<PAGE>
ITEM 1. FINANCIAL STATEMENTS
CENTENNIAL MORTGAGE INCOME FUND II
A Limited Partnership
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
ASSETS MARCH 31, DECEMBER 31,
1995 1994
-------------------------------
<S> <C> <C>
Cash and cash equivalents $ 1,412,000 $ 1,908,000
Restricted cash 11,000 11,000
Real estate loans receivable, earning 304,000 305,000
Real estate loans receivable from
unconsolidated investees (note 4) 2,729,000 2,813,000
-------------------------------
3,033,000 3,118,000
Less allowance for possible
loan losses 8,000 8,000
------------------------------
Net real estate loans receivable 3,025,000 3,110,000
Real estate owned, net, held
for sale (note 3) 11,283,000 11,284,000
Less allowance for possible losses
on real estate owned 2,445,000 2,445,000
------------------------------
Net real estate owned 8,838,000 8,839,000
Due from affiliates 94,000 99,000
Accrued interest receivable 10,000 10,000
Other assets 318,000 20,000
------------------------------
$ 13,708,000 $ 13,997,000
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
CENTENNIAL MORTGAGE INCOME FUND II
A Limited Partnership
Consolidated Balance Sheets
(Unaudited)
(Continued)
<TABLE>
LIABILITIES AND PARTNERS' EQUITY
<CAPTION>
<S> <C> <C>
Note payable (note 5) $ 214,000 $ 224,000
Accounts payable and accrued
liabilities 27,000 26,000
Interest and property taxes
payable on real estate owned 93,000 155,000
Payable to affiliates 4,000 7,000
--------------------------------
Total liabilities 338,000 412,000
Partners' equity (deficit)-- 29,141
limited partnership units outstanding
at March 31, 1995 and December 31, 1994
General partners' (195,000) (195,000)
Limited partners' 13,565,000 13,780,000
---------------------------------
Total partners' equity 13,370,000 13,585,000
Contingencies (note 6)
----------------------------------
$ 13,708,000 $ 13,997,000
==================================
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
CENTENNIAL MORTGAGE INCOME FUND II
A Limited Partnership
Consolidated Statement of Operations
(Unaudited)
<TABLE>
For the three months ended March 31, 1995 and 1994
<CAPTION>
1995 1994
<S> <C> <C>
Revenue:
Interest income on loans to affiliates
including fees $ --- $ 12,000
Interest on loans to non-affiliates,
including fees 11,000 13,000
Interest-bearing deposits 14,000 18,000
Operations of real estate owned 33,000 83,000
-------------------------
Total Revenue 58,000 126,000
Expenses:
Provision for possible losses --- 64,000
Share of losses in unconsolidated
investees 153,000 ---
Operating expenses from operations
of real estate owned 16,000 46,000
Operating expenses from operations
Operating expenses from operations
of real estate owned paid to affiliates 3,000 5,000
Expenses associated with
non-operating real estate owned 39,000 79,000
Depreciation and amortization expense 2,000 5,000
Interest expense 6,000 93,000
General and administrative,
affiliates 27,000 37,000
General and administrative, nonaffiliates 18,000 37,000
Mortgage investment
servicing fees (note 4) 9,000 12,000
------------------------
Total expenses 273,000 378,000
------------------------
Net loss $(215,000) $(252,000)
========================
Net loss per limited partnership unit $ (7.38) $ (8.65)
========================
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
CENTENNIAL MORTGAGE INCOME FUND II
A Limited Partnership
Consolidated Statement of Partners' Equity
(Unaudited)
<TABLE>
For the three months ended March 31, 1995
<CAPTION>
Total
General Limited Partners'
Partners' Partners' Equity
-------------------------------------------
<S> <C> <C> <C>
Balance at
December 31, 1994 $ (195,000) $ 13,780,000 $ 13,585,000
Net loss --- (215,000) (215,000)
-------------------------------------------
Balance at
March 31, 1995 $ (195,000) $ 13,565,000 $ 13,370,000
===========================================
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
CENTENNIAL MORTGAGE INCOME FUND II
A Limited Partnership
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
For the three months ended March 31, 1995 and 1994
<CAPTION>
1995 1994
--------------------------
<S> <C> <C>
Cash flow from operating activities:
Net loss $ (215,000) $ (252,000)
Adjustments to reconcile net loss
