-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GK4LetarlhH64qQSv9ovpbM8DKg+9QD0v4gYRfTwALnegFlQtOlY1nZupteO14Wq oXUQJbl2C4A3hfug3Szfww== 0000890566-98-000526.txt : 19980401 0000890566-98-000526.hdr.sgml : 19980401 ACCESSION NUMBER: 0000890566-98-000526 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIERRA PACIFIC DEVELOPMENT FUND II CENTRAL INDEX KEY: 0000719606 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 953856271 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-12036 FILM NUMBER: 98583713 BUSINESS ADDRESS: STREET 1: 5850 SAN FELIPE STREET 2: STE 500 CITY: HOUSTON STATE: TX ZIP: 77057 BUSINESS PHONE: 7137066271 MAIL ADDRESS: STREET 1: 5850 SAN FELIPE STREET 2: STE 500 CITY: HOUSTON STATE: TX ZIP: 77057 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 Commission file number: 0-12036 SIERRA PACIFIC DEVELOPMENT FUND II (A CALIFORNIA LIMITED PARTNERSHIP) State of California 95-3856271 ------------------------------- --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 5850 San Felipe, Suite 450 Houston, Texas 77057 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (713) 706-6271 5850 San Felipe, Suite 500 Houston, Texas 77057 (Former name or former address, if changed since last report) Securities registered pursuant to Section 12 (b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- None None Securities registered pursuant to Section 12 (g) of the Act: 120,000 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[ ]. DOCUMENTS INCORPORATED BY REFERENCE Annual Report to Limited Partners for the Year Ended December 31, 1997 is incorporated by reference into Parts II and III PART I ITEM 1. BUSINESS (a.) GENERAL DEVELOPMENT OF BUSINESS. Sierra Pacific Development Fund II (the "Partnership") is a California limited partnership that was formed in April 1983 for the purpose of acquiring, developing, and operating commercial and industrial real estate. The Partnership's activities during the preceding five years have involved the ownership and operation of four real estate projects in Texas: RENTABLE SQUARE PROJECT NAME, LOCATION TYPE OF REAL ESTATE FOOTAGE ---------------------------------- ---------------------- ---------- Sierra Technology Center, Austin(A) Industrial/office 108,205 Sierra Westlakes, San Antonio Industrial/office 95,370 Sierra Southwest Pointe, Houston Industrial/warehouse 100,649 5850 San Felipe, Houston (B) Office 100,667 (A)SOLD DECEMBER 1994. (B)ACQUIRED DECEMBER 1994 AS PARTIAL COMPENSATION FOR THE SALE OF SIERRA TECHNOLOGY CENTER. In December 1997, Sierra Southwest Point LLC ("SSPLLC") was formed with the Partnership being the sole member. This company was formed solely to engage in the following activities: a) to acquire from Sierra Pacific Development Fund II the property known as Sierra Southwest Pointe b) to own, hold, sell, assign, transfer, operate, lease, mortgage, pledge and otherwise deal with the Property, c) to exercise all powers enumerated in the Delaware Limited Liability Company Act necessary or convenient to conduct, promotion or attainment of the business or purposes otherwise set forth. The Sierra Southwest Pointe property was transferred at no cost from the Partnership to SSPLLC. In December 1994, the Partnership sold Sierra Technology Center for $6,000,000. The sale proceeds were received in cash, a note receivable from the buyer, and equity in the 5850 San Felipe property. A gain of $539,835 was recorded in 1994 with an additional gain of $736,271 deferred to subsequent years when the note receivable is collected. In 1985, Sierra Mira Mesa Partners ("SMMP"), a California general partnership was formed with Sierra Pacific Pension Investors `84 ("SPPI `84). SMMP was initially created to develop and operate the office building known as Sierra Mira Mesa in San Diego, California. The Partnership's initial ownership interest in SMMP was 51%; the remaining 49% was owned by SPPI`84. Effective December 31, 1996, the general partners amended the partnership agreement to allow for adjustments in the sharing ratio each year based upon the relative net contributions and distributions since inception of each general partner. As a result, the sharing ratio in effect for 1997 was 45.58% for the Partnership and 54.42% for SPPI `84. In conjunction with this amendment, the general partners forgave the December 31, 1996 balances of advances due from SMMP and included these amounts as adjustments to their respective equity accounts. The sharing ratio effective January 1, 1998 will be adjusted to 33.74% for the Partnership and 66.26% for SPPI'84. SMMP also holds an 88.69% interest in Sorrento I Partners (a California general partnership with Sierra Pacific Development Fund III formed in 1993), a 24.91% interest in Sorrento II Partners (a California general partnership with Sierra Pacific Institutional Properties V formed in 1993), a 4.96% interest in Sierra Creekside Partners (a California general partnership with Sierra Pacific Development Fund formed in 1994), and a 47.05% interest in Sierra Vista Partners (a California general partnership with Sierra Pacific Development Fund III formed in 1994). Audited financial statements of Sierra Mira Mesa Partners, Sierra Vista Partners and Sorrento I Partners are included in the Annual Report to the Limited Partners attached as an Exhibit. (b.) NARRATIVE DESCRIPTION OF BUSINESS. The Partnership owns and operates three projects in Texas as described above. Each of the projects is occupied by more than one tenant, the most significant of which is Sears at Sierra Westlakes. Rental income from Sears totaled $431,000, or 23%, of total 1997 rental income. 2 There is significant competition in the office and industrial building rental market in the Partnership's trade area. Appraisals performed at the end of 1994 identified numerous projects near the Partnership's properties that offered similar amenities at comparable rental rates. (c.) COMPARISON OF CURRENT ACTIVITIES TO THOSE PROPOSED AT THE INITIATION OF THE PARTNERSHIP. In the Partnership's prospectus dated August 5, 1983, the investment objectives were described as follows: "The Partnership has been formed to acquire and operate commercial and industrial real properties, including both properties which are to be developed by the Partnership or are under development or construction and properties which are newly-constructed or have operating histories. The principal investment objectives of the Partnership are: (i) to preserve, protect, and return the Partnership's invested capital; (ii) to attempt to maximize capital gains through long-term appreciation in the value of the Partnership's real estate investments, which, if substantial, may disproportionately benefit holders of Class A Units; (iii) to provide the Limited Partners with cash distributions from operations; (iv) to provide federal income tax deductions so that all or a portion of any cash from operations distributable to the holders of Class B Units may be treated as a return of capital for tax purposes and, therefore, may not represent taxable income; and (v) to attempt to sell the Partnership's real estate investments for cash after an approximate three to five year holding period. There is no assurance that such objectives will be attained." Operations of the Partnership through 1997 have been consistent with the intent of the original prospectus in that the Partnership has invested in real estate projects that had the potential for capital gains, preservation of capital, and providing distributable cash flow partially sheltered from Federal income tax. However, the Partnership and its real estate have been adversely affected by the Tax Reform Act of 1986, aggressive lending by banks that resulted in commercial real estate overbuilding, and subsequent severe recessions. The original intention to sell its real estate investments after a three to five year holding period has been delayed indefinitely. As of December 31, 1997, the Partnership had paid cash distributions of $64.80 for each $250 unit investment and remaining partners' equity was computed at $146.63 per unit. Thus, if the Partnership were to be liquidated at the end of 1997 at book value, each $250 investment would have returned a total of $211.43. The General Partner's goal is to continue operating the properties until such time as rental rates return to the level necessary to support new commercial and industrial building development. At that time, the properties may be sold at prices substantially greater than current book values. ITEM 2. PROPERTIES The Partnership owns three properties in Texas including one office building and two industrial buildings. The three buildings represent 296,686 square feet of rentable space. Details of the individual properties and the respective tenants/leases follow. The Partnership also owns a 45.58% interest in a fourth property - Sierra Mira Mesa, an office building in San Diego, California. The Partnership also had during 1997 an indirect 40.42% interest in an industrial property known as Sorrento I in San Diego, California. This indirect ownership interest is subject to adjustment yearly based upon the relative contributions of the partners. 5850 SAN FELIPE - HOUSTON, TEXAS This property includes one office building comprising 100,667 rentable square feet and is 87% occupied at December 31, 1997. The average effective annual rent per square foot at December 31, 1997 is $10.86. The principal businesses carried on from the building are of the service sector - executive suites, property management, health care and governmental services. The property is encumbered by a mortgage lien in favor of Mutual Life Insurance Company of New York with a principal balance of $3,000,000 at December 31, 1997. In March 1996, the loan was modified to reduce the interest rate on this debt to 5% from the previous 8.5% in exchange for a principal paydown of $1,002,000. The loan requires monthly, interest-only payments through April 2004, the loan maturity date. Assuming no prepayment of principal, the principal balance due at maturity will be $3,000,000. No prepayment penalty is associated with this mortgage loan. 3 SUMMARY OF SIGNIFICANT TENANTS As of December 31, 1997, twenty-eight tenants occupy the office building. Two tenants, an executive suite service company and health care service company, occupy more than ten percent of the rentable square footage of the building. The executive suite tenants include sales, property management, legal, insurance and mortgage services. Details of the significant lease are as follows:
Percent of Effective Percent Square Rentable Rent Per Effective of Gross Tenants of 5850 Feet Square Square Rent Per Annual Expiration San Felipe Occupied Feet Foot Annum Rent of Lease - -------------------------------------------------------------------------------------------------------- Third Coast Business Centers 17,502 17% $ 9.26 $ 162,099 17% December 2004 Kimberly Home Health 10,903 11% 10.90 118,874 12% September 2001 Tenants Occupying less than 10% sq ft 59,292 59% 11.33 671,496 71% Various --------------------------------------------------------- $ 10.86 $ 952,469 100% Total Rented Space 87,697 87% Vacancies 12,970 13% ------------------ Total Rentable Space 100,667 100% ==================
Reference is made to Item 13 of Form 10-K for a further discussion of Third Coast Business Centers. SUMMARY OF LEASES BY EXPIRATION Two tenants in 5850 San Felipe are on month to month leases, the other twenty-six tenants are on leases scheduled to expire over the next ten years as indicated in the table below.
Year of expiration 1998 1999 2000 2001 2002 2003 2004 2007 Total ------- ------- -------- ------- -------- ------- -------- ------- -------- Number of tenants .......... 2 6 5 5 5 1 1 1 26 Percent of total tenants ... 7% 21% 18% 18% 18% 4% 4% 3% 93% Total area (square feet) ... 2,128 9,085 13,278 18,389 15,141 3,346 17,502 6,656 85,525 Annual rent ................ $21,734 $89,373 $147,314 $201,350 $175,997 $38,857 $162,099 $90,240 $926,964 Percent gross annual rent .. 2% 9% 16% 21% 19% 4% 17% 9% 97%
SIERRA SOUTHWEST POINTE - HOUSTON, TEXAS This property includes one industrial building comprising 100,649 rentable square feet and is 98% occupied at December 31, 1997. The average effective annual rent per square foot at December 31, 1997 is $4.48. The principal businesses carried on from the building are healthcare, manufacturing, retail and church services. The property was encumbered by a mortgage lien in favor of American General Mortgage Company with a principal balance of $1,069,837 at September 30, 1997, the loan maturity date. The mortgage bore interest at 10% and was payable in monthly installments of $14,207 through September 1997, the loan maturity date. Upon maturation of this loan, Heller Financial Corporation provided $1,300,000 secured by a mortgage lien collateralized by certain land and buildings. The new loan is due in monthly interest only payments computed at the LIBOR rate plus 300 basis points. This note matures in January 1999. The loan contains an option to convert the note to a fixed interest rate and extend the maturity date ten years from date the option is exercised. The fixed interest rate shall be equal to the U.S. Government Security rate plus 200 basis points. This option expires at maturity. The obiligee of the note is Sierra Southwest Pointe, LLC. 4 Summary of Significant Tenants Eighteen tenants occupy the building at December 31, 1997. No tenant occupies ten percent or more of the rentable square footage of the building as of December 31, 1997. SUMMARY OF LEASES BY EXPIRATION There is one month to month lease and seventeen term leases that are scheduled to expire over the next four years as indicated in the table below. One tenant occupies two units with separate lease terms.
Year of expiration 1998 1999 2000 2001 Totals -------- -------- ------- ------- ------ Number of tenants ........... 8 6 2 1 17 Percent of total tenants ................... 44% 33% 11% 6% 94% Total area (square feet) .... 36,450 38,829 11,939 2,000 89,218 Annual rent ................. $142,323 $181,594 $62,100 $11,904 $397,921 Percent gross annual rent ... 32% 41% 14% 3% 90%
SIERRA WESTLAKES DEVELOPMENT - SAN ANTONIO, TEXAS This property includes one industrial building comprising 95,370 rentable square feet and is 75% occupied at December 31, 1997. The average effective annual rent per square foot at December 31, 1997 is $8.66. The property has only two tenants whose principal businesses are distribution and manufacturing. Details of their leases follow. The property is encumbered by a mortgage lien in favor of Westmark Commercial Mortgage Fund II with a principal balance of $1,957,503 at December 31, 1997. The mortgage bears interest at 9% and is payable in monthly installments of $16,784 through March 2006, the loan maturity date. Payments are amortized over a 300 month period with a principal balance of $1,654,784 due at maturity assuming no payment has been made on principal in advance of its due date. SUMMARY OF SIGNIFICANT TENANTS
Tenants Percent of Effective Percent of of Square Feet Rentable Rent Per Effective Rent Gross Annual Sierra Westlakes Development Occupied Square Feet Square Foot Per Annum Rent Expiration of Lease - ------------------------------ ------------- ---------------- --------------- ---------------- --------------- --------------------- Sears 45,935 48% $ 9.38 $ 431,079 70% December 2007 Felco Office Systems 25,357 27% 7.35 186,323 30% February 2001 ------------- ---------------- --------------- ---------------- --------------- Total Rented Space 71,292 75% $ 8.66 $ 617,402 100% Vacancies 24,078 25% ------------- ---------------- Total Rentable Space 95,370 100% ============= ================
DEPRECIABLE PROPERTY Reference is made to Schedule III of Form 10-K. 5 REAL ESTATE TAXES Real Estate Tax as % of 1997 Real Assessed Estate Tax Property Value Obligation - ---------------------------------------------------------- 5850 San Felipe Houston, Texas 2.76% $77,364 Sierra Southwest Pointe Houston, Texas 3.01% $66,943 Sierra Westlake Development San Antonio, Texas 2.81% $87,786 INSURANCE In the opinion of management, the properties are adequately covered by insurance. SIERRA MIRA MESA - SAN DIEGO, CALIFORNIA Sierra Mira Mesa office building consists of 89,560 rentable square feet and is 98% occupied at December 31, 1997. The principal business carried on from the building is insurance. The average effective annual rent per square foot at December 31, 1997 is $18.74. SUMMARY OF SIGNIFICANT TENANTS Only one of the five tenants occupies ten percent or more of the rentable square footage of the building. The principal business of this significant tenant is insurance. Details of this significant tenant and its leases follow:
Percent of Effective Percent of Square Feet Rentable Rent Per Effective Rent Gross Annual Tenants Occupied Square Feet Square Foot Per Annum Rent Expiration of Lease - ------------------------------ ------------- ---------------- --------------- ---------------- --------------- --------------------- State Comp. Insurance Fund 73,912 83% $ 19.77 $ 1,461,132 90% February 2003 State Comp. Insurance Fund 1,489 2% 4.03 6,000 0% Month to Month Tenants Occupying <10% sq ft 11,925 13% 14.23 169,748 10% Various ------------- ---------------- --------------- ---------------- --------------- Total Rented Space 87,326 98% $ 18.74 $ 1,636,880 100% Vacancies 2,234 2% ------------- ---------------- Total Rentable Space 89,560 100% ============= ================
SUMMARY OF LEASES BY EXPIRATION The Property's five tenants have leases scheduled to expire over the next six years as scheduled below. Year of expiration 1998 1999 2000 2001 2002 2003 Total Number of tenants 1 2 0 1 0 1 5 Percent of total tenants 20% 40% 0% 20% 0% 20% 100% Total area (square feet) 4,035 6,579 0 762 0 73,912 85,288 Annual rent $55,396 $ 102,352 $ 0 $ 12,000 $ 0 $1,461,132 $ 1,630,880 Percent gross annual rent 3% 6% 0% 1% 0% 90% 100%
6 DEPRECIABLE PROPERTY Sierra Mira Mesa, San Diego, California Office Building - Income Producing-Property
Tenant Buildings Improvements Total Historical Cost & Tax Basis $ 2,480,940 $ 6,026,352 $ 2,227,856 $ 10,735,148 Accumulated Depreciation (2,174,943) (1,913,087) (4,088,030) ------------------------ ----------------------- --------------------- ---------------------- Net Carrying Value $ 2,480,940 $ 3,851,409 $ 314,769 $ 6,647,118 ======================== ======================= ===================== ====================== Depreciation Method Not Applicable Straight-line Straight-line Depreciable Life Not Applicable 5-30 Years 1-10 years
REAL ESTATE TAXES The real estate tax obligation for 1997 is approximately 1.12% of the assessed value or $69,864. INSURANCE In the opinion of management, the property is adequately covered by insurance. ENCUMBRANCES The property is encumbered by a mortgage lien in favor of Lincoln National Life Insurance Company with a principal balance of $5,041,225 at December 31, 1997. The mortgage bears interest at 7.74%. Monthly principal and interest payments of $51,739 are due through maturity at October 2010. The note is subject to prepayment penalties of approximately 1% of the outstanding principal balance between months 25 and 177 of the loan term. No prepayment is allowed during the first two years of the loan and no prepayment penalty will be imposed if prepayment occurs in the final three months of the loan term. SORRENTO I - SAN DIEGO, CALIFORNIA Sorrento I is an industrial building with 43,100 square feet of rentable space. One tenant began leasing the entire 43,100 rentable square feet of Sorrento I in 1996. Rental income of $23,636 per month is recognized under this lease, which expires in April 2003. The effective annual rent per square foot at December 31, 1997 is $6.58. The principal business of the tenant is research and development in the communications sector. DEPRECIABLE PROPERTY Sorrento I, San Diego, California Office Building - Income-Producing Property
