SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number : 0-14276
SIERRA PACIFIC DEVELOPMENT FUND III
(A CALIFORNIA LIMITED PARTNERSHIP)
State of California 33-0043953
------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
5850 San Felipe, Suite 450
Houston, Texas 77057
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone
number, including area code: (713) 706-6271
--------------
5850 San Felipe, Suite 500
Houston, Texas
-------------------------------------------------------------
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12 (b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
Securities registered pursuant to Section 12 (g) of the Act:
60,000 LIMITED PARTNERSHIP UNITS
Title of class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]. No[ ].
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Limited Partners for the Year Ended December 31, 1997 is
incorporated by reference into Parts II and III
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PART I
ITEM 1. BUSINESS
(a.) GENERAL DEVELOPMENT OF BUSINESS. Sierra Pacific Development Fund III (the
"Partnership") is a California limited partnership that was formed in June 1984
for the purpose of acquiring, developing, and operating commercial and
industrial real estate.
In February 1985, the Partnership acquired land in San Diego, California as the
first step in the development of Sierra Sorrento I. This 43,100 square foot
industrial/warehouse project was completed in February 1986. In October 1986,
the Partnership acquired land in Anaheim, California for the development of
Sierra Vista. This property, a 102,855 square foot industrial/office project,
was completed in April 1988.
In April 1993, the Partnership created a California general partnership
(Sorrento I Partners) with Sierra Mira Mesa Partners ("SMMP") to facilitate cash
contributions by SMMP for the continued development and operation of the Sierra
Sorrento I property. The Partnership contributed the Sierra Sorrento I property
and SMMP contributed cash ($2,459,277, net, through December 31, 1996) in
exchange for a 88.69% interest in Sorrento I Partners. SMMP made additional
contributions of $141,000 and received distributions of $164,300 in 1997. 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, 1998, the Partnership's interest
in Sorrento I Partners will be increased to 11.41%, and SMMP's interest will be
reduced to 88.59%. Because the Partnership owns less than 50% of the Sierra
Sorrento I property, it records its interest in Sorrento I Partners as an
investment in an unconsolidated joint venture using the equity method of
accounting. Thus, the Sierra Sorrento I property is not reflected as an asset on
the Partnership's balance sheet nor is the debt on the property reflected in the
balance sheet.
In February 1994, the Partnership formed a joint venture with SMMP known as
Sierra Vista Partners ("SVP") to facilitate cash contributions by SMMP for the
continued development and operation of the Sierra Vista property. Through
December 31, 1996, SMMP had contributed $2,355,161 cash, net, for a 47.05%
interest in Sierra Vista Partners. SMMP made additional contributions of
$1,193,141, and received distributions of $2,152,098 in 1997. 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, 1998 the Partnership's interest in Sierra
Vista Partners will be increased to 65.49%, and SMMP's interest will be
decreased to 34.51%.
In October 1997, the Sierra Vista property was sold for $5,630,000. The
Partnership received net cash proceeds of $2,140,598 from the sale for its
62.26% interest in this property and the purchaser assumed the Partnership's
$3,044,397 debt on the property. The partnership also incurred additional
selling costs and credited security deposits and prorata rents for October to
the buyer. In accordance with the SVP joint venture agreement, these proceeds
were distributed to SMMP. Under the terms of the agreement, SMMP receives
preferential cash distributions of available "Distributable Funds" from the sale
of the property to the extent of its capital contributions. SMMP had made net
contributions of $3,335,204 to the Partnership through the sale date.
At December 31, 1997, the Partnership's remaining real estate investment is an
11.31% minority interest in the Sierra Sorrento I property.
Audited financial statements of Sorrento I Partners are included in the Annual
Report to the Limited Partners attached as an Exhibit.
(b.) NARRATIVE DESCRIPTION OF BUSINESS. The Partnership owned and operated
Sierra Vista, an industrial/office project in Anaheim, California. The Sierra
Vista property was sold in October 1997. During 1997 and as of December 31,
1997, the Partnership has an 11.31% interest in an industrial property known as
Sorrento I in San Diego, California through a California general partnership
with Sierra Mira Mesa Partners.
(c.) COMPARISON OF CURRENT ACTIVITIES TO THOSE PROPOSED AT THE INITIATION OF THE
PARTNERSHIP. In the Partnership's prospectus dated September 4, 1984, the
investment objectives were described as follows:
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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 1997 have been consistent with the intent
of the original prospectus in that the Partnership has invested in real estate
projects that had the potential for capital gains, preservation of capital and
providing distributable cash flow partially sheltered from Federal income tax.
As discussed above, the Partnership sold the Sierra Vista property in October
1997. As of December 31, 1997, the Partnership had paid cash distributions of
$11.19 for each $250 unit investment and remaining partners' equity (deficit)
was computed at $0 per unit. Thus, if the Partnership were to be
liquidated at the end of 1997 at book value, each $250 investment would have
returned a total of $11.19.
ITEM 2. PROPERTIES
As stated in Item 1 the Partnership sold the Sierra Vista property in October
1997. During 1997 and as of December 31, 1997, the Partnership has an 11.31%
interest in an industrial property known as Sorrento I in San Diego, California
through a California general partnership with Sierra Mira Mesa Partners. See
Item 1. Business for discussion of percentage ownership changes.
Sorrento I is an industrial building with 43,100 square feet of rentable space.
One tenant began leasing the entire 43,100 rentable square feet of Sorrento I in
1996. Rental income of $23,636 per month is recognized under this lease, which
expires in April 2003. The effective annual rent per square foot at December 31,
1997 is $6.58. The principal business of the tenant is research and development
in the communications sector.
DEPRECIABLE PROPERTY
Sorrento I, San Diego, California
Office Building - Income-Producing Property
<TABLE>
<CAPTION>
Tenant
Land Buildings Improvements Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Historical Cost & Tax Basis ................. $ 1,305,518 $ 1,342,683 $ 329,299 $ 2,977,500
Accumulated Depreciation .................... -- (474,327) (63,485) (537,812)
----------- ----------- ----------- -----------
Net Carrying Value .......................... $ 1,305,518 $ 868,356 $ 265,814 $ 2,439,688
=========== =========== =========== ===========
Depreciation Method Not Applicable Straight-line Straight-line
Depreciable Life Not Applicable 10-30 Years 7-10 years
</TABLE>
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REAL ESTATE TAXES The real estate tax obligation for 1997 is approximately 1.12%
of the assessed value or $28,603.
INSURANCE In the opinion of management, the property is adequately
covered by insurance.
ENCUMBRANCES Sorrento I Partners ("SIP") had a non-recourse bank note
payable with an original principal balance of $3,000,000
collateralized by the Sorrento I property. The annual interest
rate of the note was variable at bank prime plus 2-1/2% with a
minimum rate of 9% and maximum rate of 15-1/2%. The original
maturity of the note was July 1998 and the note included a
discounted payoff option of $1,500,000.
