FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission File Number: 0-22520
CENTENNIAL MORTGAGE INCOME FUND
(Exact name of registrant as specified in its charter)
California 33-0053488
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1540 South Lewis Street, Anaheim, California 92805
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (714)502-8484
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Units
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate by check mark whether if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.
YES X NO
PART I
ITEM 1. BUSINESS.
(a) General Development of the Business
Centennial Mortgage Income Fund (the "Partnership"), a California Limited
Partnership, was organized on December 13, 1983. The Partnership's
registration statement became effective June 8, 1984. The general partners
are John B. Joseph, Ronald R. White and Centennial Corporation ("CC"), a
privately held corporation whose stock is owned by affiliates of Ronald R.
White and John B. Joseph.
Beginning in the fourth quarter of 1985, the Partnership ceased accepting
capital contributions and entered its operating stage of business. During the
fourth quarter of 1990, 60 months after the closing of its offering stage, the
Partnership ceased making new loans and entered the repayment stage as
required by the Partnership Agreement. As of December 31, 2000, the
Partnership had reduced its remaining assets to $1,599,000, all of which was
cash deposits with banks. There is a significant possibility that the
Partnership will distribute this cash in a final liquidation prior to the end
of calendar 2001. For additional information, see Item 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(b) Financial Information about Industry Segments
Given that the Partnership is in the process of liquidation, the Partnership
has identified only one operating business segment which is the business of
asset liquidation.
(c) Narrative Description of Business
The Partnership was formed to invest in mortgage investments consisting of
participating first mortgage loans, construction loans, and wrap-around and
other junior loans on commercial, industrial and residential income-producing
real property.
The Partnership's objectives are to preserve the Partnership's invested
capital, provide increased cash distributions to the limited partners as the
cash flow from the properties underlying mortgage investments increases over
the life of the Partnership, provide capital growth through participation in
the increased value of the underlying properties and provide liquidating
distributions as loans are repaid and cash from the sale of real estate owned
is no longer needed for development and operations of real estate owned.
From 1985 through 1990, the Partnership invested in numerous loans which were
secured by real estate in California. Due to the long term recession and
falling real estate market values in California during the early 1990's, many
of the Partnership's loans became delinquent and management of the Partnership
elected to foreclose, thereby increasing real estate owned balances. As a
result, the Partnership became a direct investor in this real estate. The
Partnership has managed its operating properties and completed certain
development processes on its raw land over the last several years in an effort
to make this real estate more marketable.
The improving real estate markets and development of the Partnership's assets
have enabled the Partnership to liquidate all of its non-cash assets. As of
December 31, 2000, the Partnership's assets consisted of $1,599,000 in cash
and cash equivalents.
Real estate owned by the Partnership reached a peak at December 31, 1993 when
its total carrying value, before allowance for possible losses, reached
$21,394,000. The real estate owned balance before allowance for possible
losses then decreased to $13,820,000 at December 31, 1994 and decreased again
to $12,349,000 at year end 1995. Real estate owned decreased again to
$11,360,000 as of December 31, 1996 and $8,490,000 as of December 31, 1997.
The Partnership sold the remainder of its real estate owned during 1998.
Real estate loans have also declined significantly in recent years. Real
estate loans totaled $6,641,000 as of December 31, 1994 and had been reduced
to only $541,000 as of December 31, 1999. The Partnership's final real estate
loans were repaid during 2000.
The liquidation of assets during 1997 and 1998 enabled the Partnership to make
a $1,998,000 cash distribution to its limited partners in August 1998 and an
additional $3,873,000 cash distribution to its limited partners in February
1999.
Risks of the year 2000 Issue
As discussed above, the Partnership is in the process of liquidating its
remaining assets. As of December 31, 1999, the Partnership held only cash and
cash equivalents, a single note secured by real estate, and $7,000 in other
non-cash assets. In light of these circumstances, the Partnership made only
the absolutely necessary modifications to existing software which were
necessitated by the year 2000 issues. The cost of these modifications was
less than $10,000.
To date, the Partnership has experienced only minor computer related problems
that are the result of the year 2000. None of these problems have caused any
significant disruption to the Partnership's operations. The Partnership does
not anticipate that it will encounter any significant problems in the coming
months nor does it anticipate that it will be required to spend any
significant amounts to correct these problems.
Cautionary Statements Regarding Forward-Looking Information
The Partnership wishes to caution readers that the forward-looking statements
contained in this Form 10-K under "Item 1. Business," "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Form 10-K involve known and unknown risks and uncertainties
which may cause the actual results, performance or achievements of the
Partnership to be materially different from any future results, performance or
achievements expressed or implied by any forward-looking statements made by or
on behalf of the Partnership. In connection with the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995, the Partnership is
filing the following cautionary statements identifying important factors that
in some cases have affected, and in the future could cause the Partnership's
actual results to differ materially from those expressed in any such forward-
looking statements.
The factors that could cause the Partnership's results to differ materially
include, but are not limited to, general economic and business conditions,
including interest rate fluctuations; success of operating initiatives;
adverse publicity; changes in business strategy; quality of management;
business abilities and judgment of personnel; availability of qualified
personnel; employee benefit costs and changes in, or the failure to comply
with government regulations.
(d) Financial Information about Foreign and Domestic Operations and Export
Sales
Not applicable.
ITEM 2. DESCRIPTION OF PROPERTY.
No properties or facilities are owned or leased by the Partnership.
ITEM 3. LEGAL PROCEEDINGS.
Unbeknownst to the Partnership, on July 19, 1996, a default was entered
against the Partnership for failure to respond to a complaint filed on July
17, 1995 in the San Bernardino Superior Court, entitled Henry Yong Lim et al -
vs.- Cardinal Security, et al and allegedly served on the Partnership in May
1996. As shown by the proofs of service, the complaint was served on the
wrong party in 1996. The Partnership first became aware of its involvement in
this lawsuit in September 1997 when it received copies of requests for entry
of default judgement totaling approximately $1,000,000. The judgements
involved both economic and non-economic damages and injuries allegedly
suffered by the plaintiffs as a result of an altercation between the
plaintiffs, other third parties and security guards employed by the
Partnership at its shopping center in Upland, California. The request for
judgement names Centennial Mortgage Income Fund Partnership as a defendant in
this action. Since the Partnership was never served with the complaint and
had no other way of knowing about this action, the Partnership retained legal
counsel to set aside the defaults and any default judgements which were
entered, due to the lack of proper service and notice. The Partnership also
tendered this action to its liability insurance carrier for legal and
liability coverage. The default judgement was set aside and the plaintiff's
appeal of the set aside ruling was denied by the Court. The Court also ruled
that the prior jury found 0% liability as to the Partnership for non-economic
damages and that the plaintiffs could only proceed to trial against the
Partnership for recovery of economic damages. In December 2000, the Court
ruled that the statute of limitations had passed and the plaintiffs were
barred from continuing the lawsuit. Although this ruling is subject to
appeal, no such appeal has been filed as of the date of this report. Based
upon evidence presented at the prior trial, Management believes that these
economic damages should not exceed $40,000. Management intends to vigorously
defend any future actions related to this matter. Management believes that
even if the plaintiff's appeal the court's recent decision and prevail in in
their appeal, the Partnership's insurance coverage and/or the security
company's insurance carrier should prevent the Partnership from suffering a
material loss from these proceedings.
There are no other pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters have been submitted to a vote of security holders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP UNITS AND RELATED SECURITY
HOLDER MATTERS.
(a) Securities Market Information
There is no market for the Partnership's limited partnership units, nor is one
expected to develop.
The Partnership units were offered by the Partnership through selected dealers
who were members of the National Association of Securities Dealers, Inc.
(b) Approximate Number of Holders of Limited Partnership Units
As of December 31, 2000, there were approximately 4,713 holders of limited
partnership units.
(c) Partnership Distributions
The Partnership paid a $1,998,000 cash distribution to limited partners in
August 1998. This distribution equaled $51.59 per limited partnership unit.
The Partnership paid a $3,873,000 cash distribution to limited partners in
February 1999. This distribution equaled $100.00 per limited partnership
unit.
Based in part upon advice from legal counsel, management intends to refrain
from making a final distribution until the possibility of any unforeseen legal
action against the Partnership becomes remote. See Item 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ITEM 6. SELECTED FINANCIAL DATA.
(dollars in thousands, except per unit data)
Years ended
- ------------------------------------------------------------------------------
12/31/00 12/31/99 12/31/98 12/31/97 12/31/96
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Total revenue $ 107 $ 157 $ 1,199 $ 992 $ 1,105
Net income (loss) (71) (115) 91 123 (2,514)
Net income (loss)
per limited partnership
unit- basic and diluted. (1.83) (2.97) 2.35 3.18 (64.91)
Cash distributions per
limited partnership unit --- 100.00 51.59 --- ---
CONSOLIDATED BALANCE
SHEET DATA:
Total loans before
allowance for losses --- 541 782 3,847 3,297
Total real estate owned
before allowance
for losses --- --- --- 8,490 11,360
Total assets 1,599 1,672 6,035 10,397 11,394
Partners' equity 1,589 1,660 5,648 7,555 7,432
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Net income (loss) and income (loss) per limited partnership unit were
$(71,000) and $(1.83) for the year ended December 31, 2000 as compared to
$(115,000) and $(2.97) for the year ended December 31, 1999 and $91,000 and
$2.35 for the year ended December 31, 1998. As a result of the liquidation of
most of the Partnership's remaining assets during 1998, there were many
changes in the components of the Partnership's statements of operations for
1999 and 2000. A detailed discussion of the significant changes in each
component of revenue and expense for each of the years in the three year
period ended December 31, 2000 is included in the following paragraphs.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, the Partnership had $1,599,000 in cash and cash
equivalents. During the year ended December 31, 2000, the Partnership's
principal sources of cash were; i) $542,000 in principal collected on loans
receivable; ii) $31,000 in current interest income on loans; and iii) $64,000
in interest income on interest bearing deposits. The Partnership's principal
uses of cash during the year ended December 31, 2000 were for $150,000 in
general and administrative costs.
Future sources of cash are expected to be from interest earned on cash
deposits.
