SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000 Commission file number: 0-14276
SIERRA PACIFIC DEVELOPMENT FUND III
(A California Limited Partnership)
--------------------------------
State of California 33-0043953
- ------------------------------------------------ ----------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification Number)
5850 San Felipe, Suite 450
Houston, Texas 77057
- ------------------------------------------------ ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 706-6271
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
60,000 Limited Partnership Units
Title of class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Limited Partners for the Year Ended December 31, 2000
is incorporated by reference into Parts II and III
PART I
ITEM 1. BUSINESS
(a.) GENERAL DEVELOPMENT OF BUSINESS. Sierra Pacific Development Fund III (the
"Partnership") is a California limited partnership that was formed in June 1984
for the purpose of acquiring, developing, and operating commercial and
industrial real estate.
In February 1985, the Partnership acquired land in San Diego, California as the
first step in the development of Sierra Sorrento I. This 43,100 square foot
industrial/warehouse project was completed in February 1986. In October 1986,
the Partnership acquired land in Anaheim, California for the development of
Sierra Vista. This property, a 102,855 square foot industrial/office project,
was completed in April 1988.
In April 1993, the Partnership created a California general partnership,
Sorrento I Partners ("SIP"), with Sierra Mira Mesa Partners ("SMMP") to
facilitate cash contributions by SMMP for the continued development and
operation of the Sierra Sorrento I property. The Partnership contributed the
Sierra Sorrento I property and related debt; and SMMP contributed cash. Through
December 31, 1999, SMMP's net cash contributions were $1,557,370 which resulted
in a 83.24% interest in SIP. SMMP made additional contributions of $89,160 and
received distributions of $284,284 in 2000. SMMP primary use of the net
distributions was to provide its joint venture partners with an additional
source of capital. The percentage interests of the Partnership and Sierra Mira
Mesa Partners are to be adjusted each year on January 1 during the term of
Sorrento I Partners, beginning January 1, 1995 and ending December 31, 2013
unless terminated sooner, based upon the relative net contributions and
distributions since inception through the preceding December 31. Accordingly, as
of January 1, 2001, the Partnership's interest in Sorrento I Partners will be
increased to 18.72%, and SMMP's interest will be reduced to 81.28%. Because the
Partnership owns less than 50% of the Sierra Sorrento I property and does not
exert control over such property, it records its interest in Sorrento I Partners
as an investment in an unconsolidated joint venture using the equity method of
accounting. Thus, the Sierra Sorrento I property is not reflected as an asset on
the Partnership's balance sheet nor is the debt on the property reflected in the
balance sheet.
In February 1994, the Partnership formed a joint venture with SMMP known as
Sierra Vista Partners ("SVP") to facilitate cash contributions by SMMP for the
continued development and operation of the Sierra Vista property. Through
December 31, 1999, SMMP had contributed net cash of $1,326,848, which resulted
in a 33.36% interest in SVP. SMMP made additional contributions of $20,000, and
received distributions of $8,943 in 2000. The net contributions received from
SMMP were used to assist with administrative expenses, as SVP has no source of
revenue. The percentage interests of the Partnership and SMMP are to be adjusted
each year on January 1 during the term of SVP, beginning January 1, 1995 and
ending December 31, 2013 unless terminated sooner, based upon the relative net
contributions and distributions since inception through the preceding December
31. Accordingly, as of January 1, 2001 the Partnership's interest in SVP will be
decreased to 66.45%, and SMMP's interest will be increased to 33.55%.
In October 1997, the Sierra Vista property was sold for $5,630,000. The
Partnership received net cash proceeds of $2,140,598 from the sale for its
52.95% interest in this property and the purchaser assumed the Partnership's
$3,044,397 debt on the property. The Partnership also incurred additional
selling costs and credited security deposits and prorata rents for October 1997
to the buyer. In accordance with the SVP joint venture agreement, these proceeds
were distributed to SMMP. Under the terms of the agreement, SMMP receives
preferential cash distributions of available "Distributable Funds" from the sale
of the property to the extent of its capital contributions. SMMP had made net
contributions of $3,335,204 to SVP through the sale date.
At December 31, 2000, the Partnership's remaining real estate investment was a
16.76% minority interest in SIP.
Audited financial statements of Sorrento I Partners are included in the Annual
Report to the Limited Partners attached as an Exhibit.
(b.) NARRATIVE DESCRIPTION OF BUSINESS. The Partnership owned and operated
Sierra Vista, an industrial/office project in Anaheim, California. The Sierra
Vista property was sold in October 1997. During the year ended and as of
December 31, 2000, the Partnership had a 16.76% interest in an industrial
property known as Sorrento I in San Diego, California through a California
general partnership with Sierra Mira Mesa Partners.
2
(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 is a California limited partnership which was organized to
invest in commercial and industrial real properties. The Partnership may invest
in both properties which are to be developed or are under development or
construction and properties which are newly-constructed or have operating
histories. The Partnership's objectives are: (i) to preserve, protect, and
return the Partnership's invested capital; (ii) to attempt to maximize capital
gains through long-term appreciation in the value of its real estate
investments; (iii) to generate sufficient cash from operations to make
distributions of Available Cash to the Limited Partners; (iv) to provide federal
income tax deductions so that all or a portion of any Available Cash distributed
to the Limited Partners may be treated as a return of capital for tax purposes
and, therefore, may not represent taxable income; and (v) to attempt to sell the
Partnership's real estate investments for cash after an approximate three to
five year holding period. No assurance can be given that these objectives will
be attained or that the Partnership's capital will not decrease."
Operations of the Partnership through 2000 have been consistent with the intent
of the original prospectus in that the Partnership has invested in real estate
projects that had the potential for capital gains, preservation of capital and
providing distributable cash flow partially sheltered from Federal income tax.
As discussed above, the Partnership sold the Sierra Vista property in October
1997. As of December 31, 2000, the Partnership had paid cash distributions of
$11.19 for each $250 unit investment and remaining partners' equity (deficit)
was computed at $0 per unit. Thus, if the Partnership were to be liquidated at
the end of 2000 at book value, each $250 investment would have returned a total
of $11.19.
CGS Real Estate Company, Inc. ("CGS"), an affiliate of the general partner, is
continuing the development of a plan which will combine the property owned by
Sorrento I Partners with properties of other real estate partnerships managed by
CGS and its affiliates. These limited partnerships own office properties,
industrial properties, shopping centers, and residential apartment properties.
It is expected that the acquirer, American Spectrum Realty, Inc. ("ASR"), would
qualify as a real estate investment trust. Limited partners would receive shares
of common stock from ASR, which would be listed on a national securities
exchange. The transaction is subject to the approval of the limited partners of
the Partnerships. ASR filed a Registration Statement on Form S-4 August 14, 2000
relating to the solicitation of consents with the Securities and Exchange
Commission. The Registration Statement was amended February 14, 2001.
ITEM 2. PROPERTIES
As stated in Item 1 the Partnership sold the Sierra Vista property in October
1997. During the year ended and as of December 31, 2000, the Partnership had a
16.76% interest in an industrial property known as Sorrento I in San Diego,
California through a California general partnership with Sierra Mira Mesa
Partners. See Item 1. Business for discussion of percentage ownership changes.
