-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WMqw3dAMnwcqDrQPIvkmpGMMk+1AFU4wd9vzGNUcAe7Ky4Tu8cbYEqYo3FhTmgZI fteodUPHDmctFOvS1VBiXg== 0000736980-99-000002.txt : 19990402 0000736980-99-000002.hdr.sgml : 19990402 ACCESSION NUMBER: 0000736980-99-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTENNIAL MORTGAGE INCOME FUND II CENTRAL INDEX KEY: 0000773337 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 330112106 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15448 FILM NUMBER: 99582529 BUSINESS ADDRESS: STREET 1: 1540 S LEWIS STREET CITY: ANAHEIM STATE: CA ZIP: 92805 BUSINESS PHONE: 7145028484225 MAIL ADDRESS: STREET 2: 1540 S LEWIS STREET CITY: ANAHEIM STATE: CA ZIP: 92805 10-K 1 CENTENNIAL MORTGAGE INCOME FUND II FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from N/A to N/A Commission File Number: 0-15448 CENTENNIAL MORTGAGE INCOME FUND II (Exact name of registrant as specified in its charter) California 33-0112106 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1540 South Lewis Street, Anaheim, California 92805 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (714)502-8484 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Limited Partnership Units (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark whether if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. YES X NO This report includes a total of 62 pages. PART I ITEM 1. BUSINESS. (a) General Development of the Business Centennial Mortgage Income Fund II (the "Partnership"), a California Limited Partnership, was organized on July 12, 1985. The Partnership's registration statement became effective January 17, 1986. The general partners are John B. Joseph, Ronald R. White and Centennial Corporation ("CC"). Beginning in the fourth quarter of 1987, the Partnership ceased accepting capital contributions and entered its operating stage of business. During the fourth quarter of 1992, 60 months after the closing of its offering stage, the Partnership ceased making new loans and entered the repayment stage. For additional information, See Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (b) Financial Information about Industry Segments The Partnership adopted Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information"("SFAS 131"). Given that the Partnership is in the process of liquidation, the Partnership has identified only one operating business segment which is the business of asset liquidation. The adoption of SFAS 131 did not have an impact on the Partnership's financial reporting. (c) Narrative Description of Business The Partnership was formed to invest in mortgage investments consisting of participating first mortgage loans, other equity participation loans, construction loans, and wrap-around and other junior loans on commercial, industrial and residential income-producing real property. The Partnership's objectives are to preserve the Partnership's invested capital, provide increased cash distributions to the limited partners as the cash flow from the properties underlying mortgage investments increases over the life of the Partnership, provide capital growth through participation in the increased value of the underlying properties and provide liquidating distributions as cash from the sale of real estate owned is no longer needed for development and operations of real estate owned. Due to the long term recession and falling real estate market values in California during the early 1990's, many of the Partnership's loans became delinquent and management of the Partnership elected to foreclose, thereby increasing real estate owned balances. As a result, the Partnership became a direct investor in this real estate. The Partnership has managed its operating properties and completed certain development processes on its raw land over the last several years in an effort to make this real estate more marketable. The improving real estate markets and development of the Partnership's assets have enabled the Partnership to liquidate the majority of its assets. As of December 31, 1998, the Partnership's assets consisted of $1,010,000 in cash and $3,810,000 in other assets. Based upon the current stated maturity dates of the Partnership's $598,000 in notes receivable and the improving real estate markets, it is possible that these assets could be liquidated as soon as July 2000. Real estate owned by the Partnership reached a peak at December 31, 1993 when its total carrying value, before allowance for possible losses, reached $24,170,000. The real estate owned balance before allowance for possible losses then decreased to $11,284,000 at December 31, 1994 and increased to $11,314,000 at year end 1995. Real estate owned increased again to $11,316,000 as of December 31, 1996, decreased to $10,827,000 as of December 31, 1997 and decreased again to $4,599,000 as of December 31, 1998. As of December 31, 1998, the Partnership had established a $1,411,000 allowance for possible losses on its real estate owned. The Partnership is actively marketing the remaining real estate assets for sale. The liquidation of assets during 1998 enabled the Partnership to make a $3,496,000 cash distribution to its limited partners in October 1998. As of December 31, 1998, the Partnership has entered into a purchase and sale agreement to sell a portion of the 45 acres in Sacramento with an aggregate book value before allowance for losses of approximately $900,000. Management currently estimates that the net sale proceeds from this transaction, if consummated, will be approximately equal to the net book value after allowances for losses. This sale is subject to numerous uncertainties and there is a significant possibility that the transaction will not be consummated. Risks of the year 2000 Issue As discussed above, the Partnership is in the process of liquidating its remaining assets. As of December 31, 1998, the Partnership held only cash, three notes secured by real estate and two properties. Management anticipates that the Partnership will hold a lesser number of assets by January 1, 2000. Management does not believe that the value of any of these assets is subject to valuation risk as a result of the year 2000 issues, other than general economic climate issues that might arise. None of the Partnership's assets have any equipment with computerized components essential to their operations. Although the Partnership has made some changes already to its software, these changes have not been tested. The Partnership intends to begin testing changes made to its existing software in the next few months. The Partnership has not, and does not contemplate spending any significant amount of funds to upgrade its computer systems inasmuch as virtually all of its computer needs could easily be met with existing "over the counter" software and hardware. The cost of this software and hardware, if needed, should not exceed $10,000. The only exception to this is the computer software which the Partnership uses to track its limited partners and their addresses. The Partnership has made a preliminary evaluation of this software with its outside software consultant and believes that it can be modified for less than $10,000. Even if attempts to correct deficiencies in the software without spending significant sums are not successful, the Partnership anticipates that it could convert its systems to standard spreadsheet or data base programs at a nominal cost. Cautionary Statements Regarding Forward-Looking Information The Partnership wishes to caution readers that the forward- looking statements contained in this Form 10-K under "Item 1. Business," "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-K involve known and unknown risks and uncertainties which may cause the actual results, performance or achievements of the Partnership to be materially different from any future results, performance or achievements expressed or implied by any forward-looking statements made by or on behalf of the Partnership. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Partnership is filing the following cautionary statements identifying important factors that in some cases have affected, and in the future could cause the Partnership's actual results to differ materially from those expressed in any such forward- looking statements. The factors that could cause the Partnership's results to differ materially include, but are not limited to, general economic and business conditions, including interest rate fluctuations; the impact of competitive products and pricing; success of operating initiatives; adverse publicity; changes in business strategy or development plans; quality of management; availability, terms and deployment of capital; the results of financing efforts; business abilities and judgment of personnel; availability of qualified personnel; employee benefit costs and changes in, or the failure to comply with government regulations. (d) Financial Information about Foreign and Domestic Operations and Export Sales Not applicable. ITEM 2. DESCRIPTION OF PROPERTY. No properties or facilities are owned or leased by the Partnership other than real estate owned which was obtained through foreclosure of real estate loans receivable, as described in notes 5 and 6 of Notes to Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS. There are no material pending legal proceedings other than ordinary routine litigation incidental to the registrant's business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters have been submitted to a vote of security holders. PART II ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP UNITS AND RELATED SECURITY HOLDER MATTERS. (a) Securities Market Information There is no market for the Partnership's limited partnership units, nor is one expected to develop. The Partnership units were offered by the Partnership through selected dealers who were members of the National Association of Securities Dealers, Inc. (b) Approximate Number of Holders of Limited Partnership Units As of December 31, 1998, there were approximately 3,120 holders of limited partnership units. (c) Partnership Distributions The Partnership paid a $3,496,000 cash distribution to limited partners in October 1998. This distribution equaled approximately $120.00 per limited partnership unit. Management intends to distribute cash flow available for distribution (as defined in the Partnership Agreement), if any, on a periodic basis as substantial cash balances are accumulated from property sales and/or loan payoffs. Distributions may vary in amount and may be suspended based upon advice from legal counsel until the possibility of any unforeseen legal action against the Partnership becomes remote. See Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ITEM 6. SELECTED FINANCIAL DATA
Years ended (dollars in thousands, except per unit data) - -------------------------------------------------------------------------------- - ---------- - -------------------------------------------------------------------------------- - ---------- 12/31/98 12/31/97 12/31/96 12/31/95 12/31/94 - -------------------------------------------------------------------------------- - ---------- Consolidated Statement of Operations Data: Total revenue........... $ 479 $ 170 $ 251 $ 279 $ 433 Net loss................ (754) (929) (1,515) (2,377) (2,243) Net loss per limited partnership unit- basic and diluted... (25.87) (31.88) (51.99) (81.57) (76.97) Consolidated Balance Sheet Data: Total loans before allowance for losses 598 1,029 1,068 1,856 3,118 Total real estate owned before allowance for losses............. 4,599 10,827 11,316 11,314 11,284 Total assets............. 4,820 9,354 10,132 11,605 13,997 Partners' equity......... 4,514 8,764 9,693 11,208 13,585
