-----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, C7kcett7wvBgIFunI00Hekdd0jsuXNKWcDX2RaRE1wh5V3PlYOAn9aquAYIV42HJ TCgHwy84fem7q4VdwDHslg== 0000890566-99-000386.txt : 19990331 0000890566-99-000386.hdr.sgml : 19990331 ACCESSION NUMBER: 0000890566-99-000386 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIERRA PACIFIC DEVELOPMENT FUND III CENTRAL INDEX KEY: 0000747680 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 330043953 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14276 FILM NUMBER: 99579307 BUSINESS ADDRESS: STREET 1: 5850 SAN FELIPE SUITE 120 CITY: HOUSTON STATE: TX ZIP: 77057 BUSINESS PHONE: 7139776171 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, 1998 Commission file number : 0-14276 SIERRA PACIFIC DEVELOPMENT FUND III (A CALIFORNIA LIMITED PARTNERSHIP) State of California 33-0043953 - ------------------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) 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 ------------------------------------------------------------- (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: 60,000 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, 1998 is incorporated by reference into Parts II and III 1 PART I ITEM 1. BUSINESS (a.) GENERAL DEVELOPMENT OF BUSINESS. Sierra Pacific Development Fund III (the "Partnership") is a California limited partnership that was formed in June 1984 for the purpose of acquiring, developing, and operating commercial and industrial real estate. In February 1985, the Partnership acquired land in San Diego, California as the first step in the development of Sierra Sorrento I. This 43,100 square foot industrial/warehouse project was completed in February 1986. In October 1986, the Partnership acquired land in Anaheim, California for the development of Sierra Vista. This property, a 102,855 square foot industrial/office project, was completed in April 1988. In April 1993, the Partnership created a California general partnership (Sorrento I Partners) with Sierra Mira Mesa Partners ("SMMP") to facilitate cash contributions by SMMP for the continued development and operation of the Sierra Sorrento I property. The Partnership contributed the Sierra Sorrento I property and SMMP contributed cash ($2,435,977, net, through December 31, 1997) in exchange for a 88.59% interest in Sorrento I Partners. SMMP made additional contributions of $8,500 and received distributions of $118,000 in 1998. The percentage interests of the Partnership and Sierra Mira Mesa Partners are to be adjusted every January 1st during the term of Sorrento I Partners, beginning January 1, 1995. Accordingly, as of January 1, 1999, the Partnership's interest in Sorrento I Partners will be increased to 11.88%, and SMMP's interest will be reduced to 88.12%. Because the Partnership owns less than 50% of the Sierra Sorrento I property, it records its interest in Sorrento I Partners as an investment in an unconsolidated joint venture using the equity method of accounting. Thus, the Sierra Sorrento I property is not reflected as an asset on the Partnership's balance sheet nor is the debt on the property reflected in the balance sheet. In February 1994, the Partnership formed a joint venture with SMMP known as Sierra Vista Partners ("SVP") to facilitate cash contributions by SMMP for the continued development and operation of the Sierra Vista property. Through December 31, 1997, SMMP had contributed $1,396,204 cash, net, for a 34.51% interest in Sierra Vista Partners. SMMP made additional contributions of $36,900, and received distributions of $108,656 in 1998. The percentage interests of the Partnership and Sierra Mira Mesa Partners are to be adjusted every January 1st during the term of Sierra Vista Partners, beginning January 1, 1995. Accordingly, as of January 1, 1999 the Partnership's interest in Sierra Vista Partners will be increased to 66.68%, and SMMP's interest will be decreased to 33.32%. In October 1997, the Sierra Vista property was sold for $5,630,000. The Partnership received net cash proceeds of $2,140,598 from the sale for its 52.95% interest in this property and the purchaser assumed the Partnership's $3,044,397 debt on the property. The Partnership also incurred additional selling costs and credited security deposits and prorata rents for October to the buyer. In accordance with the SVP joint venture agreement, these proceeds were distributed to SMMP. Under the terms of the agreement, SMMP receives preferential cash distributions of available "Distributable Funds" from the sale of the property to the extent of its capital contributions. SMMP had made net contributions of $3,335,204 to SVP through the sale date. At December 31, 1998, the Partnership's remaining real estate investment is an 11.41% minority interest in the Sierra Sorrento I property. Audited financial statements of Sorrento I Partners are included in the Annual Report to the Limited Partners attached as an Exhibit. (b.) NARRATIVE DESCRIPTION OF BUSINESS. The Partnership owned and operated Sierra Vista, an industrial/office project in Anaheim, California. The Sierra Vista property was sold in October 1997. During 1998 and as of December 31, 1998, the Partnership has an 11.41% interest in an industrial property known as Sorrento I in San Diego, California through a California general partnership with Sierra Mira Mesa Partners. (c.) COMPARISON OF CURRENT ACTIVITIES TO THOSE PROPOSED AT THE INITIATION OF THE PARTNERSHIP. In the Partnership's prospectus dated September 4, 1984, the investment objectives were described as follows: 2 "The Partnership is a California limited partnership which was organized to invest in commercial and industrial real properties. The Partnership may invest in both properties which are to be developed or are under development or construction and properties which are newly-constructed or have operating histories. The Partnership's objectives 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 its real estate investments; (iii) to generate sufficient cash from operations to make distributions of Available Cash to the Limited Partners; (iv) to provide federal income tax deductions so that all or a portion of any Available Cash distributed to the Limited Partners 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. No assurance can be given that these objectives will be attained or that the Partnership's capital will not decrease." Operations of the Partnership through 1997 have been consistent with the intent of the original prospectus in that the Partnership has invested in real estate projects that had the potential for capital gains, preservation of capital and providing distributable cash flow partially sheltered from Federal income tax. As discussed above, the Partnership sold the Sierra Vista property in October 1997. As of December 31, 1998, the Partnership had paid cash distributions of $11.19 for each $250 unit investment and remaining partners' equity (deficit) was computed at $0 per unit. Thus, if the Partnership were to be liquidated at the end of 1998 at book value, each $250 investment would have returned a total of $11.19. ITEM 2. PROPERTIES As stated in Item 1 the Partnership sold the Sierra Vista property in October 1997. During 1998 and as of December 31, 1998, the Partnership has an 11.41% interest in an industrial property known as Sorrento I in San Diego, California through a California general partnership with Sierra Mira Mesa Partners. See Item 1. Business for discussion of percentage ownership changes. 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, 1998 is $6.58. The principal business of the tenant is research and development in the communications sector. DEPRECIABLE PROPERTY Sorrento I, San Diego, California Office Building - Income-Producing Property
TENANT LAND BUILDINGS IMPROVEMENTS TOTAL -------------- ------------- ------------- ----------- Historical Cost & Tax Basis $ 1,305,518 $ 1,342,683 $ 329,299 $ 2,977,500 Accumulated Depreciation .............. (526,906) (112,833) (639,739) -------------- ------------- ------------- ----------- Net Carrying Value ........ $ 1,305,518 $ 815,777 $ 216,466 $ 2,337,761 ============== ============= ============= =========== Depreciation Method ....... Not Applicable Straight-line Straight-line Depreciable Life .......... Not Applicable 10-30 Years 7-10 years
