 million at December 31, 1995.
The total loan pipeline at those dates was $18,364,000 and $33,718,000,
respectively. It is impractical to estimate market value of the portfolio
at December 31, 1996, since its value is dependent on interest rates, time
of closing, turndown ratio, and other variables which cannot be determined
with any reasonable certainty at this time.
At December 31, 1996, loans held for sale was comprised of 10% "A"
(conforming) loans and 90% "B/C" (non-conforming) loans. At December 31,
1995, the breakdown was 78% "A" loans and 22% "B" loans.
Litigation in Process
The Company is a defendant in Robert J. Conover vs. Greentree Mortgage Co.,
L.P.. and Greentree Management Corporation (collectively "Greentree"),
Westmark Group Holdings, Inc., Westmark Mortgage Corporation and Michael F.
Morrell. The plaintiff served as president and chief financial officer of
Greentree pursuant to an employment agreement between the plaintiff and
Greentree. Plaintiff was discharged from those positions in September 1995.
Plaintiff brought this action for compensatory damages based upon an
alleged breach of such employment agreement. Greentree disputes the
allegations of the complaint. The Company believes that there is no legal
justification for the joinder of the Company and Mr. Morrell as defendants
in the pending dispute between the plaintiff and Greentree, and that the
likelihood of loss in this matter is remote. Consequently, no amount has
been accrued in this matter at December 31, 1996.
The Company is a defendant in Conway et al v. Danna, Network Financial
Services, Inc., et al. The suit alleges Unfair Practices; Fraud (Negligent
Misrepresentations; Intentional Misrepresentations; Concealment); Breach of
Written Contract; Breach of Implied Covenant of Good Faith and Fair
Dealing; Common Count; and Breach of California Securities Statutes against
Network Financial Services, Inc. (AKA Westmark Group Holdings, Inc.) and
others. The Company considers the risk of loss in this matter to be remote
and, consequently, no amount has been accrued at December 31, 1996.
10
2. COMMITMENTS AND CONTINGENCIES (continued)
Litigation in Process (continued)
The Company is a defendant in Knight v. Lomas Mortgage U.S.A. and Westmark
Mortgage Corporation. The complaint is based upon a contention by the
Plaintiff that Lomas Mortgage U.S.A. as the servicing agent wrongfully
impaired the credit rating of Plaintiff and breached the written agreement
between the parties. The company has been named as a party defendant in
view of the original contractual relationship between the Plaintiff and
Westmark. The Company considers the risk of loss in this matter to be
remote, and consequently, no amount has been accrued as of December 31,
1996.
The Company is a defendant in Ortega v. Michael Santa Maria et al filed in
Orange County Superior Court of the State of California. The complaint is
based upon a contention by the Borrower Ortega that Santa Maria,
individually and as an owner/manager/broker of Bann Cor Mortgage made false
presentations of material fact to the plaintiffs. The Company acquired this
loan from Bann Cor and subsequently sold the loan to Imperial Credit
Industries. A preliminary determination indicates that the basis for the
dispute is between Santa Maria and Bann Cor. However, the Company has been
named as a party defendant. The Company considers the risk of loss in the
matter to be remote, and consequently, no provision for loss has been
accrued at December 31, 1996.
One of the Company's wholly owned subsidiaries, Green World Technologies,
Inc. has been named, together with other defendants, in Shape Up America v.
Phillippe et al,. The Complaint alleges breach of contract, conspiracy,
fraud, and quantum meruit. The Plaintiff claims to be entitled to various
forms of compensation based upon the sale of certain licensing, patent and
marketing rights to the Talon Refrigerant Management System. Based upon a
preliminary review of this information, the Company considers the risk of
loss in this matter to be minimal, and consequently, no amount has been
accrued at December 31, 1996.
The Company is a defendant in Tula Business Inc., Pokras, Inc., Dovasar,
S.A., Rafoel Lapidus and Eli Itzinger v. Medical Industries of America,
Inc. et al. This action was initiated by certain shareholders of MIOA
alleging fraud, misappropriation of funds and various securities
violations. The Company is named as a peripheral defendant in view of
various loans from MIOA to the Company and the position of MIOA as a 49%
shareholder of the Company. It is anticipated that the company will have no
liability whatsoever and that the matter will be resolved without the
necessity of the Company's participation. Consequently, no loss amount has
been accrued at December 31, 1996. See subsequent event footnote #10.
The Company has entered into a series of settlement agreements with various
creditors. Various settlement defaults have resulted in unsatisfied
judgments. All amounts owed pursuant to ongoing settlements and defaulted
amounts have been recorded at their full settlement amounts at December 31,
1996.
11
2. COMMITMENTS AND CONTINGENCIES (continued)
Outstanding Settlement Agreements in Progress
The Company currently has outstanding settlement agreements with various
creditors totaling $882,000. These settlement agreements provide for
periodic issuances of an estimated 1,020,000 common shares which will be
sold at the prevailing fair market value to satisfy the claims of
creditors. Shares remaining unsold, if any, after full satisfaction of
these claims will be returned to the Company's treasury. Should the market
price of the Company's stock decline, it is possible that the number of
shares reserved to settle the claims of creditors would prove to be
insufficient, and the Company would be required to satisfy the remaining
liabilities in cash. The Company is in the process of preparing an SB-2
registration statement for the shares underlying these settlement
agreements.
Land Purchase Commitment
The Company has agreed to place $5,000,000 of preferred stock in escrow to
secure an option to purchase additional land parcels similar to the
Company's current investment in land. The preferred stock may be
convertible by the landowner into common stock at a minimum conversion
price of $1.00 beginning in April 1997. The Company is contractually
obligated to purchase $1,000,000 of land, which contractual obligation will
be satisfied through the release of $1,000,000 in preferred shares from
escrow. Additional shares of stock will be released through conversion to
common equity only in the event that land sales net proceeds to the Company
in excess of $1,000,000.
3. RELATED PARTY TRANSACTIONS
Effective November 1995, and through the year ended December 31, 1996, the
Company owned a $2,000,000 investment in the preferred stock of Medical
Industries of America, Inc. ("MIOA"). MIOA in turn owned approximately 49%
of the outstanding common stock of the Company. In the transaction more
fully described in Note 10, these shareholdings will be exchanged to
eliminate all significant commonality of ownership between the two
companies.
From February 1996 to May 1996, MIOA advanced the Company a total of
$1,727,569 for which the Company issued various 10% promissory notes
payable between February 13, 1997 and May 1, 1997. The promissory notes are
secured by Series C preferred stock of the Company which is convertible at
84% of the bid price on the date of the conversion. As more fully discussed
in Note 10, this debt is to be refinanced on a long term basis, subject to
the receipt by the Company of a minimum of $3,000,000 in equity financing.
During the period January 1, 1996 to June 28, 1996, Mr. Norman J.
Birmingham served as president of MIOA. From November 1995 to September
1996, Mr. Birmingham served as president of the Company, and in December
1996, he was named as chief financial officer of the Company. Mr.
Birmingham owns 8,000 shares of MIOA (which is less than 1% of the total
outstanding shares) and approximately 1,000 shares of the Company.
The Company purchased its investment in lad from PBF Land Co. PBF Land Co.
is owned and controlled by Mr. Charles Chillinsworth II.
12
3. RELATED PARTY TRANSACTIONS (Continued)
The Company purchased its investment in Green World Technologies, Inc. from
GTB Company, which is owned and controlled by Mr. Charles Chillingsworth.
For the period January 1, 1996 through March 1996, Mr. Chillingsworth
provided consultant services to the Company totalling $78,000. For the
period November 1995 through May 1996, Mr. Chillingsworth also provided
legal services to MIOA. Mr. Chillingsworth owns no shares of MIOA, but is a
party to a settlement agreement with the Company entitling him to 36,551
shares of the Company.
In June 1996, the Company issued 150,000 shares of WGHI common stock with a
fair value of $187,000 to Mr. Bradley T. Ray. Mr. Ray was a consultant to
and held shares in MIOA through June 1996. The maximum aggregate number of
shares of MIOA owned by Mr. Ray totaled 12,450 (on a post-split basis)
which amount equates to approximately 12% of the then outstanding shares of
MIOA.
