FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission File Number: 0-15448
CENTENNIAL MORTGAGE INCOME FUND II
(Exact name of registrant as specified in its charter)
California 33-0112106
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1540 South Lewis Street, Anaheim, California 92805
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714)502-8484
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
PART I
ITEM 1. FINANCIAL STATEMENTS
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, December 31,
Assets 1996 1995
- -----------------------------------------------------------------
Cash and cash equivalents $ 513,000 $ 854,000
Restricted cash 12,000 11,000
Short-term investments --- 102,000
Real estate loans
receivable, earning 22,000 25,000
Real estate loans receivable
from unconsolidated investees,
earning (note 4) 1,247,000 1,033,000
Real estate loans receivable
from unconsolidated investees,
nonearning (note 4) 215,000 798,000
- -----------------------------------------------------------------
1,484,000 1,856,000
Less allowance for possible
loan losses 8,000 8,000
- -----------------------------------------------------------------
Net real estate loans receivable 1,476,000 1,848,000
Real estate owned, net, held
for sale (note 3) 11,316,000 11,314,000
Less allowance for possible loan
losses on real estate owned 2,545,000 2,545,000
- -----------------------------------------------------------------
Net real estate owned 8,771,000 8,769,000
See accompanying notes to consolidated financial statements
1
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
(Continued)
(Unaudited)
<CAPTION>
<S> <C> <C>
June 30, December 31,
Assets 1996 1995
- -----------------------------------------------------------------
Due from affiliates 2,000 ---
Other assets 30,000 21,000
- -----------------------------------------------------------------
$ 10,804,000 $ 11,605,000
=================================================================
Liabilities and Partners' Equity
- -----------------------------------------------------------------
Note payable $ 165,000 $ 185,000
Accounts payable and
accrued liabilities 7,000 6,000
Interest and property taxes
payable on real estate owned 240,000 203,000
Payable to affiliates (note 4) 1,000 3,000
- -----------------------------------------------------------------
Total liabilities 413,000 397,000
Partners' equity (deficit)
-- 29,141 limited partnership
units outstanding at
June 30, 1996 and December 31, 1995
General partners (195,000) (195,000)
Limited partners 10,586,000 11,403,000
- -----------------------------------------------------------------
Total partners' equity 10,391,000 11,208,000
Contingencies (note 5)
- -----------------------------------------------------------------
$ 10,804,000 $ 11,605,000
=================================================================
</TABLE>
See accompanying notes to consolidated financial statements
2
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months Three Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------
Revenue:
Interest income
on loans to
nonaffiliates,
including fees $ 8,000 $ 23,000 $ 4,000 $ 12,000
Interest income
on loans to
unconsolidated
investees,
including fees 51,000 --- 27,000 ---
Interest-bearing
deposits 14,000 27,000 6,000 13,000
Income from
operations of
real estate owned 62,000 68,000 31,000 35,000
- -----------------------------------------------------------------
Total revenue 135,000 118,000 68,000 60,000
Expenses:
Provision for
possible losses --- 100,000 --- 100,000
Share of losses in
unconsolidated
investees 587,000 310,000 442,000 157,000
Operating expenses
from operations of
real estate owned 35,000 37,000 18,000 21,000
Operating expenses
from operations of
real estate owned
paid to affiliates 6,000 6,000 3,000 3,000
Expenses associated
with non-operating
real estate owned 183,000 110,000 90,000 71,000
See accompanying notes to consolidated financial statements
3
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
(Continued)
(Unaudited)
<CAPTION>
Six Months Three Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------
Depreciation and
amortization
expense 4,000 4,000 1,000 2,000
Interest expense 8,000 10,000 4,000 4,000
General and
administrative,
affiliates 88,000 64,000 46,000 37,000
General and
administrative,
nonaffiliates 41,000 38,000 14,000 20,000
Mortgage investment
servicing fees
paid to
affiliates
(note 4) --- 18,000 --- 9,000
- -----------------------------------------------------------------
Total expenses 952,000 697,000 618,000 424,000
- -----------------------------------------------------------------
Net loss $(817,000) $(579,000) $(550,000) $(364,000)
=================================================================
Net loss per
limited
partnership
unit $ (28.04) $ (19.87) $ (18.87) $ (12.49)
=================================================================
