SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM l0-Q
Quarterly Report Under Section 13 or 15(d)
of The Securities Exchange Act of 1934
For Quarter Ended September 30, 1999
Commission file number O-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 office) (Zip Code)
(925) 935-3840
(Registrant's Telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No_________
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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OWENS MORTGAGE INVESTMENT FUND
(A California Limited Partnership)
Interim Balance Sheets
September 30, 1999 and December 31, 1998
(UNAUDITED)
September 30 December 31
1999 1998
ASSETS
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Cash and cash equivalents ........................... $ 4,343,339 $ 8,260,599
Certificates of deposit ............................. 250,000 434,006
Commercial paper .................................... -- 3,084,044
Loans secured by trust deeds ........................ 200,535,280 182,721,465
Less: Allowance for loan losses .................... (3,750,000) (3,500,000)
196,785,280 179,221,465
Real estate held for sale, net of allowance
for losses of $1,184,000 in 1999 and 1998 9,963,220 9,971,202
Interest receivable ................................. 1,561,902 1,380,530
Other receivables ................................... -- 59,074
Total Assets ............................... $ 212,903,741 $ 202,410,920
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Accrued distributions payable ....................... $ 568,122 $ 522,827
Due to General Partner .............................. 642,410 391,098
Accounts payable and accrued liabilities ............ 27,525 156,193
Total Liabilities .......................... 1,238,057 1,070,118
PARTNERS' CAPITAL:
General partners .................................... 2,080,415 1,967,069
Limited partners (Subject to Redemption) ............ 209,585,269 199,373,733
Total Partners' Capital .................... 211,665,684 201,340,802
Total Liabilities and Partners' Capital .... $ 212,903,741 $ 202,410,920
See accompanying notes to interim financial statements
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<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(A California Limited Partnership)
STATEMENTS OF INCOME
For the Three and Nine Months Ended September 30, 1999 and 1998 (Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30 September 30 September 30 September 30
1999 1998 1999 1998
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REVENUES:
Interest income on loans secured by trust deeds ...... $ 5,015,553 $ 5,030,646 $ 14,472,585 $ 14,267,744
Gain (loss) on sale of real estate ................... 822,316 (2,074) 840,640 1,251,943
Other income ......................................... 68,055 241,070 318,252 586,927
Total revenues .............................. 5,905,924 5,269,642 15,631,477 16,106,614
OPERATING EXPENSES:
Management fees to General Partner ................... 817,267 1,720,721 1,740,594 2,493,560
Servicing fees to General Partner .................... 123,670 108,097 355,790 356,829
Promotional interest to General Partner .............. 24,602 -- 54,972 38,460
Administrative ....................................... 10,000 23,480 22,500 53,220
Legal and accounting ................................. 13,130 20,629 123,287 79,798
Real estate operations, net .......................... (40,259) 3,753 (108,135) 23,280
Other ................................................ 100 59 62,860 13,156
Provision for loan losses ............................ 250,000 -- 250,000 --
Total operating expenses ............................. 1,198,510 1,876,739 2,501,868 3,058,303
Net income .................................. $ 4,707,414 $ 3,392,903 $ 13,129,609 $ 13,048,311
Net income allocated to General Partner ..... $ 46,398 $ 33,593 $ 129,565 $ 129,191
Net income allocated to limited partners .... $ 4,661,016 $ 3,359,310 $ 13,000,044 $ 12,919,120
Net income allocated to limited partners
per weighted average limited partnership unit $ .022 $ .017 $ .063 $ .066
Weighted average limited partnership units .. 208,589,000 195,746,000 204,916,000 194,839,000
See accompanying notes to interim financial statements
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<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(A California Limited Partnership)
Interim Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and 1998
(UNAUDITED)
September 30 September 30
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ............................................ $ 13,129,609 $ 13,048,311
Adjustments to reconcile net
income to net cash provided by operating activities:
Gain on sale of real estate by limited partnership .... -- (1,227,070)
Gain on sale of real estate properties ................ (840,640) (24,873)
Provision for loan losses ............................. 250,000 --
Changes in operating assets and liabilities:
Interest receivable ................................... (122,298) (950,824)
Other receivables - ................................... (418,816)
