UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-KSB
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
| | TRANSITION REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 33-98178
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MATZEL & MUMFORD MORTGAGE FUNDING, INC.
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(Exact name of registrant as specified in its charter)
New Jersey 22-3382016
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 Village Court, Hazlet, New Jersey 07730
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 888-1055
Securities registered pursuant to Section 12(b) of the Act:
Intermediate Term Secured Notes
Securities registered pursuant to Section 12(g) of the Act:
None
Check whether the issuer has 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, and has been subject to such filing requirements for at least the past
90 days. Yes |X| No |_|
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. |X|
Issuer's revenues for its most recent fiscal year: $619,573
No voting stock of the registrant is held by non-affiliates.
Shares outstanding as of March 26, 1999: 500
Exhibit index appears on page _____
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INDEX
Item
Number Page
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PART I
Item 1. Description of Business...............................................1
Item 2. Description of Properties............................................13
Item 3. Legal Proceedings....................................................17
Item 4. Submission of Matters to a Vote of Security Holders..................17
PART II
Item 5. Market Price of the Company's Common Stock and
Related Stockholder Matters..........................................18
Item 6. Management's Discussion & Analysis of Financial
Condition and Plan of Operations.....................................26
Item 7. Financial Statements and Supplementary Data..........................29
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures............................................30
PART III
Item 9. Director, Executive Officers and Control Persons,
Compliance with Section 16(a) of the Exchange Act....................31
Item 10. Executive Compensation...............................................32
Item 11. Security Ownership of Certain Beneficial Owners
and Management.......................................................32
Item 12. Certain Relationships and Related Transactions.......................32
PART IV
Item 13. Exhibits and Reports on Form 8-K.....................................34
Signatures....................................................................35
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CERTAIN DEFINITIONS
Certain defined terms, as well as certain phrases that are commonly used in
the homebuilding industry, appear frequently in this Report. For the readers
convenience, several of these terms are explained below.
FUNDING COMPANY - Matzel & Mumford Mortgage Funding, Inc., the issuer of
the Notes.
MMO - The Matzel & Mumford Organization, Inc., a real estate development
and management company that is affiliated with the Funding Company.
MATZEL & MUMFORD REAL ESTATE DEVELOPMENT COMPANY - an entity controlled by
the principals of MMO which is engaged in the business, either directly or
indirectly, of developing single family housing communities.
M&M PROJECT ENTITY or PROJECT ENTITY - a Matzel & Mumford real estate
development company to which the Funding Company makes a Loan.
PROJECT - a single-family housing community that an M&M Project Entity will
develop with the proceeds of a Loan from the Funding Company.
LOAN - a loan that the Funding Company makes to an M&M Project Entity to
finance a Project or a particular phase of a Project.
BUILDING LOT - the site on which an individual home will be constructed.
INFRASTRUCTURE IMPROVEMENTS - improvements to land, such as roads, sewers
and utilities, but not the improvement of individual building lots by the
construction of homes or the addition of landscaping, driveways and the like.
TRUSTEE - First Union National Bank, formerly First Fidelity Bank, N.A., as
trustee for the holders of the Notes.
NOTES - The Intermediate Term Secured Notes issued by the Funding Company.
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PART I
ITEM 1(A) DESCRIPTION OF BUSINESS--THE FUNDING COMPANY GENERAL
Matzel & Mumford Mortgage Funding, Inc. (the "Funding Company") is a
finance company that was incorporated in New Jersey on July 11, 1995 for the
purpose of funding land acquisition, infrastructure improvements, and the
construction of homes in single-family residential housing communities by making
Loans.
In 1996, the Funding Company made a public offering of up to $6,000,000 of
its Intermediate Term Secured Notes (the "Notes"). On May 16, 1996, the Funding
Company issued and sold $3,750,000 principal amount of Notes.
The Funding Company was formed to make secured Loans to M&M Project
Entities for the development of Projects. See "Properties--Projects." The
Funding Company was conceived by the principals of MMO to provide a reliable and
flexible source of financing for Matzel & Mumford real estate development
companies. Lenders such as banks generally do not make loans for land
acquisition, development or construction without requiring corresponding equity
contributions equal to at least 25% of development costs. Prior to the
establishment of the Funding Company and the offering of the Notes, the
limitations imposed by first mortgage lenders had required MMO's principals to
expend time and energy, which could have otherwise been devoted to development
activities, to attract and maintain equity investors or subordinated lenders.
The effective cost of equity capital or subordinated debt generally is more than
the interest rate that the Funding Company pays on the Notes.
As of February 28, 1999, the Funding Company has an aggregate of $3,547,872
of Loans outstanding. See "Properties--Projects." The Funding Company also had
$452,128 deposited in a cash collateral account with First Union National Bank,
as trustee for the holders of the Notes.
LENDING PRACTICES
The Funding Company makes Loans for varying purposes, depending upon the
stage to which a financed Project has been developed. MMO views the development
and construction of a housing community as a three-phase process. First, MMO (or
a Matzel & Mumford real estate development company) identifies and negotiates
the acquisition of land, obtains construction approvals, and then acquires the
land. Second, MMO (or a Matzel & Mumford real estate development company) makes
infrastructure improvements, and commences sales and marketing efforts,
including the construction of one or more model homes. Third, MMO (or a Matzel &
Mumford real estate development company) allocates building lots to individual
homebuyers, collects downpayments, constructs homes to the buyers'
specifications, and improves the individual building lots with driveways,
landscaping and the like, and may construct one or more "spec" houses, which are
homes that are not yet subject to a purchase
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contract. Depending on the size of a Project, the second and third phases of
work may overlap; an M&M Project Entity is likely to be entering into contracts
for particular building lots while it is engaged in making infrastructure
improvements. When the Funding Company makes Loans for Projects in the stage of
home construction and related activities, these "later-stage" Loans generally
are also used to refinance any outstanding debt that is secured by the
particular building lots that are to be developed.
An M&M Project Entity must satisfy several preconditions to obtain advances
on a Loan. The Funding Company does not finance land acquisition without a land
appraisal, nor does the Funding Company make a land acquisition Loan until the
M&M Project Entity has secured preliminary site plan and subdivision approval,
and management of the Funding Company believes that the M&M Project Entity can
secure final approvals at a reasonable cost and within a reasonable period of
time. In addition, the Funding Company does not finance a Project until it
receives a market and financial feasibility study (or an updated study in the
case of a later-stage Loan) that considers the competition, comparable sales
absorption in the market, cost to complete the Project, and potential
profitability of the development, and an environmental assessment (or an updated
assessment in the case of a later-stage Loan) prepared by an independent
consultant. The Funding Company believes that these requirements reduce the risk
that a given Project will not prove to be viable, although no assurance can be
given that each Project will be profitable or that all costs will be fully
recovered through the sale of houses. See "Summary of Loan Agreement" for a
discussion of the mortgage liens received by the Funding Company.
SELECTION OF PROPERTIES
The Funding Company evaluates many factors in determining whether to make a
Loan for a particular housing community. These factors can be summarized as
follows:
o Location. The Funding Company favors projects in communities with good
public school systems, accessible amenities, available infrastructure,
and property taxes that are considered reasonable for MMO's target
homebuyers.
o Zoning of the subject parcel and the adjacent parcels. The Funding
Company favors property that adjoins property that is zoned for
residential use.
o Market analysis. The Funding Company requires an M&M Project Entity to
provide a detailed market survey that demonstrates the potential of a
new community at projected home prices. In the case of a later stage
Loan, the Funding Company accepts an update of a market survey
previously prepared for the initial lender.
o Cost of land. For a land acquisition Loan, the Funding Company
considers whether the acquisition cost is reasonable in light of other
development costs and projected selling prices for the homes to be
developed.
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o Site development costs. The Funding Company considers estimates of
the per lot cost of preparing for construction, including utilities,
roads and drainage. The Funding Company also considers the necessity
and cost of off-site improvements, as well as related monetary
contributions or fees, that a municipality may require to compensate
for the impact of a new housing community. Required off-site
improvements may include improvement or expansion of existing roads,
intersections, or sewer and water systems, and the construction of
parks and playgrounds.
o Density, or the number of houses per acre. The Funding Company favors
moderate density sites that support upscale houses without excessive
lot improvement costs.
o Total lot count. The Funding Company generally does not invest in
projects that involve fewer than fifteen building lots because
management believes that fixed costs (such as marketing and
organizational expenses) make it difficult for communities of that
size to be profitable. Conversely, for a larger community, the
project may be divided into sections so that an M&M Project Entity
can develop and sell the homes on one segment without the need to
first make infrastructure improvements to the entire parcel.
o Utilities. The Funding Company favors parcels with available public
sewers and water.
o Environmental issues. The Funding Company does not favor financing
properties contiguous to Superfund sites and sites that are adversely
affected by electrical transmission lines, train routes or waste
control facilities.
o Proximity of other MMO managed projects. Management of the Funding
Company believes that the presence of an affiliated community may
enable an M&M Project Entity to reduce its expenses by sharing
certain services, to enjoy the benefits of cross-selling, and to
learn from an affiliate that has already gained experience in the
relevant market.
SUMMARY OF LOAN AGREEMENT
The Funding Company enters into a loan agreement (a "Loan Agreement") with
an M&M Project Entity once the Funding Company decides to make a Loan for a
proposed Project. The Funding Company does not commit to finance a Project
unless the M&M Project Entity has secured preliminary site plan and subdivision
approval, and management of the Funding Company believes that the M&M Project
Entity can secure final approvals at a reasonable cost and within a reasonable
period of time. Prior to making any advances on a Loan, the Funding Company
requires a land appraisal (in the case of a land acquisition Loan) and current
market and environmental data.
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Unless its obligations are otherwise limited in the documents that govern a
particular Loan, once the Funding Company enters into a Loan Agreement with an
M&M Project Entity, it is committed to make advances for land acquisition and
all covered expenses related to infrastructure improvements and home
construction as such expenses are incurred, so long as the M&M Project Entity
provides the requisite supporting documentation. Land acquisition costs must be
supported by an appraisal, but appraisals are only estimates of value and there
is no assurance that an appraisal accurately reflects realizable value. M&M
Project Entities are not required to inject equity capital into their respective
Projects. Instead, Loans are available to finance all approved expenses arising
in connection with development of a Project.
The Loans are subject to quarterly interest payments at a rate of at least
16% per annum of the outstanding principal. In addition, each M&M Project Entity
pays the Funding Company an annual administrative fee to cover ongoing expenses
and contingencies arising in connection with the Loans, such as auditing, legal
and trust services. Loans may be paid on a revolving basis as M&M Project
Entities sell individual homes, but the full amount of a Loan is not scheduled
to mature until the projected completion date for the applicable Project (i.e.,
the date that all of the homes will be delivered and closed). However, to reduce
the risk that Loans will not mature until after the Notes come due, the Funding
Company does not anticipate making Loans for land acquisition or initial
infrastructure improvements after the fifth anniversary of the date of issuance
of the Notes.
Each M&M Project Entity that acquires a Loan is required to execute a
mortgage in favor of the Funding Company which grants to the Funding Company a
lien on the property to be acquired or developed. If the Funding Company makes a
Loan for infrastructure improvements or home construction, but did not make the
initial land acquisition loan, the borrowing M&M Project Entity may be required
to use a portion of the proceeds of its Loan to pay off any prior lenders so the
Funding Company's mortgage is a first priority. Alternatively, the Funding
Company may accept second liens to secure Loans made with up to 25% of the
proceeds of the Notes.
When the Funding Company has a mortgage on land within a financed Project,
the applicable M&M Project Entity is required to approach the Funding Company
for an incremental release of its lien when that M&M Project Entity wishes to
sell a particular building lot within that mortgaged land to a homebuyer.
Prepayments in connection with the release of individual building lots are
ratable, subject to a 5% additional prepayment. To offer a simplified example,
if the Funding Company were to make a $1,000,000 Loan for a Project involving 21
building lots, the M&M Project Entity would be required to prepay $50,000 in
principal ($1,000,000, divided by 21 building lots, plus a 5% additional
prepayment) to obtain the release of a single building lot from the Funding
Company's lien. Because the Funding Company has incorporated this additional
prepayment into its "release" price, the value of the Funding Company's
collateral relative to the outstanding amount of the applicable Loan should
increase as homes are sold. In the foregoing example, after 19 homes are sold,
the Funding Company will hold a mortgage on the two remaining building lots when
the outstanding amount of the Loan is just slightly more than the selling price
of one house. For
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purposes of comparison, a bank that makes land acquisition and development loans
may also permit its borrowers to obtain incremental releases of individual
building lots by making partial prepayments, but generally will require a 10-20%
additional prepayment.
M&M Project Entities are subject to certain restrictions while their Loans
from the Funding Company are outstanding. For example, they may not pay
dividends or make other distributions to or for the benefit of their equity
investors unless they are current on all of their payment and other obligations
to the Funding Company in connection with Loans. They also may not make loans
to, or guarantee the obligations of, any other person or entity while indebted
to the Funding Company.
Finally, they may not assume any other first mortgage debt while a first
mortgage Loan from the Funding Company is outstanding. The Funding Company does
not restrict the ability of the M&M Project Entities to acquire equity financing
and secured debt that is lower in priority than the Funding Company's liens.
COVERED EXPENSES
The Loans are available to satisfy all expenses relating to the development
of a Project. These expenses may include:
Land acquisition, such as (i) purchase price, (ii) costs of closing title,
(iii) subdivision approval expenses, including professional engineering, legal
and market analysis services, (iv) commissions, and (v) rollback taxes.
Site development, such as (i) earthwork, (ii) utilities, (iii) curbs and
sidewalks, (iv) paving, (v) landscaping, (vi) engineering, (vii) off-site
contributions or impact fees, and (viii) inspections, fees and permits.
Hard costs, such as subcontracted materials and services.
Options, such as subcontracted materials and services for upgrades to sold
homes.
Soft costs, such as (i) insurance, (ii) legal fees, (iii) realty transfer
fees, (iv) architectural services, (v) homeowners warranty policy, and (vi)
other warranty expenses.
Construction overhead, such as (i) field supervision and labor, and (ii)
construction office and indirect expense.
Selling and marketing overhead, such as (i) in-house sales office
personnel, (ii) outside commissions, (iii) sales office and indirect expenses,
(iv) furnishing, decoration and maintenance of model homes, and (v) advertising.
Financing, such as (i) interest expense (including interest on the Loans),
and (ii) appraisal costs.
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General and administrative fees for general office management and overhead.
SERVICING
The Funding Company has entered into a Loan Servicing Agreement with MMO
pursuant to which MMO services all of the Loans. Under the Loan Servicing
Agreement, MMO receives a fee equal to one-half of one percent (0.5%) per annum
of the outstanding principal amount of the serviced Loans, payable at the end of
each quarter. In exchange for the servicing fee, MMO collects payments in
respect of the Loans, transfers collected funds to the Funding Company or to the
Trustee, as appropriate, and institutes foreclosure proceedings following the
occurrence of certain defaults under a Loan Agreement. MMO is not entitled to
collect the servicing fee attributable to any Loan that is in default and
subject to foreclosure unless and until such default is cured or the principal
amount of the Loan is repaid in full, together with all accrued interest.
In its capacity as servicer of the Loans, MMO must undertake commercially
reasonable efforts to collect all payments owed to the Funding Company in
respect of outstanding Loans and to enforce compliance with all obligations of
the M&M Project Entities under their respective Loan Agreements and Mortgages.
MMO will foreclose upon property securing a Loan that is in default only when,
in MMO's business judgment, no satisfactory arrangements can be made that will
enable the defaulting M&M Project Entity to cure its outstanding defaults while
protecting the Funding Company's rights and interests. MMO has the authority to
terminate foreclosure proceedings if all outstanding defaults have been cured.
