SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------
FORM 10-K
Annual Report Pursuant to Section 13 or
15(d) of The Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997 Commission file number
0-17248
OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
(Exact Name of Registrant as specified in its charter)
California 68-0023931
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2221 Olympic Boulevard
Walnut Creek, California 94595
(Address of principal executive (Zip Code)
Offices)
Registrant's Telephone number,
including area code (510) 935-3840
Securities to be registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Not applicable Not applicable
Securities to be registered pursuant to Section 12(g) of the Act:
Limited Partnership Units
(Title of class)
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 reguired to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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]
DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits filed with Registrant's Registration Statement No.33-81896 are
incorporated by reference into Part IV.
Exhibit Index at pages 55-56.
<PAGE>
Part I
Item 1. Business
Owens Mortgage Investment Fund, a California Limited Partnership, (the
"Partnership") was organized on June 14, 1984 and invests in first, second,
third, wraparound and construction mortgage loans and loans on leasehold
interest mortgages. In June, 1985, the Partnership became the
successor-in-interest to, and acquired the assets and limited partners of Owens
Mortgage Investment Fund I, a California limited partnership formed in June 1983
with the same policies and objectives as the Partnership. In September, 1992 the
Partnership changed its name from Owens Mortgage Investment Fund II to Owens
Mortgage Investment Fund.
All of the loans invested in by the Partnership are arranged or purchased
by Owens Financial Group, Inc. (the "Corporate General Partner"). In connection
with the investment in such loans, the Partnership in limited instances acquires
an equity interest in the underlying real property in the form of a shared
appreciation interest. To date, the Partnership has not acquired any material
shared appreciation interests. The Partnership's mortgage loans are secured by
mortgages on unimproved as well as improved real property and nonincome
producing as well as income-producing real property such as apartments, shopping
centers, office buildings, and other commercial or industrial properties. No
single Partnership loan may exceed 10% of the total Partnership assets as of the
date the loan is made.
The following table shows the growth in total Partnership capital,
mortgage investments and net income as of and for the years ended December 31,
1997, 1996, 1995, 1994 and 1993.
Mortgage Net
Capital Investments Income
1997 $ 190,731,135 $ 174,714,607 $ 15,420,247
1996 $ 176,840,104 $ 154,148,933 $ 14,758,412
1995 $ 164,744,443 $ 151,350,591 $ 13,491,375
1994 $ 151,846,728 $ 145,050,213 $ 12,709,424
1993 $ 137,583,163 $ 133,549,495 $ 9,318,645
<PAGE>
As of December 31, 1997, the Partnership held investments in 215
mortgage loans, secured by ownership and leasehold interests in real property,
67% of which are situated in Northern California. The remaining 33% are located
in Southern California, Oregon, Nevada, Arizona and Hawaii. The following table
sets forth the types and maturities of mortgage investments held by the
Partnership as of December 31, 1997:
<TABLE>
<CAPTION>
TYPES AND MATURITIES OF MORTGAGE INVESTMENTS
(As of December 31, 1997)
Number
of Loans Amount Percent
<S> <C> <C> <C>
1st Mortgages................................ 177 $ 161,275,350 92.31%
2nd Mortgages................................ 35 12,744,274 7.29%
3rd Mortgages or wraparound deeds of trust... 3 694,983 .40%
------- ------------- -------
215 $ 174,714,607 100.00%
===== ============= =======
Maturing on or before
December 31, 1999 (1)....................... 130 $ 103,387,402 59.18%
Maturing on or between January 1, 2000
and December 31, 2002....................... 45 44,060,802 25.22%
Maturing on or between January 1, 2003
and May 1, 2015............................. 40 27,266,403 15.60%
------ -------------- --------
215 $ 174,714,607 100.00%
===== ============= =======
IncomeProducing Properties................... 193 $ 165,201,582 94.56%
SingleFamily Residences...................... 11 2,088,606 1.20%
Unimproved land.............................. 11 7,424,419 4.24%
------- ------------- ---------
215 $ 174,714,607 100.00%
===== ============= =======
- --------
<FN>
(1) $22,295,000 was past maturity as of December 31, 1997.
</FN>
</TABLE>
The average loan balance of the mortgage loan portfolio of $812,626 as
of December 31, 1997, is considered by the General Partners to be a reasonable
diversification of investments concentrated in mortgages secured by commercial
properties. Of such investments, 44% earn a variable rate of interest and 56%
earn a fixed rate of interest. All were negotiated according to the
Partnership's investment standards.
Due to general economic conditions, certain sectors of the commercial
real estate market have recently experienced increases in both values and rental
rates and decreases in vacancy rates. Although these conditions have created
increased competition for quality loans, the Corporate General Partner has
continued to use relatively low loan-to-value ratios as a major criteria in
making mortgage loans.
As of December 31, 1997, the Partnership had invested in construction
loans in the aggregate amount of $7,092,000 and in loans partially secured by a
leasehold interest of $9,546,000.
The Partnership has other assets in addition to its mortgage
investments, comprised principally of funds held in conjunction with contingency
reserve requirements, cash held for investment, real estate acquired through
foreclosure, including an investment in the development limited partnership
formed to develop certain property in Carmel Valley, California, real estate
held for sale and mortgage interest receivable. As of December 31, 1997,
$4,073,115 ($3,829,000 representing contingency reserve funds) was primarily
invested in certificates of deposit (with staggered maturity dates to a maximum
of one year), money market accounts, and general banking accounts as required to
transact the business of the Partnership. In addition, as of December 31, 1997,
the Partnership held $14,151,141 in real estate held for sale including
$3,812,122 in the development limited partnership formed to develop the property
located in Carmel Valley, California, and $1,773,608 in mortgage interest
receivable from borrowers.
Delinquencies
The Corporate General Partner does not regularly examine the
maintenance of acceptable loan-to-value ratios for the existing portfolio
because the majority of loans in the Partnership's portfolio mature in a period
of 1-7 years. In the event that payments on a loan securing a property become
delinquent, the loan is past maturity, the General Partners learn of physical
changes to the property securing the loan or to the area in which the property
is located or the General Partners learn of changes to the economic condition of
the borrower or of leasing activity of the property securing the loan, the
General Partners will perform an internal review on the property including, but
not limited to, a physical evaluation of the property as well as for the area in
which the property is located, the financial stability of the borrower and the
property's tenant mix and in its sole discretion, will work with the borrower to
bring the loan current.
Although the Corporate General Partner is not obligated to do so, it
purchases the Partnership's receivables for delinquent interest from the
Partnership with respect to certain Partnership loans originated prior to May 1,
1993, and which are delinquent more than 90 days. The amount of such purchases
made and not reimbursed by borrowers during 1997 was $87,000. In exchange for
purchasing such delinquent interest receivables or purchasing delinquent loans,
the Corporate General Partner is entitled to receive a higher maximum management
fee. Such payments have been recorded by the Partnership as interest payments as
if made by the borrower, and have not been classified as contributions by the
Corporate General Partner or as loans made by the Corporate General Partner. The
Partnership has no obligation to repay such amounts to the Corporate General
Partner.
As of December 31, 1997, the Partnership's portfolio included
$5,236,000 (compared with $11,348,000 as of December 31, 1996) of loans
delinquent more than 90 days, representing 3.0% of the Partnership's investment
in mortgage loans. The balance of delinquent loans at December 31, 1997,
includes $3,279,000 (compared with $5,046,000 as of December 31, 1996) in the
process of foreclosure and $184,000 (compared with $3,156,000 as of December 31,
1996) involving loans to borrowers who are in bankruptcy. The General Partners
believe that these loans may result in a loss of principal and/or interest.
However, the General Partners believe that the $3,500,000 allowance for losses
on loans which is maintained in the financial statements of the Partnership as
of December 31, 1997 is sufficient to cover any potential losses of principal.
Of the $11,348,000 that was delinquent as of December 31, 1996,
$2,704,000 remained delinquent as of December 31, 1997, $3,024,000 was paid off,
$1,300,000 became current, $3,886,000 became real estate acquired through
foreclosure of the Partnership (see "Properties") and $434,000 became real
estate owned by the Corporate General Partner. The General Partners believe that
there could be partial losses of principal on these loans.
Where payments on delinquent loans are not made currently by the
borrowers, the Corporate General Partner has chosen to continue to purchase the
Partnership's receivables for delinquent interest on a monthly basis only on
certain loans originated prior to May 1, 1993. Such loans totaled $1,485,000 as
of December 31, 1997. At December 31, 1997, the amount of delinquent interest
receivables purchased by the Corporate General Partner, together with amounts
advanced by the Corporate General Partner in connection with these and other
loans, including property taxes, insurance, legal fees, and interest to senior
lenders that has not been repaid to the Corporate General Partner by borrowers
was approximately $414,000. The Partnership is not obligated to reimburse the
Corporate General Partner for such advances or to reacquire the delinquent
interest receivables purchased by the Corporate General Partner.
Finally, although not required to do so, the Corporate General Partner
has purchased certain loans from the Partnership at the time of foreclosure of
such loans, for the unpaid principal amount, in order to prevent the Partnership
from suffering a loss upon such foreclosure. This generally occurs where there
is more than one investor in the loan for which the property provides security
and because the General Partners want to avoid administrative problems
associated with multiple ownership of real property. In most other instances,
the Corporate General Partner will cause the Partnership to foreclose on a loan
and obtain title to the real property securing the loan.
In 1996, the Partnership foreclosed on an $870,000 loan and acquired
title to the property providing security on the loan. Thereafter, the Corporate
General Partner purchased the property from the Partnership for the amount of
the loan by increasing the unsecured note payable to the Partnership by such
amount. See "Unsecured Loan to Corporate General Partner." The Partnership
foreclosed on another loan in the amount of $1,450,000 and acquired title to the
property providing security for the loan also. The Corporate General Partner
purchased the property from the Partnership, and the Partnership carried back a
loan in the same amount as the original loan it had on the property prior to
foreclosure. The loan is secured and due on demand.
During 1997, the Corporate General Partner purchased three loans from
the Partnership prior to foreclosure in which the Partnership had a partial
interest and had invested $613,400 in principal. The Corporate General Partner
subsequently foreclosed on these loans and obtained title to the properties
providing security on the loans.
With the exception of the sale of the Sonora residential lots to the
Corporate General Partner at a loss of $710,000 in February, 1998, the
Partnership has not suffered material losses on defaults or foreclosures,
partially due to the prior practice of the Corporate General Partner to purchase
loans from the Partnership which were at risk of causing a loss to the
Partnership and its practice to date to voluntarily absorb such losses in very
limited circumstances. Delinquent loans (defined as those loans for which the
borrower is 90 days late in payment of installments due) have historically
represented approximately 5-10% of the total loans that the Partnership has
outstanding at any given time. Although the Corporate General Partner does not
generally purchase the Partnership's receivables for delinquent interest on
delinquent loans, the amount of nonperforming delinquent loans (i.e., loans
delinquent in payment over 90 days on which the Corporate General Partner
historically has not purchased the Partnership's receivables for delinquent
interest) has decreased to $5,236,000 of the loan portfolio (3.0%). However,
$4,320,000 of the delinquent loans as of December 31, 1996, became either real
estate acquired by the Partnership through foreclosure or purchased by the
Corporate General Partner so as to become real estate owned by the Corporate
General Partner as of December 31, 1997. There is no assurance that the
Corporate General Partner will continue to make payments to the Partnership on
any delinquent loan.
Following is a table representing the Partnership's delinquency experience
(over 90 days) as of December 31, 1993, 1994, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Nonperforming Delinquent
<S> <C> <C> <C> <C> <C>
Loans $ 0 $ 4,923,000 $ 8,309,000 $ 10,012,000 $ 3,751,000
Total Delinquent Loans $ 10,621,000 $ 12,849,000 $ 12,037,000 $ 11,348,000 $ 5,236,000
Total Mortgage Investments $ 133,549,000 145,050,000 $ 151,351,000 $ 154,149,000 $ 174,715,000
Percent of Nonperforming Loans to
Total Mortgage Investments 0.00% 3.39% 5.49% 6.50% 2.15%
Percent of Delinquent Loans to
Total Mortgage Investments 7.95% 8.86% 7.95% 7.36% 3.00%
</TABLE>
Allowance for Loan Losses
An allowance for loan losses of $3,500,000 is maintained in the
financial statements of the Partnership as of December 31, 1997 and 1996,
respectively. The General Partners believe that, based on historical experience
and a review of the loans and their respective collateral, the allowance for
loan losses as of December 31, 1997 is adequate in amount.
Unsecured Loan to Corporate General Partner
During 1997, the Corporate General Partner paid off the balance of the
unsecured loan in the amount of $488,764 plus accrued interest. As of December
31, 1997 there is no outstanding principal balance under the Corporate General
Partners unsecured loan to the Partnership.
Although the terms of the loan between the Partnership and the Corporate
General Partner may or may not be at market, they are considered fair and
reasonable.
Fee Structure
Management Fee's are payable to the Corporate General Partner on a
monthly basis at a maximum annual rate of 2 3/4% per annum on the average unpaid
balance of the Partnership's mortgage loans at the end of each of the 12 months
in the then current calendar year. As such, the Corporate General Partner may
collect a fee in any one month that is greater than the 2-3/4% calculated on an
annual basis. However, for the calendar year, the total fee collected may not
exceed the 2-3/4% limitation. This fee is reduced to 1 3/4% per annum if the
Corporate General Partner has not provided during the preceding calendar year
any of the following discretionary services: (1) advanced its own funds to
purchase the Partnership's interest receivable on delinquent mortgage loans; (2)
advanced its own funds to cover any other costs associated with delinquent loans
held by the Partnership, such as property taxes, insurance and legal expenses;
or (3) purchased any such defaulted loans from the Partnership. The Corporate
General Partner is entitled to collect the Management Fee on all loans,
including those that are delinquent. This is due to the added costs to the
Corporate General Partner associated with such loans including legal fees.
Servicing Fees charged for the twelve months ended December 31, 1976
were $421,000. Management Fees charged to the Partnership for the twelve months
ended December 31, 1997 were $3,879,000. During this same period, the maximum
Servicing Fees and Management Fees that could have been collected by the
Corporate General Partner were $421,000 and $4,614,000, respectively.
