-----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, QgReo14MYs0uXpX0ImK+OxvzPfEdc8QN/LdHKLk4USlBLmZFlkoHASqCv94/ZAvX tBrkzJ5xH4SOx/iiqCPDVg== 0000773337-01-000007.txt : 20010402 0000773337-01-000007.hdr.sgml : 20010402 ACCESSION NUMBER: 0000773337-01-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 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: 1587834 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 0001.txt 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, 2000 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 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 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. (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, 2000, the Partnership's assets consisted of $1,674,000 in cash and cash equivalents and $399,000 in other non-cash assets. It is possible that the remaining non-cash assets could be liquidated during 2001. Real estate owned by the Partnership reached a peak at December 31, 1993 and has been declining since that time. The following are the balances of real estate owned before allowance for possible losses as of December 31 for the past eight years: 1993 $ 24,170,000 1994 11,284,000 1995 11,314,000 1996 11,316,000 1997 10,827,000 1998 4,599,000 1999 2,843,000 2000 1,511,000 As of December 31, 2000, the Partnership had established a $1,112,000 allowance for possible losses on its real estate owned. The liquidation of assets during 1998 enabled the Partnership to make a $3,496,000 cash distribution to its limited partners in October 1998. Additional asset liquidations during 1999 and 2000 enabled the Partnership to make another $2,127,000 cash distribution to its limited partners in October 2000. Risks of the year 2000 Issue As discussed above, the Partnership is in the process of liquidating its remaining assets. As of December 31, 1999, the Partnership held only cash and cash equivalents, two notes receivable, a single parcel of unimproved real estate and $7,000 in other non-cash assets. In light of these circumstances, the Partnership made only the absolutely necessary modifications to existing software which were necessitated by the year 2000 issues. The cost of these modifications was less than $10,000. To date, the Partnership has experienced only minor computer related problems that are the result of the year 2000. None of these problems have caused any significant disruption to the Partnership's operations. The Partnership does not anticipate that it will encounter any future significant problems in the coming months nor does it anticipate that it will be required to spend any significant amounts to correct future year 2000 problems. 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 note 5 of Notes to Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS. None 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, 2000, there were approximately 2,799 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. The Partnership paid a $2,127,000 cash distribution to limited partners in October 2000. This distribution equaled approximately $73.00 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) - ----------------------------------------------------------------------------- 12/31/00 12/31/99 12/31/98 12/31/97 12/31/96 - ------------------------------------------------------------------------------ CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenue $ 181 $ 277 $ 479 $ 170 $ 251 Net loss (71) (254) (754) (929) (1,515) Net loss per limited partnership unit- basic and diluted (2.44) (8.72) (25.87) (31.88) (51.99) Cash distributions per limited partnership unit 73.00 --- 120.00 -- -- CONSOLIDATED BALANCE SHEET DATA: Total loans before allowance for losses --- 548 598 1,029 1,068 Total real estate owned before allowance for losses 1,511 2,843 4,599 10,827 11,316 Total assets 2,073 4,325 4,820 9,354 10,132 Partners' equity 2,062 4,260 4,514 8,764 9,693
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. General Net loss and loss per limited partnership unit were $(71,000) and $(2.44) for the year ended December 31, 2000, down from $(254,000) and $(8.72) for the year ended December 31, 1999 and $(754,000) and $(25.87) in 1998. Major changes between statements of operations components from 1999 to 2000 included: 1) an $82,000 increase in interest on interest bearing deposits; 2) a $32,000 increase in provision for possible losses; 3) a $68,000 decrease in net operating income from operations of real estate owned; 4) a $60,000 decrease in expenses associated with non-operating real estate owned; 5) a $37,000 decrease in interest expense; and 6) a $105,000 decrease in general and administrative costs. Major changes between statements of operations components from 1998 to 1999 included: 1) a $460,000 decrease in provision for possible losses; 2) a $127,000 decrease in expenses associated with non- operating real estate owned; 3) a $197,000 decrease in gain (loss) on sale of real estate owned; and 4) a $96,000 decrease in share of losses in unconsolidated investee. 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, 2000 is included in the following paragraphs. Liquidity and Capital Resources At December 31, 2000, the Partnership had $1,674,000 in unrestricted cash and cash equivalents. Additional sources of funds are expected to be from the sale of real estate owned. During 2000, the Partnership's principal sources of cash were: i) $1,332,000 of cash proceeds from the sale of real estate; ii) $516,000 in principal payments received on loans in excess of disbursements on loans; and iii) $169,000 in interest income on loans and interest bearing deposits. The Partnership's principal uses of cash during 2000 were: i) a $2,127,000 cash distribution to limited partners; ii) $186,000 in general and administrative costs; iii) $27,000 in real estate taxes paid; and iv) $61,000 in other expenses associated with non-operating real estate owned; Subsequent to December 31, 2000, the Partnership entered into a purchase and sale agreement involving the remaining 18 acres of its property in Sacramento. Although the buyer failed to make certain required cash deposits into escrow and the Partnership has cancelled the sales agreement, the prospective buyer has continued to express an interest in consummating the purchase of the property. The remaining acreage has several characteristics that limit its usefulness to many prospective purchasers, including the configuration of its lot lines and power line easements. The current prospective buyer is an "end user" and their intended use of the property is not precluded by these characteristics. While the cancelled agreement provided for an all cash sales price of $1,180,000, management believes that it may be unable find another buyer in the near future who would be willing to purchase the property for this price. Given management's intention to liquidate the Partnership as soon as practicable, it may elect to sell the remaining property to a developer rather than an "end user" at a lower price than the transaction discussed above if it is not consumated. Accordingly, the Partnership has not adjusted the net carrying value