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: 0-12036
SIERRA PACIFIC DEVELOPMENT FUND II
(A California Limited Partnership)
State of California 95-3856271
- ---------------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or 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:
120,000 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 II (the
"Partnership") is a California limited partnership that was formed in April 1983
for the purpose of acquiring, developing, and operating commercial and
industrial real estate.
The Partnership's activities have involved the ownership and operation of four
real estate projects in Texas:
Rentable
Square
Project name, location Type of real estate Footage
---------------------- ------------------- -------
Sierra Technology Center, Austin (A) Industrial/office 108,205
Sierra Westlakes, San Antonio Industrial/office 95,370
Sierra Southwest Pointe, Houston Industrial/warehouse 101,102
5850 San Felipe, Houston (B) Office 100,258
(A) Sold December 1994.
(B) Acquired December 1994 as partial compensation for the sale of
Sierra Technology Center.
In December 1997, Sierra Southwest Point LLC ("SSPLLC") 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 Development
Fund II the property known as Sierra Southwest Pointe, 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 the conduct, promotion or
attainment of the business or purposes otherwise set forth. The Sierra
Southwest Pointe property was transferred at no cost from the Partnership to
SSPLLC. The accounts of SSPLLC are consolidated into the financial statements
of the Partnership since the date of formation and all significant
intercompany transactions are eliminated in consolidation. All entities in
which the Partnership has a controlling equity interest are consolidated in
the financial statements.
In December 1994, the Partnership sold Sierra Technology Center for
$6,000,000. The sale proceeds were received in cash, a note receivable from
the buyer, and equity in the 5850 San Felipe property. A gain of $539,835 was
recorded in 1994 with an additional gain of $736,271 deferred to subsequent
years, to be recognized when the note receivable is collected.
In 1985, Sierra Mira Mesa Partners ("SMMP"), a California general
partnership, was formed with Sierra Pacific Pension Investors `84
("SPPI'84"). 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 51%; the remaining 49%
was owned by SPPI'84. Effective December 31, 1996, the general partners
amended the partnership agreement to allow for adjustments in the sharing
ratio on January 1 each year based upon the relative net contributions and
distributions since inception of each general partner. 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. As a result, the sharing ratio in effect for
1998, 1999 and 2000 was 33.74%, 33.01% and 30.17%, respectively, for the
Partnership and 66.26%, 66.99% and 69.83%, respectively, for SPPI'84. During
2000, SMMP made net distributions of $1,506,795 to the Partnership and
$563,993 to SPPI'84. The net distributions received from SMMP were primarily
used by the Partnership as a source for additional funding made on its trust
deed note receivable from an affiliate of the General Partner. Accordingly,
on January 1, 2001, the sharing ratio will be decreased to 19.68% for the
Partnership and increased to 80.32% for SPPI'84 to reflect the 2000
contributions and distributions.
As of December 31, 2000, SMMP also holds an 83.24% interest in Sorrento I
Partners (a California general partnership with Sierra Pacific Development Fund
III formed in 1993), a 43.92% interest in Sorrento II Partners (a California
general partnership with Sierra Pacific Institutional Properties V formed in
1993), a 5.08% interest in Sierra Creekside Partners (a California general
partnership with Sierra Pacific Development Fund formed in 1994), and a 33.36%
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 are included in the
Annual Report to the Limited Partners attached as an Exhibit.
(b.) NARRATIVE DESCRIPTION OF BUSINESS. The Partnership owns and operates three
projects in Texas as described above. Each of the projects is occupied by more
than one tenant, the most significant of which is Sears at Sierra
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Westlakes. Rental income from Sears totaled $432,000, or 15%, of total rental
income for the year ended December 31, 2000.
There is significant competition in the office and industrial building rental
market in the Partnership's trade area. Appraisals performed at the end of 1994
identified numerous projects near the Partnership's properties 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 August 5, 1983, the
investment objectives were described as follows:
"The Partnership has been formed to acquire and operate commercial and
industrial real properties, including both properties which are to be developed
by the Partnership or are under development or construction and properties which
are newly-constructed or have operating histories. The principal investment
objectives of the Partnership 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 the Partnership's real estate
investments, which, if substantial, may disproportionately benefit holders of
Class A Units; (iii) to provide the Limited Partners with cash distributions
from operations; (iv) to provide federal income tax deductions so that all or a
portion of any cash from operations distributable to the holders of Class B
Units 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. There is no assurance that such objectives will be attained."
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.
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 its real estate investments after a three to five year holding
period has been delayed indefinitely. As of December 31, 2000, the Partnership
had paid cash distributions of $64.80 for each $250 unit investment and
remaining partners' equity was computed at $135.71 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 $200.51.
CGS Real Estate Company, Inc. ("CGS"), an affiliate of the general partner, is
continuing the development of a plan which will combine the Partnership's
properties 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 acquirer, 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.
ITEM 2. PROPERTIES
The Partnership owns three properties in Texas including one office building and
two industrial buildings. The three buildings represent 296,730 square feet of
rentable space. Details of the individual properties and the respective
tenants/leases follow. During 2000, the Partnership owned a 30.17% interest in a
fourth property - Sierra Mira Mesa, an office building in San Diego, California.
The Partnership also had an indirect 25.11% interest in an industrial property
known as Sorrento I in San Diego, California. Ownership interest in both of
these properties is subject to adjustment yearly based upon the relative net
contributions of the partners.
5850 San Felipe - Houston, Texas
This property includes one office building comprising 100,258 rentable square
feet and was 97% occupied at December 31, 2000. The average effective annual
rent per square foot at December 31, 2000 was $11.97. The principal businesses
carried on from the building are of the service sector - executive suites,
property management, health care and governmental services.
The property was encumbered by a mortgage lien in favor of Mutual Life Insurance
Company of New York with a principal balance of $3,000,000 at December 31, 2000.
In March 1996, the loan was modified to reduce the interest rate on this debt to
5% from the previous 8.5% in exchange for a principal paydown of $1,002,000. The
loan
3
requires monthly, interest-only payments through April 2004, the loan maturity
date. Assuming no prepayment of principal, the principal balance due at maturity
will be $3,000,000. No prepayment penalty is associated with this mortgage loan.
Summary of Significant Tenants
As of December 31, 2000, twenty-eight tenants occupy the office building. Two
tenants, an executive suite service company and health care service company,
occupy more than ten percent of the rentable square footage of the building.
Details of the significant leases are as follows:
Square Percent of Effective Effective Percent of
Feet Rentable Rent Per Rent Per Gross
Tenants of 5850 San Felipe Occupied Square Feet Square Foot Annum Annual Rent Expiration of Lease
- ----------------------------------------------------------------------------------------------------------------------
Third Coast Business Centers 17,502 17% $ 9.26 $ 162,099 14% December 2004
Kimberly Home Health 10,903 11% 10.90 118,874 10% September 2001
Kimberly Home Health 1,746 2% 13.00 22,698 2% April 2003
Tenants Occupying < 10% sq ft 67,200 67% 12.82 861,706 74% Various
---------------------------------------------------------
Total Rented Space 97,351 97% $ 11.97 $1,165,377 100%
Vacancies 2,907 3%
----------------
Total Rentable Space 100,258 100%
================
Reference is made to Item 13 of Form 10-K for a further discussion of Third
Coast Business Centers.
Summary of Leases by Expiration
Two tenants of 5850 San Felipe are on month to month lease; the remaining
twenty-six tenants' leases are scheduled to expire over the next seven years as
indicated in the table below.
Year of expiration 2001 2002 2003 2004 2005 2006 2007 Totals
Number of leases 5 8 8 2 2 0 1 26
Percent of tot. leasess 18% 29% 29% 7% 7% 0% 4% 94%
Tot. area (sq. feet) 20,600 20,152 24,055 19,509 2,811 0 6,656 93,783
Annual rent $ 230,225 $ 257,517 $ 312,122 $ 189,900 $ 40,314 $ 0 $ 90,240 $1,120,318
Per. gross annual rent 20% 22% 27% 16% 3% 0% 8% 96%
Sierra Southwest Pointe - Houston, Texas
This property includes one industrial building comprising 101,102 rentable
square feet and was 81% occupied at December 31, 2000. The average effective
annual rent per square foot at December 31, 2000 was $6.41. The principal
businesses carried on from the building are healthcare, manufacturing, retail,
fitness, and church services.
The property was encumbered by a mortgage lien in favor of American General
Mortgage Company with a principal balance of $1,069,837 at September 30, 1997,
the loan maturity date. The mortgage bore interest at 10% and was payable in
monthly installments of $14,207 through September 1997, the loan maturity date.
Upon maturity of this loan, Heller Financial Corporation provided $1,300,000
secured by a mortgage lien collateralized by certain land and buildings. This
loan was due in monthly interest only payments computed at the LIBOR rate plus
300 basis points. The note matured in January 1999. In August 1999, the Heller
Financial Corporation note balance was paid and a new loan in the amount of
$1,500,000 was funded with the same lender. The new mortgage bears interest at
8.35% per annum and calls for monthly principal and interest payments of
$11,927. Such payments shall continue until September 2009, the maturity date.
Although the loan is secured by a trust deed on the Sierra Southwest Pointe
property, the obiligee on the note is Sierra Southwest Pointe, LLC. As of
December 31, 2000, the loan balance was $1,479,069.
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Summary of Significant Tenants
Twenty-one tenants occupied the building at December 31, 2000. No tenant
occupied ten percent or more of the rentable square footage of the building as
of December 31, 2000.
Summary of Leases by Expiration
At December 31, 2000, there was one month to month lease and twenty term leases
that are scheduled to expire over the next ten years as indicated in the table
below.
Year of expiration 2001 2002 2003 2004 2005 2006 2007
Number of leases 4 4 10 0 1 0 0
Percent of total leases 19% 19% 48% 0% 5% 0% 0%
Total area (square feet) 13,873 20,702 32,118 0 2,958 0 0
Annual rent $ 85,899 $118,419 $208,589 $ 0 $ 16,431 $ 0 $ 0
Percent gross annual rent 16% 23% 40% 0% 3% 0% 0%
Year of expiration 2008 2009 2010 Totals
Number of leases 0 0 1 20
Percent of total leases 0% 0% 5% 96%
Total area (square feet) 0 0 7,600 77,251
Annual rent $ 0 $ 0 $ 70,291 $499,629
Percent gross annual rent 0% 0% 13% 95%
Sierra Westlakes Development - San Antonio, Texas
This property includes one industrial building comprising 95,370 rentable square
feet and was 75% occupied at December 31, 2000. The average effective annual
rent per square foot at December 31, 2000 was $8.67. The property had only two
tenants whose principal businesses were distribution and manufacturing. Details
of their leases follow.
The property is encumbered by a mortgage lien in favor of Westmark Commercial
Mortgage Fund II with a principal balance of $1,870,972 at December 31, 2000.
The mortgage bears interest at 9% and is payable in monthly installments of
$16,784 through March 2006, the loan maturity date. Payments are amortized over
a 300 month period with a principal balance of $1,654,784 due at maturity
assuming no payment has been made on principal in advance of its due date.
