-----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, PW+NUiMPzGLBh8431iUeeMuMsjgWheEav50XQAKRP6L7yT6vdg9Kn7NXpuLrT/TE Jo9WLPEwPuWzD1ia8mQ6Ig== 0000773337-99-000008.txt : 19990817 0000773337-99-000008.hdr.sgml : 19990817 ACCESSION NUMBER: 0000773337-99-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 99691407 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 June 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
June 30, December 31, Assets 1999 1998 (Unaudited) - ----------------------------------------------------------------- Cash and cash equivalents $ 1,697,000 $ 1,010,000 Real estate loans receivable, earning 540,000 581,000 Real estate loans receivable from unconsolidated investee, nonearning (note 4) 5,000 17,000 - ----------------------------------------------------------------- Net real estate loans receivable 545,000 598,000 - ----------------------------------------------------------------- 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 - ----------------------------------------------------------------- See accompanying notes to consolidated financial statements 1 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Consolidated Balance Sheets (Continued) June 30, December 31, Assets 1999 1998 (Unaudited) - ----------------------------------------------------------------- Due from affiliate 2,000 2,000 Other assets, net 27,000 22,000 - ----------------------------------------------------------------- $ 4,642,000 $ 4,820,000 ================================================================= Liabilities and Partners' Equity - ----------------------------------------------------------------- Note payable $ 233,000 $ 234,000 Accounts payable and accrued liabilities 22,000 72,000 - ----------------------------------------------------------------- Total liabilities 255,000 306,000 - ----------------------------------------------------------------- Partners' equity (deficit) -- 29,141 limited partnership units outstanding at June 30, 1999 and December 31, 1998 General partners (56,000) (56,000) Limited partners 4,443,000 4,570,000 - ----------------------------------------------------------------- Total partners' equity 4,387,000 4,514,000 Contingencies (note 5) - ----------------------------------------------------------------- $ 4,642,000 $ 4,820,000 =================================================================
See accompanying notes to consolidated financial statements 2 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Operations (Unaudited)
Six Months Three Months Ended June 30, Ended June 30, 1999 1998 1999 1998 - ----------------------------------------------------------------- Revenue: Interest income on loans to nonaffiliates, including fees $ 24,000 $ 3,000 $ 12,000 $ --- Interest on interest-bearing deposits 17,000 5,000 8,000 3,000 Income from operations of real estate owned 92,000 76,000 48,000 38,000 Gain on sale of real estate owned --- 192,000 --- 192,000 Other income 6,000 7,000 2,000 5,000 - ----------------------------------------------------------------- Total revenue 139,000 283,000 70,000 238,000 Expenses: Share of losses in unconsolidated investee --- 75,000 --- 21,000 Operating expenses from operations of real estate owned 43,000 34,000 23,000 15,000 Operating expenses from operations of real estate owned paid to affiliates 6,000 6,000 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) Six Months Three Months Ended June 30, Ended June 30, 1999 1998 1999 1998 - ----------------------------------------------------------------- Expenses associated with non-operating real estate owned 25,000 189,000 12,000 64,000 Depreciation and amortization expense 2,000 2,000 1,000 1,000 Interest expense 10,000 6,000 5,000 4,000 General and administrative, affiliates 137,000 124,000 26,000 79,000 General and administrative, nonaffiliates 43,000 29,000 18,000 15,000 - ----------------------------------------------------------------- Total expenses 266,000 465,000 88,000 202,000 - ----------------------------------------------------------------- Net income (loss) $ (127,000) $ (182,000) $ (18,000) $ 36,000 ================================================================= Net income (loss) per limited partnership unit $ (4.36) $ (6.25) $ (.62) $ 1.24 =================================================================
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 six months ended June 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 --- (127,000) (127,000) - ----------------------------------------------------------------- Balance (deficit) at June 30, 1999 $ (56,000) $ 4,443,000 $ 4,387,000 =================================================================
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 six months ended June 30, 1999 and 1998 1999 1998 - ----------------------------------------------------------------- Cash flows from operating activities: Net loss $ (127,000) $ (182,000) Adjustments to reconcile net loss to net cash used in operating activities: Gain on sale of real estate owned --- (192,000) Depreciation expense 2,000 2,000 Equity in losses of unconsolidated investee --- 75,000 Changes in assets and liabilities: Increase in other assets (7,000) (34,000) Decrease in due from affiliates --- 1,000 Increase (decrease) in accounts payable and accrued liabilities (50,000) 28,000 Increase (decrease) in interest and taxes payable on real estate owned --- (484,000) - ----------------------------------------------------------------- Net cash used in operating activities (182,000) (786,000) - ----------------------------------------------------------------- Cash flows from investing activities: Principal collected on loans 62,000 200,000 Advances on loans made to unconsolidated investee (note 5) (9,000) (282,000) 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 six months ended June 30, 1999 and 1998 1998 1997 - ----------------------------------------------------------------- Additions to real estate owned (25,000) (35,000) Proceeds from sale of real estate owned 842,000 4,823,000 - ----------------------------------------------------------------- Net cash provided by investing activities 870,000 4,706,000 - ----------------------------------------------------------------- Cash flows from financing activities: Principal payments on notes payable (1,000) (97,000) Advances on notes payable --- 235,000 - ----------------------------------------------------------------- Net cash provided by (used in) financing activities (1,000) 138,000 - ----------------------------------------------------------------- Net increase in cash and cash equivalents 687,000 4,058,000 Beginning cash and cash equivalents 1,010,000 195,000 - ----------------------------------------------------------------- Ending cash and cash equivalents $ 1,697,000 $4,253,000 ================================================================= Supplemental schedule of cash flow information: Cash paid during the six month period for: Interest $ 10,000 $ 5,000
