SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K SB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File No.
December 31, 1997 333-15151
FEDERAL MORTGAGE MANAGEMENT II, INC.
(Exact name of registrant as specified in its charter)
Florida 65-0625618
- ------------------------------ ---------------------------
State or other jurisdiction of IRS Employer Identification
incorporation or organization Number
1800 Second Street, Suite 780, Sarasota, Florida 34236
-------------------------------------------------------
(Address of principal executive offices, zip code)
941-954-2328
-----------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(b) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to
such filing requirements for the past 90 days. / X / Yes / / No.
As of December 31, 1997 the Company has 121 secured promissory Notes
Payable (Notes) with a total of $1,606,500 principal balance outstanding.
As indicated, the Company is a Company organized pursuant to Florida law.
The Company had total revenues of $26,340 in 1997.
PART I
Item 1. Description of Business
FEDERAL MORTGAGE MANAGEMENT II, INC., (the "Company") was organized
under the Florida General Corporation Act in November 1995. All of the
outstanding voting Common Stock is owned beneficially by Guy S. Della
Penna, the sole member of the Board of Directors and the sole officer of
the Company.
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 purchase of mortgage loans and insured instruments of deposit have
been acquired in accordance with a specific acquisition policy described in
the registration statement.
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 a 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 ).
In accordance with the acquisition policy the Company may:
(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 brincipal 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 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.
On November 26, 1997, the Company had received gross proceeds in
excess of the minimum amount of $1,500,000 to break escrow under the
Prospectus dated July 15, 1997, Commission Number 333-15151. As of
December 31, 1997, the Company had received gross note proceeds of
$1,606,500. Presented below is a summary of the use of proceeds from the
Note offering as of December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Selling commissions $ 109,320
Offering management fee 48,195
Non-accountable expense allowance 32,130
Organizational and offering expense 122,729
Purchase of federal instruments 175,539
Purchase of residential mortgages
and interim financings 1,028,008
Payment of note interest 34,124
Organizational expense reimbursement 32,520
Cash remaining 23,935
-----------
Gross offering proceeds $ 1,606,500
===========
</TABLE>
The notes were and continue to be sold on a best efforts basis by
Executive Wealth Management Services, Inc., the managing underwriter. As
of December 31, 1997, the offering was still open.
Supply of Portfolio Loans
In the recent past there has been a limited supply of the types of
mortgage loans intended to be purchased as Portfolio Loans. The types 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., ( Homevestors ), 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. 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. 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.
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.
Custody Agreement.
The Notes were issued pursuant to an indenture and custody agreement
(the Custody Agreement ), and the notes and mortgages comprising the
Portfolio Loans are 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. 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. 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.
Item 2. Properties
At December 31, 1997, the significant assets of the Company were
constituted by the first lien residential mortgage loans, interim financing
loans and certificates of deposit in the amount of $1,010,508 and $175,539,
respectively. The mortgaged properties included in the loan portfolio at
December 31, 1997, are located in Florida, Kansas, Missouri and Texas.
(See Item 1 for discussion of mortgage activity, including servicing and
portfolio turnover policy.)
Item 3. Legal Proceedings
The Company was not a party to any litigation for the period ended
December 31, 1997 nor is any litigation or claim threatened.
Item. 4 Submission of Matters to a Vote of Security Holders
NOT APPLICABLE
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
At December 31, 1997, all of the outstanding voting equity securities
of the Company were held of record and beneficially by Guy S. Della Penna.
Mr. Della Penna is the promoter and sole director and officer of the
Company. There is no present market for the Common Stock of the Company.
Item 6. Management s Discussion and Analysis or Plan of Operations
Plan of Operation
The Company received gross Note proceeds in excess of the minimum
principal amount of $1,500,000 on November 26, 1997. The Company was
required to pay monthly interest to Noteholders starting December, 1997 in
accordance with the registration statement, even though the Company was not
fully invested in a portfolio of mortgage loans.
The Company utilizing the Note proceeds from the public offering, has
acquired mortgage loans secured by first liens on real estate, interim
financing, as well as insured certificates and instruments of deposit or
debt securities issued by the United States and instrumentality s thereof
in accordance with an expressed Acquisition Policy. Acquired mortgage
loans must have an amortization schedule with respect to monthly payments
or principal and interest not in excess of 360 months (30 years) from the
time that the mortgage loan acquired was originated or periodic payments of
interest only.
