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, 1998
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
The Partnership adopted Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise
and Related Information"("SFAS 131"). Given that the Partnership
is in the process of liquidation, the Partnership has identified
only one operating business segment which is the business of
asset liquidation. The adoption of SFAS 131 did not have an
impact on the Partnership's financial reporting.
(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.
The improving real estate markets and development of the
Partnership's assets have enabled the Partnership to liquidate
the majority of its assets. As of December 31, 1998, the
Partnership's assets consisted of $1,010,000 in cash and
$3,810,000 in other assets. Based upon the current stated
maturity dates of the Partnership's $598,000 in notes receivable
and the improving real estate markets, it is possible that these
assets could be liquidated as soon as July 2000.
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, decreased to $10,827,000 as of December
31, 1997 and decreased again to $4,599,000 as of December 31,
1998. As of December 31, 1998, the Partnership had established a
$1,411,000 allowance for possible losses on its real estate
owned. The Partnership is actively marketing the remaining real
estate assets for sale.
The liquidation of assets during 1998 enabled the Partnership to
make a $3,496,000 cash distribution to its limited partners in
October 1998.
As of December 31, 1998, the Partnership has entered into a
purchase and sale agreement to sell a portion of the 45 acres in
Sacramento with an aggregate book value before allowance for
losses of approximately $900,000. Management currently estimates
that the net sale proceeds from this transaction, if consummated,
will be approximately equal to the net book value after
allowances for losses. This sale is subject to numerous
uncertainties and there is a significant possibility that the
transaction will not be consummated.
Risks of the year 2000 Issue
As discussed above, the Partnership is in the process of
liquidating its remaining assets. As of December 31, 1998, the
Partnership held only cash, three notes secured by real estate
and two properties. Management anticipates that the Partnership
will hold a lesser number of assets by January 1, 2000.
Management does not believe that the value of any of these assets
is subject to valuation risk as a result of the year 2000 issues,
other than general economic climate issues that might arise.
None of the Partnership's assets have any equipment with
computerized components essential to their operations.
Although the Partnership has made some changes already to its
software, these changes have not been tested. The Partnership
intends to begin testing changes made to its existing software in
the next few months. The Partnership has not, and does not
contemplate spending any significant amount of funds to upgrade
its computer systems inasmuch as virtually all of its computer
needs could easily be met with existing "over the counter"
software and hardware. The cost of this software and hardware,
if needed, should not exceed $10,000. The only exception to this
is the computer software which the Partnership uses to track its
limited partners and their addresses. The Partnership has made a
preliminary evaluation of this software with its outside software
consultant and believes that it can be modified for less than
$10,000. Even if attempts to correct deficiencies in the
software without spending significant sums are not successful,
the Partnership anticipates that it could convert its systems to
standard spreadsheet or data base programs at a nominal cost.
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, 1998, there were approximately 3,120 holders
of limited partnership units.
(c) Partnership Distributions
The Partnership paid a $3,496,000 cash distribution to limited
partners in October 1998. This distribution equaled
approximately $120.00 per limited partnership unit.
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 based upon advice from legal
counsel until the possibility of any unforeseen legal action
against the Partnership becomes remote. 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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12/31/98 12/31/97 12/31/96 12/31/95
12/31/94
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Consolidated Statement
of Operations Data:
Total revenue........... $ 479 $ 170 $ 251 $ 279
$ 433
Net loss................ (754) (929) (1,515) (2,377)
(2,243)
Net loss per limited
partnership unit-
basic and diluted... (25.87) (31.88) (51.99) (81.57)
(76.97)
Consolidated Balance
Sheet Data:
Total loans before
allowance for losses 598 1,029 1,068 1,856
3,118
Total real estate owned
before allowance
for losses............. 4,599 10,827 11,316 11,314
11,284
Total assets............. 4,820 9,354 10,132 11,605
13,997
Partners' equity......... 4,514 8,764 9,693 11,208
13,585
</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 $(754,000)
and $(25.87) for the year ended December 31, 1998, down from
$(929,000) and $(31.88) for the year ended December 31, 1997 and
$(1,515,000) and $(51.99) in 1996. Major changes between income
statement components between 1998 and 1997 included: i) a
$227,000 increase in the provision for losses; ii) a $146,000
decrease in expenses associated with non-operating real estate
owned; iii) a $73,000 increase in general and administrative-
affiliates; iv) a $72,000 increase in interest on interest-
bearing deposits; and v) a $192,000 increase in gain on sale of
property. The decrease in loss for 1997 as compared to 1996 is
primarily due to a significant decrease in share of losses in
unconsolidated investees. A detailed discussion of the
significant changes in each component of revenue and expense for
each of the years in the three year period ended December 31,
1998 is included in the following paragraphs.
Liquidity and Capital Resources
At December 31, 1998, the Partnership had $1,010,000 in
unrestricted cash and interest-bearing deposits. Additional
sources of funds are expected to be from the repayments of notes
receivable and the sale of real estate owned. Future operations
of real estate owned are not expected to be a significant source
of funds.
During 1998, the Partnership's principal sources of cash were: i)
$4,823,000 of cash proceeds from the sale of real estate; ii)
$615,000 in principal payments received on loans; iii) $56,000 in
net operating income from operating property; iv) $137,000 in
principal advances on notes payable, net of repayments; and v)
$106,000 in interest income on loans and interest bearing
deposits. The Partnership's principal uses of cash during 1998
were: i) a $3,496,000 cash distribution to limited partners; ii)
$321,000 in general and administrative costs; iii) $295,000 in
advances on loans to LCR; iii) $615,000 in real estate taxes
paid; iv) $101,000 in other expenses associated with non-
operating real estate owned; v)$154,000 in additions to real
estate owned; and vi) $16,000 in interest payments.
As of December 31, 1998, the Partnership has entered into a
purchase and sale agreement to sell a portion of the 45 acres in
Sacramento with an aggregate book value before allowance for
losses of approximately $900,000. Management currently estimates
that the net sale proceeds from this transaction, if consummated,
will be approximately equal to the net book value after
allowances for losses. This sale is subject to numerous
uncertainties and there is a significant possibility that the
transaction will not be consummated.
As of December 31, 1998, the Partnership had no unfunded loan
commitments to nonaffiliates. The Partnership's notes payable
commitments for 1999 consist of interest and non-balloon
principal payments due of approximately $22,000. 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 $52,000 payable in 1999, and ii) selling,
general and administrative costs.
