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, 1999
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,
Assets 1999 1998
(Unaudited)
- ------------------------------------------------------------------------
Cash and cash equivalents $ 1,685,000 $ 1,010,000
Real estate loans
receivable, earning 539,000 581,000
Real estate loans receivable from
unconsolidated investee,
nonearning (note 4) 5,000 17,000
- ------------------------------------------------------------------------
Net real estate loans receivable 544,000 598,000
- ------------------------------------------------------------------------
Real estate owned, held for sale (note 3) 3,782,000 4,599,000
Less allowance for possible
losses on real estate owned 1,411,000 1,411,000
- ------------------------------------------------------------------------
Net real estate owned 2,371,000 3,188,000
- ------------------------------------------------------------------------
Due from affiliate 2,000 2,000
Other assets, net 18,000 22,000
- ------------------------------------------------------------------------
$ 4,620,000 $ 4,820,000
========================================================================
Liabilities and Partners' Equity
- ------------------------------------------------------------------------
Note payable $ 233,000 $ 234,000
Accounts payable and
accrued liabilities 37,000 72,000
- ------------------------------------------------------------------------
Total liabilities 270,000 306,000
- ------------------------------------------------------------------------
Partners' equity (deficit) - 29,141
limited partnership units outstanding
at September 30, 1999 and December 31, 1998
General partners (56,000) (56,000)
Limited partners 4,406,000 4,570,000
- ------------------------------------------------------------------------
Total partners' equity 4,350,000 4,514,000
Contingencies (note 5)
- ------------------------------------------------------------------------
$ 4,620,000 $ 4,820,000
========================================================================
See accompanying notes to consolidated financial statements
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,
1999 1998 1999 1998
- ------------------------------------------------------------------------
Revenue:
Interest income on loans
to nonaffiliates,
including fees $ 34,000 $ 3,000 $ 10,000 $ ---
Interest on
interest-bearing deposits 36,000 51,000 19,000 46,000
Income from operations of
real estate owned 135,000 118,000 43,000 42,000
Gain on sale of real
real estate owned --- 192,000 --- ---
Other income 8,000 11,000 2,000 4,000
- ---------------------------------------------------------------------------
Total revenue 213,000 375,000 74,000 92,000
- ---------------------------------------------------------------------------
Expenses:
Share of losses in
unconsolidated investee --- 82,000 --- 7,000
Operating expenses from
operations of real
estate owned 69,000 67,000 26,000 33,000
Operating expenses from
operations of real estate
owned paid to affiliates 9,000 9,000 3,000 3,000
Expenses associated with
non-operating
real estate owned 52,000 228,000 27,000 39,000
Depreciation and amortization 3,000 3,000 1,000 1,000
Interest expense 16,000 11,000 6,000 5,000
General and
administrative, affiliates 162,000 192,000 25,000 68,000
General and administrative,
nonaffiliates 66,000 46,000 23,000 17,000
- ----------------------------------------------------------------------------
Total expenses 377,000 638,000 111,000 173,000
- ----------------------------------------------------------------------------
Net loss $ (164,000) $ (263,000) $ (37,000) $ (81,000)
============================================================================
Net loss per limited
partnership unit $ (5.63) $ (9.03) $ (1.27) $ (2.78)
============================================================================
See accompanying notes to consolidated financial statements
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statement of Partners' Equity
(Unaudited)
For the nine months ended September 30, 1999
Total
General Limited Partners'
Partners Partners Equity
- ----------------------------------------------------------------------------
Balance (deficit) at
December 31, 1998 $ (56,000) $ 4,570,000 $ 4,514,000
Net loss --- (164,000) (164,000)
- ----------------------------------------------------------------------------
Balance (deficit) at
September 30, 1999 $ (56,000) $ 4,406,000 $ 4,350,000
============================================================================
See accompanying notes to consolidated financial statements
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Unaudited)
For the nine months ended September 30, 1999 and 1998
1999 1998
- ------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (164,000) $ (263,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Gain on sale of real estate owned --- (192,000)
Depreciation expense 3,000 3,000
Equity in losses of unconsolidated investee --- 82,000
Changes in assets and liabilities:
Decrease (increase) in other assets 1,000 (25,000)
Decrease in due from unconsolidated investees --- 14,000
Increase in due from affiliates --- (18,000)
Increase (decrease) in accounts payable
and accrued liabilities (35,000) 63,000
Decrease in interest and
taxes payable on real estate owned --- (460,000)
- -------------------------------------------------------------------------
Net cash used in operating activities (195,000) (796,000)
- -------------------------------------------------------------------------
Cash flows from investing activities:
Principal collected on loans 62,000 499,000
Advances on loans made to
unconsolidated investee (note 5) (8,000) (289,000)
Additions to real estate owned (25,000) (72,000)
Proceeds from sale of real estate owned 842,000 4,823,000
