SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported)
August 10, 2007
Mortgage Assistance Center Corporation
--------------------------------------
(Exact name of registrant as specified in its charter)
Florida 000-21627 06-1413994
------- --------- ----------
(State or other jurisdiction (Commission File (IRS Employer
incorporation) Number) Identification No.)
3141 Mockingbird Lane, Suite 1200W
Dallas, Texas 75047
(Address of principal executive offices including Zip Code)
(214) 670-0005
--------------
(Registrant's telephone number, including area code)
N/A
---
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
[_] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[_] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[_] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[_] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
1
ITEM 1.01 Entry into a Material Definitive Agreement
Background
As mentioned in the Company's periodic reports filed with the Securities
and Exchange Commission, the Company has historically been unable to generate
sufficient cash from operations to meet its ongoing financial obligations, and
has continued to rely on additional borrowings and sales of stock to provide
adequate liquidity. On November 30, 2006, the Company entered into a Series A
Preferred Stock and common stock Warrant Purchase Agreement ("Purchase
Agreement") with W.C. Payne Investments, L.L.C. and FAX/MACC, L.P. (the
"Investors"), pursuant to which the Company sold to the Investors 1,500,000
shares of the Company's Series A Preferred Stock, $.001 par value per share (the
"Series A Stock") at a price of $1.00 per share, as well as warrants to purchase
9,113,387 shares of the Company's common stock at an exercise price of $0.01 per
share. Under the terms of the Purchase Agreement, the Investors were also
obligated to purchase an additional 1,500,000 preferred shares to be purchased
in three increments of 500,000, conditioned on the Company's satisfaction, on
March 31, June 30, and September 30, 2007, of certain financial benchmarks set
forth in the Purchase Agreement.
The Company did not achieve its benchmarks for the period ended March 31,
2007; however, the Investors waived the benchmarks for this period and, during
April, the Company received the first of the three subsequent tranches of
$500,000 in cash in exchange for an additional 500,000 shares of Series A Stock,
as contemplated by the November 30, 2006 financing transaction.
The Company also did not achieve its benchmarks for the period ended June
30, 2007. After initial discussions with the Investors, the Company was advised
that the Investors would not fund the second tranche of $500,000. After
additional discussions with the Investors, the Company received a new proposal
from the Investors with respect to an equity investment of $1,000,000 in
exchange for the issuance of 267,347,556 new shares of common stock, which will
result in the Investors holding 95% of the outstanding shares of common stock
(the "Transaction"). In connection with this transaction, all previously issued
but unexercised warrants held by the Investors would be cancelled. The proposed
investment was also subject to several conditions including (1) the approval of
the transaction by the Company's board of directors, (2) the approval of an
amendment to the Articles of Incorporation to increase the number of authorized
shares of common stock, and (3) the Company obtaining a bridge loan of $300,000
from one of its joint venture investors, who agreed to immediately fund the
proposed bridge loan subject to the Company accepting the proposed equity
financing (see Lender Agreement below).
Upon receiving the investment proposal described above, a special meeting
of the Company's board of directors was held to discuss the proposal. As no
other financing alternatives were made known during the meeting, the board of
directors unanimously approved the proposed financing, subject to any
alternative financing becoming immediately available to the Company. As no other
sources of funding could be obtained by the Company within the time frame
required to meet its payroll and other obligations, the Company accepted the
terms proposed by the Investors.
