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, 1998 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 (925) 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 required 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.333-71299 are
incorporated by reference into Part IV.
Exhibit Index at page 47.
<PAGE>
Part I
Item 1. Business
The Partnership is a California limited partnership organized on June
14, 1984, which 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 October 1992, the Partnership changed its name from Owens
Mortgage Investment Partnership II to Owens Mortgage Investment Fund, a
California Limited Partnership. The address of the Partnership is P.O. Box 2400,
2221 Olympic Blvd., Walnut Creek, CA 94595. Its telephone number is (925)
935-3840.
The General Partner makes and arranges or purchases all of the loans
invested in by the Partnership. In connection with the investment in loans, the
Partnership in limited instances may acquire 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, improved,
income-producing and non-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,
1998, 1997, 1996, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
Total Partners' Mortgage Net
Capital Investments Income
<S> <C> <C> <C>
1998 ........................... $ 201,340,802 $ 182,721,465 $ 16,978,692
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
</TABLE>
As of December 31, 1998, the Partnership held investments in 187
mortgage loans, secured by liens on title and leasehold interests in real
property, and one loan secured by a collateral assignment of a limited liability
company that owns and is developing commercial real property in Arizona. 48% of
the mortgage loans are located in Northern California. The remaining 52% are
located in Southern California, Oregon, Washington, Montana, Nevada, Arizona,
and Hawaii.
The following table sets forth the types and maturities of mortgage investments
held by the Partnership as of September 30, 1998:
<TABLE>
<CAPTION>
TYPES AND MATURITIES OF MORTGAGE INVESTMENTS
(As of December 31, 1998)
Number of Loans Amount Percent
<S> <C> <C> <C>
1st Mortgages.................................... 151 $ 162,597,467 88.99%
2nd Mortgages.................................... 34 19,223,907 10.52%
3rd Mortgages.................................... 2 548,967 .30%
4th Mortgages.................................... 1 351,124 .19%
--- ------------- ------
188 $ 182,721,465 100.00%
=== ============= =======
Maturing on or before December 31, 1999 (1)...... 83 $ 73,197,674 40.06%
Maturing on or between January 1, 2000 and December 67 83,551,214 45.73%
31, 2002.......................................
Maturing on or between January 1, 2003 and September 38 25,972,577 14.21%
1, 2018 --- ------------- -------
188 $ 182,721,465 100.00%
=== ============= =======
Income Producing Properties...................... 160 $ 162,768,798 89.08%
Single Family Residences......................... 13 2,360,417 1.29%
Unimproved land.................................. 15 17,592,250 9.63%
--- ------------- -------
188 $ 182,721,465 100.00%
=== ============= =======
- --------
<FN>
(1) $23,418,000 was past maturity as of December 31, 1998.
</FN>
</TABLE>
The average loan balance of the mortgage loan portfolio of $972,000 as
of December 31, 1998 is considered by the General Partner to be a reasonable
diversification of investments concentrated in mortgages secured by commercial
properties. Of such investments, 37% earn a variable rate of interest and 63%
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. When the General Partner experiences
increased competition for quality loans, as has been the case during 1998, it
continues to use relatively low loan-to-value ratios as a major criteria in
making loans to minimize the risk of being undersecured.
As of December 31, 1998, the Partnership was invested in construction
loans in the amount of approximately $13,924,000 and in loans partially secured
by a leasehold interest of $13,531,000.
The Partnership has other assets in addition to its mortgage
investments, comprised principally of the following:
$11,779,000 in cash, cash equivalents and marketable securities
which is held for investment, required to transact the business
of the Partnership, or in conjunction with contingency reserve
requirements;
$9,971,000 in real estate acquired through foreclosure (including
$806,000 in the corporate joint venture formed to develop the
property located in Los Gatos, California); and
$1,381,000 in interest receivable.
Delinquencies
The General Partner does not regularly examine the existing loan
portfolio to see if acceptable loan-to-value ratios are being maintained because
the majority of loans mature in a period of only 1-7 years. The General Partner
will perform an internal review on a property securing a loan in the following
circumstances:
payments on the loan securing the property become delinquent;
the loan is past maturity;
it learns of physical changes to the property securing the loan
or to the area in which the property is located; or
it learns of changes to the economic condition of the borrower or
of leasing activity of the property securing the loan.
A review includes a physical evaluation of the property and the area in
which the property is located, the financial stability of the borrower, and the
property's tenant mix. The General Partner may then work with the borrower to
bring the loan current.
As of December 31, 1998, the Partnership's portfolio included
$8,710,000 (compared with $5,236,000 as of December 31, 1997) of loans
delinquent more than 90 days, representing 4.8% of the Partnership's investment
in mortgage loans. Loans delinquent more than 90 days have historically
represented between 3% to 10% of the total loans outstanding at any given time.
The balance of delinquent loans at December 31, 1998 includes $3,657,000
(compared with $3,279,000 as of December 31, 1997) in the process of foreclosure
and $4,000 (compared with $184,000 as of December 31, 1997) involving loans to
borrowers who are in bankruptcy. The General Partner believes that these loans
may result in a loss of principal and interest. However, the General Partner
believes that the $3,500,000 allowance for losses on loans which is maintained
in the financial statements of the Partnership as of December 31, 1998 is
sufficient to cover any potential losses of principal. With the exception of the
Sonora property on which the Partnership recorded a loss of $712,000 in 1997,
the Partnership has not suffered material losses on defaults or foreclosures.
Of the $5,236,000 that was delinquent as of December 31, 1997,
$3,098,000 remained delinquent as of December 31, 1998, $1,172,000 was paid off,
$331,000 became current, $455,000 became real estate acquired through
foreclosure of the Partnership and $180,000 became real estate owned by an
affiliate of the General Partner.
Although not required to do so, the General Partner has at times in the
past purchased certain loans from the Partnership at the time of foreclosure for
the unpaid principal amount in order to prevent the Partnership from suffering a
loss upon foreclosure. This generally occurred where there was more than one
investor in the loan for which the property provided security and because the
General Partner wanted to avoid administrative problems associated with multiple
ownership of real property. For the most part, the General Partner will no
longer purchase defaulted loans from the Partnership and will act to cause the
Partnership to foreclose and obtain title to the real property securing the loan
when necessary to enforce the Partnership's rights to the security. Losses from
delinquencies may increase as a result.
Despite this general policy change, where payments on delinquent loans
are not made currently by the borrowers, the 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 $806,000 as of December 31, 1998. The amount of purchases made during
the years ended December 31, 1998 and 1997 was $110,000 and $87,000,
respectively. 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 General Partner or as loans made by the General Partner.
The Partnership has no obligation to repay such amounts to the General Partner.
Following is a table representing the Partnership's delinquency
experience (over 90 days) as of December 31, 1995, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1995 1996 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Delinquent Loans....................... $ 12,037,000 $ 11,348,000 $ 5,236,000 $ 8,710,000
Nonperforming Delinquent Loans......... $ 8,309,000 $ 10,012,000 $ 3,751,000 $ 7,904,000
Total Mortgage Investments............. $ 151,351,000 $ 154,149,000 $ 174,715,000 $ 182,721,465
Percent of Delinquent Loans to Total Loans 7.95% 7.36% 3.00% 4.77%
Percent of Nonperforming Delinquent Loans
to Total Loans....................... 5.49% 6.50% 2.15% 4.33%
</TABLE>
The following delinquent loans formerly held by the Partnership have
been acquired and foreclosed upon by the General Partner from January 1, 1994
through December 31, 1998:
Delinquent Year
Principal Interest Foreclosed
$ 58,000 $ 4,417 1994
1,184,223 252,810 1995
2,320,000 86,981 1996
613,400 50,625 1997
-- -- 1998
Should the General Partner realize any further gain or loss on the
disposition or operation of a property acquired by the General Partner through
foreclosure of a Partnership loan, the General Partner will retain such gain or
absorb such loss. The Partnership will not have any claim to any gain nor will
it be liable for any loss on such activities.
If the delinquency rate increases on loans held by the Partnership, the
interest income of the Partnership will be reduced by a proportionate amount.
For example, if an additional 10% of the Partnership loans become delinquent,
the mortgage interest income of the Partnership would be reduced by
approximately 10%. If a mortgage loan held by the Partnership is foreclosed on,
the Partnership will acquire ownership of real property and the inherent
benefits and detriments of such.
Compensation to the General Partner
The General Partner receives various forms of compensation and
reimbursement of expenses from the Partnership and compensation from borrowers
under mortgage loans held by the Partnership.
Compensation and Reimbursement from the Partnership
Management Fees
The Partnership pays the General Partner a management fee monthly that
cannot exceed 2 3/4% annually of the average unpaid balance of the Partnership's
mortgage loans at the end of each of the 12 months in the calendar year. Until
the Partnership Agreement was amended in December 1998 with the approval of a
majority-in-interest of the limited partners, the General Partner's management
fee was limited to 1 3/4% in any calendar year in which it did not purchase any
delinquent interest receivables or underlying delinquent loans from the
Partnership. Since this fee is paid monthly, it could exceed 2 3/4% in one or
more months, but the total fee in any one year is limited to a maximum of 2
3/4%, and any amount paid above this must be repaid by the General Partner to
the Partnership. The General Partner is entitled to receive a management fee on
all loans, including those that are delinquent. The General Partner believes
this is justified by the added effort associated with such loans. The management
fees may vary from month to month and are at the discretion of the General
Partner.
Servicing Fees
The General Partner has serviced all of the mortgage loans held by the
Partnership and expects to continue this policy. The Partnership Agreement
permits the General Partner to receive from the Partnership a monthly servicing
fee of 1/4 of 1% per annum of the unpaid balance of mortgage loans held by the
Partnership.
