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