FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission File Number: 0-22520
CENTENNIAL MORTGAGE INCOME FUND
(Exact name of registrant as specified in its charter)
California 33-0053488
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1540 South Lewis Street, Anaheim, California 92805
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (714)502-8484
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Units
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate by check mark whether if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (Section 229.405 of this
chapter) is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
YES X NO
This report includes a total of 951 pages.
PART I
ITEM 1. BUSINESS.
(a) General Development of the Business
Centennial Mortgage Income Fund (the "Partnership"), a California
Limited Partnership, was organized on December 13, 1983. The
Partnership's registration statement became effective June 8,
1984. The general partners are John B. Joseph, Ronald R. White
and Centennial Corporation ("CC"), a privately held corporation
whose stock is owned by affiliates of Ronald R. White and John B.
Joseph.
Beginning in the fourth quarter of 1985, the Partnership ceased
accepting capital contributions and entered its operating stage
of business. During the fourth quarter of 1990, 60 months after
the closing of its offering stage, the Partnership ceased making
new loans and entered the repayment stage as required by the
Partnership Agreement. For additional information, see Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
(b) Financial Information about Industry Segments
The Partnership adopted Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise
and Related Information"("SFAS 131"). Given that the Partnership
is in the process of liquidation, the Partnership has identified
only one operating business segment which is the business of
asset liquidation. The adoption of SFAS 131 did not have an
impact on the Partnership's financial reporting.
(c) Narrative Description of Business
The Partnership was formed to invest in mortgage investments
consisting of participating first mortgage loans, construction
loans, and wrap-around and other junior loans on commercial,
industrial and residential income-producing real property.
The Partnership's objectives are to preserve the Partnership's
invested capital, provide increased cash distributions to the
limited partners as the cash flow from the properties underlying
mortgage investments increases over the life of the Partnership,
provide capital growth through participation in the increased
value of the underlying properties and provide liquidating
distributions as loans are repaid and cash from the sale of real
estate owned is no longer needed for development and operations
of real estate owned.
Due to the long term recession and falling real estate market
values in California during the early 1990's, many of the
Partnership's loans became delinquent and management of the
Partnership elected to foreclose, thereby increasing real estate
owned balances. As a result, the Partnership became a direct
investor in this real estate. The Partnership has managed its
operating properties and completed certain development processes
on its raw land over the last several years in an effort to make
this real estate more marketable.
The improving real estate markets and development of the
Partnership's assets have enabled the Partnership to liquidate
the majority of its assets. As of December 31, 1998, the
Partnership's assets consisted of $4,938,000 in cash and
$1,097,000 in other assets. Based upon the current stated
maturity dates of its remaining non-cash assets, it is possible
that these assets could be liquidated by July 2000.
Real estate owned by the Partnership reached a peak at December
31, 1993 when its total carrying value, before allowance for
possible losses, reached $21,394,000. The real estate owned
balance before allowance for possible losses then decreased to
$13,820,000 at December 31, 1994 and decreased again to
$12,349,000 at year end 1995. Real estate owned decreased again
to $11,360,000 as of December 31, 1996 and $8,490,000 as of
December 31, 1997. The Partnership sold the remainder of its
real estate owned during 1998.
Real estate loans have also declined significantly in recent
years. Real estate loans totaled $6,641,000 as of December 31,
1994 and had been reduced to only $782,000 as of December 31,
1998.
The liquidation of assets enabled the Partnership to make a
$1,998,000 cash distribution to its limited partners in August
1998. The Partnership made an additional $3,873,000 cash
distribution to its limited partners in February 1999.
Risks of the year 2000 Issue
As discussed above, the Partnership is in the process of
liquidating its remaining assets. As of December 31, 1998, the
Partnership held only cash, five notes secured by real estate,
and an interest in certain funds held in an escrow account that
are expected to be used to pay for future improvement costs to a
property which was sold by the Partnership during 1998.
Management anticipates that the Partnership will hold a lesser
number of assets by January 1, 2000. Management does not believe
that the value of any of these assets is subject to valuation
risk as a result of the year 2000 issues, other than general
economic climate issues that might arise. None of the
Partnership's assets have any equipment with computerized
components essential to their operation.
Although the Partnership has made some changes already to its
software, these changes have not been tested. The
Partnership intends to begin testing changes made to its existing
software in the next few months. The Partnership has not, and
does not contemplate spending any significant amount of funds to
upgrade its computer systems inasmuch as virtually all of its
computer needs could easily be met with existing "over the
counter" software and hardware. The cost of this software and
hardware, if needed, should not exceed $10,000. The only
exception to this is the computer software which the Partnership
uses to track its limited partners and their addresses. The
Partnership has made a preliminary evaluation of this software
with its outside software consultant and believes that it can be
modified for less than $10,000. Even if attempts to correct
deficiencies in the software without spending significant sums
are not successful, the Partnership anticipates that it could
convert its systems to standard spreadsheet or data base programs
at a nominal cost.
Cautionary Statements Regarding Forward-Looking Information
The Partnership wishes to caution readers that the forward-
looking statements contained in this Form 10-K under "Item 1.
Business," "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in
this Form 10-K involve known and unknown risks and uncertainties
which may cause the actual results, performance or achievements
of the Partnership to be materially different from any future
results, performance or achievements expressed or implied by any
forward-looking statements made by or on behalf of the
Partnership. In connection with the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995, the
Partnership is filing the following cautionary statements
identifying important factors that in some cases have affected,
and in the future could cause the Partnership's actual results to
differ materially from those expressed in any such forward-
looking statements.
The factors that could cause the Partnership's results to differ
materially include, but are not limited to, general economic and
business conditions, including interest rate fluctuations; the
impact of competitive products and pricing; success of operating
initiatives; adverse publicity; changes in business strategy or
development plans; quality of management; availability, terms and
deployment of capital; the results of financing efforts; business
abilities and judgment of personnel; availability of qualified
personnel; employee benefit costs and changes in, or the failure
to comply with government regulations.
(d) Financial Information about Foreign and Domestic Operations
and Export Sales
Not applicable.
ITEM 2. DESCRIPTION OF PROPERTY.
No properties or facilities are owned or leased by the
Partnership other than real estate owned which was obtained
through foreclosure of real estate loans receivable, as described
in notes 5 and 6 of Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
Unbeknownst to the Partnership, on July 19, 1996, a default was
entered against the Partnership for failure to respond to a
complaint filed on July 17, 1995 in the San Bernardino Superior
Court, entitled Henry Yong Lim et al -vs.- Cardinal Security, et
al and allegedly served on the Partnership in May 1996. As shown
by the proofs of service, the complaint was served on the wrong
party in 1996. The Partnership first became aware of its
involvement in this lawsuit in September 1997 when it received
copies of requests for entry of default judgement totaling
approximately $1,000,000. The judgements involved both economic
and non-economic damages and injuries allegedly suffered by the
plaintiffs as a result of an altercation between the plaintiffs,
other third parties and security guards employed by the
Partnership at its shopping center in Upland, California. The
request for judgement names Centennial Mortgage Income Fund
Partnership as a defendant in this action. Since the Partnership
was never served with the complaint and had no other way of
knowing about this action, the Partnership retained legal counsel
to set aside the defaults and any default judgements which were
entered, due to the lack of proper service and notice. The
Partnership also tendered this action to its liability insurance
carrier for legal and liability coverage. The default judgement
has been set aside and the plaintiff's appeal of the set aside
ruling has been denied by the Court. The Court has also ruled
that the prior jury found 0% liability as to the Partnership for
non-economic damages and that the plaintiffs can only proceed to
trial against the Partnership for recovery of economic damages.
Based upon evidence presented at the prior trial, Management
believes that these economic damages should not exceed $40,000.
Management intends to vigorously defend any future actions
related to this matter. Management believes that even if the
plaintiff's prevail in these actions, the Partnership's insurance
coverage and/or the security company's insurance carrier should
prevent the Partnership from suffering a material loss from these
proceedings.
There are no other material pending legal proceedings other than
ordinary routine litigation incidental to the registrant's
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters have been submitted to a vote of security holders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP UNITS AND RELATED
SECURITY HOLDER MATTERS.
(a) Securities Market Information
There is no market for the Partnership's limited partnership
units, nor is one expected to develop.
The Partnership units were offered by the Partnership through
selected dealers who were members of the National Association of
Securities Dealers, Inc.
(b) Approximate Number of Holders of Limited Partnership Units
As of December 31, 1998, there were approximately 4,778 holders
of limited partnership units.
(c) Partnership Distributions
The Partnership paid a $1,998,000 cash distribution to limited
partners in August 1998. This distribution equaled $51.60 per
limited partnership unit.
The Partnership paid a $3,873,000 cash distribution to limited
partners in February 1999. This distribution equaled $100.00 per
limited partnership unit.
Based in part upon advice from legal counsel, management intends
to refrain from making any additional distributions until the
possibility of any unforeseen legal action against the
Partnership becomes remote. See Item 7. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA.
<CAPTION>
(dollars in thousands, except per unit data)
Years ended
<S> <C> <C> <C> <C>
<C>
- --------------------------------------------------------------------------------
- ----------
12/31/98 12/31/97 12/31/96 12/31/95
12/31/94
- --------------------------------------------------------------------------------
- ----------
Consolidated Statement
of Operations Data:
Total revenue........ $ 1,199 $ 992 $ 1,105 $ 1,159
$ 1,096
Net income (loss).. 91 123 (2,514) (2,776)
(1,286)
Net income (loss)
per limited
partnership unit-
basic and diluted. 2.35 3.18 (64.91) (71.68)
(33.21)
Consolidated Balance
Sheet Data:
Total loans before
allowance for losses 782 3,847 3,297 4,793
6,641
Total real estate owned
before allowance
for losses......... --- 8,490 11,360 12,349
13,820
Total assets......... 6,035 10,397 11,394 14,842
17,688
Partners' equity..... 5,648 7,555 7,432 9,946
12,722
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
General
Net income (loss) and income (loss) per limited partnership unit
were $91,000 and $2.35 for the year ended December 31, 1998 as
compared to $123,000 and $3.18 for the year ended December 31,
1997 and $(2,514,000) and $(64.91) for the year ended December
31, 1996. Major changes between income statement components
between 1998 and 1997 included: i) a $423,000 increase in the
provision for losses; ii) an $83,000 increase in general and
administrative expense - affiliates; iii) a $321,000 collection
of prior deferred interest and discounts on loans receivable; and
iv) an $83,000 increase in gain on sale of property. The
improved profitability in 1997 over 1996 is primarily
attributable to a significant decrease in losses from
unconsolidated investees, a recovery of previously recorded
provision for losses and improved profitability of operating
properties. A detailed discussion of the significant changes in
each component of revenue and expense for each of the years in
the three year period ended December 31, 1998 is included in the
following paragraphs.
Liquidity and Capital Resources
At December 31, 1998, the Partnership had $4,938,000 in cash and
interest bearing deposits. During the year ended December 31,
1998, the Partnership's principal sources of cash were; i)
$6,220,000 in proceeds from the sale of real estate owned; ii)
$2,678,000 in principal collected on loans receivable; iii)
$430,000 in net operating income from operating properties; iv)
$321,000 in collections of previously nonaccrued or deferred
income; v) $82,000 in current interest income on loans; and vi)
$83,000 in interest income on interest bearing deposits. The
Partnership's principal uses of cash during the year ended
December 31, 1998 were: i) $2,421,000 in principal payments on
notes payable; iii) a $1,998,000 cash distribution to limited
partners; ii) $209,000 in advances on loans made to LCR; iii)
$245,000 in interest payments; iv) $373,000 in general and
administrative costs; and v) $125,000 in expenses associated with
non-operating properties (principally real estate taxes).
Future sources of cash are expected to be from the repayment of
the $782,000 in remaining loans receivable and interest earned on
cash deposits.
The Partnership had no unfunded loan commitments to nonaffiliates
at December 31, 1998. The Partnership's principal capital
requirements are now limited to selling, general and
administrative costs. These commitments are expected to be paid
from existing cash balances. Included in other assets on the
Partnership's December 31, 1998 balance sheet is a $300,000
escrow account that is to be used to pay for improvements to one
of the properties that the Partnership sold during 1998. Accounts
payable and accrued liabilities as of December 31, 1998 includes
a $300,000 accrual for this obligation. The Partnership's
obligation to pay for improvements to this property has been
limited to $300,000 pursuant to the sale contract.
Effective with the third quarter of 1991, the Partnership had
suspended making any cash distributions to partners due to a
decline in liquidity and the uncertainty of the cash requirements
for existing and potential real estate owned. Pursuant to the
Partnership Agreement, 60 months after the closing of the
offering, cash proceeds from mortgage investments are no longer
available for reinvestment by the Partnership.
Through the latter part of 1997, the general partners believed
that the cash proceeds from mortgage reductions and the sale of
real estate owned should be retained by the Partnership until
such time as it was assured that it had sufficient cash to
fulfill any potential operating requirements. Due to the
substantial real estate and loan receivable balances, these
potential operating costs were considered to be very significant.
As a result of the substantial decrease in loans and real estate
owned which has occurred, the general partners determined that
the Partnership could make a $1,998,000 distribution to its
limited partners in August 1998.