Sorrento I, an industrial building, contains 43,100 square feet of rentable
space. Since 1996, one tenant has leased 100% of the rentable square feet of
Sorrento I. 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, 2000 is $6.58. The tenant's principal business is research and
development in the communications sector.
3
Depreciable Property
Sorrento I, San Diego, California
Office Building - Income-Producing Property
Tenant
Land Buildings Improvements Total
Historical Cost & Tax Basis $ 1,305,518 $ 1,347,961 $ 329,299 $ 2,982,778
Accumulated Depreciation (632,721) (211,530) (844,251)
---------------------------------------------------------
Net Carrying Value $ 1,305,518 $ 715,240 $ 117,769 $ 2,138,527
=========================================================
Depreciation Method Not Applicable Straight-line Straight-line
Depreciable Life Not Applicable 10-30 Years 7-10 years
Real Estate Taxes The real estate tax obligation for the year ended
December 31, 2000 was approximately 1.12% of the
assessed value or $30,253, which was the obligation of
the tenant.
Insurance In the opinion of management, the property is adequately
covered by insurance.
Encumbrances SIP had a $750,000 note payable to CGS, which was
modified on September 30, 1997. The interest rate
remained fixed at 9.34% through October 1998, at which
time the rate converted to the one-year treasury rate
plus 375 basis points. The note was amortized over a
210-month term with payments of $6,048 per month,
principal and interest inclusive, until maturity in
March 2015.
In August 1999, the CGS note with a principal balance of
$607,693 was paid. On the same date, SIP entered into a
new loan agreement with Finova Realty Capital, Inc. in
the amount of $1,637,500. Capitalized loan costs paid to
Finova Realty Capital, Inc were $48,557. This loan,
which is secured by the Sorrento I property, bears
interest at 8.75% per annum. Principal and interest
payments of $12,882 are due and payable monthly until
the loan matures in September 2009. The note balance as
of December 31, 2000 was $1,625,540.
ITEM 3. LEGAL PROCEEDINGS
The Partnership is not involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
4
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERS' EQUITY AND RELATED MATTERS
As of December 31, 2000, the number of security holders is as follows:
Number Number of
of Units Record Holders
-------- --------------
Limited Partners 36,521 842
====== ===
These securities are all of the same class, namely, limited partnership
interests (units) and were sold pursuant to a registration statement filed under
the Securities Act of 1933, as amended. The total offering was 60,000 units at
$250.00 per unit.
No broker or dealer currently makes a market in the units of the Partnership.
Accordingly, there are no published price or trading volume figures available
for the units. The units have been transferred on an extremely limited extent
from time-to-time since the inception of the Partnership; however, the market
for the units is highly restricted and sporadic, especially in view of the
investor suitability requirements imposed on new purchasers by the various state
blue sky laws and the restrictions on transfer contained in the Partnership
Agreement.
The Partnership has neither paid nor declared any cash or other distributions to
the General or Limited Partners during the three most recent fiscal years. There
are no contractual or other restrictions on the Partnership's ability to make
such distributions.
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data for the Partnership is filed by reference to the
Annual Report to the Limited Partners attached as an Exhibit.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes certain forward looking statements reflecting the
Partnership's expectations in the near future; however, many factors which may
affect the actual results, especially changing regulations, are difficult to
predict. Accordingly, there is no assurance that the Partnership's expectations
will be realized.
Overview:
The following discussion should be read in 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, 2000, the Partnership owned a 66.64%
interest in Sierra Vista Partners, which operated the Sierra Vista property,
which was sold in October 1997. In addition, the Partnership held a 16.76%
interest in Sorrento I Partners ("SIP"), which operates the Sorrento I property.
Results of Operations:
Comparison of year ended December 31, 2000 to year ended December 31, 1999.
5
No rental income has been generated since the sale of the property in 1997. The
Partnership recorded other income of approximately $15,000 in 1999 as a result
of refunds associated with 1998 operations. Total operating expenses decreased
by approximately $1,000, or 7%, principally due to higher professional fees
incurred in 1999. Total operating expenses for the year ended December 31, 2000
primarily consisted of accounting and auditing costs.
The Partnership's remaining real estate investment is a 16.76% minority interest
in the Sorrento I property. The Partnership's share of loss from its investment
in SIP was approximately $17,000 for the year ended December 31, 2000 compared
to approximately $8,000 for the year ended December 31, 1999. This increase in
loss was principally due to higher interest expense associated with the
refinance of the Sorrento I property in August 1999. In accordance with the
Sorrento I partnership agreement, the Partnership's share of loss was allocated
in proportion to its ownership interest for the years ended December 31, 1999
and 2000.
Comparison of year ended December 31, 1999 to year ended December 31, 1998.
No rental income was recorded for the years ended December 31, 1999 and 1998 due
to the sale of the Property in 1997. Other income of approximately $15,000 was
recorded in 1999 principally as a result of refunds associated with prior year
operations. In 1998, the Partnership received approximately $94,000 associated
with an adjustment to the refinancing of the debt on the Sierra Vista property
that took place prior to the sale of the property in 1997. This amount was
recorded as other income. Operating expenses for the year ended December 31,
1999 were approximately $15,000, which consisted primarily of accounting and
auditing costs. In 1998, operating expenses amounted to approximately $37,000.
The Partnership's share of (loss) income from its investment in SIP was
approximately $(8,000) for the year ended December 31, 1999 compared to
approximately $1,000 for the year ended December 31, 1998. In accordance with
the Sorrento I partnership agreement, the Partnership's share of loss was
allocated in proportion to its 11.88% ownership interest in 1999.
Liquidity and Capital Resouces:
The Partnership received net cash proceeds of $2,141,000 from the sale of the
property in 1997. In accordance with the Sierra Vista Partners joint venture
agreement, these proceeds were distributed to SMMP. Under the terms of the
agreement, SMMP receives preferential cash distributions of available
"Distributable Funds" from the sale of the property to the extent of its capital
contributions. SMMP had made net contributions of $3,335,000 to the Partnership
through the sale date.
One tenant began leasing the entire 43,100 rentable square feet of the Sorrento
I property in 1996. This lease commenced May 1, 1996 and expires April 30, 2003.
The current base rent called for under this lease is $23,204 per month and shall
increase in subsequent periods. The lease contains an option to extend for an
additional five years.
In August 1999, SIP repaid its $607,693 loan balance to CGS Real Estate Company,
Inc. and entered into a new loan agreement with Finova Realty Capital, Inc. in
the amount of $1,637,500. The loan is collateralized by the Sorrento I property
and bears interest at 8.75% per annum. Monthly payments of $12,882, consisting
of both principal and interest, are due until maturity in September 2009. The
majority of the loan proceeds were distributed to SMMP in accordance with the
partnership agreement.
