ITEM 1. BUSINESS
(a.) GENERAL DEVELOPMENT OF BUSINESS. Sierra Pacific Pension Investors '84 (the "Partnership") is a California limited partnership that was formed in June 1984 for the purpose of acquiring, developing, and operating commercial and industrial real estate.
The Partnership's activities during the preceding five years have involved the ownership and operation of two real estate projects in Arizona:
RENTABLE SQUARE PROJECT NAME, LOCATION TYPE OF REAL ESTATE FOOTAGE - ---------------------- ------------------- ------- Sierra Spectrum, Phoenix (A) Office 70,532 Sierra Valencia, Tucson Industrial/office 81,943 (A)SOLD DECEMBER, 1994.
On March 7, 1997 Sierra Valencia LLC ("SVLLC") was formed with the Partnership being the sole member. This company was formed solely to engage in the following activities: a) to acquire from Sierra Pacific Pension Investors '84 the property known as Sierra Valencia, b) to own, hold, sell, assign, transfer, operate, lease, mortgage, pledge and otherwise deal with the Property, c) to exercise all powers enumerated in the Delaware Limited Liability Company Act necessary or convenient to conduct, promotion or attainment of the business or purposes otherwise set forth. The Sierra Valencia property was transferred at no cost from the Partnership to SVLLC.
In December, 1994, the Partnership sold Sierra Spectrum for $4,000,000. The sale proceeds were received in cash and a note receivable from the buyer. A gain of $91,823 was recorded in 1994 with an additional gain of $367,296 deferred to subsequent years when the note receivable is collected. A principal paydown of $1,318,000 was received in 1995 and $151,510 of this deferred gain was recognized.
In 1985 Sierra Mira Mesa Partners ("SMMP"), a California general partnership, was formed between the Partnership and Sierra Pacific Development Fund II ("SPDFII"). SMMP was initially created to develop and operate the office building known as Sierra Mira Mesa in San Diego, California. The Partnership's initial ownership interest in SMMP was 49%; the remaining 51% was owned by SPDFII. Effective December 31, 1996, the general partners amended the partnership agreement to allow for adjustments in the sharing ratio each year based upon the relative net contributions and distributions since inception of each general partner. As a result, the sharing ratio in effect for 1997 was 54.42% for the Partnership and 45.58% for SPDFII. In conjunction with this amendment, the general partners forgave the December 31, 1996 balances of advances due from SMMP and included these amounts as adjustments to their respective equity accounts. The sharing ratio effective January 1, 1998 will be adjusted to 66.26% for the Partnership and 33.74% for SPDFII.
SMMP also holds an 88.69% interest in Sorrento I Partners (a California general partnership with Sierra Pacific Development Fund III formed in 1993), a 24.91% interest in Sorrento II Partners (a California general partnership with Sierra Pacific Institutional Properties V formed in 1993), a 4.96% interest in Sierra Creekside Partners (a California general partnership with Sierra Pacific Development Fund formed in 1994), and a 47.05% interest in Sierra Vista Partners (a California general partnership with Sierra Pacific Development Fund III formed in 1994).
Audited financial statements of Sierra Mira Mesa Partners and Sorrento I Partners are included in the Annual Report to the Limited Partners attached as an Exhibit.
(b.)NARRATIVE DESCRIPTION OF BUSINESS. During 1997, the Partnership owned and operated one real estate project in Tucson, Arizona as described above. The project is occupied by eight tenants, the most significant of which are SHC of Arizona and Todd Engineering. SHC of Arizona comprised $124,471, or 26%, of 1997 rental income and Todd Engineering comprised $63,500, or 13%, of 1997 rental income.
There is significant competition in the industrial/office building rental market in the Partnership's trade area. An appraisal performed at the end of 1994 identified numerous projects near the Partnership's property that offered similar amenities at comparable rental rates.
(c.) COMPARISON OF CURRENT ACTIVITIES TO THOSE PROPOSED AT THE INITIATION OF THE PARTNERSHIP. In the Partnership's prospectus dated September 4, 1984, the investment objectives were described as follows:
"The Partnership has been formed to acquire and operate on an all-cash basis commercial and industrial real properties, including properties which are to be developed by the Partnership or are under development or construction ("development properties") and properties which are newly-constructed or have operating histories ("existing properties"). A minimum of 50% of the cash invested in properties by the Partnership will be invested in development properties. The primary investment objectives of the Partnership are to: (i) preserve, protect, and return the Partnership's invested capital; (ii) generate sufficient cash from operations to make distributions of Available Cash to the Limited Partners; (iii) attempt to maximize long-term appreciation in the value of the Partnership's real estate investments; (iv) attempt to sell the Partnership's real estate investments for cash after an approximate three to five year holding period; (v) exclude from the assets of the Limited Partners, for purposes of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the assets of the Partnership; and (vi) exclude from unrelated business taxable income the entire amount of any allocations to the Limited Partners. There is no assurance that such objectives will be attained."
Operations of the Partnership through 1997 have been consistent with the intent of the original prospectus in that the Partnership has invested in real estate projects that had the potential for capital gains, preservation of capital, and providing distributions of Available Cash to the limited partners. The ERISA and unrelated business tax objectives have been met. However, the Partnership and its real estate have been adversely affected by the Tax Reform Act of 1986, aggressive lending by banks that resulted in commercial real estate overbuilding, and subsequent severe recessions. The original intention to sell the Partnership's real estate investments after the five year holding period has been delayed indefinitely. As of December 31, 1997, the Partnership had paid cash distributions of $21.43 for each $250 unit investment and remaining partners' equity was computed at $114.35 per unit. Thus, if the Partnership were to be liquidated at the end of 1997 at book value, each $250 investment would have returned a total of $135.78.
The General Partner's goal is to continue operating its remaining property until such time as rental rates return to the level necessary to support new commercial and industrial building development. At that time, the property may be sold at a price substantially greater than its current book value.
ITEM 2.
ITEM 2. PROPERTIES
The Partnership owns Sierra Valencia (the "Property"), an industrial property located in Tucson, Arizona. The Property includes one building comprising 81,943 rentable square feet and is 99% occupied at December 31, 1997. The weighted-average effective annual rent per square foot at December 31, 1997 is $6.07. The principal businesses carried on from the building are varied and include healthcare sales and administration, pistachio nut marketing and distribution, optics research and development, manufacturing for the recreational vehicle segment, and sales and distribution of medical equipment and supplies.
The Partnership also owns a 54.42% interest in SMMP which owns Sierra Mira Mesa, an office building in San Diego, California. Through its ownership interest in SMMP, the Partnership also has an indirect 48.26% interest in an industrial property known as Sorrento I in San Diego, California. This indirect ownership interest is subject to adjustment yearly based upon the relative contributions of the partners.
SIERRA VALENCIA - TUCSON, ARIZONA
SUMMARY OF SIGNIFICANT TENANTS
Six of the Property's eight tenants occupy more than ten percent of the rentable square footage of the building as follows:
DEPRECIABLE PROPERTY Reference is made to Schedule III of the Form 10-K.
REAL ESTATE TAXES The real estate tax obligation for 1997 is approximately 4.8% of assessed value. The annual real estate taxes for 1997 are $92,020.
INSURANCE In the opinion of management, the property is adequately covered by insurance.
ENCUMBRANCES On March 27, 1997, Sierra Valencia LLC entered into a loan agreement with First Union Bank of North Carolina in the amount of $1,404,000. This loan, which is secured by a first lien on the Sierra Valencia property, bears interest at 9.25% per annum and calls for monthly principal and interest payments of $12,024 on the first day of each month. Such payments shall continue until April 2007, when the indebtedness is due in full. There is a 1% premium for prepayment of this note. As of December 31, 1997 the loan balance was $1,395,607.
On April 15, 1997, the Partnership entered into a loan agreement with IDM Participating Income Company II, an affiliate of the general partner, in the amount of $200,000. This loan is secured by a second lien on the Sierra Valencia property. This note bears a variable interest rate determined by the Federal Reserve of San Francisco's discount rate prevailing on the 25th day of the month preceding the payment due date plus a 3% premium. The interest rate can be adjusted the last day of March, June, September and December of each year until note agreement is fulfilled. The minimum rate will be 12.12%. The maximum rate will be 15.15%. The current interest rate paid is 12.12%. Monthly payment of $6,659, consisting of both interest and principle, commenced on May 15, 1997 and shall continue until April 15, 2000, when the indebtedness is paid in full. As of December 31, 1997, the loan balance was $166,527.
SIERRA MIRA MESA - SAN DIEGO, CALIFORNIA
Sierra Mira Mesa office building consists of 89,560 rentable square feet and is 98% occupied at December 31, 1997. The principal business carried on from the building is insurance. The average effective annual rent per square foot at December 31, 1997 is $18.74.
SUMMARY OF SIGNIFICANT TENANTS
Only one of the five tenants occupies ten percent or more of the rentable square footage of the building. The principal business of this significant tenant is insurance. Details of this significant tenant and its leases follow:
DEPRECIABLE PROPERTY
Sierra Mira Mesa, San Diego, California Office Building - Income-Producing Property
REAL ESTATE TAXES The real estate tax obligation for 1997 is approximately 1.12% of the assessed value or $69,864.
INSURANCE In the opinion of management, the property is adequately covered by insurance.
ENCUMBRANCES The property is encumbered by a mortgage lien in favor of Lincoln National Life Insurance Company with a principal balance of $5,041,225 at December 31, 1997. The mortgage bears interest at 7.74%. Monthly principal and interest payments of $51,739 are due through maturity at October 2010. The note is subject to prepayment penalties of approximately 1% of the outstanding principal balance between months 25 and 177 of the loan term. No prepayment is allowed during the first two years of the loan and no prepayment penalty will be imposed if prepayment occurs in the final three months of the loan term.
