FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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: 0-22520
CENTENNIAL MORTGAGE INCOME FUND
(Exact name of registrant as specified in its charter)
California 33-0053488
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1540 South Lewis Street, Anaheim, California 92805
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714)502-8484
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
PART I
ITEM 1. FINANCIAL STATEMENTS
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, December 31,
Assets 1996 1995
- -----------------------------------------------------------------
Cash and cash
equivalents $ 2,086,000 $ 2,947,000
Short-term investments --- 103,000
Real estate loans
receivable, earning 704,000 714,000
Real estate loans
receivable, nonearning 1,064,000 1,368,000
Real estate loans receivable
from unconsolidated investees,
earning (note 4) 1,688,000 667,000
Real estate loans receivable
from unconsolidated investees,
nonearning (note 4) 1,458,000 2,044,000
- -----------------------------------------------------------------
4,914,000 4,793,000
Less allowance for possible
loan losses 957,000 957,000
- -----------------------------------------------------------------
Net real estate loans receivable 3,957,000 3,836,000
Real estate owned, net, held
for sale, (note 3) 9,847,000 10,799,000
Real estate owned, insubstance
foreclosed (note 3) 1,310,000 1,550,000
- -----------------------------------------------------------------
11,157,000 12,349,000
See accompanying notes to consolidated financial statements
1
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
(Unaudited)
(Continued)
<CAPTION>
<S> <C> <C>
June 30, December 31,
Assets 1996 1995
- -----------------------------------------------------------------
Less allowance for possible
losses on real estate
owned 4,086,000 4,523,000
- -----------------------------------------------------------------
Net real estate owned 7,071,000 7,826,000
Accrued interest receivable 4,000 18,000
Other assets 78,000 112,000
- -----------------------------------------------------------------
$ 13,196,000 $ 14,842,000
=================================================================
See accompanying notes to consolidated financial statements
2
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
(Unaudited)
(Continued)
<CAPTION>
<S> <C> <C>
June 30, December 31,
Liabilities and Partners' Equity 1996 1995
- -----------------------------------------------------------------
Notes payable (note 5) $ 3,355,000 $ 4,010,000
Notes payable to affiliates (note 4) 67,000 90,000
Accounts payable and
accrued liabilities 21,000 51,000
Interest and property taxes
payable on real estate owned --- 11,000
Interest payable to affiliates on
notes secured by real estate 193,000 171,000
Payable to affiliates (note 4) 1,000 4,000
Deferred profit on equity participation 289,000 559,000
- -----------------------------------------------------------------
Total liabilities 3,926,000 4,896,000
Partners' equity (deficit)
-- 38,729 limited partnership
units outstanding as of
June 30, 1996 and December 31, 1995
General partners (525,000) (525,000)
Limited partners 9,795,000 10,471,000
- -----------------------------------------------------------------
Total partners' equity 9,270,000 9,946,000
Contingencies (note 6)
- -----------------------------------------------------------------
$ 13,196,000 $ 14,842,000
=================================================================
</TABLE>
See accompanying notes to consolidated financial statements
3
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months Three Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------
Revenue:
Interest income
on loans to
nonaffiliates,
including fees $ 47,000 $ 45,000 $ 25,000 $ 20,000
Interest income
on loans to
affiliates,
including fees 61,000 --- 36,000 ---
Interest-bearing
deposits 48,000 48,000 21,000 26,000
Operations of real
estate owned 394,000 438,000 169,000 225,000
Gain on sale
of property 40,000 112,000 40,000 40,000
- -----------------------------------------------------------------
Total revenue 590,000 643,000 291,000 311,000
Expenses:
Provision for
possible losses --- 716,000 --- 716,000
Share of losses in
unconsolidated
investees 587,000 310,000 442,000 157,000
Operating expenses
from operations
of real
estate owned 142,000 126,000 70,000 64,000
Operating expenses
from operations
of real estate
owned paid to
affiliates 29,000 28,000 15,000 15,000
See accompanying notes to consolidated financial statements
4
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
(Continued)
(Unaudited)
<CAPTION>
Six Months Three Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------
Expenses
associated with
non-operating
real estate
owned $ 133,000 $ 123,000 $ 68,000 $ 77,000
Depreciation and
amortization
expense 7,000 58,000 3,000 29,000
Interest expense 235,000 271,000 115,000 132,000
General and
administrative,
affiliates 120,000 81,000 56,000 47,000
General and
administrative,
nonaffiliates 55,000 45,000 18,000 22,000
Mortgage
investment
servicing fees
paid to affiliates 2,000 25,000 1,000 12,000
- -----------------------------------------------------------------
Total expenses 1,310,000 1,783,000 788,000 1,271,000
- -----------------------------------------------------------------
Net loss before
minority
interest (720,000) (1,140,000) (497,000) (960,000)
Minority interest 44,000 126,000 23,000 100,000
- -----------------------------------------------------------------
