UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________ to _______________________
Commission file number 0-18945
WESTMARK GROUP HOLDINGS, INC.
(name of small business issuer in its charter)
DELAWARE 84-1055077
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
8000 No. FEDERAL HIGHWAY
BOCA RATON, FLORIDA 33487
(Address of principal executive offices)(Zip Code)
(561) 526-3300
(Issuer's telephone number, including area code)
---------------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. Yes [XX] No [ ]
The number of shares outstanding of each of the registrant's classes of common
stock, as of September 30, 1999: 3,447,426 (one class).
Transitional Small Business Disclosure Format: Yes [ ] No [XX]
1
WESTMARK GROUP HOLDINGS, INC.
FORM 10-QSB REPORT INDEX
10-QSB Part and Item No.
- -----------------------
Part I-Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets as of
September 30, 1999 and December 31, 1998...........................3
Consolidated statements of operations
for the three months and nine months ended September 30, 1999
and 1998...........................................................4
Consolidated statements of cash flows for the nine
months ended September 30, 1999 and 1998...........................5
Condensed notes to consolidated financial statements........................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................7
Part II-Other Information
Item 1. Legal Proceedings..........................................................11
Item 2. Changes in Securities......................................................12
Item 3. Defaults Upon Senior Securities............................................12
Item 4. Submission of Matters to a Vote of Security Holders........................12
Item 5. Other Information..........................................................12
Item 6. Exhibits and Reports on Form 8-K...........................................12
Signatures...................................................................................13
2
ITEM 1. Financial Statements
--------------------
Westmark Group Holdings, Inc. and Subsidiary
Consolidated Balance Sheets
September 30, 1999 with comparative figures for December 31, 1998
UNAUDITED
ASSETS 1999 1998
------
------------------- -----------------
Current assets:
Cash and cash equivalents $ 7,929,504 $7,111,373
Accounts receivable 5,265,835 1,259,252
Mortgage loans held for sale 44,779,906 21,741,557
Deferred tax asset 1,275,000 1,275,000
------------------- -----------------
Total current assets 59,250,245 31,387,182
Property and equipment, net 830,871 578,382
Investments in preferred stock 76,528 349,028
Property and Notes Held for Sale, net 820,801 211,500
Investments in real estate 150,000 300,000
Other assets 540,753 315,982
------------------- -----------------
Total assets $61,669,198 $33,142,074
=================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Warehouse lines of credit $57,177,904 $29,006,951
Notes payable and capital leases 366,890 304,525
Settlements payable 180,399 309,746
Accounts payable 409,880 723,765
Accrued liabilities 483,571 221,775
Income taxes payable - 32,000
Dividends payable 33,803 17,500
------------------- -----------------
Total current liabilities 58,652,447 30,616,262
------------------- -----------------
Long-term portion of debt and capital lease obligations - 39,749
------------------- -----------------
Stockholders' Equity:
Preferred stock, $0.001 par value, 10,000,000 shares authorized, 417,154
(150,005 at December 31, 1998) shares issued and outstanding;
stated at liquidation value 1,256,510 600,010
Common stock, $0.005 par value, 15,000,000 shares authorized,
3,447,426 (3,315,824 at December 31, 1998) shares issued and outstanding 17,236 16,579
Additional paid-in capital 29,622,370 29,293,091
Treasury Stock (58,173 shares at cost) (333,333) -
Deficit (27,296,032) (27,173,617)
Stock subscription receivable (250,000) (250,000)
------------------- -----------------
Total stockholders' equity 3,016,751 2,486,063
------------------- -----------------
Total liabilities and stockholders' equity $61,669,198 $33,142,074
=================== =================
See accompanying condensed notes to consolidated financial statements.