to cash used in operating activities:
Provision for possible losses --- 64,000
Loss on deed in lieu of foreclosure --- 48,000
Depreciation and amortization expense 2,000 5,000
Equity in losses of unconsolidated
investees 53,000 ---
Changes in assets and liabilities:
Increase in accrued interest receivable --- (6,000)
Increase in other assets (299,000) (14,000)
Decrease in payable to affiliates (3,000) ---
Decrease in due from affiliates 5,000 12,000
Increase in accounts payable
and accrued liabilities 1,000 90,000
Decrease in interest and property taxes
payable on real estate owned (62,000) (31,000)
------------------------
Net cash used in operating activities (418,000) (84,000)
Cash flows from investing activities:
Principal collected on loans 1,000 9,000
Advances on loans made to affiliates (69,000) (10,000)
Additions to real estate owned --- (10,000)
------------------------
Net cash used in investing activities (68,000) (11,000)
Cash flows from financing activities:
Principal payments on notes payable (10,000) (8,000)
------------------------
Net decrease in cash (496,000) (103,000)
Beginning cash and cash equivalents 1,908,000 1,542,000
------------------------
Ending cash and cash equivalents $ 1,412,000 $ 1,439,000
========================
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
CENTENNIAL MORTGAGE INCOME FUND II
A Limited Partnership
Consolidated Statements of Cash Flows
(Unaudited)
(Continued)
<TABLE>
For the three months ended March 31, 1995 and 1994
<CAPTION>
1995 1994
<S> <C> <C>
Supplemental disclosures of cash
flow information:
Cash paid during the quarter for:
Interest $ 5,000 $ 26,000
Supplemental schedule of noncash investing
and financing activities:
Decrease in real estate owned through
transfer of ownership (note 4) $ --- $ 2,550,000
Increase in real estate loans receivable
through transfer of ownership of real
estate owned (note 4) --- 1,058,000
Decrease in allowance for possible
losses on real estate owned through
transfer of ownership (note 4) --- 715,000
Decrease in notes payable through
transfer of ownership (note 4) --- 656,000
Decrease in interest and property taxes
payable on real estate owned through
transfer of ownership (note 4) --- 121,000
Decrease in real estate owned through
deed in lieu of foreclosure --- 1,739,000
Decrease in other assets through deed
in lieu of foreclosure --- 49,000
Decrease in notes payable through deed
in lieu of foreclosure --- 1,757,000
Decrease in interest and property taxes
payable on real estate owned through
deed in lieu of foreclosure --- 31,000
Transfer of restricted cash to workout loan --- 501,000
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
CENTENNIAL MORTGAGE INCOME FUND II
A Limited Partnership
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 1995 and 1994
(1) BUSINESS
Centennial Mortgage Income Fund II (the "Partnership") has
historically invested in commercial, industrial and residential
income-producing real property through mortgage investments
consisting of participating first mortgage loans, other equity
participation loans, construction loans, and wrap-around and other
junior loans. The Partnership's underwriting policy for granting
credit was to fund loans secured by first and second deeds of trust
on real property. The Partnership's area of concentration is in
California.
Management believes that the real estate industry in California
continues to stabilize. Sources of financing for borrowers have
become more readily available, however, due to decreased real
estate market values the Partnership's borrowers continue to have
difficulty obtaining long-term financing to pay off existing loans.
As these loans become delinquent, management of the Partnership
might elect to foreclose, thereby increasing real estate owned
balances. As a result of past foreclosures, the Partnership has
become a direct investor in this real estate and intends to manage
operating properties and develop raw land until such time as the
Partnership is able to sell this real estate owned.
As required by the Partnership Agreement, the Partnership is
currently in the repayment stage, and as a result, cash proceeds
from mortgage investments are no longer available for reinvestment.
