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, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission File Number: 0-22520
CENTENNIAL MORTGAGE INCOME FUND
(Exact name of registrant as specified in its charter)
California 33-0053488
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1540 South Lewis Street, Anaheim, California 92805
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (714)502-8484
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Units
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate by check mark whether if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.
YES X NO
PART I
ITEM 1. BUSINESS.
(a) General Development of the Business
Centennial Mortgage Income Fund (the "Partnership"), a California Limited
Partnership, was organized on December 13, 1983. The Partnership's
registration statement became effective June 8, 1984. The general partners
are John B. Joseph, Ronald R. White and Centennial Corporation ("CC"), a
privately held corporation whose stock is owned by affiliates of Ronald R.
White and John B. Joseph.
Beginning in the fourth quarter of 1985, the Partnership ceased accepting
capital contributions and entered its operating stage of business. During the
fourth quarter of 1990, 60 months after the closing of its offering stage, the
Partnership ceased making new loans and entered the repayment stage as
required by the Partnership Agreement. As of December 31, 1999, the
Partnership had reduced its remaining assets to $1,672,000, $1,124,000 of
which was cash deposits with banks. There is a significant possibility that
the Partnership will be able to liquidate its remaining non cash assets during
calendar 2000. For additional information, see Item 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(b) Financial Information about Industry Segments
Given that the Partnership is in the process of liquidation, the Partnership
has identified only one operating business segment which is the business of
asset liquidation.
(c) Narrative Description of Business
The Partnership was formed to invest in mortgage investments consisting of
participating first mortgage loans, construction loans, and wrap-around and
other junior loans on commercial, industrial and residential income-producing
real property.
The Partnership's objectives are to preserve the Partnership's invested
capital, provide increased cash distributions to the limited partners as the
cash flow from the properties underlying mortgage investments increases over
the life of the Partnership, provide capital growth through participation in
the increased value of the underlying properties and provide liquidating
distributions as loans are repaid and cash from the sale of real estate owned
is no longer needed for development and operations of real estate owned.
From 1985 through 1990, the Partnership invested in numerous loans which were
secured by real estate in California. Due to the long term recession and
falling real estate market values in California during the early 1990's, many
of the Partnership's loans became delinquent and management of the Partnership
elected to foreclose, thereby increasing real estate owned balances. As a
result, the Partnership became a direct investor in this real estate. The
Partnership has managed its operating properties and completed certain
development processes on its raw land over the last several years in an effort
to make this real estate more marketable.
The improving real estate markets and development of the Partnership's assets
have enabled the Partnership to liquidate the majority of its assets. As of
December 31, 1999, the Partnership's assets consisted of $1,124,000 in cash
and cash equivalents and $548,000 in other non-cash 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 $541,000 as of December 31, 1999.
The liquidation of assets during 1997 and 1998 enabled the Partnership to make
a $1,998,000 cash distribution to its limited partners in August 1998 and an
additional $3,873,000 cash distribution to its limited partners in February
1999.
Risks of the year 2000 Issue
As discussed above, the Partnership is in the process of liquidating its
remaining assets. As of December 31, 1999, the Partnership held only cash and
cash equivalents, a single note secured by real estate, and $7,000 in other
non-cash assets. In light of these circumstances, the Partnership made only
the absolutely necessary modifications to existing software which were
necessitated by the year 2000 issues. The cost of these modifications was
less than $10,000.
To date, the Partnership has experienced only minor computer related problems
that are the result of the year 2000. None of these problems have caused any
significant disruption to the Partnership's operations. The Partnership
anticipates that it will encounter additional minor problems in the coming
months. It does not anticipate that it will be required to spend any
significant amounts to correct these problems or that these problems will
cause any disruptions of any consequence to the Partnership's operations.
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.
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 contracted 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. In March 2000, attorneys for the
Partnership filed a motion for summary judgement in favor of the Partnership
against the Plaintiffs. 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, 1999, there were approximately 4,744 holders of limited
partnership units.
(c) Partnership Distributions
The Partnership paid a $1,998,000 cash distribution to limited partners in
August 1998. This distribution equaled $51.60 per limited partnership unit.
The Partnership paid a $3,873,000 cash distribution to limited partners in
February 1999. This distribution equaled $100.00 per limited partnership
unit.
Based in part upon advice from legal counsel, management intends to refrain
from making any additional distributions until the possibility of any
unforeseen legal action against the Partnership becomes remote. See Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
(dollars in thousands, except per unit data)
Years ended
- ------------------------------------------------------------------------------
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Total revenue $ 157 $ 1,199 $ 992 $ 1,105 $ 1,159
Net income (loss) (115) 91 123 (2,514) (2,776)
Net income (loss)
per limited
partnership unit-
basic and diluted. (2.97) 2.35 3.18 (64.91) (71.68)
Cash distributions
per limited
partnership unit 100.00 51.59 --- --- ---
CONSOLIDATED BALANCE
SHEET DATA:
Total loans before
allowance for losses 541 782 3,847 3,297 4,793
Total real estate owned
before allowance
for losses --- --- 8,490 11,360 12,349
Total assets 1,672 6,035 10,397 11,394 14,842
Partners' equity 1,660 5,648 7,555 7,432 9,946
</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
$(115,000) and $(2.97) for the year ended December 31, 1999 as compared to
$91,000 and $2.35 for the year ended December 31, 1998 and $123,000 and $3.18
for the year ended December 31, 1997. As a result of the liquidation of most
of the Partnership's remaining assets during 1997 and 1998, there were many
changes in the components of the Partnership's statements of operations for
1997, 1998 and 1999. 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, 1999 is included in the following paragraphs.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Partnership had $1,124,000 in cash and cash
equivalents. During the year ended December 31, 1999, the Partnership's
principal sources of cash were; i) $242,000 in principal collected on loans
receivable; ii) $25,000 in collections of previously charged off loans; iii)
$52,000 in current interest income on loans; and iv) $67,000 in interest
income on interest bearing deposits. The Partnership's principal uses of cash
during the year ended December 31, 1999 were: i) a $3,873,000 cash
distribution to limited partners; and ii) $336,000 in general and
administrative costs.
Future sources of cash are expected to be from the repayment of the $541,000
in remaining loans receivable and interest earned on cash deposits.
The Partnership had no unfunded loan commitments at December 31, 1999. 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.
Effective with the third quarter of 1991, the Partnership had suspended making
any cash distributions to partners due to a decline in liquidity and the
uncertainty of the cash requirements for existing and potential real estate
owned. Pursuant to the Partnership Agreement, 60 months after the closing of
the offering, cash proceeds from mortgage investments are no longer available
for reinvestment by the Partnership.
Through the latter part of 1997, the general partners believed that the cash
proceeds from mortgage reductions and the sale of real estate owned should be
retained by the Partnership until such time as it was assured that it had
sufficient cash to fulfill any potential operating requirements. Due to the
substantial real estate and loan receivable balances, these potential
operating costs were considered to be very significant. As a result of the
substantial decrease in loans and real estate owned which occurred during
1997, the general partners determined that the Partnership could make a
$1,998,000 distribution to its limited partners in August 1998.
As a result of the substantial sales activity which occurred in the fourth
quarter of 1998, the general partners declared and paid an additional
$3,873,000 cash distribution to limited partners in February 1999. This left
the Partnership with approximately $1.12 million of cash and cash equivalents
as of December 31, 1999.
The general partners have had discussions with legal counsel regarding the
amounts of cash balances that would be prudent to be retained by the
Partnership at this time. In light of the substantial amount of real estate
that the Partnership has held an interest in over the years, there is always
the potential for future litigation to arise, particularly in the area of
toxic contamination. Although the general partners are not aware of any
threatened litigation, or litigation that is likely to arise, they have
determined that the Partnership should retain at least $1,000,000 in cash
balances to be available to defend the Partnership in any future litigation
which may arise. It is expected that these cash balances will be retained
until such time as legal counsel advises the general partners that the
potential for any future litigation is remote.
RESULTS OF OPERATIONS
The Partnership's non-cash assets declined from $9,379,000 as of December 31,
1997 to only $1,097,000 as of December 31, 1998. The Partnership's non-cash
assets declined again to $548,000 as of December 31, 1999. The Partnership
reported profits for both 1998 and 1997. However, as a result of the declining
non-cash assets and the costs of administering a publicly held partnership,
the Partnership reported a loss in 1999 and expects to report another loss in
2000. The substantial reduction in non-cash assets during 1998 caused many
changes in the Partnership's results of operations as discussed below.
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 $-0-,
$12,000, and $2,313,000 as of December 31, 1999, 1998 and 1997, respectively.