In accordance with the SIP joint venture agreement, cash distributions of
available "Distributable Funds" shall first be distributed to SMMP as a return
of capital in proportion to its aggregate unreturned contributed capital and
then to the Partnership in proportion to its aggregate unreturned contributed
capital. Any remaining proceeds shall first be distributed pro rata in
proportion to the partners' positive balances in their capital accounts and then
in accordance with their percentage interest.
The Partnership's primary capital requirements will be for the continued
development and operation of the Sorrento I property. It is anticipated that
these requirements will be funded from the operations of the property and the
Partnership's joint venture partner, SMMP. As required, SMMP advances or
contributes cash to meet SIP's requirements. SMMP has adequate resources to make
the necessary advances during the foreseeable future. In 2000, the Partnership
received net contributions of $11,000 from SMMP. These proceeds were used to pay
operating expenses incurred during the year.
6
Certain factors raise substantial doubt about the Partnership's ability to
continue as a going concern. As shown in the financial statements, the
Partnership has no operating assets and its only remaining real estate
investment is its minority interest in SIP. The other partner in SIP, SMMP, will
receive preferential distributions from SIP until its contributed capital is
returned. The Partnership does not anticipate receiving any cash distributions
from SIP in the near future. Management believes the Partnership will be able to
obtain any cash needed to fund future overhead expenditures from related parties
until such time as the Partnership engages in new activities or a decision is
made to liquidate the Partnership. The financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Partnership be unable to continue as a going concern.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and independent auditors' reports are
incorporated by reference to the Annual Report to the Limited Partners attached
as an Exhibit.
1. Reports of Independent Public Accountants
2. Consolidated Balance Sheets - December 31, 2000 and 1999
3. Consolidated Statements of Operations - for the years ended December
31, 2000, 1999 and 1998
4. Consolidated Statements of Changes in Partners' Equity (Deficit) -
for the years ended December 31, 2000, 1999 and 1998
5. Consolidated Statements of Cash Flows - for the years ended December
31, 2000, 1999 and 1998
6. Notes to Consolidated Financial Statements
7. Balance Sheets of Sorrento I Partners as of December 31, 2000 and
1999 and Statements of Operations, Changes in Partners' Equity
(Deficit) and Cash Flows for each of the three years in the period
ended December 31, 2000 and Independent Auditors' Report
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
On April 11, 2000, the Partnership dismissed Deloitte & Touche LLP ("D&T") as
its independent auditors. The reports of D&T on the Partnership's financial
statements of the fiscal years ended December 31, 1999 and 1998 did not contain
an adverse opinion, or disclaimer of opinion and were not qualified or modified
as to audit scope or accounting principles. The Partnership's managing general
partner approved the decision to change accountants. During the Partnership's
two most recent fiscal years and subsequent interim periods, there were no
disagreements with D&T on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedures, which
disagreements, if not resolved to the satisfaction of D&T would have caused it
to make reference to such disagreement in its reports.
The Partnership engaged Arthur Andersen LLP ("AA") to act as its independent
public accountants, effective April 11, 2000. During the two most recent fiscal
years and subsequent interim periods, the Partnership has not consulted AA on
items which (1) involved the application of accounting principles to a specified
transaction, either completed or proposed, or involved the type of audit opinion
that might be rendered on the Partnership's financial statements, or (2)
concerned the subject matter of a disagreement or a reportable event with the
Partnership's former accountant.
7
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Sierra Pacific Development Fund III ("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. CGS Real Estate Company, Inc. and its affiliates are engaged in real
estate management, leasing, ownership, and sales. The companies own or manage
more than ten million square feet of commercial real estate in Texas, Arizona,
Colorado, Missouri, California and the Carolinas.
The executive officers and directors of S-P Properties, Inc. are:
Approximate
Name Position Age time in office
- ---- -------- --- --------------
Thomas N. Thurber President and Director 50 6 years
Gregory J. Nooney, Jr. Vice President 69 3 years
Patricia A. Nooney Vice President 44 3 years
William J. Carden Assistant Secretary/Treasurer
and Director 56 6 years
Morris S. Cohen Director 63 2 years
Thomas N. Thurber - President and Director, S-P Properties, Inc. Mr. Thurber is
a Certified Public Accountant who began his career with Arthur Andersen & Co. in
1972. In 1979, he joined a major publicly traded real estate development firm
(Daon) where he became Controller for U.S. Operations. Subsequently, Mr. Thurber
served as Director of Real Estate for a developer of retail properties, and
Chief Financial Officer of a trust with significant investments in commercial
real estate. Mr. Thurber also serves as a director of Property Secured
Investments, Inc. Mr. Thurber holds a bachelors degree in accounting from
Florida State University.
Gregory J. Nooney, Jr. - Vice President, S-P Properties, Inc. Mr. Nooney also
has served as Chairman of the Board and Chief Executive Office of Brooklyn
Street Properties, Inc. since May 1983. He joined Brooklyn Street Properties,
Inc. in 1954 and served as President from 1969 to May 1983. Brooklyn Street
Properties, Inc., which was founded in 1945, is a real estate investment
company. In addition, Mr. Nooney was chairman and Chief Executive Officer of
Nooney Realty Trust, Inc. from 1984 through February 1998 and then served as
Vice Chairman from February 1998 through November 1999. Mr. Nooney is currently
Chairman of Coldwell Banker Commercial American Spectrum.
Patricia A. Nooney - Vice President, S-P Properties, Inc. Ms. Nooney is
President of Coldwell Banker Commercial American Spectrum, a wholly-owned
subsidiary of CGS Real Estate Company, Inc. She joined Brooklyn Street
Properties, Inc., in 1981 and has served as an officer since 1985. From 1990 to
November 1999, Ms. Nooney was President and Secretary of Nooney Realty Trust,
Inc.
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. He 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.
8
Morris S. Cohen - Director, S-P Properties, Inc. Mr. Cohen's extensive real
estate background includes negotiation of joint venture partnerships for
property acquisitions, production of syndication packages and direct
responsibilities for operations, finance, sales, leasing and property
management. Mr. Cohen was a senior level officer with major public and privately
held real estate companies and served as President of IDM Participating Income
Corporation from April 1995 to October 1996. Mr. Cohen is a graduate of Queens
College.
There have been no events under any bankruptcy act, no criminal proceedings, and
no judgements or injunctions material to the evaluation of the ability and
integrity of any director during the past five years.
SUMMARY OF 2000 AUDIT FIRM FEES
During 2000, the Partnership engaged Andersen as its principal auditors
to provide audit services. Audit fees of $30,184 represent services
provided in connection with the audit of the Partnership's consolidated and
subsidiary financial statements for the year ended December 31, 2000 and
review of interim financial information included in the Partnership's
quarterly reports on Form 10-Q during the year.
ITEM 11. MANAGEMENT REMUNERATION
The Registrant is a California Limited Partnership and has no officers or
directors. No options to purchase securities of the Registrant have been granted
to any person.
