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, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission File Number: 0-22520
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 1997 1996
- -----------------------------------------------------------------
Cash and cash
equivalents $ 1,308,000 $ 1,712,000
Real estate loans
receivable, earning 783,000 700,000
Real estate loans
receivable, nonearning 1,069,000 1,066,000
Real estate loans receivable
from unconsolidated investees,
earning (note 4) 465,000 ---
Real estate loans receivable
from unconsolidated investees,
nonearning (note 4) 1,292,000 1,531,000
- -----------------------------------------------------------------
3,609,000 3,297,000
Less allowance for possible
loan losses 982,000 982,000
- -----------------------------------------------------------------
Net real estate loans receivable 2,627,000 2,315,000
Real estate owned, net, held
for sale, (note 3) 10,051,000 10,050,000
Real estate owned, insubstance
foreclosed (note 3) 1,310,000 1,310,000
- -----------------------------------------------------------------
11,361,000 11,360,000
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 1997 1996
- -----------------------------------------------------------------
Less allowance for
possible losses on
real estate owned 4,101,000 4,101,000
- -----------------------------------------------------------------
Net real estate owned 7,260,000 7,259,000
Accrued interest receivable 5,000 4,000
Due from affiliates 11,000 ---
Other assets 130,000 104,000
- -----------------------------------------------------------------
$11,341,000 $11,394,000
=================================================================
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 1997 1996
- -----------------------------------------------------------------
Notes payable (note 5) $ 3,348,000 $ 3,355,000
Notes payable to affiliates (note 4) 41,000 74,000
Accounts payable and
accrued liabilities 15,000 23,000
Interest payable to affiliates on
notes secured by real estate 217,000 220,000
Payable to affiliates (note 4) 1,000 1,000
Deferred profit on
equity participation 289,000 289,000
- -----------------------------------------------------------------
Total liabilities 3,911,000 3,962,000
Partners' equity (deficit)
-- 38,729 limited partnership
units outstanding as of
June 30, 1997 and December 31, 1996
General partners (525,000) (525,000)
Limited partners 7,955,000 7,957,000
- -----------------------------------------------------------------
Total partners' equity 7,430,000 7,432,000
Contingencies (note 6)
- -----------------------------------------------------------------
$11,341,000 $11,394,000
=================================================================
</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,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------
Revenue:
Interest income
on loans to
nonaffiliates,
including fees $ 55,000 $ 47,000 $ 28,000 $ 25,000
Interest income
on loans to
affiliates,
including fees 7,000 61,000 6,000 36,000
Interest-bearing
deposits 37,000 48,000 16,000 21,000
Operations of real
estate owned 436,000 394,000 198,000 169,000
Gain on sale
of property --- 40,000 --- 40,000
Other 6,000 --- --- ---
- -----------------------------------------------------------------
Total revenue 541,000 590,000 248,000 291,000
Expenses:
Share of losses in
unconsolidated
investees 54,000 587,000 25,000 442,000
Operating expenses
from operations
of real
estate owned 66,000 142,000 29,000 70,000
Operating expenses
from operations
of real estate
owned paid to
affiliates 23,000 29,000 12,000 15,000
See accompanying notes to consolidated financial statements
4
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
(Unaudited)
(Continued)
<CAPTION>
Six Months Three Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------
Expenses
associated with
non-operating
real estate owned 75,000 133,000 31,000 68,000
Depreciation and
amortization
expense 7,000 7,000 4,000 3,000
Interest expense 200,000 235,000 97,000 115,000
General and
administrative,
affiliates 107,000 120,000 56,000 56,000
General and
administrative,
nonaffiliates 55,000 55,000 38,000 18,000
Mortgage
investment
servicing
fees paid
to affiliates 2,000 2,000 1,000 1,000
- -----------------------------------------------------------------
Total expenses 589,000 1,310,000 293,000 788,000
- -----------------------------------------------------------------
Net loss before
minority
interest (48,000) (720,000) (45,000) (497,000)
Minority interest 46,000 44,000 2,000 23,000
- -----------------------------------------------------------------
Net loss $ (2,000) $ (676,000) $ (43,000) $ (474,000)
