FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission File Number: 0-15448
CENTENNIAL MORTGAGE INCOME FUND II
(Exact name of registrant as specified in its charter)
California 33-0112106
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1540 South Lewis Street, Anaheim, California 92805
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (714)502-8484
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Units
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate by check mark whether if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (Section 229.405 of this
chapter) is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
YES X NO
This report includes a total of 69 pages.
PART I
ITEM 1. BUSINESS.
(a) General Development of the Business
Centennial Mortgage Income Fund II (the "Partnership"), a
California Limited Partnership, was organized on July 12, 1985.
The Partnership's registration statement became effective January
17, 1986. The general partners are John B. Joseph, Ronald R.
White and Centennial Corporation ("CC"). During the fourth
quarter of 1992, 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.
Centennial Capital Inc., ("CCI") tendered its resignation as a
general partner of the Partnership effective January 31, 1994.
The remaining general partners requested the consent of the
limited partners to the addition of Centennial Corporation ("CC")
as new general partner. During 1994, CC, a privately-held
corporation whose stock is owned by affiliates of Ronald R. White
and John B. Joseph, was approved as a new general partner. CC
was incorporated in October of 1983 to engage in the real estate
lending business and to provide consulting services.
(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, other equity
participation 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 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. Most
of the loans secured by operating properties have been repaid.
As a result, the Partnership has become a direct investor in real
estate and intends to manage operating properties and develop raw
land until such time as the Partnership is able to sell its real
estate owned. The real estate owned balance before allowance for
possible losses at December 31, 1994 was $11,284,000, increasing
to $11,314,000 at year end 1995 and increasing to $11,316,000 at
year end 1996.
(d) Financial Information about Foreign and Domestic Operations
and Export Sales
Not applicable.
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. LEGAL PROCEEDINGS.
There are no material pending legal proceedings other than
ordinary routine litigation incidental to the registrant's
business.
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. 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 3,800 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. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(dollars in thousands, except per unit data)
Years ended
- --------------------------------------------------------------------------------
- ----------
<S> <C> <C> <C> <C>
<C>
- --------------------------------------------------------------------------------
- ----------
12/31/96 12/31/95 12/31/94 12/31/93
12/31/92
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- ----------
Consolidated Statement
of Operations Data:
Total revenue................$ 251 $ 279 $ 433 $ 715
$ 1,240
Net loss..................... (1,515) (2,377) (2,243) (4,543)
(3,463)
Net loss per limited
partnership unit........... (51.99) (81.57) (76.97) (115.90)
(112.90)
Consolidated Balance
Sheet Data:
Total loans.................. 1,068 1,856 3,118 883
7,425
Total real estate owned...... 11,316 11,314 11,284 24,170
18,572
Total assets................. 10,132 11,605 13,997 22,443
25,028
Partners' equity............. 9,693 11,208 13,585 15,828
20,371
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
General
Net loss and loss per limited partnership unit were $(1,515,000)
and $(51.99) for the year ended December 31, 1996 down from
$(2,377,000) and $(81.57) in 1995 and $(2,243,000) and $(76.97)
in 1994. The loss in 1996 is primarily the result of the losses
in unconsolidated investees, an increase in expenses associated
with non-operating real estate owned and an increase in general
and administrative expenses. The loss in 1995 is primarily due
to losses in unconsolidated investees and a decrease in income
from operations of real estate owned. The loss in 1994 is
primarily the result of the provision for possible losses and
losses in unconsolidated investees, a decrease in interest income
and income from operations of real estate owned offset by a
decrease in operating expenses from operations of real estate
owned and a decrease in interest expense.
Liquidity and Capital Resources
At December 31, 1996, the Partnership had $261,000 in
unrestricted cash and interest-bearing deposits. Additional
sources of funds are expected to be from the sale of real estate
owned. Future operations of real estate owned are not expected
to be a significant source of funds. As of December 31, 1996,
all real estate owned is classified as held for sale and the
Partnership was currently marketing $11,316,000 in real estate
owned. As of December 31, 1996, the Partnership had no unfunded
loan commitments to nonaffiliates. The Partnership funded
advances on loans to affiliates during 1996 totaling $336,000,
received principal payoffs and paydowns on loans from
nonaffiliates totaling $7,000 and received principal paydowns on
loans from affiliates totaling $141,000. During 1996, the
Partnership funded $2,000 of capital expenditures for real estate
owned.
The Partnership's notes payable commitments for 1997 consist of
interest and non-balloon principal payments due of approximately
$58,000. In addition to the note payable commitments, the
Partnership's principal capital requirements include: i) property
taxes and bonds on real estate owned of approximately $541,000
payable and delinquent in 1997, and ii) selling, general and
administrative costs. Property taxes delinquent at December 31,
1996 have been accrued at December 31, 1996. The Partnership can
apply for a 5 year redemption plan on a portion of the property
taxes due in 1997 to ease liquidity constraints if necessary.
These commitments are expected to be paid from existing cash
balances and the sale of real estate owned. The Partnership has
entered into contracts to sell all of its proposed marina and
condominium project in Redwood City and a portion of its 45 acre
project in Sacramento and has been negotiating with several other
buyers on other projects. All of these potential transactions
are subject to numerous contingencies and uncertainties and there
is no assurance that any of them will ultimately close escrow.
The Partnership expects to be able to sell this real estate owned
to meet liquidity needs.
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. Beginning with the
fourth quarter of 1992, the Partnership entered its repayment
stage and 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 for 1997.
However, the Partnership needs to improve liquidity through the
sale of real estate owned in order to allocate funds to improve
and to fulfill the operating requirements of the remaining real
estate owned by the Partnership on a long-term basis.
Results of Operations
Due to the downturn in the real estate industry in California and
its impact on the Partnership's borrowers, the Partnership's
loans to nonaffiliates have been converted into real estate owned
through foreclosures. As a result, interest income on loans to
nonaffiliates, including fees, decreased substantially during
1996, 1995 and 1994. Interest income on loans to nonaffiliates,
including fees, decreased to $21,000 in 1996 from $42,000 in 1995
and $96,000 in 1994. Interest income on loans to nonaffiliates
decreased in 1996, 1995 and 1994 primarily due to payoffs of
existing loans. Interest income on loans to affiliates,
including fees was $81,000 for 1996 and $52,000 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 receivable from unconsolidated investees in 1994.
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. There were no loans on
nonaccrual, other than loans to affiliates, as of December 31,
1996, 1995 and 1994.
The real estate owned balance before allowance for possible
losses at December 31, 1996, 1995 and 1994 was $11,316,000,
$11,314,000 and $11,284,000, 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 cost to sell. An
impairment loss shall be measured as the amount by which the
carrying amount of the asset exceeds the fair value of the assets
less costs to sell. SFAS 121 requires that assets to be disposed
of not be depreciated while they are held for disposal. All of
the Partnership's real estate owned is presumed held for sale.
