-----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, I9WdbZknoJ5B4epxMBnJVGSEDrwh7yfnJTkzbWI65u0vHlKnab1mxunql/1bE4qd RjP4Q0pwZCQdE6JLY143gw== 0000736980-98-000004.txt : 19980518 0000736980-98-000004.hdr.sgml : 19980518 ACCESSION NUMBER: 0000736980-98-000004 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 II CENTRAL INDEX KEY: 0000773337 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 330112106 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15448 FILM NUMBER: 98622739 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 II 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: 0-15448 CENTENNIAL MORTGAGE INCOME FUND II (Exact name of registrant as specified in its charter) California 33-0112106 (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 II AND SUBSIDIARIES A Limited Partnership Consolidated Balance Sheets
March 31, December 31, 1998 1997 Assets (Unaudited) - ----------------------------------------------------------------- Cash and cash equivalents $ 332,000 $ 195,000 Real estate loans receivable, earning --- 215,000 Real estate loans receivable from unconsolidated investee, nonearning (note 4) 724,000 814,000 - ----------------------------------------------------------------- 724,000 1,029,000 Less allowance for possible loan losses --- 15,000 - ----------------------------------------------------------------- Net real estate loans receivable 724,000 1,014,000 - ----------------------------------------------------------------- Real estate owned, held for sale (note 3) 10,827,000 10,827,000 Less allowance for possible loan losses on real estate owned 2,702,000 2,702,000 - ----------------------------------------------------------------- Net real estate owned 8,125,000 8,125,000 - ----------------------------------------------------------------- See accompanying notes to consolidated financial statements 1 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Consolidated Balance Sheets (Continued) March 31, December 31, 1998 1997 Assets (Unaudited) - ----------------------------------------------------------------- Due from affiliates 16,000 16,000 Other assets, net 14,000 4,000 - ----------------------------------------------------------------- $ 9,211,000 $ 9,354,000 ================================================================= Liabilities and Partners' Equity - ----------------------------------------------------------------- Note payable $ 85,000 $ 97,000 Accounts payable and accrued liabilities 28,000 9,000 Interest and property taxes payable on real estate owned 552,000 484,000 - ----------------------------------------------------------------- Total liabilities 665,000 590,000 - ----------------------------------------------------------------- Partners' equity (deficit) -- 29,141 limited partnership units outstanding at March 31, 1998 and December 31, 1997 General partners (195,000) (195,000) Limited partners 8,741,000 8,959,000 - ----------------------------------------------------------------- Total partners' equity 8,546,000 8,764,000 Contingencies (note 5) - ----------------------------------------------------------------- $ 9,211,000 $ 9,354,000 =================================================================
See accompanying notes to consolidated financial statements 2 CENTENNIAL MORTGAGE INCOME FUND II 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 $ 5,000 $ 4,000 Interest on interest- bearing deposits 2,000 2,000 Income from operations of real estate owned 38,000 32,000 Other --- 11,000 - ----------------------------------------------------------------- Total revenue 45,000 49,000 Expenses: Share of losses in unconsolidated investee 54,000 29,000 Operating expenses from operations of real estate owned 19,000 18,000 Operating expenses from operations of real estate owned paid to affiliates 3,000 3,000 Expenses associated with non-operating real estate owned 125,000 105,000 Depreciation and amortization expense 1,000 2,000 Interest expense 2,000 3,000 See accompanying notes to consolidated financial statements 3 CENTENNIAL MORTGAGE INCOME FUND II 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 45,000 44,000 General and administrative, nonaffiliates 14,000 13,000 - ----------------------------------------------------------------- Total expenses 263,000 217,000 - ----------------------------------------------------------------- Net loss $ (218,000) $ (168,000) ================================================================= Net loss per limited partnership unit $ (7.48) $ (5.77) =================================================================
See accompanying notes to consolidated financial statements 4 CENTENNIAL MORTGAGE INCOME FUND II 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 $ (195,000) $ 8,959,000 $ 8,764,000 Net loss --- (218,000) (218,000) - ----------------------------------------------------------------- Balance at March 31, 1998 $ (195,000) $ 8,741,000 $ 8,546,000 =================================================================
