10-K 1 0001.txt 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, 2000 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 to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark whether if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. YES X NO PART I ITEM 1. BUSINESS. (a) General Development of the Business Centennial Mortgage Income Fund (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. As of December 31, 2000, the Partnership had reduced its remaining assets to $1,599,000, all of which was cash deposits with banks. There is a significant possibility that the Partnership will distribute this cash in a final liquidation prior to the end of calendar 2001. For additional information, see Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (b) Financial Information about Industry Segments Given that the Partnership is in the process of liquidation, the Partnership has identified only one operating business segment which is the business of asset liquidation. (c) Narrative Description of Business The Partnership was formed to invest in mortgage investments consisting of participating first mortgage loans, 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. From 1985 through 1990, the Partnership invested in numerous loans which were secured by real estate in California. Due to the long term recession and falling real estate market values in California during the early 1990's, many of the Partnership's loans became delinquent and management of the Partnership elected to foreclose, thereby increasing real estate owned balances. As a result, the Partnership became a direct investor in this real estate. The Partnership has managed its operating properties and completed certain development processes on its raw land over the last several years in an effort to make this real estate more marketable. The improving real estate markets and development of the Partnership's assets have enabled the Partnership to liquidate all of its non-cash assets. As of December 31, 2000, the Partnership's assets consisted of $1,599,000 in cash and cash equivalents. 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. The Partnership sold the remainder of its real estate owned during 1998. Real estate loans have also declined significantly in recent years. Real estate loans totaled $6,641,000 as of December 31, 1994 and had been reduced to only $541,000 as of December 31, 1999. The Partnership's final real estate loans were repaid during 2000. The liquidation of assets during 1997 and 1998 enabled the Partnership to make a $1,998,000 cash distribution to its limited partners in August 1998 and an additional $3,873,000 cash distribution to its limited partners in February 1999. Risks of the year 2000 Issue As discussed above, the Partnership is in the process of liquidating its remaining assets. As of December 31, 1999, the Partnership held only cash and cash equivalents, a single note secured by real estate, and $7,000 in other non-cash assets. In light of these circumstances, the Partnership made only the absolutely necessary modifications to existing software which were necessitated by the year 2000 issues. The cost of these modifications was less than $10,000. To date, the Partnership has experienced only minor computer related problems that are the result of the year 2000. None of these problems have caused any significant disruption to the Partnership's operations. The Partnership does not anticipate that it will encounter any significant problems in the coming months nor does it anticipate that it will be required to spend any significant amounts to correct these problems. 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; success of operating initiatives; adverse publicity; changes in business strategy; quality of management; 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. 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 both economic and non-economic 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 retained legal counsel to set aside the defaults and any default judgements which were entered, due to the lack of proper service and notice. The Partnership also tendered this action to its liability insurance carrier for legal and liability coverage. The default judgement was set aside and the plaintiff's appeal of the set aside ruling was denied by the Court. The Court also ruled that the prior jury found 0% liability as to the Partnership for non-economic damages and that the plaintiffs could only proceed to trial against the Partnership for recovery of economic damages. In December 2000, the Court ruled that the statute of limitations had passed and the plaintiffs were barred from continuing the lawsuit. Although this ruling is subject to appeal, no such appeal has been filed as of the date of this report. Based upon evidence presented at the prior trial, Management believes that these economic damages should not exceed $40,000. Management intends to vigorously defend any future actions related to this matter. Management believes that even if the plaintiff's appeal the court's recent decision and prevail in in their appeal, 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 pending legal proceedings. 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, 2000, there were approximately 4,713 holders of limited partnership units. (c) Partnership Distributions The Partnership paid a $1,998,000 cash distribution to limited partners in August 1998. This distribution equaled $51.59 per limited partnership unit. The Partnership paid a $3,873,000 cash distribution to limited partners in February 1999. This distribution equaled $100.00 per limited partnership unit. Based in part upon advice from legal counsel, management intends to refrain from making a final distribution until the possibility of any unforeseen legal action against the Partnership becomes remote. See Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ITEM 6. SELECTED FINANCIAL DATA.
(dollars in thousands, except per unit data) Years ended ------------------------------------------------------------------------------ 12/31/00 12/31/99 12/31/98 12/31/97 12/31/96 ------------------------------------------------------------------------------ CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenue $ 107 $ 157 $ 1,199 $ 992 $ 1,105 Net income (loss) (71) (115) 91 123 (2,514) Net income (loss) per limited partnership unit- basic and diluted. (1.83) (2.97) 2.35 3.18 (64.91) Cash distributions per limited partnership unit --- 100.00 51.59 --- --- CONSOLIDATED BALANCE SHEET DATA: Total loans before allowance for losses --- 541 782 3,847 3,297 Total real estate owned before allowance for losses --- --- --- 8,490 11,360 Total assets 1,599 1,672 6,035 10,397 11,394 Partners' equity 1,589 1,660 5,648 7,555 7,432
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 $(71,000) and $(1.83) for the year ended December 31, 2000 as compared to $(115,000) and $(2.97) for the year ended December 31, 1999 and $91,000 and $2.35 for the year ended December 31, 1998. As a result of the liquidation of most of the Partnership's remaining assets during 1998, there were many changes in the components of the Partnership's statements of operations for 1999 and 2000. 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, 2000 is included in the following paragraphs. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2000, the Partnership had $1,599,000 in cash and cash equivalents. During the year ended December 31, 2000, the Partnership's principal sources of cash were; i) $542,000 in principal collected on loans receivable; ii) $31,000 in current interest income on loans; and iii) $64,000 in interest income on interest bearing deposits. The Partnership's principal uses of cash during the year ended December 31, 2000 were for $150,000 in general and administrative costs. Future sources of cash are expected to be from interest earned on cash deposits. The Partnership had no unfunded loan commitments at December 31, 2000. The Partnership's principal capital requirements are now limited to general and administrative costs. These commitments are expected to be paid from existing cash balances. Effective with the third quarter of 1991, the Partnership had suspended making any cash distributions to partners due to a decline in liquidity and the uncertainty of the cash requirements for existing and potential real estate owned. Pursuant to the Partnership Agreement, 60 months after the closing of the offering, cash proceeds from mortgage investments are no longer available for reinvestment by the Partnership. Through the latter part of 1997, the general partners believed that the cash proceeds from mortgage reductions and the sale of real estate owned should be retained by the Partnership until such time as it was assured that it had sufficient cash to fulfill any potential operating requirements. Due to the substantial real estate and loan receivable balances, these potential operating costs were considered to be very significant. As a result of the substantial decrease in loans and real estate owned which occurred during 1997, the general partners determined that the Partnership could make a $1,998,000 distribution to its limited partners in August 1998. As a result of the substantial sales activity which occurred in the fourth quarter of 1998, the general partners declared and paid an additional $3,873,000 cash distribution to limited partners in February 1999. The general partners have had discussions with legal counsel regarding the amount of cash balances that would be prudent to be retained by the Partnership at this time. In light of the substantial amount of real estate that the Partnership has held an interest in over the years, there is always the potential for future