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 September 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission File Number: 0-15448
CENTENNIAL MORTGAGE INCOME FUND II
(Exact name of registrant as specified in its charter)
California 33-0112106
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1540 South Lewis Street, Anaheim, California 92805
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714)502-8484
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
PART I
ITEM 1. FINANCIAL STATEMENTS
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
Assets 1996 1995
- -----------------------------------------------------------------
Cash and cash equivalents $ 483,000 $ 854,000
Restricted cash 12,000 11,000
Short-term investments --- 102,000
Real estate loans
receivable, earning 21,000 25,000
Real estate loans receivable
from unconsolidated investees,
earning (note 4) --- 1,033,000
Real estate loans receivable
from unconsolidated investees,
nonearning (notes 2 and 4) 1,190,000 798,000
- -----------------------------------------------------------------
1,211,000 1,856,000
Less allowance for possible
loan losses 8,000 8,000
- -----------------------------------------------------------------
Net real estate loans receivable 1,203,000 1,848,000
Real estate owned, net, held
for sale (note 3) 11,316,000 11,314,000
Less allowance for possible loan
losses on real estate owned 2,545,000 2,545,000
- -----------------------------------------------------------------
Net real estate owned 8,771,000 8,769,000
See accompanying notes to consolidated financial statements
1
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
(Continued)
(Unaudited)
September 30, December 31,
Assets 1996 1995
- -----------------------------------------------------------------
Due from affiliates 12,000 ---
Other assets 18,000 21,000
- -----------------------------------------------------------------
$ 10,499,000 $ 11,605,000
=================================================================
Liabilities and Partners' Equity
- -----------------------------------------------------------------
Note payable $ 154,000 $ 185,000
Accounts payable and
accrued liabilities 11,000 6,000
Interest and property taxes
payable on real estate owned 308,000 203,000
Payable to affiliates (note 4) 1,000 3,000
- -----------------------------------------------------------------
Total liabilities 474,000 397,000
Partners' equity (deficit)
-- 29,141 limited partnership
units outstanding at
September 30, 1996 and
December 31, 1995
General partners (195,000) (195,000)
Limited partners 10,220,000 11,403,000
- -----------------------------------------------------------------
Total partners' equity 10,025,000 11,208,000
Contingencies (note 5)
- -----------------------------------------------------------------
$ 10,499,000 $ 11,605,000
=================================================================
See accompanying notes to consolidated financial statements
2
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
(Unaudited)
Nine Months Three
Months
Ended September 30, Ended September
30,
1996 1995 1996
1995
- --------------------------------------------------------------------------------
- ----------
Revenue:
Interest income
on loans to
unconsolidated
investees,
including fees $ 81,000 $ 32,000 $ 30,000 $
32,000
Interest income
on loans to
nonaffiliates,
including fees 16,000 37,000 8,000
14,000
Interest-bearing
deposits 18,000 39,000 4,000
12,000
Income from
operations of
real estate owned 95,000 103,000 33,000
35,000
- --------------------------------------------------------------------------------
- ----------
Total revenue 210,000 211,000 75,000
93,000
Expenses:
Provision for
possible losses --- 199,000 ---
99,000
See accompanying notes to consolidated financial statements
3
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
(Unaudited)
(Continued)
Nine Months Three
Months
Ended September 30, Ended September
30,
1996 1995 1996
1995
- --------------------------------------------------------------------------------
- ----------
Share of provision
for losses
recorded by
unconsolidated
investees 515,000 399,000 165,000
252,000
Share of other
losses recorded by
unconsolidated
investees 341,000 73,000 104,000
(90,000)
Operating expenses
from operations of
real estate owned 58,000 62,000 23,000
25,000
Operating expenses
from operations of
real estate owned
paid to affiliates 9,000 9,000 3,000
3,000
Expenses associated
with non-operating
real estate owned 262,000 176,000 79,000
66,000
See accompanying notes to consolidated financial statements
4
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
(Unaudited)
(Continued)
Nine Months Three Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
- --------------------------------------------------------------------------------
- ----------
Depreciation and
amortization
expense 7,000 8,000 3,000
4,000
Interest expense 12,000 15,000 4,000
5,000
General and
administrative,
affiliates 132,000 101,000 44,000
37,000
General and
administrative,
nonaffiliates 57,000 50,000 16,000
12,000
Mortgage investment
servicing fees,
affiliates --- 25,000 ---
7,000
- --------------------------------------------------------------------------------
- ----------