As a result of the substantial sales activity which occurred in
the fourth quarter of 1998, the general partners declared and
paid an additional $3,873,000 cash distribution to limited
partners in February 1999. This left the Partnership with
approximately $1.0 million of cash on hand as of February 10,
1999.
The general partners have had discussions with legal counsel
regarding the amounts of cash reserves that would be prudent to
be retained by the Partnership at this time. In light of the
substantial amount of real estate that the Partnership has held
an interest in over the years, there is always the potential for
future litigation to arise, particularly in the area of toxic
contamination. Although the general partners are not aware of
any threatened litigation, or litigation that is likely to arise,
they have determined that the Partnership should retain at least
$1,000,000 in cash reserves to be available to defend the
Partnership in any future litigation which may arise. It is
expected that these reserves will be retained until such time as
legal counsel advises the general partners that the potential for
any future litigation is remote.
Results of Operations
The Partnership's non-cash assets declined from $9,379,000 as of
December 31, 1997 to only $1,097,000 as of December 31, 1998.
Although the Partnership has reported profits for both 1998 and
1997, based on the remaining assets and the anticipated costs of
administering a publicly held partnership, the general partners
do not expect the Partnership to report profits in 1999 or 2000.
The substantial reduction in non-cash assets during 1998 caused
many changes in the Partnership's results of operations as
discussed below.
Interest income on loans to affiliates, including fees was
$47,000 for 1998, $37,000 for 1997 and $100,000 for 1996. This
income is related to the Silverwood joint venture, which was
constructing homes in Lancaster, California. The real estate
market in Lancaster has not seen the improvement that many other
areas in California have. As a result, the Partnership placed
certain of its loans to Silverwood on nonaccrual status during
1996, thus decreasing interest income during the latter half of
1996 and all of 1997. The increase for 1998 resulted from higher
average balances on the one remaining earning Silverwood loan.
The Partnership received payments on several of the Partnership's
loans to nonaffiliates which had been converted into
nonperforming loans during 1996 through 1998. As a result,
interest income on loans to nonaffiliates, including fees,
increased from $100,000 during the year ended December 31, 1996
to $122,000 during the year ended December 31, 1997, and
increased again to $356,000 during the year ended December 31,
1998. During 1998, the Partnership received payments in full, or
nearly in full, on three loans that had previously been
classified as impaired and on which interest had not been fully
accrued in prior periods. As a result, the Partnership recorded
$321,000 in interest income on these loans that had been earned
in prior periods but not accrued as income. Management believes
that these payments on nonperforming loans are directly
attributable to the improving real estate market in California.
Loans on "nonaccrual" refers to loans upon which the Partnership
is no longer accruing interest. Management's policy is to cease
accruing interest on loans when collection of interest and/or
principal payments has become doubtful. Loans to affiliates and
nonaffiliates on nonaccrual status amounted to $12,000,
$2,313,000, and $2,597,000 as of December 31, 1998, 1997 and
1996, respectively.
Real estate loans receivable, earning is comprised of four loans
totaling $770,000 as of December 31, 1998 that are performing.
Two of these loans, that are from an unaffiliated party, were
received in connection with the payoff of a previously nonearning
loan to affiliate.
Real estate loans receivable from unconsolidated investee,
nonearning is comprised of one past due loan totaling $23,000 as
of December 31, 1998. This loan is partially offset by $11,000
in share of losses in unconsolidated investee.
The following sections entitled "Nonaccrual, Nonperforming Loans
and Other Loans to Affiliates" and "Real Estate Owned" provide a
detailed analysis of assets held during 1998.
Nonaccrual, Nonperforming Loans and Other Loans to Affiliates
Loans on nonaccrual status during the year ended December 31,
1998 are summarized below:
During 1994, the Partnership renegotiated an equity participation
note with an original committed amount of $374,000 secured by a
second deed of trust on a 32,431 square foot shopping center in
Corona, California. The loan provided for interest due to be
payable at loan maturity; however, due to the amount of the
senior debt and the decrease in land values, the Partnership
placed the loan on nonaccrual. The principal balance and
nonaccrued interest at December 31, 1997 were $376,000 and
$144,000 respectively. The Partnership had recorded a reduction
of $62,000 against the $376,000 principal balance as of December
31, 1997 which represented previously nonaccrued interest and had
also recorded a $289,000 deferred profit in connection with this
loan. Additionally, due to the recent operating history of the
property and the large lien on the property that is senior to the
Partnership's note, an allowance for possible losses of $25,000
was also recorded against this note during 1997. The senior note
holder has commenced foreclosure proceedings and the borrower has
filed for protection under bankruptcy laws. Accordingly, the
Partnership charged off the balance of this note during 1998
against the $289,000 deferred profit and $25,000 previously
recorded allowance for possible losses.
During 1991, the Partnership sold a pad on an existing piece of
real estate owned in Corona, California and carried back
financing in the amount of $600,000. The Partnership's share of
the loan was 77 percent. Due to the loss of a major tenant, the
borrower was unable to make full monthly interest payments in
accordance with the original note terms. Management worked out a
forbearance agreement with the borrower for payments equal to the
net cash flow from the property. The remaining interest due was
placed on nonaccrual. The Partnership's share of the principal
balance and nonaccrued interest at December 31, 1997 was
$461,000, and $142,000, respectively.The Partnership had recorded
a $365,000 allowance for possible losses against this note.
During 1998, the Partnership accepted a $211,000 payment on this
note as payment in full in connection with the sale of the
property. As a result, the Partnership reversed $115,000 of the
previously recorded allowance for possible losses and charged off
the $250,000 balance against the allowance.
During 1989, the Partnership funded a loan with an original
committed amount of $343,000 to provide land development
financing in Perris, California. The loan matured June 1, 1993
and the borrower was unable to make interest payments or pay off
the loan. Given the depressed value of the property and the
amount of the delinquent bonds and taxes, the Partnership elected
to not foreclose on this property and had established an
allowance for losses of $294,000, to fully reserve the carrying
value of the note as of December 31, 1997. The principal balance
and nonaccrued interest at December 31, 1997 were $294,000 and
$208,000, respectively. During 1998, the Partnership charged off
the $294,000 balance of the note against the previously recorded
allowance for possible losses.
During 1994, the Partnership funded a $1,250,000 unsecured note
and a 50 percent participation in a $2,115,000 unsecured note,
both representing workout loans and due from LCR. These two
loans reflect the majority of the cost basis of 179 residential
lots which LCR contributed to Silverwood. LCR's only source of
repayment of these notes was the excess, if any, of proceeds from
the sale of the fully developed lots over the amount of secured
debt. Due to the continuing decline in value of the lots from
1994 through 1997, management did not expect that either of these
notes would ever be repaid. As a result, the loans were placed
on nonaccrual. As of December 31, 1997, the principal balance
and nonaccrued interest balances of the $1,250,000 note were
$1,250,000 and $392,000, respectively. The Partnership's share
of the principal and nonaccrued balances of the $2,115,000 note
as of the same date were $1,055,000 and $323,000, respectively.
As discussed in note 5 of Notes to Consolidated Financial
Statements, the Partnership had reduced the carrying value of
these notes by $2,305,000, a portion of its share of losses from
this unconsolidated investee as of December 31, 1997. During
1998, the remaining lots were sold and LCR received no cash from
the sale. Accordingly, the Partnership charged off these notes
against the $2,305,000 of previously recorded losses from
unconsolidated investee during 1998.
During 1994 and 1995, LCR had evaluated various alternative
strategies for liquidating its investment in the 179 lots in
Lancaster. LCR determined that its best course of action
appeared to be the full-scale buildout and sale of single-family
homes since the market for finished lots had fallen so
significantly. LCR obtained construction financing commitments
from the Partnership and Centennial Mortgage Income Fund II
("CMIF II"), an affiliate. LCR entered into a joint venture
agreement entitled Silverwood with Home Devco to construct and
sell single-family homes at the project. Silverwood began
constructing a model home complex at the project in June 1995.
Construction commenced in September 1995 on Phase I at the
project. Construction of Phase II of the project was commenced
in February 1997. At December 31, 1997, the Partnership held a
50 percent participation in three notes and a 100 percent
interest in a fourth note due from Silverwood consisting of a
land development loan, a model home loan and two home
construction loans with a combined disbursed balance of
$2,374,000. The Partnership's disbursed balance of the
$3,266,000 development loan at December 31, 1997 was $1,212,000.
The Partnership's disbursed balance of the $490,000 model loan at
December 31, 1997 was $239,000. At December 31, 1997, the
Partnership's disbursed balance of the $1,034,000 Phase I
construction loan was $171,000. At December 31, 1997 the
Partnership's disbursed balance of the $870,000 Phase II
construction loan was $752,000. As discussed in note 5 of Notes
to Consolidated Financial Statements, the Partnership had reduced
the carrying value of the land development loan by $381,000, the
remainder of its share of losses in unconsolidated investee as of
December 31, 1997.
During 1998, all but one of the remaining homes were sold and all
of the undeveloped lots were sold. The Partnership funded
additional advances of $180,000 and $29,000 on the development
loan and the Phase II construction loan, respectively. The
Partnership recorded an additional $96,000 in losses from
unconsolidated investee during 1998 and received cash payments of
$342,000, $239,000, $148,000 and $693,000 on the development
loan, the model loan, the Phase I loan and the Phase II loan,
respectively. The Partnership also received notes receivable
totaling $584,000 from an unaffiliated party as a partial
repayment of the development loan in connection with the sale of
the remaining lots. These new notes are secured by the 157 lots
sold.
The remaining principal balances of the development loan, the
model loan, the Phase I loan and the Phase II loan were $466,000,
$-0-, $23,000 and $88,000, respectively, after the 1998 advances
and payments received. The Partnership charged off the
development loan against $466,000 of the remaining losses from
unconsolidated investee, leaving a balance of losses from
unconsolidated investee of $11,000 which has been offset against
the $23,000 balance of the Phase I loan. The $88,000 balance of
the Phase II loan was repaid in full when the remaining home was
sold in March 1999.
Real Estate Owned
A description of the Partnership's principal real estate owned
and loan classified as insubstance foreclosure during the year
ended December 31, 1998 follows:
Shopping Center in Upland, California
During the third quarter of 1988, the Partnership foreclosed on a
loan secured by this project. The Partnership originally
committed $5,600,000 for the rehabilitation of a 33,327 square
foot retail center and construction of an automotive service
facility in Upland, California. Cost overruns and construction
delays prevented the borrower from selling the project and
thereby performing on the loan. The property's carrying value
before allowance for possible losses was $4,628,000 at December
31, 1997. The property was encumbered by a note of $2,421,000,
secured by a first trust deed on the property. The Partnership
had recorded a $921,000 allowance for losses related to this
property as of December 31, 1997. The Partnership reversed
$145,000 of this provision during the first quarter of 1998. The
property generated approximately $506,000 and $431,000 in net
operating income before debt service during 1997 and 1996,
respectively. This property was sold in November 1998. The sale
generated net cash proceeds of $3,858,000 after selling costs and
resulted in a $6,000 gain on sale. The $2,421,000 debt secured
by the property was repaid from the sales proceeds.
19 Acres in Sacramento, California
During the third quarter of 1991, the Partnership took a deed in
lieu of foreclosure on a second trust deed secured by 19 acres of
undeveloped land in Sacramento, California. The property is
located in the North Natomas area and is zoned for light-
industrial commercial use. The property was encumbered by a
$900,000, 12 percent fixed interest rate note payable secured by
a first trust deed on the property which was repaid in December
1997. At December 31, 1997, the carrying value before allowance
for possible losses of this asset was $2,822,000 and the
Partnership had recorded a $1,134,000 allowance for losses
related to this project. The Partnership recorded additional
provisions for losses totaling $445,000 during the first three
quarters of 1998. In December 1998, this property was sold for
$1,600,000, net of selling costs. The sale agreement required
that the Partnership establish a $300,000 escrow account out of
the sales proceeds from which the buyer could withdraw amounts to
pay for certain specified development work to be done to the
property. If the cost of the specified development work exceeds
the amount in the escrow account, the buyer is required to pay
the difference. If the specified costs are less than the amount
in the escrow account, the balance of the account will be
returned to the Partnership. Management does not expect that the
Partnership will receive any significant amount from this escrow
account. The sale resulted in a $57,000 gain on sale.
4 Condominiums in Oxnard, California
During 1990, the Partnership funded a loan secured by a first
trust deed with an original committed amount of $3,000,000 for
the construction of 12 condominiums in Oxnard, California. The
borrower signed over control to the second trust deed holder in
December 1992 and the second trust deed holder, an affiliate,
abandoned the property. The Partnership then controlled the
property and received 100 percent of all sales proceeds net of
selling costs. As a result, the Partnership recorded an
insubstance foreclosure on these 12 condominiums. During 1997,
the Partnership sold one condominium, bringing the cumulative
sales total to eight units. The Partnership recorded a $1,000
gain on the 1997 sale. The remaining four units were sold and
closed escrow during the first quarter of 1998. The 1998 sales
generated approximately $762,000 in net cash proceeds to the
Partnership and resulted in a gain on sale of $21,000. The
carrying value before allowance for possible losses at December
31, 1997 was $1,040,000 and the Partnership had recorded a
$299,000 allowance for losses related to this project as of the
same date.
