FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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)
March 31, December 31,
Assets 1997 1996
- -----------------------------------------------------------------
Cash and cash equivalents $ 149,000 $ 261,000
Restricted cash 12,000 12,000
Real estate loans
receivable, earning 18,000 19,000
Real estate loans receivable
from unconsolidated investees,
nonearning (note 4) 1,030,000 1,049,000
- -----------------------------------------------------------------
1,048,000 1,068,000
Less allowance for possible
loan losses 8,000 8,000
- -----------------------------------------------------------------
Net real estate loans receivable 1,040,000 1,060,000
Real estate owned, net, held
for sale (note 3) 11,316,000 11,316,000
Less allowance for possible loan
losses on real estate owned 2,545,000 2,545,000
- -----------------------------------------------------------------
Net real estate owned 8,771,000 8,771,000
See accompanying notes to consolidated financial statements
1
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
(Continued)
(Unaudited)
March 31, December 31,
Assets 1997 1996
- -----------------------------------------------------------------
Due from unconsolidated investees 16,000 16,000
Other assets 29,000 12,000
- -----------------------------------------------------------------
$ 10,017,000 $ 10,132,000
=================================================================
Liabilities and Partners' Equity
- -----------------------------------------------------------------
Note payable $ 132,000 $ 143,000
Accounts payable and
accrued liabilities 9,000 12,000
Interest and property taxes
payable on real estate owned 348,000 283,000
Payable to affiliates (note 4) 3,000 1,000
- -----------------------------------------------------------------
Total liabilities 492,000 439,000
Partners' equity (deficit)
-- 29,141 limited partnership
units outstanding at
March 31, 1997 and
December 31, 1996
General partners (195,000) (195,000)
Limited partners 9,720,000 9,888,000
- -----------------------------------------------------------------
Total partners' equity 9,525,000 9,693,000
Contingencies (note 5)
- -----------------------------------------------------------------
$ 10,017,000 $ 10,132,000
=================================================================
See accompanying notes to consolidated financial statements
2
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
(Unaudited)
For the three months ended March 31, 1997 and 1996
1997 1996
- -----------------------------------------------------------------
Revenue:
Interest income on loans
to unconsolidated
investees, including fees $ --- $ 24,000
Interest income on loans
to nonaffiliates,
including fees 4,000 4,000
Interest-bearing deposits 2,000 8,000
Operations of real estate owned 32,000 31,000
Other 11,000 ---
- -----------------------------------------------------------------
Total revenue 49,000 67,000
Expenses:
Provision for
possible losses --- ---
Share of losses in
unconsolidated investees 29,000 145,000
Operating expenses
from operations of
real estate owned 18,000 17,000
Operating expenses
from operations of
real estate owned
paid to affiliates 3,000 3,000
Expenses associated
with non-operating
real estate owned 105,000 93,000
Depreciation and
amortization expense 2,000 3,000
Interest expense 3,000 4,000
See accompanying notes to consolidated financial statements
3
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
(Continued)
(Unaudited)
For the three months ended March 31, 1997 and 1996
1997 1996
- -----------------------------------------------------------------
General and administrative,
affiliates 44,000 42,000
General and administrative,
nonaffiliates 13,000 27,000
- -----------------------------------------------------------------
Total expenses 217,000 334,000
- -----------------------------------------------------------------
Net loss $ (168,000) $ (267,000)
=================================================================
Net loss per limited
partnership unit $ (5.77) $ (9.16)
=================================================================
See accompanying notes to consolidated financial statements
4
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statement of Partners' Equity
(Unaudited)
For the three months ended March 31, 1997
Total
General Limited Partners'
Partners Partners Equity
- -----------------------------------------------------------------
Balance at
December 31, 1996 $ (195,000) $ 9,888,000 $ 9,693,000
Net loss --- (168,000) (168,000)
- -----------------------------------------------------------------
Balance at
March 31, 1997 $ (195,000) $ 9,720,000 $ 9,525,000
=================================================================
See accompanying notes to consolidated financial statements
5
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Unaudited)
For the three months ended March 31, 1997 and 1996
1997 1996
- -----------------------------------------------------------------
