Item 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
The business of Keystone Mortgage Fund (the "Partnership") was to make loans secured by deeds of trust on improved commercial and industrial real properties. As of December 31, 1996, the Partnership had no loans outstanding as compared to $1,031,390 outstanding at December 31, 1995.
During 1990, the general partners informed the limited partners that all principal repayments received by the Fund will be distributed to the limited partners less required reserves for operating expenses. The limited partners were also informed that the Fund will no longer repurchase units.
EMPLOYEES
The Partnership does not have any employees. Services are performed for the Partnership by Keystone, for which it receives compensation as set forth in the Partnership Agreement.
Item 2.
Item 2. PROPERTIES.
The fund occupies space leased by Keystone Mortgage Company, and pays no rent.
Item 3.
Item 3. LEGAL PROCEEDINGS.
None.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
None.
Item 6.
Item 6. FINANCIAL INFORMATION.
SELECTED FINANCIAL DATA
The following table sets forth in tabular form, selected financial data for the fiscal years 1996, 1995, 1994, 1993, and 1992:
The following table set forth in tabular form, distributions and withdrawals for the fiscal years 1996, 1995, 1994, 1993, and 1992:
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES:
The portion of Partnership cash flow consisting of principal repayments is being distributed to the limited partners less required reserves for operating expenses. Excess cash flow is used to purchase short-term investments and those investments have maturities consistent with the timing of Partnership distributions. The Fund will no longer repurchase units. Interest income, net of Partnership expenses, is distributed to the Partners on a semi-annual basis. However, the General Partners have the right to retain up to 10% of Partnership cash flow for the purpose of maintaining an adequate liquidity.
The Partnership's liquidity is primarily subject to the schedule of maturities of Partnership loans and the extent of liquidity can therefore be projected with reasonable accuracy. During 1996, the Partnership's working capital increased $446,002. Management believes the Partnership has adequate working capital and cash reserves to carry on its business.
In 1990 the decision was made to liquidate the Fund by distributing all proceeds of loan repayments to the Limited Partners as the loans mature through 1997. The investment in real estate will be held for the production of income until 1997.
On a short-term basis, the Partnership is able to generate adequate amounts of cash to meet the Partnership's need for cash and contingencies through its receipt of monthly principal and interest payments on mortgage loans and, furthermore, as liquidity needs arise the partnership may change the frequency of cash distributions to Limited Partners.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
Partnership revenue increased 13.6% in 1996 over 1995 as compared to a decrease of 17.8% in 1995 as compared to 1994. The 1996 increase was due mainly to the gain on disposition of investment in real estate. Interest earned on trust deed notes receivable continues to decrease due to the continued loan payoffs. Revenue from rental property decreased 21.5% in 1996 over 1995 primarily because of the disposition of some properties. Rental revenue increased 17.2% in 1995 as compared to 1994.
General and administrative expenses decreased 84.4% in 1996 over 1995 and increased substantially, $274,547, in 1995 over 1994. In 1995 there was a $270,000 charge to General & Administrative expenses for the reimbursement of fund expenses to the General Partners.
Servicing related expenses increased 11.0% in 1996 over 1995 and decreased 34.3% in 1995 as compared to 1994. Expenses related to investment in real estate decreased 28.0% in 1996 over 1995 compared to an increase of 14.1% in 1995 over 1994.
The net income per Limited Partnership unit was determined by using a weighted average of the number of units outstanding during the applicable fiscal year. The partnership had an increase of $27.16 per limited partnership unit in 1996 over 1995 as compared to a decrease of $28.88 in 1995 over 1994.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Index to the financial statements of Keystone Mortgage Fund is included in Item 14.
Item 9.
Item 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
KEYSTONE MORTGAGE FUND (A California Limited Partnership)
Financial Statements
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
PEAT MARWICK LLP 725 South Figueroa Street Los Angeles, CA 90017
INDEPENDENT AUDITORS' REPORT
The General Partners Keystone Mortgage Fund:
We have audited the accompanying balance sheets of Keystone Mortgage Fund (a California limited partnership) as of December 31, 1996 and 1995 and the related statements of operations, partners' capital and cash flows for each of the years in the three-year period ended December 31, 1996. These financial statements are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Keystone Mortgage Fund as of December 31, 1996 and 1995 and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP (Signature)
January 22, 1997, except for note 7, which is as of February 28, 1997
KEYSTONE MORTGAGE FUND (A California Limited Partnership)
Balance Sheets December 31, 1996 and 1995
See accompanying notes to financial statements.