</TABLE>
See accompanying notes to consolidated financial statements
4
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statement of Partners' Equity
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended June 30, 1996
<S> <C> <C> <C>
Total
General Limited Partners'
Partners Partners Equity
- -----------------------------------------------------------------
Balance at
December 31, 1995 $ (195,000) $ 11,403,000 $ 11,208,000
Net loss --- (817,000) (817,000)
- -----------------------------------------------------------------
Balance at
June 30, 1996 $ (195,000) $ 10,586,000 $ 10,391,000
=================================================================
</TABLE>
See accompanying notes to consolidated financial statements
5
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended June 30, 1996 and 1995
<S> <C> <C>
1996 1995
- -----------------------------------------------------------------
Cash flows from
operating activities:
Net loss $ (817,000) $ (579,000)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Provision for
possible losses --- 100,000
Amortization of
unearned loan fees
and discounts (1,000) ---
Interest accrued to
principal on loans
to affiliates (51,000) ---
Depreciation expense 4,000 4,000
Equity in losses of
unconsolidated investees 587,000 310,000
Changes in assets
and liabilities:
Increase in other assets (13,000) (14,000)
Increase in due
from affiliates (2,000) ---
Decrease in payable
to affiliates (2,000) (3,000)
Increase (decrease) in
accounts payable and
accrued liabilities 1,000 (8,000)
Increase (decrease) in
interest and taxes
payable on real
estate owned 37,000 (11,000)
See accompanying notes to consolidated financial statements
6
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Continued)
(Unaudited)
<CAPTION>
For the six months ended June 30, 1996 and 1995
<S> <C> <C>
1996 1995
- -----------------------------------------------------------------
Net cash used in
operating activities (257,000) (201,000)
- -----------------------------------------------------------------
Cash flows from
investing activities:
Principal collected on loans 32,000 3,000
Advances on loans made
to unconsolidated
investees (note 4) (195,000) (121,000)
Additions to real
estate owned (2,000) ---
Increase in restricted cash (1,000) ---
Decrease in short-term
investments 102,000 ---
- -----------------------------------------------------------------
Net cash used in
investing activities (64,000) (118,000)
- -----------------------------------------------------------------
Cash flows from
financing activities:
Principal payments on
notes payable (20,000) (19,000)
- -----------------------------------------------------------------
Net decrease in cash (341,000) (338,000)
Beginning cash and
cash equivalents 854,000 1,908,000
- -----------------------------------------------------------------
Ending cash and cash
equivalents $ 513,000 $ 1,570,000
=================================================================
Supplemental disclosures of
cash flow information:
Cash paid during the
six months for:
Interest $ 8,000 $ 10,000
</TABLE>
See accompanying notes to consolidated financial statements
7
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1996 and 1995
(1) BUSINESS
Centennial Mortgage Income Fund II (the "Partnership") has
historically invested in commercial, industrial and residential
income-producing real property through mortgage investments
consisting of participating first mortgage loans, other equity
participation loans, construction loans, and wrap-around and
other junior loans. The Partnership's underwriting policy for
granting credit was to fund loans secured by first and second
deeds of trust on real property. The Partnership's area of
concentration is in California.
As of June 30, 1996, most of the loans secured by operating
properties have been repaid to the Partnership. However, during
recent years, real estate market values for undeveloped land in
California have declined severely. As the loans secured by
undeveloped land became delinquent, the Partnership elected to
foreclose on certain of these loans, thereby increasing real
estate owned balances. As a result, the Partnership has become a
direct investor in this real estate and intends to manage
operating properties and develop raw land until such time as the
Partnership is able to sell this real estate owned.
As required by the Partnership Agreement, the Partnership is
currently in the repayment stage, and as a result, cash proceeds
from mortgage investments are no longer available for
reinvestment.
(2) BASIS OF PRESENTATION
The consolidated financial statements are unaudited and reflect
all adjustments, consisting only of normal recurring accruals,
which are, in the opinion of management, necessary for a fair
statement of the results of operations for the interim periods.