Principal Investment Objectives
The Partnership invests primarily in mortgage loans on commercial,
industrial and residential income producing real property, single-family
residences and land. The terms of each loan are negotiated on a loan-by-loan
basis by the Corporate General Partner.
The Partnership's two principal investment objectives in making
investments of the type described above are to: (i) preserve the capital of the
Partnership; and (ii) provide monthly cash distributions to the Limited
Partners. It is not an objective of the Partnership to provide tax-sheltered
income. The General Partners have the authority, subject to the provisions of
the Partnership Agreement, to change the Partnership's investment objectives.
The Corporate General Partner locates and identifies all mortgages in
which the Partnership invests and makes all investment decisions on behalf of
the Partnership in its sole discretion. In evaluating prospective investments,
the Corporate General Partner considers such factors as the ratio of the amount
of the investment to the value of the property by which it is secured, the
property's potential for capital appreciation, expected levels of rental and
occupancy rates, current and projected cash flow of the property, potential for
rental increases, the degree of liquidity of the investment, geographic location
of the property, the condition and use of the property, its income-producing
capacity, the quality, experience and creditworthiness of the borrower, general
economic conditions in the area where the property is located, and any other
factors which the Corporate General Partner believes are relevant.
All loans made or invested in by the Partnership are originated or
purchased by the Corporate General Partner. During the course of its business,
the Corporate General Partner is continuously evaluating prospective
investments. The Corporate General Partner will originate loans from referrals,
brokerage organizations, additional lending to previous borrowers and personal
solicitations of new borrowers. All potential mortgage loans to be made or
invested in are evaluated to determine if the mortgage loan is the type made by
the Partnership, if the security for the loan and the loan-to-value ratio meets
the standards established by the Partnership, and if the loan may be structured
in a manner to meet the Partnership's investment criteria and objectives. If the
Corporate General Partner approves the loan as presented, an appraisal will be
ordered on the property securing the loan, and the property will be inspected by
an officer, director, agent or employee of the Corporate General Partner.
The Partnership requires that the borrower obtain a title insurance
policy as to the priority of the mortgage and the condition of title. The
Partnership receives independent, on-site appraisals for each property in which
it invests. All independent appraisers used by the Partnership are licensed or
qualified as independent fee appraisers and are certified by the state in which
the property being appraised is located. Such appraisals will ordinarily take
into account factors including: property location; age; condition; estimated
building cost; community and site data; valuation of land; valuation by cost;
economic market analysis; valuation by income; and correlation of the foregoing
valuation methods. However, the General Partners generally rely on their own
independent analysis and not exclusively on such appraisals in determining
whether or not to arrange a particular mortgage loan.
Types of Mortgage Loans
As more fully described below, the Partnership makes and invests in
first, second, third and wraparound mortgage loans, construction loans on real
property, and loans on leasehold interests. The Partnership does not ordinarily
make or invest in mortgage loans with a maturity of more than 15 years. All
loans provide for monthly payments of interest and some also provide for
principal amortization, although many Partnership loans provide for payments of
interest only, with a payment of principal in full at the end of the loan term.
The General Partners or their Affiliates do not originate loans with negative
amortization provisions.
First Mortgage Loans
First mortgage loans are secured by first deeds of trust on real
property. Such loans are generally for terms of from one year to 7 years. In
addition, such loans do not usually exceed 80% of the appraised value of
improved residential real property, 50% of the appraised value of unimproved
real property, and 70 - 75% of the appraised value of commercial property.
Second and Wrapround Mortgage Loans
Second and wraparound mortgage loans are invested in by the Partnership
on real property which is already subject to prior mortgage indebtedness, in an
amount which, when added to the existing indebtedness, does not generally exceed
70% of the appraised value of the mortgaged property. A wraparound loan is one
or more junior mortgage loans having principal amounts equal to the outstanding
balance under the existing mortgage loans plus the amount actually to be
advanced under the wraparound mortgage loan. Under a wraparound loan, the
Partnership generally makes principal and interest payments on behalf of the
borrower to the holders of the prior mortgage loans.
Third Mortgage Loans
Third mortgage loans are invested in by the Partnership on real
property which is already subject to prior first and second mortgage
indebtedness, in an amount which, when added to the existing indebtedness, does
not generally exceed 70% of the appraised value of the mortgaged property.
Construction Loans
Construction loans are loans made for the renovation of developed
property and for the development of undeveloped property. Construction loans
invested in by the Partnership are secured by first deeds of trust on real
property. Such loans are generally for terms of from six months to 2 years. In
addition, if the mortgaged property is being developed, the amount of such loans
does not generally exceed 70% of the appraised value of the mortgaged property,
as developed.
Generally the Partnership will not disburse funds with respect to a
particular construction loan until work in the previous phase of the project on
which the loan is made has been completed and an independent inspector has
verified the quality of construction and adherence to the construction plans,
and reviewed the estimated cost of completing the project. In addition, the
Partnership generally requires the submission of signed labor and material lien
releases by the borrower in connection with each completed phase of the project
prior to rnaking any periodic disbursements of proceeds of the loan to the
borrower.
Leasehold Interest Loans
Loans on leasehold interests are secured by an assignment of the
borrower's leasehold interest in the particular real property. Such loans are
generally for terms of from six months to 15 years. Leasehold interest loans
generally do not exceed 70% of the value of the leasehold interest and are
accompanied by personal guarantees of the borrowers. The leasehold interest
loans either are amortized over a period which is shorter than the lease term or
have a maturity date prior to the date the lease terminates. These loans all
contain provisions allowing the Corporate General Partner to cure any default
under the lease.
Variable Rate Loans
Approximately $77,310,000 (44.2%) of the Partnership's loan portfolio
as of December 31, 1997, contain a variable interest rate feature. The variable
rate loans originated by the General Partners use as indices the one and five
year Treasury Constant Maturity Index, the Prime Rate Index and the Monthly
Weighted Average Cost of Funds Index for Eleventh District Savings Institutions
(Federal Home Loan Bank Board).
Premiums over the above described indices have varied from 250-550
basis points depending upon market conditions at the time the loan is made.
Generally, an index based upon the prime rate or Treasury Bill rate is the most
volatile, while an index based upon the cost of funds is the most stable.
From January 1, 1997, through December 31, 1997, the one year Treasury
Constant Maturity Index has increased from 5.50% to 5.51%, the five-year
Treasury Constant maturity Index has decreased from 6.12% to 5.71%, the Prime
Rate Index remained constant at 8.50% and the Monthly Weighted Average Cost of
Funds Index for the Eleventh District Savings Institutions has increased from
4.84% to 4.96%.
It is possible that the interest rate index used in a variable rate
loan will rise (or fall) more slowly than the rate of competing investments
available to the Partnership. The General Partners attempt to minimize such
differential by tying variable rate loans to indices that are more sensitive to
fluctuations in market rates. In addition, most variable rate loans originated
by the Corporate General Partner contain provisions under which the interest
rate cannot fall below the starting rate.
Interest Rate Caps
Interest rate caps are found in all variable rate loans originated by the
Corporate General Partner. The interest rate cap most frequently used is a 4%
ceiling and a floor equal to the starting rate. The inherent risk in interest
rate caps occurs when general market interest rates exceed the cap rate.
Assumability
Variable rate loans of 5 to 10 year maturities, are generally not
assumable without the prior consent of the General Partners. The Partnership
does not typically make or invest in other assumable loans. To minimize risk to
the investors, any borrower assuming a loan is subject to the same stringent
underwriting criteria as the original borrower.
Prepayment Penalties
The Partnership's loans typically do not contain a prepayment penalty. If
the Partnership's loans are at a high rate of interest in a market of falling
interest rates, the failure to have a prepayment penalty provision in the loan
allows the borrower to refinance the loan at a lower rate of interest, thus
providing a lower yield to the Partnership on the reinvestment of the prepayment
proceeds. However, as of December 31, 1997, $77,310,000 (approximately 44.2%) of
the mortgage loans held in the Partnership's portfolio were variable rate loans
which by their terms generally will have lower interest rates in a market of
falling interest rates, thereby providing lower yields to the Partnership.
However, these loans are written with relatively high minimum interest rates,
which generally operates to reduce this risk of lower yields.
Balloon Payment
A majority of the loans made or invested in by the Partnership require the
borrower to make a "balloon payment" on the principal amount upon maturity of
the loan. To the extent that a borrower has an obligation to pay a mortgage loan
in a large lump sum payment, its ability to satisfy this obligation may be
dependent upon its ability to sell the property, obtain suitable refinancing or
otherwise raise a substantial cash amount. As a result, such loans involve a
higher risk of default than fully amortizing loans.
Equity Interests and Participation In Real Property
As part of investing in or making a mortgage loan the Partnership may
acquire an equity interest in the real property securing the loan in the form of
a shared appreciation interest or other equity participation.
The Partnership also may invest its funds directly in real property, if in
the opinion of the General Partners, it is in the Partnership's best interest.
See "Properties." No other properties (other than those that may be subject to
foreclosure by the Partnership or a senior lender) are currently under review
for acquisition by the Partnership.
Standards for Mortgage Loans
In arranging mortgage loans, the Corporate General Partner considers
relevant real property and financial factors, including the condition and use of
the property, its income-producing capacity and the quality, experience, and
creditworthiness of the borrower.
The Partnership does not normally invest in mortgage loans secured by
multifamily residential property or commercial property unless the net annual
estimated cash flow after vacancy, operating expense, and mortgage debt service
deductions on senior liens equals or exceeds the annual payments required on the
mortgage loan. In addition, the Partnership limits the amount of its investment
in any single mortgage loan, and the amount of its investment in mortgage loans
to any one borrower, to 10% of the total Partnership assets as of the date the
loan is made.
Mortgage Loans to Affiliates
The Partnership will not invest in mortgage loans to any of the General
Partners, Affiliates of the General Partners, or any limited partnership or
entity affiliated with or organized by the General Partners. However, the
Partnership may have an investment in a mortgage loan to the General Partners
when the Corporate General Partner assumes by foreclosure the obligations of the
borrower under a mortgage loan. As of December 31, 1997, the Partnership had
secured loans outstanding to the Corporate General Partner of $2,215,549.
Purchase of Loans from Affiliates
Although the Partnership has never done so, the Partnership may purchase
loans from the General Partners or their Affiliates that were originated by the
General Partners or their Affiliates and held for such party's own portfolio, as
long as any such loan is not in default and as long as such loan otherwise
satisfies all of the requirements set forth above. In addition, if such loan was
not made by the maker of the loan within the 90 days prior to its purchase by
the Partnership from the General Partners or their Affiliates, the General
Partners or their Affiliates, respectively, shall retain a minimum of a 10%
interest in such loan.
Borrowing
The Partnership has not incurred indebtedness for the purpose of investing
in mortgage loans. However, the Partnership may incur indebtedness in order to
prevent default under mortgage loans which are senior to the Partnership's
mortgage loans or to discharge such senior mortgage loans if this becomes
necessary to protect the Partnership's investment in mortgage loans. Such
short-term indebtedness may be with recourse to the Partnership's assets. In
addition, although the Partnership has not historically had to do so, the
Partnership may incur indebtedness in order to assist in the operation or
development of a property securing a mortgage loan that the Partnership takes
over as a result of default on the loan or foreclosure.
Sale and Repayment of Mortgages
The Partnership invests in mortgage loans and does not engage in real
estate operations or real estate developments (other than when such operations
are required when the Partnership forecloses on a loan in which it has made an
investment or takes over management of such foreclosed property), and does not
invest in mortgage loans primarily for sale or other disposition in the ordinary
course of business. The Partnership may require a borrower to repay the mortgage
loan upon sale of the mortgaged property if the General Partners determine that
such repayment appears to be advantageous to the Partnership based upon
then-current interest rates, the length of time that the loan has been held by
the Partnership, and the objectives of the Partnership. The net proceeds to the
Partnership from any such sale or repayment are invested in new mortgage loans
or distributed to the Partners at such times and in such intervals as the
General Partners in their sole discretion determine.
No Trust or Investment Company Activities
The Partnership has not qualified as a real estate investment trust under
the Internal Revenue Code of 1986, as amended, and, therefore, is not subject to
the restrictions on its activities imposed on real estate investment trusts. The
Partnership is not subject to registration as an investment company under the
Investment Company Act of 1940. It is the intention of the Partnership to
conduct its business in such manner as not to be deemed a "dealer" in mortgage
loans for federal income tax purposes.
Miscellaneous Policies and Procedures
The Partnership will not: (i) issue securities senior to the Units or
issue any Units or other securities for other than cash; (ii) invest in the
securities of other issuers for the purpose of exercising control; (iii)
underwrite securities of other issuers; or (iv) offer securities in exchange for
property. No single Partnership loan may exceed 10% of the total Partnership
assets as of the date that a loan is made.
Competition and General Economic Conditions
The Partnership's major competitors in providing mortgage loans secured by
deeds of trust on income producing and residential property are banks, savings
and loan associations, thrifts, conduit lenders, and other entities both larger
and smaller than the Partnership. The Partnership is competitive in large part
because the Corporate General Partner generates all of its loans. The Corporate
General Partner has been in the business of making or investing in mortgage
loans in Northern California for more than 40 years and has developed a quality
reputation and recognition within the field.
In the past few years, the major institutional lenders had not been as
active in the commercial mortgage market as in past years. In fact, some
institutional lenders discontinued their commercial lending practice completely.
Recently, however, many major institutional lenders have reentered the
commercial mortgage market due to a stronger economy, stabilized property values
and leasing rates and the decrease in demand for residential loans. This has
created increased competition to the Partnership for investments in mortgages
secured by commercial properties, creating downward pressure on interest rates.
As such, interest rates of mortgage investments held by the Partnership may drop
in the near future, reducing the net yield earned by the Limited Partners.
In past years, due to general economic conditions, the commercial real
estate market in California had experienced decreases in both values and rental
rates and an increase in vacancy rates. These conditions prompted the Corporate
General Partner to apply stricter underwriting standards. The Corporate General
Partner continues to apply relatively low loan-to-value ratios as a practice in
making mortgage loans.