3
Westmark Group Holdings, Inc. and Subsidiary
Consolidated Statements of Operations
For the three months and nine months ended September 30, 1999 and 1998
UNAUDITED
Three Months Ended Nine Months Ended
------------------------------------- ----------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Gain on sale of loans $4,462,014 $4,209,187 $11,811,460 $9,803,193
Loan origination fees 649,942 294,103 1,686,862 1,173,728
Interest income 1,123,754 642,646 2,594,706 1,306,142
Other income 97,676 41,172 342,653 74,670
--------------- --------------- ---------------- ---------------
6,333,386 5,187,108 16,435,681 12,357,733
--------------- --------------- ---------------- ---------------
Costs and Expenses:
Direct loan fees 1,700,673 1,345,083 3,369,171 2,369,259
Interest expense 994,489 606,288 2,090,421 1,356,381
General and administrative 3,834,728 2,719,752 10,836,969 7,152,798
Depreciation and amortization 22,098 43,576 85,232 129,211
--------------- --------------- ---------------- ---------------
6,551,988 4,714,699 16,381,793 11,007,649
--------------- --------------- ---------------- ---------------
Income (loss) from operations (218,602) 472,409 53,888 1,350,084
--------------- --------------- ---------------- ---------------
Other Income (Expense):
Dividend income - 35,000 - 105,000
Provision for impairment in value of
investment in real estate (150,000) - (150,000) -
--------------- --------------- ---------------- ---------------
Income (loss) before taxes (368,602) 507,409 (96,112) 1,455,084
Income tax expense - 177,593 - 509,279
--------------- --------------- ---------------- ---------------
Tax benefit of net operating loss carryforward - (177,593) - (509,279)
--------------- --------------- ---------------- ---------------
Net income (loss) $(368,602) $ 507,409 $ (96,112) $1,455,084
=============== =============== ================ ===============
Earnings (Loss) Per Common Share:
Basic $ (0.12) $ 0.17 $ (0.04) $ 0.52
=============== =============== ================ ===============
Diluted $ (0.12) $ 0.10 $ (0.04) $ 0.30
=============== =============== ================ ===============
Weighted Average Shares Outstanding:
Basic 3,340,601 2,915,225 3,325,295 2,783,998
=============== =============== ================ ===============
Diluted 3,530,675 5,218,609 3,515,369 4,916,886
=============== =============== ================ ===============
See accompanying condensed notes to consolidated financial statements.
4
Westmark Group Holdings, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the nine months ended September 30, 1999 and 1998
UNAUDITED
1999 1998
---- ----
Cash Flows from Operating Activites:
Net income (loss) $ (96,112) $1,455,084
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation 85,232 49,960
Amortization - 74,187
Common stock issued for services 12,000 237,500
Changes in operating assets and liabilities:
Impairment in value of investment in real estate 150,000 -
(Increase) decrease in:
Accounts receivable (4,006,583) -
Mortgage loans held for sale (23,038,349) (11,061,093)
Other assets (224,771) (245,306)
Increase (decrease) in:
Accounts payable (329,582) 60,352
Accrued liabilities 261,796 (33,370)
Settlements payable (129,347) (452,177)
Warehouse lines of credit 28,170,953 10,732,642
---------------- ---------------
Net cash provided by operating activities 855,237 817,779
---------------- ---------------
Cash Flows from Investing Activities:
Purchases of property and equipment (337,721) (451,191)
Investment in property and notes held for sale (609,301) -
---------------- ---------------
Net cash used by investing activities (947,022) (451,191)
---------------- ---------------
Cash Flows from Financing Activities:
Proceeds from sale of preferred stock 974,436 306,144
Preferred dividends (26,303) -
Proceeds from sale of common stock - 600,000
Purchase of common stock for treasury (60,833) -
Proceeds from line of credit 100,000 -
Payments on notes payable and capital leases (77,384) (951,407)
---------------- ---------------
Net cash provided (used) by financing activities 909,916 (45,263)
---------------- ---------------
Net Increase in Cash and Cash Equivalents 818,131 321,325
Cash and Cash Equivalents, Beginning 7,111,373 100,010
---------------- ---------------
Cash and Cash Equivalents, Ending $7,929,504 $ 421,335
================ ===============
Supplemental Disclosures:
Cash paid for interest $1,896,391
================
Capital leases $ 39,749
================
See accompanying condensed notes to consolidated financial statements.