Scheduled principal and interest payments on portfolio loans at
December 31, 1997, represent an annualized rate of return of approximately
16% on the basis of the Company costs in acquiring such portfolio loans and
an annualized rate of return of approximately 15.03% (stated rate) on the
basis of the unpaid principal balance of the Portfolio Loans at December
31, 1997.
At December 31, 1997, the portfolio of the Company consisted of
mortgage notes with a carrying value of $1,010,508. The following table
shows the mortgage notes at a face value and carrying value which takes
into consideration the discount, principal payments and an allowance for
loss:
<TABLE>
<CAPTION>
Allowance
Principal for
Face Value Discount Payments Loss Carrying Value
---------- ---------- ---------- --------- --------------
<S> <C> <C> <C> <C>
$1,128,563 $(100,555) $ (0) $(17,500) $1,010,508
</TABLE>
At December 31, 1997, the underlying real estate collateral of the
Company s portfolio of mortgage loans have an appraised value of
approximately $1,639,234 or a carrying value to appraised value ratio of
.62 to 1. The collateral real estate securing such loans as of December
31, 1997 was residential real estate and interim financing. The Company
held no unimproved real estate loans as of December 31, 1997.
Upon capitalization during December, 1997, the Company purchased
residential mortgage loans and interim financing loans having a principal
balance of $1,128,563 for $967,636. The Company did not consummate any
sales of mortgage loans during December 1997.
7. Managements Discussion and Analysis of Financial Condition and
Results of Operation
<TABLE>
<CAPTION>
1997 1996 Increase
(Decrease)
-------- -------- ----------
<S> <C> <C> <C>
REVENUE
Interest income-residential
mortgage loans $ 6,827 $ --- $ 6,827
Other revenue 19,513 --- 19,513
EXPENSES
Advertising 12,935 165 12,770
Consulting 20,120 --- 20,120
Interest expense 47,098 --- 47,098
Management fees 41,096 --- 41,096
Other expense 349 892 (543)
Provision for loss 17,500 --- 17,500
Service fees 1,500 --- 1,500
</TABLE>
For the year ended December 31, 1997, the Company experienced a net
loss of $114,260. This loss was attributed to the initial operational
activities such as interest expense of $47,098. This reflects the first
payment due to the investors, accrued from the date that their subscription
document was accepted and at their invested note rate.
Advertising expense of $12,935 reflects expenses reimbursed for the
raising of additional capital.
Consulting fees of $20,120 reflect legal fees of $6,294, accounting
fees of $9,017, other consulting-mortgage broker $3,309 and trustee fees of
$1,500.
Management fees of $41,096 which reflects a standard 3% of the
aggregate face value of the Eligible Collateral as of December 31, 1997.
Provision for loss of $17,500 reflects an allowance for the
possibility of losses sustained in the process of buying and selling
mortgage notes.
Item 8. Financial Statements and Supplementary Data
Included in the Annual Report on Form 10K-SB as Exhibit 1 are the
audited financial statements specified in Instruction (a) to Item 7.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
NOT APPLICABLE
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The day-to-day business and affairs of the Company are managed and
carried out the by President. Mr. Guy S. Della Penna serves as the sole
director and President of Federal Mortgage Management II, Inc. Information
concerning Mr. Della Penna is presented below:
Mr. Della Penna, age 45, has been a resident of Sarasota, Florida
since 1980 and is the founder and President of Capital Management Group,
Inc. Capital Management Group, Inc. was organized by Mr. Della Penna in
1989. Under the auspices of Capital Management Group, Inc., Mr. Della
Penna has provided financial and tax consulting and advisory services to
individuals and corporate entities. Capital Management Group, Inc. also
acts as general agent for various insurance companies. Mr. Della Penna is
a General Securities Principal and Financial and Operations Principal
pursuant to NASD Rules. Additionally, at December 31, 1996, Mr. Della
Penna was the majority shareholder, director and officer of Executive
Securities, Inc., the manager of the Note offering. Mr. Della Penna has
been active in the financial industry for approximately 19 years. During
the period April 1980 to January 1986, Mr. Della Penna served as the
Assistant to the Chairman of the Board of Snelling & Snelling, Inc., as
well as Assistant Treasurer. Snelling & Snelling, Inc. is a franchiser of
an employee recruitment business. While with such firm, Mr. Della Penna
also served as a member of the Executive, Acquisition and Pension and
Profit Sharing committees. Mr. Della Penna also served as the personal
business manager and financial advisor to the Snelling family and
affiliated entities and in such capacity, was responsible for cash
management, tax and investment analysis and commitments. The Snelling
family are the principal shareholders of Snelling & Snelling, Inc. During
the period April, 1978 through February 1980, Mr. Della Penna was an
associated person of Lehman Brothers, New York, New York, where he was
involved in the structuring, documentation and marketing of tax exempt
financings issued by state and local governments. 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.
