As filed with the Securities and Exchange Commission on July 11, 1997
File No. 333-15151
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 3 TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FEDERAL MORTGAGE MANAGEMENT II, INC.
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(Name of small business issuer in its charter)
FLORIDA 6211 65-0625618
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(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification Number)
1800 SECOND STREET, SUITE 780
SARASOTA, FLORIDA 34236
(941) 954-2328
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(Address and telephone number of principal executive offices)
1800 SECOND STREET, SUITE 780
SARASOTA, FLORIDA 34236
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(Address of principal place of business)
GUY S. DELLA PENNA, PRESIDENT & CEO
EXECUTIVE WEALTH MANAGEMENT SERVICES, INC.
2323 STICKNEY POINT RD.
SARASOTA, FLORIDA 34231
(941) 921-9700
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(Name, address and telephone number of agent for service)
Copies to:
Gregory C. Yadley, Esquire
Shumaker, Loop & Kendrick, LLP
101 E. Kennedy Blvd., Suite 2800
Tampa, FL 33602
(813) 229-7600
Approximate date of proposed commencement of sale to the public: As soon as
practical after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF PROPOSED PROPOSED
EACH CLASS OF DOLLAR AMOUNT MAXIMUM OFFERING MAXIMUM AMOUNT OF
SECURITIES TO TO BE PRICE PER AGGREGATE REGISTRATION
BE REGISTERED REGISTERED UNIT (1) OFFERING PRICE FEE
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Series 1997A
Promissory Notes $5,000,000 $1,000 $5,000,000 $1,515.15
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FEDERAL MORTGAGE MANAGEMENT II, INC.
$5,000,000 Aggregate Principal Amount of Promissory Notes
FEDERAL MORTGAGE MANAGEMENT II, INC. (the "Company") is a newly formed
Florida corporation based in Sarasota, Florida. The Company is offering its
Promissory Notes (the "Notes") in aggregate principal amount of $5,000,000.
Within such aggregate principal amount of $5,000,000, the Notes are available in
the following maturities and Note interest rates ("Note Rate"):
SELLING
SERIES AMOUNT COMMISSION MATURITY DATE RATE
-------- ---------- ---------- ----------------- ----
1997 A-I $ 500,000 3.00% September 30, 2001 8.00%
1997 A-II 1,000,000 4.50% September 30, 2002 9.00%
1997 A-III 3,500,000 7.00% September 30, 2003 10.00%
Interest on the Notes will be payable monthly at the applicable Note
Rate commencing on the first day of the first month following attainment of the
Minimum Requirement (as hereinafter defined) and the release of the proceeds
from the sale of the Notes to the Company, and thereafter, on the first day of
each month (each a "Payment Date"). The amount of interest payable on each
Payment Date will equal the interest accrued during the month ending on the day
prior to such Payment Date ("Interest Accrual Period"). All Note Rates are fixed
and not subject to adjustment during the Note term. The Notes are non-callable.
Subject to certain conditions, interest at the Note Rate will begin to
accrue upon acceptance of a subscription for a Note by the Company and after
attainment of the minimum requirement. The minimum subscription for Notes is
$5,000. See "TERMS OF NOTE OFFERING." Utilizing the net proceeds received from
the sale of the Notes, the Company will originate, acquire, hold and deal in a
portfolio of residential real estate mortgage loans (each a "Portfolio Loan" and
collectively, the "Portfolio Loans") to be acquired in accordance with an
acquisition policy described herein (the "Acquisition Policy"). See "BUSINESS OF
THE COMPANY - PLAN OF OPERATION."
AN INVESTMENT IN THE NOTES IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF
RISK, WITH THE HIGHEST DEGREE OF RISK BEING ASSOCIATED WITH THE SERIES 1997
A-III NOTES DUE IN 2003. INVESTORS SHOULD CAREFULLY CONSIDER THE MATERIAL RISKS
SET FORTH UNDER THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 7.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Notes are being offered on a best efforts basis by Executive Wealth
Management Services, Inc. ("Executive"), which will receive average selling
commissions at the rate of 6.1% of Note proceeds. As indicated in Notes (2) and
(3) below, Executive and its affiliates also will receive certain other fees and
expense allowances.
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MAXIMUM SELLING PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(2) COMPANY(3)
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Per Note (1) $ 1,000 $ 128 $ 878
Total Minimum (4) 1,500,000 191,500 1,308,500
Total Maximum 5,000,000 580,000 4,420,000
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(1) Subscriptions for Notes may be made in increments of $1,000, subject to
a minimum investment of $5,000 principal amount of Notes. Subscribers
may request that their subscriptions be allocated between the three
sub-Series of Notes in $1,000 increments, subject to availability. The
Company and Executive, the selling agent for the Notes, are affiliates.
In accordance with the provisions of the Bylaws of the National
Association of Securities Dealers, Inc. (the "NASD"), the fairness of
the Note offering made hereby has been reviewed by Kashner Davidson
Securities Corporation, a "qualified independent underwriter" as such
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term is defined in Rule 2720 of the NASD Rules of Conduct. See "PLAN OF
DISTRIBUTION" and "DESCRIPTION OF NOTES AND CUSTODY AGREEMENT."
(2) The Notes are being sold on a best efforts basis by Executive, as
selling agent, and may also be sold through the facilities of other
securities broker-dealers who are members of the NASD and are
authorized by the Company to offer the Notes and are permitted to do so
under the laws of the jurisdictions in which the Notes may be offered.
Average selling commissions at the rate of 6.1% of the Note proceeds
will be paid to Executive and the other qualified securities
broker-dealers if the Minimum Requirement is attained (as described in
Note 4 below). Additionally, Executive will be entitled to receive a 3%
Note offering management fee charged against gross Note offering
proceeds in connection with the sale of the Notes offered hereby, as
well as a non-accountable expense allowance equal to 2% of gross Note
offering proceeds. The Company will pay a fee of $15,000 to Kashner
Davidson Securities Corporation for its service as a "qualified
independent underwriter" in connection with the offering of the Notes,
and will also pay the expenses of Kashner Davidson's counsel arising in
connection with its representation of Kashner Davidson in this matter,
estimated to be $10,000. The payment of all selling commissions, fees
and the non-accountable expense allowance to Executive and other
qualified securities broker-dealers is subject to the attainment of the
Minimum Requirement described in Note (4) below.
(3) The amount reflected in the table does not take into account expenses
incurred and to be incurred by or on behalf of the Company in
connection with the organization of the Company and the Note offering
and consisting primarily of legal, accounting and filing fees, printing
expenses and other miscellaneous fees and expenses which are in excess
of $220,000. Upon the attainment of the Minimum Requirement, the
Company will pay $120,000 of such expenses. If at least $2,000,000
principal amount of Notes is sold by the Company, the Company will
reimburse Capital Management Group, Inc. ("CMG") for up to an
additional $100,000 of such expenses which may have been paid
previously or accrued by CMG. Such expenses are in addition to selling
commissions, the management fees and the non-accountable expense
allowance described in Note (2) above. CMG will pay or absorb expenses
of the Company in connection with the organization of the Company and
the Note offering in excess of such amounts. See "USE OF PROCEEDS."
(4) The offering of Notes made hereby is subject to the requirement that
the Company receive and accept subscriptions for Notes in the minimum
principal amount of $1,500,000 on or before midnight on the 90th day
after the date of this Prospectus, subject to a one-time extension
effected at the sole option of the Company of up to 90 days from such
date. Pending the receipt and acceptance of such subscriptions for
Notes, all subscription funds delivered by investors to Executive shall
be deposited promptly in an escrow account and maintained therein in
accordance with an Escrow Agreement between the Company, Executive and
SouthTrust Asset Management Company of Florida, N.A., Sarasota, Florida
(the "Escrow Agent"). Such minimum subscriptions for Notes requirement
is referred to in this Prospectus as the "Minimum Requirement." If the
Minimum Requirement is not successfully attained, all subscription
funds maintained in the escrow account shall be returned promptly to
investors with the interest earned thereon. See "TERMS OF NOTE
OFFERING." If the Minimum Requirement is timely attained, the Note
offering will continue until the earlier of (a) the 270th day from the
date of this Prospectus, (b) the sale of the entire $5,000,000
principal amount of Notes, or (c) termination of the Note offering at
the sole election of the Company (the "Offering Period"). See "USE OF
PROCEEDS" and "BUSINESS OF THE COMPANY."
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE NOTE OFFERING DESCRIBED HEREIN AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR EXECUTIVE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
THERE HAS NOT BEEN ANY CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE OF THIS PROSPECTUS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY THE NOTES IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL.
UNTIL _____________, 1997 [90 DAYS AFTER THE DATE OF THIS PROSPECTUS],
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER A
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PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO OTHER UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
Interested Investors Should Contact:
Executive Wealth Management Services, Inc.
2323 Stickney Point Road
Sarasota, Florida 34231
941/921-9700
The date of this Prospectus is July __, 1997.
<PAGE>
TABLE OF CONTENTS
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PAGE
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GLOSSARY OF CERTAIN TERMS..................................................1
INVESTOR SUITABILITY...................................................... 1
PROSPECTUS SUMMARY........................................................ 2
SUMMARY FINANCIAL INFORMATION............................................. 7
RISK FACTORS.............................................................. 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS........................15
TERMS OF NOTE OFFERING....................................................15
PLAN OF DISTRIBUTION......................................................17
CONFLICTS OF INTEREST; TRANSACTIONS WITH MANAGEMENT AND AFFILIATES........17
USE OF PROCEEDS...........................................................19
CAPITALIZATION............................................................20
BUSINESS OF THE COMPANY - PLAN OF OPERATION...............................21
Background
Principal Activity
Summary of Portfolio Loan Acquisition Policy
Portfolio Loan Acquisition Policy
Supply of Portfolio Loans
Portfolio Loan Servicing
Competition
Eligible Collateral as Security for the Note Obligations
MANAGEMENT................................................................27
Information Concerning Mr. Della Penna
Compensation
Indemnification
Key-Man Life Insurance
PRINCIPAL SHAREHOLDERS....................................................28
DESCRIPTION OF THE NOTES AND THE CUSTODY AGREEMENT........................28
General
Eligible Collateral
Summary of the Custody Agreement
The Trustee
Action by the Trustee upon Default by the Company
Note Prepayment
Transfer Agent
REPORTS TO NOTE HOLDERS...................................................31
LITIGATION................................................................32
LEGAL MATTERS.............................................................32
EXPERTS...................................................................32
ADDITIONAL INFORMATION....................................................32
INDEX TO FINANCIAL STATEMENTS............................................F-1
APPENDIX A - PRIOR PERFORMANCE INFORMATION
EXHIBIT A - NOTE SUBSCRIPTION AGREEMENT
EXHIBIT B - INDENTURE AND CUSTODY AGREEMENT
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GLOSSARY OF CERTAIN TERMS
The information presented in this Prospectus concerning the Company's
activities in connection with the acquisition of residential real estate
mortgage loans utilizes certain terms to describe such loans and their
characteristics with respect to past and present loan payment performance of the
borrower obligated under a particular Portfolio Loan (the mortgagor), current
financial status of the mortgagor, the manner of origination of the loan,
factors affecting the Company's ability to sell the loan in the secondary
mortgage loan market and other factors and characteristics which may be material
in connection with the Company's purchase, ownership and subsequent sale of a
Portfolio Loan. Unless the text of this Prospectus clearly indicates otherwise,
the terms below which are descriptive of residential real estate mortgage loans
shall have the meanings or definitions indicated:
"Residential real estate mortgage loan" means a mortgage loan
secured by a lien on real estate which is either improved with a one to
four family residential dwelling or is unimproved but zoned and
intended for use as a building lot for a one to four family residential
dwelling.
"Conforming loan" means a residential real estate mortgage loan
which has been originated in compliance with the origination criteria
of the Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC"), both of which are federally
chartered corporations. Such loan origination criteria include loan
amount to value of collateral real estate ratios, mortgagor payment
history and the ability of the mortgagor to repay the loan. A
conforming loan may also be a loan not originated in compliance with
FNMA or FHLMC origination criteria but which at the time of acquisition
for the Company is salable to FNMA or FHLMC.
"Non-conforming loan" means a residential real estate mortgage
loan (a) whose mortgagor has an acceptable payment and credit history
but which is otherwise non-conforming to the loan transaction
documentation criteria of FNMA or FHLMC, or (b) which is in compliance
with FNMA or FHLMC loan transaction documentation criteria but does not
otherwise conform to FNMA or FHLMC loan underwriting requirements in
terms of loan to value ratios, credit history or other underwriting
criteria.
Within the conforming and non-conforming loan categories, there are
three standards of loan performance:
A "performing loan" is a residential real estate mortgage loan
which, during the prior six months, has been current in terms of
scheduled principal and interest payments or has not been in excess of
30 days delinquent in any such payment.
An "under-performing loan" is a residential real estate mortgage
loan (a) which is more than 30 days delinquent with respect to one or
more current or historical scheduled principal or interest payments but
with respect to which at least one payment has been received in the
last 90 days, or (b) which has been more than 30 days delinquent with
respect to one or more current or historical scheduled principal or
interest payments in the prior six months but which, on a current
basis, is now meeting scheduled principal and interest payments as
required by the loans terms and has done so for a minimum period of 60
days.
A "non-performing loan" is a residential real estate mortgage loan
(a) with respect to which no payment has been received in the past 90
days, or (b) the mortgagor of which, together with the underlying
collateral real estate, is or may be subject to a foreclosure or
bankruptcy proceeding.
INVESTOR SUITABILITY
In the view of the Company, the Notes offered by this Prospectus should
be acquired only if the purchasing investor (a) is able to hold the Notes over
the term thereof and recognizes that until maturity, the Notes offered by this
Prospectus represent an illiquid investment; (b) is able to assume on a
continuing basis with respect to the Note investment the risk of loss of a
substantial portion of the investor's investment in the Notes; and (c) has a net
worth sufficient to permit the assumption of the risks inherent in the Company's
intended activities. See "RISK FACTORS."
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In keeping with the foregoing, the Company will accept subscriptions
for Notes only from (i) individuals who, alone or together with his or her
spouse, have a minimum net worth (exclusive of home and automobiles) of
$150,000, or (ii) entities which have a net worth of at least $150,000. Further,
no subscriber may subscribe for Notes representing more than ten (10) percent of
such subscriber's net worth.
The Notes offered by this Prospectus involve a high degree of risk and
each investor's investment in Notes will be at risk in the activities of the
Company. If the Company is unsuccessful or only marginally successful in
carrying out its business activities with respect to the purchase and sale of
Portfolio Loans, the Company's ability to meet the interest and principal
obligations represented by outstanding Notes in a timely manner will be
impaired. Accordingly, investors should only purchase Notes with the full
understanding of the risks which must be assumed in order to obtain the
opportunity of receiving the rate of return on their invested capital offered by
the Notes. See "RISK FACTORS."
PROSPECTUS SUMMARY
Set forth below is a summary of certain information which is contained
in this Prospectus. Such information is qualified in its entirety by the more
detailed information and financial statements and notes thereto appearing
elsewhere in this Prospectus.
The Company Federal Mortgage Management II, Inc. (the "Company") was
incorporated under Florida law on November 13, 1995. The
Company was formed and is being capitalized primarily to
originate, underwrite, acquire, hold and deal in a portfolio
of primarily first lien residential mortgage loans (the
"Portfolio Loans"). As a general matter, the Company expects
to buy Portfolio Loans which represent higher credit risks,
and therefore offer a higher yield, than loans generally
originated by commercial banks or other institutional
lenders. During a period of generally from three to six
months after the acquisition of a Portfolio Loan, the Company
will endeavor to bring all loan documentation for the loan
into compliance with the institutional mortgage loan market
(referred to as "scrubbing" the loan) and, with respect to
under-performing or non-performing loans, will attempt to
work with the mortgagor to have the loan payments brought to
current status in terms of principal and interest payments.
After servicing the loan for a three to nine month period and
bringing a delinquent loan current, or at least improving its
performing status (referred to as "seasoning" the loan), the
Company will then package together a number of "scrubbed" and
"seasoned" Portfolio Loans and attempt to sell them into the
institutional mortgage loan market at a premium over the
price the Company paid for them.
Pending the purchase of Portfolio Loans, the Company may
invest available cash in deposit or certificate accounts of
state or federally chartered banking institutions with at
least $500 million of assets or debt securities of the United
States or instrumentalities thereof ("Federal Instruments")
or money market or equivalent funds at a New York Stock
Exchange member firm with net assets of at least $200 million
("Money Market Funds"). See "BUSINESS OF THE COMPANY - PLAN
OF OPERATION."
The Company's offices are located at 1800 Second Street,
Suite 780, Sarasota, Florida 34236; its telephone number is
941/954-2328.
Securities Being The Company is offering $5,000,000 in aggregate principal
Offered amount of Promissory Notes, in varying maturities and with
varying Note Rates, as set forth below:
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SERIES AMOUNT MATURITY DATE RATE
---------- ---------- ------------------ -------
1997 A-I $ 500,000 September 30, 2001 8.00%
1997 A-II 1,000,000 September 30, 2002 9.00%
1997 A-III 3,500,000 September 30, 2003 10.00%
Interest will be calculated on the principal amount of
outstanding Notes on the basis of a 365 day year and will be
paid to Note holders by the Company on a monthly basis. The
principal obligation of the Notes will be due at Note
maturity. The principal obligation of outstanding Notes may
not be prepaid by the Company prior to maturity.
A maximum principal amount of $5,000,000 of such Notes may be
issued by the Company.
Interest will accrue on each Note at the Note Rate from the
time of acceptance of the subscription for the Note by the
Company. Payment of the interest on subscribed Notes will
commence on the first day of the first month following
attainment of the Minimum Requirement and the release of Note
subscription funds to the Company. Thereafter, Note interest
will be paid on a calendar month basis on the first day of
each month. Such will also be the case for Note subscriptions
accepted subsequent to the attainment of the Minimum
Requirement. If the Company does not attain the Minimum
Requirement within 90 days of the date of this Prospectus,
subject to a one-time extension of up to 90 days from such
date effected at the sole option of the Company, all
subscription funds will be returned promptly to investors
with the interest earned thereon. See "TERMS OF NOTE
OFFERING."
Custody Agreement The Notes will be issued pursuant to an indenture and custody
agreement (the "Custody Agreement"), and the notes and
mortgages comprising the Portfolio Loans will be held by, and
in the name of, Michael Hric, P.A., as trustee (the
"Trustee"), acting as agent for the holders of the Notes. The
Custody Agreement does not contain provisions meeting the
requirements of the Trust Indenture Act of 1939, although the
holders of the Notes and the Trustee will have certain rights
which correspond to some of the requirements of such act. The
Trustee will acquire and maintain a lien on the Portfolio
Loans (as well as the proceeds of any sale of a Portfolio
Loan until the same is reinvested in another Portfolio Loan
or paid out to the Noteholders) and any real estate acquired
upon foreclosure of a Portfolio Loan. Pending the purchase of
Portfolio Loans, the Company may invest available cash in
Federal Instruments or Money Market Funds which will also be
held by the Trustee under the Custody Agreement. The
Portfolio Loans and Federal Instruments, as well as the cash
proceeds from the sale thereof, Money Market Funds, and any
real estate acquired upon foreclosure of a Portfolio Loan are
hereinafter referred to as Eligible Collateral. As a general
matter, cash payments on the Portfolio Loans, representing
the repayment of principal and interest thereon, will be paid
directly to the Company, and the Trustee will not have
possession and control over the cash from these payments. At
the time of the release of subscription funds to the Company
upon the attainment of the Minimum Requirement and for an
indefinite period thereafter, the face amount or value of the
Eligible Collateral will be less than the aggregate principal
obligation of outstanding Notes, as approximately 15% to 22%
of the gross proceeds from the sale of the Notes will be used
immediately to pay offering and other accrued expenses.
Pursuant to the Custody Agreement, the Trustee will at all
times hold Eligible Collateral with an aggregate Unadjusted
Value (as defined below) equal to at least 60% of the
aggregate outstanding principal balance of the Notes. The
Unadjusted Value of a Federal Instrument is the cash value of
the instrument. Money Market Funds are considered cash
equivalents and the Unadjusted Value of Money Market Funds is
the current balance of such funds. The Unadjusted Value of a
Portfolio Loan is equal to the outstanding balance due under
the loan, and may exceed the amount which could be obtained
upon an immediate sale of the same. The Unadjusted Value of
real estate owned by the Company as a result of a Portfolio
loan foreclosure will be valued at the lesser of the
estimated fair market value of the property received by the
Company upon foreclosure or the principal balance of the loan
at the time of foreclosure plus accrued interest and fees and
costs incurred by the Company in connection with such
foreclosure process, and also may exceed the amount which
could be obtained upon an
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immediate sale of the same. The remaining assets of the
Company, including other items of Eligible Collateral, may be
held by the Company. Accordingly, the principal and interest
obligations represented by the Notes may never be fully
collateralized by Eligible Collateral held by the Trustee,
and may be secured by collateral which may have a liquidation
value equal to less than 60% of the aggregate outstanding
principal obligations due under the Notes. To the extent that
the value of the Eligible Collateral held by the Trustee is
less than the aggregate principal and interest obligations
represented by the Notes, or if the Trustee does not maintain
a perfected security interest on the Eligible Collateral held
by it, the Notes will be general unsecured obligations of the
Company. See "RISK FACTORS - Source of Note Repayment," "USE
OF NOTE PROCEEDS," "BUSINESS OF THE COMPANY - PLAN OF
OPERATION," and "DESCRIPTION OF THE NOTES AND THE CUSTODY
AGREEMENT."
The Company will act in the capacity of paying agent with
respect to the principal and interest obligations of
outstanding Notes.
Terms of Note The Company must receive and accept on or before midnight
Offering _____________, 1997, subject to a one-time extension effected
at the sole option of the Company of up to 90 days from such
date, subscriptions for Notes in the minimum principal amount
of $1,500,000 or more (the "Minimum Requirement"). Pending
the receipt of such subscriptions for Notes, all subscription
funds delivered by investors to Executive (or other
securities broker-dealers participating in the sale of Notes)
shall be promptly deposited in an escrow account and
maintained therein in accordance with an Escrow Agreement
between the Company, Executive and the Escrow Agent. If the
Minimum Requirement is not successfully attained, all
subscription funds maintained in the Escrow Account will be
returned promptly to subscribers with the interest earned
thereon. If the Minimum Requirement is timely attained, the
Note subscription funds then on hand and under the control of
the Escrow Agent will be disbursed promptly to the Trustee
for utilization by the Company in the acquisition of
Portfolio Loans, Federal Instruments and Money Market Funds
and in the payment of selling commissions, offering
management and due diligence fees, the non-accountable
expense allowance and other incurred expenses. In such event,
the Note offering is expected to continue until the earlier
of (a) the 270th day from the date of this Prospectus, (b)
the sale of the entire $5,000,000 principal amount of Notes,
or (c) termination of the Note offering at the sole election
of the Company (the "Offering Period").
Upon receipt of Note subscription funds from investors and
prior to the attainment of the Minimum Requirement, the
Escrow Agent promptly will invest subscription funds in
investments selected for their safety of invested principal,
liquidity and the rates of interest offered. If the Minimum
Requirement is attained within a period of 90 days from the
date of this Prospectus, subject to a one-time extension of
up to 90 days from such date effected at the sole option of
the Company, interest on Notes subscribed to at the Note Rate
will accrue from the time that the Company accepts each
subscription to Notes delivered by investors and such
interest will be paid to Note holders as described above. See
"TERMS OF NOTE OFFERING."
Minimum Subscriptions for Notes may be made in increments of $1,000,
Investment subject to a minimum investment of $5,000 principal amount of
Notes (except for Individual Retirement Accounts, for which
the minimum investment will be $2,000). Subscribers may
request that their subscriptions be allocated between the
three sub-Series of Notes in $1,000 increments, subject to
availability.
Use of Note Upon the attainment of the Minimum Requirement, Note proceeds
Proceeds will be utilized to pay selling commissions, management fees,
the non-accountable expense allowance, capitalized interest
and the direct costs and expenses of the Note offering. Net
Note proceeds remaining will be utilized to originate,
underwrite, acquire, hold and deal in Portfolio Loans and,
pending full investment in Portfolio Loans, Federal
Instruments and Money Market Funds. In connection with the
organization of the Company and the Note offering, CMG has
provided assistance and has advanced certain costs. CMG will
be reimbursed on an accountable basis for such assistance and
advances in an amount not to exceed $100,000 if $2,000,000 or
more principal amount of Notes is sold. CMG is wholly owned
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by Guy S. Della Penna, a director and officer and sole
shareholder of the Company. See "USE OF PROCEEDS" and
"MANAGEMENT."
Management; The management of the Company is comprised of Guy S. Della
Principal Penna. Mr. Della Penna serves as the sole member of the Board
Shareholders of Directors and the sole officer of the Company. See
"MANAGEMENT." All of the outstanding voting Common Stock of
the Company is owned beneficially by Mr. Della Penna.
Risk Factors An investment in the Notes offered by this Prospectus and the
intended activities of the Company are subject to certain
risks, including but not limited to the following: (a)
following the release of funds from the sale of the Notes,
the assets of the Company will be approximately 15% to 22%
less than the aggregate obligations of the Company under the
Notes and there can be no assurance that the Company will be
successful in generating sufficient profits through the
trading of Portfolio Loans to permit the Company to pay its
operating expenses and service the interest and principal
obligations represented by the Notes; (b) the occurrence of
material adverse changes in the secondary market for
residential real estate loans which might affect the ability
of the Company to generally sell the Portfolio Loans for a
premium over the price paid for them, which will be necessary
for the Company to be able to repay the principal amount of
the Notes; (c) the occurrence of increases in interest rates
generally and mortgage interest rates specifically which may
cause the value of the Portfolio Loans held by the Company to
decline in value; (d) the occurrence of decreases in property
values in areas where the Company owns real property as a
result of foreclosures on Portfolio Loans which may cause the
value of the Company's property to decline in value; (e) the
fact that the Notes will be only partially collateralized for
an indefinite period and may never be fully collateralized;
(f) the Company intends to invest in mortgage loans with
mortgagors who have impaired credit and which, therefore,
have a high risk of default; (g) the Company is only recently
formed and has no operating history; (h) in valuing a
property for computing loan to value ratios, the Company may
use various nonstandardized property evaluation methods; (i)
the Company will not maintain any loss reserve or credit
enhancements with respect to the Notes; (j) there can be no
assurance that an adequate supply of mortgage loans meeting
the Company's Acquisition Policy will be available; (k) the
performance of the Trustee under the Custody Agreement will
not be covered by a fidelity bond; (l) the fact that the
Notes will constitute an illiquid investment; and (m) the
fact that the offering of the Notes and the management of the
Company will involve numerous and significant conflicts of
interest. See "RISK FACTORS."
Acquisition of The Acquisition Policy gives the Company wide latitude in the
Portfolio Loans type of Portfolio Loans which it may acquire and, with the
exception of complying with certain loan to value ratios at
acquisition, the Company may obtain Portfolio Loans which are
conforming or non-conforming in terms of certain loan
origination criteria established by the Federal National
Mortgage Association and the Federal Home Loan Mortgage
Corporation or which may be performing, non-performing or
under- performing in terms of each borrower's (mortgagor's)
performance with respect to scheduled principal and interest
payments or the mortgagor's credit history. The Portfolio
Loans originated or acquired by the Company generally will be
loans on improved residential real property (home and
property), but they may include loans on parcels of
unimproved real property which is zoned for residential use,
subject to certain limitations on the percentage amount of
unimproved real estate loans which can be originated or
purchased by the Company. It is anticipated that the Company
may purchase a substantial portion of its Portfolio Loans
from affiliates, and certain fees may be paid to affiliates
in connection with such purchases. See "RISK FACTORS -
Conflicts of Interest," "BUSINESS OF THE COMPANY - PLAN OF
OPERATION - Portfolio Loan Acquisition Policy" and "CONFLICTS
OF INTEREST; TRANSACTIONS WITH MANAGEMENT AND AFFILIATES."
Supply of Portfolio Loans may be purchased by the Company from a
Portfolio Loans variety of sources known to management, although in the
recent past there has been a limited supply of the type of
mortgage loans intended to be purchased as Portfolio Loans.
The type of loans sought by the Company are not generally
available through any recognized national market; rather, in
each geographic region there appears
-5-
<PAGE>
to be a limited number of buyers and sellers involved in the
market. Mr. Della Penna has established relationships with
several buyers and sellers in Arkansas, California, Florida,
Kansas, Missouri, North Carolina, Ohio, Oklahoma,
Pennsylvania and Texas. Management believes that such sellers
should be able to provide a steady source of Portfolio Loans
for the Company, and that such buyers will provide a ready
market for all of the mortgage notes purchased by the Company
after the Company has "seasoned" and "scrubbed" such loans.
