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, 1998 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, 1998 is
incorporated by reference into Parts II and III
1
<PAGE>
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 82,520
(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 in effect for 1998 was 66.26% for
the Partnership and 33.74% for SPDFII. On January 1, 1999, the sharing ratio
will be increased to 66.99% for the Partnership and decreased to 33.01% for
SPDFII to reflect the 1998 contributions and distributions.
SMMP also holds an 88.59% interest in Sorrento I Partners (a California general
partnership with Sierra Pacific Development Fund III formed in 1993), a 33.55%
interest in Sorrento II Partners (a California general partnership with Sierra
Pacific Institutional Properties V formed in 1993), a 9.33% interest in Sierra
Creekside Partners (a California general partnership with Sierra Pacific
Development Fund formed in 1994), and a 34.51% 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 II
Partners are included in the Annual Report to the Limited Partners attached as
an Exhibit.
(b.) NARRATIVE DESCRIPTION OF BUSINESS. During 1998, the Partnership owned and
operated one real estate project in Tucson, Arizona as described above. Success
of the project is dependent upon timely payment of rent by six tenants who
accounted for approximately 86% of the rental income of the Partnership for the
year ended December 31, 1998.
2
<PAGE>
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 1998 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, 1998, the Partnership had paid
cash distributions of $21.43 for each $250 unit investment and remaining
partners' equity was computed at $115.97 per unit. Thus, if the Partnership were
to be liquidated at the end of 1998 at book value, each $250 investment would
have returned a total of $137.40.
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 82,520
rentable square feet and is 99% occupied at December 31, 1998. The
weighted-average effective annual rent per square foot at December 31, 1998 is
$6.99. The principal businesses carried on from the building are varied and
include healthcare sales and administration, pistachio nut marketing and
distribution, communication services, optics research and development,
telecommunications manufacturing, and sales and distribution of medical
equipment and supplies.
The Partnership also owns a 66.26% 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 58.70% interest in an industrial
property known as Sorrento I in San Diego, California. 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
Seven of the Property's nine tenants occupy more than ten percent of the
rentable square footage of the building as follows:
<TABLE>
<CAPTION>
Square Percent of Effective Percent of
Feet Rentable Rent Per Effective Rent Gross Annual
Tenants Occupied Square Feet Square Foot Per Annum Rent Expiration of Lease
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Byron Medical, Inc. 8,124 10% $ 6.24 $ 50,694 9% November 1999
Innovative Lasers Corporation 14,017 17% 7.24 101,451 18% October 2001
Pistachio Corp. of Arizona, Inc. 10,648 13% 5.10 54,305 9% July 2000
Excel Technologies 10,111 12% 4.75 48,000 8% October 2003
Lucent Technologies 9,721 12% 9.69 94,188 17% May 2001
Wick Communications Co. 10,021 12% 5.23 52,364 9% September 2001
SHC of Arizona, L.C. 13,586 16% 9.16 124,471 22% June 2002
Tenants Occupying <10% sq ft 5,716 7% 8.21 46,954 8% Various
---------------------------------------------------------------------------
Total Rented Space 81,944 99% $ 6.99 $ 572,427 100%
Vacancies 576 1%
----------------------------
Total Rentable Space 82,520 100%
============================
</TABLE>
SUMMARY OF LEASES BY EXPIRATION
The leases on the Property are scheduled to expire over the next five years as
indicated in the table below.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year of expiration 1999 2000 2001 2002 2003 Totals
Number of tenants 3 1 3 1 1 9
Percent of total tenants 34% 11% 33% 11% 11% 100%
Total area (square feet) 13,840 10,648 33,759 13,586 10,111 81,944
Annual rent $ 97,649 $ 54,305 $ 248,002 $ 124,471 $ 48,000 $ 572,427
Percent gross annual rent 17% 10% 43% 22% 8% 100%
</TABLE>
DEPRECIABLE
PROPERTY Reference is made to Schedule III of the Form 10-K.
REAL ESTATE
TAXES The real estate tax obligation for 1998 is approximately 4.8%
of assessed value. The annual real estate taxes for 1998 are
$100,793.
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, 1998 the loan
balance was $1,381,610.
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, 1998, the
loan balance was $103,373.
SIERRA MIRA MESA - SAN DIEGO, CALIFORNIA
Sierra Mira Mesa office building consists of 89,560 rentable square feet and is
100% occupied at December 31, 1998. The principal business carried on from the
building is insurance. The average effective annual rent per square foot at
December 31, 1998 is $19.51.
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 lease follow:
<TABLE>
<CAPTION>
Percent of Effective Percent of
Square Feet Rentable Rent Per Effective Rent Gross Annual
Tenants Occupied Square Feet Square Foot Per Annum Rent Expiration of Lease
- -------------------------------- ------------- ---------------- --------------- ---------------- ------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
State Comp. Insurance Fund 74,567 83% $ 19.79 $ 1,475,948 85% February 2003
Tenants Occupying <10% sq ft 14,888 17% 18.07 269,099 15% Various
------------- ---------------- --------------- ---------------- ------------
Total Rented Space 89,455 100% $ 19.51 $ 1,745,047 100%
Vacancies 105 0%
------------- ----------------
Total Rentable Space 89,560 100%
============= ================
</TABLE>
SUMMARY OF LEASES BY EXPIRATION
The Property's five tenants have leases scheduled to expire over the next ten
years as scheduled below.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year of expiration 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Totals
Number of tenants 1 0 1 0 1 1 0 0 0 1 5
Percent of tot. tenants 20% 0% 20% 0% 20% 20% 0% 0% 0% 20% 100%
Tot. area (square feet) 2,651 0 762 0 74,567 4,762 0 0 0 6,713 89,455
Annual rent $40,607 $ 0 $ 12,000 $ 0 $ 1,475,948 $61,745 $ 0 $ 0 $ 0 $ 154,747 $ 1,745,047
Per. gross annual rent 2% 0% 1% 0% 84% 4% 0% 0% 0% 9% 100%
</TABLE>
5
<PAGE>
DEPRECIABLE PROPERTY
Sierra Mira Mesa, San Diego, California
Office Building - Income-Producing Property
Tenant
Land Buildings Improvements Total
Historical Cost & Tax
Basis $2,480,940 $6,234,452 $ 581,373 $9,296,765
Accumulated
Depreciation (2,389,205) (245,027) (2,634,232)
----------------------------------------------------------
Net Carrying Value $2,480,940 $3,845,247 $ 336,346 $6,662,533
==========================================================
Depreciation Method Not Applicable Straight-line Straight-line
Depreciable Life Not Applicable 5-30 Years 1-10 Years
REAL ESTATE
TAXES The real estate tax obligation for 1998 is approximately 1.12%
of the assessed value or $71,184.
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 $4,802,191 at December 31, 1998. 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,
1998 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
Tenant
Land Buildings Improvements Total
Historical Cost & Tax
Basis $1,305,518 $1,342,683 $ 329,299 $2,977,500
Accumulated
Depreciation (526,906) (112,833) (639,739)
----------------------------------------------------------
Net Carrying Value $1,305,518 $ 815,777 $ 216,466 $2,337,761
==========================================================
Depreciation Method Not Applicable Straight-line Straight-line
Depreciable Life Not Applicable 10-30 Years 7-10 Years
6
<PAGE>
REAL ESTATE
TAXES The real estate tax obligation for 1998 is approximately 1.12%
of the assessed value or $29,144.
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 (9.06% at
December 31, 1998). 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 converted to the one-year
treasury rate plus 375 basis points (9.06% at December 31,
1998). The principal of the note on the effective date was
$635,479 and is amortized over a 210-month term. Current
payments are $6,048 per month, principal and interest
inclusive until maturity in March 2015. The loan balance as of
December 31, 1998 was $616,223.
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, 1998, the number of security holders is as follows:
NUMBER NUMBER OF
OF UNITS RECORD HOLDERS
-------- --------------
Limited Partners 77,000 2,814
======== ==========
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 $0, $.65 and $2.60 per limited
partnership unit during the years ended December 31, 1998, 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, 1998, the Partnership owns Sierra
Valencia, an industial office building in Tucson, Arizona. The Partnership also
owns a 66.26% interest in Sierra Mira Mesa Partners ("SMMP"). SMMP owns an
office building - Sierra Mira Mesa in San Diego, California.
Results of Operations:
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997.
8
<PAGE>
Rental income increased by $31,000, or 6%, principally due to an increase in
rental rates. The weighted-average effective rent per square foot, on an accrual
basis, increased from $6.07 at December 31, 1997 to $6.99 at December 31, 1998.
One tenant, whose lease accounted for 19,255 square feet, vacated in 1998. This
space was re-leased to two new tenants at higher rental rates. Occupancy at
December 31, 1998 and 1997 remained constant at 99%.
Total operating expenses increased by $41,000, or 7%, when compared to the prior
year. Depreciation and amortization expenses increased primarily due to
additional tenant improvements and lease costs associated with the new tenants
at the Property. Further, higher property taxes were attributable to an increase
in the assessed value of the Property.