The Funding Company must reimburse MMO for its out-of-pocket costs incurred in
connection with the collection of Loans after default only if and to the extent
that the Funding Company collects an amount in excess of the principal of and
accrued interest on a Loan.
MARKET FACTORS
The Funding Company is a dedicated finance company that serves only its
affiliates. Accordingly, the Funding Company's success is tied to the success of
Matzel & Mumford real estate development companies. Because of the affiliation
between the Funding Company and its borrowers, the Funding Company effectively
has no competition in its market niche.
REGULATION
The Funding Company's lending activities are not subject to significant
government regulation. However, the activities of the M&M Project Entities are
extensively governed by land use and other government laws and regulations.
Similarly, the Funding Company's activities do not directly implicate any
environmental laws, but the activities of the M&M Project Entities are subject
to many statutes, ordinances, rules and regulations concerning the protection of
health, safety and the environment.
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EMPLOYEES
The Funding Company has no employees but instead relies on the services of
management and staff employed by MMO. MMO is the employer of record and assumes
all payroll obligations, payroll taxes and employee benefits administration for
such personnel. The Funding Company pays a fee to MMO for its loan
administration services.
MMO had 94 employees as of February 28, 1999, five of which provide
services to the Funding Company. The Funding Company's officers, three of whom
also are officers of MMO and other related entities, devote varying amounts of
their business time and energy specifically to the Funding Company. Bruce Matzel
and Roger Mumford each devote approximately 5% of their time to the affairs of
the Funding Company. Michael Skea devotes approximately 10% of his time to the
affairs of the Funding Company.
ITEM 1(B) DESCRIPTION OF BUSINESS--MATZEL & MUMFORD REAL ESTATE DEVELOPMENT
COMPANIES
GENERAL
After it identifies a Project, MMO assists with the formation of a new
Matzel & Mumford real estate development company to develop that Project. These
new entities constitute the M&M Project Entities to which the Funding Company
makes Loans.
The M&M Project Entities design, build and market single-family detached
housing in middle and high income residential communities. The Funding Company
expects currently that the M&M Project Entities will restrict their activities
to the New Jersey market. The New Jersey market is characterized by a wide
diversity of housing choices and moderate population and job growth, and is home
to many large corporations, such as AT&T, Merck Pharmaceutical, Allied Signal
and Johnson & Johnson. The State of New Jersey ranks in the upper quartile in
total household income in the nation, creating opportunities for the sale of
larger, up-scale new homes which Matzel & Mumford real estate development
companies produce.
MMO currently manages the development of 9 active single-family housing
communities in New Jersey. These projects include approximately 376 homes which
have been delivered and closed, approximately 222 homes which are under binding
contracts of sale, and approximately 152 building lots that are still available.
The outstanding purchase contracts are valued at an aggregate of approximately
$75,000,000. MMO manages all of the Projects that the M&M Project Entities
develop in exchange for management fees and other payments.
MMO has purchase options for parcels of real estate that MMO expects can be
used for future development. Based on subdivision plans that have not yet been
approved, these parcels comprise approximately 1,166 building lots as of
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December 31, 1998. Under current market conditions, MMO anticipates that those
1,166 lots, together with the approximately 152 available lots described above,
will provide approximately four years worth of development work. MMO may assign
to M&M Project Entities its rights under option contracts for particular parcels
for the development of new Projects.
COMMUNITIES
MMO emphasizes careful land planning to help obtain the optimal siting of
each individual house in its communities. It seeks to provide an attractive
neighborhood appearance through the use of winding streets, cul-de-sacs,
underground utilities and, whenever possible, the preservation of existing
mature trees. MMO strives to mix a variety of home models with differing front
elevations to increase the visual interest in its communities. Varying
architectural styles are selected for each community to create a compatible,
pleasing streetscape, and communities have attractive entrances with distinctive
signage and landscaping. The Funding Company believes that the combination of
these design factors enhances long-term values for homebuyers.
HOUSES
MMO continuously monitors and changes its house designs in keeping with
customer tastes and preferences. MMO has developed a reputation in the
marketplace for innovative floor-plans and distinctive architectural
appointments, and strives to distinguish itself through its dedication to
customer satisfaction and quality construction. MMO attracts the upscale
homebuyer with its custom Design Center, where the homebuyer can choose from a
wide array of upgrades and options, including floor coverings, kitchen and
bathroom fixtures and similar products. In addition, MMO can modify its house
designs by, for example, adding rooms and finishing basements.
MMO offers an aggregate of over 40 different house designs in its
communities. It selects five or six models for each new development, and can
vary each model with different roof treatments and exterior finishes. Most
models have open floor-plans where lines of sight run through several rooms.
Models frequently feature nine-foot ceilings on the first floor, and palladian
windows and volume ceilings on the upper floor to create a dramatic sense of
openness, size and depth. Models typically are deeper from the front to the back
of the house than most competing houses in the market, providing opportunities
for hallways and other transition areas between rooms.
Depending on the location and model offered, houses in communities
developed by Matzel & Mumford real estate development companies have base
selling prices that range from the $200,000s to the $500,000s. Custom options
and upgrades can typically add 10% or more to the base selling price of a given
model. The prices at which homes are offered in particular communities have
generally increased from time to time as the number of available building lots
decreases, but there can be no assurance that sales prices will increase in the
future.
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PROJECT OPERATIONS
Matzel & Mumford real estate development companies rely on the services of
MMO's on-site sales associates and construction personnel. MMO charges the
Matzel & Mumford real estate development companies directly for the salary,
commission and benefit costs incurred in connection with such personnel.
Marketing, construction and administrative oversight are performed by other
employees of MMO in MMO's corporate offices in exchange for management fees.
Subcontractors (which typically are not affiliated with MMO) perform all
land development and house construction work in connection with Projects,
generally under fixed-price contracts. MMO or its designated affiliate acts as a
general contractor and purchasing agent. MMO's on-site construction supervisors
coordinate subcontractors' activities and supervise all aspects of construction
work and quality control. MMO generally seeks to motivate construction
supervisors by providing them with incentive compensation arrangements.
MMO maintains insurance covering each Matzel & Mumford real estate
development company to protect against certain risks associated with their
activities. These insurance coverages include, among other things, general
liability, builder's risk, "all-risk" property, workers' compensation and
automobile. Matzel & Mumford real estate development companies repay MMO for
this insurance in part through a direct reimbursement and in part through MMO's
management fees. The Funding Company believes the amounts and extent of MMO's
insurance coverages are adequate.
MMO generally receives the following four types of fees and other payments
from Matzel & Mumford real estate development companies in connection with the
development of housing communities:
(1) Management Fee. This fee covers administrative management services
(other than warranty service) performed and third party expenses incurred on
behalf of a Matzel & Mumford real estate development company. The fee generally
ranges from 3% to 5% of revenues from the closing of homes to third party
buyers. MMO estimates the management fee at the commencement of development
activities and it is generally paid in equal monthly amounts over the projected
home selling period for a community.
(2) Legal Fee. This fee covers legal services performed on behalf of a
Matzel & Mumford real estate development company, such as closing title to
purchased property, negotiating and closing financing, and closing sales of
homes to third party buyers. The fee generally is based on the fair value of
services performed by MMO's legal staff, with a fixed fee (currently,
approximately $1,000) assessed for each third party sale.
(3) Warranty Fee. This fee covers the warranty service administrative
management functions described under "-- Customer Service, Warranties and
Quality Control." The amount of the fee varies from community to community, and
averaged approximately $700 per home in 1998.
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(4) Construction Cost Reimbursement. This payment is direct (dollar for
dollar) compensation for construction and sales expenses (including salaries,
commissions, bonuses and payroll taxes) incurred by MMO, as well as other
out-of-pocket expenses incurred by MMO and properly allocable to particular
Matzel & Mumford real estate development companies. The amount of this payment
varies from community to community.
ENVIRONMENTAL ISSUES
Matzel & Mumford real estate development companies are subject to, and must
plan for compliance with, a number of environmental regulatory programs in
connection with the acquisition of property and the development of communities.
Prior to acquiring any particular property, Matzel & Mumford real estate
development companies require a due diligence period of sufficient length to
permit a thorough investigation of environmental conditions affecting that
property. This investigation includes both an environmental site assessment to
determine whether there are potential environmental liabilities attached to the
acquisition of the property, and an analysis of the environmental issues
involved in developing the property. This latter analysis includes consideration
of the availability and cost of utility service, such as water and sewer, and an
investigation of the physical characteristics of the property, such as wetlands,
steep slopes, flood plains and the like, to determine whether the property can
be developed in accordance with applicable environmental regulations in a manner
consistent with the project's cost guidelines.
In performing an environmental site assessment, Matzel & Mumford real
estate development companies retain qualified professional environmental
consultants to reduce the risk that the condition of the subject property will
expose them to liability under regulatory programs. To date, Matzel & Mumford
real estate development companies have been successful in avoiding the
acquisition of properties which carry such potential liabilities. In one
instance, involving a purchase of property in South River, New Jersey, the
environmental site assessment disclosed the need for a modest amount of
environmental remediation, estimated to cost $15,000. After the closing of the
acquisition, the environmental remediation was completed at a cost of $50,000.
In evaluating the potential acquisition of particular parcels, Matzel &
Mumford real estate development companies consider the application of a number
of environmental statutes which could impose requirements for development
permits. In New Jersey, these statutes include the Freshwater Wetlands
Protection Act, the Flood Hazard Area Control Act, the Water Pollution Control
Act, the Water Quality Management Planning Act, the Coastal Area Facility Review
Act, the Waterfront Development Law and the Wetlands Act of 1970.
During the contractual due diligence period before an acquisition, Matzel &
Mumford real estate development companies evaluate the applicability of
environmental regulatory programs and the estimated cost of related compliance.
For example, a wetlands analysis is undertaken to determine the nature and
extent of the wetlands on
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the property, including the applicable transition area requirements. As another
example, compliance with New Jersey's Flood Hazard Area Control Act requires
Matzel & Mumford real estate development companies to retain qualified
engineering consultants to delineate flood hazard areas affecting proposed
development plans and obtain stream encroachment permits where structures or
fill are required to encroach within these flood hazard areas (for example, the
installation of storm water outfalls adjacent to streams). Obtaining the
necessary stream encroachment permits requires that both engineering and
environmental quality standards are satisfied in the design of a housing
development.
MMO has refined and improved the evaluation and investigation procedure
described above over the years in an effort to minimize the risk that a Matzel &
Mumford real estate development company will incur unexpected environmental
compliance or mitigation costs. MMO discovered approximately five years ago that
its due diligence procedures then in effect were not sufficiently thorough when
a Matzel & Mumford real estate development company acquired property unaware
that it contained wetlands. The seller of that property had misrepresented the
character of the property and had cleared vegetation in order to conceal the
existence of wetlands, and even the most exhaustive of investigative techniques
may have failed to uncover those wetlands. Nevertheless, MMO responded to that
experience by enhancing its environmental due diligence.
The costs typically encountered in designing development plans to comply
with environmental regulations and obtaining the necessary permits range from
$1,000 to $4,000 per approved building lot.
MARKETING SALES
MMO conducts a multi-faceted program to market and sell houses. Each
community that MMO manages has an on-site sales office and one to three models
that demonstrate the floorplans and many features of MMO's products. New
customers are attracted to Matzel & Mumford communities through various media,
including print advertising, direct mail, off-site signage, and local
publications targeted to potential homebuyers. A portion of sales, particularly
in the upper selling price ranges, are also derived from the introduction of
customers to Matzel & Mumford communities by local cooperating realtors.
MMO's sales force, which services all Matzel & Mumford real estate
development companies, consists of licensed real estate salespersons or brokers,
many of whom have been associated with MMO for several years. Sales personnel
maintain considerable knowledge about MMO, its operations and its housing
products, and attend periodic refresher courses in the areas of mortgage
financing, construction techniques and scheduling, marketing, and advertising to
increase their effectiveness. These individuals are compensated with a
combination of salary and commission to optimize stability and motivation.
Model homes in Matzel & Mumford communities are usually fully furnished and
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decorated to accentuate the design and size of the home. Model home features are
selected by evaluating the demographics and lifestyle of the target buyer. Many
of the available options and upgrades are installed in model homes to further
enhance the presentation and increase the sales of such items. A fully furnished
and decorated model may contain, for example, a ceramic tile foyer, chair rails
and crown moldings, built-in cabinetry, home electronics for music and security,
recessed lighting, decorative wall and window treatments, and premium
appliances.
MMO's Design Center in Hazlet, New Jersey promotes the sale of options and
upgrades that homebuyers may observe in the model homes. Design Center
consultants are trained to demonstrate all of the available premium items and to
strengthen the personal relationship that Matzel & Mumford real estate
development companies endeavor to create with each homebuyer. The Funding
Company expects that the Design Center will give the M&M Project Entities an
important competitive advantage in serving homebuyers, particularly in upscale
communities where customers can spend discretionary income on amenities.
The pace at which Matzel & Mumford communities contract for the sale of
homes varies depending on several factors. Sales volume is generally highest
when the communities are first opened (due primarily to the wide choice of
available lots), and then sales activity generally decreases as projects mature.
In addition, the ability to sell houses is dependent, in large part, on the
ability of buyers to obtain mortgage financing. Matzel & Mumford real estate
development companies generally do not finance the purchase of houses in their
communities, but refer customers to sources of mortgage financing or rely on the
customers to access financing individually.
CUSTOMER SERVICE, WARRANTIES AND QUALITY CONTROL
MMO has developed detailed quality and design standards for each home model
that provide strict construction guidelines for on-site staff and
subcontractors. Standards extend to the type and quality of every material used
in the construction process. These standards include detailed measurements,
diagrams and other graphical references.
After a house is constructed, and as part of its ongoing management
responsibilities, MMO's on-site personnel maintain quality control, conduct
house inspections, and provide post-closing warranty service. The proactive and
continuing participation by MMO personnel reduces post-closing repair costs,
fosters MMO's reputation for quality and service, and leads to repeat and
referral business.
Through its warranty department that serves all communities developed by
Matzel & Mumford real estate development companies, MMO provides homebuyers with
a one-year limited warranty as to workmanship, and helps owners secure the
benefits of product warranties for materials used in the construction process
and equipment installed in its houses. In accordance with New Jersey consumer
protection laws, MMO also has a private warranty insurance policy that extends a
limited warranty to New
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Jersey homebuyers for the first ten years of home ownership for major structural
defects and provides limited assurance in the event that MMO is unable to
perform specified warrantable repairs. Finally, the subcontractors who perform
most of the actual construction in communities developed by Matzel & Mumford
real estate development companies provide warranties of workmanship to MMO, the
benefits of which are passed along to homebuyers.
ITEM 2 DESCRIPTION OF PROPERTIES
GENERAL
The Funding Company does not presently own, and does not intend in the
future to acquire, any property. Rather, the Funding Company makes Loans secured
by mortgages on property owned or to be acquired by Matzel & Mumford real estate
development companies.
The Funding Company maintains its principal business office at 100 Village
Court, Hazlet, New Jersey, 07730, occupying space leased by MMO. The Funding
Company pays no rent for the use of MMO's headquarters.
PROJECTS
Set forth below is a description of the Matzel & Mumford real estate
development companies to which, and communities for which, the Funding Company
has made Loans since its inception.
Maplehurst Farm
On March 19, 1997, the Funding Company made a first mortgage loan in the
amount of $600,000 to Matzel & Mumford at Piscataway, L.L.C. ("Piscataway LLC"),
the entity organized to develop, market and build a 126-lot subdivision known as
Maplehurst Farm located in Piscataway, Middlesex County, New Jersey. The Loan
was secured by a first mortgage on three building lots for construction of spec
homes. Part of the Loan proceeds was used to repay a loan made by Amboy National
Bank ("Amboy") to finance the acquisition and improvement of those three
building lots. The Funding Company was fully repaid by Piscataway LLC on the
Loan in 1997.
