PART 1
ITEM 1. FINANCIAL STATEMENTS
CENTENNIAL MORTGAGE INCOME FUND II
A Limited Partnership
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
ASSETS 1995 1994
-------------------------------
Cash and cash equivalents $ 2,317,000 $ 1,908,000
Restricted cash 11,000 11,000
Real estate loans receivable, earning 26,000 305,000
Real estate loans receivable from
unconsolidated investees (note 4) 560,000 213,000
Real estate loans receivable from
unconsolidated investees,
nonearning, (note 4) 2,128,000 2,600,000
-------------------------------
2,714,000 3,118,000
Less allowance for possible
loan losses 8,000 8,000
------------------------------
Net real estate loans receivable 2,706,000 3,110,000
Real estate owned, net, held
for sale (note 3) 11,311,000 11,284,000
Less allowance for possible losses
on real estate owned 2,545,000 2,445,000
------------------------------
Net real estate owned 8,766,000 8,839,000
Due from affiliates --- 99,000
Accrued interest receivable --- 10,000
Other assets 23,000 20,000
------------------------------
$ 13,823,000 $ 13,997,000
==============================
See accompanying notes to consolidated financial statements
CENTENNIAL MORTGAGE INCOME FUND II
A Limited Partnership
Consolidated Balance Sheets
(Unaudited)
(Continued)
September 30, December 31,
LIABILITIES AND PARTNERS' EQUITY 1995 1994
-------------------------------
Note payable $ 195,000 $ 224,000
Accounts payable and accrued
liabilities 23,000 26,000
Interest and property taxes
payable on real estate owned 205,000 155,000
Payable to affiliates (note 4) 721,000 7,000
--------------------------------
Total liabilities 1,144,000 412,000
Partners' equity (deficit)-- 29,141
limited partnership units
outstanding at September 30, 1995
and December 31, 1994
General partners' (195,000) (195,000)
Limited partners' 12,874,000 13,780,000
---------------------------------
Total partners' equity 12,679,000 13,585,000
Contingencies (note 5)
----------------------------------
$ 13,823,000 $ 13,997,000
==================================
See accompanying notes to consolidated financial statements
CENTENNIAL MORTGAGE INCOME FUND II
A Limited Partnership
Consolidated Statements of Operations
(Unaudited)
Nine Months Three Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
--------------------------------------------------------
Revenue:
Interest on loans to non-affiliates,
including fees $ 37,000 $ 82,000 $ 14,000 $ 55,000
Interest on loans to affiliates,
including fees 32,000 --- 32,000 ---
Interest-bearing deposits 39,000 25,000 12,000 7,000
Income from operations of
real estate owned 103,000 211,000 35,000 65,000
--------------------------------------------------------
Total revenue 211,000 318,000 93,000 127,000
Expenses:
Provision for possible losses 199,000 137,000 99,000 73,000
Share of losses in unconsolidated
investees 472,000 --- 162,000 ---
Loss on sale of real estate owned --- 6,000 --- 10,000
Operating expenses from operations
of real estate owned 62,000 131,000 25,000 38,000
Operating expenses from operations
of real estate owned paid
to affiliates 9,000 11,000 3,000 3,000
Expenses associated with
non-operating real estate owned 176,000 241,000 66,000 41,000
Depreciation and amortization expense 8,000 10,000 4,000 3,000
CENTENNIAL MORTGAGE INCOME FUND II
A Limited Partnership
Consolidated Statements of Operations
(Unaudited)
(Continued)
Nine Months Three Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
--------------------------------------------------------
Interest expense 15,000 151,000 5,000 13,000
General and administrative,
affiliates 101,000 121,000 37,000 39,000
General and administrative,
nonaffiliates 50,000 80,000 12,000 12,000
Mortgage investment servicing
fees, affiliates 25,000 32,000 7,000 10,000
--------------------------------------------------------
Total expenses 1,117,000 920,000 420,000 242,000
--------------------------------------------------------
Net loss $ (906,000) $ (602,000) $ (327,000) $ (115,000)
========================================================
Net loss per limited
partnership unit $ (31.09) $ (20.66) $ (11.22) $ (3.95)
========================================================
See accompanying notes to consolidated financial statements
CENTENNIAL MORTGAGE INCOME FUND II
A Limited Partnership
Consolidated Statement of Partners' Equity
(Unaudited)
For the nine months ended September 30, 1995
Total
General Limited Partners'
