UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1996.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 33-5154
Residential Resources, Inc.
-------------------------------
(Exact name of registrant as specified in its charter)
Arizona 86-0544838
------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
or incorporation or organization) Identification No.)
2058 North Mills Avenue, Suite 344, Claremont, California 91711
---------------------------------------------------------------------
(Address of principal executive offices)
909-629-6187
--------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -----------------------
None None
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant: (i) has filed all reports
required to be filed by Section 13 or 15(d) 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 reports), or (ii) has been subject to
such filing requirements for the past (90) days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this form 10-K or any amendment to this Form 10-K. /X/
The number of shares outstanding of the registrant's common stock as of June
27, 1996 was 7,018.
PART 1
Item 1 BUSINESS
Residential Resources, Inc., (the "Company") was incorporated on April 3, 1986
and is a limited purpose financing company. The business the company is issuing
mortgage-collateralized bonds directly or through one or more trusts ("Trusts")
established by the company. Under the Company's original Articles of
Incorporation, the Company had the power to issue bonds only secured by certain
types of real estate related loans.
Effective June 17, 1994 the Company's Articles of Incorporation were amended
to change the par value of the Company's Common Stock to one of no par value,
and there is no preferred stock authorized. The Articles were further amended
to permit the issuance of bonds secured by a wider range of collateral than
was possible under the original form of articles, including but not limited
to Financial Obligations of the United States of America, Installment Loan
Agreements, Automobile Loan Agreements/Lease Agreements and Credit Card
Receivables.
The collateral for such bonds consists of one or more of the following: debt
instruments secured by real property, leasehold interests in real property,
equity in cooperative apartment corporations and manufactured housing
contracts; certain mortgage certificates issued or guaranteed by the
Government National Mortgage Association, the Federal Home Loan Mortgage
Corporation and the Federal National Mortgage Association; and other types of
obligations secured by interests in real property and other types of
collateral. The proceeds from the issuance of such asset-backed bonds are
used to purchase such collateral. Each Trust is created by an agreement
between the Company, acting as depositor, and a bank, trust company or other
fiduciary acting as owner-trustee. Each such Trust is established solely for
the purpose of issuing one Series of Bonds. The Company's Articles of
Incorporation limit its activities to the above purposes and to activities
incidental to and necessary for such purposes.
The Company intends to either purchase collateral from or lend the proceeds
of the issuance of its asset-backed bonds to financial entities. Financing
transactions with financing subsidiaries of financial entities are
accomplished pursuant to funding agreements. The financial entities and
financing subsidiaries are affiliated with home builders, thrifts, commercial
banks, insurance companies, mortgage bankers and other entities engaged in
finance activities. The bonds, when issued are limited to obligations of the
Company, in that they will be payable solely from the collateral pledged to
the bonds. With respect to any bonds issued by a Trust established by the
Company, neither the Trust nor the Company guarantees or otherwise is
obligated to pay the bonds.
1
During the year ended March 31, 1987, the Company, as depositor, created four
Trusts which issued mortgage-collateralized bonds in the aggregate principal
amount of $700,000,000 at interest rates varying from 7.89% to 9.45% and with
stated maturates ranging from August 20, 2007 to February 20, 2018. During
the year ended March 31, 1988, the Company, as depositor, created one Trust
and one segregated assets pool of mortgage collateral to secure a series of
bonds; in that same year the Company issued mortgage-collateralized bonds in
the aggregate principal amount of $450,000,000 at interest rates ranging from
8.35% to 9.94% and with stated maturity ranging from February 21, 2000 to
August 21, 2017. During the year ended March 31, 1989, the Company created
eight segregated asset pools of mortgage collateral to secure eight series of
mortgage-collateralized bonds in the aggregate principal amount of
$1,750,100,000 at interest rates ranging from 0% to 10.44% and with stated
maturity ranging from February 1, 2000 to January 20, 2020. During the years
ended March 31, 1991 and 1990 the Company did not act as depository for any
trusts or issue any series of bonds. During the year ended March 31, 1992,
the Company, as depositor, created a trust, Residential Mortgage Securities
Trust Sixteen, which issued mortgage-collateralized bonds in the aggregate
principal amount of $12,560,000 at an interest rate of 9.0% and a stated
maturity of September 1, 2021. The Company did not act as issuer or depositor
for any series of bonds during the years ended March 31, 1993, through March
31, 1996.