SORRENTO I - SAN DIEGO, CALIFORNIA
Sorrento I is an industrial building with 43,100 square feet of rentable space. One tenant began leasing the entire 43,100 rentable square feet of Sorrento I in 1996. Rental income of $23,636 per month is recognized under this lease, which expires in April 2003. The effective annual rent per square foot at December 31, 1997 is $6.58. The principal business of the tenant is research and development in the communications sector.
DEPRECIABLE PROPERTY
Sorrento I, San Diego, California
Office Building - Income-Producing Property
REAL ESTATE TAXES The real estate tax obligation for 1997 is approximately 1.12% of the assessed value or $28,603.
INSURANCE In the opinion of management, the property is adequately covered by insurance.
ENCUMBRANCES Sorrento I Partners ("SIP") had a non-recourse bank note payable with an original principal balance of $3,000,000 collateralized by the Sorrento I property. The annual interest rate of the note was variable at bank prime plus 2-1/2% with a minimum rate of 9% and maximum rate of 15-1/2%. The original maturity of the note was July 1998 and the note included a discounted payoff option of $1,500,000.
CGS Real Estate Company, Inc. ("CGS"), an affiliate of the General Partner, acquired the note and security documents from the bank in May 1996. In connection with the purchase of the bank note and security documents by CGS, SIP made a principal payment to the bank of $750,000 and entered into a $750,000 note agreement with CGS (the "CGS Agreement"). The CGS Agreement, collaterized by real and personal property, called for monthly interest payments through December 1996 and monthly principal and interest payments thereafter until maturity on May 31, 2016. The interest rate is fixed at 9.34% per annum for the first year of the note and will thereafter be the one year Treasury rate plus 375 basis points. A prepayment in the amount of $105,000 was paid in April 1997.
A modification agreement was entered into on September 30, 1997. The interest rate remained fixed at 9.34% through October 1998, at which time the rate will convert to the one-year treasury rate plus 375 basis points. The principal of the note on the effective date was $635,479 and is amortized over a 210-month term. Current payments are $6,154 per month, principal and interest inclusive until maturity in March 2015. The loan balance as of December 31, 1997 was $631,827.
At any time upon 120 days written notice to CGS, SIP may fully discharge the note by the payment of an amount equal to $750,000 less the aggregate amount of principal paid under the note between the date of the CGS Agreement and the date of payment plus any interest due.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Partnership is not involved in any material legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERS' EQUITY AND RELATED MATTERS
As of December 31, 1997, the number of security holders is as follows:
NUMBER NUMBER OF OF UNITS RECORD HOLDERS ------------- ------------ Limited Partners 77,000 3,600 ============= ============
These securities are all of the same class, namely, limited partnership interests (units) and were sold pursuant to a registration statement filed under the Securities Act of 1933, as amended. The total offering was 80,000 units at $250.00 per unit.
No broker or dealer currently makes a market in the units of the Partnership. Accordingly, there are no published price or trading volume figures available for the units. The units have been transferred on an extremely limited extent from time-to-time since the inception of the Partnership; however, the market for the units is highly restricted and sporadic, especially in view of the investor suitability requirements imposed on new purchasers by the various state blue sky laws and the restrictions on transfer contained in the Partnership Agreement.
The Partnership paid cash distributions of $.65 and $2.60 per limited partnership unit during the years ended December 31, 1997 and 1996, respectively. There are no contractual or other restrictions on the Partnership's ability to make such distributions.
ITEM 6.
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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations include certain forward looking statements reflecting the Partnership's expectations in the near future; however, many factors which may affect the actual results, especially changing regulations, are difficult to predict. Accordingly, there is no assurance that the Partnership's expectations will be realized.
Overview:
The following discussion should be read in conjunction with the Selected Financial Data and the Partnership's Consolidated Financial Statements and Notes thereto incorporated by reference to the Annual Report to the Limited Partners attached as an Exhibit. As of December 31, 1997, the Partnership owns Sierra Valencia, an industial office building in Tucson, Arizona. The Partnership also owns a 54.42% interest in Sierra Mira Mesa Partners ("SMMP"). SMMP owns an office building - Sierra Mira Mesa in San Diego, California.
Results of Operations:
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996.
Rental income remained relatively unchanged decreasing by $2,000, or 1%, primarily as a result of lower common area maintenance billings. This decrease was partially offset by an increase in the weighted-average effective rent per square foot, on an accrual basis, increased from $5.58 at December 31, 1996 to $6.07 at December 31, 1997. The Property is 99% occupied at December 31, 1997.
Total operating expenses decreased by $18,000, or 3%, primarily due to lower administrative fees and a decrease in legal and accounting fees. This decrease was partially offset by an increase in other operating expenses incurred during the year.
Interest expense of $115,000 was recognized during the year due to two loan agreements entered into by the Partnership. The loans are secured by the Sierra Valencia property. The Property was previously unencumbered.
The Partnership's share of (loss) income from investment in SMMP was ($507,000) for the year ended December 31, 1997 compared to $156,000 for the year ended December 31, 1996. The loss generated by SMMP was principally the result of its share of loss from its joint venture partner, Sierra Vista Partners ("SVP"). SVP sold the Sierra Vista property in October 1997 and recorded a $968,000 loss from property disposition.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995.
Rental income increased by $39,000 or 9%, due primarily to an increase in occupancy from 88% at December 31, 1995 to 100% at December 31, 1996. One new tenant accounted for an increase in leased square footage of 10,021, or 12%, of the rentable square footage of Sierra Valencia. The weighted-average effective rent per square foot, on an accrual basis, decreased from $5.80 at December 31, 1995 to $5.58 at December 31, 1996, principally as a result of favorable lease terms given to this new tenant as an incentive to lease space at the Property.
Interest income decreased by $84,000, or 30%, due to a $1,318,000 principal paydown of the note receivable from the sale of Sierra Spectrum received in July 1995. This note had an original balance of $3,200,000 and bears interest at a rate of 10% per annum.
Operating expenses decreased by $85,000, or 12%, primarily due to a $70,000 decrease in depreciation and amortization expense resulting from the discontinuance of depreciation on the building which was fully depreciated in the first quarter of 1996.
The Partnership's share of income (loss) from investment in SMMP was $156,000 for the year ended December 31, 1996 compared to ($296,000) for the year ended December 31, 1995. This increase in income generated by SMMP was principally due to its share of income from Sorrento I Partners ("SIP"), which owns the Sorrento I property. SIP, which is included in the consolidated financial statements of SMMP, exercised a discounted payoff option in 1996 which resulted in an extraordinary gain of $1,200,000. Furthermore, Sorrento I Partners entered into a lease with a tenant for all the square footage of the Sorrento I property in 1996. The property, which was vacant throughout 1995, recorded rental income of $189,000 in 1996 as a result of this new tenant.
Liquidity and Capital Resources:
In 1997, the Partnership entered into two loan agreements totaling $1,604,000. The loans are secured by the Sierra Valencia property. The proceeds of these loans were primarily used to satisfy the liquidity requirements of SMMP. The Property was previously unencumbered.
The Partnership used cash of $97,000 in operating activities and paid $160,000 for property additions and lease commissions during 1997. The Partnership is in an illiquid position at December 31, 1997 with cash and billed rents of $31,000 and accrued and other liabilities of $108,000. The Partnership anticipates cash required to meet debt obligations and for construction of new tenant space will be funded from the operations of the Property.
Inflation:
The Partnership's long-term leases contain provisions designed to mitigate the adverse impact of inflation on its results from operations. Such provisions may include escalation clauses related to Consumer Price Index increases.
YEAR 2000 COMPLIANCE
The Year 2000 Compliance issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Partnership's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities.
The total cost to the Partnership of activities associated with the Year 2000 Compliance issue is not anticipated to be material to its financial position or results of operations in any given year.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and independent auditors' report are incorporated by reference to the Annual Report to the Limited Partners attached as an Exhibit.
1. Independent Auditors' Report
2. Consolidated Balance Sheets - December 31, 1997 and 1996
3. Consolidated Statements of Operations - for the years ended December 31, 1997, 1996 and 1995
4. Consolidated Statements of Changes in Partners' Equity - for the years ended December 31, 1997, 1996 and 1995
5. Consolidated Statements of Cash Flows - for the years ended December 31, 1997, 1996 and 1995
6. Notes to Consolidated Financial Statements
7. Audited Consolidated Financial Statements and related footnotes of Sierra Mira Mesa Partners
8. Audited financial statements and related footnotes of Sorrento I Partners
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Registrant is a California Limited Partnership and has no officers or directors.
S-P Properties, Inc., a California corporation, is the general partner of the Registrant. In December 1994, Finance Factors, Inc., a subsidiary of CGS Real Estate Company, Inc., purchased the common stock of TCP, Inc. TCP, Inc. owns all of the common stock of S-P Properties, Inc. In July 1995, Finance Factors, Inc. merged with Bancor Real Estate Company, Inc., a subsidiary of CGS Real Estate Company, Inc. CGS Real Estate Company, Inc. and its affiliates are engaged in real estate management, leasing, ownership, and sales. The companies own or manage more than ten million square feet of commercial real estate in Texas, Arizona, Colorado, California and the Carolinas.
