131
18
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
FORM 10-KSB
( X ) Annual Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934.
For the Year Ended December 31, 1998
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from __________ to __________.
Commission File Number: 333-06328
STERLING FINANCIAL SERVICES OF FLORIDA I, INC.
(Exact name of Registrant as specified in its Charter)
FLORIDA 65-0716464
(State of or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
239 Halliday Park Drive, Tampa, Florida 33612
Address of Principle Executive Offices:
(813) 932-2228
Registrant's telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by 7 Section 13 or 15(d) of the Securities Exchange act of 1934
during the preceding 12 months (or for such other shorter period that the
registrant was required to file such reports), and (20 has been subject to such
filing requirements for the past 90 days. ___ Yes _X_No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by referencing Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. _____
Issuer's revenues for the most recent fiscal year: $416,439.00
The aggregate market value of the voting stock held by non-affiliates of the
registrant at December 31, 1998 was $0. Shares of common stock held by each
officer and director and by each person who owns more that 5% of the outstanding
common stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of July 31, 1999.
1,000 Common Shares
Documents Incorporated By Reference - NONE
Transitional small business disclosure format. ___ Yes _X_No
Sterling Financial Services of Florida I, Inc.
FORM 10 - KSB
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Table of Contents
PART I.
ITEM 1. Business 2
ITEM 2. Properties 11
ITEM 3. Legal Proceedings 11
ITEM 4. Submission of Matters to a Vote of 11
Security Holders
PART II
ITEM 5. Market for the Common Equity and
Related Stockholder Matters 12
ITEM 6. Management's Discussion and Analysis
of Financial Condition and Results
of Operations (including Year 2000 12
issue and Cautionary Statement)
ITEM 7. Financial Statements 17
ITEM 8. Changes In and Disagreements With 32
Accountants on Accounting and
Financial Disclosures
PART III
ITEM 9 Directors, Executive Officers,
Promoters and Control Persons;
Compliance with Section 16(a) of the 32
Exchange Act
ITEM 10 Executive Compensation 33
ITEM 11 Security Ownership of Certain 33
Beneficial Owners and Management
ITEM 12 Certain Relationships and Related 34
Transactions
ITEM 13 Exhibits, Financial Statement 35
Schedules and
Reports on Form 8-K
Signatures 36
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PART I.
ITEM 1 - BUSINESS
Sterling Financial Services of Florida I, Inc. (the "Corporation") was
formed in January 1997 under the laws of the State of Florida primarily to offer
a package of financial services to the sub-prime mobile home industry, including
originating, purchasing and refinancing for its own account retail mobile home
installment sales contracts (the "Contracts") created in connection with the
financing of used as well as new mobile homes (the "Homes"), selling Contracts
to other lenders and providing certain floor plan financing to mobile home
dealers (the "Dealers") (collectively, the "Financing Activities"). In addition,
the Corporation may also (1) purchase, refurbish and lease or sell new or used
Homes; (2) buy and improve land for development of mobile home parks, buy and
sell such parks or provide financing to others for such purposes; and (3)
purchase other sub-prime financial companies in the mobile home lending business
(collectively, the "Other Activities").
Prior to June 30, 1999 (when the offering terminated), the Corporation was
offering subscriptions for a maximum $9,900,000 of secured notes payable in the
principal amount of $1,000 each (the "Notes"). The Notes provide for monthly
interest payments at the rate of 10.5% per annum, and are payable in full on
June 30, 2002. During the respective periods ended December 31, 1998 and 1997,
the Corporation sold $4,362,000 and $1,612,000 of Notes. Subsequent to December
31, 1998, and through June 30, 1999, the Corporation sold additional Notes for
$3,844,000. Accordingly, in total the Corporation sold $9,818,000 of Notes.
The Corporation is using the proceeds from the sale of the Notes to fund
its Financing and Other Activities, and its operating losses. The Notes are
secured by a first lien on the assets acquired with the proceeds of the offering
or other assets acquired with funds obtained from the repayment, sale or
refinancing or such assets (these assets are collectively referred to as the
"Collateral"). The primary source of payment on the Notes will be payments made
by sub-prime borrowers on the Contracts (see Mobile Home Finance Industry -
Sub-Prime Market Segment for definition of a sub-prime borrower).
It was initially anticipated that approximately 85% of the Corporation's
business would involve originating and refinancing Contracts created in
connection with the financing of primarily used as well as some new Homes. The
Corporation intended to originate Contracts, as opposed to purchasing Contracts
at a discount from Dealers or others. As a secondary activity, not anticipated
to exceed approximately 15% of the Corporation's business was the Corporation's
intent to provide certain floor plan financing to mobile home dealers. In
addition, from time to time, it was anticipated the Corporation would
participate in Other Activities. Notwithstanding such parameters, most the of
the Corporation's outstanding finance receivables have been purchased from
dealers at a discount.
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In addition, in August 1998, the Corporation purchased a 25% interest in
Parkwood Estates Mobile Home Park, L.C. ("Parkwood"). Parkwood, which is related
to the Corporation by virtue of Anthony Sutter's 75% ownership interest in
Parkwood (Mr. Sutter is the Corporation's President and majority stockholder).
used these funds to purchase Parkwood Estates Mobile Home Park, a mobile home
park located in Hillsborough County, Florida (the "Park").
Risk Factors
An investment in the Notes involves various risks, including the following:
o Because most of the borrowers under the Contracts are considered
sub-prime, the risk of default on the Contracts is greater than if the
Corporation originated Contracts with "A" or prime credit borrowers.
o Over the past several years, lenders to sub-prime borrowers have
experienced increased rates of delinquency, default and credit losses.
o There are various conflicts of interest resulting from the
relationship between the Corporation and Sterling Financial
Services, Inc., a Florida corporation
(the "Servicing Company").
o Increased competition in the sub-prime mobile home finance business and
deviations from credit underwriting guidelines could result in the
Corporation originating Contracts with a greater risk of loss. Although
the Corporation has established certain guidelines with minimum
acceptable criteria for Contract origination, there is no limitation
upon the number of Contracts which can deviate from these guidelines.
o The Corporation has experienced negative interest income and net
operating losses since its inception; these losses are being funded
from proceeds generated from the sale of the Notes.
o There are limited sources available for the payment of interest and
principal on the Notes.
o The value of the Collateral will be less than the principal due on the
Notes.
o No public or other market for the Notes exists and there can be no
assurance that one may develop in the future.
o The success of the Corporation will, to a large extent, depend on the
quality of services provided by Mr. Sutter and the Servicing Company's
employees. The Corporation does not have an employment contract with
Mr. Sutter and the loss of his services could materially adversely
affect the business of the Corporation.
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MOBILE HOME FINANCE INDUSTRY
Sub-Prime Market Segment
The Corporation operates in the sub-prime segment of the mobile home
finance market, focusing on financing homes sold to sub-prime borrowers. A
sub-prime borrower is a purchaser of a home who does not qualify for traditional
A or prime credit, which in general means that the borrower does not have all of
the following characteristics: (i) a long credit history and no defaults, (ii)
at his/her current job for at least 18 months, (iii) can easily finance a Home
through a traditional financial institution, such as a bank, (iv) usually a
homeowner, and (v) typical risk of loan loss is less than 3% and whose typical
cost of credit is prime plus 1% to 3%. Sub-prime borrowers are generally rated
"B," "C" or "D" based upon the degree of variance from the foregoing
characteristics.
It has been management's experience that lenders to sub-prime borrowers
impose interest rates significantly higher than lenders to prime borrowers. To
the extent this interest rate differential continues, Contracts financed in the
sub-prime market segment will have the potential for higher yields, but, because
sub-prime borrowers are not as creditworthy as prime borrowers, these Contracts
also present greater risk of default and loss. Accordingly, the net yield on
sub-prime contracts may be less than that on prime contracts.
Competition
Although there is some competition in the mobile home finance business,
the Corporation believes that there are few competitors providing financing to
sub-prime purchasers of Homes. The sub-prime market is highly fragmented and, to
date, is served by only a few non-traditional consumer finance sources. Because
the Corporation provides financing to borrowers who do not qualify for
traditional financing, the Corporation does not believe that it competes with
most commercial banks, savings and loans, credit unions and other consumer
lenders that apply more traditional lending criteria to the credit approval
process. Historically, these traditional sources of mobile home financing (some
of which are larger and have significantly greater financial resources) have not
served the Corporation's sub-prime market segment to any significant extent.
However, if these and other companies expand their activities in the market
served by the Corporation, the competition for suitable Contracts in that market
will continue to intensify, which could have an adverse effect on the
Corporation.
In connection with the origination of Contracts, the Corporation will
encounter competition from persons or entities that may have objectives similar
in whole or in part to those of the Corporation. These competitors may be
substantially better financed, and have reputations and public awareness of
their operations that are more widely known and accepted. The pressure of such
competition may require that the Corporation pay more for Contracts it
originates or purchases, or result in the Corporation originating Contracts of
lesser quality, which could reduce or eliminate payments to Note Holders.
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ORIGINATION AND SERVICING OF CONTRACTS
The Corporation has engaged the Servicing Company to provide all services
in connection with Contract origination and servicing. The agreement may be
terminated by either party without cause upon 15 days' notice. Because the
Servicing Company must operate within the guidelines established by the
Corporation, all management and operational decisions made by the Servicing
Company will be the same as would be made if the Corporation made such decisions
directly. A description of the guidelines of the Corporation is set forth below.
No funds of the Corporation are deposited or kept in any account commingled with
funds of the Servicing Company or any other person or entity. See "Business -
Relationship with Servicing Company."
Origination
The Servicing Company will contact borrowers as well as park owners and
Dealers to advise them of the Corporation's program for Contract origination. In
addition, print advertising directed at individual borrowers may be used. The
Corporation does not anticipate that it will be dependent upon one or a few park
owners or Dealers for identifying potential borrowers. Also, the Corporation
anticipates that park owners, Dealers or potential borrowers will contact the
Corporation regarding the availability of financing, and the Corporation will
make a credit application available directly to the borrower.