The Partnership recognized interest expense in the amount of $148,000 for the
year in comparison to $115,000 in the prior year. This increase was the result
of a full year of interest expense on two loan agreements entered into in 1997.
The Partnership's share of income from investment in SMMP was $196,000 in 1998,
which includes a $76,000 adjustment to account for the Patnership's share of an
understatement of SMMP's unconsolidated joint venture loss in the prior year. In
1997, the Partnership recorded a $507,000 loss from investment in SMMP. The loss
generated by SMMP in 1997 was primarily 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, 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 the two loan
agreements entered into by the Partnership in 1997. 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.
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 $67,000 in operating activities and paid $105,000
for property additions and lease commissions during 1998. The Partnership is in
an illiquid position at December 31, 1998 with cash and billed rents of $11,000
and current liabilities of $116,000. The Partnership anticipates cash required
to meet debt obligations, operating expenses and costs for construction of new
tenant space will be funded from the operations of the Property.
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.
9
<PAGE>
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. As a result,
many companies' software and computer systems may need to be upgraded or
replaced in order to comply with Year 2000 requirements.
The Partnership employs a property management company to manage, operate and
lease the property. The management company believes it will be ready for the
Year 2000 date change by the end of 1999. The impact of Year 2000 non-compliance
by other third parties cannot accurately be gauged.
The total cost to the Partnership of activities associated with Year 2000
Compliance is not anticipated to be material to its financial position or
results of operations in any given year. In January 1999, the Partnership began
utilizing a new software program to maintain books and records. The new software
program is Year 2000 compliant.
The total amount of potential risk that would be reasonably likely to result
from Year 2000 failures cannot presently be estimated. In the event the
Partnership does not properly identify Year 2000 issues in a timely manner,
there can be no assurance that Year 2000 issues will not materially affect the
Partnership's results.
The Partnership's contingency plan should systems fail due to the Year 2000 date
change is to temporarily convert to a manual system. The Partnership believes it
could temporarily operate on a manual system without adversely impacting
operations.
The preceding Year 2000 discussion contains various forward-looking statements
which represent the Partnership's beliefs or expectations regarding future
events. All forward-looking statements involve a number of risks and
uncertainties that could cause the actual results to differ materially from
projected results.
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, 1998 and 1997
3. Consolidated Statements of Operations - for the years ended December
31, 1998, 1997 and 1996
4. Consolidated Statements of Changes in Partners' Equity - for the years
ended December 31, 1998, 1997 and 1996
5. Consolidated Statements of Cash Flows - for the years ended December
31, 1998, 1997 and 1996
6. Notes to Consolidated Financial Statements
7. Consolidated Balance Sheets of Sierra Mira Mesa Partners as of
December 31, 1998 and 1997 and Statements of Operations, Changes in
General Partners' Equity and Cash Flows for each of the three years in
the period ended December 31, 1998 and Independent Auditors' Report
8. Balance Sheets of Sorrento II Partners as of December 31, 1998 and
1997 and Statements of Operations, Changes in General Partners' Equity
and Cash Flows for each of the three years in the period ended
December 31, 1998 and Independent Auditors' Report
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, Missouri, 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 48 4 years
Dawson L. Davenport Vice President 43 4 years
Steven M. Speier Secretary/Treasurer and
Director 48 4 years
William J. Carden Assistant Secretary/
Treasurer and Director 54 4 years
Thomas N. Thurber - President and Director, S-P Properties, Inc. Mr. Thurber is
a Certified Public Accountant who began his career with Arthur Andersen & Co. in
1972. In 1979, he joined a major publicly traded real estate development firm
(Daon) where he became Controller for U.S. Operations. Subsequently, Mr. Thurber
served as Director of Real Estate for a developer of retail properties, and
Chief Financial Officer of a trust with significant investments in commercial
real estate. Mr. Thurber also serves as a director of Property Secured
Investments, Inc. Mr. Thurber holds a bachelors degree in accounting from
Florida State University.
Dawson L. Davenport - Vice President, S-P Properties, Inc. Mr. Davenport is the
founder of WD Real Estate Services, a full service property management firm that
became part of the Banc Commercial family of companies in 1992. Mr. Davenport
has been responsible for the management, development and rehabilitation of
substantial commercial, industrial, retail, and residential projects during the
past seventeen years. Mr. Davenport specializes in leasing and turning around
distressed properties.
Steven M. Speier - Secretary/Treasurer and Director, S-P Properties, Inc. Mr.
Speier who after spending two years in public accounting, went into the banking
industry in 1975. During his sixteen year banking career, Mr. Speier managed a
real estate loan portfolio of approximately $1.5 billion secured by properties
throughout the United States. Mr. Speier brings to S-P Properties, Inc. a broad
real estate background that includes management, leasing, and disposition of all
categories of commercial real estate. Mr. Speier also serves as a director of
IDM Corporation. Mr. Speier is a licensed real estate broker, is registered as a
Certified Public Accountant, and has a masters degree in business administration
from Grand Valley State University in Michigan.
William J. Carden - Assistant Secretary/Treasurer and Director, S-P Properties,
Inc. Mr. Carden is the founder and President of CGS Real Estate Company, Inc.,
which owns over one million square feet of commercial real estate. Mr. Carden
founded DVM Properties, Inc. in 1974 which concentrated on rehabilitation of
retail, office, industrial, and commercial real estate. Mr. Carden is a former
Director of Bay Financial, a New York Stock Exchange company and currently
serves as a director of Property Secured Investments, Inc. and IDM Corporation.
There have been no events under any bankruptcy act, no criminal proceedings, and
no judgments or injunctions material to the evaluation of the ability and
integrity of any director or officer during the past five years.
11
<PAGE>
ITEM 11. MANAGEMENT REMUNERATION
The Registrant is a California Limited Partnership and has no officers or
directors. No options to purchase securities of the Registrant have been granted
to any person.
In accordance with the terms of the Partnership Agreement, certain affiliates of
the General Partner receive real estate brokerage commissions in connection with
the leasing of properties by the Partnership and receive from the Partnership
certain management and administrative services fees. These amounts are set forth
in the Annual Report to the Limited Partners attached as an Exhibit.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
None
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership 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, 1998 were $20,103. 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 $72,284 during the year
ended December 31, 1998. 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. 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 principal balance of the note.
In 1998, the maturity date was extended to December 31, 1999 and interest
receivable of $222,128 was added to the pricipal balance. 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 - Selected Financial Data
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, 1998, 1997 and 1996
2. Schedule III - Real Estate and Accumulated Depreciation - December
31, 1998
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, 1999 /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, 1999 /s/THOMAS N. THURBER
-------------- ---------------------
Thomas N. Thurber
President and Director
S-P Properties, Inc.
Date: March 19, 1999 /s/WILLIAM J. CARDEN
-------------- ---------------------
William J. Carden
Assistant Secretary/Treasurer
and Director
S-P Properties, Inc.
Date: March 19, 1999 /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, 1998 and 1997, and for each of the three years
in the period ended December 31, 1998 and have issued our report thereon dated
March 12, 1999. Such consolidated financial statements and report are included
in your 1998 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 12, 1999
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, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
INCOME -
PRODUCING
PROPERTIES
-----------
Allowance for loss - January 1, 1996 $ 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
Provision charged to costs
and expenses (1) 0
-----------
Allowance for loss - December 31, 1998 $ 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, 1998
<TABLE>
<CAPTION>
Initial Cost Gross Amount at
to Partnership(1) Improvements Which carried at close of period
------------------ Capitalized --------------------------------
Encumb- Improve- After Acquis- Improve- Total
Description rances Land ments ition (2) Land ments (3)(4)(5)
- ----------- ------ ---- ----- --------- ---- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
OFFICE BUILDING-
INCOME -PRODUCING:
Sierra Valencia
Tucson, AZ $1,484,983 $977,677 $ 0 $4,054,231 $977,677 $3,976,275 $4,953,952
<CAPTION>
Accum. Date Date Deprec.
Description Deprec.(5) Constructed Acquired Life
- ----------- ---------- ----------- -------- ----
OFFICE BUILDING-
INCOME -PRODUCING:
Sierra Valencia
Tucson, AZ $1,861,937 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. See Notes 1 and 4 to the
financial statements incorporated by reference to the Annual Report to the
Limited Partners attached as an exhibit.
