U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10K-SB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended Commission File Number
December 31, 1997 33-42406-A
FEDERAL MORTGAGE INVESTORS, LTD.
(a Florida limited partnership)
(Exact name of Registrant as specified in its Charter)
Florida 65-0287111
- ------------------------------ -----------------
State or other jurisdiction of I.R.S. Employer
incorporation or organization Identification Number
1800 Second Street, Suite 780, Sarasota, Florida 34236
- --------------------------------------------------------------
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: 813/954-2328
Securities registered pursuant to Section 12/b/ of the Act: NONE
Securities registered pursuant to Section 12/g/ of the Act: NONE
Indicate by check mark whether the registrant /1/ 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/, and /2/ has been subject to
such filing requirements for the past 90 days. Yes /X/ NO .
Federal Mortgage Investors, Ltd. had total revenues of $34,095 for the
year ended December 31, 1997.
As of December 31, 1997, the Partnership has 1,552 Limited Partnership
Units outstanding. As indicated, the Partnership is a limited partnership
organized pursuant to Florida law.
PART I
Item 1. Description of Business
FEDERAL MORTGAGE INVESTORS, LTD. (the /Partnership/) is a limited
partnership which has been organized pursuant to the Florida Revised
Uniform Limited Partnership Law. The initial certificate legally creating
the Partnership was filed in July, 1991 by the General Partners of the
Partnership, Guy S. Della Penna (/Della Penna/) and Capital Mortgage
Management, Inc. (/Capital Mortgage/), a corporation wholly-owned by Della
Penna. Pursuant to an effective Registration Statement under the
Securities Act of 1933, as amended (the /Act/) (Commission File No. 22-
42406-A), dated November 20, 1991, the Partnership engaged in the public
offering of 7,500 Units of limited partnership interest at a per Unit
offering price of $1,000 (the /Units/) until January 31, 1993, at which
time the offering was concluded. The Units were offered on behalf of the
Partnership on a best efforts basis by Executive Wealth Management
Services, Inc. (formally known as Executive Securities, Inc.), a
securities broker-dealer and member of the National Association of
Securities Dealers, Inc. Della Penna is the majority shareholder of
Executive Wealth Management Services, Inc. The Partnership has a total of
1,552 Units outstanding as of December 31, 1997. During the offering
period a total of 2,569 Units were sold, however, due to approved investor
death or hardship redemptions, 1,079 Units were bought back and 62 were
resold by the Partnership throughout the life of the Partnership, to date.
The purpose of Federal Mortgage Investors, Ltd. (the Partnership) is to
acquire and deal in mortgage notes secured by first liens on real estate
and to acquire insured instruments of deposits and/or debt securities
issued by the United States and instrumentalities thereof. Purchases of
the mortgage notes, instruments of deposits and debt securities are made in
accordance with policies set forth in the limited partnership agreement.
However, during mid to late fiscal 1996, management evaluated the costs
associated with servicing individual residential mortgage notes, the
delinquency rate and factors contributing to delinquencies, and the
annualized return on investments. Management has taken steps to cut
expenses and find viable areas of revenues and alternative sources of
capital. With increasing the revenue stream as a primary objective,
interim lending was considered a good relatively short-term investment
alternative and such had minimal costs associated with it.
The Partnership will also act as broker and receive a fee of .5% to
1.5% for such transactions. The Partnership has through the years
established relationships in the industry. These relationships could
benefit respective purchase and sales transactions. It is due primarily to
these relationships that management believes the Partnership can benefit.
The profits and losses are allocated and cash distributions are made in
accordance with the Partnership agreement.
The Partnership encounters competition in its efforts to acquire acceptable
mortgage loans for its Portfolio. Numerous investment entities presently
exist, including affiliates which are in the continuous business of
acquiring residential real estate loans from the sources intended to be
utilized by the Partnership. The basis of this competition in Portfolio
loan acquisition is related to the ability of the Partnership to thoroughly
identify sources of loan purchases, the ability of the Partnership to
rapidly and effectively evaluate mortgage loan acquisition
candidates and the price that the Partnership is able and willing to pay or
broker for acceptable residential mortgage loans within its Portfolio
Acquisition Policy.
