UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission file number: 0-16832
IDM Participating Income Company-II
(A CALIFORNIA LIMITED PARTNERSHIP)
State of California 33-0177934
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
2424 S.E. Bristol Street, Suite 200 92660
Newport Beach, California
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (714) 225-7520
One World Trade Center, Suite 1000
LONG BEACH, CALIFORNIA 90831-1000
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
Securities registered pursuant to Section 12(g) of the Act:
200,000 LIMITED PARTNERSHIP UNITS
Title of class
Indicated 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 to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]. No[ ].
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K, not contained in this form, and no disclosure will 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. [X]
State the aggregate market value of the limited partnership units held by
non-affiliates computed by reference to the price at which the units were sold,
or the average bid and asked prices of such units, as of a specified date within
the past 60 days.
AT MARCH 31, 1997 - NONE - UNITS NOT TRADED
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registration of Securities on Form 10 dated April 28, 1988
(Registration No. 0-16832) are incorporated herein by reference in Part IV
of this Form 10-K.
Form 10-K for the fiscal year ended December 31, 1992 filed by the
Registrant on April 14, 1993
<PAGE>
PART I
ITEM 1. BUSINESS
IDM Participating Income Company-II, a California Limited Partnership (the
"Partnership" or "Registrant"), is a California limited partnership formed in
1986 under the California Revised Limited Partnership Act to make participating
loans to affiliates of the General Partner and to other parties as determined by
the General Partner ("Borrower"). The General Partner of the Registrant is IDM
Participating Income General Partners' Co. - II. The General Partner of the
General Partner of the Registrant is IDM Participating Income Corporation, a
wholly owned subsidiary of IDM Corporation. IDM Corporation ("IDM"), a
California corporation, together with certain affiliates, reorganized under
Chapter 11 of the United States Bankruptcy Code effective on March 22, 1993.
All units of the Registrant's Limited Partnership Interests have been sold for
cash resulting in proceeds of $20,000,000, all of which was invested in
construction or permanent real estate loans made to the Borrowers.
The Partnership's stated objectives are to preserve the Partnership's investment
capital, provide quarterly distributions, and provide additional interest upon
the sale, refinancing or other disposition of the real estate used as collateral
for the participating loans.
The Partnership loaned its funds as construction and/or permanent loans pursuant
to a master loan agreement. Each participating loan has been secured by a first
or junior deed of trust and assignment of rents on the respective property, is
non-recourse against the Borrower, and has a term of the earliest of five years
from the date the certificate of occupancy is issued or six years from the date
of the loan. The loans have the characteristics and terms described below in the
subpart of the Item 1. Business, under the heading "Loan Summary."
As restructured in the bankruptcy of the debtors of the Registrant, collection
of the notes held by the Partnership is dependent upon both the value of the
property securing the loans and the continuing credit of the applicable
Borrowers. As was the case prior to the bankruptcy of IDM and its affiliated
debtor entities, the remaining secured loans are non-recourse, and if there is
default on the loan, the Partnership will only have recourse against the
respective property and not any Borrower. Further, to the extent there is any
senior secured debt on the property, and a foreclosure results from a default on
the senior secured debt, there is a risk that the Partnership might not recover
the amount owing or any portion thereof.
PLAN OF REORGANIZATION
The order confirming the Reorganization Plan of the Borrowers of the Registrant
and certain other affiliated debtors (the "Plan") was entered by the United
States Bankruptcy Court for the Central District of California, Northern
Division on March 10, 1993 and became effective on March 22, 1993. A copy of the
Plan was filed as Exhibit 28 to the 1992 Form 10-K and is incorporated herein by
reference.
As of December 31, 1996, the Partnership has total secured notes receivable of
approximately $415,000 and an aggregate unsecured claim in the amount of
$8,924,000 resulting from the undersecured portion of the Partnership's loans to
IDM and affiliated bankrupt debtors.
The Partnership received a total of 73,607 shares of IDM stock for its aggregate
$6,418,355 of IDM undersecured debt which have been distributed to the partners
of the Partnership. For the remaining balances of secured and undersecured loans
to CFB Co., E&C Co., Circle Business Center, Ltd., Harbor Plaza, Ltd., and
Downtown Plaza, Ltd., the Partnership received non-interest bearing unsecured
promissory notes maturing December 31, 1997. See "Loan Summary" for a discussion
of these notes.
LOAN SUMMARY
The Registrant's original loan portfolio consisted of the eight loans described
below:
In November 1986, the Partnership funded a $1,480,000 loan to CFB Co. (an
affiliate of the General Partner) to refinance an existing loan on the Coast
Federal Building located in Long Beach, California. The project consists of an
operating four-story commercial office building totaling approximately 56,000
square feet with subterranean and surface parking. This loan was converted to a
non-interest bearing loan, maturing December 31, 1997, in accordance with the
Plan of Reorganization. On June 30, 1994, the primary lender foreclosed on the
property and this loan was written off against the previously established
reserve.
2
<PAGE>
In November 1986, the Partnership funded two $1,045,000 loans, one to E & C Co.
and one to Circle Business Center, Ltd. (both affiliates of the General Partner)
to refinance existing loans for the Circle Business Center project located in
Long Beach, California. The project consists of an operating six-story
commercial office building totaling approximately 79,000 square feet. Both loans
had been secured by a junior deed of trust. On April 11, 1994, a purchaser
acquired the senior note from the holder and subsequently acquired the property
through a transfer in the bankruptcy court. The above loans were written off
against the previously established reserve.
