ITEM 1. BUSINESS.
(a) General Development of the Business
Centennial Mortgage Income Fund (the "Partnership"), a California Limited Partnership, was organized on December 13, 1983. The Partnership's registration statement became effective June 8, 1984. The general partners were John B. Joseph, Ronald R. White and West Coast Bancorp ("WCB").
During 1992, WCB resigned as general partner of the Partnership. Centennial Corporation ("CC"), a privately-held corporation whose stock is owned by affiliates of Ronald R. White and John B. Joseph, became a new general partner in 1993. CC was incorporated in October of 1983. Upon the resignation of WCB as general partner, the two remaining general partners appointed CC as an interim corporate general partner and subsequently received a majority vote of the limited partners approving the new corporate general partner.
Beginning in the fourth quarter of 1985, the Partnership entered its operating stage of business. During the fourth quarter of 1990, 60 months after the closing of its offering stage, the Partnership entered the repayment stage. For additional information, see Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(b) Financial Information about Industry Segments
Not applicable.
(c) Narrative Description of Business
The Partnership was formed to invest in mortgage investments consisting of participating first mortgage loans, construction loans, and wrap-around and other junior loans on commercial, industrial and residential income-producing real property.
The Partnership's objectives are to preserve the Partnership's invested capital, provide increased cash distributions to the limited partners as the cash flow from the properties underlying mortgage investments increases over the life of the Partnership, provide capital growth through participation in the increased value of the underlying properties and provide liquidating distributions as loans are repaid and cash from the sale of real estate owned is no longer needed for development and operations of real estate owned.
Due to the long term recession and falling real estate market values in California, many of the Partnership's loans became delinquent and management of the Partnership elected to foreclose, 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. The real estate owned balance before allowance for possible losses at December 31, 1994 was $13,820,000 decreasing to $12,349,000 at year end 1995 and $11,360,000 at year end 1996.
(d) Financial Information about Foreign and Domestic Operations and Export Sales
Not applicable.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY.
No properties or facilities are owned or leased by the Partnership other than real estate owned which was obtained through foreclosure of real estate loans receivable, as described in notes 5 and 6 of Notes to Consolidated Financial Statements.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings other than ordinary routine litigation incidental to the registrant's business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters have been submitted to a vote of security holders.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP UNITS AND RELATED SECURITY HOLDER MATTERS.
(a) Securities Market Information
There is no market for the Partnership's limited partnership units, nor is one expected to develop.
The Partnership units were offered by the Partnership through selected dealers who were members of the National Association of Securities Dealers, Inc.
(b) Approximate Number of Holders of Limited Partnership Units
As of December 31, 1996, there were approximately 5,500 holders of limited partnership units.
(c) Partnership Distributions
No distributions were declared or paid by the Partnership during the three year period ended December 31, 1996.
Management intends to distribute cash flow available for distribution (as defined in the Partnership Agreement), if any, on a quarterly basis. Distributions may vary in amount and may be suspended at such time as the Partnership requires working capital, or at any time that the general partners, in their sole discretion, determine it to be in the best interest of the Partnership. In the third quarter of 1991, management suspended distributions. See Item 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
General
Net loss and loss per limited partnership unit were $(2,514,000) and $(64.91) for the year ended December 31, 1996 down from $(2,776,000) and $(71.68) in 1995 and up from $(1,286,000) and $(33.21) in 1994. The decrease in loss in 1996 is primarily the result of a decrease in the provision for possible losses which was partially offset by an increase in share of losses in unconsolidated investees. The increase in loss in 1995 is primarily the result of an increase in share of losses in unconsolidated investees.
Liquidity and Capital Resources
At December 31, 1996, the Partnership had $1,712,000 in cash and interest-bearing deposits. Additional sources of funds are future operations of real estate owned, sale of real estate owned and payoffs of existing loans. The Partnership also had $1,066,000 in nonperforming loans which had reached maturity as of December 31, 1996, however, none of these loans is considered to be a near term source of cash. As of December 31, 1996, all real estate owned is classified as held for sale and the Partnership was currently marketing $11,360,000 in real estate owned. The Partnership had no unfunded loan commitments to nonaffiliates at December 31, 1996. The Partnership funded advances on loans to affiliates during 1996 totaling $1,044,000 and received payoffs and paydowns on loans to nonaffiliates totaling $163,000. During 1996, the Partnership funded $273,000 of capital expenditures for real estate owned and received proceeds from the sale of real estate owned of $190,000.
The Partnership's notes payable commitments for 1997 consist of interest and principal payments due of approximately $2,563,000. The note payable secured by the Upland Shopping Center totaling $2,455,000 matures May 1, 1997. The Partnership does not presently have sufficient capital reserves to make this balloon payment and meet operating commitments. However, the Partnership has a letter of intent from the lender to extend this note until November 1, 2001. 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 $185,000 payable in 1997, 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. 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 reinvestment of proceeds received from the payoff of existing loans and/or 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 will generate a greater return to the limited partners than any other strategies available to the Partnership. During 1995, the Partnership, through its 50 percent owned corporation, LCR Development, Inc., ("LCR"), entered into a joint venture agreement with Home Devco, Inc. ("Home Devco"), an affiliated entity, entitled Silverwood Homes ("Silverwood"). For further information see note 5 of Notes to Consolidated Financial Statements.
Effective with the third quarter of 1991, the Partnership suspended making any 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 and the sale of real estate owned 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 into nonperforming loans and/or real estate owned through foreclosures. As a result, interest income on loans to affiliates and nonaffiliates, including fees, decreased substantially during 1996, 1995 and 1994. Interest income on loans to affiliates, including fees was $100,000 for 1996 and $41,000 for 1995 related to the Silverwood joint venture. There was no interest income on loans to affiliates for 1994 due to the fact that there were no loans to affiliates in 1994. Interest income on loans to nonaffiliates, including fees, was $100,000 in 1996, $78,000 in 1995 and $186,000 in 1994. Interest income on loans to nonaffiliates increased in 1996 primarily due to the restructure and payment of interest on two loans. Interest income on loans to nonaffiliates decreased in 1995 due to payoffs of existing loans and increases in loans on nonaccrual.
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 collection of interest and/or principal payments has become doubtful. Loans to affiliates and nonaffiliates on nonaccrual status amounted to $2,597,000, $3,412,000 and $2,319,000 as of December 31, 1996, 1995 and 1994, respectively.
