-----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, H2Boratpyzcyx8Lh872PYQMwYkgXuxWkgZCmPiBiTwk3Qp4dv4H1RX8hKzMNskWw mSu1vaZQLPbNaR+Hge0rqA== 0000773337-98-000006.txt : 19981118 0000773337-98-000006.hdr.sgml : 19981118 ACCESSION NUMBER: 0000773337-98-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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-Q SEC ACT: SEC FILE NUMBER: 000-15448 FILM NUMBER: 98750973 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-Q 1 CENTENNIAL MORTGAGE INCOME FUND II 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, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from N/A to N/A Commission File Number: 0-15448 CENTENNIAL MORTGAGE INCOME FUND II (Exact name of registrant as specified in its charter) California 33-0112106 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1540 South Lewis Street, Anaheim, California 92805 (Address of principal executive 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 1998 1997 (Unaudited) - ----------------------------------------------------------------- Cash and cash equivalents (note 3) $ 4,497,000 $ 195,000 Real estate loans receivable, earning --- 215,000 Real estate loans receivable from unconsolidated investee, nonearning (note 5) 722,000 814,000 - ----------------------------------------------------------------- 722,000 1,029,000 Less allowance for possible loan losses --- 15,000 - ----------------------------------------------------------------- Net real estate loans receivable 722,000 1,014,000 - ----------------------------------------------------------------- Real estate owned, held for sale (note 4) 4,517,000 10,827,000 Less allowance for possible losses on real estate owned 951,000 2,702,000 - ----------------------------------------------------------------- Net real estate owned 3,566,000 8,125,000 - ----------------------------------------------------------------- See accompanying notes to consolidated financial statements 1 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Consolidated Balance Sheets (Continued) September 30, December 31, Assets 1998 1997 (Unaudited) - ----------------------------------------------------------------- Due from unconsolidated investee 2,000 16,000 Due from affiliate 18,000 --- Other assets, net 26,000 4,000 - ----------------------------------------------------------------- $ 8,831,000 $ 9,354,000 ================================================================= Liabilities and Partners' Equity - ----------------------------------------------------------------- Note payable (note 4) $ 234,000 $ 97,000 Accounts payable and accrued liabilities 72,000 9,000 Interest and property taxes payable on real estate owned 24,000 484,000 - ----------------------------------------------------------------- Total liabilities 330,000 590,000 - ----------------------------------------------------------------- Partners' equity (deficit) -- 29,141 limited partnership units outstanding at September 30, 1998 and December 31, 1997 General partners (195,000) (195,000) Limited partners 8,696,000 8,959,000 - ----------------------------------------------------------------- Total partners' equity 8,501,000 8,764,000 Commitments (note 6) Contingencies (note 7) - ----------------------------------------------------------------- $ 8,831,000 $ 9,354,000 =================================================================
See accompanying notes to consolidated financial statements 2 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, 1998 1997 1998 1997 - ----------------------------------------------------------------- Revenue: Interest income on loans to nonaffiliates, including fees $ 3,000 $ 1,000 $ --- $ --- Interest on interest-bearing deposits 51,000 4,000 46,000 --- Income from operations of real estate owned 118,000 98,000 42,000 33,000 Gain on sale of real estate owned 192,000 11,000 --- --- Other income 11,000 15,000 4,000 6,000 - ----------------------------------------------------------------- Total revenue 375,000 129,000 92,000 39,000 Expenses: Share of losses in unconsolidated investee (note 5) 82,000 91,000 7,000 37,000 Operating expenses from operations of real estate owned 67,000 63,000 33,000 26,000 Operating expenses from operations of real estate owned paid to affiliates 9,000 9,000 3,000 3,000 See accompanying notes to consolidated financial statements 3 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Operations (Unaudited) (Continued) Nine Months Three Months Ended September 30, Ended September 30, 1998 1997 1998 1997 - ----------------------------------------------------------------- Expenses associated with non-operating real estate owned 228,000 247,000 39,000 64,000 Depreciation and amortization expense 3,000 4,000 1,000 1,000 Interest expense 11,000 10,000 5,000 4,000 General and administrative, affiliates (note 6) 192,000 141,000 68,000 45,000 General and administrative, nonaffiliates 46,000 49,000 17,000 21,000 - ----------------------------------------------------------------- Total expenses 638,000 614,000 173,000 201,000 - ----------------------------------------------------------------- Net loss $ (263,000) $ (485,000) $ (81,000) $ (162,000) ================================================================= Net loss per limited partnership unit $ (9.03) $ (16.64) $ (2.78) $ (5.56) =================================================================
