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, 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>
March 31, December 31,
Assets 1996 1995
- -----------------------------------------------------------------
Cash and cash
equivalents $ 2,021,000 $ 2,947,000
Short-term investments 104,000 103,000
Real estate loans
receivable, earning 709,000 714,000
Real estate loans
receivable, nonearning 1,333,000 1,368,000
Real estate loans receivable
from unconsolidated investees,
earning (note 4) 1,503,000 667,000
Real estate loans receivable
from unconsolidated investees,
nonearning (note 4) 1,899,000 2,044,000
- -----------------------------------------------------------------
5,444,000 4,793,000
Less allowance for possible
loan losses 957,000 957,000
- -----------------------------------------------------------------
Net real estate loans receivable 4,487,000 3,836,000
Real estate owned, net, held
for sale, (note 3) 10,806,000 10,799,000
Real estate owned, insubstance
foreclosed (note 3) 1,550,000 1,550,000
- -----------------------------------------------------------------
12,356,000 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>
March 31, December 31,
Assets 1996 1995
- -----------------------------------------------------------------
Less allowance for possible
losses on real estate
owned 4,523,000 4,523,000
- -----------------------------------------------------------------
Net real estate owned 7,833,000 7,826,000
Accrued interest receivable 4,000 18,000
Prepaid real estate taxes 38,000 ---
Other assets 124,000 112,000
- -----------------------------------------------------------------
$ 14,611,000 $ 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>
March 31, December 31,
Liabilities and Partners' Equity 1996 1995
- -----------------------------------------------------------------
Notes payable (note 5) $ 4,010,000 $ 4,010,000
Notes payable to affiliates (note 4) 76,000 90,000
Accounts payable and
accrued liabilities 38,000 51,000
Interest and property taxes
payable on real estate owned --- 11,000
Interest payable to affiliates on
notes secured by real estate 183,000 171,000
Payable to affiliates (note 4) 1,000 4,000
Deferred profit on equity participation 559,000 559,000
- -----------------------------------------------------------------
Total liabilities 4,867,000 4,896,000
Partners' equity (deficit)
-- 38,729 limited partnership
units outstanding as of
March 31, 1996 and December 31, 1995
General partners (525,000) (525,000)
Limited partners 10,269,000 10,471,000
- -----------------------------------------------------------------
Total partners' equity 9,744,000 9,946,000
Contingencies (note 6)
- -----------------------------------------------------------------
$ 14,611,000 $ 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>
For the three months ended March 31, 1996 and 1995
<S> <C> <C>
1996 1995
- -----------------------------------------------------------------
Revenue:
Interest income on loans
to nonaffiliates,
including fees $ 22,000 $ 25,000
Interest income on loans
to affiliates,
including fees 25,000 ---
Interest-bearing
deposits 27,000 22,000
Operations of real estate owned 225,000 213,000
Gain on sale of
real estate owned --- 72,000
- -----------------------------------------------------------------
Total revenue 299,000 332,000
Expenses:
Provision for
possible losses --- ---
Share of losses
in unconsolidated
investees 145,000 153,000
Operating expenses
from operations
of real estate owned 72,000 62,000
Operating expenses
from operations of
real estate owned
paid to affiliate 14,000 13,000
Expenses associated
with non-operating
real estate owned 65,000 46,000
Depreciation and
amortization expense 4,000 29,000
Interest expense 120,000 139,000
See accompanying notes to consolidated financial statements
4
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
(Continued)
(Unaudited)
<CAPTION>
For the three months ended March 31, 1996 and 1995
<S> <C> <C>
1996 1995
- -----------------------------------------------------------------
General and administrative,
affiliates 64,000 34,000
General and administrative,
nonaffiliates 37,000 23,000
Mortgage investment servicing
fees paid to affiliate 1,000 13,000
- -----------------------------------------------------------------
Total expenses 522,000 512,000
- -----------------------------------------------------------------
Net loss before
minority interest (223,000) (180,000)
Minority interest 21,000 26,000
- -----------------------------------------------------------------
Net loss $ (202,000) $ (154,000)
=================================================================
Net loss per limited
partnership unit $ (5.22) $ (3.98)
=================================================================
</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 three months ended March 31, 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 --- (202,000) (202,000)
- -----------------------------------------------------------------
Balance at
March 31, 1996 $ (525,000) $ 10,269,000 $ 9,744,000
=================================================================
</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 three months ended March 31, 1996 and 1995
<S> <C> <C>
1996 1995
- -----------------------------------------------------------------
Cash flows from
operating activities:
Net loss $ (202,000) $ (154,000)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Provision for
possible losses --- ---
Interest accrued
to principal (25,000) (6,000)
Depreciation and
amortization 4,000 29,000
