FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter ended September 30, 1997
----------------------------------------------------
Commission file number 0-12036
----------------------------------------------------
SIERRA PACIFIC DEVELOPMENT FUND II
(A LIMITED PARTNERSHIP)
State of California 95-3836271
- ------------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
5850 San Felipe, Suite 500
Houston, Texas 77057
- ---------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone
number, including area code: (713) 706-6271
-----------------------------------------------
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[ ].
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following financial statements are submitted in the next pages:
PAGE
NUMBER
Balance Sheets - September 30, 1997 and December 31, 1996 4
Statements of Operations - For the Nine Months Ended
September 30, 1997 and 1996 and the Three Months Ended
September 30, 1997 and 1996 5
Statements of Changes in Partners' Equity - From April 29,
1983 (inception of Partnership) to December 31, 1996 and
for the Nine Months Ended September 30, 1997 6
Statements of Cash Flows - For the Nine Months Ended
September 30, 1997 and 1996 7
Notes to Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(a) OVERVIEW
The following discussion should be read in conjunction with the Partnership's
Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q.
The Partnership currently owns three properties; 5850 San Felipe, Sierra
Westlakes, and Sierra Southwest Pointe. In addition, the Partnership holds a
35.98% interest in Sierra Mira Mesa Partners ("SMMP").
(b) RESULTS OF OPERATIONS
Rental income for the nine months ended September 30, 1997 increased by $43,000,
or 3%, when compared to the corresponding period in the prior year, primarily
due to an in increase in occupancy at 5850 San Felipe from 64% at September 30,
1996 to 73% at September 30, 1997. Occupancy at Sierra Southwest Pointe and
Sierra Westlakes remained comparable between the same periods. This increase in
rental income was partially offset due to the write off of rent receivable at
5850 San Felipe in August 1997. Rental income for the three months ended
September 30, 1997 decreased by $35,000, or 8%, principally due to the rent
receivable write off in the quarter.
2
<PAGE>
Operating expenses for the nine months ended September 30, 1997 increased
$54,000, or 5%, when compared to the corresponding period in prior year,
principally due to higher maintenance and repair costs and from an increase in
legal fees incurred defending against litigation pending against the
Partnership. This increase was partially offset by lower accounting and auditing
costs for the period. Depreciation and amortization expenses for the nine months
ended September 30, 1997 increased by $116,000, or 25%, principally due to
increased depreciation and amortization on renovations to the lobby at 5850 San
Felipe in 1996 and from additional tenant improvements associated with the
increased occupancy.
Interest expense decreased by $27,000, or 8%, due primarily to the restructure
of the debt collateralized by 5850 San Felipe. This modification agreement,
which was effective March 22, 1996, reduced the interest rate on this debt to 5%
from the previous 8.5%, in exhange for a principal paydown of approximately
$1,000,000. The reduced interest expense resulting from this agreement was
partially offset by the interest associated with the funding of a $2,000,000
note collateralized by the Sierra Westlakes property in February 1996.
The Partnership's share of (loss) income from investment in SMMP was ($107,000)
for the nine months ended September 30, 1997 compared to $256,000 for the
corresponding period in the prior year. The income generated by SMMP was
principally due to its share of income from Sorrento I Partners ("SIP"), which
owns the Sorrento I property. SIP exercised a discounted payoff option in May
1996 and recorded an extraordinary gain of $1,200,000 in connection with this
transaction.
(c) LIQUIDITY AND CAPITAL RESOURCES
The Partnership is in an illiquid position as of September 30, 1997 with cash
and billed receivables of $98,000 compared to $738,000 of accrued and other
liabilities. The Partnership's primary capital requirements will be for the
possible acquisition of land for additional parking at Sierra Westlakes,
construction of new tenant space and compliance with the Americans with
Disabilities Act or other yet unknown changes in building codes. It is
anticipated that the capital required to fund these capital requirements will be
generated from current cash flow from rental activities.