The real estate owned balance before allowance for possible losses at December 31, 1996, 1995 and 1994 was $11,360,000, $12,349,000 and $13,820,000, respectively. During 1995 and 1994, the Partnership accounted for foreclosed assets using the American Institute of Certified Public Accountants Statement of Position 92-3 ("SOP 92-3"), "Accounting for Foreclosed Assets". SOP 92-3 indicated that foreclosed assets were presumed held for sale and not for the production of income. Accordingly, foreclosed assets held for sale were carried at the lower of cost or fair value minus estimated costs to sell. The cost of such assets at the time of foreclosure was the fair value of the asset foreclosed. Immediately after foreclosure, a valuation allowance was recognized for estimated costs to sell through a charge to operations. All of the Partnership's real estate owned was presumed held for sale.
Effective January 1, 1996, the Partnership adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 supersedes SOP 92-3 and also requires that long-lived assets to be disposed of be reported at the lower of carrying amount or fair value less costs to sell. An impairment loss shall be measured as the amount by which the carrying amount of the asset exceeds the fair value of the assets less costs to sell. SFAS 121 requires that assets to be disposed of not be depreciated while they are held for disposal. The adoption of SFAS 121 did not have a significant impact on the Partnership's financial statements.
Had all accrued interest been recorded throughout 1996, 1995 and 1994 on the affiliated and nonaffiliated nonaccrual loans, interest income would have increased by $261,000, $646,000 and $543,000, respectively, for those periods.
Real estate loans receivable, earning represents four loans totaling $700,000 which are performing but classified as impaired. The four loans have been restructured and are reduced by deferred liabilities and allowances of $321,000. Real estate loans receivable, nonearning represents three past due or renegotiated loans totaling $1,066,000. These loans are reduced by $950,000 in deferred profit and allowances. Most of the borrowers have little or no equity in the underlying collateral for the loans and as a result, these loans represent an investment in real estate. Therefore, these loans are carried on the balance sheet at the fair value of the underlying real estate collateral or have been fully reserved.
Real estate loans receivable from unconsolidated investees, earning and nonearning represent property taken back by the Partnership and transferred to unconsolidated corporations 50 percent owned by the Partnership.
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 status during the year ended December 31, 1996 are summarized below:
During 1988, the Partnership recorded an equity participation note with an original committed amount of $350,000 secured by a second trust deed on a 160-unit apartment complex in Riverside, California. The loan was on nonaccrual due to past due interest. The complex was 82 percent leased, and due to low rental rates and slow payments, the first trust deed holder filed a notice of default on April 12, 1995 and completed a judicial foreclosure during 1996. The loan had been recorded with a deferred profit liability equal to the principal balance of the loan and the foreclosure had no impact on the Partnership's income statement.
During 1994, the Partnership renegotiated an equity participation note with an original committed amount of $374,000 secured by a second deed of trust on a 32,431 square foot shopping center in Corona, California. The loan provides for interest due to be payable at loan maturity; however, due to the amount of the senior debt and the decrease in land values, the Partnership has placed the loan on nonaccrual. The principal balance and nonaccrued interest at December 31, 1996 are $375,000 and $107,000 respectively. The Partnership has recorded a reduction of $62,000 against the $375,000 principal balance which represents previously nonaccrued interest and has also recorded a $289,000 deferred profit in connection with this loan. During 1991, the Partnership sold a pad on an existing piece of real estate owned in Corona, California and carried back financing in the amount of $600,000. The Partnership's share of the loan is 77 percent. Due to the loss of the major tenant, the borrower has been unable to make monthly interest payments. Management has worked out a forbearance agreement with the borrower for net cash flow monthly payments. The remaining interest due has been placed on nonaccrual. The principal balance and nonaccrued interest at December 31, 1996 are $460,000, and $111,000, respectively. The Partnership had recorded a $367,000 allowance for losses related to this loan as of December 31, 1996.
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 a $293,000 allowance for losses related to this loan as of December 31, 1996. The principal balance and nonaccrued interest at December 31, 1996 are $293,000 and $163,000, 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 lots contributed to Silverwood. LCR's only source of repayment of these notes are proceeds from the sale of the fully developed lots. Management has estimated the proceeds for repayment of these two notes to be less than the original principal balance of the loans. As a result, the loans have been placed on nonaccrual. The principal balance and participating principal balance and nonaccrued interest balances at December 31, 1996 are $1,250,000 and $293,000 and $1,055,000 and $240,000, respectively. As discussed in note 5 of Notes to Consolidated Financial Statements, the Partnership has reduced the carrying value of these notes by $2,305,000, a portion of its share of losses from this unconsolidated investee.
During 1994 and 1995, LCR had evaluated various alternative strategies for liquidating its investment in the 179 lots in Lancaster. During 1994, LCR determined that its best course of action appeared to be the full-scale buildout and sale of single- family homes since the market for finished lots had fallen so significantly. LCR obtained construction financing commitments from Centennial Mortgage Income Fund II ("CMIF II"), an affiliate, and the Partnership and entered into a joint venture agreement entitled Silverwood with Home Devco to construct and sell single-family homes at the project. The joint venture began constructing a model home complex at the project in June 1995. Construction commenced in September 1995 on Phase I at the project. At December 31, 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 with a combined disbursed balance of $1,787,000. The Partnership's disbursed balance of the $3,265,700 development loan at December 31, 1996 is $977,000. The Partnership's disbursed balance of the $490,000 model loan at December 31, 1996 is $239,000. At December 31, 1996, the Partnership's disbursed balance of the $1,034,000 Phase I construction loan is $571,000. The Phase I construction loan matured July 1, 1996 and the Partnership is in the process of extending this note. As discussed in note 5 of Notes to Consolidated Financial Statements, the Partnership had reduced the carrying value of the land development loan by $256,000, the remainder of its share of losses in unconsolidated investees.
Sales volumes of new homes in the Lancaster area have continued to decline since 1995 while sales prices have remained relatively flat and construction costs have increased. This has caused a further decline in the value of finished lots and a reduction in the anticipated net proceeds the Partnership expects to realize from the buildout of homes at the project. Additionally, Silverwood closed escrow on only two homes during 1996, far less than originally anticipated. As a result of these factors, LCR recorded a $2,361,000 and $866,000 provision for losses on real estate investments during 1996 and 1995, respectively.