3 REAL ESTATE TAXES The real estate tax obligation for 1998 is approximately 1.12% of the assessed value or $29,144. INSURANCE In the opinion of management, the property is adequately covered by insurance. ENCUMBRANCES Sorrento I Partners ("SIP") had a non-recourse bank note payable with an original principal balance of $3,000,000 collateralized by the Sorrento I property. The annual interest rate of the note was variable at bank prime plus 2-1/2% with a minimum rate of 9% and maximum rate of 15-1/2%. The original maturity of the note was July 1998 and the note included a discounted payoff option of $1,500,000. CGS Real Estate Company, Inc. ("CGS"), an affiliate of the General Partner, acquired the note and security documents from the bank in May 1996. In connection with the purchase of the bank note and security documents by CGS, SIP made a principal payment to the bank of $750,000 and entered into a $750,000 note agreement with CGS (the "CGS Agreement"). The CGS Agreement, collaterized by real and personal property, called for monthly interest payments through December 1996 and monthly principal and interest payments thereafter until maturity on May 31, 2016. The interest rate is fixed at 9.34% per annum for the first year of the note and will thereafter be the one year Treasury rate plus 375 basis points. A pre-payment in the amount of $105,000 was paid in April 1997. A modification agreement was entered into on September 30, 1997. The interest rate remained fixed at 9.34% through October 1998, at which time the rate converted to the one-year treasury rate plus 375 basis points (9.06% at December 31, 1998). The note is amortized over a 210-month term and current payments are $6,048 per month, principal and interest inclusive until maturity in March 2015. The loan balance as of December 31, 1998 was $616,223. At any time upon 120 days written notice to CGS, SIP may fully discharge the note by the payment of an amount equal to $750,000 less the aggregate amount of principal paid under the note between the date of the CGS Agreement and the date of payment plus any interest due. ITEM 3. LEGAL PROCEEDINGS The Partnership is not involved in any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 4 PART II ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERS' EQUITY AND RELATED MATTERS As of December 31, 1998, the number of security holders is as follows: NUMBER OF NUMBER RECORD OF UNITS HOLDERS --------- --------- Limited Partners ................................... 36,521 841 ========= ========= 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 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 has neither paid nor declared any cash or other distributions to the General or Limited Partners during the three most recent fiscal years. 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 Financial 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 conjuntion 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, 1998, the Partnership owned a 65.49% interest in Sierra Vista Partners, which operated the Sierra Vista property, which was sold in October 1997. In addition, the Partnership held an 11.41% interest in Sorrento I Partners ("SIP"), which operates the Sorrento I property. 5 Results of Operations: COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997. No rental income was recorded for the year ended December 31, 1998 due to the sale of the Property in 1997. Rental income in the prior year was $558,000. In 1998, the Partnership received a cash payment of $94,000, recorded as other income, related to an adjustment to the refinancing of the debt on the Sierra Vista property that took place prior to the sale of the property in 1997. Operating expenses for the year ended December 31, 1998 were $37,000, which consisted primarily of accounting and other general and administrative expenses. Operating expenses in the prior year were $952,000. No interest expense was incurred in 1998 due to the sale of the Property in the prior year. The Partnership's loan was transferred and assumed by the buyer of the property at the time of sale. The Partnership's remaining real estate investment is an 11.41% minority interest in the Sorrento I property. The Partnership's share of income from its investment in SIP was $1,000 for the year ended December 31, 1998 compared to $8,000 for the year ended December 31, 1997. In accordance with the Sorrento I partnership agreement, income resulting from its operations is first allocated to the General Partners in proportion to the relative amounts of net cumulative losses until such allocation of income equals the previously allocated net cumulative losses. Then, profits are allocated in proportion to the distributions made to the General Partners during the year. As such, SIP allocated the Partnership 43.04% of its income, and the other General Partner, SMMP, received 56.96% of its income for each of the years ending December 31, 1998 and 1997. COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996. On October 10, 1997 the Sierra Vista property was sold for $5,630,000. The Partnership recorded a $968,000 loss from property disposition. Revenues decreased by $177,000, or 24%, and operating expenses decreased by $109,000, or 10%, primarily due to the sale of the property. Legal and accounting fees increased by $14,000, principally as a result of higher professional fees associated with the refinance of the property in April 1997 and due to costs incurred related to the sale. Interest expense increased by $35,000, or 13%, primarily due to interest and other financing charges associated with the payoff of the mortgage note that matured in February 1997 and due to a higher interest rate associated with a new loan funded in April 1997. This loan was transferred and assumed by the buyer of the property in October 1997. The Partnership's share of income from its investment in SIP was $8,000 for the year ended December 31, 1997 compared to $414,000 for the year ended December 31, 1996. SIP exercised a discounted payoff option on its note payable in May 1996. SIP recorded an extraordinary gain of $1,200,000 in connection with this transaction. Liquidity and Capital Resouces: The Partnership received net cash proceeds of $2,141,000 from the sale of the property in 1997. In accordance with the Sierra Vista Partners joint venture agreement, these proceeds were distributed to Sierra Mira Mesa Partners ("SMMP"). Under the terms of the agreement, SMMP receives preferential cash distributions of available "Distributable Funds" from the sale of the property to the extent of its capital contributions. SMMP had made net contributions of $3,335,000 to the Partnership through the sale date. As of December 31, 1998, the Partnership is in a liquid position with cash of $1,000 and no current liabilities. One tenant began leasing the entire 43,100 rentable square feet of the Sorrento I property in 1996. This lease commenced May 1, 1996 and expires April 30, 2003. The current base rent called for under this lease is $23,204 per month and shall increase in subsequent periods. The lease contains an option to extend for an additional five years. 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. 6 CGS Real Estate Company, Inc. ("CGS"), an affiliate of the General Partner, acquired the note and security documents from the bank in May 1996. In connection with the purchase of the bank note and security documents by CGS, SIP made a principal payment to the bank of $750,000 and entered into a $750,000 note agreement with CGS (the "CGS Agreement"). This transaction resulted in a $1,200,000 gain for SIP in 1996. The note balance was paid down $105,000 in April 1997. A modification agreement was entered into on September 30, 1997. The interest rate remained fixed at 9.34% through October 1998, at which time the rate converted to one-year treasury plus 375 basis points (9.06% at December 31, 1998). The note is amortized over a 210-month term and at the current interest rate, the CGS Agreement calls for monthly principal and interest payments of $6,048, which is significantly less than the $28,570 called for under the bank note payable. At any time upon 120 days written notice to CGS, SIP may fully discharge the note by the payment of an amount equal to $750,000 less the aggregate amount of principal paid under the note between the date of the CGS Agreement and the date of payment plus any interest due. Sorrento I has improved its cash flow as a result of the new lease and new payment terms on the debt. Sierra Vista Partners and Sorrento I Partners were formed, in part, to provide the projects with a source of cash for tenant improvements and lease commissions. As required, the Partnership's joint venture partner (SMMP) either advances or contributes cash to meet the Partnership's requirements. SMMP has adequate resources to make the necessary advances during the foreseeable future. The Partnership's primary capital requirements will be for the continued development and operation of the Sorrento I property. It is anticipated that these requirements will be funded from the operations of the property and the Partnership's joint venture partner. In accordance with the SIP joint venture agreement, proceeds shall first be distributed to SMMP as a return of capital in proportion to its aggregate unreturned contributed capital and then to the Partnership in proportion to its aggregate unreturned contributed capital. Any remaining proceeds shall first be distributed pro rata in proportion to the partners' positive balances in their capital accounts and then in accordance with their percentage interest. 