KEYSTONE MORTGAGE FUND (A California Limited Partnership)
Statements of Operations Years ended December 31, 1996, 1995 and 1994
See accompanying notes to financial statements.
KEYSTONE MORTGAGE FUND (A California Limited Partnership)
Statements of Partners' Capital Years ended December 31, 1996, 1995 and 1994
See accompanying notes to financial statements.
KEYSTONE MORTGAGE FUND (A California Limited Partnership)
Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994
See accompanying notes to financial statements.
KEYSTONE MORTGAGE FUND (A California Limited Partnership)
Notes to Financial Statements December 31, 1996 and 1995
(1) ORGANIZATION AND PARTNERSHIP AGREEMENT
Keystone Mortgage Fund (the Fund), a California limited partnership, was formed on April 19, 1984 for the purpose of investing in short- to intermediate-term loans secured by deeds of trust on commercial industrial real property.
Profits and losses are generally allocated 1% to the general partners and 99% to the limited partners. To the extent property is obtained in settlement of a loan obligation, any net gain resulting from the sale of such property, determined using cost before any previous write-downs, would be allocated 24% to the general partners and 76% to the limited partners.
Distributions are allocated in the same manner as profits and losses, except that any distribution of principal repayments of trust deed notes receivable are made 100% to the limited partners. Effective January 1, 1992, the partnership agreement was amended to allow for distribution to the partners on a semiannual basis rather than on a quarterly basis.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Fund considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
SHORT-TERM INVESTMENTS
The Fund invests in various bank notes and U.S. Government securities with original maturities between three months and six months. The Fund accounts for short-term investments under Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). In accordance with SFAS 115, the Fund classifies its investment in debt securities as held-to-maturity securities and such short-term investments are stated at cost as the Fund intends to hold these securities to maturity. At December 31, 1996 and 1995, short-term investments consisted of U.S. Government agency notes with remaining maturities of less than five months. At December 31, 1996 and 1995, these securities had an unrealized gain of $0 and $2,585, respectively, and there were no unrealized loses.
USES OF ESTIMATES
Management of the Fund has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates.
KEYSTONE MORTGAGE FUND (A California Limited Partnership)
Notes to Financial Statements, Continued
TRUST DEED NOTE RECEIVABLE
The trust deed note receivable is accounted for under the provisions of Statement of Financial Accounting Standards No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a Loan,'' and Statement of Financial Accounting Standards No. 118 (SFAS 118), "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures.'' Under SFAS 114, a loan is impaired when it is "probable" that a creditor will be unable to collect all amounts due (i.e., both principal and interest) according to the contractual terms of the loan agreement. The measurement of impairment may be based on (1) the present value of the expected future cash flows of the impaired loan discounted at the loan's original effective interest rate, (2) the observable market price of the impaired loan or (3) the fair value of the collateral of a collateral-dependent loan. The amount by which the recorded investment of the loan exceeds the measure of the impaired loan is recognized by recording a valuation allowance with a corresponding charge to provision for loan losses.
ALLOWANCE FOR LOSSES ON TRUST DEED NOTE RECEIVABLE
An analysis of the collectibility of the trust deed note receivable is performed by management on a regular basis. Management considers such factors as current economic conditions, the borrower's ability to repay and repayment performance, probability of foreclosure and estimated collateral values in determining any allowance need. Management has determined that no allowance is necessary as of December 31, 1996 and 1995.
INVESTMENT IN REAL ESTATE
The investment in real estate was acquired in settlement of loans. It was initially recorded at estimated fair value, less selling costs. At the time of foreclosure, any excess of cost over the estimated net fair value was accounted for as a loan charge-off and deducted from the allowance for loan losses. As of December 31, 1995, such real estate was carried at the lower of cost or net realizable value as the Fund is holding the real estate for the production of income. Depreciation was recorded based on the straight-line method and an estimated life of 20 years. As of December 31, 1996, the real estate is held for sale and is carried at the lower of cost or fair value, less estimated costs to sell, and depreciation is no longer provided in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121). The provisions of SFAS 121 were implemented on January 1, 1996. There was no impact to the carrying value of the real estate as a result of implementing SFAS 121 as the fair value, less estimated costs to sell exceeds the cost of the real estate.
