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, 1998 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, 1998 the Company has 144 secured promissory Notes Payable
(Notes) with a total of $2,368,500 principal balance outstanding. As indicated,
the Company is a Company organized pursuant to Florida law. The Company had
total revenues of $409,291 in 1998.
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 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 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, 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 December 31, 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 1,028,008
Payment of note interest 223,816
Organizational expense reimbursement 32,520
Operating expenses 262,245
-------
Gross offering proceeds $2,368,500
</TABLE>
The notes were sold on a best efforts basis by FAS Wealth Management
Services, Inc., formerly Executive Wealth Management, Inc., the managing
underwriter. As of December 31, 1998, the offering was closed.
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 13.2% 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 fee of .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, 1998, 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 $952,892 and $347,827, respectively.
The mortgaged properties included in the loan portfolio at December 31, 1998,
are located in Florida, Kansas, Missouri, California, S. Carolina 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, 1998 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
An affiliate of the Registrant, Federal Mortgage Management, Inc. ("FMMI"),
conducted and concluded in 1993 and 1994 a public offering of its Secured
Promissory Notes designated as the Series 1993A Notes of FMMI. FMMI is in
default with respect to the sub-Series 1993A-IV Notes in aggregate principal
amount of $2,740,000. FMMI is in the process of offering to exchange
$1,945,200 principal amount of such notes held by residents of the State of
Florida for new Notes in the same principal and interest amounts but having
an extended due date of June 21, 2002.
The Registrant, in separate and distinct transaction, has privately offered
to approximately 25 holders of such 1993A-IV sub-Series of Notes who are not
residents of the State of Florida its Subordinated Secured Promissory Notes,
First Series (the "Subordinated Notes") in aggregate principal amount of
$716,500 which is the principal amount of the unpaid 1993A-IV notes held by
such non-Florida resident holders.
The principal and interest obligation of the Subordinated Notes will be
junior and inferior to the principal and interest obligation represented by the
1997A Series of Notes of the Registrant which were publicly offered during the
recent past. The terms of issuance of the 1997A Series of Notes of the
Registrant remains unchanged and the obligation represented by the
Subordinated Notes and the lien securing the Subordinated Notes will be
junior and inferior to the first priority lien which presently secures the
principal and interest obligation of the 1997A Series of Secured Promissory
Notes of the Registrant.
As of the time of the filing of this report, the Registrant cannot predict
whether such Subordinated Notes will be issued.
At December 31, 1998, 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,
1998, represent an annualized rate of return of approximately 17% on the basis
of the Company costs in acquiring such portfolio loans and an annualized
rate of return of approximately 16% (stated rate) on the basis of the unpaid
principal balance of the Portfolio Loans at December 31, 1998.
At December 31, 1998, 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>
$1,006,425 $(34,072) $ (760) $ (18,701) $952,892
</TABLE>
At December 31, 1998, the underlying real estate collateral of the Company's
portfolio of mortgage loans have an appraised value of approximately $1,575,565
or a carrying value to appraised value ratio of .64 to 1. The collateral
real estate securing such loans as of December 31, 1998 was residential real
estate and interim financing. The Company held no unimproved real estate
loans as of December 31, 1998.
7. Management's Discussion and Analysis of Financial Condition and Results of
Operation
<TABLE>
<CAPTION>
REVENUE 1998 1997 Increase
(Decrease)
--------- --------- ----------
<S> <C> <C> <C>
Interest income-residential
mortgage loans $ 145,824 $ 6,827 $ 138,997
Gain on sale of mortgage notes 226,283 --- 226,283
Other revenue 37,184 19,513 17,671
--------- -------- ---------
EXPENSES
Advertising 7,757 12,935 (5,178)
Consulting 47,786 20,120 27,666
Interest expense 223,816 47,098 176,718
Management fees 47,814 41,096 6,718
Other expense 228,902 349 228,553
Service fees 13,506 1,500 12,006
</TABLE>
For the year ended December 31, 1998, the Company experienced a net loss of
$165,490 compared to a $114,260 loss for the year ended 1997. This increase
of $51,230 reflects the start up operations of the Company during fiscal 1998.