See accompanying notes to consolidated financial statements 7 CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Notes to Consolidated Financial Statements (Unaudited) June 30, 1999 and 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 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 June 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 six and three months ended June 30, 1999 and 1998 are not necessarily indicative of results which may be expected 8 for any other interim period, or for the year as a whole. Information pertaining to the six and three months ended June 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) June 30, December 31, 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 =================================================================
9 (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 six months ended June 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 June 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 June 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 10 corporation using the equity method. The following represents condensed financial information for LCR Development, Inc. at June 30, 1999 and December 31, 1998 and for the six months ended June 30, 1999 and 1998: LCR Development, Inc. Consolidated Balance Sheet
June 30, December 31, 1999 1998 Assets (Unaudited) - ----------------------------------------------------------------- Cash $ 10,000 $ 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 - ----------------------------------------------------------------- $ 20,000 $ 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 6,000 12,000 Interest and taxes payable on real property 2,036,000 1,837,000 Payable to affiliates 9,000 5,000 - ----------------------------------------------------------------- Total liabilities 6,370,000 6,285,000 Stockholders' deficit (6,350,000) (6,152,000) - ----------------------------------------------------------------- $ 20,000 $ 133,000 =================================================================
11 LCR Development, Inc. Consolidated Statement of Operations (Unaudited)
Six months Six months ended ended June 30, 1999 June 30, 1998 - ----------------------------------------------------------------- Housing sales $ 123,000 $ 515,000 Cost of housing sales 118,000 481,000 Provision for losses --- 178,000 Selling and marketing expenses 1,000 47,000 General and administrative expenses --- 19,000 - ----------------------------------------------------------------- Operating income (loss) 4,000 (209,000) Interest expense 201,000 206,000 - ----------------------------------------------------------------- Net loss before income taxes (197,000) (415,000) Income taxes 1,000 1,000 - ----------------------------------------------------------------- Net (loss) (198,000) (416,000) ================================================================= Interest not included in share of losses (198,000) (265,000) - ----------------------------------------------------------------- Allocable net loss $ --- $ (151,000) ================================================================= Share of loss recorded $ --- $ (75,000) =================================================================
(5) CONTINGENCIES There are no material pending legal proceedings. 12 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 $(127,000) and $(4.36) and $(182,000) and $(6.25) for the six months ended June 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 June 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 13 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 continue such testing over 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 "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 June 30, 1999, the Partnership had $1,697,000 in unrestricted cash and interest-bearing deposits. The Partnership had no unfunded loan commitments at June 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 of 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 six months ended June 30, 1999. As of June 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 $1,693,000 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 $678,000. Management currently estimates that the net sale proceeds from these transactions, if consummated, would be 14 approximately $100,000 greater than the net book value after allowances for losses. Both agreements provide for contingency periods which have not expired and which would allow the buyer to terminate the agreement if their due diligence reveals any facts which they deem unacceptable. 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 15 $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 $24,000 and $12,000 for the six and three months ended June 30, 1999, respectively. Interest income on loans to nonaffiliates, including fees was $3,000 and $-0- for the six and three months ended June 30, 1998, respectively. The increase can be attributed to an increase in the average balances of these loans in the latter part of 1998 which resulted from the sale of property. These increased receivable balances continued into the first six months of 1999. Interest on interest-bearing deposits totaled $17,000 and $8,000 for the six and three months ended June 30, 1999, respectively. Interest on interest-bearing deposits totaled $5,000 and $3,000 for the six and three months ended June 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 increase in 1999 is primarily attributable to an increase 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 June 30, 1999 was $1,537,000. All of these loans have become unsecured as a result of the Partnership 16 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 June 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 87 percent leased as of June 30, 1999, however, a number of leases expire in 1999 and occupancy levels could decline as a result. The property generated net operating income of $43,000 and $36,000 during the six months ended June 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 June 30, 1999 was $939,000. The Partnership has recorded a $261,000 allowance for losses related to this property as of June 30, 1999. As of June 30, 1999, the property was 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 agreement provides for a contingency period which has not expired and which would allow the buyer to terminate the agreement if their due diligence reveals any facts which they deem unacceptable. 