In March 1987, the Partnership funded a $2,100,000 loan to Meadow Wood Village
Apartments, Ltd. (an affiliate of the General Partner) to refinance an existing
loan on Meadow Wood Apartments located in Long Beach, California. The project
consists of seventeen operating buildings containing a total of 206 residential
units. The loan was secured by a junior deed of trust and matured June 30, 1995.
At December 31, 1995, the outstanding principal balance of $1,900,000 was
reserved in its entirety resulting in a net book value of $0. This note and
junior deed of trust were sold effective September 1, 1996 for $100,000.
Subsequent to December 31, 1996, additional monies were received from Meadow
Wood Village Apartments, Ltd. related to this note. These amounts received in
January 1997 are reflected as a receivable from affiliate at December 31, 1996.
These combined collections are reflected in the income statement as a recovery
of reserved receivables in the amount of $250,000.
In October 1988, the Partnership funded a $1,380,000 loan to Harbor Plaza, Ltd.
(an affiliate of the General Partner) to refinance an existing loan on Harbor
Plaza located in Port Hueneme, California. The project is comprised of an
operating single-story garden office building totaling approximately 14,000
square feet. The loan is secured by a first deed of trust. At December 31, 1995,
a reserve of $565,000 was outstanding against this loan. At December 31, 1996,
an additional provision of $400,000 was recorded for a total reserve of
$965,000.
In November 1988, the Partnership funded a $1,800,000 loan to Downtown Plaza,
Ltd. (an affiliate of the General Partner) to refinance an existing loan on
Downtown Plaza located in Long Beach, California. The project is an operating
six-story office building totaling approximately 91,000 square feet. The loan
was secured by a junior deed of trust. However, it had been converted to a
non-interest bearing, unsecured note maturing December 31, 1997. On October 5,
1994, the primary lender foreclosed on the property and the loan was written off
against the previously established reserve.
In October 1989, the Partnership began funding a $12,000,000 loan ($7,100,000 at
December 31, 1996) to IDM Apartments Corporation (an affiliate of the General
Partner) for the Villa Redondo Apartments project located in Long Beach,
California. The project is a 125 unit apartment complex. The loan is secured by
a junior deed of trust. Under the Plan, the secured principal balance was
reduced to $3,017,000. The remainder was converted to an unsecured
non-interest-bearing note due December 31, 1997. IDM Apartments Corporation
filed a second Chapter 11 in November 1994. This loan is fully reserved at
December 31, 1996.
In December 1991, the Partnership funded a $3,500,000 loan to IDM Corporation
(an affiliate of the General Partner) on Pads A, E, and F of the Beach and
Lampson retail center. The borrower repaid $1,100,000 during 1992. The loan is
secured by a first deed of trust. Under the Plan, the secured principal balance
was reduced to $1,333,000 and the remainder was converted to shares of IDM
common stock and distributed to the limited partners of this Partnership. During
1996, IDM Corporation sold Pad F of the Beach and Lampson retail center for
$525,000. The net sales proceeds received of $474,085 were repaid to the
Partnership and applied as a principal reduction on this loan. At December 31,
1996, the remaining principal balance was reserved in its entirety.
It is not contemplated that the Partnership will conduct any other business
activity, other than holding the above-described loans.
INDEMNIFICATION OF GENERAL PARTNER
Section 16 of the Partnership Agreement provides for indemnification of the
General Partner by the Partnership under certain circumstances. Generally, the
General Partner may be indemnified out of Partnership assets for any loss or
liability arising from its conduct whenever such course of conduct does not
constitute fraud, gross negligence, or gross misconduct. Indemnification for
securities laws violations may be allowed only in certain limited circumstances
(see Section 16.2 of the Partnership Agreement). In the case of a liability
arising from an alleged violation of the securities laws, the General Partner
may obtain indemnification only if the General Partner is successful in
defending the action and the court specifically approves the indemnification or,
if the action is settled, the court specifically approves the settlement and the
indemnification of such settlement. To the extent that any indemnification is
paid, the assets of the Partnership will be depleted and the return to a limited
partner on his investment may be impaired. As the result of this indemnification
arrangement, purchasers of Partnership Units may have a more limited right of
action than they would have absent the indemnification provisions in the
3
<PAGE>
Partnership Agreement. Furthermore, purchasers of Partnership Units should bear
in mind that adequate legal remedies may not be available or affordable in the
event they believe that fiduciary obligations have been breached.
ITEM 2. PROPERTIES
The Partnership owns no physical properties.
ITEM 3. LEGAL PROCEEDINGS
The Partnership has no material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
4
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of December 31,1996, the number of security holders is as follows:
Number of Number of
Units Record Holders
--------------- ----------------
Limited Partners 200,000 1,690
=============== ================
These securities are all of the same class, namely, limited partnership
interests (units) and were registered pursuant to a registration statement filed
under the Securities Act of 1934. The total offering was 200,000 units at
$100.00 per unit.
No broker or dealer currently makes a market in the units of the Partnership.