Interest income on loans to affiliates, including fees was $3,000 for 1999,
$47,000 for 1998 and $37,000 for 1997. This income is related to earning
loans made to the Silverwood joint venture, which was constructing homes in
Lancaster, California. The decrease for 1999 resulted from the payoff of the
last earning loan in March 1999. The increase for 1998 resulted from higher
average balances on the one remaining earning Silverwood loan. The real
estate market in Lancaster did not see the improvement that many other areas
in California had seen while the Silverwood joint venture held this property.
As a result, the Partnership placed several other loans to Silverwood on
nonaccrual status during 1996. The interest on these nonaccrual loans was not
included in interest income during 1997, 1998 or 1999.
Interest income on loans to nonaffiliates, including fees, was $49,000,
$356,000 and $122,000 during the years ended December 31, 1999, 1998 and 1997,
respectively. During 1998, the Partnership received payments in full, or
nearly in full, on three loans that had previously been classified as impaired
and on which interest had not been fully accrued in prior periods. As a
result, the Partnership recorded $321,000 in interest income on these loans
that had been earned in prior periods but not accrued as income. This caused
interest income on loans to nonaffiliates , including fees to be abnormally
high during 1998.
Real estate loans receivable, earning is comprised of a single loan totaling
$541,000 as of December 31, 1999 that is performing. This loan, which is from
an unaffiliated party, was received in connection with the payoff of a
previously nonearning loan to the Silverwood joint venture.
Real estate loans receivable from unconsolidated investee, nonearning is
comprised of one past due loan totaling $11,000 as of December 31, 1999. This
loan, which is due from the Silverwood joint venture, is entirely 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 and 1999.
Nonaccrual, Nonperforming Loans and Other Loans to Affiliates
Loans on nonaccrual status during the year ended December 31, 1998 and 1999
are summarized below:
During 1994, the Partnership renegotiated an equity participation note with an
original committed amount of $374,000 secured by a second deed of trust on a
32,431 square foot shopping center in Corona, California. The loan provided
for interest due to be payable at loan maturity; however, due to the amount of
the senior debt and the decrease in land values, the Partnership placed the
loan on nonaccrual. The principal balance and nonaccrued interest at December
31, 1997 were $376,000 and $144,000 respectively. The Partnership had
recorded a reduction of $62,000 against the $376,000 principal balance as of
December 31, 1997 which represented previously nonaccrued interest and had
also recorded a $289,000 deferred profit in connection with this loan.
Additionally, due to the recent operating history of the property and the
large lien on the property that was senior to the Partnership's note, an
allowance for possible losses of $25,000 was also recorded against this note
during 1997. The senior note holder commenced foreclosure proceedings and the
borrower filed for protection under bankruptcy laws. Accordingly, the
Partnership charged off the balance of this note during 1998 against the
$289,000 deferred profit and $25,000 previously recorded allowance for
possible losses. The Partnership released its lien on the property in 1999
for $25,000 in connection with the refinance of the property through
bankruptcy proceedings. The Partnership recorded this $25,000 payment, which
represented a bad debt recovery, as other income in 1999.
During 1991, the Partnership sold a pad on an existing piece of real estate
owned in Corona, California and carried back financing in the amount of
$600,000. The Partnership's share of the loan was 77 percent. Due to the
loss of a major tenant, the borrower was unable to make full monthly interest
payments in accordance with the original note terms. Management worked out a
forbearance agreement with the borrower for payments equal to the net cash
flow from the property. The remaining interest due was placed on nonaccrual.
The Partnership's share of the principal balance and nonaccrued interest at
December 31, 1997 was $461,000, and $142,000, respectively. The Partnership
had recorded a $365,000 allowance for possible losses against this note.
During 1998, the Partnership accepted a $211,000 payment on this note as
payment in full in connection with the sale of the property. As a result, the
Partnership reversed $115,000 of the previously recorded allowance for
possible losses and charged off the $250,000 balance against the allowance.
During 1989, the Partnership funded a loan with an original committed amount
of $343,000 to provide land development financing in Perris, California. The
loan matured June 1, 1993 and the borrower was unable to make interest
payments or pay off the loan. Given the depressed value of the property and
the amount of the delinquent bonds and taxes, the Partnership elected to not
foreclose on this property and had established an allowance for losses of
$294,000, to fully reserve the carrying value of the note as of December 31,
1997. The principal balance and nonaccrued interest at December 31, 1997 were
$294,000 and $208,000, respectively. During 1998, the Partnership charged off
the $294,000 balance of the note against the previously recorded allowance for
possible losses.
Loans to Unconsolidated Investee
During 1994 the Partnership acquired a 50% interest in LCR Development, Inc.,
an unconsolidated subsidiary. The balance of LCR is owned by Centennial
Mortgage Income Fund II ("CMIF II"), an affiliate. LCR was formed in order to
take title to 179 residential lots in Lancaster, California through
foreclosure of a $1,250,000 secured loan held by the Partnership and a
$2,115,000 secured loan held jointly by the Partnership and CMIF II. The
Partnership assigned its interests in these notes to LCR in exchange for two
new notes payable by LCR to the Partnership and CMIF II. LCR subsequently:
i) took title to the 179 lots through foreclosure; ii) entered into a joint
venture with Home Devco, Inc. named Silverwood Homes ("Silverwood"); and
iii) contributed the 179 lots to Silverwood. The principal purpose of the
joint venture was to construct homes on the property. From 1995 through 1997.
Silverwood constructed and sold homes on the property and the Partnership and
CMIF II made several construction and development loans to Silverwood. It was
anticipated that there would be excess cash from the home sales after paying
off the development and construction loans and this excess cash would be used
to repay LCR for its investment in the joint venture. LCR would then be able
to use this anticipated excess cash from Silverwood's home sales to repay the
Partnership and CMIF II for the $1,250,000 and $2,115,000 loans.
LCR reported substantial net losses due to the continuing decline in value of
the lots from 1994 through 1997. The Partnership recorded its share of losses
from Silverwood as a reduction in the net carrying value of its notes due from
LCR and Silverwood. Cash generated from home sales at Silverwood was
insufficient to enable Silverwood to remit any payments to LCR. As a result,
no payments were ever made against the $1,250,000 or $2,115,000 loans and the
loans were placed on nonaccrual. As of December 31, 1997, the principal
balance of the $1,250,000 note was $1,250,000. The Partnership's share of the
principal balance of the $2,115,000 note as of the same date was $1,055,000.
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 one hundred
percent of the proceeds from the sale were paid to the Partnership and CMIF II
as a partial repayment of their development and construction loans to
Silverwood. Accordingly, the Partnership charged off the LCR notes against
the $2,305,000 of previously recorded losses from unconsolidated investee
during 1998.
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 had reduced the carrying value of one of these loans by $381,000,
the remainder of its share of losses in unconsolidated investee as of December
31, 1997. This resulted in a net carrying value for the Silverwood loans of
$1,993,000 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
$209,000 on the development loan and the Phase II construction loan in 1998.
The Partnership also recorded an additional $96,000 in losses from
unconsolidated investee during 1998 and received cash payments totaling
$1,422,000 against these loans. Additionally, the Partnership received two
notes receivable totaling $584,000 from an unaffiliated party as a partial
repayment of the development loan in connection with the sale of the remaining
157 lots in October 1998. These new notes are secured by the 157 lots sold.
The remaining combined principal balances of the development and construction
loans was $577,000 after the 1998 advances and payments were made. The
Partnership charged off $466,000 of this balance against the remaining losses
from unconsolidated investee, leaving a balance of loans receivable and losses
from unconsolidated investee of $111,000 and $11,000, respectively, as of
December 31, 1998.
During 1999, Silverwood sold its final home and made payments totalling
$100,000 to the Partnership out of cash generated from this sale.
Real Estate Owned
The Partnership liquidated its remaining real estate owned during 1998. A
description of the Partnership's principal real estate owned and loan
classified as insubstance foreclosure during the year ended December 31, 1998
follows:
Shopping Center in Upland, California
During the third quarter of 1988, the Partnership foreclosed on a loan secured
by this project. The Partnership originally committed $5,600,000 for the
rehabilitation of a 33,327 square foot retail center and construction of an
automotive service facility in Upland, California. Cost overruns and
construction delays prevented the borrower from selling the project and
thereby performing on the loan. The property's carrying value before
allowance for possible losses was $4,628,000 at December 31, 1997. The
property was encumbered by a note of $2,421,000, secured by a first trust deed
on the property. The Partnership had recorded a $921,000 allowance for losses
related to this property as of December 31, 1997. The Partnership reversed
$145,000 of this provision during the first quarter of 1998. The property
generated approximately $506,000 and $431,000 in net operating income before
debt service during 1997 and 1996, respectively. This property was sold in
November 1998. The sale generated net cash proceeds of $3,858,000 after
selling costs and resulted in a $6,000 gain on sale. The $2,421,000 debt
secured by the property was repaid from the sales proceeds.