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 employs a property management company to manage, operate and lease the property. The management company believes it will be ready for the Year 2000 date change by the end of 1999. The impact of Year 2000 non-compliance by other third parties cannot accurately be gauged. The total cost to the Partnership of activities associated with Year 2000 Compliance is not anticipated to be material to its financial position or results of operations in any given year. In January 1999, the Partnership began utilizing a new software program to maintain books and records. The new software program is Year 2000 compliant. The total amount of potential risk that would be reasonably likely to result from Year 2000 failures cannot presently be estimated. In the event the Partnership does not properly identify Year 2000 issues in a timely manner, there can be no assurance that Year 2000 issues will not materially affect the Partnership's results. The Partnership's contingency plan should systems fail due to the Year 2000 date change is to temporarily convert to a manual system. The Partnership believes it could temporarily operate on a manual system without adversely impacting operations. 7 The preceding Year 2000 discussion contains various forward-looking statements which represent the Partnership's beliefs or expectations regarding future events. All forward-looking statements involve a number of risks and uncertainties that could cause the actual results to differ materially from projected results. 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, 1998 and 1997 3. Consolidated Statements of Operations - for the years ended December 31, 1998, 1997 and 1996 4. Consolidated Statements of Changes in Partners' Equity (Deficit) for the years ended December 31, 1998, 1997 and 1996 5. Consolidated Statements of Cash Flows - for the years ended December 31, 1998, 1997 and 1996 6. Notes to Consolidated Financial Statements 7. Balance Sheets of Sorrento I Partners as of December 31, 1998 and 1997 and Statements of Operations, Changes in Partners' Equity (Deficit) and Cash Flows for each of the three years in the period ended December 31, 1998 and Independent Auditors' Report ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None 8 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 48 4 years Dawson L. Davenport Vice President 43 4 years Steven M. Speier Secretary/Treasurer and 48 4 years Director William J. Carden Assistant Secretary/Treasurer 54 4 years and Director Thomas N. Thurber - President and Director, S-P Properties, Inc. Mr. Thurber is a Certified Public Accountant who began his career with Arthur Andersen & Co. in 1972. In 1979, he joined a major publicly traded real estate development firm (Daon) where he became Controller for U.S. Operations. Subsequently, Mr. Thurber served as Director of Real Estate for a developer of retail properties, and Chief Financial Officer of a trust with significant investments in commercial real estate. Mr. Thurber also serves as a director of Property Secured Investments, Inc. Mr. Thurber holds a bachelors degree in accounting from Florida State University. Dawson L. Davenport - Vice President, S-P Properties, Inc. Mr. Davenport is the founder of WD Real Estate Services, a full service property management firm that became part of the Banc Commercial family of companies in 1992. Mr. Davenport has been responsible for the management, development and rehabilitation of substantial commercial, industrial, retail, and residential projects during the past seventeen years. Mr. Davenport specializes in leasing and turning around distressed properties. Steven M. Speier - Secretary/Treasurer and Director, S-P Properties, Inc. Mr. Speier who after spending two years in public accounting, went into the banking industry in 1975. During his sixteen year banking career, Mr. Speier managed a real estate loan portfolio of approximately $1.5 billion secured by properties throughout the United States. Mr. Speier brings to S-P Properties, Inc. a broad real estate background that includes management, leasing, and disposition of all categories of commercial real estate. Mr. Speier also serves as a director of IDM Corporation. Mr. Speier is a licensed real estate broker, is registered as a Certified Public Accountant, and has a masters degree in business administration from Grand Valley State University in Michigan. William J. Carden - Assistant Secretary/Treasurer and Director, S-P Properties, Inc. Mr. Carden is the founder and President of CGS Real Estate Company, Inc., which owns over one million square feet of commercial real estate. Mr. Carden founded DVM Properties, Inc. in 1974 which concentrated on rehabilitation of retail, office, industrial, and commercial real estate. Mr. Carden is a former Director of Bay Financial, a New York Stock Exchange company, and currently serves as a director of Property Secured Investments, Inc. and IDM Corporation. 9 There have been no events under any bankruptcy act, no criminal proceedings, and no judgments or injunctions material to the evaluation of the ability and integrity of any director or officer during the past five years. 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, broker fees in connection with obtaining financing 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 None 10 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 schedule and the report of the independent auditors thereon are in included herein: 1. Schedule II-Valuation and Qualifying Accounts and Reserves-for the years ended December 31, 1998, 1997 and 1996. All other financial statement schedules are omitted as they either are not required or are not applicable. C. REPORTS ON FORM 8-K None 11 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 III a California Limited Partnership S-P PROPERTIES, INC. General Partner Date: March 19, 1999 /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, 1999 /S/THOMAS N. THURBER ---------------------------- -------------------------------------- Thomas N. Thurber President and Director S-P Properties, Inc. Date: March 19, 1999 /S/WILLIAM J. CARDEN ---------------------------- -------------------------------------- William J. Carden Assistant Secretary/Treasurer and Director S-P Properties, Inc. Date: March 19, 1999 /S/G. ANTHONY EPPOLITO ---------------------------- -------------------------------------- G. Anthony Eppolito Chief Accountant S-P Properties, Inc. 12 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE To the Partners of Sierra Pacific Development Fund III We have audited the consolidated financial statements of Sierra Pacific Development Fund III, a California limited partnership, (the "Partnership") as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998 and have issued our report thereon dated February 26, 1999. Such consolidated financial statements and report are included in your 1998 Annual Report to the Limited Partners and are incorporated herein by reference. Our audits also included the financial statement schedule of Sierra Pacific Development Fund III, listed in Item 14. The financial statement schedule is the responsibility of the Partnership's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Houston, Texas February 26, 1999 13 SCHEDULE II - FORM 10-K SIERRA PACIFIC DEVELOPMENT FUND III VALUATION AND QUALIFYING ACCOUNTS AND RESERVES For the Years Ended December 31, 1998, 1997, and 1996 INCOME - PRODUCING PROPERTIES ----------- Allowance for loss - January 1, 1996 ...................... $ 1,600,000 Provision charged to costs and expenses ......................................... 0 ----------- Allowance for loss - December 31, 1996 .................... 1,600,000 Reduction due to sale of property (1) .................. (1,600,000) ----------- Allowance for loss - December 31, 1997 .................... 0 Provision charged to costs and expenses ......................................... 0 ----------- Allowance for loss - December 31, 1998 .................... $ 0 =========== (1) See Note 1 to the consolidated financial statements incorporated by reference to the Annual Report to the Limited Partners attached as an Exhibit. 14 SIERRA PACIFIC DEVELOPMENT FUND III (A California Limited Partnership) SELECTED FINANCIAL DATA For the Years Ended December 31, 1998, 1997, 1996, 1995, and 1994 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, 1998 have been derived from the audited consolidated 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.
