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 : 0-14269
SIERRA PACIFIC PENSION INVESTORS '84
(A CALIFORNIA LIMITED PARTNERSHIP)
State of California 33-0043952
------------------------------- -------------------------------
(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 77057
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12 (b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
Securities registered pursuant to Section 12 (g) of the Act:
80,000 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
1
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PART I
ITEM 1. BUSINESS
(a.) GENERAL DEVELOPMENT OF BUSINESS. Sierra Pacific Pension Investors '84 (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.
The Partnership's activities during the preceding five years have involved the
ownership and operation of two real estate projects in Arizona:
RENTABLE
SQUARE
PROJECT NAME, LOCATION TYPE OF REAL ESTATE FOOTAGE
- ---------------------- ------------------- -------
Sierra Spectrum, Phoenix (A) Office 70,532
Sierra Valencia, Tucson Industrial/office 81,943
(A)SOLD DECEMBER, 1994.
On March 7, 1997 Sierra Valencia LLC ("SVLLC") was formed with the Partnership
being the sole member. This company was formed solely to engage in the following
activities: a) to acquire from Sierra Pacific Pension Investors '84 the property
known as Sierra Valencia, b) to own, hold, sell, assign, transfer, operate,
lease, mortgage, pledge and otherwise deal with the Property, c) to exercise all
powers enumerated in the Delaware Limited Liability Company Act necessary or
convenient to conduct, promotion or attainment of the business or purposes
otherwise set forth. The Sierra Valencia property was transferred at no cost
from the Partnership to SVLLC.
In December, 1994, the Partnership sold Sierra Spectrum for $4,000,000. The sale
proceeds were received in cash and a note receivable from the buyer. A gain of
$91,823 was recorded in 1994 with an additional gain of $367,296 deferred to
subsequent years when the note receivable is collected. A principal paydown of
$1,318,000 was received in 1995 and $151,510 of this deferred gain was
recognized.
In 1985 Sierra Mira Mesa Partners ("SMMP"), a California general partnership,
was formed between the Partnership and Sierra Pacific Development Fund II
("SPDFII"). SMMP was initially created to develop and operate the office
building known as Sierra Mira Mesa in San Diego, California. The Partnership's
initial ownership interest in SMMP was 49%; the remaining 51% was owned by
SPDFII. Effective December 31, 1996, the general partners amended the
partnership agreement to allow for adjustments in the sharing ratio each year
based upon the relative net contributions and distributions since inception of
each general partner. As a result, the sharing ratio in effect for 1997 was
54.42% for the Partnership and 45.58% for SPDFII. In conjunction with this
amendment, the general partners forgave the December 31, 1996 balances of
advances due from SMMP and included these amounts as adjustments to their
respective equity accounts. The sharing ratio effective January 1, 1998 will be
adjusted to 66.26% for the Partnership and 33.74% for SPDFII.
SMMP also holds an 88.69% interest in Sorrento I Partners (a California general
partnership with Sierra Pacific Development Fund III formed in 1993), a 24.91%
interest in Sorrento II Partners (a California general partnership with Sierra
Pacific Institutional Properties V formed in 1993), a 4.96% interest in Sierra
Creekside Partners (a California general partnership with Sierra Pacific
Development Fund formed in 1994), and a 47.05% interest in Sierra Vista Partners
(a California general partnership with Sierra Pacific Development Fund III
formed in 1994).
Audited financial statements of Sierra Mira Mesa Partners and Sorrento I
Partners are included in the Annual Report to the Limited Partners attached as
an Exhibit.
(b.)NARRATIVE DESCRIPTION OF BUSINESS. During 1997, the Partnership owned and
operated one real estate project in Tucson, Arizona as described above. The
project is occupied by eight tenants, the most significant of which are SHC
of Arizona and Todd Engineering. SHC of Arizona comprised $124,471, or 26%,
of 1997 rental income and Todd Engineering comprised $63,500, or 13%, of
1997 rental income.
2
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There is significant competition in the industrial/office building rental market
in the Partnership's trade area. An appraisal performed at the end of 1994
identified numerous projects near the Partnership's property that offered
similar amenities at comparable rental rates.
(c.) COMPARISON OF CURRENT ACTIVITIES TO THOSE PROPOSED AT THE INITIATION OF
THE PARTNERSHIP. In the Partnership's prospectus dated September 4, 1984, the
investment objectives were described as follows:
"The Partnership has been formed to acquire and operate on an all-cash basis
commercial and industrial real properties, including properties which are to be
developed by the Partnership or are under development or construction
("development properties") and properties which are newly-constructed or have
operating histories ("existing properties"). A minimum of 50% of the cash
invested in properties by the Partnership will be invested in development
properties. The primary investment objectives of the Partnership are to: (i)
preserve, protect, and return the Partnership's invested capital; (ii) generate
sufficient cash from operations to make distributions of Available Cash to the
Limited Partners; (iii) attempt to maximize long-term appreciation in the value
of the Partnership's real estate investments; (iv) attempt to sell the
Partnership's real estate investments for cash after an approximate three to
five year holding period; (v) exclude from the assets of the Limited Partners,
for purposes of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), the assets of the Partnership; and (vi) exclude from unrelated
business taxable income the entire amount of any allocations to the Limited
Partners. There is no assurance that such objectives will be attained."
Operations of the Partnership through 1997 have been consistent with the intent
of the original prospectus in that the Partnership has invested in real estate
projects that had the potential for capital gains, preservation of capital, and
providing distributions of Available Cash to the limited partners. The ERISA and
unrelated business tax objectives have been met. However, the Partnership and
its real estate have been adversely affected by the Tax Reform Act of 1986,
aggressive lending by banks that resulted in commercial real estate
overbuilding, and subsequent severe recessions. The original intention to sell
the Partnership's real estate investments after the five year holding period has
been delayed indefinitely. As of December 31, 1997, the Partnership had paid
cash distributions of $21.43 for each $250 unit investment and remaining
partners' equity was computed at $114.35 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 $135.78.
The General Partner's goal is to continue operating its remaining property until
such time as rental rates return to the level necessary to support new
commercial and industrial building development. At that time, the property may
be sold at a price substantially greater than its current book value.
ITEM 2. PROPERTIES
The Partnership owns Sierra Valencia (the "Property"), an industrial property
located in Tucson, Arizona. The Property includes one building comprising 81,943
rentable square feet and is 99% occupied at December 31, 1997. The
weighted-average effective annual rent per square foot at December 31, 1997 is
$6.07. The principal businesses carried on from the building are varied and
include healthcare sales and administration, pistachio nut marketing and
distribution, optics research and development, manufacturing for the
recreational vehicle segment, and sales and distribution of medical equipment
and supplies.
The Partnership also owns a 54.42% interest in SMMP which owns Sierra Mira Mesa,
an office building in San Diego, California. Through its ownership interest in
SMMP, the Partnership also has an indirect 48.26% interest in an industrial
property known as Sorrento I in San Diego, California. This indirect ownership
interest is subject to adjustment yearly based upon the relative contributions
of the partners.
3
<PAGE>
SIERRA VALENCIA - TUCSON, ARIZONA
SUMMARY OF SIGNIFICANT TENANTS
Six of the Property's eight tenants occupy more than ten percent of the rentable
square footage of the building as follows:
<TABLE>
<CAPTION>
Percent
of Effective Percent
Square Rentable Rent Per Effective of Gross
Feet Square Square Rent Per Annual Expiration of
Tenants Occupied Feet Foot Annum Rent Lease
- ------------------------ -------- ---------- ----------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Todd Engineering 19,255 23% $ 3.30 $ 63,500 13% Month to Month
SHC of Arizona, L.C. 13,586 17% 9.16 124,471 25% June 2002
Pistachio Corp. of
Arizona, Inc. 10,648 13% 5.10 54,305 11% July 2000
Byron Medical, Inc. 8,124 10% 6.24 50,694 10% November 1999
Wick Communications Co. 10,021 12% 5.23 52,364 11% September 2001
Innovative Lasers
Corporation 14,017 17% 7.24 101,451 21% October 2001
Tenants Occupying
less than 10% sq ft 5,716 7% 8.21 46,955 9% Various
-------- ---------- ----------- ---------- -----------
Total Rented Space 81,367 99% $ 6.07 $ 493,740 100%
Vacancies 576 1%
-------- ----------
Total Rentable Space 81,943 100%
======== ==========
SUMMARY OF LEASES BY EXPIRATION
One of the eight tenants has a month to month lease. The remaining leases on the
Property are scheduled to expire over the next five years as indicated in the
table below.
Year of expiration 1998 1999 2000 2001 2002 Totals
Number of tenants 0 3 1 2 1 7
Percent of total
tenants 0% 37% 13% 25% 13% 88%
Total area (square
feet) 0 13,840 10,648 24,038 13,586 62,112
Annual rent $ 0 $ 97,649 $ 54,305 $153,815 $ 124,471 $ 430,240
Percent gross annual
rent 0% 20% 11% 31% 25% 87%
</TABLE>
DEPRECIABLE PROPERTY Reference is made to Schedule III of the Form 10-K.
REAL ESTATE TAXES The real estate tax obligation for 1997 is
approximately 4.8% of assessed value. The annual real
estate taxes for 1997 are $92,020.
INSURANCE In the opinion of management, the property is adequately
covered by insurance.
ENCUMBRANCES On March 27, 1997, Sierra Valencia LLC entered into a
loan agreement with First Union Bank of North Carolina in
the amount of $1,404,000. This loan, which is secured by a
first lien on the Sierra Valencia property, bears interest
at 9.25% per annum and calls for monthly principal and
interest payments of $12,024 on the first day of each
month. Such payments shall continue until April 2007, when
the indebtedness is due in full. There is a 1% premium for
prepayment of this note. As of December 31, 1997 the loan
balance was $1,395,607.
4
<PAGE>
On April 15, 1997, the Partnership entered into a loan
agreement with IDM Participating Income Company II, an
affiliate of the general partner, in the amount of
$200,000. This loan is secured by a second lien on the
Sierra Valencia property. This note bears a variable
interest rate determined by the Federal Reserve of San
Francisco's discount rate prevailing on the 25th day of
the month preceding the payment due date plus a 3%
premium. The interest rate can be adjusted the last day of
March, June, September and December of each year until
note agreement is fulfilled. The minimum rate will be
12.12%. The maximum rate will be 15.15%. The current
interest rate paid is 12.12%. Monthly payment of $6,659,
consisting of both interest and principle, commenced on
May 15, 1997 and shall continue until April 15, 2000, when
the indebtedness is paid in full. As of December 31, 1997,
the loan balance was $166,527.
SIERRA MIRA MESA - SAN DIEGO, CALIFORNIA
Sierra Mira Mesa office building consists of 89,560 rentable square feet and is
98% occupied at December 31, 1997. The principal business carried on from the
building is insurance. The average effective annual rent per square foot at
December 31, 1997 is $18.74.
SUMMARY OF SIGNIFICANT TENANTS
Only one of the five tenants occupies ten percent or more of the rentable square
footage of the building. The principal business of this significant tenant is
insurance. Details of this significant tenant and its leases follow:
<TABLE>
<CAPTION>
Percent
of Effective Percent
Square Rentable Rent Per Effective of Gross
Feet Square Square Rent Per Annual Expiration of
Tenants Occupied Feet Foot Annum Rent Lease
- ----------------------- --------- ---------- ----------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
State Comp. Insurance
Fund 73,912 83% $ 19.77 $1,461,132 90% February 2003
State Comp. Insurance
Fund 1,489 2% 4.03 6,000 0% Month to Month
Tenants Occupying
less than 10% sq ft 11,925 13% 14.23 169,748 10% Various
--------- ---------- ----------- ---------- -----------
Total Rented Space 87,326 98% $ 18.74 $1,636,880 100%
Vacancies 2,234 2%
--------- ----------
Total Rentable Space 89,560 100%
========= ==========
SUMMARY OF LEASES BY EXPIRATION
The Property's five tenants have leases scheduled to expire over the next six
years as scheduled below.
