ITEM 1. BUSINESS.
(a) General Development of the Business
Centennial Mortgage Income Fund II (the "Partnership"), a California Limited Partnership, was organized on July 12, 1985. The Partnership's registration statement became effective January 17, 1986. The general partners are John B. Joseph, Ronald R. White and Centennial Corporation ("CC").
Beginning in the fourth quarter of 1987, the Partnership ceased accepting capital contributions and entered its operating stage of business. During the fourth quarter of 1992, 60 months after the closing of its offering stage, the Partnership ceased making new loans and entered the repayment stage. For additional information, See Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(b) 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.
(c) Narrative Description of Business
The Partnership was formed to invest in mortgage investments consisting of participating first mortgage loans, other equity participation loans, construction loans, and wrap-around and other junior loans on commercial, industrial and residential income-producing real property.
The Partnership's objectives are to preserve the Partnership's invested capital, provide increased cash distributions to the limited partners as the cash flow from the properties underlying mortgage investments increases over the life of the Partnership, provide capital growth through participation in the increased value of the underlying properties and provide liquidating distributions as cash from the sale of real estate owned is no longer needed for development and operations of real estate owned.
Due to the long term recession and falling real estate market values in California during the early 1990's, many of the Partnership's loans became delinquent and management of the Partnership elected to foreclose, thereby increasing real estate owned balances. As a result, the Partnership became a direct investor in this real estate. The Partnership has managed its operating properties and completed certain development processes on its raw land over the last several years in an effort to make this real estate more marketable.
The improving real estate markets and development of the Partnership's assets have enabled the Partnership to liquidate the majority of its assets. As of December 31, 2001, the Partnership's assets consisted of $1,333,000 in cash and cash equivalents and $276,000 in other non-cash assets. It is possible that the remaining non-cash assets could be liquidated during 2002.
Real estate owned by the Partnership reached a peak at December 31, 1993 and has been declining since that time. The following are the balances of real estate owned before allowance for possible losses as of December 31 for the past nine years:
1993	 $ 24,170,000 1994	 11,284,000 1995	 11,314,000 1996	 11,316,000 1997	 10,827,000 1998	 4,599,000 1999	 2,843,000 2000	 1,511,000 2001	 1,044,000
As of December 31, 2001, the Partnership had established a $768,000 allowance for possible losses on its real estate owned.
The liquidation of assets during 1998 enabled the Partnership to make a $3,496,000 cash distribution to its limited partners in October 1998.
Additional asset liquidations during 1999 and 2000 enabled the Partnership to make another $2,127,000 cash distribution to its limited partners in October 2000.
The Partnership made another $583,000 cash distribution to its limited partners in September 2001.
Cautionary Statements Regarding Forward-Looking Information
The Partnership wishes to caution readers that the forward-looking statements contained in this Form 10-K under "Item 1. Business," "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-K 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.
(d) Financial Information about Foreign and Domestic Operations and Export Sales
Not applicable.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY.
No properties or facilities are owned or leased by the Partnership other than real estate owned which was obtained through foreclosure of real estate loans receivable, as described in note 5 of Notes to Consolidated Financial Statements.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
None
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters have been submitted to a vote of security holders.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP UNITS AND RELATED SECURITY HOLDER MATTERS.
(a) Securities Market Information
There is no market for the Partnership's limited partnership units, nor is one expected to develop. The Partnership units were offered by the Partnership through selected dealers who were members of the National Association of Securities Dealers, Inc.
(b) Approximate Number of Holders of Limited Partnership Units
As of December 31, 2001, there were approximately 2,958 holders of limited partnership units.
(c) Partnership Distributions
The Partnership paid a $3,496,000 cash distribution to limited partners in October 1998. This distribution equaled approximately $120.00 per limited partnership unit.
The Partnership paid a $2,127,000 cash distribution to limited partners in October 2000. This distribution equaled approximately $73.00 per limited partnership unit.
The Partnership made another $583,000 cash distribution to its limited partners in September 2001. This distribution equaled approximately $20.00 per limited partnership unit.