Overall income increased $382,951 for the year ended December 31, 1998, as
compared to the same period ended 1997. This increase relates to the Company
completing its offering of notes in the amount of $2,368,500 and initiating
operations during 1998.
Expenses also increased for the year ended December 31, 1998, as compared to
the same period ended 1997.
Advertising expense decreased $5,178 for the year ended December 31, 1998 as
compared to the same period ended 1997. This decrease is due to the fact that
the offering closed in early fiscal 1998.
Consulting fees increased $27,666 for the year ended December 31,1998, as
compared to the same period ended 1997. This increase relates to increased
accounting and legal fees associated with the Company.
Interest expense increased from $47,098 for the year ended December 31, 1997 to
$223,816 for the same period ended 1998. This increase relates to a larger
amount of notes outstanding for a longer period of time during fiscal 1998
compared to 1997.
Management fees increased $6,618 for the year ended December 31, 1998, as
compared to the same period ended 1997. This increase is due to the fact that
there were more funds available for investment purposes during fiscal 1998, as
compared to 1997.
Service fees increased $12,006 for the year ended December 31, 1998, as
compared to the same period ended 1997. This increase relates to more funds
being invested in mortgages at December 31, 1998, as compared to 1997, and
for a longer period of time.
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 46, 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
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
- --------- ----- -------- ------ ------- ---------- --------- ------- --------
Guy S.
Della Penna
President/CEO 1997 $ 41,096
1998 47,814
</TABLE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of December 31, 1998, 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 $47,814 and $41,096 were paid for the period ending
December 31, 1998 and 1997, respectively, 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 1999
6
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 170,296
<SECURITIES> 1,797,407
<RECEIVABLES> 59,947
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,027,650
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,027,650
<CURRENT-LIABILITIES> 2,390,582
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> (362,933)
<TOTAL-LIABILITY-AND-EQUITY> 2,027,650
<SALES> 409,291
<TOTAL-REVENUES> 409,291
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 350,465
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 223,816
<INCOME-PRETAX> (165,490)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (165,490)
<EPS-PRIMARY> (1654.9)
<EPS-DILUTED> (1654.9)
</TABLE>
February 16, 1999
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, 1998 and 1997 and the related
statements of operations, changes in stockholders equity and cash flows for
the years then ended. These financial statements are the responsibility of
the Companys 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, 1998 and 1997, and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.
Certified Public Accountants
FEDERAL MORTGAGE MANAGEMENT II, INC.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
ASSETS
<S> <C> <C>
Cash $ 170,296 $ 23,935
Investments 347,824 175,539
Accounts receivable, net 13,050
Accrued interest receivable 9,947 16,658
Portfolio of residential mortgage loans - net 952,892 1,010,508
Prepaid expenses 12,000
Note receivable - related party 50,000
Property and equipment - net 15,927
Other real estate owned - net 39,500
Deferred financing costs - net 441,264 308,964
----------- ---------
$ 2,027,650 $1,560,654
=========== ==========
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
LIABILITIES
Interest payable $ 19,593 $ 14,680
Accounts payable 1,360 259
Due to affiliates 1,129 55,532
Notes payable 2,368,500 1,606,500
----------- ----------
2,390,582 1,676,971
----------- ----------
STOCKHOLDERS EQUITY (DEFICIT)
Common stock, $.01 par value, 1,000
shares authorized, 100 shares
issued and outstanding 1 1
Additional paid-in capital 999 999
Note receivable - affiliate (81,125)
Retained deficit (282,807) (117,317)
----------- ----------
(362,932) (116,317)
----------- ----------
$ 2,027,650 $1,560,654
=========== ==========
</TABLE>
FEDERAL MORTGAGE MANAGEMENT II, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1998 1997
----- -----
<S> <C> <C>
REVENUE
Interest income - mortgage loans $ 145,824 $ 6,826
Gain on sale of mortgages 226,283
Interest income 34,813 19,660