- -------------------------------------------------------------------------
Net cash provided by investing activities 871,000 4,961,000
- -------------------------------------------------------------------------
Cash flows from financing activities:
Principal payments on notes payable (1,000) (98,000)
Advances on notes payable --- 235,000
- -------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (1,000) 137,000
- -------------------------------------------------------------------------
Net increase in cash and cash equivalents 675,000 4,302,000
Beginning cash and cash equivalents 1,010,000 195,000
- -------------------------------------------------------------------------
Ending cash and cash equivalents $ 1,685,000 $ 4,497,000
=========================================================================
Supplemental schedule of cash flow information:
Cash paid during the nine month period for:
Interest $ 14,000 $ 10,000
See accompanying notes to consolidated financial statements
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 1999 and December 31, 1998
(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 or
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 September 30, 1999, most 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 has become a direct investor in this real estate and
intends to manage operating properties and develop raw land until such time as
the Partnership is able to sell this real estate owned.
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, 1999 and 1998 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, 1999 and 1998 is unaudited and condensed inasmuch as it does not include
all related footnote disclosures.
The condensed 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 generally accepted accounting
principles. Notes to consolidated financial statements included in Form 10-K
for the year ended December 31, 1998 on file with the Securities and Exchange
Commission, provide additional disclosures and a further description of
accounting policies.
Financial Information about Industry Segments
The Partnership adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131"). Given that the Partnership is in the process of liquidation, the
Partnership has identified only one operating business segment which is the
business of asset liquidation. The adoption of SFAS 131 did not have an
impact on the Partnership's financial reporting.
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 1,
1999 1998
- -----------------------------------------------------------------------------
1. Office building in
San Bernardino, CA $ 939 $ 914
2. Land in Sacramento, CA 2,843 3,685
- -----------------------------------------------------------------------------
Total real estate owned $ 3,782 $ 4,599
=============================================================================
(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, 1999 or 1998.
The Partnership owns 50 percent of the outstanding capital stock of a
corporation which has not been consolidated in the accompanying financial
statements, LCR Development, Inc., ("LCR"). The balance of outstanding
capital stock in this corporation is owned by Centennial Mortgage Income Fund,
("CMIF"), an affiliate. LCR invested in a joint venture, Silverwood
Homes ("Silverwood") which has constructed homes in Lancaster, California.
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. During 1998, the Partnership charged off the
remaining balances of all but one of these loans against the cumulative LCR
losses that it had recorded.
At September 30, 1999, the Partnership had a 50 percent participation in a
single loan from Silverwood which is now unsecured. The Partnership's
disbursed balance of this loan at September 30, 1999 is $10,000 and the
Partnership had applied $5,000, the balance of cumulative losses from
unconsolidated investee against the carrying value of the note as of the same
date.
The consolidated balance sheets and statements of operations of LCR have not
been consolidated in the Partnership's financial statements. The Partnership
accounts for its investment in this corporation using the equity method. The
following represents condensed financial information for LCR Development, Inc.
at September 30, 1999 and December 31, 1998 and for the nine months ended
September 30, 1999 and 1998:
LCR Development, Inc.
Consolidated Balance Sheet
September 30, December 31,
1999 1998
Assets (Unaudited)
- -----------------------------------------------------------------------------
Cash $ 8,000 $ 11,000
Restricted cash 10,000 20,000
Real estate owned, --- 119,000
Less allowance for losses
on real estate investment --- 17,000
- -----------------------------------------------------------------------------
Net real estate owned --- 102,000
- -----------------------------------------------------------------------------
$ 18,000 $ 133,000
=============================================================================
Liabilities and Stockholders' Deficit
- -----------------------------------------------------------------------------
Notes payable to affiliates
CMIF $ 2,782,000 $ 2,882,000
CMIF II 1,537,000 1,549,000
- -----------------------------------------------------------------------------
Total notes payable 4,319,000 4,431,000
Accounts payable
and accrued liabilities 4,000 12,000
Interest and taxes payable
on real property 2,103,000 1,837,000
Payable to affiliates 9,000 5,000
- -----------------------------------------------------------------------------
Total liabilities 6,435,000 6,285,000
Stockholders' deficit (6,417,000) (6,152,000)
- -----------------------------------------------------------------------------
$ 18,000 $ 133,000
=============================================================================
LCR Development, Inc.