19 Acres in Sacramento, California
During the third quarter of 1991, the Partnership took a deed in lieu of
foreclosure on a second trust deed secured by 19 acres of undeveloped land in
Sacramento, California. The property is located in the North Natomas area and
is zoned for light-industrial commercial use. The property was encumbered by a
$900,000, 12 percent fixed interest rate note payable secured by a first trust
deed on the property which was repaid in December 1997. At December 31, 1997,
the carrying value before allowance for possible losses of this asset was
$2,822,000 and the Partnership had recorded a $1,134,000 allowance for losses
related to this project. The Partnership recorded additional provisions for
losses totaling $445,000 during the first three quarters of 1998. In December
1998, this property was sold for $1,600,000, net of selling costs. The sale
agreement required that the Partnership establish a $300,000 escrow account
out of the sales proceeds from which the buyer could withdraw amounts to pay
for certain specified development work to be done to the property. All of the
funds in this escrow account were used to pay for development costs incurred
during 1999 and the Partnership now has no further obligations related to this
property. The sale resulted in a $57,000 gain on sale.
12 Condominiums in Oxnard, California
During 1990, the Partnership funded a loan secured by a first trust deed with
an original committed amount of $3,000,000 for the construction of 12
condominiums in Oxnard, California. The borrower signed over control to the
second trust deed holder in December 1992 and the second trust deed holder, an
affiliate, abandoned the property. The Partnership then controlled the
property and received 100 percent of all sales proceeds net of selling costs.
As a result, the Partnership recorded an insubstance foreclosure on these 12
condominiums. During 1997, the Partnership sold one condominium, bringing the
cumulative sales total to eight units. The Partnership recorded a $1,000 gain
on the 1997 sale. The remaining four units were sold and closed escrow during
the first quarter of 1998. The 1998 sales generated approximately $762,000 in
net cash proceeds to the Partnership and resulted in a gain on sale of
$21,000. The carrying value before allowance for possible losses at December
31, 1997 was $1,040,000 and the Partnership had recorded a $299,000 allowance
for losses related to this project as of the same date.
Interest on Interest-Bearing Deposits
Interest earned on interest-bearing deposits was $67,000 in 1999, $83,000 in
1998 and $72,000 in 1997. The decrease in 1999 was primarily attributable to
a decline in average cash balances held by the Partnership which resulted from
the $3,873,000 distribution to limited partners in February 1999. The
increase in interest on interest bearing deposits in 1998 is due to an
increase in average cash balances. Interest on interest-bearing deposits
represents interest earned on Partnership funds invested, for liquidity, in
time certificate and money market deposits.
Income from Operations of Real Estate Owned
As discussed above, the Partnership liquidated its remaining real estate owned
during 1998. Accordingly, there was no income from operations of real estate
owned during 1999. Income from operations of real estate owned for 1998 and
1997 consists of operating revenues of $602,000 and $755,000, 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 and 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 and
$(268,000) in 1997. There was no comparable provision during 1999. The 1998
provision is comprised of reversals totaling $290,000, $145,000 of which was
on two loans which were repaid during 1998, and $145,000 of which was related
to the Upland Shopping center which was sold in 1998. These reversals were
offset by an additional provision of $445,000 which was recorded against the
19 acres in Sacramento. The 1997 recovery related to two loans secured by a
mini-storage facility in Citrus Heights, California that were repaid in
January 1998.
Management believes that the remaining loan receivable as of December 31, 1999
is 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 $-0-
for 1999, $96,000 for 1998 and $125,000 for 1997. The 1998 and 1997 share of
losses consist primarily of operating losses from the sale of homes and
finished lots recorded by LCR. All but one of these homes had been liquidated
by the end of 1998 and that home was sold in early 1999. The Partnership's
remaining investment in and loans receivable from these unconsolidated
investees was reduced to $100,000 as of December 31, 1998 and has been further
reduced to $-0- as of December 31, 1999.
As discussed above, the Partnership liquidated its remaining real estate owned
during 1998. Accordingly, the only operating expenses from operations of real
estate owned during 1999 were $3,000 in refunds of common area maintenance
billings related to the Upland Shopping Center which were determined after the
1998 financials had been issued. Operating expenses from operations of real
estate owned were $142,000 for 1998 and $168,000 for 1997. 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.
Operating expenses from operations of real estate owned paid to affiliates
were $-0- for 1999, $30,000 for 1998 and $41,000 for 1997. 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.
Expenses associated with non-operating real estate owned were $1,000 in 1999,
$125,000 in 1998 and $162,000 in 1997. 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 and
$86,000 during 1998 and 1997, respectively. The decrease for 1998 is due
primarily to a $42,000 decrease in costs associated with the condominium
project in Oxnard.
Depreciation and amortization expense for 1999, 1998 and 1997 consists of
$-0-, $7,000 and $12,000, respectively. The amounts represent depreciation on
office furniture and equipment which were fully depreciated at the end of
1998.
Interest expense was $-0- for 1999, $245,000 for 1998 and $378,000 for 1997.
These amounts represent interest related to the underlying debt on the Upland
Shopping Center and the 19 acres in Sacramento. The decrease for 1999 is
attributable to the sale of the Upland Shopping center and the associated
repayment of debt which occurred in November 1998. The decrease for 1998 is
attributable to the repayment of the debt secured by the 19 acres in
Sacramento in December 1997.
General and administrative expenses, affiliates totaled $162,000 for 1999,
$286,000 for 1998 and $203,000 for 1997. 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. The decrease for 1999 is primarily
attributable to a layoff of the majority of the employees of the general
partner in March 1999 which was in response to the substantial decline in
assets being managed by the general partners.
General and administrative expenses, nonaffiliates totaled $107,000 for 1999,
$87,000 for 1998 and $103,000 for 1997. The increase for 1999 is primarily
attributable to an increase in accounting and investor reporting costs. 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.
Mortgage investment servicing fees paid to affiliates were $-0- in 1999,
$2,000 in 1998 and $4,000 in 1997. 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, 1999, the Partnership held fixed rate bank deposits with
carrying values totaling $1,124,000 and a single fixed rate mortgage note
receivable with a carrying value of $541,000. The bank deposits all had
maturities of less than ninety days. The fixed rate mortgage note matures in
July 2000 and bears interest at 8 percent per annum. The fair value of these
assets was estimated to be equal to their carrying values as of December 31,
1999. Increasing interest rates could have an adverse effect on the fair value
of the Partnership's fixed rate note receivable and/or the value of the
underlying real estate collateral which secure the Partnership's note
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, 1999. 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 61
General Partner
John B. Joseph is currently Vice Chairman of the Board of Directors and Vice
President of Centennial Corporation. He has held these positions since 1983.
Mr. Joseph also has served, in the following capacities during the past five
years: he was on the board of directors for West Coast Bancorp ("WCB"), a
publicly held bank holding company operating in California from its inception
in 1981 through February 1999; he was Chairman of the Board of Directors of
WCB since its inception in 1981 and CEO from April 1991 until 1998. Mr. Joseph
has also been general partner of various public and private limited
partnerships engaged in real estate development and lending activities.
Mr. Joseph has 30 years of experience in asset management in both securities
and real estate. Mr. Joseph has worked in all areas of real estate. In the
past, Mr. Joseph has been engaged in the syndication and management of over
$100 million worth of income property, including industrial complexes,
shopping centers, business centers, office buildings, commercial properties
and residential units. Mr. Joseph has been named as a subject of a pending
legal proceeding in the Justice Court, Las Vegas Township, Clark County ,
Nevada, Case No. 99F08732A-F. The proceedings involve several charges
associated with an investment Mr. Joseph made in a mining venture which is
unrelated to the Partnership and its affiliates. Mr. Joseph has denied any
wrongdoing and has employed legal counsel to defend him in this matter.
Ronald R. White
Age 53
General Partner
Ronald R. White is currently President and CEO of Centennial Corporation. He
has held these positions since 1983. He was also Executive Vice President and
Vice Chairman of the Board of Directors of WCB until 1998. Mr. White served
in these capacities since April 1987. Mr. White also serves, or has served,
in the following capacities during the past five years: general partner of
various public and private limited partnerships engaged in real estate
development and lending activities.
Mr. White's career spans the financial and management fields in both
securities and real estate. Mr. White has 28 years of experience in asset
management. In the past, Mr. White has been engaged in the syndication and
management of over $100 million worth of income property including industrial
complexes, shopping centers, business centers, office buildings, commercial
properties, and residential units.
Centennial Corporation ("CC"), a privately held corporation, whose stock is
owned by affiliates of Ronald R. White and John B. Joseph, was voted in as new
general partner in 1993. CC was incorporated in 1983 to engage in the real
estate lending business and to provide consulting services.
Identification of Executive Officers
The Partnership does not have officers as such. The affairs of the
Partnership are managed by the general partners noted above.
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
The following table summarizes the types and recipients of compensation paid
and to be paid to the general partners and affiliates by the Partnership.
