-----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, Fygjs1jJGQNXJUYG9gWQsZwUpSleA7Kic1d3pVQzPYfvuvhLa91CagkpWWr2cLOT 6+LMrl92Gdlti6Izvo2xkg== 0000890566-00-000413.txt : 20000331 0000890566-00-000413.hdr.sgml : 20000331 ACCESSION NUMBER: 0000890566-00-000413 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 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: 585811 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, 1999 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, 1999 is incorporated by reference into Parts II and III 1 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 100,868 5850 San Felipe, Houston (B) Office 100,900 (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, to be recognized 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. 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. As a result, the sharing ratio in effect for 1997, 1998 and 1999 was 45.58%, 33.74% and 33.01%, respectively, for the Partnership and 54.42%, 66.26% and 66.99%, respectively, for SPPI'84. On January 1, 2000, the sharing ratio will be decreased to 30.17% for the Partnership and increased to 69.83% for SPPI'84 to reflect the 1999 contributions and distributions. SMMP also holds an 88.12% interest in Sorrento I Partners (a California general partnership with Sierra Pacific Development Fund III formed in 1993), a 35.10% interest in Sorrento II Partners (a California general partnership with Sierra Pacific Institutional Properties V formed in 1993), a 6.55% interest in Sierra Creekside Partners (a California general partnership with Sierra Pacific Development Fund formed in 1994), and a 33.32% 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 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 $432,000, or 18%, of total 1999 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 1999 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, 1999, the Partnership had paid cash distributions of $64.80 for each $250 unit investment and remaining partners' equity was computed at $131.03 per unit. Thus, if the Partnership were to be liquidated at the end of 1999 at book value, each $250 investment would have returned a total of $195.83. 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 297,138 square feet of rentable space. Details of the individual properties and the respective tenants/leases follow. During 1999, the Partnership owned a 33.01% interest in a fourth property - Sierra Mira Mesa, an office building in San Diego, California. The Partnership also had an indirect 29.08% interest in an industrial property known as Sorrento I in San Diego, California. 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 100,900 rentable square feet and is 98% occupied at December 31, 1999. The average effective annual rent per square foot at December 31, 1999 is $11.82. 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, 1999. 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, 1999, twenty-nine 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. Details of the significant leases are as follows:
PERCENT OF PERCENT OF SQUARE FEET RENTABLE EFFECTIVE RENT EFFECTIVE GROSS ANNUAL TENANTS OF 5850 SAN FELIPE OCCUPIED SQUARE FEET PER SQUARE FOOT RENT PER ANNUM RENT EXPIRATION OF LEASE - ----------------------------- ------------- --------------- ---------------- --------------- ---------------- ---------------------- Third Coast Business Centers 17,502 17% $ 9.26 $ 162,099 14% December 2004 Kimberly Home Health 10,903 11% 10.90 118,874 10% September 2001 Kimberly Home Health 1,746 2% 13.00 22,698 2% April 2003 Tenants Occupying <10% sq ft 68,243 68% 12.59 859,510 74% Various ------------- --------------- ---------------- --------------- ---------------- Total Rented Space 98,394 98% $ 11.82 $1,163,181 100% Vacancies 2,506 2% ------------- --------------- Total Rentable Space 100,900 100% ============= ===============
Reference is made to Item 13 of Form 10-K for a further discussion of Third Coast Business Centers. SUMMARY OF LEASES BY EXPIRATION One tenant in 5850 San Felipe is on month a month lease, the other twenty-eight tenants are on leases scheduled to expire over the next eight years as indicated in the table below.
Year of expiration 2000 2001 2002 2003 2004 2005 2006 2007 Totals Number of tenants 3 6 9 6 2 1 0 1 28 Percent of tot. tenants 10% 21% 31% 21% 7% 3% 0% 3% 97% Tot. area (sq. feet) 3,855 24,677 20,025 20,916 19,509 2,197 0 6,656 97,835 Annual rent $ 44,969 $ 277,727 $ 254,373 $ 267,204 $ 189,900 $ 29,816 $ 0 $90,240 $1,154,229 Per. gross annual rent 4% 24% 22% 23% 16% 2% 0% 8% 99%
SIERRA SOUTHWEST POINTE - HOUSTON, TEXAS This property includes one industrial building comprising 100,868 rentable square feet and is 78% occupied at December 31, 1999. The average effective annual rent per square foot at December 31, 1999 is $5.53. The principal businesses carried on from the building are healthcare, manufacturing, retail, fitness, 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 maturity of this loan, Heller Financial Corporation provided $1,300,000 secured by a mortgage lien collateralized by certain land and buildings. This loan was due in monthly interest only payments computed at the LIBOR rate plus 300 basis points. The note matured in January 1999. In August 1999, the note balance was paid and a new loan in the amount of $1,500,000 was funded with the same lender. The new mortgage bears interest at 8.35% per annum and calls for monthly principal and interest payments of $11,927. Such payments shall continue until September 2009, when the indebtedness is due in full. The loan is secured by a trust deed on the Sierra Southwest Pointe property. The obiligee on the note is Sierra Southwest Pointe, LLC. As of December 31, 1999, the loan balance was $1,494,678. 4 Summary of Significant Tenants Sixteen tenants occupy the building at December 31, 1999. No tenant occupies ten percent or more of the rentable square footage of the building as of December 31, 1999. SUMMARY OF LEASES BY EXPIRATION There are five month to month leases and eleven term leases that are scheduled to expire over the next five years as indicated in the table below.
Year of expiration 2000 2001 2002 2003 Totals Number of tenants 2 4 3 2 11 Percent of total tenants 13% 25% 19% 13% 69% Total area (square feet) 7,508 13,873 20,702 12,001 54,084 Annual rent $ 48,855 $ 85,899 $ 118,419 $94,490 $347,663 Percent gross annual rent 11% 20% 27% 22% 80%
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, 1999. The average effective annual rent per square foot at December 31, 1999 is $8.67. 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 $1,902,438 at December 31, 1999. 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
PERCENT OF PERCENT OF TENANTS OF SQUARE FEET RENTABLE EFFECTIVE RENT EFFECTIVE GROSS ANNUAL EXPIRATION SIERRA WESTLAKES DEVELOPMENT OCCUPIED SQUARE FEET PER SQUARE FOOT RENT PER ANNUM RENT OF LEASE - ---------------------------------- ------------- --------------- ---------------- --------------- ---------------- ----------------- Sears 45,935 48% $ 9.40 $ 431,789 70% December 2007 Felco Office Systems 25,357 27% 7.35 186,323 30% February 2001 ------------- --------------- ---------------- --------------- ---------------- Total Rented Space 71,292 75% $ 8.67 $ 618,112 100% 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 Assessed 1999 Real Estate Tax Property Value Obligation - ------------------------------------------------------------------------ o 5850 San Felipe Houston, Texas 2.84% $121,964 o Sierra Southwest Pointe Houston, Texas 2.95% $70,310 o Sierra Westlake Development San Antonio, Texas 2.89% $90,252 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 100% occupied at December 31, 1999. The principal business carried on from the building is insurance. The average effective annual rent per square foot at December 31, 1999 is $19.94. 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 lease follow:
TENANTS PERCENT OF PERCENT OF SQUARE FEET RENTABLE EFFECTIVE RENT EFFECTIVE GROSS ANNUAL OCCUPIED SQUARE FEET PER SQUARE FOOT RENT PER ANNUM RENT EXPIRATION OF LEASE - -------------------------------- ------------- --------------- ---------------- --------------- ---------------- ------------------- State Comp. Insurance Fund 74,567 83% $ 19.79 $ 1,475,948 83% February 2003 Tenants Occupying <10% sq ft 14,888 17% 20.64 307,355 17% Various - -------------------------------- ------------- --------------- ---------------- --------------- ---------------- Total Rented Space 89,455 100% $ 19.94 $1,783,303 100% Vacancies 105 0% ------------- --------------- Total Rentable Space 89,560 100% ============= ===============
SUMMARY OF LEASES BY EXPIRATION The Property's five tenants have leases scheduled to expire over the next nine years as scheduled below.