Accordingly, there are no published price or trading volume figures available
for the units. The units have been transferred on an extremely limited extent
from time-to-time since the inception of the Partnership; however, the market
for the units is highly restricted and sporadic, especially in view of the
investor suitability requirements imposed on new purchasers by the various state
blue sky laws.
5
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Statement of Operations Information (in thousands, except per unit amounts)
Years Ended December 31,
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Interest income ................ $ 254 $ 332 $ 364 $ 692 $ 1,587
Recovery of reserved receivables 250 0 63 0 1,078
General and administrative ..... (64) (22) (13) (1) 0
Provision for possible losses .. (1,099) (1,900) (347) (3,834) (4,121)
------- ------- ----- ------- -------
Net (loss) income .............. $ (659) $(1,590) $ 67 $(3,143) $(1,456)
======= ======= ===== ======= =======
Net (loss) income per average
number of limited partnership
units outstanding ............ $ (3.26) $ (7.87) $ .33 $(15.56) $ (7.21)
======= ======= ===== ======= =======
Cash distributions per average
number of limited partnership
units outstanding ............ $ 0 $ 1.99 $2.49 $ 1.26 $ 7.34
======= ======= ===== ======= =======
</TABLE>
Balance Sheet Information (in thousands)
December 31,
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Cash/interest receivable
(net of reserve) ......... $ 633 $ 41 $ 33 $ 31 $ 49
Loans to affiliates
(net of reserve) ......... 415 1,815 3,815 4,248 8,694
Receivables from affiliate 150 0 0 0 0
------ ------ ------ ------ ------
Total Assets ............. $1,198 $1,856 $3,848 $4,279 $8,743
====== ====== ====== ====== ======
6
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes certain forward looking statements reflecting the
Partnership's expectations in the near future; however, many factors which may
affect the actual results, especially changing regulations, are difficult to
predict. Accordingly, there is no assurance that the Partnership's expectations
will be realized.
Overview:
The following discussion should be read in conjunction with the Selected
Financial Data (Item 6. of this Form 10-K) and the Partnership's Financial
Statements and Notes thereto beginning on page F-1 of this Form 10-K. The
bankruptcy proceeding and the Plan, which is discussed in detail in Item 1.
Business, has had, and will continue to have, a material and substantial impact
on the Partnership's liquidity, capital resources and results of operations,
which are discussed below.
Results of Operations:
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995.
The Meadow Wood Village Apartments, Ltd. Loan was reserved in its entirety
December 31, 1995 resulting in a provision for loss of $1,900,000 in the prior
year. This note and junior deed of trust were sold for $100,000 effective
September 1, 1996. Subsequent to year-end, additional monies were received from
Meadow Wood Village Apartments, Ltd. related to this note. These amounts
received in January 1997 are reflected as a receivable from affiliate at
December 31, 1996. The combined collections are reflected in the income
statement as a recovery of reserved receivables in the amount of $250,000.
Interest continued to accrue at 12.12% through the sale date. For the years
ended December 31, 1996 and 1995, the Partnership recognized interest income of
$154,000 and $233,000, respectively, related to this loan. Meadow Wood Village
Apartments, Ltd. discontinued interest payments in 1996. When this loan was
sold, the Partnership wrote-off the interest receivable balance of $173,000
related to this loan.
At December 31, 1996, the remaining balance of the IDM Corporation loan on the
Beach and Lampson retail center was reserved in its entirety and an additional
provision was recorded on the Harbor Plaza, Ltd. loan.
General and administrative expenses increased in 1996 mainly as a result of
professional fees incurred for a fair value opinion on the Villa Redondo loan
receivable. Additionally, the Partnership, along with certain affiliates, was
involved in investor litigation. This litigation was settled in the current year
and the Partnership paid $7,500 towards the settlement.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994.
Interest income decreased $32,000, or 9%, primarily as a result of the reduction
in interest earned on the Meadow Wood Village Apartments, Ltd. note. The
Partnership received principal payments on this note in late 1994 and early 1995
of $100,000 each.
General and administrative expenses increased $9,000, or 69%, primarily due to
increased audit and tax fees paid in 1995.
Liquidity and Capital Resources:
In 1996, the Partnership's cash position increased by the partial collection of
a loan receivable and the collection of interest income. The Partnership is in a
liquid position at December 31, 1996 with cash balances of $576,000 and current
liabilities of $1,000. The Partnership has no plans or commitments for any
future capital expenditures.
Inflation:
The Partnership does not expect inflation to be a material factor in its
operations in 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index to Financial Statements on page F-1 of this Form
10-K.
7
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On May 15, 1996, acting under Board authorization, the Partnership engaged the
accounting firm of Deloitte & Touche LLP to replace Arthur Andersen LLP as the
Partnership's independent auditor. In connection with the purchase of 47.5% of
the common stock of IDM Corporation (the parent of the General Partner of the
General Partner) in April 1996 by S-P Properties, Inc., the accounting for the
Partnership was transferred to Houston, Texas. Deloitte & Touche LLP acts as the
primary independent auditor for other entities controlled by S-P Properties,
Inc. and this change was caused entirely by the move of the accounting function
and the desire to employ only one accounting firm. There were no disagreements
with the predecessor auditors.
