EX-99.1 2 federal8ka060305ex991.txt FINANCIAL STATEMENTS FOR PRIDE LENDING, INC. Exhibit 99.1 PRIDE LENDING, INC. ------------------- INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm F-2 Financial Statements: Balance Sheets F-3 Statements of Operations F-4 & F-5 Statement of Changes in Stockholders' Equity F-6 Statements of Cash Flows F-7 & F-8 Notes to Financial Statements F-9 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------------------------------------- The Audit Committee Pride Lending, Inc. Denver, Colorado We have audited the accompanying balance sheet of Pride Lending, Inc. as of June 30, 2004 and 2003, and the related statements of operations, shareholders' equity and cash flows for the two years ended June 30, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. 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 audit provides 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 Pride Lending, Inc. as of June 30, 2004 and 2003, and the results of its operations and its cash flows for the two years ended June 30, 2004, in conformity with accounting principles generally accepted in the United States of America. /s/ Miller and McCollom ----------------------- Miller and McCollom Certified Public Accountants 4350 Wadsworth Blvd., Suite 300 Wheat Ridge, CO 80033 September 10, 2004 F-2

The accompanying notes are an integral part of the financial statements. F-3 PRIDE LENDING, INC. ------------------- STATEMENTS OF OPERATIONS Year Ended June 30, 2004 2003 ---------- ---------- Revenue: Interest income $ 65,836 $ 55,522 Other 6,821 -- ---------- ---------- 72,657 55,522 ---------- ---------- Expenses: Bad debt 184 8,277 General and administrative 8,558 9,329 Officer's compensation (Note 4) 15,506 9,896 Other 1,891 33 ---------- ---------- 26,139 27,535 ---------- ---------- Net income before provision for income taxes 46,518 27,987 ---------- ---------- Provision for income taxes (Note 2): Current 8,606 5,178 ---------- ---------- 8,606 5,178 ---------- ---------- Net income $ 37,912 $ 22,809 ========== ========== Per Share $ .03 $ .02 ========== ========== Weighted Average Shares Outstanding 1,325,000 1,325,000 ========== ========== The accompanying notes are an integral part of the financial statements. F-4 PRIDE LENDING, INC. ------------------- STATEMENTS OF OPERATIONS (UNAUDITED) Nine Months Ended March 31, 2005 2004 ------------ ------------ Revenue: Interest income $ 22,766 $ 46,523 Other -- 6,821 ------------ ------------ 22,766 53,344 ------------ ------------ Expenses: General and administrative 9,092 6,233 Officer's compensation (Note 4) 3,412 11,305 Other 25 1,891 ------------ ------------ 12,529 19,429 ------------ ------------ Net income before provision for income taxes 10,237 33,915 ------------ ------------ Provision for income taxes (Note 2): Current 1,894 6,274 ------------ ------------ 1,894 6,274 ------------ ------------ Net income $ 8,343 $ 27,641 ============ ============ Per Share $ .01 $ .02 ============ ============ Weighted Average Shares Outstanding 1,325,000 1,325,000 ============ ============ The accompanying notes are an integral part of the financial statements. F-5