Results for the six months ended June 30, 1996 and 1995 are not
necessarily indicative of results which may be expected for any
other interim period, or for the year as a whole.
8
Information pertaining to the six months ended June 30, 1996 and
1995 is unaudited and condensed inasmuch as it does not include
all related footnote disclosures.
The condensed consolidated financial statements do not include
all information and footnotes necessary for fair presentation of
financial position, results of operations and cash flows in
conformity with generally accepted accounting principles. Notes
to consolidated financial statements included in Form 10-K for
the year ended December 1995 on file with the Securities and
Exchange Commission, provide additional disclosures and a further
description of accounting policies.
Net Loss per Limited Partnership Unit
Net loss per limited partnership unit was based on the weighted
average number of limited partnership units outstanding of 29,141
for all periods presented.
Impaired Loans
The Partnership considers a loan to be impaired when based upon
current information and events, it believes it is probable that
the Partnership will be unable to collect all amounts due
according to the contractual terms of the loan agreement. In
determining impairment, the Partnership considers large non-
homogeneous loans including nonaccrual loans, troubled debt
restructuring and performing loans which exhibit, among other
characteristics, high loan-to-value ratios, low debt-coverage
ratios, or other indications that the borrowers are experiencing
increased levels of financial difficulty. The Partnership bases
the measurement of collateral-dependent impaired loans on the
fair value of the loan's collateral. The amount by which the
recorded investment of the loan exceeds the measure of the
impaired loan's value is recognized by recording a valuation
allowance.
At June 30, 1996, the carrying value of loans that are considered
to be impaired under SFAS 114 totaled $215,000 (all of which were
on nonaccrual status). At June 30, 1996, there was no allowance
for possible loan losses determined in accordance with the
provisions of SFAS 114, related to loans considered impaired
under SFAS 114 recorded by the Partnership. However, the
unconsolidated investees have recorded an allowance for losses of
$4,180,000 and the Partnership's proportionate share of losses in
unconsolidated investees reflects this allowance.
9
There was a $4,000 investment in impaired loans during the six
months ended June 30, 1996. For the six months ended June 30,
1996, the Partnership recognized no interest income nor cash
basis income on these impaired loans.
Carrying Value of Real Estate Owned, Held for Sale
Effective January 1, 1996, the Partnership adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" ("SFAS 121"). SFAS 121 requires that long-lived
assets to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell. An impairment loss shall
be measured as the amount by which the carrying amount of the
asset exceeds the fair value of the assets. SFAS 121 requires
that assets to be disposed of not be depreciated while they are
held for disposal.
<TABLE>
(3) REAL ESTATE OWNED
<CAPTION>
Real estate owned consists of the following:
(dollars in thousands)
<S> <C> <C>
June 30, December 31,
1996 1995
- -----------------------------------------------------------------
1. Office building in
San Bernardino, CA $ 837 $ 837
2. 45 acres in Sacramento, CA 4,128 4,126
3. Proposed marina and condominiums
in Redwood City, CA 5,360 5,360
4. 10.66 acres in Roseville, CA 1,003 1,003
- -----------------------------------------------------------------
Subtotal 11,328 11,326
Less accumulated depreciation 12 12
- -----------------------------------------------------------------
Total real estate owned $ 11,316 $ 11,314
=================================================================
</TABLE>
10
In accordance with SFAS 121, the Partnership carries real estate
owned, held for sale, at the lower of carrying amount or fair
value less costs to sell. The estimated fair values were
determined by using appraisals, discounted cash flows and/or
other valuation techniques. The actual market price of real
estate can only be determined by negotiation between independent
third parties in a sales transaction.
(4) TRANSACTIONS WITH AFFILIATES
Under the provisions of the Partnership Agreement, Centennial
Corporation, ("CC"), is entitled to receive from the Partnership
mortgage investment servicing fees for loans serviced equal to an
annual rate of 1/4 of 1 percent of the committed amount to be
funded by the Partnership. Mortgage investment servicing fees
for the six and three months ended June 30, 1995 were $18,000 and
$9,000. There were no mortgage investment servicing fees
incurred for the six and three months ended June 30, 1996.