Net loss $ (676,000) $(1,014,000) $(474,000) $ (860,000)
=================================================================
Net loss per
limited
partnership
unit $ (17.45) $ (26.18) $ (12.24) $ (22.21)
=================================================================
</TABLE>
See accompanying notes to consolidated financial statements
5
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statement of Partners' Equity
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended June 30, 1996
<S> <C> <C> <C>
Total
General Limited Partners'
Partners Partners Equity
- -----------------------------------------------------------------
Balance at
December 31, 1995 $ (525,000) $ 10,471,000 $ 9,946,000
Net loss --- (676,000) (676,000)
- -----------------------------------------------------------------
Balance at
June 30, 1996 $ (525,000) $ 9,795,000 $ 9,270,000
=================================================================
</TABLE>
See accompanying notes to consolidated financial statements
6
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended June 30, 1996 and 1995
<S> <C> <C>
1996 1995
- -----------------------------------------------------------------
Cash flows from
operating activities:
Net loss $ (676,000) $(1,014,000)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Provision for
possible losses --- 716,000
Interest accrued
to principal on
loans receivable (62,000) (6,000)
Depreciation expense 7,000 58,000
Minority interest (44,000) (126,000)
Gain on sale of
real estate owned (40,000) (112,000)
Equity in losses of
unconsolidated investees 587,000 310,000
Changes in assets
and liabilities:
Decrease in
accrued interest
receivable 14,000 14,000
(Increase) decrease
in other assets 27,000 (24,000)
Decrease in
accounts payable and
accrued liabilities (30,000) (16,000)
Increase in interest
and property taxes
payable on real
estate owned 4,000 2,000
See accompanying notes to consolidated financial statements
7
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Continued)
(Unaudited)
<CAPTION>
For the six months ended June 30, 1996 and 1995
<S> <C> <C>
1996 1995
- -----------------------------------------------------------------
Increase in interest
payable to affiliates
on notes secured by
real estate owned $ 22,000 $ 43,000
Decrease in payable
to affiliates (3,000) (5,000)
- -----------------------------------------------------------------
Net cash used in
operating
activities (194,000) (160,000)
- -----------------------------------------------------------------
Cash flows from
investing activities:
Principal collected
on loans 44,000 12,000
Advances on loans made
to unconsolidated
investees (note 4) (960,000) (114,000)
Advances on loans
made to customers --- (2,000)
Proceeds from sale of
real estate owned 190,000 1,015,000
Disbursements on
real estate owned (60,000) ---
Decrease in short-term
investments 103,000 ---
- -----------------------------------------------------------------
Net cash provided by
(used in) investing
activities (683,000) 911,000
- -----------------------------------------------------------------
See accompanying notes to consolidated financial statements
8
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Unaudited)
(Continued)
<CAPTION>
For the six months ended June 30, 1996 and 1995
<S> <C> <C>
1996 1995
- -----------------------------------------------------------------
Cash flows from
financing activities:
Principal advances
on notes payable
to affiliates $ 21,000 $ 19,000
Principal payments
on notes payable (5,000) ---
- -----------------------------------------------------------------
Net cash provided by
financing activities 16,000 19,000
- -----------------------------------------------------------------
Net increase
(decrease) in cash (861,000) 770,000
Beginning cash and
cash equivalents 2,947,000 2,267,000
- -----------------------------------------------------------------
Ending cash and cash
equivalents $ 2,086,000 $ 3,037,000
=================================================================
Supplemental schedule of
cash flow information:
Cash paid during
the six months for:
Interest $ 199,000 $ 200,000
Supplemental schedule of
noncash investing and
financing activities:
Decrease in real estate
owned resulting from
foreclosure $ 1,029,000 $ ---
See accompanying notes to consolidated financial statements
9
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Unaudited)
(Continued)
<CAPTION>
For the six months ended June 30, 1996 and 1995
<S> <C> <C>
1996 1995
- -----------------------------------------------------------------
Decrease in real
estate loans
through chargeoff
of deferred profit $ 270,000 $ ---
Decrease in notes
payable through
foreclosure 650,000 ---
Decrease in interest
and taxes payable
on real estate
owned through
foreclosure 15,000 ---
Decrease in allowance
for losses resulting
from foreclosure 364,000 ---
Decrease in deferred
profit on equity
participation
through foreclosure 270,000 ---
</TABLE>
See accompanying notes to consolidated financial statements
10
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1996 and 1995
(1) BUSINESS
Centennial Mortgage Income Fund (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 June 30, 1996, a majority 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 and certain operating properties became
delinquent, management of the Partnership elected to foreclose on
certain of these loans, thereby increasing real estate owned
balances. As a result, the Partnership 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.