See accompanying notes to consolidated financial statements 5 CENTENNIAL MORTGAGE INCOME FUND II 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 loss $ (218,000) $ (168,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization expense 1,000 2,000 Equity in losses of unconsolidated investee 54,000 29,000 Changes in assets and liabilities: Increase in other assets (11,000) (19,000) Increase in payable to affiliates --- 2,000 Increase (decrease) in accounts payable and accrued liabilities 19,000 (3,000) Increase in interest and taxes payable on real estate owned 68,000 65,000 - ----------------------------------------------------------------- Net cash used in operating activities (87,000) (92,000) - ----------------------------------------------------------------- See accompanying notes to consolidated financial statements 6 CENTENNIAL MORTGAGE INCOME FUND II 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) - ----------------------------------------------------------------- Cash flows from investing activities: Principal collected on loans 236,000 47,000 Advances on loans made to unconsolidated investees --- (56,000) - ----------------------------------------------------------------- Net cash provided by (used in) investing activities 236,000 (9,000) - ----------------------------------------------------------------- Cash flows used in financing activities: Principal payments on notes payable (12,000) (11,000) - ----------------------------------------------------------------- Net increase (decrease) in cash 137,000 (112,000) Beginning cash and cash equivalents 195,000 261,000 - ----------------------------------------------------------------- Ending cash and cash equivalents $ 332,000 $ 149,000 ================================================================= Supplemental schedule of cash flow information: Cash paid during the quarter for: Interest $ 2,000 $ 3,000 See accompanying notes to consolidated financial statements 7 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Notes to Consolidated Financial Statements (Unaudited) March 31, 1998 and 1997 (1) BUSINESS Centennial Mortgage Income Fund II (the "Partnership") was formed in 1985 and 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, most 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 became delinquent, 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. 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. 8 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 Loss per Limited Partnership Unit Net loss per limited partnership unit was based on the weighted average number of limited partnership units outstanding of 29,141 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 under SFAS 114 totaled $724,000 (all of which were on nonaccrual status). At March 31, 1998, there was no allowance for possible loan losses determined in accordance with the provisions of SFAS 114, related to loans considered impaired under SFAS 114. This is due to the fact that all the remaining loans considered to be impaired were to an unconsolidated investee. The unconsolidated investee has recorded an allowance for losses of $4,148,000 and the Partnership's proportionate share of losses in unconsolidated 9 investee reflects the majority of this allowance. There was no investment in impaired loans during the three months ended March 31, 1998. For the three months ended March 31, 1998, the Partnership recognized no interest income nor cash basis income on these impaired loans.
(3) REAL ESTATE OWNED
Real estate owned consists of the following: (dollars in thousands) March 31, December 31, 1998 1997 - ----------------------------------------------------------------- 1. Office building in San Bernardino, CA $ 827 $ 827 2. Land in Sacramento, CA 3,637 3,637 3. Proposed marina and condominiums in Redwood City, CA 5,360 5,360 4. 10.66 acres in Roseville, CA 1,003 1,003 - ----------------------------------------------------------------- Total real estate owned $10,827 $10,827 =================================================================
(4) TRANSACTIONS WITH AFFILIATES Under the provisions of the Partnership Agreement, the general partners are to receive compensation for their services in 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 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 10 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, ("CMIF"), an affiliate. LCR has invested in a joint venture, Silverwood Homes ("Silverwood") which is constructing 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. The Partnership holds a 50 percent participation in an unsecured note in the amount of $2,115,000 due from LCR. The Partnership's share of the note at March 31, 1998 is $1,059,000 and the Partnership had applied $1,059,000, a portion of the cumulative losses from unconsolidated investee, against the carrying value of the note as of that same date. The Partnership has not accrued its share of interest on this note which was approximately $345,000 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 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 due from Silverwood consisting of a land development loan, a model home loan and a home construction loan. The Partnership's disbursed balance of the $3,265,700 development loan at March 31, 1998 is $906,000 and the Partnership had applied $431,000, the balance of cumulative losses from unconsolidated investee 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 $245,000. At March 31, 1998, the Partnership's disbursed balance of the $1,034,000 Phase I construction loan is $4,000. The consolidated balance sheet and income statement 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, 1998 and for the three months ended March 31, 1998: 11 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 =================================================================