8
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Registrant has no directors or officers. The General Partner of the
Registrant is IDM Participating Income General Partners' Co. - II, which also
has no directors or officers. The General Partner of the General Partner of the
Registrant is IDM Participating Income Corporation, a wholly owned subsidiary of
IDM Corporation. The executive officers and Directors of IDM Participating
Income Corporation are:
Approximate
Name Position Age Time in Office
- ------------------------------------------------------------------------------
Steven M. Speier President and Director 46 1 year
Thomas N. Thurber Secretary 46 1 year
Michele E. Johnson Vice President and 32 1 year
Chief Financial Officer
Morris S. Cohen Director 59 2 years
William J. Carden Director 52 1 year
Steven M. Speier - Director, IDM Participating Income Corporation. Mr. Speier is
a Certified Public Accountant who, after spending two years in public
accounting, went into the banking industry in 1975. During his sixteen-year
banking career, Mr. Speier managed a real estate loan portfolio of approximately
$1.5 billion secured by properties throughout the United States. Mr. Speier
brings to IDM Participating Income Corporation a broad real estate background
that includes management, leasing, and disposition of all categories of
commercial real estate. Mr. Speier also serves as a director of S-P Properties,
Inc. Mr. Speier is a licensed real estate broker and has a master's degree in
business administration from Grand Valley State University in Michigan.
Thomas N. Thurber - Secretary, IDM Participating Income Corporation. Mr. Thurber
is a Certified Public Accountant who began his career with Arthur Andersen & Co.
in 1972. In 1979, he joined a major publicly traded real estate development firm
(Daon) where he became Controller for U.S. Operations. Subsequently, Mr. Thurber
served as Director of Real Estate for a developer of retail properties and Chief
Financial Officer of a trust with significant investments in commercial real
estate. From 1995 to present, Mr. Thurber has served as President of S-P
Properties, Inc., the corporate general partner of five widely held limited
partnerships. Mr. Thurber holds a bachelor's degree in accounting from Florida
State University.
Michele E. Johnson - Vice President and Chief Financial Officer, IDM
Participating Income Corporation. Ms. Johnson is the current Chief Financial
Officer of S-P Properties, Inc. and IDM Corporation, both real estate companies
involved in widely held partnerships reporting to the SEC. Ms. Johnson's
previous experience includes five years as a Certified Public Accountant in
Big-Six public accounting and three years with a consulting firm contracted to
manage and liquidate Resolution Trust Corporation receiverships. Ms. Johnson
graduated from the University of Texas with a degree in accounting in 1986.
Morris S. Cohen - Director, IDM Participating Income Corporation. Mr. Cohen's
extensive real estate background includes negotiation of joint venture
partnerships for property acquisitions, production of syndication packages and
direct responsibilities for operations, finance, sales, leasing and property
management. Mr. Cohen was a senior level officer with major public and privately
held real estate companies and served as President of IDM Participating Income
Corporation from April 1995 to October 1996. Mr. Cohen is a graduate of Queens
College.
William J. Carden - Director, IDM Participating Income Corporation. Mr. Carden
is the founder and President of CGS Real Estate Company, Inc., which owns over
one million square feet of commercial real estate. Mr. Carden founded DVM
Properties, Inc. in 1974, which concentrated on rehabilitation of retail,
office, industrial, and commercial real estate. Mr. Carden is a former Director
of Bay Financial, a New York Stock Exchange Company, and currently serves as a
director of S-P Properties, Inc. and Property Secured Investments, Inc.
There have been no events under any bankruptcy act, no criminal proceedings, and
no judgments or injunctions material to the evaluation of the ability and
integrity of any director or officer during the past five years.
9
<PAGE>
ITEM 11. MANAGEMENT REMUNERATION
The Registrant is a California Limited Partnership and has no officers or
directors. No options to purchase securities of the Registrant have been granted
to any person.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
None
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As described in Item 1. Business, the Registrant has loaned funds to IDM
Corporation, the parent of the General Partner of the General Partner and to
other affiliated partnerships.
In April 1996, IDM Corporation, the parent of the General Partner of the General
Partner, entered into a Stock Purchase Agreement with S-P Properties, Inc. Under
this agreement, S-P Properties, Inc. purchased 4,006,589 newly issued shares of
IDM Corporation common stock, representing 47.5% of the issued and outstanding
common stock of IDM Corporation. In conjunction with the stock purchase, the
Registrant granted an option to S-P Properties, Inc. to purchase the Villa
Redondo note and junior deed of trust, which is fully reserved and has a net
book value of $0, for $300,000. The prior Board of Directors of IDM Corporation
approved the option. The option price was determined by commissioning a national
valuation firm to issue a fairness opinion. This option expires December 31,
1997.
10
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. EXHIBITS:
(3) The Amended and Restated Agreement of Limited Partnership previously
filed as Exhibit 3 to the Registrant's Registration of Securities on
Form 10 dated April 28, 1988 (Registration No. 0-16832) which is
incorporated herein by reference.
(10) Master Loan Agreement and Participating Notes previously filed as
Exhibit 10 to the Registrant's Registration of Securities on Form 10
dated April 28, 1988 (Registration No. 0-16832) which is
incorporated herein by reference.