(5) Reconciliation of total real estate carrying value and accumulated
depreciation for the three years ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Total Real Estate Accumulated
Carrying Value Depreciation
-------------- ------------
<S> <C> <C>
Balance - January 1, 1996 $ 4,762,948 $ 1,358,741
Additions during the year 94,057 189,499
Write off of 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 1,677,364
Additions during the year 42,614 203,222
Write off fully depreciated assets (18,649) (18,649)
-------------- ------------
Balance - December 31, 1998 $ 4,953,952 $ 1,861,937
============== ============
</TABLE>
17
<PAGE>
SIERRA PACIFIC PENSION INVESTORS '84 AND SUBSIDIARY
(A California Limited Partnership)
SELECTED FINANCIAL DATA
For the Years Ended December 31, 1998,1997,1996,1995 and 1994
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, 1998 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>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
REVENUES ........................................ $ 726,154 $ 670,986 $ 668,706 $ 713,877 $ 1,024,731
OPERATING EXPENSES:
Total ......................................... 649,550 608,721 626,646 711,475 1,303,971
Per dollar of revenues ........................ 0.89 0.91 0.94 1.00 1.27
INTEREST EXPENSE:
Total ......................................... 147,712 114,696 0 0 0
Per dollar of revenues ........................ 0.20 0.17 0.00 0.00 0.00
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS:
Total ......................................... 124,886 (559,320) (137,422) (141,624) (304,760)
General Partner ............................... 0 0 0 0 25,667
Limited Partnership ........................... 124,886 (559,320) (137,422) (141,624) (330,427)
Per Limited Partnership Unit (1) .............. 1.62 (7.26) (1.78) (1.84) (4.29)
CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES .......................... (66,517) (96,708) 133,115 85,860 273,900
CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES .......................... 126,636 (1,430,332) (94,057) 1,332,930 (286,770)
CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES .......................... (77,151) 1,512,134 (251,766) (1,507,000) 345,333
TOTAL ASSETS .................................... 10,558,178 10,475,000 9,510,493 9,496,780 10,011,579
PARTNERS' EQUITY:
Total ......................................... 8,929,708 8,804,822 9,414,142 9,416,533 9,758,157
General Partner ............................... 0 0 0 0 0
Limited Partners .............................. 8,929,708 8,804,822 9,414,142 9,416,533 9,758,157
LIMITED PARTNERS' EQUITY - PER UNIT (1) ......... 115.97 114.35 122.26 122.29 126.73
NOTE RECEIVABLE ................................. 2,227,627 2,005,498 1,697,739 1,697,739 2,832,704
INCOME-PRODUCING PROPERTIES:
Number ........................................ 1 1 1 1 1
Cost .......................................... 4,953,952 4,929,987 4,803,698 4,762,948 4,743,836
Less: Accumulated depreciation ................ (1,861,937) (1,677,364) (1,494,933) (1,358,741) (1,106,776)
Valuation allowance .................. (1,880,000) (1,880,000) (1,880,000) (1,880,000) (1,880,000)
Net book value ................................ 1,212,015 1,372,623 1,428,765 1,524,207 1,757,060
INVESTMENT IN UNCONSOLIDATED
JOINT VENTURE ............................. 6,743,274 6,720,551 4,616,117 4,464,589 4,804,259
NOTES PAYABLE - Related to income-
producing property ........................ 1,484,983 1,562,134 0 0 0
DISTRIBUTIONS PER UNIT (1): ..................... 0 0.65 2.60 2.60 2.00
</TABLE>
(1) The net income (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, 1998 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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Houston, Texas
March 12, 1999
19
<PAGE>
SIERRA PACIFIC PENSION INVESTORS '84 AND SUBSIDIARY
(A California Limited Partnership)
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
December 31, 1998 December 31, 1997
----------------- -----------------
ASSETS
Cash and cash equivalents ................ $ 10,122 $ 27,154
Receivables:
Note, net of deferred gain of
$215,786 (Notes 3 and 4) ............ 2,227,627 2,005,498
Unbilled rent (Notes 1 and 4) ......... 42,331 45,846
Billed rent (Note 1) .................. 962 4,186
Due from affiliates (Note 3) ............. 47,466 47,466
Income-producing property - net of
accumulated depreciation and valuation
allowance of $3,741,937 in 1998 and
$3,557,364 in 1997, respectively
(Notes 4 and 6) ........................ 1,212,015 1,372,623
Investment in unconsolidated
joint venture (Notes 1 and 5) .......... 6,743,274 6,720,551
Other assets (Notes 1, 2 and 3) .......... 274,381 251,676
----------- -----------
Total Assets ............................. $10,558,178 $10,475,000
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Accrued and other liabilities (Note 2) ... $ 143,487 $ 108,044
Notes payable (Note 6) ................... 1,484,983 1,562,134
----------- -----------
Total Liabilities ........................ 1,628,470 1,670,178
----------- -----------
Partners' equity (Notes 1 and 7):
General Partner ........................ 0 0
Limited Partners:
80,000 units authorized,
77,000 issued and outstanding ........ 8,929,708 8,804,822
----------- -----------
Total Partners' equity ................... 8,929,708 8,804,822
----------- -----------
Total Liabilities and Partners' equity ... $10,558,178 $10,475,000
=========== ===========
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, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
Rental income (Note 1) ......................................... $ 504,016 $ 473,408 $ 475,900
Interest income (Note 3) ....................................... 222,138 197,578 192,806
--------- --------- ---------
Total revenues ............................................ 726,154 670,986 668,706
--------- --------- ---------
EXPENSES:
Operating expenses:
Depreciation and amortization .................................. 258,718 236,395 236,624
Property taxes and insurance ................................... 139,225 121,953 125,261
General and administrative ..................................... 33,353 44,028 36,399
Legal and accounting ........................................... 62,651 55,960 74,062
Administrative fees (Note 3) ................................... 51,699 45,684 61,809
Maintenance and repairs ........................................ 40,688 36,639 39,857
Management fees (Note 3) ....................................... 33,341 35,768 27,508
Utilities ...................................................... 15,526 14,609 13,828
Other operating expenses ....................................... 14,349 17,685 11,298
--------- --------- ---------
Total operating expenses .................................... 649,550 608,721 626,646
--------- --------- ---------
Interest ....................................................... 147,712 114,696 0
--------- --------- ---------
Total expenses ............................................ 797,262 723,417 626,646
--------- --------- ---------
(LOSS) INCOME BEFORE PARTNERSHIP'S SHARE
OF UNCONSOLIDATED JOINT VENTURE
INCOME (LOSS) .................................................. (71,108) (52,431) 42,060
--------- --------- ---------
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE INCOME (LOSS) FROM
CONTINUING OPERATIONS (Note 5) ................................. 195,994 (506,889) (179,482)
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE EXTRAORDINARY GAIN (Note 5) ...................... 0 0 335,031
--------- --------- ---------
NET INCOME (LOSS) ................................................ $ 124,886 $(559,320) $ 197,609
========= ========= =========
Per limited partnership unit (Note 1):
Income (loss) before extraordinary gain ........................ $ 1.62 $ (7.26) $ (1.78)
Extraordinary gain ............................................. 0 0 4.35
--------- --------- ---------
Net income (loss) ................................................ $ 1.62 $ (7.26) $ 2.57
========= ========= =========
</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, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Limited Partners Total
----------------------------- General Partners'
Per Unit Total Partner Equity
------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Partners' equity - January 1, 1996 ................. $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
Net income ......................................... 1.62 124,886 124,886
------- ----------- --------- ----------
Partners' equity - December 31, 1998 ............... $115.97 $ 8,929,708 $ 0 $8,929,708
======= =========== ========= ==========
</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, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
--------- ----------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................. $ 124,886 $ (559,320) $ 197,609
Adjustments to reconcile net income (loss) to cash
(used in) provided by operating activities:
Depreciation and amortization .................................... 258,718 236,395 236,624
Undistributed (income) loss of
unconsolidated joint venture ................................... (195,994) 506,889 (155,549)
Decrease (increase) in rent receivable ........................... 6,739 41,958 (8,389)
Increase in note receivable ...................................... (222,128) (148,298) (127,567)
Increase in other assets ......................................... (74,181) (186,025) (25,717)
Increase in accrued and other liabilities ........................ 35,443 11,693 16,104
--------- ----------- ---------
Net cash (used in) provided by operating activities .............. (66,517) (96,708) 133,115
--------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions .................................. (42,614) (126,289) (94,057)
Capital contributions to
unconsolidated joint venture ................................... (42,000) (1,551,843) 0
Distributions from unconsolidated
joint venture .................................................. 211,250 247,800 0
--------- ----------- ---------
Net cash provided by (used in) investing activities .............. 126,636 (1,430,332) (94,057)
--------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Funding of notes payable secured by property ..................... 0 1,604,000 0
Principal payments on notes payable .............................. (77,151) (41,866) 0
Borrowings from affiliates ....................................... 0 0 177,200
Payments to affiliates ........................................... 0 0 (228,966)
Cash distributions ............................................... 0 (50,000) (200,000)
--------- ----------- ---------
Net cash (used in) provided by financing activities .............. (77,151) 1,512,134 (251,766)
--------- ----------- ---------
NET DECREASE IN CASH AND
CASH EQUIVALENTS .................................................. (17,032) (14,906) (212,708)
CASH AND CASH EQUIVALENTS - Beginning of year ........................ 27,154 42,060 254,768
--------- ----------- ---------
CASH AND CASH EQUIVALENTS - End of year .............................. $ 10,122 $ 27,154 $ 42,060
========= =========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interet .......................... $ 148,142 $ 102,738 $ 0
========= =========== =========
</TABLE>
In 1998, $222,128 of interest receivable was added to the principal balance of
the related party note receivable. In 1997, $307,759 of interest receivable was
added to the principal balance of the related party 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 in effect for 1998 was 66.26% for
the Partnership and 33.74% for SPDFII. On January 1, 1999, the sharing ratio
will be increased to 66.99% for the Partnership and decreased to 33.01% for
SPDFII.
