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FINANCIAL STATEMENTS REVIEWED BY ARTHUR ANDERSEN & CO. . . . . ,I Ii ARTHUR ANDERSEN & CO. CERTIFIED PUBLIC ACCOUNTANTS TAMPA, FLORIDA 33602 To the Board of Directors of U. S. Home Mortgage Corporation: We have examined the balance sheets of U. S. HOME MORTGAGE CORPORATION (a Florida corporation and a wholly owned subsidiary of U. S. Home Corporation) as of February 28, 1975 and February 29, 1976, and the related statements of loss, stockholder's investment and changes in financial position for the years then ended. Our examination was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures, including tests of escrow funds relating to owned and serviced loans, as we considered necessary in the circumstances. The procedures followed with respect to such escrow funds are set forth in the following paragraph. EScrow fund cash in banks as shown by the mortgage service ledgers was reconciled with amounts confirmed directly to us by the depositories. By reference, on a test basis, to data supporting collec- tions and disbursements of such funds we satisfied ourselves that such deposits are adequate but not excessive in relation to the disbursements made from the funds and that satisfactory procedures are followed to account for such funds. In our opinion, the accompanying financial statements present fairly the financial position of U. S. Home Mortgage Corporation as of February 28, 1975 and February 29, 1976, and the results of its operations and the changes in its financial position for the years then ended in con- formity with generally accepted accounting principles consistently appl ied during the periods. ~.~ a~",6t.' I ~ ( Tampa, Florida, May 7, 1976. ASSETS CURRENT ASSETS: Cash (Note 5) Cash held in escrow (including $138,310 in 1975 and $258,400 ih 1976, appl icable to FHA insured loans) -- (Note 5) Receivables - Construction mortgages Current portion of first mortgages and participation mortgages (Notes 2 and 5) Accrued interest and other Income tax benefits, etc., due from U.S. Home Corporation (Note 1) Inventory of first mortgages held for sale, at unpaid principal balances less unearned discounts (Notes 1 and 5) Commitment deposits with investors (Note 7) Total current assets FIRST MORTGAGES RECEIVABLE AND PARTICIPATION MORTGAGES RECEIVABLE (excluding installments due within one year) -- (Notes 2 and 5) FEDERAL NATIONAL MORTGAGE ASSOCIATION STOCK, at cost (market of $48,039 in 1975 and $49,313 in 1976) -- (Note 4) INVESTMENT IN WHOLLY OWNED SUBSIDIARIES, at equity in underlying net assets (Note 3) PROPERTY AND EQUIPMENT, at cost, less accumulated depreciation and amortization of $26,266 in 1975 and $38,021 in 1976 (Note 1) OTHER ASSETS U. S. HOME MORTGA (A Wholly Owned Subsidiary 1975 $ 8,227 663,976 209 , 1 84 311,599 36,274 22,019 3,258,706 33,068 4,543,053 1 ,443, 947 48,315 76, 140 41 ,689 $ 6,153,144 BALANCE FEBRUARY 28, 1975 AND 1976 $ 9, 192 827,845 353,130 513,485 25,503 28,337 4,204,342 5,961 ,834 1,077 ,363 52,851 215,072 62,309 51 ,712 $ 7,421,141 The accompanying notes are an intI ;" t:?;':HW" Home Cor oration) 1976 LIABILITIES AND STOCKHOLDER'S INVESTMENT URRENT LIABILITIES: Demand notes payable to banks (Nijte 5) Unfunded mortgage loans in pro~ess represented by cash overdraft (subsequently converted to demand note payable to bank) Accounts payable Due to closing agents Accrued expenses (Note 9) Mortgagors. escrow deposits (including $138,310 in 1975 and $258,400 in 1976, app1 icab1e to FHA insured loans) Accrued income taxes, including current deferred of $16,700 in 1975 and $(60,800) in 1976 (Notes 1 and 6) 1975 1976 $ 3,168,916 $ 3,289,682 263,056 1,100,386 7,017 75,484 26,448 23,390 13 , 626 139,944 663,976 827,845 21,510 (5,379) 4, 164, 549 5,451,352 Total current liabilities OMMITMENTS AND CONTINGENCIES (Notes 2 and 7) INVESTMENT: Common stock, $100 par value, 100 shares authorized and outstanding Capital surplus Retained earnings (deficit) 10,000 10,000 2,000,098 2,005,098 (21 ,503) (45,309) 1 ,988,595 1 ,969,789 $ 6,153,144 $ 7 ,421 , 1 41 Total stockholder's investment part of these balance sheets. I 1 U. S. HOME MORTGAGE CORPORATI ON (A WhoJJy Owned Subsidiary of U.S. Home CorporC!tion) STATEMENTS OF