3
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND II
(A Limited Partnership)
BALANCE SHEETS
September 30, 1997 and December 31, 1996
September 30, December 31,
1997 1996
----------- -----------
ASSETS
Cash and cash equivalents ...................... $ 19,316 $ 22,962
Receivables:
Note, net of deferred gain of $736,271 ....... 2,163,729 2,163,729
Unbilled rent ................................ 291,079 334,495
Billed rent .................................. 78,655 25,181
Due from affiliates .......................... 862,084 1,017,674
Other receivables ............................ 294,518 176,421
Income-producing properties - net of
accumulated depreciation and valuation
allowance of $3,672,685 and $3,222,155,
respectively ................................. 11,066,329 11,206,449
Investment in unconsolidated joint venture ..... 4,883,236 4,838,609
Other assets ................................... 831,870 444,338
----------- -----------
Total Assets ................................... $20,490,816 $20,229,858
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Accrued and other liabilities .................. $ 737,596 $ 574,648
Due to affiliate ............................... 726,800 0
Notes payable .................................. 6,033,554 6,098,994
----------- -----------
Total Liabilities .............................. 7,497,950 6,673,642
----------- -----------
Partners' equity:
General Partner .............................. 0 0
Limited Partners:
Class A Limited Partners:
60,000 units authorized,
56,674 issued and outstanding ............ 8,497,784 8,866,234
Class B Limited Partners:
60,000 units authorized,
29,979 issued and outstanding ............ 4,495,082 4,689,982
----------- -----------
Total Partners' equity ......................... 12,992,866 13,556,216
----------- -----------
Total Liabilities and Partners' equity ......... $20,490,816 $20,229,858
=========== ===========
Unaudited
See Accompanying Notes
4
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND II
(A Limited Partnership)
STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 1997 and 1996
and for the Three Months Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------------- ----------------------
1997 1996 1997 1996
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Rental income ...................... $ 1,369,264 $ 1,326,093 $ 421,481 $ 456,098
Interest income .................... 253,941 264,480 84,780 85,010
----------- ----------- --------- ---------
Total revenues .................. 1,623,205 1,590,573 506,261 541,108
----------- ----------- --------- ---------
EXPENSES:
Operating expenses ................. 1,127,938 1,073,447 365,787 360,957
Depreciation and amortization ...... 573,789 457,824 198,974 158,276
Interest ........................... 327,508 354,701 108,651 111,673
----------- ----------- --------- ---------
Total costs and expenses ........ 2,029,235 1,885,972 673,412 630,906
----------- ----------- --------- ---------
LOSS BEFORE PARTNERSHIP'S SHARE OF
UNCONSOLIDATED JOINT VENTURE (LOSS)
INCOME ............................ (406,030) (295,399) (167,151) (89,798)
----------- ----------- --------- ---------
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE (LOSS) INCOME ....... (107,320) 255,903 (31,064) (39,652)
----------- ----------- --------- ---------
NET LOSS ............................. $ (513,350) $ (39,496) $(198,215) $(129,450)
=========== =========== ========= =========
Net loss per limited partnership unit $ (5.92) $ (0.46) $ (2.29) $ (1.49)
=========== =========== ========= =========
</TABLE>
Unaudited
See Accompanying Notes
5
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND II
(A Limited Partnership)
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
From April 29, 1983 (Inception of Partnership) to December 31, 1996
and for the Nine Months Ended September 30, 1997
<TABLE>
<CAPTION>
Limited Partners Total
------------------------------------------- General Partners'
Class A Class B Total Per Unit Partner Equity
------------ ----------- ------------ ------- -------- ------------
<S> <C> <C> <C> <C> <C>
Proceeds from sale of
partnership units ................. $ 14,392,000 $ 7,579,000 $ 21,971,000 $250.00 $ 21,971,000
Underwriting commissions
and other organization expenses ... (1,939,045) (1,021,124) (2,960,169) (33.68) (2,960,169)
Repurchase of 1,231 partnership
units ............................ (177,934) (66,167) (244,101) 0.06 (244,101)
Cumulative net income
(to December 31, 1996) ............ 243,566 128,245 371,811 4.29 $ 46,674 418,485
Cumulative distributions
(to December 31, 1996) ............ (3,652,353) (1,929,972) (5,582,325) (64.22) (46,674) (5,628,999)
