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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission File Number: 0-15448
CENTENNIAL MORTGAGE INCOME FUND II
(Exact name of registrant as specified in its charter)
California 33-0112106
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1540 South Lewis Street, Anaheim, California 92805
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714)502-8484
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
PART I
ITEM 1. FINANCIAL STATEMENTS
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
September 30, December 31,
2002 2001
Assets (Unaudited)
- ---------------------------------------------------------------------------
Cash and cash equivalents $ 2,317,000 $ 1,333,000
Real estate owned, held for sale (note 3) --- 1,044,000
Less allowance for possible
losses on real estate owned --- 768,000
- ---------------------------------------------------------------------------
Net real estate owned --- 276,000
- ---------------------------------------------------------------------------
$ 2,317,000 $ 1,609,000
===========================================================================
Liabilities and Partners' Equity
- ---------------------------------------------------------------------------
Accounts payable and accrued liabilities $ --- $ 11,000
- ---------------------------------------------------------------------------
Total liabilities --- 11,000
- ---------------------------------------------------------------------------
Partners' equity (deficit)
- -- 29,141 limited partnership units
outstanding at September 30, 2002
and December 31, 2001
General partners (56,000) (56,000)
Limited partners 2,373,000 1,654,000
- ---------------------------------------------------------------------------
Total partners' equity 2,317,000 1,598,000
Contingencies (note 5)
- ---------------------------------------------------------------------------
$ 2,317,000 $ 1,609,000
===========================================================================
See accompanying notes to consolidated financial statements
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CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
(Unaudited)
Nine Months Three Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
- ------------------------------------------------------------------------------
Revenue:
Interest on interest-
bearing deposits $ 22,000 $ 50,000 $ 9,000 $ 12,000
Other 14,000 5,000 1,000 1,000
Gain on sale of
property 846,000 --- --- ---
- ------------------------------------------------------------------------------
Total revenue 882,000 55,000 10,000 13,000
- ------------------------------------------------------------------------------
Expenses:
Expenses associated with non-
operating real estate
owned 20,000 37,000 --- 12,000
General and administrative,
affiliates 89,000 70,000 29,000 19,000
General and administrative,
nonaffiliates 54,000 43,000 13,000 12,000
- ------------------------------------------------------------------------------
Total expenses 163,000 150,000 42,000 43,000
- ------------------------------------------------------------------------------
Net income (loss) $ 719,000 $ (95,000) $ (32,000) $ (30,000)
==============================================================================
Net income (loss) per
limited partnership unit $ 24.67 $ (3.26) $ (1.10) $ (1.03)
==============================================================================
See accompanying notes to consolidated financial statements
2
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statement of Partners' Equity
For the nine months ended September 30, 2002
Total
General Limited Partners'
Partners Partners Equity
(Unaudited) (Unaudited) (Unaudited)
- ---------------------------------------------------------------------------
Balance (deficit) at
December 31, 2001 $ (56,000) $ 1,654,000 $ 1,598,000
Net income --- 719,000 719,000
- ---------------------------------------------------------------------------
Balance (deficit) at
September 30, 2002 $ (56,000) $ 2,373,000 $ 2,317,000
===========================================================================
See accompanying notes to consolidated financial statements
3
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2002 and 2001
2002 2001
(Unaudited) (Unaudited)
- --------------------------------------------------------------------------
Cash flows used in
operating activities:
Net income (loss) $ 719,000 $ (95,000)
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Gain on sale of real
estate owned (846,000) ---
Changes in assets and liabilities:
Increase in other assets --- (3,000)
Increase (decrease) in accounts payable
and accrued liabilities (11,000) 6,000
- --------------------------------------------------------------------------
Net cash used in operating activities (138,000) (92,000)
- --------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of
real estate owned 1,122,000 ---
- --------------------------------------------------------------------------
Net cash provided by
investing activities 1,122,000 ---
- --------------------------------------------------------------------------
Cash flows used in financing activities:
Cash distribution to limited partners --- (583,000)
- --------------------------------------------------------------------------
Net increase (decrease) in
in cash and cash equivalents 984,000 (675,000)
Beginning cash and cash equivalents 1,333,000 1,674,000
- --------------------------------------------------------------------------
Ending cash and cash equivalents $ 2,317,000 $ 999,000
==========================================================================
Supplemental schedule of noncash investing
And financing activities:
Decrease in allowance for
possible losses on real estate
owned as a result of sales $ 768,000 $ ---
See accompanying notes to consolidated financial statements
4
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A Limited Partnership
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2002 and 2001
(1) BUSINESS
Centennial Mortgage Income Fund II (the "Partnership") was formed in 1985 and
initially invested in commercial, industrial and residential income-producing
real property through mortgage investments consisting of participating first
mortgage loans, other equity participation loans, construction loans, and
wrap-around and other junior loans. The Partnership's underwriting policy for
granting credit was to fund loans secured by first and second deeds of trust
on real property. The Partnership's area of concentration was in California.