11
Results for the six months ended June 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.
Information pertaining to the six months ended June 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 for financial statement
purposes was based on the weighted average number of limited
partnership units outstanding of 38,729 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 June 30, 1996, the carrying value of loans that are considered
to be impaired under SFAS 114 totaled $3,227,000 (of which
$2,522,000 were on nonaccrual status). At June 30, 1996, the
allowance for possible loan losses determined in accordance with
the provisions of SFAS 114, related to loans considered impaired
under SFAS 114 totaled $957,000. There were three loans
12
to unconsolidated investees considered impaired under SFAS 114
for which there is no related allowance for possible loan losses
at June 30, 1996. However, the unconsolidated investees have
recorded an allowance for losses of $4,180,000 and the
Partnership's proportionate share of losses in unconsolidated
investees reflects this allowance. One of the loans receivable
is recorded with a corresponding deferred profit liability of
$289,000. There was a $2,000 investment in impaired loans during
the six months ended June 30, 1996. For the six months ended
June 30, 1996, the Partnership recognized interest income on
impaired loans of $33,000.
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.
<TABLE>
(3) REAL ESTATE OWNED
<CAPTION>
Real estate owned consists of the following:
(dollars in thousands)
<S> <C> <C>
June 30, December 31,
1996 1995
- -----------------------------------------------------------------
1. Shopping Center in Upland, CA $ 5,143 $ 5,106
2. 19 acres in Sacramento, CA 2,641 2,618
3. Auto retail center in Corona, CA 2,580 2,580
4. 23 acres in Riverside, CA --- 1,012
5. 5 condominiums in Oxnard, CA 1,310 1,550
- -----------------------------------------------------------------
Subtotal 11,674 12,866
Less accumulated depreciation 517 517
- -----------------------------------------------------------------
Total real estate owned $ 11,157 $ 12,349
=================================================================
</TABLE>
13
Property No. 5 has been accounted for as insubstance foreclosure
under SFAS 118 as the Partnership does not currently hold legal
title to this property, but the borrower has surrendered the
collateral to the control of the Partnership.
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.
The Partnership had been depreciating the auto retail center in
Corona through December 31, 1995. The depreciation of this
property was ceased in conjunction with the Partnership's
adoption of SFAS 121.
(4) TRANSACTIONS WITH AFFILIATES
Under the provisions of the Partnership Agreement, Centennial
Corporation is entitled to receive from the Partnership mortgage
investment servicing fees for loans serviced equal to an annual
rate of 1/4 of 1 percent of the committed amount to be funded by
the Partnership. The Partnership incurred $2,000 and $1,000 of
mortgage investment servicing fees for the six and three months
ended June 30, 1996 and $25,000 and $12,000 for the six and three
months ended June 30, 1995.
Under the provisions of the Partnership Agreement, the general
partners are to receive compensation for their services in
supervising the affairs of the Partnership. This partnership
management compensation shall be equal to 10 percent of the cash
available for distribution, as defined in the Partnership
Agreement. The general partners will not receive this
compensation until the limited partners have received a 12
percent per annum cumulative return on their adjusted invested
capital but are entitled to receive a 5 percent interest in cash
available for distribution in any year until this provision has
been met. Adjusted invested capital is defined as the original
capital invested less distributions from mortgage reductions.