When the credit application from the borrower is received, an investigator
will review the application and obtain the applicant's credit bureau and other
information.
Contract origination guidelines include the following minimum acceptable
criteria:
o Employment history - at least six months on the job;
o Income - depends on the amount of the loan and the debt to income
ratio of the borrower (see below);
o Time at residence - at least one year at current residence;
o Debt to income ratio - personal debt cannot exceed 50% of the borrower's
net income;
o Bankruptcy - all debts must have been fully discharged at least one
year prior to application for the loan;
o Child support - if the borrower is paying child support, it will be
treated as a personal debt and factored into the debt to income ratio;
if the borrower is receiving child support, such income will only be
considered if court mandated;
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o Repossessions - must have occurred at least one year prior to
application for the loan;
o Liens/judgments - will be decided on a case-by-case basis, depending on
the type of lien or judgment, the amount involved and the age thereof;
o Previous delinquencies, collections and charge-offs - will be decided
on a case-by-case basis with consideration taken for mitigating
circumstances, such as divorce, disability, extended illness or layoff
due to downsizing; and
o Co-buyers and co-signers - will also be subject to the minimum
acceptable criteria set forth above.
There are no fixed criteria pursuant to which material deviation of these
guidelines will be permitted. However, no Contract will be originated to a
borrower deviating from these guidelines for which there is not an increased
down payment or a co-signer meeting the guidelines, or both. The additional down
payment required will increase with the increase in deviation from the
guidelines, although there is no fixed formula for determining the amount of
increased down payment required.
Prior to the origination of the Contract, the Corporation reviews the
financing to determine the following: (i) all required documentation has been
included, (ii) the math is correct, (iii) regulatory requirements have been
satisfied, (iv) the amount financed does not exceed the maximum loan allowed,
and (v) any conditions imposed have been satisfied. The Corporation will contact
the insurance carrier to confirm insurance.
Servicing
Billing. The Servicing Company generates monthly statements which are
sent to the borrower.
Collections. The Corporation has established certain collection
guidelines, which guidelines will not necessarily be followed in all
cases and which are subject to modification at any time.
When a delinquency occurs, a collector will make a call by the eleventh
day of the delinquency. If no response is received, a Notice of Default Letter
will be sent to the borrower on the sixteenth day. If the account has still not
been brought current, a collector will personally visit the delinquent borrower.
If the borrower is unable to make all required payments on a current basis, a
collector may make reasonable payment arrangements to cure the delinquency. If
all of these collection processes are not successful, the repossession process
commences immediately.
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Repossessions and Resale Department. Either the borrower voluntarily
agrees to vacate the Home, or an attorney is contacted by the Corporation to
effect an involuntary repossession. All costs associated with the repossession
are an obligation of the borrower. To effect an involuntary repossession, in
general, the borrower is first given written notice of intent to repossess, and
a period of time, generally five days, to cure all defaults. If the defaults are
not cured within said time period, a complaint is filed and a judgment obtained.
After the judgment is obtained, a writ of possession is obtained and given to
the appropriate law enforcement agencies, who evict the borrower from the Home.
The Home will be renovated as necessary and sold in its then current location,
if possible, or moved to a Dealer's lot or another park for resale.
Laws limiting or prohibiting deficiency judgments, Federal bankruptcy laws
and numerous other related federal and state laws may interfere with or affect
the ability of a secured party to repossess Collateral and/or to enforce a
deficiency judgment. For example, in a Chapter 13 proceeding under the Federal
Bankruptcy Code, a court may prevent a lender from repossessing a mobile home,
and, as part of the rehabilitation plan, reduce the amount of the secured
indebtedness to the market value of the Home at the time of bankruptcy, leaving
the lender as a general unsecured creditor for the remainder of the
indebtedness. A bankruptcy court may also reduce the monthly payments due under
a Contract or change the rate of interest and time of repayment of the
indebtedness. This may limit the Corporation's ability to receive full payments
on a Contract; to or repossess collateral in the event of default under a
Contract, which may decrease funds available to make payments on the Notes.
SALE OF CONTRACTS
The Corporation may from time to time sell blocks of Contracts (the "Sale
Contracts") which it originates to other lenders. The Corporation does not
anticipate selling such Contracts until at least twelve (12) months after the
origination date. No such sales have occurred as of the date of this Form
10-KSB.
FLOOR PLAN FINANCING
The Corporation provides financing to Dealers for Homes held for resale to
Home purchasers (called floor plan financing). The Corporation anticipates that
the financing will be at effective interest rates ranging from 14% to 24% (the
A.P.R. may be less, but the effective rate includes additional interest payments
in the form of points or similar charges allowed by law). Advances under floor
plan arrangements are secured by the mobile home purchased with the proceeds of
the borrowing and generally are due on the earlier of the date the Home is sold
or six months from the inception of the advance.
OTHER ACTIVITIES
The Corporation may also: (1) purchase, refurbish and lease or sell new or
used Homes; (2) buy and improve land for development of mobile home parks, buy
and sell such parks or provide financing to others for such purpose; and (3)
purchase other sub-prime financial companies in the mobile home lending
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business. In connection therewith, in 1998 the Corporation purchased a 25%
interest in Parkwood Estates Mobile Home Park, L.C. ("Parkwood") which owns a
mobile home park in Hillsborough County, Florida (the Corporation's majority
stockholder and President owns the remaining 75% of Parkwood). In addition, the
Corporation has purchased a significant amount of new home inventories, which
they are selling substantially at this park. Finally, the Corporation owns and
rents Homes located in the Halliday Village Mobile Home Park (which is
wholly-owned by the Corporation's majority stockholder and President). The
Corporation anticipates that it may continue to engage in such activities if it
becomes aware of favorable opportunities.
MARKETING
The Corporation anticipates that it will not have to engage in any
significant marketing activities because of the anticipated high demand for the
financing it provides and the lack of significant competition to provide such
financing. However, the Corporation intends to contact Dealers throughout
Florida to advise them of the availability of the Corporation's financing
program.
MARKET AREA
There are a large number of Home purchases in Florida and there is
significant wealth in Florida because of the nature and size of the population.
The Corporation believes that Florida currently benefits from a strong economy.
According to the Florida Chamber of Commerce, Florida is the fourth largest
consumer market in the U.S. In 1993, Florida's population was over 13.4 million,
with approximately 70% of new arrivals in the 18 to 44 age bracket. Florida
emerged as a major economic force in the U.S. in the 1980's. By the end of the
decade, Florida had become the nation's leader in major new plant locations or
expansions. In addition, Florida has consistently been a pacesetter in new
business incorporation, and has the largest number of manufacturing plants in
the Southeast. Numerous economists predict moderate but continued steady growth
in Florida's economy.
However, because the Corporation has limited its operations to Florida, a
downturn in the Florida economy could adversely affect the Corporation's results
of operations inasmuch as the creditworthiness of the Corporation's borrowers
and/or prospective borrowers could be impaired. Although the Corporation
believes Florida's economy will continue to grow, there can be no assurance this
will occur. The resulting lack of diversity in the geographic area in which the
Corporation operates may increase the risk of loss to the Corporation and the
Note Holders because adverse economic conditions which may occur in Florida but
not elsewhere in the country will have a greater adverse affect on the
Corporation's operations, and thus its ability to make payments on the Notes
than if the Corporation operated in a broader geographic area.
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CHANGES IN PROGRAMS, PRODUCTS, POLICIES AND PROCEDURES
Factors such as increased competition in the industry and other industry
trends described above, as well as other reasons, may cause the Corporation from
time to time to review and change its financing programs, products and services
offered, and other business policies and procedures. To the extent there are
future changes in these areas, the Corporation may originate Contracts or be
subject to other circumstances which may increase the risk of loss to Note
Holders. The Corporation will continually review these areas and reserves the
right to change any criteria related thereto described herein or otherwise as it
deems appropriate.
CONSUMER FINANCE LAWS AND REGULATIONS
The Corporation's business activities, particularly its Financing
Activities, are subject to regulation and licensing under various Federal,
Florida and local consumer finance statutes, regulations and ordinances. These
laws, rules and regulations: (i) govern the way the Corporation can operate;
(ii) limit the interest rate and other charges that may be imposed by, or
prescribe certain other terms of, the Contracts that the Corporation originates;
and (iii) define the Corporation's rights to repossess and sell Collateral. If
the Corporation fails to comply with these laws and regulations, it could be
required to cease operations or be subject to fines and penalties, and borrowers
under the Contracts could have civil remedies against the Corporation and
defenses under the Contracts which could adversely affect the Corporations
ability to enforce its rights and collect payment of sums due thereunder, all of
which could eliminate or reduce the Corporation's cash flow and thereby its
ability to make payments on the Notes. Also there is no assurance laws and
regulations under which the Corporation operates will not become more
restrictive; this could reduce the Corporation's cash flow and thereby its
ability to make payments on the Notes.
RELATIONSHIP WITH SERVICING COMPANY
Servicing Agreement
The Corporation has entered into a Servicing Agreement with the Servicing
Company, to provide all services in connection with Contract origination and
servicing. The Servicing Agreement is for an initial term commencing January 1,
1997 through June 30, 2002, after which date it may be extended at the sole
discretion of the Corporation upon such terms and conditions and for such
periods as mutually agreed between the Corporation and the Servicing Company.
Either party may terminate the Servicing Agreement for any reason upon 15 days'
advance notice.
Because the Servicing Company must operate within the guidelines
established by the Corporation, all management and operational decisions made by
the Servicing Company will be the same as would be made if the Corporation made
such decisions directly. No funds of the Corporation are deposited or kept in
any account commingled with funds of the Servicing Company or any other person
or entity.
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The Corporation will pay the Servicing Company an amount equal to all
expenses of the Servicing Company computed on an accrual basis ("Actual Costs")
plus twenty percent (20%) of Actual Costs for services rendered, except that if
the Servicing Company provides similar services to other entities, the
Corporation will pay the Servicing Company: (i) for any out-of-pocket cash
expenditures, such as attorneys' fees and court costs incurred in connection
with origination and servicing of the Corporation's Contracts (the "Direct
Expenses"), and (ii) for their pro-rata amount of Actual Costs less Direct
Expenses - with such pro-ration based upon the ratio of the total number of
Contracts held by each entity to the total number of Contracts held by all
entities.