In accordance with the terms of the Partnership Agreement, certain affiliates of
the General Partner receive real estate brokerage commissions in connection with
the leasing of properties by the Partnership, broker fees in connection with
obtaining financing and receive from the Partnership certain management and
administrative services fees. These amounts are set forth in the Annual Report
to the Limited Partners attached as an Exhibit.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
None
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. Exhibits
1. Annual Report to the Limited Partners
2. Exhibit Number 27 - Selected Financial Data
B. Financial Statement Schedules
None
C. Reports on Form 8-K
None
9
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SIERRA PACIFIC DEVELOPMENT FUND III
a California Limited Partnership
S-P PROPERTIES, INC.
General Partner
Date: April 3, 2001 /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: April 3, 2001 /s/Thomas N. Thurber
----------------------------------- -----------------------------------
Thomas N. Thurber
President and Director
S-P Properties, Inc.
Date: April 3, 2001 /s/William J. Carden
----------------------------------- -----------------------------------
William J. Carden
Assistant Secretary/Treasurer and
Director
S-P Properties, Inc.
Date: April 3, 2001 /s/G. Anthony Eppolito
----------------------------------- -----------------------------------
G. Anthony Eppolito
Chief Accountant
S-P Properties, Inc.
10
SIERRA PACIFIC DEVELOPMENT FUND III
(A California Limited Partnership)
SELECTED FINANCIAL DATA
For the Years Ended December 31, 2000, 1999, 1998, 1997, and 1996
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, 2000 have been derived from the
audited consolidated financial statements of the Partnership. This information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and Notes thereto which are incorporated by reference to the Annual
Report to the Limited Partners attached as an Exhibit.
- --------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- ----------- -----------
REVENUES $ 0 $ 15,139 $ 93,656 $ 558,724 $ 735,569
OPERATING EXPENSES:
Total 13,679 14,752 37,044 952,104 1,061,188
Per dollar of revenues 0 0.97 0.40 1.70 1.44
INTEREST EXPENSE:
Total 0 0 0 299,404 264,206
Per dollar of revenues 0 0 0 0.54 0.36
NET (LOSS) INCOME FROM
CONTINUING OPERATIONS:
Total (25,815) (7,366) 37,625 (871,354) (470,012)
General Partner (25,815) (7,366) 37,625 (374,667) 0
Limited Partners 0 0 0 (496,687) (470,012)
Per unit (1) 0 0 0 (13.60) (12.87)
CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (13,679) 387 58,089 (508,265) (162,872)
CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 0 0 0 1,746,014 (499,590)
CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 11,057 2,400 (71,756) (1,320,586) 743,730
TOTAL ASSETS 1,100 3,722 935 20,739 6,271,935
PARTNERS' EQUITY (DEFICIT):
Total (370,223) (344,408) (337,042) (374,667) 496,687
General Partner (370,223) (344,408) (337,042) (374,667) 0
Limited Partners 0 0 0 0 496,687
LIMITED PARTNERS' EQUITY -
PER UNIT (1) 0 0 0 0 13.60
INCOME-PRODUCING PROPERTIES:
Number 0 0 0 0 1
Cost 0 0 0 0 10,229,216
Less: Accumulated depreciation 0 0 0 0 (2,801,334)
Valuation allowance 0 0 0 0 (1,600,000)
Net book value 0 0 0 0 5,827,882
INVESTMENT IN UNCONSOLIDATED
JOINT VENTURE (357,312) (340,614) (332,996) (333,783) (341,689)
NOTE PAYABLE - Related to income-
producing property 0 0 0 0 3,410,795
MINORITY INTEREST IN CONSOLIDATED
JOINT VENTURE 14,011 7,516 4,981 56,963 1,797,208
DISTRIBUTIONS PER UNIT (1) 0 0 0 0 0
(1) The net (loss) income, limited partners' equity and distributions per unit
are based upon the limited partnership units outstanding at the end of the
year, 36,521 in all years. The cumulative cash distributions per limited
partnership unit from inception to December 31, 2000 equal $11.19.
11
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Sierra Pacific Development Fund III
We have audited the accompanying consolidated balance sheet of Sierra Pacific
Development Fund III, a California limited partnership, and subsidiary (the
"Partnership") as of December 31, 2000, and the related consolidated statements
of operations, changes in partners' equity (deficit) and cash flows for the year
then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sierra
Pacific Development Fund III and subsidiary as of December 31, 2000, and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared
assuming that the Partnership will continue as a going concern. As discussed
in Note 1 to the financial statements, the Partnership has suffered recurring
losses from operations and has a net capital deficiency that raises
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Houston, Texas
March 26, 2001
12
INDEPENDENT AUDITORS' REPORT
To the Partners of
Sierra Pacific Development Fund III
We have audited the accompanying consolidated balance sheet of Sierra Pacific
Development Fund III, a California limited partnership, (the "Partnership") as
of December 31, 1999 and the related consolidated statements of operations,
changes in partners' equity (deficit) and cash flows for the years ended
December 31, 1999 and 1998. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sierra Pacific
Development Fund III as of December 31, 1999 and the results of its operations
and its cash flows for the years ended December 31, 1999 and 1998 in conformity
with accounting principles generally accepted in the United States of America.
The accompanying 1999 financial statements have been prepared assuming that the
Partnership will continue as a going concern. As described in Note 1 to the
financial statements, the Partnership's reduced operations, Partner's capital
deficiency, and lack of funds to pay operating expenses raise substantial doubt
about its ability to continue as a going concern. Management's plans concerning
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2000
13
SIERRA PACIFIC DEVELOPMENT FUND III AND SUBSIDIARY
(A California Limited Partnership)
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
December 31, December 31,
2000 1999
--------- ---------
ASSETS
Cash and cash equivalents $ 1,100 $ 3,722
--------- ---------
Total Assets $ 1,100 $ 3,722
========= =========
LIABILITIES AND PARTNERS' (DEFICIT)
Investment in unconsolidated
joint venture (Notes 1 and 4) $ 357,312 340,614
--------- ---------
Total Liabilities 357,312 340,614
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 6)
Minority interest in consolidated
joint venture (Note 3) 14,011 7,516
--------- ---------
Partners' (deficit) (Notes 1 and 5):
General Partner (370,223) (344,408)
Limited Partners:
60,000 units authorized,
36,521 issued and
outstanding 0 0
--------- ---------
Total Partners' (deficit) (370,223) (344,408)
--------- ---------
Total Liabilities and Partners' deficit $ 1,100 $ 3,722
========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
14
SIERRA PACIFIC DEVELOPMENT FUND III AND SUBSIDIARY
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
-------- -------- --------
REVENUES:
Other income (Note 3) $ 0 $ 15,139 $ 93,656
-------- -------- --------
Total revenues 0 15,139 93,656
-------- -------- --------
EXPENSES:
Operating expenses:
Legal and accounting 13,679 14,651 16,818
General and administrative 0 101 20,226
-------- -------- --------
Total operating expenses 13,679 14,752 37,044
-------- -------- --------
(LOSS) INCOME BEFORE PARTNERSHIP'S SHARE
OF UNCONSOLIDATED JOINT VENTURE
(LOSS) INCOME (13,679) 387 56,612
-------- -------- --------
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE (LOSS) INCOME (16,698) (7,618) 787
(LOSS) INCOME BEFORE MINORITY INTEREST'S
SHARE OF CONSOLIDATED JOINT VENTURE
LOSS (INCOME) (30,377) (7,231) 57,399
-------- -------- --------
MINORITY INTEREST'S SHARE OF CONSOLIDATED
JOINT VENTURE LOSS (INCOME) (Note 3) 4,562 (135) (19,774)
-------- -------- --------
NET (LOSS) INCOME $(25,815) $ (7,366) $ 37,625
======== ======== ========
Net (loss) income per limited partnership
unit (Note 1) $ 0 $ 0 $ 0
======== ======== ========
The accompanying notes are an integral part
of these consolidated financial statements.