5
Westmark Group Holdings, Inc. and subsidiary
Condensed Consolidated Notes to Financial Statements
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310b of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine and three month periods ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1999. For further information, refer to
the consolidated financial statements and footnotes related thereto included in
the Company's audited annual report on Form 10-KSB for the year ended December
31, 1998.
NOTE 2: FINANCING ACTIVITY
The Company has secured warehouse lines of credit on favorable terms
from the following institutions:
Household Financial Services, Inc. $40 million
Princap Mortgage Warehouse, Inc. $10 million
Great Eastern Funding $10 million
Provident Bank $10 million
National Mortgage Warehouse $10 million
All warehouse lines of credit are one year renewable contracts and
there can be no assurance that they will renew or renew on similar terms.
Warehouse lines totaling $31.5 million, which are not included in the above
table, did not renew in the first three quarters of 1999 due to lenders changing
their lending policies to exclude sub-prime business.
NOTE 3: EARNINGS PER SHARE
The Company provides for the calculation of basic and diluted earnings
per share. Basic earnings per share include only common stock outstanding during
the period. Diluted earnings per share assumes exercising warrants and options
granted that are "In the Money" and convertible preferred stock and convertible
debt. Earnings per share is computed by dividing income available to common
stockholders by the basic weighted average number of common shares and income
available to all stock holders by the diluted weighted average number of common
shares. For the nine months ended September 30, 1999, diluted loss per share has
not been adjusted for the anti dilutive effect of preferred stock dividends,
warrants, options, convertible debt and convertible preferred stock.
NOTE 4: RELATED PARTY
Effective September 30, 1999, Medical Industries of America, Inc., now
known as Cyber-Care, Inc., required the Company to repurchase $333,333 of the
Company's common stock at $5.73 per share because diluted earnings per share, as
defined in an exchange agreement dated September 30, 1998 between the Company
and Cyber-Care, did not equal or exceed $.45 per diluted share for the six
months ended June 30, 1999. The Company used $272,500 of Cyber-Care preferred
stock that it owned as partial consideration in the transaction. Additionally,
the Company has agreed to repurchase $333,333 of its common stock owned by
Cyber-Care at $5.73 per share if diluted earnings per share do not equal or
exceed $0.55 per share for the six months ending December 31, 1999.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
This Quarterly Report on Form 10-QSB contains forward-looking
statements. For this purpose, any statements contained in it that are not
statements of historical fact should be regarded as forward-looking statements.
For example, the words "believes," "anticipates," "plans," and "expects" are
intended to identify forward-looking statements. There are a number of important
factors that could cause the Company's actual results to differ materially from
those indicated by such forward-looking statements. These factors include those
shown in the company's 1998 Annual Report on Form 10-KSB under the caption
"Certain Factors That May Affect Future Results."
The following discussion of the Company's results of operations and
financial condition should be read together with the Company's condensed
consolidated unaudited Financial Statements contained in Part I, Item 1 and the
related Notes in this Form 10-QSB, and the company's audited Financial
Statements and the related Notes contained in the Company's audited Financial
Statements contained in the Company's 1998 Annual Report on Form 10-KSB.
General
- -------
Westmark Mortgage Corporation, the Company's wholly-owned subsidiary,
is a mortgage banking company engaged in the business of funding, purchasing and
selling mortgage loans secured primarily by one-to-four family residences. The
Company operates in 34 states and has operating offices in Boca Raton, Florida;
Santa Ana, California; Chicago, Illinois area; and, Atlanta, Georgia area. In
1999, the Company began a "Retail Operation" which has three South Florida
locations and deals directly with borrowers, to compliment its "Wholesale
Operation", which deals through mortgage brokers. The Company primarily
generates income from (i) gains recognized from premiums on loans sold to
institutional purchasers, (ii) investment income earned on loans held for sale,
and (iii) origination fees and related revenue received as part of loan
closings. Gain on sale of loans, which represents the sales price in excess of
loan acquisition costs from whole loan sales, constituted 72% and 79% of total
revenues for the nine months ended September 30, 1999 and 1998, respectively,
and 70% and 81% of total revenues for the three months ended September 30, 1999
and 1998, respectively. Investment income earned on loans held for sale
constituted 16% and 11% of total revenues for the nine months ended September
30, 1999 and 1998, respectively, and 18% and 12% of total revenues for the three
months ended September 30, 1999 and 1998, respectively. Loan origination fees
and related revenue represented 10% and 9% of total revenues for the nine months
ended September 30, 1999 and 1998, respectively, and 10% and 6% of total
revenues for the three months ended September 30, 1999 and 1998, respectively.