CGS Real Estate Company, Inc. ("CGS"), an affiliate of the
General Partner, acquired the note and security documents from
the bank in May 1996. In connection with the purchase of the
bank note and security documents by CGS, SIP made a principal
payment to the bank of $750,000 and entered into a $750,000
note agreement with CGS (the "CGS Agreement"). The CGS
Agreement, collaterized by real and personal property, called
for monthly interest payments through December 1996 and
monthly principal and interest payments thereafter until
maturity on May 31, 2016. The interest rate is fixed at 9.34%
per annum for the first year of the note and will thereafter
be the one year Treasury rate plus 375 basis points. A
pre-payment in the amount of $105,000 was paid in April 1997.
A modification agreement was entered into on September 30,
1997. The interest rate will remain fixed at 9.34% through
October 1998, at which time the rate will convert to the
one-year treasury rate plus 375 basis points. The note is
amortized over a 210-month term and current payments are
$6,154 per month, principal and interest inclusive until
maturity in March 2015. The loan balance as of December 31,
1997 was $631,827.
At any time upon 120 days written notice to CGS, SIP may fully
discharge the note by the payment of an amount equal to
$750,000 less the aggregate amount of principal paid under the
note between the date of the CGS Agreement and the date of
payment plus any interest due.
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
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERS' EQUITY AND RELATED MATTERS
As of December 31, 1997, the number of security holders is as follows:
Number of
Number Record
of Units Holders
------ --------
Limited Partners .............. 36,521 846
====== ========
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 Financial Condition and Results of
Operations includes certain forward looking statements reflecting the
Partnership's expectations in the near future; however, many factors which may
affect the actual results, especially changing regulations, are difficult to
predict. Accordingly, there is no assurance that the Partnership's expectations
will be realized.
Overview:
The following discussion should be read in conjuntion with the Selected
Financial Data and the Partnership's Consolidated Financial Statements and Notes
thereto incorporated by reference to the Annual Report to the Limited Partners
attached as an Exhibit. As of December 31, 1997, the Partnership owned a 52.95%
interest in Sierra Vista Partners, which operated the Sierra Vista property. In
addition, the Partnership held an 11.31% 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, 1997 TO YEAR ENDED DECEMBER 31, 1996.
On October 10, 1997 the Sierra Vista property was sold for $5,630,000. The
Partnership recorded a $968,000 loss from property disposition.
Revenues decreased by $177,000, or 24%, and operating expenses decreased by
$109,000, or 10%, primarily due to the sale of the property. Legal and
accounting fees increased by $14,000, principally as a result of higher
professional fees associated with the refinance of the property in April 1997
and due to costs incurred related to the sale. Interest expense increased by
$35,000, or 13%, primarily due to interest and other financing charges
associated with the payoff of the mortgage note that matured in February 1997
and due to a higher interest rate associated with a new loan funded in April
1997. This loan was transferred and assumed by the buyer of the property in
October 1997.
The Partnership's remaining real estate investment is an 11.31% minority
interest in the Sorrento I property. Currently, it is not contemplated that the
Partnership will attempt to acquire any additional real estate holdings.
The Partnership's share of income from its investment in SIP was $8,000 for the
year ended December 31, 1997 compared to $414,000 for the year ended December
31, 1996. SIP exercised a discounted payoff option on its note payable in May
1996. SIP recorded an extraordinary gain of $1,200,000 in connection with this
transaction.
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
was $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's 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 extaordinary 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.
Liquidity and Capital Resouces:
The Partnership received net cash proceeds of $2,141,000 from the sale of the
property. In accordance with the Sierra Vista Partners joint venture agreement,
these proceeds were distributed to Sierra Mira Mesa Partners ("SMMP"). Under the
terms of the agreement, SMMP receives preferential cash distributions of
available "Distributable Funds" from the sale of the property to the extent of
its capital contributions. SMMP had made net contributions of $3,335,000 to the
Partnership through the sale date.
As of December 31, 1997, the Partnership is in a liquid position. Total cash and
receivables amount to $21,000 compared to $5,000 of accrued and other
liabilities.
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One tenant began leasing the entire 43,100 rentable square feet of the Sorrento
I property in 1996. This lease commenced May 1, 1996 and expires April 30, 2003.
The 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.
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 SIP in 1996. The note balance was paid down $105,000 in
April 1997.
A modification agreement was entered into on September 30, 1997. The interest
rate remained fixed at 9.34% through October 1998, at which time the rate will
convert to the one-year treasury plus 375 basis points. The note is amortized
over a 210-month term and at the current interest rate, the CGS Agreement calls
for monthly principal and interest payments of $6,154, which is significantly
less than the $28,570 called for under the bank note payable.
At any time upon 120 days written notice to CGS, SIP may fully discharge the
note by the payment of an amount equal to $750,000 less the aggregate amount of
principal paid under the note between the date of the CGS Agreement and the date
of payment plus any interest due.
Sorrento I improved its 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 lease
commissions. As required, the Partnership's joint venture partner (SMMP) either
advances or contributes cash to meet the Partnership's requirements. SMMP has
adequate resources to make the necessary advances during the foreseeable future.
The Partnership's primary capital requirements will be for the continued
development and operation of the Sorrento I property. It is anticipated that
these requirements will be funded from the operations of the property and the
Partnership's joint venture partner.
YEAR 2000 COMPLIANCE
The Year 2000 Compliance issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Partnership's computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The total cost to the Partnership of activities associated with the Year 2000
Compliance issue is not anticipated to be material to its financial position or
results of operations in any given year.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and independent auditors' report are
incorporated by reference to the Annual Report to the Limited Partners attached
as an Exhibit.
1. Independent Auditors' Report
2. Consolidated Balance Sheets - December 31, 1997 and 1996
3. Consolidated Statements of Operations - for the years ended December
31, 1997, 1996 and 1995
4. Consolidated Statements of Changes in Partners' Equity (Deficit) -
for the years ended December 31, 1997, 1996 and 1995
5. Consolidated Statements of Cash Flows - for the years ended December
31, 1997, 1996 and 1995
6. Notes to Consolidated Financial Statements
7. Audited financial statements and related footnotes of Sorrento I
Partners
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
8
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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 47 3 years
Dawson L. Davenport Vice President 42 3 years
Steven M. Speier Secretary/Treasurer and Director 47 3 years
William J. Carden Assistant Secretary/Treasurer and 53 3 years
Director
Thomas N. Thurber - President and Director, S-P Properties, Inc. Mr. Thurber is
a Certified Public Accountant who began his career with Arthur Andersen & Co. in
1972. In 1979, he joined a major publicly traded real estate development firm
(Daon) where he became Controller for U.S. Operations. Subsequently, Mr. Thurber
served as Director of Real Estate for a developer of retail properties, and
Chief Financial Officer of a trust with significant investments in commercial
real estate. Mr. Thurber also serves as a director of Property Secured
Investments, Inc. Mr. Thurber holds a bachelors degree in accounting from
Florida State University.
Dawson L. Davenport - Vice President, S-P Properties, Inc. Mr. Davenport is the
founder of WD Real Estate Services, a full service property management firm that
became part of the Banc Commercial family of companies in 1992. Mr. Davenport
has been responsible for the management, development and rehabilitation of
substantial commercial, industrial, retail, and residential projects during the
past seventeen years. Mr. Davenport specializes in leasing and turning around
distressed properties.
