SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K SB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File No.
December 31, 1997 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
incorporation or organization Number
1800 Second Street, Suite 780, Sarasota, Florida 34236
(Address of principal executive offices, zip code)
941-954-2328
-------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(b) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to
such filing requirements for the past 90 days. /X/ Yes / /No.
As of December 31, 1997 the Company has 156 secured promissory Notes
Payable (Notes) with a total of $2,688,400 principal balance outstanding.
As indicated, the Company is a Company organized pursuant to Florida law.
The Company had total revenues of $236,248 in 1997.
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, 1997, such 100,000 shares are held
beneficially by the Gaeton S. Della Penna Revocable Living Trust, dtd. June
1, 1992, as amended. 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, as of December 31, 1997, the Company had 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 9% 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, 1997, the portfolio of mortgage loans held
by the Company met this criteria.
The Company may on a case by case basis acquire real estate mortgage
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, 1997, the Company s portfolio of
mortgage loans did not include any mortgage loans secured by unimproved
real estate.
During mid to late fiscal 1996, management evaluated the costs
associated with servicing individual residential mortgage notes, the
delinquency rate and factors contributing to delinquencies, and the
annualized return on investments. Management was concerned and
dissatisfied with these results and has taken extensive steps to cut
expenses and find viable areas of mortgage related revenues. With
increasing the revenue stream as a primary objective, interim financing
projected a better forecast and had minimal costs associated with it.
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
Policy of the Corporation. For such arrangement, the Corporation has
advanced an effective good faith retainer in the amount of $200,000.
HomeVestors has granted the Corporation and its affiliates a first right of
refusal on interim first lien residential mortgage financings created by
HomeVestors. HomeVestors will pay the Corporation 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 have been returned to the Corporation.
However, management has decided to enter the same arrangement through an
affiliate and will essentially liquidate or transfer the good faith
retainer of $200,000 plus accrued interest to date so as to invest, buy,
sell and trade in both interim and permanent loans. Mr. Della Penna, the
President owns approximately 17% of the outstanding Common Stock of
HomeVestors. The Corporation 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. Interest payments on
the notes and other distributions will be made in accordance with the
registration statement.
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, 1997, the Company owned Certificates of Deposits with a face
value of $100,000. After taking into account the discount of $19,772 , the
Certificate of Deposits had a book value of $80,228. These will have been
liquidated, the proceeds of which will be utilized in the buying and
selling of first lien residential mortgages.
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. In return,
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, 1997, the Company paid $5,189 in servicing fees
to FMIL.
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 three 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 interim financing mortgage
loans as well as 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 on December 1, 1997, 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, 1997, the significant assets of the Company were
constituted by the first lien residential mortgage loans, and interim
financing and certificates of deposit in the amount of $264,912 and
$80,228, respectively. The mortgaged properties included in the loan
portfolio at December 31, 1997, are located in Florida, Kansas, Missouri
and Texas. (See Item 1 for discussion of mortgage activity, including
servicing and portfolio turnover policy.)
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, 1997 nor is any litigation or claim threatened.
Item. 4 Submission of Matters to a Vote of Security Holders
NOT APPLICABLE
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
At December 31, 1997, all of the outstanding voting equity securities
of the Company constituted by 100,000 shares of Common Stock, $.01 par
value, were held of record and beneficially by the Gaeton S. Della Penna
Revocable Living Trust, dtd. June 1, 1992, as amended. 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, 1997 and 1996, and the related increase in
each:
<TABLE>
<CAPTION>
1997 1996 Increase/
Decrease
--------- --------- ----------
<S> <C> <C> <C>
Accretion of certificate
of deposit interest $ --- $ 6,577 $ (6,577)
Interest income - residential
mortgage loans 220,693 249,252 (28,559)
Interest income 7,180 --- 7,180
Other income 8,622 3,632 4,990
EXPENSES
Bad debts expense 295,499 --- 295,499
Commissions 13,588 15,942 (2,354)
Consulting 15,539 20,006 (4,467)
Interest 324,258 347,237 (22,979)
Loss on write-offs-ORE
and mortgage loan notes 244,609 --- 244,609
Management Fees 20,520 81,157 (60,637)
Office expense 9,530 5,632 3,898
Salaries and wages 23,143 --- 23,143
Service fees 5,189 10,343 (5,154)
Taxes 4,399 1,373 3,026
Travel and entertainment 4,142 7,187 (3,045)
</TABLE>
The Company had a decrease in operating revenue of $22,966 for the
year ended December 31, 1997, as compared to the same period in 1996. This
decrease is due primarily to a decrease in interest income of $28,559 for
the year ended December 31, 1997 as compared to the same period ended 1996.
