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, 1996 Commission file number : 0-12036
SIERRA PACIFIC DEVELOPMENT FUND II
(A CALIFORNIA LIMITED PARTNERSHIP)
----------------------------------
State of California 95-3856271
- --------------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
5850 San Felipe, Suite 500
Houston, Texas 77057
- --------------------------------------- --------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (713) 706-6271
--------------------------------------
5850 San Felipe, Suite 120
Houston, Texas 77057
-----------------------------------------------------------
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12 (b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12 (g) of the Act:
120,000 LIMITED PARTNERSHIP UNITS
---------------------------------
Title of class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No__.
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Limited Partners for the Year Ended
December 31, 1996 is incorporated by
reference into Parts II and III
<PAGE>
PART I
ITEM 1. BUSINESS
(a.) GENERAL DEVELOPMENT OF BUSINESS. Sierra Pacific Development Fund II (the
"Partnership") is a California limited partnership that was formed in April 1983
for the purpose of acquiring, developing, and operating commercial and
industrial real estate.
The Partnership's activities during the preceding five years have involved the
ownership and operation of four real estate projects in Texas:
RENTABLE
SQUARE
PROJECT NAME, LOCATION TYPE OF REAL ESTATE FOOTAGE
---------------------- ------------------- -------
Sierra Technology Center, Austin (A) Industrial/office 108,205
Sierra Westlakes, San Antonio Industrial/office 95,370
Sierra Southwest Pointe, Houston Industrial/warehouse 100,258
5850 San Felipe, Houston (B) Office 99,610
(A) SOLD DECEMBER 1994.
(B) ACQUIRED DECEMBER 1994 AS PARTIAL COMPENSATION FOR THE SALE OF
SIERRA TECHNOLOGY CENTER.
In December 1994, the Partnership sold Sierra Technology Center for $6,000,000.
The sale proceeds were received in cash, a note receivable from the buyer, and
equity in the 5850 San Felipe property. A gain of $539,835 was recorded in 1994
with an additional gain of $736,271 deferred to subsequent years when the note
receivable is collected.
The Partnership holds a 51% interest in Sierra Mira Mesa Partners ("SMMP"), a
California Limited Partnership with Sierra Pacific Pension Investors '84 formed
in 1985. SMMP was initially created to develop and operate the office building
known as Sierra Mira Mesa in San Diego, California. SMMP also holds a 75.06%
interest in Sorrento I Partners (a California Limited Partnership with Sierra
Pacific Development Fund III formed in 1993), a 26.92% interest in Sorrento II
Partners (a California Limited Partnership with Sierra Pacific Institutional
Properties V formed in 1993), an 18.87% interest in Sierra Creekside Partners (a
California Limited Partnership with Sierra Pacific Development Fund formed in
1994), and a 37.74% interest in Sierra Vista Partners (a California Limited
Partnership with Sierra Pacific Development Fund III formed in 1994).
Audited financial statements of Sierra Mira Mesa Partners, Sierra Vista Partners
and Sorrento I Partners are included in the Annual Report to the Limited
Partners attached as an Exhibit.
(b.) NARRATIVE DESCRIPTION OF BUSINESS. The Partnership owns and operates three
projects in Texas as described above. Each of the projects is occupied by more
than one tenant, the most significant of which is Sears at Sierra Westlakes.
Rental income from Sears totaled $431,000, or 24%, of total 1996 rental income.
This lease expires in December 1997.
There is significant competition in the office and industrial building rental
market in the Partnership's trade area. Appraisals performed at the end of 1994
identified numerous projects near the Partnership's properties that offered
similar amenities at comparable rental rates.
Compliance with the provision of the Americans with Disabilities Act and changes
in local building codes could require substantial capital expenditures at one or
more of the Partnership's buildings. However, such expenditures through 1996
have been minimal and there are no identified deficiencies that will require
significant capital expenditures in the future.
2
<PAGE>
(c.) COMPARISON OF CURRENT ACTIVITIES TO THOSE PROPOSED AT THE INITIATION OF THE
PARTNERSHIP. In the Partnership's prospectus dated August 5, 1983, the
investment objectives were described as follows:
"The Partnership has been formed to acquire and operate commercial and
industrial real properties, including both properties which are to be developed
by the Partnership or are under development or construction and properties which
are newly-constructed or have operating histories. The principal investment
objectives of the Partnership are: (i) to preserve, protect, and return the
Partnership's invested capital; (ii) to attempt to maximize capital gains
through long-term appreciation in the value of the Partnership's real estate
investments, which, if substantial, may disproportionately benefit holders of
Class A Units; (iii) to provide the Limited Partners with cash distributions
from operations; (iv) to provide federal income tax deductions so that all or a
portion of any cash from operations distributable to the holders of Class B
Units may be treated as a return of capital for tax purposes and, therefore, may
not represent taxable income; and (v) to attempt to sell the Partnership's real
estate investments for cash after an approximate three to five year holding
period. There is no assurance that such objectives will be attained."
Operations of the Partnership through 1996 have been consistent with the intent
of the original prospectus in that the Partnership has invested in real estate
projects that had the potential for capital gains, preservation of capital, and
providing distributable cash flow partially sheltered from Federal income tax.
However, the Partnership and its real estate have been adversely affected by the
Tax Reform Act of 1986, aggressive lending by banks that resulted in commercial
real estate overbuilding, and subsequent severe recessions. The original
intention to sell its real estate investments after a three to five year holding
period has been delayed indefinitely. As of December 31, 1996, the Partnership
had paid cash distributions of $64.22 for each $250 unit investment and
remaining partners' equity was computed at $156.45 per unit. Thus, if the
Partnership were to be liquidated at the end of 1996 at book value, each $250
investment would have returned a total of $220.67.
The General Partner's goal is to continue operating the properties until such
time as rental rates return to the level necessary to support new commercial and
industrial building development. At that time, the properties may be sold at
prices substantially greater than current book values.
ITEM 2. PROPERTIES
The Partnership owns three properties in Texas including one office building and
two industrial buildings. The three buildings represent 295,238 square feet of
rentable space. Details of the individual properties and the respective
tenants/leases follow. The Partnership also owns a 51% interest in a fourth
property - Sierra Mira Mesa, an office building in San Diego, California. The
Partnership also had during 1996 an indirect 38.3% interest in an industrial
property known as Sorrento I in San Diego, California and an indirect 19.3%
interest in an industrial property known as Sierra Vista in Anaheim, California
through its 51% ownership in SMMP. These indirect ownership interests are
subject to adjustment yearly based upon the relative contributions of the
partners.
5850 SAN FELIPE - HOUSTON, TEXAS
This property includes one office building comprising 99,610 rentable square
feet and is 72% occupied at December 31, 1996. The average effective annual rent
per square foot at December 31, 1996 is $10.33. The principal businesses carried
on from the building are of the service sector - executive suites, property
management, health care and governmental services.
The property is encumbered by a mortgage lien in favor of Mutual Life Insurance
Company of New York with a principal balance of $3,000,000 at December 31, 1996.
In March 1996, the loan was modified to reduce the interest rate on this debt to
5% from the previous 8.5% in exchange for a principal paydown of $1,002,000. The
loan requires monthly, interest-only payments through April 2004, the loan
maturity date. Assuming no prepayment of principal, the principal balance due at
maturity will be $3,000,000. No prepayment penalty is associated with this
mortgage loan.
3
<PAGE>
SUMMARY OF SIGNIFICANT TENANTS
As of December 31, 1996, twenty-four tenants occupy the office building. Only
one tenant, an executive suite services company, occupies more than ten percent
of the rentable square footage of the building. The executive suite tenants
include sales, property management, legal, and engineering services. Details of
the significant lease are as follows:
<TABLE>
<CAPTION>
Square Percent of Effective Effective Percent of Expiration of Lease
Tenants of 5850 San Feet Rentable Rent Per Rent Per Gross Annual
Felipe Occupied Square Square Foot Annum Rent
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Third Coast Business
Centers 17,502 18% $ 9.26 $162,099 22% December 2004
Tenants Occupying
less than 10% sq ft 53,799 54% 10.68 574,314 78% Various
-------------------------------------------------------------------------------
$ 10.33 $736,413 100%
Total Rented Space 71,301 72%
Vacancies 28,309 28%
----------------------
Total Rentable Space 99,610 100%
======================
</TABLE>
Reference is made to Item 13 of Form 10-K for a further discussion of this
significant tenant.
SUMMARY OF LEASES BY EXPIRATION
Three tenants in 5850 San Felipe are on month to month leases, the other
twenty-one tenants are on leases scheduled to expire over the next eight years
as indicated in the table below.
<TABLE>
<CAPTION>
Year of expiration 1997 1998 1999 2000 2001 2002 2003 2004 Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Number of tenants 5 1 7 2 5 0 0 1 21
Percent of total tenants 21% 4% 29% 8% 21% 0% 0% 4% 87%
Total area (square feet) 4,464 1,165 9,293 6,060 19,469 0 0 17,502 57,953
Annual rent $50,867 $ 11,067 $ 90,767 $ 65,858 $202,466 $ 0 $ 0 $ 162,099 $ 583,124
Percent gross annual rent 7% 2% 12% 9% 27% 0% 0% 22% 79%
</TABLE>
SIERRA SOUTHWEST POINTE - HOUSTON, TEXAS
This property includes one industrial building comprising 100,258 rentable
square feet and is 91% occupied at December 31, 1996. The average effective
annual rent per square foot at December 31, 1996 is $4.21. The principal
businesses carried on from the building are healthcare, manufacturing, retail
and church services.
The property is encumbered by a mortgage lien in favor of American General
Mortgage Company with a principal balance of $1,115,540 at December 31, 1996.
The mortgage bears interest at 10% and is payable in monthly installments of
$14,207 through September 1997, the loan maturity date. Payments are amortized
over a 190 month period with a principal balance of $1,075,085 due at maturity
assuming no payment has been made on principal in advance of its due date.
SUMMARY OF SIGNIFICANT TENANTS
Seventeen tenants occupy the building at December 31, 1996. No tenant occupies
ten percent or more of the rentable square footage of the building as of
December 31, 1996.
4
<PAGE>
SUMMARY OF LEASES BY EXPIRATION
There are two month to month leases and sixteen term leases that are scheduled
to expire over the next five years as indicated in the table below. One tenant
occupies two units with separate lease terms.
<TABLE>
<CAPTION>
Year of expiration 1997 1998 1999 2000 2001 Totals
<S> <C> <C> <C> <C> <C> <C>
Number of tenants 3 6 6 0 1 16
Percent of total tenants 17% 33% 33% 0% 6% 89%
Total area (square feet) 22,408 26,720 28,875 0 2,000 80,003
Annual rent $ 90,475 $ 112,297 $ 133,582 $ 0 $11,904 $ 348,258
Percent gross annual rent 24% 29% 35% 0% 3% 91%
</TABLE>
SIERRA WESTLAKES DEVELOPMENT - SAN ANTONIO, TEXAS
This property includes one industrial building comprising 95,370 rentable square
feet and is 75% occupied at December 31, 1996. The average effective annual rent
per square foot at December 31, 1996 is $8.66. The property has only two tenants
whose principal businesses are distribution and manufacturing. Details of their
leases follow.
The property is encumbered by a mortgage lien in favor of Westmark Commercial
Mortgage Fund II with a principal balance of $1,983,454 at December 31, 1996.
The mortgage bears interest at 9% and is payable in monthly installments of
$16,783.93 through March 2006, the loan maturity date. Payments are amortized
over a 300 month period with a principal balance of $1,654,784 due at maturity
assuming no payment has been made on principal in advance of its due date.
SUMMARY OF SIGNIFICANT TENANTS
<TABLE>
<CAPTION>
Tenants of Square Percent of Effective Effective Percent of Expiration of Lease
Sierra Westlakes Feet Rentable Rent Per Rent Per Gross Annual
Development Occupied Square Square Foot Annum Rent
- ---------------------- ----------- ------------- ---------------- ---------------- ---------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Sears 45,935 48% $9.38 $431,079 70% December 1997
Felco Office Systems 25,357 27% 7.35 186,323 30% February 2001
--------------------------------------------------------------------------------
Total Rented Space 71,292 75% $8.66 $617,402 100%
Vacancies 24,078 25%
-------------------------
Total Rentable Space 95,370 100%
=========================
</TABLE>
DEPRECIABLE PROPERTY Reference is made to Schedule III of Form 10-K.
REAL ESTATE TAXES
Real Estate
Property Tax as % of 1996 Real Estate Tax
Assessed Value Obligation
- ---------------------------- -------------------- -------------------------
o 5850 San Felipe
Houston, Texas 2.76% $77,267
o Sierra Southwest Pointe
Houston, Texas 3.01% $48,732
o Sierra Westlake Development
San Antonio, Texas 2.72% $85,109
INSURANCE In the opinion of management, the properties are adequately
covered by insurance.
5
<PAGE>
SIERRA MIRA MESA - SAN DIEGO, CALIFORNIA
Sierra Mira Mesa office building consists of 89,560 rentable square feet and is
98% occupied at December 31, 1996. The principal business carried on from the
building is insurance. The average effective annual rent per square foot at
December 31, 1996 is $18.58.
SUMMARY OF SIGNIFICANT TENANTS
Only one of the five tenants occupies ten percent or more of the rentable square
footage of the building. The principal business of this significant tenant is
insurance. Details of this significant tenant and its leases follow:
<TABLE>
<CAPTION>
Tenants Square Percent of Effective Effective Percent of Expiration of Lease
Feet Rentable Rent Per Rent Per Gross Annual
Occupied Square Square Foot Annum Rent
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
State Comp.
Insurance Fund 73,912 83% $ 19.77 $1,461,132 90% February 2003
State Comp.
Insurance Fund 1,489 2% 4.03 6,000 0% Month to Month
Tenants Occupying
less than 10% sq ft 11,925 13% 13.02 155,306 10% Various
---------------------------------------------------------------------
Total Rented Space 87,326 98% $ 18.58 $1,622,438 100%
Vacancies 2,234 2%
--------------------------
Total Rentable Space 89,560 100%
==========================
</TABLE>
SUMMARY OF LEASES BY EXPIRATION
One of the five tenants is on a month to month lease; the other four are
scheduled to expire over the next seven years as scheduled below.
<TABLE>
<CAPTION>
Year of expiration 1997 1998 1999 2000 2001 2002 2003 Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Number of tenants 1 1 1 0 0 0 1 4
Percent of total tenants 20% 20% 20% 0% 0% 0% 20% 80%
Total area (square feet) 1,817 4,035 4,762 0 0 0 73,912 84,526
Annual rent $26,165 $ 55,396 $ 61,745 $ 0 $ 0 $ 0 $1,461,132 $1,604,438
Percent gross
annual rent 2% 3% 4% 0% 0% 0% 90% 99%
</TABLE>
DEPRECIABLE PROPERTY
Sierra Mira Mesa, San Diego, California
Office Building - Income Producing-Property
<TABLE>
<CAPTION>
Tenant
Land Buildings Improvements Total
---- --------- ------------ -----
<S> <C> <C> <C> <C>
Historical Cost & Tax Basis $ 2,480,940 $ 6,068,190 $ 2,007,750 $ 10,556,880
Accumulated Depreciation (2,009,589) (1,639,873) (3,649,462)
--------------------------------------------------------------
Net Carrying Value $ 2,480,940 $ 4,058,601 $ 367,877 $ 6,907,418
==============================================================
Depreciation Method Not Applicable Straight-line Straight-line
Depreciable Life Not Applicable 5-30 Years 1-10 years
</TABLE>
REAL ESTATE TAXES The real estate tax obligation for 1996 is approximately
1.12% of the assessed value or $68,529.
INSURANCE In the opinion of management, the property is adequately
covered by insurance.
6
<PAGE>
ENCUMBRANCES The property is encumbered by a mortgage lien in favor of
Lincoln National Life Insurance Company with a principal
balance of $5,262,512 at December 31, 1996. The mortgage
bears interest at 7.74%. Monthly principal and interest
payments of $51,738.57 are due through maturity at October
2010. The note is subject to prepayment penalties of
approximately 1% of the outstanding principal balance
between months 25 and 177 of the loan term. No prepayment is
allowed during the first two years of the loan and no
prepayment penalty will be imposed if prepayment occurs in
the final three months of the loan term.