Under the provisions of the Partnership Agreement, the general
partners are to receive compensation for their services in
supervising the affairs of the Partnership. This partnership
management compensation shall be equal to 10 percent of the cash
available for distribution, as defined in the Partnership
Agreement. The general partners will not receive this
compensation until the limited partners have received a 12
percent per annum cumulative return on their adjusted invested
capital, but are entitled to receive a 5 percent interest in cash
available for distribution in any year until this provision has
been met. Adjusted invested capital is defined as the original
capital invested less distributions from mortgage reductions.
Payments to the general partners have been limited to 5 percent
of cash available for distribution as the limited partners have
not received their 12 percent per annum cumulative return. Under
this provision of the Partnership Agreement, no distributions
were paid to the general partners during the six and three months
ended June 30, 1996 or 1995.
The Partnership owns 50 percent of the outstanding capital stock
of two corporations which have not been consolidated in the
accompanying financial statements, LCR Development, Inc., ("LCR")
and BKS Development Inc., ("BKS"). The balance of outstanding
capital stock in these corporations is owned by Centennial
Mortgage Income Fund ("CMIF"), 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
11
this joint venture. Under the equity method of accounting, these
loans are a component of the Partnership's investment in LCR and
BKS, and therefore, the Partnership has recorded losses by LCR
and BKS as a reduction of the carrying value of these loans
receivable.
The Partnership holds a 50 percent participation in an unsecured
note in the amount of $2,115,000 due from LCR. The Partnership's
share of the note at June 30, 1996 is $1,059,000 and the
Partnership had applied $1,022,000 of cumulative losses from
unconsolidated investees against the carrying value of the note
as of that same date. The Partnership has not accrued its share
of interest on this note which was approximately $217,000 as of
June 30, 1996.
Silverwood began constructing a model home complex at the project
in June 1995. Construction commenced in September 1995 on Phase
I at the project. At June 30, 1996, the Partnership holds a 50
percent participation in three notes, due from Silverwood
consisting of a land development loan, a model home loan and a
home construction loan. The Partnership's disbursed balance of
the $3,265,700 development loan at June 30, 1996, is $643,000.
The Partnership's disbursed balance of the $490,000 model loan at
June 30, 1996 is $238,000. At June 30, 1996 the Partnership's
disbursed balance of the $1,034,000 Phase I construction loan is
$367,000.
12
The consolidated balance sheet and income statement of LCR have
not been consolidated in the Partnership's financial statements.
The Partnership accounts for its investment in this corporation
using the equity method. The following represents condensed
financial information for LCR Development, Inc. at June 30, 1996
and for the six months ended June 30, 1996:
LCR Development, Inc.
Consolidated Balance Sheet
<TABLE>
<CAPTION>
<S> <C>
June 30,
Assets 1996
- -----------------------------------------------------------------
Cash $ 2,000
Real estate owned, held for investment 5,902,000
Less allowance for losses on
real estate investments 1,337,000
- -----------------------------------------------------------------
Net real estate owned 4,565,000
Organization costs 2,000
- -----------------------------------------------------------------
$ 4,569,000
=================================================================
Liabilities and Stockholders' Deficit
- -----------------------------------------------------------------
Notes payable to affiliates $ 6,299,000
Payable to affiliates 2,000
Interest and taxes payable on real property 313,000
- -----------------------------------------------------------------
Total liabilities 6,614,000
Stockholders' deficit (2,045,000)
- -----------------------------------------------------------------
$ 4,569,000
=================================================================
</TABLE>
13
LCR Development, Inc.
Consolidated Statement of Operations
<TABLE>
<CAPTION>
<S> <C>
Six months
ended
June 30, 1996
- -----------------------------------------------------------------
Provision for losses on real estate owned $ 550,000
Interest expense 113,000
Selling and marketing expenses 100,000
General and administrative 91,000
- -----------------------------------------------------------------
Net (loss) $ (854,000)
=================================================================
</TABLE>
The Partnership holds a 50 percent participation in a note
secured by a first trust deed in the amount of $3,894,000 due
from BKS. The Partnership's share of the note receivable at June
30, 1996 is $1,951,000 and the Partnership had applied $1,773,000
of cumulative losses from unconsolidated investees against the
carrying value of the note as of that same date. The Partnership
had not accrued its share of interest on this note which was
approximately $562,000 as of June 30, 1996.