1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------ ------------ REVENUES ........................ $ 93,656 $ 558,724 $ 735,569 $ 615,088 $ 679,669 OPERATING EXPENSES: Total ......................... 37,044 952,104 1,061,188 1,005,228 1,247,668 Per dollar of revenues ........ 0.40 1.70 1.44 1.63 1.84 INTEREST EXPENSE: Total ......................... 0 299,404 264,206 311,218 347,716 Per dollar of revenues ........ 0 0.54 0.36 0.51 0.51 NET INCOME (LOSS) FROM CONTINUING OPERATIONS: Total ......................... 37,625 (871,354) (470,012) (792,830) (886,386) General Partner ............... 37,625 (374,667) 0 0 0 Limited Partners .............. 0 (496,687) (470,012) (792,830) (886,386) Per unit (1) .................. 0 (13.60) (12.87) (21.71) (24.27) CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .......... 58,089 (508,265) (162,872) (312,505) (282,318) CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ......... 0 1,746,014 (499,590) (414,881) (53,157) CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ......... (71,756) (1,320,586) 743,730 739,431 334,795 TOTAL ASSETS .................... 935 20,739 6,271,935 6,059,967 5,962,159 PARTNERS' EQUITY (DEFICIT): Total ......................... (337,042) (374,667) 496,687 450,055 1,242,885 General Partner ............... (337,042) (374,667) 0 0 0 Limited Partners .............. 0 0 496,687 450,055 1,242,885 LIMITED PARTNERS' EQUITY - PER UNIT (1) .................. 0 0 13.60 12.32 34.03 INCOME-PRODUCING PROPERTIES: Number ........................ 0 0 1 1 1 Cost .......................... 0 0 10,229,216 9,644,114 9,360,606 Less: Accumulated depreciation 0 0 (2,801,334) (2,344,100) (1,982,058) Valuation allowance .. 0 0 (1,600,000) (1,600,000) (1,600,000) Net book value ................ 0 0 5,827,882 5,700,014 5,778,548 INVESTMENT IN UNCONSOLIDATED JOINT VENTURE ................. (332,996) (333,783) (341,689) (755,546) (490,699) NOTE PAYABLE - Related to income- producing property ............ 0 0 3,410,795 3,410,795 3,410,795 MINORITY INTEREST IN CONSOLIDATED JOINT VENTURE ................. 4,981 56,963 1,797,208 1,271,308 705,252 DISTRIBUTIONS PER UNIT (1) ...... 0 0 0 0 0
(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, 36,521 in all years. The cumulative cash distributions per limited partnership unit from inception to December 31, 1998 equal $11.19. 15 INDEPENDENT AUDITORS' REPORT To the Partners of Sierra Pacific Development Fund III We have audited the accompanying consolidated balance sheets of Sierra Pacific Development Fund III, a California limited partnership, (the "Partnership") as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in partners' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1998. 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 Pacific Development Fund III as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. The accompanying 1998 financial statements have been prepared assuming that the Partnership will continue as a going concern. As described in Note 1 to the financial statements, the Partnership's reduced operations, Partner's capital deficiency and lack of funds to pay operating expenses raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. DELOITTE & TOUCHE LLP Houston, Texas February 26, 1999 16 SIERRA PACIFIC DEVELOPMENT FUND III (A CALIFORNIA LIMITED PARTNERSHIP) CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997
DECEMBER 31, 1998 DECEMBER 31, 1997 ----------------- ----------------- ASSETS Cash and cash equivalents ......................... $ 935 $ 14,602 Accounts receivable ............................... 0 6,137 --------- --------- Total Assets ...................................... $ 935 $ 20,739 ========= ========= LIABILITIES AND PARTNERS' EQUITY Accounts payable .................................. $ 0 $ 4,660 Investment in unconsolidated joint venture (Notes 1 and 4) ................... 332,996 333,783 --------- --------- Total Liabilities ................................. 332,996 338,443 --------- --------- Minority interest in consolidated joint venture (Note 3) ......................... 4,981 56,963 --------- --------- Partners' equity (deficit) (Notes 1 and 6): General Partner ................................. (337,042) (374,667) Limited Partners: 60,000 units authorized, 36,521 issued and outstanding ................................... 0 0 --------- --------- Total Partners' equity (deficit) .................. (337,042) (374,667) --------- --------- Total Liabilities and Partners' equity ............ $ 935 $ 20,739 ========= =========
SEE ACCOMPANYING NOTES 17 SIERRA PACIFIC DEVELOPMENT FUND III (A CALIFORNIA LIMITED PARTNERSHIP) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ----------- ----------- ----------- REVENUES: Rental income (Note 1) ................... $ 0 $ 558,091 $ 735,569 Other income (Note 3) .................... 93,656 633 0 ----------- ----------- ----------- Total revenues ...................... 93,656 558,724 735,569 ----------- ----------- ----------- EXPENSES: Operating expenses: Depreciation and amortization .......... 0 464,427 545,989 Maintenance and repairs ................ 0 104,981 122,293 Property taxes and insurance ........... 0 63,209 69,754 Administrative fees (Note 2) ........... 0 75,180 73,047 Utilities .............................. 0 58,037 60,183 Legal and accounting ................... 16,818 44,128 29,846 Management fees (Note 2) .............. 0 40,248 38,873 Salaries and payroll taxes ............. 0 35,565 53,276 General and administrative ............. 20,226 13,261 5,860 Renting expenses ....................... 0 3,535 4,764 Other operating expenses ............... 0 49,533 57,303 ----------- ----------- ----------- Total operating expenses ................... 37,044 952,104 1,061,188 Interest ................................... 0 299,404 264,206 ----------- ----------- ----------- Total expenses ...................... 37,044 1,251,508 1,325,394 ----------- ----------- ----------- INCOME (LOSS) BEFORE LOSS FROM PROPERTY DISPOSITION .................... 56,612 (692,784) (589,825) LOSS FROM PROPERTY DISPOSITION (Note 3) .... 0 (967,764) 0 ----------- ----------- ----------- INCOME (LOSS) BEFORE PARTNERSHIP'S SHARE OF UNCONSOLIDATED JOINT VENTURE INCOME (LOSS) ........................... 56,612 (1,660,548) (589,825) ----------- ----------- ----------- PARTNERSHIP'S SHARE OF UNCONSOLIDATED JOINT VENTURE INCOME (LOSS) FROM CONTINUING OPERATIONS (Note 4) .......... 787 7,906 (102,787) PARTNERSHIP'S SHARE OF UNCONSOLIDATED JOINT VENTURE EXTRAORDINARY GAIN (Note 4) 0 0 516,644 ----------- ----------- ----------- INCOME (LOSS) BEFORE MINORITY INTEREST'S SHARE OF CONSOLIDATED JOINT VENTURE (INCOME) LOSS ............................ 57,399 (1,652,642) (175,968) ----------- ----------- ----------- MINORITY INTEREST'S SHARE OF CONSOLIDATED JOINT VENTURE (INCOME) LOSS (Note 3) ..... (19,774) 781,288 222,600 ----------- ----------- ----------- NET INCOME (LOSS) .......................... $ 37,625 $ (871,354) $ 46,632 =========== =========== =========== Per limited partnership unit (Note 1): Loss before extraordinary gain ........... $ 0 $ (13.60) $ (12.87) Extraordinary gain ....................... $ 0 $ 0 $ 14.15 ----------- ----------- ----------- Net (loss) income .......................... $ 0 $ (13.60) $ 1.28 =========== =========== ===========
SEE ACCOMPANYING NOTES 18 SIERRA PACIFIC DEVELOPMENT FUND III (A CALIFORNIA LIMITED PARTNERSHIP) CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Limited Partners Total ---------------------- General Partners' Per Unit Total Partner Equity --------- --------- --------- --------- Partners' equity - January 1, 1996 ........... $ 12.32 $ 450,055 $ 0 $ 450,055 Net income ................................... 1.28 46,632 46,632 --------- --------- --------- --------- Partners' equity - December 31, 1996 ......... 13.60 496,687 0 496,687 Net loss ..................................... (13.60) (496,687) (374,667) (871,354) --------- --------- --------- --------- Partners' equity - December 31, 1997 ......... 0 0 (374,667) (374,667) Net income ................................... 0 0 37,625 37,625 --------- --------- --------- --------- Partners' equity (deficit) - December 31, 1998 $ 0 $ 0 $(337,042) $(337,042) ========= ========= ========= =========
SEE ACCOMPANYING NOTES 19 SIERRA PACIFIC DEVELOPMENT FUND III (A CALIFORNIA LIMITED PARTNERSHIP) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) .................................... $ 37,625 $ (871,354) $ 46,632 Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation and amortization ...................... 0 464,427 545,989 Loss from property disposition ..................... 0 967,764 0 Partnership's share of unconsolidated joint venture income ............................. (787) (7,906) (413,857) Minority interest's share of consolidated joint venture income (loss) ...................... 19,774 (781,288) (222,600) Decrease (increase) in rent receivable ............. 0 21,374 (102,089) Decrease (increase) in other receivables ........... 6,137 (4,876) (1,261) Increase in other assets ........................... 0 (280,515) (68,979) (Decrease) increase in accrued and other liabilities (4,660) (15,891) 53,293 ----------- ----------- ----------- Net cash provided by (used in) operating activities .. 58,089 (508,265) (162,872) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments for property additions ...................... 0 (394,584) (592,372) Net cash proceeds from property disposition .......... 0 2,140,598 0 Release of restricted certificate of deposit ......... 0 0 92,782 ----------- ----------- ----------- Net cash provided by (used in) investing activities .. 0 1,746,014 (499,590) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Contributions from minority investor ................. 36,900 1,193,141 748,500 Distributions to minority investor ................... (108,656) (2,152,098) 0 Loan to affiliate .................................... 0 0 (4,770) Repayment of loan to affiliate ....................... 0 4,770 0 Funding of note payable secured by property .......... 0 3,050,000 0 Principal payments on notes payable .................. 0 (3,416,399) 0 ----------- ----------- ----------- Net cash (used in) provided by financing activities .. (71,756) (1,320,586) 743,730 ----------- ----------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ........................... (13,667) (82,837) 81,268 CASH AND CASH EQUIVALENTS - Beginning of year ......... 14,602 97,439 16,171 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS - End of year ................ $ 935 $ 14,602 $ 97,439 =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for interest ............... $ 0 $ 324,853 $ 240,000 =========== =========== ===========