Accrued distributions payable ......................... 45,295 (25,009)
Accounts payable and accrued liabilities .............. (128,668) 1,494,994
Due to General Partner ................................ 251,312 3,825
Net cash provided by operating activities ............ 12,584,610 11,900,538
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of loans secured by trust deeds ............. (92,479,859) (62,688,044)
Principal collected ................................... 1,243,618 1,327,576
Loan payoffs .......................................... 66,673,967 60,270,185
Sales of loans secured by trust deeds at face value ... 7,207,294 --
Investment in real estate properties .................. (206,147) (261,451)
Net proceeds from disposition of real estate properties 851,498 179,555
Investment in limited partnership ..................... -- (1,250,395)
Distributions received from limited partnership ....... -- 5,944,129
Investment in corporate joint venture ................. (255,564) (79,566)
Investment in certificates of deposit ................. -- (84,006)
Proceeds from maturities of certificates of deposit ... 184,006 550,000
Maturity of (investment in) commercial paper .......... 3,084,044 (3,040,867)
Net cash (used in) provided by investing activities ... (13,697,143) 867,116
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of partnership Units ............... 15,714,358 9,193,566
Partners' cash distributions .......................... (4,874,487) (4,733,054)
Partners' capital withdrawals ......................... (13,644,598) (10,945,087)
Net cash used in financing activities ........ (2,804,727) (6,484,575)
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS .................................................. (3,917,260) 6,283,079
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD .......................................... 8,260,599 3,073,115
CASH AND CASH EQUIVALENTS AT
END OF PERIOD ................................................ $ 4,343,339 $ 9,356,194
See notes 2 and 3 for supplemental disclosure of non-cash investing and
financing activities.
See accompanying notes to interim financial statements
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OWENS MORTGAGE INVESTMENT FUND
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(1) Summary of Significant Accounting Policies
In the opinion of the management of the Partnership, the accompanying
unaudited financial statements contain all adjustments, consisting of normal,
recurring adjustments, necessary to present fairly the financial information
included therein. These financial statements should be read in conjunction with
the audited financial statements included in the Partnership's Form 10-K for the
fiscal year ended December 31, 1998 filed with the Securities and Exchange
Commission. The results of operations for the nine-month period ended September
30, 1999 are not necessarily indicative of the operating results to be expected
for the full year.
(2) Loans Secured by Trust Deeds
The Partnership's investment in loans delinquent greater than ninety
days is $10,012,000 and $8,710,000 as of September 30, 1999 and December 31,
1998, respectively. As of September 30, 1999, $7,913,000 of the delinquent loans
has a specific related allowance for credit losses totaling $2,215,000. There is
a non-specific allowance for credit losses of $1,535,000 for the remaining
delinquent balance and for other current loans. The Partnership has discontinued
the accrual of interest on all loans that are delinquent greater than ninety
days. The Partnership recorded an additional allowance for credit losses of
$250,000 during the nine months ended September 30, 1999.
As of September 30, 1999 and December 31, 1998, loans past maturity
totaled approximately $29,881,000 and $23,418,000, respectively. Of the past
maturity loans at September 30, 1999, $8,093,000 represent loans for which
interest payments are delinquent more than ninety days.
During the nine months ended September 30, 1999 and 1998, the
Partnership refinanced loans totaling $3,855,000 and $9,941,000, respectively.
During the nine months ended September 30, 1999, the Partnership sold
for cash full and partial interests in eight loans to third parties and to
related parties in the amounts of $6,482,000 and $725,000, respectively. The
sale of all the loans resulted in no gain or loss in the accompanying financial
statements. Real Estate Held for Sale
During the nine months ended September 30, 1999, a 6-unit residential
building located in Oakland, California, of which the Partnership owned a 22%
interest, was sold resulting in a gain to the Partnership of $18,000. In
addition, in August 1999, a 66-acre residential parcel located in Vallejo,
California was sold for cash of $500,000 and a note of $1,000,000 resulting in a
gain to the Partnership of $822,000. During the nine months ended September 30,
1999, the Partnership acquired through foreclosure a 91% interest in 92
residential lots in Lake Don Pedro, California, on which it had a trust deed
investment of $541,165.