SIERRA VISTA - ANAHEIM, CALIFORNIA
The property includes four buildings comprising 102,855 rentable square feet and
is 91% occupied at December 31, 1996. The average effective annual rent per
square foot at December 31, 1996 is $8.40. The property is primarily industrial
space. The principal businesses of the tenants are sales, marketing, and
financial services.
SUMMARY OF SIGNIFICANT TENANTS
None of the forty-four tenants at December 31, 1996 occupy more than ten percent
of the rentable square footage of the building. Five tenants are on month to
month leases and thirty-nine have leases that are scheduled to expire during the
next seven years as illustrated below.
SUMMARY OF LEASES BY EXPIRATION
<TABLE>
<CAPTION>
Year of expiration 1997 1998 1999 2000 2001 2002 2003 Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Number of tenants 9 11 11 3 4 0 1 39
Percent of total tenants 21% 25% 25% 7% 9% 0% 2% 89%
Total area (square feet) 16,504 27,656 24,296 4,860 9,790 0 1,753 84,859
Annual rent $155,651 $ 203,053 $ 194,771 $ 47,619 $ 108,254 $ 0 $ 14,791 $724,139
Percent gross annual rent 20% 26% 25% 6% 14% 0% 2% 93%
</TABLE>
DEPRECIABLE PROPERTY
Sierra Vista, Anaheim, California
Industrial Building - Income-Producing Property
<TABLE>
<CAPTION>
Tenant
Land Buildings Improvements Total
---- --------- ------------ -----
<S> <C> <C> <C> <C>
Historical Costs & Tax $ 2,878,269 $ 4,170,337 $ 3,180,610 $ 10,229,216
Basis
Accumulated Depreciation (1,096,735) (1,704,599) (2,801,334)
--------------------------------------------------------------------------------------
Net Carrying Value $ 2,878,269 $ 3,073,602 $ 1,476,011 $ 7,427,882
======================================================================================
Depreciation Method Not Applicable Straight-line Straight-line
Depreciable Life Not Applicable 3-30 Years 1-10 Years
</TABLE>
7
<PAGE>
REAL ESTATE TAXES The property's real estate tax obligation during 1996 was
approximately 1.1% of assessed value or $58,519.
INSURANCE In the opinion of the Partnership's management, the
Property is adequately covered by insurance.
ENCUMBRANCES: The property is encumbered by a mortgage lien in favor of
Olen Commercial Realty with a principal balance of
$3,410,795 at December 31, 1996. The original note was dated
August 29, 1989 with a face amount of $3,500,000 and a
maturity date of December 31, 1990. This note has been
modified and extended numerous times. It was last
restructured on August 1, 1995. This agreement extended the
maturity date from May 1996 to February 1997 and increased
the collateral of real and personal property to include a
certificate of deposit in the original amount of
approximately $92,000. The assignment of the certificate of
deposit provides for the release of this collateral when the
property achieves a 90% occupancy rate. The property is 91%
occupied at December 31, 1996. The annual interest rate was
reduced from 3% above Bank of America's prime rate to a
fixed rate of 8% retroactive to June 1995. The required
monthly payments were reduced from $31,700 to $20,000
effective August 1995 with the last payment estimated at
$3,443,000. There are no prepayment penalties associated
with this note.
On April 10, 1997, the Olen note was paid off. On the same
date, the Partership entered into a loan agreement with
First Union National Bank in the amount of $3,050,000. This
loan, which is secured by the Sierra Vista property, bears
interest at 9.375% and calls for monthly principal and
interest payments of $25,807.02 on the first day of each
month. Such payments shall continue until May 2007, when the
indebtedness is due in full. There is a 1% premium for
prepayment of this note.
SORRENTO I - SAN DIEGO, CALIFORNIA
Sorrento I is an industrial building with 43,100 square feet of rentable space.
One tenant leased 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, 1996 is
$6.58. The principal business of the new tenant is research and development in
the communications sector.
DEPRECIABLE PROPERTY
Sorrento I, San Diego, California
Office Building - Income-Producing Property
<TABLE>
<CAPTION>
Tenant
Land Buildings Improvements Total
---- --------- ------------ -----
<S> <C> <C> <C> <C>
Historical Cost & Tax Basis $ 1,305,518 $1,342,683 $1,063,783 $ 3,711,984
Accumulated Depreciation (421,749) (748,621) (1,170,370)
------------- ----------- ----------- -----------
Net Carrying Value $ 1,305,518 $ 920,934 $ 315,162 $ 2,541,614
============= =========== =========== ===========
Depreciation Method Not Applicable Straight-line Straight-line
Depreciable Life Not Applicable 10-30 Years 7-10 years
</TABLE>
REAL ESTATE TAXES The real estate tax obligation for 1996 is approximately
1.13% of the assessed value or $28,324.
INSURANCE In the opinion of management, the property is adequately
covered by insurance.
8
<PAGE>
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,
calls 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.
At any time upon 120 days written notice to CGS, SIP may
fully discharge the note by the payment of an amount equal
to $750,000 less the aggregate amount of principal paid
under the note between the date of the CGS Agreement and the
date of payment plus any interest due.
ITEM 3. LEGAL PROCEEDINGS
In November 1995, a limited partner of the Partnership, on their own behalf and
on behalf of all others similarly situated, filed a lawsuit against S-P
Properties, Inc., the General Partner of the Partnership, among others, in the
Superior Court of the State of California, County of Los Angeles. This suit
alleges breach of fiduciary duty and breach of contract.
The Plaintiffs' claims relate to various loans made by the Partnership and by
Sierra Mira Mesa Partners to a former affiliate of the General Partner which
were allegedly improper or made below market rates.
The Plaintiffs seek unspecified compensatory and punitive damages and removal of
the General Partner.
The case is presently in discovery. The Partnership and the General Partner deny
any wrongdoing and intend to vigorously defend against the Plaintiffs' claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
9
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERS' EQUITY AND RELATED MATTERS
As of December 31, 1996, the number of security holders is as follows:
Number of
Number Record
of Units Holders
-------- -------
Limited Partners:
Class A Units 56,674 3,507
Class B Units 29,979 848
These securities are all of the same class, namely, limited partnership
interests (units) and were sold pursuant to a registration statement filed under
the Securities Act of 1933, as amended. The total offering was 60,000 Class A
units at $250.00 per unit and 60,000 Class B units at $250.00 per unit.
No broker or dealer currently makes a market in the units of the Partnership.
Accordingly, there are no published price or trading volume figures available
for the units. The units have been transferred on an extremely limited extent
from time-to-time since the inception of the Partnership; however, the market
for the units is highly restricted and sporadic, especially in view of the
investor suitability requirements imposed on new purchasers by the various state
blue sky laws and the restrictions on transfer contained in the Partnership
Agreement.
The Partnership paid cash distributions of $3.46 and $2.31 per limited
partnership unit during each of the two years ended December 31, 1996 and 1995,
respectively. There are no contractual or other restrictions on the
Partnership's ability to make such distributions.
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data for the Partnership is filed by reference to the
Annual Report to the Limited Partners attached as an Exhibit.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Finanacial Condition and Results of
Operations includes certain forward looking statements reflecting the
Partnership's expectations in the near future; however, many factors which may
affect the actual results, especially changing regulations, are difficult to
predict. Accordingly, there is no assurance that the Partnership's expectations
will be realized.
Overview:
The following discussion should be read in conjunction with the Selected
Financial Data and the Partnership's Financial Statements and Notes thereto
incorporated by reference to the Annual Report to the Limited Partners attached
as an Exhibit. As of December 31, 1996, the Partnership owns three properties,
Sierra Westlakes, Sierra Southwest Pointe and 5850 San Felipe. The Partnership
sold its interest in the Sierra Technology property on December 31, 1994. In
addition, the Partnership holds a 51% interest in Sierra Mira Mesa Partners
("SMMP"). Through its interest in SMMP, the Partnership also has a 38.3%
interest in a property known as Sorrento I in San Diego, California and a 19.3%
interest in an industrial property known as Sierra Vista in Anaheim, California.
10
<PAGE>
Results of Operations:
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995.
Revenues were virtually unchanged in 1996, having increased by $47,000, or 2%,
primarily as a result of increased occupancy at Sierra Westlakes and 5850 San
Felipe. The occupancy rate increased from 66% to 75% at Sierra Westlakes and
from 59% to 72% at 5850 San Felipe during 1996. This increase in occupancy was
offset by a decrease in the weighted-average rent per square foot, on an accrual
basis, from $9.79 to $8.66 at Sierra Westlakes and from $11.50 to $10.33 at 5850
San Felipe. The rate decrease at Sierra Westlakes is due to a favorable lease
term given to a major tenant as an incentive to renew their lease and to expand
by 8,000 square feet. The expiration of long-term government leases at 5850 San
Felipe with rental rates higher than current market rates is the primary reason
for the building's weighted-average rate decrease. Occupancy and rental rates at
Sierra Southwest Pointe remained comparable between the two years.
Operating expenses increased by $189,000, or 10%, principally as a result of
increased depreciation and amortization expenses and higher maintenance and
repairs due to additional tenant improvements and costs associated with the
increased occupancy of the properties. Renovations to the lobby at 5850 San
Felipe also attributed to the increase in depreciation and amortization
expenses. Legal and accounting expenses increased $93,000, primarily as a result
of legal fees incurred defending against litigation pending against the
Partnership. The increase in operating expenses was partially offset by a
$58,000 decrease in administrative fees due to expense cutting measures
implemented by management.
The Partnership's share of income (loss) from investment in SMMP was $162,000
for the year ended December 31, 1996 compared to ($308,000) for the year ended
December 31, 1995. The increase in income generated by SMMP was principally due
to its share of income from Sorrento I Partners ("SIP"), which owns the Sorrento
I property. SIP, which is included in the consolidated financial statements of
SMMP, exercised a discounted payoff option in 1996 which resulted in an
extraordinary gain of $1,200,000. Furthermore, Sorrento I Partners entered into
a lease with a tenant for all of the square footage of the Sorrento I property
in 1996. The property, which was vacant throughout 1995, recorded rental income
of $189,000 in 1996 as a result of this new tenant.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994.
Revenues increased by $239,000, or 13%, principally as a result of an increase
in interest income resulting from the note receivable related to the sale of
Sierra Technology in December 1994. This note, in the amount of $2,900,000,
bears interest at a rate of 10% per annum and matures in December 1997.
Occupancy rates did not vary by more than 3% from the prior year on any of the
three properties. Rental rates per square foot, on an accrual basis, of Sierra
Westlakes increased from $8.45 at December 31, 1994 to $9.79 at December 31,
1995 due to the renewal of a major tenant's lease that had expired in March
1995.
Operating expenses decreased by $140,000, or 7%, due primarily to decreased
depreciation and amortization expense due to the sale of the Sierra Technology
building in 1994. This building had significant depreciable tenant improvements
that were being depreciated over the related lease lives. The Partnership did
not incur comparable costs at 5850 San Felipe until December 1995. The decrease
in depreciation expense of $337,000 was partially offset by increased utility
and maintenance charges. The Sierra Technology property is a triple net property
where the tenant pays for utilities and maintenance, while 5850 San Felipe is
"full service gross", so the landlord pays these costs.
In 1994, the Partnership recorded a gain of $539,835 from the disposition of the
Sierra Technology property. An additional amount of $736,271 was recorded as a
deferred gain to be recognized as principal payments are received on the note
receivable from the buyer. No related gains were recorded in 1995 as no
principal payments on the note were received during the year.
The Partnership's share of loss from investment in SMMP increased by $185,000.
The increase in losses generated by SMMP was principally due to its share of
losses from the Sorrento I Partners joint venture, which owns the Sorrento I
property. This property was unoccupied during all of 1995 and generated a net
loss of $640,000. SMMP's share of that loss was $375,000.
11
<PAGE>
Liquidity and Capital Resources:
The Partnership generated cash flows from operations of $401,000 during 1996.
During 1996, the Partnership paid $849,000 for property additions, $98,000 for
leasing commissions and $300,000 in distributions to the limited partners. The
capital required to fund these expenditures was generated in part from a
$2,000,000 loan funded on Sierra Westlakes in February 1996.
The Partnership is in an illiquid position at December 31, 1996 with cash and
cash equivalents of $23,000 and current liabilities of $575,000.
The Partnership's primary capital requirements will be for the construction of
new tenant space and compliance with the Americans with Disabilities Act or
other yet unknown changes in building codes. It is anticipated that these
requirements will be funded from the operation of the properties. Additionally,
the Partnership holds a $2,900,000 note receivable related to the sale of Sierra
Technology that matures in December 1997. Management expects repayment of this
note at maturity.
Inflation:
The Partnership's long-term leases contain provisions designed to mitigate the
adverse impact of inflation on its results from operations. Such provisions may
include escalation clauses related to Consumer Price Index increases.
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. Balance Sheets - December 31, 1996 and 1995
3. Statements of Operations - for the years ended December 31, 1996, 1995
and 1994
4. Statements of Changes in Partners' Equity - from April 29, 1983
(Inception of Partnership) to December 31, 1993 and for the years
ended December 31, 1996, 1995 and 1994
5. Statements of Cash Flows - for the years ended December 31, 1996, 1995
and 1994
6. Notes to Financial Statements
7. Audited Consolidated Financial Statements and related footnotes of
Sierra Mira Mesa Partners
8. Audited Financial Statements and related footnotes of Sierra Vista
Partners
9. Audited Financial Statements and related footnotes of Sorrento I
Partners
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None
12
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Registrant is a California Limited Partnership and has no officers or
directors.
S-P Properties, Inc., a California corporation, is the General Partner of the
Registrant. In December 1994, Finance Factors, Inc., a subsidiary of CGS Real
Estate Company, Inc., purchased the common stock of TCP, Inc. TCP, Inc. owns all
of the common stock of S-P Properties, Inc. In July 1995, Finance Factors, Inc.
merged with Bancor Real Estate Company, Inc., another subsidiary of CGS Real
Estate Company, Inc. CGS Real Estate Company, Inc. and its affiliates are
engaged in real estate management, leasing, ownership, and sales. The companies
own or manage more than ten million square feet of commercial real estate in
Texas, Arizona, Colorado, California and the Carolinas.
The executive officers and directors of S-P Properties, Inc. are:
APPROXIMATE
NAME POSITION AGE TIME IN OFFICE
- ---- -------- --- --------------
Thomas N. Thurber President and Director 46 2 years
Dawson L. Davenport Vice President 41 2 years
Steven M. Speier Secretary/Treasurer
and Director 46 2 years
William J. Carden Assistant Secretary/Treasurer
and Director 52 2 years
Thomas N. Thurber - President and Director, S-P Properties, Inc. Mr. Thurber is
a Certified Public Accountant who began his career with Arthur Andersen & Co. in
1972. In 1979, he joined a major publicly traded real estate development firm
(Daon) where he became Controller for U.S. Operations. Subsequently, Mr. Thurber
served as Director of Real Estate for a developer of retail properties, and
Chief Financial Officer of a trust with significant investments in commercial
real estate. Mr. Thurber also serves as a director of Property Secured
Investments, Inc. Mr. Thurber holds a bachelors degree in accounting from
Florida State University.
Dawson L. Davenport - Vice President, S-P Properties, Inc. Mr. Davenport is the
founder of WD Real Estate Services, a full service property management firm that
became part of the Banc Commercial family of companies in 1992. Mr. Davenport
has been responsible for the management, development and rehabilitation of
substantial commercial, industrial, retail, and residential projects during the
past seventeen years. Mr. Davenport specializes in leasing and turning around
distressed properties.
Steven M. Speier - Secretary/Treasurer and Director, S-P Properties, Inc. Mr.
Speier is a Certified Public Accountant 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 and has a masters degree in business administration
from Grand Valley State University in Michigan.
William J. Carden - Assistant Secretary/Treasurer and Director, S-P Properties,
Inc. Mr. Carden is the founder and President of CGS Real Estate Company, Inc.,
which owns over one million square feet of commercial real estate. Mr. Carden
founded DVM Properties, Inc. in 1974 which concentrated on rehabilitation of
retail, office, industrial, and commercial real estate. Mr. Carden is a former
Director of Bay Financial, a New York Stock Exchange company and currently
serves as a director of Property Secured Investments, Inc. and IDM Corporation.
There have been no events under any bankruptcy act, no criminal proceedings, and
no judgments or injunctions material to the evaluation of the ability and
integrity of any director or officer during the past five years.
