10-Q 1 cmif29302.txt CENT MORTGAGE INCOME FUND II 9/30/02 10-Q 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, 2002 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, 2002 2001 Assets (Unaudited) --------------------------------------------------------------------------- Cash and cash equivalents $ 2,317,000 $ 1,333,000 Real estate owned, held for sale (note 3) --- 1,044,000 Less allowance for possible losses on real estate owned --- 768,000 --------------------------------------------------------------------------- Net real estate owned --- 276,000 --------------------------------------------------------------------------- $ 2,317,000 $ 1,609,000 =========================================================================== Liabilities and Partners' Equity --------------------------------------------------------------------------- Accounts payable and accrued liabilities $ --- $ 11,000 --------------------------------------------------------------------------- Total liabilities --- 11,000 --------------------------------------------------------------------------- Partners' equity (deficit) -- 29,141 limited partnership units outstanding at September 30, 2002 and December 31, 2001 General partners (56,000) (56,000) Limited partners 2,373,000 1,654,000 --------------------------------------------------------------------------- Total partners' equity 2,317,000 1,598,000 Contingencies (note 5) --------------------------------------------------------------------------- $ 2,317,000 $ 1,609,000 ===========================================================================
See accompanying notes to consolidated financial statements 1 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Operations (Unaudited)
Nine Months Three Months Ended September 30, Ended September 30, 2002 2001 2002 2001 ------------------------------------------------------------------------------ Revenue: Interest on interest- bearing deposits $ 22,000 $ 50,000 $ 9,000 $ 12,000 Other 14,000 5,000 1,000 1,000 Gain on sale of property 846,000 --- --- --- ------------------------------------------------------------------------------ Total revenue 882,000 55,000 10,000 13,000 ------------------------------------------------------------------------------ Expenses: Expenses associated with non- operating real estate owned 20,000 37,000 --- 12,000 General and administrative, affiliates 89,000 70,000 29,000 19,000 General and administrative, nonaffiliates 54,000 43,000 13,000 12,000 ------------------------------------------------------------------------------ Total expenses 163,000 150,000 42,000 43,000 ------------------------------------------------------------------------------ Net income (loss) $ 719,000 $ (95,000) $ (32,000) $ (30,000) ============================================================================== Net income (loss) per limited partnership unit $ 24.67 $ (3.26) $ (1.10) $ (1.03) ==============================================================================
See accompanying notes to consolidated financial statements 2 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Consolidated Statement of Partners' Equity
For the nine months ended September 30, 2002 Total General Limited Partners' Partners Partners Equity (Unaudited) (Unaudited) (Unaudited) --------------------------------------------------------------------------- Balance (deficit) at December 31, 2001 $ (56,000) $ 1,654,000 $ 1,598,000 Net income --- 719,000 719,000 --------------------------------------------------------------------------- Balance (deficit) at September 30, 2002 $ (56,000) $ 2,373,000 $ 2,317,000 ===========================================================================
See accompanying notes to consolidated financial statements 3 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows
For the nine months ended September 30, 2002 and 2001 2002 2001 (Unaudited) (Unaudited) -------------------------------------------------------------------------- Cash flows used in operating activities: Net income (loss) $ 719,000 $ (95,000) Adjustments to reconcile net income (loss) to net cash used in operating activities: Gain on sale of real estate owned (846,000) --- Changes in assets and liabilities: Increase in other assets --- (3,000) Increase (decrease) in accounts payable and accrued liabilities (11,000) 6,000 -------------------------------------------------------------------------- Net cash used in operating activities (138,000) (92,000) -------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from sale of real estate owned 1,122,000 --- -------------------------------------------------------------------------- Net cash provided by investing activities 1,122,000 --- -------------------------------------------------------------------------- Cash flows used in financing activities: Cash distribution to limited partners --- (583,000) -------------------------------------------------------------------------- Net increase (decrease) in in cash and cash equivalents 984,000 (675,000) Beginning cash and cash equivalents 1,333,000 1,674,000 -------------------------------------------------------------------------- Ending cash and cash equivalents $ 2,317,000 $ 999,000 ========================================================================== Supplemental schedule of noncash investing And financing activities: Decrease in allowance for possible losses on real estate owned as a result of sales $ 768,000 $ ---
