-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ED2QlarYxrzPTmxpmwKqaPcdDiZNvjXErOMO/H9DfCtuuU4948OdxfAFw3cht/7m xhYb+C09TETWFUk0k1e7NQ== 0000736980-96-000004.txt : 19961118 0000736980-96-000004.hdr.sgml : 19961118 ACCESSION NUMBER: 0000736980-96-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTENNIAL MORTGAGE INCOME FUND CENTRAL INDEX KEY: 0000736980 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 330053488 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 002-88588 FILM NUMBER: 96664913 BUSINESS ADDRESS: STREET 1: 1540 S LEWIS STREET CITY: ANAHEIM STATE: CA ZIP: 92805 BUSINESS PHONE: 7145028484225 MAIL ADDRESS: STREET 2: 1540 S LEWIS STREET CITY: ANAHEIM STATE: CA ZIP: 92805 10-Q 1 CENTENNIAL MORTGAGE INCOME FUND 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 September 30, 1996 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from N/A to N/A Commission File Number: 0-22520 CENTENNIAL MORTGAGE INCOME FUND (Exact name of registrant as specified in its charter) California 33-0053488 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1540 South Lewis Street, Anaheim, California 92805 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (714)502-8484 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO PART I ITEM 1. FINANCIAL STATEMENTS CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Balance Sheets (Unaudited)
September 30, December 31, Assets 1996 1995 - ----------------------------------------------------------------- Cash and cash equivalents $ 1,959,000 $ 2,947,000 Short-term investments --- 103,000 Real estate loans receivable, earning 705,000 714,000 Real estate loans receivable, nonearning 1,065,000 1,368,000 Real estate loans receivable from unconsolidated investees, earning (note 4) --- 667,000 Real estate loans receivable from unconsolidated investees, nonearning (notes 2 and 4) 2,885,000 2,044,000 - ----------------------------------------------------------------- 4,655,000 4,793,000 Less allowance for possible loan losses 1,157,000 957,000 - ----------------------------------------------------------------- Net real estate loans receivable 3,498,000 3,836,000 Real estate owned, net, held for sale, (note 3) 10,003,000 10,799,000 Real estate owned, insubstance foreclosed (note 3) 1,310,000 1,550,000 - ----------------------------------------------------------------- 11,313,000 12,349,000 See accompanying notes to consolidated financial statements 1 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Balance Sheets (Unaudited) (Continued) September 30, December 31, Assets 1996 1995 - ----------------------------------------------------------------- Less allowance for possible losses on real estate owned 4,086,000 4,523,000 - ----------------------------------------------------------------- Net real estate owned 7,227,000 7,826,000 Accrued interest receivable 4,000 18,000 Other assets 84,000 112,000 - ----------------------------------------------------------------- $ 12,772,000 $ 14,842,000 ================================================================= Liabilities and Partners' Equity - ----------------------------------------------------------------- Notes payable (note 5) 3,355,000 4,010,000 Notes payable to affiliates (note 4) 65,000 90,000 Accounts payable and accrued liabilities 23,000 51,000 Interest and property taxes payable on real estate owned 51,000 11,000 Interest payable to affiliates on notes secured by real estate 207,000 171,000 Payable to affiliates (note 4) 1,000 4,000 Deferred profit on equity participation 289,000 559,000 - ----------------------------------------------------------------- Total liabilities 3,991,000 4,896,000 See accompanying notes to consolidated financial statements 2 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Balance Sheets (Unaudited) (Continued) September 30, December 31, 1996 1995 - ----------------------------------------------------------------- Partners' equity (deficit) -- 38,729 limited partnership units outstanding as of September 30, 1996 and December 31, 1995 General partners (525,000) (525,000) Limited partners 9,306,000 10,471,000 - ----------------------------------------------------------------- Total partners' equity 8,781,000 9,946,000 Contingencies (note 6) - ----------------------------------------------------------------- $ 12,772,000 $ 14,842,000 =================================================================
See accompanying notes to consolidated financial statements 3 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Operations (Unaudited)
Nine Months Three Months Ended September 30, Ended September 30, 1996 1995 1996 1995 - -------------------------------------------------------------------------------- - ---------- Revenue: Interest income on loans to nonaffiliates, including fees $ 76,000 $ 64,000 $ 29,000 $ 19,000 Interest income on loans to unconsolidated investees, including fees 100,000 26,000 39,000 26,000 Interest-bearing deposits 71,000 76,000 23,000 28,000 Income from operations of real estate owned 584,000 625,000 190,000 187,000 Gain on sale of property 40,000 113,000 --- 1,000 - -------------------------------------------------------------------------------- - ---------- Total revenue 871,000 904,000 281,000 261,000 See accompanying notes to consolidated financial statements 4 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Operations (Unaudited) (Continued) Nine Months Three Months Ended September 30, Ended September 30, 1996 1995 1996 1995 - -------------------------------------------------------------------------------- - ---------- Expenses: Provision for possible losses 200,000 716,000 200,000 - ---Share of provision for losses recorded by unconsolidated investees 515,000 399,000 165,000 252,000 Share of other losses recorded by unconsolidated investees 341,000 73,000 104,000 (90,000) Operating expenses from operations of real estate owned 201,000 196,000 59,000 70,000 Operating expenses from operations of real estate owned paid to affiliates 43,000 41,000 14,000 13,000 See accompanying notes to consolidated financial statements 5 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Operations (Unaudited) (Continued) Nine Months Three Months Ended September 30, Ended September 30, 1996 1995 1996 1995 - -------------------------------------------------------------------------------- - ---------- Expenses associated with non-operating real estate owned 182,000 176,000 49,000 53,000 Depreciation and amortization expense 14,000 87,000 7,000 29,000 Interest expense 357,000 360,000 122,000 89,000 General and administrative, affiliates 170,000 126,000 50,000 45,000 General and administrative, nonaffiliates 76,000 64,000 21,000 19,000 Mortgage investment servicing fees paid to affiliates 3,000 37,000 1,000 12,000 - -------------------------------------------------------------------------------- - ---------- See accompanying notes to consolidated financial statements 6 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Operations (Unaudited) (Continued) Nine Months Three Months Ended September 30, Ended September 30, 1996 1995 1996 1995 - -------------------------------------------------------------------------------- - ---------- Total expenses 2,102,000 2,275,000 792,000 492,000 - -------------------------------------------------------------------------------- - ---------- Net loss before minority interest (1,231,000) (1,371,000) (511,000) (231,000) - -------------------------------------------------------------------------------- - ---------- Minority interest share of losses 66,000 146,000 22,000 20,000 - -------------------------------------------------------------------------------- - ---------- Net loss $ (1,165,000) $ (1,225,000) $ (489,000) $ (211,000) ================================================================================ ========== Net loss per limited partnership unit $ (30.08) $ (31.63) $ (12.63) $ (5.45) ================================================================================ ==========
See accompanying notes to consolidated financial statements 7 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statement of Partners' Equity (Unaudited)
For the nine months ended September 30, 1996 Total General Limited Partners' Partners Partners Equity - ----------------------------------------------------------------- Balance at December 31, 1995 $ (525,000) $ 10,471,000 $ 9,946,000 Net loss --- (1,165,000) (1,165,000) - ----------------------------------------------------------------- Balance at September 30, 1996 $ (525,000) $ 9,306,000 $ 8,781,000 =================================================================
See accompanying notes to consolidated financial statements 8 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows (Unaudited)
For the nine months ended September 30, 1996 and 1995 1996 1995 - ----------------------------------------------------------------- Cash flows from operating activities: Net loss $(1,165,000) $(1,225,000) Adjustments to reconcile net loss to cash used in operating activities: Provision for possible losses 200,000 716,000 Interest accrued to principal on loans receivable (100,000) (6,000) Depreciation and amortization expense 14,000 87,000 Minority interest share of losses (66,000) (96,000) Gain on sale of real estate owned (40,000) (113,000) Equity in losses of unconsolidated investees 856,000 472,000 Changes in assets and liabilities: Decrease in accrued interest receivable 14,000 19,000 (Increase) decrease in other assets 19,000 (25,000) Decrease in accounts payable and accrued liabilities (28,000) --- Increase in interest and property taxes payable on real estate owned 55,000 53,000 See accompanying notes to consolidated financial statements 9 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows (Unaudited) (Continued) For the nine months ended September 30, 1996 and 1995 1996 1995 - ----------------------------------------------------------------- Increase (decrease) in interest payable to affiliates on notes secured by real estate $ 36,000 $ (23,000) Decrease in payable to affiliates (3,000) (6,000) - ----------------------------------------------------------------- Net cash used in operating activities (208,000) (147,000) - ----------------------------------------------------------------- Cash flows from investing activities: Principal collected on loans 157,000 22,000 Advances on loans made to customers --- (3,000) Advances on loans made to unconsolidated investees (note 4) (1,045,000) (335,000) Proceeds from sale of real estate owned 190,000 1,015,000 Disbursements on real estate owned (221,000) (16,000) Decrease in short-term investments 103,000 --- - ----------------------------------------------------------------- Net cash provided by (used in) investing activities (816,000) 683,000 - ----------------------------------------------------------------- See accompanying notes to consolidated financial statements 10 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows (Unaudited) (Continued) For the nine months ended September 30, 1996 and 1995 1996 1995 - ----------------------------------------------------------------- Cash flows from financing activities: Principal payments on notes payable $ (5,000) $ (9,000) Advances on notes payable to affiliates 41,000 46,000 - ----------------------------------------------------------------- Net cash provided by financing activities 36,000 37,000 - ----------------------------------------------------------------- Net increase (decrease) in cash (988,000) 573,000 Beginning cash and cash equivalents 2,947,000 2,267,000 - ----------------------------------------------------------------- Ending cash and cash equivalents $ 1,959,000 $ 2,840,000 ================================================================= Supplemental schedule of cash flow information: Cash paid during the nine months for: Interest $ 230,000 $ 292,000 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 11 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows (Unaudited) (Continued) For the nine months ended September 30, 1996 and 1995 1996 1995 - ----------------------------------------------------------------- Decrease in deferred profit on equity participation through foreclosure 270,000 --- Decrease in allowance for losses resulting from foreclosure 364,000 --- Decrease in notes payable through foreclosure 650,000 --- Decrease in interest and taxes payable on real estate owned through foreclosure 15,000 --- Decrease in real estate loans through chargeoff of deferred profit 270,000 --- Decrease in loans receivable and related allowance for losses resulting from chargeoff of loan receivable --- 233,000
