-----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, Ry/xIgwKFelkArEwZc/49KNI0E7c/C3BXvmLKoPSY2Tp1CTYkGiW68Ug3k/uSquP XPdlMalHq+qojnqYtmRhKA== 0000736980-99-000006.txt : 19990518 0000736980-99-000006.hdr.sgml : 19990518 ACCESSION NUMBER: 0000736980-99-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99626848 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, 1999 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, 1999 1998 Assets (Unaudited) - ----------------------------------------------------------------- Cash and cash equivalents $ 1,010,000 $ 4,938,000 Real estate loans receivable, earning 677,000 682,000 Real estate loans receivable from unconsolidated investee, earning --- 88,000 Real estate loans receivable from unconsolidated investee, nonearning --- 12,000 - ----------------------------------------------------------------- 677,000 782,000 Less allowance for possible loan losses --- --- - ----------------------------------------------------------------- Net real estate loans receivable 677,000 782,000 - ----------------------------------------------------------------- Accrued interest receivable 3,000 --- Due from unconsolidated investee 20,000 7,000 Other assets, net 322,000 308,000 - ----------------------------------------------------------------- $ 2,032,000 $ 6,035,000 ================================================================= 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, 1999 1998 Liabilities and Partners' Equity (Unaudited) - ----------------------------------------------------------------- Notes payable to affiliates (note 3) 2,000 2,000 Accounts payable and accrued liabilities 330,000 385,000 - ----------------------------------------------------------------- Total liabilities 332,000 387,000 - ----------------------------------------------------------------- Partners' equity (deficit) -- 38,729 limited partnership units outstanding as of March 31, 1999 and December 31, 1998 General partners (132,000) (132,000) Limited partners 1,832,000 5,780,000 - ----------------------------------------------------------------- Total partners' equity 1,700,000 5,648,000 Contingencies (note 4) - ----------------------------------------------------------------- $ 2,032,000 $ 6,035,000 =================================================================
See accompanying notes to consolidated financial statements 2 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Operations For the three months ended March 31, 1999 and 1998
1999 1998 (Unaudited) (Unaudited) - ----------------------------------------------------------------- Revenue: Interest income on loans to nonaffiliates, including fees $ 14,000 $ 169,000 Interest income on loans to unconsolidated investee, including fees 3,000 14,000 Interest on interest- bearing deposits 32,000 19,000 Income from operations of real estate owned --- 159,000 Gain on sale of real estate owned --- 21,000 Other --- 1,000 - ----------------------------------------------------------------- Total revenue 49,000 383,000 - ----------------------------------------------------------------- Expenses: Share of losses in unconsolidated investee --- 54,000 Operating expenses from operations of real estate owned --- 36,000 Operating expenses from operations of real estate owned paid to affiliate --- 8,000 Expenses associated with non-operating real estate owned 2,000 35,000 Depreciation and amortization expense --- 2,000 Interest expense --- 67,000 See accompanying notes to consolidated financial statements 3 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Operations (Continued) For the three months ended March 31, 1999 and 1998 1999 1998 (Unaudited) (Unaudited) - ----------------------------------------------------------------- General and administrative, affiliates 96,000 51,000 General and administrative, nonaffiliates 26,000 22,000 Mortgage investment servicing fees paid to affiliate --- 1,000 - ----------------------------------------------------------------- Total expenses 124,000 276,000 - ----------------------------------------------------------------- Income (loss) before minority interest (75,000) 107,000 Minority interest --- 24,000 - ----------------------------------------------------------------- Net income (loss) $ (75,000) $ 131,000 ================================================================= Net income (loss) per limited partnership unit $ (1.94) $ 3.38 =================================================================
See accompanying notes to consolidated financial statements 4 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statement of Partners' Equity For the three months ended March 31, 1999
Total General Limited Partners' Partners Partners Equity (Unaudited) (Unaudited) (Unaudited) - ----------------------------------------------------------------- Balance at December 31, 1998 $ (132,000) $ 5,780,000 $ 5,648,000 Net loss --- (75,000) (75,000) Distribution to limited Partners --- (3,873,000) (3,873,000) - ----------------------------------------------------------------- Balance at March 31, 1999 $ (132,000) $ 1,832,000 $ 1,700,000 =================================================================
See accompanying notes to consolidated financial statements 5 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows For the three months ended March 31, 1999 and 1998