of the property which was $399,000 after allowance for possible losses as of December 31, 2000. As of December 31, 2000, the Partnership had no unfunded loan commitments or notes payable commitments. The Partnership's principal capital requirements include: i) property taxes and bonds on real estate owned of approximately $23,000 payable in 2001, 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 occurred in 1997 and 1998, the general partners determined that the Partnership could make a $3,496,000 distribution to its limited partners in October 1998. Additional asset liquidations during 1999 and 2000 enabled the Partnership to make another $2,127,000 cash distribution to its limited partners in October 2000. The general partners have had discussions with legal counsel regarding the amounts of cash balances 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. The litigation which arose in 1999 (see discussion under "Other Expenses"- "Expenses associated with non-operating real estate owned" below) is an example of this. Although the general partners are not aware of any other threatened litigation, or litigation that is likely to arise, they have determined that the Partnership should retain at least $1,000,000 in cash balances to be available to defend the Partnership in any future litigation which may arise. It is expected that these cash balances will be retained until such time as legal counsel advises the general partners that the potential for any future litigation is remote. The general partners anticipate making another distribution to limited partners during the first half of 2001. The amount of this distribution will most likely be approximately equal to the Partnership's cash balances in excess of $1,000,000 unless unforeseen developments arise. The potential sales transaction discussed above could have a significant impact on the amount of this distribution. Results of Operations The Partnership's non-cash assets declined from $9,159,000 as of December 31, 1997 to $399,000 as of December 31, 2000. The substantial reduction in non- cash assets between 1997 and 2000 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. There was no interest income on loans to affiliates for 2000 or 1999 because the loans receivable from unconsolidated investees were placed on nonaccrual status in late 1996. The income in 1998 is related to interest repayments on loans to the Silverwood joint venture, which was constructing homes in Lancaster, California. This interest, which was repaid in 1998, had not previously been accrued by the Partnership. Interest income on loans to nonaffiliates was $32,000, $45,000 and $12,000 in 2000, 1999 and 1998, respectively. In October 1998, the Partnership received two loans in connection with the payoff of certain loans to Silverwood Homes, an unconsolidated investee discussed in more detail below. These new loans have been the principal source of interest income on loans to nonaffiliates since 1998. The increase in 1999 can be attributed to the fact that the loans were outstanding for a greater part of the year while the decrease in 2000 is attributable to the loans being repaid in October 2000. The real estate owned balance before allowance for possible losses at December 31, 2000, 1999 and 1998 was $1,511,000, $2,843,000 and $4,599,000, respectively. The balance at December 31, 2000 is comprised of a single property located in Sacramento California and is offset by a $1,112,000 allowance for possible losses. 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 years ended December 31, 1998 and 1999 are summarized below: During 1994 the Partnership acquired a 50% interest in LCR Development, Inc., an unconsolidated subsidiary. The balance of LCR is owned by Centennial Mortgage Income Fund ("CMIF "), an affiliate. LCR was formed in order to take title to 179 residential lots in Lancaster, California through foreclosure of a $1,250,000 secured loan held by CMIF and a $2,115,000 secured loan held jointly by the Partnership and CMIF. The Partnership assigned its interest in the $2,115,000 note to LCR in exchange for a new note payable by LCR to the Partnership and CMIF. LCR subsequently: i) took title to the 179 lots through foreclosure; ii) entered into a joint venture with Home Devco, Inc. named Silverwood Homes ("Silverwood"); and iii) contributed the 179 lots to Silverwood. The principal purpose of the joint venture was to construct homes on the property. From 1995 through 1998, the Partnership and CMIF made several construction and development loans to Silverwood and Silverwood constructed 22 homes and sold 21 homes on the property . Originally, it was anticipated that homes would be constructed on all 179 lots, that there would be excess cash from the home sales after paying off the development and construction loans, and this excess cash would be used to repay LCR for its investment in the joint venture. LCR would then be able to use this anticipated excess cash from Silverwood's home sales to repay the Partnership and CMIF for the $1,250,000 and $2,115,000 loans. LCR reported substantial net losses, principally due to the continuing decline in value of the lots, from 1995 through 1997. As of December 31, 1997, the Partnership had reduced its share of the carrying value of the $2,115,000 loan to $-0- and had reduced the carrying value of $1,191,000 in development and construction loans by $377,000 to $814,000. These reductions were made by applying the Partnership's share of losses from unconsolidated investee that it had recorded, against the carrying value of the loans. During 1998, Silverwood stopped constructing homes and all but one of the remaining homes that had been constructed were sold. Additionally, all of the undeveloped lots were sold. The Partnership funded additional advances of $295,000 on the development and construction loans in 1998. The Partnership also recorded an additional $96,000 in losses from unconsolidated investee during 1998 and received cash payments totaling $410,000 against these loans. Additionally, the Partnership received two 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 157 lots in October 1998. These new notes were secured by the 157 lots sold. These transactions left the Partnership with a net carrying value of its loans to Silverwood of $17,000 as of December 31, 1998. During 1999, Silverwood sold its final home and made payments totaling $12,000 to the Partnership out of cash generated from this sale. During 2000, Silverwood made an additional $3,000 payment and the Partnership charged off the remaining $2,000 balance of its loans to Silverwood to provision for losses. Real Estate Owned A description of the Partnership's principal real estate owned during the years ended December 31, 2000 and 1999 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 increased the occupancy to as high as 92 percent, however, a number of leases expired in 1999 and occupancy levels declined slightly as a result. The property generated net operating income of $68,000 during 1999. The Partnership sold this property in December 1999. The sale generated net sales proceeds of $637,000. The sale resulted in a $5,000 loss after applying $299,000 of the Partnership's previously recorded allowance for possible losses on real estate investments. 