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, 1997
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 62 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").
Beginning in the fourth quarter of 1987, the Partnership ceased
accepting capital contributions and entered its operating stage
of business. During the fourth quarter of 1992, 60 months after
the closing of its offering stage, the Partnership ceased making
new loans and entered the repayment stage. For additional
information, See Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(b) Financial Information about Industry Segments
Not applicable.
(c) Narrative Description of Business
The Partnership was formed to invest in mortgage investments
consisting of participating first mortgage loans, 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 during the early 1990's, many of the
Partnership's loans became delinquent and management of the
Partnership elected to foreclose, thereby increasing real estate
owned balances. As a result, the Partnership became a direct
investor in this real estate. The Partnership has managed its
operating properties and completed certain development processes
on its raw land over the last several years in an effort to make
this real estate more marketable.
Real estate owned by the Partnership reached a peak at December
31, 1993 when its total carrying value, before allowance for
possible losses, reached $24,170,000. The real estate owned
balance before allowance for possible losses then decreased to
$11,284,000 at December 31, 1994 and increased to $11,314,000 at
year end 1995. Real estate owned increased again to $11,316,000
as of December 31, 1996 and decreased to $10,827,000 as of
December 31, 1997. As of December 31, 1997, the Partnership had
established a $2,702,000 allowance for possible losses on its
real estate owned.
As of December 31, 1997, the Partnership has entered into
purchase and sale agreements to sell two properties and a portion
of a third property with an aggregate book value before allowance
for losses of approximately $7.3 million and a net book value
after allowances of approximately $5.3 million. Management
currently estimates that the net sale proceeds from these
transactions, if they are consummated, will be equal to or
greater than the net book value after allowances for losses. The
only debt encumbering these properties is approximately $431,000
in accrued real estate taxes. As discussed in greater detail
below, these sales are subject to numerous uncertainties and it
is very likely that one or more of the transactions will not be
consummated.
Additionally, subsequent to December 31, 1997, the Partnership's
unconsolidated subsidiary, LCR Development, Inc. ("LCR") has
entered into purchase and sale agreements to sell its remaining
undeveloped lots and several of its remaining homes. Three of
these homes had closed escrow as of March 25, 1998.
The Partnership has identified and evaluated the impact on its
operating and application software and products of the problems
and uncertainties related to the year 2000. The Partnership has
implemented a plan to address the issues and expects to resolve
year 2000 compliance issues primarily through replacement and
normal upgrades of its software and products, the cost of which
replacements and upgrades are not considered material.
Compliance is expected to be achieved during 1998 and/or early
1999. However, there can be no assurance that such replacements
and upgrades can be completed on schedule.
Cautionary Statements Regarding Forward-Looking Information
The Partnership wishes to caution readers that the
forward-looking statements contained in this Form 10-K under
"Item 1. Business," "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" and elsewhere
in this Form 10-K involve known and unknown risks and
uncertainties which may cause the actual results, performance or
achievements of the Partnership to be materially different from
any future results, performance or achievements expressed or
implied by any forward-looking statements made by or on behalf of
the Partnership. In connection with the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995, the
Partnership is filing the following cautionary statements
identifying important factors that in some cases have affected,
and in the future could cause the Partnership's actual results to
differ materially from those expressed in any such forward-
looking statements.
The factors that could cause the Partnership's results to differ
materially include, but are not limited to, general economic and
business conditions, including interest rate fluctuations; the
impact of competitive products and pricing; success of operating
initiatives; adverse publicity; changes in business strategy or
development plans; quality of management; availability, terms and
deployment of capital; the results of financing efforts; business
abilities and judgment of personnel; availability of qualified
personnel; employee benefit costs and changes in, or the failure
to comply with government regulations.
(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, 1997, there were approximately 3,670 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, 1997.
Management intends to distribute cash flow available for
distribution (as defined in the Partnership Agreement), if any,
on a periodic basis as substantial cash balances are accumulated
from property sales and/or loan payoffs. 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. If a substantial portion of
the pending escrows discussed above are consummated, it is
possible that the Partnership could make a distribution during
1998. See Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years ended
(dollars in thousands, except per unit data)
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<S> <C> <C> <C> <C>
<C>
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12/31/97 12/31/96 12/31/95 12/31/94
12/31/93
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Consolidated Statement
of Operations Data:
Total revenue................$ 170 $ 251 $ 279 $ 433
$ 715
Net loss..................... (929) (1,515) (2,377) (2,243)
(4,543)
Net loss per limited
partnership unit-
basic and diluted........ (31.88) (51.99) (81.57) (76.97)
(115.90)
Consolidated Balance
Sheet Data:
Total loans..
before allowance for losses 1,029 1,068 1,856 3,118
883
Total real estate owned
before allowance for losses 10,827 11,316 11,314 11,284
24,170
Total assets................. 9,354 10,132 11,605 13,997
22,443
Partners' equity............. 8,764 9,693 11,208 13,585
15,828
</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 $(929,000)
and $(31.88) for the year ended December 31, 1997, down from
$(1,515,000) and $(51.99) for the year ended December 31, 1996
and $(2,377,000) and $(81.57) in 1995. The decrease in loss for
1997 is primarily due to a decrease in share of losses in
unconsolidated investees. The decreased loss in 1996 is also
primarily the result of a decrease in losses in unconsolidated
investees. The loss in 1995 is primarily due to losses in
unconsolidated investees and a decrease in income from operations
of real estate owned
Liquidity and Capital Resources
At December 31, 1997, the Partnership had $195,000 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.
During 1997, the Partnerships principal sources of cash were: i)
$293,000 in principal payments received on loans; ii) $222,000 of
cash proceeds from the sale of real estate; iii) $32,000 in net
operating income from operating property; iv) $28,000 in interest
income; and v) a $12,000 reduction in restricted cash. The
Partnership's principal uses of cash during 1997 were: i)
$246,000 in administrative costs; ii) $179,000 in advances on
loans to affiliates; iii) $177,000 in real estate taxes and other
expenses related to non-operating properties; iv) $46,000 in
principal reductions on notes payable; and v) $12,000 in interest
payments.
