SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K SB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File No.
December 31, 1998 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, 1998 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 $246,860 in 1998.
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, 1998, 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 instrumentalitys 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 incertain instances unimproved real estate, in accordance
with the Acquisition Policy. The Company may originate mortgage loans. 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, 1998, 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 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 Companys Portfolio. At December 31, 1998, the Companys portfolio of
mortgage loans did not include any mortgage loans secured by unimproved real
estate.
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. As of February 15, 1999, this amount has
been paid back to the Company. HomeVestors has granted the Corporation and
its affiliates a first right of refusal on interim first lien residential
mortgage financings created by HomeVestors. HomeVestors paid the Corporation
12% interest per annum on this sum on a quarterly basis for a period of two
years. Mr. Della Penna, the President owns approximately 13% of the
outstanding Common Stock of HomeVestors. 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, 1998, the Company did
not own Certificates of Deposits.
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 Companys
portfolio of mortgage loans, computed and paid monthly. In the year ended
December 31, 1998, the Company paid $567 in servicing fees to FMIL.
Portfolio turnover policy. The Company engages in the business of acquiring
and selling mortgage loan portfolios. It is managements intent to turn the
entire portfolio over at least three times 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.
Item 2. Properties
At December 31, 1998, the significant assets of the Company were constituted by
the first lien residential mortgage loans, and interim financing and other
real estate in the amount of $124,913. The mortgaged properties included in
the loan portfolio at December 31, 1998, are located in Kansas and Texas.
Item 3. Legal Proceedings
The Company was not a party to any litigation for the period ended December
31, 1998, nor is any litigation or claim threatened.
Item. 4 Submission of Matters to a Vote of Security Holders
Not applicable
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Registrant conducted a public offering of its Secured Promissory Notes
designated as its Series 1993A Notes and realized approximate net proceeds from
such sale of $3,614,625. Such public offering concluded September 30, 1994.
The 1993A Series of Secured Promissory Notes of the Registrant were
classified into four sub-Series as indicated by the table presented below:
Principal Annual Principal
Amount Term to Note Amount
Series Authorized Maturity Rate Sold
1993A-I $ 500,000 24 months 7.25% $ 273,000
1993A-II 750,000 36 months 7.75 239,500
1993A-III 1,000,000 48 months 8.50 1,000,000
1993-IV 2,750,000 60 months 9.00 2,470,000
The Registrant has repaid all of the principal and interest obligation of the
sub-Series 1993A-I, 1993A-II and 1993A-III, the principal and interest
obligation represented by the outstanding 1993A-IV sub-Series was due
December 21, 1998. The aggregate principal amount due in such sub-Series
as of February 16, 1999 is $2,661,700.
Circumstances precluded the Registrant from meeting the obligation represented
by the 1993A-IV Notes on the due date thereof and the Registrant is in default.
Of the aggregate principal amount represented by such 1993A-IV sub-Series of
Notes, $1,945,200 of such principal amount is held by holders believed to be
residents of the State of Florida (the Outstanding Notes and Qualified
Holders, respectively).
Pursuant to a document styled Offering Document Relating to Note Exchange (the
Exchange Document), the Registrant has solicited the Holders to accept in
full payment of such Outstanding Notes substitute Promissory Notes in like
principal and interest amounts but incorporating a maturity date of June 21,
2002 (the New Notes). The Exchange Offer will be conducted by the Registrant
until April 16, 1999 unless extended by the Registrant as permitted by the
terms of the Exchange Offer. The Exchange Offer is made exclusively by the
Exchange Document which contains all information believed material
by the Registrant in order to permit Holders to make an informed decision as
to whether to accept the Exchange Offer or to pursue such remedies that such
Holders have as a result of the terms of issuance of the Outstanding Notes.
The Exchange Offer is being made by the Registrant without registration of the
New Notes under the Securities Act of 1933, as amended, or the Florida
Securities and Investor Protection Act, as amended (the Act and FIPA,
respectively) in reliance upon the exemption from registration under the Act
as set forth in Section 3(a)(11) thereof and Rule 147 promulgated thereunder
and the transactional exemption provided by Chapter 517.061(5) of FIPA.
As a separate and distinct transaction, an affiliate of the Registrant, Federal
Mortgage Management II, Inc. is offering to exchange its Subordinated Secured
Promissory Notes, First Series (the Subordinated Notes), for the 1993A-IV
sub-Series of Notes held by persons who are not residents of the State of
Florida (Non-Florida Holders). The Subordinated Notes of Federal Mortgage
Management II, Inc. will be offered in like principal amount and with the
same interest rates as the Notes held by such Non-Florida Holders. Such
Exchange Offer was made in an informational letter with exhibits and
attachments directed to such Non-Florida Holders and dated February 17, 1999.