Partners Partners Equity
-------------------------------------------
Balance at
December 31, 1994 $ (195,000) $ 13,780,000 $ 13,585,000
Net loss --- (906,000) (906,000)
-------------------------------------------
Balance at
September 30, 1995 $ (195,000) $ 12,874,000 $ 12,679,000
===========================================
See accompanying notes to consolidated financial statements
CENTENNIAL MORTGAGE INCOME FUND II
A Limited Partnership
Consolidated Statements of Cash Flows
(Unaudited)
For the nine months ended September 30, 1995 and 1994
1995 1994
--------------------------
Cash flow from operating activities:
Net loss $ (906,000) $ (602,000)
Adjustments to reconcile net loss
to cash provided by (used in)
operating activities:
Provision for possible losses 199,000 137,000
Share of losses in unconsolidated
investees 472,000 ---
Amortization of fees and discounts --- (8,000)
Depreciation and amortization expense 8,000 10,000
Changes in assets and liabilities:
Decrease in accrued interest receivable 10,000 6,000
Increase in other assets (7,000) (19,000)
Increase (decrease) in payable
to affiliates 714,000 1,000
Decrease in due from affiliates --- 8,000
Decrease in accounts payable
and accrued liabilities (3,000) (23,000)
Increase in interest and taxes
payable on real estate owned 50,000 141,000
------------------------
Net cash provided by (used in)
operating activities 537,000 (349,000)
------------------------
Cash flows from investing activities:
Principal collected on loans 279,000 507,000
Advances on loans made to
unconsolidated investees (note 4) (347,000) (90,000)
Additions to real estate owned (31,000) (8,000)
Proceeds from sale of real estate owned --- 72,000
------------------------
Net cash provided by (used in)
investing activities (99,000) 481,000
------------------------
CENTENNIAL MORTGAGE INCOME FUND II
A Limited Partnership
Consolidated Statements of Cash Flows
(Unaudited)
(Continued)
For the nine months ended September 30, 1995 and 1994
1995 1994
--------------------------
Cash flows from financing activities:
Principal payments on notes payable (29,000) (26,000)
--------------------------
Net cash used in financing
activities (29,000) (26,000)
--------------------------
Net increase in cash 409,000 106,000
Beginning cash and cash equivalents 1,908,000 1,542,000
--------------------------
Ending cash and cash equivalents $ 2,317,000 $ 1,648,000
==========================
See accompanying notes to consolidated financial statements
CENTENNIAL MORTGAGE INCOME FUND II
A Limited Partnership
Consolidated Statements of Cash Flows
(Unaudited)
(Continued)
For the nine months ended September 30, 1995 and 1994
1995 1994
Supplemental disclosures of cash
flow information:
Cash paid during the quarter for:
Interest $ 15,000 $ 64,000
Supplemental schedule of noncash
investing and financing activities:
Decrease in real estate owned
through transfer of ownership $ --- $ 6,449,000
Increase in real estate loans
receivable through transfer of
ownership of real estate owned --- 3,004,000
Decrease in allowance for possible
losses on real estate owned as
a result of partial chargeoff
upon transfer of ownership --- 2,477,000
Decrease in notes payable through
transfer of ownership --- 1,910,000
Decrease in interest and property taxes
payable on real estate owned through
transfer of ownership --- 327,000
Decrease in real estate owned through
deed in lieu of foreclosure
or foreclosure --- 5,091,000
Decrease in allowance for possible
losses on real estate owned as
a result of partial chargeoff
upon foreclosure --- 1,185,000
Decrease in other assets through
deed in lieu of foreclosure
or foreclosure --- 52,000
Decrease in notes payable through deed
in lieu of foreclosure or foreclosure --- 3,745,000
Decrease in interest and property
taxes payable on real estate owned
through deed in lieu of foreclosure --- 613,000
Transfer of restricted cash to workout loan --- 501,000
Decrease in accounts payable and accrued
liabilities through transfer of ownership --- 5,000
Decrease in other assets through chargeoff
to the allowance for possible losses 99,000 ---
See accompanying notes to consolidated financial statements
CENTENNIAL MORTGAGE INCOME FUND II
A Limited Partnership
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 1995 and 1994
(1) BUSINESS
Centennial Mortgage Income Fund II (the "Partnership") has
historically 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.