=================================================================
Net loss
per limited
partnership
unit $ (.05) $ (17.45) $ (1.11) $ (12.24)
=================================================================
</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, 1997
<S> <C> <C> <C>
Total
General Limited Partners'
Partners Partners Equity
- -----------------------------------------------------------------
Balance at
December 31, 1996 $ (525,000) $ 7,957,000 $ 7,432,000
Net loss --- (2,000) (2,000)
- -----------------------------------------------------------------
Balance at
June 30, 1997 $ (525,000) $ 7,955,000 $ 7,430,000
=================================================================
</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, 1997 and 1996
<S> <C> <C>
1997 1996
- -----------------------------------------------------------------
Cash flows from
operating activities:
Net loss $ (2,000) $ (676,000)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Amortization of unearned
loan fees (1,000) ---
Interest accrued to
principal on loans
receivable (7,000) (62,000)
Depreciation expense 7,000 7,000
Minority interest (46,000) (44,000)
Gain on sale of real
estate owned --- (40,000)
Equity in losses of
unconsolidated investees 54,000 587,000
Changes in assets
and liabilities:
(Increase) decrease in accrued
interest receivable (1,000) 14,000
(Increase) decrease in
other assets (33,000) 27,000
Decrease in accounts
payable and accrued
liabilities (8,000) (30,000)
Increase (decrease) in
interest and property
taxes payable on
real estate owned --- 4,000
Increase in interest
payable to affiliates
on notes secured
by real estate owned (3,000) 22,000
See accompanying notes to consolidated financial statements
7
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Unaudited)
(Continued)
<CAPTION>
For the six months ended June 30, 1997 and 1996
<S> <C> <C>
1997 1996
- -----------------------------------------------------------------
Decrease in payable
to affiliates --- (3,000)
Increase in due from
affiliates (11,000) ---
- -----------------------------------------------------------------
Net cash used in
operating
activities (51,000) (194,000)
- -----------------------------------------------------------------
Cash flows from
investing activities:
Principal collected
on loans to customers 10,000 44,000
Principal collected on
loans made to
unconsolidated investees 200,000 ---
Advances on loans made
to unconsolidated
investees (note 4) (563,000) (960,000)
Advances on loans made to
customers (5,000) ---
Proceeds from sale of
real estate owned --- 190,000
Disbursements on
real estate owned (1,000) (60,000)
Decrease in short-term
investments --- 103,000
- -----------------------------------------------------------------
Net cash used in
investing activities (359,000) (683,000)
- -----------------------------------------------------------------
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, 1997 and 1996
<S> <C> <C>
1997 1996
- -----------------------------------------------------------------
Cash flows from
financing activities:
Principal advances
on notes payable
to affiliates 13,000 21,000
Principal payments
on notes payable (7,000) (5,000)
- -----------------------------------------------------------------
Net cash provided by
financing activities 6,000 16,000
- -----------------------------------------------------------------
Net decrease in cash (404,000) (861,000)
Beginning cash and
cash equivalents 1,712,000 2,947,000
- -----------------------------------------------------------------
Ending cash and cash
equivalents $ 1,308,000 $ 2,086,000
=================================================================
Supplemental schedule of
cash flow information:
Cash paid during
the six months for:
Interest $ 197,000 $ 199,000
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, 1997 and 1996
<S> <C> <C>
1997 1996
- -----------------------------------------------------------------
Decrease in real
estate loans
through chargeoff
of deferred profit --- 270,000
Decrease in notes
payable through
foreclosure --- 650,000
Decrease in interest
and property 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
Increase in real estate
loans receivable through
sale and carryback
financing of real estate
loans receivable from
unconsolidated investees 90,000 ---
</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, 1997 and 1996
(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, 1997, 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, 1997 and 1996 are not
necessarily indicative of results which may be expected for any
other interim period, or for the year as a whole.