See accompanying notes to consolidated financial statements 4 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Notes to Consolidated Financial Statements (Unaudited) September 30, 2002 and 2001 (1) BUSINESS Centennial Mortgage Income Fund II (the "Partnership") was formed in 1985 and initially invested in commercial, industrial and residential income-producing real property through mortgage investments consisting of participating first mortgage loans, other equity participation loans, construction loans, and wrap-around and other junior loans. The Partnership's underwriting policy for granting credit was to fund loans secured by first and second deeds of trust on real property. The Partnership's area of concentration was in California. In the normal course of business, the Partnership participated with other lenders in extending credit to single borrowers. The Partnership did this in an effort to decrease credit concentrations and provide a greater diversification of credit risk. As of September 30, 2002, all of the Partnership's loans have been repaid or charged off. However, during the early 1990's, real estate market values for undeveloped land in California declined severely. As the loans secured by undeveloped land became delinquent, the Partnership elected to foreclose on certain of these loans, thereby increasing real estate owned balances. As a result, the Partnership became a direct investor in this real estate. The real estate owned balance before allowance for possible losses was $1,044,000 as of December 31, 2001 and reduced to zero as of September 30, 2002. Beginning with the fourth quarter of 1992, the Partnership entered its repayment stage and cash proceeds from mortgage investments are no longer available for reinvestment in new loans by the Partnership. (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, 2002 and 2001 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, 2002 and 2001 is unaudited and condensed inasmuch as it does not include all related footnote disclosures. The consolidated financial statements do not include all information and footnotes necessary for fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. Notes to consolidated financial statements included in Form 10-K for the year ended December 31, 2001 on file with the Securities and Exchange Commission, provide additional disclosures and a further description of accounting policies. 5 Financial Information about Industry Segments Given that the Partnership is in the process of liquidation, the Partnership has identified only one operating business segment which is the business of asset liquidation. Net Income (Loss) per Limited Partnership Unit Net income (loss) per limited partnership unit was based on the weighted average number of limited partnership units outstanding of 29,141 for all periods presented. (3) REAL ESTATE OWNED
Real estate owned consists of the following: (dollars in thousands) September 30, December 31, 2002 2001 ---------------------------------------------------------------------------- 1. Land in Sacramento, CA --- 1,044 ---------------------------------------------------------------------------- Total real estate owned $ --- $ 1,044 ============================================================================
During the second quarter of 2002, the Partnership sold the remaining 12 acres of its property in Sacramento. The sale generated net proceeds of $1,122,000 and the Partnership recorded a $846,000 gain on the sale. This was the last property owned by the Partnership. As a result, the real estate owned balance at September 30, 2002 is zero. (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, 2002 or 2001. (5) CONTINGENCIES There are no material pending legal proceedings. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL References to the "Partnership" in the following discussion refers to Centennial Mortgage Income Fund II and its wholly-owned subsidiaries. The Partnership had net income (losses) and income (losses) per limited partnership unit of $719,000 and $24.67 and $(95,000) and $(3.26) for the nine months ended September 30, 2002 and September 30, 2001, 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. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2002, the Partnership had $2,317,000 in unrestricted cash and interest-bearing deposits. The Partnership had no unfunded loan commitments at September 30, 2002. During the first nine months of 2002, the Partnership's principal sources of cash were $1,122,000 of cash proceeds from the sale of real estate, $22,000 in interest income on interest bearing deposits and $10,000 in other income related to an extension payment under the purchase and sale agreement for the Partnership's last remaining real estate owned property. The Partnership's principal uses of cash during the first nine months of 2002 were approximately $154,000 in general and administrative costs and $20,000 in expenses associated with non-operating real estate owned. During the second quarter of 2002, the Partnership had consummated a purchase and sale agreement involving the remaining 12 acres of its property in Sacramento. Net proceeds from the sale were $1,122,000 and the Partnership reported a gain of $846,000. The Partnership's principal capital requirements for the next year consist of 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 7 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. As a result of the substantial decrease in real estate owned which occurred in 1997 and 1998, the general partners determined that the Partnership could make a $3,496,000 distribution to its limited partners in October 1998. Additional asset liquidations during 1999, 2000 and 2001 enabled the Partnership to make a $2,127,000 cash distribution to its limited partners in October 2000 and $583,000 in September 2001. With the sale of the