FORM 10-K/A
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, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission File Number: 0-22520
CENTENNIAL MORTGAGE INCOME FUND
(Exact name of registrant as specified in its charter)
California 33-0053488
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1540 South Lewis Street, Anaheim, California 92805
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (714)502-8484
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Units
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate by check mark whether if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (Section 229.405 of this
chapter) is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
YES X NO
This report includes a total of 86 pages.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
General
Net loss and loss per limited partnership unit were $(2,514,000)
and $(64.91) for the year ended December 31, 1996 down from
$(2,776,000) and $(71.68) in 1995 and up from $(1,286,000) and
$(33.21) in 1994. The decrease in loss in 1996 is primarily the
result of a decrease in the provision for possible losses which
was partially offset by an increase in share of losses in
unconsolidated investees. The increase in loss in 1995 is
primarily the result of an increase in share of losses in
unconsolidated investees.
Liquidity and Capital Resources
At December 31, 1996, the Partnership had $1,712,000 in cash and
interest-bearing deposits. Additional sources of funds are
future operations of real estate owned, sale of real estate owned
and payoffs of existing loans. The Partnership also had
$1,066,000 in nonperforming loans which had reached maturity as
of December 31, 1996, however, none of these loans is considered
to be a near term source of cash. As of December 31, 1996, all
real estate owned is classified as held for sale and the
Partnership was currently marketing $11,360,000 in real estate
owned. The Partnership had no unfunded loan commitments to
nonaffiliates at December 31, 1996. The Partnership funded
advances on loans to affiliates during 1996 totaling $1,044,000
and received payoffs and paydowns on loans to nonaffiliates
totaling $163,000. During 1996, the Partnership funded $273,000
of capital expenditures for real estate owned and received
proceeds from the sale of real estate owned of $190,000.
The Partnership's notes payable commitments for 1997 consist of
interest and principal payments due of approximately $2,563,000.
The note payable secured by the Upland Shopping Center totaling
$2,455,000 matures May 1, 1997. The Partnership does not
presently have sufficient capital reserves to make this balloon
payment and meet operating commitments. However, the Partnership
has a letter of intent from the lender to extend this note until
November 1, 2001. In addition to the note payable commitments,
the Partnership's principal capital requirements include: i) real
property taxes and bonds on real estate owned of approximately
$185,000 payable in 1997, and ii) selling, general and
administrative costs. These commitments are expected to be paid
from existing cash balances, future loan payoffs, and the sale of
real estate owned.
The Partnership is continuously evaluating various alternative
strategies for liquidating its real estate assets. These
alternative strategies include the potential joint venture and/or
build out of certain of the Partnership's properties in order to
increase their marketability and maximize the return to the
limited partners. In the event the Partnership decides to
implement some of these strategies, it may require the
reinvestment of proceeds received from the payoff of existing
loans and/or the sale of other real estate assets. The decision
to invest additional cash in existing assets will only be made
if, based on management's best judgment at the time, there is a
clear indication that such investment will generate a greater
return to the limited partners than any other strategies
available to the Partnership. During 1995, the Partnership,
through its 50 percent owned corporation, LCR Development, Inc.,
("LCR"), entered into a joint venture agreement with Home Devco,
Inc. ("Home Devco"), an affiliated entity, entitled Silverwood
Homes ("Silverwood"). For further information see note 5 of
Notes to Consolidated Financial Statements.
Effective with the third quarter of 1991, the Partnership
suspended making any cash distributions to partners due to a
decline in liquidity and the uncertainty of the cash requirements
for existing and potential real estate owned. Pursuant to the
Partnership Agreement, 60 months after the closing of the
offering, cash proceeds from mortgage investments are no longer
available for reinvestment by the Partnership. Management
believes that current and projected liquidity is sufficient to
fund operating expenses and to meet the contractual obligations
and cash flow operating requirements of the Partnership.
However, although no new mortgage investments shall be made, the
general partners expect that the cash proceeds from future
mortgage reductions and the sale of real estate owned will be
retained by the Partnership until such time as the Partnership
has sufficient cash to fulfill the operating requirements of the
real estate owned by the Partnership.
Results of Operations
Due to the downturn in the real estate industry in California and
its impact on the Partnership's borrowers, most of the
Partnership's loans to nonaffiliates have been converted into
nonperforming loans and/or real estate owned through
foreclosures. As a result, interest income on loans to
affiliates and nonaffiliates, including fees, decreased
substantially during 1996, 1995 and 1994. Interest income on
loans to affiliates, including fees was $100,000 for 1996 and
$41,000 for 1995 related to the Silverwood joint venture. There
was no interest income on loans to affiliates for 1994 due to the
fact that there were no loans to affiliates in 1994. Interest
income on loans to nonaffiliates, including fees, was $100,000 in
1996, $78,000 in 1995 and $186,000 in 1994. Interest income on
loans to nonaffiliates increased in 1996 primarily due to the
restructure and payment of interest on two loans. Interest
income on loans to nonaffiliates decreased in 1995 due to payoffs
of existing loans and increases in loans on nonaccrual.
Loans on "nonaccrual" refers to loans upon which the Partnership
is no longer accruing interest. Management's policy is to cease
accruing interest on loans when collection of interest and/or
principal payments has become doubtful. Loans to affiliates and
nonaffiliates on nonaccrual status amounted to $2,597,000,
$3,412,000 and $2,319,000 as of December 31, 1996, 1995 and 1994,
respectively.
The real estate owned balance before allowance for possible
losses at December 31, 1996, 1995 and 1994 was $11,360,000,
$12,349,000 and $13,820,000, respectively. During 1995 and 1994,
the Partnership accounted for foreclosed assets using the
American Institute of Certified Public Accountants Statement of
Position 92-3 ("SOP 92-3"), "Accounting for Foreclosed Assets".
SOP 92-3 indicated that foreclosed assets were presumed held for
sale and not for the production of income. Accordingly,
foreclosed assets held for sale were carried at the lower of cost
or fair value minus estimated costs to sell. The cost of such
assets at the time of foreclosure was the fair value of the asset
foreclosed. Immediately after foreclosure, a valuation allowance
was recognized for estimated costs to sell through a charge to
operations. All of the Partnership's real estate owned was
presumed held for sale.
Effective January 1, 1996, the Partnership adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" ("SFAS 121"). SFAS 121 supersedes SOP 92-3 and also
requires that long-lived assets to be disposed of be reported at
the lower of 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. The
adoption of SFAS 121 did not have a significant impact on the
Partnership's financial statements.
Had all accrued interest been recorded throughout 1996, 1995 and
1994 on the affiliated and nonaffiliated nonaccrual loans,
interest income would have increased by $261,000, $646,000 and
$543,000, respectively, for those periods.
Real estate loans receivable, earning represents four loans
totaling $700,000 which are performing but classified as
impaired. The four loans have been restructured and are reduced
by deferred liabilities and allowances of $321,000. Real estate
loans receivable, nonearning represents three past due or
renegotiated loans totaling $1,066,000. These loans are reduced
by $950,000 in deferred profit and allowances. Most of the
borrowers have little or no equity in the underlying collateral
for the loans and as a result, these loans represent an
investment in real estate. Therefore, these loans are carried on
the balance sheet at the fair value of the underlying real estate
collateral or have been fully reserved.
Real estate loans receivable from unconsolidated investees,
earning and nonearning represent property taken back by the
Partnership and transferred to unconsolidated corporations 50
percent owned by the Partnership.
The following sections entitled Nonaccrual, Nonperforming Loans
and Other Loans to Affiliates and Real Estate Owned provide a
detailed analysis of these assets.
Nonaccrual, Nonperforming Loans and Other Loans to Affiliates
Loans on nonaccrual status during the year ended December 31,
1996 are summarized below:
During 1988, the Partnership recorded an equity participation
note with an original committed amount of $350,000 secured by a
second trust deed on a 160-unit apartment complex in Riverside,
California. The loan was on nonaccrual due to past due interest.
The complex was 82 percent leased, and due to low rental rates
and slow payments, the first trust deed holder filed a notice of
default on April 12, 1995 and completed a judicial foreclosure
during 1996. The loan had been recorded with a deferred profit
liability equal to the principal balance of the loan and the
foreclosure had no impact on the Partnership's income statement.
During 1994, the Partnership renegotiated an equity participation
note with an original committed amount of $374,000 secured by a
second deed of trust on a 32,431 square foot shopping center in
Corona, California. The loan provides for interest due to be
payable at loan maturity; however, due to the amount of the
senior debt and the decrease in land values, the Partnership has
placed the loan on nonaccrual. The principal balance and
nonaccrued interest at December 31, 1996 are $375,000 and
$107,000 respectively. The Partnership has recorded a reduction
of $62,000 against the $375,000 principal balance which
represents previously nonaccrued interest and has also recorded a
$289,000 deferred profit in connection with this loan.
During 1991, the Partnership sold a pad on an existing piece of
real estate owned in Corona, California and carried back
financing in the amount of $600,000. The Partnership's share of
the loan is 77 percent. Due to the loss of the major tenant, the
borrower has been unable to make monthly interest payments.
Management has worked out a forbearance agreement with the
borrower for net cash flow monthly payments. The remaining
interest due has been placed on nonaccrual. The principal
balance and nonaccrued interest at December 31, 1996 are
$460,000, and $111,000, respectively. The Partnership had
recorded a $367,000 allowance for losses related to this loan as
of December 31, 1996.
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. The Partnership classified the loan as an insubstance
foreclosure at December 31, 1993. Given the depressed value of
the property and the amount of the delinquent bonds and taxes,
the Partnership has been negotiating with the borrower in an
attempt to discount the note to facilitate a sale or have the
borrower deed the property to the Partnership. Should the
negotiations not be completed and the property be lost to a tax
sale, management has established a $293,000 allowance for losses
related to this loan as of December 31, 1996. The principal
balance and nonaccrued interest at December 31, 1996 are $293,000
and $163,000, respectively.
During 1994, the Partnership funded a $1,250,000 unsecured note
and a 50 percent participation in a $2,115,000 unsecured note,
both representing workout loans and due from LCR, an affiliate.
These two loans reflect the majority of the cost basis of lots
contributed to Silverwood. LCR's only source of repayment of
these notes are proceeds from the sale of the fully developed
lots. Management has estimated the proceeds for repayment of
these two notes to be less than the original principal balance of
the loans. As a result, the loans have been placed on
nonaccrual. The principal balance and participating principal
balance and nonaccrued interest balances at December 31, 1996 are
$1,250,000 and $293,000 and $1,055,000 and $240,000,
respectively. As discussed in note 5 of Notes to Consolidated
Financial Statements, the Partnership has reduced the carrying
value of these notes by $2,305,000, a portion of its share of
losses from this unconsolidated investee.
During 1994 and 1995, LCR had evaluated various alternative
strategies for liquidating its investment in the 179 lots in
Lancaster. During 1994, 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 Centennial Mortgage Income Fund II ("CMIF II"), an
affiliate, and the Partnership and entered into a joint venture
agreement entitled Silverwood with Home Devco to construct and
sell single-family homes at the project. The joint venture began
constructing a model home complex at the project in June 1995.
Construction commenced in September 1995 on Phase I at the
project. At December 31, 1996, the Partnership holds a 50
percent participation in three notes due from Silverwood
consisting of a land development loan, a model home loan and a
home construction loan with a combined disbursed balance of
$1,787,000. The Partnership's disbursed balance of the
$3,265,700 development loan at December 31, 1996 is $977,000.