See accompanying notes to consolidated financial statements 4 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Consolidated Statement of Partners' Equity (Unaudited)
For the nine months ended September 30, 1998 Total General Limited Partners' Partners Partners Equity - ----------------------------------------------------------------- Balance (deficit) at December 31, 1997 $ (195,000) $ 8,959,000 $ 8,764,000 Net loss --- (263,000) (263,000) - ----------------------------------------------------------------- Balance (deficit) at September 30, 1998 $ (195,000) $ 8,696,000 $ 8,501,000 =================================================================
See accompanying notes to consolidated financial statements 5 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows (Unaudited)
For the nine months ended September 30, 1998 and 1997 1998 1997 - ----------------------------------------------------------------- Cash flows from operating activities: Net loss $ (263,000) $ (485,000) 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 4,000 Equity in losses of unconsolidated investee 82,000 91,000 Changes in assets and liabilities: Decrease in due from unconsolidated investee 14,000 --- Increase in due from affiliate (18,000) --- Increase in other assets (25,000) (4,000) Decrease in payable to affiliates --- (1,000) Increase (decrease) in accounts payable and accrued liabilities 63,000 (5,000) Increase (decrease) in interest and taxes payable on real estate owned (460,000) 140,000 - ----------------------------------------------------------------- Net cash used in operating activities (796,000) (260,000) - ----------------------------------------------------------------- Cash flows from investing activities: Principal collected on loans 499,000 291,000 Advances on loans made to unconsolidated investee (note 5) (289,000) (177,000) See accompanying notes to consolidated financial statements 6 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows (Unaudited) (Continued) For the nine months ended September 30, 1998 and 1997 1998 1997 - ----------------------------------------------------------------- Additions to real estate owned (72,000) --- Proceeds from sale of real estate owned 4,823,000 --- Increase in escrow deposits --- 30,000 - ----------------------------------------------------------------- Net cash provided by investing activities 4,961,000 144,000 - ----------------------------------------------------------------- Cash flows from financing activities: Principal payments on notes payable (98,000) (34,000) Advances on notes payable 235,000 --- - ----------------------------------------------------------------- Net cash provided by (used in) financing activities 137,000 (34,000) - ----------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 4,302,000 (150,000) Beginning cash and cash equivalents 195,000 261,000 - ----------------------------------------------------------------- Ending cash and cash equivalents $ 4,497,000 $ 111,000 ================================================================= Supplemental schedule of cash flow information: Cash paid during the nine months for: Interest $ 10,000 $ 9,000
See accompanying notes to consolidated financial statements 7 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Notes to Consolidated Financial Statements (Unaudited) September 30, 1998 and 1997 (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 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, 1998, most of the loans secured by operating properties have been repaid to the Partnership. However, during the early 1990's, real estate market values for undeveloped land in California declined severely. As the loans secured by undeveloped land became delinquent, the Partnership elected to foreclose on certain of these loans, thereby increasing real estate owned balances. As a result, the Partnership has become a direct investor in this real estate and intends to manage operating properties and develop raw land until such time as the Partnership is able to sell 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 and real estate 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 months ended September 30, 1998 and 1997 are not necessarily indicative of results which may be expected for any other interim period, or for the year as a whole. 8 Information pertaining to the nine months ended September 30, 1998 and 1997 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 the 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, 1997 on file with the Securities and Exchange Commission, provide additional disclosures and a further description of accounting policies. 