<TABLE>
<CAPTION>
Amount Earned/
Type of Reimbursable for the
Compensation & Year Ended
Name of Entity Description of Payment December 31, 1999
- ----------------------------------------------------------------------------
<S> <C> <C>
Operating Stage:
Application and An amount up to a maximum of 3 percent $ ---
commitment fees of the gross proceeds of the offering
- - the general on any single mortgage investment, and
partner or an aggregate maximum of 7 percent
affiliates of the gross proceeds of the offering,
payable to the general partners or
affiliates. The application and
commitment fees are payable solely from
borrowers and prospective borrowers and
not directly from the proceeds of the
offering.
General partners' The general partners or affiliates $ 162,000(1)
reimbursable shall be entitled to reimbursement
expenses - general for certain expenses, subject to
partner or the conditions of the Partnership
affiliates Agreement
General partners' A 5 percent interest in cash flow $ ---
interest in cash available for distribution for any
distributions year until all limited partnership
- - general unit holders have received an amount
partners or equal to a 12 percent non-cumulative
affiliates annual return on their adjusted
invested capital, and 10 percent of
the balance of any cash flow available
for distribution for such year
Mortgage 1/4 of 1 percent of the maximum amount $ ---(2)
investment funded or to be funded by the Partnership
servicing fees on mortgage investment serviced by CC
Repayment Stage:
General partners' One percent of mortgage reductions $ ---
share of until all limited partners have
mortgage received an amount equal to their
reductions adjusted invested capital and cumulative
- - general distributions (including cash flow
partners or available for distribution) equal to a
affiliates 12 percent annual return with respect
to their adjusted invested capital, and
15 percent of the balance of any
mortgage reductions
</TABLE>
(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, 1999.
(b) Security Ownership of Management
The percent of units owned by Management outstanding is less than 1 percent.
Name and address Nature and Number of Percent of
of Beneficial Owner Units Outstanding Units Outstanding
- ---------------------------------------------------------------------------
Ronald R. White
1540 S. Lewis St.
Anaheim, CA 92805 Limited partnership units: 1 ---
(c) Change in Control
The Partnership knows of no contractual arrangements which may at a subsequent
date result in a change of control of the Partnership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This disclosure is made in note 5 of the Notes to the Consolidated Financial
Statements which is incorporated in this filing.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (a)(2) - See Index to Consolidated Financial Statements and
Schedule attached hereto.
(a)(3) - Exhibits.
(3) & (4) Articles of Incorporation and Bylaws
The Amended Limited Partnership Agreement
Incorporated by reference to Exhibit A to the Partnership's
Prospectus contained in the Partnership's registration
Statement on Form Form S-11 (Commission File No. 0-22520)
Dated June 8, 1984, as supplemented and filed under the Securities
Act of 1933
(27) Financial Data Schedule
(b)(4) - Reports on Form 8-K.
None.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A California Limited Partnership
By:/s/John B. Joseph
_________________________________
John B. Joseph
General Partner March 30, 2000
By:/s/Ronald R. White
_________________________________
Ronald R. White
General Partner March 30, 2000
By: CENTENNIAL CORPORATION
General Partner
/s/John B. Joseph
_________________________________
John B. Joseph
Executive Vice President March 30, 2000
/s/Ronald R. White
_________________________________
Ronald R. White
President March 30, 2000
/s/Joel H. Miner
_________________________________
Joel H. Miner
Chief Financial Officer March 30, 2000
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, 1999, 1998 and 1997
(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, 1999 and 1998 F-4
Consolidated Statements of Operations --
Years ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Partners' Equity --
Years ended December 31, 1999, 1998 and 1997 F-6
Consolidated Statements of Cash Flows --
Years ended December 31, 1999, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-9
Schedule
Schedule IV - Mortgage Loans on Real Estate F-22
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, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999, 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 14, 2000
F-3
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents (note 5) $ 1,124,000 $ 4,938,000
Real estate loans
receivable, earning 541,000 682,000
Real estate loans receivable from
unconsolidated investee, earning (note 5) --- 88,000
Real estate loans receivable from
unconsolidated investee, nonearning (note 5) --- 12,000
- ------------------------------------------------------------------------------
Net real estate loans receivable 541,000 782,000
- ------------------------------------------------------------------------------
Other assets, net --- 306,000
Due from unconsolidated investee 7,000 9,000
- ------------------------------------------------------------------------------
$ 1,672,000 $ 6,035,000
==============================================================================
LIABILITIES AND PARTNERS' EQUITY
- ------------------------------------------------------------------------------
Notes payable to affiliates (note 5) $ --- $ 2,000
Accounts payable and
accrued liabilities 12,000 385,000
- ------------------------------------------------------------------------------
Total liabilities 12,000 387,000
- ------------------------------------------------------------------------------
Partners' equity (deficit)
-- 38,729 limited partnership
units outstanding in 1999 and 1998
General partners (132,000) (132,000)
Limited partners 1,792,000 5,780,000
- ------------------------------------------------------------------------------
Total partners' equity 1,660,000 5,648,000
Contingencies (note 7)
- ------------------------------------------------------------------------------
$ 1,672,000 $ 6,035,000
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-4
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE:
Interest on loans to affiliates,
including fees (note 5) $ 3,000 $ 47,000 $ 37,000
Interest on loans to
nonaffiliates, including fees 49,000 356,000 122,000
Interest on interest-bearing
deposits (note 5) 67,000 83,000 72,000
Gain on sale of property --- 84,000 1,000
Income from operations
of real estate owned --- 602,000 755,000
Other 38,000 27,000 5,000
- ------------------------------------------------------------------------------
Total revenue 157,000 1,199,000 992,000
- ------------------------------------------------------------------------------
EXPENSES:
Provision for (recovery of)
losses (notes 3 and 4) --- 155,000 (268,000)
Loss on sale of property --- --- 6,000
Share of losses in unconsolidated
investee (note 5) --- 96,000 125,000
Operating expenses from operations
of real estate owned 3,000 142,000 168,000
Operating expenses from operations
of real estate owned paid to
affiliates (note 5) --- 30,000 41,000
Expenses associated with non-operating
real estate owned 1,000 125,000 162,000
Depreciation and amortization expense --- 7,000 12,000
Interest expense --- 245,000 378,000
General and administrative,
affiliates (note 5) 162,000 286,000 203,000
General and administrative,
nonaffiliates 107,000 87,000 103,000
Mortgage investment servicing fees
paid to affiliates (note 5) --- 2,000 4,000
- ------------------------------------------------------------------------------
Total expenses 273,000 1,175,000 934,000
- ------------------------------------------------------------------------------
Income (loss) before minority interest (116,000) 24,000 58,000
Minority interest (note 5) 1,000 67,000 65,000
- ------------------------------------------------------------------------------
Net income (loss) $(115,000) $ 91,000 $ 123,000
==============================================================================
Net income (loss) per limited
partnership unit-basic and diluted $ (2.97) $ 2.35 $ 3.18
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-5
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Partners' Equity
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Total
General Limited Partners'
Partners Partners Equity
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
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
Net loss --- (115,000) (115,000)
Distributions to
limited partners --- (3,873,000) (3,873,000)
- ---------------------------------------------------------------------------
Balance (deficit) at
December 31, 1999 $ (132,000) $ 1,792,000 $ 1,660,000
==========================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-6
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (115,000) $ 91,000 $ 123,000
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Amortization of unearned loan fees --- (5,000) (2,000)
Depreciation and amortization --- 7,000 12,000
Provision for (recovery of) losses --- 155,000 (268,000)
Interest accrued to principal
on loans to affiliates --- (9,000) (37,000)
Minority interest (1,000) (67,000) (65,000)
Loss (gain) on sale of real
estate owned --- (84,000) 5,000
Share of losses in
unconsolidated investees --- 96,000 125,000
Changes in assets and liabilities:
(Increase) decrease in accrued
interest receivable --- 5,000 (1,000)
(Increase) decrease in other assets 306,000 (275,000) 45,000
Increase (decrease) in accounts
payable and accrued liabilities (373,000) 365,000 (3,000)
Decrease in payable to affiliates --- --- (1,000)
Decrease in interest payable to
affiliates on notes secured
by real estate --- (39,000) (4,000)
- ------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities (183,000) 240,000 (71,000)
- ------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on loans made
to customers, net of amounts recorded
as income in current period 142,000 932,000 24,000
Principal collected on loans made
to affiliates 100,000 1,422,000 331,000
Advances on loans
made to customers (1,000) (20,000) (21,000)
Advances on loans made
to affiliates --- (209,000) (970,000)
Proceeds from sale
of real estate owned --- 6,220,000 1,118,000
Capital expenditures
for real estate owned --- (300,000) ---
(Increase) decrease in due from
unconsolidated investee 2,000 58,000 (58,000)
- -------------------------------------------------------------------------------
Net cash provided by
investing activities 243,000 8,103,000 424,000
- -------------------------------------------------------------------------------
F-7
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows(Continued)
Years ended December 31, 1999, 1998 and 1997
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on notes payable
to affiliates --- 136,000 19,000
Principal payments
on notes payable --- (2,421,000) (934,000)
Principal payments on notes
payable to affiliates (1,000) (140,000) (132,000)
Distributions to
limited partners (3,873,000) (1,998,000) ---
- -------------------------------------------------------------------------------
Net used in
financing activities (3,874,000) (4,423,000) (1,047,000)
- -------------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents (3,814,000) 3,920,000 (694,000)
Cash and cash equivalents at
beginning of year 4,938,000 1,018,000 1,712,000
- -------------------------------------------------------------------------------
Cash and cash equivalents
at end of year $ 1,124,000 $ 4,938,000 $ 1,018,000
===============================================================================
Supplemental schedule of cash
flow information - cash paid
during the year for interest $ --- $ 245,000 $ 356,000
- -------------------------------------------------------------------------------
Supplemental schedule of noncash
investing and financing activities:
Decrease in deferred profit
on equity participation
and real estate loans
resulting from foreclosure $ --- $ 289,000 $ ---
Decrease in allowance for
possible losses on real estate
loans and real estate owned as a
result of sales and chargeoffs --- 3,223,000 1,747,000
Receipt of notes receivable as
partial repayment of
note receivable --- 584,000 ---
</TABLE>
See accompanying notes to consolidated financial statements
F-8
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
(1) SUMMARY 0F SIGINFICANT ACCOUNTING POLICIES
Business
Centennial Mortgage Income Fund (the "Partnership") initially invested in
commercial, industrial and residential income-producing real property through
mortgage investments consisting of participating first mortgage loans, other
equity participation loans, construction loans, and wrap-around and other
junior loans. The Partnership's underwriting policy for granting credit was
to fund loans secured by first and second deeds of trust on real property.
