-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UE1QTg6w4/Dgdm4LW60wCfnB5hJA/zMvFtl2fwbay2V/srAqHKsGaU1TFU3GZELq xGG2lCJj2o96cCfo4JWUpg== 0000736980-98-000002.txt : 19980401 0000736980-98-000002.hdr.sgml : 19980401 ACCESSION NUMBER: 0000736980-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTENNIAL MORTGAGE INCOME FUND CENTRAL INDEX KEY: 0000736980 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 330053488 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 002-88588 FILM NUMBER: 98582461 BUSINESS ADDRESS: STREET 1: 1540 S LEWIS STREET CITY: ANAHEIM STATE: CA ZIP: 92805 BUSINESS PHONE: 7145028484225 MAIL ADDRESS: STREET 2: 1540 S LEWIS STREET CITY: ANAHEIM STATE: CA ZIP: 92805 10-K 1 CENTENNIAL MORTGAGE INCOME FUND FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 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: 0-22520 CENTENNIAL MORTGAGE INCOME FUND (Exact name of registrant as specified in its charter) California 33-0053488 (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 This report includes a total of 951 pages. PART I ITEM 1. BUSINESS. (a) General Development of the Business Centennial Mortgage Income Fund (the "Partnership"), a California Limited Partnership, was organized on December 13, 1983. The Partnership's registration statement became effective June 8, 1984. The general partners are John B. Joseph, Ronald R. White and Centennial Corporation ("CC"), a privately-held corporation whose stock is owned by affiliates of Ronald R. White and John B. Joseph. Beginning in the fourth quarter of 1985, the Partnership ceased accepting capital contributions and entered its operating stage of business. During the fourth quarter of 1990, 60 months after the closing of its offering stage, the Partnership ceased making new loans and entered the repayment stage as required by the Partnership Agreement. For additional information, see Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (b) Financial Information about Industry Segments Not applicable. (c) Narrative Description of Business The Partnership was formed to invest in mortgage investments consisting of participating first mortgage 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 loans are repaid and 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. Real estate owned by the Partnership reached a peak at December 31, 1993 when its total carrying value, before allowance for possible losses, reached $21,394,000. The real estate owned balance before allowance for possible losses then decreased to $13,820,000 at December 31, 1994 and decreased again to $12,349,000 at year end 1995. Real estate owned decreased again to $11,360,000 as of December 31, 1996 and $8,490,000 as of December 31, 1997. As of December 31, 1997, the Partnership had established a $2,354,000 allowance for possible losses on its real estate owned. Subsequent to December 31, 1997, the Partnership has received $630,000 from the payoff of real estate loans receivable and has received approximately $763,000 from the sale of its 4 condominiums in Oxnard, California. Additionally, subsequent to December 31, 1997, the Partnership's unconsolidated subsidiary, LCR Development, Inc. ("LCR") has entered into purchase and sale agreements to sell its remaining undeveloped lots and several of its remaining homes. Three of these homes had closed escrow as of March 25, 1998 and the Partnership received approximately $346,000 in loan repayments from the net proceeds of such sales. As a result of the transactions discussed above for which payoffs have been received and escrows have closed, the Partnership's cash and cash equivalents balance had increased from $1.0 million as of December 31, 1997 to approximately $2.8 million as of March 25, 1998. The pending LCR transaction is still subject to numerous contingencies and there can be no assurance that it will ultimately close escrow. The Partnership has identified and evaluated the impact on its operating and application software and products of the problems and uncertainties related to the year 2000. The Partnership has implemented a plan to address the issues and expects to resolve year 2000 compliance issues primarily through replacement and normal upgrades of its software and products, the cost of which replacements and upgrades are not considered material. Compliance is expected to be achieved during 1998 and/or early 1999. However, there can be no assurance that such replacements and upgrades can be completed on schedule. 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 notes 5 and 6 of Notes to Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS. Unbeknownst to the Partnership, on July 19, 1996, a default was entered against the Partnership for failure to respond to a complaint filed on July 17, 1995 in the San Bernardino Superior Court, entitled Henry Yong Lim et al -vs- Cardinal Security, et al and allegedly served on the Partnership in May 1996. As shown by the proofs of service, the complaint was served on the wrong party in 1996. The Partnership first became aware of its involvement in this lawsuit in September 1997 when it received copies of requests for entry of default judgement totaling approximately $1,000,000. The judgements involved damages and injuries allegedly suffered by the plaintiffs as a result of an altercation between the plaintiffs, other third parties and security guards employed by the Partnership at its shopping center in Upland, California. The request for judgement names Centennial Mortgage Income Fund Partnership as a defendant in this action. Since the Partnership was never served with the complaint and had no other way of knowing about this action, the Partnership has retained legal counsel to set aside the defaults and any default judgements which may have been entered, due to the lack of proper service and notice. The Partnership has tendered this action to its liability insurance carrier for legal and liability coverage. The default judgement has been set aside and the plaintiff's have appealed. Management intends to vigorously defend any future actions related to this matter. Management believes that even if the plaintiff's prevail in these actions, the Partnership's insurance coverage and/or the security company's insurance carrier should prevent the Partnership from suffering a material loss from these proceedings. There are no other material pending legal proceedings other than ordinary routine litigation incidental to the registrant's business. 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, 1997, there were approximately 5,470 holders of limited partnership units. (c) Partnership Distributions No distributions were declared or paid by the Partnership during the three year period ended December 31, 1997. 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 and/or loan payoffs. Distributions may vary in amount and may be suspended at such time as the Partnership requires working capital, or at any time that the general partners, in their sole discretion, determine it to be in the best interest of the Partnership. Subsequent to December 31, 1997, the general partners determined that the Partnership would make a distribution prior to the end of July 1998. The amount of the distribution should be at least $2,000,000 or $51 per limited partner unit, however, the exact amount of such distribution is still undetermined due to the pending transactions discussed in ITEM 1 above. See Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ITEM 6. SELECTED FINANCIAL DATA.
(dollars in thousands, except per unit data) Years ended - -------------------------------------------------------------------------------- - ---------- 12/31/97 12/31/96 12/31/95 12/31/94 12/31/93 - -------------------------------------------------------------------------------- - ---------- Consolidated Statement of Operations Data: Total revenue........ $ 991 $ 1,105 $ 1,159 $ 1,096 $ 1,246 Net income (loss).. 123 (2,514) (2,776) (1,286) (5,968) Net income (loss) per limited partnership unit basic and diluted. 3.18 (64.91) (71.68) (33.21) (154.10) Consolidated Balance Sheet Data: Total loans before allowance for losses 3,847 3,297 4,793 6,641 3,489 Total real estate owned before allowance for losses 8,490 11,360 12,349 13,820 21,394 Total assets......... 10,397 11,394 14,842 17,688 20,927 Partners' equity..... 7,555 7,432 9,946 12,722 14,008
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 $123,000 and $3.18 for the year ended December 31, 1997 as compared to $(2,514,000) and $(64.91) for the year ended December 31, 1996 and $(2,776,000) and $(71.68) for the year ended December 31, 1995. The improved profitability in 1997 is primarily attributable to a significant decrease in losses from unconsolidated investees, a recovery of previously recorded provision for losses and improved profitability of operating properties. 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, 1997 is included in the following paragraphs. Liquidity and Capital Resources At December 31, 1997, the Partnership had $1,018,000 in cash and interest bearing deposits. During the year ended December 31, 1997, the Partnership's principal sources of cash were; i)$1,118,000 in proceeds from the sale of real estate owned; ii)$545,000 in net operating income from operating properties; iii)$331,000 in principal reductions on loans receivable from affiliates (LCR); iv)$159,000 in interest income on loans; and v)$72,000 in interest income on interest bearing deposits. The Partnership's principal uses of cash during the year ended December 31, 1997 were: i)$1,066,000 in principal payments on notes payable; ii)$970,000 in advances on loans made to LCR; iii)$356,000 in interest payments; iv)$306,000 in general and administrative costs; and v)$162,000 in expenses associated with non-operating properties (principally real estate taxes). Subsequent to December 31, 1997, the Partnership has received $630,000 from the payoff of real estate loans receivable and has received approximately $763,000 from the sale of its 4 condominiums in Oxnard, California. Additionally, subsequent to December 31, 1997, the Partnership's unconsolidated subsidiary, LCR has entered into purchase and sale agreements to sell its remaining undeveloped lots and several of its remaining homes. Three of these homes had closed escrow as of March 25, 1998 and the Partnership received approximately $346,000 on loan repayments from the net proceeds of such sales. As a result of the transactions discussed above for which payoffs have been received and escrows have closed, the Partnership's cash and cash equivalents balance had increased from $1.0 million as of December 31, 1997 to approximately $2.8 million as of March 25, 1998. The additional pending transactions are still subject to numerous contingencies and there can be no assurance that they will ultimately close escrow. Additional sources of funds are future operations of real estate owned, sale of remaining real estate with a net carrying value of approximately $5.4 million and payoffs of remaining loans. The Partnership had no unfunded loan commitments to nonaffiliates at December 31, 1997. The Partnership's notes payable commitments for 1998 consist of interest and principal payments due of approximately $288,000. In addition to the note payable commitments, the Partnership's principal capital requirements include: i) real property taxes and bonds on real estate owned of approximately $142,000 payable in 1998, and ii) selling, general and administrative costs. These commitments are expected to be paid from existing cash balances, future loan payoffs, and the sale of real estate owned. The Partnership is continuously evaluating various alternative strategies for liquidating its real estate assets. These alternative strategies include the potential joint venture and/or build out of certain of the Partnership's properties in order to increase their marketability and maximize the return to the limited partners. In the event the Partnership decides to implement some of these strategies, it may require the reinvestment of proceeds received from the payoff of existing loans and/or the sale of other real estate assets. The decision to invest additional cash in existing assets will only be made if, based on management's best judgment at the time, there is a clear indication that such investment will generate a greater return to the limited partners than any other strategies available to the Partnership. During 1995, the Partnership, through its 50 percent owned corporation, LCR, entered into a joint venture agreement with Home Devco, Inc. ("Home Devco"), an affiliated entity, entitled Silverwood Homes ("Silverwood").For further information see note 5 of Notes to Consolidated Financial Statements. Effective with the third quarter of 1991, the Partnership 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. Management believes that current and projected liquidity is sufficient to fund operating expenses and to meet the contractual obligations and cash flow operating requirements of the Partnership. Until recently, 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 and loan receivable balances, these potential operating costs were considered to be very significant. Based upon recent developments, the general partners have determined that the Partnership will make a distribution to its limited partners by the end of July 1998. The amount of this distribution is still undetermined due to the uncertainty of the pending escrows discussed above, but should be at least $2,000,000 or $51 per limited partner unit. Results of Operations Management has noted that the long-term downturn in the real estate industry in California has not only stabilized, it has improved considerably in many sectors of the market. The improving real estate markets were a significant factor in the increased profitability of the Partnership during 1997. Interest income on loans to affiliates, including fees was $37,000 for 1997, $100,000 for 1996, and $41,000 for 1995. This income is related to the Silverwood joint venture which is constructing homes in Lancaster, California. The real estate market in Lancaster has not seen the improvement that many other areas in California have. As a result, the Partnership placed certain of its loans to Silverwood on a nonaccrual status during 1996, thus decreasing interest income during the latter half of 1996 and all of 1997. The increase from 1995 