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. Impaired Loans The Partnership considers a loan to be impaired when based upon current information and events, it believes it is probable that the Partnership will be unable to collect all amounts due according to the contractual terms of the loan agreement. In determining impairment, the Partnership considers large non- homogeneous loans including nonaccrual loans, troubled debt restructuring and performing loans which exhibit, among other characteristics, high loan-to-value ratios, low debt-coverage ratios, or other indications that the borrowers are experiencing increased levels of financial difficulty. The Partnership bases the measurement of collateral-dependent impaired loans on the fair value of the loan's collateral. The amount by which the recorded investment of the loan exceeds the measure of the impaired loan's value is recognized by recording a valuation allowance. At September 30, 1998, the carrying value of loans that are considered to be impaired under SFAS 114 totaled $722,000 (all of which were on nonaccrual status). At September 30, 1998, there was no allowance for possible loan losses determined in accordance with the provisions of SFAS 114, related to loans considered impaired under SFAS 114. This is due to the fact that all the remaining loans considered to be impaired were to an unconsolidated investee. The unconsolidated investee has recorded an allowance for losses of $4,144,000 and the Partnership's proportionate share of losses in unconsolidated investee reflects its share of this allowance. There was a $289,000 investment in impaired loans during the nine months 9 ended September 30, 1998. For the nine months ended September 30, 1998, the Partnership recognized no interest income or cash basis income on these impaired loans. Impact of Accounting Pronouncements Issued but not Adopted by the Partnership In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" was issued and is effective for fiscal years beginning after December 15, 1997. This statement establishes standards for segment reporting in the financial statements. The Partnership anticipates that the adoption of this pronouncement will not result in disclosures that will be materially different from those presently required. (3) CASH AND CASH EQUIVALENTS At September 30, 1998, the Partnership has approximately $4,010,000 in cash and cash equivalents held in accounts over the Federal Deposit Insurance Corporation limit. The majority of these funds were used to pay a distribution to limited partners during October 1998. (4) REAL ESTATE OWNED
Real estate owned consists of the following: (dollars in thousands) September 30, December 31, 1998 1997 - ----------------------------------------------------------------- 1. Office building in San Bernardino, CA $ 880 $ 827 2. Land in Sacramento, CA 3,637 3,637 3. Proposed marina and condominiums in Redwood City, CA --- 5,360 4. 10.66 acres in Roseville, CA --- 1,003 - ----------------------------------------------------------------- Total real estate owned $ 4,517 $10,827 =================================================================
During the second quarter of 1998, the Partnership refinanced the note secured by the office building in San Bernardino. The new loan amount was $235,000, payable at 8.640 percent fixed with monthly payments of $1,830. The loan matures June 1, 2008. 10 Property no. 3 was sold during the second quarter of 1998 with the Partnership receiving net proceeds of $3,699,000. Property no. 4 was also sold during the second quarter of 1998 with the Partnership receiving net proceeds of $1,124,000. (5) 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, 1998 or 1997. 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 has invested in a joint venture, Silverwood Homes ("Silverwood") which is constructing 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. The Partnership holds a 50 percent participation in an unsecured note in the amount of $2,115,000 due from LCR. The Partnership's share of the note at September 30, 1998 is $1,059,000 and the Partnership has applied $1,059,000, a portion of the cumulative losses from unconsolidated investee, against the carrying value of the note as of that same date. The Partnership has not accrued its share of interest on this note which was approximately $386,000 as of September 30, 1998. 