SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission file number : 0-14276
SIERRA PACIFIC DEVELOPMENT FUND III
(A CALIFORNIA LIMITED PARTNERSHIP)
State of California 33-0043953
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
5850 San Felipe, Suite 500
Houston, Texas 77057
- ------------------------------- ---------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (713) 706-6271
--------------------------------------
5850 San Felipe, Suite 120
Houston, Texas
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(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12 (b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12 (g) of the Act:
60,000 LIMITED PARTNERSHIP UNITS
Title of class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Limited Partners for the Year Ended December 31, 1996 is
incorporated by reference into Parts II and III
<PAGE>
PART I
ITEM 1. BUSINESS
(a.) GENERAL DEVELOPMENT OF BUSINESS. Sierra Pacific Development Fund III (the
"Partnership") is a California limited partnership that was formed in June 1984
for the purpose of acquiring, developing, and operating commercial and
industrial real estate.
In February 1985, the Partnership acquired land in San Diego, California as the
first step in the development of Sierra Sorrento I. This 43,100 square foot
industrial/warehouse project was completed in February 1986. In October 1986,
the Partnership acquired land in Anaheim, California for the development of
Sierra Vista. This Property, a 102,855 square foot industrial/office project,
was completed in April 1988.
In April 1993, the Partnership created a California general partnership
(Sorrento I Partners) with Sierra Mira Mesa Partners ("SMMP") to facilitate cash
contributions by SMMP for the continued development and operation of the Sierra
Sorrento I property. The Partnership contributed the Sierra Sorrento I property
and SMMP contributed cash ($944,077 through December 31, 1995) in exchange for a
75.06% interest in Sorrento I Partners. SMMP made additional contributions of
$1,551,100 and received distributions of $35,900 in 1996. The percentage
interests of the Partnership and Sierra Mira Mesa Partners are to be adjusted
every January 1st during the term of Sorrento I Partners, beginning January 1,
1995. Accordingly, as of January 1, 1997, the Partnership's interest in Sorrento
I Partners will be reduced to 11.31%, and SMMP's interest will be increased to
88.69%. Because the Partnership owns less than 50% of the Sierra Sorrento I
property, it records its interest in Sorrento I Partners as an investment in an
unconsolidated joint venture using the equity method of accounting. Thus, the
Sierra Sorrento I property is not reflected as an asset on the Partnership's
balance sheet nor is the debt on the property reflected in the balance sheet.
In February 1994, the Partnership formed a joint venture with SMMP known as
Sierra Vista Partners to facilitate cash contributions by SMMP for the continued
development and operation of the Sierra Vista property. Through December 31,
1995, SMMP had contributed $1,606,661 cash, net, for a 37.74% interest in Sierra
Vista Partners. SMMP made additional contributions of $748,500 in 1996. The
percentage interests of the Partnership and Sierra Mira Mesa Partners are to be
adjusted every January 1st during the term of Sierra Vista Partners, beginning
January 1, 1995. Accordingly, as of January 1, 1997 the Partnership's interest
in Sierra Vista Partners will be reduced to 52.95%, and SMMP's interest will be
increased to 47.05%.
At December 31, 1996, the Partnership's remaining real estate is a 62.26% equity
interest in the Sierra Vista property and a 24.94% minority interest in the
Sierra Sorrento I property.
Audited financial statements of Sorrento I Partners are included in the Annual
Report to the Limited Partners attached as an Exhibit.
(b.) NARRATIVE DESCRIPTION OF BUSINESS. The Partnership owns and operates Sierra
Vista, an industrial/office project in Anaheim, California.
There is significant competition in the industrial/office building rental market
in the Partnership's trade area. A 1994 appraisal identified six buildings in
the immediate area that offered space and amenities comparable to Sierra Vista.
(c.) COMPARISON OF CURRENT ACTIVITIES TO THOSE PROPOSED AT THE INITIATION OF
THE PARTNERSHIP. In the Partnership's prospectus dated September 4, 1984, the
investment objectives were described as follows:
2
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"The Partnership is a California limited partnership which was organized to
invest in commercial and industrial real properties. The Partnership may invest
in both properties which are to be developed or are under development or
construction and properties which are newly-constructed or have operating
histories. The Partnership's objectives are: (i) to preserve, protect, and
return the Partnership's invested capital; (ii) to attempt to maximize capital
gains through long-term appreciation in the value of its real estate
investments; (iii) to generate sufficient cash from operations to make
distributions of Available Cash to the Limited Partners; (iv) to provide federal
income tax deductions so that all or a portion of any Available Cash distributed
to the Limited Partners may be treated as a return of capital for tax purposes
and, therefore, may not represent taxable income; and (v) to attempt to sell the
Partnership's real estate investments for cash after an approximate three to
five year holding period. No assurance can be given that these objectives will
be attained or that the Partnership's capital will not decrease."
Operations of the Partnership through 1996 have been consistent with the intent
of the original prospectus in that the Partnership has invested in real estate
projects that had the potential for capital gains, preservation of capital and
providing distributable cash flow partially sheltered from Federal income tax.
However, the Partnership and its real estate have been adversely affected by the
Tax Reform Act of 1986, aggressive lending by banks that resulted in commercial
real estate overbuilding, and subsequent severe recessions. The original
intention to sell the Partnership's real estate investments after a five year
holding period was delayed indefinitely. As of December 31, 1996, the
Partnership had paid cash distributions of $11.19 for each $250 unit investment
and remaining partners' equity was computed at $13.60 per unit. Thus, if the
Partnership were to be liquidated at the end of 1996 at book value, each $250
investment would have returned a total of $24.79.
The General Partner's goal is to continue operating the Sierra Vista property
until such time as rental rates return to the level necessary to support new
office building development. At that time, the Property may be sold at a price
substantially greater than current book value.
ITEM 2. PROPERTIES
During 1996, the Partnership owns (fee simple) a 62.26% interest in Sierra
Vista, an industrial property located in Anaheim, California. The property
includes four buildings comprising 102,855 rentable square feet and is 91%
occupied at December 31, 1996. The average effective annual rent per square foot
at December 31, 1996 is $8.40. The principal businesses of the tenants are
sales, marketing, and financial services.
During 1996, the Partnership also has a 24.94% interest in an industrial
property known as Sorrento I in San Diego, California through a California
general partnership with Sierra Mira Mesa Partners.
(See Item 1. Business for discussion of percentage ownership changes.)
SIERRA VISTA - ANAHEIM, CALIFORNIA
SUMMARY OF SIGNIFICANT TENANTS
None of the forty-four tenants at December 31, 1996 occupy more than ten percent
of the rentable square footage of the building. Five tenants are on month to
month leases and thirty-nine have leases that are scheduled to expire during the
next seven years as illustrated below.
SUMMARY OF LEASES BY EXPIRATION
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Year of expiration ................. 1997 1998 1999 2000 2001 2002 2003 Total
Number of tenants .................. 9 11 11 3 4 0 1 39
Percent of total tenants ........... 21% 25% 25% 7% 9% 0% 2% 89%
Total area (square feet) ........... 16,504 27,656 24,296 4,860 9,790 0 1,753 84,859
Annual rent ........................ $155,651 $203,053 $194,771 $47,619 $108,254 $0 $14,791 $724,139
Percent gross annual rent .......... 20% 26% 25% 6% 14% 0% 2% 93%
</TABLE>
3
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DEPRECIABLE PROPERTY Reference is made to Schedule III of the Form 10-K.
REAL ESTATE TAXES The property's real estate tax obligation
during 1996 was approximately 1.1% of assessed value or
$58,519.
INSURANCE In the opinion of the Partnership's management, the
property is adequately covered by insurance.
ENCUMBRANCES The property is encumbered by a mortgage lien in favor of
Olen Commercial Realty with a principal balance of
$3,410,795 at December 31, 1996. The original note was
dated August 29, 1989 with a face amount of $3,500,000 and
a maturity date of December 31, 1990. This note has been
modified and extended numerous times. It was last
restructured on August 1, 1995. This agreement extended
the maturity date from May 1996 to February 1997 and
increased the collateral of real and personal property to
include a certificate of deposit in the original amount of
approximately $92,000. The assignment of the certificate
of deposit provides for the release of this collateral
when the property achieves a 90% occupancy rate. The
property is 91% occupied at December 31, 1996. The annual
interest rate was reduced from 3% above Bank of America's
prime rate to a fixed rate of 8% retroactive to June 1995.