(27) Financial Data Schedule
(28) The Disclosure Statement and Joint Plan of Reorganization of IDM
Corporation and its Affiliated Debtors previously filed as Exhibit
28 to the Registrant's Form 10-K for the fiscal year ended December
31, 1992 filed on April 14, 1993 (Commission No. 0-16832) which is
incorporated herein by reference.
B. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule and the report of the independent
auditors thereon are included herein:
1. Schedule XII - Mortgage Loans on Real Estate - December 31, 1996
All other schedules are omitted as they either are not required or are not
applicable, or the required information is set forth in the financial
statements and notes thereto.
C. REPORTS ON FORM 8-K
None
11
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
IDM PARTICIPATING INCOME COMPANY-II,
a California Limited Partnership
IDM PARTICIPATING INCOME CORPORATION
General Partner of the General Partner
Date: March 26, 1997 /s/ STEVEN M. SPEIER
Steven M. Speier
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: March 26, 1997 /s/ STEVEN M. SPEIER
Steven M. Speier
President and Director
IDM Participating Income Corporation
Date: March 26, 1997 /s/ WILLIAM J. CARDEN
William J. Carden
Director
IDM Participating Income Corporation
Date: March 26, 1997 /s/ MORRIS S. COHEN
Morris S. Cohen
Director
IDM Participating Income Corporation
Date: March 26, 1997 /s/ MICHELE E. JOHNSON
Michele E. Johnson
Chief Financial Officer
IDM Participating Income Corporation
12
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Partners of
IDM Participating Income Company - II
We have audited the financial statements of IDM Participating Income Company -
II, a California limited partnership, (the "Partnership") as of December 31,
1996, and for the year then ended and have issued our report thereon dated March
17, 1997. Our audit also included the financial statement schedule of IDM
Participating Income Company-II listed in Item 14. This financial statement
schedule is the responsibility of the Partnership's management. Our
responsibility is to express an opinion based on our audit. In our opinion, such
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Houston, Texas
March 17, 1997
13
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Partners of
IDM Participating Income Company - II
We have audited in accordance with generally accepted auditing standards, the
financial statements of IDM Participating Income Company-II included in this
Form 10-K and have reissued our report thereon dated March 8, 1996. Our audit
was made for the purpose of forming an opinion on the basic financial statements
taken as a whole. The schedule listed in Item 14 is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Orange County, California
March 8, 1996
14
<PAGE>
IDM PARTICIPATING INCOME COMPANY-II
A California Limited Partnership
(in thousands)
Schedule XII - Mortgage Loans on Real Estate
December 31, 1996
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- -------- -------- -------- --------
Description Final Prior Face Carrying
Maturity Liens Amount Amount
Date Of Of
Mortgages Mortgages
- --------------------------------------------------------------------------------
First Mortgages:
Retail complex - Beach & Lampson,
Stanton, CA ....................... Dec 1997 $ 0 $ 859(2) $ 859
Office Bldg. - Harbor Plaza, Ltd.,
Port Hueneme, CA .................. Dec 1997 0 1,380(1) 1,380
Second Mortgages:
Apt. Complex - Villa Redondo,
Long Beach, CA .................... Dec 1997 7,983 7,100(3) 7,100
Reserve for possible losses ......... 0 0 (8,924)
------ ------- -------
Total ................ $7,983 $ 9,339 $ 415
====== ======= =======
Column A: All debtors are IDM corporation and other affiliates.
Column D: (1) The secured portion of this loan bears interest at 8%.
(2) The secured portion of this loan bears interest at 8%. The
undersecured portion of the loan has been repaid with newly
issued IDM stock.
(3) The secured portion of this loan bears interest at 8%. The
undersecured portion of the loan has been replaced with a non-
interest-bearing loan.
RECONCILIATION FOR 1996, 1995, AND 1994:
1996 1995 1994
------- ------- -------
Balance at beginning of year ..... $ 1,815 $ 3,815 $ 4,248
Additions during year:
New mortgage loans ........... 0 0 0
Deductions during year:
Collections of principal ..... (474) (100) (100)
Provisions for possible losses (926) (1,900) (333)
------- ------- -------
Balance at close of year .......... $ 415 $ 1,815 $ 3,815
======= ======= =======
The reserve is based on management's assessment of the loans outstanding, the
outcome of IDM's plan of reorganization and on prevailing and anticipated
economic conditions.
15
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditors' Reports F-2
Balance Sheets - December 31, 1996 and 1995 F-3
Statements of Operations and Partners' Capital - F-4
for the years ended December 31, 1996, 1995,
and 1994
Statements of Cash Flows - for the years ended F-5
December 31, 1996, 1995, and 1994
Notes to Financial Statements F-6
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of IDM Participating Income Company - II:
We have audited the accompanying balance sheet of IDM Participating Income
Company - II, a California limited partnership, (the "Partnership") as of
December 31, 1996, and the related statements of operations, changes in
partners' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of IDM Participating Income
Company - II as of December 31, 1996, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
March 17, 1997
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of IDM Participating Income Company - II:
We have audited the accompanying balance sheet of IDM Participating Income
Company - II (the "Partnership") as of December 31, 1995, and the related
statements of operations, changes in partners' capital and cash flows for each
of the two years ended December 31, 1995. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements 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 financial statements referred to above present fairly, in
all material respects, the financial position of IDM Participating Income
Company - II as of December 31, 1995, and the results of its operations an its
cash flows for each of the two years ended December 31, 1995, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in Note 2 to the
financial statements, the financial condition of various affiliated entities to
which the Partnership has loaned funds raises substantial doubt about the
Partnership's ability to continue as a going concern. The financial statements
do not include any adjustments relating to the recoverability and classification
of asset carrying amounts that might result should the Partnership be unable to
continue as a going concern.