Minority interest (21,000) (26,000)
Gain on sale of
real estate owned --- (72,000)
Equity in losses of
unconsolidated investees 145,000 153,000
Changes in assets
and liabilities:
Decrease in accrued
interest receivable 14,000 1,000
Increase in other assets (16,000) (565,000)
Increase (decrease) in
accounts payable and
accrued liabilities (13,000) 5,000
Decrease in interest
and taxes payable
on real estate owned (49,000) (8,000)
Increase in interest
payable to affiliates on
notes secured by real estate 12,000 ---
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 three months ended March 31, 1996 and 1995
<S> <C> <C>
1996 1995
- -----------------------------------------------------------------
Decrease in payable
to affiliates (3,000) (4,000)
- -----------------------------------------------------------------
Net cash used in
operating
activities (154,000) (647,000)
- -----------------------------------------------------------------
Cash flows from
investing activities:
Principal collected
on loans 40,000 9,000
Advances on loans made to
unconsolidated investees (810,000) (36,000)
Advances on loans
made to customers (1,000) (1,000)
Capital expenditures
for real estate owned (7,000) ---
Proceeds from sale of
real estate owned --- 766,000
Increase in short-term
investments (1,000) ---
- -----------------------------------------------------------------
Net cash provided by
(used in) investing
activities (779,000) 738,000
- -----------------------------------------------------------------
Cash flows from
financing activities:
Proceeds from notes
payable to affiliates 7,000 5,000
- -----------------------------------------------------------------
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 three months ended March 31, 1996 and 1995
<S> <C> <C>
1996 1995
- -----------------------------------------------------------------
Net cash provided by
financing activities 7,000 5,000
- -----------------------------------------------------------------
Net increase
(decrease) in cash (926,000) 96,000
Beginning cash and
cash equivalents 2,947,000 2,267,000
- -----------------------------------------------------------------
Ending cash and cash
equivalents $ 2,021,000 $ 2,363,000
=================================================================
Supplemental schedule of
cash flow information:
Cash paid during
the quarter for:
Interest $ 100,000 $ 100,000
Supplemental schedule of
noncash investing and
financing activities:
Decrease in allowance
for loan losses and
real estate loans
receivable through
foreclosure $ --- $ 233,000
Decrease in allowance
for losses on real
estate owned through
sale or transfer of
ownership --- 64,000
</TABLE>
See accompanying notes to consolidated financial statements
9
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 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 March 31, 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.
10
Results for the three months ended March 31, 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 three months ended March 31, 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 March 31, 1996, the carrying value of loans that are
considered to be impaired under SFAS 114 totaled $3,941,000 (of
which $3,232,000 were on nonaccrual status). At March 31, 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 $954,000. There were three loans
11
to unconsolidated investees considered impaired under SFAS 114
for which there is no related allowance for possible loan losses
at March 31, 1996. However, the unconsolidated investees have
recorded an allowance for losses of $3,480,000 and the
Partnership's proportionate share of losses in unconsolidated
investees reflects this allowance. Two of the loans receivable
are recorded with a corresponding deferred profit liability of
$559,000. There was a $1,000 investment in impaired loans during
the three months ended March 31, 1996. For the three months
ended March 31, 1996, the Partnership recognized cash basis
interest income on impaired loans of $2,000.
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>
March 31, December 31,
1996 1995
- -----------------------------------------------------------------
1. Shopping Center in Upland, CA $ 5,106 $ 5,106
2. 19 acres in Sacramento, CA 2,625 2,618
3. Auto retail center in Corona, CA 2,580 2,580
4. 23 acres in Riverside, CA 1,012 1,012
5. 6 condominiums in Oxnard, CA 1,550 1,550
- -----------------------------------------------------------------
Subtotal 12,873 12,866
Less accumulated depreciation 517 517
- -----------------------------------------------------------------
Total real estate owned $ 12,356 $ 12,349
=================================================================
</TABLE>
12
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 $1,000 and $13,000 of
mortgage investment servicing fees for the three months ended
March 31, 1996 and 1995, respectively.
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 three
months ended March 31, 1996 or 1995.
13
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
March 31, 1996 is $1,055,000 and the Partnership had applied
$651,000 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 $446,000 as of March 31, 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 March 31, 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 March 31, 1996, is $739,000. The
Partnership's disbursed balance of the $490,000 model loan at
March 31, 1996 is $227,000. At March 31, 1996 the Partnership's
disbursed balance of the $1,034,000 Phase I construction loan is
$537,000.