Tenant Land Buildings Improvements Total Historical Cost & Tax Basis $ 1,305,518 $ 1,342,683 $ 329,299 $ 2,977,500 Accumulated Depreciation (474,327) (63,485) (537,812) ------------------------ ----------------------- --------------------- ---------------------- Net Carrying Value $ 1,305,518 $ 868,356 $ 265,814 $ 2,439,688 ======================== ======================= ===================== ====================== Depreciation Method Not Applicable Straight-line Straight-line Depreciable Life Not Applicable 10-30 Years 7-10 years
7 REAL ESTATE TAXES The real estate tax obligation for 1997 is approximately 1.12% of the assessed value or $28,603. INSURANCE In the opinion of management, the property is adequately covered by insurance. ENCUMBRANCES Sorrento I Partners ("SIP") had a non-recourse bank note payable with an original principal balance of $3,000,000 collateralized by the Sorrento I property. The annual interest rate of the note was variable at bank prime plus 2-1/2% with a minimum rate of 9% and maximum rate of 15-1/2%. The original maturity of the note was July 1998 and the note included a discounted payoff option of $1,500,000. CGS Real Estate Company, Inc. ("CGS"), an affiliate of the General Partner, acquired the note and security documents from the bank in May 1996. In connection with the purchase of the bank note and security documents by CGS, SIP made a principal payment to the bank of $750,000 and entered into a $750,000 note agreement with CGS (the "CGS Agreement"). The CGS Agreement, collaterized by real and personal property, called for monthly interest payments through December 1996 and monthly principal and interest payments thereafter until maturity on May 31, 2016. The interest rate is fixed at 9.34% per annum for the first year of the note and will thereafter be the one year Treasury rate plus 375 basis points. A modification agreement was entered into on September 30, 1997. The interest rate remained fixed at 9.34% through October 1998, at which time the rate will convert to the one-year treasury rate plus 375 basis points. The principal of the note on the effective date was $635,479 and is amortized over a 210-month term until maturity in March 2015. Current payments are $6,154 per month, principal and interest inclusive. The loan balance as of December 31, 1997 was $631,827. At any time upon 120 days written notice to CGS, SIP may fully discharge the note by the payment of an amount equal to $750,000 less the aggregate amount of principal paid under the note between the date of the CGS Agreement and the date of payment plus any interest due. ITEM 3. LEGAL PROCEEDINGS In November 1995, a limited partner of the Partnership, on their own behalf and on behalf of all others similarly situated, filed a lawsuit against S-P Properties, Inc., the General Partner of the Partnership, among others, in the Superior Court of the State of California, County of Los Angeles (the "Court"). This suit alleged breach of fiduciary duty and breach of contract. The Plaintiff's claims related to various loans made by the Partnership and by Sierra Mira Mesa Partners to a former affiliate of the General Partner which were allegedly improper or made below market rates. The Plaintiffs were seeking unspecified compensatory and punitive damages and removal of the General Partner. In September 1997, the Court denied the Plaintiff's motion for class certification, but granted the Plaintiff leave to file an amended complaint. The Partnership demurred to all class action allegations in the amended complaint. The Court granted the demurred without leave to amend, thereby reducing the Plaintiff's allegations to a derivative suit. The case is presently in discovery. The Partnership believes any damages awarded in favor of the Plaintiff's derivative suit would be immaterial to the Partnership's operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERS' EQUITY AND RELATED MATTERS As of December 31, 1997, the number of security holders is as follows: Number of Number Record of Units Holders ---------------- ------------------ Limited Partners: Class A Units 56,674 3,126 Class B Units 29,979 799 These securities are all of the same class, namely, limited partnership interests (units) and were sold pursuant to a registration statement filed under the Securities Act of 1933, as amended. The total offering was 60,000 Class A units at $250.00 per unit and 60,000 Class B units at $250.00 per unit. No broker or dealer currently makes a market in the units of the Partnership. Accordingly, there are no published price or trading volume figures available for the units. The units have been transferred on an extremely limited extent from time-to-time since the inception of the Partnership; however, the market for the units is highly restricted and sporadic, especially in view of the investor suitability requirements imposed on new purchasers by the various state blue sky laws and the restrictions on transfer contained in the Partnership Agreement. The Partnership paid cash distributions of $.58 and $3.46 per limited partnership unit during the two years ended December 31, 1997 and 1996, respectively. There are no contractual or other restrictions on the Partnership's ability to make such distributions. ITEM 6. SELECTED FINANCIAL DATA The Selected Financial Data for the Partnership is filed by reference to the Annual Report to the Limited Partners attached as an Exhibit. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Finanacial Condition and Results of Operations includes certain forward looking statements reflecting the Partnership's expectations in the near future; however, many factors which may affect the actual results, especially changing regulations, are difficult to predict. Accordingly, there is no assurance that the Partnership's expectations will be realized. Overview: The following discussion should be read in conjunction with the Selected Financial Data and the Partnership's Consolidated Financial Statements and Notes thereto incorporated by reference to the Annual Report to the Limited Partners attached as an Exhibit. As of December 31, 1997, the Partnership owns three properties, Sierra Westlakes, Sierra Southwest Pointe and 5850 San Felipe. The Partnership sold its interest in the Sierra Technology property on December 31, 1994. In addition, the Partnership holds a 45.58% interest in Sierra Mira Mesa Partners ("SMMP"). SMMP owns an office building - Sierra Mira Mesa in San Diego, California. 9 Results of Operations: COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996. Rental income increased $62,000, or 4%, primarily as a result of increased occupancy at 5850 San Felipe during the fourth quarter. Occupancy at the building increased from 72% at December 31, 1996 to 87% at December 31, 1997. Further, the weighted-average rent per square foot, on an accrual basis, increased from $10.33 to $10.86 at 5850 San Felipe and from $4.21 to $4.48 at Sierra Southwest Pointe during 1997. The increase in occupancy and rental rates was partially offset by the write off of rent receivable at 5850 San Felipe in August 1997. Occupancy at Sierra Southwest Pointe and Sierra Westlakes remained comparable between the two years. Operating expenses increased by $234,000, or 12%, primarily as a result of increased depreciation and amortization expenses due to additional tenant improvements associated with the increased occupancy at 5850 San Felipe and due to a full year of depreciation on the prior year renovations to the lobby of the building. Legal and accounting expenses increased $73,000, principally due to higher legal fees incurred defending litigation against the Partnership. This increase was partially offset by a decrease in property taxes and insurance resulting from a successful tax appeal at 5850 San Felipe. Interest expense decreased by $29,000, or 6%, primarily due to the restructure of the debt collateralized by 5850 San Felipe in the prior year. This modification agreement, which was effective March 22, 1996, reduced the interest rate on this debt from the previous 8.5%, in exchange for a principal paydown of approximately $1,000,000. The Partnership's share of (loss) income from investment in SMMP was ($285,000) for the year ended December 31, 1997 compared to $162,000 for the year ended December 31, 1996. The loss generated by SMMP was principally the result of its share of loss from its joint venture partner, Sierra Vista Partners ("SVP"). SVP sold the Sierra Vista property in October 1997 and recorded a $968,000 loss from property disposition. COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995. Revenues were virtually unchanged in 1996, having increased by $47,000, or 2%, primarily as a result of increased occupancy at Sierra Westlakes and 5850 San Felipe. The occupancy rate increased from 66% to 75% at Sierra Westlakes and from 59% to 72% at 5850 San Felipe during 1996. This increase in occupancy was offset by a decrease in the weighted-average rent per square foot, on an accrual basis, from $9.79 to $8.66 at Sierra Westlakes and from $11.50 to $10.33 at 5850 San Felipe. The rate decrease at Sierra Westlakes is due to a favorable lease term given to a major tenant as an incentive to renew their lease and to expand by 8,000 square feet. The expiration of long-term government leases at 5850 San Felipe with rental rates higher than current market rates is the primary reason for the building's weighted-average rate decrease. Occupancy and rental rates at Sierra Southwest Pointe remained comparable between the two years. Operating expenses increased by $189,000, or 10%, principally as a result of increased depreciation and amortization expenses and higher maintenance and repairs due to additional tenant improvements and costs associated with the increased occupancy of the properties. Renovations to the lobby at 5850 San Felipe also attributed to the increase in depreciation and amortization expenses. Legal and accounting expenses increased $93,000, primarily as a result of legal fees incurred defending against litigation pending against the Partnership. The increase in operating expenses was partially offset by a $58,000 decrease in administrative fees due to expense cutting measures implemented by management. The Partnership's share of income (loss) from investment in SMMP was $162,000 for the year ended December 31, 1996 compared to ($308,000) for the year ended December 31, 1995. The increase in income generated by SMMP was principally due to its share of income from Sorrento I Partners ("SIP"), which owns the Sorrento I property. SIP, which is included in the consolidated financial statements of SMMP, exercised a discounted payoff option in 1996 which resulted in an extraordinary gain of $1,200,000. Furthermore, Sorrento I Partners entered into a lease with a tenant for all of the square footage of the Sorrento I property in 1996. The property, which was vacant throughout 1995, recorded rental income of $189,000 in 1996 as a result of this new tenant. 10 Liquidity and Capital Resources: The Partnership used cash from operations of $673,000 during 1997. In 1997, the Partnership paid $677,000 for property additions, $460,000 for leasing commissions and $50,000 in distributions to the limited partners. The Partnership's joint venture, SMMP, made net distributions of $1,287,800 to assist with the funding of these expenditures. In September 1997, the mortgage note on the Sierra Southwest Pointe property with a principal balance of $1,070,000 matured. A new lender funded a $1,300,000 loan to the Partnership. The new loan requires monthly interest-only payments computed at the LIBOR rate plus 300 basis points until maturity in January 1999. The loan contains an option to convert the note to a fixed interest rate and extend the maturity date ten years from the date the option is exercised. The fixed interest rate shall be equal to the U.S. Government Security rate plus 200 basis points. The Partnership intends to exercise this option upon maturity. The loan is secured by a trust deed on the Sierra Southwest Pointe property. The Partnership is in an illiquid position at December 31, 1997 with cash and current receivables of $186,000 and current liabilities of $514,000. The Partnership's primary capital requirements will be for the construction of new tenant space. It is anticipated that these requirements will be funded from the operation of the properties and distributions from SMMP. Inflation: The Partnership's long-term leases contain provisions designed to mitigate the adverse impact of inflation on its results from operations. Such provisions may include escalation clauses related to Consumer Price Index increases. YEAR 2000 COMPLIANCE The Year 2000 Compliance issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Partnership's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The total cost to the Partnership of activities associated with the Year 2000 Compliance issue is not anticipated to be material to its financial position or results of operations in any given year. 11 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements and independent auditors' report are incorporated by reference to the Annual Report to the Limited Partners attached as an Exhibit. 1. Independent Auditors' Report 2. Consolidated Balance Sheets - December 31, 1997 and 1996 3. Consolidated Statements of Operations - for the years ended December 31, 1997, 1996, and 1995 4. Consolidated Statements of Changes in Partners' Equity - for the years ended December 31, 1997, 1996, and 1995 5. Consolidated Statements of Cash Flows - for the years ended December 31, 1997, 1996, and 1995 6. Notes to Consolidated Financial Statements 7. Audited Consolidated Financial Statements and related footnotes of Sierra Mira Mesa Partners 8. Audited Financial Statements and related footnotes of Sierra Vista Partners 9. Audited Financial Statements and related footnotes of Sorrento I Partners ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None 12 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The Registrant is a California Limited Partnership and has no officers or directors. S-P Properties, Inc., a California corporation, is the General Partner of the Registrant. In December 1994, Finance Factors, Inc., a subsidiary of CGS Real Estate Company, Inc., purchased the common stock of TCP, Inc. TCP, Inc. owns all of the common stock of S-P Properties, Inc. In July 1995, Finance Factors, Inc. merged with Bancor Real Estate Company, Inc., another subsidiary of CGS Real Estate Company, Inc. CGS Real Estate Company, Inc. and its affiliates are engaged in real estate management, leasing, ownership, and sales. The companies own or manage more than ten million square feet of commercial real estate in Texas, Arizona, Colorado, California and the Carolinas. The executive officers and directors of S-P Properties, Inc. are:
APPROXIMATE NAME POSITION AGE TIME IN OFFICE - ---- -------- --- -------------- Thomas N. Thurber President and Director 47 3 years Dawson L. Davenport Vice President 42 3 years Steven M. Speier Secretary/Treasurer and Director 47 3 years William J. Carden Assistant Secretary/Treasurer and Director 53 3 years
Thomas N. Thurber - President and Director, S-P Properties, Inc. Mr. Thurber is a Certified Public Accountant who began his career with Arthur Andersen & Co. in 1972. In 1979, he joined a major publicly traded real estate development firm (Daon) where he became Controller for U.S. Operations. Subsequently, Mr. Thurber served as Director of Real Estate for a developer of retail properties, and Chief Financial Officer of a trust with significant investments in commercial real estate. Mr. Thurber also serves as a director of Property Secured Investments, Inc. Mr. Thurber holds a bachelors degree in accounting from Florida State University. Dawson L. Davenport - Vice President, S-P Properties, Inc. Mr. Davenport is the founder of WD Real Estate Services, a full service property management firm that became part of the Banc Commercial family of companies in 1992. Mr. Davenport has been responsible for the management, development and rehabilitation of substantial commercial, industrial, retail, and residential projects during the past seventeen years. Mr. Davenport specializes in leasing and turning around distressed properties. Steven M. Speier - Secretary/Treasurer and Director, S-P Properties, Inc. Mr. Speier who after spending two years in public accounting, went into the banking industry in 1975. During his sixteen year banking career, Mr. Speier managed a real estate loan portfolio of approximately $1.5 billion secured by properties throughout the United States. Mr. Speier brings to S-P Properties, Inc. a broad real estate background that includes management, leasing, and disposition of all categories of commercial real estate. Mr. Speier also serves as a director of IDM Corporation. Mr. Speier is a licensed real estate broker, is registered as a Certified Public Accountant, and has a masters degree in business administration from Grand Valley State University in Michigan. William J. Carden - Assistant Secretary/Treasurer and Director, S-P Properties, Inc. Mr. Carden is the founder and President of CGS Real Estate Company, Inc., which owns over one million square feet of commercial real estate. Mr. Carden founded DVM Properties, Inc. in 1974 which concentrated on rehabilitation of retail, office, industrial, and commercial real estate. Mr. Carden is a former Director of Bay Financial, a New York Stock Exchange company and currently serves as a director of Property Secured Investments, Inc. and IDM Corporation. There have been no events under any bankruptcy act, no criminal proceedings, and no judgments or injunctions material to the evaluation of the ability and integrity of any director or officer during the past five years. 13 ITEM 11. MANAGEMENT REMUNERATION The Registrant is a California Limited Partnership and has no officers or directors. No options to purchase securities of the Registrant have been granted to any person. In accordance with the terms of the Partnership Agreement, certain affiliates of the General Partner receive real estate brokerage commissions in connection with the leasing of properties by the Partnership and receive from the Partnership certain management and administrative services fees. These amounts are set forth in the Annual Report to the Limited Partners attached as an Exhibit. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT None ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Partnership pays a management fee of 5% of the gross rental income collected from the properties to American Spectrum Real Estate Services, Inc. (ASRE), formerly Banc Commercial Texas. These fees for the year ended December 31, 1997 were $93,168. Bancor Real Estate Company, Inc. (Bancor) provides services to the Partnership such as accounting, legal, data processing and similar services and is entitled to reimbursement for expenses incurred to provide such services. Amounts so reimbursed totaled $232,399 during the year ended December 31, 1997. Additionally, the Partnership reimbursed Bancor for construction supervision costs in the amount of $50,083 during the year ended December 31, 1997. In consideration for services rendered with respect to initial leasing of Partnership properties, ASRE is paid initial leasing costs. For the year ended December 31, 1997, a total of $225,240 was paid for initial leasing costs. Bancor and ASRE are both wholly owned subsidiaries of CGS Real Estate Company, Inc. William J. Carden, an officer and director of S-P Properties, Inc., the General Partner of the Partnership, owns 50% of CGS Real Estate Company, Inc. During 1993, the Partnership loaned funds to Carlsberg Management Company, Inc., a former affiliate of the General Partner, in the form of unsecured demand notes. Interest was paid at rates approximately 100 basis points above certificate of deposit rates established by major commercial banks. The loans reached a maximum of $1,100,000 during 1993 and were reduced to $1,000,000 at December 31, 1993. The loans were reduced to $812,000 at December 31, 1994 and the interest rate was fixed at 6%. The loan was assumed by Finance Factors, Inc. with the sale of the outstanding stock of TCP, Inc. in December 1994. In July 1995, Finance Factors, Inc. merged with Bancor Real Estate Company, Inc. who has assumed the note. In 1997, interest receivable of $89,298 was added to the principal balance of the note. The principal balance outstanding at December 31, 1997 is $901,298. Both Finance Factors, Inc. and Bancor Real Estate Company, Inc. are wholly owned subsidiaries of CGS Real Estate Company, Inc. Bancor Real Estate Company, Inc. dba Third Coast Business Centers leases 17,502 square feet of 5850 San Felipe, a property of the Partnership. The terms of this lease are consistent with the current market conditions for office space in the area of the property. The Partnership recognized rental income of $162,099 during the year ended December 31, 1997 related to this lease. Bancor Real Estate Company, Inc. is a wholly owned subsidiary of CGS Real Estate Company, Inc. On December 30, 1994, the Sierra Technology property with a historical cost basis of $3,849,228 was sold for $6,000,000 ($3,100,000 cash down-payment and $2,900,000 trust deed note) to Texas DVM, Inc. The original note called for monthly interest only payments and bore interest of 10% per annum until December 31, 1997, when the entire indebtedness was due in full. In 1997, the maturity date was extended to December 31, 1998 and interest receivable of $290,000 was added to the principal balance of the note. All other terms of the original note remained unchanged. The principal balance outstanding at December 31, 1997 is $3,190,000. CGS Real Estate Company, Inc. owns Texas DVM, Inc. 14 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K A. EXHIBITS 1. Annual Report to the Limited Partners 2. Exhibit Number 27 - Financial Data Schedule B. FINANCIAL STATEMENT SCHEDULES The following financial statement schedules and the report of the independent auditors thereon are included herein: 1. Schedule II - Valuation and Qualifying Accounts and Reserves - for the years ended December 31, 1997, 1996, and 1995 2. Schedule III - Real Estate and Accumulated Depreciation - December 31, 1997 All other schedules are omitted as they either are not required or are not applicable, or the required information is set forth in the financial statements and notes thereto. C. REPORTS ON FORM 8-K None 15 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. SIERRA PACIFIC DEVELOPMENT FUND II a California Limited Partnership S-P PROPERTIES, INC. General Partner Date: March 19, 1998 /s/THOMAS N. THURBER -------------- ---------------------------------------- Thomas N. Thurber President and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: March 19, 1998 /s/THOMAS N. THURBER -------------- ---------------------------------------- Thomas N. Thurber President and Director S-P Properties, Inc. Date: March 19, 1998 /s/WILLIAM J. CARDEN -------------- ---------------------------------------- William J. Carden Assistant Secretary/Treasurer and Director S-P Properties, Inc. Date: March 19, 1998 /s/G. ANTHONY EPPOLITO -------------- ---------------------------------------- G. Anthony Eppolito Chief Accountant S-P Properties, Inc. 16 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES To the Partners of Sierra Pacific Development Fund II We have audited the consolidated financial statements of Sierra Pacific Development Fund II and subsidiary, a California limited partnership, (the "Partnership") as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997 and have issued our report thereon dated March 13, 1998. Such consolidated financial statements and reports are included in your 1997 Annual Report to the Limited Partners and are incorporated herein by reference. Our audits also included the financial statement schedules of Sierra Pacific Development Fund II, listed in Item 14. These financial statement schedules are the responsibility of the Partnership's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Houston, Texas March 13, 1998 17 SCHEDULE II - FORM 10-K SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY VALUATION AND QUALIFYING ACCOUNTS AND RESERVES For the Years Ended December 31, 1997, 1996 and 1995 ---------------------------------------------------------------------- Income - Producing Properties -------------- Allowance for loss - January 1, 1995 $ 450,000 Provision charged to costs and expenses (1) 0 -------------- Allowance for loss - December 31, 1995 450,000 Provision charged to costs and expenses (1) 0 -------------- Allowance for Loss - December 31, 1996 450,000 Provision charged to costs and expenses (1) 0 -------------- Allowance for loss - December 31, 1997 $ 450,000 ============== (1) See Notes 1 and 4 to consolidatd financial statements incorporated by reference to the Annual Report to the Limited Partners attached as an Exhibit. 18 SCHEDULE III - FORM 10-K SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------------------------- Initial Cost Gross Amount at to Partnership (1) Improvements Which carried at close of period ----------------------- Capitalized ------------------------------------ Encumb- Improve- After Acquis- Improve- Total Description rances Land ments ition (2) Land ments (3)(4)(6) - ---------------------------------------------------------------------------------------------------------------------- OFFICE BUILDING- INCOME -PRODUCING: 5850 San Felipe Houston, Texas $ 3,000,000 $ 1,950,000 $2,806,932 $1,786,197 $1,950,000 $ 4,580,542 $ 6,530,542 Sierra Southwest Pointe Houston, Texas $ 1,300,000 $ 570,124 $2,279,488 $ 360,930 $ 570,124 $ 2,078,326 $ 3,078,450 Sierra Westlakes Development Houston, Texas $ 1,957,503 $ 1,743,622 $3,732,654 $1,743,622 $ 3,715,436 $ 5,459,058 ---------------------------------------------------------------------------------------------- TOTAL $ 6,257,503 $ 4,263,746 $5,086,420 $5,879,781 $4,263,746 $10,804,304 $15,068,050 ==============================================================================================
- -------------------------------------------------------------------------------- Accum. Date Date Deprec. Description Deprec.(5) Constructed Acquired Life - -------------------------------------------------------------------------------- OFFICE BUILDING- INCOME -PRODUCING: 5850 San Felipe Houston, Texas $ 599,180 3/77 12/94 1-30 yrs. Sierra Southwest Pointe Houston, Texas 595,726 8/72 7/91 2-30 yrs. Sierra Westlakes Development Houston, Texas 2,210,765 10/85 8/84 1-30 yrs. ---------- TOTAL $3,405,671 ==========
(1) The initial cost represents the original purchase price of the property. (2) The Partnership has capitalized property development costs. (3) Also represents costs for Federal Income Tax purposes. (4) A valuation allowance of $450,000 was established as the appraised value of the properties declined below book value. See Notes 1 and 4 to the financial statements incorporated by reference to the Annual Report to the Limited Partners attached as an exhibit. (5) Reconciliation of total real estate carrying value and accumulated depreciation for the three years ended December 31, 1997 is as follows: Total Real Estate Accumulated Carrying Value Depreciation ----------------- ------------ Balance - January 1, 1995 $ 13,288,847 $1,895,469 Additions during the year 415,923 458,903 Write off fully depreciated assets (13,152) (13,152) ------------- ----------- Balance - December 31, 1995 13,691,618 2,341,220 Additions during the year 848,511 542,460 Write off fully depreciated assets (111,525) (111,525) ------------- ----------- Balance - December 31, 1996 14,428,604 2,772,155 Additions during the year 676,666 670,736 Write off fully depreciated assets (37,220) (37,220) ------------- ----------- Balance - December 31, 1997 $ 15,068,050 $3,405,671 ============= =========== 19 SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY (A California Limited Partnership) SELECTED FINANCIAL DATA For the Years Ended December 31, 1997, 1996, 1995, 1994 and 1993 The following table sets forth certain selected historical financial data of the Partnership. The selected operating and financial position data as of and for each of the five years ended December 31, 1997 have been derived from the audited financial statements of the Partnership. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto which are incorporated by reference to the Annual Report to the Limited Partners attached as an Exhibit.
1997 1996 1995 1994 1993 ------------ ------------ ------------ ------------ ------------ REVENUES $ 2,179,772 $ 2,128,491 $ 2,081,670 $ 1,842,321 $ 1,906,135 OPERATING EXPENSES: Total 2,259,482 2,025,153 1,835,944 1,976,381 1,693,663 Per dollar of revenues 1.04 0.95 0.88 1.07 0.89 INTEREST EXPENSE: Total 435,818 464,880 461,567 126,173 128,708 Per dollar of revenues 0.20 0.22 0.22 0.07 0.07 NET (LOSS) INCOME FROM CONTINUING OPERATIONS: Total (800,406) (548,350) (523,440) 157,470 31,686 General Partner 0 0 0 25,998 0 Limited Partners (800,406) (548,350) (523,440) 131,472 31,686 Per Unit (1) (9.24) (6.32) (6.04) 1.52 0.37 CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (672,814) 401,092 (841,813) 1,038,686 861,226 CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 611,134 (848,511) (374,172) 1,435,165 (212,773) CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 108,508 267,418 (122,354) (1,096,914) (1,734,660) TOTAL ASSETS 19,477,303 20,229,858 19,676,261 20,948,592 17,706,165 PARTNERS' EQUITY: Total 12,705,810 13,556,216 14,055,860 14,779,300 15,860,970 General Partner 0 0 0 0 0 Limited Partners Class A 8,310,049 8,866,234 9,193,008 9,666,163 10,373,612 Class B 4,395,761 4,689,982 4,862,852 5,113,137 5,487,358 LIMITED PARTNERS' EQUITY - PER UNIT(1) 146.63 156.45 162.21 170.56 183.04 NOTE RECEIVABLE 2,453,729 2,163,729 2,163,729 2,163,729 N/A INCOME-PRODUCING PROPERTIES: Number 3 3 3 3 3 Cost 15,068,050 14,428,604 13,691,618 13,288,847 14,321,737 Less: Accumulated depreciation (3,405,671) (2,772,155) (2,341,220) (1,895,469) (2,920,396) Valuation allowance (450,000) (450,000) (450,000) (450,000) (850,000) Net book value 11,212,379 11,206,449 10,900,398 10,943,378 10,551,341 INVESTMENT IN UNCONSOLIDATED JOINT VENTURE 3,416,664 4,838,609 4,681,570 5,035,779 5,152,570 NOTES PAYABLE - Related to income- producing property 6,257,503 6,098,994 5,185,902 5,248,256 1,267,744 DISTRIBUTIONS PER UNIT (1): 0.58 3.46 2.31 14.00 8.00 N/A = Not applicable nor available
(1) The net loss, limited partners' equity and distributions per unit are based upon the limited partnership units outstanding at the end of the year, 56,674 Class A and 29,979 Class B in all years. The cumulative distributions per limited partnership unit from inception to December 31, 1997 equal $64.80. 20 INDEPENDENT AUDITORS' REPORT To the Partners of Sierra Pacific Development Fund II We have audited the accompanying consolidated balance sheets of Sierra Pacific Development Fund II and subsidiary, a California limited partnership, (the "Partnership") as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in partners' equity and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these 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 Sierra Pacific Development Fund II and subsidiary as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Houston, Texas March 13, 1998 21 SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY (A California Limited Partnership) CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996 December 31, 1997 December 31, 1996 ----------------- ----------------- ASSETS Cash and cash equivalents $ 69,790 $ 22,962 Receivables: Note, net of deferred gain of $736,271 (Notes 3 and 4) 2,453,729 2,163,729 Unbilled rent (Notes 1 and 4) 277,452 334,495 Billed rent (Note 1) 78,698 25,181 Due from affiliates (Note 3) 951,381 1,017,674 Other (Note 2) 37,795 176,421 Income-producing properties - net of accumulated depreciation and valuation allowance of $3,855,671 in 1997 and $3,222,155 in 1996 (Notes 1 and 4) 11,212,379 11,206,449 Investment in unconsolidated joint venture (Notes 1 and 5) 3,416,664 4,838,609 Other assets (Notes 1, 2 and 3) 979,415 444,338 ----------- ----------- Total Assets $19,477,303 $20,229,858 =========== =========== LIABILITIES AND PARTNERS' EQUITY Accrued and other liabilities (Note 2) $ 513,990 $ 574,648 Notes payable (Note 6) 6,257,503 6,098,994 ----------- ----------- Total Liabilities 6,771,493 6,673,642 ----------- ----------- Partners' equity (Notes 1 and 7): General Partner 0 0 Limited Partners: Class A Limited Partners: 60,000 units authorized, 56,674 issued and outstanding 8,310,049 8,866,234 Class B Limited Partners: 60,000 units authorized, 29,979 issued and outstanding 4,395,761 4,689,982 ----------- ----------- Total Partners' equity 12,705,810 13,556,216 ----------- ----------- Total Liabilities and Partners' equity $19,477,303 $20,229,858 =========== =========== See Accompanying Notes 22 SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY (A California Limited Partnership) CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995 ----------- ----------- ----------- REVENUES: Rental income (Note 1) $ 1,841,050 $ 1,778,871 $ 1,735,678 Interest income (Note 3) 338,722 349,620 345,992 ----------- ----------- ----------- Total revenues 2,179,772 2,128,491 2,081,670 ----------- ----------- ----------- EXPENSES: Operating expenses: Depreciation and amortization 786,905 632,513 517,137 Property taxes and insurance 311,475 334,132 324,920 Administrative fees (Note 3) 216,177 224,760 283,041 Maintenance and repairs 295,358 279,797 219,102 Utilities 173,500 181,227 209,525 Management fees (Note 3) 93,168 90,250 86,531 Legal and accounting 215,138 141,929 49,424 General and administrative 53,955 37,108 46,732 Salaries and payroll taxes 36,000 36,000 31,651 Renting expenses 23,333 13,599 5,360 Other operating expenses 54,473 53,838 62,520 ----------- ----------- ----------- Total operating expenses 2,259,482 2,025,153 1,835,943 ----------- ----------- ----------- Interest 435,818 464,880 461,567 ----------- ----------- ----------- Total expenses 2,695,300 2,490,033 2,297,510 ----------- ----------- ----------- LOSS BEFORE PARTNERSHIP'S SHARE OF UNCONSOLIDATED JOINT VENTURE LOSS (515,528) (361,542) (215,840) ----------- ----------- ----------- PARTNERSHIP'S SHARE OF UNCONSOLIDATED JOINT VENTURE LOSS FROM CONTINUING OPERATIONS (Note 5) (284,878) (186,808) (307,600) PARTNERSHIP'S SHARE OF UNCONSOLIDATED JOINT VENTURE EXTRAORDINARY GAIN (Note 5) 0 348,706 0 ----------- ----------- ----------- NET LOSS $ (800,406) $ (199,644) $ (523,440) =========== =========== =========== Per limited partnership unit (Note 1): Loss before extraordinary gain $ (9.24) $ (6.32) $ (6.04) Extraordinary gain 0 4.02 0 ----------- ----------- ----------- Net loss $ (9.24) $ (2.30) $ (6.04) =========== =========== ===========
See Accompanying Notes 23 SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY (A California Limited Partnership) CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY For the Years Ended December 31, 1997, 1996 and 1995
Total Limited Partners General Partners' Class A Class B Total Per Unit Partner Equity ---------- ---------- ----------- ------- ------ ----------- Partners' equity - January 1, 1995 $9,666,163 $5,113,137 $14,779,300 $170.56 $0 $14,779,300 Net income (342,348) (181,092) (523,440) (6.04) (523,440) Distributions (130,807) (69,193) (200,000) (2.31) (200,000) ---------- ---------- ----------- ------- ------ ----------- Partners' equity - December 31, 1995 9,193,008 4,862,852 14,055,860 162.21 0 14,055,860 Net loss (130,574) (69,070) (199,644) (2.30) (199,644) Distributions (196,200) (103,800) (300,000) (3.46) (300,000) ---------- ---------- ----------- ------- ------ ----------- Partners' equity - December 31, 1996 8,866,234 4,689,982 13,556,216 156.45 0 13,556,216 Net loss (523,493) (276,913) (800,406) (9.24) (800,406) Distributions (32,692) (17,308) (50,000) (0.58) (50,000) ---------- ---------- ----------- ------- ------ ----------- Partners' equity - December 31, 1997 $8,310,049 $4,395,761 $12,705,810 $146.63 $0 $12,705,810 ========== ========== =========== ======= ====== ===========
See Accompanying Notes 24 SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY (A California Limited Partnership) CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (800,406) $ (199,644) $ (523,440) Adjustments to reconcile net loss to cash (used in) provided by operating activities: Depreciation and amortization 786,905 632,513 517,137 Undistributed loss (income) of unconsolidated joint venture 284,878 (161,898) 307,599 Decrease (increase) in rent receivable 3,526 47,374 (139,368) Increase in other receivables (240,672) (58,879) (114,505) Increase in other assets (646,387) (138,523) (262,699) (Decrease) increase in accrued and other liabilities (60,658) 280,149 (626,537) ----------- ----------- ----------- Net cash (used in) provided by operating activities (672,814) 401,092 (841,813) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments for property additions (676,666) (848,511) (415,923) Capital contributions to unconsolidated joint venture (293,000) 0 (768,258) Distributions from unconsolidated joint venture 1,580,800 0 810,009 ----------- ----------- ----------- Net cash provided by (used in) investing activities 611,134 (848,511) (374,172) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Loan to affiliates 0 (205,674) 0 Borrowings from affiliates 0 349,900 140,000 Repayments of borrowings from affiliates 0 (489,900) 0 Cash distributions (50,000) (300,000) (200,000) Funding of note payable secured by property 1,300,000 2,000,000 0 Principal payments on notes payable (1,141,492) (1,086,908) (62,354) ----------- ----------- ----------- Net cash provided by (used in) financing activities 108,508 267,418 (122,354) ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 46,828 (180,001) (1,338,339) CASH AND CASH EQUIVALENTS - Beginning of year 22,962 202,963 1,541,302 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS - End of year $ 69,790 $ 22,962 $ 202,963 =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for interest $ 455,666 $ 466,407 $ 433,553 =========== =========== ===========
