-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WHvrU2OCdGaqGUHlZDb+CsyphcbuEW3t1BuaCN0LCxCAtFpVyd/PEIXQsSjOA/ah UKSxpCOt43MMbTjV9ZNVlA== 0000841501-03-000001.txt : 20030314 0000841501-03-000001.hdr.sgml : 20030314 20030314140833 ACCESSION NUMBER: 0000841501-03-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030314 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OWENS MORTGAGE INVESTMENT FUND CENTRAL INDEX KEY: 0000841501 STANDARD INDUSTRIAL CLASSIFICATION: [6221] IRS NUMBER: 680023931 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-17248 FILM NUMBER: 03603823 BUSINESS ADDRESS: STREET 1: 2221 OLYMPIC BLVD STREET 2: P O BOX 2308 CITY: WALNUT CREEK STATE: CA ZIP: 94595 BUSINESS PHONE: 9252805393 MAIL ADDRESS: STREET 1: 2221 OLYMPIC BLVD STREET 2: P O BOX 2308 CITY: WALNUT CREEK STATE: CA ZIP: 94595 FORMER COMPANY: FORMER CONFORMED NAME: OWENS MORTGAGE INVESTMENT FUND II DATE OF NAME CHANGE: 19920703 10-K 1 a200210k.txt OWENS MORTGAGE INVESTMENT FUND 2002 FORM 10-K 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, 2002 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 ___ 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.333-69272 are incorporated by reference into Part IV. Exhibit Index at page 59. 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 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. Owens Financial Group, Inc. (the General Partner) makes, arranges or purchases all of the loans invested in by the Partnership. 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 total Partnership capital, mortgage investments and net income as of and for the years ended December 31, 2002, 2001, 2000, 1999, 1998 and 1997.
Total Partners' Mortgage Net Capital Investments Income 2002............................ $ 280,350,974 $ 260,211,121 $ 21,669,959 2001............................ $ 272,286,714 $ 213,703,469 $ 21,889,224 2000............................ $ 238,757,190 $ 223,273,464 $ 22,535,056 1999 ........................... $ 214,611,813 $ 200,356,517 $ 17,479,853 1998 ........................... $ 201,340,802 $ 182,721,465 $ 16,978,692 1997............................ $ 190,731,135 $ 174,714,607 $ 15,420,247
As of December 31, 2002, the Partnership held investments in 100 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. 43% of the mortgage loans are located in Northern California. The remaining 57% are located in Southern California, Arizona, Colorado, Connecticut, Hawaii, Idaho, Missouri, Nevada, Ohio, Oregon, Texas, Virginia and Washington. The following table sets forth the types and maturities of mortgage investments held by the Partnership as of December 31, 2002:
TYPES AND MATURITIES OF MORTGAGE INVESTMENTS (As of December 31, 2002) Number of Loans Amount Percent 1st Mortgages.................................... 89 $ 241,335,259 92.75% 2nd Mortgages.................................... 11 18,875,862 7.25% --- ------------- ------- 100 $ 260,211,121 100.00% === ============= ======= Maturing on or before December 31, 2003 (1)...... 53 $ 160,350,025 61.62% Maturing on or between January 1, 2004 and December 31, 2006....................................... 32 80,626,284 30.99% Maturing on or between January 1, 2007 and September 1, 2018 15 19,234,812 7.39% --- ------------- ------- 100 $ 260,211,121 100.00% === ============= ======= Income Producing Properties...................... 85 $ 228,210,411 87.70% Construction..................................... 4 12,670,310 4.87% Unimproved Land.................................. 8 16,938,678 6.51% Residential...................................... 3 2,391,722 0.92% --- ------------- ------- 100 $ 260,211,121 100.00% === ============= =======
- -------- (1) Approximately $47,129,000 was past maturity as of December 31, 2002. The average loan balance of the mortgage loan portfolio of $2,602,000 as of December 31, 2002 is considered by the General Partner to be a reasonable diversification of investments concentrated in mortgages secured by commercial properties. Of such investments, 13.0% earn a variable rate of interest and 87.0% earn a fixed rate of interest. All were negotiated according to the Partnership's investment standards. As of December 31, 2002, the Partnership was invested in construction loans in the amount of approximately $12,670,000 and in loans secured by leasehold interests of $25,423,000. The Partnership has other assets in addition to its mortgage investments, comprised principally of the following: o $6,684,000 in cash and cash equivalents held for investment, required to transact the business of the Partnership and/or in conjunction with contingency reserve requirements; o $31,742,000 in real estate held for sale and investment; and o $3,177,000 in interest and other receivables. 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 1-3 years. The General Partner will perform an internal review on a loan secured by property in the following circumstances: o payments on the loan become delinquent; o the loan is past maturity; o it learns of physical changes to the property securing the loan or to the area in which the property is located; or o 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 securing the loan and the area in which the property is located, the financial stability of the borrower, and the property's occupancy. As of December 31, 2002, the Partnership's portfolio included $26,327,000 (compared with $18,604,000 as of December 31, 2001) of loans delinquent more than 90 days, representing 10.1% 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, 2002 includes $6,503,000 (compared with $5,327,000 as of December 31, 2001) in the process of foreclosure and $4,300,000 (compared with $6,182,000 as of December 31, 2001) involving loans to borrowers who are in bankruptcy. The General Partner believes that these loans may result in a loss of principal and foregone interest. However, the General Partner believes that the $4,4,774,000 allowance for losses on loans which is maintained in the financial statements of the Partnership as of December 31, 2002 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, $614,000 of losses on two loans in 2001 and the $1,235,000 loss recognized at foreclosure on a motel property located in Phoenix, Arizona during 2002, the Partnership has not suffered material losses on defaults or foreclosures. Of the $18,604,000 that was delinquent as of December 31, 2001, $5,353,000 remained delinquent as of December 31, 2002, $3,364,000 was paid off, $5,525,000 became real estate acquired through foreclosure of the Partnership, and $4,362,000 was brought current. In limited instances where the Partnership has participated in loans with third parties, the General Partner has advanced certain payments on behalf of borrowers of Partnership loans, such as property taxes, insurance and mortgage interest pursuant to senior indebtedness. Such payments made on loans by the General Partner during 2002 totaled approximately $67,000 of which $51,000 had been reimbursed to OFG by the borrowers as of December 31, 2002. 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, 1999, 2000, 2001 and 2002 and foreclosures by the Partnership during the years ended December 31, 1999, 2000, 2001 and 2002:
1999 2000 2001 2002 ---- ---- ---- ---- Delinquent Loans....................... $ 7,415,000 $ 8,014,000 $ 18,604,000 $ 26,327,000 Loans Foreclosed....................... $ 2,001,000 $ 685,000 $ 3,369,000 $ 9,370,000 Total Mortgage Investments............. $ 200,357,000 $ 223,273,000 $ 213,703,000 $ 260,211,000 Percent of Delinquent Loans to Total Loans 3.70% 3.59% 8.71% 10.12%
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 ownership. 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 Management fees to the General Partner are paid pursuant to the Partnership Agreement and are determined at the sole discretion of the General Partner. The management fee is paid monthly and 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. 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. 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. A number of factors are considered in the General Partner's monthly meeting to determine the yield to pay to partners. These factors include: o Interest rate environment and recent trends in interest rates on loans and similar investment vehicles; o Delinquencies on Partnership loans; o Level of cash held pending investment in mortgage loans; and o Real estate activity, including net operating income from real estate and gains/losses from sales. Once the yield is set and all other items of tax basis income and expense are determined for a particular month, the management fees are also set for that month. Large fluctuations in the management fees paid to the General Partner are normally a result of extraordinary items of income or expense within the Partnership (such as gains or losses from sales of real estate, etc.) or fluctuations in the level of delinquent loans, since the majority of the Partnership's assets are invested in mortgage loans. If the maximum management fees had been paid to the General Partner during the year ended December 31, 2002, the management fees would have been $6,724,000 (increase of $3,108,000), which would have reduced net income allocated to limited partners by approximately 14.3%, and net income allocated to limited partners per weighted average limited partner unit by the same percentage to $.07. If the maximum management fees had been paid to the General Partner during the years ended December 31, 2001 and 2000, the management fees would have been $6,287,000 (increase of $2,849,000) and 5,845,000 (increase of $1,931,000), respectively, which would have reduced net income allocated to limited partners by approximately 13.0% and 8.7%, respectively, and net income allocated to limited partners per weighted average limited partner unit by the same percentages to $.07 and $.09, respectively. The maximum management fee permitted under the Partnership Agreement is 2 3/4% per year of the average upaid balance of mortgage loans. For the years 2000, 2001 and 2002, the management fees were 1.85%, 1.48% and 1.46% of the average unpaid balance of mortgage loans, respecitvely. 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, which, when added to all other fees paid in connection with the servicing of a particular loan, does not exceed the lesser of the customary, competitive fee in the community where the loan is placed for the provision of such mortgage services on that type of loan or up to 0.25% per annum of the unpaid balance of mortgage loans held by the Partnership. The General Partner has historically been paid the maximum servicing fee allowable. Carried Interest Based upon the Partnership's investment in mortgages of a minimum of 86.5% of capital contributions, the General Partner receives a carried interest of 1/2 of 1% of the aggregate capital accounts of the limited partners, which is additional compensation to the General Partner. The carried interest is increased each month by 1/2 of 1% of the net increase in the capital accounts of the limited partners. If there is a net decrease in the capital accounts for a particular month, no carried interest is allocated for that month and the allocation to carried interest is "trued-up" to the correct 0.5% amount in the next month that there is an increase in the net change in capital accounts. Thus, if the Partnership generates an annual yield on capital of the limited partners of 10%, the General Partner would receive additional distributions on its carried interest of approximately $150,000 per year if $300,000,000 of Units were outstanding. In addition, 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 carried interest. These capital distributions, however, will be made only after the limited partners have received capital distributions equaling 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. Loan Origination Fees Loan origination fees, also called mortgage placement fees or points, are paid to the General Partner by the borrowers of loans held by the Partnership, with the exception of certain loans not originated by the General Partner. These fees are compensation for the evaluation, origination, extension and refinancing of loans for the borrowers and may be paid at the placement, extension or refinancing of the loan or at the time of final repayment of the loan. The amount of these fees is determined by competitive conditions and the General Partner 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. Generally, on the majority of the Partnership's loans, the late payment fee charged to the borrower for late payments is 10% of the payment amount. In addition, on the majority of the Partnership's loans, the additional interest charge required to be paid by borrowers once a loan is past maturity is in the range of 3%-5% (paid in addition to the pre-default interest rate). 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, 2002 and 2001, 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.