As of December 31, 1997, the Partnership has entered into
purchase and sale agreements to sell two properties and a portion
of a third property with an aggregate book value before allowance
for losses of approximately $7.3 million and a net book value
after allowances of approximately $5.3 million. Management
currently estimates that the net sale proceeds from these
transactions, if they are consummated, will be equal to or
greater than the net book value after allowances for losses. The
only debt encumbering these properties is approximately $431,000
in accrued real estate taxes. As discussed in greater detail
below, these sales are subject to numerous uncertainties and it
is very likely that one or more of the transactions will not be
consummated.
Additionally, as of December 31, 1997, the Partnership's
unconsolidated subsidiary, LCR had entered into purchase and sale
agreements to sell its remaining undeveloped lots and several of
its remaining homes. Three of these homes had closed escrow as
of March 11, 1998.
As of December 31, 1997, the Partnership had no unfunded loan
commitments to nonaffiliates. The Partnership's notes payable
commitments for 1998 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 $814,000 payable and delinquent in 1998,
and ii) selling, general and administrative costs. A substantial
portion of the $484,000 in property taxes payable at December 31,
1997 were delinquent. The Partnership can apply for a 5 year
redemption plan on a portion of the property taxes due in 1998 to
ease liquidity constraints if necessary.
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, 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 1998.
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
Management has noted that the long-term downturn in the real
estate industry in California has not only stabilized, it has
improved considerably in many sectors of the market. The
improving real estate markets were a significant factor in the
decreased losses of the Partnership during 1997.
Interest income on loans to nonaffiliates, including fees, was
$22,000, $21,000 and $42,000 in 1997, 1996 and 1995,
respectively. Interest income on loans to nonaffiliates
decreased in 1997 and 1996 as compared to 1995 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. This income related to the Silverwood joint venture.
There was no interest income on loans to affiliates for 1997
because these loans receivable from unconsolidated investees were
placed on nonaccrual status in late 1996.
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,
1997, 1996 and 1995.
Real estate loans receivable, earning represents four loans with
a cumulative balance of $215,000 as of December 31, 1997. One
of these loans in the amount of $200,000 was received in
connection with the sale of real estate owned during 1997. This
loan has been repaid subsequent to December 31, 1997. The
Partnership had recorded a $15,000 allowance for losses in
connection with the remaining loans as of December 31,1997.
Real estate loans receivable from unconsolidated investees,
nonearning represent loans to LCR, an unconsolidated corporation
50 percent owned by the Partnership, and loans to Silverwood
homes, a subsidiary of LCR.
The real estate owned balance before allowance for possible
losses at December 31, 1997, 1996 and 1995 was $10,827,000,
$11,316,000 and $11,314,000, respectively. The balance at
December 31, 1997 is comprised of four properties and is offset
by a $2,702,000 allowance for possible losses. As discussed
above, the Partnership had entered into purchase and sale
agreements on two of these properties and a portion of a third
property as of December 31, 1997. The aggregate book value
before allowance for possible allowances of these properties
subject to purchase and sale agreements was approximately $7.3
million as of December 31, 1997 and the Partnership has recorded
approximately $2.0 million in allowances for possible losses
against this book value. Management is attempting to sell the
remaining properties.
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,
1997 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 179
residential lots which LCR contributed to Silverwood. LCR's only
source of repayment of this note is the excess, if any, of
proceeds from the sale of the fully developed lots over the
amount of secured debt. Due to the continuing decline in value
of the lots, management does not expect that this loan will be
repaid. As a result, the loan has been placed on nonaccrual.
The participating principal balance and nonaccrued interest
balances at December 31, 1997 are $1,059,000 and $324,000,
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 had evaluated various alternative
strategies for liquidating its investment in the 179 lots in
Lancaster. During 1994, LCR determined that its best course of
action appeared to be the full-scale buildout and sale of single-
family homes since the market for finished lots had fallen so
significantly. LCR obtained construction financing commitments
from the Partnership and CMIF. LCR entered into a joint venture
agreement entitled Silverwood with Home Devco to construct and
sell single-family homes at the project.
Silverwood began constructing a model home complex at the project
in June 1995. Construction commenced in September 1995 on Phase
I at the project. Construction of Phase II of the project was
commenced in February 1997. At December 31, 1997, 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 combined disbursed
balances of $1,191,000. The Partnership's disbursed balance of
the $3,266,000 development loan at December 31, 1997 was
$942,000. The Partnership's disbursed balance of the $490,000
model loan at December 31, 1997 was $245,000. At December 31,
1997, the Partnership's disbursed balance of the $1,034,000 Phase
I construction loan was $4,000. As discussed in note 5 of Notes
to Consolidated Financial Statements, the Partnership had reduced
the carrying value of the land development loan by $377,000, the
remainder of its share of losses in unconsolidated investees.
Sales volumes of new homes in the Lancaster area have continued
to remain sluggish 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
it might realize from the buildout of homes at the project.
Additionally, Silverwood closed escrow on only two homes during
1996 and seven homes in 1997, far less than originally
anticipated. As a result of these factors, LCR recorded a
$207,000, $2,516,000 and $1,077,000 provision for losses on real
estate investments during 1997, 1996 and 1995, respectively.
Subsequent to December 31, 1997, Silverwood has closed escrow on
three more homes in Phase II and has placed two more homes in
escrow. Additionally, Silverwood has entered into a purchase
and sale agreement to sell the 157 remaining undeveloped lots and
intends to shut down its homebuilding activities.
