-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QG6gDBiNOa7DPqkY/gDpbaVNs3zqc6LYCh0XDGi0jgOhopJypQ4pkUN+fV02y1cO W/cNVXfgbv/7rWsOi8KlMg== 0000736980-99-000001.txt : 19990402 0000736980-99-000001.hdr.sgml : 19990402 ACCESSION NUMBER: 0000736980-99-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTENNIAL MORTGAGE INCOME FUND CENTRAL INDEX KEY: 0000736980 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 330053488 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 002-88588 FILM NUMBER: 99582503 BUSINESS ADDRESS: STREET 1: 1540 S LEWIS STREET CITY: ANAHEIM STATE: CA ZIP: 92805 BUSINESS PHONE: 7145028484225 MAIL ADDRESS: STREET 2: 1540 S LEWIS STREET CITY: ANAHEIM STATE: CA ZIP: 92805 10-K 1 CENTENNIAL MORTGAGE INCOME FUND FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 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 This report includes a total of 951 pages. PART I ITEM 1. BUSINESS. (a) General Development of the Business Centennial Mortgage Income Fund (the "Partnership"), a California Limited Partnership, was organized on December 13, 1983. The Partnership's registration statement became effective June 8, 1984. The general partners are John B. Joseph, Ronald R. White and Centennial Corporation ("CC"), a privately held corporation whose stock is owned by affiliates of Ronald R. White and John B. Joseph. Beginning in the fourth quarter of 1985, the Partnership ceased accepting capital contributions and entered its operating stage of business. During the fourth quarter of 1990, 60 months after the closing of its offering stage, the Partnership ceased making new loans and entered the repayment stage as required by the Partnership Agreement. For additional information, see Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (b) Financial Information about Industry Segments The Partnership adopted Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information"("SFAS 131"). 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. The adoption of SFAS 131 did not have an impact on the Partnership's financial reporting. (c) Narrative Description of Business The Partnership was formed to invest in mortgage investments consisting of participating first mortgage loans, construction loans, and wrap-around and other junior loans on commercial, industrial and residential income-producing real property. The Partnership's objectives are to preserve the Partnership's invested capital, provide increased cash distributions to the limited partners as the cash flow from the properties underlying mortgage investments increases over the life of the Partnership, provide capital growth through participation in the increased value of the underlying properties and provide liquidating distributions as loans are repaid and cash from the sale of real estate owned is no longer needed for development and operations of real estate owned. Due to the long term recession and falling real estate market values in California during the early 1990's, many of the Partnership's loans became delinquent and management of the Partnership elected to foreclose, thereby increasing real estate owned balances. As a result, the Partnership became a direct investor in this real estate. The Partnership has managed its operating properties and completed certain development processes on its raw land over the last several years in an effort to make this real estate more marketable. The improving real estate markets and development of the Partnership's assets have enabled the Partnership to liquidate the majority of its assets. As of December 31, 1998, the Partnership's assets consisted of $4,938,000 in cash and $1,097,000 in other assets. Based upon the current stated maturity dates of its remaining non-cash assets, it is possible that these assets could be liquidated by July 2000. 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 $782,000 as of December 31, 1998. The liquidation of assets enabled the Partnership to make a $1,998,000 cash distribution to its limited partners in August 1998. The Partnership made 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, 1998, the Partnership held only cash, five notes secured by real estate, and an interest in certain funds held in an escrow account that are expected to be used to pay for future improvement costs to a property which was sold by the Partnership during 1998. Management anticipates that the Partnership will hold a lesser number of assets by January 1, 2000. Management does not believe that the value of any of these assets is subject to valuation risk as a result of the year 2000 issues, other than general economic climate issues that might arise. None of the Partnership's assets have any equipment with computerized components essential to their operation. Although the Partnership has made some changes already to its software, these changes have not been tested. The Partnership intends to begin testing changes made to its existing software in the next few months. The Partnership has not, and does not contemplate spending any significant amount of funds to upgrade its computer systems inasmuch as virtually all of its computer needs could easily be met with existing "over the counter" software and hardware. The cost of this software and hardware, if needed, should not exceed $10,000. The only exception to this is the computer software which the Partnership uses to track its limited partners and their addresses. The Partnership has made a preliminary evaluation of this software with its outside software consultant and believes that it can be modified for less than $10,000. Even if attempts to correct deficiencies in the software without spending significant sums are not successful, the Partnership anticipates that it could convert its systems to standard spreadsheet or data base programs at a nominal cost. Cautionary Statements Regarding Forward-Looking Information The Partnership wishes to caution readers that the forward- looking statements contained in this Form 10-K under "Item 1. Business," "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-K involve known and unknown risks and uncertainties which may cause the actual results, performance or achievements of the Partnership to be materially different from any future results, performance or achievements expressed or implied by any forward-looking statements made by or on behalf of the Partnership. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Partnership is filing the following cautionary statements identifying important factors that in some cases have affected, and in the future could cause the Partnership's actual results to differ materially from those expressed in any such forward- looking statements. The factors that could cause the Partnership's results to differ materially include, but are not limited to, general economic and business conditions, including interest rate fluctuations; the impact of competitive products and pricing; success of operating initiatives; adverse publicity; changes in business strategy or development plans; quality of management; availability, terms and deployment of capital; the results of financing efforts; business abilities and judgment of personnel; availability of qualified personnel; employee benefit costs and changes in, or the failure to comply with government regulations. (d) Financial Information about Foreign and Domestic Operations and Export Sales Not applicable. ITEM 2. DESCRIPTION OF PROPERTY. No properties or facilities are owned or leased by the Partnership other than real estate owned which was obtained through foreclosure of real estate loans receivable, as described in notes 5 and 6 of Notes to Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS. Unbeknownst to the Partnership, on July 19, 1996, a default was entered against the Partnership for failure to respond to a complaint filed on July 17, 1995 in the San Bernardino Superior Court, entitled Henry Yong Lim et al -vs.- Cardinal Security, et al and allegedly served on the Partnership in May 1996. As shown by the proofs of service, the complaint was served on the wrong party in 1996. The Partnership first became aware of its involvement in this lawsuit in September 1997 when it received copies of requests for entry of default judgement totaling approximately $1,000,000. The judgements involved 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 has been set aside and the plaintiff's appeal of the set aside ruling has been denied by the Court. The Court has also ruled that the prior jury found 0% liability as to the Partnership for non-economic damages and that the plaintiffs can only proceed to trial against the Partnership for recovery of economic damages. 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 prevail in these actions, the Partnership's insurance coverage and/or the security company's insurance carrier should prevent the Partnership from suffering a material loss from these proceedings. There are no other material pending legal proceedings other than ordinary routine litigation incidental to the registrant's business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters have been submitted to a vote of security holders. PART II ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP UNITS AND RELATED SECURITY HOLDER MATTERS. (a) Securities Market Information There is no market for the Partnership's limited partnership units, nor is one expected to develop. The Partnership units were offered by the Partnership through selected dealers who were members of the National Association of Securities Dealers, Inc. (b) Approximate Number of Holders of Limited Partnership Units As of December 31, 1998, there were approximately 4,778 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 $51.60 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 any additional distributions 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 - -------------------------------------------------------------------------------- - ---------- 12/31/98 12/31/97 12/31/96 12/31/95 12/31/94 - -------------------------------------------------------------------------------- - ---------- Consolidated Statement of Operations Data: Total revenue........ $ 1,199 $ 992 $ 1,105 $ 1,159 $ 1,096 Net income (loss).. 91 123 (2,514) (2,776) (1,286) Net income (loss) per limited partnership unit- basic and diluted. 2.35 3.18 (64.91) (71.68) (33.21) Consolidated Balance Sheet Data: Total loans before allowance for losses 782 3,847 3,297 4,793 6,641 Total real estate owned before allowance for losses......... --- 8,490 11,360 12,349 13,820 Total assets......... 6,035 10,397 11,394 14,842 17,688 Partners' equity..... 5,648 7,555 7,432 9,946 12,722
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 $91,000 and $2.35 for the year ended December 31, 1998 as compared to $123,000 and $3.18 for the year ended December 31, 1997 and $(2,514,000) and $(64.91) for the year ended December 31, 1996. Major changes between income statement components between 1998 and 1997 included: i) a $423,000 increase in the provision for losses; ii) an $83,000 increase in general and administrative expense - affiliates; iii) a $321,000 collection of prior deferred interest and discounts on loans receivable; and iv) an $83,000 increase in gain on sale of property. The improved profitability in 1997 over 1996 is primarily attributable to a significant decrease in losses from unconsolidated investees, a recovery of previously recorded provision for losses and improved profitability of operating properties. A detailed discussion of the significant changes in each component of revenue and expense for each of the years in the three year period ended December 31, 1998 is included in the following paragraphs. Liquidity and Capital Resources At December 31, 1998, the Partnership had $4,938,000 in cash and interest bearing deposits. During the year ended December 31, 1998, the Partnership's principal sources of cash were; i) $6,220,000 in proceeds from the sale of real estate owned; ii) $2,678,000 in principal collected on loans receivable; iii) $430,000 in net operating income from operating properties; iv) $321,000 in collections of previously nonaccrued or deferred income; v) $82,000 in current interest income on loans; and vi) $83,000 in interest income on interest bearing deposits. The Partnership's principal uses of cash during the year ended December 31, 1998 were: i) $2,421,000 in principal payments on notes payable; iii) a $1,998,000 cash distribution to limited partners; ii) $209,000 in advances on loans made to LCR; iii) $245,000 in interest payments; iv) $373,000 in general and administrative costs; and v) $125,000 in expenses associated with non-operating properties (principally real estate taxes). Future sources of cash are expected to be from the repayment of the $782,000 in remaining loans receivable and interest earned on cash deposits. The Partnership had no unfunded loan commitments to nonaffiliates at December 31, 1998. The Partnership's principal capital requirements are now limited to selling, general and administrative costs. These commitments are expected to be paid from existing cash balances. Included in other assets on the Partnership's December 31, 1998 balance sheet is a $300,000 escrow account that is to be used to pay for improvements to one of the properties that the Partnership sold during 1998. Accounts payable and accrued liabilities as of December 31, 1998 includes a $300,000 accrual for this obligation. The Partnership's obligation to pay for improvements to this property has been limited to $300,000 pursuant to the sale contract. 