litigation to arise, particularly in the area of toxic contamination. Although the general partners are not aware of any threatened litigation, or litigation that is likely to arise, they have determined that the Partnership should retain at least $1,000,000 in cash balances to be available to defend the Partnership in any future litigation which may arise. It is expected that these cash balances will be retained until such time as legal counsel advises the general partners that the potential for any future litigation is remote. Assuming no future litigation arises, the general partners anticipate that the Partnership will make a cash distribution to limited partners of approximately $600,000 during the first half of 2001 with a final distribution sometime during the fourth quarter of 2001. RESULTS OF OPERATIONS The Partnership's non-cash assets declined from $9,379,000 as of December 31, 1997 to only $1,097,000 as of December 31, 1998. The Partnership's non-cash assets declined again to $548,000 as of December 31, 1999 and to $-0- as of December 31, 2000. The Partnership reported profits for 1998. However, as a result of the declining non-cash assets and the costs of administering a publicly held partnership, the Partnership reported losses of $71,000 and $115,000 during calendar 2000 and 1999, respectively, and expects to report another loss in 2001. The substantial reduction in non-cash assets during 1998 caused many changes in the Partnership's results of operations as discussed below. Interest income on loans to affiliates, including fees was $-0- for 2000, $3,000 for 1999 and $47,000 for 1998. This income is related to earning loans made to the Silverwood joint venture, which was constructing homes in Lancaster, California. The decrease from 1998 to 1999 resulted from the payoff of the last earning loan in March 1999. Interest income on loans to nonaffiliates, including fees, was $31,000, $49,000 and $356,000 during the years ended December 31, 2000, 1999 and 1998, respectively. During 1998, the Partnership received payments in full, or nearly in full, on three loans that had previously been classified as impaired and on which interest had not been fully accrued in prior periods. As a result, the Partnership recorded $321,000 in interest income on these loans that had been earned in prior periods but not accrued as income. This caused interest income on loans to nonaffiliates , including fees to be abnormally high during 1998. In October 1998, the Partnership received two loans in connection with the payoff of certain loans to Silverwood Homes, an unconsolidated investee discussed in more detail below. These new loans were the principal source of interest income on loans to nonaffiliates during 2000 and 1999. The decrease in 2000 is attributable to the loans being repaid in October 2000. The following sections entitled "Nonaccrual, Nonperforming Loans and Other Loans to Affiliates" and "Real Estate Owned" provide a detailed analysis of assets held during 1998, 1999 and 2000. Nonaccrual, Nonperforming Loans and Other Loans to Affiliates Loans on nonaccrual status during the year ended December 31, 1998 and 1999 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 provided 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 placed the loan on nonaccrual. The principal balance and nonaccrued interest at December 31, 1997 were $376,000 and $144,000 respectively. The Partnership had recorded a reduction of $62,000 against the $376,000 principal balance as of December 31, 1997 which represented previously nonaccrued interest and had 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 that was senior to the Partnership's note, an allowance for possible losses of $25,000 was also recorded against this note during 1997. The senior note holder commenced foreclosure proceedings and the borrower filed for protection under bankruptcy laws. Accordingly, the Partnership charged off the balance of this note during 1998 against the $289,000 deferred profit and $25,000 previously recorded allowance for possible losses. The Partnership released its lien on the property in 1999 for $25,000 in connection with the refinance of the property through bankruptcy proceedings. The Partnership recorded this $25,000 payment, which represented a bad debt recovery, as other income in 1999. 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 was 77 percent. Due to the loss of a major tenant, the borrower was unable to make full monthly interest payments in accordance with the original note terms. Management worked out a forbearance agreement with the borrower for payments equal to the net cash flow from the property. The remaining interest due was placed on nonaccrual. The Partnership's share of the principal balance and nonaccrued interest at December 31, 1997 was $461,000, and $142,000, respectively. The Partnership had recorded a $365,000 allowance for possible losses against this note. During 1998, the Partnership accepted a $211,000 payment on this note as payment in full in connection with the sale of the property. As a result, the Partnership reversed $115,000 of the previously recorded allowance for possible losses and charged off the $250,000 balance against the allowance. 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 elected to not foreclose on this property and had established an allowance for losses of $294,000, to fully reserve the carrying value of the note as of December 31, 1997. The principal balance and nonaccrued interest at December 31, 1997 were $294,000 and $208,000, respectively. During 1998, the Partnership charged off the $294,000 balance of the note against the previously recorded allowance for possible losses. Loans to Unconsolidated Investee During 1994 the Partnership acquired a 50% interest in LCR Development, Inc., an unconsolidated subsidiary. The balance of LCR is owned by Centennial Mortgage Income Fund II ("CMIF II "), an affiliate. LCR was formed in order to take title to 179 residential lots in Lancaster, California through foreclosure of a $1,250,000 secured loan held by the Partnership and a $2,115,000 secured loan held jointly by the Partnership and CMIF II. The Partnership assigned its interest in the $2,115,000 note to LCR in exchange for a new note payable by LCR to the Partnership and CMIF II. LCR subsequently: i) took title to the 179 lots through foreclosure; ii) entered into a joint venture with Home Devco, Inc. named Silverwood Homes ("Silverwood"); and iii) contributed the 179 lots to Silverwood. The principal purpose of the joint venture was to construct homes on the property. From 1995 through 1998, the Partnership and CMIF II made several construction and development loans to Silverwood and Silverwood constructed 22 homes and sold 21 homes on the property . Originally, it was anticipated that homes would be constructed on all 179 lots, that there would be excess cash from the home sales after paying off the development and construction loans, and this excess cash would be used to repay LCR for its investment in the joint venture. LCR would then be able to use this anticipated excess cash from Silverwood's home sales to repay the Partnership and CMIF II for the $1,250,000 and $2,115,000 loans. LCR reported substantial net losses, principally due to the continuing decline in value of the lots, from 1995 through 1997. As of December 31, 1997, the Partnership had reduced its share of the carrying value of the$1,250,000 and $2,115,000 loans to $-0- and had reduced the carrying value of $2,374,000 in development and construction loans by $381,000 to $1,993,000. These reductions were made by applying the Partnership's share of losses from unconsolidated investee that it had recorded, against the carrying value of the loans. During 1998, Silverwood stopped constructing homes and all but one of the remaining homes that had been constructed were sold. Additionally, all of the undeveloped lots were sold. The Partnership funded additional advances of $209,000 on the development and construction loans in 1998. The Partnership also recorded an additional $96,000 in losses from unconsolidated investee during 1998 and received cash payments totaling $1,422,000 against these loans. Additionally, the Partnership received two notes receivable totaling $584,000 from an unaffiliated party as a partial repayment of the development loan in connection with the sale of the remaining 157 lots in October 1998. These new notes were secured by the 157 lots sold. These transactions left the Partnership with a net carrying value of its loans to Silverwood of $100,000 as of December 31, 1998. During 1999, Silverwood sold its final home and made payments totaling $100,000 to the Partnership out of cash generated from this sale. Real Estate Owned The Partnership liquidated its remaining real estate owned during 1998. A description of the Partnership's principal real estate owned and loan classified as insubstance foreclosure during the year ended December 31, 1998 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 was encumbered by a note of $2,421,000, secured by a first trust deed on the property. The Partnership had recorded a $921,000 allowance for losses related to this property as of December 31, 1997. The Partnership reversed $145,000 of this provision during the first quarter of 1998. The property generated approximately $506,000 and $431,000 in net operating income before debt service during 1997 and 1996, respectively. This property was sold in November 1998. The sale generated net cash proceeds of $3,858,000 after selling costs and resulted in a $6,000 gain on sale. The $2,421,000 debt secured by the property was repaid from the sales proceeds. 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. 