Real Estate Owned
A description of the Partnership's principal real estate owned
during the year ended December 31, 1997 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 74
percent leased. The property generated net operating income of
$32,000 during 1997. 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, 1997 was $827,000. The
Partnership has recorded a $250,000 allowance for losses related
to this property as of December 31, 1997. The property is
encumbered by a fully amortizing note secured by a first trust
deed of $97,000 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 Partnership rezoned and subdivided a portion of
the property to facilitate one escrow on a 6.5 acre portion of
the property without freeway visibility. This transaction closed
escrow during the fourth quarter of 1997. Net proceeds from the
sale were $215,000 in cash plus a short-term note receivable of
$200,000. The Partnership recorded no gain or loss in connection
with the sale. During the first quarter of 1998, the Partnership
opened escrow on a 9.45 acre portion of the property which also
did not have freeway visibility. The purchase price is $875,000
and the transaction is subject to the buyer obtaining certain
senior housing tax credits through a governmental lottery. As a
result, there is no assurance that this transaction will ever be
consummated. At December 31, 1997, the carrying value before
allowance for possible losses was $3,637,000. The Partnership
has recorded a $646,000 allowance for losses related to this
property as of December 31, 1997.
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 has
been in escrow since 1996 for a purchase price of $4,000,000.
Numerous issues have arisen during the course of this escrow
which have prevented it from closing. The most significant of
these issues involves access to the property over a privately
owned road. The Partnership and the buyer have been working with
officials of Redwood City to complete eminent domain proceedings
on this private road. Although considerable progress has been
made towards a resolution to the access issue, the transaction is
unlikely to close if this issue is not fully resolved in the
relatively near future. It is possible that this transaction
could close in the second quarter of 1998, however, there is no
assurance that this escrow will ever actually close. In order to
resolve the access issue, the Partnership is likely to incur
substantial costs. The Partnership has recorded a $1,806,000
allowance for losses related to this property as of December 31,
1997. This allowance is based upon the assumption that the
current transaction will close escrow and reflects management's
estimate of future costs to resolve the access issue and other
costs of selling the property. If the access issue is not
satisfactorily resolved, the value of this property would be
severely impacted and the current allowance for possible losses
would be inadequate.
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, 1997 of $1,003,000,
and has no additional debt. The property is currently in escrow
for a purchase price of $1,200,000 and close of escrow is
scheduled for the second quarter of 1998. The buyer has only
made a $20,000 nonrefundable deposit against the purchase price.
Accordingly, there can be no assurance that this transaction will
ever be consummated. The Partnership has no recorded allowance
for losses related to this property as of December 31, 1997.
Interest on Interest-Bearing Deposits
Interest on interest-bearing deposits was $6,000 in 1997, $21,000
in 1996 and $49,000 in 1995. The decreases in interest on
interest-bearing deposits in 1997 and 1996 are primarily the
result of lower cash balances due to a lack of the sale of real
estate owned. 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 $131,000 in 1997, $127,000 in 1996 and $134,000 in
1995. The 1997, 1996 and 1995 revenues are from the office
building in San Bernardino.
Provision for Possible Losses
The provision for possible losses was $233,000 in 1997 and
$199,000 in 1995. There was no provision for possible losses
recorded in 1996. The 1997 provision relates to the 45 acres in
Sacramento and the proprosed marina and condominiums in Redwood
City. The 1995 provision relates to loans receivable from an
affiliate secured by timeshare interests and the office building
in San Bernardino.
Management believes that the allowance for possible losses at
December 31, 1997 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 $125,000 for 1997, $1,059,000
for 1996 and $1,803,000 for 1995. The 1997 share of losses
consists primarily of operating losses from the sale of homes
recorded by LCR. The 1996 share of losses consist primarily of
provisions for losses on real estate investments recorded by LCR
and BKS Development, Inc. ("BKS") related to the 179 lots in
Lancaster and a 283 acre project in Bakersfield owned by BKS.
The 1996 losses also include 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 wrote off its remaining investment
in BKS during 1996 and its remaining net carrying value of its
investment in LCR has been reduced to $814,000 as of December 31,
1997.
Operating expenses from operations of real estate owned were
$87,000 in 1997, $76,000 in 1996 and $107,000 in 1995. The
increase for 1997 is due primarily to an increase in property tax
expense. The decrease for 1996 is due to parking lot expenses
incurred in 1995 with no similar expense in 1996.
Operating expenses from operations of real estate owned paid to
affiliates were $12,000 each for 1997, 1996 and 1995. The
expenses consist of property management fees paid to affiliates
of the general partners.
Expenses associated with non-operating real estate owned were
$378,000 in 1997, $344,000 in 1996 and $289,000 in 1995. The
expenses relate to the proposed marina and condominiums in
Redwood City, the 128 single-family lots in Redlands, the 45
acres in Sacramento and the 10.66 acres in Roseville. These
expenses include property taxes of $234,000, $257,000 and
$244,000 for 1997, 1996 and 1995, respectively. The increase in
costs from 1996 to 1997 is primarily due to an increase in legal
expenses and other consulting fees associated with the escrow on
the proposed Marina and condominiums in Redwood City, the 45
acres in Sacramento and the 10.66 acres in Roseville. These
increases were partially offset by a reduction in property taxes
due to tax refunds received from appeals filed in 1995. The
increase from 1995 to 1996 is also 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.
Depreciation and amortization expense was $6,000 in 1997, $8,000
in 1996 and $11,000 in 1995 for the office building in San
Bernardino and office equipment. The decreases are due to assets
becoming fully amortized.
Interest expense was $12,000 for 1997, $16,000 for 1996 and
$20,000 for 1995. This interest expense relates to the
underlying debt on the office building in San Bernardino. The
decreases are the result of the reduction of the outstanding
balance of the debt.
General and administrative expenses, affiliates were $184,000,
$173,000 and $123,000 in 1997, 1996 and 1995, respectively.
These expenses are primarily salary allocation reimbursements
paid to affiliates for the management of the Partnership's
assets. The increase in 1997 is primarily due to the costs
associated with the pending and closed sales transactions. The
increase for 1996 is primarily due to a $33,000 change in billing
methodology from mortgage investment servicing fees to salary
allocations.
General and administrative expenses, nonaffiliates was $62,000,
$78,000 and $59,000 in 1997, 1996 and 1995, respectively. The
decrease in 1997 is due primarily to a decrease in investor
reporting and moving expenses. The increase for 1996 is
primarily due to increased investor reporting expenses and moving
expenses.
