4
5
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q-SB
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the nine months ended Commission File Number
September 30, 1998 33-48017-A
- ------------------- -----------------------
FEDERAL MORTGAGE MANAGEMENT II, INC.
(a Florida corporation)
(Exact name of Registrant as specified in its Charter)
Florida 65-0025618
- ------------------------------ ----------------
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification Number
1800 Second St., Suite 780, Sarasota, Florida 34231
----------------------------------------------------
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (941) 365-4200
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes / X / No / /.
For the nine months ended September 30, 1998, the Registrant had revenues
of $345,992.
As of September 30, 1998, the Company had 145 secured promissory notes
payable (Notes) with a total of $2,368,500 principal balance outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Set forth below are the unaudited financial statements reflecting the
Company's financial condition as of September 30, 1998, and the related
statements of operations and shareholders' equity for the nine months ended
September 30, 1998 and 1997.
FEDERAL MORTGAGE MANAGEMENT II, INC.
BALANCE SHEET
SEPTEMBER 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSET
Cash $ 423,608
Residential mortgage notes 849,781
Account receivable 66,413
Prepaid expenses 71,100
Certificates of deposit 324,823
----------
Total current assets 1,735,725
OTHER ASSET
Deferred financing costs, net of
accumulated amortization 457,915
Equipment at cost, net of
accumulated depreciation 16,538
----------
Total other assets 474,453
----------
TOTAL ASSETS $2,210,178
==========
LIABILITIES AND STOCKHOLDER'S DEFICIENCY
CURRENT LIABILITIES
Accounts payable $ 20,738
Notes payable 2,368,500
----------
TOTAL LIABILITIES 2,389,238
FEDERAL MORTGAGE MANAGEMENT II, INC.
BALANCE SHEET
SEPTEMBER 30, 1998 (Unaudited)
STOCKHOLDERS EQUITY
Common stock, $.01 par value
1,000 shares authorized, 100 shares
issued and outstanding 1
Additional paid-in capital 999
Accumulated deficit (180,060)
-----------
Total Stockholders deficiency (179,060)
-----------
TOTAL LIABILITIES AND
STOCKHOLDERS DEFICIENCY $2,210,178
===========
</TABLE>
STATEMENT OF OPERATIONS
Nine Months and Three Months Ended September 30
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 (Unaudited)September 30 (Unaudited)
1998 1997 1998 1997
-------- --------- -------- --------
<S> <C> <C> <C> <C>
REVENUE
Interest income $107,041 $ --- $ 47,676 $---
Gain on sale of
mortgage loans 226,283 --- 68,018 ---
Other income 12,668 --- 4,794 ---
-------- --------- --------- --------
Total Revenue 345,992 --- 120,488 ---
EXPENSES
Accounting and legal 17,617 2,508 5,000 ---
Advertising 7,757 --- 588 ---
Amortization/
Depreciation 43,421 --- 25,894 ---
Commission 25,829 --- 14,252 ---
Consulting 19,997 1,500 1,000 1,500
Insurance 1,669 --- 576 ---
Interest 166,037 13,060 58,778 13,060
Licenses, fees
and reports --- 165 --- ---
Management fees 27,839 --- --- ---
Miscellaneous 5,144 --- 558 ---
Office expenses 10,156 51 4,014 ---
Rent 8,594 --- 2,865 ---
Salaries and Wages 51,916 --- 9,112 ---
Service fees 12,844 --- 1,863 ---
Taxes 6,338 --- 1,787 ---
Travel 3,577 --- 1,104 ---
--------- --------- -------- --------
Total expenses 408,735 17,284 127,392 14,560
--------- --------- -------- ---------
NET LOSS/INCOME $(62,743) $(17,284) $(6,903) $ (14,560)
========= ========= ======== =========
</TABLE>
STATEMENT OF CHANGES IN STOCKHOLDER'S DEFICIENCY
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Additional Accumu-
Common Paid-In lated
Stock Capital Deficit Total
------- ---------- -------- ------
<S> <C> <C> <C> <C>
Balance
January 1, 1997 $ 1 $ 999 $ (3,057) $ (2,057)
Net Loss (17,284) (17,284)
------- ---------- --------- ---------
Balance
September 30, 1997 $ 1 $ 999 $(20,341) $(19,341)
======= ========== ========= =========
Additional Accumu-
Common Paid-In lated
Stock Capital Deficit Total
------- ---------- -------- --------
Balance
January 1, 1998 $ 1 $ 999 $(117,317) $(116,317)
Net Loss (62,743) (62,743)
Balance ------- ---------- ---------- ----------
September 30, 1998 $ 1 $ 999 $(180,060) $(179,060)
======= ========== ========== ==========
</TABLE>
FEDERAL MORTGAGE MANAGEMENT II, INC.