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. The Partnership recorded additional provisions for losses totaling $445,000 during the first three quarters of 1998. In December 1998, this property was sold for $1,600,000, net of selling costs. The sale agreement required that the Partnership establish a $300,000 escrow account out of the sales proceeds from which the buyer could withdraw amounts to pay for certain specified development work to be done to the property. All of the funds in this escrow account were used to pay for development costs incurred during 1999 and the Partnership now has no further obligations related to this property. The sale resulted in a $57,000 gain on sale. 12 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 then controlled the property and received 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 during the first quarter of 1998. The 1998 sales generated approximately $762,000 in net cash proceeds to the Partnership and resulted in a gain on sale of $21,000. 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 on interest-bearing deposits represents interest earned on Partnership funds invested, for liquidity, in time certificate and money market deposits. Interest earned on interest-bearing deposits was $64,000 in 2000, $67,000 in 1999 and $83,000 in 1998. The decrease in 1999 was primarily attributable to a decline in average cash balances held by the Partnership which resulted from the $3,873,000 distribution to limited partners in February 1999. Income from Operations of Real Estate Owned As discussed above, the Partnership liquidated its remaining real estate owned during 1998. Accordingly, there was no income from operations of real estate owned during 1999 or 2000. Income from operations of real estate owned for 1998 consists of operating revenues of $602,000 from the Upland Shopping Center which was sold in November 1998. Provision for Possible Losses The provision for possible losses was $30,000 in 2000 and $155,000 in 1998. There was no comparable provision during 1999. The 2000 provision relates to a discounted payoff of the remaining loans held by the Partnership. The 1998 provision is comprised of reversals totaling $290,000, $145,000 of which was on two loans which were repaid during 1998, and $145,000 of which was related to the Upland Shopping center which was sold in 1998. These reversals were offset by an additional provision of $445,000 which was recorded against the 19 acres in Sacramento. 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 unconsolidated investees was $96,000 for 1998. There was no comparable amount reported in 2000 or 1999. The 1998 share of losses consist primarily of operating losses from the sale of homes and finished lots recorded by LCR. The Partnership's remaining investment in and loans receivable from this unconsolidated investee has been reduced to $-0- as of December 31, 1999 and 2000. As discussed above, the Partnership liquidated its remaining real estate owned during 1998. Accordingly, the only operating expenses from operations of real estate owned during 1999 were $3,000 in refunds of common area maintenance billings related to the Upland Shopping Center which were determined after the 1998 financials had been issued. Operating expenses from operations of real estate owned were $142,000 for 1998. These expenses were associated with the Upland Shopping Center. The decrease in 1999 can be attributed to the sale of the Upland Shopping Center in November 1998. Operating expenses from operations of real estate owned paid to affiliates were $-0- for 2000 and 1999 and $30,000 for 1998. The expenses consist of property management fees paid to affiliates of the general partners. The decrease in 1999 is due to the sale of the Upland Shopping center in November 1998. Expenses associated with non-operating real estate owned were $-0- in 2000, $1,000 in 1999 and $125,000 in 1998. 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 $99,000 during 1998. The decrease for 1999 is due the sale of the Partnership's remaining real estate during 1998. Depreciation and amortization expense for 1998 consists of $7,000 in depreciation on office furniture and equipment which were fully depreciated at the end of 1998. Interest expense was $245,000 for 1998 and represented interest related to the underlying debt on the Upland Shopping Center. The decrease for 1999 is attributable to the sale of the Upland Shopping center and the associated repayment of debt which occurred in November 1998. General and administrative expenses, affiliates totaled $83,000 for 2000, $162,000 for 1999 and $286,000 for 1998. These expenses are primarily salary allocation reimbursements paid to affiliates for the management of the Partnership's assets. The 1998 amount included $74,000 in accrued severance pay while the 1999 amount included only $25,000 in accrued severance pay. The balance of the decrease for 1999 is primarily attributable to a layoff of the majority of the employees of the general partner in March 1999 which was in response to the substantial decline in assets being managed by the general partners. The further decrease in 2000 is partly attributable to this layoff which did not occur until part way through 1999 and partly due to the further reduction of time spent on administering the Partnership. General and administrative expenses, nonaffiliates totaled $65,000 for 2000, $107,000 for 1999 and $87,000 for 1998. The decrease for 2000 is primarily attributable to a decrease in accounting fees and investor reporting costs. The increase for 1999 is primarily attributable to an increase in accounting fees and investor reporting costs. Mortgage investment servicing fees paid to affiliates were $2,000 in 1998. No fees of this nature were paid in 1999 or 2000. These fees consist of amounts paid to Centennial Corporation for servicing the Partnership's loan portfolio. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available for sale security or a foreign-currency-denominated forecasted transaction. Under SFAS 133, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. The adoption of this pronouncement by the Partnership had no effect on its financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Since the Partnership does not invest in any derivative financial instruments or enter into any activities involving foreign currencies, its market risk associated with financial instruments is limited to the effect that changing domestic interest rates might have on the fair value of its bank deposits. As of December 31, 2000, the Partnership held only fixed rate bank deposits with carrying values totaling $1,599,000. The bank deposits all had maturities of less than ninety days. The fair value of these assets was estimated to be equal to their carrying values as of December 31, 2000. Management currently intends to hold the remaining fixed rate assets until their respective maturities. Accordingly, the Partnership is not exposed to any material cash flow or earnings risk associated with these assets. Given the relatively short-term maturities of these assets, management does not believe the Partnership is exposed to any significant market risk related to the fair value of these assets. The Partnership had no interest bearing indebtedness outstanding as of December 31, 2000. Accordingly, the Partnership is not exposed to any market risk associated with its liabilities. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Consolidated Financial Statements and Schedule 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 62 General Partner John B. Joseph is currently Vice Chairman of the Board of Directors and Vice President of Centennial Corporation. He has held these positions since 1983. Mr. Joseph also has served, in the following capacities during the past five years: he was on the board of directors for West Coast Bancorp ("WCB"), a publicly held bank holding company operating in California from its inception in 1981 through February 1999; he was Chairman of the Board of Directors of WCB since its inception in 1981 and CEO from April 1991 until 1998. Mr. Joseph has also been general partner of various public and private limited partnerships engaged in real estate development and lending activities. Mr. Joseph has 30 years of experience in asset management in both securities and real estate. Mr. Joseph has worked in all areas of real estate. In the past, Mr. Joseph has been engaged in the syndication and management of over $100 million worth of income property, including industrial complexes, shopping centers, business centers, office buildings, commercial properties and residential units. Ronald R. White Age 54 General Partner Ronald R. White is currently President and CEO of Centennial Corporation. He has held these positions since 1983. He was also Executive Vice President and Vice Chairman of the Board of Directors of WCB until 1998. Mr. White served in these capacities since April 1987. Mr. White also serves, or has served, in the following capacities during the past five years: general partner of various public and private limited partnerships engaged in real estate development and lending activities. Mr. White's career spans the financial and management fields in both securities and real estate. Mr. White has 28 years of experience in asset management. In the past, Mr. White has been engaged in the syndication and management of over $100 million worth of income property including industrial complexes, shopping centers, business centers, office buildings, commercial properties, and residential units. Centennial Corporation ("CC"), a privately held corporation, whose stock is owned by affiliates of Ronald R. White and John B. Joseph, was voted in as new general partner