Year of expiration 2000 2001 2002 2003 2004 2005 2006 2007 2008 Totals Number of tenants 1 1 0 1 1 0 0 0 1 5 Percent of tot. tenants 20% 20% 0% 20% 20% 0% 0% 0% 20% 100% Tot. area (square feet) 2,651 762 0 74,567 4,762 0 0 0 6,713 89,455 Annual rent $ 40,607 $12,000 $ 0 $ 1,475,948 $ 100,002 $ 0 $ 0 $ 0 $154,746 $1,783,303 Per. gross annual rent 2% 1% 0% 83% 5% 0% 0% 0% 9% 100%
6 DEPRECIABLE PROPERTY Sierra Mira Mesa, San Diego, California Office Building - Income-Producing Property
TENANT LAND BUILDINGS IMPROVEMENTS TOTAL ----------------------- ------------------------ --------------------- --------------------- Historical Cost & Tax Basis $ 2,480,940 $ 6,294,326 $ 529,732 $ 9,304,998 Accumulated Depreciation (2,612,091) (210,492) (2,822,583) ----------------------- ------------------------ --------------------- --------------------- Net Carrying Value $ 2,480,940 $ 3,682,235 $ 319,240 $ 6,482,415 ======================= ======================== ===================== ===================== 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 1999 is approximately 1.12% of the assessed value or $72,469. 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 $4,543,984 at December 31, 1999. 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. 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, 1999 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 $ 1,347,961 $ 329,299 $ 2,982,778 Accumulated Depreciation (579,615) (162,182) (741,797) ----------------------- ------------------------ --------------------- --------------------- Net Carrying Value $ 1,305,518 $ 768,346 $ 167,117 $ 2,240,981 ======================= ======================== ===================== ===================== Depreciation Method Not Applicable Straight-line Straight-line Depreciable Life Not Applicable 10-30 Years 7-10 Years
REAL ESTATE TAXES The real estate tax obligation for 1999 is approximately 1.11% of the assessed value or $29,672. 7 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. 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 converted to the one-year treasury rate plus 375 basis points. The note was amortized over a 210-month term and payments were $6,048 per month, principal and interest inclusive until maturity in March 2015. In August 1999, the CGS note with a principal balance of $607,693 was paid. On the same date, SIP entered into a new loan agreement with Finova Realty Capital, Inc. in the amount of $1,637,500. This loan, which is secured by the Sorrento I property, bears interest at 8.75% per annum. Monthly payments of $12,882, consisting of both principal and interest, are due until maturity in September 2009. The note balance as of December 31, 1999 was $1,635,054. 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 relate to three loans made to affiliates, two by the Partnership and one by Sierra Mira Mesa Partners ("SMMP"), 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. In December 1999, as a compromise to all claims asserted in what became a derivative action on behalf of the Partnership, the parties agreed to enter into a Mutual Compromise and Settlement (the "Settlement"). The Settlement provides for a complete release of the Partnership, general partners and all affiliates. As part of the material terms of the Settlement, S-P Properties, as the general partner of the Partnership, on or before December 31, 2000, will call and collect the two demand notes with balances of $1,012,698 and $3,798,900, respectively, at December 31, 1999 and a portion of the SMMP loan (the date of collection being referred to herein as the "Payment Date"). In the case of the SMMP loan, the amount due being that percentage of the loan that is equal to the Partnership's interest in SMMP, and in any event no less than thirty percent (30%). The loan proceeds received by the Partnership, totaling approximately $5,600,000, will be distributed on a per-unit basis to the limited partners and assignees of the Partnership of record as of the Payment Date. The Partnership will pay Plaintiff's attorneys' fees of $1,000,000. The Plaintiff, on behalf of the Partnership, will dismiss the entire action with prejudice. The court approved the Settlement on February 9, 2000. S-P Properties, Inc. has denied and continues to deny that it has committed any violations of law, and states that it has entered into the Settlement solely to eliminate the burden and expense of further litigation. 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, 1999, the number of security holders is as follows: NUMBER OF NUMBER RECORD OF UNITS HOLDERS --------- ----------- Limited Partners: Class A Units 56,674 2,917 Class B Units 29,979 783 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 $0, $0 and $.58 per limited partnership unit during the years ended December 31, 1999, 1998 and 1997, 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, 1999, 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 33.01% 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, 1999 TO YEAR ENDED DECEMBER 31, 1998. Rental income increased by $59,000, or 3%, for the year ended December 31, 1999 when compared to the prior year, primarily due to an increase in rental rates at 5850 San Felipe and Sierra Southwest Pointe. The weighted-average effective annual rent per square foot, on an accrual basis, increased from $11.36 to $11.82 at 5850 San Felipe and from $5.11 to $5.53 at Sierra Southwest Pointe in 1999. Rental rates at Sierra Westlakes remained unchanged. This increase was partially offset due a decrease in occupancy at Sierra Southwest Pointe from 94% at December 31, 1998 to 78% at December 31, 1999. Occupancy at 5850 San Felipe and Sierra Westlakes remained comparable between the two years. Total operating expenses increased by $1,274,000, or 53%, in comparison to the prior year, principally due to the settlement of a lawsuit against the Partnership. As stipulated in the settlement agreement, not withstanding other terms and conditions, the Partnership agreed to pay the plaintiff's attorney fees of $1,000,000. These fees and other legal costs associated with the lawsuit were included in operating expenses for the year ended December 31, 1999. The increase in total operating expenses was also attributable to higher administrative costs and maintenance and repair expenses incurred during the year. In addition, a loan made to an affiliate in 1996 and a rent receivable balance from a former tenant was deemed uncollectible and subsequently written-off to bad debt expense in 1999. Further, property taxes rose primarily as a result of an increase in the assessed value of 5850 San Felipe and Sierra Southwest Pointe. The Partnership's share of income (loss) from its investment in SMMP was $160,000 for the year ended December 31, 1999 compared to $(15,000) for the prior year. SMMP generated income for the years ended December 31, 1999 and 1998. The Partnership's loss from its investment in SMMP in the prior year was largely due to a $76,000 adjustment recorded in the first quarter of 1998 to correct an understatement of its share of unconsolidated joint venture loss in 1997. COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997. Rental income increased $457,000, or 25%, primarily as a result of near maximum occupancy at 5850 San Felipe. Occupancy at the building has risen over the past two years from 72% at December 31, 1996 to 96% at December 31, 1998. Occupancy at Sierra Southwest Pointe and Sierra Westlakes remained comparable between the two years. The increase in rental income is also attributable to increased rental rates at the buildings. The weighted-average effective annual rent per square foot, on an accrual basis, increased from $10.86 to $11.36 at 5850 San Felipe and from $4.48 to $5.11 at Sierra Southwest Pointe during 1998. Rental rates at Sierra Westlakes remained comparable. Total operating expenses increased by $133,000, or 6%, when compared to the prior year. Depreciation and amortization increased primarily as a result of depreciation and amortization expenses on additional tenant improvements and lease costs associated with the increased occupancy at 5850 San Felipe. The increase in occupancy also resulted in higher utilities and management fees. In addition, property taxes were higher principally due to an increase in the assessed value of 5850 San Felipe. The increase in total operating expenses was partially offset by a decrease in legal fees. The Partnership incurred higher legal fees in 1997 defending litigation against the Partnership. The Partnership recorded a $15,000 loss in 1998 from its investment in SMMP. SMMP generated income for the year ended December 31, 1998, however the Partnership had understated its share of unconsolidated joint venture loss in the prior year and recorded a $76,000 adjustment in the first quarter of 1998. In 1997, the Partnership recorded a $285,000 loss from investment in SMMP. The loss generated by SMMP in 1997 was primarily 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. Liquidity and Capital Resources: The Partnership generated cash from operations of $85,000 during 1999. In 1999, the Partnership paid $387,000 for property additions and $59,000 for leasing commissions. The Partnership's joint venture, SMMP, made net distributions of $326,000 to assist with the funding of these expenditures. In January 1999, the $1,300,000 mortgage note on the Sierra Southwest Pointe property matured. In August 1999, the note was paid and a new $1,500,000 loan agreement was entered into with the same lender. The new mortgage bears interest at 8.35% per annum and calls for monthly principal and interest payments of $11,927. Such payments shall continue until September 2009, when the 10 indebtedness is due in full. Net proceeds will primarily be used to pay accrued liabilities and to fund future capital expenditures. The loan is secured by a trust deed on the Sierra Southwest Pointe property. The Partnership is in an illiquid position at December 31, 1999 with cash and billed rents of $401,000 and current liabilities of $1,362,000, which includes accrued legal fees of $1,000,000 (See "Legal Proceedings"). In February and March 2000, the Partnership made scheduled payments totaling $500,000 of the accrued legal fees. The remaining $500,000 due by December 31, 2000 is expected to be funded from the operation of the properties and distributions from SMMP. 