Of the 1993A-IV sub-Series of Notes which are outstanding, $716,500 principal
amount thereof is held by approximately 25 holders who are not residents of
the State of Florida.
The Subordinated Notes have not been registered under the Act or FIPA in
reliance upon exemptions provided by the Act and FIPA which relate to
transactions by an issuer not involving any public offering in that the
Outstanding Notes held by Non-Florida Holders constitutes a small number of
holders and the Exchange Offer with respect to such holders is being
conducted by Federal Mortgage Management II, Inc. without any general
solicitation.
At December 31, 1998, 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, 1998 and 1997, and the related increase in each:
<TABLE>
<CAPTION>
REVENUE 1998 1997 Increase/
---- ---- Decrease
<S> <C> <C> <C>
Interest income-residential
mortgage loans $ 24,487 $220,693 $(196,206)
Interest income 21,000 7,180 13,820
Other income 201,373 10,203 191,170
-------- -------- ---------
Total Revenue 246,860 238,076 8,784
EXPENSES
Bad debts expense 41,981 259,499 (253,518)
Commissions 750 13,588 (12,838)
Consulting 25,523 15,539 (9,984)
Interest 239,592 324,258 (84,666)
Loss on write-offs - ORE --- 244,609 (244,609)
Management Fees 10,235 20,520 (10,285)
Office expense 398 7,272 (6,874)
Rent --- 11,459 (11,459)
Salaries and wages --- 23,143 (23,143)
Service fees 567 5,189 (4,622)
Taxes 479 4,399 (3,920)
Travel and entertainment --- 4,142 (4,142)
</TABLE>
The Company had an increase in operating revenue of $8,784 for the year ended
December 31, 1998, as compared to the same period in 1997. This increase is
due primarily to an increase of $200,000 in other income and relates to the
reversal of the allowance for uncollectible accounts.
Most all expense categories decreased substantially for the year ended December
31, 1998 as compared to the same period ended 1997. These decreases were due
to the effect of the principal payments to note holders in the amount of
$1,000,000 in December 1997 which resulted in fewer funds available for
investment, the clean up of the mortgage portfolio during fiscal 1997 and the
write off and losses sustained from that clean up; and managements cost
cutting approach.
Item 7. Management's Discussion and Analysis and Plan of Operations
Scheduled principal and interest payments on portfolio loans at December 31,
1998, represent an annualized rate of return of approximately 15% 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, 1998.
At December 31, 1998, the portfolio of the Company consisted of mortgage notes
with a carrying value of $134,193. 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
$96,770 ($5,158) ($672) ($3,000) $87,940
At December 31, 1998, the underlying real estate collateral of the Companys
portfolio of mortgage loans have an appraised value of approximately $188,591,
or a carrying value to appraised value ratio of 69 to 1. The collateral real
estate securing such loans as of December 31, 1998, was residential real
estate. The Company held no unimproved real estate loans as of December 31,
1998.
There was 1 mortgage loan with a carrying value of $33,281 that was delinquent
(in terms of scheduled principal and interest payments) as of December 31,
1998. This loan represents 25% of the carrying value of the portfolio.
As shown in the accompanying financial statements, the Corporation incurred a
net loss of $232,301 during the year ended December 31, 1998, and as of that
date, the Companys current liabilities exceeded its current assets by
$2,410,659. 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.
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 46, has been a resident of Sarasota, Florida since 1980
is the founder and President of Capital Management Group, Inc. Capital
Management Group, Inc. was organized by Mr. Della Penna in 1989. Under the
auspices of Capital Management Group, Inc., Mr. Della Penna has provided
financial and tax consulting and advisory services to individuals and
corporate entities. Capital Management Group, Inc. also acts as general
agent for various insurance companies. Mr. Della Penna is a General Securities
Principal and Financial and Operations Principal pursuant to NASD Rules.