Steven M. Speier - Secretary/Treasurer and Director, S-P Properties, Inc. Mr.
Speier who after spending two years in public accounting, went into the banking
industry in 1975. During his sixteen year banking career, Mr. Speier managed a
real estate loan portfolio of approximately $1.5 billion secured by properties
throughout the United States. Mr. Speier brings to S-P Properties, Inc. a broad
real estate background that includes management, leasing, and disposition of all
categories of commercial real estate. Mr. Speier also serves as a director of
IDM Corporation. Mr. Speier is a licensed real estate broker, is registered as a
Certified Public Accountant, and has a masters degree in business administration
from Grand Valley State University in Michigan.
William J. Carden - Assistant Secretary/Treasurer and Director, S-P Properties,
Inc. Mr. Carden is the founder and President of CGS Real Estate Company, Inc.,
which owns over one million square feet of commercial real estate. Mr. Carden
founded DVM Properties, Inc. in 1974 which concentrated on rehabilitation of
retail, office, industrial, and commercial real estate. Mr. Carden is a former
Director of Bay Financial, a New York Stock Exchange company, and currently
serves as a director of Property Secured Investments, Inc. and IDM Corporation.
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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, broker fees in connection with
obtaining financing and receive from the Partnership certain management and
administrative services fees. These amounts are set forth in the Annual Report
to the Limited Partners attached as an Exhibit.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
None
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership pays a management fee of 6% of the gross rental income collected
from the property to American Spectrum Real Estate Services, Inc. (ASRE),
formerly Banc Commercial California. These fees for the year ended December 31,
1997 were $40,248. 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 $75,530 during the year ended December
31, 1997. The Partnership also reimburses ASRE for construction supervision
costs. These fees for the year ended December 31, 1997 were $64,904. In
consideration for services rendered with respect to initial leasing of
Partnership properties, ASRE is paid initial leasing costs. These fees for the
year ended December 31, 1997 were $76,984. In consideration for services
rendered with respect to obtaining financing for the Partnership, CGS Real
Estate Company, Inc. is paid broker fees. These fees for the year ended December
31, 1997 were $61,000. Bancor and ASRE are both wholly owned subsidiaries of CGS
Real Estate Company, Inc. William J. Carden, an officer and director of S-P
Properties, Inc., the General Partner of the Partnership, owns 50% of CGS Real
Estate Company, Inc.
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, 1997, 1996 and 1995
2. Schedule III - Real Estate and Accumulated Depreciation - December 31,
1997
All other schedules are omitted as they either are not required or are not
applicable, or the required information is set forth in the financial
statements and notes thereto.
C. REPORTS ON FORM 8-K
None
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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 19, 1998 /s/THOMAS N. THURBER
- -------------------- -----------------------------------------
Thomas N. Thurber
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: March 19, 1998 /s/THOMAS N. THURBER
- -------------------- -----------------------------------------
Thomas N. Thurber
President and Director
S-P Properties, Inc.
Date: March 19, 1998 /s/WILLIAM J. CARDEN
- -------------------- -----------------------------------------
William J. Carden
Assistant Secretary/Treasurer and Director
S-P Properties, Inc.
Date: March 19, 1998 /s/G. ANTHONY EPPOLITO
- -------------------- -----------------------------------------
G. Anthony Eppolito
Chief Accountant
S-P Properties, Inc.
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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, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997 and have issued our report thereon dated March 13, 1998.
Such consolidated financial statements and report are included in your 1997
Annual Report to the Limited Partners and are incorporated herein by reference.
Our audits also included the financial statement schedules of Sierra Pacific
Development Fund 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
March 13, 1998
13
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SCHEDULE II - FORM 10-K
SIERRA PACIFIC DEVELOPMENT FUND III
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31, 1997, 1996, and 1995
Income -
Producing
Properties
-----------
Allowance for loss - January 1, 1995 ...................... $ 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
Reduction due to sale of property ...................... (1,600,000)
-----------
Allowance for loss - December 31, 1997 .................... $ 0
===========
(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, 1997
<TABLE>
<CAPTION>
Initial Cost Gross Amount at
to Partnership (1) Improvements Which carried at close of period
----------------------- Capitalized -------------------------------------
Encumb- Improve- After Acquis- Improve- Total
Description rances Land ments ition (2) Land ments (3)(4)(5)(6)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INDUSTRIAL BUILDING-
INCOME -PRODUCING:
Sierra Vista (4)
Anaheim, California 0 $ 2,878,269 $ 7,791,392 0 0 0
Accum. Date Date Deprec.
Description Deprec. (6) Constructed Acquired Life
- -------------------------------------------------------------------------------
INDUSTRIAL BUILDING-
INCOME -PRODUCING:
Sierra Vista (4)
Anaheim, California 0 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 52.95% and
Sierra Mira Mesa Partners, an affiliate, has a 47.05% equity interest at
December 31, 1997.
(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, 1997 is as follows:
Total Real Estate Accumulated
Carrying Value Depreciation
------------ ------------
Balance - January 1, 1995 .................... $ 9,360,606 $ 1,982,058
Additions during the year ................. 283,508 362,042
------------ ------------
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
Additions during the year ................. 394,584 409,313
Deductions:
Write off of fully depreciated assets ... (2,782) (2,782)
Sale of property ....................... (10,621,018) (3,207,865)
------------ ------------
Balance - December 31, 1997 .................. $ 0 $ 0
============ ============
15
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND III
(A California Limited Partnership)
SELECTED FINANCIAL DATA
For the Years Ended December 31, 1997, 1996, 1995, 1994 and 1993
The following table sets forth certain selected historical financial data of the
Partnership. The selected operating and financial position data as of and for
each of the five years ended December 31, 1997 have been derived from the
audited consolidated financial statements of the Partnership. This information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and Notes thereto which are incorporated by reference to the Annual
Report to the Limited Partners attached as an Exhibit.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES ...................................... $ 558,724 $ 735,569 $ 615,088 $ 679,669 $ 757,032
OPERATING EXPENSES:
Total ....................................... 952,104 1,061,188 1,005,228 1,247,668 1,354,674
Per dollar of revenues ...................... 1.70 1.44 1.63 1.84 1.79
INTEREST EXPENSE:
Total ....................................... 299,404 264,206 311,218 347,716 411,619
Per dollar of revenues ...................... 0.54 0.36 0.51 0.51 0.54
NET LOSS FROM
CONTINUING OPERATIONS:
Total ....................................... (871,354) (470,012) (792,830) (886,386) (1,117,569)
General Partner ............................. (374,667) 0 0 0 0
Limited Partners ............................ (496,687) (470,012) (792,830) (886,386) (1,117,569)
Per unit (1) ................................ (13.60) (12.87) (21.71) (24.27) (30.60)
CASH USED IN
OPERATING ACTIVITIES ........................ (508,265) (162,872) (312,505) (282,318) (333,264)
CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES ....................... 1,746,014 (499,590) (414,881) (53,157) 79,365
CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES ....................... (1,320,586) 743,730 739,431 334,795 253,812
TOTAL ASSETS .................................. 20,739 6,271,935 6,059,967 5,962,159 6,602,678
PARTNERS' EQUITY (DEFICIT):
Total ....................................... (374,667) 496,687 450,055 1,242,885 2,129,271
General Partner ............................. (374,651) 0 0 0 0
Limited Partners ............................ (0) 496,687 450,055 1,242,885 2,129,271
LIMITED PARTNERS' EQUITY (DEFICIT) -
PER UNIT (1) ................................ (0) 13.60 12.32 34.03 58.30
INCOME-PRODUCING PROPERTIES:
Number ...................................... 0 1 1 1 1
Cost ........................................ 0 10,229,216 9,644,114 9,360,606 9,307,449
Less: Accumulated depreciation .............. 0 (2,801,334) (2,344,100) (1,982,058) (1,587,451)
Valuation allowance ................... 0 (1,600,000) (1,600,000) (1,600,000) (1,300,000)
Net book value .............................. 0 5,827,882 5,700,014 5,778,548 6,419,998