The adoption of SFAS 121 did not have a significant impact on the
Partnership's financial statements.
The following sections entitled Nonaccrual Loans and Other Loans
to Affiliates and Real Estate Owned provide a detailed analysis
of these assets.
Nonaccrual Loans and Other Loans to Affiliates
Loans on nonaccrual status during the year ended December 31,
1996 are summarized below:
During 1994, the Partnership converted a 50 percent participation
in a note secured by a second trust deed into a 50 percent
participation in a $2,115,000 unsecured note representing a
workout loan due from LCR, an affiliate. This loan and an
additional loan funded by Centennial Mortgage Income Fund
("CMIF") reflect the majority of the cost basis of lots
contributed to Silverwood. LCR's only source of repayment of
this note is proceeds from the sale of the fully developed lots.
Management has estimated the proceeds for repayment of this note
to be less than the original principal balance of the loan. As a
result, the loan has been placed on nonaccrual. The
participating principal balance and nonaccrued interest balances
at December 31, 1996 are $1,059,000 and $241,000, respectively.
As discussed in note 5 of Notes to Consolidated Financial
Statements, the Partnership has reduced the carrying value of
this note by $1,059,000, a portion of its share of losses from
this unconsolidated investee.
During 1994 and 1995, LCR evaluated various alternative
strategies for liquidating its investment in the 179 lots in
Lancaster. During 1994, LCR determined that its best course of
action appeared to be the full-scale buildout and sale of single-
family homes since the market for finished lots had fallen so
significantly. LCR obtained construction financing commitments
from CMIF and the Partnership and entered into a joint venture
agreement entitled Silverwood with Home Devco to construct and
sell single-family homes 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 1 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
$1,301,000. The Partnership's disbursed balance of the
$3,265,700 development loan at December 31, 1996 is $771,000.
The Partnership had applied $252,000 of cumulative losses from
unconsolidated investees against the carrying value of the note
as of the same date. The Partnership's disbursed balance of the
$490,000 model loan at December 31, 1996 is $245,000. The
Partnership's disbursed balance of the $1,034,000 Phase 1
construction loan at December 31, 1996 is $285,000.
Sales volumes of new homes in the Lancaster area have continued
to decline since 1995 while sales prices have remained relatively
flat and construction costs have increased. This has caused a
further decline in the value of finished lots and a reduction in
the anticipated net proceeds the Partnership expects to realize
from the buildout of homes at the project. Additionally,
Silverwood closed escrow on only 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
during the year ended December 31, 1996 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 66
percent leased and the property is beginning to generate positive
net operating income. The property generated net operating
income of $36,000 during 1996. The property is being marketed
for sale, however, due to below desirable occupancy levels, it is
difficult to attract buyers. The carrying value before allowance
for possible losses at December 31, 1996 was $825,000. The
Partnership has recorded a $250,000 allowance for losses related
to this property as of December 31, 1996. The property is
encumbered by a fully amortizing note secured by a first trust
deed of $143,000 which matures December 1, 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. A portion of
the property is adjacent to Highway 99 and has good freeway
visibility. The property is listed for sale and during 1995 and
1996 there was a significant increase in activity. The
Partnership is in the process of rezoning and subdividing
portions of the property to facilitate one escrow on a 6.5 acre
portion of the property without freeway visibility. This portion
was originally placed in escrow during 1995. However, due to the
buyer's inability to obtain financing, the escrow fell through.
During the first quarter of 1996, this escrow was reopened. The
Partnership is not expecting to realize any material gains or
losses related to this potential sale and there is no assurance
that the escrow will actually close. At December 31, 1996, the
carrying value before allowance for possible losses was
$4,128,000. The Partnership has recorded a $584,000 allowance
for losses related to this property as of December 31, 1996.
Proposed Marina and Condominiums in Redwood City, California
On April 7, 1989, the Partnership foreclosed on a land loan
located in Redwood City, California with an original committed
amount of $3,487,000. The purpose of the loan was to acquire the
land and provide for the planning of a 122-slip marina plus an
office building and restaurant. The original maturity date of
October 21, 1986 was extended to March 1, 1987. In March 1987,
the borrower filed bankruptcy. The property is included in real
estate owned at its carrying value before allowance for possible
losses of $5,360,000. Management has obtained an extension on
the 404B1 permit for the marina through March 1999. The 404B1
permit enables the owner to build the currently proposed 104-slip
boat marina. The Partnership has completed approximately 70
percent of the dredging of the marina site. The property is
currently in escrow for a purchase price of $4,000,000 with
possible increases if certain conditions are met. Close of
escrow is scheduled for December 31, 1997 with extensions to
March 31, 1998. However, there is no assurance that this escrow
will actually close. The Partnership has recorded a $1,651,000
allowance for losses related to this property as of December 31,
1996.
10.66 Acres in Roseville, California
The Partnership funded a loan in 1990 with an original commitment
of $2,779,000 secured by a second deed of trust on 982 acres in
Roseville, California. The borrower failed to make the required
yearly principal payment to the first and second trust deed
holders. The first trust deed holder filed a notice of default
for nonpayment. Management negotiated a settlement agreement to
accept a 10.66 acre commercial site as payment in full for the
$2,779,000 note. This property had a carrying value before
allowance for possible losses at December 31, 1996 of $1,003,000,
and has no additional debt. This area has seen an increase in
residential development during 1995 and 1996 which has increased
interest in this property. Management is marketing the property
for sale and is currently negotiating with a buyer for a portion
of the property. The Partnership has recorded a $60,000
allowance for losses related to this property as of December 31,
1996.
Interest on Interest-Bearing Deposits
Interest on interest-bearing deposits was $21,000 in 1996,
$49,000 in 1995 and $38,000 in 1994. The decrease in interest on
interest-bearing deposits in 1996 is primarily the result of
lower cash balances due to a lack of the sale of real estate
owned. The increase in interest on interest-bearing deposits in
1995 is primarily the result of 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 consists of operating
revenues of $127,000 in 1996, $134,000 in 1995 and $243,000 in
1994. The 1996 and 1995 revenues are from the office building in
San Bernardino. The 1994 revenues are from the office building
in San Bernardino and eight months of revenues from a lube center
and car wash in San Marcos.
Provision for Possible Losses
The provision for possible losses was $199,000 in 1995 and
$1,268,000 in 1994. There was no provision for possible losses
recorded in 1996. The 1995 provision relates to loans receivable
from an affiliate secured by timeshare interests and the office
building in San Bernardino. The 1994 provision relates to the
proposed marina and condominiums in Redwood City offset by a
decrease in the provision for 128 lots in Redlands, the lube
center and car wash in San Marcos and the office building in San
Bernardino.
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.