Item 2. Properties
As of May 1, 1993, the Corporate General Partner changed its policy so
as to generally not purchase mortgage loans from the Partnership prior to
foreclosures. Subsequent to this change in policy, the Partnership acquired
title to two properties through foreclosure on which it had loans totaling
$3,265,737 during 1997. In addition, during 1997 the Partnership sold two second
deeds of trust secured by a single property to the Corporate General Partner for
their aggregate face value of $600,000. Subsequent to this, the Partnership
purchased the property that originally provided security for these second deeds
of trust at the foreclosure sale for $1,350,000 and wiped out the second deeds
of trust held by the Corporate General Partner. The Corporate General Partner
incurred a loss of $600,000 as a result of this transaction.
During 1997, the Partnership (1) disposed of a property acquired in 1994
which originally provided security for a $925,000 loan which was foreclosed on
in 1994 at a net gain of $64,000, (2) disposed of a property acquired in 1995
which orignally provided security for a $850,000 loan that was partially paid
down in 1996 by a personal judgment against the borrower in the amount of
$300,000 at a net gain of $66,000 and (3) disposed of a property acquired in
1995 which provided partial security for a $661,531 loan at a gain of $14,000.
The Partnership continues to own its interest in the development
limited partnership that owns the residential lots in Carmel Valley, California
(see "Development Limited Partnership," below) and the limited liability company
that owns a commercial lot in Los Gatos (see "Development Limited Liability
Company / Corporate Joint Venture," below) and to hold title to the following
nine properties as of December 31, 1997:
<TABLE>
<CAPTION>
REAL ESTATE OWNED
(As of December 31, 1997)
Additional Delinquent
Year Partnership Capitalized Senior Interest at
Description Foreclosed Loan Amount Costs Loans Foreclosure(1)
Light Industrial Warehouse
<S> <C> <C> <C> <C>
Merced, CA.................. 1993 $ 1,000,000 $ 0 $ 0 $ 175,333
Commercial Lot
Sacramento, CA ............. 1994 $ 500,000 $ 49,828 $ 0 $ 39,042
Commercial Lot/Residential
Development
Vallejo, CA ................ 1994 $ 525,000 $ 506,240(2) $ 0 $ 83,949(3)
Office Building
Monterey, CA ............... 1995 $ 550,000 $ 156,174 $1,425,000(4) $ 30,077
Residential Lots
Sonora, CA.................. 1996 $ 1,683,000 $ 178,710 $ 0 $ 701,274
High Density Residential Lot
Reno, NV ................... 1996 $ 230,000 $ 0 $ 0 $ 12,937
Commercial Storage
Oakland, CA............... 1997 $ 444,063 $ 0 $ 0 $ 214,581
Light Industrial
Paso Robles, CA........... 1997 $ 600,000 (5) $ 941,251(5) $ 0 $ 131,416
Residential Lots
Ione, CA 1997 $ 2,821,674 $ 13,612 $ 0 $ 746,316
- --------
<FN>
(1) Approximately $1,219,000 of the aggregate delinquent interest receivable
due to the Partnership or to the senior lienholder at foreclosure was
purchased from the Partnership by the Corporate General Partner. Except for
$83,949 that was reimbursed by the Partnership in connection with the
Vallejo, California property, the Partnership has not reimbursed or
repurchased receivables from the Corporate General Partner for any amounts,
has no rights to any subsequent repayments of these amounts and has no
obligation to reimburse the Corporate General Partner for such advances or
repurchase of receivables purchased by the Corporate General Partner.
(2) Of this additional capitalized cost, $450,000 represents the purchase of a
minority investor's interest in the property to provide the Partnership
with complete ownership. Prior to the purchase, the Partnership owned 70%
of the property. The Corporate General Partner believes that based on the
value of these properties, the Partnership benefits from owning 100% of the
assets.
(3) The delinquent interest receivable was purchased by the Corporate General
Partner on behalf of the Partnership, which held a 70% interest in the
property and on behalf of the former co-owner of the property, an
independent, third-party. Under applicable law, the Partnership could only
repurchase such receivable if all other lenders/owners of the property
repurchased their respective receivables. Consequently, the Partnership
repurchased from the Corporate General Partner $83,949 of the interest
receivable purchased by the Corporate General Partner, although it was not
obligated to do so. The remaining $38,550 of the delinquent interest
receivable purchased by the Corporate General Partner was paid by the other
owner of the property.
(4) This senior loan was originally $2,102,646 including late charges and fees.
The Corporate General Partner arranged for this loan to be discounted to
$1,425,000 if the Partnership were to pay it off in full. The Partnership
paid this loan off prior to March 31, 1995.
(5) The Partnership held two junior deeds of trust secured by this property.
Prior to foreclosure by the senior lienholder, the Corporate General
Partner purchased the $600,000 of loans from the Partnership. The
Partnership then purchased the property at the foreclosure sale for
$1,350,000, and wiped out the Corporate General Partner's junior deeds of
trust. The Corporate General Partner incurred a loss of $600,000 at
foreclosure.
</FN>
</TABLE>
The light industrial warehouse located in Merced, California is
currently vacant. A prior tenant of the property in the business of tire
recycling left approximately 450,000 used tires on the property. Although the
Corporate General Partner has not determined the amount, the Partnership may
have a liability to dispose of these tires. Due to this and declining values on
the property, the Partnership may sustain a loss and has recorded a $350,000
allowance for loss on this property in its financial statements as of December
31, 1997.
The commercial lot located in Sacramento, California is currently
listed with a real estate broker for sale. The Partnership may sustain a loss on
this property and has recorded a $250,000 allowance for loss on this property in
its financial statements as of December 31, 1997.
The properties located in Vallejo, California are in a secluded golf
course community. There are approximately 1,100 fully developed lots owned by
other, nonrelated entities that have not been made available for sale. The
Corporate General Partner believes that sales of these lots will occur during
1998 and that residential construction will begin in 1999. The Partnership owns
the only commercial real property, other than the golf course and club house, in
the development. The Partnership is in the process of obtaining development
rights on the residential parcels.
The majority of the office building located in Monterey, California is
currently leased; however, the tenant has vacated the building continuing to
make lease payments. The lease terminates in September, 1998. The Partnership is
attempting to lease the building and place the property on the market for sale
or sell to an owner-user. The Partnership may sustain a loss on this property
and has recorded a $200,000 allowance for loss on this property in its financial
statements as of December 31, 1997.
The Partnership sold the Sonora property to the Corporate General
Partner subsequent to December 31, 1997 at a substantial loss of approximately
$712,000. The Corporate General Partner purchased the property because it
believes that the property will have to be held for years before it is
economically feasible to develop. The property's appraised value is less than
the amount for which the Corporate General Partner paid for it. The purchase
terms were for no cash down and interest-only payments for ten years at a rate
of 8%. The loan is due at the end of the ten-year period. The Partnership has
recorded a $712,000 allowance for loss on this property in its financial
statements as of December 31, 1997.
The Partnership successfully rezoned the Reno lot from commercial to
high density residential suitable for apartment construction. The Partnership
likely will either build out the lot or sell it to a developer.
The commercial property located in Oakland, California is an industrial
storage site. The Partnership is attempting to lease up additional spaces and
sell the property.
The light industrial property in Paso Robles, California is leased out
to a variety of tenants. The Partnership will attempt to lease out the few
remaining vacant spaces prior to listing the property for sale.
The Partnership owns 133 residential lots in Ione, California. As of
December 31, 1997, 53 of the lots had homes on them owned by unrelated
individuals on which the Partnership is collecting rent. The Partnership is
attempting to sell all lots with houses on them to the renters of the houses.
The Partnership will develop the other lots and sell them as single family
residences. The Partnership may sustain a loss on this property and has recorded
a $384,000 allowance for loss on this property in its financial statement as of
December 31, 1997.
Due to potential losses on several of the Partnership's properties, a
$1,296,000 additional reserve for losses on real estate was recorded in 1997,
bringing the total allowance in the Partnership's financial statements to
$1,896,000 as of December 31, 1997.
Development Limited Partnership
In 1993, the Partnership foreclosed on a $600,000 loan secured by a
junior lien on 30 residential lots located in Carmel Valley, California, and, in
1994, paid off the $500,000 senior loan. The Partnership incurred additional
costs of $503,000 in protecting its investment, thus increasing the carrying
value of the lots to $1,603,000. During 1995, the Partnership began to develop
the lots and in 1995 incurred an additional $671,000 in costs.
In 1995, the Partnership became the sole limited partner in a limited
partnership formed with Wood Valley Development, Inc., an unrelated
developer/builder and sole general partner, for the development and buildout of
these lots. In exchange for its interest in this development limited
partnership, the Partnership in 1996 contributed the lots to the development
limited partnership and agreed to make additional advances to fund the
development costs. During 1997, the Partnership had advanced additional
development costs aggregating $4,153,000. The amount invested in or advanced by
the Partnership at December 31, 1997, equaled $3,812,000, net of distributions
through such date.
Under the terms of the agreement governing the development limited
partnership, the Partnership is entitled to receive certain distributions of
cash before the developer receives any funds. The cash received by the
development limited partnership from sales of developed lots is distributed as
follows: (i) to third parties (e.g., contractors, taxing authorities, etc.) for
amounts incurred by the development limited partnership and related to the lots
sold; (ii) to the Partnership, in an amount equal to $70,000 per lot sold; (iii)
to the Partnership, in an amount equal to a pro rata portion of the development
costs advanced, plus interest at prime plus 2%; (iv) to the Partnership, in an
amount equal to other out-of-pocket expenses incurred by Partnership with
respect to the lots sold, plus interest at prime plus 2%; and (v) the balance,
if any, 70% to the Partnership, and 30% to the developer.
The development limited partnership is building single-family
residences of between approximately 2,200 and 2,800 square feet on the lots. As
of December 31, 1997, a total of 16 homes had been completed and sold and
construction had been completed or commenced on the remaining 14 lots. During
1997, 15 homes were sold for aggregate proceeds of $8,012,000. In 1997, the
development limited partnership distributed $7,574,000 to the Partnership,
$2,355,000 of which represented profit and interest.
The Corporate General Partner has entered into a joint venture with
Wood Valley Development, Inc. to purchase and build out up to 34 lots that are
contiguous to and interspersed with the lots in Carmel Valley owned by the
development limited partnership formed between the Partnership and Wood Valley
Development, Inc. As of December 31, 1997, the joint venture between the
Corporate General Partner and Wood Valley Development, Inc. had purchased 28
lots and developed and sold 17 of these lots. The remaining six lots are
expected to be purchased by this joint venture during 1998.
The Partnership does not have any direct or indirect interest in these
34 lots nor do any of these lots provide any security for the original
Partnership loan which was foreclosed on in 1993. The development limited
partnership has, however, incurred certain infrastructure and soft costs that
benefited not only the 30 lots owned by the development limited partnership, but
the 34 contiguous lots owned by the Corporate General Partner/Wood Valley
Development, Inc. joint venture. As sales of these 34 lots occur, the
development limited partnership is being reimbursed on a pro rata basis, without
interest, for such development, infrastructure and soft costs incurred by the
development limited partnership. Upon receipt of any such funds the development
limited partnership will distribute monies as outlined above. During 1997, the
development limited partnership received reimbursement of $648,000 in
development costs and the balance of development advances receivable is $103,000
as of December 31, 1997.
Development Limited Liability Company / Corporate Joint Venture
In 1995, the Partnership foreclosed on a $571,853 loan and obtained
title to a commercial lot in Los Gatos, California. In 1997, the Partnership
formed a limited liability company (the "Company") with BGC Properties LLC, an
unaffiliated developer, and contributed the land valued at $760,000 to the
newly-formed limited liability company in exchange for a 70% interest in the
profits and losses of the Company. The sole purpose of the Company is to
develop, construct and operate a commercial office building on the land, to be
held for investment or sale. The Partnership is required to provide construction
financing to the Company in the form of additional contributions or loans to the
Company, or to obtain such financing from third parties. To the extent the
Partnership lends such funds, it will receive interest at a rate of prime plus
2%. Upon completion of construction of improvements, the Partnership is required
to obtain or provide permanent financing.
The Partnership is the sole manager of the Company. As such, the
Partnership has exclusive control and authority over the Company's affairs,
subject to certain rights of BGC. The Partnership will not receive any
compensation for serving as manager of the Company.
BGC will provide certain development services to the Company and will
receive a development fee. At BGC's election, BGC may defer payment of all or a
portion of the fee, and earn interest thereon at the rate of 8% per annum,
simple. Additionally, an affiliate of BGC will serve as property manager and
earn an asset management fee.
Prior to contributing the land to the Company, the Partnership invested
approximately $629,000 (including $57,000 in capitalized costs subsequent to
foreclosure) in such land. Since contributing the land to the Company the
Partnership has loaned $10,600 to the Company, which amount will be repaid, with
interest, as discussed above. The Company expects to have development rights by
mid-1998 and have construction completed in 1999.
Reserve for Losses on Real Estate Held for Sale
The Partnership has recorded a reserve of $1,896,000 for losses on real
estate held for sale in the financial statements of the Partnership as of
December 31, 1997. Of this amount, $712,000 is attributable to the residential
lots in Sonora, California which were sold to the Corporate General Partner in
February, 1998 at a loss of $712,000. The General Partners believe that this
allowance is adequate.
Item 3. Legal Proceedings
The Partnership is not presently involved in any material pending legal
proceedings other than ordinary routine litigation incidental to the business.
Item 4. Submission of Matters to a Vote of the Security Holders
None.
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
a. There is no established public trading market for the trading of
Units.
b. Holders: As of December 31, 1997, approximately 2,666 Limited
Partners held 189,063,000 Units of limited partnership interest in the
Partnership.
c. The Partnership generally distributes all net income of the
Partnership to Unit holders on a monthly basis. The Partnership made
distributions to the Limited Partners of approximately $14,758,000 and
$15,420,000 during 1996 and 1997, respectively. It is the intention of the
Corporate General Partner to continue to distribute all income earned by the
Partnership to the Unit holders.