In 1997, $379,298 of interest receivable was added to the principal balance of the related notes receivable from affiliates. These transactions are noncash items not reflected in the above statement of cash flows. See Accompanying Notes 25 SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Sierra Pacific Development Fund II (the "Partnership") was organized on April 29, 1983 in accordance with the provisions of the California Uniform Limited Partnership Act to acquire, develop and operate commercial and industrial real properties. S-P Properties, Inc. is the General Partner and manager of the Partnership. On December 30, 1994, all of the outstanding stock of TCP, Inc. was sold to Finance Factors, Inc. TCP, Inc. owns all of the common stock of S-P Properties, Inc. Finance Factors was a subsidiary of CGS Real Estate Company, Inc., a national real estate company. In July 1995, Finance Factors, Inc. merged with Bancor Real Estate Company, Inc., another subsidiary of CGS Real Estate Company, Inc. The Partnership's activities during the preceding five years have involved the ownership and operation of four real estate projects in Texas: Sierra Technology Center in Austin, Texas; Sierra Westlakes in San Antonio, Texas; Sierra Southwest Pointe in Houston, Texas; and 5850 San Felipe in Houston, Texas. In December 1997, Sierra Southwest Pointe LLC ("SSPLLC") was formed with the Partnership being the sole member. This company was formed solely to engage in the following activities: a) to acquire from Sierra Pacific Development Fund II the property known as Sierra Southwest Pointe, b) to own, hold, sell, assign, transfer, operate, lease, mortgage, pledge and otherwise deal with the Property, c) to exercise all powers enumerated in the Delaware Limited Liability Company Act necessary or convenient to conduct, promotion or attainment of the business or purposes otherwise set forth. Title to the Sierra Southwest Pointe property was transferred from the Partnership to SSPLLC. The accounts of SSPLLC are consolidated into the financial statements of the Partnership since the date of formation and all significant intercompany transactions are eliminated in consolidation. In December 1994, the Partnership sold Sierra Technology Center for $6,000,000. The sale proceeds were received in cash, a note receivable from the buyer, and equity in the 5850 San Felipe property. In 1985 Sierra Mira Mesa Partners ("SMMP"), a California general partnership was formed between the Partnership and Sierra Pacific Pension Investors `84 (SPPI`84). SMMP was initially created to develop and operate the office building known as Sierra Mira Mesa in San Diego, California. The Partnership's initial ownership interest in SMMP was 51%; the remaining 49% was owned by SPPI`84. Effective December 31, 1996, the general partners amended the partnership agreement to allow for adjustments in the sharing ratio each year based upon the relative net contributions and distributions since inception of each general partner. As a result, the sharing ratio in effect for 1997 was 45.58% for the Partnership and 54.42% for SPPI`84. In conjunction with this amendment, the general partners forgave the December 31, 1996 balances of advances due from SMMP and included these amounts as adjustments to their respective equity accounts. The sharing ratio effective January 1, 1998 will be adjusted to 33.74% for the Partnership and 66.26% for SPPI`84. SMMP also holds an 88.69% interest in Sorrento I Partners (a California general partnership with Sierra Pacific Development Fund III formed in 1993), a 24.91% interest in Sorrento II Partners (a California general partnership with Sierra Pacific Institutional Properties V formed in 1993), a 4.96% interest in Sierra Creekside Partners (a California general partnership with Sierra Pacific Development Fund formed in 1994), and a 47.05% interest in Sierra Vista Partners (a California general partnership with Sierra Pacific Development Fund III formed in 1994). 26 Sierra Pacific Development Fund II and subsidiary Notes to Consolidated Financial Statements Page two BASIS OF FINANCIAL STATEMENTS The Partnership maintains its books and prepares its financial statements in accordance with generally accepted accounting principles. However, the Partnership prepares its tax returns on the accrual basis of accounting as defined by the Internal Revenue Code with adjustments to reconcile book and taxable income (loss) for differences in the treatment of certain income and expense items. The accompanying financial statements do not reflect any provision for federal or state income taxes since such taxes are the obligation of the individual partners. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include highly liquid, short-term investments with original maturities of three months or less. FAIR VALUE OF FINANCIAL INSTRUMENTS The financial instruments of the Partnership at December 31, 1997 and 1996 consist of cash and cash equivalents, receivables, due from affiliates, accounts payable and notes payable. The fair value of cash and cash equivalents, receivables and accounts payable approximates the carrying value due to the short term nature of these items. In the opinion of management, the estimated fair value of the notes payable, based on market rates at December 31, 1997, is $5,685,000. Management was unable to determine the fair value of the amounts due from affiliates due to the related party nature of this receivable. INCOME-PRODUCING PROPERTIES Property and tenant improvements are carried at cost and depreciated on the straight-line method over the estimated lives of the related assets, ranging from one to thirty years. Tenant improvements incurred at the initial leasing of the properties are depreciated over ten years and tenant improvements incurred at the re-leasing of the properties are depreciated over the life of the related lease. Expenditures for repairs and maintenance are charged against income as incurred. Improvements and major renewals are capitalized. Costs and the related accumulated depreciation of assets sold or retired are removed from the accounts in the year of disposal or when fully depreciated and any resulting gain or loss is reflected in income or deferred income as appropriate. The Partnership employs a systematic approach in determining whether the value of income-producing properties has been impaired. Prior to 1995, a provision for loss on a property was established if the appraised value of the property declined below its book value due to what the General Partner believed to be an other than temporary condition. A complete appraisal was performed on the properties as of December 31 each year. Effective January 1, 1995, the Partnership implemented Statement of Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (the "Statement"). The Partnership regularly evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Future cash flows are estimated and compared to the carrying amount of the asset to determine if an impairment has occurred. If the sum of the expected future cash flows is less than the carrying amount of the asset, the Partnership shall recognize an impairment loss in accordance with the Statement. No additional provision was required with the implementation of this Statement. 27 Sierra Pacific Development Fund II and subsidiary Notes to Consolidated Financial Statements Page three Because the determination of fair value is based upon projections of future economic events such as property occupancy rates, rental rates, operating cost inflation and market capitalization rates which are inherently subjective, the amounts ultimately realized at disposition may differ materially from the net carrying value as of December 31, 1997. The cash flows used to determine fair value and net realizable value are based on good faith estimates and assumptions developed by management. Unanticipated events and circumstances may occur and some assumptions may not materialize; therefore, actual results may vary from the estimates and the variances may be material. The Partnership may provide additional write-downs which could be material in subsequent years if real estate markets or local economic conditions change. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE The investment in unconsolidated joint venture is stated at cost and is adjusted for the Partnerships' share in earnings or losses and cash contributions to or distributions from the joint venture (equity method). OTHER ASSETS Deferred leasing costs represent costs incurred to lease properties and are amortized over the life of the related lease. Deferred loan costs represent costs incurred to obtain financing and are amortized over the life of the related loan. RENTAL INCOME AND RENT RECEIVABLE Rental income is recognized on the straight-line method over the term of the related operating lease in accordance with the provisions of Statement of Financial Accounting Standards No. 13, "Accounting for Leases". Rent receivable consists of (a) unbilled rent - the difference between rent recognized on the straight-line method and actual cash due; and (b) billed rent - - rent due but not yet received. CALCULATION OF EQUITY AND NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT Equity and net income (loss) per limited partnership unit are determined by dividing the Limited Partners' equity and net income (loss) by the number of limited partnership units outstanding, 56,674 Class A and 29,979 Class B. 28 Sierra Pacific Development Fund II and subsidiary Notes to Consolidated Financial Statements Page four 2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS Additional information regarding certain balance sheet accounts, at December 31, 1997 and 1996 is as follows: 1997 1996 -------- -------- Other receivables: Interest receivable $ 0 $176,421 Accounts receivable 37,795 0 -------- -------- $ 37,795 $176,421 ======== ======== Other assets: Prepaid expenses $ 20,192 $ 20,192 Deferred loan costs, net of accumulated amortization of $11,617 in 1997 and $17,969 in 1996 111,467 68,895 Deferred leasing costs, net of accumulated amortization of $381,317 in 1997 and $297,795 in 1996 637,667 281,783 Tax impounds 30,686 63,178 Reserves 169,113 0 Deposits 10,290 10,290 ======== ======== $979,415 $444,338 ======== -------- Accrued and other liabilities: Accounts payable $326,284 $383,593 Security deposits 83,475 68,704 Accrued property taxes 87,407 85,679 Interest payable 16,824 36,672 -------- -------- $513,990 $574,648 ======== ======== 3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS In 1994, all of the common stock of TCP, Inc. was purchased by Finance Factors, Inc. from Carlsberg Management Company ("CMC"). TCP, Inc. owns all of the common stock of S-P Properties, Inc., the General Partner of the Partnership. CMC continued to manage the affairs of the Partnership through March 31, 1995. An affiliate of the General Partner receives a management fee of 5% of the gross rental income collected from the properties. Management fees paid to affiliates for the years ended December 31, 1997, 1996 and 1995 were $93,168, $90,250 and $70,531, respectively. An affiliate of the General Partner is entitled to reimbursement for expenses incurred by the affiliate for services provided to the Partnership such as accounting, legal, data processing and similar services. The affiliate was reimbursed $232,399, $224,760 and $165,696 for such services for the years ended December 31, 1997, 1996 and 1995, respectively. The Partnership reimbursed the affiliate for construction supervision costs incurred by the affiliate. For the years ended December 31, 1997, 1996 and 1995 the affiliate received $50,083, $43,257 and $13,485, respectively, for tenant improvements supervisory costs. In consideration for services rendered with respect to initial leasing of Partnership properties, an affiliate of the General Partner is paid initial leasing costs. For the years ended December 31, 1997, 1996 and 1995 these fees amounted to $225,240, $59,021 and $132,121, respectively, and were recorded as deferred leasing costs. 29 Sierra Pacific Development Fund II and subsidiary Notes to Consolidated Financial Statements Page five During 1993, the Partnership loaned funds to a former affiliate of the General Partner in the form of demand notes. Interest was paid at rates approximately 100 basis points above certificate of deposit rates established by major commercial banks. The loans reached a maximum of $1,100,000. The loans were reduced to $812,000 at December 31, 1994 and the interest rate was fixed at 6%. In 1997, interest receivable of $89,298 was added to the principal balance of the note. Interest income of $48,720, $48,853, and $48,720 was recognized in 1997, 1996, and 1995, respectively, related to this note. The balance outstanding at December 31, 1997 is $901,298. The note is guaranteed by the owners of GCS Real Estate Company, Inc. An affiliate of the General Partner leases 17,502 square feet of 5850 San Felipe, a property of the Partnership. The terms of this lease are consistent with the current market conditions for office space in the area of the property. The Partnership recognized rental income of $162,099 during the years ended December 31, 1997, 1996 and 1995 related to this lease. As further described in Note 4, in 1994 the Partnership sold a property to an affiliate of the General Partner for cash of $3,100,000 and a $2,900,000 trust deed note. The original note called for monthly interest only payments and bore interest of 10% per annum until December 1997, when the entire indebtedness was due in full. In 1997, the maturity date was extended to December 31, 1998 and interest receivable of $290,000 was added to the principal balance of the note. All other terms of the original note remained unchanged. Interest income of $290,000 was recognized during each of the years ended December 31, 1997, 1996 and 1995 related to this note. The December 31, 1997 principal balance was $3,190,000. The note is secured by a first lien on the property and management believes the collateral has sufficient value to recover the Partnerships's net investment in the note after satisfaction of the first lienholder. During 1995, the Partnership received a short-term, non-interest bearing loan from Sierra Mira Mesa Partners in the amount of $140,000. This loan was repaid in 1996. In 1996, the Partnership made a short-term, non-interest bearing loan to Sierra Mira Mesa Partners in the amount of $155,590. This loan was forgiven and reclassed to investment in Sierra Mira Mesa Partners (See Note 1). During 1996, the Partnership made a non-interest bearing advance to an affiliate in the amount of $50,083. Repayment is expected in 1998. 4. INCOME-PRODUCING PROPERTIES At December 31, 1997 and 1996 the total cost and accumulated depreciation of the properties are as follows: 1997 1996 ------------ ------------ Land $ 4,263,746 $ 4,263,746 Building and improvements 10,804,304 10,164,858 ------------ ------------ Total 15,068,050 14,428,604 Accumulated depreciation (3,405,671) (2,772,155) Valuation allowance (450,000) (450,000) ------------ ------------ Net $ 11,212,379 $ 11,206,449 ============ ============ 30 Sierra Pacific Development Fund II and subsidiary Notes to Consolidated Financial Statements Page six On December 30, 1994, the Sierra Technology Center property, with a historical cost basis of $3,849,228, was sold for $6,000,000 ($3,100,000 cash down-payment and $2,900,000 trust deed note) to an affiliate of Finance Factors, Inc. In a related transaction, on December 30, 1994, the Partnership purchased 5850 San Felipe, an office building in Houston, Texas for $5,000,000 from an affiliate of Finance Factors, Inc. The Partnership paid $973,713 as cash down-payment and assumed a first trust deed note with a balance of $4,026,287. In accordance with Emerging Issues Task Force No. 87-29, "Exchange of Real Estate Involving Boot", the fair value of the assets and liabilities transferred in the two transactions was allocated between a monetary and a non-monetary component. Accordingly, the historical cost of the San Felipe building was reduced by $243,068, representing the non-monetary portion of the gain on sale of the Sierra Technology Center. The monetary portion of the gain on sale was recorded in accordance with Statement of Financial Accounting Standards No. 66 "Accounting For Sales of Real Estate" using the installment method and the Partnership recorded a gain of $539,835 (net of selling costs and unamortized loan fees and lease costs). A deferred gain of $736,271 will be recognized as principal payments on the trust deed note are received. Future minimum base rental income, under the existing operating leases for the properties, to be recognized on a straight-line basis and amounts to be received on a cash basis are as follows: STRAIGHT-LINE CASH YEAR ENDING DECEMBER 31, BASIS BASIS -------------- -------------- 1998 $ 1,928,838 $ 1,958,023 1999 1,737,850 1,786,928 2000 1,497,619 1,554,833 2001 1,201,617 1,244,524 2002 823,851 849,766 Thereafter 2,919,565 2,992,718 -------------- -------------- Total $ 10,109,340 $ 10,386,792 ============== ============== Approximately 23% of 1997 rental revenues were generated from a Sears, Roebuck and Company telemarketing division for warranty sales. 31 Sierra Pacific Development Fund II and subsidiary Notes to Consolidated Financial Statements Page seven 5. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE Sierra Mira Mesa Partners ("SMMP"), a California general partnership, was formed in 1985 between the Partnership and Sierra Pacific Pension Investors `84, an affiliate, to develop and operate the real property known as Sierra Mira Mesa, an office building, located in San Diego, California. The property contains 89,560 square feet and is 98% leased at December 31, 1997. At December 31, 1997 the Partnership's interest in SMMP is 45.58%; the remaining 54.42% interest was owned by Sierra Pacific Pension Investors `84. The Partnership's investment in SMMP as of December 31, 1997 and 1996 is comprised of the following: 1997 1996 ---------------- ---------------- Equity interest $ 3,261,917 $4,679,005 Investment advisory and other fees, less accum- ulated amortization of $53,444 and $48,586 in 1997 and 1996, respectively 154,747 159,604 ------------- ------------ Investment in unconsolidated joint venture $ 3,416,664 $4,838,609 ============= ============ The consolidated financial statements of SMMP include the accounts of SMMP and Sorrento I Partners, a majority owned California general partnership for the years ended December 31, 1997 and 1996. Sorrento I Partners was accounted for under the equity method in 1995. The financial statements of SMMP for 1995 have not been restated as the consolidation was accounted for as a step acquisition in accordance with Accounting Research Bulletin No. 51, "Consolidated Financial Statements". The condensed balance sheets at December 31, 1997 and 1996, and the condensed statements of operations for the years ended December 31, 1997, 1996 and 1995 for SMMP are as follows: 32 Sierra Pacific Development Fund II and subsidiary Notes to Consolidated Financial Statements Page eight CONDENSED CONSOLIDATED BALANCE SHEETS December 31, December 31, 1997 1996 ------------ ------------ ASSETS Cash and cash equivalents $ 244,408 $ 26,721 Rent receivable 1,287,009 1,186,818 Other receivables 0 169,241 Due from affiliates 2,030,577 1,536,968 Income-producing property, net of accumulated depreciation 9,086,805 9,449,032 Investment in unconsolidated joint ventures 1,793,770 2,773,176 Other assets 831,350 1,119,115 ------------ ------------ Total Assets $ 15,273,919 $ 16,261,071 ============ ============ LIABILITIES AND GENERAL PARTNERS' EQUITY Accrued and other liabilities $ 68,765 $ 104,428 Due to Sierra Pacific Pension Investors `84 0 1,311,300 Notes payable 5,673,052 6,012,512 ------------ ------------ Total Liabilities 5,741,817 7,428,240 ------------ ------------ Minority interest in joint venture (333,783) (341,689) ------------ ------------ General Partners' equity 9,865,885 9,174,520 ------------ ------------ Total Liabilities and General Partners' equity $ 15,273,919 $ 16,261,071 ============ ============ 33 Sierra Pacific Development Fund II and subsidiary Notes to Consolidated Financial Statements Page nine CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------- 1997 1996 1995 ------------- -------------- -------------- Revenues: Rental income $ 1,919,582 $ 1,808,673 $ 1,529,497 Other income 184,168 178,726 181,358 ------------- -------------- -------------- Total revenues 2,103,750 1,987,399 1,710,855 ------------- -------------- -------------- Expenses: Operating expenses 742,548 728,593 641,206 Depreciation and amortization 825,911 813,359 586,602 Interest 463,804 559,759 392,088 ------------- -------------- -------------- Total expenses 2,032,263 2,101,711 1,619,896 ------------- -------------- -------------- Income (Loss) before Partnership's share of unconsolidated joint venture loss 71,487 (114,312) 90,959 Partnership's share of unconsolidated joint venture losses (855,349) (354,765) (694,095) ------------- -------------- -------------- Loss before extraordinary gain (783,862) (469,077) (603,136) Extraordinary gain 0 1,200,381 0 ------------- -------------- -------------- (Loss) Income before minority interest's share of consolidated joint venture (income) loss (783,862) 731,304 (603,136) Minority interest's share of consolidated joint venture (income) loss from continuing operations (7,906) 102,787 0 Minority interest's share of consolidated joint venture extraordinary gain 0 (516,644) 0 ------------- -------------- -------------- Net (Loss) Income $ (791,768) $ 317,447 $ (603,136) ============= ============== ==============