(2) BASIS OF PRESENTATION
The consolidated financial statements are unaudited and reflect all
adjustments, consisting only of normal recurring accruals, which
are, in the opinion of management, necessary for a fair statement
of the results of operations for the interim periods. Results for
the three months ended March 31, 1995 and 1994 are not necessarily
indicative of results which may be expected for any other interim
period, or for the year as a whole.
Information pertaining to the three months ended March 31, 1995 and
1994 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, 1994 on file with the Securities and
8
<PAGE>
CENTENNIAL MORTGAGE INCOME FUND II
A Limited Partnership
Notes to Consolidated Financial Statements
(Continued)
(Unaudited)
March 31, 1995 and 1994
Exchange Commission, provide additional disclosures and a further
description of accounting policies.
NET LOSS PER LIMITED PARTNERSHIP UNIT
Net loss per limited partnership unit was based on the weighted
average number of limited partnership units outstanding of 29,141
for all periods presented.
IMPAIRED LOANS
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 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 as the Partnership's existing policy of measuring loan
impairment is 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 restructurings 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.
9
<PAGE>
CENTENNIAL MORTGAGE INCOME FUND II
A Limited Partnership
Notes to Consolidated Financial Statements
(Continued)
(Unaudited)
March 31, 1995 and 1994
At March 31, 1995, the Partnership had no loans that are considered
to be impaired under SFAS 114. At March 31, 1995, there was no
allowance for possible loan losses determined in accordance with
the provisions of SFAS 114, related to loans considered to be
impaired under SFAS 114. There was no investment in impaired loans
during the three months ended March 31, 1995.
NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1995, the FASB issued 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 provides guidance for recognition and measurement of
impairment of long-lived assets, certain identifiable intangibles
and goodwill related both to assets to be held and used by an
entity and assets to be disposed of. SFAS 121 is effective for
financial statements for fiscal years beginning after December 15,
1995. Although the Partnership has not yet adopted SFAS 121,
management does not expect such adoption to have a material impact
on the Partnership's consolidated financial statements.
<TABLE>
(3) REAL ESTATE OWNED
Real estate owned consists of the following:
<CAPTION>
(dollars in thousands)
MARCH 31, DECEMBER 31,
1995 1994
-------------------------
<S> <C> <C>
1. Office building in San Bernardino, CA $ 837 $ 837
2. 45 acres in Sacramento, CA 4,092 4,092
3. Proposed marina and condominiums in
Redwood City, CA 5,360 5,360
4. 10.66 acres in Roseville, CA 1,003 1,003
-------------------------
Subtotal 11,292 11,292
Less accumulated depreciation 9 8
-------------------------
Total real estate owned $ 11,283 $ 11,284
=========================
</TABLE>
10
<PAGE>
CENTENNIAL MORTGAGE INCOME FUND II
A Limited Partnership
Notes to Consolidated Financial Statements
(Continued)
(Unaudited)
March 31, 1995 and 1994
(4) TRANSACTIONS WITH AFFILIATES
The Partnership Agreement provides for payment to the general
partners of application and commitment fees in connection with
mortgage loans which are to be paid solely by borrowers and cannot,
with respect to any single mortgage investment, exceed 3 percent of
the gross proceeds of the offering (including a pro rata amount of
all expenses and any applicable reserves) invested or committed to
such mortgage investment. In the event repayments of principal on
mortgage investments which do not constitute mortgage reductions
are used to make additional mortgage loans, the general partners
or their affiliates may receive additional application and
commitment fees, subject, however, to the restriction that the
total aggregate of such fees received by the general partners or
their affiliates may not exceed 7 percent of the gross proceeds of
the offering. No application and commitment fees were incurred for
the quarters ended March 31, 1995 and 1994. Application and
commitment fees incurred from inception to March 31, 1995 totaled
$1,659,000.
Additionally, CMIF, Inc. and Centennial Corporation, affiliates 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 amount to be
funded by the Partnership. Mortgage investment servicing fees for
the quarters ended March 31, 1995 and 1994 were $9,000 and $12,000,
respectively, payable to CMIF, Inc. and Centennial Corporation.
Under 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 of 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.