Additionally, at December 31, 1996, Mr. Della Penna was the majority
shareholder, director and officer of Executive Securities, Inc., the manager
of the Note offering. Mr. Della Penna has been active in the financial
industry for approximately 19 years. During the period April 1980 to January
1986, Mr. Della Penna served as the Assistant to the Chairman of the Board of
Snelling & Snelling, Inc., as well as Assistant Treasurer. Snelling & Snelling,
Inc. is a franchiser of an employee recruitment business. While with such
firm, Mr. Della Penna also served as a member of the Executive, Acquisition
and Pension and Profit Sharing committees. Mr. Della Penna also served as
the personal business manager and financial advisor to the Snelling family
and affiliated entities and in such capacity, was responsible for cash
management, tax and investment analysis and commitments. The Snelling family
are the principal shareholders of Snelling & Snelling, Inc. During the
period April, 1978 through February 1980, Mr. Della Penna was an associated
person of Lehman Brothers, New York, New York, where he was involved in the
structuring, documentation and marketing of tax exempt financings issued by
state and local governments. Mr. Della Penna holds a Bachelor of Science
degree in Business Administration from Ithaca College, Ithaca, New York and
received a Master of Business Administration degree in Finance from the State
University of New York, Albany, New York.
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other Securities
Name Annual Restricted Under- All Other
and Compen- Stock lying LTIP Compen-
Principal sation Award(s) Options/ Payouts sation
Position Year Salary Bonus SARs
- --------- ---- ------ ----- ------ ---------- ---------- ------- ---------
Guy S. Della Penna
President/CEO
1994 $150,977
1995 157,643
1996 81,157
1997 20,520
1998 10,235
</TABLE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
As of December 31, 1998, 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 $10,235 and $20,520 were paid in 1998 and 1997, respectively,
to an affiliated company, Capital Mortgage Management. Mr. Della Penna is
the 100% stockholder of this affiliated Company.
For the year ended December 31, 1998, the Company utilized office space of an
affiliate for which it paid $11,459.
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
-----------------
March 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 28,599
<SECURITIES> 124,913
<RECEIVABLES> 150,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 303,512
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 303,512
<CURRENT-LIABILITIES> 2,714,171
<BONDS> 0
0
0
<COMMON> 1,000
<OTHER-SE> (2,411,659)
<TOTAL-LIABILITY-AND-EQUITY> 303,512
<SALES> 246,860
<TOTAL-REVENUES> 246,860
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 239,569
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 239,592
<INCOME-PRETAX> (232,301)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (232,301)
<EPS-PRIMARY> (2.323)
<EPS-DILUTED> (2.323)
</TABLE>
FEDERAL MORTGAGE MANAGEMENT, INC.
CONTENTS PAGE
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 1
STATEMENTS OF FINANCIAL CONDITION 2
STATEMENTS OF OPERATIONS 3
STATEMENTS OF COMPREHENSIVE INCOME 4
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT) 5
STATEMENTS OF CASH FLOWS 6
NOTES TO FINANCIAL STATEMENTS 7
FEDERAL MORTGAGE MANAGEMENT, INC.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
ASSETS
<S> <C> <C>
Cash $ 28,599 $ 71,877
Accounts receivable, net 200
Notes receivable 32,500
Notes receivable - affiliate, net 150,000
Portfolio of residential mortgage loans - net 88,613 257,911
Other real estate owned - net 36,300
Deferred financing costs, net of accumulated
amortization of $793,583 and $634,867 158,717
---------- ----------
$ 303,512 $ 521,205
========== ==========
LIABILITIES AND STOCKHOLDERS EQUITY
(DEFICIT)
LIABILITIES
Interest payable $ 19,906 $ 19,850
Other liabilities 5,865 1,548
Current portion of notes payable 2,688,400 2,688,400
---------- ----------
2,714,171 2,709,798
---------- ----------
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
Account receivable - related party (199,270) (209,505)
Retained deficit (2,212,389) (1,980,088)
----------- -----------
(2,410,659) (2,188,593)
----------- -----------
$ 303,512 $ 521,205
=========== ===========
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1998 1997
---- ----
REVENUE
<S> <C> <C>
Interest income - mortgage loans $ 24,487 $ 220,693
Interest income 21,000 7,180
Other income 201,373 8,622
---------- ---------
246,860 236,495
EXPENSES
Amortization 158,716 158,716
Bad debt 41,981 295,499
Commissions 750 13,588
Consulting fees 793
Executive compensation 10,235 20,520
Interest 239,592 324,258
Legal and accounting 25,523 14,746
Licenses and fees 2,037
Loss on sale of mortgage loans and other
real estate owned 244,609
Miscellaneous 920 4,630
Office supplies 313 3,886
Postage 85 3,386
Rent 11,459
Salary and benefits 23,143
Service fees 567 5,189
Taxes 479 4,399
Travel and entertainment 4,142
-------- ---------
479,161 1,135,000
--------- ---------
NET LOSS $(232,301) $(898,505)
========== ==========
LOSS PER COMMON SHARE $ (2.323) $ (8.985)
========== ==========
</TABLE>
STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
