FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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 office) (Zip Code)
Registrant's telephone number, including area code: (714)502-8484
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Units
(Title of Class)
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 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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.
YES X NO
PART I
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. 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. LEGAL PROCEEDINGS.
None
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. 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. SELECTED FINANCIAL DATA
Years ended
(dollars in thousands, except per unit data)
- -----------------------------------------------------------------------------
12/31/01 12/31/00 12/31/99 12/31/98 12/31/97
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Total revenue $ 313 $ 181 $ 277 $ 479 $ 170
Net income (loss) 119 (71) (254) (754) 929
Net income (loss)
per limited
partnership unit-
basic and diluted 4.08 (2.44) (8.72) (25.87) (31.88)
Cash distributions
per limited
partnership unit 20.00 73.00 --- 120.00 ---
CONSOLIDATED BALANCE
SHEET DATA:
Total loans before
allowance for losses --- --- 548 598 1,029
Total real estate
owned before allowance
for losses 1,044 1,511 2,843 4,599 10,827
Total assets 1,609 2,073 4,325 4,820 9,354
Partners' equity 1,598 2,062 4,260 4,514 8,764
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. 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. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedules attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON REPORTING AND
FINANCIAL DISCLOSURE
None
PART III
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. 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. 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. 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. 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)
F-1
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 F-3
Consolidated Balance Sheets --
December 31, 2001 and 2000 F-4
Consolidated Statements of Operations --
Years ended December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Partners' Equity --
Years ended December 31, 2001, 2000 and 1999 F-6
Consolidated Statements of Cash Flows --
Years ended December 31, 2001, 2000 and 1999 F-7
Notes to Consolidated Financial
Statements F-9
Schedules
Schedule III - Consolidated Real Estate Owned F-18
All other schedules are omitted as the required information is inapplicable,
or the information is presented in the consolidated financial statements or
notes thereto.
F-2
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
F-3
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
December 31, 2001 and 2000
ASSETS 2001 2000
- ------------------------------------------------------------------------------
Cash and cash equivalents $ 1,333,000 $ 1,674,000
Real estate owned, held
for sale (note 5) 1,044,000 1,511,000
Less allowance for possible losses on
real estate owned (note 3) 768,000 1,112,000
- ------------------------------------------------------------------------------
Net real estate owned 276,000 399,000
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
$ 1,609,000 $ 2,073,000
==============================================================================
LIABILITIES AND PARTNERS' EQUITY
- ------------------------------------------------------------------------------
Accounts payable
and accrued liabilities 11,000 11,000
- ------------------------------------------------------------------------------
Total liabilities 11,000 11,000
- ------------------------------------------------------------------------------
Partners' equity (deficit) --
29,141 limited partnership units
outstanding in 2001 and 2000
General partners (56,000) (56,000)
Limited partners 1,654,000 2,118,000
- ------------------------------------------------------------------------------
Total partners' equity 1,598,000 2,062,000
Contingencies (note 6)
- ------------------------------------------------------------------------------
$ 1,609,000 $ 2,073,000
==============================================================================
See accompanying notes to consolidated financial statements
F-4
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
Years ended December 31, 2001, 2000 and 1999
2001 2000 1999
- ------------------------------------------------------------------------------
Revenue:
Interest on loans to
nonaffiliates --- 32,000 45,000
Interest on interest-bearing
deposits (note 4) 56,000 137,000 55,000
Income from operations
of real estate owned --- --- 173,000
Gain (loss)on sale of real estate
owned 251,000 --- (5,000)
Other 6,000 12,000 9,000
- ------------------------------------------------------------------------------
Total revenue 313,000 181,000 277,000
- ------------------------------------------------------------------------------
Expenses:
Provision for possible losses
(notes 3 and 4) --- 32,000 ---
Operating expenses from operations
of real estate owned --- --- 93,000
Operating expenses from operations
of real estate owned paid to
affiliates (note 4) --- --- 12,000
Expenses associated with
non-operating real estate owned 45,000 45,000 105,000
Depreciation and amortization expense --- --- 4,000
Interest expense --- --- 37,000
General and administrative,
affiliates (note 4) 94,000 104,000 192,000
General and administrative,
nonaffiliates 55,000 71,000 88,000
- ------------------------------------------------------------------------------
Total expenses 194,000 252,000 531,000
- ------------------------------------------------------------------------------
Net income (loss) $ 119,000 $ (71,000) $ (254,000)
==============================================================================