Information pertaining to the six months ended June 30, 1997 and
1996 is unaudited and condensed inasmuch as it does not include
all related footnote disclosures.
The condensed consolidated financial statements do not include
all information and footnotes necessary for fair presentation of
financial position, results of operations and cash flows in
conformity with generally accepted accounting principles. Notes
to consolidated financial statements included in Form 10-K for
the year ended December 31, 1996 on file with the Securities and
Exchange Commission, provide additional disclosures and a further
description of accounting policies.
Net Loss per Limited Partnership Unit
Net loss per limited partnership unit 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, 1997, the carrying value of loans that are considered
to be impaired under SFAS 114 totaled $3,054,000 (of which
$2,361,000 were on nonaccrual status). At June 30, 1997, the
allowance for possible loan losses determined in accordance with
the provisions of SFAS 114, related to loans considered impaired
under SFAS 114 totaled $982,000. There were five loans
12
to unconsolidated investees considered impaired under SFAS 114
for which there is no related allowance for possible loan losses
at June 30, 1997. However, the unconsolidated investees have
recorded an allowance for losses of $3,968,000 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 $108,000 investment in impaired loans
during the six months ended June 30, 1997. For the six months
ended June 30, 1997, the Partnership recognized interest income
on impaired loans of $43,000 which included $11,000 of interest
income recognized using the cash basis method of income
recognition.
Carrying Value of Real Estate Owned, Held for Sale
Effective January 1, 1996, the Partnership adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" ("SFAS 121"). SFAS 121 supersedes SOP 92-3 and also
requires that long-lived assets to be disposed of be reported at
the lower of carrying amount or fair value less costs to sell.
An impairment loss shall be measured as the amount by which the
carrying amount of the asset exceeds the fair value of the assets
less costs to sell. SFAS 121 requires that assets to be disposed
of not be depreciated while they are held for disposal. The
Partnership considers all real estate owned as held for sale and
is actively marketing all properties.
<TABLE>
(3) REAL ESTATE OWNED
<CAPTION>
Real estate owned consists of the following:
(dollars in thousands)
<S> <C> <C>
June 30, December 31,
1997 1996
- -----------------------------------------------------------------
1. Shopping Center in Upland, CA $ 4,628 $ 4,628
2. 19 acres in Sacramento, CA 2,822 2,822
3. Auto retail center in Corona, CA 2,601 2,600
4. 5 condominiums in Oxnard, CA 1,310 1,310
- -----------------------------------------------------------------
Total real estate owned $ 11,361 $ 11,360
=================================================================
</TABLE>
13
Property No. 4 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.
(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, 1997 and $2,000 and $1,000 for the six and three
months ended June 30, 1996, 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 six
months ended June 30, 1997 or 1996.
The Partnership owns 50 percent of the outstanding capital stock
of two corporations which have not been consolidated in the
accompanying financial statements, LCR Development, Inc., ("LCR")
and BKS Development Inc., ("BKS"). The balance of outstanding
14
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 wrote off its investment and
loan receivable from BKS during 1996 when its share of losses
equaled its investment and the recovery of any of its investment
became unlikely.
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, 1997 is $1,055,000 and the Partnership had applied
$1,055,000, a portion of its of cumulative losses from
unconsolidated investees, against the carrying value of the note
as of that same date. The Partnership has also applied
$1,250,000 of cumulative losses from unconsolidated investees
against the carrying value of the $1,250,000 note as of June 30,
1997. The Partnership has not accrued its share of interest on
these notes which was approximately $623,000 as of June 30, 1997.