Cash flows from
operating activities:
Net loss $ (168,000) $ (267,000)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Provision for
possible losses --- ---
Interest accrued
to principal --- (24,000)
Depreciation and
amortization expense 2,000 3,000
Equity in losses of
unconsolidated investees 29,000 145,000
Changes in assets
and liabilities:
Increase in other assets (19,000) (11,000)
Increase in payable
to affiliates 2,000 7,000
(Increase) decrease in
due from affiliates --- (11,000)
Increase (decrease) in
accounts payable and
accrued liabilities (3,000) 20,000
Increase (decrease) in
interest and taxes payable
on real estate owned 65,000 (30,000)
- -----------------------------------------------------------------
Net cash used in
operating activities (92,000) (168,000)
- -----------------------------------------------------------------
See accompanying notes to consolidated financial statements
6
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Unaudited)
(Continued)
For the three months ended March 31, 1997 and 1996
1997 1996
- -----------------------------------------------------------------
Cash flows from
investing activities:
Principal collected on loans 47,000 33,000
Advances on loans made
to unconsolidated
investees (56,000) (22,000)
Additions to real
estate owned --- (2,000)
Increase in short-term
investments --- (2,000)
- -----------------------------------------------------------------
Net cash provided by (used in)
investing activities (9,000) 7,000
- -----------------------------------------------------------------
Cash flows used in
financing activities:
Principal payments on
notes payable (11,000) (10,000)
- -----------------------------------------------------------------
Net decrease in cash (112,000) (171,000)
Beginning cash and
cash equivalents 261,000 854,000
- -----------------------------------------------------------------
Ending cash and cash
equivalents $ 149,000 $ 683,000
=================================================================
Supplemental schedule of
cash flow information:
Cash paid during the
quarter for:
Interest $ 3,000 $ 4,000
See accompanying notes to consolidated financial statements
7
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 1997 and 1996
(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 March 31, 1997, 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 three months ended March 31, 1997 and 1996 are
not necessarily indicative of results which may be expected for
any other interim period, or for the year as a whole.
8
Information pertaining to the three months ended March 31, 1997
and 1996 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, 1996 on file with the Securities and
Exchange Commission, provide additional disclosures and a further
description of accounting policies.
Net Loss per Limited Partnership Unit
Net loss per limited partnership unit was based on the weighted
average number of limited partnership units outstanding of 29,141
for all periods presented.
Impaired Loans
The Partnership considers a loan to be impaired when based upon
current information and events, it believes it is probable that
the Partnership will be unable to collect all amounts due
according to the contractual terms of the loan agreement. In
determining impairment, the Partnership considers large non-
homogeneous loans including nonaccrual loans, troubled debt
restructuring and performing loans which exhibit, among other
characteristics, high loan-to-value ratios, low debt-coverage
ratios, or other indications that the borrowers are experiencing
increased levels of financial difficulty. The Partnership bases
the measurement of collateral-dependent impaired loans on the
fair value of the loan's collateral. The amount by which the
recorded investment of the loan exceeds the measure of the
impaired loan's value is recognized by recording a valuation
allowance.
At March 31, 1997, the carrying value of loans that are
considered to be impaired under SFAS 114 totaled $1,030,000 (all
of which were on nonaccrual status). At March 31, 1997, 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 $4,183,000 and the Partnership's proportionate
share of losses in unconsolidated investees reflects $4,045,000
9
of this allowance. There was a $56,000 investment in impaired
loans during the three months ended March 31, 1997. For the
three months ended March 31, 1997, the Partnership recognized no
interest income nor cash basis income on these 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 supersedes SOP 92-3 and also
requires that long-lived assets to be disposed of be reported at
the lower of carrying amount or fair value less costs 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
less costs to sell. SFAS 121 requires that assets to be disposed
of not be depreciated while they are held for disposal. The
Partnership considers all real estate owned as held for sale and
is actively marketing all properties.