Total expenses 1,393,000 1,117,000 441,000
420,000
- --------------------------------------------------------------------------------
- ----------
See accompanying notes to consolidated financial statements
5
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
(Unaudited)
(Continued)
Nine Months Three Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
- --------------------------------------------------------------------------------
- ----------
Net loss $ (1,183,000) $ (906,000) $ (366,000) $
(327,000)
================================================================================
==========
Net loss per
limited
partnership unit $ (40.60) $ (31.09) $ (12.56) $
(11.22)
================================================================================
==========
See accompanying notes to consolidated financial statements
6
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statement of Partners' Equity
(Unaudited)
For the nine months ended September 30, 1996
Total
General Limited Partners'
Partners Partners Equity
- -----------------------------------------------------------------
Balance at
December 31, 1995 $ (195,000) $ 11,403,000 $ 11,208,000
Net loss --- (1,183,000) (1,183,000)
- -----------------------------------------------------------------
Balance at
September 30, 1996 $ (195,000) $ 10,220,000 $ 10,025,000
=================================================================
See accompanying notes to consolidated financial statements
7
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Unaudited)
For the nine months ended September 30, 1996 and 1995
1996 1995
- -----------------------------------------------------------------
Cash flows from
operating activities:
Net loss $ (1,183,000) $ (906,000)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities:
Provision for
possible losses --- 199,000
Equity in losses in
unconsolidated investees 856,000 472,000
Amortization of fees
and discounts (1,000) ---
Interest accrued to
principal on loans
to affiliates (82,000) ---
Depreciation and
amortization expense 7,000 8,000
Changes in assets
and liabilities:
Decrease in accrued
interest receivable --- 10,000
Increase in other assets (4,000) (7,000)
Increase (decrease) in
payable to affiliates (2,000) 714,000
Increase in due
from affiliates (12,000) ---
Increase (decrease) in
accounts payable and
accrued liabilities 5,000 (3,000)
Increase in interest
and taxes payable on
real estate owned 105,000 50,000
See accompanying notes to consolidated financial statements
8
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Unaudited)
(Continued)
For the nine months ended September 30, 1996 and 1995
1996 1995
- -----------------------------------------------------------------
Net cash provided by (used in)
operating activities (311,000) 537,000
- -----------------------------------------------------------------
Cash flows from
investing activities:
Principal collected on loans 146,000 279,000
Advances on loans made
to unconsolidated
investees (note 4) (274,000) (347,000)
Additions to real
estate owned (2,000) (31,000)
Increase in restricted cash (1,000) ---
Decrease in short-term
investments 102,000 ---
- -----------------------------------------------------------------
Net cash used in
investing activities (29,000) (99,000)
- -----------------------------------------------------------------
Cash flows from
financing activities:
Principal payments on
notes payable (31,000) (29,000)
- -----------------------------------------------------------------
Net cash used in
financing activities (31,000) (29,000)
- -----------------------------------------------------------------
Net increase (decrease)
in cash (371,000) 409,000
Beginning cash and
cash equivalents 854,000 1,908,000
- -----------------------------------------------------------------
Ending cash and cash
equivalents $ 483,000 $ 2,317,000
=================================================================
See accompanying notes to consolidated financial statements
9
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Unaudited)
(Continued)
For the nine months ended September 30, 1996 and 1995
1996 1995
- -----------------------------------------------------------------
Supplemental disclosures of
cash flow information:
Cash paid during the
period for:
Interest $ 12,000 $ 15,000
Supplemental schedule of
noncash investing and
financing activities:
Decrease in other
assets through
chargeoff to the
allowance for
possible losses --- 99,000
See accompanying notes to consolidated financial statements
10
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 1996 and 1995
(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.
As of September 30, 1996, most of the loans secured by operating
properties have been repaid to the Partnership. However, during
recent years, real estate market values for undeveloped land in
California have declined severely. As the loans secured by
undeveloped land became delinquent, the Partnership elected to
foreclose on certain of these loans, thereby increasing real
estate owned balances. As a result, the Partnership has become a
direct investor in this real estate and intends to manage
operating properties and develop raw land until such time as the
Partnership is able to sell this real estate owned.