Silverwood began constructing a model home complex at the project
in June 1995. Construction commenced in September 1995 on Phase
I and February 1997 on Phase II at the project. At June 30,
1997, the Partnership holds a 50 percent participation in three
notes, due from Silverwood including a land development loan, a
model home loan, a home construction loan and 100 percent
ownership in a second home construction loan. The Partnership's
disbursed balance of the $3,265,700 development loan at June 30,
1997, is $1,080,000 and the Partnership had applied $310,000, the
balance of cumulative losses from unconsolidated investees,
against the carrying value of the note as of the same date. The
Partnership's disbursed balance of the $490,000 model loan at
June 30, 1997 is $239,000. At June 30, 1997 the Partnership's
disbursed balance of the $1,034,000 Phase I construction loan is
$283,000. At June 30, 1997, the Partnership's disbursed balance
of the $870,000 Phase II construction loan is $465,000.
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, 1997 and for the six months ended June 30, 1997:
LCR Development, Inc.
Consolidated Balance Sheet
<TABLE>
<CAPTION>
<S> <C>
June 30,
Assets 1997
- -----------------------------------------------------------------
Cash $ 5,000
Restricted cash 10,000
Real estate owned, held for investment 6,590,000
Less allowance for losses on
real estate investments 3,968,000
- -----------------------------------------------------------------
Net real estate owned 2,622,000
Organization costs 1,000
- -----------------------------------------------------------------
$ 2,638,000
=================================================================
Liabilities and Stockholders' Deficit
- -----------------------------------------------------------------
Notes payable to affiliates
CMIF $ 4,372,000
CMIF II 2,191,000
- -----------------------------------------------------------------
6,563,000
Accounts payable and accrued liabilities 5,000
Interest and taxes payable
on real property 1,135,000
Payable to affiliates 29,000
- -----------------------------------------------------------------
Total liabilities 7,732,000
Stockholders' deficit (5,094,000)
- -----------------------------------------------------------------
$ 2,638,000
=================================================================
</TABLE>
16
LCR Development, Inc.
Consolidated Statement of Operations
<TABLE>
<CAPTION>
<S> <C>
Six months
ended
June 30, 1997
- -----------------------------------------------------------------
Housing sales $ 592,000
Cost of housing sales 605,000
Provision for losses on real estate owned 91,000
Selling and marketing expenses 53,000
General and administrative expenses 34,000
- -----------------------------------------------------------------
Operating loss (191,000)
Interest incurred 275,000
Less interest expense capitalized (91,000)
- -----------------------------------------------------------------
Net (loss) (375,000)
=================================================================
Interest expense not included
in share of losses (268,000)
- -----------------------------------------------------------------
Allocable net loss $ (107,000)
=================================================================
Share of loss recorded $ (54,000)
=================================================================
</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, 1997, 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 $555,000 and $557,000
at June 30, 1997 and December 31, 1996, respectively, and the
Partnership had cumulatively applied $416,000 and $420,000 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
17
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 March 1, 1998.
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, 1997,
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 $465,000 and $452,000
at June 30, 1997 and December 31, 1996, respectively, and the
Partnership had cumulatively applied $346,000 and $295,000 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.
18
<TABLE>
(5) NOTES PAYABLE
<CAPTION>
Notes payable consist of the following:
(dollars in thousands)
<S> <C> <C>
June 30, December 31,
1997 1996
- -----------------------------------------------------------------
Note payable secured by
19 acres in Sacramento, CA
with interest only payments
due monthly; interest rate of
12 percent fixed, maturing
March 1, 1998 $ 900 $ 900
Note payable secured by
shopping center in
Upland, CA with interest
and principal payments due
monthly of $24,000; interest
rate of 9.5 percent variable,
maturing June 1, 2007 2,448 2,455
- -----------------------------------------------------------------
Total notes payable $ 3,348 $ 3,355
=================================================================
</TABLE>
(6) CONTINGENCIES
There are no material pending legal proceedings other than
ordinary routine litigation incidental to the Partnership's
business.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
GENERAL
The Partnership had net losses and losses per limited partnership
unit of $(2,000) and $(.05) for the six months ended June 30,
1997 and losses of ($676,000) and $(17.45) for the six months
ended June 30, 1996. The decrease in losses from June 30, 1996
to June 30, 1997 is primarily the result of a decrease in share
of losses in unconsolidated investees and operating expenses for
real estate owned.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Partnership had $1,309,000 in cash and
interest-bearing deposits. The Partnership had no unfunded loan
commitments to nonaffiliates at June 30, 1997. 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 1997 totaling $568,000
and received payoffs and paydowns on loans totaling $210,000.
