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, 2000
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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
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(Address of principal executive (Zip Code)
offices)
Registrant's telephone number,
including area code: (713) 706-6271
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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, 2000 and December 31, 1999 5
Statements of Operations - For the Nine Months and Three Months
Ended September 30, 2000 and 1999 6
Statements of Changes in Partners' Equity - For the Year Ended
December 31, 1999 and for the Nine Months Ended September 30, 2000 7
Statements of Cash Flows - For the Nine Months Ended
September 30, 2000 and 1999 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 Sierra Pacific
Development Fund II's (the Partnership) 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
30.17% interest in Sierra Mira Mesa Partners (SMMP).
(b) RESULTS OF OPERATIONS
Rental income for the nine months ended September 30, 2000 increased by
approximately $90,000, or 5%, in comparison to the same period in 1999,
primarily due to an increase in common area maintenance fees recovery revenue at
5850 San Felipe. Supplemental billings were made in 2000 to recover higher than
anticipated prior year common area maintenance fees. The increase in rental
income is also attributable to higher rental rates and occupancy. Occupancy at
Sierra Southwest Point rose from 85% at September 30, 1999 to 95% at September
30, 2000. At 5850 San Felipe, occupancy rose slightly from 98% to 99% between
the same periods. Sierra Westlakes remained 75% occupied.
2
<PAGE>
Rental income for the quarter ended September 30, 2000 increased by
approximately $17,000, or 3%, principally due to the higher rental rates and
occupancy. This increase was partially offset by lower common area maintenance
fee recovery revenue at Sierra Westlakes, as supplemental billings were made in
the third quarter of 1999 to recover higher than anticipated common area
maintenance fees from a prior period.
Operating expenses for the nine months ended September 30, 2000 increased by
approximately $143,000, or 13%, when compared to the corresponding period in
1999, largely due to an increase in legal fees associated with the settlement of
a lawsuit against the Partnership (see discussion below). In addition,
maintenance and repairs costs and accounting and auditing fees rose during the
period. Operating expenses for the three months ended September 30, 2000
increased by approximately $50,000, or 15%, primarily due to, among other
factors, higher maintenance and repairs, utilities, administrative costs and
accounting and auditing fees incurred during the quarter.
The Partnership's share of unconsolidated joint venture income increased by
approximately $12,000 for the nine months ended September 30, 2000 when compared
to the corresponding period in the prior year. This increase in income generated
by SMMP was in large part attributable to its share of Sorrento II Partners'
(SIIP) income. SIIP, which SMMP accounts for as an unconsolidated joint venture
investment on the equity method, recorded an increase in income due to, among
other factors, higher common area maintenance fees recovery revenue and a
decrease in ground lease expense during the nine months ended September 30,
2000.
(c) 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,
the general partner of the Partnership, on or before December 31, 2000, will
call and collect the two demand notes with balances of $1,012,698 and
$4,642,334, respectively, on September 30, 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
will be distributed on a per-unit basis to the limited partners and assignees of
the Partnership of record as of the Payment Date.
The collection and distribution of the two demand notes held by the Partnership
will result in a reduction of equity and notes receivable. The collection and
distribution of the note receivable held by SMMP will ultimately result in a
reduction in equity and investment in unconsolidated joint venture of
approximately $735,000 (30% of SMMP's note receivable balance of $2,451,227).
3
<PAGE>
The Partnership also agreed to pay plaintiff's attorneys' fees of $1,000,000. In
the first quarter of 2000, the Partnership made scheduled payments totaling
$500,000. The remaining $500,000 is due by December 31, 2000.
The Partnership is in an illiquid position as of September 30, 2000 with cash
and billed rents of approximately $293,000 and current liabilities of
approximately $910,000, which includes the remaining legal liability of
$500,000.
The Partnership's primary capital requirement is the remaining legal obligation.
It is anticipated this liability will be contributed to the real estate
investment trust (REIT) currently being organized by CGS Real Estate Company
Inc., an affiliate of the general partner (See Note 5). In the event the REIT is
not formed in time, it is anticipated this obligation would be funded from the
operations of the properties and distributions from SMMP.
Inflation:
The Partnership does not expect inflation to be a material factor in its
operations in 2000.
