<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K SB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NO.
DECEMBER 31, 1996 33-66260-A
FEDERAL MORTGAGE MANAGEMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 65-0381142
- --------------------------------------- ----------------------------------
State or other jurisdiction of IRS Employer Identification Number
incorporation or organization
1800 Second Street, Suite 780, Sarasota, Florida 34236
-------------------------------------------------------
(Address of principal executive offices, zip code)
941-954-2328
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(b) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No.
----- -----
As of December 31, 1996 the Company has 195 secured promissory Notes Payable
(Notes) with a total of $3,733,200 principal balance outstanding. As
indicated, the Company is a Company organized pursuant to Florida law. The
Company had total revenues of $247,762 in 1995.
<PAGE> 2
PART I
Item 1. Description of Business
FEDERAL MORTGAGE MANAGEMENT, INC., (the "Company") was organized under
the Florida General Corporation Act in December 1992. The Company was
initially capitalized by the issuance of 100,000 shares of Common Stock, $.01
par value. As of the December 31, 1996, such 100,000 shares are held
beneficially by Guy S. Della Penna. Mr. Della Penna has paid a nominal cash
consideration of $1,000 for such shares.
The Company was formed and capitalized for the principal purpose of
acquiring and dealing in mortgage loans secured by first liens on residential
real estate. The Company may also originate real estate mortgage loans, and/or
acquire federally insured instruments of deposit and/or debt securities issued
by the United States and instrumentality's thereof. The Purchase of mortgage
loans and insured instruments of deposit have been acquired in accordance with
a specific acquisition policy described in the registration statement. The
Company utilized the net proceeds of the Notes in acquiring the Portfolio and
Federal Instruments. The payment of the periodic principal and interest
obligations of the Portfolio Loans, as well as Portfolio Loan payoff prior to
maturity is and will be the source of funds utilized by the Company with which
to meet the interest obligation of the Notes. The Portfolio Loans will involve
maturities which are in excess of the maturities of the Notes of all Series.
The principal obligation of each Series maturity of Notes is expected by the
Company to be funded by the scheduled principal and interest payments of the
Portfolio mortgages, by the early payoff of Portfolio Loans and, when
necessary, the disposition by the Company of a portion of the Portfolio.
In accordance with the acquisition policy (the "Acquisition Policy"),
the Company purchases mortgage loans which are secured by a first priority lien
on real estate and in certain instances unimproved real estate, in accordance
with the Acquisition Policy. The Company may originate mortgage loans.
However, at December 31, 1996, the Company originated one mortgage loan but
does not anticipate any such mortgage loans in the near future. The mortgage
loans have varying maturity dates from 10 to 30 years with interest rates
ranging from 10% to 18%.
In order for a mortgage loan to be considered for acquisition by the
Company for its Portfolio, such mortgage loan must be a first lien and have a
principal balance which is not in excess of 90% of the fair market value of the
underlying collateral real estate securing the mortgage loan. Such fair market
value must be substantiated at a time contemporaneous to the intended
acquisition of the mortgage loan by expert sources of appraisal. All
appraisals must be completed by state licensed or certified appraisers.
Alternative to such loan to value ratio, a mortgage loan may be acquired for
the Company Portfolio at an acquisition cost which does not exceed 80% of the
fair market value of the underlying property, which fair market value shall
also be determined as a result of independent expert sources of appraisal. As
of December 31, 1996, the portfolio of mortgage loans held by the Company met
this criteria.
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The Company may on a case by case basis acquire real estate mortgage
loans which are secured by first liens on unimproved real estate provided that
the unpaid principal of any such mortgage loan acquired does not exceed 50% of
the fair market value of such unimproved real estate determined contemporaneous
to the acquisition of such loan by the Company as a result of expert appraisal.
It is also subject to the condition that at no time during the term of
existence of the Company shall the aggregate principal balance of Portfolio
mortgages secured by unimproved real estate exceed 10% of the aggregate
principal balance of all mortgage loans held in the Company's Portfolio. At
December 31, 1996, the Company's portfolio of mortgage loans did not include
any mortgage loans secured by unimproved real estate.
The Acquisition Policy permits the Company to utilize an amount not in
excess of 10% of its available net proceeds for the acquisition of Federal
Instruments. Federal Instruments are defined as insured deposit and
certificate accounts issued by financial institutions such as banks, savings
banks and savings and loan associations whose accounts are insured to the
maximum amount by the Federal Deposit Insurance Company or debt instruments
issued by the United States or instrumentalities, thereof. At December 31,
1996, the Company owned Certificates of Deposits with a face value of $125,000.
After taking into account the discount of $50,991 and the accumulated accretion
of the discount of $15,228, the Certificate of Deposits had a book value of
$89,237.
Sources of Loan Purchase. The Company acquires its residential
mortgage loans from insured financial or deposit institutions, from the sellers
of the collateral real property securing the mortgage loan (or agents thereof),
credit unions, pension funds, insurance companies, mortgage bankers and
businesses which are involved in the purchase, rehabilitation and resale of
residential real estate and associated underlying mortgages.