SMMP also holds an 88.59% interest in Sorrento I Partners (a California general
partnership with Sierra Pacific Development Fund III formed in 1993), a 33.55%
interest in Sorrento II Partners (a California general partnership with Sierra
Pacific Institutional Properties V formed in 1993), a 9.33% interest in Sierra
Creekside Partners (a California general partnership with Sierra Pacific
Development Fund formed in 1994), and a 34.51% 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, 1998 and 1997
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, 1998. The note receivable and the amounts due from
affiliates are not fair valued 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.
Prior to 1995, the Partnership assessed impairment of income-producing
properties based upon appraised values and established provisions for impairment
where appraisals indicated other than temporary declines in value. 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 such
impairment has been recognized by the Partnership since 1995.
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, 1998. 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 using the straight line method of
accounting.
Deferred loan costs represent costs incurred to obtain financing and are
amortized over the life of the related loan using the straight line method of
accounting.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
These SFAS's, which are effective for the Partnership's fiscal year ending
December 31, 1998, establish additional disclosure requirements but do not
affect the measurement of the results of operations. During the periods
presented, the Partnership did not have any items of comprehensive income. The
adoption of SFAS No. 131 had no effect on the Partnership's financial statements
as the Partnership operates in only one segment, the acquisition, development,
and operation of commercial real estate.
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,
1998 and 1997, is as follows:
1998 1997
-------- --------
Other assets:
Prepaid expenses ................................ $ 3,341 $ 3,211
Tax impounds .................................... 25,185 37,636
Tenant improvements reserves .................... 46,586 22,822
Deferred loan costs, net of accumulated
amortization of $15,863 in 1998 and
$6,676 in 1997 ............................... 75,795 84,982
Deferred leasing costs, net of accumulated
amortization of $132,440 in 1998 and
$150,458 in 1997 ............................. 123,474 103,025
-------- --------
$274,381 $251,676
======== ========
Accrued and other liabilities:
Accounts payable ................................ $ 44,401 $ 18,850
Accrued expenses ................................ 72,028 62,136
Security deposits ............................... 27,058 27,058
-------- --------
$143,487 $108,044
======== ========
3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS
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, 1998, 1997 and 1996 were $20,103, $21,799, and $15,030,
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 $72,284, $63,910 and $61,809 for such services for the years ended
December 31, 1998, 1997 and 1996, respectively. Additionally, the Partnership
reimbursed the affiliate for construction supervision costs incurred by the
affiliate. For the years ended December 31, 1998, 1997, and 1996, the affiliate
received $0, $10,504 and $1,873, respectively, for tenant improvements
supervisory costs.
In consideration for services rendered with respect to initial leasing of
Partnership properties, an affiliate of the General Partner is paid initial
leasing costs. For the years ended December 31, 1998, 1997, and 1996, these fees
amounted to $0, $19,109 and $10,153, respectively, and were recorded as deferred
leasing costs.
Prior to 1997, the Partnership made non-interest bearing short-term advances to
Sierra Mira Mesa Partners of $1,311,300. 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 1999. The balance outstanding at December
31, 1998 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. 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. In 1998, the maturity date was extended to December 31, 1999 and interest
receivable of $222,128 was added to the principal balance of the note. All other
terms of the original note remained unchanged. Interest income related to this
note of $222,128, $196,136, and $191,000 was recognized during the years ended
December 31, 1998, 1997, and 1996, respectively. The December 31, 1998 balance
of the note was $2,443,413 and the note is secured by a second lien on the
property. Management believes the collateral has sufficient value to recover the
Partnership's net investment in the note after satisfaction of the first lien
holder.
4. INCOME-PRODUCING PROPERTIES
At December 31, 1998 and 1997 the total cost and accumulated depreciation of the
property are as follows:
1998 1997
----------- -----------
Land ................................. $ 977,677 $ 977,677
Building and improvements ............ 3,976,275 3,952,310
----------- -----------
Total ....................... 4,953,952 4,929,987
Accumulated depreciation ............. (1,861,937) (1,677,364)
Valuation allowance .................. (1,880,000) (1,880,000)
----------- -----------
Net ......................... $ 1,212,015 $ 1,372,623
=========== ===========
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 using the installment method and the Partnership recorded a
deferred gain of $367,296 at December 31, 1994, which 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. As of December 31, 1998 the remaining deferred gain was $215,786.
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
----------------------- ---------- -----------
1999 $ 550,155 $ 549,272
2000 452,152 458,666
2001 335,532 350,985
2002 110,287 121,534
2003 40,000 50,000
---------- -----------
Total $ 1,488,126 $ 1,530,457
========== ===========
The Partnership relied on six tenants to generate approximately 86% of total
1998 rental revenues. The breakdown of these six tenants' industry segments and
rental income contribution is as follows: 20% - optics research and development;
10% - telecommunications manufacturing; 25% - healthcare administration; 10% -
sales/distribution of medical equipment and supplies; and 10% - communication
services; and 11% - 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 100% leased at December 31, 1998. At December 31, 1998
the Partnership's interest in SMMP was 66.26%; the remaining 33.74% interest was
owned by Sierra Pacific Development Fund II.
The Partnership's investment in SMMP as of December 31, 1998 and 1997 is
comprised of the following:
1998 1997
---------- ----------
Equity interest $6,630,711 $6,603,969
Investment advisory and other fees,
less accumulated amortization of
$141,662 and $137,642 in 1998 and
1997, respectively 112,563 116,582
---------- ----------
Investment in unconsolidated
joint venture $6,743,274 $6,720,551
========== ==========
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, 1998 and 1997. The condensed balance sheets at December
31, 1998 and 1997, and the condensed statements of operations for the years
ended December 31, 1998, 1997 and 1996 for SMMP follow:
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1998 1997
------------ ------------
ASSETS
Cash and cash equivalents $ 14,064 $ 244,408
Rent receivable 1,226,156 1,287,009
Due from affiliates 2,233,158 2,030,577
Income-producing property,
net of accumulated depreciation 9,000,294 9,086,805
Investment in unconsolidated
joint ventures 1,640,460 1,793,770
Other assets 897,993 831,350
------------ ------------
Total Assets $ 15,012,125 $ 15,273,919
============ ============
LIABILITIES AND GENERAL PARTNERS' EQUITY
Accrued and other liabilities $ 251,990 $ 68,765
Notes payable 5,418,414 5,673,052
------------ ------------
Total Liabilities 5,670,404 5,741,817
------------ ------------
Minority interest in joint venture (332,996) (333,783)
------------ ------------
General Partners' equity 9,674,717 9,865,885
------------ ------------
Total Liabilities and General Partners' equity $ 15,012,125 $ 15,273,919
============ ============
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,
---------------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Rental income $ 1,883,630 $ 1,919,582 $ 1,808,673
Other income 205,781 184,168 178,726
----------- ----------- -----------
Total revenues 2,089,411 2,103,750 1,987,399
----------- ----------- -----------
Expenses:
Operating expenses 754,978 742,548 728,593
Depreciation and amortization 581,956 825,911 813,359
Interest 438,711 463,804 559,759
----------- ----------- -----------
Total expenses 1,775,645 2,032,263 2,101,711
----------- ----------- -----------
Income (loss) before Partnership's
share of unconsolidated joint
venture losses 313,766 71,487 (114,312)
Partnership's share of unconsolidated
joint venture losses (131,897) (855,349) (354,765)
----------- ----------- -----------
Income (loss) before extraordinary gain 181,869 (783,862) (469,077)
Extraordinary gain 0 0 1,200,381
----------- ----------- -----------
Income (loss) before minority interest's
share of consolidated joint venture
(income) loss 181,869 (783,862) 731,304
----------- ----------- -----------
Minority interest's share of consolidated
joint venture (income) loss from
Continuing operations (787) (7,906) 102,787
Minority interest's share of consolidated
joint venture extraordinary gain 0 0 (516,644)
----------- ----------- -----------
Net income (loss) $ 181,082 $ (791,768) $ 317,447
=========== =========== ===========
</TABLE>
As of December 31, 1998, SMMP holds a 33.55% interest in Sorrento II Partners (a
California general partnership with Sierra Pacific Institutional Properties V
formed in 1993), a 9.33% interest in Sierra Creekside Partners (a California
general partnership with Sierra Pacific Development Fund formed in 1994), and a
34.51% 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,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 85,792 $ 122,997
Rent receivable 542,527 549,240
Due from affiliates 47,666 47,666
Income-producing property,
net of accumulated depreciation 8,343,438 8,610,352
Other assets 1,320,667 1,339,407
----------- -----------
Total Assets $10,340,090 $10,669,662
=========== ===========
LIABILITIES AND GENERAL PARTNERS' EQUITY
Accrued and other liabilities $ 520,646 $ 325,087
Note payable 1,720,324 1,763,420
----------- -----------
Total Liabilities 2,240,970 2,088,507
----------- -----------
Ground lessors' equity in income producing
property 3,000,000 3,000,000
----------- -----------
General Partners' equity 5,099,120 5,581,155
----------- -----------
Total Liabilities and General Partners' equity $10,340,090 $10,669,662
=========== ===========
</TABLE>
32
<PAGE>
Sierra Pacific Pension Investors `84 and subsidiary
Notes to Consolidated Financial Statements
Page ten
CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
----------- ----------- -----------
Revenues:
Rental income $ 1,734,403 $ 2,294,859 $ 2,474,335
Other income 93,668 9,698 13,968
----------- ----------- -----------
Total revenues 1,828,071 2,304,557 2,488,303
----------- ----------- -----------
Expenses:
Operating expenses 1,302,968 1,755,826 1,788,643
Depreciation and amortization 829,081 1,321,177 1,461,571
Interest 156,636 459,763 427,967
----------- ----------- -----------
Total expenses 2,288,685 3,536,766 3,678,181
----------- ----------- -----------
Loss before loss from property
disposition (460,614) (1,232,209) (1,189,878)
Loss from property disposition 0 (967,764) 0
----------- ----------- -----------
Net Loss $ (460,614) $(2,199,973) $(1,189,878)
=========== =========== ===========
Reference is made to the audited financial statements of Sierra Mira Mesa
Partners and Sorrento II 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, 1998 the loan balance was $1,381,610.