The Partnership had no unfunded loan commitments at December 31, 2000. The
Partnership's principal capital requirements are now limited to general and
administrative costs. These commitments are expected to be paid from existing
cash balances.
Effective with the third quarter of 1991, the Partnership had suspended making
any cash distributions to partners due to a decline in liquidity and the
uncertainty of the cash requirements for existing and potential real estate
owned. Pursuant to the Partnership Agreement, 60 months after the closing of
the offering, cash proceeds from mortgage investments are no longer available
for reinvestment by the Partnership.
Through the latter part of 1997, the general partners believed that the cash
proceeds from mortgage reductions and the sale of real estate owned should be
retained by the Partnership until such time as it was assured that it had
sufficient cash to fulfill any potential operating requirements. Due to the
substantial real estate and loan receivable balances, these potential
operating costs were considered to be very significant. As a result of the
substantial decrease in loans and real estate owned which occurred during
1997, the general partners determined that the Partnership could make a
$1,998,000 distribution to its limited partners in August 1998.
As a result of the substantial sales activity which occurred in the fourth
quarter of 1998, the general partners declared and paid an additional
$3,873,000 cash distribution to limited partners in February 1999.
The general partners have had discussions with legal counsel regarding the
amount of cash balances that would be prudent to be retained by the
Partnership at this time. In light of the substantial amount of real estate
that the Partnership has held an interest in over the years, there is always
the potential for future litigation to arise, particularly in the area of
toxic contamination. Although the general partners are not aware of any
threatened litigation, or litigation that is likely to arise, they have
determined that the Partnership should retain at least $1,000,000 in cash
balances to be available to defend the Partnership in any future litigation
which may arise. It is expected that these cash balances will be retained
until such time as legal counsel advises the general partners that the
potential for any future litigation is remote.
Assuming no future litigation arises, the general partners anticipate that the
Partnership will make a cash distribution to limited partners of approximately
$600,000 during the first half of 2001 with a final distribution sometime
during the fourth quarter of 2001.
RESULTS OF OPERATIONS
The Partnership's non-cash assets declined from $9,379,000 as of December 31,
1997 to only $1,097,000 as of December 31, 1998. The Partnership's non-cash
assets declined again to $548,000 as of December 31, 1999 and to $-0- as of
December 31, 2000. The Partnership reported profits for 1998. However, as a
result of the declining non-cash assets and the costs of administering a
publicly held partnership, the Partnership reported losses of $71,000 and
$115,000 during calendar 2000 and 1999, respectively, and expects to report
another loss in 2001. The substantial reduction in non-cash assets during
1998 caused many changes in the Partnership's results of operations as
discussed below.
Interest income on loans to affiliates, including fees was $-0- for 2000,
$3,000 for 1999 and $47,000 for 1998. This income is related to earning loans
made to the Silverwood joint venture, which was constructing homes in
Lancaster, California. The decrease from 1998 to 1999 resulted from the
payoff of the last earning loan in March 1999.
Interest income on loans to nonaffiliates, including fees, was $31,000,
$49,000 and $356,000 during the years ended December 31, 2000, 1999 and 1998,
respectively. During 1998, the Partnership received payments in full, or
nearly in full, on three loans that had previously been classified as impaired
and on which interest had not been fully accrued in prior periods. As a
result, the Partnership recorded $321,000 in interest income on these loans
that had been earned in prior periods but not accrued as income. This caused
interest income on loans to nonaffiliates , including fees to be abnormally
high during 1998. In October 1998, the Partnership received two loans in
connection with the payoff of certain loans to Silverwood Homes, an
unconsolidated investee discussed in more detail below. These new loans were
the principal source of interest income on loans to nonaffiliates during 2000
and 1999. The decrease in 2000 is attributable to the loans being repaid in
October 2000.
The following sections entitled "Nonaccrual, Nonperforming Loans and Other
Loans to Affiliates" and "Real Estate Owned" provide a detailed analysis of
assets held during 1998, 1999 and 2000.
Nonaccrual, Nonperforming Loans and Other Loans to Affiliates
Loans on nonaccrual status during the year ended December 31, 1998 and 1999
are summarized below:
During 1994, the Partnership renegotiated an equity participation note with an
original committed amount of $374,000 secured by a second deed of trust on a
32,431 square foot shopping center in Corona, California. The loan provided
for interest due to be payable at loan maturity; however, due to the amount of
the senior debt and the decrease in land values, the Partnership placed the
loan on nonaccrual. The principal balance and nonaccrued interest at December
31, 1997 were $376,000 and $144,000 respectively. The Partnership had
recorded a reduction of $62,000 against the $376,000 principal balance as of
December 31, 1997 which represented previously nonaccrued interest and had
also recorded a $289,000 deferred profit in connection with this loan.
Additionally, due to the recent operating history of the property and the
large lien on the property that was senior to the Partnership's note, an
allowance for possible losses of $25,000 was also recorded against this note
during 1997. The senior note holder commenced foreclosure proceedings and the
borrower filed for protection under bankruptcy laws. Accordingly, the
Partnership charged off the balance of this note during 1998 against the
$289,000 deferred profit and $25,000 previously recorded allowance for
possible losses. The Partnership released its lien on the property in 1999
for $25,000 in connection with the refinance of the property through
bankruptcy proceedings. The Partnership recorded this $25,000 payment, which
represented a bad debt recovery, as other income in 1999.
During 1991, the Partnership sold a pad on an existing piece of real estate
owned in Corona, California and carried back financing in the amount of
$600,000. The Partnership's share of the loan was 77 percent. Due to the
loss of a major tenant, the borrower was unable to make full monthly interest
payments in accordance with the original note terms. Management worked out a
forbearance agreement with the borrower for payments equal to the net cash
flow from the property. The remaining interest due was placed on nonaccrual.
The Partnership's share of the principal balance and nonaccrued interest at
December 31, 1997 was $461,000, and $142,000, respectively. The Partnership
had recorded a $365,000 allowance for possible losses against this note.
During 1998, the Partnership accepted a $211,000 payment on this note as
payment in full in connection with the sale of the property. As a result, the
Partnership reversed $115,000 of the previously recorded allowance for
possible losses and charged off the $250,000 balance against the allowance.
During 1989, the Partnership funded a loan with an original committed amount
of $343,000 to provide land development financing in Perris, California. The
loan matured June 1, 1993 and the borrower was unable to make interest
payments or pay off the loan. Given the depressed value of the property and
the amount of the delinquent bonds and taxes, the Partnership elected to not
foreclose on this property and had established an allowance for losses of
$294,000, to fully reserve the carrying value of the note as of December 31,
1997. The principal balance and nonaccrued interest at December 31, 1997 were
$294,000 and $208,000, respectively. During 1998, the Partnership charged off
the $294,000 balance of the note against the previously recorded allowance for
possible losses.
Loans to Unconsolidated Investee
During 1994 the Partnership acquired a 50% interest in LCR Development, Inc.,
an unconsolidated subsidiary. The balance of LCR is owned by Centennial
Mortgage Income Fund II ("CMIF II "), an affiliate. LCR was formed in order
to take title to 179 residential lots in Lancaster, California through
foreclosure of a $1,250,000 secured loan held by the Partnership and a
$2,115,000 secured loan held jointly by the Partnership and CMIF II. The
Partnership assigned its interest in the $2,115,000 note to LCR in exchange
for a new note payable by LCR to the Partnership and CMIF II. LCR
subsequently: i) took title to the 179 lots through foreclosure; ii) entered
into a joint venture with Home Devco, Inc. named Silverwood Homes
("Silverwood"); and iii) contributed the 179 lots to Silverwood. The
principal purpose of the joint venture was to construct homes on the property.
From 1995 through 1998, the Partnership and CMIF II made several construction
and development loans to Silverwood and Silverwood constructed 22 homes and
sold 21 homes on the property . Originally, it was anticipated that homes
would be constructed on all 179 lots, that there would be excess cash from the
home sales after paying off the development and construction loans, and this
excess cash would be used to repay LCR for its investment in the joint
venture. LCR would then be able to use this anticipated excess cash from
Silverwood's home sales to repay the Partnership and CMIF II for the
$1,250,000 and $2,115,000 loans.
LCR reported substantial net losses, principally due to the continuing decline
in value of the lots, from 1995 through 1997. As of December 31, 1997, the
Partnership had reduced its share of the carrying value of the$1,250,000 and
$2,115,000 loans to $-0- and had reduced the carrying value of $2,374,000 in
development and construction loans by $381,000 to $1,993,000. These
reductions were made by applying the Partnership's share of losses from
unconsolidated investee that it had recorded, against the carrying value of
the loans.
During 1998, Silverwood stopped constructing homes and all but one of the
remaining homes that had been constructed were sold. Additionally, all of the
undeveloped lots were sold. The Partnership funded additional advances of
$209,000 on the development and construction loans in 1998. The Partnership
also recorded an additional $96,000 in losses from unconsolidated investee
during 1998 and received cash payments totaling $1,422,000 against these
loans. Additionally, the Partnership received two notes receivable totaling
$584,000 from an unaffiliated party as a partial repayment of the development
loan in connection with the sale of the remaining 157 lots in October 1998.
These new notes were secured by the 157 lots sold. These transactions left
the Partnership with a net carrying value of its loans to Silverwood of
$100,000 as of December 31, 1998.
During 1999, Silverwood sold its final home and made payments totaling
$100,000 to the Partnership out of cash generated from this sale.
Real Estate Owned
The Partnership liquidated its remaining real estate owned during 1998. A
description of the Partnership's principal real estate owned and loan
classified as insubstance foreclosure during the year ended December 31, 1998
follows:
Shopping Center in Upland, California
During the third quarter of 1988, the Partnership foreclosed on a loan secured
by this project. The Partnership originally committed $5,600,000 for the
rehabilitation of a 33,327 square foot retail center and construction of an
automotive service facility in Upland, California. Cost overruns and
construction delays prevented the borrower from selling the project and
thereby performing on the loan. The property's carrying value before
allowance for possible losses was $4,628,000 at December 31, 1997. The
property was encumbered by a note of $2,421,000, secured by a first trust deed
on the property. The Partnership had recorded a $921,000 allowance for losses
related to this property as of December 31, 1997. The Partnership reversed
$145,000 of this provision during the first quarter of 1998. The property
generated approximately $506,000 and $431,000 in net operating income before
debt service during 1997 and 1996, respectively. This property was sold in
November 1998. The sale generated net cash proceeds of $3,858,000 after
selling costs and resulted in a $6,000 gain on sale. The $2,421,000 debt
secured by the property was repaid from the sales proceeds.