Year of expiration 1998 1999 2000 2001 2002 2003 Total
Number of tenants 1 2 0 1 0 1 5
Percent of total
tenants 20% 40% 0% 20% 0% 20% 100%
Total area
(square feet) 4,035 6,579 0 762 0 73,912 85,288
Annual rent $55,396 $102,352 $ 0 $12,000 $ 0 $1,461,132 $1,630,880
Percent gross
annual rent 3% 6% 0% 1% 0% 89% 99%
</TABLE>
5
<PAGE>
DEPRECIABLE PROPERTY
Sierra Mira Mesa, San Diego, California
Office Building - Income-Producing Property
<TABLE>
<CAPTION>
Tenant
Buildings Improvements Total
<S> <C> <C> <C> <C>
Historical Cost & Tax Basis $ 2,480,940 $ 6,026,352 $ 2,227,856 $10,735,148
Accumulated Depreciation (2,174,943) (1,913,087) (4,088,030)
---------------- ---------------- -------------- ---------------
Net Carrying Value $ 2,480,940 $ 3,851,409 $ 314,769 $ 6,647,118
================ ================ ============== ===============
Depreciation Method Not Applicable Straight-line Straight-line
Depreciable Life Not Applicable 5-30 Years 1-10 Years
</TABLE>
REAL ESTATE TAXES The real estate tax obligation for 1997 is approximately
1.12% of the assessed value or $69,864.
INSURANCE In the opinion of management, the property is adequately
covered by insurance.
ENCUMBRANCES The property is encumbered by a mortgage lien in
favor of Lincoln National Life Insurance Company with a
principal balance of $5,041,225 at December 31, 1997. The
mortgage bears interest at 7.74%. Monthly principal and
interest payments of $51,739 are due through maturity at
October 2010. The note is subject to prepayment penalties
of approximately 1% of the outstanding principal balance
between months 25 and 177 of the loan term. No prepayment
is allowed during the first two years of the loan and no
prepayment penalty will be imposed if prepayment occurs in
the final three months of the loan term.
SORRENTO I - SAN DIEGO, CALIFORNIA
Sorrento I is an industrial building with 43,100 square feet of rentable space.
One tenant began leasing the entire 43,100 rentable square feet of Sorrento I in
1996. Rental income of $23,636 per month is recognized under this lease, which
expires in April 2003. The effective annual rent per square foot at December 31,
1997 is $6.58. The principal business of the tenant is research and development
in the communications sector.
DEPRECIABLE PROPERTY
Sorrento I, San Diego, California
Office Building - Income-Producing Property
<TABLE>
<CAPTION>
Tenant
Land Buildings Improvements Total
<S> <C> <C> <C> <C>
Historical Cost & Tax Basis $ 1,305,518 $ 1,342,683 $ 329,299 $ 2,977,500
Accumulated Depreciation (474,327) (63,485) (537,812)
---------------- ---------------- -------------- ---------------
Net Carrying Value $ 1,305,518 $ 868,356 $ 265,814 $ 2,439,688
================ ================ ============== ===============
Depreciation Method Not Applicable Straight-line Straight-line
Depreciable Life Not Applicable 10-30 Years 7-10 Years
</TABLE>
6
<PAGE>
REAL ESTATE TAXES The real estate tax obligation for 1997 is approximately
1.12% of the assessed value or $28,603.
INSURANCE In the opinion of management, the property is adequately
covered by insurance.
ENCUMBRANCES Sorrento I Partners ("SIP") had a non-recourse bank note
payable with an original principal balance of $3,000,000
collateralized by the Sorrento I property. The annual
interest rate of the note was variable at bank prime plus
2-1/2% with a minimum rate of 9% and maximum rate of
15-1/2%. The original maturity of the note was July 1998
and the note included a discounted payoff option of
$1,500,000.
CGS Real Estate Company, Inc. ("CGS"), an affiliate of the
General Partner, acquired the note and security documents
from the bank in May 1996. In connection with the purchase
of the bank note and security documents by CGS, SIP made a
principal payment to the bank of $750,000 and entered into
a $750,000 note agreement with CGS (the "CGS Agreement").
The CGS Agreement, collaterized by real and personal
property, called for monthly interest payments through
December 1996 and monthly principal and interest payments
thereafter until maturity on May 31, 2016. The interest
rate is fixed at 9.34% per annum for the first year of the
note and will thereafter be the one year Treasury rate
plus 375 basis points. A prepayment 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
principal of the note on the effective date was $635,479
and is amortized over a 210-month term. 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
7
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERS' EQUITY AND RELATED MATTERS
As of December 31, 1997, the number of security holders is as follows:
NUMBER NUMBER OF
OF UNITS RECORD HOLDERS
------------- ------------
Limited Partners 77,000 3,600
============= ============
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 80,000 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 paid cash distributions of $.65 and $2.60 per limited
partnership unit during the years ended December 31, 1997 and 1996,
respectively. There are no contractual or other restrictions on the
Partnership's ability to make such distributions.
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data for the Partnership is filed by reference to the
Annual Report to the Limited Partners attached as an Exhibit.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations include certain forward looking statements reflecting the
Partnership's expectations in the near future; however, many factors which may
affect the actual results, especially changing regulations, are difficult to
predict. Accordingly, there is no assurance that the Partnership's expectations
will be realized.
Overview:
The following discussion should be read in conjunction with the Selected
Financial Data and the Partnership's Consolidated Financial Statements and Notes
thereto incorporated by reference to the Annual Report to the Limited Partners
attached as an Exhibit. As of December 31, 1997, the Partnership owns Sierra
Valencia, an industial office building in Tucson, Arizona. The Partnership also
owns a 54.42% interest in Sierra Mira Mesa Partners ("SMMP"). SMMP owns an
office building - Sierra Mira Mesa in San Diego, California.
8
<PAGE>
Results of Operations:
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996.
Rental income remained relatively unchanged decreasing by $2,000, or 1%,
primarily as a result of lower common area maintenance billings. This decrease
was partially offset by an increase in the weighted-average effective rent per
square foot, on an accrual basis, increased from $5.58 at December 31, 1996 to
$6.07 at December 31, 1997. The Property is 99% occupied at December 31, 1997.
Total operating expenses decreased by $18,000, or 3%, primarily due to lower
administrative fees and a decrease in legal and accounting fees. This decrease
was partially offset by an increase in other operating expenses incurred during
the year.
Interest expense of $115,000 was recognized during the year due to two loan
agreements entered into by the Partnership. The loans are secured by the Sierra
Valencia property. The Property was previously unencumbered.
The Partnership's share of (loss) income from investment in SMMP was ($507,000)
for the year ended December 31, 1997 compared to $156,000 for the year ended
December 31, 1996. The loss generated by SMMP was principally the result of its
share of loss from its joint venture partner, Sierra Vista Partners ("SVP"). SVP
sold the Sierra Vista property in October 1997 and recorded a $968,000 loss from
property disposition.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995.
Rental income increased by $39,000 or 9%, due primarily to an increase in
occupancy from 88% at December 31, 1995 to 100% at December 31, 1996. One new
tenant accounted for an increase in leased square footage of 10,021, or 12%, of
the rentable square footage of Sierra Valencia. The weighted-average effective
rent per square foot, on an accrual basis, decreased from $5.80 at December 31,
1995 to $5.58 at December 31, 1996, principally as a result of favorable lease
terms given to this new tenant as an incentive to lease space at the Property.
Interest income decreased by $84,000, or 30%, due to a $1,318,000 principal
paydown of the note receivable from the sale of Sierra Spectrum received in July
1995. This note had an original balance of $3,200,000 and bears interest at a
rate of 10% per annum.
Operating expenses decreased by $85,000, or 12%, primarily due to a $70,000
decrease in depreciation and amortization expense resulting from the
discontinuance of depreciation on the building which was fully depreciated in
the first quarter of 1996.
The Partnership's share of income (loss) from investment in SMMP was $156,000
for the year ended December 31, 1996 compared to ($296,000) for the year ended
December 31, 1995. This increase in income generated by SMMP was principally due
to its share of income from Sorrento I Partners ("SIP"), which owns the Sorrento
I property. SIP, which is included in the consolidated financial statements of
SMMP, exercised a discounted payoff option in 1996 which resulted in an
extraordinary gain of $1,200,000. Furthermore, Sorrento I Partners entered into
a lease with a tenant for all 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 Resources:
In 1997, the Partnership entered into two loan agreements totaling $1,604,000.
The loans are secured by the Sierra Valencia property. The proceeds of these
loans were primarily used to satisfy the liquidity requirements of SMMP. The
Property was previously unencumbered.
The Partnership used cash of $97,000 in operating activities and paid $160,000
for property additions and lease commissions during 1997. The Partnership is in
an illiquid position at December 31, 1997 with cash and billed rents of $31,000
and accrued and other liabilities of $108,000. The Partnership anticipates cash
required to meet debt obligations and for construction of new tenant space will
be funded from the operations of the Property.
9
<PAGE>
Inflation:
The Partnership's long-term leases contain provisions designed to mitigate the
adverse impact of inflation on its results from operations. Such provisions may
include escalation clauses related to Consumer Price Index increases.
YEAR 2000 COMPLIANCE
The Year 2000 Compliance issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Partnership's computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The total cost to the Partnership of activities associated with the Year 2000
Compliance issue is not anticipated to be material to its financial position or
results of operations in any given year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and independent auditors' report are
incorporated by reference to the Annual Report to the Limited Partners attached
as an Exhibit.
1. Independent Auditors' Report
2. Consolidated Balance Sheets - December 31, 1997 and 1996
3. Consolidated Statements of Operations - for the years ended December 31,
1997, 1996 and 1995
4. Consolidated Statements of Changes in Partners' Equity - for the years
ended December 31, 1997, 1996 and 1995
5. Consolidated Statements of Cash Flows - for the years ended December 31,
1997, 1996 and 1995
6. Notes to Consolidated Financial Statements
7. Audited Consolidated Financial Statements and related footnotes of Sierra
Mira Mesa Partners
8. Audited financial statements and related footnotes of Sorrento I Partners
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
10
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Registrant is a California Limited Partnership and has no officers or
directors.
S-P Properties, Inc., a California corporation, is the general partner of the
Registrant. In December 1994, Finance Factors, Inc., a subsidiary of CGS Real
Estate Company, Inc., purchased the common stock of TCP, Inc. TCP, Inc. owns all
of the common stock of S-P Properties, Inc. In July 1995, Finance Factors, Inc.
merged with Bancor Real Estate Company, Inc., a 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 47 3 years
Director
William J. Carden Assistant Secretary/ 53 3 years
Treasurer and Director
Thomas N. Thurber - President and Director, S-P Properties, Inc. Mr. Thurber is
a Certified Public Accountant who began his career with Arthur Andersen & Co. in
1972. In 1979, he joined a major publicly traded real estate development firm
(Daon) where he became Controller for U.S. Operations. Subsequently, Mr. Thurber
served as Director of Real Estate for a developer of retail properties, and
Chief Financial Officer of a trust with significant investments in commercial
real estate. Mr. Thurber also serves as a director of Property Secured
Investments, Inc. Mr. Thurber holds a bachelors degree in accounting from
Florida State University.
Dawson L. Davenport - Vice President, S-P Properties, Inc. Mr. Davenport is the
founder of WD Real Estate Services, a full service property management firm that
became part of the Banc Commercial family of companies in 1992. Mr. Davenport
has been responsible for the management, development and rehabilitation of
substantial commercial, industrial, retail, and residential projects during the
past seventeen years. Mr. Davenport specializes in leasing and turning around
distressed properties.
Steven M. Speier - Secretary/Treasurer and Director, S-P Properties, Inc. Mr.
Speier who after spending two years in public accounting, went into the banking
industry in 1975. During his sixteen year banking career, Mr. Speier managed a
real estate loan portfolio of approximately $1.5 billion secured by properties
throughout the United States. Mr. Speier brings to S-P Properties, Inc. a broad
real estate background that includes management, leasing, and disposition of all
categories of commercial real estate. Mr. Speier also serves as a director of
IDM Corporation. Mr. Speier is a licensed real estate broker, is registered as a
Certified Public Accountant, and has a masters degree in business administration
from Grand Valley State University in Michigan.
William J. Carden - Assistant Secretary/Treasurer and Director, S-P Properties,
Inc. Mr. Carden is the founder and President of CGS Real Estate Company, Inc.,
which owns over one million square feet of commercial real estate. Mr. Carden
founded DVM Properties, Inc. in 1974 which concentrated on rehabilitation of
retail, office, industrial, and commercial real estate. Mr. Carden is a former
Director of Bay Financial, a New York Stock Exchange company and currently
serves as a director of Property Secured Investments, Inc. and IDM Corporation.
11
<PAGE>
There have been no events under any bankruptcy act, no criminal proceedings, and
no judgments or injunctions material to the evaluation of the ability and
integrity of any director or officer during the past five years.