LOSS FOR THE YEARS ENDED FEBRUARY 28, 1975 AND FEBRUARY 29, 1976 REVENUES (Note 1): 1975 Interest on mortgages receivable Loan origination fees Loan commitment fees (Note 2) Servicing fees Other $504,740 125,380 59,878 1 53 , 1 56 46,464 889,618 EXPENSES: Interest General and administrative (including depre- ciation and amortization of $11,737 in 1975 and $14,509 in 1976) Loss on sale of mortgages (Note 9) 420,514 539,707 Loss before income taxes 960,221 (70,603) PROVISION (CREDIT) FOR INCOME TAXES (Notes 1 and 6): Current Deferred (40,000) 6,000 NET LOSS (34, DOl)) $ (36,603) The accompanying notes are an integral part of these statements. $ 566,61~ 151,236 1 ,654 233,502 103,336 1 ,056 ,3~7 378,558 654,891 70, 134 1,103,583 (47,236) 54,070 07,500) (23,430) $ (23,806) .. t' 1976 FOR THE YEARS ENDED Retained Common Stock Capital Earnings S ha res Amount Surplus ( De f i c i t) BALANCE, February 28, 1974 100 $10,000 $2,000,098 $ 15,100 Net loss (36,603) BALANCE, February 28, 1975 100 10,000 2,000,098 (21,503) Net loss (23,806) Contribution of common stock of U.S.H. Mortgage Services, Inc. by U.S. Home Corporation 5,000 BALANC E , February 29, 1976 100 $10,000 $2,005,098 $(45,309) - .,,,-,,,, "-~_ ::.\<\" :/ ~':t;,:'r-- > .:;)"L.:-., i ~, .' The accompanying notes are an integral part of these s i,ntt!~lll o,,,,,,,,".,,,,,,,,,,,",",,,,;';~,,oi;;,;;,'i"i " ,<:: .,~~'~\,/>' " "" U. S. HOME MORTGAGE CORPORAT,ON (A Wholly Owned Subsidiary of U.S. Home Corporation) STATEMENTS OF CHANGES IN FINANCIAL POSITION FOR THE YEARS ENDED FEBRUARY 28, 1975 AND FEBRUARY 29, 1976 SOURCE OF FUNDS: Decrease in first mortgages and participations receivable Decrease in working capital APPLICATION OF FUNDS: Operations - Net loss Add (deduct) items not providing (requiring) funds: Amortization of deferred commitment fee income Depreciation and amortization of pro- perty and equipment and other assets Funds used in operations Increase (decrease) in - First mortgages and participations receivable Other assets (excluding amortization) Purchases of Federal National Mortgage Association stock Additions to property and equipment (excluding provision for depreciation), net Investment in subsidiaries Increase in working capital CHANGES IN WORKING CAPITAL COMPONENTS: Increase (decrease) - Cash, excluding escrow deposits Receivables Due from U.S. Home Corporation Inventory of first mortgages held for sale Commitment deposits with investors Demand notes payable to banks Accounts payable Due to closing agents Accrued expenses Accrued income taxes including current deferred Unfunded mortgage loans in process represented by cash overdraft 1975 1976 $ 1,305,512 $ 366,585 $ 1,305,512 $ 366,585 $ 36,603 $ 23,806 59,878 (11 ,737) 84,744 1,190,654 (24,190) (14,509) 9,297 10,702 29,302 4,536 25,002 $ 1 ,305,512 210,072 131,978 $ 366,585 $ ( 448,91 0) $ 965 (773,008) 335,061 (5,680) 6,318 (2,184,265) 945,636 (47,615) (33,068) 2,062, 162 (120,766) 473 ( 68,467) 49,823 3,058 28,816 (116,318) (8,418) 26,889 21,110 (837 , 330) $(1,305,512) $ 131,978 The accompanying notes are an integral part of these statements. U. S. HOME MORTGAGE CORPORATION (A Wholly Owned Subsidiary of U. S. Hame Corporation) NOTES TO FINANCIAL STATEMENTS FEBRUARY 29. 1976 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Revenues - The Company originates mortgage loans with individual commercial entities and sells the mortgages to investors. continues to service substantially all mortgages sold on a related service fees are recorded as income when received. homeowners and The Company fee basis. The Loan origination fees result from services performed by the Company in arranging and originating mortgage loans and are recorded as income when received. Loan commitment fees result from the issuance of mortgage commitments, the terms of which have been accepted by the borrower and the lender. Fees received by the Company for issuing commitments are recorded as deferred commitment fee income and amortized to income on a straight-line basis over the rel ated commi tment peri od. I f a commi tment is exerc i sed pr i or to the expiration date, the balance of the fee deferred at that date is recognized as income. Inventory of First Mortqaqes Held for Sale - First mortgages are carried at their unpaid principal balances less unearned discounts. These loans are held for sale in the normal course of business. The discounts on these mortgages are recorded as income at the time the related mortgage is sold. The market value of these first mortgages, in the aggregate, approxi- mated their book value at February 28, 1975 and February 29. 