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PART I
ITEM 1. BUSINESS.
(a) General Development of the Business
Centennial Mortgage Income Fund II (the "Partnership"), a
California Limited Partnership, was organized on July 12, 1985.
The Partnership's registration statement became effective January
17, 1986. The general partners are John B. Joseph, Ronald R.
White and Centennial Corporation ("CC"). During the fourth
quarter of 1992, 60 months after the closing of its offering
stage, the Partnership entered the repayment stage. For
additional information, See Item 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Centennial Capital Inc., ("CCI") tendered its resignation as a
general partner of the Partnership effective January 31, 1994.
The remaining general partners decided to attempt to continue the
business of the Partnership and to request the consent of the
limited partners to the addition of Centennial Corporation ("CC")
as new general partner. During 1994, CC, a privately-held
corporation whose stock is owned by affiliates of Ronald R. White
and John B. Joseph, was approved as a new general partner. CC
was incorporated in October of 1983 to engage in the real estate
lending business and to provide consulting services.
(b) Financial Information about Industry Segments
Not applicable.
(c) Narrative Description of Business
The Partnership was formed to invest in mortgage investments
consisting of participating first mortgage loans, other equity
participation loans, construction loans, and wrap-around and
other junior loans on commercial, industrial and residential
income-producing real property.
The Partnership's objectives are to preserve the Partnership's
invested capital, provide increased cash distributions to the
limited partners as the cash flow from the properties underlying
mortgage investments increases over the life of the Partnership,
provide capital growth through participation in the increased
value of the underlying properties and provide liquidating
distributions as cash from the sale of real estate owned is no
longer needed for development and operations of real estate
owned.
Due to the long term recession and falling real estate market
values in California, many of the Partnership's loans became
delinquent and management of the Partnership elected to
foreclose, thereby increasing real estate owned balances. Most
of the loans secured by operating properties have been repaid.
As a result, the Partnership has become a direct investor in real
estate and intends to manage operating properties and develop raw
land until such time as the Partnership is able to sell its real
estate owned. The real estate owned balance at December 31, 1993
was $24,170,000, decreasing to $11,284,000 at year end 1994 and
increasing to $11,314,000 at year end 1995. The decrease from
1993 to 1994 was principally the result of $6,449,000 of real
estate being transferred to unconsolidated subsidiaries and
$5,091,000 of real estate being disposed of through deed in lieu
of foreclosure or foreclosure.
(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 note 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, 1995, there were approximately 3,900 holders
of limited partnership units.
(c) Partnership Distributions
No distributions were declared or paid by the Partnership during
the three year period ended December 31, 1995.
Management intends to distribute cash flow available for
distribution (as defined in the Partnership Agreement), if any,
on a quarterly basis. Distributions may vary in amount and may
be suspended at such time as the Partnership requires working
capital, or at any time that the general partners, in their sole
discretion, determine it to be in the best interest of the
Partnership. In the third quarter of 1991, management suspended
distributions. See Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ITEM 6. SELECTED FINANCIAL DATA
(dollars in thousands, except per unit data)
Years ended
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12/31/95 12/31/94 12/31/93 12/31/92
12/31/91
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Consolidated Statement
of Operations Data
Total revenue.................$ 279 $ 433 $ 715 $ 1,240
$ 1,941
Net earnings (loss)........... (2,377) (2,243) (4,543) (3,463)
983
Net earnings (loss)
per limited
partnership unit............ (81.57) (76.97) (155.90) (112.90)
32.05
Consolidated Balance
Sheet Data
Total loans................... 1,856 3,118 883 7,425
16,685
Total real estate owned....... 11,314 11,284 24,170 18,572
10,311
Total assets.................. 11,605 13,997 22,443 25,028
27,112
Partners' equity.............. 11,208 13,585 15,828 20,371
23,834
Distributions
per limited
partnership unit............ --- --- --- ---
44.99
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
General
Net loss and loss per limited partnership unit were $(2,377,000)
and $(81.57) for the year ended December 31, 1995 down from
$(2,243,000) and $(76.97) in 1994 and $(4,543,000) and $(155.90)
in 1993. The loss in 1995 is primarily due to an increase in
losses in unconsolidated investees and a decrease in income from
operations of real estate owned. The loss in 1994 is primarily
the result of the provision for possible losses and losses in
unconsolidated investees, a decrease in interest income and
income from operations of real estate owned offset by a decrease
in operating expenses from operations of real estate owned and a
decrease in interest expense. The loss in 1993 is primarily the
result of a large provision for possible losses, an increase in
operating expenses from real estate owned and interest expense
and a decrease in interest income from 1992.
Liquidity and Capital Resources
At December 31, 1995, the Partnership had $854,000 in
unrestricted cash and interest-bearing deposits. The Partnership
had an additional $102,000 in a certificate of deposit at
December 31, 1995 with a maturity date of June, 1996. Additional
sources of funds are expected to be from the sale of real estate
owned. Future operations of real estate owned are not expected
to be a significant source of funds. Although all real estate
owned is classified as held for sale, the Partnership was
currently marketing $5,129,000 in real estate owned as of
December 31, 1995. As of December 31, 1995, the Partnership had
no unfunded loan commitments to nonaffiliates. The Partnership
funded advances on loans to affiliates during 1995 totaling
$776,000 and received principal payoffs and paydowns on loans
from nonaffiliates totaling $280,000. During 1995, the
Partnership funded $34,000 of capital expenditures for real
estate owned.
The Partnership's notes payable commitments for 1996 consist of
interest and non-balloon principal payments due of approximately
$58,000. In addition to the note payable commitments, the
Partnership's principal capital requirements include: i) property
taxes and bonds on real estate owned of approximately $476,000
payable and delinquent in 1996, and ii) selling, general and
administrative costs. Property taxes delinquent at December 31,
1995 have been accrued at December 31, 1995. The Partnership can
apply for a 5 year redemption plan on a portion of the property
taxes due in 1996 to ease liquidity constraints if necessary.
These commitments are expected to be made from existing cash
balances and the sale of real estate owned. When current
economic conditions rebound in California, the Partnership
expects to be able to sell real estate owned to meet liquidity
needs.
The Partnership is continuously evaluating various alternative
strategies for liquidating its real estate assets. These
alternative strategies include the potential joint venture and/or
build out of certain of the Partnership's properties in order to
increase their marketability and maximize the return to the
limited partners. In the event the Partnership decides to
implement some of these strategies, it may require the
reinvestment of proceeds received from the payoff of existing
loans and/or the sale of other real estate assets. The decision
to invest additional cash in existing assets will only be made
if, based on management's best judgment at the time, there is a
clear indication that such investment will generate a
significantly greater return to the limited partners than any
other strategies available to the Partnership. During 1995, the
Partnership, through its 50 percent owned corporation LCR
Development, Inc., ("LCR") entered into a joint venture agreement
with Home Devco, Inc., ("Home Devco"), an affiliated entity,
entitled Silverwood Homes ("Silverwood"). For further
information see note 5 of Notes to Consolidated Financial
Statements.
Effective with the third quarter of 1991, the Partnership
suspended making any cash distributions to partners, due to a
decline in liquidity and the uncertainty of the cash requirements
for existing and potential real estate owned. Beginning with the
fourth quarter of 1992, the Partnership entered its repayment
stage and cash proceeds from mortgage investments are no longer
available for reinvestment by the Partnership. Management
believes that current and projected liquidity is sufficient to
fund operating expenses and to meet the contractual obligations
and cash flow operating requirements of the Partnership for 1996.
However, the Partnership needs to improve liquidity through the
sale of real estate owned in order to allocate funds to improve
and to fulfill the operating requirements of the remaining real
estate owned by the Partnership on a long-term basis.
Results of Operations
Due to the downturn in the real estate industry in California and
its impact on the Partnership's borrowers, the Partnership's
loans to nonaffiliates have been converted into real estate owned
through foreclosures. As a result, interest income on loans to
nonaffiliates, including fees, decreased substantially during
1995 and 1994. Interest income on loans to nonaffiliates,
including fees, decreased to $42,000 in 1995 from $96,000 in 1994
and $263,000 in 1993. Interest income on loans to nonaffiliates
decreased in 1995 and 1994 primarily due to payoffs of existing
loans. Interest income on loans to nonaffiliates decreased in
1993 due to increases in real estate owned balances and payoffs
of existing loans. Interest income on loans to affiliates,
including fees was $52,000 for 1995 related to the Silverwood
joint venture. There was no interest income on loans to
affiliates for 1994 and 1993 due to the loans to affiliates being
placed on nonaccrual and subsequently classified as insubstance
foreclosures in 1993 and loans receivable from unconsolidated
investees in 1994.
Loans on "nonaccrual" refers to loans upon which the Partnership
is no longer accruing interest. Management's policy is to cease
accruing interest on loans when collection of interest and/or
principal payments has become doubtful. There were no loans on
nonaccrual, other than loans to affiliates, as of December 31,
1995, 1994 and 1993.
The real estate owned balance at December 31, 1995, 1994 and 1993
was $11,314,000, $11,284,000 and $24,170,000, respectively. On
April 28, 1992, the American Institute of Certified Public
Accountants issued Statement of Position 92-3 ("SOP 92-3"),
"Accounting for Foreclosed Assets." SOP 92-3 indicates that
foreclosed assets are presumed held for sale and not for the
production of income. Accordingly, foreclosed assets held for
sale are to be carried at the lower of cost or fair value minus
estimated costs to sell. The cost of such assets at the time of
foreclosure is the fair value of the asset foreclosed.
