UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark one)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2006
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ______________ to ________________
Commission file number ______________________
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Mortgage Assistance Center Corporation
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(Exact Name Of Small Business Issuer As Specified In Its Charter)
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Florida 06-1413994
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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2614 Main St., Dallas, TX 75226
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(Address of Principal Executive Offices)
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(214) 670-0005
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(Issuer's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
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Check whether the issuer has (1) filed all reports required to be files by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes |_| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 12,725,720 shares of Common
Stock as of June 30, 2006
Transitional Small Business Disclosure Format: Yes |_| No |X|
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
Mortgage Assistance Center Corporation
Consolidated Financial Statements
And
REPORT OF INDEPENDENT REGISTERED
Public Accounting Firm
June 30, 2006
MORTGAGE ASSISTANCE CENTER CORPORATION
Table of Contents
Page
----
Report of Independent Registered Public Accounting Firm......................F-3
Financial Statements
Consolidated Balance Sheets
as of June 30, 2006, and December 31, 2005.........................F-4
Consolidated Statements of Operations and Comprehensive Loss
for the three and six months ended June 30, 2006 and 2005..........F-6
Consolidated Statements of Cash Flows
for six months ended June 30, 2006 and 2005.........................F-7
Notes to Consolidated Financial Statements..............................F-9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Mortgage Assistance Center Corporation
Dallas, Texas
We have reviewed the accompanying consolidated balance sheet of Mortgage
Assistance Center Corporation (formerly Safe Alternatives Corporation of
America, Inc.), a Florida corporation, as of June 30, 2006 and the consolidated
statements of operations and comprehensive loss for the three-month and
six-month periods ended June 30, 2006 and 2005, and the consolidated statements
of and cash flows for the six-month periods ended June 30, 2006 and 2005. These
interim financial statements are the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying interim financial statements for them to be in
conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has sustained
recurring losses from operations and had an accumulated stockholders' deficit
and a working capital deficiency at June 30, 2006. These circumstances create
substantial doubt about the Company's ability to continue as a going concern and
are discussed in Note 5. The financial statements do not contain any adjustments
that might result from the outcome of this uncertainty.
F-2
The December 31, 2005 financial statements of Mortgage Assistance Center
Corporation and Mortgage Assistance Corporation were audited by us and we
expressed an unqualified opinion in our report dated March 3, 2006, but we have
not performed any auditing procedures since that date.
/s/ Sutton Robinson Freeman & Co., P.C.
Sutton Robinson Freeman & Co., P.C.
Certified Public Accountants
Tulsa, Oklahoma
August 9, 2006
F-3
Mortgage Assistance Center Corporation
Consolidated Balance Sheets
June 30, 2006 (Unaudited) and December 31, 2005 (Audited)
June 30, December 31,
2006 2005
ASSETS (Unaudited) (Audited)
------------ ------------
Current Assets:
Cash and cash equivalents $ 14,662 $ 365,097
Portfolio assets, at cost (net of impairment reserve
of $150,750 and $202,690 at June 30, 2006 and
December 31, 2005, respectively) 2,473,674 1,708,053
Accounts receivable-related parties 55,681 58,995
Prepaid expenses 22,541 30,547
------------ ------------
Total Current Assets 2,566,558 2,162,692
------------ ------------
Property and Equipment, at cost:
Furniture, equipment and computers 103,579 103,579
Less accumulated depreciation 41,571 30,286
------------ ------------
Total Property and Equipment 62,008 73,293
------------ ------------
Investments And Other Assets:
Investment in Metro Media Partnership 70,396 98,916
Deposits 3,000 3,000
------------ ------------
Total Investments and Other Assets 73,396 101,916
------------ ------------
Total Assets $ 2,701,962 $ 2,337,901
============ ============
The accompanying notes are an integral part of these consolidated financial
statements
F-4
Mortgage Assistance Center Corporation
Consolidated Balance Sheets
June 30, 2006 (Unaudited) and December 31, 2005 (Audited)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
2006 2005
(Unaudited) (Audited)
------------ ------------
Current Liabilities:
Notes payable-individuals and others $ 2,864,407 $ 1,794,288
Note payable - stockholder 77,585 --
Accounts payable-trade 226,147 180,308
Accounts payable-others 200,000 289,784
Accrued interest payable 114,838 72,983
Other accrued liabilities 193,692 156,743
------------ ------------
Total Current Liabilities 3,676,669 2,494,106
------------ ------------
Long-term Debt:
Notes payable-individuals -- 639,105
Note payable-stockholder -- 60,574
Mortgages payable 151,182 71,104
------------ ------------
Total Long-Term Debt 151,182 770,783
------------ ------------
Minority Interests 489,569 292,536
------------ ------------
Total Liabilities 4,317,420 3,557,425
------------ ------------
Commitments (Note 14)
Stockholders' Equity (Deficit):
Common stock, par value $0.001 per share; authorized
authorized 50,000,000 shares; issued 12,725,720 shares 12,726 12,726
Additional paid-in capital 173,663 173,663
Retained earnings (deficit) after December 31, 2004 (1,904,007) (1,508,073)
------------ ------------
(1,717,618) (1,321,684)
Subscriptions issuable 102,160 102,160
------------ ------------
Total Stockholders' Equity (deficit) (1,615,458) (1,219,524)
------------ ------------
Total Liabilities and Stockholders' Equity $ 2,701,962 $ 2,337,901
============ ============
The accompanying notes are an integral part of these consolidated financial
statements
F-5
Mortgage Assistance Center Corporation
Consolidated Statements of Operations and Comprehensive Loss
Three and Six Months Ended June 30, 2006 and 2005
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
(Restated) (Restated)
------------ ------------ ------------ ------------
Operating Revenues:
Sales of portfolio assets $ 539,347 $ 523,648 $ 775,635 $ 1,299,437
Servicing fees and comissions from
affiliates and others 139,320 7,527 144,590 2,286
Income (loss) from partnership (11,742) -- (28,520) --
Other 4,739 6,592 7,619 13,049
------------ ------------ ------------ ------------
Gross operating revenues 671,664 537,767 899,324 1,314,772
Cost of portfolio assets sold 391,842 347,848 548,025 873,169
------------ ------------ ------------ ------------
Net operating revenues 279,822 189,919 351,299 441,603
------------ ------------ ------------ ------------
Operating Expenses:
Salaries, wages and contract labor 184,072 148,167 398,565 288,153
Selling, general and administrative expenses 217,093 210,491 365,726 360,528
Depreciation and amortization 5,642 3,541 11,285 6,932
------------ ------------ ------------ ------------
Total operating expenses 406,807 362,199 775,576 655,613
------------ ------------ ------------ ------------
Operating loss (126,985) (172,280) (424,277) (214,010)
Other income (expense):
Interest and other income 88,059 838 95,189 838
Interest expense (54,243) (36,393) (108,974) (91,777)
Merger expense -- -- -- (295,000)
Investor relations expense -- -- 6,661 --
------------ ------------ ------------ ------------
Loss before minority interests and income taxes (93,169) (207,835) (431,401) (599,949)
Minority interests 5,724 (26,384) 35,467 (110,231)
------------ ------------ ------------ ------------
Loss before income taxes (87,445) (234,219) (395,934) (710,180)
Income tax benefit (expense) -- -- -- --
------------ ------------ ------------ ------------
Net Loss (87,445) (234,219) (395,934) (710,180)
Other comprehensive income -- -- -- --
------------ ------------ ------------ ------------
Comprehensive Loss $ (87,445) $ (234,219) $ (395,934) $ (710,180)
============ ============ ============ ============
Net loss per weighted-average share
of common stock outstanding, calculated
on Net Loss - basic and fully diluted $ (0.01) $ (0.02) $ (0.03) $ (0.06)
============ ============ ============ ============
Weighted-average number of shares of
common stock outstanding 12,725,720 12,634,609 12,725,720 12,630,164
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements
F-6
Mortgage Assistance Center Corporation
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2006 and 2005
(Unaudited)
Six Months Ended
June 30,
2006 2005
(Restated)
---------- ----------
Cash Flows From Operating Activities
Net loss $ (395,934) $(710,180)
---------- ----------
Adjustments to reconcile net loss to net cash provided (used) by operating
activities:
Depreciation 11,285 6,933
Professional fees paid with common stock -- 600
(Income) loss from partnership 28,520 --
Merger expense -- 295,000
Change in assets and liabilities:
(Increase) decrease in portfolio assets (684,144) (281,967)
(Increase) decrease in accounts receivable from related parties 3,314 (49,056)
(Increase) decrease in prepaid expenses 8,006 21,632
Increase (decrease) in bank overdraft -- --
Increase (decrease) in accounts payable-trade 45,839 (8,692)
Increase (decrease) in accounts payable-other (89,784) --
Increase (decrease) in accrued interest payable 52,494 26,801
Increase (decrease) in other accrued liabilities 36,349 22,686
Increase (decrease) in minority interests 197,033 110,232
---------- ----------
Total adjustments (391,088) 144,169
---------- ----------
Net Cash Provided (Used) by Operating Activities (787,022) (566,011)
---------- ----------
Cash Flows From Investing Activities
Purchase of property and equipment -- (4,897)
---------- ----------
Net Cash Used by Investing Activities -- (4,897)
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements
F-7
Mortgage Assistance Center Corporation
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2006 and 2005
(unaudited)
Six Months Ended
June 30,
2006 2005
(Restated)
---------- ----------
Cash Flows From Financing Activities
Proceeds from issuance of common stock -- --
Proceeds from issuance of debt to individuals and others 651,000 509,083
Repayments of debt to individuals and others (230,625) (563,000)
Repayments of mortgage debt (799) --
Net advances from Stockholder 17,011 --
---------- ----------
Net Cash Provided (Used) by Financing Activities 436,587 (53,917)
---------- ----------
Net Increase (Decrease) in Cash (350,435) (562,384)
Cash at Beginning of Period 365,097 572,884
---------- ----------
Cash at End of Period $ 14,662 $ 10,500
========== ==========
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Period for:
Interest $ 67,097 $ 64,976
Income taxes $ -- $ --
The accompanying notes are an integral part of these consolidated financial
statements
F-8
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
March 31, 2006
(Unaudited)
Note 1 - Organization
------------
Mortgage Assistance Center Corporation (formerly Safe Alternatives
Corporation of America, Inc.) (the "Company" or "MACC") was organized
in 1976, under the name Knight Airlines, Inc. In October 1978, the
Company completed an initial public offering of its common stock in
Florida, pursuant to an exemption from registration under Regulation A
promulgated under the Securities Act of 1933, as amended. The Company
ceased operations in April 1983 and was inactive through September
1995. In May 1994, the name of the Company was changed to Portsmouth
Corporation.