At present, one company in Texas, Homevestors of America,
Inc., is providing a majority of the residential mortgage
loans being purchased by other companies under the control of
Mr. Della Penna which are engaged in the same or similar
business as the Company, and such loan originator may be the
source of a significant amount of the mortgage loans
purchased as Portfolio Loans. Mr. Della Penna beneficially
owns approximately 17% of the common stock of Homevestors.
Homevestors is establishing a network of individuals and
companies to buy and sell residential real estate, with a
focus on sales to credit- impaired buyers and, in connection
with such sales, originate mortgage loans on such real estate
which will meet the Acquisition Policy of the Company. See
"RISK FACTORS - Supply of Portfolio Loans," "BUSINESS OF THE
COMPANY - PLAN OF OPERATION - Supply of Portfolio Loans" and
"CONFLICTS OF INTEREST; TRANSACTIONS WITH MANAGEMENT AND
AFFILIATES."
Conflicts of Guy S. Della Penna serves as a general partner of Federal
Interest; Mortgage Investors, Ltd., a limited partnership formed in
Transactions with 1991 ("FMIL"), and as the sole director and officer of the
Management and corporate general partner of FMIL. He also serves as the sole
Affiliates director and officer of Federal Mortgage Management, Inc., a
corporation formed in 1993 ("FMMI"). FMIL and FMMI are
engaged in the acquisition, holding and disposition of
residential real estate mortgage loans having the same or
substantially similar characteristics as the residential real
estate mortgage loans to be acquired by the Company. Mr.
Della Penna serves as the sole director and officer of the
Company. Accordingly, in the identification of suitable
Portfolio Loans, it is expected that Mr. Della Penna may be
subject, from time to time, to certain conflicts of interest
relating to the manner in which desirable mortgage loans will
be acquired and allocated among the Company, FMIL and FMMI or
which entity will first liquidate mortgage loans when the
opportunity for loan sales are limited. Such conflicts of
interest will be resolved by Mr. Della Penna in his
discretion, considering such factors as he deems relevant,
including the financial condition and needs of each entity.
There is no requirement and can be no assurance that
conflicts will be resolved in a manner that is in the best
interests of the Company. See "CONFLICTS OF INTEREST;
TRANSACTIONS WITH MANAGEMENT AND AFFILIATES."
From time to time the Company, FMIL and FMMI may act jointly
in the acquisition or disposition of pools of loans. Such
transactions may involve conflicts of interest or the
creation of profit or gain for FMIL, FMMI or Mr. Della Penna
as a result of the consummation of such transactions. Joint
transactions by the Company, FMIL and FMMI will be undertaken
in order to acquire or sell loans on a pooled basis which is
perceived to be more favorable than otherwise would be
available. See "BUSINESS OF THE COMPANY - PLAN OF OPERATION
-- Portfolio Loan Acquisition Policy."
Mr. Della Penna beneficially owns approximately 17% of the
common stock of Homevestors of America, Inc., an entity which
is currently a major originator of mortgage loans for other
similar programs in which Mr. Della Penna is involved.
Homevestors is establishing a network of individuals and
companies which will buy and sell residential real estate
with a focus on sales to credit impaired buyers and, in
connection with such sales, originate mortgage loans on such
real estate which will meet the Acquisition Policy of the
Company. It is anticipated that the Company may purchase a
substantial portion of its Portfolio Loans through such
network, and certain fees, such as mortgage placement fees,
may be paid to affiliates of Mr. Della Penna in connection
with such purchases. Such fees will not exceed the fees
generally charged for similar services by independent third
parties.
-6-
<PAGE>
The Company will pay to FMIL a monthly servicing fee of
$1,500 plus .5% (on an annual basis) of the aggregate
outstanding principal balance of the Portfolio Loans as of
the end of the prior month. Such servicing fees have not been
determined by arm's length negotiation, even though
management believes that such fees fairly relate to fees
which would be charged by non-affiliated servicing entities.
Such fees are intended to defray the compensation paid by
FMIL to its employees who carry out such servicing
activities. See "BUSINESS OF THE COMPANY - PLAN OF OPERATION
-- Portfolio Loan Acquisition Policy." For his general
management services, Mr. Della Penna will receive an annual
management fee equal to 3% of the aggregate face value of the
Eligible Collateral as of December 31 of the prior year. See
"MANAGEMENT - Compensation." Mr. Della Penna is also a
director, president and the controlling shareholder of
Executive Wealth Management Services, Inc. ("Executive").
Executive will receive commissions, Note offering management
fees and a non-accountable expense allowance aggregating
11.10% of gross Note proceeds, assuming average commissions
at the rate of 6.10%. CMG, an affiliate of Executive which is
also controlled by Mr. Della Penna, will receive
reimbursement for certain expenses paid by it on behalf of
the Company and for support services rendered to the Company
with respect to this Note offering on an accountable basis in
an amount not to exceed $100,000 if $2 million or more
principal amount of Notes is sold by the Company. Such
arrangements have not been negotiated on an arm's length
basis. See "CONFLICTS OF INTEREST; TRANSACTIONS WITH
MANAGEMENT AND AFFILIATES" and "USE OF PROCEEDS."
The Trustee, Michael Hric, P.A., is a law firm in Sarasota,
Florida. Michael Hric, P.A. has performed legal services for
Mr. Della Penna and his affiliates in the past and may
perform additional services in the future. See "CONFLICTS OF
INTEREST; TRANSACTIONS WITH MANAGEMENT AND AFFILIATES."
<TABLE>
<CAPTION>
SUMMARY FINANCIAL INFORMATION
PERIOD FROM INCEPTION THREE MONTHS
NOVEMBER 13,1995 TO ENDED
MARCH 31, 1997 YEAR ENDED MARCH 31, 1997
(UNAUDITED) DECEMBER 31, 1996 (UNAUDITED)
-------------------- ----------------- --------------
<S> <C> <C> <C>
Statement of Income (Loss) Data:
Revenues $ - $ -
Operating expenses 104,068 3,057 101,011
Income (Loss) from operations (104,068) (3,057) (101,011)
Net income (Loss) (104,068) (3,057) (101,011)
Net income (Loss) per share 100 shares (1040.68) (30.57) (1,010.11)
MARCH 31,
1997
Statement of Financial Condition Data: --------
Working Capital (199,428)
Total assets (1) 99,309
Long-term debt, net of current portion -
Shareholders' equity (103,068)
<FN>
- ----------
(1) Consists primarily of deferred financing costs. See Note B to Notes to
Financial Statements.
</FN>
</TABLE>
RISK FACTORS
AN INVESTMENT IN THE NOTES IS SPECULATIVE AND PRESENTS SUBSTANTIAL
RISKS. IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
PROSPECTIVE INVESTORS SHOULD REVIEW CAREFULLY THE FOLLOWING RISKS CONCERNING THE
COMPANY AND ITS INTENDED BUSINESS ACTIVITIES BEFORE PURCHASING ANY OF THE NOTES
OFFERED HEREBY. THE RISK FACTORS IDENTIFIED AND DISCUSSED BELOW CONSTITUTE SOME
BUT PERHAPS NOT ALL OF THE MATERIAL
-7-
<PAGE>
RISKS WHICH MAY AFFECT ADVERSELY THE INTENDED ACTIVITIES OF THE COMPANY, THE
PORTFOLIO LOANS AND AN INVESTMENT IN THE NOTES OFFERED HEREBY.
SOURCE OF NOTE REPAYMENT. There is no requirement that the Eligible
Collateral and other assets of the Company have at any time a face amount or
value equal to the outstanding principal obligations due under the Notes. At the
time of the release of subscription funds to the Company upon the attainment of
the Minimum Requirement and for an indefinite period thereafter, the face amount
or value of the Eligible Collateral and such other assets will be less than the
aggregate principal obligation of outstanding Notes, as approximately 15% to 22%
of the gross proceeds from the sale of the Notes will be used immediately to pay
offering and other accrued expenses and other expenses of operation. See "USE OF
PROCEEDS." Further, as the Eligible Collateral will be comprised primarily of
debt instruments (including Portfolio Loans and Federal Instruments), the value
of the Eligible Collateral will decrease from time to time when interest rates
increase (and increase when interest rates decrease). To the extent that the
Company forecloses on Portfolio Loans in default, the value of the Eligible
Collateral will likely decline if and when the value of real estate in the area
in which the foreclosed property is located declines. Further, any such general
decline in property values will likely increase the risk of defaults on the
Portfolio Loans as the amount of each mortgagor's equity in its property
declines, especially if the market value of the property decreases below the
outstanding amount owed under the mortgage loan on the property. In a similar
mortgage program organized by Guy Della Penna, there has been a continuing
deficiency between the outstanding principal obligations of the promissory notes
issued by such company and the aggregate value of the mortgages and other
investments which provide the source of those note repayments. At this point in
time, it is anticipated that Mr. Della Penna will make up this deficiency from
his own financial resources, even though he has no obligation to do so. Similar
deficiencies exist in another mortgage program, organized by Mr. Della Penna as
a limited partnership. See "APPENDIX A PRIOR PERFORMANCE INFORMATION."
A deficiency between the value of the Eligible Collateral and the
outstanding principal obligations under the Notes does not constitute an event
of default giving rise to any remedy on the part of Note holders. The principal
and interest obligations represented by outstanding Notes as well as the
operating expenses of the Company are expected to be paid using the cash flow
generated by the receipt of principal and interest payments on the Portfolio
Loans, Federal Instruments and Money Market Funds, the receipt of funds from the
early payoff of Portfolio Loans by the mortgagors and proceeds from the sale of
Portfolio Loans, Federal Instruments and real estate received upon loan
foreclosures. In order for the Company to repay the principal amount due under
the Notes, it will have to generate substantial profits from the trading of
Portfolio Loans. There can be no assurance that such cash flow will be
sufficient at all times to meet the outstanding interest obligations with
respect to the Notes and the principal repayment obligation at the maturity of
the Notes. Potential declines in the value of the Eligible Collateral caused by
increases in interest rates or decreases in property values and the 15% to 22%
gap described above between the face amount of the Notes and the amount of
proceeds from the sale of the Notes which are left to be invested in Portfolio
Loans after the payment of all offering and other accrued expenses are expected
to be made up primarily by profits made by the Company from the trading of
Portfolio Loans by the Company. It is not anticipated that any significant
number of Portfolio Loans will be held to maturity. There can be no assurance
that the Company will be successful in its efforts to generate profits through
the trading of Portfolio Loans.
The status of Portfolio Loans at the time of any Portfolio Loan
liquidation as performing, non-performing or under-performing may have an
adverse affect on the amount of proceeds that the Company may realize as a
result of the liquidation of such loans. To the extent that Portfolio Loans are
non-performing or under-performing, their value in any secondary market for
residential real estate mortgage loans will be less than would be the case if
they were performing.
To the extent that at the time of any required liquidation of Eligible
Collateral (such as upon the maturity of any of the Notes) the value of the
Eligible Collateral has declined due to increases in interest rates or decreases
in property values, or if any Portfolio Loans which are to be sold include a
substantial number of non-performing or under-performing loans, or if the
Company has not been successful in trading Portfolio Loans, the Company may have
insufficient resources with which to meet its obligations under the Notes and
may be placed in circumstances where it will be forced to default on all or part
of the obligations represented by outstanding Notes. IF ALL OF THE NOTES OFFERED
HEREUNDER ARE SOLD, THIS RISK WILL BE THE GREATEST FOR HOLDERS OF THE SERIES
1997 A-III NOTES, DUE IN 2003, SINCE THE SERIES 1997 A-I AND A-II NOTES ARE DUE
TO BE PAID IN FULL IN 2001 AND 2002, AND THE PAYMENT OF THE PRINCIPAL
OBLIGATIONS OF SUCH NOTES WILL LEAVE THE COMPANY WITH A REDUCED AMOUNT OF ASSETS
WITH WHICH
-8-
<PAGE>
TO MEET THE REMAINING INTEREST AND PRINCIPAL REPAYMENT OBLIGATIONS ON THE SERIES
1997 A-III NOTES, AS WELL AS ITS OPERATING EXPENSES. TO THE EXTENT THAT FEW IF
ANY OF THE SERIES 1997 A-III NOTES ARE SOLD, THIS RISK WILL ALSO IMPACT HOLDERS
OF THE SERIES 1997 A-II NOTES. THERE CAN BE NO ASSURANCE AS TO THE PRINCIPAL
AMOUNT OF NOTES IN ANY SERIES WHICH MAY BE SOLD IN THE OFFERING, SUBJECT TO THE
REQUIREMENT THAT AT LEAST $1,500,000 OF NOTES MUST BE SUBSCRIBED FOR AND SOLD IN
ORDER FOR THE COMPANY TO SELL ANY NOTES. The Company has not made any
arrangements for any alternative source of funds in the event that cash flow
from operations and sales of Eligible Collateral is inadequate to fund
operations and meet its interest and principal obligations under the Notes, and
it is not anticipated that any other sources will be available. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS", "BUSINESS OF THE COMPANY -
PLAN OF OPERATION," "DESCRIPTION OF THE NOTES AND THE CUSTODY AGREEMENT" and
"MANAGEMENT - Compensation."
Investors will be subject to additional risk if only the minimum
$1,500,000 principal amount of Notes is sold because the Company will likely be
able to invest in a smaller, less diverse group of Portfolio Loans.
NOTES NOT FULLY SECURED BY ELIGIBLE COLLATERAL; NOTES AS UNSECURED
OBLIGATIONS OF THE COMPANY. There is no requirement that the Eligible Collateral
have at any time a face amount or value equal to the outstanding principal
obligation represented by the Notes. At the time of the release of subscription
funds to the Company upon the attainment of the Minimum Requirement and for an
indefinite period thereafter, the face amount or value of the Eligible
Collateral will be less than the aggregate principal obligation of outstanding
Notes, as approximately 15% to 22% of the gross proceeds from the sale of the
Notes will be used immediately to pay offering and other accrued expenses and
reserves. See "USE OF NOTE PROCEEDS." Such deficiency in terms of relative
values does not constitute an event of default giving rise to any remedies on
the part of Note holders. Under the Custody Agreement, the Trustee will at all
times hold Eligible Collateral with an aggregate Unadjusted Value (as defined
below) equal to at least 60% of the aggregate outstanding principal balance of
the Notes. The remaining assets of the Company, including other items of
Eligible Collateral, may be held by the Company. The Unadjusted Value of a
Federal Instrument is the cash value of the instrument. Money Market Funds are
considered cash equivalents and the Unadjusted Value of Money Market Funds is
the current balance of such funds. The Unadjusted Value of a Portfolio Loan is
equal to the outstanding balance due under the loan, and may exceed the amount
which could be obtained upon an immediate sale of the same. The Unadjusted Value
of real estate owned by the Company as a result of a Portfolio Loan foreclosure
will be valued at the lesser of the estimated fair market value of the property
received by the Company upon foreclosure or the principal balance of the loan at
the time of foreclosure plus accrued interest and fees and costs incurred by the
Company in connection with such foreclosure process, and also may exceed the
amount which could be obtained upon an immediate sale of the same. Accordingly,
the principal and interest obligations represented by the Notes may never be
fully collateralized by Eligible Collateral held by the Trustee, and may be
secured by collateral which may have a liquidation value equal to less than 60%
of the outstanding principal obligations due under the Notes. To the extent that
the value of the Eligible Collateral held by the Trustee is less than the
aggregate principal and interest obligations represented by the Notes, or if the
Trustee does not maintain a perfected security interest on the Eligible
Collateral held by it, the Notes will be general unsecured obligations of the
Company. It is not anticipated that the Company will acquire significant assets
other than the Portfolio Loans. See "USE OF NOTE PROCEEDS," "BUSINESS OF THE
COMPANY - PLAN OF OPERATION," and "DESCRIPTION OF THE NOTES AND THE CUSTODY
AGREEMENT."
No assurance can be given that Note holders will be able to recoup the
amount of their investment in the Notes in the event of the Company's default
under the Notes or the Custody Agreement. The Portfolio Loans should be viewed
as illiquid collateral for the Note obligations since neither the Company nor
the Trustee, acting on behalf of the Note holders, will have any ability to
accelerate the obligations represented by the Portfolio Loans at any particular
time or times except in instances where the Portfolio Loans are in a default
status. Under most likely circumstances, if the Trustee is required to sell the
Portfolio Loans over a short period of time in order to satisfy the aggregate
obligation represented by the Notes, the Portfolio Loans and any Federal
Instruments will have to be sold at a substantial discount from the aggregate
face amount of the Portfolio Loans and Federal Instruments at the time of such
sale. Under such circumstances, it is unlikely that the Trustee will obtain
sufficient proceeds from the sale of the Portfolio Loans and Federal Instruments
to be able to meet the then outstanding principal and interest obligations due
under the Notes. See "ABSENCE OF QUALIFYING TRUST INDENTURE" below and
"DESCRIPTION OF THE NOTES AND THE CUSTODY AGREEMENT."
-9-
<PAGE>
CHARACTER OF PORTFOLIO LOANS. Certain of the Portfolio Loans acquired
by the Company may be non-performing or under-performing. For a definition of
non-performing loans and under-performing loans, see "GLOSSARY OF CERTAIN TERMS"
and "BUSINESS OF THE COMPANY - PLAN OF OPERATION - Portfolio Loan Acquisition
Policy." Due to the greater discount at which such mortgage loans can be
acquired, the Company intends to acquire mortgage loans which present a higher
risk of default. These loans will generally involve credit impaired borrowers
who may not qualify for traditional mortgage financing because of a prior
bankruptcy, poor or no credit history or previous foreclosures. Also, such loans
may have been originated by small independent mortgage companies or brokers or
individual sellers of real estate who may not have generated the complete credit
and loan file necessary to sell the mortgage loans into the institutional
mortgage market. While it is the intention of the Company to complete the
paperwork necessary to qualify such loans for resale into the institutional
mortgage loan market and to work with the mortgagors under any non-performing or
under-performing loans to have such loans brought into performing status so that
the Company can resell such Portfolio Loans for a premium over their acquisition
price, there can be no assurance that the Company will be successful in such
effort. Significant levels of default on such Portfolio Loans may occur as a
result of a number of factors entirely beyond the control of the Company,
including the development of adverse and recessionary economic conditions in the
United States generally or in areas where the Company has acquired significant
numbers of Portfolio Loans, adverse economic circumstances which affect
individual mortgagors, such as loss of employment, ill health or death, or
losses not adequately covered by insurance. It is not anticipated that the
Portfolio Loans will be covered by any mortgage insurance that will protect the
Company from loss in the event of a default by the mortgagor. To the extent that
the Company acquires significant numbers of under-performing and non-performing
Portfolio Loans, the Company's ability to service the interest and principal
payments required by outstanding Notes could be materially and adversely
affected since such non-performing and under-performing loans may not themselves
generate sufficient cash flow to permit the Company to meet its operating
expenses and the obligations represented by outstanding Notes and the Company
may be unable to sell the loans for a premium over their acquisition prices. The
Acquisition Policy of the Company permits the acquisition of any number of
non-performing or under-performing loans, if the Company determines that such
loans are acceptable from a cash flow standpoint and the loans meet the other
criteria of the Acquisition Policy. The possibility exists that non-performing
and under-performing loans may constitute substantially all of the Portfolio
Loans from time to time. See "BUSINESS OF THE COMPANY - PLAN OF OPERATION -
Portfolio Loan Acquisition Policy."
COMPANY ONLY RECENTLY FORMED. The Company has been formed recently and
has no operational history. The Company is totally dependent upon the receipt of
the net proceeds from the sale of the Notes offered hereby to commence its
business activities. The Company as an entity has no previous experience with
respect to the acquisition of residential real estate mortgage loans, unimproved
real estate mortgage loans and Federal Instruments. See "BUSINESS OF THE COMPANY
- - PLAN OF OPERATION." Management of the Company, however, has experience with
respect to the acquisition and trading of residential real estate mortgage loans
and Federal Instruments. See "MANAGEMENT" and Appendix A to this Prospectus
which contains summary information regarding the performance of Federal Mortgage
Management, Inc. and Federal Mortgage Investors, Ltd., two similar programs
sponsored by Mr. Della Penna.
DETERMINATION OF VALUE OF COLLATERAL REAL ESTATE. The Company's
Acquisition Policy does not require any fixed procedure for the determination of
the current estimated fair market value of the real estate collateralizing the
Portfolio Loans. In determining the current estimated fair market value of the
underlying real estate, the Company may use one or a combination of methods,
including a review of the original in-file appraisal which was made at the time
of loan origination, a review of the current tax or assessed value for ad
valorem taxes with respect to the property, procurement of a current appraisal,
including a "drive-by" appraisal. The method or combination of methods utilized
by the Company in each case is at the sole discretion of the Company. See
"BUSINESS OF THE COMPANY - PLAN OF OPERATION - Portfolio Loan Acquisition
Policy."
NO LOSS RESERVE OR CREDIT ENHANCEMENTS. Since the Company will have no
other significant assets except for the proceeds of the Note offering, no
reserve for losses can or will be provided. There are no guarantees by any third
parties of the repayment obligations of the Company under the Notes, nor are
there any insurance arrangements or other sources of funds to repay Note holders
in the event of a default by the Company in its repayment obligations under the
Notes.
-10-
<PAGE>
SUPPLY OF PORTFOLIO LOANS. Currently, management believes that there is
a limited number of mortgage loans available for purchase that meet the criteria
of the Acquisition Policy of the Company. This may impact the ability of the
Company to invest the proceeds of the Note offering in a timely manner, which
may negatively impact the Company's cash flow. The type of loans sought by the
Company are not generally available through any recognized national market;
rather, in each geographic region there appears to be a limited number of buyers
and sellers involved in the market. Mr. Della Penna has established
relationships with several buyers and sellers in Arkansas, California, Florida,
Kansas, Missouri, North Carolina, Ohio, Oklahoma, Pennsylvania and Texas.
Management believes that such sellers should be able to provide a steady source
of Portfolio Loans for the Company, and that such buyers will provide a ready
market for all of the mortgage notes purchased by the Company after the Company
has "seasoned" and "scrubbed" such loans. There can be no assurance, however,
that such sellers or buyers will continue to sell and purchase mortgage loans on
terms acceptable to the Company or that other sellers or buyers can be found
which will sell and purchase a sufficient quantity of the type of mortgage loans
which meet the Company's acquisition policy. At present, one company in Texas,
Homevestors of America, Inc., is providing a majority of the residential
mortgage loans being purchased by other companies under the control of Mr. Della
Penna which are engaged in the same business as the Company, and such loan
originator may be the source of a significant amount of the mortgage loans
purchased as Portfolio Loans. Mr. Della Penna beneficially owns approximately
17% of the common stock of Homevestors. Homevestors is establishing a network of
individuals and companies which will buy and sell residential real estate with a
focus on sales to credit impaired buyers and, in connection with such sales,
originate mortgage loans on such real estate which will meet the Acquisition
Policy of the Company. A majority of the loans currently available to the
Company for purchase from its present supply sources are on real estate located
in Texas, Oklahoma, Missouri and Florida. This may continue to be the case in
the future. In the event that the Company's Portfolio Loans are geographically
concentrated, the Company's operations may be affected to a greater degree by
local and regional economic conditions. The Company, FMMI and FMIL may be in
competition for the same mortgage loans from time to time. See "CONFLICTS OF
INTEREST; TRANSACTIONS WITH MANAGEMENT AND AFFILIATES."
The Company is unable to predict changes in the current interest rate
environment affecting residential real estate mortgage loans or the impact that
a change in rates will have on the continuing availability of loans which are
suitable for acquisition by the Company. An increase or decrease in such
mortgage loan interest rates could affect, in a material adverse fashion, the
Company's ability to procure Portfolio Loans in sufficient numbers and amounts
to permit the Company to meet the interest and principal obligations represented
by outstanding Notes. Among other effects, a significant increase in mortgage
interest rates could result in a decreased supply of available mortgage loans
which are suitable for the Company since fewer potential mortgagors will qualify
for desired mortgage loans due to their inability to meet the greater periodic
principal and interest obligations required by higher interest rate loans. To
the extent that residential real estate mortgage loan interest rates decline,
mortgagors may be inclined to refinance their existing mortgage loans to obtain
a lower interest rate. The Company can make no prediction as to what trends will
occur with respect to the levels of residential real estate mortgage loan
interest rates. See "BUSINESS OF THE COMPANY - PLAN OF OPERATION."
PRIOR PERFORMANCE. Information concerning the loan acquisition,
ownership and disposition activities of FMIL and FMMI with respect to their
portfolios is presented in Appendix A to this Prospectus. The information
reflected in Appendix A is at March 31, 1997. At March 31, 1997, the loan
portfolios of FMIL and FMMI reflected delinquency rates of approximately 8% and
16%, respectively, in terms of the carrying value of portfolio loans which were
31 or more days delinquent with respect to any historical or current scheduled
loan principal and interest payment. One loan contained in the FMIL portfolio
and 11 loans contained in the FMMI portfolio were delinquent in such fashion at
March 31, 1997. The one loan of FMIL was making scheduled monthly principal and
interest payments. In addition to these delinquency problems, FMIL and FMMI
historically have had only limited success at trading mortgage notes. It is not
anticipated that the operations of FMMI (which issued promissory notes to
investors in order to obtain funds with which to acquire mortgage loans)
together with the sale of all of the portfolio loans and other assets of FMMI
(primarily other investment securities), will generate enough income and sales
proceeds for FMMI to be able to repay all of the promissory notes issued by it.
Since FMIL is a limited partnership, there exists no absolute contractual
obligation to effect cash distributions. FMIC sold an aggregate of $4,252,500
principal amount of Secured Promissory Notes denominated as its 1993A-I, II, III
and IV Series. Series 1993A-I and II in aggregate principal amount of $512,500
have been paid (together with interest due thereon). Series III and IV in
aggregate principal amount of $3,740,000 become due in December 1997
($1,000,000) and December 1998 ($2,740,000). In May 1997, the management of FMIL
and FMIC (which is the management of the Company) liquidated the mortgage
portfolios of FMIL and FMIC in order to preclude any possible further
deterioration of portfolio value. In such liquidation, FMIL experienced a loss
calculated on the basis of loan acquisition cost of approximately $54,000 and
FMMI experienced a loss calculated on the same basis of approximately $88,000.
The portfolios of FMIL and FMIC are now constituted substantially by mortgage
loans acquired from Homevestors of America, Inc. In such regard, FMIL acquired
loans having a carrying value of approximately $38,000 and FMMI acquired loans
having a carrying value of approximately $1,250,000. See "RISK FACTORS"
"CONFLICTS OF INTEREST - Transactions with Management and Affiliates" and
BUSINESS OF THE COMPANY - PLAN OF OPERATIONS." The possibility exists that the
Company will experience similar delinquencies or trading history with respect to
its Portfolio Loans, and the existence of such delinquencies and such trading
history could materially impair the ability of the Company to pay the interest
payments required by outstanding Notes or to repay the principal of the
outstanding Notes at maturity.
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As noted above, FMIL and FMMI have experienced delinquencies with their
current portfolio of mortgage loans. Management of FMMI and FMIL, which will
also be the management of the Company, believes it has isolated the cause of
this increase in delinquencies and has implemented corrective measures,
described below. Management believes that the delinquencies were a result of
underwriting standards in effect at the time. Management believes that the two
most significant factors in assessing the likelihood of a mortgage loan becoming
delinquent are the amount of down payment and the credit history of the
mortgagor. While each of these two factors alone would not necessarily predict a
high probability for the mortgage loan to become delinquent, in the experience
of management of FMIL and FMMI, when both factors are present the probability
increases significantly. In order for FMIL and FMMI to purchase mortgage loans
at the discounts they had been seeking, the mortgages were typically with
mortgagors who had a history of credit problems and had not made substantial
down payments.
In the experience of the management of FMIL and FMMI, mortgagors with
past credit problems who have attempted to resolve delinquencies with their
lenders present an acceptable credit risk. In the last quarter of 1996,
management of FMIL and FMMI implemented new credit review procedures on the
prospective mortgage loans they buy, providing that if a mortgagor has past
credit problems and that mortgagor has not made a good faith effort to rectify
the situation, the mortgage loan will not be purchased unless there are
compensating factors contributing its purchase. Additionally, loans generally
will not be purchased unless a down payment equal to at least 5% of the purchase
price was made at the inception of the loan, unless there are compensating
circumstances making the purchase of the loan feasible. In the past, depending
on the circumstances, a mortgage loan with a down payment of as little as 3%
might have been purchased. With the new criteria described above in place, the
management of FMIL and FMMI believe that the delinquencies within the mortgage
loan portfolios of FMIL and FMMI will decrease in the future. The results for
the first quarter of 1997 were promising, but management believes that it is too
early to draw definite conclusions about long-term performance. The Company
intends to follow the above described procedures with respect to its Acquisition
Policy.
