UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
(Mark one)
[X] Annual Report Under Section 13 or 15(d) of The Securities Exchange Act of
1934
For the fiscal year ended December 31, 2007
[] Transition Report Under Section 13 or 15(d) of The Securities Exchange Act
of 1934
For the transition period from ______________ to _____________
Commission File Number: 000-21627
Mortgage Assistance Center Corporation
(Exact name of Registrant as specified in its charter)
Florida 06-1413994
--------- ----------------
(State or other jurisdiction (IRS Employer
of incorporation) identification
number)
1341 W. Mockingbird Lane, Suite 1200 West, Dallas, Texas 75247
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 670-0005
Securities registered under Section 12 (b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock -
$0.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ] Yes [X] No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act. [ ] Yes [X] No
Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period the Company 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X] Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of "accelerated filer," "large
accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer |_| Non-accelerated filer |_|
Accelerated filer |_| Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined by
Rule 12b-2of the Exchange Act. Yes [ ] No [X]
The issuer's total gross operating revenues for the fiscal year ended December
31, 2007 was $3,925,235.
The aggregate market value of voting common equity held by non-affiliates as of
June 29, 2007 was approximately $726,972. As of April 11, 2008, there were
14,071,024 shares of Common Stock issued and outstanding.
MORTGAGE ASSISTANCE CENTER CORPORATION
Index to Contents
Page Number
Part I
Item 1 Business.................................................3
Item 1A Risk Factors..............................................
Item 1B Unresolved Staff Comments.................................
Item 2 Properties................................................
Item 3 Legal Proceedings........................................8
Item 4 Submission of Matters to a Vote of Security Holders......9
Part II
Item 5 Market for Registrant's Common Equity, Related Stockholders
Matters and Issuer Purchases of Equity Securities............9
Item 6 Selected Financial Data.......................................
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................12
Item 7A Quantitative and Qualitative Disclosures About Market Risk....
Item 8 Financial Statements and Supplemental Data.................F-1
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures.....................17
Item 9A(T) Controls and Procedures.....................................17
Item 9B Other Information...........................................17
Part III
Item 10 Directors, Executive Officers and Corporate Governance.....18
Item 11 Executive Compensation.....................................20
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................23
Item 13 Certain Relationships and Related Transactions, and
Director Independence......................................23
Item 14 Principal Accountant Fees and Services.....................24
Part IV
Item 15 Exhibits, Financial Statement Schedules....................24
Signatures...............................................................25
CAUTION REGARDING FORWARD-LOOKING INFORMATION
From time to time, certain information provided by the Company, including
written or oral statements made by its representatives, may contain
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. Certain statements in this Form 10-K are forward-looking statements.
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, and 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.
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.
Given these uncertainties, readers of this Form 10-K and investors are cautioned
not to place undue reliance on such forward-looking statements. The Company
disclaims any obligation to update any such factors or to publicly announce the
result of any revisions to any of the forward-looking statements contained
herein to reflect future events or developments.
PART I
Item 1 - Business
History
Mortgage Assistance Center Corporation, a Florida corporation (the "Company" or
"MACC"), was organized in 1976, under the name Knight Airlines, Inc. In
September 1995, pursuant to a plan of reorganization, the Company was renamed
Safe Alternatives Corporation of America.
In January 2005, the Company changed its name to Mortgage Assistance Center
Corporation, and through a series of corporate reorganizations completed in
August 2005, the Company acquired Mortgage Assistance Corporation ("MAC"), a
Texas corporation. MAC is now a wholly owned subsidiary of MACC.
Business
The Company 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 mortgage notes are secured by real estate, are typically 90
days to 2 years past due at the time of purchase, and in many cases have been
foreclosed upon. 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 and to the current market value of the underlying
real estate. This business model enables MAC to provide assistance to borrowers
3
and 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 though four 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; (c)
foreclosing or obtaining a deed-in-lieu of foreclosure on properties that
continue to be non-performing; or (d) purchasing real estate that has gone
through the foreclosure process and then either renting or selling the real
estate. The Company believes that current and future market conditions signal an
increasing rate of foreclosures on residential properties. Accordingly, the
Company anticipates increased business opportunities from this segment.
Additionally, MAC generates revenue via fees charged to manage and service
mortgage notes for its joint ventures and other investors. When the Company
acquires a loan or pool of loans, the process of resolution begins with the
borrower, changing the status of non-performing loans into either performing
loans or foreclosing on the real estate. The Company may resell a portion of its
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 financed the acquisition of its loan pools through
various profit participation entities directly with investors and by issuing
promissory notes to individuals and investment entities. In addition, the
Company has historically sustained recurring losses from operations and had an
accumulated stockholders' deficit as of December 31, 2007.
Competition
The market in the non-performing mortgage industry is extremely competitive.
Competition varies depending on the quality of the collateral securing the
non-performing mortgages. MAC seeks profit opportunities in many areas of this
industry, but currently focuses its business in lower value non-performing
mortgage pools. MAC is principally purchasing non-performing mortgages in the
$200,000 or less range as management believes that this segment of the industry
generates a higher profit margin. Competitors in this industry include financial
institutions, hedge funds, individual investors, as well as other privately held
and public companies, many of which may be better capitalized than MAC, and may
have superior business relationships to suppliers of asset portfolios and better
sales channels to sell product. Typically, large amounts of cash are required to
facilitate the purchase of non-performing mortgage pools and the Company's
ability to compete in this market has historically been limited by this large
cash requirement.
Employees
As of December 31, 2007, the Company had 32 employees.
Item 1A - Risk Factors
Cautionary Factors That May Affect Future Results
We provide the following cautionary discussion of risks, uncertainties and
possible inaccurate assumptions relevant to our business and our products. These
are factors that we think could cause our actual results to differ materially
from expected results. Other factors besides those listed here could adversely
affect us.
Trends, Risks and Uncertainties
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The Company has sought to identify what it believes to be the most significant
risks to its business as discussed in "Risk Factors" below, but cannot predict
whether or not or to what extent any such risks may be realized nor can there be
any assurances that the Company has identified all possible risks that might
arise. Investors should carefully consider all such risk factors before making
an investment decision with respect to the Company's common stock.
As for the availability of non-performing mortgages, our purchase volume as a
percentage of the industry volume is miniscule. The historically low purchase
prices of mortgages in our niche cannot be guaranteed to continue.
Limited Operating History; Anticipated Losses; Uncertainly of Future Results
The Company has only a limited operating history upon which an evaluation of the
Company and its prospects can be based. The Company's prospects must be
evaluated with a view to the risks encountered by a company in an early stage of
development, particularly in light of the uncertainties relating to the
implementation of the Company's business model. While the Company has invested
significant financial resources over the last year to upgrade its operational
infrastructure, the Company will continue to: incur costs to develop, introduce
and enhance its products; establish business relationships; acquire and develop
products that will complement each other; and improve its technological support.
To the extent that such expenses are not subsequently followed by commensurate
revenues, the Company's business, results of operations and financial condition
will be materially adversely affected. There can be no assurance that the
Company will be able to generate sufficient revenues from the sale of its
products and services. The Company may experience negative cash flow from
operations for a period of time as it continues to improve its business model,
and up until such time as the Company is sufficiently capitalized. The Company
may be required to sell additional equity or debt securities if cash generated
by operations is insufficient to satisfy the Company's liquidity requirements.
The sale of additional equity or convertible debt securities would result in
additional dilution to the Company's shareholders.
Need for Additional Financing
On November 30, 2006, the Company entered into a Series A Preferred Stock and
Common Stock Warrant Purchase Agreement ("Series A Purchase Agreement") with
W.C. Payne Investments, L.L.C. and FAX/MACC, L.P. (the "Investors") pursuant to
which the Company sold to Investors 1,500,000 shares of the Company's Series A
Preferred Stock at a price of $1.00 per share, as well as warrants to purchase
9,111,387 shares of the Company's common stock at an exercise price of $0.01 per
warrant share. Under the terms of the Series A Purchase Agreement, the Investors
would also purchase an additional 1,500,000 preferred shares, in increments of
500,000, conditioned on the satisfaction of certain financial benchmarks set
forth in the Purchase Agreement.
During April 2007, despite not achieving its benchmarks for the first quarter,
the Company received the first of the three subsequent tranches of $500,000 in
cash as contemplated by the November 30, 2006 financing transaction. However,
the Company did not achieve its benchmarks for the subsequent periods, and the
Investors advised the Company that they did not intend to fund further tranches
under the Purchase Agreement.
In August 2007, after discussions with the Investors, the Company received a
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
would represent approximately 95% of the outstanding shares of our common stock
(the "Transaction"). Effective September 2007, the Company entered into an
agreement with the Investors with respect to the Transaction. The agreement was
structured as an amendment to the Purchase Agreement described above. The
Investors advanced 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. The
5
issuance of the shares to the Investors is subject to an amendment to the
Company's Articles of Incorporation increasing the Company's authorized shares.
The Company continues to require additional operating capital in order to
sustain operations. Without such additional capital, there can be no assurance
that the Company can continue to operate as a going concern.
Indemnification of Officers and Directors
The Company's By-Laws provide for the indemnification, to the full extent
allowed by Florida law, of its directors, officers, employees and agents who are
or were a party, or are threatened to be made a party to any threatened, pending
or completed legal action, suit or proceeding by reason of the fact that he or
she is or was serving a director, officer, employee or agent of the Company or
is or was serving in such capacity at another entity at the Company's request.
The extent, amount and eligibility for such indemnification are determined by a
majority vote of a quorum of disinterested directors, or by a majority vote of a
quorum of disinterested shareholders.
Dependence upon Outside Advisors
To supplement the business experience of its officers and directors, the Company
may be required to employ accountants, technical experts, appraisers, attorneys,
or other consultants or advisors. The selection of any such advisors will be
made by the Company's officers, without any input by shareholders. Furthermore,
it is anticipated that such persons may be engaged on an as needed basis without
a continuing fiduciary or other obligation to the Company. In the event the
officers of the Company consider it necessary to hire outside advisors, they may
elect to hire persons who are affiliates, if those affiliates are able to
provide the required services.
Auditor's Opinion Expresses Doubt About The Company's Ability To Continue As a
"Going Concern"
The independent auditor's report issued in connection with the consolidated
audited financial statements of the Company for the period ended December 31,
2007, indicates that operating losses incurred during 2007 and prior periods,
and the resulting accumulated stockholders' deficit and working capital deficit,
among other factors, may cause the Company to be unable to continue as a going
concern for a reasonable period of time. If the Company is unable to fully
develop its business model and raise additional capital, the Company may have to
cease operations, which would be detrimental to the value of the Company's
common stock. The Company can make no assurances that its business operations
will develop and provide the Company with significant cash to continue
operations.
There Has Been A Volatile Public Market For The Company's Common Stock And The
Price Of The Company's Stock May Be Subject To Fluctuations
We cannot assure investors that a liquid transparent trading market for the
Company's common stock will develop or be sustained. Investors may not be able
to resell shares at any price. The market for the Company's stock has from time
to time experienced extreme price and volume fluctuations (See Item 5 of this
Form 10-K), and the market price of the Company's common stock could continue to
be volatile due to factors, most of which are beyond the Company's control,
including but not limited to, factors such as:
o Operating results that vary from the expectations of securities
analysts and investors;
o Changes in expectations as to the Company's future financial
performance, including financial estimates by securities analysts
o The operations, regulatory, market and other risks discussed in this
section;
o Announcements by the Company or its competitors of significant
contracts, acquisitions, strategic partnerships, joint ventures or
capital commitments;
o Announcements by third parties of significant claims or proceedings
against the Company; and
6
o Future sales of the Company's common stock.
Risks Relating To Penny Stocks
Because the Company's stock is quoted on the NASD Over The Counter Bulletin
Board ("OTCBB") and subject to the Penny Stock Regulations, an investor may find
it difficult to dispose of, or to obtain accurate quotations as to the market
value of, the Company's securities. The regulations governing low-priced or
penny stocks could limit the ability of broker-dealers to sell the Company's
securities and thus the ability of the purchasers and shareholders to sell their
securities in the secondary market.
Limited Market Due To Penny Stock
The Company's stock differs from many stocks, in that it is a "penny stock." The
Securities and Exchange Commission has adopted a number of rules to regulate
"penny stocks." These rules include, but are not limited to, Rules 3a5l-l,
15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6 and 15g-7 under the Securities and
Exchange Act of 1934, as amended. Because the Company's securities probably
constitute "penny stock" within the meaning of the rules, the rules would apply
to the Company and its securities. The rules may further affect the ability of
owners of the stock to sell securities in any market that may develop. There may
be a limited or no market for penny stocks, due to the regulatory burdens on
broker-dealers. The market among dealers may not be active. Investors in penny
stock often are unable to sell stock back to the dealer that sold them the
stock. The mark-ups or commissions charged by the broker-dealers may be greater
than any profit a seller may realize. In some cases, the stock may fall quickly
in value. Investors may be unable to reap any profit from any sale of the stock.
Stockholders should be aware that, according to the Securities and Exchange
Commission Release No. 34- 29093, the market for penny stocks has suffered in
recent years from patterns of fraud and abuse. These patterns include: control
of the market for the security by one or a few broker-dealers that are often
related to the promoter or issuer; manipulation of prices through prearranged
matching of purchases and sales and false and misleading press releases; "boiler
room" practices involving high pressure sales tactics and unrealistic price
projections by inexperienced sales persons; excessive and undisclosed bid-ask
differentials and markups by selling broker-dealers; and the wholesale dumping
of the same securities by promoters and broker-dealers after prices have been
manipulated to a desired level, along with the inevitable collapse of those
prices with consequent investor losses. Furthermore, the "penny stock"
designation may adversely affect the development of any public market for the
Company's shares of common stock or, if such a market develops, its
continuation. Broker-dealers are required to personally determine whether an
investment in "penny stock" is suitable for customers. Penny stocks are
securities (i) with a price of less than five dollars per share; (ii) that are
not traded on a "recognized" national exchange; (iii) whose prices are not
quoted on the NASDAQ automated quotation system (NASDAQ-listed stocks must still
meet requirement (i) above); or (iv) of an issuer with net tangible assets less
than $2,000,000 (if the issuer has been in continuous operation for at least
three years) or $5,000,000 (if in continuous operation for less than three
years), or with average annual revenues of less than $6,000,000 for the last
three years. Section 15(g) of the Exchange Act, and Rule 15g-2 of the Commission
require broker-dealers dealing in penny stocks to provide potential investors
with a document disclosing the risks of penny stocks and to obtain a manually
signed and dated written receipt of the document before effecting any
transaction in a penny stock for the investor's account. Potential investors in
the Company's common stock are urged to obtain and read such disclosure
carefully before purchasing any shares that are deemed to be "penny stock." Rule
15g-9 of the Commission requires broker-dealers in penny stocks to approve the
account of any investor for transactions in such stocks before selling any penny
stock to that investor. This procedure requires the broker-dealer to (i) obtain
from the investor information concerning his or her financial situation,
investment experience and investment objectives; (ii) reasonably determine,
based on that information, that transactions in penny stocks are suitable for
the investor and that the investor has sufficient knowledge and experience as to
be reasonably capable of evaluating the risks of penny stock transactions; (iii)
provide the investor with a written statement setting forth the basis on which
the broker-dealer made the determination in (ii) above; and (iv) receive a
signed and dated copy of such statement from the investor, confirming that it
7
accurately reflects the investor's financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult for the Company's stockholders to resell their shares to third parties
or to otherwise dispose of them.
Future Capital Needs Could Result In Dilution To Investors; Additional Financing
Could Be Unavailable Or Have Unfavorable Terms
The Company's future capital requirements will depend on many factors, including
cash flow from operations, the general state of the economy, available mortgage
pools, competing market developments, and the Company's ability to market its
products successfully. It will be necessary to raise additional funds through
equity and/or debt financings. Any equity financings could result in dilution to
the Company's existing stockholders. Sources of debt financing may result in
higher interest expense. Any financing, if available, may be on terms
unfavorable to the Company. If adequate funds are not obtained, the Company may
be required to reduce or curtail operations.
No Assurance of Success or Profitability.
The Company's market share in the non-performing mortgage industry is not
significant. Maintaining or increasing the Company's market share will depend on
its ability to develop and maintain a niche in which there is an adequate supply
of notes and real estate that can be profitably acquired and remarketed. There
is no assurance that the Company will generate revenues or profits.
Reports Filed with the SEC
The Company is a public reporting company and files periodic reports with the
Securities and Exchange Commission in compliance with the rules and regulations
of the Securities Exchange Act of 1934. The public may read and copy this Annual
Report on Form 10-K (and previous Annual Reports filed on Form 10-KSB) and any
other materials filed by the Company at the SEC's Public Reference Room at 450
Fifth Street N.W., Washington, D.C. 20549. The public may obtain information on
the operation of the Public Reference Room by call the SEC at 1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issues at http://www.sec.gov.
Item 1B - Unresolved Staff comments
As a smaller reporting company, MACC is not required to provide this
information.