On September 15, 1995, pursuant to an Asset Purchase Agreement and
Plan of Reorganization between the Company and Safe Alternatives
Corporation of America, Inc., a Delaware corporation ("SAC-Delaware"),
the Company purchased all of the assets of SAC-Delaware, and assumed
all of the liabilities of SAC-Delaware. On March 4, 1996, the Company
changed its name to Safe Alternatives Corporation of America, Inc. (a
Florida corporation).
On September 17, 2002, the Board of Directors of the Company agreed to
sell all of the Company's assets to Environmental Alternatives, Inc.
("EAI"), a privately held Vermont corporation, in exchange for EAI's
assumption of and agreement to indemnify and hold the Company harmless
from paying any and all claims that could attach to the Company as of
June 30, 2002.
From July 1, 2002 to May 2005 the Company had no assets or operating
activities.
Pursuant to a Majority Shareholder Consent, on May 14, 2004, the
Company's Board of Directors authorized a change in the Company name
to Mortgage Assistance Center Corporation. The Company's Articles of
Incorporation were amended on December 22, 2004 and became effective
January 17, 2005. The changes were made in connection with the
requirements of a Letter of Intent executed between the Company and
Mortgage Assistance Corporation ("MAC"), a Texas corporation, in which
re-organizational steps were undertaken to create a change in control
of MACC prior to the completion of a business combination agreement.
Upon completion of a definitive Business Combination Agreement in
August 2005, MACC acquired all of the issued and outstanding capital
stock of Mortgage Assistance Corporation. MAC became a wholly owned
subsidiary of MACC as described in Note 3.
F-9
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
June 30, 2006
(Unaudited)
Note 2 - Preparation of Financial Statements
-----------------------------------
The Company follows the accrual basis of accounting in accordance with
accounting principles generally accepted in the United States of
America and has a year end of December 31.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Management further acknowledges that it is solely responsible for
adopting sound accounting practices, establishing and maintaining a
system of internal accounting control and preventing and detecting
fraud. The Company's system of internal accounting control is designed
to assure, among other items, that 1) recorded transactions are valid;
2) valid transactions are recorded; and 3) transactions are recorded
in the proper period in a timely manner to produce financial
statements which present fairly the financial condition, results of
operations and cash flows of the Company for the respective periods
being presented.
During interim periods, the Company follows the accounting policies
set forth in its annual audited financial statements filed with the U.
S. Securities and Exchange Commission on its Annual Report on Form
10-KSB for the year ended December 31, 2005. The information presented
within these interim financial statements may not include all
disclosures required by generally accepted accounting principles, and
the users of financial information provided for interim periods should
refer to the annual financial information and footnotes when reviewing
the interim financial results presented herein.
In the opinion of management, the accompanying interim financial
statements, prepared in accordance with the U. S. Securities and
Exchange Commission's instructions for Form 10-QSB, are unaudited and
contain all material adjustments, consisting only of normal recurring
adjustments necessary to present fairly the consolidated financial
condition, results of operations and cash flows of the Company for the
respective interim periods presented. The current period results of
operations are not necessarily indicative of results, which ultimately
will be reported for the full fiscal year ending December 31, 2006.
F-10
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
June 30, 2006
(Unaudited)
Note 3 - Business Combination
--------------------
On May 14, 2004, the Company's President, Dale Hensel, executed a
Letter of Intent with Mortgage Assistance Corporation ("MAC"), a Texas
corporation controlled by Mr. Hensel, whereby MAC offered to be
acquired by the Company. Under the terms and conditions of the letter
of intent the MACC board obtained a majority shareholder consent in
lieu of a special meeting according to the Florida Business
Corporation Statutes and approved the following actions:
1. The reverse split of the Company's common shares on a One
for Two Hundred Fifty (1:250) basis;
2. The corporate name change from Safe Alternatives Corporation
of America, Inc. to Mortgage Assistance Center Corporation;
3. The change in the authorized number of common stock shares
from 175,000,000 to 50,000,000 shares;
4. Authorized a business combination whereby the Company
exchanged 12,000,000 post reverse split common shares for
all of the issued and outstanding common stock of MAC; and
5. Any such further recommendations as may be considered
reasonable and in the best interest of the shareholders.
In May 2004, a majority shareholder action approved the reverse stock
split and the reduction in the authorized number of common shares.
On May 10, 2005, the Company entered into a Business Combination
Agreement to acquire all of the issued and outstanding capital stock
of Mortgage Assistance Corporation, a Texas corporation, consisting of
7,500,000 shares, in exchange for twelve million (12,000,000) shares
of MACC stock. The Company issued 1.6 MACC shares for each MAC share
held by the 34 shareholders of MAC in an exempt transaction under
Section 4(2) and Regulation D Rule 506 of the Securities Act of 1933,
as amended (the "Securities Act"). These shares are restricted
securities and may not be publicly resold absent registration with the
Securities and Exchange Commission (SEC) or exemption from the
registration requirements of the Securities Act. MAC became a wholly
owned subsidiary of MACC upon MACC's complete acquisition of all the
MAC shares.
As of May 10, 2005, MACC received 6,896,556 MAC shares (92%) and
caused 11,034,489 (87.1%) of the Company shares to be issued to three
individuals who comprise a control group consisting of Dale Hensel,
Dan Barnett and Michelle Taylor. Together they control 87.1% of the
voting common stock of the Company. Dale Hensel is the sole officer
and director of the Company. Mr. Hensel is also the President and
F-11
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
June 30, 2006
(Unaudited)
Note 3 - Business Combination (Continued)
--------------------
director of MAC. Dan Barnett is the Vice President and director of
MAC. Ms. Taylor is a Vice President and director of MAC. Subsequently,
the remainders of the MAC shares were surrendered and 12,000,000
shares were issued for 100% of MAC.
A conflict of interest existed in May 2004 when Mr. Hensel recommended
that the Company acquire all of the issued and outstanding capital
stock of MAC because Mr. Hensel was the Company president and director
and also the president, director and shareholder of MAC. The decisions
to acquire MAC, change the corporate name, implement the reverse split
and capital change were actions over which Mr. Hensel had exercised
degrees of control and in which he had a financial interest by virtue
of being a shareholder of MAC. All of these transactions were
disclosed to, authorized and approved by the written consent of the
Company's majority shareholders who held 75.9% of the voting stock. At
the time of voting, Mr. Hensel was not a shareholder of the Company
and did not vote for approval of these transactions.