14
The balance sheet and statement of operations of BKS have not
been consolidated in the Partnership's financial statements. The
Partnership accounts for its investment in this corporation using
the equity method. The following represents condensed financial
information for BKS at June 30, 1996 and for the six months ended
June 30, 1996:
<TABLE>
BKS Development, Inc.
Balance Sheet
<CAPTION>
<S> <C>
June 30,
Assets 1996
- -----------------------------------------------------------------
Cash $ 1,000
Real property 5,199,000
Less allowance for losses on
real estate investments 2,843,000
- -----------------------------------------------------------------
Net real estate owned 2,356,000
- -----------------------------------------------------------------
$ 2,357,000
=================================================================
Liabilities and Stockholders' Deficit
- -----------------------------------------------------------------
Bonds payable $ 698,000
Note payable to affiliates 3,898,000
Interest and property taxes
payable on real property 1,307,000
- -----------------------------------------------------------------
Total liabilities 5,903,000
Stockholders' deficit (3,546,000)
- -----------------------------------------------------------------
$ 2,357,000
=================================================================
</TABLE>
15
BKS Development, Inc.
Statement of Operations
<TABLE>
<CAPTION>
<S> <C>
Six months
ended
June 30, 1996
- -----------------------------------------------------------------
Interest expense $ 92,000
Provision for losses 150,000
Property taxes 72,000
General and administrative 5,000
- -----------------------------------------------------------------
Net (loss) $ (319,000)
=================================================================
</TABLE>
(5) CONTINGENCIES
There are no material pending legal proceedings other than
ordinary routine litigation incidental to the Partnership's
business.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
GENERAL
References to the "Partnership" in the following discussion
refers to Centennial Mortgage Income Fund II and its wholly-owned
subsidiaries.
The Partnership had net losses and losses per limited partnership
unit of $(817,000) and $(28.04) and $(550,000) and $(18.87),
respectively, for the six and three months ended June 30, 1996
and ($579,000) and $(19.87) and $(364,000) and $(12.49),
respectively, for the six and three months ended June 30, 1995.
The increase in losses from 1995 to 1996 is primarily the result
of an increase in losses in unconsolidated investees and an
increase in expenses associated with non-operating real estate
owned which were partially offset by an increase in net interest
income and a decrease in the provision for possible losses.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Partnership had $513,000 in unrestricted
cash and interest-bearing deposits. The Partnership had no
unfunded loan commitments to nonaffiliates at June 30, 1996.
Sources of funds are expected to be from the sale of real estate
owned. Future operations of real estate owned are not expected
to be a significant source of funds. The Partnership funded
advances on loans to unconsolidated investees totaling $195,000
and received payoffs and paydowns on loans totaling $32,000
during the six months ended June 30, 1996. During the first six
months of 1996, the Partnership disbursed funds for the
improvement of real estate owned totaling $2,000.
The Partnership's notes payable commitments consist of interest
and principal payments due of approximately $58,000 payable
during the next twelve months. In addition to the note payable
commitments, the Partnership's principal capital requirements
include: (i) real property taxes on real estate owned of
approximately $512,000 payable during the next twelve months
(including taxes accrued and delinquent as of June 30, 1996), and
(ii) selling, general and administrative costs. Interest and
property taxes payable on real estate owned as of June 30, 1996
consisted of $240,000 in delinquent real estate taxes on the
proposed marina in Redwood City. The Partnership can apply for a
5 year redemption plan on a portion of the property taxes due in
1996 to ease liquidity constraints, if necessary. These
commitments are expected to be paid from existing cash reserves
and the sale of real estate owned. Several of the Partnership's
real estate assets are listed for sale; however, if liquidity
becomes a major concern in 1996, management may find it necessary
to significantly reduce the asking prices on one or more assets
in order to generate liquidity.