Portfolio Servicing. The responsibility of servicing the residential
mortgage loan Portfolio of the Company is vested in the management. In
connection with such Portfolio servicing, management is responsible for the
collection of all principal and interest payments due under the terms of the
Portfolio loans for the Company and management is also responsible for
collection procedures with respect to mortgage loans which are in a default
status, including foreclosure of the collateral property and the sale thereof,
the acquisition and disposition of Portfolio mortgage loans and, when
appropriate, the elimination of origination deficiencies in non standard loans
which otherwise involve acceptable credit and payment histories.
From inception, management engaged the services of Federal Mortgage
Investors, Ltd. (FMIL), an affiliate, as its servicing agent, who in turn
engaged the services of Thomas J. McClellan as its servicor. Mr. McClellan
has over 22 years of experience in the commercial banking industry with 12 of
those years being specifically in loan servicing, origination and due
diligence. In return for rendering of his services, the Company paid FMIL a
servicing fee of .5% of the principal balance of the Company's portfolio of
mortgage loans, computed and paid monthly. In the year ended December 31,
1996, the Company paid $10,343 in servicing fees to FMIL. Management
terminated the services of Mr. McClellan as of December 31, 1996 for reasons,
among other things, of reducing overhead. Mr. Della Penna with the assistance
of one other person, assume the former responsibility of Mr. McClellan.
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Portfolio turnover policy. The Company engages in the business of
acquiring and selling mortgage loan portfolios. It is management's intent to
turn the entire portfolio over at least once a year.
Competition. The Company encounters competition in its efforts to
acquire acceptable mortgage loans for its Portfolio. Numerous investment
entities presently exist which are in the continuous business of acquiring
residential real estate loans from the sources intended to be utilized by the
Company. The basis of this competition in Portfolio loan acquisition is
related to the ability of the Company to thoroughly identify sources of loan
purchases, the ability of the Company to rapidly and effectively evaluate
mortgage loan acquisition candidates and the price that the Company is able and
willing to pay for acceptable residential mortgage loans within its Portfolio
Acquisition Policy guidelines. However, the Company has a relationship with an
affiliate of Mr. Della Penna, specifically HomeVestors of America, Inc. in
Dallas, Texas which is anticipated to be one of the largest sources of B, C and
D credit mortgage origination sources in the United States.
Trust Indenture.
The Prospectus dated December 21, 1993, for the offering of the Notes,
as well as the Note instrument itself, the Company agreed to perfect a first
security lien for the collective benefit of all Noteholders with respect to all
items of "Eligible Collateral", a term which is defined in the Prospectus.
Essentially, eligible collateral consists of residential real estate first
mortgage loans (the "Portfolio"), debt instruments of the United States
government and insured certificate of deposit accounts ("Federal Instruments"),
cash received as a result of principal and interest payments made on Portfolio
loans or received on loan payoff or sale of loans and Federal Instruments, and
real estate owned as a result of Portfolio loan foreclosures, if any.
The Company's original intention was to perfect such security interest
by the filing of a financing statement with the Florida Department of State and
Sarasota County, Florida pursuant to the Florida Uniform Commercial Code
("UCC"). It was intended that any such financing statement would be amended
from time to time in accordance with the UCC. Filing a financing statement
identifying every noteholder with the Florida Department of State created
significant filing fee costs and involved significant procedural difficulties
and, therefore, had not been effected.
The Company took certain remedial actions to perfect a first security
lien on the Eligible Collateral. On December 1, 1995, the Company entered into
an indenture of trust (the "Indenture") with Michael Hric, P.A. (the "Trustee")
pursuant to which the Trustee will act as trustee and agent for the Noteholders
with respect to the Eligible Collateral and the Company's performance with
respect to the Notes. The Trustee has taken possession in the manner described
in the Indenture, of all items of Eligible Collateral and has filed a UCC-1
financing statement with the Florida Secretary of State.
During the period of time between the acquisition of the Portfolio and
the Trustee's actions
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on December 1, 1995, no creditor of the Company obtained a lien against the
Eligible Collateral superior or otherwise to that of the Trustee on behalf of
the Noteholders. Accordingly, the delay in and filing a financing statement
with the Florida Department of State as to the Eligible Collateral did not
prejudice the Noteholders.
Item 2. Properties
At December 31, 1996, the significant assets of the Company were
constituted by the first lien residential mortgage loans and certificates of
deposit in the amount of $1,745,094 and $104,601, respectively. The mortgaged
properties included in the loan portfolio at December 31, 1996, are located in
Florida, Alabama, Massachusetts, Kansas, Missouri and Texas. (See Item 1 for
discussion of mortgage activity, including servicing and portfolio turnover
policy.)
The Company leases office space from an affiliate company, Executive
Wealth Management Services, Inc. (EWMS) for $954 a month.
Item 3. Legal Proceedings
The Company was not a party to any litigation for the period ended
December 31, 1996 nor is any litigation or claim threatened.
Item. 4 Submission of Matters to a Vote of Security Holders
NOT APPLICABLE
BALANCE OF PAGE INTENTIONALLY LEFT BLANK
5
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
At December 31, 1996, all of the outstanding voting equity securities
of the Company constituted by 100,000 shares of Common Stock, $.01 par value,
were held of record and beneficially by Guy S. Della Penna. Mr. Della Penna is
the promoter and sole director and officer of the Company. There is no present
market for the Common Stock of the Company.