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. As a result, many companies' software and computer systems may need to be upgraded or replaced in order to comply with Year 2000 requirements. The Partnership did not experience any major system failures or disruptions in operations over the year 2000 transition. All systems have continued to operate as normal. The Partnership did not separately track internal costs related to the Year 2000 issue and Partnership management believes these amounts did not have a material impact on the Partnership's financial position or results of operations. The Partnership employs a property management company to manage, operate and lease the properties. The management company did not experience any major systems failures or disruptions in operations at the property. The Partnership remains confident that no Year 2000 issues with the property management company or other third parties will arise in the future although no guarantees can be made to that effect. 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, 1999 and 1998 3. Consolidated Statements of Operations - for the years ended December 31, 1999, 1998, and 1997 4. Consolidated Statements of Changes in Partners' Equity - for the years ended December 31, 1999, 1998, and 1997 5. Consolidated Statements of Cash Flows - for the years ended December 31, 1999, 1998, and 1997 6. Notes to Consolidated Financial Statements 7. Consolidated Balance Sheets of Sierra Mira Mesa Partners as of December 31, 1999 and 1998 and Statement of Operations, Changes in General Partners' Equity and Cash Flows for each of the three years in the period ended December 31, 1999 and Independent Auditors' Report 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, Missouri, 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 49 5 years Gregory J. Nooney, Jr. Vice President 68 2 years Patricia A. Nooney Vice President 43 2 years William J. Carden Assistant Secretary/Treasurer and Director 55 5 years Morris S. Cohen Director 62 1 year
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. Gregory J. Nooney, Jr. - Vice President, S-P Properties, Inc. He also has served as Chairman of the Board and Chief Executive Officer of Brooklyn Street Properties, Inc. since May 1983. Mr. Nooney joined Brooklyn Street Properties, Inc. in 1954 and served as President from 1969 to May 1983. Brooklyn Street Properties, Inc., which was founded in 1945, is a real estate investment company. In addition, Mr. Nooney was chairman and Chief Executive Officer of Nooney Realty Trust from 1984 through February 1998 and then served as Vice Chairman from February 1998 through November 1999. Mr. Nooney is currently Chairman of Coldwell Banker Commercial American Spectrum. Patricia A. Nooney - Vice President, S-P Properties, Inc. Patricia A. Nooney is President of Coldwell Banker Commercial American Spectrum, a wholly-owned subsidiary of CGS Real Estate Company. Ms. Nooney joined Brooklyn Street Properties, Inc., in 1981 and has served as an officer since 1985. From 1990 to November 1999, Ms. Nooney was President and Secretary of Nooney Realty Trust, Inc. 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. Morris S. Cohen - Director, S-P Properties, Inc. Mr. Cohen's extensive real estate background includes negotiation of joint venture partnerships for property acquisitions, production of syndication packages and direct responsibilities for operations, finance, sales, leasing and property management. Mr. Cohen was a senior level officer with major public and privately held real estate companies and served as President of IDM Participating Income Corporation from April 1995 to October 1996. Mr. Cohen is a graduate of Queens College. 13 There have been no events under any bankruptcy act, no criminal proceedings, and no judgements or injunctions material to the evaluation of the ability and integrity of any director during the past five years. 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, 1999 were $112,161. 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 $292,790 during the year ended December 31, 1999. In consideration for services rendered with respect to initial leasing of Partnership properties, ASRE and Bancor are paid initial leasing costs. For the year ended December 31, 1999, a total of $53,746 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, controls 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 assumed the note. In 1999, 1998 and 1997, interest receivable of $57,322, $54,078 and $89,298 was added to the principal balance of the note. The principal balance outstanding at December 31, 1999 is $1,012,698. 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. In addition, ASRE began leasing 5,339 square feet of 5850 San Felipe in January 1998. The terms of the leases are consistent with the current market conditions for office space in the area of the property. The Partnership recognized rental income of $219,760 during the year ended December 31, 1999 related to these leases. 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 each of the three years ended December 31, 1999, maturity has been extended for additional one-year terms. In 1997, 1998 and 1999, interest receivable of $290,000, $319,000 and $289,900, respectively, 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, 1999 is $3,798,900. 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 - Selected Financial Data 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, 1999, 1998, and 1997 2. Schedule III - Real Estate and Accumulated Depreciation - December 31, 1999 All other financial statement 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, 2000 /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, 2000 /s/ THOMAS N. THURBER ---------------------------- -------------------------------------- Thomas N. Thurber President and Director S-P Properties, Inc. Date: March 19, 2000 /s/ WILLIAM J. CARDEN ---------------------------- -------------------------------------- William J. Carden Assistant Secretary/Treasurer and Director S-P Properties, Inc. Date: March 19, 2000 /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, 1999 and 1998, and for each of the three years in the period ended December 31, 1999 and have issued our report thereon dated February 25, 2000. Such consolidated financial statements and reports are included in your 1999 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 February 25, 2000 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, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- INCOME - PRODUCING PROPERTIES ------------------ Allowance for loss - January 1, 1997 $ 450,000 Provision charged to costs and expenses (1) 0 ------------------ Allowance for loss - December 31, 1997 450,000 Provision charged to costs and expenses (1) 0 ------------------ Allowance for Loss - December 31, 1998 450,000 Provision charged to costs and expenses (1) 0 ------------------ Allowance for loss - December 31, 1999 $ 450,000 ================== (1) See Notes 1 and 4 to consolidated 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, 1999 - --------------------------------------------------------------------------------
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)(5) - ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- OFFICE/INDUSTRIAL BUILDINGS INCOME -PRODUCING: 5850 San Felipe Houston, Texas ........... $ 3,000,000 $ 1,950,000 $ 2,806,932 $ 2,428,165 $ 1,950,000 $ 5,162,296 $ 7,112,296 Sierra Southwest Pointe Houston, Texas ........... 1,494,678 570,124 2,279,488 495,844 570,124 2,561,913 3,132,037 Sierra Westlakes Development Houston, Texas ........... 1,902,438 1,743,622 -- 3,759,827 1,743,622 2,331,415 4,075,037 ----------- ----------- ----------- ----------- ----------- ----------- ----------- TOTAL ...................... $ 6,397,116 $ 4,263,746 $ 5,086,420 $ 6,683,836 $ 4,263,746 $10,055,624 $14,319,370 =========== =========== =========== =========== =========== =========== =========== ACCUMULATED DATE DATE DEPRECIATION DESCRIPTION DEPRECIATION (5) CONSTRUCTED ACQUIRED LIFE - ----------- ----------- ----------- ----------- ----------- OFFICE/INDUSTRIAL BUILDINGS INCOME -PRODUCING: 5850 San Felipe Houston, Texas ........... $ 1,437,594 3/77 12/94 1-30 yrs. Sierra Southwest Pointe Houston, Texas ........... 765,965 8/72 7/91 2-30 yrs. Sierra Westlakes Development Houston, Texas ........... 1,075,160 10/85 8/84 1-30 yrs. ----------- TOTAL ...................... $ 3,278,719 ===========
(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, 1999 is as follows:
TOTAL REAL ESTATE ACCUMULATED CARRYING VALUE DEPRECIATION ------------------------ --------------------- Balance - January 1, 1997 $ 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, 1998 15,068,050 3,405,671 Additions during the year 416,813 729,888 Write off fully depreciated assets (1,467,901) (1,467,901) ------------------------ --------------------- Balance - December 31, 1998 14,016,962 2,667,658 Additions during the year 387,242 695,895 Write off fully depreciated assets (84,834) (84,834) ------------------------ --------------------- Balance - December 31, 1999 $ 14,319,370 $ 3,278,719 ======================== =====================
19 SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY (A CALIFORNIA LIMITED PARTNERSHIP) SELECTED FINANCIAL DATA For the Years Ended December 31, 1999, 1998, 1997, 1996, and 1995 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, 1999 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. - --------------------------------------------------------------------------------
1999 1998 1997 1996 1995 ------------ ------------ ------------ ------------ ------------ REVENUES .............................. $ 2,766,153 $ 2,673,328 $ 2,179,772 $ 2,128,491 $ 2,081,670 OPERATING EXPENSES: Total ............................... 3,666,379 2,392,838 2,259,482 2,025,153 1,835,944 Per dollar of revenues .............. 1.33 0.90 1.10 0.95 0.88 INTEREST EXPENSE: Total ............................... 437,352 439,499 435,818 464,880 461,567 Per dollar of revenues .............. 0.16 0.16 0.20 0.22 0.22 NET LOSS FROM CONTINUING OPERATIONS: Total ............................... (1,177,254) (173,921) (800,406) (548,350) (523,440) General Partner ..................... 0 0 0 0 0 Limited Partners .................... (1,177,254) (173,921) (800,406) (548,350) (523,440) Per Unit (1) ........................ (13.59) (2.01) (9.24) (6.32) (6.04) CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ................ 84,929 241,502 (672,814) 401,092 (841,813) CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES ................ (61,058) (213,813) 611,134 (848,511) (374,172) CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ................ 165,912 (26,299) 108,508 267,418 (122,354) TOTAL ASSETS .......................... 19,204,328 19,342,914 19,477,303 20,229,858 19,676,261 PARTNERS' EQUITY: Total ............................... 11,354,635 12,531,889 12,705,810 13,556,216 14,055,860 General Partner ..................... 0 0 0 0 0 Limited Partners Class A ........................... 7,426,335 8,196,299 8,310,049 8,866,234 9,193,008 Class B ........................... 3,928,300 4,335,590 4,395,761 4,689,982 4,862,852 LIMITED PARTNERS' EQUITY - PER UNIT (1) 131.03 144.62 146.63 156.45 162.21 NOTE RECEIVABLE ....................... 3,062,629 2,772,729 2,453,729 2,163,729 2,163,729 INCOME-PRODUCING PROPERTIES: Number .............................. 3 3 3 3 3 Cost ................................ 14,319,370 14,016,962 15,068,050 14,428,604 13,691,618 Less: Accumulated depreciation ...... (3,278,719) (2,667,658) (3,405,671) (2,772,155) (2,341,220) Valuation allowance ........... (450,000) (450,000) (450,000) (450,000) (450,000) Net book value ...................... 10,590,651 10,899,304 11,212,379 11,206,449 10,900,398 INVESTMENT IN UNCONSOLIDATED JOINT VENTURE ....................... 3,023,177 3,193,894 3,416,664 4,838,609 4,681,570 NOTES PAYABLE - Related to income- producing property .................. 6,397,116 6,231,204 6,257,503 6,098,994 5,185,902 DISTRIBUTIONS PER UNIT (1): ........... 0 0 0.58 3.46 2.31
(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, 1999 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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Houston, Texas February 25, 2000 21 SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY (A CALIFORNIA LIMITED PARTNERSHIP) CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998 - -------------------------------------------------------------------------------- DECEMBER 31, -------------------------- 1999 1998 ----------- ----------- ASSETS Cash and cash equivalents ........................ $ 260,963 $ 71,180 Receivables: Note, net of deferred gain of $736,271 (Notes 3 and 4) ..................... 3,062,629 2,772,729 Unbilled rent (Notes 1 and 4) ................. 239,271 277,328 Billed rent (Note 1) .......................... 140,211 79,259 Due from affiliates (Note 3) .................. 1,013,698 1,005,459 Accounts receivable ........................... 0 7,946 Income-producing properties - net of accumulated depreciation and valuation allowance of $3,728,719 in 1999 and $3,117,658 in 1998 (Notes 1, 4 and 6) ...... 10,590,651 10,899,304 Investment in unconsolidated joint venture (Notes 1 and 5) ................................ 3,023,177 3,193,894 Other assets (Notes 1, 2 and 3) .................. 873,728 1,035,815 ----------- ----------- Total Assets ..................................... $19,204,328 $19,342,914 =========== =========== LIABILITIES AND PARTNERS' EQUITY Accrued and other liabilities (Notes 2 and 8) .... $ 1,452,577 $ 579,821 Notes payable (Note 6) ........................... 6,397,116 6,231,204 ----------- ----------- Total Liabilities ................................ 7,849,693 6,811,025 ----------- ----------- 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 .............. 7,426,335 8,196,299 Class B Limited Partners: 60,000 units authorized, 29,979 issued and outstanding .............. 3,928,300 4,335,590 ----------- ----------- Total Partners' equity ........................... 11,354,635 12,531,889 ----------- ----------- Total Liabilities and Partners' equity ........... $19,204,328 $19,342,914 =========== =========== 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, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
1999 1998 1997 ----------- ----------- ----------- REVENUES: Rental income (Note 1) ..................... $ 2,356,436 $ 2,297,908 $ 1,841,050 Interest income (Note 3) ................... 409,717 375,420 338,722 ----------- ----------- ----------- Total revenues ........................ 2,766,153 2,673,328 2,179,772 ----------- ----------- ----------- EXPENSES: Operating expenses: Depreciation and amortization ............ 869,457 890,846 786,905 Property taxes and insurance ............. 372,696 343,864 311,475 Administrative fees (Note 3) ............. 283,875 244,116 216,177 Maintenance and repairs .................. 328,528 293,874 295,358 Utilities ................................ 204,376 215,449 173,500 Management fees (Note 3) ................. 112,161 118,976 93,168 Legal and accounting (Note 8) ............ 1,227,643 130,252 215,138 General and administrative ............... 59,304 36,549 53,955 Salaries and payroll taxes ............... 36,000 36,000 36,000 Renting expenses ......................... 17,179 13,761 23,333 Bad debt expense ......................... 76,021 0 0 Other operating expenses ................. 79,139 69,151 54,473 ----------- ----------- ----------- Total operating expenses .............. 3,666,379 2,392,838 2,259,482 Interest ..................................... 437,352 439,499 435,818 ----------- ----------- ----------- Total expenses .................... 4,103,731 2,832,337 2,695,300 ----------- ----------- ----------- LOSS BEFORE PARTNERSHIP'S SHARE OF UNCONSOLIDATED JOINT VENTURE INCOME (LOSS) ............................. (1,337,578) (159,009) (515,528) ----------- ----------- ----------- PARTNERSHIP'S SHARE OF UNCONSOLIDATED JOINT VENTURE INCOME (LOSS) (Note 5) ...... 160,324 (14,912) (284,878) ----------- ----------- ----------- NET LOSS ..................................... $(1,177,254) $ (173,921) $ (800,406) =========== =========== =========== Net loss per limited partnership unit (Note 1) $ (13.59) $ (2.01) $ (9.24) =========== =========== ===========
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, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
LIMITED PARTNERS TOTAL ---------------------------------------------- GENERAL PARTNERS' CLASS A CLASS B TOTAL PER UNIT PARTNER EQUITY ------------ ------------ ------------ ------------ ------------ ------------ Partners' equity - January 1, 1997 .. $ 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 Net loss ........... (113,750) (60,171) (173,921) (2.01) (173,921) ------------ ------------ ------------ ------------ ------------ ------------ Partners' equity - December 31, 1998 8,196,299 4,335,590 12,531,889 144.62 0 12,531,889 Net loss ........... (769,964) (407,290) (1,177,254) (13.59) (1,177,254) ------------ ------------ ------------ ------------ ------------ ------------ Partners' equity - December 31, 1999 $ 7,426,335 $ 3,928,300 $ 11,354,635 $ 131.03 $ 0 $ 11,354,635 ============ ============ ============ ============ ============ ============
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, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