Summary of Significant Tenants
Square Percent of Effective Effective Percent of
Tenants of Feet Rentable Rent Per Rent Per Gross
Sierra Westlakes Development Occupied Square Feet Square Foot Annum Annual Rent Expiration of Lease
- ----------------------------------------------------------------------------------------------------------------------
Sears 45,935 48% $ 9.40 $ 431,789 70% December 2007
Felco Office Systems 25,357 27% 7.35 186,323 30% February 2001
----------------------------------------------------------
Total Rented Space 71,292 75% $ 8.67 $ 618,112 100%
Vacancies 24,078 25%
-------------------
Total Rentable Space 95,370 100%
===================
Depreciable Property Reference is made to Schedule III of Form 10-K.
5
Real Estate Taxes
Real Estate Tax as 2000 Real Estate Tax
Property % of Assessed Value Obligation
- --------------------------------------------------------------------------------
o 5850 San Felipe
Houston, Texas 2.90% $179,436
o Sierra Southwest Pointe
Houston, Texas 3.00% $74,485
o Sierra Westlake Development
San Antonio, Texas 2.96% $115,846
Insurance
In the opinion of management, the properties are adequately covered by
insurance.
Sierra Mira Mesa - San Diego, California
Sierra Mira Mesa office building consists of 89,560 rentable square feet and was
100% occupied at December 31, 2000. The principal business carried on from the
building is insurance. The average effective annual rent per square foot at
December 31, 2000 is $20.26.
Summary of Significant Tenants
One tenant, whose principal business is insurance, occupies ten percent or more
of the rentable square footage of the building. Details of this significant
tenant and its lease follow:
Square Percent of Effective Effective Percent of
Feet Rentable Rent Per Rent Per Gross
Tenants Occupied Square Feet Square Foot Annum Annual Rent Expiration of Lease
- ----------------------------------------------------------------------------------------------------------------------
State Comp. Insurance Fund 74,567 83% $ 19.79 $ 1,475,948 81% February 2003
Tenants Occupying < 10% sq ft 14,888 17% 22.59 336,253 19% Various
-------------------------------------------------------------
Total Rented Space 89,455 100% $ 20.26 $1,812,201 100%
Vacancies 105 0%
-------------------
Total Rentable Space 89,560 100%
===================
Summary of Leases by Expiration
The Property's five tenants have leases scheduled to expire over the next eight
years as scheduled below.
Year of expiration 2001 2002 2003 2004 2005
Number of leases 1 0 2 1 0
Percent of tot. leases 20% 0% 40% 20% 0%
Tot. area (square feet) 762 0 77,218 4,762 0
Annual rent $ 12,000 $ 0 $1,545,453 $ 100,002 $ 0
Per. gross annual rent 1% 0% 85% 5% 0%
Year of expiration 2006 2007 2008 Totals
Number of leases 0 0 1 5%
Percent of tot. leases 0% 0% 20% 100%
Tot. area (square feet) 0 0 6,713 89,455
Annual rent $ 0 $ 0 $ 154,746 $1,812,201
Per. gross annual rent 0% 0% 9% 100%
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Depreciable Property
Sierra Mira Mesa, San Diego, California
Office Building - Income-Producing Property
Tenant
Land Buildings Improvements Total
Historical Cost & Tax Basis $ 2,480,940 $ 6,311,388 $ 486,113 $ 9,278,441
Accumulated Depreciation (2,852,576) (217,921) (3,070,497)
---------------------------------------------------------------
Net Carrying Value at
December 31, 2000 $ 2,480,940 $ 3,458,812 $ 268,192 $ 6,207,944
===============================================================
Depreciation Method Not Applicable Straight-line Straight-line
Depreciable Life Not Applicable 5-30 Years 1-10 Years
Real Estate Taxes The real estate tax obligation for 2000 was
approximately 1.12% of the assessed value or $73,884.
Insurance In the opinion of management, the property is adequately
covered by insurance.
Encumbrances The property is encumbered by a mortgage lien in favor
of Lincoln National Life Insurance Company with a
principal balance of $4,265,067 at December 31, 2000.
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.
Sorrento I - San Diego, California
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.
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 at
December 31, 2000 $ 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 1.11% of the
assessed value or $30,253, which was the obligation of
the tenant.
7
Insurance In the opinion of management, the property is adequately
covered by insurance.
Encumbrances In August 1999, Sorrento I Partners ("SIP") paid its
mortgage note due to CGS, an affiliate of the General
Partner, with an outstanding balance of $607,693. 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. 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
In November 1995, a limited partner of the Partnership, on their own behalf
and on behalf of all others similarly situated, filed a lawsuit against S-P
Properties, Inc. ("S-P"), the General Partner of the Partnership, among
others, in the Superior Court of the State of California, County of Los
Angeles (the "Court"). This suit alleged breach of fiduciary duty and breach
of contract. The Plaintiff's claims relate to three loans made to affiliates,
two by the Partnership and one by Sierra Mira Mesa Partners ("SMMP"), which
were allegedly improper or made below market rates. The Plaintiffs were
seeking unspecified compensatory and punitive damages and removal of the
General Partner.
In September 1997, the Court denied the Plaintiff's motion for class
certification, but granted the Plaintiff leave to file an amended complaint. The
Partnership demurred to all class action allegations in the amended complaint.
The Court granted the demurred without leave to amend, thereby reducing the
Plaintiff's allegations to a derivative suit.
In December 1999, as a compromise to all claims asserted in what became a
derivative action on behalf of the Partnership, the parties agreed to enter
into a Mutual Compromise and Settlement (the "Settlement"). The Settlement
provides for a complete release of the Partnership, general partners and all
affiliates. As part of the material terms of the Settlement, S-P as the
General Partner of the Partnership, on or before December 31, 2000, would
call and collect the two demand notes with balances of $1,073,460 and
$5,336,584, respectively, at December 31, 2000 and a portion of the SMMP loan
(the date of collection being referred to herein as the "Payment Date"). In
the case of the SMMP loan, the amount due being that percentage of the loan
that is equal to the Partnership's interest in SMMP, and in any event no less
than thirty percent (30%). The loan proceeds received by the Partnership,
totaling approximately $7,200,000, would be distributed on a per-unit basis
to the limited partners and assignees of the Partnership of record within 30
days of the Payment Date. The Partnership would pay Plaintiff's attorneys'
fees of $1,000,000. The Plaintiff, on behalf of the Partnership, would
dismiss the entire action with prejudice. The court approved the Settlement
on February 9, 2000.
During the year ended December 31, 2000, the Partnership paid scheduled
Plaintiff's attorneys' fees of $500,000. The $500,000 balance was due
December 31, 2000. As of March 30, 2001, S-P has not called and collected the
notes and the Partnership has not satisfied its remaining legal fee
obligation. The $500,000 legal fee obligation is included in accrued and
other liabilities on the balance sheet at December 31, 2000.
On February 21, 2001, the Plaintiff served S-P with a Notice of Default
Election stating that the Plaintiff was declaring the Settlement null and
void because of S-P's failure to collect various loans and distribute the
proceeds no later than January 30, 2001 as required under the Settlement
Agreement. The Notice of Default Election also stated the Plaintiff's
intention to ask the court to put the case back on the active trial list. In
addition, the Plaintiff filed a motion to file a supplemental complaint
alleging new violations of the Partnership Agreement.
On March 16, 2001, the court granted the Plaintiff's motion to file the
supplemental complaint. In the supplemental complaint, the Plaintiff has
included new allegations alleging that after entering into the Settlement
Agreement, S-P breached the Partnership Agreement by lending certain persons
and entities over $500,000 by transferring these funds to certain executive
officers of S-P or their alleged affiliates. The court also restored the case
to the civil active list and set a further status conference for May 23, 2001
with the intention of setting a trial date for approximately three months
thereafter.
S-P intends to file a demurrer to the supplemental complaint and otherwise
vigorously defend the action.
Management anticipates settlement of the notes receivable upon the completion
of the consolidation transaction discussed in Item 1 (c.) above. However,
there can be no assurance such transaction will be executed. Should the
partnerships be unable to settle the notes receivable subject to the
litigation, a principal shareholder of S-P has unconditionally guaranteed
their payment.
S-P has denied and continues to deny that it has committed any violations of
law, and states that it has entered into the Settlement solely to eliminate
the burden and expense of further litigation. Management believes the
ultimate outcome of this litigation will not have a material adverse effect
on the Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERS' EQUITY AND RELATED MATTERS
As of December 31, 2000, the number of security holders is as follows:
Number Number of
of Units Record Holders
---------- --------------
Limited Partners:
Class A Units 56,674 2,733
Class B Units 29,979 652
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 Class A
units at $250.00 per unit and 60,000 Class B 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 final 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 owns three
properties, Sierra Westlakes, Sierra Southwest Pointe and 5850 San Felipe. The
Partnership sold its interest in the Sierra Technology property on December 31,
1994. In addition, the Partnership holds a 30.17% interest in SMMP. SMMP owns an
office building - Sierra Mira Mesa in San Diego, California.
9
Results of Operations:
Comparison of year ended December 31, 2000 to year ended December 31, 1999.
Rental income increased approximately $453,000, or 19%, principally due to
higher common area maintenance ("CAM") fees billed between years. CAM
reconciliations for the year ended December 31, 1999 were performed during the
year ended December 31, 2000. As such, CAM recoveries during the year ended
December 31, 2000 included both the current and prior year. Further, CAM
recovery revenue rose in 2000 as a result of an increase in operating expenses
at the properties when compared to the prior year. The increase in rental income
was also attributable to higher rental rates. The weighted-average effective
annual rent per square foot, on an accrual basis, supports the increase from
$11.82 to $11.97 at 5850 San Felipe and from $5.53 to $6.41 at Sierra Southwest
Pointe in 2000. Rental rates at Sierra Westlakes remained unchanged. Occupancy
at Sierra Southwest Pointe increased from 78% at December 31, 1999 to 81% at
December 31, 2000. Occupancy at 5850 San Felipe and Sierra Westlakes remained
comparable between the two years. At December 31, 2000, 5850 San Felipe was 97%
occupied and Sierra Westlakes was 75% occupied.
Total operating expenses decreased approximately $1,008,000, or 27%, when
compared to the prior year, primarily due to the settlement of a lawsuit against
the Partnership in the prior year. As stipulated in the settlement agreement,
not withstanding other terms and conditions, the Partnership agreed to pay the
plaintiff's attorney fees of $1,000,000. These fees and other legal costs
associated with the lawsuit were included in operating expenses for the year
ended December 31, 1999. Further, the decrease in total operating expenses was
also attributable to bad debt expense of approximately $76,000 recognized in the
prior year. No such expense was recorded in 2000. The decrease in total
operating expenses was partially offset by higher property taxes and insurance
attributable to an increase in the assessed values of the Properties.
The Partnership's share of income from its investment in SMMP decreased
approximately $19,000, or 12%, in comparison to the prior year. This decrease
was primarily due to a decrease in the Partnership's ownership interest in SMMP
from 33.01% in 1999 to 30.17% in 2000.
Comparison of year ended December 31, 1999 to year ended December 31, 1998.
Rental income increased approximately $59,000, or 3%, for the year ended
December 31, 1999 when compared to the prior year, primarily due to an increase
in rental rates at 5850 San Felipe and Sierra Southwest Pointe. The
weighted-average effective annual rent per square foot, on an accrual basis,
increased from $11.36 to $11.82 at 5850 San Felipe and from $5.11 to $5.53 at
Sierra Southwest Pointe in 1999. Rental rates at Sierra Westlakes remained
unchanged. This increase was partially offset due a decrease in occupancy at
Sierra Southwest Pointe from 94% at December 31, 1998 to 78% at December 31,
1999. Occupancy at 5850 San Felipe and Sierra Westlakes remained comparable
between the two years.