ITEM 11. MANAGEMENT REMUNERATION
The Registrant is a California Limited Partnership and has no officers or
directors. No options to purchase securities of the Registrant have been granted
to any person.
In accordance with the terms of the Partnership Agreement, certain affiliates of
the General Partner receive real estate brokerage commissions in connection with
the leasing of properties by the Partnership and receive from the Partnership
certain management and administrative services fees. These amounts are set forth
in the Annual Report to the Limited Partners attached as an Exhibit.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
None
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership may pay 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 $21,799. 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 $63,910 during the year
ended December 31, 1997. The Partnership also reimburses ASRE for construction
supervision costs. The Partnership paid $10,504 to ASRE for tenant improvement
supervisory costs in 1997. In consideration for services rendered with respect
to initial leasing of Partnership properties, ASRE is paid initial leasing
costs. For the year ended December 31, 1997, these fees amounted to $19,109.
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.
On December 30, 1994, the Sierra Spectrum property with a historical cost basis
of $2,993,134 was sold for $4,000,000 ($800,000 cash down-payment and $3,200,000
trust deed note) to No.-So., Inc. This note calls for monthly interest only
payments and bears interest of 10% per annum. The original note was due to
mature on June 30, 1995 and was extended to June 30, 1996. During the year ended
December 31, 1995, the Partnership received principal payments of $1,317,928 on
the trust deed note. In 1997, the maturity date was extended to December 31,
1998 and interest receivable of $307,759 was added to the pricipal balance of
the note. All other terms of the original note remain unchanged. CGS Real Estate
Company, Inc. owns 33.33% of No.-So., Inc.
Reference is made to Item 2 for additional information concerning related party
transactions.
12
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. EXHIBITS
1. Annual Report to the Limited Partners
2. Exhibit Number 27 - Financial Data Schedule
B. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules and the report of the independent
auditors thereon are included herein:
1. Schedule II - Valuation and Qualifying Accounts and Reserves - for the
years ended December 31, 1997, 1996 and 1995
2. Schedule III - Real Estate and Accumulated Depreciation - December 31,
1997
All other schedules are omitted as they either are not required or are not
applicable, or the required information is set forth in the financial
statements and notes thereto.
C. REPORTS ON FORM 8-K
None
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SIERRA PACIFIC PENSION INVESTORS '84
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.
14
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
To the Partners of
Sierra Pacific Pension Investors '84
We have audited the consolidated financial statements of Sierra Pacific Pension
Investors '84 and subsidiary, a California limited partnership, (the
"Partnership") as of December 31, 1997 and 1996, and for each of the three years
in the period ended December 31, 1997 and have issued our report thereon dated
March 13, 1998. Such consolidated financial statements and 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 Pension Investors '84, 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
15
<PAGE>
SCHEDULE II - FORM 10-K
SIERRA PACIFIC PENSION INVESTORS '84 AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
Income -
Producing
Properties
---------------
Allowance for loss - January 1, 1995 $ 1,880,000
Provision charged to costs
and expenses (1) 0
---------------
Allowance for loss - December 31, 1995 1,880,000
Provision charged to costs
and expenses (1) 0
---------------
Allowance for Loss - December 31, 1996 1,880,000
Provision charged to costs
and expenses (1) 0
---------------
Allowance for loss - December 31, 1997 $ 1,880,000
===============
(1) See Notes 1 and 4 to consolidated financial statements incorporated by
reference to the Annual Report to the Limited Partners attached as an
Exhibit.
16
<PAGE>
SCHEDULE III - FORM 10-K
SIERRA PACIFIC PENSION INVESTORS '84 AND SUBSIDIARY
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Initial Cost Gross Amount at
to Partnership (1) Improvements Which carried at close of period
----------------------- Capitalized -------------------------------------
Encumb- Improve- After Acquis- Improve- Total
Description rances Land ments ition (2) Land ments (3)(4)(6)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OFFICE BUILDING-
INCOME -PRODUCING:
Sierra Valencia
Tucson, AZ $1,562,134 $977,677 $4,011,617 $977,677 $3,952,310 $4,929,987
'
Accum. Date Date Deprec.
Description Deprec. (5) Constructed Acquired Life
- -------------------------------------------------------------------------------
OFFICE BUILDING-
INCOME -PRODUCING:
Sierra Valencia
Tuscon, AZ $1,677,364 11/87 9/85 3-30 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) A valuation allowance of $1,880,000 was established as the appraised
value of the properties declined below book value.
(5) Reconciliation of total real estate carrying value and accumulated
depreciation for the three years ended December 31, 1997 is as follows:
Total Real Estate Accumulated
Carrying Value Depreciation
---------------- ------------
Balance - January 1, 1995 $ 4,743,836 $ 1,106,776
Additions during the year 25,112 257,965
Write off of fully depreciated assets (6,000) (6,000)
------------ ------------
Balance - December 31, 1995 4,762,948 1,358,741
Additions during the year 94,057 189,499
Write off fully depreciated assets (53,307) (53,307)
------------ ------------
Balance - December 31, 1996 4,803,698 1,494,933
Additions during the year 126,289 182,431
------------ ------------
Balance - December 31, 1997 $ 4,929,987 $ 1,667,364
============ ============
17
<PAGE>
SIERRA PACIFIC PENSION INVESTORS '84 AND SUBSIDIARY
(A California Limited Partnership)
SELECTED FINANCIAL DATA
For the Years Ended December 31, 1997, 1996, 1995, 1994 and 1993
The following table sets forth certain selected historical financial data of the
Partnership. The selected operating and financial position data as of and for
each of the five years ended December 31, 1997 have been derived from the
audited financial statements of the Partnership. This information should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto which are incorporated by reference to the Annual Report to the Limited
Partners attached as an Exhibit.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES $ 670,986 $ 668,706 $ 713,877 $ 1,024,731 $ 976,600
OPERATING EXPENSES:
Total 608,721 626,646 711,475 1,303,971 1,261,416
Per dollar of revenues 0.91 0.94 1.00 1.27 1.29
INTEREST EXPENSE:
Total 114,696 0 0 0 0
Per dollar of revenues 0.17 0.00 0.00 0.00 0.00
NET LOSS FROM
CONTINUING OPERATIONS:
Total (559,320) (137,422) (141,624) (304,760) (334,852)
General Partner 0 0 0 25,667 0
Limited Partnership (559,320) (137,422) (141,624) (330,427) (334,852)
Per Limited Partnership Unit (1) (7.26) (1.78) (1.84) (4.29) (4.35)
CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (96,708) 133,115 85,860 273,900 (41,067)
CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (1,430,332) (94,057) 1,332,930 (286,770) (61,415)
CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 1,512,134 (251,766) (1,507,000) 345,333 (602,000)
TOTAL ASSETS 10,475,000 9,510,493 9,496,780 10,011,579 10,471,527
PARTNERS' EQUITY:
Total 8,804,822 9,414,142 9,416,533 9,758,157 10,242,584
General Partner 0 0 0 0 0
Limited Partners 8,804,822 9,414,142 9,416,533 9,758,157 10,242,584
LIMITED PARTNERS' EQUITY - PER UNIT (1) 114.35 122.26 122.29 126.73 133.02
NOTE RECEIVABLE 2,005,498 1,697,739 1,697,739 2,832,704 N/A
INCOME-PRODUCING PROPERTIES:
Number 1 1 1 1 2
Cost 4,929,987 4,803,698 4,762,948 4,743,836 10,007,326
Less: Accumulated depreciation (1,677,364) (1,494,933) (1,358,741) (1,106,776) (1,811,593)
Valuation allowance (1,880,000) (1,880,000) (1,880,000) (1,880,000) (3,660,000)
Net book value 1,372,623 1,428,765 1,524,207 1,757,060 4,535,733
INVESTMENT IN UNCONSOLIDATED
JOINT VENTURE 6,720,551 4,616,117 4,464,589 4,804,259 4,915,823
NOTES PAYABLE - Related to income-
producing property 1,562,134 0 0 0 0
DISTRIBUTIONS PER UNIT (1): 0.65 2.60 2.60 2.00 1.00
</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,
77,000 in all years. The cumulative distributions per limited partnership
unit from inception to December 31, 1997 equal $21.43.
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
Sierra Pacific Pension Investors '84
We have audited the accompanying consolidated balance sheets of Sierra Pacific
Pension Investors '84 and subsidiary, a California limited partnership, (the
"Partnership") as of December 31, 1997 and 1996, and the related consolidated
statements of operations, changes in partners' equity and cash flows for each of
the three years in the period ended December 31, 1997. These 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
Pension Investors '84 and subsidiary as of December 31, 1997 and 1996, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Houston, Texas
March 13, 1998
19
<PAGE>
SIERRA PACIFIC PENSION INVESTORS '84 AND SUBSIDIARY
(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 $ 27,154 $ 42,060
Receivables:
Note, net of deferred gain of
$215,786 (Notes 3 and 4) 2,005,498 1,697,739
Unbilled rent (Notes 1 and 4) 45,846 76,575
Billed rent (Note 1) 4,186 15,415
Due from Sierra Mira Mesa Partners (Note 3) 0 1,311,300
Other 0 159,461
Due from affiliates (Note 3) 47,466 47,466
Income-producing property - net of
accumulated depreciation and
valuation allowance of $3,557,364 in 1997
and $3,374,933 in 1996, respectively (Note 4) 1,372,623 1,428,765
Investment in unconsolidated
joint venture (Notes 1 and 5) 6,720,551 4,616,117
Other assets (Notes 1, 2 and 3) 251,676 115,595
------------------ ------------------
Total Assets $ 10,475,000 $ 9,510,493
================== ==================
LIABILITIES AND PARTNERS' EQUITY
Accrued and other liabilities (Note 2) $ 108,044 $ 96,351
Notes payable (Note 6) 1,562,134 0
------------------ ------------------
Total Liabilities 1,670,178 96,351
------------------ ------------------
Partners' equity (Notes 1 and 7):
General Partner 0 0
Limited Partners:
80,000 units authorized,
77,000 issued and outstanding 8,804,822 9,414,142
------------------ ------------------
Total Partners' equity 8,804,822 9,414,142
------------------ ------------------
Total Liabilities and Partners' equity $ 10,475,000 $ 9,510,493
================== ==================
</TABLE>
SEE ACCOMPANYING NOTES
20
<PAGE>
SIERRA PACIFIC PENSION INVESTORS '84 AND SUBSIDIARY
(A CALIFORNIA LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------ ------------ ------------------
<S> <C> <C> <C> <C>
REVENUES:
Rental income (Note 1) $ 473,408 $ 475,900 $ 437,188
Interest income (Note 3) 197,578 192,806 276,689
------------------ ------------ ------------------
Total revenues 670,986 668,706 713,877
------------------ ------------ ------------------
EXPENSES:
Operating expenses:
Depreciation and amortization 236,395 236,624 306,320
Property taxes and insurance 121,953 125,261 111,347
General and administrative 44,028 36,399 61,655
Legal and accounting 55,960 74,062 61,302
Administrative fees (Note 3) 45,684 61,809 54,349
Maintenance and repairs 36,639 39,857 43,752
Management fees (Note 3) 35,768 27,508 27,134
Utilities 14,609 13,828 17,840
Salaries and payroll taxes 0 0 8,854
Renting expenses 0 0 7,617
Other operating expenses 17,685 11,298 11,305
------------------ ------------ ------------------
Total operating expenses 608,721 626,646 711,475
------------------ ------------ ------------------
Interest 114,696 0 0
------------------ ------------ ------------------
Total expenses 723,417 626,646 711,475
------------------ ------------ ------------------
(LOSS) INCOME BEFORE GAIN FROM PROPERTY
DISPOSITION (52,431) 42,060 2,402
GAIN FROM PROPERTY DISPOSITION (Note 4) 0 0 151,510
------------------ ------------ ------------------
(LOSS) INCOME BEFORE PARTNERSHIP'S SHARE
OF UNCONSOLIDATED JOINT VENTURE LOSS (52,431) 42,060 153,912
------------------ ------------ ------------------
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE LOSS FROM CONTINUING
OPERATIONS (Note 5) (506,889) (179,482) (295,536)
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE EXTRAORDINARY GAIN (Note 5) 0 335,031 0
------------------ ------------ ------------------
NET (LOSS) INCOME $ (559,320) $ 197,609 $ (141,624)
================== ============ ==================
Per limited partnership unit (Note 1):
Loss before extraordinary gain $ (7.26) $ (1.78) $ (1.84)
Extraordinary gain 0 4.35 0
------------------ ------------ ------------------
Net (loss) income $ (7.26) $ 2.57 $ (1.84)
================== ============ ==================
</TABLE>
SEE ACCOMPANYING NOTES
21
<PAGE>
SIERRA PACIFIC PENSION INVESTORS '84 AND SUBSIDIARY
(A CALIFORNIA LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Limited Partners Total
---------------------------------- General Partners'
Per Unit Total Partner Equity
------------------ ------------ ------------------ ------------
<S> <C> <C> <C> <C>
Partners' equity - January 1, 1995 $ 126.73 $ 9,758,157 $ 0 $ 9,758,157
Net loss (1.84) (141,624) (141,624)
Distributions (2.60) (200,000) (200,000)
------------------ ------------ ------------------ ------------
Partners' equity December 31, 1995 122.29 9,416,533 0 9,416,533