The Company sells most of the loans it funds, generally within 30 to 60
days of origination. The loans are sold through purchase agreements with
Household Financial Services, Conseco Finance Servicing Corporation, Bay
Financial, Associates Home Equity Services, Inc., BancOne Financial Services,
Inc., GMAC/Residential Funding Corporation, and various other non-conforming
mortgage conduits. These agreements are for specific terms or are open ended,
and require the loans to satisfy the underwriting criteria described therein.
The Company sold loans totaling $302.2 million and $190.5 million during the
nine months ended September 30, 1999 and 1998, respectively, and $115.6 million
and $80.8 million during the three months ended September 30, 1999 and 1998,
respectively. The Company does not retain the servicing rights for any of the
loans it sells, and sells all loans primarily in whole loan sales. The gain on
sale of loans was $11,811,460 and $9,803,193 for the nine months ended September
30, 1999 and 1998, respectively; and $4,462,014 and $4,209,187 for the three
months ended September 30, 1999 and 1998, respectively.
7
Loans held for sale were comprised of all sub-prime loans at September
30, 1999 and 1998. At the time the Company commits to fund a loan, the interest
rate is locked for the individual loan transaction. Until the Company obtains a
commitment to sell the loan to an investor, the Company is subject to
interest-rate fluctuations.
Investment income earned on loans held for sale is derived primarily
from interest payments on loans in inventory. Loans generally carry a note rate
in excess of the Company's borrowing cost. This results in a positive revenue
differential between cost to borrow (at the time the loan funds) and the loan
sale. Management's strategy is to sell those loans in whole loan sales and in
bulk sales as quickly as practicable in order to optimize cash flow from the
sale of the loans. In addition, the Company realizes revenue from loan
origination fees and certain loan discount fees.
The Company assigns credit grades to its sub-prime loans during the underwriting
process. These grades range from "A+" to "D". At September 30, 1999, the credit
grades assigned to mortgage loans held for sale was approximately 75% "A+", "A"
and "A-", 16% "B", 8% "C", and 1% "D". About 55% of these loans were adjustable
rate mortgages and 45% were fixed rate. The weighted average interest rate of
these loans was approximately 10.7%.
Underwriting
- ------------
All home equity loans are underwritten to the Company's mortgage
underwriting guidelines. The underwriting process is intended to assess both the
prospective borrower's ability to repay the loan and the adequacy of the real
property security as collateral for the loan. In the origination process,
typically, the loan application is taken by the approved broker/correspondent
using the basic application (FNMA Form 1003) and the credit report ordered by
the originating office. The Form 1003 and credit report are forwarded via Toll
Free fax to the Boca Raton, Florida, Santa Ana, California, Schaumberg, Illinois
or Kennesaw, Georgia offices. Westmark underwriters grade the credit report and
determine acceptability within program guidelines and a preliminary
approval/pre-qualification is faxed back to the originator. Approvals are
usually generated within a 24-hour period and closing occurs within days.