Mortgage investment servicing fees paid to affiliates were
$33,000 in 1995. There were no mortgage investment servicing
fees paid to affiliates during 1997 or 1996. These fees consist
of amounts paid to CC for servicing the Partnership's loan
portfolio. Beginning in 1996, the Partnership no longer incurs
mortgage investment servicing fees for servicing the
Partnership's real estate owned 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 59
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; 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 51
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;
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 29 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 27 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.
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, 1997
- -----------------------------------------------------------------
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 $ 196,000 (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,
1997.
(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, 1998
By:/s/Ronald R. White
_________________________________
Ronald R. White
General Partner March 31, 1998
By: CENTENNIAL CORPORATION
General Partner
/s/John B. Joseph
_________________________________
John B. Joseph
Executive Vice President March 31, 1998
/s/Ronald R. White
_________________________________
Ronald R. White
President March 31, 1998
/s/Joel H. Miner
_________________________________
Joel H. Miner
Chief Financial Officer March 31, 1998
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, 1997, 1996 and 1995
(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, 1997 and 1996............................. F-3
Consolidated Statements of Operations --
Years ended December 31, 1997, 1996 and 1995........... F-5
Consolidated Statements of Partners' Equity --
Years ended December 31, 1997, 1996 and 1995........... F-7
Consolidated Statements of Cash Flows --
Years ended December 31, 1997, 1996 and 1995........... F-8
Notes to Consolidated Financial
Statements............................................. F-11
Schedules
Schedule III - Consolidated Real Estate Owned
and Accumulated Depreciation and Amortization.......... F-31
Schedule IV - Mortgage Loans on Real Estate.............. F-35
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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 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 20, 1998
F-2
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1997 and 1996
<S> <C> <C>
Assets 1997 1996
- -----------------------------------------------------------------
Cash and cash
equivalents (note 5) $ 195,000 $ 261,000
Restricted cash --- 12,000
Real estate loans
receivable, earning 215,000 19,000
Real estate loans
receivable from
unconsolidated investees,
nonearning (note 5) 814,000 1,049,000
- -----------------------------------------------------------------
1,029,000 1,068,000
Less allowance for
possible loan losses (note 3) 15,000 8,000
- -----------------------------------------------------------------
Net real estate
loans receivable 1,014,000 1,060,000
- -----------------------------------------------------------------
Real estate owned, held
for sale (notes 6 and 7) 10,827,000 11,316,000
Less allowance for
possible losses on real
estate owned (note 4) 2,702,000 2,545,000
- -----------------------------------------------------------------
Net real estate owned 8,125,000 8,771,000
- -----------------------------------------------------------------
Due from affiliates 16,000 16,000
Other assets, net 4,000 12,000
- -----------------------------------------------------------------
$ 9,354,000 $ 10,132,000
=================================================================
F-3
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
(Continued)
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997 and 1996
<S> <C> <C>
Liabilities and Partners' Equity
- -----------------------------------------------------------------
Note payable (note 7) $ 97,000 $ 143,000
Accounts payable
and accrued liabilities 9,000 12,000
Property taxes payable
on real estate owned 484,000 283,000
Payable to affiliates (note 5) --- 1,000
- -----------------------------------------------------------------
Total liabilities 590,000 439,000
- -----------------------------------------------------------------
Partners' equity (deficit) --
29,141 limited partnership units
outstanding in 1997 and 1996
General partners (195,000) (195,000)
Limited partners 8,959,000 9,888,000
- -----------------------------------------------------------------
Total partners' equity 8,764,000 9,693,000
Contingencies (note 8)
- -----------------------------------------------------------------
$ 9,354,000 $ 10,132,000
=================================================================
</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, 1997, 1996 and 1995
<S> <C> <C> <C>
1997 1996 1995
- -----------------------------------------------------------------
Revenue:
Interest on loans
to affiliates,
including fees
(note 5) $ --- $ 81,000 $ 52,000
Interest on loans
to nonaffiliates,
including fees 22,000 21,000 42,000
Interest on
interest-bearing
deposits (note 5) 6,000 21,000 49,000
Income from operations
of real estate owned 131,000 127,000 134,000
Other 11,000 1,000 2,000
- -----------------------------------------------------------------
Total revenue 170,000 251,000 279,000
- -----------------------------------------------------------------
Expenses:
Provision for
possible losses
(notes 3 and 4) 233,000 --- 199,000
Share of losses
in unconsolidated
investees (note 5) 125,000 1,059,000 1,803,000
Operating expenses
from operations
of real estate owned 87,000 76,000 107,000
Operating expenses
from operations
of real estate owned
paid to affiliates
(note 5) 12,000 12,000 12,000
F-5
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
(Continued)
<CAPTION>
Years ended December 31, 1997, 1996 and 1995
<S> <C> <C> <C>
1997 1996 1995
- -----------------------------------------------------------------
Expenses associated
with non-operating
real estate owned 378,000 344,000 289,000
Depreciation and
amortization expense 6,000 8,000 11,000
Interest expense 12,000 16,000 20,000
General and
administrative,
affiliates (note 5) 184,000 173,000 123,000
General and
administrative,
nonaffiliates 62,000 78,000 59,000
Mortgage investment
servicing fees paid
to affiliates (note 5) --- --- 33,000
- -----------------------------------------------------------------
Total expenses 1,099,000 1,766,000 2,656,000
- -----------------------------------------------------------------
Net loss $ (929,000) $(1,515,000) $(2,377,000)
=================================================================
Net loss
per limited
partnership unit -
basic and diluted $ (31.88) $ (51.99) $ (81.57)
=================================================================
</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, 1997, 1996 and 1995
<S> <C> <C> <C>
Total
General Limited Partners'
Partners Partners Equity
- -----------------------------------------------------------------
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
Net loss --- (929,000) (929,000)