The executive officers and directors of S-P Properties, Inc. are:
APPROXIMATE NAME POSITION AGE TIME IN OFFICE - ---- -------- --- -------------- Thomas N. Thurber President and Director 47 3 years
Dawson L. Davenport Vice President 42 3 years
Steven M. Speier Secretary/Treasurer and 47 3 years Director
William J. Carden Assistant Secretary/ 53 3 years Treasurer and Director
Thomas N. Thurber - President and Director, S-P Properties, Inc. Mr. Thurber is a Certified Public Accountant who began his career with Arthur Andersen & Co. in 1972. In 1979, he joined a major publicly traded real estate development firm (Daon) where he became Controller for U.S. Operations. Subsequently, Mr. Thurber served as Director of Real Estate for a developer of retail properties, and Chief Financial Officer of a trust with significant investments in commercial real estate. Mr. Thurber also serves as a director of Property Secured Investments, Inc. Mr. Thurber holds a bachelors degree in accounting from Florida State University.
Dawson L. Davenport - Vice President, S-P Properties, Inc. Mr. Davenport is the founder of WD Real Estate Services, a full service property management firm that became part of the Banc Commercial family of companies in 1992. Mr. Davenport has been responsible for the management, development and rehabilitation of substantial commercial, industrial, retail, and residential projects during the past seventeen years. Mr. Davenport specializes in leasing and turning around distressed properties.
Steven M. Speier - Secretary/Treasurer and Director, S-P Properties, Inc. Mr. Speier who after spending two years in public accounting, went into the banking industry in 1975. During his sixteen year banking career, Mr. Speier managed a real estate loan portfolio of approximately $1.5 billion secured by properties throughout the United States. Mr. Speier brings to S-P Properties, Inc. a broad real estate background that includes management, leasing, and disposition of all categories of commercial real estate. Mr. Speier also serves as a director of IDM Corporation. Mr. Speier is a licensed real estate broker, is registered as a Certified Public Accountant, and has a masters degree in business administration from Grand Valley State University in Michigan.
William J. Carden - Assistant Secretary/Treasurer and Director, S-P Properties, Inc. Mr. Carden is the founder and President of CGS Real Estate Company, Inc., which owns over one million square feet of commercial real estate. Mr. Carden founded DVM Properties, Inc. in 1974 which concentrated on rehabilitation of retail, office, industrial, and commercial real estate. Mr. Carden is a former Director of Bay Financial, a New York Stock Exchange company and currently serves as a director of Property Secured Investments, Inc. and IDM Corporation.
There have been no events under any bankruptcy act, no criminal proceedings, and no judgments or injunctions material to the evaluation of the ability and integrity of any director or officer during the past five years.
ITEM 11.
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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
None
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership may pay a management fee of 6% of the gross rental income collected from the property to American Spectrum Real Estate Services, Inc. (ASRE), formerly Banc Commercial California. These fees for the year ended December 31, 1997 were $21,799. Bancor Real Estate Company, Inc. (Bancor) provides services to the Partnership such as accounting, legal, data processing and similar services and is entitled to reimbursement for expenses incurred to provide such services. Amounts so reimbursed totaled $63,910 during the year ended December 31, 1997. The Partnership also reimburses ASRE for construction supervision costs. The Partnership paid $10,504 to ASRE for tenant improvement supervisory costs in 1997. In consideration for services rendered with respect to initial leasing of Partnership properties, ASRE is paid initial leasing costs. For the year ended December 31, 1997, these fees amounted to $19,109. Bancor and ASRE are both wholly owned subsidiaries of CGS Real Estate Company, Inc. William J. Carden, an officer and director of S-P Properties, Inc., the General Partner of the Partnership, owns 50% of CGS Real Estate Company, Inc.
On December 30, 1994, the Sierra Spectrum property with a historical cost basis of $2,993,134 was sold for $4,000,000 ($800,000 cash down-payment and $3,200,000 trust deed note) to No.-So., Inc. This note calls for monthly interest only payments and bears interest of 10% per annum. The original note was due to mature on June 30, 1995 and was extended to June 30, 1996. During the year ended December 31, 1995, the Partnership received principal payments of $1,317,928 on the trust deed note. In 1997, the maturity date was extended to December 31, 1998 and interest receivable of $307,759 was added to the pricipal balance of the note. All other terms of the original note remain unchanged. CGS Real Estate Company, Inc. owns 33.33% of No.-So., Inc.
Reference is made to Item 2 for additional information concerning related party transactions.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. EXHIBITS
1. Annual Report to the Limited Partners
2. Exhibit Number 27 - Financial Data Schedule
B. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules and the report of the independent auditors thereon are included herein:
1. Schedule II - Valuation and Qualifying Accounts and Reserves - for the years ended December 31, 1997, 1996 and 1995
2. Schedule III - Real Estate and Accumulated Depreciation - December 31,
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
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIERRA PACIFIC PENSION INVESTORS '84 a California Limited Partnership S-P PROPERTIES, INC. General Partner
Date: March 19, 1998 /s/THOMAS N. THURBER -------------------------------- ------------------------------------ Thomas N. Thurber President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: March 19, 1998 /s/THOMAS N. THURBER -------------------------------- ---------------------------------- Thomas N. Thurber President and Director S-P Properties, Inc.
Date: March 19, 1998 /s/WILLIAM J. CARDEN -------------------------------- ---------------------------------- William J. Carden Assistant Secretary/Treasurer and Director S-P Properties, Inc.
Date: March 19, 1998 /s/G. ANTHONY EPPOLITO -------------------------------- ---------------------------------- G. Anthony Eppolito Chief Accountant S-P Properties, Inc.
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
To the Partners of Sierra Pacific Pension Investors '84
We have audited the consolidated financial statements of Sierra Pacific Pension Investors '84 and subsidiary, a California limited partnership, (the "Partnership") as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997 and have issued our report thereon dated March 13, 1998. Such consolidated financial statements and report are included in your 1997 Annual Report to the Limited Partners and are incorporated herein by reference. Our audits also included the financial statement schedules of Sierra Pacific Pension Investors '84, listed in Item 14. These financial statement schedules are the responsibility of the Partnership's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Houston, Texas March 13, 1998
SCHEDULE II - FORM 10-K SIERRA PACIFIC PENSION INVESTORS '84 AND SUBSIDIARY VALUATION AND QUALIFYING ACCOUNTS AND RESERVES For the Years Ended December 31, 1997, 1996 and 1995 - --------------------------------------------------------------------------------
Income - Producing Properties --------------- Allowance for loss - January 1, 1995 $ 1,880,000
Provision charged to costs and expenses (1) 0 --------------- Allowance for loss - December 31, 1995 1,880,000
Provision charged to costs and expenses (1) 0 --------------- Allowance for Loss - December 31, 1996 1,880,000
Provision charged to costs and expenses (1) 0 --------------- Allowance for loss - December 31, 1997 $ 1,880,000 ===============
(1) See Notes 1 and 4 to consolidated financial statements incorporated by reference to the Annual Report to the Limited Partners attached as an Exhibit.
SCHEDULE III - FORM 10-K
SIERRA PACIFIC PENSION INVESTORS '84 AND SUBSIDIARY REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 - --------------------------------------------------------------------------------
(1) The initial cost represents the original purchase price of the property.
(2) The Partnership has capitalized property development costs.
(3) Also represents costs for Federal Income tax purposes.
(4) A valuation allowance of $1,880,000 was established as the appraised value of the properties declined below book value.
(5) Reconciliation of total real estate carrying value and accumulated depreciation for the three years ended December 31, 1997 is as follows:
Total Real Estate Accumulated Carrying Value Depreciation ---------------- ------------ Balance - January 1, 1995 $ 4,743,836 $ 1,106,776 Additions during the year 25,112 257,965 Write off of fully depreciated assets (6,000) (6,000) ------------ ------------ Balance - December 31, 1995 4,762,948 1,358,741 Additions during the year 94,057 189,499 Write off fully depreciated assets (53,307) (53,307) ------------ ------------ Balance - December 31, 1996 4,803,698 1,494,933 Additions during the year 126,289 182,431 ------------ ------------ Balance - December 31, 1997 $ 4,929,987 $ 1,667,364 ============ ============
SIERRA PACIFIC PENSION INVESTORS '84 AND SUBSIDIARY (A California Limited Partnership)
SELECTED FINANCIAL DATA For the Years Ended December 31, 1997, 1996, 1995, 1994 and 1993
The following table sets forth certain selected historical financial data of the Partnership. The selected operating and financial position data as of and for each of the five years ended December 31, 1997 have been derived from the audited financial statements of the Partnership. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto which are incorporated by reference to the Annual Report to the Limited Partners attached as an Exhibit. - --------------------------------------------------------------------------------
N/A = Not applicable nor available
(1) The net loss, limited partners' equity and distributions per unit are based upon the limited partnership units outstanding at the end of the year, 77,000 in all years. The cumulative distributions per limited partnership unit from inception to December 31, 1997 equal $21.43.
INDEPENDENT AUDITORS' REPORT
To the Partners of Sierra Pacific Pension Investors '84
We have audited the accompanying consolidated balance sheets of Sierra Pacific Pension Investors '84 and subsidiary, a California limited partnership, (the "Partnership") as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in partners' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sierra Pacific Pension Investors '84 and subsidiary as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas March 13, 1998
SIERRA PACIFIC PENSION INVESTORS '84 AND SUBSIDIARY (A CALIFORNIA LIMITED PARTNERSHIP)
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
SIERRA PACIFIC PENSION INVESTORS '84 AND SUBSIDIARY (A CALIFORNIA LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
SEE ACCOMPANYING NOTES
SIERRA PACIFIC PENSION INVESTORS '84 AND SUBSIDIARY (A CALIFORNIA LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
SEE ACCOMPANYING NOTES
SIERRA PACIFIC PENSION INVESTORS '84 AND SUBSIDIARY (A CALIFORNIA LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
In 1997, $307,759 of interest receivable was added to the principal balance of the related note receivable. In 1995, $31,453 of interest receivable was added to the principal balance of the related note receivable. These transactions are noncash items not reflected in the above statements of cash flows.