19 Acres in Sacramento, California
During the third quarter of 1991, the Partnership took a deed in lieu of
foreclosure on a second trust deed secured by 19 acres of undeveloped land in
Sacramento, California. The property is located in the North Natomas area and
is zoned for light-industrial commercial use. The property was encumbered by a
$900,000, 12 percent fixed interest rate note payable secured by a first trust
deed on the property which was repaid in December 1997. At December 31, 1997,
the carrying value before allowance for possible losses of this asset was
$2,822,000 and the Partnership had recorded a $1,134,000 allowance for losses
related to this project. The Partnership recorded additional provisions for
losses totaling $445,000 during the first three quarters of 1998. In December
1998, this property was sold for $1,600,000, net of selling costs. The sale
agreement required that the Partnership establish a $300,000 escrow account
out of the sales proceeds from which the buyer could withdraw amounts to pay
for certain specified development work to be done to the property. All of the
funds in this escrow account were used to pay for development costs incurred
during 1999 and the Partnership now has no further obligations related to this
property. The sale resulted in a $57,000 gain on sale.
12 Condominiums in Oxnard, California
During 1990, the Partnership funded a loan secured by a first trust deed with
an original committed amount of $3,000,000 for the construction of 12
condominiums in Oxnard, California. The borrower signed over control to the
second trust deed holder in December 1992 and the second trust deed holder, an
affiliate, abandoned the property. The Partnership then controlled the
property and received 100 percent of all sales proceeds net of selling costs.
As a result, the Partnership recorded an insubstance foreclosure on these 12
condominiums. During 1997, the Partnership sold one condominium, bringing the
cumulative sales total to eight units. The Partnership recorded a $1,000 gain
on the 1997 sale. The remaining four units were sold and closed escrow during
the first quarter of 1998. The 1998 sales generated approximately $762,000 in
net cash proceeds to the Partnership and resulted in a gain on sale of
$21,000. The carrying value before allowance for possible losses at December
31, 1997 was $1,040,000 and the Partnership had recorded a $299,000 allowance
for losses related to this project as of the same date.
Interest on Interest-Bearing Deposits
Interest on interest-bearing deposits represents interest earned on
Partnership funds invested, for liquidity, in time certificate and money
market deposits. Interest earned on interest-bearing deposits was $64,000 in
2000, $67,000 in 1999 and $83,000 in 1998. The decrease in 1999 was primarily
attributable to a decline in average cash balances held by the Partnership
which resulted from the $3,873,000 distribution to limited partners in
February 1999.
Income from Operations of Real Estate Owned
As discussed above, the Partnership liquidated its remaining real estate owned
during 1998. Accordingly, there was no income from operations of real estate
owned during 1999 or 2000. Income from operations of real estate owned for
1998 consists of operating revenues of $602,000 from the Upland Shopping
Center which was sold in November 1998.
Provision for Possible Losses
The provision for possible losses was $30,000 in 2000 and $155,000 in 1998.
There was no comparable provision during 1999. The 2000 provision relates to
a discounted payoff of the remaining loans held by the Partnership. The 1998
provision is comprised of reversals totaling $290,000, $145,000 of which was
on two loans which were repaid during 1998, and $145,000 of which was related
to the Upland Shopping center which was sold in 1998. These reversals were
offset by an additional provision of $445,000 which was recorded against the
19 acres in Sacramento.
Other Expenses
The Partnership has invested in corporations in which it has less than a
majority ownership and accounts for these investments using the equity method.
The Partnership's share of losses in unconsolidated investees was $96,000 for
1998. There was no comparable amount reported in 2000 or 1999. The 1998
share of losses consist primarily of operating losses from the sale of homes
and finished lots recorded by LCR. The Partnership's remaining investment in
and loans receivable from this unconsolidated investee has been reduced to
$-0- as of December 31, 1999 and 2000.
As discussed above, the Partnership liquidated its remaining real estate owned
during 1998. Accordingly, the only operating expenses from operations of real
estate owned during 1999 were $3,000 in refunds of common area maintenance
billings related to the Upland Shopping Center which were determined after the
1998 financials had been issued. Operating expenses from operations of real
estate owned were $142,000 for 1998. These expenses were associated with the
Upland Shopping Center. The decrease in 1999 can be attributed to the sale of
the Upland Shopping Center in November 1998.
Operating expenses from operations of real estate owned paid to affiliates
were $-0- for 2000 and 1999 and $30,000 for 1998. The expenses consist of
property management fees paid to affiliates of the general partners. The
decrease in 1999 is due to the sale of the Upland Shopping center in November
1998.
Expenses associated with non-operating real estate owned were $-0- in 2000,
$1,000 in 1999 and $125,000 in 1998. The expenses are primarily related to
the 19 acres in Sacramento, a 23 acre parcel previously owned in Riverside and
the condominiums in Oxnard. These costs include property taxes of $99,000
during 1998. The decrease for 1999 is due the sale of the Partnership's
remaining real estate during 1998.
Depreciation and amortization expense for 1998 consists of $7,000 in
depreciation on office furniture and equipment which were fully depreciated at
the end of 1998.
Interest expense was $245,000 for 1998 and represented interest related to the
underlying debt on the Upland Shopping Center. The decrease for 1999 is
attributable to the sale of the Upland Shopping center and the associated
repayment of debt which occurred in November 1998.
General and administrative expenses, affiliates totaled $83,000 for 2000,
$162,000 for 1999 and $286,000 for 1998. These expenses are primarily salary
allocation reimbursements paid to affiliates for the management of the
Partnership's assets. The 1998 amount included $74,000 in accrued severance
pay while the 1999 amount included only $25,000 in accrued severance pay. The
balance of the decrease for 1999 is primarily attributable to a layoff of the
majority of the employees of the general partner in March 1999 which was in
response to the substantial decline in assets being managed by the general
partners. The further decrease in 2000 is partly attributable to this layoff
which did not occur until part way through 1999 and partly due to the further
reduction of time spent on administering the Partnership.
General and administrative expenses, nonaffiliates totaled $65,000 for 2000,
$107,000 for 1999 and $87,000 for 1998. The decrease for 2000 is primarily
attributable to a decrease in accounting fees and investor reporting costs.
The increase for 1999 is primarily attributable to an increase in accounting
fees and investor reporting costs.
Mortgage investment servicing fees paid to affiliates were $2,000 in 1998.
No fees of this nature were paid in 1999 or 2000. These fees consist of
amounts paid to Centennial Corporation for servicing the Partnership's loan
portfolio.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment,
(b) a hedge of the exposure to variable cash flows of a forecasted
transaction or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available for sale security or a foreign-currency-denominated forecasted
transaction. Under SFAS 133, an entity that elects to apply hedge accounting
is required to establish at the inception of the hedge the method it will use
for assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods
must be consistent with the entity's approach to managing risk. The adoption
of this pronouncement by the Partnership had no effect on its financial
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since the Partnership does not invest in any derivative financial instruments
or enter into any activities involving foreign currencies, its market risk
associated with financial instruments is limited to the effect that changing
domestic interest rates might have on the fair value of its bank deposits.
As of December 31, 2000, the Partnership held only fixed rate bank deposits
with carrying values totaling $1,599,000. The bank deposits all had
maturities of less than ninety days. The fair value of these assets was
estimated to be equal to their carrying values as of December 31, 2000.
Management currently intends to hold the remaining fixed rate assets until
their respective maturities. Accordingly, the Partnership is not exposed to
any material cash flow or earnings risk associated with these assets. Given
the relatively short-term maturities of these assets, management does not
believe the Partnership is exposed to any significant market risk related to
the fair value of these assets.
The Partnership had no interest bearing indebtedness outstanding as of
December 31, 2000. Accordingly, the Partnership is not exposed to any market
risk associated with its liabilities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedule attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON REPORTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of General Partners
The Partnership is managed by its general partners. The individual general
partners' principal occupations and affiliations during the last five years
are described in the following table. The general partners devote to the
affairs of the Partnership such portion of their time as they consider
necessary for the effective supervision of its affairs.
Name, Age and Position
Principal Occupation and
Affiliation during Last Five Years
- -----------------------------------------------------------------------------
John B. Joseph
Age 62
General Partner
John B. Joseph is currently Vice Chairman of the Board of Directors and Vice
President of Centennial Corporation. He has held these positions since 1983.
Mr. Joseph also has served, in the following capacities during the past five
years: he was on the board of directors for West Coast Bancorp ("WCB"), a
publicly held bank holding company operating in California from its inception
in 1981 through February 1999; he was Chairman of the Board of Directors of
WCB since its inception in 1981 and CEO from April 1991 until 1998. Mr. Joseph
has also been general partner of various public and private limited
partnerships engaged in real estate development and lending activities.
Mr. Joseph has 30 years of experience in asset management in both securities
and real estate. Mr. Joseph has worked in all areas of real estate. In the
past, Mr. Joseph has been engaged in the syndication and management of over
$100 million worth of income property, including industrial complexes,
shopping centers, business centers, office buildings, commercial properties
and residential units.
Ronald R. White
Age 54
General Partner
Ronald R. White is currently President and CEO of Centennial Corporation. He
has held these positions since 1983. He was also Executive Vice President and
Vice Chairman of the Board of Directors of WCB until 1998. Mr. White served
in these capacities since April 1987. Mr. White also serves, or has served,
in the following capacities during the past five years: general partner of
various public and private limited partnerships engaged in real estate
development and lending activities.
Mr. White's career spans the financial and management fields in both
securities and real estate. Mr. White has 28 years of experience in asset
management. In the past, Mr. White has been engaged in the syndication and
management of over $100 million worth of income property including industrial
complexes, shopping centers, business centers, office buildings, commercial
properties, and residential units.