13
<PAGE>
ITEM 11. MANAGEMENT REMUNERATION
The Registrant is a California Limited Partnership and has no officers or
directors. No options to purchase securities of the Registrant have been granted
to any person.
In accordance with the terms of the Partnership Agreement, certain affiliates of
the General Partner receive real estate brokerage commissions in connection with
the leasing of properties by the Partnership and receive from the Partnership
certain management and administrative services fees. These amounts are set forth
in the Annual Report to the Limited Partners attached as an Exhibit.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
None
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership pays a management fee of 5% of the gross rental income collected
from the properties to Banc Commercial Texas (BCTX). These fees for the year
ended December 31, 1996 were $90,250. Bancor Real Estate Company, Inc. (Bancor)
provides services to the Partnership such as accounting, legal, data processing
and similar services and is entitled to reimbursement for expenses incurred to
provide such services. Amounts so reimbursed totaled $224,760 during the year
ended December 31, 1996. Additionally, the Partnership reimbursed Bancor for
construction supervision costs in the amount of $43,257 during the year ended
December 31, 1996. In consideration for services rendered with respect to
initial leasing of Partnership properties, BCTX is paid initial leasing costs.
For the year ended December 31, 1996, a total of $59,021 was paid for initial
leasing costs. Bancor and BCTX are both wholly owned subsidiaries of CGS Real
Estate Company, Inc. William J. Carden, an officer and director of S-P
Properties, Inc., the General Partner of the Partnership, owns 50% of CGS Real
Estate Company, Inc.
During 1993, the Partnership loaned funds to Carlsberg Management Company, Inc.,
a former affiliate of the General Partner, in the form of unsecured demand
notes. Interest was paid at rates approximately 100 basis points above
certificate of deposit rates established by major commercial banks. The loans
reached a maximum of $1,100,000 during 1993 and were reduced to $1,000,000 at
December 31, 1993. The loans were reduced to $812,000 at December 31, 1994 and
the interest rate was fixed at 6%. The loan was assumed by Finance Factors, Inc.
with the sale of the outstanding stock of TCP, Inc. in December 1994. In July
1995, Finance Factors, Inc. merged with Bancor Real Estate Company, Inc. who has
assumed the note. Both Finance Factors, Inc. and Bancor Real Estate Company,
Inc. are wholly owned subsidiaries of CGS Real Estate Company, Inc. William J.
Carden, an officer and director of S-P Properties, Inc., the General Partner of
the Partnership, owns 50% of CGS Real Estate Company, Inc.
Bancor Real Estate Company, Inc. dba Third Coast Business Centers leases 17,502
square feet of 5850 San Felipe, a property of the Partnership. The terms of this
lease are consistent with the current market conditions for office space in the
area of the property. The Partnership recognized rental income of $162,099
during the year ended December 31, 1996 related to this lease. Bancor Real
Estate Company, Inc. is a wholly owned subsidiary of CGS Real Estate Company,
Inc. William J. Carden, an officer and director of S-P Properties, Inc., the
General Partner of the Partnership, owns 50% of CGS Real Estate Company, Inc.
On December 30, 1994, the Sierra Technology property with a historical cost
basis of $3,849,228 was sold for $6,000,000 ($3,100,000 cash down-payment and
$2,900,000 trust deed note) to Texas DVM, Inc. This note calls for monthly
interest only payments and bears interest of 10% per annum. Such payments shall
continue until December 1997, when the entire indebtedness is due in full. CGS
Real Estate Company, Inc. owns Texas DVM, Inc. William J. Carden, an officer and
director of S-P Properties, Inc., the General Partner of the Partnership, owns
50% of CGS Real Estate Company, Inc.
14
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. EXHIBITS
1. Annual Report to the Limited Partners
2. Exhibit Number 27 - Financial Data Schedule
B. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules and the report of the
independent auditors thereon are included herein:
1. Schedule II - Valuation and Qualifying Accounts and Reserves - for the
years ended December 31, 1996, 1995 and 1994
2. Schedule III - Real Estate and Accumulated Depreciation - December 31,
1996
All other schedules are omitted as they either are not required or are not
applicable, or the required information is set forth in the financial
statements and notes thereto.
C. REPORTS ON FORM 8-K
None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SIERRA PACIFIC DEVELOPMENT FUND II
a California Limited Partnership
S-P PROPERTIES, INC.
General Partner
Date: March 31, 1997 /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 31, 1997 /s/ THOMAS N. THURBER
-------------- ---------------------
Thomas N. Thurber
President and Director
S-P Properties, Inc.
Date: March 31, 1997 /s/ WILLIAM J. CARDEN
-------------- ---------------------
William J. Carden
Assistant Secretary/Treasurer
and Director
S-P Properties, Inc.
Date: March 31, 1997 /s/ MICHELE E. JOHNSON
-------------- ---------------------
Michele E. Johnson
Chief Accounting Officer
S-P Properties, Inc.
16
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
To the Partners of
Sierra Pacific Development Fund II
We have audited the financial statements of Sierra Pacific Development Fund II,
a California limited partnership, (the "Partnership") as of December 31, 1996
and 1995, and for each of the three years in the period ended December 31, 1996
and have issued our report thereon dated February 24, 1997. Such financial
statements and report are included in your 1996 Annual Report to the Limited
Partners and are incorporated herein by reference. Our audits also included the
financial statement schedules of Sierra Pacific Development Fund II, listed in
Item 14. These financial statement schedules are the responsibility of the
Partnership's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedules, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Houston, Texas
February 24, 1997
17
<PAGE>
SCHEDULE II - FORM 10-K
SIERRA PACIFIC DEVELOPMENT FUND II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31, 1996, 1995 and 1994
Income -
Producing
Properties
---------
Allowance for loss - January 1, 1994 ................... $ 850,000
Provision charged to costs
and expenses (1) .................................. 0
Reduction due to sale of property (1) .................. (400,000)
---------
Allowance for loss - December 31, 1994 ................. 450,000
Provision charged to costs
and expenses (1) .................................. 0
---------
Allowance for Loss - December 31, 1995 ................. 450,000
Provision charged to costs
and expenses (1) .................................. 0
---------
Allowance for loss - December 31, 1996 ................. $ 450,000
=========
(1) See Notes 1 and 4 to financial statements incorporated by reference to
the Annual Report to the Limited Partners attached as an Exhibit.
18
<PAGE>
SCHEDULE III - FORM 10-K
SIERRA PACIFIC DEVELOPMENT FUND II
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Initial Cost Gross Amount at
to Partnership(1) Improvements Which carried at close of period
------------------------ Capitalized -------------------------------------
Encumb- Improve- After Acquis- Improve- Total
Description rances Land ments ition (2) Land ments (3)(4)(5)
- ----------- ---------- ---------- ---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OFFICE/INDUSTRIAL BUILDINGS
INCOME -PRODUCING:
5850 San Felipe
Houston, Texas $3,000,000 $1,950,000 $2,806,932 $1,090,617 $1,950,000 $3,897,057 $5,847,057
Sierra Southwest Pointe
Houston, Texas 1,115,540 570,124 2,279,488 325,096 570,124 2,498,300 3,068,424
Sierra Westlakes Development
San Antonio, Texas 1,983,454 1,743,622 0 3,787,402 1,743,622 3,769,501 5,513,123
------------------------------------------------------------------------------------------------
TOTAL $6,098,994 $4,263,746 $5,086,420 $5,203,115 $4,263,746 $10,164,858 $14,428,604
================================================================================================
Accumulated Date Date Depreciation
Description Depreciation(5) Constructed Acquired Life
- ----------- ------------- ----------- -------- ------------
OFFICE/INDUSTRIAL BUILDINGS
INCOME -PRODUCING:
5850 San Felipe
Houston, Texas $ 286,601 3/77 12/94 1-30 yrs.
Sierra Southwest Pointe
Houston, Texas 519,754 8/72 7/91 2-30 yrs.
Sierra Westlakes Development
San Antonio, Texas 1,965,800 10/85 8/84 1-30 yrs.
----------
TOTAL $2,772,155
==========
</TABLE>
- ----------
(1) The initial cost represents the original purchase price of the property.
(2) The Partnership has capitalized property development costs.
(3) Also represents costs for Federal Income Tax purposes.
(4) A valuation allowance of $450,000 was established as the appraised value
of the properties declined below book value. See Notes 1 and 4 to the
financial statements incorporated by reference to the Annual Report to
the Limited Partners attached as an Exhibit.
(5) Reconciliation of total real estate carrying value and accumulated
depreciation for the three years ended December 31, 1996 is as follows:
Total Real Estate Accumulated
Carrying Value Depreciation
------------ ----------
Balance - January 1, 1994 $ 14,321,737 $ 2,920,396
Acquisitions and
Additions during the year 4,976,047 734,782
Sales during the year (6,008,937) (1,759,709)
------------ ----------
Balance - December 31, 1994 13,288,847 1,895,469
Additions during the year 415,923 458,903
Write off of fully depreciated assets (13,152) (13,152)
------------ ----------
Balance - December 31, 1995 13,691,618 2,341,220
Additions during the year 848,511 542,460
Write off of fully depreciated assets (111,525) (111,525)
------------ ----------
Balance - December 31, 1996 $ 14,428,604 $ 2,772,155
============ ==========
19
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND II
(A California Limited Partnership)
SELECTED FINANCIAL DATA
For the Years Ended December 31, 1996, 1995, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES $ 2,128,491 $ 2,081,670 $ 1,842,321 $ 1,906,135 $ 1,658,093
OPERATING EXPENSES:
Total 2,025,153 1,835,944 1,976,381 1,693,663 1,460,528
Per dollar of revenues 0.95 0.88 1.07 0.89 0.88
NET (LOSS) INCOME FROM
CONTINUING OPERATIONS:
Total (548,350) (523,440) 157,470 31,686 278,675
General Partner 0 0 25,998 0 0
Limited Partners (548,350) (523,440) 131,472 31,686 278,675
Per Unit (1) (6.32) (6.04) 1.52 0.37 3.22
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 401,092 (841,813) 1,038,686 861,226 649,851
CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (848,511) (374,172) 1,435,165 (212,773) (67,649)
CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 267,418 (122,354) (1,096,914) (1,734,660) 442,574
TOTAL ASSETS 20,229,858 19,676,261 20,948,592 17,706,165 18,330,858
PARTNERS' EQUITY:
Total 13,556,216 14,055,860 14,779,300 15,860,970 16,522,508
General Partner 0 0 0 0 0
Limited Partners
Class A 8,866,234 9,193,008 9,666,163 10,373,612 10,806,280
Class B 4,689,982 4,862,852 5,113,137 5,487,358 5,716,228
LIMITED PARTNERS' EQUITY - PER UNIT(1) 156.45 162.21 170.56 183.04 190.67
NOTE RECEIVABLE 2,163,729 2,163,729 2,163,729 N/A N/A
INCOME-PRODUCING PROPERTIES:
Number 3 3 3 3 3
Cost 14,428,604 13,691,618 13,288,847 14,321,737 14,093,664
Less: Accumulated depreciation (2,772,155) (2,341,220) (1,895,469) (2,920,396) (2,225,677)
Valuation allowance (450,000) (450,000) (450,000) (850,000) (850,000)
Net book value 11,206,449 10,900,398 10,943,378 10,551,341 11,017,987
INVESTMENT IN UNCONSOLIDATED
JOINT VENTURE 4,838,609 4,681,570 5,035,779 5,152,570 5,224,804
NOTES PAYABLE - Related to income-
producing property 6,098,994 5,185,902 5,248,256 1,267,744 1,309,180
DISTRIBUTIONS PER UNIT (1): 3.46 2.31 14.00 8.00 6.00
</TABLE>
- ----------
N/A = Not applicable nor available
(1) The net income (loss), limited partners' equity and distributions per
unit are based upon the limited partnership units outstanding at the end
of year, 56,674 Class A and 29,979 Class B in all years. The cumulative
distributions per limited partnership unit from inception to December
31, 1996 equal $64.22.
20
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
Sierra Pacific Development Fund II
We have audited the accompanying balance sheets of Sierra Pacific Development
Fund II, a California limited partnership, (the "Partnership") as of December
31, 1996 and 1995, and the related statements of operations, changes in
partners' equity and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sierra Pacific Development Fund
II as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
February 24, 1997
21
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND II
(A California Limited Partnership)
BALANCE SHEETS
December 31, 1996 and 1995
December 31, 1996 December 31, 1995
----------------- -----------------
ASSETS
Cash and cash equivalents $ 22,962 $ 202,963
Receivables:
Note, net of deferred gain of
$736,271 (Notes 3 and 4) 2,163,729 2,163,729
Unbilled rent (Notes 1 and 4) 334,495 364,615
Billed rent (Note 1) 25,181 42,435
Due from affiliates (Note 3) 1,017,674 812,000
Other (Note 2) 176,421 117,542
Income-producing properties - net of
accumulated depreciation and
valuation allowance of $3,222,155 in 1996
and $2,791,220 in 1995 (Notes 1 and 4) 11,206,449 10,900,398
Investment in unconsolidated joint venture
(Notes 1 and 5) 4,838,609 4,681,570
Other assets (Notes 1, 2 and 3) 444,338 391,009
----------- -----------
Total Assets $20,229,858 $19,676,261
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Accrued and other liabilities (Note 2) $ 574,648 $ 294,499
Due to affiliate (Note 3) 0 140,000
Notes payable (Note 6) 6,098,994 5,185,902
----------- -----------
Total Liabilities 6,673,642 5,620,401
----------- -----------
Partners' equity (Notes 1 and 7):
General Partner 0 0
Limited Partners:
Class A Limited Partners:
60,000 units authorized,
56,674 issued and outstanding 8,866,234 9,193,008
Class B Limited Partners:
60,000 units authorized,
29,979 issued and outstanding 4,689,982 4,862,852
----------- -----------
Total Partners' equity 13,556,216 14,055,860
----------- -----------
Total Liabilities and Partners' equity $20,229,858 $19,676,261
=========== ===========
See Accompanying Notes
22
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND II
(A California Limited Partnership)
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Rental income (Note 1) $ 1,778,871 $ 1,735,678 $ 1,794,264
Interest income (Note 3) 349,620 345,992 48,057
----------- ----------- -----------
Total revenues 2,128,491 2,081,670 1,842,321
----------- ----------- -----------
EXPENSES:
Operating expenses:
Depreciation and amortization 632,513 517,137 854,251
Property taxes and insurance 334,132 324,920 285,001
Administrative fees (Note 3) 224,760 283,041 333,982
Maintenance and repairs 279,797 219,102 141,550
Utilities 181,227 209,525 59,880
Management fees (Note 3) 90,250 86,531 94,777
Legal and accounting 141,929 49,424 66,472
General and administrative 37,108 46,732 48,574
Salaries and payroll taxes 36,000 31,651 36,710
Renting expenses 13,599 5,360 13,961
Other operating expenses 53,838 62,520 41,223
----------- ----------- -----------
Total operating expenses 2,025,153 1,835,943 1,976,381
Interest 464,880 461,567 126,173
----------- ----------- -----------
Total expenses 2,490,033 2,297,510 2,102,554
----------- ----------- -----------
LOSS BEFORE GAIN FROM PROPERTY DISPOSITION (361,542) (215,840) (260,233)
GAIN FROM PROPERTY DISPOSITION (Note 4) 0 0 539,835
----------- ----------- -----------
(LOSS) INCOME BEFORE PARTNERSHIP'S SHARE OF
UNCONSOLIDATED JOINT VENTURE LOSS (361,542) (215,840) 279,602
----------- ----------- -----------
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE LOSS FROM CONTINUING
OPERATIONS (Note 5) (186,808) (307,600) (122,132)
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE EXTRAORDINARY GAIN (Note 5) 348,706 0 0
----------- ----------- -----------
NET (LOSS) INCOME $ (199,644) $ (523,440) $ 157,470
=========== =========== ===========
Per limited partnership unit (Note 1):
Loss before extraordinary gain $ (6.32) $ (6.04) $ 1.52
Extraordinary gain 4.02 0 0
----------- ----------- -----------
Net (loss) income $ (2.30) $ (6.04) $ 1.52
=========== =========== ===========
</TABLE>
See Accompanying Notes
23
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND II
(A California Limited Partnership)
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
From April 29, 1983 (Inception of Partnership) to December 31, 1993
and for the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Limited Partners Total
------------------------------------------ General Partners'
Class A Class B Total Per Unit Partner Equity
------------ ----------- ----------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Proceeds from sale of
partnership units $ 14,392,000 $ 7,579,000 $21,971,000 $250.00 $ $21,971,000
Underwriting commissions
and other organization expenses (1,939,045) (1,021,124) (2,960,169) (33.68) (2,960,169)
Repurchase of 1,231 partnership
units (177,934) (66,167) (244,101) 0.06 (244,101)
Cumulative net income
(to December 31, 1993) 630,501 332,922 963,423 11.11 20,676 984,099
Cumulative distributions
(to December 31, 1993) (2,531,910) (1,337,273) (3,869,183) (44.45) (20,676) (3,889,859)
------------ ----------- ----------- ------ ----------- -----------
Partners' equity -
January 1, 1994 10,373,612 5,487,358 15,860,970 183.04 0 15,860,970
Net income 85,987 45,485 131,472 1.52 25,998 157,470
Distributions (793,436) (419,706) (1,213,142) (14.00) (25,998) (1,239,140)
------------ ----------- ----------- ------ ----------- -----------
Partners' equity -
December 31, 1994 9,666,163 5,113,137 14,779,300 170.56 0 14,779,300
Net loss (342,348) (181,092) (523,440) (6.04) (523,440)
Distributions (130,807) (69,193) (200,000) (2.31) (200,000)
------------ ----------- ----------- ------ ----------- -----------
Partners' equity -
December 31, 1995 9,193,008 4,862,852 14,055,860 162.21 0 14,055,860
Net loss (130,574) (69,070) (199,644) (2.30) (199,644)
Distributions (196,200) (103,800) (300,000) (3.46) (300,000)
------------ ----------- ----------- ------ ----------- -----------
Partners' equity -
December 31, 1996 $ 8,866,234 $ 4,689,982 $13,556,216 $156.45 $ 0 $13,556,216
============ =========== =========== ======== =========== ===========
</TABLE>
See Accompanying Notes
24
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND II
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (199,644) $ (523,440) $ 157,470
Adjustments to reconcile net (loss) income
to cash provided by (used in) operating activities:
Depreciation and amortization 632,513 517,137 854,251
Undistributed (income) loss of unconsolidated
joint venture (161,898) 307,599 122,132
Gain from property disposition 0 0 (539,835)
Decrease (increase) in rent receivable 47,374 (139,368) 68,214
(Increase) decrease in other receivables (58,879) (114,505) 12,662
Increase in other assets (138,523) (262,699) (44,968)
Increase (decrease) in accrued and other liabilities 280,149 (626,537) 408,760
---------- ---------- ----------
Net cash provided by (used in) operating activities 401,092 (841,813) 1,038,686
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property acquisition and additions (848,511) (415,923) (1,192,828)
Net cash proceeds from property disposition 0 0 2,638,193
Capital contributions to unconsolidated joint venture 0 (768,258) (145,350)
Distributions received from unconsolidated
joint venture 0 810,009 135,150
---------- ---------- ----------
Net cash (used in) provided by investing activities (848,511) (374,172) 1,435,165
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan to affiliates (205,674) 0 0
Repayments of loan to affiliates 0 0 188,000
Borrowings from affiliates 349,900 140,000 0
Repayments of borrowings from affiliates (489,900) 0 0
Cash distributions (300,000) (200,000) (1,239,140)
Funding of note payable secured by property 2,000,000 0 0
Principal payments on notes payable (1,086,908) (62,354) (45,774)
---------- ---------- ----------
Net cash provided by (used in) financing activities 267,418 (122,354) (1,096,914)
---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (180,001) (1,338,339) 1,376,937
CASH AND CASH EQUIVALENTS - Beginning of year 202,963 1,541,302 164,365
---------- ---------- ----------
CASH AND CASH EQUIVALENTS - End of year $ 22,962 $ 202,963 $1,541,302
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $ 466,407 $ 433,553 $ 126,554
========== ========== ==========
</TABLE>
In 1994, the Partnership purchased 5850 San Felipe for $5,000,000. The
Partnership paid $973,713 as cash down-payment and assumed a first deed of trust
note with a balance of $4,026,287. The $4,026,287 note payable is a non-cash
item not reflected in the above statements of cash flows.