The required monthly payments were reduced from $31,700 to
$20,000 effective August 1995 with the last payment
estimated at $3,443,000. There are no prepayment penalties
associated with this note.
On April 10, 1997, the Olen note was paid off. On the same
date, the Partership entered into a loan agreement with
First Union National Bank in the amount of $3,050,000.
This loan, which is secured by the Sierra Vista property,
bears interest at 9.375% and calls for monthly principal
and interest payments of $25,807.02 on the first day of
each month. Such payments shall continue until May 2007,
when the indebtedness is due in full. There is a 1%
premium for prepayment of this note.
SORRENTO I - SAN DIEGO, CALIFORNIA
Sorrento I is an industrial building with 43,100 square feet of rentable space.
One tenant leased the entire 43,100 rentable square feet of Sorrento I in 1996.
Rental income of $23,636 per month is recognized under this lease, which expires
in April 2003. The effective annual rent per square foot at December 31, 1996 is
$6.58. The principal business of the new tenant is research and development in
the communications sector.
DEPRECIABLE PROPERTY
Sorrento I, San Diego, California
Office Building - Income-Producing Property
<TABLE>
<CAPTION>
Tenant
Land Buildings Improvements Total
<S> <C> <C> <C> <C>
Historical Cost & Tax Basis $ 1,305,518 $ 1,342,683 $ 1,063,783 $ 3,711,984
Accumulated Depreciation (421,749) (748,621) (1,170,370)
---------------- ---------------- -------------- ---------------
Net Carrying Value $ 1,305,518 $ 920,934 $ 315,162 $ 2,541,614
================ ================ ============== ===============
Depreciation Method Not Applicable Straight-line Straight-line
Depreciable Life Not Applicable 10-30 Years 7-10 years
</TABLE>
4
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REAL ESTATE TAXES The real estate tax obligation for 1996 is
approximately 1.13% of the assessed value or $28,324.
INSURANCE In the opinion of management, the property is adequately
covered by insurance.
ENCUMBRANCES Sorrento I Partners ("SIP") had a non-recourse bank note
payable with an original principal balance of $3,000,000
collateralized by the Sorrento I property. The annual
interest rate of the note was variable at bank prime plus
2-1/2% with a minimum rate of 9% and maximum rate of
15-1/2%. The original maturity of the note was July 1998
and the note included a discounted payoff option of
$1,500,000.
CGS Real Estate Company, Inc. ("CGS"), an affiliate of the
General Partner, acquired the note and security documents
from the bank in May 1996. In connection with the purchase
of the bank note and security documents by CGS, SIP made a
principal payment to the bank of $750,000 and entered into
a $750,000 note agreement with CGS (the "CGS Agreement").
The CGS Agreement, collaterized by real and personal
property, calls for monthly interest payments through
December 1996 and monthly principal and interest payments
thereafter until maturity on May 31, 2016. The interest
rate is fixed at 9.34% per annum for the first year of the
note and will thereafter be the one year Treasury rate
plus 375 basis points.
At any time upon 120 days written notice to CGS, SIP may
fully discharge the note by the payment of an amount equal
to $750,000 less the aggregate amount of principal paid
under the note between the date of the CGS Agreement and
the date of payment plus any interest due.
ITEM 3. LEGAL PROCEEDINGS
The Partnership is not involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
5
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERS' EQUITY AND RELATED MATTERS
As of December 31, 1996, the number of security holders is as follows:
Number of
Number Record
of Units Holders
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Limited Partners 36,521 867
============= ============
These securities are all of the same class, namely, limited partnership
interests (units) and were sold pursuant to a registration statement filed under
the Securities Act of 1933, as amended. The total offering was 60,000 units at
$250.00 per unit.
No broker or dealer currently makes a market in the units of the Partnership.
Accordingly, there are no published price or trading volume figures available
for the units. The units have been transferred on an extremely limited extent
from time-to-time since the inception of the Partnership; however, the market
for the units is highly restricted and sporadic, especially in view of the
investor suitability requirements imposed on new purchasers by the various state
blue sky laws and the restrictions on transfer contained in the Partnership
Agreement.
The Partnership has neither paid nor declared any cash or other distributions to
the General or Limited Partners during the two most recent fiscal years. There
are no contractual or other restrictions on the Partnership's ability to make
such distributions.
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data for the Partnership is filed by reference to the
Annual Report to the Limited Partners attached as an Exhibit.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of 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, 1996, the Partnership owns a 62.26%
interest in Sierra Vista Partners, which operates the Sierra Vista property. In
addition, the Partnership holds a 24.94% interest in Sorrento I Partners
("SIP"), which operates the Sorrento I property.
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Results of Operations:
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995.
Revenues increased by $120,000, or 20%, due to an increase in occupancy and
rental rates. Occupancy increased from 66% at December 31, 1995 to 91% at
December 31, 1996. Management embarked on an aggressive program of leasing space
during the year that resulted in this increased occupancy. The weighted-average
effective annual rent per square foot, on an accrual basis, at December 31, 1996
is $8.40 compared to $8.03 at December 31, 1995.
Operating expenses increased by $56,000, or 6%, primarily due to increased
depreciation and amortization expenses and higher maintenance and repairs due to
additional tenant improvements and costs associated with the increased
occupancy. This increase was partially offset by reduced property taxes and
insurance expenses and by a decrease in general and administrative costs due to
expense cutting measures implemented by management.
Interest expense decreased by $47,000, or 15%, due to the restructuring of the
note payable in August 1995. The annual interest rate on the note was reduced
from 3% above Bank of America's prime rate to a fixed rate of 8% retroactive to
June 1995.
The Partnership share of income (loss) from its investment in SIP was $414,000
for the year ended December 31, 1996 compared to ($265,000) for the year ended
December 31, 1995. SIP exercised a discounted payoff option on its note payable
in May 1996. SIP recorded an extraordinary gain of $1,200,000 in connection with
this transaction. Furthermore, Sorrento I Partners entered into a lease with a
tenant for all of the square footage of the Sorrento I property in 1996. The
property, which was vacant throughout 1995, recorded rental income of $189,000
in 1996 as a result of this new tenant.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994.
Revenues decreased by $65,000, or 10%, principally as the result of a reduction
in rent rates on new leases. The weighted-average effective annual rent per
square foot, on an accrual basis, at December 31, 1995 was $8.03 compared to
$8.89 at December 31, 1994. This decrease is primarily caused by favorable
rental rates given to new tenants as an incentive to enter into new leases.
Occupancy decreased during the year from 76% to 66% following the loss of three
major tenants. Operating expenses decreased by $242,000, or 19%, primarily due
to the recording of a provision for loss in 1994 as the appraised value of the
Sierra Vista property was less than the recorded book value of the property.
Effective January 1, 1995, the Partnership implemented Statement of Financial
Accounting Standards No. 121 "Accounting for Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of". No additional provision was required
with the implementation of this Statement.
Interest expense decreased by $36,000, or 10%, due to the restructuring of the
note in August 1995.
The Partnership's share of loss from investment in SIP increased by $129,000, or
96%, due to the vacancy of the Sorrento I Property throughout 1995. This
property was fully occupied by a single tenant through September 1994. While
operating expenses for the property were largely unchanged from 1994 to 1995, no
income was recorded in 1995. On February 19, 1996, the Partnership entered into
a lease for all of the square footage of Sierra Sorrento I.
Liquidity and Capital Resources:
The Partnership used cash of $163,000 in operating activities during 1996. Cash
of $749,000 was received from Sierra Mira Mesa Partners ("SMMP") during the
year. As of December 31, 1996, the Partnership is in an illiquid position. Total
cash and billed receivables amount to $186,000 compared to $226,000 of accrued
and other liabilities. Significant capital expenditures were required in 1996
for tenant improvements and leasing commissions for the Sierra Vista property as
a result of the increased occupancy.
One tenant leased the entire 43,100 rentable square feet of the Sorrento I
Property in 1996. This lease commenced May 1, 1996 and expires April 30, 2003.
The base rent called for under this lease is $21,891 per month for the first 24
months, which shall be increased in subsequent periods. The lease contains an
option to extend for an additional five years.
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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"). This transaction resulted in a
$1,200,000 gain for Sorrento I Partners. At the current one year Treasury rate,
the CGS Agreement calls for monthly principal and interest payments of $6,974,
which is significantly less than the $28,570 called for under the bank note
payable.
Management expects the Sorrento I property to generate positive cash flow in
1997 as a result of the new lease and new payment terms on the debt.
