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 June 30, 1998
-----------------------------------------------
Commission file
number 0-12036
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SIERRA PACIFIC DEVELOPMENT FUND II
(A LIMITED PARTNERSHIP)
State of California 95-3856271
- ------------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
5850 San Felipe, Suite 450
Houston, Texas 77057
- ------------------------------------- -----------------------------------
(Address of principal executive
offices) (Zip Code)
Registrant's telephone
number,
including area code: (713) 706-6271
-----------------------------------------------
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 - June 30, 1998 and December 31, 1997 4
Statements of Operations - For the Six Months Ended
June 30, 1998 and 1997 and for the Three Months
Ended June 30, 1998 and 1997 5
Statements of Changes in Partners' Equity - From
April 29, 1983 (inception of Partnership) to
December 31, 1997 and for the Six Months Ended June
30, 1998 6
Statements of Cash Flows - For the Six Months Ended
June 30, 1998 and 1997 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
33.74% interest in Sierra Mira Mesa Partners ("SMMP").
2
<PAGE>
(b) RESULTS OF OPERATIONS
Rental income for the six months ended June 30, 1998 increased by $223,000, or
23%, when compared to the corresponding period in the prior year, principally
due to an increase in occupancy. At 5850 San Felipe, occupancy increased from
75% at June 30, 1997 to 98% at June 30, 1998. Occupancy at Sierra Southwest
Pointe and Sierra Westlakes remained comparable between the same periods. Rental
income for the three months ended June 30, 1998 increased by $36,000, or 7%,
primarily due to the increased occupancy at 5850 San Felipe. This increase was
partially offset due to lower common area maintenance fees billed during the
quarter in comparison to the same period in the 1997.
Operating expenses for the six months ended June 30, 1998 decreased by $98,000,
or 13%, in comparison to the corresponding period in prior year, principally due
to a decrease in legal fees. Further, lower administrative costs and maintenance
and repair expenses were incurred during the period. Operating expenses for the
three months ended June 30, 1998 decreased by $133,000, or 28%, primarily due to
the decrease in legal, administrative, and maintenance and repair costs. In
addition, auditing costs, which were accrued in the first quarter, were accrued
in the second quarter in the prior year.
Depreciation and amortization expenses for the six months ended June 30, 1998
increased by $91,000, or 24%, principally due to increased depreciation and
amortization on additional tenant improvements and lease costs associated with
the increased occupancy at 5850 San Felipe.
The Partnership's share of loss from investment in SMMP decreased by $25,000 for
the six months ended June 30, 1998 when compared to the same period in 1997. The
decrease in loss was due to its share of unconsolidated joint venture income
generated by SMMP for the six months and three months ended June 30, 1998.
However, the Partnership had understated its share of unconsolidated joint
venture loss in the prior year and recorded a $76,000 adjustment in the first
quarter of 1998.
(c) LIQUIDITY AND CAPITAL RESOURCES
The Partnership is in an illiquid position as of June 30, 1998 with cash and
billed receivables of $170,000 compared to $608,000 of accrued and other
liabilities. The Partnership's primary capital requirements will be for the
construction of new tenant space. It is anticipated that these requirements will
be funded from the operations of the properties and distributions from SMMP.