Real Estate Owned
A description of the Partnership's principal real estate owned and loan classified as insubstance foreclosure during the year ended December 31, 1996 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 $431,000 during 1996 and its carrying value before allowance for possible losses was $4,628,000 at December 31, 1996. The property is encumbered by a note of $2,455,000, secured by a first trust deed on the property. The Partnership oversees the management and leasing of the property which is currently 98 percent leased. Management is currently marketing the property for sale and hopes to sell this property during 1997. The Partnership had recorded a $921,000 allowance for losses related to this property as of December 31, 1996.
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 located in the North Natomas area and is zoned for light- industrial commercial use. 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 these issues are finalized and the demand for development land in the area returns, the Partnership intends to list the property for sale. At December 31, 1996, the carrying value before allowance for possible losses of this asset was $2,822,000 and the Partnership had recorded a $1,134,000 allowance for losses related to this project.
Auto Retail Center in Corona, California
During 1988, the Partnership funded a loan with an original committed amount of $3,313,000 for the purpose of constructing a 39,185 square foot auto/retail center in Corona, California. The loan matured on September 1, 1989. The borrower defaulted under a forbearance agreement, and the Partnership filed a notice of default on December 14, 1990. The borrower filed for bankruptcy on February 15, 1991. A pad was sold during April 1991 resulting in the Partnership receiving a net paydown of $249,000. The Partnership provided financing to the purchaser. The Partnership took a grant deed on the property through the Bankruptcy Courts in December 1991. The subject center is 43 percent leased and the property generated net operating income of $35,000 during 1996. The center is being marketed for sale and has been in escrow twice. However, both of those sales were not finalized. The net carrying value before allowance for possible losses at December 31, 1996 is $2,600,000 and the Partnership had recorded a $1,665,000 allowance for losses related to this project.
23 Acres in Riverside, California
The Partnership took a grant deed in consideration of its note secured by a third trust deed on the property during the second quarter of 1992 and paid off the second deed of trust. The property was encumbered by a 13.75 percent fixed rate note payable secured by a first trust deed of $650,000 payable to another financial institution which matured August 1, 1992. During 1993 and 1994, management has attempted to negotiate with the FDIC as successor to the financial institution to payoff or restructure the terms of the note secured by the first trust deed and was not successful resulting in the FDIC commencing foreclosure proceedings on the property. The foreclosure was completed in 1996 and management established an allowance for losses sufficient to cover the loss which was incurred as a result of the foreclosure of this property.
5 Condominiums in Oxnard, California
During 1990, the Partnership funded a loan secured by a first trust deed with an original committed amount of $3,000,000 for the construction of 12 condominiums in Oxnard, California. The Partnership has recorded an insubstance foreclosure on these 12 condominiums. The borrower signed over control to the second trust deed holder in December 1992, the second trust deed holder, an affiliate, abandoned the property and the Partnership now controls the property. The condominiums are located adjacent to the beach. The values of beach front property have been hard hit in the local market due to the excess supply of this type of property. The Partnership has declined to assume any of the original builder's liabilities which would be required should the Partnership accept a deed in lieu of foreclosure on the property. However, the Partnership does receive 100 percent of all sales proceeds net of selling costs. As of December 31, 1996, the Partnership had sold seven condominiums and is attempting to sell the remaining units. The carrying value before allowance for possible losses at December 31, 1996 is $1,310,000. Gain on sale of the condominiums recorded in 1996 was $23,000. The Partnership had recorded a $381,000 allowance for losses related to this project.
Interest on Interest-Bearing Deposits
Interest earned on interest-bearing deposits was $85,000 in 1996, $102,000 in 1995 and $63,000 in 1994. The decrease in interest on interest-bearing deposits in 1996 is principally due to a decrease in average cash balances. The increase in interest on interest-bearing deposits in 1995 is principally due to an increase in average cash balances. 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 for 1996, 1995 and 1994 consists of operating revenues of $780,000, $784,000 and $771,000, respectively, primarily from the Upland Shopping Center and the auto retail center in Corona.
Provision for Possible Losses
The provision for possible losses was $40,000 in 1996, $836,000 in 1995 and $807,000 in 1994. The 1996 provision relates primarily to the 19 acres in Sacramento, the loan secured by the auto center in San Bernardino, the auto retail center in Corona offset by a reduction in provision on the Upland Shopping Center. The 1995 provision relates primarily to the auto retail center in Corona, California and the Upland Foothill Shopping Center. The 1994 provision relates primarily to the auto retail center in Corona, the loan secured by a third trust deed on a mini-storage facility in Citrus Heights and the loan secured by a pad in Corona.
Management believes that the allowance for possible losses at December 31, 1996 is adequate to absorb the known risks in the Partnership's loan and real estate owned portfolios, including losses on pending sales and possible foreclosures.
Other Expenses
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 $2,304,000 for 1996, $1,803,000 for 1995 and $408,000 for 1994. The 1996 share of losses consists primarily of provisions for losses on real estate investments recorded by LCR and BKS related to the 179 lots in Lancaster and the 283 acres in Bakersfield and to additional costs related to the sale of homes in Lancaster. The 1995 share of losses consists primarily of provisions for losses on real estate investments related to the 179 lots in Lancaster and the 283 acres in Bakersfield. The Partnership has now written off its investment in BKS completely and its remaining net carrying value of its investment in LCR had been reduced to $1,531,000 as of December 31, 1996.
Operating expenses from operations of real estate owned were $259,000 for 1996, $265,000 for 1995 and $274,000 for 1994. These expenses were associated with the auto retail center in Corona and the Upland Shopping Center.
Operating expenses from operations of real estate owned paid to affiliates were $55,000 for 1996, $54,000 for 1995 and $56,000 for 1994. The expenses consist of property management fees paid to affiliates of the general partners.
Expenses associated with non-operating real estate owned were $226,000 in 1996, $254,000 in 1995 and $263,000 in 1994. The expenses relate to the 19 acres in Sacramento, the 23 acres in Riverside, the condominiums in Oxnard, the 179 lots in Lancaster and the 283 acres in Bakersfield. These costs include property taxes of $108,000, $106,000 and $106,000 during 1996, 1995 and 1994, respectively. The 179 lots in Lancaster and the 283 acres in Bakersfield were transferred to unconsolidated investees in 1994. The decrease for 1996 is due primarily to a decrease in legal costs associated with the 23 acres in Riverside.
Depreciation and amortization expense for 1996, 1995 and 1994 consists of $23,000, $115,000 and $111,000, respectively, for the Upland Shopping Center. The decrease for 1996 is due to the adoption of SFAS 121.