- -----------------------------------------------------------------
Balance (deficit) at
December 31, 1997 $ (195,000) $ 8,959,000 $ 8,764,000
=================================================================
</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, 1997, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
- -----------------------------------------------------------------
Cash flows from
operating activities:
Net loss $ (929,000) $ (1,515,000) $ (2,377,000)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Provision for
possible losses 233,000 --- 199,000
Amortization of
unearned loan fees --- (1,000) ---
Depreciation and
amortization expense 6,000 8,000 11,000
Interest accrued
to principal on
loans to affiliates --- (82,000) (45,000)
Equity in losses
of unconsolidated
investees 125,000 1,059,000 1,803,000
Changes in assets
and liabilities:
Decrease in accrued
interest receivable --- --- 10,000
(Increase) decrease
in other assets 2,000 1,000 (8,000)
Increase (decrease)
in accounts payable
and accrued
liabilities (3,000) 6,000 (20,000)
Increase in interest
and property taxes
payable on real
estate owned 201,000 80,000 48,000
Decrease in payable
to affiliates (1,000) (2,000) (4,000)
- -----------------------------------------------------------------
Net cash used in
operating activities (366,000) (446,000) (383,000)
- -----------------------------------------------------------------
F-8
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Continued)
Years ended December 31, 1997, 1996 and 1995
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
- -----------------------------------------------------------------
Cash flows from
investing activities:
Principal collected
on loans 293,000 148,000 280,000
Advances on loans
made to affiliates (179,000) (336,000) (776,000)
Capital expenditures
for real
estate owned (2,000) (2,000) (34,000)
Proceeds from sale
of real estate owned 222,000 --- ---
Decrease (increase) in
restricted cash and
short term investments 12,000 101,000 (102,000)
Increase in due
from affiliate --- (16,000) ---
- -----------------------------------------------------------------
Net cash provided by
(used in) investing
activities 346,000 (105,000) (632,000)
- -----------------------------------------------------------------
Cash flows used in
financing activities:
Principal payments
on notes payable (46,000) (42,000) (39,000)
- -----------------------------------------------------------------
Net cash used in
financing activities (46,000) (42,000) (39,000)
- -----------------------------------------------------------------
Net decrease
in cash and cash
equivalents (66,000) (593,000) (1,054,000)
Cash and cash equivalents
at beginning of year 261,000 854,000 1,908,000
- -----------------------------------------------------------------
Cash and cash equivalents
at end of year $ 195,000 $ 261,000 $ 854,000
=================================================================
F-9
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Continued)
Years ended December 31, 1997, 1996 and 1995
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
- -----------------------------------------------------------------
Supplemental
schedule of
cash flow
information:
Cash paid during
the year for:
Interest $ 12,000 $ 16,000 $ 20,000
- -----------------------------------------------------------------
Supplemental
schedule of
noncash investing
and financing
activities:
Decrease in real
estate owned and
increase in real
estate loans
through sale and
carryback financing
of real estate $ 200,000 $ --- $ ---
Decrease in allowance
for possible losses
on real estate owned
as a result of sale 69,000 --- ---
</TABLE>
See accompanying notes to consolidated financial statements
F-10
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Notes to Consolidated Financial Statements
December 31, 1997, 1996, 1995
(1) Summary of Significant Accounting Policies
Business
Centennial Mortgage Income Fund II (the "Partnership") was formed
in 1985 and initially 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, 1997, most of the loans secured by operating
properties have been repaid to the Partnership. However, during
the early 1990's, real estate market values for undeveloped land
in California 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 the remaining real estate owned. The
real estate owned balance before allowance for possible losses at
December 31, 1995 was $11,314,000, increasing to $11,316,000 at
year end 1996 and decreasing to $10,827,000 at year end 1997.
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 has formed several subsidiaries to own and
operate certain of its real estate assets. The corporations
formed were PIR Development, Inc., RSA Development, Inc.,
F-11
CTA Development, Inc., LCR Development, Inc., ("LCR"), and BKS
Development, Inc., ("BKS"). All of these corporations are
California corporations. 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 transfers, 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, loans made to these
subsidiaries are a component of the Partnership's investment in
them, 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.
Partners' Capital Accounts
Cash available for distribution, as defined in the Partnership
Agreement, is to be allocated 95 percent to the limited partners
and 5 percent to the general partners until each limited partner
has received an amount equal to a 12 percent non-cumulative
annual return on his adjusted invested capital (as defined in the
Partnership Agreement). Thereafter, cash available for
distribution is to be allocated 90 percent to the limited
partners and 10 percent to the general partners. All
distributions of mortgage reductions (as defined in the
Partnership Agreement) after the first sixty months following the
closing date of the Partnership, shall be distributed 99 percent
to the limited partners and 1 percent to the general partners,
until each limited partner has received a 12 percent cumulative
annual return on his adjusted invested capital, after which such
amounts are to be distributed 85 percent to the limited partners
and 15 percent to the general partners.
F-12
The Partnership had no cash available for distribution during the
three years ended December 31, 1997.
Based upon these and various other 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
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.
F-13
Real Estate Owned
During 1995, 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 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.
Estimated fair values are 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. An impairment loss shall be measured as
the amount by which the carrying amount of the asset exceeds the
fair value of the assets less costs to sell. SFAS 121 requires
that assets to be disposed of not be depreciated while they are
held for disposal. The Partnership considered all real estate
owned as held for sale during 1997 and 1996, and is actively
marketing all properties using third party brokers or in house
sales staff. Management's intent is to attempt to sell all
properties within one year, however, it is improbable that all of
the Partnership's assets will actually be sold in that period.