Management intends to distribute cash flow available for distribution (as defined in the Partnership Agreement), if any, on a periodic basis as substantial cash balances are accumulated from property sales. Distributions may vary in amount and may be suspended based upon advice from legal counsel until the possibility of any unforeseen legal action against the Partnership becomes remote. See Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
General
Net income (loss) and income (loss) per limited partnership unit were $119,000 and $4.08 for the year ended December 31, 2001, up from $(71,000) and $(2.44) for the year ended December 31, 2000 and $(254,000) and $(8.72) in 1999. Major changes between statements of operations components from 2000 to 2001 included: 1) a $251,000 increase in gain on sale of real estate owned; 2) an $81,000 decrease in interest on interest bearing deposits; 3) a $32,000 decrease in provision for possible losses; 4) a $32,000 decrease in interest on loans to nonaffiliates; and 5) a $26,000 decrease in general and administrative costs. Major changes between statements of operations components from 1999 to 2000 included: 1) an $82,000 increase in interest on interest bearing deposits; 2) a $32,000 increase in provision for possible losses; 3) a $68,000 decrease in net operating income from operations of real estate owned; 4) a $60,000 decrease in expenses associated with non-operating real estate owned; 5) a $37,000 decrease in interest expense; and 6) a $105,000 decrease in general and administrative costs. A detailed discussion of the significant changes in each component of revenue and expense for each of the years in the three year period ended December 31, 2001 is included in the following paragraphs.
Liquidity and Capital Resources
At December 31, 2001, the Partnership had $1,333,000 in unrestricted cash and cash equivalents. Additional sources of funds are expected to be from the sale of real estate owned.
During 2001, the Partnership's principal sources of cash were $374,000 of cash proceeds from the sale of real estate and $56,000 in interest on interest bearing deposits. The Partnership's principal uses of cash during 2001 were: i) a $583,000 cash distribution to limited partners; ii) $149,000 in general and administrative costs; iii) $23,000 in real estate taxes paid; and iv) $22,000 in other expenses associated with non-operating real estate owned;
As of December 31, 2001, the Partnership had entered into a purchase and sale agreement involving the remaining 12 acres of its property in Sacramento. The Partnership has entered into several purchase and sale agreements involving this particular parcel in the past that have not been consummated. The remaining acreage has several characteristics that limit its usefulness to many prospective purchasers, including the configuration of its lot lines and power line easements. The current prospective buyer was one of the parties who previously failed to consummate a purchase and sale agreement on this parcel. They are an "end user" and their intended use of the property is not precluded by the limiting characteristics discussed above. While the agreement provides for an all cash sales price of $1,200,000, management believes that it may be unable to find another buyer in the near future who would be willing to purchase the property for this price. Given management's intention to liquidate the Partnership as soon as practicable, it may elect to sell the remaining property to a developer rather than an "end user" at a lower price than the transaction discussed above if it is not consummated. Accordingly, the Partnership has not adjusted the net carrying value of the property which was $276,000 after allowance for possible losses as of December 31, 2001.
As of December 31, 2001, the Partnership had no unfunded loan commitments or notes payable commitments. The Partnership's principal capital requirements include: i) property taxes and bonds on real estate owned of approximately $16,000 payable in 2002, and ii) selling, general and administrative costs.
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 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 and 2000 enabled the Partnership to make another $2,127,000 cash distribution to its limited partners in October 2000.
The Partnership made another $583,000 cash distribution to its limited partners in September 2001.
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. The litigation which arose in 1999 (see discussion under "Other Expenses"- "Expenses associated with non-operating real estate owned" below) is an example of this. Although the general partners are not aware of any other 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.
The general partners anticipate making another distribution to limited partners if and when the remaining acreage in Sacramento is sold. The amount of this distribution will most likely be approximately equal to the Partnership's cash balances in excess of $1,000,000 at the time the distribution is made unless unforeseen developments arise.