See Accompanying Notes
25
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND II
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Sierra Pacific Development Fund II (the "Partnership") was organized on April
29, 1983 in accordance with the provisions of the California Uniform Limited
Partnership Act to acquire, develop and operate commercial and industrial real
properties. S-P Properties, Inc. is the General Partner and manager of the
Partnership. On December 30, 1994, all of the outstanding stock of TCP, Inc. was
sold to Finance Factors, Inc. TCP, Inc. owns all of the common stock of S-P
Properties, Inc. Finance Factors was a subsidiary of CGS Real Estate Company,
Inc., a national real estate company. In July 1995, Finance Factors, Inc. merged
with Bancor Real Estate Company, Inc., another subsidiary of CGS Real Estate
Company, Inc.
The Partnership's activities during the preceding five years have involved the
ownership and operation of four real estate projects in Texas: Sierra Technology
Center in Austin, Texas; Sierra Westlakes in San Antonio, Texas; Sierra
Southwest Pointe in Houston, Texas; and 5850 San Felipe in Houston, Texas.
In December 1994, the Partnership sold Sierra Technology Center for $6,000,000.
The sale proceeds were received in cash, a note receivable from the buyer, and
equity in the 5850 San Felipe property.
The Partnership holds a 51% interest in Sierra Mira Mesa Partners ("SMMP"), a
California general partnership with Sierra Pacific Pension Investors '84 formed
in 1985. SMMP was initially created to develop and operate the office building
known as Sierra Mira Mesa in San Diego, California. SMMP also holds a 75.06%
interest in Sorrento I Partners (a California general partnership with Sierra
Pacific Development Fund III formed in 1993), a 26.92% interest in Sorrento II
Partners (a California general partnership with Sierra Pacific Institutional
Properties V formed in 1993), an 18.87% interest in Sierra Creekside Partners (a
California general partnership with Sierra Pacific Development Fund formed in
1994), and a 37.74% interest in Sierra Vista Partners (a California general
partnership with Sierra Pacific Development Fund III formed in 1994).
BASIS OF FINANCIAL STATEMENTS
The Partnership maintains its books and prepares its financial statements in
accordance with generally accepted accounting principles. However, the
Partnership prepares its tax returns on the accrual basis of accounting as
defined by the Internal Revenue Code with adjustments to reconcile book and
taxable income (loss) for differences in the treatment of certain income and
expense items. The accompanying financial statements do not reflect any
provision for federal or state income taxes since such taxes are the obligation
of the individual partners.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid, short-term investments with
original maturities of three months or less.
26
<PAGE>
Sierra Pacific Development Fund II
Notes to Financial Statements
Page Two
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Partnership at December 31, 1996 and 1995
consist of cash and cash equivalents, receivables, due from affiliates, accounts
payable and notes payable. The fair value of cash and cash equivalents,
receivables and accounts payable approximates the carrying value due to the
short term nature of these items. In the opinion of management, the estimated
fair value of the notes payable, based on market rates at December 31, 1996, is
$5,460,000. Management was unable to determine the fair value of due from
affiliates due to the related party nature of this receivable.
INCOME-PRODUCING PROPERTIES
Property and tenant improvements are carried at cost and depreciated on the
straight-line method over the estimated lives of the related assets, ranging
from one to thirty years. Tenant improvements incurred at the initial leasing of
the properties are depreciated over ten years and tenant improvements incurred
at the re-leasing of the properties are depreciated over the life of the related
lease.
Expenditures for repairs and maintenance are charged against income as incurred.
Improvements and major renewals are capitalized. Costs and the related
accumulated depreciation of assets sold or retired are removed from the accounts
in the year of disposal or when fully depreciated and any resulting gain or loss
is reflected in income or deferred income as appropriate.
The Partnership employs a systematic approach in determining whether the value
of income-producing properties has been impaired. Prior to 1995, a provision for
loss on a property was established if the appraised value of the property
declined below its book value due to what the General Partner believed to be an
other than temporary condition. A complete appraisal was performed on the
properties as of December 31 each year. A provision for loss on the properties
was established as the appraised value of the properties declined below book
value because of depressed real estate market conditions, which the General
Partner believed to be other than temporary. A complete appraisal was performed
on the properties as of December 31, 1994 that indicated an appraised value in
excess of the historical cost basis of each of the properties.
Effective January 1, 1995, the Partnership implemented Statement of Financial
Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" (the "Statement"). The Partnership
regularly evaluates long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable. Future cash flows are estimated and compared to the carrying amount
of the asset to determine if an impairment has occurred. If the sum of the
expected future cash flows is less than the carrying amount of the asset, the
Partnership shall recognize an impairment loss in accordance with the Statement.
No additional provision was required with the implementation of this Statement.
Because the determination of fair value is based upon projections of future
economic events such as property occupancy rates, rental rates, operating cost
inflation and market capitalization rates which are inherently subjective, the
amounts ultimately realized at disposition may differ materially from the net
carrying value as of December 31, 1996. The cash flows used to determine fair
value and net realizable value are based on good faith estimates and assumptions
developed by management. Unanticipated events and circumstances may occur and
some assumptions may not materialize; therefore, actual results may vary from
the estimates and the variances may be material. The Partnership may provide
additional write-downs which could be material in subsequent years if real
estate markets or local economic conditions change.
INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
The investment in unconsolidated joint venture is stated at cost and is adjusted
for the Partnerships' share in earnings or losses and cash contributions to or
distributions from the joint venture (equity method).
27
<PAGE>
Sierra Pacific Development Fund II
Notes to Financial Statements
Page three
OTHER ASSETS
Deferred leasing costs represent costs incurred to lease properties and are
amortized over the life of the related lease.
Deferred loan costs represent costs incurred to obtain financing and are
amortized over the life of the related loan.
RENTAL INCOME AND RENT RECEIVABLE
Rental income is recognized on the straight-line method over the term of the
related operating lease in accordance with the provisions of Statement of
Financial Accounting Standards No. 13, "Accounting for Leases".
Rent receivable consists of (a) unbilled rent - the difference between rent
recognized on the straight-line method and actual cash due; and (b) billed rent
- - rent due but not yet received.
CALCULATION OF EQUITY AND NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT
Equity and net income (loss) per limited partnership unit are determined by
dividing the Limited Partners' equity and net income (loss) by the number of
limited partnership units outstanding, 56,674 Class A and 29,979 Class B.
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts, at December 31,
1996 and 1995, is as follows:
1996 1995
-------- --------
Other receivables:
Interest receivable $176,421 $ 24,167
Accounts receivable 0 30,317
Distributions receivable 0 63,058
-------- --------
$176,421 $117,542
======== ========
Other assets:
Prepaid expenses $ 20,192 $ 18,213
Deferred loan costs, net of
accumulated amortization
of $17,969 in 1996 and
$9,860 in 1995 68,895 73,924
Deferred leasing costs, net
of accumulated amortization
of $297,795 in 1996 and
$225,798 in 1995 281,783 261,215
Tax impounds 63,178 27,367
Deposits 10,290 10,290
-------- --------
$444,338 $391,009
======== ========
Accrued and other liabilities:
Accounts payable $383,593 $117,571
Security deposits 68,704 61,577
Accrued property taxes 85,679 77,153
Interest payable 36,672 38,198
-------- --------
$574,648 $294,499
======== ========
28
<PAGE>
Sierra Pacific Development Fund II
Notes to Financial Statements
Page four
3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS
In 1994, all of the common stock of TCP, Inc. was purchased by Finance Factors,
Inc. from Carlsberg Management Company ("CMC"). TCP, Inc. owns all of the common
stock of S-P Properties, Inc., the General Partner of the Partnership. CMC
continued to manage the affairs of the Partnership through March 31, 1995.
An affiliate of the General Partner receives a management fee of 5% of the gross
rental income collected from the properties. Management fees paid to affiliates
for the years ended December 31, 1996, 1995 and 1994 were $90,250, $70,531 and
$94,777, respectively.
An affiliate of the General Partner is entitled to reimbursement for expenses
incurred by the affiliate for services provided to the Partnership such as
accounting, legal, data processing and similar services. The affiliate was
reimbursed $224,760, $165,696 and $333,982 for such services for the years ended
December 31, 1996, 1995 and 1994, respectively. The 1994 amount includes
$199,910 of partnership management fees which were previously not accrued. Under
the terms of the Partnership agreement, the General Partner receives a portion
of cash available for distribution, constituting a fee for management of the
Partnership. In years prior to 1994, due to the poor operating performance of
the Partnership and the lack of funds available to pay such fees, no accrual was
made for these fees as payment was not considered to be probable. In 1994, the
Partnership received cash for the sale of a property and paid these accumulated
fees.
The Partnership reimbursed the affiliate for construction supervision costs
incurred by the affiliate. For the years ended December 31, 1996, 1995 and 1994
the affiliate received $43,257, $13,485 and $14,374, respectively, for tenant
improvements supervisory costs.
In consideration for services rendered with respect to initial leasing of
Partnership properties, an affiliate of the General Partner is paid initial
leasing costs. For the years ended December 31, 1996 these fees amounted to
$59,021 and $132,121, respectively, and were recorded as deferred leasing costs.
For the year ended December 31, 1994, the affiliate also received $11,915 for
leasing supervision costs that were recorded as part of renting expenses of the
properties. No such costs were incurred in 1995 and 1996.
During 1993, the Partnership loaned funds to a former affiliate of the General
Partner in the form of demand notes. Interest was paid at rates approximately
100 basis points above certificate of deposit rates established by major
commercial banks. The loans reached a maximum of $1,100,000. The loans were
reduced to $812,000 at December 31, 1994 and the interest rate was fixed at 6%.
Interest income of $48,853, $48,720 and $48,057 was recognized in 1996, 1995 and
1994, respectively, related to this note. The balance outstanding at December
31, 1996 is $812,000.
An affiliate of the General Partner leases 17,502 square feet of 5850 San
Felipe, a property of the Partnership. The terms of this lease are consistent
with the current market conditions for office space in the area of the property.
The Partnership recognized rental income of $162,099 during the years ended
December 31, 1996 and 1995 related to this lease. No such income was recognized
in 1994.
As further described in Note 4, in 1994 the Partnership sold a property to an
affiliate of the General Partner for cash of $3,100,000 and a $2,900,000 trust
deed note. This note calls for monthly interest only payments and bears interest
of 10% per annum. Interest income of $290,000 was recognized in 1996 related to
this note. Such payments shall continue until December 1997, when the entire
indebtedness is due in full.
In 1995, the Partnership received a short-term loan from Sierra Mira Mesa
Partners in the amount of $140,000. This loan was non-interest bearing and
repaid in 1996.
During 1996, the Partnership made short-term, non-interest bearing loans to
affiliates. Repayment is expected in 1997. The balance outstanding at December
31, 1996 is $205,674.
29
<PAGE>
Sierra Pacific Development Fund II
Notes to Financial Statements
Page five
4. INCOME-PRODUCING PROPERTIES
At December 31, 1996 and 1995 the total cost and accumulated depreciation of the
properties are as follows:
1996 1995
------------ ------------
Land $ 4,263,746 $ 4,263,746
Building and improvements 10,164,858 9,427,872
------------ ------------
Total 14,428,604 13,691,618
Accumulated depreciation (2,772,155) (2,341,220)
Valuation allowance (450,000) (450,000)
------------ ------------
Net $ 11,206,449 $ 10,900,398
============ ============
On December 30, 1994, the Sierra Technology Center property, with a historical
cost basis of $3,849,228, was sold for $6,000,000 ($3,100,000 cash down-payment
and $2,900,000 trust deed note) to an affiliate of Finance Factors, Inc. In a
related transaction, on December 30, 1994, the Partnership purchased 5850 San
Felipe, an office building in Houston, Texas for $5,000,000 from an affiliate of
Finance Factors, Inc. The Partnership paid $973,713 as cash down-payment and
assumed a first trust deed note with a balance of $4,026,287. In accordance with
Emerging Issues Task Force No. 87-29, "Exchange of Real Estate Involving Boot",
the fair value of the assets and liabilities transferred in the two transactions
was allocated between a monetary and a non-monetary component. Accordingly, the
historical cost of the San Felipe building was reduced by $243,068, representing
the non-monetary portion of the gain on sale of the Sierra Technology Center.
