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, 1999
--------------------------------------------------
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
or organization) Number)
5850 San Felipe, Suite 450
Houston, Texas 77057
- ----------------------------------- ----------------------------
(Address of principal executive (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, 1999 and December 31, 1998 5
Statement of Operations - For the Nine Months Ended September 30, 1999 6
and for the Three Months Ended September 30, 1999 and 1998
Statements of Changes in Partners' Equity - From April 29, 1983
(inception of Partnership) to December 31, 1998 and for the Nine 7
Months Ended September 30, 1999
Statements of Cash Flows - For the Nine Months Ended September 30, 1999
and 1998 8
Notes to Financial Statements 9
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
33.01% interest in Sierra Mira Mesa Partners ("SMMP").
(b) RESULTS OF OPERATIONS
Rental income for the nine months and three months ended September 30, 1999
increased by $57,000, or 3%, and by $34,000, or 6%, when compared to the
corresponding periods in the prior year, primarily due to additional common area
maintenance fee billings at Sierra Westlakes. This increase was partially offset
as a result of a decrease in occupancy at Sierra Southwest Pointe from 97% at
September 31, 1998 to 85% at September 30, 1999. Occupancy at 5850 San Felipe
and Sierra Westlakes remained comparable between the same periods.
2
<PAGE>
Operating expenses for the nine months ended September 30, 1999 increased
$53,000, or 5%, when compared to the corresponding period in prior year,
primarily due to an increase in property taxes and administrative costs. This
increase was partially offset due to lower professional fees incurred during the
period. Operating expenses for the three months ended September 30, 1999
decreased by $76,000, or 18%, principally as a result of a decrease in
professional fees and administrative costs. Further, utilities and maintenance
and repair costs were lower during the quarter.
Depreciation and amortization expenses for the nine months ended September 30,
1999 decreased by $32,000, or 5%, principally due to fully depreciated
capitalized tenant improvements.
The Partnership's share of income (loss) from investment in SMMP was $121,000
for the nine months ended September 30, 1999 compared to ($37,000) for the
corresponding period in the prior year. The Partnership had understated its
share of loss from investment in SMMP in 1997 and recorded a $76,000 adjustment
in the first quarter of 1998. SMMP generated increased income for the nine
months ended September 30, 1999 when compared to the same period in 1998.
(c) LIQUIDITY AND CAPITAL RESOURCES
In January 1999, the mortgage note on the Sierra Southwest Pointe property with
a principal balance of $1,300,000 matured. A new loan in the amount of
$1,500,000 was funded in August 1999 with the same lender. This loan 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, when the
indebtedness is due in full. The net proceeds will primarily be used to pay
accrued liabilities and to fund future capital improvements. The loan is secured
by a trust deed on the Sierra Southwest Pointe property.
The Partnership is in a liquid position as of September 30, 1999 with cash and
billed receivables of $624,000 compared to $354,000 of accrued and other
liabilities. The Partnership's primary capital requirements will be for the
construction of new tenant space.
(d) YEAR 2000 COMPLIANCE
The Year 2000 Compliance issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Partnership's computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. As a result,
many companies' software and computer systems may need to be upgraded or
replaced in order to comply with Year 2000 requirements.
3
<PAGE>
The Partnership employs a property management company to manage, operate and
lease the property. The management company believes it will be ready for the
Year 2000 date change by the end of 1999. The impact of Year 2000 non-compliance
by other third parties cannot accurately be gauged.
The total cost to the Partnership of activities associated with Year 2000
Compliance is not anticipated to be material to its financial position or
results of operations in any given year. In January 1999, the Partnership began
utilizing a new software program to maintain books and records. The new software
program is Year 2000 compliant.
The total amount of potential risk that would be reasonably likely to result
from Year 2000 failures cannot presently be estimated. In the event the
Partnership does not properly identify Year 2000 issues in a timely manner,
there can be no assurance that Year 2000 issues will not materially affect the
Partnership's results.
The Partnership's contingency plan should systems fail due to the Year 2000 date
change is to temporarily convert to a manual system. The Partnership believes it
could temporarily operate on a manual system without adversely impacting
operations.
The preceding Year 2000 discussion contains various forward-looking statements
which represent the Partnership's beliefs or expectations regarding future
events. All forward-looking statements involve a number of risks and
uncertainties that could cause the actual results to differ materially from
projected results.