to 1996 resulted from increasing loan balances to Silverwood. The Partnership has begun to receive increased payments on several of the Partnership's loans to nonaffiliates which had been converted into nonperforming loans. As a result, interest income on loans to nonaffiliates, including fees, increased from $78,000 during the year ended December 31, 1995 to $100,000 during the year ended December 31, 1996, and increased again to $122,000 during the year ended December 31, 1997. Management believes that the increases in payments are directly attributable to the improving real estate market in California. Loans on "nonaccrual" refers to loans upon which the Partnership is no longer accruing interest. Management's policy is to cease accruing interest on loans when collection of interest and/or principal payments has become doubtful. Loans to affiliates and nonaffiliates on nonaccrual status amounted to $2,313,000, $2,597,000, and $3,412,000 as of December 31, 1997, 1996 and 1995, respectively. Had all accrued interest been recorded throughout 1997, 1996 and 1995 on the affiliated and nonaffiliated nonaccrual loans, interest income would have increased by $483,000, $261,000, and $646,000, respectively, for those periods. Real estate loans receivable, earning is comprised of four loans totaling $782,000 as of December 31, 1997 that are performing. However, three of the loans totaling $692,000 were classified as impaired. These three loans had been restructured and had been offset by a $31,000 allowance for losses as of the end of 1997. Two of these notes were repaid subsequent to December 31, 1997 and the Partnership received $630,000 in net cash from these repayments. During 1997,the Partnership reversed $268,000 in allowances for losses that had been recorded in prior years against these repaid loans. Real estate loans receivable, nonearning is comprised of four past due or renegotiated loans totaling $1,072,000 as of December 31, 1997. These loans are offset by $973,000 in deferred profit and allowance for possible losses. Most of the borrowers have little or no equity in the underlying collateral for the loans and as a result, these loans effectively represent an investment in the real estate held as collateral. Therefore, these loans are carried on the balance sheet at the fair value of the collateral or have been fully reserved. Real estate loans receivable from unconsolidated investees, earning and nonearning represent loans to LCR, an unconsolidated corporation 50 percent owned by the Partnership, and loans to Silverwood homes, a subsidiary of LCR. The real estate owned balance before allowance for possible losses at December 31, 1997, 1996 and 1995 was $8,490,000, $11,360,000, and $12,349,000, respectively. The balance at December 31, 1997 is comprised of three properties and is offset by a $2,354,000 allowance for possible losses. One of these three properties was sold subsequent to December 31, 1997 and the Partnership received approximately $763,000 in net cash proceeds from the sale. The following sections entitled "Nonaccrual, Nonperforming Loans and Other Loans to Affiliates" and "Real Estate Owned" provide a detailed analysis of these assets. Nonaccrual, Nonperforming Loans and Other Loans to Affiliates Loans on nonaccrual status during the year ended December 31, 1997 are summarized below: During 1994, the Partnership renegotiated an equity participation note with an original committed amount of $374,000 secured by a second deed of trust on a 32,431 square foot shopping center in Corona, California. The loan provides for interest due to be payable at loan maturity; however, due to the amount of the senior debt and the decrease in land values, the Partnership has placed the loan on nonaccrual. The principal balance and nonaccrued interest at December 31, 1997 were $376,000 and $144,000 respectively. The Partnership has recorded a reduction of $62,000 against the $376,000 principal balance which represents previously nonaccrued interest and has also recorded a $289,000 deferred profit in connection with this loan. Additionally, due to the recent operating history of the property and the large lien on the property which is senior to the Partnership's note, an allowance for possible losses of $25,000 has also been recorded against this note. During 1991, the Partnership sold a pad on an existing piece of real estate owned in Corona, California and carried back financing in the amount of $600,000. The Partnership's share of the loan is 77 percent. Due to the loss of a major tenant, the borrower has been unable to make full monthly interest payments in accordance with the original note terms. Management has worked out a forbearance agreement with the borrower for payments equal to the net cash flow from the property. The remaining interest due has been placed on nonaccrual. The Partnerhip's share of the principal balance and nonaccrued interest at December 31, 1997 were $461,000, and $142,000, respectively. The Partnership has recorded a $365,000 allowance for possible losses against this note. During 1989, the Partnership funded a loan with an original committed amount of $343,000 to provide land development financing in Perris, California. The loan matured June 1, 1993 and the borrower was unable to make interest payments or pay off the loan. Given the depressed value of the property and the amount of the delinquent bonds and taxes, the Partnership has elected to not foreclose on this property and has established an allowance for losses of $294,000, to fully reserve the carrying value of the note. The principal balance and nonaccrued interest at December 31, 1997 are $294,000 and $208,000, respectively. During 1994, the Partnership funded a $1,250,000 unsecured note and a 50 percent participation in a $2,115,000 unsecured note, both representing workout loans and due from LCR. These two loans reflect the majority of the cost basis of 179 residential lots which LCR contributed to Silverwood. LCR's only source of repayment of these notes is the excess, if any, of proceeds from the sale of the fully developed lots over the amount of secured debt. Due to the continuing decline in value of the lots, management does not expect that either of these notes will ever be repaid. As a result, the loans have been placed on nonaccrual. As of December 31, 1997, the principal balance and nonaccrued interest balances of the $1,250,000 note were $1,250,000 and $392,000, respectively. The Partnership's share of the principal and nonaccrued balances of the $2,115,000 note as of the same date were $1,055,000 and $323,000, respectively. As discussed in note 5 of Notes to Consolidated Financial Statements, the Partnership has reduced the carrying value of these notes by $2,305,000, a portion of its share of losses from this unconsolidated investee. During 1994 and 1995, LCR had evaluated various alternative strategies for liquidating its investment in the 179 lots in Lancaster. During 1995, LCR determined that its best course of action appeared to be the full-scale buildout and sale of single- family homes since the market for finished lots had fallen so significantly. LCR obtained construction financing commitments from the Partnership and Centennial Mortgage Income Fund II ("CMIF II"), an affiliate. LCR entered into a joint venture agreement entitled Silverwood with Home Devco to construct and sell single-family homes at the project. Silverwood began constructing a model home complex at the project in June 1995. Construction commenced in September 1995 on Phase I at the project. Construction of Phase II of the project was commenced in February 1997. At December 31, 1997, the Partnership holds a 50 percent participation in three notes and a 100 percent interest in a fourth note due from Silverwood consisting of a land development loan, a model home loan and two home construction loans with a combined disbursed balance of $2,374,000. The Partnership's disbursed balance of the $3,266,000 development loan at December 31, 1997 was $1,212,000. The Partnership's disbursed balance of the $490,000 model loan at December 31, 1997 was $239,000. At December 31, 1997, the Partnership's disbursed balance of the $1,034,000 Phase I construction loan was $171,000. At December 31, 1997 the Partnership's disbursed balance of the $870,000 Phase II construction loan was $752,000. As discussed in note 5 of Notes to Consolidated Financial Statements, the Partnership had reduced the carrying value of the land development loan by $381,000, the remainder of its share of losses in unconsolidated investees. Sales volumes of new homes in the Lancaster area have continued to remain sluggish since 1995 while sales prices have remained relatively flat and construction costs have increased. This has caused a further decline in the value of finished lots and a reduction in the anticipated net proceeds the Partnership expects it might realize from the buildout of homes at the project. Additionally, Silverwood closed escrow on only two homes during 1996 and seven homes in 1997, far less than originally anticipated. As a result of these factors, LCR recorded a $207,000, $2,516,000 and $1,077,000 provision for losses on real estate investments during 1997, 1996 and 1995, respectively. Subsequent to December 31, 1997, Silverwood has closed escrow on three more homes in Phase II and has placed two more homes in escrow. Additionally, Silverwood has entered into a purchase and sale agreement to sell the 157 remaining undeveloped lots and intends to cease its homebuilding activities. Real Estate Owned A description of the Partnership's principal real estate owned and loan classified as insubstance foreclosure during the year ended December 31, 1997 follows: Shopping Center in Upland, California During the third quarter of 1988, the Partnership foreclosed on a loan secured by this project. The Partnership originally committed $5,600,000 for the rehabilitation of a 33,327 square foot retail center and construction of an automotive service facility in Upland, California. Cost overruns and construction delays prevented the borrower from selling the project and thereby performing on the loan. The property's carrying value before allowance for possible losses was $4,628,000 at December 31, 1997. The property is encumbered by a note of $2,421,000, secured by a first trust deed on the property. The Partnership oversees the management and leasing of the property which is currently 96 percent leased. The Partnership had recorded a $921,000 allowance for losses related to this property as of December 31, 1997. The property generated approximately $506,000 and $431,000 in net operating income before debt service during 1997 and 1996, respectively. 19 Acres in Sacramento, California During the third quarter of 1991, the Partnership took a deed in lieu of foreclosure on a second trust deed secured by 19 acres of undeveloped land in Sacramento, California. The property is located in the North Natomas area and is zoned for light- industrial commercial use. The property was encumbered by a $900,000, 12 percent fixed interest rate note payable secured by a first trust deed on the property which was repaid in December 1997. The Partnership continues to finalize the entitlement processing, flood issues and provide for utility services for the property. As these issues are finalized and the demand for development land in the area returns, the Partnership intends to list the property for sale. At December 31, 1997, the carrying value before allowance for possible losses of this asset was $2,822,000 and the Partnership had recorded a $1,134,000 allowance for losses related to this project. Auto Retail Center in Corona, California During 1988, the Partnership funded a loan with an original committed amount of $3,313,000 for the purpose of constructing a 39,185 square foot auto/retail center in Corona, California. The loan matured on September 1, 1989. The borrower defaulted under a forbearance agreement, and the Partnership filed a notice of default on December 14, 1990. The borrower filed for bankruptcy on February 15, 1991. A pad was sold during April 1991 resulting in the Partnership receiving a net paydown of $249,000. The Partnership provided financing to the purchaser. The Partnership took a grant deed on the property through the Bankruptcy Courts in December 1991. The property was sold for $1,000,000 in July 1997 and the Partnership realized $935,000 in net cash proceeds from the sale. 4 Condominiums in Oxnard, California During 1990, the Partnership funded a loan secured by a first trust deed with an original committed amount of $3,000,000 for the construction of 12 condominiums in Oxnard, California. The borrower signed over control to the second trust deed holder in December 1992 and the second trust deed holder, an affiliate, abandoned the property. The Partnership now controls the property and receives 100 percent of all sales proceeds net of selling costs. As a result, the Partnership recorded an insubstance foreclosure on these 12 condominiums. During 1997, the Partnership sold one condominium, bringing the cumulative sales total to eight units. The Partnership recorded a $1,000 gain on the 1997 sale. The remaining four units were sold and closed escrow subsequent to December 31, 1997. The sales subsequent to December 31, 1997 generated approximately $763,000 in net cash proceeds to the Partnership. The carrying value before allowance for possible losses at December 31, 1997 was $1,040,000 and the Partnership had recorded a $299,000 allowance for losses related to this project as of the same date. Interest on Interest-Bearing Deposits Interest earned on interest-bearing deposits was $72,000 in 1997, $85,000 in 1996 and $102,000 in 1995. The decrease in interest on interest-bearing deposits in 1997 and 1996 is principally due to a decrease in average cash balances. Interest on interest- bearing deposits represents interest earned on Partnership funds invested, for liquidity, in time certificate and money market deposits. Income from Operations of Real Estate Owned Income from operations of real estate owned for 1997, 1996 and 1995 consists of operating revenues of $755,000, $780,000, and $784,000, respectively. These revenues were primarily from the Upland Shopping Center and the auto retail center in Corona. The decrease in 1997 can be attributed to the sale of the auto retail center in July 1997. Provision