14
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
March 31, 1996 and for the three months ended March 31, 1996:
LCR Development, Inc.
Consolidated Balance Sheet
<TABLE>
<CAPTION>
<S> <C>
March 31,
Assets 1996
- -----------------------------------------------------------------
Cash $ 1,000
Real estate owned, held for investment 5,696,000
Less allowance for losses on
real estate investments 787,000
- -----------------------------------------------------------------
Net real estate owned 4,909,000
Organization costs 2,000
- -----------------------------------------------------------------
$ 4,912,000
=================================================================
Liabilities and Stockholders' Deficit
- -----------------------------------------------------------------
Notes payable to affiliates $ 5,914,000
Accounts payable and accrued liabilities 2,000
Interest and taxes payable
on real property 299,000
- -----------------------------------------------------------------
Total liabilities 6,215,000
Stockholders' deficit (1,303,000)
- -----------------------------------------------------------------
$ 4,912,000
=================================================================
</TABLE>
15
LCR Development, Inc.
Consolidated Statement of Operations
<TABLE>
<CAPTION>
<S> <C>
Three months
ended
March 31, 1996
- -----------------------------------------------------------------
Interest expense $ 49,000
Selling and marketing expenses 62,000
General and administrative 1,000
- -----------------------------------------------------------------
Net (loss) $ (112,000)
=================================================================
</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 March 31, 1996 is $1,947,000 and the Partnership
had applied $1,702,000 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 $488,000 as of March 31, 1996.
16
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 March 31, 1996 and for the three months
ended March 31, 1996:
BKS Development, Inc.
Balance Sheet
<TABLE>
<CAPTION>
<S> <C>
March 31,
Assets 1996
- -----------------------------------------------------------------
Cash $ 1,000
Real property 5,199,000
Less allowance for losses on
real estate investments 2,693,000
- -----------------------------------------------------------------
Net real estate owned 2,506,000
- -----------------------------------------------------------------
$ 2,507,000
=================================================================
Liabilities and Stockholders' Deficit
- -----------------------------------------------------------------
Bonds payable $ 698,000
Notes payable to affiliates 3,894,000
Interest and property taxes
payable on real property 1,320,000
- -----------------------------------------------------------------
Total liabilities 5,912,000
Stockholders' deficit (3,405,000)
- -----------------------------------------------------------------
$ 2,507,000
=================================================================
</TABLE>
17
BKS Development, Inc.
Statement of Operations
<TABLE>
<CAPTION>
<S> <C>
Three months
ended
March 31, 1996
- -----------------------------------------------------------------
Interest expense $ 74,000
Property taxes 103,000
General and administrative 1,000
- -----------------------------------------------------------------
Net (loss) $ (178,000)
=================================================================
</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 March 31, 1996, the
ownership percentages are 86.25 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 $520,000 and $508,000
at March 31, 1996 and December 31, 1995, respectively, and the
Partnership had cumulatively applied $382,000 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 March 31, 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 $393,000 and $383,000
at March 31, 1996 and December 31, 1995, respectively, and the
18
Partnership had cumulatively applied $269,000 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>
March 31, 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 2,460 2,460
Note payable secured by 23
acres in Riverside, CA;
interest rate of 13.75
percent fixed,
matured August 1, 1992 650 650
- -----------------------------------------------------------------
Total notes payable $ 4,010 $ 4,010
=================================================================
</TABLE>
19
The Partnership acquired the 23 acres in Riverside by deed in
lieu of foreclosure, subject to the note payable discussed above.
In the third quarter of 1993, the lender filed a notice of
default and commenced judicial foreclosure proceedings on the
property. The original borrower on the note payable has
completed negotiations with the lender to perfect a nonjudicial
foreclosure on the property. Management has obtained
indemnification against the damages and/or losses asserted by the
lender related to the first trust deed, and in exchange has
agreed to allow the lender to complete this foreclosure in 1996.
Management has established an allowance for losses sufficient to
cover the loss which will be incurred as a result of the
foreclosure of this property. Accordingly, the Partnership has
not accrued interest expense on this note.
(6) CONTINGENCIES
There are no material pending legal proceedings other than
ordinary routine litigation incidental to the Partnership's
business.