Interest on Interest-Bearing Deposits
Interest earned on interest-bearing deposits was $83,000 in 1998,
$72,000 in 1997 and $85,000 in 1996. The increase in interest on
interest bearing deposits in 1998 is due to an increase in
average cash balances while the decrease in 1997 is principally
due to a decrease in average cash balances. Interest on interest-
bearing deposits represents interest earned on Partnership funds
invested, for liquidity, in time certificate and money market
deposits.
Income from Operations of Real Estate Owned
Income from operations of real estate owned for 1998, 1997 and
1996 consists of operating revenues of $602,000, $755,000, and
$780,000, respectively. These revenues were primarily from the
Upland Shopping Center and the auto retail center in Corona. The
decrease in 1998 can be attributed to the sale of the Upland
Shopping Center in November 1998. The decrease in 1997 can be
attributed to the sale of the auto retail center in July 1997.
Provision for Possible Losses
The provision for (recovery of) possible losses was $155,000 in
1998, $(268,000) in 1997 and $40,000 in 1996. The 1998 provision
is comprised of reversals totaling $290,000 on two loans which
were repaid during 1998 and the Upland Shopping center which was
sold in 1998 which were offset by an additional provision of
$445,000 which was recorded against the 19 acres in Sacramento.
The 1997 recovery related to two loans secured by a mini-storage
facility in Citrus Heights, California that were repaid in
January 1998. The 1996 expense was primarily attributable to
increased provisions on the 19 acres in Sacramento, the loan
secured by the auto center in San Bernardino and the auto retail
center in Corona which were partially offset by a reduction in
the provision on the Upland Shopping Center.
Management believes that all of the remaining loans receivable as
of December 31, 1998 are adequately secured and that there is no
allowance for losses necessary.
Other Expenses
The Partnership has invested in corporations in which it has less
than a majority ownership and accounts for these investments
using the equity method. The Partnership's share of losses in
these unconsolidated investees was $96,000 for 1998, $125,000 for
1997 and $2,304,000 for 1996. The 1998 and 1997 share of losses
consist primarily of operating losses from the sale of homes and
finished lots recorded by LCR. The 1996 share of losses consists
primarily of provisions for losses on real estate investments
recorded by LCR and BKS Development Inc. ("BKS") related to the
179 lots in Lancaster and the 283 acres owned by BKS in
Bakersfield. The 1996 losses also included additional costs
related to the sale of homes in Lancaster. The Partnership's
remaining investment in and loans receivable from these
unconsolidated investees had been reduced to $100,000 as of
December 31, 1998.
Operating expenses from operations of real estate owned were
$142,000 for 1998, $168,000 for 1997 and $259,000 for 1996.
These expenses were associated with the auto retail center in
Corona and the Upland Shopping Center. The decrease in 1998 can
be attributed to the sale of the Upland Shopping Center in
November 1998. The decrease in 1997 is primarily due to the sale
of the auto retail center in July 1997.
Operating expenses from operations of real estate owned paid to
affiliates were $30,000 for 1998, $41,000 for 1997 and $55,000
for 1996. The expenses consist of property management fees paid
to affiliates of the general partners. The decrease in 1998 is
due to the sale of the Upland Shopping center in November 1998.
The decrease in 1997 is primarily due to the sale of the auto
retail center in July 1997.
Expenses associated with non-operating real estate owned were
$125,000 in 1998, $162,000 in 1997 and $226,000 in 1996. The
expenses are primarily related to the 19 acres in Sacramento, a
23 acre parcel previously owned in Riverside and the condominiums
in Oxnard. These costs include property taxes of $99,000,
$86,000 and $108,000 during 1998, 1997 and 1996, respectively.
The decrease for 1998 is due primarily to a $42,000 decrease in
costs associated with the condominium project in Oxnard. The
decrease for 1997 is due primarily to a decrease in property tax
expense resulting from the receipt of tax refunds and a decrease
in services rendered regarding the 19 acres in Sacramento.
Depreciation and amortization expense for 1998, 1997 and 1996
consists of $7,000, $12,000 and $23,000, respectively. The
amounts represent depreciation on office furniture and equipment
which has now been fully depreciated.
Interest expense was $245,000 for 1998, $378,000 for 1997 and
$476,000 for 1996. These amounts represent interest related to
the underlying debt on the Upland Shopping Center, the
intercompany debt on the auto retail center in Corona and the 19
acres in Sacramento. The decrease for 1998 is attributable to
the repayment of the debt secured by the 19 acres in Sacramento
in December 1997. The decrease for 1997 is attributable to the
intercompany debt on the auto retail center in Corona being
placed on nonaccrual for 1997 and a decrease in the principal
balance of the debt on the Upland shopping center.
General and administrative expenses, affiliates totaled $286,000
for 1998, $203,000 for 1997 and $218,000 for 1996. These
expenses are primarily salary allocation reimbursements paid to
affiliates for the management of the Partnership's assets. The
increase for 1998 is primarily attributable to $74,000 in accrued
severance pay as discussed in note 8 of Notes to the Consolidated
Financial Statements. The decrease in 1997 was the result of a
reduction in staffing.
General and administrative expenses, nonaffiliates totaled
$87,000 for 1998, $103,000 for 1997 and $100,000 for 1996. The
1997 amount includes approximately $31,000 of costs associated
with the extension of the maturity of the note secured by the
Upland Shopping Center and the legal proceedings involving the
same property. The 1996 expenses included certain moving costs.
There were no comparable expenses during 1998.
Mortgage investment servicing fees paid to affiliates were $2,000
in 1998, $4,000 in 1997 and $4,000 in 1996. These fees consist
of amounts paid to Centennial Corporation for servicing the
Partnership's loan portfolio.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Since the Partnership does not invest in any derivative financial
instruments or enter into any activities involving foreign
currencies, its market risk associated with financial instruments
is limited to the effect that changing domestic interest rates
might have on the fair value of its bank deposits and notes
receivable.
As of December 31, 1998, the Partnership held fixed rate bank
deposits with carrying values totaling $4,938,000, variable rate
mortgage note receivables with carrying values totaling $100,000
and fixed rate mortgage notes receivable with carrying values
totaling $682,000. The bank deposits all had maturities of less
than ninety days. Substantially all of the variable rate
mortgages were repaid in March 1999. The fixed rate mortgage
notes had maturities ranging from four to nineteen months as of
December 31, 1998 and bore interest at rates ranging from 8
percent to 10 percent per annum. The estimated fair value of all
of these assets was estimated to be equal to their carrying
values as of December 31, 1998. Increasing interest rates could
have an adverse effect on the fair value of the Partnership's
fixed rate notes receivable and/or the value of the underlying
real estate collateral which secure the Partnership's notes
receivable.
Management currently intends to hold the remaining fixed rate
assets until their respective maturities. Accordingly, the
Partnership is not exposed to any material cash flow or earnings
risk associated with these assets. Given the relatively short-
term maturities of these assets, management does not believe the
Partnership is exposed to any significant market risk related to
the fair value of these assets.
The Partnership had no interest bearing indebtedness outstanding
as of December 31, 1998. Accordingly, the Partnership is not
exposed to any market risk associated with its liabilities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedule
attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
REPORTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of General Partners
The Partnership is managed by its general partners. The
individual general partners' principal occupations and
affiliations during the last five years are described in the
following table. The general partners devote to the affairs of
the Partnership such portion of their time as they consider
necessary for the effective supervision of its affairs.
Name, Age and Position
Principal Occupation and
Affiliation during Last Five Years
- -----------------------------------------------------------------
John B. Joseph
Age 60
General Partner
John B. Joseph is currently Vice Chairman of the Board of
Directors and Vice President of Centennial Corporation. He is
also on the board of directors for West Coast Bancorp ("WCB"), a
publicly held bank holding company operating in California and
its subsidiary, Sunwest Bank. He had been Chairman of the Board
and Chief Executive Officer of WCB until 1998. He was Chairman
of the Board of Directors of WCB since its inception in 1981 and
CEO from April 1991 until 1998. Mr. Joseph also serves, or has
served, in the following capacities during the past five years:
Vice Chairman of the Board of Directors of The Centennial Group,
Inc. ("CGI"), a publicly-held real estate development corporation
from February 1987 to July 1993; Senior Executive Vice President
of CGI from July 1987 to July 1993; general partner of various
public and private limited partnerships engaged in real estate
development and lending activities. Mr. Joseph has held, over
the past five years, various positions in the subsidiaries of WCB
and CGI.
Ronald R. White
Age 52
General Partner
Ronald R. White is currently President and CEO of Centennial
Corporation. He was also Executive Vice President and Vice
Chairman of the Board of Directors of WCB until 1998. Mr. White
served in these capacities since April 1987. Mr. White also
serves, or has served, in the following capacities during the
past five years: Chairman of the Board of Directors, President
and Chief Executive Officer of CGI from February 1987 to July
1993; general partner of various public and private limited
partnerships engaged in real estate development and lending
activities. Mr. White has held, over the past five years,
various positions in the subsidiaries of WCB and CGI.
Mr. Joseph has 30 years of experience in asset management in both
securities and real estate. Mr. Joseph has worked in all areas
of real estate. In the past, Mr. Joseph has been engaged in the
syndication and management of over $100 million worth of income
property, including industrial complexes, shopping centers,
business centers, office buildings, commercial properties and
residential units.
Mr. White's career spans the financial and management fields in
both securities and real estate. Mr. White has 28 years of
experience in asset management. In the past, Mr. White has been
engaged in the syndication and management of over $100 million
worth of income property including industrial complexes, shopping
centers, business centers, office buildings, commercial
properties, and residential units.
Centennial Corporation ("CC"), a privately held corporation,
whose stock is owned by affiliates of Ronald R. White and John B.
Joseph, was voted in as new general partner in 1993. CC was
incorporated in 1983 to engage in the real estate lending
business and to provide consulting services.
Identification of Executive Officers
The Partnership does not have officers as such. The affairs of
the Partnership are managed by the general partners noted above.
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
The following table summarizes the types and recipients of
compensation paid and to be paid to the general partners and
affiliates by the Partnership.
Amount Earned/
Type of Reimbursable for the
Compensation & Year Ended
Name of Entity Description of Payment December 31, 1998
- -----------------------------------------------------------------
Operating Stage:
Application and An amount up to a maximum $ ---
commitment fees of 3 percent of the gross
- - the general proceeds of the offering
partner or on any single mortgage
affiliates investment, and an aggregate
maximum of 7 percent of the
gross proceeds of the offering,
payable to the general partners
or affiliates. The application
and commitment fees are payable
solely from borrowers and
prospective borrowers and not
directly from the proceeds of
the offering.
General partners' The general partners or $ 316,000 (1)
reimbursable affiliates shall be entitled
expenses to reimbursement for certain
- general expenses, subject to the
partner or conditions of the Partnership
affiliates Agreement.
General partners' A 5 percent interest in $ ---
interest in cash cash flow available for
distributions distribution for any year
- - general until all limited
partners or partnership unit holders
affiliates have received an amount
equal to a 12 percent
non-cumulative annual return
on their adjusted invested
capital, and 10 percent of
the balance of any cash flow
available for distribution
for such year.
Mortgage 1/4 of 1 percent of the $ 2,000 (2)
investment maximum amount funded or to
servicing fees be funded by the Partnership
on mortgage investments
serviced by CC
Amount Earned/
Type of Reimbursable for the
Compensation & Year Ended
Name of Entity Description of Payment December 31, 1998
- -----------------------------------------------------------------
Repayment Stage:
General partners' One percent of mortgage $ ---
share of reductions until all limited
mortgage partners have received an
reductions amount equal to their adjusted
- - general invested capital and cumulative
partners or distributions (including cash
affiliates flow available for distribution)
equal to a 12 percent annual return
with respect to their adjusted
invested capital, and 15 percent of
the balance of any mortgage reductions
(1) Such reimbursable expenses include salaries and related
salary expenses for services which could be performed directly
for the Partnership by independent parties such as legal,
clerical, accounting, financial reporting, governmental
reporting, transfer agent, data processing and duplication
services. Such reimbursement of expenses will be made regardless
of whether any distributions are made to the limited partners.
(2) Mortgage Investment Servicing Fees are payable on the
maximum amount to be funded on a Mortgage Investment from the
date the Partnership first signs a letter of commitment for such
Mortgage Investment. Fees shown in the table represent amounts
earned by CC for servicing these mortgage investments.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
No persons are known by the Partnership to own beneficially more
than 5 percent of the limited partnership units at December 31,
1998.
(b) Security Ownership of Management
The percent of units owned by Management outstanding is less than
1 percent.
Name and address Nature and Number of Percent of
of Beneficial Owner Units Outstanding Units Outstanding
- -----------------------------------------------------------------
Ronald R. White
1540 S. Lewis St.
Anaheim, CA 92805 Limited partnership units: 1 ---
(c) Change in Control
The Partnership knows of no contractual arrangements which may at
a subsequent date result in a change of control of the
Partnership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This disclosure is made in note 5 of the Notes to the
Consolidated Financial Statements which is incorporated in this
filing.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a)(1) and (a)(2) - See Index to Consolidated Financial
Statements and Schedule attached hereto.