Total operating expenses increased approximately $1,274,000, or 53%, in
comparison to the prior year, principally due to the settlement of a lawsuit
against the Partnership. As stipulated in the settlement agreement, not
withstanding other terms and conditions, the Partnership agreed to pay the
plaintiff's attorney fees of $1,000,000. These fees and other legal costs
associated with the lawsuit were included in operating expenses for the year
ended December 31, 1999. The increase in total operating expenses was also
attributable to higher administrative costs and maintenance and repair expenses
incurred during the year. In addition, a loan made to an affiliate in 1996 and a
rent receivable balance from a former tenant was deemed uncollectible and
subsequently written-off to bad debt expense in 1999. Further, property taxes
rose primarily as a result of an increase in the assessed value of 5850 San
Felipe and Sierra Southwest Pointe.
The Partnership's share of income (loss) from its investment in SMMP was
approximately $160,000 for the year ended December 31, 1999 compared to
approximately $(15,000) for the prior year. SMMP generated income for the years
ended December 31, 1999 and 1998. The Partnership's loss from its investment in
SMMP in the prior year was largely due to an adjustment of approximately $76,000
recorded in the first quarter of 1998 to correct an understatement of its share
of unconsolidated joint venture loss in 1997.
Liquidity and Capital Resources:
In December 1999, a lawsuit was settled against the Partnership that provided
for a complete release of the Partnership, general partners and all affiliates.
The suit related to three loans made to affiliates, two by the Partnership and
one by SMMP. As part of the material terms of the Settlement, S-P Properties,
Inc. ("S-P"), the General
10
Partner of the Partnership, on or before December 31, 2000, would call and
collect the two demand notes with balances of $1,073,460 and $5,336,584,
respectively, at December 31, 2000 and a portion of the SMMP loan (the date
of collection being referred to herein as the "Payment Date"). In the case of
the SMMP loan, the amount due is equal to that percentage of the loan
corresponding to the Partnership's interest in SMMP, which in any event is no
less than thirty percent (30%). The loan proceeds received by the Partnership
would be distributed on a per-unit basis to the limited partners and
assignees of the Partnership of record as of the Payment Date ("See Legal
Proceedings").
The Partnership also agreed to pay plaintiff's attorneys' fees of $1,000,000.
In 2000, the Partnership paid scheduled Plaintiff's attorneys' fees of
$500,000. The $500,000 balance was due December 31, 2000. As of March 30,
2001, S-P has not called and collected the notes and the Partnership has not
satisfied its remaining legal fee obligation.
On February 21, 2001, the Plaintiff served S-P with a Notice of Default
Election stating that the Plaintiff was declaring the Settlement null and
void because of S-P's failure to collect various loans and distribute the
proceeds no later than January 30, 2001 as required under the Settlement
Agreement. The Notice of Default Election also stated the Plaintiff's
intention to ask the court to put the case back on the active trial list. In
addition, the Plaintiff filed a motion to file a supplemental complaint
alleging new violations of the Partnership Agreement.
On March 16, 2001, the court granted the Plaintiff's motion to file the
supplemental complaint. In the supplemental complaint, the Plaintiff has
included new allegations alleging that after entering into the Settlement
Agreement, S-P breached the Partnership Agreement by lending certain persons
and entities over $500,000 by transferring these funds to certain executive
officers of S-P or their alleged affiliates. The court also restored the case
to the civil active list and set a further status conference for May 23, 2001
with the intention of setting a trial date for approximately three months
thereafter.
S-P intends to file a demurrer to the supplemental complaint and otherwise
vigorously defend the action.
The collection and distribution of the two demand notes held by the
Partnership would result in a reduction of equity and notes receivable. The
collection and distribution of the note receivable held by SMMP would
ultimately result in a reduction in equity and investment in unconsolidated
joint venture of approximately $809,000 (30% of SMMP's note receivable
balance of $2,696,350).
The Partnership used cash of approximately $268,000 from its operating
activities and paid approximately $265,000 for property additions and lease
costs in 2000. The Partnership also advanced an additional $1,102,000 on its
trust deed note receivable in 2000. The Partnership's joint venture, SMMP, made
net distributions of $1,507,000 to the Partnership to assist with these cash
outlays.
The Partnership is in an illiquid position at December 31, 2000 with cash and
billed rents of $690,000 and current liabilities of approximately $1,046,000,
which includes accrued legal fees of $500,000.
The Partnership's primary capital requirement is the remaining legal
obligation. Management anticipates fulfilling this obligation and settlement
of the notes receivable upon the completion of the consolidation transaction
discussed in Item 1 (c.). However, there can be no assurance such transaction
will be executed. Should the Partnership be unable to settle the note
receivable, a principal shareholder of S-P has unconditionally guaranteed
this payment. Other capital requirements principally will be for
construction of new tenant space and debt obligations. It is anticipated that
these requirements will be funded from the operation of the properties and
distributions from SMMP.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and reports of independent public
accountants 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 - 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. Consolidated Balance Sheets of Sierra Mira Mesa Partners as of
December 31, 2000 and 1999 and Statements of Operations, Changes in
General Partners' Equity and Cash Flows for each of the three years
in the period ended December 31, 2000 and Independent Auditors'
Report
11
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.
12
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Sierra Pacific Development Fund II (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.
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.
13
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 $54,386 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 and receive from the Partnership
certain management and administrative services fees. These amounts are set forth
in the Annual Report to the Limited Partners attached as an Exhibit.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
None
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership pays a monthly management fee of 5% of the gross rental income
collected from the properties to American Spectrum Real Estate Services, Inc.
("ASRE"). These fees for the year ended December 31, 2000 were $133,141. 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 $266,043 during the year ended December 31, 2000. In
consideration for services rendered with respect to initial leasing of
Partnership properties, ASRE and Bancor are paid initial leasing costs of which
$75,182 was paid during the year ended December 31, 2000. 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, controls 50% of CGS Real Estate Company, Inc.
During 1993, the Partnership loaned funds to Carlsberg Management Company, Inc.,
a former affiliate of the General Partner, in the form of unsecured demand
notes. Interest was paid at rates approximately 100 basis points above
certificate of deposit rates established by major commercial banks. The loans
reached a maximum of $1,100,000 during 1993 and were reduced to $1,000,000 at
December 31, 1993. The loans were reduced to $812,000 at December 31, 1994 and
the interest rate was fixed at 6%. The loan was assumed by Finance Factors, Inc.
with the sale of the outstanding stock of TCP, Inc. in December 1994. In July
1995, Finance Factors, Inc. merged with Bancor Real Estate Company, Inc., who
assumed the note. In 2000, 1999, and 1998, interest receivable of $60,762,
$57,322 and $54,078 was added to the principal balance of the note. The
principal balance outstanding at December 31, 2000 is $1,073,460. Both Finance
Factors, Inc. and Bancor Real Estate Company, Inc. are wholly owned subsidiaries
of CGS Real Estate Company, Inc.
Bancor Real Estate Company, Inc., dba Third Coast Business Centers, leases
17,502 square feet of 5850 San Felipe, a property of the Partnership. In
addition, ASRE began leasing 5,339 square feet of 5850 San Felipe in January
1998. The terms of the leases are consistent with the current market conditions
for office space in the area of the property. The Partnership recognized rental
income of $215,051 during the year ended December 31, 2000 related to these
leases.
On December 30, 1994, the Sierra Technology property with a historical cost
basis of $3,849,228 was sold for $6,000,000 ($3,100,000 cash down-payment and
$2,900,000 trust deed note) to Texas DVM, Inc. The original note called for
monthly interest only payments and bore interest of 10% per annum until December
31, 1997, when the entire indebtedness was due in full. In each of the three
years ended December 31, 2000, maturity has been extended for additional
one-year terms. In 1998, 1999 and 2000 interest receivable of $319,000,
$289,900, and $436,098, respectively, was added to the principal balance of the
note. In 2000, the Partnership funded an additional $1,101,586. This amount was
added to the principal balance of the note. All other terms of the original note
remained unchanged. The principal balance outstanding at December 31, 2000 was
$5,336,584. CGS Real Estate Company, Inc. owns Texas DVM, Inc.
14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. Exhibits
1. Annual Report to the Limited Partners
2. Exhibit Number 27 - Selected Financial Data
B. Financial Statement Schedules
The following financial statement schedules and the reports of the
independent public accountants thereon are included herein:
1. Report of Independent Public Accountants on Financial Statement
Schedules as of December 31, 2000, dated March 26, 2001
2. Independent Auditors' Report on Financial Statement Schedules as of
December 31, 1999 and 1998 dated February 25, 2000
3. Schedule II - Valuation and Qualifying Accounts and Reserves - for
the years ended December 31, 2000, 1999, and 1998
4. Schedule III - Real Estate and Accumulated Depreciation - December
31, 2000
All other financial statement 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
15
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 II
a California Limited Partnership
S-P PROPERTIES, INC.
General Partner
Date: April 5, 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 5, 2001 /s/ Thomas N. Thurber
---------------------------- ------------------------------------------
Thomas N. Thurber
President and Director
S-P Properties, Inc.
Date: April 5, 2001 /s/ William J. Carden
---------------------------- ------------------------------------------
William J. Carden
Assistant Secretary/Treasurer and Director
S-P Properties, Inc.
Date: April 5, 2001 /s/ G. Anthony Eppolito
---------------------------- ------------------------------------------
G. Anthony Eppolito
Chief Accountant
S-P Properties, Inc.
16
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Partners of
Sierra Pacific Development Fund II
We have audited the consolidated financial statements of Sierra Pacific
Development Fund II, a California limited partnership, and subsidiary (the
"Partnership") as of and for the year ended December 31, 2000 and have issued
our report thereon dated March 26, 2001. Such consolidated financial statements
and reports are included in your 2000 Annual Report to the Limited Partners and
are incorporated herein by reference. Our audit also included the financial
statement schedules of Sierra Pacific Development Fund II, 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 audit. In
our opinion, such consolidated 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.
ARTHUR ANDERSEN LLP
Houston, Texas
March 26, 2001
17
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
To the Partners of
Sierra Pacific Development Fund II
We have audited the consolidated financial statements of Sierra Pacific
Development Fund II and subsidiary, a California limited partnership, (the
"Partnership") as of December 31, 1999 and 1998, and have issued our report
thereon dated February 25, 2000. Such consolidated financial statements and
reports are included in your 1999 Annual Report to the Limited Partners and are
incorporated herein by reference. Our audits also included the financial
statement schedules of Sierra Pacific Development Fund II, 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 consolidated 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
February 25, 2000
18
SCHEDULE II - FORM 10-K
SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
Income -
Producing
Properties
----------
Allowance for loss - January 1, 1998 $450,000
Provision charged to costs
and expenses (1) 0
--------
Allowance for loss - December 31, 1998 450,000
Provision charged to costs
and expenses (1) 0
--------
Allowance for Loss - December 31, 1999 450,000
Provision charged to costs
and expenses (1) 0
--------
Allowance for loss - December 31, 2000 $450,000
========
(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.