44 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 43.78 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. There had been only limited industrial/commercial use development activity in the area surrounding this property during 1996 and 1997. In light of this limited activity and management's objective of liquidating the Partnership's remaining assets as soon as practical, the Partnership recorded an additional $504,000 provision for losses against the carrying value of this property during 1998. During the first quarter of 1999, the Partnership opened escrow on a 9.45 acre portion of the property which also did not have freeway visibility. for a purchase price of $900,000. The escrow closed at the end of the second quarter of 1999, generated $842,000 in net cash proceeds and was recorded at no gain or loss. Both the parcel sold in 1997 and the parcel sold in 1999 are zoned for residential use. The balance of the property is zoned for industrial/commercial use. The Partnership sold another 7.13 acres parcel of the property in February 2000. The sale generated net sales proceeds of $846,000. The Partnership recorded no gain or loss on this sale. The Partnership sold another 2.65 acre parcel of the property in August 2000. The sale generated net sales proceeds of $486,000. The Partnership recorded no gain or loss on this sale. As of December 31, 2000, the Partnership still held approximately 18 acres of the 43.78 acre parcel in Sacramento. Subsequent to December 31, 2000, the Partnership entered into a purchase and sale agreement involving this remaining 18 acres. Although the buyer failed to make certain required cash deposits into escrow and the Partnership has cancelled the sales agreement, the prospective buyer has continued to express an interest in consummating the purchase of the property. The remaining acreage has several characteristics that limit its usefulness to many prospective purchasers, including the configuration of its lot lines and power line easements. The current prospective buyer is an "end user" and their intended use of the property is not precluded by these characteristics. While the cancelled agreement provided for an all cash sales price of $1,180,000, management believes that it may be unable find another buyer in the near future who would be willing to purchase the property for this price. Given management's intention to liquidate the Partnership as soon as practicable, it may elect to sell the remaining property to a developer rather than an "end user" at a lower price than the transaction discussed above if it is not consummated. Accordingly, the Partnership has not adjusted the net carrying value of the property which was $399,000 after allowance for possible losses as of December 31, 2000. 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 was sold in June 1998 for an all cash purchase price of $1,200,000 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 represents interest earned on Partnership funds invested, for liquidity, in time certificate and money market deposits. Interest on interest-bearing deposits was $137,000 in 2000, $55,000 in 1999 and $78,000 in 1998. The increase in interest income from 1999 to 2000 was primarily due to higher average cash balances that resulted from the property sales and loan payoffs received in the fourth quarter of 1999 and all of 2000. The decrease in interest income from 1998 to 1999 was caused by lower average cash and cash equivalent balances. The lower average balances during 1999 were the result of the $3.5 million cash distribution to limited partners in October 1998. Income from Operations of Real Estate Owned Income from operations of real estate owned totaled $173,000 in 1999 and $160,000 in 1998. The 1999 and 1998 revenues are from the office building in San Bernardino. The increase from 1998 to 1999 was primarily due to increased occupancy levels. The property was sold in December 1999. Gain (loss) on Sale of Real Estate Owned As discussed above, the Partnership recorded a loss of $5,000 on the sale of the office building in San Bernardino in 1999. The Partnership also 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 recorded on the sale of real estate during 2000. Provision for Possible Losses The provision for possible losses was $32,000 in 2000 and $460,000 in 1998. There was no provision for possible losses recorded in 1999. The 2000 provision relates to the discounted payoff of the remaining loans held by the Partnership. 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. Management believes that the allowance for possible losses at December 31, 2000 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 unconsolidated investees was $96,000 for 1998. There was no comparable amount reported in 2000 or 1999. The 1998 share of losses consist primarily of operating losses from the sale of homes and finished lots recorded by LCR. The Partnership's remaining investment in and loans receivable from this unconsolidated investee has been reduced to $-0- as of December 31, 2000. Operating expenses from operations of real estate owned were $93,000 in 1999 and $92,000 in 1998. These expenses were associated with the office building in San Bernardino that was sold in December 1999. Operating expenses from operations of real estate owned paid to affiliates were $12,000 each for 1999 and 1998. The expenses consist of property management fees paid to affiliates of the general partners. These expenses were associated with the office building in San Bernardino that was sold in December 1999. Expenses associated with non-operating real estate owned were $45,000 in 2000, $105,000 in 1999 and $232,000 in 1998. The expenses relate principally to the proposed marina and condominiums in Redwood City, the 44 acres in Sacramento and the 10.66 acres in Roseville. These expenses include property taxes of $27,000, $39,000 and $130,000 for 2000, 1999 and 1998, respectively. The decreases from 1998 to 1999 are 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 1999 expense also includes $43,000 in costs accrued in anticipation of the settlement of litigation involving certain time-share units previously owned by the Partnership which were charged off in 1992. There was no comparable litigation expense during 2000. Depreciation and amortization expense was $4,000 in 1999 and $4,000 in 1998 for the office building in San Bernardino that was sold in December 1999. . Interest expense was $37,000 for 1999 and $16,000 for 1998. This interest expense relates to the debt secured by the office building in San Bernardino. The increase in interest expense from 1998 to 1999 is a result of the refinance of property in June 1998 with a new $235,000 note bearing interest at 8.64 percent per annum. General and administrative expenses, affiliates were $104,000, $192,000 and $257,000 in 2000, 1999 and 1998, respectively. These expenses are primarily salary allocation reimbursements paid to affiliates for the management of the Partnership's assets. The decreases in 2000 and 1999 are attributable to a substantial layoff of the corporate partner's personnel in March 1999 in response to the Partnership's decreasing assets. General and administrative expenses, nonaffiliates was $71,000, $88,000 and $64,000 in 2000, 1999 and 1998, respectively. The decrease in 2000 is principally attributable to a decrease in accounting fees and investor reporting costs. The increase in 1999 is principally attributable to an increase in accounting fees and investor reporting costs . In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available for sale security or a foreign-currency-denominated forecasted transaction. Under SFAS 133, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. The adoption of this pronouncement had no effect on the Partnership's financial statements. 