15
SIERRA PACIFIC DEVELOPMENT FUND III AND SUBSIDIARY
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' (DEFICIT)
For the Years Ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
Limited Partners Total
--------------------- General Partners'
Per Unit Total Partner Equity
--------- --------- --------- ---------
Partners' (deficit) - January 1, 1998 $ 0 $ 0 $(374,667) $(374,667)
Net income 0 0 37,625 37,625
--------- --------- --------- ---------
Partners' (deficit) - December 31, 1998 0 0 (337,042) (337,042)
Net loss 0 0 (7,366) (7,366)
--------- --------- --------- ---------
Partners' (deficit) - December 31, 1999 0 0 (344,408) (344,408)
Net loss 0 0 (25,815) (25,815)
--------- --------- --------- ---------
Partners' (deficit) - December 31, 2000 $ 0 $ 0 $(370,223) $(370,223)
========= ========= ========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
16
SIERRA PACIFIC DEVELOPMENT FUND III AND SUBSIDIARY
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (25,815) $ (7,366) $ 37,625
Adjustments to reconcile net (loss) income
to cash (used in) provided by operating activities:
Partnership's share of unconsolidated
joint venture loss (income) 16,698 7,618 (787)
Minority interest's share of consolidated
joint venture (loss) income (4,562) 135 19,774
Decrease in other receivables 0 0 6,137
Decrease in accrued and other liabilities 0 0 (4,660)
--------- --------- ---------
Net cash (used in) provided by operating activities (13,679) 387 58,089
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from minority investor 20,000 16,400 36,900
Distributions to minority investor (8,943) (14,000) (108,656)
--------- --------- ---------
Net cash provided by (used in) financing activities 11,057 2,400 (71,756)
--------- --------- ---------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (2,622) 2,787 (13,667)
CASH AND CASH EQUIVALENTS - Beginning of year 3,722 935 14,602
--------- --------- ---------
CASH AND CASH EQUIVALENTS - End of year $ 1,100 $ 3,722 $ 935
========= ========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
17
SIERRA PACIFIC DEVELOPMENT FUND III AND SUBSIDIARY
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Sierra Pacific Development Fund III (the "Partnership") was organized on June 5,
1984 in accordance with the provisions of the California Uniform Limited
Partnership Act to acquire, develop and operate certain commercial and
industrial real properties. S-P Properties, Inc. is the General Partner and
manager of the Partnership.
In February 1985, the Partnership acquired land in San Diego, California as the
first step in the development of Sierra Sorrento I. This 43,100 square foot
industrial/warehouse project was completed in February 1986. In October 1986,
the Partnership acquired land in Anaheim, California for the development of
Sierra Vista. This property, a 102,855 square foot industrial/office project,
was completed in April 1988.
In April 1993, the Partnership created a California general partnership Sorrento
I Partners ("SIP") with Sierra Mira Mesa Partners ("SMMP") to facilitate cash
contributions by SMMP for the continued development and operation of the Sierra
Sorrento I property. SIP is an unconsolidated joint venture of the Partnership.
In February 1994, the Partnership formed a California general partnership with
SMMP known as Sierra Vista Partners ("SVP") to facilitate cash contributions by
SMMP for the continued development and operation of the Sierra Vista property.
The Partnership contributed the properties and SMMP contributed cash to these
newly formed partnerships. SMMP has made additional contributions each year to
these partnerships since inception.
In October 1997, the Sierra Vista property was sold for $5,630,000. The
Partnership received net cash proceeds of $2,140,598 from the sale. In
accordance with the SVP joint venture agreement, these proceeds were distributed
to SMMP. Under the terms of the agreement, SMMP receives preferential cash
distributions of available "Distributable Funds" from the sale of the property
to the extent of its capital contributions. SMMP had made net contributions of
$3,335,204 to the Partnership through the sale date.
Going Concern Considerations
Certain factors raise substantial doubt about the Partnership's ability to
continue as a going concern. As shown in the financial statements, the
Partnership has no operating assets and its only remaining real estate
investments is its minority interest in SIP. The other partner in SIP, SMMP,
will receive preferential distributions from SIP until its contributed capital
is returned. The Partnership does not anticipate receiving any cash
distributions from SIP in the near future. Management believes the Partnership
will be able to obtain any cash needed to fund future overhead expenditures from
related parties until such time as the Partnership engages in new activities or
a decision is made to liquidate the Partnership. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Partnership be unable to continue as a going concern.
The Partnership has suffered recurring losses from operations and has a net
capital deficiency that raises substantial doubt about its ability to continue
as a going concern. Management anticipates the operations of the Partnership
will not require significant amounts of cash in the future and any cash
requirements of SIP will be funded by SMMP. Management believes the Partnership
will be able to obtain any cash needed to fund future overhead expenditures from
related parties until such time as the Partnership engages in new activities or
a decision is made to liquidate the Partnership. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
18
Sierra Pacific Development Fund III
Notes to Consolidated Financial Statements
Page two
Basis of Financial Statements
The consolidated financial statements include the accounts of the Partnership
and Sierra Vista Partners, a majority owned joint venture as of December 31,
2000 (see Note 3). All significant intercompany balances and transactions have
been eliminated in consolidation.
The Partnership maintains its books and prepares its financial statements in
accordance with accounting principles generally accepted in the United States.
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 accounting principles
generally accepted in the Untied States 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
Cash include highly liquid, short-term investments with original maturities of
three months or less.
Investment in Unconsolidated Joint Venture
The investment in the unconsolidated joint venture is stated at cost and is
adjusted for the Partnership's share in earnings or losses and cash
contributions to or distributions from the joint venture (equity method).
Rental Income
Rental income is recognized on a straight-line method over the term of the
related operating lease in accordance with the provisions of Statement of
Financial Accounting Standard No. 13, "Accounting for Leases."
The Partnership periodically reviews its outstanding receivables for
uncollectibility and provides a provision for bad debts for those accounts it
believes it may not collect in full.
Calculation of Equity (Deficit) and Net Income (Loss) Per Limited Partnership
Unit
Equity (deficit) and net income (loss) per limited partnership unit are
determined by dividing the Limited Partners' equity and net income (loss) by
36,521, the number of limited partnership units outstanding for all periods.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
requires a company to recognize all derivative instruments (including certain
derivative instruments embedded in other contracts) as assets or liabilities in
its balance sheet and measure them at fair value. The statement requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. SFAS No. 133, as amended, is
effective for fiscal years beginning after June 15, 2000. The Partnership has
evaluated SFAS No. 133 and the impact on existing accounting policies and
financial reporting disclosures. The Partnership believes the adoption of SFAS
No. 133 will not have a material effect on its financial statements.
