-----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, JDB1RXp24QbUh0VYIOqjOdoUBwG3qvx6SbTP8I+S8mi1UKhfEj6Fpi3N2QS7+3D+ TAUSta+qLP6DggxuFjb35Q== 0000736980-98-000003.txt : 19980518 0000736980-98-000003.hdr.sgml : 19980518 ACCESSION NUMBER: 0000736980-98-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTENNIAL MORTGAGE INCOME FUND CENTRAL INDEX KEY: 0000736980 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 330053488 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 002-88588 FILM NUMBER: 98622723 BUSINESS ADDRESS: STREET 1: 1540 S LEWIS STREET CITY: ANAHEIM STATE: CA ZIP: 92805 BUSINESS PHONE: 7145028484225 MAIL ADDRESS: STREET 2: 1540 S LEWIS STREET CITY: ANAHEIM STATE: CA ZIP: 92805 10-Q 1 CENTENNIAL MORTGAGE INCOME FUND FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from N/A to N/A Commission File Number: 0-22520 CENTENNIAL MORTGAGE INCOME FUND (Exact name of registrant as specified in its charter) California 33-0053488 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1540 South Lewis Street, Anaheim, California 92805 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (714)502-8484 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 PART I ITEM 1. FINANCIAL STATEMENTS CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Balance Sheets
March 31, December 31, 1998 1997 Assets (Unaudited) - ----------------------------------------------------------------- Cash and cash equivalents $ 2,772,000 $ 1,018,000 Real estate loans receivable, earning 308,000 782,000 Real estate loans receivable, nonearning 1,060,000 1,072,000 Real estate loans receivable from unconsolidated investee, earning (note 4) 460,000 752,000 Real estate loans receivable from unconsolidated investee, nonearning (note 4) 1,279,000 1,241,000 - ----------------------------------------------------------------- 3,107,000 3,847,000 Less allowance for possible loan losses 714,000 714,000 - ----------------------------------------------------------------- Net real estate loans receivable 2,393,000 3,133,000 - ----------------------------------------------------------------- Real estate owned, held for sale, (note 3) 7,450,000 7,450,000 Real estate owned, insubstance foreclosed (note 3) --- 1,040,000 - ----------------------------------------------------------------- 7,450,000 8,490,000 See accompanying notes to consolidated financial statements 1 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Balance Sheets (Continued) March 31, December 31, 1998 1997 Assets (Unaudited) - ----------------------------------------------------------------- Less allowance for possible losses on real estate owned 2,055,000 2,354,000 - ----------------------------------------------------------------- Net real estate owned 5,395,000 6,136,000 - ----------------------------------------------------------------- Accrued interest receivable --- 5,000 Due from unconsolidated investee 27,000 58,000 Other assets, net 63,000 47,000 - ----------------------------------------------------------------- $10,650,000 $10,397,000 ================================================================= See accompanying notes to consolidated financial statements 2 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Balance Sheets (Continued) March 31, December 31, 1998 1997 Liabilities and Partners' Equity (Unaudited) - ----------------------------------------------------------------- Note payable (note 5) $ 2,417,000 $ 2,421,000 Notes payable to affiliates (note 4) 179,000 73,000 Accounts payable and accrued liabilities 2,000 20,000 Interest and property taxes payable on real estate owned 37,000 --- Interest payable to affiliates on notes secured by real estate 39,000 39,000 Payable to affiliates (note 4) 1,000 --- Deferred profit on equity participation 289,000 289,000 - ----------------------------------------------------------------- Total liabilities 2,964,000 2,842,000 - ----------------------------------------------------------------- Partners' equity (deficit) -- 38,729 limited partnership units outstanding as of March 31, 1998 and December 31, 1997 General partners (525,000) (525,000) Limited partners 8,211,000 8,080,000 - ----------------------------------------------------------------- Total partners' equity 7,686,000 7,555,000 Contingencies (note 6) - ----------------------------------------------------------------- $10,650,000 $10,397,000 =================================================================
See accompanying notes to consolidated financial statements 3 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Operations For the three months ended March 31, 1998 and 1997
1998 1997 (Unaudited) (Unaudited) - ----------------------------------------------------------------- Revenue: Interest income on loans to nonaffiliates, including fees $ 169,000 $ 27,000 Interest income on loans to affiliates, including fees 14,000 1,000 Interest on interest- bearing deposits 19,000 21,000 Income from operations of real estate owned 159,000 238,000 Gain on sale of real estate owned 21,000 --- Other 1,000 6,000 - ----------------------------------------------------------------- Total revenue 383,000 293,000 - ----------------------------------------------------------------- Expenses: Share of losses in unconsolidated investee 54,000 29,000 Operating expenses from operations of real estate owned 36,000 37,000 Operating expenses from operations of real estate owned paid to affiliate 8,000 11,000 Expenses associated with non-operating real estate owned 35,000 44,000 Depreciation and amortization expense 2,000 3,000 Interest expense 67,000 103,000 See accompanying notes to consolidated financial statements 4 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Operations (Continued) For the three months ended March 31, 1998 and 1997 1998 1997 (Unaudited) (Unaudited) - ----------------------------------------------------------------- General and administrative, affiliates 51,000 51,000 General and administrative, nonaffiliates 22,000 17,000 Mortgage investment servicing fees paid to affiliate 1,000 1,000 - ----------------------------------------------------------------- Total expenses 276,000 296,000 - ----------------------------------------------------------------- Income (loss) before minority interest 107,000 ( 3,000) Minority interest 24,000 44,000 - ----------------------------------------------------------------- Net income $ 131,000 $ 41,000 ================================================================= Net income per limited partnership unit $ 3.38 $ 1.06 =================================================================