for Possible Losses The provision for (recovery of) possible losses was $(268,000)in 1997, $40,000 in 1996 and $836,000 in 1995. The 1997 recovery related to two loans secured by a mini-storage facility in Citrus Heights, California that were repaid in January 1998. The 1996 expense was primarily attributable to increased provisions on the 19 acres in Sacramento, the loan secured by the auto center in San Bernardino and the auto retail center in Corona which were partially offset by a reduction in the provision on the Upland Shopping Center. The 1995 provision relates primarily to the auto retail center in Corona, California and the Upland Foothill Shopping Center. Management believes that the allowance for possible losses at December 31, 1997 is adequate to absorb the known risks in the Partnership's loan and real estate owned portfolios, including losses on pending sales and possible foreclosures. Other Expenses The Partnership has invested in corporations in which it has less than a majority ownership and accounts for these investments using the equity method. The Partnership's share of losses in these unconsolidated investees was $125,000 for 1997, $2,304,000 for 1996 and $1,803,000 for 1995. The 1997 share of losses consists primarily of operating losses from the sale of homes recorded by LCR. The 1996 share of losses consists primarily of provisions for losses on real estate investments recorded by LCR and BKS Development Inc. ("BKS") related to the 179 lots in Lancaster and the 283 acres owned by BKS in Bakersfield. The 1996 losses also included additional costs related to the sale of homes in Lancaster. The 1995 share of losses consists primarily of provisions for losses on real estate investments related to the 179 lots in Lancaster and the 283 acres in Bakersfield. The Partnership had written off its investment in BKS completely during 1996 and its remaining net carrying value of its investment in LCR had been reduced to $1,993,000 as of December 31, 1997. Operating expenses from operations of real estate owned were $168,000 for 1997, $259,000 for 1996 and $265,000 for 1995. These expenses were associated with the auto retail center in Corona and the Upland Shopping Center. The decrease in 1997 is principally attributable to the sale of the auto retail center in July 1997. Operating expenses from operations of real estate owned paid to affiliates were $41,000 for 1997, $55,000 for 1996 and $54,000 for 1995. The expenses consist of property management fees paid to affiliates of the general partners. The decrease in 1997 is principally attributable to the sale of the auto retail center in July 1997. Expenses associated with non-operating real estate owned were $162,000 in 1997, $226,000 in 1996 and $254,000 in 1995. The expenses are primarily related to the 19 acres in Sacramento, a 23 acre parcel previously owned in Riverside and the condominiums in Oxnard. These costs include property taxes of $86,000, $108,000 and $106,000 during 1997, 1996 and 1995, respectively. The decrease for 1997 is due primarily to a decrease in property tax expense resulting from the receipt of tax refunds and a decrease in services rendered regarding the 19 acres in Sacramento. The decrease for 1996 is due primarily to a decrease in legal costs associated with the 23 acres in Riverside. Depreciation and amortization expense for 1997, 1996 and 1995 consists of $12,000, $23,000 and $115,000, respectively. The 1997 and 1996 amounts represent depreciation on office furniture and equipment while the 1995 amount also includes depreciation for the Upland Shopping Center. The decrease for 1996 is due to the adoption of SFAS 121. Interest expense was $378,000 for 1997, $476,000 for 1996 and $430,000 for 1995. These amounts represent interest related to the underlying debt on the Upland Shopping Center, the intercompany debt on the auto retail center in Corona and the 19 acres in Sacramento. The decrease for 1997 is attributable to the intercompany debt on the auto retail center in Corona being placed on nonaccrual for 1997 and a decrease in the principal balance of the debt on the Upland shopping center. The increase for 1996 is due to the addition of extension fee expense on the underlying debt on the Upland Shopping Center. General and administrative expenses, affiliates totaled $203,000 for 1997, $218,000 for 1996 and $167,000 for 1995. These expenses are primarily salary allocation reimbursements paid to affiliates for the management of the Partnership's assets. The decrease in 1997 was the result of a reduction in staffing. The increase for 1996 is primarily due to a $44,000 change in billing methodology from mortgage investment servicing fees to salary allocations. General and administrative expenses, nonaffiliates totaled $103,000 for 1997, $100,000 for 1996 and $79,000 for 1995. The 1997 amount includes approximately $31,000 of costs associated with the extension of the maturity of the note secured the Upland Shopping Center and the legal proceedings involving the same property. The increase in 1996 is due to moving expenses, and increases in office expenses and investor reporting costs. Mortgage investment servicing fees paid to affiliates were $4,000 in 1997, $4,000 in 1996 and $48,000 in 1995. These fees consist of amounts paid to Centennial Corporation for servicing the Partnership's loan portfolio. Beginning in 1996, the Partnership no longer incurred mortgage investment servicing fees for servicing the Partnership's real estate owned portfolio. 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 59 General Partner John B. Joseph is currently Vice Chairman of the Board of Directors and Vice President of Centennial Corporation. He is also currently Chairman of the Board and Chief Executive Officer of West Coast Bancorp ("WCB"), a publicly-held bank holding company operating in California. He has been Chairman of the Board of Directors of WCB since its inception in 1981 and CEO since April 1991. Mr. Joseph also serves, or has served, in the following capacities during the past five years: Vice Chairman of the Board of Directors of The Centennial Group, Inc. ("CGI"), a publicly-held real estate development corporation from February 1987 to July 1993; Senior Executive Vice President of CGI from July 1987 to July 1993; general partner of various public and private limited partnerships engaged in real estate development and lending activities. Mr. Joseph presently holds and has held, over the past five years, various positions in the subsidiaries of WCB and CGI. Name, Age and Position Principal Occupation and Affiliation during Last Five Years - ----------------------------------------------------------------- Ronald R. White Age 51 General Partner Ronald R. White is currently President and CEO of Centennial Corporation. He is also currently Executive Vice President and Vice Chairman of the Board of Directors of WCB. Mr. White has served in these capacities since April 1987. Mr. White also serves, or has served, in the following capacities during the past five years: Chairman of the Board of Directors, President and Chief Executive Officer of CGI from February 1987 to July 1993; general partner of various public and private limited partnerships engaged in real estate development and lending activities. Mr. White presently holds and has held, over the past five years, various positions in the subsidiaries of WCB and CGI. Mr. Joseph has 29 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. Mr. White's career spans the financial and management fields in both securities and real estate. Mr. White has 27 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 1993. 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, 1997 - ----------------------------------------------------------------- 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 $ 244,000 (1) reimbursable affiliates shall be entitled expenses to reimbursement for certain - general expenses, subject to the partner or conditions of the Partnership affiliates Agreement. General partners' A 5 percent interest in $ --- interest in cash cash flow available for distributions distribution for any year - - general until all limited partners or partnership unit holders affiliates have received an amount equal to a 12 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 $ 4,000 (2) investment maximum amount funded or to servicing fees be funded by the Partnership on mortgage investments serviced by CC and CMIF, Inc., an indirect subsidiary of CGI. 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. (2) Mortgage Investment Servicing Fees are payable on the maximum amount to be funded on a Mortgage Investment from the date the Partnership first signs a letter of commitment for such Mortgage Investment. Fees shown in the table represent amounts earned by CC for servicing these mortgage investments. (3) 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, 1997. (b) Security Ownership of Management The percent of units owned by Management outstanding 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 5 of the Notes to the Consolidated Financial Statements which is 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. None. (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 AND SUBSIDIARIES A California Limited Partnership By:/s/John B. Joseph _________________________________ John B. Joseph General Partner March 31, 1998 By:/s/Ronald R. White _________________________________ Ronald R. White General Partner March 31, 1998 By: CENTENNIAL CORPORATION General Partner /s/John B. Joseph _________________________________ John B. Joseph Executive Vice President March 31, 1998 /s/Ronald R. White _________________________________ Ronald R. White President March 31, 1998 /s/Joel H. Miner _________________________________ Joel H. Miner Chief Financial Officer March 31, 1998 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership ANNUAL REPORT Form 10-K Consolidated Financial Statements Items 8, 14(a)(1) and 14(a)(2) December 31, 1997, 1996 and 1995 (With Independent Auditors' Report Thereon) CENTENNIAL MORTGAGE INCOME FUND 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, 1997 and 1996.............................. F-4 Consolidated Statements of Operations -- Years ended December 31, 1997, 1996 and 1995............ F-7 Consolidated Statements of Partners' Equity -- Years ended December 31, 1997, 1996 and 1995............ F-9 Consolidated Statements of Cash Flows -- Years ended December 31, 1997, 1996 and 1995............ F-10 Notes to Consolidated Financial Statements ............. F-14 Schedules Schedule III - Consolidated Real Estate Owned and Accumulated Depreciation and Amortization. ............. F-38 Schedule IV - Mortgage Loans on Real Estate............. F-42 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-1 Exhibit 21 LCR DEVELOPMENT, INC. A California Corporation Index to Consolidated Financial Statements Consolidated Financial Statements Page Independent Auditors' Report............................ F-53 Consolidated Balance Sheets -- December 31, 1997 and 1996.............................. F-54 Consolidated Statements of Operations -- Years ended December 31, 1997, 1996 and 1995............ F-56 Consolidated Statements of Stockholders' Equity (Deficit) Years ended December 31, 1997, 1996 and 1995............ F-57 Consolidated Statements of Cash Flows -- Years ended December 31, 1997, 1996 and 1995............ F-58 Notes to Consolidated Financial Statements.............. F-60 F-2 INDEPENDENT AUDITORS' REPORT To the General Partners Centennial Mortgage Income Fund: We have audited the consolidated financial statements of Centennial Mortgage Income Fund, 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 schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Orange County, California March 20, 1998 F-3 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Balance Sheets
December 31, 1997 and 1996 Assets 1997 1996 - ----------------------------------------------------------------- Cash and cash equivalents (note 5) $ 1,018,000 $ 1,712,000 Real estate loans receivable, earning 782,000 700,000 Real estate loans receivable, nonearning 1,072,000 1,066,000 Real estate loans receivable from unconsolidated investee, earning (note 5) 752,000 --- Real estate loans receivable from unconsolidated investee, nonearning (note 5) 1,241,000 1,531,000 - ----------------------------------------------------------------- 3,847,000 3,297,000 Less allowance for possible loan losses (note 3) 714,000 982,000 - ----------------------------------------------------------------- Net real estate loans receivable 3,133,000 2,315,000 - ----------------------------------------------------------------- Real estate owned, held for sale (notes 6 and 7) 7,450,000 10,050,000 Real estate owned, held for sale, insubstance foreclosed (note 6) 1,040,000 1,310,000 - ----------------------------------------------------------------- 8,490,000 11,360,000 F-4 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Balance Sheets (Continued) December 31, 1997 and 1996 Assets 1997 1996 - ----------------------------------------------------------------- Less allowance for possible losses on real estate owned (note 4) 2,354,000 4,101,000 - ----------------------------------------------------------------- Net real estate owned 6,136,000 7,259,000 - ----------------------------------------------------------------- Accrued interest receivable 5,000 4,000 Other assets, net 47,000 104,000 Due from unconsolidated investee 58,000 --- - ----------------------------------------------------------------- $ 10,397,000 $ 11,394,000 ================================================================= F-5 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Balance Sheets (Continued) December 31, 1997 and 1996 Liabilities and Partners' Equity 1997 1996 - ----------------------------------------------------------------- Notes payable (note 7) $ 2,421,000 $ 3,355,000 Notes payable to affiliates (note 5) 73,000 74,000 Accounts payable and accrued liabilities 20,000 23,000 Interest payable to affiliates on notes secured by real estate (note 5) 39,000 220,000 Payable to affiliates --- 1,000 Deferred profit on equity participation 289,000 289,000 - ----------------------------------------------------------------- Total liabilities 2,842,000 3,962,000 - ----------------------------------------------------------------- Partners' equity (deficit) -- 38,729 limited partnership units outstanding in 1997 and 1996 General partners (525,000) (525,000) Limited partners 8,080,000 7,957,000 - ----------------------------------------------------------------- Total partners' equity 7,555,000 7,432,000 Contingencies (note 8) - ----------------------------------------------------------------- $ 10,397,000 $ 11,394,000 =================================================================