Item 2 - Properties
MACC, through its 50% equity interest in a joint venture, owns a two-story
office/warehouse building with 69,551 square feet situated on 5.34 acres of land
located at 999 Metro Media in Dallas, Texas. Pursuant to the terms of the
purchase agreement, the joint venture is obligated for the entire amount of this
building's monthly mortgage payment of $8,714 per month. The joint venture is
also solely responsible for the servicing, maintenance, and management of this
property. Pursuant to a lease agreement that expires April 30, 2008, this
office/warehouse facility is currently being leased for $17,500 per month. No
assurance can be provided that the property will be leased beyond April 30,
2008, or that if the property is leased beyond April 30, 2008, rentals will be
sufficient to cover mortgage and maintenance expenses. The Company's investment
in this partnership is accounted for based on the consolidation method as
described in Note 2 to the Financial Statements and elsewhere in this Form 10-K.
The Company's principal executive offices are located at 1341 West Mockingbird
Lane, Dallas, Texas 75247. The lease is for approximately 17,563 square feet at
this location pursuant to a lease agreement that expires March 2014. The current
monthly rental under this lease is $15,002 and the rental escalates over the
8
term of the lease to $21,954 per month for the final twelve months, for a total
of approximately $1,629,000 over the lease term.
Item 3 - Legal Proceedings
There are no material legal proceedings against the Company.
The Company is not aware of any material legal proceeding to which, any
director, officer, partnership interest of the Company, or any owner of record
or beneficial owner of more than 5% of the Company common stock is a party to
and which would be adverse to the Company.
Item 4 - Submission of Matters to a Vote of Security Holders
On August 8, 2007, the Board of Directors received a written consent from the
holders of 7,413,333 shares of our common stock authorizing an amendment to the
Articles of Incorporation that increases the authorized number of shares of
common stock that the Company is permitted to issue from 50,000,000 to
500,000,000 (the "Amendment"). The 7,413,333 shares represented by this written
consent constituted approximately 58% of the then issued and outstanding shares
entitled to vote on the Amendment, which vote is sufficient under Florida law
and the Articles of Incorporation to approve the Amendment. The Company has not
yet filed the Amendment with the State of Florida but, pending the filing of an
Information Statement pursuant to the Securities Exchange Act, the Company
intends to file the Amendment with the State of Florida.
PART II
Item 5 - Market for registrant's Common Equity, and Related Stockholder Matters
and Issuer Purchases of Equity Securities
Market Price of Common Stock:
There has not been an active market for the Company's securities. The Company's
Common Stock is quoted on the NASD OTC Bulletin Board.
A range of high and low quotations for each quarter for the Company's Common
Stock for fiscal years 2006 and 2007 are listed below. The information was
obtained from the NASD OTC Bulletin Board (www.otcbb.com). The prices reported
may not be indicative of the value of the Common Stock or the existence of an
active trading market. The Company does not know whether these quotations
reflect inter-dealer prices without retail mark-up, markdown or commissions.
These quotations may not represent actual transactions. During 2006 and 2007,
the Company's stock was quoted under the symbol MTGC.OB.
2006 2007
-----------------------------------------------
Low High Low High
------- ------ ------- ------
First Quarter $1.30 $2.50 $0.64 $1.01
Second Quarter $1.05 $1.85 $0.25 $0.75
Third Quarter $0.55 $1.55 $0.16 $0.45
Fourth Quarter $0.55 $1.01 $0.06 $0.21
9
Holders of Record:
The Company had approximately 1,347 holders of record of its common stock as of
December 31, 2007, holding 14,071,024 common shares issued and outstanding.
The Transfer Agent is Continental Stock Transfer & Trust Company, 17 Battery
Place South, 8th Floor, New York, NY 10004, and their telephone number is (212)
509-4000.
Dividend Policy:
The Company has not declared any cash dividends to the holders of its capital
stock and does not anticipate declaring or paying dividends in the foreseeable
future. Further, the terms of the Company's Series A Preferred Stock prohibit
the Company from declaring or paying any dividends any shares of its capital
stock unless (1) all accrued but unpaid dividends on the Series A Preferred
Stock have been, or are simultaneously paid; and (2) the holders of at least
fifty percent (50%) of the Series A Preferred Stock consent to such dividend.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes the Company's equity compensation plan
information as of December 31, 2007. Information is included for equity
compensation plans not approved by the Company's security holders.
Equity Compensation Plan Information
------------------------------ -------------------------- ---------------------- -----------------------
Plan Category Number of Securities to Weighted-average Number of Securities
be issued upon exercise Exercise price of remaining available for
of outstanding options, outstanding options, future issuance under
warrants and rights warrants, and rights equity compensation
plans (excluding
securities reflected in
column (a)
(a) (b) (c)
------------------------------ -------------------------- ---------------------- -----------------------
Equity Compensation
Plans approved by
security holders 3,182,800 $0.83 1,068,000
------------------------------ -------------------------- ---------------------- -----------------------
Equity Compensation
Plans not approved by
security holders 1,143,891 $0.57 N/A
------------------------------ -------------------------- ---------------------- -----------------------
Total 4,325,891 $0.76 N/A
-------------------------------------------------------- ---------------------- -------------------------
10
Equity Compensation Plan Grants Approved By Security Holders.
1) Under the provisions of the Plan, and pursuant to Board of Directors
approval on November 28, 2006, the Company granted statutory options
(e.g. incentive stock options) for 248,000 shares of common stock, to
various employees in consideration for employment with and services
provided to the Company. These options were issued with an exercise
price of $0.85, which was the closing trading price per share on the
date of the grant. These options were 100% fully vested and exercisable
at the date of the grant, and may be exercised at any time through
November 28, 2011, unless sooner terminated pursuant to the Plan. Of
these options, options for 16,000 shares had been terminated and
options for 232,000 shares were outstanding as of December 31, 2007. A
third-party consultant determined the fair value of these options with
a commercially available software product that utilizes a proven
trinomial lattice valuation methodology. Based on this analysis, the
value of the options at grant was determined to be approximately $0.37.
2) Under the provisions of the Plan, and pursuant to Board of Directors
approval on November 28, 2006, the Company granted non-statutory
options (e.g. non-qualified stock options) for 834,800 shares of common
stock to various individuals in consideration for prior employment and
/ or consulting services provided to the Company. These options were
issued with an exercise price of $0.85, which was the closing trading
price per share on the date of the grant. These options were 100% fully
vested and exercisable at the date of the grant, and may be exercised
at any time through November 28, 2011, unless sooner terminated
pursuant to the Plan. As of December 31, 2007, all of these options,
options had been terminated. A third-party consultant determined the
fair value of these options with a commercially available software
product that utilizes a proven trinomial lattice valuation methodology.
Based on this analysis, the value of the options at grant was
determined to be approximately $0.38.
3) In connection with three-year employment agreements entered into
between the Company and two of its principal officers and stockholders
on November 30, 2006, the officers were granted incentive stock options
for 600,000 shares of common stock under the Plan. One third of such
incentive stock options will become exercisable upon each successive
anniversary date of the employment agreements, provided that the
Company employs the officers on each such anniversary date. A
third-party consultant determined the fair value of these options with
a commercially available software product that utilizes a proven
trinomial lattice valuation methodology. Based on this analysis, the
value of the options at grant was determined to be approximately $0.45.
These officers were terminated by the Company and, as a result, options
for 300,000 shares were terminated and the remaining options, of which
only 100,000 are vested, will be terminated on April 30, 2008, unless
exercised before then.
4) In connection with a retention agreement reached with a key employee on
January 26, 2007, the employee was granted 50,000 restricted shares and
50,000 incentive stock options. Under the terms of the agreement,
one-third of the shares will become exercisable upon each subsequent
anniversary date of the agreement provided that the Company employs the
individual on each such anniversary date. The incentive stock options
were issued at an exercise price of $0.64 per share which was the per
share price at the close of trading on January 26. The option value was
determined to be $0.34 per share.
5) In connection with the employment agreement entered into between the
Company and Mr. Ron Johnson on February 9, 2007, the Company granted
incentive options for 1,000,000 shares of common stock under the Plan.
One third of such options became exercisable upon the full execution of
the employment agreement, and the remaining two thirds will become
exercisable in two equal installments on each of the subsequent two
anniversary dates of the employment agreement, provided that Mr.
Johnson is employed by the Company on each such anniversary date. A
third-party consultant determined the fair value of these options with
a commercially available software product that utilizes a proven
11
trinomial lattice valuation methodology. Based on this analysis, the
value of the options at grant was determined to be approximately $0.37.
6) In connection with the employment agreement entered into between the
Company and Mr. Richard Coleman on March 1, 2007, the Company granted
Mr. Coleman options for 750,000 shares of common stock under the Plan.
One third of such options became exercisable upon the full execution of
the employment agreement, and the remaining two thirds will become
exercisable in two equal installments on each of the subsequent two
anniversary dates of the employment agreement, provided that Mr.
Coleman is employed by the Company on such anniversary date. A
third-party consultant determined the fair value of these options with
a commercially available software product that utilizes a proven
trinomial lattice valuation methodology. Based on this analysis, the
value of the options at grant was determined to be approximately $0.51.
Mr. Coleman resigned from the Company on February 4, 2008, and as a
result, unvested options for 500,000 shares were terminated.
12
Equity Compensation Plans Not Approved By Security Holders.
1) Mortgage Assistance Center Corporation signed a Letter Agreement dated
November 29, 2006, 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 MACC. In addition to
the cash compensation stipulated in the Letter Agreement and disclosed
in the Notes to the Financial Statements contained in this Form 10-K,
Caolo was granted equity in MACC ("Equity Fee") in the form of a five
year common stock purchase warrant for four hundred sixty-seven
thousand (467,000) shares of common stock of MACC for no additional
consideration other than an exercise price of fair market value to be
paid by Caolo whenever such common stock purchase warrant is exercised.
The Letter Agreement establishes that this common stock purchase
warrant for 467,000 shares of common stock of MACC is partially being
made in lieu of and as a replacement for that certain previous common
stock purchase warrant for 317,000 shares of common stock of Mortgage
Assistance Corporation which was, through mutual mistake, erroneously
set forth in the previous Agreement dated September 1, 2005, between
Michael Caolo & Associates and Mortgage Assistance Corporation, the
subsidiary, instead of MACC, the parent corporation, which was the
intended proper party. This warrant was originally issued at an
exercise price of $0.39 per share, subject to adjustment in accordance
with the terms of the warrants. This warrant was subsequently cancelled
and reissued on May 7, 2007 at an exercise price of $0.65 which was the
actual price per share at the close of trading on May 7, 2007. A
third-party consultant determined the fair value of these options with
a commercially available software product that utilizes a proven
trinomial lattice valuation methodology. The value of the warrants was
determined to be $0.29 per warrant share on the date of the grant.
These warrants expire on November 30, 2011.
2) On November 27, 2006, the Company executed a Letter Agreement to retain
Parkwood Advisors, L.L.C. ("Parkwood") as a non-exclusive financial and
business advisor to MACC. In addition to the cash compensation
stipulated in the Letter Agreement and disclosed in the Notes to the
Financial Statements contained in this Form 10-K, Parkwood was granted
equity in MACC ("Equity Fee") in the form of a five year common stock
purchase warrant for one hundred fifty thousand (150,000) shares of
common stock of for no additional consideration other than an exercise
price of fair market value to be paid by Parkwood whenever such common
stock purchase warrant is exercised. The Letter Agreement establishes
that this common stock purchase warrant for 150,000 shares of common
stock of MACC is partially being made in lieu of and as a replacement
for that certain previous common stock purchase warrant for 100,000
shares of common stock of Mortgage Assistance Center Corporation which
was set forth in the previous Letter Agreement dated May 5, 2006,
between Parkwood Advisors, LLC and Mortgage Assistance Center
Corporation. This warrant was originally issued at an exercise price of
$0.39 per share, subject to adjustment in accordance with the terms of
the warrants. This warrant was subsequently cancelled and reissued on
May 7, 2007 at an exercise price of $0.65 which was the actual price
per share at the close of trading on May 7, 2007. A third-party
consultant determined the fair value of these options with a
commercially available software product that utilizes a proven
trinomial lattice valuation methodology. The value of the warrants was
determined to be $0.29 per warrant share. These warrants expire on
November 30, 2011.
3) At December 31, 2007, the Company had a cumulative obligation to a
financial consultant pursuant to a June 19, 2006 Consulting Agreement
for an equity compensation fee of $308,133, representing five percent
(5%) of the amount of monies loaned to the Company by lenders procured
by the consultant. The equity compensation fee is to be converted to a
share basis according to the closing trading price per share on the
date each individual funding tranche closes and paid in the form of
five-year common stock purchase warrants of the Company with an
aggregate fair market value equivalent to the equity compensation fee
earned. This calculation converts the equity compensation fee to a
total of 585,096 warrant shares. Pursuant to this agreement, the
consultant was issued a common stock purchase warrant on June 11, 2007
for 157,866 warrant shares at an exercise price of $0.40 which was the
13
actual per share price at the close of trading on June 11.
Subsequently, the consultant was issued a second warrant for 219,025
shares on June 29, 2007 at an exercise price of $0.43. A third-party
consultant determined the fair value of these options with a
commercially available software product that utilizes a proven
trinomial lattice valuation methodology. The value of the warrants was
determined to be $0.18 and $0.19, respectively, per warrant share.
These warrants expire five years from the date of grant. As of December
31, 2007 the Company had an obligation to issue another warrant to this
consultant for a total of 208,205 shares of common stock.
4) On November 30, 2006, the Company issued two, ten-year common stock
purchase warrants for seventy five thousand (75,000) shares of common
stock each to William G. Payne and to Rod Cain Jones in conjunction
with their appointment to the Company's board of directors. These
warrants were originally issued at an exercise price of $.39 per share.
These warrants were subsequently cancelled and reissued on May 7, 2007
at an exercise price of $0.65 which was the actual price per share at
the close of trading on May 7, 2007. A third-party consultant
determined the fair value of these options with a commercially
available software product that utilizes a proven trinomial lattice
valuation methodology. The value of the warrants was determined to be
$0.29 per warrant share. These warrants expire November 30, 2016.
Recent Sales of Unregistered Securities:
In addition to the issuances of options described above under "Securities
Authorized for Issuance under Equity Compensation Plans," the Company has issued
the following securities without registration under the Securities Act of 1933:
Legal Services Plan
- -------------------
On June 23, 2005, the Company adopted a Legal Services Plan. The Plan reserved
400,000 shares and was registered on a Form S-8 registration statement filed on
June 23, 2005. The Company's Board of Directors administered the Plan. A total
of 400,000 shares were issued including: (a.) 300,000 shares issued to Mary F.
Seymour, Attorney at Law; and (b.) 100,000 shares issued to Gregory M. Wilson,
Attorney at Law. Both issuances were made in consideration for legal services
provided to the Company during 2005. These advisors are not engaged to provide
any additional services in the future.
Series A Preferred Stock and Common Stock Warrants
- --------------------------------------------------
On November 30, 2006, the Company, along with W.C. Payne Investments, L.L.C and
FAX/MACC, L.P. (collectively, the "Investors" entered into a Series A Preferred
Stock and Common Stock Warrant Purchase Agreement (the "Series A Purchase
Agreement"), pursuant to which the Company sold to Investors 1,500,000 shares of
the Company's Series A Preferred Stock at a price of $1.00 per share, as well as
warrants to purchase 4,556,694 shares of the Company's common stock at an
exercise price of $.01 per warrant share (the "Warrants"). Under the terms of
the Series A Purchase Agreement, the Investors purchased 1,500,000 of the Shares
on November 30, 2006, with the additional 1,500,000 Shares to be purchased, in
increments of 500,000, conditioned upon the satisfaction of certain benchmarks
by March 31, June 30, and September 30, 2007. 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 2007, 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 Series A
Purchase Agreement.
Funding Commitment
- ------------------
On August 10, 2007, in connection with a $300,000 bridge loan, the Company
granted to the lender of the bridge loan the right to receive a warrant to
purchase 37,522,464 shares of our common stock at an exercise price per share
equal to the closing price of a share of the common stock on the day immediately
14
preceding the date warrant is issued. The Company also agreed to issue an
additional warrant providing the lender with the opportunity to receive an
additional 56,283696 shares of common stock. This second warrant will become
exercisable with respect to 3,752,246 shares of common stock for every
$2,000,000 in financing provided to the Company by the lender or his affiliates,
if and when requested by the Company; provided that he or his affiliates have
such funds available for such purpose. Both these warrants will be issuable by
the Company upon filing of an amendment to the Company's Articles of
Incorporation, increasing the number of shares that the Company is authorized to
issue. The Company has obtained the consent of majority the shares entitled to
vote on such amendment, which under Florida law, is sufficient to authorize the
amendment. The Company intends to file the amendment with the State of Florida,
pending the filing of an Information Statement with the Securities and Exchange
Commission.
New Financing
- -------------
The Company also did not achieve its benchmarks under the above described Series
A Purchase Agreement 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 would represent approximately 95%
of the outstanding shares of our common stock (the "Transaction"). Effective
September 2007, the Company entered into an agreement with the Investors with
respect to the Transaction. The agreement was structured as an amendment to the
Series A Purchase Agreement. The Investors advanced 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. The issuance of the shares to the
Investors is subject to the above described amendment to the Company's Articles
of Incorporation.