---- ----
<S> <C> <C>
NET INCOME $(232,301) $(898,505)
Other comprehensive income, net of tax:
Realized loss on securities
Realized holding loss arising
during the period (15,364)
Reclassification adjustment for
losses included in net income 15,364
---------- ----------
Other comprehensive income
---------- ----------
COMPREHENSIVE INCOME $(232,301) $(898,505)
========== ==========
</TABLE>
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Account Receiv Retained Comprehensive
Stock Related Party Deficit Income Total
------ -------------- -------- ------------- -----
<S> <C> <C> <C> <C> <C>
BALANCE,
at January 1, 1997 $1,000 $ $(1,081,583) $ 15,364 $(1,065,219)
NET LOSS - 1997 (898,505) (898,505)
Account receivable
- related party (209,505) (209,505)
Change in unrealized
appreciation on
securities
available for sale (15,364) (15,364)
------ ------------- ------------- ----------- ------------
BALANCE,
at December 31, 1997 1,000 (209,505) (1,980,088) (2,188,593)
NET LOSS - 1998 (232,301) (232,301)
Change in account
receivable -
related party 10,235 10,235
------ ------------- ------------ ------------ ------------
BALANCE
at December 31, 1998 $1,000 $ (199,270) $(2,212,389) $ $(2,410,659)
====== ============= ============ ============ ============
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(232,301) $ (898,505)
Adjustments to reconcile net loss to net
cash (used) provided by operating activities:
Amortization 158,716 158,716
Changes in operating assets and liabilities:
Accounts and notes receivable, net (157,065) 108,225
Portfolio of residential mortgage loans 169,298 1,487,183
Prepaid expenses 29,225
Interest payable and other liabilities 4,374 (21,605)
Other real estate owned (36,300) 217,441
---------- ------------
NET CASH (USED) PROVIDED BY
OPERATING ACTIVITIES (93,278) 1,080,680
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of certificates of deposit 89,237
Sale of note receivable - affiliate 50,000
---------- ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 50,000 89,237
NET CASH USED BY FINANCING ACTIVITIES
Redemption of note holders (1,275,323)
---------- ------------
DECREASE IN CASH (43,278) (105,406)
CASH, at beginning of year 71,877 177,283
---------- ------------
CASH, at end of year $ 28,599 $ 71,877
========== ============
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 239,536 $ 331,821
========== ============
</TABLE>
FEDERAL MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
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
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 1997 financial statements to
conform with the 1998 financial statement presentation. Such
reclassifications had no effect on net income as previously reported.
Earnings per Share
Earnings per share of common stock were computed by dividing net income by the
weighted average number of common shares outstanding for the year. Diluted
earnings per share are not presented because the Corporation has issued no
dilutive potential common shares.
NOTE C - NOTES RECEIVABLE - AFFILIATE, NET
Notes receivable-affiliate consist of promissory notes with a 12% interest rate,
interest paid quarterly. (See Notes L and Q)
The carrying amount of notes receivable-affiliate at December 31, is as follows:
1998 1997
---- ----
Notes receivable-affiliate $150,000 $200,000
Allowance for uncollectible notes 200,000
-------- --------
Notes receivable-affiliate, net $150,000 $ -
======== ========
Included in other income is $200,000 related to the reversal of the allowance
for uncollectible accounts in 1998. The allowance was reversed as a portion
of the note was sold during 1998 and the balance was paid in February, 1999.
(See Note L)
NOTE D - 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:
December 31,
1998 1997
--------- ---------
Face value $96,770 $271,670
Discount (5,157) (6,759)
Less: allowance for losses (3,000) (7,000)
-------- ---------
$88,613 $257,911
======== ========
At December 31, 1998, the mortgages have maturities less than one year, and
varying interest rates ranging from 9% to 20%. The residential mortgage
loans are secured by first liens on residential real property. The
Corporations policy is to acquire residential mortgage loans with balances
that do not exceed 90% of the fair market value of the real estate or the
loan acquisition price does not exceed 80% of the fair market value of the
collateral real estate at the time of the loan acquisition. The Corporation
purchases mortgage loans collateralized by real estate located in the United
States. In 1997, the Corporation liquidated the long-term portion of its
mortgage portfolio.
NOTE E - OTHER REAL ESTATE OWNED
Other real estate owned represents real property acquired by foreclosure or in
settlement of debt. Other real estate owned is valued at the lower of the
propertys fair value or the recorded investment in the mortgage. At the time
of foreclosure, if the fair value of the real estate acquired is less than
the Partnerships recorded investment in the mortgage, a write down is
recognized through a charge to the allowance for mortgage losses. Gains or
losses on the sale of and losses on the periodic revaluation of real estate
acquired are charged or credited to noninterest expense.