Effective with the third quarter of 1991, the Partnership had
suspended making any cash distributions to partners, due to a
decline in liquidity and the uncertainty of the cash requirements
for existing and potential real estate owned. Pursuant to the
Partnership Agreement, 60 months after the closing of the
offering, cash proceeds from mortgage investments are no longer
available for reinvestment by the Partnership.
Through the latter part of 1997, the general partners believed
that the cash proceeds from mortgage reductions and the sale of
real estate owned should be retained by the Partnership until
such time as it was assured that it had sufficient cash to
fulfill any potential operating requirements. Due to the
substantial real estate owned balances, these potential operating
costs were considered to be very significant. As a result of the
substantial decrease in real estate owned which has occurred, the
general partners determined that the Partnership could make a
$3,496,000 distribution to its limited partners in October 1998.
The general partners have had discussions with legal counsel
regarding the amounts of cash reserves that would be prudent to
be retained by the Partnership at this time. In light of the
substantial amount of real estate that the Partnership has held
an interest in over the years, there is always the potential for
future litigation to arise, particularly in the area of toxic
contamination. Although the general partners are not aware of
any threatened litigation, or litigation that is likely to arise,
they have determined that the Partnership should retain at least
$1,000,000 in cash reserves to be available to defend the
Partnership in any future litigation which may arise. It is
expected that these reserves will be retained until such time as
legal counsel advises the general partners that the potential for
any future litigation is remote.
Results of Operations
The Partnership's non-cash assets declined from $9,159,000 as of
December 31, 1997 to $3,810,000 as of December 31, 1998. The
substantial reduction in non-cash assets during 1998 caused many
changes in the Partnership's results of operations as discussed
below.
Interest income on loans to affiliates, including fees was
$16,000 for 1998 and $81,000 for 1996. There was no interest
income on loans to affiliates for 1997 because the loans
receivable from unconsolidated investees were placed on
nonaccrual status in late 1996. This income is related to the
Silverwood joint venture, which was constructing homes in
Lancaster, California. The real estate market in Lancaster has
not seen the improvement that many other areas in California
have. As a result, the Partnership placed certain of its loans
to Silverwood on nonaccrual status during 1996, thus decreasing
interest income during the latter half of 1996 and all of 1997.
The 1998 interest income resulted from the payoff of one of the
nonearning Silverwood loans.
Interest income on loans to nonaffiliates, including fees, was
$12,000, $22,000 and $21,000 in 1998, 1997 and 1996,
respectively. Interest income on loans to nonaffiliates
continues to decrease due to payoffs of existing loans.
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,
1998, 1997 and 1996.
Real estate loans receivable, earning represents two loans with a
cumulative balance of $581,000 as of December 31, 1998. These
loans, from an unaffiliated party, were received in connection
with the payoff of a previously nonearning loan to affiliate.
Real estate loans receivable from unconsolidated investee,
nonearning is comprised of one past due loan totaling $22,000 as
of December 31, 1998. This loan is partially offset by $5,000 in
share of losses in unconsolidated investee.
The real estate owned balance before allowance for possible
losses at December 31, 1998, 1997 and 1996 was $4,599,000,
$10,827,000 and $11,316,000, respectively. The balance at
December 31, 1998 is comprised of two properties and is offset by
a $1,411,000 allowance for possible losses. As discussed above,
the Partnership had entered into a purchase and sale agreement on
a portion of the 45 acres in Sacramento as of December 31, 1998.
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,
1998 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 was 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 from 1994 through 1997, management did not expect
that this loan would ever be repaid. As a result, the loan was
placed on nonaccrual. The participating principal balance and
nonaccrued interest balances at December 31, 1997 were $1,059,000
and $324,000, respectively. As discussed in note 5 of Notes to
Consolidated Financial Statements, the Partnership had reduced
the carrying value of this note by $1,059,000, a portion of its
share of losses from this unconsolidated investee as of December
31, 1997. During 1998, the remaining lots were sold and LCR
received no cash from the sale. Accordingly, the Partnership
charged off this note against the $1,059,000 of previously
recorded losses from unconsolidated investee during 1998.
During 1994 and 1995, LCR had evaluated various alternative
strategies for liquidating its investment in the 179 lots in
Lancaster. 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 held 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 investee as of
December 31, 1997.
During 1998, all but one of the remaining homes were sold and all
of the undeveloped lots were sold. The Partnership funded
additional advances of $212,000 and $83,000 on the development
and the Phase I construction loan, respectively. The Partnership
recorded an additional $96,000 in losses from unconsolidated
investee during 1998 and received cash payments of $100,000,
$245,000 and $65,000 on the development loan, the model loan and
the Phase I loan, respectively. The Partnership also received
notes receivable totaling $586,000 from an unaffiliated party as
a partial repayment of the development loan in connection with
the sale of the remaining lots. These new notes are secured by
the 157 lots and had a combined principal balance of $581,000 as
of December 31, 1998. The remaining principal balances of the
development loan, the model loan and the Phase I loan were
$468,000, $-0- and $22,000, respectively, after the 1998 advances
and payments received. The Partnership charged off the
development loan against $468,000 of the remaining losses from
unconsolidated investee, leaving a balance of losses from
unconsolidated investee of $5,000 which has been offset against
the $22,000 balance of the Phase I loan.
Real Estate Owned
A description of the Partnership's principal real estate owned
during the year ended December 31, 1998 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 project was 74 percent leased as of December 31, 1997
and 83 percent leased as of December 31, 1998. Additional leases
signed subsequent to December 31, 1998 have increased the
occupancy to 92 percent, however, a number of leases expire in
1999 and occupancy levels could decline as a result. The
property generated net operating income of $56,000 during 1998.
The property is being marketed for sale and management has seen
an increase in interest in the property as a result of the
installation of an elevator. The carrying value before allowance
for possible losses at December 31, 1998 was $914,000. The
Partnership has recorded a $261,000 allowance for losses related
to this property as of December 31, 1998, $11,000 of which was
recorded in 1998. As of December 31, 1998, the property was
encumbered by a new note secured by a first trust deed of
$234,000 which matures June 1, 2008. The Partnership used the
majority of the proceeds from this new note to payoff the prior
note and pay for several improvements to the building including
the elevator.