Venture Funding
- ---------------
Effective October 22, 2007, in connection with a joint venture by and between
MAC and HBK Fund MS LLC, the Company had 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 one-third percent (3.33%) of the shares of common stock for
which the HBK Warrant is exercisable for each $2.5 million in venture
funding HBK provides pursuant to the venture agreement, up to an
aggregate of $25,000,000 in funding; and
2) Six and two-thirds percent (6.67%) of the shares of common stock for
which the HBK Warrant is exercisable for each $2.5 million in venture
funding HBK provides pursuant to the venture 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 adjusts upward on the date of consummation of the Transaction
(described under New Financing).
Bridge Financing
- ----------------
Effective February 12, 2008, in connection with two promissory note agreements,
the Company granted to the lenders thereunder the right, exercisable at any time
after the earlier to occur of (a) a going private transaction, or (b) February
12, 2009, to purchase an aggregate of 25% of the capital stock of the Company
for a nominal consideration.
Issuer Purchases of Equity Securities:
Not Applicable
16
Item 6. Selected Financial Data
As a smaller reporting company, this information is not required.
Item 7 - Management's Discussion and Analysis and Results of Operations
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-K. 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 discussed under the headings "Caution Regarding
Forward-Looking Information," "Risk Factors" and elsewhere in this Form 10-K.
Business Overview:
The Company 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 mortgage notes are secured by real estate, are typically 90
days to 2 years past due at the time of purchase, and in many cases have been
foreclosed upon. 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 and to the current market value of the underlying
real estate. This business model enables MAC to provide assistance to borrowers
and 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 though four 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; (c)
foreclosing or obtaining a deed-in-lieu of foreclosure on properties that
continue to be non-performing; or (d) purchasing real estate that has gone
through the foreclosure process and then either renting or selling the real
estate. The Company believes that current and future market conditions signal an
increasing rate of foreclosures on residential properties. Accordingly, the
Company anticipates increased business opportunities from this segment.
Additionally, MAC generates revenue via fees charged to manage and service
mortgage notes for its joint ventures and other investors. When the Company
acquires a loan or pool of loans, the process of resolution begins with the
borrower, changing the status of non-performing loans into either performing
loans or foreclosing on the real estate. The Company may resell a portion of its
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 financed the acquisition of its loan pools through
various profit participation entities directly with investors and by issuing
promissory notes to individuals and investment entities. In addition, the
Company has historically sustained recurring losses from operations and had an
accumulated stockholders' deficit as of December 31, 2007. 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-K.
17
Liquidity and Capital Resources:
As of December 31, 2007, the Company lists cash on hand in banks of $616,288
down from the $1,205,120 reported as of the calendar year ended December 31,
2006. Total assets were $8,410,084 as of December 31, 2007, which is a decrease
of $1,143,001 from the year ended December 31, 2006. This decrease is primarily
due to the sale of pools of mortgage notes sold through ongoing operations
during the year, and the fact that the assets of Dutch Fork Capital, LLC, were
included as a consolidated entity in 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 and
payments, if any, of $5,788,361 net of an impairment reserve of $197,237 as of
December 31, 2007. This represents a decrease in portfolio assets of $1,010,148
from calendar year 2006. On a fully consolidated basis, if MACC's total
portfolio assets were to be stated at an estimated fair market value of the
underlying properties, the Company anticipates that these properties would have
an estimated fair market value of approximately $10,230,641.
As a function of its ongoing operations, the Company acquired various pools of
mortgage notes from various sources throughout the year. These acquisitions
included both mortgage notes and properties on a real estate owned basis
("REOs") acquired for the Company's own portfolio as well as mortgage notes and
REOs acquired directly by the Company's various investment partnerships for
their respective portfolios. In total, these combined acquisitions during 2007
included a total of 125 mortgage notes or REOs. The total aggregate initial
acquisition costs, including closing costs and administrative fees, for mortgage
notes and REOs acquired during the year were approximately $3,699,869. These
amounts do not include 157 REO's acquired for $7,596,067 applicable to
unconsolidated entities.
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.
In addition to the Company's portfolio assets maintained for sale, the Company
also lists fixed assets including land, building improvements, and office
furniture and equipment of $1,642,873, net of accumulated depreciation of
$148,038.
As of December 31, 2007, the Company reported total liabilities of $8,337,971
including total current liabilities of $4,856,274 and long-term debt of
$3,481,697. Minority interests of $3,612,087 reflect 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 accounting treatment for
these minority interests is discussed in greater detail in the Notes to the
Financial Statements and elsewhere throughout this Form 10-K.
Included in the current liabilities of $4,856,274 are $1,120,136 of non-interest
bearing loans from minority interest partners in one of the Company's investment
partnerships; a $1,000,000 advance from a principal shareholder as an advance on
the purchase of common stock in connection with the proposed recapitalization of
the Company; and $1,518,375 of other principal repayments of debt scheduled to
be repaid during the next twelve months. Other current liabilities include
$96,856 of accrued stock-based compensation which reflects the portion of earned
but un-issued stock-based compensation as of December 31, 2007; $342,641 in
accounts payable to trade vendors and others; $74,911 in accrued fees and wages,
$262,838 in other accrued liabilities and $440,517 to be repaid to certain joint
venture partners.
18
Long-term debt consists of notes payable to individuals and others, and
mortgages payable. The long-term notes payable include promissory notes issued
for the purpose of acquiring pools of non-performing mortgage notes and
properties. Historically, the Company has financed the purchase of its mortgage
notes and properties 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. The balance as of
December 31, 2007, of $2,466,678 in long-term notes payable have various
maturity dates beginning in September 2008. A detailed schedule of these
long-term notes and their respective terms is provided in the Notes to the
Financial Statements section of this Form 10-K. As further described in Note 8
in the Financial Statements, the Company reports the long-term portion of
mortgages payable of $945,816 representing the mortgage balance due on the 999
Metromedia property, and a $69,203 mortgage balance due for an individual
residential property the Company currently owns and intends to sell.
The equity section of the balance sheet the purchase of additional Series A
Preferred Stock, the discount from the value of the preferred stock assigned to
the attached warrants that is being accreted back over the period in which the
preferred stock can be redeemed, and the exercise of warrants to purchase
1,345,900 additional shares of common stock of the Company during the year. The
Company has a total of 14,071,024 shares of common stock (par value $0.001)
issued and outstanding as of December 31, 2007, with a corresponding common
capital stock entry of $14,071; and additional paid-in capital of $3,240,449. As
of December 31, 2007, and as a result of the continued operating losses the
Company shows a retained earnings deficit of ($7,140,954) and a total
stockholders' equity deficit of ($3,539,974) bringing total liabilities and
stockholders' equity into balance at $8,410,084.
Management's Plans to Raise Capital:
The continued operation of the Company will be largely influenced by its ability
to raise capital for the acquisition of mortgage pools and to provide working
capital to fund operating expenses of the Company prior to the point where the
Company can achieve consistent earnings performance. 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. 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. These
conditions are described in more detail in this section and elsewhere throughout
this Form 10-K and previous filings.
Results of Operations:
Revenues
For the year ended December 31, 2007, the Company recorded gross operating
revenue of $3,785,298, an increase of $1,001,194, or 41%, compared to the gross
operating revenues of $2,784,104 reported for the year ended December 31, 2006.
This includes total sales of portfolio assets of $2,971,190; servicing fees from
affiliates and others of $189,872; rental income of $216,504; and other
miscellaneous income of $407,732. The Company reports net operating revenue by
deducting the cost of portfolio assets sold from gross operating revenues. For
the year ended December 31, 2007, net operating revenues were $1,155,586
compared to net operating revenues of $1,282,259 for the year ended December 31,
2006.
Operating Expenses
The Company's total operating expenses for the year ended December 31, 2007 were
$4,574,162 compared to $3,155,764 of total operating expenses in 2006. The
increase was due to the significant investment in the infrastructure of the
Company to support the increase activity in portfolio assets. Total salaries,
wages and contract labor expenses for the calendar year 2007 were $2,323,665
compared to $1,313,373 in 2006. This increase is driven primarily by the
non-cash compensation expense recognized by the Company for various grants of
19
options awarded to employees and contractors under the Company's Equity
Incentive Plan and as disclosed in the Notes to the Financial Statements and
elsewhere in this Form 10-K. Going forward the Company anticipates the need to
hire additional key sales and staff resources drive growth and increase
capabilities. Other miscellaneous operating expenses include depreciation and
amortization expense of $87,002, and a charge for bad debts expense of $196,465.
Other selling, general and administrative expenses for the year ended December
31, 2007 were $1,967,030 compared to $1,576,767 for the year prior. This
increased SG&A expense reflects the impact of scaling of the 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. Beginning in 2005 and continuing through 2007, the Company
has concentrated on building a scalable enterprise to achieve efficiency and
profitability as the Company anticipates increased growth. Two major internal
infrastructure build-out projects were continued during 2007. As a result of
these infrastructure upgrades, the Company is now able to more efficiently
service a much larger volume of mortgages than was previously being serviced.
These projects include the following:
1) The Affiliate Network. The Company continued recruiting and cultivating
its 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. The Company continued to invest in
developing this valuable resource by adding additional specialized
staff and other resources including an online presence for owned real
estate along with additional incentive and fee based services that
extend the Company's revenue model.
2) Website Technology. During 2007 the Company added REO Listings
Technology to its website. Adding this technology is part our
continuing efforts to further develop the website, which will further
expand our sales channels. Moving forward, this technology will be an
excellent tool as we acquire additional REO portfolios.
Despite demonstrating substantial growth and diversification in the Company's
sources of revenue, the Company recorded an operating loss for the calendar year
ended December 31, 2007, of ($3,418,576) compared to an operating loss of
($1,833,505) for the year ended December 31, 2006.
Other Income and Expense
The Company had $10,976 in interest and other income and a total of ($426,618)
in interest expense plus a loss on retirement of property of ($2,825) for net
total other income and expense of ($418,467) for the year ended December 31,
2007.
Net Loss
The Company's loss before minority interests of ($3,837,042) combined with
losses of the minority interests in subsidiaries net earnings of ($16,576)
resulted in a net loss of ($3,553,552) during 2007. This compares to a net loss
of ($2,100,408) during the year ended December 31, 2006. On a weighted-average
basis of the number of shares of common stock outstanding for the year, this
equals a net loss per share of ($0.27) during 2007, compared to a net loss per
share of ($0.16) during 2006.
Cash Flows:
During the twelve months ended December 31, 2007, the Company lists net cash
used by operating activities both continuing and discontinued of ($4,356,265).
This includes the net loss for the year of ($3,622,706) plus total adjustments
20
of ($708,605) to reconcile net loss to net cash provided by or (used by)
operating activities. This includes the following uses of cash from operating
activities: increase in portfolio assets, $1,495,924, gains in minority
interests in subsidiaries' net earnings of $85,729; decrease in prepaid expenses
and other assets of ($164,707); and an increase in accounts payable to trades
and others of $101,340. This includes the following sources of cash from
operating activities: increase in depreciation, $74,570; increase in non-cash
stock-based compensation, $248,332; decrease in accrued fees and wages,
($107,621); an increase in other accrued liabilities of $93,769. The Company
also reported income from discontinued operations of $300,066 from Dutch Fork
Capital, LLC.
During this period, the Company reported net cash used by investing activities
of ($365,513) which was the result of various purchases of property and
equipment for use in operating the business.
During the twelve months ended December 31, 2007, the Company lists net cash
provided by financing activities of $4,148,531. This includes the following
sources of cash from financing activities: the net proceeds from the issuance of
preferred stock in the amount of $500,000; the proceeds from issuance of debt to
individuals and others in the amount of $2,866,678; and total capital
contributions from minority interests of $2,015,802. This includes the following
uses of cash from financing activities: repayments of debt to individuals and
others, ($801,072); distributions to minority interests, $1,425,095; repayments
of mortgage loans, $21,241.
The sources and uses of cash from operating, investing and financing activities
result in a net decrease in cash of ($588,832) for the year ended December 31,
2007, and results in total cash at the end of the year of $616,288.
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, the value of portfolio assets on the balance
sheet is recorded based on actual acquisition costs, not the face value of the
unpaid principle balance of the mortgage notes receivable or value of the
underlying real estate. If assets are deemed impaired, those assets will be
discounted to the net realizable value. Since the Company's business model
consists of buying non-performing assets at a substantial discount to the face
value of the existing mortgage note or property, the acquisition cost basis of
the Company's portfolio assets has the effect of substantially understating the
estimated true market value of the assets when sold at retail or wholesale
values.
21
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, but is not carried on certain low value properties where it
is uneconomical to do so.
Balance Sheet Arrangements:
Not applicable.
Stock Options:
In October 2006, the stockholders of the Company adopted the Mortgage Assistance
Center Corporation 2006 Equity Incentive Plan (the "Plan"), which allows the
Company to grant stock options, restricted stock and performance awards to
officers, directors, key employees and consultants. The Company's board of
directors or committees thereof will administer the Plan. Subject to adjustment
as provided in the Plan, the maximum aggregate number of shares that may be
issued under the Plan is 4,250,000 shares of common stock, provided, however,
that (i) the aggregate number of shares that may be issued as restricted stock
may not exceed 1,062,500 and (ii) the aggregate number of shares that may be
issued under statutory stock options may not exceed 2,000,000, and (iii) the
aggregate number of shares that may be issued under non-statutory stock options
may not exceed 1,187,500. Subject to adjustment as provided in the Plan, the
aggregate number of shares that may be issued to any individual under the Plan,
whether issued under options or restricted stock, shall not exceed 1,000,000.
The Plan will continue in effect until terminated; however, no incentive stock
options or other awards will be granted under the Plan after 10 years from the
date the Company's stockholders approved the Plan.
The per share exercise price for shares to be issued pursuant of the exercise of
an option will be determined by the Board; however, each option will be granted
at an exercise price equal to no less than the fair market value of a share on
the date of grant, except that the case of an incentive stock option granted to
an employee who, at the time the option is granted, owns stock possessing more
than 10 percent of the total combined voting power of all classes of stock of
the Company or any Parent or Subsidiary, each incentive stock option shall be
granted at an exercise price equal to no less than 110% of the fair market value
of a share on the date of grant.
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.
Item 7A - 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 8 - Financial Statements
The required financial statements begin at Page F-1 of this document.
22
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no disagreements related to accounting principles or practices,
financial statement disclosure, internal controls or auditing scope or procedure
during the past two fiscal years and interim periods, including the interim
period up through the date the relationship ended.
Item 9A (T) - Disclosure Controls and Procedures
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, does not expect that 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.
Disclosure Controls and Procedures. As of the end of the December 31, 2007
reporting period, the Company carried out an evaluation, under the supervision
of and with the participation of the 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 Company's 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, management, including the Chief Executive Officer
and Chief Financial Officer, believe that the Company's disclosure controls and
procedures are designed to provide reasonable assurance of achieving their
objectives and, based upon the aforementioned evaluation, our Chief Executive
Officer and the Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective at that reasonable assurance level in
timely alerting them to material information relating to the Company required to
be included in the Company's period SEC filings.
Changes in Internal Control Over Financial Reporting
During the fourth quarter of 2007, there was no change in the Company's internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
Management's Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. The Company's internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.
23
Management conducted an evaluation of the effectiveness of the internal controls
over financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control over
financial reporting as of December 31, 2007. Based on management's assessment
and those criteria, management believes that the internal control over financial
reporting as of December 31, 2007 was not effective.
The Company had ineffective segregation of duties between its accounting and
check signing process. This control deficiency could result in material
misstatements to annual or interim financial statements that would not be
prevented or detected.
Remediation to Address Material Weakness: The Company intends to segregate
duties between signing checks and having access to the computer system.
Management's internal control report was not subject to attestation by the
Corporation's independent registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
Corporation to provide only management's report.
Item 9B - Other Information
Not applicable.
PART III
Item 10 - Directors, Executive Officers, and Corporate Governance
The following table sets forth certain information regarding the officers and
directors of MACC and MAC:
Name Age Position and Tenure
Ronald E. Johnson 58 Chairman, CEO, President and Director
(Appointed February 9, 2007)
Richard D. Coleman 53 CFO (Appointed March 1, 2007)
William G. Payne 42 Director
Rod Jones 42 Director
Dan Barnett 49 Director
Ronald E. Johnson, Chairman, CEO and President.
- -----------------------------------------------
24
Mr. Johnson was appointed as the Company's Chairman, Chief Executive Officer and
President in February 2007. From June 2006 through February 2007, he served as
an independent management consultant. From November 2004 until June 2006, Mr.
Johnson was President and CEO of Minyard Food Stores, a Texas based grocery
chain and from September 2002 until August 2004, Mr. Johnson served as Chief
Executive Officer of ICM, LLC, a floor care management company servicing retail
stores in over 30 states. Mr. Johnson attended the University of South Carolina
and he also attended Francis Marion College.
Richard D. Coleman, CFO.
- -----------------------
On March 1, 2007, Mr. Coleman was appointed as Senior Vice President, Finance,
and he was appointed as the Company's Chief Financial Officer in June 2007. From
June 2005 through February 2007, he was engaged in various financial, accounting
and management consulting projects. From August 2002 through May 2005, he was
President and Chief Financial Officer of Industrial Cleaning Management, LLC,
following fifteen years serving in various financial and accounting management
positions in the retail industry. Mr. Coleman is a graduate of the University of
Utah with a Bachelor of Science degree in Accounting. Mr. Coleman resigned from
the Company on February 4, 2008, and under a consulting agreement with the
Company, he continues to provide limited financial advisory services.