In connection with the delinquencies in its portfolio, FMIL filed a
lawsuit in July 1995, regarding the purchase of 19 first lien residential
mortgage notes in July 1993 for approximately $1,193,000. FMIL's complaint
alleged that the mortgages were worth considerably less than such amount. FMIL
entered into a Mediation Settlement Agreement dated October 7, 1996, with the
defendants in that litigation, pursuant to which FMIL is entitled to earn a
profit of approximately $1 million in connection with the sale of mortgages and
portfolios of mortgages to the defendants. Any funds received as a result of
this litigation will inure to the benefit of FMIL only. The Company will not
receive any of such funds.
ABSENCE OF QUALIFYING TRUST INDENTURE. The Notes are not being issued
pursuant to a trust indenture which meets the requirements of the provisions of
the Trust Indenture Act of 1939 (the "Trust Indenture Act") in reliance upon an
exemption thereunder. In summary, the Trust Indenture Act requires that debt
securities be issued pursuant to the provisions and terms of a trust indenture
instrument and that such issuance and the administration of the trust indenture
be vested in an independent trustee, such as a bank with trust powers or a trust
company. The Company is relying on an exemption from the Trust Indenture Act for
the issuance of debt securities in principal amount of $5,000,000 or less over a
specified period of time. The enactment of the Trust Indenture Act was intended
to assure the independence of indenture trustees and to afford protection to
investors who acquire debt securities issued under the authority of a trust
instrument qualified under the Trust Indenture Act. Under usual circumstances,
the services of an independent trustee acting for the benefit of noteholders
include authentication of the debt securities issued to investors under the
terms of such indenture, periodic assurance that collateral is maintained in
accordance with the terms of the trust indenture, and oversight to ensure that
the issuer of the debt securities performs its obligations under the trust
indenture on an initial and continuous basis with respect to certain debt to
equity ratios, operation of certain aspects of the business of the issuer of the
debt securities and similar matters. Additionally, in the event of specified
defaults with respect to the obligation represented by the debt instruments
issued under the trust indenture, the trustee acting on its own initiative or
upon request of the holders of the debt securities will initiate curative,
remedial action intended to cure such default or to act on behalf of the holders
of the debt securities with respect to action on any collateral securing the
obligation of such debt securities.
The Notes will be issued under the Custody Agreement, pursuant to which
the Trustee will acquire and maintain a lien on certain Eligible Collateral for
the benefit of the holders of the Notes. The Custody Agreement does not contain
provisions meeting the requirements of the Trust Indenture Act, although the
Note holders and the Trustee will have certain rights which correspond to some
of the requirements of the Trust Indenture Act. There
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is no requirement that the Trustee hold all items of Eligible Collateral or that
the Eligible Collateral held by the Trustee have a value equal to the
outstanding principal obligation represented by the Notes. Pursuant to the
Custody Agreement, the Trustee will at all times hold Eligible Collateral with
an aggregate Unadjusted Value (as defined below) equal to at least 60% of the
aggregate outstanding principal balance of the Notes. The remaining assets of
the Company, including other items of Eligible Collateral, may be held by the
Company. The Unadjusted Value of a Federal Instrument is the cash value of the
instrument. Money Market Funds are considered cash equivalents and the
Unadjusted Value of Money Market Funds is the current balance of such funds. The
Unadjusted Value of a Portfolio Loan is equal to the outstanding balance due
under the loan, and may exceed the amount which could be obtained upon an
immediate sale of the same. The Unadjusted Value of real estate owned by the
Company as a result of a Portfolio Loan foreclosure will be valued at the lesser
of the estimated fair market value of the property received by the Company upon
foreclosure or the principal balance of the loan at the time of foreclosure plus
accrued interest and fees and costs incurred by the Company in connection with
such foreclosure process, and also may exceed the amount which could be obtained
upon an immediate sale of the same. Accordingly, the principal and interest
obligations represented by the Notes may never be fully collateralized by
Eligible Collateral held by the Trustee, and may be secured by collateral which
may have a liquidation value equal to less than 60% of the outstanding principal
obligations due under the Notes. To the extent that the value of the Eligible
Collateral held by the Trustee is less than the aggregate principal and interest
obligations represented by the Notes, or if the Trustee does not maintain a
perfected security interest on the Eligible Collateral held by it, the Notes
will be general unsecured obligations of the Company. In the event of a
continuing default, if the Trustee does not take action, a vote of persons
holding at least 75% in principal amount of the Notes is required to force the
Trustee to take action to collect the amount due under the Notes. See
"DESCRIPTION OF THE NOTES AND THE CUSTODY AGREEMENT."
Michael Hric, P.A., a law firm in Sarasota, Florida, will serve as the
Trustee under the Custody Agreement. The principal of Michael Hric, P.A. is
Michael Hric. Mr. Hric has performed legal services for Mr. Della Penna and his
affiliated companies in the past and may perform additional services in the
future. Mr. Hric did not provide any services with respect to the formation of
the Company and the offer and sale of the Notes. See "CONFLICTS OF INTEREST;
TRANSACTIONS WITH MANAGEMENT AND AFFILIATES."
ABSENCE OF FIDELITY BOND. Due to the cost involved, no fidelity or
surety bond will be obtained covering the actions of the Trustee. In the event
of the loss or misappropriation of a substantial part of the Eligible Collateral
held by the Trustee, the Company will be adversely affected and will likely be
unable to repay the Notes in full.
NOTE INVESTMENT ILLIQUID - NO MARKET FOR NOTES. The Notes offered by
this Prospectus have been registered pursuant to the provisions of the
Securities Act of 1933, as amended, and have been qualified for sale in Florida
and California. Accordingly, the Notes are freely transferable by the holders
thereof (other than affiliates of the Company) under applicable Federal and
certain state securities laws. However, the Company does not expect that any
active market will develop at any time for the Notes. Accordingly, purchasers of
Notes should be prepared to hold the Notes for the entire Note term. If a
purchaser desires to sell a Note prior to its maturity, such purchaser likely
will be required to locate a buyer on his own. With respect to any Note transfer
by a holder thereof, the Company will be required to cancel the Note being
transferred and to issue a new Note as a result of such transfer. The Company
reserves the right to obtain certain information from the intended Note
transferee in any transaction in order to assure that such intended Note
transferee is a suitable investor with respect to the Note being transferred.
See "INVESTOR SUITABILITY" and "DESCRIPTION OF THE NOTES AND THE CUSTODY
AGREEMENT."
TERMS OF THE NOTES. The terms of the Notes, including their maturity
and the Note Rate, have been solely determined by the Company in consultation
with Kashner Davidson Securities Corporation, Sarasota, Florida. Because of the
affiliation between Executive and the Company, Kashner Davidson Securities
Corporation has acted as a qualified independent underwriter pursuant to Rule
2720 of the NASD Rules of Conduct, and in such role, has passed upon the
fairness of the terms of the Note offering made hereby and the terms of the
Notes. See "PLAN OF DISTRIBUTION."
ABSENCE OF RATING. The Notes offered by this Prospectus have not been
afforded any rating by any recognized rating agency such as Standard & Poors or
Moodys, and the Company does not intend to seek any such rating. The Company
does not believe that the Notes would be afforded any investment grade rating by
any
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recognized rating agency and believes that such rating agencies would likely
view the Notes as speculative debt securities.
NATURE OF THE NOTE OFFERING. The Notes offered by this Prospectus will
be offered to investors through the best efforts of Executive. Executive is
under no obligation to purchase any of the Notes offered hereby. Additionally,
this offering is subject to the requirement that the Company receive and accept
subscriptions for Notes in the minimum principal amount of $1,500,000 by
midnight _____________, 1997, subject to a one-time extension of up to 90 days
from such date (the "Minimum Requirement"). If the Minimum Requirement is timely
met, the subscription funds will be released to the Trustee and the Company may
continue offering Notes and accepting subscriptions for additional Notes through
the termination of the Offering Period. See "TERMS OF NOTE OFFERING." To the
extent that only the minimum principal amount of Notes are sold, the Company
will be required to purchase a reduced number of Portfolio Loans, thereby
increasing risk because of reduced diversification of the Portfolio Loans. Also,
the Company may sustain the adverse consequences of a reduction in economic
scale as a result of certain costs of the Note offering, the organization and
capitalization of the Company and the fees to be paid to certain affiliates of
the Company. See "PROSPECTUS SUMMARY" and "USE OF PROCEEDS."
DEPENDENCE ON MANAGEMENT. Note holders will be entirely dependent upon
the ability of management of the Company to carry out the Company's business and
to acquire and manage the Portfolio Loans, Federal Instruments and Money Market
Funds which will constitute substantially all of the Company's assets. The
death, disability or inability to serve of Mr. Della Penna could have a
material, adverse affect on the ability of the Company to implement and carry
out its business and plan of operation. However, the Company intends to obtain a
key-man life insurance policy on Mr. Della Penna in the amount of $1,000,000,
the proceeds of which could be used to repay up to $1,000,000 of the principal
and interest due under the Notes in the event of Mr. Della Penna's death. See
"BUSINESS OF THE COMPANY - PLAN OF OPERATION" and "MANAGEMENT."
CONFLICTS OF INTEREST. Guy S. Della Penna serves as an individual
general partner of FMIL and the sole director and officer of the corporate
general partner of FMIL. Additionally, Mr. Della Penna serves as the sole
director and officer of FMMI. FMIL and FMMI are engaged in the acquisition,
holding and disposition of residential real estate mortgage loans having the
same or substantially the same characteristics as the Portfolio Loans to be
acquired by the Company. Mr. Della Penna serves as the sole director and officer
of the Company. As a result of such multiple relationships, conflict of interest
situations may arise between and among the Company, FMIL and FMMI with respect
to the acquisition or sale of residential real estate loans for the Company and
FMIL and FMMI. Mr. Della Penna will deal with such conflict of interest
situations among the Company, FMIL and FMMI in his discretion, considering such
factors as he deems relevant, including the financial condition and needs of
each entity. There is no requirement and can be no assurance that conflicts will
be resolved in a manner that is in the best interests of the Company. See
"CONFLICTS OF INTEREST; TRANSACTIONS WITH MANAGEMENT AND AFFILIATES."
Mr. Della Penna beneficially owns approximately 17% of the common stock
of Homevestors of America, Inc., an entity which is currently a major originator
of mortgage loans for other similar programs in which Mr. Della Penna is
involved. Homevestors is establishing a network of individuals and companies
which will buy and sell residential real estate with a focus on sales to credit
impaired buyers and, in connection with such sales, originate mortgage loans on
such real estate which will meet the Acquisition Policy of the Company. It is
anticipated that the Company may purchase a substantial portion of its Portfolio
Loans through such network, and certain fees, such as mortgage placement fees,
may be paid to affiliates of Mr. Della Penna in connection with such purchases.
Such fees will not exceed the fees generally charged for similar services by
independent third parties.
The Company will pay to FMIL a monthly servicing fee of $1,500 plus .5%
(on an annual basis) of the aggregate outstanding principal balance of the
Portfolio Loans as of the end of the prior month. Such servicing fees have not
been determined by arm's length negotiation, even though management believes
that such fees fairly relate to fees which would be charged by non-affiliated
servicing entities. Such fees are intended to defray the compensation paid by
FMIL to its employees who carry out such servicing activities. See "BUSINESS OF
THE COMPANY - PLAN OF OPERATION - Portfolio Loan Servicing." For his general
management services, Mr. Della Penna will receive an annual management fee equal
to 3% of the aggregate face value of the Eligible Collateral as of December 31
of the prior year. See "MANAGEMENT - Compensation."
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Executive will receive average selling commissions, a Note offering
management fee and a non-accountable expense allowance of 6.1%, 3% and 2%,
respectively. Additionally, CMG will receive expense reimbursement on an
accountable basis in the amount of $100,000 if $2,000,000 or more principal
amount of Notes is sold. Such commission, Note offering management fee and
non-accountable expense allowance amounts and reimbursement which will be paid
to Executive and CMG have not been determined as a result of arm's length
negotiations but have been determined principally by Guy S. Della Penna, the
principal shareholder of Executive and the sole shareholder of the Company and
CMG. See "PLAN OF DISTRIBUTION."
The Trustee, Michael Hric, P.A., is a Florida professional association
(corporation) which engages in the practice of law in Sarasota, Florida. The
principal of Michael Hric, P.A. is Michael Hric. Mr. Hric has performed legal
services for Mr. Della Penna and his affiliated companies in the past and may
perform additional services in the future. Mr. Hric did not provide any services
with respect to the formation of the Company and the offer and sale of the
Notes. See "CONFLICTS OF INTEREST; TRANSACTIONS WITH MANAGEMENT AND AFFILIATES"
and "DESCRIPTION OF THE NOTES AND THE CUSTODY AGREEMENT."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
The Company was formed pursuant to the Florida Business Corporation Act
in November 1995, and initially capitalized by the issuance of 100 shares of
Common Stock, $.01 par value, to Guy S. Della Penna, for the nominal cash
consideration of $1,000. See "MANAGEMENT" and "PRINCIPAL SHAREHOLDERS." The
Company is entirely dependent on the receipt of the proceeds of the sale of
Notes to initiate and conduct its operations.
The Company was formed and is being capitalized for the purpose of
originating, acquiring, holding and dealing in a portfolio of residential real
estate mortgage loans ("Portfolio Loans") secured by liens on residential real
estate properties, which for the most part will be improved, in accordance with
a specific acquisition policy. See "BUSINESS OF THE COMPANY - PLAN OF
OPERATION." The Company intends to utilize the net proceeds of the Notes offered
hereby to acquire the Portfolio Loans. The principal and interest obligations
represented by outstanding Notes are expected to be paid using the cash flow
generated by the receipt of principal and interest payments on the Portfolio
Loans, Federal Instruments and Money Market Funds, the receipt of funds from the
early payoff of Portfolio Loans by the mortgagors, the trading of Portfolio
Loans and proceeds from the sale of Portfolio Loans, Federal Instruments and
real estate received upon loan foreclosures. The Portfolio Loans will have
maturities which are in excess of the maturities of the Notes.
In order for the Company to repay the principal amount due under the
Notes, it will have to generate substantial profits from the sale of Portfolio
Loans that the Company has originated or purchased and then "scrubbed" and/or
"seasoned." No assurance can be given that the Company will generate sufficient
profits or cash flow on an initial or continuing basis to permit the Company to
meet its obligations with respect to outstanding Notes. See "RISK FACTORS -
Source of Note Repayment" and "BUSINESS OF THE COMPANY - PLAN OF OPERATION."
TERMS OF NOTE OFFERING
The Company must receive and accept subscriptions for Notes in the
minimum principal amount of $1,500,000 on or before midnight _____________,
1997, subject to a one-time extension effected at the sole option of the Company
of up to 90 days from such date, in order for the offering to continue and for
the Note proceeds to be utilized in the business of the Company (the "Minimum
Requirement"). In the event that the Minimum Requirement is not successfully
attained, all subscription funds will be returned promptly to subscribers
without diminution and with interest as provided below. If the Minimum
Requirement is timely attained, the Note offering will continue until the
earlier of (a) the 270th day from the date of this Prospectus, (b) the sale of
the entire $5,000,000 principal amount of Notes, or (c) termination of the Note
offering at the sole election of the Company (the "Offering Period").
Subscription funds for the first $1,500,000 in principal amount of
Notes will be deposited into an escrow account pursuant to an escrow agreement
(the "Escrow Agreement"), dated ______________, 1997, between the Company,
Executive and SouthTrust Asset Management Company of Florida, N.A., Sarasota,
Florida (the "Escrow
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Agent"). The Escrow Agreement provides that the Escrow Agent will receive and
accumulate such Note subscription funds until midnight _____________, 1997,
subject to a one-time extension of up to 90 days effected at the sole option of
the Company. If at any time there is on deposit in the escrow account $1,500,000
or more in cash or in securities purchased with Note subscription funds, then
the Escrow Agent will deliver custody of such funds (and cash equivalent items)
to the Trustee for use by the Company in its intended business activity. If at
the end of such period there is less than $1,500,000 of cash (or investments
purchased with Note subscription funds), then the Note offering will terminate
and the Escrow Agent will return such Note subscription funds to the respective
Note subscribers with interest as described below.
During the time period in which the Escrow Agent is accumulating Note
subscription funds prior to attaining the Minimum Subscription, the Escrow Agent
will invest and reinvest such Note subscription funds in debt securities which
in the opinion of the Escrow Agent assures safety of principal and liquidity.
Interest earned as a result of such investment and reinvestment activities will
be paid to the Company in the event the Minimum Requirement is attained. If the
Minimum Requirement is not attained, such interest shall be paid to the Note
subscribers, taking into account the period of time that each Note subscriber's
subscription funds were on deposit with the Escrow Agent and the amount of each
subscriber's funds. The amount of such interest will be less than the applicable
Note Rate.
Subscriptions for Notes may be made in increments of $1,000, subject to
a minimum investment of $5,000 principal amount of Notes (except for Individual
Retirement Accounts, for which the minimum investment will be $2,000).
Subscribers may request that their subscriptions be allocated between the three
sub-Series of Notes in $1,000 increments, subject to availability.
The Notes will be offered on a best efforts basis by Executive. Guy S.
Della Penna, who also serves as the sole Director and Chief Executive Officer of
the Company, beneficially owns approximately 57% of the outstanding common stock
of Executive. Mr. Della Penna is also the beneficial owner of all of the
outstanding voting Common Stock of the Company. As a result, Executive and the
Company are deemed affiliates as such term is defined in Rule 2720 of the NASD
Rules of Conduct. Accordingly, the Company is subject to and will comply with
certain provisions required by Rule 2720 in connection with this offering, which
provisions relate principally to the fairness of the terms of the Notes and
their distribution.
In summary, Rule 2720 requires that the fairness of the terms of debt
securities and their issuance offered by affiliates of NASD members be passed
upon by another NASD member. Such other NASD member must be independent of the
issuer of the debt securities and the NASD member assisting in the distribution
of such debt securities and also meet the definition of "qualified independent
underwriter" as set forth in Rule 2720. Generally, in order to be a qualified
independent underwriter acting in a Rule 2720 capacity, during the five year
period immediately preceding the filing of the registration statement covering
the securities proposed to be distributed by the affiliated NASD member, the
independent NASD member must (i) have been actively engaged in the investment
banking or securities business; (ii) have generated net income from its
operations as a securities broker-dealer during the last three of such five
years; and (iii) have a board of directors constituted by a majority of persons
who have been actively engaged in the investment banking or securities business
for such five year period. Such qualified independent underwriter also must have
been actively engaged in the underwriting of public offerings of securities of a
similar size and type for at least such five year period.
In addition to passing upon the fairness of certain terms of the debt
securities and their issuance, the qualified independent underwriter also must
participate in the preparation of the registration statement and the prospectus
for the public offering of such debt securities and must exercise the usual
standards of due diligence with respect to such activity. The qualified
independent underwriter is subject to the liabilities imposed on underwriters of
securities by the Securities Act of 1933, as amended.
In connection with this offering of the Notes, Executive and the
Company have engaged Kashner Davidson Securities Corporation ("Kashner
Davidson") to act as the qualified independent underwriter. Executive, the
Company and Kashner Davidson believe that Kashner Davidson is a qualified
independent underwriter pursuant to Rule 2720 and that the terms of the Note
offering made hereby are in compliance with the provisions of Rule 2720. The
Company will pay Kashner Davidson a fee of $15,000 for its services as qualified
independent underwriter, and will also pay the expenses of Kashner Davidson's
counsel arising in connection with its representation of Kashner Davidson in
this matter, estimated to be $10,000.
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In connection with its function as a qualified independent underwriter
for the Notes offered by this Prospectus, Kashner Davidson has assisted in the
preparation of the Registration Statement of which this Prospectus is a part and
has reviewed the appropriateness and fairness of the terms to maturity and rates
of interest of the Notes and has concluded that such terms and rates are fair
and appropriate under currently existing market conditions, taking into account
the rates of interest, terms to maturity, and partially secured nature of the
Notes, as well as the amounts of selling commissions, Note offering management
fee and non-accountable expense allowance items of compensation allowed to
Executive. The net income of the Company, if any, will inure to the benefit of
Mr. Della Penna, the sole shareholder of the Company. See "MANAGEMENT" and
"PRINCIPAL SHAREHOLDERS."
PLAN OF DISTRIBUTION
The aggregate $5,000,000 principal amount of the Notes offered by this
Prospectus will be offered on a best efforts basis through Executive, an
affiliate of the Company. See "TERMS OF THE NOTE OFFERING." Executive is a
registered securities broker-dealer pursuant to the provisions of the Securities
Exchange Act of 1934, as amended, and the Blue Sky laws of various states,
including Florida. Executive is a member of the NASD and the Securities Investor
Protection Corporation ("SIPC").
For its best efforts in connection with the sale of the Notes,
Executive will be entitled to receive average selling commissions at the rate of
6.10% of the principal amount of Notes sold by it, at the specific rates set
forth on the cover of this Prospectus. In addition, Executive will be entitled
to receive a Note offering management fee equal to 3% of the gross proceeds of
Notes sold by Executive or other Qualified Dealers and a non-accountable expense
allowance equal to 2% of such Note proceeds. Accordingly, Executive will be
entitled to receive additional fees and allowance equal to $50 per $1,000
principal amount of Notes sold and $250,000 if the entire $5,000,000 principal
amount of Notes is sold. Notes may also be sold by Qualified Dealers. Such
Qualified Dealers may receive all or a portion of the selling commissions
payable on account of the sale of the Notes. Executive may also reallow a
portion of the non-accountable expense allowance. Selling commissions and the
Note offering management and due diligence fee will only be paid if the Minimum
Requirement is attained. See "TERMS OF NOTE OFFERING" and "USE OF PROCEEDS."
The Note offering made hereby is subject to the condition that the
Company receive and accept subscriptions for Notes in the minimum principal
amount of $1,500,000 on or before midnight __________________, 1997, subject to
a one-time extension effected at the sole option of the Company of up to 90 days
from such date (the "Minimum Requirement"). Until such time as the Minimum
Requirement is attained, investors' checks delivered in connection with
subscriptions to Notes will be made payable to the Escrow Agent. Pending the
timely attainment of the Minimum Requirement, all Note subscription funds will
be deposited in the Escrow Account which is administered by the Escrow Agent. In
connection with offerings of securities that involve other than firm
underwriting arrangements, the United States Securities and Exchange Commission
(the "Commission") has adopted Rule 15c2-4, which requires securities
broker-dealers, such as Executive and Qualified Dealers, who participate in
offerings of securities which involve a contingency promptly upon receipt to
transmit any and all checks, drafts, or money orders from investors, together
with a copies of any executed subscription agreement relating to such security,
to an escrow agent. The Commission has interpreted the term "promptly" to mean
by noon of the next business day following receipt of subscription funds until
such time as the minimum offering contingency established in connection with the
offering has been met. Accordingly, Executive and any Qualified Dealer effecting
a subscription for the Notes offered hereby will transmit such funds directly to
the Escrow Agent by noon of the next business day following subscription. If,
upon examination of the subscription documents, it is determined by Executive
and/or the Company that the Note subscriber is not a suitable investor, the
Company and Executive will direct that the subscription funds of such unsuitable
subscriber be returned promptly to such subscriber. See "INVESTOR SUITABILITY"
and "TERMS OF NOTE OFFERING."
CONFLICTS OF INTEREST;
TRANSACTIONS WITH MANAGEMENT AND AFFILIATES
Guy S. Della Penna is the sole director and officer of the Company. Mr.
Della Penna also serves as an individual general partner of Federal Mortgage
Investors, Ltd., a limited partnership formed in 1991 ("FMIL"), and
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as the sole director and officer of the corporate general partner of FMIL. He
also serves as the sole director and officer of Federal Mortgage Management,
Inc., a corporation formed in 1993 ("FMMI"). The organization and capitalization
of both of these entities was sponsored by Executive. Mr. Della Penna is an
officer, director and owner of a majority of the outstanding stock of Executive.
Utilizing the proceeds from the public offer and sale of units of
limited partnership interests and promissory notes, respectively, FMIL and FMMI
have acquired portfolios of residential real estate mortgage loans utilizing an
acquisition criteria similar to the criteria to be utilized by the Company.
Appendix A to this Prospectus is a presentation of certain information
concerning the loan portfolios of FMIL and FMMI. See "RISK FACTORS Conflicts of
Interest." To the extent possible, Mr. Della Penna (acting as management of the
Company and in his capacity as individual general partner and corporate officer
of the corporate general partner of FMIL and as corporate officer of FMMI) will
endeavor to cause the Company to become fully invested in Portfolio Loans as
quickly as possible following attainment of the Minimum Requirement (subject to
the maintenance of the initial reserve for interest payments) for this Note
offering prior to making substantial additional portfolio acquisitions on behalf
of FMIL or FMMI. However, there is no requirement that this be done and because
Mr. Della Penna owes fiduciary duties to FMIL and FMMI as well as to the
Company, no assurance can be given that Mr. Della Penna will be successful in
such effort.
The possibility exists that the Company, FMIL and FMMI may be in a
conflict of interest situation if they are all in the process of acquiring or
selling residential real estate loans for or from their respective portfolios at
the same time. In such instances, Mr. Della Penna will be required to allocate
available residential real estate loans which meet the respective acquisition
criteria of the three entities among them and to determine which entity shall
have the first opportunity to sell loans when sale opportunities are limited.
Portfolio Loans also may be sold or otherwise conveyed or transferred between or
among the Company, FMIL, FMMI, Mr. Della Penna or other affiliates of such
persons. Mr. Della Penna intends to resolve such conflicts of interest as he
sees fit, considering the factors he considers relevant at the time, including
the financial condition and needs of each entity. There is no requirement and
can be no assurance that conflicts will be resolved in a manner that is in the
best interests of the Company.
As a result of such possible conflict of interest situations, the
possibility exists that the Company may be unable to acquire or sell Portfolio
Loans at the time or in the amounts desired. In such case, the financial
condition and operations of the Company could be adversely affected in a
material fashion. As a result, the Company's ability to pay the obligation of
Notes outstanding may also be materially affected. See "RISK FACTORS."
The Company, FMIL and FMMI may act in a joint fashion in the
acquisition or sale of residential real estate mortgage loans for their
respective portfolios. Such procedures will only be followed in instances where
such joint action is desirable due to economies of scale achieved or other
mutually beneficial reasons.
In the future, Mr. Della Penna or his affiliates, including Executive,
may organize additional entities which will pursue mortgage loan acquisition
activities similar to those to be undertaken by the Company and will compete
with the Company in the same manner as FMIL and FMMI. It is anticipated that the
conflict of interest policies described above will be utilized to resolve
conflict of interest situations with such entities which may be organized in the
future.
Mr. Della Penna beneficially owns approximately 17% of the common stock
of Homevestors of America, Inc., an entity which is currently a major originator
of mortgage loans for other similar programs in which Mr. Della Penna is
involved. Homevestors is establishing a network of individuals and companies
which will buy and sell residential real estate with a focus on sales to credit
impaired buyers and, in connection with such sales, originate mortgage loans on
such real estate which will meet the Acquisition Policy of the Company. It is
anticipated that the Company may purchase a substantial portion of its Portfolio
Loans through such network, and certain fees, such as mortgage placement fees,
may be paid to affiliates of Mr. Della Penna in connection with such purchases.
Such fees will not exceed the fees generally charged for similar services by
independent third parties.
The Company's Portfolio Loans will be serviced by FMIL. The Company
will pay a monthly servicing fee to FMIL of $1,500 plus .5% (on an annual basis)
of the aggregate outstanding principal balance of the Portfolio Loans as of the
end of the prior month. Such servicing cost has not been determined as a result
of arm's length negotiations but is believed by the Company to fairly relate to
servicing costs which could be obtained from
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<PAGE>
independent, non-affiliated sources. Such monthly servicing fee is intended
principally to defray the salary costs of the employees carrying out such
servicing activities. Such servicing costs to be paid by the Company to FMIL
under such arrangements are expected to range on an annual basis from $16,200 to
$33,000, depending upon whether the minimum or maximum principal amount of Notes
offered hereby are sold. See "BUSINESS OF THE COMPANY - PLAN OF OPERATION -
Portfolio Loan Servicing."
For his general management services, Mr. Della Penna will receive an
annual management fee equal to 3% of the aggregate face value of the Eligible
Collateral as of December 31 of the prior year. See "MANAGEMENT - Compensation."