Centennial Corporation ("CC"), a privately held corporation, whose stock is
owned by affiliates of Ronald R. White and John B. Joseph, was voted in as new
general partner in 1993. CC was incorporated in 1983 to engage in the real
estate lending business and to provide consulting services.
Identification of Executive Officers
The Partnership does not have officers as such. The affairs of the
Partnership are managed by the general partners noted above.
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
The following table summarizes the types and recipients of compensation paid
and to be paid to the general partners and affiliates by the Partnership.
Amount Earned/
Type of Reimbursable for the
Compensation & Year Ended
Name of Entity Description of Payment December 31, 2000
- ----------------------------------------------------------------------------
Operating Stage:
Application and An amount up to a maximum of 3 percent $ ---
commitment fees of the gross proceeds of the offering
- - the general on any single mortgage investment, and
partner or an aggregate maximum of 7 percent
affiliates of the gross proceeds of the offering,
payable to the general partners or
affiliates. The application and
commitment fees are payable solely from
borrowers and prospective borrowers and
not directly from the proceeds of the
offering.
General partners' The general partners or affiliates $ 83,000(1)
reimbursable shall be entitled to reimbursement
expenses - general for certain expenses, subject to
partner or the conditions of the Partnership
affiliates Agreement
General partners' A 5 percent interest in cash flow $ ---
interest in cash available for distribution for any
distributions year until all limited partnership
- - general unit holders have received an amount
partners or equal to a 12 percent non-cumulative
affiliates annual return on their adjusted
invested capital, and 10 percent of
the balance of any cash flow available
for distribution for such year
Mortgage 1/4 of 1 percent of the maximum amount $ ---
investment funded or to be funded by the Partnership
servicing fees on mortgage investment serviced by CC
Repayment Stage:
General partners' One percent of mortgage reductions $ ---
share of until all limited partners have
mortgage received an amount equal to their
reductions adjusted invested capital and cumulative
- - general distributions (including cash flow
partners or available for distribution) equal to a
affiliates 12 percent annual return with respect
to their adjusted invested capital, and
15 percent of the balance of any
mortgage reductions
(1) Such reimbursable expenses include salaries and related salary expenses
for services which could be performed directly for the Partnership by
independent parties such as legal, clerical, accounting, financial reporting,
governmental reporting, transfer agent, data processing and duplication
services. Such reimbursement of expenses will be made regardless of whether
any distributions are made to the limited partners.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
No persons are known by the Partnership to own beneficially more than 5
percent of the limited partnership units at December 31, 2000.
(b) Security Ownership of Management
The percent of units owned by Management outstanding is less than 1 percent.
Name and address Nature and Number of Percent of
of Beneficial Owner Units Outstanding Units Outstanding
- ---------------------------------------------------------------------------
Ronald R. White
1540 S. Lewis St.
Anaheim, CA 92805 Limited partnership units: 1 ---
(c) Change in Control
The Partnership knows of no contractual arrangements which may at a subsequent
date result in a change of control of the Partnership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This disclosure is made in note 5 of the Notes to the Consolidated Financial
Statements which is incorporated in this filing.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (a)(2) - See Index to Consolidated Financial Statements and
Schedule attached hereto.
(a)(3) - Exhibits.
(3) & (4) Articles of Incorporation and Bylaws
The Amended Limited Partnership Agreement
Incorporated by reference to Exhibit A to the Partnership's
Prospectus contained in the Partnership's registration
Statement on Form Form S-11 (Commission File No. 0-22520)
Dated June 8, 1984, as supplemented and filed under the Securities
Act of 1933
(b)(4) - Reports on Form 8-K.
None.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A California Limited Partnership
By:/s/John B. Joseph
_________________________________
John B. Joseph
General Partner March 30, 2001
By:/s/Ronald R. White
_________________________________
Ronald R. White
General Partner March 30, 2001
By: CENTENNIAL CORPORATION
General Partner
/s/John B. Joseph
_________________________________
John B. Joseph
Executive Vice President March 30, 2001
/s/Ronald R. White
_________________________________
Ronald R. White
President March 30, 2001
/s/Joel H. Miner
_________________________________
Joel H. Miner
Chief Financial Officer March 30, 2001
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
ANNUAL REPORT
Form 10-K
Consolidated Financial Statements
Items 8, 14(a)(1) and 14(a)(2)
December 31, 2000, 1999 and 1998
(With Independent Auditors' Report Thereon)
F-1
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Items 8, 14(a)(1) and 14(a)(2)
Index to Consolidated Financial Statements and Schedule
Consolidated Financial Statements Page
Independent Auditors' Report F-3
Consolidated Balance Sheets --
December 31, 2000 and 1999 F-4
Consolidated Statements of Operations --
Years ended December 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Partners' Equity --
Years ended December 31, 2000, 1999 and 1998 F-6
Consolidated Statements of Cash Flows --
Years ended December 31, 2000, 1999 and 1998 F-7
Notes to Consolidated Financial Statements F-9
Schedule
Schedule IV - Mortgage Loans on Real Estate F-21
All other schedules are omitted as the required information is inapplicable,
or the information is presented in the consolidated financial statements or
notes thereto.
F-2
INDEPENDENT AUDITORS' REPORT
To the General Partners
Centennial Mortgage Income Fund:
We have audited the consolidated financial statements of Centennial Mortgage
Income Fund, a limited partnership, and subsidiaries as listed in the
accompanying index. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement schedule as
listed in the accompanying index. These consolidated financial statements and
financial statement schedule are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Centennial
Mortgage Income Fund and subsidiaries as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
KPMG LLP
Orange County, California
February 26, 2001
F-3
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Balance Sheets
December 31, 2000 and 1999
ASSETS 2000 1999
- ------------------------------------------------------------------------------
Cash and cash equivalents $ 1,599,000 $ 1,124,000
Real estate loans
receivable, earning --- 541,000
Due from unconsolidated investee --- 7,000
- ------------------------------------------------------------------------------
$ 1,599,000 $ 1,672,000
==============================================================================
LIABILITIES AND PARTNERS' EQUITY
- ------------------------------------------------------------------------------
Accounts payable and
accrued liabilities 10,000 12,000
- ------------------------------------------------------------------------------
Total liabilities 10,000 12,000
- ------------------------------------------------------------------------------
Partners' equity (deficit)
-- 38,729 limited partnership
units outstanding in 2000 and 1999
General partners (132,000) (132,000)
Limited partners 1,721,000 1,792,000
- ------------------------------------------------------------------------------
Total partners' equity 1,589,000 1,660,000
Contingencies (note 7)
- ------------------------------------------------------------------------------
$ 1,599,000 $ 1,672,000
==============================================================================
See accompanying notes to consolidated financial statements
F-4
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Operations
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
- ----------------------------------------------------------------------------
REVENUE:
Interest on loans to affiliates,
including fees (note 5) $ --- $ 3,000 $ 47,000
Interest on loans to
nonaffiliates, including fees 31,000 49,000 356,000
Interest on interest-bearing
deposits (note 5) 64,000 67,000 83,000
Gain on sale of property --- --- 84,000
Income from operations
of real estate owned --- --- 602,000
Other 12,000 38,000 27,000
- ------------------------------------------------------------------------------
Total revenue 107,000 157,000 1,199,000
- ------------------------------------------------------------------------------
EXPENSES:
Provision for losses (notes 3 and 4) 30,000 --- 155,000
Share of losses in unconsolidated
investee (note 5) --- --- 96,000
Operating expenses from operations
of real estate owned --- 3,000 142,000
Operating expenses from operations
of real estate owned paid to
affiliates (note 5) --- --- 30,000
Expenses associated with non-operating
real estate owned --- 1,000 125,000
Depreciation and amortization expense --- --- 7,000
Interest expense --- --- 245,000
General and administrative,
affiliates (note 5) 83,000 162,000 286,000
General and administrative,
nonaffiliates 65,000 107,000 87,000
Mortgage investment servicing fees
paid to affiliates (note 5) --- --- 2,000
- ------------------------------------------------------------------------------
Total expenses 178,000 273,000 1,175,000
- ------------------------------------------------------------------------------
Income (loss) before minority interest (71,000) (116,000) 24,000
Minority interest (note 5) --- 1,000 67,000
- ------------------------------------------------------------------------------
Net income (loss) $ (71,000) $ (115,000) $ 91,000
==============================================================================
Net income (loss) per limited
partnership unit-basic and diluted $ (1.83) $ (2.97) $ 2.35
==============================================================================
See accompanying notes to consolidated financial statements
F-5
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Partners' Equity
Years ended December 31, 2000, 1999 and 1998
Total
General Limited Partners'
Partners Partners Equity
- ---------------------------------------------------------------------------
Balance (deficit) at
December 31, 1997 (525,000) 8,080,000 7,555,000
Net income --- 91,000 91,000
Distributions to
limited partners --- (1,998,000) (1,998,000)
Reduction in general
partner deficit capital
account (note 1) 393,000 (393,000) ---
- ---------------------------------------------------------------------------
Balance (deficit) at
December 31, 1998 (132,000) 5,780,000 5,648,000
Net loss --- (115,000) (115,000)
Distributions to
limited partners --- (3,873,000) (3,873,000)
- ---------------------------------------------------------------------------
Balance (deficit) at
December 31, 1999 $ (132,000) $ 1,792,000 $ 1,660,000
Net loss --- (71,000) (71,000)
- ---------------------------------------------------------------------------
Balance (deficit) at
December 31, 2000 $ (132,000) $ 1,721,000 $ 1,589,000
==========================================================================
See accompanying notes to consolidated financial statements
F-6
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
- ------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (71,000) $ (115,000) $ 91,000
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Amortization of unearned loan fees --- --- (5,000)
Depreciation and amortization --- --- 7,000
Provision for losses 30,000 --- 155,000
Interest accrued to principal
on loans to affiliates (31,000) --- (9,000)
Minority interest --- (1,000) (67,000)
Loss (gain) on sale of real
estate owned --- --- (84,000)
Share of losses in
unconsolidated investees --- --- 96,000
Changes in assets and liabilities:
Decrease in accrued
interest receivable --- --- 5,000
(Increase) decrease in other assets --- 306,000 (275,000)
Increase (decrease) in accounts
payable and accrued liabilities (2,000) (373,000) 365,000
Decrease in interest payable to
affiliates on notes secured
by real estate --- --- (39,000)
- ------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities (74,000) (183,000) 240,000
- ------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on loans made
to customers, net of amounts recorded
as income in current period 542,000 142,000 932,000
Principal collected on loans made
to affiliates --- 100,000 1,422,000
Advances on loans made to customers --- (1,000) (20,000)
Advances on loans made to affiliates --- --- (209,000)
Proceeds from sale of real estate owned --- --- 6,220,000
Capital expenditures
for real estate owned --- --- (300,000)
(Increase) decrease in due from
unconsolidated investee 7,000 2,000 58,000
- ------------------------------------------------------------------------------
Net cash provided by
investing activities 549,000 243,000 8,103,000
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
F-7
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Consolidated Statements of Cash Flows(Continued)
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
- -----------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on notes payable
to affiliates --- --- 136,000
Principal payments
on notes payable --- --- (2,421,000)
Principal payments on notes
payable to affiliates --- (1,000) (140,000)
Distributions to
limited partners --- (3,873,000) (1,998,000)
- ------------------------------------------------------------------------------
Net used in
financing activities --- (3,874,000) (4,423,000)
- ------------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents 475,000 (3,814,000) 3,920,000
Cash and cash equivalents at
beginning of year 1,124,000 4,938,000 1,018,000
- ------------------------------------------------------------------------------
Cash and cash equivalents
at end of year $ 1,599,000 $ 1,124,000 $ 4,938,000
==============================================================================
Supplemental schedule of cash
flow information - cash paid
during the year for interest $ --- $ --- $ 245,000
- ------------------------------------------------------------------------------
Supplemental schedule of noncash
investing and financing activities:
Decrease in deferred profit
on equity participation
and real estate loans
resulting from foreclosure $ --- $ --- $ 289,000
Decrease in allowance for
possible losses on real estate
loans and real estate owned as a
result of sales and chargeoffs --- --- 3,223,000
Receipt of notes receivable as
partial repayment of
note receivable --- --- 584,000
See accompanying notes to consolidated financial statements
F-8
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
Notes to Consolidated Financial Statements
December 31, 2000, 1999, and 1998
(1) SUMMARY 0F SIGINFICANT ACCOUNTING POLICIES
Business
Centennial Mortgage Income Fund (the "Partnership") initially invested in
commercial, industrial and residential income-producing real property through
mortgage investments consisting of participating first mortgage loans, other
equity participation loans, construction loans, and wrap-around and other
junior loans. The Partnership's underwriting policy for granting credit was
to fund loans secured by first and second deeds of trust on real property.