Results of Operations
The Partnership's non-cash assets declined from $3,810,000 as of December 31, 1998 to $276,000 as of December 31, 2001. The substantial reduction in non- cash assets between 1998 and 2001 caused many changes in the Partnership's results of operations as discussed below.
Interest income on loans to nonaffiliates was $-0-, $32,000 and $45,000 in 2001, 2000 and 1999, respectively. In October 1998, the Partnership received two loans in connection with the payoff of certain loans to Silverwood Homes, an unconsolidated investee. These new loans were the principal source of interest income on loans to nonaffiliates during 2000 and 1999. The decrease in 2000 is attributable to the loans being repaid in October 2000.
The real estate owned balance before allowance for possible losses at December 31, 2001, 2000 and 1999 was $1,044,000, $1,511,000 and $2,843,000, respectively. The balance at December 31, 2001 is comprised of a single property located in Sacramento California and is offset by a $768,000 allowance for possible losses.
The following section entitled "Real Estate Owned" provide a detailed analysis of these assets.
Real Estate Owned
A description of the Partnership's principal real estate owned during the years ended December 31, 2001, 2000 and 1999 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 74 percent leased as of December 31, 1997 and 83 percent leased as of December 31, 1998. Additional leases signed increased the occupancy to as high as 92 percent, however, a number of leases expired in 1999 and occupancy levels declined slightly as a result. The property generated net operating income of $68,000 during 1999. The Partnership sold this property in December 1999. The sale generated net sales proceeds of $637,000. The sale resulted in a $5,000 loss after applying $299,000 of the Partnership's previously recorded allowance for possible losses on real estate investments.
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 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.
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.
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 acres 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 sales proceeds of $374,000. The Partnership recorded a $251,000 gain on the sale.
As of December 31, 2001, the Partnership had entered into a purchase and sale agreement involving the remaining 12 acres of its property in Sacramento. The Partnership has entered into several purchase and sale agreements involving this particular parcel in the past that have not been consummated. The remaining acreage has several characteristics that limit its usefulness to many prospective purchasers, including the configuration of its lot lines and power line easements. The current prospective buyer was one of the parties who previously failed to consummate a purchase and sale agreement on this parcel. They are an "end user" and their intended use of the property is not precluded by the limiting characteristics discussed above. While the agreement provides for an all cash sales price of $1,200,000, management believes that it may be unable to find another buyer in the near future who would be willing to purchase the property for this price. Given management's intention to liquidate the Partnership as soon as practicable, it may elect to sell the remaining property to a developer rather than an "end user" at a lower price than the transaction discussed above if it is not consummated. Accordingly, the Partnership has not adjusted the net carrying value of the property which was $276,000 after allowance for possible losses as of December 31, 2001.
Interest on Interest-Bearing Deposits
Interest on interest-bearing deposits represents interest earned on Partnership funds invested, for liquidity, in time certificate and money market deposits. Interest on interest-bearing deposits was $56,000 in 2001, $137,000 in 2000 and $55,000 in 1999. The decrease in interest income from 2000 to 2001 was due to both a decrease in average cash balances as well as a reduction in the interest rates earned on those balances. The increase in interest income from 1999 to 2000 was primarily due to higher average cash balances that resulted from the property sales and loan payoffs received in the fourth quarter of 1999 and all of 2000.
Income from Operations of Real Estate Owned
Income from operations of real estate owned totaled $173,000 in 1999 The 1999 revenues are from the office building in San Bernardino. The property was sold in December 1999. There was no income from operations of real estate owned in either 2001 or 2000.
Gain (loss) on Sale of Real Estate Owned
As discussed above, the Partnership recorded a loss of $5,000 on the sale of the office building in San Bernardino in 1999 and a $251,000 gain on the sale of land in Sacramento during 2001.
Provision for Possible Losses
The provision for possible losses was $32,000 in 2000. There was no provision for possible losses recorded in 2001 or 1999. The 2000 provision relates to the discounted payoff of the remaining loans held by the Partnership. Management believes that the allowance for possible losses at December 31, 2001 is adequate to absorb the known risks in the Partnership's loan and real estate owned portfolios.