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. 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 was $875,000 and the transaction
was subject to the buyer obtaining certain senior housing tax
credits through a governmental lottery. The buyer did not
receive the tax credits and escrow was cancelled. During the
first quarter of 1999, the Partnership again opened escrow with a
new buyer for a purchase price of $900,000 on the 9.45 acre
portion of the property. The escrow is scheduled to close at the
end of the second quarter of 1999. However, there is no
assurance that this transaction will ever be consummated. Both
the parcel sold and the parcel in escrow are zoned for
residential use. The balance of the property is zoned for
industrial/commercial use. There has been only limited
industrial/commercial use development activity in the area
surrounding this property during the past couple of years. In
light of this limited activity and management's objective of
liquidating the Partnership's remaining assets as soon as
practical, management may elect to sell this property at prices
below its March 31, 1998 appraised value. Accordingly, the
Partnership recorded an additional $504,000 provision for losses
against the carrying value of this property during 1998. At
December 31, 1998, the carrying value before allowance for
possible losses was $3,685,000. The Partnership has recorded a
$1,150,000 allowance for losses related to this property as of
December 31, 1998.
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 had been in escrow
since 1996 for a purchase price of $4,000,000. Due to some
pending costs to resolve access issues, the price was reduced to
$3,900,000. It closed escrow June 12, 1998 and the Partnership
received net proceeds from the sale of $3,699,000.During the
first quarter of 1998, the Partnership reversed $55,000 of its
previously recorded provision for losses against this property.
The Partnership recorded a $71,000 gain on sale on this
transaction.
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. The property had been in escrow for an all cash
purchase price of $1,200,000 and closed escrow June 30, 1998 with
the Partnership receiving net proceeds of $1,124,000. The
Partnership recorded a $121,000 gain on sale on this transaction.
Interest on Interest-Bearing Deposits
Interest on interest-bearing deposits was $78,000 in 1998, $6,000
in 1997 and $21,000 in 1996. The increase in interest on
interest-bearing deposits for 1998 is primarily the result of
higher cash balances due to the sale of real estate owned. 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 $160,000 in 1998, $131,000 in 1997 and $127,000 in
1996. The 1998, 1997 and 1996 revenues are from the office
building in San Bernardino. The increase for 1998 is primarily
due to increased occupancy.
Gain on Sale of Real Estate Owned
As discussed above, the Partnership recorded gains of $71,000 and
$121,000 on the sales of the Redwood City and Roseville
properties, respectively, during 1998. There were no gains or
losses on the sale of real estate during 1997 or 1996.
Provision for Possible Losses
The provision for possible losses was $460,000 in 1998 and
$233,000 in 1997. There was no provision for possible losses
recorded in 1996. The 1998 provision is comprised of a $504,000
provision on the 45 acres in Sacramento, an $11,000 provision on
the office building in San Bernardino offset by a reversal of
$55,000 on the proposed marina and condominiums in Redwood City.
The 1997 provision relates to the 45 acres in Sacramento and the
proposed marina and condominiums in Redwood City.
Management believes that the allowance for possible losses at
December 31, 1998 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 $96,000 for 1998, $125,000 for
1997 and $1,059,000 for 1996. The 1998 and 1997 share of losses
consist primarily of operating losses from the sale of homes and
finished lots recorded by LCR. The 1996 share of losses consists
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 Partnership's remaining
investment in and loans receivable from these unconsolidated
investees has been reduced to $17,000 as of December 31, 1998.
Operating expenses from operations of real estate owned were
$92,000 in 1998, $87,000 in 1997 and $76,000 in 1996. The
increase for 1998 can be attributed to several air conditioning
unit repairs at the office building in San Bernardino. The
increase for 1997 is due primarily to an increase in property tax
expense.
Operating expenses from operations of real estate owned paid to
affiliates were $12,000 each for 1998, 1997 and 1996. The
expenses consist of property management fees paid to affiliates
of the general partners.
Expenses associated with non-operating real estate owned were
$232,000 in 1998, $378,000 in 1997 and $344,000 in 1996. The
expenses relate to the proposed marina and condominiums in
Redwood City, the 45 acres in Sacramento and the 10.66 acres in
Roseville. These expenses include property taxes of $130,000,
$234,000 and $257,000 for 1998, 1997 and 1996, respectively. The
decrease from 1997 to 1998 is principally attributable to the
sale of the proposed marina and condominiums in Redwood City and
the 10.66 acres in Roseville in June 1998. 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.
Depreciation and amortization expense was $4,000 in 1998, $6,000
in 1997 and $8,000 in 1996 for the office building in San
Bernardino and office equipment. The decreases are due to assets
becoming fully amortized.
Interest expense was $16,000 for 1998, $12,000 for 1997 and
$16,000 for 1996. This interest expense relates to the debt
secured by the office building in San Bernardino. Interest
expense from 1997 to 1998 increased as a result of the refinance
of property with a new $235,000 note bearing interest at 8.64
percent per annum. The decrease from 1996 to 1997 is the result
of the reduction of the outstanding balance of the debt on the
previous note.
General and administrative expenses, affiliates were $257,000,
$184,000 and $173,000 in 1998, 1997 and 1996, respectively.
These expenses are primarily salary allocation reimbursements
paid to affiliates for the management of the Partnership's
assets. The increase for 1998 is primarily attributable to
$67,000 in accrued severance pay as discussed in note 8 of Notes
to Consolidated Financial Statements. The increase in 1997 is
primarily due to the costs associated with the pending and closed
sales transactions.
General and administrative expenses, nonaffiliates was $64,000,
$62,000 and $78,000 in 1998, 1997 and 1996, respectively. The
decrease in 1997 is due primarily to a decrease in investor
reporting and moving expenses.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Since the Partnership does not invest in any derivative financial
instruments or enter into any activities involving foreign
currencies, its market risk associated with financial instruments
is limited to the effect that changing domestic interest rates
might have on the fair value of its bank deposits, notes
receivable and notes payable.
As of December 31, 1998, the Partnership held fixed rate bank
deposits with carrying values totaling $1,010,000, variable rate
mortgage note receivables with carrying values totaling $17,000
and fixed rate mortgage notes receivable with carrying values
totaling $581,000. The bank deposits all had maturities of less
than ninety days. A substantial portion of the variable rate
mortgage notes were repaid in March 1999. The fixed rate
mortgage notes had maturities ranging from four to nineteen
months as of December 31, 1998 and bore interest at rates ranging
from 8 percent to 10 percent per annum. The estimated fair value
of all of these assets was estimated to be equal to their
carrying values as of December 31, 1998. Increasing interest
rates could have an adverse effect on the fair value of the
Partnership's fixed rate notes receivable and/or the value of the
underlying real estate collateral which secure the Partnership's
note receivable.