Immediately after foreclosure, a valuation allowance is
recognized for estimated costs to sell through a charge to
income. All of the Partnership's real estate owned is presumed
held for sale.
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
During 1994, the Partnership converted a 50 percent participation
in a note secured by a second trust deed into a 50 percent
participation in a $2,115,000 unsecured note representing a
workout loan due from LCR, an affiliate. This loan and an
additional loan funded by Centennial Mortgage Income Fund
("CMIF") reflect the majority of the cost basis of lots
contributed to Silverwood. LCR's only source of repayment of
this note is proceeds from the sale of the fully developed lots.
Management has estimated the proceeds for repayment of this note
to be less than the original principal balance of the loan. As a
result, the loan has been placed on nonaccrual. The
participating principal balance and nonaccrued interest balances
at December 31, 1995 are $1,059,000 and $176,000, respectively.
During 1994 and 1995, LCR has evaluated various alternative
strategies for liquidating its investment in the 179 lots in
Lancaster ranging from the sale of the lots in their present
condition to a full-scale buildout and sale of single-family
homes at the project. During late 1993 and through 1994, LCR
determined that its best course of action appeared to be the
full-scale buildout and sale of single-family homes since the
market for finished lots had fallen so significantly. In late
1993, discussions with one home builder advanced to the point of
a draft joint venture agreement, whereby the home builder was to
build and sell homes at the project and obtain construction
financing. Under this draft joint venture agreement, LCR was to
complete improvements to the lots, pay all developer fees at an
estimated cost of $12,619 per lot and then contribute finished
lots to the joint venture in exchange for an initial capital
contribution credit of $32,000 per lot. The home builder was to
obtain construction financing and supervise the construction and
sale of single family homes at the project. The home builder was
to be reimbursed for all onsite costs of construction and
marketing of the project and receive an overhead fee equal to 3%
of all sales revenues. After these costs had been paid, LCR was
to receive distributions from the joint venture equal its $32,000
initial capital contribution. Subsequent to the return of LCR's
initial capital contribution, the joint venture partner was to
receive distributions equal to $5,000 of the first $7,000 in
profits. Thereafter, LCR and the joint venture partner would
split profits and distributions equally. At the time LCR was
conducting it negotiations with this home builder, it did not
have the financial resources to build homes at the project
without additional funds. Thus, the ability of the independent
home builder to obtain construction financing was the principal
reason for utilizing a third party to construct the homes. The
joint venture negotiations were terminated when the home builder
insisted on managerial control of the joint venture, which would
have been in violation of paragraph 10.9 of the Partnership
Agreement of the Partnership.
Subsequent to the termination of the joint venture negotiations
discussed above, LCR has obtained construction financing
commitments from CMIF and the Partnership. LCR has entered into
a joint venture agreement entitled Silverwood with Home Devco to
construct and sell single-family homes at the project. This new
joint venture agreement includes substantially the same terms as
the draft joint venture discussed above except that: i) the
contribution value per lot has been adjusted from $32,000 to
$19,381 in order to reflect the fact that the joint venture
rather than LCR will now be responsible for paying the $12,619 in
estimated costs to complete improvements to the lots and pay
developer fees; ii) Home Devco will not obtain construction
financing for the project; and iii) Home Devco will not receive
any priority interest in profits after LCR has received the
equivalent of $19,381 in distributions per lot contributed to the
joint venture but rather will receive only a 50 percent interest
in profits and distributions from the joint venture. LCR's cost
basis of lots contributed to the joint venture was approximately
$19,810. Management believes that the market value of finished
lots in Lancaster has fallen since the original joint venture was
negotiated and that the new joint venture agreement with Home
Devco is on more favorable terms to LCR than could now be
obtained with an independent home builder. The new joint venture
began constructing a model home complex at the project in June
1995. Construction commenced in September 1995 on Phase 1 at the
project. At December 31, 1995, the Partnership holds a 50
percent participation in three notes due from Silverwood
consisting of a land development loan, a model home loan and a
home construction loan with a combined disbursed balance of
$1,033,000. The Partnership's disbursed balance of the
$3,265,700 development loan at December 31, 1995 is $543,000.
The Partnership's disbursed balance of the $490,000 model loan at
December 31, 1995 is $255,000. The Partnership's disbursed
balance of the $1,034,000 Phase 1 construction loan at December
31, 1995 is $235,000.
During 1994, the Partnership acquired a 50 percent participation
in a $3,894,000 note due from BKS Development, Inc. ("BKS"). The
loan is secured by 283 acres in Bakersfield, CA. The property
has declined in value and is subject to delinquent bonds and
taxes. As a result, the Partnership has placed the loan on
nonaccrual. The participating principal balance and nonaccrued
interest balances at December 31, 1995 are $1,947,000, and
$414,000 respectively.
Real Estate Owned
A description of the Partnership's principal real estate owned
during the year ended December 31, 1995 follows:
Office Building in San Bernardino, California
The Partnership funded a loan during January 1988 with an
original committed amount of $921,000 which was secured by a
second trust deed on an office building comprised of 15,984
square feet of rentable space located in San Bernardino,
California. The loan was provided as gap financing behind a
first deed of trust in the amount of $350,000 to another
financial institution. The borrower was unable to payoff the
loan at maturity and the Partnership foreclosed on April 20,
1993. The Partnership restructured the note secured by the first
trust deed to a more favorable term and rate. The project is 68
percent leased and the property is beginning to generate positive
net operating income. The property generated net operating
income of $15,000 during 1995. As soon as occupancy increases
and lease rates improve, the property will be listed for sale.
The carrying value at December 31, 1995 was $837,000, less
depreciation of $12,000. The property is encumbered by a fully
amortizing note secured by a first trust deed of $185,000 which
matures December 1, 1999.
45 Acres in Sacramento, California
The Partnership funded a loan in 1987 with a committed amount of
$4,000,000 secured by a first trust deed on 44.52 acres in
Sacramento, California. The loan was provided for the
development of offsite improvements. The maturity date was
February 1, 1991. The borrower was unable to obtain construction
financing and bring interest current. The Partnership accepted a
grant deed on the property on March 10, 1992. The property is
zoned for multi-family and light industrial use. The property is
listed for sale and during 1995 there was a significant increase
in activity. The Partnership is in the process of rezoning and
subdivision of portions of the property to facilitate one escrow
on a portion of the property. During the first quarter of 1996,
this escrow was reopened for a portion of the property. The
Partnership is not expecting to realize any material gains or
losses related to this potential sale and there is no assurance
that the escrow will actually close. At December 31, 1995, the
carrying value was $4,126,000.
Proposed Marina and Condominiums in Redwood City, California
On April 7, 1989, the Partnership foreclosed on a land loan and
now owns the property. The Partnership originally committed
$3,487,000 for a land loan on the property located in Redwood
City, California. The purpose of the loan was to acquire the
land and provide for the planning of a 122-slip marina plus an
office building and restaurant. The original maturity date of
October 21, 1986 was extended to March 1, 1987. In March 1987,
the borrower filed bankruptcy. The property is included in real
estate owned at its carrying value of $5,360,000. Management has
obtained an extension on the 404B1 permit for the marina through
March 1996 and is currently working on the next extension. The
404B1 permit enables the owner to build the currently proposed
104-slip boat marina. The Partnership has completed
approximately 70 percent of the dredging of the marina site.
Residential sales in this entire area have seen a steady decline
over the last 2-3 years, however the area appears to have
stabilized. As a result, management is pursuing both, (i) the
sale or joint venture of the property and (ii) Partnership
buildout of the project and sale thereafter.
10.66 Acres in Roseville, California
The Partnership funded a loan in 1990 with an original committed
amount of $2,779,000 secured by a second deed of trust on 982
acres in Roseville, California. The borrower failed to make the
required yearly principal payment to the first and second trust
deed holders. The first trust deed holder filed a notice of
default for nonpayment. Management negotiated a settlement
agreement to accept a 10.66 acre commercial site as payment in
full for the $2,779,000 note. This property had a carrying value
at December 31, 1995 of $1,003,000, and has no additional debt.
This area has seen an increase in residential development during
1995 which, hopefully, will increase interest in this property.
Management is marketing the property for sale and is evaluating a
possible rezone.
Interest on Interest-Bearing Deposits
Interest on interest-bearing deposits was $49,000 in 1995,
$38,000 in 1994 and $16,000 in 1993. The increase in interest on
interest-bearing deposits in 1995 and 1994 is primarily the
result of an increase in average cash balances. The decrease in
interest on interest-bearing deposits in 1993 is primarily the
result of lower cash balances due to a decrease in loan payoffs.
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 $134,000 in 1995, $243,000 in 1994, and $436,000 in
1993. The 1995 revenues are from the office building in San
Bernardino. The 1994 revenues are from the office building in
San Bernardino and eight months of a lube center and car wash in
San Marcos. The 1993 revenues are from the office building in
San Bernardino, multi-tenant industrial buildings in Moreno
Valley, the lube center and car wash in San Marcos and an office
building in Westminster.
Provision for Possible Losses
The provision for possible losses was $199,000 in 1995,
$1,268,000 in 1994 and $3,649,000 in 1993. The 1995 provision
relates to loans receivable from affiliate secured by timeshare
interests and the office building in San Bernardino. The 1994
provision relates to the proposed marina and condominiums in
Redwood City offset by a decrease in the provision for 128 lots
in Redlands, the lube center and car wash in San Marcos and the
office building in San Bernardino. The provision for 1993 was
primarily due to the following real estate owned: the 179 single-
family residential lots in Lancaster, the 283 acres in
Bakersfield, the 128 lots in Redlands and the 45 acres in
Sacramento.