See accompanying notes to consolidated financial statements F-6 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Operations
Years ended December 31, 1997, 1996 and 1995 1997 1996 1995 - ----------------------------------------------------------------- Revenue: Interest on loans to affiliates, including fees (note 5) $ 37,000 $ 100,000 $ 41,000 Interest on loans to nonaffiliates, including fees 122,000 100,000 78,000 Interest on interest-bearing deposits (note 5) 72,000 85,000 102,000 Gain on sale of property 1,000 40,000 154,000 Income from operations of real estate owned 755,000 780,000 784,000 Other 5,000 --- --- - ----------------------------------------------------------------- Total revenue 992,000 1,105,000 1,159,000 - ----------------------------------------------------------------- Expenses: Provision for (recovery of) losses (notes 3 and 4) (268,000) 40,000 836,000 Loss on sale of property 6,000 --- --- Share of losses in unconsolidated investees (note 5) 125,000 2,304,000 1,803,000 Operating expenses from operations of real estate owned 168,000 259,000 265,000 Operating expenses from operations of real estate owned paid to affiliates (note 5) 41,000 55,000 54,000 Expenses associated with non-operating real estate owned 162,000 226,000 254,000 F-7 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Operations (Continued) Years ended December 31, 1997, 1996 and 1995 1997 1996 1995 - ----------------------------------------------------------------- Depreciation and amortization expense 12,000 23,000 115,000 Interest expense 378,000 476,000 430,000 General and administrative, affiliates (note 5) 203,000 218,000 167,000 General and administrative, nonaffiliates 103,000 100,000 79,000 Mortgage investment servicing fees paid to affiliates (note 5) 4,000 4,000 48,000 - ----------------------------------------------------------------- Total expenses 934,000 3,705,000 4,051,000 - ----------------------------------------------------------------- Income (loss) before minority interest $ 58,000 $(2,600,000) $(2,892,000) Minority interest (note 5) 65,000 86,000 116,000 - ----------------------------------------------------------------- Net income (loss) $123,000 $(2,514,000) $(2,776,000) ================================================================= Net income (loss) per limited partnership unit-basic and diluted $ 3.18 $ (64.91) $ (71.68) =================================================================
See accompanying notes to consolidated financial statements F-8 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Partners' Equity
Years ended December 31, 1997, 1996 and 1995 Total General Limited Partners' Partners Partners Equity - ----------------------------------------------------------------- Balance (deficit) at December 31, 1994 $ (525,000) $ 13,247,000 $ 12,722,000 Net loss --- (2,776,000) (2,776,000) - ----------------------------------------------------------------- Balance (deficit) at December 31, 1995 (525,000) 10,471,000 9,946,000 Net loss --- (2,514,000) (2,514,000) - ----------------------------------------------------------------- Balance (deficit) at December 31, 1996 (525,000) 7,957,000 7,432,000 Net income --- 123,000 123,000 - ----------------------------------------------------------------- Balance (deficit) at December 31, 1997 $ (525,000) $ 8,080,000 $ 7,555,000 =================================================================
See accompanying notes to consolidated financial statements F-9 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows Years ended December 31, 1997, 1996 and 1995
1997 1996 1995 - ----------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $ 123,000 $ (2,514,000) $ 2,776,000) Adjustments to reconcile net income (loss) to net cash used in operating activities: Amortization of unearned loan fees (2,000) (2,000) --- Depreciation and amortization 12,000 23,000 115,000 Provision for (recovery of) losses (268,000) 40,000 836,000 Interest accrued to principal on loans to affiliates (37,000) (195,000) (47,000) Minority interest (65,000) (86,000) (116,000) Loss (gain) on sale of real estate owned 5,000 (40,000) (154,000) Share of losses in unconsolidated investees 125,000 2,304,000 1,803,000 Changes in assets and liabilities: (Increase) decrease in accrued interest receivable (1,000) 14,000 24,000 (Increase) decrease in other assets 45,000 (5,000) (34,000) Decrease in accounts payable and accrued liabilities (3,000) (28,000) (4,000) F-10 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows (Continued) Years ended December 31, 1997, 1996 and 1995 1997 1996 1995 - ----------------------------------------------------------------- Increase in interest and property taxes payable on real estate owned --- 4,000 3,000 Decrease in payable to affiliates (1,000) (3,000) (5,000) Increase (decrease) in interest payable to affiliates on notes secured by real estate (4,000) 49,000 (1,000) - ----------------------------------------------------------------- Net cash used in operating activities (71,000) (439,000) (356,000) - ----------------------------------------------------------------- Cash flows from investing activities: Principal collected on loans made to customers 24,000 50,000 288,000 Principal collected on loans made to affiliates 331,000 113,000 --- Advances on loans made to customers (21,000) --- --- Advances on loans made to affiliates (970,000) (1,044,000) (429,000) Proceeds from sale of real estate owned 1,118,000 190,000 1,285,000 Capital expenditures for real estate owned --- (273,000) (58,000) Increase in due from unconsolidated investee (58,000) --- --- F-11 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows (Continued) Years ended December 31, 1997, 1996 and 1995 1997 1996 1995 - ----------------------------------------------------------------- (Increase) decrease in short-term investments --- 103,000 (103,000) - ----------------------------------------------------------------- Net cash provided by (used in) investing activities 424,000 (861,000) 983,000 - ----------------------------------------------------------------- Cash flows from financing activities: Advances on notes payable to affiliates 19,000 70,000 62,000 Principal payments on notes payable (934,000) (5,000) (9,000) Principal payments on notes payable to affiliates (132,000) --- --- - ----------------------------------------------------------------- Net cash provided by (used in) financing activities (1,047,000) 65,000 53,000 - ----------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (694,000) (1,235,000) 680,000 Cash and cash equivalents at beginning of year 1,712,000 2,947,000 2,267,000 - ----------------------------------------------------------------- Cash and cash equivalents at end of year $ 1,018,000 $ 1,712,000 $ 2,947,000 ================================================================= F-12 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows (Continued) Years ended December 31, 1997, 1996 and 1995 1997 1996 1995 - ----------------------------------------------------------------- Supplemental schedule of cash flow information: Cash paid during the year for: Interest $ 356,000 $ 400,000 $ 401,000 - ----------------------------------------------------------------- Supplemental schedule of noncash investing and financing activities: Decrease in deferred profit on equity participation and real estate loans resulting from foreclosure $ --- $ 270,000 $ --- Decrease in notes payable and real estate owned resulting from foreclosure --- 650,000 --- Decrease in interest and taxes payable on real estate owned and real estate owned resulting from foreclosure --- 15,000 --- See accompanying notes to consolidate financial statements F-13 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Notes to Consolidated Financial Statements December 31, 1997, 1996, 1995 (1) Summary of Significant Accounting Policies Business Centennial Mortgage Income Fund (the "Partnership") 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, 1997, a majority 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 and commercial real estate in California declined severely. As the loans secured by undeveloped land and certain operating properties became delinquent, management of the Partnership elected to foreclose on certain of these loans, thereby increasing real estate owned balances. As a result, the Partnership has become a direct investor in this real estate and intends to manage operating properties and develop raw land until such time as the Partnership is able to sell this real estate owned. The real estate owned balance before allowance for possible losses at December 31, 1995 was $12,349,000 decreasing to $11,360,000 at year end 1996 and $8,490,000 at year end 1997. Basis of Presentation The Partnership formed several subsidiaries to own and operate certain of its real estate assets. The corporations formed were BNN Development, Inc., ("BNN"), Upland Foothill Retail, Inc., ("Upland"), CPI Development, Inc., ("CPI"), Grand Plaza Auto Retail, Inc., ("Grand Plaza"), LCR Development, Inc., ("LCR") and BKS Development, Inc., ("BKS"). All of these corporations are California corporations. F-14 The Partnership owns a 100 percent interest in Upland and CPI, 86.25 percent interest in BNN, 86.7 percent interest in Grand Plaza and a 50 percent interest in LCR and BKS. Several of the Partnership's assets have been transferred to these new corporations, at the Partnership's cost basis, in transactions which included no cash down with the Partnership carrying a substantial portion of the financing. Upland, CPI, BNN, and Grand Plaza have been consolidated in the accompanying consolidated financial statements, and all significant inter- company balances and transactions, including the aforementioned transfers, have been eliminated in consolidation. As the Partnership's ownership interest in LCR and BKS is more than 20 percent but does not exceed 50 percent, the Partnership accounts for its ownership interest using the equity method. Under the equity method of accounting, these loans are a component of the Partnership's investment in LCR and BKS, and therefore the Partnership has recorded losses by LCR and BKS as a reduction of the carrying value of these loans receivable (see note 5). Organization The Partnership was organized on December 13, 1983 in accordance with the provisions of the California Limited Partnership Act. The Partnership commenced operations in 1984. 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 Messrs. Joseph and White. 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 F-15 properly reflect the ecomonic effect of the allocations discussed above, the Partnership has allocated financial statements 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, 1997. 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 income and losses to the limited partners. Real Estate Loans and Allowance for Possible Loan Losses Loans are reported at the principal amount outstanding, net of unearned income and the allowance for possible loan losses. Interest accrual is discontinued when, in the opinion of management, its collection is deemed doubtful. The allowance for possible loan losses is established through a provision for possible losses charged to expense. Loans are charged against the allowance for possible loan losses when management believes that the collectibility of principal is unlikely. Management believes that the allowance for possible loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. Impaired Loans The Partnership considers a loan to be impaired when based upon current information and events, it believes it is probable that the Partnership will be unable to collect all amounts due according to the contractual terms of the loan agreement. In determining impairment, the Partnership considers large non- homogeneous loans including nonaccrual loans, troubled debt restructuring and performing loans which exhibit, among other characteristics, high loan-to-value ratios, low debt-coverage ratios, or other indications that the borrowers are experiencing increased levels of financial difficulty. The Partnership bases 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 exceeds the measure of the impaired loan's value is recognized by recording a valuation allowance. F-16 Real Estate Owned During 1995, the Partnership accounted for foreclosed assets using the American Institute of Certified Public Accountants Statement of Position 92-3 ("SOP 92-3"), "Accounting for Foreclosed Assets". SOP 92-3 indicated that foreclosed assets were presumed held for sale and not for the production of income. Accordingly, foreclosed assets held for sale were carried at the lower of cost or fair value minus estimated costs to sell. The cost of such assets at the time of foreclosure was the fair value of the asset foreclosed. Immediately after foreclosure, a valuation allowance was recognized for estimated costs to sell through a charge to income. All of the Partnership's real estate owned, including insubstance foreclosures, was presumed held for sale. Effective January 1, 1996, the Partnership adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 supersedes SOP 92-3 and also requires that long-lived assets to be disposed of be reported at the lower of the carrying amount or fair value less costs to sell. 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. SFAS 121 requires that assets to be disposed of not be depreciated while they are held for disposal. 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 parties in a sales transaction. The Partnership considered all real estate owned as held for sale during 1997 and 1996 and continues to actively market all properties using third party brokers and in house sales staff. Management's intent is to attempt to sell all properties within one year, however, it is improbable that all of the Partnership's assets will actually be sold in that period. The Partnership considers collateral for a loan "insubstance" foreclosed only when the borrower actually surrenders the collateral to the creditor and the creditor receives physical possession of the borrower's assets. Loan Fees Origination fees and direct costs associated with lending are netted and amortized to interest income as an adjustment to yield over the respective lives of the loans using the interest method. F-17 Deferred Profit on Equity Participation Deferred profit on equity participation represents the Partnership's portion of equity from real estate loans/investments that was earned, but has not yet been paid by the borrower. Generally, revenue is recognized when collection of the deferred profit becomes assured. No deferred profit was recognized during 1995, 1996 and 1997. 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 income for generally accepted accounting principles ("GAAP") and taxable earnings: F-18