19
SCHEDULE III - FORM 10-K
SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2000
- ------------------------------------------------------------------------------------------------
Initial Cost
to Partnership (1) Improvements
---------------------------- Capitalized
Encumb- Improve- After Acquis-
Description rances Land ments ition (2)
- ----------- ------ ---- ----- -------------
OFFICE/INDUSTRIAL BUILDINGS
INCOME -PRODUCING:
5850 San Felipe
Houston, Texas $ 3,000,000 $1,950,000 $2,806,932 $ 2,504,580
Sierra Southwest Pointe
Houston, Texas 1,479,068 570,124 2,279,488 579,890
Sierra Westlakes Development
San Antonio, Texas 1,870,973 1,743,622 3,759,827
---------------------------------------------------------------
TOTAL $ 6,350,041 $4,263,746 $5,086,420 $ 6,844,297
===============================================================
- ----------------------------------------------------------------------------------------------------------------
Gross Amount at
Which carried at close of period
-----------------------------------------------
Improve- Total Accumulated
Description Land ments (3)(4)(5) Depreciation (5)
- ----------- ---- ----- --------- ----------------
OFFICE/INDUSTRIAL BUILDINGS
INCOME -PRODUCING:
5850 San Felipe
Houston, Texas $ 1,950,000 $ 5,143,287 $ 7,093,287 $ 1,821,212
Sierra Southwest Pointe
Houston, Texas 570,124 2,642,501 3,212,625 899,687
Sierra Westlakes Development
San Antonio, Texas 1,743,622 2,331,415 4,075,037 1,182,278
--------------------------------------------------------------------------
TOTAL $ 4,263,746 $ 10,117,203 $14,380,949 $ 3,903,177
==========================================================================
- -----------------------------------------------------------------------------
Date Date Depreciation
Description Constructed Acquired Life
- ----------- ----------- -------- ----
OFFICE/INDUSTRIAL BUILDINGS
INCOME -PRODUCING:
5850 San Felipe
Houston, Texas 3/77 12/94 1-30 yrs.
Sierra Southwest Pointe
Houston, Texas 8/72 7/91 2-30 yrs.
Sierra Westlakes Development
San Antonio, Texas 10/85 8/84 1-30 yrs.
TOTAL
(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 $450,000 was established in 1989 as the appraised
value of the properties declined below book value. See Notes 1 and 4 to
the financial statements incorporated by reference to the Annual Report to
the Limited Partners attached as an exhibit.
(5) Reconciliation of total real estate carrying value and accumulated
depreciation for the three years ended December 31, 2000 is as follows:
Total Real Estate Accumulated
Carrying Value Depreciation
------------ ------------
Balance - January 1, 1998 $ 15,068,050 $ 3,405,671
Additions during the year 416,813 729,888
Write off fully depreciated assets (1,467,901) (1,467,901)
------------ ------------
Balance - December 31, 1999 14,016,962 2,667,658
Additions during the year 387,242 695,895
Write off fully depreciated assets (84,834) (84,834)
------------ ------------
Balance - December 31, 1999 14,319,370 3,278,719
Additions during the year 176,681 723,340
Proceeds from insurance company (16,220) 0
Write off fully depreciated assets (98,882) (98,882)
------------ ------------
Balance - December 31, 2000 $ 14,380,949 $ 3,903,177
============ ============
20
SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY
(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 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 $ 3,307,555 $ 2,766,153 $ 2,673,328 $ 2,179,772 $ 2,128,491
OPERATING EXPENSES:
Total 2,658,213 3,666,379 2,392,838 2,259,482 2,025,153
Per dollar of revenues 0.80 1.33 0.90 1.10 0.95
INTEREST EXPENSE:
Total 446,167 437,352 439,499 435,818 464,880
Per dollar of revenues 0.13 0.16 0.16 0.20 0.22
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS:
Total 344,676 (1,177,254) (173,921) (800,406) (548,350)
General Partner 3,447 0 0 0 0
Limited Partners 341,229 (1,177,254) (173,921) (800,406) (548,350)
Per Unit (1) 3.94 (13.59) (2.01) (9.24) (6.32)
CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (268,431) 84,929 241,502 (672,814) 401,092
CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 244,748 (61,058) (213,813) 611,134 (848,511)
CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (47,075) 165,912 (26,299) 108,508 267,418
TOTAL ASSETS 19,195,672 19,204,328 19,342,914 19,477,303 20,229,858
PARTNERS' EQUITY:
Total 11,699,311 11,354,635 12,531,889 12,705,810 13,556,216
General Partner (60,558) 0 0 0 0
Limited Partners
Class A 7,691,371 7,426,335 8,196,299 8,310,049 8,866,234
Class B 4,068,498 3,928,300 4,335,590 4,395,761 4,689,982
LIMITED PARTNERS' EQUITY - PER UNIT (1) 135.71 131.03 144.62 146.63 156.45
NOTE RECEIVABLE 4,600,313 3,062,629 2,772,729 2,453,729 2,163,729
INCOME-PRODUCING PROPERTIES:
Number 3 3 3 3 3
Cost 14,380,949 14,319,370 14,016,962 15,068,050 14,428,604
Less: Accumulated depreciation (3,903,177) (3,278,719) (2,667,658) (3,405,671) (2,772,155)
Valuation allowance (450,000) (450,000) (450,000) (450,000) (450,000)
Net book value 10,027,772 10,590,651 10,899,304 11,212,379 11,206,449
INVESTMENT IN UNCONSOLIDATED
JOINT VENTURE 1,653,025 3,023,177 3,193,894 3,416,664 4,838,609
NOTES PAYABLE - Related to income-
producing property 6,350,041 6,397,116 6,231,204 6,257,503 6,098,994
DISTRIBUTIONS PER UNIT (1): 0 0 0 0.58 3.46
(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, 56,674 Class A and 29,979 Class B in all years. The cumulative
distributions per limited partnership unit from inception to December 31,
2000 equal $64.80.
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Sierra Pacific Development Fund II
We have audited the accompanying consolidated balance sheet of Sierra Pacific
Development Fund II, a California limited partnership, and subsidiary (the
"Partnership") as of December 31, 2000 and the related consolidated statements
of operations, changes in partners' equity 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 II 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.
ARTHUR ANDERSEN LLP
Houston, Texas
March 26, 2001
22
INDEPENDENT AUDITORS' REPORT
To the Partners of
Sierra Pacific Development Fund II
We have audited the accompanying consolidated balance sheet of Sierra Pacific
Development Fund II and subsidiary, a California limited partnership, (the
"Partnership") as of December 31, 1999, and the related consolidated statements
of operations, changes in partners' equity and cash flows for the years ended
December 31, 1999 and 1998. These consolidated 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 II and subsidiary 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.
DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2000
23
SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY
(A California Limited Partnership)
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
December 31, 2000 December 31, 1999
----------------- -----------------
ASSETS
Cash and cash equivalents $ 190,205 $ 260,963
Receivables:
Note, net of deferred gain of
$736,271 (Notes 3 and 4) 4,600,313 3,062,629
Unbilled rent (Notes 1 and 4) 216,099 239,271
Billed rent (Note 1) 499,487 140,211
Due from affiliates (Note 3) 1,074,460 1,013,698
Income-producing properties - net of
accumulated depreciation and valuation
allowance of $4,353,177 and $3,728,719
(Notes 1, 4 and 6) 10,027,772 10,590,651
Investment in unconsolidated joint venture
(Notes 1 and 5) 1,653,025 3,023,177
Other assets - net of accumulated amortization
of $514,075 and $393,674 (Notes 1, 2 and 3) 934,311 873,728
------------ -----------
Total Assets $ 19,195,672 $19,204,328
============ ===========
LIABILITIES AND PARTNERS' EQUITY
Accrued and other liabilities (Notes 2 and 8) $ 1,146,320 $ 1,452,577
Notes payable (Note 6) 6,350,041 6,397,116
------------ -----------
Total Liabilities 7,496,361 7,849,693
------------ -----------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 8)
Partners' equity (deficit) (Notes 1 and 7):
General Partner (60,558) 0
Limited Partners:
Class A Limited Partners:
60,000 units authorized,
56,674 issued and outstanding 7,691,371 7,426,335
Class B Limited Partners:
60,000 units authorized,
29,979 issued and outstanding 4,068,498 3,928,300
------------ -----------
Total Partners' equity 11,699,311 11,354,635
------------ -----------
Total Liabilities and Partners' equity $ 19,195,672 $19,204,328
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
24
SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
----------- ----------- -----------
REVENUES:
Rental income (Note 1) $ 2,809,291 $ 2,356,436 $ 2,297,908
Interest income (Note 3) 498,264 409,717 375,420
----------- ----------- -----------
Total revenues 3,307,555 2,766,153 2,673,328
----------- ----------- -----------
EXPENSES:
Operating expenses:
Depreciation and amortization 895,231 869,457 890,846
Property taxes and insurance 453,345 372,696 343,864
Administrative fees (Note 3) 246,561 283,875 244,116
Maintenance and repairs 327,100 328,528 293,874
Utilities 235,669 204,376 215,449
Management fees (Note 3) 133,141 112,161 118,976
Legal and accounting (Note 8) 168,634 1,227,643 130,252
General and administrative 64,731 59,304 36,549
Salaries expense 36,000 36,000 36,000
Renting expenses 29,523 17,179 13,761
Bad debt expense 0 76,021 0
Other operating expenses 68,278 79,139 69,151
----------- ----------- -----------
Total operating expenses 2,658,213 3,666,379 2,392,838
Interest 446,167 437,352 439,499
----------- ----------- -----------
Total expenses 3,104,380 4,103,731 2,832,337
----------- ----------- -----------
INCOME (LOSS) BEFORE PARTNERSHIP'S SHARE
OF UNCONSOLIDATED JOINT VENTURE
INCOME (LOSS) 203,175 (1,337,578) (159,009)
----------- ----------- -----------
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE INCOME (LOSS) (Note 5) 141,501 160,324 (14,912)
----------- ----------- -----------
NET INCOME (LOSS) $ 344,676 $(1,177,254) $ (173,921)
=========== =========== ===========
Net income (loss) per limited partnership unit (Note 1) $ 3.94 $ (13.59) $ (2.01)
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
25
SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
For the Years Ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
Limited Partners Total
------------------------------------------- General Partners'
Class A Class B Total Per Unit Partner Equity
---------- ---------- ----------- -------- ----------- -----------
Partners' equity -
January 1, 1998 $8,310,049 $4,395,761 $12,705,810 $146.63 $ 0 $12,705,810
Net loss (113,750) (60,171) (173,921) (2.01) (173,921)
---------- ---------- ----------- ------- ----------- -----------
Partners' equity -
December 31, 1998 8,196,299 4,335,590 12,531,889 144.62 0 12,531,889
Net loss (769,964) (407,290) (1,177,254) (13.59) (1,177,254)
---------- ---------- ----------- ------- ----------- -----------
Partners' equity -
December 31, 1999 7,426,335 3,928,300 11,354,635 131.03 0 11,354,635
Transfer among general partner
and limited partners 41,861 22,144 64,005 0.74 (64,005) 0
Net income 223,175 118,054 341,229 3.94 3,447 344,676
---------- ---------- ----------- ------- ----------- -----------
Partners' equity (deficit) -
December 31, 2000 $7,691,371 $4,068,498 $11,759,869 $135.71 $ (60,558) $11,699,311
========== ========== =========== ======= =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
26
SIERRA PACIFIC DEVELOPMENT FUND II 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 income (loss) $ 344,676 $(1,177,254) $ (173,921)
Adjustments to reconcile net income (loss) to cash
(used in) provided by operating activities:
Depreciation and amortization 895,231 869,457 890,846
Undistributed (income) loss of unconsolidated
joint venture (141,501) (160,324) 14,912
Bad debt expense 0 76,021 0
Increase in rent receivable (336,104) (64,370) (437)
Increase in other receivables (496,860) (324,739) (343,229)
Increase in other assets (227,616) (6,618) (212,500)
(Decrease) increase in accrued and other liabilities (306,257) 872,756 65,831
----------- ----------- -----------
Net cash (used in) provided by operating activities (268,431) 84,929 241,502
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions (176,681) (387,242) (416,813)
Proceeds from insurance company 16,220 0 0
Loan to affiliate of the general partner (1,101,586) 0 0
Capital contributions to unconsolidated joint venture (119,678) (44,000) (8,490)
Distributions from unconsolidated joint venture 1,626,473 370,184 211,490
----------- ----------- -----------
Net cash provided by (used in) investing activities 244,748 (61,058) (213,813)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable secured by property 0 1,500,000 0
Principal payments on notes payable (47,075) (1,334,088) (26,299)
----------- ----------- -----------
Net cash (used in) provided by financing activities (47,075) 165,912 (26,299)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (70,758) 189,783 1,390
CASH AND CASH EQUIVALENTS - Beginning of year 260,963 71,180 69,790
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - End of year $ 190,205 $ 260,963 $ 71,180
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for real estate taxes $ 223,178 $ 270,074 $ 139,638
=========== =========== ===========
Cash paid during the year for interest $ 435,032 $ 437,352 $ 443,823
=========== =========== ===========
In 2000, 1999 and 1998, interest receivable of $496,860, $347,222 and $373,078,
respectively, was added to the principal balance of the related notes receivable
from affiliates. These transactions are noncash items not reflected in the above
statements of cash flows.