Except for the Executive Officers listed in Item 10 hereof, the Company has no
employees.
Item 2. PROPERTIES:
None
Item 3. LEGAL PROCEEDINGS:
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is no established public trading market for the common stock of the
Company. At June 27, 1996, one corporation holds approximately 95% of the
issued and outstanding stock of the Company. No dividends have been declared
or paid with respect to such stock.
2
Item 6. SELECTED FINANCIAL DATA:
INCOME STATEMENT DATA
Year Ended, March 31,
- ------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- --------- ---------- ----------
Operating
Revenues $440,324 $ 969,227 --- $ 8,500 $ 33,857
Net Income
(Loss) (181,862) (59,434) (99,268) ( 7,052) 2,829
Net Income
(Loss) Per
Share (25.91) ( 8.46) (14.10) (1.00) 0.40
Cash
Dividends None None None None None
BALANCE SHEET DATA
Year Ended, March 31,
- -------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- --------- --------- --------- ---------
Total Assets $400,787 $ 493,671 $ 230,006 $ 223,779 $ 225,634
Long Term
Obligations None None None None None
Total Stock-
holders Equity
(Deficit) $(230,564) $ (48,702) $ 10,732 $ ( 5,877)$ 1,175
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company was incorporated on April 3, 1986, as a limited purpose financing
corporation to facilitate the issuance and sale of mortgage-collateralized
bonds. See Item 1, incorporated herein by reference. The operations of the
Company have been confined to this limited purpose.
3
Because of the limited purpose and operations of the Company, it does not
have and is not expected to have any significant assets, other than assets
which may be acquired and immediately pledged to secure a specific series of
bonds issued by the Company, if any, intangible capitalized costs and
deferred registration costs.
During the year ended March 31, 1996, the Company entered into several
contracts to provide for the rating, securitization and placement of an
aggregate of $132,000,000 in mortgage-backed securities. The contracts call
for base fees earned upon achievement of milestones and commissions at
issuances which are expected to occur at various dates over the next three
years. No revenues have yet been earned on these contracts and as of March
31, 1996, the Company has retained $140,000 in customer deposits in
connection therewith.
During the year ended March 31, 1995, the Company entered into two contracts
to assist financial institutions in the rating, securitization and placement
of an aggregate of $500,000,000 in mortgage-backed securities. During the
year ended March 31, 1996, the financial institutions were unable to proceed
with the remainder of their contracts. As a result, the $200,000 contract
receivable at March 31, 1995 which related to fees earned in connection with
one of the contracts was deemed uncollectable as of March 31, 1996.
During 1994 the Company had no revenue. Revenues of $440,324 and $969,227,
were received by the Company for the years ended March 31, 1996, and 1995,
respectively.
Costs and expenses consisted primarily of contract expenses (commissions,
consulting and legal fees) and General and Administrative costs. General and
Administrative costs during 1995 included $200,000 in bad debt expense
relating to a contract as described above. Costs and expenses of $621,341,
$1,027,690, and $98,418 were incurred by the Company for the years ended
March 31, 1996, 1995 and 1994, respectively.
The Company has little need for liquidity as it is customary for the Company
to receive advances in connection with its contracts in order to cover
contract costs. However, the Company's major stockholder has provided the
Company with funding in the past, on an as-needed basis, and has committed to
support the Company for at least a year. The Company has no commitments for
capital expenditures and no material resources.
The Company has open shelf registration statements on file with the
Securities and Exchange Commission under which the Company or trusts created
by the Company may issue mortgage-collateralized bonds in an aggregate
principal amount of up to $1.1 billion on an expedited basis. The Company
actively pursues opportunities which will allow it to utilize its unused
shelf balance and which are within the confines of the Company's limited
purpose.
4
Item 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
The financial statements required by this Item are attached hereto as Exhibit
"A" and are incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
5
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
NAME AGE POSITION
William P. Schlick 41 Chairman of the Board
Chief Executive Officer
Chief Financial Officer
Richard J. Groeneweg 49 Director, President
Clare T. Morse 47 Director, Secretary
Richard A. Wagner 69 Director
William P. Schlick, Chairman of the Board of Directors, Chief Executive
Officer and Chief Financial Officer. Mr. Schlick has been an officer and
director of the Company since October 15, 1993. Since 1986 Mr. Schlick has
served as Chief Financial Officer of S & J Service, Inc., an investment
company dealing in real estate and other capital assets, and President of
A.C.I.R.S., Inc., a company which markets Air Transport Category aircraft.