In the normal course of business, the Partnership participated with other
lenders in extending credit to single borrowers. The Partnership did this in
an effort to decrease credit concentrations and provide a greater
diversification of credit risk.
As of September 30, 2002, all of the Partnership's loans have been repaid or
charged off. However, during the early 1990's, real estate market values for
undeveloped land in California declined severely. As the loans secured by
undeveloped land became delinquent, the Partnership elected to foreclose on
certain of these loans, thereby increasing real estate owned balances. As a
result, the Partnership became a direct investor in this real estate. The
real estate owned balance before allowance for possible losses was $1,044,000
as of December 31, 2001 and reduced to zero as of September 30, 2002.
Beginning with the fourth quarter of 1992, the Partnership entered its
repayment stage and cash proceeds from mortgage investments are no longer
available for reinvestment in new loans by the Partnership.
(2) BASIS OF PRESENTATION
The consolidated financial statements are unaudited and reflect all
adjustments, consisting only of normal recurring accruals, which are, in the
opinion of management, necessary for a fair statement of the results of
operations for the interim periods. Results for the nine and three months
ended September 30, 2002 and 2001 are not necessarily indicative of results
which may be expected for any other interim period, or for the year as a whole.
Information pertaining to the nine and three months ended September 30, 2002
and 2001 is unaudited and condensed inasmuch as it does not include all related
footnote disclosures.
The consolidated financial statements do not include all information and
footnotes necessary for fair presentation of financial position, results of
operations and cash flows in conformity with accounting principles generally
accepted in the United States of America. Notes to consolidated financial
statements included in Form 10-K for the year ended December 31, 2001 on file
with the Securities and Exchange Commission, provide additional disclosures
and a further description of accounting policies.
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Financial Information about Industry Segments
Given that the Partnership is in the process of liquidation, the Partnership
has identified only one operating business segment which is the business of
asset liquidation.
Net Income (Loss) per Limited Partnership Unit
Net income (loss) per limited partnership unit was based on the weighted
average number of limited partnership units outstanding of 29,141 for all
periods presented.
(3) REAL ESTATE OWNED
Real estate owned consists of the following:
(dollars in thousands)
September 30, December 31,
2002 2001
- ----------------------------------------------------------------------------
1. Land in Sacramento, CA --- 1,044
- ----------------------------------------------------------------------------
Total real estate owned $ --- $ 1,044
============================================================================
During the second quarter of 2002, the Partnership sold the remaining 12 acres
of its property in Sacramento. The sale generated net proceeds of $1,122,000
and the Partnership recorded a $846,000 gain on the sale. This was the last
property owned by the Partnership. As a result, the real estate owned balance
at September 30, 2002 is zero.