ORIGINATION FEES
Fees from the origination of trust deed notes receivable and certain direct origination costs are recognized over the contractual life of such trust deed notes receivable using methods which generally produce a level-yield on the unpaid loan balance.
INTEREST INCOME ON TRUST DEED NOTES RECEIVABLE
Interest income on trust deed notes receivable is accrued as it is earned. Interest receivable which is deemed uncollectible is excluded from interest income. Trust deed notes receivable are placed on nonaccrual status after being delinquent 90 days. There are no notes on nonaccrual status at December 31, 1996 and 1995.
KEYSTONE MORTGAGE FUND (A California Limited Partnership)
Notes to Financial Statements, Continued
INCOME TAXES
No provision has been made for income taxes in the accompanying financial statements, inasmuch as the liability for taxes arising from the transactions of the Fund is the responsibility of the partners.
INCOME AND DISTRIBUTIONS PER LIMITED PARTNERSHIP UNIT
Net income and distributions per limited partnership unit are based on the net income and distributions attributable to the limited partners and the weighted average number of limited partnership units outstanding during each period.
(3) RELATED PARTY TRANSACTIONS
The general partners of the Fund are Keystone Mortgage Company (managing general partner), John P. Sullivan and Christopher E. Turner. Messrs. Sullivan and Turner are officers/directors of Keystone Mortgage Company. As compensation for servicing loans, the Fund pays an annual fee of 1/2 of 1% of the average outstanding loan principal balances, computed as of the end of each month, to Keystone Mortgage Company. Servicing-related expenses include approximately $4,000 in 1996, $7,000 in 1995 and $16,000 in 1994 of servicing fees paid to Keystone Mortgage Company.
Prior to 1995, Keystone Mortgage Company did not pass through to the Fund expenses that Keystone Mortgage Company incurred related to operation of the Fund as allowed by the Fund's partnership agreement. During 1995, Keystone Mortgage Company made a decision to charge the Fund for reimbursement of such expenses incurred by Keystone Mortgage Company from inception of the Fund and, accordingly, requested payment from the Fund. The expense reimbursement totals $270,000 and is included in general and administrative expenses for the year ended December 31, 1995 in the accompanying statements of operations and in due to general partner in the accompanying balance sheets as of December 31, 1996 and 1995. Expense reimbursements totaling $10,000 relating to 1996 are included in general and administrative expenses for the year ended December 31, 1996 in the accompanying statement of operations and in due to general partner in the accompanying balance sheet as of December 31, 1996.
(4) TRUST DEED NOTE RECEIVABLE
Trust deed note receivable consists of the following at December 31, 1995:
First trust deed on an office/warehouse/light industrial billing located in Hawthorne, California, interest rate of 10.375%, originally due November 1, 1997, repaid during 1996 $1,031,390 Less: Net deferred loan origination fees 2,020 Less current portion 11,894 ---------- $1,017,476 ---------- ----------
The estimated fair value of the trust deed note receivable at December 31, 1995 is equivalent to the carrying value.
KEYSTONE MORTGAGE FUND (A California Limited Partnership)
Notes to Financial Statements, Continued
(5) INVESTMENT IN REAL ESTATE
Investment in real estate consists of industrial condominium units located in Arizona. At December 31, 1996, the investment is held for sale and is carried at the lower of cost or fair value, less estimated costs to sell. The investment is composed of the following at December 31, 1995:
Land $ 260,000 Buildings and improvements 1,040,000 ---------- 1,300,000 Less: Accumulated depreciation 162,696 Net realizable value allowance 34,500 ---------- $1,102,804 ---------- ----------
Future minimum rental payments to be received under operating leases are as follows:
1997 $ 92,405 1998 18,410 Thereafter -- -------- $110,815 -------- --------
(6) RECONCILIATION OF NET INCOME BETWEEN FINANCIAL STATEMENTS AND PARTNERSHIP TAX RETURN (UNAUDITED)
The difference between the net income for financial reporting purposes and the net income for Federal income tax purposes per the partnership tax return is summarized as follows:
KEYSTONE MORTGAGE FUND (A California Limited Partnership)
Notes to Financial Statements, Continued
(7) SUBSEQUENT EVENTS
On February 28, 1997, the investment in real estate was sold to an unrelated third party for approximately $1.2 million, net of selling costs. The Fund recognized a gain of approximately $400,000 in the sale transaction during 1997. Management plans to distribute the total net assets of the Fund to the general partners and limited partners during the second quarter of 1997. Cash flows from the final distribution in liquidation of the Fund shall be distributed in accordance with capital accounts.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVES OFFICERS.