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. As of December 31, 2000, the Partnership held fixed rate bank deposits with carrying values totaling $1,674,000. The bank deposits all had maturities of less than ninety days. The fair value of these bank deposits was estimated to be equal to their carrying values as of December 31, 2000 due to their near term maturities. 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. 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 62 General Partner John B. Joseph is currently Vice Chairman of the Board of Directors and Vice President of Centennial Corporation. He has held these positions since 1983. Mr. Joseph also has served, in the following capacities during the past five years: he was on the board of directors for West Coast Bancorp ("WCB"), a publicly held bank holding company operating in California from its inception in 1981 through February 1999; he was Chairman of the Board of Directors of WCB since its inception in 1981 and CEO from April 1991 until 1998. Mr. Joseph has also been general partner of various public and private limited partnerships engaged in real estate development and lending activities. 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. Ronald R. White Age 54 General Partner Ronald R. White is currently President and CEO of Centennial Corporation. He has held these positions since 1983. 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: general partner of various public and private limited partnerships engaged in real estate development and lending activities. 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, 2000 - ------------------------------------------------------------------------------ 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 affiliates $ 104,000 (1) reimbursable shall be entitled to reimbursement expenses for certain expenses, subject to - general the conditions of the Partnership partner or Agreement. affiliates General partners' A 5 percent interest in cash $ --- interest in cash flow available for distribution distributions for any year until all limited - - general partnership unit holders have partners or received an amount equal to a 12 affiliates 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, 2000. (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. (3) & (4) Articles of Incorporation and Bylaws The Amended and Restated Limited Partnership Agreement Incorporated by reference to Exhibit A to the Partnership's Prospectus contained in the Partnership's registration Statement on Form Form S-11 (Commission File No. 0-15448) Dated January 17, 1986, as supplemented filed under the Securities Act of 1933 (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 30, 2001 By:/s/Ronald R. White _________________________________ Ronald R. White General Partner March 30, 2001 By: CENTENNIAL CORPORATION General Partner /s/John B. Joseph _________________________________ John B. Joseph Executive Vice President March 30, 2001 /s/Ronald R. White _________________________________ Ronald R. White President March 30, 2001 /s/Joel H. Miner _________________________________ Joel H. Miner Chief Financial Officer March 30, 2001 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, 2000, 1999 and 1998 (With Independent Auditors' Report Thereon) F-1 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-3 Consolidated Balance Sheets -- December 31, 2000 and 1999 F-4 Consolidated Statements of Operations -- Years ended December 31, 2000, 1999 and 1998 F-5 Consolidated Statements of Partners' Equity -- Years ended December 31, 2000, 1999 and 1998 F-6 Consolidated Statements of Cash Flows -- Years ended December 31, 2000, 1999 and 1998 F-7 Notes to Consolidated Financial Statements F-9 Schedules Schedule III - Consolidated Real Estate Owned F-21 Schedule IV - Mortgage Loans on Real Estate F-22 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-2 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 February 26, 2001 F-3 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Consolidated Balance Sheets December 31, 2000 and 1999
ASSETS 2000 1999 - ------------------------------------------------------------------------------ Cash and cash equivalents (note 5) $ 1,674,000 $ 2,039,000 Real estate loans receivable, earning --- 543,000 Real estate loans receivable from unconsolidated investee, nonearning (note 5) --- 5,000 - ------------------------------------------------------------------------------ Net real estate loans receivable --- 548,000 - ------------------------------------------------------------------------------ Real estate owned, held for sale (note 6) 1,511,000 2,843,000 Less allowance for possible losses on real estate owned (note 4) 1,112,000 1,112,000 - ------------------------------------------------------------------------------ Net real estate owned 399,000 1,731,000 - ------------------------------------------------------------------------------ Due from unconsolidated investee --- 2,000 Other assets, net --- 5,000 - ------------------------------------------------------------------------------ $ 2,073,000 $ 4,325,000 ============================================================================== LIABILITIES AND PARTNERS' EQUITY - ------------------------------------------------------------------------------ Accounts payable and accrued liabilities 11,000 65,000 - ------------------------------------------------------------------------------ Total liabilities 11,000 65,000 - ------------------------------------------------------------------------------ Partners' equity (deficit) -- 29,141 limited partnership units outstanding in 2000 and 1999 General partners (56,000) (56,000) Limited partners 2,118,000 4,316,000 - ------------------------------------------------------------------------------ Total partners' equity 2,062,000 4,260,000 Contingencies (note 7) - ------------------------------------------------------------------------------ $ 2,073,000 $ 4,325,000 ==============================================================================
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, 2000, 1999 and 1998