As of February 28, 1999, the Funding Company does not contemplate making
additional Loans to this Project Entity.
Heather Knolls-East & West
On July 30, 1996, the Funding Company made a first mortgage loan in the
amount of $3,500,000 to Matzel & Mumford at South Brunswick, L.L.C., ("South
Brunswick LLC"), an entity organized to develop, market and build a 40-lot
subdivision known as Heather Knolls East (the "East subdivision"). In 1997, the
Funding Company was fully repaid by South Brunswick LLC on the Loan.
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On November 1, 1996, the Funding Company made a first mortgage loan in the
amount of $1,100,000 to South Brunswick LLC to develop, market and build a
contiguous 51-lot subdivision known as Heather Knolls West (the "West
subdivision"). On November 13, 1997, the Loan was refinanced, pursuant to which
the Funding Company made a new first mortgage Loan to South Brunswick LLC in the
amount of $3,400,000 for land and improvements. In 1997, the Funding Company was
fully repaid by South Brunswick LLC on the Loan.
On June 18, 1998 the Funding Company made a new first mortgage loan to
South Brunswick LLC in the amount of $3,400,000 on twelve building lots in the
East subdivision for the construction of sold homes. Upon receipt of the
financing from the Funding Company, South Brunswick LLC used a portion of the
proceeds to repay Amboy National Bank (first mortgage holder) for its existing
acquisition and improvement funding. The remaining funds were used for the
construction of houses on a percentage of completion method. At the end of 1998,
the Funding Company was fully repaid by South Brunswick LLC on the Loan and the
Funding Company does not contemplate making additional Loans to this Project
Entity.
Seven Oaks
On November 19, 1996, the Funding Company made a second mortgage loan in
the amount of $1,000,000 to Matzel & Mumford at Freehold, LLC ("Freehold LLC"),
the entity organized to develop, market and build a 126-lot subdivision known as
Seven Oaks located in Freehold Township, Monmouth County, New Jersey. In January
1997, the Funding Company was fully repaid by Freehold LLC on the Loan.
On November 15, 1997, the Funding Company made a new second mortgage Loan
to Freehold LLC in the amount of $600,000. As of February 28, 1999, $559,350 of
the Loan was outstanding.
On July 31, 1998, the Funding Company made a first mortgage loan to
Freehold LLC in the amount of $2,390,000 on seven building lots for the
construction of sold homes. Upon receipt of the financing from the Funding
Company, Freehold LLC used a portion of the proceeds to repay Amboy National
Bank (first mortgage holder) for its existing acquisition and improvement
funding and Apple Chase Investors, L.L.C. (second mortgage holder for its
acquisition funding). The remaining funds were used for the construction of
houses on a percentage of completion method. During the fourth quarter of 1998
the loan to the Funding Company was repaid in full.
On August 28, 1998, the Funding Company made a first mortgage loan to
Freehold LLC in the amount of $1,700,000 on five building lots for the
construction of sold homes. Upon receipt of the financing from the Funding
Company, Freehold LLC used a portion of the proceeds to repay Amboy National
Bank (first mortgage holder) for its existing acquisition and improvement
funding. The remaining funds were used for the construction of houses on a
percentage of completion method. As of February 28, 1999, $263,022 remains
outstanding.
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On November 6, 1998, the Funding Company made a first mortgage loan to
Freehold LLC in the amount of $2,620,000 on seven building lots for the
construction of sold homes. Upon receipt of the financing from the Funding
Company, Freehold LLC used a portion of the proceeds to repay Amboy National
Bank (first mortgage holder) for its existing acquisition and improvement
funding. The remaining funds were used for the construction of houses on a
percentage of completion method. As of February 28, 1999, $1,282,000 is
outstanding.
Subsequent to December 31, 1998, the Funding Company made a first mortgage
loan to Freehold LLC in the amount of $800,000 on two building lots for the
construction of sold homes. Upon receipt of the financing from the Funding
Company, Freehold LLC used a portion of the proceeds to repay Amboy National
Bank (first mortgage holder) for its existing acquisition and improvement
funding. The remaining funds were used for the construction of houses on a
percentage of completion method. As of February 28, 1999, $256,000 is
outstanding.
West Windsor
On February 4, 1997, the Funding Company made a first mortgage loan in the
amount of $850,000 to Matzel & Mumford at West Windsor, L.L.C. ("West Windsor
LLC"), the entity organized to develop, market and build a 38-lot subdivision
known as Windsor Crossing located in West Windsor, Mercer County, New Jersey.
The Loan to West Windsor LLC was secured by a first mortgage on two
building lots for construction of spec homes. Part of the Loan proceeds was used
to repay loans made by First Savings Bank ("FSB") and Apple Chase Investors,
L.L.C. ("Apple Chase") to West Windsor LLC to finance the acquisition and
improvement of those two building lots.
In 1997, the Funding Company was fully repaid by West Windsor LLC on the
Loan. The Funding Company does not contemplate making additional Loans to this
Project Entity.
Section 13
On February 7, 1997, the Funding Company made a first mortgage loan in the
amount of $2,100,000 to Section 13 of the Hills, L.L.C. ("Section 13 LLC"), the
entity organized to develop, market and build a 60-lot subdivision known as
Beacon Crest located in a planned unit development known as "The Hills" in
Basking Ridge, Somerset County, New Jersey.
The Loan to Section 13 LLC was secured by a first mortgage on five building
lots for construction of spec homes. Part of the Loan proceeds was used to repay
a loan made by Amboy to Section 13 LLC to finance the acquisition and
improvement of those five building lots.
In 1997, the Funding Company was fully repaid by Section 13 LLC on the
Loan. The Funding Company does not contemplate making additional Loans to this
Project Entity.
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White Oak Estates
On February 27, 1997, the Funding Company made a first mortgage Loan in the
amount of $100,000 to Matzel & Mumford at White Oak Estates, LLC ("White Oak
LLC"), the entity organized to develop, market and build a 58-lot subdivision
known as White Oak Estates in Branchburg, Somerset County, New Jersey.
The Loan to White Oak LLC was secured by a first mortgage on two building
lots for construction of spec homes. Part of the Loan proceeds was used to repay
loans made by FSB and Apple Chase to White Oak LLC to finance the acquisition
and improvement of those two building lots. In 1997, the Funding Company was
fully repaid by White Oak LLC on the Loan, and the Funding Company does not
contemplate making additional Loans to this Project Entity.
Apple Ridge II
On July 15, 1997, the Funding Company made a first mortgage Loan in the
amount of $1,000,000 to Matzel & Mumford at Apple Ridge II, L.L.C. ("Apple Ridge
LLC"), the entity organized to develop, market and build a 17-lot subdivision
known as Apple Ridge II located on Church Road in Wall, Monmouth County, New
Jersey. The Loan to Apple Ridge LLC was for acquisition of the property and
project overhead.
In 1997, the Funding Company was fully repaid by Apple Ridge LLC on the
Loan. As of February 28, 1999, the Funding Company does not contemplate making
additional Loans to this Project Entity.
Heritage Landing
On October 13, 1998, the Funding Company made a first mortgage Loan in the
amount of $1,400,000 to Matzel & Mumford at Heritage Landing, L.L.C. ("Heritage
Landing"), the entity organized to develop, market and build a 132 lot
subdivision known as Heritage Landing located on River Road in South River,
Middlesex, New Jersey. The Loan to Heritage Landing was for acquisition of
thirty six building lots of the property and project overhead. The thirty six
building lots is part of the overall 132 lot subdivision. During the fourth
quarter, fifteen of the thirty six building lots financed by the Funding Company
were repaid leaving an outstanding balance of $787,500, as of February 28, 1999,
on the remaining twenty building lots.
Maple Crest
On November 30, 1998, the Funding Company made a second mortgage loan in
the amount of $400,000 to Matzel & Mumford at Phillipsburg, LLC
("Phillipsburg"), the entity organized to develop, market and build a 26-lot
subdivision known as Maple Crest located in Phillipsburg Township, Warren
County, New Jersey.
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Summary of MMO Projects
The following table summarizes (as of February 28, 1999) the single-family
housing communities that Matzel & Mumford real estate development companies have
commenced. The entities developing some of these communities may receive Loans
for post-acquisition development activities.
<TABLE>
<CAPTION>
Homes Selling
Number of Homes Under Lots Prices
Name Location Homes Delivered Contract Available (000s)
- ---- --------------- --------- --------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Cranbury Knoll ............... E. Brunswick, NJ 58 18 37 3 $319-369
Heather Knolls ............... S. Brunswick, NJ 91 54 37 0 $322-369
Heritage Landing ............. South River, NJ 132 0 56 66 $269-325
Kings Crossing ............... Montgomery, NJ 118 74 27 17 $369-439
Maple Crest .................. Phillipsburg, NJ 26 0 0 26 $189-219
Maplehurst Farm .............. Piscataway, NJ 126 122 4 0 $259-439
Seven Oaks ................... Freehold, NJ 126 76 31 19 $369-479
Windsor Crossing ............. W. Windsor, NJ 38 32 6 0 $389-469
Woodland Crest ............... Tinton Falls, NJ 45 0 24 21 $269-329
--- --- --- ---
760 376 222 152
--- --- --- ---
</TABLE>
ITEM 3 LEGAL PROCEEDINGS
The Funding Company has no pending litigation, but it may be involved from
time to time in litigation arising in the ordinary course of its business.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No meetings were held during the year ended December 31, 1998, and there
were no matters which developed that required a vote of holders of the Notes.
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PART II
Item 5(a) MARKET PRICE OF THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
GENERAL
The authorized capital stock of the Funding Company consists of 5,000
shares of common stock, no par value, 500 of which are outstanding. There is no
public market for the Funding Company's common stock. As of the date of this
Report, Bruce Matzel and Roger Mumford each own 250 shares of the Funding
Company's outstanding common stock, and the Funding Company does not presently
intend to issue common stock to any third party. The Funding Company has never
paid a dividend in respect of its common stock, but is not prohibited from
paying dividends or making other distributions so long as it is current on its
obligations in respect of the Notes and any other obligations that it may have
under the Indenture described under the heading "Description of Notes and
Related Matters."
INDEMNIFICATION
Directors and officers of the Funding Company are indemnified by the
Funding Company to the full extent permitted by the New Jersey Business
Corporation Act (the "NJBCA"), in particular Section 14A:3-5 of the NJBCA, the
material provisions of which may be summarized as follows:
Legal Proceedings. Section 14A:3-5 of the NJBCA provides that in
non-derivative legal proceedings (proceedings other than those brought by or in
the right of the corporation), a corporation may indemnify "corporate agents"
(defined to include directors, officers, employees and persons serving in other
capacities at the corporation's request) against both "expenses" (defined as
reasonable costs, disbursements and counsel fees) and "liabilities" (defined to
include judgments, fines, settlements and penalties) if the corporate agent
acted in good faith and in a manner that such corporate agent reasonably
believed to be in or not opposed to the best interests of the corporation and,
with respect to any criminal proceeding, such corporate agent had no reasonable
cause to believe the conduct was unlawful. The NJBCA also provides that in
derivative legal proceedings (proceedings brought by or in the right of the
corporation), a corporation may indemnify corporate agents against expenses if
the corporate agent acted in good faith and in a manner that such corporate
agent reasonably believed to be in or not opposed to the best interests of the
corporation.
In all cases, the NJBCA requires a corporation to indemnify against
expenses, including counsel fees, to the extent that a corporate agent has been
successful in a derivative or nonderivative legal proceeding on the merits or
otherwise, or in defense of any claim, issue or matter therein, and permits a
corporation to advance expenses upon an undertaking for repayment if it shall
ultimately be determined that the
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corporate agent is not entitled to indemnification. The NJBCA states that the
indemnification it provides "shall not exclude any other rights, including the
right to be indemnified against liabilities and expenses incurred in proceedings
by or in the right of the corporation," to which a corporate agent may be
entitled "under a certificate of incorporation, by-law, agreement, vote of
shareholders or otherwise," unless the agent has been adjudged guilty of a
breach of loyalty, a failure to act in good faith, a knowing violation of law,
or the receipt of an improper personal benefit.
Determinations Regarding Indemnification. Indemnification of a party
(unless ordered by a court) is dependent upon a determination that such
indemnification is proper because the party has met the applicable standards set
forth above. Such a determination must be made (a) by the Board of Directors or
a committee thereof acting by a majority vote of a quorum consisting of
directors who were not parties to or otherwise involved in the proceedings, or
(b) under certain circumstances, by independent legal counsel in a written
opinion, or (c) by the shareholders.
Other Material Provisions. The indemnification provided by statute is not
exclusive of other rights of indemnification, and inures to the benefit of an
officer's or director's legal representative, provided that a corporation may
not indemnify an officer or director who has been adjudged guilty of a breach of
loyalty, a failure to act in good faith, a knowing violation of law or the
receipt of any improper personal benefit. A corporation may purchase and
maintain insurance against expenses incurred by, and liabilities asserted
against, directors, officers, employees or agents, whether or not the
corporation would be empowered to provide such indemnity.
The Funding Company's Certificate of Incorporation provides that directors
and officers shall not be personally liable to the Funding Company or its
shareholders for damages for breach of any duty except in the case of a breach
of the duty of loyalty to the Funding Company or its shareholders, an act or
omission that is not in good faith or that constitutes a knowing violation of
law, or an act or omission that results in the receipt by an officer or director
of an improper personal benefit.
The Funding Company does not presently maintain indemnification insurance
for its officers and directors, but is in the process of applying for such
insurance. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Funding Company pursuant to the foregoing provisions,
or otherwise, the Funding Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
ITEM 5(B) DESCRIPTION OF NOTES AND RELATED MATTERS
GENERAL
In 1996, the Funding Company made a public offering of up to $6,000,000 of
Notes. On May 16, 1996, the Funding Company issued and sold $3,750,000 principal
amount
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of Notes. The Notes rank pari passu with all secured and unsubordinated debt
that the Funding Company may incur in the future, including any other notes. The
Notes bear interest at the rate of 15% per annum, and will mature on April 1,
2002. Interest on the Notes, calculated based on a 365-day year, is payable
quarterly on March 31, June 30, September 30 and December 31 of each year.
THE INDENTURE
The Notes were issued under an Indenture (the "Indenture") between the
Funding Company and First Union National Bank as Trustee. The Indenture conforms
in many respects to the requirements of the Trust Indenture Act of 1939 (the
"TIA"). However, the TIA expressly exempts from its terms an offering of
securities issued pursuant to an indenture that is limited to $10,000,000
principal amount of debt. Because the Indenture contains such a limitation, the
Funding Company has elected, as permitted by the TIA, not to comply with certain
requirements of that statute.
The Indenture gives the Funding Company the right, in its discretion, to
replace the Trustee with another qualified institution no more than once each
year so long as there is no outstanding Event of Default (as defined in the
Indenture) at the time of such action, and gives the Funding Company or the
Holders of a specified volume of Notes the right to replace the Trustee at any
time for certain defined reasons.
CONVERSION RIGHTS
The Notes are not convertible into any other securities of the Funding
Company.
REDEMPTION AT THE OPTION OF THE FUNDING COMPANY
The Funding Company has the right to redeem all or a portion of the Notes
at any time. In the event of a redemption of less than all of the Notes, the
Trustee will select the Notes to be redeemed by such method as the Trustee deems
fair and appropriate. The Funding Company will notify (or cause the Trustee to
notify) Holders of any redemption in writing at least 30 days in advance
thereof. In connection with any redemption, the Funding Company will pay all
accrued and unpaid interest on each redeemed Note to the date of redemption, and
an amount equal to (i) 103% of the face amount of each redeemed Note if the
redemption takes place prior to the first anniversary of the issuance thereof,
(ii) 102% of such face amount if the redemption takes place between the first
and second anniversary of the issuance thereof, (iii) 101% of such face amount
if the redemption takes place between the second and third anniversary of the
issuance thereof, and (iv) 100% of such face amount if the redemption takes
place after the third anniversary of the issuance thereof.