In the second quarter of 1990, the Partnership participated in
making a loan to Centennial Estates, Inc. ("CEI"). CEI is a
wholly-owned subsidiary of The Centennial Group, Inc. ("CGI") in
which Ronald R. White and John B. Joseph were directors/executive
11
<PAGE>
CENTENNIAL MORTGAGE INCOME FUND II
A Limited Partnership
Notes to Consolidated Financial Statements
(Continued)
(Unaudited)
March 31, 1995 and 1994
officers and major shareholders. Ronald R. White and John B.
Joseph were also executive officers of CEI. The purpose of the
loan was to develop 179 single-family residential lots in
Lancaster, California. The amount originally committed was
$5,009,000, of which the Partnership had a 50 percent participation
interest, bore interest at prime plus 1.5 percent and matured on
March 1, 1992. The loan was subsequently extended to September 1,
1992, and the Partnership's share of the committed loan amount was
capped at $1,773,000. Subsequent to management's evaluation of the
property at December 31, 1992, management placed the loan on
nonaccrual effective January 1, 1993. During 1993, the
Partnership recorded this note as an insubstance foreclosure. In
February, 1994, LCR Development, Inc., ("LCR"), a corporation in
which the Partnership holds a 50 percent interest, the other 50
percent interest is held by Centennial Mortgage Income Fund
("CMIF"), an affiliate, purchased the underlying note secured by a
first trust deed and foreclosed on the property.
In 1994, the Partnership signed over its interest in the note
secured by the second trust deed to LCR to facilitate LCR's
foreclosure. At the time of foreclosure, the Partnership's
carrying value of the property recorded as insubstance foreclosure
was $2,550,000. The Partnership charged off $715,000 of this
carrying value to the allowance for losses on real estate owned,
transferred notes payable of $656,000, transferred interest and
property taxes payable on real estate owned of $121,000 and
recorded its share of a new note due from LCR in the amount of
$1,058,000. Subsequent to the foreclosure, the Partnership holds
a 50 percent participation in a note secured by a second trust deed
in the amount of $2,627,000. The Partnership's share of the note
secured by the second trust deed at March 31, 1995 is $1,341,000
and the Partnership had applied $210,000 of cumulative losses from
unconsolidated investees against the carrying value of the note as
of that same date.
The balance sheet and income statement of LCR Development, Inc.
have not been consolidated in the Partnership's financial
statements. The Partnership accounts for its investment in this
corporation using the equity method. The following represents
condensed financial information for LCR Development, Inc. at March
31, 1995 and for the three months ended March 31, 1995:
12
<PAGE>
CENTENNIAL MORTGAGE INCOME FUND II
A Limited Partnership
Notes to Consolidated Financial Statements
(Continued)
(Unaudited)
March 31, 1995 and 1994
<TABLE>
LCR DEVELOPMENT, INC.
BALANCE SHEET
<CAPTION>
Assets March 31,
1995
---------------
<S> <C>
Cash $ 4,000
Real property 3,852,000
Organization costs 3,000
----------------
$ 3,859,000
================
</TABLE>
<TABLE>
<CAPTION>
Liabilities and Stockholders' Deficit March 31,
1995
----------------
<S> <C>
Notes payable to affiliates $ 3,877,000
Interest and property taxes
payable on real property 403,000
----------------
Total liabilities 4,280,000
Stockholders' deficit (421,000)
----------------
$ 3,859,000
================
</TABLE>
<TABLE>
LCR DEVELOPMENT, INC.
STATEMENT OF OPERATIONS
<CAPTION>
Three months
ended
March 31, 1995
----------------
<S> <C>
Interest expense $ 107,000
----------------
Net loss $ 107,000
================
</TABLE>
13
<PAGE>
CENTENNIAL MORTGAGE INCOME FUND II
A Limited Partnership
Notes to Consolidated Financial Statements
(Continued)
(Unaudited)
March 31, 1995 and 1994
In August 1990, the Partnership committed to participate in another
loan to CEI. The loan funded April 29, 1991. The funds were
provided for a land development loan on a 283-acre residential
tract in Bakersfield, California. The amount originally committed
was $7,000,000 of which the Partnership had a 50 percent
participation interest. The committed amount was subsequently
capped at $6,492,000. The loan bore interest at prime plus 3
percent and matured on March 1, 1993. Subsequent to management's
evaluation of the property at December 31, 1992, management placed
the loan on nonaccrual effective January 1, 1993. During 1993, the
Partnership had recorded this note as an insubstance foreclosure.