/s/ Arthur Andersen LLP
Orange County, California
March 8, 1996
F-2A
<PAGE>
IDM PARTICIPATING INCOME COMPANY-II
A California Limited Partnership
Balance Sheets
December 31, 1996 and 1995
(in thousands, except unit amounts)
ASSETS
1996 1995
------ ------
Cash ....................................... $ 576 $ 14
Loans to affiliates (Note 2):
Interest receivable ................... 57 27
Principal, less reserve for possible
losses of $8,924 and $9,898 at
December 31, 1996 and 1995,
respectively .......................... 415 1,815
Receivable from affiliate (Note 2) ......... 150 0
------ ------
$1,198 $1,856
====== ======
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable ........................... $ 1 $ 0
COMMITMENTS AND CONTINGENCIES (Note 3)
General partner ............................ 436 442
Limited partners:
200,000 units authorized,
200,000 issued and outstanding ............. 761 1,414
------ ------
Total Partners' capital .................... 1,197 1,856
------ ------
Total Liabilities and Partners' capital .... $1,198 $1,856
====== ======
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
IDM PARTICIPATING INCOME COMPANY-II
A California Limited Partnership
Statement of Operations and Partners' Capital
For The Year Ended December 31, 1996
(in thousands, except unit and per unit amounts)
General Limited
Partner Partners Total
--------- -------- -------
Interest income (Note 2) .................... $ 3 $ 251 $ 254
Recovery of reserved receivables (Note 2) ... 3 247 250
Provision for possible losses (Note 2) ...... (11) (1,088) (1,099)
General and administrative expenses ......... (1) (63) (64)
--------- ------- -------
Net loss ............................... (6) (653) (659)
Partners' capital - beginning of year ....... 442 1,414 1,856
Distributions to partners ................... 0 0 0
--------- ------- -------
Partners' capital - end of year ............. $ 436 $ 761 $ 1,197
========= ======= =======
Net loss per average limited
partnership unit outstanding ........... $ (3.26)
=======
Average number of limited
partnership units outstanding .......... 200,000
=======
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
IDM PARTICIPATING INCOME COMPANY-II
A California Limited Partnership
Statement of Operations and Partners' Capital
For The Year Ended December 31, 1995
(in thousands, except unit and per unit amounts)
General Limited
Partner Partners Total
--------- -------- -------
Interest income (Note 2) .................... $ 3 $ 329 $ 332
General and administrative expenses ......... 0 (22) (22)
Provision for possible losses (Note 2) ...... (19) (1,881) (1,900)
--------- ------- -------
Net loss ............................... (16) (1,574) (1,590)
Partners' capital - beginning of year ....... 462 3,386 3,848
Distributions to partners ................... (4) (398) (402)
--------- ------- -------
Partners' capital - end of year ............. $ 442 $ 1,414 $ 1,856
========= ======= =======
Net loss per average limited ................
partnership unit outstanding $ (7.87)
=======
Average number of limited ...................
partnership units outstanding 200,000
=======
The accompanying notes are an integral part of these financial statements.
F-4A
<PAGE>
IDM PARTICIPATING INCOME COMPANY-II
A California Limited Partnership
Statement of Operations and Partners' Capital
For The Year Ended December 31, 1994
(in thousands, except unit and per unit amounts)
General Limited
Partner Partners Total
--------- -------- -------
Interest income (Note 2) .................... $ 4 $ 360 $ 364
Recovery of reserved receivables (Note 2) ... 1 62 63
Provision for possible losses ............... (3) (344) (347)
General and administrative expenses ......... 0 (13) (13)
--------- ------- -------
Net income .................................. 2 65 67
Partners' capital - beginning of year ....... 465 3,814 4,279
Distributions to partners ................... (5) (493) (498)
--------- ------- -------
Partners' capital - end of year ............. $ 462 $ 3,386 $ 3,848
========= ======= =======
Net income per average limited ..............
partnership unit outstanding $ .33
=======
Average number of limited ...................
partnership units outstanding 200,000
=======
The accompanying notes are an integral part of these financial statements.
F-4B
<PAGE>
IDM PARTICIPATING INCOME COMPANY-II
A California Limited Partnership
Statements of Cash Flows
For the Years Ended December 31, 1996, 1995, and 1994
(in thousands)
1996 1995 1994
------- ------- -----
Cash flows from operating activities:
Net (loss) income ............................... $ (659) $(1,590) $ 67
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Recovery of reserved receivables ........... 0 0 (14)
Provision for possible losses............... 1,099 1,900 347
(Increase) decrease in interest ............ (203) 1 1
receivable ..............................