in 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, 2000 ---------------------------------------------------------------------------- Operating Stage: Application and An amount up to a maximum of 3 percent $ --- commitment fees of the gross proceeds of the offering - the general on any single mortgage investment, and partner or an aggregate maximum of 7 percent affiliates of the gross proceeds of the offering, payable to the general partners or affiliates. The application and commitment fees are payable solely from borrowers and prospective borrowers and not directly from the proceeds of the offering. General partners' The general partners or affiliates $ 83,000(1) reimbursable shall be entitled to reimbursement expenses - general for certain expenses, subject to partner or the conditions of the Partnership affiliates Agreement General partners' A 5 percent interest in cash flow $ --- interest in cash available for distribution for any distributions year until all limited partnership - general unit holders have received an amount partners or equal to a 12 percent non-cumulative affiliates 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 maximum amount $ --- investment funded or to be funded by the Partnership servicing fees on mortgage investment serviced by CC Repayment Stage: General partners' One percent of mortgage reductions $ --- share of until all limited partners have mortgage received an amount equal to their reductions adjusted invested capital and cumulative - general distributions (including cash flow partners or available for distribution) equal to a affiliates 12 percent annual return with respect to their adjusted invested capital, and 15 percent of the balance of any mortgage reductions
(1) Such reimbursable expenses include salaries and related salary expenses for services which could be performed directly for the Partnership by independent parties such as legal, clerical, accounting, financial reporting, governmental reporting, transfer agent, data processing and duplication services. Such reimbursement of expenses will be made regardless of whether any distributions are made to the limited partners. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Security Ownership of Certain Beneficial Owners No persons are known by the Partnership to own beneficially more than 5 percent of the limited partnership units at December 31, 2000. (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 Schedule attached hereto. (a)(3) - Exhibits. (3) & (4) Articles of Incorporation and Bylaws The Amended Limited Partnership Agreement Incorporated by reference to Exhibit A to the Partnership's Prospectus contained in the Partnership's registration Statement on Form Form S-11 (Commission File No. 0-22520) Dated June 8, 1984, as supplemented and filed under the Securities Act of 1933 (b)(4) - Reports on Form 8-K. None. Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A California Limited Partnership By:/s/John B. Joseph _________________________________ John B. Joseph General Partner March 30, 2001 By:/s/Ronald R. White _________________________________ Ronald R. White General Partner March 30, 2001 By: CENTENNIAL CORPORATION General Partner /s/John B. Joseph _________________________________ John B. Joseph Executive Vice President March 30, 2001 /s/Ronald R. White _________________________________ Ronald R. White President March 30, 2001 /s/Joel H. Miner _________________________________ Joel H. Miner Chief Financial Officer March 30, 2001 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, 2000, 1999 and 1998 (With Independent Auditors' Report Thereon) F-1 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Items 8, 14(a)(1) and 14(a)(2) Index to Consolidated Financial Statements and Schedule Consolidated Financial Statements Page Independent Auditors' Report F-3 Consolidated Balance Sheets -- December 31, 2000 and 1999 F-4 Consolidated Statements of Operations -- Years ended December 31, 2000, 1999 and 1998 F-5 Consolidated Statements of Partners' Equity -- Years ended December 31, 2000, 1999 and 1998 F-6 Consolidated Statements of Cash Flows -- Years ended December 31, 2000, 1999 and 1998 F-7 Notes to Consolidated Financial Statements F-9 Schedule Schedule IV - Mortgage Loans on Real Estate F-21 All other schedules are omitted as the required information is inapplicable, or the information is presented in the consolidated financial statements or notes thereto. F-2 INDEPENDENT AUDITORS' REPORT To the General Partners Centennial Mortgage Income Fund: 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 schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Centennial Mortgage Income Fund and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG LLP Orange County, California February 26, 2001 F-3 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Balance Sheets December 31, 2000 and 1999
ASSETS 2000 1999 ------------------------------------------------------------------------------ Cash and cash equivalents $ 1,599,000 $ 1,124,000 Real estate loans receivable, earning --- 541,000 Due from unconsolidated investee --- 7,000 ------------------------------------------------------------------------------ $ 1,599,000 $ 1,672,000 ============================================================================== LIABILITIES AND PARTNERS' EQUITY ------------------------------------------------------------------------------ Accounts payable and accrued liabilities 10,000 12,000 ------------------------------------------------------------------------------ Total liabilities 10,000 12,000 ------------------------------------------------------------------------------ Partners' equity (deficit) -- 38,729 limited partnership units outstanding in 2000 and 1999 General partners (132,000) (132,000) Limited partners 1,721,000 1,792,000 ------------------------------------------------------------------------------ Total partners' equity 1,589,000 1,660,000 Contingencies (note 7) ------------------------------------------------------------------------------ $ 1,599,000 $ 1,672,000 ==============================================================================
See accompanying notes to consolidated financial statements F-4 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Operations Years ended December 31, 2000, 1999 and 1998
2000 1999 1998 ---------------------------------------------------------------------------- REVENUE: Interest on loans to affiliates, including fees (note 5) $ --- $ 3,000 $ 47,000 Interest on loans to nonaffiliates, including fees 31,000 49,000 356,000 Interest on interest-bearing deposits (note 5) 64,000 67,000 83,000 Gain on sale of property --- --- 84,000 Income from operations of real estate owned --- --- 602,000 Other 12,000 38,000 27,000 ------------------------------------------------------------------------------ Total revenue 107,000 157,000 1,199,000 ------------------------------------------------------------------------------ EXPENSES: Provision for losses (notes 3 and 4) 30,000 --- 155,000 Share of losses in unconsolidated investee (note 5) --- --- 96,000 Operating expenses from operations of real estate owned --- 3,000 142,000 Operating expenses from operations of real estate owned paid to affiliates (note 5) --- --- 30,000 Expenses associated with non-operating real estate owned --- 1,000 125,000 Depreciation and amortization expense --- --- 7,000 Interest expense --- --- 245,000 General and administrative, affiliates (note 5) 83,000 162,000 286,000 General and administrative, nonaffiliates 65,000 107,000 87,000 Mortgage investment servicing fees paid to affiliates (note 5) --- --- 2,000 ------------------------------------------------------------------------------ Total expenses 178,000 273,000 1,175,000 ------------------------------------------------------------------------------ Income (loss) before minority interest (71,000) (116,000) 24,000 Minority interest (note 5) --- 1,000 67,000 ------------------------------------------------------------------------------ Net income (loss) $ (71,000) $ (115,000) $ 91,000 ============================================================================== Net income (loss) per limited partnership unit-basic and diluted $ (1.83) $ (2.97) $ 2.35 ==============================================================================
See accompanying notes to consolidated financial statements F-5 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Partners' Equity Years ended December 31, 2000, 1999 and 1998
Total General Limited Partners' Partners Partners Equity --------------------------------------------------------------------------- Balance (deficit) at December 31, 1997 (525,000) 8,080,000 7,555,000 Net income --- 91,000 91,000 Distributions to limited partners --- (1,998,000) (1,998,000) Reduction in general partner deficit capital account (note 1) 393,000 (393,000) --- --------------------------------------------------------------------------- Balance (deficit) at December 31, 1998 (132,000) 5,780,000 5,648,000 Net loss --- (115,000) (115,000) Distributions to limited partners --- (3,873,000) (3,873,000) --------------------------------------------------------------------------- Balance (deficit) at December 31, 1999 $ (132,000) $ 1,792,000 $ 1,660,000 Net loss --- (71,000) (71,000) --------------------------------------------------------------------------- Balance (deficit) at December 31, 2000 $ (132,000) $ 1,721,000 $ 1,589,000 ==========================================================================
See accompanying notes to consolidated financial statements F-6 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows Years ended December 31, 2000, 1999 and 1998