William G. Payne, Director.
- ---------------------------
Pursuant to the Series A preferred stock financing transacted as of November 30,
2006, Mr. Payne was appointed the Company's Board of Directors. Mr. Payne is the
former managing partner of FAX, LP a private investment firm that led the
financing transaction with the Company and that has completed over $60 million
in investments. From 2002 - 2005 Mr. Payne served as the co-founding partner of
Bluffview Capital, LP, a boutique investment bank focused on capital raising and
merger and acquisition advisory services. From 1993 - 2001 Mr. Payne served as
Director - Corporate Finance with Credit Suisse First Boston - Donaldson Lufkin
& Jenrette, a global investment banking firm. Mr. Payne earned the Masters of
Business Administration degree, graduating with distinction, from the J.L.
Kellogg Graduate School of Management at Northwestern University in Evanston,
IL.
Rod Jones, Director.
- --------------------
Prior to founding Cain Capital in 1997, Mr. Jones was a partner in a
Dallas-based family office where he primarily focused on alternative investments
and private equity investing. Before joining the family office, Mr. Jones was
part of the private client group at the Dallas office of Donaldson Lufkin &
Jenrette, a global investment banking and financial management company. He is
currently on the Board of Directors at Parkland Hospital and Blue Wing, a
freight forwarding company. Mr. Jones earned a Bachelor of Arts degree from
Southern Methodist University and earned a Masters in Business Administration
degree from the University of Texas. Mr. Jones resigned as a director on March
17, 2008.
Dan Barnett, Director.
- ----------------------
Mr. Barnett has 22 years experience with Exxon Mobil with responsibilities
ranging from engineering to General Manager. Most recently, he served as North
American Planning Advisor in 2000. He also was founder and owner of various real
estate services and investment companies and holds a Texas Real Estate Brokers
license. In 2003, he founded Mortgage Solution Partners, which was acquired by
Mortgage Assistance Corporation in 2004.
Meetings and Committees of the Board of Directors
Our business is managed under the direction of the Board of Directors. The Board
of Directors meets on a regularly scheduled basis to review significant
developments affecting us and to act on matters requiring approval of the Board
25
of Directors. It also holds special meetings when an important matter requires
attention or action by the Board of Directors between scheduled meetings. During
fiscal 2007, the Board of Directors met two times. The Board of Directors does
not have a standing audit, compensation, nominating or governance committee.
Audit Committee
The Company does not maintain a standing Audit Committee. An audit committee
typically reviews, acts on and reports to the board of directors with respect to
various auditing and accounting matters, including the recommendations and
performance of independent auditors, the scope of the annual audits, fees to be
paid to the independent auditors, and internal accounting and financial control
policies and procedures. Certain stock exchanges currently require companies to
adopt a formal written charter that establishes an audit committee that
specifies the scope of an audit committee's responsibilities and the means by
which it carries out those responsibilities. In order to be listed on any of
these exchanges, the Company will be required to establish an audit committee.
The Company's board of directors does not have an "audit committee financial
expert," within the meaning of such phrase under applicable regulations of the
Securities and Exchange Commission, serving on its audit committee. The board of
directors believes that all members of its audit committee are financially
literate and experienced in business matters, and that one or more members of
the audit committee are capable of (i) understanding generally accepted
accounting principles ("GAAP") and financial statements, (ii) assessing the
general application of GAAP principles in connection with our accounting for
estimates, accruals and reserves, (iii) analyzing and evaluating our financial
statements, (iv) understanding our internal controls and procedures for
financial reporting; and (v) understanding audit committee functions, all of
which are attributes of an audit committee financial expert. However, the board
of directors believes that there is not any audit committee member who has
obtained these attributes through the experience specified in the SEC's
definition of "audit committee financial expert." Further, like many small
companies, it is difficult for the Company to attract and retain board members
who qualify as "audit committee financial experts," and competition for these
individuals is significant. The board believes that its current audit committee
is able to fulfill its role under SEC regulations despite not having a
designated "audit committee financial expert."
Indebtedness of Directors and Executive Officers
None of our directors or officers or their respective associates or affiliates
is indebted to us.
Family Relationships
There are no family relationships among our directors or executive officers.
Compensation Committee
The Company does not maintain a standing Compensation Committee. Due to the
Company's small size at this point in time, the Board of Directors has not
established a separate compensation committee. All members of the Board of
Directors (with the exception of any member about whom a particular compensation
decision is being made) participate in the compensation award process.
Nominating Committee
The Company does not maintain a standing Nominating Committee and does not have
a Nominating Committee charter. Due to the Company's small size at this point in
time, the Board of Directors has not established a separate nominating committee
and feels that all directors should have input into nomination decisions. As
26
such, all members of the Board of Directors generally participate in the
director nomination process. Under the rules promulgated by the SEC, the Board
of Directors is, therefore, treated as a "nominating committee". The Board of
Directors will consider qualified nominees recommended by shareholders.
Shareholders desiring to make such recommendations should submit such
recommendations to the Corporate Secretary, c/o Mortgage Assistance Center
Corporation at 1341 W. Mockingbird Lane, Suite 1200 West, Dallas, Texas 75247.
The Board of Directors will evaluate candidates properly proposed by
shareholders in the same manner as all other candidates.
The Board of Directors has not established specific minimum age, education,
experience or skill requirements for potential directors. The Board of Directors
takes into account all factors they consider appropriate in fulfilling their
responsibilities to identify and recommend individuals as director nominees.
The Board of Directors may use multiple sources for identifying and evaluating
nominees for directors, including referrals from the Company's current directors
and management as well as input from third parties, including executive search
firms retained by the Board of Directors. The Board of Directors will obtain
background information about candidates, which may include information from
directors' and officers' questionnaires and background and reference checks, and
will then interview qualified candidates. The Board of Directors will then
determine, based on the background information and the information obtained in
the interviews, whether to recommend that a candidate be nominated to the Board
of Directors. We strongly encourage and, from time to time actively survey, our
shareholders to recommend potential director candidates.
Shareholder Communications with the Company's Board of Directors
Any shareholder wishing to send written communications to the Company's Board of
Directors may do so by sending them in care of Dennis Downey, Corporate
Secretary, at the Company's principal executive offices. All such communications
will be forwarded to the intended recipient(s).
Compliance With Section 16(a) of The Exchange Act
Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section
16(a) of the Securities Exchange Act of 1934 requires the Company's directors
and executive officers, and persons who own more than 10% of the Company's
Common Stock, to file with the Securities and Exchange Commission initial
reports of beneficial ownership and reports of changes in beneficial ownership
of Common Stock of the Company. Officers, directors and greater than 10%
shareholders are required by the Securities and Exchange Commission to furnish
the Company with copies of all section 16(a) reports they file. The Company only
has notice of one Form 3 filing by Mr. Johnson and has not been provided with
copies of any forms by any other officers, directors or 10% shareholders and
assumes that the forms were not filed.
Code of Ethical Conduct
On May 13, 2004, the Board of Directors adopted a policy of ethical conduct that
applies to all employees and directors, including the chief executive officer,
chief financial officer, chief accounting officer or controller, and persons
performing similar functions. On January 9, 2008, the Board of Directors adopted
an amended Code of Ethical Conduct which identified more comprehensive
standards. The Company believes the adoption of this Code of Ethical Conduct is
consistent with the requirements of the Sarbanes-Oxley Act of 2002.
The Code of Ethical Conduct is designed to deter wrongdoing and to promote:
o Honest and ethical conduct, including the ethical handling of actual
or apparent conflicts of interest between personal and professional
relationships;
27
o Full, fair, accurate, timely and understandable disclosure in reports
and documents that we file or submit to the Securities & Exchange
omission and in other public communications made by us;
o Compliance with applicable governmental laws, rules and regulations,
o The prompt internal reporting to an appropriate person or persons
identified in the code of violations of our Code of Ethical Conduct
including the establishment of protection for employees under
"whistleblower" guidelines; and
o Accountability for adherence to the Code.
Item 11 - Executive Compensation
The following table sets forth, for our last three fiscal years, certain
information concerning the compensation paid by the Company to our Chief
Executive Officer, Chief Financial Officer and our other most highly paid
executive officers who received in excess of $100,000 in compensation during
these periods
Except as described below under "Employment Contracts," there are no
compensatory plans or arrangements, with respect to any of our executive
officers, which result or will result from the resignation, retirement or any
other termination of such individual's employment with us or from a change in
control of the Company or a change in the individual's responsibilities
following a change in control.
Change in
Pension Value
and Non-
Qualified
Non-Equity Deferred
Name and Principal Position Year Total Base Stock Option Incentive Plan Compensation All Other
Salary($) Bonus($) Awards($) Awards($) Compensation Earnings Earnings Total
Ron Johnson, CEO, President 2007 $ 200,000 - - 1,000,000 - - - $ 1,200,000
Rick Coleman, CFO 2007 $ 175,000 - - 750,000 - - - $ 925,000
Dale Hensel, CEO, CFO 2007 $ 135,000 - - - - - - $ 135,000
2006 $ 88,250 - - 300,000 - - - $ 388,250
2005 $ 56,000 - - - - - - $ 56,000
Dan Barnett, EVP 2007 $ 135,000 - - - - - - $ 135,000
2006 $ 88,250 - - 300,000 - - - $ 388,250
2005 $ 53,466 - - - - - - $ 53,466
Mr. Johnson was appointed as our Chief Executive Officer and President in
February 2007.
Mr. Coleman was appointed as our Chief Financial Officer in March 2007.
Mr. Hensel was removed as Chief Executive Officer and Chief Financial Officer
with the appointment of Messrs Johnson and Coleman, respectively.
Dan Barnett served as our Executive Vice President until December 10, 2007.
Outstanding Equity Awards - Narrative Disclosures
1) Incentive stock options issued to principal officers Hensel and Barnett
were issued at 110% of fair market value on the date of the grant
pursuant to the terms of the Company's Equity Incentive Plan for
holders of more that 10% of the voting stock of the Company. One third
of such incentive stock options will become exercisable upon each
successive anniversary date of the employment agreements, provided that
the Company employs the officers on each such anniversary date. A
28
commercially available software product utilizing a proven trinomial
lattice valuation methodology determined the fair value of these
options. Based on this analysis, the value of the options at grant was
determined to be approximately $0.45. Mr. Hensel's employment agreement
was terminated by the Company on January 31, 2008, and Mr. Barnett's
agreement was terminated by the Company on December 10, 2007. As a
consequence of these terminations, Mr. Barnett's options have been
terminated and Mr. Hensel's options, of which only 100,000 are vested,
will terminate on April 30, 2008, unless exercised before then. All
non-cash compensation expense for this issuance will occur in future
years pursuant to vesting.
2) Incentive stock options issued to Messrs. Johnson and Coleman were
issued market value on the date of the grant pursuant to the terms of
the Company's Equity Incentive Plan. One third of such options became
exercisable upon the full execution of the employment agreement, and
the remaining two thirds will become exercisable in two equal
installments on each of the subsequent two anniversary dates of the
employment agreement, provided that such officer is employed by the
Company on each such anniversary date. A third-party consultant
determined the fair value of these options with a commercially
available software product that utilizes a proven trinomial lattice
valuation methodology. Based on this analysis, the value of the options
at grant was determined to be approximately $0.37.
Employment Agreements
On November 30, 2006, the Company executed employment agreements with principal
officers Dale Hensel and Dan Barnett. The terms and conditions of the agreements
are identical in all material respects. The agreements are effective beginning
at the date of execution, through the remainder of 2006 and then for a period of
three years commencing on January 1, 2007. Compensation for each officer
includes: total gross base salary for each officer of $135,000 annually; a cash
incentive bonus program worth up to 50% of the annual base pay amount and which
is entirely dependent on meeting the established performance targets of the
Company and which must be approved by the Board of Directors; and a grant to
each officer of statutory options for 300,000 common shares under the Company's
Equity Incentive Plan. Mr. Hensel's employment agreement was terminated by the
Company on January 31, 2008, and Mr. Barnett's agreement was terminated by the
Company on December 10, 2007.
Effective as of February 9, 2007, the Company entered into an employment
agreement with Ron Johnson, pursuant to which, Mr. Johnson became our Chairman,
Chief Executive Officer and President. Under the terms of this agreement, Mr.
Johnson will receive an annual base salary of two hundred thousand dollars
($200,000) and a cash bonus equal to fifty percent (50%) of his base salary,
contingent upon the Company's meeting or exceeding the annual financial budget
projection for any fiscal year as approved by the Board, in addition to any
bonuses or incentive compensation granted by the Board in its sole discretion.
The employment agreement has a term of two (2) years, commencing February 9,
2007, and automatically renews for successive one-year periods as of each
successive anniversary date. Either party may terminate the agreement upon 90
days' prior written notice, however, should the Company terminate the agreement
without good cause, Mr. Johnson is entitled to receive all compensation and
benefits provided under the agreement for the remainder of the calendar year in
which the termination occurs and for the succeeding calendar year. Mr. Johnson
was also granted incentive options for a total of 1,000,000 shares of the
Company's common stock under the Company's stock option plan. One third of these
incentive options became exercisable upon the full execution of the Johnson
Employment Agreement. Of the remaining two thirds, one half will become
exercisable on each of the subsequent two successive anniversary dates of the
employment agreement.
Effective March 1, 2007, the Company entered into an employment agreement with
Richard Coleman, pursuant to which Mr. Coleman became the Chief Financial
Officer. The terms of Mr. Coleman's agreement are essentially the same as those
29
in Mr. Johnson's agreement, except that Mr. Coleman's annual salary is one
hundred seventy five thousand dollars ($175,000) and the incentive options
granted were for a total of 750,000 shares under the Company's stock option
plan. Mr. Coleman resigned from his employment with the Company on February 4,
2008.
- --------------------------------------------------------------------------------
Option Awards
- --------------------------------------------------------------------------------
Number of Securities
Underlying Unexercised Equity Incentive Plan
Options Awards
- --------------------------------------------------------------------------------
Name Number (#) Number(#) Number of Number of
Exercisable Unexercisable Securities Securities
Underlying Underlying
Earned, but Unexercised
Unexercised Unearned
Options (#) Options (#)
- --------------------------------------------------------------------------------
Dale Hensel - - - 100,000
- --------------------------------------------------------------------------------
Dan Barnett - - - 100,000
- --------------------------------------------------------------------------------
Ron Johnson - - 333,334 666,666
- --------------------------------------------------------------------------------
Rick Coleman - - 250,000 500,000
- --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Stock Awards
- ----------------------------------------------------------------------------------------------------
Equity Incentive Plan
- ----------------------------------------------------------------------------------------------------
Name Option Option Number of Market Value Number of Market or
Exercise Expiration Shares or of Shares or Unearned Payout Value
Price($) Date Units of Unit of Shares or of Unearned
Stock That Stock That Units or Shares or
Have Not Have Not Other Rights Units or Other
Vested (#) Vested That Have Rights That
Not Vested Have Not
(#) Vested ($)
- ----------------------------------------------------------------------------------------------------
Dale Hensel $1.11 11/30/2011 - - - -
- ----------------------------------------------------------------------------------------------------
Dan Barnett $1.11 11/30/2011 - - - -
- ----------------------------------------------------------------------------------------------------
Ron Johnson 0.65 2/9/2012 - - - -
- ----------------------------------------------------------------------------------------------------
Rick Coleman 0.90 3/1/2012 - - - -
- ----------------------------------------------------------------------------------------------------
Director Compensation
On November 30, 2006, the Company issued 150,000 warrants (75,000 each) to
William G. Payne and Rod Cain Jones in conjunction with their appointment to the
Company's Board of Directors. These warrants have an exercise price of $.39 per
share, which price may be adjusted with the terms of the warrants. The Company
ascribed a value of $0.62 per warrant share to these warrants using previously
noted trinomial lattice valuation model. These warrants expire November 30,
2016. No other Directors received equity compensation.
Limitation of Liability and Indemnification Matters
The Company's By-Laws provide for the indemnification, to the full extent
allowed by Florida law, of its directors, officers, employees and agents who are
or were a party, or are threatened to be made a party to any threatened, pending
or completed legal action, suit or proceeding by reason of the fact that he or
she is or was serving a director, officer, employee or agent of the Company or
is or was serving in such capacity at another entity at the Company's request.
The extent, amount and eligibility for such indemnification are determined by a
30
majority vote of a quorum of disinterested directors, or by a majority vote of a
quorum of disinterested shareholders.
Section 607.0850 of the Florida Business Corporation Act empowers a Florida
corporation to indemnify any person who is a party to any proceeding (other than
an action by or in the right of such corporation) by reason of the fact that
such person is or was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise,
provided that he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. A Florida corporation may indemnify any person who is a
party to any proceeding by or in the right of the corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable in the proceeding.
Where an officer, director, employee or agent of a corporation is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses that are actually and
reasonably incurred in connection therewith.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. The
Company is not aware of any claims, whether possible or asserted, for
indemnification.
Item 12 - Security Ownership of Certain Beneficial Owners and Management and
related stockholder matters
The following table shows as of December 31, 2007, the shares of Common Stock
beneficially owned by all of the persons who served as the directors or officers
of the Company during 2007 as well as the principal shareholders (greater than
5%) of the Company individually and, as to the directors and officers, as a
group.