Consolidated Statement of Operations
(Unaudited)
Nine months Nine months
ended ended
September 30, September 30,
1999 1998
- ---------------------------------------------------------------------------
Housing sales $ 123,000 $ 1,368,000
Cost of housing sales 118,000 1,312,000
Provision for losses --- 215,000
Selling and marketing expenses 1,000 66,000
General and administrative expenses --- 28,000
- ---------------------------------------------------------------------------
Operating income (loss) 4,000 (253,000)
Interest expense 268,000 304,000
- ---------------------------------------------------------------------------
Net loss before income taxes (264,000) (557,000)
Income taxes 1,000 1,000
- ---------------------------------------------------------------------------
Net loss (265,000) (558,000)
===========================================================================
Interest not included
in share of losses (266,000) (394,000)
- ---------------------------------------------------------------------------
Allocable net income (loss) $ 1,000 $ (164,000)
===========================================================================
Share of loss recorded $ --- $ (82,000)
===========================================================================
(5) CONTINGENCIES
There are no material pending legal proceedings.
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
$(164,000) and $(5.63) and $(263,000) and $(9.03) for the nine months ended
September 30, 1999 and 1998, 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.
Risks of the year 2000 Issue
The Partnership is in the process of liquidating its remaining assets. As of
September 30, 1999, the Partnership held only cash, two notes secured by real
estate, and two properties. Management anticipates that the Partnership will
hold a lesser number of assets by January 1, 2000. Management does not
believe that the value of any of these assets is subject to valuation risk as
a result of the year 2000 issues, other than general economic climate issues
that might arise. None of the Partnership's assets have any equipment with
computerized components essential to their operation.
Although the Partnership has made some changes already to its software, all
of these changes have not been tested. The Partnership has begun testing
changes made to its existing software and intends to complete such testing
prior to December 31, 1999. The Partnership has not, and does not
contemplate pending any significant amount of funds to upgrade its computer
systems inasmuch as virtually all of its computer needs could easily be met
with existing "over the counter" software and hardware. The cost of this
software and hardware, if needed, should not exceed $10,000. The only
exception to this is the computer software which the Partnership uses to
track its limited partners and their addresses. The Partnership has made a
preliminary evaluation of this software with its outside software consultant
and believes that it can be modified for less than $10,000. Even if attempts
to correct deficiencies in the software without spending significant sums are
not successful, the Partnership anticipates that it could convert its systems
to standard spreadsheet or data base programs at a nominal cost.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Partnership had $1,685,000 in unrestricted cash and
interest-bearing deposits. The Partnership had no unfunded loan
commitments at September 30, 1999. Sources of funds are expected to be from
the sale of real estate owned and the payoff or paydown of notes receivable.
Future operations of real estate owned are not expected to be a significant
source funds. During June 1999, the Partnership received $842,000 in net
cash proceeds from the sale of a portion of the 45 acres in Sacramento. The
Partnership also received paydowns on loans totaling $62,000 during the nine
months ended September 30, 1999.
As of September 30, 1999, the Partnership has entered into a purchase and
sale agreement to sell the balance of the 45 acres in Sacramento which had an
aggregate book value after allowance for losses of approximately $1,731,000 as
of that same date. The Partnership has also entered into a purchase and
sale agreement to sell the office building in San Bernardino which had an
aggregate book value after allowance for losses of approximately $640,000.
Management currently estimates that the net sale proceeds from these
transactions, if consummated, would be approximately $100,000 greater than
the net book value after allowances for losses. Both agreements provide for
contingency periods which have expired and which would allow the buyer to
terminate the agreement if their due diligence reveals any facts which they
deem unacceptable. The buyer of the office building has approved all
contingencies and placed a $10,000 non-refundable deposit into escrow. The
buyer of the 45 acres has not yet performed under the contract, although the
buyer has expressed an interest in continuing the transaction. These sales
are subject to these and numerous other uncertainties and there can be no
assurance that either of these transactions will be consummated.