Sierra Vista Partners and Sorrento I Partners were formed, in part, to provide
the projects with a source of cash for tenant improvements and leasing
commissions. As required, the Partnership's joint venture partner (SMMP) either
advances or contributes cash to meet the Partnership's requirements. During
1996, SMMP contributed $749,000 to Sierra Vista Partners. SMMP has adequate
resources to make the necessary advances during the foreseeable future.
The Partnership's primary capital requirement will be for the construction of
new tenant space and compliance with the Americans with Disablilites Act or
other yet unknown changes in building codes. These requirements will be funded
from operations and the Partnership's joint venture partner, if needed.
Inflation:
The Partnership's long-term leases contain provisions designed to mitigate the
adverse impact of inflation on its results from operations. Such provisions may
include escalation clauses related to Consumer Price Index increases.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and independent auditors' report are
incorporated by reference to the Annual Report to the Limited Partners attached
as an Exhibit.
1. Independent Auditors' Report
2. Consolidated Balance Sheets - December 31, 1996 and 1995
3. Consolidated Statements of Operations - for the years ended December
31, 1996, 1995 and 1994
4. Consolidated Statements of Changes in Partners' Equity - from June
5, 1984 (Inception of Partnership) to December 31, 1993 and for the
years ended December 31, 1996, 1995 and 1994
5. Consolidated Statements of Cash Flows - for the years ended December
31, 1996, 1995 and 1994
6. Notes to Consolidated Financial Statements
7. Audited financial statements and related footnotes of Sorrento I
Partners
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None
8
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Registrant is a California Limited Partnership and has no officers or
directors.
S-P Properties, Inc., a California corporation, is the General Partner of the
Registrant. In December 1994, Finance Factors, Inc., a subsidiary of CGS Real
Estate Company, Inc., purchased the common stock of TCP, Inc. TCP, Inc. owns all
of the common stock of S-P Properties, Inc. In July 1995, Finance Factors, Inc.
merged with Bancor Real Estate Company, Inc., another subsidiary of CGS Real
Estate Company, Inc. CGS Real Estate Company, Inc. and its affiliates are
engaged in real estate management, leasing, ownership, and sales. The companies
own or manage more than ten million square feet of commercial real estate in
Texas, Arizona, Colorado, California and the Carolinas.
The executive officers and directors of S-P Properties, Inc. are:
APPROXIMATE
NAME POSITION AGE TIME IN OFFICE
- --------------------------------------------------------------------------------
Thomas N. Thurber President and Director 46 2 years
Dawson L. Davenport Vice President 41 2 years
Steven M. Speier Secretary/Treasurer and Director 46 2 years
William J. Carden Assistant Secretary/Treasurer
and Director 52 2 years
Thomas N. Thurber - President and Director, S-P Properties, Inc. Mr. Thurber is
a Certified Public Accountant who began his career with Arthur Andersen & Co. in
1972. In 1979, he joined a major publicly traded real estate development firm
(Daon) where he became Controller for U.S. Operations. Subsequently, Mr. Thurber
served as Director of Real Estate for a developer of retail properties, and
Chief Financial Officer of a trust with significant investments in commercial
real estate. Mr. Thurber also serves as a director of Property Secured
Investments, Inc. Mr. Thurber holds a bachelors degree in accounting from
Florida State University.
Dawson L. Davenport - Vice President, S-P Properties, Inc. Mr. Davenport is the
founder of WD Real Estate Services, a full service property management firm that
became part of the Banc Commercial family of companies in 1992. Mr. Davenport
has been responsible for the management, development and rehabilitation of
substantial commercial, industrial, retail, and residential projects during the
past seventeen years. Mr. Davenport specializes in leasing and turning around
distressed properties.
Steven M. Speier - Secretary/Treasurer and Director, S-P Properties, Inc. Mr.
Speier is a Certified Public Accountant who, after spending two years in public
accounting, went into the banking industry in 1975. During his sixteen year
banking career, Mr. Speier managed a real estate loan portfolio of approximately
$1.5 billion secured by properties throughout the United States. Mr. Speier
brings to S-P Properties, Inc. a broad real estate background that includes
management, leasing, and disposition of all categories of commercial real
estate. Mr. Speier also serves as a director of IDM Corporation. Mr. Speier is a
licensed real estate broker and has a masters degree in business administration
from Grand Valley State University in Michigan.
William J. Carden - Assistant Secretary/Treasurer and Director, S-P Properties,
Inc. Mr. Carden is the founder and President of CGS Real Estate Company, Inc.,
which owns over one million square feet of commercial real estate. Mr. Carden
founded DVM Properties, Inc. in 1974 which concentrated on rehabilitation of
retail, office, industrial, and commercial real estate. Mr. Carden is a former
Director of Bay Financial, a New York Stock Exchange company, and currently
serves as a director of Property Secured Investments, Inc. and IDM Corporation.
9
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There have been no events under any bankruptcy act, no criminal proceedings, and
no judgments or injunctions material to the evaluation of the ability and
integrity of any director or officer during the past five years.
ITEM 11. MANAGEMENT REMUNERATION
The Registrant is a California Limited Partnership and has no officers or
directors. No options to purchase securities of the Registrant have been granted
to any person.
In accordance with the terms of the Partnership Agreement, certain affiliates of
the General Partner receive real estate brokerage commissions in connection with
the leasing of properties by the Partnership 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 6% of the gross rental income collected
from the property to Banc Commercial California (BCCA). These fees for the year
ended December 31, 1996 were $38,873. 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 $73,047 during the year
ended December 31, 1996. The Partnership also reimburses BCCA for construction
supervision costs. The Partnership paid $7,782 to BCCA for tenant improvement
supervisory costs in 1995. In consideration for services rendered with respect
to initial leasing of Partnership properties, BCCA is paid initial leasing
costs. For the year ended December 31, 1996 a total of $91,660 was paid for
initial leasing costs. Bancor and BCCA 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.
10
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. EXHIBITS
1. Annual Report to the Limited Partners
2. Exhibit Number 27 - Financial Data Schedule
B. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules and the report of the
independent auditors thereon are included herein:
1. Schedule II - Valuation and Qualifying Accounts and Reserves - for the
years ended December 31, 1996, 1995 and 1994
2. Schedule III - Real Estate and Accumulated Depreciation - December 31,
1996
All other schedules are omitted as they either are not required or are not
applicable, or the required information is set forth in the financial
statements and notes thereto.
C. REPORTS ON FORM 8-K
None
11
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SIERRA PACIFIC DEVELOPMENT FUND III
a California Limited Partnership
S-P PROPERTIES, INC.
General Partner
Date: March 31, 1997 /S/THOMAS N. THURBER
- -------------------- --------------------
Thomas N. Thurber President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: March 31, 1997 /S/THOMAS N. THURBER
- -------------------- --------------------
Thomas N. Thurber President and Director S-P
Properties, Inc.
Date: March 31, 1997 /S/WILLIAM J. CARDEN
- -------------------- --------------------
William J. Carden
Assistant Secretary/Treasurer and Director
S-P Properties, Inc.
Date: March 31, 1997 /S/MICHELE E. JOHNSON
- -------------------- --------------------
Michele E. Johnson
Chief Accounting Officer
S-P Properties, Inc.
12
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INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
To the Partners of
Sierra Pacific Development Fund III
We have audited the consolidated financial statements of Sierra Pacific
Development Fund III, a California limited partnership, (the "Partnership") as
of December 31, 1996 and 1995, and for each of the three years in the period
ended December 31, 1996 and have issued our report thereon dated February 24,
1997, except for Note 6, which the date is April 10, 1997. Such consolidated
financial statements and report are included in your 1996 Annual Report to the
Limited Partners and are incorporated herein by reference. Our audits also
included the financial statement schedules of Sierra Pacific Development Fund
III, listed in Item 14. These financial statement schedules are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Houston, Texas
February 24, 1997, except for Note 6, which the date is April 10, 1997
13
<PAGE>
SCHEDULE II - FORM 10-K
SIERRA PACIFIC DEVELOPMENT FUND III
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31, 1996, 1995 and 1994
Income-
Producing
Properties
----------
Allowance for loss - January 1, 1994 ............. $1,300,000
Provision charged to costs
and expenses (1) ............................ 300,000
----------
Allowance for loss - December 31, 1994 ........... 1,600,000
Provision charged to costs
and expenses (1) ............................ 0
----------
Allowance for loss - December 31, 1995 ........... 1,600,000
Provision charged to costs
and expenses (1) ........................... 0
----------
Allowance for loss - December 31, 1996 ........... $1,600,000
==========
(1) See Notes 1 and 4 to the consolidated financial statements incorporated by
reference to the Annual Report to the Limited Partners attached as an
Exhibit.