(3) REAL ESTATE OWNED
Real estate owned consists of the following:
(dollars in thousands)
March 31, December 31,
1997 1996
- -----------------------------------------------------------------
1. Office building in
San Bernardino, CA $ 825 $ 825
2. 45 acres in Sacramento, CA 4,128 4,128
3. Proposed marina and condominiums
in Redwood City, CA 5,360 5,360
4. 10.66 acres in Roseville, CA 1,003 1,003
- -----------------------------------------------------------------
Total real estate owned $11,316 $11,316
=================================================================
10
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, the general
partners are to receive compensation for their services in
supervising the affairs of the Partnership. This partnership
management compensation shall be equal to 10 percent of the cash
available for distribution, as defined in the Partnership
Agreement. The general partners will not receive this
compensation until the limited partners have received a 12
percent per annum cumulative return on their adjusted invested
capital, but are entitled to receive a 5 percent interest in cash
available for distribution in any year until this provision has
been met. Adjusted invested capital is defined as the original
capital invested less distributions from mortgage reductions.
Payments to the general partners have been limited to 5 percent
of cash available for distribution as the limited partners have
not received their 12 percent per annum cumulative return. Under
this provision of the Partnership Agreement, no distributions
were paid to the general partners during the three months ended
March 31, 1997 or 1996.
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"). The balance of outstanding
capital stock in these corporations is owned by Centennial
Mortgage Income Fund, ("CMIF"). LCR has invested in a joint
venture, Silverwood Homes ("Silverwood") which is constructing
homes in Lancaster, California. The Partnership has participated
in making several loans to 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 wrote off its investment and loan receivable from BKS
during 1996 when its share of losses equaled its investment and
the recovery of any of its investment became unlikely.
11
The Partnership holds a 50 percent participation in an unsecured
note in the amount of $2,115,000 due from LCR. The Partnership's
share of the note at March 31, 1997 is $1,059,000 and the
Partnership had applied $1,059,000 a portion of the 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 $261,000 as of March 31, 1997.
Silverwood began constructing a model home complex in June 1995.
Construction commenced in September 1995 on Phase I at the
project. At March 31, 1997, the Partnership holds a 50 percent
participation in three notes due from Silverwood consisting of a
land development loan, a model home loan and a home construction
loan. The Partnership's disbursed balance of the $3,265,700
development loan at March 31, 1997 is $825,000 and the
Partnership had applied $281,000, the balance of cumulative
losses from unconsolidated investees against the carrying value
of the note as of the same date. The Partnership's disbursed
balance of the $490,000 model loan at March 31, 1997 is $245,000.
At March 31, 1997, the Partnership's disbursed balance of the
$1,034,000 Phase I construction loan is $241,000
The consolidated balance sheet and income statement of LCR have
not been consolidated in the Partnership's financial statements.
The Partnership accounts for its investment in this corporation
using the equity method. The following represents condensed
financial information for LCR Development, Inc. at March 31, 1997
and for the three months ended March 31, 1997:
12
LCR Development, Inc.
Consolidated Balance Sheet
(Unaudited)
March 31,
Assets 1997
- -----------------------------------------------------------------
Cash $ 2,000
Restricted cash 10,000
Real estate owned, held for investment 6,875,000
Less allowance for losses
on real estate investment 4,183,000
- -----------------------------------------------------------------
Net real estate owned 2,692,000
Organization costs 1,000
- -----------------------------------------------------------------
$ 2,705,000
=================================================================
Liabilities and Stockholders' Deficit
- -----------------------------------------------------------------
Notes payable to affiliates
CMIF $ 4,223,000
CMIF II 2,370,000
- -----------------------------------------------------------------
Total notes payable 6,593,000
Accounts payable and accrued liabilities 2,000
Interest and taxes payable on real property 997,000
Payable to affiliates 27,000
- -----------------------------------------------------------------
Total liabilities 7,619,000
Stockholders' deficit (4,914,000)
- -----------------------------------------------------------------
$ 2,705,000
=================================================================
13
LCR Development, Inc.