Other Expenses
Operating expenses from operations of real estate owned were $93,000 in 1999. These expenses were associated with the office building in San Bernardino that was sold in December 1999. There were no comparable expenses in either 2000 or 2001.
Operating expenses from operations of real estate owned paid to affiliates were $12,000 for 1999. The expenses consist of property management fees paid to affiliates of the general partners. These expenses were associated with the office building in San Bernardino that was sold in December 1999. There were no operating expenses from operations of real estate owned during 2001 or 2000.
Expenses associated with non-operating real estate owned were $45,000 in 2001, $45,000 in 2000 and $105,000 in 1999. The expenses relate principally to the 44 acres in Sacramento. These expenses include property taxes of $23,000, $27,000 and $39,000 for 2001, 2000 and 1999, respectively. The 1999 expense also includes $43,000 in costs accrued in anticipation of the settlement of litigation involving certain time-share units previously owned by the Partnership which were charged off in 1992 and approximately $20,000 in unanticipated costs related to a proposed Marina in Redwood City, California that the Partnership sold in 1998. There was no comparable litigation expense during 2000 or 2001.
Depreciation and amortization expense was $4,000 in 1999 and related to the office building in San Bernardino that was sold in December 1999. There was no depreciation expense during 2001 or 2000.
Interest expense was $37,000 for 1999. This interest expense relates to the debt secured by the office building in San Bernardino. There was no interest expense during 2001 or 2000.
General and administrative expenses, affiliates were $94,000, $104,000 and $192,000 in 2001, 2000 and 1999, respectively. These expenses are primarily salary allocation reimbursements paid to affiliates for the management of the Partnership's assets. The decreases in 2001 and 2000 are attributable to a substantial layoff of the corporate partner's personnel in March 1999 in response to the Partnership's decreasing assets.
General and administrative expenses, nonaffiliates was $55,000, $71,000 and $88,000 in 2001, 2000 and 1999, respectively. The decrease in 2001 was principally due to decreased investor mailings and a reduction in offsite record storage costs. The decrease in 2000 is principally attributable to a decrease in accounting fees and investor reporting costs.
ITEM 7A.
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.
As of December 31, 2001, the Partnership held fixed rate bank deposits with carrying values totaling $797,000. The bank deposits all had maturities of less than ninety days. The fair value of these bank deposits was estimated to be equal to their carrying values as of December 31, 2001 due to their near term maturities.
Given the relatively short-term maturities of these assets, management does not believe the Partnership is exposed to any significant market risk related to their fair value.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedules attached hereto.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON REPORTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of General Partners
The Partnership is managed by its general partners. The individual general partners' principal occupations and affiliations during the last five years are described in the following table. The general partners devote to the affairs of the Partnership such portion of their time as they consider necessary for the effective supervision of its affairs.
Name, Age and Position Principal Occupation and Affiliation during Last Five Years - ------------------------------------------------------------------------------ John B. Joseph Age 63 General Partner
John B. Joseph is currently Vice Chairman of the Board of Directors and Vice President of Centennial Corporation. He has held these positions since 1983. Mr. Joseph also has served, in the following capacities during the past five years: he was on the board of directors for West Coast Bancorp ("WCB"), a publicly held bank holding company operating in California from its inception in 1981 through February 1999; he was Chairman of the Board of Directors of WCB since its inception in 1981 and CEO from April 1991 until 1998. Mr. Joseph has also been general partner of various public and private limited partnerships engaged in real estate development and lending activities.
Mr. Joseph has 30 years of experience in asset management in both securities and real estate. Mr. Joseph has worked in all areas of real estate. In the past, Mr. Joseph has been engaged in the syndication and management of over $100 million worth of income property, including industrial complexes, shopping centers, business centers, office buildings, commercial properties and residential units.