See accompanying notes to consolidated financial statements 5 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statement of Partners' Equity For the three months ended March 31, 1998
Total General Limited Partners' Partners Partners Equity (Unaudited) (Unaudited) (Unaudited) - ----------------------------------------------------------------- Balance at December 31, 1997 $ (525,000) $ 8,080,000 $ 7,555,000 Net income --- 131,000 131,000 - ----------------------------------------------------------------- Balance at March 31, 1998 $ (525,000) $ 8,211,000 $ 7,686,000 =================================================================
See accompanying notes to consolidated financial statements 6 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows For the three months ended March 31, 1998 and 1997
1998 1997 (Unaudited) (Unaudited) - ----------------------------------------------------------------- Cash flows from operating activities: Net income $ 131,000 $ 41,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Interest accrued to principal (14,000) (1,000) Depreciation and amortization 2,000 3,000 Minority interest (24,000) (44,000) Equity in losses of unconsolidated investee 54,000 29,000 Gain on sale of real real estate owned (21,000) --- Amortization of unearned Loan fees (5,000) --- Changes in assets and liabilities: (Increase) decrease in accrued interest receivable 5,000 (1,000) Increase in other assets (18,000) (62,000) Decrease in accounts payable and accrued liabilities (18,000) (3,000) Increase in interest and taxes payable on real estate owned 37,000 43,000 (Increase) decrease in due from unconsolidated investee 31,000 (10,000) See accompanying notes to consolidated financial statements 7 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows (Continued) For the three months ended March 31, 1998 and 1997 1998 1997 (Unaudited) (Unaudited) - ----------------------------------------------------------------- Increase in payable to affiliates 1,000 --- - ----------------------------------------------------------------- Net cash provided by (used in)operating activities 161,000 (5,000) - ----------------------------------------------------------------- Cash flows from investing activities: Principal collected on loans 826,000 53,000 Advances on loans made to unconsolidated investee (114,000) (179,000) Advances on loans made to customers (7,000) --- Capital expenditures for real estate owned --- (1,000) Proceeds from sale of real estate owned 762,000 --- - ----------------------------------------------------------------- Net cash provided by (used in) investing activities 1,467,000 (127,000) - ----------------------------------------------------------------- Cash flows from financing activities: Proceeds from notes payable to affiliates 130,000 1,000 Principal payments on notes payable (4,000) --- - ----------------------------------------------------------------- See accompanying notes to consolidated financial statements 8 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows (Continued) For the three months ended March 31, 1998 and 1997 1998 1997 (Unaudited) (Unaudited) - ----------------------------------------------------------------- Net cash provided by financing activities 126,000 1,000 - ----------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 1,754,000 (131,000) Beginning cash and cash equivalents 1,018,000 1,712,000 - ----------------------------------------------------------------- Ending cash and cash equivalents $ 2,772,000 $ 1,581,000 ================================================================= Supplemental schedule of cash flow information: Cash paid during the quarter for: Interest $ 65,000 $ 100,000
See accompanying notes to consolidated financial statements 9 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Notes to Consolidated Financial Statements (Unaudited) March 31, 1998 and 1997 (1) BUSINESS Centennial Mortgage Income Fund (the "Partnership") initially invested in commercial, industrial and residential income- producing real property through mortgage investments consisting of participating first mortgage loans, other equity participation loans, construction loans, and wrap-around and other junior loans. The Partnership's underwriting policy for granting credit was to fund loans secured by first and second deeds of trust on real property. The Partnership's area of concentration is in California. In the normal course of business, the Partnership participated with other lenders in extending credit to single borrowers; the Partnership did this in an effort to decrease credit concentrations and provide a greater diversification of credit risk. As of March 31, 1998, a majority of the loans secured by operating properties have been repaid to the Partnership. However, during the early 1990's, real estate market values for undeveloped land in California declined severely. As the loans secured by undeveloped land and certain operating properties became delinquent, management of the Partnership elected to foreclose on certain of these loans, thereby increasing real estate owned balances. As a result, the Partnership has become a direct investor in this real estate and intends to manage operating properties and develop raw land until such time as the Partnership is able to sell this real estate owned. As required by the Partnership Agreement, the Partnership is currently in the repayment stage, and as a result, cash proceeds from mortgage investments are no longer available for reinvestment. (2) BASIS OF PRESENTATION The consolidated financial statements are unaudited and reflect all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair statement of the results of operations for the interim periods. 