Interim Financing and Future Commitments
Lender Agreement
- ----------------
On August 10, 2007, the Company received from the investor the
aforementioned $300,000 bridge loan in the form of two promissory notes, a
demand note in the principal amount of $100,000, and a sixty-day term note. The
notes are non-interest bearing; outstanding principal was due and payable upon
maturity of the notes; and the demand note was repaid on October 3, 2007 and the
term note was repaid on October 10, 2007. The investor is the sole shareholder
of a company that has provided additional funding totaling approximately
$5,000,000 to the Company for the purchase of portfolio assets over the last two
years. In connection with these notes, the Company granted to the investor the
right to receive from the Company a warrant to purchase 37,522,464 shares of
common stock at an exercise price per share equal to the closing price of a
share of the common stock on the day immediately preceding the date warrant is
issued. The Company also agreed to issue an additional warrant providing the
opportunity to receive an additional 56,283696 shares of common stock. This
2
warrant will become exercisable with respect to 3,752,246 shares of common stock
for every $2,000,000 in additional equity or debt funding provided to the
Company by the investor or his affiliates, if and when requested by the Company;
provided that he or his affiliates have such funds available for such purpose.
These warrants will be issuable by the Company to the investor upon filing of
the Amendment with the Florida Department of State and have a term of five years
from the date of issue. It is further anticipated that any debt funding provided
by the investor or his affiliates would bear interest at a rate equal to at
least twelve percent (12%) per annum, and could remain outstanding for no longer
than twenty-four (24) months.
New Financing Amendment
- -----------------------
Effective September 2007, the Company entered into an agreement with the
Investors pursuant to which the Transaction described above will be consummated.
The agreement was structured as an amendment to the Purchase Agreement described
above. The Investors funded the $1,000,000 purchase price for the 267,347,556
shares of common stock in two separate tranches of $500,000, one of which was
paid to the Company in August, 2007, prior to the entry by the parties of the
definitive agreement, and the second of which was paid to the Company in
October, 2007. Upon filing of the Amendment with the Florida Department of
State, the Company will issue the 267,347,556 shares to the Investors.
Messrs. William G. Payne and Rod C. Jones are members of our Board of
Directors. Mr. Payne is also the Managing Member of W.C. Payne Investments,
L.L.C. and Mr. Jones is a limited partner in FAX/MACC, L.P., and the Managing
Member of FAX GenPar, LLC, which is the General Partner of Family Access
Exchange II, L.P, which is the General Partner of FAX/MACC, L.P. At the time the
Company received the proposal from the Investors, Mr. Payne was, through his
relationship with W.C. Payne Investments, deemed to hold 448,600 shares of
common stock, warrants to purchase an additional 3,489,283 shares of common
stock at an exercise price of $.01 per share; and 666,667 shares of Series A
Stock; and Mr. Jones, through his relationship with FAX/MAC was deemed to hold
897,200 shares of common stock, warrants to purchase an additional 6,978,566
shares of common stock at an exercise price of $.01 per share and 1,333,333
shares of Series A Stock.
In addition, as directors, each of Messrs. Payne and Jones hold, in their
individual capacities, warrants to purchase 75,000 shares of our common stock at
an exercise price of $.65 per share.
Upon issuance of the 267,347,556 shares of common stock contemplated under
the Transaction, (1) W.C. Payne Investments will hold 89,564,452 shares of our
common stock, and 666,667 shares of Series A Stock; (2) FAX/MAC will hold
179,128,904 shares of common stock, and 1,333,333 shares of Series A Stock; (3)
Mr. Payne will be deemed to be the beneficial owner of those shares held by W.C.
Payne Investments; (4) Mr. Cain will be deemed the beneficial owner of those
shares held by FAX/MAC; and (5) our officers, directors and their affiliates
will beneficially own or control approximately 98.9% of our outstanding common
stock. As a result, our officers and directors and their affiliates could have
the ability to exert substantial influence over all matters requiring approval
by our shareholders, including the election and removal of directors and any
proposed merger, consolidation or sale of all or substantially all of our assets
and other corporate transactions. This concentration of control could be
disadvantageous to other shareholders with interests different from those of our
officers, directors their affiliates. For example, our officers, directors and
affiliates could delay or prevent an acquisition or merger even if the
transaction would benefit other shareholders. In addition, this significant
concentration of share ownership may adversely affect the trading price for our
common stock because investors often perceive disadvantages in owning stock in
companies with controlling shareholders.