The Partnership's disbursed balance of the $490,000 model loan at
December 31, 1996 is $239,000. At December 31, 1996, the
Partnership's disbursed balance of the $1,034,000 Phase I
construction loan is $571,000. The Phase I construction loan
matured July 1, 1996 and the Partnership is in the process of
extending this note. As discussed in note 5 of Notes to
Consolidated Financial Statements, the Partnership had reduced
the carrying value of the land development loan by $256,000, the
remainder of its share of losses in unconsolidated investees.
Sales volumes of new homes in the Lancaster area have continued
to decline since 1995 while sales prices have remained relatively
flat and construction costs have increased. This has caused a
further decline in the value of finished lots and a reduction in
the anticipated net proceeds the Partnership expects to realize
from the buildout of homes at the project. Additionally,
Silverwood closed escrow on only two homes during 1996, far less
than originally anticipated. As a result of these factors, LCR
recorded a $2,516,000 and $1,077,000 provision for losses on real
estate investments during 1996 and 1995, respectively.
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, 1996 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 generated net
operating income before debt service of $431,000 during 1996 and
its carrying value before allowance for possible losses was
$4,628,000 at December 31, 1996. The property is encumbered by a
note of $2,455,000, secured by a first trust deed on the
property. The Partnership oversees the management and leasing of
the property which is currently 98 percent leased. Management is
currently marketing the property for sale and hopes to sell this
property during 1997. The Partnership had recorded a $921,000
allowance for losses related to this property as of December 31,
1996.
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 is encumbered by a
$900,000, 12 percent fixed interest rate note payable secured by
a first trust deed on the property. The note requires monthly
interest-only payments, and the balance is due April 1, 1998.
The Partnership continues to finalize the entitlement processing,
flood issues and provide for utility services for the property.
As these issues are finalized and the demand for development land
in the area returns, the Partnership intends to list the property
for sale. At December 31, 1996, the carrying value before
allowance for possible losses of this asset was $2,822,000 and
the Partnership had recorded a $1,134,000 allowance for losses
related to this project.
Auto Retail Center in Corona, California
During 1988, the Partnership funded a loan with an original
committed amount of $3,313,000 for the purpose of constructing a
39,185 square foot auto/retail center in Corona, California. The
loan matured on September 1, 1989. The borrower defaulted under
a forbearance agreement, and the Partnership filed a notice of
default on December 14, 1990. The borrower filed for bankruptcy
on February 15, 1991. A pad was sold during April 1991 resulting
in the Partnership receiving a net paydown of $249,000. The
Partnership provided financing to the purchaser. The Partnership
took a grant deed on the property through the Bankruptcy Courts
in December 1991. The subject center is 43 percent leased and
the property generated net operating income of $35,000 during
1996. The center is being marketed for sale and has been in
escrow twice. However, both of those sales were not finalized.
The net carrying value before allowance for possible losses at
December 31, 1996 is $2,600,000 and the Partnership had recorded
a $1,665,000 allowance for losses related to this project.
23 Acres in Riverside, California
The Partnership took a grant deed in consideration of its note
secured by a third trust deed on the property during the second
quarter of 1992 and paid off the second deed of trust. The
property was encumbered by a 13.75 percent fixed rate note
payable secured by a first trust deed of $650,000 payable to
another financial institution which matured August 1, 1992.
During 1993 and 1994, management has attempted to negotiate with
the FDIC as successor to the financial institution to payoff or
restructure the terms of the note secured by the first trust deed
and was not successful resulting in the FDIC commencing
foreclosure proceedings on the property. The foreclosure was
completed in 1996 and management established an allowance for
losses sufficient to cover the loss which was incurred as a
result of the foreclosure of this property.
5 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
Partnership has recorded an insubstance foreclosure on these 12
condominiums. The borrower signed over control to the second
trust deed holder in December 1992, the second trust deed holder,
an affiliate, abandoned the property and the Partnership now
controls the property. The condominiums are located adjacent to
the beach. The values of beach front property have been hard hit
in the local market due to the excess supply of this type of
property. The Partnership has declined to assume any of the
original builder's liabilities which would be required should the
Partnership accept a deed in lieu of foreclosure on the property.
However, the Partnership does receive 100 percent of all sales
proceeds net of selling costs. As of December 31, 1996, the
Partnership had sold seven condominiums and is attempting to sell
the remaining units. The carrying value before allowance for
possible losses at December 31, 1996 is $1,310,000. Gain on sale
of the condominiums recorded in 1996 was $23,000. The
Partnership had recorded a $381,000 allowance for losses related
to this project.
Interest on Interest-Bearing Deposits
Interest earned on interest-bearing deposits was $85,000 in 1996,
$102,000 in 1995 and $63,000 in 1994. The decrease in interest
on interest-bearing deposits in 1996 is principally due to a
decrease in average cash balances. The increase in interest on
interest-bearing deposits in 1995 is principally due to an
increase 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 1996, 1995 and
1994 consists of operating revenues of $780,000, $784,000 and
$771,000, respectively, primarily from the Upland Shopping Center
and the auto retail center in Corona.
Provision for Possible Losses
The provision for possible losses was $40,000 in 1996, $836,000
in 1995 and $807,000 in 1994. The 1996 provision relates
primarily to the 19 acres in Sacramento, the loan secured by the
auto center in San Bernardino, the auto retail center in Corona
offset by a reduction in provision on the Upland Shopping Center.
The 1995 provision relates primarily to the auto retail center in
Corona, California and the Upland Foothill Shopping Center. The
1994 provision relates primarily to the auto retail center in
Corona, the loan secured by a third trust deed on a mini-storage
facility in Citrus Heights and the loan secured by a pad in
Corona.
Management believes that the allowance for possible losses at
December 31, 1996 is adequate to absorb the known risks in the
Partnership's loan and real estate owned portfolios, including
losses on pending sales and possible foreclosures.
Other Expenses
The Partnership has invested in corporations in which it has less
than a majority ownership and accounts for these investments
using the equity method. The Partnership's share of losses in
these unconsolidated investees was $2,304,000 for 1996,
$1,803,000 for 1995 and $408,000 for 1994. The 1996 share of
losses consists primarily of provisions for losses on real estate
investments recorded by LCR and BKS related to the 179 lots in
Lancaster and the 283 acres in Bakersfield and to additional
costs related to the sale of homes in Lancaster. The 1995 share
of losses consists primarily of provisions for losses on real
estate investments related to the 179 lots in Lancaster and the
283 acres in Bakersfield. The Partnership has now written off
its investment in BKS completely and its remaining net carrying
value of its investment in LCR had been reduced to $1,531,000 as
of December 31, 1996.
Operating expenses from operations of real estate owned were
$259,000 for 1996, $265,000 for 1995 and $274,000 for 1994.
These expenses were associated with the auto retail center in
Corona and the Upland Shopping Center.
Operating expenses from operations of real estate owned paid to
affiliates were $55,000 for 1996, $54,000 for 1995 and $56,000
for 1994. The expenses consist of property management fees paid
to affiliates of the general partners.
Expenses associated with non-operating real estate owned were
$226,000 in 1996, $254,000 in 1995 and $263,000 in 1994. The
expenses relate to the 19 acres in Sacramento, the 23 acres in
Riverside, the condominiums in Oxnard, the 179 lots in Lancaster
and the 283 acres in Bakersfield. These costs include property
taxes of $108,000, $106,000 and $106,000 during 1996, 1995 and
1994, respectively. The 179 lots in Lancaster and the 283 acres
in Bakersfield were transferred to unconsolidated investees in
1994. The decrease for 1996 is due primarily to a decrease in
legal costs associated with the 23 acres in Riverside.
Depreciation and amortization expense for 1996, 1995 and 1994
consists of $23,000, $115,000 and $111,000, respectively, for the
Upland Shopping Center. The decrease for 1996 is due to the
adoption of SFAS 121.
Interest expense was $476,000 for 1996, $430,000 for 1995 and
$497,000 for 1994. The interest expense for 1996, 1995 and 1994
relates to the underlying debt on the Upland Shopping Center and
the 19 acres in Sacramento. The increase for 1996 is due to the
addition of extension fee expense and decreased principal
reductions on the underlying debt on the Upland Shopping Center.
The decrease for 1995 is due to the increase of principal on
nonaccrual on the underlying inter-company debt secured by the 19
acres in Sacramento.
General and administrative expenses, affiliates totaled $218,000
for 1996, $167,000 for 1995 and $179,000 for 1994. These
expenses are primarily salary allocation reimbursements paid to
affiliates for the management of the Partnership's assets. The
increase for 1996 is primarily due to a $44,000 change in billing
methodology from mortgage investment servicing fees to salary
allocations.
General and administrative expenses, nonaffiliates totaled
$100,000 for 1996, $79,000 for 1995 and $80,000 for 1994. The
increase for 1996 is primarily due to moving expenses, increased
office expenses and outside services.
Mortgage investment servicing fees paid to affiliates decreased
to $4,000 in 1996 from $48,000 in 1995 and $52,000 in 1994.
These fees consist of amounts paid to Centennial Corporation and
CMIF, Inc., an affiliate of the general partners, for servicing
the Partnership's loan portfolio. During 1996, the Partnership
no longer incurs mortgage investment servicing fees for servicing
the Partnership's real estate owned portfolio. The decrease for
1995 is primarily due to the decrease in size of the
Partnership's loan portfolio.
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: CENTENNIAL CORPORATION
General Partner
/s/Joel H. Miner
_________________________________
Joel H. Miner
Chief Financial Officer August 4, 1997
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
ANNUAL REPORT
Form 10-K/A
Consolidated Financial Statements
Items 8, 14(a)(1) and 14(a)(2)
December 31, 1996, 1995 and 1994
(With Independent Auditors' Report Thereon)
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Items 8, 14(a)(1) and 14(a)(2)
Index to Consolidated Financial Statements and Schedules
Consolidated Financial Statements Page
Independent Auditors' Report............................ F-3
Consolidated Balance Sheets --
December 31, 1996 and 1995.............................. F-4
Consolidated Statements of Operations --
Years ended December 31, 1996, 1995 and 1994............ F-7
Consolidated Statements of Partners' Equity --
Years ended December 31, 1996, 1995 and 1994............ F-9
Consolidated Statements of Cash Flows --
Years ended December 31, 1996, 1995 and 1994............ F-10
Notes to Consolidated Financial Statements ............. F-16
Schedules
Schedule III - Consolidated Real Estate Owned and
Accumulated Depreciation and Amortization. ............. F-41
Schedule IV - Mortgage Loans on Real Estate............. F-46
All other schedules are omitted as the required information is
inapplicable, or the information is presented in the consolidated
financial statements or notes thereto.
Exhibit 21
LCR DEVELOPMENT, INC.
A California Corporation
Index to Consoldiated Financial Statements
Consolidated Financial Statements Page
Independent Auditors' Report............................ F-57
Consolidated Balance Sheets --
December 31, 1996 and 1995.............................. F-58
F-1
Consolidated Statements of Operations --
Years ended December 31, 1996, 1995 and 1994............ F-60
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1996, 1995 and 1994............ F-61
Consolidated Statements of Cash Flows --
Years ended December 31, 1996, 1995 and 1994............ F-62
Notes to Consolidated Financial Statements.............. F-65
F-2
INDEPENDENT AUDITORS' REPORT
To the General Partners
Centennial Mortgage Income Fund:
We have audited the consolidated financial statements of
Centennial Mortgage Income Fund, a limited partnership, and
subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also
have audited the financial statement schedules as listed in the
accompanying index. These consolidated financial statements and
financial statement schedules are the responsibility of the
Partnership's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial
statement schedules based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Centennial Mortgage Income Fund and subsidiaries as
of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with
generally accepted accounting principles. Also, in our opinion,
the related financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as
a whole, present fairly, in all material respects, the
information set forth therein.