1976. Income Taxes - The Company joins with its parent company in filing consolidated income tax returns and therefore, any losses for tax purposes are applied against the. taxable income of the consolidated group. The related tax benefit is provided to the Company by the parent at statutory rates and is reflected as due from U. S. Home Corporation in the accompanying balance sheet. Deferred income taxes result in different methods being utilized in the recognition of certain income and expense items for financial reporting and income tax purposes as set forth in Note 6. Depreciation and Amortization - Property and equipment are depreciated by the straight-line method at rates calculated to amortize the cost of the assets over their estimated useful lives. -2- The ranges of 1 ives used in computing depreciation are as follows: Years Furniture and fixtures 5 - 8 2 - 8 but not exceeding terms of lease Leasehold improvements (2) TRANSACTIONS WITH AFFILIATED COMPANIES: In September, 1972 the Company originated a $3,300,000 first mortgage loan for a 1 imited partnership in which an affil iate is the general partner, and subsequently sold the mortgage with recourse to a financial institution. The current balance of this loan is approximately $3,221,000. In May, 1976 the Company entered into an agreement with its parent company, whereby the parent will acquire the related property, if it should become necessary for the company to reacquire the mortgage and institute foreclosure pro- ceedings by virtue of its previous sale of the mortgage with recourse. In November, 1972 the Company gave standby construction and permanent financing commitments in the aggregate principal amount of $2,500,000 to a 1 imited partnership in which an affil iate is a general partner. In con- nection with these commitments, the Company received a nonrefundable fee of $75,000 which was recognized as income on a straight-l ine basis over the commitment period which ended in February, 1975. The commitment was exercised in February, 1975 for a first mortgage in the principal amount of $1,400,000 at an interest rate of 8-1/2%. In addition, the Company sold without recourse a 35% interest in the loan for $490,000 to the general partner affil iate. At February 29, 1976, the Company's investment in this loan ($903,707) was pledged as collateral for a demand note payable to a bank (see Note 5). In April, 1976 the Company sold without recourse its 6~1o interest in this loan ($903,111) to a financial institution for $791,351. The general partner affiliate reimbursed the Company $111,760, for the related discount. In October, 1973 the Company purchased from an affil iate without recourse two first mortgage notes receivable, which bear interest at prime plus 2-1/2%, aggregating $1,000,000 ($500,000 maturing in October, 1974 and $500,000 maturing in October, 1976). The affil iate acquired the notes from a third party in the normal course of business. During the year ended February 28, 1975 the terms of the note maturing in October, 1974 were revised to provide that $200,000 be paid at that date with the remainder of $300,000 payable in March, 1975. A 25% participating interest owned by the parent company at February 28, 1974, was repurchased by the Company (for $250,000) during fiscal year 1975. The balance of this loan is $500,000 at February 29, 1976 and is due in October, 1976. The Company leases office space and receives data processing services from its parent. Rentals paid to the parent were $45,800 in 1976. Data processing fees were $12,600 in 1975 and $15,000 in 1976. -3- (3) INVESTMENT IN SUBSIDIARIES: Real Estate Appraisals, Inc. and U.S.H. Mortgage Services, Inc. are wholly-owned subsidiaries of the Company and have been inactive since inception in 1975. The Company accounts for its investment in these subsidiaries on the equity basis. Condensed balance sheets