It was anticipated that the Corporation would loan up to $75,000 to the
Servicing Company for the purchase and/or lease of office space, office
equipment, trucks and automobiles, however to date this transaction has not been
consummated. In the event such a transaction occurs, the Corporation anticipates
that it will repay any advanced funds in equal monthly installments of principal
and interest at the rate of 10.5% per annum, with the final payment due on June
30, 2002.
Reason for Using the Servicing Company
A separate servicing company was formed for administrative convenience. It
is anticipated that additional employees will need to be hired to perform
servicing functions for the Corporation. In addition, if affiliated entities are
formed, the same employees performing servicing functions for the Corporation
would perform similar servicing functions for such entities. If there were no
separate servicing company, such employees would be considered to be employees
of the Corporation and the affiliated entities, requiring separate paychecks and
related income tax filings and deposits to be made by each separate entity.
Conflicts of Interest
Anthony A. Sutter, the sole officer and director of the Corporation and
the Servicing Company, may engage for his own account, or for the account of
others, including the affiliated entities, in other business ventures, some of
which may have the same investment objectives as the Corporation, and therefore
compete with the Corporation.
To the extent the Corporation competes with other businesses, including
affiliated entities, competition for origination of suitable Contracts would
intensify, which could have an adverse effect on the Corporation because the
Corporation may originate Contracts with a greater risk of loss, which could
adversely affect the Note Holders by reducing the funds available to make
payments on the Notes and the value of the Collateral.
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This competition for origination of Contracts creates a potential conflict
of interest because it is anticipated that the Servicing Company, which is
responsible for originating Contracts, will provide similar origination services
to any affiliated entities formed by Mr. Sutter or his affiliates which are
engaged in businesses similar to that of the Corporation. An additional conflict
of interest with respect thereto exists because the Corporation and Servicing
Company are both managed by Mr. Sutter. Accordingly, there is no assurance that
decisions concerning Contract origination and other matters will be made which
more favorably impact the Corporation than the affiliated entities, increasing
the risk of default on the Notes.
In order to minimize the foregoing conflicts of interest, the Corporation
and the Servicing Company have agreed that if the Corporation and affiliated
entities both have funds available for Contract origination, Contracts will be
originated on an alternating basis, meaning first the Corporation will originate
a Contract, then the affiliated entities will originate a Contract (or Contracts
if there is more than one affiliated entity with funds available), then the
Corporation will originate a Contract, and so on.
EMPLOYEES
As of December 31, 1998, there was only one (1) employee of the
Corporation, Mr. Sutter. Management of the Corporation and the employee
are the same individual. Mr. Sutter is not represented by a collective
bargaining agreement nor is he bound by an employment agreement (see Business
- - Risk Factors).
ITEM 2 - PROPERTIES
The Corporation's executive offices are located at 12408 North Florida
Avenue, Tampa, Florida. Prior to April 1998, the office was leased from Halliday
Village Mobile Home Park, Inc., an entity wholly owned by the Corporation's
majority stockholder and President under an informal arrangement requiring
monthly rent of $2,200. Subsequent to April 1998, the Corporation's rent was
paid by the Servicing Company, and accordingly, such expenses are paid to the
Servicing Company in accordance with the Servicing Agreement between the
Corporation and the Servicing Company.
ITEM 3 - LEGAL PROCEEDINGS
NONE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
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PART II.
ITEM 5 - MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
NONE
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Corporation is primarily in the business of originating and purchasing
retail mobile home installment sales contracts created in connection with the
financing of manufactured homes. The Corporation also owns and rents mobile
homes, located in the Halliday Village Mobile Home Park, a related party by
virtue of common ownership, ("Halliday") and has a 25% ownership interest in
Parkwood which was formed in 1998 for the purpose of purchasing, and leasing
Parkwood Estates Mobile Home Park in Hillsborough County, Florida (the "Park").
The Corporation's operations are located in Tampa, Florida and substantially all
of its customers are Florida residents.
Readers are referred to the cautionary statement, which addresses
forward-looking statements made by the Corporation.
RESULTS OF OPERATIONS
The Corporation generated revenues of $416,439 and $25,449, respectively
during the year ended December 31, 1998 and the period January 3, 1997 (date of
inception) to December 31, 1997 (the Corporation was considered to be a
development stage enterprise through December 31, 1997). Because the Corporation
did not have significant revenues during its development stage, this analysis
does not include any additional discussion on such revenues. Revenues generated
in 1998 resulted substantially from interest and fees of approximately $276,000.
This amount consisted of interest and fees earned on finance receivables of
approximately $153,000, interest earned on cash equivalents of approximately
$72,000, interest and fees earned on mobile home floor plan receivables of
approximately $48,000 and interest earned on affiliate receivables of
approximately $3,000 (interest income on cash equivalents was significant
because of the lag time between the receipt of proceeds from sale of the Notes
and the date the funds were invested in finance and/or other interest bearing
receivables). In addition to interest and fee revenues, the Corporation
generated approximately $93,000 of rental revenues from the rental of mobile
homes owned by the Corporation, and $35,000 of revenues from the sale of a
mobile home.
During the year ended December 31, 1998 and the period January 3, 1997
(date of inception) to December 31, 1997, the Corporation incurred expenses of
$1,188,696 and
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$176,986, respectively, an increase of 85%. These expenses related
substantially to interest paid on the Notes and management fees paid under the
aforementioned Servicing Agreement.
Interest expense increased by 85% from approximately $72,000 for the
period ended December 31, 1997 to approximately $481,000 for the year ended
December 31, 1998. These amounts consisted of interest on the Notes of
approximately $387,000 and $49,000, respectively (an increase of 87%) and
amortization of deferred debt issuance costs of approximately $94,000 and
$23,000, respectively (an increase of 75%). The deferred debt issuance costs
arose from commissions and other costs incurred in selling the Notes. The
significant increase in interest expense resulted from the corresponding
increase in the balances of the Notes.
Management fees increased by 86% during the year ended December 31, 1998
in comparison to the preceding fiscal period. The increase from approximately
$62,000 to approximately $442,000 resulted because the Servicing Company
required additional personnel and expenses to originate and service the
Corporation's finance and mobile home floor plan receivables, as well as manage
the Corporation's operations.
Occupancy and equipment expenses increased by 83% during the year ended
December 31, 1998 in comparison to the preceding fiscal period. The increase
from approximately $24,000 to approximately $143,000 resulted substantially from
the increase in property and equipment, including rental homes purchased and/or
improved by the Corporation. In 1997, such expenses consisted substantially of
lot and office rent of approximately $15,000 and depreciation of approximately
$6,000. During the year ended December 31, 1998, lot and office rent, and
depreciation expense increased to $95,000 (an increase of 84%) and $21,000 (an
increase of 71%), respectively, and the Corporation incurred approximately
$26,000 of repairs and maintenance expense. With respect to the Corporation's
rental homes, the Corporation rents lot space from Halliday. In connection
therewith, the Corporation paid lot rent of approximately $86,000 to such
affiliate in 1998. In addition, prior to April 30, 1998, the Corporation rented
its administrative offices from Halliday for approximately $2,200 per month.
Subsequently, the Corporation paid such expense to the Servicing Company in
accordance with the aforementioned Servicing Agreement - see Certain
Relationships and Related Transactions.
The December 31, 1998 results of operations also included recognition of
the Corporation's loss of approximately $14,000 in Parkwood. This amount
represents 25% (the Corporation's ownership percentage) of the total loss
generated by Parkwood during its initial period of operations - see Certain
Relationships and Related Transactions.
The only other expense of significance in 1998 (there were none of
significance in 1997) resulted from the cost of a Home sold by the Corporation.
The Corporation generated a 30% profit margin on the sale of the Home and it is
anticipated that sales, and related cost of sales, of Homes will result in a
substantial portion of operating revenues and expenses in future years.
13
<PAGE>
The net losses incurred during the respective periods ended December 31,
1998 and 1997 were $772,257 and $151,537, respectively. The losses arose
substantially because the Corporation's revenue generating assets did not
provide sufficient income to cover fixed expenses arising substantially from
interest on the Notes, and management fees paid in connection with the
origination and servicing of the Contracts.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities used $1,024,227 and $126,174 of cash during the
respective periods ended December 31, 1998 and 1997. The cash was used primarily
to fund the net losses for such periods less certain non-cash expenses (e.g.
depreciation and amortization of deferred debt issuance costs) and certain
accrued expenses which did not require the outlay of cash during the reporting
periods. In addition, during the year ended December 31, 1998, the Corporation
had an increase in mobile home inventories of approximately $422,000
(representing an increase of 97%). The Corporation anticipates that most of
these inventories will be sold at the Park.
The Corporation's investing activities used $2,190,372 and $461,871 of
cash during the respective periods ended December 31, 1998 and 1997. Most of
this cash was used as a result of the net change in finance and floor plan
receivables of approximately $1,502,000 and $283,000 (an increase of 81%) for
the respective periods ended December 31, 1998 and 1997. At December 31, 1998,
finance receivables had terms of 5 to 30 years and interest rates ranging from
12.9% to 17.9%. The Corporation is attempting to limit its exposure to interest
rate spread by investing funds in finance and floor plan receivables as proceeds
are received from the Notes since the cost of the funds is significantly higher
than the yield on cash and cash equivalents. In addition, as mentioned above,
during the year ended December 31, 1998, the Corporation purchased a 25%
interest in Parkwood for $561,606, and advanced $55,000 to Parkwood for cash
flow needs. This advance resulted from an arrangement between the Corporation
and Parkwood whereby the Corporation has agreed to loan Parkwood up to $350,000
to fund its cash flow needs. Advances under the arrangement accrue interest at a
fixed rate of 12.9%, are unsecured and have no specified repayment terms.