Payments to the general partners have been limited to 5 percent
of cash available for distribution as the limited partners have
not yet received their 12 percent per annum cumulative return.
Under this provision of the Partnership Agreement, no
distributions were paid to the general partners during the six
and three months ended June 30, 1996 or 1995.
14
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 II ("CMIF II"), an affiliate. 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 $1,250,000 unsecured note and holds a 50
percent participation in a $2,115,000 unsecured note, both due
from LCR. The Partnership's share of the $2,115,000 note at June
30, 1996 is $1,055,000 and the Partnership had applied $1,022,000
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 these notes which was
approximately $491,000 as of June 30, 1996.
Silverwood began constructing a model home complex at the project
in June 1995. Construction commenced in September 1995 on Phase
I at the project. At June 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 June 30, 1996, is $808,000. The
Partnership's disbursed balance of the $490,000 model loan at
June 30, 1996 is $233,000. At June 30, 1996 the Partnership's
disbursed balance of the $1,034,000 Phase I construction loan is
$647,000.
15
The consolidated balance sheet and statement of operations of LCR
Development, Inc. have not been consolidated in the Partnership's
financial statements. The Partnership accounts for its
investment in the corporation using the equity method. The
following represents condensed financial information for LCR at
June 30, 1996 and for the six months ended June 30, 1996:
LCR Development, Inc.
Consolidated Balance Sheet
<TABLE>
<CAPTION>
<S> <C>
June 30,
Assets 1996
- -----------------------------------------------------------------
Cash $ 2,000
Real estate owned, held for investment 5,902,000
Less allowance for losses on
real estate investments 1,337,000
- -----------------------------------------------------------------
Net real estate owned 4,565,000
Organization costs 2,000
- -----------------------------------------------------------------
$ 4,569,000
=================================================================
Liabilities and Stockholders' Deficit
- -----------------------------------------------------------------
Notes payable to affiliates $ 6,299,000
Accounts payable and accrued liabilities 2,000
Interest and taxes payable
on real property 313,000
- -----------------------------------------------------------------
Total liabilities 6,614,000
Stockholders' deficit (2,045,000)
- -----------------------------------------------------------------
$ 4,569,000
=================================================================
</TABLE>
16
LCR Development, Inc.
Consolidated Statement of Operations
<TABLE>
<CAPTION>
<S> <C>
Six months
ended
June 30, 1996
- -----------------------------------------------------------------
Provision for losses on real estate owned $ 550,000
Interest expense 113,000
Selling and marketing expenses 100,000
General and administrative 91,000
- -----------------------------------------------------------------
Net (loss) $ (854,000)
=================================================================
</TABLE>
The Partnership holds a 50 percent participation in a $3,894,000
note due from BKS. The Partnership's share of the note
receivable at June 30, 1996 is $1,947,000 and the Partnership had
applied $1,772,000 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 $562,000 as of June 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 June 30, 1996 and for the six months ended
June 30, 1996:
BKS Development, Inc.
Balance Sheet
<TABLE>
<CAPTION>
<S> <C>
June 30,
Assets 1996
- -----------------------------------------------------------------
Cash $ 1,000
Real property 5,199,000
Less allowance for losses on
real estate investments 2,843,000
- -----------------------------------------------------------------
Net real estate owned 2,356,000
- -----------------------------------------------------------------
$ 2,357,000
=================================================================
Liabilities and Stockholders' Deficit
- -----------------------------------------------------------------
Bonds payable $ 698,000
Notes payable to affiliates 3,898,000
Interest and property taxes
payable on real property 1,307,000
- -----------------------------------------------------------------
Total liabilities 5,903,000
Stockholders' deficit (3,546,000)
- -----------------------------------------------------------------
$ 2,357,000
=================================================================
</TABLE>
18
BKS Development, Inc.