F-14
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-15
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Current Temporary Differences Partnership Corporations Total
(Unaudited) (Unaudited) (Unaudited)
- --------------------------------------------------------------------------------
- ----------
GAAP earnings (loss) for
the year ended
December 31, 1997 $ 226,000 $ (1,155,000) $
(929,000)
Provision for losses (577,000) 741,000
164,000
Accrued expenses not deducted
under the cash basis
method of accounting --- 204,000
204,000
Share of losses in
unconsolidated investees 125,000 ---
125,000
Carrying costs expensed for books
and capitalized for tax purposes --- 38,000
38,000
Depreciation --- (15,000)
(15,000)
- --------------------------------------------------------------------------------
- ----------
Taxable loss for the year
ended December 31, 1997 $ (226,000) $ (187,000) $
(413,000)
================================================================================
==========
Taxable loss allocable to
General Partner ---
================================================================================
==========
Taxable loss
per limited
partner unit $ (7.76)
================================================================================
==========
</TABLE>
F-16
<TABLE>
<CAPTION>
December 31, 1997
- -----------------------------------------------------------------
<S> <C> <C>
Cumulative Temporary Differences Partnership Corporations
(Unaudited) (Unaudited)
- -----------------------------------------------------------------
Net operating loss
carry forwards $ --- $ 303,000
Provision for losses 259,000 2,458,000
Accrued expenses not deducted
under the cash basis --- 4,848,000
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 --- 1,123,000
Depreciation --- (57,000)
Share of losses in
unconsolidated investees 1,439,000 ---
- -----------------------------------------------------------------
Total cumulative
temporary differences $ 2,505,000 $ 8,675,000
=================================================================
</TABLE>
The cumulative temporary partnership differences shown above,
which total approximately $86.00 per limited partnership unit,
should reverse when the Partnership liquidates its investments,
assuming that future tax law changes do not preclude the
Partnership from deducting these deferred items. 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 $2.2 million in notes receivable from these
investees, a portion of which could be charged to bad debt
F-17
expense should these investees liquidate their single property
holdings at current carrying values.
In addition, as of December 31, 1997, the Partnership held
approximately $12.3 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 $297.00
per limited partnership unit.
The subsidiary corporations are subject to taxation and account
for income taxes under 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. None
of the subsidiary corporations have paid any income taxes since
their respective formations and all of them have had net deferred
tax assets which have been fully offset by valuation allowances
as of December 31, 1997, 1996 and 1995. Accordingly, no tax
expense or benefit has been recorded by these corporations during
the three years ended December 31, 1997. No deferred tax asset
related to the corporations cumulative temporary differences
shown above 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.
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 1997, 1996 and 1995.
F-18
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, the 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. Revenue from the sale of real
estate is recorded when title to the property has been
transferred, an adequate cash investment has been made by the
buyer, and the earnings process has been completed.
Impact of Accounting Pronouncements Issued but not Adopted by the
Partnership
In June 1997, Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"), was issued
and is effective for fiscal years beginning after December 15,
1997. This statement requires companies to classify items of
other comprehensive income by their nature in an income statement
and display the accumulated balance of other income separately
from retained earnings and additional paid-in capital in the
equity section of a statement of financial position.
In June 1997, Statement of Financial Accounting Standards No.131,
"Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"), was issued and is effective for fiscal
years beginning after December 15, 1997. This statement
establishes standards for segment reporting in the financial
statements.
The Partnership anticipates that the adoption of SFAS 130 and 131
F-19
will not result in disclosures that will be materially
different from those presently required.
(2) Fair Value of Financial Instruments
Statement of Financial Accounting Standards 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.
Real Estate Loans Receivable - Earning
The net carrying value of earning loans is estimated to be fair
value since over 93 percent of these loans were repaid within one
month of December 31, 1997.
Real Estate Loans Receivable from Unconsolidated Investee -
Earning and Nonearning
The net carrying value of loans from unconsolidated investees is
not estimable due to the uncertainty of the amounts and timing of
future payments to be made.
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.
F-20
(3) Allowance for Possible Loan Losses
<TABLE>
<CAPTION>
Changes in the allowance for possible loan losses are as follows:
<S> <C> <C> <C>
1997 1996 1995
- -----------------------------------------------------------------
Balance at
beginning of year $ 8,000 $ 8,000 $ 8,000
Loans to affiliates
and nonaffiliates
charged-off --- --- (99,000)
Provision for
possible losses 7,000 --- 99,000
- -----------------------------------------------------------------
Balance at
end of year $ 15,000 $ 8,000 $ 8,000
================================================================
</TABLE>
At December 31, 1997, the carrying value of loans that are
considered to be impaired totaled $814,000 (all of which were on
nonaccrual status). At December 31 1997, there
was no allowance for possible loan losses recorded by the
Partnership, related to loans considered to be impaired.
However, as discussed in note 5, the unconsolidated investees
have recorded an allowance for losses of $4,063,000 and the
Partnership's proportionate share of the losses in unconsolidated
investees reflects the majority of this allowance. There were
investments of $179,000 and $336,000 in impaired loans for the
years ended December 31, 1997 and 1996, respectively. 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, 1997 and 1995. No cash basis
income was recognized on these impaired loans for the years ended
December 31, 1997, 1996 and 1995.
If the loans on nonaccrual had been current throughout their
terms, interest income would have increased by approximately
$199,000, $96,000 and $379,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
F-21
(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>
1997 1996 1995
- -----------------------------------------------------------------
Balance at
beginning of year $ 2,545,000 $ 2,545,000 $ 2,445,000
Real estate
owned charged-off (69,000) --- ---
Provision for losses 226,000 --- 100,000
- -----------------------------------------------------------------
Balance at
end of year $ 2,702,000 $ 2,545,000 $ 2,545,000
=================================================================
</TABLE>
(5) Transactions with Affiliates
Under the provisions of the Partnership Agreement, CC is entitled
to receive from the Partnership mortgage investment servicing
fees for loans serviced equal to an annual rate of 1/4 of 1
percent of the committed amounts to be funded by the Partnership.
The Partnership incurred $33,000 of mortgage investment servicing
fees payable to CC in 1995 and paid $30,000 and $3,000 of such
fees in 1995 and 1996, respectively. No mortgage investment
servicing fees were incurred during 1997 or 1996.
As discussed in note 1, the Partnership owns 50 percent of the
stock of two corporations which have not been consolidated in the
accompanying financial statements; LCR and BKS. The balance of
stock in these corporations is owned by Centennial Mortgage
Income Fund ("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
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.
F-22
Accordingly, the December 31, 1996 consolidated balance sheet and
all of the 1997 consolidated financial statements include only
amounts related to the LCR and Silverwood loans and investments.
A summary of these real estate loans receivable from
unconsolidated investees as of December 31, 1997 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 942,000 377,000 565,000
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 4,000 --- 4,000
- -----------------------------------------------------------------
Totals $ 2,250,000 $ 1,436,000 $ 814,000
</TABLE>
F-23
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>
The Partnership has not accrued its share of interest on the
$1,059,000 note which was approximately $324,000, $241,000 and
$176,000 as of December 31, 1997, 1996 and 1995, respectively.