See accompanying notes to consolidated financial statements 12 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Notes to Consolidated Financial Statements (Unaudited) September 30, 1996 and 1995 (1) BUSINESS Centennial Mortgage Income Fund (the "Partnership") has historically invested in commercial, industrial and residential income-producing real property through mortgage investments consisting of participating first mortgage loans, other equity participation loans, construction loans, and wrap-around and other junior loans. The Partnership's underwriting policy for granting credit was to fund loans secured by first and second deeds of trust on real property. The Partnership's area of concentration is in California. As of September 30, 1996, a majority of the loans secured by operating properties have been repaid to the Partnership. However, during recent years, real estate market values for undeveloped land in California have declined severely. As the loans secured by undeveloped land and certain operating properties became delinquent, management of the Partnership elected to foreclose on certain of these loans, thereby increasing real estate owned balances. As a result, the Partnership has become a direct investor in this real estate and intends to manage operating properties and develop raw land until such time as the Partnership is able to sell this real estate owned. As required by the Partnership Agreement, the Partnership is currently in the repayment stage, and as a result, cash proceeds from mortgage investments are no longer available for reinvestment. (2) BASIS OF PRESENTATION The consolidated financial statements are unaudited and reflect all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair statement of the results of operations for the interim periods. 13 Results for the nine months ended September 30, 1996 and 1995 are not necessarily indicative of results which may be expected for any other interim period, or for the year as a whole. Information pertaining to the nine months ended September 30, 1996 and 1995 is unaudited and condensed inasmuch as it does not include all related footnote disclosures. The condensed consolidated financial statements do not include all information and footnotes necessary for fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. Notes to consolidated financial statements included in Form 10-K for the year ended December 31, 1995 on file with the Securities and Exchange Commission, provide additional disclosures and a further description of accounting policies. Net Loss per Limited Partnership Unit Net loss per limited partnership unit for financial statement purposes was based on the weighted average number of limited partnership units outstanding of 38,729 for all periods presented. Impaired Loans The Partnership considers a loan to be impaired when based upon current information and events, it believes it is probable that the Partnership will be unable to collect all amounts due according to the contractual terms of the loan agreement. In determining impairment, the Partnership considers large non- homogeneous loans including nonaccrual loans, troubled debt restructuring and performing loans which exhibit, among other characteristics, high loan-to-value ratios, low debt-coverage ratios, or other indications that the borrowers are experiencing increased levels of financial difficulty. The Partnership bases the measurement of collateral-dependent impaired loans on the fair value of the loan's collateral. The amount by which the recorded investment of the loan exceeds the measure of the impaired loan's value is recognized by recording a valuation allowance. At September 30, 1996, the carrying value of loans that are considered to be impaired under SFAS 114 totaled $4,655,000 (of which $3,950,000 were on nonaccrual status). At September 30, 1996, the allowance for possible loan losses determined in accordance with the provisions of SFAS 114, related to loans considered impaired under SFAS 114 totaled $1,157,000. There 14 were six loans to unconsolidated investees considered impaired under SFAS 114 for which there is a $200,000 allowance for possible loan losses at September 30, 1996. The unconsolidated investees have recorded an additional allowance for losses of $4,502,000 and the Partnership's proportionate share of losses in unconsolidated investees reflects this allowance. Three of the loans to unconsolidated investees related to the Silverwood Homes project were placed on nonaccrual at September 30, 1996 due to slow sales rates (see note 4). One of the other loans receivable is recorded with a corresponding deferred profit liability of $289,000. There was a $1,045,000 investment in impaired loans during the nine months ended September 30, 1996. For the nine months ended September 30, 1996, the Partnership recognized interest income on impaired loans of $152,000 and cash basis interest income of $3,000. Carrying Value of Real Estate Owned, Held for Sale Effective January 1, 1996, the Partnership adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 requires that long-lived assets to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. An impairment loss shall be measured as the amount by which the carrying amount of the asset exceeds the fair value of the assets. SFAS 121 requires that assets to be disposed of not be depreciated while they are held for disposal. 15 (3) REAL ESTATE OWNED
Real estate owned consists of the following: (dollars in thousands) September 30, December 31, 1996 1995 - ----------------------------------------------------------------- 1. Shopping Center in Upland, CA $ 5,153 $ 5,106 2. 19 acres in Sacramento, CA 2,773 2,618 3. Auto retail center in Corona, CA 2,599 2,580 4. 23 acres in Riverside, CA --- 1,012 5. 5 condominiums in Oxnard, CA 1,310 1,550 - ----------------------------------------------------------------- Subtotal 11,835 12,866 Less accumulated depreciation and amortization 522 517 - ----------------------------------------------------------------- Total real estate owned $ 11,313 $ 12,349 =================================================================