2000 1999 1998 ------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (71,000) $ (115,000) $ 91,000 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Amortization of unearned loan fees --- --- (5,000) Depreciation and amortization --- --- 7,000 Provision for losses 30,000 --- 155,000 Interest accrued to principal on loans to affiliates (31,000) --- (9,000) Minority interest --- (1,000) (67,000) Loss (gain) on sale of real estate owned --- --- (84,000) Share of losses in unconsolidated investees --- --- 96,000 Changes in assets and liabilities: Decrease in accrued interest receivable --- --- 5,000 (Increase) decrease in other assets --- 306,000 (275,000) Increase (decrease) in accounts payable and accrued liabilities (2,000) (373,000) 365,000 Decrease in interest payable to affiliates on notes secured by real estate --- --- (39,000) ------------------------------------------------------------------------------ Net cash provided by (used in) operating activities (74,000) (183,000) 240,000 ------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Principal collected on loans made to customers, net of amounts recorded as income in current period 542,000 142,000 932,000 Principal collected on loans made to affiliates --- 100,000 1,422,000 Advances on loans made to customers --- (1,000) (20,000) Advances on loans made to affiliates --- --- (209,000) Proceeds from sale of real estate owned --- --- 6,220,000 Capital expenditures for real estate owned --- --- (300,000) (Increase) decrease in due from unconsolidated investee 7,000 2,000 58,000 ------------------------------------------------------------------------------ Net cash provided by investing activities 549,000 243,000 8,103,000 ------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements F-7 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows(Continued) Years ended December 31, 2000, 1999 and 1998 2000 1999 1998 ----------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Advances on notes payable to affiliates --- --- 136,000 Principal payments on notes payable --- --- (2,421,000) Principal payments on notes payable to affiliates --- (1,000) (140,000) Distributions to limited partners --- (3,873,000) (1,998,000) ------------------------------------------------------------------------------ Net used in financing activities --- (3,874,000) (4,423,000) ------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 475,000 (3,814,000) 3,920,000 Cash and cash equivalents at beginning of year 1,124,000 4,938,000 1,018,000 ------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 1,599,000 $ 1,124,000 $ 4,938,000 ============================================================================== Supplemental schedule of cash flow information - cash paid during the year for interest $ --- $ --- $ 245,000 ------------------------------------------------------------------------------ Supplemental schedule of noncash investing and financing activities: Decrease in deferred profit on equity participation and real estate loans resulting from foreclosure $ --- $ --- $ 289,000 Decrease in allowance for possible losses on real estate loans and real estate owned as a result of sales and chargeoffs --- --- 3,223,000 Receipt of notes receivable as partial repayment of note receivable --- --- 584,000
See accompanying notes to consolidated financial statements F-8 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Notes to Consolidated Financial Statements December 31, 2000, 1999, and 1998 (1) SUMMARY 0F SIGINFICANT 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, 2000, all of the loans secured by operating properties have been repaid to the Partnership. However, during the early 1990's, real estate market values for undeveloped land 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 became a direct investor in this real estate and managed operating properties and developed raw land until such time as the Partnership was able to sell this real estate owned. The real estate owned balance before allowance for possible losses at December 31, 1997 was $8,490,000, decreasing to $-0- at year end 1998 through 2000. Basis of Presentation The Partnership formed several subsidiaries to own and operate certain of its real estate assets. The corporations formed were Upland Foothill Retail, Inc., ("Upland"), Grand Plaza Auto Retail, Inc., ("Grand Plaza"), and LCR Development, Inc., ("LCR"). All of these corporations are California corporations. The Partnership owned a 100 percent interest in Upland, 86.7 percent interest in Grand Plaza and a 50 percent interest in LCR. Several of the Partnership's assets were transferred to these corporations, at the Partnership's cost basis, in transactions which included no cash down with the Partnership carrying a substantial portion of the financing. Grand Plaza was liquidated in 1999. Upland was never capitalized. Grand Plaza has been consolidated in the accompanying consolidated financial statements through 1999. All significant inter-company balances and transactions, including the aforementioned transfers, have been eliminated in consolidation. As the Partnership's ownership interest in LCR was more than 20 percent but does not exceed 50 percent, the Partnership has accounted for its ownership F-9 interest using the equity method. The Partnership made several loans to LCR and its subsidiary. Under the equity method of accounting, these loans were a component of the Partnership's investment in LCR, and therefore the Partnership recorded losses by LCR 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 properly reflect the economic 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 years ended December 31, 2000 or 1999. Accordingly, the general partners were not entitled to any interest in the distribution to partners paid in 1999. The Partnership generated $240,000 in Cash Available for Distribution during 1998, however due to the deficit balance in the general partners capital account, they were not entitled to any interest in the distributions to partners paid in 1998. 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. As a result of the liquidation of the majority of the Partnership's investments in 1998, it has become clear that the amount of the required deficit restoration of the General Partners will not exceed $132,000 and the capital accounts of the general partners and limited partners have been adjusted to reflect such maximum deficit restoration. Real Estate Loans and Allowance for Possible Loan Losses Loans were reported at the principal amount outstanding, net of unearned F-10 income and the allowance for possible loan losses. Interest accrual was discontinued when, in the opinion of management, its collection was deemed doubtful. The allowance for possible loan losses was established through a provision for possible losses charged to expense. Loans were charged against the allowance for possible loan losses when management believed that the collectibility of principal was unlikely. Impaired Loans The Partnership considered a loan to be impaired when based upon current information and events, it believed it was probable that the Partnership would be unable to collect all amounts due according to the contractual terms of the loan agreement. In determining impairment, the Partnership considered large non-homogeneous loans including nonaccrual loans, troubled debt restructuring and performing loans which exhibited, among other characteristics, high loan- to-value ratios, low debt-coverage ratios, or other indications that the borrowers were experiencing increased levels of financial difficulty. The Partnership based the measurement of collateral-dependent impaired loans on the fair value of the loan's collateral. The amount by which the recorded investment of the loan exceeded the measure of the impaired loan's value was recognized by recording a valuation allowance. Real Estate Owned Long-lived assets to be disposed of were reported at the lower of the carrying amount or fair value less costs to sell. An impairment loss was measured as the amount by which the carrying amount of the asset exceeded the fair value of the assets less costs to sell. Assets to be disposed of were not depreciated while they were held for disposal. Estimated fair values were 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 1998 and 1997. The Partnership considered collateral for a loan "insubstance" foreclosed only when the borrower actually surrendered the collateral to the creditor and the creditor received physical possession of the borrower's assets. 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-11 Current Temporary Differences Partnership Corporations Total (Unaudited) (Unaudited) (Unaudited) ------------------------------------------------------------------------------ GAAP loss for the year ended December 31, 2000 $ (71,000) $ --- $ (71,000) Minority interest share of losses not taxable (11,000) --- (11,000) ------------------------------------------------------------------------------ Taxable (loss) for the year ended December 31, 2000 $ (82,000) $ --- $ (82,000) ============================================================================== Taxable loss allocable to General Partners $ --- ============================================================================== Taxable loss per limited partner unit $ (2.12) ==============================================================================