10 Results for the three months ended March 31, 1998 and 1997 are not necessarily indicative of results which may be expected for any other interim period, or for the year as a whole. Information pertaining to the three months ended March 31, 1998 and 1997 is unaudited and condensed inasmuch as it does not include all related footnote disclosures. The condensed consolidated financial statements do not include all information and footnotes necessary for fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. Notes to consolidated financial statements included in Form 10-K for the year ended December 31, 1997 on file with the Securities and Exchange Commission, provide additional disclosures and a further description of accounting policies. Net Income per Limited Partnership Unit Net income per limited partnership unit for financial statement purposes was based on the weighted average number of limited partnership units outstanding of 38,729 for all periods presented. Impaired Loans The Partnership considers a loan to be impaired when based upon current information and events, it believes it is probable that the Partnership will be unable to collect all amounts due according to the contractual terms of the loan agreement. In determining impairment, the Partnership considers large non- homogeneous loans including nonaccrual loans, troubled debt restructuring and performing loans which exhibit, among other characteristics, high loan-to-value ratios, low debt-coverage ratios, or other indications that the borrowers are experiencing increased levels of financial difficulty. The Partnership bases the measurement of collateral-dependent impaired loans on the fair value of the loan's collateral. The amount by which the recorded investment of the loan exceeds the measure of the impaired loan's value is recognized by recording a valuation allowance. At March 31, 1998, the carrying value of loans that are considered to be impaired totaled $2,557,000 (of which $2,339,000 were on nonaccrual status). At March 31, 1998, the allowance for possible loan losses related to loans considered impaired totaled $714,000. There were five loans to an unconsolidated investee 11 considered impaired for which there is no related allowance for possible loan losses at March 31, 1998. However, the unconsolidated investee has recorded an allowance for losses of $4,148,000 and the Partnership's proportionate share of losses in unconsolidated investee reflects the majority of this allowance. One of the loans receivable is recorded with a corresponding deferred profit liability of $289,000. There was a $121,000 investment in impaired loans during the three months ended March 31, 1998. For the three months ended March 31, 1998, the Partnership recognized interest income on impaired loans of $159,000 which included $151,000 of interest income recognized using the cash basis method of income recognition. (3) REAL ESTATE OWNED
Real estate owned consists of the following: (dollars in thousands) March 31, December 31, 1998 1997 - ----------------------------------------------------------------- 1. Shopping Center in Upland, CA $ 4,628 $ 4,628 2. 19 acres in Sacramento, CA 2,822 2,822 3. Condominiums in Oxnard, CA --- 1,040 - ----------------------------------------------------------------- Total real estate owned $ 7,450 $ 8,490 =================================================================
Prior to its sale, property No. 3 was accounted for as insubstance foreclosure under SFAS 118 as the Partnership did not hold legal title to this property, but the borrower surrendered the collateral to the control of the Partnership. (4) TRANSACTIONS WITH AFFILIATES Under the provisions of the Partnership Agreement, Centennial Corporation ("CC") is entitled to receive from the Partnership mortgage investment servicing fees for loans serviced equal to an annual rate of 1/4 of 1 percent of the committed amount to be funded by the Partnership. The Partnership incurred $1,000 of mortgage investment servicing fees for the three months ended March 31, 1998 and 1997, respectively. Under the provisions of the Partnership Agreement, the general partners are to receive compensation for their services in 12 supervising the affairs of the Partnership. This partnership management compensation shall be equal to 10 percent of the cash available for distribution, as defined in the Partnership Agreement. The general partners will not receive this compensation until the limited partners have received a 12 percent per annum cumulative return on their adjusted invested capital but are entitled to receive a 5 percent interest in cash available for distribution in any year until this provision has been met. Adjusted invested capital is defined as the original capital invested less distributions from mortgage reductions. Payments to the general partners have been limited to 5 percent of cash available for distribution as the limited partners have not yet received their 12 percent per annum cumulative return. Under this provision of the Partnership Agreement, no distributions were paid to the general partners during the three months ended March 31, 1998 or 1997. The Partnership owns 50 percent of the outstanding capital stock of a corporation which has not been consolidated in the accompanying financial statements, LCR Development, Inc., ("LCR"). The balance of outstanding capital stock in this corporation is owned by Centennial Mortgage Income Fund II ("CMIF II"), an affiliate. LCR has invested in a joint venture, Silverwood Homes ("Silverwood") which is constructing homes in Lancaster, CA. The Partnership has participated in making several loans to this corporation and joint venture. Under the equity method of accounting, these loans are a component of the Partnership's investment in LCR, and therefore, the Partnership has recorded losses by LCR as a reduction of the carrying value of these loans receivable. The Partnership holds a $1,250,000 unsecured note and holds a 50 percent participation in a $2,115,000 unsecured note, both due from LCR. The Partnership's share of the $2,115,000 note at March 31, 1998 is $1,055,000 and the Partnership had applied $1,055,000, a portion of its of cumulative losses from unconsolidated investees, against the carrying value of the note as of that same date. The Partnership has also applied $1,250,000 of cumulative losses from unconsolidated investees against the carrying value of the $1,250,000 note as of March 31, 1998. The Partnership has not accrued its share of interest on these notes which was approximately $759,000 as of March 31, 1998. Silverwood began constructing a model home complex at the project in June 1995. Construction commenced in September 1995 on Phase I and February 1997 on Phase II at the project. At March 31, 1998, the Partnership holds a 50 percent participation in four 13 notes, due from Silverwood including a land development loan, a model home loan and two home construction loans. The