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(A California Limited Partnership)
As of and for the Year ended
December 31
____________________________________________________________________________________________
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loans secured
by trust deeds $ 174,714,607 $ 154,148,933 $ 151,350,591 $ 145,050,213 $ 133,549,495
less: Allowance
for loan losses (3,500,000) (3,500,000) (3,250,000) (2,750,000) (2,750,000)
Real estate held
for sale 16,047,141 13,221,093 9,612,359 5,028,325 2,608,000
less: Allowance
for losses on
real estate (1,896,000) (600,000) (600,000) (400,000) 0
Cash, cash
equivalents and
other assets 5,959,306 14,105,992 8,288,818 5,697,459 5,202,246
------------ ------------ ----------- ----------- -----------
$ 191,325,054 $ 177,376,018 $ 165,401,768 $ 152,625,997 $ 138,609,741
============ =========== =========== =========== ===========
Liabilities..... $ 593,919 $ 535,914 $ 657,325 $ 779,269 $ 1,026,578
Partner's capital
General partners 1,864,033 1,731,874 1,623,526 1,488,360 1,342,578
Limited partners 188,867,102 175,108,230 163,120,917 150,358,368 136,240,585
----------- ----------- ----------- ----------- -----------
partners........ 190,731,135 176,840,104 164,744,443 151,846,728 137,583,163
----------- ----------- ----------- ----------- -----------
Liabilities/
Partners' Capital $ 191,325,054 $ 177,376,018 $ 165,401,768 $ 152,625,997 $ 138,609,741
=========== =========== =========== =========== ===========
Revenues........ $ 21,325,850 $ 16,824,479 $ 16,415,301 $ 15,503,534 $ 14,979,065
Operating expenses
Promotional
interest ....... 70,747 57,395 69,255 72,984 72,359
Managementfee 3,879,454 866,985 1,431,616 1,475,155 2,234,968
Servicing fee 420,742 384,004 371,000 338,000 323,000
Net Real Estate
Operations .. 70,216 344,298 224,108 270,038 75,844
Provision for
losses on loans 0 250,000 500,000 0 2,750,000
Provision for
losses on real
estate held for
sale 1,296,000 0 200,000 400,000 0
Other 168,444 163,385 127,947 237,933 204,249
----------- ----------- ----------- ----------- ----------
Net Income $ 15,420,247 $ 14,758,412 $ 13,491,375 $ 12,709,424 $ 9,318,645
=========== =========== =========== =========== ==========
Net income
allocated to
general partners $ 154,202 $ 146,960 $ 135,584 $ 127,726 $ 90,218
======= ======= ======= ======= ======
Net income
allocated to
limited partners $ 15,266,045 $ 14,611,452 $ 13,355,791 $ 12,581,698 $ 9,228,427
========== ========== ========== ========== =========
Net income per
limited
partnership unit $.08 $.08 $.08 $.09 $.07
=== === === === ===
</TABLE>
This information should be read in conjunction with the accompanying audited
financial statements and notes to financial statements.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The net income increase of $662,000 (4.5%) for 1997 as compared to
1996, was attributable to (i) the increase in interest income of $1,997,000 from
mortgage investments held by the Partnership which increased from $154,149,000
to $174,715,000 as of December 31, 1996 and 1997, respectively, (ii) the
decrease in net real estate operations losses from $344,000 to $70,000 for the
years ended December 31, 1996 and December 31, 1997, respectively, (iii) the
increase in gain on sale of real estate by the development limited partnership
from $171,000 to $2,355,000 for the years ended December 31, 1996 and 1997,
respectively, (iv) the decrease in nonperforming loans from $10,012,000 to
$3,751,000 as of December 31, 1996 and 1997, respectively and (v) the decrease
in provision for loan losses from $250,000 to $0 for the years ended December
31, 1996 and 1997, respectively. The net income increase in 1997 as compared to
1996, was negatively affected by (i) the increase in management fees paid to
general partner from $867,000 to $3,879,000 for the years ended December 31,
1996 and 1997, respectively, and (ii) an increase in the provision for losses on
real estate acquired through foreclosure from $0 to $1,296,000 for the years
ended December 31, 1996 and 1997, respectively. The increase in management fees,
which fees represented .56% and 2.31% of the average monthly trust deed
investment for the years ended December 31, 1996, and 1997, respectively, was
due to increased income in 1997. This increase in income was due primarily to
the increase in gains on the sale of real estate owned by the development
limited partnership of which the Partnership is a limited partner
The net income increase of $1,267,000 (9.4%) for 1996 as compared to
1995 was attributable to (i) the increase in mortgage investments held by the
Partnership from $151,351,000 to $154,149,000 as of December 31, 1995 and 1996,
respectively, (ii) the decrease in management fees from $1,432,000 to $867,000,
for the years ended December 31, 1995 and December 31, 1996, respectively, and
(iii) the decrease in provision for losses on loans and real estate held for
sale from $700,000 to $250,000 for the years ended December 31, 1995 and 1996,
respectively. The net income increase in 1996, as compared to 1995, was
negatively affected by (i) the increase in net operating loss from real estate
held for sale from $224,000 to $344,000 for the years ended December 31, 1995
and 1996, respectively, and (ii) an increase in nonperforming loans from
$8,309,000 to $10,012,000 as of December 31, 1995 and 1996, respectively.
Nonperforming loans for the purposes of this discussion and analysis
are defined as those loans which are 90 days or more delinquent in payment and
on which the Corporate General Partner has not purchased the related Partnership
receivables for delinquent interest payments to the Partnership. All income was
derived from investments in mortgage loans and short term interestbearing
accounts, notes receivable from the Corporate General Partner, income from real
estate held for sale and real estate acquired through foreclosure and gain from
the disposition of real estate.
The Partnership has experienced a decrease in its average net yield per
Unit from 8.79% in 1995 to 8.72% and 8.69% in 1996 and 1997, respectively. The
average net yield represents the net income of the Partnership after all
expenses, other than the provision for losses on loans or real estate acquired
through foreclosure. If the provisions for losses on loans or real estate
acquired through foreclosure are included, the Partnership experienced an
increase in its average yield per Unit from 8.31% in 1995 to 8.58% in 1996, and
a decrease in its average yield per Unit from 8.58% in 1996 to 8.17% in 1997.
For 1997, the decrease in average net yield before provisions for
losses was negligible. However, both income and operating expenses of the
Partnership increased substantially. Income increased primarily due to the gain
on the sale of real estate by the development limited partnership in which the
Partnership has invested (see "Properties-Development Limited Partnership"). The
expenses increased due to the increased management fees paid to the Corporate
General Partner. Although, this fee increased substantially from the prior year,
the annualized fee represented 2.31% of the average trust deed investments held
by the Partnership. This is less than the maximum fee of 2.75% per annum
permitted by the Partnership Agreement.
For 1996, the decrease was the result of the overall decrease in
general market rates and changes in the Corporate General Partner's policies
regarding purchasing delinquent interest receivables, purchasing loans subject
to foreclosure and purchasing at foreclosure sale certain properties which
provided security for Partnership loans. The amount of nonperforming loans held
by the Partnership had increased from $8,309,000 (5.49% of loan portfolio) to
$10,012,000 (6.50% of loan portfolio) as of December 31, 1995 and 1996,
respectively, due to the diminishing amount of loans for which the Corporate
General Partner purchases delinquent interest receivables. However, the yield
decreases were partially offset due to a decrease in the management fees paid to
the Corporate General Partner from $1,432,000 to $867,000 for 1995 and 1996,
respectively. This represented a decrease in the annualized rate of management
fees to total trust deed investments of the Partnership from 0.95% to 0.56% for
1995 and 1996, respectively. In 1996, due to the increase in nonperforming loans
and the general decrease in market interest rates, the Corporate General Partner
voluntarily reduced the fees it collects in order to maximize the yield to
investors.
The Corporate General Partner has not yet determined the level of
management fees for 1998.
Loan Portfolio
The number of Partnership mortgage investments decreased from 254 and
238 as of December 31, 1995, and 1996, respectively, to 215 as of December 31,
1997. The average loan balance in these periods increased from $635,927 and
$639,622 as of December 31, 1995 and 1996, respectively, to $812,626 as of
December 31, 1997. These average loan balance increases reflect the
Partnership's increased ability to invest in larger mortgage loans meeting the
Partnership's objectives.
The Partnership's loan portfolio consists primarily of short-term (1-7
years), fixed and variable rate loans secured by real estate. As of December 31,
1997, the Partnership's loans secured by deeds of trust on real property
collateral located in Northern California totaled approximately 67%
($117,352,000) of the loan portfolio.
As of December 31, 1997, approximately 94.6% of the loan portfolio was
invested in loans on income-producing property, 4.2% in land loans and 1.2% in
residential loans. Also, as of December 31, 1997, approximately 92.3% of the
loan portfolio was invested in first deeds of trust, 7.3% in second deeds of
trust and 0.4% in third and all-inclusive deeds of trust.
The following table sets forth the principal amount of mortgage
investments, by classification of property securing each loan, held by the
Partnership as of December 31, 1997, 1996, 1995, 1994 and 1993, respectively:
<TABLE>
<CAPTION>
LOAN PORTFOLIO
(dollars in thousands)
Principal Amount
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Single Family Residences $ 2,089 $ 3,935 $ 2,250 $ 3,180 $ 3,004
Unimproved Land 7,424 4,214 6,503 6,742 7,953
Income Producing Properties 165,202 146,000 142,598 135,128 122,592
-------- -------- -------- -------- --------
Total $ 174,715 $ 154,149 $ 151,351 $ 145,050 $ 133,549
======== ======== ======== ======== ========
</TABLE>
As of December 31, 1997, there were delinquent loans aggregating
$3,751,000 for which the Corporate General Partner elected not to purchase
delinquent interest receivables. As of December 31, 1997, the Corporate General
Partner purchased from the Partnership receivables for delinquent interest
related to delinquent loans held by the Partnership that aggregated $1,485,000
and that were originated or invested in prior to May 1, 1993.
Purchases of Partnership receivables for delinquent interest for loans
originated prior to May 1, 1993, and advances for payments, such as property
taxes, insurance, legal fees and mortgage interest pursuant to senior
indebtedness, made to or an behalf of the Partnership by the Corporate General
Partner during 1997 and 1996, but not collected as of December 31, 1997 and
1996, totaled approximately $219,000 and $541,000, respectively.
In connection with the periodic closing of the accounting records of
the Partnership and the preparation of the financial statements, an evaluation
of the loan loss requirement of the Partnership is performed by the Corporate
General Partner. Based upon this evaluation, a determination was made to
maintain a reserve for losses on loans in the Partnership's financial statements
in the amount of $3,500,000 as of December 31, 1997 and 1996. As of December 31,
1997, the Corporate General Partner has determined that the reserve for losses
on loans is adequate. See "Business-Delinquencies" for a discussion of the rate
of delinquencies in 1996 and 1997.
At December 31, 1997, the Partnership held title to nine separate
properties that, prior to foreclosure by the Partnership, secured Partnership
loans aggregating $8,354,000. At December 31, 1996 and 1995, the Partnership
held title to 10 and 11 properties, respectively. Prior to foreclosure, these
properties secured Partnership loans aggregating $6,877,000 and $6,115,437 in
1996 and 1995, respectively. See "Properties" for a discussion of these
properties.
In 1993, the Partnership foreclosed on a $600,000 loan and obtained
title to 30 lots in Carmel Valley, California, subject to a senior loan in the
amount of $500,000. In 1994, the Partnership paid off the $500,000 senior loan
and incurred $503,000 of additional costs in protecting its investment. The
Partnership began to develop the lots in 1995, and incurred an additional
$671,000 in costs. In 1995, the Partnership entered into a development limited
partnership with an unrelated builder/developer for the purpose of constructing
single-family residences on the lots, and, in 1996, the Partnership contributed
the lots to the development limited partnership in exchange for a limited
partner interest. The $671,000 in costs incurred in 1995 became an obligation of
the development limited partnership in 1996 when the lots were contributed to
the development limited partnership.
The Partnership is obligated to fund the costs of developing the lots
owned by the development limited partnership. During 1997 and 1996, the
Partnership advanced additional development costs totaling $4,153,000 and
$2,895,000, respectively. The Partership has invested in the development limited
partnership, net of reimbursements, $3,123,000 and $3,388,000 as of December 31,
1997 and 1996, respectively.
During 1997, 15 homes sold for aggregate proceeds of $8,012,000, and
the Partnership received distributions from the development limited partnership
totaling $7,574,000, including $2,355,000 in gain and interest. The
Partnership's net investment in the development limited partnership totaled
$3,812,000 and $4,878,000 as of December 31, 1997, and 1996, respectively. See
"Properties - Development Limited Partnership" for a discussion of this
investment.
In 1995, the Partnership foreclosed on a $571,853 loan and obtained
title to a commercial lot in Los Gatos that secured the loan. In 1997, the
Partnership contributed the lot to a limited liability company formed with an
unaffiliated developer to develop and sell a commercial office building on the
lot. The Partnership may, and is expected to, provide construction financing to
the limited liability company at an annual rate equal to prime plus two percent.
See "Properties- Development Limited Liability Company/Corporate Joint Venture"
for a discussion of this investment.
Asset Quality
A consequence of lending activities is that losses will be experienced
and that the amount of such losses will vary from time to time depending upon
the risk characteristics of the loan portfolio as affected by economic
conditions and the financial experiences of borrowers. There is no precise
method of predicting specific losses or amounts that ultimately may be charged
off on particular segments of the loan portfolio, especially in light of the
current economic environment.
The conclusion that a Partnership loan may become uncollectable, in
whole or in part, is a matter of judgment. Although institutional lenders are
subject to requirements and regulations, that among other things, require a
lender to perform ongoing analyses of its portfolio, loan to value ratio,
reserves, etc., and to obtain and maintain current information regarding its
borrowers and the securing properties, the Partnership is not subject to these
regulations and has not adopted these practices. Rather, the Corporate General
Partner, in connection with the periodic closing of the accounting records of
the Partnership and the preparation of the financial statements, causes an
evaluation of the mortgage loan portfolio of the Partnership to be performed by
management and independent auditors. Based upon this evaluation, a determination
is made as to whether the allowance for loan losses is adequate to cover
potential loan losses of the Partnership. As of December 31, 1997, management
has determined that the allowance for loan losses of $3,500,000 is adequate in
amount. As of December 31, 1997, loans secured by trust deeds include $5,236,000
in loans delinquent over 90 days of which $3,279,000 was invested in loans which
were in the process of foreclosure. Due to the loan-to-value criteria
established by the Corporate General Partner, the mortgage loans held by the
Partnership appear in general to be, in the opinion of the General Partners,
adequately secured.