The Partnership acquired property No. 4 by deed in lieu of foreclosure, subject to the note payable discussed in note 5. In the second quarter of 1996, the lender foreclosed on the property. Property No. 5 has been accounted for as insubstance foreclosure under SFAS 118 as the Partnership does not currently hold legal title to this property, but the borrower has surrendered the collateral to the control of the Partnership. In accordance with SFAS 121, the Partnership carries real estate owned, held for sale, at the lower of carrying amount or fair value less costs to sell. The estimated fair values were determined by using appraisals, discounted cash flows and/or other valuation techniques. The actual market price of real estate can only be determined by negotiation between independent third parties in a sales transaction. The Partnership had been depreciating the auto retail center in Corona through December 31, 1995. The depreciation of this property was ceased in conjunction with the Partnership's adoption of SFAS 121. 16 (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 $3,000 and $1,000 of mortgage investment servicing fees for the nine and three months ended September 30, 1996 and $37,000 and $12,000 for the nine and three months ended September 30, 1995. Under the provisions of the Partnership Agreement, the general partners are to receive compensation for their services in supervising the affairs of the Partnership. This partnership management compensation shall be equal to 10 percent of the cash available for distribution, as defined in the Partnership Agreement. The general partners will not receive this compensation until the limited partners have received a 12 percent per annum cumulative return on their adjusted invested capital but are entitled to receive a 5 percent interest in cash available for distribution in any year until this provision has been met. Adjusted invested capital is defined as the original capital invested less distributions from mortgage reductions. Payments to the general partners have been limited to 5 percent of cash available for distribution as the limited partners have not yet received their 12 percent per annum cumulative return. Under this provision of the Partnership Agreement, no distributions were paid to the general partners during the nine and three months ended September 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"). These two corporations were formed in order to complete foreclosures on two properties which were collateral for loans previously made by the Partnership and Centennial Mortgage Income Fund II, ("CMIF II"), an affiliate. The balance of outstanding capital stock in these corporations is owned by CMIF II. 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. 17 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 September 30, 1996 is $1,055,000 and the Partnership had applied $1,204,000 of cumulative losses from unconsolidated investees against the carrying value of these notes as of that same date. The Partnership has not accrued its share of interest on these notes which was approximately $537,000 as of September 30, 1996. Silverwood began constructing a model home complex in June 1995. Construction commenced in September 1995 on Phase I at the project, which included nine homes. Silverwood began marketing the project in the first quarter of 1996 and completed construction of the homes in Phase I in the second quarter of 1996. Silverwood began deliveries of these homes to buyers in the third quarter of 1996. Management had hoped to close escrow on all of the homes in Phase I during the third quarter. Unfortunately, market conditions in the Lancaster housing market deteriorated during the summer months and only two homes have closed escrow as of the date of this report. Management is revamping its marketing program for this project in an effort to improve sales rates. At September 30, 1996, the Partnership holds a 50 percent participation in three notes, due from Silverwood including a land development loan, a model home loan and a home construction loan. The Partnership's disbursed balance of the $3,265,700 development loan at September 30, 1996, is $886,000. The Partnership's disbursed balance of the $490,000 model loan at September 30, 1996 is $239,000. At September 30, 1996 the Partnership's disbursed balance of the $1,034,000 Phase I construction loan is $567,000. 18 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 September 30, 1996 and for the nine months ended September 30, 1996: LCR Development, Inc. Consolidated Balance Sheet (Unaudited)
September 30, Assets 1996 - ----------------------------------------------------------------- Cash $ 12,000 Real estate owned, held for investment Land 4,446,000 Model complex 467,000 Homes under construction 834,000 Less allowance for losses on real estate investments 1,529,000 - ----------------------------------------------------------------- Net real estate owned 4,218,000 Organization costs 1,000 - ----------------------------------------------------------------- $ 4,231,000 ================================================================= Liabilities and Stockholders' Deficit - ----------------------------------------------------------------- Notes payable to affiliates $ 6,300,000 Payable to affiliates 13,000 Interest and taxes payable on real property 326,000 - ----------------------------------------------------------------- Total liabilities 6,639,000 Stockholders' deficit (2,408,000) - ----------------------------------------------------------------- $ 4,231,000 =================================================================
19 LCR Development, Inc. Consolidated Statement of Operations (Unaudited)
Nine months ended September 30, 1996 - ----------------------------------------------------------------- Housing sales $ 233,000 Cost of housing sales 238,000 Provision for losses on real estate owned 750,000 Selling and marketing expenses 144,000 General and administrative 137,000 - ----------------------------------------------------------------- Operating income (loss) (1,036,000) Interest expense 181,000 - ----------------------------------------------------------------- Net (loss) $ (1,217,000) =================================================================