The Partnership's notes payable commitments for the next year consist of
interest and principal payments due of approximately $22,000 payable during
the next twelve months. In addition to the note payable commitments, the
Partnership's principal capital requirements include: (i) real property taxes
on real estate owned of approximately $35,000 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 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 during 1998, the general partners
determined that the Partnership could make a $3,496,000 distribution to its
limited partners in October 1998. It is possible, if the transactions
discussed above are consummated, that the Partnership could make another
distribution to limited partners prior to the end of 1999.
The general partners have had discussions with legal counsel regarding the
amount of cash reserves that would be prudent to be retained by the
Partnership at this time. In light of the substantial amount of real estate
that the Partnership has held an interest in over the years, there is always
the potential for future litigation to arise, particularly in the area of
toxic contamination. Although the general partners are not aware of any
threatened litigation, or litigation that is likely to arise, they have
determined that the Partnership should retain at least $1,000,000 in cash
reserves to be available to defend the Partnership in any future litigation
which may arise. It is expected that these reserves will be retained until
such time as legal counsel advises the general partners that the potential
for any future litigation is remote.
RESULTS OF OPERATIONS
INTEREST INCOME
Interest income on loans to nonaffiliates, including fees was $34,000 and
$10,000 for the nine and three months ended September 30, 1999, respectively.
Interest income on loans to nonaffiliates, including fees was $3,000 and $-0-
for the nine and three months ended September 30, 1998, respectively. The
increase can be attributed to an increase in the average balances of these
loans in the latter part of 1998 that resulted from the sale of property.
These increased receivable balances continued into the first nine months of
1999.
Interest on interest-bearing deposits totaled $36,000 and $19,000 for the
nine and three months ended September 30, 1999, respectively. Interest on
interest-bearing deposits totaled $51,000 and $46,000 for the nine and three
months ended September 30, 1998, respectively Interest on interest-bearing
deposits represents interest earned on Partnership funds invested, for
liquidity, in time certificate and money market deposits. The decrease for
the nine months ended Septmeber 30, 1999 is primarily attributable to a
decrease in the average balance of cash and cash equivalents.
The following sections entitled Nonaccrual Loans and Real Estate Owned
provide a detailed analysis of these assets.
NONACCRUAL LOANS AND REAL ESTATE OWNED
The Partnership holds an investment in LCR and accounts for its investment in
LCR using the equity method. LCR has invested in a joint venture, Silverwood
which has constructed homes. The Partnership made a series of loans to LCR
and Silverwood from 1994 to 1997. The Partnership treated these loans as a
component of its investment in LCR and reduced the carrying value of the
loans by its share of losses recorded by LCR.
All of the loans to LCR and Silverwood were on nonaccrual status during all
of 1998 and in the first quarter of 1999. The Partnership's share of the
outstanding balances of loans to LCR and Silverwood as of September 30, 1999
was $1,537,000. All of these loans have become unsecured as a result of the
Partnership releasing its liens in exchange for principal reductions. The
Partnership charged off all but one of these loans during the fourth quarter
of 1998 against its previously recorded share of losses incurred by LCR. The
Partnership's share of the remaining loan was $10,000 as of September 30, 1999
and the Partnership had reduced its carrying value of this loan by
$5,000 which represents the remaining portion of its share of losses incurred
by LCR.
REAL ESTATE OWNED
A description of the Partnership's principal real estate owned 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 83 percent leased
as of December 31, 1998 and 73 percent leased as of September 30, 1999. The
property generated net operating income of $57,000 and $42,000 during the
nine months ended September 30, 1999 and 1998, respectively. The property
has been marketed for sale and management has seen an increase in interest in
the property as a result of the installation of an elevator. The carrying
value before allowance for possible losses at September 30, 1999 was
$939,000. The Partnership has recorded a $299,000 allowance for losses
related to this property as of September 30, 1999. As of September 30, 1999,
the property as encumbered by a note secured by a first trust deed of
$233,000 which matures June 1, 2008. The Partnership has entered into a
purchase and sale agreement to sell this property. The sale is subject to
this and numerous other uncertainties and there can be no assurance that this
transaction will be consummated.