2000 1999 1998 - ------------------------------------------------------------------------------ Revenue: Interest on loans to affiliates, including fees (note 5) $ --- $ --- $ 16,000 Interest on loans to nonaffiliates 32,000 45,000 12,000 Interest on interest-bearing deposits (note 5) 137,000 55,000 78,000 Income from operations of real estate owned --- 173,000 160,000 Gain (loss)on sale of real estate owned --- (5,000) 192,000 Other 12,000 9,000 21,000 - ------------------------------------------------------------------------------ Total revenue 181,000 277,000 479,000 - ------------------------------------------------------------------------------ Expenses: Provision for possible losses (notes 3 and 4) 32,000 --- 460,000 Share of losses in unconsolidated investee (note 5) --- --- 96,000 Operating expenses from operations of real estate owned --- 93,000 92,000 Operating expenses from operations of real estate owned paid to affiliates (note 5) --- 12,000 12,000 Expenses associated with non-operating real estate owned 45,000 105,000 232,000 Depreciation and amortization expense --- 4,000 4,000 Interest expense --- 37,000 16,000 General and administrative, affiliates (note 5) 104,000 192,000 257,000 General and administrative, nonaffiliates 71,000 88,000 64,000 - ------------------------------------------------------------------------------ Total expenses 252,000 531,000 1,233,000 - ------------------------------------------------------------------------------ Net loss $ (71,000) $ (254,000) $ (754,000) ============================================================================== Net loss per limited partnership unit - basic and diluted $ ( 2.44) $ (8.72) $ (25.87) ==============================================================================
See accompanying notes to consolidated financial statements F-5 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Partners' Equity Years ended December 31, 2000, 1999 and 1998
Total General Limited Partners' Partners Partners Equity - ------------------------------------------------------------------------------ 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 Net loss --- (254,000) (254,000) - ------------------------------------------------------------------------------ Balance (deficit) at December 31, 1999 $ (56,000) $ 4,316,000 $ 4,260,000 Net loss --- (71,000) (71,000) Distribution to limited partners --- (2,127,000) (2,127,000) - ------------------------------------------------------------------------------ Balance (deficit) at December 31, 2000 (56,000) 2,118,000 2,062,000 ==============================================================================
See accompanying notes to consolidated financial statements F-6 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows Years ended December 31, 2000, 1999 and 1998
2000 1999 1998 - ----------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (71,000) $ (254,000) $ (754,000) Adjustments to reconcile net loss to net cash used in operating activities: Provision for possible losses 32,000 --- 460,000 Depreciation and amortization --- 4,000 4,000 Gain (loss) on sale of real estate owned --- 5,000 (192,000) Equity in losses of unconsolidated investee --- --- 96,000 Changes in assets and liabilities: (Increase) decrease in other assets 5,000 13,000 (22,000) Increase (decrease) in accounts payable and accrued liabilities (54,000) (7,000) 63,000 Increase (decrease) in property taxes payable on real estate owned --- --- (484,000) - ------------------------------------------------------------------------------ Net cash used in operating activities (88,000) (239,000) (829,000) - ----------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Principal collected on loans 520,000 50,000 615,000 Advances on loans receivable - earning (4,000) --- --- Advances on loans made to unconsolidated investee --- --- (295,000) Capital expenditures for real estate owned --- (27,000) (154,000) Proceeds from sale of real estate owned 1,332,000 1,479,000 4,823,000 Decrease in due from unconsolidated investee 2,000 --- 14,000 - ----------------------------------------------------------------------------- Net cash provided by investing activities 1,850,000 1,502,000 5,003,000 - ----------------------------------------------------------------------------- See accompanying notes to consolidated financial statements F-7 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows (Continued) Years ended December 31, 2000, 1999 and 1998 2000 1999 1998 - ----------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Advances on notes payable --- --- 235,000 Principal payments on notes payable --- (234,000) (98,000) Distributions to limited partners (2,127,000) --- (3,496,000) - ----------------------------------------------------------------------------- Net cash used in financing activities(2,127,000) (234,000) (3,359,000) - ----------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (365,000) 1,029,000 815,000 Cash and cash equivalents at beginning of year 2,039,000 1,010,000 195,000 - ----------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 1,674,000 $ 2,039,000 $1,010,000 ============================================================================= Supplemental schedule of cash flow information - interest paid during the year $ --- $ 29,000 $ 16,000 - ----------------------------------------------------------------------------- Supplemental schedule of noncash investing and financing activities: Decrease in allowance for possible losses on real estate loans and on real estate owned as a result of sales and chargeoffs --- 299,000 1,766,000 Decrease in allowance for possible loans receivable and loans receivable as a result of chargeoffs 32,000 --- --- Receipt of notes receivable as partial repayment of note receivable --- --- 586,000
See accompanying notes to consolidated financial statements F-8 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Notes to Consolidated Financial Statements December 31, 2000, 1999, 1998 (1) SUMMARY OF SIGNIFICANT ACCOUNTING P0LICIES 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, 2000, all 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. The real estate owned balance before allowance for possible losses at December 31, 1997 was $10,827,000, decreasing to $4,599,000 at year end 1998, $2,843,000 at year end 1999 and decreasing to $1,511,000 at year end 2000. 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. ("PIR"), RSA Development, Inc. ("RSA"), CTA Development, Inc. ("CTA") and LCR Development, Inc., ("LCR"). 