Account executives rely on pagers, fax machines, cellular phones and overnight
delivery to be in contact with corporate headquarters at all times. The
underwriting standards involve the following:
o the borrower's ability to repay is analyzed by verifying income
via traditional methods, i.e., self-employed borrowers are asked
to supply copies of Federal Income Tax Returns and waged borrowers
supply copies of W-2 forms and paystubs. In instances where
"stated income" is used, lower loan to value ratios are offered,
and verification of the source of the income is obtained (copies
of business license, phone verification of employment, and/or bank
statements);
o loan to value ratios are adjusted to reflect the condition of the
borrower's recent credit history. The greater and more recent the
derogatory items are, the more equity the borrower is required to
maintain in the property;
o the property being offered as security for the loan is appraised
by a state licensed appraiser. The appraisal report is carefully
reviewed by Westmark's staff underwriter to ensure that the loan
is sufficiently secured. If there is a question about the quality
of the appraisal, a review from another appraiser is obtained.
Larger loan sizes require two full independent appraisal reports;
8
o on purchase transactions, the borrower's cash down payment is
verified as to amount and source to ensure that they have
legitimate equity in the property and on refinances, the length of
time of ownership is verified, using FNMA guidelines in this area;
o and, on a case-by-case basis, after review and approval by the
Company's underwriters, home equity loans may be made which vary
from the underwriting guidelines if approved by a senior
underwriter or by an executive officer of the Company.
In summary, Westmark carefully analyzes each borrower's income, credit
and equity. The loan to value ratio reflects the risk associated with each
borrower's situation. These steps are taken to ensure each loan's quality and
performance.
See Condensed Notes to Consolidated Financial Statements of the Company
(included in Item 1) for further discussion of accounting policies and other
significant items.
Results of Operations
- ---------------------
Nine months and three months ended September 30, 1999 compared to nine
months and three months ended September 30, 1998:
Total revenues increased 33% and 22% to $16,435,681 and $6,333,386 in
the nine months and three months ended September 30, 1999 compared with
$12,357,733 and $5,187,108 in the nine months and three months ended September
30, 1998. This increase was primarily due to the Company's increased ability to
acquire and sell non-conforming mortgages, offset by a reduction in the premium
spread received as described below.
Gain on sale of loans, all of which was derived from premiums on whole
loan sales, increased 20% and 6% to $11,811,460 and $4,462,014 compared with
$9,803,193 and $4,209,187 for the nine months and three months ended September
30, 1999 and 1998, respectively. The volume of non-conforming loans sold was
approximately $302.2 and $190.5 million compared with $115.6 and $80.8 million
for the nine months and three months ended September 30, 1999 and 1998,
respectively. This is an increase of 58% and 43% for the nine and three months
ended September 30, 1999 as compared to the nine and three months ended
September 30, 1998, respectively. This increase was the result of increased
sales volume due to the implementation of management's strategy to increase the
volume of originating and selling loans, offset by a reduction in the premium
spread received, discussed below.
In October and November 1998 industry wide margins on the sale of loans
and the rate of growth in whole loan sales were both reduced. This resulted in
an industry wide reduction of premiums on whole loan sales of approximately 30%
due to many investors deciding to invest in more liquid securities with higher
yields. At the same time several investors who historically had acquired
mortgage loans for resale in credit enhanced and non-enhanced packages went out
of business or lost their funding sources. Since this October 1998 correction,
margins have begun to stabilize and the Company has been able to continue
growing. This is due primarily to certain investors the Company has developed
long-term relationships with, who purchase a significant majority of the
Company's mortgages, buying mortgages to hold for investment rather than resale.
As a result of this investment approach the investors are less concerned with
liquidity and are again purchasing the Company's loans in the same or greater
quantities as during 1998, although at premium reductions of 35% and 32% for the
nine months and three months ended September 30, 1999 compared to 1998.
Loan origination fees increased 44% and 121% to $1,686,862 and $649,942
compared to $1,173,728 and $294,103 for the nine months and three months ended
September 30, 1999 and 1998, respectively. This increase is primarily due to
increased loan volume, management adjusting the wholesale loan origination
pricing structure to provide for an increase in per loan origination fees, and a
higher fee structure on retail loans.
9
Investment income, comprised primarily of interest earned on loans held
for sale, increased 99% and 75% to $2,594,706 and $1,123,754 compared to
$1,306,142 and $642,646 for the nine and three months ended September 30, 1999
and 1998, respectively. This increase is due primarily to more loan production
in 1999 as compared to 1998.