Executive is an affiliate of the Company by virtue of the ownership of
the outstanding voting Common Stock of the Company and Executive by Mr. Della
Penna. In connection with the offering made by this Prospectus, Executive will
receive average selling commissions of 6.10% of the principal amount of Notes
that it sells. Additionally, Executive will receive in connection with the Note
offering, a Note offering management fee equal to 3% of the gross Note proceeds
realized by the Company, as well as a nonaccountable expense allowance of 2% of
such gross Note proceeds. The rate of selling commissions, the Note offering
management fee amount and the non-accountable expense allowance amount have not
been determined by arm's length negotiations, but have been solely determined by
Mr. Della Penna acting on behalf of the Company and Executive with review as to
fairness by Kashner Davidson Securities Corporation. Accordingly, conflict of
interest circumstances may have existed with respect to the different interests
of the Company and Executive in determining such rates. No assurance can be
given that more favorable rates to the Company would not have resulted from an
arm's length negotiation process. See "PLAN OF DISTRIBUTION."
In the event that at least $2,000,000 principal amount of Notes is sold
by the Company, CMG, also an affiliate of the Company and Executive by virtue of
Mr. Della Penna's common ownership of all three entities, will receive
reimbursement for certain expenses which it has advanced in connection with the
organization of the Company and the Note offering made by this Prospectus, as
well as payment for certain support services provided by CMG to the Company in
connection with the Note offering. Such reimbursement amount may not exceed
$100,000 regardless of the amount of expenses paid by CMG or value of services
provided. Such expense reimbursement and service payment will only occur on an
accountable basis and CMG will be required to provide documentation to the
Company with respect to any such payment. Such expense reimbursement
arrangements were determined solely by Mr. Della Penna and, accordingly, may be
less favorable to the Company than if they had been determined through an arm's
length negotiation process. See "USE OF PROCEEDS."
Michael Hric, P.A., will serve as the trustee under the Custody
Agreement. Michael Hric, P.A., is a Florida professional association
(corporation) which engages in the practice of law in Sarasota, Florida. The
principal of Michael Hric, P.A. is Michael Hric. Mr. Hric has engaged in the
practice of law in Sarasota, Florida since 1979 with a practice emphasis in the
areas of taxation and business law. Mr. Hric has performed legal services for
Mr. Della Penna and his affiliated companies in the past and may perform
additional services in the future. Mr. Hric did not provide any services with
respect to the formation of the Company and the offer and sale of the Notes.
USE OF PROCEEDS
The gross proceeds from the sale of the Notes will range from a minimum
of $1,500,000 if only the Minimum Requirement is attained to a maximum of
$5,000,000 if the entire principal amount of Notes is sold. Average selling
commissions of 6.1% of the principal amount of the Notes sold will be paid to
Executive and other Qualified Dealers. A 3% Note offering management fee and a
2% non-accountable expense allowance also will be paid to Executive.
Additionally, if at least $2,000,000 principal amount of Notes is sold by the
Company, certain expenses will be reimbursed to CMG in the maximum amount of
$100,000. The items for which reimbursement will be made to CMG by the Company
relate to the payment of certain salaries by CMG to management, clerical,
secretarial and administrative staff; the providing of office space, utilities
and supplies; certain travel expenses; and the providing of computer hardware
and software. Additionally, CMG has accrued or paid certain costs associated
with the Note offering relating to consulting, legal and accounting fees, filing
fees and printing costs. See "CONFLICTS OF INTEREST; TRANSACTIONS WITH
MANAGEMENT AND AFFILIATES." CMG, in its sole
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<TABLE>
<CAPTION>
discretion but without any obligation to do so, may determine to defer the
payment of such expense reimbursement until such time as the Company has
realized Note proceeds in excess of $2,000,000.
MINIMUM PERCENT $2,000,000 PERCENT MAXIMUM PERCENT
------------- ------- ------------ ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Gross Proceeds ................... $ 1,500,000 100.0% $ 2,000,000 100.0% $ 5,000,000 100.0%
Selling Commissions (average) .... (91,500) 6.1 (122,000) 6.1 (305,000) 6.1
Offering Management Fee .......... (45,000) 3.0 (60,000) 3.0 (150,000) 3.0
Non-accountable Expense Allowance (30,000) 2.0 (40,000) 2.0 (100,000) 2.0
Organizational and Offering
Expense Reimbursement (1) ...... 0 0 (100,000) 5.0 (100,000) 2.0
Organizational and Offering
Expenses (1) ................... (120,000) 8.0 (120,000) 6.0 (120,000) 2.4
------------- ------ ----------- ------ ----------- --------
Available for Use in Company
Activities ..................... $ 1,213,500 80.9% $ 1,558,000 77.9% $ 4,225,000 84.5%
Cash Held for Interest Payment (2) (30,000) 2.0 (40,000) 2.0 (100,000) 2.0
------------- ------ ----------- ------ ----------- --------
Total to be Invested in Mortgages $ 1,183,500 78.9% $ 1,518,000 75.9% $ 4,125,000 82.5%
============= ======== =========== ====== =========== ========
<FN>
- ----------
(1) CMG is entitled to receive expense reimbursement with respect to
organizational assistance and expenses incurred on the Company's behalf
in connection with the Note offering, up to a maximum of $100,000,
provided that at least $2,000,000 principal amount of Notes is sold by
the Company. Such amounts will be in addition to the $120,000
organizational and offering expenses payable by the Company upon the
attainment of the Minimum Requirement. Such expense reimbursements to
CMG may not exceed such amounts even though the amounts actually
expended by CMG on behalf of the Company and in connection with the
Note offering may exceed such amounts. Organizational and Offering
Expenses also includes the fee of $15,000 paid by the Company to
Kashner Davidson Securities Corporation for its service as a "qualified
independent underwriter" in connection with the offering of the Notes,
and the expenses of Kashner Davidson's counsel arising in connection
with its representation of Kashner Davidson in this matter, estimated
to be $10,000.
(2) Such amounts will provide for the payment of approximately 90 days of
Note interest at the Note Rate. To the extent that cash flow is
sufficient to meet the interest obligation of outstanding Notes, such
amounts or a portion thereof will be utilized to acquire Portfolio
Loans. See "RISK FACTORS - No Loss Reserve or Credit Enhancements."
</FN>
</TABLE>
CAPITALIZATION
The capitalization of the Company as of the date of this Prospectus and
as adjusted for the attainment of the Minimum Requirement and the sale of the
entire $5,000,000 principal amount of Notes is set forth in the table presented
below.
UPON ATTAINMENT UPON SALE OF ENTIRE
OF MINIMUM $5,000,000 PRINCIPAL
OUTSTANDING REQUIREMENT AMOUNT OF NOTES
----------- -------------------- ---------------------
Series 1997 --- $1,500,000 Principal $5,000,000 Principal
Notes in authorized Amount of Notes Amount of Notes
principal amount
of $5,000,000
Common Stock, $1,000 $1,000 $1,000
$.01 par value,
1,000 shares
authorized, 100
shares outstanding
- -----------------
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<PAGE>
BUSINESS OF THE COMPANY - PLAN OF OPERATION
BACKGROUND
The Company was organized under the Florida Business Corporation Act in
November 1995. Guy S. Della Penna may be deemed the promoter of the Company as
that term is defined in the Securities Act of 1933, as amended. Other than the
development of its business plan, the Company has not engaged in any other
business activities. Mr. Della Penna presently serves as the sole director and
officer of the Company. See "MANAGEMENT." Guy S. Della Penna is affiliated with
FMIL, a Florida limited partnership, and FMMI, a Florida corporation, both of
which have acquired, hold and deal in residential real estate mortgage loans in
accordance with an acquisition policies similar to the Acquisition Policy to be
utilized by the Company. Appendix A to this Prospectus provides summary
information concerning the portfolios and portfolio experience of FMIL and FMMI.
PRINCIPAL ACTIVITY
Utilizing the proceeds from this offering of Notes, the Company will
originate, underwrite, acquire, hold and deal in a portfolio of residential
mortgage loans ("Portfolio Loans") which are secured by liens on the real
estate. Such liens will primarily be first liens, represented by first
mortgages, however, the Company may also invest in second lien mortgage loans,
represented by second mortgages, provided that the aggregate principal balance
of all second lien loans will not at any time exceed 10% of the aggregate
principal balance of all Portfolio Loans. The Portfolio Loans acquired by the
Company will generally be loans on improved residential real property (home and
property), but they may include loans on parcels of unimproved real property
which is zoned for residential use, subject to certain limitations on the
percentage amount of unimproved real estate loans which can be purchased by the
Company. The Company has developed an Acquisition Policy with respect to the
acquisition of Portfolio Loans.
As a general matter, the Company expects to buy Portfolio Loans which
represent higher credit risks, and therefore offer a higher yield, than loans
generally originated by commercial banks and other institutional lenders. These
loans will generally involve credit impaired borrowers who may not qualify for
traditional mortgage financing because of a prior bankruptcy, poor or no credit
history or previous foreclosures. Also, such loans may have been originated by
small independent mortgage companies or brokers or individual sellers of real
estate who may not have generated the complete credit and loan file necessary to
sell the mortgage loans into the institutional mortgage market. During a period
of generally from three to six months after the acquisition of a Portfolio Loan,
the Company will endeavor to bring all documentation for the loan into
compliance with the institutional mortgage loan market (referred to as
"scrubbing" the loan) and, with respect to under-performing or non-performing
loans, will attempt to work with the mortgagor to have the loan payments brought
up to date. After servicing the loan for a three to nine month period and
bringing a delinquent loan current, or at least improving its performing status
(referred to as "seasoning" the loan), the Company will then package together a
number of "scrubbed" and "seasoned" Portfolio Loans and attempt to sell them
into the institutional mortgage loan market at a premium over the price the
Company paid for them.
Portfolio Loans may be marketed directly or through brokers that
represent pension funds, insurance companies, banks, savings and loan
institutions, credit unions and mortgage bankers. The Company may sell Portfolio
Loans from time to time through the facilities of FNMA and FHLMC through
approved, authorized sellers. The Company is not required to utilize approved
sellers with respect to sales to pension funds, insurance companies, banks,
savings and loan institutions, credit unions and mortgage bankers. Generally,
approved sellers include mortgage bankers and banks which have received such
designation from FNMA and FHLMC. Management has had only limited experience
relative to the sale of loans, as constituted by the sales experience of FMIL
and FMMI. See Appendix A to this Prospectus.
SUMMARY OF PORTFOLIO LOAN ACQUISITION POLICY
The Company's Acquisition Policy vests substantial discretion in
management with respect to the character of the Portfolio Loans which may be
acquired. Under the Acquisition Policy, a detailed description of which is set
forth below, the Company will:
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(a) Originate and acquire residential real estate mortgage
loans (i) secured by a first lien on the collateral real estate, and
(ii) with a loan balance not in excess of 90% of the estimated fair
market value of the collateral real estate at the time of acquisition
of the Portfolio Loan by the Company or, alternatively, a Portfolio
Loan with a loan to value ratio in excess of 90% may be acquired by the
Company provided that the Company's cost to acquire the loan does not
exceed 85% of the estimated fair market value of the real estate as
determined at the time of acquisition of the Portfolio Loan;
(b) Originate and acquire unimproved real estate mortgage
loans having a loan balance at the time of loan acquisition not greater
than 50% of the estimated fair market value of the collateral real
estate property, subject to the further condition that the aggregate
principal balance of unimproved real estate mortgage loans shall not at
any time exceed 10% of the aggregate principal balance of all Portfolio
Loans;
(c) In cases when the Company is acquiring a promissory note
secured by a first lien mortgage on a parcel of property, originate or
acquire a residential real estate mortgage loan secured by a second
lien on the collateral real estate, provided that both loans, on an
aggregate basis, meet the criteria of paragraph (a) above; provided
however, that the aggregate principal balance of all second lien loans
shall not at any time exceed 10% of the aggregate principal balance of
all Portfolio Loans;
(d) Originate, without limitation as to amount, short-term (up
to 12 months) mortgage loans for purposes of purchasing undervalued
residential real estate, as more fully described on below; and
(e) In all loan acquisition transactions, take into
account the relative contribution in terms of cash flow to be provided
by such loan or group of loans in the context of the Company's
principal and interest obligations under the outstanding Notes.
The effect of the Acquisition Policy will be to permit the Company to
acquire in individual and pooled loan acquisitions conforming and non-conforming
loans, which loans may be performing, under-performing and non-performing,
without purchase limitations in terms of the aggregate principal balance of the
Portfolio Loans from time to time. See "RISK FACTORS."
Interested investors are referred to the "GLOSSARY OF CERTAIN TERMS"
contained in this Prospectus for definitions of terms utilized in the
description of the Company's Acquisition Policy described herein.
PORTFOLIO LOAN ACQUISITION POLICY
The Company intends to acquire residential mortgage loans which are
secured primarily by first liens on residential real estate located throughout
the continental United States. In cases when the Company is acquiring a
promissory note secured by a first lien mortgage on a parcel of property, it may
also originate or acquire a residential real estate mortgage loan secured by a
second lien on the collateral real estate, provided that both loans, on an
aggregate basis, meet the Company's Acquisition Policy criteria, and provided
further that the aggregate principal balance of all second lien loans shall not
at any time exceed 10% of the aggregate principal balance of all Portfolio
Loans. Some loans may be secured by vacant residential building lots. The
Company anticipates that a majority of loan purchases will involve the purchase
of groups or pools of loans by the Company from one or more vendors which, in
most cases, will have acted as loan originators. The Company will endeavor to
acquire performing loans as Portfolio Loans. However, in the instance of pooled
loan purchases, a number of the loans acquired and included in the pool may be
under-performing or non-performing in terms of current or historical principal
and interest payments at the time of acquisition by the Company. See "RISK
FACTORS." All loans acquired by the Company, including under-performing and
non-performing loans, will be subject to the Acquisition Policy criteria which
requires that the loan balance not exceed 90% of the estimated fair market value
of the collateral real estate securing such loan at the time of acquisition of
the Portfolio Loan by the Company or, alternatively, a Portfolio Loan with a
loan to value ratio in excess of 90% may be acquired by the Company provided
that the Company's cost to acquire the loan does not exceed 85% of the estimated
fair market value of the collateral real estate as determined at the time of
acquisition of the Portfolio Loan.
In addition to the foregoing criteria, the maximum amount of
under-performing and non-performing loans in any group of loans being considered
for acquisition by the Company will be viewed in the light of the necessary
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<PAGE>
cash flow required to service outstanding Notes. Any group of loans considered
for purchase as Portfolio Loans must have sufficient, demonstrated cash flow
which, when combined with the cash flow of all other Portfolio Loans and the
profits from trading the Portfolio Loans, will assure to the extent possible the
servicing of the obligations represented by outstanding Notes. Also, in such
purchases, the Company will take into account the pool purchase price, the
discount from the unpaid aggregate principal balance of the loan pool, the
average age of the pooled loans and the underlying circumstances relating to the
under-performing and non-performing loans contained in the pool (such as
temporary inability to pay, restoration of scheduled payments, servicing
problems and other factors).
The Company anticipates acquiring Portfolio Loans either on an
individual or on a pool basis at discounts from their face amounts, as
determined at the time of purchase. Historically, FMIL and FMMI have been able
to acquire loans at discounts ranging generally from 15% to 30% of the
outstanding principal balance thereof, although no assurance can be given that
the Company will be able to acquire Portfolio Loans within such discount range.
Monthly payments of principal and interest under the mortgage loans must be
determined by reference to amortization schedules with terms not in excess of
360 months (30 years), calculated from the time of loan origination.
Mortgage loans acquired by the Company may have been originated by a
financial or deposit institution, a credit union, an insurance company, a
mortgage company or mortgage broker or the seller of the real property which
serves as collateral for the mortgage loan (or agents of such sellers). The
Company will acquire loans directly from such persons, and also from pension
funds, mortgage bankers and the Resolution Trust Corporation as a result of its
acquisition of the subject loan from a distressed financial institution.
Mr. Della Penna beneficially owns approximately 17% of the common stock
of Homevestors of America, Inc., an entity which is currently a major originator
of mortgage loans for other similar programs in which Mr. Della Penna is
involved. Homevestors is establishing a network of individuals and companies
which will purchase undervalued residential real estate and then remarket the
same, either immediately or after making repairs, with a focus on sales to
credit impaired buyers. In connection with such remarketing, the sellers will
originate mortgage loans on such real estate which will meet the Acquisition
Policy of the Company. It is anticipated that the Company may purchase a
substantial portion of its Portfolio Loans through such network, although it
will not be required to purchase any loans and the originators will not be
required to sell any loans to the Company. Certain fees, such as mortgage
placement fees, may be paid to affiliates of Mr. Della Penna in connection with
purchases of such mortgage loans by the Company. Such fees will not exceed the
fees generally charged for similar services by independent third parties.
In connection with the network described in the preceding paragraph,
the Company may also make short-term mortgage loans to the individuals or
companies participating in the network for the purchase of the undervalued
residential real estate. The principal amount of such loans will be limited to
an amount no greater than 70% of the estimated fair market value of the real
property as it exists on the date the loan is made, that is, prior to any needed
repairs being made. The loan will be for a term of 12 months or less and will be
secured by a first lien on the property. No loans will be made to finance any
repairs. It is anticipated that such loans will bear interest at a rate
significantly higher than will be charged on a standard, long-term residential
mortgage loan, and will generate additional income for the Company. Mr. Della
Penna and his affiliates may receive fees from the participants in the network
in consideration for various services performed or provided by them and for the
right to participate in such network. There is no limitation on the amount of
capital that the Company may invest in such short-term mortgage loans.
The Company may, on a case-by-case basis and in accordance with an
individual loan analysis, acquire real estate mortgage loans which are secured
by first liens on unimproved real estate, provided that the unpaid principal of
any such mortgage loan does not exceed 50% of the estimated fair market value of
such unimproved real estate. Such acquisitions are subject to the further
condition that the aggregate principal balance of all mortgage loans secured by
unimproved real estate may not exceed 10% of the aggregate principal balance of
all Portfolio Loans. The Company anticipates that the initial loan acquisition
activity of the Company will be directed towards the acquisition of residential
real estate mortgage loans and not unimproved real estate mortgage loans and
that the acquisition of mortgage loans involving as their underlying collateral
unimproved real estate will be an activity undertaken at a time when the cash
flow of the Company is sufficient in the judgment of management to assure the
timely servicing of the obligation represented by outstanding Notes.
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<PAGE>
In considering loans for acquisition, the Company will determine
estimated fair market value of the underlying collateral real estate utilizing
one or a combination of methods. One such method utilizes the original in-file
appraisal which was made at the time of the loan origination, provided such
appraisal was done within the past 12 months. Additional methods of determining
estimated fair market value include a review of the current tax value or
assessed value for ad valorem taxes of the property, the procurement of a new
appraisal, including a "drive- by" appraisal. A "drive-by" appraisal consists of
a comparison of recent sales of dwellings determined to be comparable to the
subject dwelling based upon an examination of the exterior of the dwelling and a
search of tax and other records which describe the dwelling. Such appraisals are
utilized when the dwelling is occupied and access is limited. The Company will
use its best judgment in determining which method or combination of methods will
be used in connection with the evaluation of any particular loan. In this
regard, the Company may take into account the age of the loan, the status of the
documentation relative to the loan, the mortgagor payment history and current
economic trends in the geographic area of the continental United States in which
the collateral property is located. The Company does not anticipate reappraising
loan collateral properties at any regular intervals unless special circumstances
arise. The manner of determining the estimated fair market value of the real
estate underlying the Company's loans is strictly within the discretion of the
Company, and the Acquisition Policy does not provide any uniform or fixed
procedure.
Factors which the Company will consider in evaluating loans for
possible acquisition include satisfactory title to the collateral real estate,
the sufficiency and adequacy of the initial mortgage loan underwriting
procedure, the existence of hazard and liability insurance (with the Company
designated as a named insured to the extent of its interest in the property),
the credit and payment history of the mortgagor, the adequacy and completeness
of the mortgage instrument and other documentation which created and governs the
loan, and other matters which could affect the relative credit characteristics
or salability of the mortgage loan.
Non-conforming loans may from time to time constitute up to 100% of the
Company's Portfolio Loans. Under-performing loans, if current at the time of
consideration for acquisition by the Company (once delinquent but now making
regularly scheduled monthly payments on a consistent basis), also may comprise
up to 100% of the Portfolio Loans from time to time. Under-performing loans will
be subject to the acquisition considerations and standards described above. The
Company will acquire non-performing loans only when such loans are part of a
pool of loans which the Company desires to acquire and the pool is satisfactory
in terms of the considerations described in the Acquisition Policy. As
previously described, even when an individual loan or group of loans meets the
criteria for acquisition, the Company also will take into account the relative
contribution of any such loan or group of loans to the cash flow needed to cover
the principal and interest obligations of the Company under the outstanding
Notes.
Regardless of the categorization of particular loans as conforming or
non-conforming, all loans which are "performing," in terms of timely principal
and interest payments on a monthly basis, are considered by the Company to have
low to moderate risk. Non-performing loans and under-performing loans present
greater risk, although individual circumstances may have a substantial effect on
the level of risk attributable to such loans. The lack of cash flow as to any
individual loan or group of loans decreases the liquidity of the Company even
though there may be a greater opportunity for gains on the sale of such loans if
the Company can bring them from an under-performing or non-performing status to
a performing status. See "RISK FACTORS - Source of Note Repayment."
When it acquires non-conforming loans involving acceptable credit and
payment histories, the Company, subsequent to loan acquisition, will undertake
the necessary steps to cure the origination deficiencies then present in such
loans, thereby permitting the sale of such loans into the secondary mortgage
market, specifically the market represented by the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
Where this corrective activity is successful, the Company will generally be able
to improve the liquidity of the loan and obtain a premium on its sale over its
acquisition cost.
The Company expects to acquire both fixed-rate and adjustable-rate
mortgage loans ("ARMs") as Portfolio Loans. ARMs provide for automatic
adjustment of the interest rate, usually on an annual basis, as market rates
change. The Company anticipates that a majority of the Portfolio Loans acquired
by the Company will be fixed-rate mortgage loans.
The Acquisition Policy permits but does not require the acquisition of
Federal Instruments and Money Market Funds. In order to maintain sufficient cash
to fund principal in interest payment obligations on the Notes,
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the Company may have up to 10% of its available capital invested in Federal
Instruments and Money Market Funds at all times, and may invest any cash
received upon the sale of a Portfolio Loan or parcel of real property received
upon foreclosure temporarily in Federal Instruments or Money Market Funds
pending its use to acquire additional Portfolio Loans. "Federal Instruments" are
comprised of deposit or certificate accounts issued by state or federally
chartered banking institutions with at least $500 million of assets or debt
instruments issued by the United States or instrumentalities thereof. "Money
Market Funds" are money market or equivalent funds at a New York Stock Exchange
member firm with net assets of at least $200 million.
SUPPLY OF PORTFOLIO LOANS
In the recent past there has been a limited supply of the type of
mortgage loans intended to be purchased as Portfolio Loans. The type of loans
sought by the Company are not generally available through any recognized
national market; rather, in each geographic region there appears to be a limited
number of buyers and sellers involved in the market. Mr. Della Penna has
established relationships with several buyers and sellers in Arkansas,
California, Florida, Kansas, Missouri, North Carolina, Ohio, Oklahoma,
Pennsylvania and Texas. Management believes that such sellers should be able to
provide a steady source of Portfolio Loans for the Company, and that such buyers
will provide a ready market for all of the mortgage notes purchased by the
Company after the Company has "seasoned" and "scrubbed" such loans. At present,
one company in Texas, Homevestors of America, Inc., is providing a majority of
the residential mortgage loans being purchased by FMIL and FMMI, and such loan
originator may be the source of a significant amount of the mortgage loans
purchased by the Company as Portfolio Loans. Mr. Della Penna beneficially owns
approximately 17% of the common stock of Homevestors. Homevestors is
establishing a network of individuals and companies which will buy and sell
residential real estate with a focus on sales to credit impaired buyers and, in
connection with such sales, originate mortgage loans on such real estate which
will meet the Acquisition Policy of the Company.
PORTFOLIO LOAN SERVICING
The responsibility of servicing the Portfolio Loans of the Company is
vested in the management of the Company. See "MANAGEMENT." In that regard,
management will be responsible for the collection of all principal and interest
payments due under the terms of the Portfolio Loans, for the institution and
prosecution of collection proceedings, including foreclosure, with respect to
Portfolio Loans which are in default, the sale of property after completion of
foreclosure, the acquisition and disposition of Portfolio Loans, including
origination activities, and, where appropriate, the elimination of origination
deficiencies from nonconforming loans which otherwise involve acceptable credit
and payment histories. As of the date of this Prospectus, Company management
intends to arrange for the performance of Portfolio Loan service operations
through FMIL, utilizing a loan servicing system which complies with FNMA
standards. The Company will pay a monthly servicing fee of $1,500 plus .5% (on
an annual basis) of the aggregate outstanding principal balance of the Portfolio
Loans as of the end of the prior month. Such servicing fee will inure to the
benefit of FMIL and are intended to defray the compensation paid by FMIL to its
employees who carry out such servicing activities. The monthly servicing fee to
FMIL was not determined as a result of arm's length negotiation but it is
believed to be fair and reasonable in relationship to the servicing costs which
would be incurred by the Company from independent sources. See "CONFLICTS OF
INTEREST; TRANSACTIONS WITH MANAGEMENT AND AFFILIATES."
Mortgagors of Portfolio Loans who do not make timely payment of
principal or interest will receive written notice within 15 days after the due
date for such payment and personal contact within 30 days after the due date if
the payment has not yet been received by the Company. A combination of written
and personal contact will continue during the 90 day period following the
initial occurrence of loan delinquency. If the Portfolio Loan which is in
default is not restored to current and performing status within such 90 day
period, the Company will commence loan foreclosure proceedings or will endeavor
promptly to negotiate the satisfaction of the loan by taking the collateral
property by way of deed in lieu of foreclosure (after determination of the
estimated fair market value of the underlying collateral and status of title) or
through actual foreclosure proceedings. In certain circumstances, the Company
may grant extensions of the note term or enter into other workout arrangements
in lieu of foreclosure or negotiation of an immediate satisfaction of the
mortgage and note. When collateral property is taken in connection with a
defaulted loan, the Company will endeavor to sell such collateral property at
the best price obtainable consistent with a speedy disposition of the property.
A sale transaction may involve the assumption of the foreclosed loan by the
purchaser of the real estate or the origination of a new loan by the Company to
the purchaser. If such
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sale transaction involves the origination of a new loan to the purchaser, the
Company generally will require at least a five percent down payment on the
purchase price.
COMPETITION
The Company anticipates that it will encounter competition from many
sources in its efforts to acquire acceptable mortgage loans. The type of loans
sought by the Company are not generally available through any recognized
national market; rather, in each geographic region there appears to be a limited
number of buyers and sellers involved in the market. Numerous investment and
other entities are in the business of acquiring residential real estate mortgage
loans on an ongoing basis. The basis of such competition in Portfolio Loan
acquisitions is expected to relate to the ability of the Company to rapidly
identify sources of loans for purchase, the ability of the Company to rapidly
and effectively evaluate mortgage loans and the price that the Company is able
and willing to pay for acceptable residential mortgage loans. FMIL and FMMI,
affiliates of the Company and Guy S. Della Penna, are engaged in the
acquisition, holding and disposition of residential real estate mortgage loans
having the same or substantially the same characteristics as the mortgage loans
to be acquired for the Company. In addition, Mr. Della Penna may form additional
companies in the future which will engage in the same or similar business. All
of such companies may compete with each other from time to time in acquiring
mortgage loans from a limited pool of mortgage loans, as well as in the sale of
such loans to third parties. See "RISK FACTORS - Conflicts of Interest" and
"CONFLICTS OF INTEREST; TRANSACTIONS WITH MANAGEMENT AND AFFILIATES."
ELIGIBLE COLLATERAL AS SECURITY FOR THE NOTE OBLIGATIONS
The Notes will be issued under the Custody Agreement, pursuant to which
the notes and mortgages comprising the Portfolio Loans will be held by, and in
the name of, the Trustee for the benefit of the holders of the Notes. The
Custody Agreement does not contain provisions meeting the requirements of the
Trust Indenture Act, although the Note holders and the Trustee will have certain
rights which correspond to some of the requirements of the Trust Indenture Act.
The Trustee will acquire and maintain a lien on the Portfolio Loans (as well as
the proceeds of any sale of a Portfolio Loan until the same is reinvested in
another Portfolio Loan or paid out to the Noteholders). Pending the purchase of
Portfolio Loans, the Company may invest available cash in debt instruments of
the United States government and certificates or deposit accounts ("Federal
Instruments") or money market or equivalent funds at a New York Stock Exchange
member firm with net assets of at least $200 million ("Money Market Funds")
which will initially also be held by the Trustee under the Custody Agreement.