20
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 $(202,000) and $(5.22) for the three months ended March
31, 1996 and ($154,000) and $(3.98) for the three months ended
March 31, 1995. The increase in losses from March 31, 1995 to
March 31, 1996 is primarily the result of an increase in
operating expenses for real estate owned and an increase in
general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Partnership had $2,021,000 in cash and
interest-bearing deposits. The Partnership had no unfunded loan
commitments to nonaffiliates at March 31, 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 three months of 1996
totaling $810,000 and received payoffs and paydowns on loans
totaling $40,000. During the first three months of 1996, the
Partnership incurred costs for the improvement of real estate
owned totaling $7,000.
The Partnership's notes payable commitments consist of interest
and all principal payments due of approximately $3,360,000, which
does not include payments on the note secured by the 23 acres in
Riverside totaling $650,000. The original borrower on the
$650,000 note payable has completed negotiations with the lender
to perfect a nonjudicial foreclosure on the property. 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 $2,460,000 matures November 1,
1996. The Partnership does not presently have sufficient capital
reserves to make these balloon payments and meet operating
commitments. The Partnership believes that it will be able to
obtain extensions on these two notes. 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 $215,000 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. As a result, interest income on loans to
nonaffiliates continues to decline. Interest income on loans to
nonaffiliates, including fees decreased to $22,000 from $25,000
for the three months ended March 31, 1996 and 1995, respectively.
The decrease in interest income on loans from 1995 to 1996 is due
to a one time payment received during the first quarter of 1995
which was not received in 1996.
Interest income on loans to unconsolidated investees, including
fees totaled $25,000 for the three months ended March 31, 1996.
There was no comparable income for the same period in 1995 due to
the loans to unconsolidated investees being placed on nonaccrual
and subsequently classified as insubstance foreclosures and
foreclosures. 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, 1996 totaled $3,232,000 as compared with $3,894,000 at March
31, 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 three months of 1996 and 1995 on the
affiliated and nonaffiliated nonacrual loans, interest income
would have been approximately $161,000 and $189,000 higher than
was actually reported for those periods.
The real estate owned balance at March 31, 1996 and 1995 was
$12,356,000 and $12,980,000, 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 March 31, 1996
are summarized below:
During 1988, the Partnership recorded an equity participation
note with an original committed amount of $350,000 secured by a
second trust deed on a 160-unit apartment complex in Riverside,
California. The loan is on nonaccrual due to past due interest.
The complex is 82 percent leased and due to low rental rates and
slow payments, the first trust deed holder filed a notice of
default on April 12, 1995 and is proceeding with judicial
foreclosure. The loan is recorded with a deferred profit
liability equal to the principal balance of the loan. As a
result, the foreclosure will have no impact on the Partnership's
financial statements. The principal balance and nonaccrued
interest at March 31, 1996 are $269,000 and $79,000,
respectively.
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 March 31, 1996 are $312,000 and $78,000
respectively.
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 March 31, 1996 are $460,000
and $74,000, 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 March 31, 1996
are $292,000 and $130,000, respectively.
During 1994, the Partnership foreclosed on a note secured by a
first trust deed on a two-story office building and third trust
deed on a residence, all located in Sacramento, California. The
two-story office building was sold in January 1995 and the
Partnership retained the note secured by the third trust deed.
The borrower prepaid interest for one year and made no further
payments. The principal and nonaccrued interest balances at
March 31, 1996 are $81,000 and $6,000, respectively. The
Partnership has recorded a reduction of $81,000 against the
principal balance which represents previously nonaccrued
interest.
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 March 31,
1996 are $1,250,000 and $250,000 and $1,055,000 and $196,000,
respectively. As discussed in note 4, the Partnership has
reduced the carrying value of these notes by $651,000, 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 March 31,
1996 are $1,947,000 and $488,000, respectively. As discussed in
note 4, the Partnership has reduced its carrying value of this
note by $1,702,000, 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 $128,000 during the first
three months of 1996 and its net carrying value was $4,589,000 at
March 31, 1996. The property is currently 73 percent leased.
The property is encumbered by a note of $2,460,000, 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. Should 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 March 31, 1996, the carrying value of this asset was
$2,625,000.
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 three months of 1996. The center is being marketed for
sale. The carrying value at March 31, 1996 is $2,580,000.