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, 1998, the loan balance was $103,373.
The annual maturities of the notes payable as of December 31, 1998 are $88,450
in 1999, $50,986 in 2000, $20,682 in 2001, $22,679 in 2002, $24,868 in 2003, and
$1,277,318 thereafter.
The Partnership is exposed to interest rate fluctuations on $103,373 of variable
rate debt at December 31, 1998.
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)
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997 AND STATEMENTS OF
OPERATIONS, CHANGES IN GENERAL PARTNERS' EQUITY AND CASH FLOWS FOR EACH OF
THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998 AND
INDEPENDENT AUDITORS' REPORT
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, 1998 and 1997, and the related consolidated
statements of operations, changes in general partners' equity and cash flows for
each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its
operations and cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
March 12, 1999
36
<PAGE>
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY
(A CALIFORNIA GENERAL PARTNERSHIP)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ -------------
ASSETS
<S> <C> <C>
Cash and cash equivalents .................... $ 14,064 $ 244,408
Receivables:
Unbilled rent (Notes 1 and 4) ............. 1,226,156 1,274,906
Billed rent (Note 1) ...................... 0 12,103
Due from affiliates, net (Note 3) ............ 2,233,158 2,030,577
Income-producing property - net of accumulated
depreciation of $3,273,970 in 1998 and
$4,625,842 in 1997 (Notes 1, 4 and 6) ..... 9,000,294 9,086,805
Investment in unconsolidated
joint ventures (Notes 1 and 5) ............ 1,640,460 1,793,770
Other assets (Notes 1, 2 and 3) .............. 897,993 831,350
------------ ------------
Total Assets ................................. $ 15,012,125 $ 15,273,919
============ ============
LIABILITIES AND GENERAL PARTNERS' EQUITY
Accrued and other liabilities (Note 2) ....... $ 251,990 $ 68,765
Notes payable (Note 6) ....................... 5,418,414 5,673,052
------------ ------------
Total Liabilities ............................ 5,670,404 5,741,817
------------ ------------
Minority interest in consolidated
joint venture (Note 1) .................... (332,996) (333,783)
General Partners' equity (Note 1) ............ 9,674,717 9,865,885
------------ ------------
Total Liabilities and General Partners' equity $ 15,012,125 $ 15,273,919
============ ============
</TABLE>
See Accompanying Notes
37
<PAGE>
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY
(A CALIFORNIA GENERAL PARTNERSHIP)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Rental income (Note 1) ............... $ 1,883,630 $ 1,919,582 $ 1,808,673
Interest income ...................... 205,781 174,764 178,726
Other income ......................... 0 9,404 0
----------- ----------- -----------
Total revenues .................. 2,089,411 2,103,750 1,987,399
----------- ----------- -----------
Expenses:
Operating expenses:
Depreciation and amortization ........ 581,956 825,911 813,359
Property taxes and insurance ......... 97,781 92,347 53,587
Administrative fees (Note 3) ......... 111,206 104,580 101,142
Maintenance and repairs .............. 240,965 228,890 262,271
Management fees (Note 3) ............. 109,725 101,558 93,780
Utilities ............................ 135,077 138,203 138,443
Legal and accounting ................. 27,657 47,242 42,011
General and administrative ........... 7,443 12,677 4,484
Renting expenses ..................... 0 309 5,128
Other operating expenses ............. 25,124 16,742 27,747
----------- ----------- -----------
Total operating expenses ........ 1,336,934 1,568,459 1,541,952
Interest ............................. 438,711 463,804 559,759
----------- ----------- -----------
Total expenses .................. 1,775,645 2,032,263 2,101,711
----------- ----------- -----------
INCOME (LOSS) BEFORE PARTNERSHIP'S SHARE
OF UNCONSOLIDATED JOINT VENTURE LOSSES 313,766 71,487 (114,312)
----------- ----------- -----------
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE LOSSES (Note 5) ........ (131,897) (855,349) (354,765)
----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN . 181,869 (783,862) (469,077)
EXTRAORDINARY GAIN ON EXTINGUISHMENT
OF DEBT (Note 6) ..................... 0 0 1,200,381
----------- ----------- -----------
INCOME (LOSS) BEFORE MINORITY INTEREST'S
SHARE OF CONSOLIDATED JOINT VENTURE
(INCOME) LOSS ........................ 181,869 (783,862) 731,304
----------- ----------- -----------
MINORITY INTEREST'S SHARE OF CONSOLIDATED
JOINT VENTURE (INCOME) LOSS FROM
CONTINUING OPERATIONS ................ (787) (7,906) 102,787
MINORITY INTEREST'S SHARE OF CONSOLIDATED
JOINT VENTURE EXTRAORDINARY GAIN ..... 0 0 (516,644)
----------- ----------- -----------
NET INCOME (LOSS) ....................... $ 181,082 $ (791,768) $ 317,447
=========== =========== ===========
</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, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GENERAL PARTNERS
------------------------------------------------------
SIERRA PACIFIC SIERRA PACIFIC
DEVELOPMENT PENSION
FUND II INVESTORS '84 TOTAL
----------------- ----------------- ------------
<S> <C> <C> <C>
General Partners' equity - January 1, 1996 . $ 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
Net income (loss) .......................... (14,912) 195,994 181,082
Contributions .............................. 8,490 42,000 50,490
Distributions .............................. (211,490) (211,250) (422,740)
----------- ----------- -----------
General Partners' equity - December 31, 1998 $ 3,044,005 $ 6,630,712 $ 9,674,717
=========== =========== ===========
</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, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................... $ 181,082 $ (791,768) $ 317,447
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Depreciation and amortization ...................... 581,956 825,911 813,359
Gain from extinguishment of debt ................... 0 0 (1,200,381)
Undistributed losses of
unconsolidated joint ventures .................... 131,897 855,349 354,765
Minority interest in consolidated
joint venture income ............................ 787 7,906 413,857
Decrease (increase) in rent receivable ............. 60,853 (100,191) (164,870)
Increase in due from affiliates .................... (202,581) (168,779) (70,286)
(Increase) decrease in other assets ................ (215,974) 55,566 (293,798)
Increase (decrease) in accrued and other liabilities 183,225 (35,663) 12,579
----------- ----------- -----------
Net cash provided by operating activities ............ 721,245 648,331 182,672
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions .................... (346,113) (231,484) (745,134)
Capital contributions to
unconsolidated joint ventures .................... (350,900) (2,315,041) (824,400)
Distributions received from unconsolidated
joint ventures ................................... 372,312 2,439,098 731,500
----------- ----------- -----------
Net cash used in investing activities ................ (324,701) (107,427) (838,034)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans to affiliates ................................ 0 0 (4,771)
Repayments of loans to affiliates .................. 0 0 142,801
Borrowings from affiliates ......................... 0 0 166,890
Capital contributions from General Partners ........ 50,490 1,844,843 0
Cash distributions ................................. (422,740) (1,828,600) 0
Principal payments on notes payable ................ (254,638) (339,460) (992,832)
----------- ----------- -----------
Net cash used in financing activities ................ (626,888) (323,217) (687,912)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS ................................ (230,344) 217,687 (1,343,274)
CASH AND CASH EQUIVALENTS - Beginning of year .......... 244,408 26,721 1,369,995
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - End of year ................ $ 14,064 $ 244,408 $ 26,721
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest ............... $ 439,756 $ 470,608 $ 580,906
=========== =========== ===========
</TABLE>
In 1998, $202,581 of interest receivable was added to the principal balance of
the note receivable from affiliate. In 1997, $338,020 of interest receivable was
added to the principal balance of the note receivable from affiliate. These
transactions are noncash items 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 100% leased at December 31, 1998.