11 Silverwood began constructing a model home complex at the project in June 1995. Construction commenced in September 1995 on Phase I and in February 1997 on Phase II at the project. At September 30, 1998, the Partnership holds a 50 percent participation in three notes due from Silverwood consisting of a land development loan, a model home loan and a home construction loan. At September 30, 1998, the Partnership's disbursed balance of the $1,034,000 Phase I construction loan is $23,000 and the Partnership has applied $23,000, a portion of the cumulative share of losses from unconsolidated investee, against the carrying value of the note as of that same date. The Partnership's disbursed balance of the $3,266,000 development loan at September 30, 1998 is $1,101,000 and the Partnership had applied $436,000, the balance of cumulative losses from unconsolidated investee, against the carrying value of the note as of the same date. The Partnership's disbursed balance of the $490,000 model loan at September 30, 1998 is $57,000. The consolidated balance sheet and income statement of LCR have not been consolidated in the Partnership's financial statements. The Partnership accounts for its investment in this corporation using the equity method. The following represents condensed financial information for LCR at September 30, 1998 and for the nine months ended September 30, 1998 and 1997: 12 LCR Development, Inc. Consolidated Balance Sheets
September 30, December 31, 1998 1997 Assets (Unaudited) - ----------------------------------------------------------------- Cash $ 18,000 $ 11,000 Restricted cash 20,000 20,000 Real estate owned, 5,832,000 6,950,000 Less allowance for losses on real estate investment 4,144,000 4,063,000 - ----------------------------------------------------------------- Net real estate owned 1,688,000 2,887,000 Organization costs --- 1,000 - ----------------------------------------------------------------- $ 1,726,000 $ 2,919,000 ================================================================= Liabilities and Stockholders' Deficit - ----------------------------------------------------------------- Notes payable to affiliates CMIF $ 3,587,000 $ 4,679,000 CMIF II 2,239,000 2,250,000 - ----------------------------------------------------------------- Total notes payable 5,826,000 6,929,000 Sales deposit 160,000 --- Accounts payable and accrued liabilities 14,000 38,000 Interest and taxes payable on real property 1,779,000 1,377,000 Payable to affiliates 5,000 75,000 - ----------------------------------------------------------------- Total liabilities 7,784,000 8,419,000 Stockholders' deficit (6,058,000) (5,500,000) - ----------------------------------------------------------------- $ 1,726,000 $ 2,919,000 =================================================================
13 LCR Development, Inc. Consolidated Statements of Operations (Unaudited)
Nine months Nine months ended ended September 30, 1998 September 30, 1997 - ----------------------------------------------------------------- Housing sales $ 1,368,000 $ 706,000 Cost of housing sales 1,312,000 725,000 Provision for losses 215,000 146,000 Selling and marketing expenses 66,000 95,000 General and administrative expenses 28,000 48,000 - ----------------------------------------------------------------- Operating (loss) (253,000) (308,000) Interest expense 304,000 272,000 - ----------------------------------------------------------------- Net loss before income taxes (557,000) (580,000) Income taxes 1,000 1,000 - ----------------------------------------------------------------- Net (loss) $ (558,000) $ (581,000) ================================================================= Interest not included in share of losses (394,000) (399,000) - ----------------------------------------------------------------- Allocable net loss $ (164,000) $ (182,000) ================================================================= Share of loss recorded $ (82,000) $ (91,000) =================================================================
(6) COMMITMENTS The day to day operations of the Partnership and several other affiliated partnerships are carried on by employees of the corporate general partner, Centennial Corporation ("CC"). CC no longer has any significant operations other than the management of these partnerships which are in the repayment stage. During the first quarter of 1998, several employees resigned from their employment at CC. Their resignations were principally due to the anticipated disposition of the majority of the assets owned by the Partnership and other affiliated partnerships in the relatively near future. The disposition of these assets can reasonably be expected to precipitate layoffs, and given the 14 relatively robust job market in Southern California, where the general partners conduct their operations, these employees opted to secure positions with other companies with more promising futures. As of April 1, 1998, CC employed only six employees. All of the remaining employees have been employed by CC for over ten years and have intimate knowledge of the partnerships' operations. The general partners concluded that it would be in the best interest of the Partnership to provide the remaining employees with some type of incentive for them to continue working for the partnerships until the majority of the partnerships' assets were liquidated. Accordingly, CC entered into twelve-month employment contracts with each of these employees which expire on March 31, 1999. The