------------ ----------- ------------ ------- -------- ------------
Partners' equity -
January 1, 1997 ................... 8,866,234 4,689,982 13,556,216 156.45 0 13,556,216
Net loss ............................ (335,748) (177,602) (513,350) (5.92) (513,350)
Distributions ....................... (32,702) (17,298) (50,000) (0.58) (50,000)
------------ ----------- ------------ ------- -------- ------------
Partners' equity - September 30, 1997 $ 8,497,784 $ 4,495,082 $ 12,992,866 $149.95 $ 0 $ 12,992,866
============ =========== ============ ======= ======== ============
</TABLE>
Unaudited
See Accompanying Notes
6
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND II
(A Limited Partnership)
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .............................................. $(513,350) $ (39,496)
Adjustments to reconcile net loss
to cash (used in) provided by operating activities:
Depreciation and amortization ....................... 573,789 457,824
Undistributed loss (income) of unconsolidated
joint venture ..................................... 107,320 (255,903)
(Increase) decrease in rent receivable .............. (10,058) 21,892
(Increase) decrease in other receivables ............ (118,097) 25,901
Increase in other assets ............................ (469,928) (207,696)
Increase (decrease) in accrued and other liabilities 162,948 (453)
--------- -----------
Net cash (used in) provided by operating activities . (267,376) 2,069
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions ..................... (347,630) (486,725)
Capital contributions to unconsolidated joint venture (155,590) 0
Distributions received from unconsolidated
joint venture ..................................... 0 0
--------- -----------
Net cash used in investing activities ............... (503,220) (486,725)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions .................................. (50,000) (300,000)
Funding of note payable secured by property ......... 0 2,000,000
Principal payments on notes payable ................. (65,440) (1,066,777)
Payments to affiliate ............................... 0 (327,840)
Repayment of loans to affiliate ..................... 155,590 0
Borrowings from affiliate ........................... 726,800 0
--------- -----------
Net cash provided by financing activities ........... 766,950 305,383
--------- -----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS .................................... (3,646) (179,273)
CASH AND CASH EQUIVALENTS - Beginning of period ......... 22,962 202,963
--------- -----------
CASH AND CASH EQUIVALENTS - End of period ............... $ 19,316 $ 23,690
========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest ............ $ 342,765 $ 355,056
========= ===========
</TABLE>
Unaudited
See Accompanying Notes
7
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND II
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------
1. BASIS OF FINANCIAL STATEMENTS
In the opinion of the Partnership's management, these unaudited financial
statements reflect all adjustments which are necessary for a fair presentation
of its financial position at September 30, 1997 and results of operations and
cash flows for the periods presented. All adjustments included in these
statements are of a normal and recurring nature. These financial statements
should be read in conjunction with the financial statements and notes thereto
contained in the Annual Report of the Partnership for the year ended December
31, 1996.
2. RELATED PARTY TRANSACTIONS
In 1994, all of the common stock of TCP, Inc. was purchased by Finance
Factors, Inc. from Carlsberg Management Company ("CMC"). TCP, Inc. owns all
of the common stock of S-P Properties, Inc., the General Partner of the
Partnership. CMC continued to manage the affairs of the Partnership through
March 31, 1995.
Included in the financial statements for the nine months ended September 30,
1997 and 1996 are affiliate transactions as follows:
September 30
---------------------------
1997 1996
-------- --------
Management fees .......................... $ 67,944 $ 66,841
Administrative fees ...................... 175,299 144,798
Leasing fees ............................. 186,640 44,215
Construction fees ........................ 50,083 43,257
3. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
Sierra Mira Mesa Partners ("SMMP") 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. At September 30, 1997 the Partnership's interest in SMMP is
35.98%; the remaining 64.02% interest is owned by Sierra Pacific Pension
Investors '84.