(a)(3) - Exhibits.
None.
(b)(4) - Reports on Form 8-K.
None.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A California Limited Partnership
By:/s/John B. Joseph
_________________________________
John B. Joseph
General Partner March 31, 1999
By:/s/Ronald R. White
_________________________________
Ronald R. White
General Partner March 31, 1999
By: CENTENNIAL CORPORATION
General Partner
/s/John B. Joseph
_________________________________
John B. Joseph
Executive Vice President March 31, 1999
/s/Ronald R. White
_________________________________
Ronald R. White
President March 31, 1999
/s/Joel H. Miner
_________________________________
Joel H. Miner
Chief Financial Officer March 31, 1999
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
ANNUAL REPORT
Form 10-K
Consolidated Financial Statements
Items 8, 14(a)(1) and 14(a)(2)
December 31, 1998, 1997 and 1996
(With Independent Auditors' Report Thereon)
F-1
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Items 8, 14(a)(1) and 14(a)(2)
Index to Consolidated Financial Statements and Schedule
Consolidated Financial Statements Page
Independent Auditors' Report............................ F-3
Consolidated Balance Sheets --
December 31, 1998 and 1997.............................. F-4
Consolidated Statements of Operations --
Years ended December 31, 1998, 1997 and 1996............ F-7
Consolidated Statements of Partners' Equity --
Years ended December 31, 1998, 1997 and 1996............ F-9
Consolidated Statements of Cash Flows --
Years ended December 31, 1998, 1997 and 1996............ F-10
Notes to Consolidated Financial Statements.............. F-14
Schedule
Schedule IV - Mortgage Loans on Real Estate............. F-36
All other schedules are omitted as the required information is
inapplicable, or the information is presented in the consolidated
financial statements or notes thereto.
F-2
INDEPENDENT AUDITORS' REPORT
To the General Partners
Centennial Mortgage Income Fund:
We have audited the consolidated financial statements of
Centennial Mortgage Income Fund, a limited partnership, and
subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the
accompanying index. These consolidated financial statements and
financial statement schedule are the responsibility of the
Partnership's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Centennial Mortgage Income Fund and subsidiaries as
of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
Orange County, California
March 19, 1999
F-3
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1998 and 1997
<S> <C> <C>
Assets 1998 1997
- -----------------------------------------------------------------
Cash and cash
equivalents (note 5) $ 4,938,000 $ 1,018,000
Real estate loans
receivable, earning 682,000 782,000
Real estate loans
receivable, nonearning --- 1,072,000
Real estate loans receivable
from unconsolidated investee,
earning (note 5) 88,000 752,000
Real estate loans receivable
from unconsolidated investee,
nonearning (note 5) 12,000 1,241,000
- -----------------------------------------------------------------
782,000 3,847,000
Less allowance for possible
loan losses (note 3) --- 714,000
- -----------------------------------------------------------------
Net real estate loans receivable 782,000 3,133,000
- -----------------------------------------------------------------
Real estate owned, held for
sale (notes 6 and 7) --- 7,450,000
Real estate owned, held
for sale, insubstance
foreclosed (note 6) --- 1,040,000
- -----------------------------------------------------------------
--- 8,490,000
F-4
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
(Continued)
<CAPTION>
December 31, 1998 and 1997
<S> <C> <C>
Assets 1998 1997
- -----------------------------------------------------------------
Less allowance for possible
losses on real estate
owned (note 4) --- 2,354,000
- -----------------------------------------------------------------
Net real estate owned --- 6,136,000
- -----------------------------------------------------------------
Accrued interest receivable --- 5,000
Other assets, net 315,000 47,000
Due from unconsolidated investee --- 58,000
- -----------------------------------------------------------------
$ 6,035,000 $ 10,397,000
=================================================================
F-5
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
(Continued)
<CAPTION>
December 31, 1998 and 1997
<S> <C> <C>
Liabilities and Partners' Equity 1998 1997
- -----------------------------------------------------------------
Notes payable (note 7) $ --- $ 2,421,000
Notes payable to affiliates (note 5) 2,000 73,000
Accounts payable and
accrued liabilities 385,000 20,000
Interest payable to affiliates on
notes secured by real estate (note 5) --- 39,000
Deferred profit on equity participation --- 289,000
- -----------------------------------------------------------------
Total liabilities 387,000 2,842,000
- -----------------------------------------------------------------
Partners' equity (deficit)
-- 38,729 limited partnership
units outstanding in 1998 and 1997
General partners (132,000) (525,000)
Limited partners 5,780,000 8,080,000
- -----------------------------------------------------------------
Total partners' equity 5,648,000 7,555,000
Commitments (note 8)
Contingencies (note 9)
Subsequent event (note 10)
- -----------------------------------------------------------------
$ 6,035,000 $ 10,397,000
=================================================================
</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, 1998, 1997 and 1996
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------
Revenue:
Interest on loans to
affiliates, including
fees (note 5) $ 47,000 $ 37,000 $ 100,000
Interest on loans to
nonaffiliates,
including fees 356,000 122,000 100,000
Interest on
interest-bearing
deposits (note 5) 83,000 72,000 85,000
Gain on sale of property 84,000 1,000 40,000
Income from operations
of real estate owned 602,000 755,000 780,000
Other 27,000 5,000 ---
- -----------------------------------------------------------------
Total revenue 1,199,000 992,000 1,105,000
- -----------------------------------------------------------------
Expenses:
Provision for (recovery of)
losses (notes 3 and 4) 155,000 (268,000) 40,000
Loss on sale of
property --- 6,000 ---
Share of losses in
unconsolidated
investees (note 5) 96,000 125,000 2,304,000
Operating expenses
from operations
of real estate owned 142,000 168,000 259,000
Operating expenses from
operations of real
estate owned paid to
affiliates (note 5) 30,000 41,000 55,000
Expenses associated
with non-operating
real estate owned 125,000 162,000 226,000
F-7
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
(Continued)
<CAPTION>
Years ended December 31, 1998, 1997 and 1996
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------
Depreciation and
amortization expense 7,000 12,000 23,000
Interest expense 245,000 378,000 476,000
General and
administrative,
affiliates (note 5) 286,000 203,000 218,000
General and
administrative,
nonaffiliates 87,000 103,000 100,000
Mortgage investment
servicing fees paid
to affiliates (note 5) 2,000 4,000 4,000
- -----------------------------------------------------------------
Total expenses 1,175,000 934,000 3,705,000
- -----------------------------------------------------------------
Income (loss) before
minority interest 24,000 58,000 (2,600,000)
Minority
interest (note 5) 67,000 65,000 86,000
- -----------------------------------------------------------------
Net income (loss) $ 91,000 $ 123,000 $(2,514,000)
=================================================================
Net income (loss) per
limited partnership
unit-basic and diluted $ 2.35 $ 3.18 $ (64.91)
=================================================================
</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, 1998, 1997 and 1996
<S> <C> <C> <C>
Total
General Limited Partners'
Partners Partners Equity
- -----------------------------------------------------------------
Balance (deficit) at
December 31, 1995 $ (525,000) $ 10,471,000 $ 9,946,000
Net loss --- (2,514,000) (2,514,000)
- -----------------------------------------------------------------
Balance (deficit) at
December 31, 1996 (525,000) 7,957,000 7,432,000
Net income --- 123,000 123,000
- -----------------------------------------------------------------
Balance (deficit) at
December 31, 1997 (525,000) 8,080,000 7,555,000
Net income --- 91,000 91,000
Distributions to
limited partners --- (1,998,000) (1,998,000)
Reduction in general
partner deficit capital
account (note 1) 393,000 (393,000) ---
- -----------------------------------------------------------------
Balance (deficit) at
December 31, 1998 $ (132,000) $ 5,780,000 $ 5,648,000
=================================================================
</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, 1998, 1997 and 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------
Cash flows from
operating activities:
Net income (loss) $ 91,000 $ 123,000 $(2,514,000)
Adjustments to
reconcile net income
(loss) to net cash
used in operating
activities:
Amortization
of unearned
loan fees (5,000) (2,000) (2,000)
Depreciation
and amortization 7,000 12,000 23,000
Provision for
(recovery of) losses 155,000 (268,000) 40,000
Interest accrued to
principal on loans
to affiliates (9,000) (37,000) (195,000)
Minority interest (67,000) (65,000) (86,000)
Loss (gain) on
sale of real
estate owned (84,000) 5,000 (40,000)
Share of losses
in unconsolidated
investees 96,000 125,000 2,304,000
Changes in assets
and liabilities:
(Increase) decrease
in accrued interest
receivable 5,000 (1,000) 14,000
(Increase) decrease
in other assets (275,000) 45,000 (5,000)
F-10
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows (Continued)
Years ended December 31, 1998, 1997 and 1996
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------
Increase (decrease) in
accounts payable and
accrued liabilities 365,000 (3,000) (28,000)
Increase in
interest and property
taxes payable on
real estate owned --- --- 4,000
Decrease in payable to
affiliates --- (1,000) (3,000)
Increase (decrease)
in interest payable
to affiliates on notes
secured by real estate (39,000) (4,000) 49,000
- -----------------------------------------------------------------
Net cash provided by
(used in) operating
activities 240,000 (71,000) (439,000)
- -----------------------------------------------------------------
Cash flows from
investing activities:
Principal collected on
loans made to customers,
net of amounts recorded
as income in
current period 932,000 24,000 50,000
Principal collected on
loans made to
affiliates 1,422,000 331,000 113,000
Advances on loans
made to customers (20,000) (21,000) ---
Advances on loans made
to affiliates (209,000) (970,000) (1,044,000)
Proceeds from sale
of real estate owned 6,220,000 1,118,000 190,000
Capital expenditures
for real estate owned (300,000) --- (273,000)
(Increase) decrease in
due from unconsolidated
investee 58,000 (58,000) ---
F-11
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows(Continued)
Years ended December 31, 1998, 1997 and 1996
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------
(Increase) decrease
in short-term
investments --- --- 103,000
- -----------------------------------------------------------------
Net cash provided by
(used in) investing
activities 8,103,000 424,000 (861,000)
- -----------------------------------------------------------------
Cash flows from
financing activities:
Advances on
notes payable
to affiliates 136,000 19,000 70,000
Principal payments
on notes payable (2,421,000) (934,000) (5,000)
Principal payments
on notes payable
to affiliates (140,000) (132,000) ---
Distributions to
limited partners (1,998,000) --- ---
- -----------------------------------------------------------------
Net cash provided by
(used in) financing
activities (4,423,000) (1,047,000) 65,000
- -----------------------------------------------------------------
Net increase
(decrease) in
cash and cash
equivalents 3,920,000 (694,000) (1,235,000)
Cash and cash
equivalents at
beginning of year 1,018,000 1,712,000 2,947,000
- -----------------------------------------------------------------
Cash and cash
equivalents
at end of year $ 4,938,000 $ 1,018,000 $ 1,712,000
=================================================================
F-12
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows (Continued)
Years ended December 31, 1998, 1997 and 1996
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------
Supplemental
schedule of
cash flow
information:
Cash paid during
the year for:
Interest $ 245,000 $ 356,000 $ 400,000
- -----------------------------------------------------------------
Supplemental schedule
of noncash investing
and financing activities:
Decrease in deferred
profit on equity
participation
and real estate
loans resulting
from foreclosure $ 289,000 $ --- $ 270,000
Decrease in notes
payable and real
estate owned
resulting from
foreclosure --- --- 650,000
Decrease in interest
and taxes payable on
real estate owned
resulting from
foreclosure --- --- 15,000
Decrease in allowance
for possible losses
on real estate loans
and real estate owned
as a result of sales
and chargeoffs 3,223,000 1,747,000 437,000
Receipt of notes
receivable as
partial repayment
of note receivable 584,000 --- ---
</TABLE>
See accompanying notes to consolidate financial statements
F-13
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Notes to Consolidated Financial Statements
December 31, 1998, 1997, and 1996
(1) Summary of Significant Accounting Policies
Business
Centennial Mortgage Income Fund (the "Partnership") initially
invested in commercial, industrial and residential income-
producing real property through mortgage investments consisting
of participating first mortgage loans, other equity participation
loans, construction loans, and wrap-around and other junior
loans. The Partnership's underwriting policy for granting credit
was to fund loans secured by first and second deeds of trust on
real property. The Partnership's area of concentration is in
California. In the normal course of business, the Partnership
participated with other lenders in extending credit to single
borrowers; the Partnership did this in an effort to decrease
credit concentrations and provide a greater diversification of
credit risk.
As of December 31, 1998, a majority of the loans secured by
operating properties have been repaid to the Partnership.
However, during the early 1990's, real estate market values for
undeveloped land and commercial real estate in California
declined severely. As the loans secured by undeveloped land and
certain operating properties became delinquent, management of the
Partnership elected to foreclose on certain of these loans,
thereby increasing real estate owned balances. As a result, the
Partnership became a direct investor in this real estate and
managed operating properties and developed raw land until such
time as the Partnership was able to sell this real estate owned.
The real estate owned balance before allowance for possible
losses at December 31, 1996 was $11,360,000, decreasing to
$8,490,000 at year end 1997 and $ -0- at year end 1998.