The number of shares beneficially owned by each person or entity is determined
under rules of the Securities and Exchange Commission, and the information is
not necessarily indicative of beneficial ownership for any other purpose. Under
such rules, beneficial ownership includes any shares as to which the person has
the sole or shared voting power or investment power and also any shares which
the person has the right to acquire as of a date within 60 days after the
relevant date through the exercise of any stock option or other right.
The Company's ownership includes 14,071,024 shares issued and outstanding as of
December 31, 2007. Collectively, the Directors and Officers with a beneficial
ownership greater than 5%, control 88% of the Company. The share ownership in
the table and footnotes below has been reclassified after giving effect to the
reverse split.
Table 1: Beneficial Ownership Greater Than 5%
- --------------------------------------------------------------------------------
Percent of Class
Name and Address (1) Number of Shares Beneficially Owned
- -------------------------------------- ------------------ ----------------------
Dale J. Hensel (2) 5,031,058 45.59%
Dan Barnett 4,967,058 45.01%
Michelle Taylor 1,036,375 9.39%
All Directors and Officers as a Group 11,034,491 100.00%
- -------------------------------------- ------------------- ---------------------
31
1) Unless otherwise indicated, the business address for each person listed
is: 1341 West Mockingbird Lane, Dallas, Texas 75247
2) Dale Hensel's stock holdings include shares beneficially owned by
Hensel under a family limited partnership entity, Leberknight, FLP
which holds 3,840,000 common shares (34.79%).
Changes In Control.
None
Item 13 - Certain Relationships and Related Transactions and director
independence
Series A Preferred Stock Issuance
- ---------------------------------
On November 30, 2006, the Company entered into a Series A Preferred Stock and
Common Stock Warrant Purchase Agreement ("Series A Purchase Agreement") with
W.C. Payne Investments, L.L.C. and FAX/MACC, L.P. (the "Investors") pursuant to
which the Company sold to Investors 1,500,000 shares of the Company's Series A
Preferred Stock at a price of $1.00 per share, as well as warrants to purchase
9,111,387 shares of the Company's common stock at an exercise price of $0.01 per
warrant share. Under the terms of the Series A Purchase Agreement, the Investors
would also purchase an additional 1,500,000 preferred shares, in increments of
500,000, conditioned on the satisfaction of certain financial benchmarks set
forth in the Series A Purchase Agreement.
Prior to this transaction Messrs. Jones and Payne were not members of the
Company's Board of Directors, but became board members immediately subsequent to
this transaction.
Dutch Fork
- ----------
In December 2006, the Company entered into a 50-50 joint venture with FAX/Dutch
Fork, L.P. pursuant to which FAX/Dutch Fork provided funding to the venture for
the purpose of obtaining distressed real estate to be serviced by the Company.
The original agreements governing the venture provide that the Company would
receive its out of pocket expenses, plus a pro-rata share of the profits of the
venture after FAX/Dutch Fork received an amount equal to its invested capital,
plus a preferred return. Effective May 17, 2007 the Company sold its half
interest in the joint venture to FAX/Dutch Fork for $300,000; and as a condition
of the sale, the Company agreed to continue to service the portfolio assets in
the joint venture and provide accounting and administrative services at no
charge to Dutch Fork.
Messrs. Payne and Jones have an indirect ownership interest in FAX/Dutch Fork,
L.P.
Subsequent Funding by Series A Investors
- ----------------------------------------
During April 2007, despite not achieving its benchmarks for the first quarter,
the Company received the first of the three subsequent tranches of $500,000 in
cash as contemplated by the November 30, 2006 financing transaction. However,
the Company did not achieve its benchmarks for the subsequent periods, and the
Investors advised the Company that they did not intend to fund further tranches
under the Series A Purchase Agreement.
In August 2007, after subsequent discussions with the Investors, the Company
received a 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
32
stock, which would represent approximately 95% of the outstanding shares of our
common stock (the "Transaction"). Effective September 2007, the Company entered
into an agreement with the Investors with respect to the Transaction. The
agreement was structured as an amendment to the Purchase Agreement described
above. The Investors advanced 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. The issuance of the shares to the Investors is subject to an
amendment to the Company's Articles of Incorporation increasing the Company's
authorized shares.
Mr. Payne is 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. As a result of the Series A Preferred
Stock sale described above, 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.
Bridge Funding
- --------------
Effective February 12, 2008, the Company entered into two agreements (the "Note
Agreements") pursuant to which the Company may borrow up to an aggregate of
$600,000 (the "Funding Commitment") through one or more advances. The Note
Agreements provide that the Company may, from time to time, request advances up
to the Funding Commitment; provided, among other things, that (a) no more than
two advances may be requested during any calendar month, and (b) no advance
shall be less than $25,000. The first advances under the Note Agreements, in an
aggregate amount of $300,000, were received by the Company on February 12, 2008.
Amounts outstanding under the Note Agreements bear interest at the rate of
fifteen percent per annum, compounded monthly. All outstanding principal and
accrued interest on advances is due and payable on demand. Repayment of advances
under the Note Agreements is secured by a pledge of the membership or other
equity interests held by the Company in various joint ventures formed by the
Company for the purpose of acquiring and holding portfolios of distressed,
single-family real estate and non-performing mortgages that the Company manages.
In connection with the Note Agreements, the Company has granted to each lender
thereunder, the right, exercisable at any time after the earlier to occur of (a)
a going private transaction, or (b) February 12, 2009, to purchase 12.5% of the
capital stock of the Company for a nominal consideration (an "Option").
CSSF Master Fund, LP, one of the lenders under the Notes Agreements, is also a
member in Canyon Ferry Capital LLC, a joint venture previously established by
the Company's subsidiary, Mortgage Assistance Corporation, to acquire a
portfolio of real estate properties. MAC is a member of this joint venture,
serves as its manager and services the real estate portfolio. Pursuant to the
terms governing this joint venture, MAC receives a share in the profits of the
joint venture once its venture partners have received the amount of their
capital contribution to the venture, plus a preferred return on such capital.
Mr. Payne is an employee of the investment advisor for CSSF Master Fund. In such
capacity, Mr. Payne may receive bonus compensation from this investment advisor
based on the performance of CSSF Master Fund.
33
Currently, none of our directors is independent, as defined by Rule 4200(a)(15)
of the Nasdaq's listing standards.
Item 14 - Principal Accountant Fees and Services
The Company paid or accrued the following fees in each of the prior two fiscal
years to its principal accountant, Sutton, Robinson Freeman & Co., of Tulsa,
Oklahoma.
--------------------- ------------------------ --------------------
Year End Year End
December 31, 2007 December 31, 2006
--------------------- ------------------------ --------------------
Audit Fees 65,137 58,831
--------------------- ------------------------ --------------------
Tax Fees 4,160 5,070
--------------------- ------------------------ --------------------
All Other Fees 6,174 --
--------------------- ------------------------ --------------------
--------------------- ------------------------ --------------------
Total Fees $75,471 $63,901
--------------------- ------------------------ --------------------
Audit Committee Pre-Approval Policies and Procedures
The Company does not currently have and Audit Committee. Currently, the Board of
Directors pre-approves all audit and non-audit services that are to be performed
and fees to be charged by our independent auditor or assure that the provision
of these services does not impair the independence of such auditor. The Board of
Directors pre-approved all audit services and fees of our independent auditor
for the years ended December 31, 2007 and 2006. Our independent auditors did not
provide us with any non-audited services during the period indicated above.
Sutton, Robinson Freeman & Co. was engaged for the full year 2007. The Company's
principal accountant, Sutton, Freeman & Robinson & Co. did not engage any other
persons or firms other than the principal accountant's full-time, permanent
employees.
34
Item 15 - Exhibits, Financial Statement Schedules
Exhibits
--------
3(i) Certificate of Incorporation of the Company (Incorporated
by reference from the Company's Registration Statement on
Form 10-KSB filed December 31, 1996).
3(i).1 Articles of Amendment filed November 16, 2004 (Incorporated
by reference from report filed on November 23, 2004)
3(i).2 Amendment to Articles of Incorporation increasing the
number of authorized shares of the Company's common stock
to one hundred seventy-five million (175,000,000) shares at
$0.0001 par value Incorporated by reference from the
Company's Form 10-QSB for the quarterly period ended June
30, 2001.
3(i).3 Amendment to Articles of Incorporation authorizing the
issuance of up to three million (3,000,000) preferred
shares at a $1.00 par value; and authorizing the creation
of the Company's Equity Incentive Plan (Incorporated by
reference to the Company's Form 8-K filed December 6, 2006)
3(i).4 Articles of Amendment filed January 17, 2005 (Incorporated
by reference from report on January 17, 2005)
3(ii) By-Laws of the Company (Incorporated by reference from the
Company's Registration Statement on Form 10-KSB filed
December 31, 1996)
4 Copy of specimen certificate representing shares of Common
Stock, $.0001 par value per share, of the Company
(Incorporated by reference from the Company's Registration
Statement on Form 10-KSB filed December 31, 1996)
10.1 Canyon Ferry Capital, LLC - Company Agreement and Servicing
Agreement
10.2 Dutch Fork Capital, LLC - Company Agreement and Servicing
Agreement
10.3 Employment Agreement dated as of February 9, 2007, by and
between Ron Johnson and the Company (Incorporated by
reference to the Company's Form 8-K filed February 15, 2007)
10.4 Employment Agreement dated as of March 1, 2007, by and
between Rick Coleman and the Company*
10.5 Employment Agreement dated as of November 30, 2006, by and
between Dan Barnett and the Company* (Incorporated by
reference to the Company's Form 8-K filed December 6, 2007)
10.6 Employment Agreement dated as of November 30, 2006, by and
between Dale Hensel and the Company * (Incorporated by
reference to the Company's Form 8-K filed December 6, 2007)
10.7 Funding Commitment Agreement dated as of October 2007, by
and between Mortgage Assistance Center Corporation and Bob
Mangold (Incorporated by reference to the Company's Form 8-K
filed November 29, 2007)
10.8 Amendment and Agreement dated as of September 2007, by and
among Mortgage Assistance Center Corporation and the
investors listed therein (Incorporated by reference to the
Company's Form 8-K filed November 29, 2007)
10.9 Venture Funding Agreement dated as of October 22, 2007, by
and among Mortgage Assistance Center Corporation, Mortgage
Assistance Corporation and HBK Fund MS LLC (Incorporated by
reference to the Company's Form 8-K filed November 29, 2007)
35
10.10 Modification Agreement dated as of October 19, 2007, by and
among Mortgage Assistance Corporation, MAP/MAC, LLC and
Mortgage Acquisition Partners, L.L.C. (Incorporated by
reference to the Company's Form 8-K filed November 29, 2007)
10.11 Promissory Note dated February 12, 2008 (Incorporated by
reference to the Company's Form 8-K filed March 7, 2008)
10.12 Promissory Note dated February 12, 2008 (Incorporated by
reference to the Company's Form 8-K filed March 7, 2008)
20.1 Code of Ethical Conduct*
31.1 Chief Executive Officer - Section 302 Certification pursuant
to the Sarbanes-Oxley Act of 2002*
31.2 Chief Financial Officer - Section 302 Certification pursuant
to the Sarbanes-Oxley Act of 2002*
32.1 Chief Executive Officer - Section 906 Certification pursuant
to the Sarbanes-Oxley Act of 2002*
32.1 Chief Financial Officer - Section 906 Certification pursuant
to the Sarbanes-Oxley Act of 2002*
* Filed herewith
Key to Referenced Exhibits:
---------------------------
+ Incorporated by reference from report filed on November 23,
2004
++ Incorporated by reference from report on January 17, 2005
* Incorporated by reference from the Company's Registration
Statement on Form 10-KSB filed December 31, 1996
** Incorporated by reference from the Company's Form 10-QSB for
the quarterly period ended June 30, 2001
*** Incorporated by reference to the Company's Form 8-K filed
December 6, 2006
**** Incorporated by reference to the Company's Form 8-K filed
February 15, 2007
***** Incorporated by reference to the Company's Form 8-K filed
November 29, 2007
****** Incorporated by reference to the Company's Form 8-K filed
March 7, 2008
36
MORTGAGE ASSISTANCE CENTER CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
AND
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
DECEMBER 31, 2007 AND 2006
SUTTON ROBINSON FREEMAN & CO., P.C.
Mortgage Assistance Center Corporation
Table of Contents
Report of Independent Registered Public Accounting Firm...................F-2
Financial Statements
Consolidated Balance Sheets as of December 31, 2007 and 2006.........F-4
Consolidated Statements of Operations and Comprehensive Loss
or the years ended December 31, 2007 and 2006..................F-6
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the years ended December 31, 2007 and 2006 ......F-8
Consolidated Statements of Cash Flows
for the years ended December 31, 2007 and 2006................F-9
Notes to Consolidated Financial Statements..........................F-11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Mortgage Assistance Center Corporation
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Mortgage
Assistance Center Corporation (a Florida corporation) as of December 31, 2007
and 2006, and the related statements of operations and comprehensive loss,
changes in stockholders' deficit and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Mortgage
Assistance Center Corporation as of December 31, 2007 and 2006, and the
consolidated results of its operations, changes in stockholders' deficit and
cash flows for the years then ended in conformity with United States 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 at
December 31, 2007. These circumstances create substantial doubt about the
Company's ability to continue as a going concern and are discussed in Note 3.
Management's plans in regard to these matters are also described in Note 3. The
financial statements do not contain any adjustments that might result from the
outcome of these uncertainties.
We were not engaged to examine management's assertion about the effectiveness of
Mortgage Assistance Center Corporation's internal controls over financial
reporting as of December 31, 2007 included in the accompanying Management's
Report on Internal Control over Financial Reporting and, accordingly, we do not
express an opinion thereon.
/s/ Sutton Robinson Freeman & Co., P.C.
---------------------------------------
F-2
Sutton Robinson Freeman & Co., P.C.