Current Temporary Differences Partnership Corporations Total (Unaudited) (Unaudited) (Unaudited) - -------------------------------------------------------------------------------- - ---------- GAAP loss for the year ended December 31, 1997 $(2,454,000) $ 2,577,000 $ 123,000 Provision for losses (350,000) (1,665,000) (2,015,000) Charge-offs deductible for tax purposes (119,000) --- (119,000) Accrued expenses deducted using the cash method --- (1,329,000) (1,329,000) Carrying costs expensed for books and capitalized for tax purposes --- 123,000 123,000 Depreciation (107,000) 158,000 51,000 Minority interest share of losses not taxable --- 353,000 353,000 Share of losses in unconsolidated investee not deductible 122,000 --- 122,000 Net operating loss carry forward --- (217,000) (217,000) - -------------------------------------------------------------------------------- - ---------- Taxable (loss) for the year ended December 31, 1997 $(2,908,000) $ --- $(2,908,000) ================================================================================ ========== Taxable loss allocable to General Partners $ --- ================================================================================ ========== Taxable loss per limited partner unit $ (75.09) ================================================================================ ==========
F-19 December 31, 1997 - ----------------------------------------------------------------- Cumulative Temporary Differences Partnership Corporations (Unaudited) (Unaudited) - ----------------------------------------------------------------- Provision for losses $ 1,934,000 $ 1,134,000 Charge-offs on foreclosures not deductible for tax purposes 2,113,000 --- Deferred profit previously taxable 289,000 --- Accrued expenses not deducted for tax purposes using the cash basis --- 286,000 Carrying costs expensed for books and capitalized for tax purposes --- 1,214,000 Depreciation (210,000) --- Net operating loss carryforwards --- 6,000 Interest income accrued for tax, not for GAAP 220,000 --- Minority interest in losses not taxable --- (362,000) Share of losses in unconsolidated investee not deductible 2,686,000 --- - ----------------------------------------------------------------- Total cumulative temporary differences $ 7,032,000 $ 2,278,000 =================================================================
The cumulative temporary partnership differences shown above, which total approximately $182.00 per limited partnership unit, should reverse when the Partnership liquidates its investments, assuming that future tax law changes do not preclude the Partnership from deducting these deferred items. There can be no assurance that these will be realized as future operations of the Partnership could result in greater or lesser amounts of allocable tax losses to the limited partners. In addition, the deductibility of taxable losses is dependent upon each limited partners' individual tax position. The reversal of these differences should result in future taxable income or loss per limited partnership unit which is less than or greater than the Partnership will report for financial statement purposes. Management believes that the share of losses in unconsolidated investee is a temporary difference since the Partnership holds approximately $4,679,000 in notes receivable from this investee, F-20 a portion of which could be charged to bad debt expense should this investee liquidate its single property holdings at current carrying values. In addition, as of December 31, 1997, the Partnership held approximately $3,929,000 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 $64.00 per limited partnership unit. The subsidiary corporations are subject to taxation and account for income taxes under an asset liability approach to establishing deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the corporations' 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, 1997, 1996 and 1995. Accordingly, no tax expense or benefit has been recorded by these corporations during the three years ended December 31, 1997. 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 GAAP income in excess of the temporary differences shown above. Some of the subsidiary corporations are cash basis taxpayers. Statements of Cash Flows For purposes of reporting cash flows, cash and cash equivalents includes 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 the weighted average number of limited partnership units outstanding of 38,729 in 1997, 1996 and 1995. F-21 Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and 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. Depreciation and Amortization Prior to the adoption of SFAS 121 on January 1, 1996, depreciation and amortization of real estate assets was charged to expense on a straight-line basis over the estimated useful lives of the assets; 31.5 years for buildings, or, in the case of tenant improvements, over the terms of the leases from 6 months to 14 years if shorter than the estimated useful lives. Revenue Recognition Revenue from rental income on real estate owned is recognized on a straight-line basis over the life of the lease when payments become due under operating leases. During 1997, 1996 and 1995, 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. Impact of Accounting Pronouncements Issued but not Adopted by the Partnership In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), was issued and is effective for fiscal years beginning after December 15, 1997. This statement requires companies to classify items of other comprehensive income by their nature in an income statement and display the accumulated balance of other income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. In June 1997, Statement of Financial Accounting Standards No.131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), was issued and is effective for fiscal years beginning after December 15, 1997. This statement establishes standards for segment reporting in the financial statements. F-22 The Partnership anticipates that the adoption of SFAS 130 and 131 will not result in disclosures that will be materially different from those presently required. (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. Accrued Interest Receivable, Accounts Payable and Accrued Liabilities and Interest Payable Carrying amounts approximate fair value because of the short-term maturity of these instruments, or they are due on demand. Real Estate Loans Receivable, Earning and Nonearning The net carrying value of the real estate loans receivable, earning and nonearning, is estimated to be fair value. Management believes these loans are impaired, and accordingly, the loans are carried at the fair value of the underlying real estate collateral. Real Estate Loans Receivable from Unconsolidated Investee - Earning and Nonearning The net carrying value of loans from unconsolidated investee is not estimable due to the uncertainty of the amounts and timing of future payments to be made. F-23 Notes Payable The carrying value of notes payable to nonaffiliates approximate fair value because the interest rates on these notes are approximately equal to current market rates for notes secured by similar assets. Notes Payable to Affiliates As discussed in note 5, the notes payable to affiliates are reduced by the cumulative minority interest losses to reflect the net outstanding payable to the affiliate. Due to the uncertainty of the amounts and timing of future payments to be made, the determination of fair value of these notes is not practical. (3) Allowance for Possible Loan Losses Changes in the allowance for possible loan losses are as follows:
1997 1996 1995 - ----------------------------------------------------------------- Balance at beginning of year $ 982,000 $ 957,000 $ 1,157,000 Loans charged-off --- --- (233,000) Provision for (recovery of) loan losses (268,000) 25,000 33,000 - ----------------------------------------------------------------- Balance at end of year $ 714,000 $ 982,000 $ 957,000 =================================================================
At December 31, 1997, the carrying value of loans that are considered to be impaired totaled $3,005,000 (of which $2,313,000 were on nonaccrual status). At December 31, 1997, the allowance for possible loan losses totaled $714,000. One of the loans receivable is recorded with a corresponding deferred profit liability of $289,000. There were five loans to an unconsolidated investee considered impaired for which there is no related allowance for possible loan losses at December 31, 1997. However, as discussed in note 5, the unconsolidated investee has recorded an allowance for losses of $4,063,000 and the Partnership's proportionate share of the losses in unconsolidated investee reflects the majority of this allowance. There was a F-24 $255,000 and $1,044,000 investment in impaired loans for the years ended December 31, 1997 and 1996, respectively. For the years ended December 31, 1997, 1996 and 1995, the Partnership recognized interest income on these impaired loans of $96,000, $169,000 and $13,000, respectively. There was no interest income recognized using the cash basis method of income during the years ended December 31, 1997, 1996 and 1995. If these loans had been current throughout their terms, interest income would have increased by approximately $369,000, $261,000 and $646,000 for the years ended December 31, 1997, 1996 and 1995, respectively. (4) Allowance for Possible Losses on Real Estate Owned Changes in the allowance for possible losses on real estate owned are as follows:
1997 1996 1995 - ----------------------------------------------------------------- Balance at beginning of year $ 4,101,000 $ 4,523,000 $ 4,013,000 Provision for losses --- 15,000 803,000 Real estate owned charged-off (1,747,000) (437,000) (293,000) - ----------------------------------------------------------------- Balance at end of year $ 2,354,000 $ 4,101,000 $ 4,523,000 =================================================================
(5) Transactions with Affiliates Under the provisions of the Partnership Agreement, CC is entitled to receive from the Partnership mortgage investment servicing fees for loans serviced equal to an annual rate of 1/4 of 1 percent of the committed amounts to be funded by the Partnership. The Partnership incurred $4,000, $4,000 and $48,000 of mortgage investment servicing fees payable to CC in 1997, 1996 and 1995 of which $4,000, $4,000 and $52,000 were paid in 1997, 1996 and 1995. F-25 As discussed in note 1, the Partnership owns 50 percent of the stock of two corporations which have not been consolidated in the accompanying financial statements, LCR and BKS. The balance of stock in these corporations is owned by Centennial Mortgage Income Fund II ("CMIF II"), an affiliate. LCR has invested in a joint venture, Silverwood Homes ("Silverwood") which is constructing homes. The Partnership has participated in making several loans to these corporations and this joint venture. Under the equity method of accounting, these loans are a component of the Partnership's investment in LCR and BKS, and therefore the Partnership has recorded losses by LCR and BKS as a reduction of the carrying value of these loans receivable. The Partnership wrote off its investment in and loans receivable from BKS during 1996 when its share of losses equaled its investment and the probability of recovery of any of its investment became unlikely. Accordingly, the December 31, 1996 consolidated balance sheet and all of the 1997 consolidated financial statements include only amounts related to the LCR and Silverwood loans and investments. F-26 A summary of these real estate loans receivable from unconsolidated investee as of December 31, 1997 is as follows:
Net Principal Losses Carrying Balance Offset Value - ----------------------------------------------------------------- Unsecured note receivable from LCR $ 1,250,000 $ 1,250,000 $ --- 50 percent interest in unsecured note receivable from LCR 1,055,000 1,055,000 --- 50 percent interest in development loan secured by a first trust deed from Silverwood 1,212,000 381,000 831,000 50 percent interest in construction loan secured by a first trust deed from Silverwood 239,000 --- 239,000 50 percent interest in construction loan secured by a first trust deed from Silverwood 171,000 --- 171,000 Construction loan secured by a first trust deed from Silverwood 752,000 --- 752,000 - ----------------------------------------------------------------- Totals $ 4,679,000 $ 2,686,000 $ 1,993,000
F-27 A summary of these real estate loans receivable from unconsolidated investee as of December 31, 1996 is as follows:
Net Principal Losses Carrying Balance Offset Value - ----------------------------------------------------------------- Unsecured note receivable from LCR $ 1,250,000 $ 1,250,000 $ --- 50 percent interest in unsecured note receivable from LCR 1,055,000 1,055,000 --- 50 percent interest in development loan secured by a first trust deed from Silverwood 977,000 256,000 721,000 50 percent interest in construction loan secured by a first trust deed from Silverwood 239,000 --- 239,000 50 percent interest in construction loan secured by a first trust deed from Silverwood 571,000 --- 571,000 - ----------------------------------------------------------------- Totals $ 4,092,000 $ 2,561,000 $ 1,531,000