The affairs of the Partnership are managed by the Managing General Partner, Keystone Mortgage Company, and the Individual General Partners, John P. Sullivan and Christopher E. Turner.
KEYSTONE MORTGAGE COMPANY
Keystone Mortgage Company, A California Corporation ("Keystone"), has been engaged in the mortgage banking business since 1957. Keystone is a member of the Mortgage Bankers Association of America, the California Mortgage Bankers Association and the Southern California Mortgage Bankers Association. Keystone originates and services real estate loans on behalf of more than ten national life insurance companies, a savings bank, a commercial bank and various trust funds. In addition, Keystone and certain officers have been, and continue to be joint venture partners in the development of real estate with several of the life insurance companies for which Keystone acts as a mortgage loan correspondent. Keystone currently services a portfolio of loans in principal amount in excess of $350,000,000 and has originated loans in original principal amount in excess of $1,000,000,000 since its inception in 1957. Other activities of Keystone include property management and the sale and leasing real estate. Keystone is a licensed real estate broker in the State of California. Keystone Mortgage Company is also the Managing General Partner of Keystone Mortgage Fund II, a California limited partnership.
DIRECTORS AND OFFICERS
The directors and executive officers of Keystone Mortgage Company are:
NAME AGE TITLE DATE OF APPT.
John P. Sullivan 71 President and Chairman of the Board 1957 Christopher E. Turner 63 Executive Vice President and Director 1972 Ron N. Buchanan 50 Vice President 1978 Sandra B. Coopersmith 58 Vice President 1975 Melinda F. Love 42 Vice President 1984 Norma Foster 57 Vice President 1986 John G. Sullivan 35 Vice President 1992 Mark G. Sullivan 40 Secretary 1984
JOHN P. SULLIVAN has been in mortgage banking in California since 1953, and since 1957, he has served as president of Keystone. He was a founding member of American Real Estate Association, and has been a director of the Southern California Mortgage Bankers Association, a member of the International Council of Shopping Centers, and a member of the Executive Committee of the Southern California Economic and Job Development Council of the Los Angeles Chamber of Commerce. He has served as a director of a savings and loan association, a lecturer at Stanford University and the School of
Mortgage Banking at Michigan State, and a lecturer on the subject of shopping center financing at the University of California at Los Angeles.
CHRISTOPHER E. TURNER has been active in mortgage banking in California since 1963, and since 1972, he has served as executive vice president of Keystone. Prior to joining Keystone, Mr. Turner was employed at the University of California at Los Angeles in the real estate research program where he worked for three years as a graduate research economist after receiving his MBA degree. He lectured on the subject of real estate appraising and investments at the University of Southern California from 1967 to 1974 and lectured on the subject of industrial real estate at the University of California at Los Angeles in 1974 and 1975 in the real estate extension program. Mr. Turner has also lectured at the Schools of Mortgage Banking at Stanford University and Houston University. He is a member of the American Industrial Real Estate Association and the Urban Land Institute, the National Mortgage Bankers Association and the American Society of Real Estate Counselors. He has also served on the research committee of the National Mortgage Bankers Association and on the Board of Governors of the American Industrial Real Estate Association.
RON N. BUCHANAN joined Keystone in 1972 and currently serves as vice president. Prior to his association with Keystone, he was employed by Security Pacific National Bank in the construction loan department. He is an active member in the American Industrial Real Estate Association and has served on its Board of Directors. Mr. Buchanan has been a lecturer in real estate finance in the University of California at Los Angeles extension program since 1976.
SANDRA B. COOPERSMITH has been with Keystone since 1967. Her present responsibilities include management of the loan closing and loan servicing departments. For a year prior to her employment at Keystone, she was the corporate treasurer of a Los Angeles-based mortgage banking company. She has also been a manager of the real estate division of a Los Angeles-based financial institution, overseeing field inspectors, loan officers, credit checkers and loan processors. She is a past president and life member of the Los Angeles Escrow Association.