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 $1,059,000 for 1996,
$1,803,000 for 1995 and $408,000 for 1994. The 1996 share of
losses consist 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 additional costs
related to the sale of homes in Lancaster. The 1995 share of
losses also 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 written off its
investment in BKS and its remaining net carrying value of its
investment in LCR has been reduced to $1,049,000 as of December
31, 1996.
Operating expenses from operations of real estate owned were
$76,000 in 1996, $107,000 in 1995 and $161,000 in 1994. The
decrease for 1996 is due to parking lot expenses incurred in 1995
with no similar expense in 1996. The decrease from 1994 to 1995
is due to the decrease in the number of real estate owned
properties.
Operating expenses from operations of real estate owned paid to
affiliates were $12,000 each for 1996 and 1995 and $14,000 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
$344,000 in 1996, $289,000 in 1995 and $313,000 in 1994. The
expenses relate to the proposed marina and condominiums in
Redwood City, the 128 single-family lots in Redlands, the 283
acres in Bakersfield, the 179 lots in Lancaster, the 45 acres in
Sacramento and the 10.66 acres in Roseville. These expenses
include property taxes of $257,000, $244,000 and $305,000 for
1996, 1995 and 1994, respectively. The increase from 1995 to
1996 is due to costs incurred to facilitate the escrows on the
proposed marina and condominiums in Redwood City and the 45 acres
in Sacramento as well as the negotiations on the 10.66 acres in
Roseville. The decrease from 1994 to 1995 is primarily due to a
decrease in property tax expenses due to the decrease in real
estate owned.
Depreciation and amortization expense was $8,000 in 1996, $11,000
in 1995 and $13,000 in 1994 for the office building in San
Bernardino and the multi-tenant industrial buildings in Moreno
Valley. The decrease from 1995 to 1996 is due to fully amortized
leasing commissions in 1995.
Interest expense was $16,000 for 1996, $20,000 for 1995 and
$156,000 for 1994. The interest expense for 1996 and 1995 relates
only to the underlying debt on the office building in San
Bernardino. The decrease from 1994 to 1995 is the result of the
reduction of the debt on the 128 lots in Redlands, the lube
center and car wash in San Marcos and the multi-tenant industrial
buildings in Moreno Valley.
The loss on sale of real estate owned totaled $64,000 for 1994.
There was no comparable expense for 1996 and 1995. The 1994 loss
was from the sale of the lube center and car wash in San Marcos.
General and administrative expenses, affiliates increased to
$173,000 in 1996 from $123,000 in 1995 and $151,000 in 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 $33,000
change in billing methodology from mortgage investment servicing
fees to salary allocations. The decrease for 1995 is due to no
extraordinary payment of vacation benefits which had accrued but
not vested in prior periods and were paid in 1994 upon
replacement of the corporate general partner.
General and administrative expenses, nonaffiliates increased to
$78,000 in 1996 from $59,000 in 1995 and $87,000 in 1994. The
increase for 1996 is primarily due to increased investor
reporting expenses and moving expenses. The decrease for 1995 is
due primarily to a decrease in administrative expenses associated
with real estate owned.
Mortgage investment servicing fees paid to affiliates were
$33,000 in 1995 and $41,000 in 1994. There were no mortgage
investment servicing fees paid to affiliates during 1996. These
fees consist of amounts paid to CC and CMIF, Inc., 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 decreases for
1995 and 1994 are primarily due to the decreases in size of the
Partnership's loan portfolio.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedules
attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
REPORTING AND FINANCIAL DISCLOSURE
None.
PART III
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 Chief
Executive Officer 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-owned real estate development
corporation, from February 1987 to July 1993; Senior Executive
Vice President of CGI from July 1987 to July 1993; Director and
Executive Vice President of Centennial Capital, Inc. ("CCI"), a
subsidiary of CGI, from April 1988 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.
Ronald R. White
Age 50
General Partner
Ronald R. White is currently President and CEO of Centennial
Corporation. He served as Chairman of the Board of Directors,
President and Chief Executive Officer of CGI from February 1987
to July 1993. Mr. White also serves, or has served, in the
following capacities during the past five years: Executive Vice
President and Vice Chairman of the Board of Directors of WCB;
Director and Executive Vice President of CCI from April 1988 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.
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 the first quarter of 1994. 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, 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. 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 $ 185,000 (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 $ ---
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.
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 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. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This disclosure is made in note 5 of Notes to the Consolidated
Financial Statements incorporated in this filing.
PART IV
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 II 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 II 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 II 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 II AND SUBSIDIARIES
A Limited Partnership
Items 8, 14(a)(1) and 14(a)(2)
Index to Consolidated Financial Statements and Schedules
Consolidated Financial Statements Page
Independent Auditors' Report............................. F-2
Consolidated Balance Sheets --
December 31, 1996 and 1995............................. F-3
Consolidated Statements of Operations --
Years ended December 31, 1996, 1995 and 1994........... F-5
Consolidated Statements of Partners' Equity --
Years ended December 31, 1996, 1995 and 1994........... F-7
Consolidated Statements of Cash Flows --
Years ended December 31, 1996, 1995 and 1994........... F-8
Notes to Consolidated Financial
Statements............................................... F-14
Schedules
Schedule III - Consolidated Real Estate Owned
and Accumulated Depreciation and Amortization.......... F-38
Schedule IV - Mortgage Loans on Real Estate.............. F-43
All other schedules are omitted as the required information is
inapplicable, or the information is presented in the consolidated
financial statements or notes thereto.
