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EXHIBIT A-6
J & J SECURITIES LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1993, 1994 AND 1995
AND MARCH 31, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
1. ORGANIZATION
J & J Securities Limited ("J&J") is a UK based company, incorporated in
England in 1977, that originates and services mortgage loans for investment
purposes secured by residential properties. J&J conducts all its business in the
UK and lends on the basis of first and second mortgages on residential
properties.
2. UNAUDITED INFORMATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and do not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments consisting of normal recurring accruals, considered necessary for a
fair presentation of the results for the interim period have been included.
Operating results for the six months ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the fiscal year ended
September 30, 1996.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared under and are in accordance
with generally accepted accounting procedures in the US. The following principal
accounting policies have been applied:
Mortgage loans held for investment, net
Mortgage loans are stated at cost plus accrued interest income less any
provision for permanent diminution in value. Specific provisions for permanent
diminution in value are made by reference to doubtful loans which fail to meet
certain criteria. This includes management's estimate of the value of the
underlying collateral. Recovery of the carrying value of such loans is dependent
to a great extent on economic, operating and other conditions that may be beyond
J&J's control. In addition a general provision is made in respect of losses
which, although not specifically identified, are likely to exist in any
portfolio of loans of this type.
Loans are placed on nonaccrual status on the occurrence of the criteria
referred to above. Loans may be reinstated to accrual status when, in the
opinion of management, the criteria are no longer applicable.
SFAS No. 114 "Accounting by Creditors for Impairment of a Loan" as amended
by SFAS No. 118 "Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosures" is effective for accounting periods beginning after
December 15, 1994. SFAS No. 114 addresses accounting by creditors for impairment
of a loan by specifying how allowances for credit losses for certain loans
should be determined. A loan is impaired when it is probable that the creditor
will be unable to collect all amounts in accordance with the contractual terms
of the loan agreement. As an expedient, impairment is measured based on the fair
value of the loan's collateral. The adoption of these standards had no material
impact on the financial statements.
Revenue recognition
Mortgage loan interest accrues and is credited to the profit and loss
account on a monthly basis. Other interest, chargeable expenses and sundry
income are included on an accrual basis. All income derives from activities
within the United Kingdom.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and money market funds.
Such funds are deemed to be cash equivalents for purposes of the statements of
cash flows.
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J & J SECURITIES LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
Equipment and vehicles, net
Equipment and vehicles are stated at original cost less accumulated
depreciation. Depreciation is computed by using the straight-line method based
on the estimated lives of the depreciable assets.
Expenditures for maintenance and repairs are charged directly to the
appropriate operating account at the time the expense is incurred. Expenditures
determined to represent additions are capitalized. Cost of assets sold or
retired and the related amounts of accumulated depreciation are eliminated from
the accounts in the year of sale or retirement. Any resulting profit or loss is
reflected in the statement of earnings.
Income taxes
J&J accounted for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes." Under the asset and liability method of SFAS No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement and tax
reporting bases of existing assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax laws. Deferred tax liabilities and
assets are adjusted for the effect of a change in tax laws or rates.
J&J has potential net operating losses (NOL's) carried forward against
which a valuation reserve has been fully provided at each balance sheet date as
future income tax benefit in respect of these NOL's is only available as a
consequence of future income sufficient to enable the benefit to be realized.
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 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.
Foreign currency translation
J&J reflects the result of its operations in accordance with SFAS No. 52,
"Foreign Currency Translation." To the extent there are foreign currency
translation gains or losses, such gains or losses are considered unrealized and
are recorded as a separate component of stockholders' equity.