The adequacy of the allowance for loan losses to cover possible loan
losses is determined only on a judgmental basis, after full review, including
consideration of:
* Economic conditions;
* Borrower's financial condition;
* Evaluation of industry trends;
* Review and evaluation of potential problem loans identified as having loss
potential; and
* Quarterly review by Board of Directors.
Liquidity and Capital Resources
The Partnership relies upon purchases of Units and loan payoffs for the
source of capital for mortgage investments. Although general market interest
rates have most recently declined, a substantial increase in such rates could
have an adverse affect on the Partnership. If general market interest rates were
to increase substantially, the yield on the Partnership's mortgage investments
may provide lower yields than other comparable debt-related investments. As
such, additional Limited Partner investment into the Partnership could decline,
which, in turn, would reduce the liquidity of the Partnership. The Partnership
has not and does not intend to borrow money for investment purposes. See
"Business-Borrowing."
Contingency Reserves
The Partnership maintains cash and certificates of deposit as
contingency reserves in an aggregate amount of at least 2% of the gross proceeds
of the sale of Units. To the extent that such funds are not sufficient to pay
expenses in excess of revenues, or to meet any obligation of the Partnership, it
may be necessary for the Partnership to sell or otherwise liquidate certain of
its investments on terms which may not be favorable to the Partnership.
Current Economic Conditions
Although the current economic climate in Northern California is
generally strong, many areas outside of the San Francisco Bay Area continue to
experience depressed values created by the real estate recession of the early
1990's. Other than the loss incurred in February 1998, on the sale to the
Corporate General Partner of the Sonora property acquired by the Partnership
through foreclosure, the Partnership has not sustained any material losses to
date due primarily to the Corporate General Partner's prior practice of
advancing delinquent interest and purchasing loans prior to foreclosure. The
Corporate General Partner has ceased such practices, with very limited
exceptions. Assuming the Corporate General Partner continues in this manner, the
Partnership is likely to sustain losses with respect to loans secured by
properties located in areas of declining real estate values. Despite the
Partnership's ability to purchase mortgage loans with relatively strong yields
during 1997 from the Corporate General Partner, there is increased competition
from a variety of lenders that could have the affect of reducing mortgage yields
in the future. As such, current loans with relatively high yields could be
replaced with loans with lower yields, which in turn could reduce the net yield
paid to the Limited Partners. In addition, when there is a reduction in the
demand by borrowers for loans originated by the Corporate General Partner and,
thus, fewer loans for the Partnership to invest in, the Partnership will invest
its excess cash in shorter term investments yielding considerably less than the
current investment portfolio.
As of December 31, 1997, the Partnership held title to nine separate
properties acquired through foreclosure of Partnership loans from 1993 through
1997. A $1,896,000 provision for losses on real estate held for sale was
recorded in the Partnership's financial statements as of December 31, 1997. The
Corporate General Partner considers this allowance to be adequate as of December
31, 1997. See "Properties."
The Partnership continues to receive substantial additional investments
from new and existing Limited Partners, which investments provide capital for
loans and repurchases of existing Limited Partnership Units.
Year 2000
The Corporate General Partner depends on the use of computers to timely
provide accurate information essential to the management and operation of the
Partnership. The computer programs used by the Corporate General Partner to
account for mortgage loan investments, investments in Units and other items is
in the process of being reviewed, remedied and tested by independent consultants
engaged to determine whether these programs are able to recognize the year 2000.
To the extent the programs recognize calendar years by their last two digits
only, there exists what commonly is referred to as a Year 2000 issue.
Based on the preliminary results of the consultants' testing, the
General Partners do not anticipate significant cost, uncertainties or problems
associated with becoming Year 2000 compliant. The total cost to remedy Year 2000
issues which will be paid by the Corporate General Partners. None of such costs
will be reimbursed by the Partnership. The consultants expect all problems to be
remedied by December 31, 1998. Although not anticipate by the General Partners,
a failure by the Corporate General Partner or its independent consultants to
adequately address the Year 2000 issue, however, could result in the
misstatement of reported information, the inability to accurately track mortgage
investments and payments due or other operational problems.
Item 8. Financial Statements and Supplementary Data See pages 32-49 and pages
55-59 of this Form 10-K report.
<PAGE>
Independent Auditors' Report
The Partners
Owens Mortgage Investment Fund:
We have audited the accompanying balance sheets of Owens Mortgage Investment
Fund, a California limited partnership, as of December 31, 1997 and 1996, and
the related statements of income, partners' capital and cash flows for each of
the years in the three-year period ended December 31, 1997. 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 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 Owens Mortgage Investment Fund
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
Oakland, California
February 13, 1998
<PAGE>
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(a California limited partnership)
Balance Sheets
December 31, 1997 and 1996
Assets 1997 1996
------ ------------ -------------
<S> <C> <C>
Cash and cash equivalents $ 3,073,115 11,386,661
Certificates of deposit 1,000,000 850,000
Loans secured by trust deeds 174,714,607 154,148,933
Less allowance for loan losses (3,500,000) (3,500,000)
----------- -----------
171,214,607 150,648,933
Unsecured loans due from general partner -- 488,764
Interest receivable 1,773,608 1,321,493
Other receivables 112,583 59,074
Real estate held for sale, net of allowance
for losses of $1,896,000 in 1997 and
$600,000 in 1996 14,151,141 12,621,093
----------- -----------
$ 191,325,054 177,376,018
=========== ===========
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued liabilities 49,534 24,458
Accrued distributions payable 544,385 511,456
----------- -----------
Total liabilities 593,919 535,914
----------- -----------
Partners' Capital:
General partners 1,864,033 1,732,726
Limited partners (units subject to redemption):
Authorized 250,000,000 units in 1997
and 1996; 280,569,612 and 253,948,052
units issued and 189,063,122 and
175,303,398 units outstanding in 1997
and 1996, respectively 188,867,102 175,107,378
----------- -----------
Total partners' capital 190,731,135 176,840,104
----------- -----------
$ 191,325,054 177,376,018
=========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(a California limited partnership)
Statements of Income
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
--------------------------------------------
Revenues:
<S> <C> <C> <C>
Interest income on loans secured by
trust deeds $ 18,241,427 16,424,906 16,132,544
Other interest income 451,009 228,849 282,757
Gain on sale of real estate 2,633,414 170,724 --
------------- ------------- -------------
Total revenues 21,325,850 16,824,479 16,415,301
------------- ------------- -------------
Operating expenses:
Management fees paid to general partner 3,879,454 866,985 1,431,616
Mortgage servicing fees paid to general
partner 420,742 384,004 371,000
Promotional interest 70,747 57,395 69,255
Administrative 56,687 56,516 56,516
Legal and accounting 102,914 97,175 60,254
Net real estate operations 70,216 344,298 224,108
Other 8,843 9,694 11,177
Provision for loan losses -- 250,000 500,000
Provision for losses on real estate acquired
through foreclosure 1,296,000 -- 200,000
------------- ------------- -------------
Total operating expenses 5,905,603 2,066,067 2,923,926
------------- ------------- -------------
Net income $ 15,420,247 14,758,412 13,491,375
============= ============= =============
Net income allocated to
general partners $ 154,202 146,960 135,584
============= ============= =============
Net income allocated to
limited partners $ 15,266,045 14,611,452 13,355,791
============= ============= =============
Net income per weighted average
limited partner unit $ .08 .08 .08
============= ============= =============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(a California limited partnership)
Statements of Partners' Capital
Years ended December 31, 1997, 1996 and 1995
Total
General Limited Partners Partners'
Partners Units Amount Capital
<S> <C> <C> <C> <C>
Balances, December 31, 1994 1,488,360 150,554,388 150,358,368 151,846,728
Net income 135,584 13,355,791 13,355,791 13,491,375
Sale of partnership units 138,507 15,119,315 15,119,315 15,257,822
Partners' withdrawals -- (10,090,062) (10,090,062) (10,090,062)
Partners' distributions (138,925) (5,622,495) (5,622,495) (5,761,420)
----------- ------------ ------------ ------------
Balances, December 31, 1995 1,623,526 163,316,937 163,120,917 164,744,443
Net income 146,960 14,611,452 14,611,452 14,758,412
Sale of partnership units 114,781 16,834,406 16,834,406 16,949,187
Partners' withdrawals -- (13,665,872) (13,665,872) (13,665,872)
Partners' distributions (152,541) (5,793,525) (5,793,525) (5,946,066)
----------- ------------ ------------ ------------
Balances, December 31, 1996 1,732,726 175,303,398 175,107,378 176,840,104
Net income 154,202 15,266,045 15,266,045 15,420,247
Sale of partnership units 141,493 17,064,537 17,064,537 17,206,030
Partners' withdrawals -- (12,515,336) (12,515,336) (12,515,336)
Partners' distributions (164,388) (6,055,522) (6,055,522) (6,219,910)
----------- ------------ ------------ ------------
Balances, December 31, 1997 $ 1,864,033 189,063,122 $ 188,867,102 190,731,135
=========== ============ ============ ============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(a California limited partnership)
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 15,420,247 14,758,412 13,491,375
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of real estate by limited partnership (2,355,075) (170,724) --
Gain on sale of real estate properties (278,339) -- --
Provision for losses on real estate properties held
for sale 1,296,000 -- 200,000
Provision for loan losses -- 250,000 500,000
Changes in operating assets and liabilities:
Interest and other receivables (505,624) (21,339) (165,464)
Accrued distributions payable 32,929 22,299 42,532
Accounts payable 25,076 8,290 16,168
Due to general partner -- (152,000) (180,644)
------------- ------------- -------------
Net cash provided by operating activities 13,635,214 14,694,938 13,903,967
------------- ------------- -------------
Cash flows from investing activities:
Investment in loans secured by trust deeds (78,449,432) (51,365,781) (43,563,067)
Principal collected on secured and unsecured loans 2,484,071 2,773,553 2,513,912
Loan payoffs 53,449,102 44,978,479 32,452,735
Investment in limited partnership (4,152,918) (2,895,261) --
Distributions received from limited partnership 7,573,669 462,103 --
Investment in corporate joint venture (67,510) -- --
Additions to real estate properties held for sale (2,061,944) (96,540) (2,638,630)
Disposition of real estate properties held for sale 955,418 441,563 577,395
Investment in certificates of deposit, net (150,000) -- 250,000
------------- ------------- -------------
Net cash used in investing activities (20,419,544) (5,701,884) (10,407,655)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from sale of partnership units 17,206,030 16,949,187 15,257,822
Cash distributions (6,219,910) (5,946,066) (5,761,420)
Capital withdrawals (12,515,336) (13,665,872) (10,090,062)
------------- ------------- -------------
Net cash used in financing activities (1,529,216) (2,662,751) (593,660)
------------- ------------- -------------
Net (decease) increase in cash and cash equivalents (8,313,546) 6,330,303 2,902,652
Cash and cash equivalents at beginning of year 11,386,661 5,056,358 2,153,706
------------- ------------- -------------
Cash and cash equivalents at end of year $ 3,073,115 11,386,661 5,056,358
============= ============= =============
</TABLE>
See notes 3, 4, 5, and 6 for supplemental disclosure of non-cash investing
activities.
See accompanying notes to financial statements.
<PAGE>
OWENS MORTGAGE INVESTMENT FUND
(a California limited partnership)
Notes to Financial Statements
December 31, 1997, 1996 and 1995
(1) Organization
Owens Mortgage Investment Fund (the Partnership), a California limited
partnership, was formed on June 14, 1984 to invest in loans secured by
first, second and third trust deeds, wraparound and construction
mortgage loans and leasehold interest mortgages. The Partnership
commenced operations on the date of formation and will continue until
December 31, 2034 unless dissolved prior thereto under the provisions
of the partnership agreement.
The general partners include Owens Financial Group, Inc. (OFG) and
certain individuals who are OFG's shareholders and officers. The
individual partners have assigned to OFG their interest in any present
or future promotional allowance from the Partnership. OFG is a
California corporation engaged in the origination of real estate
mortgage loans for eventual sale and the subsequent servicing of those
mortgages for the Partnership and other third-party investors.
The general partners are authorized to offer and sell units in the
Partnership up to an aggregate of 250,000,000 units outstanding at
$1.00 per unit, representing $250,000,000 of limited partnership
interests in the Partnership. Limited partnership units outstanding
were 189,063,122, 175,303,398 and 163,316,937 at December 31, 1997,
1996 and 1995, respectively.
(2) Summary of Significant Accounting Policies
(a) Management 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.
(b) Loans Secured by Trust Deeds
Loans secured by trust deeds are acquired from OFG and are
recorded at cost. Interest income on loans is accrued by the
simple interest method.
<PAGE>
(2) Summary of Significant Accounting Policies, Continued
Effective January 1, 1995, the Partnership adopted the Financial
Accounting Standards Board's Statement No. 114, Accounting by
Creditors for Impairment of a Loan, and No. 118, Accounting by
Creditors for Impairment of a Loan--Income Recognition and
Disclosures. Under Statement No. 114, a loan is impaired when,
based on current information and events, it is probable that a
creditor will be unable to collect the contractual interest and
principal payments of a loan according to the contractual terms
of the loan agreement. Statement No. 114 requires that impaired
loans be measured on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or
the fair value of the collateral if the loan is collateral
dependent. Statement No. 118 clarifies interest income
recognition and disclosure provisions of Statement No. 114. The
adoption of these statements did not have a material effect on
the financial statements of the Partnership.
In June 1996, the Financial Accounting Standards Board issued
Statement No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities. Statement
125 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of
liabilities and provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that
are secured borrowings. The Partnership implemented Statement
125 effective January 1, 1997 which did not result in a material
impact on the financial statements.