As required by the Partnership Agreement, the Partnership is
currently in the repayment stage, and as a result, cash proceeds
from mortgage investments are no longer available for
reinvestment.
(2) BASIS OF PRESENTATION
The consolidated financial statements are unaudited and reflect
all adjustments, consisting only of normal recurring accruals,
which are, in the opinion of management, necessary for a fair
statement of the results of operations for the interim periods.
Results for the nine months ended September 30, 1996 and 1995 are
not necessarily indicative of results which may be expected for
any other interim period, or for the year as a whole.
11
Information pertaining to the nine months ended September 30,
1996 and 1995 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, 1995 on file with the Securities and
Exchange Commission, provide additional disclosures and a further
description of accounting policies.
Net Loss per Limited Partnership Unit
Net loss per limited partnership unit was based on the weighted
average number of limited partnership units outstanding of 29,141
for all periods presented.
Impaired Loans
The Partnership considers a loan to be impaired when based upon
current information and events, it believes it is probable that
the Partnership will be unable to collect all amounts due
according to the contractual terms of the loan agreement. In
determining impairment, the Partnership considers large non-
homogeneous loans including nonaccrual loans, troubled debt
restructuring and performing loans which exhibit, among other
characteristics, high loan-to-value ratios, low debt-coverage
ratios, or other indications that the borrowers are experiencing
increased levels of financial difficulty. The Partnership bases
the measurement of collateral-dependent impaired loans on the
fair value of the loan's collateral. The amount by which the
recorded investment of the loan exceeds the measure of the
impaired loan's value is recognized by recording a valuation
allowance.
At September 30, 1996, the carrying value of loans that are
considered to be impaired under SFAS 114 totaled $1,190,000 (all
of which were on nonaccrual status). At September 30, 1996,
there was no allowance for possible loan losses determined in
accordance with the provisions of SFAS 114, related to loans
considered impaired under SFAS 114 recorded by the Partnership.
However, the unconsolidated investees have recorded an allowance
for losses of $4,502,000 and the Partnership's proportionate
share of losses in unconsolidated investees reflects this
12
allowance. Three of the loans to unconsolidated investees
related to the Silverwood Homes project were placed on nonaccrual
at September 30, 1996 due to slow sales rates (see note 4).
There was a $274,000 investment in impaired loans during the nine
months ended September 30, 1996. For the nine months ended
September 30, 1996, the Partnership recognized interest income on
impaired loans of $81,000. For the nine months ended September
30, 1996, the Partnership did not recognize any cash basis income
on impaired loans.
Carrying Value of Real Estate Owned, Held for Sale
Effective January 1, 1996, the Partnership adopted 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 requires that long-lived
assets to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell. An impairment loss shall
be measured as the amount by which the carrying amount of the
asset exceeds the fair value of the assets. SFAS 121 requires
that assets to be disposed of not be depreciated while they are
held for disposal.
(3) REAL ESTATE OWNED
Real estate owned consists of the following:
(dollars in thousands)
September 30, December 31,
1996 1995
- -----------------------------------------------------------------
1. Office building in
San Bernardino, CA $ 837 $ 837
2. 45 acres in Sacramento, CA 4,128 4,126
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 11,328 11,326
Less accumulated depreciation 12 12
- -----------------------------------------------------------------
Total real estate owned $ 11,316 $ 11,314
=================================================================
13
In accordance with SFAS 121, the Partnership carries real estate
owned, held for sale, at the lower of carrying amount or fair
value less costs to sell. The estimated fair values were
determined by using appraisals, discounted cash flows and/or
other valuation techniques. The actual market price of real
estate can only be determined by negotiation between independent
third parties in a sales transaction.
(4) 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. Mortgage investment servicing fees
for the nine and three months ended September 30, 1995 were
$25,000 and $7,000. There were no mortgage investment servicing
fees incurred for the nine and three months ended September 30,
1996.
Under the provisions of the Partnership Agreement, the general
partners are to receive compensation for their services in
supervising the affairs of the Partnership. This partnership
management compensation shall be equal to 10 percent of the cash
available for distribution, as defined in the Partnership
Agreement. The general partners will not receive this
compensation until the limited partners have received a 12
percent per annum cumulative return on their adjusted invested
capital, but are entitled to receive a 5 percent interest in cash
available for distribution in any year until this provision has
been met. Adjusted invested capital is defined as the original
capital invested less distributions from mortgage reductions.