Ronald R. White Age 55 General Partner
Ronald R. White is currently President and CEO of Centennial Corporation. He has held these positions since 1983. He was also Executive Vice President and Vice Chairman of the Board of Directors of WCB until 1998. Mr. White served in these capacities since April 1987. Mr. White also serves, or has served, in the following capacities during the past five years: general partner of various public and private limited partnerships engaged in real estate development and lending activities.
Mr. White's career spans the financial and management fields in both securities and real estate. Mr. White has 28 years of experience in asset management. In the past, Mr. White has been engaged in the syndication and management of over $100 million worth of income property including industrial complexes, shopping centers, business centers, office buildings, commercial properties, and residential units.
Centennial Corporation ("CC"), a privately-held corporation, whose stock is owned by affiliates of Ronald R. White and John B. Joseph, was voted in as new general partner in the first quarter of 1994. CC was incorporated in 1983 to engage in the real estate lending business and to provide consulting services.
Identification of Executive Officers
The Partnership does not have officers as such. The affairs of the Partnership are managed by the general partners noted above.
ITEM 11.
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
The following table summarizes the types and recipients of compensation paid and to be paid to the general partners and affiliates by the Partnership.
Amount Earned/ Type of Reimbursable for the Compensation & Year Ended Name of Entity Description of Payment December 31, 2001 - ------------------------------------------------------------------------------ Operating Stage:
Application and An amount up to a maximum $ --- commitment fees of 3 percent of the gross - - the general proceeds of the offering partner or on any single mortgage affiliates investment, and an aggregate maximum of 7 percent of the gross proceeds of the offering, payable to the general partners or affiliates. The application and commitment fees are payable solely from borrowers and prospective borrowers and not directly from the proceeds of the offering.
General partners' The general partners or affiliates $ 94,000 (1) reimbursable shall be entitled to reimbursement expenses for certain expenses, subject to - general the conditions of the Partnership partner or Agreement. affiliates
General partners' A 5 percent interest in cash $ --- interest in cash flow available for distribution distributions for any year until all limited - - general partnership unit holders have partners or received an amount equal to a 12 affiliates percent non-cumulative annual return on their adjusted invested capital, and 10 percent of the balance of any cash flow available for distribution for such year
Mortgage 1/4 of 1 percent of the $ --- investment maximum amount funded or to servicing fees be funded by the Partnership on mortgage investments serviced by CC Repayment Stage:
General partners' One percent of mortgage $ --- share of reductions until all limited mortgage partners have received an reductions amount equal to their adjusted - - general invested capital and cumulative partners or distributions (including cash affiliates flow available for distribution) equal to a 12 percent annual return with respect to their adjusted invested capital, and 15 percent of the balance of any mortgage reductions.
(1) Such reimbursable expenses include salaries and related salary expenses for services which could be performed directly for the Partnership by independent parties such as legal, clerical, accounting, financial reporting, governmental reporting, transfer agent, data processing and duplication services. Such reimbursement of expenses will be made regardless of whether any distributions are made to the limited partners.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
No persons are known by the Partnership to own beneficially more than 5 percent of the limited partnership units at December 31, 2001.
(b) Security Ownership of Management
The percent of units owned by Management is less than 1 percent.
Name and address Nature and Number of Percent of of Beneficial Owner Units Outstanding Units Outstanding - ------------------------------------------------------------------------------ Ronald R. White 1540 S. Lewis St. Anaheim, CA 92805 Limited partnership units: 1 ---
(c) Change in Control
The Partnership knows of no contractual arrangements which may at a subsequent date result in a change of control of the Partnership.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This disclosure is made in note 4 of Notes to the Consolidated Financial Statements incorporated in this filing.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) and (a)(2) - See Index to Consolidated Financial Statements and Schedules attached hereto.
(a)(3) - Exhibits.
(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 Form S-11 (Commission File No. 0-15448) Dated January 17, 1986, as supplemented filed under the Securities Act of 1933
(b)(4) - Reports on Form 8-K.
