FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
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 offices) (Zip Code)
Registrant's telephone number, including area code: (714)502-8484
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 to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
PART I
ITEM 1. FINANCIAL STATEMENTS
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
September 30, December 31,
2001 2000
Assets (Unaudited)
- ---------------------------------------------------------------------------
Cash and cash equivalents $ 999,000 $ 1,674,000
Real estate owned, held for sale (note 3) 1,511,000 1,511,000
Less allowance for possible loan
losses on real estate owned 1,112,000 1,112,000
- ---------------------------------------------------------------------------
Net real estate owned 399,000 399,000
- ---------------------------------------------------------------------------
Other assets, net 3,000 ---
- ---------------------------------------------------------------------------
$ 1,401,000 $ 2,073,000
===========================================================================
Liabilities and Partners' Equity
- ---------------------------------------------------------------------------
Accounts payable and accrued liabilities $ 17,000 $ 11,000
- ---------------------------------------------------------------------------
Total liabilities 17,000 11,000
- ---------------------------------------------------------------------------
Partners' equity (deficit)
-- 29,141 limited partnership
units outstanding at September 30, 2001
and December 31, 2000
General partners (56,000) (56,000)
Limited partners 1,440,000 2,118,000
- ---------------------------------------------------------------------------
Total partners' equity 1,384,000 2,062,000
Contingencies (note 5)
- ---------------------------------------------------------------------------
$ 1,401,000 $ 2,073,000
===========================================================================
See accompanying notes to consolidated financial statements
1
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
(Unaudited)
Nine Months Three Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
- ------------------------------------------------------------------------
Revenue:
Interest income on loans
to nonaffiliates,
including fees $ --- $ 32,000 $ --- $ 11,000
Interest on interest-
bearing deposits 50,000 106,000 12,000 44,000
Other income 5,000 7,000 1,000 4,000
- ------------------------------------------------------------------------
Total revenue 55,000 145,000 13,000 59,000
- ------------------------------------------------------------------------
Expenses:
Provision for possible losses --- 30,000 --- 30,000
Expenses associated with non-
operating real estate
owned 37,000 40,000 12,000 8,000
General and administrative,
affiliates 70,000 82,000 19,000 24,000
General and administrative,
nonaffiliates 43,000 53,000 12,000 17,000
- -------------------------------------------------------------------------
Total expenses 150,000 205,000 43,000 79,000
- -------------------------------------------------------------------------
Net loss $ (95,000) $ (60,000) $ (30,000) $ (20,000)
=========================================================================
Net loss per limited
partnership unit
- basic and diluted $ (3.26) $ (2.06) $ (1.03) $ (0.69)
=========================================================================
See accompanying notes to consolidated financial statements
2
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statement of Partners' Equity (Unaudited)
For the nine months ended September 30, 2001
Total
General Limited Partners'
Partners Partners Equity
- --------------------------------------------------------------------------
Balance (deficit) at
December 31, 2000 $ (56,000) $ 2,118,000 $ 2,062,000
Cash distribution to
limited partners --- (583,000) (583,000)
Net loss --- (95,000) (95,000)
- --------------------------------------------------------------------------
Balance (deficit) at
September 30, 2001 $ (56,000) $ 1,440,000 $ 1,384,000
===========================================================================
See accompanying notes to consolidated financial statements
3
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows (Unaudited)
For the nine months ended September 30, 2001 and 2000
2001 2000
- --------------------------------------------------------------------------
Cash flows used in
operating activities:
Net loss $ (95,000) $ (60,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Provision for possible losses --- 30,000
Changes in assets and liabilities:
Increase in other assets (3,000) (1,000)
Increase (decrease) in accounts payable
and accrued liabilities 6,000 (48,000)
Increase in due to affiliates --- 1,000
- -------------------------------------------------------------------------
Net cash used in operating activities (92,000) (78,000)
- -------------------------------------------------------------------------
Cash flows from investing activities:
Principal collected on loans --- 23,000
Cash proceeds from sale of real
estate owned, held for sale --- 1,332,000
- -------------------------------------------------------------------------
Net cash provided by
investing activities --- 1,355,000
- -------------------------------------------------------------------------
Cash flows used in financing activities:
Cash distribution to limited partners (583,000) ---
- -------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents (675,000) 1,277,000
Beginning cash and cash equivalents 1,674,000 2,039,000
- -------------------------------------------------------------------------
Ending cash and cash equivalents $ 999,000 $3,316,000
=========================================================================
Supplemental schedule of noncash investing
and financing activities:
Decrease in notes receivable as
a result of partial chargeoff $ --- $ 30,000
See accompanying notes to consolidated financial statements
4
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2001 and 2000
(1) 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 was 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 September 30, 2001, all of the Partnership's loans have been repaid or
charged off. 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 became a direct investor in this real estate. The
real estate owned balance before allowance for possible losses as of December
31, 2000 and September 30, 2001 had been reduced to $1,511,000.