Net income (loss) per limited
partnership unit
- basic and diluted $ 4.08 $ (2.44) $ (8.72)
==============================================================================
See accompanying notes to consolidated financial statements
F-5
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Partners' Equity
Years ended December 31, 2001, 2000 and 1999
Total
General Limited Partners'
Partners Partners Equity
- ------------------------------------------------------------------------------
Balance (deficit) at
December 31, 1998 (56,000) 4,570,000 4,514,000
Net loss --- (254,000) (254,000)
- ------------------------------------------------------------------------------
Balance (deficit) at
December 31, 1999 (56,000) 4,316,000 4,260,000
Net loss --- (71,000) (71,000)
Distribution to
limited partners --- (2,127,000) (2,127,000)
- ------------------------------------------------------------------------------
Balance (deficit) at
December 31, 2000 $ (56,000) $ 2,118,000 $ 2,062,000
Net income --- 119,000 119,000
Distribution to
limited partners --- (583,000) (583,000)
- ------------------------------------------------------------------------------
Balance (deficit) at
December 31, 2001 (56,000) 1,654,000 1,598,000
==============================================================================
See accompanying notes to consolidated financial statements
F-6
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000 and 1999
2001 2000 1999
- -----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 119,000 $ (71,000) $ (254,000)
Adjustments to reconcile net income
(loss) to net cash used
in operating activities:
Provision for possible losses --- 32,000 ---
Depreciation and amortization --- --- 4,000
Gain (loss) on sale of real estate
owned (251,000) --- 5,000
Changes in assets and liabilities:
(Increase) decrease in other assets --- 5,000 13,000
Increase (decrease) in accounts
payable and accrued liabilities --- (54,000) (7,000)
- -----------------------------------------------------------------------------
Net cash used in operating activities (132,000) (88,000) (239,000)
- -----------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on loans --- 520,000 50,000
Capital expenditures
for real estate owned --- --- (27,000)
Proceeds from sale of
real estate owned 374,000 1,332,000 1,479,000
Advances on loans receivable
- earning --- (4,000) ---
Decrease in due from
unconsolidated investee --- 2,000 ---
- -----------------------------------------------------------------------------
Net cash provided by
investing activities 374,000 1,850,000 1,502,000
- -----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
F-7
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows (continued)
Years ended December 31, 2001, 2000 and 1999
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable --- --- (234,000)
Distributions to limited partners (583,000) (2,127,000) ---
- -----------------------------------------------------------------------------
Net cash used in financing activities (583,000) (2,127,000) (234,000)
- -----------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents (341,000) (365,000) 1,029,000
Cash and cash equivalents
at beginning of year 1,674,000 2,039,000 1,010,000
- -----------------------------------------------------------------------------
Cash and cash equivalents
at end of year $ 1,333,000 $ 1,674,000 $2,039,000
=============================================================================
Supplemental schedule of cash
flow information - interest
paid during the year $ --- $ --- $ 29,000
- -----------------------------------------------------------------------------
Supplemental schedule of noncash
investing and financing activities:
Decrease in allowance for possible
losses on real estate loans and
on real estate owned as a result
of sales and chargeoffs 344,000 --- 299,000
Decrease in allowance for possible
loans receivable and loans receivable
as a result of chargeoffs --- 32,000 ---
See accompanying notes to consolidated financial statements
F-8
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.
F-9
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.
F-10
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.
F-11
Current Temporary
Differences Partnership Corporations Total
(Unaudited) (Unaudited) (Unaudited)
- ------------------------------------------------------------------------------
GAAP earnings (loss) for
the year ended
December 31, 2001 $ (87,000) $ 206,000 $ 119,000
Provision for losses --- (344,000) (344,000)
Carrying costs expensed
for books and capitalized for
tax purposes --- (247,000) (247,000)
Increase in net operating loss --- 385,000 385,000
- ------------------------------------------------------------------------------
Taxable loss for the year
ended December 31, 2001 $ (87,000) $ --- $ (87,000)
==============================================================================
Taxable loss allocable to
General Partner ---
==============================================================================
Taxable loss per limited
partner unit $ (2.99)
==============================================================================
Cumulative Temporary Differences as of December 31, 2001
Partnership Corporations
(Unaudited) (Unaudited)
- ------------------------------------------------------------------------------
Net operating loss carry forwards $ --- $ 676,000
Provision for losses --- 768,000
Accrued expenses not deducted
under the cash basis --- 1,841,000
Carrying costs expensed for books and
capitalized for tax purposes --- 605,000
- ------------------------------------------------------------------------------
Total cumulative
temporary differences $ --- $ 3,890,000
==============================================================================
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.