There were no cumulative temporary differences as of December 31, 2000. The last operating subsidiary corporation was liquidated during 1999. 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 2000, 1999 and 1998. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported 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. 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. 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. F-12 Financial Information about Industry Segments Given that the Partnership is in the process of liquidation, the Partnership has identified only one operating business segment which is the business of asset liquidation. (2) FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 "Disclosures About Fair Value of Financial Instruments" ("SFAS 107"), requires that the Partnership disclose estimated fair values for its financial instruments as well as the methods and significant assumptions used to estimate fair values. The following information does not purport to represent the aggregate net fair value of the Partnership. The following methods and assumptions were used by the Partnership in estimating the fair value of each class of financial instrument. Cash and Cash Equivalents The carrying amount, which is cost, is assumed to be the fair value because of the liquidity of these instruments. As of December 31, 2000, the Partnership had bank deposits at four different banks whose deposits are federally insured. Approximately $1,286,000 of the Partnership's cash and cash equivalent balance as of that same date was in excess of maximum balances covered by such insurance. Accounts Payable and Accrued Liabilities Carrying value is considered to be equal to the fair value of these liabilities as they are due on demand. (3) ALLOWANCE FOR POSSIBLE LOSSES Changes in the allowance for possible loan losses are as follows:
2000 1999 1998 ----------------------------------------------------------------------------- Balance at beginning of year $ --- $ --- $ 714,000 Loans charged-off (30,000) --- (569,000) Provision for (recovery of) loan losses 30,000 --- (145,000) ----------------------------------------------------------------------------- Balance at end of year $ --- $ --- $ --- =============================================================================
F-13 (4) ALLOWANCE FOR POSSIBLE LOSSES ON REAL ESTATE OWNED Changes in the allowance for possible losses on real estate owned are as follows:
2000 1999 1998 ------------------------------------------------------------------------------ Balance at beginning of year $ --- $ --- $ 2,354,000 Provision for losses, net of recoveries --- --- 300,000 Real estate owned charged-off --- --- (2,654,000) ------------------------------------------------------------------------------ Balance at end of year $ --- $ --- $ --- ==============================================================================
(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 and paid $-0-, $-0- and $2,000 of mortgage investment servicing fees to CC in 2000, 1999 and 1998, respectively. As discussed in note 1, the Partnership owns 50 percent of the stock of LCR, a corporation which has not been consolidated in the accompanying financial statements. The balance of stock in this corporation is owned by Centennial Mortgage Income Fund II ("CMIF II"), an affiliate. LCR invested in a joint venture, Silverwood Homes ("Silverwood") which has constructed homes. The Partnership participated in making several loans to this corporation and this joint venture. Under the equity method of accounting, these loans were a component of the Partnership's investment in LCR, and therefore the Partnership recorded losses by LCR as a reduction of the carrying value of these loans receivable. All but two of these loans were charged off in 1998. The remaining two loans were repaid in 1999 and 2000. A summary of the real estate loan receivable from unconsolidated investee as of December 31, 1999 is as follows:
Net Principal Losses Carrying Balance Offset Value ------------------------------------------------------------------------------ 50 percent interest in unsecured loan from Silverwood $ 11,000 $ 11,000 $ --- ------------------------------------------------------------------------------ Total $ 11,000 $ 11,000 $ --- ------------------------------------------------------------------------------
F-14 LCR 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 accounted for its investment in this corporation using the equity method. LCR ceased active operation in 1999 and liquidated the majority of its remaining assets during 2000. As of December 31, 2000, the Partnership's carrying value of investments and loans to this joint venture had been reduced to $-0-. The Partnership recorded losses from this unconsolidated investee of $-0-, $-0-, and $96,000 during the years ended December 31, 2000, 1999 and 1998, respectively. The following represents condensed financial information for LCR at December 31, 1998 and for the year ended December 31, 1998: LCR Development, Inc. Consolidated Balance Sheets
December 31, Assets 1998 ------------------------------------------------------------------------- Cash $ 11,000 Restricted cash 20,000 Real estate owned 119,000 Less allowance for losses on real estate investments 17,000 -------------------------------------------------------------------------- Net real estate owned 102,000 -------------------------------------------------------------------------- $ 133,000 ========================================================================== Liabilities and Stockholders' Deficit -------------------------------------------------------------------------- Notes payable to affiliates: CMIF $ 2,882,000 CMIF II 1,549,000 -------------------------------------------------------------------------- Total notes payable 4,431,000 Accounts payable and accrued liabilities 12,000 Interest payable to affiliates 1,837,000 Payable to affiliates 5,000 -------------------------------------------------------------------------- Total liabilities 6,285,000 Stockholders' deficit (6,152,000) -------------------------------------------------------------------------- $ 133,000 ==========================================================================
F-15 LCR Development, Inc. Consolidated Statements of Operations Year ended December 31, 1998
1998 ------------------------------------------------------------------------ Revenues Housing sales $ 1,509,000 Sale of finished lots 1,499,000 ------------------------------------------------------------------------ 3,008,000 ------------------------------------------------------------------------ Costs and expenses Cost of housing sales 1,437,000 Cost of sale of finished lots 1,514,000 Provision for losses on real estate owned 216,000 Selling and marketing expenses 66,000 General and administrative 24,000 ------------------------------------------------------------------------ 3,257,000 ------------------------------------------------------------------------ Operating loss (249,000) Interest expense 403,000 ------------------------------------------------------------------------ Net loss $ (652,000) ======================================================================== Interest not included in share of losses (460,000) ------------------------------------------------------------------------ Allocable net loss $ (192,000) ======================================================================== Share of loss recorded $ (96,000) ========================================================================
The Partnership and CMIF II have not recorded interest income in connection with the $1,837,000 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. 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 $83,000, $137,000 and $242,000 for such services in 2000, 1999 and 1998, respectively. The Partnership also accrued an additional $25,000 and $74,000 in severance costs paid to the corporate general partner's employees as general and administrative, affiliates expense during 1999 and 1998, respectively. These amounts were paid pursuant to employment contracts that were entered into by the general partner in order to ensure that the Partnership and several affiliated partnerships would have an adequate staff of employees with knowledge of the partnerships business to complete the liquidation of their assets. F-16 During 1999 and 1998, the Partnership maintained interest-bearing deposits with Sunwest Bank, an affiliate of the general partners through March 1999. The balances at December 31, 1998 were $1,752,000. Interest earned on such deposits for the three months ended March 31, 1999 and the year ended December 31, 1998 was $6,000, and $17,000, respectively. In December 1998, BNN sold its remaining property and recorded a $57,000 gain on sale. BNN also recorded a $445,000 provision for losses during the third quarter of 1998 and $120,000 in expenses associated with non-operating real estate owned incurred throughout 1998. The Partnership owned an interest in BNN with an affiliated entity CMIF III. At December 31, 1998, the ownership percentages were 86.25 for the Partnership and 13.75 for CMIF III. CMIF III's share of BNN's net loss for 1998 was $67,000. (6) REAL ESTATE OWNED
The following is a summary of consolidated real estate owned for the years ended December 31, 2000, 1999 and 1998: 2000 1999 1998 ------------------------------------------------------------------------------ Balance at beginning of year $ --- $ --- $ 8,490,000 Additions during period: Improvements --- --- --- Deduction during period: Real estate sold --- --- (6,136,000) Chargeoffs --- --- (2,654,000) ------------------------------------------------------------------------------ Balance at year end $ --- $ --- $ --- ==============================================================================
