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