KPMG Peat Marwick LLP
Orange County, California
March 21, 1997
F-3
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1996 and 1995
<S> <C> <C>
Assets 1996 1995
- -----------------------------------------------------------------
Cash and cash
equivalents (note 5) $ 1,712,000 $ 2,947,000
Short-term investments --- 103,000
Real estate loans
receivable, earning 700,000 714,000
Real estate loans
receivable, nonearning 1,066,000 1,368,000
Real estate loans receivable
from unconsolidated investees,
earning (note 5) --- 667,000
Real estate loans receivable
from unconsolidated investees,
nonearning (note 5) 1,531,000 2,044,000
- -----------------------------------------------------------------
3,297,000 4,793,000
Less allowance for possible
loan losses (note 3) 982,000 957,000
- -----------------------------------------------------------------
Net real estate loans receivable 2,315,000 3,836,000
Real estate owned, held for
sale, less accumulated
depreciation of $517,000
in 1995 (notes 6 and 7) 10,050,000 10,799,000
Real estate owned, held
for sale, insubstance
foreclosed (note 6) 1,310,000 1,550,000
- -----------------------------------------------------------------
11,360,000 12,349,000
F-4
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
(Continued)
<CAPTION>
December 31, 1996 and 1995
<S> <C> <C>
Assets 1996 1995
- -----------------------------------------------------------------
Less allowance for possible
losses on real estate
owned (note 4) 4,101,000 4,523,000
- -----------------------------------------------------------------
Net real estate owned 7,259,000 7,826,000
Accrued interest receivable 4,000 18,000
Other assets 104,000 112,000
- -----------------------------------------------------------------
$ 11,394,000 $ 14,842,000
=================================================================
F-5
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
(Continued)
<CAPTION>
December 31, 1996 and 1995
<S> <C> <C>
Liabilities and Partners' Equity 1996 1995
- -----------------------------------------------------------------
Notes payable (note 7) $ 3,355,000 $ 4,010,000
Notes payable to affiliates (note 5) 74,000 90,000
Accounts payable and
accrued liabilities 23,000 51,000
Interest and property taxes
payable on real estate owned --- 11,000
Interest payable to affiliates on
notes secured by real estate 220,000 171,000
Payable to affiliates 1,000 4,000
Deferred profit on equity participation 289,000 559,000
- -----------------------------------------------------------------
Total liabilities 3,962,000 4,896,000
Partners' equity (deficit)
-- 38,729 limited partnership
units outstanding in 1996 and 1995
General partners (525,000) (525,000)
Limited partners 7,957,000 10,471,000
- -----------------------------------------------------------------
Total partners' equity 7,432,000 9,946,000
Contingencies (note 8)
- -----------------------------------------------------------------
$ 11,394,000 $ 14,842,000
=================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-6
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31, 1996, 1995 and 1994
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Revenue:
Interest on loans
to affiliates,
including fees
(note 5) $ 100,000 $ 41,000 $ ---
Interest on loans to
nonaffiliates,
including fees 100,000 78,000 186,000
Interest on
interest-bearing
deposits (note 5) 85,000 102,000 63,000
Gain on sale of property 40,000 154,000 76,000
Income from operations
of real estate owned 780,000 784,000 771,000
- -----------------------------------------------------------------
Total revenue 1,105,000 1,159,000 1,096,000
- -----------------------------------------------------------------
Expenses:
Provision for
possible losses
(notes 3 and 4) 40,000 836,000 807,000
Share of losses
in unconsolidated
investees (note 5) 2,304,000 1,803,000 408,000
Operating expenses
from operations
of real estate owned 259,000 265,000 274,000
Operating expenses
from operations of
real estate owned
paid to affiliates
(note 5) 55,000 54,000 56,000
Expenses associated
with non-operating
real estate owned 226,000 254,000 263,000
F-7
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
(Continued)
<CAPTION>
Years ended December 31, 1996, 1995 and 1994
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Depreciation and
amortization expense 23,000 115,000 111,000
Interest expense 476,000 430,000 497,000
General and
administrative,
affiliates (note 5) 218,000 167,000 179,000
General and
administrative,
nonaffiliates 100,000 79,000 80,000
Mortgage investment
servicing fees paid
to affiliates (note 5) 4,000 48,000 52,000
- -----------------------------------------------------------------
Total expenses 3,705,000 4,051,000 2,727,000
- -----------------------------------------------------------------
Net loss before
minority interest $(2,600,000) $(2,892,000) $(1,631,000)
Minority
interest (note 5) 86,000 116,000 345,000
- -----------------------------------------------------------------
Net loss $(2,514,000) $(2,776,000) $(1,286,000)
=================================================================
Net loss per limited
partnership unit $ (64.91) $ (71.68) $ (33.21)
=================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-8
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Partners' Equity
<TABLE>
<CAPTION>
Years ended December 31, 1996, 1995 and 1994
<S> <C> <C> <C>
Total
General Limited Partners'
Partners Partners Equity
- -----------------------------------------------------------------
Balance (deficit) at
December 31, 1993 $ (525,000) $ 14,533,000 $ 14,008,000
Net loss --- (1,286,000) (1,286,000)
- -----------------------------------------------------------------
Balance (deficit) at
December 31, 1994 (525,000) 13,247,000 12,722,000
Net loss --- (2,776,000) (2,776,000)
- -----------------------------------------------------------------
Balance (deficit) at
December 31, 1995 (525,000) 10,471,000 9,946,000
Net loss --- (2,514,000) (2,514,000)
- -----------------------------------------------------------------
Balance (deficit) at
December 31, 1996 $ (525,000) $ 7,957,000 $ 7,432,000
=================================================================
</TABLE>
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, 1996, 1995 and 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Cash flows from
operating
activities:
Net loss $ (2,514,000) $ (2,776,000) $ (1,286,000)
Adjustments to
reconcile net
loss to net cash
used in operating
activities:
Amortization
of unearned
loan fees (2,000) --- (1,000)
Depreciation
and amortization 23,000 115,000 111,000
Provision for
possible losses 40,000 836,000 807,000
Interest accrued to
principal on loans
to affiliates (195,000) (47,000) ---
Minority interest (86,000) (116,000) (345,000)
Gain on sale
of real
estate owned (40,000) (154,000) (76,000)
Equity in losses
of unconsolidated
investees 2,304,000 1,803,000 408,000
Changes in assets
and liabilities:
(Increase) decrease
in accrued interest
receivable 14,000 24,000 (15,000)
(Increase) decrease
in other assets (5,000) (34,000) 37,000
Decrease in accounts
payable and accrued
liabilities (28,000) (4,000) (34,000)
F-10
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Continued)
Years ended December 31, 1996, 1995 and 1994
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Increase in interest
and property taxes
payable on real
estate owned 4,000 3,000 19,000
Increase (decrease) in
payable to affiliates (3,000) (5,000) 4,000
Increase (decrease)
in interest payable
to affiliates on
notes secured by
real estate 49,000 (1,000) ---
Deferred profit
recognized --- --- (75,000)
- -----------------------------------------------------------------
Net cash used in
operating
activities (439,000) (356,000) (446,000)
- -----------------------------------------------------------------
Cash flows from
investing activities:
Principal collected
on loans 163,000 288,000 515,000
Advances on loans
made to customers --- --- (161,000)
Advances on
loans made to
affiliates (1,044,000) (429,000) (1,442,000)
Proceeds from
sale of real
estate owned 190,000 1,285,000 681,000
Capital
expenditures for
real estate owned (273,000) (58,000) (187,000)
F-11
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Continued)
Years ended December 31, 1996, 1995 and 1994
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
(Increase) decrease
in short-term
investments 103,000 (103,000) ---
- -----------------------------------------------------------------
Net cash provided
by (used in)
investing
activities (861,000) 983,000 (594,000)
- -----------------------------------------------------------------
Cash flows from
financing activities:
Proceeds from
notes payable
to affiliates 70,000 62,000 36,000
Repayment of
notes payable (5,000) (9,000) (8,000)
- -----------------------------------------------------------------
Net cash
provided by
financing
activities 65,000 53,000 28,000
- -----------------------------------------------------------------
Net increase
(decrease) in
cash and cash
equivalents (1,235,000) 680,000 (1,012,000)
Cash and cash
equivalents at
beginning of year 2,947,000 2,267,000 3,279,000
- -----------------------------------------------------------------
Cash and cash
equivalents
at end of year $ 1,712,000 $ 2,947,000 $ 2,267,000
=================================================================
F-12
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Continued)
Years ended December 31, 1996, 1995 and 1994
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Supplemental
schedule of
cash flow
information:
Cash paid during
the year for:
Interest $ 400,000 $ 401,000 $ 393,000
- -----------------------------------------------------------------
Supplemental
schedule of
noncash investing
and financing
activities:
Increase in real
estate owned
through foreclosure
of real estate
loans receivable $ --- $ --- $ 540,000
Decrease in
deferred profit
on equity
participation
and real estate
loans resulting
from foreclosure 270,000 --- ---
Decrease in notes
payable and real
estate owned
resulting from
foreclosure 650,000 --- ---
F-13
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Continued)
Years ended December 31, 1996, 1995 and 1994
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Decrease in interest
and taxes payable
on real estate
owned and real
estate owned
resulting from
foreclosure 15,000 --- ---
Decrease in real
estate owned and
related allowance
for losses resulting
from partial write-
down or charge-off
of property 437,000 293,000 1,029,000
Decrease in real
estate owned through
transfer of
ownership (note 5) --- --- 6,443,000
Decrease in
allowance for
losses resulting
from partial
charge-off of
loans receivable
and real estate
owned upon
transfer of
ownership (note 5) --- --- 2,009,000
F-14
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
(Continued)
Years ended December 31, 1996, 1995 and 1994
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Decrease in notes
payable through
transfer of
ownership (note 5) --- --- 1,104,000
Decrease in
interest and
property taxes
payable on real
estate owned
through transfer
of ownership (note 5) --- --- 326,000
Increase in real
estate loans from
affiliates through
transfer of
ownership (note 5) --- --- 3,004,000
Decrease in
real estate
owned and notes
payable to
affiliates due
to retroactive
reduction in
note balance --- --- 120,000
Decrease in
accrued interest
receivable through
renegotiation of loan --- --- 20,000
Decrease in real
estate loans and
related allowance for
losses resulting from
partial write-down
or charge-off --- 233,000 15,000
</TABLE>
See accompanying notes to consolidated financial statements
F-15
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Notes to Consolidated Financial Statements
December 31, 1996, 1995, 1994
(1) Summary of Significant Accounting Policies
Business
Centennial Mortgage Income Fund (the "Partnership") has
historically 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, 1996, a majority of the loans secured by
operating properties have been repaid to the Partnership.
However, during recent years, real estate market values for
undeveloped land in California have declined severely. As the
loans secured by undeveloped land and certain operating
properties became delinquent, management of the Partnership
elected to foreclose on certain of these loans, thereby
increasing real estate owned balances. As a result, the
Partnership has become a direct investor in this real estate and
intends to manage operating properties and develop raw land until
such time as the Partnership is able to sell this real estate
owned. The real estate owned balance before allowance for
possible losses at December 31, 1994 was $13,820,000 decreasing
to $12,349,000 at year end 1995 and $11,360,000 at year end 1996.
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").
F-16
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 50 percent interest in LCR and BKS. Several of the
Partnership's assets have been transferred to these new
corporations, at the Partnership's cost basis, in transactions
which included no cash down with the Partnership carrying a
substantial portion of the financing. Upland, CPI, BNN, and
Grand Plaza have been consolidated in the accompanying
consolidated financial statements, and all significant inter-
company balances and transactions 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.
