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 June 30, 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
June 30, December 31,
Assets 1999 1998
(Unaudited)
- -----------------------------------------------------------------
Cash and cash
equivalents $ 1,146,000 $ 4,938,000
Real estate loans
receivable, earning 537,000 682,000
Real estate loans receivable
from unconsolidated investee,
earning --- 88,000
Real estate loans receivable
from unconsolidated investee,
nonearning --- 12,000
- -----------------------------------------------------------------
Net real estate loans receivable 537,000 782,000
- -----------------------------------------------------------------
Due from unconsolidated investee 7,000 7,000
Other assets, net 26,000 308,000
- -----------------------------------------------------------------
$ 1,716,000 $ 6,035,000
=================================================================
See accompanying notes to consolidated financial statements
1
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
(Continued)
June 30, December 31,
1999 1998
Liabilities and Partners' Equity (Unaudited)
- -----------------------------------------------------------------
Notes payable to affiliates (note 3) --- 2,000
Accounts payable and
accrued liabilities 8,000 385,000
- -----------------------------------------------------------------
Total liabilities 8,000 387,000
- -----------------------------------------------------------------
Partners' equity (deficit)
-- 38,729 limited partnership
units outstanding as of
June 30, 1999 and
December 31, 1998
General partners (132,000) (132,000)
Limited partners 1,840,000 5,780,000
- -----------------------------------------------------------------
Total partners' equity 1,708,000 5,648,000
Contingencies (note 4)
- -----------------------------------------------------------------
$ 1,716,000 $ 6,035,000
=================================================================
See accompanying notes to consolidated financial statements
2
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
(Unaudited)
Six Months Three Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
- -----------------------------------------------------------------
Revenue:
Interest income
on loans to
nonaffiliates,
including fees $ 27,000 $ 182,000 $ 13,000 $ 16,000
Interest income
on loans to
affiliates,
including fees 3,000 24,000 --- 10,000
Interest on interest-
bearing deposits 42,000 43,000 10,000 24,000
Income from
operations of real
estate owned --- 338,000 --- 179,000
Gain on sale of
real estate owned --- 21,000 --- ---
Other 31,000 9,000 31,000 5,000
- -----------------------------------------------------------------
Total revenue 103,000 617,000 54,000 234,000
Expenses:
Share of losses in
unconsolidated
investee --- 76,000 --- 22,000
Operating expenses
from operations
of real
estate owned --- 67,000 --- 31,000
Operating expenses
from operations
of real estate
owned paid to
affiliates --- 15,000 --- 7,000
See accompanying notes to consolidated financial statements
3
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
(Unaudited)
(Continued)
Six Months Three Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
- -----------------------------------------------------------------
Expenses
associated with
non-operating
real estate owned 3,000 68,000 1,000 33,000
Depreciation and
amortization
expense --- 4,000 --- 2,000
Interest expense --- 131,000 --- 64,000
General and
administrative,
affiliates 120,000 144,000 24,000 93,000
General and
administrative,
nonaffiliates 47,000 34,000 21,000 12,000
Mortgage
investment
servicing fees
paid to affiliates --- 1,000 --- ---
- -----------------------------------------------------------------
Total expenses 170,000 540,000 46,000 264,000
- -----------------------------------------------------------------
Income (loss)
before minority
interest (67,000) 77,000 8,000 (30,000)
Minority interest --- 29,000 --- 5,000
- -----------------------------------------------------------------
Net income
(loss) $ (67,000) $ 106,000 $ 8,000 $ (25,000)
=================================================================
Net income (loss)
per limited
partnership
unit $ (1.73) $ 2.74 $ .21 $ (.65)
=================================================================
See accompanying notes to consolidated financial statements
4
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statement of Partners' Equity
(Unaudited)
For the six months ended June 30, 1999
Total
General Limited Partners'
Partners Partners Equity
- -----------------------------------------------------------------
Balance (deficit) at
December 31, 1998 $ (132,000) $ 5,780,000 $ 5,648,000
Net income --- (67,000) (67,000)
Distribution to limited
Partners --- (3,873,000) (3,873,000)
- -----------------------------------------------------------------
Balance (deficit) at
June 30, 1999 $ (132,000) $ 1,840,000 $ 1,708,000
=================================================================
See accompanying notes to consolidated financial statements
5
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Unaudited)
For the six months ended June 30, 1999 and 1998
1999 1998