The accompanying notes are an integral part of these consolidated financial
statements.
27
SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Sierra Pacific Development Fund II (the "Partnership") was organized on April
29, 1983 in accordance with the provisions of the California Uniform Limited
Partnership Act to acquire, develop and operate commercial and industrial
real properties. S-P Properties, Inc. ("S-P") is the General Partner and
manager of the Partnership.
The Partnership's activities have involved the ownership and operation of four
real estate projects in Texas: Sierra Technology Center in Austin, Texas; Sierra
Westlakes in San Antonio, Texas; Sierra Southwest Pointe in Houston, Texas; and
5850 San Felipe in Houston, Texas.
In December 1997, Sierra Southwest Pointe LLC ("SSPLLC") 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 Development Fund II
the property known as Sierra Southwest Pointe, 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 the conduct, promotion or attainment of the
business or purposes otherwise set forth. Title to the Sierra Southwest Pointe
property was transferred from the Partnership to SSPLLC. The accounts of SSPLLC
are consolidated into the financial statements of the Partnership since the date
of formation and all significant intercompany transactions are eliminated in
consolidation. All entities in which the Partnership has a controlling equity
interest are consolidated in the financial statements.
In December 1994, the Partnership sold Sierra Technology Center for
$6,000,000. The sale proceeds were received in cash, a note receivable from
the buyer, and equity in the 5850 San Felipe property.
In 1985 Sierra Mira Mesa Partners ("SMMP"), a California general partnership,
was formed between the Partnership and Sierra Pacific Pension Investors `84
(SPPI'84). 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 51%; the remaining 49%
was owned by SPPI'84. Effective December 31, 1996, the general partners
amended the partnership agreement to allow for adjustments in the sharing
ratio on January 1, each year based upon the relative net contributions and
distributions since inception of each general partner. 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. As a result, the sharing ratio in effect for
1998, 1999 and 2000 was 33.74%, 33.01% and 30.17%, respectively, for the
Partnership and 66.26%, 66.99% and 69.83%, respectively, for SPPI'84. During
2000, SMMP made net distributions of $1,506,795 to the Partnership and
$563,993 to SPPI'84. Accordingly on January 1, 2001, the sharing ratio will
be decreased to 19.68% for the Partnership and increased to 80.32% for
SPPI'84 to reflect the 2000 contributions and distributions.
As of December 31, 2000 SMMP also holds an 83.24% interest in Sorrento I
Partners (a California general partnership with Sierra Pacific Development Fund
III formed in 1993), a 43.92% interest in Sorrento II Partners (a California
general partnership with Sierra Pacific Institutional Properties V formed in
1993), a 5.08% interest in Sierra Creekside Partners (a California general
partnership with Sierra Pacific Development Fund formed in 1994), and a 33.36%
interest in Sierra Vista Partners (a California general partnership with Sierra
Pacific Development Fund III formed in 1994).
28
Sierra Pacific Development Fund II 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 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 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 the Partnership at December 31, 2000 and 1999
consist of cash and cash equivalents, receivables, due from affiliates, accounts
payable and notes payable. The fair value of cash and cash equivalents,
receivables and accounts payable approximates the carrying value due to the
short term nature of these items. In the opinion of management, the estimated
fair value of the notes payable, based on market rates at December 31, 2000, is
$6,013,000. Management does not estimate the fair value of the amounts due from
affiliates due to the related party nature of this receivable.
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.
Prior to 1995, the Partnership assessed impairment of income-producing
properties based upon appraised values and established provisions for impairment
where appraisals indicated other than temporary declines in value. Effective
January 1, 1995, the Partnership implemented Statement of Financial Accounting
Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (the "Statement"). The Partnership
regularly evaluates long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable in accordance with the Statement. 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. Improvements totaling $450,000 were recognized
prior to 1995 as appraisals indicated other than temporary declines in value. No
such impairments have been recognized by the Partnership since 1995.
29
Sierra Pacific Development Fund II 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, 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. The Partnership may provide
additional write-downs which could be material in subsequent years if real
estate markets or local economic conditions change.
Investment in Unconsolidated Joint Venture
The investment in unconsolidated joint venture is stated at cost and is adjusted
for the Partnership's share in earnings or losses and cash contributions to or
distributions from the joint venture (equity method).
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.
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 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 56,674 Class A
and 29,979 Class B, the number of limited partnership units outstanding for all
periods presented.
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.
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. The Partnership adopted the accounting provisions of SAB 101 in
2000. The implementation of SAB 101 did not have a significant effect on the
Partnership's financial condition or results of operations.
30
Sierra Pacific Development Fund II 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,
2000 and 1999 is as follows:
2000 1999
---------- ----------
Other assets:
Prepaid expenses $ 38,854 $ 21,203
Deferred loan costs, net of accumulated amortization
of $60,996 in 2000 and $41,467 in 1999 133,638 153,167
Deferred leasing costs, net of accumulated amortization
of $453,079 in 2000 and $352,207 in 1999 451,552 511,143
Tax and insurance impounds 213,264 155,388
Tenant improvements reserves 87,003 22,827
Deposits 10,000 10,000
---------- ----------
$ 934,311 $ 873,728
========== ==========
Accrued and other liabilities:
Accounts payable $ 141,048 $ 115,967
Security deposits 100,453 90,974
Accrued expenses 377,914 233,136
Unearned rental income 3,770 0
Interest payable 23,135 12,500
Accrued legal liability 500,000 1,000,000
---------- ----------
$1,146,320 $1,452,577
========== ==========
3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS
Affiliates of the General Partner may receive a monthly management fee totaling
5% of the gross rental income collected from the properties. Management fees
paid to affiliates for the years ended December 31, 2000, 1999 and 1998 were
$133,141, $112,161 and $118,976, 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 $266,043, $292,790 and $252,201 for such services for the years ended
December 31, 2000, 1999 and 1998, respectively. The Partnership reimbursed the
affiliate for construction supervision costs incurred by the affiliate. For the
years ended December 31, 2000, 1999 and 1998 the affiliate received $0, $0 and
$16,754, respectively, for tenant improvements supervisory costs.
In consideration for services rendered with respect to initial leasing of
Partnership properties, affiliates of the General Partner are paid initial
leasing costs. For the years ended December 31, 2000, 1999 and 1998 affiliates
were paid $75,182, $53,746 and $49,811, respectively. These payments were
recorded as deferred leasing costs.
31
Sierra Pacific Development Fund II and subsidiary
Notes to Consolidated Financial Statements
Page five
During 1993, the Partnership loaned funds to a former affiliate of the General
Partner in the form of demand notes. Interest was paid at rates approximately
100 basis points above certificate of deposit rates established by major
commercial banks. The loans reached a maximum of $1,100,000. The loans were
reduced to $812,000 at December 31, 1994 and the interest rate was fixed at 6%.
In 2000, 1999 and 1998, interest receivable of $60,762, $57,322 and $54,078 was
added to the principal balance of the note. Interest income of $60,762, $57,322
and $54,078 was recognized in 2000, 1999, and 1998, respectively, related to
this note. The balance outstanding at December 31, 2000 was $1,073,460. The note
is guaranteed by the owners of CGS Real Estate Company, Inc. (See Note 8).
Two affiliates of the General Partner lease a total of 22,841 square feet of
5850 San Felipe, a property of the Partnership. The terms of the leases are
consistent with the current market conditions for office space in the area of
the property. During the years ended December 31, 2000, 1999, and 1998, the
Partnership recognized rental income of $215,051, $219,760, and $219,760,
respectively, related to these leases.
As further described in Note 4, in 1994 the Partnership sold a property to an
affiliate of the General Partner for cash of $3,100,000 and a $2,900,000 trust
deed note. The original note called for monthly interest only payments and bore
interest of 10% per annum until December 1997, when the entire indebtedness was
due in full. In each of the three years ended December 31, 2000, maturity has
been extended for additional one-year terms. In 2000, 1999 and 1998, interest
receivable of $436,098, $289,900 and $319,000, respectively, was added to the
principal balance of the note. In 2000, the Partnership funded an additional
$1,101,586. This amount was added to the principal balance of the note. All
other terms of the original note remained unchanged. The Partnership recognized
interest income of $436,098, $350,900 and $319,000 related to the note during
2000, 1999 and 1998, respectively. The December 31, 2000 principal balance was
$5,336,584. The note is secured by a second lien on the property and management
believes the collateral combined with the guarantee from a major shareholder
has sufficient value to recover the Partnership's net investment in the note
after satisfaction of the first lien holder (See Note 8).
During 1996, the Partnership made a non-interest bearing advance to an affiliate
in the amount of $50,083. This advance was deemed uncollectible and subsequently
written off to bad debt expense in 1999.
4. INCOME-PRODUCING PROPERTIES
At December 31, 2000 and 1999 the total cost and accumulated depreciation of the
properties are as follows:
2000 1999
------------ ------------
Land $ 4,263,746 $ 4,263,746
Building and improvements 10,117,203 10,055,624
------------ ------------
Total 14,380,949 14,319,370
Accumulated depreciation (3,903,177) (3,278,719)
Valuation allowance (450,000) (450,000)
------------ ------------
Net $ 10,027,772 $ 10,590,651
============ ============
During 2000 and 1999, the Partnership removed $98,882 and $84,834, respectively,
from its buildings and improvements and related accumulated depreciation
accounts for fully depreciated property.