Item 2. Properties
Management continued its review and cleanup of the portfolio during all
of fiscal 1997. At December 31, 1997, the Partnership did not hold any
properties available for sale.
Item 3. Legal Proceedings
The Partnership entered into a lawsuit in July 1995, regarding the
purchase of nineteen first lien residential mortgage notes with an unpaid
principal balance of approximately $1,529,000. The Partnership purchased
these mortgage notes for approximately $1,193,000 in July 1993. The
Partnership alleges that the individuals (one a former officer of the
Corporate General Partner) entered into a conspiracy to obtain mortgages
for the Partnership which were worth considerably less than described. On
October 7, 1996, the Partnership entered into a Mediation Settlement
Agreement with the defendants. This settlement calls for the defendants to
purchase mortgage notes from the Partnership with an average "spread"
between the Partnership's cost and selling price of 400 basis points (4%).
The Settlement Agreement provides for the Partnership to earn from this
"spread" on mortgages sold to defendants a sum of $977,000. Other general
provisions of the settlement include, but are not limited to the following:
1. The Partnership must provide the mortgage notes to the defendants
in minimum blocks of $250,000 of outstanding principal balance.
2. Each mortgage shall be a fixed rate mortgage with a minimum ten
(10%) interest rate and a maximum 360 month amortization.
3. Each mortgage must have a minimum of five percent (5%) verifiable
cash down payment and a loan-to-value ratio no greater than 95% of the fair
market value, measured in accordance with an appraisal by a national
appraisal firm using FNMA Standard No. 704 or better, conducted within one
(1) year of the purchase.
4. The property which is security for the mortgage must be located
within the Continental United States unless otherwise agreed by defendants.
5. Each mortgage must be on a Standard FMNA Form and all supporting
documents.
6. The borrowers under each mortgage must meet acceptable credit
standards.
As a result of this settlement, the Partnership will no longer have to
inventory, service and/or establish a payment history on the mortgage loan
included in its portfolio. This will result in increased turnover in the
Portfolio of mortgage loans thus resulting in increased profitability.
The Partnership has yet to realize gains from the Mediation Settlement.
However, one defendant is actively assisting the Partnership in developing
loan sources, lines of credit and other avenues of brokerage. The hard
costs and opportunity costs associated with the legal proceedings has
rendered the Partnership with minimal cash flow and it is the General
Partner s decision to effect lesser limited partner return of capital cash
distributions.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
PART II
Item 5. Market for Partnership's Units and Related Partner Matters
As a limited partnership formed pursuant to the Florida Revised
Uniform Limited Partnership Law, the Partnership has no authorized class of
Common Stock or other equity securities. The Partnership had 1,552 non-
assessable Units of limited partnership interest outstanding at December
31, 1997.
In accordance with the terms of the Agreement, such Units may only be
transferred upon consent of the General Partners of the Partnership. As of
December 31, 1997, there has not been, nor is it expected that any active
secondary market will develop with respect to such Units.
Since no active trading market for the Units is expected to develop,
Limited Partners desiring to sell their Units may be required to
individually negotiate sale/purchase transactions with suitable Unit
purchasers in accordance with the Agreement requirements relating to the
written consent of the General Partners.
During the life of the Partnership, the Partnership, liquidated a
total of 1,079 Units, as a result of investor death or hardships.
The Partnership acts as its own transfer agent and registrar with
respect to its Units.
Item 6. Selected Financial Data
The Partnership experienced net income (loss) of ($331,628),
and($123,065) for the years ended December 31, 1997, and 1996,
respectively.
During the year ended December 31, 1997, the Partnership had operating
revenues of $26,683, a decrease of $71,032 as compared to the same period
in 1996. The following is a table reflecting the increases and decreases in
operating income and expenses for the years ended December 31, 1997 and
1996.