Given the current economic climate, it is possible that real
estate values will continue to decline, and it is possible that
there will be additional provisions in the future. Management
believes that the allowance for possible losses at December 31,
1995 is adequate to absorb the known risks in the Partnership's
loan and real estate owned portfolios.
Other Expenses
The Partnership has invested in corporations in which it has less
than a majority ownership and accounts for these investments
using the equity method. The Partnership's share of losses in
these unconsolidated investees was $1,803,000 for 1995 and
$408,000 for 1994. There was no comparable expense for 1993.
The 1995 share of losses consist primarily of provisions for
losses on real estate investments related to the 179 lots in
Lancaster owned by LCR and the 283 acres in Bakersfield owned by
BKS.
Operating expenses from operations of real estate owned were
$107,000 in 1995, $161,000 in 1994 and $353,000 in 1993. The
decreases for 1995 and 1994 are due to the decreases in the
number of real estate owned properties as discussed above.
Operating expenses from operations of real estate owned paid to
affiliates were $12,000 for 1995, $14,000 for 1994 and $32,000
for 1993. The expenses consist of property management fees paid
to affiliates of the general partners.
Expenses associated with non-operating real estate owned were
$289,000 in 1995, $313,000 in 1994 and $404,000 in 1993. The
expenses relate to the proposed marina and condominiums in
Redwood City, the 128 single-family lots in Redlands, the 283
acres in Bakersfield, the 179 lots in Lancaster, the 45 acres in
Sacramento and the 10.66 acres in Roseville. The decrease for
1995 is primarily due to a decrease in property tax expenses due
to the decrease in real estate owned. The decrease for 1994 is
due to the Bakersfield and Lancaster expenses being reflected as
share of losses in unconsolidated investees in early 1994 whereas
LCR and BKS expenses were classified as non-operating expenses in
late 1993.
Depreciation and amortization expense was $11,000 in 1995,
$13,000 in 1994 and $59,000 in 1993 for the Westminster office
building, the office building in San Bernardino and the multi-
tenant industrial buildings in Moreno Valley. The decreases for
1995 and 1994 are due to the loss of the multi-tenant industrial
buildings in Moreno Valley during 1994 and the sale of the
Westminster office building in 1993.
Interest expense was $20,000 for 1995, $156,000 for 1994 and
$473,000 for 1993. The interest expense for 1995 relates only to
the underlying debt on the office building in San Bernardino.
The decreases from 1993 to 1994 and again in 1995 are the result
of the reduction of the debt on the 128 lots in Redlands, the
lube center and car wash in San Marcos and the multi-tenant
industrial buildings in Moreno Valley.
The loss on sale of real estate owned totaled $64,000 for 1994
and $7,000 for 1993. There was no comparable expense for 1995.
The 1994 loss was from the sale of the lube center and car wash
in San Marcos. The 1993 loss was from the sale of the office
building in Westminster.
General and administrative expenses, affiliates decreased to
$123,000 in 1995 from $151,000 in 1994 and $128,000 in 1993.
These expenses are primarily salary allocation reimbursements
paid to affiliates for the management of the Partnership's
assets. The decrease for 1995 is due to no extraordinary payment
of vacation benefits in 1995. The increase for 1994 is primarily
due to a payoff of employee vacation benefits which had accrued
but not vested in prior periods and were paid in the current
period upon replacement of the corporate general partner.
General and administrative expenses, nonaffiliates decreased to
$59,000 in 1995 from $87,000 in 1994 and $98,000 in 1993. The
decreases for 1995 and 1994 are due primarily to decreases in
administrative expenses associated with real estate owned.
Mortgage investment servicing fees paid to affiliates were
$33,000 in 1995, $41,000 in 1994 and $55,000 in 1993. These fees
consist of amounts paid to CC and CMIF, Inc., for servicing the
Partnership's loan portfolio. The decreases for 1995 and 1994
are primarily due to the decreases in size of the Partnership's
loan portfolio.
Newly Issued Accounting Pronouncement
In March 1995, the FASB issued Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121").
SFAS 121 provides guidance for recognition and measurement of
impairment of long-lived assets, certain identifiable intangibles
and goodwill related both to assets to be held and used by an
entity and assets to be disposed of. SFAS 121 is effective for
financial statements for fiscal years beginning after December
15, 1995. Although the Partnership has not yet adopted SFAS 121,
management does not expect such adoption will have a material
impact on the Partnership's financial position or results of
operations.
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
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John B. Joseph
Age 57
General Partner
John B. Joseph is currently Vice Chairman of the Board of
Directors and Vice President of Centennial Corporation. He is
also currently Chairman of the Board and Chief Executive Officer
of West Coast Bancorp ("WCB"), a publicly-held bank holding
company operating in California. He has been Chairman of the
Board of Directors of WCB since its inception in 1981 and Chief
Executive Officer since April 1991. Mr. Joseph also serves, or
has served, in the following capacities during the past five
years: President of WCB from April 1987 to April 1991; Vice
Chairman of the Board of Directors of The Centennial Group, Inc.
("CGI"), a publicly-owned real estate development corporation,
since February 1987; Senior Executive Vice President of CGI from
July 1987 to July 1993; Director and Executive Vice President of
Centennial Capital, Inc. ("CCI"), a subsidiary of CGI, since
April 1988; general partner of various public and private limited
partnerships engaged in real estate development and lending
activities. Mr. Joseph presently holds and has held, over the
past five years, various positions in the subsidiaries of WCB and
CGI.
Ronald R. White
Age 49
General Partner
Ronald R. White is currently President and CEO of Centennial
Corporation. He served as Chairman of the Board of Directors,
President and Chief Executive Officer of CGI since February 1987.
Mr. White also serves, or has served, in the following capacities
during the past five years: Executive Vice President and Vice
Chairman of the Board of Directors of WCB; President of WCB from
1981 to April 1987; Director and Executive Vice President of CCI
since April 1988; general partner of various public and private
limited partnerships engaged in real estate development and
lending activities. Mr. White presently holds and has held, over
the past five years, various positions in the subsidiaries of WCB
and CGI.
Mr. Joseph has 27 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 25 years of
experience in asset management. In the past, Mr. White has been
engaged in the syndication and management of over $100 million
worth of income property including industrial complexes, shopping
centers, business centers, office buildings, commercial
properties and residential units.
CC, a privately-held corporation, whose stock is owned by
affiliates of Ronald R. White and John B. Joseph, was voted in as
new general partner in the first quarter of 1994. CC was
incorporated in 1983 to engage in the real estate lending
business and to provide consulting services.
Identification of Executive Officers
The Partnership does not have officers as such. The affairs of
the Partnership are managed by the general partners noted above.
Involvement in Certain Legal Proceedings
On December 13, 1991, The Centennial Group, Inc., ("CGI") filed a
voluntary petition for relief under Chapter XI of the federal
bankruptcy laws in the United States Bankruptcy Court for the
Central District of California. Messrs. Joseph and White were
directors, executive officers and principal stockholders of CGI.
On March 4, 1994, CGI's plan of reorganization was confirmed and
the company emerged from bankruptcy proceedings.
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
The following table summarizes the types and recipients of
compensation paid and to be paid to the general partners and
affiliates by the Partnership.
Amount Earned/
Type of Reimbursable for the
Compensation & Year Ended
Name of Entity Description of Payment December 31, 1995
- - -----------------------------------------------------------------
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 $ 135,000 (1)
reimbursable affiliates shall be entitled
expenses to reimbursement for certain
- general expenses, subject to the
partner or conditions of the Partnership
affiliates Agreement.
General partners' A 5 percent interest in $ ---
interest in cash cash flow available for
distributions distribution for any year
- - - general until all limited
partners or partnership unit holders
affiliates have received an amount
equal to a 12 percent
non-cumulative annual return
on their adjusted invested
capital, and 10 percent of
the balance of any cash flow
available for distribution
for such year.
Mortgage 1/4 of 1 percent of the $ 33,000 (2)
investment maximum amount funded or to
servicing fees be funded by the Partnership
on mortgage investments
serviced by CC and CMIF, Inc.,
an indirect subsidiary of CGI.
Repayment Stage:
General partners' One percent of mortgage $ ---
share of reductions until all limited
mortgage partners have received an
reductions amount equal to their adjusted
- - - general invested capital and cumulative
partners or distributions (including cash
affiliates flow available for distribution)
equal to a 12 percent annual
return with respect to their
adjusted invested capital, and
15 percent of the balance of
any mortgage reductions.
(1) Such reimbursable expenses include salaries and related
salary expenses for services which could be performed directly or
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.
(2) Mortgage Investment Servicing Fees are payable on the
maximum amount to be funded on a Mortgage Investment from the
date the Partnership first signs a letter of commitment for such
Mortgage Investment. Fees shown in the table represent amounts
earned by Centennial Corporation for servicing these mortgage
investments and/or related real estate owned.
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,
1995.