Item 6. Selected Financial Data
The following table reflects the significant revenue and expense items
for the years ended December 31, 1996 and 1995, and the related increase in
each:
<TABLE>
<CAPTION>
REVENUE 1996 1995 Increase/
---- ---- Decrease
--------
<S> <C> <C> <C>
Accretion of certificate of
deposit interest $ 6,577 15,674 $ (9,097)
Interest income - residential mortgage loans 249,252 295,595 (46,343)
(Loss) gain on sale of mortgage loans
and other real estate owned (11,699) 120,222 (131,921)
Other income 3,632 2,262 1,370
EXPENSES
Advertising 9,969 (9,969)
Commissions 15,942 24,158 (8,216)
Interest 347,237 372,666 (25,429)
Legal and accounting 6,755 30,228 (23,473)
Management Fees 81,157 157,643 (76,486)
Service fees 10,343 13,263 (2,920)
Travel and entertainment 7,187 11,385 (4,198)
</TABLE>
The Company had a decrease in operating revenue of $156,991 for the year
ended December 31, 1996, as compared to the same period in 1995. This decrease
is due primarily to the decrease in gain on sale of residential mortgage loans
of $131,921. Loss on sale of mortgage notes of $11,699 for the period ended
December 31, 1996 as compared to a gain of $120,222 for the same period ended
1995 reflects the fact that the Company did not have a large pool of mortgages
sold during the year ended December 31, 1996. The Company also received
$46,343 less in interest income from
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mortgage notes for the period ended December 31, 1996. This is due to the fact
that the Company made principal payments to noteholders in December 1995 of
$273,000 which resulted in fewer funds invested in mortgage notes and a decline
in the performance of the mortgages in the portfolio. The Company also had
$239,000 in principal mature December 21, 1996.
Advertising decreased $9,969 as of the year ended December 31, 1996
compared to the same period ended 1995. This decrease relates to the fact that
the Company was still actively promoting the note offering during early 1995.
Commissions decreased $8,216 from the year ended December 31, 1996, as
compared to the year ended December 31, 1995. This decrease relates to the
fact that as of December 31, 1996, the Company sold fewer mortgages through
third-party mortgage brokers than compared to the same period ended in 1995.
Interest expense for the year ended December 31, 1996, decreased
$25,429 as compared to the same period in 1995. This decrease is attributable
to the fact that as of December 31, 1995, the Company's 7.25% series of notes
matured. Principal in the amount of $273,000 was paid to the noteholders.
Legal and accounting expenses decreased $23,412 during the year ended
December 31, 1996, as compared to the same period in 1995. This decrease is
the result of a reclass of approximately $5,500 in legal fees reported in 1995
which were receivable from an affiliate. As of December 31, 1996, these funds
have been received.
Management fees decreased from $157,643 to $81,157 for the period
ended December 31, 1995 and 1996, respectively. This decrease relates to fewer
mortgage notes and the related face value of portfolio assets held at December
31, 1996 compared to the period ended 1995.
Servicing fees decreased $2,420 for the period ended December 31, 1996
as compared to the same period in 1995. This decrease relates to the fact that
fewer mortgages were held during the year ended December 31, 1996 as compared
to the same period ended December 31, 1995.
Travel expenses decreased from $11,385 to $7,187 for the period ended
December 31, 1995 and 1996, respectively. The decrease relates to decreased
traveling of management in offering for the acquisition and sale of its
portfolio of residential mortgages.
Item 7. Management's Discussion and Analysis and Plan of Operations
The Company received gross Note proceeds in excess of the minimum
principal amount of $1,500,000 on January 31, 1994. The Company was required
to pay monthly interest to Note Holders starting February 1, 1994 in accordance
with the registration statement, even though the Company was not fully invested
in a portfolio of mortgage loans.
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The Company established from the net Note proceeds received an
interest reserve in order to facilitate the payment of the interest obligation
of the Notes during the Company's early periods of operation. The Company
continued to issue notes throughout the effective Registration period and
closed the offering on September 21, 1994. At the time the offering was
closed, the Company received gross Note proceeds in the amount of $4,252,500.
The Company, utilizing the Note proceeds from the public offering, has
acquired mortgage loans secured by first liens on real estate, as well as
insured certificates and instruments of deposit or debt securities issued by
the United States and instrumentality's thereof in accordance with an expressed
Acquisition Policy. In summary, such Acquisition Policy requires that the
Company only acquire mortgage loans for its Portfolio which are secured by a
first priority lien on residential real estate. Acquired mortgage loans must
have an amortization schedule with respect to monthly payments or principal and
interest not in excess of 360 months (30 years) from the time that the mortgage
loan acquired was originated or periodic payments of interest only.
Scheduled principal and interest payments on portfolio loans at
December 31, 1996, represent an annualized rate of return of approximately 14%
on the basis of the Company costs in acquiring such portfolio loans and an
annualized rate of return of approximately 12% (stated rate) on the basis of
the unpaid principal balance of the portfolio loans at December 31, 1996.