3
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND II
(A Limited Partnership)
BALANCE SHEETS
June 30, 1998 and December 31, 1997
- --------------------------------------------------------------------------------
June 30, 1998 December 31, 1997
------------- -------------
ASSETS
Cash and cash equivalents ...................... $ 39,903 $ 69,790
Receivables:
Note, net of deferred gain of $736,271 ....... 2,453,729 2,453,729
Unbilled rent ................................ 293,649 277,452
Billed rent .................................. 129,795 78,698
Due from affiliates .......................... 787,381 951,381
Other receivables ............................ 186,317 37,795
Income-producing properties - net of
accumulated depreciation and valuation
allowance of $4,215,104 and $3,855,671,
respectively ................................. 11,179,091 11,212,379
Investment in unconsolidated joint venture ..... 3,363,424 3,416,664
Other assets ................................... 1,083,135 979,415
----------- -----------
Total Assets ................................... $19,516,424 $19,477,303
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Accrued and other liabilities .................. $ 608,516 $ 513,990
Notes payable .................................. 6,246,831 6,257,503
----------- -----------
Total Liabilities .............................. 6,855,347 6,771,493
----------- -----------
Partners' equity:
General Partner .............................. 0 0
Limited Partners:
Class A Limited Partners:
60,000 units authorized,
56,674 issued and outstanding ............ 8,280,792 8,310,049
Class B Limited Partners:
60,000 units authorized,
29,979 issued and outstanding ............ 4,380,285 4,395,761
----------- -----------
Total Partners' equity ......................... 12,661,077 12,705,810
----------- -----------
Total Liabilities and Partners' equity ......... $19,516,424 $19,477,303
=========== ===========
Unaudited
See Accompanying Notes
4
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND II
(A Limited Partnership)
STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 1998 and 1997
and for the Three Months Ended June 30, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
---------------------------------- ---------------------------------
1998 1997 1998 1997
---------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Rental income ........................................ $ 1,170,354 $ 947,783 $ 546,338 $ 509,996
Interest income ...................................... 186,318 169,161 93,233 84,647
----------- ----------- ----------- -----------
Total revenues .................... 1,356,672 1,116,944 639,571 594,643
----------- ----------- ----------- -----------
EXPENSES:
Operating expenses ................................... 664,480 762,151 327,869 460,554
Depreciation and amortization ........................ 465,456 374,815 238,415 192,680
Interest ............................................. 220,657 218,857 109,950 109,174
----------- ----------- ----------- -----------
Total costs and expenses .......... 1,350,593 1,355,823 676,234 762,408
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE PARTNERSHIP'S
SHARE OF UNCONSOLIDATED JOINT
VENTURE (LOSS) INCOME ............................... 6,079 (238,879) (36,663) (167,765)
----------- ----------- ----------- -----------
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE (LOSS) INCOME ......................... (50,812) (76,256) 22,885 (38,883)
----------- ----------- ----------- -----------
NET LOSS ............................................... $ (44,733) $ (315,135) $ (13,778) $ (206,648)
=========== =========== =========== ===========
Net loss per limited partnership unit .................. $ (0.52) $ (3.64) $ (0.16) $ (2.38)
=========== =========== =========== ===========
</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, 1997
and for the Six Months Ended June 30, 1998
- --------------------------------------------------------------------------------
<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, 1997) ................ (279,927) (148,668) (428,595) (4.95) $ 46,674 (381,921)
Cumulative distributions
(to December 31, 1997) ................ (3,685,045) (1,947,280) (5,632,325) (64.80) (46,674) (5,678,999)
------------ ------------ ------------ ------- ------------ ------------
Partners' equity -
January 1, 1998 ....................... 8,310,049 4,395,761 12,705,810 146.63 0 12,705,810
Net loss ................................ (29,257) (15,476) (44,733) (0.52) (44,733)
------------ ------------ ------------ ------- ------------ ------------
Partners' equity - June 30, 1998 ........ $ 8,280,792 $ 4,380,285 $ 12,661,077 $146.11 $ 0 $ 12,661,077
============ ============ ============ ======= ============ ============
</TABLE>
Unaudited
See Accompanying Notes
6
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND II
(A Limited Partnership)
STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .............................................. $ (44,733) $ (315,135)
Adjustments to reconcile net loss
to cash provided by (used in) operating activities:
Depreciation and amortization ....................... 465,456 374,815
Undistributed loss of unconsolidated
joint venture ..................................... 50,812 76,256
Increase in rent receivable ......................... (67,294) (69,674)
Increase in other receivables ....................... (148,522) (33,317)
Increase in other assets ............................ (179,858) (364,306)
Increase in accrued and other liabilities ........... 94,526 137,502
---------- ---------
Net cash provided by (used in) operating activities . 170,387 (193,859)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions ..................... (353,602) (249,845)
Capital contributions to unconsolidated joint venture 0 (155,590)
---------- ---------
Net cash used in investing activities ............... (353,602) (405,435)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions .................................. 0 (50,000)
Principal payments on notes payable ................. (10,672) (41,753)
Repayment of loans to affiliate ..................... 0 155,590
Borrowings from affiliate ........................... 164,000 650,300
---------- ---------
Net cash provided by financing activities ........... 153,328 714,137
---------- ---------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS .................................... (29,887) 114,843
CASH AND CASH EQUIVALENTS - Beginning of period ......... 69,790 22,962
---------- ---------
CASH AND CASH EQUIVALENTS - End of period ............... $ 39,903 $ 137,805
========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest ............ $ 200,944 $ 219,195
========== =========
</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 June 30, 1998 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, 1997.