<TABLE>
<CAPTION>
Operating revenue 1997 1996 Increase/
(decrease)
<S> <C> <C> <C>
Interest income $ 7,574 $ 72,845 $(65,271)
Servicing fees 9,998 10,346 (348)
All other operating revenues 9,111 14,524 (5,413)
-------- -------- ---------
Total revenue $ 26,683 $ 97,715 $(71,032)
Operating expenses
Legal and accounting 10,398 34,175 (23,777)
Losses on residential
mortgage loans and other
real estate owned 286,567 16,171 270,396
Management fees 396 26,077 (25,681)
Salaries and wages 24,575 89,442 (64,867)
All other operating expenses 36,375 54,915 (18,540)
-------- -------- ---------
Total expenses $358,311 $220,780 $137,531
</TABLE>
Interest income decreased by $65,271 for the year ended December 31,
1997 as compared to the same period in 1996 due to the fact that the
Partnership traded the portfolio of mortgage loans more actively in 1996
than it did in 1997. Also during 1997, the Partnership cleaned up the
portfolio which resulted in losses.
Also contributing to the decrease in interest income was the reduction
in the amount invested in residential mortgage notes relates to the fact
that during 1996 there were approximately 176 more limited partnership
units outstanding, as compared to 1997.
The increase in operating expenses during the year ending December
31, 1997 as compared to December 31, 1996, is attributable to the cleanup
mentioned above.
Servicing fees of $9,998 and $10,346 were charged to an affiliate issuer
Federal Mortgage Management, Inc. (FMMI) during 1997 and 1996, respectively.
These fees relate to the performance of servicing duties and responsibilities
by the Partnerships portfolio servicer. The fee paid by FMMI is paid
monthly and it is calculated by multiplying .5% times the average face value of
the mortgages held by FMMI during any given month.
Management evaluated the costs of servicing individual residential
mortgage notes, the current and foreseeable market of mortgage notes as
well as the returns associated with the current portfolio and the annual
return to the limited partners. During the last six months of 1997, the
Partnership has invested approximately 15-20% of the portfolio in what is
categorized as interim financing. The past six months has given the
management team the perspective that this area of interim financing is a
better way to keep the investment dollars constantly in movement.
Currently, once a portfolio is purchased, the cost of preparing the
portfolio for sale is primarily tied up in servicing. Given the current
market trends, timing, rating and pricing factors of a portfolio can change
drastically within a short time, with a cost of several points, or loosing
the sale altogether.
Although management has spent the last twenty four months developing a
list of buyers and sellers, there has not always been favorable timing in
order to achieve management's goal of turning the portfolio at least three
times a year.
Management believes that by positioning itself between a greater
number of buyers and sellers and not having to service the mortgage notes,
the Partnership can increase the revenue and at the same time, decrease the
costs associated with servicing. This is done through interim financing.
Management believes that the above mentioned movement to interim
financing along with the previously mentioned lawsuit settlement, and
broker fees, with the decreased operational expenses and possible decrease
of monthly returns to investors that the Partnership can sustain operations
during fiscal 1998.
Item 7. Management's Discussion and Analysis of Financial Conditions and
results of Operation.
The Partnership, utilizing the Unit proceeds from the public
offering, has implemented and conducted its business operations for the
purposes of which the Partnership has been organized. The purpose for
which the Partnership has been organized is to acquire, purchase, hold and
deal in mortgage loans secured by first liens on residential real estate,
as well as insured certificates and instruments of deposit or debt
securities issued by the United States government and instrumentalities
thereof in accordance with an expressed Acquisition Policy. In summary,
such Acquisition Policy requires that the Partnership only acquire mortgage
loans for its Portfolio which are secured by a first priority lien on
residential real estate. Acquired mortgage loans must have an amortization
schedule with respect to monthly payments of principal and interest not to
exceed 360 months (30 years) from the time that the mortgage loan acquired
was originated.