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 has occurred, 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. This left the Partnership with approximately $1.0 million of cash on hand as of February 10, 1999. The general partners have had discussions with legal counsel regarding the amounts of cash reserves 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 reserves to be available to defend the Partnership in any future litigation which may arise. It is expected that these reserves will be retained until such time as legal counsel advises the general partners that the potential for any future litigation is remote. 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. Although the Partnership has reported profits for both 1998 and 1997, based on the remaining assets and the anticipated costs of administering a publicly held partnership, the general partners do not expect the Partnership to report profits in 1999 or 2000. 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 $47,000 for 1998, $37,000 for 1997 and $100,000 for 1996. This income is related to the Silverwood joint venture, which was constructing homes in Lancaster, California. The real estate market in Lancaster has not seen the improvement that many other areas in California have. As a result, the Partnership placed certain of its loans to Silverwood on nonaccrual status during 1996, thus decreasing interest income during the latter half of 1996 and all of 1997. The increase for 1998 resulted from higher average balances on the one remaining earning Silverwood loan. The Partnership received payments on several of the Partnership's loans to nonaffiliates which had been converted into nonperforming loans during 1996 through 1998. As a result, interest income on loans to nonaffiliates, including fees, increased from $100,000 during the year ended December 31, 1996 to $122,000 during the year ended December 31, 1997, and increased again to $356,000 during the year ended December 31, 1998. 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. Management believes that these payments on nonperforming loans are directly attributable to the improving real estate market in California. Loans on "nonaccrual" refers to loans upon which the Partnership is no longer accruing interest. Management's policy is to cease accruing interest on loans when collection of interest and/or principal payments has become doubtful. Loans to affiliates and nonaffiliates on nonaccrual status amounted to $12,000, $2,313,000, and $2,597,000 as of December 31, 1998, 1997 and 1996, respectively. Real estate loans receivable, earning is comprised of four loans totaling $770,000 as of December 31, 1998 that are performing. Two of these loans, that are from an unaffiliated party, were received in connection with the payoff of a previously nonearning loan to affiliate. Real estate loans receivable from unconsolidated investee, nonearning is comprised of one past due loan totaling $23,000 as of December 31, 1998. This loan is partially offset by $11,000 in share of losses in unconsolidated investee. 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. Nonaccrual, Nonperforming Loans and Other Loans to Affiliates Loans on nonaccrual status during the year ended December 31, 1998 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 is 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 has commenced foreclosure proceedings and the borrower has 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. 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. During 1994, the Partnership funded a $1,250,000 unsecured note and a 50 percent participation in a $2,115,000 unsecured note, both representing workout loans and due from LCR. These two loans reflect the majority of the cost basis of 179 residential lots which LCR contributed to Silverwood. LCR's only source of repayment of these notes was the excess, if any, of proceeds from the sale of the fully developed lots over the amount of secured debt. Due to the continuing decline in value of the lots from 1994 through 1997, management did not expect that either of these notes would ever be repaid. As a result, the loans were placed on nonaccrual. As of December 31, 1997, the principal balance and nonaccrued interest balances of the $1,250,000 note were $1,250,000 and $392,000, respectively. The Partnership's share of the principal and nonaccrued balances of the $2,115,000 note as of the same date were $1,055,000 and $323,000, respectively. As discussed in note 5 of Notes to Consolidated Financial Statements, the Partnership had reduced the carrying value of these notes by $2,305,000, a portion of its share of losses from this unconsolidated investee as of December 31, 1997. During 1998, the remaining lots were sold and LCR received no cash from the sale. Accordingly, the Partnership charged off these notes against the $2,305,000 of previously recorded losses from unconsolidated investee during 1998. During 1994 and 1995, LCR had evaluated various alternative strategies for liquidating its investment in the 179 lots in Lancaster. LCR determined that its best course of action appeared to be the full-scale buildout and sale of single-family homes since the market for finished lots had fallen so significantly. LCR obtained construction financing commitments from the Partnership and Centennial Mortgage Income Fund II ("CMIF II"), an affiliate. LCR entered into a joint venture agreement entitled Silverwood with Home Devco to construct and sell single-family homes at the project. Silverwood began constructing a model home complex at the project in June 1995. Construction commenced in September 1995 on Phase I at the project. Construction of Phase II of the project was commenced in February 1997. At December 31, 1997, the Partnership held a 50 percent participation in three notes and a 100 percent interest in a fourth note due from Silverwood consisting of a land development loan, a model home loan and two home construction loans with a combined disbursed balance of $2,374,000. The Partnership's disbursed balance of the $3,266,000 development loan at December 31, 1997 was $1,212,000. The Partnership's disbursed balance of the $490,000 model loan at December 31, 1997 was $239,000. At December 31, 1997, the Partnership's disbursed balance of the $1,034,000 Phase I construction loan was $171,000. At December 31, 1997 the Partnership's disbursed balance of the $870,000 Phase II construction loan was $752,000. As discussed in note 5 of Notes to Consolidated Financial Statements, the Partnership had reduced the carrying value of the land development loan by $381,000, the remainder of its share of losses in unconsolidated investee as of December 31, 1997. During 1998, all but one of the remaining homes were sold and all of the undeveloped lots were sold. The Partnership funded additional advances of $180,000 and $29,000 on the development loan and the Phase II construction loan, respectively. The Partnership recorded an additional $96,000 in losses from unconsolidated investee during 1998 and received cash payments of $342,000, $239,000, $148,000 and $693,000 on the development loan, the model loan, the Phase I loan and the Phase II loan, respectively. The Partnership also received 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 lots. These new notes are secured by the 157 lots sold. The remaining principal balances of the development loan, the model loan, the Phase I loan and the Phase II loan were $466,000, $-0-, $23,000 and $88,000, respectively, after the 1998 advances and payments received. The Partnership charged off the development loan against $466,000 of the remaining losses from unconsolidated investee, leaving a balance of losses from unconsolidated investee of $11,000 which has been offset against the $23,000 balance of the Phase I loan. The $88,000 balance of the Phase II loan was repaid in full when the remaining home was sold in March 1999. Real Estate Owned A description of the Partnership's principal real estate owned and loan classified as insubstance foreclosure during the year ended December 31, 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. If the cost of the specified development work exceeds the amount in the escrow account, the buyer is required to pay the difference. If the specified costs are less than the amount in the escrow account, the balance of the account will be returned to the Partnership. Management does not expect that the Partnership will receive any significant amount from this escrow account. The sale resulted in a $57,000 gain on sale. 4 Condominiums in Oxnard, California During 1990, the Partnership funded a loan secured by a first trust deed with an original committed amount of $3,000,000 for the construction of 12 condominiums in Oxnard, California. The borrower signed over control to the second trust deed holder in December 1992 and the second trust deed holder, an affiliate, abandoned the property. The Partnership 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 earned on interest-bearing deposits was $83,000 in 1998, $72,000 in 1997 and $85,000 in 1996. The increase in interest on interest bearing deposits in 1998 is due to an increase in average cash balances while the decrease in 1997 is principally due to a decrease in average cash balances. Interest on interest- bearing deposits represents interest earned on Partnership funds invested, for liquidity, in time certificate and money market deposits. Income from Operations of Real Estate Owned Income from operations of real estate owned for 1998, 1997 and 1996 consists of operating revenues of $602,000, $755,000, and $780,000, respectively. These revenues were primarily from the Upland Shopping Center and the auto retail center in Corona. The decrease in 1998 can be attributed to the sale of the Upland Shopping Center in November 1998. The decrease in 1997 can be attributed to the sale of the auto retail center in July 1997. Provision for Possible Losses The provision for (recovery of) possible losses was $155,000 in 1998, $(268,000) in 1997 and $40,000 in 1996. The 1998 provision is comprised of reversals totaling $290,000 on two loans which were repaid during 1998 and the Upland Shopping center which was sold in 1998 which were offset by an additional provision of $445,000 which was recorded against the 19 acres in Sacramento. The 1997 recovery related to two loans secured by a mini-storage facility in Citrus Heights, California that were repaid in January 1998. The 1996 expense was primarily attributable to increased provisions on the 19 acres in Sacramento, the loan secured by the auto center in San Bernardino and the auto retail center in Corona which were partially offset by a reduction in the provision on the Upland Shopping Center. Management believes that all of the remaining loans receivable as of December 31, 1998 are adequately secured and that there is no allowance for losses necessary. Other Expenses The Partnership has invested in corporations in which it has less than a majority ownership and accounts for these investments using the equity method. The Partnership's share of losses in these unconsolidated investees was $96,000 for 1998, $125,000 for 1997 and $2,304,000 for 1996. The 1998 and 1997 share of losses consist primarily of operating losses from the sale of homes and finished lots recorded by LCR. The 1996 share of losses consists primarily of provisions for losses on real estate investments recorded by LCR and BKS Development Inc. ("BKS") related to the 179 lots in Lancaster and the 283 acres owned by BKS in Bakersfield. The 1996 losses also included additional costs related to the sale of homes in Lancaster. The Partnership's remaining investment in and loans receivable from these unconsolidated investees had been reduced to $100,000 as of December 31, 1998. Operating expenses from operations of real estate owned were $142,000 for 1998, $168,000 for 1997 and $259,000 for 1996. These expenses were associated with the auto retail center in Corona and the Upland Shopping Center. The decrease in 1998 can be attributed to the sale of the Upland Shopping Center in November 1998. The decrease in 1997 is primarily due to the sale of the auto retail center in July 1997. Operating expenses from operations of real estate owned paid to affiliates were $30,000 for 1998, $41,000 for 1997 and $55,000 for 1996. The expenses consist of property management fees paid to affiliates of the general partners. The decrease in 1998 is due to the sale of the Upland Shopping center in November 1998. The decrease in 1997 is primarily due to the sale of the auto retail center in July 1997. Expenses associated with non-operating real estate owned were $125,000 in 1998, $162,000 in 1997 and $226,000 in 1996. 