This decrease relates to the fact that the Company paid principal payments
to noteholders in the amount of $239,000 in December of 1996 which resulted
in fewer funds invested in mortgage notes and an increase in delinquent or
non-performing loans.
Bad debts increased $295,499 for the year ended December 31, 1997, as
compared to the same period ended 1996. This increase relates to an
advance made to a mortgage broker against commissions generated and a note
receivable of $200,000 . The advance was believed to be uncollectible at
December 31, 1997. However, Management anticipates selling the note
receivable of $200,000 to a third party. An allowance for the full
$200,000 was entered on the company's book at December 31, 1997.
Commissions decreased $2,354 from the year ended December 31, 1997, as
compared to the year ended December 31, 1996. This decrease relates to the
fact that as of December 31, 1997, the Company sold fewer mortgages through
third-party mortgage brokers than compared to the same period ended in 1996
and during fiscal 1997, and the Company invested more funds in interim
financing.
Consulting fees decreased $4,467 for the year ended December 31, 1997
compared to the same period ended 1996. This decrease results from the
Company s decision to write off those properties mentioned above and legal
action costs. Legal fees, taxes, insurance and maintenance upgrades to
these properties decreased substantially throughout fiscal 1997.
Interest expense for the year ended December 31, 1997, decreased
$22,979 as compared to the same period in 1996. This decrease is
attributable to the fact that as of December 31, 1996, the Company's 7.75%
series of notes matured. Principal in the amount of $239,000 was paid to
the noteholders.
Loss on write offs-ORES and mortgage notes of $244,609 for the year
ended December 31, 1997, compared to none for the same period ended 1996,
is due to the liquidation at market value of the portfolio during fiscal
1997. Several mortgage notes that had been foreclosed and held on the
books as ORES (Other Real Estate), were costing more to maintain than the
Company could financially justify from a cost basis and realistically
carry. These properties were written off throughout the third and fourth
fiscal quarters of 1997.
Management fees decreased from $81,157 to $20,520 for the period ended
December 31, 1996 and 1997, respectively. This decrease relates to fewer
mortgage notes and the related face value of portfolio assets held at
December 31, 1997 compared to the period ended 1996.
Servicing fees decreased $5,154 for the period ended December 31, 1997
as compared to the same period in 1996. This decrease relates to the fact
that fewer mortgages were held during the year ended December 31, 1997 as
compared to the same period ended December 31, 1996.
Travel expenses decreased from $7,187 to $4,142 for the period ended
December 31, 1996 and 1997, respectively. The decrease relates to
decreased traveling of management in sourcing, reviewing and offering for
the acquisition and sale portfolios of residential mortgages and seeking to
interim financing where and when appropriate, as an alternative.
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 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, 1997, represent an annualized rate of return of approximately
20% on the basis of the Company costs in acquiring such portfolio loans and
an annualized rate of return of approximately 15% (stated rate) on the
basis of the unpaid principal balance of the portfolio loans at December
31, 1997.
At December 31, 1997, the portfolio of the Company consisted of
mortgage notes with a carrying value of $257,912. The following table
shows the mortgage notes at face value and carrying value which takes into
consideration the discount and allowance for losses:
Principal Allowance
Face Value Discount Payments For Losses Carrying Value
- ---------- -------- --------- ---------- --------------
$271,925 ($6,758) ($255) ($7,000) $ 257,912
At December 31, 1997, the underlying real estate collateral of the
Companys portfolio of mortgage loans have an appraised value of
approximately $417,386, or a carrying value to appraised value ratio of 64
to 1. The collateral real estate securing such loans as of December 31,
1997, was residential real estate. The Company held no unimproved real
estate loans as of December 31, 1997.
There was 1 mortgage loan with a carrying value of $33,698 that was
delinquent (in terms of scheduled principal and interest payments) as of
December 31, 1997. This loan represents 13% of the carrying value of the
portfolio.