12 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) =================================================================
(5) CONTINGENCIES There are no material pending legal proceedings other than ordinary routine litigation incidental to the Partnership's business. Based in 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. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL References to the "Partnership" in the following discussion refers to Centennial Mortgage Income Fund II and its wholly-owned subsidiaries. The Partnership had net losses and losses per limited partnership unit of $(218,000) and $(7.48) and $(168,000) and $(5.77) for the three months ended March 31, 1998 and March 31, 1997, respectively. The losses for 1998 are primarily the result of expenses associated with non-operating real estate owned. 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 $332,000 in unrestricted cash and interest-bearing deposits. The Partnership had no unfunded loan commitments to nonaffiliates at March 31, 1998. Sources of funds are expected to be from the sale of real estate owned. Future operations of real estate owned are not expected to be a significant source of funds. The Partnership received payoffs and paydowns on loans totaling $236,000 during the three months ended March 31, 1998. As of March 31, 1998, the Partnership has entered into purchase and sale agreements to sell two properties and a portion of a third property with an aggregate book value before allowance for losses of approximately $7.3 million and a net book value after allowances of approximately $5.3 million. Management currently estimates that the net sale proceeds from these transactions, if they are consummated, will be equal to or greater than the net book value after allowances for losses. The only debt encumbering these properties is approximately $552,000 in accrued real estate taxes. As discussed in greater detail below, these sales are subject to numerous uncertainties and it is very likely that one or more of the transactions will not be consummated. Additionally, as of March 31, 1998, the Partnership's unconsolidated subsidiary, LCR, had entered into a purchase and sale agreement to sell its remaining undeveloped lots. The Partnership's notes payable commitments for the next year consist of interest and principal payments due of approximately $58,000 payable during the next twelve months. In addition to the note payable commitments, the Partnership's principal capital requirements include: (i) real property taxes on real estate owned of approximately $820,000 payable and delinquent during the next twelve months, and (ii) selling, general and administrative costs. The Partnership can apply for a 5 year redemption plan on a portion of the property taxes due in 1998 to ease liquidity constraints if necessary. These commitments are expected to be paid from existing cash balances and the sale of real estate owned. The Partnership is continuously evaluating various alternative strategies for liquidating its real estate assets under current market conditions. 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 investment of proceeds received from the payoff of existing loans and 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 should generate a significantly 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 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. However, the Partnership needs to improve liquidity through the sale of real estate owned in order to allocate funds to improve and to fulfill the operating requirements of the remaining real estate owned by the Partnership on a long-term basis. 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. As of March 31, 1998, all of the nonaffiliated loans have been repaid to the Partnership and the Partnership does not expect to realize any future interest income on loans to nonaffiliates. Interest income on loans to nonaffiliates, including fees was $5,000 and $4,000 for the three months ended March 31, 1998 and 1997, respectively. The outstanding principal balance of loans on nonaccrual at March 31, 1998 and 1997 totaled $724,000 and $1,030,000, respectively. 