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 their 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) shall be distributed 99 percent to the
limited partners and 1 percent to the general partners, until
each limited partner has received a 12 percent cumulative annual
return on his adjusted invested capital, after which such amounts
are to be distributed 85 percent to the limited partners and 15
percent to the general partners. These amounts may be adjusted
subject to the provisions of the Partnership Agreement. In order
to properly reflect the economic effect of the allocations
F-17
discussed above, the Partnership has allocated financial
statement net earnings (losses) 95 percent to the limited
partners and 5 percent to the general partners through 1992.
Based upon the various terms of the Partnership Agreement, it is
improbable that the general partners would be required to make
any capital contributions to the Partnership in excess of their
negative capital account as of December 31, 1992. Accordingly,
since January 1, 1993, the Partnership has allocated 100 percent
of the losses to the limited partners.
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
Effective January 1, 1995, the Partnership adopted Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan" ("SFAS 114"), as amended by Statement
of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosures" ("SFAS 118"). Under SFAS 114, a loan is impaired
when it is "probable" that a creditor will be unable to collect
all amounts due (i.e. both principal and interest) according to
the original contractual terms of the loan agreement. The
measurement of impairment may be based on (i) the present value
of the expected future cash flows of the impaired loan discounted
at the loan's original effective interest rate, (ii) the
observable market price of the impaired loan, or (iii) the fair
value of the collateral of a collateral-dependent loan. SFAS 114
does not apply to large groups of smaller balance homogeneous
loans that are collectively evaluated for impairment. The
adoption of SFAS 114, as amended by SFAS 118, had no material
impact on the Partnership's consolidated financial statements.
The Partnership reclassified a loan totaling $291,000 which was
F-18
formerly classified as insubstance foreclosure net of related
notes payable, accrued interest and property taxes at December
31, 1994, to impaired loans receivable at December 31, 1995. The
Partnership's previously existing policy of measuring loan
impairment was consistent with methods prescribed in these
standards.
The Partnership considers a loan to be impaired when based upon
current information and events, it believes it is probable that
the Partnership will be unable to collect all amounts due
according to the contractual terms of the loan agreement. In
determining impairment, the Partnership considers large non-
homogeneous loans including nonaccrual loans, troubled debt
restructuring and performing loans which exhibit, among other
characteristics, high loan-to-value ratios, low debt-coverage
ratios, or other indications that the borrowers are experiencing
increased levels of financial difficulty. The Partnership bases
the measurement of collateral-dependent impaired loans on the
fair value of the loan's collateral. The amount by which the
recorded investment of the loan exceeds the measure of the
impaired loan's value is recognized by recording a valuation
allowance.
Real Estate Owned
During 1995 and 1994, the Partnership accounted for foreclosed
assets using the American Institute of Certified Public
Accountants Statement of Position 92-3 ("SOP 92-3"), "Accounting
for Foreclosed Assets". SOP 92-3 indicated that foreclosed
assets were presumed held for sale and not for the production of
income. Accordingly, foreclosed assets held for sale were
carried at the lower of cost or fair value minus estimated costs
to sell. The cost of such assets at the time of foreclosure was
the fair value of the asset foreclosed. Immediately after
foreclosure, a valuation allowance was recognized for estimated
costs to sell through a charge to income. All of the
Partnership's real estate owned, including insubstance
foreclosures, was presumed held for sale.
Effective January 1, 1996, the Partnership adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" ("SFAS 121"). SFAS 121 supersedes SOP 92-3 and also
requires that long-lived assets to be disposed of be reported at
the lower of the carrying amount or fair value less costs to
sell. An impairment loss shall be measured as the amount by
which the carrying amount of the asset exceeds the fair value of
F-19
the assets less costs to sell. SFAS 121 requires that assets to
be disposed of not be depreciated while they are held for
disposal. The Partnership considered all real estate owned as
held for sale during 1996 and is actively marketing all
properties using third party brokers and in house sales staff.
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
the borrower. Generally, revenue is recognized when collection
of the deferred profit becomes assured. During 1994, $75,000 was
recognized as revenue to the extent cash was received. No
deferred profit was recognized during 1995 and 1996.
Income Taxes
Under provisions of the Internal Revenue Code and the California
Revenue and Taxation Code, partnerships are generally not subject
to income taxes. For tax purposes, any income or losses realized
are those of the individual partners, not the Partnership. The
Partnership reports certain transactions differently for tax and
financial statement purposes. The following is a recap of
current and cumulative temporary differences between income for
generally accepted accounting principles ("GAAP") and taxable
earnings:
F-20
<TABLE>
<S> <C> <C> <C>
Current Temporary Differences Partnership Corporations
Total
- --------------------------------------------------------------------------------
- ----------
GAAP loss for the year
ended December 31, 1996 $(1,848,000) $ (666,000)
$(2,514,000)
Provision for losses (662,000) 265,000
(397,000)
Charge-offs deductible
for tax purposes (1,300,000) ---
(1,300,000)
Accrued expenses deducted
using the cash method --- 262,000
262,000
Deferred profit previously taxable (270,000) ---
(270,000)
Carrying costs expensed
for books and capitalized
for tax purposes --- 254,000
254,000
Depreciation (104,000) (37,000)
(141,000)
Minority interest share of
losses not taxable --- (86,000)
(86,000)
Share of losses in unconsolidated
investees not deductible 352,000 ---
352,000
Interest income accrued
for tax, not for GAAP (121,000) ---
(121,000)
- --------------------------------------------------------------------------------
- ----------
Taxable loss for the year
ended December 31, 1996 $(3,953,000) $ (8,000)
$(3,961,000)
================================================================================
==========
Taxable loss allocable to
General Partners $ ---
================================================================================
==========
Taxable loss per
limited partner unit $ (102.07)
================================================================================
==========
</TABLE>
F-21
<TABLE>
December 31, 1996
- -----------------------------------------------------------------
<S> <C> <C>
Cumulative Temporary Differences Partnership Corporations
- -----------------------------------------------------------------
Provision for losses $ 2,284,000 $ 2,799,000
Charge-offs on foreclosures not
deductible for tax purposes 2,235,000 ---
Deferred profit previously taxable 289,000 ---
Accrued expenses not deducted for tax
purposes using the cash basis --- 1,616,000
Carrying costs expensed for books
and capitalized for tax purposes --- 1,090,000
Depreciation (104,000) (159,000)
Net operating loss carryforwards --- 223,000
Interest income accrued for
tax, not for GAAP 220,000 ---
Minority interest
in losses not taxable --- (715,000)
Share of losses in
unconsolidated investees
not deductible 2,563,000 ---
- -----------------------------------------------------------------
Total cumulative
temporary differences $ 7,487,000 $ 4,854,000
=================================================================
</TABLE>
The cumulative temporary partnership differences shown above,
which total approximately $193.00 per limited partnership unit,
should reverse when the Partnership liquidates its investments.
There can be no assurance that these will be realized as future
operations of the Partnership could result in greater or lesser
amounts of allocable tax losses to the limited partners. In
addition, the deductibility of taxable losses is dependent upon
each limited partners' individual tax position. The reversal of
these differences should result in future taxable income or loss
per limited partnership unit which is less than or greater than
the Partnership will report for financial statement purposes.
Management believes that the share of losses in unconsolidated
investees is a temporary difference since the Partnership holds
approximately $4,092,000 in notes receivable from these
investees, a portion of which could be charged to bad debt
expense should these investees liquidate their single property
holdings at current carrying values.
F-22
In addition, as of December 31, 1996, the Partnership held
approximately $6,467,000 in loans and interest receivable from
the consolidated corporations. These loans have been eliminated
in the Partnership's consolidated financial statements. It is
anticipated that the temporary differences should reverse on the
corporations' returns when the corporations liquidate their
investments. If these investments are liquidated at current
carrying values, the Partnership should be able to deduct bad
debt expense on its tax returns in the approximate amount of the
temporary differences shown above which is approximately $125.00
per limited partnership unit.
The subsidiary corporations are subject to taxation and account
for income taxes under Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" ("SFAS 109").
SFAS 109 requires an asset and liability approach to establishing
deferred tax assets and liabilities for the temporary differences
between the financial reporting basis and the tax basis of the
corporations' assets and liabilities. No benefit for net
operating losses or cumulative differences related to the
corporations has been recorded in the consolidated financial
statements due to the improbability of realization. Future
consolidated financial statements could reflect income tax
expense in the event that these corporations generate profits in
excess of operating loss carryforwards available. Some of the
subsidiary corporations are cash basis taxpayers.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents
includes cash and interest-bearing deposits with original
maturities of three months or less.
Short-term Investments
Short-term investments include certificates of deposits with
original maturities greater than 90 days but less than one year.
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 1996, 1995 and 1994.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
F-23
make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amount of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Depreciation and Amortization
Prior to the adoption of SFAS 121 on January 1, 1996,
depreciation and amortization of real estate assets was charged
to expense on a straight-line basis over the estimated useful
lives of the assets; 31.5 years for buildings, or, in the case of
tenant improvements, over the terms of the leases from 6 months
to 14 years if shorter than the estimated useful lives.
Revenue Recognition
Revenue from rental income on real estate owned is recognized on
a straight-line basis over the life of the lease when payments
become due under operating leases. During 1996, 1995 and 1994,
the Partnership has recognized gains on the sale of real estate
owned as the gains are determinable and the earnings process is
complete.
(2) Fair Value of Financial Instruments
Statement of Financial Accounting Standard 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.
Short-term Investments
The carrying amount is estimated to be fair value because the
funds were invested at current market rates within one month of
the balance sheet date.
F-24
Accrued Interest Receivable, Accounts Payable and Accrued
Liabilities and Interest and Property Taxes 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 in accordance
with SFAS 114 and SFAS 118, as discussed in note 1, the loans are
carried at the fair value of the underlying real estate
collateral.
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. Therefore, the carrying
value of these instruments is estimated to be fair value.
(3) Allowance for Possible Loan Losses
Changes in the allowance for possible loan losses are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Balance at
beginning of year $ 957,000 $1,157,000 $ 999,000
Transfer to allowance
for possible losses
on real estate owned --- --- (116,000)
Loans charged-off --- (233,000) (15,000)
Provision for
possible loan losses 25,000 33,000 289,000
- -----------------------------------------------------------------
Balance at end of year $ 982,000 $ 957,000 $ 1,157,000
=================================================================
</TABLE>
F-25
At December 31, 1996, the carrying value of loans that are
considered to be impaired under SFAS 114 totaled $3,297,000 (of
which $2,597,000 were on nonaccrual status). At December 31
1996, the allowance for possible loan losses determined in
accordance with the provisions of SFAS 114, related to loans
considered to be impaired under SFAS 114 totaled $982,000. One
of the loans receivable is recorded with a corresponding deferred
profit liability of $289,000. There were five loans to
unconsolidated investees considered impaired under SFAS 114 for
which there is no related allowance for possible loan losses at
December 31, 1996. However, as discussed in note 5, the
unconsolidated investees have recorded an allowance for losses of
$3,898,000 and the Partnership's proportionate share of the
losses in unconsolidated investees reflects this allowance.
There was a $1,044,000 and $1,000 investment in impaired loans
for the years ended December 31, 1996 and 1995, respectively.
For the years ended December 31, 1996 and 1995, the Partnership
recognized interest income on these impaired loans of $169,000
and $13,000, respectively. There was no interest income
recognized on impaired loans for the year ended December 31,
1994. There was no interest income recognized using the cash
basis method of income during the years ended December 31, 1996,
1995 and 1994. If these loans had been current throughout their
terms, interest income would have increased by approximately
$261,000, $646,000 and $543,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
(4) Allowance for Possible Losses on Real Estate Owned
Changes in the allowance for possible losses on real estate owned
are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Balance at
beginning of year $ 4,523,000 $ 4,013,000 $ 6,417,000
Transfer from allowance
for possible loan losses --- --- 116,000
Provision for losses 15,000 803,000 518,000
Real estate owned
charged-off (437,000) (293,000) (3,038,000)
- -----------------------------------------------------------------
Balance at
end of year $ 4,101,000 $ 4,523,000 $ 4,013,000
=================================================================
</TABLE>
F-26
The 1996 provision for losses contains a $15,000 provision for
the auto retail center in Corona, California, a $250,000
provision for the 19 acres in Sacramento offset by a $250,000
recovery for the Upland Shopping Center.