Partnership's disbursed balance of the $3,265,700 development loan at March 31, 1998, is $1,304,000 and the Partnership had applied $435,000, the balance of cumulative losses from unconsolidated investees, against the carrying value of the note as of the same date. The Partnership's disbursed balance of the $490,000 model loan at March 31, 1998 is $239,000. At March 31, 1998 the Partnership's disbursed balance of the $1,034,000 Phase I construction loan is $171,000. At March 31, 1998, the Partnership's disbursed balance of the $870,000 Phase II construction loan is $460,000. The consolidated balance sheet and statement of operations of LCR Development, Inc. have not been consolidated in the Partnership's financial statements. The Partnership accounts for its investment in the corporation using the equity method. The following represents condensed financial information for LCR at March 31, 1998 and for the three months ended March 31, 1998 and 1997: 14 LCR Development, Inc. Consolidated Balance Sheet (Unaudited)
March 31, Assets 1998 - ----------------------------------------------------------------- Cash $ 23,000 Restricted cash 20,000 Real estate owned, held for investment 6,657,000 Less allowance for losses on real estate investment 4,148,000 - ----------------------------------------------------------------- Net real estate owned 2,509,000 Organization costs 1,000 - ----------------------------------------------------------------- $ 2,553,000 ================================================================= Liabilities and Stockholders' Deficit - ----------------------------------------------------------------- Notes payable to affiliates CMIF $ 4,479,000 CMIF II 2,214,000 - ----------------------------------------------------------------- Total notes payable 6,693,000 Accounts payable and accrued liabilities 9,000 Interest and taxes payable on real property 1,544,000 Payable to affiliates 46,000 - ----------------------------------------------------------------- Total liabilities 8,292,000 Stockholders' deficit (5,739,000) - ----------------------------------------------------------------- $ 2,553,000 =================================================================
15 LCR Development, Inc. Consolidated Statement of Operations (Unaudited)
Three months Three months ended ended March 31, 1998 March 31, 1997 - ----------------------------------------------------------------- Housing sales $ 418,000 $ 92,000 Cost of housing sales 383,000 104,000 Provision for losses 135,000 138,000 Selling and marketing expenses 24,000 29,000 General and administrative expenses 9,000 15,000 - ----------------------------------------------------------------- Operating income (loss) (133,000) (194,000) Interest expense 105,000 --- - ----------------------------------------------------------------- Net loss before income taxes (238,000) (194,000) Income taxes 1,000 1,000 - ----------------------------------------------------------------- Net loss $ (239,000) $ (195,000) ================================================================= Interest expense not included in share of losses (131,000) (138,000) - ----------------------------------------------------------------- Allocable net loss $ (108,000) $ (57,000) ================================================================= Share of loss recorded $ (54,000) $ (29,000) =================================================================
The Partnership owns an interest in BNN Development, Inc., the corporation which owns the 19 acres in Sacramento, California jointly with an affiliated entity, CMIF III. At March 31, 1998, the ownership percentages are 86.25 for the Partnership and 13.75 for CMIF III. The assets and liabilities of this corporation have been consolidated in the accompanying consolidated financial statements. Notes payable and interest payable to affiliates on notes secured by real estate owned includes $564,000 and $473,000 at March 31, 1998 and December 31, 1997, respectively, and the Partnership had cumulatively applied $385,000 and $361,000, of minority interest share of losses from this corporate joint venture against the note payable to affiliates balance as of the same dates. The notes payable to affiliates balance reflects CMIF III's share of a note payable by the corporation to the Partnership and CMIF III. The note bears interest at 15 percent fixed and matures August 1, 1998. 16 (5) NOTE PAYABLE
Note payable consists of the following: (dollars in thousands) March 31, December 31, 1998 1997 - ----------------------------------------------------------------- Note payable secured by shopping center in Upland, CA with interest and principal payments due monthly of $24,000; interest rate of 9.5 percent ,which may be adjusted based on changes in the LIBOR rate, maturing June 1, 2007 $ 2,417 $ 2,421 - ----------------------------------------------------------------- Total note payable $ 2,417 $ 2,421 =================================================================
(6) CONTINGENCIES Unbeknownst to the Partnership, on July 19, 1996, a default was entered against the Partnership for failure to respond to a complaint filed on July 17, 1995 in the San Bernardino Superior Court, entitled Henry Yong Lim et al -vs- Cardinal Security, et al and allegedly served on the Partnership in May 1996. As shown by the proofs of service, the complaint was served on the wrong party in 1996. The Partnership first became aware of its involvement in this lawsuit in September 1997 when it received copies of requests for entry of default judgement totaling approximately $1,000,000. The judgements involved damages and injuries allegedly suffered by the plaintiffs as a result of an altercation between the plaintiffs, other third parties and security guards employed by the Partnership at its shopping center in Upland, California. The request for judgement names Centennial Mortgage Income Fund Partnership as a defendant in this action. Since the Partnership was never served with the complaint and had no other way of knowing about this action, the Partnership has retained legal counsel to set aside the defaults 17 and any default judgements which may have been entered, due to the lack of proper service and notice. The Partnership has tendered this action to its liability insurance carrier for legal and liability coverage. The default judgement has been set aside and the plaintiff's have appealed. Management intends to vigorously defend any future actions related to this matter. Management believes that even if the plaintiff's prevail in these actions, the Partnership's insurance coverage and/or the security company's insurance carrier should prevent the Partnership from suffering a material loss from these proceedings. There are no other material pending legal proceedings other than ordinary routine litigation incidental to the Partnership's business. Based on part of advice of legal counsel, management does not believe that the results of any of these matters will have a material impact on the Partnership's financial position or results of operations. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL The Partnership had net income and net income per limited partnership unit of $131,000 and $3.38 for the three months ended March 31, 1998 and $41,000 and $1.06 for the three months ended March 31, 1997, respectively. The increase in income from March 31, 1997 to March 31, 1998 is primarily the result of a loan receivable payoff during January 1998 which included the repayment of $144,000 of previously nonaccrued interest. Cautionary Statements Regarding Forward-Looking Information The Partnership wishes to caution readers that the forward-looking statements contained in this Form 10-Q under "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-Q involve known and unknown risks and uncertainties which may cause the actual results, performance or achievements of the Partnership to be materially different from any future results, performance or achievements expressed or implied by any forward- looking statements made by or on behalf of the Partnership. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Partnership is filing the following cautionary statements identifying important factors that in some cases have affected, and in the future could cause the Partnership's actual results to differ materially from those expressed in any such forward-looking statements. The factors that could cause the Partnership's results to differ materially include, but are not limited to, general economic and business conditions, including interest rate fluctuations; the impact of competitive products and pricing; success of operating initiatives; adverse publicity; changes in business strategy or development plans; quality of management; availability, terms and deployment of capital; the results of financing efforts; business abilities and judgment of personnel; availability of qualified personnel; employee benefit costs and changes in, or the failure to comply with government regulations. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1998, the Partnership had $2,772,000 in cash and interest-bearing deposits. The Partnership had no unfunded loan commitments to nonaffiliates at March 31, 1998. During the first quarter of 1998, the Partnership's principal sources of cash were: i) $762,000 in proceeds from the sale of real estate owned; ii)$642,000 in principal and nonaccrued interest payments on loans receivable; iii) $328,000 in principal reductions on loans receivable from affiliates (LCR); iv) $130,000 of loan proceeds from affiliates (CMIF III loans to BNN); v) $115,000 in net operating income from real estate owned; and vi) $58,000 in other interest income. The Partnership's principal uses of cash during the first quarter of 1998 were: i) $114,000 in advances on loans made to LCR; ii) $65,000 in interest payments; and iii) $73,000 in general and administrative costs. The Partnership's notes payable commitments for the next year consist of interest and principal payments due of approximately $288,000. In addition to the note payable commitments, the Partnership's principal capital requirements include: i) real property taxes and bonds on real estate owned of approximately $142,000 payable during the next twelve months, and ii) selling, general and administrative costs. These commitments are expected to be paid from existing cash balances, future loan payoffs, and the sale of real estate owned. The Partnership is continuously evaluating various alternative strategies for liquidating its real estate assets. These alternative strategies include the potential joint venture and/or build out of certain of the Partnership's properties in order to increase their marketability and maximize the return to the limited partners. In the event the Partnership decides to implement some of these strategies, it may require the reinvestment of proceeds received from the payoff of existing loans and/or the sale of other real estate assets. The decision to invest additional cash in existing assets will only be made if, based on management's best judgment at the time, there is a clear indication that such investment will generate a greater return to the limited partners than any other strategies available to the Partnership. During 1995, the Partnership, through its 50 percent owned corporation, LCR, entered into a joint venture agreement with Home Devco, Inc. ("Home Devco"), an affiliated entity, entitled Silverwood Homes ("Silverwood").For further information see note 4 of Notes to Consolidated Financial Statements. Effective with the third quarter of 1991, the Partnership suspended making any cash distributions to partners due to a decline in liquidity and the uncertainty of the cash requirements for existing and potential real estate owned. Pursuant to the Partnership Agreement, 60 months after the closing of the offering, cash proceeds from mortgage investments are no longer available for reinvestment by the Partnership. Management believes that current and projected liquidity is sufficient to fund operating expenses and to meet the contractual obligations and cash flow operating requirements of the Partnership. Until recently, the general partners believed that the cash proceeds from mortgage reductions and the sale of real estate owned should be retained by the Partnership until such time as it was assured that it had sufficient cash to fulfill any potential operating requirements. Due to the substantial real estate and loan receivable balances, these potential operating costs were considered to be very significant. Based upon recent developments, the general partners have determined that the Partnership will make a distribution to its limited partners by the end of July 1998. The amount of this distribution is still undetermined due to certain pending and proposed escrows