F-28 The Partnership has not accrued its share of interest on the unsecured notes receivable from LCR which was approximately $715,000 and $533,000 as of December 31, 1997 and 1996, respectively. The Partnership has not accrued its share of interest on two of the Silverwood loans which was approximately $188,000 as of December 31, 1997. LCR has entered into a joint venture agreement entitled Silverwood with Home Devco, ("Home Devco"), an affiliate of the general partners of the Partnership, to construct and sell single- family homes at the project. During 1995, LCR contributed 179 lots which were zoned for single family homes in Lancaster, California to the joint venture as its initial capital contribution. As LCR has a 99.99 percent ownership interest in the joint venture, Silverwood has been consolidated with LCR. The consolidated balance sheets and statements of operations of LCR have not been consolidated in the Partnership's financial statements. The Partnership accounts for its investment in this corporation using the equity method. The following represents condensed financial information for LCR at December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995: F-29 LCR Development, Inc. Consolidated Balance Sheets
December 31, December 31, Assets 1997 1996 - ----------------------------------------------------------------- Cash $ 11,000 $ --- Restricted cash 20,000 10,000 Real estate owned 6,950,000 6,492,000 Less allowance for losses on real estate investments 4,063,000 3,898,000 - ----------------------------------------------------------------- Net real estate owned 2,887,000 2,594,000 Organization costs 1,000 1,000 - ----------------------------------------------------------------- $ 2,919,000 $ 2,605,000 ================================================================= Liabilities and Stockholders' Deficit - ----------------------------------------------------------------- Notes payable to affiliates: CMIF $ 4,679,000 $ 4,092,000 CMIF II 2,250,000 2,360,000 - ----------------------------------------------------------------- Total notes payable 6,929,000 6,452,000 Accounts payable and accrued liabilities 38,000 11,000 Interest payable to affiliates 1,377,000 845,000 Payable to affiliates 75,000 16,000 - ----------------------------------------------------------------- Total liabilities 8,419,000 7,324,000 Stockholders' deficit (5,500,000) (4,719,000) - ----------------------------------------------------------------- $ 2,919,000 $ 2,605,000 =================================================================
F-30 LCR Development, Inc. Consolidated Statements of Operations
Years ended December 31, 1997, 1996 and 1995 1997 1996 1995 - ----------------------------------------------------------------- Housing sales $ 834,000 $ 233,000 $ --- Cost of housing sales 852,000 238,000 --- Provision for losses on real estate owned 207,000 2,516,000 1,077,000 Selling and marketing expenses 131,000 184,000 --- General and administrative 64,000 162,000 (3,000) - ----------------------------------------------------------------- Operating loss (420,000) (2,867,000) (1,074,000) Interest expense (361,000) 151,000 --- - ----------------------------------------------------------------- Net (loss) $ (781,000) $(3,018,000) $ (1,074,000) ================================================================= Interest not included in share of losses (532,000) (336,000) (197,000) - ----------------------------------------------------------------- Allocable net loss $ (249,000) $(2,682,000) $ (877,000) ================================================================= Share of losses recorded $ (125,000) $(1,966,000) $ (438,000) =================================================================
Although the Partnership owns a 50 percent interest in LCR, it holds more than 50 percent of LCR's debt. Since the Partnership has made a $1,250,000 unsecured loan to LCR, the Partnership was allocated losses to the extent of the unsecured loan and remaining losses were allocated 50 percent to the Partnership and 50 percent to CMIF II during 1996. Additionally, the Partnership and CMIF II have not recorded interest income in connection with the $1,377,000 of accrued interest payable to affiliates by LCR and Silverwood. Accordingly, the Partnership has not recorded its share of losses from LCR to the extent that it represents this nonaccrued interest income. F-31
Difference of Allocation of Share of Losses 1997 - ----------------------------------------------------------------- The Partnership's 50 percent share of LCR's stockholders' deficit at December 31, 1997 $(2,750,000) Cumulative interest payable by LCR to the Partnership not accrued as income by the Partnership 689,000 Loans receivable considered as part of the Partnership's investment 4,679,000 Disproportionate loss allocation (625,000) - ----------------------------------------------------------------- Net loans receivable $ 1,993,000 =================================================================
As discussed above, the Partnership holds 50 percent of the stock of BKS with CMIF II. BKS owned a 283 acre residential tract in Bakersfield, California and foreclosed on this property on August 8, 1994. Bonds and taxes accrued on the property increased from $1,605,000 at December 31, 1995 to $2,085,000 at December 31, 1996. During 1995, BKS reduced its carrying value of the property and the Partnership recorded $1,364,000 as its share of BKS's net loss for the year. During 1996, the bond holders commenced foreclosure proceedings on the property. Management elected to abandon the property in 1996 due to the fact that land values had not increased. Therefore, during 1996, the Partnership recorded its $338,000 share of losses in connection with BKS which resulted in the Partnership's investment in BKS being reduced to a zero balance. Bonds, property taxes and note payable to affiliates are nonrecourse liabilities and, therefore, the Partnership and BKS have no contingent liability in excess of the property. The Partnership has no future obligation nor risk of additional losses related to this investee. F-32 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 $244,000, $273,000 and $221,000 for such services in 1997, 1996 and 1995, respectively. During 1997, 1996 and 1995, the Partnership maintained interest- bearing deposits with Sunwest Bank, an affiliate of the general partners. The balances at December 31, 1997, 1996 and 1995 were $2,000, $534,000 and $280,000, respectively. Interest earned on such deposits for 1997, 1996 and 1995 was $13,000, $22,000 and $5,000, respectively. In July 1997, the auto retail center in Corona, California was sold by Grand Plaza Auto Retail, Inc. ("Grand Plaza"), a consolidated subsidiary corporation of the Partnership. The Partnership owns an 86.7 percent interest in Grand Plaza with the balance of 13.3 percent owned by Centennial Mortgage Income Fund III ("CMIF III") an affiliate. Both the Partnership and CMIF III had made loans to Grand Plaza prior to the sale that exceeded the value of the assets held by it. CMIF III's share of these loans had been reduced by its share of Grand Plaza's operating losses, with the net amount having been shown as notes and interest payable to affiliates in the Partnership's financial statements. Grand Plaza realized $935,000 in net cash proceeds from the sale of the property. Grand Plaza charged off $1,665,000 of its $2,600,000 carrying value of the property against its allowance for losses on real estate owned and recorded a $6,000 loss on the sale. The net sales proceeds were used to pay a portion of the notes payable by Grand Plaza to the Partnership and CMIF III. CMIF III'S share of the proceeds was $123,000. F-33 The Partnership owns an interest in BNN, the corporation which owns the 19 acres in Sacramento, California jointly with an affiliated entity CMIF III. At December 31, 1997, the ownership percentages are 86.25 for the Partnership and 13.75 for CMIF III. The assets and liabilities of this corporation have been consolidated in the accompanying consolidated financial statements. Notes payable and interest payable to affiliates at December 31, 1997 and 1996 includes $473,000 and $452,000, respectively, and the Partnership had recorded $361,000 and $295,000, respectively, of minority interest in cumulative losses from this corporate joint venture against the note payable to affiliates balance as of the same dates. The notes payable to affiliates balance reflects CMIF III's share of a note payable by the corporation to the Partnership and CMIF III. The note bears interest at 15 percent fixed and matures August 1, 1998. (6) Real Estate Owned
Real estate owned consists of the following: December 31, December 31, 1997 1996 - ----------------------------------------------------------------- 1. Shopping Center in Upland, CA $ 4,628,000 $ 4,628,000 2. 19 acres in Sacramento, CA 2,822,000 2,822,000 3. Auto retail center in Corona, CA --- 2,600,000 4. Condominiums in Oxnard, CA 1,040,000 1,310,000 - ----------------------------------------------------------------- Total real estate owned $ 8,490,000 $ 11,360,000 =================================================================
At December 31, 1997 and 1996, property number 4 is accounted for as insubstance foreclosure under SFAS 118 as the Partnership does not currently hold legal title to this property, but the borrower has surrendered the collateral to the control of the Partnership. F-34 The Partnership leases its operating properties under several non- cancelable operating lease agreements. Future minimum rents to be received as of December 31, 1997, are as follows:
Years ending December 31, - ----------------------------------------------------------------- 1998 $ 638,000 1999 598,000 2000 473,000 2001 473,000 2002 473,000 Thereafter 2,501,000 - ----------------------------------------------------------------- $ 5,156,000 =================================================================
F-35 (7) Notes Payable
Notes payable consist of the following: December 31, December 31, 1997 1996 - ----------------------------------------------------------------- Note payable secured by shopping center in Upland, CA with interest and principal payments due monthly of $24,000; interest rate of 9.5 percent which may be adjusted based on changes in the LIBOR rate, maturing June 1, 2007 $ 2,421,000 $ 2,455,000 Note payable secured by 19 acres in Sacramento, CA with interest only payments due monthly; interest rate of 12 percent fixed, repaid in December, 1997 --- 900,000 - ----------------------------------------------------------------- Total notes payable $ 2,421,000 $ 3,355,000 =================================================================
F-36 (8) Contingencies Unbeknownst to the Partnership, on July 19, 1996, a default was entered against the Partnership for failure to respond to a complaint filed on July 17, 1995 in the San Bernardino Superior Court, entitled Henry Yong Lim et al -vs- Cardinal Security, et al and allegedly served on the Partnership in May 1996. As shown by the proofs of service, the complaint was served on the wrong party in 1996. The Partnership first became aware of its involvement in this lawsuit in September 1997 when it received copies of requests for entry of default judgement totaling approximately $1,000,000. The judgements involved damages and injuries allegedly suffered by the plaintiffs as a result of an altercation between the plaintiffs, other third parties and security guards employed by the Partnership at its shopping center in Upland, California. The request for judgement names Centennial Mortgage Income Fund Partnership as a defendant in this action. Since the Partnership was never served with the complaint and had no other way of knowing about this action, the Partnership has retained legal counsel to set aside the defaults and any default judgements which may have been entered, due to the lack of proper service and notice. The Partnership has tendered this action to its liability insurance carrier for legal and liability coverage. The default judgement has been set aside and the plaintiff's have appealed. Management intends to vigorously defend any future actions related to this matter. Management believes that even if the plaintiff's prevail in these actions, the Partnership's insurance coverage and/or the security company's insurance carrier should prevent the Partnership from suffering a material loss from these proceedings. There are no other material pending legal proceedings other than ordinary routine litigation incidental to the Partnership's business. Based on part of advice of legal counsel, management does not believe that the results of any of these matters will have a material impact on the Partnership's financial position or results of operations. F-37 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Schedule III Consolidated Real Estate Owned December 31, 1997
Initial Costs Capitalized Cost to Subsequent Partnership to Acquisition Real Estate Property Encumbrances Owned Improvements - -------------------------------------------------------------------------------- - ---------- Shopping Center in Upland $ 2,421,000 $ 4,903,000 $ (275,000) 19 acres in Sacramento --- 2,567,000 255,000 4 Condominiums in Oxnard --- 915,000 125,000 - -------------------------------------------------------------------------------- - ---------- $ 2,421,000 $ 8,385,000 $ 105,000 ================================================================================ ========== F-38 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Schedule III Consolidated Real Estate Owned (Continued) December 31, 1997 Gross Amount at Which Carried on Books (F3) Life On Which Real Estate Date Depreciation Property Owned Total Acquired Is Computed - -------------------------------------------------------------------------------- - ---------- Shopping Center in Upland $ 4,628,000 $ 4,628,000 August 1988 (F1) 19 acres in Sacramento 2,822,000 2,822,000 August 1991 None 4 Condominiums in Oxnard 1,040,000 1,040,000 December 1992 (F2) None - --------------------------------------------------------------- $ 8,490,000 $ 8,490,000 $ --- =============================================================== F-39 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Schedule III Consolidated Real Estate Owned (Continued) December 31, 1997 Prior to the adoption of SFAS 121, tenant improvements were depreciated over life of leases; buildings depreciated over 31.5 years; Insubstance foreclosure; Aggregate cost for Federal Income Tax purposes is $9,883,000 at December 31, 1997; Improvements are presented net of accumulated depreciation as required per SFAS 121.