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. General Net loss and loss per limited partnership unit were $(754,000) and $(25.87) for the year ended December 31, 1998, down from $(929,000) and $(31.88) for the year ended December 31, 1997 and $(1,515,000) and $(51.99) in 1996. Major changes between income statement components between 1998 and 1997 included: i) a $227,000 increase in the provision for losses; ii) a $146,000 decrease in expenses associated with non-operating real estate owned; iii) a $73,000 increase in general and administrative- affiliates; iv) a $72,000 increase in interest on interest- bearing deposits; and v) a $192,000 increase in gain on sale of property. The decrease in loss for 1997 as compared to 1996 is primarily due to a significant decrease in share of losses in unconsolidated investees. A detailed discussion of the significant changes in each component of revenue and expense for each of the years in the three year period ended December 31, 1998 is included in the following paragraphs. Liquidity and Capital Resources At December 31, 1998, the Partnership had $1,010,000 in unrestricted cash and interest-bearing deposits. Additional sources of funds are expected to be from the repayments of notes receivable and the sale of real estate owned. Future operations of real estate owned are not expected to be a significant source of funds. During 1998, the Partnership's principal sources of cash were: i) $4,823,000 of cash proceeds from the sale of real estate; ii) $615,000 in principal payments received on loans; iii) $56,000 in net operating income from operating property; iv) $137,000 in principal advances on notes payable, net of repayments; and v) $106,000 in interest income on loans and interest bearing deposits. The Partnership's principal uses of cash during 1998 were: i) a $3,496,000 cash distribution to limited partners; ii) $321,000 in general and administrative costs; iii) $295,000 in advances on loans to LCR; iii) $615,000 in real estate taxes paid; iv) $101,000 in other expenses associated with non- operating real estate owned; v)$154,000 in additions to real estate owned; and vi) $16,000 in interest payments. As of December 31, 1998, the Partnership has entered into a purchase and sale agreement to sell a portion of the 45 acres in Sacramento with an aggregate book value before allowance for losses of approximately $900,000. Management currently estimates that the net sale proceeds from this transaction, if consummated, will be approximately equal to the net book value after allowances for losses. This sale is subject to numerous uncertainties and there is a significant possibility that the transaction will not be consummated. As of December 31, 1998, the Partnership had no unfunded loan commitments to nonaffiliates. The Partnership's notes payable commitments for 1999 consist of interest and non-balloon principal payments due of approximately $22,000. In addition to the note payable commitments, the Partnership's principal capital requirements include: i) property taxes and bonds on real estate owned of approximately $52,000 payable in 1999, and ii) selling, general and administrative costs. Effective with the third quarter of 1991, the Partnership had suspended making any cash distributions to partners, due to a decline in liquidity and the uncertainty of the cash requirements for existing and potential real estate owned. Pursuant to the Partnership Agreement, 60 months after the closing of the offering, cash proceeds from mortgage investments are no longer available for reinvestment by the Partnership. Through the latter part of 1997, the general partners believed that the cash proceeds from mortgage reductions and the sale of real estate owned should be retained by the Partnership until such time as it was assured that it had sufficient cash to fulfill any potential operating requirements. Due to the substantial real estate owned balances, these potential operating costs were considered to be very significant. As a result of the substantial decrease in real estate owned which has occurred, the general partners determined that the Partnership could make a $3,496,000 distribution to its limited partners in October 1998. The general partners have had discussions with legal counsel regarding the amounts of cash reserves that would be prudent to be retained by the Partnership at this time. In light of the substantial amount of real estate that the Partnership has held an interest in over the years, there is always the potential for future litigation to arise, particularly in the area of toxic contamination. Although the general partners are not aware of any threatened litigation, or litigation that is likely to arise, they have determined that the Partnership should retain at least $1,000,000 in cash reserves to be available to defend the Partnership in any future litigation which may arise. It is expected that these reserves will be retained until such time as legal counsel advises the general partners that the potential for any future litigation is remote. Results of Operations The Partnership's non-cash assets declined from $9,159,000 as of December 31, 1997 to $3,810,000 as of December 31, 1998. The substantial reduction in non-cash assets during 1998 caused many changes in the Partnership's results of operations as discussed below. Interest income on loans to affiliates, including fees was $16,000 for 1998 and $81,000 for 1996. There was no interest income on loans to affiliates for 1997 because the loans receivable from unconsolidated investees were placed on nonaccrual status in late 1996. This income is related to the Silverwood joint venture, which was constructing homes in Lancaster, California. The real estate market in Lancaster has not seen the improvement that many other areas in California have. As a result, the Partnership placed certain of its loans to Silverwood on nonaccrual status during 1996, thus decreasing interest income during the latter half of 1996 and all of 1997. The 1998 interest income resulted from the payoff of one of the nonearning Silverwood loans. Interest income on loans to nonaffiliates, including fees, was $12,000, $22,000 and $21,000 in 1998, 1997 and 1996, respectively. Interest income on loans to nonaffiliates continues to decrease due to payoffs of existing loans. Loans on "nonaccrual" refers to loans upon which the Partnership is no longer accruing interest. Management's policy is to cease accruing interest on loans when collection of interest and/or principal payments has become doubtful. There were no loans on nonaccrual, other than loans to affiliates, as of December 31, 1998, 1997 and 1996. Real estate loans receivable, earning represents two loans with a cumulative balance of $581,000 as of December 31, 1998. These loans, from an unaffiliated party, were received in connection with the payoff of a previously nonearning loan to affiliate. Real estate loans receivable from unconsolidated investee, nonearning is comprised of one past due loan totaling $22,000 as of December 31, 1998. This loan is partially offset by $5,000 in share of losses in unconsolidated investee. The real estate owned balance before allowance for possible losses at December 31, 1998, 1997 and 1996 was $4,599,000, $10,827,000 and $11,316,000, respectively. The balance at December 31, 1998 is comprised of two properties and is offset by a $1,411,000 allowance for possible losses. As discussed above, the Partnership had entered into a purchase and sale agreement on a portion of the 45 acres in Sacramento as of December 31, 1998. Management is attempting to sell the remaining properties. The following sections entitled "Nonaccrual Loans and Other Loans to Affiliates" and "Real Estate Owned" provide a detailed analysis of these assets. Nonaccrual Loans and Other Loans to Affiliates Loans on nonaccrual status during the year ended December 31, 1998 are summarized below: During 1994, the Partnership converted a 50 percent participation in a note secured by a second trust deed into a 50 percent participation in a $2,115,000 unsecured note representing a workout loan due from LCR, an affiliate. This loan and an additional loan funded by Centennial Mortgage Income Fund ("CMIF") reflect the majority of the cost basis of 179 residential lots which LCR contributed to Silverwood. LCR's only source of repayment of this note was the excess, if any, of proceeds from the sale of the fully developed lots over the amount of secured debt. Due to the continuing decline in value of the lots from 1994 through 1997, management did not expect that this loan would ever be repaid. As a result, the loan was placed on nonaccrual. The participating principal balance and nonaccrued interest balances at December 31, 1997 were $1,059,000 and $324,000, respectively. As discussed in note 5 of Notes to Consolidated Financial Statements, the Partnership had reduced the carrying value of this note by $1,059,000, a portion of its share of losses from this unconsolidated investee as of December 31, 1997. During 1998, the remaining lots were sold and LCR received no cash from the sale. Accordingly, the Partnership charged off this note against the $1,059,000 of previously recorded losses from unconsolidated investee during 1998. During 1994 and 1995, LCR had evaluated various alternative strategies for liquidating its investment in the 179 lots in Lancaster. LCR determined that its best course of action appeared to be the full-scale buildout and sale of single-family homes since the market for finished lots had fallen so significantly. LCR obtained construction financing commitments from the Partnership and CMIF. LCR entered into a joint venture agreement entitled Silverwood with Home Devco to construct and sell single-family homes at the project. Silverwood began constructing a model home complex at the project in June 1995. Construction commenced in September 1995 on Phase I at the project. Construction of Phase II of the project was commenced in February 1997. At December 31, 1997, the Partnership held a 50 percent participation in three notes due from Silverwood consisting of a land development loan, a model home loan and a home construction loan with combined disbursed balances of $1,191,000. The Partnership's disbursed balance of the $3,266,000 development loan at December 31, 1997 was $942,000. The Partnership's disbursed balance of the $490,000 model loan at December 31, 1997 was $245,000. At December 31, 1997, the Partnership's disbursed balance of the $1,034,000 Phase I construction loan was $4,000. As discussed in note 5 of Notes to Consolidated Financial Statements, the Partnership had reduced the carrying value of the land development loan by $377,000, the remainder of its share of losses in unconsolidated investee as of December 31, 1997. During 1998, all but one of the remaining homes were sold and all of the undeveloped lots were sold. The Partnership funded additional advances of $212,000 and $83,000 on the development and the Phase I construction loan, respectively. The Partnership recorded an additional $96,000 in losses from unconsolidated investee during 1998 and received cash payments of $100,000, $245,000 and $65,000 on the development loan, the model loan and the Phase I loan, respectively. The Partnership also received notes receivable totaling $586,000 from an unaffiliated party as a partial repayment of the development loan in connection with the sale of the remaining lots. These new notes are secured by the 157 lots and had a combined principal balance of $581,000 as of December 31, 1998. The remaining principal balances of the development loan, the model loan and the Phase I loan were $468,000, $-0- and $22,000, respectively, after the 1998 advances and payments received. The Partnership charged off the development loan against $468,000 of the remaining losses from