Increase in receivable from affiliate (150) 0 0
Increase in accounts payable ............... 1 0 0
------- ------- -----
Net cash provided by operating
activities............................... 88 311 401
------- ------- -----
Cash flows from investing activities:
Collections from loans to affiliates ......... 474 100 100
------- ------- -----
Net cash provided by
investing activities..................... 474 100 100
------- ------- -----
Cash flows from financing activities:
Distributions to partners .................... 0 (402) (498)
------- ------- -----
Net cash used in
financing activities .................... 0 (402) (498)
------- ------- -----
Net increase in cash ......................... 562 9 3
Cash at beginning of year................... 14 5 2
------- ------- -----
Cash at end of year ........................ $ 576 $ 14 $ 5
======= ======= =====
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
IDM PARTICIPATING INCOME COMPANY-II
A California Limited Partnership
Notes to Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
IDM Participating Income Company-II, a California limited partnership (the
"Partnership"), was formed in 1986 for the purpose of lending funds to various
affiliated companies. The General Partner, IDM Participating Income General
Partners' Co.-II, an affiliate of IDM Corporation ("IDM"), contributed an amount
equal to one percent of the limited partners' contributed capital. All
organizational, offering and operating expenses of the Partnership are borne by
the General Partner or its affiliates. Profits, losses and distributions are
allocated to the partners in accordance with their partnership interest until
the partners have received a 12% cumulative annual return, at which time
profits, losses and distributions will be allocated 85% among the limited
partners and 15% to the General Partner.
REORGANIZATION
IDM was impacted by an economic recession, especially the decline in real estate
values, the state of disarray in the savings and loan industry and the limited
availability of commercial real estate loans from domestic and international
banks. In addition, IDM's source of public funds was critically reduced in July
1991, as the majority of the dealers who sold IDM partnership units stopped
selling these units. Subsequently, IDM suspended distributions to investors and
on July 10, 1992, IDM, together with certain affiliates, filed for protection
under Chapter 11 of the United States Bankruptcy Code. The Chapter 11 filing
allowed IDM as debtor in possession to continue its business operations without
interruption under the supervision of the bankruptcy court. On March 10, 1993,
an order confirming the Reorganization Plan of IDM (the "Plan") was entered by
the United States Bankruptcy Court for the Central District of California,
Northern Division. The Plan became effective on March 22, 1993.
BASIS OF FINANCIAL STATEMENTS
The Partnership maintains its books and prepares its financial statements in
accordance with generally accepted accounting principles. However, the
Partnership prepares its tax return on the accrual basis of accounting as
defined by the Internal Revenue Code with adjustments to reconcile book and
taxable income (loss) for differences in the treatment of certain income and
expense items. The accompanying financial statements do not reflect any
provision for federal or state income taxes since such taxes are the obligation
of the individual partners.
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 and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
F-6
<PAGE>
IDM Participating Income Company - II
Notes to Financial Statements
Page two
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Partnership at December 31, 1996 and 1995
consist of cash, loans to affiliates, receivable from affiliate, and accounts
payable. The fair value of cash and accounts payable approximates the carrying
value due to the short-term nature of these items. Management was unable to
determine the fair value of loans to affiliates and receivable from affiliate
due to the related party nature of these receivables.
LOANS TO AFFILIATES
The reserve for possible losses is established by provisions charged to expense.
The reserve is based on management's assessment of the loans outstanding, the
outcome of IDM's plan of reorganization and on prevailing and anticipated
economic conditions. The valuation of the loans outstanding depends on the
valuation of the properties securing such loans. The Partnership regularly
evaluates the properties securing such loans for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. Future undiscounted cash flows of the properties securing such
loans are estimated and compared to the carrying amount of the loans to
determine if impairment has occurred. If the sum of the expected future
undiscounted cash flows is less than the carrying amount of the loans, the
Partnership shall recognize a reserve to reduce the carrying amount of the
outstanding loan.
Because the determination of fair value is based upon projection of future
economic events, the amounts ultimately realized at disposition may differ
materially from the net carrying value as of December 31, 1996. The cash flows
used to determine fair value and net realizable value are based on good faith
estimates and assumptions developed by management. Unanticipated events and
circumstances may occur and some assumptions may not materialize; therefore,
actual results may vary from the estimates and the variances may be material.
The Partnership may provide additional write-downs which could be material in
subsequent years if real estate markets or local economic conditions change.
REVENUE RECOGNITION
Interest income is recognized as provided for under the Plan except for when, in
the opinion of management, such amounts are uncollectible.
CALCULATION OF NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT
Net income (loss) per limited partnership unit is determined by dividing net
income (loss) by the number of limited partnership units outstanding, 200,000.
F-6A
<PAGE>
IDM Participating Income Company - II
Notes to Financial Statements
Page three
2. LOANS TO AFFILIATES
The Partnership made senior and junior mortgage loans to provide financing to
IDM Corporation and its affiliated companies as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
----------------------------- -----------------------------
Balance Reserve Net Balance Reserve Net
------- ------- ------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
IDM Corporation:
Villa Redondo
Long Beach, CA
(due 12/97) ............ $ 7,100 $(7,100) $ 0 $ 7,100 $(7,100) $ 0
Beach & Lampson
Stanton, CA
(due 12/97) ............ 859 (859) 0 1,333 (333) 1,000
Other affiliated companies:
Meadow Wood Village
Apartments, Ltd. .......
Long Beach, CA
(due 6/95) ............. 0 0 0 1,900 (1,900) 0
Harbor Plaza, Ltd. .....