Payments to the general partners have been limited to 5 percent
of cash available for distribution as the limited partners have
not received their 12 percent per annum cumulative return. Under
this provision of the Partnership Agreement, no distributions
were paid to the general partners during the nine and three
months ended September 30, 1996 or 1995.
The Partnership owns 50 percent of the outstanding capital stock
of two corporations which have not been consolidated in the
accompanying financial statements, LCR Development, Inc., ("LCR")
and BKS Development Inc., ("BKS"). These two corporations were
formed in order to complete foreclosures on two properties which
were collateral for loans previously made by the Partnership and
14
Centennial Mortgage Income Fund, ("CMIF"), an affiliate. The
balance of outstanding capital stock in these corporations is
owned by CMIF. LCR has invested in a joint venture, Silverwood
Homes ("Silverwood") which is constructing homes in Lancaster,
CA. The Partnership has participated in making several loans to
these corporations and this joint venture. Under the equity
method of accounting, these loans are a component of the
Partnership's investment in LCR and BKS, and therefore, the
Partnership has recorded losses by LCR and BKS as a reduction of
the carrying value of these loans receivable.
The Partnership holds a 50 percent participation in an unsecured
note in the amount of $2,115,000 due from LCR. The Partnership's
share of the note at September 30, 1996 is $1,059,000 and the
Partnership had applied $1,059,000 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 $238,000 as of
September 30, 1996.
Silverwood began constructing a model home complex in June 1995.
Construction commenced in September 1995 on Phase I at the
project, which included nine homes. Silverwood began marketing
the project in the first quarter of 1996 and completed
construction of the homes in Phase I in the second quarter of
1996. Silverwood began deliveries of these homes to buyers in
the third quarter of 1996. Management had hoped to close escrow
on all of the homes in Phase I during the third quarter.
Unfortunately, market conditions in the Lancaster housing market
deteriorated during the summer months and only two homes have
closed escrow as of the date of this report. Management is
revamping its marketing program for this project in an effort to
improve sales rates.
At September 30, 1996, the Partnership holds a 50 percent
participation in three notes, due from Silverwood including 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, 1996, is $717,000 and the
Partnership had applied $144,000 of cumulative losses from
unconsolidated investees against the carrying value of the note
as of that same date. The Partnership's disbursed balance of the
$490,000 model loan at September 30, 1996 is $245,000. At
September 30, 1996 the Partnership's disbursed balance of the
$1,034,000 Phase I construction loan is $281,000.
15
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,
1996 and for the nine months ended September 30, 1996:
LCR Development, Inc.
Consolidated Balance Sheet
(Unaudited)
September 30,
Assets 1996
- -----------------------------------------------------------------
Cash $ 12,000
Real estate owned, held for investment
Land 4,446,000
Model complex 467,000
Homes under construction 834,000
Less allowance for losses on
real estate investments 1,529,000
- -----------------------------------------------------------------
Net real estate owned 4,218,000
Organization costs 1,000
- -----------------------------------------------------------------
$ 4,231,000
=================================================================
Liabilities and Stockholders' Deficit
- -----------------------------------------------------------------
Notes payable to affiliates $ 6,300,000
Payable to affiliates 13,000
Interest and taxes payable on real property 326,000
- -----------------------------------------------------------------
Total liabilities 6,639,000
Stockholders' deficit (2,408,000)
- -----------------------------------------------------------------
$ 4,231,000
=================================================================
16
LCR Development, Inc.
Consolidated Statement of Operations
(Unaudited)
Nine months
ended
September 30, 1996
- -----------------------------------------------------------------
Revenue:
Housing sales $ 233,000
Cost of housing sales 238,000
Provision for losses on real estate owned 750,000
Selling and marketing expenses 144,000
General and administrative expenses 137,000
- -----------------------------------------------------------------
Operating income (loss) (1,036,000)
Interest expense 181,000
- -----------------------------------------------------------------
Net (loss) $ (1,217,000)
=================================================================
The Partnership holds a 50 percent participation in a note
secured by a first trust deed in the amount of $3,894,000 due
from BKS. The Partnership's share of the note receivable at
September 30, 1996 is $1,951,000 and the Partnership had applied
$1,860,000 of cumulative losses from unconsolidated investees
against the carrying value of the note as of that same date. The
Partnership had not accrued its share of interest on this note
which was approximately $637,000 as of September 30, 1996.