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, $86,000 and $108,000 during 1998, 1997 and 1996, respectively. The decrease for 1998 is due primarily to a $42,000 decrease in costs associated with the condominium project in Oxnard. The decrease for 1997 is due primarily to a decrease in property tax expense resulting from the receipt of tax refunds and a decrease in services rendered regarding the 19 acres in Sacramento. Depreciation and amortization expense for 1998, 1997 and 1996 consists of $7,000, $12,000 and $23,000, respectively. The amounts represent depreciation on office furniture and equipment which has now been fully depreciated. Interest expense was $245,000 for 1998, $378,000 for 1997 and $476,000 for 1996. These amounts represent interest related to the underlying debt on the Upland Shopping Center, the intercompany debt on the auto retail center in Corona and the 19 acres in Sacramento. The decrease for 1998 is attributable to the repayment of the debt secured by the 19 acres in Sacramento in December 1997. The decrease for 1997 is attributable to the intercompany debt on the auto retail center in Corona being placed on nonaccrual for 1997 and a decrease in the principal balance of the debt on the Upland shopping center. General and administrative expenses, affiliates totaled $286,000 for 1998, $203,000 for 1997 and $218,000 for 1996. These expenses are primarily salary allocation reimbursements paid to affiliates for the management of the Partnership's assets. The increase for 1998 is primarily attributable to $74,000 in accrued severance pay as discussed in note 8 of Notes to the Consolidated Financial Statements. The decrease in 1997 was the result of a reduction in staffing. General and administrative expenses, nonaffiliates totaled $87,000 for 1998, $103,000 for 1997 and $100,000 for 1996. The 1997 amount includes approximately $31,000 of costs associated with the extension of the maturity of the note secured by the Upland Shopping Center and the legal proceedings involving the same property. The 1996 expenses included certain moving costs. There were no comparable expenses during 1998. Mortgage investment servicing fees paid to affiliates were $2,000 in 1998, $4,000 in 1997 and $4,000 in 1996. These fees consist of amounts paid to Centennial Corporation for servicing the Partnership's loan portfolio. 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 and notes receivable. As of December 31, 1998, the Partnership held fixed rate bank deposits with carrying values totaling $4,938,000, variable rate mortgage note receivables with carrying values totaling $100,000 and fixed rate mortgage notes receivable with carrying values totaling $682,000. The bank deposits all had maturities of less than ninety days. Substantially all of the variable rate mortgages were repaid in March 1999. The fixed rate mortgage notes had maturities ranging from four to nineteen months as of December 31, 1998 and bore interest at rates ranging from 8 percent to 10 percent per annum. The estimated fair value of all of these assets was estimated to be equal to their carrying values as of December 31, 1998. Increasing interest rates could have an adverse effect on the fair value of the Partnership's fixed rate notes receivable and/or the value of the underlying real estate collateral which secure the Partnership's notes receivable. 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, 1998. 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 60 General Partner John B. Joseph is currently Vice Chairman of the Board of Directors and Vice President of Centennial Corporation. He is also on the board of directors for West Coast Bancorp ("WCB"), a publicly held bank holding company operating in California and its subsidiary, Sunwest Bank. He had been Chairman of the Board and Chief Executive Officer of WCB until 1998. He was Chairman of the Board of Directors of WCB since its inception in 1981 and CEO from April 1991 until 1998. Mr. Joseph also serves, or has served, in the following capacities during the past five years: Vice Chairman of the Board of Directors of The Centennial Group, Inc. ("CGI"), a publicly-held real estate development corporation from February 1987 to July 1993; Senior Executive Vice President of CGI from July 1987 to July 1993; general partner of various public and private limited partnerships engaged in real estate development and lending activities. Mr. Joseph has held, over the past five years, various positions in the subsidiaries of WCB and CGI. Ronald R. White Age 52 General Partner Ronald R. White is currently President and CEO of Centennial Corporation. 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: Chairman of the Board of Directors, President and Chief Executive Officer of CGI from February 1987 to July 1993; general partner of various public and private limited partnerships engaged in real estate development and lending activities. Mr. White has held, over the past five years, various positions in the subsidiaries of WCB and CGI. 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. 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, 1998 - ----------------------------------------------------------------- Operating Stage: Application and An amount up to a maximum $ --- commitment fees of 3 percent of the gross - - the general proceeds of the offering partner or on any single mortgage affiliates investment, and an aggregate maximum of 7 percent of the gross proceeds of the offering, payable to the general partners or affiliates. The application and commitment fees are payable solely from borrowers and prospective borrowers and not directly from the proceeds of the offering. General partners' The general partners or $ 316,000 (1) reimbursable affiliates shall be entitled expenses to reimbursement for certain - general expenses, subject to the partner or conditions of the Partnership affiliates Agreement. General partners' A 5 percent interest in $ --- interest in cash cash flow available for distributions distribution for any year - - general until all limited partners or partnership unit holders affiliates have received an amount equal to a 12 percent non-cumulative annual return on their adjusted invested capital, and 10 percent of the balance of any cash flow available for distribution for such year. Mortgage 1/4 of 1 percent of the $ 2,000 (2) investment maximum amount funded or to servicing fees be funded by the Partnership on mortgage investments serviced by CC Amount Earned/ Type of Reimbursable for the Compensation & Year Ended Name of Entity Description of Payment December 31, 1998 - ----------------------------------------------------------------- Repayment Stage: General partners' One percent of mortgage $ --- share of reductions until all limited mortgage partners have received an reductions amount equal to their adjusted - - general invested capital and cumulative partners or distributions (including cash affiliates flow available for distribution) equal to a 12 percent annual return with respect to their adjusted invested capital, and 15 percent of the balance of any mortgage reductions (1) Such reimbursable expenses include salaries and related salary expenses for services which could be performed directly for the Partnership by independent parties such as legal, clerical, accounting, financial reporting, governmental reporting, transfer agent, data processing and duplication services. Such reimbursement of expenses will be made regardless of whether any distributions are made to the limited partners. (2) Mortgage Investment Servicing Fees are payable on the maximum amount to be funded on a Mortgage Investment from the date the Partnership first signs a letter of commitment for such Mortgage Investment. Fees shown in the table represent amounts earned by CC for servicing these mortgage investments. 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, 1998. (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. None. (b)(4) - Reports on Form 8-K. None. Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A California Limited Partnership By:/s/John B. Joseph _________________________________ John B. Joseph General Partner March 31, 1999 By:/s/Ronald R. White _________________________________ Ronald R. White General Partner March 31, 1999 By: CENTENNIAL CORPORATION General Partner /s/John B. Joseph _________________________________ John B. Joseph Executive Vice President March 31, 1999 /s/Ronald R. White _________________________________ Ronald R. White President March 31, 1999 /s/Joel H. Miner _________________________________ Joel H. Miner Chief Financial Officer March 31, 1999 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, 1998, 1997 and 1996 (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, 1998 and 1997.............................. F-4 Consolidated Statements of Operations -- Years ended December 31, 1998, 1997 and 1996............ F-7 Consolidated Statements of Partners' Equity -- Years ended December 31, 1998, 1997 and 1996............ F-9 Consolidated Statements of Cash Flows -- Years ended December 31, 1998, 1997 and 1996............ F-10 Notes to Consolidated Financial Statements.............. F-14 Schedule Schedule IV - Mortgage Loans on Real Estate............. F-36 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Centennial Mortgage Income Fund and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Orange County, California March 19, 1999 F-3 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Balance Sheets
December 31, 1998 and 1997 Assets 1998 1997 - ----------------------------------------------------------------- Cash and cash equivalents (note 5) $ 4,938,000 $ 1,018,000 Real estate loans receivable, earning 682,000 782,000 Real estate loans receivable, nonearning --- 1,072,000 Real estate loans receivable from unconsolidated investee, earning (note 5) 88,000 752,000 Real estate loans receivable from unconsolidated investee, nonearning (note 5) 12,000 1,241,000 - ----------------------------------------------------------------- 782,000 3,847,000 Less allowance for possible loan losses (note 3) --- 714,000 - ----------------------------------------------------------------- Net real estate loans receivable 782,000 3,133,000 - ----------------------------------------------------------------- Real estate owned, held for sale (notes 6 and 7) --- 7,450,000 Real estate owned, held for sale, insubstance foreclosed (note 6) --- 1,040,000 - ----------------------------------------------------------------- --- 8,490,000 F-4 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Balance Sheets (Continued) December 31, 1998 and 1997 Assets 1998 1997 - ----------------------------------------------------------------- Less allowance for possible losses on real estate owned (note 4) --- 2,354,000 - ----------------------------------------------------------------- Net real estate owned --- 6,136,000 - ----------------------------------------------------------------- Accrued interest receivable --- 5,000 Other assets, net 315,000 47,000 Due from unconsolidated investee --- 58,000 - ----------------------------------------------------------------- $ 6,035,000 $ 10,397,000 ================================================================= F-5 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Balance Sheets (Continued) December 31, 1998 and 1997 Liabilities and Partners' Equity 1998 1997 - ----------------------------------------------------------------- Notes payable (note 7) $ --- $ 2,421,000 Notes payable to affiliates (note 5) 2,000 73,000 Accounts payable and accrued liabilities 385,000 20,000 Interest payable to affiliates on notes secured by real estate (note 5) --- 39,000 Deferred profit on equity participation --- 289,000 - ----------------------------------------------------------------- Total liabilities 387,000 2,842,000 - ----------------------------------------------------------------- Partners' equity (deficit) -- 38,729 limited partnership units outstanding in 1998 and 1997 General partners (132,000) (525,000) Limited partners 5,780,000 8,080,000 - ----------------------------------------------------------------- Total partners' equity 5,648,000 7,555,000 Commitments (note 8) Contingencies (note 9) Subsequent event (note 10) - ----------------------------------------------------------------- $ 6,035,000 $ 10,397,000 =================================================================