F-12
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.
F-13
(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
Changes in the allowance for possible losses on real estate owned are as
follows:
2001 2000 1999
- ------------------------------------------------------------------------------
Balance at beginning of year $ 1,112,000 $ 1,112,000 $ 1,411,000
Real estate owned charged-off --- --- (299,000)
Sale of real estate (344,000) --- ---
- ------------------------------------------------------------------------------
Balance at end of year $ 768,000 $ 1,112,000 $ 1,112,000
==============================================================================
(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.
F-14
(5) REAL ESTATE OWNED
Real estate owned consists of the following:
December 31, December 31,
2001 2000
- ------------------------------------------------------------------------------
1. Land in Sacramento, CA $ 1,044,000 $ 1,511,000
- ------------------------------------------------------------------------------
Total real estate owned $ 1,044,000 $ 1,511,000
==============================================================================
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.
F-15
(7) QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarter Ended
December 31, September 30, June 30, March 31,
2001 2001 2001 2001
- ------------------------------------------------------------------------------------------
REVENUE:
Interest on interest-bearing deposits $ 6,000 $ 12,000 $ 17,000 $ 21,000
Gain on sale of real estate 251,000 --- --- ---
Other 1,000 1,000 2,000 2,000
- ------------------------------------------------------------------------------------------
Total revenue 258,000 13,000 19,000 23,000
- ------------------------------------------------------------------------------------------
EXPENSES:
Provision for losses --- --- --- ---
Expenses associated with non-operating
real estate owned 8,000 12,000 9,000 16,000
General and administrative 36,000 31,000 40,000 42,000
- ------------------------------------------------------------------------------------------
Total expenses 44,000 43,000 49,000 58,000
- ------------------------------------------------------------------------------------------
Net income (loss) $ 214,000 $ (30,000) $ (30,000) $ (35,000)
==========================================================================================
Net income (loss) per limited
partnership unit-basic and diluted $ 7.34 $ (1.03) $ (1.03) $ (1.20)
==========================================================================================
F-16
(7) QUARTERLY FINANCIAL RESULTS (UNAUDITED)(CONTINUED)
Quarter Ended
December 31, September 30, June 30, March 31,
2000 2000 2000 2000
- ------------------------------------------------------------------------------------------
REVENUE:
Interest income on loans $ --- $ 11,000 $ 10,000 $ 11,000
Interest on interest-bearing deposits 31,000 44,000 36,000 26,000
Other 5,000 4,000 2,000 1,000
- ------------------------------------------------------------------------------------------
Total revenue 36,000 59,000 48,000 38,000
- ------------------------------------------------------------------------------------------
EXPENSES:
Provision for losses 2,000 30,000 --- ---
Expenses associated with non-operating
real estate owned 5,000 8,000 10,000 22,000
General and administrative 40,000 41,000 44,000 50,000
- ------------------------------------------------------------------------------------------
Total expenses 47,000 79,000 54,000 72,000
- ------------------------------------------------------------------------------------------
Net loss $ (11,000) $ (20,000) $ (6,000) $ (34,000)
==========================================================================================
Net loss per limited partnership
unit-basic and diluted $ (.38) $ (.69) $ (.20) $ (1.17)
==========================================================================================
F-17
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Real Estate Owned
December 31, 2001
Schedule III
Initial Costs Capitalized Gross Amount at
Cost to Subsequent Which Carried
Partnership to Acquisition on Books
Total
Real Real Life on Which
Encum- Estate Improvements Carrying Estate Date Depreciation is
Property brances Owned Costs Owned Acquired Computed
- ------------------------------------------------------------------------------------------------------------
12 Acres in Sacramento --- 877,000 106,000 61,000 1,044,000 March-92 None
- -----------------------------------------------------------------------------------------------------------
$ --- $ 877,000 $ 106,000 $ 61,000 $ 1,044,000
===========================================================================================================
Aggregate cost for Federal income tax purposes is $738,000 at December 31, 2001.
The following is a summary of consolidated real estate owned for the three years ended December 31, 2001.
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
Balance at beginning of year $ 1,511,000 $ 2,843,000 $ 4,599,000
Additions during period:
Improvements --- --- 27,000
Deductions during period:
Real estate sold (467,000) (1,332,000) (1,783,000)
- -------------------------------------------------------------------------------------------------------------
Balance at year end $ 1,044,000 $ 1,511,000 $ 2,843,000
=============================================================================================================
See accompanying independent auditors report
F-18