Year Ended Year Ended ---------- ---------- December 31, 2002 December 31, 2001 ----------------- ----------------- Maximum Maximum Form of Compensation Actual Allowable Actual Allowable - -------------------- ------ --------- ------ --------- Paid by the Partnership: Management Fees*..................... $ 3,616,000 $ 6,724,000 $ 3,438,000 $ 6,287,000 Servicing Fees....................... 611,000 611,000 572,000 572,000 Carried Interest..................... 40,000 40,000 173,000 173,000 ------------- ------------ ------------ ------------ Subtotal $ 4,267,000 $ 7,375,000 $ 4,183,000 $ 7,032,000 ------------- ------------ ------------ ------------ Paid by Borrowers: Loan Origination Fees................ $ 5,815,000 $ 5,815,000 $ 6,990,000 $ 6,990,000 Late Payment Charges................. 649,000 649,000 1,297,000 1,297,000 ------------ ------------- ------------- ------------ Subtotal $ 6,464,000 $ 6,464,000 $ 8,287,000 $ 8,287,000 ------------ ------------- ------------- ------------ Grand Total $ 10,731,000 $ 13,839,000 $ 12,470,000 $ 15,319,000 ============ ============= ============= ============ Reimbursement by the Partnership of Other Expenses $ 217,000 $ 217,000 $ 32,000 $ 32,000 ============== =============== =============== ===============
- ------- * 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, 2002 and 2001, exclusive of expense reimbursement, was $10,731,000 and $12,470,000, respectively, or 3.8% and 4.6%, 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 $13,839,000 and $15,319,000, respectively, or 4.9% and 5.6%, respectively, of partners' capital, which would have reduced net income allocated to limited partners by approximately 14.3% and 13.0%, respectively. Loan origination fees as a percentage of loans purchased by the Partnership were 4.2%, 4.3% and 6.8% for the years ended December 31, 2002, 2001, and 2000, respectively. Of the $5,815,000 in loan origination fees accrued during the year ended December 31, 2002, approximately $2,142,000 were back-end fees earned as of December 31, 2002 but will not be collected until the related loans are paid off in full. Of the $6,990,000 in loan origination fees accrued during the year ended December 31, 2001, approximately $225,000 were back-end fees earned as of December 31, 2001 but will not be collected until the related loans are paid off in full. Of the $7,936,000 in loan origination fees accrued during the year ended December 31, 2000, approximately $5,033,000 were back-end fees earned but not collected as of December 31, 2000. In the year ended December 31, 2000, two loans in the total amount of $45,419,000 had loan origination fees totaling $4,542,000. 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 arranges, makes and/or purchases all loans, which are then either made or purchased by the Partnership, on a loan-by-loan basis. Normally, when the Partnership has sufficient funds available to make or invest in a specific loan, the General Partner will give the Partnership priority in making or purchasing the loan over other persons to whom the General Partner may sell loans as a part of its business. However, there may be limited instances when another investor may be given priority over the Partnership to purchase a particular loan, such as when the particular loan does not meet all of the investment criteria of the Partnership or when the General Partner does not want to add more of a particular loan type to the Partnership's portfolio. Factors that further influence the General Partner in determining whether the Partnership has priority over other investors include the following: o All loans arranged by the General Partner which are secured by property located outside the State of California and that satisfy investment criteria of the Partnership will be acquired by the Partnership; and o All hypothecation loans (also called "wrap-around loans" or "all-inclusive deeds of trust") will be made or acquired by the Partnership. A hypothecation loan is one in which the security for the loan is the assignment of another secured promissory note. In December 2001, the Partnership obtained its California Finance Lender ("CFL") license to enable it to fund loans directly to borrowers. Obtaining this license has not changed the business of the Partnership in any way or changed the duties of or fees paid to the General Partner. The main benefit of the Partnership receiving its CFL license is the quicker investment of proceeds from capital contributions and loan payoffs into new loans, which may increase the income earned by the Partnership. 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: o the ratio of the amount of the investment to the value of the property by which it is secured; o the property's potential for capital appreciation; o expected levels of rental and occupancy rates; o current and projected cash flow generated by the property; o potential for rental rate increases; o the marketability of the investment; o geographic location of the property; o the condition and use of the property; o the property's income-producing capacity; o the quality, experience and creditworthiness of the borrower; o general economic conditions in the area where the property is located; and o any other factors that the General Partner believes are relevant. Substantially all investment loans of the Partnership are arranged or 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 or participate in 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 meet 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 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 replacement 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 make a particular mortgage loan. The General Partner has the power to cause the Partnership to become a joint venturer, partner or member of an entity formed to own, develop, operate and/or dispose of properties owned or co-owned by the Partnership acquired through foreclosure of a loan. To date, the Partnership has entered into four such ventures for purposes of developing and disposing of properties acquired by the Partnership through foreclosure. The General Partner may enter into such ventures in the future. 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 1-3 years. Virtually all loans provide for monthly payments of interest and some also provide for principal amortization. Most 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 generally originate loans with negative amortization provisions. The Partnership does not have any policies directing the portion of its assets that may be invested in construction loans, loans secured by leasehold interests and second, third and wrap-around mortgage loans. However, the General Partner recognizes that these types of loans are riskier than first deeds of trust on income-producing, fee simple properties and will seek to minimize the amount of these types of loans in the Partnership's portfolio. Additionally, the General Partner will consider that these loans are riskier when determining the rate of interest on the loans. First Mortgage Loans First mortgage loans are secured by first deeds of trust on real property. Such loans are generally for terms of 1-3 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 completion of work to be paid for. In addition, the Partnership requires the submission of signed labor and material lien releases by the contractor 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. 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 permit the General Partner to cure any default under the lease. Variable Rate Loans Approximately 13.0% ($33,859,000) of the Partnership's loans as of December 31, 2002 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 or 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, 2002 and December 31, 2001:
December 31, December 31, 2002 2001 ---------------- ------------- One-year Treasury Constant Maturity Index 1.41% 2.28% Five-year Treasury Constant Maturity Index 2.89% 4.49% Prime Rate Index 4.25% 4.75% Monthly Weighted Average Cost of Funds for Eleventh District Savings Institutions 2.54% 3.37%
The majority of the Partnership's variable rate loans use the five-year Treasury Constant Maturity Index. This index tends to be less sensitive to fluctuations in market rates. Thus, it is possible that the rates on the Partnership's variable rate loans will rise slower than the rates of other loan investments available to the Partnership. However, most variable rate loans arranged by the General Partner contain provisions whereby the interest rate cannot fall below the starting rate (the "floor rate"). Thus, for variable rate loans, the Partnership is generally protected against declines in general market interest rates. Interest Rate Caps All of the Partnership's variable rate loans 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. 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. 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. Loans to Affiliates The Partnership will not provide loans to the General Partner, affiliates of the General Partner, or any limited partnership or entity affiliated with or organized by the General Partner except for cash advances made to the General Partner, its affiliates, agents or attorneys ("Indemnified Party") for reasonable legal expenses and other costs incurred as a result of any legal action or proceeding if: o such suit, action or proceeding relates to or arises out of any action or inaction on the part of the Indemnified Party in the performance of its duties or provision of its services on behalf of the Partnership; o such suit, action or proceeding is initiated by a third party who is not a Limited Partner; and o the Indemnified Party undertakes by written agreement to repay any funds advanced in the cases in which such Indemnified Party would not be entitled to indemnification under Article IV. 5(a) of the Partnership Agreement. Purchase of Loans from Affiliates The Partnership may purchase loans deemed suitable for acquisition from the General Partner or its Affiliates only if the General Partner makes or purchases such loans in its own name and temporarily holds title thereto for the purpose of facilitating the acquisition of such loans, and provided that such loans are purchased by the Partnership for a price no greater than the cost of such loans to the General Partner (except compensation in accordance with Article IX of the Partnership Agreement), there is no other benefit arising out of such transactions to the General Partner, such loans are not in default, and otherwise satisfy all requirements of Article VI. of the Partnership Agreement, including: o The Partnership shall not make or invest in mortgage loans on any one property if at the time of acquisition of the loan the aggregate amount of all mortgage loans outstanding on the property, including loans by the Partnership, would exceed an amount equal to 80% of the appraised value of the property as determined by independent appraisal, unless substantial justification exists because of the presence of other documented underwriting criteria. o The Partnership will limit any single mortgage loan and limit its mortgage loans to any one borrower to not more than 10% of the total Partnership assets as of the date the loan is made or purchased. o The Partnership may not invest in or make mortgage loans on unimproved real property is an amount in excess of 25% of the total Partnership assets. At times when there is a decline in mortgage originations by the General Partner and the Partnership has funds to invest in new loans, the General Partner may purchase loans from other lending institutions such as banks or mortgage bankers. Borrowing In March 2001, the Partnership amended its Limited Partnership Agreement, with the consent of a majority of limited partners, to allow the Partnership to incur indebtedness for the purpose of investing in mortgage loans. Prior to that, it could only incur indebtedness in order to prevent default under mortgage loans which are senior to the Partnership's mortgage loans, to discharge senior mortgage loans if this becomes necessary to protect the Partnership's investment in mortgage loans, or in order to operate or develop a property that the Partnership acquires under a defaulted loan. The total amount of indebtedness incurred by the Partnership cannot exceed the sum of 50% of the aggregate fair market value of all Partnership loans. The Partnership finalized a line of credit agreement with a bank in August 2001, which provides interim financing on mortgage loans invested in by the Partnership. The amount of credit available under this line of credit is $40,000,000 (pursuant to an amendment in August 2002). The balance outstanding on the line of credit was $6,867,000 as of December 31, 2002. Repayment of Mortgages on Sales of Properties The Partnership invests in mortgage loans and does not normally acquire real estate or engage in real estate operations or development (other than when the Partnership forecloses on a loan and 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: o issue securities senior to the Units or issue any Units or other securities for other than cash; o 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; o underwrite securities of other issuers; or o 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. In general, mortgage interest rates have fallen during 2002. This has been partially due to actions by the Federal Reserve Bank to reduce the discount rate on borrowings charged to member banks, a slowing economy and low threat of inflation. Although the general trend for interest rates has been down, many lenders have tightened their credit and reduced their lending exposure in various markets and property types. This credit tightening from competing lenders would generally provide the Partnership with additional lending opportunities at above-market rates. However, as a result of the slowing economy, there are now fewer transactions in the marketplace, which could potentially reduce the number of lending opportunities to the Partnership. Continued rate reductions by the Federal Reserve Bank, the slowing economy and a continued low threat of inflation could have the effect of reducing mortgage yields in the future. Current loans with relatively high yields could be replaced with loans with lower yields, which in turn could reduce the net yield paid to the limited partners. In addition, if there is less demand by borrowers for loans and, thus, fewer loans for the Partnership to invest in, it will invest its excess cash, including proceeds from the offering of the Units, in shorter-term alternative investments yielding considerably less than the current investment portfolio. Item 2. Properties Between 1993 and 2002, the Partnership foreclosed on $29,844,000 of delinquent mortgage loans and acquired title to 29 properties securing the loans. As of December 31, 2002, the Partnership still holds title to 13 of these properties (either solely or through its investments in the limited liability companies discussed below) in the amount of $18,500,000, net of an allowance for losses of $250,000. Three of the properties are being held for long-term investment and the remaining ten properties are being marketed for sale or will be marketed for sale in the foreseeable future. All of the properties individually have a book value less than 2% of total Partnership assets as of December 31, 2002. See also discussion of the property within the real estate joint venture and the corporate joint venture, which were not acquired through foreclosure, below. o The Partnership's (or related LLC's) title to all properties is held as fee simple. o There are no mortgages or encumbrances to third parties on any of the Partnership's real estate properties acquired through foreclosure. o Of the thirteen properties held, eight 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, other than the undeveloped land located in Reno, Nevada, on which a new retail or residential building may be constructed. o Management of the General Partner believes that all properties owned by the Partnership are adequately covered by customary casualty insurance. o The Partnership maintains an allowance for losses on real estate held for sale in its financial statements of $250,000 as of December 31, 2002. Real estate acquired through foreclosure is typically held for a number of years before ultimate disposition primarily because the Partnership has the intent and ability to dispose of the properties for the highest possible price (such as when market conditions improve). During the time that the real estate is held, the Partnership may earn less income on these properties than could be earned on mortgage loans and may have negative cash flow on these properties. Investment in Limited Partnership During the year ended December 31, 2001, the Partnership entered into a limited partnership, University Hills, L.P. (University Hills) with two other unrelated developers for the purpose of developing, leasing and selling an apartment complex on 5.3 acres of undeveloped land located in Reno, Nevada (which was acquired through foreclosure by the Partnership in 1996). As of December 31, 2001, the land had not been contributed into University Hills by the Partnership. During the year ended December 31, 2002, University Hills was dissolved. The Partnership intends to develop the property on its own. During the year ended December 31, 2002, approximately $41,000 of costs previously advanced to University Hills were written off by the Partnership. The Partnership's total net basis in the property is $365,000 as of December 31, 2002. Investment in Limited Liability Companies Oregon Leisure Homes, LLC During 2001, a new entity named Oregon Leisure Homes, LLC (OLH) was formed between the Partnership and an unrelated developer for the purpose of developing and selling eight condominium units located in Lincoln City, Oregon, which were acquired by the Partnership via a deed in lieu of foreclosure. OLH also purchased a house located on the ocean in Lincoln City for renovation and sale. OLH will sell eleven interests in each condominium and seven interests in the ocean house. The Partnership is co-manager of OLH and is to receive 70% of the profits. The assets, liabilities, income and expenses of OLH have been consolidated into the accompanying consolidated balance sheet and income statement of the Partnership. During the year ended December 31, 2002, the Partnership advanced an additional $936,000 to OLH (for a total of $1,537,000) for continued development and marketing of the condominium units and house that are currently for sale. OLH sold three interests in the condominiums during the year ended December 31, 2002 for total proceeds of $74,000 and a note in the amount of $27,000. No gain or loss was recognized as a result of these sales. OLH sold six interests in the ocean house during the year ended December 31, 2002 for proceeds of $383,000 and three notes in the total amount of $296,000, and recognized gain in the amount of $198,000. The net loss to the Partnership (including gains on sales) was approximately $182,000 for the year ended December 31, 2002. The Partnership's investment in the OLH real property was approximately $1,558,000 as of December 31, 2002. Dation, LLC In July 2001, a mobile home park located in Lake Charles, Louisiana that secured a Partnership loan in the amount of $2,113,600 was transferred by the borrower to a new entity named Dation, LLC (Dation), which was formed between the Partnership and an unrelated developer. The Partnership is advancing funds to Dation to finish the remaining lots under the existing loan terms and may provide additional financing to Dation. The Partnership is co-manager of Dation and is to receive 50% of the profits and losses. The net loss to the Partnership was approximately $184,000 and $79,000 for the years ended December 31, 2002 and 2001, respectively. The Partnership also recognized $64,000 and $128,000 in interest income from its loan to Dation. As of December 31, 2002, the Partnership had advanced an additional $140,000 to Dation and had received repayments from sales of lots in the amount of $60,000, under the existing loan. The Partnership's total investment in Dation was approximately $1,931,000 as of December 31, 2002. Investment in Real Estate Joint Venture The Partnership has a construction loan on a housing development located in Hayward, California. The loan is reported in the financial statements as an investment in a real estate joint venture to account for the investment pursuant to accounting guidelines for acquisition, development and construction arrangements. The Partnership is to receive interest on its advances to the joint venture at the rate of 10.25% per annum and is to receive 30% of the net profits from the sale of each house after payment of a 10% loan fee is made to OFG. As of December 31, 2002, the Partnership has received all interest payments due on the loan but has not received any payments of residual profits. The Partnership advanced an additional $8,847,000 to the joint venture and received payment of advances in the amount of $14,028,000 during the year ended December 31, 2002. The Partnership's investment in the joint venture was approximately $1,330,000 and $6,511,000 as of December 31, 2002 and 2001, respectively. 