Net income 2.57 197,609 197,609
Distributions (2.60) (200,000) (200,000)
------------------ ------------ ------------------ ------------
Partners' equity December 31, 1996 122.26 9,414,142 0 9,414,142
Net loss (7.26) (559,320) (559,320)
Distributions (0.65) (50,000) (50,000)
------------------ ------------ ------------------ ------------
Partners' equity - December 31, 1997 $ 114.35 $ 8,804,822 $ 0 $ 8,804,822
================== ============ ================== ============
</TABLE>
SEE ACCOMPANYING NOTES
22
<PAGE>
SIERRA PACIFIC PENSION INVESTORS '84 AND SUBSIDIARY
(A CALIFORNIA LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------ ------------ ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (559,320) $ 197,609 $ (141,624)
Adjustments to reconcile net income (loss) to cash
(used in) provided by operating activities:
Depreciation and amortization 236,395 236,624 306,320
Undistributed loss (income) of
unconsolidated joint venture 506,889 (155,549) 295,536
Gain from property disposition 0 0 (151,510)
Decrease (increase) in rent receivable 41,958 (8,389) 12,433
Increase in other receivables (148,298) (127,567) (63,347)
(Increase) decrease in other assets (186,025) (25,717) 1,227
Increase (decrease) in accrued and other liabilities 11,693 16,104 (173,175)
------------------ ------------ ------------------
Net cash (used in) provided by operating activities (96,708) 133,115 85,860
------------------ ------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions (126,289) (94,057) (25,112)
Payments received on note receivable 0 0 1,317,928
Capital contributions to
unconsolidated joint venture (1,551,843) 0 (1,275,036)
Distributions from unconsolidated
joint venture 247,800 0 1,315,150
------------------ ------------ ------------------
Net cash (used in) provided by investing activities (1,430,332) (94,057) 1,332,930
------------------ ------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Funding of notes payable secured by property 1,604,000 0 0
Principal payments on notes payable (41,866) 0 0
Borrowings from affiliates 0 177,200 0
Payments to affiliates 0 (228,966) (1,307,000)
Cash distributions (50,000) (200,000) (200,000)
------------------ ------------ ------------------
Net cash provided by (used in) financing activities 1,512,134 (251,766) (1,507,000)
------------------ ------------ ------------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (14,906) (212,708) (88,210)
CASH AND CASH EQUIVALENTS - Beginning of year 42,060 254,768 342,978
------------------ ------------ ------------------
CASH AND CASH EQUIVALENTS - End of year $ 27,154 $ 42,060 $ 254,768
================== ============ ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 102,738 $ 0 $ 0
================== ============ ==================
</TABLE>
In 1997, $307,759 of interest receivable was added to the principal balance of
the related note receivable. In 1995, $31,453 of interest receivable was added
to the principal balance of the related note receivable. These transactions are
noncash items not reflected in the above statements of cash flows.
SEE ACCOMPANYING NOTES
23
<PAGE>
SIERRA PACIFIC PENSION INVESTORS '84 AND SUBSIDIARY
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Sierra Pacific Pension Investors '84 (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 real properties. S-P
Properties, Inc. is the General Partner and manager of the Partnership. On
December 30, 1994, all of the outstanding stock of TCP, Inc. was sold to Finance
Factors, Inc. TCP, Inc. owns all of the common stock of S-P Properties, Inc.
Finance Factors was a subsidiary of CGS Real Estate Company, Inc., a national
real estate company. In July 1995, Finance Factors, Inc. merged with Bancor Real
Estate Company, Inc., another subsidiary of CGS Real Estate Company, Inc.
The Partnership's activities during the preceding five years have involved the
ownership and operation of two real estate projects in Arizona: Sierra Spectrum
in Phoenix, Arizona and Sierra Valencia in Tucson, Arizona. In December 1994,
the Partnership sold Sierra Spectrum.
On March 7, 1997 Sierra Valencia LLC ("SVLLC") was formed with the Partnership
being the sole member. This company was formed solely to engage in the following
activities: a) to acquire from Sierra Pacific Pension Investors '84 the property
known as Sierra Valencia, b) to own, hold, sell, assign, transfer, operate,
lease, mortgage, pledge and otherwise deal with the Property, c) to exercise all
powers enumerated in the Delaware Limited Liability Company Act necessary or
convenient to conduct, promotion or attainment of the business or purposes
otherwise set forth. Title to the Sierra Valencia property was transferred from
the Partnership to SVLLC. The accounts of SVLLC are consolidated into the
financial statements of the Partnership since the date of formation and all
significant intercompany transactions are eliminated in consolidation.
In 1985 Sierra Mira Mesa Partners ("SMMP"), a California general partnership was
formed between the Partnership and Sierra Pacific Development Fund II
("SPDFII"). SMMP was initially created to develop and operate the office
building known as Sierra Mira Mesa in San Diego, California. The Partnership's
initial ownership interest in SMMP was 49%; the remaining 51% was owned by
SPDFII. Effective December 31, 1996, the general partners amended the
partnership agreement to allow for adjustments in the sharing ratio each year
based upon the relative net contributions and distributions since inception of
each general partner. As a result, the sharing ratio in effect for 1997 was
54.42% for the Partnership and 45.58% for SPDFII. In conjunction with this
amendment, the general partners forgave the December 31, 1996 balances of
advances due from SMMP and included these amounts as adjustments to their
respective equity accounts. The sharing ratio effective January 1, 1998 will be
adjusted to 66.26% for the Partnership and 33.74% for SPDFII.
SMMP also holds an 88.69% interest in Sorrento I Partners (a California general
partnership with Sierra Pacific Development Fund III formed in 1993), a 24.91%
interest in Sorrento II Partners (a California general partnership with Sierra
Pacific Institutional Properties V formed in 1993), a 4.96% interest in Sierra
Creekside Partners (a California general partnership with Sierra Pacific
Development Fund formed in 1994), and a 47.05% interest in Sierra Vista Partners
(a California general partnership with Sierra Pacific Development Fund III
formed in 1994).
24
<PAGE>
Sierra Pacific Pension Investors '84 and subsidiary
Notes to Consolidated Financial Statements
Page two
BASIS OF FINANCIAL STATEMENTS
The Partnership maintains its books and prepares its financial statements in
accordance with generally accepted accounting principles. However, the
Partnership prepares its tax returns on the accrual basis of accounting as
defined by the Internal Revenue Code with adjustments to reconcile book and
taxable income (loss) for differences in the treatment of certain income and
expense items. The accompanying financial statements do not reflect any
provision for federal or state income taxes since such taxes are the obligation
of the individual partners.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid, short-term investments with
original maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Partnership at December 31, 1997 and 1996
consist of cash and cash equivalents, receivables, note receivables, due from
affiliates, accounts payable and notes payable. The fair value of cash and cash
equivalents, receivables and accounts payable approximates the carrying value
due to the short term nature of these items. In the opinion on management, the
fair value of the notes payable approximates the carrying value based on market
rates at December 31, 1997. The fair value of the note receivable and the
amounts due from affiliates can not be determined due to the related party
nature of these receivables.
INCOME-PRODUCING PROPERTIES
Property and tenant improvements are carried at cost and depreciated on the
straight-line method over the estimated lives of the related assets, ranging
from three to thirty years. Tenant improvements incurred at the initial leasing
of the properties are depreciated over ten years and tenant improvements
incurred at the re-leasing of the properties are depreciated over the life of
the related lease.
Expenditures for repairs and maintenance are charged against income as incurred.
Improvements and major renewals are capitalized. Costs and the related
accumulated depreciation of assets sold or retired are removed from the accounts
in the year of disposal or when fully depreciated and any resulting gain or loss
is reflected in income or deferred income as appropriate.
The Partnership employs a systematic approach in determining whether the value
of income-producing property has been impaired. Prior to 1995, a provision for
loss on a property was established if the appraised value of the property
declined below its book value due to what the General Partner believed to be an
other than temporary condition. A complete appraisal was performed on the
properties as of December 31 each year.
Effective January 1, 1995, the Partnership implemented Statement of Financial
Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" (the "Statement"). The Partnership
regularly evaluates long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable. Future cash flows are estimated and compared to the carrying amount
of the asset to determine if 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 due to the implementation of this Statement.
25
<PAGE>
Sierra Pacific Pension Investors '84 and subsidiary
Notes to Consolidated Financial Statements
Page three
Because the determination of fair value is based upon projections of future
economic events such as property occupancy rates, rental rates, operating cost
inflation and market capitalization rates which are inherently subjective, the
amounts ultimately realized at disposition may differ materially from the net
carrying value as of December 31, 1997. The cash flows used to determine fair
value and net realizable value are based on good faith estimates and assumptions
developed by management. Unanticipated events and circumstances may occur and
some assumptions may not materialize; therefore actual results may vary from the
estimates and the variances may be material. The Partnership may provide
additional write-downs which could be material in subsequent years if real
estate markets or local economic conditions change.
INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
The investment in unconsolidated joint venture is stated at cost and is adjusted
for the Partnerships' share in earnings or losses and cash contributions to or
distributions from the joint venture (equity method).
OTHER ASSETS
Deferred leasing costs represent costs incurred to lease the property and are
amortized over the life of the related lease.
Deferred loan costs represent costs incurred to obtain financing and are
amortized over the life of the related loan.
RENTAL INCOME AND RENT RECEIVABLE
Rental income is recognized on the straight-line method over the term of the
related operating lease in accordance with the provisions of Statement of
Financial Accounting Standards No. 13, "Accounting for Leases".
Rent receivable consists of (a) unbilled rent - the difference between rent
recognized on the straight-line method and actual cash due; and (b) billed rent
- - rent due but not yet received.
CALCULATION OF EQUITY AND NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT
Equity and net income (loss) per limited partnership unit are determined by
dividing the Limited Partners' equity and net income (loss) by the number of
limited partnership units outstanding, 77,000.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB also issued SFAS No. 129, Disclosure of Information
about Capital Structure, which establishes standards for disclosing information
about an entity's capital structure. SFAS No. 129 was effective for periods
ending after December 15, 1997. The adoption of SFAS No. 129 did not impact the
Partnership's capital structure disclosures as the Partnership was already in
compliance with this SFAS.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, and
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments and related information in interim and annual financial statements.
SFAS No. 131 will not impact the Partnership's financial statements as it
reports as a single segment. SFAS Nos. 130 and 131 are effective for periods
beginning after December 15, 1997. Management is evaluating what, if any,
additional disclosures may be required upon the implementation of SFAS No. 130.
26
<PAGE>
Sierra Pacific Pension Investors '84 and subsidiary
Notes to Consolidated Financial Statements
Page four
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts, at December 31,
1997 and 1996, is as follows:
1997 1996
----------- -------------
Other assets:
Prepaid expenses $ 3,211 $ 3,210
Tax impounds 37,636 0
Tenant improvements reserves 22,822 0
Deferred loan costs, net of accumulated
amortization of $6,676 in 1997 84,982 0
Deferred leasing costs, net of accumulated
amortization of $150,458 in 1997 and
$113,032 in 1996 103,025 112,385
----------- -------------
$ 251,676 $ 115,595
=========== =============
Accrued and other liabilities:
Accounts payable $ 18,850 $ 25,123
Accrued expenses 62,136 44,333
Security deposits 27,058 26,895
----------- -------------
$ 108,044 $ 96,351
=========== =============
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 June 30, 1995.