Total operating expenses increased 49% and 39% to $16,381,793 and
$6,551,988 compared to $11,007,649 and $4,714,699 for the nine months and three
months ended September 30, 1999 and 1998, respectively. This increase is
primarily due to (i) an increase in direct loan fees, (ii) an increase in
interest expense and, (iii) an increase in general and administrative expenses.
Direct loan fee expenses increased 42% and 26% to $3,369,171 and
$1,700,673 compared to $2,369,259 and $1,345,083 for the nine months and three
months ended September 30, 1999 and 1998, respectively, due primarily to the
increase in loan volume, higher fees paid on increased correspondent loan
purchases and increased loan processing fees charged by the Company's warehouse
lenders.
Interest expense increased 54% and 64% to $2,090,421 and $994,489
compared to $1,356,381 and $606,288 for the nine months and three months ended
September 30, 1999 and 1998, respectively, due primarily to the increased volume
of whole loan originations and correspondent loan purchases.
General and administrative expense increased 52% and 41% to $10,836,969
and $3,834,728 compared to $7,152,798 and $2,719,752 for the nine months and
three months ended September 30, 1999 and 1998, respectively, due primarily to
increased personnel costs necessary to implement management's strategy to
increase loan volumes and provide additional staff for future growth. Personnel
cost increased 42% to $7,037,540 for the nine months ended September 30, 1999
compared to $4,960,900 for the nine months ended September 30, 1998. The balance
of the increase in general and administrative expense was primarily attributable
to increases in rent, office supplies, telephones, and overnight deliveries.
Depreciation and amortization expenses decreased to $85,232 and $22,098
compared to $129,211 and $43,576 for the nine and three months ended September
30, 1999 and 1998, respectively, primarily due to reduced amortization expense
as a result of fully amortizing in 1998 assets acquired, offset by increased
depreciation on purchases of computer hardware and software, and leasehold
improvements.
The Company had a net loss of $96,112 and $368,602 compared to a net
income of $1,455,084 and $507,409 for the nine months and three months ended
September 30, 1999 and 1998, respectively. The decrease in net income in 1999
compared to 1998 was the result of the following:
o increased warehouse interest expense as a result of prime increasing
and the retirement of LIBOR based lines;
o staffing up for expected fourth quarter levels of production;
o reduced premium spread received; and
o the net realizable value writedown of "Investment in Real Estate" by
$150,000 to reflect the Company's current evaluation of facts and
circumstances.
Liquidity and Capital Resources
- -------------------------------
The Company uses its cash flow from whole loan sales, loan origination
fees, net interest income and borrowings under its warehouse lines of credit to
meet its working capital needs. The Company's cash requirements include the
funding of loan originations, purchases, payment of interest expenses,
operations expenses, taxes and capital expenditures.
10
On September 30, 1999, total stockholders equity was $3,016,751,
working capital was $597,798 and the net loss was $96,112 for the nine months
ended September 30, 1999. Adequate credit facilities and other sources of
funding, including the ability of the Company to sell loans, are essential to
the continuation of the Company's ability to originate and purchase loans. The
Company borrows funds on a short- term basis to support the accumulation of
loans prior to sale. These short-term borrowings are made under warehouse lines
of credit with various lenders as described in note 2 to the condensed
consolidated financial statements. Pursuant to the warehouse lines of credit,
the Company has available total secured revolving credit lines of $80 million to
finance the Company's origination or purchase of loans, pending sale to
investors. The warehouse lines of credit are collateralized by the assignment
and pledge of eligible mortgage loans. The various warehouse lines of credit
bear interest at annual rates ranging from prime plus 1 to prime plus 2%,
payable at the time of purchase by the permanent investor. The warehouse lines
of credit provide for a transaction charge from $100 per loan to as low as $25
per loan and require the Company to possess a minimum net worth of $2.5 million,
a current ratio of 1.1 and a compensating cash balance on deposit in the amount
of $5,000 under the more restrictive covenants. On September 30, 1999, the
balance outstanding, pursuant to the warehouse lines of credit, totaled
$57,177,904. In April 1999, the Company obtained a working capital line of
credit for $150,000 with Northern Trust Bank, of which $100,000 has been used
and is outstanding as of September 30, 1999.
