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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
PART I
ITEM 1. FINANCIAL STATEMENTS
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
2003 2002
Assets
- ---------------------------------------------------------------------------
Cash and cash equivalents $ 1,078,000 $ 1,294,000
Other assets, net --- 4,000
- ---------------------------------------------------------------------------
$ 1,078,000 $ 1,298,000
===========================================================================
Liabilities and Partners' Equity
- ---------------------------------------------------------------------------
Accounts payable and accrued liabilities $ --- $ 62,000
- ---------------------------------------------------------------------------
Total liabilities --- 62,000
- ---------------------------------------------------------------------------
Partners' equity (deficit)
-- 29,133 limited partnership
units outstanding at September 30,
2003 and December 31, 2002
General partners (56,000) (56,000)
Limited partners 1,134,000 1,292,000
- ---------------------------------------------------------------------------
Total partners' equity 1,078,000 1,236,000
Contingencies (note 5)
- ---------------------------------------------------------------------------
$ 1,078,000 $ 1,298,000
===========================================================================
See accompanying notes to consolidated financial statements
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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,
2003 2002 2003 2002
- ------------------------------------------------------------------------------
Revenue:
Interest on interest-
bearing deposits $ 8,000 $ 22,000 $ 2,000 $ 9,000
Other 7,000 14,000 1,000 1,000
Gain on sale of
property --- 846,000 --- ---
- ------------------------------------------------------------------------------
Total revenue 15,000 882,000 3,000 10,000
- ------------------------------------------------------------------------------
Expenses:
Expenses associated with non-
operating real estate
owned --- 20,000 --- ---
General and administrative,
affiliates 109,000 89,000 39,000 29,000
General and administrative,
nonaffiliates 64,000 54,000 8,000 13,000
- ------------------------------------------------------------------------------
Total expenses 173,000 163,000 47,000 42,000
- ------------------------------------------------------------------------------
Net income (loss) $ (158,000) $ 719,000 $ (44,000) $ (32,000)
==============================================================================
Net income (loss) per
limited partnership unit $ (5.42) $ 24.68 $ (1.51) $ (1.10)
==============================================================================
See accompanying notes to consolidated financial statements
2
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statement of Partners' Equity
(Unaudited)
For the nine months ended September 30, 2003
Total
General Limited Partners'
Partners Partners Equity
- ---------------------------------------------------------------------------
Balance (deficit) at
December 31, 2002 $ (56,000) $ 1,292,000 $ 1,236,000
Net loss --- (158,000) (158,000)
- ---------------------------------------------------------------------------
Balance (deficit) at
September 30, 2003 $ (56,000) $ 1,134,000 $ 1,078,000
===========================================================================
See accompanying notes to consolidated financial statements
3
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Unaudited)
For the nine months ended September 30, 2003 and 2002
2003 2002
- --------------------------------------------------------------------------
Cash flows used in
operating activities:
Net income (loss) $ (158,000) $ 719,000
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:
Decrease in other assets 4,000 ---
Decrease in accounts payable
and accrued liabilities (62,000) (11,000)
- --------------------------------------------------------------------------
Net cash used in operating activities (216,000) (138,000)
- --------------------------------------------------------------------------
Cash flows from
investing activities:
Proceeds from sale of
real estate owned --- 1,122,000
- --------------------------------------------------------------------------
Net cash provided by
investing activities --- 1,122,000
- --------------------------------------------------------------------------
Net increase (decrease) in
in cash and cash equivalents (216,000) 984,000
Beginning cash and cash equivalents 1,294,000 1,333,000
- --------------------------------------------------------------------------
Ending cash and cash equivalents $ 1,078,000 $ 2,317,000
==========================================================================
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, 2003 and 2002
(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.
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, 2003 and 2002 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, 2003
And 2002 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, 2002 on file
with the Securities and Exchange Commission, provide additional disclosures
and a further description of accounting policies.
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. As of December 31, 2002 and September 30, 2003, the
Partnership does not believe that there would be a material difference if it
had adopted the liquidation basis of accounting.
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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 29,133 for all
periods presented.
(3) 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,
2003 or 2002.
(4) CONTINGENCIES
There are no material pending legal proceedings.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The Partnership had net income (losses) and income (losses) per limited
partnership unit of $(158,000) and $(5.42) and $719,000 and $24.68 for the nine
months ended September 30, 2003 and September 30, 2002, respectively. The
income for the nine months ended September 30, 2002 was generated by the sale
of the remaining 12 acres of the last parcel of land owned by the Partnership.
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.
6
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, the Partnership had $1,078,000 in unrestricted cash and
interest-bearing deposits. During the first nine months of 2003, the
Partnership's principal sources of cash were $8,000 in interest income on
interest bearing deposits and $7,000 in other income related to transfer fee
charges. The Partnership's principal uses of cash during the first nine months
of 2003 were approximately $173,000 in general and administrative costs.