remaining 12 acres in Sacramento, the Partnership is planning a distribution for the fourth quarter of 2002. The general partners have had discussions with legal counsel regarding the amounts of cash balances that would be prudent to be retained by the Partnership at this time. In light of the substantial amount of real estate that the Partnership has held an interest in over the years, there is always the potential for future litigation to arise, particularly in the area of toxic contamination. Although the general partners are not aware of any threatened litigation, or litigation that is likely to arise, they have determined that the Partnership should retain at least $1,000,000 in cash balances to be available to defend the Partnership in any future litigation which may arise. It is expected that these cash balances will be retained until such time as legal counsel advises the general partners that the potential for any future litigation is remote. REAL ESTATE OWNED The real estate owned balances at September 30, 2002 and 2001 were zero and $1,511,000, respectively. A description of the Partnership's principal real estate owned follows: 44 Acres in Sacramento, California The Partnership funded a loan in 1987 with a committed amount of $4,000,000 secured by a first trust deed on 43.78 acres in Sacramento, California. The loan was provided for the development of offsite improvements. The maturity date was February 1, 1991. The borrower was unable to obtain construction financing and bring interest current. The Partnership accepted a grant deed on the property on March 10, 1992. The property was zoned for multi-family and light industrial use. A portion of the property is adjacent to Highway 99 and has good freeway visibility. The Partnership rezoned and subdivided a portion of the property to facilitate one escrow on a 6.5 acre portion of the property without freeway visibility. This transaction closed escrow during the fourth quarter of 1997. There had been only limited industrial/commercial use development activity in the area surrounding this property during 1996 and 1997. In light of this limited activity and management's objective of liquidating the Partnership's remaining assets as soon as practical, the Partnership recorded an additional $504,000 provision for losses against the carrying value of this property during 1998. 8 During the first quarter of 1999, the Partnership opened escrow on a 9.45 acre portion of the property which also did not have freeway visibility. for a purchase price of $900,000. The escrow closed at the end of the second quarter of 1999, generated $842,000 in net cash proceeds and was recorded at no gain or loss. Both the parcel sold in 1997 and the parcel sold in 1999 are zoned for residential use. The balance of the property is zoned for industrial/commercial use. The Partnership sold another 7.13 acre parcel of the property in February 2000. The sale generated net sales proceeds of $846,000. The Partnership recorded no gain or loss on this sale. The Partnership sold another 2.65 acre parcel of the property in August 2000. The sale generated net sales proceeds of $486,000. The Partnership recorded no gain or loss on this sale. The Partnership sold approximately 5.58 acres of the property in December 2001. The sale generated net proceeds of $374,000. The Partnership recorded a $251,000 gain on the sale. During the second quarter of 2002, the Partnership sold the remaining 12 acres of its property in Sacramento. The sale generated net proceeds of $1,122,000. The Partnership recorded an $846,000 gain on the sale. INTEREST ON INTEREST-BEARING DEPOSITS Interest on interest-bearing deposits totaled $22,000 and $50,000 for the nine months ended September 30, 2002 and 2001, respectively. Interest on interest-bearing deposits totaled $9,000 and $12,000 for the three months ended September 30, 2002 and 2001, respectively. Interest on interest-bearing deposits represents interest earned on Partnership funds invested, for liquidity, in time certificate and money market deposits. The decrease in 2002 is primarily attributable to a decrease in the average balance of cash and cash equivalents that resulted from a $583,000 cash distribution to limited partners in September 2001 as well as a reduction in the interest rates earned on those balances. PROVISION FOR POSSIBLE LOSSES There was no provision for possible losses for the nine months ended September 30, 2002 and 2001. The provision for possible losses results from the change in the allowance for possible losses on real estate owned net of chargeoffs, if any. Due to the sale of the remaining 12 acres in Sacramento, the Partnership had no allowance for possible losses on real estate owned as of September 30, 2002. OTHER EXPENSES Expenses associated with non-operating real estate owned were $20,000 and $37,000 for the nine months ended September 30, 2002 and 2001, respectively. Expenses associated with non-operating real estate owned were zero and $12,000 for the three months ended September 30, 2002 and 2001, respectively. The expenses relate primarily to the land in Sacramento. The decrease for 2002 is primarily due to a decrease in property taxes as the lots were sold and the sale of the remaining parcel in the second quarter of 2002. 