Item 11. Executive Compensation
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (I)
Other Securities
Name Annual Restricted Under- All Other
and Compen- Stock lying LTIP Compen-
Principal sation Award(s) Options/ Payouts sation
Position Year Salary($) Bonus($) ($) ($) SARs (#) ($) ($)
- --------- ---- --------- -------- ------ ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Guy S.
Della Penna
President/CEO
1997 --- --- $41,096 --- --- --- ---
</TABLE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of December 31, 1997, Mr. Della Penna, President and CEO, owns 100%
of the outstanding shares of common stock.
Item 13. Certain Relationships and Related Transactions
Management fees of $41,096 were paid for the period ending December
31, 1997, to an affiliated company, Capital Mortgage Management. Mr. Della
Penna is the 100% stockholder of this affiliated Company.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
NOT APPLICABLE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FEDERAL MORTGAGE MANAGEMENT II, INC.
BY: Guy S. Della Penna
--------------------------------------
Guy S. Della Penna, President & Chief
Executive Officer
March 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 23,935
<SECURITIES> 1,186,047
<RECEIVABLES> 41,708
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,251,690
<PP&E> 308,964
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,560,654
<CURRENT-LIABILITIES> 70,471
<BONDS> 1,606,500
0
0
<COMMON> 1,000
<OTHER-SE> (117,317)
<TOTAL-LIABILITY-AND-EQUITY> 1,560,654
<SALES> 26,486
<TOTAL-REVENUES> 26,486
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 140,746
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (114,260)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (114,260)
<EPS-PRIMARY> (1,142.60)
<EPS-DILUTED> (1,142.60)
</TABLE>
FEDERAL MORTGAGE MANAGEMENT II, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
January 30, 1998
TO THE STOCKHOLDER
Federal Mortgage Management II, Inc.
Sarasota, Florida
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the accompanying statements of financial condition of
Federal Mortgage Management II, Inc. as of December 31, 1997 and 1996 and
the related statements of operations, changes in stockholder s equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Company s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Federal Mortgage
Management II, Inc. at December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Certified Public Accountants
FEDERAL MORTGAGE MANAGEMENT II, INC.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
1997 1996
ASSETS
<S> <C> <C>
Cash $ 23,935 $ 449
Investments 175,539
Accounts receivable, net 13,050
Accrued interest receivable 16,658
Portfolio of residential mortgage
loans - net 1,010,508
Prepaid expenses 12,000
Deferred financing costs 308,964 93,356
---------- --------
$1,560,654 $ 93,805
========== ========
LIABILITIES AND STOCKHOLDER S EQUITY (DEFICIT)
LIABILITIES
Accounts payable $ 14,939 $ 7,572
Due to affiliates 55,532 88,290
Notes payable 1,606,500
---------- ---------
1,676,971 95,862
========== =========
STOCKHOLDER S EQUITY (DEFICIT)
Common stock, $.01 par value, 1,000
shares authorized, 100 shares
issued and outstanding 1 1
Additional paid-in capital 999 999
Retained deficit (117,317) (3,057)
----------- ---------
(116,317) (2,057)
----------- ---------
$1,560,654 $ 93,805
=========== =========
</TABLE>
See notes to financial statements.
FEDERAL MORTGAGE MANAGEMENT II, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------
1997 1996
---- ----
REVENUE
<S> <C> <C>
Interest income - mortgage loans $ 6,826 $
Interest income 19,660
---------- ---------
26,486
---------- ---------
EXPENSES
Accounting 3,918 2,184
Advertising 12,935 165
Consulting 8,409
Interest expense 47,098
Legal 6,294
Licenses and fees 1,824 383
Management and service fees 42,596
Other 172 325
Provision for loss 17,500
---------- -----------
140,746 3,057
---------- -----------
NET LOSS $(114,260) $ (3,057)
========== ===========
LOSS PER COMMON SHARE $(1,142.60) $ (30.57)
========== ===========
</TABLE>
See notes to financial statements.