None.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A California Limited Partnership
By:/s/John B. Joseph _________________________________ John B. Joseph General Partner March 21, 2002
By:/s/Ronald R. White _________________________________ Ronald R. White General Partner March 21, 2002
By: CENTENNIAL CORPORATION General Partner
/s/John B. Joseph _________________________________ John B. Joseph Executive Vice President March 21, 2002
/s/Ronald R. White _________________________________ Ronald R. White President and Chief Financial Officer March 21, 2002
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
ANNUAL REPORT
Form 10-K
Consolidated Financial Statements Items 8, 14(a)(1) and 14(a)(2) December 31, 2001, 2000 and 1999 (With Independent Auditors' Report Thereon)
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership
Items 8, 14(a)(1) and 14(a)(2) Index to Consolidated Financial Statements and Schedules
Consolidated Financial Statements Page
Independent Auditors' Report
Consolidated Balance Sheets -- December 31, 2001 and 2000
Consolidated Statements of Operations -- Years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Partners' Equity -- Years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows -- Years ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
Schedules
Schedule III - Consolidated Real Estate Owned
All other schedules are omitted as the required information is inapplicable, or the information is presented in the consolidated financial statements or notes thereto.
INDEPENDENT AUDITORS' REPORT
To the General Partners Centennial Mortgage Income Fund II:
We have audited the consolidated financial statements of Centennial Mortgage Income Fund II, a limited partnership, and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Centennial Mortgage Income Fund II and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Orange County, California January 23, 2002
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership
Consolidated Balance Sheets
December 31, 2001 and 2000
See accompanying notes to consolidated financial statements
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership
Consolidated Statements of Operations Years ended December 31, 2001, 2000 and 1999
See accompanying notes to consolidated financial statements
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership
Consolidated Statements of Partners' Equity Years ended December 31, 2001, 2000 and 1999
See accompanying notes to consolidated financial statements
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership
Consolidated Statements of Cash Flows Years ended December 31, 2001, 2000 and 1999
See accompanying notes to consolidated financial statements
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership
Notes to Consolidated Financial Statements December 31, 2001, 2000, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING P0LICIES
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 December 31, 2001, all of the loans secured by operating properties have been repaid to the Partnership. However, during the early 1990's, real estate market values for undeveloped land in California declined severely. As the loans secured by undeveloped land became delinquent, the Partnership elected to foreclose on certain of these loans, thereby increasing real estate owned balances. As a result, the Partnership became a direct investor in this real estate. The real estate owned balance before allowance for possible losses at December 31, 1999 was $2,843,000, decreasing to $1,511,000 at year end 2000, $1,044,000 at year end 2001.
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.
Basis of Presentation
The Partnership formed several subsidiaries to own and operate certain of its real estate assets. The corporations formed were PIR Development, Inc. ("PIR"), and CTA Development, Inc. ("CTA") and LCR Development, Inc., ("LCR"). All of these corporations are California corporations. Several of the Partnership's assets were transferred to these corporations, at the Partnership's cost basis, in transactions which included no cash down and the Partnership carrying 100 percent of the financing. CTA was liquidated during 2000. The Partnership reduced the carrying value of its investment in LCR to $-0- during 2000. With the exception of LCR, all of these corporations are wholly owned corporations and have been consolidated in the accompanying consolidated financial statements. All significant intercompany balances and transactions, including the aforementioned transfers, have been eliminated in consolidation.
Organization
The Partnership was organized on July 12, 1985 in accordance with the provisions of the California Uniform Limited Partnership Act. The Partnership commenced operations in June 1986. The general partners are John B. Joseph, Ronald R. White and Centennial Corporation ("CC"), a privately-held California corporation whose stock is owned by affiliates of Ronald R. White and John B. Joseph.