The number of shares authorized for issuance in this Business
Combination transaction between MACC and the MAC shareholders was
negotiated between Mr. Hensel and MAC management in a transaction with
management. The management of MACC and MAC shared a common director
and officer in Dale Hensel. The transaction did not represent an
arms-length transaction.
At the date of the merger, MAC expensed $295,000 of legal fees and
other costs related to the acquisition. These costs had previously
been capitalized pending successful completion of a merger. At that
time a market value for MACC's common shares was difficult to
ascertain because of the limited and illiquid market for the Company
shares. There was no active market for MACC common stock at that time.
The acquisition of MAC constituted an exchange of equity interests
between entities under common control and resulted in a change in the
reporting entity. This type of transaction is not a business
combination under Statement of Financial Accounting Standards Number
141 and, consequently, has been accounted for in a manner similar to a
pooling of interests rather than as a purchase. Accordingly, the
equity interests that were issued to MAC shareholders in May 2005 in
exchange for the net assets of MAC were given effect as of January 1,
2005, based on the net book value of MAC on a historical cost basis.
The results of operations for the interim periods ending June 30, 2006
and 2005 present the combined results of MACC and MAC for those
periods.
F-12
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
June 30, 2006
(Unaudited)
Note 4 - Summary of Significant Accounting Policies
------------------------------------------
Description of Business:
Through MAC, the Company operates as a financial services company,
acquiring and managing pools of distressed real estate-based
mortgages. The types of mortgages pools acquired include
non-performing, charged-off, sub-prime mortgages, typically between
ninety days and two years past due and secured by residential real
estate. The Company acquires both priority ("first") and subordinate
("second") mortgage loans or "liens". Approximately 1% of the loans
acquired are subordinate liens, which bear the risk of being
reclassified as an unsecured loan should the first lien holder
foreclose on the property. The Company primarily acquires
non-performing first lien loan pools of varying amounts from banks and
other lenders at a significant discount from the loans' outstanding
legal principal amount, the total of the aggregate of expected future
sales price and the total payments to be received from obligors.
After the Company acquires the loans, the process of resolution begins
with the borrower, changing the status of the non-performing loans
into either performing loans or foreclosing on the real estate. The
Company will resell a substantial portion of its re-performing loans
in various-sized loan pools. The Company will be required to foreclose
on certain properties when loans held in its portfolio continue to be
in default. As a result, the Company will be engaged in owning single-
family dwellings and possibly other real estate. Such foreclosed real
estate will be held, rehabilitated where necessary, and sold.
Principles of Consolidation and Basis of Presentation:
The accompanying financial statements are consolidated and include the
financial statements MACC, MAC, its wholly owned subsidiary, and two
unincorporated entities, MAP/MAC, L.L.C. and Apple Canyon Capital,
L.L.C. All significant intercompany accounts and transactions are
eliminated in consolidation.
The Company owns 50% of MAP/MAC, L.L.C. and 56% of Apple Canyon
Capital, L.L.C. and has the ability to exercise control over the
operations of MAP/MAC, L.L.C. The consolidated financial statements
include 100% of the assets and liabilities of MAP/MAC, L.L.C. and
Apple Canyon Capital, L.L.C., with the ownership interests of minority
investors recorded as a noncurrent liability, "minority interests."
Investments in other entities where MACC has an ownership interest of
from 20% to 50% and the ability to significantly influence the
operations of the investee are accounted for using the equity method
of accounting, and the investment balance is included in long term
investments, while MACC's share of the investees' operations is
included in other operating revenues.
F-13
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
June 30, 2006
(Unaudited)
Note 4 - Summary of Significant Accounting Policies (continued)
------------------------------------------
Accounting Change:
Effective April 1, 2006, the Company began consolidating the accounts
MAP/MAC, L.L.C. Historically the Company had accounted for its
investment in MAP/MAC, L.L.C. under the equity method. The change was
made to more clearly reflect the Company's operations as a financial
services company, utilizing funding from a third party investor to
finance the purchase of mortgage note receivable pools and real estate
portfolios, either directly or through unincorporated ventures. The
consolidation of MAP/MAC, L.L.C. did not have a material impact on the
results of operations or financial position of the Company.
Portfolio Assets:
Portfolio assets are held for sale and reflected in the accompanying
financial statements as mortgage note receivable pools or real estate
portfolios. The following is a description of each classification and
the related accounting policy accorded to each portfolio type:
Mortgage Note Receivable Pools:
Mortgage note receivable pools consist primarily of first lien
distressed real estate based mortgages. The cost basis of loan pools
acquired consists of their purchase price from banks or other sellers
plus purchase commissions, if any. Loan pool costs are allocated to
individual loans based on the face value of the unpaid principal of
the loans and their performance status based on the note's expected
cash flow. Any payments of due diligence costs, property taxes, or
insurance required are capitalized and included in the cost basis of
the individual loans involved.
Subsequent to acquisition, the adjusted cost of the mortgage note
receivable pools is evaluated for impairment on a quarterly basis. The
evaluation of impairment is determined based on the review of
estimated future cash receipts, which represents the net realizable
value of the note pool. Once it is determined that there is
impairment, a valuation allowance is established for any impairment
identified through provisions charged to operations in the period of
the impairment is identified. The Company determined that an
impairment allowance of $150,750 and $202,690 was required at June 30,
2006 and December 31, 2005, respectively.
F-14
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
June 30, 2006
(Unaudited)
Note 4 - Summary of Significant Accounting Policies (continued)
------------------------------------------
Mortgage Note Receivable Pools: (continued)
The Company recognizes gain or loss upon the resale or other
resolution of mortgage loans pools based upon the difference between
the selling price of the loan pool and the cost basis of the
individual loans included in the pool being sold. Collections of
delinquent principal and interest payments are credited against the
cost basis of the respective loan.
The Company has adopted Statement of Position No. 03-3, Accounting for
Certain Loans or Debt Securities Acquired in a Transfer ("SOP 03-3").
SOP 03-3 addresses accounting for differences between contractual cash
flows and cash flows expected to be collected from an investor's
initial investment in loans or debt securities acquired in a transfer
if those differences are attributable, at least in part, to credit
quality. SOP 03-3 was effective for all loans acquired after 2004;
however, all of the loans in the Company's portfolio were accounted
for in accordance with SOP 03-3, regardless of date acquired.
Real Estate Portfolios:
Real estate portfolios consist of real estate acquired by foreclosures
of individual mortgage notes receivable. Such portfolios are carried
at the lower of cost or fair value less estimated costs to sell. The
cost of foreclosed real estate consists of original loan costs plus
any costs relating to the development and improvement of the real
estate for its intended use. The costs of foreclosure and any required
refurbishment costs to bring the property to resalable condition, as
well as any maintenance, taxes and insurance costs required during the
holding period are capitalized. Income or loss is recognized upon the
disposal of real estate at the date of closing, based on the
difference between selling prices, less commissions, and capitalized
costs. Rental income, net of expenses, on real estate portfolios is
recognized when received. Accounting for portfolios is on an
individual asset-by-asset basis as opposed to a pool basis.
Subsequent to acquisition, the amortized cost of real estate
portfolios is evaluated for impairment on a quarterly basis. The
evaluation of impairment is determined based on the review of the
estimated future cash receipts, which represents the net realizable
value of the real estate portfolio. A valuation allowance is
established for any impairment identified through provisions charged
to operations in the period the impairment is identified. The Company
determined that no allowance for impairment on real estate portfolios
was required at June 30, 2006 and December 31, 2005.
F-15
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
June 30, 2006
(Unaudited)
Note 4 - Summary of Significant Accounting Policies (continued)
------------------------------------------
Cash and Cash Equivalents:
The Company considers all highly liquid debt or equity instruments
purchased with an original maturity at the date of purchase of 90 days
or less to be cash equivalents.
Property and Equipment:
Property and equipment acquired are recorded at cost. Depreciation of
property and equipment is determined by the straight line and
double-declining balance methods over estimated useful lives ranging
from two to seven years.
Upon sale, retirement or other disposal of property and equipment, the
related cost and accumulated depreciation are removed from the
accounts. All gains or losses arising from the sale, retirement or
other disposition of property or equipment are reflected in earnings.
Maintenance, repairs, renewals and betterments, in general, are
charged to expense as incurred, except that of major renewals and
betterments which extend the life on an asset or increase the value
thereof are capitalized.
Income Taxes:
The Company accounts for income taxes based on Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes".