(5) Transactions with Affiliates
Under the provisions of the Partnership Agreement, CC and CMIF,
Inc., an affiliate of the general partners, are 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 $9,000 of mortgage investment servicing fees
payable to CMIF, Inc. in 1994, and $11,000 of such fees were paid
in 1994. The Partnership incurred $4,000, $48,000 and $43,000 of
mortgage investment servicing fees payable to CC in 1996, 1995
and 1994 of which $10,000, $53,000 and $34,000 were paid in 1996,
1995 and 1994.
Under the provisions of the Partnership Agreement, the general
partners are to receive compensation for their services in
supervising the affairs of the Partnership. This partnership
management compensation shall be equal to 10 percent of the cash
available for distribution, as defined in the Partnership
Agreement. The general partners will not receive this
compensation until the limited partners have received a 12
percent per annum cumulative return on their adjusted invested
capital; however, the general partners are entitled to receive a
minimum 5 percent interest in cash available for distribution in
any year until the provision has been met. Adjusted invested
capital is defined as the original capital invested less
distributions from mortgage reductions. Under this provision,
payments to the general partners have been limited to 5 percent
of cash available for distribution as the limited partners have
not received their 12 percent per annum cumulative return. Under
this provision of the Partnership Agreement, no distributions
were paid to the general partners in 1996, 1995 or 1994.
As discussed in note 1, the Partnership owns 50 percent of the
stock of two corporations which have not been consolidated in the
accompanying financial statements, LCR and BKS. The balance of
stock in these corporations is owned by Centennial Mortgage
Income Fund II ("CMIF II"), an affiliate. LCR has invested in a
joint venture, Silverwood Homes ("Silverwood") which is
constructing homes. The Partnership has participated in making
several loans to these corporations and this joint venture.
Under the equity method of accounting, these loans are a
component of the Partnership's investment in LCR and BKS, and
F-27
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.
A summary of these real estate loans receivable from
unconsolidated investees as of December 31, 1996 is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net
Principal Losses Carrying
Balance Offset Value
- -----------------------------------------------------------------
Unsecured note
receivable from LCR $ 1,250,000 $ 1,250,000 $ ---
50 percent interest
in unsecured note
receivable from LCR 1,055,000 1,055,000 ---
50 percent interest
in development loan
secured by a first
trust deed from
Silverwood 977,000 256,000 721,000
50 percent interest
in construction loan
secured by a first
trust deed from
Silverwood 239,000 --- 239,000
50 percent interest
in construction loan
secured by a first
trust deed from
Silverwood 571,000 --- 571,000
- -----------------------------------------------------------------
Totals $ 4,092,000 $ 2,561,000 $ 1,531,000
</TABLE>
F-28
A summary of these real estate loans receivable from
unconsolidated investees as of December 31, 1995 is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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 1,055,000 595,000 460,000
50 percent interest
in note receivable
secured by a first
trust deed from BKS 1,947,000 1,613,000 334,000
50 percent interest
in development loan
secured by a first
trust deed from
Silverwood 352,000 --- 352,000
50 percent interest
in construction loan
secured by a first
trust deed from
Silverwood 161,000 --- 161,000
50 percent interest
in construction loan
secured by a first
trust deed from
Silverwood 154,000 --- 154,000
- -----------------------------------------------------------------
Totals $ 4,919,000 $ 2,208,000 $ 2,711,000
</TABLE>
F-29
In February 1994, the Partnership assigned its 50 percent
interest in a construction loan secured by a second trust deed,
which was participated with CMIF II, to LCR in order to
facilitate LCR's foreclosure of 179 lots in Lancaster,
California. In anticipation of this foreclosure, LCR purchased
the underlying note secured by a first trust deed on the property
with funds provided by a $1,250,000 unsecured note payable to the
Partnership by LCR. CMIF II also assigned its 50 percent
interest in the construction loan secured by a second trust deed
to LCR. In exchange for the assignments of their notes secured
by a second trust deed, the Partnership and CMIF II each received
a 50 percent interest in an unsecured note due from LCR with a
principal balance of $2,115,000 as of December 31, 1996 and 1995,
respectively. The Partnership has not accrued its share of
interest on these unsecured notes which was approximately
$533,000 and $401,000 as of December 31, 1996 and 1995,
respectively.
LCR has entered into a joint venture agreement entitled
Silverwood with Home Devco, ("Home Devco"), an affiliate of the
general partners of the Partnership, to construct and sell single-
family homes at the project. LCR has contributed the 179 lots 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 and the contribution of
these lots to the joint venture has no effect on the financial
position of 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, 1996 and
1995 and for the years ended December 31, 1996, 1995 and 1994:
F-30
LCR Development, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, December 31,
Assets 1996 1995
- -----------------------------------------------------------------
Restricted cash $ 10,000 $ ---
Real estate owned 6,492,000 5,263,000
Less allowance for
losses on real
estate investments 3,898,000 1,390,000
- -----------------------------------------------------------------
Net real estate owned 2,594,000 3,873,000
Organization costs 1,000 2,000
- -----------------------------------------------------------------
$ 2,605,000 $ 3,875,000
=================================================================
Liabilities and Stockholders' Equity (Deficit)
- -----------------------------------------------------------------
Notes payable
to affiliates:
CMIF $ 4,092,000 $ 2,973,000
CMIF II 2,360,000 2,092,000
- -----------------------------------------------------------------
Total notes payable 6,452,000 5,065,000
Accounts payable
and accrued liabilities 11,000 1,000
Interest payable to
affiliates
on real property 845,000 509,000
Payable to affiliates 16,000 1,000
- -----------------------------------------------------------------
Total liabilities 7,324,000 5,576,000
Stockholders' equity
(deficit) (4,719,000) (1,701,000)
- -----------------------------------------------------------------
$ 2,605,000 $ 3,875,000
=================================================================
</TABLE>
F-31
LCR Development, Inc.
Consolidated Statement of Operations
<TABLE>
<CAPTION>
Years ended December 31, 1996, 1995 and 1994
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Housing sales $ 233,000 $ --- $ ---
Cost of housing sales 238,000 --- ---
Provision for
losses on
real estate owned 2,516,000 1,077,000 313,000
Selling and
marketing expenses 184,000 --- ---
General and
administrative 162,000 (3,000) 3,000
- -----------------------------------------------------------------
Operating loss (2,867,000) (1,074,000) (316,000)
Interest expense 151,000 --- 313,000
- -----------------------------------------------------------------
Net (loss) $(3,018,000) $(1,074,000) $ (629,000)
=================================================================
Interest not included
in share of losses (336,000) (197,000) (313,000)
- -----------------------------------------------------------------
Allocable net loss $(2,682,000) $ (877,000) $ (316,000)
=================================================================
Share of losses
recorded $(1,966,000) $ (438,000) $ (158,000)
=================================================================
</TABLE>
Although the Partnership owns a 50 percent interest in LCR, it
holds more than 50 percent of LCR's debt. Since the Partnership
has made a $1,250,000 unsecured loan to LCR, the Partnership was
allocated losses to the extent of the unsecured loan and
remaining losses were allocated 50 percent to the Partnership and
50 percent to CMIF II during 1996.
F-32
<TABLE>
<CAPTION>
Difference of Allocation of Share of Losses
<S> <C>
1996
- -----------------------------------------------------------------
The Partnership's 50 percent share
of LCR's stockholders' deficit
at December 31, 1996 $(2,361,000)
Cumulative interest payable by LCR
to the Partnership not accrued as
income by the Partnership 425,000
Loans receivable considered as part
of the Partnership's investment 4,092,000
Disproportionate loss allocation (625,000)
- -----------------------------------------------------------------
Net loans receivable $ 1,531,000
=================================================================
</TABLE>
As discussed above, the Partnership holds 50 percent of the stock
of BKS with CMIF II. In 1994, the Partnership and CMIF II
assigned to BKS their 50 percent interest in a note receivable
secured by a first trust deed on a 283 acre residential tract in
Bakersfield, California. BKS foreclosed on this property on
August 8, 1994. In exchange for their assignments, the
Partnership and CMIF II each received a 50 percent interest in a
new note from BKS secured by a first trust deed on the property.
The Partnership ceased accruing interest on this new note on
January 1, 1995. Bonds and taxes accrued on the property
increased from $1,605,000 at December 31, 1995 to $2,085,000 at
December 31, 1996 and the bond holders have commenced foreclosure
proceedings on the property. Management has elected to abandon
the property due to the fact that land values have not increased.
The balance of bonds and unpaid property taxes are now
approximately equal to the value of the property. Bonds,
property taxes and note payable to affiliates are nonrecourse
liabilities and, therefore, the Partnership and BKS have no
contingent liability in excess of the property. The Partnership
has no future obligation nor risk of additional losses related to
this investee. Therefore, during 1996, the Partnership recorded
its share of losses in connection with BKS ($338,000) which
results in the Partnership's investment in BKS, including loans,
having a zero balance.
F-33
The balance sheet and statements of operations of BKS have not
been consolidated in the Partnership's financial statements. The
Partnership accounted for its investment in this corporation
using the equity method. The following represents condensed
financial information for BKS at December 31, 1995 and for the
years ended December 31, 1995 and 1994:
BKS Development, Inc.
Balance Sheet
<TABLE>
<CAPTION>
<S> <C> <C>
December 31,
Assets 1995
- -----------------------------------------------------------------
Cash $ 1,000
Real property 5,200,000
Less allowance for losses
on real estate investments 2,693,000
- -----------------------------------------------------------------
Net real estate owned 2,507,000
- -----------------------------------------------------------------
$ 2,508,000
=================================================================
Liabilities and Stockholders' Deficit
- -----------------------------------------------------------------
Bonds payable $ 899,000
Notes payable to affiliates 3,893,000
Interest and property taxes
payable on real property 943,000
- -----------------------------------------------------------------
Total liabilities 5,735,000
Stockholders' deficit (3,227,000)
- -----------------------------------------------------------------
$ 2,508,000
=================================================================
</TABLE>
F-34
BKS Development, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31, 1995 and 1994
<S> <C> <C>
1995 1994
- -----------------------------------------------------------------
Interest and
property tax
expense $ 35,000 $ 499,000
Provision
for losses 2,693,000 ---
General and
administrative --- 2,000
- -----------------------------------------------------------------
Net income (loss) $ (2,728,000) $ (501,000)
=================================================================
Share of losses
recorded $ (1,364,000) $ (250,000)
=================================================================
</TABLE>
At the time of the foreclosure by LCR and BKS discussed above,
the Partnership had accounted for its interests in the notes
secured by a second trust deed and first trust deed as having
been insubstance foreclosed. A summary of the effects of the
foreclosures on the Partnership's balance sheet during 1994 is as
follows:
F-35
<TABLE>
<CAPTION>
<S> <C> <C> <C>
LCR BKS TOTAL
- -----------------------------------------------------------------
Decrease in real
estate owned $ 2,543,000 $ 3,900,000 $ 6,443,000
Increase in
real estate loans 1,057,000 1,947,000 3,004,000
Decrease in allowance
for possible losses
on real estate owned 709,000 1,300,000 2,009,000
Decrease in notes payable 655,000 449,000 1,104,000
Decrease in interest
and property
taxes payable 122,000 204,000 326,000
</TABLE>
The Partnership reimburses the general partner and its affiliates
for expenses incurred on behalf of the Partnership for services
such as salaries, legal, accounting, property management and
other such services. The general partners and affiliates of the
general partners charged $273,000, $221,000 and $235,000 for such
services in 1996, 1995 and 1994, respectively.