OWENS MORTGAGE INVESTMENT FUND
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(4) Transactions with Affiliates
The General Partner of the Partnership, Owens Financial Group, Inc.
(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.
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.
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 particular
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 may not exceed
the stated limits. Management fees amounted to approximately $817,000 and
$1,721,000 for the three months ended September 30, 1999 and 1998, respectively,
and $1,741,000 and $2,494,000 for the nine months ended September 30, 1999 and
1998, respectively. Service fee payments to OFG approximated $124,000 and
$108,000 for the three months ended September 30, 1999 and 1998, respectively,
and $356,000 and $357,000 for the nine months ended September 30, 1999 and 1998,
respectively.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Three Months Ended September 30, 1999 Compared to 1998
The net income increase of $1,315,000 (38.8%) for 1999 compared to 1998, was due
to:
an increase in gain on sale of real estate of $824,000; and
a decrease in management fees to General Partner of $903,000.
The net income increase in 1999 as compared to 1998, was offset by:
a decrease in other income of $173,000; and
an increase in the provision for loan losses of $250,000.
Gain on sale of real estate increased by $824,000 due to gains
recognized from the sales of two properties located in Oakland and Vallejo,
California during the three months ended September 30, 1999 (see "Real Estate
Properties Held for Sale" below).
Management fees to the General Partner are paid pursuant to the
Partnership Agreement between the General Partner and Limited Partners.
Other income decreased by $173,000 (71.8%) due primarily to a decrease
in interest income earned on investments (money market funds, certificates of
deposit, commercial paper, etc.) as the Partnership was able to remain fully
invested in loans secured by deeds of trust during most of the three months
ended September 30, 1999.
Nine Months Ended September 30, 1999 Compared to 1998
The net income increase of $81,000 (0.6%) for 1999 compared to 1998, was due to:
an increase in interest income on loans secured by trust deeds of
$205,000;
a decrease in management fees to the General Partner of $753,000;
an increase in income from real estate operations of $131,000.
The net income increase in 1999 as compared to 1998, was offset by:
a decrease in gain on sale of real estate of $411,000;
a decrease in other income of $269,000; and
an increase in the provision for loan losses of $250,000.
Interest income on loans secured by trust deeds increased $205,000 (1.4
%) for the nine months ended September 30, 1999, as compared to same period in
1998. This increase was primarily a result of the growth in the loan portfolio
even though its weighted average yield decreased from 10.99% to 10.79% for the
nine months ended September 30, 1998 and 1999, respectively. This increase was
partially offset by deferred interest accrued on one large loan during the nine
months ended September 30, 1998 which was not accrued during the nine months
ended September 30, 1999. This deferred interest was not reflected in the
weighted average yield calculation for the nine months ended September 30, 1998.
Management fees to the General Partner are paid pursuant to the
Partnership Agreement between the General Partner and Limited Partners.
Real estate operations resulted in income of $108,000 during the nine
months ended September 30, 1999 as compared to a loss of $23,000 during 1998.
This increase in income is a result of increased occupancy on two of the
Partnership's properties and reduced operating costs due to legal, insurance and
payroll expenses incurred on the Merced and Oakland properties in the nine
months ended September 30, 1998 which were not incurred in 1999.
Gain on sale of real estate decreased by $411,000 (32.8%). The decrease
in gain on sale of real estate was a result of a decrease in the gain on sales
of homes from the development limited partnership between the Partnership and
Wood Valley Development, Inc. (see "Investment in Development Limited
Partnership" below) as the final homes in the development were completed and
sold during 1998. The decrease in gain on sale of homes from the development
limited partnership was partially offset by gains recognized from the sales of
two properties located in Oakland and Vallejo, California during the nine months
ended September 30, 1999 (see "Real Estate Properties Held for Sale" below).