Pursuant to an exchange agreement dated September 30, 1998 between the
Company and Medical Industries of America, Inc., now known as Cyber-Care, Inc.,
the Company has agreed to repurchase $333,333 of its common stock owned by
Cyber-Care at $5.73 per share if diluted earnings per share do not equal or
exceed $0.55 per share for the six months ending December 31, 1999. The Company
anticipates that it will be required to make this repurchase based on its
earnings for the first nine months of 1999. The Company expects to have
sufficient funds available from operations to make the repurchase payment.
Year 2000 Compliance
- --------------------
Computer-based systems that utilize two digits rather than four digits
to define the applicable year may fail to properly recognize date sensitive
information when the year changes to 2000. The Company has completed a
comprehensive review of its computer-based systems to determine if they will be
affected by resulting Year 2000 related compliance issues, that is whether those
systems have Year 2000 related "computer bugs." This review has revealed no
material Year 2000 related compliance issues, primarily because the Company has
developed or purchased most of its computer hardware and software systems within
the last four years. Therefore, it does not expect to be affected by Year 2000
issues because very few of the Company's computer-based systems were installed
before the Y2K problem was recognized. We do not expect to incur Year 2000
compliance related costs that would be material to us. The Company is asking for
confirmation from outside vendors, financial institutions and others that they
are Year 2000 compliant or that they are developing and implementing plans to
become Year 2000 compliant. However, there is no assurance that these outside
vendors, financial institutions and others will timely resolve their own Year
2000 compliance issues or that any such failure would not have an adverse effect
on the Company. The Company has completed contingency plans to assure the
continuation of its operations if these outside vendors, financial institutions
or others fail to timely resolve their own Year 2000 compliance issues. The
Company believes it is devoting the necessary resources to timely address all
Year 2000 compliance issues over which we have control.
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-------------------------
The Company was named as a respondent in Ted BRISTOW and Gary PHILLIPPE
VS. GREEN WORLD TECHNOLOGIES, INC., MEDICAL INDUSTRIES OF AMERICA, INC., and
WESTMARK GROUP HOLDINGS, INC., Case #74-160-00629-99, filed with the American
Arbitration Association in California on May 10, 1999. The claimants were
employed by Green World Technologies, Inc., a former affiliate of the Company.
The claimants were terminated by Green World Technologies, Inc. in August of
1997. The claimants allege that they are entitled to severance compensation from
the Company as a result of their employment termination. The Company filed a
complaint in the Circuit Court of Palm Beach County, Florida on June 24, 1999,
Case #CL 99-6201 AO, seeking a judicial determination that the Company is not
bound to arbitrate this matter. The Circuit Court has denied BRISTOW's and
PHILLIPPE's motion to dismiss them from the Circuit Court action for lack of
jurisdiction. The parties have since stipulated to a permanent stay of the
arbitration proceedings against the Company. In a separate action, the United
States District Court for the Eastern District of California has denied
PHILLIPPE's and BRISTOW's motion to compel the Company to submit to arbitration
and granted the Company's motion to dismiss the Company for lack of personal
jurisdiction.
The Company does not believe that any of these pending legal
proceedings and those reported in its 1998 Annual Report on Form 10-KSB and in
its Quarterly Reports on Form 10-QSB for the periods ending March 31, 1999 and
June 30, 1999, individually or in the aggregate, will materially impact the
company's financial condition or results of operations. From time to time, the
company is a party to routine litigation incidental to its business. Management
does not believe that the resolution of any or all of such routine litigation is
likely to have a material adverse effect on the Company's financial condition or
results of operations.