The Company is leasing its headquarters from a shareholder and former
officer of the Company, Mr. Michael J. Morell for approximate monthly
payments of $2,300 through April 1998. Mr. Morell is currently an officer
and director of MIOA.
4. OUTSTANDING DEBT
Warehouse Lines
As of December 31, 1996, Westmark Mortgage Corporation has a warehouse
agreement with Princap Mortgage Warehouse, Inc. totaling $15,000,000
through November , 1997. The line is fully collateralized by the assignment
and pledge of eligible mortgage loans. Interest on the line is payable at
the time of purchase by the permanent investor at an annual rate of 2.0%
above the prime rate of interest (10.25% at December 31, 1996). There is a
transaction charge of $140 per loan. In addition the warehouse agreement
requires Westmark Mortgage Corporation to possess minimum net worth of
$250,000, and maintain a compensating cash balance on deposit with a
designated financial institution totaling $5,000. At December 31, 1996, the
balance outstanding on this line-of-credit totaled $4,748,021.
Other Notes Payable
The Company is obligated under the following notes payable at December 31,
1996:
10% notes payable, to MIOA, face amount $1,727,569, secured by
Series C Preferred Stock of the Company convertible at 84% of
bid price on the date of conversion. Due at various dates
ranging from February 13, 1997 to May 1, 1997 ............ 1,727,569
12% mortgage loan, secured by building. Face amount $87,000
Installment payments of $2,807 due monthly with entire amount
due June 1, 1998 Foreclosure actions initiated in 1995 have
been cured in 1996 ....................................... 48,005
13
4. OUTSTANDING DEBT (Continued)
Other Notes Payable (continued)
12.5% unsecured demand note, face amount $25,000,
requiring payments of $3,500 per month pursuant to a 1996
settlement agreement. These payments are in def ............ 19,770
18% unsecured demand note, face amount $22,350, due
on demand ................................................... 22,350
10% convertible demand note, face amount $29,218, due
April 15, 1997, convertible into the Company's common
stock at a conversion price equal to the closing bid price
on the date of conversion .................................. 29,218
12% convertible, subordinated, unsecured promissory
notes, face amount $79,750, due thirty days from issuance
and renewable thereafter in thirty day increments by the
holder. Convertible at the option of the holder into shares
of the Company's common stock at a conversion rate
of $0.55 per share ......................................... 79,750
10% convertible unsecured promissory notes, face
amount $39,850, due on demand, convertible into shares
of the Company's common stock at prices ranging from
$0.42 to $0.61 per share ................................... 39,850
10% convertible unsecured promissory notes, face amount
$61,251, due June 30, 1997, convertible into shares of the
Company's common stock at the prevailing market value
in the event of default .................................... 59,751
10% convertible unsecured promissory note, face
amount $50,000, due June 14, 1996, convertible into
the Company's common stock at $0.81 per share .............. 30,000
10% convertible unsecured promissory note, face
amount $100,000, due Feb. 28, 1997, convertible into
shares of the Company's common stock at $0.81 pe ........... 100,000
10% unsecured promissory note, face amount $19,000,
due on demand .............................................. 19,000
14
4. OUTSTANDING DEBT (Continued)
Other Notes Payable (continued)
13.54% convertible obligation, face amount $229,000,
$115,000 of which shall be payable in cash upon the
closing of a transaction whereby WGHI receives at least
$3,000,000 in additional capitalization, otherwise payable
in shares of the Company's stock. Balance payable in
shares of the Company's common stock by January 30,
1997 .................................................... 229,000
11.25% convertible obligation, face amount $80,000
$40,000 of which shall be payable in cash upon the closing
of a transaction whereby WGHI receives at least
$3,000,000 in additional capitalization, otherwise payable
in shares of the Company's stock. Balance payable in
shares of the Company's common stock by January 30,
1997 .................................................... 80,000
---------
Total notes outstanding .................................. 2,484,263
=========
5. LEASES
Beginning in March 1995, the Company is leasing its headquarters from a
consultant and former officer of the company for an average monthly rental
of $2,300 through April 1998. The Company also leases office equipment for
average monthly payments totaling approximately $10,000 through 2001.
Future minimum lease payments under non-cancellable operating leases are as
follows:
For the year ended December 31,
1997 125,584
1998 48,288
1999 34,908
2000 33,780
2001 2,345
-------
Future minimum operating lease payments 244,905
=======
During 1996, the Company closed its offices in Costa Mesa, California, San
Jose, California, and Honolulu, Hawaii, and to that end, negotiated final
payments on leases previously extending through 2002. The amount of accrued
rent for terminated leases at December 31, 1996 was $123,000. In addition,
as part of the agreement to terminate the Costa Mesa lease, the Company
agreed to transfer ownership of all furniture and equipment at that
location to the succeeding tenants. The Company's cost basis in these
assets was approximately $70,000 at the time of transfer. Miscellaneous
costs related to the lease termination totaled $12,000. These amounts have
been included in general and administrative expenses for the year ended
December 31, 1996.
15
5. LEASES (continued)
Rent expense for the years ended December 31, 1996 and 1995 was $172,950
and $462,117 respectively.
6. EXTRAORDINARY ITEMS
Disposal of Network Capital Group
On July 10, 1996, the Company sold all of its capital stock in Network
Capital Group, Inc. to PBF Land Company (PBF) in exchange for various
parcels of real property in Florida with an appraised value of $1.3
million. At the time of the sale, the recorded amounts of the assets of
Network Capital Group exceeded its liabilities by $902,629. The Company
recorded the real property parcels at $1,000,000, resulting in a gain on
the disposal of Network Capital Group, Inc. of $97,371, ($0.03 per share)
before tax effect of $39,000. As part of the same agreement, the Company
extended a commitment to purchase an additional $1,000,000 in similar real
estate through the issuance of preferred stock to be valued at $1,000,000.
Loss from operations of Network Capital Group prior to disposal is
immaterial to these financial statements.
Gain on Extinguishment of Debt
In 1995, the Company settled its litigation with Dolan Development
Partners, Inc., effectively reducing the amount of principal and interest
payable on two promissory notes from $1,500,000 to $1,050,000. These
modifications have resulted in an extraordinary gain of $450,000 ($0.42 per
share) before tax effect of $180,000.
7. INCOME TAXES
The Company's net operating and capital loss carryforwards are estimated to
be $22 million for federal income tax purposes at December 31, 1996. The
carryforwards expire in various years for 2003 to 2011, with the majority
expiring in 2007 and 2008. These carryforwards are on a consolidated return
basis for the members of the consolidated group and, thus, the loss
carryforwards may have certain separate return limitations. Use of the
Company's net operating and capital loss carryforwards may also be limited
under Internal Revenue Code Section 382.
Deferred taxes result from temporary differences in the recognition of
income and expenses for financial and income tax reporting purposes and as
a result of non-benefited net operating and capital loss carryforwards. The
approximate effect of temporary differences that gave rise to deferred tax
balances at December 31, 1996 were as follows:
16
7. INCOME TAXES (continued)
Deferred tax assets
Unconsolidated subsidiary .............. 45,000
Deferred compensation .................. 18,000
Non-benefitted losses .................. 8,830,000
---------
Total deferred tax assets ........... 8,893,000
Valuation allowance, deferred tax assets (8,893,000)
---------
Net deferred tax assets ................ 0
Deferred tax liabilities ............... 0
---------
Net deferred tax asset ................. 0
=========
The valuation allowance for deferred tax assets increased 2,129,000 during
the year ended December 31, 1996.