Statement of Operations
<TABLE>
<CAPTION>
<S> <C>
Six months
ended
June 30, 1996
- -----------------------------------------------------------------
Interest expense $ 92,000
Provision for losses 150,000
Property taxes 72,000
General and administrative 5,000
- -----------------------------------------------------------------
Net (loss) $ (319,000)
=================================================================
</TABLE>
The Partnership owns an interest in Grand Plaza Auto Retail,
Inc., the corporation which owns the auto retail center in
Corona, California jointly with an affiliated entity, Centennial
Mortgage Income Fund III, ("CMIF III"). At June 30, 1996, the
ownership percentages are 86.67 for the Partnership and 13.33 for
CMIF III. The assets and liabilities of this corporation have
been consolidated in the accompanying consolidated financial
statements. Notes payable and interest payable to affiliates on
notes secured by real estate owned includes $530,000 and $508,000
at June 30, 1996 and December 31, 1995, respectively, and the
Partnership had cumulatively applied $396,000 and $370,000 of
minority interest share of losses from this corporate joint
venture against the note payable to affiliates balance as of the
same dates. The notes payable to affiliates balance reflects
CMIF III's share of a note payable by the corporation to the
Partnership and CMIF III. The note bears interest at 14 percent
fixed and matures October 1, 1996.
The Partnership owns an interest in BNN Development, Inc., the
corporation which owns the 19 acres in Sacramento, California
jointly with an affiliated entity, CMIF III. At June 30, 1996,
the ownership percentages are 86.25 for the Partnership and 13.75
for CMIF III. The assets and liabilities of this corporation
have been consolidated in the accompanying consolidated financial
statements. Notes payable and interest payable to affiliates on
notes secured by real estate owned includes $403,000 and $383,000
at June 30, 1996 and December 31, 1995, respectively, and the
19
Partnership had cumulatively applied $277,000 and $260,000, of
minority interest share of losses from this corporate joint
venture against the note payable to affiliates balance as of the
same dates. The notes payable to affiliates balance reflects
CMIF III's share of a note payable by the corporation to the
Partnership and CMIF III. The note bears interest at 15 percent
fixed and matures November 1, 1997.
<TABLE>
(5) NOTES PAYABLE
<CAPTION>
Notes payable consist of the following:
(dollars in thousands)
<S> <C> <C>
June 30, December 31,
1996 1995
- -----------------------------------------------------------------
Note payable secured by
19 acres in Sacramento, CA
with interest only payments
due monthly; interest rate of
12 percent fixed, maturing
September 1, 1996 $ 900 $ 900
Note payable secured by
shopping center in
Upland, CA with interest
and principal payments due
monthly of $24,000; interest
rate of 11.25 percent fixed,
maturing November 1, 1996 2,455 2,460
Note payable secured by 23
acres in Riverside, CA;
interest rate of 13.75
percent fixed,
matured August 1, 1992 --- 650
- -----------------------------------------------------------------
Total notes payable $ 3,355 $ 4,010
=================================================================
</TABLE>
20
The Partnership acquired the 23 acres in Riverside by deed in
lieu of foreclosure, subject to the note payable discussed above.
In the second quarter of 1996, the lender foreclosed on the
property.
(6) CONTINGENCIES
There are no material pending legal proceedings other than
ordinary routine litigation incidental to the Partnership's
business.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
GENERAL
The Partnership had net losses and losses per limited partnership
unit of $(676,000) and $(17.45) and $(474,000) and $(12.24) for
the six and three months ended June 30, 1996 and ($1,014,000) and
$(26.18) and $(860,000) and $(22.21) for the six and three months
ended June 30, 1995. The decrease in losses from 1995 to 1996 is
primarily due to a decrease in the provision for possible losses.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Partnership had $2,086,000 in cash and
interest-bearing deposits. The Partnership had no unfunded loan
commitments to nonaffiliates at June 30, 1996. Sources of funds
are expected to be from the sale of real estate owned, future
operations of real estate owned and payoffs of existing loans.
The Partnership funded disbursements on loans to unconsolidated
investees during the first six months of 1996 totaling $960,000
and received payoffs and paydowns on loans totaling $44,000.
During the first six months of 1996, the Partnership incurred
costs for the improvement of real estate owned totaling $60,000
and received payoffs and paydowns on real estate owned of
$190,000.