See accompanying independent auditors' report. F-40 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Schedule III Consolidated Real Estate Owned (Continued) December 31, 1997
The following is a summary of consolidated real estate owned for the years ended December 31, 1997, 1996, and 1995. 1997 1996 1995 - -------------------------------------------------------------------------------- - ---------- Balance at beginning of year $ 11,360,000 $ 12,339,000 $ 13,705,000 Additions during period: Improvements --- 273,000 58,000 Deductions during period: Real estate sold (1,123,000) (150,000) (1,131,000) Real estate foreclosed --- (665,000) - --- Charge-offs (1,747,000) (437,000) (293,000) - -------------------------------------------------------------------------------- - ---------- Balance at year end $ 8,490,000 $ 11,360,000 $ 12,339,000 ================================================================================ ========= F-41 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Schedule IV
Mortgage Loans on Real Estate December 31, 1997 Interest Final Periodic Description Rate Maturity Date Payment Terms - -------------------------------------------------------------------------------- - ---------- Note secured by: First Trust Deed Interest only on Two-Unit Pad balloon payment in Corona, CA 11% fixed April 1, 1994 of $460,000 Second Trust Deed on Mini-Storage Interest only Facility in balloon payment Citrus Heights, CA 7% fixed November 1, 2000 of $608,000 Unsecured Note on Mini-Storage Facility in Citrus Heights, CA 12% fixed May 1, 1997 P + I monthly First Trust Deed $5,106 P + I on 17,789 s.f. monthly-balloon Auto Care Center in payment of San Bernardino, CA Prime + 3% August 1, 1998 $290,000 F-42 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Schedule IV Mortgage Loans on Real Estate (Continued) December 31, 1997 Interest Final Periodic Description Rate Maturity Date Payment Terms - -------------------------------------------------------------------------------- - ---------- Note secured by: Second Trust Deed Interest only on 32,341 s.f. balloon Retail Center payment of in Corona, CA 10% fixed June 30, 1998 $374,000 55 percent interest in P + I Second Trust Deed monthly on single-family balloon residence in payment of Sacramento, CA 5% fixed May 1, 1998 $150,000 Unsecured Note related to 179 lots in P + I due at Lancaster, CA 7.75% fixed June 30, 1998 maturity F-43 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Schedule IV Mortgage Loans on Real Estate (Continued) December 31, 1997 Interest Final Periodic Description Rate Maturity Date Payment Terms - -------------------------------------------------------------------------------- - ---------- Note secured by: 50 percent interest in unsecured note related to 179 lots in P + I due at Lancaster, CA 7.75% fixed June 30, 1998 maturity First Trust Deed Interest only on 7.83 acres balloon of vacant land payment of in Perris, CA 12% fixed June 1, 1993 $294,000 50 percent interest in First Trust Deed on 165 lots P + I due at in Lancaster, CA Prime + 1% August 1, 1999 maturity F-44 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Schedule IV Mortgage Loans on Real Estate (Continued) December 31, 1997 Interest Final Periodic Description Rate Maturity Date Payment Terms - -------------------------------------------------------------------------------- - ---------- Note secured by: 50 percent interest in First Trust Deed on four single family homes P + I due at in Lancaster, CA Prime + 1% July 1, 1998 maturity 50 percent interest in First Trust Deed on one single family home P + I due at in Lancaster, CA Prime + 1% July 1, 1998 maturity First Trust Deed on eight single family homes in P + I due at Lancaster, CA Prime + 1% July 1, 1998 maturity First Trust Deed on single family home in Lancaster, CA 9.5% fixed April 30, 2000 P + I monthly F-45 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Schedule IV Mortgage Loans on Real Estate (Continued) December 31, 1997 Principal Amount Face Carrying of Loan Subject Amount of Amount of to Delinquent Description Prior Liens Mortgages Mortgages (F1) Principal or Interest - -------------------------------------------------------------------------------- - ---------- Note secured by: First Trust Deed on Two-Unit Pad in Corona, CA None $ 461,000 $ 461,000 $ 461,000 Second Trust Deed on Mini-Storage 1st T.D. Facility in of Citrus Heights, CA $2,950,000 608,000 607,000 None Unsecured note 1st T.D. of on Mini-Storage $2,950,000 Facility in 2nd T.D. of Citrus Heights, CA $608,000 72,000 55,000 None 54% interest in a First Trust Deed on 17,780 s.f Auto Care Center in 544,000 San Bernardino, CA None (54% - 294,000) 288,000 None F-46 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Schedule IV Mortgage Loans on Real Estate (Continued) December 31, 1997 Principal Amount Face Carrying of Loan Subject Amount of Amount of to Delinquent Description Prior Liens Mortgages Mortgages (F1) Principal or Interest - -------------------------------------------------------------------------------- - ---------- Note secured by: Second Trust Deed on 32,341 s.f. 1st T.D. Retail Center of in Corona, CA $6,100,000 376,000 376,000 376,000 55 percent interest in Second Trust Deed on Single-Family 1st T.D. Residence in of 150,000 Sacramento, CA $278,000 (55% - 83,000) 85,000 85,000 Unsecured Note related to 179 lots in Lancaster, CA $3,266,000 1,250,000 1,250,000 1,250,000 F-47 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Schedule IV Mortgage Loans on Real Estate (Continued) December 31, 1997 Principal Amount Face Carrying of Loan Subject Amount of Amount of to Delinquent Description Prior Liens Mortgages Mortgages (F1) Principal or Interest - -------------------------------------------------------------------------------- - ---------- Note secured by: 50 percent interest in unsecured note related to 179 lots in 2,115,000 Lancaster, CA None (50% - 1,057,000) 1,055,000 1,055,000 First Trust Deed on 7.83 acres of vacant land in Perris, CA None 343,000 294,000 294,000 50 percent interest in First Trust Deed on 165 lots 3,266,000 in Lancaster, CA None (50% - 1,636,000) 1,212,000 1,212,000 F-48 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Schedule IV Mortgage Loans on Real Estate (Continued) December 31, 1997 Face Carrying Principal Amount of Loan Amount of Amount of Subject to Delinquent Description Prior Liens Mortgages Mortgages (F1) Principal or Interest - -------------------------------------------------------------------------------- - ---------- Note secured by: 50 percent interest in First Trust Deed on four single single family homes in 490,000 Lancaster, CA None (50% - 245,000) 239,000 239,000 50 percent interest in First Trust Deed on one single family home 804,000 in Lancaster, CA None (50% - 402,000) 170,000 170,000 First Trust Deed on eight single family homes in Lancaster, CA 870,000 752,000 - --- First Trust Deed on single family home in Lancaster, CA 90,000 90,000 - --- Loss from unconsolidated investee (2,686,000) (2,686,000) Unearned interest and discounts (401,000) (143,000) - -------------------------------------------------------------------------------- - ---------- $ 7,787,000 $ 3,847,000 $ 2,313,000 ================================================================================ ========== F-49 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Schedule IV Mortgage Loans on Real Estate (Continued) December 31, 1997 Aggregate cost for Federal Income Tax purpose is $8,258,000 at December 31, 1997. F-50 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Schedule IV Mortgage Loans on Real Estate (Continued) December 31, 1997 The following is a summary of activity for the years ended December 1997, 1996 and 1995. 1997 1996 1995 - -------------------------------------------------------------------------------- - ---------- Balance at beginning of year $ 3,297,000 $ 4,793,000 $ 6,641,000 Additions during period: New mortgage loans/disbursements 991,000 1,044,000 429,000 Other - Interest reserve, amortization and transfer from accrued interest 39,000 197,000 47,000 Deductions during period: Collections of principal (355,000) (163,000) (288,000) Charge-offs --- (270,000) (233,000) Losses from unconsolidated investees (125,000) (2,304,000) (1,803,000) - -------------------------------------------------------------------------------- - ---------- Balance at year end $ 3,847,000 $ 3,297,000 $ 4,793,000 ================================================================================ =========
See accompanying independent auditors' report. F-51 Exhibit 21 LCR DEVELOPMENT, INC. A California Corporation Index to Consolidated Financial Statements Consolidated Financial Statements Page Independent Auditors' Report ............................. F-53 Consolidated Balance Sheets -- December 31, 1997 and 1996............................... F-54 Consolidated Statements of Operations -- Years ended December 31, 1997, 1996 and 1995........... F-56 Consolidated Statements of Stockholders' Equity (Deficit) Years ended December 31, 1997, 1996 and 1995........... F-57 Consolidated Statements of Cash Flows -- Years ended December 31, 1997, 1996 and 1995........... F-58 Notes to Consolidated Financial Statements ............... F-60 F-52 INDEPENDENT AUDITORS' REPORT The Board of Directors LCR Development, Inc.: We have audited the consolidated balance sheets of LCR Development, Inc. and subsidiary (the "Company") as of December 31, 1997 and 1996 and the related statements of operations, stockholders' equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 LCR Development, Inc. and subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and has various notes payable scheduled to mature in 1998. These items raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. KPMG Peat Marwick LLP Orange County, California March 11, 1998 F-53 LCR Development, Inc. Consolidated Balance Sheets
December 31, December 31, Assets 1997 1996 - ----------------------------------------------------------------- Cash $ 11,000 $ --- Restricted cash 20,000 10,000 Real estate owned (note 5) 6,950,000 6,492,000 Less allowance for losses on real estate investments (note 4) 4,063,000 3,898,000 - ----------------------------------------------------------------- Net real estate owned 2,887,000 2,594,000 Organization costs 1,000 1,000 - ----------------------------------------------------------------- $ 2,919,000 $ 2,605,000 ================================================================= Liabilities and Stockholders' Equity (Deficit) - ----------------------------------------------------------------- Notes payable to affiliates: CMIF $ 4,679,000 $ 4,092,000 CMIF II 2,250,000 2,360,000 - ----------------------------------------------------------------- Total notes payable (note 7) 6,929,000 6,452,000 Accounts payable and accrued liabilities 38,000 11,000 Interest payable to affiliates 1,377,000 845,000 Payable to affiliates (note 6) 75,000 16,000 - ----------------------------------------------------------------- Total liabilities 8,419,000 7,324,000 F-54 LCR Development, Inc. Consolidated Balance Sheets (Continued)
Liabilities and December 31, December 31, Stockholders' Equity (Deficit) 1997 1996 - ----------------------------------------------------------------- Stockholders' equity (deficit) Common stock, no par value; 300 shares authorized; 300 shares issued and outstanding in 1997 and 1996 3,000 3,000 Accumulated deficit (5,503,000) (4,722,000) - ----------------------------------------------------------------- Total stockholders' equity (deficit) (5,500,000) (4,719,000) Contingencies (note 9) - ----------------------------------------------------------------- $ 2,919,000 $ 2,605,000 =================================================================
See accompanying notes to consolidated financial statements F-55 LCR Development, Inc. Consolidated Statements of Operations
Years ended December 31, 1997, 1996 and 1995 1997 1996 1995 - ----------------------------------------------------------------- Housing sales $ 834,000 $ 233,000 $ --- Cost of housing sales 852,000 238,000 --- Provision for losses on real estate owned (note 4) 207,000 2,516,000 1,077,000 Selling and marketing expenses 131,000 184,000 --- General and administrative 64,000 162,000 (3,000) - ----------------------------------------------------------------- Operating loss (420,000) (2,867,000) (1,074,000) Interest expense (note 5) 361,000 151,000 --- - ----------------------------------------------------------------- Loss before income taxes $ (781,000) $(3,018,000) $(1,074,000) - ----------------------------------------------------------------- Income taxes (note 8) --- --- --- - ----------------------------------------------------------------- Net loss $ (781,000) $(3,018,000) $(1,074,000) ================================================================= Net loss per common share -basic and diluted $ (2,603) $ (10,060) $ (3,580) ================================================================= Weighted average number of common shares outstanding 300 300 300 =================================================================
See accompanying notes to consolidated financial statements F-56 LCR Development, Inc. Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1997, 1996 and 1995 Total Stockholders' Common Accumulated Equity Stock Deficit (Deficit) - ----------------------------------------------------------------- Balance (deficit) at December 31, 1994 $ 3,000 $ (630,000) $ (627,000) Net loss --- (1,074,000) (1,074,000) - ----------------------------------------------------------------- Balance (deficit) at December 31, 1995 3,000 (1,704,000) (1,701,000) Net loss --- (3,018,000) (3,018,000) - ----------------------------------------------------------------- Balance (deficit) at December 31, 1996 3,000 (4,722,000) (4,719,000) Net loss --- (781,000) (781,000) - ----------------------------------------------------------------- Balance (deficit) at December 31, 1997 $ 3,000 $ (5,503,000) $ (5,500,000) =================================================================