(b) Security Ownership of Management
The percent of units, owned by Management, outstanding 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 29, 1996
By:/s/Ronald R. White
_________________________________
Ronald R. White
General Partner March 29, 1996
By: CENTENNIAL CORPORATION
General Partner
/s/John B. Joseph
_________________________________
John B. Joseph
Executive Vice President March 29, 1996
/s/Ronald R. White
_________________________________
Ronald R. White
President March 29, 1996
/s/Joel H. Miner
_________________________________
Joel H. Miner
Chief Financial Officer March 29, 1996
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, 1995, 1994 and 1993
(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, 1995 and 1994............................. F-3
Consolidated Statements of Operations --
Years ended December 31, 1995, 1994 and 1993........... F-5
Consolidated Statements of Partners' Equity --
Years ended December 31, 1995, 1994 and 1993........... F-7
Consolidated Statements of Cash Flows --
Years ended December 31, 1995, 1994 and 1993........... F-8
Notes to Consolidated Financial
Statements............................................... F-14
Schedules
Schedule III - Consolidated Real Estate Owned
and Accumulated Depreciation and Amortization.......... F-36
Schedule IV - Mortgage Loans on Real Estate.............. F-41
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, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 1995 in conformity with
generally accepted accounting principles. Also, in our opinion,
the related financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as
a whole, present fairly, in all material respects, the
information set forth therein.
KPMG Peat Marwick LLP
Orange County, California
March 22, 1996
F-2
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
December 31, 1995 and 1994
Assets 1995 1994
- - -----------------------------------------------------------------
Cash and cash
cash equivalents (note 5) $ 854,000 $ 1,908,000
Restricted cash 11,000 11,000
Short-term investments 102,000 ---
Real estate loans
receivable, earning 25,000 305,000
Real estate loans
receivable from
unconsolidated investees,
earning (note 5) 1,033,000 2,813,000
Real estate loans
receivable from
unconsolidated investees,
nonearning (note 5) 798,000 ---
- - -----------------------------------------------------------------
1,856,000 3,118,000
Less allowance for
possible loan losses (note 3) 8,000 8,000
- - -----------------------------------------------------------------
Net real estate
loans receivable 1,848,000 3,110,000
Real estate owned, held
for sale, less accumulated
depreciation of $12,000 in
1995 and $8,000 in 1994
(notes 6 and 7) 11,314,000 11,284,000
Less allowance for
possible losses on real
estate owned (note 4) 2,545,000 2,445,000
- - -----------------------------------------------------------------
Net real estate owned 8,769,000 8,839,000
See accompanying notes to consolidated financial statements
F-3
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
December 31, 1995 and 1994
Assets 1995 1994
- - -----------------------------------------------------------------
Loan to affiliate --- 99,000
Accrued interest receivable --- 10,000
Other assets 21,000 20,000
- - -----------------------------------------------------------------
$ 11,605,000 $ 13,997,000
=================================================================
Liabilities and Partners' Equity
- - -----------------------------------------------------------------
Note payable (note 7) $ 185,000 $ 224,000
Accounts payable
and accrued liabilities 6,000 26,000
Interest and property taxes
payable on real estate owned 203,000 155,000
Payable to affiliates (note 5) 3,000 7,000
- - -----------------------------------------------------------------
Total liabilities 397,000 412,000
Partners' equity (deficit) --
29,141 limited partnership units
outstanding in 1995 and 1994
General partners (195,000) (195,000)
Limited partners 11,403,000 13,780,000
- - -----------------------------------------------------------------
Total partners' equity 11,208,000 13,585,000
Contingencies (note 8)
- - -----------------------------------------------------------------
$ 11,605,000 $ 13,997,000
=================================================================
See accompanying notes to consolidated financial statements
F-4
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
Years ended December 31, 1995, 1994 and 1993
1995 1994 1993
- - -----------------------------------------------------------------
Revenue:
Interest on loans
to affiliates,
including fees
(note 5) $ 52,000 $ --- $ ---
Interest on loans
to nonaffiliates,
including fees 42,000 96,000 263,000
Interest on
interest-bearing
deposits (note 5) 49,000 38,000 16,000
Income from operations
of real estate owned 134,000 243,000 436,000
Other 2,000 56,000 ---
- - -----------------------------------------------------------------
Total revenue 279,000 433,000 715,000
- - -----------------------------------------------------------------
Expenses:
Provision for
possible losses
(notes 3 and 4) 199,000 1,268,000 3,649,000
Share of losses
in unconsolidated
investees (note 5) 1,803,000 408,000 ---
Operating expenses
from operations
of real estate owned 107,000 161,000 353,000
Operating expenses
from operations
of real estate owned
paid to affiliates
(note 5) 12,000 14,000 32,000
See accompanying notes to consolidated financial statements
F-5
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
Years ended December 31, 1995, 1994 and 1993
1995 1994 1993
- - -----------------------------------------------------------------
Expenses associated
with non-operating
real estate owned 289,000 313,000 404,000
Depreciation and
amortization expense 11,000 13,000 59,000
Interest expense 20,000 156,000 473,000
Loss on sale of
real estate owned --- 64,000 7,000
General and
administrative,
affiliates (note 5) 123,000 151,000 128,000
General and
administrative,
nonaffiliates 59,000 87,000 98,000
Mortgage investment
servicing fees paid
to affiliates (note 5) 33,000 41,000 55,000
- - -----------------------------------------------------------------
Total expenses 2,656,000 2,676,000 5,258,000
- - -----------------------------------------------------------------
Net loss $(2,377,000) $(2,243,000) $(4,543,000)
=================================================================
Net loss
per limited
partnership unit $ (81.57) $ (76.97) $ (155.90)
=================================================================
See accompanying notes to consolidated financial statements
F-6
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Partners' Equity
Years ended December 31, 1995, 1994 and 1993
Total
General Limited Partners'
Partners Partners Equity
- - -----------------------------------------------------------------
Balance at
December 31, 1992 $ (195,000) $ 20,566,000 $ 20,371,000
Net loss --- (4,543,000) (4,543,000)
- - -----------------------------------------------------------------
Balance at
December 31, 1993 (195,000) 16,023,000 15,828,000
Net loss --- (2,243,000) (2,243,000)
- - -----------------------------------------------------------------
Balance at
December 31, 1994 (195,000) 13,780,000 13,585,000
Net loss --- (2,377,000) (2,377,000)
- - -----------------------------------------------------------------
Balance at
December 31, 1995 $ (195,000) $ 11,403,000 $ 11,208,000
=================================================================
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, 1995, 1994 and 1993
1995 1994 1993
- - -----------------------------------------------------------------
Cash flow from
operating activities:
Net loss $ (2,377,000) $ (2,243,000) $ (4,543,000)
Adjustments to
reconcile net loss
to net cash used
in operating activities:
Provision for
possible losses 199,000 1,268,000 3,649,000
Amortization of
unearned loan fees --- (8,000) (10,000)
Depreciation and
amortization expense 11,000 13,000 59,000
Interest accrued
to principal on
loans to affiliates (45,000) --- ---
Loss on sale
of real estate
owned, net --- 8,000 7,000
Equity in losses
of unconsolidated
investees 1,803,000 408,000 ---
Changes in assets
and liabilities:
Decrease in accrued
interest receivable 10,000 6,000 22,000
Increase in due
from affiliate --- --- (3,000)
Increase in
other assets (8,000) (11,000) (13,000)
Increase (decrease)
in accounts payable
and accrued
liabilities (20,000) (25,000) 27,000
See accompanying notes to consolidated financial statements
F-8
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Continued)
Years ended December 31, 1995, 1994 and 1993
1995 1994 1993
- - -----------------------------------------------------------------
Decrease in payable
to affiliates (4,000) --- (4,000)
Increase in interest
and property taxes
payable on real
estate owned 48,000 130,000 264,000
- - -----------------------------------------------------------------
Net cash used in
operating activities (383,000) (454,000) (545,000)
- - -----------------------------------------------------------------
Cash flows from
investing activities:
Principal collected
on loans 280,000 1,016,000 1,503,000
Advances on loans
made to customers --- (2,000) (1,000)
Advances on loans
made to affiliates (776,000) (215,000) ---
Capital expenditures
for real
estate owned (34,000) (16,000) (124,000)
Proceeds from sale
of real estate owned --- 821,000 558,000
Increase in
restricted cash --- --- (377,000)
(Increase) decrease
in short-term
investments (102,000) --- 125,000
- - -----------------------------------------------------------------
Net cash provided
by (used in)
investing
activities (632,000) 1,604,000 1,684,000
- - -----------------------------------------------------------------
See accompanying notes to consolidated financial statements
F-9
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Continued)
Years ended December 31, 1995, 1994 and 1993
1995 1994 1993
- - -----------------------------------------------------------------
Cash flow from
financing activities:
Principal payments
on notes payable (39,000) (784,000) (44,000)
- - -----------------------------------------------------------------
Net cash used
in financing
activities (39,000) (784,000) (44,000)
- - -----------------------------------------------------------------
Net increase
(decrease) in
cash and cash
equivalents (1,054,000) 366,000 1,095,000
Cash and cash
equivalents at
beginning of year 1,908,000 1,542,000 447,000
- - -----------------------------------------------------------------
Cash and cash
equivalents at
end of year $ 854,000 $ 1,908,000 $ 1,542,000
=================================================================
See accompanying notes to consolidated financial statements
F-10
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Continued)
Years ended December 31, 1995, 1994 and 1993
1995 1994 1993
- - -----------------------------------------------------------------
Supplemental
schedule of
cash flow
information:
Cash paid during
the year for:
Interest $ 20,000 $ 70,000 $ 299,000
- - -----------------------------------------------------------------
Supplemental
schedule of
noncash investing
and financing
activities:
Foreclosure or
insubstance
foreclosure of
real estate loans
receivable and
transfer to real
estate owned $ --- $ --- $ 5,025,000
Increase in real
estate owned
through assumption
of notes payable --- --- 1,390,000
Increase in
interest and property
taxes payable on
real estate owned
through insubstance
foreclosure of real
estate loans receivable --- --- 325,000
See accompanying notes to consolidated financial statements
F-11
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Continued)
Years ended December 31, 1995, 1994 and 1993
1995 1994 1993
- - -----------------------------------------------------------------
Decrease in real
estate owned through
transfer of
ownership (note 5) --- 6,449,000 ---
Increase in real
estate loans
through transfer
of ownership
of real estate
owned (note 5) --- 3,004,000 ---
Decrease in allowance
for possible losses
on real estate owned
as a result of partial
chargeoff upon transfer
of ownership (note 5) --- 2,015,000 ---
Decrease in notes
payable through
transfer of
ownership (note 5) --- 1,105,000 ---
Decrease in interest
and property taxes
payable on real
estate owned through
transfer of
ownership (note 5) --- 325,000 ---
Decrease in real
estate owned
through deed in
lieu of foreclosure
or foreclosure --- 5,091,000 ---
See accompanying notes to consolidated financial statements
F-12
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Continued)
Years ended December 31, 1995, 1994 and 1993
1995 1994 1993
- - -----------------------------------------------------------------
Decrease in
allowance for
possible losses
on loans and
real estate owned
as a result of
partial chargeoff $ 99,000 $ 1,647,000 $ 75,000
Decrease in other
assets through
deed in lieu of
foreclosure
or foreclosure --- 52,000 ---
Decrease in notes
payable through
deed in lieu of
foreclosure
or foreclosure --- 3,745,000 ---
Decrease in interest and
property taxes payable
on real estate owned
through deed in lieu
of foreclosure, sale
or foreclosure --- 288,000 ---
Transfer of restricted
cash to workout loan --- 501,000 ---
Decrease in accounts
payable and accrued
liabilities through
transfer of ownership --- 5,000 ---
See accompanying notes to consolidated financial statements
F-13
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Notes to Consolidated Financial Statements
December 31, 1995, 1994, 1993
(1) Summary of Significant Accounting Policies
Business
Centennial Mortgage Income Fund II (the "Partnership") has
historically invested in commercial, industrial and residential
income-producing real property through mortgage investments
consisting of participating first mortgage loans, other equity
participation loans, construction loans, and wrap-around and
other junior loans. The Partnership's underwriting policy for
granting credit was to fund loans secured by first and second
deeds of trust on real property. The Partnership's area of
concentration is in California. In the normal course of
business, the Partnership participated with other lenders in
extending credit to single borrowers. The Partnership did this
in an effort to decrease credit concentrations and provide a
greater diversification of credit risk.