An affiliate of the General Partner may receive a management fee of 6% of the
gross rental income collected from the properties. Management fees for the years
ended December 31, 1997, 1996 and 1995 were $21,799, $15,030, and $5,300,
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 $63,910, $61,809 and $33,651 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 and 1996, the affiliate
received $10,504 and $1,873, respectively, for tenant improvements supervisory
costs. No such costs were incurred in 1995.
In consideration for services rendered with respect to initial leasing of
Partnership properties, an affiliate of the General Partner is paid initial
leasing costs. For the years ended December 31, 1997 and 1996, these fees
amounted to $19,109 and $10,153, respectively, and were recorded as deferred
leasing costs. No such costs were incurred in 1995.
In 1995 and 1996, the Partnership made non-interest bearing short-term advances
to Sierra Mira Mesa Partners of $1,300,000 and $11,300, respectively. These
advances were forgiven and reclassed to investment in Sierra Mira Mesa Partners
in 1997 (See Note 1).
During 1996, the Partnership made non-interest bearing advances to other
affiliates. Repayment is expected in 1998. The balance outstanding at December
31, 1997 is $47,466.
27
<PAGE>
Sierra Pacific Pension Investors '84 and subsidiary
Notes to Consolidated Financial Statements
Page five
As further described in Note 4, in 1994 the Partnership sold a property to an
affiliate of the General Partner for cash of $800,000 and a $3,200,000 trust
deed note. This note calls for monthly interest only payments and bears interest
of 10% per annum. The original note was due to mature on June 30, 1995 and was
extended to June 30, 1996. In 1997, the maturity date was extended to December
31, 1998 and interest receivable of $307,759 was added to the principal balance
of the note. All other terms of the original note remained unchanged. No
interest was due to the Partnership at December 31, 1997. Interest receivable
was $159,461 at December 31, 1996. Interest income related to this note of
$196,136 and $191,000 was recognized during the years ended December 31, 1997
and 1996, respectively. The December 31, 1997 balance was $2,221,284. The note
is secured by a second lien on the property and management believes the
collateral has sufficient value to recover the Partnership's net investment
inthe note after satisfaction of the first lienholder.
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 $ 977,677 $ 977,677
Building and improvements 3,952,310 3,826,021
------------- -------------
Total 4,929,987 4,803,698
Accumulated depreciation (1,677,364) (1,494,933)
Valuation allowance (1,880,000) (1,880,000)
------------- -------------
Net $ 1,372,623 $ 1,428,765
============= =============
On December 30, 1994, the Sierra Spectrum property, with a historical cost basis
of $2,993,134, was sold for $4,000,000 ($800,000 cash down-payment and a
$3,200,000 trust deed note) to an affiliate of Finance Factors, Inc. The gain on
sale was recorded in accordance with Statement of Financial Accounting Standards
No. 66, "Accounting For Sales of Real Estate", using the installment method and
the Partnership recorded a gain of $91,823 (net of selling costs and unamortized
loan fees and lease costs). A deferred gain of $367,296 was recorded at December
31, 1994. This gain will be recognized as principal payments on the trust deed
note are received. During the year ended December 31, 1995, the Partnership
received principal payments of $1,317,928 on the trust deed note and recognized
$151,510 of the deferred gain related to this transaction.
28
<PAGE>
Sierra Pacific Pension Investors '84 and subsidiary
Notes to Consolidated Financial Statements
Page six
Future minimum base rental income, under the existing operating leases for the
Sierra Valencia property, to be recognized on a straight-line basis and amounts
to be received on a cash basis are as follows:
Straight-line Cash
YEAR ENDING DECEMBER 31, Basis Basis
- -------------------------- ------------- -------------
1998 $ 430,239 $ 437,272
1999 410,467 421,796
2000 309,964 319,898
2001 248,287 261,590
2002 62,287 66,534
------------- -------------
Total $ 1,461,244 $ 1,507,090
============= =============
The Partnership relied on five tenants to generate approximately 71% of total
1997 rental revenues. The breakdown of these five tenants' industry segments and
rental income contribution is as follows: 15% - manufacturing for the
recreational vehicle segment; 24% healthcare administration; 11% -
sales/distribution of medical equipment and supplies; and 11% - communication
services; and 10% - pistachio nut marketing.
5. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
Sierra Mira Mesa Partners ("SMMP"), a California general partnership, was formed
in 1985 between the Partnership and Sierra Pacific Development Fund II, an
affiliate, to develop and operate the real property known as Sierra Mira Mesa,
an office building, located in San Diego, California. The property contains
89,560 square feet and is 98% leased at December 31, 1997. At December 31, 1997
the Partnership's interest in SMMP was 54.42%; the remaining 45.58% interest was
owned by Sierra Pacific Development Fund II.
The Partnership's investment in SMMP as of December 31, 1997 and 1996 is
comprised of the following:
1997 1996
------------- ------------
Equity interest $ 6,603,969 $ 4,495,515
Investment advisory and
other fees, less accumulated
amortization of $137,642 and
$133,622 in 1997 and 1996,
respectively. 116,582 120,602
------------- ------------
Investment in unconsolidated
joint venture $ 6,720,551 $ 4,616,117
============= ============
29
<PAGE>
Sierra Pacific Pension Investors '84 and subsidiary
Notes to Consolidated Financial Statements
Page seven
The consolidated financial statements of SMMP include the accounts of SMMP and
Sorrento I Partners, a majority owned California general partnership for the
years ended December 31, 1997 and 1996. Sorrento I Partners was accounted for
under the equity method in 1995. The financial statements of SMMP for prior
years have not been restated as the consolidation was accounted for as a step
acquisition in accordance with Accounting Research Bulletin No. 51,
"Consolidated Financial Statements". The condensed balance sheets at December
31, 1997 and 1996, and the condensed statements of operations for the years
ended December 31, 1997, 1996 and 1995 for SMMP follow:
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 244,408 $ 26,721
Rent receivable 1,287,009 1,186,818
Other receivables 0 169,241
Due from affiliates 2,030,577 1,536,968
Income-producing property,
net of accumulated depreciation 9,086,805 9,449,032
Investment in unconsolidated
joint ventures 1,793,770 2,773,176
Other assets 831,350 1,119,115
------------ --------------
Total Assets $ 15,273,919 $ 16,261,071
============ ==============
LIABILITIES AND GENERAL PARTNERS' EQUITY
Accrued and other liabilities $ 68,765 $ 104,428
Due to Sierra Pacific
Pension Investors '84 0 1,311,300
Notes payable 5,673,052 6,012,512
------------ --------------
Total Liabilities 5,741,817 7,428,240
------------ --------------
Minority interest in joint
venture (333,783) (341,689)
------------ --------------
General Partners' equity 9,865,885 9,174,520
------------ --------------
Total Liabilities and General Partners' equity $ 15,273,919 $ 16,261,071
============ ==============
</TABLE>
30
<PAGE>
Sierra Pacific Pension Investors '84 and subsidiary
Notes to Consolidated Financial Statements
Page eight
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995
------------ ------------- -------------
<S> <C> <C> <C>
Revenues:
Rental income $ 1,919,582 $ 1,808,673 $ 1,529,497
Other income 184,168 178,726 181,358
------------ ------------- -------------
Total revenues 2,103,750 1,987,399 1,710,855
------------ ------------- -------------
Expenses:
Operating expenses 742,548 728,593 641,206
Depreciation and amortization 825,911 813,359 586,602
Interest 463,804 559,759 392,088
------------ ------------- -------------
Total expenses 2,032,263 2,101,711 1,619,896
------------ ------------- -------------
Income (Loss) before Partnership's
share of unconsolidated joint
venture losses 71,487 (114,312) 90,959
Partnership's share of
unconsolidated joint venture losses (855,349) (354,765) (694,095)
------------ ------------- -------------
Loss before extraordinary gain (783,862) (469,077) (603,136)
Extraordinary gain 0 1,200,381 0
------------ ------------- -------------
(Loss) Income before minority
interest's share of consolidated joint
venture (income) loss (783,862) 731,304 (603,136)
------------ ------------- -------------
Minority interest's share of
consolidated joint venture (income) loss
from continuing operations (7,906) 102,787 0
Minority interest's share of
consolidated joint venture extraordinary
gain 0 (516,644) 0
------------ ------------- -------------
Net (Loss) Income $ (791,768) $ 317,447 $ (603,136)
============ ============= =============
</TABLE>
As of December 31, 1997, SMMP holds a 24.91% interest in Sorrento II Partners (a
California general partnership with Sierra Pacific Institutional Properties V
formed in 1993), a 4.96% interest in Sierra Creekside Partners (a California
general partnership with Sierra Pacific Development Fund formed in 1994), and a
47.05% interest in Sierra Vista Partners (a California general partnership with
Sierra Pacific Development Fund III formed in 1994).
31
<PAGE>
Sierra Pacific Pension Investors '84 and subsidiary
Notes to Consolidated Financial Statements
Page nine
The following is a summary of aggregated financial information for all
investments owned by SMMP which are accounted for under the equity method:
CONDENSED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ --------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 122,997 $ 159,369
Rent receivable 549,240 781,284
Due from affiliates 47,666 50,681
Income-producing property,
net of accumulated
depreciation 8,610,352 15,043,645
Other assets 1,339,407 732,144
------------ --------------
Total Assets $ 10,669,662 $ 16,767,123
============ ==============
LIABILITIES AND GENERAL PARTNERS' EQUITY
Accrued and other liabilities $ 325,087 $ 648,328
Note payable 1,763,420 5,213,615
------------ --------------
Total Liabilities 2,088,507 5,861,943
------------ --------------
Ground lessors' equity in income producing
property 3,000,000 3,000,000
------------ --------------
General Partners' equity 5,581,155 7,905,180
------------ --------------
Total Liabilities and General Partners' equity $ 10,669,662 $ 16,767,123
============ ==============
</TABLE>
32
<PAGE>
Sierra Pacific Pension Investors '84 and subsidiary
Notes to Consolidated Financial Statements
Page ten
CONDENSED COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995
------------ ------------- -------------
<S> <C> <C> <C>
Revenues:
Rental income $ 2,294,859 $ 2,474,335 $ 2,124,077
Other income 9,698 13,968 6,915
------------ ------------- -------------
Total revenues 2,304,557 2,488,303 2,130,992
------------ ------------- -------------
Expenses:
Operating expenses 1,755,826 1,788,643 2,009,862
Depreciation and amortization 1,321,177 1,461,571 1,438,310
Interest 459,763 427,967 691,407
------------ ------------- -------------
Total expenses 3,536,766 3,678,181 4,139,579
------------ ------------- -------------
Loss before loss from property
disposition (1,232,209) (1,189,878) (2,008,587)
Loss from property disposition (967,764) 0 0
------------ ------------- -------------
Net Loss $ (2,199,973) $ (1,189,878) $ (2,008,587)
============ ============= =============
</TABLE>
Reference is made to the audited financial statements of Sierra Mira Mesa
Partners and Sorrento I Partners included herein.
33
<PAGE>
Sierra Pacific Pension Investors '84 and subsidiary
Notes to Consolidated Financial Statements
Page eleven
6. NOTES PAYABLE
On March 27, 1997, Sierra Valencia LLC entered into a loan agreement with First
Union Bank of North Carolina in the amount of $1,404,000. This loan, which is
secured by a first lien on the Sierra Valencia property, bears interest at 9.25%
per annum and calls for monthly principal and interest payments of $12,024 on
the first day of each month. Such payments shall continue until April 2007, when
the indebtedness is due in full. There is a 1% premium for prepayment of this
note. As of December 31, 1997 the loan balance was $1,395,607.
On April 15, 1997, the Partnership entered into a loan agreement with IDM
Participating Income Company II, an affiliate of the general partner, in the
amount of $200,000. This loan is secured by a second lien on the Sierra Valencia
property. This note bears a variable interest rate determined by the Federal
Reserve of San Francisco's discount rate prevailing on the 25th day of the month
preceding the payment due date plus a 3% premium. The interest rate can be
adjusted the last day of March, June, September and December of each year until
note agreement is fulfilled. The minimum rate will be 12.12%. The maximum rate
will be 15.15%. The current interest rate paid is 12.12%. Monthly payment of
$6,659, consisting of both interest and principal, commenced on May 15, 1997 and
shall continue until April 15, 2000, when the indebtedness is paid in full. As
of December 31, 1997, the loan balance was $166,527.
The annual maturities of the notes payable as of December 31, 1997 are $79,006
in 1998, $88,630 in 1999, $51,182 in 2000, $20,898 in 2001, $22,915 in 2002, and
$1,299,503 thereafter.