The Partnership holds a 50 percent participation in a $3,894,000 note due from BKS. The Partnership's share of the note receivable at September 30, 1996 is $1,952,000 and the Partnership had applied $1,860,000 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 $637,000 as of September 30, 1996. 20 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 September 30, 1996 and for the nine months ended September 30, 1996: BKS Development, Inc. Balance Sheet (Unaudited)
September 30, Assets 1996 - ----------------------------------------------------------------- Cash $ 1,000 Real property 5,199,000 Less allowance for losses on real estate investments 2,973,000 - ----------------------------------------------------------------- Net real estate owned 2,226,000 - ----------------------------------------------------------------- $ 2,227,000 ================================================================= Liabilities and Stockholders' Deficit - ----------------------------------------------------------------- Bonds payable $ 698,000 Notes payable to affiliates 3,903,000 Interest and property taxes payable on real property 1,347,000 - ----------------------------------------------------------------- Total liabilities 5,948,000 Stockholders' deficit (3,721,000) - ----------------------------------------------------------------- $ 2,227,000 =================================================================
21 BKS Development, Inc. Statement of Operations (Unaudited)
Nine months ended September 30, 1996 - ----------------------------------------------------------------- Interest expense $ 116,000 Provision for losses 280,000 Property taxes 88,000 General and administrative 10,000 - ----------------------------------------------------------------- Net (loss) $ (494,000) =================================================================
The Partnership owns an interest in Grand Plaza Auto Retail, Inc., ("Grand Plaza"), the corporation which owns the auto retail center in Corona, California jointly with an affiliated entity, Centennial Mortgage Income Fund III, ("CMIF III"). At September 30, 1996, the ownership percentages are 86.67 for the Partnership and 13.33 for CMIF III. The assets and liabilities of this corporation have been consolidated in the accompanying consolidated financial statements. The liabilities of Grand Plaza include a note and interest payable to CMIF III and the Partnership. CMIF III's share of this note and interest totaled $544,000 and $508,000 at September 30, 1996 and December 31, 1995, respectively. The Partnership had cumulatively applied $408,000 and $370,000 of minority interest share of losses from this corporate joint venture against the note payable to affiliates balance as of the same dates. The note bears interest at 14 percent fixed and matures October 1, 1996. The Partnership owns an interest in BNN Development, Inc., ("BNN"), the corporation which owns the 19 acres in Sacramento, California jointly with an affiliated entity, CMIF III. At September 30, 1996, the ownership percentages are 86.25 for the Partnership and 13.75 for CMIF III. The assets and liabilities of this corporation have been consolidated in the accompanying consolidated financial statements. The liabilities of BNN include a note and interest payable to CMIF III and the Partnership. CMIF III's share of this note and interest totaled 22 $423,000 and $383,000 at September 30, 1996 and December 31, 1995, respectively. The Partnership had cumulatively applied $287,000 and $260,000, of minority interest share of losses from this corporate joint venture against the note payable to affiliates balance as of the same dates. The note bears interest at 15 percent fixed and matures November 1, 1997. (5) NOTES PAYABLE
Notes payable consist of the following: (dollars in thousands) September 30, December 31, 1996 1995 - ----------------------------------------------------------------- Note payable secured by 19 acres in Sacramento, CA with interest only payments due monthly; interest rate of 12 percent fixed, maturing April 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 11.25 percent fixed, maturing November 1, 1996 2,455 2,460 Note payable secured by 23 acres in Riverside, CA; interest rate of 13.75 percent fixed, matured August 1, 1992 --- 650 - ----------------------------------------------------------------- Total notes payable $ 3,355 $ 4,010 =================================================================
23 The Partnership acquired the 23 acres in Riverside by deed in lieu of foreclosure, subject to the note payable discussed above. In the second quarter of 1996, the lender foreclosed on the property. (6) CONTINGENCIES There are no material pending legal proceedings other than ordinary routine litigation incidental to the Partnership's business. 24 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 $(1,165,000) and $(30.08) and $(489,000) and $(12.63) for the nine and three months ended September 30, 1996 and ($1,225,000) and $(31.63) and $(211,000) and $(5.45) for the nine and three months ended September 30, 1995. The decrease in losses from 1995 to 1996 is primarily due to a decrease in the provision for possible losses offset by an increase in the share of losses in unconsolidated investees. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1996, the Partnership had $1,959,000 in cash and interest-bearing deposits. The Partnership had no unfunded loan commitments to nonaffiliates at September 30, 1996. Sources of funds are expected to be from the sale of real estate owned, future operations of real estate owned and payoffs of existing loans. The Partnership funded disbursements on loans to unconsolidated investees during the first nine months of 1996 totaling $1,045,000 and received payoffs and paydowns on loans totaling $157,000. During the first nine months of 1996, the Partnership incurred costs for the improvement of real estate owned totaling $221,000 and received payoffs and paydowns on real estate owned of $190,000. The Partnership's notes payable commitments consist of interest and all principal payments due of approximately $2,563,000. The note payable secured by the Upland Shopping Center totaling $2,455,000 matures November 1, 1996. The Partnership does not presently have sufficient capital reserves to make this balloon payment and meet operating commitments. Management is negotiating an extension on the $2,455,000 