As of December 31, 1995, most of the loans secured by operating
properties have been repaid to the Partnership. However, during
recent years, real estate market values for undeveloped land in
California have declined severely. As the loans secured by
undeveloped land became delinquent, the Partnership elected to
foreclose on certain of these loans, thereby increasing real
estate owned balances. As a result, the Partnership has become a
direct investor in this real estate and intends to manage
operating properties and develop raw land until such time as the
Partnership is able to sell this real estate owned. The real
estate owned balance at December 31, 1993 was $24,170,000,
decreasing to $11,284,000 at year end 1994 and increasing to
$11,314,000 at year end 1995. The decrease from 1993 to 1994 was
principally the result of $6,449,000 of real estate being
transferred to unconsolidated subsidiaries and $5,091,000 of real
estate being disposed of through deed in lieu of foreclosure or
foreclosure.
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.
F-14
Basis of Presentation
The Partnership formed several subsidiaries to own and operate
certain of its real estate assets. The corporations formed were
PIR Development, Inc., RSA Development, Inc., CTA Development,
Inc., LCR Development, Inc., ("LCR"), BKS Development, Inc.,
("BKS") and BPK Retail, Inc. Several of the Partnership's assets
have been transferred to these new corporations, at the
Partnership's cost basis, in transactions which included no cash
down and the Partnership carrying 100 percent of the financing.
With the exception of LCR and BKS, all of these corporations are
wholly owned corporations and have been consolidated in the
accompanying consolidated financial statements. All significant
intercompany balances and transactions, including the
aforementioned transfer, have been eliminated in consolidation.
As the Partnership's ownership interest in LCR and BKS is more
than 20 percent but does not exceed 50 percent, the Partnership
accounts for its ownership interest using the equity method.
Under the equity method of accounting, these loans are a
component of the Partnership's investment in LCR and BKS, and
therefore the Partnership has recorded losses by LCR and BKS as a
reduction of the carrying value of these loans receivable (see
note 5).
Organization
The Partnership was organized on July 12, 1985 in accordance with
the provisions of the California Uniform Limited Partnership Act.
The Partnership commenced operations in June 1986. The general
partners are John B. Joseph, Ronald R. White and Centennial
Corporation ("CC"), a privately-held California corporation whose
stock is owned by affiliates of Ronald R. White and John B.
Joseph. Centennial Capital, Inc. ("CCI"), a California
corporation, wholly-owned by the Centennial Group, Inc. retired
as general partner during 1994.
Cash available for distribution, as defined in the Partnership
Agreement, is to be distributed 95 percent to the limited
partners and 5 percent to the general partners until each limited
partner has received an amount equal to a 12 percent non-
cumulative annual return on their adjusted invested capital (as
defined in the Partnership Agreement). Thereafter, cash
available for distribution is to be distributed 90 percent to the
limited partners and 10 percent to the general partners. All
distributions of mortgage reductions (as defined in the
F-15
Partnership Agreement) shall be distributed 99 percent to the
limited partners and 1 percent to the general partners, until
each limited partner has received a 12 percent cumulative annual
return on their adjusted invested capital, after which such
amounts are to be distributed 85 percent to the limited partners
and 15 percent to the general partners. These amounts may be
adjusted subject to the provisions of the Partnership Agreement.
In order to properly reflect the economic effect of the
allocations discussed above, the Partnership has allocated
financial statement net earnings and losses 95 percent to the
limited partners and 5 percent to the general partners through
1992. Based upon the various terms of the Partnership Agreement,
it is improbable that the general partners would be required to
make any capital contributions to the Partnership in excess of
their negative capital account as of December 31, 1992.
Accordingly, the Partnership has allocated 100 percent of the
1995, 1994 and 1993 losses to the limited partners.
Real Estate Loans and Allowance for Possible Losses
Loans are reported at the principal amount outstanding, net of
unearned income and the allowance for possible loan losses.
Interest accrual is discontinued when, in the opinion of
management, its collection is deemed doubtful. The allowance for
possible loan losses is established through a provision for
possible losses charged to expense. Loans are charged against
the allowance for possible loan losses when management believes
that the collectibility of principal is unlikely.
Management believes that the allowance for possible loan losses
is adequate. While management uses available information to
recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions.
Impaired Loans
Effective January 1, 1995, the Partnership adopted Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan" ("SFAS 114"), as amended by Statement
of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosures" ("SFAS 118"). Under SFAS 114, a loan is impaired
when it is "probable" that a creditor will be unable to collect
all amounts due (i.e. both principal and interest) according to
the original contractual terms of the loan agreement. The
measurement of impairment may be based on (i) the present value
of the expected future cash flows of the impaired loan discounted
F-16
at the loan's original effective interest rate, (ii) the
observable market price of the loan, or (iii) the fair value of
the collateral of a collateral-dependent loan. SFAS 114 does not
apply to large groups of smaller balance homogeneous loans that
are collectively evaluated for impairment. The adoption of SFAS
114, as amended by SFAS 118, had no material impact on the
Partnership's consolidated financial statements as the
Partnership's previously existing policy of measuring loan
impairment was consistent with methods prescribed in these
standards.
The Partnership considers a loan to be impaired when based upon
current information and events, it believes it is probable that
the Partnership will be unable to collect all amounts due
according to the contractual terms of the loan agreement. In
determining impairment, the Partnership considers large non-
homogeneous loans including nonaccrual loans, troubled debt
restructuring and performing loans which exhibit, among other
characteristics, high loan-to-value ratios, low debt-coverage
ratios, or other indications that the borrowers are experiencing
increased levels of financial difficulty. The Partnership bases
the measurement of collateral-dependent impaired loans on the
fair value of the loan's collateral. The amount by which the
recorded investment of the loan exceeds the measure of the
impaired loan's value is recognized by recording a valuation
allowance.
Real Estate Owned
The Partnership accounts for foreclosed assets using the American
Institute of Certified Public Accountants Statement of Position
92-3 ("SOP 92-3"), "Accounting for Foreclosed Assets." SOP 92-3
indicates that foreclosed assets are presumed held for sale and
not for the production of income. Accordingly, foreclosed assets
held for sale are to be carried at the lower of cost or fair
value minus estimated costs to sell. The cost of such assets at
the time of foreclosure is the fair value of the asset
foreclosed. Immediately after foreclosure, a valuation allowance
is recognized for estimated costs to sell through a charge to
income. All of the Partnership's real estate owned is presumed
held for sale.
The Partnership considers collateral for a loan "insubstance"
foreclosed only when the borrower actually surrenders the
collateral to the creditor and the creditor receives physical
possession of the borrower's assets. There are no insubstance
foreclosures under this criteria at December 31, 1995 or 1994.
F-17
Loan Fees
Origination fees and direct costs associated with lending are
netted and amortized to interest income as an adjustment to yield
over the respective lives of the loans using the interest method.