Partners' Capital Accounts
Cash Available for Distribution, as defined in the Partnership Agreement, is to be allocated 95 percent to the limited partners and 5 percent to the general partners until each limited partner has received an amount equal to a 12 percent non-cumulative annual return on his adjusted invested capital (as defined in the Partnership Agreement). Thereafter, Cash Available for Distribution is to be allocated 90 percent to the limited partners and 10 percent to the general partners. All distributions of Mortgage Reductions (as defined in the Partnership Agreement) after the first sixty months following the closing date of the Partnership, shall be distributed 99 percent to the limited partners and 1 percent to the general partners, until each limited partner has received a 12 percent cumulative annual return on his adjusted invested capital, after which such amounts are to be distributed 85 percent to the limited partners and 15 percent to the general partners. In order to properly reflect the economic effect of the allocations discussed above, the Partnership has allocated financial statement net earnings (losses) 95 percent to the limited partners and 5 percent to the general partners through 1992. The Partnership had no Cash Available for Distribution during the three years ended December 31, 2001.
Based upon these and various other terms of the Partnership Agreement, it is improbable that the general partners would be required to make any capital contributions to the Partnership in excess of their negative capital account as of December 31, 1992. Accordingly, since January 1, 1993, the Partnership has allocated 100 percent of the losses to the limited partners. As a result of the liquidation of the majority of the Partnership's investments in 1998, it became clear that the amount of the required deficit restoration of the General Partners would not exceed $56,000 and the capital accounts of the General Partners and limited partners were adjusted in 1998 to reflect such maximum deficit restoration
Real Estate Loans and Allowance for Possible Losses
Loans were reported at the principal amount outstanding, net of unearned income and the allowance for possible loan losses. Interest accrual was discontinued when, in the opinion of management, its collection was deemed doubtful. The allowance for possible loan losses was established through a provision for possible losses charged to expense. Loans were charged against the allowance for possible loan losses when management believed that the collectibility of principal was unlikely.
Impaired Loans
The Partnership considered a loan to be impaired when based upon current information and events, it believed it was probable that the Partnership would be unable to collect all amounts due according to the contractual terms of the loan agreement. In determining impairment, the Partnership considered large non-homogeneous loans including nonaccrual loans, troubled debt restructuring and performing loans which exhibited, among other characteristics, high loan- to-value ratios, low debt-coverage ratios, or other indications that the borrowers were experiencing increased levels of financial difficulty. The Partnership based the measurement of collateral-dependent impaired loans on the fair value of the loan's collateral. The amount by which the recorded investment of the loan exceeded the measure of the impaired loan's value was recognized by recording a valuation allowance.
Real Estate Owned
Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. Estimated fair values are determined by using appraisals, discounted cash flows and/or other valuation techniques. The actual market price of real estate can only be determined by negotiation between independent third parties in a sales transaction and sales proceeds could differ substantially from estimated fair values. An impairment loss shall be measured as the amount by which the carrying amount of the asset exceeds the fair value of the assets less costs to sell. Assets to be disposed of are not depreciated while they are held for disposal. The Partnership considered all real estate owned as held for sale during 2001 and 2000, and is actively marketing all properties using third party brokers or in house sales staff. Management's intent is to attempt to sell all properties within one year, however, there can be no assurance that the balance of the Partnership's assets will actually be sold in that period.
Income Taxes
Under provisions of the Internal Revenue Code and the California Revenue and Taxation Code, partnerships are generally not subject to income taxes. For tax purposes, any income or losses realized are those of the individual partners, not the Partnership. The Partnership reports certain transactions differently for tax and financial statement purposes. The following is a recap of current and cumulative temporary differences between earnings for generally accepted accounting principles ("GAAP") and taxable earnings.
As of December 31, 2001, the Partnership held approximately $4.2 million in loans and interest receivable from the consolidated corporations. These loans have been eliminated in the Partnership's consolidated financial statements. It is anticipated that the temporary differences should reverse on the corporations' returns when the corporations liquidate their investments. If these investments are liquidated at current carrying values, the Partnership should be able to deduct bad debt expense on its tax returns in the approximate amount of the temporary differences shown above which is approximately $133 per limited partnership unit.