45 Acres in Sacramento, California
The Partnership funded a loan in 1987 with a committed amount of $4,000,000
secured by a first trust deed on 44.52 acres in Sacramento, California. The
loan was provided for the development of offsite improvements. The maturity
date was February 1, 1991. The borrower was unable to obtain construction
financing and bring interest current. The Partnership accepted a grant deed
on the property on March 10, 1992. The property is zoned for multi-family and
light industrial use. A portion of the property is adjacent to Highway
99 and has good freeway visibility. The Partnership rezoned and subdivided a
portion of the property to facilitate one escrow on a 6.5 acre portion of the
property without freeway visibility. This transaction closed escrow during
the fourth quarter of 1997. During the first quarter of 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 in June 1999 and the Partnership received approximately $842,000 in
net cash proceeds from the sale. The sale did not result in any gain or
loss. Both the sold parcels are zoned for residential use. The balance of
the property is zoned for industrial/commercial use. There has been only
limited industrial/commercial use development activity in the area
surrounding this property during the past couple of years. In light of this
limited activity and management's objective of liquidating the Partnership's
remaining assets as soon as practical, management determined that it might
elect to sell this property at prices below its March 31, 1998 appraised
value. Accordingly, the Partnership recorded an additional $504,000
provision for losses against the carrying value of this property during 1998.
At September 30, 1999, the carrying value before allowance for possible
losses was $2,843,000. The Partnership had recorded a $1,112,000 allowance
for losses related to this property as of September 30, 1999 and December 31,
1998. The Partnership has entered into a purchase and sale agreement to sell
this property. The agreement provided for a contingency period which has
expired and which would allow the buyer to terminate the agreement if their
due diligence reveals any facts which they deem unacceptable. Although the
contingency period has expired and the buyer has failed to place a required
non-refundable deposit into escrow, the buyer has indicated that they wish to
continue to evaluate the property for purchase. The sale is subject to this
and numerous other uncertainties and there can be no assurance that this
transaction will be consummated.
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. The Partnership recorded a $71,000 gain on sale on this
transaction.
10.66 Acres in Roseville, California
The Partnership funded a loan in 1990 with an original commitment of
$2,779,000 secured by a second deed of trust on 982 acres in Roseville,
California. The borrower failed to make the required yearly principal
payment to the first and second trust deed holders. The first trust deed
holder filed a notice of default for nonpayment. Management negotiated a
settlement agreement to accept a 10.66 acre commercial site as payment in
full for the $2,779,000 note. The property had been in escrow for an all
cash purchase price of $1,200,000 and closed escrow June 30, 1998 with the
Partnership receiving net proceeds of $1,124,000. The Partnership recorded a
$121,000 gain on sale on this transaction.
INCOME FROM OPERATIONS OF REAL ESTATE OWNED
Income from operations of real estate owned totaled $135,000 and $43,000 for
the nine and three months ended September 30, 1999, respectively. Income from
operations of real estate owned totaled $118,000 and $42,000 for the
nine and three months ended September 30, 1998, respectively. The 1999 and
1998 revenues are from the office building in San Bernardino. The increase
during 1999 resulted from increased occupancy levels during the latter part
of 1998 and continuing into the first six months of 1999. As discussed
above, occupancy levels have declined in the last several months. Rental
rates remained relatively flat.
PROVISION FOR POSSIBLE LOSSES
There was no provision for possible losses for the nine months ended
September 30, 1999 or 1998. 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, 1999 is adequate to absorb the known and inherent
risk in the Partnership's loan and real estate owned portfolio.
SHARE OF LOSSES IN UNCONSOLIDATED INVESTEE
The Partnership has invested in a corporation in which it has less than a
majority ownership and accounts for this investment using the equity method.
The Partnership's share of losses in this unconsolidated investee was $82,000
and $7,000 for the nine and three months ended September 30, 1998,
respectively. There were no losses recorded during the nine months ended
September 30, 1999. The 1998 share of losses consists primarily of
provisions for losses on real estate investments related to the 179 lots in
Lancaster owned by LCR. By the end of 1998, LCR had liquidated most of its
assets and as a result, virtually no gain or loss was recorded by LCR during
the nine months ended September 30, 1999 other than interest accruing as
payable to the Partnership and CMIF, an affiliate. Since the Partnership did
not accrue this interest as income, it did not record its share of the loss
resulting from this interest expense recorded by LCR.
OTHER EXPENSES
Operating expenses from operations of real estate owned were $69,000 and
$26,000 for the nine and three months ended September 30, 1999, respectively.
Operating expenses from operations of real estate owned were $67,000 and
$33,000 for the nine and three months ended September 30, 1998, respectively.