INVESTMENT IN UNCONSOLIDATED
JOINT VENTURE ............................... (333,783) (341,689) (755,546) (490,699) (355,280)
NOTE PAYABLE - Related to income-
producing property .......................... 0 3,410,795 3,410,795 3,410,795 3,437,000
MINORITY INTEREST IN CONSOLIDATED
JOINT VENTURE ............................... 56,963 1,797,208 1,271,308 705,252 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, 1997 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 partnership, (the "Partnership") as
of December 31, 1997 and 1996, and the related consolidated statements of
operations, changes in partners' equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sierra Pacific
Development Fund III as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
March 13, 1998
17
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND III
(A CALIFORNIA LIMITED PARTNERSHIP)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents ................................ $ 14,602 $ 97,439
Receivables:
Unbilled rent (Note 1) ............................... 0 97,448
Billed rent (Note 1) ................................. 0 88,445
Other ................................................ 6,137 1,261
Due from affiliates (Note 3) ............................. 0 4,770
Income-producing property - net of
accumulated depreciation and valuation
allowance of $4,401,334 in 1996 (Note 4) ............... 0 5,827,882
Other assets (Notes 1, 2 and 3) .......................... 0 154,690
------------------ ------------------
Total Assets ............................................. $ 20,739 $ 6,271,935
================== ==================
LIABILITIES AND PARTNERS' EQUITY
Accrued and other liabilities (Note 2) ................... $ 4,660 $ 225,556
Notes payable (Note 6) ................................... 0 3,410,795
Investment in unconsolidated
joint venture (Notes 1 and 5) .......................... 333,783 341,689
------------------ ------------------
Total Liabilities ........................................ 338,443 3,978,040
------------------ ------------------
Minority interest in consolidated
joint venture (Note 4) ................................ 56,963 1,797,208
------------------ ------------------
Partners' equity (deficit) (Notes 1 and 7):
General Partner ........................................ (374,667) 0
Limited Partners:
60,000 units authorized, 36,521 issued and outstanding (0) 496,687
------------------ ------------------
Total Partners' equity (deficit) ......................... (374,667) 496,687
------------------ ------------------
Total Liabilities and Partners' equity ................... $ 20,739 $ 6,271,935
================== ==================
</TABLE>
SEE ACCOMPANYING NOTES
18
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND III
(A CALIFORNIA LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Rental income (Note 1) ................... $ 558,091 $ 735,569 $ 615,088
Interest income .......................... 633 0 0
----------- ----------- -----------
Total revenues ......................... 558,724 735,569 615,088
----------- ----------- -----------
EXPENSES:
Operating expenses:
Depreciation and amortization .......... 464,427 545,989 471,498
Maintenance and repairs ................ 104,981 122,293 98,716
Property taxes and insurance ........... 63,209 69,754 93,917
Administrative fees (Note 3) ........... 75,180 73,047 66,842
Utilities .............................. 58,037 60,183 57,938
Legal and accounting ................... 44,128 29,846 39,779
Management fees (Note 3) .............. 40,248 38,873 38,035
Salaries and payroll taxes ............. 35,565 53,276 34,287
General and administrative ............. 13,261 5,860 33,220
Renting expenses ....................... 3,535 4,764 20,221
Other operating expenses ............... 49,533 57,303 50,775
----------- ----------- -----------
Total operating expenses ............... 952,104 1,061,188 1,005,228
Interest ................................... 299,404 264,206 311,218
----------- ----------- -----------
Total expenses ......................... 1,251,508 1,325,394 1,316,446
----------- ----------- -----------
LOSS BEFORE LOSS FROM
PROPERTY DISPOSITION .................... (692,784) (589,825) (701,358)
LOSS FROM PROPERTY DISPOSITION (Note 4) .... (967,764) 0 0
----------- ----------- -----------
LOSS BEFORE PARTNERSHIP'S SHARE OF
UNCONSOLIDATED JOINT VENTURE LOSS ....... (1,660,548) (589,825) (701,358)
----------- ----------- -----------
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE INCOME (LOSS) FROM
CONTINUING OPERATIONS (Note 5) .......... 7,906 (102,787) (264,847)
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE EXTRAORDINARY GAIN (Note 5) 0 516,644 0
----------- ----------- -----------
LOSS BEFORE MINORITY INTEREST'S SHARE
OF CONSOLIDATED JOINT VENTURE LOSS ....... (1,652,642) (175,968) (966,205)
----------- ----------- -----------
MINORITY INTEREST'S SHARE OF
CONSOLIDATED JOINT VENTURE LOSS (Note 4) . 781,288 222,600 173,375
----------- ----------- -----------
NET (LOSS) INCOME .......................... $ (871,354) $ 46,632 $ (792,830)
=========== =========== ===========
Per limited partnership unit (Note 1):
Loss before extraordinary gain ........... $ (13.60) $ (12.87) $ (21.71)
Extraordinary gain ....................... 0 14.15 0
----------- ----------- -----------
Net (loss) income .......................... $ (13.60) $ 1.28 $ (21.71)
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES
19
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND III
(A CALIFORNIA LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Limited Partners Total
-------------------------- General Partners'
Per Unit Total Partner Equity
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Partners' equity - January 1, 1995 ......................... $ 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
Net loss ................................................... (13.60) (496,687) (374,667) (871,354)
----------- ----------- ----------- -----------
Partners' equity (deficit) - December 31, 1997 ............. $ (0) $ (0) $ (374,667) $ (374,667)
=========== =========== =========== ===========
</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, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income .................................................... $ (871,354) $ 46,632 $ (792,830)
Adjustments to reconcile net (loss) income
to cash used in operating activities:
Depreciation and amortization ...................................... 464,427 545,989 471,498
Loss from property disposition ..................................... 967,764 0 0
Partnership's share of unconsolidated
joint venture (income) loss ...................................... (7,906) (413,857) 264,847
Minority interest's share of consolidated
joint venture loss ............................................... (781,288) (222,600) (173,375)
Decrease (increase) in rent receivable ............................. 21,374 (102,089) (27,601)
Increase in other receivables ...................................... (4,876) (1,261) 0
Decrease in other assets ........................................... (280,515) (68,979) (114,779)
(Decrease) increase in accrued and other liabilities ............... (15,891) 53,293 59,735
----------- ----------- -----------
Net cash used in operating activities ................................ (508,265) (162,872) (312,505)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions ...................................... (394,584) (592,372) (322,099)
Net cash proceeds from property disposition .......................... 2,140,598 0 0
Payment for restricted certificate of deposit ........................ 0 0 (92,782)
Release of restricted certificate of deposit ......................... 0 92,782 0
----------- ----------- -----------
Net cash provided by (used in) investing activities .................. 1,746,014 (499,590) (414,881)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from minority investor ................................. 1,193,141 748,500 796,356
Distributions to minority investor ................................... (2,152,098) 0 (56,925)
Loan to affiliate .................................................... 0 (4,770) 0
Repayment of loan to affiliate ....................................... 4,770 0 0
Funding of note payable secured by property .......................... 3,050,000 0 0
Principal payments on notes payable .................................. (3,416,399) 0 0
----------- ----------- -----------
Net cash (used in) provided by financing activities .................. (1,320,586) 743,730 739,431
----------- ----------- -----------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS ........................................... (82,837) 81,268 12,045
CASH AND CASH EQUIVALENTS - Beginning of year ......................... 97,439 16,171 4,126
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - End of year ................................ $ 14,602 $ 97,439 $ 16,171
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest ............................... $ 324,853 $ 240,000 $ 326,927
=========== =========== ===========
</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 ("SVP") to
facilitate cash contributions by SMMP for the continued development and
operation of the Sierra Vista property. The Partnership contributed the
properties and SMMP contributed cash to these newly formed partnerships. SMMP
made additional contributions in 1994, 1995, 1996 and 1997 to these
partnerships.