Management currently intends to hold the remaining fixed rate
receivables until their respective maturities. Accordingly, the
Partnership is not exposed to any material cash flow or earnings
risk associated with these receivables. Given the relatively
short-term maturities of these assets, management does not
believe the Partnership is exposed to any significant market risk
related to their fair value.
The Partnership had a single interest bearing note payable
outstanding as of December 31, 1998. This note is a fixed rate
note. Accordingly, the Partnership does not believe it is is not
exposed to any cash flow or earnings risk associated with this
note as the Partnership expects to repay the note at or prior to
maturity.
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 60
General Partner
John B. Joseph is currently Vice Chairman of the Board of
Directors and Vice President of Centennial Corporation. He is
also on the board of directors for West Coast Bancorp ("WCB"), a
publicly-held bank holding company operating in California and
its subsidiary, Sunwest Bank. He had been Chairman of the Board
and Chief Executive Officer until 1998. He was Chairman of the
Board of Directors of WCB since its inception in 1981 and CEO
from April 1991 until 1998. 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 has also held various positions in the subsidiaries of WCB
and CGI.
Ronald R. White
Age 52
General Partner
Ronald R. White is currently President and CEO of Centennial
Corporation. He was also Executive Vice President and Vice
Chairman of the Board of Directors of WCB until 1998. Mr. White
served in these capacities since April 1987. Mr. White also
serves, or has served, in the following capacities during the
past five years: Chairman of the Board of Directors, President
and Chief Executive Officer of CGI from February 1987 to July
1993; general partner of various public and private limited
partnerships engaged in real estate development and lending
activities. Mr. White has also held various positions in the
subsidiaries of WCB and CGI.
Mr. Joseph has 30 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 28 years of
experience in asset management. In the past, Mr. White has been
engaged in the syndication and management of over $100 million
worth of income property including industrial complexes, shopping
centers, business centers, office buildings, commercial
properties and residential units.
Centennial Corporation ("CC"), a privately-held corporation,
whose stock is owned by affiliates of Ronald R. White and John B.
Joseph, was voted in as new general partner in 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, 1998
- -----------------------------------------------------------------
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 $ 269,000 (1)
reimbursable affiliates shall be entitled
expenses to reimbursement for certain
- general expenses, subject to the
partner or conditions of the Partnership
affiliates Agreement.
Amount Earned/
Type of Reimbursable for the
Compensation & Year Ended
Name of Entity Description of Payment December 31, 1998
- -----------------------------------------------------------------
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
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,
1998.
(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, 1999
By:/s/Ronald R. White
_________________________________
Ronald R. White
General Partner March 31, 1999
By: CENTENNIAL CORPORATION
General Partner
/s/John B. Joseph
_________________________________
John B. Joseph
Executive Vice President March 31, 1999
/s/Ronald R. White
_________________________________
Ronald R. White
President March 31, 1999
/s/Joel H. Miner
_________________________________
Joel H. Miner
Chief Financial Officer March 31, 1999
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, 1998, 1997 and 1996
(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, 1998 and 1997............................. F-3
Consolidated Statements of Operations --
Years ended December 31, 1998, 1997 and 1996........... F-5
Consolidated Statements of Partners' Equity --
Years ended December 31, 1998, 1997 and 1996........... F-7
Consolidated Statements of Cash Flows --
Years ended December 31, 1998, 1997 and 1996........... F-8
Notes to Consolidated Financial
Statements............................................ F-11
Schedules
Schedule III - Consolidated Real Estate Owned
and Accumulated Depreciation and Amortization......... F-30
Schedule IV - Mortgage Loans on Real Estate............. F-33
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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, 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 LLP
Orange County, California
March 19, 1999
F-2
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1998 and 1997
<S> <C> <C>
Assets 1998 1997
- -----------------------------------------------------------------
Cash and cash
equivalents (note 5) $ 1,010,000 $ 195,000
Real estate loans
receivable, earning 581,000 215,000
Real estate loans
receivable from
unconsolidated investees,
nonearning (note 5) 17,000 814,000
- -----------------------------------------------------------------
598,000 1,029,000
Less allowance for
possible loan losses (note 3) --- 15,000
- -----------------------------------------------------------------
Net real estate
loans receivable 598,000 1,014,000
- -----------------------------------------------------------------
Real estate owned, held
for sale (notes 6 and 7) 4,599,000 10,827,000
Less allowance for
possible losses on real
estate owned (note 4) 1,411,000 2,702,000
- -----------------------------------------------------------------
Net real estate owned 3,188,000 8,125,000
- -----------------------------------------------------------------
Due from unconsolidated
investee 2,000 16,000
Other assets, net 22,000 4,000
- -----------------------------------------------------------------
$ 4,820,000 $ 9,354,000
=================================================================
F-3
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
(Continued)
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998 and 1997
<S> <C> <C>
Liabilities and Partners' Equity
- -----------------------------------------------------------------
Note payable (note 7) $ 234,000 $ 97,000
Accounts payable
and accrued liabilities 72,000 9,000
Property taxes payable
on real estate owned --- 484,000
- -----------------------------------------------------------------
Total liabilities 306,000 590,000
- -----------------------------------------------------------------
Partners' equity (deficit) --
29,141 limited partnership units
outstanding in 1998 and 1997
General partners (56,000) (195,000)
Limited partners 4,570,000 8,959,000
- -----------------------------------------------------------------
Total partners' equity 4,514,000 8,764,000
Commitments (note 8)
Contingencies (note 9)
- -----------------------------------------------------------------
$ 4,820,000 $ 9,354,000
=================================================================
</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, 1998, 1997 and 1996
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------
Revenue:
Interest on loans
to affiliates,
including fees
(note 5) $ 16,000 $ --- $ 81,000
Interest on loans
to nonaffiliates,
including fees 12,000 22,000 21,000
Interest on
interest-bearing
deposits (note 5) 78,000 6,000 21,000
Income from operations
of real estate owned 160,000 131,000 127,000