Income Taxes
Under provisions of the Internal Revenue Code and the California
Revenue and Taxation Code, partnerships are generally not subject
to income taxes. For tax purposes, any income or losses realized
are those of the individual partners, not the Partnership. The
Partnership reports certain transactions differently for tax and
financial statement purposes. The following is a recap of
current and cumulative temporary differences for generally
accepted accounting principles ("GAAP") and taxable earnings.
F-18
Current Temporary Differences Partnership Corporations Total
- - --------------------------------------------------------------------------------
- - ----------
GAAP earnings (loss)
for the year ended
ended December 31, 1995 $ (1,989,000) $ (388,000) $
(2,377,000)
Provision for losses 100,000 ---
100,000
Accrued expenses not deducted
under the cash basis
method of accounting --- 142,000
142,000
Share of losses in
unconsolidated investees 1,803,000 ---
1,803,000
Carrying costs expensed for books
and capitalized for tax purposes --- 250,000
250,000
Depreciation --- (11,000)
(11,000)
- - --------------------------------------------------------------------------------
- - ----------
Taxable loss for the year
ended December 31, 1995 $ (86,000) $ (7,000) $
(93,000)
================================================================================
==========
Taxable loss allocable to
General Partner ---
================================================================================
==========
Taxable loss
per limited
partner unit $ (2.95)
================================================================================
==========
F-19
December 31, 1995
- - -----------------------------------------------------------------
Cumulative Temporary Differences Partnership Corporations
- - -----------------------------------------------------------------
Net operating loss
carry forwards $ --- $ 120,000
Provision for losses 836,000 1,717,000
Accrued expenses not deducted
under the cash basis --- 4,464,000
Interest income accrued for
tax, not per books 211,000 ---
Chargeoff of loans not deducted 2,015,000 ---
Carrying costs expensed for
books and capitalized
for tax purposes --- 816,000
Depreciation --- (28,000)
Share of losses in
unconsolidated investees 2,211,000 ---
- - -----------------------------------------------------------------
Total cumulative
temporary differences $ 5,273,000 $ 7,089,000
=================================================================
The cumulative temporary partnership differences shown above,
which total approximately $181.00 per limited partnership unit,
should reverse when the Partnership liquidates its investments.
There can be no assurance that these losses will be realized as
future operations of the Partnership could result in greater or
lesser amounts of allocable tax losses to the limited partners.
In addition, the deductibility of taxable losses is dependent
upon each limited partners' individual tax position. The
reversal of these differences will result in future taxable
income or loss per limited partnership unit which is less than
the Partnership will report for financial statement purposes.
Management believes that the share of losses in unconsolidated
investees is a temporary difference since the Partnership holds
approximately $4.0 million in notes receivable from these
investees, a portion of which could be charged to bad debt
expense should these investees liquidate their single property
holdings at current carrying values.
F-20
In addition, as of December 31, 1995, the Partnership held
approximately $16.4 million in loans receivable from the
consolidated corporations. These loans have been eliminated in
the Partnership's consolidated financial statements. It is
anticipated that the temporary differences should reverse on the
corporations' returns when the corporations liquidate their
investments. If these investments are liquidated at current
carrying values, the Partnership should be able to deduct bad
debt expense on its tax returns in the approximate amount of the
temporary differences shown above which is approximately $243.00
per limited partnership unit.
The subsidiary corporations are subject to taxation and account
for income taxes under Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" ("SFAS 109").
SFAS 109 requires an asset and liability approach to establishing
deferred tax assets and liabilities for the temporary differences
between the financial reporting basis and the tax basis of the
corporation's assets and liabilities. No benefit for net
operating losses or cumulative differences related to the
corporations has been recorded in the consolidated financial
statements due to the improbability of realization. Future
consolidated financial statements could reflect income tax
expense in the event that these newly formed corporations
generate profits in excess of operating loss carryforwards
available. Some of the subsidiary corporations are cash basis
taxpayers.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents
include cash and interest-bearing deposits with original
maturities of three months or less.
Short-term Investments
Short-term investments include certificates of deposits with
original maturities greater than 90 days but less than one year.
Net Loss Per Limited Partnership Unit
Net loss per limited partnership unit for financial statement
purposes was based on 29,141 weighted average limited partnership
units outstanding in 1995, 1994 and 1993.
F-21
Depreciation and Amortization
Depreciation and amortization of assets is charged to expense on
a straight-line basis over the estimated useful lives of the
assets; 3 years for equipment and 31.5 years for buildings, or,
in the case of tenant improvements, over the terms of the leases
if shorter than the estimated useful lives.
Revenue Recognition
Revenue from rental income on real estate owned is recognized on
a straight-line basis over the life of the lease when payments
become due under operating leases.
Reclassifications
Certain amounts in the 1994 and 1993 consolidated financial
statements have been reclassified to conform to the 1995
presentation.
(2) Fair Value of Financial Instruments
Statement of Financial Accounting Standard No. 107 "Disclosures
About Fair Value of Financial Instruments" ("SFAS 107"), requires
that the Partnership disclose estimated fair values for its
financial instruments as well as the methods and significant
assumptions used to estimate fair values. The following
information does not purport to represent the aggregate net fair
value of the Partnership.
The following methods and assumptions were used by the
Partnership in estimating the fair value of each class of
financial instrument.
Cash and Cash Equivalents
The carrying amount, which is cost, is assumed to be the fair
value because of the liquidity of these instruments.
Short-Term Investments
The carrying amount is estimated to be fair value because the
funds were invested at current market rates on December 26, 1995.
F-22
Real Estate Loans Receivable from Unconsolidated Investees -
Earning
The net carrying value of earning loans from unconsolidated
investees is estimated to be fair value. These loans reprice at
market rate each time the reference rate is adjusted.
Note Payable
The carrying value of the fixed rate note payable is estimated to
be the fair value using estimated market discount rates.
Accounts Payable and Accrued Liabilities, Payable to Affiliates
and Interest and Property Taxes Payable
Carrying value is considered to be equal to the fair value of
these liabilities as they are short-term in nature.
(3) Allowance for Possible Loan Losses
Changes in the allowance for possible loan losses are as follows:
1995 1994 1993
- - -----------------------------------------------------------------
Balance at
beginning of year $ 8,000 $ 149,000 $ 562,000
Loans to affiliates
and nonaffiliates
charged-off (99,000) (73,000) (25,000)
Transfer to
allowance for
possible losses on
real estate owned --- --- (1,536,000)
Provision for
possible losses
(reduction in provision) 99,000 (68,000) 1,148,000
- - -----------------------------------------------------------------
Balance at
end of year $ 8,000 $ 8,000 $ 149,000
================================================================
F-23
At December 31, 1995, the carrying value of loans that are
considered to be impaired under SFAS 114 totaled $798,000 (both
of which were on nonaccrual status). At December 31 1995, there
was no allowance for possible loan losses determined in
accordance with the provisions of SFAS 114, related to loans
considered to be impaired under SFAS 114, recorded by the
Partnership. However, as discussed in note 5, the
nonconsolidated affiliates have recorded an allowance for losses
of $3,480,000 and the Partnership's proportionate share of the
losses in unconsolidated investees reflects this allowance.
There was no new investment in impaired loans during the twelve
months ended December 31, 1995. For the year ended December 31,
1995, the Partnership recognized no interest income nor cash
basis income on these impaired loans.
If the loans on nonaccrual had been current throughout their
terms, interest income would have increased by approximately
$379,000 and $211,000 for the years ended December 31, 1995 and
1994, respectively.
F-24
(4) Allowance for Possible Losses on Real Estate Owned
Changes in the allowance for possible losses on real estate owned
are as follows:
1995 1994 1993
- - -----------------------------------------------------------------
Balance at
beginning of year $ 2,445,000 $ 4,698,000 $ 1,311,000
Real estate
owned charged-off --- (3,589,000) (650,000)
Transfer from
allowance for
possible loan losses --- --- 1,536,000
Provision for losses 100,000 1,336,000 2,501,000
- - -----------------------------------------------------------------
Balance at
end of year $ 2,545,000 $ 2,445,000 $ 4,698,000
=================================================================
(5) Transactions with Affiliates
CC and CMIF, Inc., an affiliate of the general partners, are
entitled to receive from the Partnership mortgage investment
servicing fees for loans serviced equal to an annual rate of 1/4
of 1 percent of the committed amounts to be funded by the
Partnership. Under the provisions of the Partnership Agreement,
the Partnership incurred $8,000 and $55,000 of mortgage
investment servicing fees payable to CMIF, Inc. in 1994 and 1993,
respectively, of which $12,000 and $51,000 were paid in 1994 and
1993, respectively. The Partnership incurred $33,000 and $33,000
of mortgage investment servicing fees payable to CC in 1995 and
1994 of which $30,000 and $27,000 were paid in 1995 and 1994,
respectively.
Under the provisions of the Partnership Agreement, the general
partners are to receive compensation for their services in
supervising the affairs of the Partnership. This partnership
management compensation shall be equal to 10 percent of the cash
available for distribution, as defined in the Partnership
F-25
Agreement. The general partners will not receive this
compensation until the limited partners have received a 12
percent per annum cumulative return on their adjusted invested
capital; however, the general partners are entitled to receive a
minimum 5 percent interest in cash available for distribution in
any year until this return has been met. Adjusted invested
capital is defined as the original capital invested less
distributions from mortgage reductions. Under this provision,
payments to the general partners have been limited to 5 percent
of cash available for distribution as the limited partners have
not received their 12 percent per annum cumulative return. No
distributions were paid to the general partners during 1995, 1994
and 1993.