unconsolidated investee, leaving a balance of losses from unconsolidated investee of $5,000 which has been offset against the $22,000 balance of the Phase I loan. Real Estate Owned A description of the Partnership's principal real estate owned during the year ended December 31, 1998 follows: Office Building in San Bernardino, California The Partnership funded a loan during January 1988 with an original committed amount of $921,000 which was secured by a second trust deed on an office building comprised of 15,984 square feet of rentable space located in San Bernardino, California. The loan was provided as gap financing behind a first deed of trust in the amount of $350,000 to another financial institution. The borrower was unable to payoff the loan at maturity and the Partnership foreclosed on April 20, 1993. The project was 74 percent leased as of December 31, 1997 and 83 percent leased as of December 31, 1998. Additional leases signed subsequent to December 31, 1998 have increased the occupancy to 92 percent, however, a number of leases expire in 1999 and occupancy levels could decline as a result. The property generated net operating income of $56,000 during 1998. The property is being marketed for sale and management has seen an increase in interest in the property as a result of the installation of an elevator. The carrying value before allowance for possible losses at December 31, 1998 was $914,000. The Partnership has recorded a $261,000 allowance for losses related to this property as of December 31, 1998, $11,000 of which was recorded in 1998. As of December 31, 1998, the property was encumbered by a new note secured by a first trust deed of $234,000 which matures June 1, 2008. The Partnership used the majority of the proceeds from this new note to payoff the prior note and pay for several improvements to the building including the elevator. 45 Acres in Sacramento, California The Partnership funded a loan in 1987 with a committed amount of $4,000,000 secured by a first trust deed on 44.52 acres in Sacramento, California. The loan was provided for the development of offsite improvements. The maturity date was February 1, 1991. The borrower was unable to obtain construction financing and bring interest current. The Partnership accepted a grant deed on the property on March 10, 1992. The property is zoned for multi-family and light industrial use. A portion of the property is adjacent to Highway 99 and has good freeway visibility. The Partnership rezoned and subdivided a portion of the property to facilitate one escrow on a 6.5 acre portion of the property without freeway visibility. This transaction closed escrow during the fourth quarter of 1997. During the first quarter of 1998, the Partnership opened escrow on a 9.45 acre portion of the property which also did not have freeway visibility. The purchase price was $875,000 and the transaction was subject to the buyer obtaining certain senior housing tax credits through a governmental lottery. The buyer did not receive the tax credits and escrow was cancelled. During the first quarter of 1999, the Partnership again opened escrow with a new buyer for a purchase price of $900,000 on the 9.45 acre portion of the property. The escrow is scheduled to close at the end of the second quarter of 1999. However, there is no assurance that this transaction will ever be consummated. Both the parcel sold and the parcel in escrow are zoned for residential use. The balance of the property is zoned for industrial/commercial use. There has been only limited industrial/commercial use development activity in the area surrounding this property during the past couple of years. In light of this limited activity and management's objective of liquidating the Partnership's remaining assets as soon as practical, management may elect to sell this property at prices below its March 31, 1998 appraised value. Accordingly, the Partnership recorded an additional $504,000 provision for losses against the carrying value of this property during 1998. At December 31, 1998, the carrying value before allowance for possible losses was $3,685,000. The Partnership has recorded a $1,150,000 allowance for losses related to this property as of December 31, 1998. Proposed Marina and Condominiums in Redwood City, California On April 7, 1989, the Partnership foreclosed on a land loan located in Redwood City, California with an original committed amount of $3,487,000. The purpose of the loan was to acquire the land and provide for the planning of a 122-slip marina plus an office building and restaurant. The original maturity date of October 21, 1986 was extended to March 1, 1987. In March 1987, the borrower filed bankruptcy. The property had been in escrow since 1996 for a purchase price of $4,000,000. Due to some pending costs to resolve access issues, the price was reduced to $3,900,000. It closed escrow June 12, 1998 and the Partnership received net proceeds from the sale of $3,699,000.During the first quarter of 1998, the Partnership reversed $55,000 of its previously recorded provision for losses against this property. The Partnership recorded a $71,000 gain on sale on this transaction. 10.66 Acres in Roseville, California The Partnership funded a loan in 1990 with an original commitment of $2,779,000 secured by a second deed of trust on 982 acres in Roseville, California. The borrower failed to make the required yearly principal payment to the first and second trust deed holders. The first trust deed holder filed a notice of default for nonpayment. Management negotiated a settlement agreement to accept a 10.66 acre commercial site as payment in full for the $2,779,000 note. The property had been in escrow for an all cash purchase price of $1,200,000 and closed escrow June 30, 1998 with the Partnership receiving net proceeds of $1,124,000. The Partnership recorded a $121,000 gain on sale on this transaction. Interest on Interest-Bearing Deposits Interest on interest-bearing deposits was $78,000 in 1998, $6,000 in 1997 and $21,000 in 1996. The increase in interest on interest-bearing deposits for 1998 is primarily the result of higher cash balances due to the sale of real estate owned. The decreases in interest on interest-bearing deposits in 1997 and 1996 are primarily the result of lower cash balances due to a lack of the sale of real estate owned. Interest on interest- bearing deposits represents interest earned on Partnership funds invested, for liquidity, in time certificate and money market deposits. Income from Operations of Real Estate Owned Income from operations of real estate owned consists of operating revenues of $160,000 in 1998, $131,000 in 1997 and $127,000 in 1996. The 1998, 1997 and 1996 revenues are from the office building in San Bernardino. The increase for 1998 is primarily due to increased occupancy. Gain on Sale of Real Estate Owned As discussed above, the Partnership recorded gains of $71,000 and $121,000 on the sales of the Redwood City and Roseville properties, respectively, during 1998. There were no gains or losses on the sale of real estate during 1997 or 1996. Provision for Possible Losses The provision for possible losses was $460,000 in 1998 and $233,000 in 1997. There was no provision for possible losses recorded in 1996. The 1998 provision is comprised of a $504,000 provision on the 45 acres in Sacramento, an $11,000 provision on the office building in San Bernardino offset by a reversal of $55,000 on the proposed marina and condominiums in Redwood City. The 1997 provision relates to the 45 acres in Sacramento and the proposed marina and condominiums in Redwood City. Management believes that the allowance for possible losses at December 31, 1998 is adequate to absorb the known risks in the Partnership's loan and real estate owned portfolios. Other Expenses The Partnership has invested in corporations in which it has less than a majority ownership and accounts for these investments using the equity method. The Partnership's share of losses in these unconsolidated investees was $96,000 for 1998, $125,000 for 1997 and $1,059,000 for 1996. The 1998 and 1997 share of losses consist primarily of operating losses from the sale of homes and finished lots recorded by LCR. The 1996 share of losses consists primarily of provisions for losses on real estate investments recorded by LCR and BKS Development, Inc. ("BKS") related to the 179 lots in Lancaster and a 283 acre project in Bakersfield owned by BKS. The 1996 losses also include additional costs related to the sale of homes in Lancaster. The Partnership's remaining investment in and loans receivable from these unconsolidated investees has been reduced to $17,000 as of December 31, 1998. Operating expenses from operations of real estate owned were $92,000 in 1998, $87,000 in 1997 and $76,000 in 1996. The increase for 1998 can be attributed to several air conditioning unit repairs at the office building in San Bernardino. The increase for 1997 is due primarily to an increase in property tax expense. Operating expenses from operations of real estate owned paid to affiliates were $12,000 each for 1998, 1997 and 1996. The expenses consist of property management fees paid to affiliates of the general partners. Expenses associated with non-operating real estate owned were $232,000 in 1998, $378,000 in 1997 and $344,000 in 1996. The expenses relate to the proposed marina and condominiums in Redwood City, the 45 acres in Sacramento and the 10.66 acres in Roseville. These expenses include property taxes of $130,000, $234,000 and $257,000 for 1998, 1997 and 1996, respectively. The decrease from 1997 to 1998 is principally attributable to the sale of the proposed marina and condominiums in Redwood City and the 10.66 acres in Roseville in June 1998. The increase in costs from 1996 to 1997 is primarily due to an increase in legal expenses and other consulting fees associated with the escrow on the proposed marina and condominiums in Redwood City, the 45 acres in Sacramento and the 10.66 acres in Roseville. These increases were partially offset by a reduction in property taxes due to tax refunds received from appeals filed in 1995. Depreciation and amortization expense was $4,000 in 1998, $6,000 in 1997 and $8,000 in 1996 for the office building in San Bernardino and office equipment. The decreases are due to assets becoming fully amortized. Interest expense was $16,000 for 1998, $12,000 for 1997 and $16,000 for 1996. This interest expense relates to the debt secured by the office building in San Bernardino. Interest expense from 1997 to 1998 increased as a result of the refinance of property with a new $235,000 note bearing interest at 8.64 percent per annum. The decrease from 1996 to 1997 is the result of the reduction of the outstanding balance of the debt on the previous note. General and administrative expenses, affiliates were $257,000, $184,000 and $173,000 in 1998, 1997 and 1996, respectively. These expenses are primarily salary allocation reimbursements paid to affiliates for the management of the Partnership's assets. The increase for 1998 is primarily attributable to $67,000 in accrued severance pay as discussed in note 8 of Notes to Consolidated Financial Statements. The increase in 1997 is primarily due to the costs associated with the pending and closed sales transactions. General and administrative expenses, nonaffiliates was $64,000, $62,000 and $78,000 in 1998, 1997 and 1996, respectively. The decrease in 1997 is due primarily to a decrease in investor reporting and moving expenses. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Since the Partnership does not invest in any derivative financial instruments or enter into any activities involving foreign currencies, its market risk associated with financial instruments is limited to the effect that changing domestic interest rates might have on the fair value of its bank deposits, notes receivable and notes payable. As of December 31, 1998, the Partnership held fixed rate bank deposits with carrying values totaling $1,010,000, variable rate mortgage note receivables with carrying values totaling $17,000 and fixed rate mortgage notes receivable with carrying values totaling $581,000. The bank deposits all had maturities of less than ninety days. A substantial portion of the variable rate mortgage notes were repaid in March 1999. The fixed rate mortgage notes had maturities ranging from four to nineteen months as of December 31, 1998 and bore interest at rates ranging from 8 percent to 10 percent per annum. The estimated fair value of all of these assets was estimated to be equal to their carrying values as of December 31, 1998. Increasing interest rates could have an adverse effect on the fair value of the Partnership's fixed rate notes receivable and/or the value of the underlying real estate collateral which secure the Partnership's note receivable. Management currently intends to hold the remaining fixed rate receivables until their respective maturities. Accordingly, the Partnership is not exposed to any material cash flow or earnings risk associated with these receivables. Given the relatively short-term maturities of these assets, management does not believe the Partnership is exposed to any significant market risk related to their fair value. The Partnership had a single interest bearing note payable outstanding as of December 31, 1998. This note is a fixed rate note. Accordingly, the Partnership does not believe it is is not exposed to any cash flow or earnings risk associated with this note as the Partnership expects to repay the note at or prior to maturity. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Consolidated Financial Statements and Schedules attached hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON REPORTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Identification of General Partners The Partnership is managed by its general partners. The individual general partners' principal occupations and affiliations during the last five years are described in the following table. The general partners devote to the affairs of the Partnership such portion of their time as they consider necessary for the effective supervision of its affairs. Name, Age and Position Principal Occupation and Affiliation during Last Five Years - ----------------------------------------------------------------- John B. Joseph Age 60 General Partner John B. Joseph is currently Vice Chairman of the Board of Directors and Vice President of Centennial Corporation. He is also on the board of directors for West Coast Bancorp ("WCB"), a publicly-held bank holding company operating in California and its subsidiary, Sunwest Bank. He had been Chairman of the Board and Chief Executive Officer until 1998. He was Chairman of the Board of Directors of WCB since its inception in 1981 and CEO from April 1991 until 1998. Mr. Joseph also serves, or has served, in the following capacities during the past five years: Vice Chairman of the Board of Directors of The Centennial Group, Inc. ("CGI"), a publicly-owned real estate development corporation, from February 1987 to July 1993; Senior Executive Vice President of CGI from July 1987 to July 1993; general partner of various public and private limited partnerships engaged in real estate development and lending activities. Mr. Joseph has also held various positions in the subsidiaries of WCB and CGI. Ronald R. White Age 52 General Partner Ronald R. White is currently President and CEO of Centennial Corporation. He was also Executive Vice President and Vice Chairman of the Board of Directors of WCB until 1998. Mr. White served in these capacities since April 1987. Mr. White also serves, or has served, in the following capacities during the past five years: Chairman of the Board of Directors, President and Chief Executive Officer of CGI from February 1987 to July 1993; general partner of various public and private limited partnerships engaged in real estate development and lending activities. Mr. White has also held various positions in the subsidiaries of WCB and CGI. Mr. Joseph has 30 years of experience in asset management in both securities and real estate. Mr. Joseph has worked in all areas of real estate. In the past, Mr. Joseph has been engaged in the syndication and management of over $100 million worth of income property, including industrial complexes, shopping centers, business centers, office buildings, commercial properties and residential units. Mr. White's career spans the financial and management fields in both securities and real estate. Mr. White has 28 years of experience in asset management. In the past, Mr. White has been engaged in the syndication and management of over $100 million worth of income property including industrial complexes, shopping centers, business centers, office buildings, commercial properties and residential units. Centennial Corporation ("CC"), a privately-held corporation, whose stock is owned by affiliates of Ronald R. White and John B. Joseph, was voted in as new general partner in the first quarter of 1994. CC was incorporated in 1983 to engage in the real estate lending business and to provide consulting services. Identification of Executive Officers The Partnership does not have officers as such. The affairs of the Partnership are managed by the general partners noted above. ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS The following table summarizes the types and recipients of compensation paid and to be paid to the general partners and affiliates by the Partnership. Amount Earned/ Type of Reimbursable for the Compensation & Year Ended Name of Entity Description of Payment December 31, 1998 - ----------------------------------------------------------------- Operating Stage: Application and An amount up to a maximum $ --- commitment fees of 3 percent of the gross - - the general proceeds of the offering partner or on any single mortgage affiliates investment, and an aggregate maximum of 7 percent of the gross proceeds of the offering, payable to the general partners or affiliates. The application and commitment fees are payable solely from borrowers and prospective borrowers and not directly from the proceeds of the offering. General partners' The general partners or $ 269,000 (1) reimbursable affiliates shall be entitled expenses to reimbursement for certain - general expenses, subject to the partner or conditions of the Partnership affiliates Agreement. Amount Earned/ Type of Reimbursable for the Compensation & Year Ended Name of Entity Description of Payment December 31, 1998 - ----------------------------------------------------------------- General partners' A 5 percent interest in $ --- interest in cash cash flow available for distributions distribution for any year - - general until all limited partners or partnership unit holders affiliates have received an amount equal to a 12 percent non-cumulative annual return on their adjusted invested capital, and 10 percent of the balance of any cash flow available for distribution for such year. Mortgage 1/4 of 1 percent of the $ --- investment maximum amount funded or to servicing fees be funded by the Partnership on mortgage investments serviced by CC Repayment Stage: General partners' One percent of mortgage $ --- share of reductions until all limited mortgage partners have received an reductions amount equal to their adjusted - - general invested capital and cumulative partners or distributions (including cash affiliates flow available for distribution) equal to a 12 percent annual return with respect to their adjusted invested capital, and 15 percent of the balance of any mortgage reductions. (1) Such reimbursable expenses include salaries and related salary expenses for services which could be performed directly for the Partnership by independent parties such as legal, clerical, accounting, financial reporting, governmental reporting, transfer agent, data processing and duplication services. Such reimbursement of expenses will be made regardless of whether any distributions are made to the limited partners. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Security Ownership of Certain Beneficial Owners No persons are known by the Partnership to own beneficially more than 5 percent of the limited partnership units at December 31, 1998. (b) Security Ownership of Management The percent of units owned by Management is less than 1 percent. Name and address Nature and Number of Percent of of Beneficial Owner Units Outstanding Units Outstanding - ----------------------------------------------------------------- Ronald R. White 1540 S. Lewis St. Anaheim, CA 92805 Limited partnership units: 1 --- (c) Change in Control The Partnership knows of no contractual arrangements which may at a subsequent date result in a change of control of the Partnership. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. This disclosure is made in note 5 of Notes to the Consolidated Financial Statements incorporated in this filing. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) and (a)(2) - See Index to Consolidated Financial Statements and Schedules attached hereto. (a)(3) - Exhibits. None. (b)(4) - Reports on Form 8-K. None. Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A California Limited Partnership By:/s/John B. Joseph _________________________________ John B. Joseph General Partner March 31, 1999 By:/s/Ronald R. White _________________________________ Ronald R. White General Partner March 31, 1999 By: CENTENNIAL CORPORATION General Partner /s/John B. Joseph _________________________________ John B. Joseph Executive Vice President March 31, 1999 /s/Ronald R. White _________________________________ Ronald R. White President March 31, 1999 /s/Joel H. Miner _________________________________ Joel H. Miner Chief Financial Officer March 31, 1999 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership ANNUAL REPORT Form 10-K Consolidated Financial Statements Items 8, 14(a)(1) and 14(a)(2) December 31, 1998, 1997 and 1996 (With Independent Auditors' Report Thereon) CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Items 8, 14(a)(1) and 14(a)(2) Index to Consolidated Financial Statements and Schedules Consolidated Financial Statements Page Independent Auditors' Report............................. F-2 Consolidated Balance Sheets -- December 31, 1998 and 1997............................. F-3 Consolidated Statements of Operations -- Years ended December 31, 1998, 1997 and 1996........... F-5 Consolidated Statements of Partners' Equity -- Years ended December 31, 1998, 1997 and 1996........... F-7 Consolidated Statements of Cash Flows -- Years ended December 31, 1998, 1997 and 1996........... F-8 Notes to Consolidated Financial Statements............................................ F-11 Schedules Schedule III - Consolidated Real Estate Owned and Accumulated Depreciation and Amortization......... F-30 Schedule IV - Mortgage Loans on Real Estate............. F-33 All other schedules are omitted as the required information is inapplicable, or the information is presented in the consolidated financial statements or notes thereto. F-1 INDEPENDENT AUDITORS' REPORT To the General Partners Centennial Mortgage Income Fund II: We have audited the consolidated financial statements of Centennial Mortgage Income Fund II, a limited partnership, and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Centennial Mortgage Income Fund II and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG LLP Orange County, California March 19, 1999 F-2 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Consolidated Balance Sheets