The monetary portion of the gain on sale was recorded in accordance with
Statement of Financial Accounting Standards No. 66 "Accounting For Sales of Real
Estate" using the installment method and the Partnership recorded a gain of
$539,835 (net of selling costs and unamortized loan fees and lease costs). A
deferred gain of $736,271 will be recognized as principal payments on the trust
deed note are received.
Future minimum base rental income, under the existing operating leases for the
properties, to be recognized on a straight-line basis and amounts to be received
on a cash basis are as follows:
STRAIGHT-LINE CASH
YEAR ENDING DECEMBER 31, BASIS BASIS
------------------------ ---------- ----------
1997 $1,528,403 $1,606,189
1998 951,134 997,498
1999 813,485 859,534
2000 576,091 629,021
2001 346,110 374,593
Thereafter 486,298 569,181
---------- ----------
Total $4,701,521 $5,036,016
========== ==========
30
<PAGE>
Sierra Pacific Development Fund II
Notes to Financial Statements
Page six
Approximately 24% of 1996 rental revenues were generated from a Sears, Roebuck
and Company telemarketing division for warranty sales.
5. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
Sierra Mira Mesa Partners ("SMMP"), a California general partnership, was formed
in 1985 between the Partnership and Sierra Pacific Pension Investors '84, an
affiliate, to develop and operate the real property known as Sierra Mira Mesa,
an office building, located in San Diego, California. The property contains
89,560 square feet and is 98% leased at December 31, 1996. At December 31, 1996
the Partnership's interest in SMMP is 51%; the remaining 49% interest was owned
by Sierra Pacific Pension Investors '84.
The Partnership's investment in SMMP as of December 31, 1996 and 1995 is
comprised of the following:
1996 1995
---------- ----------
Equity interest $4,679,005 $4,517,107
Investment advisory and
other fees, less accum-
ulated amortization of
$48,586 and $43,728
in 1996 and 1995, respec-
tively 159,604 164,463
---------- ----------
Investment in unconsolidated
joint venture $4,838,609 $4,681,570
========== ==========
31
<PAGE>
Sierra Pacific Development Fund II
Notes to Financial Statements
Page seven
The consolidated financial statements of SMMP include the accounts of SMMP and
Sorrento I Partners, a majority owned California general partnership for the
year ended December 31, 1996. Sorrento I Partners was accounted for under the
equity method in the prior years. The financial statements of SMMP for prior
years have not been restated as the consolidation was accounted for as a step
acquisition in accordance with Accounting Research Bulletin No. 51,
"Consolidated Financial Statements". The condensed balance sheets at December
31, 1996 and 1995, and the condensed statements of operations for the years
ended December 31, 1996, 1995 and 1994 for SMMP are as follows:
CONDENSED BALANCE SHEETS
December 31, December 31,
1996 1995
------------ -----------
ASSETS
Cash and cash equivalents $ 26,721 $ 1,325,020
Rent receivable 1,186,818 1,021,948
Other receivables 169,241 98,955
Due from affiliates 1,536,968 1,830,588
Income-producing property,
net of accumulated depreciation 9,449,032 7,059,867
Investment in unconsolidated
joint ventures 2,773,176 3,306,143
Other assets 1,119,115 1,044,860
------------ -----------
Total Assets $ 16,261,071 $15,687,381
============ ===========
LIABILITIES AND GENERAL PARTNERS' EQUITY
Accrued and other liabilities $ 104,428 $ 62,940
Due to Sierra Pacific Pension
Investors `84 1,311,300 1,300,000
Note payable 6,012,512 5,467,368
------------ -----------
Total Liabilities 7,428,240 6,830,308
------------ -----------
Minority interest in joint venture (341,689) 0
------------ -----------
General Partners' equity 9,174,520 8,857,073
------------ -----------
Total Liabilities and General Partners' equity $ 16,261,071 $15,687,381
============ ===========
32
<PAGE>
Sierra Pacific Development Fund II
Notes to Financial Statements
Page eight
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Rental income $ 1,808,673 $ 1,529,497 $ 1,458,990
Other income 178,726 181,358 376,022
----------- ----------- -----------
Total revenues 1,987,399 1,710,855 1,835,012
----------- ----------- -----------
Expenses:
Operating expenses 728,593 641,206 690,827
Depreciation and amortization 813,359 586,602 526,253
Interest 559,759 392,088 366,330
----------- ----------- -----------
Total expenses 2,101,711 1,619,896 1,583,410
----------- ----------- -----------
(Loss) Income before Partnership's
share of unconsolidated
joint venture losses (114,312) 90,959 251,602
Partnership's share of unconsolidated
joint venture losses (354,765) (694,095) (491,079)
----------- ----------- -----------
Loss before extraordinary gain (469,077) (603,136) (239,477)
Extraordinary gain 1,200,381 0 0
----------- ----------- -----------
Income (Loss) before minority interest's
share of consolidated joint venture
loss 731,304 (603,136) (239,477)
----------- ----------- -----------
Minority interest's share of
consolidated joint venture loss
from continuing operations 102,787 0 0
Minority interest's share of
consolidated joint venture
extraordinary gain (516,644) 0 0
----------- ----------- -----------
Net Income (Loss) $ 317,447 $ (603,136) $ (239,477)
=========== =========== ===========
</TABLE>
As of December 31, 1996, SMMP also holds a 26.92% interest in Sorrento II
Partners (a California general partnership with Sierra Pacific Institutional
Properties V formed in 1993), an 18.87% interest in Sierra Creekside Partners (a
California general partnership with Sierra Pacific Development Fund formed in
1994), and a 37.74% interest in Sierra Vista Partners (a California general
partnership with Sierra Pacific Development Fund III formed in 1994).
33
<PAGE>
Sierra Pacific Development Fund II
Notes to Financial Statements
Page nine
The following is a summary of aggregated financial information for all
investments owned by SMMP which are accounted for under the equity method:
CONDENSED BALANCE SHEETS
December 31, December 31,
1996 1995
----------- -----------
ASSETS
Cash and cash equivalents $ 159,369 $ 915,348
Restricted certificate of deposit 0 92,782
Rent receivable 781,284
559,063
Due from affiliates 50,681 0
Income-producing property,
net of accumulated depreciation 15,043,645 17,673,355
Other assets 732,144 831,769
----------- -----------
Total Assets $16,767,123 $20,072,317
=========== ===========
LIABILITIES AND GENERAL PARTNERS' EQUITY
Accrued and other liabilities $ 648,328 $ 519,998
Note payable 5,213,615 8,032,405
----------- -----------
Total Liabilities 5,861,943 8,552,403
----------- -----------
Ground lessors' equity in
income-producing property 3,000,000 3,000,000
----------- -----------
General Partners' equity 7,905,180 8,519,914
----------- -----------
Total Liabilities and General Partners' equity $16,767,123 $20,072,317
=========== ===========
34
<PAGE>
Sierra Pacific Development Fund II
Notes to Financial Statements
Page ten
CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
Revenues:
Rental income $ 2,474,335 $ 2,124,077 $ 2,036,925
Other income 13,968 6,915 9,111
----------- ----------- -----------
Total revenues 2,488,303 2,130,992 2,046,036
----------- ----------- -----------
Expenses:
Operating expenses 1,788,643 2,009,862 2,213,433
Depreciation and amortization 1,461,571 1,438,310 1,303,173
Interest 427,967 691,407 587,893
----------- ----------- -----------
Total expenses 3,678,181 4,139,579 4,104,499
----------- ----------- -----------
Net Loss $(1,189,878) $(2,008,587) $(2,058,463)
=========== =========== ===========
Reference is made to the audited financial statements of Sierra Mira Mesa
Partners, Sierra Vista Partners and Sorrento I Partners included herein.
35
<PAGE>
Sierra Pacific Development Fund II
Notes to Financial Statements
Page eleven
6. NOTES PAYABLE
At December 31, 1996 and 1995, notes payable consisted of the following:
1996 1995
---------- ----------
Mortgage note payable, due in monthly
installments with interest at 10%, collateralized
by certain land and buildings. This note matures
in September 1997. $1,115,540 $1,171,402
Mortgage note payable, due in monthly interest only
payments at 5% collateralized by certain land and
buildings. This note matures in April 2004. 3,000,000 4,014,500
Mortgage note payable, due in monthly installments
with interest at 9% collateralized by certain land and
buildings. This note matures in March 2006. 1,983,454 0
---------- ----------
$6,098,994 $5,185,902
========== ==========
Annual maturities of notes payable as of December 31, 1996, are: $1,139,405 in
1997; $26,103 in 1998; $28,552 in 1999; $31,230 in 2000; $34,160 in 2001; and
$4,839,544 thereafter.
7. PARTNERS' EQUITY
Accrual basis profits and losses resulting from operations of the Partnership
are allocated 99% to the Limited Partners and 1% to the General Partner.
Currently, the Partnership does not meet the criteria for distributing cash to
the General Partner, and it cannot reasonably predict when the criteria will be
met. Accordingly, no accrual basis profits and losses from operations were
allocated to the General Partner.
Upon any sale, refinancing or other disposition of the Partnership's real
properties, allocations and distributions are made after each Limited Partner
has received 100% of his Adjusted Capital Contributions plus a 15% per annum
cumulative return on such invested capital. Any remaining proceeds shall be
distributed 85% to the Limited Partners and 15% to the General Partner.
Distributions of the remaining proceeds to the Limited Partners shall be made in
a manner such that Limited Partners holding Class A Units shall receive
distributions 15% greater than the distributions received by the holders of
Class B Units.
8. LITIGATION
In November 1995, a limited partner of the Partnership filed a lawsuit against
S-P Properties, Inc., the General Partner of the Partnership, among others,
alleging claims of breach of fiduciary duty and breach of contract. The case is
presently in discovery. The Partnership and the General Partner deny any
wrongdoing and intend to vigorously defend against the Plaintiff's claims. The
amount of any liability which might finally exist cannot reasonably be estimated
and no provision for loss has been made in the accompanying financial
statements.
36
<PAGE>
SIERRA MIRA MESA PARTNERS
(A CALIFORNIA GENERAL PARTNERSHIP)
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
37
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
Sierra Mira Mesa Partners
We have audited the accompanying consolidated balance sheets of Sierra Mira Mesa
Partners, a California general partnership, (the "Partnership") as of December
31, 1996 and 1995, and the related consolidated statements of operations,
changes in partners' equity and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sierra Mira Mesa
Partners as of December 31, 1996 and 1995, and the results of its operations and
cash flows for each for the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
February 24, 1997
38
<PAGE>
SIERRA MIRA MESA PARTNERS
(A California General Partnership)
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
December 31, December 31,
1996 1995
------------ -----------
ASSETS
Cash and cash equivalents $ 26,721 $ 1,325,020
Receivables:
Unbilled rent (Notes 1 and 4) 1,186,818 1,021,948
Other 169,241 98,955
Due from affiliates, net (Note 3) 1,536,968 1,830,588
Income-producing property - net of
accumulated depreciation of
$4,819,832 in 1996 and $3,198,509
in 1995 (Notes 1 and 4) 9,449,032 7,059,867
Investment in unconsolidated
joint ventures (Notes 1 and 5) 2,773,176 3,306,143
Other assets (Notes 1, 2 and 3) 1,119,115 1,044,860
------------ -----------
Total Assets $ 16,261,071 $15,687,381
============ ===========
LIABILITIES AND GENERAL PARTNERS' EQUITY
Accrued and other liabilities (Note 2) $ 104,428 $ 62,940
Due to Sierra Pacific Pension
Investors '84 (Note 3) 1,311,300 1,300,000
Notes payable (Note 6) 6,012,512 5,467,368
------------ -----------
Total Liabilities 7,428,240 6,830,308
------------ -----------
Minority interest in consolidated
joint venture (Note 1) (341,689) 0
General Partners' equity
(Notes 1 and 7) 9,174,520 8,857,073
------------ -----------
Total Liabilities and General
Partners' equity $ 16,261,071 $15,687,381
============ ===========
See Accompanying Notes
39
<PAGE>
SIERRA MIRA MESA PARTNERS
(A California General Partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Rental income (Note 1) $ 1,808,673 $ 1,529,497 $ 1,458,990
Interest income 178,726 181,358 292,408
Other income 0 0 83,614
----------- ----------- -----------
Total revenues 1,987,399 1,710,855 1,835,012
----------- ----------- -----------
Expenses:
Operating expenses:
Depreciation and amortization 813,359 586,602 526,253
Property taxes and insurance 53,587 126,078 117,827
Administrative fees (Note 3) 101,142 63,623 45,149
Maintenance and repairs 262,271 201,373 211,374
Management fees (Note 3) 93,780 79,388 101,977
Utilities 138,443 126,769 129,425
Legal and accounting 42,011 20,231 34,940
General and administrative 4,484 3,475 5,787
Salaries and payroll taxes 0 2,151 24,642
Renting expenses 5,128 205 7,144
Other operating expenses 27,747 17,913 12,562
----------- ----------- -----------
Total operating expenses 1,541,952 1,227,808 1,217,080
Interest 559,759 392,088 366,330
----------- ----------- -----------
Total expenses 2,101,711 1,619,896 1,583,410
----------- ----------- -----------
(LOSS) INCOME BEFORE PARTNERSHIP'S SHARE
OF UNCONSOLIDATED JOINT VENTURE LOSSES (114,312) 90,959 251,602
----------- ----------- -----------
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE LOSSES (Note 5) (354,765) (694,095) (491,079)
----------- ----------- -----------
LOSS BEFORE EXTRAORDINARY GAIN (469,077) (603,136) (239,477)
EXTRAORDINARY GAIN ON EXTINGUISHMENT
OF DEBT (Note 6) 1,200,381 0 0
----------- ----------- -----------
INCOME (LOSS) BEFORE MINORITY INTEREST'S
SHARE OF CONSOLIDATED JOINT VENTURE
LOSS 731,304 (603,136) (239,477)
----------- ----------- -----------
MINORITY INTEREST'S SHARE OF CONSOLIDATED
JOINT VENTURE LOSS FROM CONTINUING
OPERATIONS 102,787 0 0
MINORITY INTEREST'S SHARE OF CONSOLIDATED
JOINT VENTURE EXTRAORDINARY GAIN (516,644) 0 0
----------- ----------- -----------
NET INCOME (LOSS) $ 317,447 $ (603,136) $ (239,477)
=========== =========== ===========
</TABLE>
See Accompanying Notes
40
<PAGE>
SIERRA MIRA MESA PARTNERS
(A California General Partnership)
CONSOLIDATED STATEMENTS OF CHANGES IN GENERAL PARTNERS' EQUITY
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
General Partners
---------------------------------------------
Sierra Pacific Sierra Pacific
Development Pension
Fund II Investors '84 Total
----------- ------------- -----------
<S> <C> <C> <C>
General Partners' equity - January 1, 1994 $ 4,978,391 $ 4,783,160 $ 9,761,551
Net loss (122,133) (117,344) (239,477)
Contributions 145,350 139,650 285,000
Distributions (135,150) (129,850) (265,000)
----------- ----------- -----------
General Partners' equity - December 31, 1994 4,866,458 4,675,616 9,542,074
Net loss (307,600) (295,536) (603,136)
Contributions 768,258 1,275,036 2,043,295
Distributions (810,009) (1,315,150) (2,125,160)
----------- ----------- -----------
General Partners' equity - December 31, 1995 4,517,107 4,339,966 8,857,073
Net income 161,898 155,549 317,447
----------- ----------- -----------
General Partners' equity - December 31, 1996 $ 4,679,005 $ 4,495,515 $ 9,174,520
=========== =========== ===========
</TABLE>
See Accompanying Notes
41
<PAGE>
SIERRA MIRA MESA PARTNERS
(A California General Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 317,447 $ (603,136) $ (239,477)
Adjustments to reconcile net income (loss)
to cash provided by (used in) operating activities:
Depreciation and amortization 813,359 586,602 526,253
Gain from extinguishment of debt (1,200,381) 0 0
Undistributed losses of
unconsolidated joint ventures 354,765 694,095 491,079
Minority interest in consolidated
joint venture income 413,857 0 0
(Increase) decrease in rent receivable (164,870) (97,228) 310,013
(Increase) decrease in other receivables (70,286) (98,955) 20,079
Increase in other assets (293,798) (592,548) (151,580)
Increase (decrease) in accrued and other liabilities 12,579 (26,419) 6,449
----------- ----------- -----------
Net cash provided by (used in) operating activities 182,672 (137,589) 962,816
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions (745,134) (45,552) (60,054)
Capital contributions to
unconsolidated joint ventures (824,400) (1,972,826) (2,100,000)
Distributions received from unconsolidated
joint ventures 731,500 488,566 0
----------- ----------- -----------
Net cash used in investing activities (838,034) (1,529,812) (2,160,054)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans to affiliates (4,771) (142,801) 0
Repayments of loans to affiliates 142,801 0 0
Borrowings from affiliates 166,890 1,300,000 0
Repayments of borrowings from affiliates 0 0 1,462,213
Cash contributions from General Partners 0 2,043,295 285,000
Cash distributions 0 (2,125,160) (265,000)
Principal proceeds from notes payable 0 5,500,000 0
Principal payments on notes payable (992,832) (3,612,225) (272,418)
----------- ----------- -----------
Net cash (used in) provided by financing activities (687,912) 2,963,109 1,209,795
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (1,343,274) 1,295,708 12,557
CASH AND CASH EQUIVALENTS - Beginning of year 1,369,995 29,312 16,755
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - End of year $ 26,721 $ 1,325,020 $ 29,312
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $ 580,906 $ 399,521 $ 363,899
=========== =========== ===========
</TABLE>
See Accompanying Notes
42
<PAGE>
SIERRA MIRA MESA PARTNERS
(A CALIFORNIA GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Sierra Mira Mesa Partners ("SMMP"), a California general partnership, was formed
in 1985 between Sierra Pacific Development Fund II ("SPDFII") and Sierra Pacific
Pension Investors '84 ("SPPI'84") to develop and operate the real property known
as Sierra Mira Mesa, an office building, located in San Diego, California. The
property contains 89,560 square feet and is 98% leased at December 31, 1996. At
December 31, 1996 Sierra Pacific Development Fund II's interest in SMMP was 51%;
the remaining 49% interest was owned by Sierra Pacific Pension Investors '84.