Finally, cash used for the purchase and/or improvement of property and equipment
increased by 46% from approximately $103,000 for the fiscal period ended
December 31, 1997 to approximately $179,000 for the year ended December 31, 1998
(including capital expenditures of approximately $83,000 and $156,000,
respectively relating to rental homes owned by the Corporation).
Cash used by operating and investing activities was funded by financing
activities which generated net cash inflows of $3,681,072 and $1,404,478 during
the respective periods ended December 31, 1998 and 1997. This cash was generated
from the sale of the Notes (resulting in net cash proceeds of approximately
$3,926,000, and $1,416,000, respectively, an increase of 64%, after payment of
deferred debt issuance costs). Through June 30, 1999 (the termination date of
the offering), the Corporation was offering subscriptions for a maximum of 9,900
Notes in the principal amount of $1,000 each. The Notes bear simple interest at
14
<PAGE>
10.5% (interest payable monthly) and are payable in full on June 30, 2002. At
December 31, 1998, the Corporation had sold $5,974,000 of Notes; subsequently,
additional Notes of $3,844,000 were sold. Accordingly, the Corporation sold
$9,818,000 of Notes or approximately 99% of the Notes initially offered to the
public. Because debt issuance costs approximated 10% of the Notes sold, net
proceeds to the Corporation approximated $8,800,000 in total.
The net impact of the above operating, investing and financing activities
was that cash and cash equivalents increased by 42% from $466,473 to $816,433
during the respective periods ended December 31, 1998 and 1997.
The Corporation believes that it will be able to satisfy its cash
requirements for the foreseeable future if it does not expand its business by
originating additional finance receivable contracts. However, in order for the
Corporation to continue to expand its Dealer base and portfolio of finance
receivable contracts, and to ultimately pay the Notes in full, the Corporation
will have to generate significant cash from operations and/or secure additional
capital resources (e.g. other debt or equity). No assurance can be given that
the Corporation will be able to generate profitable results of operations or
that additional capital resources will be available or available on reasonable
terms. Also, if the Corporation is unable to originate receivable contracts in
an amount and at a pace that approximates the amount and the pace that capital
is raised through the sale of the Notes, the Corporation's deficit would be
expected to increase as the interest earned on the capital raised will not be
sufficient to cover the cost of the interest on the Notes.
YEAR 2000 ISSUE
Many software applications and operational programs written in the past
were not designed to recognize calendar dates beginning in the Year 2000. The
failure of such applications or systems to properly recognize the dates
beginning in the Year 2000 could result in miscalculations or system failures
which could result in an adverse effect on the Corporation's operations.
The Corporation does not currently utilize any critical date sensitive
systems. Although many of the Corporation's transactions rely on date sensitive
calculations, such calculations are currently being performed either manually or
using off the shelf spreadsheet programs. However, the Corporation is currently
involved in installing a new PC based server and accounting application, which
is represented to be Year 2000 compliant.
The Corporation has not incurred any costs to date related to Year 2000
compliance nor does it believe that its cost of conversion will be significant
because of the installation of new systems that are represented to be fully Year
2000 compliant. The Corporation believes the costs to transition its remaining
systems to Year 2000 compliance will not have a material effect on its financial
position or results of operations.
15
<PAGE>
The Corporation has not deferred any information technology projects to
address the Year 2000 issue. In addition to internal Year 2000 activities, the
Corporation will communicate with others with which their systems interface or
on which they rely to determine the extent to which those companies are
addressing their Year 2000 compliance. There can be no assurance that there will
not be an adverse effect on the Corporation, if third parties, such as utility
companies or mobile home suppliers, do not convert their systems in a timely
manner and in a way that is compatible with the Corporation's systems. However,
management believes that ongoing communication with, and assessment of, these
third parties will minimize these risks. Although the Corporation anticipates
minimal business disruption will occur as a result of Year 2000 issues, possible
consequences include, but are not limited to, loss of electric power, inability
to process transactions or engage in similar business activities.
To date, the Corporation has not established a contingency plan for
possible Year 2000 issues. Where needed, the Corporation will establish
contingency plans based on assessment of outside risks and actual testing
experience with suppliers. It is not anticipated that a contingency plan will
need to be developed as manual processes mitigate outside risks. The cost of the
conversion and the completion dates are based on management's best estimates and
may be updated, as additional information becomes available.
CAUTIONARY STATEMENT
This Form 10-KSB, press releases and certain information provided
periodically in writing or orally by the Corporation's officers or its agents
contain statements which constitute forward-looking statements within the
meaning of Section 27A of the Securities Act, as amended and Section 21E of the
Securities Exchange Act of 1934. The words expect, anticipate, believe, goal,
plan, intend, estimate and similar expressions and variations thereof if used
are intended to specifically identify forward-looking statements. Those
statements appear in a number of places in this Form 10-KSB and in other places,
particularly, Management's Discussion and Analysis of Financial Condition and
Results of Operations, and include statements regarding the intent, belief or
current expectations of the Corporation, its directors or its officers with
respect to, among other things: (i) the Corporation's liquidity and capital
resources; (ii) its financing opportunities and plans and (iii) its future
performance and operating results. Investors and prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those projected in the forward-looking statements as a
result of various factors. The factors that might cause such differences
include, among others: (i) any material inability of the Corporation to
successfully identify, consummate and integrate the acquisition of finance
receivables at reasonable and anticipated costs, (ii) any material inability of
the Corporation to successfully develop its products; (iii) any adverse effect
or limitations caused by governmental regulations; (iv) any adverse effect on
the Corporation's continued positive cash flow and ability to obtain acceptable
financing in connection with its growth plans; (v) any increased competition in
business; (vi) any inability of the Corporation to successfully conduct its
business in new markets; and (vii) other risks including those identified in the
16
<PAGE>
Corporation's filings with the SEC. The Corporation undertakes no obligation to
publicly update or revise the forward looking statements made in this Form
10-KSB, to reflect events or circumstances after the date of this Form 10-KSB or
to reflect the occurrence of unanticipated events.
Impact of Inflation and Changing Prices
Because the Corporation's Notes bear interest at fixed rates, increased
costs of borrowed funds would not be expected to have a material adverse impact
on the Corporation's results of operations unless alternative source of
financing are required. In this case, inflationary increases could result in
higher interest rates which could have a material adverse impact on the
Corporation's ability to grow its business. In addition, inflation could also
adversely affect the Corporation's operating expenses.
ITEM 7 - FINANCIAL STATEMENTS
STERLING FINANCIAL SERVICES OF FLORIDA I, INC.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
Independent Auditors' Report 1
Financial Statements as of and for the year ended December 31, 1998 and for the
period January 3, 1997 (date of inception) to December 31, 1997:
Balance Sheets 2
Statements of Operations 3
Statements of Stockholders' Deficit 4
Statements of Cash Flows 5
Notes to Financial Statements 6
- --------------------------------------------------------------------------------
17
<PAGE>
(Letterhead of Beard, Nertney, Kingery, Crouse & Hohl, P.A.)
18
<PAGE>
131
42
INDEPENDENT AUDITORS' REPORT
To the Stockholders of Sterling Financial Services of Florida I, Inc.:
We have audited the accompanying balance sheets of Sterling Financial Services
of Florida I, Inc. (the "Company") as of December 31, 1998 and 1997, and the
related statements of operations, stockholders' deficit and cash flows for the
year ended December 31, 1998 and for the period January 3, 1997 (date of
inception) to December 31, 1997. 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 audits 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 the Company as of December 31,
1998 and 1997, and the results of its operations and cash flows for the year
ended December 31, 1998 and for the period January 3, 1997 (date of inception)
to December 31, 1997 in conformity with generally accepted accounting
principles.
As discussed in Notes D and G to the financial statements, there are significant
transactions with related parties. These transactions include, but are not
limited to, payment of management fees and advances to various affiliates.
Beard, Nertney, Kingery, Crouse & Hohl, P.A.
June 18, 1999
Tampa, FL.
19
<PAGE>
STERLING FINANCIAL SERVICES OF FLORIDA I, INC.
BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1998 1997
---- ----
ASSETS
Cash and cash equivalents $1,282,906 $ 816,433
------------ ------------
Receivables:
Finance - net
1,485,697 196,503
Mobile home floor plan
182,007 86,040
Affiliate
257,278 12,550
Interest and fees
8,920
------------ ------------
Total receivables 1,933,902 295,093
------------ ------------
Inventories 433,597 12,000
------------ ------------
Investment in and advances to Parkwood Estates
Mobile Home Park, L.C. (Related Party)
602,178
------------
Property and equipment - net 254,541 173,231
------------ ------------
Other assets:
Deferred debt issuance costs - net 514,999 172,856
Repossessed mobile homes 85,417
------------ ------------
Total other assets
600,416 172,856
------------ ------------
TOTAL $ 5,107,540 $1,469,613
============ =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES:
Secured notes payable $5,974,000 $1,612,000
Accrued and other liabilities 56,334 8,150
------------ ------------
Total liabilities 6,030,334 1,620,150
------------ ------------
STOCKHOLDERS' DEFICIT:
Common stock, no par value, 10,000
shares authorized; 1,000 shares issued
and outstanding
1,000 1,000
Deficit (923,794) (151,537)
------------ ------------
Total stockholders' deficit (922,794) (150,537)
------------ ------------
TOTAL $5,107,540 $1,469,613
============ ============
- --------------------------------------------------------------------------------
See notes to financial statements.
20
<PAGE>
STERLING FINANCIAL SERVICES OF FLORIDA I, INC.
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1998 AND FOR THE PERIOD JANUARY 3, 1997
(DATE OF INCEPTION) TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1998 1997
---- ----
REVENUES:
Interest and fee $ 276,144 $19,189
Rental 93,527 6,260
Mobile home sales 34,900
Other 11,868
------------ ------------
Total revenues 416,439 25,449
------------ ------------
OPERATING EXPENSES:
Interest expense 481,383 71,622
Management fees - Related Party 442,328 62,368
Occupancy and equipment 142,768 23,697
Professional Fees
40,602
Cost of mobile homes sold
24,692
Equity in loss of Parkwood Estates
Mobile Home Park, L.C. - Related Party
14,429
Other
42,494 19,299
------------ ------------
Total operating expenses 1,188,696 176,986
------------ ------------
NET LOSS $(772,257) $ (151,537)
============ ============
LOSS PER COMMON SHARE $(772.26) $(151.54)
============ ============
- --------------------------------------------------------------------------------
See notes to financial statements.