SEE ACCOMPANYING NOTES 20 SIERRA PACIFIC DEVELOPMENT FUND III (A CALIFORNIA LIMITED PARTNERSHIP) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Sierra Pacific Development Fund III (the "Partnership") was organized on June 5, 1984 in accordance with the provisions of the California Uniform Limited Partnership Act to acquire, develop and operate certain 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. In February 1985, the Partnership acquired land in San Diego, California as the first step in the development of Sierra Sorrento I. This 43,100 square foot industrial/warehouse project was completed in February 1986. In October 1986, the Partnership acquired land in Anaheim, California for the development of Sierra Vista. This property, a 102,855 square foot industrial/office project, was completed in April 1988. In April 1993, the Partnership created a California general partnership (Sorrento I Partners) with Sierra Mira Mesa Partners ("SMMP") to facilitate cash contributions by SMMP for the continued development and operation of the Sierra Sorrento I property. In February 1994, the Partnership formed a California general partnership with SMMP known as Sierra Vista Partners ("SVP") to facilitate cash contributions by SMMP for the continued development and operation of the Sierra Vista property. The Partnership contributed the properties and SMMP contributed cash to these newly formed partnerships. SMMP has made additional contributions each year to these partnerships since inception. In October 1997, the Sierra Vista property was sold for $5,630,000. The Partnership received net cash proceeds of $2,140,598 from the sale. In accordance with the SVP joint venture agreement, these proceeds were distributed to SMMP. Under the terms of the agreement, SMMP receives preferential cash distributions of available "Distributable Funds" from the sale of the property to the extent of its capital contributions. SMMP had made net contributions of $3,335,204 to the Partnership through the sale date. GOING CONCERN CONSIDERATIONS The Partnership has no operating assets and its only remaining real estate investment is 11.41% interest in Sorrento I Partners ("SIP"). The other partner in SIP, SMMP, will receive preferential distributions from SIP until its contributed capital is returned. The Partnership does not anticipate receiving any cash distributions from SIP in the near future. Management anticipates the operations of the Partnership will not require significant amounts of cash in the future and any cash requirements of SIP will be funded by SMMP. Management believes the Partnership will be able to obtain any cash needed to fund future overhead expenditures from related parties until such time as the Partnership engages in new activities or a decision is made to liquidate the Partnership. 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. 21 Sierra Pacific Development Fund III Notes to Consolidated Financial Statements Page two 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 include the accounts of the Partnership and Sierra Vista Partners, a majority owned joint venture as of December 31, 1998 (see Note 3). All significant intercompany balances and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS Cash and cash equivalents include highly liquid, short-term investments with original maturities of three months or less. FAIR VALUE OF FINANCIAL INSTRUMENTS The financial instruments of the Partnership at December 31, 1998 and 1997 consist of cash and cash equivalents, receivables, and accounts 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. INCOME-PRODUCING PROPERTY Property and tenant improvements are carried at cost and depreciated on the straight-line method over the estimated lives of the related assets, ranging from 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 the resulting gain or loss is reflected in income. Prior to 1995, the Partnership assessed impairment of income-producing properties based upon appraised values and established provisions for impairment where appraisals indicated other than temporary declines in value. Effective January 1, 1995, the Partnership implemented Statement of Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (the "Statement"). The Partnership regularly evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Future cash flows are estimated and compared to the carrying amount of the asset to determine if an impairment has occurred. If the sum of the expected future cash flows is less than the carrying amount of the asset, the Partnership shall recognize an impairment loss in accordance with the Statement. No such impairments have been recognized by the Partnership since 1995. Because the determination of fair value is based upon projections of future economic events such as property occupancy rates, rental rates, operating cost inflation and market capitalization rates which are inherently subjective, the amounts ultimately realized at disposition may differ materially from the net carrying value. The cash flows used to determine fair value and net realizable value are based on good faith estimates and assumptions developed by management. Unanticipated events and circumstances may occur and some assumptions may not materialize; therefore actual results may vary from the estimates and the variances may be material. The Partnership may provide additional write-downs which could be material in subsequent years if real estate markets or local economic conditions change. 22 Sierra Pacific Development Fund III Notes to Consolidated Financial Statements Page three INVESTMENT IN UNCONSOLIDATED JOINT VENTURE The investment in unconsolidated joint venture 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 venture (equity method). RENTAL INCOME Rental income is recognized on a straight-line method over the term of the related operating lease in accordance with the provisions of Statement of Financial Accounting Standard No. 13, "Accounting for Leases." CALCULATION OF EQUITY (DEFICIT) AND NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT Equity (deficit) and net income (loss) per limited partnership unit are determined by dividing the Limited Partners' equity and net income (loss) by 36,521, the number of limited partnership units outstanding. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board had 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 are 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. 2. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS An affiliate of the General Partner may receive a management fee of 6% of the gross rental income collected from the properties. Management fees paid to affiliates for the years ended December 31, 1997 and 1996 were $40,248 and $38,873, respectively. No such costs were incurred in 1998. 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 $75,530 and $73,047 for such services for the years ended December 31, 1997 and 1996, respectively. No such costs were incurred in 1998. Additionally, the Partnership reimbursed the affiliate for construction supervision costs incurred by the affiliate. For the years ended December 31, 1997 and 1996 the affiliate received $64,904 and $7,782, respectively, for tenant improvements supervisory costs. No such costs were incurred in 1998. In consideration for services rendered with respect to initial leasing of Partnership properties, an affiliate of the General Partner is paid initial leasing costs. For the years ended December 31, 1997 and 1996 these fees amounted to $76,984 and $91,660, respectively, and were recorded as deferred leasing costs. No such costs were incurred in 1998. During 1996, the Partnership made a short-term, non-interest bearing loan to an affiliate. Repayment was made during 1997. In consideration for services rendered with respect to obtaining new financing, an affiliate of the General Partner is paid broker fees. For the year ended December 31, 1997, these fees amounted to $61,000 and were recorded as deferred loan costs. These fees were written off with the sale of the Sierra Vista property in 1997. No such fees were incurred in 1998 or 1996. 