New Funding and Stock Issuance
Effective October 22, 2007, the Company, Mortgage Assistance Center, a
Texas corporation and our wholly-owned subsidiary ("MAC"), and HBK Fund MS LLC,
a Delaware limited liability company ("HBK") entered into a Venture Funding
Agreement (the "Venture Funding Agreement") pursuant to which the Company may
receive up to $75,000,000 in joint venture funding to acquire various pools of
distressed real estate and mortgage notes (collectively, the "Property
Portfolios"). Under the Venture Funding Agreement, HBK would provide equity
funding to enable newly created joint venture entities (collectively, the "Joint
3
Ventures"), each of which would be owned 75% by HBK and 25% by the Company, to
acquire Property Portfolios, and the Joint Ventures would acquire, manage and
sell the distressed real estate and mortgage notes. A new Joint Venture would be
created for each Property Portfolio funded by HBK. Any funding required by the
Joint Venture in excess of the initial equity funding by HBK would be provided
by HBK in the form of promissory notes with maturities of no less than one year
and bearing an interest rate of eight percent (8%) per annum, and any required
debt service associated with the promissory notes would take precedence over any
profit distributions described below..
Upon acquisition of a Property Portfolio, the Company would receive a
sourcing fee equal to three percent (3%) of the purchase price of the Property
Portfolio. MAC , under the terms of a servicing agreement between the parties,
would service the Property Portfolio. Profit distributions from the Joint
Venture would be made first to HBK until it received repayment of its capital
investment in the Joint Venture; second to HBK for its 8% priority return as
defined in the Joint Venture agreement; third to MAC for an amount equal to the
8% return received by HBK; and remaining profits of the venture would be split
in proportion to the parties' equity ownership.
In connection with the Venture Funding Agreement, the Company has issued a
warrant to purchase shares of our common stock, that would, when, if exercised
in full, result in the warrant holder holding 33% of the outstanding shares of
common stock (the "HBK Warrant"). The HBK Warrant vests and becomes immediately
exercisable with respect to:
(1) Three and ? percent (3.33%) of the shares of common stock for
which the Warrant is exercisable for each $2.5 million in Venture
funding HBK provides pursuant to this Agreement, up to an aggregate of
$25,000,000 in funding; and
(2) Six and ? percent (6.67%) of the shares of common stock for
which the Warrant is exercisable for each $2.5 million in Venture
funding HBK provides pursuant to this Agreement, subsequent to the
first $25,000,000 in funding.
The number of shares of common stock issuable on exercise of the HBK
warrant automatically shall adjust upward on the date of consummation of the
equity investment in the Company (the "Consummation Date") described under the
caption "Cash Requirements" in the Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the Company's
Quarterly Report on Form 10-QSB for the quarter ended June 30, 2007.
The Company has agreed to file a registration statement covering the resale
of the shares issuable under the HBK Warrant within 45 days of the Consummation
Date and must be declared effective no later than 60 days following the
Consummation Date if the Securities and Exchange Commission (the "Commission")
staff elects not to review the registration statement or 120 days following the
Consummation Date if the Commission staff elects to review the registration
statement. The Company shall be obligated to pay to HBK as liquidated damages
for each full calendar month that the Company is not in compliance with the
foregoing registration requirements through the expiration of the HBK Warrant an
amount equal to two percent (2%) of the aggregate funding HBK has provided to
the Ventures as of the first day of the calendar month in question.
The descriptions of the transactions under "Lender Agreement," "New
Financing Amendment" and "New Funding and Stock Issuance" above are qualified in
their entirety by reference to copies of the applicable agreements filed as
exhibits to this Form 8-K and incorporated herein by this reference.