SFAS No. 109 requires the recognition of deferred tax assets and
liabilities for the future tax consequences attributable to temporary
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. In
addition, SFAS No. 109 requires the recognition of future tax
benefits, such as net operating loss carry forwards, to the extent
that realization of such benefits is more likely than not. The amount
of deferred tax liabilities or assets is calculated by applying the
provisions on enacted tax laws to determine the amount of taxes
payable or refundable currently or in future years. Valuation
allowances are established, when necessary, to reduce deferred tax
assets when it is more likely than not that all or a portion of the
deferred tax asset will not be realized.
Net Loss Per Share:
The Company computes net income (loss) per share in accordance with
SFAS No. 128, Earnings per Share and SEC Staff Accounting Bulletin No.
98 ("SAB 98").
F-16
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
June 30, 2006
(Unaudited)
Note 4 - Summary of Significant Accounting Policies (continued)
------------------------------------------
Net Loss Per Share: (continued)
Under the provisions of SFAS No. 128 and SAB 98, basic net income
(loss) per share is calculated by dividing net income (loss) available
to common stockholders for the period by the weighted average number
of common shares outstanding during the period.
Note 5 - Going Concern Uncertainty
-------------------------
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of
business. As shown in the financial statements, the Company has
incurred significant operating losses in 2006 and prior periods,
resulting in an accumulated stockholders' deficit and a working
capital deficit as of June 30, 2006. These factors, among others, may
indicate that the Company will be unable to continue as a going
concern for a reasonable period of time. The financial statements do
not include any adjustments relating to the recoverability of assets
and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely
basis, to obtain additional financing or refinancing as may be
required, and ultimately to sustain profitability.
The Company is actively pursuing alternative financing plans to fund
the Company's requirements, and those plans include, but are not
limited to, additional equity sales or debt financing under
appropriate market conditions, allegiances or partnership agreements,
or other business transactions which could generate adequate funding
opportunities.
The Company executed a Term Sheet in July 2006 with an unaffiliated
third party which would provide for up to a $200,000 bridge financing
immediately upon acceptance and execution of the Term Sheet and up to
a $3,000,000 Series A Preferred Stock financing. The agreement is
non-binding and a condition to closing would require the Company to
restructure the majority of its existing short-term debt.
The Company continues to explore opportunities to secure additional
sources of debt financing as a means of more cost effectively
acquiring pools of mortgage notes and foreclosed properties.
While the Company is confident in its ability to secure additional
capital in the future, there is no guarantee that the Company will
receive sufficient funding to sustain operations or implement any
future business plan steps.
F-17
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
June 30, 2006
(Unaudited)
Note 6 - Portfolio Assets
----------------
Portfolio assets were comprised of the following at June 30, 2006:
Mortgage note receivable pools $ 1,754,178
Real Estate portfolios 678,064
Tax liens 168,212
Other 23,970
-----------
Total portfolio assets 2,624,424
Valuation allowance for impairment (150,750)
-----------
Net portfolio assets $ 2,473,674
===========
Portfolio assets are pledged to secure non-recourse notes payable to
individuals (See Note 8).
Note 7 - Investment in Partnership
-------------------------
In December 2005 MACC and two unrelated third parties formed 999 Metro
Media Venture ("Metro Media Partnership"), a partnership, to purchase,
manage and develop certain commercial rental property located in
Dallas, Texas. MACC owns 50% of the venture. MACC's initial capital
contribution was $100,000, funded by the obligation of the third
parties to purchase 40,000 shares of MACC common stock valued at $2.50
per share. MACC's investment in Metro Media Partnership is accounted
for using the equity method.
A summary of the results of operations for the six months ended June
30, 2006 and net assets at June 30, 2006 for Metro Media Partnership
is as follows:
Results of operations:
Total revenues $ 33,309
Operating profit (loss) (16,690)
Net income (loss) (57,039)
Net assets:
Current assets $ 168,200
Noncurrent assets 1,291,855
-----------
Total assets 1,460,055
Current liabilities (38,912)
Noncurrent liabilities (1,000,000)
-----------
$ 421,143
===========
F-18
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
June 30, 2006
(Unaudited)
Note 8 - Notes Payable
-------------
At June 30, 2006, notes payable to individuals and others were
comprised of the following:
Non-interest bearing loan payable to minority interest
partner in MAP/MAC, L.L.C., due upon demand $1,080,136
Loan due principal and accrued interest
at 12% at maturity in April - November 2006 578,083
Loan due interest only monthly at 16%
maturing February 2006 223,200
Loan due principal and accrued interest at 3% at
maturity in January 2007 200,000
Non-interest bearing loan payable out of joint
venture distributions 114,169
Loan due February 2006, issuance of
30,000 shares of common stock at inception
and 1,800 shares monthly beginning April 2005
through maturity in lieu of interest 100,000
Loan due interest only on a monthly basis at
18%, maturing March 2006 102,275
Loan due interest only monthly at 16% renewable
on a monthly basis 75,000
Loans due interest only on a monthly or
quarterly basis at 10%, maturing February
through August 2006 306,544
Other 85,000
----------
Total 2,864,407
Less portion due within one year 2,864,407
----------
$ --
==========
Certain real estate mortgage note receivable pools secure the loans
from individuals and others.
F-19
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
June 30, 2006
(Unaudited)
Note 8 - Notes Payable (continued)
-------------
On September 30, 2004, Mortgage Assistance Corporation, a Texas
corporation ("MAC") and Mortgage Acquisition Partners, L.L.C., a
Missouri limited liability company ("MAP," and collectively, the
"Parties") jointly formed MAP/MAC, L.L.C., ("MAP/MAC") a Texas limited
liability company for the express purpose of purchasing, servicing,
and selling nonperforming mortgage notes and properties. Pursuant to
the terms of the operating agreement for this entity, MAP/MAC issued a
Promissory Note to the minority interest partner, MAP for $233,000.
The loan payable to the minority interest partner in the MAP/MAC,
L.L.C. joint venture consists of non-interest bearing advances used to
purchase mortgage loan portfolios. The Company's principal officers
and stockholders have guaranteed repayment of the initial loan
advances of $233,000. This initial Note is due and payable no later
than thirty (30) days after receipt of a written demand by the Payee,
MAP.
Pursuant to the terms of the operating agreement of this entity, MAC
will periodically and from time to time issue distributable cash to
MAP consisting of proceeds from the sale of mortgage notes and
properties owned by MAP/MAC, net of all costs and fees incurred in the
acquisition, servicing and sale of such assets. By agreement of the
Parties, such distributable cash may be reinvested by MAP back into
MAP/MAC for the purchase of additional pools of mortgage notes. As of
June 30, 2006, MAP has elected to reinvest three profit distribution
payments back into MAP/MAC for a total non-interest bearing loan
payable amount of $1,080,136. Proceeds from these cash distribution
payments subsequently reinvested in MAP/MAC were used for the
acquisition of additional mortgage notes, which are in the process of
being serviced and sold. Pursuant to the terms of the MAP/MAC
operating agreement, no interim payments of principal are due prior to
the sale of the underlying assets. Upon sale of the underlying assets,
MAC is obligated to repay the non-interest bearing note, from proceeds
of the sale, and equally distribute remaining net profits, if any, to
MAC and MAP individually.
For all subsequent advances under this loan, including cash
distributions subsequently reinvested in MAP/MAC, and in the event
MAP/MAC does not fully repay and satisfy such advances with the
proceeds from the sale or other distribution of the related loan
portfolios, MAC has guaranteed repayment of fifty percent (50%) of the
shortfall.
In a similar transaction to that described above, the Company also
lists a non-interest bearing note payable out of joint venture
distributions of $114,169. This agreement operates in a manner
substantially similar to the MAP/MAC agreement, but bears no
relationship to the MAP/MAC entity or minority interest partners.
F-20
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
June 30, 2006
(Unaudited)
Note 9 - Minority Interests
------------------
Minority interests on the Company's consolidated balance sheets
represent the ownership percentages of two subsidiaries, MAP/MAC,
L.L.C. (50%) and Apple Canyon Capital, L.L. C. (42%), not owned by the
Company.
Changes to minority interests for the six-months ended June 30, 2006,
consisted of the following:
Balance, December 31, 2005 $ 292,536
Minority interests in losses of subsidiaries (35,467)
Capital contributions from minority interests
in Apple Canyon Capital, L.L.C 350,000
Distributions to minority interests in
MAP/MAC, L.L.C (117,500)
---------
$ 489,569
=========
Note 10 - Related Party Transactions
--------------------------
During the period ended June 30, 2006, MAC engaged in certain
transactions with two affiliated entities, ABOVO Corporation and
Vision Ads, Inc. ("VA"), (dba "Red Horse Realty"), two corporations
owned by MAC's vice president.