December 31, 1998 and 1997 Assets 1998 1997 - ----------------------------------------------------------------- Cash and cash equivalents (note 5) $ 1,010,000 $ 195,000 Real estate loans receivable, earning 581,000 215,000 Real estate loans receivable from unconsolidated investees, nonearning (note 5) 17,000 814,000 - ----------------------------------------------------------------- 598,000 1,029,000 Less allowance for possible loan losses (note 3) --- 15,000 - ----------------------------------------------------------------- Net real estate loans receivable 598,000 1,014,000 - ----------------------------------------------------------------- Real estate owned, held for sale (notes 6 and 7) 4,599,000 10,827,000 Less allowance for possible losses on real estate owned (note 4) 1,411,000 2,702,000 - ----------------------------------------------------------------- Net real estate owned 3,188,000 8,125,000 - ----------------------------------------------------------------- Due from unconsolidated investee 2,000 16,000 Other assets, net 22,000 4,000 - ----------------------------------------------------------------- $ 4,820,000 $ 9,354,000 ================================================================= F-3 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Consolidated Balance Sheets (Continued)
December 31, 1998 and 1997 Liabilities and Partners' Equity - ----------------------------------------------------------------- Note payable (note 7) $ 234,000 $ 97,000 Accounts payable and accrued liabilities 72,000 9,000 Property taxes payable on real estate owned --- 484,000 - ----------------------------------------------------------------- Total liabilities 306,000 590,000 - ----------------------------------------------------------------- Partners' equity (deficit) -- 29,141 limited partnership units outstanding in 1998 and 1997 General partners (56,000) (195,000) Limited partners 4,570,000 8,959,000 - ----------------------------------------------------------------- Total partners' equity 4,514,000 8,764,000 Commitments (note 8) Contingencies (note 9) - ----------------------------------------------------------------- $ 4,820,000 $ 9,354,000 =================================================================
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, 1998, 1997 and 1996 1998 1997 1996 - ----------------------------------------------------------------- Revenue: Interest on loans to affiliates, including fees (note 5) $ 16,000 $ --- $ 81,000 Interest on loans to nonaffiliates, including fees 12,000 22,000 21,000 Interest on interest-bearing deposits (note 5) 78,000 6,000 21,000 Income from operations of real estate owned 160,000 131,000 127,000 Gain on sale of real estate owned 192,000 --- --- Other 21,000 11,000 1,000 - ----------------------------------------------------------------- Total revenue 479,000 170,000 251,000 - ----------------------------------------------------------------- Expenses: Provision for possible losses (notes 3 and 4) 460,000 233,000 --- Share of losses in unconsolidated investees (note 5) 96,000 125,000 1,059,000 Operating expenses from operations of real estate owned 92,000 87,000 76,000 Operating expenses from operations of real estate owned paid to affiliates (note 5) 12,000 12,000 12,000 F-5 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Operations (Continued) Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 - ----------------------------------------------------------------- Expenses associated with non-operating real estate owned 232,000 378,000 344,000 Depreciation and amortization expense 4,000 6,000 8,000 Interest expense 16,000 12,000 16,000 General and administrative, affiliates (note 5) 257,000 184,000 173,000 General and administrative, nonaffiliates 64,000 62,000 78,000 - ----------------------------------------------------------------- Total expenses 1,233,000 1,099,000 1,766,000 - ----------------------------------------------------------------- Net loss $ (754,000) $ (929,000) $(1,515,000) ================================================================= Net loss per limited partnership unit - basic and diluted $ (25.87) $ (31.88) $ (51.99) =================================================================
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, 1998, 1997 and 1996 Total General Limited Partners' Partners Partners Equity - ----------------------------------------------------------------- Balance (deficit) at December 31, 1995 $ (195,000) $ 11,403,000 $ 11,208,000 Net loss --- (1,515,000) (1,515,000) - ----------------------------------------------------------------- Balance (deficit) at December 31, 1996 (195,000) 9,888,000 9,693,000 Net loss --- (929,000) (929,000) - ----------------------------------------------------------------- Balance (deficit) at December 31, 1997 (195,000) 8,959,000 8,764,000 Net loss --- (754,000) (754,000) Distribution to limited partners --- (3,496,000) (3,496,000) Reduction in general partner deficit capital account (note 1) 139,000 (139,000) --- - ----------------------------------------------------------------- Balance (deficit) at December 31, 1998 $ (56,000) $ 4,570,000 $ 4,514,000 =================================================================
See accompanying notes to consolidated financial statements F-7 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows Years ended December 31, 1998, 1997 and 1996
1998 1997 1996 - ----------------------------------------------------------------- Cash flows from operating activities: Net loss $ (754,000) $ (929,000) $ (1,515,000) Adjustments to reconcile net loss to net cash used in operating activities: Provision for possible losses 460,000 233,000 --- Amortization of unearned loan fees --- --- (1,000) Depreciation and amortization expense 4,000 6,000 8,000 Interest accrued to principal on loans to affiliates --- --- (82,000) Gain on sale of real estate owned (192,000) --- --- Equity in losses of unconsolidated investees 96,000 125,000 1,059,000 Changes in assets and liabilities: (Increase) decrease in other assets (22,000) 2,000 1,000 Increase (decrease) in accounts payable and accrued liabilities 63,000 (3,000) 6,000 Increase (decrease) in property taxes payable on real estate owned (484,000) 201,000 80,000 Decrease in payable to affiliates --- (1,000) (2,000) - ----------------------------------------------------------------- Net cash used in operating activities (829,000) (366,000) (446,000) - ----------------------------------------------------------------- F-8 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows (Continued) Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 - ----------------------------------------------------------------- Cash flows from investing activities: Principal collected on loans 615,000 293,000 148,000 Advances on loans made to affiliates (295,000) (179,000) (336,000) Capital expenditures for real estate owned (154,000) (2,000) (2,000) Proceeds from sale of real estate owned 4,823,000 222,000 --- Decrease (increase) in restricted cash and short term investments --- 12,000 101,000 Decrease (increase) in due from unconsolidated investee 14,000 --- (16,000) - ----------------------------------------------------------------- Net cash provided by (used in) investing activities 5,003,000 346,000 (105,000) - ----------------------------------------------------------------- Cash flows used in financing activities: Advances on notes payable 235,000 --- --- Principal payments on notes payable (98,000) (46,000) (42,000) Distributions to limited partners (3,496,000) --- --- - ----------------------------------------------------------------- Net cash used in financing activities (3,359,000) (46,000) (42,000) - ----------------------------------------------------------------- Net decrease in cash and cash equivalents 815,000 (66,000) (593,000) Cash and cash equivalents at beginning of year 195,000 261,000 854,000 - ----------------------------------------------------------------- Cash and cash equivalents at end of year $ 1,010,000 $ 195,000 $ 261,000 ================================================================= F-9 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows (Continued) Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 - ----------------------------------------------------------------- Supplemental schedule of cash flow information: Interest paid during the year $ 16,000 $ 12,000 $ 16,000 - ----------------------------------------------------------------- Supplemental schedule of noncash investing and financing activities: Decrease in real estate owned and increase in real estate loans through sale and carryback financing of real estate $ --- $ 200,000 $ --- Decrease in allowance for possible losses on real estate loans and on real estate owned as a result of sales and chargeoffs 1,766,000 69,000 --- Receipt of notes receivable as partial repayment of note receivable 586,000 --- ---
See accompanying notes to consolidated financial statements F-10 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Notes to Consolidated Financial Statements December 31, 1998, 1997, 1996 (1) Summary of Significant Accounting Policies Business Centennial Mortgage Income Fund II (the "Partnership") was formed in 1985 and initially invested in commercial, industrial and residential income-producing real property through mortgage investments consisting of participating first mortgage loans, other equity participation loans, construction loans, and wrap- around and other junior loans. The Partnership's underwriting policy for granting credit was to fund loans secured by first and second deeds of trust on real property. The Partnership's area of concentration is in California. In the normal course of business, the Partnership participated with other lenders in extending credit to single borrowers. The Partnership did this in an effort to decrease credit concentrations and provide a greater diversification of credit risk. As of December 31, 1998, most of the loans secured by operating properties have been repaid to the Partnership. However, during the early 1990's, real estate market values for undeveloped land in California declined severely. As the loans secured by undeveloped land became delinquent, the Partnership elected to foreclose on certain of these loans, thereby increasing real estate owned balances. As a result, the Partnership has become a direct investor in this real estate and intends to manage operating properties and develop raw land until such time as the Partnership is able to sell the remaining real estate owned. The real estate owned balance before allowance for possible losses at December 31, 1996 was $11,316,000, decreasing to $10,827,000 at year end 1997 and decreasing to $4,599,000 at year end 1998. Beginning with the fourth quarter of 1992, the Partnership entered its repayment stage and cash proceeds from mortgage investments are no longer available for reinvestment in new loans by the Partnership. Basis of Presentation The Partnership has formed several subsidiaries to own and operate certain of its real estate assets. The corporations formed were PIR Development, Inc., RSA Development, Inc., CTA F-11 Development, Inc., LCR Development, Inc., ("LCR"), and BKS Development, Inc., ("BKS"). All of these corporations are California corporations. Several of the Partnership's assets were transferred to these corporations, at the Partnership's cost basis, in transactions which included no cash down and the Partnership carrying 100 percent of the financing. With the exception of LCR and BKS, all of these corporations are wholly owned corporations and have been consolidated in the accompanying consolidated financial statements. All significant intercompany balances and transactions, including the aforementioned transfers, have been eliminated in