1999 1998 1997 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss .............................................. $(1,177,254) $ (173,921) $ (800,406) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation and amortization ....................... 869,457 890,846 786,905 Undistributed (income) loss of unconsolidated joint venture ..................................... (160,324) 14,912 284,878 Bad debt expense .................................... 76,021 0 0 (Increase) decrease in rent receivable .............. (64,370) (437) 3,526 Increase in other receivables ....................... (324,739) (343,229) (240,672) Increase in other assets ............................ (6,618) (212,500) (646,387) Increase (decrease) in accrued and other liabilities 872,756 65,831 (60,658) ----------- ----------- ----------- Net cash provided by (used in) operating activities ... 84,929 241,502 (672,814) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments for property additions ....................... (387,242) (416,813) (676,666) Capital contributions to unconsolidated joint venture . (44,000) (8,490) (293,000) Distributions from unconsolidated joint venture ....... 370,184 211,490 1,580,800 ----------- ----------- ----------- Net cash (used in) provided by investing activities ... (61,058) (213,813) 611,134 ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash distributions .................................... 0 0 (50,000) Funding of note payable secured by property ........... 1,500,000 0 1,300,000 Principal payments on notes payable ................... (1,334,088) (26,299) (1,141,492) ----------- ----------- ----------- Net cash provided by (used in) financing activities ... 165,912 (26,299) 108,508 ----------- ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS ............... 189,783 1,390 46,828 CASH AND CASH EQUIVALENTS - Beginning of year ........... 71,180 69,790 22,962 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS - End of year ................ $ 260,963 $ 71,180 $ 69,790 =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for interest ................ $ 437,352 $ 443,823 $ 455,666 =========== =========== ===========
In 1999, 1998 and 1997, interest receivable of $347,222, $373,078 and $379,298, respectively, was added to the principal balance of the related notes receivable from affiliates. These transactions are noncash items not reflected in the above statements 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. 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. As a result, the sharing ratio in effect for 1997, 1998 and 1999 was 45.58%, 33.74% and 33.01%, respectively, for the Partnership and 54.42%, 66.26% and 66.99%, respectively, for SPPI'84. On January 1, 2000, the sharing ratio will be decreased to 30.17% for the Partnership and increased to 69.83% for SPPI'84 to reflect the 1999 contributions and distributions. SMMP also holds an 88.12% interest in Sorrento I Partners (a California general partnership with Sierra Pacific Development Fund III formed in 1993), a 35.10% interest in Sorrento II Partners (a California general partnership with Sierra Pacific Institutional Properties V formed in 1993), a 6.55% interest in Sierra Creekside Partners (a California general partnership with Sierra Pacific Development Fund formed in 1994), and a 33.32% 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, 1999 and 1998 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, 1999, is $5,975,000. Management does not fair value 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. 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. An impairment of $450,000 was recognized prior to 1995 as appraisals indicated an other than temporary decline in value. 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, 1999. 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 using the straight line method of accounting. Deferred loan costs represent costs incurred to obtain financing and are amortized over the life of the related loan using the straight line method of accounting. 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. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." These SFAS's, which were effective for the Partnership's fiscal year ending December 31, 1998, establish additional disclosure requirements but do not affect the measurement of the results of operations. During the periods presented, the Partnership did not have any items of comprehensive income. The adoption of SFAS No. 131 had no effect on the Partnership's financial statements as the Partnership operates in only one segment, the acquisition, development and operation of commercial real estate. 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, 1999 and 1998 is as follows:
1999 1998 ---------- ---------- Other assets: Prepaid expenses ...................................... $ 21,203 $ 20,192 Deferred loan costs, net of accumulated amortization of $41,467 in 1999 and $25,859 in 1998 ............. 153,167 117,044 Deferred leasing costs, net of accumulated amortization of $352,207 in 1999 and $259,518 in 1998 ........... 511,143 605,302 Tax and insurance impounds ............................ 155,388 111,533 Tenant improvements reserves .......................... 22,827 171,454 Deposits .............................................. 10,000 10,290 ---------- ---------- $ 873,728 $1,035,815 ========== ========== Accrued and other liabilities: Accounts payable ...................................... $ 115,967 $ 231,525 Security deposits ..................................... 90,974 90,891 Accrued expenses ...................................... 233,136 225,264 Unearned rental income ................................ 0 19,641 Interest payable ...................................... 12,500 12,500 Accrued legal liability ............................... 1,000,000 0 ---------- ---------- $1,452,577 $ 579,821 ========== ==========
3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS 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, 1999, 1998 and 1997 were $112,161, $118,976 and $93,168, 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 $292,790, $252,201 and $232,399 for such services for the years ended December 31, 1999, 1998 and 1997, respectively. The Partnership reimbursed the affiliate for construction supervision costs incurred by the affiliate. For the years ended December 31, 1999, 1998 and 1997 the affiliate received $0, $16,754 and $50,083, respectively, for tenant improvements supervisory costs. In consideration for services rendered with respect to initial leasing of Partnership properties, affiliates of the General Partner are paid initial leasing costs. For the years ended December 31, 1999, 1998 and 1997 these fees amounted to $53,746, $49,811 and $225,240, 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 1999, 1998 and 1997, interest receivable of $57,322, $54,078 and $89,298 was added to the principal balance of the note. Interest income of $57,322, $54,078, and $48,720 was recognized in 1999, 1998, and 1997, respectively, related to this note. The balance outstanding at December 31, 1999 is $1,012,698. The note is guaranteed by the owners of CGS Real Estate Company, Inc. (See Note 8). Two affiliates of the General Partner lease a total of 22,841 square feet of 5850 San Felipe, a property of the Partnership. The terms of the leases are consistent with the current market conditions for office space in the area of the property. During the years ended December 31, 1999, 1998, and 1997, the Partnership recognized rental income of $219,760, $219,760, and $162,099 related to these leases. 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 each of the three years ended December 31, 1999, maturity has been extended for additional one-year terms. In 1999, 1998 and 1997, interest receivable of $289,900, $319,000 and $290,000, respectively, was added to the principal balance of the note. All other terms of the original note remained unchanged. The Partnership recognized interest income of $350,900, $319,000 and $290,000 related to the note during 1999, 1998 and 1997, respectively. The December 31, 1999 principal balance was $3,798,900. The note is secured by a second lien on the property and management believes the collateral has sufficient value to recover the Partnership's net investment in the note after satisfaction of the first lien holder (See Note 8). During 1996, the Partnership made a non-interest bearing advance to an affiliate in the amount of $50,083. This advance was deemed uncollectible and subsequently written off to bad debt expense in 1999. 4. INCOME-PRODUCING PROPERTIES At December 31, 1999 and 1998 the total cost and accumulated depreciation of the properties are as follows:
1999 1998 ------------ ------------ Land ................................. $ 4,263,746 $ 4,263,746 Building and improvements ......................... 10,055,624 9,753,216 ------------ ------------ Total ....................... 14,319,370 14,016,962 Accumulated depreciation ............. (3,278,719) (2,667,658) Valuation allowance .................. (450,000) (450,000) ------------ ------------ Net ......................... $ 10,590,651 $ 10,899,304 ============ ============
During 1999 and 1998, the Partnership removed $84,834 and $1,467,901, respectively, from its buildings and improvements and related accumulated depreciation accounts for fully depreciated property. 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 ------------------------ ------------ ------------ 2000 $ 2,194,606 $ 2,243,117 2001 1,849,946 1,899,848 2002 1,449,297 1,496,860 2003 850,661 902,009 2004 730,684 771,611 Thereafter 1,562,321 1,563,341 ----------- ----------- Total $ 8,637,515 $ 8,876,786 =========== =========== Approximately 18% of 1999 rental revenues were generated from a Sears, Roebuck and Company. 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 100% leased at December 31, 1999. At December 31, 1999 the Partnership's interest in SMMP is 33.01%; the remaining 66.99% interest was owned by Sierra Pacific Pension Investors `84. The Partnership's investment in SMMP as of December 31, 1999 and 1998 is comprised of the following:
1999 1998 ---------- ---------- Equity interest .......................... $2,878,145 $3,044,004 Investment advisory and other fees, less accumulated amortization of $63,160 and $58,302 in 1999 and 1998, respectively 145,032 149,890 ---------- ---------- Investment in unconsolidated joint venture ......................... $3,023,177 $3,193,894 ========== ==========
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, 1999 and 1998. The condensed balance sheets at December 31, 1999 and 1998, and the condensed statements of operations for the years ended December 31, 1999, 1998 and 1997 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, 1999 1998 ------------ ------------ ASSETS Cash and cash equivalents .................. $ 319,400 $ 14,064 Rent receivable ............................ 1,198,515 1,226,156 Due from affiliates ........................ 2,451,227 2,233,158 Income-producing property, net of accumulated depreciation .......... 8,723,396 9,000,294 Investment in unconsolidated joint ventures .......................... 2,526,875 1,640,460 Other assets ............................... 793,658 897,993 ------------ ------------ Total Assets ............................... $ 16,013,071 $ 15,012,125 ============ ============ LIABILITIES AND GENERAL PARTNERS' EQUITY Accrued and other liabilities .............. $ 101,104 $ 251,990 Notes payable .............................. 6,179,038 5,418,414 ------------ ------------ Total Liabilities .......................... 6,280,142 5,670,404 ------------ ------------ Minority interest in joint venture ......... (340,614) (332,996) ------------ ------------ General Partners' equity ................... 10,073,543 9,674,717 ------------ ------------ Total Liabilities and General Partners' equity ................................... $ 16,013,071 $ 15,012,125 ============ ============ 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, ------------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Revenues: Rental income ............... $ 2,126,106 $ 1,883,630 $ 1,919,582 Other income ................ 224,308 205,781 184,168 ----------- ----------- ----------- Total revenues ... 2,350,414 2,089,411 2,103,750 ----------- ----------- ----------- Expenses: Operating expenses .......... 800,654 754,978 742,548 Depreciation and amortization .............. 587,070 581,956 825,911 Interest .................... 450,177 438,711 463,804 ----------- ----------- ----------- Total expenses ... 1,837,901 1,775,645 2,032,263 ----------- ----------- ----------- Income before Partnership's share of unconsolidated joint venture losses ............. 512,513 313,766 71,487 Partnership's share of unconsolidated joint venture losses ....... (36,405) (131,897) (855,349) ----------- ----------- ----------- Income (loss) before minority interest's share of consolidated joint venture loss (income) .............. 476,108 181,869 (783,862) ----------- ----------- ----------- Minority interest's share of consolidated joint venture loss (income) .............. 7,618 (787) (7,906) ----------- ----------- ----------- Net income (loss) .............. $ 483,726 $ 181,082 $ (791,768) =========== =========== =========== As of December 31, 1999, SMMP also holds a 35.10% interest in Sorrento II Partners (a California general partnership with Sierra Pacific Institutional Properties V formed in 1993), a 6.55% interest in Sierra Creekside Partners (a California general partnership with Sierra Pacific Development Fund formed in 1994), and a 33.32% 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, 1999 1998 ----------- ----------- ASSETS Cash and cash equivalents ......................... $ 272,657 $ 85,792 Rent receivable ................................... 588,742 542,527 Due from affiliates ............................... 0 47,666 Income-producing property, net of accumulated depreciation ................. 8,109,927 8,343,438 Other assets ...................................... 1,897,050 1,320,667 ----------- ----------- Total Assets ...................................... $10,868,376 $10,340,090 =========== =========== LIABILITIES AND GENERAL PARTNERS' EQUITY Accrued and other liabilities ..................... $ 350,272 $ 520,646 Note payable ...................................... 1,673,186 1,720,324 ----------- ----------- Total Liabilities ................................. 2,023,458 2,240,970 ----------- ----------- Ground lessors' equity in income-producing property 3,000,000 3,000,000 ----------- ----------- General Partners' equity .......................... 5,844,918 5,099,120 ----------- ----------- Total Liabilities and General Partners' equity .... $10,868,376 $10,340,090 =========== =========== 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, ------------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Revenues: Rental income ............... $ 2,112,254 $ 1,734,403 $ 2,294,859 Interest income ............. 34,540 0 0 Other income ................ 15,151 93,668 9,698 ----------- ----------- ----------- Total revenues ...... 2,161,945 1,828,071 2,304,557 ----------- ----------- ----------- Expenses: Operating expenses .......... 1,407,262 1,302,968 1,755,826 Depreciation and amortization 779,142 829,081 1,321,177 Interest .................... 152,563 156,636 459,763 ----------- ----------- ----------- Total expenses ...... 2,338,967 2,288,685 3,536,766 ----------- ----------- ----------- Loss before loss from property disposition .................. (177,022) (460,614) (1,232,209) Loss from property disposition .................. 0 0 (967,764) ----------- ----------- ----------- Net loss ....................... $ (177,022) $ (460,614) $(2,199,973) =========== =========== =========== Reference is made to the audited financial statements of Sierra Mira Mesa Partners included herein. 36 Sierra Pacific Development Fund II and subsidiary Notes to Consolidated Financial Statements Page twelve 6. NOTES PAYABLE At December 31, 1999 and 1998, notes payable consisted of the following: 1999 1998 ------------- -------------- Mortgage note payable, due in monthly interest only payments at LIBOR rate + 300 basis points collateralized by certain land and buildings. This note was paid in August 1999. $ 0 $ 1,300,000 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. 1,902,438 1,931,204 Mortgage note payable, due in monthly installments with interest at 8.35%, collateralized by certain land and buildings. This note matures in September 2009. 1,494,678 0 ------------- -------------- $ 6,397,116 $ 6,231,204 ============= ============== Annual maturities of notes payable as of December 31, 1999, are: $44,343 in 2000; $52,788 in 2001; $57,632 in 2002; $62,921 in 2003; $3,068,345 in 2004; and $3,111,087 thereafter. 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 fiduciary duty and breach of contract. The Plaintiff's claims relate to three loans made to affiliates, two by the Partnership and one by Sierra Mira Mesa Partners ("SMMP"), 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. In December 1999, as a compromise to all claims asserted in what became a derivative action on behalf of the Partnership, the parties agreed to enter into a Mutual Compromise and Settlement ("the Settlement"). The Settlement provides for a complete release of the Partnership, general partners and all affiliates. As part of the material terms of the Settlement, S-P Properties, as the general partner of the Partnership, on or before December 31, 2000, will call and collect the two demand notes with balances of $1,012,698 and $3,798,900, respectively, at December 31, 1999 and a portion of the SMMP loan (the date of collection being referred to herein as the "Payment Date"). In the case of the SMMP loan, the amount due being that percentage of the loan that is equal to the Partnership's interest in SMMP, and in any event no less than thirty percent (30%). The loan proceeds received by the Partnership, totaling approximately $5,600,000, will be distributed on a per-unit basis to the limited partners and assignees of the Partnership of record as of the Payment Date. The Partnership will pay Plaintiff's attorneys' fees of $1,000,000. Such attorneys' fees have been accrued as of December 31, 1999 and are included in accrued and other liabilities on the consolidated balance sheet. The Plaintiff, on behalf of the Partnership, will dismiss the entire action with prejudice. The court approved the Settlement on February 9, 2000. S-P Properties, Inc. has denied and continues to deny that it has committed any violations of law, and states that it has entered into the Settlement solely to eliminate the burden and expense of further litigation. 38 SIERRA MIRA MESA PARTNERS AND SUBSIDIARY (A CALIFORNIA GENERAL PARTNERSHIP) CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998 AND STATEMENTS OF OPERATIONS, CHANGES IN GENERAL PARTNERS' EQUITY AND CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1999 AND INDEPENDENT AUDITORS' REPORT 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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of its operations and cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Houston, Texas February 25, 2000 40 SIERRA MIRA MESA PARTNERS AND SUBSIDIARY (A CALIFORNIA GENERAL PARTNERSHIP) CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998 - -------------------------------------------------------------------------------- December 31, December 31, 1999 1998 ----------- ----------- ASSETS Cash and cash equivalents ........................ $ 319,400 $ 14,064 Receivables: Unbilled rent (Notes 1 and 4) ................. 1,114,598 1,226,156 Billed rent (Note 1) .......................... 83,917 0 Due from affiliates, net (Note 3) ................ 2,451,227 2,233,158 Income-producing property - net of accumulated depreciation of $3,564,380 in 1999 and $3,273,970 in 1998 (Notes 1, 4 and 6) ......... 8,723,396 9,000,294 Investment in unconsolidated joint ventures (Notes 1 and 5) ................ 2,526,875 1,640,460 Other assets (Notes 1, 2 and 3) .................. 793,658 897,993 ----------- ----------- Total Assets ..................................... $16,013,071 $15,012,125 =========== =========== LIABILITIES AND GENERAL PARTNERS' EQUITY Accrued and other liabilities (Note 2) ........... $ 101,104 $ 251,990 Notes payable (Note 6) ........................... 6,179,038 5,418,414 ----------- ----------- Total Liabilities ................................ 6,280,142 5,670,404 ----------- ----------- Minority interest in consolidated joint venture (Note 1) ........................ (340,614) (332,996) General Partners' equity (Note 1) ................ 10,073,543 9,674,717 ----------- ----------- Total Liabilities and General Partners' equity ... $16,013,071 $15,012,125 =========== =========== SEE ACCOMPANYING NOTES 41 SIERRA MIRA MESA PARTNERS AND SUBSIDIARY (A CALIFORNIA GENERAL PARTNERSHIP) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