19
Sierra Pacific Development Fund III
Notes to Consolidated Financial Statements
Page three
2. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS
No such transactions were incurred for the years ended December 31, 2000, 1999,
1998.
3. INCOME-PRODUCING PROPERTIES
On April 1, 1993, the Sierra Sorrento I property was transferred to a joint
venture called SIP (Note 4). The historical cost basis of the property and
related assets at the date of transfer was $2,662,877 and the outstanding
balance of the related debt was $2,986,024 with accrued interest of $22,824.
On February 1, 1994, the Partnership formed a joint venture with SMMP, an
affiliate. The joint venture, known as SVP, was formed as a California
general partnership to develop and operate the Sierra Vista property. The
Partnership received an 81.5% equity interest for its contribution of Sierra
Vista. Such interest was computed based upon the Partnership's contribution
relative to the estimated fair value of SVP's net assets at the date of
formation of the joint venture. SMMP was allocated an 18.5% initial equity
interest in SVP in exchange for its $600,000 cash contribution ($1,396,203,
net, through December 31, 1997). SMMP made additional cash contributions of
$36,900, $16,400, and $20,000 and received distributions of $108,656, $14,000
and $8,943 during 1998, 1999 and 2000, respectively. The percentage interests
of the Partnership and SMMP are to be adjusted every January 1 during the
term of SVP, beginning January 1, 1995 and ending December 31, 2013 unless
terminated sooner, based upon net contributions made through the preceding
December 31. Accordingly, as of January 1, 1998, 1999 and 2000, the
Partnership's interest in SVP was changed to 65.49%, 66.68% and 66.64%,
respectively, and SMMP's interest was changed to 34.51%, 33.32%, and 33.36%,
respectively. On January 1, 2001, the Partnership's interest in SVP will be
decreased to 66.45% and SMMP's interest will be increased to 33.55%.
In October 1997, the Sierra Vista property was sold for $5,630,000. The
Partnership received net cash proceeds of $2,140,598 from the sale for its
52.95% interest in this property and the purchaser assumed the Partnership's
$3,044,397 debt on the property. The Partnership also incurred additional
selling costs and credited security deposits and prorata rents for October 1997
to the buyer. In accordance with the SVP joint venture agreement, these proceeds
were distributed to SMMP. Under the terms of the agreement, SMMP received
preferential cash distributions of available "Distributable Funds" from the sale
of the property to the extent of its capital contributions. SMMP had made net
contributions of $3,335,204 to the Partnership through the sale date. In 1998,
the Partnership received a cash payment of $94,000, recorded as other income,
related to an adjustment to the refinancing of the debt on the Sierra Vista
property that took place prior to the sale of the property in 1997. Other income
of $15,000 was recorded in 1999 principally as a result of refunds associated
with prior year operations.
20
Sierra Pacific Development Fund III
Notes to Consolidated Financial Statements
Page four
4. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
SIP was formed on April 1, 1993 between the Partnership and SMMP, an affiliate,
to develop and operate the real property known as Sorrento I, an industrial
building located in San Diego, California. One tenant 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.
At December 31, 2000, the Partnership owned a 16.76% equity interest in SIP with
its contribution of Sorrento I and the related debt; SMMP owned an 83.24% equity
interest as a result of its $1,557,370 net cash contributions through 1999. In
accordance with the SIP joint venture agreement, proceeds shall first be
distributed to SMMP as a return of capital in proportion to its aggregate
unreturned contributed capital and then to the Partnership in proportion to its
aggregate unreturned contributed capital. Any remaining proceeds shall first be
distributed pro rata in proportion to the partners' positive balances in their
capital accounts and then in accordance with their percentage interest. On
January 1, 2001, the Partnership and SMMP owned an 18.72% and 81.28% equity
interest in SIP, respectively.
SIP had a $750,000 note payable to CGS which was modified on September 30, 1997.
The interest rate remained fixed at 9.34% through October 1998, at which time
the rate converted to the one-year treasury rate plus 375 basis points. The note
was amortized over a 210-month term and payments were $6,048 per month,
principal and interest, inclusive until maturity in March 2015.
In August 1999, the CGS note, with an outstanding balance of $607,693, was
repaid. On the same date, SIP entered into a new loan agreement with Finova
Realty Capital, Inc. in the amount of $1,637,500. This loan, which is secured by
the Sorrento I property, bears interest at 8.75% per annum. Monthly payments of
$12,882, consisting of both principal and interest, are due until maturity in
September 2009. The note balance as of December 31, 2000 was $1,625,540.
Reference is made to the audited financial statements of SIP included herein.
5. PARTNERS' EQUITY (DEFICIT)
Accrual basis profits and losses resulting from operations of the Partnership
are allocated 99% to the Limited Partners and 1% to the General Partner. During
1997, the General Partner was allocated losses to the extent they were in excess
of the Limited Partners' capital balances since the Limited Partners cannot be
allocated losses that would result in a negative capital account balance.
Profits recognized in 1998 were allocated to the General Partner to offset
previous losses. The losses recognized in 1999 and 2000 were allocated solely to
the General Partner.
Upon any sale, refinancing or other dispositions of the Sorrento I property,
allocations and distributions are 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, capital contributions net of any
distributions. Thereafter, distributions generally will be allocated 1% to
the General Partner and 99% to the Limited Partners until the Limited
Partners have received distributions from all sources equal to the sum of
their respective priority distributions (an amount equal to 15% per annum
cumulative on each Limited Partner's unreturned capital).
However, after the Limited Partners have received distributions of sale or
financing proceeds equal to their unreturned capital plus distributions from all
sources equal to a cumulative but not compounded return of 6% per annum on their
unreturned capital, the General Partner may be entitled to special distributions
not to exceed 3% of the gross sales prices of properties sold by the
Partnership. Thereafter, the General Partners will be entitled to receive
incentive distributions which, when aggregated with the 1% distributions to the
General Partner described in the preceding sentence, will equal 20% of the total
net sale or financing proceeds available for distribution to the Partners. Any
remaining sale or financing proceeds will be distributed to the Limited
Partners.
21
Sierra Pacific Development Fund III
Notes to Consolidated Financial Statements
Page five
The proceeds from the sale of the Sierra Vista property were required to be
distributed to SMMP under the provisions of the joint venture agreement with
SMMP and thus were not allocated in accordance with the provisions described
above.
6. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Partnership occasionally becomes party to
litigation. In the opinion of management, pending or threatened litigation
involving the Partnership will not have a material adverse effect on its
financial condition.
7. PENDING TRANSACTION
CGS is continuing the development of a plan which will combine the property
owned by SIP with the properties of other real estate partnerships managed by
CGS and its affiliates. These limited partnerships own office properties,
industrial properties, shopping centers and residential apartment properties. It
is expected that the acquiror, American Spectrum Realty, Inc. ("ASR"), would
qualify as a real estate investment trust. Limited partners would receive shares
of common stock in ASR, which would be listed on a national securities exchange.