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 in effect for 1998 was 33.74% for SPDFII and 66.26%
for SPPI'84. On January 1, 1999, the sharing ratio will be decreased to 33.01%
for SPDF II and increased to 66.99% for SPPI'84 to reflect the 1998
contributions and distributions.
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, 1998. All
significant intercompany balances and transactions have been eliminated in
consolidation.
41
<PAGE>
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page two
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, 1998 and 1997
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, 1998. Management does not fair value the amounts
due from affiliates 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.
Prior to 1995, the Partnership assessed impairment of income-producing
properties based upon appraised values and established provisions for impairment
where appraisals indicated other than temporary declines in value. 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 such impairment has been recognized by the Partnership.
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, 1998. 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 using the straight line method of
accounting.
Deferred loan costs represent costs incurred to obtain financing and are
amortized over the life of the related loan using the straight line method of
accounting.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
These SFAS's, which are effective for the Partnership's fiscal year ending
December 31, 1998, establish additional disclosure requirements but do not
affect the measurement of the results of operations. During the periods
presented, the Partnership did not have any items of comprehensive income. The
adoption of SFAS No. 131 had no effect on the Partnership's financial statements
as the Partnership operates in only one segment, the acquisition, development,
and operation of commercial real estate.
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts, at December 31,
1998 and 1997, is as follows:
1998 1997
-------- --------
Other assets:
Prepaid expenses .................................. $ 21,070 $ 20,800
Deferred loan costs, net of
accumulated amortization of
$226,318 in 1998 and
$202,307 in 1997 ................................ 133,878 157,889
Deferred leasing costs, net of accumulated
amortization of $414,395 in
1998 and $871,903 in 1997 ....................... 637,028 609,019
Tax impounds ...................................... 23,728 23,288
Tenant improvement reserves ....................... 82,289 20,354
-------- --------
$897,993 $831,350
======== ========
Accrued and other liabilities:
Accounts payable .................................. $192,455 $ 38,666
Security deposits ................................. 17,922 5,999
Accrued expenses .................................. 8,101 2,073
Unearned rental income ............................ 12,530 0
Interest payable .................................. 20,982 22,027
-------- --------
$251,990 $ 68,765
======== ========
43
<PAGE>
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page four
3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS
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 $109,725,
$101,558 and $93,780, respectively, for the years ended December 31, 1998, 1997
and 1996. 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 $111,206, $104,580 and
$101,142, respectively, for such services for the years ended December 31, 1998,
1997 and 1996. Additionally, SMMP reimbursed an affiliate for construction
supervision costs incurred by the affiliate. For the years ended December 31,
1998, 1997 and 1996, the affiliate received $1,327, $11,154 and $48,205,
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, 1998, 1997, and 1996, these fees amounted to
$63,492, $3,656, and $65,120 respectively, and were recorded as deferred leasing
costs.
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, 1998 and 1997, interest receivable of $202,581 and $338,020,
respectively, was added to the principal balance of the loan. No interest
related to this loan was due to the Partnership at December 31, 1998 and 1997.
The principal balance outstanding at December 31, 1998 is $2,228,387. The loan
is guaranteed by the owners of CGS Real Estate Company, Inc.
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 1999.
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).
See Note 6 for note payable transactions with related parties.
44
<PAGE>
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page five
4. INCOME-PRODUCING PROPERTIES
At December 31, 1998 and 1997 the total cost and accumulated depreciation of the
properties are as follows:
1998 1997
------------ ------------
Land ........................... $ 3,786,458 $ 3,786,458
Building and improvements ...... 8,487,806 9,926,189
------------ ------------
Total ................. 12,274,264 13,712,647
Accumulated depreciation ....... (3,273,970) (4,625,842)
------------ ------------
Net ................... $ 9,000,294 $ 9,086,805
============ ============
During 1998 and 1997, the Partnership removed $1,784,496 and $787,700,
respectively, from its building and improvements and related accumulated
depreciation accounts for fully depreciated property.
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
-------------------- ------------ ------------
1999 $ 2,078,020 $ 2,189,576
2000 2,029,716 2,246,281
2001 2,023,332 2,339,768
2002 2,014,332 2,437,297
2003 595,285 677,208
Thereafter 772,937 849,648
------------ ------------
Total $ 9,513,622 $ 10,739,778
============ ============
In each of the three years in the period ending December 31, 1998, two tenants
accounted for the majority of the Partnership's rental income. A state
governmental agency associated with workers compensation insurance accounted for
rental income of 78%, 67%, and 81% in 1998, 1997 and 1996, respectively; a
tenant in the communications sector accounted for rental income of 15%, 13% and
10% in 1998, 1997 and 1996, respectively.
5. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
SMMP holds the following investments accounted for under the equity method at
December 31, 1998:
o a 33.55% 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, 1998 and 1997 is $1,711,089 and $1,711,297, respectively.
SMMP's share of the net loss of SIIP for the three years ended December 31,
1998, 1997 and 1996 is $143,251, $59,066 and $61,933, respectively;
45
<PAGE>
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page six
o a 9.33% 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, 1998 and 1997 is $(75,610) and $25,510, respectively. SMMP's share of
the net loss of SCP for the three years ended December 31, 1998, 1997 and
1996 is $8,420, $14,995 and $70,232, respectively;
o a 34.51% 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, 1998 and
1997 is $4,981 and $56,963, respectively. SMMP's share of the net income
(loss) of SVP for the three years ended December 31, 1998, 1997 and 1996 is
$19,774, $(781,288) and $(222,600), respectively. The Sierra Vista property
was sold in October 1997.
The following is a summary of aggregated financial information for all
investments owned by SMMP which are accounted for under the equity method:
CONDENSED COMBINED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1998 1997
------------- -------------
ASSETS
Cash and cash
equivalents ............................ $ 85,793 $ 122,997
Rent receivable ........................ 542,527 549,240
Due from affiliate ..................... 47,666 47,666
Income-producing property, net of
accumulated depreciation ............. 8,343,438 8,610,352
Other assets ........................... 1,320,667 1,339,407
----------- -----------
Total Assets ........................... $10,340,090 $10,669,662
=========== ===========
LIABILITIES AND GENERAL
PARTNERS' EQUITY
Accrued and other liabilities .......... $ 520,646 $ 325,087
Note payable ........................... 1,720,324 1,763,420
----------- -----------
Total Liabilities ...................... 2,240,970 2,088,507
----------- -----------
Ground lessors' equity in
income-producing property ............ 3,000,000 3,000,000
----------- -----------
General Partners' equity ............... 5,099,120 5,581,155
----------- -----------
Total Liabilities and General
Partners' equity ..................... $10,340,090 $10,669,662
=========== ===========
46
<PAGE>
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page seven
CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
----------- ----------- -----------
Revenues:
Rental income ............... $ 1,734,403 $ 2,294,859 $ 2,474,335
Other income ................ 93,668 9,698 13,968
----------- ----------- -----------
Total revenues ...... 1,828,071 2,304,557 2,488,303
----------- ----------- -----------
Expenses:
Operating expenses .......... 1,302,968 1,755,826 1,788,643
Depreciation and amortization 829,081 1,321,177 1,461,571
Interest .................... 156,636 459,763 427,967
----------- ----------- -----------
Total expenses ...... 2,288,685 3,536,766 3,678,181
----------- ----------- -----------
Net loss before disposition of
property .................... (460,614) (1,232,209) (1,189,878)
Loss from property disposition . 0 (967,764) 0
----------- ----------- -----------
Net loss ....................... $ (460,614) $(2,199,973) $(1,189,878)
=========== =========== ===========
6. NOTES PAYABLE
1998 1997
---------- ----------
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 ......................... $4,802,191 $5,041,225
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
converted 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 ...................................... 616,223 631,827
---------- ----------
$5,418,414 $5,673,052
========== ==========
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
converted to the one-year treasury rate plus 375 basis points (9.06% at December
31, 1998). 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 $6,048 per month, principal and interest inclusive. The loan balance as of
December 31, 1998 was $616,223.
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, 1998 are: $275,661 in 1999; $298,018 in 2000; $322,194 in 2001;
$348,333 in 2002; $376,598 in 2003; and $3,797,610 thereafter.