4
ITEM 2.02 Results of Operations and Financial Condition
Internal Investigation
In Note 6 of the Notes to Financial Statements of our Quarterly Report on
Form 10-QSB for the quarter ended June 30, 2007, the Company disclosed that
during an examination, carried out under the supervision of the Company's Chief
Executive Officer and Chief Financial Officer, and with the participation our
executive management, of the effectiveness and design and operation of our
disclosure controls and procedures, certain weaknesses were discovered in the
Company's disclosure control processes that prevented senior management from
obtaining information regarding certain operational aspects related to the joint
ventures. Upon discovering these weaknesses, executive management and counsel
conducted an internal investigation to determine the cause of these weaknesses
and the extent to which, if any, these weaknesses may have caused the Company to
improperly report financial information.
Background
- ----------
MAC acts as the sole manager for several limited liability companies (the
"LLCs"), each of which holds loan portfolios, former REO properties or a
combination of both (the "Properties"). As manager, MAC selects the properties
to be purchased by the LLC and has obtained either loans or equity investments
from the LLC members in order to acquire the Properties. In addition, MAC has
entered into servicing agreements with the LLCs, pursuant to which MAC is to
perform services related to the Properties (the "Servicing Agreements"). Due to
MAC's operating control over these entities and its 50% interest in the profits,
each of these LLCs is consolidated in the Company's financial statements.
MAC, in the regular course of its business, also sells Properties from its
inventories to various unconsolidated individuals and entities ("Purchasers")
and enters into Servicing Agreements with these individuals and entities
pursuant to which MAC is entitled to a 50% share in the profits generated from
its servicing activities.
Improper Transactions
- ---------------------
Through the course of its internal investigation the Company uncovered
that, for a period from approximately March, 2006 until March 2007 (a) MAC
charged various LLCs and Purchasers for services under the Servicing Agreements,
yet failed to adequately provide the applicable services ("Service
Overcharges"), and (b) MAC either, on behalf of itself or as manager of an LLC,
sold Properties (1) from its inventory to an LLC, (2) from one LLC to another
LLC, (3) from its inventory to a Purchaser, or (4) from an LLC to a Purchaser,
for prices higher than the acquisition cost of such Properties, notwithstanding
the fact that the agreements governing MAC's management of the LLCs specifically
required that any such sales of Properties be at MAC's acquisition cost.
Although there is no similar requirement under any of the agreements with
Purchasers, the investigation has uncovered some indication that the Purchasers
may have also believed that their purchase of Properties was at MAC's
acquisition cost.
Based on its internal investigation, the Company believes that the
aggregate financial impact of these transactions on the Company is approximately
$440,000, of which approximately $160,000 represents Service Overcharges, and
approximately $280,000 represents profits generated by the aforementioned sale
of Properties. Because the Company reports the operations of the LLCs on a
consolidated basis whereby intercompany transactions were eliminated in
consolidation, it does not believe that the impact of these Service Overcharges
and profits will necessitate any adjustments with respect to the Company's
previously issued financial statements, but the Company will reflect the impact
of these transactions as a $440,000 liability on the Company's future financial
statements. These profits did, however, impact the profits and losses reported
by the individual LLCs to their respective non-Company members.
The Company is currently engaged in discussions with its affected LLC
members and Purchasers with regard to the above transactions in order to attempt
to settle with each affected party. Although no legal claims against the Company
have been asserted, the above described transactions were conducted in such a
5
manner as to potentially expose the Company to claims for breach of contract,
fraud, breach of fiduciary duties, and misappropriation of business
opportunities, among others, and there can be no assurance that that legal
action will not ensue. MAC has, however, entered into a Modification Agreement
with MAP/MAC, LLC ("MAP/MAC") one of the LLCs affected by the above described
transactions, and Mortgage Acquisition Partners, L.L.C., ("MAP"), the member of
MAP/MAC not affiliated with MAC or the Company. Pursuant to the Modification
Agreement, the LLC and its members have agreed to release MAC from any claims
arising from the above described transactions as well as any breach or violation
by MAC of the LLC's governing documents, or any related promissory note or
servicing agreements provided, (1) MAP/MAC pays $100,000 to MAP as partial
repayment on outstanding loans, (2) MAC repays to MAP, on or before October 1,
2008, all other outstanding loan balances related to the acquisition of
properties made by MAC on behalf of MAP/MAC, and (3) MAC and MAP/MAC comply,
through October 1, 2008, with all other terms and conditions set forth the
agreements governing or related to MAC's venture relationship with MAP. The
outstanding loan balance to be repaid under the Modification Agreement under (2)
above will be $1,120,135.66 after the $100,000 payment described in (1) above.