MAC charges VA, a real estate management firm, for usage of office
space, personnel and other administrative costs. MAC had an account
receivable from VA of $43,164 at June 30, 2006.
ABOVO Corporation engages in the purchase and sale of residential real
estate, and often carries the notes receivable with its purchasers. In
2004, MAC began servicing ABOVO Corporation's real estate loans. MAC
recognized $5,682 of servicing fees from ABOVO Corporation for the six
months ended June 30, 2006.
F-21
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
June 30, 2006
(Unaudited)
Note 11 - Income Taxes
------------
The components of income tax (benefit) expense, on continuing
operations, for the six months ended June 30, 2006 and 2005,
respectively, are as follows:
Six Months Ended
June 30, 2006 June 30, 2005
------------- -------------
Federal:
Current $ -- $ --
Deferred -- --
------------- -------------
-- --
------------- -------------
State:
Current -- --
Deferred -- --
------------- -------------
Total $ -- $ --
============= =============
The Company's income tax expense for the periods ended June 30, 2006
and 2005, respectively, differed from the statutory tax rate of 34.0%
as follows:
Six Months Ended
June 30, 2006 June 30, 2005
------------- -------------
Statutory rate applied to income
before income taxes $ (134,600) $ (241,300)
Increase (decrease) in income taxes
resulting from:
State income taxes
Other, including reserve for deferred tax
asset and application of net operating loss
loss carryforward 134,600 241,300
------------- -------------
Income tax expense $ -- $ --
============= =============
Deferred tax assets and liabilities consisted of the following at June
30, 2006 and December 31, 2005:
June 30, December 31,
2006 2005
------------ ------------
Deferred tax assets
Net operating loss carryforwards $ 3,889,000 $ 3,222,000
Less valuation allowance (3,889,000) (3,222,000)
------------ ------------
Net Deferred Tax Asset $ -- $ --
============ ============
F-22
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
June 30, 2006
(Unaudited)
Note 11 - Income Taxes (continued)
------------
As of June 30, 2006, the Company had a net operating loss carryforward
of approximately $11,400,000 to offset future taxable income. Subject
to current regulations, this carryforward will begin to expire in
2007. Due to the reverse acquisition transaction with MAC in May 2005,
the usage of the Company's net operating loss carryforward will be
severely limited. The amount and availability of the net operating
loss carryforwards may be subject to limitations set forth by Section
338 of the Internal Revenue Code. Factors such as the number of shares
ultimately issued within a three year look-back period; whether there
is a deemed more than 50 percent change in control; the applicable
long-term tax exempt bond rate; continuity of historical business; and
subsequent income of the Company all enter into the annual computation
of allowable annual utilization of the carryforwards.
A 100% valuation allowance has been established related to the
deferred tax asset resulting from the net operating loss carryforward,
reflecting the uncertainty of the future realization of this asset.
Note 12 - Common Stock Transactions
-------------------------
On May 14, 2004, the Stockholders approved an amendment to the
Company's Articles of Incorporation, which increased the par value of
each share of common stock from $0.0001 per share to $0.001 per share
and decreased the number of authorized common shares from 175,000,000
shares to 50,000,000 shares. The stockholders also approved a
one-for-two hundred fifty (1:250) reverse stock split. Pursuant to
authorization by the Board of Directors, the reverse stock split
became effective for stockholders of record as of November 22, 2004.
Stock certificates representing pre-split denominations may be
exchanged for stock certificates representing the post-split
denominations, at the election of stockholders, as mandatory
certificate exchange is not required. Common stock and additional
paid-in capital at December 31, 2004 were restated to reflect this
split. The number of common shares issued at December 31, 2004, after
giving effect to the split, was determined to be 664,603 (165,853,058
shares issued before the split), including 1191 shares estimated to be
issued to fractional stockholders.
The effect of the reverse stock split has been reflected as of January
1, 2004 in the balance sheet, but activity for 2004 and prior periods
has not been restated in those statements. All references to the
number of common shares and per share amounts elsewhere in the
financial statements and related footnotes have been restated as
appropriate to reflect the effect of the reverse split for all periods
presented.
F-23
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
June 30, 2006
(Unaudited)
Note 12 - Common Stock Transactions (continued)
-------------------------
In connection with a Business Combination Agreement between the
Company and MAC on May 10, 2005 (See Note 3), the Company issued
12,000,000 post-split shares to the MAC shareholders in exchange for
all of the issued and outstanding shares of MAC. As the acquisition of
MAC represented an exchange of equity interests between entities under
common control, the equity interests issued were recorded at
approximately $257,000, representing the net book value of MAC on a
historical cost basis as of January 1, 2005, the beginning of the
period in which the transaction occurred. The effect of the MAC
acquisition has been reflected as of January 1, 2004 to provide
comparable weighted average per share amounts for all periods
presented.
In accordance with the Letter of Agreement with MAC in March 2004,
Loper & Seymour, P.A., an escrow agent, agreed to return 338,883
(84,720,733 pre-split) shares to the Company. The Company elected to
cancel the shares. The effect of this cancellation has been applied
retroactive to January 1, 2004. On June 23, 2005, the Company issued
400,000 post-split shares for legal services pursuant to certain Legal
Services Compensation Agreements. Of these issuances, 300,000 shares
were issued to the Company's former legal counsel, Mary F. Seymour,
Attorney at Law.
Note 13 - Quasi-Reorganization
--------------------
Effective January 1, 2006, the Company, with the consent of its
stockholders, completed a quasi-reorganization, whereby the retained
deficit at January 1, 2005, of $23,798,786, accumulated prior to the
merger of the Company with MAC, was eliminated against additional
paid-in capital. The purpose of the quasi-reorganization is to more
clearly reflect the stockholders' equity accounts based upon the
Company's operations and activities as a financial services company,
which commenced on January 1, 2005. The equity section of the December
31, 2005 Balance Sheet has been restated to reflect the
quasi-reorganization.
Note 14 - Commitments
-----------
Consulting Contracts:
The Company has contracted with RJ Falkner & Company, Inc. to provide
consulting services in regard to preparation of a Research Profile on
the Company, distribution of such reports, identification of potential
institutional investors and other matters related to investor
relations. The contract is for twelve months, continues monthly after
January 15, 2006 unless cancelled by either party. Under the terms of
the contract FJ Falkner & Company, Inc. will be compensated $3,000
monthly and will be issued 50,000 shares of MACC common stock.
F-24
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
June 30, 2006
(Unaudited)
Note 14 - Commitments (Continued)
-----------
Consulting Contracts: (continued)
MACC has agreed to register these shares with the SEC upon the
registration of any other shares or within twenty-four months,
whichever occurs first.
Mortgage Assistance Corporation has signed a Letter Agreement dated
September 1, 2005 with Michael Caolo & Associates, Attorneys and
Counselors ("Caolo") as a non-exclusive legal and business advisor and
consultant in the position of General Counsel for MAC to provide legal
and business Advice, counsel and services in connection with the
coordination of all legal matters of MAC, including coordination with
special securities counsel for S.E.C. reporting requirements, and
including but not limited to possible private placements, mergers,
consolidations, recapitalization, acquisitions or purchases of assets
or equity interest, or similar transactions. The agreement has an
initial term of six months with a minimum fee of $4,000 per month.
Additionally, provided MAC does not terminate the Letter Agreement
during the first ninety (90) days of its duration, Caolo shall be
entitled to additional compensation of equity in MACC ("Equity Fee")
in the form of a common stock purchase warrant for three hundred
seventeen thousand (317,000) shares of common tock of MACC for no
additional consideration other than an exercise price of ten cents
($.10) per share. Provided Caolo continues to serve MAC as its legal
counsel to the reasonable satisfaction of the Board of Directors and
is not terminated for "good cause", such common stock purchase warrant
may be exercised according to the following schedule:
1. Fifty thousand (50,000) of such shares on the 91st day after
the execution of the Letter Agreement
2. Sixty-six thousand seven hundred fifty (66,750) of such
shares after July 1, 2006
3. Sixty-six thousand seven hundred fifty (66,750) of such
shares after December 31, 2006
4. Sixty-six thousand seven hundred fifty (66,750) of such
shares after July 1, 2007 and
5. Sixty-six thousand seven hundred fifty (66,750) of such
shares after December 31, 2007.