As required by the Partnership Agreement, the Partnership is currently in the
repayment stage, and as a result, cash proceeds from mortgage investments are
no longer available for reinvestment.
(2) BASIS OF PRESENTATION
The consolidated financial statements are unaudited and reflect all
adjustments, consisting only of normal recurring accruals, which are, in the
opinion of management, necessary for a fair statement of the results of
operations for the interim periods. Results for the nine and three months
ended September 30, 2001 and 2000 are not necessarily indicative of results
which may be expected for any other interim period, or for the year as a
whole.
Information pertaining to the nine and three months ended September 30, 2001
and 2000 is unaudited and condensed inasmuch as it does not include all
related footnote disclosures.
The consolidated financial statements do not include all information and
footnotes necessary for fair presentation of financial position, results of
operations and cash flows in conformity with accounting principles generally
accepted in the United States of America. Notes to consolidated financial
statements included in Form 10-K for the year ended December 31, 2000 on file
with the Securities and Exchange Commission, provide additional disclosures
and a further description of accounting policies.
5
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.
Net Loss per Limited Partnership Unit
Net loss per limited partnership unit was based on the weighted average number
of limited partnership units outstanding of 29,141 for all periods presented.
(3) REAL ESTATE OWNED
Real estate owned consists of the following:
(dollars in thousands)
September 30, December 31,
2001 2000
- ----------------------------------------------------------------------------
1. Aproximately 18 acres of unimproved
land in Sacramento, CA 1,511 1,511
- ----------------------------------------------------------------------------
Total real estate owned $ 1,511 $ 1,511
============================================================================
(4) TRANSACTIONS WITH AFFILIATES
Under the provisions of the Partnership Agreement, the general partners are to
receive compensation for their services in supervising the affairs of the
Partnership. This partnership management compensation shall be equal to 10
percent of the cash available for distribution, as defined in the Partnership
Agreement. The general partners will not receive this compensation until the
limited partners have received a 12 percent per annum cumulative return on
their adjusted invested capital, but are entitled to receive a 5 percent
interest in cash available for distribution in any year until this provision
has been met. Adjusted invested capital is defined as the original capital
invested less distributions from mortgage reductions. Payments to the general
partners have been limited to 5 percent of cash available for distribution as
the limited partners have not received their 12 percent per annum cumulative
return. Under this provision of the Partnership Agreement, no distributions
were paid to the general partners during the nine months ended September 30,
2001 or 2000.
(5) CONTINGENCIES
There are no material pending legal proceedings.
(6) DISTRIBUTION TO LIMITED PARTNERS
The Partnership declared a distribution payable to its limited partners who
were holders of record as of September 1, 2001 in the amount of $20.00 per
limited partnership unit. The distribution totaled approximately $583,000 and
was paid on September 15, 2001.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
References to the "Partnership" in the following discussion refers to
Centennial Mortgage Income Fund II and its wholly-owned subsidiaries.
The Partnership had net losses and losses per limited partnership unit of
$(95,000) and $(3.26)) for the nine months ended September 30, 2001,
respectively, and $(60,000) and $(2.06) for the nine months ended September
30, 2000, respectively.
Cautionary Statements Regarding Forward-Looking Information
The Partnership wishes to caution readers that the forward-looking statements
contained in this Form 10-Q under "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in
this Form 10-Q 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.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, the Partnership had $999,000 in unrestricted cash and
interest-bearing deposits. The Partnership had no unfunded loan commitments
at September 30, 2001. During the first nine months of 2001, the
Partnership's principal source of cash was $50,000 in interest income on
interest bearing deposits. The Partnership's principal uses of cash during
the first nine months of 2001 were a $583,000 cash distribution to limited
partners, approximately $122,000 in general and administrative costs and
$25,000 in expenses associated with non-operating real estate owned.