A notice of default was filed on March 17, 1994. In 1994, the
Partnership assigned the note receivable to BKS Development, Inc.
("BKS"), a corporation in which the Partnership holds a 50 percent
interest with the other 50 percent interest held by CMIF. BKS
foreclosed on this property on August 8, 1994.
At time of foreclosure, the Partnership's carrying value of the
property recorded as insubstance foreclosure was $3,899,000. The
Partnership charged off $1,300,000 of this carrying value to the
allowance for losses, decreased notes payable by $449,000,
decreased interest and property taxes payable on real estate owned
by $204,000 and recorded its share of a new note due from BKS in
the amount of $1,946,000. The Partnership's share of the note
receivable at March 31, 1995 is $1,946,000 and the Partnership had
applied $348,000 of cumulative losses from unconsolidated investees
against the carrying value of the note as of that same date.
The balance sheet and statement of operations of BKS Development,
Inc. have not been consolidated in the Partnership's financial
statements. The Partnership accounts for its investment in this
corporation using the equity method. The following represents
condensed financial information for BKS at March 31, 1995 and for
the three months ended March 31, 1995:
<TABLE>
BKS DEVELOPMENT, INC.
BALANCE SHEET
<CAPTION>
Assets March 31,
1995
---------------
<S> <C>
Cash $ 1,000
Real property 5,199,000
---------------
5,200,000
===============
</TABLE>
14
<PAGE>
CENTENNIAL MORTGAGE INCOME FUND II
A Limited Partnership
Notes to Consolidated Financial Statements
(Continued)
(Unaudited)
March 31, 1995 and 1994
<TABLE>
<CAPTION>
Liabilities and Stockholders' Deficit March 31,
1995
---------------
<S> <C>
Bonds payable $ 899,000
Notes payable to affiliates 3,893,000
Interest and property taxes
payable on real property 1,106,000
----------------
Total liabilities 5,898,000
Stockholders' deficit (698,000)
----------------
$ 5,200,000
================
</TABLE>
<TABLE>
BKS DEVELOPMENT, INC.
STATEMENT OF OPERATIONS
<CAPTION>
Three months
ended
March 31, 1995
<S> <C>
Interest expense $ 172,000
Property taxes 26,000
----------------
Net loss $ 198,000
================
</TABLE>
Partnership management believes the terms of both LCR and BKS
transactions were fair to the Partnership at the time the loans
were made and were no more favorable than those obtainable from
unrelated third parties for comparable financing on comparable
property.
15
<PAGE>
CENTENNIAL MORTGAGE INCOME FUND II
A Limited Partnership
Notes to Consolidated Financial Statements
(Continued)
(Unaudited)
March 31, 1995 and 1994
<TABLE>
(5) NOTE PAYABLE
Note payable consists of the following:
<CAPTION>
(dollars in thousands)
March 31, December 31,
1995 1994
------------------------------
<S> <C> <C>
Note payable secured by office
building in San Bernardino, CA,
with principal, interest and
property taxes payable monthly
of $5,588; interest rate of 9.5%,
maturing December 1, 1999 $ 214 $ 224
----------------------------
Total note payable $ 214 $ 224
============================
</TABLE>
(6) CONTINGENCIES
There are no material pending legal proceedings other than ordinary
routine litigation incidental to the registrant's business.