Management believes that the real estate industry in California
continues to stabilize. However, due to the long-term recession
and falling real estate values, many of the Partnership's loans
became delinquent and management of the Partnership elected to
foreclose, thereby increasing real estate owned balances. Nearly
all of the Partnership's performing loans have now been repaid. As
a result, the Partnership has become a direct investor in 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 nine months ended September 30, 1995 and 1994 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 nine months ended September 30, 1995
and 1994 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, 1994 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
Effective January 1, 1995, the Partnership adopted Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan" ("SFAS 114"), as amended by Statement of
Financial Accounting Standards No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures"
("SFAS 118"). Under SFAS 114, a loan is impaired when it is
"probable" that a creditor will be unable to collect all amounts
due (i.e. both principal and interest) according to the contractual
terms of the loan agreement. The measurement of impairment may be
based on (i) the present value of the expected future cash flows of
the impaired loan discounted at the loan's original effective
interest rate, (ii) the observable market price of the impaired
loan, or (iii) the fair value of the collateral of a collateral-
dependent loan. SFAS 114 does not apply to large groups of smaller
balance homogeneous loans that are collectively evaluated for
impairment. The adoption of SFAS 114, as amended by SFAS 118, had
no material impact on the Partnership's consolidated financial
statements as the Partnership's existing policy of measuring loan
impairment is consistent with methods prescribed in these
standards.
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 restructurings 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 September 30, 1995, the carrying value of loans that are
considered to be impaired under SFAS 114 totaled $2,128,000
(of which $2,128,000 were on nonaccrual status). At September 30,
1995, there was no allowance for possible loan losses determined in
accordance with the provisions of SFAS 114, related to loans
considered to be impaired under SFAS 114 recorded by the
Partnership. However, the nonconsolidated affiliates have recorded
an allowance for losses of $967,000. There was no investment in
impaired loans during the nine months ended September 30, 1995.
For the nine months ended September 30, 1995, the Partnership
recognized no interest income nor cash basis income on these
impaired loans.
NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1995, the FASB issued Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121").
SFAS 121 provides guidance for recognition and measurement of
impairment of long-lived assets, certain identifiable intangibles
and goodwill related both to assets to be held and used by an
entity and assets to be disposed of. SFAS 121 is effective for
financial statements for fiscal years beginning after December 15,
1995. Although the Partnership has not yet adopted SFAS 121,
management does not expect such adoption to have a material impact
on the Partnership's consolidated financial statements.
(3) REAL ESTATE OWNED
Real estate owned consists of the following:
(dollars in thousands)
September 30, December 31,
1995 1994
----------------------------
1. Office building in San Bernardino, CA $ 837 $ 837
2. 45 acres in Sacramento, CA 4,123 4,092
3. Proposed marina and condominiums in
Redwood City, CA 5,360 5,360
4. 10.66 acres in Roseville, CA 1,003 1,003
-------------------------
Subtotal 11,323 11,292
Less accumulated depreciation 12 8
-------------------------
Total real estate owned $ 11,311 $ 11,284
=========================
(4) TRANSACTIONS WITH AFFILIATES
CMIF, Inc., an affiliate of the general partners, and Centennial
Corporation, "CC", are 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. Mortgage investment servicing fees for
the nine and three months ended September 30, 1995 were $25,000 and
$7,000, respectively, payable to CMIF, Inc. and CC. Mortgage
investment servicing fees for the nine and three months ended
September 30, 1994 were $32,000 and $10,000, respectively, payable
to CMIF, Inc. and CC.
Under 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 of 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.
The Partnership received a payoff on September 29, 1995 for a loan
which was participated with Centennial Mortgage Income Fund III,
("CMIF III"). Payable to affiliates at September 30, 1995 includes
CMIF III's share of the payoff of $712,000 which was paid to CMIF
III on October 2, 1995.
The Partnership holds 50 percent of the outstanding capital stock
of LCR Development, Inc., ("LCR"). The balance of outstanding
capital stock of LCR is owned by Centennial Mortgage Income Fund
("CMIF"), an affiliate. The Partnership holds a 50 percent
participation in a note in the amount of $2,115,000 due from LCR.
The Partnership's share of the note at September 30, 1995 is
$1,059,000 and the Partnership had applied $328,000 of cumulative
losses from unconsolidated investees 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 $74,000 as
of September 30, 1995.