23 Sierra Pacific Development Fund III Notes to Consolidated Financial Statements Page four 3. INCOME-PRODUCING PROPERTIES On April 1, 1993, the Sierra Sorrento I property was transferred to a joint venture called Sorrento I Partners (Note 4). The historical cost basis of the property and related assets at the date of transfer was $2,662,877 and the outstanding balance of the related debt was $2,986,024 with accrued interest of $22,824. On February 1, 1994, the Partnership formed a joint venture with Sierra Mira Mesa Partners ("SMMP"), an affiliate. The joint venture, known as Sierra Vista Partners ("SVP"), was formed as a California general partnership to develop and operate the Sierra Vista property. The Partnership had an 81.5% equity interest with its contribution of Sierra Vista. Such interest was computed based upon the estimated fair value of SVP's net assets at the date of formation of the joint venture. SMMP was allocated an 18.5% initial equity interest in SVP in exchange for its $600,000 cash contribution ($1,606,661, net, through December 31, 1995). SMMP made additional cash contributions amounting to $748,500, $1,193,141 and $36,900 and received distributions amounting to $0, $2,152,098 and $108,656 during 1996, 1997 and 1998, respectively. The percentage interests of the Partnership and SMMP are to be adjusted every January 1st during the term of SVP, beginning January 1, 1995. Accordingly, as of January 1, 1996, 1997 and 1998, the Partnership's interest in SVP was changed to 62.26%, 52.95% and 65.49%, respectively, and SMMP's interest was changed to 37.74%, 47.05% and 34.51% respectively. On January 1, 1999, the Partnership's interest in SVP will be increased to 66.68% and SMMP's interest will be reduced to 33.32%. In October 1997, the Sierra Vista property was sold for $5,630,000. The Partnership received net cash proceeds of $2,140,598 from the sale for its 52.95% interest in this property and the purchaser assumed the Partnership's $3,044,397 debt on the property. The Partnership also incurred additional selling costs and credited security deposits and prorata rents for October to the buyer. In accordance with the SVP joint venture agreement, these proceeds were distributed to SMMP. Under the terms of the agreement, SMMP receives preferential cash distributions of available "Distributable Funds" from the sale of the property to the extent of its capital contributions. SMMP had made net contributions of $3,335,204 to the Partnership through the sale date. In 1998, the Partnership received a cash payment of $94,000, recorded as other income, related to an adjustment to the refinancing of the debt on the Sierra Vista property that took place prior to the sale of the property in 1997. 4. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE Sorrento I Partners ("SIP") was formed on April 1, 1993 between the Partnership and SMMP, an affiliate, to develop and operate the real property known as Sorrento I, an industrial building located in San Diego, California. 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. At December 31, 1998, the Partnership has an 11.41% equity interest with its contribution of Sorrento I and the related debt; SMMP has an 88.59% equity interest with its $2,435,977 net cash contributions through 1997. In accordance with the SIP joint venture agreement, proceeds shall first be distributed to SMMP as a return capital in proportion to its aggregate unreturned contributed capital and then to the Partnership in proportion to its aggregate unreturned contributed capital. Any remaining proceeds shall first be distributed pro rata in proportion to the partners' positive balances in their capital accounts and then in accordance with their percentage interest. SIP had a non-recourse bank note payable with an original principal balance of $3,000,000 collateralized by real and personal property. The original maturity of the note was July 1998 and the note included a discounted payoff option of $1,500,000. CGS Real Estate Company, Inc. ("CGS"), an affiliate of the General Partner, acquired the note and security documents from the bank in May 1996. In connection with the purchase of the bank note and security documents by CGS, SIP made a principal payment to the bank of $750,000 and entered into a $750,000 note agreement with CGS (the "CGS Agreement"). The excess of the net carrying amount of the balance due under the bank note agreement, net of unamortized deferred loan fees, over the balance due under the CGS Agreement was recognized as an extraordinary item in 1996. 24 Sierra Pacific Development Fund III Notes to Consolidated Financial Statements Page five 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 (9.06% at December 31, 1998). The note is amortized over a 210-month term and current payments are $6,048 per month, principal and interest inclusive. The loan balance as of December 31, 1998 was $616,223. At any time upon 120 days written notice to CGS, SIP may fully discharge the note by the payment of an amount equal to $750,000 less the aggregate amount of principal paid under the note between the date of the CGS Agreement and the date of payment plus any interest due. Reference is made to the audited financial statements of Sorrento I Partners included herein. 5. NOTES PAYABLE On April 10, 1997, the Partnership's note with National Bank of Southern California was repaid and the Partnership entered into a new loan agreement in the amount of $3,050,000 with First Union National Bank of North Carolina. The loan was secured by the Sierra Vista property, bore interest at 9.375% and called for monthly principal and interest payments of $25,807 on the first day of each month. This loan was transferred and assumed by the buyer of the property in October 1997. 6. PARTNERS' EQUITY (DEFICIT) 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 had been allocated to the General Partner through December 31, 1996. During 1997, the General Partner was allocated losses to the extent they were in excess of the Limited Partners' capital balances since the Limited Partners cannot be allocated losses in excess of their balances. As such, the profit recognized in 1998 was allocated to the General Partner. Upon any sale, refinancing or other dispositions of the Partnership's real properties, allocations and distributions will be made to the Limited Partners until they have received distributions from the sale or financing proceeds in an amount equal to 100% of their unreturned capital. Thereafter, distributions generally will be allocated 1% to the General Partner and 99% to the Limited Partners until the Limited Partners have received distributions from all sources equal to the sum of their respective priority distributions (an amount equal to 15% per annum cumulative on each Limited Partner's unreturned capital). However, after the Limited Partners have received distributions of sale or financing proceeds equal to their unreturned capital plus distributions from all sources equal to a cumulative but not compounded return of 6% per annum on their unreturned capital, the General Partner may be entitled to special distributions not to exceed 3% of the gross sales prices of properties sold by the Partnership. Thereafter, the General Partners will be entitled to receive incentive distributions which, when aggregated with the 1% distributions to the General Partner described in the preceding sentence, will equal 20% of the total net sale or financing proceeds available for distribution to the Partners. Any remaining sale or financing proceeds will be distributed to the Limited Partners. The proceeds from the sale of the Sierra Vista property were required to be distributed to SMMP under the provisions of the agreement with SMMP and thus were not allocated in accordance with the provisions described above. 25 SORRENTO I PARTNERS (A CALIFORNIA GENERAL PARTNERSHIP) BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997 AND STATEMENTS OF OPERATIONS, CHANGES IN GENERAL PARTNERS' EQUITY (DEFICIT) AND CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998 AND INDEPENDENT AUDITORS' REPORT 26 INDEPENDENT AUDITORS' REPORT To the Partners of Sorrento I Partners We have audited the accompanying balance sheets of Sorrento I Partners, a California general partnership, (the "Partnership") as of December 31, 1998 and 1997, and the related statements of operations, changes in general partners' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sorrento I Partners as of December 31, 1998 and 1997, and the results of its operations and cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Houston, Texas February 26, 1999 27 SORRENTO I PARTNERS (A CALIFORNIA GENERAL PARTNERSHIP) BALANCE SHEETS DECEMBER 31, 1998 AND 1997 DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ ASSETS Cash and cash equivalents ........................ $ 1,765 $ 3,675 Receivables: Unbilled rent (Notes 1 and 4) ................. 45,345 34,906 Other ......................................... 14,572 14,301 Due from affiliates (Note 3) ..................... 4,770 4,770 Income-producing property - net of accumulated depreciation of $639,739 in 1998 and $537,812 in 1997 (Notes 1, 4 and 5) ........... 2,337,761 2,439,688 Other assets (Notes 1 and 2) ..................... 112,191 137,926 ------------ ------------ Total Assets ..................................... $ 2,516,404 $ 2,635,266 ============ ============ LIABILITIES AND GENERAL PARTNERS' EQUITY Accounts payable ................................. $ 20,537 $ 16,124 Note payable to affiliate (Note 5) ............... 616,223 631,827 ------------ ------------ Total Liabilities ................................ 636,760 647,951 ------------ ------------ General Partners' equity (Notes 1 and 6) ......... 1,879,644 1,987,315 ------------ ------------ Total Liabilities and General Partners' equity ... $ 2,516,404 $ 2,635,266 ============ ============ SEE ACCOMPANYING NOTES 28 SORRENTO I PARTNERS (A CALIFORNIA GENERAL PARTNERSHIP) STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 1998 1997 1996 ----------- ----------- ----------- Revenues: Rental income (Note 1) .......... $ 282,322 $ 283,635 $ 189,177 Other income .................... 