The Partnership is exposed to interest rate fluctuations on $616,223 of variable
debt at December 31, 1998.
48
<PAGE>
SORRENTO II PARTNERS
(A CALIFORNIA GENERAL PARTNERSHIP)
BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997 AND STATEMENTS OF
OPERATIONS, CHANGES IN GENERAL PARTNERS' EQUITY AND CASH FLOWS FOR EACH OF
THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998 AND
INDEPENDENT AUDITORS' REPORT
49
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
Sorrento II Partners
We have audited the accompanying balance sheets of Sorrento II Partners, a
California general partnership, (the "Partnership") as of December 31, 1998 and
1997, and the related statements of operations, changes in general partners'
equity and cash flows for each of the three years in the period ended December
31, 1998. 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 II Partners as of
December 31, 1998 and 1997, and the results of its operations and cash flows for
each of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
February 26, 1999
50
<PAGE>
SORRENTO II PARTNERS
(A CALIFORNIA GENERAL PARTNERSHIP)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
ASSETS
Cash and cash equivalents ................ $ 3,203 $ 23,479
Receivables:
Unbilled rent (Notes 1 and 4) .......... 486,238 476,278
Due from affiliates (Note 3) ............. 18,995 18,995
Prepaid ground lease (Note 3) ............ 683,000 845,000
Income-producing property - net of
accumulated depreciation of
$2,760,889 in 1998 and $2,390,306
in 1997 (Notes 1 and 4) ................ 5,570,726 5,629,596
Other assets (Notes 1, 2 and 3) .......... 385,079 219,646
---------- ----------
Total Assets ............................. $7,147,241 $7,212,994
========== ==========
LIABILITIES AND PARTNERS' EQUITY
Accrued and other liabilities (Note 2) ... $ 252,764 $ 48,386
Ground lease payable (Note 1) ............ 185,863 172,058
---------- ----------
Total Liabilities ........................ 438,627 220,444
---------- ----------
Ground lessor's equity in income-
producing property (Note 3) ............ 3,000,000 3,000,000
---------- ----------
General Partners' equity (Notes 1 and 5) . 3,708,614 3,992,550
---------- ----------
Total Liabilities and Partners' equity ... $7,147,241 $7,212,994
========== ==========
SEE ACCOMPANYING NOTES
51
<PAGE>
SORRENTO II PARTNERS
(A CALIFORNIA GENERAL PARTNERSHIP)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1998 1997 1996
----------- ----------- -----------
REVENUES:
Rental income (Note 1) .......... $ 814,801 $ 979,052 $ 990,901
----------- ----------- -----------
Total revenues ............. 814,801 979,052 990,901
----------- ----------- -----------
EXPENSES:
Operating expenses:
Depreciation and amortization . 458,276 447,453 447,452
Ground lease (Note 3) ......... 373,805 381,826 382,733
Property taxes and insurance .. 104,621 89,444 90,530
Maintenance and repairs ....... 80,758 66,599 84,287
Administrative fees (Note 3) .. 74,059 65,163 67,428
Management fees (Note 3) ...... 49,919 59,515 54,102
Legal and accounting .......... 29,742 61,781 33,070
General and administrative .... 15,055 13,655 25,316
Utilities ..................... 26,250 22,029 20,193
Renting expenses .............. 0 1,981 1,940
Other operating expenses ...... 29,295 6,723 13,915
----------- ----------- -----------
Total operating expenses .......... 1,241,780 1,216,169 1,220,966
----------- ----------- -----------
NET LOSS .......................... $ (426,979) $ (237,117) $ (230,065)
=========== =========== ===========
SEE ACCOMPANYING NOTES
52
<PAGE>
SORRENTO II PARTNERS
(A CALIFORNIA GENERAL PARTNERSHIP)
STATEMENTS OF CHANGES IN GENERAL PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GENERAL PARTNERS
-------------------------------------------
SIERRA PACIFIC SIERRA
INSTITUTIONAL MIRA MESA
PROPERTIES V PARTNERS TOTAL
-------------- ----------- -----------
<S> <C> <C> <C>
General Partners' equity - January 1, 1996 . $ 2,627,436 $ 1,286,896 $ 3,914,332
Net loss ................................... (168,132) (61,933) (230,065)
Contributions .............................. 0 44,500 44,500
Distributions .............................. 0 (190,500) (190,500)
----------- ----------- -----------
General Partners' equity - December 31, 1996 2,459,304 1,078,963 3,538,267
Net loss ................................... (178,051) (59,066) (237,117)
Contributions .............................. 0 953,400 953,400
Distributions .............................. 0 (262,000) (262,000)
----------- ----------- -----------
General Partners' equity - December 31, 1997 2,281,253 1,711,297 3,992,550
Net loss ................................... (283,728) (143,251) (426,979)
Contributions .............................. 0 228,700 228,700
Distributions .............................. 0 (85,657) (85,657)
----------- ----------- -----------
General Partners' equity - December 31, 1998 $ 1,997,525 $ 1,711,089 $ 3,708,614
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES
53
<PAGE>
SORRENTO II PARTNERS
(A CALIFORNIA GENERAL PARTNERSHIP)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................. $(426,979) $(237,117) $(230,065)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Depreciation and amortization ...................... 458,276 447,453 447,452
(Increase) decrease in rent receivable ............. (9,960) 13,687 (88,632)
Increase in other assets ........................... (62,463) (844,087) (1,967)
Increase (decrease) in accrued and other liabilities 218,183 (27,122) 31,729
--------- --------- ---------
Net cash provided by (used in) operating activities 177,057 (647,186) 158,517
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions ...................... (340,376) (29,313) (51,877)
--------- --------- ---------
Net cash used in investing activities ................ (340,376) (29,313) (51,877)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments to affiliates ............................... 0 0 (18,995)
Distributions to General Partner ..................... (85,657) (262,000) (190,500)
Contributions from General Partner ................... 228,700 953,400 44,500
--------- --------- ---------
Net cash provided by (used in) financing activities .. 143,043 691,400 (164,995)
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS .............................. (20,276) 14,901 (58,355)
CASH AND CASH EQUIVALENTS - Beginning of year .......... 23,479 8,578 66,933
--------- --------- ---------
CASH AND CASH EQUIVALENTS - End of year ............... $ 3,203 $ 23,479 $ 8,578
========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES
54
<PAGE>
SORRENTO II PARTNERS
(A CALIFORNIA GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Sorrento II Partners ("SIIP") was organized on October 1, 1993 as a California
general partnership between Sierra Pacific Institutional Properties V ("SPIPV")
and Sierra Mira Mesa Partners ("SMMP") to develop and operate the real property
known as Sorrento II (the "Property"), an 88,073 office building in San Diego,
California. The property consists of two separate buildings; a two-story
building consisting of 29,500 usable square feet that was completed in November
1988 and a two-story building consisting of 58,573 usable square feet that was
completed in May 1989. In 1993, SMMP contributed cash of $710,000 ($1,470,400,
net, through December 31, 1995) for a 20.11% interest and SPIPV contributed the
property and $115,000 cash for a 79.89% interest. During 1996, 1997 and 1998,
SMMP contributed an additional $44,500, $953,400 and $228,700 and received
distributions amounting to $190,500, $262,000 and $85,657 respectively. The
partnership agreement calls for a recalculation of the percentage ownership
interest each year on January 1st to account for the partners' aggregate capital
contributions and distributions since inception through the prior year.
Accordingly, as of January 1, 1996, 1997 and 1998 SPIPV's interest in SIIP was
changed to 73.08%, 75.09% and 66.45%, respectively. On January 1, 1999, SPIPV's
interest will be decreased to 64.90% and SMMP's interest will be increased to
35.10% to reflect the 1998 contributions and distributions.
S-P Properties, Inc. is the General Partner of SPIPV and of SMMP's general
partners, Sierra Pacific Development Fund II ("SPDFII") and Sierra Pacific
Pension Investors '84 ("SPPI'84"). On December 30, 1994, all of the outstanding
stock of TCP, Inc. was sold to Finance Factors, Inc. TCP, Inc. owns all of the
common stock of S-P Properties, Inc. Finance Factors was a subsidiary of CGS
Real Estate Company, Inc., a national real estate company. In July 1995, Finance
Factors, Inc. merged with Bancor Real Estate Company, Inc., another subsidiary
of CGS Real Estate Company, Inc.
On October 1, 1993, the Partnership created a California general partnership
(Sorrento II Partners) with Sierra Mira Mesa Partners ("SMMP"), an affiliate, to
facilitate cash contributions by SMMP for the continued development and
operation of the Sorrento II property. The Partnership contributed the Sierra
Sorrento II property and cash and SMMP contributed cash to the newly formed
partnership. At December 31, 1998, the Partnership's remaining asset is a 66.45%
interest in Sorrento II Partners.