The Partnership has not accrued its share of interest on the
Silverwood loans which was approximately $147,000 and $32,000 as
of December 31, 1997 and 1996, respectively.
F-24
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, 1997 and
1996 and for the years ended December 31, 1997, 1996 and 1995:
F-25
LCR Development, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, December 31,
Assets 1997 1996
- -----------------------------------------------------------------
Cash $ 11,000 $ ---
Restricted cash 20,000 10,000
Real estate owned 6,950,000 6,492,000
Less allowance for
losses on real
estate investments 4,063,000 3,898,000
- -----------------------------------------------------------------
Net real estate owned 2,887,000 2,594,000
Organization costs 1,000 1,000
- -----------------------------------------------------------------
$ 2,919,000 $ 2,605,000
=================================================================
Liabilities and Stockholders' Deficit
- -----------------------------------------------------------------
Notes payable
to affiliates:
CMIF $ 4,679,000 $ 4,092,000
CMIF II 2,250,000 2,360,000
- -----------------------------------------------------------------
Total notes payable 6,929,000 6,452,000
Accounts payable
and accrued liabilities 38,000 11,000
Interest payable to
affiliates 1,377,000 845,000
Payable to affiliates 75,000 16,000
- -----------------------------------------------------------------
Total liabilities 8,419,000 7,324,000
Stockholders' deficit (5,500,000) (4,719,000)
- -----------------------------------------------------------------
$ 2,919,000 $ 2,605,000
=================================================================
</TABLE>
F-26
LCR Development, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31, 1997, 1996 and 1995
<S> <C> <C> <C>
1997 1996 1995
- -----------------------------------------------------------------
Housing sales $ 834,000 $ 233,000 $ ---
Cost of housing sales 851,000 238,000 ---
Provision for
losses on
real estate owned 207,000 2,516,000 1,077,000
Selling and
marketing expenses 131,000 184,000 ---
General and
administrative 64,000 162,000 (3,000)
- -----------------------------------------------------------------
Operating loss (420,000) (2,867,000) (1,074,000)
Interest expense 361,000 151,000 ---
- -----------------------------------------------------------------
Net (loss) $ (781,000) $(3,018,000) $(1,074,000)
=================================================================
Interest not included
in share of losses (532,000) (336,000) (197,000)
- -----------------------------------------------------------------
Allocable net loss $ (249,000) $ (2,682,000) $ (877,000)
=================================================================
Share of losses
recorded $ (125,000) $ (716,000) $ (438,000)
=================================================================
</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 the Partnership and 50 percent to CMIF
during 1996. Additionally, the Partnership and CMIF have not
recorded interest income in connection with the $1,377,000 of
accrued interest payable to affiliates by LCR and Silverwood.
Accordingly, the Partnership has not recorded its share of losses
from LCR to the extent that it represents this nonaccrued
interest income.
F-27
<TABLE>
<CAPTION>
Difference of Allocation of Share of Losses
<S> <C>
1997
- -----------------------------------------------------------------
The Partnership's 50 percent share
of LCR's stockholders' deficit
at December 31, 1997 $(2,750,000)
Cumulative interest payable by LCR
to the Partnership not accrued as
income by the Partnership 689,000
Loans receivable considered as part
of the Partnership's investment 2,250,000
Disproportionate loss allocation 625,000
- -----------------------------------------------------------------
Net loans receivable $ 814,000
=================================================================
</TABLE>
As discussed above, the Partnership holds 50 percent of the stock
of BKS with CMIF. BKS owned a 283 acre residential tract in
Bakersfield, California and foreclosed on this property on August
8, 1994. Bonds and taxes accrued on the property increased from
$1,605,000 at December 31, 1995 to $2,085,000 at December 31,
1996. During 1995, BKS reduced its carrying value of the
property and the Partnership recorded $1,364,000 as its share of
BKS's net loss for the year. During 1996, the bond holders
commenced foreclosure proceedings on the property. Management
elected to abandon the property in 1996 due to the fact that land
values had not increased. Therefore, during 1996, the
Partnership recorded its $343,000 share of losses in connection
with BKS which resulted in the Partnership's investment in BKS
being reduced to a zero balance. 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.
The Partnership reimburses the general partner for salaries and
related expenses incurred on behalf of the Partnership for
services such as legal, accounting, property management and other
administrative functions. The general partners charged $196,000
$185,000 and $135,000 for such services in 1997, 1996 and 1995,
respectively.
F-28
During 1997, 1996 and 1995, the Partnership maintained interest-
bearing deposits with Sunwest Bank, an affiliate of the general
partners. The balances at December 31, 1997, 1996, and 1995 were
$66,000, $5,000 and $170,000, respectively. Interest earned on
such deposits for 1997, 1996 and 1995 was $2,000, $5,000 and
$3,000, respectively.