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. RSA and CTA were liquidated during 1998 and 2000, respectively. The Partnership reduced the carrying value of its investment in LCR to $-0- during 2000. With the exception of LCR, 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 is more than 20 percent but does not exceed 50 percent, the Partnership has accounted for its ownership interest using the equity method. The Partnership made several loans to LCR F-9 and its subsidiary. Under the equity method of accounting, these loans were a component of the Partnership's investment in LCR, and therefore the Partnership recorded losses by LCR as a reduction of the carrying value of these loans receivable (see note 5). Organization The Partnership was organized on July 12, 1985 in accordance with the provisions of the California Uniform Limited Partnership Act. The Partnership commenced operations in June 1986. The general partners are John B. Joseph, Ronald R. White and Centennial Corporation ("CC"), a privately-held California corporation whose stock is owned by affiliates of Ronald R. White and John B. Joseph. Partners' Capital Accounts Cash Available for Distribution, as defined in the Partnership Agreement, is to be allocated 95 percent to the limited partners and 5 percent to the general partners until each limited partner has received an amount equal to a 12 percent non-cumulative annual return on his adjusted invested capital (as defined in the Partnership Agreement). Thereafter, Cash Available for Distribution is to be allocated 90 percent to the limited partners and 10 percent to the general partners. All distributions of Mortgage Reductions (as defined in the Partnership Agreement) after the first sixty months following the closing date of the Partnership, shall be distributed 99 percent to the limited partners and 1 percent to the general partners, until each limited partner has received a 12 percent cumulative annual return on his adjusted invested capital, after which such amounts are to be distributed 85 percent to the limited partners and 15 percent to the general partners. 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, 2000. 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 became clear that the amount of the required deficit restoration of the General Partners would not exceed $56,000 and the capital accounts of the General Partners and limited partners were adjusted in 1998 to reflect such maximum deficit restoration Real Estate Loans and Allowance for Possible Losses Loans were reported at the principal amount outstanding, net of unearned income and the allowance for possible loan losses. Interest accrual was discontinued when, in the opinion of management, its collection was deemed doubtful. The allowance for possible loan losses was established through a provision for possible losses charged to expense. Loans were charged against the allowance for possible loan losses when management believed that the collectibility of principal was unlikely. F-10 Impaired Loans The Partnership considered a loan to be impaired when based upon current information and events, it believed it was probable that the Partnership would be unable to collect all amounts due according to the contractual terms of the loan agreement. In determining impairment, the Partnership considered large non-homogeneous loans including nonaccrual loans, troubled debt restructuring and performing loans which exhibited, among other characteristics, high loan- to-value ratios, low debt-coverage ratios, or other indications that the borrowers were experiencing increased levels of financial difficulty. The Partnership based 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 exceeded the measure of the impaired loan's value was recognized by recording a valuation allowance. Real Estate Owned Long-lived assets to be disposed of are 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. Assets to be disposed of are not depreciated while they are held for disposal. The Partnership considered all real estate owned as held for sale during 2000 and 1999, 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, there can be no assurance that the balance of the Partnership's assets will actually be sold in that period. 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-11
Current Temporary Differences Partnership Corporations Total (Unaudited) (Unaudited) (Unaudited) - ------------------------------------------------------------------------------ GAAP earnings (loss) for the year ended December 31, 2000 $ (30,000) $ (41,000) $ (71,000) Provision for losses --- --- --- Accrued expenses not previously deducted under the cash basis method of accounting (42,000) --- (42,000) Carrying costs expensed for books and capitalized for tax purposes --- 77,000 77,000) Decrease in net operating loss --- (36,000) (36,000) Share of losses of subsidiaries (8,000) --- (8,000) - ------------------------------------------------------------------------------ Taxable loss for the year ended December 31, 2000 $ (80,000) $ --- $ (80,000) ============================================================================== Taxable loss allocable to General Partner --- ============================================================================== Taxable loss per limited partner unit $ (2.75) ==============================================================================
Cumulative Temporary Differences as of December 31, 2000 Partnership Corporations (Unaudited) (Unaudited) - ------------------------------------------------------------------------------ Net operating loss carry forwards $ --- $ 291,000 Provision for losses --- 1,112,000 Accrued expenses not deducted under the cash basis --- 1,841,000 Carrying costs expensed for books and capitalized for tax purposes --- 852,000 - ------------------------------------------------------------------------------ Total cumulative temporary differences $ --- $ 4,096,000 ==============================================================================
As of December 31, 2000, the Partnership held approximately $4.3 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 $141 per limited partnership unit. F-12 The subsidiary corporations are subject to taxation and account for income taxes under an asset and liability approach to establishing deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the corporation's assets and liabilities. None of the subsidiary corporations have paid any income taxes since their respective formations and all of them have had net deferred tax assets which have been fully offset by valuation allowances as of December 31, 2000, 1999 and 1998. Accordingly, no tax expense or benefit has been recorded by these corporations during the three years ended December 31, 2000. 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 2000, 1999 and 1998. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 was recognized on a straight- line basis over the life of the lease when payments become due under operating leases. 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 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. F-13 (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. As of December 31, 2000, the Partnership had bank deposits at four different banks whose deposits are federally insured. Approximately $1,363,000 of the Partnership's cash and cash equivalent balance as of that same date was in excess of maximum balances covered by such insurance. Accounts Payable and Accrued Liabilities Carrying value is considered to be equal to the fair value of these liabilities as they are due on demand. (3) ALLOWANCE FOR POSSIBLE LOAN LOSSES
Changes in the allowance for possible loan losses are as follows: 2000 1999 1998 - ------------------------------------------------------------------------------ Balance at beginning of year $ --- $ --- $ 15,000 Loans to affiliates and nonaffiliates charged-off --- --- (15,000) Provision for possible losses --- --- --- - ------------------------------------------------------------------------------ Balance at end of year $ --- $ --- $ --- ==============================================================================