32
Sierra Pacific Development Fund II and subsidiary
Notes to Consolidated Financial Statements
Page six
On December 30, 1994, the Sierra Technology Center property, with a historical
cost basis of $3,849,228, was sold for $6,000,000 ($3,100,000 cash down-payment
and $2,900,000 trust deed note) to an affiliate of Finance Factors, Inc. In a
related transaction, on December 30, 1994, the Partnership purchased 5850 San
Felipe, an office building in Houston, Texas for $5,000,000 from an affiliate of
Finance Factors, Inc. The Partnership paid $973,713 as cash down-payment and
assumed a first trust deed note with a balance of $4,026,287. In accordance with
Emerging Issues Task Force No. 87-29, "Exchange of Real Estate Involving Boot",
the fair value of the assets and liabilities transferred in the two transactions
was allocated between a monetary and a non-monetary component. Accordingly, the
historical cost of the San Felipe building was reduced by $243,068, representing
the non-monetary portion of the gain on sale of the Sierra Technology Center.
The monetary portion of 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
$539,835 (net of selling costs and unamortized loan fees and lease costs). A
deferred gain of $736,271 will be recognized as principal payments on the trust
deed note are received.
Future minimum base rental income, under the existing operating leases for the
properties, 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
------------- ----------
2001 $1,977,881 $2,021,543
2002 1,615,746 1,657,612
2003 1,040,701 1,088,977
2004 823,906 864,733
2005 618,367 619,823
Thereafter 1,362,926 1,402,938
---------- ----------
Total $7,439,527 $7,655,626
========== ==========
Sears, Roebuck and Company generated rental revenues of 18% and 15%,
respectively, during the years ended December 31, 1999 and 2000.
33
Sierra Pacific Development Fund II and subsidiary
Notes to Consolidated Financial Statements
Page seven
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 Pension Investors `84, 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 was 100% leased at December 31, 2000. At December 31,
2000 the Partnership's interest in SMMP was 30.17%; the remaining 69.83%
interest was owned by Sierra Pacific Pension Investors `84.
The Partnership's investment in SMMP as of December 31, 2000 and 1999 is
comprised of the following:
2000 1999
---------- ----------
Equity interest $1,512,205 $2,877,499
Other investment fees, less accum-
ulated amortization of
$68,017 and $63,160
in 2000 and 1999, respec-
tively $ 140,820 $ 145,678
---------- ----------
Investment in unconsolidated
joint venture $1,653,025 $3,023,177
========== ==========
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, 2000 and 1999. The condensed balance sheets at December
31, 2000 and 1999, and the condensed statements of operations for the years
ended December 31, 2000, 1999 and 1998 for SMMP are as follows:
34
Sierra Pacific Development Fund II and subsidiary
Notes to Consolidated Financial Statements
Page eight
Condensed Consolidated Balance Sheets
December 31, December 31,
2000 1999
------------ ------------
Assets
Cash and cash equivalents $ 51,660 $ 319,400
Rent receivable 932,011 1,198,515
Due from affiliates 2,696,350 2,451,227
Income-producing property,
net of accumulated depreciation 8,346,471 8,723,396
Investment in unconsolidated
joint ventures 1,295,403 2,526,875
Other assets, net of accumulated
amortization 787,724 793,658
------------ ------------
Total Assets $ 14,109,619 $ 16,013,071
============ ============
Liabilities and General Partners' Equity
Accrued and other liabilities $ 104,558 $ 101,104
Notes payable 5,890,607 6,179,038
------------ ------------
Total Liabilities 5,995,165 6,280,142
------------ ------------
Minority interest in joint venture (357,312) (340,614)
------------ ------------
General Partners' equity 8,471,766 10,073,543
------------ ------------
Total Liabilities and General Partners' equity $ 14,109,619 $ 16,013,071
============ ============
35
Sierra Pacific Development Fund II and subsidiary
Notes to Consolidated Financial Statements
Page nine
Condensed Consolidated Statements of Operations
For the Year Ended December 31,
2000 1999 1998
----------- ----------- -----------
Revenues:
Rental income $ 2,151,930 $ 2,126,106 $ 1,883,630
Other income 249,827 224,308 205,781
----------- ----------- -----------
Total revenues 2,401,757 2,350,414 089,411
----------- ----------- -----------
Expenses:
Operating expenses 936,177 800,654 754,978
Depreciation and amortization 571,117 587,070 581,956
Interest 485,730 450,177 438,711
----------- ----------- -----------
Total expenses 1,993,024 1,837,901 1,775,645
----------- ----------- -----------
Income before Partnership's
share of unconsolidated joint
venture income (losses) 408,733 512,513 313,766
Partnership's share of unconsolidated
joint venture income (losses) 43,580 (36,405) (131,897)
----------- ----------- -----------
Income before minority interest's
share of consolidated joint venture
loss (income) 452,313 476,108 181,869
----------- ----------- -----------
Minority interest's share of consolidated
joint venture loss (income) 16,698 7,618 (787)
----------- ----------- -----------
Net income $ 469,011 $ 483,726 $ 181,082
=========== =========== ===========
As of December 31, 2000, SMMP also holds a 43.92% interest in Sorrento II
Partners (a California general partnership with Sierra Pacific Institutional
Properties V formed in 1993), a 5.08% interest in Sierra Creekside Partners
("SCP"), (a California general partnership with Sierra Pacific Development
Fund formed in 1994), and a 33.36% interest in Sierra Vista Partners (a
California general partnership with Sierra Pacific Development Fund III
formed in 1994). Under the terms of the SCP joint venture agreement, SMMP
would be obligated to contribute any negative balance outstanding in its
capital account upon liquidation of the partnership. Such balance was
$2,540,963 and $128,513 at December 31, 2000 and 1999, respectively.
SMMP has a note receivable from an affiliate of S-P with a principal balance
outstanding at December 31, 2000 of $2,696,350. The loan is guaranteed by the
owners of CGS Real Estate Company, Inc. ("CGS") The note receivable was
involved in a lawsuit in which the Partnership was the defendant. In
connection with the settlement of the lawsuit by the Partnership, SMMP would
call a portion of the note receivable. The portion called would be that
percentage of the loan that is equal to the Partnership's ownership interest
in SMMP, in any event no less than 30%. Such funds would have been
distributed to the Partnership in accordance with the lawsuit settlement. As
of March 26, 2001, the note has not been called, the settlement has been
declared null and void, and a supplemental complaint alleging new allegations
has been filed. (See further discussion at note 8).
36
Sierra Pacific Development Fund II and subsidiary
Notes to Consolidated Financial Statements
Page ten
The following is a summary of aggregated financial information for all
investments owned by SMMP which are accounted for under the equity method:
Condensed Combined Balance Sheets
December 31, December 31,
2000 1999
----------- -----------
Assets
Cash and cash equivalents $ 53,567 $ 272,657
Rent receivable 449,743 588,742
Income-producing property,
net of accumulated depreciation 7,831,381 8,109,927
Other assets, net of accumulated
amortization 538,029 1,897,050
----------- -----------
Total Assets $ 8,872,720 $10,868,376
=========== ===========
Liabilities and General Partners' Equity
Accrued and other liabilities $ 215,570 $ 350,272
Note payable 4,025,544 1,673,186
----------- -----------
Total Liabilities 4,241,544 2,023,458
----------- -----------
Ground lessors' equity in income-producing property 0 3,000,000
----------- -----------
General Partners' equity 4,631,606 5,844,918
----------- -----------
Total Liabilities and General Partners' equity $ 8,872,720 $10,868,376
=========== ===========
37
Sierra Pacific Development Fund II and subsidiary
Notes to Consolidated Financial Statements
Page eleven
Condensed Combined Statements of Operations
For the Year Ended December 31,
2000 1999 1998
----------- ----------- -----------
Revenues:
Rental income $ 2,363,463 $ 2,112,254 $ 1,734,403
Interest income 11,218 34,540 0
Other income 0 15,151 93,668
----------- ----------- -----------
Total revenues 2,374,681 2,161,945 1,828,071
----------- ----------- -----------
Expenses:
Operating expenses 1,048,507 1,407,262 1,302,968
Depreciation and amortization 857,613 779,142 829,081
Interest 360,801 152,563 156,636
----------- ----------- -----------
Total expenses 2,266,921 2,338,967 2,288,685
----------- ----------- -----------
Income (loss) before extraordinary loss 107,760 (177,022) (460,614)
Extraordinary loss from write-off of
deferred loan costs (46,020) 0 0
----------- ----------- -----------
Net income (loss) $ 61,740 $ (177,022) $ (460,614)
=========== =========== ===========
Reference is made to the audited financial statements of Sierra Mira Mesa
Partners included herein.
38
Sierra Pacific Development Fund II and subsidiary
Notes to Consolidated Financial Statements
Page twelve
6. NOTES PAYABLE
At December 31, 2000 and 1999, notes payable consisted of the following:
2000 1999
---------- ----------
Mortgage note payable, due in monthly interest only payments
at 5%, collateralized by certain land and buildings. This
note matures in April 2004 3,000,000 3,000,000
Mortgage note payable, due in monthly installments with
interest at 9%, collateralized by certain land and
buildings. This note matures in March 2006 1,870,972 1,902,438
Mortgage note payable, due in monthly installments with
interest at 8.35%, collateralized by certain land and
buildings. This note matures in September 2009 1,479,069 1,494,678
---------- ----------
$6,350,041 $6,397,116
========== ==========
Annual maturities of notes payable as of December 31, 2000, are: $50,056 in
2001; $57,632 in 2002; $62,921 in 2003; $3,068,346 in 2004; $74,970 in 2005; and
$3,036,116 thereafter.
7. PARTNERS' EQUITY
Equity and net income (loss) per limited partnership unit is determined by
dividing the limited partners' share of the Partnership's equity and net income
(loss) by the number of limited partnership units outstanding, 56,674 Class A
and 29,979 Class B.
Partners' equity accounts have been adjusted to reflect an allocation of
cumulative net loss to the partners in accordance with the agreement of limited
partnership. This agreement provides that 99% of operating income, gains,
losses, deductions and credits of the Partnership shall be allocated among the
Limited Partners and 1% shall be allocated to the General Partner.
Prior year balances have not been adjusted because management does not believe
that the effects of these adjustments are significant to the prior year
partners' equity balances.
Upon any sale, refinancing or other disposition of the Partnership's real
properties, allocations and distributions are made after each Limited Partner
has received 100% of his Adjusted Capital Contributions plus a 15% per annum
cumulative return on such invested capital. Any remaining proceeds shall be
distributed 85% to the Limited Partners and 15% to the General Partner.
Distributions of the remaining proceeds to the Limited Partners shall be made in
a manner such that Limited Partners holding Class A Units shall receive
distributions 15% greater than the distributions received by the holders of
Class B Units.
39
Sierra Pacific Development Fund II and subsidiary
Notes to Consolidated Financial Statements
Page thirteen
8. COMMITMENTS AND CONTINGENT LIABILITIES
In November 1995, a limited partner of the Partnership, on their own behalf
and on behalf of all others similarly situated, filed a lawsuit against S-P
Properties, Inc., ("S-P"), the General Partner of the Partnership, among
others, in the Superior Court of the State of California, County of Los
Angeles (the "Court"). This suit alleged breach of fiduciary duty and breach
of contract. The Plaintiff's claims relate to three loans made to affiliates,
two by the Partnership and one by SMMP, which were allegedly improper or made
below market rates. The Plaintiffs were seeking unspecified compensatory and
punitive damages and removal of the General Partner.
In September 1997, the Court denied the Plaintiff's motion for class
certification, but granted the Plaintiff leave to file an amended complaint. The
Partnership demurred to all class action allegations in the amended complaint.
The Court granted the demurred without leave to amend, thereby reducing the
Plaintiff's allegations to a derivative suit.