LCR has been evaluating various alternative strategies for
liquidating its investment in the 179 lots in Lancaster ranging
from the sale of the lots in their present condition to a full-
scale buildout and sale of single-family homes at the project.
During late 1993 and through 1994, LCR had numerous discussions
with several independent real estate brokers and home-building
companies to assist it in determining its best alternatives for the
project. After these discussions, 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 precipitously. In late 1993, discussions with one home builder
advanced to the point of a draft joint venture agreement, whereby
the home builder was to build and sell homes at the project and
obtain construction financing. Under this draft joint venture
agreement, LCR was to complete improvements to the lots, pay all
developer fees at an estimated cost of $12,619 per lot and then
contribute finished lots to the joint venture in exchange for an
initial capital contribution credit of $32,000 per lot. The home
builder was to obtain construction financing and supervise the
construction and sale of single family homes at the project. The
home builder was to be reimbursed for all onsite costs of
construction and marketing of the project and receive an overhead
fee equal to 3% of all sales revenues. After these costs had been
paid, LCR was to receive distributions from the joint venture equal
its $32,000 initial capital contribution. Subsequent to the return
of LCR's initial capital contribution, the joint venture partner
was to receive distributions equal to $5,000 of the first $7,000 in
profits. Thereafter, LCR and the joint venture partner would split
profits and distributions equally. At the time LCR was conducting
its negotiations with this home builder, it did not have the
financial resources to build homes at the project without
additional funds. Thus, the ability of the independent home
builder to obtain construction financing was the principal reason
for utilizing a third party to construct the homes. The joint
venture negotiations were terminated when the home builder insisted
on managerial control of the joint venture, which would have been
in violation of paragraph 10.9 of the Partnership Agreement of the
Partnership.
Subsequent to the termination of the joint venture negotiations
discussed above, LCR has obtained construction financing
commitments from CMIF and the Partnership. LCR has entered into a
joint venture agreement entitled Silverwood Homes ("Silverwood")
with Home Devco, Inc., ("Home Devco"), an affiliate of the general
partners to construct and sell single-family homes at the project.
This new joint venture agreement includes substantially the same
terms as the draft joint venture discussed above except that: i)
the contribution value per lot has been adjusted from $32,000 to
$19,381 in order to reflect the fact that the joint venture rather
than LCR will now be responsible for paying the $12,619 in
estimated costs to complete improvements to the lots and pay
developer fees; ii) Home Devco will not obtain construction
financing for the project; and iii) Home Devco will not receive any
priority interest in profits after LCR has received the equivalent
of $19,381 in distributions per lot contributed to the joint
venture but rather will receive only a 50 percent interest in
profits and distributions form the joint venture. LCR's cost basis
of lots contributed to the joint venture was approximately $19,810.
Management believes that the market value of finished lots in
Lancaster has fallen since the original joint venture was
negotiated and that the new joint venture agreement with Home Devco
is on more favorable terms to LCR than could now be obtained with
an independent home builder. The new joint venture began
constructing a model home complex at the project in June 1995.
Construction commenced in September 1995 on Phase I at the project.
At September 30, 1995, 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 September 30, 1995 is $153,000. The
Partnership's disbursed balance of the $490,000 model loan at
September 30, 1995 is $105,000. The Partnership's disbursed
balance of the $1,034,000 Phase I construction loan at September
30, 1995 is $302,000.
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 September 30, 1995 and for
the nine months ended September 30, 1995:
LCR DEVELOPMENT, INC.
CONSOLIDATED BALANCE SHEET
September 30,
Assets 1995
---------------
Cash $ 1,000
Real estate owned 4,588,000
Less allowance for losses on
real estate investments 287,000
---------------
Net real estate owned 4,301,000
Organization costs 2,000
----------------
$ 4,304,000
================
LCR DEVELOPMENT, INC.
CONSOLIDATED BALANCE SHEET
(Continued)
September 30,
Liabilities and Stockholders' Deficit 1995
---------------
Notes payable to affiliates $ 4,453,000
Accounts payable and accrued liabilities 177,000
Interest and property taxes
payable on real property 329,000
----------------
Total liabilities 4,959,000
Stockholders' deficit (655,000)
----------------
$ 4,304,000
================
LCR DEVELOPMENT, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Nine months
ended
September 30, 1995
----------------
Provision for losses on real estate investments $ 341,000
----------------
Net loss $ 341,000
================
The Partnership holds 50 percent of the outstanding capital stock
of BKS Development, Inc. ("BKS"). The balance of outstanding
capital stock of BKS is also owned by CMIF. The Partnership holds
a 50 percent participation in a note secured by a second trust deed
in the amount of $3,894,000 due from BKS. The Partnership's share
of the note receivable at September 30, 1995 is $1,947,000 and the
Partnership had applied $550,000 of cumulative losses from
unconsolidated investees against the carrying value of the note as
of that same date.