In October 1997, the Sierra Vista property was sold for $5,630,000. The
Partnership received net cash proceeds of $2,140,598 from the sale and the
purchaser assumed the Partnership's debt on such property of $3,044,397. The
Partnership also incurred additional selling costs and credited security
deposits and prorata rents for October to the buyer. In accordance with the SVP
joint venture agreement, these proceeds were distributed to SMMP. Under the
terms of the agreement, SMMP receives preferential cash distributions of
available "Distributable Funds" from the sale of the property to the extent of
its capital contributions. SMMP had made net contributions of $3,335,204 to the
Partnership through the sale date.
At December 31, 1997, the Partnership's remaining real estate investment is an
11.31% 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.
22
<PAGE>
Sierra Pacific Development Fund III
Notes to Consolidated Financial Statements
Page two
The consolidated financial statements include the accounts of the Partnership
and Sierra Vista Partners, a majority owned joint venture as of December 31,
1997 (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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Partnership at December 31, 1997 and 1996
consist of cash and cash equivalents, receivables, due from affiliates, accounts
payable and notes payable. The fair value of cash and cash equivalents,
receivables, and accounts payable approximates the carrying value due to the
short term nature of these items. The fair value of 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. 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 (DEFICIT) AND NET INCOME (LOSS) PER LIMITED PARTNERSHIP
UNIT
Equity (deficit) and net income (loss) per limited partnership unit are
determined by dividing the Limited Partners' equity and net income (loss) by
36,521, the number of limited partnership units outstanding.
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts, at December 31,
1997 and 1996, is as follows:
1997 1996
-------- --------
Other assets:
Prepaid expenses ................................ $ 0 $ 34,686
Deferred loan costs, net of accumulated
amortization of $5,035 in 1996 ................ 0 315
Deferred leasing costs, net of accumulated
amortization of $121,924 in 1996 ............ 0 119,689
-------- --------
$ 0 $154,690
======== ========
Accrued and other liabilities:
Accounts payable ................................ $ 4,660 $106,400
Accrued expenses ................................ 0 8,543
Security deposits ............................... 0 82,248
Interest payable ................................ 0 20,000
Other ........................................... 0 8,365
-------- --------
$ 4,660 $225,556
======== ========
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, 1997, 1996 and 1995 were $40,248,
$38,873 and $23,615, 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 $75,530, $73,047 and $55,468 for such services for the years ended
December 31, 1997, 1996 and 1995, respectively. Additionally, the Partnership
reimbursed the affiliate for construction supervision costs incurred by the
affiliate. For the years ended December 31, 1997, 1996 and 1995 the affiliate
received $64,904, $7,782 and $20,576, respectively, for tenant improvements
supervisory costs.
In consideration for services rendered with respect to initial leasing of
Partnership properties, an affiliate of the General Partner is paid initial
leasing costs. For the years ended December 31, 1997, 1996 and 1995 these fees
amounted to $76,984, $91,660 and $46,838, respectively, and were recorded as
deferred leasing costs.
During 1996, the Partnership made a short-term, non-interest bearing loan to an
affiliate. Repayment was made during 1997.
In consideration for services rendered with respect to obtaining new financing,
an affiliate of the General Partner is paid broker fees. For the year ended
December 31, 1997, these fees amounted to $61,000 and were recorded as deferred
loan costs. These fees were written off with the sale of the property. No such
fees were incurred in 1996 or 1995.
4. INCOME-PRODUCING PROPERTIES
At December 31, 1997 and 1996 the total cost and accumulated depreciation of the
property are as follows:
1997 1996
------------ ------------
Land .................................. $ 0 $ 2,878,269
Building and improvements ............. 0 7,350,947
------------ ------------
Total .................... 0 10,229,216
Accumulated depreciation .............. 0 (2,801,334)
Valuation allowance ................... 0 (1,600,000)
------------ ------------
Net ...................... $ 0 $ 5,827,882
============ ============
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 ($870,000, net, through December 31, 1994).
SMMP made additional cash contributions amounting to $796,356, $748,500 and
$1,193,141 and received distributions amounting to $56,925, $0 and $2,152,098
during 1995, 1996 and 1997, 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, 1996 and
1997, the Partnership's interest in SVP was changed to 75.28%, 62.26% and
52.95%, respectively, and SMMP's interest was changed to 24.72%, 37.74% and
47.05% respectively. On January 1, 1998, the Partnership's interest in SVP will
be increased to 65.49% and SMMP's interest will be reduced to 34.51%.
In October 1997, the Sierra Vista property was sold for $5,630,000. The
Partnership received net cash proceeds of $2,140,598 from the sale for its
62.26% interest in this property and the purchaser assumed the Partnership's
$3,044,397 debt on the property. The Partnership also incurred additional
selling costs and credited security deposits and prorata rents for October to
the buyer. In accordance with the SVP joint venture agreement, these proceeds
were distributed to SMMP. Under the terms of the agreement, SMMP receives
preferential cash distributions of available "Distributable Funds" from the sale
of the property to the extent of its capital contributions. SMMP had made net
contributions of $3,335,204 to the Partnership through the sale date.
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. Sorrento I was vacant all of 1995. At December 31, 1997, the
Partnership has an 11.31% equity interest with its contribution of Sorrento I
and the related debt; SMMP has an 88.69% equity interest with its $2,459,277 net
cash contributions through 1996.
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 prior year.