Gain on sale of
real estate owned 192,000 --- ---
Other 21,000 11,000 1,000
- -----------------------------------------------------------------
Total revenue 479,000 170,000 251,000
- -----------------------------------------------------------------
Expenses:
Provision for
possible losses
(notes 3 and 4) 460,000 233,000 ---
Share of losses
in unconsolidated
investees (note 5) 96,000 125,000 1,059,000
Operating expenses
from operations
of real estate owned 92,000 87,000 76,000
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, 1998, 1997 and 1996
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------
Expenses associated
with non-operating
real estate owned 232,000 378,000 344,000
Depreciation and
amortization expense 4,000 6,000 8,000
Interest expense 16,000 12,000 16,000
General and
administrative,
affiliates (note 5) 257,000 184,000 173,000
General and
administrative,
nonaffiliates 64,000 62,000 78,000
- -----------------------------------------------------------------
Total expenses 1,233,000 1,099,000 1,766,000
- -----------------------------------------------------------------
Net loss $ (754,000) $ (929,000) $(1,515,000)
=================================================================
Net loss
per limited
partnership unit -
basic and diluted $ (25.87) $ (31.88) $ (51.99)
=================================================================
</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, 1998, 1997 and 1996
<S> <C> <C> <C>
Total
General Limited Partners'
Partners Partners Equity
- -----------------------------------------------------------------
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
Net loss --- (754,000) (754,000)
Distribution to
limited partners --- (3,496,000) (3,496,000)
Reduction in general
partner deficit capital
account (note 1) 139,000 (139,000) ---
- -----------------------------------------------------------------
Balance (deficit) at
December 31, 1998 $ (56,000) $ 4,570,000 $ 4,514,000
=================================================================
</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, 1998, 1997 and 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------
Cash flows from
operating activities:
Net loss $ (754,000) $ (929,000) $ (1,515,000)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Provision for
possible losses 460,000 233,000 ---
Amortization of
unearned loan fees --- --- (1,000)
Depreciation and
amortization expense 4,000 6,000 8,000
Interest accrued
to principal on
loans to affiliates --- --- (82,000)
Gain on sale of real
estate owned (192,000) --- ---
Equity in losses
of unconsolidated
investees 96,000 125,000 1,059,000
Changes in assets
and liabilities:
(Increase) decrease
in other assets (22,000) 2,000 1,000
Increase (decrease)
in accounts payable
and accrued
liabilities 63,000 (3,000) 6,000
Increase (decrease) in
property taxes payable
on real estate owned (484,000) 201,000 80,000
Decrease in payable
to affiliates --- (1,000) (2,000)
- -----------------------------------------------------------------
Net cash used in
operating activities (829,000) (366,000) (446,000)
- -----------------------------------------------------------------
F-8
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows (Continued)
Years ended December 31, 1998, 1997 and 1996
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------
Cash flows from
investing activities:
Principal collected
on loans 615,000 293,000 148,000
Advances on loans
made to affiliates (295,000) (179,000) (336,000)
Capital expenditures
for real estate owned (154,000) (2,000) (2,000)
Proceeds from sale
of real estate owned 4,823,000 222,000 ---
Decrease (increase) in
restricted cash and
short term investments --- 12,000 101,000
Decrease (increase) in
due from unconsolidated
investee 14,000 --- (16,000)
- -----------------------------------------------------------------
Net cash provided by
(used in) investing
activities 5,003,000 346,000 (105,000)
- -----------------------------------------------------------------
Cash flows used in
financing activities:
Advances on notes payable 235,000 --- ---
Principal payments
on notes payable (98,000) (46,000) (42,000)
Distributions to
limited partners (3,496,000) --- ---
- -----------------------------------------------------------------
Net cash used in
financing activities (3,359,000) (46,000) (42,000)
- -----------------------------------------------------------------
Net decrease in cash and
cash equivalents 815,000 (66,000) (593,000)
Cash and cash equivalents
at beginning of year 195,000 261,000 854,000
- -----------------------------------------------------------------
Cash and cash equivalents
at end of year $ 1,010,000 $ 195,000 $ 261,000
=================================================================
F-9
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Continued)
Years ended December 31, 1998, 1997 and 1996
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------
Supplemental
schedule of
cash flow
information:
Interest paid during
the year $ 16,000 $ 12,000 $ 16,000
- -----------------------------------------------------------------
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 loans and
on real estate owned
as a result of sales
and chargeoffs 1,766,000 69,000 ---
Receipt of notes
receivable as
partial repayment
of note receivable 586,000 --- ---
</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, 1998, 1997, 1996
(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, 1998, 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, 1996 was $11,316,000, decreasing to $10,827,000 at
year end 1997 and decreasing to $4,599,000 at year end 1998.
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., CTA
F-11
Development, Inc., LCR Development, Inc., ("LCR"), and BKS
Development, Inc., ("BKS"). All of these corporations are
California corporations. Several of the Partnership's assets
were transferred to these 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
F-12
and 15 percent to the general partners. In order to properly
reflect the economic effect of the allocations discussed above,
the Partnership has allocated financial statement net earnings
(losses) 95 percent to the limited partners and 5 percent to the
general partners through 1992. The Partnership had no Cash
Available for Distribution during the three years ended December
31, 1998.
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. As a result
of the liquidation of the majority of the Partnership's
investments in 1998, it has become clear that the amount of the
required deficit restoration of the General Partners will not
exceed $56,000 and the capital accounts of the General Partners
and limited partners have been adjusted to reflect such maximum
deficit restoration
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
F-13
increased levels of financial difficulty. The Partnership bases
the measurement of collateral-dependent impaired loans on the
fair value of the loan's collateral. The amount by which the
recorded investment of the loan exceeds the measure of the
impaired loan's value is recognized by recording a valuation
allowance.
Real Estate Owned
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 1998 and 1997, 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 the
balance of the Partnership's assets will actually be sold in that
period.
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 between earnings for
generally accepted accounting principles ("GAAP") and taxable
earnings.