Other income 2,371
---------- ----------
409,291 26,486
---------- ----------
EXPENSES
Advertising 7,757 12,935
Amortization 58,280
Bad debts 16,850
Commission 25,829
Consulting 34,020 8,409
Credit Reports 2,178
Depreciation 2,403
Insurance - health 3,002
Interest 223,816 47,098
Management fees 47,814 42,596
Miscellaneous 1,876
Office 3,543
Other 3,441 172
Payroll tax 7,985
Postage and printing 4,183
Professional 12,258 10,212
Provision for loss on mortgages 5,200 17,500
Rent 11,459
Salaries and wages 74,207
Servicing and broker fees 14,858
Taxes and fees 2,620 1,824
Telephone 7,072
Travel/lodging 4,130
--------- --------
574,781 140,746
--------- --------
NET LOSS $ (165,490) $ (114,260)
========= ========
LOSS PER COMMON SHARE $(1,654.90) $(1,142.60)
========= ========
</TABLE>
FEDERAL MORTGAGE MANAGEMENT II, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained Note Receivable
Stock Capital Deficit Affiliate Total
------ ----------- --------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE,
January 1, 1997 $1 $999 $ (3,057) $ $ (2,057)
NET LOSS - 1997 (114,260) (114,260)
BALANCE,
December 31, 1997 1 999 (117,317) (116,317)
NOTE RECEIVABLE - AFFILIATE (81,125) (81,125)
NET LOSS - 1998 (165,490) (165,490)
------ ---------- ------------- ---------------- -------------
BALANCE
at December 31, 1998 $1 $999 $(282,807) $(81,125) $(362,932)
====== ========== ============= ================ =============
</TABLE>
FEDERAL MORTGAGE MANAGEMENT II, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(165,490) $ (114,260)
Depreciation 2,403
Amortization 58,280
Changes in operating assets and liabilities:
Accounts and notes receivable, net (118,075) (13,050)
Accrued interest receivable 6,713 (16,658)
Prepaid expenses 12,000 (12,000)
Accounts and interest payable 6,014 7,367
Due to affiliates (54,403) (32,758)
--------- ----------
NET CASH USED BY OPERATING ACTIVITIES (252,558) (181,359)
--------- ----------
INVESTING ACTIVITIES
Purchase of investments (172,285) (175,539)
Purchase of property and equipment (18,330)
Net change in mortgages 57,614 (1,010,508)
Net change in other real estate owned (39,500)
--------- ----------
NET CASH USED IN INVESTING ACTIVITIES (172,501) (1,186,047)
--------- ----------
FINANCING ACTIVITIES
Increase in deferred financing costs (190,580) (215,608)
Issuance of notes payable 762,000 1,606,500
--------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 571,420 1,390,892
--------- ----------
INCREASE IN CASH 146,361 23,486
CASH, at beginning of year 23,935 449
--------- ----------
CASH, at end of year $ 170,296 $ 23,935
========= ==========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 218,903 $ 34,219
========= ==========
</TABLE>
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.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Managements 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
Company holds certificates of deposit which are classified as trading
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
bonds,
notes, debentures, and certain equity securities not classified as trading
securities nor as securities to be held to maturity. Securities available for
sale are recorded at fair market values with unrealized holding gains and
losses, net of tax, reported as a net amount in other comprehensive income.
The Company presently has no such securities.
Declines in the fair value of individual held-to-maturity, trading securities
and
available-for-sale securities below their costs that are other than temporary
would result in a write-down 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.
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.
Deferred Financing and Marketing Costs
Deferred financing and marketing costs are amortized on a straight-line basis
over five years representing the period of the maturities of the notes payable.
Reclassifications
Certain reclassifications have been made to the 1997 financial statements to
conform with the 1998 financial statement presentation. Such reclassifications
had no effect on net income as previously reported.
Earnings per Share
Earnings per share of common stock were computed by dividing net income by the
weighted average number of common shares outstanding for the year. Diluted
earnings per share are not presented because the Corporation has issued no
dilutive potential common shares.
NOTE C - INVESTMENTS
Investments consist of certificate of deposits. These investments are
classified as trading securities and are reported at fair value. The fair
value at December 31, 1998 and 1997 is $347,824 and $175,539, respectively.