STATEMENT OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(62,743) $(17,284)
(Increase) decrease in operating assets:
Accounts receivable (53,063) ---
Portfolio of residential mortgage notes 160,728 ---
Prepaid expenses (59,100) (7,500)
Purchase of assets (18,330) ---
Depreciation/Amortization 43,421 ---
Deferred financing costs (190,582) (19,242)
Increase (decrease) in operating liabilities:
Accounts payable (33,075) 55,861
------------ ----------
Total adjustments (150,001) 29,119
------------ ----------
Net cash used in operating activities: (212,744) 11,835
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of certificates of deposit (324,822) ---
Sale of certificates of deposit 175,539 ---
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note issuance 762,000 917,000
------------ ----------
Net cash provided by
financing activities 612,417 ---
------------ ----------
INCREASE IN CASH 399,673 928,835
CASH AT BEGINNING OF PERIOD 23,935 449
------------ ----------
CASH AT END OF PERIOD $423,608 $929,284
============ ==========
</TABLE>
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Federal Mortgage Management II, Inc. (the Corporation), a Florida
corporation, was organized in November 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 purchase of mortgage loans and insured instruments of
deposit have been acquired in accordance with a specific acquisition
policy described in the registration statement.
Portfolio of Residential Mortgage Loans
Residential mortgage loans are recorded at lower of cost or fair market
value. Purchase discounts are not amortized because the mortgage loans are
held for resale and typically sold after being owned by the Company for
several months. The amortization of the discount would not be materially
significant to the operating results of the Corporation.
NOTE 2 - INVESTMENT IN SECURITIES
The Corporation's investments in securities are classified in three
categories and accounted for as follows:
Trading Securities. Securities held for resale in the near term.
Unrealized gains and losses on securities are included in other
income.
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.
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 3 - PORTFOLIO OF RESIDENTIAL MORTGAGE LOANS
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 negotiating process. The fair market value of the
mortgage loans at September 30, 1998 at a minimum, approximates cost
after assessing the credit risks associated with the portfolio.
The portfolio of residential mortgage loans consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Face value $901,510
Discount (34,072)
Principal payments (157)
Allowances for losses (17,500)
---------
Carrying value $849,781
=========
</TABLE>
The mortgages have various maturities ranging from 6 months to 30 years,
and varying interest rates ranging from 11.56% to 18%. The residential
mortgage loans are secured by first liens on residential real property.
The Corporation s 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.
NOTE 4 - NOTES PAYABLE
The Corporation issued notes through a public offering to finance the
purchase of residential mortgage loans. The notes have interest rates
ranging from 8.0% to 10.0% depending on the terms which range from 48
months to 72 months. Interest is paid monthly with principal being paid
at maturity. Aggregate principal maturities on notes are as follows:
<TABLE>
<CAPTION>
<S> <C>
2001 38,000
2002 99,000
2003 2,231,500
----------
Notes payable $2,368,500
</TABLE>
The notes are collateralized by all the assets of the Corporation. For
the nine months ended September 30, 1998, the Corporation incurred
interest expense of $166,037 related to the notes payable.
NOTE 5 - RELATED PARTY TRANSACTIONS
The sole stockholder and affiliated entities enter into transactions
with the Corporation as follows.
The stockholder is the majority stockholder in the best efforts
managing underwriter broker/dealer which received compensation of
$90,580 during the nine months ended September 30, 1998. The $90,580
consisted of $52,480 in commissions, $22,860 in note offering
management fees and $15,240 in non-accountable expense allowance.
For the nine months ended September 30, 1998, the Corporation utilized
office space rented from an affiliate for which it paid $8,594, and none
for the same period ended 1997.
An affiliated company services the mortgages of the Corporation. For
the nine months ended September 30, 1998, the Corporation paid servicing
fees to the affiliate in the amount of $12,844. The Company did not
have any mortgages for the same period ended 1997, hence, there were no
service fees paid during that period.
NOTE 6 - STOCKHOLDER'S EQUITY
Preferred Stock
The Board of Directors will establish the dividend rate, redemption
price and rights of the holders of preferred stock prior to the date of
issuance of the shares of stock. No preferred stock has been issued as
of September 30, 1998. The Board of Directors has not established the
preferred stockholders' preferences and rights as of the date of this
report.