During the first six months of 1997, the Partnership incurred
costs for the improvement of real estate owned totaling $1,000.
During July, the Partnership (86.67 percent ownership) received
net proceeds of $806,000 and CMIF III (13.33 percent ownership)
received net proceeds of $129,000 for the sale of the auto retail
center in Corona, California.
The Partnership's notes payable commitments for the next twelve
months consist of interest and principal payments due of
approximately $389,000. 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 $135,000 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
At this stage of the Partnership, most of the nonaffiliated loans
have been repaid to the Partnership and interest income on loans
to nonaffiliates has begun to stabilize. As a result of these
payoffs, interest income on loans to nonaffiliates is no longer a
major contributor to the Partnership's revenue. Interest income
on loans to nonaffiliates, including fees increased to $55,000
and $28,000 for the six and three months ended June 30, 1997 from
$28,000 and $25,000 for the six and three months ended June 30,
1996, respectively. The increase in interest income on loans
from 1996 to 1997 is due to the receipt of cash basis interest
income from loans on nonaccrual.
Interest income on loans to unconsolidated investees, including
fees totaled $7,000 and $6,000 for the six and three months ended
June 30, 1997 and $61,000 and $36,000 for the six and three
months ended June 30, 1996, respectively. The decrease for 1997
is due to the loans to unconsolidated investees being placed on
nonaccrual. Interest income on loans to unconsolidated investees
represents interest earned on the Silverwood loans.
The outstanding principal balance of loans on nonaccrual at June
30, 1997 totaled $2,361,000 as compared with $2,522,000 at June
30, 1996. 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 1997 and 1996 on the
affiliated and nonaffiliated nonacrual loans, interest income
would have been approximately $268,000 and $330,000 higher than
was actually reported for those periods.
The real estate owned balance at June 30, 1997 and 1996 was
$11,361,000 and $11,157,000, 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, 1997 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, 1997 are $314,000 and $125,000
respectively. The Partnership has recorded a $289,000 deferred
profit 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, 1997 are $461,000 and
$126,000, respectively. The Partnership had recorded a $366,000
allowance for losses related to this loan as of June 30, 1997.
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. 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 a
$294,000 allowance for losses related to this loan as of June 30,
1997. The principal balance and nonaccrued interest at June 30,
1997 are $294,000 and $185,000, 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 and participating
principal balance at June 30, 1997 were $1,250,000 and
$1,055,000, respectively. The nonaccrued interest balances of
these notes as of June 30, 1997 were $342,000 and $281,000,
respectively. As discussed in note 4, the Partnership has
reduced the carrying value of these notes by $2,305,000, a
portion of its share of losses from this unconsolidated investee.
During 1994 and 1995, LCR evaluated various alternative
strategies for liquidating its investment in the 179 lots in
Lancaster. During 1994, LCR determined that its best course of
action appeared to be the full-scale buildout and sale of single-
family homes since the market for finished lots had fallen so
significantly. LCR obtained construction financing commitments
from CMIF and the Partnership and entered into a joint venture
agreement entitled Silverwood with Home Devco to construct and
sell single-family homes a the project. The joint venture began
constructing a model home complex at the project in June 1995.