14
<PAGE>
SCHEDULE III - FORM 10-K
SIERRA PACIFIC DEVELOPMENT FUND III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Initial Cost Gross Amount at
to Partnership (1) Improvements which carried at close of period
------------------------ Capitalized -----------------------------------------------
Encumb- Improve- After Acquis- Improve- Total
Description rances Land ments ition (2) Land ments (3)(4)(5)(6)
- ----------- ------ ---- ----- --------- ---- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
INDUSTRIAL BUILDING -
INCOME -PRODUCING:
Sierra Vista (4)
Anaheim, CA $3,410,795 $2,878,269 $ 7,396,808 $ 2,878,269 $ 7,350,947 $ 10,229,216
Accumulated Date Date Depreciation
Depreciation (6) Constructed Acquired Life
---------------- ----------- -------- ----
Sierra Vista (4)
Anaheim, CA $2,801,334 4/88 10/86 1-30 yrs.
</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) On February 1, 1994, the property was transferred to a joint venture,
Sierra Vista Partners. The Partnership has an equity interest of 62.26% and
Sierra Mira Mesa Partners, an affiliate, has a 37.74% equity interest at
December 31, 1996.
(5) A valuation allowance of $1,600,000 was established as the appraised value
of the property declined below book value. See Notes 1 and 4 to the
consolidated financial statements incorporated by reference to the Annual
Report to the Limited Partners attached as an Exhibit.
(6) Reconciliation of total real estate carrying value and accumulated
depreciation for the three years ended December 31, 1996 is as follows:
Total Real Estate Accumulated
Carrying Value Depreciation
----------- ------------
Balance - January 1, 1994 $ 9,307,449 $ 1,587,451
Additions during the year 53,157 394,607
----------- ------------
Balance - December 31, 1994 9,360,606 1,982,058
Additions during the year 322,099 400,633
Deductions:
Write off of fully depreciated assets (38,591) (38,591)
----------- ------------
Balance - December 31, 1995 9,644,114 2,344,100
Additions During the year 592,372 464,504
Deductions:
Write off of fully depreciated assets (7,270) (7,270)
----------- ------------
Balance - December 31, 1996 $10,229,216 $ 2,801,334
=========== ============
15
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND III
(A California Limited Partnership)
SELECTED FINANCIAL DATA
For the Years Ended December 31, 1996, 1995, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
REVENUES .................................... $ 735,569 $ 615,088 $ 679,669 $ 757,032 $ 1,039,247
OPERATING EXPENSES:
Total ..................................... 1,061,188 1,005,228 1,247,668 1,354,674 1,236,110
Per dollar of revenues .................... 1.44 1.63 1.84 1.79 1.19
INTEREST EXPENSE:
Total ..................................... 264,206 311,218 347,716 411,619 598,574
Per dollar of revenues .................... 0.36 0.51 0.51 0.54 0.57
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS:
Total ..................................... (470,012) (792,830) (886,386) (1,117,569) (795,437)
General Partner ........................... 0 0 0 0 0
Limited Partners .......................... (470,012) (792,830) (886,386) (1,117,569) (795,437)
Per unit (1) .............................. (12.87) (21.71) (24.27) (30.60) (21.78)
CASH USED IN
OPERATING ACTIVITIES ...................... (162,872) (312,505) (282,318) (333,264) (26,053)
CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES ...................... (499,590) (414,881) (53,157) 79,365 (178,515)
CASH PROVIDED BY
FINANCING ACTIVITIES ...................... 743,730 739,431 334,795 253,812 50,859
TOTAL ASSETS ................................ 6,271,935 6,059,967 5,962,159 6,602,678 10,163,579
PARTNERS' EQUITY:
Total ..................................... 496,687 450,055 1,242,885 2,129,271 3,246,840
General Partner ........................... 0 0 0 0 0
Limited Partners .......................... 496,687 450,055 1,242,885 2,129,271 3,246,840
LIMITED PARTNERS' EQUITY -
PER UNIT (1) .............................. 13.60 12.32 34.03 58.30 88.90
INCOME-PRODUCING PROPERTIES:
Number .................................... 1 1 1 1 2
Cost ...................................... 10,229,216 9,644,114 9,360,606 9,307,449 12,563,947
Less: Accumulated depreciation ............ (2,801,334) (2,344,100) (1,982,058) (1,587,451) (1,909,145)
Valuation allowance ................. (1,600,000) (1,600,000) (1,600,000) (1,300,000) (1,000,000)
Net book value ............................ 5,827,882 5,700,014 5,778,548 6,419,998 9,654,802
INVESTMENT IN UNCONSOLIDATED
JOINT VENTURE ............................. (341,689) (755,546) (490,699) (355,280) N/A
NOTE PAYABLE - Related to income-
producing property ........................ 3,410,795 3,410,795 3,410,795 3,437,000 6,542,212
MINORITY INTEREST IN CONSOLIDATED
JOINT VENTURE ............................. 1,797,208 1,271,308 705,252 N/A N/A
DISTRIBUTIONS PER UNIT (1) .................. 0 0 0 0 0
</TABLE>
N/A = Not applicable nor available
(1) The net loss, limited partners' equity and distributions per unit are based
upon the limited partnership units outstanding at the end of the year,
36,521 in all years. The cumulative cash distributions per limited
partnership unit from inception to December 31, 1996 equal $11.19.
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
Sierra Pacific Development Fund III
We have audited the accompanying consolidated balance sheets of Sierra Pacific
Development Fund III, a California limited partnerhsip, (the "Partnership") as
of December 31, 1996 and 1995, and the related consolidated statements of
operations, changes in partners' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sierra Pacific
Development Fund III as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
February 24, 1997, except for Note 6, which the date is April 10, 1997
17
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND III
(A California Limited Partnership)
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
December 31, December 31,
1996 1995
---------- ----------
ASSETS
Cash and cash equivalents ........................ $ 97,439 $ 16,171
Restricted certificate of deposit (Note 6) ....... 0 92,782
Receivables:
Unbilled rent (Notes 1 and 4) ................ 97,448 59,150
Billed rent (Note 1) ......................... 88,445 24,654
Other ........................................ 1,261 0
Due from affiliates (Note 3) ..................... 4,770 0
Income-producing property - net of
accumulated depreciation and
valuation allowance of $4,401,334 in 1996
and $3,944,100 in 1995 (Note 4) ............... 5,827,882 5,700,014
Other assets (Notes 1, 2 and 3) .................. 154,690 167,196
---------- ----------
Total Assets ..................................... $6,271,935 $6,059,967
========== ==========
LIABILITIES AND PARTNERS' EQUITY
Accrued and other liabilities (Note 2) ........... $ 225,556 $ 172,263
Note payable (Note 6) ............................ 3,410,795 3,410,795
Investment in unconsolidated
joint venture (Notes 1 and 5) .................. 341,689 755,546
---------- ----------
Total Liabilities ................................ 3,978,040 4,338,604
---------- ----------
Minority interest in consolidated
joint venture (Note 4) ........................ 1,797,208 1,271,308
---------- ----------
Partners' equity (Notes 1 and 7):
General Partner ................................ 0 0
Limited Partners:
60,000 units authorized,
36,521 issued and
outstanding .................................. 496,687 450,055
---------- ----------
Total Partners' equity ........................... 496,687 450,055
---------- ----------
Total Liabilities and Partners' equity .......... $6,271,935 $6,059,967
========== ==========
See Accompanying Notes
18
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND III
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Rental income (Note 1) ......................................... $ 735,569 $ 615,088 $ 679,669
----------- ----------- -----------
Total revenues ...................................... 735,569 615,088 679,669
----------- ----------- -----------
EXPENSES:
Operating expenses:
Depreciation and amortization ................................ 545,989 471,498 472,133
Maintenance and repairs ...................................... 122,293 98,716 72,103
Property taxes and insurance ................................. 69,754 93,917 97,555
Administrative fees (Note 3) ................................. 73,047 66,842 56,545
Utilities .................................................... 60,183 57,938 49,938
Legal and accounting ......................................... 29,846 39,779 42,148
Management fees (Note 3) .................................... 38,873 38,035 40,968
Salaries and payroll taxes ................................... 53,276 34,287 36,029
General and administrative ................................... 5,860 33,220 14,548
Renting expenses ............................................. 4,764 20,221 34,243
Provision for loss (Note 1) .................................. 0 0 300,000
Other operating expenses ..................................... 57,303 50,775 31,458
----------- ----------- -----------
Total operating expenses .................................... 1,061,188 1,005,228 1,247,668
Interest .................................................... 264,206 311,218 347,716
----------- ----------- -----------
Total expenses ....................................... 1,325,394 1,316,446 1,595,384
----------- ----------- -----------
LOSS BEFORE PARTNERSHIP'S SHARE OF
UNCONSOLIDATED JOINT VENTURE LOSS ............................. (589,825) (701,358) (915,715)
----------- ----------- -----------
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE LOSS FROM CONTINUING
OPERATIONS (Note 5) ........................................... (102,787) (264,847) (135,419)
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE EXTRAORDINARY GAIN (Note 5) ..................... 516,644 0 0