The Partnership is continuously evaluating various alternative
strategies for liquidating its real estate assets under current
market conditions. These alternative strategies include the
potential joint venture and/or build out of certain of the
Partnership's properties in order to increase their marketability
and maximize the return to the limited partners. In the event
the Partnership decides to implement some of these strategies, it
may require the investment of proceeds received from the payoff
of existing loans and the sale of other real estate assets. The
decision to invest additional cash in existing assets will only
be made if, based on management's best judgment at the time,
there is a clear indication that such investment should generate
a significantly greater return to the limited partners than any
other strategies available to the Partnership.
Effective with the third quarter of 1991, the Partnership
suspended cash distributions to partners due to a decline in
liquidity and the uncertainty of the cash requirements for
existing and potential real estate owned. Pursuant to the
Partnership Agreement, 60 months after the closing of the
offering, cash proceeds from mortgage investments are no longer
available for reinvestment by the Partnership. Management
believes that current and projected liquidity is sufficient to
fund operating expenses and to meet the contractual obligations
and cash flow operating requirements of the Partnership.
However, although no new mortgage investments shall be made, the
general partners expect that the cash proceeds from future
mortgage reductions will be retained by the Partnership until
such time as the Partnership has sufficient cash to fulfill the
operating requirements of the real estate owned by the
Partnership.
RESULTS OF OPERATIONS
Due to the downturn in the real estate industry in California,
several of the Partnership's loans have become nonperforming and
subsequently real estate owned. As a result, interest income on
loans to nonaffiliates continues to decline. Interest income on
loans to nonaffiliates, including fees decreased to $8,000 and
$4,000 for the six and three months ended June 30, 1996 from
$23,000 and $12,000 for the six and three months ended June 30,
1995. The decrease in interest income on loans for the six and
three months ended June 30, 1995 to 1996 is primarily due to the
payoff of a large loan receivable in 1995.
Interest income on loans to unconsolidated investees, including
fees totaled $51,000 and $27,000 for the six and three months
ended June 30, 1996. There was no comparable income for the same
periods in 1995. Interest income on loans to unconsolidated
investees represents interest earned on the Silverwood loans.
The outstanding principal balance of loans on nonaccrual at June
30, 1996 totaled $215,000. There were no loans on nonaccrual at
June 30, 1995. Loans on "nonaccrual" refers to loans upon which
the Partnership is no longer accruing interest. Management's
policy is to cease accruing interest on loans when interest
and/or principal repayments become 90 days past due. Had
interest accrued throughout the first six months of 1996 on the
affiliated nonaccrued loans, interest income would have been
approximately $189,000 higher than was actually reported for that
period.
The real estate owned balance at June 30, 1996 and 1995 was
$8,771,000 and $8,736,000, respectively.
The following sections entitled Nonaccrual Loans and Real Estate
Owned provide a detailed analysis of these assets.
NONACCRUAL LOANS
During 1994, the Partnership converted a 50 percent participation
in a note secured by a second trust deed into a 50 percent
participation in a $2,115,000 unsecured note representing a
workout loan due from LCR, an affiliate. This loan and an
additional loan funded by CMIF reflect the majority of the cost
basis of single family lots contributed to Silverwood Homes.
LCR's only source of repayment of this note is proceeds from the
sale of the fully developed lots. Management has estimated the
proceeds for repayment of this note to be less than the original
principal balance of the loan. As a result, the loan has been
placed on nonaccrual. The participating principal balance and
nonaccrued interest balances at June 30, 1996 are $1,059,000 and
$217,000, respectively. As discussed in note 4, the Partnership
has reduced the carrying value of this note by $1,022,000, its
share of losses from this unconsolidated investee.
During 1994, the Partnership acquired a 50 percent participation
in a $3,894,000 note due from BKS. The loan is secured by 283
acres in Bakersfield, CA. The property has declined in value and
is subject to delinquent bonds and taxes. As a result, the
Partnership has placed the loan on nonaccrual. The participating
principal balance and nonaccrued interest balance at June 30,
1996 are $1,951,000 and $562,000, respectively. As discussed in
note 4, the Partnership has reduced the carrying value of this
note by $1,773,000, its share of losses from this unconsolidated
investee.