F-14
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Current Temporary Differences Partnership Corporations Total
(Unaudited) (Unaudited) (Unaudited)
- --------------------------------------------------------------------------------
- ----------
GAAP earnings (loss) for
the year ended
December 31, 1998 $ (5,004,000) $ 4,250,000 $
(754,000)
Provision for losses (15,000) (1,291,000)
(1,306,000)
Accrued expenses not deducted
under the cash basis
method of accounting --- (2,665,000)
(2,665,000)
Interest income accrued for
tax, not per books (92,000) ---
(92,000)
Charge off of loans deducted (715,000) ---
(715,000)
Share of losses in
unconsolidated investees (1,447,000) ---
(1,447,000)
Carrying costs expensed for books
and capitalized for tax purposes --- (233,000)
(233,000)
Net operating loss carryforward
Utilization --- (55,000)
(55,000)
Depreciation --- (16,000)
(16,000)
- --------------------------------------------------------------------------------
- ----------
Taxable loss for the year
ended December 31, 1998 $ (7,273,000) $ --- $
(7,273,000)
================================================================================
==========
Taxable loss allocable to
General Partner ---
================================================================================
==========
Taxable loss per limited
partner unit $ (249.58)
================================================================================
==========
</TABLE>
F-15
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
<S> <C> <C>
Cumulative Temporary Differences as of December 31, 1998
Partnership Corporations
(Unaudited) (Unaudited)
- -----------------------------------------------------------------
Net operating loss
carry forwards $ --- $ 248,000
Provision for losses 244,000 1,167,000
Accrued expenses not deducted
under the cash basis --- 2,183,000
Carrying costs expensed for
books and capitalized
for tax purposes --- 900,000
Depreciation --- (73,000)
Share of losses in
unconsolidated investees (1,000) ---
- -----------------------------------------------------------------
Total cumulative
temporary differences $ 243,000 $ 4,425,000
=================================================================
</TABLE>
As of December 31, 1998, the Partnership held approximately $7.6
million in loans and interest receivable from the consolidated
corporations. These loans have been eliminated in the
Partnership's consolidated financial statements. It is
anticipated that the temporary differences should reverse on the
corporations' returns when the corporations liquidate their
investments. If these investments are liquidated at current
carrying values, the Partnership should be able to deduct bad
debt expense on its tax returns in the approximate amount of the
temporary differences shown above which is approximately $152 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
F-16
as of December 31, 1998, 1997 and 1996. Accordingly, no tax
expense or benefit has been recorded by these corporations during
the three years ended December 31, 1998. 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 taxable
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 1998, 1997 and 1996.
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.
Revenue Recognition
Revenue from rental income on real estate owned is recognized on
a straight-line basis over the life of the lease when payments
become due under operating leases. During 1998, 1997 and 1996,
the Partnership has recognized gains or losses on the sale of
real estate owned as the gains or losses are determinable and the
earnings process is complete.
Financial Information about Industry Segments
The Partnership adopted Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise
and Related Information"("SFAS 131"). Given that the Partnership
is in the process of liquidation, the Partnership has identified
F-17
only one operating business segment which is the business of
asset liquidation. The adoption of SFAS 131 did not have an
impact on the Partnership's financial reporting.
(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. The loans are carried at their face value. Management
believes that the interest rates on these loans is at market
rates and that the loans are adequately secured.
Real Estate Loans Receivable from Unconsolidated Investee -
Nonearning
The net carrying value of loans from unconsolidated investee 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 as its terms are similar to those currently
available.
Accounts Payable and Accrued Liabilities, 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-18
(3) Allowance for Possible Loan Losses
<TABLE>
<CAPTION>
Changes in the allowance for possible loan losses are as follows:
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------
Balance at
beginning of year $ 15,000 $ 8,000 $ 8,000
Loans to affiliates
and nonaffiliates
charged-off (15,000) --- ---
Provision for
possible losses --- 7,000 ---
- -----------------------------------------------------------------
Balance at
end of year $ --- $ 15,000 $ 8,000
================================================================
</TABLE>
At December 31, 1998, there was one loan to an unconsolidated
investee which was considered impaired and for which there was no
allowance for possible loan losses at December 31, 1998.
However, as discussed in note 5, the unconsolidated investee has
recorded substantial operating losses and the Partnership's
proportionate share of the losses in unconsolidated investee has
reduced the net carrying value of this loan to $17,000 as of
December 31, 1998. There was a $295,000 and $179,000 investment
in impaired loans for the years ended December 31, 1998 and 1997,
respectively. For the years ended December 31, 1998 and 1996,
the Partnership recognized $16,000 and $81,000 in interest income
on these impaired loans. There was no interest income recognized
on these impaired loans for the year ended December 31, 1997.
For the year ended December 31, 1998, the Partnership recognized
$16,000 in cash basis income on impaired loans. No cash basis
income was recognized on these impaired loans for the years ended
December 31, 1997 and 1996.
F-19
(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>
1998 1997 1996
- -----------------------------------------------------------------
Balance at
beginning of year $ 2,702,000 $ 2,545,000 $ 2,545,000
Real estate
owned charged-off (1,751,000) (69,000) ---
Provision for losses 460,000 226,000 ---
- -----------------------------------------------------------------
Balance at
end of year $ 1,411,000 $ 2,702,000 $ 2,545,000
=================================================================
</TABLE>
(5) Transactions with Affiliates
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 has constructed
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. Accordingly,
the 1998 and 1997 consolidated financial statements include only
amounts related to the LCR and Silverwood loans and investments.
F-20
A summary of these real estate loans receivable from
unconsolidated investee as of December 31, 1998 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 (a) $ --- $ --- $ ---
50 percent interest
in development loan
secured by a first
trust deed from
Silverwood (a) --- --- ---
50 percent interest
in construction loan
secured by a first
trust deed from
Silverwood 22,000 5,000 17,000
- -----------------------------------------------------------------
Totals $ 22,000 $ 5,000 $ 17,000
- -----------------------------------------------------------------
</TABLE>
(a) The unpaid balances of these loans were charged off by the
Partnership during 1998 when the collateral associated with the
notes was sold to an unaffiliated party. The Partnership
accepted its 50 percent share of the net proceeds from the sale
of the collateral and released its security interest in the
collateral. Since the proceeds from the sale were less than the
balances of the notes, the Partnership charged off the balance of
the notes. The cumulative principal balance of the loans charged
off was $1,527,000.
The Partnership has not accrued its share of interest on the
remaining Silverwood loan of approximately $51,000 as of December
31, 1998.
A summary of these real estate loans receivable from
unconsolidated investees as of December 31, 1997 is as follows:
F-21
<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>
The Partnership had not accrued its share of interest on the
unsecured note receivable from LCR which was approximately
$324,000 as of December 31, 1997.
The Partnership had not accrued its share of interest on three of
the Silverwood loans which was approximately $147,000 as of
December 31, 1997.
LCR 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. During 1995, LCR contributed 179 lots
which were zoned for single family homes in Lancaster, California
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.