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 provided construction financing to the Company at the rate of prime plus two percent. Construction of the building was substantially completed in June 2000. Prior to the sale of the building in July 2000, the Company entered into a reverse, like-kind exchange, whereby the proceeds attributable to the Partnership's interest in the Company from the sale of the building (approximately $3,338,000), net of repayment of the outstanding advances to the Partnership in the amount of $3,858,000, were reinvested into the purchase of a retail commercial development in Greeley, Colorado. The purpose of this exchange was to defer the recognition of gain for tax purposes to the Company and, hence, the Partnership. The sale resulted in a book gain to the Partnership of approximately $2,691,000. The Company also incurred a note payable in the amount of $6,023,000 as part of the purchase of the new property. A new member that will act as the property manager of the Greeley property was admitted to the Company in August, 2000. The Partnership receives 65% of the profits and losses in 720 University after priority return on partner contributions is allocated at the rate of 10% per annum. The assets, liabilities, income and expenses of 720 University have been consolidated into the accompanying consolidated balance sheet and income statement of the Partnership. The net income to the Partnership was approximately $291,000 during the year ended December 31, 2002. The minority interest of the joint venture partner of approximately $132,000 and $108,000 as of December 31, 2002 and 2001, respectively, is reported in the accompanying consolidated balance sheet. 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 None 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, 2002, 2,940 Limited Partners held 277,791,148 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 $21,675,000 and $21,456,000 (prior to reinvested distributions) during 2001 and 2002, respectively. It is the intention of the General Partner to continue to distribute all net income earned by the Partnership to the Unit holders. Item 6. Selected Financial Data
OWENS MORTGAGE INVESTMENT FUND, a California Limited Partnership As of and for the year ended December 31 ---------------- 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Loans secured by trust deeds $ 260,211,121 $ 213,703,469 $ 223,273,464 $ 200,356,517 $ 182,721,465 Less: Allowance for loan losses (4,774,000) (4,425,000) (4,000,000) (4,000,000) (3,500,000) Real estate held for investment 16,200,449 14,064,664 13,078,189 -- -- Real estate held for sale.. 15,791,632 14,768,961 6,683,419 13,733,722 11,155,202 Less: Allowance for losses on real estate.............. (250,000) (634,000) (1,136,000) (1,336,000) (1,184,000) Cash, cash equivalents and other assets................... 10,053,851 43,812,645 8,300,109 7,617,278 13,218,253 ------------- ------------- ------------ ------------- ------------- Total assets............... $ 297,233,053 $ 281,290,739 $ 246,199,181 $ 216,371,517 $ 202,410,920 ============= ============= ============= ============= ============= Liabilities................ $ 16,750,541 $ 8,896,345 $ 7,339,888 $ 1,759,704 $ 1,070,118 Minority interest.......... 131,538 107,680 102,103 -- -- Partners' capital General partner.......... 2,755,846 2,677,867 2,334,845 2,104,936 1,967,069 Limited partners......... 277,595,128 269,608,847 236,422,345 212,506,877 199,373,733 ----------- ----------- ----------- ----------- ----------- Total partners' capital 280,350,974 272,286,714 238,757,190 214,611,813 201,340,802 ----------- ----------- ----------- ----------- ----------- Total liabilities / Partners' capital.... $ 297,233,053 $ 281,290,739 $ 246,199,181 $ 216,371,517 $ 202,410,920 ============= ============= ============= ============= ============= Revenues................... $ 31,078,295 $ 29,479,565 $ 28,268,431 $ 22,184,072 $ 21,685,398 Expenses: Carried interest......... 40,075 173,292 102,212 67,907 49,545 Management fees.......... 3,616,102 3,437,684 3,914,488 2,652,882 3,249,824 Servicing fees........... 611,243 571,538 531,337 479,592 472,390 Rental expenses.......... 3,090,324 1,546,678 763,754 581,537 697,839 Interest expense......... 426,778 429,032 235,311 -- -- Minority interest........ 35,848 5,577 2,103 -- -- Provision for losses on loans 1,584,000 1,039,645 -- 500,000 -- Provision for (recovery of) losses on real estate, net (313,577) -- -- 152,000 -- Other.................... 317,543 386,895 184,170 270,301 237,108 ------- ------- ------- ------- ------- Total Expenses 9,408,336 7,590,341 5,733,375 4,704,219 4,706,706 --------- --------- --------- --------- --------- Net Income $ 21,669,959 $ 21,889,224 $ 22,535,056 $ 17,479,853 $ 16,978,692 ============ ============ ============ ============ ============ Net income allocated to general partner.................. $ 214,125 $ 214,147 $ 221,684 $ 172,335 $ 168,106 ========== ========== ========== ========== ========== Net income allocated to limited partners................. $ 21,455,834 $ 21,675,077 $ 22,313,372 $ 17,307,518 $ 16,810,586 ============ ============ ============ ============ ============ Net income allocated to limited partners per limited partnership unit......... $ .08 $ .08 $ .10 $ .08 $ .09 === === === === ===
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 Forward Looking Statements Some of the information in this Form 10-K may contain forward-looking statements. Such statements can be identified by the use of forward-looking words such as "may," "will," "expect," "anticipate," "estimate," "continue" or other similar words. These statements discuss future expectations, contain projections of results of operations or of financial conditions or state other forward-looking information. When considering such forward-looking statements you should keep in mind the risk factors and other cautionary statements in the Partnership's Prospectus. Although management of the Partnership believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, there are certain factors, in addition to these risk factors and cautioning statements, such as general economic conditions, local real estate conditions, adequacy of reserves, or weather and other natural occurrences that might cause a difference between actual results and those forward-looking statements. Results of Operations 2002 Compared to 2001 The net income decrease of $219,000 (1.0%) for 2002 compared to 2001, was due to: o a decrease in other income of $345,000; o an increase in management fees to the general partner of $178,000; o an increase in rental and other expenses of $1,544,000; and o an increase in provision for loan losses of $544,000. The net income decrease in 2002 as compared to 2001, was offset by: o an increase in interest income on loans secured by trust deeds of $1,382,000; o an increase in rental and other income on real estate properties of $637,000; o a decrease in carried interest to the general partner of $133,000; o a decrease in other expenses of $113,000; and o the net recovery of losses on real estate held for sale of $314,000. Interest income on investments (other income) decreased by $345,000 (50.8%) for the year ended December 31, 2002, as compared to the same period in 2001 due primarily to a decrease in the average yield on the Partnership's investments from 4.0% to 2.1% due to a decrease in general market interest rates. Management fees to the General Partner are paid pursuant to the Partnership Agreement and are determined at the sole discretion of the General Partner. The increase in management fees of $178,000 (5.2%) during the year ended December 31, 2002 as compared to 2001 was primarily a result of an increase in the average loan portfolio of 7.0% during the year. The maximum management fee permitted under the Partnership Agreement is 2 3/4% per year of the average upaid balance of mortgage loans. For the years 2000, 2001 and 2002, the management fees were 1.85%, 1.48% and 1.46% of the average unpaid balance of mortgage loans, respecitvely. In determining the management fees and hence the yield to the partners, the General Partner may consider a number of factors, including current market yields, delinquency experience, uninvested cash and real estate activities. The General Partner expects that the management fees that it receives from the Partnership will vary in amount and percentage from period to period, and it is highly likely that the General Partner will again receive less than the maximum management fees in the future. However, if the General Partner chooses to take the maximum allowable management fees in the future, the yield paid to limited partners may be reduced. If the maximum management fees had been paid to the General Partner during the year ended December 31, 2002, the management fees would have been $6,724,000 (increase of $3,108,000), which would have reduced net income allocated to limited partners by approximately 14.3%, and net income allocated to limited partners per weighted average limited partner unit by the same percentage to $.07. The increase in rental and other expenses on real estate properties of $1,544,000 (99.8%) and the increase in rental and other income on real estate properties of $637,000 (24.5%) was primarily the result of the foreclosure on a hotel located in Phoenix, Arizona during the year ended December 31, 2002 and its subsequent operation, the acquisition of a commercial building through foreclosure in the last half of 2001, the losses incurred from the Partnership's investments in OLH and Dation of $366,000 during the year ended December 31, 2002, and delinquent property taxes and other expenses incurred in the total amount of $410,000 on three non-operating properties that were obtained via foreclosure during 2002. See further discussion under "Real Estate Properties Held for Sale and Investment" below. The provision for loan losses of $1,584,000 for the year ended December 31, 2002 was based on an analysis performed on the loan portfolio as of December 31, 2002. See "Financial Condition - Loan Portfolio" below. Interest income on loans secured by trust deeds increased $1,382,000 (5.6%) for the year ended December 31, 2002, as compared to the same period in 2001. This increase was a result of an increase in the average loan portfolio of 7.0% during the year ended December 31, 2002 as compared to 2001 and an increase in the weighted average yield of the loan portfolio from 11.75% for the year ended December 31, 2001 to 11.86% for the year ended December 31, 2002. The increase was partially offset by the increase in loans delinquent greater than ninety days during the year ended December 31, 2002. See "Financial Condition - Loan Portfolio" below. The decrease in carried interest to the general partner of $133,000 (76.9%) is a result of decreased limited partner contributions to the Partnership during the year ended December 31, 2002 as the Partnership has been closed to most new investments since September 1, 2001. On a monthly basis, the General Partner receives an additional carried interest in the Partnership equal to 1/2 of 1% of the net increase in the capital accounts of the limited partners pursuant to the Partnership Agreement. The decrease in other expenses of $113,000 (60.5%) was due primarily to registration fees paid to the Securities and Exchange Commission, National Association of Securities Dealers and various states related to a new Partnership registration statement originally filed in September 2001. No filings requiring the payment of fees occurred in 2002. The net recovery of losses on real estate held for sale of $314,000 was the result of the reversal of an allowance in the amount of $384,000 previously established on the manufactured home subdivision development located in Ione, California, due to management's evaluation of the property's fair market value based on recent sales. This recovery was offset by an allowance in the amount of $70,000 established on the commercial building located in Gresham, Oregon in June 2002, which was sold by the Partnership in July 2002. Results of Operations 2001 Compared to 2000 The net income decrease of $646,000 (2.9%) for 2001 as compared to 2000, was due to: o a decrease in gain on sale of real estate of $1,530,000; o an increase in rental expenses of $783,000; o an increase in interest expense of $194,000; o an increase in other expenses of $165,000; and o an increase in the provision for loan losses of $1,040,000. The net income decrease in 2001 as compared to 2000, was offset by: o an increase in interest income on loans secured by trust deeds of $1,394,000; o an increase in rental income of $907,000; o an increase in other income of $440,000; and o a decrease in management fees to the general partner of $477,000; Gain on sale of real estate decreased by $1,530,000 (51.5%) for the year ended December 31, 2001, as compared to 2000 due to the sale of the Los Gatos office building within the corporate joint venture in July 2000, which resulted in a gain of $2,691,000 for financial statement purposes in 2000. Four properties were sold during the year ended December 31, 2001, resulting in a net gain of $1,442,000. The increase in rental expenses of $783,000 (102.5%) during the year ended December 31, 2001 as compared to 2000 was a result of the purchase of the retail development in Greeley, Colorado in July 2000. Thus, the Partnership had only approximately five months of rental expenses from this property in 2000 as compared to a full twelve months of rental expenses in 2001. The increase in interest expense of $194,000 (82.3%) during the year ended December 31, 2001 as compared to 2000 was a result of the purchase of the retail development in Greeley, Colorado in July 2000. Thus, the Partnership had only approximately five months of interest expense from this property in 2000 as compared to a full twelve months of interest expense in 2001. The increase in other expenses of $165,000 (732.9%) was due primarily to registration fees paid to the Securities and Exchange Commission, National Association of Securities Dealers and various states related to a new Partnership registration statement filed in September 2001. The increase in the provision for loan losses of $1,040,000 (100%) was made as a result of increased delinquencies in the loan portfolio as a whole and specific reserves required based on the General Partner's calculation of the fair value of the collateral on certain Partnership loans. See "Financial Condition - Loan Portfolio" below. Interest income on loans secured by trust deeds increased $1,394,000 (6.0%) for the year ended December 31, 2001, as compared to 2000. This increase was a result of an increase in the weighted average yield of the loan portfolio from 11.33% for the year ended December 31, 2000 to 11.75% for the year ended December 31, 2001. In addition, the average loan portfolio grew by 7.6% for the year ended December 31, 2001 as compared to 2000. The increased income resulting from the growth in the weighted average yield and the average loan portfolio were offset by an increase in loans greater than 90 days delinquent in payments as of December 31, 2001 as compared to December 31, 2000. See "Financial Condition - Loan Portfolio" below. The increase in rental income of $907,000 (53.7%) during the year ended December 31, 2001 as compared to 2000 was primarily a result of the purchase of the retail development in Greeley, Colorado in July 2000. Thus, the Partnership had only approximately five months of rental income from this property in 2000 as compared to a full twelve months of rental income in 2001. The increase in other income of $440,000 (184.7%) for the year ended December 31, 2001 as compared to 2000 was primarily the result of interest income from increased cash pending investment in mortgage loans during the year. These funds were invested in money market accounts and commercial paper. The increase in funds pending investment was primarily a result of increased sales of Partnership units (including sales under the Partnership's Distribution Reinvestment Plan) without the investment in new loans of the same amount. Management fees to the General Partner are paid pursuant to the Partnership Agreement and are determined at the sole discretion of the General Partner. In determining the yield to the partners and hence the management fees, the General Partner may consider a number of factors, including current market yields, delinquency experience, uninvested cash and real estate activities. The General Partner expects that the management fees that it receives from the Partnership will vary in amount and percentage from period to period, and it is highly likely that the General Partner will again receive less than the maximum management fees in the future. However, if the General Partner chooses to take the maximum allowable management fees in the future, the yield paid to limited partners may be reduced. The decrease in management fees of $477,000 (12.2%) during