SEE ACCOMPANYING NOTES
SIERRA PACIFIC PENSION INVESTORS '84 AND SUBSIDIARY (A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Sierra Pacific Pension Investors '84 (the "Partnership") was organized on June 5, 1984 in accordance with the provisions of the California Uniform Limited Partnership Act to acquire, develop and operate certain real properties. S-P Properties, Inc. is the General Partner and manager of the Partnership. On December 30, 1994, all of the outstanding stock of TCP, Inc. was sold to Finance Factors, Inc. TCP, Inc. owns all of the common stock of S-P Properties, Inc. Finance Factors was a subsidiary of CGS Real Estate Company, Inc., a national real estate company. In July 1995, Finance Factors, Inc. merged with Bancor Real Estate Company, Inc., another subsidiary of CGS Real Estate Company, Inc.
The Partnership's activities during the preceding five years have involved the ownership and operation of two real estate projects in Arizona: Sierra Spectrum in Phoenix, Arizona and Sierra Valencia in Tucson, Arizona. In December 1994, the Partnership sold Sierra Spectrum.
On March 7, 1997 Sierra Valencia LLC ("SVLLC") was formed with the Partnership being the sole member. This company was formed solely to engage in the following activities: a) to acquire from Sierra Pacific Pension Investors '84 the property known as Sierra Valencia, b) to own, hold, sell, assign, transfer, operate, lease, mortgage, pledge and otherwise deal with the Property, c) to exercise all powers enumerated in the Delaware Limited Liability Company Act necessary or convenient to conduct, promotion or attainment of the business or purposes otherwise set forth. Title to the Sierra Valencia property was transferred from the Partnership to SVLLC. The accounts of SVLLC are consolidated into the financial statements of the Partnership since the date of formation and all significant intercompany transactions are eliminated in consolidation.
In 1985 Sierra Mira Mesa Partners ("SMMP"), a California general partnership was formed between the Partnership and Sierra Pacific Development Fund II ("SPDFII"). SMMP was initially created to develop and operate the office building known as Sierra Mira Mesa in San Diego, California. The Partnership's initial ownership interest in SMMP was 49%; the remaining 51% was owned by SPDFII. Effective December 31, 1996, the general partners amended the partnership agreement to allow for adjustments in the sharing ratio each year based upon the relative net contributions and distributions since inception of each general partner. As a result, the sharing ratio in effect for 1997 was 54.42% for the Partnership and 45.58% for SPDFII. In conjunction with this amendment, the general partners forgave the December 31, 1996 balances of advances due from SMMP and included these amounts as adjustments to their respective equity accounts. The sharing ratio effective January 1, 1998 will be adjusted to 66.26% for the Partnership and 33.74% for SPDFII.
SMMP also holds an 88.69% interest in Sorrento I Partners (a California general partnership with Sierra Pacific Development Fund III formed in 1993), a 24.91% interest in Sorrento II Partners (a California general partnership with Sierra Pacific Institutional Properties V formed in 1993), a 4.96% interest in Sierra Creekside Partners (a California general partnership with Sierra Pacific Development Fund formed in 1994), and a 47.05% interest in Sierra Vista Partners (a California general partnership with Sierra Pacific Development Fund III formed in 1994).
Sierra Pacific Pension Investors '84 and subsidiary Notes to Consolidated Financial Statements Page two
BASIS OF FINANCIAL STATEMENTS
The Partnership maintains its books and prepares its financial statements in accordance with generally accepted accounting principles. However, the Partnership prepares its tax returns on the accrual basis of accounting as defined by the Internal Revenue Code with adjustments to reconcile book and taxable income (loss) for differences in the treatment of certain income and expense items. The accompanying financial statements do not reflect any provision for federal or state income taxes since such taxes are the obligation of the individual partners.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid, short-term investments with original maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Partnership at December 31, 1997 and 1996 consist of cash and cash equivalents, receivables, note receivables, due from affiliates, accounts payable and notes payable. The fair value of cash and cash equivalents, receivables and accounts payable approximates the carrying value due to the short term nature of these items. In the opinion on management, the fair value of the notes payable approximates the carrying value based on market rates at December 31, 1997. The fair value of the note receivable and the amounts due from affiliates can not be determined due to the related party nature of these receivables.
INCOME-PRODUCING PROPERTIES
Property and tenant improvements are carried at cost and depreciated on the straight-line method over the estimated lives of the related assets, ranging from three to thirty years. Tenant improvements incurred at the initial leasing of the properties are depreciated over ten years and tenant improvements incurred at the re-leasing of the properties are depreciated over the life of the related lease.
Expenditures for repairs and maintenance are charged against income as incurred. Improvements and major renewals are capitalized. Costs and the related accumulated depreciation of assets sold or retired are removed from the accounts in the year of disposal or when fully depreciated and any resulting gain or loss is reflected in income or deferred income as appropriate.
The Partnership employs a systematic approach in determining whether the value of income-producing property has been impaired. Prior to 1995, a provision for loss on a property was established if the appraised value of the property declined below its book value due to what the General Partner believed to be an other than temporary condition. A complete appraisal was performed on the properties as of December 31 each year.
Effective January 1, 1995, the Partnership implemented Statement of Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (the "Statement"). The Partnership regularly evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Future cash flows are estimated and compared to the carrying amount of the asset to determine if impairment has occurred. If the sum of the expected future cash flows is less than the carrying amount of the asset, the Partnership shall recognize an impairment loss in accordance with the Statement. No additional provision was required due to the implementation of this Statement.
Sierra Pacific Pension Investors '84 and subsidiary Notes to Consolidated Financial Statements Page three
Because the determination of fair value is based upon projections of future economic events such as property occupancy rates, rental rates, operating cost inflation and market capitalization rates which are inherently subjective, the amounts ultimately realized at disposition may differ materially from the net carrying value as of December 31, 1997. The cash flows used to determine fair value and net realizable value are based on good faith estimates and assumptions developed by management. Unanticipated events and circumstances may occur and some assumptions may not materialize; therefore actual results may vary from the estimates and the variances may be material. The Partnership may provide additional write-downs which could be material in subsequent years if real estate markets or local economic conditions change.
INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
The investment in unconsolidated joint venture is stated at cost and is adjusted for the Partnerships' share in earnings or losses and cash contributions to or distributions from the joint venture (equity method).
OTHER ASSETS
Deferred leasing costs represent costs incurred to lease the property and are amortized over the life of the related lease.
Deferred loan costs represent costs incurred to obtain financing and are amortized over the life of the related loan.
RENTAL INCOME AND RENT RECEIVABLE
Rental income is recognized on the straight-line method over the term of the related operating lease in accordance with the provisions of Statement of Financial Accounting Standards No. 13, "Accounting for Leases".
Rent receivable consists of (a) unbilled rent - the difference between rent recognized on the straight-line method and actual cash due; and (b) billed rent - - rent due but not yet received.
CALCULATION OF EQUITY AND NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT
Equity and net income (loss) per limited partnership unit are determined by dividing the Limited Partners' equity and net income (loss) by the number of limited partnership units outstanding, 77,000.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB also issued SFAS No. 129, Disclosure of Information about Capital Structure, which establishes standards for disclosing information about an entity's capital structure. SFAS No. 129 was effective for periods ending after December 15, 1997. The adoption of SFAS No. 129 did not impact the Partnership's capital structure disclosures as the Partnership was already in compliance with this SFAS.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments and related information in interim and annual financial statements. SFAS No. 131 will not impact the Partnership's financial statements as it reports as a single segment. SFAS Nos. 130 and 131 are effective for periods beginning after December 15, 1997. Management is evaluating what, if any, additional disclosures may be required upon the implementation of SFAS No. 130.
Sierra Pacific Pension Investors '84 and subsidiary Notes to Consolidated Financial Statements Page four
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts, at December 31, 1997 and 1996, is as follows:
1997 1996 ----------- ------------- Other assets: Prepaid expenses $ 3,211 $ 3,210 Tax impounds 37,636 0 Tenant improvements reserves 22,822 0 Deferred loan costs, net of accumulated amortization of $6,676 in 1997 84,982 0 Deferred leasing costs, net of accumulated amortization of $150,458 in 1997 and $113,032 in 1996 103,025 112,385 ----------- ------------- $ 251,676 $ 115,595 =========== ============= Accrued and other liabilities: Accounts payable $ 18,850 $ 25,123 Accrued expenses 62,136 44,333 Security deposits 27,058 26,895 ----------- ------------- $ 108,044 $ 96,351 =========== =============
3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS
In 1994, all of the common stock of TCP, Inc. was purchased by Finance Factors, Inc. from Carlsberg Management Company ("CMC"). TCP, Inc. owns all of the common stock of S-P Properties, Inc., the General Partner of the Partnership. CMC continued to manage the affairs of the Partnership through June 30, 1995.
An affiliate of the General Partner may receive a management fee of 6% of the gross rental income collected from the properties. Management fees for the years ended December 31, 1997, 1996 and 1995 were $21,799, $15,030, and $5,300, respectively.
An affiliate of the General Partner is entitled to reimbursement for expenses incurred by the affiliate for services provided to the Partnership such as accounting, legal, data processing and similar services. The affiliate was reimbursed $63,910, $61,809 and $33,651 for such services for the years ended December 31, 1997, 1996 and 1995, respectively. Additionally, the Partnership reimbursed the affiliate for construction supervision costs incurred by the affiliate. For the years ended December 31, 1997 and 1996, the affiliate received $10,504 and $1,873, respectively, for tenant improvements supervisory costs. No such costs were incurred in 1995.
In consideration for services rendered with respect to initial leasing of Partnership properties, an affiliate of the General Partner is paid initial leasing costs. For the years ended December 31, 1997 and 1996, these fees amounted to $19,109 and $10,153, respectively, and were recorded as deferred leasing costs. No such costs were incurred in 1995.