The Funding Company intends, but is not obligated, to redeem the Notes,
either in whole or in part, during the sixth year after the issuance thereof.
The Funding Company is prohibited from initiating long-term Loans after the
fifth anniversary of the issuance of the Notes. Therefore, from time to time
management will consider whether it is in the Funding Company's best interest to
redeem Notes and relieve the Funding Company of
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the related interest payment obligations.
SINKING FUND
The Notes are not subject to any sinking fund.
RESTRICTIONS ON DIVIDENDS
The Funding Company may pay dividends or make other distributions on its
equity securities so long as it is current on its obligations in respect of the
Notes and any other obligations that it may have under the Indenture.
RESTRICTIONS ON ADDITIONAL DEBT
The Funding Company is prohibited from incurring any secured debt which is
senior to the Notes, but may have outstanding up to an aggregate $10,000,000
principal amount of notes or other evidences of indebtedness under the
Indenture. The Funding Company may fix the terms of any indebtedness that it
issues in the future ("Future Notes"), including: (i) the title; (ii) any limit
upon the aggregate principal amount; (iii) the date or dates on which the
principal is payable; (iv) the rate or rates at which the Future Notes will bear
interest, the date or dates from which such interest will accrue, the dates on
which such interest will be payable, and the record date for the interest
payable on any interest payment date; (v) the place or places where the
principal, premium, and interest, as applicable, will be payable; (vi) the
provisions for redemption, if any, and the redemption price and any remarketing
arrangements relating thereto; (vii) the sinking fund requirements, if any;
(viii) the period or periods within which, the price or prices at which, and the
terms and conditions upon which the Future Notes may be repaid, in whole or in
part, at the option of the holder thereof; (ix) the denominations in which the
Future Notes shall be issuable; and (x) any other terms. The purchasers of any
Future Notes will have an equal priority as creditors of the Funding Company
with the purchasers of the Notes. Specifically, the holders of Future Notes will
share in the benefits of the mortgages and other collateral that secure the
Loans, including Loans that are outstanding prior to the issuance of the Future
Notes.
The Funding Company is not restricted from acquiring additional equity
financing or incurring subordinated or unsecured debt from time to time. A
lender in a subordinated or unsecured position will be unable to recover against
any of the mortgages or other collateral securing the Notes unless all of the
Notes have been repaid or provided for in full.
COLLATERAL
Each Loan is secured by a first or second mortgage on the financed work or
Project. In order to secure the Notes, the Funding Company assigns to the
Trustee, on behalf of the Holders, all of the Funding Company's rights and
interests under each Loan
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Agreement and each Mortgage that the Funding Company enters into with an M&M
Project Entity and under the Loan Servicing Agreement with MMO. The collateral
that the Trustee holds for the benefit of the Holders includes (i) the Funding
Company's security interests in and to the property comprising the Projects,
(ii) the Funding Company's right to all collections in respect of the Loans,
(iii) all right, title and interest in and to any property acquired by means of
foreclosure, and (iv) the Funding Company's interest in all insurance policies
maintained by M&M Project Entities in connection with Projects.
The Funding Company provides the Trustee with assignments in recordable
form for the mortgages that it takes on financed Projects. However, because of
the expense and administrative burden that would be involved in releasing the
Trustee's rights each time an M&M Project Entity sells a house, the assignments
are not recorded unless recording becomes necessary to enable the Trustee to
foreclose upon the related real estate. The failure to record an assignment of
mortgage to the Trustee may cause the assignment to be ineffective against
certain third parties. In particular, a bankruptcy trustee in a proceeding
respecting the Funding Company, a judgment creditor that records its judgment,
and a bona fide purchaser of any of the mortgaged property without notice of the
assignment would all have superior rights in relation to an unrecorded
assignment.
To supplement the collateral described above, the Trustee maintains, for
the benefit of the Holders, a cash collateral account (the "Cash Collateral
Account") in the corporate trust department of the Trustee. All amounts that the
Funding Company (or that MMO, in its capacity as servicer of the Loans) receives
in connection with Loans that are not required within three business days for a
payment on any Notes or to fund another Loan, are promptly delivered to the
Trustee for deposit into the Cash Collateral Account. The Trustee advances funds
from the Cash Collateral Account as requested by the Funding Company to fund
Loans, and transfers funds from the Cash Collateral Account to a separate paying
account as required to service the interest payments on the Notes. Funds
remaining in the Cash Collateral Account are invested in U.S. government bonds,
certificates of deposit, or highly rated commercial paper and money market
funds, as further described in the Indenture.
Each M&M Project Entity has the right, subject to certain prepayment
requirements, to obtain an incremental release of the Funding Company's lien in
respect of individual building lots within a Project so that such building lots
may be sold to homebuyers. All "release" payments from M&M Project Entities are
promptly delivered to the Trustee for deposit into the Cash Collateral Account
unless required within three business days for a payment on the Notes or to fund
another Loan. The Funding Company is required to deliver to the Trustee, at
least once every six months, a certificate attesting that all such releases of
property from the Funding Company's lien were in the ordinary course of the
Funding Company's business and did not impair the overall value of the
collateral for the Notes.
The Funding Company may make Loans for several Projects or particular
phases of Projects at one time. The Funding Company does not designate its
mortgages on individual Projects as collateral for specific Notes. Instead, all
of the mortgages that the
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Funding Company holds to secure the Loans secure, as a pool, all of the Notes.
Similarly, all of the payments that the Funding Company receives in connection
with Loans constitute a pool of funds that the Funding Company uses to make
payments on all of the Notes.
PAYMENT AND PAYING AGENTS
Payments on the Notes are generally made at the office of the Trustee,
but the Funding Company may elect to pay interest (i) by check mailed to the
address of the Holder as such address appears in the security register for the
Notes, or (ii) by wire transfer to an account maintained by the Holder.
CERTAIN COVENANTS OF THE FUNDING COMPANY
Limitations on Liens. So long as any Notes remain outstanding, the Funding
Company may not create, incur, assume or suffer to exist any lien of any kind
upon any of its property or assets except for (i) liens existing as of the date
of the Indenture, (ii) liens subordinated in all respects to the Notes, (iii)
liens securing the Notes and any Future Notes, and (iv) certain statutory,
judgment and other liens that are described in detail in the Indenture.
Merger and Consolidation. So long as any Notes remain outstanding, the
Funding Company may not consolidate with, or merge into, or transfer or lease
all or substantially all of its properties and assets to, any person or entity
unless (i) the successor or purchasing person or entity is a domestic
corporation that expressly assumes all payment obligations on the Notes and the
performance of the Funding Company's obligations under the Indenture, (ii)
immediately after such transaction no Event of Default (as defined in the
Indenture), and no event which, after notice or lapse of time or both, would
become an Event of Default shall have happened and be continuing, and (iii) the
Funding Company has delivered to the Trustee an officer's certificate and an
opinion of counsel stating that such transaction complies with the Indenture.
The Funding Company does not currently expect that it will engage in any merger
or consolidation.
Prompt and Continuous Use of Proceeds. In connection with the offering of
the Notes, the Funding Company agreed to convert at least 90% of the proceeds of
such offering into Loans within ten business days of the issuance of the Notes.
The Funding Company must keep an average of 90% of such funds (determined
quarterly based on average daily balances of the Loans) invested in Loans at all
times unless required within five business days to satisfy a payment obligation
under the Notes.
Timing of Loans. The Indenture prohibits the Funding Company from making
long-term Loans (such as for land acquisition and early stage development
activities) after the fifth anniversary of the issuance of the Notes. The
Funding Company may make short-term Loans (with maturities of three months or
less), such as Loans for the construction of individual homes and final
infrastructure improvements, at any time.
23
<PAGE>
Modification of Lending Policies. So long as any Notes remain outstanding, the
Funding Company may not make a Loan (i) to a person or entity other than a
Matzel & Mumford real estate development company, or (ii) to finance any
activity other than the acquisition, development and construction of a
single-family residential community, or (iii) if more than 25% of the offering
proceeds would be invested in second mortgage loans, with the balance to be
invested in first mortgage loans or deposited in the Cash Collateral Account,
without the consent of the Holders of at least 51% of the outstanding principal
amount of the Notes.
MODIFICATION AND WAIVER
Except as otherwise described in this section, the Funding Company and the
Trustee may modify and amend the Indenture by means of a supplemental indenture
with the consent of the Holders of not less than 66% in principal amount of the
Notes.
The Funding Company may not modify and amend the Indenture without the
consent of the Holder of each Note affected thereby if such modification or
amendment would: (a) change the maturity of any installment of principal of, or
interest on, any Note or change the redemption price; (b) reduce the principal
amount of, or the rate of interest on, any Note; (c) change the currency of any
payment on any Note; (d) impair the right to institute suit for the enforcement
of any payment with respect to any Note; (e) reduce the percentage in principal
amount of the Notes, the consent of whose Holders is required to modify or amend
the Indenture; or (f) modify the foregoing requirements or reduce to less than a
majority the percentage of Notes necessary to waive any past default.
EVENTS OF DEFAULT; REMEDIES
The following will be Events of Default under the Indenture with respect to
the Notes or any series of Future Notes: (a) default in the payment of any
interest upon any Note of that series when due, continued for 60 days; (b)
default in the payment of any principal or premium, if any, on any Note of that
series when due, continued for 30 days; (c) default in the deposit of a sinking
fund payment, if any, when due, in respect of any Note of that series, continued
for 30 days; (d) default in the performance, or breach, of any other covenant or
warranty of the Funding Company contained in the Indenture or in the Notes of
such series, continued for 90 days after written notice as provided in the
Indenture; (e) acceleration of any indebtedness (including any series of Future
Notes) for money borrowed in an aggregate principal amount exceeding $500,000
under the terms of the instrument under which such indebtedness is issued or
secured, if such acceleration is not annulled, or such indebtedness is not
discharged, within 30 days after the Funding Company receives written notice of
such acceleration; and (f) certain events in bankruptcy, insolvency or
reorganization.
The Trustee or the Holders of 25% in principal amount of the outstanding
Notes may declare the principal amount of all outstanding Notes due and payable
immediately if
24
<PAGE>
any Event of Default with respect to the Notes of any series occurs and is
continuing at the time of declaration. At any time after a declaration of
acceleration has been made but before a judgment or decree for payment of money
due has been obtained by the Trustee, the Holders of a majority in principal
amount of the outstanding Notes may rescind such declaration of acceleration and
its consequences if all payments due (other than those due as a result of
acceleration) have been made and all Events of Default have been cured or
waived.
Any Event of Default with respect to the Notes of any series may be waived
by the Holders of a majority in principal amount of all outstanding Notes of
that series, except a default (i) in any payment on any Note of that series, or
(ii) in respect of a covenant or provision which cannot be modified or amended
without the consent of the Holder of each outstanding Note of such series. The
Holders of at least 75% in principal amount of the Notes of any series may
consent to the postponement, for up to three years, of any interest payment due
in respect of the Notes of such series.
The Trustee is generally required, within 90 days after becoming aware of
the occurrence of an Event of Default which is continuing, to give the Holders
of the Notes of the affected series notice of such default. However, except in
the case of a payment default, the Trustee may be entitled under the terms of
the Indenture to withhold or postpone the giving of such notice if the Trustee
determines in good faith that such action is in the interest of the Holders.
The Holders of a majority in principal amount of the outstanding Notes of a
series may direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee or exercising any trust or power conferred
on the Trustee with respect to the Notes of such series, so long as such
direction is not in conflict with any rule of law or the Indenture. Before
proceeding to exercise any right or power under the Indenture at the direction
of such Holders, the Trustee is entitled to receive from such Holders reasonable
indemnity against the costs, expenses and liabilities which the Trustee might
incur in complying with any such direction.
The Indenture provides that no Holder may institute an action against the
Funding Company under the Indenture (except actions for payment of overdue
principal or interest) unless (i) the Holder previously has given to the Trustee
written notice of default and continuance thereof, (ii) the Holders of not less
than 25% in principal amount of the outstanding Notes of the affected series
have requested the Trustee to institute such action and have offered the Trustee
reasonable indemnity, and (iii) the Trustee has not instituted such action
within 60 days of such request, nor has the Trustee received directions
inconsistent with such written request from the Holders of a majority in
principal amount of the outstanding Notes of such series.
The Funding Company is required to furnish to the Trustee annually a
statement as to the fulfillment by the Funding Company of all of its obligations
under the Indenture.
SATISFACTION AND DISCHARGE OF INDENTURE
25
<PAGE>
The Funding Company may terminate its obligations under the Indenture if
all of the Notes previously authenticated and delivered (other than lost,
destroyed or stolen Notes that have been replaced or paid) (i) have been
delivered to the Trustee for cancellation and the Funding Company has paid all
sums payable by it thereunder, or (ii) have matured or will mature within one
year, or are to be called for redemption within one year and the Funding Company
has irrevocably deposited with the Trustee money sufficient to pay all amounts
that are or will become due in respect of such Notes. If the Funding Company
makes such a deposit with the Trustee, Holders may look only to the deposited
money for payment.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis contains certain forward-looking
statements. Actual results could differ materially from those referred to in the
forward-looking statements due to a number of factors, including changes in the
housing market, changes in the mortgage market, increasing construction costs,
increases in funding cost, changes in land use regulation and other factors set
forth herein. Additional detailed information concerning a number of factors
that could cause actual results to differ materially from the information
contained herein is readily available in the Funding Company's Prospectus dated
February 8, 1996, as filed with the Securities and Exchange Commission, starting
with the section on RISK FACTORS.
OVERVIEW
The Funding Company began operations on May 16, 1996. It was formed for the
purpose of funding land acquisition, infrastructure improvements, and the
construction of homes in single-family residential housing communities by making
secured Loans to M&M Project Entities for the development of Projects. See
"Properties--Projects."
LIQUIDITY AND CAPITAL RESOURCES
The Funding Company derives necessary cash flow from the collection of
principal and interest on Loans to Project Entities. The Funding Company
continually monitors the timing of receipt of such funds to coincide with the
quarterly payment of interest to holders of its 15% Secured Notes, which
represents the primary cash expenditure by the Funding Company.
The Funding Company does not expect to raise additional funds from external
sources in the foreseeable future and its shareholders are under no obligation
to contribute additional capital to the business. The Funding Company is
dependent on the collectibility of Loans to Project Entities to meet its working
capital needs. In the event that a Project Entity defaults on a Loan, the
Funding Company would need to seek repayment of such Loan through foreclosure on
the collateral securing the Loan. The Funding Company is unable to predict the
amount or timing of receipt of proceeds from a foreclosure action and,
accordingly, may be unable to meet the schedule of principal and interest
payments to holders of the 15% Secured Notes.
26
<PAGE>
RESULTS OF OPERATIONS
Revenues comprised of interest income were $619,573 and $641,132 during
1998 and 1997 respectively. Revenues were generated by the Funding Company on
Loans made to six Project Entities during 1998 and five Project Entities during
1997. See "Loans to Project Entities." At December 31, 1998, the Funding Company
had Loans outstanding to three Project Entities totaling $3,682,859 while at
December 31, 1997 the Company had two loans outstanding totaling $3,096,545. The
decrease in interest income in 1998 compared to 1997 is due to the lower total
average loan balance in 1998. The Funding Company makes Loans bearing interest
at 16% per annum and collects fees for administering each Loan from the Project
Entity.