F-1
INDEPENDENT AUDITORS' REPORT
To the General Partners
Centennial Mortgage Income Fund II:
We have audited the consolidated financial statements of
Centennial Mortgage Income Fund II, 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 II 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
F-2
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1996 and 1995
<S> <C> <C>
Assets 1996 1995
- -----------------------------------------------------------------
Cash and cash
cash equivalents (note 5) $ 261,000 $ 854,000
Restricted cash 12,000 11,000
Short-term investments --- 102,000
Real estate loans
receivable, earning 19,000 25,000
Real estate loans
receivable from
unconsolidated investees,
earning (note 5) --- 1,033,000
Real estate loans
receivable from
unconsolidated investees,
nonearning (note 5) 1,049,000 798,000
- -----------------------------------------------------------------
1,068,000 1,856,000
Less allowance for
possible loan losses (note 3) 8,000 8,000
- -----------------------------------------------------------------
Net real estate
loans receivable 1,060,000 1,848,000
Real estate owned,
held for sale,
less accumulated
depreciation of $12,000
in 1995 (notes 6 and 7) 11,316,000 11,314,000
Less allowance for
possible losses on real
estate owned (note 4) 2,545,000 2,545,000
- -----------------------------------------------------------------
Net real estate owned 8,771,000 8,769,000
F-3
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
(Continued)
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996 and 1995
<S> <C> <C>
Assets 1996 1995
- -----------------------------------------------------------------
Due from affiliates 16,000 ---
Other assets 12,000 21,000
- -----------------------------------------------------------------
$ 10,132,000 $ 11,605,000
=================================================================
Liabilities and Partners' Equity
- -----------------------------------------------------------------
Note payable (note 7) $ 143,000 $ 185,000
Accounts payable
and accrued liabilities 12,000 6,000
Interest and property taxes
payable on real estate owned 283,000 203,000
Payable to affiliates (note 5) 1,000 3,000
- -----------------------------------------------------------------
Total liabilities 439,000 397,000
Partners' equity (deficit) --
29,141 limited partnership units
outstanding in 1996 and 1995
General partners (195,000) (195,000)
Limited partners 9,888,000 11,403,000
- -----------------------------------------------------------------
Total partners' equity 9,693,000 11,208,000
Contingencies (note 8)
- -----------------------------------------------------------------
$ 10,132,000 $ 11,605,000
=================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-4
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31, 1996, 1995 and 1994
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Revenue:
Interest on loans
to affiliates,
including fees
(note 5) $ 81,000 $ 52,000 $ ---
Interest on loans
to nonaffiliates,
including fees 21,000 42,000 96,000
Interest on
interest-bearing
deposits (note 5) 21,000 49,000 38,000
Income from operations
of real estate owned 127,000 134,000 243,000
Other 1,000 2,000 56,000
- -----------------------------------------------------------------
Total revenue 251,000 279,000 433,000
- -----------------------------------------------------------------
Expenses:
Provision for
possible losses
(notes 3 and 4) --- 199,000 1,268,000
Share of losses
in unconsolidated
investees (note 5) 1,059,000 1,803,000 408,000
Operating expenses
from operations
of real estate owned 76,000 107,000 161,000
Operating expenses
from operations
of real estate owned
paid to affiliates
(note 5) 12,000 12,000 14,000
F-5
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
(Continued)
<CAPTION>
Years ended December 31, 1996, 1995 and 1994
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Expenses associated
with non-operating
real estate owned 344,000 289,000 313,000
Depreciation and
amortization expense 8,000 11,000 13,000
Interest expense 16,000 20,000 156,000
Loss on sale of
real estate owned --- --- 64,000
General and
administrative,
affiliates (note 5) 173,000 123,000 151,000
General and
administrative,
nonaffiliates 78,000 59,000 87,000
Mortgage investment
servicing fees paid
to affiliates (note 5) --- 33,000 41,000
- -----------------------------------------------------------------
Total expenses 1,766,000 2,656,000 2,676,000
- -----------------------------------------------------------------
Net loss $(1,515,000) $(2,377,000) $(2,243,000)
=================================================================
Net loss
per limited
partnership unit $ (51.99) $ (81.57) $ (76.97)
=================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-6
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Partners' Equity
<TABLE>
<CAPTION>
Years ended December 31, 1996, 1995 and 1994
<S> <C> <C> <C>
Total
General Limited Partners'
Partners Partners Equity
- -----------------------------------------------------------------
Balance (deficit) at
December 31, 1993 $ (195,000) $ 16,023,000 $ 15,828,000
Net loss --- (2,243,000) (2,243,000)
- -----------------------------------------------------------------
Balance (deficit) at
December 31, 1994 (195,000) 13,780,000 13,585,000
Net loss --- (2,377,000) (2,377,000)
- -----------------------------------------------------------------
Balance (deficit) at
December 31, 1995 (195,000) 11,403,000 11,208,000
Net loss --- (1,515,000) (1,515,000)
- -----------------------------------------------------------------
Balance (deficit) at
December 31, 1996 $ (195,000) $ 9,888,000 $ 9,693,000
=================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-7
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Cash flows from
operating activities:
Net loss $ (1,515,000) $ (2,377,000) $ (2,243,000)
Adjustments to
reconcile net loss
to net cash used
in operating activities:
Provision for
possible losses --- 199,000 1,268,000
Amortization of
unearned loan fees (1,000) --- (8,000)
Depreciation and
amortization expense 8,000 11,000 13,000
Interest accrued
to principal on
loans to affiliates (82,000) (45,000) ---
Loss on sale
of real estate
owned, net --- --- 8,000
Equity in losses
of unconsolidated
investees 1,059,000 1,803,000 408,000
Changes in assets
and liabilities:
Decrease in accrued
interest receivable --- 10,000 6,000
Increase (decrease)
in other assets 1,000 (8,000) (11,000)
Increase (decrease)
in accounts payable
and accrued
liabilities 6,000 (20,000) (25,000)
F-8
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Continued)
Years ended December 31, 1996, 1995 and 1994
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Increase in interest
and property taxes
payable on real
estate owned 80,000 48,000 130,000
Decrease in payable
to affiliates (2,000) (4,000) ---
- -----------------------------------------------------------------
Net cash used in
operating activities (446,000) (383,000) (454,000)
- -----------------------------------------------------------------
Cash flows from
investing activities:
Principal collected
on loans 148,000 280,000 1,016,000
Advances on loans
made to customers --- --- (2,000)
Advances on loans
made to affiliates (336,000) (776,000) (215,000)
Capital expenditures
for real
estate owned (2,000) (34,000) (16,000)
Proceeds from sale
of real estate owned --- --- 821,000
Increase in
restricted cash (1,000) --- ---
(Increase) decrease
in short-term
investments 102,000 (102,000) ---
Increase in due
from affiliate (16,000) --- ---
- -----------------------------------------------------------------
Net cash provided
by (used in)
investing
activities (105,000) (632,000) 1,604,000
- -----------------------------------------------------------------
F-9
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Continued)
Years ended December 31, 1996, 1995 and 1994
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Cash flows from
financing activities:
Principal payments
on notes payable (42,000) (39,000) (784,000)
- -----------------------------------------------------------------
Net cash used
in financing
activities (42,000) (39,000) (784,000)
- -----------------------------------------------------------------
Net increase
(decrease) in
cash and cash
equivalents (593,000) (1,054,000) 366,000
Cash and cash
equivalents at
beginning of year 854,000 1,908,000 1,542,000
- -----------------------------------------------------------------
Cash and cash
equivalents at
end of year $ 261,000 $ 854,000 $ 1,908,000
=================================================================
F-10
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Continued)
Years ended December 31, 1996, 1995 and 1994
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Supplemental
schedule of
cash flow
information:
Cash paid during
the year for:
Interest $ 16,000 $ 20,000 $ 70,000
- -----------------------------------------------------------------
Supplemental
schedule of
noncash investing
and financing
activities:
Decrease in real
estate owned through
transfer of
ownership (note 5) $ --- $ --- $ 6,449,000
Increase in real
estate loans
through transfer
of ownership
of real estate
owned (note 5) --- --- 3,004,000
Decrease in allowance
for possible losses
on real estate owned
as a result of partial
charge-off upon transfer
of ownership (note 5) --- --- 2,015,000
F-11
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Continued)
Years ended December 31, 1996, 1995 and 1994
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Decrease in notes
payable through
transfer of
ownership (note 5) --- --- 1,105,000
Decrease in interest
and property taxes
payable on real
estate owned through
transfer of
ownership (note 5) --- --- 325,000
Decrease in real
estate owned
through deed in
lieu of foreclosure
or foreclosure --- --- 5,091,000
Decrease in
allowance for
possible losses
on loans and
real estate owned
as a result of
partial charge-off --- 99,000 1,647,000
Decrease in other
assets through
deed in lieu of
foreclosure
or foreclosure --- --- 52,000
Decrease in notes
payable through
deed in lieu of
foreclosure
or foreclosure --- --- 3,745,000
F-12
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Continued)
Years ended December 31, 1996, 1995 and 1994
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Decrease in interest
and property taxes
payable on real
estate owned through
deed in lieu of
foreclosure, sale
or foreclosure --- --- 288,000
Transfer of restricted
cash to workout loan --- --- 501,000
Decrease in accounts
payable and accrued
liabilities through
transfer of ownership --- --- 5,000
</TABLE>
See accompanying notes to consolidated financial statements
F-13
CENTENNIAL MORTGAGE INCOME FUND II 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 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. 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, most of the loans secured by operating
properties have been repaid to the Partnership. However, during
recent years, real estate market values for undeveloped land in
California have declined severely. As the loans secured by
undeveloped land became delinquent, the Partnership elected to
foreclose on certain of these loans, thereby increasing real
estate owned balances. As a result, the Partnership has become a
direct investor in this real estate and intends to manage
operating properties and develop raw land until such time as the
Partnership is able to sell this real estate owned. The real
estate owned balance before allowance for possible losses at
December 31, 1994 was $11,284,000, increasing to $11,314,000 at
year end 1995 and $11,316,000 at year end 1996.