The Partnership's area of concentration is in California. In the normal
course of business, the Partnership participated with other lenders in
extending credit to single borrowers; the Partnership did this in an effort to
decrease credit concentrations and provide a greater diversification of credit
risk.
As of December 31, 1999, 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, 1997 was $8,490,000, decreasing to $-0- at year end 1998 and
1999.
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"), Grand Plaza Auto Retail,
Inc., ("Grand Plaza"), and LCR Development, Inc., ("LCR"). All of these
corporations are California corporations.
The Partnership owns a 100 percent interest in Upland, 86.25 percent interest
in BNN, 86.7 percent interest in Grand Plaza and a 50 percent interest in LCR.
Several of the Partnership's assets were transferred to these corporations, at
the Partnership's cost basis, in transactions which included no cash down with
the Partnership carrying a substantial portion of the financing. BNN and
Grand Plaza were liquidated in 1999 and 1997, respectively. Upland was never
capitalized. BNN and Grand Plaza have been consolidated in the accompanying
consolidated financial statements through 1999 and 1997, respectively. All
significant inter-company balances and transactions, including the
aforementioned transfers, have been eliminated in consolidation.
As the Partnership's ownership interest in LCR is more than 20 percent but
does not exceed 50 percent, the Partnership accounts for its ownership
F-9
interest using the equity method. The Partnership has made several loans to
LCR and its subsidiary. Under the equity method of accounting, these loans
are a component of the Partnership's investment in LCR, and therefore the
Partnership has recorded losses by LCR as a reduction of the carrying value of
these loans receivable (see note 5).
Organization
The Partnership was organized on December 13, 1983 in accordance with the
provisions of the California Limited Partnership Act. The Partnership
commenced operations in 1984. The general partners are John B. Joseph, Ronald
R. White and Centennial Corporation ("CC"), a privately-held California
corporation whose stock is owned by affiliates of Messrs. Joseph and White.
Partners' Capital Accounts
Cash Available for Distribution, as defined in the Partnership Agreement, is
to be allocated 95 percent to the limited partners and 5 percent to the
general partners until each limited partner has received an amount equal to a
12 percent non-cumulative annual return on his adjusted invested capital (as
defined in the Partnership Agreement). Thereafter, Cash Available for
Distribution is to be allocated 90 percent to the limited partners and 10
percent to the general partners. All distributions of Mortgage Reductions (as
defined in the Partnership Agreement) after the first sixty months following
the closing date of the Partnership, shall be distributed 99 percent to the
limited partners and 1 percent to the general partners, until each limited
partner has received a 12 percent cumulative annual return on his adjusted
invested capital, after which such amounts are to be distributed 85 percent to
the limited partners and 15 percent to the general partners. In order to
properly reflect the economic effect of the allocations discussed above, the
Partnership has allocated financial statements net earnings (losses) 95
percent to the limited partners and 5 percent to the general partners through
1992. The Partnership had no Cash Available for Distribution during the years
ended December 31, 1999 or 1997. Accordingly, the general partners were not
entitled to any interest in the distribution to partners paid in 1999. The
Partnership generated $240,000 in Cash Available for Distribution during 1998,
however due to the deficit balance in the general partners capital account,
they were not entitled to any interest in the distributions to partners paid
in 1998.
Based upon these and various other terms of the Partnership Agreement, it is
improbable that the general partners would be required to make any capital
contributions to the Partnership in excess of their negative capital account
as of December 31, 1992. Accordingly, since January 1, 1993, the Partnership
has allocated 100 percent of the income and losses to the limited partners.
As a result of the liquidation of the majority of the Partnership's
investments in 1998, it has become clear that the amount of the required
deficit restoration of the General Partners will not exceed $132,000 and the
capital accounts of the general partners and limited partners have been
adjusted to reflect such maximum deficit restoration.
Real Estate Loans and Allowance for Possible Loan Losses
Loans 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
F-10
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.
As of December 31, 1999, the Partnership's loan portfolio consisted of a
single loan secured by real estate. Management believes that the allowance
for possible loan losses is adequate. While management uses available
information to recognize losses on loans, future additions to the allowance
may be necessary based on changes in economic conditions.
Impaired Loans
The Partnership considers a loan to be impaired when based upon current
information and events, it believes it is probable that the Partnership will
be unable to collect all amounts due according to the contractual terms of the
loan agreement. In determining impairment, the Partnership considers large
non-homogeneous loans including nonaccrual loans, troubled debt restructuring
and performing loans which exhibit, among other characteristics, high loan-to-
value ratios, low debt-coverage ratios, or other indications that the
borrowers are experiencing increased levels of financial difficulty. The
Partnership bases the measurement of collateral-dependent impaired loans on
the fair value of the loan's collateral. The amount by which the recorded
investment of the loan exceeds the measure of the impaired loan's value is
recognized by recording a valuation allowance.
Real Estate Owned
Long-lived assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. An impairment loss is measured as
the amount by which the carrying amount of the asset exceeds the fair value of
the assets less costs to sell. Assets to be disposed of are not 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 were 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 represented the Partnership's portion
of equity from real estate loans/investments that was earned, but had not yet
been paid by the borrower. Generally, revenue is recognized when collection
of the deferred profit becomes assured. No deferred profit was recognized
during 1995, 1996 and 1997. Both the loan and associated deferred profit were
charged off during 1998.
F-11
Income Taxes
Under provisions of the Internal Revenue Code and the California Revenue and
Taxation Code, partnerships are generally not subject to income taxes. For
tax purposes, any income or losses realized are those of the individual
partners, not the Partnership. The Partnership reports certain transactions
differently for tax and financial statement purposes.
The following is a recap of current and cumulative temporary differences
between income for generally accepted accounting principles ("GAAP") and
taxable earnings:
<TABLE>
Current Temporary
Differences Partnership Corporations Total
(Unaudited) (Unaudited) (Unaudited)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
GAAP loss for the year
ended December 31, 1999 $ (114,000) $ (1,000) $ (115,000)
Accrued expenses deducted
using the cash method --- (1,000) (1,000)
Minority interest share of
losses not taxable (4,000) --- (4,000)
- ------------------------------------------------------------------------------
Taxable (loss) for
the year ended
December 31, 1999 $ (118,000) $ (2,000) $ (120,000)
==============================================================================
Taxable loss allocable to
General Partners $ ---
==============================================================================
Taxable loss per
limited partner unit $ (3.05)
==============================================================================
</TABLE>
There were no cumulative temporary differences as of December 31, 1999.
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, 1999, 1998 and 1997.
Accordingly, no tax expense or benefit has been recorded by these corporations
during the three years ended December 31, 1999. Since these corporations were
almost entirely liquidated as of December 31, 1999, 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.
F-12
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 1999, 1998 and 1997.
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. 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
Given that the Partnership is in the process of liquidation, the Partnership
has identified only one operating business segment which is the business of
asset liquidation.
(2) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures About Fair
Value of Financial Instruments" ("SFAS 107"), requires that the Partnership
disclose estimated fair values for its financial instruments as well as the
methods and significant assumptions used to estimate fair values. The
following information does not purport to represent the aggregate net fair
value of the Partnership.
