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, 1998
----------------------------------------------------
Commission file
number 0-12036
----------------------------------------------------
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 (Zip Code)
offices)
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, 1998 and December 31, 1997 4
Statements of Operations - For the Nine Months Ended September
30, 1998 and 1997 and for the Three Months Ended September 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 Nine
Months Ended September 30, 1998 6
Statements of Cash Flows - For the Nine Months Ended
September 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 nine months ended September 30, 1998 increased by
$371,000, or 27%, when compared to the corresponding period in the prior year,
principally due to an increase in occupancy. Occupancy increased from 73% at
September 30, 1997 to 97% at September 30, 1998 at 5850 San Felipe and from 85%
to 97% at Sierra Southwest Pointe. Occupancy at Sierra Westlakes remained
unchanged. Rental income for the three months ended September 30, 1998 increased
by $148,000, or 35%, primarily due to the increased occupancy. This increase was
partially offset due to the write off of rent receivable at 5850 San Felipe in
the third quarter of the prior year.
Operating expenses for the nine months ended September 30, 1998 decreased by
$51,000, or 5%, in comparison to the corresponding period in prior year,
principally due to a decrease in legal fees. Further, property tax appeal costs
incurred in the prior year resulted in a tax refund for 5850 San Felipe in 1998.
The decrease in operating expenses was partially offset by an increase in
utilities and management fees attributable to the increased occupancy of the
properties. Operating expenses for the three months ended September 30, 1998
increased by $47,000, or 13%, primarily due to higher maintenance and repair
costs and utilities.
Depreciation and amortization expenses for the nine months ended September 30,
1998 increased by $111,000, or 19%, principally due to increased depreciation
and amortization on additional tenant improvements and lease costs associated
with the increased occupancy.
The Partnership's share of loss from investment in SMMP was $37,000 for the nine
months ended September 30, 1998 compared to $107,000 for the same period in
1997. The decrease in loss was due to its share of unconsolidated joint venture
income generated by SMMP for the nine months and three months ended September
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 September 30, 1998 with cash
and billed receivables of $45,000 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
September 30, 1998 and December 31, 1997
- --------------------------------------------------------------------------------
September 30, December 31,
1998 1997
----------- -----------
ASSETS
Cash and cash equivalents ...................... $ 44,967 $ 69,790
Receivables:
Note, net of deferred gain of $736,271 ....... 2,453,729 2,453,729
Unbilled rent ................................ 279,648 277,452
Billed rent .................................. 133,356 78,698
Due from affiliates .......................... 745,381 951,381
Other receivables ............................ 279,697 37,795
Income-producing properties - net of
accumulated depreciation and valuation
allowance of $4,372,027 and $3,855,671,
respectively ................................. 11,059,338 11,212,379
Investment in unconsolidated joint venture ..... 3,376,425 3,416,664
Other assets ................................... 1,074,169 979,415
----------- -----------
Total Assets ................................... $19,446,710 $19,477,303
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Accrued and other liabilities .................. $ 608,212 $ 513,990
Notes payable .................................. 6,240,233 6,257,503
----------- -----------
Total Liabilities .............................. 6,848,445 6,771,493
----------- -----------
Partners' equity:
General Partner .............................. 0 0
Limited Partners:
Class A Limited Partners:
60,000 units authorized,
56,674 issued and outstanding ............ 8,239,711 8,310,049
Class B Limited Partners:
60,000 units authorized,
29,979 issued and outstanding ............ 4,358,554 4,395,761
----------- -----------
Total Partners' equity ......................... 12,598,265 12,705,810
----------- -----------
Total Liabilities and Partners' equity ......... $19,446,710 $19,477,303
=========== ===========
UNAUDITED
SEE ACCOMPANYING NOTES
4
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND II
(A Limited Partnership)
STATEMENTS OF OPERATIONS
For the Nine Months Ended Septembere 30, 1998 and 1997
and for the Three Months Ended September 30, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Rental income ............................. $ 1,739,891 $ 1,369,264 $ 569,537 $ 421,481
Interest income ........................... 281,420 253,941 95,102 84,780
----------- ----------- ----------- -----------
Total revenues ......... 2,021,311 1,623,205 664,639 506,261
----------- ----------- ----------- -----------
EXPENSES:
Operating expenses ........................ 1,077,146 1,127,938 412,666 365,787
Depreciation and amortization ............. 684,481 573,789 219,025 198,974
Interest .................................. 330,633 327,508 109,976 108,651
----------- ----------- ----------- -----------
Total costs and expenses 2,092,260 2,029,235 741,667 673,412
----------- ----------- ----------- -----------
LOSS BEFORE PARTNERSHIP'S SHARE