Basis of Presentation
The Partnership formed several subsidiaries to own and operate
certain of its real estate assets. The corporations formed were
BNN Development, Inc., ("BNN"), Upland Foothill Retail, Inc.,
("Upland"), CPI Development, Inc., ("CPI"), Grand Plaza Auto
Retail, Inc., ("Grand Plaza"), LCR Development, Inc., ("LCR") and
BKS Development, Inc., ("BKS"). All of these corporations are
California corporations.
F-14
The Partnership owns a 100 percent interest in Upland and CPI,
86.25 percent interest in BNN, 86.7 percent interest in Grand
Plaza and a 50 percent interest in LCR and BKS. Several of the
Partnership's assets were transferred to these corporations, at
the Partnership's cost basis, in transactions which included no
cash down with the Partnership carrying a substantial portion of
the financing. Upland, CPI, BNN and Grand Plaza have been
consolidated in the accompanying consolidated financial
statements, and all significant inter-company balances and
transactions, including the aforementioned transfers, have been
eliminated in consolidation.
As the Partnership's ownership interest in LCR and BKS is more
than 20 percent but does not exceed 50 percent, the Partnership
accounts for its ownership interest using the equity method.
Under the equity method of accounting, these loans are a
component of the Partnership's investment in LCR and BKS, and
therefore the Partnership has recorded losses by LCR and BKS as a
reduction of the carrying value of these loans receivable (see
note 5).
Organization
The Partnership was organized on December 13, 1983 in accordance
with the provisions of the California Limited Partnership Act.
The Partnership commenced operations in 1984. The general
partners are John B. Joseph, Ronald R. White and Centennial
Corporation ("CC"), a privately-held California corporation whose
stock is owned by affiliates of Messrs. Joseph and White.
Partners' Capital Accounts
Cash Available for Distribution, as defined in the Partnership
Agreement, is to be allocated 95 percent to the limited partners
and 5 percent to the general partners until each limited partner
has received an amount equal to a 12 percent non-cumulative
annual return on his adjusted invested capital (as defined in the
Partnership Agreement). Thereafter, Cash Available for
Distribution is to be allocated 90 percent to the limited
partners and 10 percent to the general partners. All
distributions of Mortgage Reductions (as defined in the
Partnership Agreement) after the first sixty months following the
closing date of the Partnership, shall be distributed 99 percent
to the limited partners and 1 percent to the general partners,
until each limited partner has received a 12 percent cumulative
annual return on his adjusted invested capital, after which such
F-15
amounts are to be distributed 85 percent to the limited partners
and 15 percent to the general partners. In order to properly
reflect the economic effect of the allocations discussed above,
the Partnership has allocated financial statements net earnings
(losses) 95 percent to the limited partners and 5 percent to the
general partners through 1992. The Partnership had no Cash
Available for Distribution during the two years ended December
31, 1997. The Partnership generated $240,000 in Cash Available
for Distribution during 1998, however due to the deficit balance
in the general partners capital account, they were not entitled
to any interest in the distributions to partners paid in 1998.
Based upon these and various other terms of the Partnership
Agreement, it is improbable that the general partners would be
required to make any capital contributions to the Partnership in
excess of their negative capital account as of December 31, 1992.
Accordingly, since January 1, 1993, the Partnership has allocated
100 percent of the income and losses to the limited partners. As
a result of the liquidation of the majority of the Partnership's
investments in 1998, it has become clear that the amount of the
required deficit restoration of the General Partners will not
exceed $132,000 and the capital accounts of the general partners
and limited partners have been adjusted to reflect such maximum
deficit restoration.
Real Estate Loans and Allowance for Possible Loan Losses
Loans are reported at the principal amount outstanding, net of
unearned income and the allowance for possible loan losses.
Interest accrual is discontinued when, in the opinion of
management, its collection is deemed doubtful. The allowance for
possible loan losses is established through a provision for
possible losses charged to expense. Loans are charged against
the allowance for possible loan losses when management believes
that the collectibility of principal is unlikely.
Management believes that the allowance for possible loan losses
is adequate. While management uses available information to
recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions.
Impaired Loans
The Partnership considers a loan to be impaired when based upon
current information and events, it believes it is probable that
the Partnership will be unable to collect all amounts due
according to the contractual terms of the loan agreement. In
F-16
determining impairment, the Partnership considers large non-
homogeneous loans including nonaccrual loans, troubled debt
restructuring and performing loans which exhibit, among other
characteristics, high loan-to-value ratios, low debt-coverage
ratios, or other indications that the borrowers are experiencing
increased levels of financial difficulty. The Partnership bases
the measurement of collateral-dependent impaired loans on the
fair value of the loan's collateral. The amount by which the
recorded investment of the loan exceeds the measure of the
impaired loan's value is recognized by recording a valuation
allowance.
Real Estate Owned
Effective January 1, 1996, the Partnership adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" ("SFAS 121"). SFAS 121 supersedes SOP 92-3 and also
requires that long-lived assets to be disposed of be reported at
the lower of the carrying amount or fair value less costs to
sell. An impairment loss shall be measured as the amount by
which the carrying amount of the asset exceeds the fair value of
the assets less costs to sell. SFAS 121 requires that assets to
be disposed of not be depreciated while they are held for
disposal. Estimated fair values are determined by using
appraisals, discounted cash flows and/or other valuation
techniques. The actual market price of real estate can only be
determined by negotiation between independent parties in a sales
transaction. The Partnership considered all real estate owned as
held for sale during 1998 and 1997.
The Partnership considers collateral for a loan "insubstance"
foreclosed only when the borrower actually surrenders the
collateral to the creditor and the creditor receives physical
possession of the borrower's assets.
Loan Fees
Origination fees and direct costs associated with lending are
netted and amortized to interest income as an adjustment to yield
over the respective lives of the loans using the interest method.
Deferred Profit on Equity Participation
Deferred profit on equity participation represents the
Partnership's portion of equity from real estate
loans/investments that was earned, but has not yet been paid by
F-17
the borrower. Generally, revenue is recognized when collection
of the deferred profit becomes assured. No deferred profit was
recognized during 1995, 1996 and 1997. Both the loan and
associated deferred profit were charged off during 1998.
Income Taxes
Under provisions of the Internal Revenue Code and the California
Revenue and Taxation Code, partnerships are generally not subject
to income taxes. For tax purposes, any income or losses realized
are those of the individual partners, not the Partnership. The
Partnership reports certain transactions differently for tax and
financial statement purposes.
F-18
The following is a recap of current and cumulative temporary differences between
income for generally accepted accounting principles ("GAAP") and taxable
earnings:
<TABLE>
<S> <C> <C> <C>
Current Temporary Differences Partnership Corporations
Total
(Unaudited) (Unaudited)
(Unaudited)
- --------------------------------------------------------------------------------
- ----------
GAAP loss for the year
ended December 31, 1998 $(2,181,000) $ 2,272,000 $
91,000
Provision for losses (1,934,000) (1,134,000)
(3,068,000)
Charge-offs deductible
for tax purposes (2,115,000) ---
(2,115,000)
Deferred profit previously taxed (289,000) ---
(289,000)
Accrued expenses deducted
using the cash method (220,000) (286,000)
(506,000)
Carrying costs expensed
for books and capitalized
for tax purposes --- (1,214,000)
(1,214,000)
Depreciation 210,000 ---
210,000
Minority interest share of
losses not taxable --- 363,000
363,000
Share of losses in unconsolidated
investee not deductible (2,680,000) ---
(2,680,000)
Net operating loss carry forward --- (1,000)
(1,000)
- --------------------------------------------------------------------------------
- ----------
Taxable (loss) for the year
ended December 31, 1998 $(9,209,000) $ ---
$(9,209,000)
================================================================================
==========
Taxable loss allocable to
General Partners $ ---
================================================================================
==========
Taxable loss per
limited partner unit $ (237.78)
================================================================================
==========
</TABLE>
F-19
<TABLE>
- -----------------------------------------------------------------
<S> <C> <C>
Cumulative Temporary Differences as of December 31, 1998
Partnership Corporations
(Unaudited) (Unaudited)
- -----------------------------------------------------------------
Net operating loss carryforwards $ --- $ 1,000
Share of losses in
unconsolidated investee
not deductible 4,000 ---
- -----------------------------------------------------------------
Total cumulative
temporary differences $ 4,000 $ 1,000
=================================================================
</TABLE>
The subsidiary corporations are subject to taxation and account
for income taxes under an asset liability approach to
establishing deferred tax assets and liabilities for the
temporary differences between the financial reporting basis and
the tax basis of the corporations' assets and liabilities. None
of the subsidiary corporations have paid any income taxes since
their respective formations and all of them have had net deferred
tax assets which have been fully offset by valuation allowances
as of December 31, 1998, 1997 and 1996. Accordingly, no tax
expense or benefit has been recorded by these corporations during
the three years ended December 31, 1998. No deferred tax asset
related to the corporations' cumulative temporary differences
shown above has been recorded in the consolidated financial
statements due to the improbability of realization. Since these
corporations were almost entirely liquidated as of December 31,
1998, it is unlikely that future consolidated financial
statements will reflect any material income tax expense in the
future.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents
includes cash and interest-bearing deposits with original
maturities of three months or less.
Net Loss Per Limited Partnership Unit
Net loss per limited partnership unit for financial statement
purposes was based on the weighted average number of limited
partnership units outstanding of 38,729 in 1998, 1997 and 1996.
F-20
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amount of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
Revenue from rental income on real estate owned is recognized on
a straight-line basis over the life of the lease when payments
become due under operating leases. During 1998, 1997 and 1996,
the Partnership has recognized gains or losses on the sale of
real estate owned as the gains or losses are determinable and the
earnings process is complete.
Financial Information about Industry Segments
The Partnership adopted Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise
and Related Information"(SFAS 131"). Given that the Partnership
is in the process of liquidation, the Partnership has identified
only one operating business segment which is the business of
asset liquidation. The adoption of SFAS 131 did not have an
impact on the Partnership's financial reporting.
(2) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 "Disclosures
About Fair Value of Financial Instruments" ("SFAS 107"), requires
that the Partnership disclose estimated fair values for its
financial instruments as well as the methods and significant
assumptions used to estimate fair values. The following
information does not purport to represent the aggregate net fair
value of the Partnership.
The following methods and assumptions were used by the
Partnership in estimating the fair value of each class of
financial instrument.
Cash and Cash Equivalents
The carrying amount, which is cost, is assumed to be the fair
value because of the liquidity of these instruments.
F-21
Accrued Interest Receivable, Accounts Payable and Accrued
Liabilities and Interest Payable
Carrying amounts approximate fair value because of the short-term
maturity of these instruments, or they are due on demand.
Real Estate Loans Receivable - Earning and Nonearning
The net carrying value of the real estate loans receivable,
earning and nonearning, is estimated to be fair value.
Management believes these loans are impaired, and accordingly,
the loans are carried at the fair value of the underlying real
estate collateral.
Real Estate Loans Receivable from Unconsolidated Investee -
Earning and Nonearning
The net carrying value of loans from unconsolidated investee is
not estimable due to the uncertainty of the amounts and timing of
future payments to be made.
Notes Payable
The carrying value of notes payable to nonaffiliates approximate
fair value because the interest rates on these notes are
approximately equal to current market rates for notes secured by
similar assets.
Notes Payable to Affiliates
As discussed in note 5, the notes payable to affiliates are
reduced by the cumulative minority interest losses to reflect the
net outstanding payable to the affiliate. Due to the uncertainty
of the amounts and timing of future payments to be made, the
determination of fair value of these notes is not practical.
F-22
(3) Allowance for Possible Loan Losses
Changes in the allowance for possible loan losses are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------
Balance at
beginning of year $ 714,000 $ 982,000 $ 957,000
Loans charged-off (569,000) --- ---
Provision for
(recovery of)
loan losses (145,000) (268,000) 25,000
- -----------------------------------------------------------------
Balance at end of year $ --- $ 714,000 $ 982,000
=================================================================
</TABLE>
At December 31, 1998, there was one loan to an unconsolidated
investee which was considered impaired and for which there is no
related allowance for possible loan losses at December 31, 1998.
However, as discussed in note 5, the unconsolidated investee has
recorded substantial operating losses and the Partnership's
proportionate share of the losses in unconsolidated investee has
reduced the net carrying value of this loan to $12,000 as of
December 31, 1998. There were additional investments of $209,000
and $255,000 in impaired loans during the years ended December
31, 1998 and 1997, respectively. For the years ended December
31, 1998, 1997 and 1996, the Partnership recognized interest
income on these impaired loans of $349,000, $96,000 and $169,000,
respectively. For the year ended December 31, 1998, the
Partnership recognized $311,000 in interest income using the cash
basis method of income. There was no interest income recognized
using the cash basis method of income during the years ended
December 31, 1997 and 1996.
F-23
(4) Allowance for Possible Losses on Real Estate Owned
Changes in the allowance for possible losses on real estate owned
are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------
Balance at
beginning of year $ 2,354,000 $ 4,101,000 $ 4,523,000
Provision for losses,
net of recoveries 300,000 --- 15,000
Real estate owned
charged-off (2,654,000) (1,747,000) (437,000)
- -----------------------------------------------------------------
Balance at
end of year $ --- $ 2,354,000 $ 4,101,000
=================================================================
</TABLE>
(5) Transactions with Affiliates
Under the provisions of the Partnership Agreement, CC is entitled
to receive from the Partnership mortgage investment servicing
fees for loans serviced equal to an annual rate of 1/4 of 1
percent of the committed amounts to be funded by the Partnership.