The balance sheet and statement of operations of BKS 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 BKS at September 30, 1995 and for the nine months
ended September 30, 1995:
BKS DEVELOPMENT, INC.
BALANCE SHEET
September 30,
Assets 1995
---------------
Cash $ 1,000
Real property 5,199,000
Less allowance for losses on real
estate investments 680,000
---------------
Net real estate owned 4,519,000
---------------
$ 4,520,000
===============
Liabilities and Stockholders' Deficit
Bonds payable $ 899,000
Notes payable to affiliates 3,893,000
Interest and property taxes
payable on real property 829,000
----------------
Total liabilities 5,621,000
Stockholders' deficit (1,101,000)
----------------
$ 4,520,000
================
BKS DEVELOPMENT, INC.
STATEMENT OF OPERATIONS
Nine months
ended
September 30, 1995
Interest expense $ 79,000
Provision for losses on real
estate investments 443,000
Property taxes 79,000
General and administrative 1,000
----------------
Net loss $ 602,000
================
(5) CONTINGENCIES
There are no material pending legal proceedings other than ordinary
routine litigation incidental to the registrant's business.
CENTENNIAL MORTGAGE INCOME FUND II SEPTEMBER 30, 1995
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 $(906,000) and $(31.09), and $(327,000) and $(11.22),
respectively, for the nine and three months ended September 30,
1995 and $(602,000) and $(20.66), and $(115,000) and $(3.95),
respectively, for the nine and three months ended September 30,
1994. The increase in loss from 1994 to 1995 is primarily the
result of an increase in the share of losses in unconsolidated
investees.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1995, the Partnership had $2,317,000 in
unrestricted cash and interest-bearing deposits. However, $712,000
of this cash was paid to CMIF III on October 2, 1995 (see note 4).
The Partnership had no unfunded loan commitments at September 30,
1995. Sources of funds are expected to be from future loan payoffs
and the sale of real estate owned. Future operations of real
estate owned are not expected to be a significant source of funds.
The Partnership funded advances on loans to affiliates totaling
$347,000 and received payoffs and paydowns on loans totaling
$279,000 during the nine months ended September 30, 1995. During
the first nine months of 1995, the Partnership disbursed advances
on real estate owned of $31,000.
The Partnership's notes payable commitments 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 $396,000
payable during the next twelve months, and ii) selling, general and
administrative costs. These commitments are expected to be made
from existing cash reserves, future loan payoffs, 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.
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, although no new mortgage investments shall
be made, the general partners expect that the cash proceeds from
mortgage reductions and the sale of real estate owned will be
retained by the Partnership until such time as the Partnership has
sufficient cash to fulfill operating requirements due to the amount
of real estate owned within the portfolio.
RESULTS OF OPERATIONS
Due to the downturn in the real estate industry in California,
several of the Partnership's loans have become nonperforming and
subsequently real estate owned. As a result, interest income on
loans to nonaffiliates continues to decline. Interest income on
loans to nonaffiliates, including fees decreased to $69,000 and
$46,000 for the nine and three months ended September 30, 1995 from
$82,000 and $55,000 for the nine and three months ended September
30, 1994. The decrease in interest income on loans for the nine
months ended September 30, 1994 to 1995 is primarily due to a
decrease in interest earned on notes secured by time share
interests.
Interest income on loans to affiliates, including fees totaled
$32,000 for both the nine and three months ended September 30,
1995. There was no comparable income for the same periods in 1994.
The interest income on loans to affiliates represents interest
earned on the Silverwood loans.
The outstanding principal balance of loans on nonaccrual at
September 30, 1995 totaled $2,413,000 as compared to $503,000 at
September 30, 1994. 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 nine months of 1994 on the nonaccrued
nonaffiliated loans, interest income would have been approximately
$30,000 higher than was actually reported for that period.