As of September 30, 2001, the Partnership still held approximately 18 acres of
the 43.78 acre parcel in Sacramento. Subsequent to December 31, 2000, the
Partnership entered into two separate purchase and sale agreements involving
this remaining 18 acres. The buyer in the first transaction failed to make
certain required cash deposits into escrow and the Partnership cancelled the
sales agreement. Subsequent to canceling the first sales agreement, the
Partnership entered into a second transaction involving the remainder of the
7
property. This second transaction was subject to numerous contingencies. The
buyer in this transaction cancelled the sales contract based upon these
contingencies. Subsequently, the first buyer has again entered into
negotiations to purchase the property at a higher price, however no contract
has been executed yet and they have expressed concern over whether or not they
will be able to obtain certain conditional use permits and whether site
improvement requirements that the City has indicated would needed will make
the project too costly. 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 prospective
buyers in the transactions discussed above are "end users" and their intended
uses of the property are not precluded by these characteristics.
Additionally, during the quarter ended June 30, 2001, an accident occurred on
the street on which the property is located and a truck involved in the
accident overturned on the property, resulting in the spilling of toxic
material on a portion of the property. The Partnership contacted the owner of
the truck and negotiated for the owner to clean up the spill. The cleanup has
now been completed. The first cancelled agreement provided for an all cash
sales price of $1,180,000 and the second cancelled transaction provided for a
$1,500,000 all cash purchase price. While the sales prices in both the
cancelled transactions are significantly higher than the Partnership's
$399,000 carrying value of the property, management is not confident that
either buyer will ultimately purchase the property and believes that it may be
unable find another buyer in the near future who would be willing to purchase
the property for a comparable 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 transactions discussed above if they are 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
September 30, 2001.
The Partnership's principal capital requirements for the next year consist of:
(i) real property taxes on real estate owned of approximately $24,000 payable
during the next twelve months, and (ii) selling, general and administrative
costs. These commitments are expected to be paid from existing cash balances.
Effective with the third quarter of 1991, the Partnership suspended making any
cash distributions to partners, due to a decline in liquidity and the
uncertainty of the cash requirements for existing and potential real estate
owned. 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.
The Partnership declared a distribution payable to its limited partners who
were holders of record as of September 1, 2001 in the amount of $20.00 per
limited partnership unit. The distribution totaled approximately $583,000 and
was paid on September 15, 2001.
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. Although the general partners are not aware of any
threatened litigation, or litigation that is likely to arise, they have
8
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.
RESULTS OF OPERATIONS
Interest income on loans to nonaffiliates, including fees was $-0- and $32,000
for the nine months ended September 30, 2001 and 2000, respectively. The
decrease can be attributed to the payoff of the last Partnership loan in
October 2000.
REAL ESTATE OWNED
The real estate owned balance at both September 30, 2001 and 2000 were
$1,511,000. A description of the Partnership's principal real estate owned
follows:
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.
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 no gain or loss
was recorded. 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 September 30, 2001, the Partnership still held approximately 18 acres of
the 43.78 acre parcel in Sacramento. Subsequent to December 31, 2000, the
Partnership entered into two separate purchase and sale agreements involving
this remaining 18 acres. The buyer in the first transaction failed to make
certain required cash deposits into escrow and the Partnership cancelled the
sales agreement. Subsequent to canceling the first sales agreement, the
Partnership entered into a second transaction involving the remainder of the
9
property. This second transaction was subject to numerous contingencies. The
buyer in this transaction cancelled the sales contract based upon these
contingencies. Subsequently, the first buyer has again entered into
negotiations to purchase the property at a higher price, however no contract
has been executed yet and they have expressed concern over whether or not they
will be able to obtain certain conditional use permits and whether site
improvement requirements that the City has indicated would needed will make
the project too costly. 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 prospective
buyers in the transactions discussed above are "end users" and their intended
uses of the property are not precluded by these characteristics.