consolidation. As the Partnership's ownership interest in LCR and BKS is more than 20 percent but does not exceed 50 percent, the Partnership accounts for its ownership interest using the equity method. Under the equity method of accounting, loans made to these subsidiaries are a component of the Partnership's investment in them, and therefore the Partnership has recorded losses by LCR and BKS as a reduction of the carrying value of these loans receivable (see note 5). Organization The Partnership was organized on July 12, 1985 in accordance with the provisions of the California Uniform Limited Partnership Act. The Partnership commenced operations in June 1986. The general partners are John B. Joseph, Ronald R. White and Centennial Corporation ("CC"), a privately-held California corporation whose stock is owned by affiliates of Ronald R. White and John B. Joseph. Partners' Capital Accounts Cash Available for Distribution, as defined in the Partnership Agreement, is to be allocated 95 percent to the limited partners and 5 percent to the general partners until each limited partner has received an amount equal to a 12 percent non-cumulative annual return on his adjusted invested capital (as defined in the Partnership Agreement). Thereafter, Cash Available for Distribution is to be allocated 90 percent to the limited partners and 10 percent to the general partners. All distributions of Mortgage Reductions (as defined in the Partnership Agreement) after the first sixty months following the closing date of the Partnership, shall be distributed 99 percent to the limited partners and 1 percent to the general partners, until each limited partner has received a 12 percent cumulative annual return on his adjusted invested capital, after which such amounts are to be distributed 85 percent to the limited partners F-12 and 15 percent to the general partners. In order to properly reflect the economic effect of the allocations discussed above, the Partnership has allocated financial statement net earnings (losses) 95 percent to the limited partners and 5 percent to the general partners through 1992. The Partnership had no Cash Available for Distribution during the three years ended December 31, 1998. Based upon these and various other terms of the Partnership Agreement, it is improbable that the general partners would be required to make any capital contributions to the Partnership in excess of their negative capital account as of December 31, 1992. Accordingly, since January 1, 1993, the Partnership has allocated 100 percent of the losses to the limited partners. As a result of the liquidation of the majority of the Partnership's investments in 1998, it has become clear that the amount of the required deficit restoration of the General Partners will not exceed $56,000 and the capital accounts of the General Partners and limited partners have been adjusted to reflect such maximum deficit restoration Real Estate Loans and Allowance for Possible Losses Loans are reported at the principal amount outstanding, net of unearned income and the allowance for possible loan losses. Interest accrual is discontinued when, in the opinion of management, its collection is deemed doubtful. The allowance for possible loan losses is established through a provision for possible losses charged to expense. Loans are charged against the allowance for possible loan losses when management believes that the collectibility of principal is unlikely. Management believes that the allowance for possible loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. Impaired Loans The Partnership considers a loan to be impaired when based upon current information and events, it believes it is probable that the Partnership will be unable to collect all amounts due according to the contractual terms of the loan agreement. In determining impairment, the Partnership considers large non- homogeneous loans including nonaccrual loans, troubled debt restructuring and performing loans which exhibit, among other characteristics, high loan-to-value ratios, low debt-coverage ratios, or other indications that the borrowers are experiencing F-13 increased levels of financial difficulty. The Partnership bases the measurement of collateral-dependent impaired loans on the fair value of the loan's collateral. The amount by which the recorded investment of the loan exceeds the measure of the impaired loan's value is recognized by recording a valuation allowance. Real Estate Owned Effective January 1, 1996, the Partnership adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 supersedes SOP 92-3 and also requires that long-lived assets to be disposed of be reported at the lower of carrying amount or fair value less costs to sell. Estimated fair values are determined by using appraisals, discounted cash flows and/or other valuation techniques. The actual market price of real estate can only be determined by negotiation between independent third parties in a sales transaction and sales proceeds could differ substantially from estimated fair values. An impairment loss shall be measured as the amount by which the carrying amount of the asset exceeds the fair value of the assets less costs to sell. SFAS 121 requires that assets to be disposed of not be depreciated while they are held for disposal. The Partnership considered all real estate owned as held for sale during 1998 and 1997, and is actively marketing all properties using third party brokers or in house sales staff. Management's intent is to attempt to sell all properties within one year, however, it is improbable that the balance of the Partnership's assets will actually be sold in that period. Loan Fees Origination fees and direct costs associated with lending are netted and amortized to interest income as an adjustment to yield over the respective lives of the loans using the interest method. Income Taxes Under provisions of the Internal Revenue Code and the California Revenue and Taxation Code, partnerships are generally not subject to income taxes. For tax purposes, any income or losses realized are those of the individual partners, not the Partnership. The Partnership reports certain transactions differently for tax and financial statement purposes. The following is a recap of current and cumulative temporary differences between earnings for generally accepted accounting principles ("GAAP") and taxable earnings. F-14
Current Temporary Differences Partnership Corporations Total (Unaudited) (Unaudited) (Unaudited) - -------------------------------------------------------------------------------- - ---------- GAAP earnings (loss) for the year ended December 31, 1998 $ (5,004,000) $ 4,250,000 $ (754,000) Provision for losses (15,000) (1,291,000) (1,306,000) Accrued expenses not deducted under the cash basis method of accounting --- (2,665,000) (2,665,000) Interest income accrued for tax, not per books (92,000) --- (92,000) Charge off of loans deducted (715,000) --- (715,000) Share of losses in unconsolidated investees (1,447,000) --- (1,447,000) Carrying costs expensed for books and capitalized for tax purposes --- (233,000) (233,000) Net operating loss carryforward Utilization --- (55,000) (55,000) Depreciation --- (16,000) (16,000) - -------------------------------------------------------------------------------- - ---------- Taxable loss for the year ended December 31, 1998 $ (7,273,000) $ --- $ (7,273,000) ================================================================================ ========== Taxable loss allocable to General Partner --- ================================================================================ ========== Taxable loss per limited partner unit $ (249.58) ================================================================================ ==========
F-15
- ----------------------------------------------------------------- Cumulative Temporary Differences as of December 31, 1998 Partnership Corporations (Unaudited) (Unaudited) - ----------------------------------------------------------------- Net operating loss carry forwards $ --- $ 248,000 Provision for losses 244,000 1,167,000 Accrued expenses not deducted under the cash basis --- 2,183,000 Carrying costs expensed for books and capitalized for tax purposes --- 900,000 Depreciation --- (73,000) Share of losses in unconsolidated investees (1,000) --- - ----------------------------------------------------------------- Total cumulative temporary differences $ 243,000 $ 4,425,000 =================================================================
As of December 31, 1998, the Partnership held approximately $7.6 million in loans and interest receivable from the consolidated corporations. These loans have been eliminated in the Partnership's consolidated financial statements. It is anticipated that the temporary differences should reverse on the corporations' returns when the corporations liquidate their investments. If these investments are liquidated at current carrying values, the Partnership should be able to deduct bad debt expense on its tax returns in the approximate amount of the temporary differences shown above which is approximately $152 per limited partnership unit. The subsidiary corporations are subject to taxation and account for income taxes under an asset and liability approach to establishing deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the corporation's assets and liabilities. None of the subsidiary corporations have paid any income taxes since their respective formations and all of them have had net deferred tax assets which have been fully offset by valuation allowances F-16 as of December 31, 1998, 1997 and 1996. Accordingly, no tax expense or benefit has been recorded by these corporations during the three years ended December 31, 1998. No deferred tax asset related to the corporations cumulative temporary differences shown above has been recorded in the consolidated financial statements due to the improbability of realization. Future consolidated financial statements could reflect income tax expense in the event that these corporations generate taxable profits in excess of operating loss carryforwards available. Some of the subsidiary corporations are cash basis taxpayers. Statements of Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash and interest-bearing deposits with original maturities of three months or less. Net Loss Per Limited Partnership Unit Net loss per limited partnership unit for financial statement purposes was based on 29,141 weighted average limited partnership units outstanding in 1998, 1997 and 1996. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition Revenue from rental income on real estate owned is recognized on a straight-line basis over the life of the lease when payments become due under operating leases. During 1998, 1997 and 1996, the Partnership has recognized gains or losses on the sale of real estate owned as the gains or losses are determinable and the earnings process is complete. Financial Information about Industry Segments The Partnership adopted Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information"("SFAS 131"). Given that the Partnership is in the process of liquidation, the Partnership has identified F-17 only one operating business segment which is the business of asset liquidation. The adoption of SFAS 131 did not have an impact on the Partnership's financial reporting. (2) Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107 "Disclosures About Fair Value of Financial Instruments" ("SFAS 107"), requires that the Partnership disclose estimated fair values for its financial instruments as well as the methods and significant assumptions used to estimate fair values. The following information does not purport to represent the aggregate net fair value of the Partnership. The following methods and assumptions were used by the Partnership in estimating the fair value of each class of financial instrument. Cash and Cash Equivalents The carrying amount, which is cost, is assumed to be the fair value because of the liquidity of these instruments. Real Estate Loans Receivable - Earning The net carrying value of earning loans is estimated to be fair value. The loans are carried at their face value. Management believes that the interest rates on these loans is at market rates and that the loans are adequately secured. Real Estate Loans Receivable from Unconsolidated Investee - Nonearning The net carrying value of loans from unconsolidated investee is not estimable due to the uncertainty of the amounts and timing of future payments to be made. Note Payable The carrying value of the fixed rate note payable is estimated to be the fair value as its terms are similar to those currently available. Accounts Payable and Accrued Liabilities, and Property Taxes Payable Carrying value is considered to be equal to the fair value of these liabilities as they are due on demand. F-18 (3) Allowance for Possible Loan Losses