At December 31, 1996, the portfolio of the Company consisted of
mortgage notes with a carrying value of $1,745,094. The following table shows
the mortgage notes at face value and carrying value which takes into
consideration the discount and allowance for losses:
<TABLE>
<CAPTION>
Allowance
Face Value Discount For Losses Carrying Value
---------- -------- ---------- --------------
<S> <C> <C> <C>
$2,025,780 ($250,686) ($30,000) $1,745,094
</TABLE>
At December 31, 1996, the underlying real estate collateral of the
Company's portfolio of mortgage loans have an appraised value of approximately
$2,490,925, or a carrying value to appraised value ratio of 70 to 1. The
collateral real estate securing such loans as of December 31, 1996, was
residential real estate. The Company held no unimproved real estate loans as
of December 31, 1996.
There are 16 mortgage loans with a carrying value of $463,005 that
are delinquent (in terms of scheduled principal and interest payments) as of
December 31, 1996. These loans represent 27.8% of the carrying value of the
portfolio. The Company has initiated foreclosure procedures on six of the
delinquent mortgage loans. These loans have a fair market value of
approximately $112,000, with a carrying value of $142,886. Upon successful
foreclosure, the Company anticipates a loss of $30,000 upon the subsequent
sale. Thus, as of March 31, 1997, the Company has booked a loss reserve of
$30,000.
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The remaining 10 loans that are delinquent are comprised of eight that
are in bankruptcy and two that are in workout. The eight loans that are
currently in bankruptcy have a carrying value of approximately $249,594 and are
making the scheduled monthly principal and interest payments with the arrearage
being paid to the Company by the courts over a three year period. The two
loans that are in workout have a carrying value of approximately $70,525, and
are making scheduled principal and interest payments plus an additional amount
to bring them current.
As noted above the Company has experienced delinquencies with its
current portfolio of mortgage loans. Management feels they have isolated the
cause of this increase in delinquencies and have implemented corrective
measures. Management has determined the biggest factors contributing to the
possibility of a mortgage loan becoming delinquent are the amount of down
payment and credit history of the mortgagee. In order for the Company to
purchase mortgage loans at the discounts they underwrite, the mortgagee
typically has a history of credit problems and/or cannot place a substantial
down payment on the property. While each of the above situations would not
necessarily indicate that there is a good probability for the mortgage loan
to become delinquent, however, together the probability of delinquency may
increase significantly.
The Company has experienced that if a mortgagee has past credit
problems, but has made an effort to rectify the situation, they are a good
credit risk. The Company has experienced problems with mortgagee's who have
had historical credit problems, but have not shown a good faith effort to
correct or rectify the situation. Therefore, going forward, management has
implemented a tighter credit review on the prospective mortgage loans it buys.
If a mortgagee has past credit problems and that mortgagee has not made a good
faith effort to correct or rectify the situation, the Company will not purchase
the mortgage loan unless there are compensating factors contributing to its
purchase.
Additionally, management has also determined that the amount of cash
down payment plays a significant role in whether or not mortgage loans become
delinquent. In the past, depending upon the circumstances, the Company would
purchase mortgage loans with as little as 3% down. However, because of the
relatively small amount of money the mortgagee has at risk, he or she seem to
be more likely to allow the mortgage become delinquent. Because of the
experience which the Company has had with these low down payment mortgage
loans, it is currently only purchasing loans with at least 5% cash down
payments, unless once again, there are compensating circumstances which make
its purchase more likely.
With the above referenced criteria in place, management is confident
that delinquencies within the portfolio of mortgage loans will decrease in the
future.
Management has entered into a business arrangement with HomeVestors of
America, Inc. ("HomeVestors"), a Delaware corporation domiciled in Dallas,
Texas. HomeVestors is an originator of first lien residential mortgages either
directly or through its affiliates, and has implemented a national franchise
program. Such program is establishing a network of individuals and companies
which will buy and sell residential real estate with a focus on sales to credit
impaired buyers. In connection with such sales, originated mortgage loans on
such real estate will meet the Acquisition
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Policy of the Partnership. For such arrangement, the Partnership has advanced
an effective good faith retainer in the amount of $100,000. HomeVestors has
granted the Partnership and its affiliates a first right of refusal on interim
and permanent first lien residential mortgage financings created by
HomeVestors. HomeVestors will pay the Partnership 12% interest per annum on
this sum on a quarterly basis for a period of two years. At that time, such
principal amount of funds will be returned to the Partnership. Mr. Della
Penna, the Co-General Partner owns approximately 17% of the outstanding Common
Stock of HomeVestors. The Partnership anticipates a significant increase in
revenues as a result of this arrangement and is currently projecting an 18% to
23% gross annualized return on net invested assets.
Management anticipates a significant decline in overhead expenses due
to stringent cost cutting and expense controls. In discussions with its
independent auditors, a proposed plan of note maturity extension for the Series
1993A-III and 1994A-IV were outlined. Management in consultation with legal
counsel will be addressing the feasibility, logistics and necessary steps to
proffer such plan to the noteholders of the aforementioned Series during the
first half of fiscal 1997. Such plan may include, but not be limited to the
extension of the respective maturity from 12 to 24 months from their scheduled
maturation.
Item 8. Financial Statements and Supplementary Data
Included in the Annual Report on Form 10K-SB as Exhibit 1 are the
audited financial statements specified in Instruction (a) to Item 7.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
NOT APPLICABLE
10
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PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The day-to-day business and affairs of the Company are managed and
carried out the by President. Mr. Guy S. Della Penna serves as the sole
director and President of Federal Mortgage Management, Inc. Information
concerning Mr. Della Penna is presented below:
Mr. Della Penna, age 44, has been a resident of Sarasota, Florida
since 1980 and is the founder and President of Capital Management Group, Inc.