The Partnership's notes payable commitments consist of interest
and all principal payments due of approximately $3,355,000. The
note payable secured by the 19 acres in Sacramento totaling
$900,000 matures September 1, 1996. The note payable secured by
the Upland Shopping Center totaling $2,455,000 matures November
1, 1996. The Partnership does not presently have sufficient
capital reserves to make these balloon payments and meet
operating commitments. Management has negotiated an extension on
the $900,000 note for 18 months and believes that it will be able
to obtain an extension or refinance on the $2,455,000 note. In
addition to the note payable commitments, the Partnership's
principal capital requirements include: i) real property taxes
and bonds on real estate owned of approximately $203,000 payable
during the next twelve months, and ii) selling, general and
administrative costs. These commitments are expected to be paid
from existing cash balances, 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 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 and
its impact on the Partnership's borrowers, most of the
Partnership's loans to nonaffiliates have been converted to
nonperforming loans and/or real estate owned through
foreclosures. Interest income on loans to nonaffiliates,
including fees was $47,000 and $25,000 for the six and three
months ended June 30, 1996 and $45,000 and $20,000 for the six
and three months ended June 30, 1995.
Interest income on loans to unconsolidated investees, including
fees totaled $61,000 and $36,000 for the six and three months
ended June 30, 1996. There was no comparable income for the same
periods in 1995. Interest income on loans to unconsolidated
investees represents interest earned on the Silverwood loans.
The outstanding principal balance of loans on nonaccrual at June
30, 1996 totaled $2,522,000 as compared with $2,092,000 at June
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 through the first six months of 1996 and 1995 on the
affiliated and nonaffiliated nonaccrual loans, interest income
would have been approximately $330,000 and $197,000 higher than
was actually reported for those periods.
The real estate owned balance at June 30, 1996 and 1995 was
$11,157,000 and $12,663,000, respectively.
The following sections entitled Nonaccrual, Nonperforming Loans
and Other Loans to Affiliates and Real Estate Owned provide a
detailed analysis of these assets.
Nonaccrual, Nonperforming Loans and Other Loans to Affiliates
Loans on nonaccrual and nonperforming status at June 30, 1996 are
summarized below:
During 1994, the Partnership renegotiated an equity participation
note with an original committed amount of $374,000 secured by a
second deed of trust on a 32,431 square foot shopping center in
Corona, California. The loan provides for interest due to be
payable at loan maturity; however, due to the amount of the
senior debt and the decrease in land values, the Partnership has
placed the loan on nonaccrual. The principal balance and
nonaccrued interest at June 30, 1996 are $312,000 and $87,000
respectively. The $289,000 deferred profit on equity
participation included in the liabilities on the Partnership's
June 30, 1996 balance sheet was recorded in connection with this
loan.
During 1991, the Partnership sold a pad on an existing piece of
real estate owned in Corona, California and carried back
financing in the amount of $600,000. The Partnership's share of
the loan is 77 percent. Due to the loss of the major tenant, the
borrower has been unable to make monthly interest payments.
Management has worked out a forbearance agreement with the
borrower for net cash flow monthly payments. The remaining
interest due has been placed on nonaccrual. The principal
balance and nonaccrued interest at June 30, 1996 are $460,000 and
$117,000, respectively.
During 1989, the Partnership funded a loan with an original
committed amount of $343,000 to provide land development
financing in Perris, California. The loan matured June 1, 1993
and the borrower was unable to make interest payments or pay off
the loan. The Partnership classified the loan as an insubstance
foreclosure at December 31, 1993. Given the depressed value of
the property and the amount of the delinquent bonds and taxes,
the Partnership has been negotiating with the borrower in an
attempt to discount the note to facilitate a sale or have the
borrower deed the property to the Partnership. Should the
negotiations not be completed and the property be lost to a tax
sale, management has established an allowance for losses
sufficient to cover the Partnership's equity in the property.
The principal balance and nonaccrued interest at June 30, 1996
are $292,000 and $141,000, respectively.
During 1994, the Partnership funded a $1,250,000 unsecured note
and a 50 percent participation in a $2,115,000 unsecured note,
both representing workout loans and due from LCR, an affiliate.
These two loans reflect the majority of the cost basis of single
family lots contributed to Silverwood. LCR's only source of
repayment of these notes are proceeds from the sale of the fully
developed lots. Management has estimated the proceeds for
repayment of these two notes to be less than the original
principal balance of the loans. As a result, the loans have been
placed on nonaccrual. The principal balance, participating
principal balance and nonaccrued interest balances at June 30,
1996 are $1,250,000 and $274,000 and $1,055,000 and $217,000,
respectively. As discussed in note 4, the Partnership has
reduced the carrying value of these notes by $1,022,000, its
share of losses from this unconsolidated investee.