OF UNCONSOLIDATED JOINT VENTURE
(LOSS) INCOME ............................ (70,949) (406,030) (77,028) (167,151)
----------- ----------- ----------- -----------
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE (LOSS) INCOME .............. (36,596) (107,320) 14,216 (31,064)
----------- ----------- ----------- -----------
NET LOSS .................................... $ (107,545) $ (513,350) $ (62,812) $ (198,215)
=========== =========== =========== ===========
Net loss per limited partnership unit ....... $ (1.24) $ (5.92) $ (0.72) $ (2.29)
=========== =========== =========== ===========
</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 Nine Months Ended September 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 ............................. (70,338) (37,207) (107,545) (1.24) (107,545)
------------ ------------ ------------ ---------- ------------ ------------
Partners' equity - September 30, 1998 $ 8,239,711 $ 4,358,554 $ 12,598,265 $ 145.39 $ 0 12,598,265
============ ============ ============ ========== ============ ============
</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, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .............................................. $(107,545) $(513,350)
Adjustments to reconcile net loss
to cash provided by (used in) operating activities:
Depreciation and amortization ....................... 684,481 573,789
Undistributed loss of unconsolidated
joint venture ..................................... 36,596 107,320
Increase in rent receivable ......................... (56,854) (10,058)
Increase in other receivables ....................... (241,902) (118,097)
Increase in other assets ............................ (210,674) (469,928)
Increase in accrued and other liabilities ........... 94,222 162,949
--------- ---------
Net cash provided by (used in) operating activities . 198,324 (267,376)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions ..................... (411,877) (347,630)
Capital contributions to unconsolidated joint venture 0 (155,590)
--------- ---------
Net cash used in investing activities ............... (411,877) (503,220)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions .................................. 0 (50,000)
Principal payments on notes payable ................. (17,270) (65,440)
Repayment of loans to affiliate ..................... 0 155,590
Borrowings from affiliate ........................... 206,000 726,800
--------- ---------
Net cash provided by financing activities ........... 188,730 766,950
--------- ---------
NET DECREASE IN CASH AND
CASH EQUIVALENTS .................................... (24,823) (3,646)
CASH AND CASH EQUIVALENTS - Beginning of period ......... 69,790 22,962
--------- ---------
CASH AND CASH EQUIVALENTS - End of period ............... $ 44,967 $ 19,316
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest ............ $ 311,027 $ 342,765
========= =========
</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, 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 nine months ended September 30,
1998 and 1997 are affiliate transactions as follows:
September 30
-----------------------
1998 1997
-----------------------
Management fees $ 86,229 $ 67,944
Administrative fees 175,095 175,299
Leasing fees 38,295 186,640
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
September 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 nine months ended September 30,
1998 and 1997 follows:
September 30
------------------------
1998 1997
------------------------
Rental income $1,402,947 $1,436,848
Total revenues 1,556,950 1,566,402
Operating expenses 571,196 537,379
Share of unconsolidated
joint venture loss 101,443 348,525
Net income (loss) 116,785 (295,813)
As of September 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 nine months ended
September 30, 1998 and 1997 follows:
SIIP
----------------------
September 30
----------------------
1998 1997
----------------------
Rental income $ 554,735 $ 736,809
Total revenues 554,735 736,809
Operating expenses 292,399 300,806
Net loss (350,695) (187,160)
UNAUDITED
9
<PAGE>
Sierra Pacific Development Fund II
Notes to Financial Statements
Page three
SCP SVP
--------------------------------------------
September 30 September 30
--------------------------------------------
1998 1997 1998 1997
--------------------------------------------
Rental income $ 706,189 $ 557,954 $ 0 $ 566,780
Total revenues 706,189 557,954 93,656 567,413
Operating expenses 357,587 377,391 33,075 418,057
Net (loss) income (50,279) (257,921) 60,581 (614,475)
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, 1998 /s/ THOMAS N. THURBER
--------------------------
Thomas N. Thurber
President and Director
Date: NOVEMBER 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 SEPTEMBER 30, 1998 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-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 44,967
<SECURITIES> 0
<RECEIVABLES> 692,701
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,203,401
<PP&E> 15,431,365
<DEPRECIATION> 4,372,027
<TOTAL-ASSETS> 11,059,338
<CURRENT-LIABILITIES> 608,212
<BONDS> 6,240,233
0
0
<COMMON> 0
<OTHER-SE> 12,598,265
<TOTAL-LIABILITY-AND-EQUITY> 19,446,710
<SALES> 1,739,891
<TOTAL-REVENUES> 2,021,311
<CGS> 0
<TOTAL-COSTS> 1,077,146
<OTHER-EXPENSES> 684,481
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 330,633
<INCOME-PRETAX> (107,545)
<INCOME-TAX> 0
<INCOME-CONTINUING> (107,545)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (107,545)
<EPS-PRIMARY> (1.24)
<EPS-DILUTED> (1.24)
</TABLE>