Other income decreased by $269,000 (45.8%) due primarily to a decrease
in interest income earned on investments (money market funds, certificates of
deposit, commercial paper, etc.) as the Partnership was able to remain fully
invested in loans secured by deeds of trust during most of the nine months ended
September 30, 1999.
Financial Condition
September 30, 1999 and December 31, 1998
Loan Portfolio
The number of Partnership mortgage investments decreased from 188 to
157 and the average loan balance increased from $972,000 to $1,277,000 between
December 31, 1998 and September 30, 1999. These average loan increases reflect
the Partnership's ability to invest in larger mortgage loans meeting the
Partnership's objectives.
Approximately $10,012,000 (5.0%) and $8,710,000 (4.8%) of the
loans invested in by the Partnership were more than 90 days delinquent in
payment as of September 30, 1999 and December 31, 1998, respectively. Of these
amounts, approximately $3,094,000 (1.5%) and $3,657,000 (2.0%) were in the
process of foreclosure. Loans more than 90 days delinquent increased by
$1,302,000 (14.9%) from December 31, 1998 to September 30, 1999, primarily due
to one large loan which became delinquent during 1999. Management believes that
this loan, with an outstanding principal balance of approximately $1,542,000, is
adequately secured and that no additional specific loan loss reserve for this
loan is necessary. Management increased the general loan loss reserve by
$250,000 during the quarter ended September 30, 1999. A loan loss reserve in the
amount of $3,750,000 and $3,500,000 was maintained on the books of the
Partnership as of September 30, 1999 and December 31, 1998, respectively.
As of September 30, 1999 and December 31, 1998, approximately 41% and
48% of the Partnership's mortgage loans are secured by real property in Northern
California. The decrease in the percentage of loans secured by real property in
Northern California has primarily been due to the payoff of several of those
loans and the purchase of new loans secured by properties outside of Northern
California. As the real estate market in Southern California and other parts of
the Western United States has improved, more loans secured by real estate in
those areas have been invested in by the Partnership. In general, there has been
increased competition in the lending business in Northern California,
particularly in the San Francisco Bay Area, and the General Partner has
increasingly sought loans in areas outside of this region.
The Partnership's investment in loans secured by unimproved land rose
by $9,302,000 (53%) since December 31, 1998. Improvement in real estate market
conditions have made development and, thus, loans on unimproved land more
attractive. Approximately 37% of the Partnership's investment in loans secured
by unimproved land are construction loans. All of the Partnership's loans
secured by unimproved land or land in the process of being developed are first
trust deeds. In addition, only one of these loans, in the amount of $802,200, is
more than 90 days delinquent in payment as of September 30, 1999.
Real Estate Properties Held for Sale
The Partnership currently holds title to eleven properties that were
foreclosed on from January 1, 1993 through September 30, 1999 in the amount of
$8,902,000, net of allowance for losses of $1,184,000. Since 1993, the
Partnership's investment in real estate held for sale has increased due to the
General Partner's decision to stop acquiring from the Partnership property
subject to foreclosure. When the Partnership acquires property by foreclosure,
it typically earns less income on those properties than could be earned on
mortgage loans and may not be able to sell the properties in a timely manner.
During the nine months ended September 30, 1999, the Partnership acquired
through foreclosure a 91% interest in 92 residential lots in Lake Don Pedro,
California, on which it had a trust deed investment of $541,000. During the nine
months ended September 30, 1999, a 6-unit residential building located in
Oakland, California, of which the Partnership owned a 22% interest, was sold
resulting in a gain to the Partnership of $18,000. In addition, in August 1999,
a 66-acre residential parcel located in Vallejo, California was sold for cash of
$500,000 and a note of $1,000,000 resulting in a gain to the Partnership of
$822,000.
Seven of the Partnership's eleven properties do not currently generate
revenue. Expenses from rental properties have decreased from approximately
$499,000 to $403,000 (19.2%) for the nine months ended September 30, 1998 and
1999, respectively, and revenues associated with these properties have increased
from $476,000 to $511,000 (7.3%), thus generating a net income from real estate
held for sale of $108,000 during the nine months ended September 30, 1999. The
increase in revenues is a result of increased occupancy on two of the
Partnership's properties. The decrease in expenses is due to legal, insurance
and payroll expenses incurred on the Merced and Oakland properties in the nine
months ended September 30, 1998 which were not incurred in 1999.