NOTE D - NOTES RECEIVABLE - RELATED PARTY
Notes receivable-affiliate consist of a promissory note in the amount of
$ 50,000, with a 12% interest rate, interest paid quarterly. This note was
paid in February, 1999. (See Notes K and N)
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 at December 31, consist of the
following:
1998 1997
---- ----
Face value $1,006,425 $1,128,563
Discount (34,072) (100,555)
Less: allowance for losses (19,461) (17,500)
------------ -----------
$ 952,892 $1,010,508
============ ===========
The mortgages have various maturities ranging from 1 month to 30 years, and
varying interest rates ranging from 11.5% 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 - OTHER REAL ESTATE OWNED
Other real estate owned represents real property acquired by foreclosure or in
settlement of debt. Other real estate owned is valued at the lower of the
propertys fair value or the recorded investment in the mortgage. At the time
of foreclosure, if the fair value of the real estate acquired is less than the
Partnerships recorded investment in the mortgage, a write down is recognized
through a charge to the allowance for mortgage losses. Gains or losses on the
sale of and losses on the periodic revaluation of real estate acquired are
charged or credited to noninterest expense.
Other real estate owned of $43,500 was held at December 31, 1998. The
allowance for losses on other real estate owned totaled $4,000 at December
31, 1998.
NOTE G - DEFERRED FINANCING COSTS - NET
Deferred financing costs consist of costs 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 June
1, 1998. Amortization expense for the year ended December 31, 1998 was
$58,280.
Deferred financing costs were incurred as follows:
Commission $161,800
Legal 72,389
Offering fee 71,055
Non-accountable expense 50,310
Other 53,822
Pricing 85,501
Filing fees 4,667
---------
499,544
Less: accumulated amortization 58,280
---------
$441,264
=========
NOTE H - 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 I - NOTES PAYABLE
During the years ended December 31, 1998 and 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:
2001 $ 38,000
2002 99,000
2003 2,231,500
------------
$2,368,500
============
The notes are collateralized by all the assets of the Corporation. For the
years ended December 31, 1998 and 1997, the Corporation incurred interest
expense of $223,816 and $47,098, related to the notes payable.
NOTE J - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation invests in various financial institutions whose deposits are
insured by the Federal Deposit Insurance Corporation (FDIC) up to a maximum of
$100,000. At December 31, 1998 the Company had deposits of approximately
$76,000 in excess of FDIC insurance limits. At December 31, 1997, the
Corporation had no deposits in excess of FDIC insured limits.
NOTE K - RELATED PARTY TRANSACTIONS
The Corporation paid commission and fees of approximately $162,000 and $118,000
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.
The Company purchased computer equipment and software from an affiliated
company. The purchase price was $17,100, the book value of the equipment was
$3,434.
In December of 1997, the Corporation purchased mortgages from an affiliated
company. The purchase price totaled approximately $1,028,000. The
transactions were at fair market value. In January 1998, the Corporation
purchased additional mortgages for a purchase price of $55,000. No gain or
loss was recognized on the transaction.
During the year ended December 31, 1998, the Company purchased a note
receivable from an affiliated company for $50,000. There was no discount or
premium on the note. (See Notes D and N)
An affiliated company services the mortgages of the Corporation. For the years
ended December 31, 1998 and 1997, the Corporation incurred servicing fees of
$13,506 and $1,500.
For 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 years ended December 31, 1998 and 1997 totaled
approximately $48,000 and $41,000.
The Company paid rent to an affiliated company in the amount of $11,459 during
the year ended December 31, 1998.
NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS IN ACCORDANCE
WITH THE REQUIREMENTS OF SFAS NO. 107
The Corporations financial instruments consist of all of its assets and
liabilities with the exception of other real estate and deferred financing
costs.
The Corporations 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
Corporations mortgage portfolio.
NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS IN ACCORDANCE
WITH THE REQUIREMENTS OF SFAS NO. 107 (CONTINUED)
The Corporations note obligations are not traded on an established market and
the only activity with respect to the obligations are normal, scheduled
redemptions. The Corporations 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 M - CLASSIFICATION OF MORTGAGE PORTFOLIO IN ACCORDANCE
WITH THE REQUIREMENTS OF SFAS NO. 115
The Corporations 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 J, the carrying value
of the mortgage portfolio has been determined by the Corporations management to
be equivalent to its carrying cost.
NOTE N - SUBSEQUENT EVENTS
In February 1999, the Corporation received $50,000 in full payment of the note
receivable - affiliate.
FEDERAL MORTGAGE MANAGEMENT II, INC.
NOTES TO FINANCIAL STATEMENTS