(4) TRANSACTIONS WITH AFFILIATES
Under the provisions of the Partnership Agreement, the general partners are to
receive compensation for their services in supervising the affairs of the
Partnership. This partnership management compensation shall be equal to 10
percent of the cash available for distribution, as defined in the Partnership
Agreement. The general partners will not receive this compensation until the
limited partners have received a 12 percent per annum cumulative return on
their adjusted invested capital, but are entitled to receive a 5 percent
interest in cash available for distribution in any year until this provision
has been met. Adjusted invested capital is defined as the original capital
invested less distributions from mortgage reductions. Payments to the general
partners have been limited to 5 percent of cash available for distribution as
the limited partners have not received their 12 percent per annum cumulative
return. Under this provision of the Partnership Agreement, no distributions
were paid to the general partners during the nine months ended September 30,
2002 or 2001.
(5) CONTINGENCIES
There are no material pending legal proceedings.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
References to the "Partnership" in the following discussion refers to
Centennial Mortgage Income Fund II and its wholly-owned subsidiaries.
The Partnership had net income (losses) and income (losses) per limited
partnership unit of $719,000 and $24.67 and $(95,000) and $(3.26) for the nine
months ended September 30, 2002 and September 30, 2001, respectively.
Cautionary Statements Regarding Forward-Looking Information
The Partnership wishes to caution readers that the forward-looking statements
contained in this Form 10-Q under "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in
this Form 10-Q involve known and unknown risks and uncertainties which may
cause the actual results, performance or achievements of the Partnership to be
materially different from any future results, performance or achievements
expressed or implied by any forward-looking statements made by or on behalf of
the Partnership. In connection with the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, the Partnership is filing
the following cautionary statements identifying important factors that in some
cases have affected, and in the future could cause the Partnership's actual
results to differ materially from those expressed in any such forward-looking
statements.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, the Partnership had $2,317,000 in unrestricted cash and
interest-bearing deposits. The Partnership had no unfunded loan commitments
at September 30, 2002. During the first nine months of 2002, the Partnership's
principal sources of cash were $1,122,000 of cash proceeds from the sale of
real estate, $22,000 in interest income on interest bearing deposits and
$10,000 in other income related to an extension payment under the purchase and
sale agreement for the Partnership's last remaining real estate owned property.
The Partnership's principal uses of cash during the first nine months of 2002
were approximately $154,000 in general and administrative costs and $20,000 in
expenses associated with non-operating real estate owned.
During the second quarter of 2002, the Partnership had consummated a purchase
and sale agreement involving the remaining 12 acres of its property in
Sacramento. Net proceeds from the sale were $1,122,000 and the Partnership
reported a gain of $846,000.
The Partnership's principal capital requirements for the next year consist of
selling, general and administrative costs. These commitments are expected to
be paid from existing cash balances.
Effective with the third quarter of 1991, the Partnership had suspended making
any cash distributions to partners, due to a decline in liquidity and the
uncertainty of the cash requirements for existing and potential real estate
7
owned. Pursuant to the Partnership Agreement, 60 months after the closing of
the offering, cash proceeds from mortgage investments are no longer available
for reinvestment by the Partnership.
As a result of the substantial decrease in real estate owned which occurred in
1997 and 1998, the general partners determined that the Partnership could make
a $3,496,000 distribution to its limited partners in October 1998. Additional
asset liquidations during 1999, 2000 and 2001 enabled the Partnership to make
a $2,127,000 cash distribution to its limited partners in October 2000 and
$583,000 in September 2001. With the sale of the remaining 12 acres in
Sacramento, the Partnership is planning a distribution for the fourth quarter
of 2002.
The general partners have had discussions with legal counsel regarding the
amounts of cash balances that would be prudent to be retained by the
Partnership at this time. In light of the substantial amount of real estate
that the Partnership has held an interest in over the years, there is always
the potential for future litigation to arise, particularly in the area of
toxic contamination. Although the general partners are not aware of any
threatened litigation, or litigation that is likely to arise, they have
determined that the Partnership should retain at least $1,000,000 in cash
balances to be available to defend the Partnership in any future litigation
which may arise. It is expected that these cash balances will be retained
until such time as legal counsel advises the general partners that the
potential for any future litigation is remote.