Beginning with the fourth quarter of 1992, the Partnership
entered its repayment stage and cash proceeds from mortgage
investments are no longer available for reinvestment in new loans
by the Partnership.
Basis of Presentation
The Partnership formed several subsidiaries to own and operate
certain of its real estate assets. The corporations formed were
F-14
PIR Development, Inc., RSA Development, Inc., CTA Development,
Inc., LCR Development, Inc., ("LCR"), and BKS Development, Inc.,
("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 and the
Partnership carrying 100 percent of the financing. With the
exception of LCR and BKS, all of these corporations are wholly
owned corporations and have been consolidated in the accompanying
consolidated financial statements. All significant intercompany
balances and transactions, including the aforementioned transfer,
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 July 12, 1985 in accordance with
the provisions of the California Uniform Limited Partnership Act.
The Partnership commenced operations in June 1986. 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 Ronald R. White and John B.
Joseph. Centennial Capital, Inc. ("CCI"), a California
corporation, wholly-owned by The Centennial Group, Inc. retired
as general partner during 1994.
Cash available for distribution, as defined in the Partnership
Agreement, is to be distributed 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 distributed 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 their adjusted invested capital, after which such
amounts are to be distributed 85 percent to the limited partners
F-15
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 and 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 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
F-16
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 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 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
F-17
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.
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.
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 for generally
accepted accounting principles ("GAAP") and taxable earnings.
F-18
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Current Temporary Differences Partnership Corporations Total
- --------------------------------------------------------------------------------
- ----------
GAAP loss for
the year ended
December 31, 1996 $ (1,088,000) $ (427,000) $
(1,515,000)
Provision for losses (1,300,000) ---
(1,300,000)
Accrued expenses not deducted
under the cash basis
method of accounting (119,000) 179,000
60,000
Share of losses in
unconsolidated investees (897,000) ---
(897,000)
Carrying costs expensed for books
and capitalized for tax purposes (2,000) 243,000
241,000
Depreciation --- (15,000)
(15,000)
- --------------------------------------------------------------------------------
- ----------
Taxable loss for the year
ended December 31, 1996 $ (3,406,000) $ (20,000) $
(3,426,000)
================================================================================
==========
Taxable loss allocable to
General Partner ---
================================================================================
==========
Taxable loss
per limited
partner unit $ (116.88)
================================================================================
==========
</TABLE>
F-19
<TABLE>
<CAPTION>
December 31, 1996
- -----------------------------------------------------------------
<S> <C> <C>
Cumulative Temporary Differences Partnership Corporations
- -----------------------------------------------------------------
Net operating loss
carry forwards $ --- $ 116,000
Provision for losses 836,000 1,717,000
Accrued expenses not deducted
under the cash basis --- 4,644,000
Interest income accrued for
tax, not per books 92,000 ---
Charge-off of loans not deducted 715,000 ---
Carrying costs expensed for
books and capitalized
for tax purposes (2,000) 1,085,000
Depreciation --- (42,000)
Share of losses in
unconsolidated investees 1,314,000 ---
- -----------------------------------------------------------------
Total cumulative
temporary differences $ 2,955,000 $ 7,520,000
=================================================================
</TABLE>
The cumulative temporary partnership differences shown above,
which total approximately $101.00 per limited partnership unit,
should reverse when the Partnership liquidates its investments.
There can be no assurance that these losses 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 $2.4 million 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.
F-20
In addition, as of December 31, 1996, the Partnership held
approximately $12.4 million in loans 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 $258.00
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
corporation's 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
include 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 29,141 weighted average limited partnership
units outstanding in 1996, 1995 and 1994.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
F-21
make estimates and assumptions that affect the reported amounts
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; 3 years for equipment and 31.5 years for
buildings, or, in the case of tenant improvements, over the terms
of the leases 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. In 1994, the Partnership
recognized losses on the sale of real estate owned. In 1995 and
1996, there were no sales of real estate owned.
(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.
F-22
Real Estate Loans Receivable from Unconsolidated Investees -
Earning and Nonearning
The net carrying value of earning loans from unconsolidated
investees is estimated to be fair value. These loans reprice at
market rate each time the reference rate is adjusted.
Note Payable
The carrying value of the fixed rate note payable is estimated to
be the fair value using current market rates.
Accounts Payable and Accrued Liabilities, Payable to Affiliates
and Interest and Property Taxes Payable
Carrying value is considered to be equal to the fair value of
these liabilities as they are due on demand.