discussed below, but should be at least $2,000,000 or $51 per limited partner unit. RESULTS OF OPERATIONS Management has noted that the long-term downturn in the real estate industry in California has not only stabilized, it has improved considerably in many sectors of the market. The improving real estate markets were a significant factor in the increased profitability of the Partnership during 1998. As of March 31, 1998, most of the earning nonaffiliated loans have been repaid to the Partnership. As a result of these payoffs, interest income on loans to nonaffiliates is no longer expected to be a major contributor to the Partnership's future revenue. However, during the first quarter of 1998, a previously impaired loan was repaid together with approximately $144,000 in previously nonaccrued interest. This nonaccrued interest was recorded as income in the quarter ended March 31, 1998. As a result, interest income on loans to nonaffiliates, including fees, increased to $169,000 during the three months ended March 31, 1998 from $27,000 for the comparable three months in 1997. Interest income on loans to unconsolidated investee, including fees, totaled $14,000 and $1,000 for the three months ended March 31, 1998 and 1997, respectively. Interest income on loans to unconsolidated investee represents interest earned on the Silverwood loans. The increase for 1998 is due to the new Phase II loan to Silverwood which was funded during the second half of 1997. The outstanding principal balance of loans on nonaccrual at March 31, 1998 totaled $2,339,000 as compared with $2,566,000 at March 31, 1997. Loans on "nonaccrual" refers to loans upon which the Partnership is no longer accruing interest. Management's policy is to cease accruing interest on loans when interest and/or principal repayments become 90 days past due. Had interest accrued through the first three months of 1998 and 1997 on the affiliated and nonaffiliated nonaccrual loans, interest income would have been approximately $113,000 and $133,000 higher than was actually reported for those periods. Real estate loans receivable, earning is comprised of two loans totaling $308,000 as of March 31, 1998 that are performing. However, one of the loans totaling $218,000 was classified as impaired. The value of the underlying collateral of this loan has declined substantially and the loan has been offset by a $30,000 allowance for losses as of March 31, 1998. Real estate loans receivable, nonearning is comprised of four past due or renegotiated loans totaling $1,060,000 as of March 31, 1998. These loans are offset by $973,000 in deferred profit and allowance for possible losses. Most of the borrowers have little or no equity in the underlying collateral for the loans and as a result, these loans effectively represent an investment in the real estate held as collateral. Therefore, these loans are carried on the balance sheet at the fair value of the collateral or have been fully reserved. Real estate loans receivable from unconsolidated investees, earning and nonearning represent loans to LCR, an unconsolidated corporation 50 percent owned by the Partnership, and loans to Silverwood homes, a subsidiary of LCR. The real estate owned balance before allowance for possible losses at March 31, 1998 and 1997 was $7,450,000 and $11,361,000, respectively. The balance at March 31, 1998 is comprised of two properties and is offset by a $2,055,000 allowance for possible losses. One of the three properties held at December 31, 1997 was sold during the quarter ended March 31, 1998 and the Partnership received approximately $762,000 in net cash proceeds from the sale. The following sections entitled Nonaccrual, Nonperforming Loans and Other Loans to Affiliates and Real Estate Owned provide a detailed analysis of these assets. Nonaccrual, Nonperforming Loans and Other Loans to Affiliates Loans on nonaccrual and nonperforming status at March 31, 1998 are summarized below: During 1994, the Partnership renegotiated an equity participation note with an original committed amount of $374,000 secured by a second deed of trust on a 32,431 square foot shopping center in Corona, California. The loan provides for interest due to be payable at loan maturity; however, due to the amount of the senior debt and the decrease in land values, the Partnership has placed the loan on nonaccrual. The principal balance and nonaccrued interest at March 31, 1998 were $376,000 and $154,000 respectively. The Partnership has recorded a reduction of $62,000 against the $376,000 principal balance which represents previously nonaccrued interest and has also recorded a $289,000 deferred profit in connection with this loan. Additionally, due to the recent operating history of the property and the large lien on the property which is senior to the Partnership's note, an allowance for possible losses of $25,000 has also been recorded against this note. During 1991, the Partnership sold a pad on an existing piece of real estate owned in Corona, California and carried back financing in the amount of $600,000. The Partnership's share of the loan is 77 percent. Due to the loss of a major tenant, the borrower has been unable to make full monthly interest payments in accordance with the original note terms. Management has worked out a forbearance agreement with the borrower for payments equal to the net cash flow from the property. The remaining interest due has been placed on nonaccrual. The Partnership's share of the principal balance and nonaccrued interest at March 31, 1998 were $461,000, and $153,000, respectively. The Partnership has recorded a $365,000 allowance for possible losses against this note. The Partnership has been negotiating a possible discounted payoff of this note in conjunction with a proposed sale of the property. The amount of the payoff, if it is finalized, would exceed the current net carrying value of the note. However, there is no assurance that these negotiations will ultimately result in a payoff of the note. During 1989, the Partnership funded a loan with an original committed amount of $343,000 to provide land development financing in Perris, California. The loan matured June 1, 1993 and the borrower was unable to make interest payments or pay off the loan. Given the depressed value of the property and the amount of the delinquent bonds and taxes, the Partnership has elected not to foreclose on this property and has