The Portfolio Loans and Federal Instruments, as well as the cash proceeds from
the sale thereof, Money Market Funds, and any real estate acquired upon
foreclosure of a Portfolio Loan are hereinafter referred to as Eligible
Collateral. As a general matter, cash payments on the Portfolio Loans,
representing the repayment of principal and interest thereon, will be paid
directly to the Company, and the Trustee will not have possession and control
over the cash from these payments. Pursuant to the Custody Agreement, the
Trustee will at all times hold Eligible Collateral with an aggregate Unadjusted
Value (as defined below) equal to at least 60% of the aggregate outstanding
principal balance of the Notes. The Unadjusted Value of a Federal Instrument is
the cash value of the instrument. Money Market Funds are considered cash
equivalents and the Unadjusted Value of Money Market Funds is the current
balance of such funds. The Unadjusted Value of a Portfolio Loan is equal to the
outstanding balance due under the loan, and may exceed the amount which could be
obtained upon an immediate sale of the same. The Unadjusted Value of real estate
owned by the Company as a result of a Portfolio Loan foreclosure will be valued
at the lesser of the estimated fair market value of the property received by the
Company upon foreclosure or the principal balance of the loan at the time of
foreclosure plus accrued interest and fees and costs incurred by the Company in
connection with such foreclosure process, and also may exceed the amount which
could be obtained upon an immediate sale of the same. The remaining assets of
the Company, including other items of Eligible Collateral, may be held by the
Company. Accordingly, the principal and interest obligations represented by the
Notes may never be fully collateralized by Eligible Collateral held by the
Trustee, and may be secured by collateral which may have a liquidation value
equal to less than 60% of the outstanding principal obligations due under the
Notes. To the extent that the value of the Eligible Collateral held by the
Trustee is less than the aggregate principal and interest obligations
represented by the Notes, or if the Trustee does not maintain a perfected
security interest on the Eligible Collateral held by it, the Notes will be
general unsecured obligations of the Company. See "RISK FACTORS," "USE OF
PROCEEDS," and "DESCRIPTION OF THE NOTES AND THE CUSTODY AGREEMENT."
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MANAGEMENT
The administration of the business and properties of the Company is
vested in the Board of Directors of the Company. The day-to-day operations of
the Company will be carried out by Guy S. Della Penna who serves as the sole
Director and officer of the Company, as well as other key employees. The table
set forth below sets forth information concerning Mr. Della Penna.
NAME AND AGE POSITIONS HELD WITH THE COMPANY
- ---------------------- ----------------------------------------------
Guy S. Della Penna, 44 Director, President and Chief Executive
Officer, Secretary, Treasurer and Chief
Financial Officer
INFORMATION CONCERNING MR. DELLA PENNA
Mr. Della Penna, a resident of Sarasota, Florida, since 1980, has been
active in the financial and securities industries for approximately 19 years.
Mr. Della Penna acquired Executive, the selling agent for the Notes offered by
this Prospectus, in March 1990, and is the principal, a member of the Board of
Directors and President and Chief Executive Officer of Executive. Mr. Della
Penna is a General Securities Principal and Financial and Operations Principal
pursuant to NASD Rules. See "TERMS OF NOTE OFFERING" and "PLAN OF DISTRIBUTION."
Mr. Della Penna also serves in an individual capacity as a General
Partner of Federal Resource Income Program, Ltd. ("FRIP"), a privately
capitalized Florida limited partnership, principally engaged in the purchase and
holding of producing petroleum leases. Since August 1990, Mr. Della Penna has
served as the sole shareholder, director and officer of Midwest Energy
Corporation, which acts as the corporate General Partner of FRIP. Capital
Mortgage Management, Inc., a Florida corporation wholly-owned by Mr. Della
Penna, serves as the General Partner of FMIL, a publicly held Florida limited
partnership. Mr. Della Penna has served as the sole director and officer of
Capital Mortgage Management, Inc. since August 1991. Since July 1994, Mr. Della
Penna has served as the sole shareholder, director and officer of Federal
Mortgage Management, Inc. ("FMMI"). FMIL and FMMI were organized to invest, hold
and deal in residential real estate mortgage loans.
Mr. Della Penna is also the President of CMG. CMG was organized by Mr.
Della Penna in 1989 to provide financial and advisory services, as well as
insurance products, to individuals and corporate entities. CMG acts as general
agent for various insurance companies.
Mr. Della Penna holds a Bachelor of Science degree in Business
Administration from Ithaca College, Ithaca, New York and received a Master of
Business Administration degree in Finance from the State University of New York,
Albany, New York.
COMPENSATION
As the Company's sole director and officer, Mr. Della Penna will
provide management services to the Company, including management of the
Portfolio Loans, supervision of the Company's affairs such as the maintenance of
books and records and the preparation of reports, and such other managerial
responsibilities as may reasonably be required of him in connection with the
operation of the Company's business. For his general management services, he
will receive an annual management fee equal to 3% of the aggregate face value of
the Eligible Collateral as of December 31 of the prior year. Such fees may be
paid in monthly or other installments as determined by Mr. Della Penna.
Mr. Della Penna intends to devote such time to the affairs of the
Company as is reasonably required. However, he will continue to serve as an
officer and director of the other businesses described herein, as well as other
businesses in the future. The amount of time that Mr. Della Penna will devote to
the Company may increase or decrease depending on the Company's level of
activity at various points in time.
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INDEMNIFICATION
Under the provisions of the Articles of Incorporation and Bylaws of the
Company, the officers and directors of the Company and former officers and
directors of the Company are entitled to indemnification from the Company to the
full extent permitted by law, provided that such director or officer seeking
indemnification acted in good faith and in a manner which he or she reasonably
believed to be in or not opposed to the best interests of the Company or, with
respect to any criminal action or proceeding, had reasonable cause to believe
that his or her conduct was not unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions or otherwise, the
Company has been advised that in the opinion of the United States Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act of 1933, as amended, and is, therefore, unenforceable.
KEY-MAN LIFE INSURANCE
The Company intends to obtain a key-man life insurance policy on Mr.
Della Penna in the amount of $1,000,000, the proceeds of which could be used to
repay up to $1,000,000 of the principal and interest due under the Notes in the
event of Mr. Della Penna's death.
PRINCIPAL SHAREHOLDERS
As of the date of this Prospectus, all of the outstanding voting Common
Stock of the Company is owned beneficially by Guy S. Della Penna. Mr. Della
Penna holds his shares of Common Stock pursuant to the provisions of a family
trust.
DESCRIPTION OF THE NOTES AND THE CUSTODY AGREEMENT
GENERAL
The Notes offered by this Prospectus have been authorized and
designated by the Company as its Series 1997 A-I, A-II and A-III Promissory
Notes in the authorized aggregate principal amount of $5,000,000. The Notes of
the 1997A Series will represent the general obligation of the Company and will
be partially secured by liens on the Eligible Collateral held by the Trustee
under the Custody Agreement as described below. As of the date of this
Prospectus, there are no other series of Notes of the Company outstanding.
The Notes are offered in varying maturities and Note Rates as set forth
in the table below:
PRINCIPAL
AMOUNT ANNUAL
SERIES AVAILABLE MATURITY DATE NOTE RATE
------ --------- ------------------ ---------
1997 A-I $ 500,000 September 30, 2001 8.00%
1997 A-II 1,000,000 September 30, 2002 9.00%
1997 A-III 3,500,000 September 30, 2003 10.00%
All Note Rates are fixed. The available principal amount within each of
the three Series maturities identified in the table is not subject to variation.
The minimum subscription for Notes is $5,000, with the exception of
Individual Retirement Accounts (for which the minimum investment is $2,000). A
minimum of $1,500,000 principal amount of Notes of any of the
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maturities available within the Series 1997A must be timely sold in order for
the proceeds to be utilized by the Company in the manner described in this
Prospectus. See "TERMS OF NOTE OFFERING."
Interest on the principal amount of Notes will be calculated on the
basis of a 365 day year. With respect to Note interest, such interest will
commence to accrue at the time that the subscription for a Note or Notes is
accepted by the Company. Each Note subscriber will be promptly advised of such
Note subscription acceptance or rejection. During the period that the Minimum
Requirement is being attained, interest will not be distributed. Interest on the
Notes will be payable monthly at the applicable Note Rate commencing on the
first day of the first month following attainment of the Minimum Requirement and
the release of the proceeds from the sale of the Notes to the Company and on the
first day of each month thereafter. Investors who acquire Notes subsequent to
the attainment of the Minimum Requirement will first receive interest on the
first interest payment date subsequent to their subscription acceptance and at
the Note Rate. Such later investors will also be promptly advised of such
subscription acceptance or rejection.
The principal of each Note will be paid at the stated maturity thereof.
The principal and interest obligations represented by outstanding Notes as well
as the operating expenses of the Company are expected to be paid using the cash
flow generated by the receipt of principal and interest payments on the
Portfolio Loans, Federal Instruments and Money Market Funds, the receipt of
funds from the early payoff of Portfolio Loans by the mortgagors, profits from
the trading of Portfolio Loans and proceeds from the sale of Portfolio Loans,
Federal Instruments and real estate received upon loan foreclosures. See "RISK
FACTORS - Source of Note Repayment."
The terms of issuance of the Notes (interest rate, term to maturity,
manner of collateral) have been determined by the management of the Company
taking into account market rates of interest, the anticipated Portfolio Loan
purchase capability of the Company in terms of discount and availability, the
observed cash flow of real estate mortgage loans and the experience of FMIL and
FMMI. See Appendix A to the Prospectus. Such terms have been reviewed as to
fairness by Kashner Davidson Securities Corporation, Sarasota, Florida.
ELIGIBLE COLLATERAL
The Portfolio Loans and Federal Instruments, as well as the cash
proceeds from the sale thereof, Money Market Funds, and any real estate acquired
upon foreclosure of a Portfolio Loan are referred to as Eligible Collateral. The
Trustee will have possession of and a lien on only a limited amount of the
Eligible Collateral. The remaining Eligible Collateral, as well as the other
assets of the Company, may be held by the Company and will not directly secure
the obligations of the Company under the Notes. As a general matter, cash
payments on the Portfolio Loans, representing the repayment of principal and
interest thereon, will be paid directly to the Company, and the Trustee will not
have possession and control over the cash from these payments, and such cash
will not be an item of Eligible Collateral. See "SUMMARY OF THE CUSTODY
AGREEMENT" below.
SUMMARY OF THE CUSTODY AGREEMENT
THE FOLLOWING GENERAL DESCRIPTION OF CERTAIN FEATURES OF THE INDENTURE
AND CUSTODY AGREEMENT IS A SUMMARY ONLY AND IS QUALIFIED IN ITS ENTIRETY TO
REFERENCE TO THE INDENTURE AND CUSTODY AGREEMENT, WHICH IS ATTACHED AS EXHIBIT B
TO THIS PROSPECTUS.
Upon the attainment of the Minimum Requirement, all of the subscription
funds will be turned over to the Trustee by the Escrow Agent. The Trustee will
use those funds, as well as all future subscription funds, to pay the expenses
of the Company as directed by Mr. Della Penna and purchase Portfolio Loans
identified by Mr. Della Penna. The promissory notes and mortgages constituting
the Portfolio Loans will be acquired directly by, and in the name of, the
Trustee for the benefit of the holders of the Notes. The Trustee will maintain
physical custody of such notes and mortgages at its offices in Sarasota,
Florida, and will record the mortgage assignments in the public records of the
county or other appropriate filing location for the jurisdiction in which the
real property which is the subject of the Portfolio Loan is located. Although
the Trustee will be the designated mortgagee of record and will hold all legal
title to the Portfolio Loans, the Company will receive mortgagor payments of
principal and interest under such loans.
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To the extent that sufficient mortgage loans are not available for
purchase to fully invest all available funds (other than the cash balance
maintained to fund interest payments on the Notes), the Trustee will purchase
Federal Instruments or Money Market Funds as directed by Mr. Della Penna. The
Trustee will take initial possession of the Federal Instruments or, in the case
of Money Market Funds and deposit accounts, the respective account will be in
the name of the Trustee, as trustee under the Custody Agreement.
At the time of the release of subscription funds to the Company upon
the attainment of the Minimum Requirement and for an indefinite period
thereafter, the face amount or value of the Eligible Collateral will be less
than the aggregate principal obligation of outstanding Notes, as approximately
15% to 22% of the gross proceeds from the sale of the Notes will be used
immediately to pay offering and other accrued expenses. There is no requirement
that the Trustee hold all items of Eligible Collateral or that the Eligible
Collateral held by the Trustee have a value equal to the outstanding principal
obligation represented by the Notes. Pursuant to the CustodyAgreement, the
Trustee will at all times hold Eligible Collateral with an aggregate Unadjusted
Value (as defined below) equal to at least 60% of the aggregate outstanding
principal balance of the Notes. The Unadjusted Value of a Federal Instrument is
the cash value of the instrument. Money Market Funds are considered cash
equivalents and the Unadjusted Value of Money Market Funds is the current
balance of such funds. The Unadjusted Value of a Portfolio Loan is equal to the
outstanding balance due under the loan, and may exceed the amount which could be
obtained upon an immediate sale of the same. The Unadjusted Value of real estate
owned by the Company as a result of a Portfolio Loan foreclosure will be valued
at the lesser of the estimated fair market value of the property received by the
Company upon foreclosure or the principal balance of the loan at the time of
foreclosure plus accrued interest and fees and costs incurred by the Company in
connection with such foreclosure process, and also may exceed the amount which
could be obtained upon an immediate sale of the same. The remaining assets of
the Company, including other items of Eligible Collateral, may be held by the
Company. Accordingly, the principal and interest obligations represented by the
Notes may never be fully collateralized by Eligible Collateral held by the
Trustee, and may be secured by collateral which may have a liquidation value
equal to less than 60% of the outstanding principal obligations due under the
Notes. To the extent that the value of the Eligible Collateral held by the
Trustee is less than the aggregate principal and interest obligations
represented by the Notes, or if the Trustee does not maintain a perfected
security interest on the Eligible Collateral held by it, the Notes will be
general unsecured obligations of the Company. See "RISK FACTORS - Source of Note
Repayment."
On the last day of each calendar month, the Company will calculate the
outstanding Unadjusted Value of all items of Eligible Collateral held by the
Trustee. The monthly report also will report the aggregate outstanding principal
balance of the Notes as of the corresponding date. A report of such calculations
will be delivered to the Trustee within two business days of the end of each
calendar month. If such report indicates that the aggregate Unadjusted Value of
the Eligible Collateral is less than 60% of the aggregate outstanding principal
balance of the Notes, the Company must deliver along with such report Federal
Instruments or cash in such amount as may be required to restore the ratio of
Unadjusted Value of the Eligible Collateral to the outstanding principal balance
of the Notes to .6 to 1.0.
THE TRUSTEE
Michael Hric, P.A., is a Florida professional association (corporation)
which engages in the practice of law in Sarasota, Florida. The office address of
the Trustee is 2801 Fruitville Road, Suite 100, Sarasota, Florida 34237. The
principal of Michael Hric, P.A. is Michael Hric. Mr. Hric has engaged in the
practice of law in Sarasota, Florida since 1979 with a practice emphasis in the
areas of taxation and business law. Mr. Hric has performed legal services for
Mr. Della Penna and his affiliated companies in the past and may perform
additional services in the future. Mr. Hric did not provide any services with
respect to the formation of the Company and the offer and sale of the Notes. Due
to the cost involved, no fidelity or surety bond will be obtained covering the
actions of the Trustee under the Custody Agreement.
ACTION BY THE TRUSTEE UPON DEFAULT BY THE COMPANY
The Company shall be in default with respect to its obligations under
each of the Notes of each Series and the Custody Agreement upon the occurrence
of any of the events described below, which events are continuing for the
periods of time indicated:
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(1) the Company defaults in the payment of interest on any Note at
the Note Rate when the same becomes due and payable and the
default in the payment of such Note interest continues for a
period of thirty (30) consecutive days;
(2) the Company defaults in the payment of the principal of any
Note when the same becomes due and payable;
(3) the Company or its assets become subject to any voluntary or
involuntary proceeding under the Federal Bankruptcy Act or any
state statute which relates to credit relief and/or the
liquidation of the Company, which proceeding remains
undismissed for a period of sixty (60) or more days; and/or
(4) the Company fails to perform any of its covenants set forth in
the Custody Agreement.
In the event of an occurrence of an event of default by the Company
with respect to outstanding Notes and the Custody Agreement which is continuing,
the Trustee on its own initiative or at the request of persons holding at least
75% in principal amount of the Notes may initiate and prosecute available
remedies at law or in equity in the Circuit Court of the Twelfth Judicial
Circuit in and for Sarasota County, Florida in order to obtain satisfaction of
the then outstanding principal and interest obligation of the Notes. The
anticipated purpose of such remedial action undertaken by the Trustee will be to
accelerate the obligation represented by the Notes as being immediately due and
payable to the holders of all Notes then outstanding, as well as such other
corrective and remedial action as may be identified and pursued by the Trustee
on behalf of the Note holders.
The court in such proceedings are brought may at the request of the
Trustee or by its own action, appoint another trustee or receiver with respect
to the liquidation of the Eligible Collateral and the administration and
distribution of any proceeds which may be realized as a result of the
liquidation of such Eligible Collateral. The cost of prosecuting and concluding
such remedial action may reduce the amount payable to the Note holders. Any
obligation of the Notes which remains unpaid after the liquidation of the
Eligible Collateral and the application of such liquidation proceeds to the
obligation represented by the Notes shall remain the general obligation of the
Company, which obligation shall be unsecured. See "RISK FACTORS - Source of Note
Repayment."
NOTE PREPAYMENT
The principal obligation represented by an outstanding Note may not be
prepaid by the Company in whole or in part prior to the maturity of the
particular Note, except upon the written request of a holder and at the
discretion of the Company.
TRANSFER AGENT
The Trustee will act as transfer agent with respect to outstanding
Notes.
REPORTS TO NOTE HOLDERS
The fiscal year of the Company ends December 31 and the first fiscal
year of the Company following commencement of operations will end on December
31, 1997. Commencing with the conclusion of the Company's first fiscal year
after the commencement of operations and for fiscal years thereafter in which
Notes remain outstanding, the Company will provide to the holders of the Notes
annual reports which will contain financial statements audited by the
independent certified public accountants of the Company. The Company also
intends to provide quarterly or other interim reports to Note holders, although
such reports are not expected to include financial statements which are audited.
On the last day of each calendar quarter, the Company will calculate
the value of Portfolio Loans. For purposes of such calculation, Portfolio Loans
will be valued at the attributed carrying value thereof as reflected in the
Company's financial records. Generally, carrying value relates to the cost of
such loans to the Company. The Company will also calculate the value of cash and
cash equivalents, including Money Market Funds, and Federal
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Instruments, as well as the value of owned real estate. A copy of such report
reflecting the calculation of such collateral values will be mailed to Note
holders of record on a quarterly basis. Additionally, any Note holder may
inquire of the Company by telephone or in writing as to the Unadjusted Value of
Eligible Collateral held by the Trustee as of the close of any calendar month.
Such quarterly reports will indicate the aggregate purchase price of the
Portfolio Loans and the aggregate unpaid principal amount of such loans. The
quarterly report will also reflect the aggregate loan to value ratio of
Portfolio Loans to the aggregate estimated fair market value of the underlying
collateral real estate securing the Portfolio Loans. As indicated elsewhere in
this Prospectus, only loans meeting certain loan to value requirements will be
acquired. Note holders will not be able to independently determine whether such
loan to value requirements have been complied with, however. See "RISK FACTORS."
Additionally, the annual financial statements which will be provided to Note
holders will contain a confirmation of the Unadjusted Value of the Eligible
Collateral held by the Trustee and the outstanding Note principal balance as
determined by the independent certified public accountants of the Company.
The quarterly report will be provided within 60 days of the close of
the first three fiscal quarters of each year and within 145 days of the close of
the fiscal year.
LITIGATION
As of the date of this Prospectus, the Company and its officers and
directors (in their capacities as such) are not parties to any material items of
litigation which relate to the conduct of the business of the Company or this
issuance of Notes.
LEGAL MATTERS
The validity of the Notes offered by this Prospectus will be passed
upon for the Company by Shumaker, Loop & Kendrick, LLP, Tampa, Florida.
EXPERTS
The financial statements of the Company reflecting its financial
condition for the period November 13, 1995 (inception) through December 31,
1996, are included herein in reliance upon the report of Bobbitt, Pittenger &
Co., P.A., Sarasota, Florida, independent certified public accountants, which
report appears elsewhere herein and is included herein upon the authority of
said firm as experts in accounting and auditing.
Kashner Davidson Securities Corporation, Sarasota, Florida, has acted
in the capacity of qualified independent underwriter in accordance with the
provisions of Rule 2720 of the NASD Rules of Conduct. The fairness report of
Kashner Davidson Securities Corporation is summarized under "TERMS OF THE NOTE
OFFERING" and is included as an exhibit to the Registration Statement of which
this Prospectus is a part. The fairness report may be obtained by interested
investors upon request to Executive. In addition to rendering its fairness
report, Kashner Davidson Securities Corporation also assisted in the preparation
of the Registration Statement relating to the Notes, of which this Prospectus is
a part. William T. Kirtley, P.A., Sarasota, Florida, assisted Kashner Davidson
Securities Corporation with respect to such activity.
ADDITIONAL INFORMATION
This Prospectus constitutes a part of a Registration Statement on Form
SB-2 filed by the Company with the Securities and Exchange Commission
("Commission") under the Securities Act through the Electronic Data Gathering
and Retrieval ("EDGAR") system with respect to the Notes offered hereby. This
Prospectus omits certain of the information contained in the Registration
Statement, and reference is hereby made to the Registration Statement and
related exhibits and schedules for further information with respect to the
Company and the Notes offered hereby. Any statements contained herein concerning
the provisions of any document are not necessarily complete, and in each such
instance reference is made to the copy of such document filed as an exhibit to
the Registration Statement. Each
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such statement is qualified in its entirety by such reference. The Registration
Statement and the exhibits and schedules forming a part thereof can be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, DC 20549, and should also be
available for inspection and copying at the following regional offices of the
Commission: 7 World Trade Center, Suite 1300, New York, New York 10048; and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Registration statements, reports, proxy and
information statements filed through the EDGAR system are publicly available
through the Commission's Internet web site at "http://www.sec.gov".
During the fiscal year ending December 31, 1997, the Company will be
subject to the information providing requirements of Section 13 of the
Securities Exchange Act of 1934, as amended, and in accordance therewith will be
required to file certain periodic and annual reports and other information with
the Commission. It is anticipated that such obligation on the part of the
Company will cease to exist after such fiscal year as the Company will most
likely be exempt from such information providing requirements thereafter. The
Company does not anticipate being subject to the proxy solicitation rules which
have been adopted by the Commission pursuant to its authority under such
statute.
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INDEX TO FINANCIAL STATEMENTS
FEDERAL MORTGAGE MANAGEMENT II, INC.
(a Development Stage Corporation)
PAGE
----
Report of Independent Public Accountants .............................. F-2
Balance Sheets as of March 31, 1997 (unaudited),
and December 31, 1996 ............................................. F-3
Statement of Operations and Deficit for the period from
November 13, 1995 (date of inception) to March 31, 1997
(unaudited), the three month periods ended March 31, 1997
(unaudited) and March 31, 1996 (unaudited), the year ended
December 31, 1996, and for the period from November 13, 1995
to December 31, 1995 .............................................. F-4
Statement of Changes in Stockholder's Equity for
the three months ended March 31, 1997 (unaudited), the year
ended December 31, 1996, and for the period from inception
November 13, 1995 to December 31, 1995 ............................. F-5
Statement of Cash Flows for the period from November 13, 1995
(inception) to March 31, 1997 (unaudited), the
three month periods ended March 31, 1997 (unaudited) and
March 31, 1996 (unaudited), the year ended December 31, 1996,
and for the period from inception November 13, 1995 to
December 31, 1995 ................................................. F-6
Notes to Financial Statements ......................................... F-7
F-1
<PAGE>
[Letterhead of Bobbitt, Pittenger & Company, P.A.]
February 21, 1997
TO THE STOCKHOLDER
Federal Mortgage Management II, Inc.
Sarasota, Florida
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the accompanying balance sheets of Federal Mortgage Management
II, Inc. (A Development Stage Corporation), as of December 31, 1996 and 1995,
and the related statements of operations and deficit, changes in stockholder's
equity and cash flows for the year ended December 31, 1996 and for the period
from inception November 13, 1995 to December 31, 1995. 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 statement. 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 Federal Mortgage Management II,
Inc. at December 31, 1996 and 1995, and the results of its operations and its
cash flows for the year ended December 31, 1996 and for the period from
inception November 13, 1995 to December 31, 1995, in conformity with generally
accepted accounting principles.
/s/ Bobbitt, Pittenger & Company, P.A.
Certified Public Accountants
F-2
<PAGE>
FEDERAL MORTGAGE MANAGEMENT II, INC.
(A Development Stage Corporation)
BALANCE SHEETS
(UNAUDITED)
MARCH 31 DECEMBER 31
1997 1996
----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 449 $ 449
Prepaid expenses 2,500 --
-------- --------
Total Current Assets 2,949 449
OTHER ASSETS
Deferred financing costs 96,360 93,356
-------- --------
$ 99,309 $ 93,805
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 965 $ 7,572
Due to affiliates 101,412 88,290
-------- --------
102,377 95,862
CONTINGENT LIABILITY 100,000
STOCKHOLDER'S EQUITY
Common stock, $.01 par value, 1,000 shares
authorized, 100 shares issued
and outstanding 1 1
Additional paid-in capital 999 999
Deficit accumulated during
the development stage (104,068) (3,057)
-------- --------
(103,068) (2,057)
-------- --------
$ 99,309 $ 93,805
======== ========
See notes to financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
FEDERAL MORTGAGE MANAGEMENT II, INC.
(A Development Stage Corporation)
STATEMENTS OF OPERATIONS AND DEFICIT
FOR THE PERIOD FROM NOVEMBER 13, 1995 (INCEPTION)
TO MARCH 31, 1997 (UNAUDITED), THREE MONTHS ENDED
MARCH 31, 1997 AND 1996 (UNAUDITED), THE YEAR ENDED
DECEMBER 31, 1996, AND THE PERIOD FROM NOVEMBER 13, 1995
TO DECEMBER 31, 1995
(UNAUDITED)
PERIOD FROM (UNAUDITED) (UNAUDITED) NOVEMBER 13,
NOVEMBER 13, THREE MONTHS THREE MONTHS YEAR ENDED 1995 TO
1995 (INCEPTION) ENDED ENDED DECEMBER 31, DECEMBER 31,
TO MARCH 31, 1997 MARCH 31, 1997 MARCH 31, 1996 1996 1995
----------------- -------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUE $ -- $ -- $ -- $ -- $ --
-------- -------- -------- -------- --------
EXPENSES
Accounting 2,984 800 -- 2,184 --
Advertising 165 -- -- 165 --
Filing fees 548 165 -- 383 --
Occupancy costs 12,000 12,000 -- -- --
Office supplies 4,052 3,746 -- 306 --
Other 19 -- -- 19 --
Portfolio assembly 30,000 30,000 -- -- --
Salaries 46,800 46,800 -- -- --
Travel 7,500 7,500 -- -- --
-------- -------- -------- -------- --------
NET LOSS $104,068 $101,011 $ -- $ 3,057 $ --
======== ======== ======== ======== ========
LOSS PER COMMON SHARE $1040.68 $1010.11 $ -- $ 30.57 $ --
======== ======== ======== ======== ========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
FEDERAL MORTGAGE MANAGEMENT II, INC.
(A Development Stage Corporation)
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997,
THE YEAR ENDED DECEMBER 31, 1996, AND THE PERIOD FROM INCEPTION
NOVEMBER 13, 1995 TO DECEMBER 31, 1995
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
-------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
BALANCE,
November 13, 1995
(Date of inception) $ -- $ -- $ -- $ --
BALANCE,
December 31, 1995 -- -- -- --
ISSUANCE OF COMMON STOCK 1 999 -- 1,000
NET LOSS FROM OPERATIONS -- -- (3,057) (3,057)
-------- -------- --------- ---------
BALANCE,
December 31, 1996 1 999 (3,057) (2,057)
NET LOSS FROM OPERATIONS -- -- (101,011) (101,011)
-------- -------- --------- ---------
BALANCE
March 31, 1997 (Unaudited) $ 1 $ 999 $(104,068) $(103,068)
======== ======== ========= =========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
FEDERAL MORTGAGE MANAGEMENT II, INC.