As of December 31, 1997, SMMP also holds a 24.91% interest in Sorrento II Partners (a California general partnership with Sierra Pacific Institutional Properties V formed in 1993), a 4.96% interest in Sierra Creekside Partners (a California general partnership with Sierra Pacific Development Fund formed in 1994), and a 47.05% interest in Sierra Vista Partners (a California general partnership with Sierra Pacific Development Fund III formed in 1994). 34 Sierra Pacific Development Fund II and subsidiary Notes to Consolidated Financial Statements Page ten The following is a summary of aggregated financial information for all investments owned by SMMP which are accounted for under the equity method: CONDENSED COMBINED BALANCE SHEETS December 31, December 31, 1997 1996 ----------- ----------- ASSETS Cash and cash equivalents $ 122,997 $ 159,369 Rent receivable 549,240 781,284 Due from affiliates 47,666 50,681 Income-producing property, net of accumulated depreciation 8,610,352 15,043,645 Other assets 1,339,407 732,144 ----------- ----------- Total Assets $10,669,662 $16,767,123 =========== =========== LIABILITIES AND GENERAL PARTNERS' EQUITY Accrued and other liabilities $ 325,087 $ 648,328 Note payable 1,763,420 5,213,615 ----------- ----------- Total Liabilities 2,088,507 5,861,943 ----------- ----------- Ground lessors' equity in income-producing property 3,000,000 3,000,000 ----------- ----------- General Partners' equity 5,581,155 7,905,180 ----------- ----------- Total Liabilities and General Partners' equity $10,669,662 $16,767,123 =========== =========== 35 Sierra Pacific Development Fund II and subsidiary Notes to Consolidated Financial Statements Page eleven CONDENSED COMBINED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Revenues: Rental income $ 2,294,859 $ 2,474,335 $ 2,124,077 Other income 9,698 13,968 6,915 ----------- ----------- ----------- Total revenues 2,304,557 2,488,303 2,130,992 ----------- ----------- ----------- Expenses: Operating expenses 1,755,826 1,788,643 2,009,862 Depreciation and amortization 1,321,177 1,461,571 1,438,310 Interest 459,763 427,967 691,407 ----------- ----------- ----------- Total expenses 3,536,766 3,678,181 4,139,579 ----------- ----------- ----------- Loss before loss from property disposition (1,232,209) (1,189,878) (2,008,587) Loss from property disposition (967,764) 0 0 ----------- ----------- ----------- Net Loss $(2,199,973) $(1,189,878) $(2,008,587) =========== =========== =========== Reference is made to the audited financial statements of Sierra Mira Mesa Partners, Sierra Vista Partners and Sorrento I Partners included herein. 36 Sierra Pacific Development Fund II and subsidiary Notes to Consolidated Financial Statements Page twelve 6. NOTES PAYABLE At December 31, 1997 and 1996, notes payable consisted of the following: 1997 1996 ----------- ----------- Mortgage note payable, due in monthly installments with interest at 10%, collateralized by certain land and buildings. This note matured in September 1997. $ 0 $1,115,540 Mortgage note payable, due in monthly interest only payments at LIBOR rate + 300 basis points collateralized by certain land and buildings. This loan matures in January 1999. The loan contains an option to convert the note to a fixed interest rate and extend the maturity date ten years from the date the option is exercised. The fixed interest rate shall be equal to the U.S. Government Security rate plus 200 basis points. This option expires at maturity. 1,300,000 0 Mortgage note payable, due in monthly interest only payments at 5% collateralized by certain land and buildings. This note matures in April 2004. 3,000,000 3,000,000 Mortgage note payable, due in monthly installments with interest at 9% collateralized by certain land and buildings. This note matures in March 2006. 1,957,503 1,983,454 ----------- ----------- $ 6,257,503 $ 6,098,994 =========== =========== Annual maturities of notes payable as of December 31, 1997, are: $26,103 in 1998; $1,328,552 in 1999; $31,230 in 2000; $34,160 in 2001; $37,365 in 2002; and $4,800,093 thereafter. The Partnership is exposed to interest rate fluctuations on $1,300,000 of variable rate debt at December 31, 1997. 7. PARTNERS' EQUITY Accrual basis profits and losses resulting from operations of the Partnership are allocated 99% to the Limited Partners and 1% to the General Partner. Currently, the Partnership does not meet the criteria for distributing cash to the General Partner, and it cannot reasonably predict when the criteria will be met. Accordingly, no accrual basis profits and losses from operations were allocated to the General Partner. Upon any sale, refinancing or other disposition of the Partnership's real properties, allocations and distributions are made after each Limited Partner has received 100% of his Adjusted Capital Contributions plus a 15% per annum cumulative return on such invested capital. Any remaining proceeds shall be distributed 85% to the Limited Partners and 15% to the General Partner. Distributions of the remaining proceeds to the Limited Partners shall be made in a manner such that Limited Partners holding Class A Units shall receive distributions 15% greater than the distributions received by the holders of Class B Units. 37 Sierra Pacific Development Fund II and subsidiary Notes to Consolidated Financial Statements Page thirteen 8. LITIGATION In November 1995, a limited partner of the Partnership, on their own behalf and on behalf of all others similarly situated, filed a lawsuit against S-P Properties, Inc., the General Partner of the Partnership, among others, in the Superior Court of the State of California, County of Los Angeles (the "Court"). This suit alleged breach of fid uciary duty and breach of contract. The Plaintiff's claims related to various loans made by the Partnership and by Sierra Mira Mesa Partners to a former affiliate of the General Partner which were allegedly improper or made below market rates. The Plaintiffs were seeking unspecified compensatory and punitive damages and removal of the General Partner. In September 1997, the Court denied the Plaintiff's motion for class certification, but granted the Plaintiff leave to file an amended complaint. The Partnership demurred to all class action allegations in the amended complaint. The Court granted the demurred without leave to amend, thereby reducing the Plaintiff's allegations to a derivative suit. The case is presently in discovery. The Partnership believes any damages awarded in favor of the Plaintiff's derivative suit would be immaterial to the Partnership's operations. 38 SIERRA MIRA MESA PARTNERS AND SUBSIDIARY (A CALIFORNIA GENERAL PARTNERSHIP) AUDITED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 39 INDEPENDENT AUDITORS' REPORT To the Partners of Sierra Mira Mesa Partners We have audited the accompanying consolidated balance sheets of Sierra Mira Mesa Partners and subsidiary, a California general partnership, (the "Partnership") as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in partners' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these 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 Sierra Mira Mesa Partners and subsidiary as of December 31, 1997 and 1996, and the results of its operations and cash flows for each for the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Houston, Texas March 13, 1998 40 SIERRA MIRA MESA PARTNERS AND SUBSIDIARY (A CALIFORNIA GENERAL PARTNERSHIP) CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 - -------------------------------------------------------------------------------- December 31, December 31, 1997 1996 ------------ ------------ ASSETS Cash and cash equivalents $ 244,408 $ 26,721 Receivables: Unbilled rent (Notes 1 and 4) 1,274,906 1,186,818 Billed rent (Note 1) 12,103 0 Other 0 169,241 Due from affiliates, net (Note 3) 2,030,577 1,536,968 Income-producing property - net of accumulated depreciation of $4,625,842 in 1997 and $4,819,832 in 1996 (Notes 1 and 4) 9,086,805 9,449,032 Investment in unconsolidated joint ventures (Notes 1 and 5) 1,793,770 2,773,176 Other assets (Notes 1, 2 and 3) 831,350 1,119,115 ------------ ------------ Total Assets $ 15,273,919 $ 16,261,071 ============ ============ LIABILITIES AND GENERAL PARTNERS' EQUITY Accrued and other liabilities (Note 2) $ 68,765 $ 104,428 Due to Sierra Pacific Pension Investors '84 (Note 3) 0 1,311,300 Notes payable (Note 6) 5,673,052 6,012,512 ------------ ------------ Total Liabilities 5,741,817 7,428,240 ------------ ------------ Minority interest in consolidated joint venture (Note 1) (333,783) (341,689) General Partners' equity (Note 1) 9,865,885 9,174,520 ------------ ------------ Total Liabilities and General Partners' equity $ 15,273,919 $ 16,261,071 ============ ============ SEE ACCOMPANYING NOTES 41 SIERRA MIRA MESA PARTNERS AND SUBSIDIARY (A CALIFORNIA GENERAL PARTNERSHIP) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 - --------------------------------------------------------------------------------
1997 1996 1995 ----------- ----------- ----------- Revenues: Rental income (Note 1) $ 1,919,582 $ 1,808,673 $ 1,529,497 Interest income 174,764 178,726 181,358 Other income 9,404 0 0 ----------- ----------- ----------- Total revenues 2,103,750 1,987,399 1,710,855 ----------- ----------- ----------- Expenses: Operating expenses: Depreciation and amortization 825,911 813,359 586,602 Property taxes and insurance 92,347 53,587 126,078 Administrative fees (Note 3) 104,580 101,142 63,623 Maintenance and repairs 228,890 262,271 201,373 Management fees (Note 3) 101,558 93,780 79,388 Utilities 138,203 138,443 126,769 Legal and accounting 47,242 42,011 20,231 General and administrative 12,677 4,484 3,475 Salaries and payroll taxes 0 0 2,151 Renting expenses 309 5,128 205 Other operating expenses 16,742 27,747 17,913 ----------- ----------- ----------- Total operating expenses 1,568,459 1,541,952 1,227,808 Interest 463,804 559,759 392,088 ----------- ----------- ----------- Total expenses 2,032,263 2,101,711 1,619,896 ----------- ----------- ----------- INCOME (LOSS) BEFORE PARTNERSHIP'S SHARE OF UNCONSOLIDATED JOINT VENTURE LOSSES 71,487 (114,312) 90,959 ----------- ----------- ----------- PARTNERSHIP'S SHARE OF UNCONSOLIDATED JOINT VENTURE LOSSES (Note 5) (855,349) (354,765) (694,095) ----------- ----------- ----------- LOSS BEFORE EXTRAORDINARY GAIN (783,862) (469,077) (603,136) EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT (Note 6) 0 1,200,381 0 ----------- ----------- ----------- (LOSS) INCOME BEFORE MINORITY INTEREST'S SHARE OF CONSOLIDATED JOINT VENTURE (INCOME) LOSS (783,862) 731,304 (603,136) ----------- ----------- ----------- MINORITY INTEREST'S SHARE OF CONSOLIDATED JOINT VENTURE (INCOME) LOSS FROM CONTINUING OPERATIONS (7,906) 102,787 0 MINORITY INTEREST'S SHARE OF CONSOLIDATED JOINT VENTURE EXTRAORDINARY GAIN 0 (516,644) 0 ----------- ----------- ----------- NET (LOSS) INCOME $ (791,768) $ 317,447 $ (603,136) =========== =========== ===========
SEE ACCOMPANYING NOTES 42 SIERRA MIRA MESA PARTNERS AND SUBSIDIARY (A CALIFORNIA GENERAL PARTNERSHIP) CONSOLIDATED STATEMENTS OF CHANGES IN GENERAL PARTNERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 - --------------------------------------------------------------------------------
General Partners ------------------------------------------ Sierra Pacific Sierra Pacific Development Pension Fund II Investors '84 Total ----------- ------------ ----------- General Partners' equity - January 1, 1995 $ 4,866,458 $ 4,675,616 $ 9,542,074 Net loss (307,600) (295,536) (603,136) Contributions 768,258 1,275,036 2,043,294 Distributions (810,009) (1,315,150) (2,125,159) ----------- ----------- ----------- General Partners' equity - December 31, 1995 4,517,107 4,339,966 8,857,073 Net income 161,898 155,549 317,447 ----------- ----------- ----------- General Partners' equity - December 31, 1996 4,679,005 4,495,515 9,174,520 Transfer of advances 155,590 1,311,300 1,466,890 Net loss (284,878) (506,890) (791,768) Contributions 293,000 1,551,843 1,844,843 Distributions (1,580,800) (247,800) (1,828,600) ----------- ----------- ----------- General Partners' equity - December 31, 1997 $ 3,261,917 $ 6,603,968 $ 9,865,885 =========== =========== ===========
SEE ACCOMPANYING NOTES 43 SIERRA MIRA MESA PARTNERS AND SUBSIDIARY (A CALIFORNIA GENERAL PARTNERSHIP) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 - --------------------------------------------------------------------------------
1997 1996 1995 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (791,768) $ 317,447 $ (603,136) Adjustments to reconcile net (loss) income to cash provided by (used in) operating activities: Depreciation and amortization 825,911 813,359 586,602 Gain from extinguishment of debt 0 (1,200,381) 0 Undistributed losses of unconsolidated joint ventures 855,349 354,765 694,095 Minority interest in consolidated joint venture income 7,906 413,857 0 Increase in rent receivable (100,191) (164,870) (97,228) Increase in other receivables (168,779) (70,286) (98,955) Decrease (increase) in other assets 55,566 (293,798) (592,548) (Decrease) increase in accrued and other liabilities (35,663) 12,579 (26,419) ----------- ----------- ----------- Net cash provided by (used in) operating activities 648,331 182,672 (137,589) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments for property additions (231,484) (745,134) (45,552) Capital contributions to unconsolidated joint ventures (2,315,041) (824,400) (1,972,826) Distributions received from unconsolidated joint ventures 2,439,098 731,500 488,566 ----------- ----------- ----------- Net cash used in investing activities (107,427) (838,034) (1,529,812) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Loans to affiliates 0 (4,771) (142,801) Repayments of loans to affiliates 0 142,801 0 Borrowings from affiliates 0 166,890 1,300,000 Capital contributions from General Partners 1,844,843 0 2,043,295 Cash distributions (1,828,600) 0 (2,125,160) Principal proceeds from notes payable 0 0 5,500,000 Principal payments on notes payable (339,460) (992,832) (3,612,225) ----------- ----------- ----------- Net cash (used in) provided by financing activities (323,217) (687,912) 2,963,109 ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 217,687 (1,343,274) 1,295,708 CASH AND CASH EQUIVALENTS - Beginning of year 26,721 1,369,995 29,312 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS - End of year $ 244,408 $ 26,721 $ 1,325,020 =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for interest $ 470,608 $ 580,906 $ 399,521 =========== =========== ===========
In 1997, $338,020 of interest receivable was added to the principal balance of the related note receivable from affiliate. This transaction is a noncash item not reflected in the above statement of cash flows. SEE ACCOMPANYING NOTES 44 SIERRA MIRA MESA PARTNERS AND SUBSIDIARY (A CALIFORNIA GENERAL PARTNERSHIP) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Sierra Mira Mesa Partners ("SMMP"), a California general partnership, was formed in 1985 between Sierra Pacific Development Fund II ("SPDFII") and Sierra Pacific Pension Investors '84 ("SPPI'84") to develop and operate the real property known as Sierra Mira Mesa, an office building, located in San Diego, California. The property contains 89,560 square feet and is 98% leased at December 31, 1997. Per the terms of the partnership agreement, SPDFII and SPPI`84 shared in earnings, contributions and distributions in a ratio of 51% to 49%, respectively. Effective December 31, 1996, the general partners amended the partnership agreement to allow for adjustments in the sharing ratio each year based upon the relative net contributions and distributions since inception of each general partner. As a result, the sharing ratio in effect for 1997 was 45.58% for SPDFII and 54.42% for SPPI`84. In conjunction with this amendment, the general partners forgave the December 31, 1996 balances of advances due from SMMP and included these amounts as adjustments to their respective equity accounts. The sharing ratio effective January 1, 1998 will be adjusted to 33.74% for SPDFII and 66.26% for SPPI`84. S-P Properties, Inc. is the General Partner and manager of SPDFII and SPPI'84. On December 30, 1994, all of the outstanding stock of TCP, Inc. was sold to Finance Factors, Inc. TCP, Inc. owns all of the common stock of S-P Properties, Inc. Finance Factors was a subsidiary of CGS Real Estate Company, Inc., a national real estate company. In July 1995, Finance Factors, Inc. merged with Bancor Real Estate Company, Inc., another subsidiary of CGS Real Estate Company, Inc. SMMP also holds investments in other industrial/commercial properties through its investments in unconsolidated joint ventures. Refer to Note 5 for additional information. BASIS OF FINANCIAL STATEMENTS The Partnership maintains its books and prepares its financial statements in accordance with generally accepted accounting principles. However, the Partnership prepares its tax returns on the accrual basis of accounting as defined by the Internal Revenue Code with adjustments to reconcile book and taxable income (loss) for differences in the treatment of certain income and expense items. The accompanying financial statements do not reflect any provision for federal or state income taxes since such taxes are the obligation of the individual partners. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. The consolidated financial statements of SMMP include the accounts of SMMP and Sorrento I Partners, a majority owned joint venture as of December 31, 1997. Sorrento I Partners was accounted for under the equity method in 1995. The financial statements of SMMP for 1995 have not been restated as the consolidation was accounted for as a step acquisition in accordance with Accounting Research Bulletin No. 51, "Consolidated Financial Statements". All significant intercompany balances and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS Cash and cash equivalents include highly liquid, short-term investments with original maturities of three months or less. 45 Sierra Mira Mesa Partners Notes to Consolidated Financial Statements Page two FAIR VALUE OF FINANCIAL INSTRUMENTS The financial instruments of the Partnership at December 31, 1997 and 1996 consist of cash and cash equivalents, receivables, due from affiliates, accounts payable and notes payable. The fair value of cash and cash equivalents, receivables and accounts payable approximate the carrying value due to the short term nature of these items. In the opinion of management, the fair value of the notes payable approximates the carrying value as the interest rate is based on market rates at December 31, 1997. Management was unable to determine the fair value of the amounts due from affiliates due to the related party nature of this receivable. INCOME-PRODUCING PROPERTIES Property and tenant improvements are carried at cost and depreciated on the straight-line method over the estimated lives of the related assets, ranging from three to thirty years. Tenant improvements incurred at the initial leasing of the properties are depreciated over ten years and tenant improvements incurred at the re-leasing of the properties are depreciated over the life of the related lease. Expenditures for repairs and maintenance are charged against income as incurred. Improvements and major renewals are capitalized. Costs and the related accumulated depreciation of assets sold or retired are removed from the accounts in the year of disposal or when fully depreciated and any resulting gain or loss is reflected in income or deferred income as appropriate. The Partnership employs a systematic approach in determining whether the value of income-producing property has been impaired. Prior to 1995, a provision for loss on a property was established if the appraised value of the property declined below its book value due to what the General Partner believed to be an other than temporary condition. A complete appraisal was performed on the property as of December 31 each year. Effective January 1, 1995, the Partnership implemented Statement of Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (the "Statement"). The Partnership regularly evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Future cash flows are estimated and compared to the carrying amount of the asset to determine if an impairment has occurred. If the sum of the expected future cash flows is less than the carrying amount of the asset, the Partnership shall recognize an impairment loss in accordance with the Statement. No provision was required due to the implementation of this Statement. Because the determination of fair value is based upon projections of future economic events such as property occupancy rates, rental rates, operating cost inflation and market capitalization rates which are inherently subjective, the amounts ultimately realized at disposition may differ materially from the net carrying value as of December 31, 1997. The cash flows used to determine fair value and net realizable value are based on good faith estimates and assumptions developed by management. Unanticipated events and circumstances may occur and some assumptions may not materialize; therefore actual results may vary from the estimates and the variances may be material. The Partnership may provide additional write-downs which could be material in subsequent years if real estate markets or local economic conditions change. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES The investment in unconsolidated joint ventures is stated at cost and is adjusted for the Partnership's share in earnings or losses and cash contributions to or distributions from the joint ventures (equity method). 46 Sierra Mira Mesa Partners Notes to Consolidated Financial Statements Page three OTHER ASSETS Deferred leasing costs represent costs incurred to lease properties and are amortized over the life of the related lease. Deferred loan costs represent costs incurred to obtain financing and are amortized over the life of the related loan. RENTAL INCOME AND RENT RECEIVABLE Rental income is recognized on the straight-line method over the term of the related operating lease in accordance with the provisions of Statement of Financial Accounting Standards No. 13, "Accounting for Leases". Rent receivable consists of (a) unbilled rent - the difference between rent recognized on the straight-line method and actual cash due; (b) billed rent - rent due but not yet received. 2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS Additional information regarding certain balance sheet accounts, at December 31, 1997 and 1996, is as follows: 1997 1996 ---------- ---------- Other assets: Prepaid expenses ................................ $ 20,800 $ 24,066 Deferred loan costs, net of accumulated amortization of $202,307 in 1997 and $153,009 in 1996 .......................... 157,889 207,187 Deferred leasing costs, net of accumulated amortization of $871,903 in 1997 and $689,001 in 1996 .......................... 609,019 782,199 Tax impounds .................................... 23,288 28,936 Tenant improvement reserves ...................................... 20,354 76,727 ---------- ---------- $ 831,350 $1,119,115 ========== ========== Accrued and other liabilities: Accounts payable ................................ $ 38,666 $ 56,711 Security deposits ............................... 5,999 2,761 Accrued expenses ................................ 2,073 16,125 Interest payable ................................ 22,027 28,831 ---------- ---------- $ 68,765 $ 104,428 ========== ========== 47 Sierra Mira Mesa Partners Notes to Consolidated Financial Statements Page four 3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS In 1994, all of the common stock of TCP, Inc. was purchased by Finance Factors, Inc. from Carlsberg Management Company ("CMC"). TCP, Inc. owns all of the common stock of S-P Properties, Inc., the General Partner of the Partnership. CMC continued to manage the affairs of the Partnership through March 31, 1995. An affiliate of S-P Properties, Inc. receives a management fee of 5.5% of the gross rental income collected from the property. This fee amounted to $101,558, $93,780 and $53,392, respectively, for the years ended December 31, 1997, 1996 and 1995. This fee was recorded as part of the operating expenses of the property. SMMP reimburses an affiliate of S-P Properties, Inc. for expenses incurred by the affiliate for services provided to SMMP such as accounting, data processing and similar services. The affiliate was reimbursed $104,580, $101,142 and $51,201, respectively, for such services for the years ended December 31, 1997, 1996 and 1995. Additionally, SMMP reimbursed an affiliate for construction supervision costs incurred by the affiliate. For the years ended December 31, 1997, 1996 and 1995, the affiliate received $11,154, $48,205 and $3,374, respectively, for tenant improvements supervisory costs. In consideration for services rendered with respect to initial leasing of SMMP's property, an affiliate of S-P Properties, Inc. is paid initial leasing costs. For the years ended December 31, 1997 and 1996, these fees amounted to $3,656 and $65,120, respectively, and were recorded as deferred leasing costs. No such costs were incurred in 1995. During 1993, SMMP loaned funds to a former affiliate of S-P Properties, Inc. in the form of demand notes. Such liabilities were assumed by Finance Factors, Inc. which acquired S-P Properties, Inc. as of December 30, 1994. In July 1995, Finance Factors, Inc. merged with Bancor Real Estate Company, Inc. who has assumed the note. The annual interest rate of the loans was variable at bank prime plus 2-1/4% - 3% with a minimum rate of 9%. The loans totaled $2,360,000 at December 31, 1993 and were reduced to $1,687,787 at December 31, 1994. This loan was amended effective January 1, 1995 fixing the interest rate at 10%. On December 31, 1997, interest receivable of $338,020 was added to the principal balance of the loan. No interest related to this loan was due to the Partnership at December 31, 1997. Interest receivable was $169,241 at December 31, 1996. The principal balance outstanding at December 31, 1997 is $2,025,807. The loan is guaranteed by the owners of CGS Real Estate Company, Inc. During 1995, the Partnership made a short-term, non-interest bearing loan to SPDFII in the amount of $140,000. This loan was repaid in 1996. In 1996, the Partnership received a short-term, non-interest bearing loan from SPDFII in the amount of $155,590. This loan was reclassed to equity in 1997 (See Note 1). During 1996, the Partnership made a non-interest bearing advance to an affiliate in the amount of $4,771. Repayment is expected in 1998. During 1995 and 1996, the Partnership received non-interest bearing short-term advances from SPPI'84 of $1,300,000 and $11,300, respectively. These advances were reclassed to equity in 1997 (See Note 1). Reference is made to Note 6. 48 Sierra Mira Mesa Partners Notes to Consolidated Financial Statements Page five 4. INCOME-PRODUCING PROPERTIES At December 31, 1997 and 1996 the total cost and accumulated depreciation of the properties are as follows: 1997 1996 ------------ ------------ Land ................................... $ 3,786,458 $ 3,786,458 Building and improvements .............. 9,926,189 10,482,406 ------------ ------------ Total ....................... 13,712,647 14,268,864 Accumulated depreciation ............... (4,625,842) (4,819,832) ------------ ------------ Net ......................... $ 9,086,805 $ 9,449,032 ============ ============ Future minimum base rental income, under the existing operating leases for the Sierra Mira Mesa and Sorrento I properties, to be recognized on a straight-line basis and amounts to be received on a cash basis are as follows: Year Ending Straight-line Cash December 31, Basis Basis ------------------------ -------------- -------------- 1998 $ 1,872,969 $ 1,922,487 1999 1,807,666 1,953,335 2000 1,760,152 2,000,177 2001 1,753,768 2,084,968 2002 1,744,768 2,173,586 Thereafter 338,100 417,776 -------------- -------------- Total $ 9,277,423 $ 10,552,329 ============== ============== The Partnership relied on two tenants for 80% of 1997 rental income; 67% is from a state governmental agency associated with workers compensation insurance and 13% is from a tenant in the communications sector. 5. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES SMMP holds the following investments accounted for under the equity method at December 31, 1997: o a 24.91% equity interest in Sorrento II Partners ("SIIP"), a joint venture formed on October 1, 1993 with Sierra Pacific Institutional Properties V, an affiliate, to develop and operate Sierra Sorrento II, an industrial building located in San Diego, California. SMMP's investment in SIIP as of December 31, 1997 and 1996 is $1,711,297 and $1,078,963, respectively. SMMP's share of the net loss of SIIP for the three years ended December 31, 1997, 1996 and 1995 is $59,066, $61,933 and $51,897, respectively; 49 Sierra Mira Mesa Partners Notes to Consolidated Financial Statements Page six o a 4.96% equity interest in Sierra Creekside Partners ("SCP"), a joint venture formed on February 1, 1994 with Sierra Pacific Development Fund, an affiliate, to develop and operate Sierra Creekside, a commercial office building in San Ramon, California. SMMP's investment in SCP as of December 31, 1997 and 1996 is $25,510 and $(102,995), respectively. SMMP's share of the net loss of SCP for the three years ended December 31, 1997, 1996 and 1995 is $14,995, $70,232 and $96,868, respectively; o a 47.05% equity interest in Sierra Vista Partners ("SVP"), a joint venture formed on February 1, 1994 with Sierra Pacific Development Fund III, an affiliate, to develop and operate Sierra Vista, an industrial building in Anaheim, California. SMMP's investment in SVP as of December 31, 1997 and 1996 is $56,963 and $1,797,208, respectively. SMMP's share of the net loss of SVP for the three years ended December 31, 1997, 1996 and 1995 is $781,288, $222,600 and $173,375, respectively. The Sierra Vista property was sold in October 1997. The following is a summary of aggregated financial information for all investments owned by SMMP which are accounted for under the equity method: CONDENSED COMBINED BALANCE SHEETS December 31, December 31, 1997 1996 ----------- ----------- ASSETS Cash and cash equivalents ........................ $ 122,997 $ 159,369 Rent receivable .................................. 549,240 781,284 Due from affiliate ............................... 47,666 50,681 Income-producing property, net of accumulated depreciation ................................... 8,610,352 15,043,645 Other assets ..................................... 1,339,407 732,144 ----------- ----------- Total Assets ..................................... $10,669,662 $16,767,123 =========== =========== LIABILITIES AND GENERAL PARTNERS' EQUITY Accrued and other liabilities .................................... $ 325,087 $ 648,328 Note payable ..................................... 1,763,420 5,213,615 ----------- ----------- Total Liabilities ................................ 2,088,507 5,861,943 ----------- ----------- Ground lessors' equity in income-producing property ....................................... 3,000,000 3,000,000 ----------- ----------- General Partners' equity ......................... 5,581,155 7,905,180 ----------- ----------- Total Liabilities and General Partners' equity ............................... $10,669,662 $16,767,123 =========== =========== 50 Sierra Mira Mesa Partners Notes to Consolidated Financial Statements Page seven CONDENSED COMBINED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Revenues: Rental income .................. $ 2,294,859 $ 2,474,335 $ 2,124,077 Other income ................... 9,698 13,968 6,915 ----------- ----------- ----------- Total revenues .... 2,304,557 2,488,303 2,130,992 ----------- ----------- ----------- Expenses: Operating expenses ............. 1,755,826 1,788,643 2,009,862 Depreciation and amortization ................. 1,321,177 1,461,571 1,438,310 Interest ....................... 459,763 427,967 691,407 ----------- ----------- ----------- Total expenses .... 3,536,766 3,678,181 4,139,579 ----------- ----------- ----------- Net loss before disposition of property ..................... (1,232,209) (1,189,878) (2,008,587) Loss from property disposition ..................... (967,764) 0 0 ----------- ----------- ----------- Net loss .......................... $(2,199,973) $(1,189,878) $(2,008,587) =========== =========== =========== 6. NOTES PAYABLE 1997 1996 ----------- ------------ Mortgage note payable, due in monthly installments with interest at 7.74%, collateralized by the real property known as Sierra Mira Mesa. This note matures in October 2010. $5,041,225 $5,262,512 Mortgage note payable to affiliate, due in monthly installments with interest fixed at 9.34% per annum through October 1998, at which time the rate will convert to the one-year treasury rate plus 375 basis points. The note is collateralized by the real property known as Sorrento I. This note matures in March 2015. 631,827 750,000 ----------- ------------ $5,673,052 $6,012,512 =========== ============ CGS Real Estate Company, Inc. ("CGS"), an affiliate of the General Partner, acquired the Sorrento I mortgage note, due in July 1998, and security documents from the bank in May 1996. In connection with the purchase of the bank note and security documents by CGS, the Partnership made a principal payment to the bank of $750,000 and entered into a $750,000 note agreement with CGS (the "CGS Agreement"). The CGS Agreement, collaterized by real and personal property, called for monthly interest payments through December 1996 and monthly principal and interest payments thereafter until maturity on May 31, 2016. The interest rate is fixed at 9.34% per annum for the first year of the note and will thereafter be the one year Treasury rate plus 375 basis points. A pre-payment in the amount of $105,000 was paid in April 1997. 51 Sierra Mira Mesa Partners Notes to Consolidated Financial Statements Page eight At any time upon 120 days written notice to CGS, the Partnership may fully discharge the note by the payment of an amount equal to $750,000 less the aggregate amount of principal paid under the note between the date of the CGS Agreement and the date of payment plus any interest due. A modification agreement was entered into on September 30, 1997. The interest rate remained fixed at 9.34% through October 1998, at which time the rate will convert to the one-year treasury rate plus 375 basis points. The principal of the note on the effective date was $635,479 and is amortized over a 210-month term until maturity in March 2015. Current payments are $6,154 per month, principal and interest inclusive. The loan balance as of December 31, 1997 was $631,827. The excess of the net carrying amount of the balance due under the bank note agreement, net of unamortized deferred loan fees, over the balance due under the CGS Agreement was recognized as an extraordinary item in 1996 in the amount of $1,200,381. Annual maturities under the Sierra Mira Mesa note and the CGS Agreement as of December 31, 1997 are: $254,524 in 1998; $275,206 in 1999; $297,573 in 2000; $321,763 in 2001; $347,924 in 2002; and $4,176,062 thereafter. 52 SIERRA VISTA PARTNERS (A CALIFORNIA GENERAL PARTNERSHIP) AUDITED FINANCIAL STATEMENTS DECEMBER 31, 1997 53 INDEPENDENT AUDITORS' REPORT To the Partners of Sierra Vista Partners We have audited the accompanying balance sheets of Sierra Vista Partners, a California general partnership, (the "Partnership") as of December 31, 1997 and 1996, and the related statements of operations, changes in partners' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in all material respects, the financial position of Sierra Vista Partners as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Houston, Texas March 13, 1998 54 SIERRA VISTA PARTNERS (A CALIFORNIA GENERAL PARTNERSHIP) BALANCE SHEETS DECEMBER 31, 1997 AND 1996 - -------------------------------------------------------------------------------- DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------- ----------------- ASSETS Cash and cash equivalents $14,602 $ 97,439 Receivables: Unbilled rent (Note 1) 0 97,448 Billed rent (Note 1) 0 88,445 Other 6,137 1,261 Due from affiliates (Note 3) 0 4,770 Income-producing property - net of accumulated depreciation and valuation allowance of $4,401,334 in 1996 (Notes 1 and 4) 0 5,827,882 Other assets (Notes 1 and 2) 0 154,690 ------- ---------- Total Assets $20,739 $6,271,935 ======= ========== LIABILITIES AND GENERAL PARTNERS' EQUITY Accrued and other liabilities (Note 2) $ 4,660 $ 225,556 Notes payable (Note 5) 0 3,410,795 ------- ---------- Total Liabilities 4,660 3,636,351 ------- ---------- General Partners' equity (Notes 1 and 6) 16,079 2,635,584 ------- ---------- Total Liabilities and General Partners' equity $20,739 $6,271,935 ======= ========== SEE ACCOMPANYING NOTES 55 SIERRA VISTA PARTNERS (A CALIFORNIA GENERAL PARTNERSHIP) STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 - --------------------------------------------------------------------------------