The Partnership incurred and paid $2,000, $4,000 and $4,000 of
mortgage investment servicing fees payable to CC in 1998, 1997
and 1996, respectively.
As discussed in note 1, the Partnership owns 50 percent of the
stock of two corporations which have not been consolidated in the
accompanying financial statements, LCR and BKS. The balance of
stock in these corporations is owned by Centennial Mortgage
Income Fund II ("CMIF II"), an affiliate. LCR invested in a
joint venture, Silverwood Homes ("Silverwood") which has
constructed homes. The Partnership has participated in making
several loans to these corporations and this joint venture.
Under the equity method of accounting, these loans are a
component of the Partnership's investment in LCR and BKS, and
therefore the Partnership has recorded losses by LCR and BKS as a
reduction of the carrying value of these loans receivable. The
Partnership wrote off its investment in and loans receivable from
BKS during 1996 when its share of losses equaled its investment
and the probability of recovery of any of its investment became
unlikely. Accordingly, the 1998 and 1997 consolidated financial
statements include only amounts related to the LCR and Silverwood
loans and investments.
F-24
A summary of these real estate loans receivable from
unconsolidated investee as of December 31, 1998 is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net
Principal Losses Carrying
Balance Offset Value
- -----------------------------------------------------------------
Unsecured note
receivable from LCR (a) $ --- $ --- $ ---
50 percent interest
in unsecured note
receivable from LCR (a) --- --- ---
50 percent interest
in development loan
secured by a first
trust deed from
Silverwood (a) --- --- ---
50 percent interest in
construction loan secured
by a first trust deed
from Silverwood 23,000 11,000 12,000
Construction loan secured
by a first trust deed
from Silverwood 88,000 --- 88,000
- -----------------------------------------------------------------
Totals $ 111,000 $ 11,000 $ 100,000
- -----------------------------------------------------------------
</TABLE>
(a) The unpaid balances of these loans were charged off by the
Partnership during 1998 when the collateral associated with the
notes was sold to an unaffiliated party. The Partnership
accepted its 50 percent share of the net proceeds from the sale
of the collateral and released its security interest in the
collateral. Since the proceeds from the sale were less than the
balances of the notes, the Partnership charged off the balance of
the notes. The cumulative principal balance of the loans charged
off was $2,771,000.
The Partnership has not accrued its share of interest on two of
the Silverwood loans which was approximately $47,000 as of
December 31, 1998.
F-25
A summary of these real estate loans receivable from
unconsolidated investee as of December 31, 1997 is as follows:
<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 1,212,000 381,000 831,000
50 percent interest
in construction loan
secured by a first
trust deed from
Silverwood 239,000 --- 239,000
50 percent interest
in construction loan
secured by a first
trust deed from
Silverwood 171,000 --- 171,000
Construction loan secured
by a first trust deed
from Silverwood 752,000 --- 752,000
- -----------------------------------------------------------------
Totals $ 4,679,000 $ 2,686,000 $ 1,993,000
- -----------------------------------------------------------------
</TABLE>
The Partnership had not accrued its share of interest on the
unsecured notes receivable from LCR which was approximately
$715,000 as of December 31, 1997.
The Partnership had not accrued its share of interest on three of
the Silverwood loans which was approximately $188,000 as of
December 31, 1997.
F-26
LCR entered into a joint venture agreement entitled Silverwood
with Home Devco, ("Home Devco"), an affiliate of the general
partners of the Partnership, to construct and sell single-family
homes at the project. During 1995, LCR contributed 179 lots
which were zoned for single family homes in Lancaster, California
to the joint venture as its initial capital contribution. As LCR
has a 99.99 percent ownership interest in the joint venture,
Silverwood has been consolidated with LCR.
The consolidated balance sheets and statements of operations of
LCR have not been consolidated in the Partnership's financial
statements. The Partnership accounts for its investment in this
corporation using the equity method. The following represents
condensed financial information for LCR at December 31, 1998 and
1997 and for the years ended December 31, 1998, 1997 and 1996:
F-27
LCR Development, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, December 31,
Assets 1998 1997
- -----------------------------------------------------------------
Cash $ 11,000 $ 11,000
Restricted cash 20,000 20,000
Real estate owned 119,000 6,950,000
Less allowance for
losses on real
estate investments 17,000 4,063,000
- -----------------------------------------------------------------
Net real estate owned 102,000 2,887,000
Organization costs --- 1,000
- -----------------------------------------------------------------
$ 133,000 $ 2,919,000
=================================================================
Liabilities and Stockholders' Deficit
- -----------------------------------------------------------------
Notes payable
to affiliates:
CMIF $ 2,882,000 $ 4,679,000
CMIF II 1,549,000 2,250,000
- -----------------------------------------------------------------
Total notes payable 4,431,000 6,929,000
Accounts payable
and accrued liabilities 12,000 38,000
Interest payable
to affiliates 1,837,000 1,377,000
Payable to affiliates 5,000 75,000
- -----------------------------------------------------------------
Total liabilities 6,285,000 8,419,000
Stockholders'
deficit (6,152,000) (5,500,000)
- -----------------------------------------------------------------
$ 133,000 $ 2,919,000
=================================================================
</TABLE>
F-28
LCR Development, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31, 1998, 1997 and 1996
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------
Revenues
Housing sales $ 1,509,000 $ 834,000 $ 233,000
Sale of finished lots 1,499,000 --- ---
- ----------------------------------------------------------------
3,008,000 834,000 233,000
- ----------------------------------------------------------------
Costs and expenses
Cost of housing sales 1,437,000 851,000 238,000
Cost of sale of
finished lots 1,514,000 --- ---
Provision for losses on
real estate owned 216,000 207,000 2,516,000
Selling and
marketing expenses 66,000 131,000 184,000
General and
administrative 24,000 64,000 162,000
- -----------------------------------------------------------------
3,257,000 1,254,000 3,100,000
- -----------------------------------------------------------------
Operating loss (249,000) (420,000) (2,867,000)
Interest expense 403,000 361,000 151,000
- -----------------------------------------------------------------
Net (loss) $ (652,000) $ (781,000) $(3,018,000)
=================================================================
Interest not included
in share of losses (460,000) (532,000) (336,000)
- -----------------------------------------------------------------
Allocable net loss $ (192,000) $ (249,000) $(2,682,000)
=================================================================
Share of losses
recorded $ (96,000) $ (125,000) $(1,966,000)
=================================================================
</TABLE>
Although the Partnership owns a 50 percent interest in LCR, it
holds more than 50 percent of LCR's debt. Since the Partnership
F-29
made a $1,250,000 unsecured loan to LCR, the Partnership was
allocated losses to the extent of the unsecured loan and
remaining losses were allocated 50 percent to the Partnership and
50 percent to CMIF II during 1996. Additionally, the Partnership
and CMIF II have not recorded interest income in connection with
the $1,837,000 of accrued interest payable to affiliates by LCR
and Silverwood. Accordingly, the Partnership has not recorded
its share of losses from LCR to the extent that it represents
this nonaccrued interest income.
<TABLE>
<CAPTION>
Difference of Allocation of Share of Losses
<S> <C>
1998
- -----------------------------------------------------------------
The Partnership's 50 percent share
of LCR's stockholders' deficit
at December 31, 1998 $(3,076,000)
Cumulative interest payable by LCR
to the Partnership not accrued as
income by the Partnership 919,000
Loans receivable considered as part
of the Partnership's investment (b) 2,882,000
Disproportionate loss allocation (625,000)
- -----------------------------------------------------------------
Net loans receivable $ 100,000
=================================================================
(b) The partnership has charged off $2,771,000 of these loans.
</TABLE>
As discussed above, the Partnership holds 50 percent of the stock
of BKS with CMIF II. BKS owned a 283 acre residential tract in
Bakersfield, California and foreclosed on this property on August
8, 1994. Bonds and taxes accrued on the property increased from
$1,605,000 at December 31, 1995 to $2,085,000 at December 31,
1996. During 1996, the bond holders commenced foreclosure
proceedings on the property. Management elected to abandon the
property in 1996 due to the fact that land values had not
increased. Therefore, during 1996, the Partnership recorded its
$338,000 share of losses in connection with BKS which resulted in
the Partnership's investment in BKS being reduced to a zero
balance. Bonds, property taxes and note payable to affiliates
are nonrecourse liabilities and, therefore, the Partnership and
BKS have no contingent liability in excess of the property. The
F-30
Partnership has no future obligation nor risk of additional
losses related to this investee.
The Partnership reimburses the general partner for salaries and
related expenses incurred on behalf of the Partnership for
services such as legal, clerical, accounting, property management
and other administrative functions. The general partners and
affiliates charged $242,000, $244,000 and $273,000 for such
services in 1998, 1997 and 1996, respectively. The Partnership
also accrued an additional $74,000 as general and administrative,
affiliates expense during 1998. This amount is included in
accounts payable and accrued liabilities on the consolidated
balance sheet as of December 31, 1998 and represents the
Partnership's estimated share of certain severance pay that will
become payable in April 1999 (see note 8).
During 1998, 1997 and 1996, the Partnership maintained interest-
bearing deposits with Sunwest Bank, an affiliate of the general
partners. The balances at December 31, 1998, 1997 and 1996 were
$1,752,000, $2,000 and $534,000, respectively. Interest earned
on such deposits for 1998, 1997 and 1996 was $17,000, $13,000 and
$22,000, respectively.
In July 1997, the auto retail center in Corona, California was
sold by Grand Plaza Auto Retail, Inc. ("Grand Plaza"), a
consolidated subsidiary corporation of the Partnership. The
Partnership owned an 86.7 percent interest in Grand Plaza with
the balance of 13.3 percent owned by Centennial Mortgage Income
Fund III ("CMIF III") an affiliate. Both the Partnership and
CMIF III had made loans to Grand Plaza prior to the sale that
exceeded the value of the assets held by it. CMIF III's share of
these loans had been reduced by its share of Grand Plaza's
operating losses, with the net amount having been shown as notes
and interest payable to affiliates in the Partnership's
consolidated financial statements. Grand Plaza realized $935,000
in net cash proceeds from the sale of the property. Grand Plaza
charged off $1,665,000 of its $2,600,000 carrying value of the
property against its allowance for losses on real estate owned
and recorded a $6,000 loss on the sale. The net sales proceeds
were used to pay a portion of the notes payable by Grand Plaza to
the Partnership and CMIF III. CMIF III's share of the proceeds
was $123,000.
In December 1998, the 19 acres in Sacramento was sold by BNN for
$1,300,000 net of selling costs. BNN recorded a $57,000 gain on
sale of the property after charging off its previously recorded
$1,579,000 allowance for losses against the cost basis of the
F-31
property. BNN also recorded a $445,000 provision for losses
during the third quarter of 1998 and $120,000 in expenses
associated with non-operating real estate owned incurred
throughout 1998. The Partnership owns an interest in BNN with an
affiliated entity CMIF III. At December 31, 1998, the ownership
percentages were 86.25 for the Partnership and 13.75 for CMIF
III. CMIF III's share of BNN's net loss for 1998 was $67,000 and
CMIF III funded $136,000 in additional advances under its loan to
BNN during 1998. CMIF III received $179,000 of the cash proceeds
from the sale as a partial payment of its note receivable and
interest due from BNN. Notes payable and interest payable to
affiliates at December 31, 1998 and 1997 includes $13,000 and
$473,000, respectively, and the Partnership had recorded $11,000
and $361,000, respectively, of minority interest in cumulative
losses from this corporate joint venture against the note payable
to affiliates balance as of the same dates. The notes payable to
affiliates balance reflects CMIF III's share of the remaining
note payable by the corporation to the Partnership and CMIF III.
<TABLE>
(6) Real Estate Owned
<CAPTION>
Real estate owned consists of the following:
<S> <C> <C>
December 31, December 31,
1998 1997
- -----------------------------------------------------------------
1. Shopping Center in Upland, CA $ --- $ 4,628,000
2. 19 acres in Sacramento, CA --- 2,822,000
3. Condominiums in Oxnard, CA --- 1,040,000
- -----------------------------------------------------------------
Total real estate owned $ --- $ 8,490,000
=================================================================
</TABLE>
At December 31, 1997 property number 3 was accounted for as
insubstance foreclosure under SFAS 118 as the Partnership did not
hold legal title to the property, but the borrower had
surrendered the collateral to the control of the Partnership.
The last four condominiums were sold during the first quarter of
1998. These sales generated approximately $762,000 in net cash
proceeds and resulted in a $22,000 gain on sale, after charging
off the previously recorded $299,000 allowance for losses against
the property.
F-32
Property number 1 was sold in November 1998. The sale generated
$3,861,000 in gross cash proceeds before paying off the secured
debt discussed in note 7 to the consolidated financial
statements. The Partnership recorded a $5,000 gain on the sale
after charging off the $776,000 previously recorded allowance for
losses against the property.