The effective tax rate on income before provision for income tax and
extraordinary items varies from the current statutory federal income tax
rate as follows:
December 31,
1996 1995
Statutory rate ................................ 34.00 34.00%
Non-benefitted losses and temporary differences (34.00%)(34.00%)
Tax effect of extraordinary items ............. 1.00 2.40%
------ ------
Effective tax rate ............................ 1.00 2.40%
====== ======
8. STOCKHOLDERS' EQUITY
Overview
In June 1996, the Company (formerly a Colorado corporation) reincorporated
in the State of Delaware, which resulted in the number of authorized shares
of common stock increasing to 50,000,000, $0.001 par value, and the number
of authorized shares of preferred stock increasing to 10,000,000.
In July 1995, the Company underwent a 1 for 30 reverse stock split. All
share and per share amounts in these financial statements reflect this
reverse split.
17
8. STOCKHOLDERS' EQUITY (Continued)
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("FAS 123"). As permitted by FAS 123, WGHI continues to apply
the recognition and measurement provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB25"). The
differences between the recognition and measurement provisions of FAS 123
and APB 25 are not significant to WGHI's results of operations for the year
ended December 31, 1996.
Stock Option Plans
1994 Stock Option Plan In May 1994, the shareholders approved the Network
Financial Services, Inc. 1994 Stock Option Plan. The plan is established as
a compensatory plan to attract, retain, and provide equity incentives to
selected persons to promote the financial success of the Company. A total
of 333,333 common shares have been reserved for grants under the plan. The
options may be granted as either incentive stock options (ISO's) or
Non-Qualified Stock Options (NQSO's).
1993 Omnibus Stock Option Plan
On May 26, 1993, the shareholders approved the 1993 Omnibus Stock Plan for
the purpose of providing a long-term incentive vehicle to promote the
Company's success under which a variety of stock-based incentives and other
awards may be granted to employees and directors of the Company and its
subsidiaries, and to selected consultants. The maximum number of 83,333
common shares are available for grants under this plan. Of this total,
16,667 may be awarded as restricted stock.
1990 Nonqualified Stock Option Plan
In October 1990, the shareholders adopted a Nonqualified Stock Option Plan
(the 1990 NSOP). The 1990 NSOP was adopted in order to permit the exchange
of prior options held by option holders of the Company for the new options
of the Company. The 1990 NSOP provides that options may be granted at
exercise prices equal to or less than the fair market value of the common
shares of the Company on the date of the grant. As of December 31, 1996,
all options issued under this plan had been canceled.
Option plan activity
The following summarized the stock option plan activity for the year ended
December 31, 1996:
1990 NSOP
shares price
Beginning Balance ..........................5387 $15 TO $112
Options granted ............................. 0
Options exercised ........................... 0
Options canceled ...........................5387 $15 TO $112
Ending Balance .............................. 0 N/A
18
8. STOCKHOLDERS' EQUITY (Continued)
Stock Option Plans (continued)
1993 OMNIBUS
shares price
Beginning Balance ...................... 51,682 $45 TO $70.50
Options granted ........................ 0
Options exercised ...................... 0
Options canceled ....................... 38,266 $45 TO $70.50
Ending Balance ........................ 13,416 $53
1994 Stock Option Plan
shares price
Beginning Balance ..................... 323,906 $2 TO $45
Options granted ....................... 0
Options exercised ..................... 0
Options canceled ...................... 130,989 $2 TO $45
Ending Balance ........................ 192,917 $ 2
Preferred Stock
Series A Preferred Stock
In April 1996, the Board of Directors established a series of shares
setting forth the preferences, rights and limitations and authorizing the
issuance of up to 200,000 shares of series A cumulative preferred stock
("Series A Preferred Stock"). An aggregate of 118,750 shares of series A
preferred shares were issued in April, 1996, with an aggregate stated value
of $475,000. Fair value of these shares at issuance was equal to the stated
value, which was determined with respect to the value of the underlying
common shares. The Series A Preferred Stock has a liquidation preference of
$4 per share, plus any accrued unpaid dividends (at an annual dividend rate
of 8%, cumulative whether or not declared), is redeemable by the Company at
a redemption price of $4 per share plus accrued unpaid dividends to the
date of redemption. The holder may enforce redemption by the Company upon
the same redemption terms that the Company possesses, and has no voting
rights. The shares are convertible into shares of Common stock at the
lessor of $1.50 or 84% of the closing bid price on the day prior to
conversion.
In December 1996, the holder of 100,000 shares of Series A cumulative
preferred stock waived his contractual right to enforce redemption of these
shares by the Company. Consequently, $400,000 has been reclassified in
these financial statements to non- redeemable preferred stock and has been
included in stockholders' equity at December 31, 1996.
19
8. STOCKHOLDERS' EQUITY (Continued)
Preferred Stock (continued)
Series B Preferred Stock
In April 1996, the Board of Directors established a series of shares
setting forth the preferences, rights and limitations and authorizing the
issuance of up to 300,000 shares of series B cumulative preferred stock
("Series B Preferred Stock"). An aggregate of 300,000 shares of series B
preferred shares were issued in April, 1996, with an aggregate stated value
of $600,000. Fair value of these shares at issuance was equal to stated
value, which was determined with respect to the value of the underlying
common shares. The Series B Preferred Stock has a liquidation preference of
$2 per share, plus any accrued unpaid dividends (at an annual dividend rate
of 10%, cumulative whether or not declared), is junior in liquidation
preference to the Series A preferred stock, is redeemable by the Company at
a redemption price of $2 per share plus accrued unpaid dividends to the
date of redemption, and does not have any voting rights. The shares are
convertible into shares of Common stock at the lessor of $2.00 or 84% of
the closing bid price on the day prior to conversion, subject to certain
adjustments.
Series C Preferred Stock
In March 1996, the Board of Directors established a series of shares
setting forth the preferences, rights and limitations and authorizing the
issuance of up to 500,000 shares of series C cumulative preferred stock
("Series C Preferred Stock"). An aggregate of 200,000 shares of series C
preferred shares were issued in April, 1996, with an aggregate stated value
of $700,000. Fair value of these shares at issuance was equal to the stated
value, which was determined with respect to the value of the underlying
common shares. The Series C Preferred Stock has a liquidation preference of
$3.50 per share, plus any accrued unpaid dividends (at an annual dividend
rate of 10%, cumulatively, whether or not declared) , is redeemable by the
Company at a redemption price of $3.50 per share plus accrued unpaid
dividends to the date of redemption, and does not have any voting rights.
The shares are convertible into shares of Common stock at the lessor of
$1.50 or 84% of the closing bid price on the day prior to conversion.
Series D Preferred Stock
In November 1996, the Board of Directors established a series of shares
setting forth the preferences, rights and limitations and authorizing the
issuance of up to 1,000,000 shares of series D cumulative preferred stock
("Series D Preferred Stock"). An aggregate of 50,000 shares of series D
preferred shares were issued in September, 1996, with an aggregate stated
value of $250,000. Fair value of these shares at issuance was equal to
stated value, which was determined with respect to the value of the
underlying common shares. These shares were issued for the purpose of
securing the default in the GTB/Green World transaction. The Company
considers these shares unearned, since a contractual obligation exists on
the part of GTB to indemnify the Company. The Series D preferred stock has
a liquidation preference of $5.00 per share, plus any accrued unpaid
dividends (at an annual dividend rate of 10%, cumulatively, whether or not
declared) , is redeemable by the Company at a redemption price of $5.00 per
share plus accrued unpaid dividends to the date of redemption, and does not
have any voting rights. The shares are convertible into shares of Common
stock at 100% of the closing bid price on the day prior to conversion. The
series D preferred stock is junior in liquidation preference to previous
series of preferred stock.
20
8. STOCKHOLDERS' EQUITY (Continued)
Preferred Stock (continued)
Series E Preferred Stock
In November 1996, the Board of Directors established a series of shares
setting forth the preferences, rights and limitations and authorizing the
issuance of up to 130,000 shares of series E cumulative preferred stock
("Series E Preferred Stock"). An aggregate of 130,000 shares of series E
preferred shares were issued in July, 1996, with an aggregate stated value
of $1,300,000. Fair value of these shares at issuance was equal to stated
value, which was determined with respect to the value of the underlying
common shares. These shares were issued for the purpose of acquiring the
Company's interest in Green World Technologies Inc., and for cash. The
Series E Preferred Stock has a liquidation preference of $10.00 per share,
is redeemable by the Company at a redemption price of $10.00 per share, and
does not have any voting rights. The shares are convertible into shares of
Common stock at $0.45 per share, except that the conversion price shall be
adjusted in the event that conversion of these shares will result in the
holder receiving more than 49% of the outstanding common shares of the
Company. The series E preferred stock is junior in liquidation preference
to previous series of preferred stock.