In 1995 and 1996, the Partnership made non-interest bearing short-term advances to Sierra Mira Mesa Partners of $1,300,000 and $11,300, respectively. These advances were forgiven and reclassed to investment in Sierra Mira Mesa Partners in 1997 (See Note 1).
During 1996, the Partnership made non-interest bearing advances to other affiliates. Repayment is expected in 1998. The balance outstanding at December 31, 1997 is $47,466.
Sierra Pacific Pension Investors '84 and subsidiary Notes to Consolidated Financial Statements Page five
As further described in Note 4, in 1994 the Partnership sold a property to an affiliate of the General Partner for cash of $800,000 and a $3,200,000 trust deed note. This note calls for monthly interest only payments and bears interest of 10% per annum. The original note was due to mature on June 30, 1995 and was extended to June 30, 1996. In 1997, the maturity date was extended to December 31, 1998 and interest receivable of $307,759 was added to the principal balance of the note. All other terms of the original note remained unchanged. No interest was due to the Partnership at December 31, 1997. Interest receivable was $159,461 at December 31, 1996. Interest income related to this note of $196,136 and $191,000 was recognized during the years ended December 31, 1997 and 1996, respectively. The December 31, 1997 balance was $2,221,284. The note is secured by a second lien on the property and management believes the collateral has sufficient value to recover the Partnership's net investment inthe note after satisfaction of the first lienholder.
4. INCOME-PRODUCING PROPERTIES
At December 31, 1997 and 1996 the total cost and accumulated depreciation of the property are as follows:
1997 1996 ------------- ------------- Land $ 977,677 $ 977,677 Building and improvements 3,952,310 3,826,021 ------------- ------------- Total 4,929,987 4,803,698
Accumulated depreciation (1,677,364) (1,494,933) Valuation allowance (1,880,000) (1,880,000) ------------- ------------- Net $ 1,372,623 $ 1,428,765 ============= =============
On December 30, 1994, the Sierra Spectrum property, with a historical cost basis of $2,993,134, was sold for $4,000,000 ($800,000 cash down-payment and a $3,200,000 trust deed note) to an affiliate of Finance Factors, Inc. The gain on sale was recorded in accordance with Statement of Financial Accounting Standards No. 66, "Accounting For Sales of Real Estate", using the installment method and the Partnership recorded a gain of $91,823 (net of selling costs and unamortized loan fees and lease costs). A deferred gain of $367,296 was recorded at December 31, 1994. This gain will be recognized as principal payments on the trust deed note are received. During the year ended December 31, 1995, the Partnership received principal payments of $1,317,928 on the trust deed note and recognized $151,510 of the deferred gain related to this transaction.
Sierra Pacific Pension Investors '84 and subsidiary Notes to Consolidated Financial Statements Page six
Future minimum base rental income, under the existing operating leases for the Sierra Valencia property, to be recognized on a straight-line basis and amounts to be received on a cash basis are as follows:
Straight-line Cash YEAR ENDING DECEMBER 31, Basis Basis - -------------------------- ------------- ------------- 1998 $ 430,239 $ 437,272 1999 410,467 421,796 2000 309,964 319,898 2001 248,287 261,590 2002 62,287 66,534 ------------- ------------- Total $ 1,461,244 $ 1,507,090 ============= =============
The Partnership relied on five tenants to generate approximately 71% of total 1997 rental revenues. The breakdown of these five tenants' industry segments and rental income contribution is as follows: 15% - manufacturing for the recreational vehicle segment; 24% healthcare administration; 11% - sales/distribution of medical equipment and supplies; and 11% - communication services; and 10% - pistachio nut marketing.
5. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
Sierra Mira Mesa Partners ("SMMP"), a California general partnership, was formed in 1985 between the Partnership and Sierra Pacific Development Fund II, an affiliate, to develop and operate the real property known as Sierra Mira Mesa, an office building, located in San Diego, California. The property contains 89,560 square feet and is 98% leased at December 31, 1997. At December 31, 1997 the Partnership's interest in SMMP was 54.42%; the remaining 45.58% interest was owned by Sierra Pacific Development Fund II.
The Partnership's investment in SMMP as of December 31, 1997 and 1996 is comprised of the following:
1997 1996 ------------- ------------ Equity interest $ 6,603,969 $ 4,495,515 Investment advisory and other fees, less accumulated amortization of $137,642 and $133,622 in 1997 and 1996, respectively. 116,582 120,602 ------------- ------------ Investment in unconsolidated joint venture $ 6,720,551 $ 4,616,117 ============= ============
Sierra Pacific Pension Investors '84 and subsidiary Notes to Consolidated Financial Statements Page seven
The consolidated financial statements of SMMP include the accounts of SMMP and Sorrento I Partners, a majority owned California general partnership for the years ended December 31, 1997 and 1996. Sorrento I Partners was accounted for under the equity method in 1995. The financial statements of SMMP for prior years have not been restated as the consolidation was accounted for as a step acquisition in accordance with Accounting Research Bulletin No. 51, "Consolidated Financial Statements". The condensed balance sheets at December 31, 1997 and 1996, and the condensed statements of operations for the years ended December 31, 1997, 1996 and 1995 for SMMP follow:
CONDENSED CONSOLIDATED BALANCE SHEETS
Sierra Pacific Pension Investors '84 and subsidiary Notes to Consolidated Financial Statements Page eight
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
As of December 31, 1997, SMMP holds a 24.91% interest in Sorrento II Partners (a California general partnership with Sierra Pacific Institutional Properties V formed in 1993), a 4.96% interest in Sierra Creekside Partners (a California general partnership with Sierra Pacific Development Fund formed in 1994), and a 47.05% interest in Sierra Vista Partners (a California general partnership with Sierra Pacific Development Fund III formed in 1994).
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
Sierra Pacific Pension Investors '84 and subsidiary Notes to Consolidated Financial Statements Page ten
CONDENSED COMBINED STATEMENTS OF OPERATIONS
Reference is made to the audited financial statements of Sierra Mira Mesa Partners and Sorrento I Partners included herein.
Sierra Pacific Pension Investors '84 and subsidiary Notes to Consolidated Financial Statements Page eleven
6. NOTES PAYABLE
On March 27, 1997, Sierra Valencia LLC entered into a loan agreement with First Union Bank of North Carolina in the amount of $1,404,000. This loan, which is secured by a first lien on the Sierra Valencia property, bears interest at 9.25% per annum and calls for monthly principal and interest payments of $12,024 on the first day of each month. Such payments shall continue until April 2007, when the indebtedness is due in full. There is a 1% premium for prepayment of this note. As of December 31, 1997 the loan balance was $1,395,607.
On April 15, 1997, the Partnership entered into a loan agreement with IDM Participating Income Company II, an affiliate of the general partner, in the amount of $200,000. This loan is secured by a second lien on the Sierra Valencia property. This note bears a variable interest rate determined by the Federal Reserve of San Francisco's discount rate prevailing on the 25th day of the month preceding the payment due date plus a 3% premium. The interest rate can be adjusted the last day of March, June, September and December of each year until note agreement is fulfilled. The minimum rate will be 12.12%. The maximum rate will be 15.15%. The current interest rate paid is 12.12%. Monthly payment of $6,659, consisting of both interest and principal, commenced on May 15, 1997 and shall continue until April 15, 2000, when the indebtedness is paid in full. As of December 31, 1997, the loan balance was $166,527.
The annual maturities of the notes payable as of December 31, 1997 are $79,006 in 1998, $88,630 in 1999, $51,182 in 2000, $20,898 in 2001, $22,915 in 2002, and $1,299,503 thereafter.
The Partnership is exposed to interest rate fluctuations on $166,527 of variable rate debt at December 31, 1997.
7. PARTNERS' EQUITY
Accrual basis profits and losses resulting from operations of the Partnership are allocated 99% to the Limited Partners and 1% to the General Partner. Currently, the Partnership does not meet the criteria for distributing cash to the General Partner, and it cannot reasonably predict when the criteria will be met. Accordingly, no accrual basis profits and losses from operations were allocated to the General Partner.
Upon any sale, refinancing or other disposition of the Partnership's real property, distributions will be made to the Limited Partners until they have received distributions from the sale or financing proceeds in an amount equal to 100% of their unreturned capital. Thereafter, distributions generally will be divided 1% to the General Partner and 99% to the Limited Partners until the Limited Partners have received distributions equal to 15% per annum cumulative on each Limited Partner's unreturned capital. However, after the Limited Partners have received distributions from the sale or financing proceeds equal to their unreturned capital plus distributions from all sources equal to a cumulative but not compounded return of 6% per annum on their unreturned capital, the General Partner may be entitled to special distributions not to exceed 3% of the gross sales prices of property sold by the Partnership. Thereafter, the General Partner will be entitled to receive incentive distributions which, when aggregated with the 1% distributions to the General Partner described in the preceding sentence, will equal 10% of the total net sale or financing proceeds available for distribution to the Partners. Any remaining sale or financing proceeds will be distributed to the Limited Partners.
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY (A CALIFORNIA GENERAL PARTNERSHIP)
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
INDEPENDENT AUDITORS' REPORT
To the Partners of Sierra Mira Mesa Partners
We have audited the accompanying consolidated balance sheets of Sierra Mira Mesa Partners and subsidiary, a California general partnership, (the "Partnership") as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in partners' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sierra Mira Mesa Partners and subsidiary as of December 31, 1997 and 1996, and the results of its operations and cash flows for each for the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas March 13, 1998
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY (A California General Partnership)
CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY (A California General Partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY (A California General Partnership)
CONSOLIDATED STATEMENTS OF CHANGES IN GENERAL PARTNERS' EQUITY For the Years Ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY (A California General Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1997, 1996 and 1995
In 1997, $338,020 of interest receivable was added to the principal balance of the related note receivable from affiliate. This transaction is a noncash item not reflected in the above statement of cash flows.