During 1994, the Partnership funded a 50 percent participation in
a $3,894,000 note due from BKS. The loan is secured by 283 acres
in Bakersfield, California. 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 balances at June 30,
1996 are $1,947,000 and $562,000, respectively. As discussed in
note 4, the Partnership has reduced its carrying value of this
note by $1,772,000, its share of losses from this unconsolidated
investee.
Real Estate Owned
A description of the Partnership's principal real estate owned
and loan classified as insubstance foreclosure follows:
Shopping Center in Upland, California
During the third quarter of 1988, the Partnership foreclosed on a
loan secured by this project. The Partnership originally
committed $5,600,000 for the rehabilitation of a 33,327 square
foot retail center and construction of an automotive service
facility in Upland, California. Cost overruns and construction
delays prevented the borrower from selling the project and
thereby performing on the loan. The property generated net
operating income before debt service of $212,000 during the first
six months of 1996 and its net carrying value was $4,626,000 at
June 30, 1996. The property is currently 98 percent leased. The
property is encumbered by a note of $2,455,000, secured by a
first trust deed on the property. The Partnership is marketing
this property for sale.
19 Acres in Sacramento, California
During the third quarter of 1991, the Partnership took a deed in
lieu of foreclosure on a second trust deed secured by 19 acres of
undeveloped land in Sacramento, California. The property is
encumbered by a $900,000, 12 percent fixed interest rate note
payable secured by a first trust deed on the property. The note
requires monthly interest-only payments, and the balance is due
September 1, 1996. The Partnership continues to finalize the
entitlement processing, flood issues and provide for utility
services for the property. As economic conditions rebound in
California, and the demand for development land in the area
returns, the Partnership intends to list the property for sale.
At June 30, 1996, the carrying value of this asset was
$2,641,000.
Auto Retail Center in Corona, California
During 1988, the Partnership funded a loan with an original
committed amount of $3,313,000 for the purpose of constructing a
39,185 square foot auto/retail center in Corona, California. The
loan matured on September 1, 1989. The borrower defaulted under
a forbearance agreement, and the Partnership filed a notice of
default on December 14, 1990. The borrower filed for bankruptcy
on February 15, 1991. A pad was sold during April 1991 resulting
in the Partnership receiving a net paydown of $249,000. The
Partnership provided financing to the purchaser. The Partnership
took a grant deed on the property through the Bankruptcy Courts
in December 1991. The subject center is 68 percent leased and
the property generated net operating income of $11,000 during the
first six months of 1996. The center is being marketed for sale.
The carrying value at June 30, 1996 is $2,580,000.
5 Condominiums in Oxnard, California
During 1990, the Partnership funded a loan secured by a first
trust deed with an original committed amount of $3,000,000 for
the construction of 12 condominiums in Oxnard, California. The
Partnership has recorded an insubstance foreclosure on these 12
condominiums. The borrower signed over control to the second
trust deed holder in December 1992, the second trust deed holder,
an affiliate, abandoned the property and the Partnership now
controls the property. The Partnership receives 100 percent of
all sales proceeds net of selling costs. The condominiums are
located adjacent to the beach. The values of beach front
property have been hard hit in the local market due to the excess
supply of this type of property. As of June 30, 1996, the
Partnership had sold seven condominiums and is attempting to sell
the remaining units. One unit is in escrow at June 30, 1996 but
there is no assurance that this escrow will actually close. The
carrying value at June 30, 1996 is $1,310,000.
INTEREST ON INTEREST-BEARING DEPOSITS
Interest earned on interest-bearing deposits totaled $48,000 and
$21,000 for the six and three months ended June 30, 1996 and
$48,000 and $26,000 for the six and three months ended June 30,
1995. Interest on interest-bearing deposits represents interest
earned on Partnership funds invested, for liquidity, in time
certificate and money market deposits.
INCOME FROM OPERATIONS OF REAL ESTATE OWNED
Income from operations of real estate owned consists of operating
revenues of $394,000 and $169,000 for the six and three months
ended June 30, 1996 and $438,000 and $225,000 for the six and
three months ended June 30, 1995. These revenues are from the
Upland shopping center and the auto retail center in Corona. The
decrease for 1996 is due to a chargeoff for uncollectible rents.