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 throughout the first three months of 1998 and 1997 on the affiliated nonaccrued loans, interest income would have been approximately $26,000 and $50,000 higher than was actually reported for those periods. The real estate owned balance at March 31, 1998 and 1997 was $8,125,000 and $8,771,000, respectively. The following sections entitled Nonaccrual Loans and Real Estate Owned provide a detailed analysis of these assets. NONACCRUAL LOANS During 1994, the Partnership converted a 50 percent participation in a note secured by a second trust deed into a 50 percent participation in a $2,115,000 unsecured note representing a workout loan due from LCR, an affiliate. This loan and an additional loan funded by Centennial Mortgage Income Fund ("CMIF") reflect the majority of the cost basis of 179 residential lots which LCR contributed to Silverwood. LCR's only source of repayment of this note 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 this loan will be repaid. As a result, the loan has been placed on nonaccrual. The participating principal balance and nonaccrued interest balances at March 31, 1998 are $1,059,000 and $345,000, respectively. As discussed in note 4 of Notes to Consolidated Financial Statements, the Partnership has reduced the carrying value of this note by $1,059,000, 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 1994, 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 CMIF. 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 due from Silverwood consisting of a land development loan, a model home loan and a home construction loan with combined disbursed balances of $1,155,000. The Partnership's disbursed balance of the $3,266,000 development loan at March 31, 1998 was $906,000. The Partnership's disbursed balance of the $490,000 model loan at March 31, 1998 was $245,000. At March 31, 1998, the Partnership's disbursed balance of the $1,034,000 Phase I construction loan was $4,000. As discussed in note 4 of Notes to Consolidated Financial Statements, the Partnership had reduced the carrying value of the land development loan by $431,000, 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 3 homes during the three months ended March 31, 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 1997, 1996 and 1995, respectively. Silverwood has entered into a purchase and sale agreement to sell the 157 remaining undeveloped lots and intends to shut down its homebuilding activities. The pending transaction requires the Partnership and CMIF to 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 follows: Office Building in San Bernardino, California The Partnership funded a loan during January 1988 with an original committed amount of $921,000 which was secured by a second trust deed on an office building comprised of 15,894 square feet of rentable space located in San Bernardino, California. The loan was provided as gap financing behind a first deed of trust in the amount of $350,000 to another financial institution. The borrower was unable to payoff the loan at maturity and the Partnership foreclosed on April 20, 1993. The Partnership restructured the note secured by the first trust deed to a more favorable term and rate. The project is 78 percent leased and generated net operating income before debt service of $16,000 during the first three months of 1998. The property is being marketed for sale, however, due to below desirable occupancy levels, it is difficult to attract buyers. The net carrying value at March 31, 1998 was $827,000 before allowance for possible losses. The Partnership has recorded a $250,000 allowance for losses related to this property as of March 31, 1998. The property is encumbered by a fully amortizing note secured by a first trust deed of $85,000 which will be paid off on December 1, 1999. 45 Acres in Sacramento, California The Partnership funded a loan in 1987 with a committed amount of $4,000,000 secured by a first trust deed on 44.52 acres in Sacramento, California. The loan was provided for the development of offsite improvements. The maturity date was February 1, 1991. The borrower was unable to obtain construction financing and bring interest current. The Partnership accepted a grant deed on the property on March 10, 1992. The property is zoned for multi-family and light industrial use. A portion of the property is adjacent to Highway 99 and has good freeway visibility. The Partnership rezoned and subdivided a portion of the property to facilitate one escrow on a 6.5 acre portion of the property without freeway visibility. This escrow closed during 1997. During the first quarter of 1998, the Partnership opened escrow on a 9.5 acre portion of the property. The purchase price is $875,000 and the transaction is subject to the buyer obtaining certain senior housing tax credits through a governmental lottery. As a result, there is no assurance that this transaction will ever be consummated. At March 31, 1998, the carrying value before allowance for possible losses was $3,637,000. The Partnership has recorded a $701,000 allowance for losses related to this property as of March 31, 1998. Proposed Marina and Condominiums in Redwood City, California On April 7, 1989, the Partnership foreclosed on a land loan located in Redwood City, California with an original committed amount of $3,487,000. The purpose of the loan was to acquire the land and provide for the planning of a 122-slip marina plus an office building and restaurant. The original maturity date of October 21, 1986 was extended to March 1, 1987. In March 1987, the borrower filed bankruptcy. The property is included in real estate owned at its carrying value before allowance for possible losses of $5,360,000. Management has obtained an extension on the 404B1 permit for the marina through March 1999. The 404B1 permit enables the owner to build the currently