17
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, 1996 and for the nine months
ended September 30, 1996:
BKS Development, Inc.
Balance Sheet
(Unaudited)
September 30,
Assets 1996
- -----------------------------------------------------------------
Cash $ 1,000
Real property 5,199,000
Less allowance for losses on
real estate investments 2,973,000
- -----------------------------------------------------------------
Net real estate owned 2,226,000
- -----------------------------------------------------------------
$ 2,227,000
=================================================================
Liabilities and Stockholders' Deficit
- -----------------------------------------------------------------
Bonds payable $ 698,000
Note payable to affiliates 3,903,000
Interest and property taxes
payable on real property 1,347,000
- -----------------------------------------------------------------
Total liabilities 5,948,000
Stockholders' deficit (3,721,000)
- -----------------------------------------------------------------
$ 2,227,000
=================================================================
18
BKS Development, Inc.
Statement of Operations
(Unaudited)
Nine months
ended
September 30, 1996
- -----------------------------------------------------------------
Interest expense $ 116,000
Provision for losses 280,000
Property taxes 88,000
General and administrative 10,000
- -----------------------------------------------------------------
Net (loss) $ (494,000)
=================================================================
(5) CONTINGENCIES
There are no material pending legal proceedings other than
ordinary routine litigation incidental to the Partnership's
business.
19
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 $(1,183,000) and $(40.60) and $(366,000) and $(12.56),
respectively, for the nine and three months ended September 30,
1996 and ($906,000) and $(31.09) and $(327,000) and $(11.22),
respectively, for the nine and three months ended September 30,
1995. The increase in losses from 1995 to 1996 is primarily the
result of an increase in losses in unconsolidated investees and a
decrease in the provision for possible losses.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Partnership had $483,000 in
unrestricted cash and interest-bearing deposits. The Partnership
had no unfunded loan commitments to nonaffiliates at September
30, 1996. Sources of funds are expected to be from the sale of
real estate owned. Future operations of real estate owned are
not expected to be a significant source of funds. The
Partnership funded advances on loans to unconsolidated investees
totaling $274,000 and received payoffs and paydowns on loans
totaling $146,000 during the nine months ended September 30,
1996. During the first nine months of 1996, the Partnership
disbursed funds for the improvement of real estate owned totaling
$2,000.
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 $548,000 payable during the next twelve months
(including taxes accrued and delinquent as of September 30,
1996), and (ii) selling, general and administrative costs.
Interest and property taxes payable on real estate owned as of
September 30, 1996 consisted of $261,000 in delinquent real
estate taxes on the proposed marina in Redwood City. The
Partnership can apply for a 5 year redemption plan on a portion
of the property taxes due in 1996 to ease liquidity constraints,
if necessary. These commitments are expected to be paid from
existing cash reserves and the sale of real estate owned.
Several of the Partnership's real estate assets are listed for
sale; however, if liquidity becomes a major concern in 1996 and
1997, management may find it necessary to significantly reduce
the asking prices on one or more assets in order to generate
liquidity.
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 future
mortgage reductions will be retained by the Partnership until
such time as the Partnership has sufficient cash to fulfill the
operating requirements of the real estate owned by the
Partnership.
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 $16,000 and
$8,000 for the nine and three months ended September 30, 1996
from $37,000 and $14,000 for the nine and three months ended
September 30, 1995. The decrease in interest income on loans
for the nine and three months ended September 30, 1995 to 1996 is
primarily due to the payoff of a large loan receivable in 1995.
Interest income on loans to unconsolidated investees, including
fees increased to $81,000 and $30,000 for the nine and three
months ended September 30, 1996 from $32,000 for the nine and
three months ended September 30, 1995. Interest income on loans
to unconsolidated investees represents interest earned on the
Silverwood loans. The increase in 1996 is the result of higher
average loan balances. These loans were placed on nonaccrual
status effective September 30, 1996.
The outstanding principal balance of loans on nonaccrual at
September 30, 1996 totaled $1,190,000 as compared to $2,128,000
at September 30, 1995. 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 1996 on
the affiliated nonaccrued loans, interest income would have been
approximately $285,000 higher than was actually reported for that
period.