As discussed below, the Partnership owns 50 percent of the stock
of two corporations which have not been consolidated in the
accompanying financial statements; LCR and BKS. The balance of
stock in these corporations is owned by Centennial Mortgage
Income Fund ("CMIF"), an affiliate. LCR has invested in a joint
venture, Silverwood Homes ("Silverwood") which is constructing
homes. The Partnership has participated in making several loans
to these corporations and this joint venture. Under the equity
method of accounting, these loans are a component of the
Partnership's investment in LCR and BKS, and therefore the
Partnership has recorded losses by LCR and BKS as a reduction of
the carrying value of these loans receivable.
F-26
A summary of these real estate loans receivable from
unconsolidated investees as of December 31, 1995 is as follows:
Net
Principal Losses Carrying
Balance Offset Value
- - -----------------------------------------------------------------
50 percent interest
in unsecured note
receivable from LCR $ 1,059,000 $ 595,000 $ 464,000
50 percent interest
in note receivable
secured by a first
trust deed from BKS 1,947,000 1,613,000 334,000
50 percent interest
in development loan
secured by a first
trust deed from
Silverwood 543,000 --- 543,000
50 percent interest
in construction loan
secured by a first
trust deed from
Silverwood 255,000 --- 255,000
50 percent interest
in construction loan
secured by a first
trust deed from
Silverwood 235,000 --- 235,000
- - -----------------------------------------------------------------
Totals $ 4,039,000 $ 2,208,000 $ 1,831,000
F-27
A summary of these real estate loans receivable from
unconsolidated investees as of December 31, 1994 is as follows:
Net
Principal Losses Carrying
Balance Offset Value
- - -----------------------------------------------------------------
50 percent interest
in unsecured note
receivable from LCR $ 1,059,000 $ 157,000 $ 1,116,000
50 percent interest
in note receivable
secured by first
trust deed from BKS 1,946,000 249,000 1,697,000
- - -----------------------------------------------------------------
Totals $ 3,005,000 $ 406,000 $ 2,813,000
In February 1994, the Partnership assigned its 50 percent
interest in a construction loan secured by a second trust deed,
which was participated with CMIF, to LCR in order to facilitate
LCR's foreclosure of 179 lots in Lancaster, California. In
anticipation of this foreclosure, LCR purchased the underlying
note secured by a first trust deed on the property with funds
provided by CMIF. CMIF also assigned its 50 percent interest in
the construction loan secured by a second trust deed to LCR. In
exchange for the assignment of the note secured by a second trust
deed, the Partnership received a 50 percent interest in an
unsecured note due from LCR with a principal balance of
$2,115,000 and $2,522,000 as of December 31, 1995 and 1994,
respectively. The Partnership has not accrued its share of
interest on this note which was approximately $176,000 and
$157,000 as of December 31, 1995 and 1994, respectively.
LCR has entered into a joint venture agreement entitled
Silverwood with Home Devco, ("Home Devco"), an affiliate of the
general partners of the Partnership, to construct and sell single-
family homes at the project. LCR has contributed the 179 lots to
the joint venture as its initial capital contribution. As LCR
has a 99.99 percent ownership interest in the joint venture,
Silverwood has been consolidated with LCR and the contribution of
these lots to the joint venture has no effect on the financial
position of LCR.
F-28
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, 1995 and
1994 and for the years ended December 31, 1995 and 1994:
LCR Development, Inc.
Consolidated Balance Sheets
December 31, December 31,
Assets 1995 1994
- - -----------------------------------------------------------------
Cash $ --- $ 2,000
Real estate owned 4,973,000 3,766,000
Less allowance for
losses on real
estate investments 787,000 ---
- - -----------------------------------------------------------------
Net real estate owned 4,186,000 3,766,000
Organization costs 2,000 2,000
- - -----------------------------------------------------------------
$ 4,188,000 $ 3,770,000
=================================================================
Liabilities and Stockholders' Deficit
- - -----------------------------------------------------------------
Notes payable
to affiliates $ 5,065,000 $ 3,772,000
Accounts payable
and accrued liabilities 1,000 ---
Interest and property
taxes payable
on real property 312,000 312,000
Payable to affiliates 1,000 ---
- - -----------------------------------------------------------------
Total liabilities 5,379,000 4,084,000
Stockholders' deficit (1,191,000) (314,000)
- - -----------------------------------------------------------------
$ 4,188,000 $ 3,770,000
=================================================================
F-29
LCR Development, Inc.
Consolidated Statements of Operations
Year ended Year ended
December 31, 1995 December 31, 1994
- - -----------------------------------------------------------------
Interest expense $ 93,000 $ 313,000
Provision for losses on
real estate investments 787,000 ---
General and administrative (3,000) 3,000
- - -----------------------------------------------------------------
Net loss $ 877,000 $ 316,000
=================================================================
LCR has not accrued interest on the notes payable to the
Partnership that the Partnership has classified as nonearning.
Because the Partnership accounts for these loans as a component
of its equity investment in LCR, any effect on the Partnership
would be eliminated in consolidation.
As discussed above, the Partnership holds 50 percent of the stock
of BKS with CMIF. In 1994, the Partnership assigned to BKS their
50 percent interest in a note receivable secured by a first trust
deed on a 283 acre residential tract in Bakersfield, California.
BKS foreclosed on this property on August 8, 1994. In exchange
for their assignments, the Partnership and CMIF each received a
50 percent interest in a new note from BKS secured by a first
trust deed on the property. The Partnership ceased accruing
interest on this new note on January 1, 1995. This nonaccrued
interest was approximately $414,000 as of December 31, 1995.
The balance sheets and statements of operations of BKS have not
been consolidated in the Partnership's financial statements. The
Partnership accounts for its investment in this corporation using
the equity method. The following represents condensed financial
information for BKS at December 31, 1995 and 1994 and for the
years ended December 31, 1995 and 1994:
F-30
BKS Development, Inc.
Balance Sheets
December 31, December 31,
Assets 1995 1994
- - -----------------------------------------------------------------
Cash $ 1,000 $ 1,000
Real property 5,200,000 5,199,000
Less allowance for losses
on real estate investments 2,693,000 ---
- - -----------------------------------------------------------------
Net real estate owned 2,507,000 5,199,000
- - -----------------------------------------------------------------
$ 2,508,000 $ 5,200,000
=================================================================
Liabilities and Stockholders' Deficit
- - -----------------------------------------------------------------
Bonds payable $ 899,000 $ 898,000
Notes payable to affiliates 3,893,000 3,893,000
Interest and property
taxes payable
on real property 943,000 908,000
- - -----------------------------------------------------------------
Total liabilities 5,735,000 5,699,000
Stockholders' deficit (3,227,000) (499,000)
- - -----------------------------------------------------------------
$ 2,508,000 $ 5,200,000
=================================================================
F-31
BKS Development, Inc.
Statements of Operations
Year ended Year ended
December 31, December 31,
1995 1994
- - -----------------------------------------------------------------
Interest and property
tax expense $ 35,000 $ 499,000
Provision for losses 2,693,000 ---
General and administrative --- 2,000
- - -----------------------------------------------------------------
Net loss $ 2,728,000 $ 501,000
=================================================================
BKS has not accrued interest on the note payable to the
Partnership that the Partnership has classified as nonearning.
Because the Partnership accounts for this loan as a component of
its equity investment in BKS, any effect on the Partnership would
be eliminated in consolidation.
At the time of foreclosures by LCR and BKS discussed above, the
Partnership had accounted for its interests in the notes secured
by a second trust deed and first trust deed as having been
insubstance foreclosed. A summary of the effects of the
foreclosures on the Partnership's balance sheet during 1994 is as
follows:
F-32
LCR BKS TOTAL
- - -----------------------------------------------------------------
Decrease in real
estate owned $ 2,550,000 $ 3,899,000 $ 6,449,000
Increase in
real estate loans 1,058,000 1,946,000 3,004,000
Decrease in allowance
for possible losses
on real estate owned 715,000 1,300,000 2,015,000
Decrease in notes payable 656,000 449,000 1,105,000
Decrease in interest
and property
taxes payable 121,000 204,000 325,000
The Partnership reimburses the general partner and its affiliates
for expenses incurred on behalf of the Partnership for services
such as salaries, legal, accounting, property management and
other services. The general partners and affiliates of the
general partners charged $135,000, $165,000 and $160,000 for such
services in 1995, 1994 and 1993, respectively.
During 1995, 1994 and 1993, the Partnership maintained interest-
bearing deposits with Sunwest Bank, an affiliate of the general
partners. The balances at December 31, 1995, 1994 and 1993 were
$170,000, $54,000 and $67,000, respectively. Interest earned on
such deposits for 1995, 1994 and 1993 was $3,000, $1,000 and
$9,000, respectively.
During 1993, the Partnership invested in KJC Development, Inc.
("KJC"). During 1994, KJC was used to form a mortgage lending
corporation which was subsequently closed in February of 1995.
KJC is jointly owned by the Partnership, CMIF and Centennial
Mortgage Income Fund III. The Partnership owns 33.33 percent of
the corporation and has recorded $1,000 in losses from this joint
venture as of December 31, 1995. The mortgage lending
corporation funded short-term mortgage loans utilizing working
capital funds advanced from the joint owners of KJC. No such
loans were outstanding at December 31, 1995 or 1994. The balance
F-33
sheet and statement of operations of KJC have not been
consolidated in the Partnership's financial statements and are
not presented here as they are immaterial to the Partnership.
The Partnership accounts for its investment in this corporation
using the equity method.