Certified Public Accountants
Tulsa, Oklahoma
April 7, 2008
F-3
Mortgage Assistance Center Corporation
Consolidated Balance Sheets
December 31, 2007 and 2006
ASSETS
December 31, December 31,
2007 2006
---------- ----------
Current Assets:
Cash and cash equivalents $ 616,288 $1,205,120
Portfolio assets, at cost (net of impairment reserve
of $197,237 and $253,509 at December 31, 2007 and
December 31, 2006, respectively) 5,788,361 6,798,509
Prepaid expenses and other current assets 337,158 194,405
---------- ----------
Total Current Assets 6,741,807 8,198,034
---------- ----------
Property and Equipment, at cost:
Land 699,600 699,600
Building and improvements 668,840 606,799
Office furniture and equipment 422,471 118,670
---------- ----------
1,790,911 1,425,069
Less accumulated depreciation 148,038 73,468
---------- ----------
Net Property and Equipment 1,642,873 1,351,601
---------- ----------
Investments and Other Assets:
Deposits 25,404 3,450
---------- ----------
Total Assets $8,410,084 $9,553,085
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements
F-4
Mortgage Assistance Center Corporation
Consolidated Statements of Operations and Comprehensive Loss
Years Ended December 31, 2007 and 2006
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, December 31,
2007 2006 (Restated)
----------- -----------
Current Liabilities: $ 2,614,011 $ 1,52,315
Notes payable-individuals and others 1,000,000 --
Advance from stockholders 24,500 24,400
Current portion of mortgages payable 342,641 241,301
Accounts payable 440,517 --
Settlement costs 74,911 182,532
Accrued fees and wages 359,694 265,015
Other accrued liabilities ----------- -----------
4,856,274 2,235,563
Total Current Liabilities ----------- -----------
Long-term Debt: 2,466,678 1,492,768
Notes payable-individuals and others 1,015,019 1,036,360
Mortgages payable, less current portion ----------- -----------
3,481,697 2,529,128
Total Long-Term Debt ----------- -----------
8,337,971 4,764,691
Total Liabilities ----------- -----------
3,612,087 5,466,543
Minority Interests ----------- -----------
Stockholders' Equity (Deficit):
Series A convertible preferred stock ($0.001 par value; 3,000,000 shares
authorized; 2,000,000 and 1,500,000 shares issued and outstanding;
aggregate liquidation preference of $2,000,000 and $1,500,000; cumulative
undeclared dividends of $207,962 and $12,500 respectively at 867,828 176,476
December 31, 2007 and December 31, 2006)
Common stock ($0.001 par value, 50,000,000 shares authorized, 14,071,024
and 12,725,124 shares issued and outstanding at December 31, 2007 and 14,071 12,726
December 31, 2006, respectively) 2,374,621 2,306,437
Additional paid-in capital (7,140,954) (3,518,248)
Retained earnings (deficit) after December 31, 2004 ----------- -----------
(3,884,434) (1,022,609)
344,460 344,460
Subscriptions issuable ----------- -----------
(3,539,974) (678,149)
Total Stockholders' Equity (deficit) ----------- -----------
$ 8,410,084 $ 9,553,085
Total Liabilities and Stockholders' Equity =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements
F-5
MORTGAGE ASSISTANCE CENTER CORPORATION
Amended Statements of Changes in Stockholders' Equity (Deficit)
Years Ended December 31, 2007 and 2006
December 31, December 31,
2007 2006
----------- -----------
Operating Revenues:
Sales of portfolio assets $ 2,971,190 $ 2,054,114
Servicing fees 189,872 210,635
Rental income 216,504 134,550
Other 407,732 384,805
----------- -----------
Gross operating revenues 3,785,298 2,784,104
Cost of portfolio assets sold 2,629,712 1,501,845
----------- -----------
Net operating revenues 1,155,586 1,282,259
----------- -----------
Operating Expenses:
Salaries, wages and contract labor 2,323,665 1,313,373
Selling, general and administrative expenses 1,967,030 1,576,767
Depreciation and amortization 87,002 43,181
Bad debts 196,465 182,443
----------- -----------
Total operating expenses 4,574,162 3,115,764
----------- -----------
Operating loss (3,418,576) (1,833,505)
----------- -----------
Other income (expense):
Interest and other income 10,976 131,739
Interest expense (426,618) (398,642)
Priority payments -- --
Loss on retirement of property (2,825) --
----------- -----------
Total other income (expense) (418,467) (266,903)
----------- -----------
Loss from continuing operations before
minority interests and income taxes (3,837,043) (2,100,408)
The accompanying notes are an integral part of these
consolidated financial statements
F-6
Mortgage Assistance Center Corporation
Consolidated Statements of Cash Flows
Years Ended December 31, 2007 and 2006
December 31, December 31,
2007 2006
------------ ------------
Loss from continuing operations before
minority interests and income taxes $ (3,837,043) $ (2,100,408)
Minority interests (85,729) 90,233
c
Loss from continuing operations before
income taxes (3,922,772) (2,010,175)
Income tax benefit (expense) -- --
------------ ------------
Loss from continuing operations (3,922,772) (2,010,175)
Discontinued operations:
Income from Operations of Dutch Fork Capital LLC
(Including a gain on disposal of $160,128) 300,066 --
------------ ------------
Net Loss (3,622,706) (2,010,175)
------------ ------------
Other comprehensive income -- --
Comprehensive Loss $ (3,622,706) $ (2,010,175)
============ ============
Basic and fully diluted earnings (loss) per weighted
average common shares outstanding:
Continuing operations $ (0.29) $ (0.16)
Discontinued operations $ 0.02 --
============ ============
Net Loss $ (0.27) $ (0.16)
Weighted-average number of common stock outstanding:
Basic 13,245,047 12,725,124
============ ============
Fully diluted -- --
============ ============
The accompanying notes are an integral part of these
consolidated financial statements
F-7
Mortgage Assistance Center Corporation
Consolidated Statements of Cash Flows
Years Ended December 31, 2007 and 2006
Common Stock
----------------------
Series A Shares Par Value Additional
Preferred paid-in Accumulated
Stock capital deficit
----------- ----------- ----------- ----------- -----------
Balances
December 31, 2005 $ -- 12,725,124 $ 12,726 $ 173,663 $(1,508,073)
Stock issuable to fund retirements
of notes payable -- -- -- -- --
Issuance of preferred stock with warrants
net of issuance costs of $86,985
preferred stock @ 0.001 par value per share 160,530 -- -- -- --
common stock warrants -- -- -- 1,252,485 --
Deemed dividend (accretion of discount)
on preferred stock 15,946 -- -- (15,946) --
Stock-based compensation expense -- -- -- 896,235 --
Net loss for the year -- -- -- -- (2,010,175)
----------- ----------- ----------- ----------- -----------
Balances
December 31, 2006 $ 176,476 12,725,124 $ 12,726 $ 2,306,437 $(3,518,248)
Issuance of preferred stock @ $0.001 par value
per share 500,000 -- -- -- --
Exercise of common stock warrants -- 1,345,900 1,345 12,114 --
Deemed dividend (accretion of discount)
on preferred stock 191,352 -- -- (191,352) --
Stock based compensation expense -- -- -- 247,422 --
Net loss for the year -- -- -- -- (3,622,706)
----------- ----------- ----------- ----------- -----------
Balances
December 31, 2007 $ 867,828 14,071,024 $ 14,071 $ 2,374,621 $(7,140,954)
Subscriptions
issuable Total
----------- -----------
Balances
December 31, 2005 $ 102,160 $(1,219,524)
Stock issuable to fund retirements
of notes payable 242,300 242,300
Issuance of preferred stock with warrants
net of issuance costs of $86,985
preferred stock @ 0.001 par value per share -- 160,530
common stock warrants -- 1,252,485
Deemed dividend (accretion of discount)
on preferred stock -- --
Stock-based compensation expense -- 896,235
Net loss for the year -- (2,010,175)
----------- -----------
Balances
December 31, 2006 $ 344,460 $ (678,149)
Issuance of preferred stock @ $0.001 par value
per share -- 500,000
Exercise of common stock warrants -- 13,459
Deemed dividend (accretion of discount)
on preferred stock -- --
Stock based compensation expense -- 247,422
Net loss for the year -- (3,622,706)
----------- -----------
Balances
December 31, 2007 $ 344,460 $(3,539,974)
The accompanying notes are an integral part of these
consolidated financial statements
F-8
Mortgage Assistance Center Corporation
Consolidated Statements of Cash Flows
Years Ended December 31, 2007 and 2006
December 31, December 31,
2007 2006
----------- -----------
Cash Flows From Operating Activities
Net loss $(3,622,706) $(2,010,175)
Result from discontinued operations (300,066) --
----------- -----------
Loss from continuing operations (3,922,772) (2,010,175)
=========== ===========
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Depreciation 87,002 43,181
Non-cash stock-based compensation 247,422 896,235
Minority interests in subsidiaries' net earnings (losses) 85,729 (90,233)
Loss on sale of assets 2,825 --
Change in assets and liabilities:
Decrease in portfolio assets (1,495,923) (5,090,456)
Increase in accounts receivable from related parties -- 58,995
Increase in prepaid expenses and other assets (164,574) (161,310)
Increase in accounts payable 101,340 (225,888)
Increase in settlement costs 440,517 --
Decrease in accrued fees and wages (107,621) 168,857
Increase in other accrued liabilities 94,679 150,451
----------- -----------
Total adjustments (708,604) (4,250,168)
----------- -----------
Net Cash Used by Operating Activities (4,631,376) (6,260,343)
----------- -----------
Cash Flows From Investing Activities
Additions to property and equipment (381,099) (57,438)
----------- -----------
Net Cash Used by Investing Activities (381,099) (57,438)
----------- -----------
The accompanying notes are an integral part of these
consolidated financial statements
F-9
Mortgage Assistance Center Corporation
Consolidated Statements of Cash Flows
Years Ended December 31, 2007 and 2006
December 31, December 31,
2007 2006
----------- -----------
Cash Flows From Financing Activities
Proceeds from issuance of debt to individuals and others $ 2,866,678 $ 1,793,000
Repayments of debt to individuals and others (801,072) (1,075,997)
Net proceeds from issuance of preferred stock 500,000 --
Proceeds from issuance of common stock 13,459 1,413,015
Capital contributions from minority interests 2,015,802 5,101,546
Refunds of capital contributions to minority interests (1,340,168) --
Distributions to minority interests (84,927) (236,223)
Net advances from (repayments to) stockholder 1,000,000 (60,574)
Repayments of mortgage loans (21,241) (10,844)
----------- -----------
Net Cash Provided by Financing Activities 4,148,531 6,923,923
----------- -----------
Net Cash Provided by Discontinued Operations 275,112 --
----------- -----------
Net Increase (Decrease) in Cash (588,832) 606,142
Cash at Beginning of Period 1,205,120 598,978
----------- -----------
Cash at End of Period $ 616,288 $ 1,205,120
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Year for:
Interest $ 365,513 $ 334,038
Prior payments -- --
The accompanying notes are an integral part of these
consolidated financial statements
F-10
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. The Company completed an initial public offering in 1978
of its common stock in Florida. The Company has also operated under the names of
Portsmouth Corporation, SAC-Delaware and Environmental Alternatives, Inc. From
July 1, 2002 to May 2005 the Company had no assets or operating activities.
The Company changed its name on May 14, 2004 to Mortgage Assistance Center
Corporation. The change was 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 and MAC became a wholly owned subsidiary of MACC.
Note 2- 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 and real estate
acquired by foreclosures of mortgage notes. The types of mortgage 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 resells a substantial portion of its loans in various-sized pools,
or it forecloses when loans held in its portfolio continue to be in default. As
a result, the Company may be engaged in owning single-family dwellings and
possibly other real estate. Such foreclosed real estate is held, rehabilitated
where necessary, and sold.
Principles of Consolidation and Basis of Presentation:
The accompanying financial statements are consolidated and include the financial
statements of MACC and its wholly owned subsidiary, MAC. All significant
intercompany accounts and transactions are eliminated in consolidation.
The Company through its subsidiary, MAC, has a 50% ownership interest in eight
unincorporated joint ventures and acts as the manager of each venture and, as
such, exercises control over each venture. The other members of each of the
ventures do not have either (a) the substantive ability to dissolve the venture
or otherwise remove the manager without cause, or (b)
F-12
Note 2 - Summary of Significant Accounting Policies (continued)
- ---------------------------------------------------------------
Principles of Consolidation and Basis of Presentation: (continued)
substantive participating rights. Based on these factors, MAC's interest in each
of the joint ventures meets the criteria for consolidation under the provisions
of Emerging Issues Tax Force Issue No. 04-5, Determining Whether A General
Partner, or the General Partners as a Group, Controls a Limited Partnership or
Similar Entity When the Limited Partners Have Certain Rights ("EITF Issue No.
04-5") and AICPA Statement of Position 78-9, Accounting for Investments in Real
Estate ("SOP 78-9"). The consolidated financial statements include 100% of the
assets and liabilities of these unincorporated entities, with the ownership
interests of minority investors recorded in a noncurrent caption, "Minority
Interests." On May 17, 2007, MAC sold its 50% interest in the future profits of
Dutch Fork Capital, LLC ("Dutch Fork") to the other 50% partner in that venture
for $300,000 cash. Two of MACC's directors have indirect ownership interests in
Dutch Fork. At December 31, 2007, and for the year then ended, all of the
assets, liabilities and applicable minority interests have been eliminated, and
the results of operations have been classified as Discontinued Operations.
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 represent 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 and is charged to operations in the period the impairment
is identified. Accordingly, the Company recorded an impairment allowance of
$197,237 and $253,509 as of December 31, 2007 and December 31, 2006,
respectively.
The Company recognizes gain or loss on the sale or other resolution of mortgage
loans pools based on the difference between the net sale proceeds and the cost
basis of the individual loans
F-13
Note 2 - Summary of Significant Accounting Policies (continued)
- ---------------------------------------------------------------
Mortgage Note Receivable Pools: (continued)
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 follows the provisions of Statement of Position No. 03-3, Accounting
for Certain Loans or Debt Securities Acquired in a Transfer ("SOP 03-3"), which
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 have been
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. 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 on 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 a pool basis.
Subsequent to acquisition, the 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
December 31, 2007 and December 31, 2006.
Other Revenue Recognition Policies:
Servicing fees:
Servicing fees are charged to the portfolio asset pools for services provided by
the Company (property management, legal, administrative) in order to maximize
the value of the assets in the portfolio. Income is recorded as the services are
performed, in accordance with the terms of the service agreements.
F-14
Note 2- Summary of Significant Accounting Policies (continued)
- --------------------------------------------------------------
Rental Income:
The Company, through one of its 50% owned joint ventures, owns a commercial
building in Dallas, Texas that it leases. Rental income is accrued on a monthly
basis in accordance with the terms of the lease agreement.
Other income:
Other operating income primarily consists of fees received from individual
investors, joint venture partners, or third party entities for identifying and
acquiring asset pools as well as the reimbursement of certain costs associated
therewith, and are recorded at the time the acquired pools are transferred to
the investors.
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 of thirty years for buildings and
improvements, and ranging from two to seven years for office furniture and
equipment.
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 values thereof are capitalized.
Share-Based Compensation:
Prior to January 1, 2006, the Company accounted for stock-based awards to
employees and non-management directors under the recognition and measurement
provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations, as permitted by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). Compensation cost for stock options was not
recognized in the Consolidated Statement of Income for the years prior to 2006
as all options granted had an
F-15
Note 2- Summary of Significant Accounting Policies (continued)
- --------------------------------------------------------------
Share-Based Compensation: (continued)
exercise price equal to the market value of the underlying common stock on the
date of the grant. Prior to January 1, 2006, compensation cost was recognized
for restricted stock units. Effective January 1, 2006, the Company adopted the
fair value recognition provisions of Statement of Financial Accounting Standards
No. 123(R), "Share-Based Payment", using the modified-prospective method. Under
this method, compensation cost recognized in periods subsequent to December 31,
2005, includes: (1) compensation cost for all share-based payments granted
through December 31, 2005, but for which the requisite service period had not
been completed as of December 31, 2005, based on the grant date fair value
estimated in accordance with the provisions of SFAS No. 123, and (2)
compensation cost for most share-based payments granted subsequent to December
31, 2005, based on the grant date fair value estimated in accordance with the
provisions of SFAS No. 123(R). The performance targets for certain
performance-based restricted stock units have not been established and therefore
expense is not currently recognized. Expense associated with these
performance-based awards will be recognized in future periods when performance
targets are established. Results for prior periods have not been restated.
Total stock-based compensation expense for the years ending December 31, 2007
and 2006, was $247,422 and $896,235, respectively.
Income Taxes:
The Company accounts for income taxes based on Statement of Financial Accounting
Standards No. 109 ("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.
Management's judgment and income tax assumptions are used to determine the
levels, if any, of valuation allowances associated with deferred tax assets.
F-16
Note 2- Summary of Significant Accounting Policies (continued)
- --------------------------------------------------------------
Income Taxes: (continued)
Effective January 1, 2007, the Company adopted the provisions of Financial
Interpretation No. 48 ("FIN 48"). FIN 48 prescribes guidance for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. To recognize a tax position, the enterprise determines
whether it is more likely than not that the tax position will be sustained upon
examination, including resolution of any related appeals or litigation
processes, based on the technical merits of the position. A tax position that
meets the more likely than not recognition threshold is measured to determine
the amount of benefit to recognize in the financial statements. The tax position
is measured as the largest amount of benefit, determined on a cumulative
probability basis, that is greater than 50 percent likely of being realized upon
ultimate settlement. The adoption of this Interpretation did not have any impact
on the Company's financial position or results of operations, as the Company did
not have any uncertain tax positions at December 31, 2007.
Net Loss Per Common 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"). Under
the provisions of SFAS No. 128 and SAB 98, basic net income (loss) per common
shares is based on the weighted-average outstanding common shares and issuable
restricted stock units.
Diluted net income (loss) per common share is based on the weighted-average
outstanding shares adjusted for the dilutive effect of options and warrants to
purchase common stock, nonvested restricted stock units and convertible
debentures. Due to the Company's losses, such potentially dilutive securities
are anti dilutive for the years ended December 31, 2007 and 2006. The weighted
average number of potentially fully dilutive shares was 28,386,131 and
19,333,934 for the years ended December 31, 2007 and 2006, respectively.
Note 3 - 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
2007 and prior years, resulting in an accumulated stockholders' deficit as of
December 31, 2007. 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
F-17
Note 3 - Going Concern Uncertainty (continued)
- ----------------------------------------------
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 continues to actively pursue 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 working capital. In addition, the Company continues to
explore opportunities to secure additional sources of debt or other financings
as a means of more cost effectively acquiring pools of mortgage notes and
foreclosed properties. However, there is no guarantee that the Company will
receive sufficient funding to sustain operations and/or implement any future
business plans.
Note 4 - Recent Accounting Pronouncements
- -----------------------------------------
In March 2006, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 156, Accounting for Servicing of Financial Assets (SFAS
156), which amends SFAS 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. SFAS 156 permits, but does not
require, an entity to choose either the amortization method or the fair value
measurement method for measuring each class of separately recognized servicing
assets and servicing liabilities. The provisions of SFAS No. 156 are effective
for fiscal years beginning after September 15, 2006. The Company does not expect
the adoption of SFAS 156 to have a material effect on its financial statements
and related disclosures.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS
No. 157). This Statement establishes a framework for fair value measurements in
the financial statements by providing a definition of fair value, provides
guidance on the methods used to estimate fair value and expands disclosures
about fair value measurements. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff
Position (FSP) No. FAS 157-2, permitting entities to delay application of SFAS
No. 157 to fiscal years beginning after November 15, 2008 for nonfinancial
assets and nonfinancial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually). SFAS No. 157 requires two distinct transition approaches; (i)
cumulative-effect adjustment to beginning retained earnings for certain
financial instrument transactions and (ii) prospectively as of the date of
adoption through earnings or other comprehensive income, as applicable. The
Company did not have financial instrument transactions that required a
cumulative-effect adjustment to beginning retained earnings upon the adoption of
SFAS No. 157. Beginning January 1, 2009, the Company will apply SFAS No. 157
fair value requirements to nonfinancial assets and nonfinancial liabilities that
are not recognized or disclosed on a recurring basis. SFAS No. 157 expands
disclosures about assets and liabilities measured at fair value on a recurring
basis effective beginning with first-quarter 2008 reporting.