The Partnership's area of concentration is in California. In the normal
course of business, the Partnership participated with other lenders in
extending credit to single borrowers; the Partnership did this in an effort to
decrease credit concentrations and provide a greater diversification of credit
risk.
As of December 31, 2000, all of the loans secured by operating properties have
been repaid to the Partnership. However, during the early 1990's, real estate
market values for undeveloped land and commercial real estate in California
declined severely. As the loans secured by undeveloped land and certain
operating properties became delinquent, management of the Partnership elected
to foreclose on certain of these loans, thereby increasing real estate owned
balances. As a result, the Partnership became a direct investor in this real
estate and managed operating properties and developed raw land until such time
as the Partnership was able to sell this real estate owned. The real estate
owned balance before allowance for possible losses at December 31, 1997 was
$8,490,000, decreasing to $-0- at year end 1998 through 2000.
Basis of Presentation
The Partnership formed several subsidiaries to own and operate certain of its
real estate assets. The corporations formed were Upland Foothill Retail,
Inc., ("Upland"), Grand Plaza Auto Retail, Inc., ("Grand Plaza"), and LCR
Development, Inc., ("LCR"). All of these corporations are California
corporations.
The Partnership owned a 100 percent interest in Upland, 86.7 percent interest
in Grand Plaza and a 50 percent interest in LCR. Several of the Partnership's
assets were transferred to these corporations, at the Partnership's cost
basis, in transactions which included no cash down with the Partnership
carrying a substantial portion of the financing. Grand Plaza was liquidated
in 1999. Upland was never capitalized. Grand Plaza has been consolidated in
the accompanying consolidated financial statements through 1999. All
significant inter-company balances and transactions, including the
aforementioned transfers, have been eliminated in consolidation.
As the Partnership's ownership interest in LCR was more than 20 percent but
does not exceed 50 percent, the Partnership has accounted for its ownership
F-9
interest using the equity method. The Partnership made several loans to LCR
and its subsidiary. Under the equity method of accounting, these loans were a
component of the Partnership's investment in LCR, and therefore the
Partnership recorded losses by LCR as a reduction of the carrying value of
these loans receivable (see note 5).
Organization
The Partnership was organized on December 13, 1983 in accordance with the
provisions of the California Limited Partnership Act. The Partnership
commenced operations in 1984. The general partners are John B. Joseph, Ronald
R. White and Centennial Corporation ("CC"), a privately-held California
corporation whose stock is owned by affiliates of Messrs. Joseph and White.
Partners' Capital Accounts
Cash Available for Distribution, as defined in the Partnership Agreement, is
to be allocated 95 percent to the limited partners and 5 percent to the
general partners until each limited partner has received an amount equal to a
12 percent non-cumulative annual return on his adjusted invested capital (as
defined in the Partnership Agreement). Thereafter, Cash Available for
Distribution is to be allocated 90 percent to the limited partners and 10
percent to the general partners. All distributions of Mortgage Reductions (as
defined in the Partnership Agreement) after the first sixty months following
the closing date of the Partnership, shall be distributed 99 percent to the
limited partners and 1 percent to the general partners, until each limited
partner has received a 12 percent cumulative annual return on his adjusted
invested capital, after which such amounts are to be distributed 85 percent to
the limited partners and 15 percent to the general partners. In order to
properly reflect the economic effect of the allocations discussed above, the
Partnership has allocated financial statements net earnings (losses) 95
percent to the limited partners and 5 percent to the general partners through
1992. The Partnership had no Cash Available for Distribution during the years
ended December 31, 2000 or 1999. Accordingly, the general partners were not
entitled to any interest in the distribution to partners paid in 1999. The
Partnership generated $240,000 in Cash Available for Distribution during 1998,
however due to the deficit balance in the general partners capital account,
they were not entitled to any interest in the distributions to partners paid
in 1998.
Based upon these and various other terms of the Partnership Agreement, it is
improbable that the general partners would be required to make any capital
contributions to the Partnership in excess of their negative capital account
as of December 31, 1992. Accordingly, since January 1, 1993, the Partnership
has allocated 100 percent of the income and losses to the limited partners.
As a result of the liquidation of the majority of the Partnership's
investments in 1998, it has become clear that the amount of the required
deficit restoration of the General Partners will not exceed $132,000 and the
capital accounts of the general partners and limited partners have been
adjusted to reflect such maximum deficit restoration.
Real Estate Loans and Allowance for Possible Loan Losses
Loans were reported at the principal amount outstanding, net of unearned
F-10
income and the allowance for possible loan losses. Interest accrual was
discontinued when, in the opinion of management, its collection was deemed
doubtful. The allowance for possible loan losses was established through a
provision for possible losses charged to expense. Loans were charged against
the allowance for possible loan losses when management believed that the
collectibility of principal was unlikely.
Impaired Loans
The Partnership considered a loan to be impaired when based upon current
information and events, it believed it was probable that the Partnership would
be unable to collect all amounts due according to the contractual terms of the
loan agreement. In determining impairment, the Partnership considered large
non-homogeneous loans including nonaccrual loans, troubled debt restructuring
and performing loans which exhibited, among other characteristics, high loan-
to-value ratios, low debt-coverage ratios, or other indications that the
borrowers were experiencing increased levels of financial difficulty. The
Partnership based the measurement of collateral-dependent impaired loans on
the fair value of the loan's collateral. The amount by which the recorded
investment of the loan exceeded the measure of the impaired loan's value was
recognized by recording a valuation allowance.
Real Estate Owned
Long-lived assets to be disposed of were reported at the lower of the carrying
amount or fair value less costs to sell. An impairment loss was measured as
the amount by which the carrying amount of the asset exceeded the fair value
of the assets less costs to sell. Assets to be disposed of were not
depreciated while they were held for disposal. Estimated fair values were
determined by using appraisals, discounted cash flows and/or other valuation
techniques. The actual market price of real estate can only be determined by
negotiation between independent parties in a sales transaction. The
Partnership considered all real estate owned as held for sale during 1998 and
1997.
The Partnership considered collateral for a loan "insubstance" foreclosed only
when the borrower actually surrendered the collateral to the creditor and the
creditor received physical possession of the borrower's assets.
Income Taxes
Under provisions of the Internal Revenue Code and the California Revenue and
Taxation Code, partnerships are generally not subject to income taxes. For
tax purposes, any income or losses realized are those of the individual
partners, not the Partnership. The Partnership reports certain transactions
differently for tax and financial statement purposes.
The following is a recap of current and cumulative temporary differences
between income for generally accepted accounting principles ("GAAP") and
taxable earnings:
F-11
Current Temporary
Differences Partnership Corporations Total
(Unaudited) (Unaudited) (Unaudited)
- ------------------------------------------------------------------------------
GAAP loss for the year
ended December 31, 2000 $ (71,000) $ --- $ (71,000)
Minority interest share of
losses not taxable (11,000) --- (11,000)
- ------------------------------------------------------------------------------
Taxable (loss) for the year
ended December 31, 2000 $ (82,000) $ --- $ (82,000)
==============================================================================
Taxable loss allocable to
General Partners $ ---
==============================================================================
Taxable loss per
limited partner unit $ (2.12)
==============================================================================
There were no cumulative temporary differences as of December 31, 2000.
The last operating subsidiary corporation was liquidated during 1999.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents includes cash
and interest-bearing deposits with original maturities of three months or
less.