These expenses were associated with the office building in San Bernardino.
The decrease for the three month period in 1999 is primarily attributable to
several air conditioning units being replaced during the third quarter of
1998.
Operating expenses from operations of real estate owned paid to affiliates
were $9,000 for both the nine months ended September 30, 1999 and 1998. The
operating expenses consist of property management fees paid to an affiliate.
Expenses associated with non-operating real estate owned were $52,000 and
$27,000 for the nine and three months ended September 30, 1999, respectively.
Expenses associated with non-operating real estate owned were $228,000 and
$39,000 for the nine and three months ended September 30, 1998, respectively.
The expenses relate to the proposed marina and condominiums in Redwood City,
the 45 acres in Sacramento, and the 10.66 acres in Roseville. The decrease
for the nine and three months ended September 30, 1999 is primarily due to
sale of the proposed marina and condominiums and the 10.66 acres in Roseville
during the second quarter of 1998.
Depreciation and amortization expense was $3,000 for both the nine months
ended September 30, 1999 and 1998.
Interest expense was $16,000 and $6,000 for the nine and three months ended
September 30, 1999, respectively. Interest expense was $11,000 and $5,000 for
the nine and three months ended September 30, 1998, respectively. The
interest expense relates to the office building in San Bernardino. The
increase for 1999 is due to the refinance of the note secured by the office
building in San Bernardino during 1998 and the resulting increase in principal
outstanding on the new note.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses, affiliates totaled $162,000 and $25,000
for the nine and three months ended September 30, 1999, respectively.
General and administrative expenses, affiliates totaled $192,000 and $68,000
for the nine and three months ended September 30, 1998, respectively. General
and administrative expenses, affiliates totaled $111,000 and $45,000 for the
three months ended March 31, 1999 and 1998, respectively. These expenses are
primarily salary allocation reimbursements paid to affiliates. There was a
significant increase in these expenses during the first quarter of 1999 due
to costs that were associated with the termination of five employment
contracts effective March 31, 1999. These contracts are discussed in greater
detail in note 8 to the consolidated financial statements contained in the
Partnership's Form 10-K for the period ended December 31, 1999 on file with
the Securities and Exchange Commission. As a result of the termination of
the contracts and the reduction of employees which occurred on April 1, 1999,
these expenses decreased significantly during the six months ended September
30, 1999 when compared with either the three months ended September 30, 1998 or
the three months ended March 31, 1999.
General and administrative expenses, nonaffiliates totaled $66,000 and
$23,000 for the nine and three months ended September 30, 1999, respectively.
General and administrative expenses, nonaffiliates totaled $46,000 and
$17,000 for the nine and three months ended September 30, 1998, respectively.
These expenses consist of other costs associated with the administration of
the Partnership and real estate owned. The increase in 1999 is principally to
an increase in printing costs associated with mailings to investors and an
increase in audit fees
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since the Partnership does not invest in any derivative financial instruments
or enter into any activities involving foreign currencies, its market risk
associated with financial instruments is limited to the effect that changing
domestic interest rates might have on the fair value of its bank deposits,
notes receivable, and real estate owned.
As of September 30, 1999, the Partnership held fixed rate bank deposits with
carrying values totaling $1,685,000 and two fixed rate mortgage notes
receivable with a combined carrying value totaling $544,000. The bank
deposits all had maturities of less than ninety days. The last fixed rate
mortgage note matures in July 2000 and bears interest at 8 percent per annum.
The estimated fair value of all of these assets was estimated to be equal to
their carrying values as of September 30, 1999. Increasing interest rates could
have an adverse effect on the fair value of the Partnership's fixed
rate note receivable and/or the value of the underlying real estate
collateral which secure the Partnership's note receivable.
Management currently intends to hold the remaining fixed rate 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's only interest bearing liability is a single fixed interest
rate note payable with an outstanding principal balance of $233,000 as of
September 30, 1999. The note bears at 8.6% and matures in June 2008. The
Partnership currently intends to sell the property secured by this note prior
to the note's maturity. Accordingly, the Partnership is not exposed to any
market risk associated with its liabilities.
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) None
(b) 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/Ronald R. White
_________________________________
Ronald R. White
General Partner November 15, 1999
By: CENTENNIAL CORPORATION
General Partner
/s/Joel H. Miner
_________________________________
Joel H. Miner
Chief Financial Officer November 15, 1999