NOTE 7 - DEFERRED FINANCING COSTS
Deferred financing costs consist of legal and accounting fees associated
with the filing of the registration statement with the Securities and
Exchange Commission as well as costs incurred for the promotion of the
issuance of the promissory notes. These costs are amortized over the
maturity of the notes.
NOTE 8 - 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 9 - 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 time, the Corporation may have cash
deposits exceeding the uninsured amount. The following details
financial instruments with off balance sheet risk for the Company at
September 30, 1998:
<TABLE>
<CAPTION>
<S> <C>
Certificate of deposit face $ 373,379
Certificate of deposit discount (48,556)
-----------
Carrying value at
September 30, 1998 $ 324,823
===========
</TABLE>
NOTE 10 - 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.
NOTE 11 - 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 3, the carrying value of the mortgage portfolio has been determined
by the Partnership's management to be equivalent to its carrying cost.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The Company, utilizing the Note proceeds from the public offering, has
acquired mortgage loans secured by first liens on real estate, 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. 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
September 30, 1998, the Company had received gross note proceeds of
$2,368,500. Presented below is a summary of the use of proceeds from the Note
offering as of September 30, 1998:
<TABLE>
<CAPTION>
<S> <C>
Selling commissions $ 161,800
Offering management fee 71,055
Non-accountable expense allowance 47,370
Organizational and offering expense 219,319
Purchase of assets 18,330
Purchase of federal instruments 322,367
Purchase of residential mortgages
and interim financings 1,016,121
Payment of note interest 141,383
Organizational expense reimbursement 32,550
Cash remaining 338,205
----------
Gross offering proceeds $2,368,500
==========
</TABLE>
Scheduled principal and interest payments on portfolio loans at September 30,
1998, represent an annualized rate of return of approximately 16% on the basis
of the Company s cost in acquiring such portfolio loans and an annualized rate
of return of approximately 15% (stated rate) on the basis of the unpaid
principal balance of the portfolio loans at September 30, 1998.
At September 30, 1998 the portfolio of the Company consisted of mortgage
notes with a carrying value of $991,561. The following table shows the
mortgage notes at face value and carrying value which takes into consideration
the discount and principal payments:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Principal Allowance
Face Value Discount Payments For Losses Carrying Value
- ---------- -------- ---------- ----------- ---------------
$901,510 ($34,072) ($157) $ (17,500) $ 849,781
</TABLE>
At September 30, 1998, the underlying real estate collateral of the Company's
portfolio of mortgage loans have an appraised value of approximately
$1,278,955, or a loan value to appraised value ratio of 71%. The collateral
real estate securing such loans as of September 30, 1998 was residential real
estate. The Company held no unimproved real estate loans as of September 30,
1998.
There are 2 mortgage loans with a carrying value of $95,705 that are
delinquent (in terms of scheduled principal and interest payments) as of
September 30, 1998. These loans represent 12% of the carrying value of the
portfolio. The Company has initiated foreclosure procedures on 1 of the
delinquent mortgage loans. This loan has a fair market value of
approximately $75,617, with a carrying value of $43,500. Upon successful
foreclosure, the Company expects to recognize a gain on the subsequent sale of
the properties.
The Company began operations in December 1997, after attaining the minimum
gross proceeds on November 26, 1997. The Company began operations in fiscal
1998, hence all revenue and expense items were up substantially over 1997.
(See Statement of Operations, Page 4).
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable
Item 2. Changes in Securities.
Not applicable
Item 3. Defaults Upon Senior Securities.
Not applicable
Item 4. Other Information.
Not applicable
Item 5. Exhibits and Reports on Form 8-K.
None
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.
November 1998 By Guy. S. Della Penna
- --------------- ----------------------------------
Guy S. Della Penna, President &
Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 423,608
<SECURITIES> 1,245,704
<RECEIVABLES> 66,413
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,735,725
<PP&E> 517,874
<DEPRECIATION> (43,421)
<TOTAL-ASSETS> 2,210,178
<CURRENT-LIABILITIES> 20,738
<BONDS> 2,368,500
0
0
<COMMON> 1
<OTHER-SE> (179,061)
<TOTAL-LIABILITY-AND-EQUITY> 2,210,178
<SALES> 0
<TOTAL-REVENUES> 345,992
<CGS> 345,992
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 242,698
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 166,037
<INCOME-PRETAX> (62,743)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> (62,743)
<EPS-DILUTED> (62.74)
</TABLE>