Richard J. Groeneweg, Director and President. Mr. Groeneweg has been an
officer of the Company since April 4, 1994. Mr. Groeneweg was elected to the
Board of Directors on May 4, 1994. Mr. Groeneweg served as President of Apple
Financial, Inc., from August, 1992 through December 1993; and as Director of
Sun Harbor Mortgage from mid-1991 to August, 1991: and as Chairman and CEO of
Mid-Valley Mortgage Corporation from 1986 to 1991.
Clare T. Morse, Director and Secretary. Mr. Morse has been an officer of the
Company since October 15, 1993, and a director since May 4, 1994. He has
served since 1978 as President and CEO of Security National Land and Mortgage
Company.
Richard A. Wagner, Director. Mr. Wagner has been a director of the Company
since May 4, 1994. He has been an investment management consultant since
1983. Mr. Wagner served for over 33 years with Beneficial Management
Corporation, of which he became President and Chief Operating Officer in 1978.
6
Item 11. EXECUTIVE COMPENSATION
Except for the executive officers listed in Item 10 hereof, the Company has
no employees.
During the year ended March 31, 1996, the Company paid consulting fees to the
following executive officers:
NAME FEES PAID
Richard J. Groeneweg $23,250
Clare T. Morse $18,000
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning ownership of the
Registrant's Common Stock as of June 27, 1996 by (a) each director of the
Registrant; (b) each person known to registrant to be the beneficial owner of
more than five percent (5%) of its Common Stock; and (c) all directors and
officers of Registrant as a group.
Amount of Percent of
Name of Beneficial Beneficial
Beneficial Owners Ownership Ownership
- ---------------------- ---------- ------------
Residential Resources
Financial Services, Inc. 6,667 shares (1) 95
Steven Chotin 351 shares 5
- ------------------------------------------------------------------------------
(1) Mr. William P. Schlick, Chairman of the Board, Chief Executive Officer
and Chief Financial Officer of the Company is the principal stockholder of
Residential Resources Financial Services, Inc., and may be deemed to be the
beneficial owner.
7
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April, 1995, the Company's principal shareholder, Residential Resources
Financial Services, Inc. (RRFS) paid $90,000 to a former affiliate of the
Company in connection with the February 1995 settlement agreement between the
affiliate and the Company.
During the year ended March 31, 1996 and 1995, RRFS provided managerial
services to the Company for which it was compensated $76,900 and $90,500,
respectively.
As of March 31, 1996, the Company had $52,260 in non-interest bearing
advances due to RRFS. These advances are payable upon demand.
During the year ended March 31, 1996, the Company paid $10,200 in consulting
fees to A.C.I.R.S., Inc., a company owned by William P. Schlick, the
Company's Chairman of the Board and Chief Executive Officer.
The Company acquired $61,040 in furniture, equipment and software from
Richard J. Groeneweg, President of the Company during the year ended March
31, 1996.
8
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) and (a) (2) Financial Statements and Financial Statement Schedules:
The following financial statements required by this Item are included in this
report: Reports of Independent Accountants: Residential Resources, Inc.
Balance Sheets as of March 31, 1996 and 1995; Statements of Operations,
Statements of Changes in Stockholders' (Deficit) and Statements of Cash Flows
for the three years ended March 31, 1996, 1995 and 1994. Notes to Financial
Statements, for the three years ended March 31, 1996.
(a) (3) Exhibits
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
No annual report or proxy material have yet been sent to the security
holders. An annual report is to be sent to the security holders for the
Company's last fiscal year, and four copies of such report shall be furnished
to the Securities and Exchange Commission when it is sent to security
holders.
9
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, on this 27th day
of June, 1996.
Residential Resources, Inc.
By: /s/ William P. Schlick
------------------------
William P. Schlick
Chief Executive Officer
By: /s/ Wiliam P. Schlick
-----------------------
William P. Schlick
Chief Financial Officer
10
FINANCIAL STATEMENTS
Residential Resources, Inc.
Years Ended March 31, 1996, 1995 and 1994
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Residential Resources, Inc.
Claremont, California
We have audited the accompanying balance sheets of Residential Resources,
Inc., for the years ended March 31, 1996 and March 31, 1995 and the related
statements of operations, changes in stockholders' deficit, and cash flows
for each of the three years in the period then ended. The financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 Residential Resources, Inc.
as of March 31, 1996 and March 31, 1995 and the results of its operations and
its cash flows for each of the three years in the period then ended, in
conformity with generally accepted accounting principles.