The real estate owned balance at September 30, 1995 and 1994 was
$11,311,000 and $11,284,000, 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. This loan and an additional loan funded by CMIF
reflect the majority of the cost basis of lots contributed to
Silverwood Homes.
LCR's only source of repayment of this note is proceeds from the
sale of the fully developed lots. Management has estimated the
proceeds for repayment of this note to be less than the principal
balance of the loan. As a result, the loan has been placed on
nonaccrual. The principal balance and nonaccrued interest balances
at September 30, 1995 are $1,059,000, and $136,000, respectively.
During 1994, the Partnership acquired a 50 percent participation in
a $3,894,000 note due from BKS. The loan is secured by 283 acres
in Bakersfield, CA. The property has declined in value and is
subject to delinquent bonds and taxes. As a result, the
Partnership has placed the loan on nonaccrual. The principal
balance and nonaccrued interest balances at September 30, 1995 are
$1,947,000, and $339,000, respectively.
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 15,984 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 73 percent leased and is beginning to
generate positive net operating income. The property generated net
operating income before debt service of $31,000 during the first
nine months of 1995. The property is being marketed for sale. The
carrying value at September 30, 1995 was $837,000 less depreciation
of $12,000. The property is encumbered by a fully amortizing note
secured by a first trust deed of $195,000 which will be paid off on
December 31, 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. The Partnership is in the process of
rezoning and subdivision of portions of the property to facilitate
two separate escrows which were opened during the first quarter of
1995 for separate portions of the property. The Partnership is not
expecting to realize any material gains or losses related to these
potential sales. However, there is no assurance that either of the
escrows will actually close. At September 30, 1995, the carrying
value was $4,123,000.
Proposed Marina and Condominiums in Redwood City, California
On April 7, 1989, the Partnership foreclosed on a land loan and now
owns the property. The Partnership originally committed $3,487,000
for a land loan located in Redwood City, California. 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 of
$5,360,000. In February and March of 1992, the Redwood City
Planning Commission formally approved the Certificate of Negative
Declaration, Tentative Tract Map and the Planned Unit Development.
Management has also obtained an extension on the 404B1 permit for
the marina through March 1996. The above-referenced entitlements
enable the owner to build the currently proposed 104-slip boat
marina and 117 condominium units. The Partnership has completed
approximately 70 percent of the dredging of the marina site.
Residential sales in this entire area have seen a steady decline
over the last 2-3 years, however the area appears to have
stabilized. As a result management is pursuing both, (i) the sale
or joint venture of the property and (ii) Partnership buildout of
the project and sale thereafter.
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
substitute collateral for the outstanding balance of $2,086,000.
The substitute collateral is a 10.66 acre commercial site with a
carry value at September 30, 1995 of $1,003,000. The property has
no additional debt. This area has seen an increase in residential
development during this year which hopefully will increase interest
in this property. Management is marketing the property for sale
and is evaluating a possible rezone.
INTEREST ON INTEREST-BEARING DEPOSITS
Interest on interest-bearing deposits totaled $39,000 and $12,000
for the nine and three months ended September 30, 1995 and $25,000
and $7,000 for the same respective periods in 1994. 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 cash balances for the nine months
ended September 30, 1995.
INCOME FROM OPERATIONS OF REAL ESTATE OWNED
Income from operations of real estate owned consists of operating
revenues of $103,000 and $35,000 for the nine and three months
ended September 30, 1995 and $211,000 and $65,000 for the nine and
three months ended September 30, 1994. The 1995 revenues are from
the office building in San Bernardino. The 1994 revenues are from
the lube center and car wash in San Marcos (sold in 1994), the
office building in San Bernardino and January income from the
multi-tenant industrial buildings in Moreno Valley.
PROVISION FOR POSSIBLE LOSSES
The provision for possible losses was $199,000 and $99,000 for the
nine and three months ended September 30, 1995. The provision for
possible losses was $137,000 and $73,000 for the nine and three
months ended September 30, 1994. The 1995 provision relates
primarily to the office building in San Bernardino and the
chargeoff of certain costs associated with the acquisition of notes
secured by time share interests. The 1994 provision relates
primarily to the lube center and car wash in San Marcos. The
provision for possible losses results from the change in the
allowance for possible loan losses and the allowance for possible
losses on real estate owned net of charge-offs, if any. Management
believes that the allowance for possible loan losses at September
30, 1995 is adequate to absorb the known and inherent risks in the
Partnership's loan portfolio.