The Funding Company's cost of revenues during 1998 and 1997 was $637,876
and $651,727 respectively, consisting primarily of interest expense on the Notes
issued by the Funding Company on May 15, 1996. The interest expense in 1998 and
1997 was $562,500 in each year. Interest expense is fixed on an annual basis
since the outstanding Secured Notes cannot be increased from $3,750,000. Costs
also included $42,524 in amortization of deferred costs related to the issuance
of the 15% Secured Notes for 1998 and 1997.
The Funding Company elected "S" corporation status for both federal and
state income tax purposes on July 11, 1995, therefore limiting the amount of
income taxes incurred through December 31, 1998.
The Funding Company recorded a net loss of $18,303 and $10,595 for the
years ended December 31, 1998 and December 31, 1997 respectively, although the
net interest margin was a positive $39,048 and $60,689 respectively. The losses
are a result of the amortization of the organizational costs described above.
The Notes mature May 14, 2002.
LOANS TO PROJECT ENTITIES
During 1998, the Funding Company made the following Loans to seven Project
Entities which had the following loan balances as of December 31, 1998:
<TABLE>
<CAPTION>
Loan Initial Date of Loan
Project Location Commitment Funding Outstanding
------- -------- ---------- --------------- -----------
<S> <C> <C> <C> <C>
Heather Knolls ................ S. Brunswick $3,400,000 June 18, 1998 --
Heritage Landing .............. South River $1,400,000 Oct. 13, 1998 $ 787,500
Maple Crest ................... Phillipsburg $ 400,000 Nov. 30, 1998 $ 400,000
Seven Oaks .................... Freehold $ 600,000 Nov. 15, 1997 $ 600,000
Seven Oaks .................... Freehold $2,390,000 July 31, 1998 $ --
Seven Oaks .................... Freehold $1,700,000 Aug. 28, 1998 $ 613,359
Seven Oaks .................... Freehold $2,620,000 Nov. 6, 1998 $1,282,000
</TABLE>
27
<PAGE>
Currently, the Funding Company does not have any non-performing loans or any
loans in default.
EFFECT OF INFLATION
The principal effect of inflation on the Funding Company arises from the
impact of inflation on the underlying homebuilding operations of Project
Entities that have received Loans from the Funding Company. Homebuilding may be
adversely affected during periods of high inflation, primarily because of higher
land and construction costs. Inflation also increases financing, labor and
material costs. In addition, higher mortgage interest rates significantly affect
the affordability of permanent mortgage financing to prospective homebuyers.
Homebuilding companies attempt to pass through to their customers any increases
in their costs through increased sales prices. Inflation has not had a material
adverse effect on the results of operations of the Project Entities; however,
there is no assurance that inflation will not have a material adverse impact on
such results or on the Funding Company's future results of operations.
READINESS FOR YEAR 2000
The Funding Company has completed an initial assessment of its Year 2000
status and has developed and implemented a plan to address the Funding Company's
exposure to the "Year 2000" issue. The Year 2000 issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Computer systems that have time sensitive software may
recognize the date "00" as the year 1900 rather than 2000. This could result in
a major system failure or miscalculations. Pursuant to its plan, the Funding
Company implemented a Year 2000 conversion in July 1998 which included upgrading
its software and purchasing a new network server. The cost of the compliance of
the Year 2000 conversion on all of its systems was $30,000 in 1998. No
additional costs are now anticipated. Major suppliers will be contacted in order
to assess their status as to Year 2000 compliance in the first half of 1999.
ITEM 7 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Consolidated Financial Statements beginning on Page F-1.
28
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants
Consolidated Balance Sheet as of December 31, 1998
Consolidated Statement of Loss for the year ended December 31, 1998
Consolidated Statement of Stockholders' Equity for the year ended
December 31, 1998
Consolidated Statement of Cash Flows for the year ended December 31, 1998
Summary of Accounting Policies
Notes to Consolidated Financial Statements
29
<PAGE>
MATZEL & MUMFORD
MORTGAGE FUNDING, INC.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<PAGE>
MATZEL & MUMFORD
MORTGAGE FUNDING, INC.
================================================================================
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1
<PAGE>
MATZEL & MUMFORD MORTGAGE FUNDING, INC.
CONTENTS
================================================================================
INDEPENDENT AUDITORS' REPORT 3
FINANCIAL STATEMENTS:
Balance sheets 4
Statements of operations and changes in
accumulated deficit 5
Statements of cash flows 6
Notes to financial statements 7-10
2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Matzel & Mumford Mortgage Funding, Inc.
Hazlet, New Jersey
We have audited the accompanying balance sheets of Matzel & Mumford Mortgage
Funding, Inc. as of December 31, 1998 and 1997, and the related statements of
operations and changes in accumulated 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 financial position of Matzel & Mumford Mortgage
Funding, Inc. as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/S/B D O SEIDMAN, LLP
- ---------------------
January 29, 1999
3
<PAGE>
MATZEL & MUMFORD MORTGAGE FUNDING, INC.
BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
December 31, 1998 1997
- ----------- ---------- ----------
<S> <C> <C>
ASSETS
Cash $ 383,498 $ 945,616
- -----------------------------------------------------------------------------------------------------
CURRENT ASSETS 383,498 945,616
MORTGAGE RECEIVABLE (NOTE 2) 3,682,859 3,096,545
DEFERRED FINANCING COSTS 143,525 186,049
- -----------------------------------------------------------------------------------------------------
TOTAL ASSETS $4,209,882 $4,228,210
=====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 100 $ 125
- -----------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 100 125
Notes payable (Note 3) 3,750,000 3,750,000
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 3,750,100 3,750,125
- -----------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Common stock, no par value, 5,000 shares authorized; 500
shares issued and outstanding 10,000 10,000
Additional paid in capital 490,000 490,000
Accumulated deficit (40,218) (21,915)
- -----------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 459,782 478,085
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,209,882 $4,228,210
=====================================================================================================
See accompanying notes to financial statements.
</TABLE>
4
<PAGE>
MATZEL & MUMFORD MORTGAGE FUNDING, INC.
STATEMENTS OF OPERATIONS AND CHANGES IN ACCUMULATED DEFICIT
================================================================================
<TABLE>
<CAPTION>
December 31, 1998 1997
- ----------- ---------- ----------
<S> <C> <C>
REVENUE:
Interest (Note 4) $ 583,525 $ 606,715
Fees (Note 5) 36,048 34,417
- -----------------------------------------------------------------------------------------------------
619,573 641,132
- -----------------------------------------------------------------------------------------------------
EXPENSES:
General and administrative 32,852 46,703
Amortization 42,524 42,524
Interest 562,500 562,500
- -----------------------------------------------------------------------------------------------------
637,876 651,727
- -----------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (18,303) (10,595)
ACCUMULATED DEFICIT, BEGINNING OF YEAR (21,915) (11,320)
- -----------------------------------------------------------------------------------------------------
ACCUMULATED DEFICIT, END OF YEAR $ (40,218) $ (21,915)
=====================================================================================================
See accompanying notes to financial statements.
</TABLE>
5
<PAGE>
MATZEL & MUMFORD MORTGAGE FUNDING, INC.
STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
December 31, 1998 1997
- ----------- ---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (18,303) $ (10,595)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization 42,524 42,524
Increase (decrease) in accounts payable (25) 25
Increase (decrease) in mortgage loans, net (586,314) 703,455
- -----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (562,118) 735,409
- -----------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH (562,118) 735,409
CASH, BEGINNING OF PERIOD 945,616 210,207
- -----------------------------------------------------------------------------------------------------
CASH, END OF PERIOD $ 383,498 $ 945,616
=====================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 562,500 $ 562,500
=====================================================================================================
Income taxes $ 200 $ 200
=====================================================================================================
See accompanying notes to financial statements.
</TABLE>
6
<PAGE>
MATZEL & MUMFORD MORTGAGE FUNDING, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF Nature of Business
ACCOUNTING POLICIES
Matzel & Mumford Mortgage Funding, Inc.
("Funding") is a New Jersey corporation formed
for the purpose of financing loans to real
estate development companies controlled by the
principals of The Matzel and Mumford
Organization, Inc. ("MMO"), which are engaged
in the business of developing single-family
residential housing communities.
Deferred Costs
Deferred costs include legal, accounting and
filing fees incurred in connection with the
company's registration statement. These costs
are being amortized over 6 years.
Long-Lived Assets
The Company evaluates Statement of Financial
Accounting Standards No. 114, "Accounting by
Creditors For Impairment of a Loan" ("SFAS
114"). Under SFAS 114, a creditor should
evaluate the collectibility of both interest
and principal to assess the need for a loss
accrual. Management believes there are no loss
accruals necessary at this time.
Income Taxes
The stockholders of the Company have elected
"S" corporation status for federal and state
income tax purposes. Under those provisions,
the shareholders are liable for income taxes on
their respective share of the Company's net
taxable income or loss.
Use of Estimates
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make
estimates and assumptions that affect the
reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities
at the date of the financial statements and the
reported amounts of revenues and expenses
during the reporting period. Actual results
could differ from those estimates.
7
<PAGE>
MATZEL & MUMFORD MORTGAGE FUNDING, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
2. MORTGAGE RECEIVABLE The Company has the following mortgages
receivable from its affiliates:
December 31, 1998
------------------------------------------------------------------------
Matzel & Mumford at Freehold (a) $ 2,495,359
Matzel & Mumford at Phillipsburg (b) 400,000
Matzel & Mumford at Heritage Landing (c) 787,500
------------------------------------------------------------------------
$ 3,682,859
========================================================================
(a) Matzel & Mumford at Freehold has three
notes outstanding. The first note had a
maximum commitment of $1,700,000 and is
to finance the construction of five
homes. The note is due on August 28, 1999
and had an outstanding balance of
$613,359 at December 31, 1998. The note
is collateralized by a first mortgage on
the five building lots.
The second note had a maximum commitment
of $2,620,000 and is to finance the
construction of seven homes. The note is
due on November 7, 1999 and had an
outstanding balance of $1,282,000 at
December 31, 1998. The note is
collateralized by a first mortgage on the
seven building lots.
The third note has a maximum commitment
of $600,000 and was used to finance the
land acquisition of phase three (31
lots). The note is due on November 15,
1999 and had an outstanding balance of
$600,000 at December 31, 1998. The note
is collateralized by a second mortgage on
the 31 building lots.
(b) A $400,000 second mortgage note was used
to finance the land acquisition of 26
improved lots. The note has a term of 24
months and bears interest at 16%.
Interest is payable quarterly and
principal is due at November 30, 2000.
The loan is collateralized by a second
mortgage.
8
<PAGE>
MATZEL & MUMFORD MORTGAGE FUNDING, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
(c) A $787,500 first mortgage note was used
to finance the acquisition of 21 building
lots in the project. The note has a term
of 24 months and bears interest at 16%.
Interest is payable quarterly and
principal is due at maturity. The loan is
collateralized by a first mortgage on the
21 building lots.
Interest payments on all the notes are payable
quarterly at an interest rate of 16% The
collateral on these notes has a recorded value
in excess of the respective notes.
The Company charges each borrower a quarterly
administrative fee based on the average
outstanding loan balance. Debt service payments
on the loans, together with the administrative
fee, are intended to cover the 15% interest due
on the Company's notes payable (Note 3) and the
.5% loan servicing fee payable to MMO and other
expenses of Funding.
3. NOTES PAYABLE The Company filed a registration statement
with respect to a debt offering of up to
$6,000,000. The Company raised $3,750,000 in
connection with the debt offering, which have
been used to finance affiliated real estate
projects. The Notes are payable interest only
at 15%. Interest payments are payable quarterly
beginning June 30, 1996. The Note matures on
May 14, 2002 and is redeemable at the option of
the Company.
Contemporaneously, with the issuance of the
notes, the stockholders contributed the
$500,000 capital requirement.
4. RELATED PARTY Revenues from related parties are as follows:
TRANSACTIONS
December 31, 1998 1997
-----------------------------------------------
Interest $583,525 $606,715
Service fees 36,048 34,417
-----------------------------------------------
$619,573 $641,132
===============================================
9
<PAGE>
MATZEL & MUMFORD MORTGAGE FUNDING, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
5. FAIR VALUE OF In accordance with the requirements of SFAS No.
FINANCIAL 107, "Disclosures about Fair Value of Financial
INSTRUMENT Instruments," the Company has provided the
following fair value estimates and information
about valuation methodologies. The estimated
fair value amounts have been determined using
available market information, however,
considerable judgement is required in
interpreting market data to develop estimates
of fair value; therefore, the estimates are not
necessarily indicative of the amounts that
could be realized or would be paid in a current
market exchange. The effect of using different
market assumptions and/or estimation
methodologies may be material to the estimated
fair value amounts.
For purposes of this analysis, the Company has
assumed 12% as the current market rate on the
mortgages receivable and payable.
Fair value information presented herein is
based on information available at December 31,
1998 and 1997. Although management is not aware
of any factors that would significantly affect
the estimated fair value amounts, such amounts
have not been updated since those dates and;
therefore, the current estimates of fair value
at dates subsequent to December 31, 1998 and
1997 may differ from these amounts.
December 31, 1998 1997
-------------------- ----------------------- -----------------------
FAIR Book Fair
BOOK VALUE VALUE Value Value
-------------------------------------------------------------------------
Mortgages receivable $3,682,859 $3,830,000 $3,096,545 $3,220,000
=========================================================================
Mortgages payable $3,750,000 $3,862,500 $3,750,000 $3,862,000
=========================================================================
10
<PAGE>
MATZEL & MUMFORD AT
SOUTH BRUNSWICK, L.L.C.
================================================================================
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1
<PAGE>
MATZEL & MUMFORD AT SOUTH BRUNSWICK, L.L.C
CONTENTS
================================================================================
INDEPENDENT AUDITORS' REPORT 3
FINANCIAL STATEMENTS:
Balance sheets 4
Statements of income from operations and
changes in members' equity 5
Statements of cash flows 6
Notes to financial statements 7-11
2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Members
Matzel & Mumford at South Brunswick, L.L.C.
Hazlet, New Jersey
We have audited the accompanying balance sheets of Matzel & Mumford at South
Brunswick, L.L.C. as of December 31, 1998 and 1997, and the related statements
of operations and changes in members' equity, and cash flows for each of the two
years in the period ended December 31, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 financial position of Matzel & Mumford at South
Brunswick, L.L.C. as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/S/B D O SEIDMAN, LLP
- ---------------------
January 29, 1999
3
<PAGE>
MATZEL & MUMFORD AT SOUTH BRUNSWICK, L.L.C
BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
December 31, 1998 1997
- ----------- ---------- ----------
<S> <C> <C>
ASSETS
Cash $ 47,167 $ 53,028
Cash - restricted (Note 1) 188,606 188,600
Note receivable 38,700 -
Inventory (Note 2) 6,392,263 8,776,775
- -----------------------------------------------------------------------------------------------------
TOTAL ASSETS $6,666,736 $9,018,403
=====================================================================================================
LIABILITIES AND MEMBERS' EQUITY
Mortgages payable (Note 4) $4,589,271 $5,046,744
Mortgage payable - M&M Mortgage Funding (Note 4) - 2,496,545
Accounts payable and accrued expense 876,499 163,174
Customer deposits 564,920 581,526
Due to affiliates (Note 5) 89,332 422,194
Note payable (Note 3) - 300,000
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 6,120,022 9,010,183
MEMBERS' EQUITY 546,714 8,220
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND MEMBERS' EQUITY $6,666,736 $9,018,403
=====================================================================================================
See accompanying notes to financial statements.