RAIMONDO, PETTIT & GLASSMAN
Torrance, California
June 24, 1996
F-2
RESIDENTIAL RESOURCES, INC.
BALANCE SHEETS
MARCH 31, 1996 1995
- -------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 703 $ 11,788
Contract receivable -- 200,000
Due from stockholder 140,000 --
Deferred registration costs 229,565 229,565
Property and Equipment, at cost, less accumu-
lated depreciation of $30,521 and $8,722 30,519 52,318
- -------------------------------------------------------------------------------
Total assets $ 400,787 $ 493,671
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES
Accounts payable -- 79,940
Notes and advances due to stockholders
and related parties 405,995 402,235
Note payable 52,500 52,500
Accrued interest 32,856 7,698
Customer deposits 140,000 --
- -------------------------------------------------------------------------------
Total liabilities $ 631,351 $542,373
- -------------------------------------------------------------------------------
CONTINGENCY (NOTE 9)
STOCKHOLDERS' DEFICIT
Common stock, $.10 par value - authorized,
100,000 shares; issued, 10,000 shares;
outstanding, 7,018 shares 1,000 1,000
Additional paid-in capital 109,298 109,298
Accumulated deficit (340,564) (158,702)
Treasury stock, at cost (298) (298)
- -------------------------------------------------------------------------------
Total stockholders' deficit $(230,564) $(48,702)
- -------------------------------------------------------------------------------
Total liabilities and stockholders' deficit $ 400,787 $493,671
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-3
RESIDENTIAL RESOURCES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1996 1995 1994
- -------------------------------------------------------------------------------
REVENUES
Contract fees $ 440,000 $ 969,227 $ --
Interest and other income 324 -- --
- -------------------------------------------------------------------------------
TOTAL REVENUES 440,324 969,227 --
- -------------------------------------------------------------------------------
COSTS AND EXPENSES
Contract expenses 293,466 496,160 --
General and administrative 224,626 295,147 98,418
Management fees to related parties 76,900 90,500 --
Other expenses -- 138,185 --
Interest expense 26,349 7,698 --
- -------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 621,341 1,027,690 98,418
- -------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (181,017) (58,463) (98,418)
INCOME TAXES 845 971 850
- -------------------------------------------------------------------------------
NET LOSS $ (181,862)$ (59,434) $ (99,268)
- -------------------------------------------------------------------------------
LOSS PER SHARE $ (25.91)$ (8.46) $ (14.10)
- -------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING 7,018 7,018 7,018
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-4
RESIDENTIAL RESOURCES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE THREE YEARS ENDED MARCH 31, 1996
- -------------------------------------------------------------------------------
Additional
Common Paid-in Accumulated Treasury
Stock Capital Deficit Stock Total
-------------------------------------------------------------------
Balance, March 31, 1993 $ 1,000 $ - $ (6,579) $ (298) $ (5,877)
Additional paid-in capital - 109,298 6,579 - 115,877
Net loss - - (99,268) - (99,268)
- --------------------------------------------------------------------------------------------------
Balance, March 31, 1994 1,000 109,298 (99,268) (298) 10,732
Net loss - - (59,434) - (59,434)
- --------------------------------------------------------------------------------------------------
Balance, March 31, 1995 1,000 109,298 (158,702) (298) (48,702)
Net loss - - (181,862) - (181,862)
- --------------------------------------------------------------------------------------------------
Balance, March 31, 1996 $ 1,000 $ 109,298 $ (340,564) $ (298) $ (230,564)
- --------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-5
RESIDENTIAL RESOURCES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (181,862) $(59,434) $(99,268)
Adjustments to reconcile net loss
to net cash provided by (used
in) operating activities:
Due to affiliates - 138,185 -
Depreciation 21,799 8,722 -
Write-off of contract receivable 200,000 - -
Increase (decrease) resulting
from changes in:
Contract receivable - (200,000) -
Due from stockholder (140,000) - -
Disposition of subsidiary - - 181
Deferred registration costs - 91 1,235
Other assets - - 2
Accounts payable (79,940) 21,566 41,733
Due to related parties (49,850) 51,500 57,885
Other liabilities 25,158 6,848 (77)
Customer deposits 140,000 - -
Minority interest in subsidiary - - (490)
- -----------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities (64,695) (32,522) 273
- -----------------------------------------------------------------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of property and equipment - (61,040) -
- -----------------------------------------------------------------------------------------------
Net cash used in investing activities - (61,040) -
- -----------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from advances from stockholders
and related parties 61,110 52,500 -
Repayment of advances to stockholders
and related parties (10,000) - -
Proceeds from notes 2,500 52,500 -
- -----------------------------------------------------------------------------------------------
Net cash provided by financing activities 53,610 105,000 -
- -----------------------------------------------------------------------------------------------
F-6
RESIDENTIAL RESOURCES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------
Net increase (decrease) in cash (11,085) 11,438 273
Cash and cash equivalents, beginning of year 11,788 350 77
- ----------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 703 $ 11,788 350
- ----------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest $ - - -
Taxes $ - 1,771 850
NON-CASH TRANSACTIONS:
Payment of settlement
agreement by stockholder
on behalf of the Company $ 90,000 - -
- ----------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-7
RESIDENTIAL RESOURCES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
Residential Resources, Inc. (the "Company") was incorporated on April 3, 1986
and is a limited purpose finance company.