Interest expense was $476,000 for 1996, $430,000 for 1995 and $497,000 for 1994. The interest expense for 1996, 1995 and 1994 relates to the underlying debt on the Upland Shopping Center and the 19 acres in Sacramento. The increase for 1996 is due to the addition of extension fee expense and decreased principal reductions on the underlying debt on the Upland Shopping Center. The decrease for 1995 is due to the increase of principal on nonaccrual on the underlying inter-company debt secured by the 19 acres in Sacramento.
General and administrative expenses, affiliates totaled $218,000 for 1996, $167,000 for 1995 and $179,000 for 1994. These expenses are primarily salary allocation reimbursements paid to affiliates for the management of the Partnership's assets. The increase for 1996 is primarily due to a $44,000 change in billing methodology from mortgage investment servicing fees to salary allocations.
General and administrative expenses, nonaffiliates totaled $100,000 for 1996, $79,000 for 1995 and $80,000 for 1994. The increase for 1996 is primarily due to moving expenses, increased office expenses and outside services.
Mortgage investment servicing fees paid to affiliates decreased to $4,000 in 1996 from $48,000 in 1995 and $52,000 in 1994. These fees consist of amounts paid to Centennial Corporation and CMIF, Inc., an affiliate of the general partners, for servicing the Partnership's loan portfolio. During 1996, the Partnership no longer incurs mortgage investment servicing fees for servicing the Partnership's real estate owned portfolio. The decrease for 1995 is primarily due to the decrease in size of the Partnership's loan portfolio.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedules attached hereto.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON REPORTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of General Partners
The Partnership is managed by its general partners. The individual general partners' principal occupations and affiliations during the last five years are described in the following table. The general partners devote to the affairs of the Partnership such portion of their time as they consider necessary for the effective supervision of its affairs.
Name, Age and Position Principal Occupation and Affiliation during Last Five Years - ----------------------------------------------------------------- John B. Joseph Age 58 General Partner
John B. Joseph is currently Vice Chairman of the Board of Directors and Vice President of Centennial Corporation. He is also currently Chairman of the Board and Chief Executive Officer of West Coast Bancorp ("WCB"), a publicly-held bank holding company operating in California. He has been Chairman of the Board of Directors of WCB since its inception in 1981 and CEO since April 1991. Mr. Joseph also serves, or has served, in the following capacities during the past five years: Vice Chairman of the Board of Directors of The Centennial Group, Inc. ("CGI"), a publicly-held real estate development corporation from February 1987 to July 1993; Senior Executive Vice President of CGI from July 1987 to July 1993; general partner of various public and private limited partnerships engaged in real estate development and lending activities. Mr. Joseph presently holds and has held, over the past five years, various positions in the subsidiaries of WCB and CGI.
Name, Age and Position Principal Occupation and Affiliation during Last Five Years - ----------------------------------------------------------------- Ronald R. White Age 50 General Partner
Ronald R. White is currently President and CEO of Centennial Corporation. He is also currently Executive Vice President and Vice Chairman of the Board of Directors of WCB. Mr. White has served in these capacities since April 1987. Mr. White also serves, or has served, in the following capacities during the past five years: Chairman of the Board of Directors, President and Chief Executive Officer of CGI from February 1987 to July 1993; general partner of various public and private limited partnerships engaged in real estate development and lending activities. Mr. White presently holds and has held, over the past five years, various positions in the subsidiaries of WCB and CGI.
Mr. Joseph has 28 years of experience in asset management in both securities and real estate. Mr. Joseph has worked in all areas of real estate. In the past, Mr. Joseph has been engaged in the syndication and management of over $100 million worth of income property, including industrial complexes, shopping centers, business centers, office buildings, commercial properties and residential units.
Mr. White's career spans the financial and management fields in both securities and real estate. Mr. White has 26 years of experience in asset management. In the past, Mr. White has been engaged in the syndication and management of over $100 million worth of income property including industrial complexes, shopping centers, business centers, office buildings, commercial properties, and residential units.
Centennial Corporation ("CC"), a privately-held corporation, whose stock is owned by affiliates of Ronald R. White and John B. Joseph, was voted in as new general partner in 1993. CC was incorporated in 1983 to engage in the real estate lending business and to provide consulting services.
Identification of Executive Officers
The Partnership does not have officers as such. The affairs of the Partnership are managed by the general partners noted above.
Involvement in Certain Legal Proceedings
On December 13, 1991, The Centennial Group Inc., ("CGI") filed a voluntary petition for relief under Chapter XI of the federal bankruptcy laws in the United States Bankruptcy Court for the Central District of California. Messrs. Joseph and White were directors, executive officers and principal stockholders of CGI. On March 4, 1994, CGI's plan of reorganization was confirmed and the company emerged from bankruptcy proceedings.
ITEM 11.
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
The following table summarizes the types and recipients of compensation paid and to be paid to the general partners and affiliates by the Partnership.
Amount Earned/ Type of Reimbursable for the Compensation & Year Ended Name of Entity Description of Payment December 31, 1996 - ----------------------------------------------------------------- Operating Stage:
Application and An amount up to a maximum $ --- commitment fees of 3 percent of the gross - - the general proceeds of the offering partner or on any single mortgage affiliates investment, and an aggregate maximum of 7 percent of the gross proceeds of the offering, payable to the general partners or affiliates. The application and commitment fees are payable solely from borrowers and prospective borrowers and not directly from the proceeds of the offering.
General partners' The general partners or $ 273,000 (1) reimbursable affiliates shall be entitled expenses to reimbursement for certain - general expenses, subject to the partner or conditions of the Partnership affiliates Agreement.
General partners' A 5 percent interest in $ --- interest in cash cash flow available for distributions distribution for any year - - general until all limited partners or partnership unit holders affiliates have received an amount equal to a 12 percent non-cumulative annual return on their adjusted invested capital, and 10 percent of the balance of any cash flow available for distribution for such year.
Mortgage 1/4 of 1 percent of the $ 4,000 (2) investment maximum amount funded or to servicing fees be funded by the Partnership on mortgage investments serviced by CC and CMIF, Inc., an indirect subsidiary of CGI.
Repayment Stage:
General partners' One percent of mortgage $ --- share of reductions until all limited mortgage partners have received an reductions amount equal to their adjusted - - general invested capital and cumulative partners or distributions (including cash affiliates flow available for distribution) equal to a 12 percent annual return with respect to their adjusted invested capital, and 15 percent of the balance of any mortgage reductions.