During 1996, 1995 and 1994, the Partnership maintained interest-
bearing deposits with Sunwest Bank, an affiliate of the general
partners. The balances at December 31, 1996, 1995 and 1994 were
$534,000, $280,000 and $8,000, respectively. Interest earned on
such deposits for 1996, 1995 and 1994 was $22,000, $5,000 and
$16,000, respectively.
The Partnership owns an interest in Grand Plaza, the corporation
which owns the auto retail center in Corona, California jointly
with an affiliated entity, Centennial Mortgage Income Fund III
("CMIF III"). At December 31, 1996, the ownership percentages
are 86.7 for the Partnership and 13.3 for CMIF III. The assets
and liabilities of this corporation have been consolidated in the
accompanying consolidated financial statements. Notes payable
and interest payable to affiliates includes $557,000 and $508,000
at December 31, 1996 and 1995, respectively, and the Partnership
had recorded $420,000 and $370,000, respectively, of minority
interest in cumulative losses from this corporate joint venture
against the note payable to affiliates balance as of the same
dates. The notes payable to affiliates balance reflects CMIF
III's share of a note payable by the corporation to the
Partnership and CMIF III. The note bears interest at 14 percent
F-36
fixed and matured October 1, 1996. The Partnership is in the
process of extending this note.
The Partnership owns an interest in BNN, the corporation which
owns the 19 acres in Sacramento, California jointly with an
affiliated entity CMIF III. At December 31, 1996, the ownership
percentages are 86.25 for the Partnership and 13.75 for CMIF III.
The assets and liabilities of this corporation have been
consolidated in the accompanying consolidated financial
statements. Notes payable and interest payable to affiliates at
December 31, 1996 and 1995 includes $452,000 and $383,000,
respectively, and the Partnership had recorded $295,000 and
$260,000, respectively, of minority interest in cumulative losses
from this corporate joint venture against the note payable to
affiliates balance as of the same dates. The notes payable to
affiliates balance reflects CMIF III's share of a note payable by
the corporation to the Partnership and CMIF III. The note bears
interest at 15 percent fixed and matures August 1, 1997.
<TABLE>
(6) Real Estate Owned
<CAPTION>
Real estate owned consists of the following:
(dollars in thousands)
<S> <C> <C>
December 31, December 31,
1996 1995
- -----------------------------------------------------------------
1. Shopping Center in Upland, CA $ 4,628 $ 5,106
2. 19 acres in Sacramento, CA 2,822 2,618
3. Auto retail center in Corona, CA 2,600 2,580
4. 23 acres in Riverside, CA --- 1,012
5. 5 condominiums in Oxnard, CA 1,310 1,550
- -----------------------------------------------------------------
Subtotal 11,360 12,866
Less accumulated depreciation --- 517
- -----------------------------------------------------------------
Total real estate owned $ 11,360 $ 12,349
=================================================================
</TABLE>
At December 31, 1996 and 1995, property number 5 is accounted for
as insubstance foreclosure under SFAS 118 as the Partnership does
not currently hold legal title to this property, but the borrower
has surrendered the collateral to the control of the Partnership.
F-37
At December 31, 1996, the properties held for sale are presented
net of accumulated depreciation as required by SFAS 121.
In accordance with SFAS 121, the Partnership carries real estate
owned, held for sale, at the lower of carrying amount, or fair
value less costs to sell. The estimated fair values were
determined by using appraisals, discounted cash flows and/or
other valuation techniques. The actual market price of real
estate can only be determined by negotiation between independent
third parties in a sales transaction and sales proceeds could
differ substantially from estimated fair values.
The Partnership leases its operating properties under several non-
cancelable operating lease agreements. Future minimum rents to
be received as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Years ending December 31,
- -----------------------------------------------------------------
1997 $ 684
1998 643
1999 568
2000 438
2001 422
Thereafter 2,536
- -----------------------------------------------------------------
$ 5,291
=================================================================
</TABLE>
F-38
<TABLE>
(7) Notes Payable
<CAPTION>
Notes payable consist of the following:
(dollars in thousands)
<S> <C> <C>
December 31, December 31,
1996 1995
- -----------------------------------------------------------------
Note payable secured by
shopping center in
Upland, CA with interest
and principal payments due
monthly of $24,000; interest
rate of 11.25 percent fixed,
maturing May 1, 1997 $ 2,455 $ 2,460
Note payable secured by
19 acres in Sacramento, CA
with interest only payments
due monthly; interest rate of
12 percent fixed, maturing
March 1, 1998 900 900
Note payable secured by 23
acres in Riverside, CA;
interest rate of 13.75
percent fixed,
matured August 1, 1992 --- 650
- -----------------------------------------------------------------
Total notes payable $ 3,355 $ 4,010
=================================================================
</TABLE>
The note payable secured by the Upland Shopping Center totaling
$2,455,000 becomes due in 1997. The Partnership has a letter of
intent from the lender for a five year extension on this note.
No principal is payable in 1997 on the note secured by the 19
acres in Sacramento. The balance of $900,000 is due in 1998.
F-39
The Partnership acquired the 23 acres in Riverside by deed in
lieu of foreclosure, subject to the note payable discussed above.
In the third quarter of 1993, the lender filed a notice of
default and commenced judicial foreclosure proceedings on the
property. The original borrower on the note payable negotiated
with the lender to perfect a nonjudicial foreclosure on the
property. The foreclosure was completed in 1996. Management
established an allowance for losses sufficient to cover the loss
which was incurred as a result of the foreclosure of this
property.
(8) Contingencies
There are no material pending legal proceedings other than
ordinary routine litigation incidental to the Partnership's
business. Based on part of advice of legal counsel, management
does not believe that the results of any of these matters will
have a material impact on the Partnership's financial position or
results of operations.
F-40
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Schedule III
<TABLE>
Consolidated Real Estate Owned and
Accumulated Depreciation and Amortization
December 31, 1996
<CAPTION>
Initial Costs
Capitalized
Cost to
Subsequent
Partnership to
Acquisition
<S> <C> <C> <C>
Real Estate
Property Encumbrances Owned
Improvements<F4>
- --------------------------------------------------------------------------------
- ----------
Shopping Center in Upland $ 2,455,000 $ 4,903,000 $
(275,000)
19 acres in Sacramento 900,000 2,567,000
255,000
Auto Retail Center in Corona --- 2,533,000
67,000
5 Condominiums in Oxnard --- 1,154,000
156,000
- --------------------------------------------------------------------------------
- ----------
$ 3,355,000 $ 11,157,000 $
203,000
================================================================================
==========
F-41
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Schedule III
Consolidated Real Estate Owned and
Accumulated Depreciation and Amortization
(Continued)
December 31, 1996
<CAPTION>
Gross Amount at Which
Carried on Books (F3)
<S> <C> <C> <C> <C> <C>
Accumulated Life
On Which
Real Estate Depreciation & Date
Depreciation
Property Owned Total Amortization<F4> Acquired Is
Computed
- --------------------------------------------------------------------------------
- ----------
Shopping Center
in Upland $ 4,628,000 $ 4,628,000 $ --- August 1988
(F1)
19 acres in
Sacramento 2,822,000 2,822,000 --- August 1991
None
Auto Retail Center
in Corona 2,600,000 2,600,000 --- December 1991
None
5 Condominiums
in Oxnard 1,310,000 1,310,000 --- December 1992
(F2) None
- ---------------------------------------------------------------
$11,360,000 $11,360,000 $ ---
===============================================================
F-42
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Schedule III
Consolidated Real Estate Owned and
Accumulated Depreciation and Amortization
(Continued)
December 31, 1996
<CAPTION>
<FN>
<F1> Prior to the adoption of SFAS 121, tenant improvements were depreciated
over life of leases; buildings depreciated over 31.5 years;
<F2> Insubstance foreclosure;
<F3> Aggregate cost for Federal Income Tax purposes is $12,577,000 at December
31, 1996;
<F4> Improvement are presented net of accumulated depreciation as required per
SFAS 121.
</FN>
</TABLE>
See accompanying independent auditors' report.
F-43
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Schedule III
<TABLE>
Consolidated Real Estate Owned and
Accumulated Depreciation and Amortization
(Continued)
December 31, 1996
<CAPTION>
The following is a summary of consolidated real estate owned for the years ended
December 31, 1996, 1995, and 1994.
<S> <C> <C> <C>
1996 1995
1994
- --------------------------------------------------------------------------------
- ----------
Balance at beginning of year $ 12,866,000 $ 14,232,000 $
21,701,000
Additions during period:
Acquisitions through foreclosures --- ---
540,000
Improvements 273,000 58,000
187,000
Deductions during period:
Real estate sold (150,000) (1,131,000)
(605,000)
Real estate foreclosed (665,000) ---
(4,553,000)
Charge-offs (437,000) (293,000)
(3,038,000)
- --------------------------------------------------------------------------------
- ----------
Balance at year end $ 11,887,000 $ 12,866,000 $
14,232,000
================================================================================
=========
F-44
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Schedule III
Consolidated Real Estate Owned and
Accumulated Depreciation and Amortization
(Continued)
December 31, 1996
<CAPTION>
The following is a summary of accumulated depreciation and amortization of
consolidated real estate owned for the years ended December 31, 1996, 1995, and
1994.
<S> <C> <C> <C>
1996 1995
1994
- --------------------------------------------------------------------------------
- ----------
Balance at beginning of year $ 517,000 $ 412,000 $
307,000
Additions 10,000 105,000
105,000
- --------------------------------------------------------------------------------
- ----------
Balance at year end $ 527,000 $ 517,000 $
412,000
================================================================================
==========
</TABLE>
F-45
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Schedule IV
<TABLE>
<CAPTION>
Mortgage Loans on Real Estate
December 31, 1996
<S> <C> <C> <C>
Interest Final
Periodic
Description Rate Maturity Date Payment
Terms
- --------------------------------------------------------------------------------
- ----------
Note secured by:
First Trust Deed
Interest only
on Two-Unit Pad
balloon payment
in Corona, CA 11% fixed April 1, 1994 of
$460,000
Second Trust Deed
on Mini-Storage
Interest only
Facility in
balloon payment
Citrus Heights, CA 7% fixed November 1, 2000 of
$608,000
Third Trust Deed
on Mini-Storage
Facility in
Citrus Heights, CA 12% fixed May 1, 1997 P + I
monthly
First Trust Deed
$2,500 P + I
on 17,789 s.f.
monthly balloon
Auto Care Center in
payment of
San Bernardino, CA Prime + 3% August 1, 1998
$290,000
F-46
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Schedule IV
<CAPTION>
Mortgage Loans on Real Estate
(Continued)
December 31, 1996
<S> <C> <C> <C>
Interest Final Periodic
Description Rate Maturity Date Payment
Terms
- --------------------------------------------------------------------------------
- ----------
Note secured by:
Second Trust Deed
Interest only
on 32,341 s.f.