The Partnership does not recognize interest income on loans once
they are determined to be impaired until the interest is
collected in cash. Cash receipts are allocated to interest
income, except when such payments are specifically designated as
principal reduction or when management does not believe the
Partnership's investment in the loan is fully recoverable.
(c) Allowance for Loan Losses
The Partnership maintains an allowance for loan losses equal to
$3,500,000 as of December 31, 1997 and 1996. Management of the
Partnership believes that based on historical experience and a
review of the loans and their respective collateral, the
allowance for loan losses is adequate in amount.
The outstanding balance of all loans delinquent greater than
ninety days is $5,236,400 and $11,348,000 as of December 31,
1997 and 1996, respectively. The Partnership discontinues the
accrual of interest on loans when, in the opinion of management,
there is significant doubt as to the collectibility of interest
or principal from the borrower or when the payment of principal
or interest is ninety days past due, unless OFG purchases the
interest receivable from the Partnership. As of December 31,
1997 and 1996, the aforementioned loans totaling $5,236,400 and
$11,348,000 respectively, are classified as non-accrual loans.
<PAGE>
(2) Summary of Significant Accounting Policies, Continued
OFG advances certain payments to the Partnership on behalf of
borrowers, such as property taxes, mortgage interest pursuant to
senior indebtedness, and development costs. Purchases of
interest receivable and payments made on loans by OFG during
1997 and 1996, but not collected as of December 31, 1997 and
1996, totaled approximately $219,000 and $541,000, respectively.
During 1995, OFG purchased the Partnership's receivable related
to a shortfall in the discounted payoff of a Partnership loan in
the amount of $525,000 and purchased the Partnership's interest
in loans in the amount of $377,000.
(d) Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash
equivalents include interest-bearing and noninterest-bearing
bank deposits and short-term certificates of deposit with
original maturities of three months or less.
(e) Certificates of Deposit
Certificates of deposit are held with various financial
institutions with original maturities of up to one year.
(f) Real Estate Held for Sale
Real estate held for sale includes real estate acquired through
foreclosure and is carried at the lower of the recorded
investment in the loan, inclusive of any senior indebtedness, or
the property's estimated fair value, less estimated costs to
sell.
Certain real estate held for sale acquired by the Partnership is
held in a limited partnership and corporate joint venture. The
Partnership accounts for its investments in limited partnership
and corporate joint venture under the equity method of
accounting. The limited partnership and corporate joint venture
investment in real estate is carried at the lower of cost or
estimated fair value, less estimated costs to sell. The
Partnership increases its investment by advances made to the
limited partnership and corporate joint venture. Any profit
generated from the investment in limited partnership and
corporate joint venture is recorded as a gain on sale of real
estate.
Effective January 1, 1996, the Partnership adopted the
provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 121 (FAS 121),
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. The adoption of FAS 121 did
not result in a material impact on the Partnership's financial
position.
<PAGE>
(2) Summary of Significant Accounting Policies, Continued
(g) Income Taxes
No provision is made for income taxes since the Partnership is
not a taxable entity. Accordingly, any income or loss is
included in the tax returns of the partners.
(h) Reclassifications
Certain reclassifications not affecting net income have been
made to the 1994 and 1995 financial statements to conform to the
1996 presentation.
(3) Loans Secured by Trust Deeds
Loans secured by trust deeds as of December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
------------------------
<S> <C> <C>
Income-producing properties $ 165,201,582 145,999,756
Single-family residences 2,088,606 3,935,546
Unimproved land 7,424,419 4,213,631
-------------- --------------
$ 174,714,607 154,148,933
============== ==============
First mortgages 161,275,350 139,542,698
Second mortgages 12,744,274 14,006,235
Third mortgages or all-inclusive deeds of trust 694,983 600,000
-------------- --------------
$ 174,714,607 154,148,933
============== ==============
</TABLE>
Scheduled maturities of loans secured by trust deeds as of December 31,
1997 and the interest rate sensitivity of such loans is as follows:
<TABLE>
<CAPTION>
Fixed Variable
Year ending interest interest
December 31, rate rate Total
<S> <C> <C> <C>
1998 $ 54,307,183 10,013,453 64,320,636
1999 33,863,909 7,418,189 41,282,098
2000 1,206,747 26,619,531 27,826,278
2001 1,067,671 2,987,933 4,055,604
2002 1,486,884 10,692,035 12,178,919
Thereafter (through 2012) 5,471,874 19,579,198 25,051,072
------------- ------------- -------------
$ 97,404,268 77,310,339 174,714,607
============= ============= ==============
</TABLE>
Variable rate loans use as indices the one and five year Treasury
Constant Maturity Index (5.51% and 5.71%, respectively, as of December
31, 1997), the prime rate (8.50% as of December 31, 1997) and the
weighted average cost of funds index for Eleventh District savings
institutions (4.96% as of December 31, 1997). Premiums over these
indices have varied from 250-550 basis points depending upon market
conditions at the time the loan is made.
<PAGE>
(3) Loans Secured by Trust Deeds, Continued
The scheduled maturities for 1998 include approximately $22,295,000 of
loans which are past maturity as of December 31, 1997, of which
$3,433,482 represents loans for which interest payments are delinquent
over 90 days. During the years ended December 31, 1997, 1996 and 1995,
the Partnership refinanced loans totaling $6,562,000, $5,400,000 and
$19,466,000, respectively, thereby extending the maturity dates of such
loans.
The Partnership's total investment in loans delinquent over 90 days is
$5,236,400 and $11,348,000 as of December 31, 1997 and 1996,
respectively. OFG has purchased the Partnership's receivables for
delinquent interest of $87,000, $173,000 and $456,000 related to
delinquent loans for the years ended December 31, 1997, 1996 and 1995,
respectively.
The Partnership's investment in delinquent loans as of December 31,
1997 totals approximately $5,236,000, of which $4,428,000 has a
specific related allowance for credit losses totaling approximately
$2,274,000. There is a non-specific allowance for credit losses of
$1,226,000 for the remaining balance of $808,000 and for other current
loans. There was no additional allowance for credit losses during the
year ended December 31, 1997.
Interest income received on impaired loans during the years ended
December 31, 1997, 1996 and 1995 totaled approximately $722,000,
$691,000 and $896,000, respectively, $670,000, $518,000 and $440,000 of
which was paid by borrowers and $52,000, $173,000 and $456,000 of which
related to purchases of interest receivable by OFG, respectively.
As of December 31, 1997 and 1996, the Partnership's loans secured by
deeds of trust on real property collateral located in Northern
California totaled approximately 67% ($117,352,406) and 69%
($106,403,384), respectively, of the loan portfolio. The Northern
California region (which includes the following counties and all
counties north: Monterey, Fresno, Kings, Tulare and Inyo) is a large
geographic area which has a diversified economic base. The ability of
borrowers to repay loans is influenced by the economic strength of the
region and the impact of prevailing market conditions on the value of
real estate. Such loans are secured by deeds of trust in real estate
properties and are expected to be repaid from the cash flow of the
properties or proceeds from the sale or refinancing of the properties.
The policy of the Partnership is to require real property collateral
with a value, net of senior indebtedness, that exceeds the carrying
amount of the loan balance and to record a deed of trust on the
underlying property.
<PAGE>
(4) Unsecured Loan Due from General Partner
During 1996, the Partnership sold a property to OFG which had been
acquired through foreclosure proceedings by the Partnership on a
Partnership loan. The purchase of the property in the amount of
$870,000 was added to the outstanding balance of the unsecured loan due
from general partner. OFG sold the property during 1996 for $21,700 in
cash and a trust deed receivable in the amount of $629,000. The trust
deed receivable was assigned by OFG to the Partnership in exchange for
a reduction in the unsecured loan balance.
During 1995, OFG purchased the Partnership's receivable related to a
shortfall in the discounted pay-off of a mortgage and was foreclosed
out of the second position by the holder of the first deed of trust on
a Partnership loan purchased in 1995. The purchase of the receivable
and the loan in the amount of $902,000 was added to the outstanding
balance of the unsecured loan due from general partner.
OFG is under no obligation to enter into such transactions with the
Partnership.
There was no balance on the unsecured loan due from general partner as
of December 31, 1997. The balance of the unsecured loan due from the
general partner was $488,764 as of December 31, 1996. The loan bore
interest at 8% and was due on demand.
(5) Real Estate Held for Sale
Real estate held for sale includes the following components as of
December 31, 1997 and 1996:
1997 1996
------------------------
Real estate properties held for sale $ 9,699,656 7,743,295
Investment in limited partnership 3,812,122 4,877,798
Investment in corporate joint venture 639,363 --
------------- -------------
$ 14,151,141 12,621,093
============= =============
Gain on sale of real estate includes the following components for the years
ended December 31, 1997 and 1996:
1997 1996
------------------------
Gain on sale of real estate properties $ 278,339 --
Gain on sale of real estate by limited
partnership 2,355,075 170,724
------------- -------------
$ 2,633,414 170,724
============= =============
<PAGE>
(5) Real Estate Held for Sale, Continued
(a) Real Estate Properties Held for Sale
Real estate properties held for sale at December 31, 1997 and
1996 consists of the following properties acquired through
foreclosure in 1993 through 1997:
<TABLE>
<CAPTION>
1997 1996
----------------------
<S> <C> <C>
Warehouse, Merced, California, net of valuation allowance of
$350,000 as of December 31, 1997 and 1996 $ 650,000 650,000
Light industrial building, Emeryville, California -- 919,806
100%and 70% interest in undeveloped land, Vallejo, California,
as of December 31, 1997 and 1996,
respectively 1,030,566 568,569
Commercial lot, Sacramento, California, net of valuation
allowance of $250,000 as of December 31, 1997 and 1996 299,828 299,828
Residence and commercial building, Campbell and Milpitas,
California -- 42,079
Commercial property, Sacramento, California -- 550,000
Developed land, Los Gatos, California (see note 5(c)) -- 571,853
Office building and undeveloped land, Monterey, California,
net of valuation allowance of $200,000 as of
December 31, 1997 1,902,855 2,097,810
Manufactured home subdivision development, Ione, California,
net of valuation allowance of $384,000 as of
December 31, 1997 2,451,286 --
Commercial storage and office buildings, Oakland, California 444,063 --
Undeveloped land, Reno, Nevada 230,000 230,000
Manufactured home subdivision development, Sonora,
California, net of valuation allowance of $712,000 as of
December 31, 1997. 1,149,807 1,813,350
Light industrial building, Paso Robles, California 1,541,251 --
---------- ----------
$ 9,699,656 7,743,295
========== ==========
</TABLE>
The acquisition of these properties resulted in non-cash
increases in real estate held for sale and non-cash decreases in
loans secured by trust deeds of $3,279,349, $1,913,000 and
$2,501,308 for the years ended December 31, 1997, 1996 and 1995,
respectively.
During 1997, the Partnership sold three properties for a sales
price of approximately $1,659,000. On one of the three
properties, the Partnership took back a loan secured by a trust
deed in the amount of $840,000. During 1996, the Partnership
sold three properties for a sales price of approximately
$845,000. On one of the three properties, the Partnership took
back a loan secured by a trust deed in the amount of $563,125.
(5) Real Estate Held for Sale, Continued
During 1997, the Partnership sold two loans secured by second
deeds of trust to OFG for $600,000 (face value). The Partnership
subsequently purchased the property (located in Paso Robles,
California) securing the loans at the senior lienholders trustee
sale for $1,350,000; thus, wiping out OFG's junior deeds of
trust. OFG recorded a loss of $600,000 as a result of this
transaction.
In February 1998, OFG purchased the manufactured home
subdivision development property located in Sonora, California,
from the Partnership for $1,152,000.
(b) Investment in Limited Partnership
In 1993, the Partnership foreclosed on a loan in the amount of
$600,000 secured by a junior lien on 30 residential lots located
in Carmel Valley, California, and in 1994, paid off the senior
loan in the amount of $500,000. The Partnership incurred
additional costs of $502,798 in 1994 to protect its investment,
increasing the carrying value of the lots to $1,602,798. The
Partnership began to develop the lots and incurred an additional
$671,118 in costs during 1995.
During 1995, the Partnership entered into a limited partnership,
WV-OMIF Partners, L.P. (WV-OMIF Partners) with an unrelated
developer/builder, Wood Valley Development, Inc. (Woodvalley),
for the purpose of constructing single-family homes on the 30
lots. The Partnership contributed the lots to WV-OMIF Partners
in 1996 in exchange for a limited partnership interest. The
$671,118 in capitalized costs incurred in 1995 were considered
an advance to WV-OMIF Partners pursuant to the limited
partnership agreement in 1996 when the lots were contributed.
The Partnership provides advances to the WV-OMIF Partners to
develop and construct the homes. The Partnership is entitled to
receive interest at a rate of prime plus 2% on the advances to
WV-OMIF Partners.
OFG and Woodvalley have the option of purchasing and developing
34 similar lots which are interspersed among the 30 lots being
developed by WV-OMIF Partners. WV-OMIF Partners is incurring the
infrastructure costs which benefit all 64 lots, including the 34
lots that can be developed by OFG and Woodvalley. OFG and
Woodvalley are reimbursing WV-OMIF Partners their pro rata share
of the infrastructure costs with the funds received from the
sale of the developed homes. As of December 31, 1997, Woodvalley
had purchased twenty-eight lots and developed and sold seventeen
of them. The remaining six lots as of December 31, 1997 are
expected to be purchased during fiscal year 1998. As of December
31, 1997, OFG and Woodvalley had reimbursed $648,069 in
development costs to WV-OMIF Partners from the sale of homes.
The balance of development costs due by OFG and Woodvalley
totals $102,579 as of December 31, 1997.
(5) Real Estate Held for Sale, Continued
During 1997 and 1996, the Partnership advanced an additional
$4,152,918 and $2,895,261, respectively, to WV-OMIF Partners for
the continued development and construction of the homes. WV-OMIF
Partners sold fifteen homes in 1997 for proceeds of $8,011,960
and the net gain allocable to the Partnership was $2,355,075,
including interest income of $295,957. WV-OMIF Partners
distributed $7,573,669 (including $648,069 in reimbursements
from OFG and Woodvalley) to OMIF in 1997. WV-OMIF Partners sold
one home in 1996 and distributed $462,103 to OMIF. The
Partnership's investment in WV-OMIF Partners totaled $3,812,122
and $4,877,798 as of December 31, 1997 and 1996, respectively.