See Accompanying Notes
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY (A CALIFORNIA GENERAL PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Sierra Mira Mesa Partners ("SMMP"), a California general partnership, was formed in 1985 between Sierra Pacific Development Fund II ("SPDFII") and Sierra Pacific Pension Investors '84 ("SPPI'84") to develop and operate the real property known as Sierra Mira Mesa, an office building, located in San Diego, California. The property contains 89,560 square feet and is 98% leased at December 31, 1997.
Per the terms of the partnership agreement, SPDFII and SPPI'84 shared in earnings, contributions and distributions in a ratio of 51% to 49%, respectively. Effective December 31, 1996, the general partners amended the partnership agreement to allow for adjustments in the sharing ratio each year based upon the relative net contributions and distributions since inception of each general partner. As a result, the sharing ratio in effect for 1997 was 45.58% for SPDFII and 54.42% for SPPI'84. In conjunction with this amendment, the general partners forgave the December 31, 1996 balances of advances due from SMMP and included these amounts as adjustments to their respective equity accounts. The sharing ratio effective January 1, 1998 will be adjusted to 33.74% for SPDFII and 66.26% for SPPI'84.
S-P Properties, Inc. is the General Partner and manager of SPDFII and SPPI'84. On December 30, 1994, all of the outstanding stock of TCP, Inc. was sold to Finance Factors, Inc. TCP, Inc. owns all of the common stock of S-P Properties, Inc. Finance Factors was a subsidiary of CGS Real Estate Company, Inc., a national real estate company. In July 1995, Finance Factors, Inc. merged with Bancor Real Estate Company, Inc., another subsidiary of CGS Real Estate Company, Inc.
SMMP also holds investments in other industrial/commercial properties through its investments in unconsolidated joint ventures. Refer to Note 5 for additional information.
BASIS OF FINANCIAL STATEMENTS
The Partnership maintains its books and prepares its financial statements in accordance with generally accepted accounting principles. However, the Partnership prepares its tax returns on the accrual basis of accounting as defined by the Internal Revenue Code with adjustments to reconcile book and taxable income (loss) for differences in the treatment of certain income and expense items. The accompanying financial statements do not reflect any provision for federal or state income taxes since such taxes are the obligation of the individual partners.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
The consolidated financial statements of SMMP include the accounts of SMMP and Sorrento I Partners, a majority owned joint venture as of December 31, 1997. Sorrento I Partners was accounted for under the equity method in 1995. The financial statements of SMMP for 1995 have not been restated as the consolidation was accounted for as a step acquisition in accordance with Accounting Research Bulletin No. 51, "Consolidated Financial Statements". All significant intercompany balances and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid, short-term investments with original maturities of three months or less.
Sierra Mira Mesa Partners Notes to Consolidated Financial Statements Page two
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Partnership at December 31, 1997 and 1996 consist of cash and cash equivalents, receivables, due from affiliates, accounts payable and notes payable. The fair value of cash and cash equivalents, receivables and accounts payable approximate the carrying value due to the short term nature of these items. In the opinion of management, the fair value of the notes payable approximates the carrying value as the interest rate is based on market rates at December 31, 1997. Management was unable to determine the fair value of the amounts due from affiliates due to the related party nature of this receivable.
INCOME-PRODUCING PROPERTIES
Property and tenant improvements are carried at cost and depreciated on the straight-line method over the estimated lives of the related assets, ranging from three to thirty years. Tenant improvements incurred at the initial leasing of the properties are depreciated over ten years and tenant improvements incurred at the re-leasing of the properties are depreciated over the life of the related lease.
Expenditures for repairs and maintenance are charged against income as incurred. Improvements and major renewals are capitalized. Costs and the related accumulated depreciation of assets sold or retired are removed from the accounts in the year of disposal or when fully depreciated and any resulting gain or loss is reflected in income or deferred income as appropriate.
The Partnership employs a systematic approach in determining whether the value of income-producing property has been impaired. Prior to 1995, a provision for loss on a property was established if the appraised value of the property declined below its book value due to what the General Partner believed to be an other than temporary condition. A complete appraisal was performed on the property as of December 31 each year.
Effective January 1, 1995, the Partnership implemented Statement of Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (the "Statement"). The Partnership regularly evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Future cash flows are estimated and compared to the carrying amount of the asset to determine if an impairment has occurred. If the sum of the expected future cash flows is less than the carrying amount of the asset, the Partnership shall recognize an impairment loss in accordance with the Statement. No provision was required due to the implementation of this Statement.
Because the determination of fair value is based upon projections of future economic events such as property occupancy rates, rental rates, operating cost inflation and market capitalization rates which are inherently subjective, the amounts ultimately realized at disposition may differ materially from the net carrying value as of December 31, 1997. The cash flows used to determine fair value and net realizable value are based on good faith estimates and assumptions developed by management. Unanticipated events and circumstances may occur and some assumptions may not materialize; therefore actual results may vary from the estimates and the variances may be material. The Partnership may provide additional write-downs which could be material in subsequent years if real estate markets or local economic conditions change.
INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
The investment in unconsolidated joint ventures is stated at cost and is adjusted for the Partnership's share in earnings or losses and cash contributions to or distributions from the joint ventures (equity method).
Sierra Mira Mesa Partners Notes to Consolidated Financial Statements Page three
OTHER ASSETS
Deferred leasing costs represent costs incurred to lease properties and are amortized over the life of the related lease.
Deferred loan costs represent costs incurred to obtain financing and are amortized over the life of the related loan.
RENTAL INCOME AND RENT RECEIVABLE
Rental income is recognized on the straight-line method over the term of the related operating lease in accordance with the provisions of Statement of Financial Accounting Standards No. 13, "Accounting for Leases".
Rent receivable consists of (a) unbilled rent - the difference between rent recognized on the straight-line method and actual cash due; (b) billed rent - rent due but not yet received.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB also issued SFAS No. 129, Disclosure of Information about Capital Structure, which establishes standards for disclosing information about an entity's capital structure. SFAS No. 129 was effective for periods ending after December 15, 1997. The adoption of SFAS No. 129 did not impact the Partnership's capital structure disclosures as the Partnership was already in compliance with this SFAS.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments and related information in interim and annual financial statements. SFAS No. 131 will not impact the Partnership's financial statements as it reports as a single segment. SFAS Nos. 130 and 131 are effective for periods beginning after December 15, 1997. Management is evaluating what, if any, additional disclosures may be required upon the implementation of SFAS No. 130.
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts, at December 31, 1997 and 1996, is as follows:
1997 1996 ------------ ----------- Other assets: Prepaid expenses $ 20,800 $ 24,066 Deferred loan costs, net of accumulated amortization of $202,307 in 1997 and $153,009 in 1996 157,889 207,187 Deferred leasing costs, net of accumulated amortization of $871,903 in 1997 and $689,001 in 1996 609,019 782,199 Tax impounds 23,288 28,936 Tenant improvement reserves 20,354 76,727 ------------ ----------- $ 831,350 $ 1,119,115 ============ =========== Accrued and other liabilities:
Accounts payable $ 38,666 $ 56,711 Security deposits 5,999 2,761 Accrued expenses 2,073 16,125 Interest payable 22,027 28,831 ------------ ----------- $ 68,765 $ 104,428 ============ ===========
Sierra Mira Mesa Partners Notes to Consolidated Financial Statements Page four
3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS
In 1994, all of the common stock of TCP, Inc. was purchased by Finance Factors, Inc. from Carlsberg Management Company ("CMC"). TCP, Inc. owns all of the common stock of S-P Properties, Inc., the General Partner of the Partnership. CMC continued to manage the affairs of the Partnership through March 31, 1995.
An affiliate of S-P Properties, Inc. receives a management fee of 5.5% of the gross rental income collected from the property. This fee amounted to $101,558, $93,780 and $53,392, respectively, for the years ended December 31, 1997, 1996 and 1995. This fee was recorded as part of the operating expenses of the property.
SMMP reimburses an affiliate of S-P Properties, Inc. for expenses incurred by the affiliate for services provided to SMMP such as accounting, data processing and similar services. The affiliate was reimbursed $104,580, $101,142 and $51,201, respectively, for such services for the years ended December 31, 1997, 1996 and 1995. Additionally, SMMP reimbursed an affiliate for construction supervision costs incurred by the affiliate. For the years ended December 31, 1997, 1996 and 1995, the affiliate received $11,154, $48,205 and $3,374, respectively, for tenant improvements supervisory costs.
In consideration for services rendered with respect to initial leasing of SMMP's property, an affiliate of S-P Properties, Inc. is paid initial leasing costs. For the years ended December 31, 1997 and 1996, these fees amounted to $3,656 and $65,120, respectively, and were recorded as deferred leasing costs. No such costs were incurred in 1995.
During 1993, SMMP loaned funds to a former affiliate of S-P Properties, Inc. in the form of demand notes. Such liabilities were assumed by Finance Factors, Inc. which acquired S-P Properties, Inc. as of December 30, 1994. In July 1995, Finance Factors, Inc. merged with Bancor Real Estate Company, Inc. who has assumed the note. The annual interest rate of the loans was variable at bank prime plus 2-1/4% - 3% with a minimum rate of 9%. The loans totaled $2,360,000 at December 31, 1993 and were reduced to $1,687,787 at December 31, 1994. This loan was amended effective January 1, 1995 fixing the interest rate at 10%. On December 31, 1997, interest receivable of $338,020 was added to the principal balance of the loan. No interest related to this loan was due to the Partnership at December 31, 1997. Interest receivable was $169,241 at December 31, 1996. The principal balance outstanding at December 31, 1997 is $2,025,807. The loan is guaranteed by the owners of CGS Real Estate Company, Inc.