11
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-------------------------------------------------
In November 1999, the Company completed a private placement in which it
sold a total of 367,147 shares of Series H Preferred Stock and warrants to
purchase 367,147 shares of the Company's common stock. These figures include the
263,977 shares of preferred stock and warrants to purchase 263,977 shares of
common stock which were sold in the initial closing of the private placement in
June 1999, as previously reported in the Company's quarterly report for the
period ending June 30, 1999 on Form 10-QSB. Each share of preferred stock has a
liquidation preference of $3.15 per share, is convertible into one share of
common stock, and is entitled to a cumulative dividend of 10% per year. Each
warrant is exercisable at $3.75 per share into one share of common stock at the
election of the holder. The warrants expire on May 31, 2004. The securities were
sold to "accredited investors" as that term is defined in Regulation D of the
Securities Act of 1933. After payment of $115,650 in commissions, placement
agent expenses of $28,913 and legal fees of $37,502 the Company received net
proceeds of approximately $974,436 from the private placement. The net proceeds
will be used for working capital and general corporate purposes. The exemption
the Company relied upon for the above transactions is Section 4(2) of the
Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
---------------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
-------------------------
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
----------------------------------------
(a) EXHIBITS
Exhibit Description
- ------- -----------
4.1 Series H Preferred Stock Designation.
10.1 Warehouse Loan and Security Agreement between the Company's
wholly-owned subsidiary, Westmark Mortgage Corporation and The
Provident Bank dated July 7, 1999.
10.2 Broker Origination Agreement between the Company's
wholly-owned subsidiary, Westmark Mortgage Corporation and WMC
Mortgage Corp. dated April 27, 1999.
10.3 Master Agreement for Purchase and Sale of Mortgage Loans
between the Company's wholly-owned subsidiary, Westmark
Mortgage Corporation and EquiCredit Corporation of America
dated June 9, 1999.
10.4 Addendum to the Master Agreement for Purchase and Sale of
Mortgage Loans between the Company's wholly-owned subsidiary,
Westmark Mortgage Corporation and EquiCredit Corporation of
America dated June 25, 1999.
10.5 Broker Agreement between the Company's wholly-owned
subsidiary, Westmark Mortgage Corporation and Chase Manhattan
Mortgage Corporation dated July 21, 1999.
10.6 Master Commitment between the Company's wholly-owned
subsidiary, Westmark Mortgage Corporation and Merrill Lynch
Credit Corporation dated April 14, 1999.
12
10.7 Master Loan Purchase and Sale Agreement between the Company's
wholly-owned subsidiary, Westmark Mortgage Corporation and
Merrill Lynch Credit Corporation dated April 14, 1999.
10.8 Master Agreement for Sale and Purchase of Mortgage Loans
between the Company's wholly-owned subsidiary, Westmark
Mortgage Corporation and BankBoston, N.A. dated August 31,
1999.
10.9 Mortgage Broker Agreement between the Company's wholly-owned
subsidiary, Westmark Mortgage Corporation and First Franklin
Financial Corporation dated March 23, 1999.
10.10 Master Agreement for Sale and Purchase of Mortgages between
the Company's wholly-owned subsidiary, Westmark Mortgage
Corporation and Bay Financial Savings Bank, F.S.B. dated
February 12, 1999.
10.11 Amendment to Master Agreement for Sale and Purchase of
Mortgages between the Company's wholly-owned subsidiary,
Westmark Mortgage Corporation and Bay Financial Savings Bank,
F.S.B dated February 12, 1999.
27.1 Financial Data Schedule (for SEC use only).
(b) REPORTS ON FORM 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WESTMARK GROUP HOLDINGS, INC.
By: /c/ Irving H. Bowen
-----------------------
Irving H. Bowen, Executive Vice President, Treasurer
& Chief Financial Officer, Director (Principal Accounting
Officer & Duly Authorized Director & Officer of the Registrant)
By: /c/ Mark D. Schaftlein
--------------------------
Mark D. Schaftlein, President & Chief Executive
Officer, Director (Duly Authorized Director & Officer
of the Registrant)
Dated: November 12, 1999
13