----------- ----------- -----------
LOSS BEFORE MINORITY INTEREST'S SHARE
OF CONSOLIDATED JOINT VENTURE LOSS ............................ (175,968) (966,205) (1,051,134)
----------- ----------- -----------
MINORITY INTEREST'S SHARE OF
CONSOLIDATED JOINT VENTURE LOSS (Note 4) ...................... 222,600 173,375 164,748
----------- ----------- -----------
NET INCOME (LOSS) ................................................ $ 46,632 $ (792,830) $ (886,386)
=========== =========== ===========
Per limited partnership unit (Note 1):
Loss before extraordinary gain ................................ $ (12.87) $ (21.71) $ (24.27)
Extraordinary gain ............................................ 14.15 0 0
----------- ----------- -----------
Net income (loss) ................................................ $ 1.28 $ (21.71) $ (24.27)
=========== =========== ===========
</TABLE>
See Accompanying Notes
19
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND III
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
From June 5, 1984 (Inception of Partnership) to December 31, 1993
and for the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Limited Partners Total
----------------------------- General Partners'
Per Unit Total Partner Equity
------- ----------- ----------- -----------
<S> <C> <C> <C>
Proceeds from sale of
partnership units .................................. $250.00 $ 9,222,500 $ 9,222,500
Underwriting commissions
and other organization expenses .................... (37.00) (1,364,985) (1,364,985)
Repurchase of 369 partnership units .................. (0.18) (85,005) (85,005)
Cumulative net income (loss)
(to December 31, 1993) ............................. (143.33) (5,234,392) $ 21,522 (5,212,870)
Cumulative distributions
(to December 31, 1993) ............................. (11.19) (408,847) (21,522) (430,369)
------- ----------- --------- -----------
Partners' equity - January 1, 1994 ................... 58.30 2,129,271 0 2,129,271
Net loss ............................................. (24.27) (886,386) (886,386)
------- ----------- --------- -----------
Partners' equity - December 31, 1994 ................. 34.03 1,242,885 0 1,242,885
Net loss ............................................. (21.71) (792,830) (792,830)
------- ----------- --------- -----------
Partners' equity - December 31, 1995 ................. 12.32 450,055 0 450,055
Net income ........................................... 1.28 46,632 46,632
------- ----------- --------- -----------
Partners' equity - December 31, 1996 ................. $ 13.60 $ 496,687 $ 0 $ 496,687
======= =========== ========= ===========
</TABLE>
See Accompanying Notes
20
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND III
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ....................................................... $ 46,632 $(792,830) $(886,386)
Adjustments to reconcile net loss
to cash used in operating activities:
Depreciation and amortization ......................................... 545,989 471,498 472,133
Provision for loss .................................................... 0 0 300,000
Partnership's share of unconsolidated
joint venture (income) loss ......................................... (413,857) 264,847 135,419
Minority interest in consolidated
joint venture loss .................................................. (222,600) (173,375) (164,748)
(Increase) decrease in rent receivable ................................ (102,089) (27,601) 6,744
(Increase) decrease in other receivables .............................. (1,261) 0 320
Increase in other assets .............................................. (68,979) (114,779) (86,201)
Increase (decrease) in accrued and other liabilities .................. 53,293 59,735 (59,599)
--------- --------- ---------
Net cash used in operating activities ................................. (162,872) (312,505) (282,318)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions ......................................... (592,372) (322,099) (53,157)
Payment for restricted certificate of deposit ........................... 0 (92,782) 0
Release of restricted certificate of deposit ............................ 92,782 0 0
--------- --------- ---------
Net cash used in investing activities ................................... (499,590) (414,881) (53,157)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from minority investor .................................... 748,500 796,356 870,000
Distributions to minority investor ...................................... 0 (56,925) 0
Payments to affiliates .................................................. (4,770) 0 (509,000)
Principal payments on note payable ...................................... 0 0 (26,205)
--------- --------- ---------
Net cash provided by financing activities ........................... 743,730 739,431 334,795
--------- --------- ---------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS .............................................. 81,268 12,045 (680)
CASH AND CASH EQUIVALENTS - Beginning of year ............................ 16,171 4,126 4,806
--------- --------- ---------
CASH AND CASH EQUIVALENTS - End of year ................................... $ 97,439 $ 16,171 $ 4,126
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest .................................. $ 240,000 $ 326,927 $ 340,780
========= ========= =========
</TABLE>
See Accompanying Notes
21
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND III
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Sierra Pacific Development Fund III (the "Partnership") was organized on June 5,
1984 in accordance with the provisions of the California Uniform Limited
Partnership Act to acquire, develop and operate certain commercial and
industrial real properties. S-P Properties, Inc. is the General Partner and
manager of the Partnership. On December 30, 1994, all of the outstanding stock
of TCP, Inc. was sold to Finance Factors, Inc. TCP, Inc. owns all of the common
stock of S-P Properties, Inc. Finance Factors was a subsidiary of CGS Real
Estate Company, Inc., a national real estate company. In July 1995, Finance
Factors, Inc. merged with Bancor Real Estate Company, Inc., another subsidiary
of CGS Real Estate Company, Inc.
In February 1985, the Partnership acquired land in San Diego, California as the
first step in the development of Sierra Sorrento I. This 43,100 square foot
industrial/warehouse project was completed in February 1986. In October 1986,
the Partnership acquired land in Anaheim, California for the development of
Sierra Vista. This Property, a 102,855 square foot industrial/office project,
was completed in April 1988.
In April 1993, the Partnership created a California general partnership
(Sorrento I Partners) with Sierra Mira Mesa Partners ("SMMP") to facilitate cash
contributions by SMMP for the continued development and operation of the Sierra
Sorrento I property. In February 1994, the Partnership formed a California
general partnership with SMMP known as Sierra Vista Partners to facilitate cash
contributions by SMMP for the continued development and operation of the Sierra
Vista property. The Partnership contributed the properties and SMMP contributed
cash to these newly formed partnerships. SMMP has made additional contributions
in 1994, 1995 and 1996 to these partnerships.
At December 31, 1996, the Partnership's remaining real estate is a 62.26% equity
interest in Sierra Vista Partners and a 24.94% minority interest in Sorrento I
Partners.
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 include the accounts of the Partnership
and Sierra Vista Partners, a majority owned joint venture as of December 31,
1996 (see Note 4). 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.
22
<PAGE>
Sierra Pacific Development Fund III
Notes to Consolidated Financial Statements
Page two
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Partnership at December 31, 1996 and 1995
consist of cash and cash equivalents, receivables, due from affiliates, accounts
payable and 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, 1996. The fair value of 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 properties are depreciated over ten years and tenant improvements incurred
at the re-leasing of the properties are depreciated over the life of the related
lease.
Expenditures for repairs and maintenance are charged against income as incurred.
Improvements and major renewals are capitalized. Costs and the related
accumulated depreciation of assets sold or retired are removed from the accounts
in the year of disposal or when fully depreciated and the resulting gain or loss
is reflected in income or deferred income as appropriate.
The Partnership employs a systematic approach in determining whether the value
of income-producing property has been impaired. Prior to 1995, a provision for
loss on a property was established if the appraised value of the property
declined below its book value due to what the General Partner believed to be an
other than temporary condition. A complete appraisal was performed on the
property as of December 31 each year. A provision for loss on the properties was
established as the appraised value of the properties declined below book value
because of depressed real estate market conditions, which the General Partner
believed to be other than temporary.
Effective January 1, 1995, the Partnership implemented Statement of Financial
Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" (the "Statement"). The Partnership
regularly evaluates long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable. Future cash flows are estimated and compared to the carrying amount
of the asset to determine if an impairment has occurred. If the sum of the
expected future cash flows is less than the carrying amount of the asset, the
Partnership shall recognize an impairment loss in accordance with the Statement.