Capital Management Group, Inc. was organized by Mr. Della Penna in 1989. Under
the auspices of Capital Management Group, Inc., Mr. Della Penna has provided
financial and tax consulting and advisory services to individuals and corporate
entities. Capital Management Group, Inc. also acts as general agent for
various insurance companies. Mr. Della Penna is a General Securities Principal
and Financial and Operations Principal pursuant to NASD Rules. Additionally,
at December 31, 1996, Mr. Della Penna was the majority shareholder, director
and officer of Executive Securities, Inc., the manager of the Note offering.
Mr. Della Penna has been active in the financial industry for approximately 19
years. During the period April 1980 to January 1986, Mr. Della Penna served as
the Assistant to the Chairman of the Board of Snelling & Snelling, Inc., as
well as Assistant Treasurer. Snelling & Snelling, Inc. is a franchiser of an
employee recruitment business. While with such firm, Mr. Della Penna also
served as a member of the Executive, Acquisition and Pension and Profit Sharing
committees. Mr. Della Penna also served as the personal business manager and
financial advisor to the Snelling family and affiliated entities and in such
capacity, was responsible for cash management, tax and investment analysis and
commitments. The Snelling family are the principal shareholders of Snelling &
Snelling, Inc. During the period April, 1978 through February 1980, Mr. Della
Penna was an associated person of Lehman Brothers, New York, New York, where he
was involved in the structuring, documentation and marketing of tax exempt
financings issued by state and local governments. Mr. Della Penna holds a
Bachelor of Science degree in Business Administration from Ithaca College,
Ithaca, New York and received a Master of Business Administration degree in
Finance from the State University of New York, Albany, New York.
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
------------------------------ ------ -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities
Name Annual Restricted Under- All Other
and Compen- Stock lying LTIP Compen-
Principal sation Award(s) Options/ Payouts sation
Position Year Salary ($) Bonus ($) ($) ($) SARs (#) ($) ($)
- -------- ---- ---------- --------- ------- ------ -------- --- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Guy S. Della Penna
President/CEO 1994 --- --- $150,977 --- --- --- --
1995 157,643
1996 81,157
</TABLE>
11
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Item 12. Security Ownership of Certain Beneficial Owners and Management
As of December 31, 1996, Mr. Della Penna, President and CEO, owns 100%
of the outstanding shares of common stock.
Item 13. Certain Relationships and Related Transactions
Management fees of $81,157 and $157,643 were paid in 1996 and 1995,
respectively, to an affiliated company, Capital Mortgage Management. Mr. Della
Penna is the 100% stockholder of this affiliated Company.
For the years ended December 31, 1996 and 1995, the Company utilized
office space of an affiliate for which it paid $11,529 and $12,299,
respectively.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K
27 Financial Data Schedule (for SEC use only).
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FEDERAL MORTGAGE MANAGEMENT, INC.
BY: /s/ Guy S. Della Penna
------------------------------------------
Guy S. Della Penna, President & Chief
Executive Officer
March 28, 1997
12
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FEDERAL MORTGAGE MANAGEMENT, INC.
REPORT ON AUDITS OF
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1995
Bobbitt, Pittenger & Company, P. A.
<PAGE> 14
February 21, 1997
TO THE STOCKHOLDER
Federal Mortgage Management, Inc.
Sarasota, Florida
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the accompanying balance sheets of Federal Mortgage Management,
Inc., as of December 31, 1996 and 1995, and the related statements of
operations, changes in stockholder's equity (deficit) and cash flows for the
years then ended. These financial statements are the responsibility of the
Corporation'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 Federal Mortgage Management,
Inc. at December 31, 1996 and 1995, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
Certified Public Accountants
<PAGE> 15
FEDERAL MORTGAGE MANAGEMENT, INC.
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 1
BALANCE SHEETS 2
STATEMENTS OF OPERATIONS 3
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT) 4
STATEMENTS OF CASH FLOWS 5
NOTES TO FINANCIAL STATEMENTS 6
</TABLE>
<PAGE> 16
FEDERAL MORTGAGE MANAGEMENT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
---- ----
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 177,283 $ 458,652
Accounts receivable, net 32,700 55,756
Accounts receivable - related party 217,730
Notes receivable - affiliate 100,000
Portfolio of residential mortgage loans - net 1,745,094 2,378,901
Prepaid expenses 29,225 13,155
----------- ----------
TOTAL CURRENT ASSETS 2,302,032 2,906,464
INVESTMENTS 104,601 82,660
OTHER ASSETS
Other real estate owned 217,441 183,962
Deferred financing costs, net of accumulated
amortization of $476,150 and $317,432 317,433 476,151
----------- ----------
$ 2,941,507 $3,649,237
=========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES
Interest payable $ 27,413 $ 30,103
Other liabilities 15,590 49,866
Current portion of notes payable 1,230,523 497,500
----------- ----------
TOTAL CURRENT LIABILITIES 1,273,526 577,469
NOTES PAYABLE, less current portion 2,733,200 3,733,200
----------- ----------
4,006,726 4,310,669
----------- ----------
STOCKHOLDER'S EQUITY (DEFICIT)
Common stock, $.01 par value, 150,000
shares authorized, 100,000 shares
issued and outstanding 1,000 1,000
Preferred stock, $.01 par value,
100,000 shares authorized,
no shares issued and outstanding
Retained earnings (deficit) (1,081,583) (662,432)
Net unrealized gain on securities
available for sale 15,364
----------- ----------
(1,065,219) (661,432)
----------- ----------
$ 2,941,507 $3,649,237
=========== ==========
</TABLE>
See notes to financial statements.