1999 1998 (Unaudited) (Unaudited) - ----------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $ (75,000) $ 131,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Interest accrued to principal --- (14,000) Depreciation and amortization --- 2,000 Minority interest --- (24,000) Equity in losses of unconsolidated investee --- 54,000 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 (3,000) 5,000 Increase in other assets (14,000) (18,000) Decrease in accounts payable and accrued liabilities (55,000) (18,000) Increase in interest and taxes payable on real estate owned --- 37,000 6 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows (Continued) For the three months ended March 31, 1999 and 1998 1999 1998 (Unaudited) (Unaudited) - ----------------------------------------------------------------- Increase in payable to affiliates --- 1,000 - ----------------------------------------------------------------- Net cash provided by (used in)operating activities (147,000) 130,000 - ----------------------------------------------------------------- Cash flows from investing activities: Principal collected on loans 105,000 826,000 Advances on loans made to unconsolidated investee --- (114,000) Advances on loans made to customers --- (7,000) Increase (decrease) in due from unconsolidated investee (13,000) 31,000 Proceeds from sale of real estate owned --- 762,000 - ----------------------------------------------------------------- Net cash provided by investing activities 92,000 1,498,000 - ----------------------------------------------------------------- Cash flows from financing activities: Proceeds from notes payable to affiliates --- 130,000 Principal payments on notes payable --- (4,000) Distribution to limited Partners (3,873,000) --- - ----------------------------------------------------------------- Net cash provided by (used in) financing activities (3,873,000) 126,000 - ----------------------------------------------------------------- 7 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows (Continued) For the three months ended March 31, 1999 and 1998 1999 1998 (Unaudited) (Unaudited) - ----------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (3,928,000) 1,754,000 Beginning cash and cash equivalents 4,938,000 1,018,000 - ----------------------------------------------------------------- Ending cash and cash equivalents $ 1,010,000 $ 2,772,000 ================================================================= Supplemental schedule of cash flow information: Cash paid during the quarter for: Interest $ --- $ 65,000
See accompanying notes to consolidated financial statements 8 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Notes to Consolidated Financial Statements (Unaudited) March 31, 1999 and 1998 (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, 1999, a majority of the loans secured by properties have been repaid or charged off. 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 become a direct investor in this real estate and managed operating properties and developed raw land until such time as the Partnership was able to sell this real estate owned. The final real estate owned by the Partnership was sold during the fourth quarter of 1998. 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. Results for the three months ended March 31, 1999 and 1998 are 9 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, 1999 and 1998 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, 1998 on file with the Securities and Exchange Commission, provide additional disclosures and a further description of accounting policies. Certain reclassifications have been made to the December 31, 1998 balance sheet to bring it into conformity with the March 31, 1999 presentation. Financial Information about Industry Segments The Partnership adopted Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). Given that the Partnership is in the process of liquidation, the Partnership has identified only one operating business segment which is the business of asset liquidation. The adoption of SFAS 131 did not have an impact on the Partnership's financial reporting. Net Income (loss) per Limited Partnership Unit Net income (loss) 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. (3) 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 $-0- and $1,000 of mortgage investment servicing fees for the three months ended March 31, 1999 and 1998, respectively. Under the provisions of the Partnership Agreement, the general partners are to receive compensation for their services in 10 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, 1999 or 1998. 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 invested in a joint venture, Silverwood Homes ("Silverwood") which has constructed homes in Lancaster, California. The Partnership has participated in making several loans to this corporation and this 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. During 1998, the Partnership charged off the remaining balances of all but one of these loans against the cumulative LCR losses that it had recorded. At March 31, 1999, the Partnership had a 50 percent participation in a single loan from Silverwood which is now unsecured. The Partnership's disbursed balance of this loan at March 31, 1999 is $11,000 and the Partnership had applied $11,000, the balance of cumulative losses from unconsolidated investee against the carrying value of the note as of the same date. The consolidated balance sheets and statements of operations of LCR have not been consolidated in the Partnership's financial statements. The Partnership accounts for its investment in this corporation using the equity method. The following represents condensed financial information for LCR Development, Inc. at March 31, 1999 and December 31, 1998 and for the three months ended March 31, 1999 and 1998: 11 LCR Development, Inc. Consolidated Balance Sheets (Unaudited)