- -----------------------------------------------------------------
Cash flows from
operating activities:
Net income (loss) $ (67,000) $ 106,000
Adjustments to reconcile
net income (loss) to net
cash provided by (used in)
operating activities:
Amortization of unearned
loan fees --- (5,000)
Depreciation expense --- 4,000
Interest accrued to
principal on loans
receivable --- (24,000)
Minority interest --- (29,000)
Gain on sale of real
estate owned --- (21,000)
Equity in losses of
unconsolidated investee --- 76,000
Changes in assets
and liabilities:
(Increase) decrease in accrued
interest receivable --- 4,000
(Increase) decrease in due
from unconsolidated investee --- 31,000
Decrease (increase) in other
assets 282,000 (55,000)
Increase (decrease) in
accounts payable and
accrued liabilities (377,000) 15,000
Increase in payable
to affiliates --- 1,000
- -----------------------------------------------------------------
Net cash provided by
(used in) operating
activities (162,000) 103,000
- -----------------------------------------------------------------
See accompanying notes to consolidated financial statements
6
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
For the six months ended June 30, 1999 and 1998
1999 1998
- -----------------------------------------------------------------
Cash flows from investing activities:
Principal collected
on loans to customers 145,000 497,000
Principal collected on loans made
to unconsolidated investee 100,000 751,000
Advances on loans made to
unconsolidated investee --- (173,000)
Advances on loans made
to customers --- (22,000)
Proceeds from sale of
real estate owned --- 762,000
- -----------------------------------------------------------------
Net cash provided by
investing activities 245,000 1,815,000
- -----------------------------------------------------------------
Cash flows from financing activities:
Principal advances on notes
payable to affiliates --- 137,000
Principal payments
on notes payable (2,000) (11,000)
Distribution to limited
partners (3,873,000) ---
- -----------------------------------------------------------------
Net cash provided by (used
(in financing activities (3,875,000) 126,000
- -----------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents (3,792,000) 2,044,000
Beginning cash and
cash equivalents 4,938,000 1,018,000
- -----------------------------------------------------------------
Ending cash and cash
equivalents $ 1,146,000 $ 3,062,000
=================================================================
Supplemental schedule of cash flow information:
Cash paid during the
six months for Interest $ --- $ 131,000
See accompanying notes to consolidated financial statements
7
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1999 and December 31, 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 June 30, 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 became 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.
8
Results for the six months ended June 30, 1999 and 1998 are not
necessarily indicative of results which may be expected for any
other interim period, or for the year as a whole.
Information pertaining to the six months ended June 30, 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 June 30, 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 six months
ended June 30, 1999 and 1998, respectively.
9
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 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 six
months ended June 30, 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 June 30, 1999, the Partnership had a 50 percent participation
in a single loan from Silverwood which is now unsecured. The
disbursed balance of this loan at June 30, 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 June
10
30, 1999 and December 31, 1998 and for the six months ended June
30, 1999 and 1998:
LCR Development, Inc.
Consolidated Balance Sheet
June 30, December 31,
1999 1998
Assets (Unaudited)
- -----------------------------------------------------------------
Cash $ 10,000 $ 11,000
Restricted cash 10,000 20,000
Real estate owned, --- 119,000
Less allowance for losses
on real estate investment --- 17,000
- -----------------------------------------------------------------
Net real estate owned --- 102,000
- -----------------------------------------------------------------
$ 20,000 $ 133,000
=================================================================
Liabilities and Stockholders' Deficit
- -----------------------------------------------------------------
Notes payable to affiliates
CMIF $ 2,782,000 $ 2,882,000
CMIF II 1,537,000 1,549,000
- -----------------------------------------------------------------
Total notes payable 4,319,000 4,431,000
Accounts payable
and accrued liabilities 6,000 12,000
Interest and taxes payable
on real property 2,036,000 1,837,000
Payable to affiliates 9,000 5,000
- -----------------------------------------------------------------
Total liabilities 6,370,000 6,285,000
Stockholders' deficit (6,350,000) (6,152,000)
- -----------------------------------------------------------------
$ 20,000 $ 133,000
=================================================================
11
LCR Development, Inc.