A modification agreement was entered into on September 30, 1997. The interest
rate remains fixed at 9.34% through October 1998, at which time the rate will
convert to the one-year treasury rate plus 375 basis points. The note is
amortized over a 210-month term and current payments are $6,154 per month,
principal and interest inclusive. The loan balance as of December 31, 1997 was
$631,827.
At any time upon 120 days written notice to CGS, SIP may fully discharge the
note by the payment of an amount equal to $750,000 less the aggregate amount of
principal paid under the note between the date of the CGS Agreement and the date
of payment plus any interest due.
Reference is made to the audited financial statements of Sorrento I Partners
included herein.
26
<PAGE>
Sierra Pacific Development Fund III
Notes to Consolidated Financial Statements
Page six
6. NOTES 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. 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 repaid and the Partnership entered
into a new loan agreement in the amount of $3,050,000. The loan was secured by
the Sierra Vista property, bore interest at 9.375% and called for monthly
principal and interest payments of $25,807 on the first day of each month. This
loan was transferred and assumed by the buyer of the property in October 1997.
7. PARTNERS' EQUITY (DEFICIT)
Accrual basis profits and losses resulting from operations of the Partnership
are allocated 99% to the Limited Partners and 1% to the General Partner.
Currently, the Partnership does not meet the criteria for distributing cash to
the General Partner, and it cannot reasonably predict when the criteria will be
met. Accordingly, no accrual basis profits and losses from operations has been
allocated to the General Partner through December 31, 1996. During 1997, the
General Partner was allocated losses to the extent they were in excess of the
Limited Parnters' capital balances since the Limited Partners cannot be
allocated losses in excess of their balances.
Upon any sale, refinancing or other dispositions of the Partnership's real
properties, allocations and distributions will be made to the Limited Partners
until they have received distributions from the sale or financing proceeds in an
amount equal to 100% of their unreturned capital. Thereafter, distributions
generally will be allocated 1% to the General Partner and 99% to the Limited
Partners until the Limited Partners have received distributions from all sources
equal to the sum of their respective priority distributions (an amount equal to
15% per annum cumulative on each Limited Partner's unreturned capital).
However, after the Limited Partners have received distributions of sale or
financing proceeds equal to their unreturned capital plus distributions from all
sources equal to a cumulative but not compounded return of 6% per annum on their
unreturned capital, the General Partner may be entitled to special distributions
not to exceed 3% of the gross sales prices of properties sold by the
Partnership. Thereafter, the General Partners will be entitled to receive
incentive distributions which, when aggregated with the 1% distributions to the
General Partner described in the preceding sentence, will equal 20% of the total
net sale or financing proceeds available for distribution to the Partners. Any
remaining sale or financing proceeds will be distributed to the Limited
Partners.
The proceeds from the sale of the Sierra Vista property were required to be
distributed to SMMP under the provisions of the agreement with SMMP and thus
were not allocated in accordance with the provisions described above.
27
<PAGE>
SORRENTO I PARTNERS
(A CALIFORNIA GENERAL PARTNERSHIP)
AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1997
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
Sorrento I Partners
We have audited the accompanying balance sheets of Sorrento I Partners, a
California general partnership, (the "Partnership") as of December 31, 1997 and
1996, and the related statements of operations, changes in partners' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sorrento I Partners as of
December 31, 1997 and 1996, and the results of its operations and cash flows for
each of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
March 13, 1998
29
<PAGE>
SORRENTO I PARTNERS
(A CALIFORNIA GENERAL PARTNERSHIP)
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents ........................................................ $ 3,675 $ 20,362
Receivables:
Unbilled rent (Notes 1 and 4) ................................................. 34,906 13,962
Other ......................................................................... 14,301 14,162
Due from affiliates (Note 3) ..................................................... 4,770 4,770
Income-producing property - net of accumulated
depreciation of $537,812 in 1997 and
$1,170,370 in 1996 (Notes 1, 4 and 5) ......................................... 2,439,688 2,541,614
Other assets (Notes 1 and 2) ..................................................... 137,926 171,776
---------- ----------
Total Assets ..................................................................... $2,635,266 $2,766,646
========== ==========
LIABILITIES AND GENERAL PARTNERS' EQUITY (DEFICIT)
Accrued and other liabilities (Note 2) ........................................... $ 16,124 $ 24,393
Note payable to affiliate (Note 5) ............................................... 631,827 750,000
---------- ----------
Total Liabilities ................................................................ 647,951 774,393
---------- ----------
General Partners' equity (Notes 1 and 6) ......................................... 1,987,315 1,992,253
---------- ----------
Total Liabilities and General Partners' equity ................................... $2,635,266 $2,766,646
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES
30
<PAGE>
SORRENTO I PARTNERS
(A CALIFORNIA GENERAL PARTNERSHIP)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Rental income (Note 1) ............................................ $ 283,635 $ 189,177 $ 0
Other income ...................................................... 9,404 0 0
----------- ----------- -----------
Total revenues ............................................... 293,039 189,177 0
----------- ----------- -----------
Expenses:
Operating expenses:
Depreciation and amortization ..................................... 127,662 149,618 136,089
Property taxes and insurance ...................................... 2,847 22,068 39,208
Administrative fees (Note 3) ...................................... 34,860 33,714 40,354
Maintenance and repairs ........................................... 49 24,458 31,500
Management fees (Note 3) .......................................... 15,762 13,003 0
Utilities ......................................................... 0 7,062 16,175
Legal and accounting .............................................. 22,803 18,216 26,090
General and administrative ........................................ 5,677 4,362 29,041
Salaries and payroll taxes ........................................ 0 0 1,561
Renting expenses .................................................. 0 3,300 0
Other operating expenses .......................................... 1,894 7,614 8,980
----------- ----------- -----------
Total operating expenses ..................................... 211,554 283,415 328,998
Interest .......................................................... 63,123 144,646 310,575
----------- ----------- -----------
Total expenses ............................................... 274,677 428,061 639,573
----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN .............................. 18,362 (238,884) (639,573)
----------- ----------- -----------
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT (NOTE 5) ................ 0 1,200,381 0
----------- ----------- -----------
NET INCOME (LOSS) .................................................... $ 18,362 $ 961,497 $ (639,573)
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES
31
<PAGE>
SORRENTO I PARTNERS
(A CALIFORNIA GENERAL PARTNERSHIP)
STATEMENTS OF CHANGES IN GENERAL PARTNERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
General Partners
------------------------------------------------------
Sierra Pacific Sierra
Development Mira Mesa
Fund III Partners Total
----------- ----------- -----------
<S> <C> <C> <C>
General Partners' equity (deficit) - January 1, 1995 ................ $ (490,699) $ 145,586 $ (345,113)
Net loss ............................................................ (264,847) (374,726) (639,573)
Contributions ....................................................... 0 500,242 500,242
----------- ----------- -----------
General Partners' equity (deficit) - December 31, 1995 .............. (755,546) 271,102 (484,444)
Net income .......................................................... 413,857 547,640 961,497
Contributions ....................................................... 0 1,551,100 1,551,100