Consolidated Statement of Operations
(Unaudited)
Three months
ended
March 31, 1997
- -----------------------------------------------------------------
Housing sales $ 92,000
Cost of housing sales 104,000
Provision for losses on real estate owned 138,000
Selling and marketing expenses 29,000
General and administrative expenses 16,000
- -----------------------------------------------------------------
Operating income (loss) (195,000)
Interest incurred 138,000
Less interest expense capitalized (138,000)
- -----------------------------------------------------------------
Net (loss) (195,000)
=================================================================
Interest expense not included
in share of losses (138,000)
- -----------------------------------------------------------------
Allocable net loss $ (57,000)
=================================================================
Share of loss recorded $ (29,000)
=================================================================
(5) CONTINGENCIES
There are no material pending legal proceedings other than
ordinary routine litigation incidental to the Partnership's
business.
14
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 $(168,000) and $(5.77) and $(267,000) and $(9.16) for the
three months ended March 31, 1997 and March 31, 1996,
respectively. The decrease in losses from March 31, 1996 to
March 31, 1997 is primarily the result of a decrease in share of
losses in unconsolidated investees due to the charge-off of the
283 acres in Bakersfield owned by BKS during 1996.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Partnership had $149,000 in unrestricted
cash and interest-bearing deposits. The Partnership had no
unfunded loan commitments to nonaffiliates at March 31, 1997.
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 $56,000
and received payoffs and paydowns on loans totaling $47,000
during the three months ended March 31, 1997.
The Partnership's notes payable commitments for the next year
consist of interest and principal payments due of approximately
$58,000 payable during the next twelve months. In addition to
the note payable commitments, the Partnership's principal capital
requirements include: (i) real property taxes on real estate
owned of approximately $586,000 payable and delinquent during the
next twelve months, and (ii) selling, general and administrative
costs. The Partnership can apply for a 5 year redemption plan on
a portion of the property taxes due in 1997 to ease liquidity
constraints if necessary. These commitments are expected to be
paid from existing cash balances and the sale of real estate
owned. The Partnership has entered into contracts to sell all of
its proposed marina and condominium project in Redwood City and a
portion of its 45 acre project in Sacramento and has been
negotiating with several other buyers on other projects. All of
these potential transactions are subject to numerous
contingencies and uncertainties and there is no assurance that
any of them will ultimately close escrow. The Partnership
expects to be able to sell this real estate owned to meet
liquidity needs.
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, the Partnership needs to improve liquidity through the
sale of real estate owned in order to allocate funds to improve
and to fulfill the operating requirements of the remaining real
estate owned by the Partnership on a long-term basis.
RESULTS OF OPERATIONS
At this stage of the Partnership, most of the nonaffiliated loans
have been repaid to the Partnership and interest income on loans
to nonaffiliates has begun to stabilize. As a result of these
payoffs, interest income on loans to nonaffiliates is no longer a
major contributor to the Partnership's revenue. Interest income
on loans to nonaffiliates, including fees was $4,000 for the
three months ended March 31, 1997 and 1996, respectively.
Interest income on loans to unconsolidated investees, including
fees totaled $24,000 for the three months ended March 31, 1996.
These was no comparable income for the same period in 1997 due to
the loans to unconsolidated investees being placed on nonaccrual.
Interest income on loans to unconsolidated investees represents
interest earned on the Silverwood loans.
The outstanding principal balance of loans on nonaccrual at March
31, 1997 and 1996 totaled $1,030,000 and $654,000, respectively.