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 six months ended June 30, 1998 and
1997 are affiliate transactions as follows:
June 30
-----------------------
1998 1997
-----------------------
Management fees $ 57,338 $ 44,221
Administrative fees 103,146 121,375
Leasing fees 37,553 166,812
Construction fees 16,754 50,083
3. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
Sierra Mira Mesa Partners ("SMMP") was formed in 1985 between the Partnership
and Sierra Pacific Pension Investors '84 ("SPPI'84"), an affiliate, to develop
and operate the real property known as Sierra Mira Mesa, an office building,
located 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 each year based upon the relative net
contributions and distributions since inception of each general partner. At June
30, 1998 the Partnership's interest in SMMP is 33.74%; the remaining 66.26%
interest is owned by SPPI'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 six months ended June 30, 1998 and
1997 follows:
June 30
------------------------
1998 1997
------------------------
Rental income $ 938,391 $ 955,585
Total revenues 1,040,153 1,040,240
Operating expenses 378,712 368,729
Share of unconsolidated
joint venture loss 63,128 236,476
Net income (loss) 74,196 (211,922)
As of June 30, 1998, SMMP holds a 33.55% interest in Sorrento II Partners
("SIIP"), a California general partnership with Sierra Pacific Institutional
Properties V formed in 1993; a 9.33% interest in Sierra Creekside Partners
("SCP"), a California general partnership with Sierra Pacific Development Fund
formed in 1994; and a 34.51% 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 six months ended June 30,
1998 and 1997 follows:
SIIP
----------------------
June 30
----------------------
1998 1997
----------------------
Rental income $ 351,384 $ 494,567
Total revenues 351,384 494,567
Operating expenses 201,480 209,493
Net loss (252,939) (130,368)
UNAUDITED
9
<PAGE>
Sierra Pacific Development Fund II
Notes to Financial Statements
Page three
SCP SVP
--------------------------------------------
June 30 June 30
--------------------------------------------
1998 1997 1998 1997
--------------------------------------------
Rental income $ 490,069 $ 354,983 $ 0 $ 376,250
Total revenues 490,069 354,983 93,656 376,250
Operating expenses 233,868 247,305 28,715 256,843
Net (loss) income (7,261) (201,322) 64,941 (412,360)
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: AUGUST 10, 1998 /s/ THOMAS N. THURBER
--------------------------
Thomas N. Thurber
President and Director
Date: AUGUST 10, 1998 /s/ G. ANTHONY EPPOLITO
--------------------------
G. Anthony Eppolito
Chief Accountant
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM SIERRA PACIFIC DEVELOPMENT FUND II JUNE 30, 1998 FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 39,903
<SECURITIES> 0
<RECEIVABLES> 609,761
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,143,396
<PP&E> 15,394,195
<DEPRECIATION> 4,215,104
<TOTAL-ASSETS> 19,516,424
<CURRENT-LIABILITIES> 608,516
<BONDS> 6,246,831
0
0
<COMMON> 0
<OTHER-SE> 12,661,077
<TOTAL-LIABILITY-AND-EQUITY> 19,516,424
<SALES> 1,170,354
<TOTAL-REVENUES> 1,356,672
<CGS> 0
<TOTAL-COSTS> 664,480
<OTHER-EXPENSES> 465,456
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 220,657
<INCOME-PRETAX> (44,733)
<INCOME-TAX> 0
<INCOME-CONTINUING> (44,733)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (44,733)
<EPS-PRIMARY> (.52)
<EPS-DILUTED> (.52)
</TABLE>