See accompanying notes to consolidated financial statements F-6 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Operations
Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 - ----------------------------------------------------------------- Revenue: Interest on loans to affiliates, including fees (note 5) $ 47,000 $ 37,000 $ 100,000 Interest on loans to nonaffiliates, including fees 356,000 122,000 100,000 Interest on interest-bearing deposits (note 5) 83,000 72,000 85,000 Gain on sale of property 84,000 1,000 40,000 Income from operations of real estate owned 602,000 755,000 780,000 Other 27,000 5,000 --- - ----------------------------------------------------------------- Total revenue 1,199,000 992,000 1,105,000 - ----------------------------------------------------------------- Expenses: Provision for (recovery of) losses (notes 3 and 4) 155,000 (268,000) 40,000 Loss on sale of property --- 6,000 --- Share of losses in unconsolidated investees (note 5) 96,000 125,000 2,304,000 Operating expenses from operations of real estate owned 142,000 168,000 259,000 Operating expenses from operations of real estate owned paid to affiliates (note 5) 30,000 41,000 55,000 Expenses associated with non-operating real estate owned 125,000 162,000 226,000 F-7 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Operations (Continued) Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 - ----------------------------------------------------------------- Depreciation and amortization expense 7,000 12,000 23,000 Interest expense 245,000 378,000 476,000 General and administrative, affiliates (note 5) 286,000 203,000 218,000 General and administrative, nonaffiliates 87,000 103,000 100,000 Mortgage investment servicing fees paid to affiliates (note 5) 2,000 4,000 4,000 - ----------------------------------------------------------------- Total expenses 1,175,000 934,000 3,705,000 - ----------------------------------------------------------------- Income (loss) before minority interest 24,000 58,000 (2,600,000) Minority interest (note 5) 67,000 65,000 86,000 - ----------------------------------------------------------------- Net income (loss) $ 91,000 $ 123,000 $(2,514,000) ================================================================= Net income (loss) per limited partnership unit-basic and diluted $ 2.35 $ 3.18 $ (64.91) =================================================================
See accompanying notes to consolidated financial statements F-8 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Partners' Equity
Years ended December 31, 1998, 1997 and 1996 Total General Limited Partners' Partners Partners Equity - ----------------------------------------------------------------- Balance (deficit) at December 31, 1995 $ (525,000) $ 10,471,000 $ 9,946,000 Net loss --- (2,514,000) (2,514,000) - ----------------------------------------------------------------- Balance (deficit) at December 31, 1996 (525,000) 7,957,000 7,432,000 Net income --- 123,000 123,000 - ----------------------------------------------------------------- Balance (deficit) at December 31, 1997 (525,000) 8,080,000 7,555,000 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 =================================================================
See accompanying notes to consolidated financial statements F-9 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows Years ended December 31, 1998, 1997 and 1996
1998 1997 1996 - ----------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $ 91,000 $ 123,000 $(2,514,000) Adjustments to reconcile net income (loss) to net cash used in operating activities: Amortization of unearned loan fees (5,000) (2,000) (2,000) Depreciation and amortization 7,000 12,000 23,000 Provision for (recovery of) losses 155,000 (268,000) 40,000 Interest accrued to principal on loans to affiliates (9,000) (37,000) (195,000) Minority interest (67,000) (65,000) (86,000) Loss (gain) on sale of real estate owned (84,000) 5,000 (40,000) Share of losses in unconsolidated investees 96,000 125,000 2,304,000 Changes in assets and liabilities: (Increase) decrease in accrued interest receivable 5,000 (1,000) 14,000 (Increase) decrease in other assets (275,000) 45,000 (5,000) F-10 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows (Continued) Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 - ----------------------------------------------------------------- Increase (decrease) in accounts payable and accrued liabilities 365,000 (3,000) (28,000) Increase in interest and property taxes payable on real estate owned --- --- 4,000 Decrease in payable to affiliates --- (1,000) (3,000) Increase (decrease) in interest payable to affiliates on notes secured by real estate (39,000) (4,000) 49,000 - ----------------------------------------------------------------- Net cash provided by (used in) operating activities 240,000 (71,000) (439,000) - ----------------------------------------------------------------- Cash flows from investing activities: Principal collected on loans made to customers, net of amounts recorded as income in current period 932,000 24,000 50,000 Principal collected on loans made to affiliates 1,422,000 331,000 113,000 Advances on loans made to customers (20,000) (21,000) --- Advances on loans made to affiliates (209,000) (970,000) (1,044,000) Proceeds from sale of real estate owned 6,220,000 1,118,000 190,000 Capital expenditures for real estate owned (300,000) --- (273,000) (Increase) decrease in due from unconsolidated investee 58,000 (58,000) --- F-11 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows(Continued) Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 - ----------------------------------------------------------------- (Increase) decrease in short-term investments --- --- 103,000 - ----------------------------------------------------------------- Net cash provided by (used in) investing activities 8,103,000 424,000 (861,000) - ----------------------------------------------------------------- Cash flows from financing activities: Advances on notes payable to affiliates 136,000 19,000 70,000 Principal payments on notes payable (2,421,000) (934,000) (5,000) Principal payments on notes payable to affiliates (140,000) (132,000) --- Distributions to limited partners (1,998,000) --- --- - ----------------------------------------------------------------- Net cash provided by (used in) financing activities (4,423,000) (1,047,000) 65,000 - ----------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 3,920,000 (694,000) (1,235,000) Cash and cash equivalents at beginning of year 1,018,000 1,712,000 2,947,000 - ----------------------------------------------------------------- Cash and cash equivalents at end of year $ 4,938,000 $ 1,018,000 $ 1,712,000 ================================================================= F-12 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Consolidated Statements of Cash Flows (Continued) Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 - ----------------------------------------------------------------- Supplemental schedule of cash flow information: Cash paid during the year for: Interest $ 245,000 $ 356,000 $ 400,000 - ----------------------------------------------------------------- Supplemental schedule of noncash investing and financing activities: Decrease in deferred profit on equity participation and real estate loans resulting from foreclosure $ 289,000 $ --- $ 270,000 Decrease in notes payable and real estate owned resulting from foreclosure --- --- 650,000 Decrease in interest and taxes payable on real estate owned resulting from foreclosure --- --- 15,000 Decrease in allowance for possible losses on real estate loans and real estate owned as a result of sales and chargeoffs 3,223,000 1,747,000 437,000 Receipt of notes receivable as partial repayment of note receivable 584,000 --- ---
See accompanying notes to consolidate financial statements F-13 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Notes to Consolidated Financial Statements December 31, 1998, 1997, and 1996 (1) Summary of Significant Accounting Policies Business Centennial Mortgage Income Fund (the "Partnership") initially invested in commercial, industrial and residential income- producing real property through mortgage investments consisting of participating first mortgage loans, other equity participation loans, construction loans, and wrap-around and other junior loans. The Partnership's underwriting policy for granting credit was to fund loans secured by first and second deeds of trust on real property. The Partnership's area of concentration is in California. In the normal course of business, the Partnership participated with other lenders in extending credit to single borrowers; the Partnership did this in an effort to decrease credit concentrations and provide a greater diversification of credit risk. As of December 31, 1998, a majority of the loans secured by operating properties have been repaid to the Partnership. However, during the early 1990's, real estate market values for undeveloped land and commercial real estate in California declined severely. As the loans secured by undeveloped land and certain operating properties became delinquent, management of the Partnership elected to foreclose on certain of these loans, thereby increasing real estate owned balances. As a result, the Partnership 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, 1996 was $11,360,000, decreasing to $8,490,000 at year end 1997 and $ -0- at year end 1998. Basis of Presentation The Partnership formed several subsidiaries to own and operate certain of its real estate assets. The corporations formed were BNN Development, Inc., ("BNN"), Upland Foothill Retail, Inc., ("Upland"), CPI Development, Inc., ("CPI"), Grand Plaza Auto Retail, Inc., ("Grand Plaza"), LCR Development, Inc., ("LCR") and BKS Development, Inc., ("BKS"). All of these corporations are California corporations. F-14 The Partnership owns a 100 percent interest in Upland and CPI, 86.25 percent interest in BNN, 86.7 percent interest in Grand Plaza and a 50 percent interest in LCR and BKS. Several of the Partnership's assets 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. Upland, CPI, BNN and Grand Plaza have been consolidated in the accompanying consolidated financial statements, and all significant inter-company balances and transactions, including the aforementioned transfers, have been eliminated in consolidation. As the Partnership's ownership interest in LCR and BKS is more than 20 percent but does not exceed 50 percent, the Partnership accounts for its ownership interest using the equity method. Under the equity method of accounting, these loans are a component of the Partnership's investment in LCR and BKS, and therefore the Partnership has recorded losses by LCR and BKS as a reduction of the carrying value of these loans receivable (see note 5). Organization The Partnership was organized on December 13, 1983 in accordance with the provisions of the California Limited Partnership Act. The Partnership commenced operations in 1984. The general partners are John B. Joseph, Ronald R. White and Centennial Corporation ("CC"), a privately-held California corporation whose stock is owned by affiliates of Messrs. Joseph and White. Partners' Capital Accounts Cash Available for Distribution, as defined in the Partnership Agreement, is to be allocated 95 percent to the limited partners and 5 percent to the general partners until each limited partner has received an amount equal to a 12 percent non-cumulative annual return on his adjusted invested capital (as defined in the Partnership Agreement). Thereafter, Cash Available for Distribution is to be allocated 90 percent to the limited partners and 10 percent to the general partners. All distributions of Mortgage Reductions (as defined in the Partnership Agreement) after the first sixty months following the closing date of the Partnership, shall be distributed 99 percent to the limited partners and 1 percent to the general partners, until each limited partner has received a 12 percent cumulative annual return on his adjusted invested capital, after which such F-15 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 two years ended December 31, 1997. 