Consolidated Statement of Operations
(Unaudited)
Six months Six months
ended ended
June 30, 1999 June 30, 1998
- -----------------------------------------------------------------
Housing sales $ 123,000 $ 515,000
Cost of housing sales 118,000 481,000
Provision for losses --- 178,000
Selling and marketing expenses 1,000 47,000
General and administrative expenses --- 19,000
- -----------------------------------------------------------------
Operating income (loss) 4,000 (209,000)
Interest expense 201,000 206,000
- -----------------------------------------------------------------
Net loss before income taxes (197,000) (415,000)
Income taxes 1,000 1,000
- -----------------------------------------------------------------
Net (loss) (198,000) (416,000)
=================================================================
Interest not included
in share of losses (198,000) (265,000)
- -----------------------------------------------------------------
Allocable net loss $ --- $ (151,000)
=================================================================
Share of loss recorded $ --- $ (75,000)
=================================================================
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 June 30, 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 included $13,000 at
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 that same date. The note was repaid in June 1999. The notes
payable to affiliates balance reflects CMIF III's share of a note
payable by the corporation to the Partnership and CMIF III.
12
(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.
13
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 $(67,000) and $(1.73) for the six
months ended June 30, 1999 and $106,000 and $2.74 for the six
months ended June 30, 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 $1,716,000 as of June 30, 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 June 30, 1999, the Partnership principal assets
14
were cash and a note secured by real estate. 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, not all of these changes have not been tested. The
Partnership has begun testing changes made to its existing
software and intends to continue such testing over 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 June 30, 1999, the Partnership had $1,146,000 in cash and
interest-bearing deposits. The Partnership had no unfunded loan
commitments at June 30, 1999. During the first six months of
1999, the Partnership's principal sources of cash were: i)
$145,000 in principal payments on loans made to customers; ii)
$100,000 in principal payments on loans receivable from
affiliates (LCR); iii) $42,000 in interest income on interest
bearing deposits; and iv) $30,000 in interest income on loans.
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 $262,000 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 more comparable
to the costs incurred during the three months ended June 30, 1999
than the costs incurred during the quarter ended March 31, 1999.
15
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,
16
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 principal reason that interest income on
loans to nonaffiliates decreased from $182,000 during the six
months ended June 30, 1998 to $27,000 during the six months ended
June 30, 1999.
Interest income on loans to unconsolidated investee, including
fees, totaled $3,000 and $-0-for the six and three months ended
June 30, 1999, respectively. Interest income on loans to
unconsolidated investee, including fees, totaled $24,000 and
$10,000 for the six and three months ended June 30, 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 $42,000 and
$10,000 for the six and three months ended June 30, 1999,
respectively. Interest earned on interest-bearing deposits
totaled $43,000 and $24,000 for the six and three months ended
June 30, 1998, respectively. Interest on interest-bearing
deposits represents interest earned on Partnership funds
invested, for liquidity, in time certificate and money market
deposits. The decrease in income on interest-bearing deposits is
principally due to decreased average cash balances for the six
months ended June 30, 1999 which resulted from the cash
distribution to investors in February 1999. The average cash
balances are expected to decline even further in future quarters
as a result of the $3.9 million distribution to limited partners
during February 1999.
NONACCRUAL LOANS
The Partnership holds an investment in LCR and accounts for its
investment in LCR using the equity method. LCR has invested in a
joint venture, Silverwood which has constructed homes. The
Partnership made a series of loans to LCR and Silverwood from
1994 to 1997. The Partnership treated these loans as a component
of its investment in LCR and reduced the carrying value of the
loans by its share of losses recorded by LCR.
All but one of the loans to LCR and Silverwood were on nonaccrual
status during all of 1998 and in the first quarter of 1999. The
Partnership's share of the outstanding balances of loans to LCR
and Silverwood as of June 30, 1999 was $2,782,000. All of these
loans have become unsecured as a result of the Partnership
17
releasing its liens in exchange for principal reductions. The
Partnership charged off all but one of these loans during the
fourth quarter of 1998 against its previously recorded share of
losses incurred by LCR. The Partnership's share of the remaining
loan was $10,000 as of June 30, 1999 and the Partnership had
reduced its carrying value of this loan by $10,000 which
represents the remaining portion of its share of losses incurred
by LCR.