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.
As shown in the accompanying financial statements, the Corporation
incurred a net loss of $698,505 during the year ended December 31, 1997,
and as of that date, the Company s current liabilities exceeded its current
assets by $1,937,805. The ability of the Corporation to continue as a
going concern is dependent on obtaining additional capital and financing.
The financial statements do not include any adjustments that might be
necessary if the Corporation is unable to continue as a going concern. As
disclosed in the Form 10K-SB for the fiscal year ending December 31, 1996,
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-IV has been suggested. Management in consultation with the
Trustee and legal counsel will be addressing the feasibility, logistics and
necessary steps to proffer such a definitive plan to the noteholders of the
aforementioned Series during the first half of fiscal 1998. Such plan may
include, but not be limited to the extension of the respective maturity
from 24 to 36 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
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 45, has been a resident of Sarasota, Florida
since 1980 and is the founder and President of Capital Management Group,
Inc. Capital Management Group, Inc. was organized by Mr. Della Penna in
1989. Under the auspices of Capital Management Group, Inc., Mr. Della
Penna has provided financial and tax consulting and advisory services to
individuals and corporate entities. Capital Management Group, Inc. also
acts as general agent for various insurance companies. Mr. Della Penna is
a General Securities Principal and Financial and Operations Principal
pursuant to NASD Rules. Additionally, at December 31, 1996, Mr. Della
Penna was the majority shareholder, director and officer of Executive
Securities, Inc., the manager of the Note offering. Mr. Della Penna has
been active in the financial industry for approximately 19 years. During
the period April 1980 to January 1986, Mr. Della Penna served as the
Assistant to the Chairman of the Board of Snelling & Snelling, Inc., as
well as Assistant Treasurer. Snelling & Snelling, Inc. is a franchiser of
an employee recruitment business. While with such firm, Mr. Della Penna
also served as a member of the Executive, Acquisition and Pension and
Profit Sharing committees. Mr. Della Penna also served as the personal
business manager and financial advisor to the Snelling family and
affiliated entities and in such capacity, was responsible for cash
management, tax and investment analysis and commitments. The Snelling
family are the principal shareholders of Snelling & Snelling, Inc. During
the period April, 1978 through February 1980, Mr. Della Penna was an
associated person of Lehman Brothers, New York, New York, where he was
involved in the structuring, documentation and marketing of tax exempt
financings issued by state and local governments. Mr. Della Penna holds a
Bachelor of Science degree in Business Administration from Ithaca College,
Ithaca, New York and received a Master of Business Administration degree in
Finance from the State University of New York, Albany, New York.
Item 11. Executive Compensation
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities
Name Annual Restricted Under- All Other
and Compen- Stock lying LTIP Compen-
Principal sation Award(s) Options/ Payouts sation
Position Year Salary($) Bonus($) ($) ($) SARs (#) ($) ($)
- --------- ---- -------- -------- ------- -------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Guy S.
Della Penna
President/
CEO 1994 --- --- $150,977 --- --- --- ---
1995 157,643
1996 81,157
1997 20,520
</TABLE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of December 31, 1997, the Gaeton S. Della Penna Revocable Living
Trust, dtd. June 1, 1992, as amended, owns 100% of the outstanding shares
of common stock.
Item 13. Certain Relationships and Related Transactions
Management fees of $20,520 and $81,157 were paid in 1997 and 1996,
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, 1997 and 1996, the Company utilized
office space of an affiliate for which it paid $11,459 and $11,529,
respectively.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
NOT APPLICABLE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FEDERAL MORTGAGE MANAGEMENT, INC.
BY: Guy S. Della Penna
---------------------------------------------
Guy S. Della Penna, President & Chief Executive Officer
March 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 71,877
<SECURITIES> 257,911
<RECEIVABLES> 242,205
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 571,993
<PP&E> 793,583
<DEPRECIATION> (634,867)
<TOTAL-ASSETS> 730,710
<CURRENT-LIABILITIES> 21,398
<BONDS> 0
0
0
<COMMON> 1,000
<OTHER-SE> (1,980,088)
<TOTAL-LIABILITY-AND-EQUITY> 730,710
<SALES> 236,495
<TOTAL-REVENUES> 236,495
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,135,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (898,505)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (898,505)
<EPS-PRIMARY> (8.985)
<EPS-DILUTED> (8.985)
</TABLE>
FEDERAL MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
February 6, 1998
TO THE STOCKHOLDER
Federal Mortgage Management, Inc.