Promotional Interest
The General Partner receives a promotional interest of 1/2 of 1% of
the aggregate capital accounts of the limited partners, which is additional
compensation to the General Partner. In addition, the General Partner could
receive additional distributions of Partnership income from its promotional
interest. For example, if the Partnership generates an annual yield on capital
of the limited partners of 10%, the General Partner would receive additional
distributions on its promotional interest of approximately $150,000 per year if
$300,000,000 of Units were outstanding. If the Partnership were liquidated, the
General Partner could receive up to $1,500,000 in capital distributions without
having made equivalent cash contributions as a result of its promotional
interest. These capital distributions, however, will be made only after the
limited partners have received 100% of their capital contributions.
Reimbursement of Other Expenses
The General Partner is reimbursed by the Partnership for the actual
cost of goods and materials used for or by the Partnership and obtained from
unaffiliated entities and the actual cost of services of non-management and
non-supervisory personnel related to the administration of the Partnership
(subject to certain limitations contained in the Partnership Agreement).
Compensation from Borrowers
In addition to compensation from the Partnership, the General Partner
also receives compensation from borrowers under the mortgage loans placed by the
General Partner with the Partnership.
Investment Evaluation Fees
Investment evaluation fees, also called mortgage placement fees or
points, are paid to the General Partner from the borrowers under loans held by
the Partnership. These fees are compensation for the evaluation, origination,
extension and refinancing of loans for the borrowers. The amount of these fees
is determined by competitive conditions and may have a direct effect on the
interest rate borrowers are willing to pay the Partnership.
Late Payment Charges
All late payment charges paid by borrowers of delinquent mortgage
loans, including additional interest and late payment fees, are retained by the
General Partner.
Table of Compensation and Reimbursed Expenses
The following table summarizes the compensation and reimbursed expenses
paid to the General Partner or its affiliates for the years ended December 31,
1998 and 1997, showing actual amounts and the maximum allowable amounts for
management and servicing fees. No other compensation was paid to the General
Partner during these periods. The fees were established by the General Partner
and were not determined by arms'-length negotiation.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
Form of Compensation Actual Maximum Actual Maximum
Allowable Allowable
<S> <C> <C> <C> <C>
Management Fees*..................... $ 3,250,000 $ 4,784,000 $ 3,879,000 $ 4,614,000
Promotional Interest................. 50,000 50,000 71,000 71,000
------------- ------------- ------------- -------------
Subtotal............................. $ 3,300,000 $ 4,834,000 $ 3,950,000 $ 4,685,000
----------- ----------- ----------- -----------
Reimbursement of Other Expenses...... $ 151,000 $ 151,000 $ 57,000 $ 57,000
------------ ------------ ------------- -------------
Total $ 3,451,000 $ 4,985,000 $ 4,007,000 $ 4,742,000
=========== =========== =========== ===========
Investment Evaluation Fees........... $ 1,724,000 $ 1,724,000 $ 2,994,000 $ 2,994,000
Servicing Fees....................... 472,000 472,000 421,000 421,000
Late Payment Charges................. 382,000 382,000 409,000 409,000
------------- ------------- ------------- -------------
Total $ 2,578,000 $ 2,578,000 $ 3,824,000 $ 3,824,000
=========== =========== =========== ===========
</TABLE>
- -------
* The management fees paid to the General Partner are determined by the General
Partner within the limits set by the Partnership Agreement. An increase or
decrease in the management fees paid directly impacts the yield paid to the
partners.
Aggregate actual compensation paid by the Partnership and by borrowers
to the General Partner during the years ended December 31, 1998 and 1997,
exclusive of expense reimbursement, was $5,878,000 and $7,774,000, respectively,
or 2.9% and 4.1%, respectively, of partners' capital. If the maximum amounts had
been paid to the General Partner during these periods, the compensation,
excluding reimbursements, would have been $7,412,000 and $8,509,000,
respectively, or 3.7% and 4.5%, respectively, of partners' capital, which would
have reduced net income allocated to limited partners by approximately 9.1% and
4.8%, respectively.
The General Partner believes that the maximum allowable compensation
payable to the General Partner is commensurate with the services provided.
However, in order to maintain a competitive yield for the Partnership, the
General Partner in the past has chosen not to take the maximum allowable
compensation. If it chooses to take the maximum allowable, the amount of net
income available for distribution to limited partners would be reduced during
each such year.
Principal Investment Objectives
The Partnership invests primarily in mortgage loans on commercial,
industrial and residential income-producing real property and land. The General
Partner negotiates the terms of and makes or purchases all loans, which are then
acquired by the Partnership, on a loan-by-loan basis.
The Partnership's two principal investment objectives are to preserve
the capital of the Partnership and provide monthly cash distributions to the
limited partners. It is not an objective of the Partnership to provide
tax-sheltered income. Under the Partnership Agreement, the General Partner would
be permitted to modify these investment objectives without the vote of limited
partners but has no authority to do anything that would make it impossible to
carry on the ordinary business as a mortgage investment limited partnership.
The General Partner locates and identifies virtually all mortgages the
Partnership invests in and makes all investment decisions on behalf of the
Partnership in its sole discretion. The limited partners are not entitled to act
on any proposed investment. In evaluating prospective investments, the General
Partner considers such factors as the following:
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;
the property's 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 General Partner believes are
relevant.
Substantially all investment loans of the Partnership are originated by
the General Partner, which is licensed by the State of California as a real
estate broker and California Finance Lender. During the course of its business,
the General Partner is continuously evaluating prospective investments. The
General Partner originates loans from mortgage brokers, previous borrowers, and
by personal solicitations of new borrowers. The Partnership may purchase
existing loans that were originated by other lenders. Such a loan might be
obtained by the General Partner from a third party and sold to the Partnership
at an amount equal to or less than its face value. The General Partner evaluates
all potential mortgage loan investments to determine if the security for the
loan and the loan-to-value ratio meets the standards established for the
Partnership, and if the loan can meet the Partnership's investment criteria and
objectives. An appraisal will be ordered on the property securing the loan, and
an officer, director, agent or employee of the General Partner will inspect the
property during the loan approval process.
The Partnership requires that each borrower obtain a title insurance
policy as to the priority of the mortgage and the condition of title. The
Partnership obtains an independent, on-site appraisal from a qualified appraiser
for each property in which it invests. Appraisals will ordinarily take into
account factors such as property location, age, condition, estimated building
cost, community and site data, valuation of land, valuation by cost, valuation
by income, economic market analysis, and correlation of the foregoing valuation
methods. The General Partner additionally relies on its own independent analysis
in determining whether or not to arrange a particular mortgage loan for the
Partnership.
Types of Mortgage Loans
The Partnership invests in first, second, and third mortgage loans,
wraparound mortgage loans, construction mortgage loans on real property, and
loans on leasehold interest mortgages. The Partnership does not ordinarily make
or invest in mortgage loans with a maturity of more than 15 years, and most
loans have terms of 1-7 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 and a payment of
principal in full at the end of the loan term. The General Partner does 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 1-7 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 75%
of the appraised value of commercial property.
Second and Wraparound Mortgage Loans
Second and wraparound mortgage loans are secured by second or
wraparound deeds of trust 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 75% of the appraised value of the
mortgaged property. A wraparound loan is one or more junior mortgage loans
having a principal amount 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 secured by third deeds of trust 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 75% of the appraised value of the mortgaged property.
Construction Loans
Construction loans are loans made for both original development and
renovation of property. Construction loans invested in by the Partnership are
generally secured by first deeds of trust on real property for terms of six
months to two years. In addition, if the mortgaged property is being developed,
the amount of such loans generally will not exceed 75% of the post-development
appraised value.
The Partnership will not usually disburse funds on a construction loan
until work in the previous phase of the project has been completed, and an
independent inspector has verified certain aspects of the construction and its
costs. In addition, the Partnership requires the submission of signed labor and
material lien releases by the borrower in connection with each completed phase
of the project prior to making any periodic disbursements of loan proceeds.
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 75% of the value of the leasehold interest and require
personal guarantees of the borrowers. The leasehold interest loans are either
amortized over a period that is shorter than the lease term or have a maturity
date prior to the date the lease terminates. These loans all permit the General
Partner to cure any default under the lease.
Variable Rate Loans
Approximately 37% ($66,852,000) of the Partnership's loans as of
December 31, 1998 bear interest at a variable rate. Variable rate loans
originated by the General Partner may 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).
The General Partner may negotiate spreads over these indices of from
2.5% to 5.5%, depending upon market conditions at the time the loan is made.
The following is a summary of the various indices described above as of
December 31, 1998 and 1997:
1998 1997
---- ----
One-year Treasury Constant Maturity Index 4.59% 5.51%
Five-year Treasury Constant Maturity Index 4.59% 5.71%
Prime Rate Index 7.75% 8.50%
Monthly Weighted Average Cost of Funds for
Eleventh District Savings Institutions 4.69% 4.96%
It is possible that the interest rate index used in a variable rate
loan will rise (or fall) more slowly than the interest rate of other loan
investments available to the Partnership. The General Partner attempts to
minimize such interest rate 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 General Partner contain provisions under
which the interest rate cannot fall below the starting rate.
Interest Rate Caps
All variable rate loans acquired by the Partnership have interest rate
caps. The interest rate cap is generally a ceiling that is 2-4% above the
starting rate with a floor rate 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 Partner. The Partnership does
not typically make or invest in other assumable loans. To minimize risk to the
Partnership, 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 prepayment penalties.
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, 1998, $66,852,000 (approximately 37%) of
the mortgage loans held in the Partnership's portfolio were variable rate loans
which by their terms generally 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 minimizes the 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 mortgage
loan principal 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,
these 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. During 1998, the
Partnership invested in a loan in the amount of $2,000,000 that is secured by an
assignment of a 49% interest in a limited liability company (LLC) and a direct
2% ownership in the LLC. The LLC owns a retail shopping center located in
Sedona, Arizona.
Debt Coverage Standard for Mortgage Loans
Loans on commercial property require the net annual estimated cash flow
to equal or exceed the annual payments required on the mortgage loan.