</TABLE>
4
<PAGE>
MATZEL & MUMFORD AT SOUTH BRUNSWICK, L.L.C
STATEMENTS OF INCOME FROM OPERATIONS
AND CHANGES IN MEMBERS' EQUITY
================================================================================
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997
- ----------------------- ----------- -----------
<S> <C> <C>
NET SALES $16,725,810 $ -
COST OF SALES 14,717,924 -
- -----------------------------------------------------------------------------------------------------
GROSS PROFIT 2,007,886 -
SALES AND MARKETING EXPENSES 723,847 -
GENERAL AND ADMINISTRATIVE EXPENSES 760,376 -
- -----------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 523,663 -
OTHER INCOME 14,831 -
- -----------------------------------------------------------------------------------------------------
NET INCOME 538,494 -
MEMBERS' EQUITY, BEGINNING OF YEAR 8,220 8,220
- -----------------------------------------------------------------------------------------------------
MEMBERS' EQUITY, END OF YEAR $ 546,714 $8,220
================================================================================---------------------
See accompanying notes to financial statements.
</TABLE>
5
<PAGE>
MATZEL & MUMFORD AT SOUTH BRUNSWICK, L.L.C
STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997
- ----------------------- ---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 538,494 $ 8,220
Adjustments to reconcile net loss to net cash used in
operating activities:
Increase in cash - restricted (6) (188,600)
Decrease (increase) in inventories 2,384,512 (4,371,824)
Increase in accounts payable and accrued expenses 713,325 145,111
Increase (decrease) in customer deposits (16,606) 581,526
- -----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,619,719 (3,825,567)
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable - 300,000
Repayment of note payable (300,000)
Proceeds from mortgages payable 6,443,289
Repayments on mortgages payable (2,954,018) (2,645,125)
Increase in notes receivable (38,700)
Repayments of due to affiliates (332,862) (220,026)
- -----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES (3,625,580) 3,878,138
- -----------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH (5,861) 52,571
CASH, BEGINNING OF YEAR 53,028 457
- -----------------------------------------------------------------------------------------------------
CASH, END OF YEAR $ 47,167 $ 53,028
=====================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 1,023,318 $ 752,434
=====================================================================================================
See accompanying notes to financial statements.
</TABLE>
6
<PAGE>
MATZEL & MUMFORD AT SOUTH BRUNSWICK, L.L.C
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF Nature of Business and Organization
ACCOUNTING POLICIES
Matzel & Mumford at South Brunswick, L.L.C. ("M&M at
South Brunswick") is a New Jersey limited liability
company formed on May 1, 1996, for the purpose of
purchasing land in South Brunswick, New Jersey and
developing and constructing 91 single-family homes on
the land.
Revenue Recognition
Revenues arising from home sales are recognized under
the accrual method of accounting in accordance with
Financial Accounting Standard No. 66. Under this
method, income is recognized when all terms relating
to the sale of a unit are complete, consideration is
exchanged and title is conveyed to the buyer.
Restricted Cash
Restricted cash represents amounts on deposit
primarily with municipalities as collateral for
project improvements, which are yet to be completed
or approved.
Inventories
Inventories are stated at the lower of cost or fair
value. Inventories under development or held for
development, are stated at accumulated cost unless
such cost would not be recovered from the cash flows
generated by future disposition.
Inventory costs are comprised of direct unit and
allocated costs. Development costs are capitalized
until the property is complete and title has been
conveyed to the buyer. Development costs generally
include land and site improvements, home
construction, project overhead, financing and
construction management fees. Interest capitalized is
based upon the interest charged on specifically
related debt. Management fees to a related party are
capitalized by the Company.
7
<PAGE>
MATZEL & MUMFORD AT SOUTH BRUNSWICK, L.L.C
NOTES TO FINANCIAL STATEMENTS
================================================================================
Income Taxes
The Company is organized and operates as a limited
liability corporation which is not subject to Federal
or state income taxes. Accordingly, no provision for
income taxes has been made. The earnings or losses of
the Company are included on each member's tax return,
in accordance with the terms of the operating
agreement.
Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles
requires management to make estimates and assumptions
that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements
and the reported amounts of revenues and expenses
during the reporting period. Actual results could
differ from those estimates.
2. INVENTORIES Inventories relating to the development of
single-family homes consist of the following:
December 31, 1998 1997
-----------------------------------------------------------
Land $1,725,708 $3,580,091
Site improvements 2,364,845 2,779,716
Direct home construction costs 1,488,082 1,252,118
Financing 813,628 1,164,850
-----------------------------------------------------------
$6,392,263 $8,776,775
-----------------------------------------------------------
All expenses incurred for the development of the
project are capitalized. Selling expenses which do
not benefit future periods, are treated as period
costs and expensed as incurred.
8
<PAGE>
MATZEL & MUMFORD AT SOUTH BRUNSWICK, L.L.C
NOTES TO FINANCIAL STATEMENTS
================================================================================
3. NOTES PAYABLE On June 16, 1997, the Company entered into a
financing arrangement with an individual in the
amount of $300,000 bearing interest at 15%. Repayment
of principal calls for $10,000 per closing, for
closings 11 through 40, but no later than June 15,
1999. The first interest payment commences six months
from the date of the note and then every three months
thereafter. The note is collateralized by a financial
guarantee bond, which is guaranteed by the managing
member's of the Company. This note was repaid in full
during 1998.
The fair value of the note payable at December 31,
1997, approximated fair value of instruments with
similar terms and average maturities.
4. MORTGAGES PAYABLE
December 31, 1998 1997
------------------------------------------------------------------
Land and construction - related party (a) $ - $2,496,545
Land and construction mortgage (b) 175,929 4,809,244
Land and construction mortgage (c) 4,413,342 -
1st mortgage (d) - 237,500
------------------------------------------------------------------
$4,589,271 $7,543,289
==================================================================
(a) The Company has a mortgage payable to Matzel &
Mumford Mortgage Funding, Inc., an entity
controlled by the members of M&M at South
Brunswick. The note is in the maximum amount of
$3,400,000 and is to fund land acquisition and
site improvements for phase two (51 lots) and is
payable interest only at 16%. Interest payments
are payable quarterly until November 1999, when
the outstanding principal balance is due. The
note is collateralized by a first mortgage on
the property. This note was repaid in full
during 1998.
9
<PAGE>
MATZEL & MUMFORD AT SOUTH BRUNSWICK, L.L.C
NOTES TO FINANCIAL STATEMENTS
================================================================================
(b) The Company has commitments from a bank for land
acquisition and construction as follows:
o Note A, in the maximum amount of
$4,000,000, was to fund land acquisition
and improvements. The note bears interest
at the prime rate, plus 1 1/2%, and matures
in June 1998. Interest was payable monthly
and principal is payable with each closing
at the greater of 120% of the cost of the
related land and site improvements or
$120,000. The loan was collateralized by a
first mortgage on the land and improvements
of phase one (40 lots) of the project and
is guaranteed by the managing member's of
the Company. At December 31, 1997, the Note
had a balance of $4,000,000. This Note was
repaid in full during 1998.
o Note B, a revolver, in the maximum amount
of $2,500,000, is to be used to fund
construction projects. The note bears
interest at the prime rate, plus 1%, and
matures in June 1999. Interest is payable
monthly and principal is paid upon closing
of each unit. The loan is collateralized by
a first mortgage on the units being
constructed. The note balance is $175,929
and $809,244 as of December 31, 1998 and
1997, respectively.
(c) The Company has a construction mortgage payable
in the maximum amount of $7,200,000 to fund land
improvements and construction. The note bears
interest at the prime rate (8.125% at December
31, 1998), plus .375%, and matures in June 2000.
Interest is payable monthly and principal is
payable with each closing $80,000 per lot for
land improvements and 100% of the funds advanced
for construction per lot. The loan is
collateralized by a first mortgage on the land
and improvements of phase two (51 lots) of the
project and is guaranteed by the managing
Members.
10
<PAGE>
MATZEL & MUMFORD AT SOUTH BRUNSWICK, L.L.C
NOTES TO FINANCIAL STATEMENTS
================================================================================
(d) The Company has a mortgage payable in the
maximum amount of $500,000, is to fund the
construction of two model homes. The note has a
term of 18 months expiring July 1998 and bears
interest at the prime rate, plus 1 1/2%.
Interest is payable monthly and principal is
paid upon closing of each unit. The loan is
collateralized by the model home being
constructed. The note balance is $237,500 as of
December 31, 1997. The mortgage was repaid
during 1998.
The fair value of the mortgages approximates fair
value of instruments with similar terms and average
maturities.
5. RELATED PARTY The Company has an agreement with the Matzel &
TRANSACTIONS Mumford Organization, Inc. ("MMO"), whereby MMO
provides construction management services at a fee of
4% of the gross selling price of each house. MMO is
entitled to draws of $30,000 per month. During 1998
and 1997, the Company advanced MMO $360,000 of
management fees in each year. During 1998, $502,759
of these fees were charged to expense. No amounts
were expense during 1997.
Included in due to/from affiliates are transfers of
costs incurred by affiliated companies of the
managing member of the Company. The amounts are short
term in nature and bear no interest. The amounts are
to be repaid as cash flow allows.
6. YEAR 2000 Like other companies, M&M at South Brunswick could be
(UNAUDITED) adversely affected if the computer systems we, our
suppliers or customers use do not properly process
and calculate date-related information and data from
the period surrounding and including January 1, 2000.
This is commonly known as the "Year 2000" issue.
Additionally, this issue could impact non-computer
systems and devices such as production equipment,
elevators, etc. At this time, because of the
complexities involved in this issue, management
cannot provide assurances that the Year 2000 issue
will not have an effect on the Company's operations.
11
<PAGE>
MATZEL & MUMFORD AT
HERITAGE LANDING, L.L.C.
===============================================================================
FINANCIAL STATEMENTS
PERIOD APRIL 1, 1998 (DATE OF
INCEPTION) TO DECEMBER 31, 1998
1
<PAGE>
MATZEL & MUMFORD AT HERITAGE LANDING, L.L.C.
CONTENTS
================================================================================
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
FINANCIAL STATEMENTS:
Balance sheet 4
Statement of cash flows 5
Notes to financial statements 6-10
2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Members
Matzel & Mumford at Heritage Landing, L.L.C.
Hazlet, New Jersey
We have audited the accompanying balance sheet of Matzel & Mumford at Heritage
Landing, L.L.C. as of December 31, 1998 and the related statement of cash flows
for the period April 1, 1998 (date of inception) to December 31, 1998. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Matzel & Mumford at Heritage
Landing, L.L.C. as of December 31, 1998, and its cash flows for the period April
1, 1998 (date of inception) through December 31, 1998, in conformity with
generally accepted accounting principles.
/S/B D O SEIDMAN, LLP
- ---------------------
January 29, 1999
3
<PAGE>
MATZEL & MUMFORD AT HERITAGE LANDING, L.L.C.
BALANCE SHEET
================================================================================
December 31, 1998,
- --------------------------------------------------------------------------------
ASSETS
Cash $ 174,375
Restricted cash 170,568
Inventory (Notes 2 and 3) 4,937,916
- --------------------------------------------------------------------------------
TOTAL ASSETS $5,282,859
================================================================================
LIABILITIES AND MEMBERS' EQUITY
Accounts payable and accrued expenses $ 16,472
Due to affiliates 395,296
Mortgages payable (Note 3) 3,193,159
Mortgage payable - Related party (Note 4) 787,500
Notes payable (Note 5) 819,569
Customer deposits 70,863
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 5,282,859
MEMBERS' EQUITY 1,000
MEMBERS' EQUITY RECEIVABLE (1,000)
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND MEMBERS' EQUITY $5,282,859
================================================================================
See accompanying notes to financial statements.
4
<PAGE>
MATZEL & MUMFORD AT HERITAGE LANDING, L.L.C.
STATEMENT OF CASH FLOWS
================================================================================
For the period April 1, 1998 (date of inception) to December 31, 1998
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ -
Adjustments to reconcile net income to net cash used
in operating activities:
Increase in cash-restricted (170,568)
Increase in inventories (4,274,166)
Increase in accounts payable 16,472
Increase in customer deposits 70,863
- --------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (4,357,399)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgages payable 3,316,909
Proceeds from notes payable 819,569
Increase in due to affiliates 395,296
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,531,774
- --------------------------------------------------------------------------------
INCREASE IN CASH 174,375
CASH, BEGINNING OF PERIOD -
-------------------------------------------------------------------------------
CASH, END OF PERIOD $ 174,375
================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 235,115
================================================================================
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of land financed by the seller $ 663,750
================================================================================
See accompanying notes to financial statements.
5
<PAGE>
MATZEL & MUMFORD AT HERITAGE LANDING, L.L.C.
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF Nature of Business and Organization
ACCOUNTING POLICIES
Matzel & Mumford at Heritage Landing, L.L.C. ("M&M at
Heritage Landing" or the "Company") is a New Jersey
limited liability company formed on April 1, 1998,
for the purpose of purchasing land in South River,
New Jersey and developing and constructing 132
single-family homes on the land.
On October 12, 1998, M&M at Heritage Landing
commenced the purchase of the land by closing on 36
lots. On November 24, 1998, M&M at Heritage Landing
closed on an additional 34 lots. The Company has a
commitment to purchase an additional 36 lots by
November 24, 1999 and the remaining lots prior to
August 24, 2000, at a total remaining purchase price
of $1,738,800. As of December 31, 1998, the Company
has commenced construction of homes.
Revenue Recognition
Revenues arising from home sales will be recognized
under the accrual method of accounting in accordance
with Financial Accounting Standard No. 66. Under this
method, income will be recognized when all terms
relating to the sale are complete, consideration is
exchanged and title is conveyed to the buyer.
Restricted Cash
Restricted cash represents amounts on deposit,
primarily with municipalities, as collateral for
project improvements, which are yet to be completed.
Inventories
Inventories are stated at the lower of cost or fair
value. Inventories under development, or held for
development, are stated at accumulated cost unless
such cost would not be recovered from the cash flows
generated by future disposition.
Inventory costs are comprised of direct unit and
allocated costs. Development costs will be
capitalized until the property is complete and title
has been conveyed to the buyer. Development costs
generally include land and site improvements, home
construction, project overhead, financing and
construction management fees. Capitalized interest is
based upon the interest charged on specifically
related debt. The management fees to a related party
are capitalized by the Company.
6
<PAGE>
MATZEL & MUMFORD AT HERITAGE LANDING, L.L.C.
NOTES TO FINANCIAL STATEMENTS
================================================================================
Members' Capital
The two managing members have pledged a total of
$1,000 in capital contributions.
Income Taxes
The Company is organized and operates as a limited
liability company which is not subject to Federal or
state income taxes. Accordingly, no provision for
income taxes has been made. The earnings or losses of
the Company are included on each member's tax return,
in accordance with the terms of the operating
agreement.
Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles
requires management to make estimates and assumptions
that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements
and the reported amounts of revenues and expenses
during the reporting period. Actual results could
differ from those estimates.
2. INVENTORIES Inventories relating to the development of
single-family homes consist of the following at
December 31, 1998:
-----------------------------------------------------------
Land $2,240,208
Site improvement 1,626,612
Homes under construction 819,463
Financing 251,633
-----------------------------------------------------------
$4,937,916
===========================================================
All expenses incurred for the development of the
project will be capitalized. Selling expenses which
do not benefit future periods, will be treated as
period costs and will be expensed as incurred.
7
<PAGE>
MATZEL & MUMFORD AT HERITAGE LANDING, L.L.C.
NOTES TO FINANCIAL STATEMENTS
================================================================================
3. MORTGAGES PAYABLE December 31, 1998
---------------------------------------------------------
Land, improvements and construction loan (a) $2,529,409
Second purchase money mortgage (b) 663,750
---------------------------------------------------------
$3,193,159
=========================================================
(a) The Company has a commitment from a bank for a
revolving loan of up to $5,835,000 for the
acquisition and improvement of land and the
construction of the 132 homes. The loan bears
interest at prime (7 3/4% at December 31,
1998), plus 1/2%, has a term of two years with
a one year extension at no additional cost and
is collateralized by a first mortgage on
section one consisting of 49 lots and homes
construction thereon.