MELINDA F. LOVE has been with Keystone since 1978 and was appointed vice president in 1984. Prior to joining Keystone, she was a mortgage analyst in the real estate department of Farmers New World Life Insurance Company. She is an active member in the American Industrial Real Estate Association, of which she has served as affiliate representative on the Board of Directors; she is also a member of the Southern California Mortgage Bankers Association of which she was the 1988 co-chairman of the Income Property Roundtable Committee, the 1989 assistant treasurer, 1990 treasurer and serves as a Director for 1991.
NORMA FOSTER joined Keystone in 1980 and was appointed vice president in late 1986. Ms. Foster currently serves as Business Manager for Keystone and in addition to her administrative and management responsibilities handles limited partnership accounting. Since 1962, Ms. Foster has been involved in
international banking, accounting and corporate administration. Ms. Foster holds an MBA in management from University of California at Los Angeles.
JOHN G. SULLIVAN has been with Keystone since 1984 and was appointed assistant vice president in 1987. He is an active member of the International Council of Shopping Centers, American Industrial Real Estate Association, and the Ventura county Economic Development Association. He holds a bachelors degree in business economics from the University of California at Santa Barbara. John G. Sullivan is not related to either John P. Sullivan, an Individual General Partner, or Mark G. Sullivan.
MARK G. SULLIVAN has been the secretary of Keystone since early 1984. Mr. Sullivan has experience in the analysis and development of commercial real estate projects. He holds a bachelor degree in science and geology from the University of California at Santa Barbara. He is the son of John P. Sullivan.
No director of executive officer of Keystone, within the preceding five year period, has filed a petition under Federal Bankruptcy laws, or has been convicted in a criminal proceeding or is named subject of a pending criminal proceeding.
Item 11.
Item 11. EXECUTIVE COMPENSATION.
Compensation for services rendered by the General Partners on behalf of the Partnership for the fiscal years 1994, 1995 and 1996 is as follows:
In addition, the General Partners of the Partnership are entitled to receive certain cast distributions and allocations of income or loss. No cash distributions and allocations were made for fiscal years 1994, 1995 and 1996.
Prior to 1995, Keystone did not pass expenses that Keystone Mortgage Company incurred relating to the operation of the Partnership as allowed by the Partnership agreement. During 1995 Keystone made a decision to charge the Partnership for such expenses from the inception of the Partnership. The expense reimbursement totals $270,000 and such amount was recorded as general and administrative expense during 1995.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.
No one holder of Units owns more than five percent of the total Units.
(b) SECURITY OWNERSHIP OF MANAGEMENT.
The Individual General Partners are also officers or directors of.
(c) CHANGES IN CONTROL.
A majority in interest of the Limited Partners may at any time, by vote or written consent, remove any General Partner, with or without cause. Upon such removal, the General Partner so removed shall have no further liability as a General Partner of the Partnership and the Partnership Agreement shall be amended to state that the General Partner so removed is no longer a General Partner of the Partnership. After said removal, the interest of the General Partner in the Partnership shall automatically convert to a limited partnership interest and the General Partner shall have, with respect thereto, all rights and powers of a Limited Partner.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Partnership is strictly prohibited from making any loan or participating in any other transaction involving the General Partners, or any of them, their affiliates, or any officer or director or employee of any those entities under any circumstances.
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.
(a) (1) The following financial statements of Keystone Mortgage Fund are in Item 8:
Report of Independent Auditors........................................8
Balance Sheets as of December 31, 1996 and 1995.......................9
Statements of Operation for the Years Ended December 31, 1996, 1995, and 1994................................10
Statement of Partners' Capital for the Years Ended December 31, 1996, 1995, and 1994...................11
Statements of Cash Flows for the Years Ended December 31, 1996, 1995, and 1994.........................12
Notes to Financial Statements........................................13
(a) Schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instruction or are inapplicable, and therefore have been omitted.
(b) No reports on Form 8-K were filed by the registrant during the last quarter of the period covered by this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Keystone Mortgage Fund
Date: March , 1997 /s/ --------------------------------- Keystone Mortgage Company By: John P. Sullivan, President
Date: March , 1997 /s/ --------------------------------- John P. Sullivan General Partner
Date: March , 1997 /s/ -------------------------------- Christopher E. Turner General Partner