(1) Such reimbursable expenses include salaries and related salary expenses for services which could be performed directly for the Partnership by independent parties such as legal, clerical, accounting, financial reporting, governmental reporting, transfer agent, data processing and duplication services. Such reimbursement of expenses will be made regardless of whether any distributions are made to the limited partners.
(2) Mortgage Investment Servicing Fees are payable on the maximum amount to be funded on a Mortgage Investment from the date the Partnership first signs a letter of commitment for such Mortgage Investment. Fees shown in the table represent amounts earned by CC for servicing these mortgage investments and/or related real estate owned. ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
No persons are known by the Partnership to own beneficially more than 5 percent of the limited partnership units at December 31, 1996.
(b) Security Ownership of Management
The percent of units owned by Management outstanding is less than 1 percent.
Name and address Nature and Number of Percent of of Beneficial Owner Units Outstanding Units Outstanding - -----------------------------------------------------------------
Ronald R. White 1540 S. Lewis St. Anaheim, CA 92805 Limited partnership units: 1 ---
(c) Change in Control
The Partnership knows of no contractual arrangements which may at a subsequent date result in a change of control of the Partnership.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This disclosure is made in note 5 of the Notes to the Consolidated Financial Statements which is incorporated in this filing.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (a)(2) - See Index to Consolidated Financial Statements and Schedules attached hereto.
(a)(3) - Exhibits.
None.
(b)(4) - Reports on Form 8-K.
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 March 31, 1997
By:/s/Ronald R. White _________________________________ Ronald R. White General Partner March 31, 1997
By: CENTENNIAL CORPORATION General Partner
/s/John B. Joseph _________________________________ John B. Joseph Executive Vice President March 31, 1997
/s/Ronald R. White _________________________________ Ronald R. White President March 31, 1997
/s/Joel H. Miner _________________________________ Joel H. Miner Chief Financial Officer March 31, 1997
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: _________________________________ __________________ John B. Joseph General Partner
By: _________________________________ __________________ Ronald R. White General Partner
By: CENTENNIAL CORPORATION General Partner
_________________________________ __________________ John B. Joseph Executive Vice President
_________________________________ __________________ Ronald R. White President
_________________________________ __________________ Joel H. Miner Chief Financial Officer
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership
ANNUAL REPORT
Form 10-K Consolidated Financial Statements Items 8, 14(a)(1) and 14(a)(2) December 31, 1996, 1995 and 1994 (With Independent Auditors' Report Thereon)
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership
Items 8, 14(a)(1) and 14(a)(2) Index to Consolidated Financial Statements
Consolidated Financial Statements Page
Independent Auditors' Report .............................
Consolidated Balance Sheets -- December 31, 1996 and 1995...............................
Consolidated Statements of Operations -- Years ended December 31, 1996, 1995 and 1994...........
Consolidated Statements of Partners' Equity -- Years ended December 31, 1996, 1995 and 1994...........
Consolidated Statements of Cash Flows -- Years ended December 31, 1996, 1995 and 1994...........
Notes to Consolidated Financial Statements ...............
Schedules
Schedule III - Consolidated Real Estate Owned and Accumulated Depreciation and Amortization. .............
Schedule IV - Mortgage Loans on Real Estate...............
All other schedules are omitted as the required information is inapplicable, or the information is presented in the consolidated financial statements or notes thereto.
INDEPENDENT AUDITORS' REPORT
To the General Partners Centennial Mortgage Income Fund:
We have audited the consolidated financial statements of Centennial Mortgage Income Fund, a limited partnership, and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Centennial Mortgage Income Fund and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Orange County, California March 21, 1997
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership
Consolidated Balance Sheets
See accompanying notes to consolidated financial statements
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership
Consolidated Statements of Operations
See accompanying notes to consolidated financial statements
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership
Consolidated Statements of Partners' Equity
See accompanying notes to consolidated financial statements
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership
Consolidated Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994
See accompanying notes to consolidated financial statements
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership
Notes to Consolidated Financial Statements
December 31, 1996, 1995, 1994
(1) Summary of Significant Accounting Policies
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. In the normal course of business, the Partnership participated with other lenders in extending credit to single borrowers; the Partnership did this in an effort to decrease credit concentrations and provide a greater diversification of credit risk.
As of December 31, 1996, a majority of the loans secured by operating properties have been repaid to the Partnership. However, during recent years, real estate market values for undeveloped land in California have declined severely. As the loans secured by undeveloped land and certain operating properties became delinquent, management of the Partnership elected to foreclose on certain of these loans, thereby increasing real estate owned balances. As a result, the Partnership has become a direct investor in this real estate and intends to manage operating properties and develop raw land until such time as the Partnership is able to sell this real estate owned. The real estate owned balance before allowance for possible losses at December 31, 1994 was $13,820,000 decreasing to $12,349,000 at year end 1995 and $11,360,000 at year end 1996.
Basis of Presentation
The Partnership formed several subsidiaries to own and operate certain of its real estate assets. The corporations formed were BNN Development, Inc., ("BNN"), Upland Foothill Retail, Inc., ("Upland"), CPI Development, Inc., ("CPI"), Grand Plaza Auto Retail, Inc., ("Grand Plaza"), LCR Development, Inc., ("LCR") and BKS Development, Inc., ("BKS").
The Partnership owns a 100 percent interest in Upland and CPI, 86.25 percent interest in BNN, 86.7 percent interest in Grand Plaza and 50 percent interest in LCR and BKS. Several of the Partnership's assets have been transferred to these new corporations, at the Partnership's cost basis, in transactions which included no cash down with the Partnership carrying a substantial portion of the financing. Upland, CPI, BNN, and Grand Plaza have been consolidated in the accompanying consolidated financial statements, and all significant inter- company balances and transactions have been eliminated in consolidation.
As the Partnership's ownership interest in LCR and BKS is more than 20 percent but does not exceed 50 percent, the Partnership accounts for its ownership interest using the equity method. 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 (see note 5).
Organization
The Partnership was organized on December 13, 1983 in accordance with the provisions of the California Limited Partnership Act. The Partnership commenced operations in 1984. The general partners are John B. Joseph, Ronald R. White and Centennial Corporation ("CC"), a privately-held California corporation whose stock is owned by affiliates of Messrs. Joseph and White.