Changes in the allowance for possible loan losses are as follows: 1998 1997 1996 - ----------------------------------------------------------------- Balance at beginning of year $ 15,000 $ 8,000 $ 8,000 Loans to affiliates and nonaffiliates charged-off (15,000) --- --- Provision for possible losses --- 7,000 --- - ----------------------------------------------------------------- Balance at end of year $ --- $ 15,000 $ 8,000 ================================================================
At December 31, 1998, there was one loan to an unconsolidated investee which was considered impaired and for which there was no allowance for possible loan losses at December 31, 1998. However, as discussed in note 5, the unconsolidated investee has recorded substantial operating losses and the Partnership's proportionate share of the losses in unconsolidated investee has reduced the net carrying value of this loan to $17,000 as of December 31, 1998. There was a $295,000 and $179,000 investment in impaired loans for the years ended December 31, 1998 and 1997, respectively. For the years ended December 31, 1998 and 1996, the Partnership recognized $16,000 and $81,000 in interest income on these impaired loans. There was no interest income recognized on these impaired loans for the year ended December 31, 1997. For the year ended December 31, 1998, the Partnership recognized $16,000 in cash basis income on impaired loans. No cash basis income was recognized on these impaired loans for the years ended December 31, 1997 and 1996. F-19 (4) Allowance for Possible Losses on Real Estate Owned
Changes in the allowance for possible losses on real estate owned are as follows: 1998 1997 1996 - ----------------------------------------------------------------- Balance at beginning of year $ 2,702,000 $ 2,545,000 $ 2,545,000 Real estate owned charged-off (1,751,000) (69,000) --- Provision for losses 460,000 226,000 --- - ----------------------------------------------------------------- Balance at end of year $ 1,411,000 $ 2,702,000 $ 2,545,000 =================================================================
(5) Transactions with Affiliates As discussed in note 1, the Partnership owns 50 percent of the stock of two corporations which have not been consolidated in the accompanying financial statements; LCR and BKS. The balance of stock in these corporations is owned by Centennial Mortgage Income Fund ("CMIF"), an affiliate. LCR has invested in a joint venture, Silverwood Homes ("Silverwood") which has constructed homes. The Partnership has participated in making several loans to these corporations and this joint venture. Under the equity method of accounting, these loans are a component of the Partnership's investment in LCR and BKS, and therefore the Partnership has recorded losses by LCR and BKS as a reduction of the carrying value of these loans receivable. The Partnership wrote off its investment in and loan receivable from BKS during 1996 when its share of losses equaled its investment and the recovery of any of its investment became unlikely. Accordingly, the 1998 and 1997 consolidated financial statements include only amounts related to the LCR and Silverwood loans and investments. F-20 A summary of these real estate loans receivable from unconsolidated investee as of December 31, 1998 is as follows:
Net Principal Losses Carrying Balance Offset Value - ----------------------------------------------------------------- 50 percent interest in unsecured note receivable from LCR (a) $ --- $ --- $ --- 50 percent interest in development loan secured by a first trust deed from Silverwood (a) --- --- --- 50 percent interest in construction loan secured by a first trust deed from Silverwood 22,000 5,000 17,000 - ----------------------------------------------------------------- Totals $ 22,000 $ 5,000 $ 17,000 - -----------------------------------------------------------------
(a) The unpaid balances of these loans were charged off by the Partnership during 1998 when the collateral associated with the notes was sold to an unaffiliated party. The Partnership accepted its 50 percent share of the net proceeds from the sale of the collateral and released its security interest in the collateral. Since the proceeds from the sale were less than the balances of the notes, the Partnership charged off the balance of the notes. The cumulative principal balance of the loans charged off was $1,527,000. The Partnership has not accrued its share of interest on the remaining Silverwood loan of approximately $51,000 as of December 31, 1998. A summary of these real estate loans receivable from unconsolidated investees as of December 31, 1997 is as follows: F-21
Net Principal Losses Carrying Balance Offset Value - ----------------------------------------------------------------- 50 percent interest in unsecured note receivable from LCR $ 1,059,000 $ 1,059,000 $ --- 50 percent interest in development loan secured by a first trust deed from Silverwood 942,000 377,000 565,000 50 percent interest in construction loan secured by a first trust deed from Silverwood 245,000 --- 245,000 50 percent interest in construction loan secured by a first trust deed from Silverwood 4,000 --- 4,000 - ----------------------------------------------------------------- Totals $ 2,250,000 $ 1,436,000 $ 814,000 - -----------------------------------------------------------------
The Partnership had not accrued its share of interest on the unsecured note receivable from LCR which was approximately $324,000 as of December 31, 1997. The Partnership had not accrued its share of interest on three of the Silverwood loans which was approximately $147,000 as of December 31, 1997. LCR entered into a joint venture agreement entitled Silverwood with Home Devco, ("Home Devco"), an affiliate of the general partners of the Partnership, to construct and sell single-family homes at the project. During 1995, LCR contributed 179 lots which were zoned for single family homes in Lancaster, California to the joint venture as its initial capital contribution. As LCR has a 99.99 percent ownership interest in the joint venture, Silverwood has been consolidated with LCR. F-22 The consolidated balance sheets and statements of operations of LCR have not been consolidated in the Partnership's financial statements. The Partnership accounts for its investment in this corporation using the equity method. The following represents condensed financial information for LCR at December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996: LCR Development, Inc. Consolidated Balance Sheets
December 31, December 31, Assets 1998 1997 - -------------------------------------------------------------- Cash $ 11,000 $ 11,000 Restricted cash 20,000 20,000 Real estate owned 119,000 6,950,000 Less allowance for losses on real estate investments 17,000 4,063,000 - -------------------------------------------------------------- Net real estate owned 102,000 2,887,000 Organization costs --- 1,000 - -------------------------------------------------------------- $ 133,000 $ 2,919,000 ============================================================== Liabilities and Stockholders' Deficit - -------------------------------------------------------------- Notes payable to affiliates: CMIF $ 2,882,000 $ 4,679,000 CMIF II 1,549,000 2,250,000 - -------------------------------------------------------------- Total notes payable 4,431,000 6,929,000 Accounts payable and accrued liabilities 12,000 38,000 Interest payable to affiliates 1,837,000 1,377,000 Payable to affiliates 5,000 75,000 - -------------------------------------------------------------- Total liabilities 6,285,000 8,419,000 Stockholders' deficit (6,152,000) (5,500,000) - -------------------------------------------------------------- $ 133,000 $ 2,919,000 ==============================================================
F-23 LCR Development, Inc. Consolidated Statements of Operations
Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 - ----------------------------------------------------------------- Revenues Housing sales $ 1,509,000 $ 834,000 $ 233,000 Sale of finished lots 1,499,000 --- --- - ---------------------------------------------------------------- 3,008,000 834,000 233,000 - ---------------------------------------------------------------- Costs and expenses Cost of housing sales 1,437,000 851,000 238,000 Cost of sale of finished lots 1,514,000 --- --- Provision for losses on real estate owned 216,000 207,000 2,516,000 Selling and marketing expenses 66,000 131,000 184,000 General and administrative 24,000 64,000 162,000 - ----------------------------------------------------------------- 3,257,000 1,254,000 3,100,000 - ----------------------------------------------------------------- Operating loss (249,000) (420,000) (2,867,000) Interest expense 403,000 361,000 151,000 - ----------------------------------------------------------------- Net (loss) $ (652,000) $ (781,000) $(3,018,000) ================================================================= Interest not included in share of losses (460,000) (532,000) (336,000) - ----------------------------------------------------------------- Allocable net loss $ (192,000) $ (249,000) $(2,682,000) ================================================================= Share of losses recorded $ (96,000) $ (125,000) $ (716,000) =================================================================
Although the Partnership owns a 50 percent interest in LCR, it holds less than 50 percent of LCR's debt. Since CMIF has made a $1,250,000 unsecured loan to LCR, CMIF was allocated losses to F-24 the extent of the unsecured loan and remaining losses were allocated 50 percent to the Partnership and 50 percent to CMIF during 1996. Additionally, the Partnership and CMIF have not recorded interest income in connection with the $1,837,000 of accrued interest payable to affiliates by LCR and Silverwood. Accordingly, the Partnership has not recorded its share of losses from LCR to the extent that it represents this nonaccrued interest income.
Difference of Allocation of Share of Losses 1998 - ----------------------------------------------------------------- The Partnership's 50 percent share of LCR's stockholders' deficit at December 31, 1998 $(3,076,000) Cumulative interest payable by LCR to the Partnership not accrued as income by the Partnership 919,000 Loans receivable considered as part of the Partnership's investment (b) 1,549,000 Disproportionate loss allocation 625,000 - ----------------------------------------------------------------- Net loans receivable $ 17,000 ================================================================= (b) The Partnership has charged off $1,527,000 of these loans.