0 9,404 0 ----------- ----------- ----------- Total revenues .............. 282,322 293,039 189,177 ----------- ----------- ----------- Expenses: Operating expenses: Depreciation and amortization ... 127,662 127,662 149,618 Property taxes and insurance .... 7,762 2,847 22,068 Administrative fees (Note 3) .... 38,922 34,860 33,714 Maintenance and repairs ......... 395 49 24,458 Management fees (Note 3) ........ 17,189 15,762 13,003 Utilities ....................... 0 0 7,062 Legal and accounting ............ 17,650 22,803 18,216 General and administrative ...... 7,413 5,677 4,362 Renting expenses ................ 0 0 3,300 Other operating expenses ........ 5,574 1,894 7,614 ----------- ----------- ----------- Total operating expenses ...... 222,567 211,554 283,415 Interest ........................ 57,926 63,123 144,646 ----------- ----------- ----------- Total expenses .............. 280,493 274,677 428,061 ----------- ----------- ----------- INCOME (LOSS) BEFORE EXTRAORDINARY GAIN ............................. 1,829 18,362 (238,884) ----------- ----------- ----------- EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT (NOTE 5) ................. 0 0 1,200,381 ----------- ----------- ----------- NET INCOME ......................... $ 1,829 $ 18,362 $ 961,497 =========== =========== =========== SEE ACCOMPANYING NOTES 29 SORRENTO I PARTNERS (A CALIFORNIA GENERAL PARTNERSHIP) STATEMENTS OF CHANGES IN GENERAL PARTNERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
GENERAL PARTNERS -------------------------------------------- SIERRA PACIFIC SIERRA DEVELOPMENT MIRA MESA FUND III PARTNERS TOTAL -------------- ----------- ----------- General Partners' equity (deficit) - January 1, 1996 . $ (755,546) $ 271,102 $ (484,444) Net income ........................................... 413,857 547,640 961,497 Contributions ........................................ 0 1,551,100 1,551,100 Distributions ........................................ 0 (35,900) (35,900) -------------- ----------- ----------- General Partners' equity (deficit) - December 31, 1996 (341,689) 2,333,942 1,992,253 Net income ........................................... 7,906 10,456 18,362 Contributions ........................................ 0 141,000 141,000 Distributions ........................................ 0 (164,300) (164,300) -------------- ----------- ----------- General Partners' equity (deficit) - December 31, 1997 (333,783) 2,321,098 1,987,315 Net income ........................................... 787 1,042 1,829 Contributions ........................................ 0 8,500 8,500 Distributions ........................................ 0 (118,000) (118,000) -------------- ----------- ----------- General Partners' equity (deficit) - December 31, 1998 $ (332,996) $ 2,212,640 $ 1,879,644 ============== =========== ===========
SEE ACCOMPANYING NOTES 30 SORRENTO I PARTNERS (A CALIFORNIA GENERAL PARTNERSHIP) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ........................................... $ 1,829 $ 18,362 $ 961,497 Adjustments to reconcile net income to cash provided by (used in) operating activities: Gain from extinguishment of debt ................... 0 0 (1,200,381) Depreciation and amortization ...................... 127,662 127,662 149,618 Increase in rent receivable ........................ (10,439) (20,944) (13,962) Increase in other receivables ...................... (271) (139) (14,162) Decrease (increase) in other assets ................ 0 8,114 (178,536) Increase (decrease) in accrued and other liabilities 4,413 (8,269) (4,511) ----------- ----------- ----------- Net cash provided by (used in) operating activities .. 123,194 124,786 (300,437) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments for property additions .................... 0 0 (446,630) ----------- ----------- ----------- Net cash used in investing activities ................ 0 0 (446,630) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments to affiliates ............................. 0 0 (4,770) Contributions by the General Partners .............. 8,500 141,000 1,551,100 Distributions to the General Partners .............. (118,000) (164,300) (35,900) Principal payments on note payable ................. (15,604) (118,173) (787,976) ----------- ----------- ----------- Net cash (used in) provided by financing activities .. (125,104) (141,473) 722,454 ----------- ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS .............. (1,910) (16,687) (24,613) CASH AND CASH EQUIVALENTS - Beginning of period ........ 3,675 20,362 44,975 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS - End of period .............. $ 1,765 $ 3,675 $ 20,362 =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest ............. $ 57,926 $ 68,961 $ 164,898 =========== =========== ===========
During 1996, Sorrento I exercised a discounted payoff option on its note payable that resulted in a $1,200,381 extraordinary gain. This is a noncash transaction not reflected in the above statements of cash flows. SEE ACCOMPANYING NOTES 31 SORRENTO I PARTNERS (A CALIFORNIA GENERAL PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS ________________________________________________________________________________ 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Sorrento I Partners ("SIP") was formed as a California general partnership on April 1, 1993 between Sierra Mira Mesa Partners ("SMMP") and Sierra Pacific Development Fund III ("SPDFIII") to develop and operate the real property known as Sorrento I, an industrial building, located in San Diego, California. The property contains 43,100 square feet and is located adjacent to Sierra Mira Mesa office building, which is owned and operated by Sierra Mira Mesa Partners. In 1993, SMMP contributed cash of $383,836 ($944,077, net, through December 31, 1995) for a 58.59% interest and SPDFIII contributed the property and all associated encumbrances for a 41.41% interest. During 1996, 1997 and 1998, SMMP contributed an additional $1,551,100, $141,000 and $8,500 and received distributions amounting to $35,900, $164,300 and $118,000 respectively. The partnership agreement calls for a recalculation of the percentage ownership interest each year on January 1st to account for the Partner's aggregate capital contributions and distributions since inception through the prior year. Accordingly, as of January 1, 1996, 1997 and 1998 SPDFIII's interest in SIP was changed to 24.94%, 11.31% and 11.41%, respectively. On January 1, 1999, SPDFIII's interest will be increased to 11.88% and SMMP's interest will be reduced to 88.12% to reflect the 1998 contributions and distributions. S-P Properties, Inc. is the General Partner of SPDFIII and of SMMP's general partners, Sierra Pacific Development Fund II and Sierra Pacific Pension Investors '84. On December 30, 1994, all of the outstanding stock of TCP, Inc. was sold to Finance Factors, Inc. TCP, Inc. owns all of the common stock of S-P Properties, Inc. Finance Factors was a subsidiary of CGS Real Estate Company, Inc., a national real estate company. In July 1995, Finance Factors, Inc. merged with Bancor Real Estate Company, Inc., another subsidiary of CGS Real Estate Company, Inc. BASIS OF FINANCIAL STATEMENTS SIP maintains its books and prepares its financial statements in accordance with generally accepted accounting principles. However, SIP prepares its tax returns on the accrual basis of accounting as defined by the Internal Revenue Code with adjustments to reconcile book and taxable income (loss) for differences in the treatment of certain income and expense items. The accompanying financial statements do not reflect any provision for federal or state income taxes since such taxes are the obligation of the individual partners. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include highly liquid, short-term investments with original maturities of three months or less. FAIR VALUE OF FINANCIAL INSTRUMENTS The financial instruments of SIP at December 31, 1998 and 1997 consist of cash and cash equivalents, receivables, due from affiliates, accounts payable and note payable. The fair value of cash and cash equivalents, receivables and accounts payable approximates the carrying value due to the short term nature of these items. In the opinion of management, the fair value of the note payable approximates the carrying value based on market rates at December 31, 1998. The amounts due from affiliates are not fair valued due to the related party nature of this receivable. 