the year ended December 31, 2001 as compared to 2000 was primarily a result of increased delinquencies in the Partnership's loan portfolio. If the maximum management fees had been paid to the General Partner during the year ended December 31, 2001, the management fees would have been $6,287,000 (increase of $2,849,000), which would have reduced net income allocated to limited partners by approximately 13.0%, and net income allocated to limited partners per weighted average limited partner unit by the same percentage to $.07. Financial Condition December 31, 2002, 2001 and 2000 Loan Portfolio At the end of 2000 and 2001 the number of Partnership mortgage investments was 116 and 97, respectively, and increased to 100 by December 31, 2002. The average loan balance was $1,925,000 and $2,203,000 at the end of 2000 and 2001 respectively, and increased to $2,602,000 as of December 31, 2002. The average loan balance in the Partnership's portfolio has been steadily increasing for several years. This is due to the fact that there are more lenders competing for short-term bridge financing at loan levels of $1,000,000 and less, and many of these lenders have the financial capability of funding these loans at more competitive rates. The current opportunities for maximizing the return to the Partnership are greater for larger loan amounts. Approximately $26,327,000 (10.1%) and $18,604,000 (8.7%) of the loans invested in by the Partnership were more than 90 days delinquent in monthly payments as of December 31, 2002 and 2001, respectively. Of these amounts, approximately $6,503,000 (2.5%) and $5,327,000 (2.5%) were in the process of non-judicial foreclosure and approximately $4,300,000 (1.7%) and $6,182,000 (2.9%), respectively, involved loans to borrowers who were in bankruptcy. In addition, the Partnership's investment in loans that were past maturity (delinquent in principal) but current in monthly payments was approximately $41,569,000 as of December 31, 2002. Of the total past maturity loans as of December 31, 2002, $8,161,000 was paid off and $14,000,000 had the maturity date extended subsequent to year end. Loans more than 90 days delinquent in monthly payments increased by $7,723,000 (41.5%) from December 31, 2001 to December 31, 2002, primarily due to one large loan with a principal amount of $11,222,000 that became delinquent during the year ended December 31, 2002. This loan is secured by leasehold interests in nine commercial properties located in Washington, Idaho and Nevada. The largest tenant in one of the properties recently vacated which significantly reduced the cash flow to the borrower. A modification agreement was signed in August 2002 whereby the borrower is to make reduced minimum monthly payments of $100,000 until the borrower's cash situation improves. In August 2002, the borrower sold one of the properties securing the loan and paid down loan principal by $828,000. The Partnership has been applying all payments received since June 2002 to reduction in principal and has not accrued any past due interest on the loan. The Partnership has also established a specific loan loss allowance on this loan in the amount of $621,000 as of December 31, 2002. The General Partner does not expect the delinquency rate on the Partnership's loan portfolio to continue to increase in the forseeable future. However, there is no precise method used by the General Partner to predict delinquency rates or losses on specific loans. Loans in the process of foreclosure as of December 31, 2001 consisted of three loans, of which one was foreclosed on by the Partnership in January 2002 (see "Real Estate Properties Held for Sale and Investment" below), one paid off in full resulting in no loss to the Partnership, and one is still delinquent and in foreclosure. In addition, four other delinquent loans with a total principal balance of approximately $4,903,000 entered into foreclosure during the year ended December 31, 2002. The Partnership has established a specific loan loss allowance in the amount of $353,000 on one of these loans as of December 31, 2002. Loans to borrowers who were in bankruptcy decreased by $1,882,000 (30.4%) due to one loan that became real estate held for sale due to foreclosure and one loan that became current pursuant to the bankruptcy plan during the year ended December 31, 2002. The resulting increase in loans to borrowers who were in bankruptcy was due to two delinquent loans with a total principal balance of approximately $4,300,000, the borrowers of which entered into bankruptcy proceedings during the year ended December 31, 2002. The Partnership has established a specific loan loss allowance in the amount of $1,000,000 on one of these loans as of December 31, 2002. As of December 31, 2002, 2001 and 2000, the Partnership held the following types of mortgages:
December 31, December 31, December 31, 2002 2001 2000 ---- ---- ---- 1st Mortgages $ 241,335,259 205,139,594 212,831,212 2nd Mortgages 18,875,862 8,563,875 10,377,607 3rd Mortgages -- -- 64,645 ----------- ----------- ----------- Total $ 260,211,121 $ 213,703,469 $ 223,273,464 =========== =========== =========== Income Producing Properties $ 228,210,411 $ 180,506,295 $ 169,840,446 Construction 12,670,310 14,773,984 41,417,905 Unimproved Land 16,938,678 15,360,822 11,870,113 Residential 2,391,722 3,062,368 145,000 ----------- ----------- ----------- Total $ 260,211,121 $ 213,703,469 $ 223,273,464 =========== =========== ===========
As of December 31, 2002, 2001, and 2000, approximately 43%, 54% and 54% of the Partnership's mortgage loans were secured by real property in Northern California. The Partnership's investment in residential loans decreased by $671,000 (21.9%) since December 31, 2001 due to partial repayments received on one residential loan during the year ended December 31, 2002, net of three new residential loans originated during the year. All of the residential loans are first trust deeds. The Partnership's investment in construction loans decreased by $2,104,000 (14.2%) since December 31, 2001. This decrease was primarily due to the payoff on one large construction loan in the amount of $7,350,000 and the completion of construction on properties secured by several other loans that resulted in a change in classification to income-producing or residential. Changes in the allowance for loan losses for the years ended December 31, 2002, 2001and 2000 were as follows:
2002 2001 2000 ---- ---- ---- Balance, beginning of period $ 4,425,000 $ 4,000,000 $ 4,000,000 Provision 1,584,000 1,040,000 -- Charge-offs (1,235,000) (615,000) -- --------- --------- --------- Balance, end of period $ 4,774,000 $ 4,425,000 $ 4,000,000 ========= ========= =========
Real Estate Properties Acquired Through Foreclosure and Held for Sale and Investment The Partnership currently holds title to 15 properties that were foreclosed on or purchased from January 1, 1993 through December 31, 2002 in the amount of $31,742,000, net of allowance for losses of $250,000. As of December 31, 2002, properties held for sale total $15,542,000 (including the properties held in the limited liability companies and the real estate joint venture, which was not acquired through foreclosure - see below) and properties held for investment total $16,200,000 (excluding the property held in the corporate joint venture - see below). When the Partnership acquires property by foreclosure, it typically earns less income on those properties than could be earned on mortgage loans and may not be able to sell the properties in a timely manner. During the year ended December 31, 2002, a commercial parcel located in Vallejo, California that was acquired by the Partnership through foreclosure in 1994 was sold for $1,095,000, resulting in a gain to the Partnership of approximately $734,000. In addition, a commercial building located in Sacramento, California that was acquired by the Partnership through foreclosure in 1998 was sold for $147,000, resulting in a gain to the Partnership of approximately $117,000. During the year ended December 31, 2002, the Partnership sold a commercial building located in Gresham, Oregon for proceeds in the amount of $340,000 resulting in no gain or loss. An allowance in the amount of $70,000 was previously established in 2002 on this property and, thus, the loss was reported net of the recovery of losses on real estate held for sale in the accompanying consolidated income statement for the year ended December 31, 2002. During the year ended December 31, 2002, 22 lots (11 including houses) located in a manufactured home subdivision development located in Ione, California (that were acquired by the Partnership through foreclosure in 1997) were sold for $1,811,000, resulting in a gain to the Partnership of approximately $317,000. An allowance in the amount of $384,000 that was previously established on this property was reversed during the year ended December 31, 2002 as a result of management's evaluation of the property's fair market value based on recent sales. There are 61 lots remaining to be sold on this property as of December 31, 2002. During the year ended December 31, 2002, the Partnership foreclosed on a 1st mortgage loan secured by a commercial building located in Albany, Oregon in the amount of $1,800,000 and foreclosed on a 1st mortgage loan secured by commercial land located in Gresham, Oregon in the amount of $1,620,000 and obtained the properties via the trustee's sale. During the year ended December 31, 2002, the Partnership foreclosed on a first mortgage loan secured by a hotel located in Phoenix, Arizona in the amount of $2,925,000 (which had an allowance established in the amount of $1,235,000) and obtained the property via the trustee's sale. The Partnership paid $335,000 in delinquent property taxes at the time of foreclosure which were capitalized to the basis of the property. The Partnership transferred the net basis of the loan to real estate held for sale at the time of foreclosure. During the year ended December 31, 2002, the Partnership foreclosed on a first mortgage loan secured by undeveloped land located in San Jose, California in the amount of $3,025,000 and obtained the property via the trustee's sale. During the year ended December 31, 2001, the Partnership entered into a limited partnership, University Hills, L.P. (University Hills) with two other unrelated developers for the purpose of developing, leasing and selling an apartment complex on 5.3 acres of undeveloped land located in Reno, Nevada (which was acquired through foreclosure by the Partnership in 1996). As of December 31, 2001, the land had not yet been contributed into University Hills by the Partnership. During the year ended December 31, 2002, University Hills was dissolved. The Partnership intends to develop the property on its own. During the year ended December 31, 2002, approximately $41,000 of costs previously advanced to University Hills were written off by the Partnership. The Partnership's total net basis in the property is $365,000 as of December 31, 2002. In January 2003, the Partnership foreclosed on a first mortgage loan secured by an industrial building located in Santa Clara, California in the amount of $2,000,000 and obtained the property via the trustee's sale. During the year ended December 31, 2001, an industrial building located in Merced, California that was acquired by the Partnership through foreclosure in 1993 was sold for $1,000,000, resulting in a gain to the Partnership of approximately $478,000 (net of the allowance for real estate losses established on this property in the amount of $350,000). During the year ended December 31, 2001, a light industrial building located in Oakland, California that was acquired by the Partnership through foreclosure in 1997 was sold for cash of $1,328,000, resulting in a gain to the Partnership of approximately $875,000. A commercial building located in San Ramon, California that was acquired by the Partnership through foreclosure in 1999 was sold for cash of $1,390,000, resulting in a gain to the Partnership of approximately $151,000 during 2001. In addition, one house and one improved lot located in Lake Don Pedro, California that were acquired by the Partnership through foreclosure in 1999 were sold for cash of $174,000, resulting in a loss to the Partnership of approximately $62,000 during 2001. During the year ended December 31, 2001, the Partnership foreclosed on a 2nd mortgage loan secured by an office building located in Roseville, California in the amount of $210,000 and obtained the property via the trustee's sale. The Partnership subsequently paid off the 1st mortgage loan in the amount of approximately $527,000. During the year ended December 31, 2000, an industrial building located in Lathrop, California that was acquired by the Partnership through foreclosure in April 2000 was sold for cash of $90,000 and a note of $814,000, resulting in a gain to the Partnership of approximately $142,000. The note was repaid in full by the borrower in 2001. 87 residential lots located in Lake Don Pedro, California that were acquired by the Partnership through foreclosure in 1999 were sold for cash resulting in a gain to the Partnership of approximately $46,000 during 2000. In addition, a residential/retail building located in Oakland, California that was acquired by the Partnership through foreclosure in 1999 was sold for cash resulting in a gain to the Partnership of approximately $92,000 during 2000. Changes in the allowance for real estate losses for the years ended December 31, 2002, 2001and 2000 were as follows:
2002 2001 2000 ---- ---- ---- Balance, beginning of period $ 634,000 $ 1,136,000 $ 1,336,000 Provision -- -- -- Deductions (384,000) (502,000) (200,000) -------- --------- ---------- Balance, end of period $ 250,000 $ 634,000 $ 1,136,000 ======== ========= =========
Five of the Partnership's fifteen properties do not currently generate revenue. Expenses from rental properties (including expenses from the Corporate Joint Venture - see below) have increased from approximately $1,547,000 to $3,090,000 (99.8%) for the years ended December 31, 2001 and 2002, respectively, and revenues associated with these properties (including revenues from the Corporate Joint Venture - see below) have increased from $2,596,000 to $3,233,000 (24.5%), thus generating a net income from real estate of $143,000 during the year ended December 31, 2002 (compared to $1,049,000 during 2001). The increases in income and expenses (and decrease in net income from real estate operations) are primarily a result of the foreclosure and subsequent operation of a hotel located in Phoenix, Arizona during 2002, the acquisition of a commercial building through foreclosure in the last half of 2001, the losses incurred from the Partnership's investments in OLH and Dation in the total amount of $366,000 during the year ended December 31, 2002, and delinquent property taxes and other expenses incurred in the total amount of $410,000 on three non-operating properties that were obtained via foreclosure during 2002. As of December 31, 2001 and 2000, the Partnership owned eleven and twelve properties, respectively. Prior to foreclosure, these properties secured Partnership loans aggregating $10,509,000 and $10,567,000 in 2001 and 2000, respectively. During the years ended December 31, 2001 and 2000, the Partnership acquired certain properties through foreclosure on which it had trust deed investments totaling $3,369,000 and $685,000, respectively. Investment in Limited Liability Companies Oregon Leisure Homes, LLC During 2001, a new entity named Oregon Leisure Homes, LLC (OLH) was formed between the Partnership and an unrelated developer for the purpose of developing and selling eight condominium units located in Lincoln City, Oregon, which were acquired by the Partnership via a deed in lieu of foreclosure. OLH also purchased a house located on the ocean in Lincoln City for renovation and sale. OLH will sell eleven interests in each condominium and seven interests in the ocean house. The Partnership is co-manager of OLH and is to receive 70% of the profits. The assets, liabilities, income and expenses of OLH have been consolidated into the accompanying consolidated balance sheet and income statement of the Partnership. During the year ended December 31, 2002, the Partnership advanced an additional $936,000 to OLH (for a total of $1,537,000) for continued development and marketing of the condominium units and house that are currently for sale. OLH sold three interests in the condominiums during the year ended December 31, 2002 for total proceeds of $74,000 and a note in the amount of $27,000. No gain or loss was recognized as a result of these sales. OLH sold six interests in the ocean house during the year ended December 31, 2002 for proceeds of $383,000 and three notes in the total amount of $296,000, and recognized gain in the amount of $198,000. The net loss to the Partnership (including gains on sales) was approximately $182,000 for the year ended December 31, 2002. The Partnership's investment in the OLH real property was approximately $1,558,000 as of December 31, 2002. Dation, LLC In July 2001, a mobile home park located in Lake Charles, Louisiana that secured a Partnership loan in the amount of $2,113,600 was transferred by the borrower to a new entity named Dation, LLC (Dation), which was formed between the Partnership and an unrelated developer. The Partnership is advancing funds to Dation to finish the remaining lots under the existing loan terms and may provide additional financing to Dation. The Partnership is co-manager of Dation and is to receive 50% of the profits and losses. The net loss to the Partnership was approximately $184,000 and $79,000 for the years ended December 31, 2002 and 2001, respectively. The Partnership also recognized $64,000 and $128,000 in interest income from its loan to Dation during the years ended December 31, 2002 and 2001, respectively. As of December 31, 2002, the Partnership had advanced an additional $140,000 to Dation and had received repayments from sales of lots in the amount of $60,000, under the existing loan. The Partnership's total investment in Dation was approximately $1,931,000 as of December 31, 2002. Investment in Real Estate Joint Venture The Partnership has a construction loan on a housing development located in Hayward, California. The loan is reported in the financial statements as an investment in a real estate joint venture to account for the investment pursuant to accounting guidelines for acquisition, development and construction arrangements. The Partnership is to receive interest on its advances to the joint venture at the rate of 10.25% per annum and is to receive 30% of the net profits from the sale of each house after payment of a 10% loan fee is made to OFG. As of December 31, 2002, the Partnership has received all interest payments due on the loan but has not received any payments of residual profits. The Partnership advanced an additional $8,847,000 to the joint venture and received payment of advances in the amount of $14,028,000 during the year ended December 31, 2002. The Partnership's investment in the joint venture was approximately $1,330,000 and $6,511,000 as of December 31, 2002 and 2001, respectively. 