During 1995, the Partnership made a short-term, non-interest bearing loan to SPDFII in the amount of $140,000. This loan was repaid in 1996. In 1996, the Partnership received a short-term, non-interest bearing loan from SPDFII in the amount of $155,590. This loan was reclassed to equity in 1997 (See Note 1).
During 1996, the Partnership made a non-interest bearing advance to an affiliate in the amount of $4,771. Repayment is expected in 1998.
During 1995 and 1996, the Partnership received non-interest bearing short-term advances from SPPI'84 of $1,300,000 and $11,300, respectively. These advances were reclassed to equity in 1997 (See Note 1).
Reference is made to Note 6.
Sierra Mira Mesa Partners Notes to Consolidated Financial Statements Page five
4. INCOME-PRODUCING PROPERTIES
At December 31, 1997 and 1996 the total cost and accumulated depreciation of the properties are as follows:
1997 1996 ------------- ------------- Land $ 3,786,458 $ 3,786,458 Building and improvements 9,926,189 10,482,406 ------------- ------------- Total 13,712,647 14,268,864
Accumulated depreciation (4,625,842) (4,819,832) ------------- ------------- Net $ 9,086,805 $ 9,449,032 ============= =============
Future minimum base rental income, under the existing operating leases for the Sierra Mira Mesa and Sorrento I properties, to be recognized on a straight-line basis and amounts to be received on a cash basis are as follows:
Year Ending Straight-line Cash December 31, Basis Basis ------------------------ -------------- -------------- 1998 $ 1,872,969 $ 1,922,487 1999 1,807,666 1,953,335 2000 1,760,152 2,000,177 2001 1,753,768 2,084,968 2002 1,744,768 2,173,586 Thereafter 338,100 417,776 -------------- -------------- Total $ 9,277,423 $ 10,552,329 ============== ==============
The Partnership relied on two tenants for 80% of 1997 rental income; 67% is from a state governmental agency associated with workers compensation insurance and 13% is from a tenant in the communications sector.
5. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
SMMP holds the following investments accounted for under the equity method at December 31, 1997:
o a 24.91% equity interest in Sorrento II Partners ("SIIP"), a joint venture formed on October 1, 1993 with Sierra Pacific Institutional Properties V, an affiliate, to develop and operate Sierra Sorrento II, an industrial building located in San Diego, California. SMMP's investment in SIIP as of December 31, 1997 and 1996 is $1,711,297 and $1,078,963, respectively. SMMP's share of the net loss of SIIP for the three years ended December 31, 1997, 1996 and 1995 is $59,066, $61,933 and $51,897, respectively;
Sierra Mira Mesa Partners Notes to Consolidated Financial Statements Page six
o a 4.96% equity interest in Sierra Creekside Partners ("SCP"), a joint venture formed on February 1, 1994 with Sierra Pacific Development Fund, an affiliate, to develop and operate Sierra Creekside, a commercial office building in San Ramon, California. SMMP's investment in SCP as of December 31, 1997 and 1996 is $25,510 and $(102,995), respectively. SMMP's share of the net loss of SCP for the three years ended December 31, 1997, 1996 and 1995 is $14,995, $70,232 and $96,868, respectively;
o a 47.05% equity interest in Sierra Vista Partners ("SVP"), a joint venture formed on February 1, 1994 with Sierra Pacific Development Fund III, an affiliate, to develop and operate Sierra Vista, an industrial building in Anaheim, California. SMMP's investment in SVP as of December 31, 1997 and 1996 is $56,963 and $1,797,208, respectively. SMMP's share of the net loss of SVP for the three years ended December 31, 1997, 1996 and 1995 is $781,288, $222,600 and $173,375, respectively. The Sierra Vista property was sold in October 1997.
The following is a summary of aggregated financial information for all investments owned by SMMP which are accounted for under the equity method:
CONDENSED COMBINED BALANCE SHEETS
Sierra Mira Mesa Partners Notes to Consolidated Financial Statements Page seven
CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995 ------------ ------------- ------------- Revenues: Rental income $ 2,294,859 $ 2,474,335 $ 2,124,077 Other income 9,698 13,968 6,915 ------------ ------------- ------------- Total revenues 2,304,557 2,488,303 2,130,992 ------------ ------------- ------------- Expenses: Operating expenses 1,755,826 1,788,643 2,009,862 Depreciation and amortization 1,321,177 1,461,571 1,438,310 Interest 459,763 427,967 691,407 ------------ ------------- ------------- Total expenses 3,536,766 3,678,181 4,139,579 ------------ ------------- ------------- Net loss before disposition of property (1,232,209) (1,189,878) (2,008,587) ------------ ------------- ------------- Loss from property disposition (967,764) 0 0 ------------ ------------- ------------- Net loss $ (2,199,973) $ (1,189,878) $ (2,008,587) ============ ============= =============
6. NOTES PAYABLE
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.
Sierra Mira Mesa Partners Notes to Consolidated Financial Statements Page eight
At any time upon 120 days written notice to CGS, the Partnership may fully discharge the note by the payment of an amount equal to $750,000 less the aggregate amount of principal paid under the note between the date of the CGS Agreement and the date of payment plus any interest due.
A modification agreement was entered into on September 30, 1997. The interest rate remained fixed at 9.34% through October 1998, at which time the rate will convert to the one-year treasury rate plus 375 basis points. The principal of the note on the effective date was $635,479 and is amortized over a 210-month term until maturity in March 2015. Current payments are $6,154 per month, principal and interest inclusive. The loan balance as of December 31, 1997 was $631,827.
The excess of the net carrying amount of the balance due under the bank note agreement, net of unamortized deferred loan fees, over the balance due under the CGS Agreement was recognized as an extraordinary item in 1996 in the amount of $1,200,381.
Annual maturities under the Sierra Mira Mesa note and the CGS Agreement as of December 31, 1997 are: $254,524 in 1998; $275,206 in 1999; $297,573 in 2000; $321,763 in 2001; $347,924 in 2002; and $4,176,062 thereafter.
SORRENTO I PARTNERS (A CALIFORNIA GENERAL PARTNERSHIP)
AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1997
INDEPENDENT AUDITORS' REPORT
To the Partners of Sorrento I Partners
We have audited the accompanying balance sheets of Sorrento I Partners, a California general partnership, (the "Partnership") as of December 31, 1997 and 1996, and the related statements of operations, changes in general partners' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sorrento I Partners as of December 31, 1997 and 1996, and the results of its operations and cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas March 13, 1998
SORRENTO I PARTNERS (A California General Partnership)
BALANCE SHEETS December 31, 1997 and 1996 - --------------------------------------------------------------------------------
See Accompanying Notes
SORRENTO I PARTNERS (A California General Partnership)
STATEMENTS OF OPERATIONS For the Years Ended December 31, 1997, 1996 and 1995 - --------------------------------------------------------------------------------
See Accompanying Notes
SORRENTO I PARTNERS (A California General Partnership)
STATEMENTS OF CHANGES IN GENERAL PARTNERS' EQUITY (DEFICIT) For the Years Ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
See Accompanying Notes
SORRENTO I PARTNERS (A California General Partnership)
STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
During 1996, Sorrento I exercised a discounted payoff option on its notes payable that resulted in a $1,200,381 extraordinary gain. During 1995, accrued interest was added to the note payable principal balance in the amount of $85,709. These are noncash transactions not reflected in the above statements of cash flows.
See Accompanying Notes
SORRENTO I PARTNERS (A CALIFORNIA GENERAL PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Sorrento I Partners ("SIP") was formed as a California general partnership on April 1, 1993 between Sierra Mira Mesa Partners ("SMMP") and Sierra Pacific Development Fund III ("SPDFIII") to develop and operate the real property known as Sorrento I, an industrial building, located in San Diego, California. The property contains 43,100 square feet and is located adjacent to Sierra Mira Mesa office building, which is owned and operated by Sierra Mira Mesa Partners. In 1993, SMMP contributed cash of $383,836 ($443,836, net, through 31, 1994) for a 55.03% interest and SPDFIII contributed the property and all associated encumbrances for a 44.97% interest in SIP. During 1995, 1996 and 1997, SMMP contributed an additional $500,242, $1,551,100 and $141,000 and received distributions amounting to $0, $35,900 and $164,300 respectively. The partnership agreement calls for a recalculation of the percentage ownership interest each year on January 1st to account for the Partner's aggregate capital contributions and distributions since inception through the prior year. Accordingly, as of January 1, 1995, 1996 and 1997 SPDFIII's interest in SIP was changed to 41.41%, 24.94% and 11.31%, respectively. On January 1, 1998, SPDFIII's interest will be increased to 11.41% and SMMP's interest will be reduced to 88.59% to reflect the 1997 contributions and distributions.
S-P Properties, Inc. is the General Partner of SPDFIII and of SMMP's general partners, Sierra Pacific Development Fund II and Sierra Pacific Pension Investors '84. On December 30, 1994, all of the outstanding stock of TCP, Inc. was sold to Finance Factors, Inc. TCP, Inc. owns all of the common stock of S-P Properties, Inc. Finance Factors was a subsidiary of CGS Real Estate Company, Inc., a national real estate company. In July 1995, Finance Factors, Inc. merged with Bancor Real Estate Company, Inc., another subsidiary of CGS Real Estate Company, Inc.