21
<PAGE>
STERLING FINANCIAL SERVICES OF FLORIDA I, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE PERIOD
JANUARY 3, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock
Shares Amount Deficit Total
----------- --------- ------------- ------------
<S> <C> <C> <C> <C>
Balances at January 3, 1997
(date of inception) 0 $ 0 $ 0 $ 0
Issuance of common stock 1,000 1,000 1,000
Net loss (151,537) (151,537)
----------- --------- ------------- ------------
Balances at December 31, 1997 1,000 1,000 (151,537) (150,537)
Net loss (772,257) (772,257)
----------- --------- ------------- ------------
Balances at December 31, 1998 1,000 $1,000 $ (923,794) $(922,794)
=========== ========= ============= ============
- --------------------------------------------------------------------------------
See notes to financial statements.
</TABLE>
22
<PAGE>
STERLING FINANCIAL SERVICES OF FLORIDA I, INC.
STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE PERIOD
JANUARY 3, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(772,257) $(151,537)
Adjustment to reconcile net loss to net cash
used by
Operating activities:
Depreciation 21,877 6,097
Amortization and write off of deferred
debt issuance costs 94,057 23,116
Equity in loss of Parkwood Estates Mobile
Home Park, L.C. 14,429
Increase in inventories (421,597) (12,000)
Increase in accrued and other liabilities 48,184 8,150
Increase in other receivables (8,920)
------------ ------------
NET CASH USED BY OPERATING ACTIVITIES (1,024,227) (126,174)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (103,187) (179,328)
Proceeds from sales of repossessed mobile
homes 31,506
Investment in and advances to Parkwood
Estates
Mobile Home Park L.C. (616,607)
Finance and floor plan receivables (1,722,543) (296,708)
originated and purchased
Repayments of finance and floor plan
receivables 220,459 14,165
------------ ------------
CASH USED BY INVESTING ACTIVITES (2,190,372) (461,871)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock
1,000
Proceeds from issuance of secured notes
payable 4,362,000 1,612,000
Increase in affiliate receivables (244,728) (12,550)
Cash paid for deferred debt issuance costs (436,200) (195,972)
------------ -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,681,072 1,404,478
------------ -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 466,473 816,433
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 816,433 0
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,282,906 $ 816,433
=========== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Interest paid $ 387,326 $ 48,506
============ =============
SUPPLEMENTAL DISCLOSURE NON-CASH INVESTING AND FINANCING ACTIVITIES - During the
year ended December 31, 1998, $116,923 of finance receivables were reclassified
to repossessed mobile homes when certain customers of the Company defaulted on
their finance and floor plan receivables.
- --------------------------------------------------------------------------------
See notes to financial statements.
23
<PAGE>
STERLING FINANCIAL SERVICES OF FLORIDA I, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE PERIOD
- --------------------------------------------------------------------------------
JANUARY 3, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997
NOTE A - FORMATION AND OPERATIONS OF THE COMPANY
Sterling Financial Services of Florida I, Inc. (the "Company") was incorporated
under the laws of the state of Florida on January 3, 1997. The Company, which
was in the development stage through December 31, 1997, is primarily engaged in
the business of originating and purchasing retail mobile home installment sales
contracts created in connection with the financing of manufactured homes. The
Company also owns and rents mobile homes located in the Halliday Village Mobile
Home Park, and has a 25% ownership interest in a mobile home park located in
Hillsborough County, Florida (see Note D). The Company's operations are located
in Tampa, Florida and substantially all of its customers are Florida residents.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Company's financial statements are prepared using the accrual method of
accounting.
Revenue Recognition
Interest income on finance receivables and fees charged on floor plan
receivables are recognized using the interest (actuarial) method. Unearned
finance charges are rebated to customers under the Rule of 78's method. The
difference between income previously recognized under the interest (actuarial)
method and the rule of 78's method is recognized as an adjustment to interest
income at the time of the rebate. Accrual of interest income on finance
receivables is generally suspended when no payment has been received for ninety
days; the accrual of income is not resumed until management believes such
interest is collectible.
Mobile home sales and related costs of mobile homes sold are recorded when the
closing has occurred and title has passed.
24
<PAGE>
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements. The
reported amounts of revenues and expenses during the reporting period may be
affected by the estimates and assumptions management is required to make.
Estimates from management that are critical to the accompanying financial
statements include the appropriate level or allowance for credit losses which
can be significantly impacted by future industry, market, and economic trends
and conditions.
Actual results could differ significantly from those estimates.
Financial Instruments
The Company believes the book value of their cash and cash equivalents, mobile
home floor plan and affiliate receivables, and accrued and other liabilities
approximates their fair values due to their short-term nature. In addition,
management believes the book value of their finance receivables and secured
notes payable approximates their fair values as the current interest rates on
such items approximate rates at which similar types of lending and/or borrowing
arrangements could be currently negotiated by the Company. Finally, management
believes the book value of their investment in Parkwood approximates its fair
value based on the results of an independent appraisal of the related mobile
home park. It was not practicable to estimate the fair value of the advances to
Parkwood due to the lack of similar type arrangements in the marketplace, and
because of the uncertainty surrounding the date the receivables will be
recovered.
Finance Receivables
Finance receivables, that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff, are reported at their
outstanding unpaid principal balances, reduced by any charge-off or specific
valuation accounts and net of any deferred fees or costs on originated loans, or
unamortized premiums or discounts on purchased loans.
The Company enters into agreements with dealers that establish the allowance for
credit losses through non-refundable acquisition discounts to protect the
Company from potential losses associated with the financing of installment sales
contracts. All or a portion of these negotiated discounts are available to
absorb credit losses. Credit loss experience, contractual delinquency of loan
receivables, the value of underlying collateral and current economic conditions
are factors management uses in negotiating the discounts and assessing the
overall adequacy of the discounts to absorb losses.
Management attempts to maintain the allowance at a level consistent with
anticipated loan charge offs, and if necessary will charge earnings when the
negotiated discounts do
25
<PAGE>
not appear adequate to absorb losses. The Company calculates its provision for
credit losses based on changes in the present value of expected future cash
flows of its loans discounted at the loan's effective interest rate in
accordance with Financial Accounting Standards No. 114. At December 31, 1998 and
1997, management believes the unamortized discount balance is adequate to cover
potential loan losses. Accordingly, the accompanying statements of operations do
not include provisions for loan losses.
The Company generally initiates repossession proceedings when an account is more
than two payments contractually past due, but the repossession process is
accelerated for loans which become delinquent in the first or second payment.
Inventories
Inventories are valued at the lower of cost or market and consist of mobile home
inventories.
Investment in Parkwood Estates Mobile Home Park, L.C. ("Parkwood")
The Company uses the equity method to account for its 25% ownership interest in
Parkwood.
Long-Lived Assets
The Company periodically reviews its long-lived assets for indications of
impairment. If the value of an asset is considered impaired, an impairment loss
would be recognized.
Property and Equipment
Property and equipment are stated at cost. Major additions are capitalized,
while minor additions and maintenance and repairs which do not extend the useful
life of an asset are expensed as incurred. Depreciation is computed using either
an accelerated method or the straight-line method over the assets' estimated
useful lives of 5 to 27.5 years.
Deferred Debt Issuance Costs
Direct costs incurred to register and issue the secured notes payable are
deferred and amortized to interest expense over the lives of the loans using the
interest method. Approximately $8,693 of these costs were written off as
impaired at December 31, 1997; such amount has been included in interest expense
in the accompanying 1997 statement of operations.
26
<PAGE>
Repossessed Mobile Homes
Repossessed mobile homes are initially recorded at the lower of the assets'
estimated fair market value or the unpaid balance of the related loan at the
time of repossession. Costs of capital improvements are added to the carrying
amount of the repossessed property, to the extent they do not result in the
carrying amount exceeding net realizable value.
Income Taxes
The Company has elected to be taxed under Subchapter S of the Internal Revenue
Code, and accordingly, is not subject to income taxes as the results of
operations flow through to the stockholders for inclusion in their personal
income tax returns.
Loss Per Common Share
Loss per common share is based on the weighted average number of common and
common equivalent shares outstanding during each period. The weighted average
number of common shares outstanding during the year ended December 31, 1998 and
the period January 3, 1997 (date of inception) to December 31, 1997 was 1,000.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
Reclassifications
Certain amounts in the 1997 financial statements have been reclassified to
conform to their 1998 classifications.
NOTE C - FINANCE RECEIVABLES - NET
Finance receivables consist of the following at December 31, 1998 and 1997:
1998 1997
---- ----
Finance receivables, gross $ 4,410,710 $ 426,121
Less unearned finance charges (2,793,778) (210,487)
----------- ---------
Finance receivables, principal 1,616,932 215,634
Less allowance for loan losses (See Note A) (131,235) (19,131)
----------- ----------
Finance receivables, net $ 1,485,697 $ 196,503
=========== =========
At December 31, 1998, finance receivables have terms ranging from 5 to 30 years
and
27
<PAGE>
stated interest rates ranging from 12.9% to 17.9%. At December 31, 1998 and
1997, no interest income had been suspended on finance receivables.