The transaction is subject to the approval of the limited partners of the
Partnerships. ASR filed a Registration Statement on Form S-4 August 14, 2000
relating to the solicitation of consents with the Securities and Exchange
Commission. The Registration Statement was amended on February 14, 2001.
22
Sorrento I Partners
(A California General Partnership)
Balance sheets as of December 31, 2000 and 1999 and statements of operations,
changes in general partners' equity (deficit) and cash flows for each of the
three years in the period ended December 31, 2000 and Report of Independent
Public Accountants
23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Sorrento I Partners
We have audited the accompanying balance sheet of Sorrento I Partners, a
California general partnership, (the "Partnership") as of December 31, 2000 and
the related statements of operations, changes in general partners' equity
(deficit) and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 audit provides 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, 2000 and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
March 26, 2001
24
INDEPENDENT AUDITORS' REPORT
To the Partners of
Sorrento I Partners
We have audited the accompanying balance sheet of Sorrento I Partners, a
California general partnership, (the "Partnership") as of December 31, 1999 and
the related statements of operations, changes in general partners' equity
(deficit) and cash flows for the years ended December 31, 1999 and 1998. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sorrento I Partners as of
December 31, 1999 and the results of its operations and cash flows for the years
ended December 31, 1999 and 1998 in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2000
25
SORRENTO I PARTNERS
(A California General Partnership)
BALANCE SHEETS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
December 31, December 31,
2000 1999
---------- ----------
ASSETS
Cash and cash equivalents $ 38,435 $ 249,534
Receivables:
Unbilled rent (Notes 1 and 4) 44,584 50,533
Income-producing property - net of accumulated
depreciation of $844,251 and $741,797
(Notes 1, 4 and 5) 2,138,527 2,240,981
Other assets - net of accumulated amortization of
$126,383 and $95,882 (Notes 1, 2 and 3) 168,911 154,108
---------- ----------
Total Assets $2,390,457 $2,695,156
========== ==========
LIABILITIES AND GENERAL PARTNERS' EQUITY
Accounts payable $ 13,258 $ 13,690
Note payable (Note 5) 1,625,540 1,635,054
---------- ----------
Total Liabilities 1,638,798 1,648,744
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)
General Partners' equity (Notes 1 and 6) 751,659 1,046,412
---------- ----------
Total Liabilities and General Partners' equity $2,390,457 $2,695,156
========== ==========
The accompanying notes are an integral part
of these financial statements.
26
SORRENTO I PARTNERS
(A California General Partnership)
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
--------- --------- ---------
Revenues:
Rental income (Note 1) $ 283,685 $ 283,985 $ 282,322
--------- --------- ---------
Total revenues 283,685 283,985 282,322
--------- --------- ---------
Expenses:
Operating expenses:
Depreciation and amortization 132,954 130,639 127,662
Property taxes and insurance 8,964 6,639 7,762
Administrative fees (Note 3) 40,485 45,025 38,922
Maintenance and repairs 0 42 395
Management fees (Note 3) 19,637 16,707 17,189
Legal and accounting 24,146 15,809 17,650
General and administrative 11,926 9,947 7,413
Bad debt expense 0 4,770 0
Other operating expenses 201 29,884 5,574
--------- --------- ---------
Total operating expenses 238,313 259,462 222,567
Interest 145,001 88,648 57,926
--------- --------- ---------
Total expenses 383,314 348,110 280,493
--------- --------- ---------
NET (LOSS) INCOME $ (99,629) $ (64,125) $ 1,829
========= ========= =========
The accompanying notes are an integral part
of these financial statements.
27
SORRENTO I PARTNERS
(A California General Partnership)
STATEMENTS OF CHANGES IN GENERAL PARTNERS' EQUITY (DEFICIT)
For the Years Ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
General Partners
-------------------------------------------
Sierra Pacific Sierra
Development Mira Mesa
Fund III Partners Total
-------------- ----------- -----------
General Partners' equity (deficit) - January 1, 1998 $ (333,783) $ 2,321,098 $ 1,987,315
Net income 787 1,042 1,829
Contributions 0 8,500 8,500
Distributions 0 (118,000) (118,000)
----------- ----------- -----------
General Partners' equity (deficit) - December 31, 1998 (332,996) 2,212,640 1,879,644
Net loss (7,618) (56,507) (64,125)
Contributions 0 65,313 65,313
Distributions 0 (834,420) (834,420)
----------- ----------- -----------
General Partners' equity (deficit) - December 31, 1999 (340,614) 1,387,026 1,046,412
Net loss (16,698) (82,931) (99,629)
Contributions 0 89,160 89,160
Distributions 0 (284,284) (284,284)
----------- ----------- -----------
General Partners' equity (deficit) - December 31, 2000 $ (357,312) $ 1,108,971 $ 751,659
=========== =========== ===========
The accompanying notes are an integral part
of these financial statements.
28
SORRENTO I PARTNERS
(A California General Partnership)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (99,629) $ (64,125) $ 1,829
Adjustments to reconcile net (loss) income
to cash (used in) provided by operating activities:
Depreciation and amortization 132,954 130,639 127,662
Bad debt expense 0 4,770 0
Decrease (increase) in rent receivable 5,949 (5,188) (10,439)
Decrease (increase) in other receivables 0 14,572 (271)
Increase in other assets (45,303) (70,498) 0
(Decrease) increase in accrued and other liabilities (432) (6,847) 4,413
----------- ----------- -----------
Net cash (used in) provided by operating activities (6,461) 3,323 123,194
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions 0 (5,278) 0
----------- ----------- -----------
Net cash used in investing activities 0 (5,278) 0
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions by the General Partners 89,160 65,313 8,500
Distributions to the General Partners (284,284) (834,420) (118,000)
Proceeds from note payable secured by property 0 1,637,500 0
Principal payments on notes payable (9,514) (618,669) (15,604)
----------- ----------- -----------
Net cash (used in) provided by financing activities (204,638) 249,724 (125,104)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (211,099) 247,769 (1,910)
CASH AND CASH EQUIVALENTS - Beginning of period 249,534 1,765 3,675
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - End of period $ 38,435 $ 249,534 $ 1,765
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 145,073 $ 76,328 $ 57,926
=========== =========== ===========
The accompanying notes are an integral part
of these financial statements.
29
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 ($2,326,477, net through December 31,
1997) for a 55.03% interest in SIP and SPDFIII contributed the property and all
associated encumbrances for a 44.97% interest. During 1998, 1999 and 2000, SMMP
contributed an additional $8,500, $65,313 and $89,160 and received distributions
amounting to $118,000, $834,420 and $284,284 respectively. The partnership
agreement calls for a recalculation of the percentage ownership interest each
year on January 1 to account for the Partner's aggregate capital contributions
and distributions since inception through the preceding December 31.