Sarasota, Florida
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the accompanying statements of financial condition of
Federal Mortgage Management, Inc., as of December 31, 1997 and 1996, 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, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Corporation will continue as a going concern. As discussed in Note P to
the financial statements, the Corporation has suffered recurring losses
from operations and has a net capital deficiency that raises substantial
doubt about its ability to continue as a going concern. Management s plans
in regard to these matters are also described in Note P. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
Certified Public Accountants
FEDERAL MORTGAGE MANAGEMENT, INC.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
1997 1996
ASSETS
<S> <C> <C>
Cash $ 71,877 $ 177,283
Accounts receivable, net 200 200
Accounts receivable - related party 209,505 217,730
Notes receivable 32,500 32,500
Notes receivable - affiliate, net 100,000
Portfolio of residential mortgage loans - net 257,911 1,745,094
Prepaid expenses 29,225
Investments 104,601
Other real estate owned 217,441
Deferred financing costs, net of
accumulated amortization of
$634,867 and $476,150 158,717 317,433
---------- -----------
$ 730,710 $2,941,507
========== ===========
LIABILITIES AND STOCKHOLDER S EQUITY (DEFICIT)
LIABILITIES
Interest payable $ 19,850 $ 27,413
Other liabilities 1,548 15,590
Current portion of notes payable 2,688,400 1,230,523
Notes payable 2,733,200
---------- -----------
2,709,798 4,006,726
---------- -----------
STOCKHOLDERS 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 deficit (1,980,088) (1,081,583)
Net unrealized appreciation on securities
available for sale 15,364
----------- ------------
(1,979,088) (1,065,219)
----------- ------------
$ 730,710 $ 2,941,507
=========== ============
</TABLE>
See notes to financial statements.
FEDERAL MORTGAGE MANAGEMENT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
--------------------------
1997 1996
<S> <C> <C>
REVENUE
Accretion - CD interest $ $ 6,577
Interest income - mortgage loans 220,693 249,252
Interest income 7,180
Other income 8,622 3,632
----------- ------------
236,495 259,461
----------- -----------
EXPENSES
Amortization 158,716 158,716
Bad debt expense 295,499
Commissions 13,588 15,942
Consulting fees 793 13,250
Executive compensation 20,520 81,157
Interest expense 324,258 347,237
Legal and accounting 14,746 6,755
Licenses and fees 2,037 2,407
Loss on sale of mortgage loans
and other real estate owned 244,609 11,699
Miscellaneous 4,630 5,580
Office supplies 3,886 1,398
Postage 3,386 4,039
Rent 11,459 11,529
Salary and benefits 23,143
Service fees 5,189 10,343
Taxes 4,399 1,373
Travel and entertainment 4,142 7,187
----------- -----------
1,135,000 678,612
----------- -----------
NET LOSS $ (898,505) $ (419,151)
=========== ===========
LOSS PER COMMON SHARE $ (8.985) $ (4.192)
=========== ===========
</TABLE>
See notes to financial statements.
FEDERAL MORTGAGE MANAGEMENT, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Unrealized
Appreciation
on Securities
Common Retained Available
Stock Deficit For Sale Total
<S> <C> <C> <C> <C>
BALANCE,
at January 1, 1996 $ 1,000 $ (662,432) $ $ (661,432)
NET LOSS - 1996 (419,151) (419,151)
CHANGE IN UNREALIZED
APPRECIATION ON
SECURITIES AVAILABLE
FOR SALE 15,364 15,364
--------- ------------ ----------- -------------
BALANCE,
at December 31, 1996 1,000 (1,081,583) 15,364 (1,065,219)
NET LOSS - 1997 (898,505) (898,505)
Change in unrealized
appreciation on
securities available
for sale (15,364) (15,364)
--------- ------------ ------------ -------------
BALANCE
at December 31, 1997 $1,000 $(1,980,088) $ $ (1,979,088)
========= ============ ============ =============
</TABLE>
See notes to financial statements.