Principal collections on finance receivables approximated $134,000 and $14,000
for the year ended December 31, 1998 and the period January 3, 1997 (date of
inception) to December 31, 1997, respectively. These collections approximated
16% and 12% of the average outstanding, principal balances for 1998 and 1997,
respectively. Contractual maturities of the finance receivables by year are as
follows:
Years Ending
December 31, Amounts
1999 $ 328,396
2000 328,396
2001 328,396
2002 326,385
2003 315,402
Thereafter 2,783,735
Total $ 4,410,710
===========
Changes in the allowance for credit losses during the year ended December 31,
1998 and the period January 3, 1997 (date of inception) to December 31, 1997,
were as follows:
1998 1997
---- ----
Beginning balances $ 19,131 $ 0
Additions to loan loss reserves arising
from discounts on purchased loans 112,104 19,131
Discounts accreted to income 0 0
Finance receivables charged off 0 0
------------ --------
Ending balance $ 131,235 $ 19,131
============ =========
% of finance receivables 8.1% 8.9%
============ =========
NOTE D - INVESTMENT IN AND ADVANCES TO PARKWOOD
The Company has a 25% ownership interest in Parkwood, which was formed in 1998
for the purpose of purchasing, and leasing Parkwood Estates Mobile Home Park in
Hillsborough County, Florida. The remaining 75% interest is owned by Anthony
Sutter (the Company's' President and majority stockholder). Summarized financial
information for Parkwood as of and for the period ended December 31, 1998 is as
follows:
28
<PAGE>
SUMMARIZED BALANCE SHEET
ASSETS
Property and equipment $ 2,234,071
Loan acquisition costs, net 37,115
Other 10,814
-------------
Total $ 2,282,000
=============
LIABILITIES AND MEMBERS' CAPITAL
Mortgage notes payable to NationsBank N.A. $ 1,716,000
Due to affiliate 55,000
Accrued and other liabilities 7,111
-------------
Total liabilities 1,778,111
-------------
Members' Capital:
Sterling Financial Services of Florida I, Inc. 547,178
Anthony Sutter (43,289)
-------------
Total member's capital 503,889
-------------
Total $2,282,000
=============
SUMMARIZED STATEMENT OF OPERATIONS
Revenues $ 50,666
Operating expenses (108,384)
-------------
Net loss $ (57,718)
=============
The due to affiliate arises from advances under a line of credit arrangement
with the Company, whereby the Company has agreed to loan Parkwood up to $350,000
to fund cash flow needs. Advances under the arrangement, accrue interest at a
fixed rate of 12.9%, are unsecured and have no specified repayment terms.
Through the date of this report, Parkwood had borrowed approximately $125,000
from the Company under this arrangement.
29
<PAGE>
NOTE E - PROPERTY AND EQUIPMENT-NET
Property and equipment consists of the following at December 31, 1998 and 1997:
1998 1997
Rental mobile homes $215,702 $157,956
Furniture, fixtures and office equipment 66,985 21,372
Less accumulated depreciation (28,146) (6,097)
Property and equipment - net $254,541 $173,231
======== ========
NOTE F - SECURED NOTES PAYABLE
Secured notes payable bear interest at 10.5%, with interest payable monthly, and
mature on June 30, 2002. The notes are secured by a first lien on the
installment sales contracts. The secured notes are prepayable in whole or in
part at any time without premium or penalty. The Company has registered $9.9
million of such notes and is continuing to offer the remaining notes for sale
through June 30, 1999 at which time the offering ends Through the date of this
report, notes having a cumulative principal balance of $8,392,000 have been
sold. The notes are being offered on a "best-efforts" basis by broker-dealers
who are members of the National Association of Securities Dealers, Inc.
NOTE G - OTHER RELATED PARTY TRANSACTIONS
In 1997, the Company's majority stockholder advanced $30,350 to the Company of
which $28,600 was repaid in 1997. The advances were and are, unsecured,
non-interest bearing and due on demand.
The Company has entered into an agreement with Sterling Financial Services, Inc.
("SFS, Inc."), a related party by virtue of common ownership, whereby SFS, Inc.
will manage the Company and provide all services in connection with origination
and servicing of receivables. As consideration for these services, the Company
will pay SFS, Inc. for all of its expenses plus 20%. Management fees paid to
SFS, Inc. including direct and indirect charges allocated to the Company and the
20% fee, during the year ended December 31, 1998 and the period ended January 3,
1997 (date of inception) to December 31, 1997 approximated $442,000 and $62,000
respectively.
The Company rents certain lots for 18 mobile home rental units it owns under
month to month arrangements, and prior to April 1998, certain office space for
its administrative operations from Halliday Village M.H.P. ("Halliday"), a
related party by virtue of Anthony Sutter's ownership.
30
<PAGE>
Subsequent to April 1998, the Company's rent was paid by SFS, Inc. and
accordingly, such expenses are included in management fees discussed above.
During the year ended December 31, 1998 and the period January 3, 1997 (date of
inception) to December 31, 1997, the Company paid rents to Halliday of
approximately $95,000 and $33,000, respectively.
The Company periodically advances funds to various entities owned by Anthony
Sutter, its President and majority stockholder. At December 31, 1998 and 1997,
affiliate receivables consist of the following:
1998 1997
---- ----
SFS, Inc. $226,978
Hidden Oaks Mobile Home Park
8,000 $ 2,000
Regency Oaks Mobile Home Park
6,000
Sterling Homes, Inc.
16,300 10,550
------------ -------------
Total $257,278 $ 12,550
============ =============
With the exception of the advance to SFS, Inc., which is non-interest bearing,
all of the advances bear interest of 12.9%, are unsecured and have no specified
repayment terms.
NOTE H - PROFORMA NET LOSS AS IF THE COMPANY WAS A "C"
CORPORATION
If the Company had elected to be taxed as a "C" corporation it would have been
required to record a provision or benefit for income taxes. The following
information presents the proforma net losses at December 31 1998 and 1997 as if
the Company was a "C" corporation. The presentation used is in accordance with
Financial Accounting Standards Statement No.
109, "Accounting for Income Taxes".
1998 1997
---- ----
Loss before income taxes ($772,257) ($151,537)
Income tax expense (benefit) 0 0
----------
Net loss ($772,257) ($151,537)
========== ==========
No benefit for income taxes has been recorded because the realizability of such
benefit, and the related deferred income tax asset, did not meet the required
recognition standards established by SFAS 109.
31
<PAGE>
NOTE I - CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentrations
of credit risk consist primarily of receivables, the investment in and advances
to Parkwood and cash and cash equivalents. Since substantially all of the
receivables and the investment in and advances to Parkwood arise from customers
or entities located in Florida, it is at least reasonably possible that the
Company could experience a severe impact on its operations if the Florida
economy had a downturn. Management believes risk with respect to finance and
mobile home floor plans is partially mitigated because the receivables are
collateralized by the mobile homes purchased by the Company's customers.
With respect to cash balances, the Company maintains all of its cash and cash
equivalents at one FDIC insured institution, which has a maximum insurance limit
of $100,000. At December 31, 1998 and 1997, the Company's uninsured cash
balances approximated $1,278,000 and $745,000 respectively.
- -----------------------------------------------------------------------
32
<PAGE>
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
NONE
PART III.
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Set forth below is certain information as of December 31, 1998 with
respect to any persons known to the Corporation to be the beneficial owner of
more than 5% of the Corporation's Common Stock and of the Common Stock owned by
the sole officer and director of the Corporation.
Amount and
Nature of
Beneficial
Name of Beneficial Owner Title of Class Ownership % of Class
Anthony A. Sutter Common 800 80%
Judith Estrin, Trustee; Common 200 20%
--- ---
Stanley D. Estrin
Irrevocable Trust dated
3/16/93
All officers and directors 800 80%
=== ===
as a group (1 person)
- ----------------------------
Anthony A. Sutter, age 48, has been the President, Chief Executive
Officer, Secretary, Treasurer and Sole Director of the Corporation and the
Servicing Company since their inception. He has also been the sole officer and
director of Sterling Properties Management, Inc., a Tampa, Florida property
management company, and for four Florida corporations owning mobile home parks
in Florida (Halliday Village Mobile Home Park, Inc., Oak Bend Mobile Home Park,
Inc., Hidden Oaks Mobile Home Park, Inc., and Regency Oaks Mobile Home Park,
Inc.). Mr. Sutter also owns a 75% interest in Parkwood Mobile Home Park, L.C.
(the remaining 25% is owned by the Corporation). He received a B.S. degree in
Accounting and Economics from St. Louis University, St. Louis, Missouri in 1973.
He has been involved in the residential housing business for 26 years, during
which time he has owned, managed and operated many properties, including mobile
home parks.
The Corporation does not have a written employment agreement with Mr.
Sutter. All compensation paid to Mr. Sutter will be paid by the Servicing
Company, based upon available funds, with no other limitation. No compensation
has been paid to Mr. Sutter since the Corporation's inception.
33
<PAGE>
ITEM 10 - EXECUTIVE COMPENSATION
Name Position Compensation
Anthony A. Sutter President, Chief Executive NONE
Officer, Secretary, Treasurer
and Sole Director
The Corporation does not directly pay salaries to Management. Management
would receive salaries from the Servicing Company, which salaries would be
allocated between the Corporation and Affiliated Corporations. See "Business -
Relationship with Servicing Company - Servicing Agreement." Mr. Sutter receives
no salary from the Corporation, and accordingly no officer, director or employee
of the Corporation receives compensation attributable to services rendered to
the Corporation in excess of $100,000 per year.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is certain information as of December 31, 1998 with
respect to any persons known to the Corporation to be the beneficial owner of
more than 5% of the Corporation's Common Stock and of the Common Stock owned by
the sole officer and director of the Corporation.
Amount and
Nature of
Beneficial
Name of Beneficial Owner Title of Class Ownership % of Class
Anthony A. Sutter Common 800 80%
Judith Estrin, Trustee; Common 200 20%
--- ---
Stanley D. Estrin
Irrevocable Trust dated
3/16/93
All officers and directors 800 80%
=== ===
as a group (1 person)
- ---------------------------
34
<PAGE>
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Sutter is President, Chief Executive Officer, Secretary,
Treasurer and Sole Director of both the Corporation and the Servicing
Company. Mr. Sutter owns the controlling interest in both the Corporation
and the Servicing Company.
The Corporation may sell or lease homes to affiliates. Any lease will be
at fair market value, based upon the Corporation's lease rates to independent
third parties, and any sales will be at fair market value based upon wholesale
value published by the National Automobile Dealers Association.