Partnership and the affiliated partnerships have guaranteed these employment contracts. The contracts include an increase in salary of 10 percent and also provide that if these employees remain employed by CC until the end of the contract term, they will be entitled to severance pay equal to six months base salary. The maximum total salaries, employer taxes, related benefits, and severance pay included in these contracts is approximately $615,000. The Partnership's anticipated share of this cost is estimated to be between $270,000 and $290,000, depending on the amount of time which will be spent by these employees in managing the affairs of the Partnership. The Partnership's share of the cost of these contracts during the nine months ended September 30, 1998, included in general and administrative expenses, affiliates, was approximately $124,000. (7) CONTINGENCIES There are no material pending legal proceedings other than ordinary routine litigation incidental to the Partnership's business. Based in part on advice of legal counsel, management does not believe that the results of any of these matters will have a material impact on the Partnership's financial position or results of operations. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL The Partnership had net losses and net losses per limited partnership unit of $(263,000) and $(9.03) for the nine months ended September 30, 1998 and $(485,000) and $(16.64) for the nine months ended September 30, 1997, respectively. The decrease in losses for 1998 is primarily the result of the gain on the sales of the proposed marina and condominiums in Redwood City and the 10.66 acres in Roseville. 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 judgement 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 November 30, 1998, the Partnership held only cash, one note secured by real estate, and two pieces of real property. It anticipates that it 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 any valuation risk as a result of the year 2000 issues, other than general economic climate issues which 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, these changes have not been tested. The Partnership intends to begin testing changes made to its existing software in the next few months. The Partnership has not, and does not contemplate spending any significant amount of funds to upgrade its computer systems inasmuch as virtually all of its computer needs could easily be met with existing "off 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, 1998, the Partnership had $4,497,000 in unrestricted cash and interest-bearing deposits. The Partnership had no unfunded loan commitments to nonaffiliates at September 30, 1998. Sources of funds are expected to be from repayments of real estate loans receivable from unconsolidated investee and the sale of real estate owned. Future operations of real estate owned are not expected to be a significant source of funds. The Partnership funded advances on loans to an unconsolidated investee totaling $289,000 and received payoffs and paydowns on loans totaling $499,000 during the nine months ended September 30, 1998. The Partnership made additions to real estate owned of $72,000 and received cash proceeds from the sale of real estate owned of $4,823,000 during the nine months ended September 30, 1998. During the nine months ended September 30, 1998, the Partnership closed escrow on two properties. The pending sale of a portion of a third property fell out of escrow during the second quarter of 1998. These escrows are discussed in greater detail below. 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) the $3,500,000 limited partner distribution discussed below,(ii) real property taxes on real estate owned of approximately $93,000 payable during the next twelve months, and (iii) selling, general and administrative costs. These commitments are expected to be paid from existing cash balances and the sale of real estate owned. The Partnership is continuously evaluating various alternative strategies for liquidating its real estate assets under current market conditions. These alternative strategies could include the subdivision and improvement of the Partnership's properties in order to increase their marketability and maximize the return to the limited partners. In the event the Partnership decides to implement some of these strategies, it may require the investment of a portion of the Partnership's existing cash. The decision to invest additional cash in existing assets will only be made if, based on management's best judgment at the time, there is a clear indication that such investment should generate a significantly greater return to the limited partners than any other strategies available to the Partnership. 