For the year ended December 31, 1997, the Partnership had effected
distributions of return of capital to the Unit purchasers in their
capacity as Limited Partners of the Partnership in the aggregate amount of
$154,927. These return of capital distributions are expected to be
decreased in 1998 as the general partner seeks alternative capital sources
such as private investment or warehouse lines. Significantly reduced
return of capital distributions are anticipated to be sustained from
brokerage fees, portfolio servicing and other sources yet to be identified.
There can be no assurance that the Partnership will continue to make such
cash flow distributions in the future.
Management anticipates a significant decline in overhead expenses due
to stringent cost cutting and expense controls. In addition, as previously
discussed, a decrease in annualized return of capital cash distributions is
expected to be implemented by the General Partners during the first quarter
of 1998 to stabilize cash flow and operations.
Item 8. Financial Statements and Supplementary Data
Included with this Annual Report on Form 10-K SB as an Exhibit are the
audited financial statements specified in Instruction (a) to the Item 7.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Partnership
As a limited partnership formed pursuant to the Florida Revised Uniform
Limited Partnership Law, the Partnership does not have directors or
officers. The day-to-day business and affairs of the Partnership are
managed and carried out by the General Partners. Mr. Guy S. Della Penna
serves in an individual capacity as a General Partner of the Partnership
and Capital Mortgage, a Florida corporation, also serves as a Co-General
Partner. Capital Mortgage is wholly-owned by Mr. Della Penna. Mr. Della
Penna serves as the sole director and President of Capital Mortgage.
Information concerning Mr. Della Penna is presented below:
Mr. Della Penna, age 45, has been a resident of Sarasota, Florida since
1980 and 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, 1994, Mr. Della
Penna is the majority shareholder, director and officer of Executive Wealth
Management Services, Inc., the manager of the Unit offering. Mr. Della
Penna has been active in the financial industry for approximately 15 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 franchisor 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
financing 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
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
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
Principal Compen- Stock lying LTIP Compen-
and sation Award(s) Options/ Payouts sation
Position Year Salary( $) Bonus($) ($) ($) SARs(#) ($) ($)
1997 396
1996 26,077
1995 48,394
General
Partner 1994 --- --- 61,019 --- --- --- ---
Guy S.
Della Penna 1993 --- --- 88,894 --- --- --- ---
</TABLE>
Item 12. Security Ownership of Certain Beneficial Owners and
Management
As of December 31, 1997, Mr. Della Penna owns eight Units.
Item 13. Certain Relationships and Related Transactions
The General Partners of the Partnership include an individual and a
corporation owned wholly by that individual.
For their services to the Partnership, the general partners are
entitled to receive an annual management fee that is equal to three percent
(3%) of the aggregate principal balance of the portfolio investments as
defined by the Partnership Agreement at December 31, plus one% of the cash
flow of the Partnership as defined by the Partnership Agreement. In
addition, the management fee also includes one percent (1%) of the net
income from capital transactions. Management fees for the years ended
December 31, 1976 and 1996 are $396 and $26,077 respectively.
The Partnership received $6,686 and $10,343 for the years ended
December 31, 1997 and 1996, respectively, in servicing fees from an
affiliate Company in which the individual General Partner owns 100% of the
outstanding stock. This fee relates to the servicing of mortgage loans
included in the affiliate's portfolio.
During the year ended December 31, 1997, the Partnership rented office
space from an affiliate for $8,594 compared to $11,529 for the same period
ended 1996. The decrease of $2,935 relates to the fact that payments
ceased October 1, 1997, upon management's decision to move operational
activities to an affiliate.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this Annual
Report:
(1) The financial statements of the Partnership for the fiscal
year ended December 31, 1997, as examined by Bobbitt, Pittenger & Co.,
P.A., Certified Public Accountants, is included as Exhibit 1 attached to
this report.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FEDERAL MORTGAGE INVESTORS, LTD.