Pursuant to the Servicing Agreement, the Servicing Company acts as agent
for the Corporation. During the year ended December 31, 1998, and for the period
January 3, 1997 (date of inception) to December 31, 1997, the Corporation paid
management fees of $442,328 and $62,368, respectively to the Servicing Company
under the terms of the Servicing Agreement. For a description of the Servicing
Agreement, see "Business - Relationship with Servicing Company - Servicing
Agreement."
The Corporation may loan up to $75,000 to the Servicing Company for the
purchase and/or lease of office space, office equipment, trucks and automobiles.
The Servicing Company will repay any advanced funds in equal monthly
installments of principal and interest at the rate of 10.5% per annum, with the
final payment due on June 30, 2002. To date, no such loan has been made to the
Servicing Company.
The Corporation's executive offices are located at 12408 North Florida
Avenue, Tampa, Florida. Pursuant to an oral agreement, the office was leased
from Halliday Village Mobile Park, Inc., an entity wholly owned by Mr. Sutter,
on a month-to-month basis for $2,200 per month through April 30, 1998. Rent paid
under this arrangement to Halliday during the respective periods ended December
31, 1998 and 1997 approximated $9,000 and $17,600, respectively. Subsequent to
April 30, 1998, the Corporation's rent was paid by the Servicing Company, and
accordingly, such expenses are included in the management fees discussed above -
see "Business - Relationship with Servicing Company." The Corporation also
leases lot space for its mobile home rentals from Halliday. These lot spaces are
rented on a month to month basis and no contract or lease has been signed.
During the respective periods ended December 31, 1998 and 1997, the Corporation
paid lot rents of approximately $86,000 and $18,000 to Halliday.
During the year ended December 31, 1998, the Corporation purchased a
25% interest in Parkwood Estates Mobile Home Park, L.C. which was formed to
purchase and lease Parkwood Estates Mobile Home Park located in Hillsborough
County, Florida. The purchase price was approximately $561,000. The remaining
75% interest is owned by Mr. Sutter. In addition, the Corporation has agreed to
loan the Park up to $350,000 to fund cash flow needs, and as of December 31,
1998 had advanced $55,000 under this arrangement. These advances bear interest
at 12.9%, are unsecured and have no specified repayment terms. As of July 31,
1999, the Corporation has advanced approximated $145,000 under this arrangement.
35
<PAGE>
In addition, the Corporation periodically advances funds to other entities owned
by Anthony Sutter. At December 31, 1998 and 1997, affiliate receivables consists
of the following:
1998 1997
---- ----
The Servicing Company $226,978
Hidden Oaks Mobile Home Park 8,000 $ 2,000
Regency Oaks Mobile Home Park 6,000
Sterling Homes, Inc. 16,300 10,550
-------- -------
Total $257,278 $12,550
======== =======
With the exception of the advance to the Servicing Company, which is
non-interest bearing, all of the advances bear interest at 12.9%, are unsecured
and have no specified repayment terms.
ITEM 13-EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORMS 8-K
Exhibits - Amended Servicing Agreement.
Financial Statement Schedules - None.
Reports on Form 8-K - None.
36
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
STERLING FINANCIAL SERVICES OF FLORIDA I, INC.
By: ____________________________________________________
Chief Executive Officer
Dated: July 31, 1999
In accordance with Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dated indicated.
SIGNATURE TITLE DATE
Director, Chief Accounting July 31, 1999
Officer
- ----------------------------
37
<PAGE>
AMENDED SERVICING AGREEMENT
THIS AGREEMENT is made as of the 1st day of January, 1997, by and between
STERLING FINANCIAL SERVICES, INC., a Florida corporation (the "Servicing
Company") and STERLING FINANCIAL SERVICES OF FLORIDA - I, INC., a Florida
corporation ("Sterling").
RECITALS:
WHEREAS, Sterling is engaged in the business of providing financial
services to the sub-prime mobile home industry, including, among other things,
originating, purchasing and refinancing for its own account retail mobile home
installment sale contracts (the "Contracts") created in connection with the
financing of primarily used as well as some new mobile homes (the "Homes");
WHEREAS, the Servicing Company is engaged in the business of, among other
things, originating, acquiring and servicing loans and accounts; and
WHEREAS, Sterling desires to retain the Servicing Company to provide all
services in connection with Contract origination or acquisition and servicing
(the "Services"), and the Servicing Company agrees to provide such Services in
accordance with the terms of this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
1. DUTIES AND SERVICES. Sterling hereby retains the Servicing Company and
the Servicing Company hereby agrees to render the Services upon the terms and
conditions hereinafter set forth:
a. The Servicing Company hereby agrees to provide to Sterling the
Services set forth on Schedule A attached hereto.
b. The Servicing Company agrees to operate within the guidelines
established by Sterling from time to time.
c. No funds of Sterling shall be deposited or kept in any account
commingled with funds of the Servicing Company or any other person or
entity.
2. RIGHTS. Nothing herein shall grant any direct or indirect ownership
rights to any aspect of the Services to the Servicing Company.
3. TERM. The initial term of this Agreement shall be January 1,
1997,through June 30, 2002 (the "Term"). This Agreement shall be extended
thereafter in the sole and absolute discretion of Sterling, upon such terms and
conditions as shall be mutually agreed. Either Sterling or the Servicing Company
may voluntarily elect to terminate this Agreement without cause, for any reason;
provided that the terminating party must deliver to the other party written
notice of such intention to terminate not less than fifteen (15) days prior to
the date of such termination.
4. COMPENSATION. So long as the Servicing Company is in full compliance
with all terms and conditions of this Agreement, Sterling will pay the Servicing
Company for services hereunder, as follows:
a. Sterling will pay the Servicing Company an amount equal to all
incurred expenses of the Servicing Company ("Actual Cost") plus twenty
percent(20%) of Actual Cost for services rendered. If the Servicing
Company provides similar services to future Affiliated Entities, Sterling
will pay the Servicing Company as follows: (i) any acquisition or
disposition of cash expenditures, such as attorneys' fees and court costs,
will be paid by the entity which owns the Contract to which such expenses
relate (the "Direct Expenses"); and (ii) an amount equal to Actual Cost
less Direct Expenses will be paid directly by each entity based upon the
ratio of the total number of Contracts held by each entity to the total
number of Contracts held by all entities.
38
<PAGE>
b. Sterling shall reimburse the Servicing Company for reasonable
travel expenses actually incurred by the Servicing Company in the
furtherance of Sterling's business, provided said expenses have been
approved in advance by Sterling and proper itemization of said
expenses is furnished to Sterling by the Servicing Company. All such
expenditures shall be subject to the reasonable control of Sterling.
5. RELATIONSHIP. The Servicing Company is an independent contractor with
respect to this Agreement. This Agreement is not intended to, and shall not be
construed to, create a joint venture or partnership between the said parties or
constitute either of them as agents of the other. Except as otherwise expressed
and provided for in this Agreement or otherwise expressly agreed in writing by
the parties, neither party shall have any power or authority to bind or commit
the other party. The Servicing Company assumes full responsibility for the
actions of any of its employees, officers, directors, independent contractors
or agents including negligence, malfeasance, nonfeasance or other misconduct by
such persons or entities. The Servicing Company shall pay timely and in full
all taxes, federal, state, or local, due in connection with any compensation
payable hereunder.
6. AUTHORITY. Each party represents and warrants that it has the full
right, power and authority to enter into this Agreement on the terms and
conditions hereof and that the parties executing this Agreement on behalf of
each party have been duly authorized to do so.
7. INDEMNIFICATION. The Servicing Company agrees to indemnify, defend and
hold Sterling harmless from any liabilities, claims, losses, damages, demands
or expenses, including reasonable attorneys' fees, that may be made by anyone
due to a breach of any representation, warranty or agreement of the Servicing
Company contained in or made pursuant to this Agreement. Sterling agrees to
indemnify, defend and hold the Servicing Company harmless from any liabilities,
claims, losses, damages, demands or expenses, including reasonable attorneys'
fees, that may be made by anyone due to a breach of any representation,
warranty or agreement of Sterling contained in or made pursuant to this
Agreement.
8. NOTICES. All notices, requests, consents, and other communications
under this Agreement shall be in writing and shall be deemed to have been
delivered on the date personally delivered or the date mailed, postage prepaid
by certified mail, return receipt requested, or faxed and confirmed, if
addressed to the respective parties as follows:
If to the Servicing Company: Sterling Financial Services, Inc.
12406 North Florida Avenue Tampa, FL
33612
If to Sterling: Sterling Financial Services of Florida- I, Inc.
12406 North Florida Avenue Tampa, FL
33612
Either party may change its address for the purpose of receiving notices,
demands and other communications by giving written notice to the other party of
the change.
9. SUCCESSORS AND ASSIGNS. All of the terms and conditions of this
Agreement shall be binding upon and shall inure to the benefit of the parties
and their respective successors and assigns. Neither party may assign this
Agreement without the prior written consent of the other.
10. NO WAIVER. The failure of either party to object to a breach of any
term or condition of this Agreement shall not be deemed a waiver of any right
or remedy the non-breaching party may have arising out of the breach, nor shall
it be deemed a waiver of its right to subsequently enforce the term or
condition. Each remedy under this Agreement is cumulative and shall be in
addition to all other rights or remedies existing in this Agreement or in law,
equity or bankruptcy.
11. SEVERABILITY. If any clause of this Agreement is determined to be
invalid or unenforceable, the validity or enforceability of any other
provisions hereof will not be affected thereby.
12. NUMBER AND GENDER. In this Agreement whenever the context so requires,
the masculine gender includes the feminine and/or neuter, and vice versa, and
the singular number includes the plural.
39
<PAGE>
13. COUNTERPARTS. This Agreement may be executed in counterparts, and any
number of counterparts signed in the aggregate by the parties hereto shall
constitute but one single original Agreement.