note. In addition to the note payable commitments, the Partnership's principal capital requirements include: i) real property taxes and bonds on real estate owned of approximately $203,000 payable during the next twelve months, and ii) selling, general and administrative costs. These commitments are expected to be paid from existing cash balances, future loan payoffs, and the sale of real estate owned. The Partnership is continuously evaluating various alternative strategies for liquidating its real estate assets under current market conditions. These alternative strategies include the potential joint venture and/or build out of certain of the Partnership's properties in order to increase their marketability and maximize the return to the limited partners. In the event the Partnership decides to implement some of these strategies, it may require the investment of proceeds received from the payoff of existing loans and the sale of other real estate assets. The decision to invest additional cash in existing assets will only be made if, based on management's best judgment at the time, there is a clear indication that such investment should generate a significantly greater return to the limited partners than any other strategies available to the Partnership. Effective with the third quarter of 1991, the Partnership suspended cash distributions to partners due to a decline in liquidity and the uncertainty of the cash requirements for existing and potential real estate owned. Pursuant to the Partnership Agreement, 60 months after the closing of the offering, cash proceeds from mortgage investments are no longer available for reinvestment by the Partnership. Management believes that current and projected liquidity is sufficient to fund operating expenses and to meet the contractual obligations and cash flow operating requirements of the Partnership. However, although no new mortgage investments shall be made, the general partners expect that the cash proceeds from future mortgage reductions will be retained by the Partnership until such time as the Partnership has sufficient cash to fulfill the operating requirements of the real estate owned by the Partnership. RESULTS OF OPERATIONS Due to the downturn in the real estate industry in California and its impact on the Partnership's borrowers, most of the Partnership's loans to nonaffiliates have been converted to nonperforming loans and/or real estate owned through foreclosures. Interest income on loans to nonaffiliates, including fees was $76,000 and $29,000 for the nine and three months ended September 30, 1996 and $64,000 and $19,000 for the nine and three months ended September 30, 1995. The increase for 1996 is due to the restructure of one loan to two loans and an increase in transfer fees during the third quarter of 1996. Interest income on loans to unconsolidated investees, including fees totaled $100,000 and $39,000 for the nine and three months ended September 30, 1996 and $26,000 for the nine and three months ended September 30, 1995. Interest income on loans to unconsolidated investees represents interest earned on the Silverwood loans. The increase in 1996 is the result of higher average loan balances. These loans were placed on nonaccrual status effective September 30, 1996. The outstanding principal balance of loans on nonaccrual at September 30, 1996 totaled $3,950,000 as compared with $5,347,000 at September 30, 1995. Loans on "nonaccrual" refers to loans upon which the Partnership is no longer accruing interest. Management's policy is to cease accruing interest on loans when interest and/or principal repayments become 90 days past due. Had interest accrued through the first nine months of 1996 and 1995 on the affiliated and nonaffiliated nonaccrual loans, interest income would have been approximately $454,000 and $197,000 higher than was actually reported for those periods. The real estate owned balance at September 30, 1996 and 1995 was $11,313,000 and $12,653,000, 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 September 30, 1996 are summarized below: During 1994, the Partnership renegotiated an equity participation note with an original committed amount of $374,000 secured by a second deed of trust on a 94,336 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 September 30, 1996 are $312,000 and $97,000 respectively. The $289,000 deferred profit on equity participation included in the liabilities on the Partnership's September 30, 1996 balance sheet was recorded in connection with this loan. During 1991, the Partnership sold a pad on an existing piece of real estate owned in Corona, California and carried back financing in the amount of $600,000. The Partnership's share of the loan is 77 percent. Due to the loss of the major tenant, the borrower has been unable to make monthly interest payments. Management has worked out a forbearance agreement with the borrower for net cash flow monthly payments. The remaining interest due has been placed on nonaccrual. The principal balance and nonaccrued interest at September 30, 1996 are $460,000 and $100,000, respectively. During 1989, the Partnership funded a loan with an original committed amount of $343,000 to provide land development financing in Perris, California. The loan matured June 1, 1993 and the borrower was unable to make interest payments or pay off the loan. The Partnership classified the loan as an insubstance foreclosure at December 31, 1993. Given the depressed value of the property and the amount of the delinquent bonds and taxes, the Partnership has been negotiating with the borrower in an attempt to discount the note to facilitate a sale or have the borrower deed the property to the Partnership. Should the negotiations not be completed and the property be lost to a tax sale, management has established an allowance for losses sufficient to cover the Partnership's equity in the property. The principal balance and nonaccrued interest at September 30, 1996 are $292,000 and $152,000, respectively. During 1994, the Partnership funded a $1,250,000 unsecured note and a 50 percent participation in a $2,115,000 unsecured note, both representing workout loans and due from LCR, an affiliate. These two loans reflect the majority of the cost basis of single family lots contributed to