No additional provision was required with the implementation of this Statement.
Because the determination of fair value is based upon projections of future
economic events such as property occupancy rates, rental rates, operating cost
inflation and market capitalization rates which are inherently subjective, the
amounts ultimately realized at disposition may differ materially from the net
carrying value as of December 31, 1996. The cash flows used to determine fair
value and net realizable value are based on good faith estimates and assumptions
developed by management. Unanticipated events and circumstances may occur and
some assumptions may not materialize; therefore actual results may vary from the
estimates and the variances may be material. The Partnership may provide
additional write-downs which could be material in subsequent years if real
estate markets or local economic conditions change.
INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
The investment in unconsolidated joint venture is stated at cost and is adjusted
for the partnership's share in earnings or losses and cash contributions to or
distributions from the joint venture (equity method).
23
<PAGE>
Sierra Pacific Development Fund III
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; 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 36,521, the
number of limited partnership units outstanding.
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts, at December 31,
1996 and 1995, is as follows:
1996 1995
-------- --------
Other assets:
Prepaid expenses ................................ $ 34,686 $ 60,669
Deferred loan costs, net of accumulated
amortization of $5,035 in 1996
and $44,033 in 1995 ........................... 315 12,647
Deferred leasing costs, net of accumulated
amortization of $121,924 in 1996 and $91,276
in 1995 ....................................... 119,689 93,880
======== ========
$154,690 $167,196
======== ========
Accrued and other liabilities:
Accounts payable ................................ $106,400 $ 92,776
Accrued expenses ................................ 8,543 3,121
Security deposits ............................... 82,248 51,088
Interest payable ................................ 20,000 20,000
Other ........................................... 8,365 5,278
======== ========
$225,556 $172,263
======== ========
24
<PAGE>
Sierra Pacific Development Fund III
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.
In 1992 and 1993, a former affiliate of the General Partner loaned the
Partnership funds to finance negative cash flows from operations and property
additions. In 1994, the Partnership entered into a joint venture (see Note 4)
and the loans were repaid.
An affiliate of the General Partner may receive a management fee of 6% of the
gross rental income collected from the properties. Management fees paid to
affiliates for the years ended December 31, 1996, 1995 and 1994 were $38,873,
$23,615 and $40,968, 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 $73,047, $55,468 and $56,545 for such services for the years ended
December 31, 1996, 1995 and 1994, respectively. Additionally, the Partnership
reimbursed the affiliate for construction supervision costs incurred by the
affiliate. For the years ended December 31, 1996, 1995 and 1994 the affiliate
received $7,782, $20,576 and $4,917, respectively, for tenant improvements
supervisory costs.
In consideration for services rendered with respect to initial leasing of
Partnership properties, an affiliate of the General Partner is paid initial
leasing costs. For the years ended December 31, 1996 and 1995 these fees
amounted to $91,660 and $46,838, respectively, and were recorded as deferred
leasing costs. For the year ended December 31, 1994 the affiliate also received
$7,125 for leasing supervision costs that were recorded as part of renting
expenses of the properties. No such costs were incurred in 1995 and 1996.
During 1996, the Partnership made a short-term, non-interest bearing loan to an
affiliate. Repayment is expected in 1997.
4. INCOME-PRODUCING PROPERTIES
At December 31, 1996 and 1995 the total cost and accumulated depreciation of the
property are as follows:
1996 1995
------------ -----------
Land .................................. $ 2,878,269 $ 2,878,269
Building and improvements ............. 7,350,947 6,765,845
------------ -----------
Total ...................... 10,229,216 9,644,114
Accumulated depreciation .............. (2,801,334) (2,344,100)
Valuation allowance ................... (1,600,000) (1,600,000)
------------ -----------
Net ........................ $ 5,827,882 $ 5,700,014
============ ===========
25
<PAGE>
Sierra Pacific Development Fund III
Notes to Consolidated Financial Statements
Page five
On April 1, 1993, the Sierra Sorrento I property was transferred to a joint
venture called Sorrento I Partners (Note 5). The historical cost basis of the
property and related assets at the date of transfer was $2,662,877 and the
outstanding balance of the related debt was $2,986,024 with accrued interest of
$22,824.
On February 1, 1994, the Partnership formed a joint venture with Sierra Mira
Mesa Partners ("SMMP"), an affiliate. The joint venture, known as Sierra Vista
Partners ("SVP"), was formed as a California general partnership to develop and
operate the Sierra Vista property. The Partnership had an 81.5% equity interest
with its contribution of Sierra Vista. Such interest was computed based upon the
estimated fair value of SVP's net assets at the date of formation of the joint
venture. SMMP was allocated an 18.5% initial equity interest in SVP in exchange
for its $600,000 cash contribution. SMMP made additional cash contributions
amounting to $270,000, $796,356 and $748,500 and received distributions
amounting to $0, $56,925 and $0 during 1994, 1995 and 1996, respectively. The
percentage interests of the Partnership and SMMP are to be adjusted every
January 1st during the term of SVP, beginning January 1, 1995. Accordingly, as
of January 1, 1995 and 1996, the Partnership's interest in SVP was reduced to
75.28% and 62.26%, respectively, and SMMP's interest was increased to 24.72% and
37.74%, respectively. On January 1, 1997, the Partnership's interest in SVP will
be reduced to 52.95% and SMMP's interest will be increased to 47.05%. Under the
terms of the SVP joint venture agreement, SMMP will receive preferential cash
distributions of available "Distributable Funds" from the operation of SVP or
sale of its property to the extent of its capital contributions. Additional
Distributable Funds are allocable to the Partnership to the extent of the deemed
fair value of its property contribution, and the remainder to the Partnership
and SMMP in proportion to their respective equity interests.
Future minimum base rental income, under the existing operating leases for the
Sierra Vista property, to be recognized on a straight-line basis and amounts to
be received on a cash basis are as follows:
Straight-line Cash
YEAR ENDING DECEMBER 31, Basis Basis
- ------------------------- ------------- -------------
1997 $ 642,629 $ 665,999
1998 479,876 514,002
1999 283,518 295,742
2000 146,843 159,909
2001 82,608 92,906
Thereafter 24,651 29,015
------------- -------------
Total $ 1,660,125 $ 1,757,573
============= =============
No tenant or group of mutually controlled tenants generated 10% or more of 1996
rental income.
26
<PAGE>
Sierra Pacific Development Fund III
Notes to Consolidated Financial Statements
Page six
5. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
Sorrento I Partners ("SIP") was formed on April 1, 1993 between the Partnership
and SMMP, an affiliate, to develop and operate the real property known as
Sorrento I, an industrial building located in San Diego, California. One tenant
leased the entire 43,100 rentable square feet of Sorrento I in 1996. Rental
income of $23,636 per month is recognized under this lease, which expires in
April 2003. Sierra Sorrento I was vacant all of 1995. At December 31, 1996, the
Partnership has a 24.94% equity interest with its contribution of Sierra
Sorrento I and the related debt; SMMP has a 75.06% equity interest with its
$944,077 cumulative cash contributions during 1993, 1994 and 1995.
SIP had a non-recourse bank note payable with an original principal balance of
$3,000,000 collateralized by real and personal property. The original maturity
of the note was July 1998 and the note included a discounted payoff option of
$1,500,000. CGS Real Estate Company, Inc. ("CGS"), an affiliate of the General
Partner, acquired the note and security documents from the bank in May 1996. In
connection with the purchase of the bank note and security documents by CGS, SIP
made a principal payment to the bank of $750,000 and entered into a $750,000
note agreement with CGS (the "CGS Agreement"). The excess of the net carrying
amount of the balance due under the bank note agreement, net of unamortized
deferred loan fees, over the balance due under the CGS Agreement was recognized
as an extraordinary item in the current year.
Reference is made to the audited financial statements of Sorrento I Partners
included herein.
6. NOTE PAYABLE
In August 1995, the Partnership's non-recourse note payable, secured by the
Sierra Vista property, was restructured. The restructure extended the note
maturity from May 1996 to February 1997 and increased the collateral of real and
personal property to include a certificate of deposit in the amount of $92,782.
The assignment of the certificate of deposit provides for the release of this
collateral when the property achieves a 90% occupancy rate. The property is 91%
occupied at December 31, 1996. The annual interest rate was reduced from 3%
above Bank of America's prime rate to a fixed rate of 8% retroactive to June
1995. The required monthly interest payments were reduced from $31,700 to
$20,000 effective August 1995.