Investment in Corporate Joint Venture
In 1995, the Partnership foreclosed on a $571,853 loan and obtained
title to a commercial lot in Los Gatos, California that secured the loan. In
1997, the Partnership contributed the lot to a limited liability company (the
Company) formed with an unaffiliated developer to develop and sell a commercial
office building on the lot. The Partnership is providing construction financing
to the Company at prime plus two percent.
During the nine months ended September 30, 1999 and the year ended
December 31, 1998, the Partnership advanced an additional $255,000 and $166,000,
respectively, to the corporate joint venture for development. The total
investment in the corporate joint venture was $1,061,000 and $806,000 as of
September 30, 1999 and December 31, 1998, respectively.
The Company received all development approvals and began construction
in July 1999.
Interest Receivable and Due to General Partner
Interest receivable increased from approximately $1,381,000 as of
December 31, 1998 to $1,562,000 as of September 30, 1999 ($181,000 or 13.1%),
due primarily to the growth of the loan portfolio and the accrual of interest on
two loans which will not be collected until the loans mature or payoff.
Due to General Partner increased from approximately $391,000 as of
December 31, 1998 to $642,000 as of September 30, 1999 ($251,000 or 64.2%) due
to accrued management fees for the months of August and September that are paid
pursuant to the Partnership Agreement.
Cash and Cash Equivalents, Certificates of Deposit and Commercial Paper
Cash and cash equivalents, certificates of deposit and commercial paper
have decreased from approximately $11,779,000 as of December 31, 1998 to
$4,593,000 as of September 30, 1999, respectively ($7,186,000 or 61%). This
decrease is primarily attributable to an increase in investment in loans during
the nine months ended September 30, 1999 without loan payoffs or sales of the
same amount.
Asset Quality
Some losses are normal when lending money and the amounts of losses
vary as the loan portfolio is affected by changing economic conditions and
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.
The conclusion that a Partnership loan may become uncollectible, in
whole or in part, is a matter of judgment. Although lenders such as banks and
savings and loans are subject to regulations that require them to perform
ongoing analyses of portfolio, loan to value ratios, reserves, etc., and to
obtain current information regarding its borrowers and the securing properties,
the Partnership is not subject to these regulations and has not adopted these
practices. Rather, management of the General Partner, in connection with the
quarterly closing of the accounting records of the Partnership and the
preparation of the financial statements, evaluates the Partnership's mortgage
loan portfolio. Based upon this evaluation, a determination is made as to
whether the allowance for loan losses is adequate to cover potential losses of
the Partnership. As of September 30, 1999, management believes that the
allowance for loan losses of $3,750,000 is adequate. As of then, loans secured
by trust deeds include $10,012,000 in loans delinquent over 90 days, of which
$3,094,000 was invested in loans that were in the process of foreclosure. Due to
the loan-to-value criteria established by the General Partner, in its opinion,
the mortgage loans held by the Partnership appear in general to be adequately
secured.
The General Partner's judgment of the adequacy of loan loss reserves includes
consideration of:
economic conditions;
borrower's financial condition;
evaluation of industry trends;
review and evaluation of loans identified as having loss potential; and
quarterly review by Board of Directors.
Liquidity and Capital Resources
Purchases of Units and loan payoffs provide the capital for mortgage
investments. A substantial increase in general market interest rates could have
an adverse affect on the Partnership, because then the Partnership's investment
yield could be lower than other debt-related investments. In that event,
purchases of additional Units could decline, which, in turn, would reduce the
liquidity of the Partnership and its ability to make additional mortgage
investments. In contrast, a significant increase in the dollar amount of loan
payoffs and/or additional limited partner investments without the origination of
new loans of the same amount would increase the liquidity of the Partnership.