4
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND II
(A LIMITED PARTNERSHIP)
BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
ASSETS
<S> <C> <C>
Cash and cash equivalents ...................... $ 446,186 $ 71,180
Receivables:
Note, net of deferred gain of $736,271 ....... 2,772,729 2,772,729
Unbilled rent ................................ 246,960 277,328
Billed rent .................................. 177,327 79,259
Due from affiliates .......................... 1,005,459 1,005,459
Other receivables ............................ 306,049 7,946
Income-producing properties - net of
accumulated depreciation and valuation
allowance of $3,619,948 and $3,117,658,
respectively ................................. 10,572,817 10,899,304
Investment in unconsolidated joint venture ..... 3,310,926 3,193,894
Other assets ................................... 884,256 1,035,815
----------- -----------
Total Assets ................................... $19,722,709 $19,342,914
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Accrued and other liabilities .................. $ 354,355 $ 579,821
Due to affiliate ............................... 306,184 0
Notes payable .................................. 6,412,314 6,231,204
----------- -----------
Total Liabilities .............................. 7,072,853 6,811,025
----------- -----------
Partners' equity:
General Partner .............................. 0 0
Limited Partners:
Class A Limited Partners:
60,000 units authorized,
56,674 issued and outstanding ............ 8,273,453 8,196,299
Class B Limited Partners:
60,000 units authorized,
29,979 issued and outstanding ............ 4,376,403 4,335,590
----------- -----------
Total Partners' equity ......................... 12,649,856 12,531,889
----------- -----------
Total Liabilities and Partners' equity ......... $19,722,709 $19,342,914
=========== ===========
</TABLE>
UNAUDITED
SEE ACCOMPANYING NOTES
5
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND II
(A LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Rental income .............................. $ 1,797,273 $ 1,739,891 $ 603,248 $ 569,537
Interest income ............................ 307,543 281,420 102,775 95,102
----------- ----------- ----------- -----------
Total revenues .......... 2,104,816 2,021,311 706,023 664,639
----------- ----------- ----------- -----------
EXPENSES:
Operating expenses ......................... 1,130,210 1,077,146 336,784 412,666
Depreciation and amortization .............. 652,328 684,481 217,823 219,025
Interest ................................... 324,986 330,633 110,664 109,976
----------- ----------- ----------- -----------
Total costs and expenses 2,107,524 2,092,260 665,271 741,667
----------- ----------- ----------- -----------
(LOSS) INCOME BEFORE PARTNERSHIP'S
SHARE OF UNCONSOLIDATED JOINT
VENTURE INCOME (LOSS) ..................... (2,708) (70,949) 40,752 (77,028)
----------- ----------- ----------- -----------
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE INCOME (LOSS) ............... 120,675 (36,596) 30,906 14,216
----------- ----------- ----------- -----------
NET INCOME (LOSS) ............................ $ 117,967 $ (107,545) $ 71,658 $ (62,812)
=========== =========== =========== ===========
Net income (loss) per limited partnership unit $ 1.36 $ (1.24) $ 0.83 $ (0.72)
=========== =========== =========== ===========
</TABLE>
UNAUDITED
SEE ACCOMPANYING NOTES
6
<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, 1998
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Limited Partners Total
---------------------------------------------- General Partners'
Class A Class B Total Per Unit Partner Equity
------------ ------------ ------------ -------- ------------ ------------
<S> <C> <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 (loss)
(to December 31, 1998) ............ (393,677) (208,839) (602,516) (6.96) $ 46,674 (555,842)
Cumulative distributions
(to December 31, 1998) ............ (3,685,045) (1,947,280) (5,632,325) (64.80) (46,674) (5,678,999)
------------ ------------ ------------ ------- ------------ ------------
Partners' equity -
January 1, 1999 ................... 8,196,299 4,335,590 12,531,889 144.62 0 12,531,889
Net income .......................... 77,154 40,813 117,967 1.36 117,967
------------ ------------ ------------ ------- ------------ ------------
Partners' equity - September 30, 1999 $ 8,273,453 $ 4,376,403 $ 12,649,856 $145.98 $ 0 $ 12,649,856
============ ============ ============ ======= ============ ============
</TABLE>
UNAUDITED
SEE ACCOMPANYING NOTES
7
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND II
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................... $ 117,967 $ (107,545)
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Depreciation and amortization ...................... 652,328 684,481
Undistributed (income) loss of unconsolidated
joint venture .................................... (120,675) 36,596
Increase in rent receivable ........................ (67,700) (56,854)
Increase in other receivables ...................... (298,103) (241,902)
Decrease (increase) in other assets ................ 28,916 (210,674)
(Decrease) increase in accrued and other liabilities (225,466) 94,222
----------- -----------
Net cash provided by operating activities .......... 87,267 198,324
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions .................... (199,555) (411,877)
----------- -----------
Net cash used in investing activities .............. (199,555) (411,877)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Funding of note payable secured by property ........ 1,500,000 0
Principal payments on notes payable ................ (1,318,890) (17,270)
Borrowings from affiliate .......................... 306,184 206,000
----------- -----------
Net cash provided by financing activities .......... 487,294 188,730
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ............................... 375,006 (24,823)
CASH AND CASH EQUIVALENTS - Beginning of period ........ 71,180 69,790
----------- -----------
CASH AND CASH EQUIVALENTS - End of period .............. $ 446,186 $ 44,967
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest ........... $ 300,206 $ 311,027
=========== ===========
</TABLE>
UNAUDITED
SEE ACCOMPANYING NOTES
8
<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, 1999 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, 1998.