S-P Properties, Inc. is the General Partner and manager of SPDFII and SPPI'84.
On December 30, 1994, all of the outstanding stock of TCP, Inc. was sold to
Finance Factors, Inc. TCP, Inc. owns all of the common stock of S-P Properties,
Inc. Finance Factors was a subsidiary of CGS Real Estate Company, Inc., a
national real estate company. In July 1995, Finance Factors, Inc. merged with
Bancor Real Estate Company, Inc., another subsidiary of CGS Real Estate Company,
Inc.
SMMP also holds investments in three other industrial/commercial properties
through its investments in unconsolidated joint ventures. Refer to Note 5 for
additional information.
BASIS OF FINANCIAL STATEMENTS
The Partnership maintains its books and prepares its financial statements in
accordance with generally accepted accounting principles. However, the
Partnership prepares its tax returns on the accrual basis of accounting as
defined by the Internal Revenue Code with adjustments to reconcile book and
taxable income (loss) for differences in the treatment of certain income and
expense items. The accompanying financial statements do not reflect any
provision for federal or state income taxes since such taxes are the obligation
of the individual partners.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
The consolidated financial statements of SMMP include the accounts of SMMP and
Sorrento I Partners, a majority owned joint venture as of December 31, 1996.
Sorrento I Partners was accounted for under the equity method in the prior year.
The financial statements of SMMP for prior years have not been restated as the
consolidation was accounted for as a step acquisition in accordance with
Accounting Research Bulletin No. 51, "Consolidated Financial Statements". All
significant intercompany balances and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid, short-term investments with
original maturities of three months or less.
43
<PAGE>
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page two
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Partnership at December 31, 1996 and 1995
consist of cash and cash equivalents, receivables, due from affiliates, accounts
payable and notes payable. The fair value of cash and cash equivalents,
receivables and accounts payable approximate the carrying value due to the short
term nature of these items. In the opinion of management, the fair value of the
notes payable approximates the carrying value as the interest rate is based on
market rates at December 31, 1996. Management was unable to determine the fair
value of due from affiliates due to the related party nature of this receivable.
INCOME-PRODUCING PROPERTIES
Property and tenant improvements are carried at cost and depreciated on the
straight-line method over the estimated lives of the related assets, ranging
from three to thirty years. Tenant improvements incurred at the initial leasing
of the properties are depreciated over ten years and tenant improvements
incurred at the re-leasing of the properties are depreciated over the life of
the related lease.
Expenditures for repairs and maintenance are charged against income as incurred.
Improvements and major renewals are capitalized. Costs and the related
accumulated depreciation of assets sold or retired are removed from the accounts
in the year of disposal or when fully depreciated and any resulting gain or loss
is reflected in income or deferred income as appropriate.
The Partnership employs a systematic approach in determining whether the value
of income-producing property has been impaired. Prior to 1995, a provision for
loss on a property was established if the appraised value of the property
declined below its book value due to what the General Partner believed to be an
other than temporary condition. A complete appraisal was performed on the
property as of December 31 each year. A complete appraisal was performed on the
property as of December 31, 1994 that indicated an appraised value in excess of
the historical cost basis of the property.
Effective January 1, 1995, the Partnership implemented Statement of Financial
Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" (the "Statement"). The Partnership
regularly evaluates long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable. Future cash flows are estimated and compared to the carrying amount
of the asset to determine if an impairment has occurred. If the sum of the
expected future cash flows is less than the carrying amount of the asset, the
Partnership shall recognize an impairment loss in accordance with the Statement.
No provision was required due to the implementation of this Statement.
Because the determination of fair value is based upon projections of future
economic events such as property occupancy rates, rental rates, operating cost
inflation and market capitalization rates which are inherently subjective, the
amounts ultimately realized at disposition may differ materially from the net
carrying value as of December 31, 1996. The cash flows used to determine fair
value and net realizable value are based on good faith estimates and assumptions
developed by management. Unanticipated events and circumstances may occur and
some assumptions may not materialize; therefore actual results may vary from the
estimates and the variances may be material. The Partnership may provide
additional write-downs which could be material in subsequent years if real
estate markets or local economic conditions change.
INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
The investment in unconsolidated joint ventures is stated at cost and is
adjusted for the Partnership's share in earnings or losses and cash
contributions to or distributions from the joint ventures (equity method).
44
<PAGE>
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page three
OTHER ASSETS
Deferred leasing costs represent costs incurred to lease properties and are
amortized over the life of the related lease.
Deferred loan costs represent costs incurred to obtain financing and are
amortized over the life of the related loan.
RENTAL INCOME AND RENT RECEIVABLE
Rental income is recognized on the straight-line method over the term of the
related operating lease in accordance with the provisions of Statement of
Financial Accounting Standards No. 13, "Accounting for Leases".
Unbilled rent receivable represents the difference between rent recognized on
the straight-line method and actual cash due.
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts, at December 31,
1996 and 1995, is as follows:
1996 1995
---------- ----------
Other assets:
Prepaid expenses $ 24,066 $ 7,314
Deferred loan costs, net of accumulated
amortization of $153,009 in 1996
and $104,005 in 1995 207,187 256,673
Deferred leasing costs, net of accumulated
amortization of $689,001 in 1996 and
$513,563 in 1995 782,199 747,742
Tax impounds 28,936 23,099
Tenant improvement reserves 76,727 10,032
---------- ----------
$1,119,115 $1,044,860
========== ==========
Accrued and other liabilities:
Accounts payable $ 56,711 $ 23,341
Security deposits 2,761 2,761
Accrued expenses 16,125 12,949
Interest payable 28,831 23,889
---------- ----------
$ 104,428 $ 62,940
========== ==========
3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS
In 1994, all of the common stock of TCP, Inc. was purchased by Finance Factors,
Inc. from Carlsberg Management Company ("CMC"). TCP, Inc. owns all of the common
stock of S-P Properties, Inc., the General Partner of the Partnership. CMC
continued to manage the affairs of the Partnership through March 31, 1995.
An affiliate of S-P Properties, Inc. receives a management fee of 5.5% of the
gross rental income collected from the property. This fee amounted to $93,780,
$53,392 and $101,977, respectively, for the years ended December 31, 1996, 1995
and 1994. This fee was recorded as part of the operating expenses of the
property.
45
<PAGE>
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page four
SMMP reimburses an affiliate of S-P Properties, Inc. for expenses incurred by
the affiliate for services provided to SMMP such as accounting, data processing
and similar services. The affiliate was reimbursed $101,142, $51,201 and
$45,149, respectively, for such services for the years ended December 31, 1996,
1995 and 1994. Additionally, SMMP reimbursed an affiliate for construction
supervision costs incurred by the affiliate. For the years ended December 31,
1996, 1995 and 1994, the affiliate received $48,205, $3,374 and $9,595,
respectively, for tenant improvements supervisory costs.
In consideration for services rendered with respect to initial leasing of SMMP's
property, an affiliate of S-P Properties, Inc. is paid initial leasing costs.
For the years ended December 31, 1996 and 1995, these fees amounted to $65,120
and $0, respectively, and were recorded as deferred leasing costs. The affiliate
also received $6,825 in 1994 for leasing supervision costs that were recorded as
part of the operating expenses of the property. No such costs were incurred in
1995 and 1996.
During 1993, SMMP loaned funds to a former affiliate of S-P Properties, Inc. in
the form of demand notes. Such liabilities were assumed by Finance Factors, Inc.
which acquired S-P Properties, Inc. as of December 30, 1994. In July 1995,
Finance Factors, Inc. merged with Bancor Real Estate Company, Inc. who has
assumed the note. The annual interest rate of the loans was variable at bank
prime plus 2-1/4% - 3% with a minimum rate of 9%. The loans totaled $2,360,000
at December 31, 1993 and were reduced to $1,687,787 at December 31, 1994. This
loan was amended effective January 1, 1995 fixing the interest rate at 10%. The
principal balance outstanding at December 31, 1996 is $1,687,787. Interest
receivable related to this note is $169,241 and $98,955 at December 31, 1996 and
1995, respectively.
During 1995, the Partnership made a short-term, non-interest bearing loan to
Sierra Pacific Development Fund II in the amount of $140,000. This loan was
repaid in 1996. In 1996, the Partnership received a short-term, non-interest
bearing loan from SPDFII in the amount of $155,590.
During 1995, an additional $2,801 was loaned to affiliates. This loan was repaid
in 1996. During 1996, the Partnership made a non-interest bearing, short-term
advance to an affiliate in the amount of $4,771. Repayment is expected in 1997.
During 1995 and 1996, the Partnership received non-interest bearing short-term
advances from SPPI'84 of $1,300,000 and $11,300, respectively.
4. INCOME-PRODUCING PROPERTIES
At December 31, 1996 and 1995 the total cost and accumulated depreciation of the
properties are as follows:
1996 1995
------------ ------------
Land $ 3,786,458 $ 2,480,940
Building and improvements 10,482,406 7,777,436
------------ ------------
Total 14,268,864 10,258,376
Accumulated depreciation (4,819,832) (3,198,509)
------------ ------------
Net $ 9,449,032 $ 7,059,867
============ ============
46
<PAGE>
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page five
Future minimum base rental income, under the existing operating leases for the
Sierra Mira Mesa and Sorrento I properties, to be recognized on a straight-line
basis and amounts to be received on a cash basis are as follows:
Year Ending Straight-line Cash
December 31, Basis Basis
------------ ----------- -----------
1997 $ 1,877,171 $ 1,791,010
1998 1,820,361 1,870,272
1999 1,755,058 1,898,605
2000 1,744,767 1,984,598
2001 1,744,767 2,075,968
Thereafter 2,082,836 2,591,325
---------- -----------
Total $11,024,960 $12,211,778
========== ===========
The Partnership relied on two tenants for 91% of 1996 rental income; 81% is from
a state governmental agency associated with workers compensation insurance and
10% is from a tenant in the communications sector.
5. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
SMMP holds the following investments accounted for under the equity method at
December 31, 1996:
o a 26.92% equity interest in Sorrento II Partners ("SIIP"), a joint
venture formed on October 1, 1993 with Sierra Pacific Institutional
Properties V, an affiliate, to develop and operate Sierra Sorrento II,
an industrial building located in San Diego, California. SMMP's
investment in SIIP as of December 31, 1996 and 1995 is $1,078,963 and
$1,286,896, respectively. SMMP's share of the net loss of SIIP for the
three years ended December 31, 1996, 1995, and 1994 is $61,933, $51,897
and $77,364, respectively;
o an 18.87% equity interest in Sierra Creekside Partners ("SCP"), a joint
venture formed on February 1, 1994 with Sierra Pacific Development Fund,
an affiliate, to develop and operate Sierra Creekside, a commercial
office building in San Ramon, California. SMMP's investment in SCP as of
December 31, 1996 and 1995 is $(102,995) and $476,836, respectively.
SMMP's share of the net loss of SCP for the two years ended December 31,
1996 and December 31, 1995 and the eleven months ended December 31, 1994
is $70,232, $96,868 and $83,254, respectively;
o a 37.74% equity interest in Sierra Vista Partners ("SVP"), a joint
venture formed on February 1, 1994 with Sierra Pacific Development Fund
III, an affiliate, to develop and operate Sierra Vista, an industrial
building in Anaheim, California. SMMP's investment in SVP as of December
31, 1996 and 1995 is $1,797,208 and $1,271,308, respectively. SMMP's
share of the net loss of SVP for the two years ended December 31, 1996
and December 31, 1995 and the eleven months ended December 31, 1994 is
$222,600, $173,375 and $164,748, respectively.
47
<PAGE>
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page six
The following is a summary of aggregated financial information for all
investments owned by SMMP which are accounted for under the equity method:
CONDENSED BALANCE SHEETS
December 31, December 31,
1996 1995
----------- -----------
ASSETS
Cash and cash equivalents $ 159,369 $ 915,348
Restricted certificate of deposit 0 92,782
Rent receivable 781,284 559,063
Due from affiliate 50,681 0
Income-producing property,
net of accumulated depreciation 15,043,645 17,673,355
Other assets 732,144 831,769
----------- -----------
Total Assets $16,767,123 $20,072,317
=========== ===========
LIABILITIES AND GENERAL PARTNERS'
EQUITY
Accrued and other liabilities $ 648,328 $ 519,998
Note payable 5,213,615 8,032,405
----------- -----------
Total Liabilities 5,861,943 8,552,403
----------- -----------
Ground lessors' equity in
income-producing property 3,000,000 3,000,000
----------- -----------
General Partners' equity 7,905,180 8,519,914
----------- -----------
Total Liabilities and General
Partners' equity $16,767,123 $20,072,317
=========== ===========
48
<PAGE>
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page seven
CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994
----------- ----------- -----------
Revenues:
Rental income $ 2,474,335 $ 2,124,077 $ 2,036,925
Other income 13,968 6,915 9,111
----------- ----------- -----------
Total revenues 2,488,303 2,130,992 2,046,036
----------- ----------- -----------
Expenses:
Operating expenses 1,788,643 2,009,862 2,213,433
Depreciation and 1,461,571 1,438,310 1,303,173
amortization Interest 427,967 691,407 587,893
----------- ----------- -----------
Total expenses 3,678,181 4,139,579 4,104,499
----------- ----------- -----------
Net Loss $(1,189,878) $(2,008,587) $(2,058,463)
=========== =========== ===========
6. NOTES PAYABLE
1996 1995
---------- ----------
Mortgage note payable, due in monthly
installments with interest at 7.74%,
collateralized by the real property known as
Sierra Mira Mesa. This note matures in
October 2010. $5,262,512 $5,467,368
Mortgage note payable, due in monthly
installments with interest at bank prime plus
2-1/2%, collateralized by the real property
known as Sorrento I. This note was retired in
1996. 0 2,782,863
Mortgage note payable to affiliate, due in
monthly installments with interest at the one
year Treasury rate plus 375 basis points,
collateralized by the real property known as
Sorrento I. This note matures in May 2016. 750,000 0
---------- ----------
$6,012,512 $8,250,231
========== ==========
CGS Real Estate Company, Inc. ("CGS"), an affiliate of the General Partner,
acquired the Sorrento I mortgage note, due in July 1998, and security documents
from the bank in May 1996. In connection with the purchase of the bank note and
security documents by CGS, the Partnership made a principal payment to the bank
of $750,000 and entered into a $750,000 note agreement with CGS (the "CGS
Agreement"). The CGS Agreement, collaterized by real and personal property,
calls 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.