INCOME FROM OPERATIONS OF REAL ESTATE OWNED
Income from operations of real estate owned consists of rental
income of $338,000 and $179,000 for the six and three months
ended June 30, 1998, respectively. The 1998 revenues were from a
shopping center in Upland, California which was sold in November
1998. The Partnership no longer owns a direct interest in real
estate. Accordingly, there was no comparable income earned in
1999.
OTHER INCOME
Other income totaled $31,000 and $9,000 for the six months ended
June 30, 1999 and 1998, respectively. The 1999 income includes
$25,000 related to the partial recovery of a loan which had
previously been charged off. There was no comparable recovery
during 1998.
PROVISION FOR POSSIBLE LOSSES
There was no provision for possible losses for the six months
ended June 30, 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 June 30, 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
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 $76,000 for the six
months ended June 30, 1999 and 1998, respectively. These losses
totaled $22,000 for the three months ended June 30, 1998. The
1998 share of losses consists primarily of provisions for losses
on real estate investments related to the 179 lots in Lancaster
18
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 six months ended June 30, 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
$67,000 and $31,000 for the six and three months ended June 30,
1998, respectively. The 1998 expenses were associated with the
Upland shopping center which was sold in November 1998.
Accordingly, there was no comparable expense during 1999.
Operating expenses from operations of real estate owned paid to
affiliates were $15,000 and $7,000 for the six and three months
ended June 30, 1998, respectively. The operating expenses
consist of property management fees paid to affiliates of the
general partners. Since the Partnership no longer owns any real
estate, no such fees were paid in 1999.
Expenses associated with non-operating real estate owned were
$3,000 and $68,000 for the six months ended June 30, 1999 and
1998, respectively Expenses associated with non-operating real
estate owned were $1,000 and $33,000 for the three months ended
June 30, 1999 and 1998, respectively. The expenses relate to the
19 acres in Sacramento and the condominiums in Oxnard. The 1999
decreases were 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 $4,000 and $2,000 for
the six and three months ended June 30, 1998, respectively. This
expense 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. Accordingly,
there was no comparable expense during 1999.
Interest expense was $131,000 and $64,000 for the six and three
months ended June 30, 1998, respectively. There was no
comparable expense in 1999. The interest expense during 1998
relates to the loan on the Upland Shopping Center which was sold
in November 1998.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses, affiliates totaled $120,000
19
and $24,000, respectively, for the six and three months ended
June 30, 1999. General and administrative expenses, affiliates
totaled $144,000 and $93,000, respectively, for the six and three
months ended June 30, 1998. General and administrative expenses,
affiliates totaled $96,000 and $51,000 for the three months ended
March 31, 1999 and 1998, respectively. These expenses are
primarily salary allocation reimbursements paid to affiliates.
There was a significant increase in these expenses during the
first quarter of 1999 due to several factors discussed below that
were associated with the termination of five employment contracts
effective March 31, 1999. As a result of the termination of the
contracts and the reduction of employees which occurred on April
1, 1999, these expenses decreased significantly during the three
months ended June 30, 1999 when compared with either the three
months ended June 30, 1998 or the three months ended 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 as compared with the
quarter ended March 31, 1998 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.
20
General and administrative expenses, nonaffiliates totaled
$47,000 and $21,000 for the six and three months ended June 30,
1999, respectively. General and administrative expenses,
nonaffiliates totaled $34,000 and $12,000 for the six and three
months ended June 30, 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 and $-0- for
the six and three months ended June 30, 1998, respectively.
There were no mortgage investment servicing fees paid in 1999.
These fees consists of amounts 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 June 30, 1999, the Partnership held fixed rate bank
deposits with carrying values totaling $1,146,000 and two fixed
rate mortgage notes receivable with carrying values totaling
$537,000. The bank deposits all had maturities of less than
ninety days. The last fixed rate mortgage note matures in July
2000 and bears interest at 8 percent per annum. The estimated
fair value of all of these assets was estimated to be equal to
their carrying values as of June 30, 1999. Increasing interest
rates could have an adverse effect on the fair value of the
Partnership's fixed rate note receivable and/or the value of the
underlying real estate collateral which secure the Partnership's
note 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 June 30, 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
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/Ronald R. White
_________________________________
Ronald R. White
General Partner August 14, 1999
By: CENTENNIAL CORPORATION
General Partner
/s/Joel H. Miner
_________________________________
Joel H. Miner
Chief Financial Officer August 14, 1999