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 provided construction financing to the Company at the rate of prime plus two percent. Construction of the building was substantially completed in June 2000. Prior to the sale of the building in July 2000, the Company entered into a reverse, like-kind exchange, whereby the proceeds attributable to the Partnership's interest in the Company from the sale of the building (approximately $3,338,000), net of repayment of the outstanding advances to the Partnership in the amount of $3,858,000, were reinvested into the purchase of a retail commercial development in Greeley, Colorado. The purpose of this exchange was to defer the recognition of gain for tax purposes to the Company and, hence, the Partnership. The sale resulted in a book gain to the Partnership of approximately $2,691,000. The Company also incurred a note payable in the amount of $6,023,000 as part of the purchase of the new property. A new member that will act as the property manager of the Greeley property was admitted to the Company in August, 2000. The Partnership receives 65% of the profits and losses in the Company after priority return on partner contributions is allocated at the rate of 10% per annum. The assets, liabilities, income and expenses of the Company have been consolidated into the accompanying consolidated balance sheet and income statement of the Partnership. The net income to the Partnership was approximately $291,000 during the year ended December 31, 2002. The minority interest of the joint venture partner of approximately $132,000 and $108,000 as of December 31, 2002 and 2001, respectively, is reported in the accompanying consolidated balance sheet. Cash and Cash Equivalents Cash and cash equivalents decreased from approximately $41,431,000 as of December 31, 2001 to $6,684,000 as of December 31, 2002, respectively ($34,747,000 or 83.9%). This decrease is primarily due to a greater amount of loans funded or purchased than repayments on loans received during the year ended December 31, 2002. Interest and Other Receivables Interest and other receivables increased from approximately $2,253,000 as of December 31, 2001 to $3,177,000 as of December 31, 2002 ($924,000 or 41.0%), due primarily to additional deferred interest accrued on three loans pursuant to the loan agreements in the amount of approximately $110,000, amounts due from borrowers of certain loans in the amount of $167,000 for legal fees, insurance and property tax payments made by the Partnership, and an increase in interest receivable on loans secured by trust deeds as of December 31, 2002. The increase in interest receivable is a result of an increase in the average loan portfolio of 7.0% and an increase in the weighted average yield of the loan portfolio from 11.75% for the year ended December 31, 2001 to 11.86% for the year ended December 31, 2002. Due from Affiliate Due from affiliate decreased by approximately $64,000 (50.2%) during the year ended December 31, 2002 due to additional interest accrued on the loan to Dation, LLC (see above). Due to General Partner Due to General Partner decreased from approximately $1,272,000 as of December 31, 2001 to $957,000 as of December 31, 2002 ($315,000 or 24.8%), due primarily to lower accrued management fees for the months of November and December 2002 as compared to November and December 2001. These fees are paid pursuant to the Partnership Agreement (see "Results of Operations" above). Note Payable Note payable increased from approximately $6,920,000 as of December 31, 2001 to $8,190,000 as of December 31, 2002 ($1,270,000 or 18.4%), due to advances made on the loan held within the Corporate Joint Venture for the commercial development in Greeley, Colorado (see above) to pay for building and tenant improvements during 2002. Line of Credit Payable Line of credit payable increased $6,867,000 (100%) from December 31, 2001 to December 31, 2002 as a result of the Partnership's decision to advance from the line of credit to fund investments in certain loans during the year ended December 31, 2002. There is an additional $33,133,000 available to be advanced from the line of credit as of December 31, 2002. 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 their loan portfolios (including analyses of 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. The allowance for loan losses is established through a provision for loan losses based on the General Partner's evaluation of the risk inherent in the Partnership's loan portfolio and current economic conditions. Such evaluation, which includes a review of all loans on which full collectibility may not be reasonably assured, considers among other matters: o prevailing economic conditions; o historical experience; o the types and dollar amounts of the loans in the portfolio; o borrowers' financial condition and adverse situations that may affect the borrowers' ability to pay; o evaluation of industry trends; o review and evaluation of loans identified as having loss potential; and o estimated net realizable value or fair value of the underlying collateral. 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. Additions to the allowance for loan losses are made by charges to the provision for loan losses. Loan losses deemed to be uncollectible are charged against the allowance for loan losses. Recoveries of previously charged off amounts are credited to the allowance for loan losses. There was a $1,235,000 loss recognized on a motel property located in Phoenix, Arizona at the time of foreclosure in 2002 (see discussion under "Financial Condition" above). There was a total loss of $614,000 realized on two Partnership loans during the year ended December 31, 2001 There were no actual losses incurred on loans by the Partnership during the years ended December 31, 2000, 1999 and 1998. However, the Partnership realized a loss on real estate in the amount of $712,000 from the sale of a foreclosed property to the General Partner at its fair market value during 1998. As of December 31, 2002, management believes that the allowance for loan losses of $4,774,000 is adequate. Liquidity and Capital Resources Sales of Units to investors and portfolio loan payoffs provide the capital for new mortgage investments. If general market interest rates were to rise substantially, investors might turn to interest-yielding investments other than Partnership Units, which would reduce the liquidity of the Partnership and its ability to make additional mortgage investments to take advantage of the generally higher interest rates. In contrast, a significant increase in the dollar amount of loan payoffs and 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. There was little variation in the percentage of capital withdrawals to total capital invested by the limited partners between 1994 and 2001, excluding regular distributions of net income to limited partners. There has been a significant decrease in withdrawals during the year ended December 31, 2002. Withdrawal percentages have been 7.33%, 7.99%, 6.64%, 5.45%, and 3.32% for the years ended December 31, 1998, 1999, 2000, 2001 and 2002, respectively. 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 within 61 to 91 days after written notices are delivered to the General Partner, 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, other than Units received under the Partnership's Reinvested Distribution 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 total outstanding limited partnership interests may be withdrawn during any calendar year except upon a plan of dissolution of the Partnership. In March 2001, the Partnership amended its Limited Partnership Agreement, with the consent of a majority of limited partners, to allow the Partnership to incur indebtedness for the purpose of investing in mortgage loans. The total amount of indebtedness incurred by the Partnership cannot exceed the sum of 50% of the aggregate fair market value of all Partnership loans. The Partnership finalized a line of credit agreement with a bank in August 2001, which provides interim financing on mortgage loans invested in by the Partnership. The amount of credit available under this line of credit is $40,000,000 (pursuant to an amendment in August 2002). The balance outstanding on the line of credit was $6,867,000 as of December 31, 2002. Contingency Reserves The Partnership maintains cash, cash equivalents and marketable securities as contingency reserves in an aggregate amount of 2% of the limited partners' capital accounts to cover expenses in excess of revenues or other unforeseen obligations of the Partnership. Although the General Partner believes that contingency reserves are adequate, it could become necessary for the Partnership to sell or otherwise liquidate certain of its investments to cover such contingencies on terms which might not be favorable to the Partnership. Current Economic Conditions The current economic climate in Northern California and the Western United States has shown increasing signs of a slowdown. Interest rates have continued to decline and several key indices are at the lowest levels in decades. Despite the Partnership's historical ability to purchase mortgage loans with relatively strong yields, increased competition by other mortgage lenders or changes in the economy could have the effect of reducing mortgage yields in the future. Present 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, the Partnership may be required to invest its excess cash in short-term alternative investments yielding considerably less than investments in mortgage loans. The Partnership Agreement permits the General Partner to purchase delinquent loans from the Partnership as long as certain criteria are met. Although the General Partner has purchased some delinquent loans from the Partnership in the past, it is not required to do so; 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. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The following table contains information about the cash held in money market accounts, loans held in the Partnership's portfolio and a note payable securing a real estate property owned by the Partnership as of December 31, 2002. The presentation, for each category of information, aggregates the assets and liabilities by their maturity dates for maturities occurring in each of the years 2003 through 2007 and separately aggregates the information for all maturities arising after 2007. The carrying values of these assets and liabilities approximate their fair values as of December 31, 2002.
Interest Earning Assets and Interest Bearing Liabilities, Aggregated by Maturity Date Twelve Months Ended December 31, 2003 2004 2005 2006 2007 Thereafter Total ---- ---- ---- ---- ---- ---------- ----- Interest earning assets: Money market accounts $ 6,021,109 $ 6,021,109 - - - - - Average interest 1.3% 1.3% rate - - - - - Loans secured by trust deeds $160,350,025 $43,469,490 $ 37,156,795 $ - $ 3,093,783 $ 16,141,028 $260,211,121 Average interest 12.3% 10.9% 11.0% - 8.91% 11.4% 11.7% rate Interest bearing liabilities: Note payable to bank $ 8,190,111 $ 8,190,111 - - - - - Average interest rate 4.0% - - - - - 4.0% Line of credit payable $ 6,867,371 $ 6,867,371 Average interest rate 4.3% - - - - - 4.3%
Market Risk Market risk is the exposure to loss resulting from changes in interest rates, equity prices and real estate values. The Partnership's note payable bears interest at a variable rate, tied to the LIBOR rate of interest. As a result, the Partnership's primary market risk exposure is to changes in interest rates, which will affect the interest cost of outstanding amounts on the note payable. The majority of the Partnership's mortgage loans (87.0% as of December 31, 2002) earn interest at fixed rates. Changes in interest rates may also affect the value of the Partnership's investment in mortgage loans and the rates at which the Partnership reinvests funds obtained from loan repayments and new capital contributions from limited partners. As interest rates increase, although the interest rates the Partnership obtains from reinvested funds will generally increase, the value of the Partnership's existing loans at fixed rates will generally tend to decrease. As interest rates decrease, the amounts becoming available to the Partnership for investment due to repayment of Partnership loans may be invested at lower rates than the Partnership had been able to obtain in prior investments, or than the rates on the repaid loans. The Partnership does not hedge or otherwise seek to manage interest rate risk. The Partnership does not enter into risk sensitive instruments for trading purposes. Item 8. Financial Statements and Supplementary Data See pages 34-54 and pages 60-62 of this Form 10-K. Report of Independent Certified Public Accountants The Partners Owens Mortgage Investment Fund We have audited the accompanying consolidated balance sheets of Owens Mortgage Investment Fund, a California Limited Partnership, as of December 31, 2002 and 2001, and the related consolidated statements of income, partners' capital and cash flows for the three year period ended December 31, 2002. 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 the auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 consolidated financial position of Owens Mortgage Investment Fund as of December 31, 2002 and 2001, and the results of their consolidated operations and their consolidated cash flows for the three years ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedules II and IV are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. /s/ Grant Thornton LLP Reno, Nevada February 8, 2003
OWENS MORTGAGE INVESTMENT FUND, A CALIFORNIA LIMITED PARTNERSHIP Consolidated Balance Sheets December 31, 2002 and 2001 Assets 2002 2001 ------------------- ------------------- Cash and cash equivalents $ 6,684,418 41,431,108 Loans secured by trust deeds, net of allowance for losses of $4,774,000 in 2002 and $4,425,000 in 2001 255,437,121 209,278,469 Interest and other receivables 3,176,786 2,253,322 Due from affiliate 192,647 128,215 Real estate held for sale, net of allowance for losses of $250,000 in 2002 and $634,000 in 2001 15,541,632 14,134,961 Real estate held for investment, net of accumulated depreciation and amortization of $628,000 in 2002 and $339,000 in 2001 16,200,449 14,064,664 -------------- -------------- $ 297,233,053 281,290,739 ============== ============== Liabilities and Partners' Capital Liabilities: Accrued distributions payable $ 619,234 625,645 Due to general partner 956,800 1,272,042 Accounts payable and accrued liabilities 117,025 78,829 Note payable 8,190,111 6,919,829 Line of credit payable 6,867,371 -- -------------- -------------- Total liabilities 16,750,541 8,896,345 -------------- -------------- Minority interest 131,538 107,680 -------------- -------------- Partners' capital (units subject to redemption): General partner 2,755,846 2,677,867 Limited partners Authorized 500,000,000 units outstanding in 2002 and 2001; 442,167,000 and 424,788,000 units issued and 277,791,000 and 269,805,000 units outstanding in 2002 and 2001, respectively 277,595,128 269,608,847 -------------- -------------- Total partners' capital 280,350,974 272,286,714 -------------- -------------- $ 297,233,053 281,290,739 ============== ==============
The accompanying notes are an integral part of these financial statements.
OWENS MORTGAGE INVESTMENT FUND, A CALIFORNIA LIMITED PARTNERSHIP Consolidated Statements of Income Years Ended December 31, 2002, 2001 and 2000 2002 2001 2000 ------------------ ------------------ ------------------ Revenues: Interest income on loans secured by trust deeds $ 26,145,598 24,763,875 23,369,474 Gain on sale of real estate, net 1,366,048 1,441,649 2,971,454 Rental and other income from real estate properties 3,233,067 2,595,848 1,689,256 Other income 333,582 678,193 238,247 ------------------ ------------------ ------------------ Total revenues 31,078,295 29,479,565 28,268,431 ------------------ ------------------ ------------------ Expenses: Management fees to general partner 3,616,102 3,437,684 3,914,488 Servicing fees to general partner 611,243 571,538 531,337 Carried interest to general partner 40,075 173,292 102,212 Administrative 39,600 31,500 31,500 Legal and accounting 204,091 168,255 130,201 Rental and other expenses on real estate properties 3,090,324 1,546,678 763,754 Interest expense 426,778 429,032 235,311 Minority interest 35,848 5,577 2,103 Other 73,852 187,140 22,469 Provision for loan losses 1,584,000 1,039,645 -- Recovery of losses on real estate held for sale, net (313,577) -- -- ------------------ ------------------ ------------------ Total expenses 9,408,336 7,590,341 5,733,375 ------------------ ------------------ ------------------ Net income $ 21,669,959 21,889,224 22,535,056 ================== ================== ================== Net income allocated to general partner $ 214,125 214,147 221,684 ================== ================== ================== Net income allocated to limited partners $ 21,455,834 21,675,077 22,313,372 ================== ================== ================== Net income allocated to limited partners per weighted average limited partnership unit $ 0.08 0.08 0.10 ================== ================== ==================
The accompanying notes are an integral part of these financial statements.
OWENS MORTGAGE INVESTMENT FUND, A CALIFORNIA LIMITED PARTNERSHIP Consolidated Statements of Partners' Capital Years Ended December 31, 2002, 2001 and 2000 Limited partners Total General --------------------------------------- Partners' partner Units Amount capital ------------------- ------------------ ----------------- ------------------ Balances, December 31, 1999 $ 2,104,936 212,702,897 $ 212,506,877 214,611,813 Net income 221,684 22,313,372 22,313,372 22,535,056 Sale of partnership units 204,424 23,801,227 23,801,227 24,005,651 Partners' withdrawals -- (15,121,766) (15,121,766) (15,121,766) Partners' distributions (196,199) (7,077,365) (7,077,365) (7,273,564) ------------------- ------------------ ----------------- ------------------ Balances, December 31, 2000 2,334,845 236,618,365 236,422,345 238,757,190 Net income 214,147 21,675,077 21,675,077 21,889,224 Sale of partnership units 346,584 33,105,753 33,105,753 33,452,337 Partners' withdrawals -- (14,099,001) (14,099,001) (14,099,001) Partners' distributions (217,709) (7,495,327) (7,495,327) (7,713,036) ------------------- ------------------ ----------------- ------------------ Balances, December 31, 2001 2,677,867 269,804,867 $ 269,608,847 272,286,714 Net income 214,125 21,455,834 21,455,834 21,669,959 Sale of partnership units 80,150 3,042,450 3,042,450 3,122,600 Partners' withdrawals -- (9,125,830) (9,125,830) (9,125,830) Partners' distributions (216,296) (7,386,173) (7,386,173) (7,602,469) ------------------- ------------------ ----------------- ------------------ Balances, December 31, 2002 $ 2,755,846 277,791,148 $ 277,595,128 280,350,974 =================== ================== ================= ==================
The accompanying notes are an integral part of these financial statements.