1997 1996 1995 ----------- ----------- ----------- REVENUES: Rental income (Note 1) $ 558,091 $ 735,569 $ 615,088 Interest income 633 0 0 ----------- ----------- ----------- Total revenues 558,724 735,569 615,088 ----------- ----------- ----------- EXPENSES: Operating expenses: Depreciation and amortization 464,427 545,989 471,498 Maintenance and repairs 104,981 122,293 98,716 Property taxes and insurance 63,209 69,754 93,917 Administrative fees (Note 3) 75,180 73,047 66,842 Utilities 58,037 60,183 57,938 Legal and accounting 44,128 29,846 39,779 Management fees (Note 3) 40,248 38,873 38,035 Salaries and payroll taxes 35,565 53,276 34,287 General and administrative 13,261 5,860 33,220 Renting expenses 3,535 4,764 20,221 Other operating expenses 49,533 57,303 50,775 ----------- ----------- ----------- Total operating expenses 952,104 1,061,188 1,005,228 Interest 299,404 264,206 311,218 ----------- ----------- ----------- Total expenses 1,251,508 1,325,394 1,316,446 ----------- ----------- ----------- LOSS BEFORE LOSS FROM PROPERTY DISPOSITION (692,784) (589,825) (701,358) LOSS FROM PROPERTY DISPOSITION (Note 4) (967,764) 0 0 ----------- ----------- ----------- Net loss $(1,660,548) $ (589,825) $ (701,358) =========== =========== ===========
SEE ACCOMPANYING NOTES 56 SIERRA VISTA PARTNERS (A CALIFORNIA GENERAL PARTNERSHIP) STATEMENTS OF CHANGES IN GENERAL PARTNERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 - --------------------------------------------------------------------------------
GENERAL PARTNERS ---------------------------------------------- SIERRA PACIFIC SIERRA DEVELOPMENT MIRA MESA FUND III PARTNERS TOTAL ----------- ----------- ----------- General Partners' equity - January 1, 1995 $ 1,733,584 $ 705,252 $ 2,438,836 Net loss (527,983) (173,375) (701,358) Contributions 0 796,356 796,356 Distributions 0 (56,925) (56,925) ----------- ----------- ----------- General Partners' equity - December 31, 1995 1,205,601 1,271,308 2,476,909 Net loss (367,225) (222,600) (589,825) Contributions 0 748,500 748,500 ----------- ----------- ----------- General Partners' equity - December 31, 1996 838,376 1,797,208 2,635,584 Net loss (879,260) (781,288) (1,660,548) Contributions 0 1,193,141 1,193,141 Distributions 0 (2,152,098) (2,152,098) ----------- ----------- ----------- General Partners' equity (deficit) - December 31, 1997 $ (40,884) $ 56,963 $ 16,079 =========== =========== ===========
SEE ACCOMPANYING NOTES 57 SIERRA VISTA PARTNERS (A CALIFORNIA GENERAL PARTNERSHIP) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 - --------------------------------------------------------------------------------
1997 1996 1995 ----------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(1,660,548) $(589,825) $(701,358) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization 464,427 545,989 471,498 Loss from property disposition 967,764 0 0 Decrease (increase) in rent receivable 21,374 (102,089) (27,601) Increase in other receivables (4,876) (1,261) 0 Increase in other assets (280,515) (68,979) (114,779) (Decrease) increase in accrued and other liabilities (15,891) 53,293 59,735 ----------- --------- --------- Net used in operating activities (508,265) (162,872) (312,505) ----------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments for property additions (394,584) (592,372) (322,099) Net cash proceeds from property disposition 2,140,598 0 0 Payment for restricted certificate of deposit 0 0 (92,782) Release of restricted certificate of deposit 0 92,782 0 ----------- --------- --------- Net cash provided by (used in) investing activities 1,746,014 (499,590) (414,881) ----------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Contributions from General Partner 1,193,141 748,500 796,356 Distributions to General Partner (2,152,098) 0 (56,925) Loan to affiliate 0 (4,770) 0 Repayment of loan to affiliate 4,770 0 0 Funding of note payable secured by property 3,050,000 0 0 Principal payments on note payable (3,416,399) 0 0 ----------- --------- --------- Net cash (used in) provided by financing activities (1,320,586) 743,730 739,431 ----------- --------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (82,837) 81,268 12,045 CASH AND CASH EQUIVALENTS - Beginning of period 97,439 16,171 4,126 ----------- --------- --------- CASH AND CASH EQUIVALENTS - End of period $ 14,602 $ 97,439 16,171 =========== ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 324,853 $ 240,000 326,927 =========== ========= =========
SEE ACCOMPANYING NOTES 58 SIERRA VISTA PARTNERS (A CALIFORNIA GENERAL PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Sierra Vista Partners (the "Partnership") was organized on February 1, 1994 as a California general partnership between Sierra Pacific Development Fund III ("SPDFIII") and Sierra Mira Mesa Partners ("SMMP") to develop and operate the real property known as Sierra Vista (the "Property"), an industrial building located in Anaheim, California. This property, a 102,855 square foot industrial/office project, was completed in April 1988. In October 1997, the Property was sold for $5,630,000. The Partnership received net cash proceeds of $2,140,598 from the sale and the purchaser assumed the Partnership's debt on such property of $3,044,397. The Partnership also incurred additional selling cost and credited security deposits and prorata rents for October to the buyer. In accordance with the Partnership joint venture agreement, these proceeds were distributed to SMMP. Under the terms of the agreement, SMMP receives preferential cash distributions of available "Distributable Funds" from the sale of the property to the extent of its capital contributions. SMMP had made net contributions of $3,335,204 to the Partnership through the sale date. At December 31, 1997, the Partnership is 52.95% owned by SPDFIII and 47.05% owned by SMMP. S-P Properties, Inc. is the General Partner of SPDFIII and of SMMP's general partners, Sierra Pacific Development Fund II ("SPDFII") and Sierra Pacific Pension Investors '84 ("SPPI'84"). On December 30, 1994, all of the outstanding stock of TCP, Inc. was sold to Finance Factors, Inc. TCP, Inc. owns all of the common stock of S-P Properties, Inc. Finance Factors was a subsidiary of CGS Real Estate Company, Inc., a national real estate company. In July 1995, Finance Factors, Inc. merged with Bancor Real Estate Company, Inc., another subsidiary of CGS Real Estate Company, Inc. BASIS OF FINANCIAL STATEMENTS The Partnership maintains its books and prepares its financial statements in accordance with generally accepted accounting principles. However, the Partnership prepares its tax returns on the accrual basis of accounting as defined by the Internal Revenue Code with adjustments to reconcile book and taxable income (loss) for differences in the treatment of certain income and expense items. The accompanying financial statements do not reflect any provision for federal or state income taxes since such taxes are the obligation of the individual partners. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include highly liquid, short-term investments with original maturities of three months or less. 59 Sierra Vista Partners Notes to Financial Statements Page two FAIR VALUE OF FINANCIAL INSTRUMENTS The financial instruments of the Partnership at December 31, 1997 and 1996 consist of cash and cash equivalents, receivables, due from affiliates, accounts payable and notes payable. The fair value of cash and cash equivalents, receivables, and accounts payable approximates the carrying value due to the short term nature of these items. The fair value of the notes payable approximates the carrying value based on market rates at December 31, 1997. The fair value of the amounts due from affiliates can not be determined due to the related party nature of this receivable. INCOME-PRODUCING PROPERTY Property and tenant improvements are carried at cost and depreciated on the straight-line method over the estimated lives of the related assets, ranging from one to thirty years. Tenant improvements incurred at the initial leasing of the property are depreciated over ten years and tenant improvements incurred at the re-leasing of the property are depreciated over the life of the related lease. Expenditures for repairs and maintenance are charged against income as incurred. Improvements and major renewals are capitalized. Costs and the related accumulated depreciation of assets sold or retired are removed from the accounts in the year of disposal or when fully depreciated and the resulting gain or loss is reflected in income or deferred income as appropriate. The Partnership employs a systematic approach in determining whether the value of income-producing property has been impaired. Prior to 1995, a provision for loss on a property was established if the appraised value of the property declined below its book value due to what the General Partner believed to be an other than temporary condition. A complete appraisal was performed on the property as of December 31 each year. Effective January 1, 1995, the Partnership implemented Statement of Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (the "Statement"). The Partnership regularly evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Future cash flows are estimated and compared to the carrying amount of the asset to determine if an impairment has occurred. If the sum of the expected future cash flows is less than the carrying amount of the asset, the Partnership shall recognize an impairment loss in accordance with the Statement. No additional provision was required with the implementation of this Statement. Because the determination of fair value is based upon projections of future economic events such as property occupancy rates, rental rates, operating cost inflation and market capitalization rates which are inherently subjective, the amounts ultimately realized at disposition may differ materially from the net carrying value. The cash flows used to determine fair value and net realizable value are based on good faith estimates and assumptions developed by management. Unanticipated events and circumstances may occur and some assumptions may not materialize; therefore actual results may vary from the estimates and the variances may be material. The Partnership may provide additional write-downs which could be material in subsequent years if real estate markets or local economic conditions change. OTHER ASSETS Deferred leasing costs represent costs incurred to lease properties and are amortized over the life of the related lease. Deferred loan costs represent costs incurred to obtain financing and are amortized over the life of the related loan. 60 Sierra Vista Partners Notes to Financial Statements Page three RENTAL INCOME AND RENT RECEIVABLE Rental income is recognized on the straight-line method over the term of the related operating lease in accordance with the provisions of Statement of Financial Accounting Standards No. 13, "Accounting for Leases". Rent receivable consists of (a) unbilled rent - the difference between rent recognized on the straight-line method and actual cash due; and (b) billed rent - - rent due but not yet received. 2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS Additional information regarding certain balance sheet accounts, at December 31, 1997 and 1996, is as follows: 1997 1996 -------- -------- Other assets: Prepaid expenses $ 0 $ 34,686 Deferred loan costs, net of accumulated amortization of $5,035 in 1996 0 315 Deferred leasing costs, net of accumulated amortization of $121,924 in 1996 119,689 -------- -------- $ 0 $154,690 ======== ======== Accrued and other liabilities: Accounts payable $ 4,660 $106,400 Accrued expenses 0 8,543 Security deposits 0 82,248 Interest payable 0 20,000 Other 0 8,365 -------- -------- $ 4,660 $225,556 ======== ======== 61 Sierra Vista Partners Notes to Financial Statements Page four 3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS In 1994, all of the common stock of TCP, Inc. was purchased by Finance Factors, Inc. from Carlsberg Management Company ("CMC"). TCP, Inc. owns all of the common stock of S-P Properties, Inc., the General Partner of the Partnership. CMC continued to manage the affairs of the Partnership through March 31, 1995. An affiliate of S-P Properties, Inc. may receive a management fee of 6% of the gross rental income collected from the property. Management fees paid to affiliates for the years ended December 31, 1997, 1996 and 1995 were $40,248, $38,873 and $23,615, respectively. An affiliate of S-P Properties, Inc. is entitled to reimbursement for expenses incurred by the affiliate for services provided to the Partnership such as accounting, legal, data processing and similar services. The affiliate was reimbursed $75,530, $73,047 and $55,468 for such services for the years ended December 31, 1997, 1996 and 1995, respectively. Additionally, the Partnership reimbursed the affiliate for construction supervision costs incurred by the affiliate. For the years ended December 31, 1997, 1996 and 1995 the affiliate received $64,904, $7,782 and $20,576, respectively, for tenant improvements supervisory costs. In consideration for services rendered with respect to initial leasing of Partnership properties, an affiliate of S-P Properties, Inc. is paid initial leasing costs. For the years ended December 31, 1997, 1996 and 1995 these fees amounted to $76,984, $91,660 and $46,838, respectively, and were recorded as deferred leasing costs. In consideration for services rendered with respect to obtaining new financing, an affiliate of the General Partner is paid broker fees. For the year ended December 31, 1997, these fees amounted to $61,000 and were recorded as deferred loan costs. No such fees were incurred in 1996 and 1995. During 1996, the Partnership made a short-term, non-interest bearing loan to an affiliate. Repayment was made during 1997. 4. INCOME-PRODUCING PROPERTY At December 31, 1997 and 1996 the total cost and accumulated depreciation of the property are as follows: 1997 1996 ------------ ------------ Land $ 0 $ 2,878,269 Building and improvements 0 7,350,947 ------------ ------------ Total 0 10,229,216 Accumulated depreciation 0 (2,801,334) Valuation allowance 0 (1,600,000) ------------ ------------ Net $ 0 $ 5,827,882 ============ ============ In October 1997, the Sierra Vista property was sold for $5,630,000. The Partnership received net cash proceeds of $2,140,598 from the sale. In accordance with the Partnership joint venture agreement, these proceeds were distributed to SMMP. Under the terms of the agreement, SMMP receives preferential cash distributions of available "Distributable Funds" from the sale of the property to the extent of its capital contributions. SMMP had made net contributions of $3,335,204 to the Partnership through the sale date. 62 Sierra Vista Partners Notes to Financial Statements Page five 5. NOTES PAYABLE In August 1995, the Partnership's non-recourse note payable, secured by the Property, was restructured. The restructure extended the note maturity from May 1996 to February 1997. The annual interest rate was reduced from 3% above Bank of America's prime rate to a fixed rate of 8% retroactive to June 1995. The required monthly interest payments were reduced from $31,700 to $20,000 effective August 1995. On April 10, 1997, the Partnership's note was paid off. On the same date, the Partnership entered into a new loan agreement in the amount of $3,050,000. The loan was secured by the Sierra Vista property, bore interest at 9.375 % and called for monthly principal and interest payments of $25,807 on the first day of each month. This loan was transferred and assumed by the buyer of the property in October 1997. 6. GENERAL PARTNERS' EQUITY (DEFICIT) Each partner's initial percentage interest in the capital contributed to the Partnership was as follows: SPDFIII - 81.5% and SMMP - 18.5%. Said percentage interest for each partner is to be adjusted January 1st of each fiscal year during the term of the Partnership, commencing January 1, 1995, in the event of any capital contributions made by or capital distributions made to any of the partners during the preceding fiscal year so that the partners' percentage interest shall be equal to the percentage share of the partners' aggregate net cash contributions from the inception of the Partnership. Partnership profits and losses, distributions and voting rights are allocated based upon the calculated percentage interests. SMMP contributed cash ($870,000 through December 31, 1994) and made additional contributions of $796,356, $748,500 and $1,193,141 and received distributions of $56,925, $0 and $2,152,098 during 1995, 1996 and 1997, respectively. Accordingly, as of January 1, 1995, 1996 and 1997, SMMP's interest in the Partnership was changed to 24.72%, 37.74% and 47.05%, respectively. Effective January 1, 1998, SMMP's interest in the Partnership will be reduced to 34.51%. In accordance with the Partnership joint venture agreement, the net proceeds received from the sale of the property in October 1997 were distributed to SMMP. Under the terms of the agreement, SMMP receives preferential cash distributions of available "Distributable Funds" from the sale to the extent of its capital contributions. SMMP had made net contributions of $3,335,204 to the Partnership through the sale date. 63 SORRENTO I PARTNERS (A CALIFORNIA GENERAL PARTNERSHIP) AUDITED FINANCIAL STATEMENTS DECEMBER 31, 1997 64 INDEPENDENT AUDITORS' REPORT To the Partners of Sorrento I Partners We have audited the accompanying balance sheets of Sorrento I Partners, a California general partnership, (the "Partnership") as of December 31, 1997 and 1996, and the related statements of operations, changes in general partners' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in all material respects, the financial position of Sorrento I Partners as of December 31, 1997 and 1996, and the results of its operations and cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Houston, Texas March 13, 1998 65 SORRENTO I PARTNERS (A CALIFORNIA GENERAL PARTNERSHIP) BALANCE SHEETS DECEMBER 31, 1997 AND 1996 - -------------------------------------------------------------------------------- December 31, December 31, 1997 1996 ---------- ---------- ASSETS Cash and cash equivalents $ 3,675 $ 20,362 Receivables: Unbilled rent (Notes 1 and 4) 34,906 13,962 Other 14,301 14,162 Due from affiliates (Note 3) 4,770 4,770 Income-producing property - net of accumulated depreciation of $537,812 in 1997 and $1,170,370 in 1996 (Notes 1, 4 and 5) 2,439,688 2,541,614 Other assets (Notes 1 and 2) 137,926 171,776 ---------- ---------- Total Assets $2,635,266 $2,766,646 ========== ========== LIABILITIES AND GENERAL PARTNERS' EQUITY Accrued and other liabilities (Note 2) $ 16,124 $ 24,393 Note payable to affiliate (Note 5) 631,827 750,000 ---------- ---------- Total Liabilities 647,951 774,393 ---------- ---------- General Partners' equity (Notes 1 and 6) 1,987,315 1,992,253 ---------- ---------- Total Liabilities and General Partners' equity $2,635,266 $2,766,646 ========== ========== SEE ACCOMPANYING NOTES 66 SORRENTO I PARTNERS (A CALIFORNIA GENERAL PARTNERSHIP) STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 - -------------------------------------------------------------------------------- 1997 1996 1995 -------- ----------- --------- Revenues: Rental income (Note 1) $283,635 $ 189,177 $ 0 Other income 9,404 0 0 -------- ----------- --------- Total revenues 293,039 189,177 0 -------- ----------- --------- Expenses: Operating expenses: Depreciation and amortization 127,662 149,618 136,089 Property taxes and insurance 2,847 22,068 39,208 Administrative fees (Note 3) 34,860 33,714 40,354 Maintenance and repairs 49 24,458 31,500 Management fees (Note 3) 15,762 13,003 0 Utilities 0 7,062 16,175 Legal and accounting 22,803 18,216 26,090 General and administrative 5,677 4,362 29,041 Salaries and payroll taxes 0 0 1,561 Renting expenses 0 3,300 0 Other operating expenses 1,894 7,614 8,980 -------- ----------- --------- Total operating expenses 211,554 283,415 328,998 Interest 63,123 144,646 310,575 -------- ----------- --------- Total expenses 274,677 428,061 639,573 -------- ----------- --------- INCOME (LOSS) BEFORE EXTRAORDINARY GAIN 18,362 (238,884) (639,573) -------- ----------- --------- EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT (NOTE 5) 0 1,200,381 0 -------- ----------- --------- NET INCOME (LOSS) $ 18,362 $ 961,497 $(639,573) ======== =========== ========= SEE ACCOMPANYING NOTES 67 SORRENTO I PARTNERS (A CALIFORNIA GENERAL PARTNERSHIP) STATEMENTS OF CHANGES IN GENERAL PARTNERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 - --------------------------------------------------------------------------------