By CAPITAL MORTGAGE MANAGEMENT, INC.,
Co-General Partner
By Guy S. Della Penna
----------------------------------
Guy S. Della Penna, President
By Guy S. Della Penna
----------------------------------
Guy S. Della Penna, individually,
Co-General Partner
March 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,565
<SECURITIES> 0
<RECEIVABLES> 47,897
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 55,462
<PP&E> 23,044
<DEPRECIATION> (18,669)
<TOTAL-ASSETS> 59,837
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 59,837
<TOTAL-LIABILITY-AND-EQUITY> 59,837
<SALES> 26,683
<TOTAL-REVENUES> 26,683
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 358,311
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (331,628)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (331,628)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
FEDERAL MORTGAGE INVESTORS, LTD.
CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
FINANCIAL STATEMENTS
STATEMENTS OF FINANCIAL CONDITION 2
STATEMENTS OF OPERATIONS 2
STATEMENTS OF CHANGES IN PARTNERS CAPITAL 3
STATEMENTS OF CASH FLOWS 4
NOTES TO FINANCIAL STATEMENTS 6
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 7
FEDERAL MORTGAGE INVESTORS, LTD.
STATEMENTS OF FINANCIAL CONDITION
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash $ 7,565 $
Accounts receivable - related party 47,897 666
Note receivable - related party 50,000
Prepaid management fees - related party 58,019
Portfolio of residential mortgage loans 441,798
Other real estate owned and available
for sale 301,011
Organization costs, net of accumulated
amortization of $5,250 and $4,022 178
Equipment at cost, net of
accumulated depreciation 4,375 8,956
-------- ----------
TOTAL ASSETS $ 59,837 $ 860,628
======== ==========
LIABILITIES AND PARTNERS CAPITAL
Accounts payable and other liabilities $ $ 138,176
Partners capital 59,837 722,452
-------- ----------
TOTAL LIABILITIES AND PARTNERS CAPITAL $ 59,837 $ 860,628
======== ==========
</TABLE>
See notes to financial statements.
FEDERAL MORTGAGE INVESTORS, LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
1997 1996
<S> <C> <C>
REVENUE
Interest income - residential mortgage loans $ 7,574 $ 72,845
Servicing fees 9,998 10,346
Consulting fees 12,500
Interest income - other 9,111 1,258
Other income 766
---------- ----------
26,683 97,715
---------- ----------
EXPENSES
Amortization 178 1,050
Commissions 5,667 5,511
Consulting 696 750
Depreciation 4,581 4,482
Fees and licenses 1,708 1,188
Legal and accounting 10,398 34,175
Loss on sale of residential mortgage loans
and other real estate owned 286,567 16,171
Management fees 396 26,077
Miscellaneous 1,730 6,822
Office 2,166 5,215
Rent 8,594 11,529
Salaries and wages 24,575 89,442
Taxes 5,285 8,128
Telephone 4,101 6,725
Travel 1,669 3,515
---------- ----------
358,311 220,780
---------- ----------
NET LOSS $(331,628) $(123,065)
========== ==========
</TABLE>
See notes to financial statements.
FEDERAL MORTGAGE INVESTORS, LTD.
STATEMENTS OF CHANGES IN PARTNERS CAPITAL
<TABLE>
<S> <C>
BALANCE,
at January 1, 1996 $1,324,295
REDEMPTION OF LIMITED PARTNERSHIP UNITS (291,126)
DISTRIBUTIONS (187,652)
NET LOSS (123,065)
------------
BALANCE,
at December 31, 1996 722,452
REDEMPTION OF LIMITED PARTNERSHIP UNITS (176,000)
DISTRIBUTIONS (154,987)
NET LOSS (331,628)
------------
BALANCE,
at December 31, 1997 $ 59,837
============
</TABLE>
See notes to financial statements.