REAL ESTATE OWNED
The real estate owned balances at September 30, 2002 and 2001 were zero and
$1,511,000, respectively. A description of the Partnership's principal real
estate owned follows:
44 Acres in Sacramento, California
The Partnership funded a loan in 1987 with a committed amount of $4,000,000
secured by a first trust deed on 43.78 acres in Sacramento, California. The
loan was provided for the development of offsite improvements. The maturity
date was February 1, 1991. The borrower was unable to obtain construction
financing and bring interest current. The Partnership accepted a grant deed
on the property on March 10, 1992. The property was zoned for multi-family
and light industrial use. A portion of the property is adjacent to Highway 99
and has good freeway visibility.
The Partnership rezoned and subdivided a portion of the property to facilitate
one escrow on a 6.5 acre portion of the property without freeway visibility.
This transaction closed escrow during the fourth quarter of 1997.
There had been only limited industrial/commercial use development activity in
the area surrounding this property during 1996 and 1997. In light of this
limited activity and management's objective of liquidating the Partnership's
remaining assets as soon as practical, the Partnership recorded an additional
$504,000 provision for losses against the carrying value of this property
during 1998.
8
During the first quarter of 1999, the Partnership opened escrow on a 9.45 acre
portion of the property which also did not have freeway visibility. for a
purchase price of $900,000. The escrow closed at the end of the second
quarter of 1999, generated $842,000 in net cash proceeds and was recorded at
no gain or loss. Both the parcel sold in 1997 and the parcel sold in 1999
are zoned for residential use. The balance of the property is zoned for
industrial/commercial use.
The Partnership sold another 7.13 acre parcel of the property in February
2000. The sale generated net sales proceeds of $846,000. The Partnership
recorded no gain or loss on this sale.
The Partnership sold another 2.65 acre parcel of the property in August 2000.
The sale generated net sales proceeds of $486,000. The Partnership recorded
no gain or loss on this sale.
The Partnership sold approximately 5.58 acres of the property in December 2001.
The sale generated net proceeds of $374,000. The Partnership recorded a
$251,000 gain on the sale.
During the second quarter of 2002, the Partnership sold the remaining 12 acres
of its property in Sacramento. The sale generated net proceeds of $1,122,000.
The Partnership recorded an $846,000 gain on the sale.
INTEREST ON INTEREST-BEARING DEPOSITS
Interest on interest-bearing deposits totaled $22,000 and $50,000 for the
nine months ended September 30, 2002 and 2001, respectively. Interest on
interest-bearing deposits totaled $9,000 and $12,000 for the three months
ended September 30, 2002 and 2001, respectively. Interest on interest-bearing
deposits represents interest earned on Partnership funds invested, for
liquidity, in time certificate and money market deposits. The decrease in 2002
is primarily attributable to a decrease in the average balance of cash and cash
equivalents that resulted from a $583,000 cash distribution to limited partners
in September 2001 as well as a reduction in the interest rates earned on those
balances.
PROVISION FOR POSSIBLE LOSSES
There was no provision for possible losses for the nine months ended September
30, 2002 and 2001. The provision for possible losses results from the change
in the allowance for possible losses on real estate owned net of chargeoffs, if
any. Due to the sale of the remaining 12 acres in Sacramento, the Partnership
had no allowance for possible losses on real estate owned as of September 30,
2002.
OTHER EXPENSES
Expenses associated with non-operating real estate owned were $20,000 and
$37,000 for the nine months ended September 30, 2002 and 2001, respectively.
Expenses associated with non-operating real estate owned were zero and $12,000
for the three months ended September 30, 2002 and 2001, respectively. The
expenses relate primarily to the land in Sacramento. The decrease for 2002
is primarily due to a decrease in property taxes as the lots were sold and
the sale of the remaining parcel in the second quarter of 2002.
9
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses, affiliates totaled $89,000 and $70,000
for the nine months ended September 30, 2002 and 2001, respectively. General
and administrative expenses, affiliates totaled $29,000 and $19,000 for the
three months ended September 30, 2002 and 2001, respectively. These expenses
are primarily salary allocation reimbursements paid to affiliates. The
increase for 2002 is due to an increase in time spent on the Partnerships
affairs in preparation for liquidation of the Partnership by employees of the
general partner.