WV-OMIF Partners is distributing cash received from the sale of
the lots in the following priority: (1) to third parties, such
as real property taxes and assessments, lenders, contractors,
etc.; (2) to pay the Partnership the amount of $70,000 per lot,
as each lot sells; (3) to pay the Partnership the interest on
the cash advances in full, as each lot sells; (4) to reimburse
the Partnership for its out-of-pocket cash advances for each
lot, as each lot sells; and (5) the remainder to Woodvalley and
the Partnership at a rate of 30% to Woodvalley and 70% to the
Partnership.
The WV-OMIF Partners Partnership Agreement states that the
Partnership shall take no part in the conduct or control of
WV-OMIF Partner's business or in the operation, right or
authority to act for WV-OMIF Partners. Thus, the Partnership
does not have control of WV-OMIF Partners and accounts for its
investment in WV-OMIF Partners under the equity method of
accounting.
(c) Investment in Corporate Joint Venture
In 1995, the Partnership foreclosed on a loan in the amount of
$571,853 secured by a senior lien on a commercial parcel of land
located in Los Gatos, California. During 1997, the Partnership
contributed the land into 720 University, LLC (the Company), a
corporate joint venture formed between the Partnership and BGC
Properties, LLC (BGC). The purpose of the Company is to develop,
construct and operate a commercial office building or R&D
facility on the land to be held for investment and eventual
sale. The Partnership may provide loans to the Company to
develop and construct the building or the Partnership will
obtain loans from third parties for such purposes. The
Partnership is entitled to receive interest at a rate of prime
plus 2% on the loans it makes to the Company.
During 1997, the Partnership capitalized $56,889 in costs prior
to the property being contributed to the Company and advanced
$10,621 to the Company for development. The total investment in
the corporate joint venture totals $639,363 as of December 31,
1997.
<PAGE>
(5) Real Estate Held for Sale, Continued
The net cash flows from the operations of the Company are to be
distributed in accordance with the following priorities: 1) 70%
to the Partnership and 30% to BGC until the sum of all current
and prior distributions of net cash flows equals the members'
priority return on capital as of the end of the calendar quarter
immediately preceding distribution; and 2) thereafter, 70% to
the Partnership and 30% to BGC.
The distribution upon dissolution shall be made in accordance
with the following priorities: 1) to third parties to pay all
debts; 2) to the members to pay all debts; 3) to the members in
accordance with and to the extent of their respective positive
capital account balances; 4) 70% to the Partnership and 30% to
BGC.
The Company is considered a corporate joint venture, and, thus,
the Partnership accounts for its investment in the Company under
the equity method of accounting.
(6) Partners' Capital
(a) Contributions
Limited partners of the Partnership contributed $1.00 for each
unit subscribed. Registration costs incurred by the Partnership
have been offset against contributed capital. Such costs, which
were incurred in 1989, amounted to approximately $198,000.
(b) Allocations, Distributions and Withdrawals
In accordance with the partnership agreement, the Partnership's
profits, gains and losses are allocated to each limited partner
and the general partners in proportion to their respective
capital contributions.
Distributions are made monthly to the limited partners in
proportion to their respective units as of the last day of the
preceding calendar month. Accrued distributions payable
represent amounts to be paid to the partners in January of the
subsequent year based on their capital balances at December 31.
The Partnership makes cash distributions to those limited
partners who elect to receive such distributions. Those limited
partners who elect not to receive cash distributions have their
distributions reinvested in additional limited partnership
units. Such reinvested distributions totaled $10,077,144,
$8,975,209 and $8,395,180 for the years ended December 31, 1997,
1996 and 1995, respectively. Reinvested distributions are not
shown as partners' distributions or sales of partnership units
in the accompanying statements of partners' capital.
The limited partners may withdraw, or partially withdraw, from
the Partnership and obtain the return of their outstanding
capital accounts at $1.00 per unit (book value) within 91 days
after written notices are delivered to the general partners,
subject to the following limitations:
o Any such payments are required to be made only from cash
available for distribution, net proceeds and capital
contributions (as defined) during said 91-day period.
<PAGE>
See accompanying notes to financial statements.
(6) Partners' Capital, Continued
o A maximum of $75,000 per partner may be withdrawn during any
calendar quarter (or $100,000 in the case of a deceased
limited partner).
o The general partners are not required to establish a reserve
fund for the purpose of funding such payments.
o No more than 10% of the outstanding limited partnership
interest may be withdrawn during any calendar year except upon
dissolution of the Partnership.
(c) Promotional Interest of General Partners
The general partners contributed capital to the Partnership in
the amount of 0.5% of the limited partners' aggregate capital
contributions and, together with their promotional interest, the
general partners have an interest equal to 1% of the limited
partners' contributions. This promotional interest of the
general partners of up to 1/2 of 1% is recorded as an expense of
the Partnership and credited as a contribution to the general
partners' capital account as additional compensation. As of
December 31, 1997, the general partners had made cash capital
contributions of $957,164 to the Partnership. The general
partners are required to continue cash capital contributions to
the Partnership in order to maintain their required capital
balance.
The promotional interest expense charged to the Partnership was
$70,747, $57,395 and $69,255 for the years ended December 31,
1997, 1996 and 1995, respectively.
(7) Contingency Reserves
In accordance with the partnership agreement and to satisfy the
Partnership's liquidity requirements, the Partnership is required to
maintain cash as contingency reserves (as defined) in an aggregate
amount of at least 1-1/2% of the gross proceeds of the sale of limited
partnership units. The cash capital contribution of the general
partners (amounting to $957,164 at December 31, 1997), up to a maximum
of 1/2 of 1% of the limited partners' capital contributions, will be
available as an additional contingency reserve, if necessary.
The contingency reserves required at December 31, 1997 and 1996 were
approximately $3,829,000 and $3,400,000, respectively. Certificates of
deposit and certain cash equivalents as of the same dates were
accordingly maintained as reserves.
<PAGE>
(8) Income Taxes
The net difference between partners' capital per the Partnership's
federal income tax return and these financial statements is comprised
of the following components:
<TABLE>
<CAPTION>
1997 1996
------------------------
<S> <C> <C>
Partners' capital per financial statements $ 190,731,135 176,840,104
Accrued interest income (1,773,608) (1,321,493)
Allowance for loan losses 3,500,000 3,500,000
Valuation allowance - real estate held for sale 1,896,000 600,000
Accrued distributions 544,385 511,456
-------------- --------------
Partners' capital per federal income tax return $ 194,897,912 180,130,067
============== ==============
</TABLE>
(9) Transactions with Affiliates
OFG is entitled to receive from the Partnership a management fee of up
to 2.75% per annum of the average unpaid balance of the Partnership's
mortgage loans at the end of each of the preceding twelve months for
services rendered as manager of the Partnership. The maximum management
fee is reduced to 1.75% per annum if OFG has not provided during the
preceding calendar year any of the certain services defined in the
limited partnership agreement.
All of the Partnership's loans are serviced by OFG, in consideration
for which OFG receives up to .25% per annum of the unpaid principal
balance of the loans. Servicing fees are paid from the interest income
of the loans collected from the borrowers.
Interest income on loans secured by trust deeds is collected by OFG and
is remitted monthly to the Partnership, net of servicing fees earned by
OFG. Interest receivable from OFG amounted to $1,773,608 and $1,321,493
at December 31, 1997 and 1996, respectively.
OFG, at its sole discretion may, on a monthly basis, adjust the
management and servicing fees as long as they do not exceed the
allowable limits calculated on an annual basis. In determining the
management and servicing fees and hence the yield to the Partnership,
OFG may consider a number of factors, including the then-current market
yields. Even though the fees for a month may exceed one-twelfth of the
maximum limits, at the end of the calendar year the sum of the fees
collected for each of the twelve months is equal to or less than the
stated limits. Management fees amounted to approximately $3,879,000,
$867,000 and $1,432,000 for the years ended December 31, 1997, 1996 and
1995, respectively, and are included in the accompanying statements of
income. Service fee payments to OFG approximated $421,000, $384,000 and
$371,000 for the years ended December 31, 1997, 1996 and 1995,
respectively, and are included in the accompanying statements of
income.
OFG receives late payment charges from borrowers who make delinquent
payments. Such charges are in addition to the normal monthly loan
payments and totaled approximately $409,000, $241,000 and $152,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
<PAGE>
(9) Transactions with Affiliates, Continued
OFG originates all loans the Partnership invests in and receives an
investment evaluation fee payable from payments made by borrowers. Such
fees earned by OFG amounted to approximately $2,994,000, $1,930,000 and
$1,865,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
During the year ended December 31, 1997, OFG purchased three loans
secured by trust deeds from OMIF at face values in the total amount of
$613,000 for cash of $340,000 and assumption of a loan in the amount of
$273,000. OFG then foreclosed on the loans and sold one of the
properties during 1997 for a gain of approximately $42,000.
Included in loans secured by trust deeds at December 31, 1997 and 1996
are notes totaling $2,215,549 and $1,942,332, respectively, which are
secured by properties owned by OFG. The loans bear interest at 8% per
annum and are due on demand. The Partnership received interest income
of $188,044, $72,427 and $131,482 during the years ended December 31,
1997, 1996 and 1995, respectively, from OFG under loans secured by
trust deeds and the unsecured loan due from OFG.
(10) Net Income Per Limited Partner Unit
Net income per limited partnership unit is computed using the weighted
average of limited partnership units outstanding during the year, which
was 186,954,376, 172,364,058 and 160,636,164 for the years ended
December 31, 1997, 1996 and 1995, respectively.
(11) Fair Value of Financial Instruments
The Financial Accounting Standards Board's Statement No. 107,
Disclosures about Fair Value of Financial Instruments, requires the
determination of fair value for certain of the Partnership's assets.
The following methods and assumptions were used to estimate the value
of the financial instruments included in the following categories:
(a) Cash and Cash Equivalents and Certificates of Deposit
The carrying amount approximates fair value because of the
relatively short maturity of these instruments.
(b) Loans Secured by Trust Deeds
The carrying value of these instruments of $174,714,607
approximates the fair value as of December 31, 1997. The fair
value is estimated based upon projected cash flows discounted at
the estimated current interest rates at which similar loans
would be made. The allowance for loan losses of $3,500,000 at
December 31, 1997 should also be considered in evaluating the
fair value of loans secured by trust deeds.
<PAGE>
ltem 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure There were no changes in or disagreements on
any items dealing with accounting or financial disclosure with the
accountants during the fiscal year.
Part IIl
Item 10. Directors and Executive Officers of the Registrant
The following information is provided about the General Partners of
the Partnership, who are responsible for the management of the Partnership. The
General Partners of the Partnership are David Adler, David K. Machado, Milton N.
Owens, William C. Owens and Owens Financial Group, Inc., a California
Corporation, the Corporate General Partner. The General Partners' principal
place of business is located at 2221 Olympic Blvd., Walnut Creek, CA 94595.
Their telephone number is (925) 935-3840.
The Corporate General Partner manages and controls the affairs of the
Partnership and has general responsibility and final authority in all matters
affecting the Partnership's business. Such duties include dealings with Limited
Partners, accounting, tax and legal matters, communications and filings with
regulatory agencies and all other needed management duties. The Corporate
General Partner may also, at its sole discretion and subject to change at any
time, (1) advance its own funds to the Partnership or to any senior lienholder
to cover delinquent interest or principal payments on mortgage loans held by the
Partnership, (2) advance its own funds to cover any other costs associated with
delinquent loans held by the Partnership including, but not limited to, property
taxes, insurance and legal expense or (3) purchase such defaulted loans at their
book value from the Partnership. See "Business-Delinquencies". In order to
assure that the Limited Partners will not have personal liability as General
Partners, Limited Partners have no right to participate in the management or
control of the Partnership's business or affairs other than to exercise the
limited voting rights provided for in the Partnership Agreement. The Corporate
General Partner has primary responsibility for the initial selection, evaluation
and negotiation of mortgage investments for the Partnership. The Corporate
General Partner provides all executive, supervisory and certain administrative
services for the Partnership's operations, including servicing the mortgage
loans made by the Partnership.
The books and records of the Partnership are maintained by the
Corporate General Partner, subject to audit by independent certified public
accountants. Purchasers of Units will have no right to participate in the
management of the Partnership, and it is not intended that there will be
meetings of Limited Partners.
David Adler, Milton N. Owens, William C. Owens and David K. Machado are
the four individual General Partners of the Partnership. The individual General
Partners, with the exception of David K. Machado, are also officers and
directors of the Corporate General Partner. The individual General Partners have
a net worth ranging from $2,000,000 to over $5,000,000, and the Corporate
General Partner has a net worth of approximately $10,300,000 as of December 31,
1997. There is set forth below certain information about the General Partners
and other employees of the Corporate General Partner that are actively involved
in the administration and investment activity of the Partnership.
David Adler, General Partner, age 76, became Vice Chairman of the
Corporate General Partner in April 1996. From 1981 to April 1996, he served as
President and Chief Executive Officer of the Corporate General Partner, and from
1966 to 1981, served as its Executive Vice President. He has had extensive
experience in real estate financing and partnership management.
Mr. Adler is a former director of Fairmont Foods Company, and for many
years was Chairman of its Executive Committee. He also served on the Northern
California Advisory Board of Union Bank. As a Presidential appointee, he was a
member of the Postmaster Selection Committee under Postmaster General Winston
Blount. Mr. Adler continues to be active in various civic and philanthropic
enterprises.
David K. Machado, General Partner, age 55, is a licensed real estate
broker with extensive experience as a loan officer. He was a loan officer with
Mason-McDuffie Investment Company from 1970 to 1975 and with American Savings &
Loan Association from 1975 to 1980. Mr. Machado joined the Corporate General
Partner in 1980 and served as its Vice President and Manager in charge of
corporate loan production until May 1989. He has served as a loan officer with
Owens Financial Group, Inc. since December 1, 1989.