Loan Limit Amount
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 made to the General
Partner, affiliates of the General Partner, or any limited partnership or entity
affiliated with or organized by the General Partner. However, the Partnership
may acquire investment in a mortgage loan payable by the General Partner when
the General Partner has assumed by foreclosure the obligations of the borrower
under that loan. As of December 31, 1998, the Partnership had one secured loan
under which an affiliate of the General Partner was obligated in the total
amount of $180,000.
Purchase of Loans from Affiliates
Although it has never done so, the Partnership may purchase loans from
the General Partner or its affiliates that were originated by the General
Partner and first held for its own portfolio, as long as the loan is not in
default and otherwise satisfies all of the Partnership's lending criteria. In
addition, if the loan did not originate within the 90 days prior to its purchase
by the Partnership from the General Partner, the General Partner must retain a
minimum of a 10% interest in the loan. This requirement also applies to any loan
originated by an affiliate of the General Partner.
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 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 done so, the
Partnership may incur indebtedness in order to operate or develop a property
that the Partnership acquires under a defaulted loan.
Repayment of Mortgages On Sales of Properties
The Partnership invests in mortgage loans and does not acquire real
estate or engage in real estate operations or development (other than when the
Partnership forecloses on a loan or takes over management of such foreclosed
property). The Partnership also 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 a mortgage loan upon
the sale of the mortgaged property rather than allow the buyer to assume the
existing loan. This may be done if the General Partner determines that 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, the
credit-worthiness of the buyer and the objectives of the Partnership. The net
proceeds to the Partnership from any sale or repayment are invested in new
mortgage loans, held as cash or distributed to the partners at such times and in
such intervals as the General Partner in its sole discretion determines.
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 that are imposed on real estate
investment trusts. The Partnership conducts its business so that it is not an
"investment company" within the meaning of 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:
issue securities senior to the Units or issue any Units or other
securities for other than cash;
invest in the securities of other issuers for the purpose of
exercising control, except in connection with the exercise of its
rights as a secured lender;
underwrite securities of other issuers; or
offer securities in exchange for property.
Competition and General Economic Conditions
The Partnership's major competitors in providing mortgage loans 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 General Partner generates all of its
loans. The General Partner has been in the business of making or investing in
mortgage loans in Northern California since 1951 and has developed a quality
reputation and recognition within the field.
For the past few years, the major institutional lenders have not been
as active in the commercial mortgage market as in past years. 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 have generally decreased
over the past several months and may decrease further in the near future,
reducing the net income of the Partnership and the yield earned by the limited
partners.
<PAGE>
Item 2. Properties
Between 1993 and 1998, the Partnership has foreclosed on certain
delinquent mortgage loans and has acquired title to the properties securing the
loans. As of December 31, 1998, the Partnership held title to eleven properties
that were acquired through foreclosure. All of the properties are either
currently being marketed for sale or will be marketed for sale in the
foreseeable future. None of the properties individually has a book value greater
than 2% of total Partnership assets as of December 31, 1998.
The Partnership's title to all eleven properties is held as fee
simple.
There are no mortgages or encumbrances on any of the
Partnership's real estate properties.
Of the eleven properties held, five of the properties are either
partially or fully leased to various tenants. Only minor
renovations and repairs to the properties are currently being
made or planned.
Management of the General Partner believes that all properties
owned by the Partnership are adequately covered by customary
casualty insurance.
The Partnership maintains an allowance for losses on real estate
held for sale in its financial statements of $1,184,000 as of
December 31, 1998.
Real estate acquired through foreclosure is typically held for a number
of years before ultimate disposition. During the time that the real estate is
held, the Partnership usually earns less income on these properties than could
be earned on mortgage loans.
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 Security Holders
In October 1998, a consent solicitation was submitted to all limited
partners for vote. This consent solicitation related to adoption of a Second
Amended and Restated Limited Partnership Agreement (the "Second Amended
Agreement"). The amendments require the consent of at least a
Majority-In-Interest of the Units held by Limited Partners, excluding Units held
by any General Partner (the "Requisite Consents"). The Requisite Consents were
received and the Second Amended Agreement was executed on December 14, 1998.
The Second Amended Agreement, among other things, increased the
authorized outstanding amount of Units from 250,000,000 to 500,000,000, changed
the management fee payable to the General Partner by deleting the requirement
that certain advances be made in order for the General Partner to receive the
maximum fee, acknowledged the voluntary withdrawal of all general partners other
than Owens Financial Group, Inc., increased the maximum quarterly redemption
available to Limited Partners to $100,000 and made certain other changes
including documentation of several past practices of the General Partners which
were permitted under the existing agreement.
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, 1998, approximately 2,668 Limited Partners
held 199,569,753 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
of net income to the Limited Partners of approximately $15,420,000 and
$16,979,000 (prior to reinvested distributions) during 1997 and 1998,
respectively. It is the intention of the Corporate General Partner to
continue to distribute all net 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
----------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loans secured by trust
deeds................. $ 182,721,465 $ 174,714,607 $ 154,148,933 $ 151,350,591 $ 145,050,213
Less: Allowance for
loan losses........... (3,500,000) (3,500,000) (3,500,000) (3,250,000) (2,750,000)
Real estate held for
sale.................. 11,155,202 16,047,141 13,221,093 9,612,359 5,028,325
Less: Allowance for
losses on real estate. (1,184,000) (1,896,000) (600,000) (600,000) (400,000)
Cash, cash equivalents
and other assets...... 13,218,253 5,959,306 14,105,992 8,288,818 5,697,459
---------- --------- ---------- --------- ---------
Total assets............ $ 202,410,920 $ 191,325,054 $ 177,376,018 $ 165,401,768 $ 152,625,997
============= ============= ============= ============= =============
Liabilities............. $ 1,070,118 $ 593,919 $ 535,914 $ 657,325 $ 779,269
Partners' capital
General partners...... 1,967,069 1,864,033 1,731,874 1,623,526 1,488,360
Limited partners......
199,373,733 188,867,102 175,108,230 163,120,917 150,358,368
----------- ----------- ----------- ----------- -----------
Total partners'
capital............... 201,340,802 190,731,135 176,840,104 164,744,443 151,846,728
----------- ----------- ----------- ----------- -----------
Total liabilities $ 202,410,920 $ 191,325,054 $ 177,376,018 $ 165,401,768 $ 152,625,997
============= ============= ============= ============= =============
/
Partners' capital.
Revenues................ $ 21,041,215 $ 21,325,850 $ 16,824,479 $ 16,415,301 $ 15,503,534
Operating expenses 72,984
Promotional interest.. 49,545 70,747 57,395 69,255 1,475,155
Management fee........ 3,249,824 3,879,454 866,985 1,431,616 338,000
Servicing fee......... 472,390 420,742 384,004 371,000 270,038
Net real estate
operations............ 53,656 70,216 344,298 224,108 --
Provision for losses
on loans............... -- -- 250,000 500,000 --
Provision for losses on
real estate held
for sale.............. -- 1,296,000 -- 200,000 400,000
Other................. 237,108 168,444 163,385 127,947 237,933
------------ ------------ ------------ ------------ ------------
Net Income $ 16,978,692 $ 15,420,247 $ 14,758,412 $ 13,491,375 $ 12,709,424
============ ============ ============ ============ ============
Net income allocated to
general partners...... $ 168,106 $ 154,202 $ 146,960 $ 135,584 $ 127,726
============ ============ ============ ============ ============
Net income allocated to
limited partners...... $ 16,810,586 $ 15,266,045 $ 14,611,452 $ 13,355,791 $ 12,581,698
============ ============ ============ ============ ============
Net income allocated to
limited partners per
limited partnership
unit.................. $ .09 $ .08 $ .08 $ .09 $ .08
=== === === === ===
</TABLE>
The information in this table should be read in conjunction with the
accompanying audited financial statements and notes to financial statements.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
1998 Compared to 1997
The net income increase of $1,558,000 (10.1%) for 1998 as compared to 1997, was
due to:
an increase in interest income of $858,000 from $18,241,000 to
$19,100,000;
an increase in interest income from investments of $219,000;
a decrease in management fees to the general partner of $630,000;
and
a decrease in the provision for losses on real estate acquired
through foreclosure from $1,296,000 to $0.
The net income increase in 1998 as compared to 1997, was offset by:
a decrease in the gain on sale of real estate of $1,362,000.
The increase in interest income on loans secured by trust deeds of 4.7%
was primarily a result of the growth in the loan portfolio of approximately 4.6%
even though its weighted average yield decreased from 11.07% as of December 31,
1997 to 10.79% as of December 31, 1998. The increase was also due to one large
loan which earned an approximate annual yield of 21% during 1998 and was paid
off in October 1998.
Interest income from investments increased as a result of increased
cash held in interest-bearing accounts pending investment in loans during 1998
as compared to 1997.
The management fees to the general partner were paid pursuant to the
Partnership Agreement.
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). This decrease was a result of
increased construction costs, smaller profit margins, and one fewer home being
sold during 1998 compared to 1997.
Results of Operations
1997 Compared to 1996
The net income increase of $662,000 (4.5%) for 1997 as compared to 1996, was due
to:
an increase in interest income of $1,816,000 from $16,425,000 to
$18,241,000;
a decrease in net real estate operations losses from $344,000 to
$70,000;
an increase in gain on sale of homes by the development limited
partnership from $171,000 to $2,355,000; and
a decrease in the provision for loan losses from $250,000 to $0.
The net income increase in 1997 as compared to 1996, was offset by:
an increase in management fees paid to general partner from
$867,000 to $3,879,000; and
an increase in the provision for losses on real estate acquired
through foreclosure from $0 to $1,296,000.
The increase in interest income on loans secured by trust deeds of
11.1% was primarily a result of the growth in the loan portfolio of
approximately 13.3% even though its weighted average yield decreased from 11.09%
as of December 31, 1996 to 11.07% as of December 31, 1997. The weighted average
yield was 11.14% as of December 31, 1995.