F-25
Mortgage Assistance Center Corporation
Notes to Consolidated Financial Statements
June 30, 2006
(Unaudited)
Note 14 - Commitments (Continued)
-----------
On May 5, 2006, the Company executed a letter agreement to retain
Parkwood Advisors, L.L.C. as a non-exclusive financial and business
advisor to MACC. Scope of the consulting services contemplated under
this agreement include support with the capitalization and financing
activities of the company; turnaround leadership; use of cash and
investment proceeds; business plan and financial projections; SEC
filings; and other special projects related to supporting the growth
of the business including M&A, compliance, and internal business
process improvements as mutually agreed. The agreement has an initial
term of six months, effective beginning as of March 21, 2006 with a
fixed rate fee of $7,200 per month. Fees include a cash retainer
payment of $3,000 per month, and $4,200 in deferred compensation per
month which is to become payable upon the closing of a qualified round
of financing of at least $1,000,000. Under the terms of this letter
agreement, Parkwood Advisors is also entitled to additional
compensation of equity in MACC in the form of a common stock purchase
warrant for one hundred thousand (100,000) shares of common stock of
MACC for no additional consideration other than an exercise price that
reflects a fifteen percent (15%) discount from the actual per share
trading price as of March 21, 2006.
Note 15 - Subsequent Event
----------------
In June 2006 the Company initiated a dialogue with Family Access
Exchange, L.P. of Dallas, Texas. Based on several subsequent detailed
discussions and the completion of an initial round of due diligence,
the Company was offered a non-binding Term Sheet for up to a $200,000
bridge financing available as needed immediately upon the acceptance
and execution of the Term Sheet, and up to a $3,000,000 Series A
Preferred Stock financing. The Term Sheet was executed by the Company
on July 27, 2006. While this agreement is non-binding, the Company has
agreed to a 45 day exclusivity period limiting the Company's ability
to conduct financing discussions with other potential equity
investors. Closing of this financing transaction is dependent on the
satisfactory completion of all normal and customary due diligence and
other routine conditions to close. In addition, and as a specific
condition to the closing of this round of financing, Family Access
Exchange, L.P. will require the Company to restructure all but
$500,000 of the current promissory notes and other short-term loans
into notes with no less than a two-year maturity.
While the Company cannot represent or provide any assurance that the
required debt restructuring will be achieved or that the financing
will actually close as anticipated, management has every intention to
complete the conditions to close and consummate the financing with a
closure date early in the fourth calendar quarter of 2006 or before.
F-26
Item 2. Management's Discussion and Analysis or Plan of Operation.
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto, and other financial
information included elsewhere in this Form 10-QSB. This report contains
forward-looking statements that involve risks and uncertainties. Actual results
in future periods may differ materially from those expressed or implied in such
forward-looking statements as a result of a number of factors, including, but
not limited to, the risks reported under the heading "Risk Factors" in the
Company's annual report Form 10-KSB for the year ended December 31, 2005.
Business Overview:
On May 10, 2005, Mortgage Assistance Center Corporation ("MACC" or the
"Company") entered into a Business Combination Agreement with Mortgage
Assistance Corporation ("MAC"), a Texas corporation. MAC became a wholly owned
subsidiary of MACC upon MACC's complete acquisition of all MAC shares in August
2005. MACC buys, sells and manages distressed single-family real estate and
non-performing mortgages secured by single-family residential real estate in the
secondary market in the United States through its subsidiary, MAC.
MAC purchases non-performing, charged-off, sub-prime first and second lien
mortgages. These mortgages are secured by real estate, and are typically 90 days
to 2 years past due at the time of purchase. These mortgages are purchased in
pools or portfolios of assets from major lending institutions and usually at a
substantial discount to the outstanding principal balance. This business model
enables MAC to provide assistance to borrowers and to provide liquidity to
lenders that need to remove non-performing loans from their books in order to
restore their lending power or comply with government rules regarding
non-performing loans.
The Company generates revenue through three primary activities including: (a)
immediate resale of its mortgage notes to other investors; (b) rehabilitating
the note to performing status and reselling it to a secondary investor; and (c)
foreclosing or obtaining a deed-in-lieu of foreclosure on properties that
continue to be non-performing and either renting or selling the real estate.
Historically, the proportion of the Company's revenue generating activities has
been heavily weighted toward the immediate resale of mortgage notes to other
investors. Over time and with increased capitalization, the Company's expects
its revenue mix will include more instances of reforming notes, collecting
"short-sale" payments where the owner-occupant successfully pays off the note,
and foreclosure activity. The Company believes that current and future market
conditions signal an increasing rate of foreclosures of residential properties.
Accordingly, the Company anticipates increased business opportunities from this
segment.
Secondarily, MAC generates additional revenue via servicing fees charged to its
various partnerships through which MAC maintains an equity ownership position in
a commonly owned note pool. After the Company acquires a loan or pool of loans,
the process of resolution begins with the borrower, changing the status of the
non-performing loans into either performing loans or foreclosing on the real
estate. The Company may resell a portion of its re-performing loans in
various-sized loan pools. The Company may foreclose on certain properties when
loans held in its portfolio continue to be in default. As a result, the Company
will be engaged in owning single-family dwellings and possibly other real
estate. Such foreclosed real estate may be held, rehabilitated where necessary,
and sold.
The Company has historically sustained recurring losses from operations and had
an accumulated stockholders' deficit and a working capital deficiency as of June
30, 2006. The Company has incurred substantial indebtedness, including certain
currently due and past due promissory notes and interest payments that the
Company intends to restructure. These circumstances create substantial risk
regarding the Company's ability to continue as a going concern and are discussed
in this section and elsewhere in this Form 10-QSB.
Liquidity and Capital Resources:
As of June 30, 2006, the Company reports total liabilities of $4,317,420,
including total current liabilities of $3,676,669, minority interests in
investment partnerships of $489,569, and mortgages payable of $151,182. The
$489,569 in minority interests reflects the cash investments made by individuals
or third-party entities into various joint ventures, single-purpose entities or
profits participation agreements that the Company actively manages and
materially participates in. The $151,182 in mortgage notes payable consists of
two mortgages for residential properties the Company has acquired and is
currently renting and servicing.
The majority of the $3,676,669 in current liabilities is attributed to the
issuance of debt for the purpose of acquiring pools of non-performing mortgage
notes and properties. Historically, the Company has financed the purchase of its
mortgage notes through two primary means: first, through the issuance of debt to
individuals or small investment partnerships; and second, by forming and
materially participating in various investment partnerships. As of June 30,
2006, notes payable to individuals and others is reported at $2,864,407. As
discussed in the Notes to Consolidated Financial Statements under the heading
"Note 8 - Notes Payable" and elsewhere in this Form 10-QSB, $1,080,136 of the
total notes payable is attributed to non-interest bearing loans from the
minority interest partner in one of the Company's investment partnerships,
MAP/MAC, L.L.C. Principal from this note is to be repaid through the
distribution of net proceeds derived from the sale of mortgage notes and
properties owned by this entity. An additional $114,169 of the total notes
payable amount is attributed to a similarly structured profits participation
agreement with an individual investor who will be repaid from the proceeds of
sales of the underlying jointly owned assets. The remaining notes payable of
$1,670,102 consist of various promissory notes at differing interest rates and
maturity dates. As of the date of this filing, the Company has developed a
restructuring plan for these promissory notes, along with the related portion of
accrued interest payable, and with certain other loans in the approximate
additional amount of $277,585. The Company expects to implement this
restructuring plan pursuant to the terms of a prospective equity financing
agreement disclosed in the Company's Form 8-K dated August 9, 2006 and elsewhere
in this Form 10-QSB. Separately, the Company reports a total of $226,147 in
accounts payable to trade vendors; an additional $193,692 in other accrued
liabilities primarily consisting of accrued wages and consulting fees; and
$114,838 in accrued interest payable as of June 30, 2006.
During the six months ended June 30, 2006, the Company issued a total of
$651,000 in new debt to individual investors or investment partnerships for the
purchase of pools of mortgage notes. During this same six-month period, the
Company paid $67,097 in interest or other charges on promissory notes, and
repaid $230,625 in debts to individuals and partnerships. Most debt issued to
purchase pools of mortgage notes or properties is secured by the actual mortgage
loans or foreclosed real estate held in the Company's portfolio of assets.
The Company's continued reliance on debt financing has been required to
adequately establish its portfolio of mortgage notes and properties for resale,
to fund operations currently being conducted at a net loss during a period of
ramp-up and infrastructure build-out, and to fund larger transactions. The
Company anticipates that it will continue to depend on external financing in the
foreseeable future, and it cannot be assured that adequate financing will be
available at all or at terms acceptable to management. While no lawsuits have
resulted from the currently due or past due notes payable, the Company is now
attempting to restructure this debt through various means including securing
voluntary extensions with additional penalties and interest to the Company,
securing voluntary conversions to equity, and raising additional external
financing to be used for the express purpose of restructuring notes and
providing working capital. These conditions are described in more detail in this
section and elsewhere throughout this Form 10-QSB and the Company's Form 8-K
dated August 9, 2006.