Milton N. Owens, General Partner, age 86, is a licensed real estate
broker and has been Chairman of the Board of the Corporate General Partner since
October 1981. Mr. Owens is a member of the American Institute of Real Estate
Appraisers (MAI) and holds other professional designations. Mr. Owens has
conducted real estate appraisal courses at the University of California,
Berkeley. Prior to his formation of Owens Mortgage Company, Mr. Owens was
employed with the mortgage loan division of the Travelers Insurance Company from
1936 to 1951. Mr. Owens is the father of William C. Owens, also a General
Partner of the Partnership.
William C. Owens, General Partner, age 47, has been President of the
Corporate General Partner since April 1996. From 1989 until April 1996, he
served as a Senior Vice President of the Corporate General Partner. Mr. Owens
has been active in real estate construction, development, and mortgage financing
since 1973. Prior to joining Owens Mortgage Company in 1979, Mr. Owens was
involved in mortgage banking, property management and real estate development.
As President of the Corporate General Partner, Mr. Owens has
responsibility for the overall activities and operations of the Corporate
General Partner, including corporate investment, operating policy and planning.
In addition, he has had responsibility for loan production, including the
underwriting and review of potential loan investments. Mr. Owens is also the
President of Owens Securities Corp., a subsidiary of the Corporate General
Partner. Mr. Owens is a licensed real estate broker, and is the son of Milton
Owens, also a General Partner of the Partnership.
Bryan H. Draper, age 40, has been Controller and Chief Financial
Officer of Owens Financial Group, Inc. since December 1987. Mr. Draper is a
Certified Public Accountant and is responsible for all accounting, regulatory
agency filings, and tax matters for the Partnership, the Corporate General
Partner, and Owens Securities Corporation. Mr. Draper received a Masters of
Business Administration degree from the University of Southern California in
1981.
William E. Dutra, age 36, is a member of the Loan Committee of the
Corporate General Partner and has been an employee of the Corporate General
Partner since February 1986. As a Vice President in charge of loan production,
Mr. Dutra has responsibility for loan committee review, loan underwriting and
loan production.
Andrew J. Navone, age 41, is a member of the Loan Committee of the
Corporate General Partner and has been an employee of the Corporate General
Partner since August 1985. As a Vice President, Mr. Navone has responsibilities
for loan committee review, loan underwriting and loan production.
None of the General Partners of the Partnership or the officers of the
Corporate General Partner are involved in legal proceedings outside of the
normal course of business.
Owens Financial Group, Inc., incorporated in 1981 is the Corporate
General Partner of the Partnership. Its predecessor, Owens Mortgage Company, was
formed in 1951 by Milton N. Owens for the purpose of arranging and servicing
real estate loans secured by deeds of trust on California real estate for
private and institutional lenders. Except for a brief period from 1961-1963 when
the servicing portfolio and six branch offices were sold to Palomar Mortgage
Company, Milton N. Owens controlled the operations of Owens Mortgage Company.
Presently, the Corporate General Partner is servicing approximately $219,000,000
of company-originated and purchased loans for the Partnership, private
individuals, corporate pension plans, IRA and individual pension accounts, and
institutional investors. Owens Financial Group, Inc. also serves as loan
originator for the Partnership.
Summary of Management Responsibilities
The duties, responsibilities and services of the General Partners, include
marketing the Units, mortgage investments, portfolio management, and the
management and disposition of Partnership properties.
Item 11. Executive Compensation
The Partnership does not pay any compensation to any persons other than
the Corporate General Partner. The Partnership has not issued, awarded or
otherwise paid to any General Partner, any options, SAR's, securities, or any
other direct or indirect form of compensation other than the managment and
promotional fees permitted under the Amended and Restated Limited Partnership
Agreement.
The following table summarizes the forms and amounts of compensation
paid to the General Partners or their affiliates for the year ended December 31,
1997. Such fees were established by the General Partners and were not determined
by arms-length negotiation.
Year Ended December 31, 1997
Maximum
Form of Compensation Actual Allowable
Paid by Partnership
Management Fees.............. $ 3,879,000 $ 4,614,000
Promotional Interest......... 71,000 71,000
------------ ------------
Subtotal..................... $ 3,950,000 $ 4,685,000
--------- ---------
Reimbursement of Other Expenses $ 57,000 57,000
------------ ----------
Total...................... $ 4,007,000 $ 4,742,000
========= =========
Paid by Borrowers
Investment Evaluation Fees... $ 2,994,000 $ 2,994,000
Servicing Fees .............. 421,000 421,000
Late Payment Charges......... 409,000 409,000
---------- ----------
Total...................... $ 3,824,000 $ 3,824,000
========= =========
Item 12. Security Ownership of Certain Beneficial Owners and Management.
No person or entity owns beneficially more than 5% of the ownership
interest in the Partnership. The following table sets forth the beneficial
ownership interests in the Partnership as of December 31, 1997, by (i) each
General Partner of the Partnership, and (ii) all General Partners as a group.
<TABLE>
<CAPTION>
Amount of
Title of Beneficial Percent
Class Name and Address Ownership(1) of Class
<S> <C> <C> <C>
Units David Adler, P.O. Box 2308, Walnut Creek, CA 94595 $ 807,656 .41%
David K. Machado, P.O. Box 2308, Walnut Creek, CA 94595 145,381 .07%
Milton N. Owens, P.O. Box 2308, Walnut Creek, CA 94595 148,836 .08%
William C. Owens, P.O. Box 2308, Walnut Creek, CA 94595 3,853 .00%
Owens Financial Group, Inc., P.O. Box 2308, Walnut Creek,
CA 94595(2) 2,313,520 1.18%
--------- -----
All General Partners as a group (5 persons) $ 3,419,246 1.74%
========= =====
- -----------
<FN>
(1) All interests are subject to the named person's sole voting and investment
power.
(2) The ownership of the Corporate General Partner is held as follows: 33.33% by
Milton N. Owens, 20.83% each by David Adler and William C. Owens, 8.33% by Bryan
H. Draper, 6.67% each by William E. Dutra and Andrew J.
Navone, and an aggregate of 3.34% by two unrelated individuals.
</FN>
</TABLE>
Item 13. Certain Relationships and Related Transactions
Transactions with Management and others.
Management Fee.
The Corporate General Partner manages all aspects of the Partnership.
The Corporate General Partner receives a fee for such services in an amount of
up to 2 3/4% per annum of the book value of mortgages loans invested in by the
Partnership. The amount of management fees paid to the Corporate General Partner
for the year ended December 31, 1997 was $3,879,000.
Promotional Interest.
The Corporate General Partner is required to maintain an ongoing
interest in the Partnership equal to 1 percent of the Limited Partners'
interests. To achieve this, the Corporate General Partner makes monthly cash
contributions equal to one-half of this obligation. The other half of the
obligation is funded through a promotional interest expense allocated to the
Partnership on a monthly basis. During 1997, the Partnership incurred
promotional interest costs of $71,000 which increased the Corporate General
Partners interest in the Partnership in the same amount.
See also Item 12 for a discussion of the interest in the Coroporate
General Partner held by each individual General Partner.
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
Form 10-K Pg.
(a)(1) List of Financial Statements:
Report of Independent Auditors...............................p. 32
Balance Sheets - December 31, 1997 and 1996..................p. 33
Statements of Income for the years ended
December 31, 1997, 1996 and 1995......................................p. 34
Statements of Partners Capital for the
years ended December 31, 1997, 1996 and 1995..........................p. 35
Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995................................p. 36
Notes to Financial Statements................................pp. 37-49
(2) Schedule IV - Mortgage Loans on Real Estate..................pp. 57-59
(3) Exhibits:
3. Amended and Restated Limited Partnership Agreement, incorporated
by reference to Exhibit A to Prospectus filed with Registration Statement
33-81896 filed March 31, 1998.
10(a). Subscription Agreement and Power of Attorney, incorporated
by reference to Exhibit B To Prospectus filed with Registration Statement
33-81896 filed March 31, 1998.
(b) Reports on Form 8-K - None
(c) Exhibits:
3. Amended and Restated Limited Partnership Agreement, incorporated
by reference to Exhibit A to Prospectus filed with Registration Statement
33-81896 filed March 31, 1998.
10(a). Subscription Agreement and Power of Attorney, incorporated
by reference to Exhibit B to Prospectus filed with Registration Statement
33-81896 filed March 31, 1998.
(d) Schedules:
Schedule IV - Mortgage Loans on Real Estate
<PAGE>
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
SCHEDULE IV -- MORTGAGE LOANS ON REAL ESTATE
Principal
Amount of Loans
Subject to
Description Final Carrying Delinquent
Interest Rate Maturity date Amount of Principal or
Mortgages
Interest
<S> <C> <C> <C> <C>
TYPE OF LOAN
Income Producing................ 6.875-14.50% Current to May, 2015 $165,201,582 $4,250,200
Single Family Residence......... 8.00-13.00% Current to Jun., 2001 2,088,606 184,000
Land 8.75-14.00% Current to Aug., 2002 7,424,419 802,200
------------ ----------
TOTAL $174,714,607 $5,236,400
============ ==========
AMOUNT OF LOAN
$0-250,000...................... 6.875-14.50% Current to Aug., 2005 $7,966,754 $ 267,862
$250,001-500,000................ 7.75-14.00% Current to Aug., 2010 15,112,207 1,194,973
$500,001-1,000,000.............. 7.50-14.00% Current to Apr., 2012 33,908,080 2,331,818
Over $1,000,000................. 7.50-12.75% Current to May, 2015 117,727,566 1,441,747
------------ ----------
TOTAL $174,714,607 $5,236,400
============ ==========
POSITION OF LOAN
First 6.875-14.50% Current to May, 2015 $161,275,350 $5,232,400
Second ......................... 10.00-13.50% Current to Dec., 2004 12,744,274 4,000
Third or all-inclusive
deeds of trust................. 10.00-11.00% Current to Apr., 2000 694,983 0
----------- ----------
Totals $174,714,607 $5,236,400
=========== ==========
</TABLE>
- --------------
NOTE 1: All loans are acquired from an affiliate of the Partnership,
namely Owens Financial Group, Inc., the Corporate General Partner.
<TABLE>
<S> <C>
NOTE 2: Balance at beginning of period (1/1/95)..................................................$145,050,213
Additions during period
New mortgage loans......................................................................... 63,029,067
Subtotal.......................................................................................208,079,280
Deductions during period
Collection of principal.........................................................................53,325,024
Foreclosures.....................................................................................2,501,308
Conversion to Unsecured Loan to Corporate General Partner................................... 902,357
Balance at end of period (12/31/95)...........................................................$151,350,591
Balance at beginning of period (1/1/96).............................................................$151,350,591
Additions during period
New mortgage loans..............................................................................51,365,781
Loan carried back on sale of real estate.................................................. 563,125
Subtotal.......................................................................................203,279,497
Deductions during period
Collection of principal.........................................................................46,976,563
Foreclosures.....................................................................................1,913,000
Conversion to Unsecured Loan to Corporate General Partner................................ 241,000
Balance at end of period (12/31/96)...........................................................$154,148,934
Balance at beginning of period (1/1/97).............................................................$154,148,934
Additions during period
New mortgage loans..............................................................................78,449,432
Loan carried back on sale of real estate................................................... 840,000
Subtotal.......................................................................................233,438,366
Deductions during period
Collection of principal.........................................................................55,444,410
Foreclosures............................................................................... 3,279,349
Balance at end of period (12/31/97)...........................................................$174,714,607
<FN>
During the years ended December 31, 1997, 1996 and 1995, the Partnership
refinanced loans totaling $6,562,000, $5,400,000 and $19,466,000, respectively,
thereby extending the maturity date.
During 1997, the Partnership sold five loans to the Corporate General Partner at
face values in the total amount of $1,213,000 comprised of cash of $940,000 and
an assumption of a loan in the amount of $273,000.
</FN>
</TABLE>
- --------------
NOTE 3: Included in the above loans are the following loans which exceed
3% of the total loans as of December 31, 1997. There are no other
loans which exceed 3% of the total loans as of December 31, 1997:
<TABLE>
<CAPTION>
Principal
Amount of
Loans
Subject to
Final Periodic Face Carrying Delinquent
Interest Maturity Payment Prior Amount of Amount of Principal
Description Rate Date Terms Liens Mortgages Mortgages or Interest
----------- -------- --------- ------------------------ --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial Retail Center, 10.0% 7/27/04 Interest only, None $5,344,002 $5,344,002 $0
So. Lake Tahoe, CA..... balance due at
maturity
Condominium Development 12.75% 6/1/99 Fixed amount of None $5,340,739 $5,340,739 $0
Incline Village, NV.... interest accrued
until August, 1998,
then interest only,
balance due at maturity
Office Building 10.75% 4/10/2000 Interest only, None $6,636,587 $6,636,587 $0
San Francisco, CA balance due at
maturity
Office Building 10.50% 8/26/2000 Interest only, None $7,637,892 $7,637,892 $0
San Francisco, CA balance due at
maturity
</TABLE>
- ---------------
NOTE 4: All amounts reported in this Schedule IV represent the aggregate cost
for Federal income tax purposes.
NOTE 5: There are no write-downs or reserves on any of the individual loans
listed under Note 3 above.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Dated: March 30, 1998 OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
By: Owens Financial Group, Inc.
a General Partner
Dated: March 30, 1998 By: /s/David Adler
David Adler, Director
Dated: March 30, 1998 By: /s/Bryan H. Draper
Bryan H. Draper, Director
Dated: March 30, 1998 By: /s/William C. Owens
William C. Owens
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 841501
<NAME> OWENS MORTGAGE INVESTMENT FUND
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JAN-31-1997
<EXCHANGE-RATE> 1
<CASH> 4,073,115
<SECURITIES> 0
<RECEIVABLES> 1,886,191
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,959,306
<PP&E> 14,151,141
<DEPRECIATION> 0
<TOTAL-ASSETS> 191,325,054
<CURRENT-LIABILITIES> 593,919
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 190,731,135
<TOTAL-LIABILITY-AND-EQUITY> 191,325,054
<SALES> 0
<TOTAL-REVENUES> 21,325,850
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,609,603
<LOSS-PROVISION> 1,296,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 15,420,247
<INCOME-TAX> 0
<INCOME-CONTINUING> 15,420,247
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,420,247
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