During 1997, the Corporation liquidated its other real estate owned at a loss of
approximately $112,000. Other real estate owned of $49,581 was held at
December 31, 1998. Allowance for losses on other real estate owned total
$13,281 at December 31, 1998.
NOTE F - 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 interest rates of 9.00% and 9.25%. The notes totaling $2,688,400
matured December 21, 1998. The debt is currently in default. The
Corporation has prepared and submitted to the Division of Securities,
Department of Banking and Finance, State of Florida, a proposed exchange offer
to be made with Florida resident holders of the outstanding notes. (See Note
P) Notes totaling $450,000 are held by holders who are not residents of the
State of Florida. No response has yet been received from the State of
Florida. The Corporation continues to pay monthly interest at the notes
stated rates.
The notes are collateralized by all the assets of the Corporation. For the
years ended December 31, 1998 and 1997, the Corporation incurred interest
expense of $239,592 and $324,258 respectively, related to the notes payable.
NOTE G - STOCKHOLDERS 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, 1998 and
1997. The Board of Directors has not established the preferred stockholders
preferences and rights as of the date of this report.
NOTE H - 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 were amortized on a straight line basis over five
years.
NOTE I - 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 J - COMPREHENSIVE INCOME
1997 - Realized gains on securities
Realized holding losses arising
during period $(15,364)
Add: reclassification adjustment for
losses realized in net income 15,364
--------
Net realized losses
--------
Other comprehensive income $
========
Accumulated other comprehensive income is as follows:
January 1, 1997 $ 15,364
1997 change (15,364)
--------
December 31, 1997
1998 change
--------
December 31, 1998 $
========
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:
The stockholder received compensation of approximately $10,235 and $20,520 in
1998 and 1997, respectively.
In the years ended December 31, 1998 and 1997, the Corporation sold mortgages to
an affiliated company at the Corporations cost basis. The sales prices
totaled approximately $128,000 and $1,028,000.
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 promissory notes in the amount of
$100,000, for a total of $200,000 at December 31, 1997. During the year
ended December 31, 1998, the Corporation sold a portion of this note
receivable to an affiliated company for $50,000. No gain or loss was
recognized on the transaction. (See Note C)
For the year ended December 31, 1997, the Corporation utilized office space
from an affiliate for which it paid $11,459 rent expense.
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 $199,270 overpayment.
An affiliated company services the mortgages of the Corporation. For the
years ended December 31, 1998 and 1997, the Corporation paid servicing fees
to the affiliate in the amount of $567 and $5,189, respectively.
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS IN ACCORDANCE
WITH THE REQUIREMENTS OF SFAS NO. 107
The Corporations financial instruments consist of all of its assets and
liabilities with the exception of other real estate and deferred financing
costs. The Corporations management has determined that the fair value of all
of its financial instruments is equivalent to the carrying cost. The
mortgage portfolio is purchased with the intent of a relatively short holding
period of several months. Therefore, any differences in the value of the
mortgage portfolio due to changes in market interest rates are minimal.
Furthermore, each purchase and sale of mortgages by the Corporation is a
private, negotiated transaction. There is no readily established market for
the Corporations mortgage portfolio.
The Corporations note obligations are not traded on an established market and
the only activity with respect to the obligations are normal, scheduled
redemptions. The Corporations management estimates that the current interest
rate which the Corporation would need to pay in order to sell similar note
obligations is approximately equivalent to the rates of the outstanding note
obligations.
NOTE N - CLASSIFICATION OF MORTGAGE PORTFOLIO IN ACCORDANCE
WITH THE REQUIREMENTS OF SFAS NO. 115
The Corporations mortgage portfolio is a trading security. As such, it is
required to be carried at fair value, with any unrealized holding gains or
losses included in earnings. For the reasons discussed in Note M,
the carrying value of the mortgage portfolio has been determined by the
Corporations 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, 1998 and 1997, 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 $225,320 during the year ended December 31, 1998, and as of that
date, the Companys 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. A proposed plan of note maturity extension for the
Series 1994A-IV has been suggested. Management, in consultation with the
Trustee and legal counsel is addressing the feasibility, logistics and
necessary steps to proffer such a definitive plan to the noteholders of the
aforementioned Series. Such plan may include, but not be limited to the
extension of the respective maturity 42 months from their scheduled
maturation.
NOTE Q - SUBSEQUENT EVENTS
In February 1999, the Corporation received $150,000 in full payment of note
receivable - affiliate.