March 31, December 31, Assets 1999 1998 - ----------------------------------------------------------------- Cash $ 2,000 $ 11,000 Restricted cash 30,000 20,000 Real estate owned --- 119,000 Less allowance for losses on real estate investment --- 17,000 - ----------------------------------------------------------------- Net real estate owned --- 102,000 - ----------------------------------------------------------------- 32,000 $ 133,000 ================================================================= Liabilities and Stockholders' Deficit - ----------------------------------------------------------------- Notes payable to affiliates CMIF 2,784,000 $ 2,882,000 CMIF II 1,535,000 1,549,000 - ----------------------------------------------------------------- Total notes payable 4,319,000 4,431,000 Accounts payable and accrued liabilities 8,000 12,000 Interest and taxes payable on real property 1,925,000 1,837,000 Payable to affiliates 19,000 5,000 - ----------------------------------------------------------------- Total liabilities 6,271,000 6,285,000 Stockholders' deficit (6,239,000) (6,152,000) - ----------------------------------------------------------------- 32,000 $ 133,000 =================================================================
12 LCR Development, Inc. Consolidated Statements of Operations (Unaudited)
Three months Three months ended ended March 31, 1999 March 31, 1998 - ----------------------------------------------------------------- Housing sales $ 123,000 $ 418,000 Cost of housing sales 118,000 383,000 Provision for losses --- 135,000 Selling and marketing expenses 1,000 24,000 General and administrative expenses --- 9,000 - ----------------------------------------------------------------- Operating income (loss) 4,000 (133,000) Interest expense 90,000 105,000 - ----------------------------------------------------------------- Net loss before income taxes (86,000) (238,000) Income taxes 1,000 1,000 - ----------------------------------------------------------------- Net loss (87,000) (239,000) ================================================================= Interest expense not included in share of losses (87,000) (131,000) - ----------------------------------------------------------------- Allocable net loss $ --- $ (108,000) ================================================================= Share of loss recorded $ --- $ (54,000) =================================================================
The Partnership owns an interest in BNN Development, Inc., the corporation which owned the 19 acres in Sacramento, California jointly with an affiliated entity, CMIF III. The property was sold by BNN in December 1998. At March 31, 1999, 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 to affiliates includes $13,000 at both March 31, 1999 and December 31, 1998 and the Partnership had cumulatively applied $11,000, 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. 13 (4) 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 both economic and non-economic 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 retained legal counsel to set aside the defaults and any default judgements which were entered, due to the lack of proper service and notice. The Partnership also tendered this action to its liability insurance carrier for legal and liability coverage. The default judgement has been set aside and the plaintiff's appeal of the set aside ruling has been denied by the Court. The Court has also ruled that the prior jury found 0% liability as to the Partnership for non-economic damages and that the plaintiffs can only proceed to trial against the Partnership for recovery of economic damages. Based upon evidence presented at the prior trial, Management believes that these economic damages should not exceed $40,000. 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. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL The Partnership had net income (loss) and net income (loss) per limited partnership unit of $(75,000) and $(1.94) for the three months ended March 31, 1999 and $131,000 and $3.38 for the three months ended March 31, 1998, respectively. The Partnership liquidated the majority of its non-cash assets during 1998. As a result, total assets of the Partnership declined from $10,397,000 as of December 31, 1997 to only $2,032,000 as of March 31, 1999. This substantial reduction in assets caused many changes in the components of the Partnership's statement of operations. 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. Risks of the year 2000 Issue The Partnership is in the process of liquidating its remaining assets. As of March 31, 1999, the Partnership held only cash, 15 three notes secured by real estate, and an interest in certain funds held in an escrow account that are expected to be used to pay for future improvement costs to a property which was sold by the Partnership during 1998 . Management anticipates that the Partnership will hold a lesser number of assets by January 1, 2000. Management does not believe that the value of any of these assets is subject to valuation risk as a result of the year 2000 issues, other than general economic climate issues that might arise. None of the Partnership's assets have any equipment with computerized components essential to their operation. Although the Partnership has made some changes already to its software, these changes have not been tested. The Partnership intends to begin testing changes made to its existing software in the next few months. The Partnership has not, and does not contemplate spending any significant amount of funds to upgrade its computer systems inasmuch as virtually all of its computer needs could easily be met with existing "over the counter" software and hardware. The cost of this software and hardware, if needed, should not exceed $10,000. The only exception to this is the computer software which the Partnership uses to track its limited partners and their addresses. The Partnership has made a preliminary evaluation of this software with its outside software consultant and believes that it can be modified for less than $10,000. Even if attempts to correct deficiencies in the software without spending significant sums are not successful, the Partnership anticipates that it could convert its systems to standard spreadsheet or data base programs at a nominal cost. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1999, the Partnership had $1,010,000 in cash and interest-bearing deposits. The Partnership had no unfunded loan commitments at March 31, 1999. During the first quarter of 1999, the Partnership's principal sources of cash were: i)$105,000 in principal payments on loans receivable from affiliates (LCR); and ii) $32,000 in interest income on interest bearing deposits. The Partnership's principal uses of cash during the first quarter of 1999 were: i) $3,873,000 in distributions to limited partners; and ii) approximately $190,000 in general and administrative costs. The Partnership's principal future capital requirements are expected to be general and administrative costs. As a result of a substantial reduction in employees as of March 31, 1999, general and administrative costs are expected to decrease significantly in future quarters as compared to the quarter ended March 31, 1999. 16 Effective with the third quarter of 1991, the Partnership had 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. Through the latter part of 1997, 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. As a result of the substantial decrease in loans and real estate owned which has occurred, the general partners determined that the Partnership could make a $1,998,000 distribution to its limited partners in August 1998. As a result of the substantial sales activity which occurred in the fourth quarter of 1998, the general partners declared and paid an additional $3,873,000 cash distribution to limited partners in February 1999. The general partners have had discussions with legal counsel regarding the amounts of cash reserves that would be prudent to be retained by the Partnership at this time. In light of the substantial amount of real estate that the Partnership has held an interest in over the years, there is always the potential for future litigation to arise, particularly in the area of toxic contamination. Although the general partners are not aware of any threatened litigation, or litigation that is likely to arise, they have determined that the Partnership should retain at least $1,000,000 in cash reserves to be available to defend the Partnership in any future litigation which may arise. It is expected that these reserves will be retained until such time as legal counsel advises the general partners that the potential for any future litigation is remote. RESULTS OF OPERATIONS INTEREST INCOME 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, 17 interest income on loans to nonaffiliates, including fees, was abnormally high during the quarter. No comparable nonaccrued interest was received during the three months ended March 31, 1999. This was the principle reason that interest income on loans to nonaffiliates decreased from $169,000 during the quarter ended March 31, 1998 to $14,000 during the quarter ended March 31, 1999. Interest income on loans to unconsolidated investee, including fees, totaled $3,000 and $14,000 for the three months ended March 31, 1999 and 1998, respectively. Interest income on loans to unconsolidated investee represents interest earned on the Silverwood loans. The decrease for 1999 is due to a decrease in the average outstanding loan balances to Silverwood. Interest earned on interest-bearing deposits totaled $32,000 and $19,000 for the three months ended March 31, 1999 and 1998, respectively. Interest on interest-bearing deposits represents interest earned on Partnership funds invested, for liquidity, in time certificate and money market deposits. The increase in income on interest-bearing deposits is principally due to increased average cash balances for the three months ended March 31, 1999. The average cash balances are expected to decline in future quarters as a result of the $3.9 million distribution to limited partners during February 1999. INCOME FROM OPERATIONS OF REAL ESTATE OWNED Income from operations of real estate owned consists of rental income of $-0- and $159,000 for the three months ended March 31, 1999 and 1998, respectively. The 1998 revenues were from a shopping center in Upland, California which was sold in November 1998 PROVISION FOR POSSIBLE LOSSES There was no provision for possible losses for the three months ended March 31, 1999 or 1998. 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 there is no need for an allowance for possible losses at March 31, 1999 based upon the value of the collateral underlying the notes receivable held by the Partnership as of that same date. SHARE OF LOSSES IN UNCONSOLIDATED INVESTEE The Partnership has invested in a corporation in which it has 18 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 $-0- and $54,000 for the three months ended March 31, 1999 and 1998, respectively. The 1998 share of losses consists primarily of provisions for losses on real estate investments related to the 179 lots in Lancaster owned by LCR. By the end of 1998, LCR had liquidated most of its assets and as a result, virtually no gain or loss was recorded by LCR during the three months ended March 31, 1999 other than interest accruing as payable to the Partnership and CMIF II, an affiliate. Since the Partnership did not accrue this interest as income, it did not record its share of the loss resulting from this interest expense recorded by LCR. OTHER EXPENSES Operating expenses from operations of real estate owned were $-0- and $36,000 for the three months ended March 31, 1999 and 1998, respectively. The 1998 expenses were associated with the Upland shopping center which was sold in November 1998. Operating expenses from operations of real estate owned paid to affiliates