(b) The Company has a second mortgage payable to
the seller on 24 of the lots purchased on
November 24, 1998. Interest at 7 1/2% is
payable monthly until November 24, 2001, when
the outstanding principal balance is due. The
seller is also entitled to additional fees of
3.75% of gross sales price of the house in
excess of $210,000 to $240,000 and 10% of gross
sales price of $240,000 to $400,000.
4. MORTGAGE PAYABLE - The Company has a mortgage payable to Matzel &
RELATED PARTY Mumford Mortgage Funding, Inc., an entity controlled
by the members of M&M at Heritage Landing. Interest
at 16% is payable quarterly until December 31, 2000,
when the outstanding principal balance is due. The
note is collateralized by a first mortgage on the
land and improvements, relating to the 21 lots under
development.
5. NOTES PAYABLE The Company has two notes in the amount of $819,569
due to two investment limited partnerships, for which
one of the members of the Company is the general
partner. The notes are unsecured, have no fixed
maturity, and provide for interest payable quarterly
at 12%. These notes can be called in whole or in part
by the lenders with forty-five days written notice.
8
<PAGE>
MATZEL & MUMFORD AT HERITAGE LANDING, L.L.C.
NOTES TO FINANCIAL STATEMENTS
================================================================================
6. RELATED PARTY The Company has an agreement with the Matzel &
TRANSACTIONS Mumford Organization, Inc. ("MMO"), whereby MMO
provides construction management services. Pursuant
to the agreement, the fee for such services will be
based on 3-1/2% of the gross selling price of each
house. The agreement also provides that during the
period prior to the sale of homes, MMO is entitled to
draws of $30,000 per month. During the period April
1, 1998 through December 31, 1998, the Company has
advanced fees of $90,000.
Included in "Due to affiliates" are transfers of
costs incurred by affiliated companies of the
managing member of the Company. The amounts are short
term in nature and bear no interest. The amounts are
to be repaid as cash flows permits.
7. FAIR VALUE OF In accordance with the requirements of SFAS No. 107,
FINANCIAL "Disclosures about Fair Value of Financial
INSTRUMENTS Instruments," the Company has provided the following
fair value estimates and information about valuation
methodologies. The estimated fair value amounts have
been determined using available market information,
however, considerable judgement is required in
interpreting market data to develop estimates of fair
value; therefore, the estimates are not necessarily
indicative of the amounts that could be realized or
would be paid in a current market exchange. The
effect of using different market assumptions and/or
estimation methodologies may be material to the
estimated fair value amounts.
For purposes of this analysis, the Company has
assumed 12% as the current market rate on its
Mortgages payable-related party and Notes payable.
Other Mortgages are considered to be at market rates
due to their variable interest rates and relatively
recent date of borrowing.
Fair value information presented herein is based on
information available at December 31, 1998 and 1997.
Although management is not aware of any factors that
would significantly affect the estimated fair value
amounts, such amounts have not been updated since
those dates and, therefore, the current estimates of
fair value at dates subsequent to December 31, 1998,
may differ significantly from those amounts.
9
<PAGE>
MATZEL & MUMFORD AT HERITAGE LANDING, L.L.C.
NOTES TO FINANCIAL STATEMENTS
================================================================================
December 31, 1998 Book Value Fair Value
------------------------------------------------------------
Mortgages payable $3,980,659 $4,044,000
============================================================
Notes payable $ 819,569 $ 819,569
============================================================
The recorded amounts of cash, restricted cash,
accounts payable, due to affiliates and customers
deposits approximate the fair value of these
instruments.
8. YEAR 2000 Like other companies, M&M at Heritage Landing could
(UNAUDITED) be adversely affected if the computer systems we or
our suppliers use do not properly process and
calculate date-related information and data from the
period surrounding and including January 1, 2000.
This is commonly know as the "Year 2000" issue. At
this time, because of the complexities involved in
the issue, management cannot provide assurances that
the Year 2000 issue will not have an effect on the
Company's operations.
10
<PAGE>
MATZEL & MUMFORD AT
FREEHOLD, L.L.C.
================================================================================
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1
<PAGE>
MATZEL & MUMFORD AT FREEHOLD, L.L.C.
CONTENTS
================================================================================
INDEPENDENT AUDITORS' REPORT 3
FINANCIAL STATEMENTS:
Balance sheets 4
Statements of income and changes in members' equity 5
Statements of cash flows 6
Notes to financial statements 7-11
2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Members
Matzel & Mumford at Freehold, L.L.C.
Hazlet, New Jersey
We have audited the accompanying balance sheets of Matzel & Mumford at Freehold,
L.L.C. as of December 31, 1998 and 1997, and the related statements of income
and changes in members' equity, 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 financial position of Matzel & Mumford at Freehold,
L.L.C. as of December 31, 1998 and 1997, and the results of its operations, and
its cash flows for the years then ended, in conformity with generally accepted
accounting principles.
/S/B D O SEIDMAN, LLP
- ---------------------
January 29, 1999
3
<PAGE>
MATZEL & MUMFORD AT FREEHOLD, L.L.C.
BALANCE SHEETS
================================================================================
December 31, 1998 1997
- --------------------------------------------------------------------------------
ASSETS
Cash $ 220,360 $ 361,379
Restricted cash (Note 1) 198,040 229,020
Inventory (Notes 2 and 3) 8,509,304 11,756,553
Note receivable 44,550 44,500
Due from affiliates (Note 4) - 809,711
Fixed assets, net 3,927 7,856
Utility deposits 47,823 38,570
- --------------------------------------------------------------------------------
TOTAL ASSETS $9,024,004 $13,247,589
- --------------------------------------------------------------------------------
LIABILITIES AND MEMBERS' EQUITY
Accounts payable and accrued expenses $ 769,031 $ 709,668
Mortgages payable (Note 3) 5,311,329 10,587,034
Notes payable - related party (Note 4) 2,495,359 1,000,000
Due to affiliates 48,816 -
Customer deposits 254,480 891,680
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 8,879,015 13,188,382
MEMBERS' EQUITY 144,989 59,207
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND MEMBERS' EQUITY $9,024,004 $13,247,589
================================================================================
See accompanying notes to financial statements.
4
<PAGE>
MATZEL & MUMFORD AT FREEHOLD, L.L.C.
STATEMENTS OF INCOME AND CHANGES IN MEMBERS' EQUITY
================================================================================
December 31, 1998 1997
- --------------------------------------------------------------------------------
NET SALES $22,362,396 $6,309,597
COST OF SALES 19,842,974 5,728,528
- --------------------------------------------------------------------------------
GROSS PROFIT 2,519,422 581,069
SALES AND MARKETING EXPENSES 1,139,050 333,952
GENERAL AND ADMINISTRATIVE EXPENSES 654,875 194,409
- --------------------------------------------------------------------------------
INCOME FROM OPERATIONS 725,497 52,708
OTHER INCOME 10,285 6,499
- --------------------------------------------------------------------------------
NET INCOME 735,782 59,207
MEMBERS' EQUITY, BEGINNING OF YEAR 59,207 -
DISTRIBUTIONS 650,000 -
- --------------------------------------------------------------------------------
MEMBERS' EQUITY, END OF YEAR $ 144,989 $ 59,207
================================================================================
See accompanying notes to financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
MATZEL & MUMFORD AT FREEHOLD, L.L.C.
STATEMENTS OF CASH FLOWS
==========================================================================================
<S> <C> <C>
December 31, 1998 1997
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 735,782 $ 59,207
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 3,929 3,929
Decrease (increase) in restricted cash 30,980 (31,550)
Decrease (increase) in inventory 3,247,249 (4,037,626)
Increase in accounts payable and accrued expenses 59,363 575,242
Increase in utility deposits (9,253) (38,570)
Increase (decrease) in customer deposits (637,200) 891,680
- -----------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,430,850 (2,577,688)
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Fixed asset acquisition - (11,785)
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of mortgages payable (22,039,325) (850,000)
Proceeds from mortgages payable 18,258,979 4,460,792
Increase in note receivable (50) (44,500)
Increase in due to affiliates 858,527 (683,389)
Distributions (650,000) -
- -----------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (3,571,869) 2,882,903
- -----------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH (141,019) 293,430
CASH, BEGINNING OF PERIODS 361,379 67,949
- -----------------------------------------------------------------------------------------
CASH, END OF PERIODS $ 220,360 $ 361,379
- -----------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 1,250,113 $1,204,100
=========================================================================================
See accompanying notes to financial statements.
</TABLE>
6
<PAGE>
MATZEL & MUMFORD AT FREEHOLD, L.L.C.
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF Nature of Business and Organization
ACCOUNTING POLICIES
Matzel & Mumford at Freehold, L.L.C. ("M&M at
Freehold") is a New Jersey limited liability company
formed on October 3, 1996, for the purpose of
purchasing land in Freehold, New Jersey and
developing and constructing 126 single-family homes
on the land.
Revenue Recognition
Revenues arising from home sales are recognized under
the accrual method in accordance with Financial
Accounting Standards No. 66. Under this method,
income is recognized when all terms relating to the
sale of a unit are complete, consideration is
exchanged and title is conveyed to the buyer.
Restricted Cash
Restricted cash represents amounts on deposit,
primarily with municipalities, as collateral for
project improvements, which are yet to be completed
or approved.
Inventories
Inventories are stated at the lower of cost or fair
value. Inventories under development or held for
development are stated at an accumulated cost unless
such cost would not be recovered from the cash flows
generated by future disposition. In this instance,
such inventories are recorded at fair value.
Inventories are comprised of direct unit and
allocated costs. Development costs are capitalized
until the property is complete and title has been
conveyed to the buyer. Development costs generally
include land and improvements, home construction,
project overhead, interest and construction
management fees. Interest capitalized is based upon
the interest rate on specifically related debt. All
interest incurred during 1998 and 1997 has been
capitalized. The management fees to a related party
are paid and capitalized by the Company.
7
<PAGE>
MATZEL & MUMFORD AT FREEHOLD, L.L.C.
NOTES TO FINANCIAL STATEMENTS
================================================================================
Income Taxes
The Company is organized and operates as a limited
liability company which is not subject to Federal or
state income taxes. Accordingly, no provision for
income taxes has been made. The earnings or losses of
the Company are included on each member's tax return,
according to the terms of the operating agreement.
Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles
requires management to make estimates and assumptions
that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements
and the reported amounts of revenues and expenses
during the reporting period. Actual results could
differ from those estimates.
2. INVENTORIES Inventories relating to the development of
single-family homes consist of the following:
December 31, 1998 1997
-----------------------------------------------------------
Land $3,363,575 $ 6,268,725
Site improvements 2,325,485 2,724,508
Direct home construction costs 1,997,217 1,536,229
Financing 823,027 1,227,091
-----------------------------------------------------------
$8,509,304 $11,756,553
===========================================================
3. MORTGAGES PAYABLE
December 31, 1998
-----------------------------------------------------------
Land and construction loan (a) $ 2,595,755
Land and construction loan (b) 2,715,574
-----------------------------------------------------------
$ 5,311,329
===========================================================
8
<PAGE>
MATZEL & MUMFORD AT FREEHOLD, L.L.C.
NOTES TO FINANCIAL STATEMENTS
================================================================================
(a) The note is a revolver, in the maximum amount of
$3,000,000 is to be used to fund construction.
The note bears interest at the prime rate
(7-3/4% at December 31, 1998), plus 1%, and
matures in May 1999. Interest is payable monthly
and principal is payable with each closing at
100% of all funds advanced on a per lot basis.
The Note balance is $2,595,755 as of December
31, 1998.
The note is collateralized by a first mortgage
on the land and improvements of phases one and
two (95 lots) of the project and is guaranteed
by the managing members.
(b) The Company has a commitment from a bank for
land acquisition improvement and construction
not to exceed $5,387,000 for phase three as
follows:
o Note A in the maximum amount of $2,387,000
is to fund land acquisition and
improvements. The note has a term of 18
months, is due in February 2000 and bears
interest at the prime rate, plus .5%.
Interest is payable monthly and principal
is payable with each closing at the rate of
120% of the cost of the related land and
site improvements or $92,400, which ever is
greater. The Note has a balance of
$2,221,653 at December 31, 1998.
o Note B in the maximum amount of $3,000,000
is to fund construction. The note has a
term of 18 months, is due in February 2000
and bears interest at the prime rate, plus
.5%. Interest is payable monthly and
principal is payable with each closing at
100% of all funds advanced for construction
on a per lot basis. The Note has a balance
of $493,921 at December 31, 1998.
The above notes are collateralized by a first
mortgage on the land and improvements of phase
three (31 lots) of the project and is guaranteed
by the managing members.
9
<PAGE>
MATZEL & MUMFORD AT FREEHOLD, L.L.C.
NOTES TO FINANCIAL STATEMENTS
================================================================================
4. NOTES PAYABLE - The Company has mortgages payable to Matzel &
RELATED PARTY Mumford Mortgage Funding, an entity controlled
by the members of M&M at Freehold. Interest at
16% is payable quarterly as follows:
o The first Note has a maximum commitment of
$1,700,000 and is to finance the
construction of five homes. The Note is due
on August 28, 1999 and had an outstanding
balance of $613,359 at December 31, 1998.
The Note is collateralized by a first
mortgage on the five building lots.
o The second Note has a maximum commitment of
$2,620,000 and is to finance the
construction of seven homes. The note is
due on November 7, 1999 and had an
outstanding balance of $1,282,000 at
December 31, 1998. The Note is
collateralized by a first mortgage on the
seven building lots.
o The third Note has a maximum commitment of
$600,000 and was used to finance the land
acquisition of phase three (31 lots). The
Note is due at November 15, 1999 and had an
outstanding balance of $600,000 at December
31, 1998. The Note is collateralized by a
second mortgage on the 31 building lots.
5. RELATED PARTY The Company has an agreement with the Matzel &
TRANSACTIONS Mumford Organization, Inc. ("MMO"), whereby MMO
provides construction management services at a fee of
3% of the gross selling price of each house. MMO is
entitled to draws of $50,000 per month. During 1998
and 1997, $600,000 and $360,000, respectively, of
management fees have been advanced. $650,846 and
$194,409 of management fees were expensed in 1998 and
1997, respectively.
Included in due to affiliates are advances to and
transfers of costs incurred by affiliated companies
of the managing member of the Company. The amounts
are short term in nature and bear no interest. The
amounts are to be repaid as cash flows permit.
10
<PAGE>
MATZEL & MUMFORD AT FREEHOLD, L.L.C.
NOTES TO FINANCIAL STATEMENTS
================================================================================
6. FAIR VALUE OF In accordance with the requirements of SFAS No. 107,
FINANCIAL "Disclosures about Fair Value of Financial
INSTRUMENTS Instruments," the Company has provided the following
fair value estimates and information about valuation
methodologies. The estimated fair value amounts have
been determined using available market information,
however, considerable judgement is required in
interpreting market data to develop estimates of fair
value; therefore, the estimates are not necessarily
indicative of the amounts that could be realized or
would be paid in a current market exchange. The
effect of using different market assumptions and/or
estimation methodologies may be material to the
estimated fair value amounts.
For purposes of this analysis, the Company has
assumed 12% for the current market rate of its
related party notes. Other mortgages are considered
to be at market rates due to the variable interest
rates and relatively recent date of the borrowing.
Fair value information presented herein is based on
information available at December 31, 1998 and 1997.
Although management is not aware of any factors that
would significantly affect the estimated fair value
amounts, such amounts have not been updated since
those dates and, therefore, the current estimates of
fair value at dates subsequent to December 31, 1998,
may differ significantly from these amounts.
Book Value Fair Value
-----------------------------------------------------------
Loans and mortgages payable $7,806,688 $7,885,700
===========================================================
The recorded values of cash, accounts payable,
accrued expenses and due to affiliates, due to their
short-term nature, approximate fair value.