FEDERAL MORTGAGE MANAGEMENT II, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
Stock Capital Deficit Total
------ ---------- -------- -----
<S> <C> <C> <C> <C>
BALANCE,
January 1, 1996 $ $ $ $
ISSUANCE OF
COMMON STOCK 1 999 1,000
NET LOSS - 1996 (3,057) (3,057)
------- ---------- ---------- -----------
BALANCE,
December 31, 1996 1 999 (3,057) (2,057)
NET LOSS - 1997 (114,260) (114,260)
------- ---------- ---------- -----------
BALANCE
at December 31, 1997 $ 1 $ 999 $ (117,317) $ (116,317)
======= ========== ========== ===========
</TABLE>
See notes to financial statements.
FEDERAL MORTGAGE MANAGEMENT II, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (114,260) $ (3,057)
Changes in operating assets
and liabilities:
Accounts and notes receivable, net (13,050)
Portfolio of residential mortgage loans (1,010,508)
Accrued interest receivable (16,658)
Prepaid expenses (12,000)
Accounts payable 7,367 (4,767)
Due to affiliates (32,758) 88,290
------------- -----------
NET CASH (USED) PROVIDED BY
OPERATING ACTIVITIES (1,191,867) 80,466
------------- -----------
NET CASH USED IN INVESTING ACTIVITIES
Purchase of investments (175,539)
FINANCING ACTIVITIES
Issuance of common stock 1,000
Increase in deferred financing costs (215,608) (81,017)
Issuance of notes payable 1,606,500
------------- ----------
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES 1,390,892 (80,017)
------------ ----------
INCREASE IN CASH 23,486 449
CASH, at beginning of year 449
------------ -----------
CASH, at end of year $ 23,935 $ 449
============ ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 34,219 NONE
============
</TABLE>
See notes to financial statements.
NOTE A - ORGANIZATION
Federal Mortgage Management II, Inc. (the Corporation ), a Florida
corporation, was organized on November 13, 1995. 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. Through the year ending
December 31, 1996, the Corporation was considered to be a developmental
stage company.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Investment in Securities
The Corporations investments in securities are classified in three
categories and accounted for as follows:
Trading Securities.Securities held principally for resale in the near term
are classified as trading securities and recorded at their fair values.
Unrealized gains and losses on securities are included in other income.
The Corporation presently has no such securities.
Securities to be Held to Maturity.Instruments for which the Corporation
has the positive intent and ability to hold to maturity are reported at
cost, adjusted for amortization of premiums and accretion of discounts
which are recognized in interest income using the interest method over
the period to maturity. The Corporation presently has no such
securities.
Securities Available for Sale.Securities available for sale consist of
zero coupon certificates of deposit which are not classified as trading
securities nor as securities to be held to maturity.
Declines in the fair value of individual held-to-maturity and available-for-
sale securities below their costs that are other than temporary would
result in write-downs of the individual securities to their fair value.
The Corporation presently has experienced no such declines.
Gains and losses on the sale of securities available for sale are
determined using the specific-identification method.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Portfolio of Residential Mortgage Loans
Residential mortgage loans are recorded at the lower of cost or fair market
value. Purchase discounts are not amortized since the mortgage loans are
owned for several months and then sold to investors. The amortization of
the discount would not be materially significant to the operating results
of the Corporation.
Statements of Cash Flow
For purposes of reporting cash flows, the Corporation considers cash and
cash equivalents as those amounts which are not subject to restrictions or
penalties and have an original maturity of three months or less.
Reclassifications
Certain reclassifications have been made to the 1996 financial statements
to conform with the 1997 financial statement presentation. Such
reclassifications had no effect on net income as previously reported.
Earnings per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share.
Statement 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings
per share is very similar to the previously reported fully diluted earnings
per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the Statement 128
requirements. For the years ending December 31, 1997 and 1996 the
Corporation had no dilutive securities.
NOTE C - INVESTMENTS
Investments consist of a zero coupon certificate of deposit. This
investment is classified as available for sale and is reported at fair
value.
The carrying amount of investment securities is as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
December 31, 1997:
Certificates
of deposit $175,539 $175,539
========= ========
</TABLE>
NOTE D - 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 with the closing of the offering.