16
<PAGE>
CENTENNIAL MORTGAGE INCOME FUND II MARCH 31, 1995
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 $(215,000) and $(7.38), respectively, for the three months
ended March 31, 1995 and $(252,000) and $(8.65), respectively, for
the three months ended March 31, 1994. The decrease in loss from
1994 to 1995 is primarily the result of a decrease in the provision
for possible losses, lower interest income and an increase in share
of losses in unconsolidated investees.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1995, the Partnership had $1,412,000 in unrestricted
cash and interest-bearing deposits. The Partnership had no
unfunded loan commitments at March 31, 1995. Additional sources of
funds are expected to be from future loan payoffs and the sale of
real estate owned. Future operations of real estate owned are not
expected to be a significant source of funds. The Partnership
funded advances on loans to affiliates totaling $68,000 and
received payoffs and paydowns on loans totaling $1,000 during the
three months ended March 31, 1995.
The Partnership's notes payable commitments consist of interest and
non-balloon principal payments due of approximately $50,000 payable
in 1995. In addition to the note payable commitments, the
Partnership's principal capital requirements include: i) real
property taxes on real estate owned of approximately $271,000
payable and delinquent in 1995, and ii) selling, general and
administrative costs. These commitments are expected to be made
from existing cash reserves, 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
17
<PAGE>
CENTENNIAL MORTGAGE INCOME FUND II MARCH 31, 1995
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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
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 operating requirements due to the amount
of real estate owned within the portfolio.
RESULTS OF OPERATIONS
Due to the downturn in the real estate industry in California,
several of the Partnership's loans have become nonperforming and
subsequently real estate owned. As a result, interest income on
loans to affiliates and nonaffiliates continues to decline.
Interest income on loans to affiliates, including fees was $12,000
for the quarter ended March 31, 1994. There was no interest income
on loans to affiliates for the quarter ended March 31, 1995.
Interest income on loans to nonaffiliates, including fees decreased
to $11,000 from $13,000 for the quarters ended March 31, 1995 and
1994. The decrease in interest income on loans from 1994 to 1995
is primarily due to the foreclosure of two loans.
The real estate owned balance at March 31, 1995 and 1994 was
$11,238,000 and $19,840,000, respectively. On April 28, 1992, the
American Institute of Certified Public Accountants issued Statement
of Position 92-3 ("SOP 92-3"), "Accounting for Foreclosed Assets."
SOP 92-3 indicates that foreclosed assets are presumed held for
sale and not for the production of income. Accordingly, foreclosed
assets held for sale are to be carried at the lower of cost or fair
value minus estimated costs to sell. The cost of such assets at
the time of foreclosure is the fair value of the asset foreclosed.
Immediately after foreclosure, a valuation allowance is recognized
for estimated costs to sell through a charge to income. All of the
Partnership's real estate owned, including insubstance
foreclosures, is presumed held for sale. Effective December 31,
1992, the Partnership adopted SOP 92-3. There was no adjustment
resulting from the application of SOP 92-3.
The following section entitled Real Estate Owned provides a
detailed analysis of these assets.
18
<PAGE>
CENTENNIAL MORTGAGE INCOME FUND II MARCH 31, 1995
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
REAL ESTATE OWNED
A description of the Partnership's principal real estate owned
follows:
Office Building in San Bernardino, California
The Partnership funded a loan during January 1988 with an original
committed amount of $921,000 which was secured by a second trust
deed on an office building comprised of 15,984 square feet of
rentable space located in San Bernardino, California. The loan was
provided as gap financing behind a first deed of trust in the
amount of $350,000 to another financial institution. The borrower
was unable to payoff the loan at maturity and the Partnership
foreclosed on April 20, 1993. The Partnership restructured the
note secured by the first trust deed to a more favorable term and
rate. The project is 71 percent leased and is beginning to
generate positive net operating income. The property has now been
listed for sale. The carrying value at March 31, 1995 was $837,000
less depreciation of $9,000. The property is encumbered by a note
secured by a first trust deed of $214,000 which matures December
31, 1999.
45 Acres in Sacramento, California
The Partnership funded a loan in 1987 with a committed amount of
$4,000,000 secured by a first trust deed on 44.52 acres in
Sacramento, California. The loan was provided for the development
of offsite improvements. The maturity date was February 1, 1991.