balloon
Retail Center
payment of
in Corona, CA 10% fixed June 30, 1996
$374,000
55 percent
interest in $805 P
+ I
Second Trust Deed
monthly
on single-family
balloon
residence in
payment of
Sacramento, CA 5% fixed May 1, 1998
$141,000
Unsecured Note related
to 177 lots in P + I
due at
Lancaster, CA 7.75% fixed December 1, 1997
maturity
F-47
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Schedule IV
<CAPTION>
Mortgage Loans on Real Estate
(Continued)
December 31, 1996
<S> <C> <C> <C>
Interest Final
Periodic
Description Rate Maturity Date Payment
Terms
- --------------------------------------------------------------------------------
- ----------
Note secured by:
50 percent interest
in unsecured
note related to
177 lots in P + I
due at
Lancaster, CA 7.75% fixed December 1, 1997
maturity
First Trust Deed
Interest only
on 7.83 acres
balloon
of vacant land
payment of
in Perris, CA 15% fixed June 1, 1993
$292,000
50 percent interest
in First Trust
Deed on 166 lots P + I
due at
in Lancaster, CA Prime + 1% August 1, 1997
maturity
F-48
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Schedule IV
<CAPTION>
Mortgage Loans on Real Estate
(Continued)
December 31, 1996
<S> <C> <C> <C>
Interest Final
Periodic
Description Rate Maturity Date Payment
Terms
- --------------------------------------------------------------------------------
- ----------
Note secured by:
50 percent interest
in First Trust
Deed on four
single family homes P + I
due at
in Lancaster, CA Prime + 1% July 1, 1998
maturity
50 percent interest
in First Trust
Deed on seven
single family homes P + I
due at
in Lancaster, CA Prime + 1% July 1, 1996
maturity
F-49
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Schedule IV
<CAPTION>
Mortgage Loans on Real Estate
(Continued)
December 31, 1996
<S> <C> <C> <C> <C>
Principal
Amount
Face Carrying of Loan
Subject
Amount of Amount of to
Delinquent
Description Prior Liens Mortgages Mortgages (F1) Principal
or Interest
- --------------------------------------------------------------------------------
- ----------
Note secured by:
First Trust Deed
on Two-Unit Pad
in Corona, CA None $ 460,000 $ 460,000 $
460,000
Second Trust Deed
on Mini-Storage 1st T.D.
Facility in of
Citrus Heights, CA $2,950,000 608,000 607,000
None
Third Trust Deed 1st T.D. of
on Mini-Storage $2,950,000
Facility in 2nd T.D. of
Citrus Heights, CA $608,000 72,000 65,000
None
First Trust Deed
on 17,780 s.f
Auto Care Center in 544,000
San Bernardino, CA None (54% - 294,000) 288,000
None
F-50
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Schedule IV
<CAPTION>
Mortgage Loans on Real Estate
(Continued)
December 31, 1996
<S> <C> <C> <C> <C>
Principal
Amount
Face Carrying of Loan
Subject
Amount of Amount of to
Delinquent
Description Prior Liens Mortgages Mortgages (F1) Principal
or Interest
- --------------------------------------------------------------------------------
- ----------
Note secured by:
Second Trust Deed
on 32,341 s.f. 1st T.D.
Retail Center of
in Corona, CA $6,100,000 374,000 375,000
375,000
55 percent
interest in
Second Trust Deed
on Single-Family 1st T.D.
Residence in of 150,000
Sacramento, CA $278,000 (55% - 83,000) 81,000
81,000
Unsecured Note related
to 177 lots in
Lancaster, CA $3,266,000 1,250,000 1,250,000
1,250,000
F-51
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Schedule IV
<CAPTION>
Mortgage Loans on Real Estate
(Continued)
December 31, 1996
<S> <C> <C> <C> <C>
Principal
Amount
Face Carrying of Loan
Subject
Amount of Amount of to
Delinquent
Description Prior Liens Mortgages Mortgages (F1) Principal
or Interest
- --------------------------------------------------------------------------------
- ----------
Note secured by:
50 percent interest
in unsecured
note related to 1st T.D.
177 lots in of 2,115,000
Lancaster, CA $3,266,000 (50% - 1,057,000) 1,055,000
1,055,000
First Trust Deed
on 7.83 acres
of vacant land
in Perris, CA None 343,000 293,000
293,000
50 percent interest
in First Trust
Deed on 166 lots 3,266,000
in Lancaster, CA None (50% - 1,636,000) 977,000
977,000
F-52
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Schedule IV
<CAPTION>
Mortgage Loans on Real Estate
(Continued)
December 31, 1996
<S> <C> <C> <C> <C>
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 four single
family homes in 490,000
Lancaster, CA None (50% - 245,000) 239,000
239,000
50 percent interest
in First Trust Deed
on seven single
family homes in 804,000
Lancaster, CA None (50% - 402,000) 571,000
571,000
Loss from unconsolidated investees (2,561,000)
(2,561,000)
Unearned interest and discounts (403,000)
(143,000)
- --------------------------------------------------------------------------------
- ----------
$ 9,171,000 $ 3,297,000
$2,597,000
================================================================================
==========
F-53
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Schedule IV
<CAPTION>
Mortgage Loans on Real Estate
(Continued)
December 31, 1996
<FN>
<F1> Aggregate cost for Federal Income Tax purpose is $7,705,000 at December
31, 1996.
</FN>
F-54
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Schedule IV
Mortgage Loans on Real Estate
(Continued)
December 31, 1996
<CAPTION>
The following is a summary of activity for the years ended December 1996, 1995,
and 1994.
<S> <C> <C> <C>
1996 1995
1994
- --------------------------------------------------------------------------------
- ----------
Balance at beginning of year $ 4,793,000 $ 6,641,000 $
3,489,000
Additions during period:
New mortgage loans/disbursements 1,044,000 429,000
1,603,000
Other - Interest reserve, amortization
and transfer from accrued interest 197,000 47,000
23,000
Loans transferred from real estate owned --- ---
3,004,000
Deductions during period:
Collections of principal (163,000) (288,000)
(515,000)
Foreclosures --- ---
(540,000)
Charge-offs (270,000) (233,000)
(15,000)
Losses from unconsolidated investees (2,304,000) (1,803,000)
(408,000)
- --------------------------------------------------------------------------------
- ----------
Balance at year end $ 3,297,000 $ 4,793,000 $
6,641,000
================================================================================
=========
</TABLE>
See accompanying independent auditors' report.
F-55
Exhibit 21
LCR DEVELOPMENT, INC.
A California Corporation
Index to Consolidated Financial Statements
Consolidated Financial Statements Page
Independent Auditors' Report ........................... F-57
Consolidated Balance Sheets --
December 31, 1996 and 1995.............................. F-58
Consolidated Statements of Operations --
Years ended December 31, 1996, 1995 and 1994............ F-60
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1996, 1995 and 1994............ F-61
Consolidated Statements of Cash Flows --
Years ended December 31, 1996, 1995 and 1994............ F-62
Notes to Consolidated Financial Statements ............. F-65
F-56
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, 1996 and 1995 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, 1996. 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, 1996 and 1995, and the results of their operations and their
cash flows for each of the years in the three-year period ended
December 31, 1996 in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the consolidated financial
statements, the Company has suffered recurring losses from
operations and has various notes payable scheduled to mature in
1997. These items raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
Orange County, California
April 18, 1997, except as to the first paragraph of Note 6,
which is as of July 29, 1997
F-57
LCR Development, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, December 31,
Assets 1996 1995
- -----------------------------------------------------------------
Restricted cash $ 10,000 $ ---
Real estate owned (note 5) 6,492,000 5,263,000
Less allowance for losses on
real estate investments (note 4) 3,898,000 1,390,000
- -----------------------------------------------------------------
Net real estate owned 2,594,000 3,873,000
Organization costs 1,000 2,000
- -----------------------------------------------------------------
$ 2,605,000 $ 3,875,000
=================================================================
Liabilities and Stockholders' Equity (Deficit)
- -----------------------------------------------------------------
Notes payable to affiliates:
CMIF $ 4,092,000 $ 2,973,000
CMIF II 2,360,000 2,092,000
- -----------------------------------------------------------------
Total notes payable (note 7) 6,452,000 5,065,000
Accounts payable
and accrued liabilities 11,000 1,000
Interest payable to affiliates 845,000 509,000
Payable to affiliates (note 6) 16,000 1,000
- -----------------------------------------------------------------
Total liabilities 7,324,000 5,576,000
F-58
LCR Development, Inc.
Consolidated Balance Sheets
(Continued)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Liabilities and December 31, December 31,
Stockholders' Equity (Deficit) 1996 1995
- -----------------------------------------------------------------
Stockholders' equity (deficit)
Common stock, no par value;
300 shares authorized;
300 shares issued and
outstanding in 1996 and 1995 3,000 3,000
Accumulated deficit (4,722,000) (1,704,000)
- -----------------------------------------------------------------
Total stockholders'
equity (deficit) (4,719,000) (1,701,000)
Commitments (note 9)
- -----------------------------------------------------------------
$ 2,605,000 $ 3,875,000
=================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-59
LCR Development, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31, 1996, 1995 and 1994
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Housing sales $ 233,000 $ --- $ ---
Cost of housing sales 238,000 --- ---
Provision for
losses on real
estate owned (note 4) 2,516,000 1,077,000 313,000
Selling and
marketing expenses 184,000 --- ---
General and
administrative 162,000 (3,000) 3,000
- -----------------------------------------------------------------
Operating loss (2,867,000) (1,074,000) (316,000)
Interest expense (note 5) 151,000 --- 313,000
- -----------------------------------------------------------------
Loss before income taxes $(3,018,000) $(1,074,000) $ (629,000)
- -----------------------------------------------------------------
Income taxes (note 8) --- --- ---
- -----------------------------------------------------------------
Net loss $(3,018,000) $(1,074,000) $ (629,000)
=================================================================
Net loss per common share $ (10,060) $ (3,580) $ (2,097)
=================================================================
Weighted average
number of common
shares outstanding 300 300 300
=================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-60
LCR Development, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Years ended December 31, 1996, 1995 and 1994
<S> <C> <C> <C>
Total
Stockholders'
Common Accumulated Equity
Stock Deficit (Deficit)
- -----------------------------------------------------------------
Balance (deficit) at
December 31, 1993 $ 3,000 $ (1,000) $ 2,000
Net loss --- (629,000) (629,000)
- -----------------------------------------------------------------
Balance (deficit) at
December 31, 1994 3,000 (630,000) (627,000)
Net loss --- (1,074,000) (1,074,000)
- -----------------------------------------------------------------
Balance (deficit) at
December 31, 1995 3,000 (1,704,000) (1,701,000)
Net loss --- (3,018,000) (3,018,000)
- -----------------------------------------------------------------
Balance (deficit) at
December 31, 1996 $ 3,000 $ (4,722,000) $ (4,719,000)
=================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-61
LCR Development, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31, 1996, 1995 and 1994
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Cash flows from
operating activities:
Net loss $(3,018,000) $(1,074,000) $ (629,000)
Adjustments to
reconcile net
loss to cash
provided by (used
in) operating
activities:
Provision for
possible losses 2,516,000 1,077,000 313,000
Changes in assets
and liabilities:
(Increase) decrease in
organization costs 1,000 --- (2,000)
Increase in
interest payable 151,000 --- 312,000
Increase in accounts
payable and accrued
liabilities 10,000 1,000 ---
Increase in payable
to affiliates 15,000 1,000 ---
- -----------------------------------------------------------------
Net cash provided by
(used in) operating
activities (325,000) 5,000 (6,000)
- -----------------------------------------------------------------
Cash flows from
investing activities:
Capital
expenditures for
real estate owned (1,104,000) (1,207,000) (401,000)
Proceeds from sale
of real estate owned 233,000 --- ---
Increase in
restricted cash (10,000) --- ---
- -----------------------------------------------------------------
F-62
LCR Development, Inc.