49
<PAGE>
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page eight
At any time upon 120 days written notice to CGS, the Partnership may fully
discharge the note by the payment of an amount equal to $750,000 less the
aggregate amount of principal paid under the note between the date of the CGS
Agreement and the date of payment plus any interest due.
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 the current year of
$1,200,381.
Annual maturities under the Sierra Mira Mesa note and the CGS Agreement as of
December 31, 1996 are: $235,523 in 1997; $254,660 in 1998; $275,356 in 1999;
$297,737 in 2000; $321,943 in 2001; and $4,627,293 thereafter.
7. GENERAL PARTNERS' EQUITY
Accrual basis profits and losses resulting from operations of the Partnership
are allocated 51% to Sierra Pacific Development Fund II and 49% to Sierra
Pacific Pension Investors '84.
50
<PAGE>
SIERRA VISTA PARTNERS
(A CALIFORNIA GENERAL PARTNERSHIP)
AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1996
51
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
Sierra Vista Partners
We have audited the accompanying balance sheets of Sierra Vista Partners, a
California general partnership, (the "Partnership") as of December 31, 1996 and
1995, and the related statements of operations, changes in partners' equity and
cash flows for the years in the period ended December 31, 1996. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sierra Vista Partners as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
February 24, 1997, except for Note 5, which the date is April 10, 1997
52
<PAGE>
SIERRA VISTA PARTNERS
(A California General Partnership)
BALANCE SHEETS
December 31, 1996 and 1995
December 31, December 31,
1996 1995
---------- ----------
ASSETS
Cash and cash equivalents $ 97,439 $ 16,171
Restricted certificate of deposit (Note 5) 0 92,782
Receivables:
Unbilled rent (Notes 1 and 4) 97,448 59,150
Billed rent (Note 1) 88,445 24,654
Other 1,261 0
Due from affiliates (Note 3) 4,770 0
Income-producing property - net of
accumulated depreciation and
valuation allowance of $4,401,334 in 1996
and $3,944,100 in 1995 (Notes 1 and 4) 5,827,882 5,700,014
Other assets (Notes 1 and 2) 154,690 167,196
---------- ----------
Total Assets $6,271,935 $6,059,967
========== ==========
LIABILITIES AND GENERAL PARTNERS' EQUITY
Accrued and other liabilities (Note 2) $ 225,556 $ 172,263
Note payable (Note 5) 3,410,795 3,410,795
---------- ----------
Total Liabilities 3,636,351 3,583,058
---------- ----------
General Partners' equity (Notes 1 and 6) 2,635,584 2,476,909
---------- ----------
Total Liabilities and General
Partners' equity $6,271,935 $6,059,967
========== ==========
See Accompanying Notes
53
<PAGE>
SIERRA VISTA PARTNERS
(A California General Partnership)
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1996, 1995 and
the Period February 1, 1994 (date of inception) to December 31, 1994
1996 1995 1994
----------- ---------- -----------
REVENUES:
Rental income (Note 1) $ 735,569 $ 615,088 $ 622,310
----------- ---------- -----------
Total revenues 735,569 615,088 622,310
----------- ---------- -----------
EXPENSES:
Operating expenses:
Depreciation and amortization 545,989 471,498 433,180
Maintenance and repairs 122,293 98,716 72,103
Property taxes and insurance 69,754 93,917 89,531
Administrative fees (Note 3) 73,047 66,842 56,545
Utilities 60,183 57,938 49,662
Legal and accounting 29,846 39,779 49,442
Management fees (Note 3) 38,873 38,035 38,163
Salaries and payroll taxes 53,276 34,287 33,163
General and administrative 5,860 33,220 4,351
Renting expenses 4,764 20,221 34,243
Provision for loss (Note 1) 0 0 300,000
Other operating expenses 57,303 50,775 30,214
----------- ---------- -----------
Total operating expenses 1,061,188 1,005,228 1,190,597
Interest 264,206 311,218 322,244
----------- ---------- -----------
Total expenses 1,325,394 1,316,446 1,512,841
----------- ---------- -----------
Net loss $ (589,825) $ (701,358) $ (890,531)
=========== ========== ===========
See Accompanying Notes
54
<PAGE>
SIERRA VISTA PARTNERS
(A California General Partnership)
STATEMENTS OF CHANGES IN GENERAL PARTNERS' EQUITY
For the Years Ended December 31, 1996, 1995 and
the Period February 1, 1994 (date of inception) to December 31, 1994
<TABLE>
<CAPTION>
General Partners
-------------------------------------------------
Sierra Pacific Sierra
Development Mira Mesa
Fund III Partners Total
----------- ----------- -----------
<S> <C> <C> <C> <C>
Contributions at inception, February 1, 1994 $ 2,459,367 $ 870,000 $ 3,329,367
Net loss (725,783) (164,748) (890,531)
----------- ----------- -----------
General Partners' equity - December 31, 1994 1,733,584 705,252 2,438,836
Net loss (527,983) (173,375) (701,358)
Contributions 0 796,356 796,356
Distributions 0 (56,925) (56,925)
----------- ----------- -----------
General Partners' equity - December 31, 1995 1,205,601 1,271,308 2,476,909
Net loss (367,225) (222,600) (589,825)
Contributions 0 748,500 748,500
Distributions 0 0 0
----------- ----------- -----------
General Partners' equity - December 31, 1996 $ 838,376 $ 1,797,208 $ 2,635,584
=========== =========== ===========
</TABLE>
See Accompanying Notes
55
<PAGE>
SIERRA VISTA PARTNERS
(A California General Partnership)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1995 and
the Period February 1, 1994 (date of inception) to December 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(589,825) $(701,358) $(890,531)
Adjustments to reconcile net loss
to cash used in operating activities:
Depreciation and amortization 545,989 471,498 433,180
Provision for loss 0 0 300,000
(Increase) decrease in rent receivable (102,089) (27,601) 24,604
Increase in other receivables (1,261) 0 0
Increase in other assets (68,979) (114,779) (92,215)
Increase (decrease) in accrued and other liabilities 53,293 59,735 (55,550)
--------- --------- ---------
Net cash used in operating activities (162,872) (312,505) (280,512)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions (592,372) (322,099) (53,157)
Payment for restricted certificate of deposit 0 (92,782) 0
Release of restricted certificate of deposit 92,782 0 0
--------- --------- ---------
Net cash used in investing activities (499,590) (414,881) (53,157)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from General Partner 748,500 796,356 870,000
Distributions to General Partner 0 (56,925) 0
Payments to affiliates (4,770) 0 (509,000)
Principal payments on note payable 0 0 (23,205)
--------- --------- ---------
Net cash provided by financing activities 743,730 739,431 337,795
--------- --------- ---------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 81,268 12,045 4,126
CASH AND CASH EQUIVALENTS - Beginning of period 16,171 4,126 0
--------- --------- ---------
CASH AND CASH EQUIVALENTS - End of period $ 97,439 $ 16,171 $ 4,126
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 240,000 $ 326,927 $ 348,332
========= ========= =========
</TABLE>
In February 1994, Sierra Pacific Development Fund III contributed the net assets
in the Sierra Vista Property to Sierra Vista Partners in exchange for an equity
interest. This transaction is a non cash item not reflected in the above
statements of cash flows.
See Accompanying Notes
56
<PAGE>
SIERRA VISTA PARTNERS
(A CALIFORNIA GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Sierra Vista Partners (the "Partnership") was organized on February 1, 1994 as a
California general partnership between Sierra Pacific Development Fund III
("SPDFIII") and Sierra Mira Mesa Partners ("SMMP") to develop and operate the
real property known as Sierra Vista (the "Property"), an industrial building
located in Anaheim, California. The Property includes four buildings comprising
102,855 rentable square feet and is 91% occupied at December 31, 1996. At
December 31, 1996, the Partnership is 62.26% owned by SPDFIII and 37.74% owned
by SMMP.
S-P Properties, Inc. is the General Partner of SPDFIII and of SMMP's general
partners, Sierra Pacific Development Fund II ("SPDFII") and Sierra Pacific
Pension Investors '84 ("SPPI'84"). On December 30, 1994, all of the outstanding
stock of TCP, Inc. was sold to Finance Factors, Inc. TCP, Inc. owns all of the
common stock of S-P Properties, Inc. Finance Factors was a subsidiary of CGS
Real Estate Company, Inc., a national real estate company. In July 1995, Finance
Factors, Inc. merged with Bancor Real Estate Company, Inc., another subsidiary
of CGS Real Estate Company, Inc.
BASIS OF FINANCIAL STATEMENTS
The Partnership maintains its books and prepares its financial statements in
accordance with generally accepted accounting principles. However, the
Partnership prepares its tax returns on the accrual basis of accounting as
defined by the Internal Revenue Code with adjustments to reconcile book and
taxable income (loss) for differences in the treatment of certain income and
expense items. The accompanying financial statements do not reflect any
provision for federal or state income taxes since such taxes are the obligation
of the individual partners.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid, short-term investments with
original maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Partnership at December 31, 1996 and 1995
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. The fair value of the note payable
approximates the carrying value based on market rates at December 31, 1996. The
fair value of due from affiliates can not be determined due to the related party
nature of this receivable.
57
<PAGE>
Sierra Vista Partners
Notes to Financial Statements
Page two
INCOME-PRODUCING PROPERTY
Property and tenant improvements are carried at cost and depreciated on the
straight-line method over the estimated lives of the related assets, ranging
from one to thirty years. Tenant improvements incurred at the initial leasing of
the property are depreciated over ten years and tenant improvements incurred at
the re-leasing of the property are depreciated over the life of the related
lease.
Expenditures for repairs and maintenance are charged against income as incurred.
Improvements and major renewals are capitalized. Costs and the related
accumulated depreciation of assets sold or retired are removed from the accounts
in the year of disposal or when fully depreciated and the resulting gain or loss
is reflected in income or deferred income as appropriate.
The Partnership employs a systematic approach in determining whether the value
of income-producing property has been impaired. Prior to 1995, a provision for
loss on a property was established if the appraised value of the property
declined below its book value due to what the General Partner believed to be an
other than temporary condition. A complete appraisal was performed on the
property as of December 31 each year. A provision for loss on the property was
established as the appraised value of the property declined below book value
because of depressed real estate market conditions, which the General Partner
believed to be other than temporary.
Effective January 1, 1995, the Partnership implemented Statement of Financial
Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" (the "Statement"). The Partnership
regularly evaluates long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable. Future cash flows are estimated and compared to the carrying amount
of the asset to determine if an impairment has occurred. If the sum of the
expected future cash flows is less than the carrying amount of the asset, the
Partnership shall recognize an impairment loss in accordance with the Statement.
No additional provision was required with the implementation of this Statement.
Because the determination of fair value is based upon projections of future
economic events such as property occupancy rates, rental rates, operating cost
inflation and market capitalization rates which are inherently subjective, the
amounts ultimately realized at disposition may differ materially from the net
carrying value as of December 31, 1996. The cash flows used to determine fair
value and net realizable value are based on good faith estimates and assumptions
developed by management. Unanticipated events and circumstances may occur and
some assumptions may not materialize; therefore actual results may vary from the
estimates and the variances may be material. The Partnership may provide
additional write-downs which could be material in subsequent years if real
estate markets or local economic conditions change.
OTHER ASSETS
Deferred leasing costs represent costs incurred to lease properties and are
amortized over the life of the related lease.
Deferred loan costs represent costs incurred to obtain financing and are
amortized over the life of the related loan.
RENTAL INCOME AND RENT RECEIVABLE
Rental income is recognized on the straight-line method over the term of the
related operating lease in accordance with the provisions of Statement of
Financial Accounting Standards No. 13, "Accounting for Leases".
Rent receivable consists of (a) unbilled rent - the difference between rent
recognized on the straight-line method and actual cash due; and (b) billed rent
- - rent due but not yet received.
58
<PAGE>
Sierra Vista Partners
Notes to Financial Statements
Page three
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts, at December 31,
1996 and 1995, is as follows:
1995 1996
-------- --------
Other assets:
Prepaid expenses $ 34,686 $ 60,669
Deferred loan costs, net of accumulated
amortization of $5,035 in
1996 and $44,033 in 1995 315 12,647
Deferred leasing costs, net of accumulated
amortization of $121,924 in
1996 and $91,276 in 1995 119,689 93,880
-------- --------
$154,690 $167,196
======== ========
Accrued and other liabilities:
Accounts payable $106,400 $ 92,776
Accrued expenses 8,543 3,121
Security deposits 82,248 51,088
Interest payable 20,000 20,000
Other 8,365 5,278
-------- --------
$225,556 $172,263
======== ========
3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS
In 1994, all of the common stock of TCP, Inc. was purchased by Finance Factors,
Inc. from Carlsberg Management Company ("CMC"). TCP, Inc. owns all of the common
stock of S-P Properties, Inc., the General Partner of the Partnership. CMC
continued to manage the affairs of the Partnership through March 31, 1995.
An affiliate of S-P Properties, Inc. may receive a management fee of 6% of the
gross rental income collected from the property. Management fees paid to
affiliates for the years ended December 31, 1996 and 1995 and for the period
ended December 31, 1994 were $38,873, $23,615 and $38,163, respectively.
An affiliate of S-P Properties, Inc. is entitled to reimbursement for expenses
incurred by the affiliate for services provided to the Partnership such as
accounting, legal, data processing and similar services. The affiliate was
reimbursed $73,047, $55,468 and $56,545 for such services for the years ended
December 31, 1996 and 1995 and for the period ended December 31, 1994,
respectively. Additionally, the Partnership reimbursed the affiliate for
construction supervision costs incurred by the affiliate. For the years ended
December 31, 1996 and 1995 and for the period ended December 31, 1994 the
affiliate received $7,782, $20,576 and $4,917, respectively, for tenant
improvements supervisory costs.
In consideration for services rendered with respect to initial leasing of
Partnership properties, an affiliate of S-P Properties, Inc. is paid initial
leasing costs. For the years ended December 31, 1996 and 1995 these fees
amounted to $91,660 and $46,838, respectively, and were recorded as deferred
leasing costs. For the period ended December 31, 1994, the affiliate also
received $7,125 for leasing supervision costs that were recorded as part of
renting expenses of the properties. No such costs were incurred in 1995 and
1996.
59
<PAGE>
Sierra Vista Partners
Notes to Financial Statements
Page four
During 1996, the Partnership made a short-term, non-interest bearing loan to an
affiliate. Repayment is expected in 1997.
4. INCOME-PRODUCING PROPERTIES
At December 31, 1996 and 1995 the total cost and accumulated depreciation of the
property are as follows:
1996 1995
------------ -----------
Land $ 2,878,269 $ 2,878,269
Building and improvements 7,350,947 6,765,845
------------ -----------
Total 10,229,216 9,644,114
Accumulated depreciation (2,801,334) (2,344,100)
Valuation allowance (1,600,000) (1,600,000)
------------ -----------
Net $ 5,827,882 $ 5,700,014
============ ===========
Future minimum base rental income, under the existing operating leases for the
Property, to be recognized on a straight-line basis and amounts to be received
on a cash basis are as follows:
Straight-line Cash
Year Ending December 31, Basis Basis
------------------------ ---------- ----------
1997 $ 642,629 $ 665,999
1998 479,876 514,002
1999 283,518 295,742
2000 146,843 159,909
2001 82,608 92,906
Thereafter 24,651 29,015
---------- ----------
Total $1,660,125 $1,757,573
========== ==========
No tenant or group of mutually controlled tenants generated 10% or more of 1996
rental income.
60
<PAGE>
Sierra Vista Partners
Notes to Financial Statements
Page five
5. NOTE PAYABLE
In August 1995, the Partnership's non-recourse note payable, secured by the
Property, was restructured. The restructure extended the note maturity from May
1996 to February 1997 and increased the collateral of real and personal property
to include a certificate of deposit in the amount of $92,782. The assignment of
the certificate of deposit provides for the release of this collateral when the
property achieves a 90% occupancy rate. The property is 91% occupied at December
31, 1996. The annual interest rate was reduced from 3% above Bank of America's
prime rate to a fixed rate of 8% retroactive to June 1995. The required monthly
interest payments were reduced from $31,700 to $20,000 effective August 1995.
On April 10, 1997, the Partnership's note was paid off. On the same date, the
Partnership entered into a new loan agreement in the amount of $3,050,000. This
loan, which is secured by the Sierra Vista property, bears interest at 9.375 %
and calls for monthly principal and interest payments of $25,807.02 on the first
day of each month. Such payments shall continue until May 2007, when the
indebtedness is due in full. There is a 1% premium for prepayment of this note.