The real estate owned balance at September 30, 1996 and 1995 was
$11,316,000 and $11,311,000, respectively.
The following sections entitled Nonaccrual Loans and Real Estate
Owned provide a detailed analysis of these assets.
NONACCRUAL LOANS
During 1994, the Partnership converted a 50 percent participation
in a note secured by a second trust deed into a 50 percent
participation in a $2,115,000 unsecured note representing a
workout loan due from LCR, an affiliate. This loan and an
additional loan funded by CMIF reflect the majority of the cost
basis of single family 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 original
principal balance of the loan. As a result, the loan has been
placed on nonaccrual. The participating principal balance and
nonaccrued interest balances at September 30, 1996 are $1,059,000
and $238,000, respectively. As discussed in note 4, the
Partnership has reduced the carrying value of this note by
$1,059,000, a portion of its share of losses from this
unconsolidated investee.
During 1995, the Partnership funded a 50 percent participation in
three loans due from Silverwood Homes. The first is a land
development loan with a committed amount of $3,265,700 with a
disbursed balance of $717,000 at September 30, 1996. The
Partnership had applied $144,000 of cumulative losses from
unconsolidated investees against the carrying value of the note
as of that same date. The second loan is a model loan with a
committed amount of $490,000 and a disbursed balance $245,000 at
September 30, 1996. The third loan is a home construction loan
for nine homes with a committed amount of $1,034,000 and a
disbursed balance of $281,000 at September 30, 1996. Due to the
deterioration of the housing market and poor sale record to date,
management has placed the loans on nonaccrual.
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 participating
principal balance and nonaccrued interest balance at September
30, 1996 are $1,951,000 and $637,000, respectively. As discussed
in note 4, the Partnership has reduced the carrying value of this
note by $1,860,000, its share of losses from this unconsolidated
investee.
REAL ESTATE OWNED
A description of the Partnership's principal real estate owned
follows:
Office Building in San Bernardino, California
The Partnership funded a loan during January 1988 with an
original committed amount of $921,000 which was secured by a
second trust deed on an office building comprised of 15,894
square feet of rentable space located in San Bernardino,
California. The loan was provided as gap financing behind a
first deed of trust in the amount of $350,000 to another
financial institution. The borrower was unable to payoff the
loan at maturity and the Partnership foreclosed on April 20,
1993. The Partnership restructured the note secured by the first
trust deed to a more favorable term and rate. The project is 69
percent leased and is beginning to generate positive net
operating income. The property generated net operating income
before debt service of $26,000 during the first nine months of
1996. The property is being marketed for sale. The carrying
value at September 30, 1996 was $837,000 less depreciation of
$12,000. The property is encumbered by a fully amortizing note
secured by a first trust deed of $154,000 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 one escrow on a portion of the property.
The Partnership is not expecting to realize any material gains or
losses related to this potential sale and there is no assurance
that this escrow will actually close. At September 30, 1996, the
carrying value of this asset was $4,128,000.
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. Management obtained an extension
on the 404B1 permit for the marina through March 1996 and is
currently working on another extension. The 404B1 permit enables
the owner to build the currently proposed 104-slip boat marina.
The Partnership has completed approximately 70 percent of the
dredging of the marina site. 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 a 10.66 acre commercial site as payment in
full for the $2,779,000 note. This property had a carrying value
at September 30, 1996 of $1,003,000 and has no additional debt.
This area has seen an increase in residential development since
1995 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 $18,000 and $4,000
for the nine and three months ended September 30, 1996 and
$39,000 and $12,000 for the nine and three months ended September
30, 1995. 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 cash balances for the nine and three months ended
September 30, 1996.
INCOME FROM OPERATIONS OF REAL ESTATE OWNED
Income from operations of real estate owned consists of operating
revenues of $95,000 and $33,000 for the nine and three months
ended September 30, 1996 and $103,000 and $35,000 for the nine
and three months ended September 30, 1995. The 1996 and 1995
revenues are from the office building in San Bernardino.
PROVISION FOR POSSIBLE LOSSES
There was no provision for possible losses for the nine and three
months ended September 30, 1996. The provision for possible
losses was $199,000 and $99,000 for the nine and three months
ended September 30, 1995. The 1995 provision relates 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 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
chargeoffs, if any. Management believes that the allowance for
possible losses at September 30, 1996 is adequate to absorb the
known and inherent risk in the Partnership's loan and real estate
owned portfolio.