GAIN ON SALE
Gain on sale of real estate owned represents income earned on the
sale of condominiums in Oxnard of $40,000 for the six and three
months ended June 30, 1996. Gain on sale of real estate owned
represents income earned on the sale of condominiums in Oxnard
and the sale of the office building in Sacramento for the six and
three months ended June 30, 1995 totaling $112,000 and $40,000,
respectively.
PROVISION FOR POSSIBLE LOSSES
There was no provision for possible losses for the six and three
months ended June 30, 1996. The provision for possible losses
was $716,000 for the six and three months ended June 30, 1995.
The 1995 provision relates primarily to the shopping center in
Upland and the auto retail center in Corona. The provision for
possible losses results from the change in the allowance for
possible losses and the allowance for possible losses on real
estate owned net of chargeoffs, if any. Management believes that
the allowance for possible losses at June 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 losses in
these unconsolidated investees was $587,000 and $442,000 for the
six and three months ended June 30, 1996 and $310,000 and
$157,000 for the six and three months ended June 30, 1995. The
share of losses consists primarily of a provision for losses on
real estate, interest expense, selling and marketing expense and
general and administrative expense related to the single family
development owned by LCR and the 283 acres in Bakersfield owned
by BKS.
OTHER EXPENSES
Operating expenses from operations of real estate owned were
$142,000 and $70,000 for the six and three months ended June 30,
1996 and $126,000 and $64,000 for the six and three months ended
June 30, 1995. The expenses were associated with the Upland
shopping center and the auto retail center in Corona. The
increase for 1996 is due primarily to additional asphalt and
roofing expenses for 1996.
Operating expenses from operations of real estate owned paid to
affiliates were $29,000 and $15,000 for the six and three months
ended June 30, 1996 and $28,000 and $15,000 for the six and three
months ended June 30, 1995. The operating expenses consist of
property management fees paid to affiliates of the general
partners.
Expenses associated with non-operating real estate owned were
$133,000 and $68,000 for the six and three months ended June 30,
1996 and $123,000 and $77,000 for the six and three months ended
June 30, 1995. The expenses relate to the 19 acres in
Sacramento, the condominiums in Oxnard and the 23 acres in
Riverside. The increase for the six months ended June 30, 1996
is primarily due to an increase in costs due to development of
the 19 acres in Sacramento.
Depreciation and amortization expense was $7,000 and $3,000 for
the six and three months ended June 30, 1996 and $58,000 and
$29,000 for the six and three months ended June 30, 1995. The
1995 depreciation relates primarily to the Upland shopping center
and tenant improvements for the auto retail center in Corona.
The decrease for 1996 is due to the implementation of SFAS 121
which does note require depreciation on real estate owned, held
for sale.
Interest expense was $235,000 and $115,000 for the six and three
months ended June 30, 1996 and $271,000 and $132,000 for the six
and three months ended June 30, 1995. The interest expense
during 1996 relates to the Upland Shopping Center, the 19 acres
in Sacramento, California and the Partnership's share of interest
payable to affiliates on the auto retail center in Corona. The
interest expense during 1995 also included the Partnership's
share of interest payable to affiliates on the 19 acres in
Sacramento. This loan was placed on nonaccrual in late 1995.
General and administrative expenses, affiliates totaled $120,000
and $56,000 for the six and three months ended June 30, 1996 and
$81,000 and $47,000 for the six and three months ended June 30,
1995. These expenses are primarily salary allocation
reimbursements paid to affiliates. The increase for 1996 is
partially due to a $23,000 change in billing methodology from
mortgage investment servicing fees to salary allocations and a
$16,000 payment for a prior period which had not been accrued.
General and administrative expenses, nonaffiliates totaled
$55,000 and $18,000 for the six and three months ended June 30,
1996 and $45,000 and $22,000 for the six and three months ended
June 30, 1995. These expenses consist of other costs associated
with the administration of the Partnership. The increase for
1996 is primarily due to moving expenses, office expenses and
outside services.
Mortgage investment servicing fees totaled $2,000 and $1,000 for
the six and three months ended June 30, 1996 and $25,000 and
$12,000 for the six and three months ended June 30, 1995. 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 August 14, 1996
By:/s/Ronald R. White
_________________________________
Ronald R. White
General Partner August 14, 1996
By: CENTENNIAL CORPORATION
General Partner
/s/Joel H. Miner
_________________________________
Joel H. Miner
Chief Financial Officer August 14, 1996
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