F-22
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, 1998 and
1997 and for the years ended December 31, 1998, 1997 and 1996:
LCR Development, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, December 31,
Assets 1998 1997
- --------------------------------------------------------------
Cash $ 11,000 $ 11,000
Restricted cash 20,000 20,000
Real estate owned 119,000 6,950,000
Less allowance for losses
on real estate investments 17,000 4,063,000
- --------------------------------------------------------------
Net real estate owned 102,000 2,887,000
Organization costs --- 1,000
- --------------------------------------------------------------
$ 133,000 $ 2,919,000
==============================================================
Liabilities and Stockholders' Deficit
- --------------------------------------------------------------
Notes payable to affiliates:
CMIF $ 2,882,000 $ 4,679,000
CMIF II 1,549,000 2,250,000
- --------------------------------------------------------------
Total notes payable 4,431,000 6,929,000
Accounts payable
and accrued liabilities 12,000 38,000
Interest payable to
affiliates 1,837,000 1,377,000
Payable to affiliates 5,000 75,000
- --------------------------------------------------------------
Total liabilities 6,285,000 8,419,000
Stockholders' deficit (6,152,000) (5,500,000)
- --------------------------------------------------------------
$ 133,000 $ 2,919,000
==============================================================
</TABLE>
F-23
LCR Development, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31, 1998, 1997 and 1996
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------
Revenues
Housing sales $ 1,509,000 $ 834,000 $ 233,000
Sale of finished lots 1,499,000 --- ---
- ----------------------------------------------------------------
3,008,000 834,000 233,000
- ----------------------------------------------------------------
Costs and expenses
Cost of housing sales 1,437,000 851,000 238,000
Cost of sale of
finished lots 1,514,000 --- ---
Provision for losses on
real estate owned 216,000 207,000 2,516,000
Selling and
marketing expenses 66,000 131,000 184,000
General and
administrative 24,000 64,000 162,000
- -----------------------------------------------------------------
3,257,000 1,254,000 3,100,000
- -----------------------------------------------------------------
Operating loss (249,000) (420,000) (2,867,000)
Interest expense 403,000 361,000 151,000
- -----------------------------------------------------------------
Net (loss) $ (652,000) $ (781,000) $(3,018,000)
=================================================================
Interest not included
in share of losses (460,000) (532,000) (336,000)
- -----------------------------------------------------------------
Allocable net loss $ (192,000) $ (249,000) $(2,682,000)
=================================================================
Share of losses
recorded $ (96,000) $ (125,000) $ (716,000)
=================================================================
</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
F-24
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 $1,837,000 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.
<TABLE>
<CAPTION>
Difference of Allocation of Share of Losses
<S> <C>
1998
- -----------------------------------------------------------------
The Partnership's 50 percent share
of LCR's stockholders' deficit
at December 31, 1998 $(3,076,000)
Cumulative interest payable by LCR
to the Partnership not accrued as
income by the Partnership 919,000
Loans receivable considered as part
of the Partnership's investment (b) 1,549,000
Disproportionate loss allocation 625,000
- -----------------------------------------------------------------
Net loans receivable $ 17,000
=================================================================
(b) The Partnership has charged off $1,527,000 of these loans.
</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 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
F-25
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, clerical, accounting, property management
and other administrative functions. The general partners and
affiliates charged $202,000 $196,000 and $185,000 for such
services in 1998, 1997 and 1996, respectively. The Partnership
also accrued an additional $67,000 as general and administrative,
affiliates expense during 1998. This amount is included in
accounts payable and accrued liabilities on the consolidated
balance sheet as of December 31, 1998 and represents the
Partnership's estimated share of certain severance pay that will
become payable in April 1999 (see note 8).
During 1998, 1997 and 1996, the Partnership maintained interest-
bearing deposits with Sunwest Bank, an affiliate of the general
partners. The balances at December 31, 1998, 1997, and 1996 were
$131,000, $66,000 and $5,000, respectively. Interest earned on
such deposits for 1998, 1997 and 1996 was $16,000, $2,000 and
$5,000, respectively.
(6) Real Estate Owned
<TABLE>
<CAPTION>
Real estate owned consists of the following:
<S> <C> <C>
December 31, December 31,
1998 1997
- -----------------------------------------------------------------
1. Office building
in San Bernardino, CA $ 914,000 $ 827,000
2. Land in Sacramento, CA 3,685,000 3,637,000
3. Proposed marina and
condominiums in
Redwood City, CA --- 5,360,000
4. 10.66 acres in Roseville, CA --- 1,003,000
- -----------------------------------------------------------------
Total real estate owned $ 4,599,000 $ 10,827,000
=================================================================
</TABLE>
Property number 3 was sold in June 1998 with the Partnership
receiving net proceeds of $3,699,000. The Partnership recorded a
F-26
$71,000 gain on this sale. Property number 4 was also sold in
June 1998 with the Partnership receiving net proceeds of
$1,124,000. The Partnership recorded a $121,000 gain on this
sale.
The Partnership leases its operating property under several non-
cancelable operating lease agreements. Future minimum rents to
be received as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
- -----------------------------------------------------------------
1999 $ 143,000
2000 39,000
- -----------------------------------------------------------------
$ 182,000
=================================================================
</TABLE>
(7) Note Payable
<TABLE>
<CAPTION>
Note payable consists of the following:
<S> <C> <C>
December 31, December 31,
1998 1997
- -----------------------------------------------------------------
Note payable secured by
office building in
San Bernardino, CA,
repaid during 1998 $ --- $ 97,000
Note payable secured by
office building in
San Bernardino, CA,
with principal and interest
payable monthly of $1,830;
interest at 8.64%,
maturing June 1, 2008 234,000 ---
- ----------------------------------------------------------------
$ 234,000 $ 97,000
================================================================
</TABLE>
F-27
Future principal payments to be paid as of December 31, 1998 are
as follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
- -----------------------------------------------------------------
1999 $ 2,000
2000 2,000
2001 2,000
2002 3,000
2003 3,000
Thereafter 222,000
- -----------------------------------------------------------------
$ 234,000
=================================================================
</TABLE>
(8) Commitments
The day to day operations of the Partnership and several other
affiliated partnerships are carried on by employees of the
corporate general partner, Centennial Corporation ("CC"). CC no
longer has any significant operations other than the management
of these partnerships who are in the repayment stage. During the
first quarter of 1998, several employees resigned from their
employment at CC. Their resignations were principally due to the
anticipated disposition of the majority of the assets owned by
the Partnership and other affiliated partnerships in the
relatively near future. The disposition of these assets could
reasonably be expected to precipitate layoffs, and given the
relatively robust job market in Southern California, where the
general partners conduct their operations, these employees opted
to secure positions with other companies with more promising
futures. As of April 1, 1998, CC employed only six employees.