Series F Preferred Stock
In November 1996, the Board of Directors established a series of shares
setting forth the preferences, rights and limitations and authorizing the
issuance of up to 1,000,000 shares of series F cumulative preferred stock
("Series F Preferred Stock"). An aggregate of 1,000,000 shares of series F
preferred shares are to be placed in escrow to secure the Company's option
to acquire additional parcels of land from PBF Land Company. The Series F
Preferred stock has a liquidation preference of $5.00 per share, is
redeemable by the Company at a redemption price of $5.00 per share, and
does not have any voting rights. The shares are convertible into shares of
common stock at the greater of $1.00 or the average closing bid price for
the five days prior to conversion. No more than $200,000 in stated value of
preferred stock may be converted to common over the five quarters beginning
in the second calendar quarter of 1997, until such time as the land under
option is sold for gross proceeds of greater than $1 million. The series F
preferred stock is junior in liquidation preference to previous series of
preferred stock.
All conversion prices are considered to be representative of the fair
market value of the underlying stock into which the preferred shares are
convertible, when factors such as market liquidity and trading restrictions
are taken into account. Consequently, no provision for non-cash
compensation has been recorded in connection with conversion prices
included in these preferred shares.
21
8. STOCKHOLDERS' EQUITY (Continued)
Warrants
In March , 1996, warrants were issued to officers of the company providing
for the issuance of up to 180,000 shares of common stock at an exercise
price of $2.25 per share, 90,000 of which are fully vested immediately, and
90,000 of which will vest upon the Company's attainment of certain earnings
levels by December 1997.
Warrants issued to non-employees during the year consisted of warrants to
purchase a total of 1,619,485 shares of common stock at prices ranging from
$0.55 per share to $2.38 per share. The warrants expire on various dates
from December 1997 through April 2004. The Company's policy is to consider
warrants issued to acquire common shares at a strike price within 84% of
the trading price on the date of the grant as issued for the fair market
value of the warrant. Up to a 16% reduction from the trading price of the
stock may be contained in the warrant price due to trading restrictions on
the underlying shares as well as market illiquidity, and not to provide
additional compensation to the non-employee recipient. During 1996, the
Company issued warrants at prices which contained discounts from the
trading price of the stock of more than 16%. The Company recorded a total
of $70,000 in non-cash compensation related to the issuance of these
warrants.
Convertible debt
During 1996, the Company issued debt instruments with conversion prices
equal to 84% of the bid price of the Company's common stock at the date of
issuance. Non-cash compensation has not been recorded, since this discount
is considered to be representative of the fair market value of the
underlying common stock, when factors such as market liquidity and trading
restrictions are taken into account.
Common share repurchases
Effective March 15, 1996, the Company redeemed a total of 240,000 shares of
previously issued common stock for total consideration of $802,000.
Flexible options
During 1995, the company entered into several financing arrangements which
provided for settlement of certain liabilities through the issuance of the
Company's common stock at a price equal to 50% of the bid price at the date
of conversion to equity. Both the debt and the equity portion of these
transactions have been recorded as compensation expense. A credit to
additional paid in capital has been recorded for the effect of the equity
doubler portion of these financing arrangements. Total amount recorded for
equity doublers for 1995 was $1,074,000, which consisted of debt issue
costs of $765,000, and salary liabilities convertible at 50% of bid,
totaling $309,000.
22
9. INVESTMENTS
Investment in Land
The company is the owner of various parcels of real property in Florida.
The subject property consists of various strips of 25-30 foot and 50 foot
(perimeter) platted road rights of way located in Palm Beach County. The
Company acquired the property pursuant to a recorded Quit Claim Deed from
PBF Land Co. The Company has obtained an MAI appraisal establishing a value
of $1.3 million for a fee simple interest in the property.
There are approximately 170 different parcels comprising the total
property. These platted road rights of way strips are in some cases
included in the adjacent property owners' sites. The Company has been
unable to obtain a policy of title insurance on the property. In order to
identify its rights in the property, the Company has obtained an attorney's
opinion of title, which verifies fee simple title to the property. The
Company has also obtained an affidavit of no liens.
Florida case law has held that property owners hold title to the center of
the road. However, the Company is relying upon the 1995 Federal Court Case
of West Peninsula Title v. Palm Beach County, 41 Federal 3rd, page 1490
which holds that title to the road strips rests with the owner of the
strips.
The Company has discounted the fee simple appraised amount of $1,300,000 to
$1,000,000 to reflect potential reduced marketability of these properties
due to title considerations.
Due to the nature of the property (road rights of way) independent
development by the owner is not feasible without acquiring the surrounding
lands. It is not the Company's strategy to acquire and develop additional
properties, but rather, to hold the subject properties for sale until such
time as the surrounding properties are developed.
Investment in Green World Technologies, Inc.
In July 1996, the Company acquired 100% of the stock of Green World
Technologies, Inc. from GTB, Inc. for a total purchase price of $1,300,000,
payable through the issuance of 130,000 shares of Series E preferred stock,
with a fair market value of $10 per share. Of this amount, $200,000 was
received in cash, and $1,100,000 was allocated to the assets and
liabilities of Greenworld Technologies, Inc. These shares are convertible
into common shares of the Company at a rate of $0.45 per share, which was
the fair value of the underlying common stock at the date of issuance of
the preferred shares. The transaction has been accounted for as a purchase.
The purchase price may be increased by amounts payable under a two year
commitment for quarterly payments of royalties equal to 14% of the gross
sales of Green World. These payments, considered contingent additional
consideration for the acquisition of Green World, will be expensed as
incurred. The total cost of the acquisition exceeded the fair value of net
tangible assets of Green World by $1,078,000, which amount has been
recorded as goodwill. This amount is being amortized on the straight line
method over 10 years. Green World is in the business of refrigerant
management systems for energy savings.
23
9. INVESTMENTS (Continued)
Investment in Green World Technologies, Inc. (continued)
In February, 1997, the Company agreed to transfer 15% of its interest in
Green World Technologies to GTB Company in connection with GTB's agreement
to convert 130,000 shares of Series E preferred stock to common. This
transfer and conversion are contingent upon the Company obtaining outside
financing equal to at least $3,000,000 - see Note 10. The agreement also
provides for a waiver of the payment of additional consideration in the
form of royalties. It is anticipated that the transfer of this interest in
Green World will be recorded at the fair market value of Green World at the
time of transfer.
In addition, the Company intends to spin off as a dividend to its
shareholders, a majority of its remaining interest in Green World. The
exact percentage of Green World to be distributed as a dividend has not yet
been determined.
The results of operations of Green World Technologies, Inc., whose fiscal
year end is September 30, 1996, have been included in the accompanying
financial statements for the period July 21, 1996 through September 30,
1996.
The following summarized financial information portrays the effect on the
results of operations of the Company as if the acquisition of Green World
Technologies, Inc. was made at January 1, 1996. Since Green World was not
in existence in 1995, the effect on the comparative 1995 fiscal year has
not been presented.
Total revenue .................... $2,947,572
Loss before extraordinary items .. ($3,620,453)
Net loss ......................... ($4,039,908)
Loss per share:
Loss before extraordinary items ($ 0.99)
Net loss ...................... ($ 1.10)
The above proforma amounts reflect adjustments for the amoritzation of
goodwill from January 1, 1996.
During the period October 1, 1996 through December 31, 1996, the Company
advanced a total of $52,605 to further fund the operations of Green World.