(3) Allowance for Possible Loan Losses
<TABLE>
<CAPTION>
Changes in the allowance for possible loan losses are as follows:
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Balance at
beginning of year $ 8,000 $ 8,000 $ 149,000
Loans to affiliates
and nonaffiliates
charged-off --- (99,000) (73,000)
Provision for
possible losses
(reduction in provision) --- 99,000 (68,000)
- -----------------------------------------------------------------
Balance at
end of year $ 8,000 $ 8,000 $ 8,000
================================================================
</TABLE>
At December 31, 1996, the carrying value of loans that are
considered to be impaired under SFAS 114 totaled $1,049,000 (all
of which were on nonaccrual status). At December 31 1996, there
F-23
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, recorded by the
Partnership. 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
$336,000 investment in impaired loans for the year ended December
31, 1996. There was no investment in impaired loans for the year
ended December 31, 1995. For the year ended December 31, 1996,
the Partnership recognized $81,000 in interest income on these
impaired loans. There was no interest income recognized on these
impaired loans for the years ended December 31, 1995 and 1994.
No cash basis income was recognized on these impaired loans for
the years ended December 31, 1996, 1995 and 1994.
If the loans on nonaccrual had been current throughout their
terms, interest income would have increased by approximately
$96,000, $379,000 and $211,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
(4) Allowance for Possible Losses on Real Estate Owned
<TABLE>
<CAPTION>
Changes in the allowance for possible losses on real estate owned
are as follows:
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Balance at
beginning of year $ 2,545,000 $ 2,445,000 $ 4,698,000
Real estate
owned charged-off --- --- (3,589,000)
Provision for losses --- 100,000 1,336,000
- -----------------------------------------------------------------
Balance at
end of year $ 2,545,000 $ 2,545,000 $ 2,445,000
=================================================================
</TABLE>
F-24
(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. Under the
provisions of the Partnership Agreement, the Partnership incurred
$8,000 of mortgage investment servicing fees payable to CMIF,
Inc. in 1994 and paid $12,000 of such fees in 1994. The
Partnership incurred $33,000 of mortgage investment servicing
fees payable to CC in 1995 and 1994 and paid $3,000, $30,000 and
$27,000 were paid in 1996, 1995 and 1994, respectively. No
mortgage investment servicing fees were incurred during 1996.
Under the provisions of the Partnership Agreement, the general
partners are to receive compensation for their services in
supervising the affairs of the Partnership. This partnership
management compensation shall be equal to 10 percent of the cash
available for distribution, as defined in the Partnership
Agreement. The general partners will not receive this
compensation until the limited partners have received a 12
percent per annum cumulative return on their adjusted invested
capital; however, the general partners are entitled to receive a
minimum 5 percent interest in cash available for distribution in
any year until this return 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 during 1996, 1995 or 1994.
As discussed below, 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 ("CMIF"), 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
F-25
wrote off its investment in and loan receivable from BKS during
1996 when its share of losses equaled its investment and the
recovery of any of its investment became unlikely.
A summary of these real estate loans receivable from
unconsolidated investees as of December 31, 1996 is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net
Principal Losses Carrying
Balance Offset Value
- -----------------------------------------------------------------
50 percent interest
in unsecured note
receivable from LCR $ 1,059,000 $ 1,059,000 $ ---
50 percent interest
in development loan
secured by a first
trust deed from
Silverwood 771,000 252,000 519,000
50 percent interest
in construction loan
secured by a first
trust deed from
Silverwood 245,000 --- 245,000
50 percent interest
in construction loan
secured by a first
trust deed from
Silverwood 285,000 --- 285,000
- -----------------------------------------------------------------
Totals $ 2,360,000 $ 1,311,000 $ 1,049,000
</TABLE>
F-26
A summary of these real estate loans receivable from
unconsolidated investees as of December 31, 1995 is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net
Principal Losses Carrying
Balance Offset Value
- -----------------------------------------------------------------
50 percent interest
in unsecured note
receivable from LCR $ 1,059,000 $ 595,000 $ 464,000
50 percent interest
in note receivable
secured by a first
trust deed from BKS 1,947,000 1,613,000 334,000
50 percent interest
in development loan
secured by a first
trust deed from
Silverwood 543,000 --- 543,000
50 percent interest
in construction loan
secured by a first
trust deed from
Silverwood 255,000 --- 255,000
50 percent interest
in construction loan
secured by a first
trust deed from
Silverwood 235,000 --- 235,000
- -----------------------------------------------------------------
Totals $ 4,039,000 $ 2,208,000 $ 1,831,000
</TABLE>
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, 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
F-27
provided by CMIF. CMIF also assigned its 50 percent interest in
the construction loan secured by a second trust deed to LCR. In
exchange for the assignment of the note secured by a second trust
deed, the Partnership 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 this note
which was approximately $241,000 and $176,000 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:
F-28
LCR Development, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, December 31,
Assets 1996 1995
- -----------------------------------------------------------------
Cash $ --- $ ---
Short-term investments 10,000 ---
Real estate owned 6,047,000 5,052,000
Less allowance for
losses on real
estate investments 3,140,000 866,000
- -----------------------------------------------------------------
Net real estate owned 2,907,000 4,186,000
Organization costs 2,000 2,000
- -----------------------------------------------------------------
$ 2,919,000 $ 4,188,000
=================================================================
Liabilities and Stockholders' Deficit
- -----------------------------------------------------------------
Notes payable
to affiliates:
CMIF $ 4,092,000 $ 2,973,000
CMIF II 2,360,000 2,092,000
- -----------------------------------------------------------------
Total notes payable 6,452,000 5,065,000
Accounts payable
and accrued liabilities 11,000 1,000
Interest and property
taxes payable
on real property 1,162,000 825,000
Payable to affiliates 16,000 1,000
- -----------------------------------------------------------------
Total liabilities 7,641,000 5,892,000
Stockholders' deficit (4,722,000) (1,704,000)
- -----------------------------------------------------------------
$ 2,919,000 $ 4,188,000
=================================================================
</TABLE>
F-29
LCR Development, Inc.
Consolidated Statement of Operations
<TABLE>
<CAPTION>
Years ended December 31, 1996, 1995 and 1994
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Housing sales $ 233,000 $ --- $ ---
Cost of housing sales 238,000 --- ---
Provision for
losses on
real estate owned 2,361,000 866,000 24,000
Selling and
marketing expenses 184,000 --- ---
General and
administrative 162,000 (3,000) 3,000
- -----------------------------------------------------------------
Operating income (loss) (2,712,000) (863,000) (27,000)
Interest expense 306,000 278,000 534,000
- -----------------------------------------------------------------
Net (loss) $(3,018,000) $(1,141,000) $ (561,000)
=================================================================
Interest expense not
included in share
of losses (306,000) (264,000) (245,000)
- -----------------------------------------------------------------
Allocable net loss $(2,682,000) $ (877,000) $ (316,000)
=================================================================
Share of losses
recorded $ (716,000) $ (439,000) $ (158,000)
=================================================================
</TABLE>
Although the Partnership owns a 50 percent interest in LCR, it
holds less than 50 percent of LCR's debt. Since CMIF has made a
$1,250,000 unsecured loan to LCR, CMIF was allocated losses to
the extent of the unsecured loan and remaining losses were
allocated 50 percent to CMIF and 50 percent to the Partnership
during 1996.