The original notes were payable on demand and were non-interest bearing.
Interest will continue to accrue under these notes until fully paid. The amounts
set forth above are currently recorded on the Company's financial statement as
obligations under the original MAP/MAC transactions. While the Company currently
believes that the proceeds from the sale of the remaining MAP/MAC assets will be
sufficient to cover these outstanding loan balances, however, (A) there can be
no assurance that such will be the case, and (B) unlike our other joint
ventures, if there is a shortfall, MAC will still be obligated to pay MAP the
amount of any deficiency.
The Company has implemented several new processes and procedures to
strengthen its controls and procedures, including additional required levels of
review and approval of acquisitions and sales of portfolio assets and charges to
the LLCs, in an endeavor to ensure that the Company does not engage in similar
transactions in the future.
ITEM 3.02 Unregistered Sales of Equity Securities.
See Item 1.01
ITEM 5.01 Changes in Control of the Registrant
See Item 1.01
The issuance of the 267,347,556 shares of common stock to W.C. Payne
Investments, L.L.C. and FAX/MACC, L.P (the "Investors") as contemplated under
the Transaction described more fully below under "Amendment to Articles of
Incorporation - Background," will result in a change in control of the Company.
The Company has been advised that the funds used by the Investors to acquire the
267,347,556 shares was previously provided by the members and limited partners
of the Investors for general investment purposes and not specifically to acquire
the shares from the Company.
ITEM 9.01 Financial Statements and Exhibits
(d) Exhibits
10.1 Funding Commitment Agreement dated as of October 2007, by and between
Mortgage Assistance Center Corporation and Bob Mangold.
10.2 Amendment and Agreement dated as of September 2007, by and among
Mortgage Assistance Center Corporation and the investors listed
therein.
10.3 Venture Funding Agreement dated as of October 22, 2007, by and among
Mortgage Assistance Center Corporation, Mortgage Assistance
Corporation and HBK Fund MS LLC.
6
10.4 Modification Agreement dated as of October 19, 2007, by and among
Mortgage Assistance Corporation, MAP/MAC, LLC and Mortgage Acquisition
Partners, L.L.C.
Forward Looking Statements
This Report contains forward-looking information as defined in Section 21E
of the Securities Exchange Act of 1934. Forward-looking statements include
statements concerning plans, objectives, goals, strategies, future events or
performance and underlying assumptions and other statements, which are other
than statements of historical facts. Words such as "expects", "believes",
"anticipates", "may", "intends", "projects", "estimates" and similar expressions
are intended to identify forward-looking statements. The Company's expectations,
beliefs and projections are expressed in good faith and are believed by the
Company to have a reasonable basis, including without limitation, management's
examination of historical operating trends, data contained in the Company's
records and other data available from third parties, but there can be no
assurance that management's expectation, beliefs or projections will be achieved
or accomplished. However, forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected. Such risks and uncertainties include, but are not limited to, limited
operating history, historical operating losses and the uncertainty of the
Company's profitability in the future, the need to raise additional capital to
sustain operations and implement its future business plan, and other factors
that may be beyond the Company's control. These factors include changes in
regulations or legislation, adverse determination with respect to litigation or
other claims, ability to recruit and retain employees, availability of mortgage
note portfolios at acceptable prices, and increases in operating costs. The
Company has no obligation to publicly update or revise these forward-looking
statements to reflect the occurrence of future events or circumstances.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MORTGAGE ASSISTANCE
CENTER CORPORATION
Date: October 29, 2007
/s/ Ron Johnson
Ron Johnson
President and Chief Executive Officer
7