The following methods and assumptions were used by the Partnership in
estimating the fair value of each class of financial instrument.
Cash and Cash Equivalents
The carrying amount, which is cost, is assumed to be the fair value because of
the liquidity of these instruments. As of December 31, 1999, the Partnership
had bank deposits at four different banks whose deposits are federally
insured. Approximately $763,000 of the Partnership's cash and cash equivalent
balance as of that same date was in excess of maximum balances covered by such
insurance.
Due From Unconsolidated Investee, Accounts Payable and Accrued Liabilities
Carrying amounts approximate fair value because of the short-term maturity of
these instruments, or they are due on demand.
F-13
Real Estate Loans Receivable - Earning
The net carrying value of the real estate loans receivable, earning, is
estimated to be fair value. Management believes the loans outstanding at
December 31, 1999 and 1998 were not impaired, were adequately secured and bear
or bore a market rate of interest. Additionally, the remaining loan matures
in less than one year. Accordingly, the loans were carried at their face
values.
Real Estate Loans Receivable from Unconsolidated Investee - Earning and
Nonearning
The net fair value of loans from unconsolidated investee is not estimable due
to the uncertainty of the amounts and timing of future payments to be made.
(3) ALLOWANCE FOR POSSIBLE LOSSES
Changes in the allowance for possible loan losses are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at
beginning of year $ --- $ 714,000 $ 982,000
Loans charged-off --- (569,000) ---
Provision for
(recovery of)
loan losses --- (145,000) (268,000)
- -----------------------------------------------------------------------------
Balance at end of year $ --- $ --- $ 714,000
=============================================================================
</TABLE>
At December 31, 1999, 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, 1999. 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 $-0- as of December 31, 1999.
There were additional investments of $-0-, $209,000 and $255,000 in impaired
loans during the years ended December 31, 1999, 1998 and 1997, respectively.
For the years ended December 31, 1999, 1998 and 1997, the Partnership
recognized interest income on these impaired loans of $-0-, $349,000, and
$96,000, 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, 1999 and 1997.
F-14
(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>
1999 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at
beginning of year $ --- $ $2,354,000 $ 4,101,000
Provision for losses,
net of recoveries --- 300,000 ---
Real estate owned
charged-off --- (2,654,000) (1,747,000)
- -----------------------------------------------------------------------------
Balance at end of year $ --- $ --- $ 2,354,000
=============================================================================
</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 $-0-, $2,000 and
$4,000 of mortgage investment servicing fees to CC in 1999, 1998 and 1997,
respectively.
As discussed in note 1, the Partnership owns 50 percent of the stock of LCR, a
corporation which has not been consolidated in the accompanying financial
statements. The balance of stock in this corporation is owned by Centennial
Mortgage Income Fund II ("CMIF II"), an affiliate. LCR invested in a joint
venture, Silverwood Homes ("Silverwood") which has constructed homes. The
Partnership has participated in making several loans to this corporation and
this joint venture. Under the equity method of accounting, these loans are a
component of the Partnership's investment in LCR, and therefore the
Partnership has recorded losses by LCR as a reduction of the carrying value of
these loans receivable. All but two of these loans were charged off in 1998.
One of the remaining two loans was repaid in 1999.
A summary of the real estate loan receivable from unconsolidated investee as
of December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Net
Principal Losses Carrying
Balance Offset Value
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
50 percent interest in
unsecured loan
from Silverwood $ 11,000 $ 11,000 $ ---
- ------------------------------------------------------------------------------
Total $ 11,000 $ 11,000 $ ---
- ------------------------------------------------------------------------------
</TABLE>
F-15
A summary of the real estate loans receivable from unconsolidated investee as
of December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Net
Principal Losses Carrying
Balance Offset Value
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ------------------------------------------------------------------------------
Total $ 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.
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.
F-16
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,
1999 and 1998 and for the years ended December 31, 1999, 1998 and 1997:
LCR Development, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
Assets 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
Cash $ 8,000 $ 11,000
Restricted cash 10,000 20,000
Real estate owned --- 119,000
Less allowance for losses on real
estate investments --- 17,000
- --------------------------------------------------------------------------
Net real estate owned --- 102,000
- --------------------------------------------------------------------------
$ 18,000 $ 133,000
==========================================================================
Liabilities and Stockholders' Deficit
- --------------------------------------------------------------------------
Notes payable to affiliates:
CMIF $ 2,782,000 $ 2,882,000
CMIF II 1,537,000 1,549,000
- --------------------------------------------------------------------------
Total notes payable 4,319,000 4,431,000
Accounts payable
and accrued liabilities 4,000 12,000
Interest payable to affiliates 2,192,000 1,837,000
Payable to affiliates 9,000 5,000
- --------------------------------------------------------------------------
Total liabilities 6,524,000 6,285,000
Stockholders' deficit (6,506,000) (6,152,000)
- --------------------------------------------------------------------------
$ 18,000 $ 133,000
==========================================================================
</TABLE>
F-17
LCR Development, Inc.
Consolidated Statements of Operations
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
- -----------------------------------------------------------------------------
Revenues
Housing sales $ 123,000 $ 1,509,000 $ 834,000
Sale of finished lots --- 1,499,000 ---
- ------------------------------------------------------------------------------
123,000 3,008,000 834,000
- ------------------------------------------------------------------------------
Costs and expenses
Cost of housing sales 118,000 1,437,000 852,000
Cost of sale of
finished lots --- 1,514,000 ---
Provision for losses on
real estate owned --- 216,000 207,000
Selling and
marketing expenses --- 66,000 131,000
General and
administrative 1,000 24,000 64,000
- ------------------------------------------------------------------------------
119,000 3,257,000 1,254,000
- ------------------------------------------------------------------------------
Operating income (loss) 4,000 (249,000) (420,000)
Interest expense 357,000 403,000 361,000
- ------------------------------------------------------------------------------
Net loss $ (353,000) $ (652,000) $ (781,000)
==============================================================================
Interest not included
in share of losses (354,000) (460,000) (532,000)
- ------------------------------------------------------------------------------
Allocable net income (loss) $ 1,000 $ (192,000) $ (249,000)
==============================================================================
Share of income (loss)
recorded $ --- $ (96,000) $ (125,000)
==============================================================================
</TABLE>
Although the Partnership owns a 50 percent interest in LCR, it holds more than
50 percent of LCR's debt. Since the Partnership 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 $2,192,000 of accrued interest payable to affiliates by LCR and
Silverwood. Accordingly, the Partnership has not recorded its share of losses
from LCR to the extent that it represents this nonaccrued interest income.
F-18
<TABLE>
<CAPTION>
Difference of Allocation of Share of Losses
1999
- ------------------------------------------------------------------------------
<S> <C>
The Partnership's 50 percent share
of LCR's stockholders' deficit
at December 31, 1999 $(3,253,000)
Cumulative interest payable by LCR
to the Partnership not accrued as
income by the Partnership 1,096,000
Loans receivable considered as part
of the Partnership's investment (a) 2,782,000
Disproportionate loss allocation (625,000)
- ------------------------------------------------------------------------------
Net loans receivable $ ---
==============================================================================
(a) The partnership has charged off $2,771,000 of these loans.
</TABLE>
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 $137,000, $242,000 and $244,000
for such services in 1999, 1998 and 1997, respectively. The Partnership also
accrued an additional $25,000 and $74,000 in severance costs paid to the
corporate general partner's employees as general and administrative,
affiliates expense during 1999 and 1998, respectively. These amounts were
paid pursuant to employment contracts that were entered into by the general
partner in order to ensure that the Partnership and several affiliated
partnerships would have an adequate staff of employees with knowledge of the
partnerships business to complete the liquidation of their assets.
During 1999, 1998 and 1997, the Partnership maintained interest-bearing
deposits with Sunwest Bank, an affiliate of the general partners through March
1999. The balances at December 31, 1998 and 1997 were $1,752,000 and $2,000,
respectively. Interest earned on such deposits for the three months ended
March 31, 1999 and the years ended December 31, 1998 and 1997 was $6,000,
$17,000 and $13,000, 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
F-19
$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 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 at December 31, 1998 reflects CMIF III's share of the remaining note
payable by the corporation to the Partnership and CMIF III which was repaid in
1999.