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 17 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 June 30, 1999, the carrying value before allowance for possible losses was $2,843,000. The Partnership had recorded a $1,150,000 allowance for losses related to this property as of June 30, 1999 and December 31, 1998. The Partnership has entered into a purchase and sale agreement to sell this property. The agreement provides for a contingency period which has not expired and which would allow the buyer to terminate the agreement if their due diligence reveals any facts which they deem unacceptable. 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 18 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 $92,000 and $48,000 for the six and three months ended June 30, 1999, respectively. Income from operations of real estate owned totaled $76,000 and $38,000 for the six and three months ended June 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. Rental rates remained relatively flat. PROVISION FOR POSSIBLE LOSSES There was no provision for possible losses for the six months ended June 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 June 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 19 using the equity method. The Partnership's share of losses in this unconsolidated investee was $75,000 and $21,000 for the six and three months ended June 30, 1998, respectively. There were no losses recorded during the six months ended June 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 six months ended June 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 $43,000 and $23,000 for the six and three months ended June 30, 1999, respectively. Operating expenses from operations of real estate owned were $34,000 and $15,000 for the six and three months ended June 30, 1998, respectively. These expenses were associated with the office building in San Bernardino. The increase for the three and six month periods in 1999 are primarily attributable to several air conditioning units being replaced and an increase in property tax expense. The 1998 property tax expense included a retroactive credit due to an assessment value appeal previously filed by the Partnership. Operating expenses from operations of real estate owned paid to affiliates were $6,000 for both the six months ended June 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 $25,000 and $12,000 for the six and three months ended June 30, 1999, respectively. Expenses associated with non-operating real estate owned were $189,000 and $64,000 for the six and three months ended June 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 six and three months ended June 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 $2,000 for both the six months ended June 30, 1999 and 1998. Interest expense was $10,000 and $5,000 for the six and three 20 months ended June 30, 1999, respectively. Interest expense was $6,000 and $4,000 for the six and three months ended June 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 $137,000 and $26,000 for the six and three months ended June 30, 1999, respectively. General and administrative expenses, affiliates totaled $124,000 and $79,000 for the six and three months ended June 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 several factors discussed below that were associated with the termination of five employment contracts effective March 31, 1999. 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 three months ended June 30, 1999 when compared with either the three months ended June 30, 1998 or the three months ended March 31, 1999. CC, the corporate general partner, entered into twelve month employment contracts with six employees on Apri1 1, 1998. These contracts were guaranteed by the Partnership. At that time, CC had no significant operations other than the management of the operations of the Partnership and several other affiliated partnerships. These affiliated partnerships were also in the process of liquidating. After several CC employees resigned, the General Partners concluded that it was in the best interest of the Partnership to enter into contracts to provide the remaining employees an incentive to continue working for CC until such time as the majority of the Partnership's remaining assets could be liquidated. The employment contracts provided for a ten percent increase in base compensation and six months of severance pay if the employees remained employed by the general partner until the end of their contract term. All of the employees remained until the end of their contract terms. Effective March 31, 1999, CC reduced its employees to one full time and two part time employees. The Partnership's non cash assets decreased from $8,879,000 as of March 31, 1998 to $3,851,000 as of March 31, 1999. 21 Approximately $29,000 of the increase in salary allocations during the quarter ended March 31, 1999 were the result of severance and vacation pay paid to the terminated employees. The increase in base pay accounted for an additional $5,000 of the increase. Approximately $10,000 of the increase was associated with an increase in the percentage of salaries allocated to the Partnership as a result of its increased share of assets being managed by CC. General and administrative expenses, nonaffiliates totaled $43,000 and $18,000 for the six and three months ended June 30, 1999, respectively. General and administrative expenses, nonaffiliates totaled $34,000 and $15,000 for the six and three months ended June 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 June 30, 1999, the Partnership held fixed rate bank deposits with carrying values totaling $1,697,000, two fixed rate mortgage notes receivable with a combined carrying value totaling $545,000, and two real estate projects which had a net carrying value of $2,371,000. 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 real estate projects are both in escrow to be sold. The estimated fair value of all of these assets was estimated to be equal to their carrying values as of June 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 22 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 June 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. 23 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 24 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 August 14, 1999 By: CENTENNIAL CORPORATION General Partner /s/Joel H. Miner _________________________________ Joel H. Miner Chief Financial Officer August 14, 1999 EX-27 2 ART. 5 FDS FOR 2ND QUARTER 10-Q
5 1,000 6-MOS DEC-31-1998 JUN-30-1999 1,697 0 545 0 0 2,244 0 0 4,642 22 233 0 0 0 4,387 4,642 0 139 0 266 0 0 10 (127) 0 (127) 0 0 0 (127) (4.36) (4.36)
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