Deferred financing costs were incurred as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1997 1996
----- -----
<S> <C> <C>
Commission $109,320 $
Legal 72,389 75,152
Offering fee 48,195
Non-accountable expense 32,130
Other 27,263
Pricing 15,000 15,000
Filing fees 4,667 3,204
-------- ---------
$308,964 $ 93,356
======== =========
</TABLE>
NOTE E - PORTFOLIO OF RESIDENTIAL MORTGAGE LOANS - NET
The Corporation purchases residential mortgage loans at a discount from the
face amount of the loans with the intention of selling the loans at a gain
after servicing them for a relatively short period of time. The mortgage
loans are purchased by investors based on various factors inherent in the
group of mortgages presented for sale which are considered in the
negotiation process.
The portfolio of residential mortgage loans consists of the following:
<TABLE>
<CAPTION>
December 31, 1997
-------------------
<S> <C>
Face value $1,128,563
Discount (100,555)
Less: allowance for losses (17,500)
-----------
$1,010,508
===========
</TABLE>
NOTE E - PORTFOLIO OF RESIDENTIAL MORTGAGE LOANS - NET (CONTINUED)
The mortgages have various maturities ranging from 6 months to 30 years,
and varying interest rates ranging from 7% to 18%. The residential
mortgage loans are secured by first liens on residential real property.
The Corporations policy is to acquire residential mortgage loans with
balances that do not exceed 90% of the fair market value of the real estate
or the loan acquisition price does not exceed 80% of the fair market value
of the collateral real estate at the time of the loan acquisition. The
Corporation purchases mortgage loans collateralized by real estate located
in the United States.
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 - NOTES PAYABLE
During the year ended December 31, 1997, the Corporation issued notes
through a public offering to finance the purchase of residential mortgage
loans. The notes have interest rates ranging from 8% to 10% depending on
the terms which range from 48 months to 72 months. Interest is paid
monthly with principal due at maturity. Aggregate principal maturities on
notes are as follows:
<TABLE>
<CAPTION>
<S> <C>
2001 $ 29,000
2002 79,000
2003 1,498,500
------------
$ 1,606,500
============
</TABLE>
The notes are collateralized by all the assets of the Corporation. For the
year ended December 31, 1997, the Corporation incurred interest expense of
$47,098, related to the notes payable.
NOTE H - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In addition to the portfolio of residential mortgage loans, financial
instruments that also subject the Corporation to concentrations of credit
risk consist principally of cash deposits. The Corporation places these
investments with a single financial institution. Deposits are insured up
to $100,000. At any given time, the Corporation may have cash deposits
exceeding the insured amount.
NOTE I - RELATED PARTY TRANSACTIONS
The Corporation paid commission and fees of approximately $110,000 and
$80,000 respectively, relating to the offering of the notes payable, to an
affiliated company. The sole stockholder of the Corporation is the
controlling stockholder of the affiliated company.
In December of 1997, the Corporation purchased mortgages from an affiliated
company. The purchase price totaled approximately $1,028,000. The
transaction was at fair market value.
An affiliated company services the mortgages of the Corporation. For the
year ended December 31, 1997, the Corporation incurred servicing fees of
$1,500. This amount was due to the affiliated company at December 31,
1997.
For his general management services, the sole stockholder receives an
annual management fee equal to 3% of the aggregate face value of eligible
collateral. The management fee for the year ended December 31, 1997
totaled approximately $41,000. This amount is included in due to
affiliates at December 31, 1997.
NOTE J - 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 other real estate and 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. The
mortgage portfolio is purchased with the intent of a relatively short
holding period of several months. Therefore, any differences in the value
of the mortgage portfolio due to changes in market interest rates are
minimal. Furthermore, each purchase and sale of mortgages by the
Corporation is a private, negotiated transaction. There is no readily
established market for the Corporation s mortgage portfolio.
The Corporation s note obligations are not traded on an established market
and the only activity with respect to the obligations are normal, scheduled
redemptions. The Corporation s management estimates that the current
interest rate which the Corporation would need to pay in order to sell
similar note obligations is approximately equivalent to the rates of the
outstanding note obligations.
NOTE K - CLASSIFICATION OF MORTGAGE PORTFOLIO IN ACCORDANCE
WITH THE REQUIREMENTS OF SFAS NO. 115
The Corporation s mortgage portfolio is a trading security. As such, it is
required to be carried at fair value, with any unrealized holding gains or
losses included in earnings. For the reasons discussed in Note I, the
carrying value of the mortgage portfolio has been determined by the
Corporation s management to be equivalent to its carrying cost.
NOTE L - SUBSEQUENT EVENTS
During the period January 1, 1998 through February 28, 1998, additional
notes payable totaling $454,000 were issued. (See Note G)