FEDERAL MORTGAGE MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------
1997 1996
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (898,505) $(419,151)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Accretion (6,577)
Amortization 158,716 158,716
Changes in operating assets and liabilities:
Accounts and notes receivable, net 108,225 (294,672)
Portfolio of residential mortgage loans 1,487,183 633,807
Prepaid expenses 29,225 (16,070)
Interest payable and other liabilities (21,605) (36,966)
Other real estate owned 217,441 (33,479)
------------- ----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 1,080,680 (14,392)
------------- ----------
NET CASH PROVIDED BY INVESTING ACTIVITIES
Sale of certificates of deposit 89,237
------------- ----------
NET CASH USED BY FINANCING ACTIVITIES
Redemption of note holders (1,275,323) (266,977)
------------- ----------
DECREASE IN CASH (105,406) (281,369)
CASH, at beginning of year 177,283 458,652
------------- ----------
CASH, at end of year $ 71,877 $ 177,283
============= ==========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 331,821 $ 349,927
============= ==========
</TABLE>
See notes to financial statements.
FEDERAL MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE A - 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.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
Investment in Securities
The Corporation s investments in securities are classified in three
categories and accounted for as follows:
Trading Securities. Securities held principally for resale in the near
term are classified as trading securities and recorded at their fair
values. Unrealized gains and losses on securities are included in other
income. The Corporation presently has no such securities.
Securities to be Held to Maturity. Instruments for which the Corporation
has the positive intent and ability to hold to maturity are reported at
cost, adjusted for amortization of premiums and accretion of discounts
which are recognized in interest income using the interest method over
the period to maturity. The Corporation presently has no such
securities.
Securities Available for Sale. Securities available for sale consist of
zero coupon certificates of deposit which are not classified as trading
securities nor as securities to be held to maturity.
Declines in the fair value of individual held-to-maturity and available-for-
sale securities below their costs that are other than temporary would
result in write-downs of the individual securities to their fair value.
The Corporation presently has experienced no such declines.
Gains and losses on the sale of securities available for sale are
determined using the specific-identification method.
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.
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
For purposes of reporting cash flows, the Corporation considers cash and
cash equivalents as those amounts which are not subject to restrictions or
penalties and have an original maturity of three months or less.
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 1996 financial statements
to conform with the 1997 financial statement presentation. Such
reclassifications had no effect on net income as previously reported.
Earnings per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share . Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have
been presented, and where appropriate, restated to conform to the Statement
128 requirements. For the years ending December 31, 1997 and 1996 the
Corporation had no dilutive securities.
NOTE C - NOTES RECEIVABLE - AFFILIATE, NET
Notes receivable-affiliate consist of short-term promissory notes. (See
Note L)
The carrying amount of notes receivable-affiliate at December 31, is as
follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Notes receivable-affiliate $200,000 $100,000
Allowance for uncollectible notes 200,000
--------- ---------
Notes receivable-affiliate, net $ - $100,000
========= =========
</TABLE>
NOTE D - INVESTMENTS
Investments consist of a zero coupon certificate of deposit. In 1996, this
investment was classified as available for sale and was reported at fair
value. The Corporation had no investments at December 31, 1997.
The carrying amount of investment securities is as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
December 31, 1996:
Certificates of deposit $ 89,237 $ 15,364 $ $104,601
========= ========== ========== ========
</TABLE>
NOTE E - PORTFOLIO OF RESIDENTIAL MORTGAGE LOANS - NET
The Corporation purchases residential mortgage loans at a discount from the
face amount of the loans with the intention of selling the loans at a gain
after servicing them for a relatively short period of time. The mortgage
loans are purchased by investors based on various factors inherent in the
group of mortgages presented for sale which are considered in the
negotiation process.
The portfolio of residential mortgage loans consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
<S> <C> <C>
Face value $ 271,670 $2,025,780
Discount (6,759) (250,686)
Less: allowance for losses (7,000) (30,000)
----------- -----------
$ 257,911 $1,745,094
=========== ===========
</TABLE>
The mortgages have various maturities ranging from 6 months to 30 years,
and varying interest rates ranging from 7% to 18%. The residential
mortgage loans are secured by first liens on residential real property.
The 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. The
Corporation purchases mortgage loans collateralized by real estate located
in the United States. In 1997, the Corporation liquidated the long-term
portion of its mortgage portfolio. Management intends to focus its
mortgage lending on interim loans with maturities of approximately six
months.