See accompanying notes to consolidated financial statements F-57 LCR Development, Inc. Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995 1997 1996 1995 - ----------------------------------------------------------------- Cash flows from operating activities: Net loss $ (781,000) $(3,018,000) $(1,074,000) Adjustments to reconcile net loss to cash used in operating activities: Provision for possible losses 207,000 2,516,000 1,077,000 Changes in assets and liabilities: Decrease in organization costs --- 1,000 --- Increase in real estate owned (500,000) (1,237,000) (1,497,000) Increase in interest payable 532,000 336,000 197.000 Increase in accounts payable and accrued liabilities 27,000 10,000 1,000 Increase in payable to affiliates 59,000 15,000 1,000 - ----------------------------------------------------------------- Net cash used in operating activities (456,000) (1,377,000) (1,295,000) - ----------------------------------------------------------------- Cash flows from investing activities- Increase in restricted cash (10,000) (10,000) --- - ----------------------------------------------------------------- F-58 LCR Development, Inc. Consolidated Statements of Cash Flows (Continued) Years ended December 31, 1997, 1996 and 1995 1997 1996 1995 - ----------------------------------------------------------------- Cash flows from financing activities- Advances received on notes payable 477,000 1,387,000 1,293,000 - ----------------------------------------------------------------- Net increase (decrease) in cash 11,000 --- (2,000) Cash at beginning of year --- --- 2,000 - ----------------------------------------------------------------- Cash at end of year $ 11,000 $ --- $ --- ================================================================= Supplemental schedule of noncash investing and financing activities: Decrease in real estate owned and related allowance for losses due to sale of real estate owned $ 42,000 $ 8,000 $ ---
See accompanying notes to consolidated financial statements F-59 LCR DEVELOPMENT, INC. Notes to Consolidated Financial Statements December 31, 1997, 1996, 1995 (1) Summary of Significant Accounting Policies Organization During 1993, LCR Development, Inc. ("LCR") was formed by Centennial Mortgage Income Fund ("CMIF") and Centennial Mortgage Income Fund II ("CMIF II") to own and operate one of their real estate assets, 179 single family lots in Lancaster, California. During 1994, Silverwood Homes, a California general partnership ("Silverwood"), was formed between LCR and Home Devco, Inc. ("Home Devco") for the purpose of constructing single family homes at the real estate project located in Lancaster. LCR contributed the 179 single family lots to the partnership in exchange for a capital contribution credit of $2,571,594 and Home Devco contributed $100 in cash. As LCR has contributed a 99.9 percent interest, Silverwood has been consolidated in the accompanying consolidated financial statements. All significant intercompany balances and transactions including the aforementioned contribution, have been eliminated in consolidation. LCR is entitled to a cumulative priority interest in cash available for distribution from the sale of homes equal to $19,381 per lot. Home Devco is acting as the general contractor in the construction of homes at the project and is entitled to fifty percent of any cash available for distribution from the sale of homes after LCR has received distributions equal to its priority interest. Home Devco is also entitled to reimbursement of onsite supervision costs and certain general and administrative costs. 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. An impairment loss shall be measured as the amount by which the carrying amount of the assets exceed the fair value of the assets less costs to sell. F-60 Revenue Recognition LCR recognizes revenue from sales of real estate when construction is completed, an adequate down payment has been received and title to the property sold has been transferred to the buyer. Income Taxes LCR is subject to taxation and accounts for income taxes under an asset and liability approach to 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. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Reclassifications Certain amounts in the 1996 and 1995 consolidated financial statements have been reclassified to conform to the 1997 presentation. (2) Ability to Continue as a Going Concern LCR and Silverwood had $8,419,000 in total liabilities outstanding as of December 31, 1997 and had only $2,919,000 in net assets. Most of these liabilities are payable to CMIF and CMIF II who have periodically agreed to extend this debt over the past two years. It is uncertain as to whether CMIF and CMIF II will continue to grant such extensions. Without such future extensions, it is probable that LCR and Silverwood would lose substantially all of their assets through foreclosure and would be unable to continue operations. As of December 31, 1997 , Silverwood's real estate owned consisted of a single project in Lancaster, California with 157 undeveloped lots, 4 model homes, and 9 substantially completed production homes available for sale. F-61 Subsequent to December 31, 1997, Silverwood entered into an agreement to sell its remaining undeveloped lots to an unrelated party. The agreement provides that Silverwood will receive a cash downpayment of $500,000 and carry back a note from the buyer secured by a deed of trust on the property in the amount of $1,070,000. It is estimated that Silverwood will incur approximately $103,000 in selling costs in connection with the sale. If this transaction closes, all of the net proceeds from the sale, including the note receivable carried back from the buyer, will be used to partially repay the $2,154,000 note originally secured by 179 lots in Lancaster as shown in note 7. The remaining balance of the note will then be secured by a second trust deed on the remaining 8 homes in Phase II. Management believes that the remaining homes owned by Silverwood will be sold in 1998 and that 100% of the proceeds from such sales will be used to repay secured debt. There will be insufficient proceeds to repay all of the secured debt and there will be no source of funds for LCR and Silverwood to repay its unsecured debt. Accordingly, it is probable that LCR and Silverwood will cease operations during 1998 and be unable to repay all of its debt. Management believes that it has made adjustments in the financial statements to reflect the probable outcome of these uncertainties. (3) Fair Value of Financial Instruments Statement of Financial Accounting Standard No. 107 "Disclosures About Fair Value of Financial Instruments" ("SFAS 107"), requires that LCR discloses 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 LCR. The following methods and assumptions were used by LCR in estimating the fair value of each class of financial instrument. Cash and Restricted Cash The carrying amount, which is cost, is assumed to be the fair value. Notes Payable to Affiliates and Interest Payable to Affiliates The fair value is not determinable due to their related party nature and terms. F-62 Accounts Payable and Accrued Liabilities and Payable to Affiliates The carrying value is considered to be equal to the fair value of these liabilities as they are short-term in nature. (4) Allowance for Losses on Real Estate Owned Changes in the allowance for losses on real estate owned are as follows: 1997 1996 1995 - ----------------------------------------------------------------- Balance at beginning of year $3,898,000 $1,390,000 $ 313,000 Real estate owned charged-off (42,000) (8,000) --- Provision for losses 207,000 2,516,000 1,077,000 - ----------------------------------------------------------------- Balance at end of year $4,063,000 $3,898,000 $1,390,000 =================================================================
(5) Real Estate Owned Real estate owned consists of the following: 1997 1996 - ----------------------------------------------------------------- Residential lots held for development $5,340,000 $5,177,000 Model home complex 478,000 470,000 Production homes under construction and held for sale 1,132,000 845,000 - ----------------------------------------------------------------- Sub-total 6,950,000 6,492,000 Less: allowance for losses (4,063,000) (3,898,000) Net real estate owned $2,887,000 $2,594,000 =================================================================
F-63 Interest incurred, paid and capitalized during the three years ended December 31,1997 was as follows: 1997 1996 1995 - ----------------------------------------------------------------- Interest incurred $ 568,000 $ 517,000 $ 290,000 Interest capitalized (207,000) (366,000) (290,000) - ----------------------------------------------------------------- Interest expense $ 361,000 $ 151,000 $ --- ================================================================= Interest paid $ --- $ --- $ ---
(6) Transactions with Affiliates The general partners of CMIF and CMIF II beneficially own a controlling interest in Home Devco. Under the provisions of the Partnership Agreement, Home Devco is entitled to receive from LCR reimbursement of onsite supervision costs and certain general and administrative costs equal to 3 percent of budgeted gross proceeds or a maximum of $20,000 per month. Home Devco is entitled to receive a minimum fee of $7,500 per month under the agreement, as amended. LCR paid $60,000, $160,000 and $143,000 of these costs to Home Devco and affiliates for the years ended December 31, 1997, 1996 and 1995, respectively. Through December 31, 1997, fees paid have exceeded amounts payable under the agreement by $20,000. Management has temporarily reduced the amount being paid to Home Devco to $2,500 per month effective January 1, 1998. Funds have been advanced from CMIF and CMIF II to meet operating expenses and fund options on the prospective home sales. Once the sales have been completed, the advances are to be repaid from sales proceeds. The balances at December 31, 1997, 1996 and 1995 were $76,000, $16,000 and $1,000, respectively. F-64 (7) Notes Payable to Affiliates
Notes payable to affiliates consist of the following: December 31, December 31, 1997 1996 - ----------------------------------------------------------------- Unsecured note payable to CMIF and CMIF II related to 179 lots in Lancaster, CA with principal and interest payable at maturity interest rate of 7.75% fixed, maturing June 30, 1998 $ 2,115,000 $ 2,115,000 Unsecured note payable to CMIF related to 179 lots in Lancaster, CA with principal and interest payable at maturity; interest rate of 7.75% fixed maturing June 30, 1998 1,250,000 1,250,000 Note payable to CMIF and CMIF II secured by first trust deed on lots (originally 179 lots, 165 and 166 lots at December 31, 1997 and 1996, respectively) in Lancaster, CA with principal and interest due at maturity; interest at Prime + 1%; maturing August 1, 1999 2,154,000 1,748,000 Note payable to CMIF and CMIF II secured by first trust deed on 4 lots in Lancaster, CA with principal and interest due at maturity; interest at Prime +1%; maturing July 1, 1998 484,000 484,000 F-65 Notes payable to affiliates consist of the following: (continued) December 31, December 31, 1997 1996 - ----------------------------------------------------------------- Note payable to CMIF and CMIF II originally secured by first trust deed on 9 lots in Lancaster, CA with principal and interest due at maturity; interest at Prime + 1%; maturing July 1, 1998 174,000 855,000 Note payable to CMIF originally secured by first trust deed on 9 lots in Lancaster , CA with principal and interest due at maturity; interest at Prime + 1%; maturing July 1, 1998 752,000 --- - ----------------------------------------------------------------- Total notes payable $ 6,929,000 $ 6,452,000 =================================================================
Future principal payments to be paid as of December 31, 1997 are as follows:
Years ending December 31, - ----------------------------------------------------------------- 1998 $4,775,000 1999 2,154,000 - ----------------------------------------------------------------- $6,929,000 =================================================================
F-66 (8) Income Taxes LCR and Silverwood file separate Federal and State income tax returns. LCR and Silverwood have been consolidated for the following schedules. A reconciliation of income tax expense (benefit) at the Federal statutory rate of 34% to LCR's and Silverwood's provision for taxes is as follows:
1997 1996 1995 - ----------------------------------------------------------------- Income tax benefit at the statutory rate $ (266,000) $(1,026,000) $ (365,000) State tax benefit, net of Federal tax benefit (48,000) (184,000) (66,000) Valuation allowance 308,000 1,204,000 430,000 Other 6,000 6,000 1,000 - ----------------------------------------------------------------- Total --- --- --- =================================================================
As of December 31, 1997, LCR and Silverwood have net operating loss carryforwards of approximately $420,000, expiring at various dates through 2012. F-67 The components of the consolidated net deferred tax asset at December 31, 1997, 1996 and 1995 are as follows:
1997 1996 1995 - ----------------------------------------------------------------- Net operating loss carryforwards $ 156,000 $ 78,000 $ --- Provision for losses on real estate 1,629,000 1,563,000 557,000 Capitalized interest 38,000 (1,000) 46,000 Interest not deductible until paid 291,000 185,000 79,000 Section 263A expenses 80,000 61,000 --- - ----------------------------------------------------------------- 2,194,000 1,886,000 682,000 - ----------------------------------------------------------------- Less valuation allowance (2,194,000) (1,886,000) (682,000) - ----------------------------------------------------------------- $ --- $ --- $ --- =================================================================
The net change in the total valuation allowances for the years ended December 31, 1997 and 1996 was an increase of $308,000 and $1,204,000, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the losses of LCR and Silverwood, management has determined that part or all of the consolidated deferred tax assets may not be realized in the future. Accordingly, management has provided a valuation allowance against the value of the deferred tax asset. F-68 (9) Contingencies There are no material pending legal proceedings other than ordinary routine litigation incidental to LCR's business. Based on part of advice of legal counsel, management does not believe that the results of any of these matters will have a material impact on LCR's financial position or results of operations. F-69 EX-27 2 ART. 5 FDS FOR FISCAL YEAR END 12-31-97
5 1,000 YEAR DEC-31-1997 DEC-31-1997 1,018 0 3,847 714 0 1,027 0 0 10,397 9 2,421 0 0 0 7,555 10,397 0 992 0 0 0 0 378 123 0 123 0 0 0 123 3.18 3.18
-----END PRIVACY-ENHANCED MESSAGE-----