Investment in Preferred Stock - MIOA
The Company is the owner of 200,000 shares of Medical Industries of
America, Inc. convertible, redeemable, non- voting preferred stock, series
B. The stock carries a 7% cumulative dividend, payable whether or not
declared, a $10 per share liquidation preference, and is convertible, for a
period of 10 years from the date of issuance into registered shares of MIOA
at the average of the bid and asked price of the MIOA stock for the thirty
days prior to conversion. MIOA may redeem the shares of preferred stock at
any time for $10 per share.
24
9. INVESTMENTS (Continued)
Investment in Green World Technologies, Inc. (continued)
This investment is classified as available for sale under the criteria
established by SFAS No. 115 - Accounting for Investments in Marketable
Securities. Its market value is deemed to be $2,000,000, which is equal to
cost, and which has been determined in reference to the common stock into
which it is convertible. The Company considers current liquidity of MIOA
common stock to be sufficient to sustain this market value. There were no
unrealized holding gains and losses attributable to this investment in
1996.
This investment will be returned to MIOA in exchange for capital stock of
the Company in the equity restructuring arrangement discussed in Note 10.
10. PROPOSED EQUITY FINANCING AND CAPITAL RESTRUCTURING
Private Placement
The Company is currently pursuing a Private Placement of units on a best
efforts basis for a maximum of $6,000,000 and a minimum of $3,000,000 in
gross proceeds to the Company. The units will consist of one share of 10%
convertible preferred stock and one five year warrant to purchase one share
of common stock for every two preferred shares issued. Each share of
Preferred Stock is convertible into one share of the Company's common.
Dividends on the Preferred stock may be paid in 10% Convertible Preferred
Stock or in cash at the Company's option.
Westmark-Medical Industries Agreement
The Company and Medical Industries of America, Inc. ("MIOA") entered into
an agreement dated January 23, 1997 which was amended March 31, 1997. The
performance of this agreement are conditioned upon the Company receiving at
least $3,000,000 in the financing transaction mentioned above by April 21,
1997. MIOA presently owns 1,667,284 shares of the Company's common stock
and 200,000 shares of its Series C Preferred stock. MIOA also has a
contractual right to receive additional shares sufficient to enable it to
maintain up to a 49% ownership interest in the Company. At December 31,
1996, the Company owes MIOA $1,727,569.
MIOA has agreed to return all of its shares of capital stock in the
company, both common and preferred, and to forego its 49% antidilution
protection in exchange for the transfer by the Company of its $2,000,000
investment in MIOA, and the agreement to pay a total of $3,953,000 upon the
following terms. The Company must make a cash payment to MIOA from the
proceeds of the financing. In the event the Company receives only
$3,000,000, the cash payment shall be $300,000. If the Company receives
more than $3,000,000 but not more than $5,000,000, the cash payment shall
be 10% of the financing. If the Company receives more than $5,000,000 but
less than $6,000,000, the payment shall be 10% of the financing plus the
amount of the funds exceeding $5,000,000. The principal amount of the
promissory note to be executed after this initial cash payment will be
reduced by any cash payment made as previously described. In the event that
the cash payment exceeds $1,000,000, the principal balance will be reduced
by $230,000 for every $100,000 paid in excess of $1,000,000. The note will
bear interest at 10%, with principal and interest due January 2000. The
note is to be secured by the Company's land investment.
25
11. EFFECT OF YEAR END ADJUSTMENTS WHICH ARE MATERIAL TO FOURTH
QUARTER RESULTS
Significant year end adjustments which affect the fourth quarter's results
of operations are summarized as follows:
Disposal of assets for rent settlements .......... 70,000
Increase in loan origination expenses ............ 255,000
Reversal of servicing sale adjustments ........... 70,000
Understatement of accrued interest on debt ....... 216,000
Overstatement of revenue ......................... 150,000
Increase in goodwill amortization and depreciation 45,000
Non-cash compensation not recorded ............... 831,000
Total effect of fourth quarter adjustments ....... 1,637,000
In 1993, the Company was advised by its independent auditors that there
were material weaknesses in its system of internal accounting controls.
Since that time, the Company has continued to exhibit material weaknesses
in accounting practices relating to timing of revenue and expense
recognition, consistent and timely performance of monthly closing
procedures including appropriate account reconciliations, recognition of
non-cash compensation, and the recording of other significant non-cash
transactions.
Effective in 1997, management has adopted a corrective action plan to its
system of accounting controls which includes the following elements:
Monthly closing procedures, including systematic account reconciliations
and internal review, are documented and consistently applied.
Interim financial statements are produced monthly and are reviewed on a
timely basis by responsible parties including upper management.
Quarterly reporting has been automated to ensure consistency both between
quarters and as compared to year end.
Appropriate consideration is given to proper accounting treatment of
significant, unusual and non-cash transactions, including the requirement
for consultation with experts, as necessary.
26
12. SUBSEQUENT EVENTS
Line of credit modifications
In the first fiscal quarter, the Company secured two additional $5 million
warehouse lines of credit under the following terms and conditions:
Warehouse line number one charges interest at prime plus 1.5%, will lend
100% of the face amount of the mortgage loan, and charges no loan fees.
Warehouse line number two charges interest at 2% over prime, funds 100% of
the mortgage loan amount, and charges a $100 all inclusive administrative
fee per loan.
Concurrently, the Company reduced its existing line of credit from
$15,000,000 to $10,000,000.
In March 1997, 1,000,000 shares of Series F Preferred stock with a fair
market value of $1,000,000 were issued into escrow to acquire additional
land parcels. The transaction will be consummated upon delivery of deeds to
the Company of $1,000,000 in land parcels. The market value of this stock
is determined with respect to the underlying common shares into which it is
convertible, and to the appraised value of the land to be received.
Effective April 8, 1997, the Company was released from liability in the
matter of Tula Business Inc., et al v. Medical Industries of America, Inc.
et al.
In the first quarter of 1997, a total of 1,019,019 common shares were
placed in trust pursuant to settlement agreements.
13. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 1996, the Company issued 110,000 shares
of Series E preferred stock to acquire its investment in Green World
Technologies, Inc. The Company traded land valued at approximately $2.0
million with associated liabilities of approximately $900,000 for land with
a value of $1.0 million. The Company issued stock for services and debt
conversions of approximately $1.8 million in 1996.
During the year ended December 31, 1995, the Company issued $2,000,000 in
common shares for its investment in preferred stock, issued $1,053,000 in
common shares for debt retirement, and financed the acquisition of a
building for $87,000.
27
14. SUBSEQUENT EVENTS (UNAUDITED)
Westmark-MIOA Modification
Effective June 26, 1997, the Company amended its agreement with MIOA
previously discussed in note 10 above, to provide for the termination of
MIOA's 49% anti-dilution provision. The agreement calls for the repayment
of $1,953,000 in outstanding indebtedness pursuant to a three year 10%
promissory note with monthly payments of $25,000. MIOA shall also be
entitled to certain guaranteed repayments as follows: if the Company
receives additional capitalization between $300,000 and $1.5 million, MIOA
shall be entitled to the first $300,000. If the additional capitalization
exceeds $1.5 million, MIOA shall receive the first $500,000 in excess of
$1.5 million. In the event that additional capitalization exceeds $3.0
million, MIOA shall be entitled to receive 50% of the excess until the
entire WGHI indebtedness to MIOA is paid in full.
In addition, MIOA is entitled to a percentage of positive operating cash
flows after settlement agreements for the next two years, and 50% of the
cash proceeds from the sale of spin-off of subsidiaries. Pursuant to a
separate agreement, MIOA is entitled to demand registration rights for its
shares of Common stock.