Additionally, during the quarter ended June 30, 2001, an accident occurred on
the street on which the property is located and a truck involved in the
accident overturned on the property, resulting in the spilling of toxic
material on a portion of the property. The Partnership contacted the owner of
the truck and negotiated for the owner to clean up the spill. The cleanup has
now been completed. The first cancelled agreement provided for an all cash
sales price of $1,180,000 and the second cancelled transaction provided for a
$1,500,000 all cash purchase price. While the sales prices in both the
cancelled transactions are significantly higher than the Partnership's
$399,000 carrying value of the property, management is not confident that
either buyer will ultimately purchase the property and believes that it may be
unable find another buyer in the near future who would be willing to purchase
the property for a comparable 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 transactions discussed above if they are 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
September 30, 2001.
INTEREST ON INTEREST-BEARING DEPOSITS
Interest on interest-bearing deposits totaled $12,000 and $44,000 for the
three months ended September 30, 2001 and 2000, respectively. Interest on
interest-bearing deposits totaled $50,000 and $106,000 for the nine months
ended September 30, 2001 and 2000, respectively. Interest on interest-bearing
deposits represents interest earned on Partnership funds invested, for
liquidity, in time certificate and money market deposits. The decreases in
2001 are attributable to both decrease in the average balance of cash and cash
equivalents that resulted from the $2,127,000 and $583,000 cash distribution
to limited partners in October 2000 and September 2001 as well as a reduction
in the average interest rate earned on deposits.
PROVISION FOR POSSIBLE LOSSES
There was a $30,000 provision for possible losses for the nine months ended
September 30, 2000. There was no provision for possible losses for the nine
months ended September 30, 2001. The provision in 2000 was related to a note
receivable for which the Partnership accepted a discounted payoff. This was
the final note that the Partnership held. The provision for possible losses
results from the change in the allowance for possible losses on real estate
owned net of chargeoffs, if any. Management believes that the allowance for
possible losses at September 30, 2001 is adequate to absorb the known and
inherent risk in the Partnership's loan and real estate owned portfolio.
10
OTHER EXPENSES
Expenses associated with non-operating real estate owned were $12,000 and
$8,000 for the three months ended September 30, 2001 and 2000, respectively.
Expenses associated with non-operating real estate owned were $37,000 and
$40,000 for the nine months ended September 30, 2001 and 2000, respectively.
The expenses relate to the 45 acres in Sacramento. The decrease for the nine
months ended September 30, 2001 is primarily due to a decrease in property
taxes due to the sales transactions involving the Sacramento property
discussed above.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses, affiliates totaled $70,000 and $82,000,
respectively, for the nine months ended September 30, 2001 and 2000. General
and administrative expenses, affiliates totaled $19,000 and $24,000,
respectively, for the three months ended September 30, 2001 and 2000. These
expenses are primarily salary allocation reimbursements paid to affiliates.
The decrease from 2000 to 2001 is due to a decrease in time being spent on the
Partnership's affairs by employees of the general partner.
General and administrative expenses, nonaffiliates totaled $43,000 and $53,000
for the nine months ended September 30, 2001 and 2000, respectively. General
and administrative expenses, nonaffiliates totaled $12,000 and $17,000 for the
three months ended September 30, 2001 and 2000, respectively. These expenses
consist of other costs associated with the administration of the Partnership
and real estate owned. The decrease in 2001 is principally due to a decrease
in legal fees and investor mailing costs.
ITEM 3. 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 September 30, 2001, the Partnership held only cash in checking accounts of
$11,000 and fixed rate bank deposits with carrying values totaling $988,000.
The bank deposits all had maturities of less than ninety days. The estimated
fair value of all of these assets was estimated to be equal to their carrying
values as of September 30, 2001.
Management currently intends to hold the remaining fixed rate assets until
their respective maturities. Accordingly, the Partnership is not exposed to
any material cash flow or earnings risk associated with these assets. Given
the relatively short-term maturities of these assets, management does not
believe the Partnership is exposed to any significant market risk related to
the fair value of these assets.
The Partnership had no interest bearing indebtedness outstanding as of
September 30, 2001. Accordingly, the Partnership is not exposed to any market
risk associated with its liabilities.
11
PART II
Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a)
(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) None
12
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 November 14, 2001
By:/s/ Ronald R. White
_________________________________
Ronald R. White
General Partner November 14, 2001
By: CENTENNIAL CORPORATION
General Partner
By:/s/ Joel H. Miner
_________________________________
Joel H. Miner
Chief Financial Officer November 14, 2001