6. GENERAL PARTNERS' EQUITY
Each partner's initial percentage interest in the capital contributed to the
Partnership was as follows: SPDFIII - 81.5% and SMMP - 18.5%. Said percentage
interest for each partner is to be adjusted January 1st of each fiscal year
during the term of the Partnership, commencing January 1, 1995, in the event of
any capital contributions made by or capital distributions made to any of the
partners during the preceding fiscal year so that the partners' percentage
interest shall be equal to the percentage share of the partners' aggregate net
cash contributions from the inception of the Partnership. Partnership profits
and losses, distributions and voting rights are allocated based upon the
calculated percentage interests.
SMMP made additional cash contributions of $270,000, $796,356 and $748,500 and
received distributions of $0, $56,925 and $0 during 1994, 1995 and 1996,
respectively. Accordingly, as of January 1, 1996, SMMP's interest in the
Partnership was increased to 37.74% and SPDFIII's interest in the Partnership
was decreased to 62.26%.
Under the terms of the Partnership joint venture agreement, SMMP will receive
preferential cash distributions of available "Distributable Funds" from the
operation of the Partnership or sale of its property to the extent of its
capital contributions. Additional Distributable Funds are allocable to SPDFIII
to the extent of the deemed fair value of its property contribution, and the
remainder to SPDFIII and SMMP in proportion to their respective equity
interests.
61
<PAGE>
SORRENTO I PARTNERS
(A CALIFORNIA GENERAL PARTNERSHIP)
AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1995
62
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
Sierra Sorrento I Partners
We have audited the accompanying balance sheets of Sorrento I Partners, a
California general partnership, (the "Partnership") as of December 31, 1995 and
1994, and the related statements of operations, changes in partners' equity
(deficit) and cash flows for each of the two years ended December 31, 1995 and
the period April 1, 1993 (date of inception) to December 31, 1993. 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, 1995 and 1994, and the results of its operations and its cash flows
for each of the two years ended December 31, 1995 and the period April 1, 1993
(date of inception) to December 31, 1993 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 19, 1996
63
<PAGE>
SORRENTO I PARTNERS
(A General Partnership)
BALANCE SHEETS
December 31, 1995 and 1994
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 44,975 $ 9,631
Receivables:
Billed rent (Notes 1 and 4) 0 5,880
Income-producing property - net of accumulated
depreciation of $1,057,537 in 1995 and
$948,204 in 1994 (Notes 1, 4 and 5) 2,218,597 2,333,966
Other assets (Notes 1 and 2) 63,751 76,622
----------- -----------
Total Assets $ 2,327,323 $ 2,426,099
=========== ===========
LIABILITIES AND GENERAL PARTNERS' EQUITY (DEFICIT)
Accrued and other liabilities (Note 2) $ 28,904 $ 40,202
Note payable (Note 5) 2,782,863 2,731,010
----------- -----------
Total Liabilities 2,811,767 2,771,212
----------- -----------
Geaneral Partners' equity (deficit) (Notes 1 and 6) (484,444) (345,113)
----------- -----------
Total Liabilities and General Partners' equity (deficit) $ 2,327,323 $ 2,426,099
=========== ===========
</TABLE>
See Accompanying Notes
64
<PAGE>
SORRENTO I PARTNERS
(A General Partnership)
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1995 and 1994 and the
Period April 1, 1993 (date of inception) to December 31, 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Rental income (Note 1) $ 0 $ 351,691 $ 235,288
Interest income 0 0 1,441
--------- --------- ---------
Total revenues 0 351,691 236,729
--------- --------- ---------
Expenses:
Operating expenses:
Depreciation and amortization 136,089 154,876 121,649
Property taxes and insurance 39,208 43,250 43,435
Administrative fees (Note 3) 40,354 51,575 40,424
Maintenance and repairs 31,500 47,420 42,085
Management fees (Note 3) 0 21,101 14,117
Utilities 16,175 2,443 6,614
Legal and accounting 26,090 37,425 9,160
General and administrative 29,041 8,322 1,454
Salaries and payroll taxes 1,561 9,663 9,933
Renting expenses 0 6,380 404
Other operating expenses 8,980 6,094 6,414
--------- --------- ---------
Total operating expenses 328,998 388,549 295,689
Interest 310,575 264,274 181,885
--------- --------- ---------
Total costs and expenses 639,573 652,823 477,574
--------- --------- ---------
NET LOSS $(639,573) $(301,132) $(240,845)
========= ========= =========
</TABLE>
See Accompanying Notes
65
<PAGE>
SORRENTO I PARTNERS
(A General Partnership)
STATEMENTS OF CHANGES IN GENERAL PARTNERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1995 and 1994 and the
Period April 1, 1993 (date of inception) to December 31, 1993
<TABLE>
<CAPTION>
General Partners
------------------------------------------
Sierra Pacific Sierra
Development Mira Mesa
Fund III Partners Total
--------- --------- --------
<S> <C> <C> <C>
Contributions at inception, April 1, 1993 $(246,972) $ 383,836 $ 136,864
Net loss (108,308) (132,537) (240,845)
--------- --------- --------
General Partners' equity (deficit) - December 31, 1993 (355,280) 251,299 (103,981)
Net loss (135,419) (165,713) (301,132)
Contributions 0 60,000 60,000
--------- --------- --------
General Partners' equity (deficit) - December 31, 1994 (490,699) 145,586 (345,113)
Net loss (264,847) (374,726) (639,573)
Contributions 0 500,242 500,242
--------- --------- --------
General Partners' equity (deficit) - December 31, 1995 $(755,546) $ 271,102 $(484,444)
========= ========= ========
</TABLE>
See Accompanying Notes
66
<PAGE>
SORRENTO I PARTNERS
(A General Partnership)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1995 and 1994 and the
Period April 1, 1993 (date of inception) to December 31, 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(639,573) $(301,132) $(240,845)
Adjustments to reconcile net income
to cash used in operating activities:
Depreciation and amortization 136,089 154,876 121,649
Decrease (increase) in rent receivable 5,880 (1,645) (4,235)
Increase in other assets (7,849) (2,538) (15,661)
Increase (decrease) in accrued and other liabilities 74,411 74,913 (16,148)
--------- --------- ---------
Net cash used in operating activities (431,042) (75,526) (155,240)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions 0 0 (6,037)
--------- --------- ---------
Net cash used in investing activities 0 0 (6,037)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions by the General Partners 500,242 60,000 482,836
Principal payments on note payable (33,856) (59,275) (237,127)
--------- --------- ---------
Net cash provided by financing activities 466,386 725 245,709
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 35,344 (74,801) 84,432
CASH AND CASH EQUIVALENTS - Beginning of period 9,631 84,432 0
--------- --------- ---------
CASH AND CASH EQUIVALENTS - End of period $ 44,975 $ 9,631 $ 84,432
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 223,811 $ 197,852 $ 204,710
========= ========= =========
</TABLE>
During 1995 and 1994, accrued interest was added to the note payable principal
balance in the amounts of $85,709 and $41,389, respectively. These are noncash
transactions not reflected in the above statement of cash flows.
During 1993, Sierra Pacific Development Fund III contributed the Sorrento I
Property and all related encumbrances to the newly formed joint venture of
Sorrento I Partners. The fair value of the property represented a 44.97%
interest. The net book value of the property transferred was a negative
$345,972. This is a noncash transaction not reflected in the above statement of
cash flows.
See Accompanying Notes
67
<PAGE>
SORRENTO I PARTNERS
(A GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Sorrento I Partners ("SIP") was formed 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 for a 55.03% interest and SPDFIII contributed the property and all
associated encumbrances for a 44.97% interest in the Partnership. The
partnership agreement calls for a recalculation of the percentage ownership
interest each year on January 1st to account for the portion of Partner's
aggregate capital contributions since inception through the prior year. During
1994, SMMP contributed an additional $60,000, increasing their percentage
interest to 58.59% as of December 31, 1995 and decreasing SPDFIII's interest to
41.41%. During 1995, SMMP contributed $500,242 increasing their percentage to
75.06% and decreasing SPDFIII's interest to 24.94% effective January 1, 1996.
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. S-P Properties, Inc. was owned by Finance Factors, Inc., a
subsidiary of the national real estate company, CGS Real Estate Company, Inc. In
July 1995, Finance Factors, Inc. merged with Bancor Real Estate Company, Inc.,
another subsidiary of CGS Real Estate Company, Inc.
The building's sole tenant in 1994 occupied 100% of the space and vacated in
September 1994. The building was vacant throughout 1995; however, the property
has been leased effective February 1996 to a single tenant for the term from
March 1996 through April 2003. The principal business of the new tenant is
research and development in the communications sector.
BASIS OF FINANCIAL STATEMENTS
The Partnership maintains its books and prepares its financial statements in
accordance with generally accepted accounting principles. However, the
Partnership prepares its tax returns on the accrual basis of accounting as
defined by the Internal Revenue Code with adjustments to reconcile book and
taxable income (loss) for differences in the treatment of certain income and
expense items. The accompanying financial statements do not reflect any
provision for federal or state income taxes since such taxes are the obligation
of the individual partners.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid, short-term investments with
original maturities of three months or less.
68
<PAGE>
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 properties are depreciated over ten years and tenant improvements
incurred at the re-leasing of the properties are depreciated over the life of
the related lease.
Expenditures for repairs and maintenance are charged against income as incurred.
Improvements and major renewals are capitalized. Costs and the related
accumulated depreciation of assets sold or retired are removed from the accounts
in the year of disposal or when fully depreciated and any resulting gain or loss
is reflected in income or deferred income as appropriate.
The Partnership employs a systematic approach in determining whether the value
of income-producing property has been impaired. Prior to 1995, a provision for
loss on a property was established if the appraised value of the property
declined below its book value due to what the General Partner believed to be an
other than temporary condition. A complete appraisal was performed on the
property as of December 31 each year. A complete appraisal was performed on the
property as of December 31, 1994 that indicated an appraised value in excess of
the historical cost basis of the property.
Effective January 1, 1995, the Partnership implemented Statement of Financial
Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" (the "Statement"). The Partnership
regularly evaluates long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable. Future cash flows are estimated and compared to the carrying amount
of the asset to determine if an impairment has occurred. If the sum of the
expected future cash flows is less than the carrying amount of the asset, the
Partnership shall recognize an impairment loss in accordance with the Statement.
No provision was required in 1995 due to the implementation of this Statement.
Because the determination of fair value is based upon projections of future
economic events such as property occupancy rates, rental rates, operating cost
inflation and market capitalization rates which are inherently subjective, the
amounts ultimately realized at disposition may differ materially from the net
carrying value as of December 31, 1995. The cash flows used to determine fair
value and net realizable value are based on good faith estimates and assumptions
developed by management. Unanticipated events and circumstances may occur and
some assumptions may not materialize; therefore actual results may vary from the
estimates and the variances may be material. The Partnership may provide
additional write-downs which could be material in subsequent years if real
estate markets or local economic conditions change.
OTHER ASSETS
Deferred loan costs represent costs incurred to obtain financing and are
amortized over the life of the related loan.
RENTAL INCOME AND RENT RECEIVABLE
Rental income is recognized on the straight-line method over the term of the
related operating lease in accordance with the provisions of Statement of
Financial Accounting Standards No. 13, "Accounting for Leases".
Billed rent receivable represents rent due but not yet received.
69
<PAGE>
Sorrento I Partners
Notes to Financial Statements
Page three
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts, at December 31,
1995 and 1994, is as follows:
1995 1994
------- -------
Other assets:
Prepaid expenses $ 2,600 $ 6,091
Deferred loan costs, net of accumulated
amortization of $125,175 in 1995 and
$104,456 in 1994 53,664 70,473
Tax impounds 7,429 0
Deposits 58 58
------- -------
$63,751 $76,622
======= =======
Accrued Liabilities
Accounts payable $ 2,815 $ 0
Accrued expenses 0 15,168
Interest payable 26,089 25,034
------- -------
$28,904 $40,202
======= =======
3. GENERAL AND RELATED PARTY TRANSACTIONS
In 1994, all of the common stock of S-P Properties, Inc. was purchased by
Finance Factors, Inc. from Carlsberg Management Company ("CMC"). CMC continued
to manage the affairs of the Partnership through March 31, 1995.
An affiliate of S-P Properties, Inc. receives a management fee of 6% of the
gross rental income collected from the property. This fee amounted to $21,101
and $14,117, respectively, for the year ended December 31, 1994 and for the
period ended December 31, 1993. This fee was recorded as part of the operating
expenses of the property. No such costs were incurred in 1995.
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 $31,001, $51,575 and $40,424,
respectively, for such services for the years ended December 31, 1995 and 1994
and for the period ended December 31, 1993. Additionally, SIP reimbursed an
affiliate for construction supervision costs incurred by the affiliate. For the
year ended December 31, 1994 and for the period ended December 31, 1993, the
affiliate received $1,188 and $315, respectively, for tenant improvements
supervisory costs that were recorded as part of the operating expenses of the
property. No such costs were incurred in 1995.
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 year ended December 31, 1994 and for the period ended December 31, 1993,
these fees amounted to $1,261, and $8,844, respectively, and were recorded as
deferred leasing costs. The affiliate also received in 1994 and 1993, $6,201,
and $366, respectively, for leasing supervision costs that were recorded as part
of the operating expenses of the property. No such costs were incurred in 1995.
70
<PAGE>
Sorrento I Partners
Notes to Financial Statements
Page four
4. INCOME-PRODUCING PROPERTIES
At December 31, 1995 and 1994 the total cost and accumulated depreciation of the
property are as follows:
1995 1994
----------- -----------
Land $ 1,305,518 $ 1,305,518
Building and improvements 1,970,616 1,976,652
----------- -----------
Total 3,276,134 3,282,170
Accumulated depreciation (1,057,537) (948,204)
----------- -----------
Net $ 2,218,597 $ 2,333,966
=========== ===========
The Property was vacant at December 31, 1995. On February 19, 1996, management
of the Property entered into a lease for all of the square footage of Sierra
Sorrento I. This lease, which provides for early occupancy on March 1, 1996,
commences May 1, 1996 and expires April 30, 2003. The base rent called for under
this lease is $21,891 per month for the first 24 months, which shall be
increased on the first day of the 25th, 49th and 73rd months by 6% over the base
rent paid per month for the previous 24 month period. This lease contains an
option to extend for an additional five years.
5. NOTE PAYABLE
Real and personal property are collateral for the non-recourse note payable. The
annual interest rate of the note is 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 is July 1998. At December 31, 1995, the interest rate was 11.25%. This loan
was modified effective May 1, 1995 to include a discounted payoff option. This
option allows for a one time option of paying off the note for $1,500,000
between April and October of 1996 provided there have been no events of default.
If the payoff option is not exercised, the annual maturities of the note payable
as of December 31, 1995 are: $31,348 in 1996; $35,062 in 1997; and $2,716,453 in
1998.
In the opinion of management, the carrying value of the note payable at the
current interest rate approximates fair value at December 31, 1995 based on the
indexing of the note's interest rate to market rates.
71
<PAGE>
Sorrento I Partners
Notes to Financial Statements
Page five
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.
72
<PAGE>
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.
73
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM SIERRA PACIFIC DEVELOPMENT FUND II DECEMBER 31, 1996 FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 22,962
<SECURITIES> 0
<RECEIVABLES> 359,676
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,242,238
<PP&E> 14,428,604
<DEPRECIATION> 3,222,155
<TOTAL-ASSETS> 20,229,858
<CURRENT-LIABILITIES> 574,648
<BONDS> 6,098,994
0
0
<COMMON> 0
<OTHER-SE> 13,556,216
<TOTAL-LIABILITY-AND-EQUITY> 20,229,858
<SALES> 1,778,871
<TOTAL-REVENUES> 2,128,491
<CGS> 0
<TOTAL-COSTS> 1,392,640
<OTHER-EXPENSES> 632,513
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 464,880
<INCOME-PRETAX> (199,644)
<INCOME-TAX> 0
<INCOME-CONTINUING> (548,350)
<DISCONTINUED> 0
<EXTRAORDINARY> 348,706
<CHANGES> 0
<NET-INCOME> (199,644)
<EPS-PRIMARY> (2.30)
<EPS-DILUTED> (2.30)
</TABLE>