14. THE PARTIES HERETO HEREBY KNOWINGLY, VOLUNTARILY, ANDINTENTIONALLY
WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT TO ANY LITIGATIONARISING OUT OF OR
IN CONNECTION WITH THIS AGREEMENT AND ALL PAST, PRESENT ANDFUTURE AGREEMENTS
INVOLVING THE PARTIES. THIS WAIVER OF TRIAL BY JURY PROVISIONIS A MATERIAL
INDUCEMENT FOR THE PARTIES TO ENTER INTO THIS AGREEMENT.
15. COMPLIANCE WITH LAWS. The Servicing Company will comply with all
federal and state laws, rules and regulations relating to any of its
responsibilities and duties with Sterling and will not violate any such laws,
rules and regulations.
16. VOLUNTARY AGREEMENT. The Servicing Company represents that it has not
been pressured, misled or induced to enter this Agreement based upon any
representation by Sterling not contained herein.
17. PROVISIONS TO SURVIVE. The parties hereto acknowledge that many of the
terms and conditions of this Agreement are intended to survive the term of this
Agreement. Therefore, any terms and conditions that are intended by the nature
of the promises or representations to survive the term of this Agreement shall
survive the term of this Agreement regardless of whether such provision is
expressly stated as so surviving.
18. MERGER. This Agreement represents the entire Agreement between the
parties and shall not be subject to modification or amendment by any oral
representation, or any written statement by either party, except for a dated
written amendment to this Agreement signed by an authorized officer of the
Servicing Company and an authorized officer of Sterling.
19. VENUE AND APPLICABLE LAW. This Agreement shall be enforced and
construed in accordance with the laws of the State of Florida, and venue for any
action or arbitration under this Agreement shall be Hillsborough County,
Florida.
20. ASSIGNMENT. This Agreement shall not be assignable by either party
without the written consent of the other party. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective heirs,
personal representatives, successors and assigns.
21. ARBITRATION. Any controversy or claim arising out of or relating to
this Agreement or any provision thereof shall be settled by binding arbitration
in a manner agreed upon by the parties, or if not otherwise agreed upon, then in
accordance with the rules of the American Arbitration Association in effect at
that time. Judgment upon the award so rendered may be entered in any court
having competent jurisdiction there over. The costs of the arbitration shall be
borne by the non-prevailing party, including the cost of experts, evidence and
legal counsel (and all employees and assistants) of the prevailing party.
22. DEFAULT AND REMEDIES. a. It shall be an event of default under this
Agreement upon the happening of any of the following events (an "Event of
Default"):
i.If the Corporation fails to timely remit to Servicing Company any
Compensation or other amounts due under this Agreement which are due and
payable and such failure to pay continues for a period of ten days form
the date of the mailing or delivery of an invoice from Servicing Company.
ii. If any representation or warranty of the Corporation in this
Agreement is false, incorrect or misleading in any material respect, or if
any representation or warranty contained in any reports, documents,
certificates or other papers delivered to Servicing Company from time to
time is false, incorrect or misleading in any material respect, and is not
cured within 30 days of written notice thereof to the Corporation.
iii. If the Corporation breaches or fails to perform or observe any
obligation or condition to be performed or observed by it under this
Agreement in any material respect and such breach or default is not cured
40
<PAGE>
within 30 days after Servicing Company has given the Corporation written
notice demanding that such breach or default be cured.
iv. If any representation or warranty of Servicing Company in this
Agreement is false, incorrect or misleading in any material respect, or if
any representation or warranty contained in any reports, documents,
certificates or other papers delivered to the Corporation from time to
time is false, incorrect or misleading in any material respect and is not
cured within30 days of written notice thereof to Servicing Company;
v. If Servicing Company breaches or fails to perform or observe any
obligation or condition to be performed or observed by it under this
Agreement in any material respect and such breach or default is not cured
within 30 days after the Corporation has given Servicing Company written
notice demanding that such breach or default be cured.
vi. If Servicing Company fails, in any material respect, to perform
its obligations under this Agreement in conformance with industry
standards applicable to servicing of similar Accounts and such failure is
not cured within 30 days after the Corporation has given Servicing Company
written notice demanding such failure be cured.
a.Upon the happening of an Event of Default, after the expiration of any
opportunity to cure such Default, the non-defaulting party may terminate this
Agreement by notice in writing to the defaulting party sent by facsimile or
certified mail, postage prepaid, or by hand delivery. In the event of
termination, Servicing Company agrees to make available to the Corporation such
computer records as are reasonably required to effect an orderly conversion to
another computer system.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective
as of the day and year first above written.
"Servicing Corporation"
STERLING FINANCIAL SERVICES, INC.,
a Florida corporation
By: ------------------------------------------
Anthony A. Sutter
President
"Sterling"
STERLING FINANCIAL SERVICES OF
FLORIDA - I, INC., a Florida corporation
By: ------------------------------------------
Anthony A. Sutter
President
SCHEDULE A
ORIGINATION
The Corporation intends to originate Contracts, as opposed to purchasing
Contracts at a discount from Dealers or others. The Corporation will contact
borrowers as well as Park owners and Dealers directly or by telephone or
mailing to advise them of the Corporation's program for Contract origination.
It is not anticipated that the Corporation will be dependent upon one or a few
Park owners or Dealers for identifying potential borrowers under Contracts
41
<PAGE>
originated by the Corporation. In addition, the Corporation may use print
advertising directed at individual borrowers. It is anticipated that a Park
owner, Dealer or potential borrower will contact the Corporation regarding the
availability of financing, and the Corporation will make a credit application
available directly to the borrower.
When the credit application from the borrower is received, an investigator
will review the application and obtains the applicant's credit bureau and other
information.
Contract origination guidelines include the following minimum acceptable
criteria:
- - Employment history - at least six months on the job;
- - Income - depends on the amount of the loan and the debt to income ratio
(see below)of the borrower;
- - Time at residence - at least one year at current residence;
- - Debt to income ratio - personal debt cannot exceed 50% of the borrower's
net income;
- - Bankruptcy - all debts must have been fully discharged at least one year
prior to application for the loan;
- - Child support - if the borrower is paying child support, it will be
treated as a personal debt and factored into the debt to income ratio; if
the borrower is receiving child support, such income will only be
considered if court mandated;
- - Repossessions - must have occurred at least one year prior to application
for the loan;
- - Liens/judgments - will be decided on a case-by-case basis, depending on
the type of lien or judgment, the amount involved and the age thereof;
- - Previous delinquencies, collections and charge-offs - will be decided on
a case-by-case basis with consideration taken for mitigating
circumstances, such as divorce, disability, extended illness or layoff
due to downsizing; and 8 9
- - Co-buyers and co-signers - will also be subject to the minimum acceptable
criteria set forth above.
There are no fixed criteria pursuant to which material deviation these
guidelines will be permitted. However, no Contract will be originated to a
borrower deviating from these guidelines for which there is not an increased
down payment or a co-signer meeting the guidelines, or both. The additional
down payment required will increase with the increase in deviation from the
guidelines, although there is no fixed formula for determining the amount of
increased down payment required.
In addition, the Corporation will not finance more than 130% of National
Automobile Dealers Association (NADA) manufactured home book retail value. It
will not finance Homes manufactured before 1980. Contracts under$10,000 will
have no more than a 10-year term, and Contracts between $10,000and $25,000 will
not have more than a 15-year term. The Corporation will not finance amounts in
excess of $25,000. See "Business - Consumer Finance Laws and Regulations."
When this process is complete, an application will be approved
unconditionally or with conditions, such as adjustments to the interest rate,
down payment, maximum loan to value, co-maker or other significant conditional
criteria. It is anticipated that no more than ten percent (10%) of the
Contracts originated will deviate materially from these guidelines, although
there is no specific limitation imposed thereon.
Prior to closing the funding, the Corporation reviews the financing to
determine the following: (i) all required documentation has been included,
(ii)the math is correct, (iii) the regulatory requirements have been
42
<PAGE>
satisfied,(iv) the amount financed does not exceed the maximum loan allowed,
and (v) any conditions imposed have been satisfied. The Corporation will
contact the insurance carrier to confirm insurance.
SERVICING
Billing. The Servicing Company generates bi-monthly statements which are
sent to the borrower.
Collections.The Corporation has established certain collection guidelines,
which guidelines will not necessarily be followed in all cases and which are
subject to modification at any time.
When a delinquency occurs, a Collector will make a call by the first day
of the delinquency. By the third day of delinquency, if the account has not
been brought current, the Collector will personally visit the delinquent
borrower. If the borrower is unable to make all required payments on a current
basis, the Collector may make reasonable payment arrangements to cure the
delinquency. If all of these collection processes are not successful, there
possession process commences immediately.
Repossessions and Resale Department. Either the borrower voluntarily
agrees to vacate the Home, or an attorney is contacted by the Corporation to
effect an involuntary repossession. All costs associated with the repossession
are an obligation of the borrower. To effect an involuntary repossession, in
general, the borrower is first given written notice of intent to repossess, and
a period of time, generally five days, to cure all defaults. If the defaults
are not cured within said time period, a complaint is filed and a judgment
obtained. After the judgment is obtained, a writ of possession is obtained and
given to the appropriate law enforcement agencies, who evict the borrower from
the Home. The Home will be renovated as necessary and sold in its then current
location, if possible, or moved to a Dealer's lot or another Park for resale.
43
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,282,906
<SECURITIES> 0
<RECEIVABLES> 1,616,932
<ALLOWANCES> 131,235
<INVENTORY> 433,597
<CURRENT-ASSETS> 3,735,822
<PP&E> 282,687
<DEPRECIATION> 28,146
<TOTAL-ASSETS> 5,107,540
<CURRENT-LIABILITIES> 56,334
<BONDS> 5,974,000
0
0
<COMMON> 1,000
<OTHER-SE> 0
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<TOTAL-REVENUES> 416,439
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 707,313
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 481,383
<INCOME-PRETAX> (772,257)
<INCOME-TAX> 0
<INCOME-CONTINUING> (772,257)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (772,257)
<EPS-BASIC> (772)
<EPS-DILUTED> (772)
</TABLE>