(6) REAL ESTATE OWNED
<TABLE>
<CAPTION>
The following is a summary of consolidated real estate owned for the years
ended December 31, 1999, 1998 and 1997:
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ --- $ 8,490,000 $11,360,000
Additions during period:
Improvements --- 300,000 ---
Deduction during period:
Real estate sold --- (6,136,000) (1,123,000)
Chargeoffs --- (2,654,000) (1,747,000)
- ------------------------------------------------------------------------------
Balance at year end $ --- $ --- $ 8,490,000
==============================================================================
</TABLE>
(7) CONTINGENCIES
Unbeknownst to the Partnership, on July 19, 1996, a default was entered
against the Partnership for failure to respond to a complaint filed on July
17, 1995 in the San Bernardino Superior Court, entitled Henry Yong Lim et al -
vs.- Cardinal Security, et al and allegedly served on the Partnership in May
1996. As shown by the proofs of service, the complaint was served on the
wrong party in 1996. The Partnership first became aware of its involvement in
this lawsuit in September 1997 when it received copies of requests for entry
F-20
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.
F-21
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
MORTGAGE LOANS ON REAL ESTATE
December 31, 1999
<TABLE>
<CAPTION>
SCHEDULE IV
<S> <C> <C> <C> <C> <C> <C> <C>
Principal
Amount
of Loan
Carrying Subject to
Final Periodic Face Amount of Delinquent
Interest Maturity Payment Prior Amount of Mortgages Principal or
Description Rate Date Terms Liens Mortgages <F1> or Interest
- ------------------------------------------------------------------------------------------------------------
Note secured by:
50 percent interest Interest only
in First Trust Balloon payments
Deed on 157 lots of $325,000 and $1,070,000 $ 541,000 $325,000
in Lancaster, CA 8% Fixed 4/23/00 $745,000 due in None (50%--$535,000)
July 1999
and April 2000
50 percent interest P +I due at $21,000 11,000 21,000
in unsecured note Prime +1% 7/1/98 maturity None (50% - 11,000)
Loss from unconsolidated investee (11,000)
- -------------------------------------------------------------------------------------------------------------
$ 541,000 $346,000
- -------------------------------------------------------------------------------------------------------------
<FN>
<F1> Aggregate cost for Federal Income Tax purposes is $541,000 at December 31, 1999.
</FN>
</TABLE>
F-22
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
MORTGAGE LOANS ON REAL ESTATE
(Continued)
December 31, 1999
<TABLE>
SCHEDULE IV (CONTINUED)
<CAPTION>
The following is a summary of activity for the years ended December 1999, 1998
and 1997.
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 782,000 $ 3,847,000 $ 3,297,000
Additions during period:
New mortgage loans/
disbursements 1,000 229,000 991,000
Other - Interest reserve,
amortization and transfer
from accrued interest --- 14,000 39,000
Deductions during period:
Collections of principal (242,000) (2,354,000) (355,000)
Charge-offs --- (569,000) ---
Offset against deferred profit
on equity participation (289,000) ---
Losses from unconsolidated
investees (96,000) (125,000)
- ------------------------------------------------------------------------------
Balance at year end $ 541,000 $ 782,000 $ 3,847,000
==============================================================================
</TABLE>
See accompanying independent auditors' report.
F-23
LCR DEVELOPMENT, INC.
A California Corporation
Consolidated Financial Statements
December 31, 1998 and 1997
(with Independent Auditors' Report Thereon)
F-24
LCR DEVELOPMENT, INC.
A California Corporation
Index to Consolidated Financial Statements
Consolidated Financial Statements Page
Independent Auditors' Report ............................. F-26
Consolidated Balance Sheet --
December 31, 1998 ....................................... F-27
Consolidated Statements of Operations --
Years ended December 31, 1998 and 1997 ................ F-28
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1998 and 1997 ................ F-29
Consolidated Statements of Cash Flows --
Years ended December 31, 1998 and 1997 ................ F-30
Notes to Consolidated Financial Statements ............... F-32
F-25
INDEPENDENT AUDITORS' REPORT
The Board of Directors
LCR Development, Inc.:
We have audited the consolidated balance sheet of LCR Development, Inc. and
subsidiary (the "Company") as of December 31, 1998 and the related statements
of operations, stockholders' equity (deficit) and cash flows for each of the
years in the two-year period ended December 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of LCR
Development, Inc. and subsidiary as of December 31, 1998, and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company has suffered recurring
losses from operations and has various notes payable past due or scheduled to
mature in 1999. These items raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
KPMG LLP
Orange County, California
March 19, 1999
F-26
LCR Development, Inc.
Consolidated Balance Sheet
<TABLE>
<CAPTION>
<S> <C> <C>
December 31,
Assets 1998
- ----------------------------------------------------------------------
Cash $ 11,000
Restricted cash 20,000
Real estate owned (note 5) 119,000
Less allowance for losses on
real estate investments (note 4) 17,000
- ----------------------------------------------------------------------
Net real estate owned 102,000
- ----------------------------------------------------------------------
$ 133,000
======================================================================
Liabilities and Stockholders' Equity (Deficit)
- ----------------------------------------------------------------------
Notes payable to affiliates:
CMIF $ 2,882,000
CMIF II 1,549,000
- ----------------------------------------------------------------------
Total notes payable (note 7) 4,431,000
Accounts payable and accrued liabilities 12,000
Interest payable to affiliates 1,837,000
Payable to affiliates (note 6) 5,000
- ----------------------------------------------------------------------
Total liabilities 6,285,000
- ----------------------------------------------------------------------
Stockholders' equity (deficit)
Common stock, no par value; 300
shares authorized; 300 shares issued
and outstanding 3,000
Accumulated deficit (6,155,000)
- ----------------------------------------------------------------------
Total stockholders'
equity (deficit) (6,152,000)
Contingencies (Note 9)
Uncertainties (Note 2)
- ----------------------------------------------------------------------
$ 133,000
======================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-27
LCR Development, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended December 31, 1998 and 1997
<S> <C> <C>
1998 1997
- ----------------------------------------------------------------------
Revenues
Housing sales $ 1,509,000 $ 834,000
Sale of finished lots 1,499,000 ---
- ----------------------------------------------------------------------
3,008,000 834,000
- ----------------------------------------------------------------------
Costs and expenses
Cost of housing sales 1,437,000 852,000
Cost of finished
lots sold 1,514,000 ---
Provision for
losses on real
estate owned (note 4) 216,000 207,000
Selling and
marketing expenses 66,000 131,000
General and
administrative 24,000 64,000
- ----------------------------------------------------------------------
3,257,000 1,254,000
- ----------------------------------------------------------------------
Operating loss (249,000) (420,000)
Interest expense (note 5) 403,000 361,000
- ----------------------------------------------------------------------
Loss before income taxes $ (652,000) $ (781,000)
- ----------------------------------------------------------------------
Income taxes (note 8) --- ---
- ----------------------------------------------------------------------
Net loss $ (652,000) $ (781,000)
======================================================================
Net loss per common share $ (2,173) $ (2,603)
======================================================================
Weighted average
number of common
shares outstanding 300 300
======================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-28
LCR Development, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Years ended December 31, 1998 and 1997
<S> <C> <C> <C>
Total
Stockholders'
Common Accumulated Equity
Stock Deficit (Deficit)
- ----------------------------------------------------------------------
Balance (deficit) at
December 31, 1996 3,000 (4,722,000) (4,719,000)
Net loss --- (781,000) (781,000)
- ----------------------------------------------------------------------
Balance (deficit) at
December 31, 1997 3,000 (5,503,000) (5,500,000)
Net loss --- (652,000) (652,000)
- ----------------------------------------------------------------------
Balance (deficit) at
December 31, 1998 $ 3,000 $ (6,155,000) $ (6,152,000)
======================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-29
LCR Development, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31, 1998 and 1997
<S> <C> <C>
1998 1997
- ----------------------------------------------------------------------
Cash flows from
operating activities:
Net loss $ (652,000) $ (781,000)
Adjustments to reconcile
net loss to cash
provided by (used in)
in) operating
operating activities:
Provision for
possible losses 216,000 207,000
Changes in assets
and liabilities:
Decrease in
organization costs 1,000 ---
Decrease (increase)
in real estate owned 2,569,000 (500,000)
Increase in interest payable 460,000 532,000
Increase (decrease) in
accounts payable and
accrued liabilities (21,000) 27,000
Increase (decrease) in
payable to affiliates (75,000) 59,000
- ----------------------------------------------------------------------
Net cash provided by
(used in) operating
activities 2,498,000 (456,000)
- ----------------------------------------------------------------------
Cash flows from investing activities -
increase in restricted cash (10,000) (10,000)
- ----------------------------------------------------------------------
Net cash used in investing
activities (10,000) (10,000)
- ----------------------------------------------------------------------
F-30
LCR Development, Inc.