On July 8, 1997, the Sorrento II land was purchased from Lincoln National Life
Insurance Company by CGS Real Estate Company, Inc., an affiliate of the General
Partner. On September 24, 1997, all rights, title and interest in the ground
lease were transferred and assigned to CGS Real Estate Company, Inc. ("Ground
Lessor") (See Note 3).
BASIS OF FINANCIAL STATEMENTS
SIIP 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.
55
<PAGE>
Sorrento II Partners
Notes to Consolidated Financial Statements
Page two
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 SIIP at December 31, 1998 and 1997 consist of cash
and cash equivalents, receivables, due from affiliates, and accounts payable.
The fair value of cash and cash equivalents, receivables, and accounts payable
approximates the carrying value due to the short term nature of these items. The
amounts due from affiliates are not fair valued due to the related party nature
of these receivables.
INCOME-PRODUCING PROPERTY
Property and tenant improvements are carried at cost and depreciated on the
straight-line method over the estimated lives of the related assets, ranging
from three 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.
Prior to 1995, the Partnership assessed impairment of income-producing
properties based upon appraised values and established provisions for impairment
where appraisals indicated other than temporary declines in value. Effective
January 1, 1995, SIIP 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"). SIIP 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, SIIP shall recognize an impairment loss
in accordance with the Statement. No such impairment has been recognized by the
Partnership.
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, 1998. 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. SIIP 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 using the straight line method of
accounting.
56
<PAGE>
Sorrento II Partners
Notes to Consolidated Financial Statements
Page three
RENTAL INCOME AND RENT RECEIVABLE
Rental income is recognized on the straight-line method over the term of the
related operating lease in accordance with the provisions of Statement of
Financial Accounting Standards No. 13, "Accounting for Leases".
Unbilled rent receivable represents the difference between rent recognized on
the straight-line method and actual cash due.
GROUND LEASE PAYABLE
Ground lease payable represents the difference between rent recognized on the
straight-line method in accordance with the provisions of Statement of Financial
Accounting Standards No. 13, "Accounting for Leases" and actual
cash due and paid by that date.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
These SFAS's, which are effective for the Partnership's fiscal year ending
December 31, 1998, establish additional disclosure requirements but do not
affect the measurement of the results of operations. During the periods
presented, the Partnership did not have any items of comprehensive income. The
adoption of SFAS No. 131 had no effect on the Partnership's financial statements
as the Partnership operates in only one segment, the acquisition, development,
and operation of commercial real estate.
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts, at December 31,
1998 and 1997, is as follows:
1998 1997
-------- --------
Other assets:
Prepaid expenses ...................... $ 45,741 $ 37,106
Deferred leasing costs, net of
accumulated amortization of
$225,616 in 1998 and $204,574
in 1997 ............................. 339,338 182,540
-------- --------
$385,079 $219,646
======== ========
Accrued and other liabilities:
Accounts payable ...................... $ 83,801 $ 40,319
Unearned rental income ................ 152,150 0
Security deposits ..................... 7,249 7,249
Other ................................. 9,564 818
-------- --------
$252,764 $ 48,386
======== ========
57
<PAGE>
Sorrento II Partners
Notes to Consolidated Financial Statements
Page four
3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS
An affiliate of the General Partner may receive a management fee of 6% of the
gross rental income collected from the properties. Management fees paid to
affiliates for the years ended December 31, 1998, 1997 and 1996 were $49,919,
$59,515 and $54,102, respectively.
An affiliate of the General Partner is entitled to reimbursement for expenses
incurred by the affiliate for services provided to SIIP such as accounting,
legal, data processing and similar services. The affiliate was reimbursed
$77,844, $69,720 and $67,428 for such services for the years ended December 31,
1998, 1997, and 1996, respectively. In consideration for services rendered with
respect to initial leasing of SIIP properties, ASRE is paid initial leasing
costs. For the year ended December 31, 1998, a total of $74,504 was paid for
initial leasing costs. No such costs were incurred in 1997 and 1996.
Additionally, SIIP reimbursed the affiliate for construction supervision costs
incurred by the affiliate. For the years ended December 31, 1998 and 1997, the
affiliate received $22,511 and $1,998, respectively, for tenant improvements
supervisory costs. No such costs were incurred in 1996.
SIIP sold the Sierra Sorrento II land holdings to Lincoln National Life
Insurance Company for $3,000,000 on February 1, 1989. Upon ownership transfer,
SIIP entered into a 40 year ground lease with the insurance company. The Sierra
Sorrento II land lease requires initial minimum payments of $25,000 per month
commencing February 1989. The terms of the ground lease require scheduled rent
increases over the lease term and additional ground rent. Subject to the
provisions of the ground lease, SIIP has the right to sell the property (land
and buildings) to a third party. Upon ownership transfer the ground lease will
terminate. Upon sale, the Ground Lessor is entitled to remuneration of the prior
$3,000,000 investment prior to distribution of proceeds to SIIP. The Ground
Lessor will also participate in the appreciation of the property (upon sale)
based on a formula contained in the ground lease agreement. On July 8, 1997, the
land was purchased from Lincoln National Life Insurance Company by CGS Real
Estate Company, Inc., an affiliate of the General Partner. On September 24,
1997, all rights, title and interest in the ground lease were transferred and
assigned to CGS Real Estate Company, Inc. ("Ground Lessor").
In October 1997, SIIP prepaid $900,000 of the ground lease to CGS Real Estate
Company, Inc in exchange of an amendment reducing the minimum rent required
under the lease from $360,000 to $330,000 per year from 1999 to 2008. The
minimum basic rent effective January 1, 2009 through December 31, 2028 remained
unchanged at $360,000 per year. The November 1997, December 1997, and January
1998 rent amounts payable under the terms of the lease were applied against the
prepaid balance. Effective February 1998, rent amounts shall be paid at the rate
of $18,000 per month until such time that the prepaid balance is extinguished.
For the years ended December 31, 1998 and 1997, the SIIP paid $198,000 and
$35,000, respectively, to CGS Real Estate Company, Inc. and $162,000 and
$55,000, respectively, was applied against the prepaid balance. Hence, at
December 31, 1998 the prepaid balance was $683,000.
Future minimum basic rent required under the ground lease is as follows:
MINIMUM
YEAR ENDING DECEMBER 31, BASIC RENT
------------------------ ------------
1999 $ 330,000
2000 330,000
2001 330,000
2002 330,000
2003 330,000
Thereafter 8,850,000
------------
Total $ 10,500,000
============
58
<PAGE>
Sorrento II Partners
Notes to Consolidated Financial Statements
Page five
During 1996, the Partnership made a non-interest bearing loan to an affiliate in
the amount of $18,995. Repayment is expected in 1999.
4. INCOME-PRODUCING PROPERTY
At December 31, 1998 and 1997 the total cost and accumulated depreciation of the
property are as follows:
1998 1997
----------- -----------
Land ............................. $ 2,569,815 $ 2,569,815
Building and improvements ........ 5,761,800 5,450,087
----------- -----------
Total ................... 8,331,615 8,019,902
Accumulated depreciation ......... (2,760,889) (2,390,306)
----------- -----------
Net ..................... $ 5,570,726 $ 5,629,596
=========== ===========
SIIP experienced a land ownership transfer during 1997 (See Note 3).
Future minimum base rental income, under the existing operating leases for the
Sierra Sorrento II 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
- -------------------------- -------------- ------------
1999 $ 964,485 $ 1,004,441
2000 964,485 1,050,272
2001 964,485 1,081,755
2002 964,485 1,110,726
2003 443,200 486,301
Thereafter 561,738 615,621
----------- ------------
Total $ 4,862,878 $ 5,349,116
=========== ============
In 1998, the Partnership relied on two tenants to generate all rental income;
82% was from an electronics manufacturer and the remaining 18% from a media and
marketing company. In 1997 and 1996, two tenants generated all rental income;
65% from the electronics manufacturer and 35% from a healthcare administrator.
59
<PAGE>
Sorrento II Partners
Notes to Consolidated Financial Statements
Page six
5. GENERAL PARTNERS' EQUITY
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 Instituional
Properties V 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, 1998 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,122
<SECURITIES> 0
<RECEIVABLES> 43,293
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 58,550
<PP&E> 4,953,952
<DEPRECIATION> 3,741,937
<TOTAL-ASSETS> 10,558,178
<CURRENT-LIABILITIES> 116,429
<BONDS> 1,484,983
0
0
<COMMON> 0
<OTHER-SE> 8,929,708
<TOTAL-LIABILITY-AND-EQUITY> 10,558,178
<SALES> 504,016
<TOTAL-REVENUES> 726,154
<CGS> 0
<TOTAL-COSTS> 390,832
<OTHER-EXPENSES> 258,718
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 147,712
<INCOME-PRETAX> 124,886
<INCOME-TAX> 0
<INCOME-CONTINUING> 124,886
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 124,886
<EPS-PRIMARY> 1.62
<EPS-DILUTED> 1.62
</TABLE>