Construction commenced in September 1995 on Phase I and February
1997 on Phase II at the project. At June 30, 1997, the
Partnership holds a 50 percent participation in three notes and a
100 percent ownership in a fourth note due from Silverwood
consisting of a land development loan, a model home loan and two
home construction loans with a combined disbursed balance of
$2,067,000. The Partnership's disbursed balance of the
$3,265,700 development loan at June 30, 1997 is $1,080,000. The
Partnership had applied $310,000 of cumulative losses from
unconsolidated investees against the carrying value of the note
as of the same date. The Partnership's disbursed balance of the
$490,000 model loan at June 30, 1997 is $239,000. The
Partnership's disbursed balance of the $1,034,000 Phase I
construction loan at June 30, 1997 is $283,000. The
Partnership's disbursed balance of the $870,000 Phase II
construction loan at June 30, 1997 is $465,000.
Sales volumes of new homes in the Lancaster area have continued
to decline since 1995 while sales prices have remained relatively
flat and construction costs have increased. This has caused a
further decline in the value of finished lots and a reduction in
the anticipated net proceeds the Partnership expects to realize
from the buildout of homes at the project. Additionally,
Silverwood closed escrow on only seven homes as of the date of
this report, far less than originally anticipated. As a result
of these factors, LCR has recorded a $3,968,000 allowance for
losses on real estate investments.
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 $300,000 during the first
six months of 1997. However, property taxes were approximately
$19,000 lower than they are anticipated to be over the next six
months due to a refund and retroactive reduction in assessments
which were recorded during the six months ended June 30, 1997.
The property's net carrying value before allowance for possible
losses was $4,628,000 at June 30, 1997. The property is
currently 98 percent leased. The property is encumbered by a
note of $2,448,000, secured by a first trust deed on the
property. The Partnership is marketing this property for sale.
The Partnership had recorded a $921,000 allowance for losses
related to this property as of June 30, 1997.
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
March 1, 1998. The Partnership continues to finalize the
entitlement processing, flood issues and provide for utility
services for the property. As these issues are finalized and the
demand for development land in the area returns, the Partnership
intends to list the property for sale. At June 30, 1997, the
carrying value before allowance for possible losses of this asset
was $2,822,000 and the Partnership had recorded a $1,134,000
allowance for losses related to this project.
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 43 percent leased and
the property generated net operating income of $46,000 during the
first six months of 1997. The center is being marketed for sale.
The carrying value before allowance for possible losses at June
30, 1997 is $2,601,000 and the Partnership had recorded a
$1,665,000 allowance for losses related to this project. During
the second quarter of 1997, the property was placed in escrow for
a purchase price of $1,000,000. Escrow closed during July with
net proceeds received of $935,000.
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 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 June 30, 1997, the
Partnership had sold seven condominiums and is attempting to sell
the remaining units. The carrying value before allowance for
possible losses at June 30, 1997 is $1,310,000 and the
Partnership had recorded a $381,000 allowance for losses related
to this project.
INTEREST ON INTEREST-BEARING DEPOSITS
Interest earned on interest-bearing deposits totaled $37,000 and
$16,000 for the six and three months ended June 30, 1997 and
$48,000 and $21,000 for the six and three months ended June 30,
1996, respectively. Interest on interest-bearing deposits
represents interest earned on Partnership funds invested, for
liquidity, in time certificate and money market deposits. The
decrease in income on interest-bearing deposits is principally
due to decreased cash balances for the six months ended June 30,
1997.
INCOME FROM OPERATIONS OF REAL ESTATE OWNED
Income from operations of real estate owned consists of operating
revenues of $436,000 and $198,000 for the six and three months
ended June 30, 1997 and $394,000 and $169,000 for the six and
three months ended June 30, 1996, respectively. These revenues
are from the Upland shopping center and the auto retail center in
Corona. The increase for 1997 is due to rent received from an
additional tenant beginning the third quarter of 1996 at the
Upland shopping center.
PROVISION FOR POSSIBLE LOSSES
There was no provision for possible losses for the six and three
months ended June 30, 1997 or 1996. 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 June 30, 1997 is adequate to
absorb the known and inherent risk in the Partnership's loan and
real estate owned portfolio.