(6) Real Estate Owned
Real estate owned consists of the following:
(dollars in thousands)
December 31, December 31,
1995 1994
- - -----------------------------------------------------------------
1. Office building
in San Bernardino, CA $ 837 $ 837
2. 45 acres in Sacramento, CA 4,126 4,092
3. Proposed marina and
condominiums in
Redwood City, CA 5,360 5,360
4. 10.66 acres in Roseville, CA 1,003 1,003
- - -----------------------------------------------------------------
Subtotal 11,326 11,292
Less accumulated depreciation 12 8
- - -----------------------------------------------------------------
Total real estate owned $ 11,314 $ 11,284
=================================================================
The Partnership leases its operating properties under several non-
cancelable operating lease agreements. Future minimum rents to
be received as of December 31, 1995 are as follows:
F-34
(dollars in thousands)
Years ending December 31,
- - -----------------------------------------------------------------
1996 $ 118
1997 110
1998 51
1999 38
2000 6
- - -----------------------------------------------------------------
$ 323
=================================================================
(7) Note Payable
Note payable consists of the following:
(dollars in thousands)
December 31, December 31,
1995 1994
- - -----------------------------------------------------------------
Note payable secured by
office building in
San Bernardino, CA,
with principal, interest
and property taxes payable
monthly of $5,588;
interest at 9.5%,
maturing December 1, 1999 $ 185 $ 224
=================================================================
(8) Contingencies
There are no material pending legal proceedings other than
ordinary routine litigation incidental to the Partnership's
business. Based on part of advice of legal counsel, management
does not believe that the results of any of these matters will
have a material impact on the Partnership's financial position or
results of operations.
F-35
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule III
Consolidated Real Estate Owned and
Accumulated Depreciation and Amortization
December 31, 1995
Initial Costs
Capitalized
Cost to
Subsequent
Partnership to
Acquisition
Real Estate
Property Encumbrances Owned Improvements
Carrying Costs
- - --------------------------------------------------------------------------------
- - ----------
Office Building
in San Bernardino $ 185,000 $ 800,000 $ 37,000 $
- - ---
45 Acres in Sacramento --- 3,827,000 168,000
131,000
Proposed Marina and
Condominiums in
Redwood City --- 4,101,000 1,170,000
89,000
10.66 Acres in Roseville --- 1,000,000 3,000
- - ---
- - --------------------------------------------------------------------------------
- - ----------
$ 185,000 $ 9,728,000 $ 1,378,000 $
220,000
================================================================================
==========
See accompanying independent auditors' report.
F-36
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule III
Consolidated Real Estate Owned and
Accumulated Depreciation and Amortization
(Continued)
December 31, 1995
Gross Amount at Which
Carried on Books (F2)
Accumulated
Life On Which
Real Estate Depreciation & Date
Depreciation
Property Owned Total Amortization Acquired
Is Computed
- - --------------------------------------------------------------------------------
- - ----------
Office Building
in San Bernardino $ 837,000 $ 837,000 $ 12,000 April 1993
(F1)
45 Acres in Sacramento 4,126,000 4,126,000 --- March 1992
None
Proposed Marina and
Condominiums in
Redwood City 5,360,000 5,360,000 --- April 1993
None
10.66 Acres in Roseville 1,003,000 1,003,000 --- December 1992
None
- - -----------------------------------------------------------------
$11,326,000 $11,326,000 $ 12,000
=================================================================
F-37
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule III
Consolidated Real Estate Owned and
Accumulated Depreciation and Amortization
(Continued)
December 31, 1995
Tenant improvements depreciated over life of leases; building depreciated
over 31.5 years
Aggregate cost for Federal income tax purposes is $12,168,000 at December
31, 1995.
See accompanying independent auditors' report.
F-38
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule III
Consolidated Real Estate Owned and
Accumulated Depreciation and Amortization
(Continued)
December 31, 1995
The following is a summary of consolidated real estate owned for the years ended
December 31, 1995, 1994, and 1993.
1995 1994 1993
- - --------------------------------------------------------------------------------
- - ----------
Balance at beginning of year $ 11,292,000 $ 24,200,000 $
18,621,000
Additions during period:
Acquisitions
through foreclosures --- ---
6,740,000
Improvements 34,000 16,000
124,000
Deductions during period:
Real estate sold --- (885,000)
(635,000)
Real estate foreclosed --- (8,441,000) -
- - --
Chargeoffs --- (3,589,000)
(650,000)
Other --- (9,000) -
- - --
- - --------------------------------------------------------------------------------
- - ----------
Balance at year end $ 11,326,000 $ 11,292,000 $
24,200,000
================================================================================
==========
See accompanying independent auditors' report.
F-39
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule III
Consolidated Real Estate Owned and
Accumulated Depreciation and Amortization
(Continued)
December 31, 1995
The following is a summary of accumulated depreciation and amortization of
consolidated real estate owned for the years ended December 31, 1995, 1994, and
1993.
1995 1994
1993
- - --------------------------------------------------------------------------------
- - ----------
Balance at beginning of year $ 8,000 $ 30,000 $
49,000
Additions during period:
Acquisitions through foreclosures --- ---
- - ---
Additions 4,000 8,000
51,000
Deductions during period:
Real estate sold --- (2,000)
(70,000)
Other --- (28,000)
- - ---
- - --------------------------------------------------------------------------------
- - ----------
Balance at year end $ 12,000 $ 8,000 $
30,000
================================================================================
=========
See accompanying independent auditors' report.
F-40
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule IV
Mortgage Loans on Real Estate
December 31, 1995
Interest Final
Periodic
Description Rate Maturity Date Payment
Terms
- - --------------------------------------------------------------------------------
- - ----------
Note secured by:
P + I
monthly
Timeshare Interests Various
payment of
Oxnard, CA 12.25 - 13.9% fixed Various
$2,149.35
50 percent interest in
unsecured note related to P & I
due at
179 lots in Lancaster, CA 7.75% fixed December 1, 1997
maturity
50 percent interest in
First Trust Deed on 283 P & I
due at
acres in Bakersfield, CA 15% fixed August 8, 1997
maturity
50 percent interest in
First Trust Deed on P & I
due at
179 lots in Lancaster, CA Prime + 1% August 1, 1997
maturity
50 percent interest in 1st
T.D. on four single family P & I
due at
homes in Lancaster, CA Prime + 1% July 1, 1998
maturity
50 percent interest in 1st
T.D. on nine single family P & I
due at
homes in Lancaster, CA Prime + 1% July 1, 1996
maturity
Losses from unconsolidated investees
F-41
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule IV
Mortgage Loans on Real Estate
(Continued)
December 31, 1995
Principal Amount
of
Loan Subject
to
Delinquent
Face Amount Carrying Amount
Principal or
Description Prior Liens of Mortgages of Mortgages (F1)
Interest
- - --------------------------------------------------------------------------------
- - ----------
Note secured by:
Timeshare Interests
Oxnard, CA None $ 84,000 $ 25,000
None
50 percent interest in
unsecured note related 1st T.D.
to 179 lots in of 2,115,000
Lancaster, CA $3,266,000 (50% - 1,059,000) 1,059,000 $
1,059,000
50 percent interest
in First Trust Deed
on 283 acres in 3,893,000
Bakersfield, CA None (50% - 1,947,000) 1,947,000
1,947,000
50 percent interest
in First Trust Deed
on 179 lots in 3,266,000
Lancaster, CA None (50% - 1,636,000) 543,000
None
F-42
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule IV
Mortgage Loans on Real Estate
(Continued)
December 31, 1995
Principal Amount
of
Loan Subject
to
Delinquent
Face Amount Carrying Amount
Principal or
Description Prior Liens of Mortgages of Mortgages (F1)
Interest
- - --------------------------------------------------------------------------------
- - ----------
Note secured by:
50 percent interest in
1st T.D. on four 1st T.D.
single family homes of 490,000
in Lancaster, CA $3,266,000 (50% - 245,000) 255,000
None
50 percent interest
in 1st T.D. on
nine single
family homes in 1,034,000
Lancaster, CA None (50% - 518,000) 235,000
None
- - --------------------------------------------------------------------------------
- - ----------
Losses from unconsolidated investees (2,208,000)
(2,208,000)
- - --------------------------------------------------------------------------------
- - ----------
$ 5,489,000 $ 1,856,000 $
798,000
================================================================================
==========
Aggregate cost for Federal Income Tax purposes is $6,079,000 at December
31, 1995.
F-43
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Schedule IV
Mortgage Loans on Real Estate
(Continued)
December 31, 1995
The following is a summary of activity for the years ended December 1995, 1994
and 1993.
1995 1994 1993
- - --------------------------------------------------------------------------------
- - ----------
Balance at beginning of year $ 3,118,000 $ 883,000 $
7,425,000
Additions during period:
New mortgage
loans/disbursements 821,000 217,000
1,000
Other - Interest
reserve and amortization --- 8,000
10,000
Loans transferred
from real estate owned --- 3,003,000 -
- - --
Loans transferred
from restricted cash --- 501,000 -
- - --
Deductions during period:
Collections of principal (280,000) (1,016,000)
(1,503,000)
Foreclosures --- ---
(5,025,000)
Charge-offs --- (73,000)
(25,000)
Losses from
unconsolidated investees (1,803,000) (405,000) -
- - --
- - --------------------------------------------------------------------------------
- - ----------
$ 1,856,000 $ 3,118,000 $
883,000
================================================================================
==========
See accompanying independent auditors' report.
F-44