As of June 30, 2006, and as a result of the continued operating losses and the
impact of the Company's business combination transaction described in this
section and elsewhere in this Form 10-QSB, the Company shows an accumulated
total stockholders' equity deficit of $(1,615,458).
As of June 30, 2006, the Company lists cash on hand in banks of $14,662, down
from $57,804 reported as of the quarterly period ended March 31, 2006. Total
assets of $2,701,962 are recorded as of June 30, 2006, which is an increase of
$1,496,034 in total assets over the three-month period ended March 31, 2006. Of
the total assets of MACC, the portion consisting of portfolio assets (which
includes purchased sub-prime and non-performing mortgage notes and other
foreclosed property which the Company subsequently reforms or resells) is listed
at the total actual acquisition cost basis, plus accrued servicing costs, if
any, of $2,473,674 net of an impairment reserve. This represents an increase in
portfolio assets of $1,704,569 over the three-month period ended March 31, 2006.
This increase is due in part to recent acquisitions of new pools of mortgage
notes and in part to a change in accounting treatment of the MAP/MAC, L.L.C.
investment partnership as discussed in the Notes to Consolidated Financial
Statements and elsewhere in this 10-QSB. If MACC's portfolio assets were to be
stated on an estimated fair market value basis, the Company anticipates that its
respective ownership percentage in these portfolio assets, along with other real
estate assets owned by the Company, would have an estimated fair market value of
approximately $6,400,000.
During the second calendar quarter of 2006, the Company closed the acquisition
of several pools of mortgage notes from various sources. As a result of these
various transactions throughout the quarter, the Company acquired a total of 132
notes with an estimated aggregate unpaid principal balance of approximately
$5,635,768. The total aggregate acquisition costs, including closing costs and
administrative fees, for notes acquired during the quarter were approximately
$1,099,890. The Company subsequently resold portions of these newly acquired
notes to two of its investment partnerships for their respective portfolios. The
investment partnerships purchasing these notes from the Company include MAP/MAC,
L.L.C. and Apple Canyon Capital, L.L.C., a new partnership in which MAC owns
56.46% and controls day-to-day operations. Terms of Apple Canyon Capital
operating agreement and servicing agreement are similar to other investment
partnerships the Company has participated in. Specifically, the Company services
the notes for an ongoing monthly fee payable to the Company by the investment
partnership, the Company sells the notes for the partnership, and the final net
profits are distributed to the investors based on their respective ownership
positions in the investment entity.
Pursuant to a purchase contract executed in December 2005, the Company purchased
a 50% interest in a two-story office/warehouse building with 69,551 square feet,
and situated on 5.34 acres of land located at 999 Metro Media in Dallas, Texas.
Pursuant to the terms of this agreement, MAC is obligated for the entire amount
of this building's monthly mortgage payment of approximately $7,000 per month,
plus MAC is responsible for the servicing, maintenance, and management of this
property. Additionally, terms of the Company's agreement with its investment
partners in this building require the Company to distribute essentially all
monthly lease revenues to the investment partners. Pursuant to a lease agreement
commencing on May 19, 2006, this "Class B" office / warehouse facility is now
essentially fully leased through April 30, 2007, with monthly lease revenues of
$17,500. No assurance can be provided that the property will be leased beyond
April 30, 2007 or that if the property is leased beyond April 30, 2007, that
rentals will be sufficient to cover mortgage and maintenance expenses. MAC's
investment in this partnership is accounted for based on the equity method that
causes MAC to report the value as a cash investment in this partnership of
$70,396.
Based on current market conditions and anticipated future market conditions, the
Company expects an increasing number of large pools of mortgage notes and
foreclosed properties to become available for purchase over the next several
years. The Company's ability to participate at a meaningful level in this market
is dependent on adequate capitalization.
Management's Plans to Raise Capital:
The continued operation of the Company will be largely influenced by its ability
to raise capital for the restructuring of debt, acquisition of mortgage pools
and operating expenses of the Company. During the previous twelve months, the
Company actively pursued a multitude of discussions with potential sources of
equity capital from various investment entities. In June 2006 the Company
initiated talks with Family Access Exchange, L.P. ("FAX, LP") of Dallas, Texas.
Based on subsequent detailed discussions and an initial round of preliminary due
diligence, the Company received a Memorandum Term Sheet for up to a $200,000
bridge financing available as needed immediately upon the acceptance and
execution of the Memorandum Term Sheet, and up to a $3,000,000 Series A
Preferred Stock financing. The terms presented in the Memorandum Term Sheet were
considered by the management team to be in the best interests of the Company and
were formally agreed to by the Company on July 27, 2006. While the Memorandum
Term Sheet is non-binding and subject to a definitive agreement, the Company is
obligated to abide by a 45-day exclusivity period restricting the Company's
ability to conduct financing discussions with other potential equity investors.
The closing of this transaction with FAX, LP is subject to the completion of due
diligence to the satisfaction of FAX, LP, and the negotiation of a mutually
agreeable definitive agreement to be executed contemporaneously at Closing. The
Memorandum Term Sheet requires that the Company restructure all but $500,000 of
the current promissory notes and other short-term loans into notes with no less
than a two-year maturity. While the Company cannot represent or provide any
assurance that the required debt restructuring will be achieved or that the
proposed transaction will actually close, Company management expects to complete
the terms and conditions for a successful closing early in the fourth calendar
quarter of 2006 or before. Additional information regarding the Memorandum Term
Sheet is provided in the Company's Form 8-K filing dated August 9, 2006.
Subsequent to executing the Memorandum Term Sheet from FAX, LP, the Company has
continued to explore opportunities to secure additional sources of debt
financing as a means of more cost effectively acquiring pools of mortgage notes
and foreclosed properties. As of the date of this filing, these discussions are
proceeding with the consent and cooperation of FAX, LP. The Company cannot
represent or provide any assurance that a line of credit or other similar credit
facility will successfully be obtained. Previously, on October 20, 2005, the
Company executed two agreements with Mercatus & Partners, L.P. providing for the
purchase of a combined total of 1,532,568 shares of Common Stock (currently held
in escrow by the investment banking firm of Brown Brothers Harriman) and the
combined gross proceeds to the Company of $2,000,000 through a complex overseas
transaction involving a number of European banking institutions. This agreement
is subject to and contingent upon a substantial number of conditions beyond the
control of the Company, and as of the date of this filing, the Company has
received no funding from these agreements. The Company can make no assurance
that these transactions will be completed in the foreseeable future or at all.
In addition to the Memorandum Term Sheet from FAX, LP indicated above, the
Company intends to leave the two agreements with Mercatus & Partners, LP in
place through the end of 2006.
Results of Operations:
Revenues
- --------
For the three months ended June 30, 2006, the Company recorded gross operating
revenues of $671,664 and gross operating revenues of $899,324 for the six months
ended June 30, 2006. Gross operating revenues for the three months ended June
30, 2006 include total sales of portfolio assets of $539,347; servicing fees and
commissions from affiliates and others of $139,320; combined with a loss from
partnership operations of $(11,742). Considered on a net revenue basis, which
deducts the cost of portfolio assets sold, the Company reports $279,822 in net
revenues for the three months ended June 30, 2006 and net revenues of $351,229
for the six months ended June 30, 2006. Current period increases in the total
sales of portfolio assets and servicing fees and commissions were positively
impacted by the increased pool acquisitions activity and an improved business
process for sales management, which was developed and implemented over the two
prior quarters. The Company also reports current period interest and other
income of $88,059 and interest expense of $54,243.
Viewed on a comparative basis with the second calendar quarter of 2005, the
Company demonstrates an increase of $133,897 in gross operating revenue in the
second calendar quarter of 2006, for a 25% increase from the same period a year
prior. Comparing the Company's net operating revenue between the second calendar
quarter of 2006 versus the same period in 2005 reveals an increase of $89,903 or
a 47% increase in net operating revenue in the current period over the same
period a year prior.
Operating Expenses
- ------------------
Total salaries, wages and contract labor expenses for the second calendar
quarter of 2006 were $184,072 down slightly from the $214,493 recorded in the
first calendar quarter of 2006. This compares to total salaries, wages and
contract labor expenses of $148,167 incurred during the second calendar quarter
of 2005. The Company anticipates slightly higher salary and wage expense during
the last half of 2006, assuming the close of the currently contemplated
financing transaction, based on the need to add selected strategic hires to
drive additional sales.