NOTE F - OTHER REAL ESTATE OWNED
Other real estate owned represents real property acquired by foreclosure or
in settlement of debt. Other real estate owned is valued at the lower of
the 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, the Corporation was holding properties for sale with
a cost basis of $217,441. During 1997, the Corporation liquidated its
other real estate owned at a loss of approximately $112,000. No other real
estate owned was held at December 31, 1997.
NOTE G - 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 carry an interest rates of 9.00% and 9.25%. The notes
totaling $2,688,400, mature December 21, 1998. Interest is paid monthly
with principal due at maturity.
The notes are collateralized by all the assets of the Corporation. For the
years ended December 31, 1997 and 1996, the Corporation incurred interest
expense of $324,258 and $347,237, respectively, related to the notes
payable.
NOTE H - 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,
1997 and 1996. The Board of Directors has not established the preferred
stockholder s preferences and rights as of the date of this report.
NOTE I - 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 J - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In addition to the portfolio of residential mortgage loans, financial
instruments that also subject the Corporation to concentrations of credit
risk consist principally of cash deposits. The Corporation places these
investments with a single financial institution. Deposits are insured up
to $100,000. At any given time, the Corporation may have cash deposits
exceeding the insured amount.
NOTE K - 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 L - RELATED PARTY TRANSACTIONS
The sole stockholder and affiliated entities entered into transactions with
the Corporation as follows:
As of December 31, 1996, the Corporation had accounts receivable from the
stockholder in the amount of $11,400. This was paid during 1997. The
stockholder received compensation of approximately $20,520 and $81,000 in
1997 and 1996, respectively.
During 1997 and 1996, the Corporation purchased a portfolio of mortgage
loans from an affiliate for approximately $390,000 and $138,000,
respectively. Additionally, during 1996, the affiliate collected $131,752
from the sale of mortgages owned by the Corporation. This was paid during
the year ended December 31, 1997. In December of 1997, the Corporation
sold mortgages to an affiliated company. The sales price totaled
approximately $1,028,000, at the Corporation s cost basis.
During 1996, the Corporation advanced an affiliate start-up costs while in
its development stage. Advances as of December 31, 1996 were $60,421.
These advances were repaid during the year ended December 31, 1997.
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.
During 1997, the Corporation purchased additional short-term promisssory
notes in the amount of $100,000, for a total of $200,000 at December 31,
1997. (See Note C)
For the years ended December 31, 1997 and 1996, the Corporation utilized
office space from an affiliate for which it paid $11,459 and $11,529 rent
expense, respectively.
The Corporation prepaid management fees to an affiliated company. Based on
the current financial position of the company it was determined that the
Corporation had overpaid. Included in accounts receivable - related party
is the $209,505 overpayment.
An affiliated company services the mortgages of the Corporation. For the
years ended December 31, 1997 and 1996, the Corporation paid servicing fees
to the affiliate in the amount of $5,189 and $10,343, respectively.
NOTE M -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 N -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 M, the
carrying value of the mortgage portfolio has been determined by the
Corporation s management to be equivalent to its carrying cost.
NOTE O - 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, 1997 and 1996, the Corporation had no
deposits in excess of FDIC insured limits.
NOTE P - GOING CONCERN
As shown in the accompanying financial statements, the Corporation incurred
a net loss of $898,505 during the year ended December 31, 1997, and as of
that date, the Company s current liabilities exceeded its current assets by
approximately $2,200,000. The ability of the Corporation to continue as a
going concern is dependent on obtaining additional capital and financing
and operating at a profitable level. The financial statements do not
include any adjustments that might be necessary if the Corporation is
unable to continue as a going concern. As disclosed in the Form 10K-SB for
the fiscal year ending December 31, 1996, 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 1994A-IV has been suggested.
Management, in consultation with the Trustee and legal counsel will be
addressing the feasibility, logistics and necessary steps to proffer such a
definitive plan to the noteholders of the aforementioned Series during the
first half of fiscal 1998. Such plan may include, but not be limited to
the extension of the respective maturity from 24 to 36 months from their
scheduled maturation.
NOTE Q - SUBSEQUENT EVENTS
In January of 1998, the Corporation sold mortgages totaling $55,000 to an
affiliated company. (See Note L)