-4-
<PAGE> 17
FEDERAL MORTGAGE MANAGEMENT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
----------------------
1996 1995
---- ----
<S> <C> <C>
REVENUE
Accretion - CD interest $ 6,577 $ 15,674
Interest income - mortgage loans 249,252 296,595
(Loss) gain on sale of mortgage loans and other
real estate owned (11,699) 120,222
Interest income 3,632 2,262
--------- ---------
247,762 434,753
--------- ---------
EXPENSES
Advertising 9,969
Amortization 158,716 158,716
Commissions 15,942 24,158
Consulting fees 13,250
Executive compensation 81,157 157,643
Interest expense 347,237 372,666
Legal and accounting 6,755 30,228
Licenses and fees 2,407 2,871
Miscellaneous 5,580 470
Office supplies 1,398 2,821
Postage 4,039 2,259
Rent 11,529 12,299
Service fees 10,343 13,263
Taxes 1,373 1,132
Travel and entertainment 7,187 11,385
--------- ---------
666,913 799,880
--------- ---------
NET LOSS $(419,151) $(365,127)
========= =========
LOSS PER COMMON SHARE $ (4.192) $ (3.651)
========= =========
</TABLE>
See notes to financial statements.
-5-
<PAGE> 18
FEDERAL MORTGAGE MANAGEMENT, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Unrealized
Gain on
Securities
Common Accumulated Available
Stock Deficit For Sale Total
----- ----------- ---------- -----
<S> <C> <C> <C> <C>
BALANCE,
at January 1, 1995
$1,000 $ (297,305) $ $ (296,305)
NET LOSS - 1995 (365,127) (365,127)
------ ----------- ------- -----------
BALANCE,
at December 31, 1995 1,000 (662,432) (661,432)
NET LOSS - 1996 (419,151) (419,151)
UNREALIZED GAIN
ON SECURITIES
AVAILABLE FOR SALE
15,364 15,364
------ ----------- ------- -----------
BALANCE,
at December 31, 1996
$1,000 $(1,081,583) $15,364 $(1,065,219)
====== =========== ======= ===========
</TABLE>
See notes to financial statements.
-6-
<PAGE> 19
FEDERAL MORTGAGE MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(419,151) $(365,127)
Adjustments to reconcile net loss to net
cash (used) provided by operating activities:
Accretion (6,577) (15,674)
Amortization 158,716 158,716
Changes in operating assets and liabilities:
Accounts and notes receivable, net (294,672) (10,506)
Portfolio of residential mortgage loans 633,807 454,265
Prepaid expenses (16,070) (8,855)
Interest payable and other liabilities (36,966) 42,365
Other real estate owned (33,479) (183,962)
--------- ---------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (14,392) 71,222
--------- ---------
INVESTING ACTIVITIES
Sale of certificates of deposit 252,000
--------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES 252,000
--------- ---------
FINANCING ACTIVITIES
Redemption of note holders (266,977) (21,800)
Collection of advance to stockholder 5,743
--------- ---------
NET CASH USED BY FINANCING ACTIVITIES (266,977) (16,057)
--------- ---------
(DECREASE) INCREASE IN CASH (281,369) 307,165
CASH, at beginning of year 458,652 151,487
--------- ---------
CASH, at end of year $ 177,283 $ 458,652
========= =========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 349,927 $ 373,463
========= =========
</TABLE>
See notes to financial statements.
-7-
<PAGE> 20
FEDERAL MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Federal Mortgage Management, Inc. (the "Corporation"), a Florida corporation,
was organized on December 9, 1992. The purpose of the Corporation is to
acquire and deal in residential mortgage loans secured by first liens on real
estate, and to acquire insured instruments of deposits and/or debt securities
issued by the United States government and instrumentalities thereof. Purchase
of the residential mortgage loans, instruments of deposits and debt securities
are to be in accordance with policies set forth in the Acquisition Policy of
the Corporation. The purchases of the residential mortgage loans are to be
financed by issuance of notes payable to investors. Interest payments on the
notes and other distributions will be made in accordance with the registration
statement.
Investment in Securities
The Corporation's investments in securities are classified in three categories
and accounted for as follows:
- - Trading Securities. Securities held for resale in the near term.
Unrealized gains and losses on securities are included in other income.
- - Securities to be Held to Maturity. Instruments for which the Corporation
has the positive intent and ability to hold to maturity are reported at
cost, adjusted for amortization of premiums and accretion of discounts which
are recognized in interest income using the interest method over the period
to maturity.