established an allowance for losses of $294,000, to fully reserve the carrying value of the note. The principal balance and nonaccrued interest at March 31, 1998 are $294,000 and $219,000, respectively. During 1994, the Partnership funded a $1,250,000 unsecured note and a 50 percent participation in a $2,115,000 unsecured note, both representing workout loans and due from LCR. These two loans reflect the majority of the cost basis of 179 residential lots which LCR contributed to Silverwood. LCR's only source of repayment of these notes is the excess, if any, of proceeds from the sale of the fully developed lots over the amount of secured debt. Due to the continuing decline in value of the lots, management does not expect that either of these notes will ever be repaid. As a result, the loans have been placed on nonaccrual. As of March 31, 1998, the principal balance and nonaccrued interest balances of the $1,250,000 note were $1,250,000 and $416,000, respectively. The Partnership's share of the principal and nonaccrued balances of the $2,115,000 note as of the same date were $1,055,000 and $344,000, respectively. As discussed in note 4 of Notes to Consolidated Financial Statements, the Partnership has reduced the carrying value of these notes by $2,305,000, a portion of its share of losses from this unconsolidated investee. During 1994 and 1995, LCR had evaluated various alternative strategies for liquidating its investment in the 179 lots in Lancaster. During 1995, LCR determined that its best course of action appeared to be the full-scale buildout and sale of single- family homes since the market for finished lots had fallen so significantly. LCR obtained construction financing commitments from the Partnership and Centennial Mortgage Income Fund II ("CMIF II"), an affiliate. LCR entered into a joint venture agreement entitled Silverwood with Home Devco to construct and sell single-family homes at the project. Silverwood began constructing a model home complex at the project in June 1995. Construction commenced in September 1995 on Phase I at the project. Construction of Phase II of the project was commenced in February 1997. At March 31, 1998, the Partnership holds a 50 percent participation in three notes and a 100 percent interest in a fourth note due from Silverwood consisting of a land development loan, a model home loan and two home construction loans with a combined disbursed balance of $2,174,000. The Partnership's disbursed balance of the $3,266,000 development loan at March 31, 1998 was $1,304,000. The Partnership's disbursed balance of the $490,000 model loan at March 31, 1998 was $239,000. At March 31, 1998, the Partnership's disbursed balance of the $1,034,000 Phase I construction loan was $171,000. At March 31, 1998 the Partnership's disbursed balance of the $870,000 Phase II construction loan was $460,000. As discussed in note 4 of Notes to Consolidated Financial Statements, the Partnership had reduced the carrying value of the land development loan by $434,000, the remainder of its share of losses in unconsolidated investees. Sales volumes of new homes in the Lancaster area have continued to remain sluggish since 1995 while sales prices have remained relatively flat and construction costs have increased. This has caused a further decline in the value of finished lots and a reduction in the anticipated net proceeds the Partnership expects it might realize from the buildout of homes at the project. Additionally, Silverwood closed escrow on only two homes during the twelve calendar months of 1996, seven homes during the twelve calendar months of 1997, and three homes during the first quarter of 1998, far less than originally anticipated. As a result of these factors, LCR recorded a $207,000, $2,516,000 and $1,077,000 provision for losses on real estate investments during the years ended December 31, 1997, 1996 and 1995, respectively. Additionally, Silverwood has entered into a purchase and sale agreement to sell the 157 remaining undeveloped lots and intends to cease its homebuilding activities. The pending transaction requires the Partnership and CMIF II provide financing to the buyer and is not expected to result in any significant gain or loss. There is no assurance that this transaction will ultimately close escrow. Real Estate Owned A description of the Partnership's principal real estate owned and loan classified as insubstance foreclosure during the quarter ended March 31, 1998 follows: Shopping Center in Upland, California During the third quarter of 1988, the Partnership foreclosed on a loan secured by this project. The Partnership originally committed $5,600,000 for the rehabilitation of a 33,327 square foot retail center and construction of an automotive service facility in Upland, California. Cost overruns and construction delays prevented the borrower from selling the project and thereby performing on the loan. The property generated net operating income before debt service of $115,000 during the three months ended March 31,1998 and its carrying value before allowance for possible losses was $4,628,000 at March 31, 1998. The property is encumbered by a note of $2,417,000, secured by a first trust deed on the property. The Partnership oversees the management and leasing of the property which is currently 96 percent leased. The Partnership had recorded a $776,000 allowance for losses related to this property as of March 31, 1998. 19 Acres in Sacramento, California During the third quarter of 1991, the Partnership took a deed in lieu of foreclosure on a second trust deed secured by 19 acres of undeveloped land in Sacramento, California. The property is located in the North Natomas area and is zoned for light- industrial commercial use. The Partnership continues to finalize the entitlement processing, flood issues and provide for utility services for the property. As these issues are finalized and the demand for development land in the area returns, the Partnership intends to list the property for sale. At March 31, 1998, the carrying value before allowance for possible losses of this asset was $2,822,000 and the Partnership had recorded a $1,279,000 allowance for losses related to this project. 