9 GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses, affiliates totaled $89,000 and $70,000 for the nine months ended September 30, 2002 and 2001, respectively. General and administrative expenses, affiliates totaled $29,000 and $19,000 for the three months ended September 30, 2002 and 2001, respectively. These expenses are primarily salary allocation reimbursements paid to affiliates. The increase for 2002 is due to an increase in time spent on the Partnerships affairs in preparation for liquidation of the Partnership by employees of the general partner. General and administrative expenses, nonaffiliates totaled $54,000 and $43,000 for the nine months ended September 30, 2002 and 2001, respectively, and $13,000 and $12,000 for the three months ended September 30, 2002 and 2001, respectively. These expenses consist of other costs associated with the administration of the Partnership and real estate owned. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Since the Partnership does not invest in any derivative financial instruments or enter into any activities involving foreign currencies, its market risk associated with financial instruments is limited to the effect that changing domestic interest rates might have on the fair value of its bank deposits. As of September 30, 2002, the Partnership held fixed rate bank deposits with carrying values totaling $806,000. The bank deposits all had maturities of less than ninety days. The estimated fair value of all of these assets was estimated to be equal to their carrying values as of September 30, 2002. Management currently intends to hold the remaining fixed rate assets until their respective maturities. Accordingly, the Partnership is not exposed to any material cash flow or earnings risk associated with these assets. Given the relatively short-term maturities of these assets, management does not believe the Partnership is exposed to any significant market risk related to the fair value of these assets. The Partnership had no interest bearing indebtedness outstanding as of September 30, 2002. Accordingly, the Partnership is not exposed to any market risk associated with its liabilities. ITEM 4. CONTROLS AND PROCEDURES Within the 90 days prior to the date of this report, the Partnership carried out an evaluation, under the supervision and with the participation of the Partnerships management, including the General Partners and Chief Financial Officer of Centennial Corporation, of the effectiveness of the design and operation of the Partnerships disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, management concluded that the Partnerships disclosure controls and procedures are effective in timely alerting them to material information relating to the Partnership required to be included in the Partnerships periodic Securities and Exchange Commission filings. There has been no significant changes in the Partnerships internal controls or in other factors that could significantly affect these controls subsequent to the evaluation date. 10 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)99.1 Certification of General Partner and Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002. (3) & (4) Articles of Incorporation and Bylaws The Amended and Restated Limited Partnership Agreement Incorporated by reference to Exhibit A to the Partnership's Prospectus contained in the Partnership's registration Statement on Form S-11 (Commission File No. 0-15448) Dated January 17, 1986, as supplemented filed under the Securities Act of 1933 (b) None 11 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Centennial Mortgage Income Fund II and Subsidiaries, the (Partnership) on Form 10-Q for the period ending September 30, 2002, as filed with the Securities and Exchange Commission on November 14, 2002, (the Report) I, Ronald R. White, General Partner and Chief Financial Officer of Centennial Corporation (Corporate General Partner), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. /s/ Ronald R. White _______________________________ November 14, 2002 Ronald R. White General Partner and Chief Financial Officer of Centennial Corporation 12 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Ronald R. White, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Centennial Mortgage Income Fund II and Subsidiaries, the (Partnership); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge , the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Partnership as of, and for, the periods presented in this quarterly report; 4. The Partnerships other General Partners and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Partnership and we have: a)designed such disclosure controls and procedures to ensure that material information relating to the Partnership, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b)evaluated the effectiveness of the Partnerships disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and c)presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Partnerships management and I have disclosed, based on our most recent evaluation, to the Partnership's auditors and the audit committee of the Partnership: a)all significant deficiencies in the design or operation of internal controls which could adversely affect the Partnerships ability to record, process, summarize and report financial data and have identified for the Partnerships auditors any material weaknesses in internal controls; and b)any fraud, whether or not material, that involves management or other employees who have a significant role in the Partnerships internal controls; and 13 6. I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Ronald R. White ___________________________ Ronald R. White General Partner and Chief Financial Officer of Centennial Corporation 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 /s/ John B. Joseph ________________________ John B. Joseph General Partner November 14, 2002 /s/ Ronald R. White _________________________________ Ronald R. White General Partner November 14, 2002 14