Silverwood. LCR's only source of repayment of these notes are proceeds from the sale of the fully developed lots. Management has estimated the proceeds for repayment of these two notes to be less than the original principal balance of the loans. As a result, the loans have been placed on nonaccrual. The principal balance, participating principal balance and nonaccrued interest balances at September 30, 1996 are $1,250,000 and $299,000 and $1,055,000 and $238,000, respectively. As discussed in note 4, the Partnership has reduced the carrying value of these notes by $1,204,000, a portion of its share of losses from this unconsolidated investee. During 1995, the Partnership funded a 50 percent participation in three loans due from Silverwood Homes. The first is a land development loan with a committed amount of $3,265,700 with a disbursed balance of $886,000 at September 30, 1996. The second loan is a model loan with a committed amount of $490,000 and a disbursed balance $239,000 at September 30, 1996. The third loan is a home construction loan for nine homes with a committed amount of $1,034,000 and a disbursed balance of $567,000 at September 30, 1996. Due to the deterioration of the housing market and poor sales record to date, management has placed the loans on nonaccrual. During 1994, the Partnership funded a 50 percent participation in a $3,894,000 note due from BKS. The loan is secured by 283 acres in Bakersfield, California. The property has declined in value and is subject to delinquent bonds and taxes. As a result, the Partnership has placed the loan on nonaccrual. The participating principal balance and nonaccrued interest balances at September 30, 1996 are $1,952,000 and $637,000, respectively. As discussed in note 4, the Partnership has reduced its carrying value of this note by $1,860,000, its share of losses from this unconsolidated investee. Real Estate Owned A description of the Partnership's principal real estate owned and loan classified as insubstance foreclosure follows: Shopping Center in Upland, California During the third quarter of 1988, the Partnership foreclosed on a loan secured by this project. The Partnership originally committed $5,600,000 for the rehabilitation of a 33,327 square foot retail center and construction of an automotive service facility in Upland, California. Cost overruns and construction delays prevented the borrower from selling the project and thereby performing on the loan. The property generated net operating income before debt service of $320,000 during the first nine months of 1996 and its net carrying value was $4,632,000 at September 30, 1996. The property is currently 98 percent leased. The property is encumbered by a note of $2,455,000, secured by a first trust deed on the property. The Partnership is marketing this property for sale. 19 Acres in Sacramento, California During the third quarter of 1991, the Partnership took a deed in lieu of foreclosure on a second trust deed secured by 19 acres of undeveloped land in Sacramento, California. The property is encumbered by a $900,000, 12 percent fixed interest rate note payable secured by a first trust deed on the property. The note requires monthly interest-only payments, and the balance is due April 1, 1998. The Partnership continues to finalize the entitlement processing, flood issues and provide for utility services for the property. As economic conditions rebound in California, and the demand for development land in the area returns, the Partnership intends to list the property for sale. At September 30, 1996, the carrying value of this asset was $2,773,000. Auto Retail Center in Corona, California During 1988, the Partnership funded a loan with an original committed amount of $3,313,000 for the purpose of constructing a 31,437 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 $20,000 during the first nine months of 1996. The center is being marketed for sale. The carrying value at September 30, 1996 is $2,598,000. 5 Condominiums in Oxnard, California During 1990, the Partnership funded a loan secured by a first trust deed with an original committed amount of $3,000,000 for the construction of 12 condominiums in Oxnard, California. The Partnership has recorded an insubstance foreclosure on these 12 condominiums. The borrower signed over control to the second trust deed holder in December 1992, the second trust deed holder, an affiliate, abandoned the property and the Partnership now controls the property. The Partnership receives 100 percent of all sales proceeds net of selling costs. The condominiums are located adjacent to the beach. The values of beach front property have been hard hit in the local market due to the excess supply of this type of property. As of September 30, 1996, the Partnership had sold seven condominiums and is attempting to sell the remaining units. The carrying value of the remaining five condominiums at September 30, 1996 is $1,310,000. INTEREST ON INTEREST-BEARING DEPOSITS Interest earned on interest-bearing deposits totaled $71,000 and $23,000 for the nine and three months ended September 30, 1996 and $76,000 and $28,000 for the nine and three months ended September 30, 1995. Interest on interest-bearing deposits represents interest earned on Partnership funds invested, for liquidity, in time certificate and money market deposits. INCOME FROM OPERATIONS OF REAL ESTATE OWNED Income from operations of real estate owned consists of operating revenues of $584,000 and $190,000 for the nine and three months ended September 30, 1996 and $625,000 and $187,000 for the nine and three months ended September 30, 1995. These revenues are from the Upland shopping center and the auto retail center in Corona. The decrease for 1996 is partially due to a chargeoff for uncollectible rents and a decrease in tenant occupancy at the auto retail center in Corona. GAIN ON SALE Gain on sale of real estate owned for the nine months ended September 30, 1996 represents $23,000 of income earned on the sale of one condominium in Oxnard and a $17,000 gain recorded on foreclosure of the 23 acres in Riverside, California. There was no gain recorded for the three months ended September 30, 1996. Gain on sale of real estate owned represents income earned on the sale of condominiums in Oxnard and the sale