Distributions ....................................................... 0 (35,900) (35,900)
----------- ----------- -----------
General Partners' equity (deficit) - December 31, 1996 .............. (341,689) 2,333,942 1,992,253
Net income .......................................................... 7,906 10,456 18,362
Contributions ....................................................... 0 141,000 141,000
Distributions ....................................................... 0 (164,300) (164,300)
----------- ----------- -----------
General Partners' equity (deficit) - December 31, 1997 .............. $ (333,783) $ 2,321,098 $ 1,987,315
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES
32
<PAGE>
SORRENTO I PARTNERS
(A CALIFORNIA GENERAL PARTNERSHIP)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................... $ 18,362 $ 961,497 $ (639,573)
Adjustments to reconcile net income (loss)
to cash used in operating activities:
Gain from extinguishment of debt ................................... 0 (1,200,381) 0
Depreciation and amortization ...................................... 127,662 149,618 136,089
(Increase) decrease in rent receivable ............................. (20,944) (13,962) 5,880
Increase in other receivables ...................................... (139) (14,162) 0
Decrease (increase) in other assets ................................ 8,114 (178,536) (7,849)
(Decrease) increase in accrued and other liabilities ............... (8,269) (4,511) 74,411
----------- ----------- -----------
Net cash provided by (used in) operating activities .................. 124,786 (300,437) (431,042)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions .................................... 0 (446,630) 0
----------- ----------- -----------
Net cash used in investing activities ................................ 0 (446,630) 0
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments to affiliates ............................................. 0 (4,770) 0
Contributions by the General Partners .............................. 141,000 1,551,100 500,242
Distributions to the General Partners .............................. (164,300) (35,900) 0
Principal payments on note payable ................................. (118,173) (787,976) (33,856)
----------- ----------- -----------
Net cash (used in) provided by financing activities .................. (141,473) 722,454 466,386
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS ................................................ (16,687) (24,613) 35,344
CASH AND CASH EQUIVALENTS - Beginning of period ........................ 20,362 44,975 9,631
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - End of period .............................. $ 3,675 $ 20,362 $ 44,975
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest ............................. $ 68,961 $ 164,898 $ 223,811
=========== =========== ===========
</TABLE>
During 1996, Sorrento I exercised a discounted payoff option on its notes
payable that resulted in a $1,200,381 extraordinary gain. During 1995, accrued
interest was added to the note payable principal balance in the amount of
$85,709. These are noncash transactions not reflected in the above statements of
cash flows.
SEE ACCOMPANYING NOTES
33
<PAGE>
SORRENTO I PARTNERS
(A CALIFORNIA GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Sorrento I Partners ("SIP") was formed as a California general partnership on
April 1, 1993 between Sierra Mira Mesa Partners ("SMMP") and Sierra Pacific
Development Fund III ("SPDFIII") to develop and operate the real property known
as Sorrento I, an industrial building, located in San Diego, California. The
property contains 43,100 square feet and is located adjacent to Sierra Mira Mesa
office building, which is owned and operated by Sierra Mira Mesa Partners. In
1993, SMMP contributed cash of $383,836 ($443,836, net, through 31, 1994) for a
55.03% interest and SPDFIII contributed the property and all associated
encumbrances for a 44.97% interest in SIP. During 1995, 1996 and 1997, SMMP
contributed an additional $500,242, $1,551,100 and $141,000 and received
distributions amounting to $0, $35,900 and $164,300 respectively. The
partnership agreement calls for a recalculation of the percentage ownership
interest each year on January 1st to account for the Partner's aggregate capital
contributions and distributions since inception through the prior year.
Accordingly, as of January 1, 1995, 1996 and 1997 SPDFIII's interest in SIP was
changed to 41.41%, 24.94% and 11.31%, respectively. On January 1, 1998,
SPDFIII's interest will be increased to 11.41% and SMMP's interest will be
reduced to 88.59% to reflect the 1997 contributions and distributions.
S-P Properties, Inc. is the General Partner of SPDFIII and of SMMP's general
partners, Sierra Pacific Development Fund II and Sierra Pacific Pension
Investors '84. On December 30, 1994, all of the outstanding stock of TCP,
Inc. was sold to Finance Factors, Inc. TCP, Inc. owns all of the common
stock of S-P Properties, Inc. Finance Factors was a subsidiary of CGS Real
Estate Company, Inc., a national real estate company. In July 1995, Finance
Factors, Inc. merged with Bancor Real Estate Company, Inc., another
subsidiary of CGS Real Estate Company, Inc.
BASIS OF FINANCIAL STATEMENTS
SIP maintains its books and prepares its financial statements in accordance with
generally accepted accounting principles. However, SIP prepares its tax returns
on the accrual basis of accounting as defined by the Internal Revenue Code with
adjustments to reconcile book and taxable income (loss) for differences in the
treatment of certain income and expense items. The accompanying financial
statements do not reflect any provision for federal or state income taxes since
such taxes are the obligation of the individual partners.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid, short-term investments with
original maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of SIP at December 31, 1997 and 1996 consist of cash
and cash equivalents, receivables, due from affiliates, accounts payable and
note payable. The fair value of cash and cash equivalents, receivables and
accounts payable approximates the carrying value due to the short term nature of
these items. In the opinion of management, the fair value of the note payable
approximates the carrying value based on market rates at December 31, 1997. The
fair value of the amounts due from affiliates can not be determined due to the
related party nature of this receivable.
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.
34
<PAGE>
Sorrento I Partners
Notes to Financial Statements
Page two
Expenditures for repairs and maintenance are charged against income as incurred.
Improvements and major renewals are capitalized. Costs and the related
accumulated depreciation of assets sold or retired are removed from the accounts
in the year of disposal or when fully depreciated and any resulting gain or loss
is reflected in income or deferred income as appropriate.
SIP employs a systematic approach in determining whether the value of
income-producing property has been impaired. Prior to 1995, a provision for loss
on a property was established if the appraised value of the property declined
below its book value due to what the General Partner believed to be an other
than temporary condition. A complete appraisal was performed on the property as
of December 31 each year
Effective January 1, 1995, SIP implemented Statement of Financial Accounting
Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (the "Statement"). SIP regularly evaluates
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. Future
cash flows are estimated and compared to the carrying amount of the asset to
determine if an impairment has occurred. If the sum of the expected future cash
flows is less than the carrying amount of the asset, SIP shall recognize an
impairment loss in accordance with the Statement. No provision was required due
to the implementation of this Statement.
Because the determination of fair value is based upon projections of future
economic events such as property occupancy rates, rental rates, operating cost
inflation and market capitalization rates which are inherently subjective, the
amounts ultimately realized at disposition may differ materially from the net
carrying value as of December 31, 1997. The cash flows used to determine fair
value and net realizable value are based on good faith estimates and assumptions
developed by management. Unanticipated events and circumstances may occur and
some assumptions may not materialize; therefore actual results may vary from the
estimates and the variances may be material. SIP may provide additional
write-downs which could be material in subsequent years if real estate markets
or local economic conditions change.
OTHER ASSETS
Deferred leasing costs represent costs incurred to lease properties and are
amortized over the life of the related lease.
Deferred loan costs represent costs incurred to obtain financing and are
amortized over the life of the related loan.