The Partnership is exposed to interest rate fluctuations on $166,527 of variable
rate debt at December 31, 1997.
7. PARTNERS' EQUITY
Accrual basis profits and losses resulting from operations of the Partnership
are allocated 99% to the Limited Partners and 1% to the General Partner.
Currently, the Partnership does not meet the criteria for distributing cash to
the General Partner, and it cannot reasonably predict when the criteria will be
met. Accordingly, no accrual basis profits and losses from operations were
allocated to the General Partner.
Upon any sale, refinancing or other disposition of the Partnership's real
property, 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
divided 1% to the General Partner and 99% to the Limited Partners until the
Limited Partners have received distributions equal to 15% per annum cumulative
on each Limited Partner's unreturned capital. However, after the Limited
Partners have received distributions from the 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 property sold by the Partnership.
Thereafter, the General Partner 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 10% 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.
34
<PAGE>
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY
(A CALIFORNIA GENERAL PARTNERSHIP)
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
35
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
Sierra Mira Mesa Partners
We have audited the accompanying consolidated balance sheets of Sierra Mira Mesa
Partners and subsidiary, a California general partnership, (the "Partnership")
as of December 31, 1997 and 1996, and the related consolidated statements of
operations, changes in partners' equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sierra Mira Mesa
Partners and subsidiary as of December 31, 1997 and 1996, and the results of its
operations and cash flows for each for the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
March 13, 1998
36
<PAGE>
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY
(A California General Partnership)
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
December 31, December 31,
1997 1996
------------------- ------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 244,408 $ 26,721
Receivables:
Unbilled rent (Notes 1 and 4) 1,274,906 1,186,818
Billed rent (Note 1) 12,103 0
Other 0 169,241
Due from affiliates, net (Note 3) 2,030,577 1,536,968
Income-producing property - net of accumulated
depreciation of $4,625,842 in 1997 and
$4,819,832 in 1996 (Notes 1 and 4) 9,086,805 9,449,032
Investment in unconsolidated
joint ventures (Notes 1 and 5) 1,793,770 2,773,176
Other assets (Notes 1, 2 and 3) 831,350 1,119,115
------------------- ------------------
Total Assets $ 15,273,919 $16,261,071
=================== ==================
LIABILITIES AND GENERAL PARTNERS' EQUITY
Accrued and other liabilities (Note 2) $ 68,765 $ 104,428
Due to Sierra Pacific Pension Investors '84 (Note 3) 0 1,311,300
Notes payable (Note 6) 5,673,052 6,012,512
------------------- ------------------
Total Liabilities 5,741,817 7,428,240
------------------- ------------------
Minority interest in consolidated
joint venture (Note 1) (333,783) (341,689)
General Partners' equity (Note 1) 9,865,885 9,174,520
------------------- ------------------
Total Liabilities and General Partners' equity $ 15,273,919 $16,261,071
=================== ==================
</TABLE>
37
<PAGE>
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY
(A California General Partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Revenues:
Rental income (Note 1) $ 1,919,582 $ 1,808,673 $1,529,497
Interest income 174,764 178,726 181,358
Other income 9,404 0 0
------------------- ------------------ -----------------
Total revenues 2,103,750 1,987,399 1,710,855
------------------- ------------------ -----------------
Expenses:
Operating expenses:
Depreciation and amortization 825,911 813,359 586,602
Property taxes and insurance 92,347 53,587 126,078
Administrative fees (Note 3) 104,580 101,142 63,623
Maintenance and repairs 228,890 262,271 201,373
Management fees (Note 3) 101,558 93,780 79,388
Utilities 138,203 138,443 126,769
Legal and accounting 47,242 42,011 20,231
General and administrative 12,677 4,484 3,475
Salaries and payroll taxes 0 0 2,151
Renting expenses 309 5,128 205
Other operating expenses 16,742 27,747 17,913
------------------- ------------------ -----------------
Total operating expenses 1,568,459 1,541,952 1,227,808
Interest 463,804 559,759 392,088
------------------- ------------------ -----------------
Total expenses 2,032,263 2,101,711 1,619,896
------------------- ------------------ -----------------
INCOME (LOSS) BEFORE PARTNERSHIP'S SHARE
OF UNCONSOLIDATED JOINT VENTURE LOSSES 71,487 (114,312) 90,959
------------------- ------------------ -----------------
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE LOSSES (Note 5) (855,349) (354,765) (694,095)
------------------- ------------------ -----------------
LOSS BEFORE EXTRAORDINARY GAIN (783,862) (469,077) (603,136)
EXTRAORDINARY GAIN ON EXTINGUISHMENT
OF DEBT (Note 6) 0 1,200,381 0
------------------- ------------------ -----------------
(LOSS) INCOME BEFORE MINORITY INTEREST'S
SHARE OF CONSOLIDATED JOINT VENTURE
(INCOME) LOSS (783,862) 731,304 (603,136)
------------------- ------------------ -----------------
MINORITY INTEREST'S SHARE OF CONSOLIDATED
JOINT VENTURE (INCOME) LOSS FROM
CONTINUING OPERATIONS (7,906) 102,787 0
MINORITY INTEREST'S SHARE OF CONSOLIDATED
JOINT VENTURE EXTRAORDINARY GAIN 0 (516,644) 0
------------------- ------------------ -----------------
NET (LOSS) INCOME $ (791,768) $ 317,447 $ (603,136)
=================== ================== =================
</TABLE>
SEE ACCOMPANYING NOTES
38
<PAGE>
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY
(A California General Partnership)
CONSOLIDATED STATEMENTS OF CHANGES IN GENERAL PARTNERS' EQUITY
For the Years Ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
General Partners
----------------------------------------------------------------
Sierra Pacific Sierra Pacific
Development Pension
Fund II Investors '84 Total
------------------- ----------------------------------------
<S> <C> <C> <C>
General Partners' equity - January 1, 1995 $ 4,866,458 $ 4,675,616 $ 9,542,074
Net loss (307,600) (295,536) (603,136)
Contributions 768,258 1,275,036 2,043,294
Distributions (810,009) (1,315,150) (2,125,159)
------------------- ------------------ -----------------
General Partners' equity - December 31, 1995 4,517,107 4,339,966 8,857,073
Net income 161,898 155,549 317,447
------------------- ------------------ -----------------
General Partners' equity - December 31, 1996 4,679,005 4,495,515 9,174,520
Transfer of advances 155,590 1,311,300 1,466,890
Net loss (284,878) (506,890) (791,768)
Contributions 293,000 1,551,843 1,844,843
Distributions (1,580,800) (247,800) (1,828,600)
------------------- ------------------ -----------------
General Partners' equity - December 31, 1997 $ 3,261,917 $ 6,603,968 $ 9,865,885
=================== ================== =================
</TABLE>
SEE ACCOMPANYING NOTES
39
<PAGE>
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY
(A California General Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------- ------------------ -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (791,768) $ 317,447 $ (603,136)
Adjustments to reconcile net (loss) income
to cash provided by (used in) operating activities:
Depreciation and amortization 825,911 813,359 586,602
Gain from extinguishment of debt 0 (1,200,381) 0
Undistributed losses of
unconsolidated joint ventures 855,349 354,765 694,095
Minority interest in consolidated
joint venture income 7,906 413,857 0
Increase in rent receivable (100,191) (164,870) (97,228)
Increase in other receivables (168,779) (70,286) (98,955)
Decrease (increase) in other assets 55,566 (293,798) (592,548)
(Decrease) increase in accrued and other liabilities (35,663) 12,579 (26,419)
------------------- ------------------ -----------------
Net cash provided by (used in) operating activities 648,331 182,672 (137,589)
------------------- ------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions (231,484) (745,134) (45,552)
Capital contributions to
unconsolidated joint ventures (2,315,041) (824,400) (1,972,826)
Distributions received from unconsolidated
joint ventures 2,439,098 731,500 488,566
------------------- ------------------ -----------------
Net cash used in investing activities (107,427) (838,034) (1,529,812)
------------------- ------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans to affiliates 0 (4,771) (142,801)
Repayments of loans to affiliates 0 142,801 0
Borrowings from affiliates 0 166,890 1,300,000
Capital contributions from General Partners 1,844,843 0 2,043,295
Cash distributions (1,828,600) 0 (2,125,160)
Principal proceeds from notes payable 0 0 5,500,000
Principal payments on notes payable (339,460) (992,832) (3,612,225)
------------------- ------------------ -----------------
Net cash (used in) provided by financing activities (323,217) (687,912) 2,963,109
------------------- ------------------ -----------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 217,687 (1,343,274) 1,295,708
CASH AND CASH EQUIVALENTS - Beginning of year 26,721 1,369,995 29,312
------------------- ------------------ -----------------
CASH AND CASH EQUIVALENTS - End of year $ 244,408 $ 26,721 $1,325,020
=================== ================== =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $ 470,608 $ 580,906 $ 399,521
=================== ================== =================
</TABLE>
In 1997, $338,020 of interest receivable was added to the principal balance of
the related note receivable from affiliate. This transaction is a noncash item
not reflected in the above statement of cash flows.
See Accompanying Notes
40
<PAGE>
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY
(A CALIFORNIA GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Sierra Mira Mesa Partners ("SMMP"), a California general partnership, was formed
in 1985 between Sierra Pacific Development Fund II ("SPDFII") and Sierra Pacific
Pension Investors '84 ("SPPI'84") to develop and operate the real property known
as Sierra Mira Mesa, an office building, located in San Diego, California. The
property contains 89,560 square feet and is 98% leased at December 31, 1997.
Per the terms of the partnership agreement, SPDFII and SPPI'84 shared in
earnings, contributions and distributions in a ratio of 51% to 49%,
respectively. Effective December 31, 1996, the general partners amended the
partnership agreement to allow for adjustments in the sharing ratio each year
based upon the relative net contributions and distributions since inception of
each general partner. As a result, the sharing ratio in effect for 1997 was
45.58% for SPDFII and 54.42% for SPPI'84. In conjunction with this amendment,
the general partners forgave the December 31, 1996 balances of advances due from
SMMP and included these amounts as adjustments to their respective equity
accounts. The sharing ratio effective January 1, 1998 will be adjusted to 33.74%
for SPDFII and 66.26% for SPPI'84.
S-P Properties, Inc. is the General Partner and manager of SPDFII and SPPI'84.
On December 30, 1994, all of the outstanding stock of TCP, Inc. was sold to
Finance Factors, Inc. TCP, Inc. owns all of the common stock of S-P Properties,
Inc. Finance Factors was a subsidiary of CGS Real Estate Company, Inc., a
national real estate company. In July 1995, Finance Factors, Inc. merged with
Bancor Real Estate Company, Inc., another subsidiary of CGS Real Estate Company,
Inc.
SMMP also holds investments in other industrial/commercial properties through
its investments in unconsolidated joint ventures. Refer to Note 5 for additional
information.
BASIS OF FINANCIAL STATEMENTS
The Partnership maintains its books and prepares its financial statements in
accordance with generally accepted accounting principles. However, the
Partnership prepares its tax returns on the accrual basis of accounting as
defined by the Internal Revenue Code with adjustments to reconcile book and
taxable income (loss) for differences in the treatment of certain income and
expense items. The accompanying financial statements do not reflect any
provision for federal or state income taxes since such taxes are the obligation
of the individual partners.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
The consolidated financial statements of SMMP include the accounts of SMMP and
Sorrento I Partners, a majority owned joint venture as of December 31, 1997.
Sorrento I Partners was accounted for under the equity method in 1995. The
financial statements of SMMP for 1995 have not been restated as the
consolidation was accounted for as a step acquisition in accordance with
Accounting Research Bulletin No. 51, "Consolidated Financial Statements". All
significant intercompany balances and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid, short-term investments with
original maturities of three months or less.
41
<PAGE>
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page two
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Partnership at December 31, 1997 and 1996
consist of cash and cash equivalents, receivables, due from affiliates, accounts
payable and notes payable. The fair value of cash and cash equivalents,
receivables and accounts payable approximate the carrying value due to the short
term nature of these items. In the opinion of management, the fair value of the
notes payable approximates the carrying value as the interest rate is based on
market rates at December 31, 1997. Management was unable to determine the fair
value of the amounts due from affiliates due to the related party nature of this
receivable.