Other selling, general and administrative expenses for the second calendar
quarter of 2006 were $217,093 compared to $148,633 for the quarterly period
ended March 31, 2006 and compared to $210,491 in the second calendar quarter of
2005. This reflects normal and customary SG&A expense, plus the non-salary
component of continued investment in the infrastructure development projects
described below.
Build-out of infrastructure and capabilities to facilitate substantial growth
and profitability. During 2005 the Company concentrated on building a scalable
enterprise to achieve efficiency and profitability as the Company anticipates
increased growth made possible by expected new capital planned to be completed
during the last half of 2006. Two major internal infrastructure build-out
projects were conducted during 2005 and are now being fully implemented by the
Company. As a result of these infrastructure upgrades, the Company is now able
to service a much larger volume of mortgages than was previously being serviced.
This increased transaction flow is expected to positively impact the Company's
financial performance. These capabilities and upgrades are anticipated to begin
demonstrating results during the last half of 2006. These projects include the
following:
1. The Affiliate Network. The Company has recruited and cultivated a
nationwide network of individual and boutique investors that
serve as an important part of MACC's ability to quickly resell
its notes, note pools, and owned real estate. At present the
Company maintains a network of approximately 2,500 investors in
approximately 37 states. Going forward, the Company will continue
to build and maintain this valuable resource, and will
increasingly provide additional services on a for-fee basis to
Affiliate Network investors thereby further extending the
Company's revenue model.
2. The Interlink Loan Servicing system ("ILS"). During calendar year
2005 and continuing through the first calendar quarter of 2006,
the Company has implemented an industry leading enterprise
software platform that will substantially improve MACC's
administrative efficiency, create automated workflow through to
the financial accounting system, provide real-time access to
inventory, support management's data requests and internal
reporting needs, and enhance the Company's ability to comply with
external reporting and regulatory requirements. The Company has
adapted the ILS system to adequately accommodate MACC's needs
both currently and into the future. ILS is considered to be fully
scalable to increased numbers of transactions with little
additional infrastructure investment required beyond normal and
customary maintenance and upgrades.
Net Loss
- --------
Based on much stronger operating fundamentals, the Company recorded a net loss
for the three months ended June 30, 2006, of $(87,445) compared to a net loss of
$(308,489) for the three-month period ended March 31, 2006 and compared to a net
loss of $(234,219) for the second calendar quarter of 2005. On a
weighted-average basis of the number of shares of common stock outstanding for
the period, this equals a net loss per share of $(0.01) for the three-month
period ended June 30, 2006, compared to a net loss per share of $(0.02) during
the first calendar quarter of 2006 and compared to a net loss per share of
$(0.02) during the second calendar quarter of 2005.
Critical Accounting Policies and Estimates:
Management's discussion and analysis of results of operations and financial
condition are based on the Company's consolidated financial statements that have
been prepared in accordance with accounting principles generally accepted in the
U.S. The preparation of these financial statements requires that management make
estimates and assumptions that affect the amounts reported for revenues,
expenses, assets, liabilities and other related disclosures. Actual results may
or may not differ from these estimates. These key accounting policies include
revenue recognition, income taxes, insurance, stock options, and valuation of
long-lived assets.
Revenue Recognition:
The Company recognizes revenue from real estate and mortgage product sales when
title and risk passes to the buyer and when the conditions to the sales contract
are satisfied. Provisions for certain sales incentives, trade promotions and
discounts to customers are accounted for as reductions in determining sales in
the same period the related sales are recorded.
Long-Lived and Intangible Assets:
The Company assesses changes in economic conditions and makes assumptions
regarding estimated future cash flows in evaluating the value of the Company's
inventory of notes, real estate, fixed assets, goodwill and other non-current
assets. As these assumptions and estimates may change over time, it may or may
not be necessary for the Company to record impairment charges. Under Generally
Accepted Accounting Principles, our portfolio asset value on our balance sheet
is recorded based on actual acquisition costs, not the face value of the unpaid
principle of the notes receivable or value of the underlying real estate. If
assets are deemed impaired, those assets will be discounted to the net
realizable value. This conservative approach does make it a little harder for
someone to see the underlying asset value.
Insurance:
The Company carries directors' and officers' insurance in addition to standard
liability and casualty insurance for the Company and its offices. Property
hazard insurance on other Real Estate is carried on properties that the Company
deems significant, and is not carried on certain low value properties.
Stock Options:
Currently the Company does not have an employee stock option plan. The Company
is exploring ways to reward and retain key personnel. Stock, a qualified
incentive stock option program, and stock warrants are possible alternatives
that the Company may consider in the future.
Employee Benefit Plans:
The Company has no retirement or pension plans at this time. Benefits include
health insurance, sick pay, and paid vacation as outlined in the Company
Employee's Manual.
Forward Looking Statements:
The Company has included forward-looking statements in this report. For this
purpose, any statements contained in this report that are not statements of
historical fact may be deemed to be forward looking statements. Without limiting
the foregoing, words such as "may", "will", "expect", "believe", "anticipate",
"estimate", "plan" or "continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
and actual results may differ materially depending on a variety of factors.
Factors that might cause forward-looking statements to differ materially from
actual results include, among other things, overall economic and business
conditions, demand for the Company's products, competitive factors in the
industries in which we compete or intend to compete, and other uncertainties of
our future acquisition plans.
Quantitative and Qualitative Disclosures about Market Risk:
The Company does not issue or invest in financial instruments or their
derivatives for trading or speculative purposes. The operations of the Company
are conducted primarily in the United States, and, are not subject to material
foreign currency exchange risk. Although the Company has outstanding debt and
related interest expense, market risk of interest rate exposure in the United
States is currently not material.
Item 3. Controls and Procedures
As of the end of the reporting period, June 30, 2006, the Company carried out an
evaluation, under the supervision and with the participation of management,
including the Company's Chairman and Chief Executive Officer and the Chief
Financial Officer, of the effectiveness of the design and operation of the
disclosure controls and procedures pursuant to Rule 13a-15(e) of the Securities
Exchange Act of 1934 (the "Exchange Act"), which disclosure controls and
procedures are designed to insure that information required to be disclosed by a
company in the reports that it files under the Exchange Act is recorded,
processed, summarized and reported within required time periods specified by the
SEC's rules and forms. Based upon that evaluation, the Chairman and the Chief
Financial Officer concluded that the disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company required to be included in the Company's period SEC filings.
(b) Changes in Internal Control.
Subsequent to the date of such evaluation as described in subparagraph (a)
above, there were no changes in our internal controls or other factors that
could significantly affect these controls, including any corrective action with
regard to significant deficiencies and material weaknesses.
(c) Limitations.
Management, including the Chief Executive Officer and Chief Financial Officer,
does not expect that the disclosure controls or internal controls over financial
reporting will prevent all errors or all instances of fraud. A control system,
no matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system's objectives will be met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and any design may not succeed in achieving its
stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures. Because of the inherent
limitation of a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
There are no material legal proceedings to report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
N/A
Item 3. Defaults Upon Senior Securities.
As of June 30, 2006, the Company had a total of seven promissory notes, which
are past due. These notes include various interest rates and various maturity
dates ranging from January 31, 2006 through March 31, 2006. Cumulatively, these
notes represent $730,476 in principal. The Company also lists other past due
liabilities of $200,000 which consists of a short-term loan provided by an
individual and which is not structured as a promissory note. These notes are
secured for the principal amount with portfolio assets of the Company consisting
of mortgage notes and real estate owned by the Company that is currently for
sale as a part of its normal and customary ongoing operations. As a condition to
closing the prospective capital financing disclosed in the Company's Form 8-K
dated August 9, 2006 and the Management Discussion and Analysis portion of this
10-QSB, the Company will be required to restructure all but $500,000 of its
promissory notes into terms with at least a two-year maturity. No assurance can
be provided that the Company will be able to successfully restructure its notes
payable and successfully close the prospective capital financing.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the security holders, through the
solicitation of proxies or otherwise, during the first quarter of the fiscal
year covered by this report.
Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibit No. Exhibit Name
10.1 Lease Agreement - 999 Metro Media Building
10.2 Apple Canyon Capital, L.L.C. - Operating & Servicing Agreement
Template
31 Chief Executive Officer and Chief Financial Officer-Section 302
Certification pursuant to Sarbanes-Oxley Act.
32 Chief Executive Officer and Chief Financial Officer-Section 906
Certification pursuant to Sarbanes-Oxley Act.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
August 11, 2006 MORTGAGE ASSISTANCE
CENTER CORPORATION
/s/ Dale Hensel
---------------------------------------
By: Dale Hensel
Title: President, CEO, CFO
(Principal Executive Officer and
Principal Financial Officer)