of the subsidiaries as of February 29, 1976 are as follows: REAL ESTATE APPRAISALS, INC. CONDENSED BALANCE SHEET ASSETS Cash (Note 5) Other $105,012 245 $105,257 $105,257 STOCKHOLDER'S EQUITY U. S. H. MORTGAGE SERVICES, INC. CONDENSED BALANCE SHEET ASSETS Cash (Note 5) Other $109,645 170 $109,815 $109,815 STOCKHOLDER'S EQUITY (4) FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) STOCK: At February 29, 1976 the Company was required to be owner of record of approximately 3,100 shares of the common stock of FNMA in order to comply with the FNMA Servicing Agreement. As of that date, the Company was in compliance with the stock ownership requ i rements . -4- (5) DEMAND NOTES PAYABLE TO BANKS: The Company has a line of credit with a Minnesota bank total ing $8,000,000, with interest payable at the prime rate, plus one-half of one percent per annum. At February 29, 1976 the available line of credit approximated $5,610,000. In order to maintain this line of credit, the Company is required to maintain a compensating balance of $1,200,000, as determined from the bank's ledger records adjusted for uncollected deposits. The Company was in compl iance with this requirement during the year and at February 29, 1976. Withdrawal of these funds is not legally restricted. The accounts maintained at this bank are also used to transact the normal cash business of the Company. The Company.s inventory of first mortgages held for sale is pledged as collateral under this line of credit. In addition, the Company has a $900,000 non-recourse demand note payable to an Illinois bank, with interest payable at the prime rate, plus three quarters of one percent per annum. This demand note is collateralized by the Company's investment in a participation mortgage receivable which had a balance of $903,707 at February 29, 1976 (see Note 2). The maximum amount, average monthly amount and weighted average interest rate of short-tenm borrowings were as follows: Year Ended February 28 or 29. 1975 1976 Maximum amount $5,565,422 $3,683,144 Weighted average interest rate 11 .42% $6,898,754 $4,545,851 8.56% Average monthly amount (6) INCOME TAXES: The amounts comprising income tax expense for the years ended February 28, 1975 and February 29, 1976 were as follows: -5- The components of the deferred income tax prOVISion (credit) for the years ended February 28, 1975 and February 29, 1976 were as follows: 1975 Total (All Federal) 1976 State Federal Total Nonrefundable commitment fees paid to investors, deducted currently for tax purposes $ 6,000 $(15,000) $( 1,700) $(16,700) Provisions for future interest and losses on sales of mortgages recognized currently for financial reporting purposes $ 6,000 (56,400) $ (71 ,400)_ ( 4,400) $ ( 6, 1 00) (60,800) $ (77,500) (7) COMMITMENTS: As of February 29, 1976, the Company had commitments to originate loans in the principal amount of approximately $22,000,000, and commitments from investors to purchase loans in the principal amount of $27,000,000. The Company occupies office space under noncancelable leases with remaining annual rentals of approximately $23,000 (1977) and $12,300 (1978). The Company incurred lease rental expenses of approximately $45,800 (1975) and $86,000 (1976). (8) PROFIT SHARING PLANS: The Company participates in the profit sharing plans (which may be terminated at any time) of its parent for the benefit of its employees. The annual contributions may be made in such amounts as the Board of Directors of the Company shall determine, not to exceed 15% of the total compensation (as defined) of all participating employees. Generally, employees are eligible to participate in the plans after one year of continuous employment and become fully vested after 10 years of eligibility. The aggregate contributions made during 1975 and 1976 were $2,000 and $18,500, respectively. (9) SALE OF MORTGAGES: During fiscal year 1976, the Company sold 90% undivided interests in two groups of mortgages. Pursuant to the terms of these sales, the Company guaranteed interest payments to the buyers in amounts exceeding the effective yield of the mortgages sold. Accordingly, the Company has provided currently for the excess interest to be paid over the estimated lives of the related mortgages.