28
FINANCIAL STATEMENTS FOR THE PERIOD ENDED JUNE 30, 1997
WESTMARK GROUP HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30,
1997
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Account Payable ...................................... $ 561,593
Warehouse line of credit ............................. $3,167,355
Interest payable ..................................... $ 303,071
Settlement liability ................................. $ 407,560
Notes Payable Current ................................ $ 661,757
Payroll taxes payable ................................ $ 43,976
Dividends Payable .................................... $ 188,476
Other current liabilities ............................ $ 210,625
----------
Total Current Liabilities ............................ $5,544,413
Long Term Notes ...................................... $1,760,778
----------
Total Long Term Liabilities .......................... $1,760,778
Total Liabilities ......................................... $7,305,191
==========
Stockholders' Equity
Preferred shares, $.001 par value, 10,000,000
shares authorized, 503,314 issued
and outstanding ......................................... $ 2,459,755
Common stock, $.001 par value, 50,000,000
shares authorized, 10,023,082 issued
and outstanding ......................................... $ 10,023
Additional paid in capital .............................. $ 27,733,111
Stock issued unearned/unpaid ............................ $ (1,592,435)
Accumulated deficit ..................................... $(26,997,731)
------------
Total Stockholders' Equity ............................... $ 1,612,723
Total Liabilities and Stockholders' Equity ................... $ 8,917,914
============
29
WESTMARK GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
Revenues:
Loan origination and gain on sale .................. $ 1,509,970 $ 611,391 $ 2,540,752 $ 1,208,712
Product Sales ...................................... $ 55,888 $ 80,528
Interest Income .................................... $ 220,651 $ 35,154 $ 451,390 $ 110,735
Other income ....................................... $ (4,325) $ 7,155 $ 14,789 $ 11,325
----------- ----------- ----------- -----------
Total Revenues ......................................... $ 1,782,184 $ 653,700 $ 3,087,459 $ 1,330,772
EXPENSES:
Loan origination costs ............................. $ 28,154 $ 119,523 $ 73,549 $ 572,747
Cost of goods sold ................................. $ 36,205 $ 43,272
Interest ........................................... $ 264,237 $ 188,434 $ 465,411 $ 511,668
General and administrative ......................... $ 1,085,681 $ 374,026 $ 1,933,846 $ 722,085
Professional fees .................................. $ 180,490 $ 36,851 $ 308,236 $ 106,835
Marketing and advertising .......................... $ 8,093 $ 8,397 $ 13,959 $ 32,053
Non cash compensation .............................. $ 180,735 $ 392,000 $ 483,052 $ 392,000
Servicing sale adjustment .......................... $ (70,000) $ (70,000)
Goodwill amortization .............................. $ 51,681 $ 24,729 $ 103,362 $ 49,458
Depreciation ....................................... $ 17,846 $ 23,812 $ 35,692 $ 47,624
----------- ----------- ----------- -----------
Total Expenses ......................................... $ 1,853,122 $ 1,097,772 $ 3,460,379 $ 2,364,470
Other Income (Expenses)
Gain on debt extinguishment ........................ $ 68,976 $ 68,976
Dividend income .................................... $ 35,000 $ 70,000 $ 70,000 $ 70,000
----------- ----------- ----------- -----------
Gain (Loss) from continuing operations ................. $ 33,038 $ (374,072) $ (233,944) $ (963,698)
Provision for income tax
Net Income (Loss) ...................................... $ 33,038 $ (374,072) $ (233,944) $ (963,698)
=========== =========== =========== ===========
NET LOSS PER SHARE ..................................... $ 0.01 $ (0.12) $ (0.04) $ (0.33)
WEIGHTED AVERAGE SHARES OUTSTANDING .................... 5,581,489 3,016,122 5,581,489 3,016,122
30
WESTMARK GROUP HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996
OPERATING ACTIVITIES
Consolidated net income (loss) .................................................... $ (233,944) $ (963,698)
Adjustment to reconcile consolidated net
(loss) to cash used in operations:
Depreciation .................................................................. $ 35,692 $ 47,624
Stock issued for services ..................................................... $ 483,052 $ 392,000
Amortization .................................................................. $ 103,362 $ 49,458
----------- ------------
Cash provided (used) in operations before working capital ......................... $ 388,162 $ (474,616)
(Increase)/Decrease in accounts receivable .................................... $ (3,937) $ (67,296)
(Increase)/Decrease in current assets ......................................... $ (11,553) $ 25,996
(Increase)/Decrease in mortgages held for sale ................................ $ 1,381,420 $ 12,671,366
(Increase)/Decrease in other assets ........................................... $ 2,120
Increase/(Decrease) in accounts payable ...................................... $(1,083,820) $ (620,895)
Increase/(Decrease) in other notes ........................................... $(1,822,506) $ (1,482,154)
Increase/(Decrease) in long term notes ...................................... $ 1,760,778
Increase/(Decrease) in interest payable ...................................... $ 61,379 $ (80,008)
Increase/(Decrease) in other current liabilities ............................. $ 141,766 $ (267,395)
----------- ------------
Net cash provided for working capital changes ..................................... $ 423,527 $ 10,181,734
Cash provided for operating activities ............................................ $ 811,689 $ 9,707,118
INVESTING ACTIVITIES
Purchase of fixed assets and improvements .................................... $ (25,040)
----------- ------------
Cash provided/(used) in investing activities ................................. $ (25,040) $ --
FINANCING ACTIVITIES
Net Increase/(Decrease) in warehouse line of credits ......................... $(1,580,666) $(12,053,377)
Stock for payment of debt .................................................... $ 833,812
Cash received MIOA ........................................................... $ 2,428,593
Payment of notes receivable stock sale ....................................... $ 374,222
Repurchase of stock .......................................................... $ (700,000)
Sale of stock for cash ....................................................... $ 10,000
----------- ------------
Cash provided/(used)by financing activities ....................................... $ (746,854) $ (9,940,562)
Net Increase/(Decrease) in cash ................................................... $ 39,795 $ (233,444)
Cash and cash equivalent, beginning period ........................................ $ 49,837 $ 311,916
Cash and cash equivalent, end of period ........................................... $ 89,632 $ 78,472
=========== ============
31
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
A. The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
B. The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the Corporation unless and only to the extent that
the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper.
C. To the extent that a director, officer, employee or agent of
the Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (A) and (B), or in defense
of any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
D. Any indemnification under subsections (A) and (B) (unless
ordered by a court) shall be made by the Corporation only as authorized in the
specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (A) and (B). Such
determination shall be made (i) by a majority vote of the directors who are not
parties to such action, suit or proceeding, even though less than a quorum, or
(ii) if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion, or (iii) by the stockholders.
E. Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the Corporation as authorized by the Certificate of Incorporation. Such expenses
(including attorneys' fees) incurred by other employees and agents may be so
paid upon such terms and conditions, if any, as the Board of Directors deems
appropriate.
F. The indemnification and advancement of expenses provided by,
or granted pursuant to, the other subsections of this Article shall not be
deemed exclusive of any other rights to which those seeking indemnification or
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advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
G. The Corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power to indemnify him
against such liability under the Certificate of Incorporation.
H. The indemnification and advancement of expenses provided by,
or granted pursuant to, this Article shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be
incurred in connection with the distribution of the securities being registered.
The expenses shall be paid by the Registrant.
SEC Registration Fee................................... $ 1,734
Printing and Engraving Expenses....................... 25,000
Legal Fees and Expenses............................... 60,000
Accounting Fees and Expenses.......................... 75,000
Blue Sky Fees and Expenses............................ 25,000
Transfer Agent Fees................................... 2,000
Miscellaneous......................................... 11,266
------
TOTAL............................................ $200,000
- --------------------
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In August 1993, the Company issued 61,796 shares of Common Stock
to eight investors for an aggregate purchase price of approximately $61,796. The
Company believes that the transaction herein is exempt from registration
pursuant to Regulation S of the Act as a transaction sold only to non-United
States resident investors.
Between January and December 1994, the Company issued a total of
84,821 shares of Common Stock to eight investors for an aggregate purchase price
of approximately $700,000. The Company believes that the transaction herein is
exempt from registration pursuant to Regulation S of the Act as a transaction
sold only to non-United States resident investors.
In March 1994, the Company issued options to purchase a total of
81,095 shares of Common Stock at an exercise price of $2.00 per share to
employees in consideration for services rendered. The Company believes that the
transactions herein are exempt from registration pursuant to Section 4(2) of the
Act as a transaction by an issuer not involving any public offering.