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. As discussed above, the Partnership had approximately $4.5 million in cash as of September 30, 1998. This equates to approximately $154 per limited partnership unit. The general partners had previously suspended distributions during 1991 due to a decline in liquidity and uncertainty of the cash requirements for existing and potential real estate owned. As a result of recent payoffs, the general partners have reevaluated the potential long-term cash requirements of the Partnership in order to determine the amount of cash to be distributed to the limited partners at this time. The general partners have declared a distribution payable to record holders as of October 1, 1998 with a distribution dated October 15, 1998 of $120 per limited partnership unit. Management believes that current and projected liquidity is sufficient to fund operating expenses and to meet the contractual obligations and cash flow operating requirements of the Partnership. RESULTS OF OPERATIONS Management has noted that the long-term downturn in the real estate industry in California has not only stabilized, it has improved considerably in many sectors of the market. As of September 30, 1998, all of the nonaffiliated loans have been repaid to the Partnership and the Partnership does not expect to realize any future interest income on loans to nonaffiliates. Interest income on loans to nonaffiliates, including fees was $3,000 and zero for the nine and three months ended September 30, 1998 and $1,000 and zero for the nine and three months ended September 30, 1997, respectively. The outstanding principal balance of loans on nonaccrual at September 30, 1998 and December 31, 1997 totaled $722,000 and $814,000, respectively. Loans on "nonaccrual" refer to loans upon which the Partnership is no longer accruing interest. Management's policy is to cease accruing interest on loans when interest and/or principal repayments become 90 days past due. The real estate owned balance at September 30, 1998 and December 31, 1997 was $4,517,000 and $10,827,000, respectively. The following sections entitled Nonaccrual Loans and Real Estate Owned provide a detailed analysis of these assets. NONACCRUAL LOANS During 1994, the Partnership converted a 50 percent participation in a note secured by a second trust deed into a 50 percent participation in a $2,115,000 unsecured note representing a workout loan due from LCR, an affiliate. This loan and an additional loan funded by Centennial Mortgage Income Fund ("CMIF") reflect the majority of the cost basis of 179 residential lots, which LCR contributed to Silverwood. LCR's only source of repayment of this note is the excess, if any, of proceeds from the sale of the fully developed lots over the amount of secured debt. Due to the continuing decline in value of the lots, management does not expect that this loan will be repaid. As a result, the loan has been placed on nonaccrual. The participating principal balance and nonaccrued interest balances at September 30, 1998 are $1,059,000 and $386,000, respectively. As discussed in note 5 of Notes to Consolidated Financial Statements, the Partnership has reduced the carrying value of this note by $1,059,000, a portion of its share of losses from this unconsolidated investee. During 1994 and 1995, LCR evaluated various alternative strategies for liquidating its investment in the 179 lots in Lancaster. During 1994, LCR determined that its best course of action appeared to be the full-scale buildout and sale of single- family homes since the market for finished lots had fallen so significantly. LCR obtained construction financing commitments from the Partnership and CMIF. LCR entered into a joint venture agreement entitled Silverwood with Home Devco to construct and sell single-family homes at the project. Silverwood began constructing a model home complex at the project in June 1995. Construction commenced in September 1995 on Phase I at the project. Construction of Phase II of the project was commenced in February 1997. At September 30, 1998, the Partnership holds a 50 percent participation in three notes due from Silverwood consisting of a land development loan, a model home loan and a home construction loan with combined disbursed balances of $1,181,000. The Partnership's disbursed balance of the $3,266,000 development loan at September 30, 1998 was $1,101,000. The Partnership's disbursed balance of the $490,000 model loan at September 30, 1998 was $57,000. The Partnership's disbursed balance of the $1,034,000 Phase I construction loan at September 30, 1998 was $23,000. As discussed in note 5 of Notes to Consolidated Financial Statements, the Partnership had reduced the carrying value of the land development and Phase I construction loan by $459,000, the remainder of its share of losses in unconsolidated investee. Sales volumes of new homes in the Lancaster area have continued to remain sluggish since 1995 while sales prices have remained relatively flat and construction costs have increased. This has caused a further decline in the value of finished lots and a reduction in the anticipated net proceeds the Partnership expects it might