2. RELATED PARTY TRANSACTIONS
Included in the financial statements for the nine months ended September 30,
1999 and 1998 are affiliate transactions as follows:
September 30
--------------------
1999 1998
-------- --------
Management fees ... $ 83,323 $ 86,229
Administrative fees 216,879 175,095
Leasing fees ...... 29,957 38,295
Construction fees . 0 16,754
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, 1999 the Partnership's interest in SMMP is 33.01%; the remaining
66.99% interest is owned by SPPI'84.
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,
1999 and 1998 follows:
UNAUDITED
9
<PAGE>
Sierra Pacific Development Fund II
Notes to Financial Statements
Page two
September 30
------------------------
1999 1998
------------------------
Rental income ......... $1,581,014 $1,402,947
Total revenues ........ 1,748,607 1,556,950
Operating expenses .... 546,496 571,196
Share of unconsolidated
joint venture loss .. 50,092 101,443
Net income ............ 358,835 116,785
As of September 30, 1999, SMMP holds a 35.10% interest in Sorrento II Partners
("SIIP"), a California general partnership with Sierra Pacific Institutional
Properties V formed in 1993; a 6.55% interest in Sierra Creekside Partners
("SCP"), a California general partnership with Sierra Pacific Development Fund
formed in 1994; and a 33.32% 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, 1999 and 1998 follows:
SIIP
-----------------------
September 30
-----------------------
1999 1998
-----------------------
Rental income .... $ 831,944 $ 554,735
Total revenues ... 831,944 554,735
Operating expenses 338,169 292,399
Net loss ......... (127,792) (350,695)
SCP SVP
---------------------------------------------------
September 30 September 30
---------------------------------------------------
1999 1998 1999 1998
---------------------------------------------------
Rental income .... $ 682,407 $ 706,189 $ 0 $ 0
Total revenues ... 682,407 706,189 11,907 93,656
Operating expenses 376,008 357,587 14,577 33,075
Net (loss) income (66,373) (50,279) (2,670) 60,581
UNAUDITED
10
<PAGE>
Sierra Pacific Development Fund II
Notes to Financial Statements
Page three
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
11
<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 4, 1999 /s/ THOMAS N. THURBER
---------------- ------------------------------
Thomas N. Thurber
President and Director
Date: NOVEMBER 4, 1999 /s/ G. ANTHONY EPPOLITO
---------------- ------------------------------
G. Anthony Eppolito
Chief Accountant
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM SIERRA PACIFIC DEVELOPMENT FUND II SEPTEMBER 30, 1999 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-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 446,186
<SECURITIES> 0
<RECEIVABLES> 730,336
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,935,021
<PP&E> 10,572,817
<DEPRECIATION> 3,619,948
<TOTAL-ASSETS> 19,722,709
<CURRENT-LIABILITIES> 660,519
<BONDS> 6,412,314
0
0
<COMMON> 0
<OTHER-SE> 12,649,856
<TOTAL-LIABILITY-AND-EQUITY> 19,722,709
<SALES> 1,797,273
<TOTAL-REVENUES> 2,104,816
<CGS> 0
<TOTAL-COSTS> 1,130,210
<OTHER-EXPENSES> 652,328
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 324,986
<INCOME-PRETAX> 117,967
<INCOME-TAX> 0
<INCOME-CONTINUING> 117,967
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 117,967
<EPS-BASIC> 1.36
<EPS-DILUTED> 1.36
</TABLE>