INCOME-PRODUCING PROPERTIES
Property and tenant improvements are carried at cost and depreciated on the
straight-line method over the estimated lives of the related assets, ranging
from three to thirty years. Tenant improvements incurred at the initial leasing
of the properties are depreciated over ten years and tenant improvements
incurred at the re-leasing of the properties are depreciated over the life of
the related lease.
Expenditures for repairs and maintenance are charged against income as incurred.
Improvements and major renewals are capitalized. Costs and the related
accumulated depreciation of assets sold or retired are removed from the accounts
in the year of disposal or when fully depreciated and any resulting gain or loss
is reflected in income or deferred income as appropriate.
The Partnership employs a systematic approach in determining whether the value
of income-producing property has been impaired. Prior to 1995, a provision for
loss on a property was established if the appraised value of the property
declined below its book value due to what the General Partner believed to be an
other than temporary condition. A complete appraisal was performed on the
property as of December 31 each year.
Effective January 1, 1995, the Partnership implemented Statement of Financial
Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" (the "Statement"). The Partnership
regularly evaluates long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable. Future cash flows are estimated and compared to the carrying amount
of the asset to determine if an impairment has occurred. If the sum of the
expected future cash flows is less than the carrying amount of the asset, the
Partnership shall recognize an impairment loss in accordance with the Statement.
No provision was required due to the implementation of this Statement.
Because the determination of fair value is based upon projections of future
economic events such as property occupancy rates, rental rates, operating cost
inflation and market capitalization rates which are inherently subjective, the
amounts ultimately realized at disposition may differ materially from the net
carrying value as of December 31, 1997. The cash flows used to determine fair
value and net realizable value are based on good faith estimates and assumptions
developed by management. Unanticipated events and circumstances may occur and
some assumptions may not materialize; therefore actual results may vary from the
estimates and the variances may be material. The Partnership may provide
additional write-downs which could be material in subsequent years if real
estate markets or local economic conditions change.
INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
The investment in unconsolidated joint ventures is stated at cost and is
adjusted for the Partnership's share in earnings or losses and cash
contributions to or distributions from the joint ventures (equity method).
42
<PAGE>
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page three
OTHER ASSETS
Deferred leasing costs represent costs incurred to lease properties and are
amortized over the life of the related lease.
Deferred loan costs represent costs incurred to obtain financing and are
amortized over the life of the related loan.
RENTAL INCOME AND RENT RECEIVABLE
Rental income is recognized on the straight-line method over the term of the
related operating lease in accordance with the provisions of Statement of
Financial Accounting Standards No. 13, "Accounting for Leases".
Rent receivable consists of (a) unbilled rent - the difference between rent
recognized on the straight-line method and actual cash due; (b) billed rent -
rent due but not yet received.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB also issued SFAS No. 129, Disclosure of Information
about Capital Structure, which establishes standards for disclosing information
about an entity's capital structure. SFAS No. 129 was effective for periods
ending after December 15, 1997. The adoption of SFAS No. 129 did not impact the
Partnership's capital structure disclosures as the Partnership was already in
compliance with this SFAS.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, and
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments and related information in interim and annual financial statements.
SFAS No. 131 will not impact the Partnership's financial statements as it
reports as a single segment. SFAS Nos. 130 and 131 are effective for periods
beginning after December 15, 1997. Management is evaluating what, if any,
additional disclosures may be required upon the implementation of SFAS No. 130.
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts, at December 31,
1997 and 1996, is as follows:
1997 1996
------------ -----------
Other assets:
Prepaid expenses $ 20,800 $ 24,066
Deferred loan costs, net of accumulated
amortization of $202,307 in 1997
and $153,009 in 1996 157,889 207,187
Deferred leasing costs, net of accumulated
amortization of $871,903 in 1997 and
$689,001 in 1996 609,019 782,199
Tax impounds 23,288 28,936
Tenant improvement reserves 20,354 76,727
------------ -----------
$ 831,350 $ 1,119,115
============ ===========
Accrued and other liabilities:
Accounts payable $ 38,666 $ 56,711
Security deposits 5,999 2,761
Accrued expenses 2,073 16,125
Interest payable 22,027 28,831
------------ -----------
$ 68,765 $ 104,428
============ ===========
43
<PAGE>
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page four
3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS
In 1994, all of the common stock of TCP, Inc. was purchased by Finance Factors,
Inc. from Carlsberg Management Company ("CMC"). TCP, Inc. owns all of the common
stock of S-P Properties, Inc., the General Partner of the Partnership. CMC
continued to manage the affairs of the Partnership through March 31, 1995.
An affiliate of S-P Properties, Inc. receives a management fee of 5.5% of the
gross rental income collected from the property. This fee amounted to $101,558,
$93,780 and $53,392, respectively, for the years ended December 31, 1997, 1996
and 1995. This fee was recorded as part of the operating expenses of the
property.
SMMP reimburses an affiliate of S-P Properties, Inc. for expenses incurred by
the affiliate for services provided to SMMP such as accounting, data processing
and similar services. The affiliate was reimbursed $104,580, $101,142 and
$51,201, respectively, for such services for the years ended December 31, 1997,
1996 and 1995. Additionally, SMMP reimbursed an affiliate for construction
supervision costs incurred by the affiliate. For the years ended December 31,
1997, 1996 and 1995, the affiliate received $11,154, $48,205 and $3,374,
respectively, for tenant improvements supervisory costs.
In consideration for services rendered with respect to initial leasing of SMMP's
property, an affiliate of S-P Properties, Inc. is paid initial leasing costs.
For the years ended December 31, 1997 and 1996, these fees amounted to $3,656
and $65,120, respectively, and were recorded as deferred leasing costs. No such
costs were incurred in 1995.
During 1993, SMMP loaned funds to a former affiliate of S-P Properties, Inc. in
the form of demand notes. Such liabilities were assumed by Finance Factors, Inc.
which acquired S-P Properties, Inc. as of December 30, 1994. In July 1995,
Finance Factors, Inc. merged with Bancor Real Estate Company, Inc. who has
assumed the note. The annual interest rate of the loans was variable at bank
prime plus 2-1/4% - 3% with a minimum rate of 9%. The loans totaled $2,360,000
at December 31, 1993 and were reduced to $1,687,787 at December 31, 1994. This
loan was amended effective January 1, 1995 fixing the interest rate at 10%. On
December 31, 1997, interest receivable of $338,020 was added to the principal
balance of the loan. No interest related to this loan was due to the Partnership
at December 31, 1997. Interest receivable was $169,241 at December 31, 1996. The
principal balance outstanding at December 31, 1997 is $2,025,807. The loan is
guaranteed by the owners of CGS Real Estate Company, Inc.
During 1995, the Partnership made a short-term, non-interest bearing loan to
SPDFII in the amount of $140,000. This loan was repaid in 1996. In 1996, the
Partnership received a short-term, non-interest bearing loan from SPDFII in the
amount of $155,590. This loan was reclassed to equity in 1997 (See Note 1).
During 1996, the Partnership made a non-interest bearing advance to an affiliate
in the amount of $4,771. Repayment is expected in 1998.
During 1995 and 1996, the Partnership received non-interest bearing short-term
advances from SPPI'84 of $1,300,000 and $11,300, respectively. These advances
were reclassed to equity in 1997 (See Note 1).
Reference is made to Note 6.
44
<PAGE>
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page five
4. INCOME-PRODUCING PROPERTIES
At December 31, 1997 and 1996 the total cost and accumulated depreciation of the
properties are as follows:
1997 1996
------------- -------------
Land $ 3,786,458 $ 3,786,458
Building and improvements 9,926,189 10,482,406
------------- -------------
Total 13,712,647 14,268,864
Accumulated depreciation (4,625,842) (4,819,832)
------------- -------------
Net $ 9,086,805 $ 9,449,032
============= =============
Future minimum base rental income, under the existing operating leases for the
Sierra Mira Mesa and Sorrento I properties, to be recognized on a straight-line
basis and amounts to be received on a cash basis are as follows:
Year Ending Straight-line Cash
December 31, Basis Basis
------------------------ -------------- --------------
1998 $ 1,872,969 $ 1,922,487
1999 1,807,666 1,953,335
2000 1,760,152 2,000,177
2001 1,753,768 2,084,968
2002 1,744,768 2,173,586
Thereafter 338,100 417,776
-------------- --------------
Total $ 9,277,423 $ 10,552,329
============== ==============
The Partnership relied on two tenants for 80% of 1997 rental income; 67% is from
a state governmental agency associated with workers compensation insurance and
13% is from a tenant in the communications sector.
5. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
SMMP holds the following investments accounted for under the equity method at
December 31, 1997:
o a 24.91% equity interest in Sorrento II Partners ("SIIP"), a joint
venture formed on October 1, 1993 with Sierra Pacific Institutional
Properties V, an affiliate, to develop and operate Sierra Sorrento II,
an industrial building located in San Diego, California. SMMP's
investment in SIIP as of December 31, 1997 and 1996 is $1,711,297 and
$1,078,963, respectively. SMMP's share of the net loss of SIIP for the
three years ended December 31, 1997, 1996 and 1995 is $59,066, $61,933
and $51,897, respectively;
45
<PAGE>
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page six
o a 4.96% equity interest in Sierra Creekside Partners ("SCP"), a joint
venture formed on February 1, 1994 with Sierra Pacific Development Fund, an
affiliate, to develop and operate Sierra Creekside, a commercial office
building in San Ramon, California. SMMP's investment in SCP as of December
31, 1997 and 1996 is $25,510 and $(102,995), respectively. SMMP's share of
the net loss of SCP for the three years ended December 31, 1997, 1996 and
1995 is $14,995, $70,232 and $96,868, respectively;
o a 47.05% equity interest in Sierra Vista Partners ("SVP"), a joint venture
formed on February 1, 1994 with Sierra Pacific Development Fund III, an
affiliate, to develop and operate Sierra Vista, an industrial building in
Anaheim, California. SMMP's investment in SVP as of December 31, 1997 and
1996 is $56,963 and $1,797,208, respectively. SMMP's share of the net loss
of SVP for the three years ended December 31, 1997, 1996 and 1995 is
$781,288, $222,600 and $173,375, respectively. The Sierra Vista property was
sold in October 1997.
The following is a summary of aggregated financial information for all
investments owned by SMMP which are accounted for under the equity method:
CONDENSED COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 122,997 $ 159,369
Rent receivable 549,240 781,284
Due from affiliate 47,666 50,681
Income-producing property,
net of accumulated
depreciation 8,610,352 15,043,645
Other assets 1,339,407 732,144
------------ --------------
Total Assets $ 10,669,662 $ 16,767,123
============ ==============
LIABILITIES AND GENERAL
PARTNERS' EQUITY
Accrued and other liabilities $ 325,087 $ 648,328
Note payable 1,763,420 5,213,615
------------ --------------
Total Liabilities 2,088,507 5,861,943
------------ --------------
Ground lessors' equity in income-producing
property 3,000,000 3,000,000
------------ --------------
General Partners' equity 5,581,155 7,905,180
------------ --------------
Total Liabilities and General Partners' equity $ 10,669,662 $ 16,767,123
============ ==============
</TABLE>
46
<PAGE>
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page seven
CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995
------------ ------------- -------------
Revenues:
Rental income $ 2,294,859 $ 2,474,335 $ 2,124,077
Other income 9,698 13,968 6,915
------------ ------------- -------------
Total revenues 2,304,557 2,488,303 2,130,992
------------ ------------- -------------
Expenses:
Operating expenses 1,755,826 1,788,643 2,009,862
Depreciation and amortization 1,321,177 1,461,571 1,438,310
Interest 459,763 427,967 691,407
------------ ------------- -------------
Total expenses 3,536,766 3,678,181 4,139,579
------------ ------------- -------------
Net loss before disposition of
property (1,232,209) (1,189,878) (2,008,587)
------------ ------------- -------------
Loss from property disposition (967,764) 0 0
------------ ------------- -------------
Net loss $ (2,199,973) $ (1,189,878) $ (2,008,587)
============ ============= =============
6. NOTES PAYABLE
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
Mortgage note payable, due in monthly
installments with interest at 7.74%,
collateralized by the real property known as
Sierra Mira Mesa. This note matures in October 2010. $5,041,225 $5,262,512
Mortgage note payable to affiliate, due in
monthly installments with interest fixed at
9.34% per annum through October 1998, at which
time the rate will convert to the one-year
treasury rate plus 375 basis points. The note is
collateralized by the real property
known as Sorrento I. This note matures in March 2015. 631,827 750,000
----------- ------------
$5,673,052 $6,012,512
=========== ============
</TABLE>
CGS Real Estate Company, Inc. ("CGS"), an affiliate of the General Partner,
acquired the Sorrento I mortgage note, due in July 1998, and security documents
from the bank in May 1996. In connection with the purchase of the bank note and
security documents by CGS, the Partnership made a principal payment to the bank
of $750,000 and entered into a $750,000 note agreement with CGS (the "CGS
Agreement"). The CGS Agreement, collaterized by real and personal property,
called for monthly interest payments through December 1996 and monthly
principal and interest payments thereafter until maturity on May 31, 2016. The
interest rate is fixed at 9.34% per annum for the first year of the note and
will thereafter be the one year Treasury rate plus 375 basis points. A
pre-payment in the amount of $105,000 was paid in April 1997.