realize from the buildout of homes at the project. Additionally, Silverwood closed escrow on only two homes during the twelve calendar months of 1996, seven homes during the twelve calendar months of 1997 and eleven homes during the nine months ended September 30, 1998, far less than originally anticipated. As a result of these factors, LCR recorded a $207,000, $2,516,000 and $1,077,000 provision for losses on real estate investments during 1997, 1996 and 1995, respectively. As of September 30, 1998, Silverwood had entered into a purchase and sale agreement to sell one of the remaining two homes. This escrow closed on October 26, 1998. Silverwood had also entered into a purchase and sale agreement to sell the 157 remaining undeveloped lots for $1,570,000 and had shut down its homebuilding activities. The transaction required that the Partnership and CMIF provide $1,170,000 in financing to the buyer. Although a final computation has not been determined, management does not believe that the transaction will result in any material gain or loss. This transaction also closed escrow in October 1998. 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 15,894 square feet of rentable space located in San Bernardino, California. The loan was provided as gap financing behind a first deed of trust in the amount of $350,000 to another financial institution. The borrower was unable to payoff the loan at maturity and the Partnership foreclosed on April 20, 1993. The Partnership restructured the note secured by the first trust deed to a more favorable term and rate. The project is 78 percent leased and generated net operating income before debt service of $41,000 during the first nine months of 1998. The property is being marketed for sale, however, due to below desirable occupancy levels, it is difficult to attract buyers. In order to attract new tenants and increase occupancy, management is in the process of installing an elevator. When occupancy increases, the property should be more desirable to buyers. The net carrying value at September 30, 1998 was $880,000 before allowance for possible losses. The Partnership has recorded a $250,000 allowance for losses related to this property as of September 30, 1998. The property is encumbered by a note secured by a first trust deed with a current balance of $234,000 which matures June 1, 2008. 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. Through September 30, 1998, the Partnership has sold approximately 7 acres of the property leaving approximately 37 acres to sell. A portion of the property is adjacent to Highway 99 and has good freeway visibility. During the first quarter of 1998, the Partnership opened escrow on a 9.5 acre portion of the property. The purchase price was $875,000 and the transaction was subject to the buyer obtaining certain senior housing tax credits through a governmental lottery. However, the buyer failed to obtain these credits and escrow was cancelled. At September 30, 1998, the carrying value before allowance for possible losses was $3,637,000. The Partnership has recorded a $701,000 allowance for losses related to this property as of September 30, 1998. Proposed Marina and Condominiums in Redwood City, California On April 7, 1989, the Partnership foreclosed on a land loan located in Redwood City, California with an original committed amount of $3,487,000. The purpose of the loan was to acquire the land and provide for the planning of a 122-slip marina plus an office building and restaurant. The original maturity date of October 21, 1986 was extended to March 1, 1987. In March 1987, the borrower filed bankruptcy. The property had been in escrow since 1996 for a purchase price of $4,000,000. Due to some pending costs to resolve access issues, the price was reduced to $3,900,000. It closed escrow June 12, 1998 and the Partnership received net proceeds from the sale of $3,699,000. 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 committed amount of $2,779,000 secured by a second deed of trust on 982 acres in Roseville, California. The borrower failed to make the required yearly principal payment to the first and second trust deed holders. The first trust deed holder filed a notice of default for nonpayment. Management negotiated a settlement agreement to accept a 10.66 acre commercial site as payment in full for the $2,779,000 note. The property had been in escrow for an all cash purchase price of $1,200,000 and closed escrow June 30, 1998 with the Partnership receiving net proceeds of $1,124,000. The Partnership recorded a $121,000 gain on sale on this transaction. INTEREST ON INTEREST-BEARING DEPOSITS Interest on interest-bearing deposits totaled $51,000 and $46,000 for the nine and three months ended September 30, 1998 and $4,000 and zero for the nine and three months ended September 30, 1997, respectively. Interest on interest-bearing deposits represents interest earned on Partnership funds invested, for liquidity, in time certificate and