proposed 104-slip boat marina. The Partnership has completed approximately 70 percent of the dredging of the marina site. The property had been in escrow since 1996 for a purchase price of $4,000,000. Numerous issues have arisen during the course of this escrow which have prevented it from closing. The most significant of these issues involves access to the property over a privately owned road. The Partnership and the buyer have been working with officials of Redwood City to complete eminent domain proceedings on this private road. Considerable progress has been made towards a resolution to the access issue and it is possible that this transaction could close in the second quarter of 1998, however, there is no assurance that this escrow will ever actually close. In order to resolve the access issue, the Partnership has agreed to reduce the purchase price to $3,900,000 in exchange for the buyer assuming certain future obligations related to the access issue. It is possible that the Partnership may incur substantial additional costs in order to finalize the transaction. The Partnership has recorded a $1,751,000 allowance for losses related to this property as of March 31, 1998. This allowance is based upon the assumption that the current transaction will close escrow and reflects management's estimate of future costs to resolve the access issue and other costs of selling the property. If the access issue is not satisfactorily resolved, the value of this property would be severely impacted and the current allowance for possible losses would be inadequate. 10.66 Acres in Roseville, California The Partnership funded a loan in 1990 with an original committed amount of $2,779,000 secured by a second deed of trust on 982 acres in Roseville, California. The borrower failed to make the required yearly principal payment to the first and second trust deed holders. The first trust deed holder filed a notice of default for nonpayment. Management negotiated a settlement agreement to accept a 10.66 acre commercial site as payment in full for the $2,779,000 note. This property had a carrying value at March 31, 1998 of $1,003,000 and has no additional debt. The property is currently in escrow for a purchase price of $1,200,000 and close of escrow is scheduled for the second quarter of 1998. The buyer has only made a $20,000 nonrefundable deposit against the purchase price. Accordingly, there can be no assurance that this transaction will ever be consummated. The Partnership has no recorded allowance for losses related to this property as of March 31, 1998. INTEREST ON INTEREST-BEARING DEPOSITS Interest on interest-bearing deposits totaled $2,000 and $2,000 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. INCOME FROM OPERATIONS OF REAL ESTATE OWNED Income from operations of real estate owned consists of operating revenues of $38,000 and $32,000 for the three months ended March 31, 1998 and 1997, respectively. The 1998 and 1997 revenues are from the office building in San Bernardino. 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 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 increase for 1998 is due to an increase in interest expense for 1998. OTHER EXPENSES Operating expenses from operations of real estate owned were $19,000 and $18,000 for the three months ended March 31, 1998 and 1997, respectively. These expenses were associated with the office building in San Bernardino. Operating expenses from operations of real estate owned paid to affiliates were $3,000 and $3,000 for the three months ended March 31, 1998 and 1997, respectively. The operating expenses consist of property management fees paid to an affiliate. Expenses associated with non-operating real estate owned were $125,000 and $105,000 for the three months ended March 31, 1998 and 1997, respectively. The expenses relate to the proposed marina and condominiums in Redwood City, the 45 acres in Sacramento, and the 10.66 acres in Roseville. The increase for the three months ended March 31, 1998 is primarily due to legal costs associated with the proposed marina and condominiums in Redwood City, CA. Depreciation and amortization expense was $1,000 and $2,000 for the three months ended March 31, 1998 and 1997, respectively. Interest expense was $2,000 and $3,000 for the three months ended March 31, 1998 and 1997, respectively. The interest expense relates to the office building in San Bernardino. The decrease for 1998 is due to the amortization of the note secured by the office building in San Bernardino. General and administrative expenses, affiliates for the three months ended March 31, 1998 and 1997 totaled $45,000 and $44,000, respectively. These expenses are primarily salary allocation reimbursements paid to affiliates. General and administrative expenses, nonaffiliates totaled $14,000 and $13,000 for the three months ended March 31, 1998 and 1997, respectively. These expenses consist of other costs associated with the administration of the Partnership and real estate owned. 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 332 0 724 0 0 342 0 0 9,211 570 85 0 0 0 8,546 9,211 0 45 0 0 0 0 2 (218) 0 (218) 0 0 0 (218) (7.48) (7.48)
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