(4) ALLOWANCE FOR POSSIBLE LOSSES ON REAL ESTATE OWNED
Changes in the allowance for possible losses on real estate owned are as follows: 2000 1999 1998 - ------------------------------------------------------------------------------ Balance at beginning of year $ 1,112,000 $ 1,411,000 $ 2,702,000 Real estate owned charged-off --- (299,000) (1,751,000) Provision for losses --- --- 460,000 - ------------------------------------------------------------------------------ Balance at end of year $ 1,112,000 $ 1,112,000 $ 1,411,000 ==============================================================================
F-14 (5) TRANSACTIONS WITH AFFILIATES As discussed in note 1, the Partnership owns 50 percent of the stock of a corporation which has not been consolidated in the accompanying financial statements; LCR. The balance of stock in this corporation 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 this corporation and this joint venture. Under the equity method of accounting, these loans are a component of the Partnership's investment in LCR, and therefore the Partnership has recorded losses by LCR as a reduction of the carrying value of these loans receivable. All but one of these loans were charged off in 1998 with the remaining loan being repaid during 2000. A summary of these real estate loans receivable from unconsolidated investee as of December 31, 1999 is as follows:
Net Principal Losses Carrying Balance Offset Value - ------------------------------------------------------------------------------ 50 percent interest in unsecured loan from Silverwood $ 10,000 $ 5,000 $ 5,000 - ------------------------------------------------------------------------------ Total $ 10,000 $ 5,000 $ 5,000 - ------------------------------------------------------------------------------
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. The consolidated balance sheets and statements of operations of LCR have not been consolidated in the Partnership's financial statements. The Partnership accounted for its investment in this corporation using the equity method. LCR ceased active operation in 1999 and liquidated the majority of its remaining assets during 2000. As of December 31, 2000, the Partnership's carrying value of investments and loans to the joint venture had been reduced to $-0-. The Partnership recorded losses from this unconsolidated investee of $-0-, $-0- and $96,000 during the twelve months ended December 31, 2000, 1999 and 1998, respectively. The following represents condensed financial information for LCR at December 31, 1998 and for the year ended December 31, 1998: F-15 LCR Development, Inc. Consolidated Balance Sheets
December 31, Assets 1998 - ------------------------------------------------------------------------- Cash $ 11,000 Restricted cash 20,000 Real estate owned 119,000 Less allowance for losses on real estate investments 17,000 - -------------------------------------------------------------------------- Net real estate owned 102,000 - -------------------------------------------------------------------------- $ 133,000 ========================================================================== Liabilities and Stockholders' Deficit - -------------------------------------------------------------------------- Notes payable to affiliates: CMIF $ 2,882,000 CMIF II 1,549,000 - -------------------------------------------------------------------------- Total notes payable 4,431,000 Accounts payable and accrued liabilities 12,000 Interest payable to affiliates 1,837,000 Payable to affiliates 5,000 - -------------------------------------------------------------------------- Total liabilities 6,285,000 Stockholders' deficit (6,152,000) - -------------------------------------------------------------------------- $ 133,000 ==========================================================================
F-16 LCR Development, Inc. Consolidated Statements of Operations Year ended December 31, 1998
1998 - ------------------------------------------------------------------------ Revenues Housing sales $ 1,509,000 Sale of finished lots 1,499,000 - ------------------------------------------------------------------------ 3,008,000 - ------------------------------------------------------------------------ Costs and expenses Cost of housing sales 1,437,000 Cost of sale of finished lots 1,514,000 Provision for losses on real estate owned 216,000 Selling and marketing expenses 66,000 General and administrative 24,000 - ------------------------------------------------------------------------ 3,257,000 - ------------------------------------------------------------------------ Operating loss (249,000) Interest expense 403,000 - ------------------------------------------------------------------------ Net loss $ (652,000) ======================================================================== Interest not included in share of losses (460,000) - ------------------------------------------------------------------------ Allocable net loss $ (192,000) ======================================================================== Share of loss recorded $ (96,000) ========================================================================
The Partnership and CMIF did not record interest income in connection with the $1,837,000 of accrued interest payable to affiliates by LCR and Silverwood. Accordingly, the Partnership did not record its share of losses from LCR to the extent that it represented this nonaccrued interest income. 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 $104,000 $170,000 and $202,000 for such services in 2000, 1999 and 1998, respectively. The Partnership also accrued an additional $22,000 and $67,000 as general and administrative, affiliates expense during 1999 and 1998, respectively. These amounts were the Partnership's share of certain severance pay due under several employment contracts entered into during 1998. During 1999 and 1998, the Partnership maintained interest-bearing deposits with Sunwest Bank, an affiliate of the general partners up until March 1999. Interest earned on such deposits for three months ended March 31, 1999 and the year ended December 31, 1998 was $1,000 and $16,000, respectively. F-17 (6) REAL ESTATE OWNED
Real estate owned consists of the following: December 31, December 31, 2000 1999 - ------------------------------------------------------------------------------ 1. Land in Sacramento, CA 1,511,000 2,843,000 - ------------------------------------------------------------------------------ Total real estate owned $ 1,511,000 $ 2,843,000 ==============================================================================