The limited purpose of the Company is to facilitate the issuing and selling
of asset backed bonds secured by mortgage loans, by mortgage pass-through
certificates guaranteed by the Government National Mortgage Association, by
Guaranteed Mortgage Pass-Through Certificates issued by the Federal National
Mortgage Association, by Mortgage Participation Certificates issued by the
Federal Home Loan Mortgage Corporation and other types of mortgage collateral
including mortgage pass-through certificates, mortgage-collateralized
obligations or other interests in mortgages on residential properties.
The Company intends to either purchase mortgage collateral from or lend the
proceeds of the issuance of its mortgage-collateralized bonds to financial
entities. Financing transactions with financing subsidiaries of financing
entities are pursuant to funding agreements. The financial entities and
financing subsidiaries are affiliated with home builders, thrifts, commercial
banks, mortgage bankers, and other entities engaged in mortgage finance
activities. Mortgage-collateralized bonds issued by the Company represent
limited obligations of the Company; mortgage-collateralized bonds issued by
the various trusts or segregated asset pools created by the Company represent
obligations solely of the issuing trust or segregated asset pools.
Effective June 17, 1994, the Company amended its Articles of Incorporation to
allow it to securitize other types of obligations including but not limited
to Financial Obligations of the United States of America, Installment Loan
Agreements and Credit Receivables.
During the year ended March 31, 1996, the Company entered into several
contracts to provide for the rating, securitization and placement of an
aggregate of $132,000,000 in mortgage-backed securities. The contracts call
for base fees earned upon achievement of milestones and commissions at
issuances, which are expected to occur at various dates over the next three
years. Customer deposits of $140,000 at March 31, 1996 relate to advances
received in connection with these contracts.
During the year ended March 31, 1995, the Company entered into contracts to
assist financial institutions in the rating, securitization and placement of
an aggregate of $500,000,000 in mortgage-backed securities. The $200,000
contract receivable at March 31, 1995 related to fees earned in connection
with one of the contracts. Such amount was deemed uncollectible at March 31,
1996 when the financial institution was unable to go forward with the
remainder of the contract.
F-8
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT'S 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.
REVENUE RECOGNITION
The Company recognizes issuance, rating, and securitization and consulting
fees when earned.
DEFERRED REGISTRATION COSTS
Registration costs are deferred and included in the cost of investments in
trusts as bonds are issued by the various trusts. Amounts are based on the
amount of the bond series issued relative to the total amount of bonds
expected to benefit from those costs.
BONDS ISSUED
Bonds issued in trust and segregated asset pools are payable solely out of
the distributions from the mortgage collateral securing these bonds which are
included in the trusts or assets pools. Accordingly, they are not
liabilities of the Company and are not included in the Company's balance
sheets.
PROPERTY AND EQUIPMENT
Property and equipment consist of furniture, equipment and software used in
the Company's operations, are recorded at cost, and depreciated using the
straight-line method of accounting over their useful lives which range from
three to five years.
INCOME TAXES
Effective April 1, 1988, the Company elected to be taxed as an S corporation
under Subchapter S of the Internal Revenue Code of 1986. Accordingly, the
Company's tax year end (but not its financial reporting year) was December
31. As an S corporation, the Company's income was passed through to, and
taxed directly to its stockholders.