4. FIXED ASSETS
SEPTEMBER 30,
----------------------------
1994 1995
------------ -----------
Cost
Office equipment.......................... $ 293,404 $ 376,080
Motor vehicles............................ 342,668 365,522
----------- -----------
636,072 741,602
Less:
Accumulated depreciation............... 458,509 409,188
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Balance at end of period............... $ 177,563 $ 332,414
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5. MORTGAGE LOANS HELD FOR INVESTMENT, NET
The mortgage loan balance is summarized as follows:
SEPTEMBER 30,
----------------------------
1994 1995
------------ -----------
Mortgage loans held for investment, net..... $ 59,304,209 $55,460,242
Provisions for losses..................... (10,353,557) (8,803,037)
------------ -----------
Balance, end of year...................... $ 48,950,652 $46,657,205
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J & J SECURITIES LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
The activity in the reserve for mortgage loans is summarized as follows:
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1993 1994 1995
------------ ------------ -----------
Balance, beginning of year.................. $ 12,824,868 $ 13,000,982 $10,353,557
Provision for losses...................... 3,140,497 1,766,313 1,046,700
Charge-offs............................... (2,963,312) (4,979,321) (2,641,765)
Effects of foreign exchange............... (1,071) 565,583 44,545
------------ ------------ -----------
Balance, end of year................... $ 13,000,982 $ 10,353,557 $ 8,803,037
============ ============ ===========
6. INCOME TAXES
The net provision for income taxes as presented in the statements of
operations for the years ended September 30, 1994 and 1995 is as follows:
FOR THE YEAR ENDED
SEPTEMBER 30,
--------------------------------
1993 1994 1995
-------- -------- --------
Current (provision)/credit........................... -- $140,948 --
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7. EXTRAORDINARY GAIN
On November 20, 1995, J&J entered into an agreement with its bankers to
extinguish the long-term loan (see Note 8). This resulted in an extraordinary
gain of $19,375,677 net of taxes ($22,165,677 less applicable deferred income
taxes of $2,790,000).
8. LONG-TERM LOAN
J&J has a term loan with a bank secured by its mortgage portfolio. The
interest rate is 21 1/2% above the bank's prime rate. The aggregate amount of
the bank debt maturing at September 30 in each of the next five years and
thereafter is as follows:
YEAR ENDING SEPTEMBER 30, AMOUNT
------------------------- -----------
1996.................................................. $12,345,060
1997.................................................. 12,345,060
1998.................................................. 12,345,060
1999.................................................. 6,769,528
2000.................................................. --
-----------
$43,804,708
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Subsequent to the year end, on November 20, 1995 (see Note 11), J&J entered
into an agreement with its bankers to discharge the liability at that time which
resulted in an extraordinary gain arising from the extinguishment of part of
this debt (see Note 7). The new loan facilities included a three year term loan
of $28.5 million and a $7.9 million demand note. Interest on each of the new
facilities bears interest at a variable rate of 2.5% over the lender's prime
rate.
9. DIRECTORS' INTEREST IN TRANSACTIONS
A J&J director is a partner in a legal practice which provided legal and
management services to J&J for fees of $604,392, $386,296 and $516,825 for the
years ended September 30, 1993, 1994 and 1995, respectively.
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J & J SECURITIES LIMITED
NOTES FORMING PART OF THE FINANCIAL STATEMENTS -- (CONTINUED)
A J&J director is a beneficial shareholder in Latchglen Limited trading as
London Trust Securities which received introductory commissions of $47,698,
$138,922 and $136,209 for the years ended September 30, 1993, 1994 and 1995,
respectively.
10. COMMITMENTS UNDER OPERATING LEASES
J&J leases premises under operating leases with various expiration dates.
Minimum annual rental payments at September 30, 1995 are as follows:
1996.............................................................. $105,860
1997.............................................................. 105,860
1998.............................................................. 105,860
1999.............................................................. 31,600
2000.............................................................. 31,600
Thereafter........................................................ 31,600
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$412,380
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Rent expenses for office space amounted to $54,525, $47,519 and $72,456 for
the years ended September 30, 1993, 1994 and 1995, respectively.
11. POST BALANCE SHEET EVENTS
On November 20, 1995, J&J's indebtedness to its previous principal bankers,
The National Mortgage Bank Plc, was repaid in full after agreement for the
forgiveness of a certain amount of the debt outstanding.
On April 23, 1996 J&J was acquired by City Mortgage Corporation Limited.
From that date J&J ceased its lending operations while continuing to incur
certain incidental expenditures. It is anticipated that as of September 30,
1996, J&J will be wholly-dormant.