REAL ESTATE OWNED
A description of the Partnership's principal real estate owned
follows:
Office Building in San Bernardino, California
The Partnership funded a loan during January 1988 with an
original committed amount of $921,000 which was secured by a
second trust deed on an office building comprised of 15,894
square feet of rentable space located in San Bernardino,
California. The loan was provided as gap financing behind a
first deed of trust in the amount of $350,000 to another
financial institution. The borrower was unable to payoff the
loan at maturity and the Partnership foreclosed on April 20,
1993. The Partnership restructured the note secured by the first
trust deed to a more favorable term and rate. The project is 69
percent leased and is beginning to generate positive net
operating income. The property generated net operating income
before debt service of $21,000 during the first six months of
1996. The property is being marketed for sale. The carrying
value at June 30, 1996 was $837,000 less depreciation of $12,000.
The property is encumbered by a fully amortizing note secured by
a first trust deed of $165,000 which will be paid off on December
31, 1999.
45 Acres in Sacramento, California
The Partnership funded a loan in 1987 with a committed amount of
$4,000,000 secured by a first trust deed on 44.52 acres in
Sacramento, California. The loan was provided for the
development of offsite improvements. The maturity date was
February 1, 1991. The borrower was unable to obtain construction
financing and bring interest current. The Partnership accepted a
grant deed on the property on March 10, 1992. The property is
zoned for multi-family and light industrial use. The Partnership
is in the process of rezoning and subdivision of portions of the
property to facilitate one escrow on a portion of the property.
The Partnership is not expecting to realize any material gains or
losses related to this potential sale and there is no assurance
that this escrow will actually close. At June 30, 1996, the
carrying value of this asset was $4,128,000.
Proposed Marina and Condominiums in Redwood City, California
On April 7, 1989, the Partnership foreclosed on a land loan and
now owns the property. The Partnership originally committed
$3,487,000 for a land loan located in Redwood, California. The
purpose of the loan was to acquire the land and provide for the
planning of a 122-slip marina plus an office building and
restaurant. The original maturity date of October 21, 1986 was
extended to March 1, 1987. In March 1987, the borrower filed
bankruptcy. The property is included in real estate owned at its
carrying value of $5,360,000. Management has obtained an
extension on the 404B1 permit for the marina through March 1996
and is currently working on the next extension. The 404B1 permit
enables the owner to build the currently proposed 104-slip boat
marina. The Partnership has completed approximately 70 percent
of the dredging of the marina site. Residential sales in this
entire area have seen a steady decline over the last 2-3 years,
however the area appears to have stabilized. As a result,
management is pursuing both, (i) the sale or joint venture of the
property and (ii) Partnership buildout of the project and sale
thereafter.
10.66 Acres in Roseville, California
The Partnership funded a loan in 1990 with an original committed
amount of $2,779,000 secured by a second deed of trust on 982
acres in Roseville, California. The borrower failed to make the
required yearly principal payment to the first and second trust
deed holders. The first trust deed holder filed a notice of
default for nonpayment. Management negotiated a settlement
agreement to accept a 10.66 acre commercial site as payment in
full for the $2,779,000 note. This property had a carrying value
at June 30, 1996 of $1,003,000 and has no additional debt. This
area has seen an increase in residential development during 1995
which hopefully will increase interest in this property.
Management is marketing the property for sale and is evaluating a
possible rezone.
INTEREST ON INTEREST-BEARING DEPOSITS
Interest on interest-bearing deposits totaled $14,000 and $6,000
for the six and three months ended June 30, 1996 and $27,000 and
$13,000 for the six and three months ended June 30, 1995.
Interest on interest-bearing deposits represents interest earned
on Partnership funds invested, for liquidity, in time certificate
and money market deposits. The decrease in income on interest-
bearing deposits is principally due to decreased cash balances
for the six and three months ended June 30, 1996.
INCOME FROM OPERATIONS OF REAL ESTATE OWNED
Income from operations of real estate owned consists of operating
revenues of $62,000 and $31,000 for the six and three months
ended June 30, 1996 and $68,000 and $35,000 for the six and three
months ended June 30, 1995. The 1996 and 1995 revenues are from
the office building in San Bernardino.
PROVISION FOR POSSIBLE LOSSES
There was no provision for possible losses for the six and three
months ended June 30, 1996. The provision for possible losses
was $100,000 for the six and three months ended June 30, 1995.