Cash available for distribution, as defined in the Partnership Agreement, is to be allocated 95 percent to the limited partners and 5 percent to the general partners until each limited partner has received an amount equal to a 12 percent non-cumulative annual return on their adjusted invested capital (as defined in the Partnership Agreement). Thereafter, cash available for distribution is to be allocated 90 percent to the limited partners and 10 percent to the general partners. All distributions of mortgage reductions (as defined in the Partnership Agreement) shall be distributed 99 percent to the limited partners and 1 percent to the general partners, until each limited partner has received a 12 percent cumulative annual return on his adjusted invested capital, after which such amounts are to be distributed 85 percent to the limited partners and 15 percent to the general partners. These amounts may be adjusted subject to the provisions of the Partnership Agreement. In order to properly reflect the economic effect of the allocations
discussed above, the Partnership has allocated financial statement net earnings (losses) 95 percent to the limited partners and 5 percent to the general partners through 1992. Based upon the various terms of the Partnership Agreement, it is improbable that the general partners would be required to make any capital contributions to the Partnership in excess of their negative capital account as of December 31, 1992. Accordingly, since January 1, 1993, the Partnership has allocated 100 percent of the losses to the limited partners.
Real Estate Loans and Allowance for Possible Loan Losses
Loans are reported at the principal amount outstanding, net of unearned income and the allowance for possible loan losses. Interest accrual is discontinued when, in the opinion of management, its collection is deemed doubtful. The allowance for possible loan losses is established through a provision for possible losses charged to expense. Loans are charged against the allowance for possible loan losses when management believes that the collectibility of principal is unlikely.
Management believes that the allowance for possible loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions.
Impaired Loans
Effective January 1, 1995, the Partnership adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), as amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" ("SFAS 118"). Under SFAS 114, a loan is impaired when it is "probable" that a creditor will be unable to collect all amounts due (i.e. both principal and interest) according to the original contractual terms of the loan agreement. The measurement of impairment may be based on (i) the present value of the expected future cash flows of the impaired loan discounted at the loan's original effective interest rate, (ii) the observable market price of the impaired loan, or (iii) the fair value of the collateral of a collateral-dependent loan. SFAS 114 does not apply to large groups of smaller balance homogeneous loans that are collectively evaluated for impairment. The adoption of SFAS 114, as amended by SFAS 118, had no material impact on the Partnership's consolidated financial statements. The Partnership reclassified a loan totaling $291,000 which was
formerly classified as insubstance foreclosure net of related notes payable, accrued interest and property taxes at December 31, 1994, to impaired loans receivable at December 31, 1995. The Partnership's previously existing policy of measuring loan impairment was consistent with methods prescribed in these standards.
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.
Real Estate Owned
During 1995 and 1994, the Partnership accounted for foreclosed assets using the American Institute of Certified Public Accountants Statement of Position 92-3 ("SOP 92-3"), "Accounting for Foreclosed Assets". SOP 92-3 indicated that foreclosed assets were presumed held for sale and not for the production of income. Accordingly, foreclosed assets held for sale were carried at the lower of cost or fair value minus estimated costs to sell. The cost of such assets at the time of foreclosure was the fair value of the asset foreclosed. Immediately after foreclosure, a valuation allowance was recognized for estimated costs to sell through a charge to income. All of the Partnership's real estate owned, including insubstance foreclosures, was presumed held for sale.
Effective January 1, 1996, the Partnership adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 supersedes SOP 92-3 and also requires that long-lived assets to be disposed of be reported at the lower of the carrying amount or fair value less costs to sell. An impairment loss shall be measured as the amount by which the carrying amount of the asset exceeds the fair value of
the assets less costs to sell. SFAS 121 requires that assets to be disposed of not be depreciated while they are held for disposal. The Partnership considered all real estate owned as held for sale during 1996 and is actively marketing all properties. Using third party brokers or in house sales staff, management's intent is to sell all properties within one year.
The Partnership considers collateral for a loan "insubstance" foreclosed only when the borrower actually surrenders the collateral to the creditor and the creditor receives physical possession of the borrower's assets.
Loan Fees
Origination fees and direct costs associated with lending are netted and amortized to interest income as an adjustment to yield over the respective lives of the loans using the interest method.
Deferred Profit on Equity Participation
Deferred profit on equity participation represents the Partnership's portion of equity from real estate loans/investments that was earned, but has not yet been paid by the borrower. Generally, revenue is recognized when collection of the deferred profit becomes assured. During 1994, $75,000 was recognized as revenue to the extent cash was received. No deferred profit was recognized during 1995 and 1996.
Income Taxes
Under provisions of the Internal Revenue Code and the California Revenue and Taxation Code, partnerships are generally not subject to income taxes. For tax purposes, any income or losses realized are those of the individual partners, not the Partnership. The Partnership reports certain transactions differently for tax and financial statement purposes. The following is a recap of current and cumulative temporary differences between income for generally accepted accounting principles ("GAAP") and taxable earnings:
The cumulative temporary partnership differences shown above, which total approximately $193.00 per limited partnership unit, should reverse when the Partnership liquidates its investments. There can be no assurance that these will be realized as future operations of the Partnership could result in greater or lesser amounts of allocable tax losses to the limited partners. In addition, the deductibility of taxable losses is dependent upon each limited partners' individual tax position. The reversal of these differences should result in future taxable income or loss per limited partnership unit which is less than or greater than the Partnership will report for financial statement purposes. Management believes that the share of losses in unconsolidated investees is a temporary difference since the Partnership holds approximately $4,092,000 in notes receivable from these investees, a portion of which could be charged to bad debt expense should these investees liquidate their single property holdings at current carrying values.
In addition, as of December 31, 1996, the Partnership held approximately $6,467,000 in loans and interest receivable from the consolidated corporations. These loans have been eliminated in the Partnership's consolidated financial statements. It is anticipated that the temporary differences should reverse on the corporations' returns when the corporations liquidate their investments. If these investments are liquidated at current carrying values, the Partnership should be able to deduct bad debt expense on its tax returns in the approximate amount of the temporary differences shown above which is approximately $125.00 per limited partnership unit.
The subsidiary corporations are subject to taxation and account for income taxes under Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires an asset and liability approach to establishing deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the corporations' assets and liabilities. No benefit for net operating losses or cumulative differences related to the corporations has been recorded in the consolidated financial statements due to the improbability of realization. Future consolidated financial statements could reflect income tax expense in the event that these corporations generate profits in excess of operating loss carryforwards available. Some of the subsidiary corporations are cash basis taxpayers.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents includes cash and interest-bearing deposits with original maturities of three months or less.