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
general and administrative costs. These commitments will 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 were 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 proceeds from the sale of the remaining
12 acres in Sacramento, the Partnership made a $1,000,000 distribution to its
limited partners in December 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.
As of the date of this report, no litigation has arisen and management is in
the process of making a final evaluation of the potential for any future
litigation arising as a result of any activity that the Partnership has been
involved with in the past. The general partners believe that, when finished,
this evaluation will enable them to conclude that the potential for future
litigation is now remote.
In order to begin the dissolution of the Partnership, the Partnership Agreement
requires that the general partners obtain a majority vote of the limited
7
partners in favor of dissolution. Ballots were mailed starting June 30, 2003
and a majority vote was declared on July 15, 2003.
As a result of the majority vote and the finalization of the litigation
evaluation, the general partners intend to take the additional steps to
dissolve the Partnership include paying for the costs of winding up the affairs
of the Partnership and declaring and paying a final distribution to the limited
partners. The Partnership expects to make the final distribution during the
fourth quarter of 2003.
INTEREST ON INTEREST-BEARING DEPOSITS
Interest on interest-bearing deposits totaled $8,000 and $22,000 for the
nine months ended September 30, 2003 and 2002, respectively. Interest on
interest-bearing deposits totaled $2,000 and $9,000 for the three months ended
September 30, 2003 and 2002, 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 2003
is primarily attributable to a decrease in the average balance of cash and cash
equivalents as well as a reduction in the interest rates earned on those
balances.
OTHER EXPENSES
Expenses associated with non-operating real estate owned were zero and
$20,000 for the nine months ended September 30, 2003 and 2002, respectively.
Expenses associated with non-operating real estate owned were zero for the
three months ended September 30, 2003 and 2002, respectively. The expenses
relate primarily to the land in Sacramento. The decrease for 2003 is due to
the sale of the property.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses, affiliates totaled $109,000 and $89,000
for the nine months ended September 30, 2003 and 2002, respectively. General
and administrative expenses, affiliates totaled $39,000 and $29,000 for the
three months ended September 30, 2003 and 2002, respectively. These expenses
are primarily salary allocation reimbursements paid to affiliates. The
increase for 2003 is partially the result of additional rent expense
allocations.
General and administrative expenses, nonaffiliates totaled $64,000 and $54,000
for the nine months ended September 30, 2003 and 2002, respectively, and $8,000
and $13,000 for the three months ended September 30, 2003 and 2002,
respectively. These expenses consist of other costs associated with the
administration of the Partnership and real estate owned. The increase for 2003
is principally due to payments made for accounting, tax preparation and
investor reporting.
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.
8
As of September 30, 2003, the Partnership held fixed rate bank deposits with
carrying values totaling $815,000. 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, 2003.
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, 2003. Accordingly, the Partnership is not exposed to any market
risk associated with its liabilities.
ITEM 4. CONTROLS AND PROCEDURES
As of September 30, 2003, the Partnership carried out an evaluation, under the
supervision and with the participation of the Partnership's management,
including the general partners and chief financial officer of Centennial
Corporation, of the effectiveness of the design and operation of the
Partnership's disclosure controls and procedures pursuant to Securities and
Exchange Commission ("SEC") rules. Based upon that evaluation, management
concluded that the Partnership's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Partnership, which is required to be included in the Partnership's periodic
SEC filings. There has been no significant change in the Partnership's
internal controls or in other factors that could significantly affect these
controls subsequent to the evaluation date.
Disclosure controls and procedures are defined in SEC rules as controls and
other procedures designed to ensure that information required to be disclosed
in Exchange Act reports is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms. The Partnership's
disclosure controls and procedures were designed to ensure that material
information related to the Partnership, including subsidiaries, is made known
to management, including the general partners and chief financial officer,
in a timely manner.
9
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)31-Certification pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
32-Certification pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the 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
10
Exhibit 31
SECTION 302 CERTIFICATION
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 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 Partnership's other General Partners and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Partnership and we have:
a)Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, 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 Partnership's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
c)Disclosed in this report any change in the Partnership's internal control
over financial reporting that occurred during the third quarter of 2003 that
has materially affected, or is reasonably likely to materially affect, the
Partnership's internal control over financial reporting; and
5. The Partnership's management and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the Partnership's
auditors and the audit committee (or persons performing the equivalent
function) of the Partnership:
a)All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Partnership's ability to record, process,
summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Partnership's internal control
over financial reporting.
Date: November 14, 2003 /s/ Ronald R. White
Ronald R. White
General Partner and Chief Financial
Officer of Centennial Corporation
11
Exhibit 32
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, 2003, as filed with Securities and Exchange Commission on
November 14, 2003, (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, 2003
Ronald R. White
General Partner and Chief Financial Officer
of Centennial Corporation
12
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A California Limited Partnership
/s/ John B. Joseph
________________________
John B. Joseph
General Partner November 14, 2003
/s/ Ronald R. White
_________________________________
Ronald R. White
General Partner November 14, 2003
13