money market deposits. The large increase for the nine and three months ended September 30, 1998 is due to the increased cash balances which resulted from the 1998 property sales discussed above. INCOME FROM OPERATIONS OF REAL ESTATE OWNED Income from operations of real estate owned consists of operating revenues of $118,000 and $42,000 for the nine and three months ended September 30, 1998 and $98,000 and $33,000 for the nine and three months ended September 30, 1997, respectively. The 1998 and 1997 revenues are from the office building in San Bernardino. The increase for 1998 is due to increased occupancy. PROVISION FOR POSSIBLE LOSSES There was no provision for possible losses for the nine and three months ended September 30, 1998 or 1997. Management believes that the allowance for possible loan losses at September 30, 1998 is adequate to absorb the known and inherent risk in the Partnership's loan and real estate owned portfolio. SHARE OF LOSSES IN UNCONSOLIDATED INVESTEES The Partnership has invested in LCR, 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 and $91,000 and $37,000 for the nine and three months ended September 30, 1997, respectively. The share of losses consists primarily of provisions for losses on real estate investments related to the 179 lots in Lancaster owned by LCR. OTHER EXPENSES Operating expenses from operations of real estate owned were $67,000 and $33,000 for the nine and three months ended September 30, 1998 and $63,000 and $26,000 for the nine and three months ended September 30, 1997, respectively. The increase for 1998 is due to several air conditioning unit repairs. These expenses were associated with the office building in San Bernardino. Operating expenses from operations of real estate owned paid to affiliates were $9,000 and $3,000 for the nine and three months ended September 30, 1998 and $9,000 and $3,000 for the nine and three months ended September 30, 1997, respectively. The operating expenses consist of property management fees paid to an affiliate. Expenses associated with non-operating real estate owned were $228,000 and $39,000 for the nine and three months ended September 30, 1998 and $247,000 and $64,000 for the nine and three months ended September 30, 1997, respectively. The expenses relate to the proposed marina and condominiums in Redwood City, the land in Sacramento, and the 10.66 acres in Roseville. The decrease for the nine and three months ended September 30, 1998 is primarily due to the sale of the proposed marina and condominiums in Redwood City and the 10.66 acres in Roseville in June 1998. Depreciation and amortization expense was $3,000 and $1,000 for the nine and three months ended September 30, 1998 and $4,000 and $1,000 for the nine and three months ended September 30, 1997, respectively. Interest expense was $11,000 and $5,000 for the nine and three months ended September 30, 1998 and $10,000 and $4,000 for the nine and three months ended September 30, 1997, respectively. The interest expense relates to the office building in San Bernardino. As a result of the refinance of property with a new $235,000 note bearing interest at 8.640 percent per annum, management expects interest expense to increase in future periods. General and administrative expenses, affiliates totaled $192,000 and $68,000 for the nine and three months ended September 30, 1998 and $141,000 and $45,000 for the nine and three months ended September 30, 1997, respectively. These expenses are primarily salary allocation reimbursements paid to affiliates. As discussed in note 5 of Notes to Consolidated Financial Statements, the employees of the corporate general partner have entered into contracts. These contracts provided for salary increases of 10 percent and severance benefits. General and administrative expenses, affiliates for the nine and three months ended September 30, 1998 include approximately $44,000 and $22,000, respectively, in accrued severance pay with respect to these contracts. General and administrative expenses, nonaffiliates totaled $46,000 and $17,000 for the nine and three months ended September 30, 1998 and $49,000 and $21,000 for the nine and three months ended September 30, 1997, respectively. These expenses consist of other costs associated with the administration of the Partnership and real estate owned. 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/John B. Joseph _________________________________ John B. Joseph General Partner November 16, 1998 By:/s/Ronald R. White _________________________________ Ronald R. White General Partner November 16, 1998 By: CENTENNIAL CORPORATION General Partner /s/Joel H. Miner _________________________________ Joel H. Miner Chief Financial Officer November 16, 1998 EX-27 2 ART. 5 FDS FOR 3RD QUARTER 10-Q
5 1,000 9-MOS DEC-31-1998 SEP-30-1998 4,497 0 722 0 0 4,529 0 0 8,831 85 234 0 0 0 8,501 8,831 0 375 0 0 627 0 11 (263) 0 (263) 0 0 0 (263) (9.03) (9.03)
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