The Partnership sold approximately 9.45 acres of its 37.28 acre parcel of land in Sacramento in June 1999. The sale generated net sales proceeds of $842,000. The Partnership recorded no gain or loss on this sale. The Partnership also sold its office building in San Bernardino in December 1999. The sale generated net sales proceeds of $637,000. The sale resulted in a $5,000 loss after applying $299,000 of the Partnership's previously recorded allowance for possible losses on real estate investments. A note payable with a principal balance of approximately $230,000 was repaid with funds from the proceeds of this sale. The Partnership sold approximately 7.13 acres of its 37.28 acre parcel of land in Sacramento in February 2000. The sale generated net sales proceeds of $846,000. The Partnership recorded no gain or loss on this sale. The Partnership sold approximately 2.65 acres of its 37.28 acre parcel of land in Sacramento in August 2000. The sale generated net sales proceeds of $486,000. The Partnership recorded no gain or loss on this sale. As of December 31, 2000, the Partnership still held approximately 18 acres of the 37.28 acre parcel in Sacramento with a net carrying value of $399,000, after deducting an allowance for possible losses of $1,112,000. (7) Contingencies There are no pending legal proceedings. F-18 (8) QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarter Ended December 31, September 30, June 30, March 31, 2000 2000 2000 2000 - ------------------------------------------------------------------------------------------ REVENUE: Interest income on loans $ --- $ 11,000 $ 10,000 $ 11,000 Interest on interest-bearing deposits 31,000 44,000 36,000 26,000 Other 5,000 4,000 2,000 1,000 - ------------------------------------------------------------------------------------------ Total revenue 36,000 59,000 48,000 38,000 - ------------------------------------------------------------------------------------------ EXPENSES: Provision for losses 2,000 30,000 --- --- Expenses associated with non-operating real estate owned 5,000 8,000 10,000 22,000 General and administrative 40,000 41,000 44,000 50,000 - ------------------------------------------------------------------------------------------ Total expenses 47,000 79,000 54,000 72,000 - ------------------------------------------------------------------------------------------ Net loss $ (11,000) $ (20,000) $ (6,000) $ (34,000) ========================================================================================== Net loss per limited partnership unit-basic and diluted $ (.38) $ (.69) $ (.20) $ (1.17) ==========================================================================================
F-19 (8) QUARTERLY FINANCIAL RESULTS (UNAUDITED)(CONTINUED)
Quarter Ended December 31, September 30, June 30, March 31, 1999 1999 1999 1999 - --------------------------------------------------------------------------------------- REVENUE: Interest income on loans $ 11,000 $ 10,000 $ 12,000 $ 12,000 Interest on interest-bearing deposits 19,000 19,000 8,000 9,000 Income from operations of real owned 38,000 43,000 48,000 44,000 Loss on sale of real estate owend (5,000) --- --- --- Other 1,000 2,000 2,000 4,000 - ------------------------------------------------------------------------------------------ Total revenue 64,000 74,000 70,000 69,000 - ------------------------------------------------------------------------------------------ EXPENSES: Operating expenses from operations of real estate owned 28,000 30,000 27,000 24,000 Expenses associated with non-operating real estate owned 53,000 27,000 12,000 13,000 Interest expense 21,000 6,000 5,000 5,000 General and administrative 52,000 48,000 44,000 136,000 - ------------------------------------------------------------------------------------------ Total expenses 154,000 111,000 88,000 178,000 - ------------------------------------------------------------------------------------------ Net loss $ (90,000) $ (37,000) $ (18,000) $ (109,000) ========================================================================================== Net loss per limited partnership unit-basic and diluted $ (3.09) $ (1.27) $ (.62) $ (3.74) ==========================================================================================
F-20 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Consolidated Real Estate Owned December 31, 2000
Schedule III Initial Costs Capitalized Gross Amount at Cost to Subsequent Which Carried Partnership to Acquisition on Books Total Real Real Life on Which Encum- Estate Improvements Carrying Estate Date Depreciation is Property brances Owned Costs Owned Acquired Computed - ------------------------------------------------------------------------------------------------------------ 18 Acres in Sacramento --- 1,269,000 153,000 89,000 1,511,000 March-92 None - ----------------------------------------------------------------------------------------------------------- $ --- $ 1,269,000 $ 153,000 $ 89,000 $ 1,511,000 =========================================================================================================== Aggregate cost for Federal income tax purposes is $2,364,000 at December 31, 2000.
The following is a summary of consolidated real estate owned for the three years ended December 31, 2000.
2000 1999 1998 - ------------------------------------------------------------------------------------------------------------- Balance at beginning of year $ 2,843,000 $ 4,599,000 $ 10,827,000 Additions during period: Improvements --- 27,000 154,000 Deductions during period: Real estate sold (1,332,000) (1,783,000) (4,631,000) Charge-offs --- --- (1,751,000) - ------------------------------------------------------------------------------------------------------------- Balance at year end $ 1,511,000 $ 2,843,000 $ 4,599,000 =============================================================================================================
See accompanying independent auditors report F-21 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership MORTGAGE LOANS ON REAL ESTATE December 31, 2000
SCHEDULE IV Principal Amount of Loan Subject to Final Periodic Face Carrying Delinquent Interest Maturity Payment Prior Amount of Amount of Principal or Description Rate Date Terms Liens Mortgages Mortgages or Interest - ------------------------------------------------------------------------------------------------------------ No mortgages outstanding as of December 31, 2000 --- --- - ------------------------------------------------------------------------------------------------------------- $ --- $ --- - -------------------------------------------------------------------------------------------------------------
The following is a summary of activity for the years ended December 2000, 1999 and 1998. 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------ Balance at beginning of year $ 548,000 $ 598,000 $ 1,029,000 Additions during period: New mortgage loans/disbursements 4,000 --- 295,000 Loans transferred from real estate owned --- --- --- Deductions during period: Collections of principal (520,000) (50,000) (615,000) Chargeoffs (32,000) --- (15,000) Losses from unconsolidated investees --- --- (96,000) - ------------------------------------------------------------------------------------------------------------ Balance at year end $ --- $ 548,000 $ 598,000 ============================================================================================================
See accompanying independent auditors' report. F-22 -----END PRIVACY-ENHANCED MESSAGE-----