<TABLE>
<CAPTION>
The following is a summary of consolidated real estate owned for
the years ended December 31, 1998, 1997 and 1996:
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------
Balance at beginning
of year $ 8,490,000 $11,360,000 $12,339,000
Additions during period:
Improvements 300,000 --- 273,000
Deduction during period:
Real estate sold (6,136,000) (1,123,000) (150,000)
Real estate
foreclosed --- --- (665,000)
Chargeoffs (2,654,000) (1,747,000) (437,000)
- -----------------------------------------------------------------
Balance at year end $ --- $ 8,490,000 $11,360,000
=================================================================
</TABLE>
(7) Notes Payable
<TABLE>
<CAPTION>
Notes payable consist of the following:
<S> <C> <C>
December 31, December 31,
1998 1997
- -----------------------------------------------------------------
Note payable secured by
shopping center in
Upland, CA with interest
and principal payments due
monthly of $24,000; interest
rate of 9.5 percent which may
be adjusted based on changes
in the LIBOR rate,
repaid in November 1998 $ --- $ 2,421,000
- -----------------------------------------------------------------
Total note payable $ --- $ 2,421,000
=================================================================
</TABLE>
F-33
(8) Commitments
The day to day operations of the Partnership and several other
affiliated partnerships are carried on by employees of the
corporate general partner, Centennial Corporation ("CC"). CC no
longer has any significant operations other than the management
of these partnerships who are in the repayment stage. During the
first quarter of 1998, several employees resigned from their
employment at CC. Their resignations were principally due to the
anticipated disposition of the majority of the assets owned by
the Partnership and other affiliated partnerships in the
relatively near future. The disposition of these assets could
reasonably be expected to precipitate layoffs, and given the
relatively robust job market in Southern California, where the
general partners conduct their operations, these employees opted
to secure positions with other companies with more promising
futures. As of April 1, 1998, CC employed only six employees.
All of the remaining employees had been employed by CC for over
ten years and had intimate knowledge of the partnerships'
operations. The general partners concluded that it would be in
the best interest of the Partnership to provide the remaining
employees with some type of incentive for them to continue
working for the partnerships until the majority of the
partnerships' assets were liquidated. Accordingly, CC entered
into twelve-month employment contracts with each of these
employees which expire on March 31, 1999. These employment
contracts have been guaranteed by the Partnership and the
affiliated partnerships. The contracts provided that CC could
exercise an option to extend the contract for any employee in
three month increments at the end of each calendar quarter if it
determined that such extension was in the best interest of the
partnerships. CC has exercised this option for one employee until
December 1999. All of the remaining contracts will expire in
March 1999. The contracts include an increase in salary of 10
percent and also provide that if these employees remain employed
by CC until the end of the contract term, including extensions,
they will be entitled to severance pay equal to six months base
salary. The maximum total salaries, employer taxes, related
benefits and severance pay included in these contracts is
approximately $623,000. The Partnership's anticipated share of
this cost is estimated to be between $275,000 and $300,000,
depending on the amount of time which will be spent by these
employees in managing the affairs of the Partnership. The
Partnership's share of the cost of these contracts during the
year ended December 31, 1998 was approximately $213,000. The
Partnership has recorded $74,000 in accrued severance benefits as
of December 31, 1998. The Partnership's estimated share of the
cost of the contract extension is less than $20,000.
F-34
(9) Contingencies
Unbeknownst to the Partnership, on July 19, 1996, a default was
entered against the Partnership for failure to respond to a
complaint filed on July 17, 1995 in the San Bernardino Superior
Court, entitled Henry Yong Lim et al -vs.- Cardinal Security, et
al and allegedly served on the Partnership in May 1996. As shown
by the proofs of service, the complaint was served on the wrong
party in 1996. The Partnership first became aware of its
involvement in this lawsuit in September 1997 when it received
copies of requests for entry of default judgement totaling
approximately $1,000,000. The judgements involved both economic
and non-economic damages and injuries allegedly suffered by the
plaintiffs as a result of an altercation between the plaintiffs,
other third parties and security guards employed by the
Partnership at its shopping center in Upland, California. The
request for judgement names Centennial Mortgage Income Fund
Partnership as a defendant in this action. Since the Partnership
was never served with the complaint and had no other way of
knowing about this action, the Partnership retained legal counsel
to set aside the defaults and any default judgements which were
entered, due to the lack of proper service and notice. The
Partnership also tendered this action to its liability insurance
carrier for legal and liability coverage. The default judgement
has been set aside and the plaintiff's appeal of the set aside
ruling has been denied by the Court. The Court has also ruled
that the prior jury found 0% liability as to the Partnership for
non-economic damages and that the plaintiffs can only proceed to
trial against the Partnership for recovery of economic damages.
Based upon evidence presented at the prior trial, Management
believes that these economic damages should not exceed $40,000.
Management intends to vigorously defend any future actions
related to this matter. Management believes that even if the
plaintiff's prevail in these actions, the Partnership's insurance
coverage and/or the security company's insurance carrier should
prevent the Partnership from suffering a material loss from these
proceedings.
There are no other material pending legal proceedings other than
ordinary routine litigation incidental to the Partnership's
business. Based on part of advice of legal counsel, management
does not believe that the results of any of these matters will
have a material impact on the Partnership's financial position or
results of operations.
(10) Subsequent Event
The Partnership paid a $3,873,000 cash distribution to limited
partners in February 1999.
F-35
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Schedule IV
<TABLE>
<CAPTION>
Mortgage Loans on Real Estate
December 31, 1998
<S> <C> <C> <C>
Interest Final
Periodic
Description Rate Maturity Date
Payment Terms
- --------------------------------------------------------------------------------
- ----------
Note secured by:
50 percent interest Interest
only -
in First Trust Balloon
payments of
Deed on 157 lots $325,000 in
July 1999 and
in Lancaster, CA 8% Fixed April 23, 2000 $745,000 in
July 2000
50 percent interest
in Second Trust Interest
only -
Deed on 157 lots Balloon
payment of
in Lancaster, CA 10% Fixed April 23, 1999 $100,000 in
April 1999
50 percent interest
in Second Trust
Deed on one
single family home P + I
due at
in Lancaster, CA Prime + 1% July 1, 1998
maturity
First Trust Deed on one
single family home
in Lancaster, CA 9.5% fixed April 30, 2000 P + I
monthly
F-36
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Schedule IV
<CAPTION>
Mortgage Loans on Real Estate
(Continued)
December 31, 1998
<S> <C> <C> <C>
Interest Final
Periodic
Description Rate Maturity Date
Payment Terms
- --------------------------------------------------------------------------------
- ----------
Note secured by:
First Trust Deed on one
single family home P + I
due at
in Lancaster, CA Prime + 1% January 1, 1999
maturity
F-37
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Schedule IV
<CAPTION>
Mortgage Loans on Real Estate
(Continued)
December 31, 1998
<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 157 lots $1,070,000
in Lancaster, CA None (50% - $535,000) $542,000
None
50 percent interest
in Second Trust
Deed on 157 lots 1st TD of $100,000
in Lancaster, CA $1,070,000 (50% - $50,000) 51,000
None
50 percent interest
in Second Trust
Deed on one
single family home $1,034,000
in Lancaster, CA $88,000 (50% - $517,000) 23,000
$23,000
First Trust Deed on one
single family home
in Lancaster, CA None $90,000 89,000
None
F-38
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Schedule IV
<CAPTION>
Mortgage Loans on Real Estate
(Continued)
December 31, 1998
<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 one
single family home
in Lancaster, CA None $870,000 $88,000
$88,000
Loss from unconsolidated investee (11,000)
- --------------------------------------------------------------------------------
- ----------
$ 782,000 $
111,000
================================================================================
==========
<FN>
<F1> Aggregate cost for Federal Income Tax purpose is $782,000 at December 31,
1998.
</FN>
F-39
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Schedule IV
Mortgage Loans on Real Estate
(Continued)
December 31, 1998
<CAPTION>
The following is a summary of activity for the years ended December 1998, 1997
and 1996.
<S> <C> <C> <C>
1998 1997
1996
- --------------------------------------------------------------------------------
- ----------
Balance at beginning of year $ 3,847,000 $ 3,297,000 $
4,793,000
Additions during period:
New mortgage loans/disbursements 229,000 991,000
1,044,000
Other - Interest reserve, amortization
and transfer from accrued interest 14,000 39,000
197,000
Deductions during period:
Collections of principal (2,354,000) (355,000)
(163,000)
Charge-offs (569,000) ---
(270,000)
Offset against deferred profit
on equity participation (289,000) ---
- ---
Losses from unconsolidated investees (96,000) (125,000)
(2,304,000)
- --------------------------------------------------------------------------------
- ----------
Balance at year end $ 782,000 $ 3,847,000 $
3,297,000
================================================================================
=========
</TABLE>
See accompanying independent auditors' report.
F-40
Exhibit 21
LCR DEVELOPMENT, INC.
A California Corporation
Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(with Independent Auditors' Report Thereon)
F-41
LCR DEVELOPMENT, INC.
A California Corporation
Index to Consolidated Financial Statements
Consolidated Financial Statements Page
Independent Auditors' Report ............................. F-43
Consolidated Balance Sheets --
December 31, 1998 and 1997............................... F-44
Consolidated Statements of Operations --
Years ended December 31, 1998, 1997 and 1996........... F-46
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1998, 1997 and 1996........... F-47
Consolidated Statements of Cash Flows --
Years ended December 31, 1998, 1997 and 1996........... F-48
Notes to Consolidated Financial Statements ............... F-51
F-42
INDEPENDENT AUDITORS' REPORT
The Board of Directors
LCR Development, Inc.:
We have audited the consolidated balance sheets of LCR
Development, Inc. and subsidiary (the "Company") as of December
31, 1998 and 1997 and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the
years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of LCR Development, Inc. and subsidiary as of December
31, 1998 and 1997, and the results of their operations and their
cash flows for each of the years in the three-year period ended
December 31, 1998, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the consolidated financial
statements, the Company has suffered recurring losses from
operations and has various notes payable past due or scheduled to
mature in 1999. These items raise substantial doubt about the
Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2.
The consolidated financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
KPMG LLP
Orange County, California
March 19, 1999
F-43
LCR Development, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, December 31,
Assets 1998 1997
- -----------------------------------------------------------------
Cash $ 11,000 $ 11,000
Restricted cash 20,000 20,000
Real estate owned (note 5) 119,000 6,950,000
Less allowance for losses on
real estate investments (note 4) 17,000 4,063,000
- -----------------------------------------------------------------
Net real estate owned 102,000 2,887,000
Organization costs --- 1,000
- -----------------------------------------------------------------
$ 133,000 $ 2,919,000
=================================================================
Liabilities and Stockholders' Equity (Deficit)
- -----------------------------------------------------------------
Notes payable to affiliates:
CMIF $ 2,882,000 $ 4,679,000
CMIF II 1,549,000 2,250,000
- -----------------------------------------------------------------
Total notes payable (note 7) 4,431,000 6,929,000
Accounts payable
and accrued liabilities 12,000 38,000
Interest payable to affiliates 1,837,000 1,377,000
Payable to affiliates (note 6) 5,000 75,000
- -----------------------------------------------------------------
Total liabilities 6,285,000 8,419,000
F-44
LCR Development, Inc.
Consolidated Balance Sheets
(Continued)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Liabilities and December 31, December 31,
Stockholders' Equity (Deficit) 1998 1997
- -----------------------------------------------------------------
Stockholders' equity (deficit)
Common stock, no par value;
300 shares authorized;
300 shares issued and
outstanding in 1998 and 1997 3,000 3,000
Accumulated deficit (6,155,000) (5,503,000)
- -----------------------------------------------------------------
Total stockholders'
equity (deficit) (6,152,000) (5,500,000)
Contingencies (Note 9)
Uncertainties (Note 2)
- -----------------------------------------------------------------
$ 133,000 $ 2,919,000
=================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-45
LCR Development, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31, 1998, 1997 and 1996
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------
Revenues
Housing sales $ 1,509,000 $ 834,000 $ 233,000
Sale of finished lots 1,499,000 --- ---
- -----------------------------------------------------------------
3,008,000 834,000 233,000
- -----------------------------------------------------------------
Costs and expenses
Cost of housing sales 1,437,000 852,000 238,000
Cost of finished
lots sold 1,514,000 --- ---
Provision for
losses on real
estate owned (note 4) 216,000 207,000 2,516,000
Selling and
marketing expenses 66,000 131,000 184,000
General and
administrative 24,000 64,000 162,000
- -----------------------------------------------------------------
3,257,000 1,254,000 3,100,000
- -----------------------------------------------------------------
Operating loss (249,000) (420,000) (2,867,000)
Interest expense (note 5) 403,000 361,000 151,000
- -----------------------------------------------------------------
Loss before income taxes $ (652,000) $ (781,000) $(3,018,000)
- -----------------------------------------------------------------
Income taxes (note 8) --- --- ---
- -----------------------------------------------------------------
Net loss $ (652,000) $ (781,000) $(3,018,000)
=================================================================
Net loss per common share $ (2,173) $ (2,603) $ (10,060)
=================================================================
Weighted average
number of common
shares outstanding 300 300 300
=================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-46
LCR Development, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Years ended December 31, 1998, 1997 and 1996
<S> <C> <C> <C>
Total
Stockholders'
Common Accumulated Equity
Stock Deficit (Deficit)
- -----------------------------------------------------------------
Balance (deficit) at
December 31, 1995 $ 3,000 $ (1,704,000) $ (1,701,000)
Net loss --- (3,018,000) (3,018,000)
- -----------------------------------------------------------------
Balance (deficit) at
December 31, 1996 3,000 (4,722,000) (4,719,000)
Net loss --- (781,000) (781,000)
- -----------------------------------------------------------------
Balance (deficit) at
December 31, 1997 3,000 (5,503,000) (5,500,000)
Net loss --- (652,000) (652,000)
- -----------------------------------------------------------------
Balance (deficit) at
December 31, 1998 $ 3,000 $ (6,155,000) $ (6,152,000)
=================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-47
LCR Development, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31, 1998, 1997 and 1996
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------
Cash flows from
operating activities:
Net loss $ (652,000) $ (781,000) $(3,018,000)
Adjustments to
reconcile net
loss to cash
provided by (used
in) operating
activities:
Provision for
possible losses 216,000 207,000 2,516,000
Changes in assets
and liabilities:
Decrease in
organization costs 1,000 --- 1,000
Decrease (increase)
in real estate owned 2,569,000 (500,000) (1,237,000)
Increase (decrease)
in interest payable 460,000 532,000 336,000
Increase (decrease) in
accounts payable and
accrued liabilities (21,000) 27,000 10,000
Increase (decrease) in
payable to affiliates (75,000) 59,000 15,000
- -----------------------------------------------------------------
Net cash provided by
(used in) operating
activities 2,498,000 (456,000) (1,377,000)
- -----------------------------------------------------------------
Cash flows from
investing activities:
Increase in
restricted cash --- (10,000) (10,000)
- -----------------------------------------------------------------
F-48
LCR Development, Inc.