The increase in management fees, which represented .56% and 2.34% of
the average unpaid balance of mortgage loans for the years ended December 31,
1996, and 1997, respectively, was in the sole discretion of the General Partner
pursuant to the Partnership Agreement. An increase in revenues in 1997 allowed
the General Partner to increase the management fees in that year. This increase
in revenues was due primarily to the increase in gains on the sale of homes
owned by the development limited partnership.
Financial Condition
December 31, 1998, 1997 and 1996
Loan Portfolio
At the end of 1996 and 1997 the number of Partnership mortgage
investments was 238 and 215, respectively, and decreased to 188 by the end of
1998. The average loan balance was $640,000 and $813,000 at the end of 1996 and
1997 respectively, and increased to $972,000 as of December 31, 1998. These
average loan balance increases reflect the Partnership's increased ability to
invest in larger mortgage loans meeting the Partnership's objectives.
Prior to May 1, 1993 the General Partner followed a policy of
purchasing all interest receivables of delinquent loans. However, on loans
originated by the General Partner on or after May 1, 1993, and effective
November 1, 1994, for certain other loans originated prior to May 1, 1993, the
General Partner adopted the policy not to purchase delinquent interest or
principal. As of December 31, 1998 and 1997, there were approximately $7,904,000
and $3,751,000, respectively, in loans held by the Partnership on which payments
were more than 90 days delinquent and on which such delinquent interest was not
being purchased by the General Partner. The General Partner purchased
approximately $110,000 and $87,000 in delinquent interest receivables of the
Partnership during the years ended December 31, 1998 and 1997, respectively.
Approximately $8,710,000 (4.8%) and $5,236,000 (3.0%) of the loans
invested in by the Partnership were more than 90 days delinquent in payment as
of December 31, 1998 and 1997, respectively. Of these amounts, approximately
$3,657,000 (2.0%) and $3,279,000 (1.9%) were in the process of foreclosure.
Loans more than 90 days delinquent increased by $3,474,000 (66%) from December
31, 1997 to December 31, 1998, primarily due to one large loan which became
delinquent during 1998. Management believes that the loan, with an outstanding
principal balance of approximately $4,279,000, may result in a loss of principal
to the Partnership, and, therefore, has established a loan loss reserve for this
loan in the amount of $550,000. Although the total loan loss reserve of the
Partnership increased by $550,000 for this specific loan, there were other
adjustments in the general and specific reserves which left the total reserve
unchanged as of December 31, 1998.
A loan loss reserve in the amount of $3,500,000 was recorded on the
books of the Partnership as of December 31, 1998, 1997 and 1996. The General
Partner believes that the loan loss reserve is adequate.
As of December 31, 1998, 1997 and 1996, approximately 48%, 67% and 69%
of the Partnership's mortgage loans were 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 has gradually
improved, more loans secured by real estate in Southern California 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. For example, one loan in the amount of $10,600,000
was made during the year ended December 31, 1998 secured by real estate in the
states of Washington and Montana.
As of December 31, 1998, 1997 and 1996, approximately 89.1%, 94.6% and
94.7%, respectively, of the loan portfolio was invested in loans on
income-producing properties, 9.6%, 4.2% and 2.7%, respectively, in land loans
and 1.3%, 1.2% and 2.6%, respectively, in residential loans. Also, as of these
dates, approximately 89.0%, 92.3% and 90.5%, respectively, of the loan portfolio
was invested in first deeds of trust, 10.5%, 7.3% and 9.1%, respectively, in
second deeds of trust and 0.3%, 0.4% and 0.4%, respectively, in third and fourth
deeds of trust.
The Partnership's investment in loans secured by unimproved land rose
by 137% since December 31, 1997. Improvement in real estate market conditions
has made development and, thus, loans on unimproved land more attractive. Of the
$10,168,000 increase in loans secured by unimproved land, approximately
$6,900,000 are construction loans with maturities of two years or less. 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
December 31, 1998.
The following delinquent loans formerly held by the Partnership have
been acquired and foreclosed upon by the General Partner from January 1, 1994
through December 31, 1998:
Delinquent Year
Principal Interest Foreclosed
--------- -------- ----------
$ 58,000 $ 4,417 1994
1,184,223 252,810 1995
2,320,000 86,981 1996
613,400 50,625 1997
-- -- 1998
The General Partner has purchased from the Partnership all delinquent
interest receivable on those loans foreclosed on in 1994 and 1995, but did not
purchase the delinquent interest on the loans foreclosed on in 1996 and 1997. Of
these foreclosed loans, the Partnership held three mortgages due from the
General Partner totaling $765,332. In addition, the Partnership held a mortgage
in the amount of $1,150,000 secured by a property sold by the Partnership to the
General Partner during the year ended December 31, 1998. All loans due to the
Partnership by the General Partner were paid off in full in November 1998.
Real Estate Properties Held for Sale
The Partnership currently holds title to eleven properties that were
foreclosed on from January 1, 1993 through December 31, 1998 in the amount of
$9,165,641, 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 on which the Partnership has a trust deed investment on
property acquired by the Partnership through foreclosure. During the year ended
December 31, 1998, the Partnership acquired through foreclosure a 22% interest
in a multi-unit residential building in Oakland, California; a commercial
building located in Sacramento, California; and a commercial building located in
Gresham, Oregon, on which it had trust deed investments of $53,185, $30,000 and
$425,000, respectively. In addition, in February 1998, the Partnership sold a
manufactured-home subdivision development property located in Sonora,
California, which the Partnership had acquired through foreclosure, to the
General Partner for $1,150,000, resulting in a loss to the Partnership of
approximately $2,000. An allowance for loss on this property in the amount of
$712,000 had been recorded in 1997; therefore, the loss for the year ended
December 31, 1998 was an additional $2,000.
Six of the Partnership's eleven properties do not currently generate
revenue. Although expenses from rental properties have increased from
approximately $444,000 to $699,000 (57%) for the year ended December 31, 1997
and 1998, respectively, revenues associated with these properties have also
increased from $374,000 to $645,000 (72%), thus generating a small net loss from
real estate held for sale of $54,000 during the year ended December 31, 1998.
The increase in expenses is primarily due to the increased number of real estate
properties owned. The increase in rental revenues is due to the increased number
of properties held which are generating income as of December 31, 1998 as
compared to 1997.
As of December 31, 1997 and 1996, the Partnership owned nine and ten
properties, respectively. Prior to foreclosure, these properties secured
Partnership loans aggregating $8,354,000 and $6,877,000 in 1997 and 1996,
respectively. During the years ended December 31, 1997 and 1996, the Partnership
acquired certain properties through foreclosure on which it had trust deed
investments totaling $3,279,000 and $1,913,000, respectively.
Investment in Development Limited Partnership
In 1993, the Partnership foreclosed on a $600,000 loan and obtained 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 for 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, WV-OMIF Partners, with an unrelated builder/developer, Wood Valley
Development, Inc. (Woodvalley), for the purpose of constructing single-family
residences on the lots. In 1996,the Partnership contributed the lots to WV-OMIF
Partners for a limited partner interest. The $671,000 in costs incurred in 1995
became an obligation of WV-OMIF Partners in 1996 when the lots were contributed.
WV-OMIF Partners built single-family residences of between
approximately 2,200 and 2,800 square feet on the lots. The Partnership advanced
funds to WV-OMIF Partners to construct the homes. The Partnership is entitled to
receive interest at prime plus 2% on these advances.
During the years ended December 31, 1998 and 1997, fourteen and fifteen
houses, respectively, were sold resulting in a gain on sale of real estate to
the Partnership of $1,246,884 and $2,355,075, respectively. During the year
ended December 31, 1996, one house was sold for a gain of $170,724. The
Partnership's net investment in WV-OMIF Partners totaled $0 and $3,812,122 as of
December 31, 1998, and 1997, respectively.
As of December 31, 1998, all 30 houses had been completed and sold.
The General Partner and Woodvalley exercised their option to purchase
34 similar lots that are interspersed among the 30 lots developed by WV-OMIF
Partners. WV-OMIF Partners incurred certain infrastructure costs that benefit
all 64 lots, including the 34 lots being developed by the General Partner and
Woodvalley. As of December 31, 1998, the General Partner and Woodvalley had
reimbursed all shared development costs in the total amount of $750,675 to
WV-OMIF Partners.
As WV-OMIF Partners sold the remaining house during 1998, there will be
no additional income from this partnership or from developments of this type in
the foreseeable future.
WV-OMIF Partners has provided a one-year limited warranty to homeowners
to cover minor fix-ups on the houses. The future costs to cover these warranties
are expected to be insignificant. WV-OMIF Partners has also purchased insurance
to cover, among other incidents, potential construction defects.
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 years ended December 31, 1998 and 1997, the Partnership
advanced an additional $166,198 and $67,510, respectively, to the corporate
joint venture for development. The total investment in the corporate joint
venture was $805,561 and $639,363 as of December 31, 1998 and 1997,
respectively.
The Company received all development approvals in the third quarter of
1998 and expects to begin construction in March of 1999.
Interest Receivable, Accounts Payable and Accrued Liabilities
Interest receivable decreased from approximately $1,774,000 as of
December 31, 1997 to $1,381,000 as of December 31, 1998 ($393,000 or 22.2%), due
primarily to interest income accrued on one large loan as of December 31, 1997
which was paid in October 1998 at the maturity date of the loan.
Accounts payable and accrued liabilities increased from approximately
$50,000 as of December 31, 1997 to $547,000 as of December 31, 1998 ($497,000 or
994%) due primarily to accrued management fees for the months of November and
December 1998.