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 are reported at the principal amount outstanding, net of unearned income and the allowance for possible loan losses. Interest accrual is discontinued when, in the opinion of management, its collection is deemed doubtful. The allowance for possible loan losses is established through a provision for possible losses charged to expense. Loans are charged against the allowance for possible loan losses when management believes that the collectibility of principal is unlikely. Management believes that the allowance for possible loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. Impaired Loans The Partnership considers a loan to be impaired when based upon current information and events, it believes it is probable that the Partnership will be unable to collect all amounts due according to the contractual terms of the loan agreement. In F-16 determining impairment, the Partnership considers large non- homogeneous loans including nonaccrual loans, troubled debt restructuring and performing loans which exhibit, among other characteristics, high loan-to-value ratios, low debt-coverage ratios, or other indications that the borrowers are experiencing increased levels of financial difficulty. The Partnership bases the measurement of collateral-dependent impaired loans on the fair value of the loan's collateral. The amount by which the recorded investment of the loan exceeds the measure of the impaired loan's value is recognized by recording a valuation allowance. Real Estate Owned Effective January 1, 1996, the Partnership adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 supersedes SOP 92-3 and also requires that long-lived assets to be disposed of be reported at the lower of the carrying amount or fair value less costs to sell. An impairment loss shall be measured as the amount by which the carrying amount of the asset exceeds the fair value of the assets less costs to sell. SFAS 121 requires that assets to be disposed of not be depreciated while they are held for disposal. Estimated fair values are determined by using appraisals, discounted cash flows and/or other valuation techniques. The actual market price of real estate can only be determined by negotiation between independent parties in a sales transaction. The Partnership considered all real estate owned as held for sale during 1998 and 1997. The Partnership considers collateral for a loan "insubstance" foreclosed only when the borrower actually surrenders the collateral to the creditor and the creditor receives physical possession of the borrower's assets. Loan Fees Origination fees and direct costs associated with lending are netted and amortized to interest income as an adjustment to yield over the respective lives of the loans using the interest method. Deferred Profit on Equity Participation Deferred profit on equity participation represents the Partnership's portion of equity from real estate loans/investments that was earned, but has not yet been paid by F-17 the borrower. Generally, revenue is recognized when collection of the deferred profit becomes assured. No deferred profit was recognized during 1995, 1996 and 1997. Both the loan and associated deferred profit were charged off during 1998. 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. F-18 The following is a recap of current and cumulative temporary differences between income for generally accepted accounting principles ("GAAP") and taxable earnings: Current Temporary Differences Partnership Corporations Total (Unaudited) (Unaudited) (Unaudited) - -------------------------------------------------------------------------------- - ---------- GAAP loss for the year ended December 31, 1998 $(2,181,000) $ 2,272,000 $ 91,000 Provision for losses (1,934,000) (1,134,000) (3,068,000) Charge-offs deductible for tax purposes (2,115,000) --- (2,115,000) Deferred profit previously taxed (289,000) --- (289,000) Accrued expenses deducted using the cash method (220,000) (286,000) (506,000) Carrying costs expensed for books and capitalized for tax purposes --- (1,214,000) (1,214,000) Depreciation 210,000 --- 210,000 Minority interest share of losses not taxable --- 363,000 363,000 Share of losses in unconsolidated investee not deductible (2,680,000) --- (2,680,000) Net operating loss carry forward --- (1,000) (1,000) - -------------------------------------------------------------------------------- - ---------- Taxable (loss) for the year ended December 31, 1998 $(9,209,000) $ --- $(9,209,000) ================================================================================ ========== Taxable loss allocable to General Partners $ --- ================================================================================ ========== Taxable loss per limited partner unit $ (237.78) ================================================================================ ==========
F-19 - ----------------------------------------------------------------- Cumulative Temporary Differences as of December 31, 1998 Partnership Corporations (Unaudited) (Unaudited) - ----------------------------------------------------------------- Net operating loss carryforwards $ --- $ 1,000 Share of losses in unconsolidated investee not deductible 4,000 --- - ----------------------------------------------------------------- Total cumulative temporary differences $ 4,000 $ 1,000 =================================================================
The subsidiary corporations are subject to taxation and account for income taxes under an asset liability approach to establishing deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the corporations' assets and liabilities. None of the subsidiary corporations have paid any income taxes since their respective formations and all of them have had net deferred tax assets which have been fully offset by valuation allowances as of December 31, 1998, 1997 and 1996. Accordingly, no tax expense or benefit has been recorded by these corporations during the three years ended December 31, 1998. No deferred tax asset related to the corporations' cumulative temporary differences shown above has been recorded in the consolidated financial statements due to the improbability of realization. Since these corporations were almost entirely liquidated as of December 31, 1998, it is unlikely that future consolidated financial statements will reflect any material income tax expense in the future. 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 1998, 1997 and 1996. F-20 Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenue and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition Revenue from rental income on real estate owned is recognized on a straight-line basis over the life of the lease when payments become due under operating leases. During 1998, 1997 and 1996, the Partnership has recognized gains or losses on the sale of real estate owned as the gains or losses are determinable and the earnings process is complete. Financial Information about Industry Segments The Partnership adopted Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information"(SFAS 131"). 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. The adoption of SFAS 131 did not have an impact on the Partnership's financial reporting. (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. F-21 Accrued Interest Receivable, Accounts Payable and Accrued Liabilities and Interest Payable Carrying amounts approximate fair value because of the short-term maturity of these instruments, or they are due on demand. Real Estate Loans Receivable - Earning and Nonearning The net carrying value of the real estate loans receivable, earning and nonearning, is estimated to be fair value. Management believes these loans are impaired, and accordingly, the loans are carried at the fair value of the underlying real estate collateral. Real Estate Loans Receivable from Unconsolidated Investee - Earning and Nonearning The net carrying value of loans from unconsolidated investee is not estimable due to the uncertainty of the amounts and timing of future payments to be made. Notes Payable The carrying value of notes payable to nonaffiliates approximate fair value because the interest rates on these notes are approximately equal to current market rates for notes secured by similar assets. Notes Payable to Affiliates As discussed in note 5, the notes payable to affiliates are reduced by the cumulative minority interest losses to reflect the net outstanding payable to the affiliate. Due to the uncertainty of the amounts and timing of future payments to be made, the determination of fair value of these notes is not practical. F-22 (3) Allowance for Possible Loan Losses Changes in the allowance for possible loan losses are as follows:
1998 1997 1996 - ----------------------------------------------------------------- Balance at beginning of year $ 714,000 $ 982,000 $ 957,000 Loans charged-off (569,000) --- --- Provision for (recovery of) loan losses (145,000) (268,000) 25,000 - ----------------------------------------------------------------- Balance at end of year $ --- $ 714,000 $ 982,000 =================================================================
At December 31, 1998, there was one loan to an unconsolidated investee which was considered impaired and for which there is no related allowance for possible loan losses at December 31, 1998. However, as discussed in note 5, the unconsolidated investee has recorded substantial operating losses and the Partnership's proportionate share of the losses in unconsolidated investee has reduced the net carrying value of this loan to $12,000 as of December 31, 1998. There were additional investments of $209,000 and $255,000 in impaired loans during the years ended December 31, 1998 and 1997, respectively. For the years ended December 31, 1998, 1997 and 1996, the Partnership recognized interest income on these impaired loans of $349,000, $96,000 and $169,000, respectively. For the year ended December 31, 1998, the Partnership recognized $311,000 in interest income using the cash basis method of income. There was no interest income recognized using the cash basis method of income during the years ended December 31, 1997 and 1996. F-23 (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 1996 - ----------------------------------------------------------------- Balance at beginning of year $ 2,354,000 $ 4,101,000 $ 4,523,000 Provision for losses, net of recoveries 300,000 --- 15,000 Real estate owned charged-off (2,654,000) (1,747,000) (437,000) - ----------------------------------------------------------------- Balance at end of year $ --- $ 2,354,000 $ 4,101,000 =================================================================
(5) Transactions with Affiliates Under the provisions of the Partnership Agreement, CC is entitled to receive from the Partnership mortgage investment servicing fees for loans serviced equal to an annual rate of 1/4 of 1 percent of the committed amounts to be funded by the Partnership. The Partnership incurred and paid $2,000, $4,000 and $4,000 of mortgage investment servicing fees payable to CC in 1998, 1997 and 1996, respectively. As discussed in note 1, the Partnership owns 50 percent of the stock of two corporations which have not been consolidated in the accompanying financial statements, LCR and BKS. The balance of stock in these corporations is owned by Centennial Mortgage Income Fund II ("CMIF II"), an affiliate. LCR invested in a joint venture, Silverwood Homes ("Silverwood") which has constructed homes. The Partnership has participated in making several loans to these corporations and this joint venture. Under the equity method of accounting, these loans are a component of the Partnership's investment in LCR and BKS, and therefore the Partnership has recorded losses by LCR and BKS as a reduction of the carrying value of these loans receivable. The Partnership wrote off its investment in and loans receivable from BKS during 1996 when its share of losses equaled its investment and the probability of recovery of any of its investment became unlikely. Accordingly, the 1998 and 1997 consolidated financial statements include only amounts related to the LCR and Silverwood loans and investments. F-24 A summary of these real estate loans receivable from unconsolidated investee as of December 31, 1998 is as follows:
Net Principal Losses Carrying Balance Offset Value - ----------------------------------------------------------------- Unsecured note receivable from LCR (a) $ --- $ --- $ --- 50 percent interest in unsecured note receivable from LCR (a) --- --- --- 50 percent interest in development loan secured by a first trust deed from Silverwood (a) --- --- --- 50 percent interest in construction loan secured by a first trust deed from Silverwood 23,000 11,000 12,000 Construction loan secured by a first trust deed from Silverwood 88,000 --- 88,000 - ----------------------------------------------------------------- Totals $ 111,000 $ 11,000 $ 100,000 - -----------------------------------------------------------------
(a) The unpaid balances of these loans were charged off by the Partnership during 1998 when the collateral associated with the notes was sold to an unaffiliated party. The Partnership accepted its 50 percent share of the net proceeds from the sale of the collateral and released its security interest in the collateral. Since the proceeds from the sale were less than the balances of the notes, the Partnership charged off the balance of the notes. The cumulative principal balance of the loans charged off was $2,771,000. The Partnership has not accrued its share of interest on two of the Silverwood loans which was approximately $47,000 as of December 31, 1998. F-25 A summary of these real estate loans receivable from unconsolidated investee as of December 31, 1997 is as follows:
Net Principal Losses Carrying Balance Offset Value - ----------------------------------------------------------------- Unsecured note receivable from LCR $ 1,250,000 $ 1,250,000 $ --- 50 percent interest in unsecured note receivable from LCR 1,055,000 1,055,000 --- 50 percent interest in development loan secured by a first trust deed from Silverwood 1,212,000 381,000 831,000 50 percent interest in construction loan secured by a first trust deed from Silverwood 239,000 --- 239,000 50 percent interest in construction loan secured by a first trust deed from Silverwood 171,000 --- 171,000 Construction loan secured by a first trust deed from Silverwood 752,000 --- 752,000 - ----------------------------------------------------------------- Totals $ 4,679,000 $ 2,686,000 $ 1,993,000 - -----------------------------------------------------------------
The Partnership had not accrued its share of interest on the unsecured notes receivable from LCR which was approximately $715,000 as of December 31, 1997. The Partnership had not accrued its share of interest on three of the Silverwood loans which was approximately $188,000 as of December 31, 1997. F-26 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 accounts for its investment in this corporation using the equity method. The following represents condensed financial information for LCR at December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996: F-27 LCR Development, Inc. Consolidated Balance Sheets
December 31, December 31, Assets 1998 1997 - ----------------------------------------------------------------- Cash $ 11,000 $ 11,000 Restricted cash 20,000 20,000 Real estate owned 119,000 6,950,000 Less allowance for losses on real estate investments 17,000 4,063,000 - ----------------------------------------------------------------- Net real estate owned 102,000 2,887,000 Organization costs --- 1,000 - ----------------------------------------------------------------- $ 133,000 $ 2,919,000 ================================================================= Liabilities and Stockholders' Deficit - ----------------------------------------------------------------- Notes payable to affiliates: CMIF $ 2,882,000 $ 4,679,000 CMIF II 1,549,000 2,250,000 - ----------------------------------------------------------------- Total notes payable 4,431,000 6,929,000 Accounts payable and accrued liabilities 12,000 38,000 Interest payable to affiliates 1,837,000 1,377,000 Payable to affiliates 5,000 75,000 - ----------------------------------------------------------------- Total liabilities 6,285,000 8,419,000 Stockholders' deficit (6,152,000) (5,500,000) - ----------------------------------------------------------------- $ 133,000 $ 2,919,000 =================================================================
F-28 LCR Development, Inc. Consolidated Statements of Operations
Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 - ----------------------------------------------------------------- Revenues Housing sales $ 1,509,000 $ 834,000 $ 233,000 Sale of finished lots 1,499,000 --- --- - ---------------------------------------------------------------- 3,008,000 834,000 233,000 - ---------------------------------------------------------------- Costs and expenses Cost of housing sales 1,437,000 851,000 238,000 Cost of sale of finished lots 1,514,000 --- --- Provision for losses on real estate owned 216,000 207,000 2,516,000 Selling and marketing expenses 66,000 131,000 184,000 General and administrative 24,000 64,000 162,000 - ----------------------------------------------------------------- 3,257,000 1,254,000 3,100,000 - ----------------------------------------------------------------- Operating loss (249,000) (420,000) (2,867,000) Interest expense 403,000 361,000 151,000 - ----------------------------------------------------------------- Net (loss) $ (652,000) $ (781,000) $(3,018,000) ================================================================= Interest not included in share of losses (460,000) (532,000) (336,000) - ----------------------------------------------------------------- Allocable net loss $ (192,000) $ (249,000) $(2,682,000) ================================================================= Share of losses recorded $ (96,000) $ (125,000) $(1,966,000) =================================================================
Although the Partnership owns a 50 percent interest in LCR, it holds more than 50 percent of LCR's debt. Since the Partnership F-29 made a $1,250,000 unsecured loan to LCR, the Partnership was allocated losses to the extent of the unsecured loan and remaining losses were allocated 50 percent to the Partnership and 50 percent to CMIF II during 1996. Additionally, the Partnership and CMIF II have not recorded interest income in connection with the $1,837,000 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.
Difference of Allocation of Share of Losses 1998 - ----------------------------------------------------------------- The Partnership's 50 percent share of LCR's stockholders' deficit at December 31, 1998 $(3,076,000) Cumulative interest payable by LCR to the Partnership not accrued as income by the Partnership 919,000 Loans receivable considered as part of the Partnership's investment (b) 2,882,000 Disproportionate loss allocation (625,000) - ----------------------------------------------------------------- Net loans receivable $ 100,000 ================================================================= (b) The partnership has charged off $2,771,000 of these loans.
As discussed above, the Partnership holds 50 percent of the stock of BKS with CMIF II. BKS owned a 283 acre residential tract in Bakersfield, California and foreclosed on this property on August 8, 1994. Bonds and taxes accrued on the property increased from $1,605,000 at December 31, 1995 to $2,085,000 at December 31, 1996. During 1996, the bond holders commenced foreclosure proceedings on the property. Management elected to abandon the property in 1996 due to the fact that land values had not increased. Therefore, during 1996, the Partnership recorded its $338,000 share of losses in connection with BKS which resulted in the Partnership's investment in BKS being reduced to a zero balance. Bonds, property taxes and note payable to affiliates are nonrecourse liabilities and, therefore, the Partnership and BKS have no contingent liability in excess of the property. The F-30 Partnership has no future obligation nor risk of additional losses related to this investee. 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 $242,000, $244,000 and $273,000 for such services in 1998, 1997 and 1996, respectively. The Partnership also accrued an additional $74,000 as general and administrative, affiliates expense during 1998. This amount is included in accounts payable and accrued liabilities on the consolidated balance sheet as of December 31, 1998 and represents the Partnership's estimated share of certain severance pay that will become payable in April 1999 (see note 8). During 1998, 1997 and 1996, the Partnership maintained interest- bearing deposits with Sunwest Bank, an affiliate of the general partners. The balances at December 31, 1998, 1997 and 1996 were $1,752,000, $2,000 and $534,000, respectively. Interest earned on such deposits for 1998, 1997 and 1996 was $17,000, $13,000 and $22,000, respectively. In July 1997, the auto retail center in Corona, California was sold by Grand Plaza Auto Retail, Inc. ("Grand Plaza"), a consolidated subsidiary corporation of the Partnership. The Partnership owned an 86.7 percent interest in Grand Plaza with the balance of 13.3 percent owned by Centennial Mortgage Income Fund III ("CMIF III") an affiliate. Both the Partnership and CMIF III had made loans to Grand Plaza prior to the sale that exceeded the value of the assets held by it. CMIF III's share of these loans had been reduced by its share of Grand Plaza's operating losses, with the net amount having been shown as notes and interest payable to affiliates in the Partnership's consolidated financial statements. Grand Plaza realized $935,000 in net cash proceeds from the sale of the property. Grand Plaza charged off $1,665,000 of its $2,600,000 carrying value of the property against its allowance for losses on real estate owned and recorded a $6,000 loss on the sale. The net sales proceeds were used to pay a portion of the notes payable by Grand Plaza to the Partnership and CMIF III. CMIF III's share of the proceeds was $123,000. In December 1998, the 19 acres in Sacramento was sold by BNN for $1,300,000 net of selling costs. BNN recorded a $57,000 gain on sale of the property after charging off its previously recorded $1,579,000 allowance for losses against the cost basis of the F-31 property. 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 owns 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 and CMIF III funded $136,000 in additional advances under its loan to BNN during 1998. CMIF III received $179,000 of the cash proceeds from the sale as a partial payment of its note receivable and interest due from BNN. Notes payable and interest payable to affiliates at December 31, 1998 and 1997 includes $13,000 and $473,000, respectively, and the Partnership had recorded $11,000 and $361,000, respectively, of minority interest in cumulative losses from this corporate joint venture against the note payable to affiliates balance as of the same dates. The notes payable to affiliates balance reflects CMIF III's share of the remaining note payable by the corporation to the Partnership and CMIF III. (6) Real Estate Owned
Real estate owned consists of the following: December 31, December 31, 1998 1997 - ----------------------------------------------------------------- 1. Shopping Center in Upland, CA $ --- $ 4,628,000 2. 19 acres in Sacramento, CA --- 2,822,000 3. Condominiums in Oxnard, CA --- 1,040,000 - ----------------------------------------------------------------- Total real estate owned $ --- $ 8,490,000 =================================================================
At December 31, 1997 property number 3 was accounted for as insubstance foreclosure under SFAS 118 as the Partnership did not hold legal title to the property, but the borrower had surrendered the collateral to the control of the Partnership. The last four condominiums were sold during the first quarter of 1998. These sales generated approximately $762,000 in net cash proceeds and resulted in a $22,000 gain on sale, after charging off the previously recorded $299,000 allowance for losses against the property. F-32 Property number 1 was sold in November 1998. The sale generated $3,861,000 in gross cash proceeds before paying off the secured debt discussed in note 7 to the consolidated financial statements. The Partnership recorded a $5,000 gain on the sale after charging off the $776,000 previously recorded allowance for losses against the property.