RENTAL INCOME AND RENT RECEIVABLE
Rental income is recognized on the straight-line method over the term of the
related operating lease in accordance with the provisions of Statement of
Financial Accounting Standards No. 13, "Accounting for Leases".
Rent receivable consists of (a) unbilled rent - the difference between rent
recognized on the straight-line method and actual cash due; an (b) billed rent -
rent due but not yet received.
35
<PAGE>
Sorrento I Partners
Notes to Financial Statements
Page three
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts, at December 31,
1997 and 1996 is as follows:
1997 1996
-------- --------
Other assets:
Prepaid expenses ................................ $ 0 $ 2,597
Deferred loan costs, net of accumulated
amortization of $77 in 1997 and $26
in 1996 ....................................... 940 991
Deferred leasing costs, net of accumulated
amortization of $42,506 in 1997 and
$16,822 in 1996 ............................... 136,986 162,671
Tax impounds .................................... 0 5,517
Deposits ........................................ 0 0
-------- --------
$137,926 $171,776
======== ========
Accrued and other liabilities:
Accounts payable ................................ $ 16,124 $ 18,555
Interest payable ................................ 0 5,838
-------- --------
$ 16,124 $ 24,393
======== ========
3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS
In 1994, all of the common stock of TCP, Inc. was purchased by Finance Factors,
Inc. from Carlsberg Management Company ("CMC"). TCP, Inc. owns all of the common
stock of S-P Properties, Inc., the General Partner of the Partnership. CMC
continued to manage the affairs of SIP through March 31, 1995.
An affiliate of the General Partner may receive a management fee of 6% of the
gross rental income collected from the property. Management fees paid to
affiliates for the years ended December 31, 1997 and 1996 were $15,762 and
$13,003 respectively. No such costs were incurred in 1995.
SIP reimburses an affiliate of S-P Properties, Inc. for expenses incurred by the
affiliate for services provided to SIP such as accounting, data processing and
similar services. The affiliate was reimbursed $34,860, $33,714 and $31,001,
respectively, for such services for the years ended December 31, 1997, 1996 and
1995. Additionally, SIP reimbursed an affiliate for construction supervision
costs incurred by the affiliate. For the years ended December 31, 1997, 1996 and
1995 the affiliate received $0, $33,084 and $0, respectively, for tenant
improvements supervisory costs.
In consideration for services rendered with respect to initial leasing of SIP's
property, an affiliate of S-P Properties, Inc. is paid initial leasing costs.
For the years ended December 31, 1997, 1996 and 1995 these fees amounted to $0,
$59,563 and $0, respectively, and were recorded as deferred leasing costs.
During 1996, SIP made a non-interest bearing advance to an affiliate in the
amount of $4,770. Repayment is expected in 1998.
Reference is made to Note 5.
36
<PAGE>
Sorrento I Partners
Notes to Financial Statements
Page four
4. INCOME-PRODUCING PROPERTIES
At December 31, 1997 and 1996 the total cost and accumulated depreciation of the
property are as follows:
1997 1996
----------- -----------
Land ................................... $ 1,305,518 $ 1,305,518
Building and
improvements ........................... 1,671,982 2,406,466
----------- -----------
Total ............................... 2,977,500 3,711,984
Accumulated depreciation ............... (537,812) (1,170,370)
----------- -----------
Net ................................. $ 2,439,688 $ 2,541,614
=========== ===========
During 1997 and 1996, SIP removed $734,484 and $10,780, respectively, from its
building and improvements and related accumulated depreciation accounts for
fully depreciated property.
Future minimum base rental income to be recognized on a straight-line basis and
amounts to be received on a cash basis are as follows:
Year
Ending Straight-line Cash
December 31, Basis Basis
- ------------------------------------ ---------- ----------
1998 ..................... $ 283,635 $ 273,196
1999 ..................... 283,635 278,448
2000 ..................... 283,635 289,584
2001 ..................... 283,635 295,152
2002 ..................... 283,635 306,960
Thereafter .................. 94,547 104,288
---------- ----------
Total ..................... $1,512,722 $1,547,628
========== ==========
SIP relied on one tenant for 100% of 1997 rental income. The principal business
of the tenant is research and development in the communications sector.
37
<PAGE>
Sorrento I Partners
Notes to Financial Statements
Page five
5. NOTE PAYABLE
SIP had a non-recourse bank note payable with an original principal balance of
$3,000,000 collateralized by real and personal property. The annual interest
rate of the note was variable at bank prime plus 2-1/2% with a minimum rate of
9% and maximum rate of 15-1/2%. The original maturity of the note was July 1998
and the note included a discounted payoff option of $1,500,000.
CGS Real Estate Company, Inc. ("CGS"), an affiliate of the General Partner,
acquired the note and security documents from the bank in May 1996. In
connection with the purchase of the bank note and security documents by CGS, SIP
made a principal payment to the bank of $750,000 and entered into a $750,000
note agreement with CGS (the "CGS Agreement"). The CGS Agreement, collaterized
by real and personal property, called for monthly interest payments through
December 1996 and monthly principal and interest payments thereafter until
maturity on May 31, 2016. The interest rate is fixed at 9.34% per annum for the
first year of the note and will thereafter be the one-year Treasury rate plus
375 basis points. A pre-payment in the amount of $105,000 was paid in April
1997.
A modification agreement was entered into on September 30, 1997. The interest
rate remained fixed at 9.34% through October 1998, at which time the rate will
convert to the one-year treasury rate plus 375 basis points. The note is
amortized over a 210-month term and current payments are $6,154 per month,
principal and interest inclusive until maturity in March 2015. The loan balance
as of December 31, 1997 was $631,827.
At any time upon 120 days written notice to CGS, SIP may fully discharge the
note by the payment of an amount equal to $750,000 less the aggregate amount of
principal paid under the note between the date of the CGS Agreement and the date
of payment plus any interest due.
The excess of the net carrying amount of the balance due under the bank note
agreement, net of unamortized deferred loan fees, over the balance due under the
CGS Agreement was recognized as an extraordinary item in 1996 in the amount of
$1,200,381.
Annual maturities under the CGS Agreement as of December 31, 1997 are: $15,489
in 1998; $16,999 in 1999; $18,657 in 2000; $20,476 in 2001; $22,472 in 2002; and
$537,734 thereafter.
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.
38
<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.
39
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM SIERRA PACIFIC DEVELOPMENT FUND III DECEMBER 31, 1997 FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 14,602
<SECURITIES> 0
<RECEIVABLES> 6,137
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,739
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 20,739
<CURRENT-LIABILITIES> 4,660
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (374,667)
<TOTAL-LIABILITY-AND-EQUITY> 20,739
<SALES> 558,091
<TOTAL-REVENUES> 558,724
<CGS> 0
<TOTAL-COSTS> 487,677
<OTHER-EXPENSES> 464,427
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 299,404
<INCOME-PRETAX> (871,354)
<INCOME-TAX> 0
<INCOME-CONTINUING> (871,354)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (871,354)
<EPS-PRIMARY> (23.86)
<EPS-DILUTED> (23.86)
</TABLE>