Consolidated Statements of Cash Flows
(Continued)
Years ended December 31, 1998, 1997 and 1996
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------
Net cash used in
investing
activities --- (10,000) (10,000)
- -----------------------------------------------------------------
Cash flows from
financing activities-
Repayments of
notes payable (2,740,000) --- ---
Advances received
on notes payable 242,000 477,000 1,387,000
- -----------------------------------------------------------------
Net cash (used in)
provided by
financing
activities (2,498,000) 477,000 1,387,000
- -----------------------------------------------------------------
Net increase (decrease)
in cash --- 11,000 ---
Cash at beginning
of year 11,000 --- ---
- -----------------------------------------------------------------
Cash at
end of year $ 11,000 $ 11,000 $ ---
=================================================================
F-49
LCR Development, Inc.
Consolidated Statements of Cash Flows
(Continued)
Years ended December 31, 1998, 1997 and 1996
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------
Supplemental schedule
of cash flow
information:
Cash paid during
The year for:
Interest $ 64,000 --- ---
Supplemental
schedule of
noncash
investing and
financing activities:
Decrease in real
estate owned and
related allowance
for losses due to
sale of real estate
owned 4,262,000 42,000 8,000
</TABLE>
See accompanying notes to consolidated financial statements
F-50
LCR DEVELOPMENT, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997, 1996
(1) Summary of Significant Accounting Policies
Organization
During 1993, LCR Development, Inc. ("LCR") was formed by
Centennial Mortgage Income Fund ("CMIF") and Centennial Mortgage
Income Fund II ("CMIF II") to own and operate one of their real
estate assets, 179 single family lots in Lancaster, California.
During 1994, Silverwood Homes, a California general partnership
("Silverwood"), was formed between LCR and Home Devco, Inc.
("Home Devco") for the purpose of constructing single family
homes at the real estate project located in Lancaster. LCR
contributed the 179 single family lots to the partnership in
exchange for a capital contribution credit of $2,571,594 and Home
Devco contributed $100 in cash. As LCR has contributed a 99.9
percent interest, Silverwood has been consolidated in the
accompanying consolidated financial statements. All significant
intercompany balances and transactions including the
aforementioned contribution, have been eliminated in
consolidation. LCR is entitled to a cumulative priority interest
in cash available for distribution from the sale of homes equal
to $19,381 per lot. Home Devco is acting as the general
contractor in the construction of homes at the project and is
entitled to fifty percent of any cash available for distribution
from the sale of homes after LCR has received distributions equal
to its priority interest. Home Devco is also entitled to
reimbursement of onsite supervision costs and certain general and
administrative costs.
Revenue Recognition
LCR recognizes revenue from sales of real estate when
construction is completed, an adequate down payment has been
received and title to the property sold has been transferred to
the buyer.
Income Taxes
LCR is subject to taxation and accounts for income taxes under
Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes" ("SFAS 109"). SFAS 109 requires an asset and
liability approach to establishing deferred tax assets and
liabilities for the temporary differences between the financial
F-51
reporting basis and the tax basis of the corporation's assets and
liabilities.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amount of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(2) Ability to Continue as a Going Concern
LCR and Silverwood has $6,285,000 in liabilities outstanding as
of December 31, 1998 and has only $133,000 in net assets. Most
of these liabilities are notes that are payable to CMIF and CMIF
II who have periodically agreed to extend this debt over the past
two years. The final home owned by Silverwood closed escrow in
March 1999 and the proceeds from the sale were used to repay part
of this debt. The remaining assets of LCR and Silverwood will be
used to repay a portion of their remaining debt. It is probable
that LCR and Silverwood will be unable to continue operations and
that the majority of the Company's debt as of December 31, 1998
will remain unpaid. Management believes that it has made
adjustments in the financial statements to reflect the probable
outcome of these uncertainties.
(3) Fair Value of Financial Instruments
Statement of Financial Accounting Standard No. 107 "Disclosures
About Fair Value of Financial Instruments" ("SFAS 107"),
requires that LCR discloses estimated fair values for its
financial instruments as well as the methods and significant
assumptions used to estimate fair values. The following
information does not purport to represent the aggregate net fair
value of LCR.
The following methods and assumptions were used by LCR in
estimating the fair value of each class of financial instrument.
Cash and Restricted Cash
The carrying amount, which is cost, is assumed to be the fair
value because of the liquidity of these instruments.
F-52
Notes Payable to Affiliates and Interest Payable to Affiliates
The fair value is not determinable due to their related party
nature and terms.
Accounts Payable and Accrued Liabilities and Payable to
Affiliates
The carrying value is considered to be equal to the fair value of
these liabilities as they are short-term in nature.
(4) Allowance for Possible Losses on Real Estate Owned
Changes in the allowance for possible losses on real estate owned
are as follows:
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------
Balance at
beginning of year $4,063,000 $3,898,000 $1,390,000
Real estate owned
charged-off (4,262,000) (42,000) (8,000)
Provision for losses 216,000 207,000 2,516,000
- -----------------------------------------------------------------
Balance at
end of year $ 17,000 $4,063,000 $3,898,000
=================================================================
</TABLE>
F-53
(5) Real Estate Owned
Real estate owned consists of the following:
<TABLE>
<S> <C> <C>
1998 1997
- -----------------------------------------------------------------
Residential lots held
for development $ --- $5,340,000
Model home complex --- 478,000
Production homes under
construction and held for sale 119,000 1,132,000
- -----------------------------------------------------------------
Sub-total 119,000 6,950,000
Less: allowance for possible losses (17,000) (4,063,000)
Net real estate owned $ 102,000 $2,887,000
=================================================================
</TABLE>
Real estate owned as of December 31, 1998 consists of one
substantially completed single family home that was sold in March
1999.
Interest incurred, paid and capitalized during the three years
ended December 31,1998 was as follows:
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------
Interest incurred $ 524,000 $ 568,000 $ 517,000
Interest capitalized (121,000) (207,000) (366,000)
- -----------------------------------------------------------------
Interest expensed $ 403,000 $ 361,000 $ 151,000
=================================================================
Interest paid $ 64,000 $ --- $ ---
</TABLE>
(6) Transactions with Affiliates
The general partners of CMIF and CMIF II beneficially own a
controlling interest in Home Devco. Under the provisions of the
Partnership Agreement, Home Devco is entitled to receive from LCR
reimbursement of onsite supervision costs and certain general and
F-54
administrative costs equal to 3 percent of budgeted gross
proceeds or a maximum of $20,000 per month. Home Devco is
entitled to receive a minimum fee of $7,500 per month under the
agreement, as amended. LCR paid $25,000, $60,000 and $160,000
of these costs to Home Devco and affiliates for the years ended
December 31, 1998, 1997 and 1996, respectively.
Funds were advanced from CMIF and CMIF II to meet operating
expenses and fund options on the prospective home sales. The
advances were repaid from sales proceeds during 1998. The
balances at December 31, 1997 and 1996 were $75,000 and $16,000,
respectively.
(7) Notes Payable to Affiliates
<TABLE>
<CAPTION>
Notes payable to affiliates consist of the following:
(dollars in thousands)
<S> <C> <C>
December 31, December 31,
1998 1997
- -----------------------------------------------------------------
Unsecured note payable to
CMIF and CMIF II related
to 179 lots in
Lancaster, CA with
principal and interest
payable at maturity;
interest rate of 7.75% fixed;
matured June 30, 1998. $ 2,115 $ 2,115
Unsecured note payable to CMIF
related to 179 lots in
Lancaster, CA with
principal and interest
payable at maturity;
interest rate of 7.75% fixed;
matured June 30, 1998. 1,250 1,250
Note payable to CMIF and CMIF II
originally secured by first trust
deed on 179 lots in Lancaster, CA
(secured by only one remaining
home at December 31, 1998); with
principal and interest due at
maturity; interest at Prime + 1%;
maturing August 1, 1999. 933 2,154
F-55
Notes payable to affiliates consist of the following:
(continued)
(dollars in thousands)
<S> <C> <C>
December 31, December 31,
1998 1997
- -----------------------------------------------------------------
Note payable to CMIF and
CMIF II secured by first
trust deed on 4 lots in
Lancaster, CA; repaid
in 1998. --- 484
Note payable to CMIF and
CMIF II originally
secured by first trust
deed on 9 lots in
Lancaster, CA with
principal and interest
due at maturity; interest
at Prime + 1%; matured
July 1, 1998. 45 174
Note payable to CMIF
originally secured by first
trust deed on 9 lots in
Lancaster , CA with principal
and interest due at maturity;
interest at Prime + 1%; maturing
January 1, 1999. 88 752
- -----------------------------------------------------------------
Total notes payable $ 4,431 $ 6,929
=================================================================
</TABLE>
All notes payable are past due as of December 31, 1998 or become
due during 1999.
(8) Income Taxes
LCR and Silverwood file separate Federal and State income tax
returns. LCR and Silverwood have been consolidated for the
following schedules.
F-56
A reconciliation of income tax expense (benefit) at the Federal
statutory rate of 34% to LCR's and Silverwood's provision for
taxes is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------
Income tax benefit at
the statutory rate $ (180,000) $ (266,000) $(1,026,000)
State tax benefit, net
of Federal tax benefit (34,000) (48,000) (184,000)
Valuation allowance 112,000 308,000 1,204,000
Other 110,000 6,000 6,000
- -----------------------------------------------------------------
Total --- --- ---
=================================================================
</TABLE>
As of December 31, 1998, LCR and Silverwood have net operating
loss carryforwards of approximately $4,007,000, expiring at
various dates through 2013.
F-57
The components of the consolidated net deferred tax asset at
December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------
Net operating loss
carryforwards $ 1,485,000 $ 156,000 $ 78,000
Chargeoffs of real
estate not yet
deductible 442,000 --- ---
Provision for losses
on real estate 7,000 1,629,000 1,563,000
Capitalized interest 1,000 38,000 (1,000)
Interest not
deductible until paid 370,000 291,000 185,000
Section 263A expenses --- 80,000 61,000
- -----------------------------------------------------------------
Total deferred
tax asset 2,306,000 2,194,000 1,886,000
Less valuation
allowance (2,306,000) (2,194,000) (1,886,000)
- -----------------------------------------------------------------
Net asset recorded $ --- $ --- $ ---
=================================================================
</TABLE>
The net increases in the total valuation allowances for the years
ended December 31, 1998 and 1997 were $151,000 and $308,000,
respectively. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible.
Based upon the losses of LCR and Silverwood, management has
determined that part or all of the consolidated deferred tax
assets may not be realized in the future. Accordingly,
management has provided a valuation allowance against the value
of the deferred tax asset.
(9) Contingencies
There are no pending legal proceedings of which the Company is
aware.
F-58
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,938
<SECURITIES> 0
<RECEIVABLES> 782
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,047
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,035
<CURRENT-LIABILITIES> 387
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 5,648
<TOTAL-LIABILITY-AND-EQUITY> 6,035
<SALES> 0
<TOTAL-REVENUES> 1,199
<CGS> 0
<TOTAL-COSTS> 1,175
<OTHER-EXPENSES> (67)
<LOSS-PROVISION> 155
<INTEREST-EXPENSE> 245
<INCOME-PRETAX> 91
<INCOME-TAX> 0
<INCOME-CONTINUING> 91
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 91
<EPS-PRIMARY> 2.35
<EPS-DILUTED> 2.35
</TABLE>