Cash and Cash Equivalents, Certificates of Deposit and Commercial Paper
Cash and cash equivalents, certificates of deposit and commercial paper
have increased from approximately $4,073,000 as of December 31, 1997 to
$11,779,000 as of December 31, 1998, respectively ($7,706,000 or 189%). This
increase is primarily attributable to the rollover of limited partner income
during the year ended December 31, 1998 without the investment in new loans of
the same amount.
Cash and cash equivalents and certificates of deposit of the
Partnership decreased from approximately $12,237,000 as of December 31, 1996 to
approximately $4,073,000 as of December 31, 1997. This decrease was due to
mortgage loan payoffs received near 1996 year end which were not reinvested in
new mortgage loans until the beginning of 1997. In contrast, the Partnership was
able to invest substantially all funds in excess of contingency reserves in
mortgage loans as of December 31, 1997. These fluctuations are normal for the
Partnership.
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 December 31, 1998, management believes that the allowance
for loan losses of $3,500,000 is adequate. As of then, loans secured by trust
deeds include $8,710,000 in loans delinquent over 90 days, of which $3,657,000
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 the Board of Directors.
Liquidity and Capital Resources
Purchases of Units and loan payoffs provide the 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, 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 has been little variation in the percentage of capital
withdrawals to total capital invested by the limited partners in recent years,
excluding regular distributions of net income to limited partners, and no
substantial change is expected. 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. 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, on or after
the date of the most recent Prospectus dated 2/16/99, 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
Although the current economic climate in Northern California and the
Western United States is generally strong, many areas outside of the San
Francisco Bay Area and throughout the Western United States 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 General
Partner of the manufactured-home development in Sonora, California, acquired
through foreclosure, the Partnership has not sustained any material losses to
date. This has been 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 at the present of these potential losses.
Despite the Partnership's ability to purchase mortgage loans with
relatively strong yields during 1997 and 1998, there is increased competition
from a variety of lenders that has had the effect of reducing mortgage yields
over the past twelve months and could have the effect of reducing mortgage
yields further 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 has
not been completed. The computer programs used to account for mortgage loan
investments, investments in Units and other items are internally-developed IT
systems. These IT systems have been reviewed by independent consultants to
determine whether these programs are able to recognize the year 2000. The
consultants are in the process of modifying all internally-developed IT systems
to make them Year 2000 compliant. Their remediation efforts and testing are
expected to be completed in early 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 is not
expected to have a material effect on the Partnership's results of operations
and financial condition. The General Partner is in the process of sending
letters to these and other Third Parties requesting representations of their
Year 2000 readiness.
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.
Item 8. Financial Statements and Supplementary Data
See pages 26-42 and pages 48-49 of this Form 10-K.
<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, 1998 and 1997, and
the related statements of income, partners' capital and cash flows for each of
the years in the three-year period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
KPMG LLP
Oakland, California
February 5, 1999
<PAGE>
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(A California Limited Partnership)
Balance Sheets
December 31, 1998 and 1997
1998 1997
---- ----
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 8,260,599 $ 3,073,115
Certificates of deposit 434,006 1,000,000
Commercial paper 3,084,044 -
Loans secured by trust deeds 182,721,465 174,714,607
Less: allowance for loan losses (3,500,000) (3,500,000)
-------------- --------------
179,221,465 171,214,607
Interest receivable 1,380,530 1,773,608
Other receivables 59,074 112,583
Real estate held for sale, net of allowance
for losses of $1,184,000 in 1998 and
$1,896,000 in 1997 9,971,202 14,151,141
------------- ------------
$ 202,410,920 $ 191,325,054
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accrued distributions payable $ 522,827 $ 544,385
Due to General Partner 391,098 49,534
Accounts payable and accrued liabilities 156,193 -
------------- -------------------
Total liabilities 1,070,118 593,919
------------ -------------
Partners' Capital:
General partners 1,967,069 1,864,033
Limited partners (units subject to redemption):
Authorized 500,000,000 units in 1998 and 250,000,000 in 1997;
305,172,278 and 280,615,578 units issued and 199,569,753 and
189,063,122 units outstanding in 1998 and 1997, respectively 199,373,733 188,867,102
----------- -----------
Total partners' capital 201,340,802 190,731,135
----------- -----------
$ 202,410,920 $ 191,325,054
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(A California Limited Partnership)
Statements of Income
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
REVENUES:
<S> <C> <C> <C>
Interest income on loans secured
by trust deeds $ 19,099,723 18,241,427 16,424,906
Gain on sale of real estate 1,271,757 2,633,414 170,724
Other income 669,735 451,009 228,849
-------------- ------------ -----------
Total revenues 21,041,215 21,325,850 16,824,479
------------ ------------ ----------
OPERATING EXPENSES:
Management fees to General Partner 3,249,824 3,879,454 866,985
Servicing fees to General Partner 472,390 420,742 384,004
Promotional interest to General Partner 49,545 70,747 57,395
Administrative 73,849 56,687 56,516
Legal and accounting 144,195 102,914 97,175
Real estate operations, net 53,656 70,216 344,298
Other 19,064 8,843 9,694
Provision for loan losses - - 250,000
Provision for losses on real estate
held for sale - 1,296,000 -
------------- ------------ ------------
Total operating expenses 4,062,523 5,905,603 2,066,067
------------- ------------ ------------
Net income $ 16,978,692 15,420,247 14,758,412
============ ============ ============
Net income allocated to general
partner $ 168,106 154,202 146,960
============ ============ ============
Net income allocated to limited
partners $ 16,810,586 15,266,045 14,611,452
============ ============ ============
Net income allocated to limited
partners per weighted average
limited partnership unit $ .09 .08 .08
============= ============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(A California Limited Partnership)
Statements of Partners' Capital
Years ended December 31, 1998, 1997 and 1996
Total
General Limited Partners Partners'
Partners Units Amount Capital
<S> <C> <C> <C> <C>
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
Net income 168,106 16,810,586 16,810,586 16,978,692
Sale of partnership units 99,084 14,210,969 14,210,969 14,310,053
Partners' withdrawals -- (14,377,618) (14,377,618) (14,377,618)
Partners' distributions (164,154) ( 6,137,306) ( 6,137,306) ( 6,301,460)
--------- ------------- ------------- -------------
Balances, December 31, 1998 $ 1,967,069 199,569,753 $ 199,373,733 201,340,802
========== =========== ============= ===========
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
OWENS MORTGAGE INVESTMENT FUND
(A California Limited Partnership)
Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 16,978,692 15,420,247 14,758,412
Adjustments to reconcile net income
to net cash provided by operating activities:
Gain on sale of real estate by limited partnership (1,246,884) (2,355,075) (170,724)
Gain on sale of real estate properties (24,873) (278,339) -
Provision for loan losses - - 250,000
Provision for losses on real estate properties
held for sale - 1,296,000 -
Changes in operating assets and liabilities:
Interest and other receivables 446,587 (505,624) (21,339)
Accrued distributions payable (21,558) 32,929 22,299
Accounts payable and accrued liabilities 156,193 - 8,290
Due to General Partner 341,564 25,076 (152,000)
------------- -------------- -------------
Net cash provided by operating activities 16,629,721 13,635,214 14,694,938
----------- ----------- ----------
Cash flows from investing activities:
Purchases of loans secured by trust deeds (83,714,828) (78,449,432) (51,365,781)
Principal collected 1,793,240 2,484,071 2,773,553
Loan payoffs 74,556,044 53,449,102 44,978,479
Investment in real estate properties (350,225) (2,061,944) (96,540)
Net proceeds from disposition of real estate 267,799 955,418 441,563
Investment in limited partnership (1,409,099) (4,152,918) (2,895,261)
Distributions received from limited partnership 6,468,105 7,573,669 462,103
Investment in corporate joint venture (166,198) (67,510) -
Investment in commercial paper (3,084,044) - -
Maturities of (investments in) certificates
of deposit, net 565,994 (150,000) -
------------- ------------- -----------------
Net cash used in investing activities (5,073,212) (20,419,544) (5,701,884)
------------- ------------- -----------
Cash flows from financing activities:
Proceeds from sale of partnership units 14,310,053 17,206,030 16,949,187
Partners' cash distributions (6,301,460) (6,219,910) (5,946,066)
Partners' capital withdrawals (14,377,618) (12,515,336) (13,665,872)
------------ ----------- ------------
Net cash used in financing activities (6,369,025) (1,529,216) (2,662,751)
-------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 5,187,484 (8,313,546) 6,330,303
Cash and cash equivalents at beginning of year 3,073,115 11,386,661 5,056,358
------------- ------------ ------------
Cash and cash equivalents at end of year $ 8,260,599 3,073,115 11,386,661
============== ============= ===========
</TABLE>
See notes 3, 4 and 5 for supplemental disclosure of non-cash investing and
financing activities. See accompanying notes to financial statements.
OWENS MORTGAGE INVESTMENT FUND
(A California Limited Partnership)
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(1) Organization
Owens Mortgage Investment Fund, a California Limited Partnership, (the
Partnership) was formed on June 14, 1984 to invest in loans secured by
first, second and third trust deeds, wraparound, participating 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 partner of the Partnership is Owens Financial Group, Inc.
(OFG); 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.
OFG is authorized to offer and sell units in the Partnership up to an
aggregate of 500,000,000 units outstanding at $1.00 per unit,
representing $500,000,000 of limited partnership interests in the
Partnership. Limited partnership units outstanding were 199,569,753,
189,063,122 and 175,303,398 at December 31, 1998, 1997 and 1996,
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. The Partnership does not recognize
interest income on loans once they are determined to be impaired
until the interest is collected in cash. A loan is impaired
when, based on current information and events, it is probable
that the Partnership will be unable to collect all amounts due
according to the contractual terms of the loan agreement and a
specific reserve has been recorded. 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.