Consolidated Statements of Cash Flows
(Continued)
Years ended December 31, 1996, 1995 and 1994
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Net cash used in
investing
activities (881,000) (1,207,000) (401,000)
- -----------------------------------------------------------------
Cash flows from
financing activities-
Advances received
on notes payable 1,206,000 1,200,000 407,000
- -----------------------------------------------------------------
Net decrease
in cash --- (2,000) ---
Cash at beginning
of year --- 2,000 2,000
- -----------------------------------------------------------------
Cash at
end of year $ --- $ --- $ 2,000
=================================================================
F-63
LCR Development, Inc.
Consolidated Statements of Cash Flows
(Continued)
Years ended December 31, 1996, 1995 and 1994
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Supplemental
schedule of
noncash
investing and
financing activities:
Increase in real
estate owned and
related notes
payable to
affiliates as a
result of transfer
of ownership $ --- $ --- $ 3,365,000
Increase in real
estate owned
as a result of
capitalized interest 366,000 290,000 ---
Decrease in real
estate owned and
related allowance
for losses due to
sale of real estate
owned 8,000 --- ---
Increase in notes
payable to
affiliates as a
result of
capitalized interest 181,000 93,000 ---
Increase in interest
payable to affiliates
as a result of
capitalized interest 185,000 197,000 ---
</TABLE>
See accompanying notes to consolidated financial statements
F-64
LCR DEVELOPMENT, INC.
Notes to Consolidated Financial Statements
December 31, 1996, 1995, 1994
(1) Summary of Significant Accounting Policies
Organization
During 1993, LCR Development, Inc. ("LCR") was formed by
Centennial Mortgage Income Fund ("CMIF") and Centennial Mortgage
Income Fund II ("CMIF II") to own and operate one of their real
estate assets, 179 single family lots in Lancaster, California.
During 1994, Silverwood Homes, a California general partnership
("Silverwood"), was formed between LCR and Home Devco, Inc.
("Home Devco") for the purpose of constructing single family
homes at the real estate project located in Lancaster. LCR
contributed the 179 single family lots to the partnership in
exchange for a capital contribution credit of $2,571,594 and Home
Devco contributed $100 in cash. As LCR has contributed a 99.9
percent interest, Silverwood has been consolidated in the
accompanying consolidated financial statements. All significant
intercompany balances and transactions including the
aforementioned contribution, have been eliminated in
consolidation. LCR is entitled to a cumulative priority interest
in cash available for distribution from the sale of homes equal
to $19,381 per lot. Home Devco is acting as the general
contractor in the construction of homes at the project and is
entitled to fifty percent of any cash available for distribution
from the sale of homes after LCR has received distributions equal
to its priority interest. Home Devco is also entitled to
reimbursement of onsite supervision costs and certain general and
administrative costs.
Real Estate Owned
During 1995 and 1994, LCR accounted for foreclosed assets using
the American Institute of Certified Public Accountants Statement
of Position 92-3 ("SOP 92-3"), "Accounting for Foreclosed
Assets". SOP 92-3 indicated that foreclosed assets were presumed
held for sale and not for the production of income. Accordingly,
foreclosed assets held for sale were carried at the lower of cost
or fair value less estimated costs to sell. The cost of such
assets at the time of foreclosure was the fair value of the asset
foreclosed. Immediately after foreclosure, a valuation allowance
was recognized for estimated costs to sell through a charge to
operations.
F-65
Effective January 1, 1996, LCR 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 carrying amount or fair value less costs to sell. An
impairment loss shall be measured as the amount by which the
carrying amount of the assets exceed the fair value of the assets
less costs to sell.
Revenue Recognition
LCR recognizes revenue from sales of real estate when
construction is completed, an adequate down payment has been
received and title to the property sold has been transferred to
the buyer.
Income Taxes
LCR is subject to taxation and accounts for income taxes under
Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes" ("SFAS 109"). SFAS 109 requires an asset and
liability approach to establishing deferred tax assets and
liabilities for the temporary differences between the financial
reporting basis and the tax basis of the corporation's assets and
liabilities.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities 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.
(2) Ability to Continue as a Going Concern
LCR and Silverwood were formed to own and develop the 179 lots in
Lancaster, California. During 1994 and 1995, operations did not
generate sufficient cash to cover current obligations as the
project was still being developed. During 1996, operations did
not generate sufficient cash to cover current obligations due to
the lack of sales of homes. Sales volumes of new homes in the
Lancaster area have continued to decline since 1995 while sales
F-66
prices have remained relatively flat and construction costs have
increased. The note payable originally secured by the nine lots
in Lancaster (Phase I) which matured July 1, 1996 has been
extended to allow sufficient time for the sale of the balance of
the homes. Based on representations by the general partners of
CMIF and CMIF II, the $2,115,000, the $1,250,000 and the
$1,748,000 notes payable to CMIF and CMIF II which all mature
during 1997 will be extended indefinitely while the project is
being developed. However, if LCR's and Silverwood's financial
condition worsens significantly, these intentions could change.
Phase II at the project is currently under development. Prior to
commencing additional phases, management will reevaluate its
investment alternatives including, but not limited to, the
cessation of construction and holding of the lots for investment
or the bulk sale of the remaining lots. Management is
continuously monitoring all aspects of the project and its impact
on LCR, CMIF and CMIF II.
(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.
Restricted Cash
The carrying amount, which is cost, is assumed to be the fair
value.
Notes Payable to Affiliates and Interest Payable to Affiliates
The fair value is not determinable due to their related party
nature and terms.
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.
F-67
(4) Allowance for Possible Losses on Real Estate Owned
Changes in the allowance for possible losses on real estate owned
are as follows:
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Balance at
beginning of year $1,390,000 $ 313,000 $ ---
Real estate owned
charged-off (8,000) --- ---
Provision for losses 2,516,000 1,077,000 313,000
- -----------------------------------------------------------------
Balance at
end of year $3,898,000 $1,390,000 $ 313,000
=================================================================
</TABLE>
(5) Real Estate Owned
Real estate owned balances at December 31, 1996, 1995 and 1994
were $6,492,000, $5,263,000 and $3,766,000, respectively. The
property was transferred to LCR in 1994 at CMIF and CMIF II's
cost, with a balance of $3,365,000. Capitalized interest for the
years ended December 31, 1996 and 1995 totaled $366,000 and
$290,000, respectively. There was no capitalized interest for
1994. No interest was paid for the years ended December 31,
1996, 1995 and 1994. Sales of real estate owned were $233,000
for the year ended December 31, 1996. There were no sales of
homes for the years ended December 31, 1995 and 1994. Charge-
offs recorded in 1996 were $8,000. There were no charge-offs
recorded for the years ended December 31, 1995 and 1994. Total
interest incurred for the years ended December 31, 1996, 1995 and
1994 was $517,000, $290,000 and $313,000, respectively.
In accordance with SFAS 121, LCR carries real estate owned, held
for sale, at the lower of carrying amount, or fair value less
costs to sell. The estimated fair value was determined by using
appraisals, discounted cash flows and/or other valuation
techniques. The actual market price of real estate can only be
determined by negotiation between independent third parties in a
sales transaction and sales proceeds could differ substantially
from estimated fair values.
F-68
(6) Transactions with Affiliates
The general partners of CMIF and CMIF II beneficially own a
controlling interest in Home Devco. Under the provisions of the
Partnership Agreement, Home Devco is entitled to receive from LCR
reimbursement of onsite supervision costs and certain general and
administrative costs equal to 3 percent of budgeted gross
proceeds or a maximum of $20,000 per month. Home Devco is
entitled to receive a minimum fee of $7,500 per month under the
agreement, as amended. LCR paid $160,000, $143,000 and $5,000 of
these costs to Home Devco and affiliates for the years ended
December 31, 1996, 1995 and 1994, respectively. Through December
31, 1996, fees paid have exceeded amounts payable under the
agreement by $50,000, however, management believes that these
fees are appropriate based on the completed project and has
temporarily reduced the amount being paid to Home Devco to $5,000
per month effective January 1, 1997.
Funds have been advanced from CMIF II to meet operating expenses
and fund options on the prospective home sales. Once the sales
have been completed, the advances are to be repaid from sales
proceeds. The balances at December 31, 1996 and 1995 were
$16,000 and $1,000, respectively.
(7) Notes Payable to Affiliates
<TABLE>
<CAPTION>
Notes payable to affiliates consist of the following:
(dollars in thousands)
<S> <C> <C>
December 31, December 31,
1996 1995
- -----------------------------------------------------------------
Unsecured note payable to
CMIF and CMIF II related
to 179 lots in
Lancaster, CA with
principal and interest
payable at maturity
interest rate of 7.75% fixed,
maturing December 1, 1997 $ 2,115 $ 2,115
F-69
Notes payable to affiliates consist of the following:
(continued)
(dollars in thousands)
<S> <C> <C>
December 31, December 31,
1996 1995
- -----------------------------------------------------------------
Unsecured note payable to CMIF
related to 179 lots in
Lancaster, CA with
principal and interest
payable at maturity;
interest rate of 7.75% fixed
maturing December 1, 1997 1,250 1,250
Note payable to CMIF
and CMIF II secured by
first trust deed on 166
lots in Lancaster, CA
with principal and interest
due at maturity; interest
at Prime + 1%; maturing
August 1, 1997 1,748 896
Note payable to CMIF and
CMIF II secured by first
trust deed on 4 lots in
Lancaster, CA with
principal and interest
due at maturity; interest
at Prime +1%;
maturing July 1, 1998 484 416
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, 1996 855 388
- -----------------------------------------------------------------
Total notes payable $ 6,452 $ 5,065
=================================================================
</TABLE>
F-70
Future principal payments to be paid as of December 31, 1996 are
as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
Years ending December 31,
<S> <C>
- -----------------------------------------------------------------
1996 $ 855
1997 5,113
1998 484
- -----------------------------------------------------------------
$6,452
=================================================================
</TABLE>
The note payable originally secured by a first trust deed on 9
lots in Lancaster which matured July 1, 1996 has been extended
indefinitely (see note 2).
(8) Income Taxes
LCR and Silverwood file separate Federal and State income tax
returns. LCR and Silverwood have been consolidated for the
following schedules.
A reconciliation of income tax expense (benefit) at the Federal
statutory rate of 34% to LCR's and Silverwood's provision for
taxes is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Income tax benefit at
the statutory rate $(1,026,000) $ (365,000) $ (214,000)
State tax benefit, net
of Federal tax benefit (184,000) (66,000) (38,000)
Valuation allowance 1,204,000 430,000 252,000
Other 6,000 1,000 ---
- -----------------------------------------------------------------
Total --- --- ---
=================================================================
</TABLE>
F-71
As of December 31, 1996, LCR and Silverwood have net operating
loss carryforwards of approximately $211,000, expiring at various
dates through 2011.
The components of the consolidated net deferred tax asset at
December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
- -----------------------------------------------------------------
Net operating loss
carryforwards $ 78,000 $ --- $ 2,000
Provision for losses
on real estate 1,563,000 557,000 125,000
Capitalized interest (1,000) 46,000 125,000
Interest not
deductible until paid 185,000 79,000 ---
Section 263A expenses 61,000 --- ---
- -----------------------------------------------------------------
1,886,000 682,000 252,000
- -----------------------------------------------------------------
Less valuation
allowance (1,886,000) (682,000) (252,000)
- -----------------------------------------------------------------
$ --- $ --- $ ---
=================================================================
</TABLE>
The net increases in the total valuation allowances for the years
ended December 31, 1996 and 1995 was an increase of $1,204,000
and $430,000, respectively. In assessing the realizability of
deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary
differences become deductible.
Based upon the losses of LCR and Silverwood, management has
determined that part or all of the consolidated deferred tax
assets may not be realized in the future. Accordingly,
management has provided a valuation allowance against the value
of the deferred tax asset.
F-72
(9) Commitments
During the first quarter of 1997, Silverwood signed a contract
with a subcontractor for $231,000.
F-73