General Partners -------------------------------------------- Sierra Pacific Sierra Development Mira Mesa Fund III Partners Total ----------- ----------- ----------- General Partners' equity (deficit) - January 1, 1995 $(490,699) $ 145,586 $ (345,113) Net loss (264,847) (374,726) (639,573) Contributions 0 500,242 500,242 --------- ----------- ----------- General Partners' equity (deficit) - December 31, 1995 (755,546) 271,102 (484,444) Net income 413,857 547,640 961,497 Contributions 0 1,551,100 1,551,100 Distributions 0 (35,900) (35,900) --------- ----------- ----------- General Partners' equity (deficit) - December 31, 1996 (341,689) 2,333,942 1,992,253 Net income 7,906 10,456 18,362 Contributions 0 141,000 141,000 Distributions 0 (164,300) (164,300) --------- ----------- ----------- General Partners' equity (deficit) - December 31, 1997 $(333,783) $ 2,321,098 1,987,315 ========= =========== ===========
SEE ACCOMPANYING NOTES 68 SORRENTO I PARTNERS (A CALIFORNIA GENERAL PARTNERSHIP) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 - --------------------------------------------------------------------------------
1997 1996 1995 --------- ----------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 18,362 $ 961,497 $(639,573) Adjustments to reconcile net income (loss) to cash used in operating activities: Gain from extinguishment of debt 0 (1,200,381) 0 Depreciation and amortization 127,662 149,618 136,089 (Increase) decrease in rent receivable (20,944) (13,962) 5,880 Increase in other receivables (139) (14,162) 0 Decrease (increase) in other assets 8,114 (178,536) (7,849) (Decrease) increase in accrued and other liabilities (8,269) (4,511) 74,411 --------- ----------- --------- Net cash provided by (used in) operating activities 124,786 (300,437) (431,042) --------- ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments for property additions 0 (446,630) 0 --------- ----------- --------- Net cash used in investing activities 0 (446,630) 0 --------- ----------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments to affiliates 0 (4,770) 0 Contributions by the General Partners 141,000 1,551,100 500,242 Distributions to the General Partners (164,300) (35,900) 0 Principal payments on note payable (118,173) (787,976) (33,856) --------- ----------- --------- Net cash (used in) provided by financing activities (141,473) 722,454 466,386 --------- ----------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (16,687) (24,613) 35,344 CASH AND CASH EQUIVALENTS - Beginning of period 20,362 44,975 9,631 --------- ----------- --------- CASH AND CASH EQUIVALENTS - End of period $ 3,675 $ 20,362 $ 44,975 ========= =========== ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 68,961 $ 164,898 $ 223,811 ========= =========== =========
During 1996, Sorrento I exercised a discounted payoff option on its notes payable that resulted in a $1,200,381 extraordinary gain. During 1995, accrued interest was added to the note payable principal balance in the amount of $85,709. These are noncash transactions not reflected in the above statements of cash flows. SEE ACCOMPANYING NOTES 69 SORRENTO I PARTNERS (A CALIFORNIA GENERAL PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Sorrento I Partners ("SIP") was formed as a California general partnership on April 1, 1993 between Sierra Mira Mesa Partners ("SMMP") and Sierra Pacific Development Fund III ("SPDFIII") to develop and operate the real property known as Sorrento I, an industrial building, located in San Diego, California. The property contains 43,100 square feet and is located adjacent to Sierra Mira Mesa office building, which is owned and operated by Sierra Mira Mesa Partners. In 1993, SMMP contributed cash of $383,836 ($443,836, net, through 31, 1994) for a 55.03% interest and SPDFIII contributed the property and all associated encumbrances for a 44.97% interest in SIP. During 1995, 1996 and 1997, SMMP contributed an additional $500,242, $1,551,100 and $141,000 and received distributions amounting to $0, $35,900 and $164,300 respectively. The partnership agreement calls for a recalculation of the percentage ownership interest each year on January 1st to account for the Partner's aggregate capital contributions and distributions since inception through the prior year. Accordingly, as of January 1, 1995, 1996 and 1997 SPDFIII's interest in SIP was changed to 41.41%, 24.94% and 11.31%, respectively. On January 1, 1998, SPDFIII's interest will be increased to 11.41% and SMMP's interest will be reduced to 88.59% to reflect the 1997 contributions and distributions. S-P Properties, Inc. is the General Partner of SPDFIII and of SMMP's general partners, Sierra Pacific Development Fund II and Sierra Pacific Pension Investors '84. On December 30, 1994, all of the outstanding stock of TCP, Inc. was sold to Finance Factors, Inc. TCP, Inc. owns all of the common stock of S-P Properties, Inc. Finance Factors was a subsidiary of CGS Real Estate Company, Inc., a national real estate company. In July 1995, Finance Factors, Inc. merged with Bancor Real Estate Company, Inc., another subsidiary of CGS Real Estate Company, Inc. BASIS OF FINANCIAL STATEMENTS SIP maintains its books and prepares its financial statements in accordance with generally accepted accounting principles. However, SIP prepares its tax returns on the accrual basis of accounting as defined by the Internal Revenue Code with adjustments to reconcile book and taxable income (loss) for differences in the treatment of certain income and expense items. The accompanying financial statements do not reflect any provision for federal or state income taxes since such taxes are the obligation of the individual partners. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include highly liquid, short-term investments with original maturities of three months or less. FAIR VALUE OF FINANCIAL INSTRUMENTS The financial instruments of SIP at December 31, 1997 and 1996 consist of cash and cash equivalents, receivables, due from affiliates, accounts payable and note payable. The fair value of cash and cash equivalents, receivables and accounts payable approximates the carrying value due to the short term nature of these items. In the opinion of management, the fair value of the note payable approximates the carrying value based on market rates at December 31, 1997. The fair value of the amounts due from affiliates can not be determined due to the related party nature of this receivable. 70 Sorrento I Partners Notes to Financial Statements Page two INCOME-PRODUCING PROPERTIES Property and tenant improvements are carried at cost and depreciated on the straight-line method over the estimated lives of the related assets, ranging from seven to thirty years. Tenant improvements incurred at the initial leasing of the property are depreciated over ten years and tenant improvements incurred at the re-leasing of the property are depreciated over the life of the related lease. Expenditures for repairs and maintenance are charged against income as incurred. Improvements and major renewals are capitalized. Costs and the related accumulated depreciation of assets sold or retired are removed from the accounts in the year of disposal or when fully depreciated and any resulting gain or loss is reflected in income or deferred income as appropriate. SIP employs a systematic approach in determining whether the value of income-producing property has been impaired. Prior to 1995, a provision for loss on a property was established if the appraised value of the property declined below its book value due to what the General Partner believed to be an other than temporary condition. A complete appraisal was performed on the property as of December 31 each year. Effective January 1, 1995, SIP implemented Statement of Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (the "Statement"). SIP regularly evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Future cash flows are estimated and compared to the carrying amount of the asset to determine if an impairment has occurred. If the sum of the expected future cash flows is less than the carrying amount of the asset, SIP shall recognize an impairment loss in accordance with the Statement. No provision was required due to the implementation of this Statement. Because the determination of fair value is based upon projections of future economic events such as property occupancy rates, rental rates, operating cost inflation and market capitalization rates which are inherently subjective, the amounts ultimately realized at disposition may differ materially from the net carrying value as of December 31, 1997. The cash flows used to determine fair value and net realizable value are based on good faith estimates and assumptions developed by management. Unanticipated events and circumstances may occur and some assumptions may not materialize; therefore actual results may vary from the estimates and the variances may be material. SIP may provide additional write-downs which could be material in subsequent years if real estate markets or local economic conditions change. OTHER ASSETS Deferred leasing costs represent costs incurred to lease properties and are amortized over the life of the related lease. Deferred loan costs represent costs incurred to obtain financing and are amortized over the life of the related loan. RENTAL INCOME AND RENT RECEIVABLE Rental income is recognized on the straight-line method over the term of the related operating lease in accordance with the provisions of Statement of Financial Accounting Standards No. 13, "Accounting for Leases". Rent receivable consists of (a) unbilled rent - the difference between rent recognized on the straight-line method and actual cash due; an (b) billed rent - rent due but not yet received. 71 Sorrento I Partners Notes to Financial Statements Page three 2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS Additional information regarding certain balance sheet accounts, at December 31, 1997 and 1996 is as follows: 1997 1996 -------- -------- Other assets: Prepaid expenses $ 0 $ 2,597 Deferred loan costs, net of accumulated amortization of $77 in 1997 and $26 in 1996 940 991 Deferred leasing costs, net of accumulated amortization of $42,506 in 1997 and $16,822 in 1996 136,986 162,671 Tax impounds 0 5,517 Deposits 0 0 -------- -------- $137,926 $171,776 ======== ======== Accrued and other liabilities: Accounts payable $ 16,124 $ 18,555 Interest payable 0 5,838 -------- -------- $ 16,124 $ 24,393 ======== ======== 3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS In 1994, all of the common stock of TCP, Inc. was purchased by Finance Factors, Inc. from Carlsberg Management Company ("CMC"). TCP, Inc. owns all of the common stock of S-P Properties, Inc., the General Partner of the Partnership. CMC continued to manage the affairs of SIP through March 31, 1995. An affiliate of the General Partner may receive a management fee of 6% of the gross rental income collected from the property. Management fees paid to affiliates for the years ended December 31, 1997 and 1996 were $15,762 and $13,003 respectively. No such costs were incurred in 1995. 72 Sorrento I Partners Notes to Financial Statements Page four SIP reimburses an affiliate of S-P Properties, Inc. for expenses incurred by the affiliate for services provided to SIP such as accounting, data processing and similar services. The affiliate was reimbursed $34,860, $33,714 and $31,001, respectively, for such services for the years ended December 31, 1997, 1996 and 1995. Additionally, SIP reimbursed an affiliate for construction supervision costs incurred by the affiliate. For the years ended December 31, 1997, 1996 and 1995 the affiliate received $0, $33,084 and $0, respectively, for tenant improvements supervisory costs. In consideration for services rendered with respect to initial leasing of SIP's property, an affiliate of S-P Properties, Inc. is paid initial leasing costs. For the years ended December 31, 1997, 1996 and 1995 these fees amounted to $0, $59,563 and $0, respectively, and were recorded as deferred leasing costs. During 1996, SIP made a non-interest bearing advance to an affiliate in the amount of $4,770. Repayment is expected in 1998. Reference is made to Note 5. 4. INCOME-PRODUCING PROPERTIES At December 31, 1997 and 1996 the total cost and accumulated depreciation of the property are as follows: 1997 1996 ----------- ----------- Land $ 1,305,518 $ 1,305,518 Building and improvements 1,671,982 2,406,466 ----------- ----------- Total 2,977,500 3,711,984 Accumulated depreciation (537,812) (1,170,370) ----------- ----------- Net $ 2,439,688 $ 2,541,614 =========== =========== During 1997 and 1996, SIP removed $734,484 and $10,780, respectively, from its building and improvements and related accumulated depreciation accounts for fully depreciated property. 73 Sorrento I Partners Notes to Financial Statements Page five Future minimum base rental income to be recognized on a straight-line basis and amounts to be received on a cash basis are as follows: Year Ending Straight-line Cash December 31, Basis Basis ------------ ------------- ------------- 1998 $ 283,635 $ 273,196 1999 283,635 278,448 2000 283,635 289,584 2001 283,635 295,152 2002 283,635 306,960 Thereafter 94,547 104,288 ------------- ------------ Total $ 1,512,722 $ 1,547,628 ============= ============ SIP relied on one tenant for 100% of 1997 and 1996 rental income. The lease agreement requires the tenant to pay expenses such as utilities, insurance and property taxes related to the property. The principal business of the tenant is research and development in the communications sector. 5. NOTE PAYABLE SIP had a non-recourse bank note payable with an original principal balance of $3,000,000 collateralized by real and personal property. The annual interest rate of the note was variable at bank prime plus 2-1/2% with a minimum rate of 9% and maximum rate of 15-1/2%. The original maturity of the note was July 1998 and the note included a discounted payoff option of $1,500,000. CGS Real Estate Company, Inc. ("CGS"), an affiliate of the General Partner, acquired the note and security documents from the bank in May 1996. In connection with the purchase of the bank note and security documents by CGS, SIP made a principal payment to the bank of $750,000 and entered into a $750,000 note agreement with CGS (the "CGS Agreement"). The CGS Agreement, collaterized by real and personal property, called for monthly interest payments through December 1996 and monthly principal and interest payments thereafter until maturity on May 31, 2016. The interest rate is fixed at 9.34% per annum for the first year of the note and will thereafter be the one-year Treasury rate plus 375 basis points. A pre-payment in the amount of $105,000 was paid in April 1997. A modification agreement was entered into on September 30, 1997. The interest rate remained fixed at 9.34% through October 1998, at which time the rate will convert to the one-year treasury rate plus 375 basis points. The note is amortized over a 210-month term and current payments are $6,154 per month, principal and interest inclusive until maturity in March 2015. The loan balance as of December 31, 1997 was $631,827. At any time upon 120 days written notice to CGS, SIP may fully discharge the note by the payment of an amount equal to $750,000 less the aggregate amount of principal paid under the note between the date of the CGS Agreement and the date of payment plus any interest due. The excess of the net carrying amount of the balance due under the bank note agreement, net of unamortized deferred loan fees, over the balance due under the CGS Agreement was recognized as an extraordinary item in 1996 in the amount of $1,200,381. Annual maturities under the CGS Agreement as of December 31, 1997 are: $15,489 in 1998; $16,999 in 1999; $18,657 in 2000; $20,476 in 2001; $22,472 in 2002; and $537,734 thereafter. 74 Sorrento I Partners Notes to Financial Statements Page six 6. GENERAL PARTNERS' EQUITY (DEFICIT) In accordance with the partnership agreement, accrual basis losses resulting from operations of the partnership are first allocated to the General Partners in proportion to the relative amounts of net cumulative partnership profits until such allocated losses equal the previously allocated net cumulative partnership profits. Then, losses are allocated in proportion to the Partners' percentage interests as computed January 1st of the year in which the loss occurred. Likewise, accrual basis profits resulting from operations of the partnership are first allocated to the General Partners in proportion to the relative amounts of net cumulative partnership losses until such allocation of profits equals the previously allocated net cumulative partnership losses. Then, profits are allocated in proportion to the distributions made to the Partners during the year. Upon dissolution of the partnership, any proceeds should be distributed first to Sierra Mira Mesa as a return of capital in proportion to its aggregate unreturned capital contributed and then to Sierra Pacific Development Fund III in proportion to its aggregate unreturned capital contributed. Any remaining proceeds shall be first distributed pro rata in proportion to the Partners' positive balances in their capital accounts and then in accordance with their percentage interest in the year of dissolution. 75 EXECUTIVE OFFICERS OF THE GENERAL PARTNER The Executive Officers of S-P Properties, Inc., the General Partner are as follows: NAME POSITION - ---- -------- Thomas N. Thurber President and Director Dawson L. Davenport Vice President Steven M. Speier Secretary/Treasurer and Director William J. Carden Assistant Secretary/Treasurer and Director The 10-K Report sent to the Securities and Exchange Commission contains additional information on the partnership's operations and is available to Limited Partners upon request. 76 EX-27 2
5 THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SIERRA PACIFIC DEVELOPMENT FUND II DECEMBER 31, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1997 DEC-31-1997 69,790 0 393,945 0 0 1,137,664 15,068,050 3,855,671 19,477,303 513,990 6,257,503 0 0 0 12,705,810 19,477,303 1,841,050 2,179,772 0 1,472,577 786,905 0 435,818 (800,406) 0 (800,406) 0 0 0 (800,406) (9.24) (9.24)
-----END PRIVACY-ENHANCED MESSAGE-----