General and administrative expenses, nonaffiliates totaled $54,000 and $43,000
for the nine months ended September 30, 2002 and 2001, respectively, and
$13,000 and $12,000 for the three months ended September 30, 2002 and 2001,
respectively. These expenses consist of other costs associated with the
administration of the Partnership and real estate owned.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since the Partnership does not invest in any derivative financial instruments
or enter into any activities involving foreign currencies, its market risk
associated with financial instruments is limited to the effect that changing
domestic interest rates might have on the fair value of its bank deposits.
As of September 30, 2002, the Partnership held fixed rate bank deposits with
carrying values totaling $806,000. The bank deposits all had maturities of
less than ninety days. The estimated fair value of all of these assets was
estimated to be equal to their carrying values as of September 30, 2002.
Management currently intends to hold the remaining fixed rate assets until
their respective maturities. Accordingly, the Partnership is not exposed to
any material cash flow or earnings risk associated with these assets. Given
the relatively short-term maturities of these assets, management does not
believe the Partnership is exposed to any significant market risk related to
the fair value of these assets.
The Partnership had no interest bearing indebtedness outstanding as of
September 30, 2002. Accordingly, the Partnership is not exposed to any market
risk associated with its liabilities.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Partnership carried
out an evaluation, under the supervision and with the participation of the
Partnerships management, including the General Partners and Chief Financial
Officer of Centennial Corporation, of the effectiveness of the design and
operation of the Partnerships disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, management concluded
that the Partnerships disclosure controls and procedures are effective in
timely alerting them to material information relating to the Partnership
required to be included in the Partnerships periodic Securities and Exchange
Commission filings. There has been no significant changes in the Partnerships
internal controls or in other factors that could significantly affect these
controls subsequent to the evaluation date.
10
PART II
Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a)99.1 Certification of General Partner and Chief Financial Officer
pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
(3) & (4) Articles of Incorporation and Bylaws
The Amended and Restated Limited Partnership Agreement
Incorporated by reference to Exhibit A to the Partnership's
Prospectus contained in the Partnership's registration
Statement on Form S-11 (Commission File No. 0-15448)
Dated January 17, 1986, as supplemented filed under the
Securities Act of 1933
(b) None
11
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Centennial Mortgage Income Fund II
and Subsidiaries, the (Partnership) on Form 10-Q for the period ending
September 30, 2002, as filed with the Securities and Exchange Commission on
November 14, 2002, (the Report) I, Ronald R. White, General Partner and Chief
Financial Officer of Centennial Corporation (Corporate General Partner),
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13 (a) or 15
(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Partnership.
/s/ Ronald R. White
_______________________________ November 14, 2002
Ronald R. White
General Partner and Chief Financial Officer
of Centennial Corporation
12
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ronald R. White, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Centennial Mortgage
Income Fund II and Subsidiaries, the (Partnership);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge , the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Partnership as of, and for, the periods presented in this quarterly report;
4. The Partnerships other General Partners and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Partnership and we have:
a)designed such disclosure controls and procedures to ensure that material
information relating to the Partnership, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b)evaluated the effectiveness of the Partnerships disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and
c)presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Partnerships management and I have disclosed, based on our most recent
evaluation, to the Partnership's auditors and the audit committee of the
Partnership:
a)all significant deficiencies in the design or operation of internal controls
which could adversely affect the Partnerships ability to record, process,
summarize and report financial data and have identified for the Partnerships
auditors any material weaknesses in internal controls; and
b)any fraud, whether or not material, that involves management or other
employees who have a significant role in the Partnerships internal controls;
and
13
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Ronald R. White
___________________________
Ronald R. White
General Partner and Chief Financial
Officer of Centennial Corporation
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CENTENNIAL MORTGAGE INCOME FUND II AND SUBSIDIARIES
A California Limited Partnership
/s/ John B. Joseph
________________________
John B. Joseph
General Partner November 14, 2002
/s/ Ronald R. White
_________________________________
Ronald R. White
General Partner November 14, 2002
14