4 Condominiums in Oxnard, California During 1990, the Partnership funded a loan secured by a first trust deed with an original committed amount of $3,000,000 for the construction of 12 condominiums in Oxnard, California. The borrower signed over control to the second trust deed holder in December 1992 and the second trust deed holder, an affiliate, abandoned the property. At that time, the Partnership controlled the property and began receiving 100 percent of all sales proceeds net of selling costs. As a result, the Partnership recorded an insubstance foreclosure on these 12 condominiums. As of December 31, 1997, the Partnership still owned four of the twelve units. During the three months ended March 31, 1998, the Partnership sold these remaining four units. These sales generated approximately $762,000 in net cash proceeds and resulted in a $21,000 gain on sale, after charging off the previously recorded $299,000 allowance for losses against the property. INTEREST ON INTEREST-BEARING DEPOSITS Interest earned on interest-bearing deposits totaled $19,000 and $21,000 for the three months ended March 31, 1998 and 1997, respectively. Interest on interest-bearing deposits represents interest earned on Partnership funds invested, for liquidity, in time certificate and money market deposits. The decrease in income on interest-bearing deposits is principally due to decreased cash balances for the three months ended March 31, 1998. INCOME FROM OPERATIONS OF REAL ESTATE OWNED Income from operations of real estate owned consists of rental income of $159,000 and $238,000 for the three months ended March 31, 1998 and 1997, respectively. The 1997 revenues are from the Upland shopping center and the auto retail center in Corona while the 1998 revenues include only the Upland shopping center due to sale of the auto retail center in the third quarter of 1997. PROVISION FOR POSSIBLE LOSSES There was no provision for possible losses for the three months ended March 31, 1998 or 1997. The provision for possible losses results from the change in the allowance for possible losses and the allowance for possible losses on real estate owned net of charge-offs, if any. Management believes that the allowance for possible losses at March 31, 1998 is adequate to absorb the known and inherent risk in the Partnership's loan and real estate owned portfolio. SHARE OF LOSSES IN UNCONSOLIDATED INVESTEE The Partnership has invested in a corporation in which it has less than a majority ownership and accounts for this investment using the equity method. The Partnership's share of losses in this unconsolidated investee was $54,000 and $29,000 for the three months ended March 31, 1998 and 1997, respectively. The share of losses consists primarily of provisions for losses on real estate investments and interest expense related to the 179 lots in Lancaster owned by LCR. The inrease for 1998 is due to an increase in interest expense recorded by LCR during 1998. OTHER EXPENSES Operating expenses from operations of real estate owned were $36,000 and $37,000 for the three months ended March 31, 1998 and 1997, respectively. The 1997 expenses were associated with both the Upland shopping center and the auto retail center in Corona while the 1998 expenses excluded the auto retail center. The 1998 expense for Upland actually increased $17,000. The increase was due to a retroactive $15,000 property tax refund received during 1997 (this refund resulted from a valuation appeal by the Partnership and was recorded as an offset against 1997 expenses) and additional roofing expenses incurred in 1998 which were not required in 1997. The Upland increase was offset by the decrease due to the sale of the auto retail center. Operating expenses from operations of real estate owned paid to affiliates were $8,000 and $11,000 for the three months ended March 31, 1998 and 1997, respectively. The operating expenses consist of property management fees paid to affiliates of the general partners. Expenses associated with non-operating real estate owned were $35,000 and $44,000 for the three months ended March 31, 1998 and 1997, respectively. The expenses relate to the 19 acres in Sacramento and the condominiums in Oxnard. The decrease for the three months ended March 31, 1998 is due to a decrease in consulting services related to entitlement work on the 19 acres. Depreciation and amortization expense was $2,000 and $3,000 for the three months ended March 31, 1998 and 1997, respectively, related to leasehold improvements at the Upland Shopping Center and furniture and fixtures of the Partnership. Interest expense was $67,000 and $103,000 for the three months ended March 31, 1998 and 1997, respectively. The interest expense during 1997 relates to both the Upland Shopping Center, the 19 acres in Sacramento, California. In December 1997, the loan secured by the 19 acres in Sacramento was repaid. Accordingly, interest expense during 1998 no longer includes interest on this note which caused the decrease from 1997 to 1998. General and administrative expenses, affiliates totaled $51,000 and $51,000 for the three months ended March 31, 1998 and 1997, respectively. These expenses are primarily salary allocation reimbursements paid to affiliates. General and administrative expenses, nonaffiliates totaled $22,000 and $17,000 for the three months ended March 31, 1998 and 1997, respectively. These expenses consist of other costs associated with the administration of the Partnership. The increase for 1998 is primarily due to an increase in professional fees. Mortgage investment servicing fees totaled $1,000 for both the three months ended March 31, 1998 and 1997, respectively. This consists of fees paid to Centennial Corporation for servicing the Partnership's loan portfolio. PART II OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) None (b) None Signatures Pursuant to the requirements of Section 13 or 15(d) 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. CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A California Limited Partnership By:/s/John B. Joseph _________________________________ John B. Joseph General Partner May 15, 1998 By:/s/Ronald R. White _________________________________ Ronald R. White General Partner May 15, 1998 By: CENTENNIAL CORPORATION General Partner /s/Joel H. Miner _________________________________ Joel H. Miner Chief Financial Officer May 15, 1998 EX-27 2 ART. 5 FDS FOR 1ST QUARTER 10-Q
5 1,000 3-MOS DEC-31-1998 MAR-31-1998 2,772 0 3,107 714 0 2,794 0 0 10,650 28 2,417 0 0 0 7,686 10,650 0 383 0 0 0 0 67 131 0 131 0 0 0 131 3.38 3.38
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