SHARE OF LOSSES IN UNCONSOLIDATED INVESTEES
The Partnership has invested in corporations in which it has less
than a majority ownership and accounts for these investments
using the equity method. The Partnership's share of provision
for losses recorded by unconsolidated investees was $515,000 and
$165,000 for the nine and three months ended September 30, 1996
and $399,000 and $252,000 for the nine and three months ended
September 30, 1995. The Partnership's share of other losses
recorded by unconsolidated investees was $341,000 and $104,000
for the nine and three months ended September 30, 1996 and
$73,000 and ($90,000) for the nine and three months ended
September 30, 1995. The share of other losses consists primarily
of interest expense, selling and marketing expense and general
and administrative expense related to the single family
development project owned by LCR and the 283 acres in Bakersfield
owned by BKS. The decrease in other losses for 1995 is due to
the reversal of interest expense in the third quarter of 1995.
OTHER EXPENSES
Operating expenses from operations of real estate owned were
$58,000 and $23,000 for the nine and three months ended September
30, 1996 and $62,000 and $25,000 for the nine and three months
ended September 30, 1995. These expenses were associated with
the office building in San Bernardino.
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, 1996 and $9,000 and $3,000 for the nine and
three months ended September 30, 1995. The operating expenses
consist of property management fees paid to an affiliate.
Expenses associated with non-operating real estate owned were
$262,000 and $79,000 for the nine and three months ended
September 30, 1996 and $176,000 and $66,000 for the nine and
three months ended September 30, 1995. These expenses include
real estate taxes of $195,000 and $148,000 for the nine months
ended September 30, 1996 and 1995, respectively. The expenses
relate to the proposed marina and condominiums in Redwood City,
the 45 acres in Sacramento, and the 10.66 acres in Roseville.
The increase for the nine and three months ended September 30,
1996 is due to an increase in costs due to development of the 45
acres in Sacramento and a retroactive downward adjustment of
property taxes related to the proposed marina and condominiums in
Redwood City which was recorded in 1995. There was no
corresponding retroactive adjustment in 1996.
Depreciation and amortization expense was $7,000 and $3,000 for
the nine and three months ended September 30, 1996 and $8,000 and
$4,000 for the nine and three months ended September 30, 1995.
Interest expense was $12,000 and $4,000 for the nine and three
months ended September 30, 1996 and $15,000 and $5,000 for the
nine and three months ended September 30, 1995. The interest
expense relates to the office building in San Bernardino. The
decrease for 1996 is due to the amortization of the note secured
by the office building in San Bernardino.
General and administrative expenses, affiliates was $132,000 and
$44,000 for the nine and three months ended September 30, 1996
and $101,000 and $37,000 for the nine and three months ended
September 30, 1995. These expenses are primarily salary
allocation reimbursements paid to affiliates. The increase for
1996 is primarily due to a $25,000 change in billing methodology
from mortgage investment servicing fees to salary allocations.
General and administrative expenses, nonaffiliates totaled
$57,000 and $16,000 for the nine and three months ended September
30, 1996 and $50,000 and $12,000 for the nine and three months
ended September 30, 1995. These expenses consist of other costs
associated with the administration of the Partnership and real
estate owned. The increase for 1996 is primarily due to moving
expenses.
Mortgage investment servicing fees paid to affiliates for the
nine and three months ended September 30, 1995 totaled $25,000
and $7,000. There were no mortgage investment servicing fees
paid to affiliates incurred for the nine and three months ended
September 30, 1996. This consists of fees paid to Centennial
Corporation, for servicing the Partnership's loan and real estate
owned portfolio. During 1996, the Partnership no longer incurs
mortgage investment servicing fees for servicing the
Partnership's real estate owned portfolio.
PART II
Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) None
(b) None
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A California Limited Partnership
By:/s/John B. Joseph
_________________________________
John B. Joseph
General Partner November 14, 1996
By:/s/Ronald R. White
_________________________________
Ronald R. White
General Partner November 14, 1996
By: CENTENNIAL CORPORATION
General Partner
/s/Joel H. Miner
_________________________________
Joel H. Miner
Chief Financial Officer November 14, 1996