The following is a summary of consolidated real estate owned for the years ended December 31, 1998, 1997 and 1996: 1998 1997 1996 - ----------------------------------------------------------------- Balance at beginning of year $ 8,490,000 $11,360,000 $12,339,000 Additions during period: Improvements 300,000 --- 273,000 Deduction during period: Real estate sold (6,136,000) (1,123,000) (150,000) Real estate foreclosed --- --- (665,000) Chargeoffs (2,654,000) (1,747,000) (437,000) - ----------------------------------------------------------------- Balance at year end $ --- $ 8,490,000 $11,360,000 =================================================================
(7) Notes Payable
Notes payable consist of the following: December 31, December 31, 1998 1997 - ----------------------------------------------------------------- Note payable secured by shopping center in Upland, CA with interest and principal payments due monthly of $24,000; interest rate of 9.5 percent which may be adjusted based on changes in the LIBOR rate, repaid in November 1998 $ --- $ 2,421,000 - ----------------------------------------------------------------- Total note payable $ --- $ 2,421,000 =================================================================
F-33 (8) Commitments The day to day operations of the Partnership and several other affiliated partnerships are carried on by employees of the corporate general partner, Centennial Corporation ("CC"). CC no longer has any significant operations other than the management of these partnerships who are in the repayment stage. During the first quarter of 1998, several employees resigned from their employment at CC. Their resignations were principally due to the anticipated disposition of the majority of the assets owned by the Partnership and other affiliated partnerships in the relatively near future. The disposition of these assets could reasonably be expected to precipitate layoffs, and given the relatively robust job market in Southern California, where the general partners conduct their operations, these employees opted to secure positions with other companies with more promising futures. As of April 1, 1998, CC employed only six employees. All of the remaining employees had been employed by CC for over ten years and had intimate knowledge of the partnerships' operations. The general partners concluded that it would be in the best interest of the Partnership to provide the remaining employees with some type of incentive for them to continue working for the partnerships until the majority of the partnerships' assets were liquidated. Accordingly, CC entered into twelve-month employment contracts with each of these employees which expire on March 31, 1999. These employment contracts have been guaranteed by the Partnership and the affiliated partnerships. The contracts provided that CC could exercise an option to extend the contract for any employee in three month increments at the end of each calendar quarter if it determined that such extension was in the best interest of the partnerships. CC has exercised this option for one employee until December 1999. All of the remaining contracts will expire in March 1999. The contracts include an increase in salary of 10 percent and also provide that if these employees remain employed by CC until the end of the contract term, including extensions, they will be entitled to severance pay equal to six months base salary. The maximum total salaries, employer taxes, related benefits and severance pay included in these contracts is approximately $623,000. The Partnership's anticipated share of this cost is estimated to be between $275,000 and $300,000, depending on the amount of time which will be spent by these employees in managing the affairs of the Partnership. The Partnership's share of the cost of these contracts during the year ended December 31, 1998 was approximately $213,000. The Partnership has recorded $74,000 in accrued severance benefits as of December 31, 1998. The Partnership's estimated share of the cost of the contract extension is less than $20,000. F-34 (9) 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 has been set aside and the plaintiff's appeal of the set aside ruling has been denied by the Court. The Court has also ruled that the prior jury found 0% liability as to the Partnership for non-economic damages and that the plaintiffs can only proceed to trial against the Partnership for recovery of economic damages. 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 prevail in these actions, the Partnership's insurance coverage and/or the security company's insurance carrier should prevent the Partnership from suffering a material loss from these proceedings. There are no other material pending legal proceedings other than ordinary routine litigation incidental to the Partnership's business. Based on part of advice of legal counsel, management does not believe that the results of any of these matters will have a material impact on the Partnership's financial position or results of operations. (10) Subsequent Event The Partnership paid a $3,873,000 cash distribution to limited partners in February 1999. F-35 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Schedule IV
Mortgage Loans on Real Estate December 31, 1998 Interest Final Periodic Description Rate Maturity Date Payment Terms - -------------------------------------------------------------------------------- - ---------- Note secured by: 50 percent interest Interest only - in First Trust Balloon payments of Deed on 157 lots $325,000 in July 1999 and in Lancaster, CA 8% Fixed April 23, 2000 $745,000 in July 2000 50 percent interest in Second Trust Interest only - Deed on 157 lots Balloon payment of in Lancaster, CA 10% Fixed April 23, 1999 $100,000 in April 1999 50 percent interest in Second Trust Deed on one single family home P + I due at in Lancaster, CA Prime + 1% July 1, 1998 maturity First Trust Deed on one single family home in Lancaster, CA 9.5% fixed April 30, 2000 P + I monthly F-36 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Schedule IV Mortgage Loans on Real Estate (Continued) December 31, 1998 Interest Final Periodic Description Rate Maturity Date Payment Terms - -------------------------------------------------------------------------------- - ---------- Note secured by: First Trust Deed on one single family home P + I due at in Lancaster, CA Prime + 1% January 1, 1999 maturity F-37 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Schedule IV Mortgage Loans on Real Estate (Continued) December 31, 1998 Principal Amount Face Carrying of Loan Subject Amount of Amount of to Delinquent Description Prior Liens Mortgages Mortgages (F1) Principal or Interest - -------------------------------------------------------------------------------- - ---------- Note secured by: 50 percent interest in First Trust Deed on 157 lots $1,070,000 in Lancaster, CA None (50% - $535,000) $542,000 None 50 percent interest in Second Trust Deed on 157 lots 1st TD of $100,000 in Lancaster, CA $1,070,000 (50% - $50,000) 51,000 None 50 percent interest in Second Trust Deed on one single family home $1,034,000 in Lancaster, CA $88,000 (50% - $517,000) 23,000 $23,000 First Trust Deed on one single family home in Lancaster, CA None $90,000 89,000 None F-38 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Schedule IV Mortgage Loans on Real Estate (Continued) December 31, 1998 Principal Amount Face Carrying of Loan Subject Amount of Amount of to Delinquent Description Prior Liens Mortgages Mortgages (F1) Principal or Interest - -------------------------------------------------------------------------------- - ---------- Note secured by: First Trust Deed on one single family home in Lancaster, CA None $870,000 $88,000 $88,000 Loss from unconsolidated investee (11,000) - -------------------------------------------------------------------------------- - ---------- $ 782,000 $ 111,000 ================================================================================ ========== Aggregate cost for Federal Income Tax purpose is $782,000 at December 31, 1998. F-39 CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES A Limited Partnership Schedule IV Mortgage Loans on Real Estate (Continued) December 31, 1998 The following is a summary of activity for the years ended December 1998, 1997 and 1996. 1998 1997 1996 - -------------------------------------------------------------------------------- - ---------- Balance at beginning of year $ 3,847,000 $ 3,297,000 $ 4,793,000 Additions during period: New mortgage loans/disbursements 229,000 991,000 1,044,000 Other - Interest reserve, amortization and transfer from accrued interest 14,000 39,000 197,000 Deductions during period: Collections of principal (2,354,000) (355,000) (163,000) Charge-offs (569,000) --- (270,000) Offset against deferred profit on equity participation (289,000) --- - --- Losses from unconsolidated investees (96,000) (125,000) (2,304,000) - -------------------------------------------------------------------------------- - ---------- Balance at year end $ 782,000 $ 3,847,000 $ 3,297,000 ================================================================================ =========
See accompanying independent auditors' report. F-40 Exhibit 21 LCR DEVELOPMENT, INC. A California Corporation Consolidated Financial Statements December 31, 1998, 1997 and 1996 (with Independent Auditors' Report Thereon) F-41 LCR DEVELOPMENT, INC. A California Corporation Index to Consolidated Financial Statements Consolidated Financial Statements Page Independent Auditors' Report ............................. F-43 Consolidated Balance Sheets -- December 31, 1998 and 1997............................... F-44 Consolidated Statements of Operations -- Years ended December 31, 1998, 1997 and 1996........... F-46 Consolidated Statements of Stockholders' Equity (Deficit) Years ended December 31, 1998, 1997 and 1996........... F-47 Consolidated Statements of Cash Flows -- Years ended December 31, 1998, 1997 and 1996........... F-48 Notes to Consolidated Financial Statements ............... F-51 F-42 INDEPENDENT AUDITORS' REPORT The Board of Directors LCR Development, Inc.: We have audited the consolidated balance sheets of LCR Development, Inc. and subsidiary (the "Company") as of December 31, 1998 and 1997 and the related statements of operations, stockholders' equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 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 1997, and the results of their operations and their cash flows for each of the years in the three-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-43 LCR Development, Inc. Consolidated Balance Sheets