The 1995 provision relates to the office building in San
Bernardino. The provision for possible losses results from the
change in the allowance for possible loan losses on and the
allowance for possible losses on real estate owned net of
chargeoffs, if any. Management believes that the allowance for
possible loan losses at June 30, 1996 is adequate to absorb the
known and inherent risk in the Partnership's loan and real estate
owned portfolio.
SHARE OF LOSSES IN UNCONSOLIDATED INVESTEES
The Partnership has invested in corporations in which it has less
than a majority ownership and accounts for these investments
using the equity method. The Partnership's share of losses in
these unconsolidated investees was $587,000 and $442,000 for the
six and three months ended June 30, 1996 and $310,000 and
$157,000 for the six and three months ended June 30, 1995. The
share of losses consists primarily of a provision for losses on
real estate owned, interest expense, selling and marketing
expense, and general and administrative expense related to the
single family development owned by LCR and the 283 acres in
Bakersfield owned by BKS.
OTHER EXPENSES
Operating expenses from operations of real estate owned were
$35,000 and $18,000 for the six and three months ended June 30,
1996 and $37,000 and $21,000 for the six and three months ended
June 30, 1995. These expenses were associated with the office
building in San Bernardino.
Operating expenses from operations of real estate owned paid to
affiliates were $6,000 and $3,000 for the six and three months
ended June 30, 1996 and $6,000 and $3,000 for the six and three
months ended June 30, 1995. The operating expenses consist of
property management fees paid to an affiliate.
Expenses associated with non-operating real estate owned were
$183,000 and $90,000 for the six and three months ended June 30,
1996 and $110,000 and $71,000 for the six and three months ended
June 30, 1995. The expenses relate to the proposed marina and
condominiums in Redwood City, the 45 acres in Sacramento, and the
10.66 acres in Roseville. The increase for the six and three
months ended June 30, 1996 is due to an increase in costs due to
development of the 45 acres in Sacramento and a retroactive
downward adjustment of property taxes related to the proposed
marina and condominiums in Redwood City which was recorded in
1995. There was no corresponding retroactive adjustment in 1996.
Depreciation and amortization expense was $4,000 and $1,000 for
the six and three months ended June 30, 1996 and $4,000 and
$2,000 for the six and three months ended June 30, 1995.
Interest expense was $8,000 and $4,000 for the six and three
months ended June 30, 1996 and $10,000 and $4,000 for the six and
three months ended June 30, 1995. The interest expense relates
to the office building in San Bernardino. The decrease for 1996
is due to the amortization of the note secured by the office
building in San Bernardino.
General and administrative expenses, affiliates was $88,000 and
$46,000 for the six and three months ended June 30, 1996 and
$64,000 and $37,000 for the six and three months ended June 30,
1995. These expenses are primarily salary allocation
reimbursements paid to affiliates. The increase for 1996 is
primarily due to an $18,000 change in billing methodology from
mortgage investment servicing fees to salary allocations.
General and administrative expenses, nonaffiliates totaled
$41,000 and $14,000 for the six and three months ended June 30,
1996 and $38,000 and $20,000 for the six and three months ended
June 30, 1995. These expenses consist of other costs associated
with the administration of the Partnership and real estate owned.
The increase for 1996 is primarily due to moving expenses.
Mortgage investment servicing fees paid to affiliates for the six
and three months ended June 30, 1995 totaled $18,000 and $9,000.
There were no mortgage investment servicing fees paid to
affiliates incurred for the six and three months ended June 30,
1996. This consists of fees paid to Centennial Corporation, for
servicing the Partnership's loan and real estate owned portfolio.
During 1996, the Partnership no longer incurs mortgage investment
servicing fees for servicing the Partnership's real estate owned
portfolio.
PART II
Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) None
(b) None
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A California Limited Partnership
By:/s/John B. Joseph
_________________________________
John B. Joseph
General Partner August 14, 1996
By:/s/Ronald R. White
_________________________________
Ronald R. White
General Partner August 14, 1996
By: CENTENNIAL CORPORATION
General Partner
/s/Joel H. Miner
_________________________________
Joel H. Miner
Chief Financial Officer August 14, 1996
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