Loans on "nonaccrual" refers to loans upon which the Partnership
is no longer accruing interest. Management's policy is to cease
accruing interest on loans when interest and/or principal
repayments become 90 days past due. Had interest accrued
throughout the first three months of 1997 and 1996 on the
affiliated nonaccrued loans, interest income would have been
approximately $50,000 and $95,000 higher than was actually
reported for those periods.
The real estate owned balance at March 31, 1997 and 1996 was
$8,771,000.
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 March 31, 1997 are $1,059,000 and
$261,000, 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 1994 and 1995, LCR evaluated various alternative
strategies for liquidating its investment in the 179 lots in
Lancaster. During 1994, LCR determined that its best course of
action appeared to be the full-scale buildout and sale of single-
family homes since the market for finished lots had fallen so
significantly. LCR obtained construction financing commitments
from CMIF and the Partnership and entered into a joint venture
agreement entitled Silverwood with Home Devco to construct and
sell single-family homes a the project. The 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 March 31, 1997, the Partnership holds a 50 percent
participation in three notes due from Silverwood consisting of a
land development loan, a model home loan and a home construction
loan with a combined disbursed balance of $1,311,000. The
Partnership's disbursed balance of the $3,265,700 development
loan at March 31, 1997 is $825,000. The Partnership had applied
$281,000 of cumulative losses from unconsolidated investees
against the carrying value of the note as of the same date. The
Partnership's disbursed balance of the $490,000 model loan at
March 31, 1997 is $245,000. The Partnership's disbursed balance
of the $1,034,000 Phase I construction loan at March 31, 1997 is
$241,000.
Sales volumes of new homes in the Lancaster area have continued
to decline since 1995 while sales prices have remained relatively
flat and construction costs have increased. This has caused a
further decline in the value of finished lots and a reduction in
the anticipated net proceeds the Partnership expects to realize
from the buildout of homes at the project. Additionally,
Silverwood closed escrow on only three homes as of the date of
this report, far less than originally anticipated. As a result
of these factors, LCR has recorded a $4,183,000 allowance for
losses on real estate investments.
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 66
percent leased and generated net operating income before debt
service of $10,000 during the first three months of 1997. The
property is being marketed for sale. The net carrying value at
March 31, 1997 was $825,000 before allowance for possible losses.
The Partnership has recorded a $250,000 allowance for losses
related to this property as of March 31, 1997. The property is
encumbered by a fully amortizing note secured by a first trust
deed of $132,000 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. A portion of
the property is adjacent to Highway 99 and has good freeway
visability. The property is listed for sale and there has been
an increase in activity. The Partnership is in the process of
rezoning and subdividing portions of the property to facilitate
one escrow on a 6.5 acre portion of the property without freeway
visibility. During the first quarter of 1996, this escrow was
reopened for 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 March 31, 1997, the carrying value before
allowance for possible losses was $4,128,000. The Partnership
has recorded a $584,000 allowance for losses related to this
property as of March 31, 1997.
Proposed Marina and Condominiums in Redwood City, California
On April 7, 1989, the Partnership foreclosed on a land loan
located in Redwood City, California with an original committed
amount of $3,487,000. The purpose of the loan was to acquire the
land and provide for the planning of a 122-slip marina plus an
office building and restaurant. The original maturity date of
October 21, 1986 was extended to March 1, 1987. In March 1987,
the borrower filed bankruptcy. The property is included in real
estate owned at its carrying value of $5,360,000. Management
obtained an extension on the 404B1 permit for the marina through
March 1999. The 404B1 permit enables the owner to build the
currently proposed 104-slip boat marina. The Partnership has
completed approximately 70 percent of the dredging of the marina
site. The property is currently in escrow for a purchase price
of $4,000,000. Close of escrow is scheduled for December 31,
1997 with extensions to March 31, 1998. However, there is no
assurance that this escrow will actually close. The Partnership
has recorded a $1,651,000 allowance for losses related to this
property as of March 31, 1997.