SHARE OF LOSSES IN UNCONSOLIDATED INVESTEES
The Partnership has invested in corporations in which it has less
than a majority ownership. The Partnership's share of losses in
these unconsolidated investees was $472,000 and $162,000 for the
nine and three months ended September 30, 1995. There were no
comparable expenses for the nine and three months ended September
30, 1994. The share of losses consists primarily of provisions for
losses on real estate owned related to the 179 lots in Lancaster
owned by LCR and the 283 acres in Bakersfield owned by BKS.
OTHER EXPENSES
Operating expenses from operations of real estate owned were
$62,000 and $25,000 for the nine and three months ended September
30, 1995 and $131,000 and $38,000 for the nine and three months
ended September 30, 1994, respectively. These expenses were
associated with the lube center and car wash in San Marcos, the
multi-tenant industrial building in Moreno Valley and the office
building in San Bernardino. The decrease in 1995 is due to the
sale of the lube center and car wash in San Marcos and the loss of
the multi-tenant industrial buildings in Moreno Valley.
Operating expenses from operations of real estate owned paid to
affiliates were $9,000 and $3,000 for the nine and three months
ended September 30, 1995 and $11,000 and $3,000 for the nine and
three months ended September 30, 1994. The operating expenses
consist of property management fees paid to an affiliate.
Expenses associated with non-operating real estate owned were
$176,000 and $66,000 for the nine and three months ended September
30, 1995 and $241,000 and $41,000 for the nine and three months
ended September 30, 1994. The expenses relate to the proposed
marina and office building in Redwood City, the 45 acres in
Sacramento, the 10.66 acres in Roseville and the 128 single-family
lots in Redlands. The decrease for the nine months ended September
30, 1995 is due to a decrease in property tax expenses due to the
loss of the 128 single-family lots in Redlands. The increase for
the three months ended September 30, 1995 is due to an increase in
costs due to development of the 45 acres in Sacramento.
Depreciation and amortization expense was $8,000 and $4,000 for the
nine and three months ended September 30, 1995 and $10,000 and
$3,000 for the nine and three months ended September 30, 1994. The
decrease for 1995 is due to the loss of the multi-tenant industrial
buildings in Moreno Valley.
Interest expense was $15,000 and $5,000 for the nine and three
months ended September 30, 1995 and $151,000 and $13,000 for the
nine and three months ended September 30, 1994. The interest
expense relates to the office building in San Bernardino, the 128
lots in Redlands, the lube center and car wash in San Marcos and
the multi-tenant industrial buildings in Moreno Valley. The
decrease for 1995 is due to the loss of the Moreno Valley real
estate owned, the loss of the 128 lots in Redlands and the sale of
the lube center and car wash in San Marcos.
General and administrative expenses, affiliates for the nine and
three months ended September 30, 1995 totaled $101,000 and $37,000,
respectively. General and administrative expenses, affiliates for
the nine and three months ended September 30, 1994 totaled $121,000
and $39,000, respectively. These expenses are primarily salary
allocation reimbursements paid to affiliates. The decrease for
1995 is due to a decrease in the number of employees performing
administrative functions.
General and administrative expenses, nonaffiliates totaled $50,000
and $12,000 for the nine and three months ended September 30, 1995
and $80,000 and $12,000 for the nine and three months ended
September 30, 1994. These expenses consist of other costs
associated with the administration of the Partnership and real
estate owned. The decrease for 1995 is primarily due to a decrease
in outside services and investor printing services.
Mortgage investment servicing fees, affiliates for the nine and
three months ended September 30, 1995 totaled $25,000 and $7,000
and $32,000 and $10,000 for the nine and three months ended
September 30, 1994. This consists of fees paid to CMIF Inc., an
affiliate of the general partners, and Centennial Corporation, for
servicing the Partnership's loan and real estate owned portfolio.
The decrease for 1995 is due to decreases in the number of loans
and real estate owned serviced.
CENTENNIAL MORTGAGE INCOME FUND II SEPTEMBER 30, 1995
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 II,
A California Limited Partnership
By: /s/John B. Joseph November 14, 1995
John B. Joseph Date
General Partner
By: /s/Ronald R. White November 14, 1995
Ronald R. White Date
General Partner
By: CENTENNIAL CORPORATION,
a California corporation
General Partner
/s/Joel H. Miner November 14, 1995
Joel H. Miner Date
Chief Financial Officer