Short-term Investments
Short-term investments include certificates of deposits with original maturities greater than 90 days but less than one year.
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 in 1996, 1995 and 1994.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Depreciation and Amortization
Prior to the adoption of SFAS 121 on January 1, 1996, depreciation and amortization of real estate assets was charged to expense on a straight-line basis over the estimated useful lives of the assets; 31.5 years for buildings, or, in the case of tenant improvements, over the terms of the leases from 6 months to 14 years if shorter than the estimated useful lives.
Revenue Recognition
Revenue from rental income on real estate owned is recognized on a straight-line basis over the life of the lease when payments become due under operating leases. During 1996, 1995 and 1994, the Partnership has recognized gains on the sale of real estate owned as the gains are determinable and the earnings process is complete.
(2) Fair Value of Financial Instruments
Statement of Financial Accounting Standard No. 107 "Disclosures About Fair Value of Financial Instruments" ("SFAS 107"), requires that the Partnership disclose estimated fair values for its financial instruments as well as the methods and significant assumptions used to estimate fair values. The following information does not purport to represent the aggregate net fair value of the Partnership.
The following methods and assumptions were used by the Partnership in estimating the fair value of each class of financial instrument.
Cash and Cash Equivalents
The carrying amount, which is cost, is assumed to be the fair value because of the liquidity of these instruments.
Short-term Investments
The carrying amount is estimated to be fair value because the funds were invested at current market rates within one month of the balance sheet date.
Accrued Interest Receivable, Accounts Payable and Accrued Liabilities and Interest and Property Taxes Payable
Carrying amounts approximate fair value because of the short-term maturity of these instruments, or they are due on demand. Real Estate Loans Receivable, Earning and Nonearning
The net carrying value of the real estate loans receivable, earning and nonearning, is estimated to be fair value. Management believes these loans are impaired, and in accordance with SFAS 114 and SFAS 118, as discussed in note 1, the loans are carried at the fair value of the underlying real estate collateral.
Notes Payable
The carrying value of notes payable to nonaffiliates approximate fair value because the interest rates on these notes are approximately equal to current market rates for notes secured by similar assets.
Notes Payable to Affiliates
As discussed in note 5, the notes payable to affiliates are reduced by the cumulative minority interest losses to reflect the net outstanding payable to the affiliate. Therefore, the carrying value of these instruments is estimated to be fair value.
(3) Allowance for Possible Loan Losses
Changes in the allowance for possible loan losses are as follows:
At December 31, 1996, the carrying value of loans that are considered to be impaired under SFAS 114 totaled $3,297,000 (of which $2,597,000 were on nonaccrual status). At December 31 1996, the allowance for possible loan losses determined in accordance with the provisions of SFAS 114, related to loans considered to be impaired under SFAS 114 totaled $982,000. One of the loans receivable is recorded with a corresponding deferred profit liability of $289,000. There were five loans to unconsolidated investees considered impaired under SFAS 114 for which there is no related allowance for possible loan losses at December 31, 1996. However, as discussed in note 5, the unconsolidated investees have recorded an allowance for losses of $3,140,000 and the Partnership's proportionate share of the losses in unconsolidated investees reflects this allowance. There was a $1,044,000 and $1,000 investment in impaired loans for the years ended December 31, 1996 and 1995, respectively. For the years ended December 31, 1996 and 1995, the Partnership recognized interest income on these impaired loans of $169,000 and $13,000, respectively. There was no interest income recognized on impaired loans for the year ended December 31, 1994. There was no interest income recognized using the cash basis method of income during the years ended December 31, 1996, 1995 and 1994. If these loans had been current throughout their terms, interest income would have increased by approximately $261,000, $646,000 and $543,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
(4) Allowance for Possible Losses on Real Estate Owned
Changes in the allowance for possible losses on real estate owned are as follows:
The 1996 provision for losses contains a $15,000 provision for the auto retail center in Corona, California, a $250,000 provision for the 19 acres in Sacramento offset by a $250,000 recovery for the Upland Shopping Center.
(5) Transactions with Affiliates
Under the provisions of the Partnership Agreement, CC and CMIF, Inc., an affiliate of the general partners, are 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 amounts to be funded by the Partnership. The Partnership incurred $9,000 of mortgage investment servicing fees payable to CMIF, Inc. in 1994, and $11,000 of such fees were paid in 1994. The Partnership incurred $4,000, $48,000 and $43,000 of mortgage investment servicing fees payable to CC in 1996, 1995 and 1994 of which $10,000, $53,000 and $34,000 were paid in 1996, 1995 and 1994.
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; however, the general partners are entitled to receive a minimum 5 percent interest in cash available for distribution in any year until the provision has been met. Adjusted invested capital is defined as the original capital invested less distributions from mortgage reductions. Under this provision, 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 in 1996, 1995 or 1994.
As discussed in note 1, the Partnership owns 50 percent of the stock of two corporations which have not been consolidated in the accompanying financial statements, LCR and BKS. The balance of stock in these corporations is owned by Centennial Mortgage Income Fund II ("CMIF II"), an affiliate. LCR has invested in a joint venture, Silverwood Homes ("Silverwood") which is constructing homes. The Partnership has participated in making several loans to these corporations and this joint venture. Under the equity method of accounting, these loans are a component of the Partnership's investment in LCR and BKS, and
therefore the Partnership has recorded losses by LCR and BKS as a reduction of the carrying value of these loans receivable. The Partnership wrote off its investment in and loans receivable from BKS during 1996 when its share of losses equaled its investment and the probability of recovery of any of its investment became unlikely.
A summary of these real estate loans receivable from unconsolidated investees as of December 31, 1996 is as follows:
A summary of these real estate loans receivable from unconsolidated investees as of December 31, 1995 is as follows:
In February 1994, the Partnership assigned its 50 percent interest in a construction loan secured by a second trust deed, which was participated with CMIF II, to LCR in order to facilitate LCR's foreclosure of 179 lots in Lancaster, California. In anticipation of this foreclosure, LCR purchased the underlying note secured by a first trust deed on the property with funds provided by a $1,250,000 unsecured note payable to the Partnership by LCR. CMIF II also assigned its 50 percent interest in the construction loan secured by a second trust deed to LCR. In exchange for the assignments of their notes secured by a second trust deed, the Partnership and CMIF II each received a 50 percent interest in an unsecured note due from LCR with a principal balance of $2,115,000 as of December 31, 1996 and 1995, respectively. The Partnership has not accrued its share of interest on these unsecured notes which was approximately $533,000 and $401,000 as of December 31, 1996 and 1995, respectively.