(2) Summary of Significant Accounting Policies, Continued
(c) Allowance for Loan Losses
The Partnership has an allowance for loan losses equal to
$3,500,000 as of December 31, 1998 and 1997. 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 in monthly
payments greater than ninety days is $8,710,000 and $5,236,000
as of December 31, 1998 and 1997, 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. OFG was purchasing the interest receivable on
delinquent Partnership loans in the total amount of $806,000 and
$1,485,000 as of December 31, 1998 and 1997, respectively. As of
December 31, 1998 and 1997, loans totaling $7,904,000 and
$3,751,000, respectively, are classified as non-accrual loans.
OFG discontinued its purchases of interest receivable and
delinquent loans for all loans acquired by the Partnership since
May 1, 1993 except in very limited situations.
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
1998 and 1997 but not collected as of December 31, 1998 and
1997, respectively, totaled approximately $270,000 and $219,000,
respectively.
(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, money market accounts and short-term certificates
of deposit with original maturities of three months or less.
(e) Marketable Securities
Marketable securities include certificates of deposit and
commercial paper with various financial institutions with
original maturities of up to one year. The Partnership
classifies its debt securities as held-to-maturity, as the
Partnership has the ability and intent to hold the securities
until maturity. These securities are recorded at amortized cost,
adjusted for the amortization or accretion of premiums or
discounts. A decline in the market value of any held-to-maturity
security below cost that is deemed to be other than temporary
results in a reduction in carrying amount to fair value. The
impairment is charged to earnings and a new cost basis for the
security is established. Premiums and discounts are amortized or
accreted over the life of the related security as an adjustment
to yield using the effective interest method. Interest income is
recognized when earned. There was no significant difference
between the carrying value and the fair value of marketable
securities as of December 31, 1998 and 1997.
(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.
(2) Summary of Significant Accounting Policies, Continued
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 the 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.
In accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-lived Assets and
Long-lived Assets to Be Disposed Of", the Partnership
periodically compares the carrying value of real estate held for
sale to expected future cash flows for the purpose of assessing
the recoverability of the recorded amounts. If the carrying
value exceeds future cash flows, the assets are reduced to fair
value. There were no required reductions to the carrying value
of real estate held for sale made for the year ended December
31, 1998. The Partnership recorded an allowance for losses on
real estate held for sale of $1,296,000 for the year ended
December 31, 1997.
(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.
(3) Loans Secured by Trust Deeds
Loans secured by trust deeds as of December 31, 1998 and 1997 are as
follows:
1998 1997
---- ----
Income-producing properties $ 162,768,798 $ 165,201,582
Single-family residences 2,360,417 2,088,606
Unimproved land 17,592,250 7,424,419
----------- -----------
$ 182,721,465 $ 174,714,607
=========== ===========
First mortgages $ 162,597,467 161,275,350
Second mortgages 19,223,907 12,744,274
Third mortgages 548,967 694,983
Fourth mortgages 351,124 --
----------- -----------
$ 182,721,465 $ 174,714,607
=========== ===========
(3) Loans Secured by Trust Deeds, Continued
Scheduled maturities of loans secured by trust deeds as of December 31,
1998 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 (Past Maturity) $ 17,127,416 6,290,804 23,418,220
1999 43,041,978 6,737,476 49,779,454
2000 40,218,829 20,197,676 60,416,505
2001 6,171,131 2,556,071 8,727,202
2002 3,082,593 11,324,913 14,407,506
2003 305,452 3,462,215 3,767,667
Thereafter (through 2018) 5,922,218 16,282,693 22,204,911
------------- ------------ --------------
$ 115,869,617 66,851,848 182,721,465
============= ============ ==============
</TABLE>
Variable rate loans use as indices the one and five year Treasury
Constant Maturity Index (4.59% and 4.59%, respectively, as of December
31, 1998), the prime rate (7.75% as of December 31, 1998) and the
weighted average cost of funds index for Eleventh District savings
institutions (4.69% as of December 31, 1998). Premiums over these
indices have varied from 250-550 basis points depending upon market
conditions at the time the loan is made.
The scheduled maturities for 1998 include approximately $23,418,000 of
loans which are past maturity as of December 31, 1998, of which
$7,918,000 represents loans for which interest payments are delinquent
over 90 days. During the years ended December 31, 1998 and 1997, the
Partnership refinanced loans totaling $9,941,000 and $2,741,000,
respectively, thereby extending the maturity dates of such loans.
The Partnership's investment in loans delinquent over 90 days as of
December 31, 1998 totals approximately $8,710,000, of which $7,373,000
has a specific related allowance for credit losses totaling
approximately $1,965,000. There is a specific and non-specific
allowance for credit losses of $1,535,000 for the remaining delinquent
loans of $1,337,000 and for other current loans. There was no net
additional allowance for credit losses during the years ended December
31, 1998 and 1997. Of the delinquent loans, approximately $3,657,000
and $3,279,000 were in the process of foreclosure as of December 31,
1998 and 1997.
The average recorded investment in impaired loans was $7,190,000 and
$7,998,000 during the years ended December 31, 1998 and 1997,
respectively. Interest income received on impaired loans during the
years ended December 31, 1998 and 1997 totaled approximately $546,000
and $722,000, respectively, $466,000 and $670,000 of which was paid by
borrowers and $80,000 and $52,000 of which related to purchases of
interest receivable by OFG, respectively.
(3) Loans Secured by Trust Deeds, Continued
As of December 31, 1998 and 1997, the Partnership's loans secured by
deeds of trust on real property collateral located in Northern
California totaled approximately 48% ($87,013,000) and 67%
($117,352,000), 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 on 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.
During 1998, the Partnership invested in a loan in the amount of
$2,000,000 that is secured by an assignment of a 49% interest in a
limited liability company (LLC) and a direct 2% ownership in the LLC.
The LLC owns a retail shopping center located in Sedona, Arizona.
(4) Real Estate Held for Sale
Real estate held for sale includes the following components as of
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Real estate properties held for sale $ 9,165,641 9,699,656
Investment in limited partnership - 3,812,122
Investment in corporate joint venture 805,561 639,363
----------- -----------
$ 9,971,202 14,151,141
========== ==========
</TABLE>
Gain on sale of real estate includes the following components for the
years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------
<S> <C> <C> <C>
Gain on sale of real estate properties $ 24,873 278,339 -
Gain on sale of real estate by limited
partnership 1,246,884 2,355,075 170,724
--------- ----------- -------
$ 1,271,757 2,633,414 170,724
========== =========== =======
</TABLE>
(4) Real Estate Held for Sale, Continued
(a) Real Estate Properties Held for Sale
Real estate properties held for sale as of December 31, 1998 and
1997 consists of the following properties acquired through
foreclosure in 1993 through 1998:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Light industrial warehouse, Merced, California, net
of valuation allowance of $350,000 as of
December 31, 1998 and 1997 $ 650,028 650,000
Commercial lot/residential development, Vallejo,
California 1,039,116 1,030,566
Commercial lot, Sacramento, California, net of
valuation allowance of $250,000 as of
December 31, 1998 and 1997 299,828 299,828
Office building and undeveloped land,
Monterey, California, net of valuation
allowance of $200,000 as of December
31, 1998 and 1997 1,885,731 1,902,855
Manufactured home subdivision development,
Ione, California, net of valuation allowance
of $384,000 as of December 31, 1998 and 1997 2,554,079 2,451,286
Self storage, Oakland, California 453,815 444,063
Undeveloped land, Reno, Nevada 215,420 230,000
Manufactured home subdivision development,
Sonora, California, net of valuation allowance
of $712,000 as of December 31, 1997 - 1,149,807
Light industrial building, Paso Robles, California 1,558,882 1,541,251
Commercial building, Sacramento, California 30,000 -
Commercial building, Gresham, Oregon 425,557 -
22% interest in 6-unit residential building,
Oakland, California 53,185 -
----------- ----------------
$ 9,165,641 9,699,656
========= =========
</TABLE>
The acquisition of certain 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 $508,686,
$3,279,349 and $1,913,000 for the years ended December 31, 1998,
1997 and 1996, respectively.
In February 1998, OFG purchased the manufactured home
subdivision development property located in Sonora, California,
from the Partnership for $1,150,000. The Partnership carried
back a loan secured by a trust deed on the property for the full
purchase price. The note included interest at 8% per annum and
was due on demand. The loan was repaid by OFG in November 1998.
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.
(4) 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, eliminating OFG's junior deeds of
trust. OFG recorded a loss of $600,000 as a result of this
transaction.
(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 was considered an
advance to WV-OMIF Partners pursuant to the limited partnership
agreement in 1996 when the lots were contributed. The
Partnership provided advances to the WV-OMIF Partners to develop
and construct the homes. The Partnership was entitled to receive
interest at a rate of prime plus 2% on the advances to WV-OMIF
Partners.
OFG and Woodvalley exercised their option of purchasing 34
similar lots which were interspersed among the 30 lots being
developed by WV-OMIF Partners. WV-OMIF Partners incurred certain
infrastructure costs which benefit all 64 lots, including the 34
lots developed by OFG and Woodvalley. OFG and Woodvalley
reimbursed 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, 1998, OFG and Woodvalley
had reimbursed all shared development costs in the total amount
of $750,675 to WV-OMIF Partners from the sale of homes.
During 1998 and 1997, the Partnership advanced an additional
$1,409,099 and $4,152,918, respectively, to WV-OMIF Partners for
the continued development and construction of the homes. WV-OMIF
sold fourteen homes during the year ended December 31, 1998 for
proceeds of $6,987,101 and the net gain allocable to the
Partnership was $1,246,884, including interest income of
$176,440. WV-OMIF Partners distributed $6,468,105 (including
$102,579 in reimbursements from OFG and Woodvalley) to OMIF
during the year ended December 31, 1998. WV-OMIF Partners sold
fifteen homes during the year ended December 31, 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. The final home in WV-OMIF Partners was completed and sold
in October 1998.