OWENS MORTGAGE INVESTMENT FUND, A CALIFORNIA LIMITED PARTNERSHIP Consolidated Statements of Cash Flows Years ended December 31, 2002, 2001 and 2000 2002 2001 2000 ---------------- ----------------- --------------- Cash flows from operating activities: Net income $ 21,669,959 21,889,224 22,535,056 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of real estate properties (1,366,048) (1,441,649) (2,971,454) Provision for loan losses 1,584,000 1,039,645 -- Recovery of losses on real estate properties held for sale, net (313,577) -- -- Depreciation and amortization 288,672 231,872 100,797 Changes in operating assets and liabilities: Interest and other receivables (600,344) (365,907) 135,322 Accounts payable and accrued liabilities 38,196 (26,811) (325,024) Due from affiliate (64,432) -- -- Due to general partner (315,242) 702,775 (182,492) ---------------- ----------------- --------------- Net cash provided by operating activities 20,921,184 22,029,149 19,292,205 ---------------- ----------------- --------------- Cash flows from investing activities: Purchases of loans secured by trust deeds (148,595,993) (148,046,907) (117,409,372) Principal collected on loans 781,258 1,293,665 1,124,071 Loan payoffs 91,937,090 150,359,545 86,831,041 Sales of loans to third and related parties at face value -- -- 6,665,913 Investment in real estate properties (12,217,682) (8,108,796) (384,513) Net proceeds from disposition of real estate properties 3,850,052 5,093,603 1,346,769 Proceeds received from real estate joint venture 14,028,000 -- -- Investment in corporate joint venture -- -- (2,863,870) Repayment received from corporate joint venture -- -- 581,250 Proceeds from sale of real estate in corporate joint venture -- -- 7,195,640 Purchase of real estate in corporate joint venture -- -- (3,337,888) Minority interest in corporate joint venture 23,858 5,577 102,103 Maturity of commercial paper, net -- -- 200,000 Maturities of certificates of deposit, net -- 50,000 -- ---------------- ----------------- --------------- Net cash (used in) provided by investing activities (50,193,417) 646,687 (19,948,856) ---------------- ----------------- --------------- Cash flows from financing activities: Proceeds from sale of partnership units 3,122,600 33,452,337 24,005,651 Accrued distributions payable (6,411) (16,119) 64,483 Advances on notes payable 1,270,282 896,612 -- Advances on line of credit payable, net 6,867,371 -- -- Partners' cash distributions (7,602,469) (7,713,036) (7,273,564) Partners' capital withdrawals (9,125,830) (14,099,001) (15,121,766) ---------------- ----------------- --------------- Net cash (used in) provided by financing activities (5,474,457) 12,520,793 1,674,804 ---------------- ----------------- --------------- Net (decrease) increase in cash and cash equivalents (34,746,690) 35,196,629 1,018,153 Cash and cash equivalents at beginning of year 41,431,108 6,234,479 5,216,326 ---------------- ----------------- --------------- Cash and cash equivalents at end of year $ 6,684,418 41,431,108 6,234,479 ================ ================= =============== Supplemental Disclosures of Cash Flow Information Cash paid during the year for interest 411,903 445,906 187,732
See notes 3 and 4 for supplemental disclosure of noncash investing and financing activities. The accompanying notes are an integral part of these financial statements. OWENS MORTGAGE INVESTMENT FUND, A CALIFORNIA LIMITED PARTNERSHIP Notes to Consolidated Financial Statements December 31, 2002, 2001 and 2000 (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 277,791,148, 269,804,867 and 236,618,365 as of December 31, 2002, 2001 and 2000, respectively. (2) Summary of Significant Accounting Policies (a) Basis of Presentation The consolidated financial statements include the accounts of the Partnership, its majority-owned limited liability company located in Oregon (see Note 4), and its majority-owned limited liability company located in Colorado (see Note 5). All significant inter-company transactions and balances have been eliminated in consolidation. Certain reclassifications not affecting net income have been made to the 2001 and 2000 consolidated financial statements to conform to the 2002 presentation. (b) 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. (c) New Accounting Pronouncements SFAS 141 and 142 On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. Major provisions of these Statements and their effective dates for the Partnership are as follows: * all business combinations initiated after June 30, 2001 must use the purchase method of accounting. The pooling of interest method of accounting is prohibited except for transactions initiated before July 1, 2001. * intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability. * goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, will not be amortized. Effective January 1, 2002, all previously recognized goodwill and intangible assets with indefinite lives will no longer be subject to amortization. * effective January 1, 2002, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicator. * all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting. These Statements have not had a material impact on the Partnership's financial position or results of operations. SFAS 143 In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and associated asset retirement costs. The new rules apply to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal operation of a long-lived asset. SFAS 143 is effective at the beginning January 1, 2003. The adoption of SFAS 143 will not, at this time, have a material impact on the Partnership's consolidated financial position or results of operations. SFAS 144 In August 2001, the Financial Accounting Standards Board issued SFAS 144, Accounting for the Impairment or Disposition of Long Lived Assets. This Statement supersedes SFAS 121, Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of, and Accounting Principles Board Opinion No. 30, Reporting Results of Operations - Reporting the Effect of Disposals on a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. This Statement retains the fundamental provisions of SFAS 121 for recognition and measurement of impairment, but amends the accounting and reporting standards for segments of business to be disposed of. The provisions of this Statement are required to be adopted no later than fiscal years beginning after December 31, 2001, with early adoption encouraged. The adoption of SFAS 144 did not result in a material impact to the Partnership's consolidated financial position or results of operations. Interpretation No. 46 In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities." Interpretation No. 46 clarifies the application of Accounting Research Bulletin No. 51 and applies immediately to any variable interest entities created after January 31, 2003 and to variable interest entities in which an interest is obtained after that date. This Interpretation is applicable for the Partnership in the third quarter of fiscal year 2003, for interests acquired in variable interest entities prior to February 1, 2003. The Partnership does not expect the adoption of Interpretation No. 46 to have a material effect on its financial position or results of operations. (d) Loans Secured by Trust Deeds Loans secured by trust deeds 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, when the loan is past maturity, or when monthly payments are delinquent greater than 90 days. 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. (e) Allowance for Loan Losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the types and dollar amounts of loans in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the underlying collateral. In limited instances, OFG advances certain payments on behalf of borrowers of Partnership loans, such as property taxes, insurance and mortgage interest pursuant to senior indebtedness. Such payments made on loans by OFG during 2002, 2001 and 2000 totaled approximately $67,000, $136,000 and $191,000, respectively. Of the amounts advanced, $51,000, $52,000 and $96,000 had been reimbursed to OFG by the borrowers as of December 31, 2002, 2001 and 2000, respectively. The loans on which OFG has made such advances are considered impaired and are evaluated with all other impaired loans for purposes of the loan loss allowance. (f) 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. The Partnership maintains its cash in bank deposit accounts that, at times, may exceed Federally insured limits. The Partnership has not experienced any losses in such accounts. The Partnership believes it is not exposed to any significant credit risk on cash and cash equivalents. (g) Marketable Securities At various times during the year, the Partnership may purchase marketable securities 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. (h) Real Estate Held for Sale and Investment Real estate held for sale includes real estate acquired through foreclosure and an investment in a real estate joint venture and is carried at the lower of the recorded investment in the loan or the joint venture, inclusive of any senior indebtedness, or the property's estimated fair value, less estimated costs to sell. Real estate held for investment includes real estate purchased or acquired through foreclosure and is initially stated at the lower of cost or the recorded investment in the loan, or the property's estimated fair value. Depreciation is provided on the straight-line method over the estimated useful lives of buildings and improvements of 39 years. Amortization of lease commissions is provided on the straight-line method over the lives of the related leases. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposition of Long-lived Assets, the Partnership periodically compares the carrying value of real estate 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. During the year ended December 31, 2002, the Partnership reduced the carrying value of a property located in Gresham, Oregon by approximately $70,000 to its fair market value and reversed a previously established reserve on a property located in Ione, California in the amount of $384,000. There were no required reductions to the carrying value of real estate held for sale or investment made for the years ended December 31, 2001 and 2000. (i) 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, 2002 and 2001 are as follows: 2002 2001 --------------- ---------------- Income-producing properties $ 228,210,411 180,506,295 Construction 12,670,310 14,773,984 Unimproved land 16,938,678 15,360,822 Residential 2,391,722 3,062,368 --------------- ---------------- $ 260,211,121 213,703,469 =============== ================ First mortgages $ 241,335,259 205,139,594 Second mortgages 18,875,862 8,563,875 --------------- ---------------- $ 260,211,121 213,703,469 =============== ================ Scheduled maturities of loans secured by trust deeds as of December 31, 2002 and the interest rate sensitivity of such loans is as follows:
Fixed Variable Total interest interest rate rate -------------------- ----------------- ------------------ Year ending December 31: 2002 (past maturity) $ 47,129,257 -- 47,129,257 2003 109,661,651 3,559,117 113,220,768 2004 28,648,442 14,821,048 43,469,490 2005 36,828,382 328,413 37,156,795 2006 -- -- -- 2007 2,800,000 293,783 3,093,783 Thereafter (through 2018) 1,284,394 14,856,634 16,141,028 -------------------- ----------------- ------------------ $ 226,352,126 33,858,995 260,211,121 ==================== ================= ==================
Variable rate loans use as indices the one- and five-year Treasury Constant Maturity Index (1.41% and 2.89%, respectively, as of December 31, 2002), the prime rate (4.25% as of December 31, 2002) or the weighted average cost of funds index for Eleventh District savings institutions (2.54% as of December 31, 2002) or include terms whereby the interest rate is increased at a later date. 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 2002 include approximately $47,129,000 of loans which are past maturity as of December 31, 2002, of which $5,003,000 represents loans for which interest payments are delinquent over 90 days. During the years ended December 31, 2002 and 2001, the Partnership refinanced loans totaling $21,985,000 and $13,677,000, respectively, thereby extending the maturity dates of such loans. 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. As of December 31, 2002, the Partnership participated in 14 separate loans with a total principal balance of $76,050,000 with an unrelated mortgage entity that originated the loans with the borrowers. The General Partner receives the payments on these participated loans from the unrelated entity. Pursuant to inter-creditor agreements between the Partnership and the unrelated entity on 11 of the loans with a total principal balance of $60,550,000, the Partnership is guaranteed its share of interest and principal prior to any other investors participated in such loans. The Partnership's investment in impaired loans that were delinquent in payments greater than 90 days was approximately $26,327,000 as of December 31, 2002. In addition, the Partnership's investment in impaired loans that were past maturity (delinquent in principal) but current in monthly payments was approximately $42,126,000 as of December 31, 2002. The Partnership had an allowance for loan losses equal to $4,774,000 and $4,425,000 as of December 31, 2002 and 2001, respectively. Of the total impaired loans as of December 31, 2002, $13,876,000 has a specific related allowance for credit losses totaling approximately $1,974,000. There is a non-specific allowance for credit losses of $2,800,000 for the remaining impaired loans. Of the impaired loans, approximately $6,503,000 and $5,327,000 were in the process of foreclosure as of December 31, 2002 and 2001. Of the total past maturity loans as of December 31, 2002, $8,161,000 was paid off and $14,000,000 had the maturity date extended subsequent to year end. Changes in the allowance for loan losses for the years ended December 31, 2002, 2001 and 2000 were as follows:
2002 2001 2000 --------------- ------------------ ----------------- Balance, beginning of year $ 4,425,000 4,000,000 4,000,000 Provision 1,584,000 1,039,645 -- Charge-offs (1,235,000) (614,645) -- --------------- ------------------ ----------------- Balance, end of year $ 4,774,000 4,425,000 4,000,000 =============== ================== =================
The average recorded investment in impaired loans with an allowance established was $12,360,000 and $11,234,000 during the years ended December 31, 2002 and 2001, respectively. Interest income received on impaired loans during the years ended December 31, 2002, 2001 and 2000 totaled approximately $630,000, $461,000 and $559,000, respectively. As of December 31, 2002 and 2001, the Partnership's loans secured by deeds of trust on real property collateral located in Northern California totaled approximately 43% ($112,218,000) and 54% ($115,358,000), 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. During the year ended December 31, 2000, the Partnership sold for cash full interests in five loans to third parties and to related parties in the amounts of $6,366,000 and $300,000, respectively. The sale of all the loans resulted in no gain or loss in the accompanying financial statements. (4) Real Estate Held for Sale Real estate held for sale includes the following components as of December 31, 2002 and 2001:
2002 2001 -------------------- -------------------- Real estate held for sale $ 10,722,133 3,778,675 Investment in limited liability companies 3,489,146 3,668,644 Investment in limited partnership -- 176,743 Investment in real estate joint venture 1,330,353 6,510,899 -------------------- -------------------- $ 15,541,632 14,134,961 ==================== ====================
Real estate properties held for sale as of December 31, 2002 and 2001 consists of the following properties acquired through foreclosure in 1993 through 2002:
2002 2001 --------------- --------------- Commercial lot/residential development, Vallejo, California $ -- 361,432 Commercial lot, Sacramento, California, net of valuation allowance of $250,000 as of December 31, 2002 and 2001 299,828 299,828 Manufactured home subdivision development, Ione, California, net of valuation allowance of $384,000 as of December 31, 2001 1,572,785 1,699,931 Undeveloped land, Reno, Nevada 364,948 219,553 Commercial building, Sacramento, California -- 30,000 Commercial building, Gresham, Oregon -- 410,423 Commercial building, Roseville, California -- 757,508 Hotel, Phoenix, Arizona 2,024,532 -- Undeveloped land, Gresham, Oregon 1,624,048 -- Commercial building, Albany, Oregon 1,800,000 -- Undeveloped land, San Jose, California 3,025,992 -- Undeveloped land, Reno, Nevada 10,000 -- --------------- --------------- $ 10,722,133 3,778,675 =============== ===============