7. YEAR 2000 Like other companies, M&M at Freehold could be
(UNAUDITED) adversely affected if the computer systems we or our
suppliers use do not properly process and calculate
date-related information and data from the period
surrounding and including January 1, 2000. This is
commonly know as the "Year 2000" issue. At this time,
because of the complexities involved in the issue,
management cannot provide assurances that the Year
2000 issue will not have an effect on the Company's
operations.
11
<PAGE>
MATZEL & MUMFORD AT
PHILLIPSBURG, L.L.C.
================================================================================
FINANCIAL STATEMENTS
PERIOD FROM SEPTEMBER 24, 1998
(DATE OF INCEPTION) TO DECEMBER 31, 1998
1
<PAGE>
MATZEL & MUMFORD AT PHILLIPSBURG, L.L.C.
CONTENTS
================================================================================
INDEPENDENT AUDITORS' REPORT 3
FINANCIAL STATEMENTS:
Balance sheet 4
Statement of cash flows 5
Notes to financial statements 6-9
2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Members
Matzel & Mumford at Phillipsburg, L.L.C.
Hazlet, New Jersey
We have audited the accompanying balance sheet of Matzel & Mumford at
Phillipsburg, L.L.C. as of December 31, 1998, and the related statement of cash
flows for the period September 24, 1998, (date of inception) to December 31,
1998. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Matzel & Mumford at
Phillipsburg, L.L.C. as of December 31, 1998, and its cash flows for the period
September 24, 1998, (date of inception) through December 31, 1998, in conformity
with generally accepted accounting principles.
/S/B D O SEIDMAN, LLP
- ---------------------
January 29, 1999
3
<PAGE>
MATZEL & MUMFORD AT PHILLIPSBURG, L.L.C.
BALANCE SHEET
================================================================================
December 31, 1998
- -------------------------------------------------------------------
ASSETS
Cash $ 5,691
Inventory (Notes 2 and 3) 1,314,740
- -------------------------------------------------------------------
TOTAL ASSETS $1,320,431
===================================================================
LIABILITIES AND MEMBERS' EQUITY
Accounts payable and accrued expenses $ 50,431
Due to affiliates 33,000
Mortgages payable (Note 3) 837,000
Notes payable - related party (Note 4) 400,000
- -------------------------------------------------------------------
TOTAL LIABILITIES 1,320,431
MEMBERS' EQUITY 1,000
MEMBERS' EQUITY RECEIVABLE (1,000)
- -------------------------------------------------------------------
TOTAL LIABILITIES AND MEMBERS' EQUITY $1,320,431
===================================================================
See accompanying notes to financial statements.
4
<PAGE>
MATZEL & MUMFORD AT PHILLIPSBURG, L.L.C.
STATEMENT OF CASH FLOWS
============================================================================
For the period September 24, 1998 (date of inception) to
December 31, 1998
- ----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ -
Adjustments to reconcile net income to net cash used in
operating activities:
Increase in inventories (1,314,740)
Increase in accounts payable and accrued expenses 50,431
- ----------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (1,264,309)
- ----------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage payable 837,000
Proceeds from notes payable 400,000
Increase in due to affiliates 33,000
- ----------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,270,000
- ----------------------------------------------------------------------------
INCREASE IN CASH 5,691
CASH, BEGINNING OF PERIOD -
- ----------------------------------------------------------------------------
CASH, END OF PERIOD $ 5,691
============================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 33,886
============================================================================
See accompanying notes to financial statements.
5
<PAGE>
MATZEL & MUMFORD AT PHILLIPSBURG, L.L.C.
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF Nature of Business and Organization
ACCOUNTING
POLICIES
Matzel & Mumford at Phillipsburg, L.L.C. ("M&M at
Phillipsburg" or the "Company") is a New Jersey
limited liability company formed on September 24,
1998, for the purpose of purchasing land in
Phillipsburg, New Jersey and developing and
constructing 26 single-family homes on the land. The
Company has begun the construction of homes.
Revenue Recognition
Revenues arising from home sales will be recognized
under the accrual method in accordance with Financial
Accounting Standard 66. Under this method, income will
be recognized when all terms relating to the sale of a
unit are complete, consideration is exchanged and
title is conveyed to the buyer.
Inventories
Inventories are stated at the lower of cost or fair
value. Inventories under development or held for
development are stated at an accumulated cost unless
such cost would not be recovered from the cash flows
generated by future disposition. In this instance,
such inventories are recorded at fair value.
Inventory costs are currently comprised of land,
capitalized interest and project overhead. Inventory
costs will be comprised of direct unit and allocated
costs. Development costs will be capitalized until the
property is complete and title has been conveyed to
the buyer. Development costs generally include land
and improvements, home construction, project overhead,
interest and construction management fees. Interest
capitalized is based upon the interest rate on
specifically related debt. The management fees to a
related party are paid and capitalized by the Company.
Members' Capital
The two managing members have pledged a total of
$1,000 in capital contributions.
6
<PAGE>
MATZEL & MUMFORD AT PHILLIPSBURG, L.L.C.
NOTES TO FINANCIAL STATEMENTS
================================================================================
Income Taxes
The Company is organized and operates as a limited
liability company which is not subject to Federal or
state income taxes. Accordingly, no provision for
income taxes has been made. The earnings or losses of
the Company are included on each member's tax return,
according to the terms of the operating agreement.
Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
2. INVENTORIES Inventories relating to the development of
single-family homes consist of the following at
December 31, 1998:
------------------------------------------------------
Land $ 927,784
Financing 39,393
Project overhead 347,563
------------------------------------------------------
$1,314,740
======================================================
All expenses incurred for the development of the
project will be capitalized. Selling expenses which do
not benefit future periods, will be treated as period
costs and will be expensed as incurred.
3. MORTGAGES PAYABLE December 31, 1998
------------------------------------------------------
Land and construction loan $ 837,000
======================================================
7
<PAGE>
MATZEL & MUMFORD AT PHILLIPSBURG, L.L.C.
NOTES TO FINANCIAL STATEMENTS
================================================================================
The Company has a commitment from a bank for land
acquisition and construction in the amount of
$2,811,000. The loan bears interest at the prime rate
(7-3/4% at December 31, 1998), plus 1/2%, which is
payaBle monthly. The loan is collateralized by land
and improvements, the guarantee of Matzel & Mumford
Organization, Inc. ("MMO") and members of the Company.
The loan matures on December 1, 2000.
4. NOTES PAYABLE - The Company has a mortgage payable to Matzel &
RELATED PARTY Mumford Mortgage Funding, an entity controlled by the
members of M&M at Phillipsburg. Interest at 16% is
payable quarterly until October 12, 2000, when the
outstanding principal balance is due. The note is
collateralized by a second mortgage on the land and
improvements of the Company.
5. RELATED PARTY The Company has an agreement with MMO, whereby MMO
TRANSACTION provides construction management services. The fee
for such services will be based on 3-1/2% of the
grosS selling price of each home. The agreement also
provides that during the period prior to the sale of
homes, MMO is entitled to draws of $25,000 per month.
During the period September 24, 1998 through December
31, 1998, the Company has not incurred any management
fees.
Included in due to affiliates are transfers of costs
incurred by affiliated companies of the managing
member of the Company. The amounts are short term in
nature and bear no interest. The amounts are to be
repaid as future cash flow allows.
8
<PAGE>
MATZEL & MUMFORD AT PHILLIPSBURG, L.L.C.
NOTES TO FINANCIAL STATEMENTS
================================================================================
6. FAIR VALUE OF In accordance with the requirements of SFAS No. 107,
FINANCIAL "Disclosures about Fair Value of Financial
INSTRUMENTS Instruments," the Company has provided the following
fair value estimates and information about valuation
methodologies. The estimated fair value amounts have
been determined using available market information,
however, considerable judgment is required in
interpreting market data to develop estimates of fair
value; therefore, the estimates are not necessarily
indicative of the amounts that could be realized or
would be paid in a current market exchange. The
effect of using different market assumptions and/or
estimation methodologies may be material to the
estimated fair value amounts.
For purposes of this analysis the Company has assumed
a 12% rate as the current market rate of its related
party notes. Other mortgages are considered to be at
market rates due to their variable interest rates and
relatively recent date of the borrowing.
Fair value information presented herein is based on
information available at December 31, 1998. Although
management is not aware of any factors that would
significantly affect the estimated fair value
amounts, such amounts have not been updated since
those dates and; therefore, the current estimates of
fair value at dates subsequent to December 31, 1998,
may differ significantly from these amounts.
Book Value Fair Value
-----------------------------------------------------
Notes and mortgages payable $1,237,000 $1,265,000
=====================================================
The recorded values of cash, accounts payable,
accrued expenses and due to affiliates, due to their
short-term nature, approximate fair value.
9
<PAGE>
MATZEL & MUMFORD AT PHILLIPSBURG, L.L.C.
NOTES TO FINANCIAL STATEMENTS
================================================================================
7. YEAR 2000 Like other companies, M&M at Phillipsburg could be
(UNAUDITED) adversely affected if the computer systems we or our
suppliers use do not properly process and calculate
date-related information and data from the period
surrounding and including January 1, 2000. This is
commonly known as the "Year 2000" issue. At this
time, because of the complexities involved in this
issue, management cannot provide assurances that the
Year 2000 issue will not have an effect on the
Company's operations.
10
<PAGE>
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Nothing to report.
30
<PAGE>
PART III
ITEM 9 DIRECTOR, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
(a) Directors and Executive Officers
The Funding Company's officers are elected annually by the Board of
Directors and serve at the discretion of the Board. The directors and executive
officers of the Funding Company are as follows:
Name Age Position
---- --- --------
Bruce Matzel 54 Chairman of the Board, Director
Roger Mumford 43 President, Director
Michael S. Skea 42 Vice President, Secretary
Bruce Matzel is Chairman of the Board of the Funding Company and a
director. Mr. Matzel has served in the same capacity for MMO since its formation
in 1986. Mr. Matzel has over thirty years of experience in the real estate
development business, including the homebuilding business. Mr. Matzel has
developed property in various locations in New Jersey, New York, and Virginia.
Roger Mumford is President of the Funding Company and a director. Mr.
Mumford has served in a similar capacity for MMO since its formation in 1986.
Mr. Mumford has been actively engaged in the homebuilding business for over
twenty years in various locations in New Jersey and Virginia.
Michael S. Skea is Vice President and Secretary of the Funding Company. Mr.
Skea has served as Corporate Counsel for MMO since May 1992. Before that, Mr.
Skea served in a similar capacity for Weiner Homes Corporation, a homebuilding
company located in Neptune, New Jersey, from 1986 to 1993. He has 11 years of
experience in the homebuilding industry, and is a member of the New Jersey Bar.
The Funding Company's directors are elected annually by the shareholders.
Mr. Matzel and Mr. Mumford are presently the only directors of the Funding
Company. Because there are only two directors, it is possible that a
disagreement between Messrs. Matzel and Mumford could cause a stalemate in the
Funding Company's operations.
There is no family relationship between or among any of the directors or
executive officers.
(b) Compliance with Section 16(a) of Exchange Act
No person has been required to file Forms 3, 4 or 5 during the last fiscal
year or prior years because no class of the registrant' securities is registered
under the Securities Exchange Act of 1934.
31
<PAGE>
ITEM 10 EXECUTIVE COMPENSATION
The Funding Company does not pay any compensation to its officers or
directors. The officers and all other staff members performing services for the
Funding Company are employees of MMO. The cost to the Funding Company of such
services is covered by a loan servicing fee that the Funding Company pays to
MMO. The Funding Company expects to maintain this arrangement for the
foreseeable future. MMO does not expect to derive any profit from the loan
servicing fee; MMO expects that the full amount of this fee will be directly
attributable to the costs of the services that MMO employees will perform for
the Funding Company.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of the date of this
Report with respect to the beneficial ownership of the Funding Company's common
stock by all persons known by the Funding Company to be the beneficial owners of
more than 5% of its outstanding shares, by directors who own common stock and by
all officers and directors as a group.
Amount and
Nature of
Name and Address of Beneficial
Title of Class Beneficial Owner Ownership Percent of Class
-------------- ------------------- ----------- ----------------
Common Stock, no Bruce Matzel 250 shares 50%
par value 100 Village Court
Hazlet, New Jersey
07730
Roger Mumford 250 shares 50%
100 Village Court
Hazlet, New Jersey
07730
The Company is not aware of any arrangements which may result in a change
of control of Matzel & Mumford Mortgage Funding, Inc.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Bruce Matzel and Roger Mumford were the promoters of the Funding Company,
which was incorporated in July, 1995.
Messrs. Matzel and Mumford were obligated to and did contribute,
contemporaneously with or prior to the issuance and sale of the Notes, an
aggregate of $490,000 to the Funding Company to provide for initial
capitalization
32
<PAGE>
expenses and the expenses of the offering of the Notes, and each of them renders
services to the Funding Company as directors and executive officers without
separate compensation therefor. The Funding Company may pay dividends or make
other distributions to its shareholders if it is current on all of its
obligations under the Notes and the Indenture.
Bruce Matzel and Roger Mumford own substantially all of the equity of MMO
and serve as MMO's principal executive officers. MMO services the Loans pursuant
to the terms of a Loan Servicing Agreement. MMO also provides management
services and design, warranty and other services to each of the M&M Project
Entities in exchange for management fees and other payments.
Bruce Matzel and Roger Mumford, in the aggregate, own at least a
controlling percentage of the equity interests in, and serve as executive
officers of, each M&M Project Entity. M&M Project Entities may pay dividends or
make other distributions to their equity holders if they are current on their
payment and other obligations to the Funding Company. Several Matzel & Mumford
real estate development companies have financing in place that is personally
guaranteed by Messrs. Matzel and Mumford. It is possible that one or more Loans
from the Funding Company may be used to refinance some of that debt.
33
<PAGE>
PART IV
Item 13 Exhibits, Schedules, and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K: None
34
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MATZEL & MUMFORD MORTGAGE FUNDING, INC.
Date: March 26, 1999 By: /s/ ROGER MUMFORD
--------------------------------------------
Roger Mumford, President
(Principal Executive Officer)
By: /s/ JONATHAN FISHER
--------------------------------------------
Jonathan Fisher, Controller
(Principal Accounting Officer)
Pursuant to the requirements of 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.
Date: March 26, 1999 By: /s/ BRUCE MATZEL
--------------------------------------------
Bruce Matzel, Director
By: /s/ ROGER MUMFORD
--------------------------------------------
Roger Mumford, Director
35
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
MATZEL & MUMFORD AT MORTGAGE FUNDING, LLC
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 383,498
<SECURITIES> 0
<RECEIVABLES> 3,682,859
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,066,357
<PP&E> 143,525
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,209,882
<CURRENT-LIABILITIES> 100
<BONDS> 3,750,000
<COMMON> 10,000
0
0
<OTHER-SE> 449,782
<TOTAL-LIABILITY-AND-EQUITY> 4,209,882
<SALES> 619,573
<TOTAL-REVENUES> 619,573
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 75,376
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 562,500
<INCOME-PRETAX> (18,303)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,303)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,303)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
MATZEL & MUMFORD AT SOUTH BRUNSWICK, LLC
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 235,773
<SECURITIES> 0
<RECEIVABLES> 38,700
<ALLOWANCES> 0
<INVENTORY> 6,392,263
<CURRENT-ASSETS> 6,666,736
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,666,736
<CURRENT-LIABILITIES> 6,120,022
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 546,714
<TOTAL-LIABILITY-AND-EQUITY> 6,666,736
<SALES> 16,725,360
<TOTAL-REVENUES> 16,740,641
<CGS> 14,986,019
<TOTAL-COSTS> 14,986,019
<OTHER-EXPENSES> 1,216,128
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