LCR has entered into a joint venture agreement entitled Silverwood with Home Devco, ("Home Devco"), an affiliate of the general partners of the Partnership, to construct and sell single- family homes at the project. LCR has contributed the 179 lots to the joint venture as its initial capital contribution. As LCR has a 99.99 percent ownership interest in the joint venture, Silverwood has been consolidated with LCR and the contribution of these lots to the joint venture has no effect on the financial position of LCR.
The consolidated balance sheets and statements of operations 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 at December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994:
LCR Development, Inc. Consolidated Balance Sheets
LCR Development, Inc. Consolidated Statement of Operations
Although the Partnership owns a 50 percent interest in LCR, it holds more than 50 percent of LCR's debt. Since the Partnership has made a $1,250,000 unsecured loan to LCR, the Partnership was allocated losses to the extent of the unsecured loan and remaining losses were allocated 50 percent to the Partnership and 50 percent to CMIF II during 1996.
As discussed above, the Partnership holds 50 percent of the stock of BKS with CMIF II. In 1994, the Partnership and CMIF II assigned to BKS their 50 percent interest in a note receivable secured by a first trust deed on a 283 acre residential tract in Bakersfield, California. BKS foreclosed on this property on August 8, 1994. In exchange for their assignments, the Partnership and CMIF II each received a 50 percent interest in a new note from BKS secured by a first trust deed on the property. The Partnership ceased accruing interest on this new note on January 1, 1995. Bonds and taxes accrued on the property increased from $1,605,000 at December 31, 1995 to $2,085,000 at December 31, 1996 and the bond holders have commenced foreclosure proceedings on the property. Management has elected to abandon the property due to the fact that land values have not increased. The balance of bonds and unpaid property taxes are now approximately equal to the value of the property. Bonds, property taxes and note payable to affiliates are nonrecourse liabilities and, therefore, the Partnership and BKS have no contingent liability in excess of the property. The Partnership has no future obligation nor risk of additional losses related to this investee. Therefore, during 1996, the Partnership recorded its share of losses in connection with BKS ($338,000) which results in the Partnership's investment in BKS, including loans, having a zero balance.
The balance sheet and statements of operations of BKS have not been consolidated in the Partnership's financial statements. The Partnership accounted for its investment in this corporation using the equity method. The following represents condensed financial information for BKS at December 31, 1995 and for the years ended December 31, 1995 and 1994:
BKS Development, Inc. Balance Sheet
BKS Development, Inc. Statements of Operations
At the time of the foreclosure by LCR and BKS discussed above, the Partnership had accounted for its interests in the notes secured by a second trust deed and first trust deed as having been insubstance foreclosed. A summary of the effects of the foreclosures on the Partnership's balance sheet during 1994 is as follows:
The Partnership reimburses the general partner and its affiliates for expenses incurred on behalf of the Partnership for services such as salaries, legal, accounting, property management and other such services. The general partners and affiliates of the general partners charged $273,000, $221,000 and $235,000 for such services in 1996, 1995 and 1994, respectively.
During 1996, 1995 and 1994, the Partnership maintained interest- bearing deposits with Sunwest Bank, an affiliate of the general partners. The balances at December 31, 1996, 1995 and 1994 were $534,000, $280,000 and $8,000, respectively. Interest earned on such deposits for 1996, 1995 and 1994 was $22,000, $5,000 and $16,000, respectively.
The Partnership owns an interest in 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 December 31, 1996, the ownership percentages are 86.7 for the Partnership and 13.3 for CMIF III. The assets and liabilities of this corporation have been consolidated in the accompanying consolidated financial statements. Notes payable and interest payable to affiliates includes $557,000 and $508,000 at December 31, 1996 and 1995, respectively, and the Partnership had recorded $420,000 and $370,000, respectively, of minority interest in cumulative losses from this corporate joint venture against the note payable to affiliates balance as of the same dates. The notes payable to affiliates balance reflects CMIF III's share of a note payable by the corporation to the Partnership and CMIF III. The note bears interest at 14 percent
fixed and matured October 1, 1996. The Partnership is in the process of extending this note.
The Partnership owns an interest in BNN, the corporation which owns the 19 acres in Sacramento, California jointly with an affiliated entity CMIF III. At December 31, 1996, the ownership percentages are 86.25 for the Partnership and 13.75 for CMIF III. The assets and liabilities of this corporation have been consolidated in the accompanying consolidated financial statements. Notes payable and interest payable to affiliates at December 31, 1996 and 1995 includes $452,000 and $383,000, respectively, and the Partnership had recorded $295,000 and $260,000, respectively, of minority interest in cumulative losses from this corporate joint venture against the note payable to affiliates balance as of the same dates. The notes payable to affiliates balance reflects CMIF III's share of a note payable by the corporation to the Partnership and CMIF III. The note bears interest at 15 percent fixed and matures August 1, 1997.
At December 31, 1996 and 1995, property number 5 is 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.
At December 31, 1996, the properties held for sale are presented net of accumulated depreciation as required by SFAS 121.
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 and sales proceeds could differ substantially from estimated fair values.
The Partnership leases its operating properties under several non- cancelable operating lease agreements. Future minimum rents to be received as of December 31, 1996, are as follows:
The note payable secured by the Upland Shopping Center totaling $2,455,000 becomes due in 1997. The Partnership has a letter of intent from the lender for a five year extension on this note. No principal is payable in 1997 on the note secured by the 19 acres in Sacramento. The balance of $900,000 is due in 1998.
The Partnership acquired the 23 acres in Riverside by deed in lieu of foreclosure, subject to the note payable discussed above. In the third quarter of 1993, the lender filed a notice of default and commenced judicial foreclosure proceedings on the property. The original borrower on the note payable negotiated with the lender to perfect a nonjudicial foreclosure on the property. The foreclosure was completed in 1996. Management established an allowance for losses sufficient to cover the loss which was incurred as a result of the foreclosure of this property.
(8) Contingencies
There are no material pending legal proceedings other than ordinary routine litigation incidental to the Partnership's business. Based on part of advice of legal counsel, management does not believe that the results of any of these matters will have a material impact on the Partnership's financial position or results of operations.
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership
Schedule III
See accompanying independent auditors' report.
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership
Schedule III
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership
Schedule IV
See accompanying independent auditors' report.