Net Loss Per Limited Partnership Unit
Net loss per limited partnership unit for financial statement purposes was
based on the weighted average number of limited partnership units outstanding
of 38,729 in 2000, 1999 and 1998.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amount
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amount of revenue
and expenses during the reporting period. Actual results could differ from
those estimates.
Revenue Recognition
Revenue from rental income on real estate owned is recognized on a straight-
line basis over the life of the lease when payments become due under operating
leases. The Partnership has recognized gains or losses on the sale of real
estate owned as the gains or losses are determinable and the earnings process
is complete.
F-12
Financial Information about Industry Segments
Given that the Partnership is in the process of liquidation, the Partnership
has identified only one operating business segment which is the business of
asset liquidation.
(2) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures About Fair
Value of Financial Instruments" ("SFAS 107"), requires that the Partnership
disclose estimated fair values for its financial instruments as well as the
methods and significant assumptions used to estimate fair values. The
following information does not purport to represent the aggregate net fair
value of the Partnership.
The following methods and assumptions were used by the Partnership in
estimating the fair value of each class of financial instrument.
Cash and Cash Equivalents
The carrying amount, which is cost, is assumed to be the fair value because of
the liquidity of these instruments. As of December 31, 2000, the Partnership
had bank deposits at four different banks whose deposits are federally
insured. Approximately $1,286,000 of the Partnership's cash and cash
equivalent balance as of that same date was in excess of maximum balances
covered by such insurance.
Accounts Payable and Accrued Liabilities
Carrying value is considered to be equal to the fair value of these
liabilities as they are due on demand.
(3) ALLOWANCE FOR POSSIBLE LOSSES
Changes in the allowance for possible loan losses are as follows:
2000 1999 1998
- -----------------------------------------------------------------------------
Balance at
beginning of year $ --- $ --- $ 714,000
Loans charged-off (30,000) --- (569,000)
Provision for
(recovery of)
loan losses 30,000 --- (145,000)
- -----------------------------------------------------------------------------
Balance at end of year $ --- $ --- $ ---
=============================================================================
F-13
(4) ALLOWANCE FOR POSSIBLE LOSSES ON REAL ESTATE OWNED
Changes in the allowance for possible losses on real estate owned are as
follows:
2000 1999 1998
- ------------------------------------------------------------------------------
Balance at beginning of year $ --- $ --- $ 2,354,000
Provision for losses,
net of recoveries --- --- 300,000
Real estate owned charged-off --- --- (2,654,000)
- ------------------------------------------------------------------------------
Balance at end of year $ --- $ --- $ ---
==============================================================================
(5) TRANSACTIONS WITH AFFILIATES
Under the provisions of the Partnership Agreement, CC is entitled to receive
from the Partnership mortgage investment servicing fees for loans serviced
equal to an annual rate of 1/4 of 1 percent of the committed amounts to be
funded by the Partnership. The Partnership incurred and paid $-0-, $-0- and
$2,000 of mortgage investment servicing fees to CC in 2000, 1999 and 1998,
respectively.
As discussed in note 1, the Partnership owns 50 percent of the stock of LCR, a
corporation which has not been consolidated in the accompanying financial
statements. The balance of stock in this corporation is owned by Centennial
Mortgage Income Fund II ("CMIF II"), an affiliate. LCR invested in a joint
venture, Silverwood Homes ("Silverwood") which has constructed homes. The
Partnership participated in making several loans to this corporation and this
joint venture. Under the equity method of accounting, these loans were a
component of the Partnership's investment in LCR, and therefore the
Partnership recorded losses by LCR as a reduction of the carrying value of
these loans receivable. All but two of these loans were charged off in 1998.
The remaining two loans were repaid in 1999 and 2000.
A summary of the real estate loan receivable from unconsolidated investee as
of December 31, 1999 is as follows:
Net
Principal Losses Carrying
Balance Offset Value
- ------------------------------------------------------------------------------
50 percent interest in unsecured
loan from Silverwood $ 11,000 $ 11,000 $ ---
- ------------------------------------------------------------------------------
Total $ 11,000 $ 11,000 $ ---
- ------------------------------------------------------------------------------
F-14
LCR entered into a joint venture agreement entitled Silverwood with Home
Devco, ("Home Devco"), an affiliate of the general partners of the
Partnership, to construct and sell single-family homes at the project. During
1995, LCR contributed 179 lots which were zoned for single family homes in
Lancaster, California to the joint venture as its initial capital
contribution. As LCR has a 99.99 percent ownership interest in the joint
venture, Silverwood has been consolidated with LCR.
The consolidated balance sheets and statements of operations of LCR have not
been consolidated in the Partnership's financial statements. The Partnership
accounted for its investment in this corporation using the equity method. LCR
ceased active operation in 1999 and liquidated the majority of its remaining
assets during 2000. As of December 31, 2000, the Partnership's carrying value
of investments and loans to this joint venture had been reduced to $-0-. The
Partnership recorded losses from this unconsolidated investee of $-0-, $-0-,
and $96,000 during the years ended December 31, 2000, 1999 and 1998,
respectively.
The following represents condensed financial information for LCR at
December 31, 1998 and for the year ended December 31, 1998:
LCR Development, Inc.
Consolidated Balance Sheets
December 31,
Assets 1998
- -------------------------------------------------------------------------
Cash $ 11,000
Restricted cash 20,000
Real estate owned 119,000
Less allowance for losses on real
estate investments 17,000
- --------------------------------------------------------------------------
Net real estate owned 102,000
- --------------------------------------------------------------------------
$ 133,000
==========================================================================
Liabilities and Stockholders' Deficit
- --------------------------------------------------------------------------
Notes payable to affiliates:
CMIF $ 2,882,000
CMIF II 1,549,000
- --------------------------------------------------------------------------
Total notes payable 4,431,000
Accounts payable
and accrued liabilities 12,000
Interest payable to affiliates 1,837,000
Payable to affiliates 5,000
- --------------------------------------------------------------------------
Total liabilities 6,285,000
Stockholders' deficit (6,152,000)
- --------------------------------------------------------------------------
$ 133,000
==========================================================================
F-15
LCR Development, Inc.
Consolidated Statements of Operations
Year ended December 31, 1998
1998
- ------------------------------------------------------------------------
Revenues
Housing sales $ 1,509,000
Sale of finished lots 1,499,000
- ------------------------------------------------------------------------
3,008,000
- ------------------------------------------------------------------------
Costs and expenses
Cost of housing sales 1,437,000
Cost of sale of finished lots 1,514,000
Provision for losses on real estate owned 216,000
Selling and marketing expenses 66,000
General and administrative 24,000
- ------------------------------------------------------------------------
3,257,000
- ------------------------------------------------------------------------
Operating loss (249,000)
Interest expense 403,000
- ------------------------------------------------------------------------
Net loss $ (652,000)
========================================================================
Interest not included in share of losses (460,000)
- ------------------------------------------------------------------------
Allocable net loss $ (192,000)
========================================================================
Share of loss recorded $ (96,000)
========================================================================
The Partnership and CMIF II have not recorded interest income in connection
with the $1,837,000 of accrued interest payable to affiliates by LCR and
Silverwood. Accordingly, the Partnership has not recorded its share of
losses from LCR to the extent that it represents this nonaccrued interest
income.
The Partnership reimburses the general partner for salaries and related
expenses incurred on behalf of the Partnership for services such as legal,
clerical, accounting, property management and other administrative functions.
The general partners and affiliates charged $83,000, $137,000 and $242,000 for
such services in 2000, 1999 and 1998, respectively. The Partnership also
accrued an additional $25,000 and $74,000 in severance costs paid to the
corporate general partner's employees as general and administrative,
affiliates expense during 1999 and 1998, respectively. These amounts were
paid pursuant to employment contracts that were entered into by the general
partner in order to ensure that the Partnership and several affiliated
partnerships would have an adequate staff of employees with knowledge of the
partnerships business to complete the liquidation of their assets.
F-16
During 1999 and 1998, the Partnership maintained interest-bearing deposits
with Sunwest Bank, an affiliate of the general partners through March 1999.
The balances at December 31, 1998 were $1,752,000. Interest earned on such
deposits for the three months ended March 31, 1999 and the year ended December
31, 1998 was $6,000, and $17,000, respectively.
In December 1998, BNN sold its remaining property and recorded a $57,000 gain
on sale. BNN also recorded a $445,000 provision for losses during the third
quarter of 1998 and $120,000 in expenses associated with non-operating real
estate owned incurred throughout 1998. The Partnership owned an interest in
BNN with an affiliated entity CMIF III. At December 31, 1998, the ownership
percentages were 86.25 for the Partnership and 13.75 for CMIF III. CMIF III's
share of BNN's net loss for 1998 was $67,000.
(6) REAL ESTATE OWNED
The following is a summary of consolidated real estate owned for the years
ended December 31, 2000, 1999 and 1998:
2000 1999 1998
- ------------------------------------------------------------------------------
Balance at beginning of year $ --- $ --- $ 8,490,000
Additions during period:
Improvements --- --- ---
Deduction during period:
Real estate sold --- --- (6,136,000)
Chargeoffs --- --- (2,654,000)
- ------------------------------------------------------------------------------
Balance at year end $ --- $ --- $ ---
==============================================================================
(7) CONTINGENCIES
Unbeknownst to the Partnership, on July 19, 1996, a default was entered
against the Partnership for failure to respond to a complaint filed on July
17, 1995 in the San Bernardino Superior Court, entitled Henry Yong Lim et al -
vs.- Cardinal Security, et al and allegedly served on the Partnership in May
1996. As shown by the proofs of service, the complaint was served on the
wrong party in 1996. The Partnership first became aware of its involvement in
this lawsuit in September 1997 when it received copies of requests for entry
of default judgement totaling approximately $1,000,000. The judgements
involved both economic and non-economic damages and injuries allegedly
suffered by the plaintiffs as a result of an altercation between the
plaintiffs, other third parties and security guards employed by the
Partnership at its shopping center in Upland, California. The request for
judgement names Centennial Mortgage Income Fund Partnership as a defendant in
this action. Since the Partnership was never served with the complaint and
had no other way of knowing about this action, the Partnership retained legal
counsel to set aside the defaults and any default judgements which were
entered, due to the lack of proper service and notice. The Partnership also
tendered this action to its liability insurance carrier for legal and
liability coverage. The default judgement was set aside and the plaintiff's
appeal of the set aside ruling was denied by the Court. The Court also ruled
that the prior jury found 0% liability as to the Partnership for non-economic
F-17
damages and that the plaintiffs could only proceed to trial against the
Partnership for recovery of economic damages. In December 2000, the Court
ruled that the statute of limitations had passed and the plaintiffs were
barred from continuing the lawsuit. Although this ruling is subject to
appeal, no such appeal has been filed as of the date of this report. Based
upon evidence presented at the prior trial, Management believes that these
economic damages should not exceed $40,000. Management intends to vigorously
defend any future actions related to this matter. Management believes that
even if the plaintiff's appeal the court's recent decision and prevail in in
their appeal, the Partnership's insurance coverage and/or the security
company's insurance carrier should prevent the Partnership from suffering a
material loss from these proceedings.