Between March and April 1994, the Company issued options to
purchase a total of 13,333 shares of Common Stock at an exercise price of $3.75
per share to employees in consideration for services rendered. The Company
believes that the transactions herein are exempt from registration pursuant to
Section 4(2) of the Act as a transaction by an issuer not involving any public
offering.
Between April and August of 1994, the Company raised
approximately $2,000,000 in a private placement of its securities through the
sale of 77,477 units, each unit consisting of one share of the Company's Common
Stock and one warrant which has expired. The Company believes that the
transaction herein is exempt from registration pursuant to Section 4(2) of the
Act as a transaction by an issuer not involving any public offering.
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Between June and July 1994, the Company issued options to
purchase a total of 46,560 shares of Common Stock at exercise prices of between
$2.00 and $45.00 per share to employees in consideration for services rendered.
The Company believes that the transactions herein are exempt from registration
pursuant to Section 4(2) of the Act as a transaction by an issuer not involving
any public offering.
In July 1994, the Company issued 13,334 shares of Common Stock to
Primark Corporation in addition to a $500,000 cash payment for the acquisition
of Westmark Mortgage. The Company believes that the transaction herein is exempt
from registration pursuant to Section 4(2) of the Act as a transaction by an
issuer not involving any public offering.
In August 1994, the Company issued 8,067 shares of Common Stock
to two individuals in consideration for converting $50,000 of indebtedness into
equity. The Company believes that the transaction herein is exempt from
registration pursuant to Section 4(2) of the Act as a transaction by an issuer
not involving any public offering.
In August through December 1994, the Company issued an aggregate
of 71,747 shares of Common Stock to employees and consultants for services
rendered valued at nominal consideration. The Company believes that the
transactions herein is exempt from registration pursuant to Section 4(2) of the
Act as a transaction by an issuer not involving any public offering.
In November 1994, the Company issued M.S. Farrell a warrant to
purchase 33,333 shares of Common Stock at a purchase price of $9.00 per share in
consideration for services rendered. The Company believes that the transaction
herein is exempt from registration pursuant to Section 4(2) of the Act as a
transaction by an issuer not involving any public offering.
In December 1994, the Company issued options to purchase a total
of 3,332 shares of Common Stock at an exercise price of $15 per share to
employees is in consideration for services rendered. The Company believes that
the transactions herein are exempt from registration pursuant to Section 4(2) of
the Act as a transaction by an issuer not involving any public offering.
Between January and May 1995, the Company raised approximately
$700,000 in a private placement of its securities through the sale of 220,032
shares of Common Stock. The Company believes that the transaction herein is
exempt from registration pursuant to Section 4(2) of the Act as a transaction by
an issuer not involving any public offering.
In March 1995, the Company issued 42,968 shares of Common Stock
to three individuals and/or entities for an aggregate consideration of
approximately $100,000. The Company believes that the transaction herein is
exempt from registration pursuant to Regulation S of the Act as a transaction by
an issuer only to non-resident United States investors.
In March 1995, the Company issued 47,190 shares of Common Stock
to various employees and consultants for services rendered valued at a nominal
amount. The Company believes that the transactions herein are exempt from
registration pursuant to Section 4(2) of the Act as a transaction by an issuer
not involving any public offering.
Between March and June 1995, the Company issued four former
officers an aggregate of 9,891 shares of Common Stock for accrued salary of
approximately $62,500. The Company believes that the transactions herein are
exempt from registration pursuant to Section 4(2) of the Act as a transaction by
an issuer not involving any public offering.
Between March and July 1995, the Company issued an option to
purchase a total of 173,848 shares of Common Stock at an exercise price of
between $2.00 and $3.75 per share to employees in consideration for services
rendered. The Company believes that the transactions herein are exempt from
registration pursuant to Section 4(2) of the Act as a transaction by an issuer
not involving any public offering.
In May 1995, the Company issued 16,667 shares of Common Stock to
Greentree Mortgage Company as a portion of the aggregate sales price for the
acquisition of certain of the production assets of Greentree Mortgage. The
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Company believes that the transaction herein is exempt from registration
pursuant to Section 4(2) of the Act as a transaction by an issuer not involving
any public offering.
In June 1995, the Company issued three individuals an aggregate
of 11,000 shares of Common Stock for services rendered valued at a nominal
amount. The Company believes that the transactions herein are exempt from
registration pursuant to Section 4(2) of the Act as a transaction by an issuer
not involving any public offering.
In August 1995, the Company issued 75,000 shares of Common Stock
to an entity for an aggregate consideration of $75,000. The Company believes
that the transaction herein is exempt from registration pursuant to Regulation S
of the Act as a transaction by an issuer only to non-resident United States
investors.
In September 1995, the Company issued 125,000 share of Common
Stock to an individual in connection with converting a promissory note in the
amount of $250,000 for such shares. The Company believes that the transaction
herein is exempt from registration pursuant to Section 4(2) of the Act as a
transaction by an issuer not involving any public offering.
In November 1995, the Company issued an aggregate of 112,419
shares of Common Stock to five individuals in consideration for consultant
services rendered. The Company believes that the transactions herein is exempt
from registration pursuant to Section 4(2) of the Act as a transaction by an
issuer not involving any public offering.
In November 1995, the Company issued 1,298,000 shares of Common
Stock to MIOA, pursuant to a stock purchase agreement. The Company believes that
the transaction herein is exempt from registration pursuant to Section 4(2) of
the Act as a transaction by an issuer not involving any public offering.
In November 1995, the Company issued a warrant to purchase
300,000 shares of Common Stock at $1.00 per share to Ocean Marketing Corp. in
consideration for consulting services rendered. The Company believes that the
transaction herein is exempt from registration pursuant to Section 4(2) of the
Act as a transaction by an issuer not involving any public offering.
Between January and April 1996, the Company issued an option to
purchase a total of 3,332 shares of Common Stock at an exercise price of $2.00
per share to employees in consideration for services rendered. The Company
believes that the transactions herein are exempt from registration pursuant to
Section 4(2) of the Act as a transaction by an issuer not involving any public
offering.
In March 1996, an individual exercised an option to purchase
5,000 shares of Common Stock is in satisfaction of accrued debt of $10,000. The
Company believes that the transaction herein is exempt from registration
pursuant to Section 4(2) of the Act as a transaction by an issuer not involving
any public offering.
In April 1996, the Company issued warrants to purchase 90,000 of
Common Stock at a price of $2.25 per share to Norman J. Birmingham in connection
with his employment agreement. The Company believes that the transaction herein
is exempt from registration pursuant to Section 4(2) of the Act as a transaction
by an issuer not involving any public offering.
In April 1996, the Company issued warrants to purchase 90,000 of
Common Stock at a price of $2.25 per share to Mark Schaftlein in connection with
his employment agreement. The Company believes that the transaction herein is
exempt from registration pursuant to Section 4(2) of the Act as a transaction by
an issuer not involving any public offering.
In April 1996, the Company issued a warrant to purchase 150,000
shares of Common Stock at a price of $2.375 per share to Greentree Mortgage in
consideration of restructuring a $100,000 debt owed by the Company to Greentree
Mortgage. The Company believes that the transaction herein is exempt from
registration pursuant to Section 4(2) of the Act as a transaction by an issuer
not involving any public offering.
II-4
In April 1996, an aggregate of 151,350 shares of Common Stock
were issued in consideration for services rendered valued at nominal
consideration. The Company believes that the transaction herein is exempt from
registration pursuant to Section 4(2) of the Act as a transaction by an issuer
not involving any public offering.
In April 1996, an aggregate of 138,656 shares of Common Stock
were issued to five individuals in consideration for converting $165,000 of
indebtedness into equity. The Company believes that the transaction herein is
exempt from registration pursuant to Section 4(2) of the Act as a transaction by
an issuer not involving any public offering.
In April 1996, an aggregate of 21,700 shares of Common Stock were
issued to ten individuals in consideration for converting $60,500 of
indebtedness into equity. The Company believes that the transaction herein is
exempt from registration pursuant to Section 4(2) of the Act as a transaction by
an issuer not involving any public offering.