(4) Real Estate Held for Sale, Continued
(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 is providing loans to the Company to
develop and construct the building and 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
incurred prior to the property being contributed to the Company
and advanced $10,621 to the Company for development. During the
year ended December 31, 1998, the Partnership advanced an
additional $166,198 to the Company for development. The total
investment in the corporate joint venture totals $805,561 and
$639,363 as of December 31, 1998 and 1997, respectively. The
Partnership earned interest income of $5,524 during 1998 on
loans provided to the Company.
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.
(5) Partners' Capital
In December 1998, the limited partners voted to amend the Partnership
Agreement and there was a further amendment by OFG in February 1999.
All such changes have been incorporated into these notes to the
financial statements.
(a) Allocations, Distributions and Withdrawals
In accordance with the Partnership Agreement, the Partnership's
profits, gains and losses are allocated to each limited partner
and OFG in proportion to their respective capital accounts.
Distributions of net income are made monthly to the limited
partners in proportion to their weighted average capital
accounts as of the last day of the preceding calendar month.
Accrued distributions payable represent amounts to be
distributed to partners in January of the subsequent year based
on their capital accounts as of December 31.
(5) Partners' Capital, Continued
The Partnership makes monthly net income 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
$10,326,334, $10,077,144 and $8,975,209 for the years ended
December 31, 1998, 1997, and 1996, respectively. Reinvested
distributions are not shown as partners' cash distributions or
proceeds from sale of partnership units in the accompanying
statements of partners' capital and cash flows.
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 OFG, subject to the
following limitations, among others:
o No withdrawal of units can be requested or made until at least
one year from the date of purchase of those units, on or after
the date of the most recent Prospectus (2/16/99), other than
units received under the Partnership's Reinvested
Distributions Plan.
o Any such payments are required to be made only from net
proceeds and capital contributions (as defined) during said
91-day period.
o A maximum of $100,000 per partner may be withdrawn during any
calendar quarter.
o The general partner is 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.
(b) Promotional Interest of General Partner
OFG has contributed capital to the Partnership in the amount of
0.5% of the limited partners' aggregate capital accounts and,
together with its promotional interest, OFG has an interest
equal to 1% of the limited partners' capital accounts. This
promotional interest of OFG of up to 1/2 of 1% is recorded as an
expense of the Partnership and credited as a contribution to
OFG's capital account as additional compensation. As of December
31, 1998, OFG had made cash capital contributions of $1,006,705
to the Partnership. OFG is required to continue cash capital
contributions to the Partnership in order to maintain its
required capital balance.
The promotional interest expense charged to the Partnership was
$49,545, $70,747 and $57,395 for the years ended December 31,
1998, 1997 and 1996, respectively.
(6) Contingency Reserves
In accordance with the Partnership Agreement and to satisfy the
Partnership's liquidity requirements, the Partnership is required to
maintain contingency reserves in an aggregate amount of at least 1-1/2%
of the capital accounts of the limited partners. The cash capital
contribution of OFG (amounting to $1,006,705 at December 31, 1998), up
to a maximum of 1/2 of 1% of the limited partners' capital accounts
will be available as an additional contingency reserve, if necessary.
The contingency reserves required at December 31, 1998 and 1997 were
approximately $4,063,000 and $3,829,000, respectively. Certificates of
deposit, commercial paper and certain cash equivalents as of the same
dates were accordingly maintained as reserves.
(7) 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>
1998 1997
---- ----
<S> <C> <C>
Partners' capital per financial statements $ 201,340,802 190,731,135
Accrued interest income (1,380,530) (1,773,608)
Allowance for loan losses 3,500,000 3,500,000
Allowance for real estate held for sale 1,184,000 1,896,000
Accrued distributions 522,827 544,385
------------ -----------
Partners' capital per federal income tax return $ 205,167,099 194,897,912
=========== ===========
</TABLE>
(8) 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.
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 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 $3,250,000,
$3,879,000 and $867,000 for the years ended December 31, 1998, 1997 and
1996, respectively, and are included in the accompanying statements of
income. Service fees amounted to approximately $472,000, $421,000 and
$384,000 for the years ended December 31, 1998, 1997 and 1996,
respectively, and are included in the accompanying statements of
income.
(8) Transactions with Affiliates, Continued
As of December 31, 1998 and 1997, the Partnership owed management and
servicing fees to OFG in the amounts of $391,098 and $49,534,
respectively, which are included in accounts payable and accrued
liabilities.
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 $382,000, $409,000 and $241,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
OFG originates all loans the Partnership invests in and receives an
investment evaluation fee from borrowers. Such fees earned by OFG
amounted to approximately $1,724,000, $2,994,000 and $1,930,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
During the year ended December 31, 1998, OFG purchased the manufactured
home subdivision development in Sonora, California from the Partnership
at a loss of approximately $2,000. An allowance for loss on this
property in the amount of $712,000 had been recorded in 1997,
therefore, the loss for the year ended December 31, 1998 was an
additional $2,000. The Partnership carried back a loan from OFG for the
entire purchase price of $1,150,000 which was paid off in November
1998.
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. An
additional property was sold by OFG during 1998 for a gain of
approximately $58,000.
OFG has purchased the Partnership's receivables for delinquent interest
of $110,000 and $87,000, related to delinquent loans for the years
ended December 31, 1998 and 1997, respectively.
Included in loans secured by trust deeds as of December 31, 1998 and
1997 are notes totaling $180,000 and $2,215,549, respectively, which
were secured by properties owned by OFG or an affiliate of OFG. The
loans earn interest at 8% per annum and are due on demand. The
Partnership earned interest income of approximately $143,000, $188,000
and $72,000 during the years ended December 31, 1998, 1997 and 1996,
respectively, from OFG and affiliates under loans secured by trust
deeds.
(9) 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. These
amounts were 195,482,129, 186,954,376 and 172,364,058 for the years
ended December 31, 1998, 1997 and 1996, respectively.
(10) 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, Certificates of Deposit and
Commercial Paper
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 $182,721,465
approximates the fair value as of December 31, 1998. 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, 1998 should also be considered in evaluating the
fair value of loans secured by trust deeds.
<PAGE>
Item 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 and financial disclosure with the accountants during the fiscal year.
Part III
Item 10. Directors and Executive Officers of the Registrant
The General Partner is Owens Financial Group, Inc., a California
corporation, 2221 Olympic Blvd., Walnut Creek, CA 94595. Its telephone number is
(925) 935-3840.
The 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. These duties include dealings with limited partners,
accounting, tax and legal matters, communications and filings with regulatory
agencies and all other needed management duties. The General Partner may also,
at its sole discretion and subject to change at any time,
purchase from the Partnership the interest receivable or
principal on delinquent mortgage loans held by the Partnership;
purchase from a senior lienholder the interest receivable or
principal on mortgage loans senior to mortgage loans held by the
Partnership;
use its own funds to cover any other costs associated with
mortgage loans held by the Partnership such as property taxes,
insurance and legal expenses; and
purchase from the Partnership real estate acquired through
foreclosure.
In order to assure that the limited partners will not have personal
liability as a General Partner, 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 General Partner has primary responsibility for the initial selection,
evaluation and negotiation of mortgage investments for the Partnership. The
General Partner provides all executive, supervisory and certain administrative
services for the Partnership's operations, including servicing the mortgage
loans held by the Partnership. The Partnership's books and records are
maintained by the General Partner, subject to audit by independent certified
public accountants.
The General Partner had a net worth of approximately $9,606,000 on
December 31, 1998. The following persons comprise the board of directors and
management employees of the General Partner actively involved in the
administration and investment activity of the Partnership.
Milton N. Owens - Mr. Owens, Chairman of the Board of Directors
of the General Partner, age 87, is a licensed real estate broker
and has been Chairman since October 1981. Mr. Owens is a lifetime
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. From 1936 to 1951, prior to his formation
of Owens Mortgage Company, Mr. Owens was employed with the
mortgage loan division of the Travelers Insurance Company. Mr.
Owens is the father of William C. Owens, also a member of the
Board of Directors and President of the General Partner.
William C. Owens - Mr. Owens, age 48, has been President of the
General Partner since April 1996 and is also a member of the
Board of Directors and the Loan Committee of the General Partner.
From 1989 until April 1996, he served as a Senior Vice President
of the 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 General Partner, Mr. Owens is
responsible for the overall activities and operations of the
General Partner, including corporate investment, operating policy
and planning. In addition, he is responsible for loan production,
including the underwriting and review of potential loan
investments. Mr. Owens is also the President of Owens Securities
Corporation, a subsidiary of the General Partner. Mr. Owens is a
licensed real estate broker and the son of Milton Owens, Chairman
of the Board of Directors of the General Partner.
Bryan H. Draper - Mr. Draper, age 41, has been Chief Financial
Officer and corporate secretary of the General Partner since
December 1987 and is also a member of the board of directors of
the General Partner. Mr. Draper is a Certified Public Accountant
and is responsible for all accounting, finance, and tax matters
for the 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 - Mr. Dutra, age 36, is a Vice President and
member of the Board of Directors and the Loan Committee of the
General Partner and has been its employee since February 1986. In
charge of loan production, Mr. Dutra has responsibility for loan
committee review, loan underwriting and loan production.
Andrew J. Navone - Mr. Navone, age 42, is a Vice President and
member of the Board of Directors and the Loan Committee of the
General Partner and has been its employee since August 1985. Mr.
Navone has responsibilities for loan committee review, loan
underwriting and loan production.
Melina A. Platt - Ms. Platt, age 32, has been Controller of the
General Partner since May 1998. Ms. Platt is a Certified Public
Accountant and is responsible for all accounting, finance, and
regulatory agency filings of the Partnership. Ms. Platt was
previously a Senior Manager with KPMG LLP.