47
<PAGE>
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page eight
At any time upon 120 days written notice to CGS, the Partnership may fully
discharge the note by the payment of an amount equal to $750,000 less the
aggregate amount of principal paid under the note between the date of the CGS
Agreement and the date of payment plus any interest due.
A modification agreement was entered into on September 30, 1997. The interest
rate remained fixed at 9.34% through October 1998, at which time the rate will
convert to the one-year treasury rate plus 375 basis points. The principal of
the note on the effective date was $635,479 and is amortized over a 210-month
term until maturity in March 2015. Current payments are $6,154 per month,
principal and interest inclusive. The loan balance as of December 31, 1997 was
$631,827.
The excess of the net carrying amount of the balance due under the bank note
agreement, net of unamortized deferred loan fees, over the balance due under the
CGS Agreement was recognized as an extraordinary item in 1996 in the amount of
$1,200,381.
Annual maturities under the Sierra Mira Mesa note and the CGS Agreement as of
December 31, 1997 are: $254,524 in 1998; $275,206 in 1999; $297,573 in 2000;
$321,763 in 2001; $347,924 in 2002; and $4,176,062 thereafter.
48
<PAGE>
SORRENTO I PARTNERS
(A CALIFORNIA GENERAL PARTNERSHIP)
AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1997
49
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
Sorrento I Partners
We have audited the accompanying balance sheets of Sorrento I Partners, a
California general partnership, (the "Partnership") as of December 31, 1997 and
1996, and the related statements of operations, changes in general partners'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sorrento I Partners as of
December 31, 1997 and 1996, and the results of its operations and cash flows for
each of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
March 13, 1998
50
<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
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
51
<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> <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
52
<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
53
<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
54
<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.
55
<PAGE>
Sorrento I Partners
Notes to Financial Statements
Page two
INCOME-PRODUCING PROPERTIES
Property and tenant improvements are carried at cost and depreciated on the
straight-line method over the estimated lives of the related assets, ranging
from seven to thirty years. Tenant improvements incurred at the initial leasing
of the property are depreciated over ten years and tenant improvements incurred
at the re-leasing of the property are depreciated over the life of the related
lease.
Expenditures for repairs and maintenance are charged against income as incurred.
Improvements and major renewals are capitalized. Costs and the related
accumulated depreciation of assets sold or retired are removed from the accounts
in the year of disposal or when fully depreciated and any resulting gain or loss
is reflected in income or deferred income as appropriate.
SIP employs a systematic approach in determining whether the value of
income-producing property has been impaired. Prior to 1995, a provision for loss
on a property was established if the appraised value of the property declined
below its book value due to what the General Partner believed to be an other
than temporary condition. A complete appraisal was performed on the property as
of December 31 each year.
Effective January 1, 1995, SIP implemented Statement of Financial Accounting
Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (the "Statement"). SIP regularly evaluates
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. Future
cash flows are estimated and compared to the carrying amount of the asset to
determine if an impairment has occurred. If the sum of the expected future cash
flows is less than the carrying amount of the asset, SIP shall recognize an
impairment loss in accordance with the Statement. No provision was required due
to the implementation of this Statement.
Because the determination of fair value is based upon projections of future
economic events such as property occupancy rates, rental rates, operating cost
inflation and market capitalization rates which are inherently subjective, the
amounts ultimately realized at disposition may differ materially from the net
carrying value as of December 31, 1997. The cash flows used to determine fair
value and net realizable value are based on good faith estimates and assumptions
developed by management. Unanticipated events and circumstances may occur and
some assumptions may not materialize; therefore actual results may vary from the
estimates and the variances may be material. SIP may provide additional
write-downs which could be material in subsequent years if real estate markets
or local economic conditions change.
OTHER ASSETS
Deferred leasing costs represent costs incurred to lease properties and are
amortized over the life of the related lease.
Deferred loan costs represent costs incurred to obtain financing and are
amortized over the life of the related loan.
RENTAL INCOME AND RENT RECEIVABLE
Rental income is recognized on the straight-line method over the term of the
related operating lease in accordance with the provisions of Statement of
Financial Accounting Standards No. 13, "Accounting for Leases".
Rent receivable consists of (a) unbilled rent - the difference between rent
recognized on the straight-line method and actual cash due; an (b) billed rent -
rent due but not yet received.
56
<PAGE>
Sorrento I Partners
Notes to Financial Statements
Page three
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB also issued SFAS No. 129, Disclosure of Information
about Capital Structure, which establishes standards for disclosing information
about an entity's capital structure. SFAS No. 129 was effective for periods
ending after December 15, 1997. The adoption of SFAS No. 129 did not impact the
Partnership's capital structure disclosures as the Partnership was already in
compliance with this SFAS.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, and
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments and related information in interim and annual financial statements.
SFAS No. 131 will not impact the Partnership's financial statements as it
reports as a single segment. SFAS Nos. 130 and 131 are effective for periods
beginning after December 15, 1997. Management is evaluating what, if any,
additional disclosures may be required upon the implementation of SFAS No. 130.
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts, at December 31,
1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
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
============= =============
</TABLE>
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.
57
<PAGE>
Sorrento I Partners
Notes to Financial Statements
Page four
SIP reimburses an affiliate of S-P Properties, Inc. for expenses incurred by the
affiliate for services provided to SIP such as accounting, data processing and
similar services. The affiliate was reimbursed $34,860, $33,714 and $31,001,
respectively, for such services for the years ended December 31, 1997, 1996 and
1995. Additionally, SIP reimbursed an affiliate for construction supervision
costs incurred by the affiliate. For the years ended December 31, 1997, 1996 and
1995 the affiliate received $0, $33,084 and $0, respectively, for tenant
improvements supervisory costs.
In consideration for services rendered with respect to initial leasing of SIP's
property, an affiliate of S-P Properties, Inc. is paid initial leasing costs.
For the years ended December 31, 1997, 1996 and 1995 these fees amounted to $0,
$59,563 and $0, respectively, and were recorded as deferred leasing costs.
During 1996, SIP made a non-interest bearing advance to an affiliate in the
amount of $4,770. Repayment is expected in 1998.
Reference is made to Note 5.
4. INCOME-PRODUCING PROPERTIES
At December 31, 1997 and 1996 the total cost and accumulated depreciation of the
property are as follows:
1997 1996
------------- -------------
Land $ 1,305,518 $ 1,305,518
Building and improvements 1,671,982 2,406,466
------------- -------------
Total 2,977,500 3,711,984
Accumulated depreciation (537,812) (1,170,370)
------------- -------------
Net $ 2,439,688 $ 2,541,614
============= =============
During 1997 and 1996, SIP removed $734,484 and $10,780, respectively, from its
building and improvements and related accumulated depreciation accounts for
fully depreciated property.
58
<PAGE>
Sorrento I Partners
Notes to Financial Statements
Page five
Future minimum base rental income to be recognized on a straight-line basis and
amounts to be received on a cash basis are as follows:
Year
Ending Straight-line Cash
December 31, Basis Basis
- ------------------------------ ------------- -------------
1998 $ 283,635 $ 273,196
1999 283,635 278,448
2000 283,635 289,584
2001 283,635 295,152
2002 283,635 306,960
Thereafter 94,547 104,288
------------- -------------
Total $ 1,512,722 $ 1,547,628
============= =============
SIP relied on one tenant for 100% of 1997 and 1996 rental income. The lease
agreement requires the tenant to pay expenses such as utilities, insurance and
property taxes related to the property. The principal business of the tenant is
research and development in the communications sector.
5. NOTE PAYABLE
SIP had a non-recourse bank note payable with an original principal balance of
$3,000,000 collateralized by real and personal property. The annual interest
rate of the note was variable at bank prime plus 2-1/2% with a minimum rate of
9% and maximum rate of 15-1/2%. The original maturity of the note was July 1998
and the note included a discounted payoff option of $1,500,000.
CGS Real Estate Company, Inc. ("CGS"), an affiliate of the General Partner,
acquired the note and security documents from the bank in May 1996. In
connection with the purchase of the bank note and security documents by CGS, SIP
made a principal payment to the bank of $750,000 and entered into a $750,000
note agreement with CGS (the "CGS Agreement"). The CGS Agreement, collaterized
by real and personal property, called for monthly interest payments through
December 1996 and monthly principal and interest payments thereafter until
maturity on May 31, 2016. The interest rate is fixed at 9.34% per annum for the
first year of the note and will thereafter be the one-year Treasury rate plus
375 basis points. A pre-payment in the amount of $105,000 was paid in April
1997.
A modification agreement was entered into on September 30, 1997. The interest
rate remained fixed at 9.34% through October 1998, at which time the rate will
convert to the one-year treasury rate plus 375 basis points. The note is
amortized over a 210-month term and current payments are $6,154 per month,
principal and interest inclusive until maturity in March 2015. The loan balance
as of December 31, 1997 was $631,827.
At any time upon 120 days written notice to CGS, SIP may fully discharge the
note by the payment of an amount equal to $750,000 less the aggregate amount of
principal paid under the note between the date of the CGS Agreement and the date
of payment plus any interest due.
The excess of the net carrying amount of the balance due under the bank note
agreement, net of unamortized deferred loan fees, over the balance due under the
CGS Agreement was recognized as an extraordinary item in 1996 in the amount of
$1,200,381.
Annual maturities under the CGS Agreement as of December 31, 1997 are: $15,489
in 1998; $16,999 in 1999; $18,657 in 2000; $20,476 in 2001; $22,472 in 2002; and
$537,734 thereafter.
59
<PAGE>
Sorrento I Partners
Notes to Financial Statements
Page six
6. GENERAL PARTNERS' EQUITY (DEFICIT)
In accordance with the partnership agreement, accrual basis losses resulting
from operations of the partnership are first allocated to the General Partners
in proportion to the relative amounts of net cumulative partnership profits
until such allocated losses equal the previously allocated net cumulative
partnership profits. Then, losses are allocated in proportion to the Partners'
percentage interests as computed January 1st of the year in which the loss
occurred.
Likewise, accrual basis profits resulting from operations of the partnership are
first allocated to the General Partners in proportion to the relative amounts of
net cumulative partnership losses until such allocation of profits equals the
previously allocated net cumulative partnership losses. Then, profits are
allocated in proportion to the distributions made to the Partners during the
year.
Upon dissolution of the partnership, any proceeds should be distributed first to
Sierra Mira Mesa as a return of capital in proportion to its aggregate
unreturned capital contributed and then to Sierra Pacific Development Fund III
in proportion to its aggregate unreturned capital contributed. Any remaining
proceeds shall be first distributed pro rata in proportion to the Partners'
positive balances in their capital accounts and then in accordance with their
percentage interest in the year of dissolution.
60
<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.
61
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM SIERRA PACIFIC PENSION INVESTORS '84 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> 27,154
<SECURITIES> 0
<RECEIVABLES> 50,032
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 78,806
<PP&E> 4,929,987
<DEPRECIATION> 3,557,364
<TOTAL-ASSETS> 10,475,000
<CURRENT-LIABILITIES> 108,044
<BONDS> 1,562,134
0
0
<COMMON> 0
<OTHER-SE> 8,804,822
<TOTAL-LIABILITY-AND-EQUITY> 10,475,000
<SALES> 473,408
<TOTAL-REVENUES> 670,986
<CGS> 0
<TOTAL-COSTS> 372,326
<OTHER-EXPENSES> 236,395
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 114,696
<INCOME-PRETAX> (559,320)
<INCOME-TAX> 0
<INCOME-CONTINUING> (559,320)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (559,320)
<EPS-PRIMARY> (7.26)
<EPS-DILUTED> (7.26)
</TABLE>