The borrower was unable to obtain construction financing and bring
interest current. The Partnership accepted a grant deed on the
property on March 10, 1992. The property is zoned for multi-family
and light industrial use. The Partnership is evaluating the
possibility of future rezoning and subdivision of portions of
the property and the associated improvement costs thereof. The
property is listed for sale and during the first quarter of 1995
two separate escrows were opened for separate portions of the
property. The Partnership is not expecting to realize any material
gains or losses related to these potential sales. However, there
is no assurance that either of the escrows will actually close. At
March 31, 1995, the carrying value was $4,092,000.
Proposed Marina and Condominiums in Redwood City, California
On April 7, 1989, the Partnership foreclosed on a land loan and now
owns the property. The Partnership originally committed $3,487,000
for a land loan located in Redwood City, California. The purpose
of the loan was to acquire the land and provide for the planning of
a 122-slip marina plus an office building and restaurant. The
original maturity date of October 21, 1986 was extended to March 1,
1987. In March 1987, the borrower filed bankruptcy. The property
19
<PAGE>
CENTENNIAL MORTGAGE INCOME FUND II MARCH 31, 1995
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
is included in real estate owned at its carrying value of
$5,360,000. In February and March of 1992, the Redwood City
Planning Commission formally approved the Certificate of Negative
Declaration, Tentative Tract Map and the Planned Unit Development.
Management has also obtained an extension on the 404B1 permit for
the marina through March 1996. The above-referenced entitlements
enable the owner to build the currently proposed 104-slip boat
marina and 117 condominium units. The Partnership has completed
approximately 70 percent of the dredging of the marina site.
Residential sales in this entire area have seen a steady decline
over the last 2-3 years, however the area appears to have
stabilized. As a result management is pursuing both, (i) the sale
or joint venture of the property and (ii) Partnership buildout of
the project and sale thereafter.
10.66 Acres in Roseville, California
The Partnership funded a loan in 1990 with an original committed
amount of $2,779,000 secured by a second deed of trust on 982 acres
in Roseville, California. The borrower failed to make the required
yearly principal payment to the first and second trust deed
holders. The first trust deed holder filed a notice of default for
nonpayment. Management negotiated a settlement agreement to accept
substitute collateral for the outstanding balance of $2,086,000.
The substitute collateral is a 10.66 acre commercial site with a
carry value at March 31, 1995 of $1,003,000. The property has no
additional debt. Management is marketing the property for sale and
is evaluating a possible rezone.
INTEREST ON INTEREST-BEARING DEPOSITS
Interest on interest-bearing deposits totaled $14,000 for the three
months ended March 31, 1995 and $18,000 for the same respective
period in 1994. Interest on interest-bearing deposits represents
interest earned on Partnership funds invested for liquidity in time
certificate and money market deposits. The decrease in income on
interest-bearing deposits is principally due to decreased cash
balances for the three months ended March 31, 1995.
INCOME FROM OPERATIONS OF REAL ESTATE OWNED
Income from operations of real estate owned consists of operating
revenues of $33,000 and $83,000 for the three months ended March
31, 1995 and 1994, respectively. The 1995 revenues are from the
office building in San Bernardino. The 1994 revenues are from the
lube center and car wash in San Marcos (sold in 1994), the office
building in San Bernardino and January income from the multi-tenant
industrial buildings in Moreno Valley.
20
<PAGE>
CENTENNIAL MORTGAGE INCOME FUND II MARCH 31, 1995
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
PROVISION FOR POSSIBLE LOSSES
The provision for possible losses was $64,000 for the three months
ended March 31, 1994. There was no provision for the three months
ended March 31, 1995. The 1994 provision relates primarily to the
lube center and car wash in San Marcos. The provision for possible
losses results from the change in the allowance for possible loan
losses and the allowance for possible losses on real estate owned
net of charge-offs, if any. Management believes that the allowance
for possible loan losses at March 31, 1995 is adequate to absorb
the known and inherent risks in the Partnership's loan portfolio.
EXPENSES
Operating expenses from operations of real estate owned were
$16,000 for the three months ended March 31, 1995 and $46,000 for
three months ended March 31, 1994. These expenses were associated
with the lube center and car wash in San Marcos, the multi-tenant
industrial buildings in Moreno Valley and the office building in
San Bernardino. The decrease in 1995 is due to the sale of the
lube center and car wash in San Marcos and the loss of the
multi-tenant industrial buildings in Moreno Valley.