As discussed above, the Partnership holds 50 percent of the stock of BKS with CMIF. BKS owned a 283 acre residential tract in Bakersfield, California and foreclosed on this property on August 8, 1994. Bonds and taxes accrued on the property increased from $1,605,000 at December 31, 1995 to $2,085,000 at December 31, 1996. During 1996, the bond holders commenced foreclosure proceedings on the property. Management elected to abandon the property in 1996 due to the fact that land values had not increased. Therefore, during 1996, the Partnership recorded its $343,000 share of losses in connection with BKS which resulted in the Partnership's investment in BKS being reduced to a zero balance. Bonds, property taxes and note payable to affiliates are nonrecourse liabilities and, therefore, the Partnership and BKS have no contingent liability in excess of the property. The F-25 Partnership has no future obligation nor risk of additional losses related to this investee. The Partnership reimburses the general partner for salaries and related expenses incurred on behalf of the Partnership for services such as legal, clerical, accounting, property management and other administrative functions. The general partners and affiliates charged $202,000 $196,000 and $185,000 for such services in 1998, 1997 and 1996, respectively. The Partnership also accrued an additional $67,000 as general and administrative, affiliates expense during 1998. This amount is included in accounts payable and accrued liabilities on the consolidated balance sheet as of December 31, 1998 and represents the Partnership's estimated share of certain severance pay that will become payable in April 1999 (see note 8). During 1998, 1997 and 1996, the Partnership maintained interest- bearing deposits with Sunwest Bank, an affiliate of the general partners. The balances at December 31, 1998, 1997, and 1996 were $131,000, $66,000 and $5,000, respectively. Interest earned on such deposits for 1998, 1997 and 1996 was $16,000, $2,000 and $5,000, respectively. (6) Real Estate Owned
Real estate owned consists of the following: December 31, December 31, 1998 1997 - ----------------------------------------------------------------- 1. Office building in San Bernardino, CA $ 914,000 $ 827,000 2. Land in Sacramento, CA 3,685,000 3,637,000 3. Proposed marina and condominiums in Redwood City, CA --- 5,360,000 4. 10.66 acres in Roseville, CA --- 1,003,000 - ----------------------------------------------------------------- Total real estate owned $ 4,599,000 $ 10,827,000 =================================================================
Property number 3 was sold in June 1998 with the Partnership receiving net proceeds of $3,699,000. The Partnership recorded a F-26 $71,000 gain on this sale. Property number 4 was also sold in June 1998 with the Partnership receiving net proceeds of $1,124,000. The Partnership recorded a $121,000 gain on this sale. The Partnership leases its operating property under several non- cancelable operating lease agreements. Future minimum rents to be received as of December 31, 1998 are as follows:
Years ending December 31, - ----------------------------------------------------------------- 1999 $ 143,000 2000 39,000 - ----------------------------------------------------------------- $ 182,000 =================================================================
(7) Note Payable
Note payable consists of the following: December 31, December 31, 1998 1997 - ----------------------------------------------------------------- Note payable secured by office building in San Bernardino, CA, repaid during 1998 $ --- $ 97,000 Note payable secured by office building in San Bernardino, CA, with principal and interest payable monthly of $1,830; interest at 8.64%, maturing June 1, 2008 234,000 --- - ---------------------------------------------------------------- $ 234,000 $ 97,000 ================================================================
F-27 Future principal payments to be paid as of December 31, 1998 are as follows:
Years ending December 31, - ----------------------------------------------------------------- 1999 $ 2,000 2000 2,000 2001 2,000 2002 3,000 2003 3,000 Thereafter 222,000 - ----------------------------------------------------------------- $ 234,000 =================================================================
(8) Commitments The day to day operations of the Partnership and several other affiliated partnerships are carried on by employees of the corporate general partner, Centennial Corporation ("CC"). CC no longer has any significant operations other than the management of these partnerships who are in the repayment stage. During the first quarter of 1998, several employees resigned from their employment at CC. Their resignations were principally due to the anticipated disposition of the majority of the assets owned by the Partnership and other affiliated partnerships in the relatively near future. The disposition of these assets could reasonably be expected to precipitate layoffs, and given the relatively robust job market in Southern California, where the general partners conduct their operations, these employees opted to secure positions with other companies with more promising futures. As of April 1, 1998, CC employed only six employees. All of the remaining employees had been employed by CC for over ten years and had intimate knowledge of the partnerships' operations. The general partners concluded that it would be in the best interest of the Partnership to provide the remaining employees with some type of incentive for them to continue working for the partnerships until the majority of the partnerships' assets were liquidated. Accordingly, CC entered into twelve-month employment contracts with each of these employees which expire on March 31, 1999. These employment contracts have been guaranteed by the Partnership and the affiliated partnerships. The contracts provided that CC could exercise an option to extend the contract for any employee in three month increments at the end of each calendar quarter if it F-28 determined that such extension was in the best interest of the partnerships. CC has exercised this option for one employee until December 1999. All of the remaining contracts will expire in March 1999. The contracts include an increase in salary of 10 percent and also provide that if these employees remain employed by CC until the end of the contract term, including extensions, they will be entitled to severance pay equal to six months base salary. The maximum total salaries, employer taxes, related benefits and severance pay included in the initial terms of these contracts is approximately $623,000. The Partnership's anticipated share of this cost is estimated to be between $265,000 and $295,000, depending on the amount of time which will be spent by these employees in managing the affairs of the Partnership. The Partnership's share of the cost of these contracts during the year ended December 31, 1998 was approximately $185,000. The Partnership has recorded $67,000 in accrued severance benefits as of December 31, 1998. The Partnership's estimated share of the cost of the contract extension is less than $20,000. (9) Contingencies There are no material pending legal proceedings other than ordinary routine litigation incidental to the Partnership's business. Based on part of advice of legal counsel, management does not believe that the results of any of these matters will have a material impact on the Partnership's financial position or results of operations. F-29 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Schedule III Consolidated Real Estate Owned December 31, 1998
Initial Costs Capitalized Cost to Subsequent Partnership to Acquisition Real Estate Property Encumbrances Owned Improvements Carrying Costs - -------------------------------------------------------------------------------- - ---------- Office Building in San Bernardino $ 234,000 $ 800,000 $ 114,000 $ - --- 45 Acres in Sacramento --- 3,371,000 198,000 116,000 - -------------------------------------------------------------------------------- - ---------- $ 234,000 $ 4,171,000 $ 312,000 $ 116,000 ================================================================================ ========== F-30 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Schedule III Consolidated Real Estate Owned (Continued) December 31, 1998 Gross Amount at Which Carried on Books (F2) Life On Which Real Estate Date Depreciation Property Owned Total Acquired Is Computed - -------------------------------------------------------------------------------- - ---------- Office Building in San Bernardino $ 914,000 $ 914,000 April 1993 (F1) 45 Acres in Sacramento 3,685,000 3,685,000 March 1992 None - ----------------------------------------------------- $ 4,599,000 $ 4,599,000 ===================================================== Prior to the adoption of SFAS 121, tenant improvements were depreciated over life of leases; building depreciated over 31.5 years Aggregate cost for Federal income tax purposes is $5,427,000 at December 31, 1998. Improvements are presented net of accumulated depreciation as required per SFAS 121.
F-31 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Schedule III Consolidated Real Estate Owned (Continued) December 31, 1998
The following is a summary of consolidated real estate owned for the years ended December 31, 1998, 1997, and 1996. 1998 1997 1996 - -------------------------------------------------------------------------------- - ---------- Balance at beginning of year $ 10,827,000 $ 11,316,000 $ 11,314,000 Additions during period: Improvements 154,000 2,000 2,000 Deductions during period: Real estate sold (4,631,000) (422,000) - - -- Charge-offs (1,751,000) (69,000) - - -- - -------------------------------------------------------------------------------- - ---------- Balance at year end $ 4,599,000 $ 10,827,000 $ 11,316,000 ================================================================================ ==========
F-32 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Schedule IV
Mortgage Loans on Real Estate December 31, 1998 Interest Final Periodic Description Rate Maturity Date Payment Terms - -------------------------------------------------------------------------------- - ---------- Note secured by: Interest only- 50 percent interest in Balloon payments of first trust deed on $325,000 in July 1999 & 157 lots in Lancaster, CA 8% Fixed April 23, 2000 $745,000 in July 2000 50 percent interest in Interest only - second trust deed on 157 Balloon payment of lots in Lancaster, CA 10% Fixed April 23, 1999 $100,000 in April 1999 50 percent interest in second trust deed on one single family home P & I due at in Lancaster, CA Prime + 1% July 1, 1998 maturity F-33 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Schedule IV Mortgage Loans on Real Estate (Continued) December 31, 1998 Principal Amount of Loan Subject to Delinquent Face Amount Carrying Amount Principal or Description Prior Liens of Mortgages of Mortgages (F1) Interest - -------------------------------------------------------------------------------- - ---------- Note secured by: 50 percent interest in first trust deed on 157 lots in $ 1,070,000 Lancaster, CA None (50% - $535,000) $ 531,000 None 50 percent interest in second trust deed on 157 1st TD of 100,000 lots in Lancaster, CA $1,070,000 (50% - $50,000) 50,000 None 50 percent interest in second trust deed on one single family home 1,034,000 in Lancaster, CA $88,000 (50% - $517,000) 22,000 22,000 Losses from unconsolidated investees (5,000) - --- - -------------------------------------------------------------------------------- - ---------- $ 598,000 $ 22,000 ================================================================================ ========== Aggregate cost for Federal Income Tax purposes is $603,000 at December 31, 1998. F-34 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Schedule IV Mortgage Loans on Real Estate (Continued) December 31, 1998 The following is a summary of activity for the years ended December 1998, 1997 and 1996. 1998 1997 1996 - -------------------------------------------------------------------------------- - ---------- Balance at beginning of year $ 1,029,000 $ 1,068,000 $ 1,856,000 Additions during period: New mortgage loans/disbursements 295,000 179,000 336,000 Other - Interest reserve and amortization --- --- 83,000 Loans transferred from real estate owned --- 200,000 - --- Deductions during period: Collections of principal (615,000) (293,000) (148,000) Chargeoffs (15,000) --- - --- Losses from unconsolidated investees (96,000) (125,000) (1,059,000) - -------------------------------------------------------------------------------- - ---------- Balance at year end $ 598,000 $ 1,029,000 $ 1,068,000 ================================================================================ ==========
See accompanying independent auditors' report. F-35 EX-27 2 ART. 5 FDS FOR FISCAL YEAR END 12-31-98
5 1,000 YEAR DEC-31-1998 DEC-31-1998 1,010 0 598 0 0 117 0 0 4,820 74 234 0 0 0 4,514 4,820 0 479 0 1,233 0 460 16 (754) 0 (754) 0 0 0 (754) (25.87) (25.87)
-----END PRIVACY-ENHANCED MESSAGE-----