Research and Acquisition
The General Partner considers prospective investments for the
Partnership. In that regard, the General Partner evaluates the credit of
prospective borrowers, analyzes the return to the Partnership of potential
mortgage loan transactions, reviews property appraisals, and determines which
types of transactions appear to be most favorable to the Partnership. For these
services, the General Partner generally receives mortgage placement fees
(points) paid by borrowers when loans are originally funded or when the
Partnership extends or refinances mortgage loans. These fees may reduce the
yield obtained by the Partnership from its mortgage loans.
Partnership Management
The General Partner is responsible for the Partnership's investment portfolio.
Its services include:
the creation and implementation of Partnership investment
policies;
preparation and review of budgets, economic surveys, cash flow
and taxable income or loss projections and working capital
requirements;
preparation and review of Partnership reports;
communications with limited partners;
supervision and review of Partnership bookkeeping, accounting and
audits;
supervision and review of Partnership state and federal tax
returns; and
supervision of professionals employed by the Partnership in
connection with any of the foregoing, including attorneys,
accountants and appraisers.
For these and certain other services the General Partner is entitled to
receive a management fee of up to 2-3/4% per annum of the unpaid balance of the
Partnership's mortgage loans. The management fee is payable on all loans,
including nonperforming or delinquent loans. The General Partner believes that a
fee payable on delinquent loans is justified because of the expense involved in
the administration of such loans. See "Compensation of the General
Partner--Management Fees," at page 7.
Item 11. Executive Compensation
The Partnership does not pay any compensation to any persons other than
the 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 management and promotional fees
permitted under the Partnership Agreement.
The following table summarizes the forms and amounts of compensation
paid to the General Partner for the year ended December 31, 1998. Such fees were
established by the General Partner and were not determined by arms-length
negotiation.
Year Ended
December 31, 1998
Form of Compensation Actual Maximum
Allowable
Management Fees...................... $ 3,250,000 $ 4,784,000
Promotional Interest................. 50,000 50,000
----------- -----------
Subtotal............................. $ 3,300,000 $ 4,834,000
----------- -----------
Reimbursement of Other Expenses...... 151,000 151,000
----------- -----------
Total.... $ 3,451,000 $ 4,985,000
=========== ===========
Investment Evaluation Fees........... $ 1,724,000 $ 1,724,000
Servicing Fees....................... 472,000 472,000
Late Payment Charges................. 382,000 382,000
----------- -----------
Total.... $ 2,578,000 $ 2,578,000
=========== ===========
Item 12. Security Ownership of Certain Beneficial Owners and Management
No person or entity owns beneficially more than 5% of the ownership
interests in the Partnership. The General Partner owns 2,387,486 units (1.2%) of
the Partnership as of December 31, 1998. The ownership (common stock) of the
General Partner is owned as follows: 43.96% by Milton N. Owens, 27.47% by
William C. Owens, 10.99% by Bryan H. Draper and 8.79% each by William E. Dutra
and Andrew J. Navone.
Item 13. Certain Relationships and Related Transactions
Transactions with management and others:
Management Fee
The General Partner 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 amount of management
fees to the General Partner for the year ended December 31, 1998 was
approximately $3,250,000.
Servicing Fee
All of the Partnership's loans are serviced by the General Partner, in
consideration for which the General Partner receives up to .25% per annum of the
unpaid principal balance of the loans on a monthly basis. The amount of
servicing fees to the General Partner for the year ended December 31, 1998 was
approximately $472,000.
Promotional Interest
The General Partner is required to continue cash capital
contributions to the Partnership in order to maintain its required capital
balance equal to 1% of the limited partners' capital accounts. The General
Partner has contributed capital to the Partnership in the amount of 0.5% of the
limited partners' aggregate capital accounts and, together with its promotional
interest, the General Partner has an interest equal to 1% of the limited
partners' capital accounts. This promotional interest of up to 1/2 of 1% is
recorded as an expense of the Partnership and credited as a contribution to the
General Partner's capital account as additional compensation. As of December 31,
1998, the General Partner had made cash capital contributions of $1,006,705 to
the Partnership.
During 1998, the Partnership incurred promotional interest expense of $49,545.
<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. 26
Balance Sheets - December 31, 1998 and 1997 p. 27
Statements of Income for the years ended
December 31, 1998, 1997 and 1996 p. 28
Statements of Partners Capital for the
years ended December 31, 1998, 1997 and 1996 p. 29
Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996 p. 30
Notes to Financial Statements pp. 31-42
(2) Schedule IV- Mortgage Loans on Real Estate pp. 48-49
(3) Exhibits:
3. Amended and Restated Limited Partnership Agreement, incorporated by
reference to Exhibit A to Prospectus filed with Registration Statement 333-71299
filed January 27, 1999.
10(a). Subscription Agreement and Power of Attorney, incorporated by
reference to Exhibit B to Prospectus filed with Registration Statement 333-71299
filed January 27, 1999.
(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 333-71299 filed January 27 1999.
10(a). Subscription Agreement and Power of Attorney, incorporated
by reference to Exhibit B to Prospectus filed with Registration Statement
333-71299 filed January 27, 1999.
(d) Schedules:
Schedule IV - Mortgage Loans on Real Estate
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE IV
OWENS MORTGAGE INVESTMENT FUND
MORTGAGE LOANS ON REAL ESTATE -- DECEMBER 31, 1998
Principal Amount
of Loans Subject
to Delinquent
Description Final Carrying Amount Principal or
Interest Rate Maturity date of Mortgages Interest
TYPE OF LOAN
<S> <C> <C> <C> <C>
Income Producing................ 6.875-14.50% Current to Sept., 2018 $162,768,798 $ 7,344,554
Single Family Residence......... 8.00-13.00% Current to Sept., 2001 2,360,417 563,080
Land .......................... 8.75-14.00% Current to Aug., 2002 17,592,250 802,200
------------ -----------
TOTAL $182,721,465 $ 8,709,834
============ ===========
AMOUNT OF LOAN
$0-250,000...................... 6.875-14.50% Current to Dec., 2012 $6,599,767 $ 21,915
$250,001-500,000................ 7.875-14.00% Current to Sept., 2018 13,760,077 773,926
$500,001-1,000,000.............. 8.00-14.50% Current to Jan., 2014 28,675,437 2,193,365
Over $1,000,000................. 8.50-12.50% Current to May, 2015 133,686,184 5,720,628
------------ ----------
TOTAL $182,721,465 $8,709,834
============ ==========
POSITION OF LOAN
First .......................... 6.875-14.50% Current to Sept., 2018 $162,597,467 $8,305,834
Second ......................... 10.00-14.50% Current to Dec., 2004 19,223,907 404,000
Third .......................... 10.00-11.00% Current to Apr., 2000 548,967 0
Fourth.......................... 12.50% Aug. 2002 351,124 0
------------ ----------
TOTAL $182,721,465 $8,709,834
============ ==========
</TABLE>
- ---------------
NOTE 1: All loans are acquired from an affiliate of the Partnership, namely
Owens Financial Group, Inc., the General Partner.
NOTE 2:
<TABLE>
<S> <C>
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 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
Balance at beginning of period (1/1/98).............................................................$174,714,607
Additions during period:
New mortgage loans..............................................................................83,714,828
Loan carried back on sale of real estate to general partner................................ 1,150,000
Subtotal.......................................................................................259,579,435
Deductions during period
Collection of principal.........................................................................76,349,284
Foreclosures............................................................................... 508,686
Balance at end of period (12/31/98)...........................................................$182,721,465
</TABLE>
During the years ended December 31, 1998, 1997 and 1996, the Partnership
refinanced loans totaling $9,941,000, $6,562,000 and $5,400,000, respectively,
thereby extending the maturity date.
During 1998, the Partnership sold a property located in Sonora, California to
the General Partner for $1,150,000. The Partnership carried back a loan secured
by a trust deed on the property for the full purchase price.
During 1997, the Partnership sold five loans to the 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.
- --------------
NOTE 3: Included in the above loans are the following loans which exceed
3% of the total loans as of December 31, 1998. There are no other
loans that exceed 3% of the total loans as of December 31, 1998:
<TABLE>
<CAPTION>
Principal
Amount of
Loans Subject
Final Face Carrying to Delinquent
Interest Maturity Periodic Payment Prior Amount of Amount of Principal or
Description Rate Date Terms Liens Mortgages Mortgages Interest
----------- --------- -------- -------------- ----- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial Retail Center, 10.00% 10/19/00 Interest only, None $5,583,000 $5,583,000 $0
McMinnville, OR........ balance due at
maturity
Office Building 10.50% 8/26/00 Interest only, None $5,950,000 $5,950,000 $0
Scottsdale, AZ......... balance due at
maturity
Office Building 10.75% 4/10/00 Interest only, None $7,005,000 $7,005,000 $0
San Francisco, CA...... balance due at
maturity
Commercial Retail Centers, 10.00% 5/8/00 Interest only, None $10,600,000 $10,600,000 $0
Great Falls, MT and balance due at
Puyallup, WA........... 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.
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: March 16, 1999 OWENS MORTGAGE INVESTMENT FUND,
a California Limited Partnership
By: Owens Financial Group, Inc., General Partner
Dated: March 16, 1999 By: /s/ William C. Owens
William C. Owens, President
Dated: March 16, 1999 By: /s/ Bryan H. Draper
Bryan H. Draper, Chief Financial Officer
Dated: March 16, 1999 By: /s/ Melina A. Platt
Melina A. Platt, Controller
<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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 8,694,605
<SECURITIES> 3,084,044
<RECEIVABLES> 1,439,604
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,218,253
<PP&E> 9,971,202
<DEPRECIATION> 0
<TOTAL-ASSETS> 202,410,920
<CURRENT-LIABILITIES> 1,070,118
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 201,340,802
<TOTAL-LIABILITY-AND-EQUITY> 202,410,920
<SALES> 0
<TOTAL-REVENUES> 21,041,215
<CGS> 0
<TOTAL-COSTS> 4,062,523
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 16,978,692
<INCOME-TAX> 0
<INCOME-CONTINUING> 16,978,692
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,978,692
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