FEDERAL MORTGAGE INVESTORS, LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET (LOSS) INCOME $(331,628) $(123,065)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,759 5,532
(Increase) decrease in operating assets:
Accounts receivable - related party (47,231) 733
Prepaid management fees 58,019 (19,249)
Portfolio of residential mortgage loans 441,798 561,034
Real estate owned and available for sale 301,011 (136,509)
Increase in operating liabilities:
Accounts payable and other
liabilities (138,176) 103,988
---------- ----------
Total adjustments 620,180 515,529
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 288,552 392,464
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture, fixtures
and equipment (3,152)
Receipt of proceeds of note receivable
- related party 50,000 (50,000)
---------- ----------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 50,000 (53,152)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of limited partnership units (176,000) (291,126)
Distributions to limited partners (154,987) (187,652)
---------- ----------
NET CASH USED BY FINANCING ACTIVITIES (330,987) (478,778)
---------- ----------
INCREASE (DECREASE) IN CASH 7,565 (139,466)
CASH, at beginning of year 139,466
---------- ----------
CASH, at end of year $ 7,565 $
========== ==========
Supplemental Disclosure:
No interest was paid in 1997 or 1996
</TABLE>
See notes to financial statements.
FEDERAL MORTGAGE INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE A - ORGANIZATION
The purpose of Federal Mortgage Investors, Ltd. (the Partnership) is to
place, acquire, and deal in mortgage loans secured by first liens on real
estate, interim financing, and to acquire insured instruments of deposits
and/or debt securities issued by the United States Government and agencies
thereof. Purchases of the mortgage loans, instruments of deposits and debt
securities are made in accordance with policies set forth in the
partnership agreement.
Profits and losses are allocated and cash distributions are made in
accordance with the partnership agreement.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Portfolio of Residential Mortgage Loans
Residential mortgage loans are recorded at lower of cost or fair market
value. The Partnership does not amortize purchase discounts on mortgage
loans since it is the intent of the Partnership that the mortgage loans
will be owned for several months and then sold to investors. The
amortization of the discounts would not be significant to the operating
results of the Partnership.
Organization Costs
Organization costs of $5,250 have been capitalized and are amortized on a
straight-line basis over five years. Organization costs are comprised of
legal fees associated with the organization of the Partnership.
Amortization expense was $178 and $1,050 for 1997 and 1996, respectively.
Furniture, Fixtures and Equipment
Depreciation is provided for in amounts sufficient to allocate the cost of
assets to operations over the estimated useful lives using the straight-
line method.
Income Taxes
The financial statements include no provisions for federal or state income
taxes since the income or loss is reportable on the tax returns of the
partners.
Statements of Cash Flows
For purposes of reporting cash flows, the Partnership 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 1996 financial statements
to conform with the 1997 financial statement presentation. Such
reclassifications had no effect on net loss as previously reported.
NOTE C - PORTFOLIO OF RESIDENTIAL MORTGAGE LOANS
The Partnership 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. During the year ended December 31,
1997 the Partnership liquidated all mortgages held in the portfolio. It is
the intention of the Partnership to place mortgages, without holding them
in the future. There are no mortgages held at December 31, 1997. The fair
market value of the mortgage loans at December 31, 1996, at a minimum,
approximates cost after assessing the credit risks associated with the
portfolio.
A summary of residential mortgage loans at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Face value at acquisition $530,532
Discount (70,939)
Principal payments received (17,795)
---------
$441,798
=========
</TABLE>
NOTE D - 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 property s 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 Partnership s 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.
At December 31, 1996, the Partnership was holding properties for sale with
a cost basis of $301,011. There was no other real estate owned at December
31, 1997.
NOTE E - FURNITURE, FIXTURES AND EQUIPMENT
A summary of furniture, fixtures and equipment at December 31, follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Furniture and fixtures $ 311 $ 311
Equipment 22,733 22,733
---------- ----------
23,044 23,044
Less: accumulated depreciation (18,669) (14,088)
---------- ----------
$ 4,375 $ 8,956
========== ==========
</TABLE>
NOTE F - RELATED PARTY TRANSACTIONS
The general partners of the Partnership include an individual and a
corporation owned wholly by that individual. Also, a registered securities
broker-dealer, of which a majority is owned by the individual general
partner, conducted the offering of partnership units for sale to the
general public.