23 Acres in Riverside, California
The Partnership took a grant deed in consideration of its note
secured by a third trust deed on the property during the second
quarter of 1992 and paid off the second deed of trust. The
carrying value at March 31, 1996 is $1,012,000. The property is
encumbered by a 13.75 percent fixed rate note payable secured by
a first trust deed of $650,000 payable to another financial
institution which matured August 1, 1992. During 1993 and 1994,
management has attempted to negotiate with the FDIC as successor
to the financial institution to payoff or restructure the terms
of the note secured by the first trust deed and was not
successful resulting in the FDIC commencing foreclosure
proceedings on the property. Throughout the two year period, the
land values continued to decline and lot improvement costs
significantly increased. During 1995, the original borrower has
been negotiating with the FDIC to perfect a nonjudicial
foreclosure on the property. Management has obtained
indemnification against the damages and/or losses asserted by the
FDIC related to the first trust deed, and in exchange has agreed
to allow the lender to complete this foreclosure in 1996.
Management has established an allowance for losses sufficient to
cover the loss which will be incurred as a result of the
foreclosure of this property.
6 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 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. The Partnership has declined to assume any of the
original builder's liabilities which would be required should the
Partnership accept a deed in lieu of foreclosure on the property.
However, the Partnership does receive 100 percent of all sales
proceeds net of selling costs. As of March 31, 1996, the
Partnership had sold six condominiums and is attempting to sell
the remaining units. One unit is in escrow at March 31, 1996 but
there is no assurance that this escrow will actually close. The
carrying value at March 31, 1996 is $1,550,000.
INTEREST ON INTEREST-BEARING DEPOSITS
Interest earned on interest-bearing deposits totaled $27,000 and
$22,000 for the three months ended March 31, 1996 and 1995,
respectively. Interest on interest-bearing deposits represents
interest earned on Partnership funds invested, for liquidity, in
time certificate and money market deposits. The increase in
income on interest-bearing deposits is principally due to
additional funds invested in higher yielding certificates of
deposits for the three months ended March 31, 1996.
INCOME FROM OPERATIONS OF REAL ESTATE OWNED
Income from operations of real estate owned consists of operating
revenues of $225,000 and $213,000 for the three months ended
March 31, 1996 and 1995, respectively. These revenues are from
the Upland shopping center and the auto retail center in Corona.
GAIN ON SALE
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 three months ended March 31, 1995
totaling $72,000. There were no sales of real estate owned
during the three months ended March 31, 1996.
PROVISION FOR POSSIBLE LOSSES
There was no provision for possible losses for the three months
ended March 31, 1996 or 1995. The provision for possible losses
results from the change in the allowance for possible losses and
the allowance for possible losses on real estate owned net of
charge-offs, if any. Management believes that the allowance for
possible losses at March 31, 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 $145,000 and $153,000 for the
three months ended March 31, 1996 and 1995, respectively. The
share of losses consists primarily of marketing, property tax and
interest expenses related to the 179 lots in Lancaster owned by
LCR and the 283 acres in Bakersfield owned by BKS.
OTHER EXPENSES
Operating expenses from operations of real estate owned were
$72,000 and $62,000 for the three months ended March 31, 1996 and
1995, respectively. 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 $14,000 and $13,000 for the three months ended
March 31, 1996 and 1995, respectively. The operating expenses
consist of property management fees paid to affiliates of the
general partners.
Expenses associated with non-operating real estate owned were
$65,000 and $46,000 for the three months ended March 31, 1996 and
1995, respectively. The expenses relate to the 19 acres in
Sacramento, the condominiums in Oxnard, and the 23 acres in
Riverside. The increase for the three months ended March 31,
1996 is due to an increase in costs due to development of the 19
acres in Sacramento.
Depreciation and amortization expense was $4,000 and $29,000 for
the three months ended March 31, 1996 and 1995, respectively.
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 $120,000 and $139,000 for the three months
ended March 31, 1996 and 1995, respectively. 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 $64,000
and $34,000 for the three months ended March 31, 1996 and 1995,
respectively. These expenses are primarily salary allocation
reimbursements paid to affiliates. The increase for 1996 is
partially due to a $12,000 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
$37,000 and $23,000 for the three months ended March 31, 1996 and
1995, respectively. These expenses consist of other costs
associated with the administration of the Partnership. The
increase for 1996 is primarily due to moving expenses, increased
legal expenses for documents, office expenses and outside
services.
Mortgage investment servicing fees totaled $1,000 and $13,000 for
the three months ended March 31, 1996 and 1995, respectively.
This consists of fees paid to Centennial Corporation for
servicing the Partnership's loan and 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 May 15, 1996
By:/s/Ronald R. White
_________________________________
Ronald R. White
General Partner May 15, 1996
By: CENTENNIAL CORPORATION
General Partner
/s/Joel H. Miner
_________________________________
Joel H. Miner
Chief Financial Officer May 15, 1996
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