were $-0- and $8,000 for the three months ended March 31, 1999 and 1998, 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 $2,000 and $35,000 for the three months ended March 31, 1999 and 1998, respectively. The expenses relate to the 19 acres in Sacramento and the condominiums in Oxnard. The decrease for the three months ended March 31, 1999 is due to the sale of the last of the Partnership's real estate owned in the fourth quarter of 1998. Depreciation and amortization expense was $-0- and $2,000 for the three months ended March 31, 1999 and 1998, respectively, related to leasehold improvements at the Upland Shopping Center and furniture and fixtures of the Partnership. These assets have either been sold or fully depreciated. Interest expense was $-0- and $67,000 for the three months ended March 31, 1999 and 1998, respectively. The interest expense during 1998 relates to the loan o the Upland Shopping Center which was sold in November 1998. 19 GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses, affiliates totaled $96,000 and $51,000, respectively, for the three months ended March 31, 1999 and 1998. These expenses are primarily salary allocation reimbursements paid to affiliates. The increase from 1998 to 1999 is due to several factors discussed below that were associated with the termination of five employment contracts effective March 31, 1999. CC, the corporate general partner, entered into twelve month employment contracts with six employees on Apri1 1, 1998. These contracts were guaranteed by the Partnership. At that time, CC had no significant operations other than the management of the operations of the Partnership and several other affiliated partnerships. These affiliated partnerships were also in the process of liquidating. After several CC employees resigned, the General Partners concluded that it was in the best interest of the Partnership to enter into contracts to provide the remaining employees an incentive to continue working for CC until such time as the majority of the Partnership's remaining assets could be liquidated. The employment contracts provided for a ten percent increase in base compensation and six months of severance pay if the employees remained employed by the general partner until the end of their contract term. All of the employees remained until the end of their contract terms. Effective March 31, 1999, CC reduced its employees to one full time and two part time employees. The Partnership's non cash assets decreased from $7,878,000 as of March 31, 1998 to $1,022,000 as of March 31, 1999. Approximately $32,000 of the increase in salary allocations during the quarter ended March 31, 1999 were the result of severance and vacation pay paid to the terminated employees. The increase in base pay accounted for an additional $5,000 of the increase. These increases were partially offset by a $6,000 decrease associated with a decrease in the percentage of salaries allocated to the Partnership as a result of its decreased share of assets being managed by CC. Future salary allocations from CC are expected to be substantially lower than in the first quarter of 1999 as a result of the termination of these employment contracts. 20 General and administrative expenses, nonaffiliates totaled $26,000 and $22,000 for the three months ended March 31, 1999 and 1998, respectively. These expenses consist of other costs associated with the administration of the Partnership. The increase for 1999 is primarily due to an increase in professional fees. Mortgage investment servicing fees totaled $1,000 for the three months ended March 31, 1998. There were no mortgage investment servicing fees paid in 1999. This consists of fees paid to Centennial Corporation for servicing the Partnership's loan portfolio. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Since the Partnership does not invest in any derivative financial instruments or enter into any activities involving foreign currencies, its market risk associated with financial instruments is limited to the effect that changing domestic interest rates might have on the fair value of its bank deposits and notes receivable. As of March 31, 1999, the Partnership held fixed rate bank deposits with carrying values totaling $1,010,000 and fixed rate mortgage notes receivable with carrying values totaling $677,000. The bank deposits all had maturities of less than ninety days. The fixed rate mortgage notes had maturities ranging from one to sixteen months as of March 31, 1999 and bore interest at rates ranging from 8 percent to 10 percent per annum. The estimated fair value of all of these assets was estimated to be equal to their carrying values as of March 31, 1999. Increasing interest rates could have an adverse effect on the fair value of the Partnership's fixed rate notes receivable and/or the value of the underlying real estate collateral which secure the Partnership's notes receivable. Management currently intends to hold the remaining fixed rate assets until their respective maturities. Accordingly, the Partnership is not exposed to any material cash flow or earnings risk associated with these assets. Given the relatively short- term maturities of these assets, management does not believe the Partnership is exposed to any significant market risk related to the fair value of these assets. The Partnership had no interest bearing indebtedness outstanding as of March 31, 1999. Accordingly, the Partnership is not exposed to any market risk associated with its liabilities. 21 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 22 EX-27 2 ART. 5 FDS FOR 1ST QUARTER 10-Q
5 1,000 3-MOS DEC-31-1998 MAR-31-1999 1,010 0 677 0 0 1,313 0 0 2,032 332 0 0 0 0 1,700 2,032 0 49 0 0 0 0 0 (75) 0 (75) 0 0 0 (75) (1.94) (1.94)
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