UNAUDITED
8
<PAGE>
Sierra Pacific Development Fund II
Notes to Financial Statements
Page two
The consolidated financial statements of SMMP include the accounts of SMMP and
Sorrento I Partners, a majority owned California general partnership. Summarized
income statement information for SMMP for the nine months ended September 30,
1997 and 1996 follows:
September 30
------------------------------
1997 1996
----------- -----------
Rental income ............................ $ 1,436,848 $ 1,327,910
Total revenues ........................... 1,566,402 1,463,279
Operating expenses ....................... 537,379 605,231
Share of unconsolidated
joint venture loss ..................... 348,525 277,055
Loss before extraordinary item ........... (295,813) (463,792)
Extraordinary gain ....................... 0 1,200,380
Net (loss) income ........................ (295,813) 501,770
As of September 30, 1997, SMMP holds a 24.91% interest in Sorrento II Partners
("SIIP"), a California general partnership with Sierra Pacific Institutional
Properties V formed in 1993; a 4.96% interest in Sierra Creekside Partners
("SCP"), a California general partnership with Sierra Pacific Development Fund
formed in 1994; and a 47.05% interest in Sierra Vista Partners ("SVP"), a
California general partnership with Sierra Pacific Development Fund III formed
in 1994.
Summarized income statement information for these Partnerships, which are
accounted for by SMMP under the equity method, for the nine months ended
September 30, 1997 and 1996 follows:
SIIP
------------------------------
September 30
------------------------------
1997 1996
--------- ---------
Rental income ........................ $ 736,809 $ 748,770
Total revenues ....................... 736,809 748,770
Operating expenses ................... 300,806 275,159
Net loss ............................. (187,160) (148,853)
UNAUDITED
9
<PAGE>
Sierra Pacific Development Fund II
Notes to Financial Statements
Page three
SCP SVP
----------------------- -----------------------
September 30 September 30
----------------------- -----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Rental income .......... $ 557,954 $ 547,972 $ 566,780 $ 523,377
Total revenues ......... 557,954 555,744 567,413 523,377
Operating expenses ..... 377,391 376,892 418,057 388,328
Net income (loss) ...... (257,921) (291,816) (614,475) (481,951)
4. 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.
UNAUDITED
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following Exhibits are filed herewith pursuant to Rule 601 of
Regulation S-K.
Exhibit
Number Description of Exhibit
- ---------- -----------------------------
27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report be signed on its behalf by the
undersigned thereunto duly authorized.
SIERRA PACIFIC DEVELOPMENT FUND II
a Limited Partnership
S-P PROPERTIES, INC.
General Partner
Date: NOVEMBER 10, 1997 /S/ THOMAS N. THURBER
Thomas N. Thurber
President and Director
Date: NOVEMBER 10, 1997 /S/ BRUCE R. TIMBERS
Bruce R. Timbers
Chief Accounting Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM SIERRA PACIFIC DEVELOPMENT FUND II SEPTEMBER 30, 1997 FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 19,316
<SECURITIES> 0
<RECEIVABLES> 664,252
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,254,573
<PP&E> 14,739,014
<DEPRECIATION> 3,672,685
<TOTAL-ASSETS> 20,490,816
<CURRENT-LIABILITIES> 1,464,396
<BONDS> 6,033,554
0
0
<COMMON> 0
<OTHER-SE> 12,992,866
<TOTAL-LIABILITY-AND-EQUITY> 20,490,816
<SALES> 1,369,264
<TOTAL-REVENUES> 1,623,205
<CGS> 0
<TOTAL-COSTS> 1,127,938
<OTHER-EXPENSES> 573,789
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 327,508
<INCOME-PRETAX> (513,350)
<INCOME-TAX> 0
<INCOME-CONTINUING> (513,350)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (513,350)
<EPS-PRIMARY> (5.92)
<EPS-DILUTED> (5.92)
</TABLE>