- - Securities Available for Sale. Securities available for sale consist of
zero coupon certificates of deposit which are not classified as trading
securities nor as securities to be held to maturity.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their costs that are other than temporary
would result in write-downs of the individual securities to their fair value.
The Corporation presently has experienced no such declines.
Gains and losses on the sale of securities available for sale are determined
using the specific-identification method.
Portfolio of Residential Mortgage Loans
Residential mortgage loans are recorded at lower of cost or fair market value.
Purchase discounts are not amortized since the mortgage loans are owned for
several months and then sold to investors. The amortization of the discount
would not be materially significant to the operating results of the
Corporation.
-8-
<PAGE> 21
FEDERAL MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred Financing and Marketing Costs
Deferred financing and marketing costs are amortized on a straight line basis
over five years representing the period of the maturities of the notes payable.
Statements of Cash Flow
The Corporation includes cash and certain cash items as cash equivalents in
preparing the statement of cash flow. In order to facilitate comparison of
financial information, certain balances reported in prior year Corporation
totals have been reclassified to conform with current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the 1995 financial statements to
conform with the 1996 financial statement presentation. Such reclassifications
had no effect on net income as previously reported.
NOTE B - INVESTMENTS
Investments consist of zero coupon certificates of deposit. In 1995 this
investment was classified as held to maturity whereby the excess of face value
over the cost of the certificates of deposit (the discount), was being
amortized by the effective interest rate method over the respective terms. In
1996, this investment was reclassified to available for sale and is currently
reported at fair value.
The carrying amounts of investment securities are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- ---------- -----
<S> <C> <C> <C> <C>
December 31, 1996:
Certificates of deposit $89,237 $15,364 $ $104,601
======= ======= ========= ========
December 31, 1995:
Certificates of deposit $82,660
=======
</TABLE>
-9-
<PAGE> 22
FEDERAL MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE C - PORTFOLIO OF RESIDENTIAL MORTGAGE LOANS - NET
The Corporation purchases residential mortgage loans at a discount from the
face amount of the loans with the intention of selling the loans at a gain
after servicing them for a relatively short period of time. The mortgage loans
are purchased by investors based on various factors inherent in the group of
mortgages presented for sale which are considered in the negotiation process.
The portfolio of residential mortgage loans consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
---- ----
<S> <C> <C>
Face value $2,025,780 $2,913,898
Discount (250,686) (534,997)
Less: allowance for losses (30,000)
---------- ----------
Cost $1,745,094 $2,378,901
========== ==========
</TABLE>
The mortgages have various maturities ranging from 10 to 30 years, and varying
interest rates ranging from 7% to 15%. The residential mortgage loans are
secured by first liens on residential real property. The Corporation's policy
is to acquire residential mortgage loans with balances that do not exceed 90%
of the fair market value of the real estate or the loan acquisition price does
not exceed 80% of the fair market value of the collateral real estate at the
time of the loan acquisition. Past experience of the Corporation and its
management indicates that, in the event of default on the mortgage loan, the
Corporation's exposure to loss on the portfolio collateral is limited.
Additionally, the Corporation purchases mortgage loans collateralized by real
estate located in various locations in the United States.
NOTE D - OTHER REAL ESTATE OWNED
Other real estate owned represents real property acquired by foreclosure or in
settlement of debt, and also includes in-substance foreclosures. In-substance
foreclosures are real estate mortgages in which the borrower has little or no
equity in the collateral and the borrower has formally or effectively abandoned
the collateral or cannot demonstrate the capacity to repay the mortgage other
than through sale of the collateral. Other real estate owned is valued at the
lower of the property's fair value or the recorded investment in the mortgage.
At the time of foreclosure, if the fair value of the real estate acquired is
less than the Partnership's recorded investment in the mortgage, a write down
is recognized through a charge to the allowance for mortgage losses. Gains or
losses on the sale of and losses on the periodic revaluation of real estate
acquired are charged or credited to noninterest expense.
At December 31, 1996 and 1995, the Corporation is holding properties for sale
with a cost basis of $217,441 and $183,962, respectively.
-10-
<PAGE> 23
FEDERAL MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE E - NOTES PAYABLE
During the year ended December 31, 1994, the Corporation issued notes through a
public offering to finance the purchase of residential mortgage loans. The
notes have interest rates ranging from 8.50% to 9.25% depending on the terms
which range from 24 months to 60 months. Interest is paid monthly with
principal being paid at maturity. Aggregate principal maturities on notes are
as follows:
<TABLE>
<S> <C>
1997 $1,230,523
1998 2,733,200
----------
3,963,723
Less current portion 1,230,523
----------
Notes payable, net of current portion $2,733,200
==========
</TABLE>
The notes are collateralized by all the assets of the Corporation. For the
years ended December 31, 1996 and 1995, the Corporation incurred interest
expense of $347,237 and $372,686, respectively, related to the notes payable.
NOTE F - STOCKHOLDER'S EQUITY
Preferred Stock
The Board of Directors will establish the dividend rate, redemption price and
rights of the holders of preferred stock prior to the date of issuance of these
shares. No preferred stock has been issued as of December 31, 1996 and 1995.
The Board of Directors has not established the preferred stockholder's
preferences and rights as of the date of this report.