F-30
<TABLE>
<CAPTION>
Difference of Allocation of Share of Losses
<S> <C>
1996
- -----------------------------------------------------------------
The Partnership's 50 percent share
of LCR's stockholders' deficit
at December 31, 1996 $(2,361,000)
Cumulative interest payable by LCR
to the Partnership not accrued as
income by the Partnership 425,000
Loans receivable considered as part
of the Partnership's investment 2,360,000
Disproportionate loss allocation 625,000
- -----------------------------------------------------------------
Net loans receivable $ 1,049,000
=================================================================
</TABLE>
As discussed above, the Partnership holds 50 percent of the stock
of BKS with CMIF. In 1994, the Partnership and CMIF 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 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 ($343,000) which results in the Partnerships's
investment in BKS, including loans, having a zero balance.
F-31
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
<TABLE>
<CAPTION>
<S> <C>
December 31,
Assets 1995
- -----------------------------------------------------------------
Cash $ 1,000
Real property 5,200,000
Less allowance for losses
on real estate investments 2,693,000
- -----------------------------------------------------------------
Net real estate owned 2,507,000
- -----------------------------------------------------------------
$ 2,508,000
=================================================================
Liabilities and Stockholders' Deficit
- -----------------------------------------------------------------
Bonds payable $ 899,000
Notes payable to affiliates 3,893,000
Interest and property
taxes payable
on real property 943,000
- -----------------------------------------------------------------
Total liabilities 5,735,000
Stockholders' deficit (3,227,000)
- -----------------------------------------------------------------
$ 2,508,000
=================================================================
</TABLE>
F-32
BKS Development, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31, 1995 and 1994
<S> <C> <C>
1995 1994
- -----------------------------------------------------------------
Interest and
property tax
expense $ 35,000 $ 499,000
Provision
for losses 2,693,000 ---
General and
administrative --- 2,000
- -----------------------------------------------------------------
Net income (loss) $(2,728,000) $ (501,000)
=================================================================
Share of losses
recorded $(1,364,000) $ (250,000)
=================================================================
</TABLE>
At the time of the foreclosures 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:
F-33
<TABLE>
<CAPTION>
<S> <C> <C> <C>
LCR BKS TOTAL
- -----------------------------------------------------------------
Decrease in real
estate owned $ 2,550,000 $ 3,899,000 $ 6,449,000
Increase in
real estate loans 1,058,000 1,946,000 3,004,000
Decrease in allowance
for possible losses
on real estate owned 715,000 1,300,000 2,015,000
Decrease in notes payable 656,000 449,000 1,105,000
Decrease in interest
and property
taxes payable 121,000 204,000 325,000
</TABLE>
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 services. The general partners and affiliates of the
general partners charged $185,000, $135,000 and $165,000 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
$5,000, $170,000 and $54,000, respectively. Interest earned on
such deposits for 1996, 1995 and 1994 was $5,000, $3,000 and
$1,000, respectively.
F-34
<TABLE>
(6) Real Estate Owned
<CAPTION>
Real estate owned consists of the following:
(dollars in thousands)
<S> <C> <C>
December 31, December 31,
1996 1995
- -----------------------------------------------------------------
1. Office building
in San Bernardino, CA $ 825 $ 837
2. 45 acres in Sacramento, CA 4,128 4,126
3. Proposed marina and
condominiums in
Redwood City, CA 5,360 5,360
4. 10.66 acres in Roseville, CA 1,003 1,003
- -----------------------------------------------------------------
Subtotal 11,316 11,326
Less accumulated depreciation --- 12
- -----------------------------------------------------------------
Total real estate owned $ 11,316 $ 11,314
=================================================================
</TABLE>
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 property under several non-
cancelable operating lease agreements. Future minimum rents to
be received as of December 31, 1996 are as follows:
F-35
<TABLE>
<CAPTION>
Years ending December 31,
(dollars in thousands)
<S> <C>
- -----------------------------------------------------------------
1997 $ 116
1998 55
1999 41
2000 6
- -----------------------------------------------------------------
$ 218
=================================================================
</TABLE>
<TABLE>
(7) Note Payable
<CAPTION>
Note payable consists of the following:
(dollars in thousands)
<S> <C> <C>
December 31, December 31,
1996 1995
- -----------------------------------------------------------------
Note payable secured by
office building in
San Bernardino, CA,
with principal, interest
and property taxes payable
monthly of $6,146;
interest at 9.5%,
maturing December 1, 1999 $ 143 $ 185
=================================================================
</TABLE>
F-36
Future principal payments to be paid as of December 31, 1996 are
as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
Years ending December 31,
<S> <C>
- -----------------------------------------------------------------
1997 $ 46
1998 50
1999 47
- -----------------------------------------------------------------
$ 143
=================================================================
</TABLE>
(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.
F-37
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule III
<TABLE>
Consolidated Real Estate Owned and
Accumulated Depreciation and Amortization
December 31, 1996
<CAPTION>
Initial Costs
Capitalized
Cost to
Subsequent
Partnership to
Acquisition
<S> <C> <C> <C> <C>
Real Estate
Property Encumbrances Owned Improvements<F3>
Carrying Costs
- --------------------------------------------------------------------------------
- ----------
Office Building
in San Bernardino $ 143,000 $ 800,000 $ 25,000 $
- ---
45 Acres in Sacramento --- 3,827,000 170,000
131,000
Proposed Marina and
Condominiums in
Redwood City --- 4,101,000 1,170,000
89,000
10.66 Acres in Roseville --- 1,000,000 3,000
- ---
- --------------------------------------------------------------------------------
- ----------
$ 143,000 $ 9,728,000 $ 1,368,000 $
220,000
================================================================================
==========
F-38
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule III
Consolidated Real Estate Owned and
Accumulated Depreciation and Amortization
(Continued)
December 31, 1996
<CAPTION>
Gross Amount at Which
Carried on Books (F2)
<S> <C> <C> <C> <C> <C>
Accumulated
Life On Which
Real Estate Depreciation & Date
Depreciation
Property Owned Total Amortization Acquired
Is Computed
- --------------------------------------------------------------------------------
- ----------
Office Building
in San Bernardino $ 825,000 $ 825,000 $ --- April 1993
(F1)
45 Acres in Sacramento 4,128,000 4,128,000 --- March 1992
None
Proposed Marina and
Condominiums in
Redwood City 5,360,000 5,360,000 --- April 1993
None
10.66 Acres in Roseville 1,003,000 1,003,000 --- December 1992
None
- -----------------------------------------------------------------
$11,316,000 $11,316,000 $ ---
=================================================================
F-39
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule III
Consolidated Real Estate Owned and
Accumulated Depreciation and Amortization
(Continued)
December 31, 1996
<CAPTION>
<FN>
<F1> Prior to the adoption of SFAS 121, tenant improvements were depreciated
over life of leases; building depreciated over 31.5 years
<F2> Aggregate cost for Federal income tax purposes is $12,359,000 at December
31, 1996.