In May 1996, an option to purchase 10,000 shares of Common Stock
was issued to a third party, at a purchase price of $2.00 per share, for
services rendered. The Company believes that the transaction herein is exempt
from registration pursuant to Section 4(2) of the Act as a transaction by an
issuer not involving any public offering.
In May 1996, 368,896 shares of Common Stock were issued to MIOA
pursuant to the November 1995 Stock Purchase Agreement. The Company believes
that the transaction herein is exempt from registration pursuant to Section 4(2)
of the Act as a transaction by an issuer not involving any public offering.
In January 1997, 250,000 shares of Common Stock were issued for
services rendered. The Company believes that the transaction herein is exempt
from registration pursuant to Section 4(2) of the Act as a transaction by an
issuer not involving any public offering.
In January 1997, 200,000 shares of Common Stock were issued for
services rendered. The Company believes that the transaction herein is exempt
from registration pursuant to Section 4(2) of the Act as a transaction by an
issuer not involving any public offering.
In March 1997, 23,000 shares of Common Stock were issued for
services rendered. The Company believes that the transaction herein is exempt
from registration pursuant to Section 4(2) of the Act as a transaction by an
issuer not involving any public offering.
In March 1997, 4,200 shares of Common Stock were issued in
connection with loans to the Company in the amount of $27,000. The Company
believes that the transaction herein is exempt from registration pursuant to
Section 4(2) of the Act as a transaction by an issuer not involving any public
offering.
In June 1997, 1,254,002 shares of Common Stock were issued
pursuant to settlement agreements. The Company believes that the transaction
herein is exempt from registration pursuant to Section 4(2) of the Act as a
transaction by an issuer not involving any public offering.
In June 1997, 2,943,202 shares of Common Stock were issued upon
conversion of indebtedness, and conversion of preferred stock. The Company
believes that the transaction herein is exempt from registration pursuant to
Section 4(2) of the Act as a transaction by an issuer not involving any public
offering.
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ITEM 27. EXHIBITS
The following exhibits are to be filed as part of the
Registration Statement:
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
2.1(3) Form of Merger between Colorado and Delaware Companies
3.1(1)(2) Articles of Incorporation of the Company and
Amendments thereto
3.2(3) Certificate of Incorporation of the Company, filed in the office
of the Secretary of State of Delaware on May 10, 1996, and
incorporated herein by reference
3.3(1) By-Laws of the Company
4.1(3) Form of specimen Common Stock
4.2(3) Series A Preferred Stock Designation
4.3(3) Series B Preferred Stock Designation
4.4(3) Series C Preferred Stock Designation
4.5(3) Series D Preferred Stock Designation
4.6(3) Series E Preferred Stock Designation
4.7(3) Series F Preferred Stock Designation
5.1(3) Opinion Regarding Legality
10.1(3) Green World Stock Purchase Agreement
10.2(3) Mortgage Warehouse and Security Agreement between the Company and
Princap Mortgage Warehouse, Inc. dated October 26, 1995
10.3(5) Purchase and Sale Agreement between the Company and MIOA dated
November 1995, as amended.
10.5(3) Rodger Stubbs Termination Agreement
10.6(3) Michael Morrell Termination Agreement
10.7(3) Linda Moore Termination Agreement
10.8(3) Norman J. Birmingham Employment Agreement
10.9(3) Mark Schaftlein Employment Agreement
10.10(3) Payton Story Employment Agreement
10.11(3) Louis Resweber Director Agreement
10.12(3) Norman J. Birmingham Warrant
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10.13(3) Mark Schaftlein Warrant
10.14(3) 1990 Non-Qualified Stock Option Plan
10.15(3) 1993 Non-Qualified Stock Option Plan
10.16(3) 1994 Non-Qualified Stock Option Plan
10.17(3) Settlement Agreement between the Company and Greentree Mortgage
Company dated April 19, 1996
10.18(3) Settlement Agreement between the Company and First American Flood
Data, Inc. dated March 29, 1996
10.19(3) Note Modification Agreement between the Company and Dolan
Development Partners, Inc. dated July 12, 1995
10.20(3) Form of Settlement Agreement between the Company and Each Party to
the Bridge Financing dated April 1, 1996
10.21(3) Settlement Agreement between the Company and James S. Hull dated
April 25, 1996
10.22(3) Settlement Agreement between the Company and Svarna Offshore Fund
dated March 21, 1996
10.23(3) Settlement Agreement between the Company and Drew Hollenbeck dated
March 21, 1996
10.24(3) Settlement Agreement between the Company and Nationwide Computer
Corporation dated March 26, 1996
10.25(3) Settlement Agreement between the Company and Teletrend
Communications dated March 27, 1996
10.26(3) Settlement Agreement between the Company and Mortgage Quality
Management, Inc. dated March 27, 1996
10.27(3) Settlement Agreement between the Company and Hakman & Company dated
March 27, 1996
10.28(3) Settlement Agreement between the Company and Republic Indemnity
dated February, 1996
10.29(3) Settlement Agreement between the Company and Jackson, Tufts, Cole &
Black dated February 22, 1196
10.30(3) Settlement Agreement between the Company and Cassidy & Associates
10.31(3) Settlement Agreement between the Company and Howard Rice dated
March 26, 1996
10.32(3) Settlement Agreement between the Company and M.S. Farrell &
Company, Inc. dated May 29, 1996
II-7
10.33(3) Settlement Agreement between the Company and Ahmad F. Moradi
10.34(3) Settlement Agreement between the Company and Grubb & Ellis
10.35(3) Settlement Agreement between the Company and Ousley, Inc.
10.36(3) Settlement Agreement between the Company and Curci-England
10.37(3) Agreement between the Company and GTB Company
10.38(3) Agreement between the Company and PBF Land Company
10.39(4) Settlement Agreement between the Company and Medical Industries of
America, Inc., and Amendments thereto.
10.40(3) Hollenbeck Settlement Agreement
10.41(4) Lee Danna Settlement Agreement
11.1(3) Statement Re: Computation of Per Share Earnings
21.1(3) List of Subsidiaries
24.1(4) Consent of Comiskey & Company, P.C.
24.2(3) Consent of Brewer & Pritchard, P.C. (Contained in Exhibit 5.1)
- ---------------------
(1) The information required by this exhibit is incorporated by reference to the
exhibits filed in connection with the Company's prior Registration Statement
on Form S-18 (Commission File No. 33-16715-D)
(2) The Articles of Amendment to the Articles of Incorporation dated July 11,
1994, were attached to the December 31, 1994 Form 10-KSB.
(3) The information required by this exhibit is incorporated by reference to the
exhibits filed in connection with the Company's prior Registration Statement
on Form SB-2 (Commission File No. 333-05569).
(4) Filed herewith.
ITEM 28. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
I. To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
ii. To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission
II-8
pursuant to Rule 424(b) of this chapter) if, in the
aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and
iii. To include any additional or changed material information
with respect to the plan of distribution.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial BONA FIDE offering
thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) I. That, for the purpose of determining liability under the
Securities Act of 1933, the information omitted from the
form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4), or 497(h) under the Securities Act of
1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
ii. That, for the purpose of determining liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time
shall be deemed to be the initial BONA FIDE offering
thereof.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Delray, State of Florida, on the 15th day of August,
1997.
Westmark Group Holdings, Inc.
By//S// MARK SCHAFTLEIN
Mark Schaftlein, President,
Chief Executive Officer and
Director
----------------------------
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
//S// MARK SCHAFTLEIN President, Chief Executive Office August 15, 1997
Mark Schaftlein and Director
//S// NORMAN J. BIRMINGHAM Director, Chief Financial Officer, August 15, 1997
Norman J. Birmingham Chief Accounting Officer
//S// TODD WALKER Director August 15, 1997
Todd Walker
//S// LOUIS RESWEBER Director August 15, 1997
Louis Resweber
//S// PAYTON STORY Director August 15, 1997
Payton Story
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