(A Development Stage Corporation)
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM NOVEMBER 13, 1995 (INCEPTION)
TO MARCH 31, 1997 (UNAUDITED), THE THREE MONTHS
ENDED MARCH 31, 1997 and 1996 (UNAUDITED), THE YEAR ENDED DECEMBER 31, 1996,
AND THE PERIOD FROM INCEPTION NOVEMBER 13, 1995 TO DECEMBER 31, 1995
PERIOD
FROM
NOVEMBER 13, THREE MONTHS THREE MONTHS PERIOD
1995 ENDED ENDED FROM NOVEMBER
(INCEPTION) MARCH 31, MARCH 31, YEAR ENDED 13 (INCEPTION)
TO MARCH 31, 1997 1996 DECEMBER 31, TO DECEMBER 31,
1997(UNAUDITED) (UNAUDITED) (UNAUDITED) 1996 1995
--------------- ------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(104,068) $(101,011) $ -- $ (3,057) $ --
Adjustments to reconcile net loss to net cash
used by operating activities
Changes in operating assets and liabilities:
Increase in prepaid expenses (2,500) (2,500) -- -- --
(Decrease)/Increase in accounts payable 965 (6,607) -- (4,767) 12,339
Increase due to affiliates 101,412 13,122 -- 88,290 --
Increase in contingent liability 100,000 100,000 -- --
--------- --------- ------ --------- --------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 95,809 3,004 -- 80,466 12,339
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 1,000 -- -- 1,000 --
Increase in deferred financing costs (96,360) (3,004) -- (81,017) (12,339)
--------- --------- ------ --------- --------
NET CASH USED IN FINANCING ACTIVITIES 95,360 (3,004) -- (80,017) (12,339)
--------- --------- ------ --------- --------
INCREASE IN CASH 449 -- -- 449 --
CASH, beginning period -- 449 -- -- --
--------- --------- ------ --------- --------
CASH, end of period $ 449 $ 449 $ -- $ 449 $ --
========= ========= ====== ========= ========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
FEDERAL MORTGAGE MANAGEMENT II, INC.
(A Development Stage Corporation)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM NOVEMBER 13, 1995 (INCEPTION)
TO MARCH 31, 1997, THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996,
THE YEAR ENDED DECEMBER 31, 1996, AND THE PERIOD FROM INCEPTION
NOVEMBER 13, 1995 TO DECEMBER 31, 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Federal Mortgage Management II, Inc. (the "Corporation"), a Florida corporation,
was organized on November 13, 1995. The Corporation's fiscal year end is
December 31. The purpose of the Corporation is to acquire and market mortgage
notes secured by first liens on real estate, and to acquire insured instruments
of deposits and/or debt securities issued by the United States government and
instrumentalities thereof. Purchase of the mortgage notes, instruments of
deposits and debt securities are to be in accordance with policies set forth in
the Acquisition Policy of the Corporation as described in the registration
statement. Interest payments on the notes and other distributions will be made
in accordance with the registration statement.
USE OF MANAGEMENT'S 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.
NOTE B - DEFERRED FINANCING COSTS
Deferred financing costs consist of legal and other fees associated with the
filing of the registration statement with the Securities and Exchange
Commission. These costs will be amortized over the life of the promissory notes
commencing on the effective date of the registration statement.
Deferred financing costs were incurred as follows:
<TABLE>
<CAPTION>
CUMULATIVE
FOR THE PERIOD FOR THE THREE FOR THE THREE
NOVEMBER 13, 1995 MONTHS ENDED MONTHS ENDED YEAR ENDED NOVEMBER 13, 1995
- MARCH 31, 1997 MARCH 31, 1997 MARCH 31, 1996 DECEMBER 31, - DECEMBER 31,
(UNAUDITED) (UNAUDITED) (UNAUDITED) 1996 1995
----------------- -------------- -------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
Legal $ 78,156 $ 3,004 $ -- $ 62,813 $ 12,339
Pricing 15,000 -- -- 15,000 --
Filing fees 3,204 -- -- 3,204 --
-------- -------- -------- -------- --------
$ 96,360 $ 3,004 $ -- $ 81,017 $ 12,339
======== ======== ======== ======== ========
</TABLE>
F-7
<PAGE>
FEDERAL MORTGAGE MANAGEMENT II, INC.
(A Development Stage Corporation)
NOTES TO FINANCIAL STATEMENTS
NOTE C - STOCKHOLDER'S EQUITY
COMMON STOCK
The Corporation is authorized to issue 1,000 shares of common stock having a par
value of $.01. The Corporation has issued and outstanding 100 shares.
NOTE D - ESCROW
An interest-bearing escrow account has been established to accumulate, invest
and reinvest the proceeds realized from the sale of the promissory notes. The
escrow account will hold such proceeds beginning with the commencement of the
offering period and shall terminate upon the earlier of the date upon which the
escrow agent receives gross proceeds of $1,500,000, or the date of the
termination of the offering.
During the escrow period, no amounts deposited in the escrow account are the
property of the Corporation, nor subject to the debts of the Corporation.
NOTE E - DEVELOPMENT STAGE OPERATIONS
The Corporation is in the process of filing a registration statement with the
Securities and Exchange Commission (SEC) for the sale of promissory notes in the
aggregate principal amount of $5,000,000. The notes consist of three series with
varying maturities and interest rates. The Corporation will commence its
designated operational activities only upon the sale of notes in the minimum
principal amount of $1,500,000. Proceeds from the sale of the notes prior to
commencement of the Corporation's designated operational activity will be placed
in an interest bearing escrow account (see Note D). In the event the Corporation
does not sell $1,500,000 of notes within the offering period, all proceeds
collected from the sale of these notes, plus applicable interest, will be
returned to the respective investors.
NOTE F - INCOME TAXES
The Corporation is recognized as a Sub-Chapter S corporation by the Internal
Revenue Service. Therefore, the financial statements include no provision for
federal income taxes since the income or loss is reportable on the tax return of
the stockholder.
NOTE G - RELATED PARTY TRANSACTIONS AND CONTINGENT LIABILITY
This Corporation's stockholder, promoter of the offering, serves as director and
officer of a similar
F-8
<PAGE>
FEDERAL MORTGAGE MANAGEMENT II, INC.
(A Development Stage Corporation)
NOTES TO FINANCIAL STATEMENTS
mortgage program. Additionally, the stockholder is a director and chief
executive officer of the registered securities broker-dealer who will offer the
notes for sale to the general public. The broker-dealer will earn commissions
averaging 6.1% on notes sold by the broker-dealer. The broker-dealer will also
receive an offering management fee of 3% of the note proceeds sold by the
broker-dealer and an additional non-accountable expense allowance equal to 2% of
note proceeds.
During the Corporation's development stage, the stockholder and affiliates have
advanced funds to fund its operations. As of March 31, 1997 and December 31,
1996, the stockholder and other affiliated companies had advanced the
Corporation $101,412 and $88,290, respectively, for financing costs associated
with the SEC offering. The stockholder and such affiliated companies expect to
make additional advances. In accordance with the offering statement, the
advances will be reimbursed in the amount of $120,000 upon the sale of
$1,500,000 in promissory notes and another $100,000 in the event $2,000,000 or
more in promissory notes are sold. Thus, if the Corporation does not
successfully raise a minimum of $2,000,000, the additional $100,000 will not be
repaid. This liability and the related expenses have been recorded on the
financial statements of the Corporation as of March 31, 1997. Advances in excess
of such amounts will not be reimbursed; however, the related expenses will be
reflected in the financial statements with a corresponding increase in
additional paid in capital.
NOTE H - FAIR VALUE OF FINANCIAL INSTRUMENTS IN ACCORDANCE
WITH THE REQUIREMENTS OF SFAS NO. 107
The Corporation's financial instruments consist of all of its assets and
liabilities with the exception of deferred financing costs. The Corporation's
management has determined that the fair value of all of its financial
instruments is equivalent to the carrying cost.
F-9
<PAGE>
APPENDIX A TO PROSPECTUS OF
FEDERAL MORTGAGE MANAGEMENT II, INC.
Set forth herein is certain summary information concerning the
activities of Federal Mortgage Investors, Ltd. ("FMIL") and Federal Mortgage
Management, Inc. ("FMMI") relating to their acquisition, ownership and
disposition of residential real estate mortgage loans for their portfolios. Such
information is provided to interested investors in connection with the Note
offering made by the Prospectus of the Company. Such information is unaudited
and has been prepared from the financial records of FMIL by the General Partners
thereof and the financial records of FMMI by its management. FMIL is a
partnership that raised funds from investors through the sale of limited
partnership interests for investment by FMIL in mortgage loans. FMMI is a
corporation that raised funds from investors through the sale of promissory
notes for investment by FMMI in mortgage loans. The information presented in
this Appendix with respect to the activities and circumstances of FMIL and FMMI
should not be viewed by investors as necessarily indicative of the experience
which will be sustained by the Company in connection with its intended assembly
and ownership of residential real estate mortgage loans as described in the
Prospectus. The results experienced by the Company, assuming that the Minimum
Requirement is met, may be more or less favorable than those experienced by FMIL
or FMMI.
Table I - Experience in Raising and Investing Funds
Table II - Compensation to Sponsor
Table III - Operating Results of Prior Programs
Table IV - Experience in Trading Mortgage Loans
<PAGE>
<TABLE>
<CAPTION>
TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS)
Table I sets forth the dollars raised in prior programs, the amount available
for investment and acquisition costs for the Company's affiliated partnership
(Federal Mortgage Investors, Ltd. (FMIL)) and corporation (Federal Mortgage
Management, Inc. (FMMI)).
FEDERAL MORTGAGE INVESTORS, LTD. FEDERAL MORTGAGE MANAGEMENT, INC.
-------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Dollar amount offered $7,500,000 $5,000,000
========== ==========
Dollar amount raised $2,348,000 100.0% $4,252,500 100.0%
Less offering expenses:
Selling commissions 164,360 7.0% 284,020 6.7%
Offering management fee 46,960 2.0% 127,875 3.0%
Non-accountable expense allowance -- 0.0% 85,250 2.0%
Organizational expense reimbursed 50,000 2.1% 148,503 3.5%
Organizational and offering expenses 84,510 3.6% 118,120 2.8%
Capitalized interest -- 0.0% 87,755 2.1%
========== ===== ========== =====
Available for investment $2,002,170 85.3% $3,400,977 80.0%
========== ===== ========== =====
Date offering began November 20, 1991 December 21, 1993
Length of offering in months 14 9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE II
Compensation to Sponsor
(Not Covered by Report of Independent Public Accountants)
Table II sets forth the compensation to the General Partner of FMIL and the sole
shareholder of FMMI and their affiliates from the offering proceeds and from
operations of FMIL and FMMI, respectively, through March 31, 1997. Both FMIL and
FMMI are still in operation, and therefore the general partner, sole shareholder
and their affiliates will continue to receive additional compensation from these
entities.
TYPE OF COMPENSATION FMIL FMMI
- ------------------------------------------------- ---- ----
<S> <C> <C>
Date offering commenced November 20, 1991 December 21, 1993
Dollar amount raised $ 2,348,000 $ 4,252,500
----------- -----------
Amount paid to sponsor from proceeds of offering:
Offering management fee 46,960 127,875
Non-accountable expense allowance -- 85,250
Organizational expense reimbursement 50,000 148,503
Dollar amount of cash generated from operations
before deducting payments to sponsor 390,989 (321,490)
Amount paid to sponsor from operations:
Management fees (1) 251,118 389,777
Servicing fees -- 55,778
<FN>
- ----------
(1) Management fees for FMIL and FMMI are computed as follows:
FMIL - Management fee equal to three percent (3%) of the aggregate
principal balance of the portfolio investments at December 31, plus one
percent (1%) of the cash flow of the Partnership (as defined by the
partnership agreement). In addition, the management fee also includes
one percent (1%) of the net income from capital transactions.
FMMI - Management fee is equal to three percent (3%) of the aggregate
principal balance of the portfolio investments at December 31.
</FN>
</TABLE>
<PAGE>
TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
(Not Covered by Report of Independent Public Accountants)
Table III sets forth the operating results of the Company's affiliated
partnership and corporation, distributions to investors and certain tax
information.
Federal Mortgage Investors, Ltd. and Federal Mortgage Management, Inc.
(a Florida Limited Partnership and S-Corporation, respectively)
<TABLE>
<CAPTION>
QUARTER
FEDERAL MORTGAGE INVESTORS, LTD. (1) ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
1992 1993 1994 1995 1996(2) 1997(2)
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Gross revenues $ 91,170 $ 207,782 $ 148,621 $ 135,995 $ 97,715 $ 7,026
Profit (loss) on sale of mortgages 4,239 194,633 64,324 80,998 (16,171) (54,133)
Less:
Operating expenses 51,374 174,012 151,362 143,486 200,127 21,043
Interest expense 3,891 452 653 85 -- --
Depreciation and amortization 788 2,851 4,995 4,993 4,482 1,144
--------- --------- --------- --------- --------- ---------
Net income - GAAP Basis $ 39,356 $ 225,100 $ 55,935 $ 68,429 $(123,065) $ (69,294)
========= ========= ========= ========= ========= =========
Taxable income (loss)
--from operations $ 39,356 $ 223,361 $ 55,286 $ 68,951 $(121,140) $ (68,150)
========= ========= ========= ========= ========= =========
Cash generated from operations $ 39,796 $ 33,770 $ (2,741) $ (7,491) $(102,412) $ (14,017)
Cash generated from sales 4,239 194,633 64,324 80,998 (16,171) (54,133)
--------- --------- --------- --------- --------- ---------
Cash generated from operations and sales 44,035 228,403 61,583 73,507 (118,583) (68,150)
Less: Cash distribution to investors
--from operating cash flow 39,796 33,770 -- -- -- --
--from sales 4,239 194,633 64,324 80,998 -- (54,133)
--from other 83,301 56,035 170,541 133,433 187,652 92,338
--------- --------- --------- --------- --------- ---------
Cash generated (deficiency) after cash
distributions $ (83,301) $ (56,035) $(173,282) $(140,924) $(306,235) $(106,355)
========= ========= ========= ========= ========= =========
TAX DISTRIBUTION DATA PER $1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
--from operations $ 29.36 $ 88.81 $ 22.95 $ 31.35 $ (55.08) $ (39.44)
Cash distributions to investors:
Source (on GAAP Basis):
-Investment income $ 29.36 $ 89.50 $ 23.22 $ 31.11 $ (55.96) $ (40.10)
-Return of capital 65.64 8.00 74.28 66.39 153.46 137.60
QUARTER
FEDERAL MORTGAGE MANAGEMENT, INC. (1) ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
1994 1995 1996(2) 1997(2)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Gross revenues $ 187,382 $ 314,531 $ 259,461 $ 36,019
Profit (loss) on sale of mortgages 218,050 120,222 (11,699) (88,086)
Less:
Operating expenses 243,944 268,498 160,960 44,960
Interest expense 299,428 372,666 347,237 82,414
Depreciation and amortization 158,716 158,716 158,716 39,679
--------- --------- --------- ---------
Net income - GAAP Basis $(296,656) $(365,127) $(419,151) $(219,120)
========= ========= ========= =========
Taxable income (loss)
--from operations $(294,615) $(363,450) $(416,605) $(219,120)
========= ========= ========= =========
Cash generated from operations $ (56,562) $ 46,033 $ 98,501 $ (8,941)
Cash generated from sales 218,050 120,222 (11,699) (88,086)
--------- --------- --------- ---------
Cash generated from operations and sales 161,488 166,255 86,802 (97,027)
Less: Cash distribution to investors
--from operating cash flow -- 46,033 98,501 (8,941)
--from sales 218,050 120,222 (11,699) (88,086)
--from other 81,378 206,411 260,435 179,441
--------- --------- --------- ---------
Cash generated (deficiency) after cash
distributions $(137,940) $(206,411) $(260,435) $(179,441)
========= ========= ========= =========
TAX DISTRIBUTION DATA PER $1,000 INVESTED
Federal income tax results:
Ordinary income (loss)
--from operations N/A N/A N/A N/A
Cash distributions to investors:
Source (on GAAP Basis):
-Investment income N/A N/A N/A N/A
-Return of capital N/A N/A N/A N/A
<FN>
- ----------
(1) The structure of this partnership differs from that of the Company. The
Company uses a promissory note offering verses the limited partnership
structure. Thus all distributions are ordinary income in the form of
interest.
(2) FMIL and FMMI experienced net losses for the three months ended March 31,
1997, and the year ended December 31, 1996. These losses are primarily
attributable to delinquency rates experienced by each. See RISK FACTORS -
Prior Performance. As a result of these delinquencies and the changing
market place their (FMIL & FMMI) ability to sell portfolio loans has been
diminished, resulting in the losses. Since FMIL is a limited partnership,
there exists no absolute contractual obligation to effect cash
distributions. FMIC sold an aggregate of $4,252,500 principal amount of
Secured Promissory Notes denominated as its 1993A-I, II, III and IV Series.
Series 1993A-I and II in aggregate principal amount of $512,500 have been
paid (together with interest due thereon). Series III and IV in aggregate
principal amount of $3,740,000 become due in December 1997 ($1,000,000) and
December 1998 ($2,740,000). In May 1997, the management of FMIL and FMIC
(which is the management of the Company) liquidated the mortgage portfolios
of FMIL and FMIC in order to preclude any possible further deterioration of
portfolio value. In such liquidation, FMIL experienced a loss calculated on
the basis of loan acquisition cost of approximately $54,000 and FMMI
experienced a loss calculated on the same basis of approximately $88,000.
The portfolios of FMIL and FMIC are now constituted substantially by
mortgage loans acquired from Homevestors of America, Inc. In such regard,
FMIL acquired loans having a carrying value of approximately $38,000 and
FMMI acquired loans having a carrying value of approximately $1,250,000.
See "RISK FACTORS" "CONFLICTS OF INTEREST - Transactions with Management
and Affiliates" and BUSINESS OF THE COMPANY - PLAN OF OPERATIONS."
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE IV
Experience in Trading Mortgage Loans
(Not Covered by Report of Independent Public Accountants)
Table IV sets forth certain information relating to the mortgage loans that
have been sold by each of FIML and FMMI since inception.
FMIL
1992 1993 1994 1995 1996 1997*
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Number of Mortgage Loans 1 56 54 25 12 27
Selling Price $ 47,100 $2,226,316 $2,583,160 $ 766,935 $ 428,769 $ 768,242
Carrying Value 42,861 2,031,683 2,518,836 685,973 444,941 856,328
========== ========== ========== ========== ========== ==========
Gain on Sale $ 4,239 $ 194,633 $ 64,324 $ 80,962 $ (16,172) $ (88,086)
========== ========== ========== ========== ========== ==========
</TABLE>
FMMI
1994 1995 1996 1997*
---------- ---------- ---------- ----------
Number of Mortgage Loans 84 59 39 11
Selling Price $2,065,383 $1,570,547 $1,515,253 $ 364,179
Carrying Value 1,847,333 1,450,325 1,503,451 418,312
========== ========== ========== ==========
Gain on Sale $ 218,050 $ 120,222 $ 11,802 $ (54,133)
========== ========== ========== ==========
* - For the three months ended March 31, 1997.
<PAGE>
EXHIBIT A TO PROSPECTUS OF
FEDERAL MORTGAGE MANAGEMENT II, INC.
Promissory Notes
Series 1997 A-I, II and III
in aggregate principal amount
of $5,000,000
FEDERAL MORTGAGE MANAGEMENT II, INC.
NOTE SUBSCRIPTION AGREEMENT
Executive Wealth Management Services, Inc.
1800 Second Street, Suite 780
Sarasota, Florida 34236
Gentlemen:
The undersigned has received a copy of the Prospectus dated
____________________, 1997, of Federal Mortgage Management II, Inc. (the
"Company") relating to the public offering, in states where the securities have
been qualified for sale, of Promissory Notes designated as the Company's Series
1997 A-I, A-II and A-III, which Notes are offered in the following aggregate
principal amounts, maturities and Note Rates in an aggregate principal amount of
$5,000,000:
SELLING
SERIES AMOUNT COMMISSION MATURITY DATE RATE
------ ------ ---------- ------------------ -----
1997 A-I $ 500,000 3.00% September 30, 2001 8.0%
1997 A-II 1,000,000 4.50% September 30, 2002 9.0%
1997 A-III 3,500,000 7.00% Septmeber 30, 2003 10.0%
The undersigned has made a decision to invest in the Notes as herein
provided and in connection with such investment in the Notes, the undersigned
represents to the Company as follows:
1. The undersigned understands that an investment in the Notes
and the intended activities of the Company are subject to substantial risk as
described in the Prospectus under the heading "RISK FACTORS."
2. The undersigned, if an individual, acknowledges that (i) the
purchase price for the investment in the Notes subscribed for hereby represents
not more than ten percent (10%) of his or her total net worth, exclusive of his
or her home, home furnishings and automobiles; (ii) the undersigned, alone or
together with his or her spouse, has a minimum net worth (exclusive of home and
automobiles) of $150,000, (iii) he or she has an overall commitment to
investments which are not readily marketable that is not disproportionate to his
or her net worth so that an investment in the Notes will not cause such overall
commitment to be excessive; and (iv) he or she has such knowledge and experience
in business and financial matters that he or she is capable of evaluating the
Company and its business and the merits of investment in the Notes. The
undersigned further represents that he or she has adequate means of providing
for his or her current needs, living expenses and personal contingencies and has
no need for liquidity in this investment and can afford to lose the entire
amount of the investment.
The undersigned, if other than an individual, acknowledges that (i) the
purchase price for the investment in the Notes subscribed for hereby represents
not more than ten percent (10%) of its total net worth; (ii) the undersigned has
a minimum net worth of $150,000, (iii) the undersigned has an overall commitment
to investments which are not readily marketable that is not disproportionate to
its net worth so that an investment in the Notes will not cause such overall
commitment to be excessive; and (iv) the individual making the investment
decision relating to the Notes on behalf of the undersigned has such knowledge
and experience in business and financial matters that he or she is capable of
evaluating the Company and its business and the merits of investment in the
Notes. The
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<PAGE>
undersigned further represents that it has adequate means of providing for its
current needs and has no need for liquidity in this investment and can afford to
lose the entire amount of the investment.
3. The undersigned understands that the minimum subscription to
Notes which will be accepted by the Company with the exception of Individual
Retirement Accounts is to Notes in aggregate principal amount of $5,000, which
$5,000 aggregate principal amount may be allocated among any Division of the
Series 1997 Notes in $1,000 increments.
4. The undersigned understands that the Note subscription funds
will be placed in an Escrow Account and accumulated until such time as there has
been timely received Note subscription funds of $1,500,000 or more, all as is in
accordance with the terms of the Note offering as set forth in the Prospectus
section captioned "TERMS OF NOTE OFFERING."
In accordance with the terms of the Note offering as set forth in the
Prospectus and subject to the minimum subscription requirements, the undersigned
hereby subscribes for the principal amount of the Notes set forth below:
Series 1997 A-I $___________________
Series 1997 A-II $___________________
Series 1997 A-III $___________________
The undersigned acknowledges that the subscription to the above-designated Notes
is subject to availability and that Note subscriptions will be considered and
accepted or rejected by the Company with respect to the various maturities
available within the Series 1997 Notes as received by the Company.
In connection with the undersigned's subscription to the Notes
designated above, the undersigned herewith tenders a check in payment of such
subscription made payable to "Southtrust Asset Management Company of Florida,
N.A., Escrow Agent - Federal Mortgage Management II, Inc." unless at the time of
the undersigned's subscription, the Minimum Requirement as described and set
forth in the Prospectus has been timely attained, in which event such check
shall be made to the order of "Michael Hric, P.A., Trustee".
The undersigned understands that the Notes subscribed to herein have
been registered pursuant to the Securities Act of 1933, as amended, and pursuant
to the provisions of those state securities statutes in those states where the
Notes have been qualified for sale and that, accordingly, from the standpoint of
Federal securities law and the applicable law of such states, the Notes are
freely transferable by the undersigned. With respect to any proposed transfer,
however, the undersigned acknowledges that the Company reserves the right to
request information of any proposed transferee in order to make a reasoned
determination as to the suitability of such proposed transferee as a holder and
investor in the Notes subscribed for herein. The undersigned also acknowledges
that the Company reserves the right to affix an endorsement to the Note
instrument delivered to the undersigned as a result of this subscription setting
forth such right of the Company to request information relative to the investor
suitability of any proposed transferee.
This Subscription Agreement shall be governed by and interpreted in
accordance with the laws of the State of Florida and shall be binding upon the
successors, assigns, heirs and personal representatives of the Company and the
undersigned.
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<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Note Subscription
Agreement on the ___ day of _______________, 199_.
----------------------------------------------------
Name of Subscriber (Please Print)
(If a corporation, partnership or other
entity, please provide full legal name of
subscribing entity)
----------------------------------------------------
Signature of individual subscriber or authorized
signatory of corporate or other entity)
----------------------------------------------------
If subscriber is a corporation, partnership
or other entity, please print full name and
title of person signing Subscription Agreement)
-----------------------------------
Social Security Number or
Taxpayer Identification Number
INSTRUCTIONS FOR ISSUANCE OF NOTES
(Please Print)
1. REGISTERED OWNER(S) ________________________________________________
2. IF MORE THAN ONE REGISTERED OWNER, METHOD OF OWNERSHIP:
_____ JOINT TENANTS WITH RIGHT OF SURVIVORSHIP;
_____ TENANTS IN COMMON;
_____ TENANTS BY THE ENTIRETIES;
or otherwise ________________________________________________
3. ADDRESS ________________________________________________
4. CITY ________________________________________________
5. STATE ________________________________________________
6. ZIP CODE ________________________________________________
7. HOME PHONE ___________________ BUSINESS PHONE_______________
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<PAGE>
Accepted this ___ day of _____________, 199_, by Federal Mortgage
Management II, Inc.
Federal Mortgage Management II, Inc.
By:________________________________
Guy S. Della Penna, President
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<PAGE>
EXHIBIT B
FEDERAL MORTGAGE MANAGEMENT II, INC.
and
MICHAEL HRIC, P.A.
Sarasota, Florida
Trustee
INDENTURE AND CUSTODY AGREEMENT
Dated as of ____________, 1997
$5,000,000
AGGREGATE PRINCIPAL AMOUNT
OF PROMISSORY NOTES
(SERIES 1997 A-I, A-II AND A-III)
<PAGE>
TABLE OF CONTENTS
PAGE
Preamble - Recitals and Representations......................................3
Article 1 - Definitions......................................................5
Article 2 - Appointment and Acceptance.......................................5
Article 3 - The Notes........................................................7
Article 4 - Covenants of the Corporation.....................................9
Article 5 - Successor Corporation.......................................... 12
Article 6 - Defaults and Remedies...........................................13
Article 7 - Trustee........................................................ 16
Article 8 - Discharge of Indenture......................................... 20
Article 9 - Amendments, Supplements and Waivers............................ 20
Article 10 - Miscellaneous................................................. 21
Signatures................................................................. 26
Exhibit A - Form of Note
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<PAGE>
THIS INDENTURE AND CUSTODY AGREEMENT, dated as of ___________, 1997,
between FEDERAL MORTGAGE MANAGEMENT II, INC., a Florida corporation (the
"Corporation") and MICHAEL HRIC, P.A., a professional association engaged in the
practice of law in Sarasota, Florida (the "Trustee").
Each party agrees as follows for the benefit of the other party and for
the equal and ratable benefit of the Holders of the Corporation's Series 1997
A-I, A-II and A-III Promissory Notes.
PREAMBLE
RECITALS AND REPRESENTATIONS
The Corporation has publicly offered its Series 1997 A-I, A-II and A-III
Promissory Notes in aggregate principal amount of $5,000,000 pursuant to a
prospectus included in a registration statement on Form SB-2, as filed with the
Securities and Exchange Commission, File No. 333-15151 (such prospectus, as
amended or supplemented during the offering, is hereinafter referred to as the
"Prospectus").
The Corporation desires to appoint the Trustee as custodian of certain
items of Eligible Collateral (as defined below) and the Trustee is willing to
act in such capacity upon the terms and conditions herein set forth. The Trustee
shall hold at all times Eligible Collateral with an aggregate Unadjusted Value
(as defined below) equal to at least 60% of the aggregate outstanding principal
balance of the Notes.
Pursuant to the terms and provisions of this Indenture and Custody
Agreement, the Trustee shall act in the collective interests of all of the Note
Holders as trustee and agent of all of the Note Holders.
Accordingly, the Corporation and the Trustee are entering into this
Indenture and Custody Agreement as of the date and year first above written.
ARTICLE I - DEFINITIONS
SECTION 1.01. DEFINITIONS.