December 31, December 31, Assets 1998 1997 - ----------------------------------------------------------------- Cash $ 11,000 $ 11,000 Restricted cash 20,000 20,000 Real estate owned (note 5) 119,000 6,950,000 Less allowance for losses on real estate investments (note 4) 17,000 4,063,000 - ----------------------------------------------------------------- Net real estate owned 102,000 2,887,000 Organization costs --- 1,000 - ----------------------------------------------------------------- $ 133,000 $ 2,919,000 ================================================================= Liabilities and Stockholders' Equity (Deficit) - ----------------------------------------------------------------- Notes payable to affiliates: CMIF $ 2,882,000 $ 4,679,000 CMIF II 1,549,000 2,250,000 - ----------------------------------------------------------------- Total notes payable (note 7) 4,431,000 6,929,000 Accounts payable and accrued liabilities 12,000 38,000 Interest payable to affiliates 1,837,000 1,377,000 Payable to affiliates (note 6) 5,000 75,000 - ----------------------------------------------------------------- Total liabilities 6,285,000 8,419,000 F-44 LCR Development, Inc. Consolidated Balance Sheets (Continued)
Liabilities and December 31, December 31, Stockholders' Equity (Deficit) 1998 1997 - ----------------------------------------------------------------- Stockholders' equity (deficit) Common stock, no par value; 300 shares authorized; 300 shares issued and outstanding in 1998 and 1997 3,000 3,000 Accumulated deficit (6,155,000) (5,503,000) - ----------------------------------------------------------------- Total stockholders' equity (deficit) (6,152,000) (5,500,000) Contingencies (Note 9) Uncertainties (Note 2) - ----------------------------------------------------------------- $ 133,000 $ 2,919,000 =================================================================
See accompanying notes to consolidated financial statements F-45 LCR Development, Inc. Consolidated Statements of Operations
Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 - ----------------------------------------------------------------- Revenues Housing sales $ 1,509,000 $ 834,000 $ 233,000 Sale of finished lots 1,499,000 --- --- - ----------------------------------------------------------------- 3,008,000 834,000 233,000 - ----------------------------------------------------------------- Costs and expenses Cost of housing sales 1,437,000 852,000 238,000 Cost of finished lots sold 1,514,000 --- --- Provision for losses on real estate owned (note 4) 216,000 207,000 2,516,000 Selling and marketing expenses 66,000 131,000 184,000 General and administrative 24,000 64,000 162,000 - ----------------------------------------------------------------- 3,257,000 1,254,000 3,100,000 - ----------------------------------------------------------------- Operating loss (249,000) (420,000) (2,867,000) Interest expense (note 5) 403,000 361,000 151,000 - ----------------------------------------------------------------- Loss before income taxes $ (652,000) $ (781,000) $(3,018,000) - ----------------------------------------------------------------- Income taxes (note 8) --- --- --- - ----------------------------------------------------------------- Net loss $ (652,000) $ (781,000) $(3,018,000) ================================================================= Net loss per common share $ (2,173) $ (2,603) $ (10,060) ================================================================= Weighted average number of common shares outstanding 300 300 300 =================================================================
See accompanying notes to consolidated financial statements F-46 LCR Development, Inc. Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1998, 1997 and 1996 Total Stockholders' Common Accumulated Equity Stock Deficit (Deficit) - ----------------------------------------------------------------- Balance (deficit) at December 31, 1995 $ 3,000 $ (1,704,000) $ (1,701,000) Net loss --- (3,018,000) (3,018,000) - ----------------------------------------------------------------- Balance (deficit) at December 31, 1996 3,000 (4,722,000) (4,719,000) Net loss --- (781,000) (781,000) - ----------------------------------------------------------------- Balance (deficit) at December 31, 1997 3,000 (5,503,000) (5,500,000) 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-47 LCR Development, Inc. Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 - ----------------------------------------------------------------- Cash flows from operating activities: Net loss $ (652,000) $ (781,000) $(3,018,000) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Provision for possible losses 216,000 207,000 2,516,000 Changes in assets and liabilities: Decrease in organization costs 1,000 --- 1,000 Decrease (increase) in real estate owned 2,569,000 (500,000) (1,237,000) Increase (decrease) in interest payable 460,000 532,000 336,000 Increase (decrease) in accounts payable and accrued liabilities (21,000) 27,000 10,000 Increase (decrease) in payable to affiliates (75,000) 59,000 15,000 - ----------------------------------------------------------------- Net cash provided by (used in) operating activities 2,498,000 (456,000) (1,377,000) - ----------------------------------------------------------------- Cash flows from investing activities: Increase in restricted cash --- (10,000) (10,000) - ----------------------------------------------------------------- F-48 LCR Development, Inc. Consolidated Statements of Cash Flows (Continued) Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 - ----------------------------------------------------------------- Net cash used in investing activities --- (10,000) (10,000) - ----------------------------------------------------------------- Cash flows from financing activities- Repayments of notes payable (2,740,000) --- --- Advances received on notes payable 242,000 477,000 1,387,000 - ----------------------------------------------------------------- Net cash (used in) provided by financing activities (2,498,000) 477,000 1,387,000 - ----------------------------------------------------------------- Net increase (decrease) in cash --- 11,000 --- Cash at beginning of year 11,000 --- --- - ----------------------------------------------------------------- Cash at end of year $ 11,000 $ 11,000 $ --- ================================================================= F-49 LCR Development, Inc. Consolidated Statements of Cash Flows (Continued) Years ended December 31, 1998, 1997 and 1996 1998 1997 1996 - ----------------------------------------------------------------- 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 8,000
See accompanying notes to consolidated financial statements F-50 LCR DEVELOPMENT, INC. Notes to Consolidated Financial Statements December 31, 1998, 1997, 1996 (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 F-51 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. (2) Ability to Continue as a Going Concern LCR and Silverwood has $6,285,000 in liabilities outstanding as of December 31, 1998 and has 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. F-52 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 1996 - ----------------------------------------------------------------- Balance at beginning of year $4,063,000 $3,898,000 $1,390,000 Real estate owned charged-off (4,262,000) (42,000) (8,000) Provision for losses 216,000 207,000 2,516,000 - ----------------------------------------------------------------- Balance at end of year $ 17,000 $4,063,000 $3,898,000 =================================================================
F-53 (5) Real Estate Owned Real estate owned consists of the following: 1998 1997 - ----------------------------------------------------------------- Residential lots held for development $ --- $5,340,000 Model home complex --- 478,000 Production homes under construction and held for sale 119,000 1,132,000 - ----------------------------------------------------------------- Sub-total 119,000 6,950,000 Less: allowance for possible losses (17,000) (4,063,000) Net real estate owned $ 102,000 $2,887,000 =================================================================
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 three years ended December 31,1998 was as follows: 1998 1997 1996 - ----------------------------------------------------------------- Interest incurred $ 524,000 $ 568,000 $ 517,000 Interest capitalized (121,000) (207,000) (366,000) - ----------------------------------------------------------------- Interest expensed $ 403,000 $ 361,000 $ 151,000 ================================================================= 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 F-54 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, $60,000 and $160,000 of these costs to Home Devco and affiliates for the years ended December 31, 1998, 1997 and 1996, 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 balances at December 31, 1997 and 1996 were $75,000 and $16,000, respectively. (7) Notes Payable to Affiliates
Notes payable to affiliates consist of the following: (dollars in thousands) December 31, December 31, 1998 1997 - ----------------------------------------------------------------- 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 $ 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 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 2,154 F-55 Notes payable to affiliates consist of the following: (continued) (dollars in thousands) December 31, December 31, 1998 1997 - ----------------------------------------------------------------- Note payable to CMIF and CMIF II secured by first trust deed on 4 lots in Lancaster, CA; repaid in 1998. --- 484 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. 45 174 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. 88 752 - ----------------------------------------------------------------- Total notes payable $ 4,431 $ 6,929 =================================================================
All notes payable are past due as of December 31, 1998 or become due during 1999. (8) Income Taxes LCR and Silverwood file separate Federal and State income tax returns. LCR and Silverwood have been consolidated for the following schedules. F-56 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 1996 - ----------------------------------------------------------------- Income tax benefit at the statutory rate $ (180,000) $ (266,000) $(1,026,000) State tax benefit, net of Federal tax benefit (34,000) (48,000) (184,000) Valuation allowance 112,000 308,000 1,204,000 Other 110,000 6,000 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. F-57 The components of the consolidated net deferred tax asset at December 31, 1998, 1997 and 1996 are as follows:
1998 1997 1996 - ----------------------------------------------------------------- Net operating loss carryforwards $ 1,485,000 $ 156,000 $ 78,000 Chargeoffs of real estate not yet deductible 442,000 --- --- Provision for losses on real estate 7,000 1,629,000 1,563,000 Capitalized interest 1,000 38,000 (1,000) Interest not deductible until paid 370,000 291,000 185,000 Section 263A expenses --- 80,000 61,000 - ----------------------------------------------------------------- Total deferred tax asset 2,306,000 2,194,000 1,886,000 Less valuation allowance (2,306,000) (2,194,000) (1,886,000) - ----------------------------------------------------------------- Net asset recorded $ --- $ --- $ --- =================================================================
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-58 EX-27 2 ART. 5 FDS FOR FISCAL YEAR END 12-31-98
5 1,000 YEAR DEC-31-1998 DEC-31-1998 4,938 0 782 0 0 5,047 0 0 6,035 387 0 0 0 0 5,648 6,035 0 1,199 0 1,175 (67) 155 245 91 0 91 0 0 0 91 2.35 2.35
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