<TABLE>
(6) Real Estate Owned
<CAPTION>
Real estate owned consists of the following:
<S> <C> <C>
December 31, December 31,
1997 1996
- -----------------------------------------------------------------
1. Office building
in San Bernardino, CA $ 827,000 $ 825,000
2. Land in Sacramento, CA 3,637,000 4,128,000
3. Proposed marina and
condominiums in
Redwood City, CA 5,360,000 5,360,000
4. 10.66 acres in Roseville, CA 1,003,000 1,003,000
- -----------------------------------------------------------------
Total real estate owned $ 10,827,000 $ 11,316,000
=================================================================
</TABLE>
The Partnership leases its operating property under several non-
cancelable operating lease agreements. Future minimum rents to
be received as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
- -----------------------------------------------------------------
1998 $ 144,000
1999 123,000
2000 23,000
- -----------------------------------------------------------------
$ 290,000
=================================================================
</TABLE>
F-29
<TABLE>
(7) Note Payable
<CAPTION>
Note payable consists of the following:
<S> <C> <C>
December 31, December 31,
1997 1996
- -----------------------------------------------------------------
Note payable secured by
office building in
San Bernadino, CA, with principal and interest
payable monthly of $4,814;
interest at 9.5%,
maturing December 1, 1999 $ 97,000 $ 143,000
=================================================================
</TABLE>
Future principal payments to be paid as of December 31, 1997 are
as follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
- -----------------------------------------------------------------
1998 $ 50,000
1999 47,000
- -----------------------------------------------------------------
$ 97,000
=================================================================
</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-30
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule III
<TABLE>
Consolidated Real Estate Owned
December 31, 1997
<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 $ 97,000 $ 800,000 $ 27,000 $
- ---
45 Acres in Sacramento --- 3,371,000 150,000
116,000
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
- ---
- --------------------------------------------------------------------------------
- ----------
$ 97,000 $ 9,272,000 $ 1,350,000 $
205,000
================================================================================
==========
F-31
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule III
Consolidated Real Estate Owned
(Continued)
December 31, 1997
<CAPTION>
Gross Amount at Which
Carried on Books (F2)
<S> <C> <C> <C> <C>
Life On
Which
Real Estate Date
Depreciation
Property Owned Total Acquired Is
Computed
- --------------------------------------------------------------------------------
- ----------
Office Building
in San Bernardino $ 827,000 $ 827,000 April 1993 (F1)
45 Acres in Sacramento 3,637,000 3,637,000 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
- -----------------------------------------------------
$10,827,000 $10,827,000
=====================================================
F-32
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule III
Consolidated Real Estate Owned
(Continued)
December 31, 1997
<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 $11,860,000 at December
31, 1997.
<F3> Improvements are presented net of accumulated depreciation as required per
SFAS 121.
</TABLE>
F-33
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule III
<TABLE>
Consolidated Real Estate Owned
(Continued)
December 31, 1997
<CAPTION>
The following is a summary of consolidated real estate owned for the years ended
December 31, 1997, 1996, and 1995.
<S> <C> <C> <C>
1997 1996 1995
- --------------------------------------------------------------------------------
- ----------
Balance at beginning of year $ 11,316,000 $ 11,314,000 $
11,280,000
Additions during period:
Improvements 2,000 2,000
34,000
Deductions during period:
Real estate sold (422,000) --- -
- --
Charge-offs (69,000) --- -
- --
- --------------------------------------------------------------------------------
- ----------
Balance at year end $ 10,827,000 $ 11,316,000 $
11,314,000
================================================================================
==========
</TABLE>
F-34
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule IV
<TABLE>
<CAPTION>
Mortgage Loans on Real Estate
December 31, 1997
<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
$387.90
First trust deed on 6.73
acres of vacant land in
Interest
Sacramento, CA 10.0% fixed February 19, 1998 due
monthly
50 percent interest in
unsecured note related to P & I
due at
179 lots in Lancaster, CA 7.75% fixed June 30, 1998
maturity
50 percent interest in
First Trust Deed on P & I
due at
165 lots in Lancaster, CA Prime + 1% August 1, 1999
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 one single family P & I
due at
home in Lancaster, CA Prime + 1% July 1, 1998
maturity
F-35
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule IV
<CAPTION>
Mortgage Loans on Real Estate
(Continued)
December 31, 1997
<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 $ 15,000
None
First trust deed on 6.73
acres of vacant land in
Sacramento, CA None 200,000 200,000
None
50 percent interest in
unsecured note related
to 179 lots in 2,115,000
Lancaster, CA None (50% - 1,059,000) 1,059,000
$1,059,000
50 percent interest
in First Trust Deed
on 165 lots in 3,266,000
Lancaster, CA None (50% - 1,636,000) 942,000
942,000
F-36
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule IV
<CAPTION>
Mortgage Loans on Real Estate
(Continued)
December 31, 1997
<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
single family homes 490,000
in Lancaster, CA None (50% - 245,000) 245,000
245,000
50 percent interest
in 1st T.D. on
one single
family home in 804,000
Lancaster, CA None (50% - 402,000) 4,000
4,000
- --------------------------------------------------------------------------------
- ----------
Losses from unconsolidated investees (1,436,000)
(1,436,000)
- --------------------------------------------------------------------------------
- ----------
$ 3,626,000 $ 1,029,000 $
814,000
================================================================================
==========
<FN>
<F1> Aggregate cost for Federal Income Tax purposes is $3,180,000 at December
31, 1997.
</FN>
F-37
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule IV
Mortgage Loans on Real Estate
(Continued)
December 31, 1997
<CAPTION>
The following is a summary of activity for the years ended December 1997, 1996
and 1995.
<S> <C> <C> <C>
1997 1996
1995
- --------------------------------------------------------------------------------
- ----------
Balance at beginning of year $ 1,068,000 $ 1,856,000 $
3,118,000
Additions during period:
New mortgage
loans/disbursements 179,000 336,000
821,000
Other - Interest
reserve and amortization --- 83,000
- ---
Loans transferred
from real estate owned 200,000 ---
- ---
Deductions during period:
Collections of principal (293,000) (148,000)
(280,000)
Losses from
unconsolidated investees (125,000) (1,059,000)
(1,803,000)
- --------------------------------------------------------------------------------
- ----------
Balance at year end $ 1,029,000 $ 1,068,000 $
1,856,000
================================================================================
==========
</TABLE>
See accompanying independent auditors' report.
F-38
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 195
<SECURITIES> 0
<RECEIVABLES> 1,029
<ALLOWANCES> 15
<INVENTORY> 0
<CURRENT-ASSETS> 194
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,354
<CURRENT-LIABILITIES> 2
<BONDS> 97
<COMMON> 0
0
0
<OTHER-SE> 8,764
<TOTAL-LIABILITY-AND-EQUITY> 9,354
<SALES> 0
<TOTAL-REVENUES> 170
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12
<INCOME-PRETAX> (929)
<INCOME-TAX> 0
<INCOME-CONTINUING> (929)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (929)
<EPS-PRIMARY> (31.88)
<EPS-DILUTED> (31.88)
</TABLE>