1999 1998 1997 ----------- ----------- ----------- Revenues: Rental income (Note 1) ............... $ 2,126,106 $ 1,883,630 $ 1,919,582 Interest income ...................... 224,308 205,781 174,764 Other income ......................... 0 0 9,404 ----------- ----------- ----------- Total revenues ..................... 2,350,414 2,089,411 2,103,750 ----------- ----------- ----------- Expenses: Operating expenses: Depreciation and amortization ........ 587,070 581,956 825,911 Property taxes and insurance ......... 98,611 97,781 92,347 Administrative fees (Note 3) ......... 121,889 111,206 104,580 Maintenance and repairs .............. 233,615 240,965 228,890 Management fees (Note 3) ............. 119,166 109,725 101,558 Utilities ............................ 135,301 135,077 138,203 Legal and accounting ................. 24,767 27,657 47,242 General and administrative ........... 16,122 7,443 12,677 Renting expenses ..................... 0 0 309 Bad debt expense ..................... 4,770 0 0 Other operating expenses ............. 46,413 25,124 16,742 ----------- ----------- ----------- Total operating expenses ........... 1,387,724 1,336,934 1,568,459 Interest ............................. 450,177 438,711 463,804 ----------- ----------- ----------- Total expenses ................. 1,837,901 1,775,645 2,032,263 ----------- ----------- ----------- INCOME BEFORE PARTNERSHIP'S SHARE OF UNCONSOLIDATED JOINT VENTURE LOSSES .. 512,513 313,766 71,487 ----------- ----------- ----------- PARTNERSHIP'S SHARE OF UNCONSOLIDATED JOINT VENTURE LOSSES (Note 5) ........ (36,405) (131,897) (855,349) ----------- ----------- ----------- INCOME (LOSS) BEFORE MINORITY INTEREST'S SHARE OF CONSOLIDATED JOINT VENTURE LOSS (INCOME) ........................ 476,108 181,869 (783,862) ----------- ----------- ----------- MINORITY INTEREST'S SHARE OF CONSOLIDATED JOINT VENTURE LOSS (INCOME) .......... 7,618 (787) (7,906) ----------- ----------- ----------- NET INCOME (LOSS) ....................... $ 483,726 $ 181,082 $ (791,768) =========== =========== ===========
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, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
GENERAL PARTNERS ---------------------------------------------- SIERRA PACIFIC SIERRA PACIFIC DEVELOPMENT PENSION FUND II INVESTORS '84 TOTAL ------------ ------------ ------------ General Partners' equity - January 1, 1997 . $ 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 Net income (loss) .......................... (14,912) 195,994 181,082 Contributions .............................. 8,490 42,000 50,490 Distributions .............................. (211,490) (211,250) (422,740) ------------ ------------ ------------ General Partners' equity - December 31, 1998 3,044,005 6,630,712 9,674,717 Net income ................................. 159,678 324,048 483,726 Contributions .............................. 44,000 539,784 583,784 Distributions .............................. (370,184) (298,500) (668,684) ------------ ------------ ------------ General Partners' equity - December 31, 1999 $ 2,877,499 $ 7,196,044 $ 10,073,543 ============ ============ ============
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, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
1999 1998 1997 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) .................................... $ 483,726 $ 181,082 $ (791,768) Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization ...................... 587,070 581,956 825,911 Undistributed losses of unconsolidated joint ventures .................... 36,405 131,897 855,349 Minority interest in consolidated joint venture (loss) income ..................... (7,618) 787 7,906 Bad debt expense ................................... 4,770 0 0 Decrease (increase) in rent receivable ............. 27,641 60,853 (100,191) Increase in due from affiliates .................... (222,839) (202,581) (168,779) (Increase) decrease in other assets ................ (45,022) (215,974) 55,566 (Decrease) increase in accrued and other liabilities (150,886) 183,225 (35,663) ----------- ----------- ----------- Net cash provided by operating activities ............ 713,247 721,245 648,331 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments for property additions .................... (160,815) (346,113) (231,484) Capital contributions to unconsolidated joint ventures ................................... (1,027,820) (350,900) (2,315,041) Distributions received from unconsolidated joint ventures ................................... 105,000 372,312 2,439,098 ----------- ----------- ----------- Net cash used in investing activities ................ (1,083,635) (324,701) (107,427) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Capital contributions from General Partners ........ 583,784 50,490 1,844,843 Cash distributions ................................. (668,684) (422,740) (1,828,600) Funding of note payable secured by property ........ 1,637,500 0 0 Principal payments on notes payable ................ (876,876) (254,638) (339,460) ----------- ----------- ----------- Net cash provided by (used in) financing activities .. 675,724 (626,888) (323,217) ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................ 305,336 (230,344) 217,687 CASH AND CASH EQUIVALENTS - Beginning of year .......... 14,064 244,408 26,721 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS - End of year ................ $ 319,400 $ 14,064 $ 244,408 =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for interest ............... $ 439,792 $ 439,756 $ 470,608 =========== =========== ===========
In 1999, 1998, and 1997 interest receivable of $222,839, $202,581, and $338,020, respectively, was added to the principal balance of the related note receivable from affiliate. These transactions are noncash items 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 100% leased at December 31, 1999. 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. 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. As a result, the sharing ratio in effect for 1997, 1998 and 1999 was 45.58%, 33.74% and 33.01%, respectively, for SPDFII and 54.42%, 66.26% and 66.99%, respectively, for SPPI'84. On January 1, 2000, the sharing ratio will be decreased to 30.17% for SPDFII and increased to 69.83% for SPPI'84 to reflect the 1999 contributions and distributions. 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, 1999. All significant intercompany balances and transactions have been eliminated in consolidation. 45 Sierra Mira Mesa Partners Notes to Consolidated Financial Statements Page two 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, 1999 and 1998 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, 1999. Management does not fair value 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. 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. No such impairment has been recognized by the Partnership. 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, 1999. 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 using the straight line method of accounting. Deferred loan costs represent costs incurred to obtain financing and are amortized over the life of the related loan using the straight line method of accounting. 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, 1999 and 1998, is as follows: 1999 1998 -------- -------- Other assets: Prepaid expenses ................................ $ 7,383 $ 21,070 Deferred loan costs, net of accumulated amortization of $49,842 in 1999 and $226,318 in 1998 .............................. 168,225 133,878 Deferred leasing costs, net of accumulated amortization of $531,945 in 1999 and $414,395 in 1998 .............................. 507,000 637,028 Tax impounds .................................... 26,831 23,728 Tenant improvement reserves ..................... 84,219 82,289 -------- -------- $793,658 $897,993 ======== ======== Accrued and other liabilities: Accounts payable ................................ $ 51,008 $192,455 Security deposits ............................... 17,922 17,922 Accrued expenses ................................ 0 8,101 Interest payable ................................ 32,174 20,982 Unearned rental income .......................... 