SHARE OF LOSSES IN UNCONSOLIDATED INVESTEES
The Partnership has invested in corporations in which it has less
than a majority ownership and accounts for these investments
using the equity method. The Partnership's share of losses in
these unconsolidated investees was $54,000 and $25,000 for the
six and three months ended June 30, 1997 and $587,000 and
$442,000 for the six and three months ended June 30, 1996,
respectively. The share of losses consists primarily of
provisions for losses on real estate investments and interest
expense related to the 179 lots in Lancaster owned by LCR and the
283 acres in Bakersfield owned by BKS. The decrease for 1997 is
due to the write off of the 283 acres in Bakersfield owned by BKS
during 1996.
OTHER EXPENSES
Operating expenses from operations of real estate owned were
$66,000 and $29,000 for the six and three months ended June 30,
1997 and $142,000 and $70,000 for the six and three months ended
June 30, 1996, respectively. The expenses were associated with
the Upland shopping center and the auto retail center in Corona.
The decrease for 1997 is due to asphalt and roofing expenses for
1996 which were not required in 1997 and a tax refund received by
the Upland shopping center and the auto retail center in Corona.
Operating expenses from operations of real estate owned paid to
affiliates were $23,000 and $12,000 for the six and three months
ended June 30, 1997 and $29,000 and $15,000 for the six and three
months ended June 30, 1996, respectively. The operating expenses
consist of property management fees paid to affiliates of the
general partners. The decrease for 1997 is due to a decrease in
fees paid by the auto retail center in Corona.
Expenses associated with non-operating real estate owned were
$75,000 and $31,000 for the six and three months ended June 30,
1997 and $133,000 and $68,000 for the six and three months ended
June 30, 1996, respectively. The expenses relate to the 19 acres
in Sacramento, the condominiums in Oxnard, time shares in Oxnard,
and the 23 acres in Riverside. The decrease for the six and
three months ended June 30, 1997 is due to a decrease in costs
associated with the condominiums in Oxnard, a decrease in
property tax expenses and a decrease in costs associated with the
time shares.
Depreciation and amortization expense was $7,000 and $4,000 for
the six and three months ended June 30, 1997 and $7,000 and
$3,000 for the six and three months ended June 30, 1996,
respectively, related to leasehold improvements at the Upland
shopping center and furniture and fixtures of the Partnership.
Interest expense was $200,000 and $97,000 for the six and three
months ended June 30, 1997 and $235,000 and $115,000 for the six
and three months ended June 30, 1996, respectively. The interest
expense during 1997 and 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 decrease for 1997 is due to the
loan secured by the auto retail center in Corona being placed on
nonaccrual in 1997.
General and administrative expenses, affiliates totaled $107,000
and $56,000 for the six and three months ended June 30, 1997 and
$120,000 and $56,000 for the six and three months ended June 30,
1996, respectively. These expenses are primarily salary
allocation reimbursements paid to affiliates. The decrease for
1997 is due to a decrease in allocation percentages.
General and administrative expenses, nonaffiliates totaled
$55,000 and $38,000 for the six and three months ended June 30,
1997 and $55,000 and $18,000 for the six and three months ended
June 30, 1996, respectively. These expenses consist of other
costs associated with the administration of the Partnership. The
increase for the three months ended June 30, 1997 is primarily
due to an increase in legal costs for the Upland shopping center
related to the refinance of the note secured by the first trust
deed.
Mortgage investment servicing fees totaled $2,000 and $1,000 for
the six and three months ended June 30, 1997 and $2,000 and
$1,000 for the six and three months ended June 30, 1996,
respectively. This consists of fees paid to Centennial
Corporation for servicing the Partnership's loan 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, 1997
By:/s/Ronald R. White
_________________________________
Ronald R. White
General Partner August 14, 1997
By: CENTENNIAL CORPORATION
General Partner
/s/Joel H. Miner
_________________________________
Joel H. Miner
Chief Financial Officer August 14, 1997
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