This increase in liquidity could result in a decrease in the yield paid to
limited partners as the Partnership would be required to invest the additional
funds in lower yielding, short term investments. The Partnership has not and
does not intend to borrow money for investment purposes.
There was little variation in the percentage of capital withdrawals to
total capital invested by the limited partners between 1994 and 1998, excluding
regular distributions of net income to limited partners. Tha annualized
withdrawal percentage increased during 1999 primarily due to an increase in the
maximum quarterly amount which could be withdrawn by limited partners from
$75,000 to $100,000 as a result of a change in the Partnership Agreement in
December 1998. Withdrawal percentages have been 7.37%, 6.11%, 7.85%, 6.63% and
7.33% for the years ended December 31, 1994, 1995, 1996, 1997 and 1998 and 8.85%
(annualized) for the nine months ended September 30, 1999. These percentages are
the annual average of the limited partners capital withdrawals in each calendar
quarter divided by the total limited partner capital as of the end of each
quarter.
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 61 to 91 days after written notices are delivered
to the General Partner, subject to the following limitations, among others:
No withdrawal of Units can be requested or made until at least one year
from the date of purchase of those Units, for purchases of Units made
on or after February 16, 1999, other than Units received under the
Partnership's Reinvested Distribution Plan.
Any such payments are required to be made only from net proceeds and
capital contributions (as defined) during said 91-day period.
A maximum of $100,000 per partner may be withdrawn during any calendar
quarter.
The General Partner is not required to establish a reserve fund for the
purpose of funding such payments.
No more than 10% of the outstanding limited partnership interest may be
withdrawn during any calendar year except upon dissolution of the
Partnership.
Contingency Reserves
The Partnership maintains cash, cash equivalents and marketable
securities as contingency reserves in an aggregate amount of 2% of the limited
partners' capital accounts to cover expenses in excess of revenues or other
unforeseen obligations of the Partnership. Although the General Partner believes
that contingency reserves are adequate, it could become necessary for the
Partnership to sell or otherwise liquidate certain of its investments to cover
such contingencies on terms which might not be favorable to the Partnership.
Current Economic Conditions
The current economic climate in Northern California and the Western
United States is generally strong. Other than the loss incurred in February 1998
on the sale to the General Partner of the manufactured-home development in
Sonora, California, acquired through foreclosure, the Partnership has not
sustained any material losses to date. This was due primarily to the General
Partner's pre-May 1, 1993 practice of purchasing delinquent interest and loans
from the Partnership prior to foreclosure. The General Partner has ceased such
practices, except as to loans that pre-exist the change in policy and other very
limited exceptions. The General Partner expects that it will not purchase
delinquent interest or principal on delinquent loans in the future, and
therefore, the Partnership could sustain losses with respect to loans secured by
properties located in areas of declining real estate values. This could result
in a reduction of the net income of the Partnership for a year in which those
losses occur. There is no way of making a reliable estimate of these potential
losses at the present time.
Despite the Partnership's ability to purchase mortgage loans with
relatively strong yields during 1997, 1998 and the nine months ended September
30, 1999, the interest rate environment and competition from a variety of
lenders has had the effect of reducing mortgage yields over the past two years.
Although mortgage yields have increased over the past six months, increased
competition or changes in the economy could again have the effect of reducing
mortgage yields in the future. 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, if there is less demand by
borrowers for loans and, thus, fewer loans for the Partnership to invest in, it
will invest its excess cash in shorter-term alternative investments yielding
considerably less than the current investment portfolio.
Year 2000 Readiness
Many computer systems may experience difficulty processing dates beyond
the year 1999; as a consequence, some computer hardware and software at most
companies will need to be modified or replaced prior to the year 2000 in order
to remain functional. The General Partner depends on the use of computers and
related systems to provide timely, accurate information essential to the
management and operation of the Partnership. These systems include both
information technology (IT) and non-information technology (non-IT) systems. For
IT and non-IT systems developed by independent third parties
(externally-developed), the vendors and suppliers have represented that these
systems are Year 2000 compliant; however, internal testing of these systems is
still being completed. The internally-developed computer programs used to
account for mortgage loan investments are currently in the process of being
replaced with new externally-developed mortgage software which is fully Year
2000 compliant. This implementation was completed in October 1999. The
internally-developed programs used to account for investments in Units and other
items have been reviewed by independent consultants to determine whether these
programs are able to recognize the year 2000 and all required modifications have
been completed. The consultants are currently in the process of testing all
modifications that have been made. The testing is expected to be completed by
October 31, 1999.