"Book-Entry Securities" means securities issued by the Treasury of the
United States of America and federal agencies of the United States of
America which are maintained in the book-entry system as provided in
Subpart O of Treasury Circular No. 300, 31 CFR 306, Subpart B of 31 CFR
Part 350, and the book-entry regulations of federal agencies substantially
in the form of Subpart O and the term Book-Entry Account shall mean an
account maintained by a Federal Reserve Trustee in accordance with the
aforesaid Circular and regulations.
<PAGE>
"Corporation" means Federal Mortgage Management II, Inc., a
Florida corporation.
"Default" means any event which is, or after notice or lapse of time or
both would be, an Event of Default, as set forth in Section 6.01.
"Eligible Collateral" means Portfolio Loans and Federal Instruments, as
well as the cash proceeds from the sale thereof, Money Market Funds, and
any real estate acquired upon foreclosure of a Portfolio Loan.
"Event of Default" has the meaning set forth in Section 6.01.
"Federal Instruments" means debt instruments of the United States
government and certificates or deposit accounts of state or federally
chartered banking institutions with at least $500 million of assets.
"Holder" or "Note Holder" means the person in whose name a Note is
registered on the Corporation's books.
"Indenture and Custody Agreement" means this Indenture and Custody
Agreement, as amended or supplemented from time to time.
"Money Market Funds" means money market or equivalent funds deposited at a
New York Stock Exchange member firm with net assets of at least $200
million.
"Note" means any of the Series 1997 A-I, A-II or A-III Promissory Notes.
"Note Rate" means the rate of interest, in the amount and paid at the
specified times on the principal of any Note as set forth in the Note.
"Officer" means the President, any Vice President, the Treasurer or the
Secretary of the Corporation.
"Officers' Certificate" means a certificate signed by two Officers or by
an Officer and an Assistant Treasurer or Assistant Secretary of the
Corporation.
"Oral Instructions" means an authorization, instruction, approval, item or
set of data, or information of any kind transmitted to the Trustee in
person or by telephone, telegram, telecopy or other mechanical or
documentary means lacking original signature, by a person or persons
reasonably believed in good faith by the Trustee to be a person or persons
authorized by a resolution of the Board of Directors
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of the Corporation to give Oral Instructions on behalf of the Corporation.
"Portfolio Loan" means a residential real estate mortgage loan secured by
a first mortgage.
"Principal" of a Note means the amount stated as principal on the face of
the Note.
"Registered Note" means the Series 1997 A-I, A-II and A-III Promissory
Notes of the Corporation issued by the Corporation and fully registered on
the Corporation's books.
"SEC" means the United States Securities and Exchange Commission.
"Securities" means promissory notes secured by mortgages on real estate,
Federal Instruments and Money Market Funds.
"Securities Depository" means a system for the central handling of
securities where all securities of any particular class or series of any
issuer deposited within the system are treated as fungible and may be
transferred or pledged by bookkeeping entry without physical delivery of
the Securities.
"Trust Account" has the meaning set forth in Section 7.01(2).
"Trustee" means the party named as such in this Indenture and Custody
Agreement until a successor replaces it and thereafter means the
successor.
"Unadjusted Value" means: (a) with respect to a Federal Instrument, the
cash value of the instrument, (b) with respect to a Portfolio Loan, the
outstanding balance due under the loan, (c) with respect to real property
owned by the Corporation as a result of the foreclosure of a Portfolio
Loan, the lesser of the estimated fair market value of the property as
determined by the Corporation and communicated to the Trustee or the
principal balance of the loan at the time of foreclosure plus accrued
interest and fees and costs incurred by the Corporation in connection with
such foreclosure process.
"Written Instruction" means an authorization, instruction, approval, item
or set of data, or information of any kind transmitted to the Trustee in
original writing containing original signatures or a copy of such document
transmitted by telecopy including transmission of such signature,
reasonably believed in good faith by the Trustee to be the signature of a
person authorized by a resolution of the Board of Directors
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of the Corporation to give written Instructions on behalf of the
Corporation.
SECTION 1.02. RULES OF CONSTRUCTION.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned
to it in accordance with generally accepted accounting principles;
(3) "or" is not exclusive; and
(4) words in the singular include the plural, and in the plural include
the singular.
ARTICLE 2 - APPOINTMENT AND ACCEPTANCE
The Corporation hereby appoints the Trustee as Trustee and custodian of
the Eligible Collateral delivered to Trustee hereunder, to be held by the
Trustee and applied as provided in this Indenture and Custody Agreement. The
Trustee hereby accepts such appointment subject to the terms and conditions set
forth herein. From the date of this Indenture and Custody Agreement and until
all Notes are paid, the Trustee, in its capacity as Trustee and agent for the
Note Holders, shall physically possess such items of Eligible Collateral and
shall deal with the same in accordance with the terms hereof.
ARTICLE 3 - THE NOTES
SECTION 3.01. FORM AND DATING.
The Notes are substantially in the form of Exhibit A. The Notes may have
notations, legends or endorsements required by law, stock exchange rule or
usage. The Corporation shall approve the form of the Notes and any notation,
legend or endorsement on them. Each Note shall be dated as of the date that the
subscription therefore has been accepted by the Corporation.
SECTION 3.02. EXECUTION AND ISSUANCE.
Two Officers or an Officer and an Assistant Secretary shall sign the Notes
for the Corporation by original or facsimile signature. The Corporation's seal
shall be reproduced on the Notes. The aggregate principal amount of Notes
outstanding at any time may not exceed $5,000,000.
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<PAGE>
SECTION 3.03. TRUSTEE AS REGISTRAR.
The Trustee shall maintain an office or agency where Notes may be
presented for registration of transfer or for exchange. The Trustee shall keep a
register of the Registered Notes and of their transfer and exchange.
SECTION 3.04. NOTE HOLDER LISTS.
As the Corporation issues Notes, it shall provide promptly to the Trustee
the names, addresses and taxpayer identification numbers of the Note Holders.
The Trustee shall preserve in as current a form as is reasonably practicable the
most recent list available to it of the names, addresses and taxpayer
identification numbers of the Note Holders. The Trustee shall promptly furnish
to the Corporation notice of any transfer of a Note by any Note Holder, along
with the new Note Holder's complete name, address and taxpayer identification
number, as provided by the Note Holder. Further, the Trustee shall furnish to
the Corporation at such times as the Corporation may request in writing a list
in such form and as of such date as the Corporation may reasonably require of
the names, addresses and taxpayer identification numbers of the Note Holders and
the Corporation may exclusively rely on the accuracy and completeness of each
such list.
SECTION 3.05. REGISTRATION, TRANSFER AND EXCHANGE.
The Corporation shall issue fully Registered Notes in the form of Exhibit
A.
When a Registered Note is presented to the Corporation or Trustee with a
request to register transfer, the Trustee shall register the transfer as
requested if the applicable requirements of the Florida Uniform Commercial Code
are met. When Registered Notes are presented to the Trustee with a request to
exchange them for an equal principal amount of Registered Notes of other
denominations, the Trustee shall make the exchange as requested if the same
requirements are met. The Trustee may charge a reasonable fee for any transfer
or exchange but not for any exchange pursuant to Section 3.08.
SECTION 3.06. REPLACEMENT NOTES.
If the Holder of a Note claims that the Note has been lost, destroyed on
wrongfully taken, the Trustee shall issue a replacement Note corresponding to
the Note that was lost, destroyed or wrongfully taken, if the applicable
requirements of the Florida Uniform Commercial Code are met. In the event any
lost, destroyed or wrongfully taken Note shall have matured or is about to
mature, the Trustee may effect payment of same if the requirements of the
Florida Uniform Commercial Code are met. An indemnity bond shall
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be provided to the Corporation to protect the Corporation from any loss which it
may suffer if a replacement Note is issued. The Trustee may charge a Note Holder
for its expenses in replacing a Note.
SECTION 3.07. OUTSTANDING NOTES.
Notes outstanding at any time are all Notes issued by action of the
Corporation except for those cancelled by it upon the repayment, exchange or
reissuance thereof. Notes outstanding include those held by the Corporation or
its affiliates.
SECTION 3.08. CANCELLATION.
The Trustee at any time may receive Notes for cancellation upon payment or
exchange. The Trustee shall promptly advise the Corporation of any such Note
cancellation and the Corporation may rely upon such representation. The Trustee
and no one else shall cancel and destroy all Notes surrendered for transfer,
exchange, payment or cancellation. Neither the Trustee nor the Corporation may
issue new Notes to replace Notes that have been paid or cancelled.
ARTICLE 4 - COVENANTS OF THE CORPORATION
SECTION 4.01. PAYMENT OF NOTES.
The Corporation shall promptly pay the principal of and interest on the
Notes on the dates and in the manner provided in the Notes.
The Corporation shall pay interest on overdue principal at the rate borne
by the Notes; it shall pay interest on overdue installments of interest at the
same rate to the extent lawful.
In the event that the Corporation desires the Trustee to make any payments
due under the Notes, the Corporation shall, at least ten days before the payment
date, provide the Trustee with Written Instructions concerning the payments to
be made, including a schedule showing the payment to be made to each Note
Holder, with the name and address of each Note Holder and whether any Notes must
be tendered against payment (such as at maturity), along with a set of checks of
the Corporation, drawn on the Trust Account, made payable to the Note Holders
who are to be paid on such interest payment date or maturity date and ready for
signature by the Trustee. The Corporation shall also provide stamped window
envelopes to the Trustee for use in mailing the checks. Provided that the
Trustee will hold Eligible Collateral with an aggregate Unadjusted Value equal
to at least 60% of the aggregate outstanding
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principal balance of the Notes following any requested payment, the Trustee
shall make such requested payments.
SECTION 4.02. LIEN OF INDENTURE.
So long as any Note remains unpaid, the obligation of the Corporation
represented by the Notes shall be secured by a lien on the Eligible Collateral
held by the Trustee effected by this Indenture and Custody Agreement. Such
security interest shall be in favor of the Trustee and the Trustee shall act for
the collective benefit of Note Holders as provided herein. The lien effected
pursuant to this Section 4.02 shall be prior to any other liens which come into
existence with respect to the Eligible Collateral held by the Trustee.
SECTION 4.03. WRITTEN AND ORAL INSTRUCTIONS TO TRUSTEE.
The Corporation shall from time to time file with the Trustee a certified
copy of each resolution of its Board of Directors authorizing execution of
Written Instructions and the number of signatories required, together with
certified signatures of the officers and other signatories authorized to sign,
which shall constitute conclusive evidence of the authority of the officers and
other signatories designated therein to act, and shall be considered in full
force and effect with the Trustee fully protected in acting in reliance thereon
until it receives a new certified copy of a resolution adding or deleting a
person or persons with authority to give written Instructions. If the certifying
officer is authorized to sign Written Instructions, the certification shall also
be signed by a second officer of the Corporation.
The Corporation shall from time to time file with the Trustee a certified
copy of each resolution of its Board of Directors authorizing the transmittal of
Oral Instructions and specifying the person or persons authorized to give Oral
Instructions in accordance with this Agreement. Any resolution so filed with the
Trustee shall be considered in full force and effect and the Trustee shall be
fully protected in acting in reliance thereon until it actually receives a new
certified copy of a resolution adding or deleting a person or persons with
authority to give Oral Instructions. If the certifying officer is authorized to
give Oral Instructions, the certification shall also be signed by a second
officer of the Corporation.
SECTION 4.04. DEPOSIT OF ELIGIBLE COLLATERAL.
The Corporation shall cause to be transferred and deposited with the
Trustee all of the cash held for the Corporation by SouthTrust Asset Management
Company of Florida, N.A., Sarasota, Florida, as escrow agent for the offering of
the Notes at the time
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this Agreement becomes effective. The Corporation shall also cause to be
deposited with the Trustee all funds which are tendered by subscribers for Notes
after the Minimum Condition (as defined in the Prospectus) is achieved upon the
acceptance of such subscriptions by the Corporation. Such deposits shall be
evidenced by appropriate schedules duly executed by the Corporation and the
Corporation agrees that it is solely responsible for the accuracy of said
schedules. The Corporation shall cause to be deposited with the Trustee
hereunder the net proceeds of all Portfolio Loans sold from time to time. The
Corporation shall cause to be deposited with the Trustee additional Securities
or cash of the Corporation from time to time so that at all times the Trustee
holds Eligible Collateral with an aggregate Unadjusted Value equal to at least
60% of the aggregate outstanding principal balance of the Notes. The Trustee
shall deal with such funds as provided in Article 7 hereof. The Trustee shall
provide to the Corporation a receipt with respect to the items of Eligible
Collateral deposited with the Trustee and copies of such receipt may be provided
to the Holders of Notes.
The Securities held by the Trustee shall, unless payable to bearer or
maintained in a Securities Depository or Book-Entry Account pursuant to Section
7.02(1), be registered in the name of the Trustee or in the name of its nominee,
or if directed by Written Instructions, in the name of the Corporation or its
nominee. Securities, excepting bearer securities, delivered from time to time to
the Trustee upon purchase or otherwise shall in all cases be in due form for
transfer or already registered as above provided. Such Securities and any cash
of the Corporation delivered to the Trustee hereunder shall, however, be and
remain the sole property of the Corporation and the Trustee shall have only the
bare custody thereof, subject to the lien of this Indenture and Custody
Agreement.
SECTION 4.05. CORPORATE EXISTENCE.
Subject to Article 5, the Corporation covenants and agrees that it will do
or cause to be done all things necessary to preserve and keep in full force and
effect its corporate existence, rights and franchises; provided, however, that
the Corporation shall not be required to preserve any right or franchise if it
shall determine that the preservation thereof is no longer desirable in the
conduct of the Corporation's business and that the loss thereof will not be
disadvantageous in any material respect to the holders of Notes. The Trustee
shall be under no obligation to investigate the Corporation's compliance with
the foregoing covenant.
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<PAGE>
SECTION 4.06. COMPLIANCE CERTIFICATES.
On the last day of each calendar month, the Corporation shall calculate
the outstanding Unadjusted Value of all items of Eligible Collateral held by the
Trustee, as well as the aggregate outstanding principal balance of the Notes. A
report of such calculations shall be delivered to the Trustee within two
business days of the end of each calendar month. If such report indicates that
the aggregate Unadjusted Value of the Eligible Collateral is less than 60% of
the aggregate outstanding principal balance of the Notes, the Corporation shall
deliver along with such report Federal Instruments or cash in such amount as may
be required to restore the ratio of Unadjusted Value of the Eligible Collateral
to the outstanding principal balance of the Notes to .6 to 1.
The Corporation shall deliver to the Trustee within forty-five (45) days
after the end of each quarter an Officers' Certificate in a form acceptable to
the Trustee, and signed by the President or Vice President of the Corporation,
stating whether or not the signer, after having made a diligent investigation,
knows of the existence of any Event of Default as set forth in Section 6.01. If
so, the Certificate shall describe the default.
SECTION 4.07. SEC REPORTS.
The Corporation shall provide to the Trustee exact copies of the reports
and other documents (or copies of such portions of any of the foregoing as the
SEC may by rules and regulations prescribe) which the Corporation is required to
file with the SEC pursuant to Sections 13 or 15(d) of the Securities Exchange
Act of 1934, if any, within fifteen (15) days after it files such reports or
documents with the SEC.
SECTION 4.08. NOTICE OF DEFAULT.
Upon the occurrence of an Event of Default, the Corporation shall
immediately provide to the Trustee written notice thereof.
ARTICLE 5 - SUCCESSOR CORPORATION
SECTION 5.01. WHEN CORPORATION MAY MERGE, ETC.
The Corporation shall not consolidate with or merge into, or transfer all
or substantially all of its assets to, another corporation unless the resulting,
surviving or transferee corporation assumes by appropriate binding instrument
all of the obligations of the Corporation under the Notes and this Indenture and
Custody Agreement. Thereafter all such obligations of the predecessor
corporation shall terminate.
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SECTION 5.02. CONTINUATION OF LIEN OF INDENTURE.
Upon the occurrence of any of the events affecting the Corporation
described in Section 5.01 above, the lien of this Indenture and Custody
Agreement established by Section 4.02 hereof shall continue unabated and of the
same first lien priority. The Corporation shall initiate and complete such
action as is required to assure such continuation and priority and shall furnish
such evidence of the accomplishment of such as the Trustee may require.
ARTICLE 6 - DEFAULTS AND REMEDIES
SECTION 6.01. EVENTS OF DEFAULT.
An "Event of Default" occurs if:
(1) the Corporation defaults in the payment of interest on any Note at
the Note Rate when the same becomes due and payable and the Default
in the payment of such Note interest continues for a period of
thirty (30) consecutive days;
(2) the Corporation defaults in the payment of the principal of any Note
when the same becomes due and payable;
(3) the Corporation or its assets become subject to any voluntary or
involuntary proceeding under the Federal Bankruptcy Act or any state
statute which relates to credit relief and/or the liquidation of the
Corporation, which proceeding remains undismissed for a period of
sixty (60) or more days; and/or
(4) the Corporation fails to perform any of its covenants set forth in
Sections 4.04, 4.05, 4.06 or 4.07 hereof, and such failure continues
for a period of ten consecutive days.
SECTION 6.02. OTHER REMEDIES.
If an Event of Default occurs and is continuing, the Trustee may pursue
any available remedy by proceeding at law or in equity to collect the payment of
principal or interest on the Notes or to enforce the performance of any
provision of the Notes or this Indenture and Custody Agreement. Such remedial
action undertaken by the Trustee and/or any Note Holder shall be initiated in
the Circuit Court of the Twelfth Judicial Circuit in and for Sarasota County,
Florida and may include action undertaken to effect the liquidation and
utilization of the Eligible Collateral held by the Trustee to discharge to the
extent possible the payment of the principal and interest obligation of the
Notes then subject to the
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lien effected pursuant to this Indenture and Custody Agreement. The Trustee may
use funds received with respect to, or from the sale of, the Eligible Collateral
to pursue remedies at law or in equity to collect the payment of principal or
interest on the Notes or to enforce the performance of any provision of the
Notes or this Indenture and Custody Agreement.
A delay or omission by the Trustee or any Note Holder in exercising any
right or remedy accruing upon an Event of Default shall not impair the right or
remedy or constitute a waiver of or acquiescence in the Event of Default. No
remedy is exclusive of any other remedy. All available remedies are cumulative.
SECTION 6.03. CONTROL BY MAJORITY.
The Holders of a majority in principal amount of the Notes 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 it. The Trustee,
however, may refuse to follow any direction that conflicts with law or this
Indenture and Custody Agreement, that is unduly prejudicial to the rights of
other Note Holders or that may involve the Trustee in personal liability.
SECTION 6.04. LIMITATIONS ON SUITS.
A Note Holder may not use this Indenture and Custody Agreement to
prejudice the rights of another Note Holder or to obtain a preference or
priority over the other Note Holders.
SECTION 6.05. RIGHTS OF HOLDERS TO RECEIVE PAYMENT.
Notwithstanding any other provision of this Indenture and Custody
Agreement, the right of any Holder of a Note to receive payment of principal and
interest on its Note, to receive payment of interest on or after the respective
due dates expressed in the Note, or to bring suit for the enforcement of any
such payment on or after such respective dates, shall not be impaired or
affected without the consent of the Holder of the Note.
SECTION 6.06. COLLECTION SUIT BY TRUSTEE.
If an Event of Default in payment of interest or principal specified in
Section 6.01 occurs and is continuing, the Trustee may recover judgment or
obtain settlement in its own name and as trustee of an express trust against the
Corporation for the whole amount of principal and interest remaining unpaid
along with costs associated with such action as described in Section 6.09.
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SECTION 6.07. TRUSTEE MAY FILE PROOFS OF CLAIM.
The Trustee may file such proofs of claim and other papers or documents as
may be necessary or advisable in order to have the claims of the Trustee and the
Note Holders allowed in any judicial proceedings relative to the Corporation,
its creditors or its property.
SECTION 6.08. PRIORITIES.
If the Trustee collects any money pursuant to this Article 6 or any other
provision of this Agreement, it shall pay out the money in the following order:
FIRST: to the Trustee for all amounts due under Section 6.09 and
Section 7.05;
SECOND: to Note Holders for amounts due and unpaid on the Notes for
principal and interest, ratably, without preference or priority of any
kind, according to the amounts due and payable on the Notes for principal
and interest, respectively; and
THIRD: to the Corporation.
The Trustee may fix a record date and payment date for any payment to Note
Holders.
SECTION 6.09. UNDERTAKING FOR COSTS.
In any suit for the enforcement of any right or remedy under this
Indenture and Custody Agreement or in any suit against the Trustee for any
action taken or omitted by it as Trustee, a court in its discretion may require
the filing by any party litigant in the suit of an undertaking to pay the costs
of the suit. Additionally, the court in its discretion may assess reasonable
costs, including reasonable attorneys' fees, against any party litigant in the
suit, having due regard to the merits and good faith of the claims or defenses
made by the party litigant. Each preceding sentence in this Section 6.09 shall
not apply to a suit by the Trustee or a suit by a Holder of Notes as provided in
this Article 6. All such costs and fees shall be paid pursuant to Sections 6.08
and 7.05. For purposes of this Section 6.09, attorneys' fees shall include those
fees incurred as a result of any trial of any controversy, appeal therefrom,
arbitration or mediation process, negotiation process or attorneys' fees
incurred as a result of any bankruptcy, receivership or similar proceedings
initiated, continuing and effecting the Corporation, the Note Holders and the
Eligible Collateral and the lien intended to be established by this Indenture
and Custody Agreement. The term
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"attorneys' fees" shall also include the fees and costs of paraprofessional
personnel and persons performing a similar function.
ARTICLE 7 - TRUSTEE
SECTION 7.01. DUTIES OF TRUSTEE.
1) GENERAL.
(a) If an Event of Default has occurred and is continuing, the Trustee
shall exercise its rights and powers in accordance with Article 6
and use the same degree of care and skill in their exercise as a
prudent man would exercise or use under the circumstances in the
conduct of his own affairs.
(b) Except during the continuance of an Event of Default:
(i) The Trustee need perform only those duties that are
specifically set forth in this Indenture and Custody Agreement
and no others.
(ii) In the absence of bad faith on its part, for all purposes
under this Agreement, the Trustee is authorized to act upon
receipt of the first of any Written or Oral Instruction it
receives. In cases where the first Instruction is an Oral
Instruction that is not in the form of a document or written
record, the Corporation shall be responsible for delivering,
or having delivered to the Trustee, a confirmatory Written
Instruction or Oral Instruction in the form of a document or
written record. The Trustee shall be entitled to rely on the
first Instruction received, and any reasonable act or omission
undertaken in compliance therewith shall be free of liability
and fully indemnified and held harmless by the Corporation.
The Trustee shall act upon and comply with any subsequent
Written or Oral Instruction which modifies such first
Instruction. The sole obligation of the Trustee with respect
to any follow-up or confirmatory Written Instruction or Oral
Instruction in documentary or written form shall be to make
reasonable efforts to detect any discrepancy between the
original Instruction and such confirmation and to report such
discrepancy to the Corporation. The Corporation shall be
responsible, at the Corporation's expense, for taking any
action, including any reprocessing,
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necessary to correct any discrepancy or error, and to the
extent such action requires the Trustee to act the Corporation
shall give the Trustee specific Written Instructions as to the
action required.
(c) The Trustee may not be relieved from liability for its own negligent
action, its own negligent failure to act, or its own willful
misconduct, except that:
(i) The Trustee shall not be liable for any error of business
judgment made in good faith by a shareholder or other professional
employee of the Trustee.
(ii) The Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to paragraph (b) of this Section.
(d) The Trustee may refuse to perform any duty or exercise any right or
power unless it receives indemnity satisfactory to it against any
loss, liability or expense.
(e) The Trustee shall not be liable for interest on any money received
by it except as otherwise provided herein.
(f) Every provision of this Indenture and Custody Agreement that in any
way relates to the Trustee is subject to this paragraph 7.01(1).
2) MAINTENANCE OF SEPARATE BANK ACCOUNT.
The Trustee shall establish an interest-bearing checking account in the
name of the Corporation in a federally insured, Florida state chartered bank or
national bank with at least $500,000,000 in deposits, in which the Trustee shall
hold all cash of the Corporation to be held by the Trustee hereunder (the "Trust
Account"). The Trustee shall be the only person authorized to draw on such
account.
3) DEALING WITH PORTFOLIO SECURITIES.
The Trustee is hereby authorized and directed to deliver Securities of the
Corporation from time to time as follows:
(a) for the purpose of completing sales of Securities sold by the
Corporation, upon receipt of both (i) the net proceeds of sale and (ii) Written
or Oral Instructions specifying the Securities sold and stating the amount to be
received and the broker, banker or other party to or upon whose order the
Securities are to be delivered; provided, however, that the Trustee may accept
payment
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owing in connection with the disposition by the Corporation of Securities on
deposit with a Securities Depository and Book-Entry Securities, by means of a
credit in the appropriate amount to the account described in Section 5 hereof.
(b) for the purpose of exchanging Securities for other Securities and/or
cash upon timely receipt of (i) Written or Oral Instructions stating the
Securities to be delivered and the Securities and/or cash to be received in
exchange and the manner in which the exchange is to be made, and (ii) against
receipt of the other Securities and/or cash as specified in the Written or Oral
Instructions;
(c) for the purpose of presenting Securities for payment which have
matured.
The lien of this Indenture and Custody Agreement shall be released by the
Trustee and discharged with respect to any Security constituting an item of
Eligible Collateral which is
(A) completely paid with respect to the principal and interest
obligation thereof; or
(B) sold in a transaction in which all interests therein become vested
in a person or entity other than the Corporation or the Trustee.
With respect to items of Eligible Collateral which achieve the status
described in subparagraph (A) above, the Trustee shall deliver to such party as
the Corporation may specify all documents and evidence of such Security upon
receipt of Written Instructions from the Corporation. With respect to items of
Eligible Collateral which achieve the status described in paragraph (B) above,
the Trustee shall deliver to such party as the Corporation may specify all
documents and evidence of such Security upon the payment of the purchase price
therefor, delivered to the Trustee. If requested by the Corporation, the Trustee
shall also deliver an instrument(s) of release sufficient to completely
discharge the items of Eligible Collateral which are being delivered hereunder
from the lien of this Indenture and Custody Agreement.
4) DISBURSEMENTS.
The Trustee is hereby authorized and directed to disburse cash on hand in
the Trust Account from time to time as follows:
(a) for the purpose of payment for the purchase of Securities purchased by
the Corporation, upon receipt by the Trustee of both (i) Written or Oral
Instructions specifying the Securities and stating the purchase price, and the
name of the broker, banker or
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other party to or upon whose order the purchase price is to be paid, and (ii)
the Securities so purchased in due form for transfer or already registered as
provided in Section 4.04, provided, however, that the Trustee may make payment
for Securities on deposit with a Securities Depository and Book-Entry Securities
at such times as the Trustee enters a credit in the account it maintains for the
Corporation to the effect that it has accepted delivery of such Securities on
behalf of the Corporation;
(b) for the purpose of paying principal or interest due on the Notes, upon
receipt by Trustee of Written Instructions to pay a specified amount of interest
to a Note Holder, or to repay a specified amount of principal to a Note Holder
and stating the Notes to be tendered against payment; and
(c) for the purpose of reimbursing the Corporation for other corporate
expenditures, such as management or supervisory fees, administration,
compensation of personnel, compensation of the Trustee, or operating expenses
(including, without limitation, fees for legal, accounting and auditing
services), and to disburse cash for other corporate purposes upon receipt of
Written Instructions stating that such expenditures were authorized by
resolution of the Board of Directors of the Corporation and are or were for
corporate purposes, and specifying the amount of payment, the purpose for which
such payment is to be made, and naming the person or persons to whom payment is
to be made;
provided, however, that in the case of disbursements under subparagraphs (b) and
(c) above, such disbursements shall only be made to the extent that the Trustee
would continue to hold Eligible Collateral with an aggregate Unadjusted Value
equal to at least 60% of the aggregate outstanding principal balance of the
Notes following such disbursement.
Before making any payment or disbursement under subparagraphs (b) or (c)
above, however, the Corporation shall provide the Trustee with Written
Instructions concerning the payments to be made at least 10 days before such
payments are to be sent, including a schedule showing the payments to be made
with the name and address of each payee and whether any goods must be tendered
against payment, along with a set of checks of the Corporation, drawn on the
Trust Account, made payable to the payees who are to be paid and ready for
signature by the Trustee. The Corporation shall also provide stamped window
envelopes to the Trustee for use in mailing the checks. Such Written
Instructions shall state that the disbursement is for one or more of the
purposes hereinabove enumerated, and if such payment or disbursement is for any
purpose specified in subparagraph (c) above, the Written Instructions shall
state that such payment or disbursement was authorized by resolution of the
Board of Directors of the Corporation and is for a proper corporate purpose.