F-9
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Upon acquisition by a corporation (see Note 5), the Company lost its
Subchapter S status. Accordingly, as of October 16, 1993, the Company
started accounting for income taxes in accordance with Financial Accounting
Standards Board ("FASB") Statement No. 109, "Accounting for Income Taxes."
This method requires the recognition of deferred tax liabilities and assets
for the expected future tax consequences of temporary differences between tax
bases and financial reporting bases of assets and liabilities The Company
has no significant temporary differences at March 31, 1995 and 1994.
The Company records a valuation allowance when it is more likely than not
that deferred tax assets will be recovered in the foreseeable future.
During 1995, the Company elected to align its tax year and fiscal reporting
year to March 31.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments included in current assets and
liabilities approximates fair value because of the short maturity of these
items. The carrying amounts of notes payable and advances approximate fair
value because these instruments bear rates consistent with current market
interest rates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
F-10
3. ISSUANCE OF BONDS AND SALE OF INVESTMENTS IN TRUSTS AND SEGREGATED ASSETS
POOLS
The amount of bonds outstanding consists of the following (classes completely
paid off are omitted):
MARCH 31, 1996 March 31, 1995
-----------------------------------
SERIES SEVEN
Class VII-B $ 29,095,661 $ 36,219,310
Class VII-C 9,062,519 11,281,344
Class VII-F 50,000 50,000
- ----------------------------------------------------------------------------
38,208,180 47,550,654
- ----------------------------------------------------------------------------
SERIES EIGHT
Class VIII-B 6,238,150 12,806,834
Class VIII-C 22,717,000 22,717,000
Class VIII-D 21,941,352 26,918,906
- ----------------------------------------------------------------------------
50,896,502 62,442,740
- ----------------------------------------------------------------------------
SERIES NINE
Class IX-B 5,347,227 14,358,003
Class IX-C 33,000,000 33,000,000
Class IX-D 15,084,519 18,628,948
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53,431,746 65,986,951
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SERIES TEN
Class X-B 12,027,852 15,339,580
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12,027,852 15,339,580
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F-11
3. ISSUANCE OF BONDS AND SALE OF INVESTMENTS IN TRUSTS AND SEGREGATED ASSETS
POOLS (CONTINUED)
MARCH 31, 1996 March 31, 1995
-----------------------------------
SERIES ELEVEN
Class XI-D $ 0 $ 532,111
Class XI-E 13,413,160 18,233,000
Class XI-F 10,670,000 10,670,000
Class XI-K 16,055 19,623
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24,099,215 29,454,734
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SERIES TWELVE
Class XII-H 0 18,669,438
Class XII-I 0 4,819,000
Class XII-J 0 100,000
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0 23,588,438
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SERIES FOURTEEN
Class XIV-A 23,201,657 27,827,764
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23,201,657 27,827,764
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SERIES FIFTEEN
Class XV-C 7,952,957 14,044,751
Class XV-D 19,251,000 19,251,000
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$ 27,203,957 $ 33,295,751
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During the year ended March 31, 1992, the Company acted as Depositor in
establishing Residential Mortgage Securities Trust Sixteen (the "Trust").
The Trust's mortgage-collateralized bonds issued had an aggregate original
principal amount of $12,560,000; an interest rate of 9.00%, a stated maturity
of September 1, 2021, and represents an obligation solely of the Trust.
F-12
3. ISSUANCE OF BONDS AND SALE OF INVESTMENTS IN TRUSTS AND SEGREGATED ASSETS
POOLS (CONTINUED)
During the years ended March 31, 1996, 1995 and 1994, there were no issuances
or sales of investments in segregated asset pools. The Company (nor its
affiliates) has no servicing rights to the bonds held in the existing trusts
and assets pools. The Company is not involved in the management of the
existing trusts.
4. DEFERRED REGISTRATION COSTS
The Company has filed four shelf registration statements with the Securities
and Exchange Commission for the issuance of a total of $4 billion of
mortgage-collateralized bonds of which approximately $2.9 billion has been
issued with an outstanding unused shelf balance of $1.1 billion as of March
31, 1996. In conjunction with these filings, the Company incurred various
fees and expenses, including applicable filing fees, legal costs, management
fees, and other related items. Deferred registration costs at March 31, 1996
and 1995 represent costs and fees to be applied to future
mortgage-collateralized bond offerings.