The acquisition of certain of these properties (including the property within the limited liability companies discussed below) resulted in non-cash increases in real estate held for sale and non-cash decreases in loans secured by trust deeds of approximately $9,370,000, $3,369,000 and $685,000 for the years ended December 31, 2002, 2001 and 2000, respectively. During the year ended December 31, 2002, the Partnership transferred the commercial building located in Roseville, California in the amount of $758,000 from real estate held for sale to real estate held for investment. During the year ended December 31, 2002, a commercial parcel located in Vallejo, California that was acquired by the Partnership through foreclosure in 1994 was sold for $1,095,000, resulting in a gain to the Partnership of approximately $734,000. In addition, a commercial building located in Sacramento, California that was acquired by the Partnership through foreclosure in 1998 was sold for $147,000, resulting in a gain to the Partnership of approximately $117,000. During the year ended December 31, 2002, the Partnership sold a commercial building located in Gresham, Oregon for proceeds in the amount of $340,000 resulting in no gain or loss. An allowance in the amount of $70,000 was previously established in 2002 on this property and, thus, the loss was reported net of the recovery of losses on real estate held for sale in the accompanying consolidated income statement for the year ended December 31, 2002. During the year ended December 31, 2002, 22 lots (11 including houses) located in a manufactured home subdivision development located in Ione, California (that were acquired by the Partnership through foreclosure in 1997) were sold for $1,811,000, resulting in a gain to the Partnership of approximately $317,000. An allowance in the amount of $384,000 that was previously established on this property was reversed during the year ended December 31, 2002 as a result of management's evaluation of the property's fair market value based on recent sales. There are 61 lots remaining to be sold on this property as of December 31, 2002. During the year ended December 31, 2002, the Partnership foreclosed on a 1st mortgage loan secured by a commercial building located in Albany, Oregon in the amount of $1,800,000 and foreclosed on a 1st mortgage loan secured by commercial land located in Gresham, Oregon in the amount of $1,620,000 and obtained the properties via the trustee's sale. During the year ended December 31, 2002, the Partnership foreclosed on a first mortgage loan secured by a hotel located in Phoenix, Arizona in the amount of $2,925,000 (which had an allowance established in the amount of $1,235,000) and obtained the property via the trustee's sale. The Partnership paid $335,000 in delinquent property taxes at the time of foreclosure which were capitalized to the basis of the property. The Partnership transferred the net basis of the loan to real estate held for sale at the time of foreclosure. During the year ended December 31, 2002, the Partnership foreclosed on a first mortgage loan secured by undeveloped land located in San Jose, California in the amount of $3,025,000 and obtained the property via the trustee's sale. During the year ended December 31, 2001, the Partnership entered into a limited partnership, University Hills, L.P. (University Hills) with two other unrelated developers for the purpose of developing, leasing and selling an apartment complex on 5.3 acres of undeveloped land located in Reno, Nevada (which was acquired through foreclosure by the Partnership in 1996). As of December 31, 2001, the land had not been contributed into University Hills by the Partnership. During the year ended December 31, 2002, University Hills was dissolved. The Partnership intends to either sell the property or develop the property on its own. During the year ended December 31, 2002, approximately $41,000 of costs previously advanced to University Hills were written off by the Partnership. The Partnership's total net basis in the property is $365,000 as of December 31, 2002. In January 2003, the Partnership foreclosed on a first mortgage loan secured by an industrial building located in Santa Clara, California in the amount of $2,000,000 and obtained the property via the trustee's sale. During the year ended December 31, 2001, an industrial building located in Merced, California that was acquired by the Partnership through foreclosure in 1993 was sold for $1,000,000, resulting in a gain to the Partnership of approximately $478,000 (net of the allowance for real estate losses established on this property in the amount of $350,000). During the year ended December 31, 2001, a light industrial building located in Oakland, California that was acquired by the Partnership through foreclosure in 1997 was sold for cash of $1,328,000, resulting in a gain to the Partnership of approximately $875,000. A commercial building located in San Ramon, California that was acquired by the Partnership through foreclosure in 1999 was sold for cash of $1,390,000, resulting in a gain to the Partnership of approximately $151,000 during 2001. In addition, a house and improved lot located in Lake Don Pedro, California that were acquired by the Partnership through foreclosure in 1999 were sold for cash of $174,000, resulting in a loss to the Partnership of approximately $62,000 during 2001. During the year ended December 31, 2001, the Partnership foreclosed on a 2nd mortgage loan secured by an office building located in Roseville, California in the amount of $210,000 and obtained the property via the trustee's sale. The Partnership subsequently paid off the 1st mortgage loan in the amount of approximately $527,000. During 2000, an industrial building located in Lathrop, California that was acquired by the Partnership through foreclosure in April 2000 was sold for cash of $90,000 and a note of $814,000, resulting in a gain to the Partnership of approximately $142,000. The note was repaid in full by the borrower in 2001. 87 residential lots located in Lake Don Pedro, California that were acquired by the Partnership through foreclosure in 1999 were sold for cash resulting in a gain to the Partnership of approximately $46,000 during 2000. In addition, a residential/retail building located in Oakland, California that was acquired by the Partnership through foreclosure in 1999 was sold for cash resulting in a gain to the Partnership of approximately $92,000 during 2000. Changes in the allowance for real estate losses for the years ended December 31, 2002, 2001 and 2000 were as follows:
2002 2001 2000 --------------- ------------------ ----------------- Balance, beginning of year $ 634,000 1,136,000 1,336,000 Provision -- -- -- Deductions (384,000) (502,000) (200,000) --------------- ------------------ ----------------- Balance, end of year $ 250,000 634,000 1,136,000 =============== ================== =================
(b) Investment in Limited Liability Companies Oregon Leisure Homes, LLC During 2001, a new entity named Oregon Leisure Homes, LLC (OLH) was formed between the Partnership and an unrelated developer for the purpose of developing and selling eight condominium units located in Lincoln City, Oregon, which were acquired by the Partnership via a deed in lieu of foreclosure. OLH also purchased a house located on the ocean in Lincoln City for renovation and ultimate sale. OLH will sell eleven interests in each condominium and seven interests in the ocean house. The Partnership is co-manager of OLH and is to receive 70% of the profits. The assets, liabilities, income and expenses of OLH have been consolidated into the accompanying consolidated balance sheet and income statement of the Partnership. During the year ended December 31, 2002, the Partnership advanced an additional $936,000 to OLH (for a total of $1,537,000) for continued development and marketing of the condominium units and house that are currently for sale. OLH sold three interests in the condominiums during the year ended December 31, 2002 for total cash proceeds of $74,000 and a note in the amount of $27,000. No gain or loss was recognized as a result of these sales. OLH sold six interests in the ocean house during the year ended December 31, 2002 for cash proceeds of $383,000 and three notes in the total amount of $296,000, and recognized gain in the amount of $198,000. The net loss to the Partnership (including gains on sales) was approximately $182,000 for the year ended December 31, 2002. The Partnership's investment in the OLH real property was approximately $1,558,000 as of December 31, 2002. Dation, LLC In July 2001, a mobile home park located in Lake Charles, Louisiana that secured a Partnership loan in the amount of $2,113,600 was transferred by the borrower to a new entity named Dation, LLC (Dation), which was formed between the Partnership and an unrelated developer. The Partnership is advancing funds to Dation to finish the remaining lots under the existing loan terms and may provide additional financing to Dation. The Partnership is co-manager of Dation and is to receive 50% of the profits and losses. The net loss to the Partnership was approximately $184,000 and $79,000 for the years ended December 31, 2002 and 2001, respectively. The Partnership also recognized $64,000 and $128,000 in interest income from its loan to Dation during the years ended December 31, 2002 and 2001, respectively. As of December 31, 2002, the Partnership had advanced an additional $140,000 to Dation and had received repayments from sales of lots in the amount of $60,000, under the existing loan. The Partnership's total investment in Dation was approximately $1,931,000 as of December 31, 2002. (c) Investment in Real Estate Joint Venture The Partnership has a construction loan made on a housing development located in Hayward, California. The loan is reported in the financial statements as an investment in a real estate joint venture to account for the investment pursuant to accounting guidelines for acquisition, development and construction arrangements. The Partnership is to receive interest on its advances to the joint venture at the rate of 10.25% per annum and is to receive 30% of the net profits from the sale of each house after payment of a 10% loan fee is made to OFG. As of December 31, 2002, the Partnership has received all interest payments due on the loan but has not received any payments of residual profits. The Partnership advanced an additional $8,847,000 to the joint venture and received payment of advances in the amount of $14,028,000 during the year ended December 31, 2002. The Partnership's investment in the joint venture was approximately $1,330,000 and $6,511,000 as of December 31, 2002 and 2001, respectively. (5) Real Estate Held for Investment Real estate held for investment is comprised of a retail property located in Greeley, Colorado held within the corporate joint venture (see below), an office building and undeveloped land located in Monterey, California, a light industrial building located in Paso Robles, California, and a commercial building located in Roseville, California and is comprised of the following as of December 31, 2002 and 2001: 2002 2001 ---- ---- Land $ 5,198,125 4,924,291 Buildings 9,123,717 8,273,043 Improvements 2,321,153 1,095,212 Other 185,215 111,206 ------------- -------------- 16,828,210 14,403,752 Less: Accumulated depreciation and amortization (627,761) (339,088) ------------- ------------- $ 16,200,449 14,064,664 ============= ============= During the year ended December 31, 2002, the Partnership transferred the commercial building located in Roseville, California in the amount of $758,000 from real estate held for sale to real estate held for investment. Depreciation and amortization expense was $289,000 and $232,000 for the years ended December 31, 2002 and 2001, respectively. Investment in Corporate Joint Venture The Partnership has an investment in a limited liability company, 720 University, LLC (720 University), which owns a commercial retail property located in Greeley, Colorado. The Partnership receives 65% of the profits and losses in 720 University after priority return on partner contributions is allocated at the rate of 10% per annum. The assets, liabilities, income and expenses of 720 University have been consolidated into the accompanying consolidated balance sheet and income statement of the Partnership. The net income to the Partnership was approximately $291,000, $186,000, and $110,000 during the years ended December 31, 2002, 2001 and 2000, respectively. The minority interest of the joint venture partner of approximately $132,000 and $108,000 as of December 31, 2002 and 2001, respectively, is reported in the accompanying consolidated balance sheet. (6) Note Payable The Partnership has a note payable with a bank through its investment in the limited liability company (see note 5), which is secured by the retail development in Greeley, Colorado. The note requires monthly interest payments with the balance of unpaid principal and interest due on May 22, 2003. The interest rate on the note is variable based on the LIBOR rate plus 2.75% (4.0% at December 31, 2002). Interest expense for the years ended December 31, 2002, 2001 and 2000 was approximately $350,000, $429,000 and $235,000, respectively. The principal balance on the note as of December 31, 2002 and 2001 was approximately $8,190,000 and $6,920,000, respectively. The Company also has the option to draw an additional $710,000 on the note for capital expenditures, tenant improvements or leasing commissions. The note contains certain covenants, which the Company has complied with as of December 31, 2002. (7) Line of Credit Payable The Partnership finalized a line of credit agreement with a group of banks in August 2001, which provides interim financing on mortgage loans invested in by the Partnership. The amount of credit available under this line of credit is $40,000,000 (pursuant to an amendment in August 2002). The balance outstanding on the line of credit was $6,867,000 and $0 as of December 31, 2002 and 2001, respectively. Borrowings under this line of credit bear interest at the bank's prime rate, which was 4.25% as of December 31, 2002. Interest expense was approximately $77,000 for the year ended December 31, 2002. The line of credit expires on July 31, 2003. The Partnership is required to maintain non-interest bearing accounts in the total amount of $500,000 with two of the banks. The agreement requires the Partnership to meet certain financial covenants including minimum tangible net worth and total liabilities to tangible net worth. The Partnership has complied with these covenants as of December 31, 2002. (8) Partners' Capital In December 1998, the limited partners voted to amend the Partnership Agreement and there were further amendments by OFG in February 1999, April 2000 and March 2001. All such changes have been incorporated into this note and elsewhere in the consolidated financial statements where applicable. (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 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. 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 $14,270,000, $14,533,000 and $12,689,000 for the years ended December 31, 2002, 2001, and 2000, respectively. Reinvested distributions are not shown as partners' cash distributions or proceeds from sale of partnership units in the accompanying consolidated 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, other than units received under the Partnership's Reinvested Distribution 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) Carried 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 carried interest (formerly "promotional interest"), OFG has an interest equal to 1% of the limited partners' capital accounts. This carried 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, 2002, OFG had made cash capital contributions of $1,390,000 to the Partnership. OFG is required to continue cash capital contributions to the Partnership in order to maintain its required capital balance. The carried interest expense charged to the Partnership was $40,000, $173,000 and $102,000 for the years ended December 31, 2002, 2001 and 2000, respectively. (9) 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 $1,390,000 as of December 31, 2002), 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 as of December 31, 2002 and 2001 were approximately $5,578,000 and $5,413,000, respectively. Cash and cash equivalents as of the same dates were accordingly maintained as reserves. (10) 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:
2002 2001 ------------------- -------------------- Partners' capital per financial statements $ 280,350,974 272,286,714 Accrued interest income (2,485,484) (2,358,962) Allowance for loan losses 4,774,000 4,425,000 Allowance for real estate held for sale/investment 625,468 834,000 Accrued distributions 619,234 625,645 Accrued fees due to general partner 297,824 230,357 Tax-deferred gains on sales of real estate (2,690,850) (2,690,850) Other 170,100 (24,541) ----------------- ---------------- Partners' capital per federal income tax return $ 281,661,266 273,327,363 ================= ================
(11) 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 the twelve months in the calendar year 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. Even though the fees for a month may exceed 1/12 of the maximum limits, at the end of the calendar year the sum of the fees collected for each of the 12 months must be equal to or less than the stated limits. Management fees amounted to approximately $3,616,000, $3,438,000 and $3,914,000 for the years ended December 31, 2002, 2001 and 2000, respectively, and are included in the accompanying consolidated statements of income. Service fees amounted to approximately $611,000, $572,000 and $531,000 for the years ended December 31, 2002, 2001 and 2000, respectively, and are included in the accompanying consolidated statements of income. As of December 31, 2002 and 2001, the Partnership owed management and servicing fees to OFG in the amounts of $956,000 and $1,272,000, respectively. The maximum servicing fees were paid to OFG during the years ended December 31, 2002, 2001 and 2000. If the maximum management fees had been paid to OFG during the years ended December 31, 2002, 2001 and 2000, the management fees would have been $6,724,000 (increase of $3,108,000), $6,287,000 (increase of $2,849,000) and $5,845,000 (increase of $1,931,000), respectively, which would have reduced net income allocated to limited partners by approximately 14.3%, 13.0% and 8.7%, respectively, and net income allocated to limited partners per weighted average limited partner unit by the same percentages to $.07, $.07 and $.09, respectively. In determining the yield to the partners and hence the management fees, OFG may consider a number of factors, including current market yields, delinquency experience, uninvested cash and real estate activities. Large fluctuations in the management fees paid to the General Partner are normally a result of extraordinary items of income or expense within the Partnership (such as gains or losses from sales of real estate, large increases or decreases in delinquent loans, etc.). Thus, OFG expects that the management fees that it receives from the Partnership will vary in amount and percentage from period to period, and OFG may again receive less than the maximum management fees in the future. However, if OFG chooses to take the maximum allowable management fees in the future, the yield paid to limited partners may be reduced. OFG receives all late payment charges from borrowers on loans owned by the Partnership, with the exception of those loans participated with an outside mortgage entity (see note 3), pursuant to the terms of the Partnership Agreement. Such charges are in addition to the normal monthly loan payments and totaled approximately $649,000, $1,297,000, and $1,118,000 for the years ended December 31, 2002, 2001 and 2000, respectively. OFG originates all loans the Partnership invests in and receives a loan origination fee from borrowers, with the exception of those loans participated with an outside mortgage entity (see note 3). Such fees earned by OFG amounted to approximately $5,815,000, $6,990,000 and $7,936,000 on loans originated of $138,278,000, $166,264,000 and $117,409,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Such fees as a percentage of loans purchased by the Partnership were 