Simultaneous with the delivery of the
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Written Instructions, the Corporation shall provide to the Trustee the
calculations of the Unadjusted Value of all items of Eligible Collateral which
will continue to be held by the Trustee after such disbursement, as well as the
aggregate outstanding principal balance of the Notes after such disbursement.
5) FIDELITY BOND.
Upon the request of the Corporation, the Trustee shall procure a fidelity
bond in favor of the Corporation in an amount equal to the outstanding balance
due under the Notes, it being understood that so long as any Note is
outstanding, any proceeds from a claim under such bond shall be covered by the
lien of this Indenture and Custody Agreement as between the Corporation and the
Note Holders. The Corporation shall reimburse the Trustee for the actual cost of
such bond.
SECTION 7.02. RIGHTS OF TRUSTEE.
1) SECURITIES DEPOSITORY. The Corporation hereby authorizes the Trustee to (a)
deposit in its account(s) with any Securities Depository registered as a
Clearing Agency under Section 17A of the Securities Exchange Act of 1934, all or
any part of the Securities as may from time to time be held for the Corporation,
and (b) deposit Book-Entry Securities belonging to the Corporation in a
Book-Entry Account which is maintained for the Trustee by a Federal Reserve
Trustee. So long as any deposit referred to in (a) and (b) above is maintained
for the Corporation, the Trustee:
(i) shall deposit the Securities in an account that includes
only assets held by it for the Corporation;
(ii) shall send the Corporation a confirmation (i.e. an advice
or notice of a transaction) of any transfers to or from the account of the
Corporation;
(iii) shall, with respect to Securities transferred to the
account of the Corporation, identify as belonging to the Corporation a
quantity of securities in a fungible bulk of securities (i) registered in
the name of the Trustee or its nominee, or (ii) shown on the Trustee's
account on the books of the Securities Depository, the Book-Entry System,
or the Trustee's agent; and
(iv) shall send to the Corporation such reports of the
systems of internal accounting control of the Trustee and its agents
through which such Securities are deposited as are available and as the
Corporation may reasonably request from time to time.
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2) RIGHT TO FURTHER ASSURANCES.
Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or opinion of counsel for the Corporation or an opinion of
counsel selected by the Trustee. The Trustee shall not be liable for any action
it takes or omits to take in good faith in reliance on the Certificate or
opinion.
3) USE OF AGENTS.
The Trustee may act through agents and shall not be responsible for the
misconduct or negligence of any agent appointed with due care.
4) LIABILITY OF TRUSTEE.
The Trustee shall not be liable for any action it takes or omits to take
in good faith which it believes to be authorized or within its rights or powers.
SECTION 7.03. TRUSTEE'S DISCLAIMER.
The Trustee makes no representation as to the validity or adequacy of this
Indenture and Custody Agreement or the Notes and it shall not be accountable for
the Corporation's use of the proceeds from the Notes, nor shall it be
responsible for any statement in the Notes or the Prospectus used in the sale of
the Notes.
SECTION 7.04. NOTICE OF DEFAULT.
If an Event of Default occurs and is continuing and if it is known to the
Trustee, the Trustee shall mail and first publish as provided in Section 10.02
notice of the Event of Default within ten (10) days after such Default occurs.
Except in the case of a Default in payment on any Note, the Trustee may withhold
the notice if and so long as it in good faith determines that withholding the
notice is in the interests of the Note Holders.
SECTION 7.05. COMPENSATION AND INDEMNITY.
The Corporation shall pay to the Trustee from time to time reasonable
compensation for its services. The Corporation shall reimburse the Trustee upon
request for all reasonable out-of-pocket expenses incurred by it. Such expenses
may include the reasonable compensation and expenses of the Trustee's agents and
attorneys, as defined in Section 6.09. The Corporation shall indemnify the
Trustee against any loss or liability incurred by it. The Trustee shall notify
the Corporation promptly of any claim for which it may seek indemnity. The
Corporation shall defend the claims and the Trustee shall cooperate in the
defense. The Trustee may have
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separate counsel and the Corporation shall pay the reasonable fees and expenses
of such counsel. The Corporation need not pay for any settlement made without
its consent. The Corporation need not reimburse any expense or indemnify against
any loss or liability incurred by the Trustee through gross negligence or bad
faith.
SECTION 7.06. REPLACEMENT OF TRUSTEE.
The Trustee may resign by so notifying the Corporation. The Holders of a
majority in principal amount of the Notes may remove the Trustee by so notifying
the removed Trustee and may appoint a successor Trustee by so notifying the
removed Trustee and may appoint a successor Trustee with the Corporation's
consent. The Corporation may remove the Trustee if:
(1) the Trustee is adjudged a bankrupt or an insolvent;
(2) a receiver or other public officer takes charge of the Trustee or
its property; or
(3) The Trustee otherwise becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the office
of the Trustee for any reason, the Corporation shall promptly appoint a
successor Trustee.
A successor Trustee shall deliver a written acceptance of its appointment
to the retiring Trustee and to the Corporation. Immediately after that, the
retiring Trustee shall transfer all property, if any, held by it as Trustee
under this Indenture and Custody Agreement to the successor Trustee, the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all of the rights, powers and duties of the Trustee
under this Indenture and Custody Agreement. A successor Trustee shall give
notice of its succession to each Note Holder as provided in Section 10.02.
If a successor Trustee does not take office within sixty (60) days after
the retiring Trustee resigns or is removed, the retiring Trustee, the
Corporation or the Holders of a majority in principal amount of the Notes may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
SECTION 7.07. SUCCESSOR TRUSTEE BY MERGER, ETC.
If the Trustee consolidates with, merges or converts into, or transfers
all or substantially all of its corporate assets to another professional
association, the resulting, surviving or transferee professional association,
without any further act, shall be the successor Trustee.
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SECTION 7.08. FAILURE TO DEPOSIT.
The Trustee assumes no duty, obligation or responsibility whatsoever with
respect to items of Eligible Collateral not deposited with the Trustee. Eligible
Collateral shall not be considered deposited with the Trustee until physically
received by, or registered in the name of, the Trustee in accordance with the
provisions of this Agreement.
SECTION 7.09. BOOKS AND RECORDS.
The Trustee acknowledges and agrees that all books and records maintained
for the Corporation in any capacity under this Agreement are the property of the
Corporation and may be inspected by the Corporation, or any authorized
regulatory agency, at any reasonable time, and that upon request they shall be
surrendered promptly to the Corporation.
SECTION 7.10. INDEMNIFICATION.
The Trustee assumes only the usual duties and obligations normally
performed by Trustees under trust indentures and custodians of Securities. It
specifically assumes no responsibility for the management, investment or
reinvestment of the Securities from time to time owned by the Corporation
whether or not on deposit hereunder, it being understood that the responsibility
for the proper and timely management, investment and reinvestment of said
Securities shall be that of the Corporation.
The Trustee shall not be liable for any taxes, assessments or governmental
charges which may be levied or assessed upon the Securities held by it
hereunder, or upon the income therefrom or otherwise whatsoever. The Trustee may
pay any such tax, assessment or charge and reimburse itself out of the moneys of
the Corporation or out of the cash held hereunder; provided, however, the
Trustee shall advise the officers of the Corporation before making any such
payment.
The Trustee may rely upon the advice of counsel, who may be counsel for
the Corporation or for the Trustee, and upon statements of accountants, brokers
or other persons reasonably believed by it in good faith to be expert in the
matters upon which they are consulted; and for any reasonable action taken or
suffered in good faith based upon such advice or statements the Trustee shall
not be liable to anyone. The Trustee shall not be liable for any reasonable act
or omission done in good faith in accordance with any Written or Oral
Instructions, request or advice of, or based upon information furnished by, the
Corporation or its officers. The Trustee is authorized to accept a certificate
of the President, Secretary or Assistant Secretary of the Corporation to the
effect that a resolution in the form submitted has been duly adopted by
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its Board of Directors, as conclusive evidence that such resolution has been
duly adopted and is in full force and effect. The Trustee shall not be liable
for any reasonable action done in good faith and reasonably believed to be
within the powers conferred upon it by this Agreement.
No liability of any kind other than to the Corporation shall be attached
to the Trustee by reason of its custody of the Securities and funds on deposit
with it from time to time under this Agreement or otherwise by reason of its
administration of its custodianship, except such as shall result from its own
gross negligence or willful misconduct or that of its officers, agents or
employees.
ARTICLE 8 - DISCHARGE OF INDENTURE
The Notes which are the subject of this Indenture and Custody Agreement
may not be prepaid by the Corporation prior to maturity. The obligations of the
Corporation under this Indenture and Custody Agreement and the obligations of
the Trustee hereunder shall be fully discharged when each and every Note which
is the subject of this Indenture and Custody Agreement is fully paid with
respect to the principal obligation of such Notes and the accrued interest
thereon. At the time that the principal of and interest on the Notes have been
fully paid by the Corporation in accordance with the terms of each such Note,
the Corporation and the Trustee shall acknowledge in writing the termination of
their respective obligation under this Indenture and Custody Agreement, and the
Trustee shall transfer custody of all items of Eligible Collateral to the
Corporation, and shall execute any instruments or documents deemed reasonably
necessary or advisable by the Corporation to evidence such transfer and the
ownership of complete title of all items of Eligible Collateral by the
Corporation.
ARTICLE 9 - AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.01. WITHOUT CONSENT OF HOLDERS.
The Corporation may amend or supplement this Indenture and Custody
Agreement or the Notes without notice to or consent of any Note Holder:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to comply with Article 5;
(3) to make any change that does not adversely affect the rights of the
Trustee or any Note Holder.
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SECTION 9.02. NOTATION ON OR EXCHANGE OF SECURITIES.
If an amendment, supplement or waiver changes the terms of a Note, the
Corporation may require the Holder of the Note to deliver it to the Corporation.
The Corporation may place an appropriate notation on the Note regarding the
changed terms and return it to the Holder. Alternatively, if the Corporation so
determines, the Corporation, in exchange for the Note, shall issue a new Note
that reflects the changed terms.
SECTION 9.03. TRUSTEE TO SIGN AMENDMENTS, ETC.
The Trustee shall sign any amendment, supplement or waiver authorized
pursuant to this Article 9 if the amendment, supplement or waiver does not
adversely affect the rights of the Trustee or any Note Holder. The Corporation
may not sign an amendment or supplement until the Board of Directors of the
Corporation approves it. The foregoing provisions of this Section 9.03
notwithstanding, no amendment, supplement or waiver authorized pursuant to this
Article 9 shall have the affect of increasing the rights, duties and
responsibilities of the Trustee without the explicit written consent of the
Trustee.
ARTICLE 10 MISCELLANEOUS
SECTION 10.01. TRUST INDENTURE ACT.
The Corporation and the Trustee acknowledge that this Indenture and
Custody Agreement and the Trustee with respect to its service as Trustee under
this Indenture and Custody Agreement are not subject to the provisions of the
Trust Indenture Act of 1939 (the "TIA"). If this Indenture and Custody Agreement
and the Trustee's service hereunder subsequently become subject to the TIA, this
Indenture and Custody Agreement shall be appropriately amended to accomplish any
necessary compliance.
SECTION 10.02. NOTICES.
Any notice or communication shall be sufficiently given if in writing and
delivered in person or mailed by first class mail addressed as follows:
If to the Corporation:
Federal Mortgage Management II, Inc.
1800 Second Street, Suite 780
Sarasota, Florida 34236
Attention: President
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If to the Trustee:
Michael Hric, P.A.
2801 Fruitville Road, Suite 100
Sarasota, Florida 34237
Attention: Michael Hric, Esq.
The Corporation or the Trustee by notice to the other may designate
additional or different addresses for subsequent notices or communications.
Any notice or communication to Note Holders shall be sufficiently given if
mailed by first class mail to each Note Holder at the address of each such Note
Holder as such appears on the lists or registration books of the Corporation
acting as Registrar. Any notice or communication mailed to a Note Holder at his
address as it appears on the lists or registration books of the Corporation
shall be sufficiently given to him if so mailed within the time prescribed.
Failure to give notice or communication to a Note Holder or any defect in
the notice given shall not affect its sufficiency with respect to other Note
Holders. If a notice or communication is mailed and, if required, published in
the manner provided above, it is duly given, whether or not the Note Holder
receives it or reads it.
SECTION 10.03. COMMUNICATION BY HOLDERS WITH OTHER HOLDERS.
Note Holders may communicate with other Note Holders with respect to their
rights under this Indenture and Custody Agreement or the Notes.
SECTION 10.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
Upon any request or application by the Corporation to the Trustee to take
any action under this Indenture and Custody Agreement, the Corporation shall
furnish to the Trustee:
(1) an Officers' Certificate stating that, in the opinion of the
signers, all conditions precedent, if any, provided for in this
Indenture and Custody Agreement relating to the proposed action have
ben complied with; and
(2) an opinion of counsel stating that, in the opinion of such counsel,
all such conditions precedent have been complied with.
Each opinion of counsel shall be in writing. The legal counsel who renders
it may be an employee of or counsel to the Corporation. The legal counsel shall
be acceptable to the Trustee.
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SECTION 10.05. STATEMENTS REQUIRED IN CERTIFICATE OF OPINION.
Each certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture and Custody Agreement shall include:
(1) a statement that the person making such certificate or opinion has
read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in
such certificate or opinion are based;
(3) a statement that, in the opinion of such person, he has made such
examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or
condition has been complied with; and
(4) a statement as to whether or not, in the opinion of such person,
such condition or covenant has been complied with.
SECTION 10.06. RULES BY TRUSTEE.
The Trustee may make reasonable rules for the administration of this
Indenture and Custody Agreement. Such rules may cover matters relating to action
by or a meeting of Note Holders.
SECTION 10.07. DAYS OF SERVICE.
Nothing contained in this Agreement is intended to or shall require the
Trustee in any capacity hereunder to perform any functions or duties on any
holiday, day of special observance or any other day on which the Trustee or
Florida state chartered banks are closed. Functions or duties normally scheduled
to be performed on such days shall be performed on, and as of, the next
succeeding business day on which both Florida state chartered banks and the
Trustee are open.
SECTION 10.08. GOVERNING LAW.
This Indenture and Custody Agreement and the Notes shall be governed by
the laws of the State of Florida.
SECTION 10.09. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.
This Indenture and Custody Agreement may not be used to interpret another
indenture, loan or debt agreement of the Corporation. Any such Indenture, loan
or debt agreement may not be
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used to interpret this Indenture and Custody Agreement.
SECTION 10.10. NO RECOURSE AGAINST OTHERS.
A director, officer, employee or stockholder, as such, of the Corporation
shall not have any liability or any obligations of the Corporation under the
Notes or this Indenture and Custody Agreement or for any claim based on, in
respect of or by reason of such obligations or their creation.
SECTION 10.11. SUCCESSORS.
All agreements of the Corporation in this Indenture and Custody Agreement
and the Notes shall bind its successor. All agreements of the Trustee in this
Indenture and Custody Agreement shall bind its successor.
SECTION 10.12. DUPLICATE ORIGINALS.
The parties may sign any number of copies of this Indenture and Custody
Agreement. Each signed copy shall be an original, but all of them together
represent the same agreement.
IN WITNESS WHEREOF, the Corporation and the Trustee have caused this
Agreement to be signed by their respective Presidents as of the day and year
first above written.
FEDERAL MORTGAGE MANAGEMENT II, INC.
By____________________________
Guy S. Della Penna, President
MICHAEL HRIC, P.A.
By____________________________
Michael Hric, President
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EXHIBIT A
FORM OF NOTE
$__________________ NO._____
FEDERAL MORTGAGE MANAGEMENT II, INC.
Promissory Note - Series 1997 [A-I/A-II/A-III]
0 B L I G A T I 0 N
FEDERAL MORTGAGE MANAGEMENT II, INC., a corporation organized and existing
under the laws of the State of Florida (the "Corporation"), for value received
hereby promises to pay to the registered holder of this Note the principal sum
of $______________________, together with interest thereon at the annual rate of
_______% (the "Note Rate"). Payment of the principal of this Note in the amount
of $________________ shall occur on September 30, 20__. Interest on the unpaid
principal amount of this Note at the Note Rate shall accrue from the date of
acceptance by the Corporation of the Payee's subscription to the Note herein and
shall be paid on a date within thirty (30) days after attainment of the Minimum
Requirement, as such Minimum Requirement is established and described in the
Prospectus relating to this Note and other Notes of like Series, which
Prospectus is dated _________________, 1997 (the "Note Prospectus"). Thereafter,
interest shall be paid on the first day of each month that this Note is
outstanding at the Note Rate until maturity.
The Corporation shall establish and maintain a Note register which shall
reflect the record holders of the Notes and any transfer of such Notes which may
occur. When permitted, title to this Note and all other Notes of this Series may
only be transferred by delivery of this Note or other Notes of the same Series
duly endorsed by the registered holder, and any transfer or attempted transfer
shall, in all events, be subject to the right of the Corporation to request such
assurances and appropriate documents from the intended transferee to permit the
Corporation to determine that any such proposed transferee is a suitable holder
of a Note of this Series. The right of the Corporation to determine such
suitability of any transferee of a Note shall not apply to transferees who are
members of the original Note holder's immediate family. The term "immediate
family" shall include a spouse and/or an adult child. The Corporation shall be
entitled to rely upon the information reflected in the Note register and to
treat the registered holder of this Note as reflected in such register as the
owner of this Note for all purposes, including, without limitation,
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the payment of obligations arising ereunder and the carrying out of transfer
instructions with respect thereto.
PREPAYMENT
The principal amount of this Note may not be prepaid in whole or in part
by the Corporation at any time.
NOTE OBLIGATION PARTIALLY SECURED
This Note has been issued under that certain Indenture and Custody
Agreement, dated as of _________________, 1997 (the "Agreement"), which
Agreement provides for the deposit of certain assets of the Corporation with a
trustee as collateral which partially secures the repayment of the obligations
of the Corporation represented by the Series 1997 A Notes. All of the covenants,
conditions and agreements contained in such Agreement are hereby made a part of
this instrument. A copy of the Agreement may be obtained from the Corporation at
its principal business office at 1800 Second Street, Suite 780, Sarasota,
Florida 34236, or from the Trustee, Michael Hric, P.A., 2801 Fruitville Road,
Suite 100, Sarasota, Florida 34237.
DEFAULT - REMEDIES
The Corporation shall be deemed to be in Default with respect to its
obligations under this Note and all like Notes of the 1997 A Series if:
(1) the Corporation defaults in the payment of interest on any Note at
the Note Rate when the same becomes due and payable and the Default
in the payment of such Note interest continues for a period of
thirty (30) consecutive days;
(2) the Corporation defaults in the payment of the principal of any Note
when the same becomes due and payable;
(3) the Corporation or its assets become subject to any voluntary or
involuntary proceeding under the Federal Bankruptcy Act or any state
statute which relates to credit relief and/or the liquidation of the
Corporation, which proceeding remains undismissed for a period of
sixty (60) or more days; and/or
(4) the Corporation fails to perform any of its covenants set forth in
Sections 4.04, 4.05, 4.06 or 4.07 hereof, and such failure continues
for a period of ten consecutive days.
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In the event of the occurrence of any of the foregoing Events of Default which
are continuing, the trustee under the Agreement may initiate, on behalf of all
of the registered holders of the Series 1997 A Notes, such action at law or in
equity as may be appropriate to timely cure such Default.
In the event of default in the payment of this promissory note, and if the
same is collected by an attorney-at-law, the undersigned hereby agrees to pay
all costs of collection, including a reasonable attorney's fee for collection,
trial or appellate service.
Presentment for payment, notice of dishonor, notice of non-payment,
protest and notice of protest are hereby waived by the undersigned and any and
all others who may at any time become liable for payment of all or any part of
this obligation.
IN WITNESS WHEREOF, the Corporation has caused this Note to be signed and
imprinted with its corporate seal, and to be dated _______________, 199_.
FEDERAL MORTGAGE MANAGEMENT, INC.
ATTEST:
By________________________
By:_______________________________
Secretary Guy S. Della Penna, President
(CORPORATE SEAL)
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<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 607.0831 of the Florida Business Corporation Act ("FBCA")
limits the liability of directors of Florida corporations. Section 607.0831
provides as follows:
1. A director is not personally liable for monetary damages to
the corporation or any other person for any statement, vote, decision,
or failure to act, regarding corporate management or policy, by a
director, unless:
a. The director breached or failed to perform his
duties as a director; and
b. The director's breach of, or failure to perform,
those duties constitutes:
(1) A violation of the criminal law, unless
the director had reasonable cause to believe his
conduct was lawful or had no reasonable cause to
believe his conduct was unlawful. A judgment or
other final adjudication against a director in any
criminal proceeding for a violation of the criminal
law estops that director from contesting the fact
that his breach, or failure to perform, constitutes
a violation of the criminal law; but does not estop
the director from establishing that he had
reasonable cause to believe that his conduct was
lawful or had no reasonable cause to believe that
his conduct was unlawful;
(2) A transaction from which the director
derived an improper personal benefit, either
directly or indirectly;
(3) A circumstance under which the liability
provisions of Florida Statutes ss.607.0834 are
applicable;
(4) In a proceeding by or in the right of the
corporation to procure a judgment in its favor or by
or in the right of a shareholder, conscious
disregard for the best interest of the corporation,
or willful misconduct; or
(5) In a proceeding by or in the right of
someone other than the corporation or a shareholder,
recklessness or an act or omission which was
committed in bad faith or with malicious purpose or
in a manner exhibiting wanton and willful disregard
of human rights, safety, or property.
2. For the purposes of this section, the term "recklessness"
means the action, or omission to act, in conscious disregard of a risk;
a. Known, or so obvious that it should have been
known to the director; and
b. Known to the director, or so obvious that it
should have been known, to be so great as to make it highly
probable that harm would follow from such action or omission.
3. A director is deemed not to have derived an improper
personal benefit from any transaction if the transaction and the nature
of any personal benefit derived by the director are not prohibited by
state or federal law or regulation and, without further limitation:
a. In an action other than a derivative suit
regarding a decision by the director to approve, reject, or
otherwise affect the outcome of an offer to purchase the stock
of, or to effect a merger of, the corporation, the transaction
and the nature of any personal benefits derived by a director
are disclosed or known to all directors voting on the matter,
and the
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transaction was authorized, approved or ratified by at least
two directors who comprise a majority of the disinterested
directors (whether or not such disinterested directors
constitute a quorum);
b. The transaction and the nature of any personal
benefits derived by a director are disclosed or known to the
shareholders entitled to vote, and the transaction was
authorized, approved, or ratified by the affirmative vote or
written consent of such shareholders who hold a majority of
the shares, the voting of which is not controlled by directors
who derived a personal benefit from or otherwise had a
personal interest in the transaction; or
c. The transaction was fair and reasonable to the
corporation at the time it was authorized by the board, a
committee, or the shareholders, notwithstanding that a
director received a personal benefit.
4. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the board of
directors which authorizes, approves, or ratifies such a transaction.
5. The circumstances set forth in subsection 3 are not
exclusive and do not preclude the existence of other circumstances under
which a director will be deemed not to have derived an improper benefit.
Section 607.0850 of the FBCA empowers a Florida corporation, subject to
certain limitations, to indemnify its directors and officers against expenses
(including attorneys' fees, judgments, fines and certain settlements) actually
and reasonably incurred by them in connection with any suit or proceeding to
which they are a party so long as they acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to a criminal action or proceeding, so long as
they had no reasonable cause to believe their conduct to have been unlawful.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated costs and expenses to be
borne by the Company in connection with the offering described in the
Registration Statement, other than underwriting commissions and discounts. All
of such expenses will be borne by the Company.
SEC Registration Fees..................................... $ 1,515
NASD Registration Fees.................................... 1,000
Blue Sky Registration Fees................................ 3,500
Legal Fees................................................ 60,000
Documentary Stamp Taxes on Notes.......................... 17,500
Auditors' Fees............................................ 5,000
Fee of Kashner Davidson Securities Corporation............ 15,000
Printing and Engraving Expenses........................... 5,000
Fees to Excrow Agent...................................... 2,800
Miscellaneous............................................. 8,000
--------
Total................................................ $119,315
========
- --------------------------------------------------------------------------------
All of the above items are estimated except the SEC, NASD and Blue Sky
Registration Fees, and the fee to Kashner Davidson Securities Corporation.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In November 1995, the Company issued 100 shares of its Common Stock to
Guy Della Penna in consideration of the payment of $1,000. The Company relied
upon the exemption from registration contained in Section 4(2) of the Securities
Act of 1933, as amended. There were no underwriters involved in the foregoing
transaction.
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<PAGE>
ITEM 27. EXHIBITS.
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
1.1* Form of Distribution Agreement between Executive Wealth
Management Services, Inc. and the Registrant.
1.2* Form of Selected Dealer Agreement to be used by Executive Wealth
Management Services, Inc.
3.1* Articles of Incorporation of the Registrant.
3.2* Bylaws of the Registrant.
4.1* Form of Promissory Note.
4.2* Form of Indenture and Custody Agreement between the Registrant
and Michael Hric, P.A., Trustee (included as Exhibit B to the
Prospectus contained in this Registration Statement).
5** Opinion of Shumaker, Loop & Kendrick, LLP regarding the Notes
being issued.
10* Form of Escrow Agreement between the Registrant, SouthTrust
Asset Management Company of Florida and Executive Wealth
Management Services, Inc.
23.1** Consent of Shumaker, Loop & Kendrick, LLP (included in the
opinion filed as Exhibit 5).
23.2 Consent of Bobbitt, Pittenger & Co., P.A., independent certified
public accountants.
23.3** Consent of Kashner Davidson.
27.1** Financial Data Schedule for year ended December 31, 1996.
27.2** Financial Data Schedule for quarter ended March 31, 1997.
---------------------
* Previously filed in the Company's Registration Statement on
Form SB-2 filed on October 31, 1996 (File No. 333-15151).
** Previously filed in Amendment No. 1 to the Company's
Registration Statement on Form SB-2 filed on June 10, 1997 (File
No. 333-15151).
ITEM 28. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this Registration Statement
to: (i) include any prospectus required by Section 10(a)(3) of the
Securities Act; (ii) reflect in the prospectus any facts or events
which, individually or together, represent a fundamental change in the
information set forth in the Registration Statement. Notwithstanding
the foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registratio
statement; and (iii) include any additional or changed material
information on the plan of distribution.
(2) That for purposes of determining any liability under the
Securities Act, each post-effective amendment shall be deemed to be a
new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
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(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Sarasota, State of Florida on July 10, 1997.
FEDERAL MORTGAGE MANAGEMENT II, INC.
By: /s/ GUY S. DELLA PENNA
-------------------------------
Guy S. Della Penna, President
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on July 10, 1997.
SIGNATURE TITLE
/s/ GUY S. DELLA PENNA
- ----------------------
Guy S. Della Penna Director, President, Chief Executive Officer, Chief
Financial Officer and Principal Accounting Officer
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EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ -------------------
1.1* Form of Distribution Agreement between Executive Wealth Management
Services, Inc. and the Registrant.
1.2* Form of Selected Dealer Agreement to be used by Executive Wealth
Management Services, Inc.
3.1* Articles of Incorporation of the Registrant.
3.2* Bylaws of the Registrant.
4.1* Form of Promissory Note.
4.2* Form of Indenture and Custody Agreement between the Registrant and
Michael Hric, P.A., Trustee (included as Exhibit B to the Prospectus
contained in this Registration Statement).
5** Opinion of Shumaker, Loop & Kendrick, LLP regarding the Notes being
issued.
10* Form of Escrow Agreement between the Registrant, SouthTrust Asset
Management Company of Florida and Executive Wealth Management
Services, Inc.
23.1** Consent of Shumaker, Loop & Kendrick, LLP (included in the opinion
filed as Exhibit 5).
23.2 Consent of Bobbitt, Pittenger & Co., P.A., independent certified
public accountants.
23.3** Consent of Kashner Davidson.
27.1** Financial Data Schedule for year ended December 31, 1996.
27.2** Financial Data Schedule for quarter ended March 31, 1997.
- ---------------------
* Previously filed in the Company's Registration Statement on Form
SB-2 filed on October 31, 1996 (File No. 333-15151).
** Previously filed in Amendment No. 1 to the Company's Registration
Statement on Form SB-2 filed on June 10, 1997 (File No. 333-15151).
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EXHIBIT 23.2
[LETTERHEAD]
July 7, 1997
The financial statements of Federal Mortgage Management II, Inc. (the "Company")
reflecting its financial condition for the period November 13, 1995 (Inception)
through December 31, 1995, and for the year ended December 31, 1996, and our
report dated February 21, 1997, may be included in the Company's Form SB-2
Registration Statement. We also consent to Bobbitt, Pittenger & Co., P.A. being
named experts in accounting and auditing.
/s/ BOBBITT, PITTENGER & COMPANY, P.A.
Certified Public Accountants