F-18
Note 4 - Recent Accounting Pronouncements (continued)
- -----------------------------------------------------
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities -- Including an Amendment of FASB
Statement No. 115" (SFAS No. 159). SFAS No. 159 establishes a fair value option
permitting entities to elect to measure eligible financial instruments and
certain other items at fair value. Unrealized gains and losses on items for
which the fair value option has been elected will be reported in earnings. The
fair value option may be applied on an instrument-by-instrument basis, is
irrevocable and is applied to the entire instrument. SFAS No. 159 is effective
as of the beginning of the first fiscal year beginning after November 15, 2007,
and should not be applied retrospectively to fiscal years beginning prior to the
effective date. On the adoption date, an entity may elect the fair value option
for eligible items existing at that date and the adjustment for the initial
remeasurement of those items to fair value should be reported as a cumulative
effect adjustment to the opening balance of retained earnings. Subsequent to
January 1, 2008, the fair value option can only be elected when a financial
instrument or certain other item is entered into. On
January 1, 2008, the Company did not elect the fair value option for any
existing eligible financial instruments or certain other items.
In June 2007, the FASB ratified EITF Issue No. 06-11 "Accounting for Income Tax
Benefits of Dividends on Share-Based Payment Awards" (EITF 06-11). EITF 06-11
requires that the income tax benefits received on dividends or dividend
equivalents paid to employees holding equity-classified nonvested shares be
recorded as additional paid-in capital when the dividends or dividend
equivalents are charged to retained earnings pursuant to SFAS No. 123(R). This
EITF is applied prospectively and is effective for fiscal years beginning after
December 15, 2007, and interim periods within those years. EITF 06-11 requires
the disclosure of any change in accounting policy for income tax benefits of
dividends or dividend equivalents on share-based payment awards as a result of
adoption. The Company began applying the provisions of EITF 06-11 on January 1,
2008 with no material impact on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R) "Business Combinations" (SFAS
No. 141(R)). SFAS No. 141(R) applies to all business combinations and
establishes guidance for recognizing and measuring identifiable assets acquired,
liabilities assumed, noncontrolling interests in the acquiree and goodwill. Most
of these items are recognized at their full fair value on the acquisition date,
including acquisitions where the acquirer obtains control but less than 100
percent ownership in the acquiree. SFAS No. 141(R) also requires expensing of
transaction costs as incurred and establishes disclosure requirements to enable
the evaluation of the nature and financial effects of the business combination.
SFAS No. 141(R) is effective for business combinations with an acquisition date
in fiscal years beginning after December 15, 2008.
In December 2007, the FASB issued SFAS No. 160 "Noncontrolling Interests in
Consolidated Financial Statements -- an amendment of Accounting Research
Bulletin No. 51" (SFAS No. 160). SFAS No. 160 establishes accounting and
reporting standards for
F-19
Note 4 - Recent Accounting Pronouncements (continued)
- -----------------------------------------------------
noncontrolling ownership interests in subsidiaries (previously referred to as
minority interests). Noncontrolling ownership interests in consolidated
subsidiaries will be presented in the consolidated balance sheet within
stockholders' equity as a separate component from the parent's equity. Earnings
attributable to the noncontrolling interests will be reported as a part of
consolidated net income and not as a separate income or expense item. Earnings
per share will continue to be based on earnings attributable to only the parent
company and does not change upon adoption of SFAS No. 160. SFAS No. 160 provides
guidance on accounting for changes in the parent's ownership interest in a
subsidiary, including transactions where control is retained and where control
is relinquished. SFAS No. 160 also requires additional disclosure of information
related to noncontrolling interests. SFAS No. 160 is effective for fiscal years
beginning after December 15, 2008, and early adoption is prohibited. The
Statement will be applied prospectively to transactions involving noncontrolling
interests, including noncontrolling interests that arose prior to the effective
date, as of the beginning of the fiscal year it is initially adopted. However,
the presentation of noncontrolling interests within stockholders' equity and the
inclusion of earnings attributable to the noncontrolling interests in
consolidated net income require retrospective application to all periods
presented. The Company will assess the impact on its consolidated financial
statements.
F-20
Note 5 - Portfolio Assets
- -------------------------
Portfolio assets were comprised of the following at December 31, 2007 and 2006:
2007 2006
---------- ----------
Mortgage note receivable pools $1,466,796 $2,125,852
Real Estate portfolios 4,283,440 4,729,647
Tax liens and other 235,362 196,518
---------- ----------
Total portfolio assets 5,985,598 7,052,017
Less valuation allowance for impairment 197,237 253,508
---------- ----------
Net portfolio assets $5,788,361 $6,798,509
========== ==========
All portfolio assets are pledged to secure notes payable to
individuals and others (See Note 6).
The following table presents changes in the reserve for
impairment:
2007 2006
--------- ---------
Beginning balance $ 253,508 $ 202,690
Provision for impairment 232,136 105,000
Amounts charged off against reserve (288,407) (54,182)
--------- ---------
Ending balance $ 197,237 $ 253,508
========= =========
F-21
Note 6 - Notes Payable
- ----------------------
At December 31, 2007 and 2006, notes payable to individuals and others were
comprised of the following:
2007 2006
---------- ----------
Non-interest bearing loan payable to minority interest
partner in MAP/MAC, L.L.C., due October 1, 2008 $1,120,136 $1,480,136
Loans payable to One Source Mortgage Investments,
Inc., due interest only monthly or semiannually
at 12%, maturing September 2008 - March 2009 1,011,500 626,500
Loans payable to Strategic Equity Investments, Inc.,
due interest semiannually at 12% maturing April 2009 -
September 2009 1,901,000 --
Loan payable to Strategic Equity Investments, Inc.,
due interest semiannually at 14% maturing December 2010 250,000 --
Loan payable to Kirtland Realty Group, L.P., due 223,200 223,200
interest only monthly at 14%, maturing November 2008
Loan payble to individuals, due interest only 425,998 425,998
quarterly at 12%, maturing November 2008
Loan payable to individual, due interest only semiannually, 95,405 95,405
maturing November 2008
Other 53,450 163,844
---------- ----------
Total 5,080,689 3,015,083
Less portion due within one year 2,614,011 1,522,315
---------- ----------
$2,466,678 $1,492,768
========== ==========
At December 31, 2007, principal installments on notes payable to individuals and
others were due $2,614,011 in 2008, $2,186,000 in 2009 and $280,678 in 2010.
Certain real estate and mortgage note receivable pools secure the loans from
individuals and others.
F-22
Note 6 - Notes Payable (continued)
- ---------------------- -----------
Pursuant to the terms of the operating agreement for MAP/MAC, L.L.C.
("MAP/MAC"), as amended (the "Modification Agreement"), MAP/MAC and its members
have agreed to release MAC from any claims arising from any previous breach or
violation by MAC of MAP/MAC'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 in 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 was $1,120,135.66 after the $100,000 payment described in (1) above was
made in November 2007.
Note 7 - Advance From Stockholders
- ----------------------------------
W. C. Payne Investments, L.L.C. and FAX/MACC L.P. advanced $1,000,000 for the
purchase of 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 a definitive agreement, and the second of which was paid
to the Company in October 2007 (see Note 10). Since the transaction is scheduled
to close during 2008, this amount has been classified as a current liability in
the accompanying consolidated financial statements.
Note 8- Mortgages Payable
At December 31, 2007 and 2006, the balance in this caption was comprised of the
following:
2007 2006
---------- ----------
Installment note payable to Legacy Texas Bank,
due $8,714 monthly beginning July 2006,
interest at 2.75% above the Federal Home Loan
Bank (FHLB) rate, maturing June 2016. $ 970,316 $ 990,412
Other 69,203 70,348
---------- ----------
Total 1,039,519 1,060,760
Less Current portion 24,500 24,400
---------- ----------
$1,015,019 $1,036,360
========== ==========
F-23
Note 8- Mortgages Payable (continued)
- -------------------------------------
The mortgage loan payable to Legacy Texas Bank (the "Bank") is collateralized by
certain rental real estate located in Dallas, Texas, which comprises the
Company's land, buildings and improvements in the accompanying consolidated
balance sheets, as well as the personal guarantees of two of the Company's
former executive officers, and both of which are significant stockholders and
served as directors during 2007. The interest rate on this loan is an adjustable
rate which was fixed on June 1, 2006 and will be subsequently recalculated,
adjusted and fixed by the Bank every three (3) years thereafter. From the
inception of this loan through June 1, 2006, the loan was payable interest only
at 1% above a specified prime rate.
Estimated principal installments due on mortgage loans for each of the five
years subsequent to December 31, 2007 are as follows:
2008 $ 24,500
2009 28,600
2010 31,500
2011 33,700
2012 36,000
F-24
Note 9 - Minority Interests
- ---------------------------
Minority interests on the Company's consolidated balance sheets represent the
50% ownership interests in the equity of eight unincorporated joint venture
subsidiaries (six in 2006) not owned by the Company.
Changes in minority interests for the years ended December 31, 2007 and 2006
consisted of the following:
2007 2006
----------- -----------
Balance, beginning of year $ 5,466,543 $ 691,453
Minority interests in net earnings (losses)
of subsidiaries 85,729 (90,233)
Capital contributions from minority interests 2,015,802 5,101,546
Distributions of capital to minority interests (1,340,168) (236,223)
Distributions of profit to minority interests (84,927) --
Discontinued operations (2,530,892) --
----------- -----------
Balance, end of year $ 3,612,087 $ 5,466,543
=========== ===========
Note 10 - Related Party Transactions
- ------------------------------------
During the years ended, December 31, 2007 and 2006, the Company engaged in
certain transactions with Messrs. William G. Payne and Rod C. Jones and with
certain entities controlled by them. Messrs. William G. Payne and Rod C. Jones
are members of the Company's 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.
Series A Preferred Stock Issuance:
On November 30, 2006, the Company entered into a Series A Preferred Stock and
Common Stock Warrant Purchase Agreement ("Series A Purchase Agreement") with
W.C. Payne Investments, L.L.C. and FAX/MACC, L.P. (the "Investors") pursuant to
which the Company sold to Investors 1,500,000 shares of the Company's Series A
Preferred Stock at a price of $1.00 per share, as well as warrants to purchase
9,111,387 shares of the Company's common stock at an exercise price of $0.01 per
warrant share. Under the terms of the Series A Purchase Agreement, the Investors
would also purchase an additional 1,500,000 preferred shares, in
F-25
Note 10 - Related Party Transactions (continued)
- ------------------------------------------------
increments of 500,000, conditioned on the satisfaction of certain financial
benchmarks set forth in the Series A Purchase Agreement (see Note 13). Prior to
this transaction, Mssrs. Payne and Jones were not members of the Company's Board
of Directors, but became members immediately after this transaction.
Dutch Fork Capital, LLC:
In December 2006, the Company entered into a 50-50 joint venture with FAX/Dutch
Fork, L.P. (of which Messrs. Payne and Jones have an ownership interest)
pursuant to which FAX/Dutch Fork provided funding to the venture for the purpose
of obtaining distressed real estate to be serviced by the Company. The original
agreements governing the venture provide that the Company would receive its out
of pocket expenses, plus a pro-rata share of the profits of the venture after
FAX/Dutch Fork received an amount equal to its invested capital, plus a
preferred return. Effective May 17, 2007, the Company sold its half interest in
the joint venture to FAX/Dutch Fork for $300,000; and as a condition of the
sale, the Company agreed to continue to service the portfolio assets in the
joint venture and provide accounting and administrative services at no charge to
Dutch Fork
Subsequent Funding by Series A Investors:
Effective September 2007, the Company entered into an amendment to the Series A
Purchase Agreement described above. The Investors advanced $1,000,000 for the
purchase of 267,347,556 shares of common stock (representing approximately 95%
of the total stock outstanding) 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. The issuance of the shares to the Investors is subject to an
amendment to the Company's Articles of Incorporation increasing the Company's
authorized shares.
Vision Ads, Inc:
During the year ended December 31, 2006, MAC engaged in certain transactions
with two of its principal officers and with an affiliated entity Vision Ads,
Inc. ("VA"), (dba "Red Horse Realty"), owned by a MAC vice president.
MAC had charged VA, a real estate management firm, for usage of office space,
personnel and other administrative costs through 2005, and had recorded an
account receivable of $50,945 from VA at December 31, 2005. At December 31,
2006, management determined that the amount owed by VA, amounting to $58,481,
would be forgiven in lieu of the officer's uncompensated service to the Company
prior to 2005 and certain other considerations, which included the forfeiture of
stock options.
F-26
Note 10 - Related Party Transactions (continued)
- ------------------------------------------------
Stockholder Loans:
One of the Company's principal officers and stockholders made cash advances of
$60,574 to the Company under two unsecured loans, bearing interest at 18%,
during 2005, and additional loans of $15,512 in 2006 at an interest rate of 12%.
All outstanding advances were repaid on November 30, 2006. Interest expense on
these loans amounted to $18,021 for the year ended December 31, 2006.
Note 11 - Income Taxes
- ----------------------
The components of income tax (benefit) expense, on continuing operations, for
the nine months ended December 31, 2007 and 2006, respectively, are as follows:
December 31,
2007 2006
---------- -----------
Federal:
Current $ - $ -
Deferred - -
---------- -----------
- -
---------- -----------
State:
Current - -
Deferred - -
---------- -----------
Total $ - $ -
========== ===========
The Company's income tax expense for the years ended December 31, 2007 and
2006, respectively, differed from the statutory tax rate of 34.0% as follows:
2007 2006
----------- -----------
Statutory rate applied to income
before income taxes $(1,106,000) $ (332,800)
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 1,106,000 332,800
----------- -----------
Income tax expense $ -- $ --
=========== ===========
F-27
Note 11 - Income Taxes (continued)
- ----------------------------------
Deferred tax assets and liabilities consisted of the following at December 31,
2007 and December 31, 2006:
December 31, December 31,
2007 2006
----------- -----------
Deferred tax assets
Net operating loss carryforwards $ 4,991,000 $ 3,960,000
Less valuation allowance (4,991,000) (3,960,000)
Net Deferred Tax Asset $ -- $ --
=========== ===========
As of December 31, 2007, the Company had a net operating loss carryforward of
approximately $14,700,000 to offset future taxable income. Subject to current
regulations, this carryforward began 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
- -----------------------------------
In August, 2007, Messrs. Payne and Jones, two of the Company's directors and
significant shareholders, exercised warrants for 448,600 and 897,300 shares of
common stock for $4,486 and $8,973, respectively.
Note 13 - Series A Preferred Stock Financing Agreement
- ------------------------------------------------------
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 Investors 1,500,000 shares of the Company's Series A Preferred
Stock at a price of $1.00 per share, as well as warrants to purchase 4,556,694
shares of the Company's common stock at an exercise price of $0.01 per warrant
share. Under the terms of the Purchase Agreement, the Investors purchased
1,500,000 of the preferred shares on November 30, 2006, with an additional
1,500,000
F-28
Note 13 - Series A Preferred Stock Financing Agreement (continued)
- ------------------------------------------------------------------
preferred shares to be purchased in three increments of 500,000, conditioned on
the satisfaction of certain financial benchmarks set forth in the Purchase
Agreement on March 31, June 30, and September 30, 2007.
The proceeds from the issuance of preferred stock, less related issuance costs
of $86,985, amounted to $1,413,015, which was allocated $160,530 to the
preferred stock and $1,252,485 to the warrants issued and classified as
additional paid-in capital. The discount from the value of the preferred stock
will be accreted back to the preferred stock over the seven-year period from the
date of issuance to the date the preferred stock can be redeemed by the Company,
November 30, 2013. Such accretion of the discount on the preferred stock is
being accounted for as a deemed dividend to the preferred stockholders, and
amounted to $191,352 and $15,946 for the years ended December 31, 2007 and 2006,
respectively.
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 subsequent tranches of $500,000 in cash as
contemplated by the November 30, 2006 financing transaction. The Company did not
achieve its benchmarks for the period ended June 30, 2007 and the Investors
advised the Company that they did not intend to fund further tranches under the
Purchase Agreement.
Holders of the preferred stock are entitled to receive cumulative cash
dividends, out of any assets legally available, at the rate of 10% per annum (of
the original per share issue price of $1.00) per share of preferred stock,
accrued and compounded on a quarterly basis. Such dividends will have preference
over any payment or declaration of a dividend or other distribution on the
Company's common stock. The preferred stock is also subject to a mandatory
conversion provision hereby, upon the determination that a holder of the
preferred stock is a "Non-Participating Holder", as defined in the Purchase
Agreement; any preferred stock of such holder will be automatically converted
into shares of common stock on a 1:1 basis. Cumulative undeclared dividends were
$207,962 and $12,500 at December 21, 2007 and 2006, respectively.
Effective November 30, 2006, in connection with the Purchase Agreement, the
Company entered into a Series A Preferred Stock Investors' Rights Agreement
("Investors' Rights Agreement") with the Investors. Pursuant to the Investors'
Rights Agreement, the Company agreed to file a registration statement covering
the resale of all issued shares of the Company's common stock and shares of
common stock issuable upon conversion or exercise of any convertible securities,
warrants, or options that are held by the Investors to be effective within
eighteen (18) months of the effective date of the Investors' Rights Agreement;
and the Company also granted piggy-back registration rights with respect to the
resale of any issued shares of common stock, or shares of common stock issuable
upon conversion or exercise of any convertible securities, warrants or options
held by the Investors but not covered by the above-mentioned registration
statement.