32 Sorrento I Partners Notes to Financial Statements Page two INCOME-PRODUCING PROPERTIES Property and tenant improvements are carried at cost and depreciated on the straight-line method over the estimated lives of the related assets, ranging from seven to thirty years. Tenant improvements incurred at the initial leasing of the property are depreciated over ten years and tenant improvements incurred at the re-leasing of the property are depreciated over the life of the related lease. Expenditures for repairs and maintenance are charged against income as incurred. Improvements and major renewals are capitalized. Costs and the related accumulated depreciation of assets sold or retired are removed from the accounts in the year of disposal or when fully depreciated and any resulting gain or loss is reflected in income. Prior to 1995, the Partnership assessed impairment of income-producing properties based upon appraised values and established provisions for impairment where appraisals indicated other than temporary declines in value. Effective January 1, 1995, SIP implemented Statement of Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (the "Statement"). SIP regularly evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Future cash flows are estimated and compared to the carrying amount of the asset to determine if an impairment has occurred. If the sum of the expected future cash flows is less than the carrying amount of the asset, SIP shall recognize an impairment loss in accordance with the Statement. No such impairments have 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, 1998. The cash flows used to determine fair value and net realizable value are based on good faith estimates and assumptions developed by management. Unanticipated events and circumstances may occur and some assumptions may not materialize; therefore actual results may vary from the estimates and the variances may be material. SIP may provide additional write-downs which could be material in subsequent years if real estate markets or local economic conditions change. OTHER ASSETS Deferred leasing costs represent costs incurred to lease properties and are amortized over the life of the related lease 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; an (b) billed rent - rent due but not yet received. 33 Sorrento I Partners Notes to Financial Statements Page three 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 are 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. 2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS Additional information regarding certain balance sheet accounts, at December 31, 1998 and 1997 is as follows: 1998 1997 -------- -------- Other assets: Deferred loan costs, net of accumulated amortization of $128 in 1998 and $77 in 1997 .................................... $ 890 $ 940 Deferred leasing costs, net of accumulated amortization of $68,191 in 1998 and $42,506 in 1997 ............................ 111,301 136,986 -------- -------- $112,191 $137,926 ======== ======== 3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS An affiliate of the General Partner may receive a management fee of 6% of the gross rental income collected from the property. Management fees paid to affiliates for the years ended December 31, 1998, 1997, and 1996 were $17,189, $15,762, and $13,003, respectively. SIP reimburses an affiliate of S-P Properties, Inc. for expenses incurred by the affiliate for services provided to SIP such as accounting, data processing and similar services. The affiliate was reimbursed $38,922, $34,860, and $33,714, respectively, for such services for the years ended December 31, 1998, 1997 and 1996. Additionally, SIP reimbursed an affiliate for construction supervision costs incurred by the affiliate. For the years ended December 31, 1998, 1997 and 1996 the affiliate received $0, $0, and $33,084, respectively, for tenant improvements supervisory costs. In consideration for services rendered with respect to initial leasing of SIP's property, an affiliate of S-P Properties, Inc. is paid initial leasing costs. For the years ended December 31, 1998, 1997 and 1996 these fees amounted to $0, $0, and $59,563, respectively, and were recorded as deferred leasing costs. During 1996, SIP made a non-interest bearing advance to an affiliate in the amount of $4,770. Repayment is expected in 1999. See Note 5 for note payable transactions with related parties. 34 Sorrento I Partners Notes to Financial Statements Page four 4. INCOME-PRODUCING PROPERTIES At December 31, 1998 and 1997 the total cost and accumulated depreciation of the property are as follows: 1998 1997 ----------- ----------- Land ................................... $ 1,305,518 $ 1,305,518 Building and improvements .............. 1,671,982 1,671,982 ----------- ----------- Total ......................... 2,977,500 2,977,500 Accumulated depreciation ............... (639,739) (537,812) ----------- ----------- Net ........................... $ 2,337,761 $ 2,439,688 =========== =========== During 1998 and 1997, SIP removed $0 and $734,484, respectively, from its building and improvements and related accumulated depreciation accounts for fully depreciated property. Future minimum base rental income to be recognized on a straight-line basis and amounts to be received on a cash basis are as follows: YEAR ENDING STRAIGHT-LINE CASH DECEMBER 31, BASIS BASIS - ------------------------- ------------- ------------ 1999........... $ 283,635 $ 278,448 2000........... 283,635 289,584 2001........... 283,635 295,152 2002........... 283,635 306,960 2003........... 94,547 104,288 Thereafter........ 0 0 ------------- ------------ Total........... $ 1,229,087 $ 1,274,432 ============= ============ SIP relied on one tenant for 100% of rental income for 1998, 1997 and 1996, respectively. The lease agreement requires the tenant to pay expenses such as utilities, insurance and property taxes related to the property. The principal business of the tenant is research and development in the communications sector. 35 Sorrento I Partners Notes to Financial Statements Page five 5. NOTE PAYABLE SIP had a non-recourse bank note payable with an original principal balance of $3,000,000 collateralized by real and personal property. The annual interest rate of the note was variable at bank prime plus 2-1/2% with a minimum rate of 9% and maximum rate of 15-1/2%. The original maturity of the note was July 1998 and the note included a discounted payoff option of $1,500,000. CGS Real Estate Company, Inc. ("CGS"), an affiliate of the General Partner, acquired the note and security documents from the bank in May 1996. In connection with the purchase of the bank note and security documents by CGS, SIP made a principal payment to the bank of $750,000 and entered into a $750,000 note agreement with CGS (the "CGS Agreement"). The CGS Agreement, collaterized by real and personal property, called for monthly interest payments through December 1996 and monthly principal and interest payments thereafter until maturity on May 31, 2016. The interest rate is fixed at 9.34% per annum for the first year of the note and will thereafter be the one-year Treasury rate plus 375 basis points. A pre-payment in the amount of $105,000 was paid in April 1997. A modification agreement was entered into on September 30, 1997. The interest rate remained fixed at 9.34% through October 1998, at which time the rate converted to the one-year treasury rate plus 375 basis points (9.06% at December 31, 1998). The note is amortized over a 210-month term and current payments are $6,048 per month, principal and interest inclusive until maturity in March 2015. The loan balance as of December 31, 1998 was $616,223. At any time upon 120 days written notice to CGS, SIP may fully discharge the note by the payment of an amount equal to $750,000 less the aggregate amount of principal paid under the note between the date of the CGS Agreement and the date of payment plus any interest due. The excess of the net carrying amount of the balance due under the bank note agreement, net of unamortized deferred loan fees, over the balance due under the CGS Agreement was recognized as an extraordinary item in 1996 in the amount of $1,200,381. Annual maturities under the CGS Agreement as of December 31, 1998 are: $17,454 in 1999; $19,102 in 2000; $20,907 in 2001; $22,881 in 2002; $25,043 in 2003; and $510,836 thereafter. The Partnership is exposed to interest rate fluctuations on $616,223 of variable debt at December 31, 1998. 6. GENERAL PARTNERS' EQUITY (DEFICIT) In accordance with the partnership agreement, accrual basis losses resulting from operations of the partnership are first allocated to the General Partners in proportion to the relative amounts of net cumulative partnership profits until such allocated losses equal the previously allocated net cumulative partnership profits. Then, losses are allocated in proportion to the Partners' percentage interests as computed January 1st of the year in which the loss occurred. Likewise, accrual basis profits resulting from operations of the partnership are first allocated to the General Partners in proportion to the relative amounts of net cumulative partnership losses until such allocation of profits equals the previously allocated net cumulative partnership losses. Then, profits are allocated in proportion to the distributions made to the Partners during the year. Upon dissolution of the partnership, any proceeds should be distributed first to Sierra Mira Mesa as a return of capital in proportion to its aggregate unreturned capital contributed and then to Sierra Pacific Development Fund III in proportion to its aggregate unreturned capital contributed. Any remaining proceeds shall be first distributed pro rata in proportion to the Partners' positive balances in their capital accounts and then in accordance with their percentage interest in the year of dissolution. 36 EXECUTIVE OFFICERS OF THE GENERAL PARTNER The Executive Officers of S-P Properties, Inc., the General Partner are as follows: NAME POSITION - ---- -------- Thomas N. Thurber President and Director Dawson L. Davenport Vice President Steven M. Speier Secretary/Treasurer and Director William J. Carden Assistant Secretary/Treasurer and Director The 10-K Report sent to the Securities and Exchange Commission contains additional information on the partnership's operations and is available to Limited Partners upon request. 37 EX-27 2
5 THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SIERRA PACIFIC DEVELOPMENT FUND III DECEMBER 31, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1998 DEC-31-1998 935 0 0 0 0 935 0 0 935 0 0 0 0 0 (337,042) 935 0 93,656 0 37,044 0 0 0 37,625 0 37,625 0 0 0 37,625 0 0
-----END PRIVACY-ENHANCED MESSAGE-----