Operating expenses from operations of real estate owned paid to
affiliates were $3,000 and $5,000 for the three months ended March
31, 1995 and 1994, respectively. The operating expenses consist of
property management fees paid to an affiliate.
Expenses associated with non-operating real estate owned were
$39,000 and $79,000 for the three months ended March 31, 1995 and
1994, respectively. The expenses relate to the proposed marina and
office building in Redwood City, the 45 acres in Sacramento, and
the 10.66 acres in Roseville. The decrease in 1995 is primarily
due to the loss of the 128 single-family lots in Redlands.
Depreciation and amortization expense for the three months ended
March 31, 1995 and 1994 was $2,000 and $5,000, respectively, for
tenant improvements on the office building in San Bernardino. The
decrease for 1995 is due to the loss of the multi-tenant industrial
buildings in Moreno Valley.
Interest expense was $6,000 for the three months ended March 31,
1995 and $93,000 for the three months ended March 31, 1994. The
interest expense relates to the office building in San Bernardino,
the 128 lots in Redlands, the lube center and car wash in San
Marcos and the multi-tenant industrial buildings in Moreno Valley.
The decrease for 1995 is due to the loss of the Moreno Valley real
estate owned, the loss of the 128 lots in Redlands and the sale of
the lube center and car wash in San Marcos.
21
<PAGE>
CENTENNIAL MORTGAGE INCOME FUND II MARCH 31, 1995
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
General and administrative expenses, affiliates for the three
months ended March 31, 1995 totaled $27,000 and $37,000,
respectively. These expenses are primarily salary allocation
reimbursements paid to affiliates. The decrease for 1995 is due to
a decrease in allocation percentages.
General and administrative expenses, nonaffiliates totaled $18,000
and $37,000 for the three months ended March 31, 1995 and 1994,
respectively. These expenses consist of other costs associated
with the administration of the Partnership and real estate owned.
The decrease for 1995 is primarily due to a decrease in legal costs
associated with real estate owned.
Mortgage investment servicing fees for the three months ended March
31, 1995 and 1994 totaled $9,000 and $12,000. This consists of
fees paid to CMIF Inc. and Centennial Corporation, affiliates of
the general partners, for servicing the Partnership's loan and real
estate owned portfolio. The decrease for 1995 is due to decreases
in the number of loans and real estate owned serviced.
22
<PAGE>
CENTENNIAL MORTGAGE INCOME FUND II MARCH 31, 1995
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
23
<PAGE>
EXHIBIT A
This schedule contains summary financial information extracted from
the March 31, 1995 10-Q and is qualified in its entirety by
reference to such financial statements.
<TABLE>
<CAPTION> March 31, December 31,
1995 1994
----------------------------------
<S> <C> <C>
Cash and cash items $ 1,423,000 $ 1,919,000
Notes and accounts
receivable-trade 3,033,000 3,118,000
Allowances for doubtful accounts 8,000 8,000
Total current assets 1,845,000 2,048,000
Total assets 13,708,000 13,997,000
Total current liabilities 124,000 188,000
Bonds, mortgages and
similar debt 214,000 224,000
Total liabilities and
partners' equity 13,708,000 13,997,000
Total revenue 58,000 126,000
Other costs and expenses 273,000 314,000
Provision for doubtful
accounts and notes --- 64,000
Income (loss) before taxes
and other items (215,000) (252,000)
Income (loss) continuing
operations (215,000) (252,000)
Net income or loss (215,000) (252,000)
Earnings per unit (7.38) (8.65)
</TABLE>
24
<PAGE>
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 II,
A California Limited Partnership
By: /s/John B. Joseph May 15, 1995
John B. Joseph Date
General Partner
By: /s/Ronald R. White May 15, 1995
Ronald R. White Date
General Partner
By: CENTENNIAL CORPORATION,
a California corporation
General Partner
/s/Robert F. Ishii May 15, 1995
Robert F. Ishii Date
Chief Financial Officer