In December 1999, as a compromise to all claims asserted in what became a
derivative action on behalf of the Partnership, the parties agreed to enter
into a Mutual Compromise and Settlement ("the Settlement"). The Settlement
provides for a complete release of the Partnership, general partners and all
affiliates. As part of the material terms of the Settlement, S-P as the
general partner of the Partnership, on or before December 31, 2000, would
call and collect the two demand notes with balances of $1,073,460 and
$5,336,584, respectively, at December 31, 2000 and a portion of the SMMP loan
(the date of collection being referred to herein as the "Payment Date"). In
the case of the SMMP loan, the amount due being that percentage of the loan
that is equal to the Partnership's interest in SMMP, and in any event no less
than thirty percent (30%). The loan proceeds received by the Partnership,
totaling approximately $7,200,000, would be distributed on a per-unit basis
to the limited partners and assignees of the Partnership of record within 30
days of the Payment Date. The Partnership would pay Plaintiff's attorneys'
fees of $1,000,000. The Plaintiff, on behalf of the Partnership, would
dismiss the entire action with prejudice. The court approved the Settlement
on February 9, 2000.
In 2000, the Partnership paid scheduled Plaintiff's attorneys' fees of
$500,000. The $500,000 balance was due December 31, 2000. As of March 30,
2001, S-P has not called and collected the notes and the Partnership has not
satisfied its remaining legal fee obligation. The $500,000 legal fee
obligation is included in accrued and other liabilities on the balance sheet
at December 31, 2000.
On February 21, 2001, the Plaintiff served S-P with a Notice of Default
Election stating that the Plaintiff was declaring the Settlement null and
void because of S-P's failure to collect various loans and distribute the
proceeds no later than January 30, 2001 as required under the Settlement
Agreement. The Notice of Default Election also stated the Plaintiff's
intention to ask the court to put the case back on the active trial list. In
addition, the Plaintiff filed a motion to file a supplemental complaint
alleging new violations of the Partnership Agreement.
On March 16, 2001, the court granted the Plaintiff's motion to file the
supplemental complaint. In the supplemental complaint, the Plaintiff has
included new allegations alleging that after entering into the Settlement
Agreement, S-P breached the Partnership Agreement by lending certain persons
and entities over $500,000 by transferring these funds to certain executive
officers of S-P or their alleged affiliates. The court also restored the case
to the civil active list and set a further status conference for May 23, 2001
with the intention of setting a trial date for approximately three months
thereafter.
S-P intends to file a demurrer to the supplemental complaint and otherwise
vigorously defend the action.
Management anticipates settlement of the notes receivable upon the completion
of the consolidation transaction (See Note 9). However, there can be no
assurance such transaction will be executed. Should the partnerships be
unable to settle the notes receivable subject to the litigation, a principal
shareholder of S-P has unconditionally guaranteed their payment.
S-P has denied and continues to deny that it has committed any violations of
law, and states that it has entered into the Settlement solely to eliminate
the burden and expense of further litigation. Management believes the
ultimate outcome of this litigation will not have a material adverse effect
on the Partnership.
40
Sierra Pacific Development Fund II and subsidiary
Notes to Consolidated Financial Statements
Page fourteen
9. PENDING TRANSACTION
CGS is continuing the development of a plan which will combine the Partnership's
properties 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 February 14, 2001.
41
Sierra Mira Mesa Partners and Subsidiary
(A California General Partnership)
Consolidated balance sheets as of December 31, 2000 and 1999 and statements of
operations, changes in general partners' equity and cash flows for each of the
three years in the period ended December 31, 2000 and Report of Independent
Public Accountants
42
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Sierra Mira Mesa Partners
We have audited the accompanying consolidated balance sheet of Sierra Mira Mesa
Partners, a California general partnership, and subsidiary (the "Partnership")
as of December 31, 2000 and the related consolidated statements of operations,
changes in partners' equity 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 Mira Mesa
Partners 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.
ARTHUR ANDERSEN LLP
Houston, Texas
March 26, 2001
43
INDEPENDENT AUDITORS' REPORT
To the Partners of
Sierra Mira Mesa Partners
We have audited the accompanying consolidated balance sheet of Sierra Mira Mesa
Partners and subsidiary, a California general partnership, (the "Partnership")
as of December 31, 1999 and the related consolidated statements of operations,
changes in partners' equity 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 Mira Mesa
Partners and subsidiary 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
44
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY
(A California General Partnership)
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
December 31, December 31,
2000 1999
------------ ------------
ASSETS
Cash and cash equivalents $ 51,660 $ 319,400
Receivables:
Unbilled rent (Notes 1 and 4) 898,542 1,114,598
Billed rent (Note 1) 33,469 83,917
Due from affiliates, net (Note 3) 2,696,350 2,451,227
Income-producing property - net of accumulated
depreciation of $3,914,748 and $3,564,380
(Notes 1, 4 and 6) 8,346,471 8,723,396
Investment in unconsolidated
joint ventures (Notes 1 and 5) 1,295,403 2,526,875
Other assets - net of accumulated amortization
of $581,788 and $721,525 (Notes 1, 2 and 3) 787,724 793,658
------------ ------------
Total Assets $ 14,109,619 $ 16,013,071
============ ============
LIABILITIES AND GENERAL PARTNERS' EQUITY
Accrued and other liabilities (Note 2) $ 104,558 $ 101,104
Notes payable (Note 6) 5,890,607 6,179,038
------------ ------------
Total Liabilities 5,995,165 6,280,142
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)
Minority interest in consolidated
joint venture (Note 1) (357,312) (340,614)
General Partners' equity (Note 1) 8,471,766 10,073,543
------------ ------------
Total Liabilities and General Partners' equity $ 14,109,619 $ 16,013,071
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
45
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY
(A California General Partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
----------- ----------- -----------
Revenues:
Rental income (Note 1) $ 2,151,930 $ 2,126,106 $ 1,883,630
Interest income 249,827 224,308 205,781
----------- ----------- -----------
Total revenues 2,401,757 2,350,414 2,089,411
----------- ----------- -----------
Expenses:
Operating expenses:
Depreciation and amortization 571,117 587,070 581,956
Property taxes and insurance 102,883 98,611 97,781
Administrative fees (Note 3) 115,621 121,889 111,206
Maintenance and repairs 246,460 233,615 240,965
Management fees (Note 3) 134,447 119,166 109,725
Utilities 194,507 135,301 135,077
Legal and accounting 35,239 24,767 27,657
General and administrative 19,937 16,122 7,443
Bad debt expense 67,673 4,770 0
Other operating expenses 19,410 46,413 25,124
----------- ----------- -----------
Total operating expenses 1,507,294 1,387,724 1,336,934
Interest 485,730 450,177 438,711
----------- ----------- -----------
Total expenses 1,993,024 1,837,901 1,775,645
----------- ----------- -----------
INCOME BEFORE PARTNERSHIP'S SHARE OF
UNCONSOLIDATED JOINT VENTURE
INCOME (LOSSES) 408,733 512,513 313,766
----------- ----------- -----------
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE INCOME (LOSSES) (Note 5) 43,580 (36,405) (131,897)
----------- ----------- -----------
INCOME BEFORE MINORITY INTEREST'S
SHARE OF CONSOLIDATED JOINT VENTURE
LOSS (INCOME) 452,313 476,108 181,869
----------- ----------- -----------
MINORITY INTEREST'S SHARE OF CONSOLIDATED
JOINT VENTURE LOSS (INCOME) 16,698 7,618 (787)
----------- ----------- -----------
NET INCOME $ 469,011 $ 483,726 $ 181,082
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
46
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY
(A California General Partnership)
CONSOLIDATED STATEMENTS OF CHANGES IN GENERAL PARTNERS' EQUITY
For the Years Ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
General Partners
------------------------------------------------
Sierra Pacific Sierra Pacific
Development Pension
Fund II Investors '84 Total
-------------- -------------- ------------
General Partners' equity - January 1, 1998 $ 3,261,917 $ 6,603,968 $ 9,865,885
Net (loss) income (14,912) 195,994 181,082
Contributions 8,490 42,000 50,490
Distributions (211,490) (211,250) (422,740)
------------ ------------ ------------
General Partners' equity - December 31, 1998 3,044,005 6,630,712 9,674,717
Net income 159,678 324,048 483,726
Contributions 44,000 539,784 583,784
Distributions (370,184) (298,500) (668,684)
------------ ------------ ------------
General Partners' equity - December 31, 1999 2,877,499 7,196,044 10,073,543
Net income 141,501 327,510 469,011
Contributions 119,678 53,900 173,578
Distributions (1,626,473) (617,893) (2,244,366)
------------ ------------ ------------
General Partners' equity - December 31, 2000 $ 1,512,205 $ 6,959,561 $ 8,471,766
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
47
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY
(A California General 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 income $ 469,011 $ 483,726 $ 181,082
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation and amortization 571,117 587,070 581,956
Undistributed (income) losses of
unconsolidated joint ventures (43,580) 36,405 131,897
Minority interest in consolidated
joint venture (loss) income (16,698) (7,618) 787
Bad debt expense 67,673 4,770 0
Decrease in rent receivable 198,831 27,641 60,853
Increase in due from affiliates (245,123) (222,839) (202,581)
Increase in other assets (143,525) (45,022) (215,974)
Increase (decrease) in accrued and other liabilities 3,454 (150,886) 183,225
----------- ----------- -----------
Net cash provided by operating activities 861,160 713,247 721,245
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions (44,733) (160,815) (346,113)
Capital contributions to unconsolidated
joint ventures (2,090,088) (1,027,820) (350,900)
Distributions received from unconsolidated
joint ventures 3,365,140 105,000 372,312
----------- ----------- -----------
Net cash provided by (used in) investing activities 1,230,319 (1,083,635) (324,701)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions from General Partners 173,578 583,784 50,490
Cash distributions to General Partners (2,244,366) (668,684) (422,740)
Proceeds from note payable secured by property 0 1,637,500 0
Principal payments on notes payable (288,431) (876,876) (254,638)
----------- ----------- -----------
Net cash (used in) provided by financing activities (2,359,219) 675,724 (626,888)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (267,740) 305,336 (230,344)
CASH AND CASH EQUIVALENTS - Beginning of year 319,400 14,064 244,408
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - End of year $ 51,660 $ 319,400 $ 14,064
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for real estate taxes $ 73,176 $ 72,469 $ 71,184
=========== =========== ===========
Cash paid during the year for interest $ 487,020 $ 439,792 $ 439,756
=========== =========== ===========
In 2000, 1999, and 1998 interest receivable of $245,123, $222,839, and $202,581,
respectively, was added to the principal balance of the related note receivable
from affiliate. These transactions are noncash items not reflected in the above
statement of cash flows.
The accompanying notes are an integral part of these consolidated financial
statements.
48
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 was 100% leased at December 31, 2000.
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. In conjunction with this amendment, the general partners
forgave the December 31, 1996 balances of advances due from SMMP and included
these amounts as adjustments to their respective equity accounts. The sharing
ratio in effect for 1998, 1999 and 2000 was 33.74%, 33.01% and 30.17%,
respectively, for SPDFII and 66.26%, 66.99% and 69.83%, respectively, for
SPPI'84. On January 1, 2001, the sharing ratio will be decreased to 19.68% for
SPDFII and increased to 80.32% for SPPI'84 to reflect the 2000 contributions and
distributions.
S-P Properties, Inc. is the General Partner and manager of SPDFII and SPPI'84.