10.66 Acres in Roseville, California
The Partnership funded a loan in 1990 with an original committed
amount of $2,779,000 secured by a second deed of trust on 982
acres in Roseville, California. The borrower failed to make the
required yearly principal payment to the first and second trust
deed holders. The first trust deed holder filed a notice of
default for nonpayment. Management negotiated a settlement
agreement to accept a 10.66 acre commercial site as payment in
full for the $2,779,000 note. This property had a carrying value
at March 31, 1997 of $1,003,000 and has no additional debt. This
area has seen an increase in residential development since 1996
which has increased interest in this property. Management is
marketing the property for sale and is evaluating a possible
rezone. The Partnership has recorded a $60,000 allowance for
losses related to this property as of March 31, 1997.
INTEREST ON INTEREST-BEARING DEPOSITS
Interest on interest-bearing deposits totaled $2,000 and $8,000
for the three months ended March 31, 1997 and 1996, 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 cash balances
for the three months ended March 31, 1997.
INCOME FROM OPERATIONS OF REAL ESTATE OWNED
Income from operations of real estate owned consists of operating
revenues of $32,000 and $31,000 for the three months ended March
31, 1997 and 1996, respectively. The 1997 and 1996 revenues are
from the office building in San Bernardino.
PROVISION FOR POSSIBLE LOSSES
There was no provision for possible losses for the three months
ended March 31, 1997 or 1996. The provision for possible losses
results from the change in the allowance for possible losses on
real estate owned net of charge-offs, if any. Management
believes that the allowance for possible loan losses at March 31,
1997 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 losses in
these unconsolidated investees was $29,000 and $145,000 for the
three months ended March 31, 1997 and 1996, respectively. The
share of losses consists primarily of provisions for losses on
real estate investments and interest expense related to the 179
lots in Lancaster owned by LCR and the 283 acres in Bakersfield
owned by BKS. The decrease for 1997 is due to the write-off of
the 283 acres in Bakersfield owned by BKS during 1996.
OTHER EXPENSES
Operating expenses from operations of real estate owned were
$18,000 and $17,000 for the three months ended March 31, 1997 and
1996, respectively. These expenses were associated with the
office building in San Bernardino.
Operating expenses from operations of real estate owned paid to
affiliates were $3,000 and $3,000 for the three months ended
March 31, 1997 and 1996, respectively. The operating expenses
consist of property management fees paid to an affiliate.
Expenses associated with non-operating real estate owned were
$105,000 and $93,000 for the three months ended March 31, 1997
and 1996, respectively. The expenses relate to the proposed
marina and condominiums in Redwood City, the 45 acres in
Sacramento, and the 10.66 acres in Roseville. The increase for
the three months ended March 31, 1997 is due to a yearly payment
for homeowner's dues related to time share units in Oxnard,
California.
Depreciation and amortization expense was $2,000 and $3,000 for
the three months ended March 31, 1997 and 1996, respectively.
Interest expense was $3,000 and $4,000 for the three months ended
March 31, 1997 and 1996, respectively. The interest expense
relates to the office building in San Bernardino. The decrease
for 1997 is due to the amortization of the note secured by the
office building in San Bernardino.
General and administrative expenses, affiliates for the three
months ended March 31, 1997 and 1996 totaled $44,000 and $42,000,
respectively. These expenses are primarily salary allocation
reimbursements paid to affiliates.
General and administrative expenses, nonaffiliates totaled
$13,000 and $27,000 for the three months ended March 31, 1997 and
1996, respectively. These expenses consist of other costs
associated with the administration of the Partnership and real
estate owned. The decrease for 1997 is primarily due to a
decrease in moving expenses, office expenses and investor
printing.
PART II
Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) None
(b) None
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A California Limited Partnership
By:/s/John B. Joseph
_________________________________
John B. Joseph
General Partner May 15, 1997
By:/s/Ronald R. White
_________________________________
Ronald R. White
General Partner May 15, 1997
By: CENTENNIAL CORPORATION
General Partner
/s/Joel H. Miner
_________________________________
Joel H. Miner
Chief Financial Officer May 15, 1997