Accordingly, as of January 1, 1998, 1999, and 2000, SPDFIII's interest in SIP
was changed to 11.41%, 11.88% and 16.76%, respectively, and SMMP's interest was
changed to 88.59%, 88.12% and 83.24%, respectively. On January 1, 2001,
SPDFIII's interest will be increased to 18.72% and SMMP's interest will be
reduced to 81.28% to reflect the 2000 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.
Basis of Financial Statements
SIP maintains its books and prepares its financial statements in accordance with
accounting principles generally accepted in the United States. 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 accounting principles
generally accepted in the United States 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, 2000 and 1999 consist of cash
and cash equivalents, receivables, 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 of management, the fair value of the note payable approximates the
carrying value based on market rates at December 31, 2000.
30
Sorrento I Partners
Notes to Financial Statements
Page two
Income-Producing Properties
Property is 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 are carried at cost and depreciated on the straight-line
method 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.
SIP regularly evaluates long-lived assets for impairment in accordance with
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") 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 such impairments have been recognized by the
Partnership for the year ended December 31, 2000.
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, 2000. 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 write-downs which
could be material in subsequent years if real estate markets or local economic
conditions change.
Other Assets
Deferred leasing costs represent costs incurred to lease properties and are
amortized over the life of the related lease using the straight line method of
accounting.
Deferred loan costs represent costs incurred to obtain financing and are
amortized over the life of the related loan using the straight line method of
accounting.
Rental Income and Rent Receivable
Rental income is recognized on the straight-line method over the term of the
related operating lease in accordance with the provisions of Statement of
Financial Accounting Standards No. 13, "Accounting for Leases".
Rent receivable consists of (a) unbilled rent - the difference between rent
recognized on the straight-line method and actual cash due; and (b) billed rent
- - rent due but not yet received.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
requires a company to recognize all derivative instruments (including certain
derivative instruments embedded in other contracts) as assets or liabilities in
its balance sheet and measure them at fair value. The statement requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. SFAS No. 133, as amended, is
effective for fiscal years beginning after June 15, 2000. The Partnership has
evaluated SFAS No. 133 and the impact on existing accounting policies and
financial reporting disclosures. The Partnership believes the adoption of SFAS
No. 133 will not have a material effect on its financial statements.
31
Sorrento I Partners
Notes to Financial Statements
Page three
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, which summarizes certain of the SEC staff's views on applying
generally accepted accounting principles to revenue recognition in financial
statements. SIP adopted the accounting provisions of SAB 101 in 2000. The
implementation of SAB 101 did not have a significant effect on SIP's financial
condition or results of operations.
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts, at December 31,
2000 and 1999 is as follows:
2000 1999
-------- --------
Other assets:
Deferred loan costs, net of accumulated
amortization of $6,822 and $2,007 $ 41,735 $ 46,550
Deferred leasing costs, net of accumulated
amortization of $119,561 and $93,876 59,931 85,616
Prepaid expenses 3,553 560
Tax impounds 4,886 2,675
Tenant Improvements reserve 58,806 18,707
-------- --------
$168,911 $154,108
======== ========
3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS
Affiliates of the General Partner receive a monthly management fee totaling 6%
of the gross rental income (as defined in the partnership agreement) collected
from the property or $600, whichever is greater. Management fees paid to the
affiliates for the years ended December 31, 2000, 1999, and 1998 were $19,637,
$16,707, and $17,189, respectively.
SIP reimburses an affiliate of S-P Properties, Inc. for expenses incurred by the
affiliate for services provided to SIP such as accounting, data processing and
similar services. The affiliate was reimbursed $40,485, $45,025, and $38,922,
for such services for the years ended December 31, 2000, 1999 and 1998,
respectively.
During 1996, SIP made a non-interest bearing advance to an affiliate in the
amount of $4,770. This advance was deemed uncollectible and subsequently written
off to bad debt expense in 1999.
See Note 5 for note payable transactions with related parties.
32
Sorrento I Partners
Notes to Financial Statements
Page four
4. INCOME-PRODUCING PROPERTIES
At December 31, 2000 and 1999 the total cost and accumulated depreciation of the
property were as follows:
2000 1999
----------- -----------
Land $ 1,305,518 $ 1,305,518
Building and improvements 1,677,260 1,677,260
----------- -----------
Total 2,982,778 2,982,778
Accumulated depreciation (844,251) (741,797)
----------- -----------
Net $ 2,138,527 $ 2,240,981
=========== ===========
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
- ------------ ------------- -------------
2001 $283,635 $295,152
2002 283,635 306,960
2003 94,546 104,288
-------- --------
Total $661,816 $706,400
======== ========
SIP relied on one tenant for 100% of rental income for 2000, 1999 and 1998,
respectively. 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 $750,000 note payable to CGS which was modified on September 30, 1997.
The interest rate remained fixed at 9.34% through October 1998, at which time
the rate converted to the one-year treasury rate plus 375 basis points. The note
was amortized over a 210-month term and called for monthly principal and
interest payments of $6,048 until maturity in March 2015.
In August 1999, the CGS note with an outstanding balance of $607,693 was repaid.
On the same date, SIP entered into a new loan agreement with Finova Realty
Capital, Inc. in the amount of $1,637,500. Capitalized loan costs paid to Finova
Realty Capital, Inc. were $48,557. This loan, which is secured by the Sorrento I
property, bears interest at 8.75% per annum. Principal and interest payments of
$12,882 are due and payable monthly until the loan matures in September 2009. In
connection with the repayment of the CGS note, SIP paid $29,528 to CGS related
to late fees which were included in other operating expenses in the statement of
operations for 1999. The note balance as of December 31, 2000 was $ 1,625,540.
33
Sorrento I Partners
Notes to Financial Statements
Page five
Annual maturities on the Finova loan as of December 31, 2000 are: $12,860 in
2001; $14,031 in 2002; $15,309 in 2003; $16,704 in 2004; $18,225 in 2005; and
$1,548,411 thereafter.
6. GENERAL PARTNERS' EQUITY (DEFICIT)
In accordance with the partnership agreement, accrual basis losses resulting
from operations of the partnership are first allocated to the General Partners
in proportion to the relative amounts of net cumulative partnership profits
until such allocated losses equal the previously allocated net cumulative
partnership profits. Then, losses are allocated in proportion to the Partners'
percentage interests as computed January 1 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.
Distributions made to the Partners during the year are made from distributable
funds, those funds at the end of each calendar quarter in excess of the working
capital requirements as determined by the Partners. Distributions are made to
the partners as follows: a) first, to SMMP until it has received an aggregate
amount equal to the sum of its capital contributions to the Partnership; b)
second to Fund III until it has received an aggregate amount equal to the sum of
its capital contributions; and c) third, to the Partners in accordance with
their respective percentage interests for the year in which the distribution is
made.
Upon dissolution of the partnership, any proceeds should be distributed first to
SMMP 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.
7. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Partnership occasionally becomes party to
litigation. In the opinion of management, pending or threatened litigation
involving the Partnership will not have a material adverse effect on its
financial condition.
34
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
Gregory J. Nooney, Jr. Vice President
Patricia A. Nooney Vice President
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.
35