There are no other material pending legal proceedings.
F-18
(8) QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarter Ended
December 31, September 30, June 30, March 31,
2000 2000 2000 2000
- ------------------------------------------------------------------------------------------
REVENUE:
Interest income on loans $ --- $ 10,000 $ 10,000 $ 11,000
Interest on interest-bearing deposits 21,000 16,000 15,000 12,000
Other 4,000 3,000 2,000 3,000
- ------------------------------------------------------------------------------------------
Total revenue 25,000 29,000 27,000 26,000
- ------------------------------------------------------------------------------------------
EXPENSES:
Provision for losses --- 30,000 --- ---
General and administrative 32,000 39,000 39,000 38,000
- ------------------------------------------------------------------------------------------
Total expenses 32,000 69,000 39,000 38,000
- ------------------------------------------------------------------------------------------
Net loss $ (7,000) $ (40,000) $ (12,000) $ (12,000)
==========================================================================================
Net loss per limited partnership
unit-basic and diluted $ (.18) $ (1.03) $ (.31) $ (.31)
==========================================================================================
F-19
(8) QUARTERLY FINANCIAL RESULTS (UNAUDITED)(CONTINUED)
Quarter Ended
December 31, September 30, June 30, March 31,
1999 1999 1999 1999
- ---------------------------------------------------------------------------------------
REVENUE:
Interest income on loans $ 11,000 $ 11,000 $ 13,000 $ 17,000
Interest on interest-bearing deposits 13,000 12,000 10,000 32,000
Other 2,000 5,000 31,000 ---
- ------------------------------------------------------------------------------------------
Total revenue 26,000 28,000 54,000 49,000
- ------------------------------------------------------------------------------------------
EXPENSES:
Expenses associated with real estate owned --- 1,000 1,000 2,000
General and administrative 54,000 48,000 45,000 122,000
- ------------------------------------------------------------------------------------------
Total expenses 54,000 49,000 46,000 124,000
- ------------------------------------------------------------------------------------------
Income (loss) before
minority interest (28,000) (21,000) 8,000 (75,000)
Minority interest (note 5) (1,000) --- --- ---
- ------------------------------------------------------------------------------------------
Net income (loss) $ (27,000) $ (21,000) $ 8,000 $ (75,000)
==========================================================================================
Net income (loss) per limited partnership
unit-basic and diluted $ (.70) $ (.54) $ .21 $ (1.94)
==========================================================================================
F-20
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
MORTGAGE LOANS ON REAL ESTATE
December 31, 2000
SCHEDULE IV
Principal
Amount
of Loan
Carrying Subject to
Final Periodic Face Amount of Delinquent
Interest Maturity Payment Prior Amount of Mortgages Principal or
Description Rate Date Terms Liens Mortgages <F1> or Interest
- ------------------------------------------------------------------------------------------------------------
Note secured by:
No mortgages outstanding at 12/31/2000 --- ---
- -------------------------------------------------------------------------------------------------------------
--- ---
- -------------------------------------------------------------------------------------------------------------
<FN>
<F1> Aggregate cost for Federal Income Tax purposes is $-0- at December 31, 2000.
</FN>
F-21
CENTENNIAL MORTGAGE INCOME FUND AND SUBSIDIARIES
A Limited Partnership
MORTGAGE LOANS ON REAL ESTATE
(Continued)
December 31, 2000
SCHEDULE IV (CONTINUED)
The following is a summary of activity for the years ended December 2000, 1999
and 1998.
2000 1999 1998
- ------------------------------------------------------------------------------
Balance at beginning of year $ 541,000 $ 782,000 $ 384,000
Additions during period:
New mortgage loans/
disbursements 31,000 1,000 229,000
Other - Interest reserve,
amortization and transfer
from accrued interest --- --- 14,000
Deductions during period:
Collections of principal (542,000) (242,000) (2,354,000)
Charge-offs (30,000) --- (569,000)
Offset against deferred profit
on equity participation --- --- (289,000)
Losses from unconsolidated
investees --- --- (96,000)
- ------------------------------------------------------------------------------
Balance at year end $ --- $ 541,000 $ 782,000
==============================================================================
See accompanying independent auditors' report.
F-22
LCR DEVELOPMENT, INC.
A California Corporation
Consolidated Financial Statements
December 31, 1998 and 1997
(with Independent Auditors' Report Thereon)
F-23
LCR DEVELOPMENT, INC.
A California Corporation
Index to Consolidated Financial Statements
Consolidated Financial Statements Page
Independent Auditors' Report ............................. F-25
Consolidated Balance Sheet --
December 31, 1998 ....................................... F-26
Consolidated Statements of Operations --
Years ended December 31, 1998 and 1997 ................ F-27
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1998 and 1997 ................ F-28
Consolidated Statements of Cash Flows --
Years ended December 31, 1998 and 1997 ................ F-29
Notes to Consolidated Financial Statements ............... F-31
F-24
INDEPENDENT AUDITORS' REPORT
The Board of Directors
LCR Development, Inc.:
We have audited the consolidated balance sheet of LCR Development, Inc. and
subsidiary (the "Company") as of December 31, 1998 and the related statements
of operations, stockholders' equity (deficit) and cash flows for each of the
years in the two-year period ended December 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of LCR
Development, Inc. and subsidiary as of December 31, 1998, and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company has suffered recurring
losses from operations and has various notes payable past due or scheduled to
mature in 1999. These items raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
KPMG LLP
Orange County, California
March 19, 1999
F-25
LCR Development, Inc.
Consolidated Balance Sheet
December 31,
Assets 1998
- ----------------------------------------------------------------------
Cash $ 11,000
Restricted cash 20,000
Real estate owned (note 5) 119,000
Less allowance for losses on
real estate investments (note 4) 17,000
- ----------------------------------------------------------------------
Net real estate owned 102,000
- ----------------------------------------------------------------------
$ 133,000
======================================================================
Liabilities and Stockholders' Equity (Deficit)
- ----------------------------------------------------------------------
Notes payable to affiliates:
CMIF $ 2,882,000
CMIF II 1,549,000
- ----------------------------------------------------------------------
Total notes payable (note 7) 4,431,000
Accounts payable and accrued liabilities 12,000
Interest payable to affiliates 1,837,000
Payable to affiliates (note 6) 5,000
- ----------------------------------------------------------------------
Total liabilities 6,285,000
- ----------------------------------------------------------------------
Stockholders' equity (deficit)
Common stock, no par value; 300
shares authorized; 300 shares issued
and outstanding 3,000
Accumulated deficit (6,155,000)
- ----------------------------------------------------------------------
Total stockholders'
equity (deficit) (6,152,000)
Contingencies (Note 9)
Uncertainties (Note 2)
- ----------------------------------------------------------------------
$ 133,000
======================================================================
See accompanying notes to consolidated financial statements
F-26
LCR Development, Inc.
Consolidated Statements of Operations
Years ended December 31, 1998 and 1997
1998 1997
- ----------------------------------------------------------------------
Revenues
Housing sales $ 1,509,000 $ 834,000
Sale of finished lots 1,499,000 ---
- ----------------------------------------------------------------------
3,008,000 834,000
- ----------------------------------------------------------------------
Costs and expenses
Cost of housing sales 1,437,000 852,000
Cost of finished
lots sold 1,514,000 ---
Provision for
losses on real
estate owned (note 4) 216,000 207,000
Selling and
marketing expenses 66,000 131,000
General and
administrative 24,000 64,000
- ----------------------------------------------------------------------
3,257,000 1,254,000
- ----------------------------------------------------------------------
Operating loss (249,000) (420,000)
Interest expense (note 5) 403,000 361,000
- ----------------------------------------------------------------------
Loss before income taxes $ (652,000) $ (781,000)
- ----------------------------------------------------------------------
Income taxes (note 8) --- ---
- ----------------------------------------------------------------------
Net loss $ (652,000) $ (781,000)
======================================================================
Net loss per common share $ (2,173) $ (2,603)
======================================================================
Weighted average
number of common
shares outstanding 300 300
======================================================================
See accompanying notes to consolidated financial statements
F-27
LCR Development, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December 31, 1998 and 1997
Total
Stockholders'
Common Accumulated Equity
Stock Deficit (Deficit)
- ----------------------------------------------------------------------
Balance (deficit) at
December 31, 1996 3,000 (4,722,000) (4,719,000)
Net loss --- (781,000) (781,000)
- ----------------------------------------------------------------------
Balance (deficit) at
December 31, 1997 3,000 (5,503,000) (5,500,000)
Net loss --- (652,000) (652,000)
- ----------------------------------------------------------------------
Balance (deficit) at
December 31, 1998 $ 3,000 $ (6,155,000) $ (6,152,000)
======================================================================
See accompanying notes to consolidated financial statements
F-28
LCR Development, Inc.