(7) 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 both economic and non-economic 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 retained legal counsel to set aside the defaults and any default judgements which were entered, due to the lack of proper service and notice. The Partnership also tendered this action to its liability insurance carrier for legal and liability coverage. The default judgement was set aside and the plaintiff's appeal of the set aside ruling was denied by the Court. The Court also ruled that the prior jury found 0% liability as to the Partnership for non-economic F-17 damages and that the plaintiffs could only proceed to trial against the Partnership for recovery of economic damages. In December 2000, the Court ruled that the statute of limitations had passed and the plaintiffs were barred from continuing the lawsuit. Although this ruling is subject to appeal, no such appeal has been filed as of the date of this report. Based upon evidence presented at the prior trial, Management believes that these economic damages should not exceed $40,000. Management intends to vigorously defend any future actions related to this matter. Management believes that even if the plaintiff's appeal the court's recent decision and prevail in in their appeal, 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. F-18 (8) QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarter Ended December 31, September 30, June 30, March 31, 2000 2000 2000 2000 ------------------------------------------------------------------------------------------ REVENUE: Interest income on loans $ --- $ 10,000 $ 10,000 $ 11,000 Interest on interest-bearing deposits 21,000 16,000 15,000 12,000 Other 4,000 3,000 2,000 3,000 ------------------------------------------------------------------------------------------ Total revenue 25,000 29,000 27,000 26,000 ------------------------------------------------------------------------------------------ EXPENSES: Provision for losses --- 30,000 --- --- General and administrative 32,000 39,000 39,000 38,000 ------------------------------------------------------------------------------------------ Total expenses 32,000 69,000 39,000 38,000 ------------------------------------------------------------------------------------------ Net loss $ (7,000) $ (40,000) $ (12,000) $ (12,000) ========================================================================================== Net loss per limited partnership unit-basic and diluted $ (.18) $ (1.03) $ (.31) $ (.31) ==========================================================================================
F-19 (8) QUARTERLY FINANCIAL RESULTS (UNAUDITED)(CONTINUED)
Quarter Ended December 31, September 30, June 30, March 31, 1999 1999 1999 1999 --------------------------------------------------------------------------------------- REVENUE: Interest income on loans $ 11,000 $ 11,000 $ 13,000 $ 17,000 Interest on interest-bearing deposits 13,000 12,000 10,000 32,000 Other 2,000 5,000 31,000 --- ------------------------------------------------------------------------------------------ Total revenue 26,000 28,000 54,000 49,000 ------------------------------------------------------------------------------------------ EXPENSES: Expenses associated with real estate owned --- 1,000 1,000 2,000 General and administrative 54,000 48,000 45,000 122,000 ------------------------------------------------------------------------------------------ Total expenses 54,000 49,000 46,000 124,000 ------------------------------------------------------------------------------------------ Income (loss) before minority interest (28,000) (21,000) 8,000 (75,000) Minority interest (note 5) (1,000) --- --- --- ------------------------------------------------------------------------------------------ Net income (loss) $ (27,000) $ (21,000) $ 8,000 $ (75,000) ========================================================================================== Net income (loss) per limited partnership unit-basic and diluted $ (.70) $ (.54) $ .21 $ (1.94) ==========================================================================================
F-20 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership MORTGAGE LOANS ON REAL ESTATE December 31, 2000
SCHEDULE IV Principal Amount of Loan Carrying Subject to Final Periodic Face Amount of Delinquent Interest Maturity Payment Prior Amount of Mortgages Principal or Description Rate Date Terms Liens Mortgages or Interest ------------------------------------------------------------------------------------------------------------ Note secured by: No mortgages outstanding at 12/31/2000 --- --- ------------------------------------------------------------------------------------------------------------- --- --- ------------------------------------------------------------------------------------------------------------- Aggregate cost for Federal Income Tax purposes is $-0- at December 31, 2000.
F-21 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership MORTGAGE LOANS ON REAL ESTATE (Continued) December 31, 2000 SCHEDULE IV (CONTINUED)
The following is a summary of activity for the years ended December 2000, 1999 and 1998. 2000 1999 1998 ------------------------------------------------------------------------------ Balance at beginning of year $ 541,000 $ 782,000 $ 384,000 Additions during period: New mortgage loans/ disbursements 31,000 1,000 229,000 Other - Interest reserve, amortization and transfer from accrued interest --- --- 14,000 Deductions during period: Collections of principal (542,000) (242,000) (2,354,000) Charge-offs (30,000) --- (569,000) Offset against deferred profit on equity participation --- --- (289,000) Losses from unconsolidated investees --- --- (96,000) ------------------------------------------------------------------------------ Balance at year end $ --- $ 541,000 $ 782,000 ==============================================================================
See accompanying independent auditors' report. F-22 LCR DEVELOPMENT, INC. A California Corporation Consolidated Financial Statements December 31, 1998 and 1997 (with Independent Auditors' Report Thereon) F-23 LCR DEVELOPMENT, INC. A California Corporation Index to Consolidated Financial Statements Consolidated Financial Statements Page Independent Auditors' Report ............................. F-25 Consolidated Balance Sheet -- December 31, 1998 ....................................... F-26 Consolidated Statements of Operations -- Years ended December 31, 1998 and 1997 ................ F-27 Consolidated Statements of Stockholders' Equity (Deficit) Years ended December 31, 1998 and 1997 ................ F-28 Consolidated Statements of Cash Flows -- Years ended December 31, 1998 and 1997 ................ F-29 Notes to Consolidated Financial Statements ............... F-31 F-24 INDEPENDENT AUDITORS' REPORT The Board of Directors LCR Development, Inc.: We have audited the consolidated balance sheet of LCR Development, Inc. and subsidiary (the "Company") as of December 31, 1998 and the related statements of operations, stockholders' equity (deficit) and cash flows for each of the years in the two-year period ended December 31, 1998. 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, 1998, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1998, 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 past due or scheduled to mature in 1999. 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 LLP Orange County, California March 19, 1999 F-25 LCR Development, Inc. Consolidated Balance Sheet
December 31, Assets 1998 ---------------------------------------------------------------------- Cash $ 11,000 Restricted cash 20,000 Real estate owned (note 5) 119,000 Less allowance for losses on real estate investments (note 4) 17,000 ---------------------------------------------------------------------- Net real estate owned 102,000 ---------------------------------------------------------------------- $ 133,000 ====================================================================== Liabilities and Stockholders' Equity (Deficit) ---------------------------------------------------------------------- Notes payable to affiliates: CMIF $ 2,882,000 CMIF II 1,549,000 ---------------------------------------------------------------------- Total notes payable (note 7) 4,431,000 Accounts payable and accrued liabilities 12,000 Interest payable to affiliates 1,837,000 Payable to affiliates (note 6) 5,000 ---------------------------------------------------------------------- Total liabilities 6,285,000 ---------------------------------------------------------------------- Stockholders' equity (deficit) Common stock, no par value; 300 shares authorized; 300 shares issued and outstanding 3,000 Accumulated deficit (6,155,000) ---------------------------------------------------------------------- Total stockholders' equity (deficit) (6,152,000) Contingencies (Note 9) Uncertainties (Note 2) ---------------------------------------------------------------------- $ 133,000 ======================================================================
See accompanying notes to consolidated financial statements F-26 LCR Development, Inc. Consolidated Statements of Operations
Years ended December 31, 1998 and 1997 1998 1997 ---------------------------------------------------------------------- Revenues Housing sales $ 1,509,000 $ 834,000 Sale of finished lots 1,499,000 --- ---------------------------------------------------------------------- 3,008,000 834,000 ---------------------------------------------------------------------- Costs and expenses Cost of housing sales 1,437,000 852,000 Cost of finished lots sold 1,514,000 --- Provision for losses on real estate owned (note 4) 216,000 207,000 Selling and marketing expenses 66,000 131,000 General and administrative 24,000 64,000 ---------------------------------------------------------------------- 3,257,000 1,254,000 ---------------------------------------------------------------------- Operating loss (249,000) (420,000) Interest expense (note 5) 403,000 361,000 ---------------------------------------------------------------------- Loss before income taxes $ (652,000) $ (781,000) ---------------------------------------------------------------------- Income taxes (note 8) --- --- ---------------------------------------------------------------------- Net loss $ (652,000) $ (781,000) ====================================================================== Net loss per common share $ (2,173) $ (2,603) ====================================================================== Weighted average number of common shares outstanding 300 300 ======================================================================