Port Hueneme, CA
(due 12/97) ............ 1,380 (965) 415 1,380 (565) 815
------- ------- ------- -------- ------- ------
$ 9,339 $(8,924) $ 415 $ 11,713 $(9,898) $1,815
======= ======= ======= ======== ======= ======
</TABLE>
Prior to the bankruptcy, the loan terms included interest at 12.12% payable
monthly with all principal due at maturity. The accrual of interest on affected
loans ceased July 10, 1992 with the bankruptcy filing of certain of the
borrowers. As of December 31, 1996, the Partnership has total debt from
affiliates which is adequately collateralized ("Secured Debt") of $415,000 and
total undercollateralized debt from affiliates ("Undersecured Debt") of
$8,924,000.
In April 1996, IDM Corporation, the parent of the General Partner of the General
Partner, entered into a Stock Purchase Agreement with S-P Properties, Inc. Under
this agreement, S-P Properties, Inc. purchased 4,006,589 newly issued shares of
IDM Corporation common stock, representing 47.5% of the issued and outstanding
common stock of IDM Corporation. In conjunction with the stock purchase, the
Partnership granted an option to S-P Properties, Inc. to purchase the Villa
Redondo note and junior deed of trust, which is fully reserved and has a net
book value of $0, for $300,000. The option was approved by the prior Board of
Directors of IDM Corporation. The option price was determined by commissioning a
national valuation firm to issue a fairness opinion. This option expires
December 31, 1997.
The remaining Secured Debt is related to Harbor Plaza, Ltd. Effective January 1,
1994, this borrower's cash flow situation improved and was sufficient to resume
current payments of interest at 8% in accordance with the Plan. For each of the
three years ended December 31, 1996, the Partnership recognized interest income
of $99,000 related to this loan.
F-6B
<PAGE>
IDM Participating Income Company - II
Notes to Financial Statements
Page four
The Beach & Lampson loan was reserved in its entirety during 1996 resulting in a
net book value of $0. To the extent that cash flow is available, the Partnership
will receive all of its allowed Secured Debt of this loan with interest at 8%
per year though December 31, 1997. No interest has been accrued on this loan
since the bankruptcy filing. During 1996, IDM Corporation sold Pad F of the
Beach and Lampson retail center for $525,000. The net sales proceeds received of
$474,085 were repaid to the Partnership and applied as a principal reduction on
this loan.
The Meadow Wood Village Apartments, Ltd. loan, which was unaffected by the
above-mentioned bankruptcy, was reserved in its entirety during 1995 resulting
in a net book value of $0. This note and junior deed of trust were sold for
$100,000 effective September 1, 1996. Subsequent to year-end, additional monies
were received from Meadow Wood Village Apartments, Ltd. related to this note.
These amounts received in January 1997 are reflected as a receivable from
affiliate at December 31, 1996. The combined collections are reflected in the
income statement as a recovery of reserved receivables in the amount of
$250,000. Interest continued to accrue at 12.12% through the sale date. For the
years ended December 31, 1996, 1995, and 1994, the Partnership recognized
interest income of $154,000, $233,000 and $251,000, respectively, related to
this loan. Meadow Wood Village Apartments, Ltd. discontinued interest payments
in 1996. When this loan was sold, the Partnership wrote-off the interest
receivable balance of $173,000 related to this loan.
3. COMMITMENTS AND CONTINGENCIES
Section 16 of the Partnership Agreement provides for indemnification of the
General Partner by the Partnership under certain circumstances. Generally, the
General Partner may be indemnified out of Partnership assets for any loss or
liability arising for its conduct whenever such course of conduct does not
constitute fraud, gross negligence, or gross misconduct. Indemnification for
securities laws violations may be allowed only in certain limited circumstances
(see Section 16.2 of the Partnership Agreement). In the case of liability
arising from an alleged violation of the securities laws, the General Partner
may obtain indemnification only if the General Partner is successful in
defending the action and the court specifically approves the indemnification or,
if the action is settled, the court specifically approves the settlement and the
indemnification of such settlement. To the extent that any indemnification is
paid, the assets of the Partnership will be depleted and the return to a limited
partner on his investment may be impaired. As the result of this indemnification
arrangement, purchasers of Partnership Units may have a more limited right of
action than they would have absent the indemnification provisions in the
Partnership Agreement. Furthermore, purchasers of Partnership Units should bear
in mind that adequate legal remedies may not be available or affordable in the
event they believe that fiduciary obligations have been breached.
4. FOURTH QUARTER ADJUSTMENTS
In December 1996, the Partnership reevaluated certain notes receivable and
recorded valuation allowances, totaling approximately $926,000, related to these
notes based on estimated net realizable value.
F-6C
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM IDM PARTICIPATING INCOME COMPANY-II DECEMBER 31, 1996 FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 576,000
<SECURITIES> 0
<RECEIVABLES> 207,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 783,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,198,000
<CURRENT-LIABILITIES> 1,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1,197,000
<TOTAL-LIABILITY-AND-EQUITY> 1,198,000
<SALES> 0
<TOTAL-REVENUES> 504,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 64,000
<LOSS-PROVISION> 1,099,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (659,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (659,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (659,000)
<EPS-PRIMARY> (3.26)
<EPS-DILUTED> (3.26)
</TABLE>