On April 10, 1997, the Partnership's note was paid off. On the same date, the
Partnership entered into a new loan agreement in the amount of $3,050,000. This
loan, which is secured by the Sierra Vista property, bears interest at 9.375 %
and calls for monthly principal and interest payments of $25,807.02 on the first
day of each month. Such payments shall continue until May 2007, when the
indebtedness is due in full. There is a 1% premium for prepayment of this note.
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 dispositions of the Partnership's real
properties, allocations and distributions will be made to the Limited Partners
until they have received distributions from the sale or financing proceeds in an
amount equal to 100% of their unreturned capital. Thereafter, distributions
generally will be allocated 1% to the General Partner and 99% to the Limited
Partners until the Limited Partners have received distributions from all sources
equal to the sum of their respective priority distributions (an amount equal to
15% per annum cumulative on each Limited Partner's unreturned capital).
27
<PAGE>
Sierra Pacific Development Fund III
Notes to Consolidated Financial Statements
Page Seven
However, after the Limited Partners have received distributions of sale or
financing proceeds equal to their unreturned capital plus distributions from all
sources equal to a cumulative but not compounded return of 6% per annum on their
unreturned capital, the General Partner may be entitled to special distributions
not to exceed 3% of the gross sales prices of properties sold by the
Partnership. Thereafter, the General Partners will be entitled to receive
incentive distributions which, when aggregated with the 1% distributions to the
General Partner described in the preceding sentence, will equal 20% of the total
net sale or financing proceeds available for distribution to the Partners. Any
remaining sale or financing proceeds will be distributed to the Limited
Partners.
28
<PAGE>
SORRENTO I PARTNERS
(A CALIFORNIA GENERAL PARTNERSHIP)
AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1996
29
<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, 1996 and
1995, and the related statements of operations, changes in partners' equity and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sorrento I Partners as of
December 31, 1996 and 1995, and the results of its operations and cash flows for
each of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
February 24, 1997
30
<PAGE>
SORRENTO I PARTNERS
(A California General Partnership)
BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
---------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents ...................................................... $ 20,362 $ 44,975
Receivables:
Unbilled rent (Notes 1 and 4) ............................................... 13,962 0
Other ....................................................................... 14,162 0
Due from affiliates (Note 3) ................................................... 4,770 0
Income-producing property - net of accumulated
depreciation of $1,170,370 in 1996 and
$1,057,537 in 1995 (Notes 1 and 4) ........................................ 2,541,614 2,218,597
Other assets (Notes 1 and 2) ................................................... 171,776 63,751
---------- -----------
Total Assets ................................................................... $2,766,646 $ 2,327,323
========== ===========
LIABILITIES AND GENERAL PARTNERS' EQUITY (DEFICIT)
Accrued and other liabilities (Note 2) ......................................... $ 24,393 $ 28,904
Note payable (Note 5) .......................................................... 0 2,782,863
Note payable to affiliate (Note 5) ............................................. 750,000 0
---------- -----------
Total Liabilities .............................................................. 774,393 2,811,767
---------- -----------
General Partners' equity (deficit) (Notes 1 and 6) ............................. 1,992,253 (484,444)
---------- -----------
Total Liabilities and General Partners' equity (deficit) ....................... $2,766,646 $ 2,327,323
========== ===========
</TABLE>
See Accompanying Notes
31
<PAGE>
SORRENTO I PARTNERS
(A California General Partnership)
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- --------- ---------
Revenues:
<S> <C> <C> <C>
Rental income (Note 1) ............................................... $ 189,177 $ 0 $ 351,691
----------- --------- ---------
Total revenues .................................................... 189,177 0 351,691
----------- --------- ---------
Expenses:
Operating expenses:
Depreciation and amortization ........................................ 149,618 136,089 154,876
Property taxes and insurance ......................................... 22,068 39,208 43,250
Administrative fees (Note 3) ......................................... 33,714 40,354 51,575
Maintenance and repairs .............................................. 24,458 31,500 47,420
Management fees (Note 3) ............................................. 13,003 0 21,101
Utilities ............................................................ 7,062 16,175 2,443
Legal and accounting ................................................. 18,216 26,090 37,425
General and administrative ........................................... 4,362 29,041 8,322
Salaries and payroll taxes ........................................... 0 1,561 9,663
Renting expenses ..................................................... 3,300 0 6,380
Other operating expenses ............................................. 7,614 8,980 6,094
----------- --------- ---------
Total operating expenses ............................................. 283,415 328,998 388,549
Interest ................................................................ 144,646 310,575 264,274
----------- --------- ---------
Total expenses .................................................... 428,061 639,573 652,823
----------- --------- ---------
LOSS BEFORE EXTRAORDINARY GAIN .......................................... (238,884) (639,573) (301,132)
----------- --------- ---------
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT (NOTE 5) ................... 1,200,381 0 0
----------- --------- ---------
NET INCOME (LOSS) ....................................................... $ 961,497 $(639,573) $(301,132)
=========== ========= =========
</TABLE>
See Accompanying Notes
32
<PAGE>
SORRENTO I PARTNERS
(A California General Partnership)
STATEMENTS OF CHANGES IN GENERAL PARTNERS' EQUITY (DEFICIT)
From April 1, 1993 (Inception of Partnership) to December 31, 1993
and for the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
General Partners
------------------------------------------------------
Sierra Pacific Sierra
Development Mira Mesa
Fund III Partners Total
--------- ----------- ----------
<S> <C> <C> <C>
Contributions at inception, April 1, 1993 .............................. $(246,972) $ 383,836 $ 136,864
Net loss ............................................................... (108,308) (132,537) (240,845)
--------- ----------- ----------
General Partners' equity (deficit) - December 31, 1993 ................. (355,280) 251,299 (103,981)
Net loss ............................................................... (135,419) (165,713) (301,132)
Contributions .......................................................... 0 60,000 60,000
--------- ----------- ----------
General Partners' equity (deficit) - December 31, 1994 ................ (490,699) 145,586 (345,113)
Net loss ............................................................... (264,847) (374,726) (639,573)
Contributions .......................................................... 0 500,242 500,242
--------- ----------- ----------
General Partners' equity (deficit) - December 31, 1995 ................ (755,546) 271,102 (484,444)
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
========= =========== ==========
</TABLE>
See Accompanying Notes
33
<PAGE>
SORRENTO I PARTNERS
(A California General Partnership)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ..................................................... $ 961,497 $(639,573) $(301,132)
Adjustments to reconcile net income (loss)
to cash used in operating activities:
Gain from extinguishment of debt .................................... (1,200,381) 0 0
Depreciation and amortization ....................................... 149,618 136,089 154,876
(Increase) decrease in rent receivable .............................. (13,962) 5,880 (1,645)
Increase in other receivables ....................................... (14,162) 0 0
Increase in other assets ............................................ (178,536) (7,849) (2,538)
(Decrease) increase in accrued and other liabilities ................ (4,511) 74,411 74,913
----------- --------- ---------
Net cash used in operating activities ................................. (300,437) (431,042) (75,526)
----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions ..................................... (446,630) 0 0
----------- --------- ---------
Net cash used in investing activities ................................. (446,630) 0 0
----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments to affiliates .............................................. (4,770) 0 0
Contributions by the General Partners ............................... 1,551,100 500,242 60,000
Distributions to the General Partners ............................... (35,900) 0 0
Principal payments on note payable .................................. (787,976) (33,856) (59,275)
----------- --------- ---------
Net cash provided by financing activities ......................... 722,454 466,386 725
----------- --------- ---------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS ................................................. (24,613) 35,344 (74,801)
CASH AND CASH EQUIVALENTS - Beginning of period ......................... 44,975 9,631 84,432
----------- --------- ---------
CASH AND CASH EQUIVALENTS - End of period ............................... $ 20,362 $ 44,975 $ 9,631
=========== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest .............................. $ 164,898 $ 223,811 $ 197,852
=========== ========= =========
</TABLE>
During 1995 and 1994, accrued interest was added to the note payable principal
balance in the amounts of $85,709 and $41,389, respectively. During 1996,
Sorrento I exercised a discounted payoff option on its notes payable that
resulted in a $1,200,381 extraordinary gain. These are noncash transactions not
reflected in the above statement of cash flows.