0 12,530 -------- -------- $101,104 $251,990 ======== ======== 47 Sierra Mira Mesa Partners Notes to Consolidated Financial Statements Page four 3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS 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 $119,166, $109,725, and $101,558 respectively, for the years ended December 31, 1999, 1998, and 1997. 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 $122,239, $111,206, and $104,580 respectively, for such services for the years ended December 31, 1999, 1998, and 1997. Additionally, SMMP reimbursed an affiliate for construction supervision costs incurred by the affiliate. For the years ended December 31, 1999, 1998, and 1997, the affiliate received $28,201, $1,327, and $11,154 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, 1999, 1998, and 1997, these fees amounted to $0, $63,492, and $3,656 respectively, and were recorded as deferred leasing costs. 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, 1999, 1998 and 1997, interest receivable of $222,839, $202,581 and $338,020, respectively, was added to the principal balance of the loan. No interest related to this loan was due to the Partnership at December 31, 1999 and 1998. The principal balance outstanding at December 31, 1999 is $2,451,227. The loan is guaranteed by the owners of CGS Real Estate Company, Inc. In connection with the settlement of a lawsuit by SPDFII, the Partnership will call a portion of the note receivable from Bancor Real Estate Company, Inc. The portion called will be that percentage of the loan that is equal to SPDFII's ownership interest in the Partnership, in any event no less than 30%. Such funds that are collected will be distributed to SPDFII in accordance with the lawsuit settlement. 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). 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 $4,770. The advance was deemed uncollectible and subsequently written off to bad debt expense in 1999. See Note 6 for note payable transactions with related parties. 48 Sierra Mira Mesa Partners Notes to Consolidated Financial Statements Page five 4. INCOME-PRODUCING PROPERTIES At December 31, 1999 and 1998 the total cost and accumulated depreciation of the properties are as follows: 1999 1998 ------------ ------------ Land ................................. $ 3,786,458 $ 3,786,458 Building and improvements ............ 8,501,318 8,487,806 ------------ ------------ Total ....................... 12,287,776 12,274,264 Accumulated depreciation ............. (3,564,380) (3,273,970) ------------ ------------ Net ......................... $ 8,723,396 $ 9,000,294 ============ ============ During 1999 and 1998, the Partnership removed $147,303 and $1,784,496, respectively, from its building and improvements and related accumulated depreciation accounts for fully depreciated property. 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 --------------------- ------------ ------------ 2000 $ 2,029,716 $ 2,246,281 2001 2,023,332 2,339,768 2002 2,014,332 2,437,297 2003 595,285 677,208 2004 179,747 184,288 Thereafter 593,192 665,360 ------------ ------------ Total $ 7,435,604 $ 8,550,202 ============ ============ In each of the three years in the period ending December 31, 1999, two tenants accounted for the majority of the Partnership's rental income. A state governmental agency associated with workers compensation insurance accounted for rental income of 69%, 78%, and 67% in 1999, 1998 and 1997, respectively; a tenant in the communications sector accounted for rental income of 13%, 15% and 13% in 1999, 1998 and 1997, respectively. 5. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES SMMP holds the following investments accounted for under the equity method at December 31, 1999: o a 35.10% 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, 1999 and 1998 is $2,647,872 and $1,711,089, respectively. SMMP's share of the net loss of SIIP for the three years ended December 31, 1999, 1998 and 1997 is $30,637, $143,251 and $59,066, respectively; 49 Sierra Mira Mesa Partners Notes to Consolidated Financial Statements Page six o a 6.55% 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, 1999 and 1998 is $(128,513) and $(75,610), respectively. SMMP's share of the net loss of SCP for the three years ended December 31, 1999, 1998 and 1997 is $5,903, $8,420 and $14,995, respectively; o a 33.32% 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, 1999 and 1998 is $7,516 and $4,981, respectively. SMMP's share of the net income (loss) of SVP for the three years ended December 31, 1999, 1998 and 1997 is $135, $19,774 and $(781,288), 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, -------------------------- 1999 1998 ----------- ----------- ASSETS Cash and cash equivalents ......................... $ 272,657 $ 85,792 Rent receivable ................................... 588,742 542,527 Due from affiliate ................................ 0 47,666 Income-producing property, net of accumulated depreciation .................. 8,109,927 8,343,438 Other assets ...................................... 1,897,050 1,320,667 ----------- ----------- Total Assets ...................................... $10,868,376 $10,340,090 =========== =========== LIABILITIES AND GENERAL PARTNERS' EQUITY Accrued and other liabilities ..................... $ 350,272 $ 520,646 Note payable ...................................... 1,673,186 1,720,324 ----------- ----------- Total Liabilities ................................. 2,023,458 2,240,970 ----------- ----------- Ground lessors' equity in income-producing property 3,000,000 3,000,000 ----------- ----------- General Partners' equity .......................... 5,844,918 5,099,120 ----------- ----------- Total Liabilities and General Partners' equity .... $10,868,376 $10,340,090 =========== =========== 50 Sierra Mira Mesa Partners Notes to Consolidated Financial Statements Page seven CONDENSED COMBINED STATEMENTS OF OPERATIONS ------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Revenues: Rental income ............... $ 2,112,254 $ 1,734,403 $ 2,294,859 Interest income ............. 34,540 0 0 Other income ................ 15,151 93,668 9,698 ----------- ----------- ----------- Total revenues ...... 2,161,945 1,828,071 2,304,557 ----------- ----------- ----------- Expenses: Operating expenses .......... 1,407,262 1,302,968 1,755,826 Depreciation and amortization .............. 779,142 829,081 1,321,177 Interest .................... 152,563 156,636 459,763 ----------- ----------- ----------- Total expenses ...... 2,338,967 2,288,685 3,536,766 ----------- ----------- ----------- Net loss before disposition of property ..................... (177,022) (460,614) (1,232,209) Loss from property disposition . 0 0 (967,764) ----------- ----------- ----------- Net loss ....................... $ (177,022) $ (460,614) $(2,199,973) =========== =========== =========== 6. NOTES PAYABLE At December 31, 1999 and 1998, notes payable consisted of the following: 1999 1998 ---------- ---------- Mortgage note payable, due in monthly installments with interest at 7.74% per annum, collateralized by the real property known as Sierra Mira Mesa. This note matures in October 2010............. $4,543,984 $4,802,191 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 converted to the one-year treasury rate plus 375 basis points. This note, which was collateralized by the real property known as Sorrento I, was paid in August 1999..................................... 0 616,223 Mortgage note payable, due in monthly installments with interest at 8.75% per annum, collateralized by the Sorrento I property. The note matures in September 2009..................................... 1,635,054 0 ---------- ---------- $6,179,038 $5,418,414 ========== ========== 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 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 converted to the one-year treasury rate plus 375 basis points. The note was amortized over a 210-month term and payments were $6,048 per month, principal and interest inclusive until maturity in March 2015. In August 1999, the CGS note with an outstanding balance of $607,693 was paid. On the same date, SIP entered into a new loan agreement with Finova Realty Capital, Inc. in the amount of $1,637,500. This loan, which is secured by the Sorrento I property, bears interest at 8.75% per annum. Monthly payments of $12,882, consisting of both principal and interest, are due until maturity in September 2009. The note balance as of December 31, 1999 was $1,635,054. In connection with the repayment of the CGS note, SIP paid $29,528 to CGS related to late fees which were included in other operating expenses in the statement of operations for 1999. As of December 31, 1999, annual maturities on notes payable are: $290,909 in 2000; $314,372 in 2001; $339,729 in 2002; $367,133 in 2003; $396,749 in 2004; and $4,470,146 thereafter. 52 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 Gregory J. Nooney, Jr. Vice President Patricia A. Nooney Vice President 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. 53 EX-27 2
5 THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SIERRA PACIFIC DEVELOPMENT FUND II DECEMBER 31, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1999 DEC-31-1999 260,963 0 379,482 0 0 1,414,872 14,319,370 3,728,719 19,204,328 1,361,603 6,397,116 0 0 0 11,354,635 19,204,328 2,356,436 2,766,153 0 2,796,922 869,457 0 437,352 (1,177,254) 0 (1,177,254) 0 0 0 (1,177,254) (13.59) (13.59)
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