The accompanying notes are an integral part of the financial statements. F-6 PRIDE LENDING, INC. ------------------- STATEMENTS OF CASH FLOW Year Ended June 30, 2004 2003 ---------- ---------- Cash Flows Operating Activities: Net income $ 37,912 $ 22,809 Increase in: Other assets 7,839 8,842 ---------- ---------- Net Cash Provided by Operating Activities 45,751 31,651 ---------- ---------- Cash Flows from Investing Activities: (Investment) in mortgage notes receivable (168,970) -- Collection of note receivable, related party -- 80,009 Collection of notes receivable 25,076 98,357 Collection of mortgage notes receivable 217,384 44,770 ---------- ---------- Net Cash Provided by Investing Activities 73,490 223,136 ---------- ---------- Cash Flows from Financing Activities: Advances, related parties (132,693) (253,107) ---------- ---------- Net Cash (Used in) Financing Activities (132,693) (253,107) Increase (decrease) in Cash (13,452) 1,680 Cash, Beginning of Period 19,343 17,663 ---------- ---------- Cash, End of Period $ 5,891 $ 19,343 ========== ========== Interest Paid $ -- $ -- ========== ========== Income Taxes Paid $ 8,606 $ 5,178 ========== ========== The accompanying notes are an integral part of the financial statements. F-7 PRIDE LENDING, INC. ------------------- STATEMENTS OF CASH FLOW (UNAUDITED) Nine Months Ended March 31, 2005 2004 ----------- ----------- Cash Flows Operating Activities: Net income $ 8,343 $ 27,641 Increase (decrease) in: Other assets 7,384 (5,347) ----------- ----------- Net Cash Provided by Operating Activities 15,727 22,294 ----------- ----------- Cash Flows from Investing Activities: (Investment) in mortgage notes receivable -- (418,970) Collection of note receivable, related party -- 35,504 Collection of notes receivable 33,043 18,299 Collection of mortgage notes receivable 322,886 116,102 ----------- ----------- Net Cash Provided by (Used in) Investing Activities 355,929 (249,065) ----------- ----------- Cash Flows from Financing Activities: (Advances) repayments, related parties (369,710) 229,312 ----------- ----------- Net Cash Provided by (Used in) Financing Activities (369,710) 229,312 ----------- ----------- Increase in Cash 1,946 2,541 Cash, Beginning of Period 5,891 19,343 ----------- ----------- Cash, End of Period $ 7,837 $ 21,884 =========== =========== Interest Paid $ -- $ -- =========== =========== Income Taxes Paid $ 1,894 $ 6,274 =========== =========== The accompanying notes are an integral part of the financial statements. F-8 PRIDE LENDING, INC. ------------------- NOTES TO FINANCIAL STATEMENTS June 30, 2004 and 2003 (References to items for March 31, 2005 and 2004 are unaudited) (1) Organization and Summary of Accounting Policies ----------------------------------------------- This summary of significant accounting policies of Pride Lending, Inc. (the "Company") is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management who is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles in the United States of America and have been consistently applied in the preparation of the financial statements. Organization The Company was organized on August 22, 2001 under the laws of the state of Colorado. Effective August 22, 2001, the assets relating to loans receivable of Prime Rate Income & Dividend Enterprises, Inc. (PIDV) were contributed to the Company. Predecessor cost basis of the assets were carried over to the Company. The Company was a wholly-owned subsidiary of Pride, Inc. (PRIDE). Effective March 31, 2005, the directors of PRIDE agreed to contribute the Company to Federal Mortgage Corporation of Puerto Rico, Inc. (FEDERAL), a related entity, in exchange for 90,000,000 shares of the common stock of FEDERAL. Description of business The Company is principally in the investment business. The Company principally invests in real estate mortgage loans. Per Share Information Per share information is computed by dividing the net income or loss by the weighted average number of shares outstanding during the period. Use of Estimates in the Preparation of Financial Statements 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. Investment in Mortgage Notes Receivable and Investment in Note Receivable The Company's investment in mortgage notes receivable consist principally of carry-back notes receivable collateralized by mortgages on real estate sold and are carried at the amortized principal balance. The Company's investment in a note receivable is collateralized by various assets. Management believes there is no impairment in value of the mortgage notes receivable and its investment in note receivable and therefore has provided no allowance for uncollectible notes. Management's policy with respect to impairment determination is to review the carrying values periodically, and at least quarterly to determine if there is any impairment. The Company requires a downpayment of at least 10% or additional collateral of at least 10% to sell a property with a carry-back mortgage note receivable. Management believes that the underlying collateral on all mortgage notes receivable are sufficient to facilitate collection of the mortgage notes receivables. Revenue Recognition Policy The Company recognizes interest income from mortgage notes receivable and investment in note receivable on a daily pro-rata basis. F-9 Concentration of Credit Risk The Company's material concentration of credit risk consists principally of investments in mortgage notes receivable and investment in note receivable. The Company's investments in mortgage notes receivable are collateralized principally by first or second deeds of trust on real estate located primarily in Colorado and Arizona. At March 31, 2005, the Company had five mortgage notes receivable from one individual totaling approximately $145,562. At June 30, 2004, the Company had fifteen mortgage notes receivable from one individual totaling approximately $466,404. The weighted average interest rate on mortgagee notes receivable is approximately 8% per annum with monthly repayment terms being amortized over periods up to twenty years. The interest rate on the note receivable is 2% above prime rate. Additional financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of temporary cash investments. The Company places its temporary cash investments with financial institutions. As of June 30, 2004, the Company had no concentration of credit risk in its cash investments since it had no temporary cash investments in bank accounts in excess of the FDIC insured amounts. Cash and Cash Equivalents The Company considers cash and cash equivalents to consist of cash on hand and demand deposits in banks with an initial maturity of 90 days or less. Fair Value Financial Instruments Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 107 ("SFAS 107"), "Disclosures About Fair Value of Financial Instruments." SFAS 107 requires disclosure of fair value information about financial instruments when it is practicable to estimate that value. The carrying amount of the Company's cash, cash equivalents, and payables approximate their estimated fair values due to their short-term maturities. Recently Issued Accounting Standards There were various accounting standards and interpretations issued during 2004 and 2003, none of which are expected to have a material impact on the Company's financial position, operations, or cash flows. Income Taxes The Company files tax returns on a consolidated basis with its parent company and affiliates. As such, surtax exemptions are allocated to various entities on a pro rata basis. Other The Company has selected June 30 as its fiscal year end. No advertising expense has been incurred. The Company has not entered into any leases. All of the Company's assets are located in the United States. (2) Income Taxes ------------ The provision for federal and state income taxes consisted of the following components: F-10

The reconciliation of income tax (benefit) computed at the federal statutory rate to income tax expense (benefit) is as follows: Tax at Federal statutory rate 15.00% State tax net of Federal benefit 3.50% Valuation allowance (18.50)% ------------ Tax provision - (3) Common and Preferred Stock -------------------------- The Company's articles of incorporation authorize 200,000,000 no par value common shares and 1,000,000 no par value preferred shares. As of June 30, 2004, there were 1,325,000 shares of common stock outstanding. There were no preferred shares outstanding as of June 30, 2004. The terms and preferences of the authorized preferred stock may be determined at the discretion of the Company's board of directors. (4) Related Party Transactions -------------------------- As of March 31, 2005, the Company had advanced $819,264 to various related parties. Effective March 31, 2005, the Company declared a dividend to its parent company in the amount of $819,264 equal to the amount of the advances. The Company and certain related parties share common staff and operating expenses. Costs for these shared expenses were allocated to the various entities. Had the Company not shared staff and certain expenses with other related parties, the operating results may have been materially different. F-11

FEDERAL MORTGAGE CORP OF PUERTO RICO 8-K/A