See accompanying notes to consolidated financial statements F-27 LCR Development, Inc. Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1998 and 1997 Total Stockholders' Common Accumulated Equity Stock Deficit (Deficit) ---------------------------------------------------------------------- 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) Net loss --- (652,000) (652,000) ---------------------------------------------------------------------- Balance (deficit) at December 31, 1998 $ 3,000 $ (6,155,000) $ (6,152,000) ======================================================================
See accompanying notes to consolidated financial statements F-28 LCR Development, Inc. Consolidated Statements of Cash Flows
Years ended December 31, 1998 and 1997 1998 1997 ---------------------------------------------------------------------- Cash flows from operating activities: Net loss $ (652,000) $ (781,000) Adjustments to reconcile net loss to cash provided by (used in) in) operating operating activities: Provision for possible losses 216,000 207,000 Changes in assets and liabilities: Decrease in organization costs 1,000 --- Decrease (increase) in real estate owned 2,569,000 (500,000) Increase in interest payable 460,000 532,000 Increase (decrease) in accounts payable and accrued liabilities (21,000) 27,000 Increase (decrease) in payable to affiliates (75,000) 59,000 ---------------------------------------------------------------------- Net cash provided by (used in) operating activities 2,498,000 (456,000) ---------------------------------------------------------------------- Cash flows from investing activities - increase in restricted cash (10,000) (10,000) ---------------------------------------------------------------------- Net cash used in investing activities (10,000) (10,000) ---------------------------------------------------------------------- F-29 LCR Development, Inc. Consolidated Statements of Cash Flows (Continued) Years ended December 31, 1998 and 1997 1998 1997 ---------------------------------------------------------------------- Cash flows from financing activities- Repayments of notes payable (2,740,000) --- Advances received on notes payable 242,000 477,000 ---------------------------------------------------------------------- Net cash (used in) provided by financing activities (2,498,000) 477,000 ---------------------------------------------------------------------- Net increase in cash --- 11,000 Cash at beginning of year 11,000 --- ---------------------------------------------------------------------- Cash at end of year $ 11,000 $ 11,000 ====================================================================== Supplemental schedule of cash flow information - cash paid during the year for interest $ 64,000 --- 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 4,262,000 42,000
See accompanying notes to consolidated financial statements F-30 LCR DEVELOPMENT, INC. Notes to Consolidated Financial Statements December 31, 1998 and 1997 (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. 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 Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires 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, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. Actual results could differ from those estimates. F-31 (2) Ability to Continue as a Going Concern LCR and Silverwood had $6,285,000 in liabilities outstanding as of December 31, 1998 and had only $133,000 in net assets. Most of these liabilities are notes that are payable to CMIF and CMIF II who have periodically agreed to extend this debt over the past two years. The final home owned by Silverwood closed escrow in March 1999 and the proceeds from the sale were used to repay part of this debt. The remaining assets of LCR and Silverwood will be used to repay a portion of their remaining debt. It is probable that LCR and Silverwood will be unable to continue operations and that the majority of the Company's debt as of December 31, 1998 will remain unpaid. 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 because of the liquidity of these instruments. Notes Payable to Affiliates and Interest Payable to Affiliates The fair value is not determinable due to their related party nature and terms. 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 Possible Losses on Real Estate Owned Changes in the allowance for possible losses on real estate owned are as follows: 1998 1997 ---------------------------------------------------------------------- Balance at beginning of year $ 4,063,000 $ 3,898,000 Real estate owned charged-off (4,262,000) (42,000) Provision for losses 216,000 207,000 ---------------------------------------------------------------------- Balance at end of year $ 17,000 $ 4,063,000 ======================================================================
F-32 (5) Real Estate Owned Real estate owned consists of the following: 1998 ---------------------------------------------------------------------- Residential lots held for development $ --- Model home complex --- Production homes under construction and held for sale 119,000 ---------------------------------------------------------------------- Sub-total 119,000 Less: allowance for possible losses (17,000) ---------------------------------------------------------------------- Net real estate owned $ 102,000 ======================================================================
Real estate owned as of December 31, 1998 consists of one substantially completed single family home that was sold in March 1999. Interest incurred, paid and capitalized during the two years ended December 31, 1998 was as follows: 1998 1997 ---------------------------------------------------------------------- Interest incurred $ 524,000 $ 568,000 Interest capitalized (121,000) (207,000) ---------------------------------------------------------------------- Interest expensed $ 403,000 $ 361,000 ====================================================================== Interest paid $ 64,000 $ ---
(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 $25,000 and $60,000 of these costs to Home Devco and affiliates for the years ended December 31, 1998 and 1997, respectively. Funds were advanced from CMIF and CMIF II to meet operating expenses and fund options on the prospective home sales. The advances were repaid from sales proceeds during 1998. The balance at December 31, 1997 was $75,000. F-33 (7) Notes Payable to Affiliates
Notes payable to affiliates consist of the following: (dollars in thousands) December 31, 1998 ----------------------------------------------------------------------- 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; matured June 30, 1998. $ 2,115 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; matured June 30, 1998. 1,250 Note payable to CMIF and CMIF II originally secured by first trust deed on 179 lots in Lancaster, CA (secured by only one remaining home at December 31, 1998); with principal and interest due at maturity; interest at Prime + 1%; maturing August 1, 1999. 933 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%; matured July 1, 1998. 45 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 January 1, 1999. 88 ---------------------------------------------------------------------- Total notes payable $ 4,431 ======================================================================
All notes payable are past due as of December 31, 1998 or become due during 1999. F-34 (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:
1998 1997 ---------------------------------------------------------------------- Income tax benefit at the statutory rate $ (180,000) $ (266,000) State tax benefit, net of Federal tax benefit (34,000) (48,000) Valuation allowance 112,000 308,000 Other 110,000 6,000 ---------------------------------------------------------------------- Total --- --- --- ======================================================================
As of December 31, 1998, LCR and Silverwood have net operating loss carryforwards of approximately $4,007,000, expiring at various dates through 2013. The components of the consolidated net deferred tax asset at December 31, 1998 and 1997 are as follows:
1998 1997 ---------------------------------------------------------------------- Net operating loss carryforwards $ 1,485,000 $ 156,000 Chargeoffs of real estate not yet deductible 442,000 --- Provision for losses on real estate 7,000 1,629,000 Capitalized interest 1,000 38,000 Interest not deductible until paid 370,000 291,000 Section 263A expenses --- --- 80,000 ---------------------------------------------------------------------- Total deferred tax asset 2,306,000 2,194,000 Less valuation allowance (2,306,000) (2,194,000) ---------------------------------------------------------------------- Net asset recorded $ --- $ --- $ --- ======================================================================
F-35 The net increases in the total valuation allowances for the years ended December 31, 1998 and 1997 were $151,000 and $308,000, 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. (9) Contingencies There are no pending legal proceedings of which the Company is aware. F-36