For their services to the Partnership, the general partners are entitled to
receive an annual management fee that is equal to three percent (3%) of the
aggregate principal balance of the portfolio investments (as defined by the
partnership agreement) at December 31, plus one percent (1%) of the cash
flow of the Partnership (as defined by the partnership agreement). In
addition, the management fee also includes one percent (1%) of the net
income from capital transactions. Such management fees for 1997 and 1996
were $396 and $26,077, respectively.
NOTE F - RELATED PARTY TRANSACTIONS (CONTINUED)
The Partnership received approximately $10,000 and $19,000 in servicing
fees for the years ended December 31, 1997 and 1996, respectively, from
affiliated companies in which the individual general partner owns 100% of
the outstanding stock. This fee relates to the servicing of mortgage loans
included in the affiliate s portfolio.
During the years ended December 31, 1997 and 1996, the Partnership sold
mortgage loans to an affiliate for approximately $390,000 and $138,000,
respectively. The net loss on the 1997 sales totaled approximately
$55,000. The 1996 sale approximated the Partnership s cost basis in the
mortgages.
During the years ended December 31, 1997 and 1996, the Partnership rented
office space from an affiliate for $8,594 and $11,529, respectively.
As of December 31, 1997 and 1996, the Partnership had a receivable from the
general partner in the amount of $46,123 and $58,019, respectively, which
consisted primarily of prepayment of management fees.
The Partnership had a note receivable for $50,000 as of December 31, 1996
from a Corporation whose controlling stockholder is a general partner in
the Partnership. The note paid 12% interest per annum and was due in and
paid in October, 1997.
NOTE G - LIMITED PARTNERSHIP CAPITAL UNITS
During 1997 and 1996, 176 and 379 partnership units were redeemed for
$176,000 and $291,126, respectively.
As of December 31, 1997 and 1996, there were 1,552 and 1,728 partnership
units issued and outstanding.
NOTE H -FAIR VALUE OF FINANCIAL INSTRUMENTS IN ACCORDANCE
WITH THE REQUIREMENTS OF SFAS NO. 107
The Partnership s financial instruments consist of all of its assets and
liabilities. The Partnership s management has determined that the fair
value of all of its financial instruments is equivalent to the carrying
cost.
NOTE I - CONCENTRATION OF CREDIT RISK
The Partnership 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, 1997 and 1996, the Partnership had no
deposits in excess of FDIC insured limits.
NOTE J - COMMITMENTS AND CONTINGENCIES
The Partnership entered into a lawsuit in July, 1995, regarding the
purchase of nineteen first lien residential mortgage notes which were worth
considerably less than represented. In 1996, the Partnership resolved the
suit in an out of court settlement and obtained a judgment totaling
$977,000. Applicable attorney fees are $150,000, of which $125,000 is
unpaid at December 31, 1997. The Partnership will be compensated by
purchasing acceptable mortgages, as defined in a mediation agreement, and
selling these mortgages at a four percentage point spread to the
defendants. The parties shall each use their best efforts to complete
performance of payment within a forty-eight month period ending October,
2000 unless extended by mutual agreement. As of December 31, 1997 no
securities had been purchased under this agreement. The co-general partner
has been named in a lawsuit by the Partnership s former attorneys to
collect legal fees stemming from this lawsuit. The Partnership s former
counsel contend they are owed legal fees in the amount of $268,100 plus
costs and interest. The Partnership believes the lawsuit is without merit,
and is vigorously contesting the lawsuit. While the lawsuit does not
presently name the Partnership as a party, it is possible that the
complaint could be amended to include the Partnership.
January 27, 1998
TO THE PARTNERS
Federal Mortgage Investors, Ltd.
Sarasota, Florida
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the accompanying statements of financial condition of
Federal Mortgage Investors, Ltd., as of December 31, 1997 and 1996 and the
related statements of operations, changes in partners capital, and cash
flows for the years then ended. These financial statements are the
responsibility of the Partnership s management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 Federal Mortgage
Investors, Ltd. at December 31, 1997 and 1996 and the results of their
operations, changes in partners capital and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
Certified Public Accountants