The subsidiary corporations are subject to taxation and account for income taxes under an asset and liability approach for establishing deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the corporation's assets and liabilities. None of the subsidiary corporations have paid any income taxes since their respective formations and all of them have had net deferred tax assets which have been fully offset by valuation allowances as of December 31, 2001, 2000 and 1999. Accordingly, no tax expense or benefit has been recorded by these corporations during the three years ended December 31, 2001. No deferred tax asset related to the corporations cumulative temporary differences shown above has been recorded in the consolidated financial statements due to the improbability of realization. Future consolidated financial statements could reflect income tax expense in the event that these corporations generate taxable profits in excess of operating loss carryforwards available. Some of the subsidiary corporations are cash basis taxpayers.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash and interest-bearing deposits with original maturities of three months or less.
Net Loss Per Limited Partnership Unit
Net loss per limited partnership unit for financial statement purposes was based on 29,141 weighted average limited partnership units outstanding in 2001, 2000 and 1999.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenue from rental income on real estate owned was recognized on a straight- line basis over the life of the lease when payments become due under operating leases. The Partnership has recognized gains or losses on the sale of real estate owned as the gains or losses are determinable and the earnings process is complete.
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.
(2) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures About Fair Value of Financial Instruments" ("SFAS 107"), requires that the Partnership disclose estimated fair values for its financial instruments as well as the methods and significant assumptions used to estimate fair values. The following information does not purport to represent the aggregate net fair value of the Partnership.
The following methods and assumptions were used by the Partnership in estimating the fair value of each class of financial instrument.
Cash and Cash Equivalents
The carrying amount, which is cost, is assumed to be the fair value because of the liquidity of these instruments. As of December 31, 2001, the Partnership had bank deposits at four different banks whose deposits are federally insured. Approximately $930,000 of the Partnership's cash and cash equivalent balance as of that same date was in excess of maximum balances covered by such insurance.
Accounts Payable and Accrued Liabilities
Carrying value is considered to be equal to the fair value of these liabilities as they are due on demand.
(3) ALLOWANCE FOR POSSIBLE LOSSES ON REAL ESTATE OWNED
(4) TRANSACTIONS WITH AFFILIATES
The Partnership reimburses the general partner for salaries and related expenses incurred on behalf of the Partnership for services such as legal, clerical, accounting, property management and other administrative functions. The general partners and affiliates charged $94,000 $104,000 and $170,000 for such services in 2001, 2000 and 1999, respectively. The Partnership also accrued an additional $22,000 as general and administrative, affiliates expense during 1999. These amounts were the Partnership's share of certain severance pay due under several employment contracts entered into during 1998.
During 1999 , the Partnership maintained interest-bearing deposits with Sunwest Bank, an affiliate of the general partners up until March 1999. Interest earned on such deposits for three months ended March 31, 1999 was $1,000.
(5) REAL ESTATE OWNED
The Partnership sold approximately 9.45 acres of its land in Sacramento in June 1999. The sale generated net sales proceeds of $842,000. The Partnership recorded no gain or loss on this sale.
The Partnership also sold its office building in San Bernardino in December 1999. The sale generated net sales proceeds of $637,000. The sale resulted in a $5,000 loss after applying $299,000 of the Partnership's previously recorded allowance for possible losses on real estate investments. A note payable with a principal balance of approximately $230,000 was repaid with funds from the proceeds of this sale.
The Partnership sold approximately 7.13 acres of land in Sacramento 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 approximately 2.65 acres of its land in Sacramento 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 its land in Sacramento in December 2001. The sale generated net sales proceeds of $374,000. The Partnership recorded a $251,000 gain on the sale.
As of December 31, 2001, the Partnership still held approximately 12.47 acres of the land in Sacramento with a net carrying value of $276,000, after deducting an allowance for possible losses of $768,000.
(6) Contingencies
There are no pending legal proceedings.
(7) QUARTERLY FINANCIAL RESULTS (UNAUDITED)
(7) QUARTERLY FINANCIAL RESULTS (UNAUDITED)(CONTINUED)
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES A Limited Partnership Consolidated Real Estate Owned December 31, 2001
See accompanying independent auditors report