4.2%, 4.2% and 6.8% for the years ended December 31, 2002, 2001 and 2000, respectively. In the year ended December 31, 2000, two loans in the total amount of $45,419,000 had loan origination fees totaling $4,542,000. During 2002, property securing a Partnership loan in the amount of $13,389,000 was sold by the borrower which resulted in the Partnership receiving a partial repayment in the amount of $10,189,000 through the close of escrow. The remaining principal balance of $3,200,000 was then transferred to a new loan, secured by the same property, with the buyer as the new borrower. The Partnership is participating in the new loan with the General Partner and with the former borrower. They each have interests in the loan in the amount of $1,427,000 ($6,054,000 total loan amount). Although the terms of the new loan include interest at the rate of 3% per annum, which is deferred until maturity (one year), per the terms of an agreement between the three lenders in the new loan, the General Partner and former borrower are paying 11.5% interest per month to the Partnership on its $3,200,000 portion of the loan until it is repaid in full in exchange for its portion of the 3% deferred interest. The total amount of interest paid by the General Partner to the Partnership was $167,000 during the year ended December 31, 2002. During the year ended December 31, 2000, OFG purchased two delinquent loans from the Partnership at face value in the total amount of $1,178,000 for a note with interest at 9% per annum. The notes were repaid in full during 2000. The Partnership earned interest income of approximately $56,000 during the year ended December 31, 2000 from OFG and affiliates under loans secured by trust deeds. (12) Net Income per Limited Partner Unit Net income per limited partnership unit is computed using the weighted average number of limited partnership units outstanding during the year. These amounts were 274,891,723, 256,208,924 and 225,427,296 for the years ended December 31, 2002, 2001 and 2000, respectively. (13) Rental Income The Partnership's real estate properties held for investment are leased to tenants under noncancellable leases with remaining terms ranging from one to twenty eight years. Certain of the leases require the tenant to pay all or some operating expenses of the properties. The future minimum rental income from noncancellable operating leases due within the five years subsequent to December 31, 2002, and thereafter are as follows: Year ending December 31: 2003 $ 1,595,348 2004 1,308,573 2005 985,422 2006 677,151 2007 345,604 Thereafter (through 2026) 4,117,040 --------------- $ 9,029,138 =============== (14) Fair Value of Financial Instruments The Financial Accounting Standards Board's Statement No. 107, Disclosures about Fair Value of Financial Instruments, requires the disclosure of fair value for certain of the Partnership's assets. The following methods and assumptions were used to estimate the value of the financial instruments included in the following categories: (a) Cash and Cash Equivalents and 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 $260,211,000 approximates the fair value as of December 31, 2002. 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 $4,774,000 as of December 31, 2002 is also considered in evaluating the fair value of loans secured by trust deeds. (c) Note Payable and Line of Credit Payable The carrying value of the Partnership's note payable in the amount of $8,190,000 and line of credit payable in the amount of $6,867,000 approximates the fair value as of December 31, 2002. The fair value is estimated based upon the quoted market prices for the same or similar issues or on the current rates offered to the Partnership for debt of the same remaining maturities. (15) Selected Quarterly Financial Data (Unaudited)
First Second Third Fourth Quarter Quarter Quarter Quarter Year ------------- ------------ ------------ ----------- ------------- Revenues: 2002 $ 7,947,735 $ 7,170,656 $ 7,975,467 $ 7,984,437 $ 31,078,295 2001 7,768,681 7,037,933 7,562,520 7,110,431 29,479,565 Expenses: 2002 2,155,095 1,900,068 2,734,869 2,618,304 9,408,336 2001 1,296,163 1,868,839 2,120,416 2,304,923 7,590,341 Net Income Allocated to General Partner 2002 57,306 52,111 51,848 52,860 214,125 2001 63,558 50,588 52,570 47,431 214,147 Net Income Allocated to Limited Partners 2002 5,735,334 5,218,477 5,188,750 5,313,273 21,455,834 2001 6,408,960 5,118,506 5,389,534 4,758,077 21,675,077 Net Income Allocated to Limited Partners per Weighted Average Limited Partnership Unit 2002 0.02 0.02 0.02 0.02 0.08 2001 0.03 0.02 0.02 0.02 0.08
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None during 2002. 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, o purchase from the Partnership the interest receivable or principal on delinquent mortgage loans held by the Partnership; o purchase from a senior lienholder the interest receivable or principal on mortgage loans senior to mortgage loans held by the Partnership; and o 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. 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 $34,000,000 on December 31, 2002. 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. o William C. Owens - Mr. Owens, age 52, 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. o Bryan H. Draper - Mr. Draper, age 45, 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. o William E. Dutra - Mr. Dutra, age 40, is a Senior 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. o Andrew J. Navone - Mr. Navone, age 46, 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. o Melina A. Platt - Ms. Platt, age 36, 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: o the creation and implementation of Partnership investment policies; o preparation and review of budgets, economic surveys, cash flow and taxable income or loss projections and working capital requirements; o preparation and review of Partnership reports; o communications with limited partners; o supervision and review of Partnership bookkeeping, accounting and audits; o supervision and review of Partnership state and federal tax returns; and o 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 to the General Partner--Management Fees," at page 6. 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 service fees and carried interest 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, 2002. Such fees were established by the General Partner and were not determined by arms-length negotiation. Year Ended December 31, 2002 Maximum Form of Compensation Actual Allowable Paid by the Partnership: Management Fees*..................... $ 3,616,000 $ 6,724,000 Servicing Fees....................... 611,000 611,000 Carried Interest..................... 40,000 40,000 -------------- ------------- Subtotal $ 4,267,000 $ 7,375,000 -------------- ------------- Paid by Borrowers: Loan Origination Fees................ $ 5,815,000 $ 5,815,000 Late Payment Charges................. 649,000 649,000 ------------- ------------- Subtotal $ 6,464,000 $ 6,464,000 ------------- ------------- Grand Total $ 10,731,000 $ 13,839,000 ============= ============= Reimbursement by the Partnership of Other Expenses $ 217,000 $ 217,000 ============= ============= 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 approximately 3,505,000 units (1.2%) of the Partnership as of December 31, 2002. The voting common stock of the General Partner is owned as follows: 56.098% by William C. Owens, and 14.634% each by Bryan H. Draper, 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, 2002 was approximately $3,616,000. 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, 2002 was approximately $611,000. Carried 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 carried interest, the General Partner has an interest equal to 1% of the limited partners' capital accounts. This carried 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, 2002, the General Partner had made total cash capital contributions of $1,390,000 to the Partnership. During 2002, the Partnership incurred carried interest expense of $40,000. 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). During 2002, the Partnership reimbursed the General Partner for expenses in the amount of $217,000. Compensation from Others 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. Loan Origination Fees Loan origination 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 and may be paid at the placement, extension or refinancing of the loan or at the time of final repayment of the loan. The amount of these fees is determined by competitive conditions and the General Partner and may have a direct effect on the interest rate borrowers are willing to pay the Partnership. During 2002, the General Partner earned investment evaluation fees on Partnership loans in the amount of $5,815,000. 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. During 2002, the General Partner received late payment charges from borrowers in the amount of $649,000. 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 Certified Public Accountants p. 34 Consolidated Balance Sheets - December 31, 2002 and 2001 p. 35 Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000 p. 36 Consolidated Statements of Partners' Capital for the years ended December 31, 2002, 2001 and 2000 p. 37 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 p. 38 Notes to Consolidated Financial Statements pp. 39-54 (2) Schedule II- Valuation and Qualifying Accounts p. 60 (3) Schedule IV- Mortgage Loans on Real Estate pp. 61-62 (4) Exhibits: 3. Sixth Amended and Restated Limited Partnership Agreement, incorporated by reference to Exhibit A to Post-Effective Amendment No. 1 to the Form S-11 Registration Statement No. 333-69272 filed April 18, 2002 and declared effective on April 26, 2002. 10(a). Subscription Agreement and Power of Attorney, incorporated by reference to Exhibit B to Post-Effective Amendment No. 1 to the Form S-11 Registration Statement No. 333-69272 filed April 18, 2002 and declared effective on April 26, 2002. (c) Exhibits: 3. Sixth Amended and Restated Limited Partnership Agreement, incorporated by reference to Exhibit A to Post-Effective Amendment No. 1 to the Form S-11 Registration Statement No. 333-69272 filed April 18, 2002 and declared effective on April 26, 2002. 10(a). Subscription Agreement and Power of Attorney, incorporated by reference to Exhibit B to Post-Effective Amendment No. 1 to the Form S-11 Registration Statement No. 333-69272 filed April 18, 2002 and declared effective on April 26, 2002. (d) Schedules: Schedule II - Valuation and Qualifying Accounts Schedule IV - Mortgage Loans on Real Estate SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS PROVISION FOR LOAN LOSSES ROLLFORWARD Balance at January 1, 2000 $ 4,000,000 Provision -- Charge-offs -- -------------- Balance at December 31, 2000 4,000,000 Provision 1,039,645 Charge-offs (614,645) -------------- Balance at December 31, 2001 4,425,000 Provision 1,584,000 Charge-offs (1,235,000) -------------- Balance at December 31, 2002 $ 4,774,000 ============== PROVISION FOR LOSSES ON REAL ESTATE ROLLFORWARD Balance at January 1, 2000 $ 1,336,000 Charges to costs and expenses -- Deductions (200,000) -------------- Balance at December 31, 2000 1,136,000 Charges to costs and expenses -- Deductions (502,000) -------------- Balance at December 31, 2001 634,000 Charges to costs and expenses -- Deductions (384,000) -------------- Balance at December 31, 2002 $ 250,000 ==============
SCHEDULE IV OWENS MORTGAGE INVESTMENT FUND MORTGAGE LOANS ON REAL ESTATE -- DECEMBER 31, 2002 Principal Amount Principal Amount of Loans Subject of Loans Subject Final Carrying Amount to Delinquent to Delinquent Description Interest Rate Maturity date of Mortgages Principal Payments TYPE OF LOAN Income Producing.......... 4.25-15.00% Current to Sept. 2018 $228,210,411 $ 43,372,535 $ 24,726,789 Construction.............. 10.00-12.00% Oct. 2003 to Oct. 2005 12,670,310 -- -- Land .................... 11.50-15.00% Current to Dec. 2003 16,938,678 2,200,000 1,600,000 Residential............... 11.00-12.00% Current to Mar. 2005 2,391,722 1,556,722 -- ------------ ------------ ------------ TOTAL $260,211,121 $ 47,129,257 $ 26,326,789 ============ ============ ============ AMOUNT OF LOAN $0-250,000................ 8.50-14.50% Current to Sept. 2014 $ 1,927,167 $ 556,999 $ -- $250,001-500,000.......... 10.00-12.50% Current to Sept. 2018 3,870,249 721,870 353,370 $500,001-1,000,000........ 4.25-14.00% Apr. 2003 to Jan. 2014 7,037,031 -- -- Over $1,000,000........... 8.50-15.00% Current to May, 2015 247,376,674 45,850,388 25,973,419 ------------ ------------ ------------ TOTAL $260,211,121 $ 47,129,257 $ 26,326,789 ============ ============ ============ POSITION OF LOAN First .................... 8.50-15.00% Current to Sept. 2018 $241,335,259 $ 38,620,757 $ 25,226,789 Second ................... 4.25-15.00% Current to Aug. 2010 18,875,862 8,508,500 1,100,000 ------------ ------------ ------------ TOTAL $260,211,121 $ 47,129,257 $ 26,326,789 ============ ============ ============
- --------------- NOTE 1: All loans are arranged by or acquired from an affiliate of the Partnership, namely Owens Financial Group, Inc., the General Partner. NOTE 2: Balance at beginning of period (1/1/00)............................$200,356,517 Additions during period: New mortgage loans............................................117,409,372 Loan carried back on sale of real estate..........................813,600 -------------- Subtotal......................................................318,579,489 Deductions during period: Collection of principal........................................87,955,112 Sales of loans secured by trust deeds at face value.............6,665,913 Foreclosures......................................................685,000 -------------- Balance at end of period (12/31/00)..........................$223,273,464 ============== Balance at beginning of period (1/1/01)............................$223,273,464 Additions during period: New mortgage loans............................................148,046,907 -------------- Subtotal......................................................371,320,371 Deductions during period: Collection of principal.......................................151,653,210 Charge-off of loans against allowance for loan losses.............614,645 Loan transferred to investment in real estate joint venture (balance as of 1/1/01)........................................1,980,447 Foreclosures....................................................3,368,600 -------------- Balance at end of period (12/31/01)..........................$213,703,469 ============== Balance at beginning of period (1/1/02)............................$213,703,469 Additions during period: New mortgage loans............................................148,595,993 -------------- Subtotal......................................................362,299,462 Deductions during period: Collection of principal........................................92,718,348 Foreclosures....................................................9,369,993 -------------- Balance at end of period (12/31/02)..........................$260,211,121 ============== During the years ended December 31, 2002, 2001 and 2000, the Partnership refinanced loans totaling $21,985,000, $13,677,000 and $25,126,000, respectively, thereby extending the maturity date. During the year ended December 31, 2000, the Partnership sold two delinquent loans at book value to the General Partner for notes receivable in the total amount of $1,178,000. The General Partner subsequently foreclosed on the loans. The notes were repaid by the General Partner in September 2000. - -------------- NOTE 3: Included in the above loans are the following loans which exceed 3% of the total loans as of December 31, 2002. There are no other loans that exceed 3% of the total loans as of December 31, 2002:
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 ----------- -------- -------- --------------- ----- --------- --------- ------------ Assisted Living Facility 10.9% 8/12/03 Interest only, None $ 7,800,000 $ 7,800,000 $ 0 Fresno, CA............. balance due at maturity Hotel and Casino 12.50% 3/14/03 Interest only, None $20,000,000 $10,000,000 $ 0 Las Vegas, NV.......... balance due at maturity Office and Retail 12.00% 2/01/13 Principal and None $13,240,000 $11,222,206 $11,222,206 Buildings in Seattle, interest due WA, Renton, WA, Nampa, monthly ID, Reno, NV, Olympia, WA, Gig Harbor, WA, Richland, WA & Idaho Falls, ID Hotel and Casino 12.00% 5/30/03 Interest only, None $48,000,000 $13,500,000 $ 0 Las Vegas, NV.......... balance due at maturity 8 Cemeteries and 14.00% 11/6/02 Interest only, None $39,400,000 $14,000,000 $14,000,000 Mortuaries balance due at (Delinquent Islands of Hawaii, Oahu, maturity Principal) and Maui...............
- --------------- NOTE 4: All amounts reported in this Schedule IV represent the aggregate cost for Federal income tax purposes. NOTE 5: There is a loan loss allowance in the amount of $621,000 as of December 31, 2002 on the loan with a carrying amount of $11,222,206 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 14, 2003 OWENS MORTGAGE INVESTMENT FUND, a California Limited Partnership By: Owens Financial Group, Inc., General Partner Dated: March 14, 2003 By: /s/ William C. Owens ------------------- William C. Owens, President Dated: March 14, 2003 By: /s/ Bryan H. Draper ------------------- Bryan H. Draper, Chief Financial Officer Dated: March 14, 2003 By: /s/ Melina A. Platt ------------------- Melina A. Platt, Controller CHIEF EXECUTIVE OFFICER CERTIFICATION I, William C. Owens, President and Chief Executive Officer of Owens Financial Group, Inc., General Partner, certify that: 1. I have reviewed this annual report on Form 10-K of Owens Mortgage Investment Fund, a California Limited Partnership (the "Registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls. 6. The Registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: March 14, 2003 /s/ William C. Owens William C. Owens President and Chief Executive Officer Owens Financial Group, Inc., General Partner CHIEF FINANCIAL OFFICER CERTIFICATION I, Bryan H. Draper, Chief Financial Officer of Owens Financial Group, Inc., General Partner, certify that: 1. I have reviewed this annual report on Form 10-K of Owens Mortgage Investment Fund, a California Limited Partnership (the "Registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls. 6. The Registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: March 14, 2003 /s/ Bryan H. Draper Bryan H. Draper Chief Financial Officer Owens Financial Group, Inc., General Partner -----END PRIVACY-ENHANCED MESSAGE-----