All of the remaining employees had been employed by CC for over
ten years and had intimate knowledge of the partnerships'
operations. The general partners concluded that it would be in
the best interest of the Partnership to provide the remaining
employees with some type of incentive for them to continue
working for the partnerships until the majority of the
partnerships' assets were liquidated. Accordingly, CC entered
into twelve-month employment contracts with each of these
employees which expire on March 31, 1999. These employment
contracts have been guaranteed by the Partnership and the
affiliated partnerships. The contracts provided that CC could
exercise an option to extend the contract for any employee in
three month increments at the end of each calendar quarter if it
F-28
determined that such extension was in the best interest of the
partnerships. CC has exercised this option for one employee until
December 1999. All of the remaining contracts will expire in
March 1999. The contracts include an increase in salary of 10
percent and also provide that if these employees remain employed
by CC until the end of the contract term, including extensions,
they will be entitled to severance pay equal to six months base
salary. The maximum total salaries, employer taxes, related
benefits and severance pay included in the initial terms of these
contracts is approximately $623,000. The Partnership's
anticipated share of this cost is estimated to be between
$265,000 and $295,000, depending on the amount of time which will
be spent by these employees in managing the affairs of the
Partnership. The Partnership's share of the cost of these
contracts during the year ended December 31, 1998 was
approximately $185,000. The Partnership has recorded $67,000 in
accrued severance benefits as of December 31, 1998. The
Partnership's estimated share of the cost of the contract
extension is less than $20,000.
(9) 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-29
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule III
<TABLE>
Consolidated Real Estate Owned
December 31, 1998
<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 $ 234,000 $ 800,000 $ 114,000 $
- ---
45 Acres in Sacramento --- 3,371,000 198,000
116,000
- --------------------------------------------------------------------------------
- ----------
$ 234,000 $ 4,171,000 $ 312,000 $
116,000
================================================================================
==========
F-30
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule III
Consolidated Real Estate Owned
(Continued)
December 31, 1998
<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 $ 914,000 $ 914,000 April 1993 (F1)
45 Acres in Sacramento 3,685,000 3,685,000 March 1992 None
- -----------------------------------------------------
$ 4,599,000 $ 4,599,000
=====================================================
<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 $5,427,000 at December
31, 1998.
<F3> Improvements are presented net of accumulated depreciation as required per
SFAS 121.
</TABLE>
F-31
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule III
<TABLE>
Consolidated Real Estate Owned
(Continued)
December 31, 1998
<CAPTION>
The following is a summary of consolidated real estate owned for the years ended
December 31, 1998, 1997, and 1996.
<S> <C> <C> <C>
1998 1997 1996
- --------------------------------------------------------------------------------
- ----------
Balance at beginning of year $ 10,827,000 $ 11,316,000 $
11,314,000
Additions during period:
Improvements 154,000 2,000
2,000
Deductions during period:
Real estate sold (4,631,000) (422,000) -
- --
Charge-offs (1,751,000) (69,000) -
- --
- --------------------------------------------------------------------------------
- ----------
Balance at year end $ 4,599,000 $ 10,827,000 $
11,316,000
================================================================================
==========
</TABLE>
F-32
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule IV
<TABLE>
<CAPTION>
Mortgage Loans on Real Estate
December 31, 1998
<S> <C> <C> <C>
Interest Final
Periodic
Description Rate Maturity Date Payment
Terms
- --------------------------------------------------------------------------------
- ----------
Note secured by:
Interest only-
50 percent interest in Balloon
payments of
first trust deed on $325,000 in
July 1999 &
157 lots in Lancaster, CA 8% Fixed April 23, 2000 $745,000 in
July 2000
50 percent interest in
Interest only -
second trust deed on 157 Balloon
payment of
lots in Lancaster, CA 10% Fixed April 23, 1999 $100,000 in
April 1999
50 percent interest in
second trust deed on one
single family home P & I
due at
in Lancaster, CA Prime + 1% July 1, 1998
maturity
F-33
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule IV
<CAPTION>
Mortgage Loans on Real Estate
(Continued)
December 31, 1998
<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 first trust deed
on 157 lots in $ 1,070,000
Lancaster, CA None (50% - $535,000) $ 531,000
None
50 percent interest in
second trust deed on 157 1st TD of 100,000
lots in Lancaster, CA $1,070,000 (50% - $50,000) 50,000
None
50 percent interest
in second trust deed on one
single family home 1,034,000
in Lancaster, CA $88,000 (50% - $517,000) 22,000
22,000
Losses from unconsolidated investees (5,000)
- ---
- --------------------------------------------------------------------------------
- ----------
$ 598,000 $
22,000
================================================================================
==========
<FN>
<F1> Aggregate cost for Federal Income Tax purposes is $603,000 at December 31,
1998.
</FN>
F-34
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule IV
Mortgage Loans on Real Estate
(Continued)
December 31, 1998
<CAPTION>
The following is a summary of activity for the years ended December 1998, 1997
and 1996.
<S> <C> <C> <C>
1998 1997
1996
- --------------------------------------------------------------------------------
- ----------
Balance at beginning of year $ 1,029,000 $ 1,068,000 $
1,856,000
Additions during period:
New mortgage
loans/disbursements 295,000 179,000
336,000
Other - Interest
reserve and amortization --- ---
83,000
Loans transferred
from real estate owned --- 200,000
- ---
Deductions during period:
Collections of principal (615,000) (293,000)
(148,000)
Chargeoffs (15,000) ---
- ---
Losses from
unconsolidated investees (96,000) (125,000)
(1,059,000)
- --------------------------------------------------------------------------------
- ----------
Balance at year end $ 598,000 $ 1,029,000 $
1,068,000
================================================================================
==========
</TABLE>
See accompanying independent auditors' report.
F-35
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,010
<SECURITIES> 0
<RECEIVABLES> 598
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 117
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,820
<CURRENT-LIABILITIES> 74
<BONDS> 234
<COMMON> 0
0
0
<OTHER-SE> 4,514
<TOTAL-LIABILITY-AND-EQUITY> 4,820
<SALES> 0
<TOTAL-REVENUES> 479
<CGS> 0
<TOTAL-COSTS> 1,233
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 460
<INTEREST-EXPENSE> 16
<INCOME-PRETAX> (754)
<INCOME-TAX> 0
<INCOME-CONTINUING> (754)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (754)
<EPS-PRIMARY> (25.87)
<EPS-DILUTED> (25.87)
</TABLE>