Although not anticipated by the General Partner, a failure to
adequately address the Year 2000 issue could result in the misstatement of
reported information, the inability to accurately track mortgage investments and
payments due or other operational problems. If IT systems are not operational in
the Year 2000, the General Partner has determined that they can operate manually
for several months while correcting the system problems before experiencing
material adverse effects on the Partnership's and the General Partner's business
and results of operations. However, shifting portions of daily operations to
manual processes may result in time delays and increased processing costs.
Additionally, the Partnership and General Partner may not be able to provide
borrowers and investors with timely and pertinent information, which may
negatively affect customer relations and lead to the potential loss of new loans
and limited partner investments.
The General Partner is in the process of assessing Year 2000 issues
with third parties, comprised primarily of certain financial institutions and
other vendors, with whom the Partnership has a material business relationship
(Third Parties). Currently, the Partnership believes that if a significant
portion of these financial institutions is non-compliant for a substantial
length of time, the Partnership's operations and financial condition would be
materially adversely affected. Non-compliance by other Third Parties including
borrowers is not expected to have a material effect on the Partnership's results
of operations and financial condition unless a substantial number of borrowers
experience difficulties. The General Partner has sent letters to these and other
Third Parties requesting representations of their Year 2000 readiness and is
currently awaiting replies from the Third Parties.
The total costs to remedy Year 2000 issues will be paid by the General
Partner. None of such costs will be reimbursed by the Partnership.
The worst case scenario from the impact of Year 2000 cannot presently
be predicted.
Forward Looking Statements and Other Year 2000 Risk Factors
The foregoing analysis of Year 2000 issues includes forward-looking
statements and predictions about possible or future events, results of
operations and financial condition. As such, this analysis may prove to be
inaccurate because of the assumptions made by the General Partner or the actual
development of future events. No assurance can be given that any of these
forward-looking statements and predictions will ultimately prove to be correct
or even substantially correct.
Various other risks and uncertainties could also affect the Year 2000
analysis causing the effect on the Partnership to be more severe than discussed
above. The General Partner's Year 2000 compliance testing cannot guarantee that
all computer systems will function without error beyond the Year 2000. Risks
also exist with respect to Year 2000 compliance by Third Parties, such as the
risk that an external party, who may have no relationship to the Partnership or
the General Partner, but who also has a significant relationship with one or
more Third Parties, may have a system failure that adversely affects the
Partnership's ability to conduct business. While the General Partner is
attempting to identify such external parties, no assurance can be given that it
will be able to do so. Furthermore, Third Parties with direct relationships with
the Partnership, whose systems have been identified as likely to be Year 2000
compliant, may suffer a breakdown due to unforeseen circumstances. It is also
possible that the information collected by the General Partner for these Third
Parties regarding their compliance with Year 2000 issues may be incorrect.
Finally, it should be noted that the foregoing discussion of Year 2000 issues
assumes that to the extent the General Partner's systems fail, whether because
of unforeseen complications or because of Third Parties' failure, switching to
manual operations will allow the Partnership to continue to conduct its
business. While the General Partner believes this assumption to be reasonable,
if it is incorrect, the Partnership's results of operations would likely be
adversely affected.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Partnership is not presently involved in any material legal proceedings.
Item 6(b). Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which this report
is filed.
<PAGE>
SIGNATURES
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: November 4, 1999 OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
By: Owens Financial Group, Inc., General Partner
Dated: _______________ By: /s/William C. Owens
William C. Owens, President
Dated: _______________ By: /s/Bryan H. Draper
Bryan H. Draper, Chief Financial Officer
Dated: _______________ By: /s/Melina A. Platt
Melina A. Platt, Controller
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
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