5. STOCKHOLDERS' DEFICIT
Effective June 17, 1994, the Company amended its articles of incorporation to
provide for a single class of no par common stock and authorized 100,000
shares thereof. The Company had previously authorized 1,000,000 shares of
Class A Preferred Stock, par value $.10 per share and 1,000,000 shares of
Class B Preferred Stock, par value $.10 per share. No preferred stock was
ever issued.
On October 15, 1993, Commonwealth Financial Corporation (substituted to
Residential Resources Financial Services in August 1994) acquired 6,667
shares of Residential Resources, Inc. common stock and all options to acquire
the 351 remaining shares for $110,000. The purchase price was allocated
based on fair market value of assets and liabilities at the date of
acquisition as follows:
Deferred registration costs $229,656
Due to affiliates (102,165)
Accounts payable (17,491)
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$110,000
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The Company had no activity from April 1, 1993 through October 15, 1993;
therefore, the acquisition was accounted for as if occurring at the beginning
of the fiscal year 1994.
As of March 31, 1996 and 1995, 2,982 shares are held as Treasury Stock.
F-13
6. RELATED PARTY TRANSACTIONS
Notes and amounts due to stockholders and related parties are as follows:
MARCH 31, 1996 March 31, 1995
------------------------------------
Settlement agreement to former stock-
holder $ - $ 90,000
Settlement agreement to former stock-
holder, due on demand, non-interest
bearing 95,500 145,000
Advances from related parties, due on
demand, non-interest bearing 106,235 114,385
Advances from RRFS, due on demand,
bearing interest of 18% 90,000 -
Advances from RRFS, due on demand,
non-interest bearing 59,260 -
Notes payable to related party, due on
demand, bearing interest of 12% 55,000 52,500
Other - 350
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$ 405,995 $ 402,235
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Since the acquisition (see Note 5), the Company is dependent upon its parent,
Residential Resources Financial Services, Inc. (RRFS), to continue as a going
concern. Advances were made during the years ended March 31, 1996 and 1995,
and RRFS has committed to support the Company for at least another year. The
amount due from stockholders of $140,000 at March 31, 1996 related to
customer deposits collected by RRFS on behalf of the Company.
During the years ending March 31, 1996 and 1995, the Company had no employees
and RRFS provided managerial services for which it was compensated $76,900
and $90,500 in management fees. During fiscal year 1994, the Company had no
activity and no managerial services were provided to the Company by RRFS.
F-14
During the year ended March 31, 1996, the Company paid consulting fees of
$10,200 to a related party, and a combined total of $41,250 to two directors
of the Company as compensation for professional services rendered, unrelated
to their services and duties as directors.
The Company acquired $61,040 in furniture, equipment and software from
related parties during the year ending March 31, 1995.
Interest expense to related parties was $18,857 and $2,227 for the years
ended March 31, 1996 and 1995, respectively. As of March 31, 1996 accrued
interest due to related parties amounted to $21,084.
7. NOTE PAYABLE
The note payable of $52,500 at March 31, 1996 and 1995 is due on demand and
bears interest of 12%.
8. INCOME TAXES
There are no material temporary differences at March 31, 1996 and 1995 and
therefore no deferred tax assets or liabilities recorded at that date.
At March 31, 1996 and 1995, the Company had $340,937 and $169,983 in net
operating loss carryforwards (NOL) which can be offset against future taxable
income for federal and state reporting purposes, respectively, and expire in
various years through 2010 and 2000, respectively. Such NOL resulted in
federal and state tax benefits of $118,089 and $57,174 which have been offset
by a valuation allowance of the same amount at March 31, 1996 and 1995,
respectively.
9. LITIGATION SETTLEMENTS
In 1994, the Company was named as a defendant in an action which was settled
in February, 1995. The net effect of the settlements to the 1995 financial
statements amounts to $138,185 and is included in other expenses. The
$90,000 settlement balance at March 31, 1995 was paid in May, 1995. The
accompanying financial statements include a liability of $95,500 for the
settlement of another related matter.
The common stock owned by RRFS serves as guarantee for the repayment of the
$95,500.
F-15
RESIDENTIAL RESOURCES, INC.
INDEX TO FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS
Balance sheets F-3
Statements of operations F-4
Statements of changes in stockholders' deficit F-5
Statements of cash flows F-6
Notes to financial statements F-8