of the office building in Sacramento for the nine and three months ended September 30, 1995 totaling $113,000 and $1,000, respectively. PROVISION FOR POSSIBLE LOSSES The provision for possible losses was $200,000 for the nine and three months ended September 30, 1996. The 1996 provision relates to the single family development project owned by LCR. The provision for possible losses was $716,000 for the nine months ended September 30, 1995. There was no provision for possible losses for the three months ended September 30, 1995. The 1995 provision relates primarily to the shopping center in Upland and the auto retail center in Corona. The provision for possible losses results from the change in the allowance for possible losses and the allowance for possible losses on real estate owned net of chargeoffs, if any. Management believes that the allowance for possible losses at September 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 provision for losses recorded by unconsolidated investees was $515,000 and $165,000 for the nine and three months ended September 30, 1996 and $399,000 and $252,000 for the nine and three months ended September 30, 1995. The Partnership's share of other losses recorded by unconsolidated investees was $341,000 and $104,000 for the nine and three months ended September 30, 1996 and $73,000 and ($90,000) for the nine and three months ended September 30, 1995. The share of other losses consists primarily of interest expense, selling and marketing expense and general and administrative expense related to the single family development project owned by LCR and the 283 acres in Bakersfield owned by BKS. The decrease in other losses for 1995 is due to the reversal of interest expense in the third quarter of 1995. OTHER EXPENSES Operating expenses from operations of real estate owned were $201,000 and $59,000 for the nine and three months ended September 30, 1996 and $196,000 and $70,000 for the nine and three months ended September 30, 1995. The expenses were associated with the Upland shopping center and the auto retail center in Corona. The increase for 1996 is due primarily to additional asphalt and roofing expenses for 1996. Operating expenses from operations of real estate owned paid to affiliates were $43,000 and $14,000 for the nine and three months ended September 30, 1996 and $41,000 and $13,000 for the nine and three months ended September 30, 1995. The operating expenses consist of property management fees paid to affiliates of the general partners. Expenses associated with non-operating real estate owned were $182,000 and $49,000 for the nine and three months ended September 30, 1996 and $176,000 and $53,000 for the nine and months ended September 30, 1995. The expenses, which include real estate taxes, relate to the 19 acres in Sacramento, the condominiums in Oxnard and the 23 acres in Riverside. The increase for the nine months ended September 30, 1996 is primarily due to an increase in costs due to development of the 19 acres in Sacramento. Depreciation and amortization expense was $14,000 and $7,000 for the nine and three months ended September 30, 1996 and $87,000 and $29,000 for the nine and three months ended September 30, 1995. The 1995 depreciation relates primarily to the Upland shopping center and tenant improvements for the auto retail center in Corona. The decrease for 1996 is due to the implementation of SFAS 121 which does note require depreciation on real estate owned, held for sale. Interest expense was $357,000 and $122,000 for the nine and three months ended September 30, 1996 and $360,000 and $89,000 for the nine and three months ended September 30, 1995. The interest expense during 1996 relates to the Upland Shopping Center, the 19 acres in Sacramento, California and the Partnership's share of interest payable to affiliates on the auto retail center in Corona. The increase in interest expense for the three months ended September 30, 1996 is due to a reversal of interest expense for the Partnership's share of interest payable to affiliates on the 19 acres in Sacramento during 1995. This loan was placed on nonaccrual in late 1995. General and administrative expenses, affiliates totaled $170,000 and $50,000 for the nine and three months ended September 30, 1996 and $126,000 and $45,000 for the nine and three months ended September 30, 1995. These expenses are primarily salary allocation reimbursements paid to affiliates. The increase for 1996 is partially due to a $34,000 change in billing methodology from mortgage investment servicing fees to salary allocations and a $16,000 payment for a prior period which had not been accrued. General and administrative expenses, nonaffiliates totaled $76,000 and $21,000 for the nine and three months ended September 30, 1996 and $64,000 and $19,000 for the nine and three months ended September 30, 1995. These expenses consist of other costs associated with the administration of the Partnership. The increase for 1996 is primarily due to moving expenses, office expenses and outside services. Mortgage investment servicing fees totaled $3,000 and $1,000 for the nine and three months ended September 30, 1996 and $37,000 and $12,000 for the nine and three months ended September 30, 1995. This consists of fees paid to Centennial Corporation for servicing the Partnership's loan and real estate owned portfolio. During 1996, the Partnership no longer incurs mortgage investment servicing fees for servicing the Partnership's real estate owned portfolio. PART II OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) None (b) None Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A California Limited Partnership By:/s/John B. Joseph _________________________________ John B. Joseph General Partner November 14, 1996 By:/s/Ronald R. White _________________________________ Ronald R. White General Partner November 14, 1996 By: CENTENNIAL CORPORATION General Partner /s/Joel H. Miner _________________________________ Joel H. Miner Chief Financial Officer November 14, 1996 EX-27 2 ART. 5 FDS FOR 3RD QUARTER 10-Q
5 1,000 3-MOS DEC-31-1995 SEP-30-1996 1,959 0 4,655 1,157 0 2,047 0 0 12,772 282 3,355 0 0 0 8,781 12,772 0 871 0 0 0 0 357 (1,165) 0 (1,165) 0 0 0 (1,165) (30.08) (30.08)
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