On December 30, 1994, all of the outstanding stock of TCP, Inc. was sold to
Finance Factors, Inc. TCP, Inc. owns all of the common stock of S-P Properties,
Inc. Finance Factors was a subsidiary of CGS Real Estate Company, Inc. ("CGS"),
a national real estate company. In July 1995, Finance Factors, Inc. merged with
Bancor Real Estate Company, Inc., another subsidiary of CGS.
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 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 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.
The consolidated financial statements of SMMP include the accounts of SMMP and
Sorrento I Partners ("SIP"), a majority owned joint venture as of December 31,
2000. SMMP consolidates all subsidiaries in which it a has controlling equity
interest. All significant intercompany balances and transactions have been
eliminated in consolidation.
49
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page two
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid, short-term investments with
original maturities of three months or less.
Fair Value of Financial Instruments
The financial instruments of the Partnership at December 31, 2000 and 1999
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 based on
market rates at December 31, 2000 and 1999. Management does not fair value
the amounts due from affiliates due to the related party nature of this
receivable.
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.
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 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"). Future cash flows
are estimated and compared to the carrying amount of the asset to determine if
an impairment has occurred. If the sum of the expected future cash flows is less
than the carrying amount of the asset, the Partnership shall recognize an
impairment loss in accordance with the Statement. No such impairment has been
recognized by the Partnership at 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. 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).
50
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page three
Other Assets
Deferred leasing costs represent costs incurred to lease properties and are
amortized over the life of the related lease using the straight line method of
accounting.
Deferred loan costs represent costs incurred to obtain financing and are
amortized over the life of the related loan using the straight line method of
accounting.
Rental Income and Rent Receivable
Rental income is recognized on the straight-line method over the term of the
related operating lease in accordance with the provisions of Statement of
Financial Accounting Standards No. 13, "Accounting for Leases".
Rent receivable consists of (a) unbilled rent - the difference between rent
recognized on the straight-line method and actual cash due; and (b) billed rent
- - rent due but not yet received.
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.
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.
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. The Partnership adopted the accounting provisions of SAB 101 in
2000. The implementation of SAB 101 did not have a significant effect on the
Partnership's financial condition or results of operations.
51
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page four
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:
Prepaid expenses $ 13,067 $ 7,383
Deferred loan costs, net of accumulated
amortization of $65,972 and $49,842 152,096 168,225
Deferred leasing costs, net of accumulated
amortization of $655,553 and $531,945 384,097 507,000
Deposits 25,000 0
Tax impounds and insurance impounds 34,491 26,831
Tenant improvement reserves 178,973 84,219
-------- --------
$787,724 $793,658
======== ========
Accrued and other liabilities:
Accounts payable $ 29,964 $ 51,008
Security deposits 32,573 17,922
Accrued expenses 11,138 0
Interest payable 30,883 32,174
-------- --------
$104,558 $101,104
======== ========
3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS
Affiliates of S-P Properties, Inc. receive a monthly management fee totaling
5.5% of the gross rental income collected from the properties or $600,
whichever is greater. This fee amounted to $134,447, $119,166, and $109,725
respectively, for the years ended December 31, 2000, 1999, and 1998. This fee
was recorded as part of the operating expenses of the properties.
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 $115,621, $122,239, and
$111,206 respectively, for such services for the years ended December 31, 2000,
1999, and 1998. Additionally, SMMP reimbursed an affiliate for construction
supervision costs incurred by the affiliate. For the years ended December 31,
2000, 1999, and 1998, the affiliate received $0, $28,201, and $1,327
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, 2000, 1999, and 1998, these fees amounted to
$0, $0, and $63,492 respectively, and were recorded as deferred leasing costs.
During 1993, SMMP loaned funds to a former affiliate of S-P Properties, Inc. in
the form of a demand note. The liability was 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 loan was variable at bank
prime plus 2 1/4% - 3% with a minimum rate of 9%. The loan totaled $2,360,000 at
December 31, 1993 and was 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, 2000, 1999, 1998 and 1997, interest receivable of $245,123,
$222,839, $202,581 and $338,020, respectively, was added to the principle
balance of the loan. No interest related to this loan was due to the Partnership
at December 31, 2000 and 1999. The principal balance outstanding at December 31,
2000 was $2,696,350. The loan is guaranteed by the owners of CGS Real Estate
Company, Inc. ("CGS").
The note receivable was involved in a lawsuit in which SPDFII was the
defendant. In connection with the settlement of the lawsuit by SPDFII, the
Partnership would call a portion of the note receivable from Bancor Real
Estate Company, Inc. The portion called would be that percentage of the loan
that is equal to SPDFII's ownership interest in the Partnership, in any event
no less than 30%. Such funds would have been distributed to SPDFII in
accordance with the lawsuit settlement. As of March 26, 2001, the note has
not been called, the settlement has been declared null and void, and a
supplemental complaint alleging new allegations has been filed.
Management anticipates settlement of the SMMP note receivable upon completion
of the consolidation transaction (see Note 8). However, there can be no
assurance such transaction will be executed. Should the partnerships be
unable to settle the note receivable subject to the litigation, a principal
shareholder of S-P Properties, Inc. has unconditionally guaranteed their
payment.
S-P Properties Inc. has denied and continues to deny that it has committed
any violations of law. Management believes the ultimate outcome of this
litigation will not have a material adverse effect on the Partnership.
52
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page five
During 1996, the Partnership made a non-interest bearing advance to an affiliate
in the amount of $4,770. The advance was deemed uncollectible and subsequently
written off to bad debt expense in 1999.
See Note 6 for note payable transactions with related parties.
4. INCOME-PRODUCING PROPERTIES
At December 31, 2000 and 1999 the total cost and accumulated depreciation of the
properties are as follows:
2000 1999
------------ ------------
Land $ 3,786,458 $ 3,786,458
Building and improvements 8,474,761 8,501,318
------------ ------------
Total 12,261,219 12,287,776
Accumulated depreciation (3,914,748) (3,564,380)
------------ ------------
Net $ 8,346,471 $ 8,723,396
============ ============
During 2000 and 1999, the Partnership removed $71,290 and $147,303,
respectively, from its building and improvements and related accumulated
depreciation accounts for fully depreciated property.
Future minimum base rental income, under the existing operating leases for the
Sierra Mira Mesa and Sorrento I properties, to be recognized on a straight-line
basis and amounts to be received on a cash basis are as follows:
Year Ending Straight-line Cash
December 31, Basis Basis
- ---------------------- ------------- ----------
2001 $2,092,837 $2,407,018
2002 2,083,837 2,507,237
2003 653,201 737,422
2004 179,747 184,288
2005 154,746 164,174
Thereafter 438,415 501,186
---------- ----------
Total $5,602,783 $6,501,325
========== ==========
In each of the three years in the period ending December 31, 2000, two tenants
accounted for the majority of the Partnership's rental income. A state
governmental agency associated with workers compensation insurance accounted for
69% of rental income in 2000 and 1999, and 78% in 1998; a tenant in the
communications sector accounted for 13% of rental income in 2000, 1999 and 1998.
53
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page six
5. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
SMMP holds the following investments accounted for under the equity method at
December 31, 2000:
o a 43.92% 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, 2000 and 1999 is $3,822,355 and $2,647,872, respectively.
SMMP's share of the net income (loss) of SIIP for the three years ended
December 31, 2000, 1999 and 1998 is $60,583, $(30,637) and $(143,251),
respectively;
o a 5.08% 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, 2000 and 1999 was $(2,540,963) and $(128,513), respectively. SMMP's
share of the net loss of SCP for the three years ended December 31, 2000,
1999 and 1998 was $(12,441), $(5,903) and $(8,420), respectively;
o a 33.36% 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, 2000 and
1999 was $14,011 and $7,516, respectively. SMMP's share of the net (loss)
income of SVP for the three years ended December 31, 2000, 1999 and 1998
was $(4,562), $135 and $19,774, respectively. The Sierra Vista property
was sold in October 1997.
54
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page seven
The following is a summary of aggregated financial information for all
investments owned by SMMP which are accounted for under the equity method:
Condensed Combined Balance Sheets
December 31, December 31,
2000 1999
----------- -----------
Assets
Cash and cash equivalents $ 53,567 $ 272,657
Rent receivable 449,743 588,742
Income-producing property,
net of accumulated depreciation 7,831,381 8,109,927
Other assets, net of accumulated
amortization 538,029 1,897,050
----------- -----------
Total Assets $ 8,872,720 $10,868,376
=========== ===========
Liabilities and General Partners' Equity
Accrued and other liabilities $ 215,570 $ 350,272
Note payable 4,025,544 1,673,186
----------- -----------
Total Liabilities 4,241,544 2,023,458
----------- -----------
Ground lessors' equity in income-producing property 0 3,000,000
----------- -----------
General Partners' equity 4,631,606 5,844,918
----------- -----------
Total Liabilities and General Partners' equity $ 8,872,720 $10,868,376
=========== ===========
55
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page eight
Condensed Combined Statements of Operations
For the Year Ended December 31,
-----------------------------------------------
2000 1999 1998
----------- ----------- -----------
Revenues:
Rental income $ 2,363,463 $ 2,112,254 $ 1,734,403
Interest income 11,218 34,540 0
Other income 0 15,151 93,668
----------- ----------- -----------
Total revenues 2,374,681 2,161,945 1,828,071
----------- ----------- -----------
Expenses:
Operating expenses 1,048,507 1,407,262 1,302,968
Depreciation and amortization 857,613 779,142 829,081
Interest 360,801 152,563 156,636
----------- ----------- -----------
Total expenses 2,266,921 2,338,967 2,288,685
----------- ----------- -----------
Income (loss) before extraordinary loss 107,760 (177,022) (460,614)
Extraordinary loss from write-off of
deferred loan costs (46,020) 0 0
----------- ----------- -----------
Net income (loss) $ 61,740 $ (177,022) $ (460,614)
=========== =========== ===========
6. NOTES PAYABLE
2000 1999
---------- ----------
Mortgage note payable, due in monthly
installments with interest at 7.74% per
annum, collateralized by the real property
known as Sierra Mira Mesa. This note
matures in October 2010 $4,265,067 $4,543,984
Mortgage note payable, due in monthly
installments with interest at 8.75% per
annum, collateralized by the Sorrento I
property. The note matures in September
2009 1,625,540 1,635,054
---------- ----------
$5,890,607 $6,179,038
========== ==========
In August 1999, SIP paid its mortgage note due to CGS, an affiliate of the
General Partner, with an outstanding balance of $607,693. 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. Principal and interest payments of $12,882 are due
monthly until maturity 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.
As of December 31, 2000, annual maturities on notes payable were: $314,146 in
2001; $339,483 in 2002; $366,864 in 2003; $396,456 in 2004; $428,435 in 2005;
and $4,045,223 thereafter.
56
Sierra Mira Mesa Partners
Notes to Consolidated Financial Statements
Page nine
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.
Under the terms of the Sierra Creekside Partners ("SCP") joint venture
agreement, SMMP would be obligated to contribute any negative balance
outstanding in its capital account upon liquidation of the Partnership. Such
balance was $2,540,963 and $128,513 at December 31, 2000 and 1999,
respectively.
8. PENDING TRANSACTION
CGS is continuing the development of a plan which will combine the
Partnership's property with the properties of other real estate partnerships
managed by CGS and its affiliates. These 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. 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.
57
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.
58