BASIS OF FINANCIAL STATEMENTS
SIP maintains its books and prepares its financial statements in accordance with generally accepted accounting principles. However, SIP prepares its tax returns on the accrual basis of accounting as defined by the Internal Revenue Code with adjustments to reconcile book and taxable income (loss) for differences in the treatment of certain income and expense items. The accompanying financial statements do not reflect any provision for federal or state income taxes since such taxes are the obligation of the individual partners.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid, short-term investments with original maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of SIP at December 31, 1997 and 1996 consist of cash and cash equivalents, receivables, due from affiliates, accounts payable and note payable. The fair value of cash and cash equivalents, receivables and accounts payable approximates the carrying value due to the short term nature of these items. In the opinion of management, the fair value of the note payable approximates the carrying value based on market rates at December 31, 1997. The fair value of the amounts due from affiliates can not be determined due to the related party nature of this receivable.
Sorrento I Partners Notes to Financial Statements Page two
INCOME-PRODUCING PROPERTIES
Property and tenant improvements are carried at cost and depreciated on the straight-line method over the estimated lives of the related assets, ranging from seven to thirty years. Tenant improvements incurred at the initial leasing of the property are depreciated over ten years and tenant improvements incurred at the re-leasing of the property are depreciated over the life of the related lease.
Expenditures for repairs and maintenance are charged against income as incurred. Improvements and major renewals are capitalized. Costs and the related accumulated depreciation of assets sold or retired are removed from the accounts in the year of disposal or when fully depreciated and any resulting gain or loss is reflected in income or deferred income as appropriate.
SIP employs a systematic approach in determining whether the value of income-producing property has been impaired. Prior to 1995, a provision for loss on a property was established if the appraised value of the property declined below its book value due to what the General Partner believed to be an other than temporary condition. A complete appraisal was performed on the property as of December 31 each year.
Effective January 1, 1995, SIP implemented Statement of Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (the "Statement"). SIP regularly evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Future cash flows are estimated and compared to the carrying amount of the asset to determine if an impairment has occurred. If the sum of the expected future cash flows is less than the carrying amount of the asset, SIP shall recognize an impairment loss in accordance with the Statement. No provision was required due to the implementation of this Statement.
Because the determination of fair value is based upon projections of future economic events such as property occupancy rates, rental rates, operating cost inflation and market capitalization rates which are inherently subjective, the amounts ultimately realized at disposition may differ materially from the net carrying value as of December 31, 1997. The cash flows used to determine fair value and net realizable value are based on good faith estimates and assumptions developed by management. Unanticipated events and circumstances may occur and some assumptions may not materialize; therefore actual results may vary from the estimates and the variances may be material. SIP may provide additional write-downs which could be material in subsequent years if real estate markets or local economic conditions change.
OTHER ASSETS
Deferred leasing costs represent costs incurred to lease properties and are amortized over the life of the related lease.
Deferred loan costs represent costs incurred to obtain financing and are amortized over the life of the related loan.
RENTAL INCOME AND RENT RECEIVABLE
Rental income is recognized on the straight-line method over the term of the related operating lease in accordance with the provisions of Statement of Financial Accounting Standards No. 13, "Accounting for Leases".
Rent receivable consists of (a) unbilled rent - the difference between rent recognized on the straight-line method and actual cash due; an (b) billed rent - rent due but not yet received.
Sorrento I Partners Notes to Financial Statements Page three
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB also issued SFAS No. 129, Disclosure of Information about Capital Structure, which establishes standards for disclosing information about an entity's capital structure. SFAS No. 129 was effective for periods ending after December 15, 1997. The adoption of SFAS No. 129 did not impact the Partnership's capital structure disclosures as the Partnership was already in compliance with this SFAS.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments and related information in interim and annual financial statements. SFAS No. 131 will not impact the Partnership's financial statements as it reports as a single segment. SFAS Nos. 130 and 131 are effective for periods beginning after December 15, 1997. Management is evaluating what, if any, additional disclosures may be required upon the implementation of SFAS No. 130.
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts, at December 31, 1997 and 1996 is as follows:
3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS
In 1994, all of the common stock of TCP, Inc. was purchased by Finance Factors, Inc. from Carlsberg Management Company ("CMC"). TCP, Inc. owns all of the common stock of S-P Properties, Inc., the General Partner of the Partnership. CMC continued to manage the affairs of SIP through March 31, 1995.
An affiliate of the General Partner may receive a management fee of 6% of the gross rental income collected from the property. Management fees paid to affiliates for the years ended December 31, 1997 and 1996 were $15,762 and $13,003 respectively. No such costs were incurred in 1995.
Sorrento I Partners Notes to Financial Statements Page four
SIP reimburses an affiliate of S-P Properties, Inc. for expenses incurred by the affiliate for services provided to SIP such as accounting, data processing and similar services. The affiliate was reimbursed $34,860, $33,714 and $31,001, respectively, for such services for the years ended December 31, 1997, 1996 and 1995. Additionally, SIP reimbursed an affiliate for construction supervision costs incurred by the affiliate. For the years ended December 31, 1997, 1996 and 1995 the affiliate received $0, $33,084 and $0, respectively, for tenant improvements supervisory costs.
In consideration for services rendered with respect to initial leasing of SIP's property, an affiliate of S-P Properties, Inc. is paid initial leasing costs. For the years ended December 31, 1997, 1996 and 1995 these fees amounted to $0, $59,563 and $0, respectively, and were recorded as deferred leasing costs.
During 1996, SIP made a non-interest bearing advance to an affiliate in the amount of $4,770. Repayment is expected in 1998.
Reference is made to Note 5.
4. INCOME-PRODUCING PROPERTIES
At December 31, 1997 and 1996 the total cost and accumulated depreciation of the property are as follows:
1997 1996 ------------- ------------- Land $ 1,305,518 $ 1,305,518 Building and improvements 1,671,982 2,406,466 ------------- ------------- Total 2,977,500 3,711,984
Accumulated depreciation (537,812) (1,170,370) ------------- ------------- Net $ 2,439,688 $ 2,541,614 ============= =============
During 1997 and 1996, SIP removed $734,484 and $10,780, respectively, from its building and improvements and related accumulated depreciation accounts for fully depreciated property.
Sorrento I Partners Notes to Financial Statements Page five
Future minimum base rental income to be recognized on a straight-line basis and amounts to be received on a cash basis are as follows:
Year Ending Straight-line Cash December 31, Basis Basis - ------------------------------ ------------- ------------- 1998 $ 283,635 $ 273,196 1999 283,635 278,448 2000 283,635 289,584 2001 283,635 295,152 2002 283,635 306,960 Thereafter 94,547 104,288 ------------- ------------- Total $ 1,512,722 $ 1,547,628 ============= =============
SIP relied on one tenant for 100% of 1997 and 1996 rental income. The lease agreement requires the tenant to pay expenses such as utilities, insurance and property taxes related to the property. The principal business of the tenant is research and development in the communications sector.
5. NOTE PAYABLE
SIP had a non-recourse bank note payable with an original principal balance of $3,000,000 collateralized by real and personal property. The annual interest rate of the note was variable at bank prime plus 2-1/2% with a minimum rate of 9% and maximum rate of 15-1/2%. The original maturity of the note was July 1998 and the note included a discounted payoff option of $1,500,000.
CGS Real Estate Company, Inc. ("CGS"), an affiliate of the General Partner, acquired the note and security documents from the bank in May 1996. In connection with the purchase of the bank note and security documents by CGS, SIP made a principal payment to the bank of $750,000 and entered into a $750,000 note agreement with CGS (the "CGS Agreement"). The CGS Agreement, collaterized by real and personal property, called for monthly interest payments through December 1996 and monthly principal and interest payments thereafter until maturity on May 31, 2016. The interest rate is fixed at 9.34% per annum for the first year of the note and will thereafter be the one-year Treasury rate plus 375 basis points. A pre-payment in the amount of $105,000 was paid in April 1997.
A modification agreement was entered into on September 30, 1997. The interest rate remained fixed at 9.34% through October 1998, at which time the rate will convert to the one-year treasury rate plus 375 basis points. The note is amortized over a 210-month term and current payments are $6,154 per month, principal and interest inclusive until maturity in March 2015. The loan balance as of December 31, 1997 was $631,827.
At any time upon 120 days written notice to CGS, SIP may fully discharge the note by the payment of an amount equal to $750,000 less the aggregate amount of principal paid under the note between the date of the CGS Agreement and the date of payment plus any interest due.
The excess of the net carrying amount of the balance due under the bank note agreement, net of unamortized deferred loan fees, over the balance due under the CGS Agreement was recognized as an extraordinary item in 1996 in the amount of $1,200,381.
Annual maturities under the CGS Agreement as of December 31, 1997 are: $15,489 in 1998; $16,999 in 1999; $18,657 in 2000; $20,476 in 2001; $22,472 in 2002; and $537,734 thereafter.
Sorrento I Partners Notes to Financial Statements Page six
6. GENERAL PARTNERS' EQUITY (DEFICIT)
In accordance with the partnership agreement, accrual basis losses resulting from operations of the partnership are first allocated to the General Partners in proportion to the relative amounts of net cumulative partnership profits until such allocated losses equal the previously allocated net cumulative partnership profits. Then, losses are allocated in proportion to the Partners' percentage interests as computed January 1st of the year in which the loss occurred.
Likewise, accrual basis profits resulting from operations of the partnership are first allocated to the General Partners in proportion to the relative amounts of net cumulative partnership losses until such allocation of profits equals the previously allocated net cumulative partnership losses. Then, profits are allocated in proportion to the distributions made to the Partners during the year.
Upon dissolution of the partnership, any proceeds should be distributed first to Sierra Mira Mesa as a return of capital in proportion to its aggregate unreturned capital contributed and then to Sierra Pacific Development Fund III in proportion to its aggregate unreturned capital contributed. Any remaining proceeds shall be first distributed pro rata in proportion to the Partners' positive balances in their capital accounts and then in accordance with their percentage interest in the year of dissolution.
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.