<F3> Improvements re presented net of accumulated depreciation as required per
SFAS 121.
</TABLE>
F-40
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule III
<TABLE>
Consolidated Real Estate Owned and
Accumulated Depreciation and Amortization
(Continued)
December 31, 1996
<CAPTION>
The following is a summary of consolidated real estate owned for the years ended
December 31, 1996, 1995, and 1994.
<S> <C> <C> <C>
1996 1995 1994
- --------------------------------------------------------------------------------
- ----------
Balance at beginning of year $ 11,326,000 $ 11,292,000 $
24,200,000
Additions during period:
Improvements 2,000 34,000
16,000
Deductions during period:
Real estate sold --- ---
(885,000)
Real estate foreclosed --- ---
(8,441,000)
Charge-offs --- ---
(3,589,000)
Other --- ---
(9,000)
- --------------------------------------------------------------------------------
- ----------
Balance at year end $ 11,328,000 $ 11,326,000 $
11,292,000
================================================================================
==========
</TABLE>
F-41
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule III
<TABLE>
Consolidated Real Estate Owned and
Accumulated Depreciation and Amortization
(Continued)
December 31, 1996
<CAPTION>
The following is a summary of accumulated depreciation and amortization of
consolidated real estate owned for the years ended December 31, 1996, 1995, and
1994.
<S> <C> <C> <C>
1996 1995
1994
- --------------------------------------------------------------------------------
- ----------
Balance at beginning of year $ 12,000 $ 8,000 $
30,000
Additions during period:
Additions --- 4,000
8,000
Deductions during period:
Real estate sold --- ---
(2,000)
Other --- ---
(28,000)
- --------------------------------------------------------------------------------
- ----------
Balance at year end $ 12,000 $ 12,000 $
8,000
================================================================================
=========
</TABLE>
See accompanying independent auditors' report.
F-42
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule IV
<TABLE>
<CAPTION>
Mortgage Loans on Real Estate
December 31, 1996
<S> <C> <C> <C>
Interest Final
Periodic
Description Rate Maturity Date Payment
Terms
- --------------------------------------------------------------------------------
- ----------
Note secured by:
P + I
monthly
Timeshare Interests Various
payment of
Oxnard, CA 12.25 - 13.9% fixed Various
$2,149.35
50 percent interest in
unsecured note related to P & I
due at
177 lots in Lancaster, CA 7.75% fixed December 1, 1997
maturity
50 percent interest in
First Trust Deed on P & I
due at
166 lots in Lancaster, CA Prime + 1% August 1, 1997
maturity
50 percent interest in 1st
T.D. on four single family P & I
due at
homes in Lancaster, CA Prime + 1% July 1, 1998
maturity
50 percent interest in 1st
T.D. on seven single family P & I
due at
homes in Lancaster, CA Prime + 1% July 1, 1996 <F2>
maturity
Losses from unconsolidated investees
F-43
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule IV
<CAPTION>
Mortgage Loans on Real Estate
(Continued)
December 31, 1996
<S> <C> <C> <C> <C>
Principal Amount
of
Loan Subject
to
Delinquent
Face Amount Carrying Amount
Principal or
Description Prior Liens of Mortgages of Mortgages (F1)
Interest
- --------------------------------------------------------------------------------
- ----------
Note secured by:
Timeshare Interests
Oxnard, CA None $ 84,000 $ 19,000
None
50 percent interest in
unsecured note related 1st T.D.
to 177 lots in of 2,115,000
Lancaster, CA $3,266,000 (50% - 1,059,000) 1,059,000 $
1,059,000
50 percent interest
in First Trust Deed
on 166 lots in 3,266,000
Lancaster, CA None (50% - 1,636,000) 771,000
771,000
F-44
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule IV
<CAPTION>
Mortgage Loans on Real Estate
(Continued)
December 31, 1996
<S> <C> <C> <C> <C>
Principal Amount
of
Loan Subject
to
Delinquent
Face Amount Carrying Amount
Principal or
Description Prior Liens of Mortgages of Mortgages (F1)
Interest
- --------------------------------------------------------------------------------
- ----------
Note secured by:
50 percent interest in
1st T.D. on four 1st T.D.
single family homes of 490,000
in Lancaster, CA $3,266,000 (50% - 245,000) 245,000
245,000
50 percent interest
in 1st T.D. on
seven single
family homes in 804,000
Lancaster, CA None (50% - 402,000) 285,000
285,000
- --------------------------------------------------------------------------------
- ----------
Losses from unconsolidated investees (1,311,000)
(1,311,000)
- --------------------------------------------------------------------------------
- ----------
$ 3,426,000 $ 1,068,000 $
1,049,000
================================================================================
==========
<FN>
<F1> Aggregate cost for Federal Income Tax purposes is $3,094,000 at December
31, 1996.
<F2> The Partnership is in the process of extending this note.
</FN>
F-45
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule IV
Mortgage Loans on Real Estate
(Continued)
December 31, 1996
<CAPTION>
The following is a summary of activity for the years ended December 1996, 1995
and 1994.
<S> <C> <C> <C>
1996 1995
1994
- --------------------------------------------------------------------------------
- ----------
Balance at beginning of year $ 1,856,000 $ 3,118,000 $
883,000
Additions during period:
New mortgage
loans/disbursements 336,000 821,000
217,000
Other - Interest
reserve and amortization 83,000 ---
8,000
Loans transferred
from real estate owned --- ---
3,003,000
Loans transferred
from restricted cash --- ---
501,000
Deductions during period:
Collections of principal (148,000) (280,000)
(1,016,000)
Charge-offs --- ---
(73,000)
Losses from
unconsolidated investees (1,059,000) (1,803,000)
(405,000)
- --------------------------------------------------------------------------------
- ----------
Balance at year end $ 1,068,000 $ 1,856,000 $
3,118,000
================================================================================
==========
</TABLE>
See accompanying independent auditors' report.
F-46
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 273
<SECURITIES> 0
<RECEIVABLES> 1,068
<ALLOWANCES> 8
<INVENTORY> 0
<CURRENT-ASSETS> 289
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,132
<CURRENT-LIABILITIES> 296
<BONDS> 143
<COMMON> 0
0
0
<OTHER-SE> 9,693
<TOTAL-LIABILITY-AND-EQUITY> 10,132
<SALES> 0
<TOTAL-REVENUES> 251
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16
<INCOME-PRETAX> (1,515)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,515)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,515)
<EPS-PRIMARY> (51.99)
<EPS-DILUTED> (51.99)
</TABLE>