Consolidated Statements of Cash Flows
Years ended December 31, 1998 and 1997
1998 1997
- ----------------------------------------------------------------------
Cash flows from
operating activities:
Net loss $ (652,000) $ (781,000)
Adjustments to reconcile
net loss to cash
provided by (used in)
in) operating
operating activities:
Provision for
possible losses 216,000 207,000
Changes in assets
and liabilities:
Decrease in
organization costs 1,000 ---
Decrease (increase)
in real estate owned 2,569,000 (500,000)
Increase in interest payable 460,000 532,000
Increase (decrease) in
accounts payable and
accrued liabilities (21,000) 27,000
Increase (decrease) in
payable to affiliates (75,000) 59,000
- ----------------------------------------------------------------------
Net cash provided by
(used in) operating
activities 2,498,000 (456,000)
- ----------------------------------------------------------------------
Cash flows from investing activities -
increase in restricted cash (10,000) (10,000)
- ----------------------------------------------------------------------
Net cash used in investing
activities (10,000) (10,000)
- ----------------------------------------------------------------------
F-29
LCR Development, Inc.
Consolidated Statements of Cash Flows
(Continued)
Years ended December 31, 1998 and 1997
1998 1997
- ----------------------------------------------------------------------
Cash flows from
financing activities-
Repayments of
notes payable (2,740,000) ---
Advances received
on notes payable 242,000 477,000
- ----------------------------------------------------------------------
Net cash (used in)
provided by financing
activities (2,498,000) 477,000
- ----------------------------------------------------------------------
Net increase in cash --- 11,000
Cash at beginning of year 11,000 ---
- ----------------------------------------------------------------------
Cash at end of year $ 11,000 $ 11,000
======================================================================
Supplemental schedule of cash
flow information - cash paid
during the year for interest $ 64,000 ---
Supplemental schedule of noncash
investing and financing activities -
decrease in real estate owned
and related allowance for losses
due to sale of real estate owned 4,262,000 42,000
See accompanying notes to consolidated financial statements
F-30
LCR DEVELOPMENT, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(1) Summary of Significant Accounting Policies
Organization
During 1993, LCR Development, Inc. ("LCR") was formed by Centennial Mortgage
Income Fund ("CMIF") and Centennial Mortgage Income Fund II ("CMIF II") to own
and operate one of their real estate assets, 179 single family lots in
Lancaster, California. During 1994, Silverwood Homes, a California general
partnership ("Silverwood"), was formed between LCR and Home Devco, Inc. ("Home
Devco") for the purpose of constructing single family homes at the real estate
project located in Lancaster. LCR contributed the 179 single family lots to
the partnership in exchange for a capital contribution credit of $2,571,594
and Home Devco contributed $100 in cash. As LCR has contributed a 99.9
percent interest, Silverwood has been consolidated in the accompanying
consolidated financial statements. All significant intercompany balances and
transactions including the aforementioned contribution, have been eliminated
in consolidation. LCR is entitled to a cumulative priority interest in cash
available for distribution from the sale of homes equal to $19,381 per lot.
Home Devco is acting as the general contractor in the construction of homes at
the project and is entitled to fifty percent of any cash available for
distribution from the sale of homes after LCR has received distributions equal
to its priority interest. Home Devco is also entitled to reimbursement of
onsite supervision costs and certain general and administrative costs.
Revenue Recognition
LCR recognizes revenue from sales of real estate when construction is
completed, an adequate down payment has been received and title to the
property sold has been transferred to the buyer.
Income Taxes
LCR is subject to taxation and accounts for income taxes under Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires an asset and liability approach to establishing
deferred tax assets and liabilities for the temporary differences between the
financial reporting basis and the tax basis of the corporation's assets and
liabilities.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
F-31
(2) Ability to Continue as a Going Concern
LCR and Silverwood had $6,285,000 in liabilities outstanding as of December
31, 1998 and had only $133,000 in net assets. Most of these liabilities are
notes that are payable to CMIF and CMIF II who have periodically agreed to
extend this debt over the past two years. The final home owned by Silverwood
closed escrow in March 1999 and the proceeds from the sale were used to repay
part of this debt. The remaining assets of LCR and Silverwood will be used to
repay a portion of their remaining debt. It is probable that LCR and
Silverwood will be unable to continue operations and that the majority of the
Company's debt as of December 31, 1998 will remain unpaid. Management
believes that it has made adjustments in the financial statements to reflect
the probable outcome of these uncertainties.
(3) Fair Value of Financial Instruments
Statement of Financial Accounting Standard No. 107 "Disclosures About Fair
Value of Financial Instruments" ("SFAS 107"), requires that LCR discloses
estimated fair values for its financial instruments as well as the methods and
significant assumptions used to estimate fair values. The following
information does not purport to represent the aggregate net fair value of LCR.
The following methods and assumptions were used by LCR in estimating the fair
value of each class of financial instrument.
Cash and Restricted Cash
The carrying amount, which is cost, is assumed to be the fair value because of
the liquidity of these instruments.
Notes Payable to Affiliates and Interest Payable to Affiliates
The fair value is not determinable due to their related party nature and
terms.
Accounts Payable and Accrued Liabilities and Payable to Affiliates
The carrying value is considered to be equal to the fair value of these
liabilities as they are short-term in nature.
(4) Allowance for Possible Losses on Real Estate Owned
Changes in the allowance for possible losses on real estate owned are as
follows:
1998 1997
- ----------------------------------------------------------------------
Balance at beginning of year $ 4,063,000 $ 3,898,000
Real estate owned charged-off (4,262,000) (42,000)
Provision for losses 216,000 207,000
- ----------------------------------------------------------------------
Balance at end of year $ 17,000 $ 4,063,000
======================================================================
F-32
(5) Real Estate Owned
Real estate owned consists of the following:
1998
- ----------------------------------------------------------------------
Residential lots held for development $ ---
Model home complex ---
Production homes under
construction and held for sale 119,000
- ----------------------------------------------------------------------
Sub-total 119,000
Less: allowance for possible losses (17,000)
- ----------------------------------------------------------------------
Net real estate owned $ 102,000
======================================================================
Real estate owned as of December 31, 1998 consists of one substantially
completed single family home that was sold in March 1999.
Interest incurred, paid and capitalized during the two years ended December
31, 1998 was as follows:
1998 1997
- ----------------------------------------------------------------------
Interest incurred $ 524,000 $ 568,000
Interest capitalized (121,000) (207,000)
- ----------------------------------------------------------------------
Interest expensed $ 403,000 $ 361,000
======================================================================
Interest paid $ 64,000 $ ---
(6) Transactions with Affiliates
The general partners of CMIF and CMIF II beneficially own a controlling
interest in Home Devco. Under the provisions of the Partnership Agreement,
Home Devco is entitled to receive from LCR reimbursement of onsite supervision
costs and certain general and administrative costs equal to 3 percent of
budgeted gross proceeds or a maximum of $20,000 per month. Home Devco is
entitled to receive a minimum fee of $7,500 per month under the agreement, as
amended. LCR paid $25,000 and $60,000 of these costs to Home Devco and
affiliates for the years ended December 31, 1998 and 1997, respectively.
Funds were advanced from CMIF and CMIF II to meet operating expenses and fund
options on the prospective home sales. The advances were repaid from sales
proceeds during 1998. The balance at December 31, 1997 was $75,000.
F-33
(7) Notes Payable to Affiliates
Notes payable to affiliates consist of the following:
(dollars in thousands)
December 31,
1998
- -----------------------------------------------------------------------
Unsecured note payable to
CMIF and CMIF II related to 179 lots
in Lancaster, CA with principal and
interest payable at maturity; interest
rate of 7.75% fixed; matured
June 30, 1998. $ 2,115
Unsecured note payable to CMIF
related to 179 lots in Lancaster,
CA with principal and interest
payable at maturity; interest rate
of 7.75% fixed; matured June 30, 1998. 1,250
Note payable to CMIF and CMIF II
originally secured by first trust deed
on 179 lots in Lancaster, CA (secured
by only one remaining home at December
31, 1998); with principal and interest
due at maturity; interest at Prime
+ 1%; maturing August 1, 1999. 933
Note payable to CMIF and CMIF II
originally secured by first trust
deed on 9 lots in Lancaster, CA
with principal and interest due at
maturity; interest at Prime + 1%;
matured July 1, 1998. 45
Note payable to CMIF originally
secured by first trust deed on 9
lots in Lancaster , CA with principal
and interest due at maturity;
interest at Prime + 1%; maturing
January 1, 1999. 88
- ----------------------------------------------------------------------
Total notes payable $ 4,431
======================================================================
All notes payable are past due as of December 31, 1998 or become due during
1999.
F-34
(8) Income Taxes
LCR and Silverwood file separate Federal and State income tax returns. LCR
and Silverwood have been consolidated for the following schedules.
A reconciliation of income tax expense (benefit) at the Federal statutory rate
of 34% to LCR's and Silverwood's provision for taxes is as follows:
1998 1997
- ----------------------------------------------------------------------
Income tax benefit at
the statutory rate $ (180,000) $ (266,000)
State tax benefit, net
of Federal tax benefit (34,000) (48,000)
Valuation allowance 112,000 308,000
Other 110,000 6,000
- ----------------------------------------------------------------------
Total --- --- ---
======================================================================
As of December 31, 1998, LCR and Silverwood have net operating loss
carryforwards of approximately $4,007,000, expiring at various dates through
2013.
The components of the consolidated net deferred tax asset at December 31, 1998
and 1997 are as follows:
1998 1997
- ----------------------------------------------------------------------
Net operating loss
carryforwards $ 1,485,000 $ 156,000
Chargeoffs of real
estate not yet
deductible 442,000 ---
Provision for losses
on real estate 7,000 1,629,000
Capitalized interest 1,000 38,000
Interest not
deductible until paid 370,000 291,000
Section 263A expenses --- --- 80,000
- ----------------------------------------------------------------------
Total deferred
tax asset 2,306,000 2,194,000
Less valuation
allowance (2,306,000) (2,194,000)
- ----------------------------------------------------------------------
Net asset recorded $ --- $ --- $ ---
======================================================================
F-35
The net increases in the total valuation allowances for the years ended
December 31, 1998 and 1997 were $151,000 and $308,000, respectively. In
assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible.
Based upon the losses of LCR and Silverwood, management has determined that
part or all of the consolidated deferred tax assets may not be realized in the
future. Accordingly, management has provided a valuation allowance against
the value of the deferred tax asset.
(9) Contingencies
There are no pending legal proceedings of which the Company is aware.
F-36