See Accompanying Notes
34
<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 for a 55.03% interest and SPDFIII
contributed the property and all associated encumbrances for a 44.97% interest
in the Partnership. The partnership agreement calls for a recalculation of the
percentage ownership interest each year on January 1st to account for the
Partner's aggregate capital contributions and distributions since inception
through the prior year. During 1994 and 1995, SMMP contributed an additional
$60,000 and $500,242, respectively, increasing their percentage interest to
75.06% as of December 31, 1996 and decreasing SPDFIII's percentage interest to
24.94%. During 1996, SMMP contributed $1,551,100 and received distributions of
$35,900, increasing their percentage interest to 88.69% and decreasing SPDFIII's
percentage interest to 11.31% effective January 1, 1997.
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
The Partnership maintains its books and prepares its financial statements in
accordance with generally accepted accounting principles. However, the
Partnership prepares its tax returns on the accrual basis of accounting as
defined by the Internal Revenue Code with adjustments to reconcile book and
taxable income (loss) for differences in the treatment of certain income and
expense items. The accompanying financial statements do not reflect any
provision for federal or state income taxes since such taxes are the obligation
of the individual partners.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid, short-term investments with
original maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Partnership at December 31, 1996 and 1995
consist of cash and cash equivalents, receivables, due from affiliates, accounts
payable and note payable. The fair value of cash and cash equivalents,
receivables and accounts payable approximates the carrying value due to the
short term nature of these items. In the opinion of management, the fair value
of the note payable approximates the carrying value based on market rates at
December 31, 1996. The fair value of due from affiliates can not be determined
due to the related party nature of this receivable.
35
<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.
The Partnership employs a systematic approach in determining whether the value
of income-producing property has been impaired. Prior to 1995, a provision for
loss on a property was established if the appraised value of the property
declined below its book value due to what the General Partner believed to be an
other than temporary condition. A complete appraisal was performed on the
property as of December 31 each year. A complete appraisal was performed on the
property as of December 31, 1994 that indicated an appraised value in excess of
the historical cost basis of the property.
Effective January 1, 1995, the Partnership implemented Statement of Financial
Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" (the "Statement"). The Partnership
regularly evaluates long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable. Future cash flows are estimated and compared to the carrying amount
of the asset to determine if an impairment has occurred. If the sum of the
expected future cash flows is less than the carrying amount of the asset, the
Partnership shall recognize an impairment loss in accordance with the Statement.
No provision was required due to the implementation of this Statement.
Because the determination of fair value is based upon projections of future
economic events such as property occupancy rates, rental rates, operating cost
inflation and market capitalization rates which are inherently subjective, the
amounts ultimately realized at disposition may differ materially from the net
carrying value as of December 31, 1996. The cash flows used to determine fair
value and net realizable value are based on good faith estimates and assumptions
developed by management. Unanticipated events and circumstances may occur and
some assumptions may not materialize; therefore actual results may vary from the
estimates and the variances may be material. The Partnership may provide
additional write-downs which could be material in subsequent years if real
estate markets or local economic conditions change.
OTHER ASSETS
Deferred leasing costs represent costs incurred to lease properties and are
amortized over the life of the related lease.
Deferred loan costs represent costs incurred to obtain financing and are
amortized over the life of the related loan.
RENTAL INCOME AND RENT RECEIVABLE
Rental income is recognized on the straight-line method over the term of the
related operating lease in accordance with the provisions of Statement of
Financial Accounting Standards No. 13, "Accounting for Leases".
Unbilled rent receivable represents the difference between rent recognized on
the straight-line method and actual cash due.
36
<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,
1996 and 1995, is as follows:
1996 1995
-------- -------
Other assets:
Prepaid expenses .................................. $ 2,597 $ 2,600
Deferred loan costs, net of accumulated
amortization of $26 in 1996 and
$125,175 in 1995 ................................ 991 53,664
Deferred leasing costs, net of accumulated
amortization of $16,822 in 1996 ................. 162,671 0
Tax impounds ...................................... 5,517 7,429
Deposits .......................................... 0 58
-------- -------
$171,776 $63,751
======== =======
Accrued and other liabilities:
Accounts payable ................................. $ 18,555 $ 2,815
Interest payable ................................. 5,838 26,089
-------- -------
$ 24,393 $28,904
======== =======
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 may receive a management fee of 6% of the
gross rental income collected from the property. Management fees paid to
affiliates for the years ended December 31, 1996, 1995 and 1994 were $13,003, $0
and $21,101, respectively.
SIP reimburses an affiliate of S-P Properties, Inc. for expenses incurred by the
affiliate for services provided to SIP such as accounting, data processing and
similar services. The affiliate was reimbursed $33,714, $31,001 and $51,575,
respectively, for such services for the years ended December 31, 1996, 1995 and
1994. Additionally, SIP reimbursed an affiliate for construction supervision
costs incurred by the affiliate. For the years ended December 31, 1996, 1995 and
1994 the affiliate received $33,084, $0 and $1,188, 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, 1996 and 1995 these fees amounted to $59,563
and $0, respectively, and were recorded as deferred leasing costs. The affiliate
also received $6,201 in 1994 for leasing supervision costs that were recorded as
part of the operating expenses of the property. No such costs were incurred in
1995 and 1996.
During 1996, the Partnership made non-interest bearing, short-term advances to
affiliates. Repayment is expected in 1997.
Reference is made to Note 5.
37
<PAGE>
Sorrento I Partners
Notes to Financial Statements
Page four
4. INCOME-PRODUCING PROPERTIES
At December 31, 1996 and 1995 the total cost and accumulated depreciation of the
property are as follows:
1996 1995
----------- -----------
Land ................................... $ 1,305,518 $ 1,305,518
Building and improvements .............. 2,406,466 1,970,616
----------- -----------
Total ....................... 3,711,984 3,276,134
Accumulated depreciation ............... (1,170,370) (1,057,537)
----------- -----------
Net ......................... $ 2,541,614 $ 2,218,597
=========== ===========
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
- ------------------------ ------------- ----------
1997 $ 283,635 $ 262,692
1998 283,635 273,196
1999 283,635 278,448
2000 283,635 289,584
2001 283,635 295,152
Thereafter 378,181 411,246
---------- ----------
Total $1,796,356 $1,810,318
========== ==========
The Partnership relied on one tenant for 100% of 1996 rental income. The
principal business of the tenant is research and development in the
communications sector.
38
<PAGE>
Sorrento I Partners
Notes to Financial Statements
Page five
5. NOTE PAYABLE
The Partnership 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, the
Partnership made a principal payment to the bank of $750,000 and entered into a
$750,000 note agreement with CGS (the "CGS Agreement"). The CGS Agreement,
collaterized by real and personal property, calls for monthly interest payments
through December 1996 and monthly principal and interest payments thereafter
until maturity on May 31, 2016. The interest rate is fixed at 9.34% per annum
for the first year of the note and will thereafter be the one year Treasury rate
plus 375 basis points.
At any time upon 120 days written notice to CGS, the Partnership may fully
discharge the note by the payment of an amount equal to $750,000 less the
aggregate amount of principal paid under the note between the date of the CGS
Agreement and the date of payment plus any interest due.
The excess of the net carrying amount of the balance due under the bank note
agreement, net of unamortized deferred loan fees, over the balance due under the
CGS Agreement was recognized as an extraordinary item in the current year of
$1,200,381.
Annual maturities under the CGS Agreement as of December 31, 1996 are: $14,237
in 1997; $15,625 in 1998; $17,149 in 1999; $18,821 in 2000; $20,656 in 2001; and
$663,512 thereafter.
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.
39
<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.
40
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM SIERRA PACIFIC DEVELOPMENT FUND III DECEMBER 31, 1996 FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 97,439
<SECURITIES> 0
<RECEIVABLES> 187,154
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 191,915
<PP&E> 10,229,216
<DEPRECIATION> 4,401,334
<TOTAL-ASSETS> 6,271,935
<CURRENT-LIABILITIES> 225,556
<BONDS> 3,410,795
0
0
<COMMON> 0
<OTHER-SE> 496,687
<TOTAL-LIABILITY-AND-EQUITY> 6,271,935
<SALES> 735,569
<TOTAL-REVENUES> 735,569
<CGS> 0
<TOTAL-COSTS> 515,199
<OTHER-EXPENSES> 545,989
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 264,206
<INCOME-PRETAX> 46,632
<INCOME-TAX> 0
<INCOME-CONTINUING> (470,012)
<DISCONTINUED> 0
<EXTRAORDINARY> 516,644
<CHANGES> 0
<NET-INCOME> 46,632
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.28
</TABLE>