The Company also entered into a Stockholders' Agreement between the Company, the
Investors,
F-29
Note 13 - Series A Preferred Stock Financing Agreement (continued)
- ------------------------------------------------------------------
and the Company's three principal common stockholders ("Stockholders") which
provides, among other things:
a) The Investors and the Company will have first offer rights,
providing that, with limited exceptions, should a Stockholder
desire to transfer any of his shares, such Stockholder must first
offer shares to the Investors and then to the Company.
b) The Investors are to be granted a co-sale right, giving them the
option to include their shares in any proposed sale of common
stock that, when aggregated with all other transfers of common
stock, represents at least ten percent (10%) of the outstanding
shares of the Company's common stock.
c) Any Investor or group of Investors desiring to transfer to a third
party substantially all of the shares and common stock equivalent
shares held by them, which shares of common stock equivalent
shares represent at least fifty percent (50%) of each of their
respective classes of the Company's stock, hold a compelled sale
right providing that, in the case of such a sale, any non-selling
minority stockholders will, at the election of the selling
Investors, be required to transfer their shares to the third-party
purchaser upon the same terms and conditions as the selling
Investors.
d) All Stockholders and Investors are to be granted preemptive
rights, providing that, with limited exceptions, if at any time
the Company proposes to issue and sell any common stock, the
Company must first offer such common stock to each Stockholder and
Investor.
Effective September 2007, the Company entered into an amendment to the Series A
Purchase Agreement described above. The Investors advanced $1,000,000 for the
purchase of 267,347,556 shares of common stock (which would then represent
approximately 95% of the total stock outstanding) 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. The issuance of the shares to the
Investors is subject to an amendment to the Company's Articles of Incorporation
increasing the Company's authorized shares.
Note 14 - Incentive Plan
- ------------------------
In October 2006, the stockholders of the Company adopted the Mortgage Assistance
Center Corporation 2006 Equity Incentive Plan (the "Plan"), which allows the
Company to grant stock options, restricted stock and performance awards to
officers, directors, key employees and consultants. The Plan will be
administered by the Company's board of directors or committees thereof. Subject
to adjustment as provided in the Plan, the maximum aggregate number of shares
that may be issued under the Plan is 4,250,000 shares of common stock, provided,
however, that
F-30
Note 14 - Incentive Plan (continued)
- ------------------------------------
(i) the aggregate number of shares that may be issued as restricted stock may
not exceed 1,062,500 and (ii) the aggregate number of shares that may be issued
under statutory stock options may not exceed 2,000,000, and (iii) the aggregate
number of shares that may be issued under non-statutory stock options may not
exceed 1,187,500. Subject to adjustment as provided in the Plan, the aggregate
number of shares that may be issued to any individual under the Plan, whether
issued under options or restricted stock, shall not exceed 1,000,000. The Plan
will continue in effect until terminated; however, no incentive stock options or
other awards will be granted under the Plan after 10 years from the date the
Plan was approved by the Company's stockholders.
The per share exercise price for shares to be issued pursuant of the exercise of
an option will be determined by the Board; however, each option will be granted
at an exercise price equal to no less than the fair market value of a share on
the date of grant, except that the case of an incentive stock option granted to
an employee who, at the time the option is granted, owns stock possessing more
than 10 percent of the total combined voting power of all classes of stock of
the Company or any Parent or Subsidiary, each incentive stock option shall be
granted at an exercise price equal to no less than 110% of the fair market value
of a share on the date of grant.
Under the provisions of the Plan, and pursuant to Board of Directors approval on
November 28, 2006, the Company granted statutory options (e.g. incentive stock
options) for 223,400 shares of common stock to various employees in
consideration for employment with and services provided to the Company. These
options were issued with an exercise price of $0.85 which was the closing
trading price per share on the date of the grant. These options were 100% fully
vested and exercisable at the date of the grant, and may be exercised at any
time through November 28, 2011. The fair value of these options was determined
by a commercially available software product utilizing a proven trinomial
lattice valuation methodology. Based on this analysis, the value of the options
at grant was determined to be approximately $0.37. Allowing for potential future
forfeitures, a non-cash compensation expense of $83,571 was recorded for 2006.
Under the provisions of the Plan, and pursuant to Board of Directors approval on
November 28, 2006, the Company granted non-statutory options (e.g. non-
qualified stock options) for 834,800 shares of common stock to various
individuals in consideration for prior employment and / or consulting services
provided to the Company. These options were issued with an exercise price of
$0.85 which was the closing trading price per share on the date of the grant.
These options were 100% fully vested and exercisable at the date of the grant,
and may be exercised at any time through November 28, 2011. The fair value of
these options was determined by a commercially available software product
utilizing a proven trinomial lattice valuation methodology. Based on this
analysis, the value of the options at grant was determined to be approximately
$0.38. Allowing for potential future forfeitures, a non-cash compensation
expense of $318,466 was recorded for 2006. As of December 31, 2007 a total of
16,000 ISO's and 84,800 NSO's were deemed to have been terminated under the
plan.
F-31
Note 14 - Incentive Plan (continued)
- ------------------------------------
In connection with three year employment agreements entered into between the
Company and two of its principal officers and stockholders on November 30, 2006,
the officers were granted incentive stock options for 600,000 shares of common
stock under the Plan. One third of such incentive stock options will become
exercisable upon each successive anniversary date of the employment agreements,
provided that the officers are employed by the Company on each such anniversary
date. The fair value of these options was determined by a commercially available
software product utilizing a proven trinomial lattice valuation methodology.
Based on this analysis, the value of the options at grant was determined to be
approximately $0.45. All non-cash compensation expense for this issuance will
occur in future years pursuant to vesting. Pursuant to the December 10, 2007
termination of one of the officers for good cause, incentive stock options for
200,000 shares were forfeited.
Note 15 - Common Stock Warrants
- -------------------------------
Pursuant to a Senior Subordinated Bridge financing executed during August 2006
with the Investors in the Company's Series A Preferred stock purchase, the
Company issued two warrants for 50,000 shares of common stock each to the
Investors. These warrants were issued at an exercise price of $0.01 per share
and may be exercised anytime through August 2013.
On November 30, 2006, the Company entered into a Series A Preferred Stock and
Common Stock Warrant Purchase Agreement (See Note 4), in which warrants to
purchase 9,113,387 shares of the Company's common stock at an exercise price of
$.01 per share were issued to the Investors. The warrants may be exercised at
any time through November 30, 2016. The fair value of these warrants was
determined by a commercially available software product utilizing a proven
trinomial lattice valuation methodology. Based on this analysis, the value of
the warrants at grant was determined to be $1.00 per warrant share. Pursuant to
a bridge financing agreement with the investors during September 2007, a total
of 1,345,800 warrant shares were duly exercised by the investors. As of December
31, 2007 the respective shares of Common Stock due upon exercise of warrants
were pending issuance.
In addition to the above warrants, the Company issued "Back-End Warrants" to the
Investors to purchase 2,700,262 shares of the Company's Common stock at an
exercise price of $0.01 per share. The Back-End warrants are now deemed to be
exercisable in full due to the Company's failure to achieve certain financial
benchmarks as of December 31, 2007.
In addition to the warrants described above, the Company issued 150,000 warrants
to the Investors in connection with their appointment to the Company's board of
directors. These warrants have an exercise price of $.65 per share, which price
may be adjusted with the terms of the warrants. The Company ascribed a value of
$0.29 per warrant share to these warrants using the previously noted trinomial
lattice valuation model. These warrants expire November 30, 2016.
F-32
Note 15 - Common Stock Warrants (continued)
- -------------------------------------------
The Company also issued warrant certificates for 467,000 shares of common stock
to its former legal counsel and for 150,000 shares to a financial advisor, both
at an exercise price of $0.65 per share, subject to adjustment in accordance
with the terms of the warrants. The Company valued these warrants at $0.29 per
warrant share using the trinomial lattice valuation methodology and recorded a
non-cash compensation expense of $382,585 for 2006. These warrants expire on
November 30, 2011.
At December 31, 2007, the Company had an obligation to a financial consultant
pursuant to a June 19, 2006 Consulting Agreement for an equity compensation fee
of $308,133, representing five percent (5%) of the amount of monies loaned to
the Company by lenders procured by the consultant. The equity compensation fee
is to be converted to a share basis according to the closing trading price per
share on the date each individual funding tranche closes and paid in the form of
five-year common stock purchase warrants of the Company with an aggregate fair
market value equivalent to the equity compensation fee earned. This calculation
converts the equity compensation fee to a total of 585,096 warrant shares.
Pursuant to this agreement, the consultant was issued a common stock purchase
warrant on June 11, 2007 for 157,866 warrant shares at an exercise price of
$0.40 which was the actual per share price at the close of trading on June 11.
Subsequently, the consultant was issued a second warrant for 219,025 shares on
June 29, 2007 at an exercise price of $0.43. A third-party consultant determined
that the fair value of these options with a commercially available software
product which utilizes a proven trinomial lattice valuation methodology. The
value of these warrants was determined to be $0.18 and $0.19, respectively, per
warrant share. These warrants expire five years from the date of grant. As of
December 31, 2007 the Company had an obligation to issue another warrant to this
consultant for a total of 208,205 shares of common stock.
Note 16- Share-Based Compensation
- ---------------------------------
At December 31, 2007, the Company had granted stock options for a total of
3,182,000 shares of common stock under its 2006 Equity Incentive Plan and had
also granted other common stock purchase warrants for compensation purposes
totaling 1,143,891 shares (See Notes 15 and 16). All outstanding options and
warrants were granted on or after November 28, 2006. Any previous agreements
with employees, former employees or consultants were cancelled. The total
non-cash compensation cost that has been charged against income for all such
options and warrants granted was $247,422 and $896,235 for the years ended
December 31, 2007 and 2006, respectively. The share-based compensation expense
increased the basic loss per share by $0.02 for the year ended December 31,
2007. The result reflects no related tax benefit due to the Company's full
valuation allowance on its deferred tax assets. As of December 31, 2007, there
was an additional $282,313 of non-cash compensation expense related to
non-vested share awards that is expected to be recognized over a period of three
years.
All of the options and warrants granted to employees for prior service during
2006 and those issues to advisors, consultants and directors for compensation
were fully vested at the grant date.
F-33
Note 16- Share-Based Compensation (continued)
Any options issued pursuant to employment or retention agreements vest according
to a pre-determined time-vest schedule.
A summary of stock options and warrants outstanding at December 31, 2007 is as
follows:
Weighted-Average
Option and Range of Remaining Weighted-Average
Warrant Shares Exercise Prices Contractual Life Exercise Price
------------------ ------------------- ----------------------- ----------------------
Outstanding 4,325,891 $ .40-1.11 4.1 years $ .76
Exercisable 2,859,191 $ .40-1.11 4.0 years $ .74
The lattice (trinomial) option-pricing model was used to estimate the fair value
of options and warrants at the date of individual grants as they occurred during
2006 and 2007. The weighted-average grant date fair value of options and
warrants granted in 2007 and the significant assumptions used in determining the
underlying fair value of each option or warrant grant, on the date of the grant
were as follows:
Weighted-average grant date
fair value of options and warrants
granted $0.39
Assumptions:
Risk-free rate of return 5.0%
Expected life 5 years
Weighted-average volatility 91.7%
Expected dividend yield 0.0%
The risk-free rate of return is estimated based on the yield curve of Constant
Maturity Treasury ("CMTs") as published by the U.S. Treasury Department. These
rates are projected over a range of future maturity dates based on the closing
market bid yields on actively traded Treasury securities in the over-the-counter
market.
The Company's assumed dividend yield of zero is based on the fact that it has
never paid cash dividends and has no present intention to pay cash dividends.
Since adoption of SFAS 123(R) on January 1, 2006, the expected share-price
volatility
F-34
Note 16- Share-Based Compensation (continued)
- ---------------------------------------------
assumption used by the Company has been based on a blend of implied volatility
in conjunction with calculations of the Company's historical volatility as
determined by various mathematical models for calculating volatility. These
values are then adjusted over a five-year period coinciding with the anticipated
life of the options. Based on counsel provided by a third-party consultant, the
Company believes this methodology will result in the best estimate of expected
volatility.
The lattice option-pricing model also allows assumptions for the sub-optimal
exercise of vested shares prior to the full expiration term of the option. The
Company's assumption for this parameter has been based on published research
which establishes the sub-optimal exercise event as a multiple of the exercise
price of vested shares.
Note 17 - Venture Funding Agreement
- -----------------------------------
Effective October 22, 2007, the Company, 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 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.
Through December 31, 2007, HBK provided equity funding of approximately
$7,600,000 for two joint venture entities. The Company recognized $227,882 of
sourcing fee revenue for the year ended December 31, 2007 based on the purchase
price of two Property Portfolios acquired.
F-35
Note 17 - Venture Funding Agreement
- -----------------------------------
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.
Note 18 - Lease Commitments
- ---------------------------
The Company leases its corporate offices in Dallas, Texas under an operating
lease expiring in April, 2014. The Company is required to pay all insurance,
maintenance and repairs related to this leased facility. The Company had no
other significant operating leases. Rental expense under this lease was $120,013
for the year ended December 31, 2007. At December 31, 2007, minimum future lease
payments to be paid annually under the seven-year non-cancellable operating
lease for operating space were as follows:
2008 $190,632
2009 210,390
2010 232,710
2011 232,710
2012 253,200
2013 263,445
2014 87,815
Note 19 - Restatement
- ---------------------
The financial statements for December 31, 2006 have been restated to present the
carrying value of the Company's Series A preferred stock at its carrying value,
as opposed to par value, and to reflect the allocation of net proceeds from the
issuance of preferred stock between preferred stock and the related warrants
issued. In addition, the 2006 financial statements were restated to reflect the
accretion of the discount from the redemption value of the preferred stock as a
deemed dividend to the preferred stockholders. The effect of this restatement
had no impact on the net stockholders' deficit at December 31, 2006, or the
consolidated results of operations for the year ended December 31, 2006.
F-36
Note 20 - Subsequent Events
- ---------------------------
On January 1, 2008, the Company and Mr. Michael Caolo entered into a Legal
Consulting Engagement Agreement pursuant to which the Company retained the
services of Mr. Caolo as its General Counsel (the "Consulting Agreement"). Under
the terms of the Consulting Agreement, Mr. Caolo was to receive a monthly
retainer of $15,000 per month during the two-year term of the agreement, plus
bonuses based on company performance. On February 21, 2008, the Company
terminated the services of Mr. Michael Caolo, and on March 6, 2008, the Company
received notification from Mr. Caolo claiming breach of the Consulting Agreement
and demanding cure. Neither the Company nor Mr. Caolo has taken any further
action with respect to Mr. Caolo's demand.
Effective February 12, 2008, the Company entered into two agreements (the "Note
Agreements") pursuant to which the Company may borrow up to an aggregate of
$600,000 (the "Funding Commitment") through one or more advances. The Note
Agreements provide that the Company may, from time to time, request advances up
to the Funding Commitment; provided, among other things, that (a) no more than
two advances may be requested during any calendar month, and (b) no advance
shall be less than $25,000. The first advances under the Note Agreements, in an
aggregate amount of $300,000, were received by the Company on February 12, 2008.
Amounts outstanding under the Note Agreements bear interest at the rate of
fifteen percent per annum, compounded monthly. All outstanding principal and
accrued interest on advances is due and payable upon demand.
Repayment of advances under the Note Agreements is secured by pledge of the
membership of other equity interests held by the Company in various joint
ventures formed by the Company for the purpose of acquiring and holding
portfolios of distressed, single-family real estate and non-performing mortgages
that the Company manages.
In connection with the Note Agreements, the Company has granted to each lender
there under, the right, exercisable at any time after the earlier to occur of
(a) a going private transaction, or (b) February 12, 2009, to purchase 12.5% of
the capital stock of the Company for a nominal consideration (an "Option"). The
issuance by the Company of each Option was made in reliance upon the exemption
available from registration under Section 4(2) of the Securities Act of 1933.
CSSF Master Fund, LP, one of the lenders under the Note Agreements, is also a
member in Canyon Ferry Capital LLC, a joint venture previously established by
the Company's subsidiary, Mortgage Assistance Corporation, to acquire a
portfolio of real estate properties. MAC is also a member of the joint venture,
serves as its manager and services the real estate portfolio. Pursuant to the
terms governing this joint venture, MAC receives a share in the profits of the
joint venture once its venture partners have received the amount of their
capital contribution to the venture, plus a preferred return on such capital.
Mr. Payne is an employee of the investment advisor for CSSF Master Fund. In such
capacity,
F-37
Note 20 - Subsequent Events
- ---------------------------
Mr. Payne may receive bonus compensation from this investment advisor based on
the performance of CSSF Master Fund.
F-38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1933, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
MORTGAGE ASSISTANCE CENTER CORPORATION
Date: April 14, 2008 By: /s/ Ron Johnson
---------------------------------------
Ron Johnson,
President and Chief Executive Officer
Date: April 14, 2008 By: /s/ Sandra Valiquette
---------------------------------------
Sandra Valiquette,
Controller
(principal accounting officer)
In accordance with the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature: Title: Date:
/s/ Ron Johnson President, Chief Executive April 14, 2008
- ------------------------- Officer and Director
Ron Johnson
/s/ Dennis Downey Chief Operating Officer April 14, 2008
- ------------------------- and Director
Dennis Downey
/s/ Sandra Valiquette Controller April 14, 2008
- ------------------------- (principal accounting officer)
Sandra Valiquette