NOTE G - DEFERRED FINANCING AND MARKETING COSTS
Deferred financing costs consist of legal and accounting fees associated with
the filing of the registration statement with the Securities and Exchange
Commission as well as costs incurred for the promotion of the issuance of the
notes payable. These costs are amortized on a straight line basis over five
years.
NOTE H - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In addition to the portfolio of residential mortgage loans, financial
instruments that also subject the Corporation to concentrations of credit risk
consist principally of cash deposits. The Corporation places these investments
with a single financial institution. Deposits are insured up to $100,000. At
any given time, the Corporation may have cash deposits exceeding the insured
amount.
-11-
<PAGE> 24
FEDERAL MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE I - INCOME TAXES
The Corporation is recognized as a Sub-Chapter S corporation by the Internal
Revenue Service. Therefore, the financial statements include no provision for
federal income taxes since the income or loss is reportable on the tax return
of the stockholder.
NOTE J - RELATED PARTY TRANSACTIONS
The sole stockholder and affiliated entities entered into transactions with the
Corporation as follows:
As of December 31, 1996 and 1995, the Corporation has accounts receivable from
the stockholder in the amount of $11,400 and $400, respectively. The
stockholder received compensation of approximately $81,000 and $158,000 in 1996
and 1995, respectively.
In December 1995, the Corporation sold a portfolio of mortgage loans to an
affiliate for $68,902. The portfolio was sold at cost; therefore, no gain or
loss was recognized. During 1996, the Corporation purchased a portfolio of
mortgage loans from the affiliate for $137,529. Additionally, during 1996, the
affiliate collected $131,752 from the sale of mortgages owned by the
Corporation. These amounts were due to the Corporation at December 31, 1996.
During 1995 and 1996 the Corporation advanced an affiliate start-up costs while
in its development stage. Advances as of December 31, 1996 and 1995 were
$60,421 and $21,653, respectively.
The stockholder is the controlling stockholder of a related entity organized in
1995 to develop and implement a franchise business pursuant to which the
franchisee will purchase residential single family houses for resale. The
corporation purchased short-term promissory notes from the entity in the amount
of $100,000 which pay interest of 12% per annum and are due on October 31,
1997.
For the years ended December 31, 1996 and 1995, the Corporation utilized office
space from an affiliate for which it paid $11,529 and $12,300 rent expense,
respectively.
An affiliated company services the mortgages of the Corporation. For the years
ended December 31, 1996 and 1995, the Corporation paid servicing fees to the
affiliate in the amount of $10,343 and $13,263, respectively.
-12-
<PAGE> 25
FEDERAL MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE K - FAIR VALUE OF FINANCIAL INSTRUMENTS IN ACCORDANCE
WITH THE REQUIREMENTS OF SFAS NO. 107
The Corporation's financial instruments consist of all of its assets and
liabilities with the exception of other real estate and deferred financing
costs. The Corporation's management has determined that the fair value of all
of its financial instruments is equivalent to the carrying cost. The mortgage
portfolio is purchased with the intent of a relatively short holding period of
several months. Therefore, any differences in the value of the mortgage
portfolio due to changes in market interest rates are minimal. Furthermore,
each purchase and sale of mortgages by the Corporation is a private, negotiated
transaction. There is no readily established market for the Corporation's
mortgage portfolio.
The Corporation's note obligations are not traded on an established market and
the only activity with respect to the obligations are normal, scheduled
redemptions. The Corporation's management estimates that the current interest
rate which the Corporation would need to pay in order to sell similar note
obligations is approximately equivalent to the rates of the outstanding note
obligations.
NOTE L - CLASSIFICATION OF MORTGAGE PORTFOLIO IN ACCORDANCE
WITH THE REQUIREMENTS OF SFAS NO. 115
The Corporation's mortgage portfolio is a trading security. As such, it is
required to be carried at fair value, with any unrealized holding gains or
losses included in earnings. For the reasons discussed in Note K, the carrying
value of the mortgage portfolio has been determined by the Corporation's
management to be equivalent to its carrying cost.
NOTE M - CONCENTRATION OF CREDIT RISK
The Corporation invests in various financial institutions whose deposits are
insured by the Federal Deposit Insurance Corporation (FDIC) up to a maximum of
$100,000. At December 31, 1996 and 1995, the Corporation had deposits of
approximately $0 and $360,000, respectively, in excess of FDIC insured limits.
NOTE N - SUBSEQUENT EVENTS
Subsequent to December 31, 1996, the Corporation has begun liquidating the
long-term portion of its mortgage portfolio and other real estate owned.
Management intends to focus its mortgage lending on interim loans with
maturities of approximately six months.
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 177,283
<SECURITIES> 2,067,136
<RECEIVABLES> 379,655
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,624,074
<PP&E> 793,583
<DEPRECIATION> (476,150)
<TOTAL-ASSETS> 2,941,507
<CURRENT-LIABILITIES> 1,273,526
<BONDS> 2,733,200
0
0
<COMMON> 1,000
<OTHER-SE> (1,066,219)
<TOTAL-LIABILITY-AND-EQUITY> 2,941,507
<SALES> 247,762
<TOTAL-REVENUES> 247,762
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 666,913
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (419,151)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (419,151)
<EPS-PRIMARY> (4.192)
<EPS-DILUTED> (4.192)
</TABLE>