Consolidated Statements of Cash Flows
(Continued)
Years ended December 31, 1998 and 1997
<CAPTION>
<S> <C> <C>
1998 1997
- ----------------------------------------------------------------------
Cash flows from
financing activities-
Repayments of
notes payable (2,740,000) ---
Advances received
on notes payable 242,000 477,000
- ----------------------------------------------------------------------
Net cash (used in)
provided by financing
activities (2,498,000) 477,000
- ----------------------------------------------------------------------
Net increase in cash --- 11,000
Cash at beginning of year 11,000 ---
- ----------------------------------------------------------------------
Cash at end of year $ 11,000 $ 11,000
======================================================================
Supplemental schedule of cash
flow information - cash paid
during the year for interest $ 64,000 ---
Supplemental schedule of noncash
investing and financing activities -
decrease in real estate owned
and related allowance for losses
due to sale of real estate owned 4,262,000 42,000
</TABLE>
See accompanying notes to consolidated financial statements
F-31
LCR DEVELOPMENT, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(1) Summary of Significant Accounting Policies
Organization
During 1993, LCR Development, Inc. ("LCR") was formed by Centennial Mortgage
Income Fund ("CMIF") and Centennial Mortgage Income Fund II ("CMIF II") to own
and operate one of their real estate assets, 179 single family lots in
Lancaster, California. During 1994, Silverwood Homes, a California general
partnership ("Silverwood"), was formed between LCR and Home Devco, Inc. ("Home
Devco") for the purpose of constructing single family homes at the real estate
project located in Lancaster. LCR contributed the 179 single family lots to
the partnership in exchange for a capital contribution credit of $2,571,594
and Home Devco contributed $100 in cash. As LCR has contributed a 99.9
percent interest, Silverwood has been consolidated in the accompanying
consolidated financial statements. All significant intercompany balances and
transactions including the aforementioned contribution, have been eliminated
in consolidation. LCR is entitled to a cumulative priority interest in cash
available for distribution from the sale of homes equal to $19,381 per lot.
Home Devco is acting as the general contractor in the construction of homes at
the project and is entitled to fifty percent of any cash available for
distribution from the sale of homes after LCR has received distributions equal
to its priority interest. Home Devco is also entitled to reimbursement of
onsite supervision costs and certain general and administrative costs.
Revenue Recognition
LCR recognizes revenue from sales of real estate when construction is
completed, an adequate down payment has been received and title to the
property sold has been transferred to the buyer.
Income Taxes
LCR is subject to taxation and accounts for income taxes under Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires an asset and liability approach to establishing
deferred tax assets and liabilities for the temporary differences between the
financial reporting basis and the tax basis of the corporation's assets and
liabilities.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
F-32
(2) Ability to Continue as a Going Concern
LCR and Silverwood had $6,285,000 in liabilities outstanding as of December
31, 1998 and had only $133,000 in net assets. Most of these liabilities are
notes that are payable to CMIF and CMIF II who have periodically agreed to
extend this debt over the past two years. The final home owned by Silverwood
closed escrow in March 1999 and the proceeds from the sale were used to repay
part of this debt. The remaining assets of LCR and Silverwood will be used to
repay a portion of their remaining debt. It is probable that LCR and
Silverwood will be unable to continue operations and that the majority of the
Company's debt as of December 31, 1998 will remain unpaid. Management
believes that it has made adjustments in the financial statements to reflect
the probable outcome of these uncertainties.
(3) Fair Value of Financial Instruments
Statement of Financial Accounting Standard No. 107 "Disclosures About Fair
Value of Financial Instruments" ("SFAS 107"), requires that LCR discloses
estimated fair values for its financial instruments as well as the methods and
significant assumptions used to estimate fair values. The following
information does not purport to represent the aggregate net fair value of LCR.
The following methods and assumptions were used by LCR in estimating the fair
value of each class of financial instrument.
Cash and Restricted Cash
The carrying amount, which is cost, is assumed to be the fair value because of
the liquidity of these instruments.
Notes Payable to Affiliates and Interest Payable to Affiliates
The fair value is not determinable due to their related party nature and
terms.
Accounts Payable and Accrued Liabilities and Payable to Affiliates
The carrying value is considered to be equal to the fair value of these
liabilities as they are short-term in nature.
(4) Allowance for Possible Losses on Real Estate Owned
Changes in the allowance for possible losses on real estate owned are as
follows:
<TABLE>
<S> <C> <C>
1998 1997
- ----------------------------------------------------------------------
Balance at beginning of year $ 4,063,000 $ 3,898,000
Real estate owned charged-off (4,262,000) (42,000)
Provision for losses 216,000 207,000
- ----------------------------------------------------------------------
Balance at end of year $ 17,000 $ 4,063,000
======================================================================
</TABLE>
F-33
(5) Real Estate Owned
Real estate owned consists of the following:
<TABLE>
<S> <C>
1998
- ----------------------------------------------------------------------
Residential lots held for development $ ---
Model home complex ---
Production homes under
construction and held for sale 119,000
- ----------------------------------------------------------------------
Sub-total 119,000
Less: allowance for possible losses (17,000)
- ----------------------------------------------------------------------
Net real estate owned $ 102,000
======================================================================
</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 two years ended December
31, 1998 was as follows:
<TABLE>
<S> <C> <C>
1998 1997
- ----------------------------------------------------------------------
Interest incurred $ 524,000 $ 568,000
Interest capitalized (121,000) (207,000)
- ----------------------------------------------------------------------
Interest expensed $ 403,000 $ 361,000
======================================================================
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 administrative costs equal to 3 percent of
budgeted gross proceeds or a maximum of $20,000 per month. Home Devco is
entitled to receive a minimum fee of $7,500 per month under the agreement, as
amended. LCR paid $25,000 and $60,000 of these costs to Home Devco and
affiliates for the years ended December 31, 1998 and 1997, respectively.
Funds were advanced from CMIF and CMIF II to meet operating expenses and fund
options on the prospective home sales. The advances were repaid from sales
proceeds during 1998. The balance at December 31, 1997 was $75,000.
F-34
(7) Notes Payable to Affiliates
<TABLE>
<CAPTION>
Notes payable to affiliates consist of the following:
(dollars in thousands)
<S> <C>
December 31,
1998
- -----------------------------------------------------------------------
Unsecured note payable to
CMIF and CMIF II related to 179 lots
in Lancaster, CA with principal and
interest payable at maturity; interest
rate of 7.75% fixed; matured
June 30, 1998. $ 2,115
Unsecured note payable to CMIF
related to 179 lots in Lancaster,
CA with principal and interest
payable at maturity; interest rate
of 7.75% fixed; matured June 30, 1998. 1,250
Note payable to CMIF and CMIF II
originally secured by first trust deed
on 179 lots in Lancaster, CA (secured
by only one remaining home at December
31, 1998); with principal and interest
due at maturity; interest at Prime
+ 1%; maturing August 1, 1999. 933
Note payable to CMIF and CMIF II
originally secured by first trust
deed on 9 lots in Lancaster, CA
with principal and interest due at
maturity; interest at Prime + 1%;
matured July 1, 1998. 45
Note payable to CMIF originally
secured by first trust deed on 9
lots in Lancaster , CA with principal
and interest due at maturity;
interest at Prime + 1%; maturing
January 1, 1999. 88
- ----------------------------------------------------------------------
Total notes payable $ 4,431
======================================================================
</TABLE>
All notes payable are past due as of December 31, 1998 or become due during
1999.
F-35
(8) Income Taxes
LCR and Silverwood file separate Federal and State income tax returns. LCR
and Silverwood have been consolidated for the following schedules.
A reconciliation of income tax expense (benefit) at the Federal statutory rate
of 34% to LCR's and Silverwood's provision for taxes is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
- ----------------------------------------------------------------------
Income tax benefit at
the statutory rate $ (180,000) $ (266,000)
State tax benefit, net
of Federal tax benefit (34,000) (48,000)
Valuation allowance 112,000 308,000
Other 110,000 6,000
- ----------------------------------------------------------------------
Total --- --- ---
======================================================================
</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.
The components of the consolidated net deferred tax asset at December 31, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
- ----------------------------------------------------------------------
Net operating loss
carryforwards $ 1,485,000 $ 156,000
Chargeoffs of real
estate not yet
deductible 442,000 ---
Provision for losses
on real estate 7,000 1,629,000
Capitalized interest 1,000 38,000
Interest not
deductible until paid 370,000 291,000
Section 263A expenses --- --- 80,000
- ----------------------------------------------------------------------
Total deferred
tax asset 2,306,000 2,194,000
Less valuation
allowance (2,306,000) (2,194,000)
- ----------------------------------------------------------------------
Net asset recorded $ --- $ --- $ ---
======================================================================
</TABLE>
F-36
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-37
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,124
<SECURITIES> 0
<RECEIVABLES> 541
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,672
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,672
<CURRENT-LIABILITIES> 12
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 1,660
<TOTAL-LIABILITY-AND-EQUITY> 1,672
<SALES> 0
<TOTAL-REVENUES> 157
<CGS> 0
<TOTAL-COSTS> 274
<OTHER-EXPENSES> ( 2)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (115)
<INCOME-TAX> 0
<INCOME-CONTINUING> (115)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (115)
<EPS-BASIC> (2.97)
<EPS-DILUTED> (2.97)
</TABLE>