4
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND II
(A LIMITED PARTNERSHIP)
BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
(UNAUDITED)
-------------------- --------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents ......................................................... $ 68,211 $ 260,963
Receivables:
Note, net of deferred gain of $736,271 .......................................... 3,906,063 3,062,629
Unbilled rent ................................................................... 230,726 239,271
Billed rent ..................................................................... 224,494 140,211
Due from affiliates ............................................................. 1,013,698 1,013,698
Interest ........................................................................ 362,278 0
Income-producing properties - net of
accumulated depreciation and valuation
allowance of $4,172,957 and $3,728,719,
respectively .................................................................... 10,182,993 10,590,651
Investment in unconsolidated joint venture ........................................ 1,842,371 3,023,177
Other assets - net of accumulated amortization
of $473,788 and $393,674, respectively .......................................... 903,228 873,728
-------------------- --------------------
Total Assets ...................................................................... $ 18,734,062 $ 19,204,328
==================== ====================
LIABILITIES AND PARTNERS' EQUITY
Accrued and other liabilities ..................................................... $ 909,868 $ 1,452,577
Notes payable ..................................................................... 6,361,069 6,397,116
-------------------- --------------------
Total Liabilities ................................................................. 7,270,937 7,849,693
-------------------- --------------------
Partners' equity (deficit):
General Partner ................................................................. (62,920) 0
Limited Partners:
Class A Limited Partners:
60,000 units authorized,
56,674 issued and outstanding ............................................... 7,538,443 7,426,335
Class B Limited Partners:
60,000 units authorized,
29,979 issued and outstanding ............................................... 3,987,602 3,928,300
-------------------- --------------------
Total Partners' equity ............................................................ 11,463,125 11,354,635
-------------------- --------------------
Total Liabilities and Partners' equity ............................................ $ 18,734,062 $ 19,204,328
==================== ====================
</TABLE>
SEE ACCOMPANYING NOTES
5
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND II
(A LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------
2000 1999 2000 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Rental income .................................................. $ 1,887,364 $ 1,797,273 $ 620,422 $ 603,248
Interest income ................................................ 363,153 307,543 126,209 102,775
------------ ------------ ------------ ------------
Total revenues .............................. 2,250,517 2,104,816 746,631 706,023
------------ ------------ ------------ ------------
EXPENSES:
Operating expenses ............................................. 1,273,003 1,130,210 387,253 336,784
Depreciation and amortization .................................. 666,602 652,328 225,720 217,823
Interest ....................................................... 334,854 324,986 111,584 110,664
------------ ------------ ------------ ------------
Total costs and expenses .................... 2,274,459 2,107,524 724,557 665,271
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE PARTNERSHIP'S
SHARE OF UNCONSOLIDATED JOINT
VENTURE INCOME ................................................ (23,942) (2,708) 22,074 40,752
------------ ------------ ------------ ------------
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE INCOME .......................................... 132,432 120,675 31,676 30,906
------------ ------------ ------------ ------------
NET INCOME ....................................................... $ 108,490 $ 117,967 $ 53,750 $ 71,658
============ ============ ============ ============
Net income per limited partnership unit .......................... $ 1.24 $ 1.36 $ 0.61 $ 0.83
============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES
6
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND II
(A LIMITED PARTNERSHIP)
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
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<TABLE>
<CAPTION>
LIMITED PARTNERS TOTAL
---------------------------- GENERAL PARTNERS'
PER UNIT CLASS A CLASS B TOTAL PARTNER EQUITY
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Proceeds from sale of
partnership units ................ $ 250.00 $ 14,392,000 $ 7,579,000 $ 21,971,000 $ 21,971,000
Underwriting commissions
and other organization expenses .. (33.68) (1,939,045) (1,021,124) (2,960,169) (2,960,169)
Repurchase of 1,231 partnership
units ........................... 0.06 (177,934) (66,167) (244,101) (244,101)
Cumulative net income (loss)
(to December 31, 1998) ........... (6.96) (393,677) (208,839) (602,516) $ 46,674 (555,842)
Cumulative distributions
(to December 31, 1998) ........... (64.80) (3,685,045) (1,947,280) (5,632,325) (46,674) (5,678,999)
------------ ------------ ------------ ------------ ------------ ------------
Partners' equity - January 1, 1999 . 144.62 8,196,299 4,335,590 12,531,889 0 12,531,889
Net loss ........................... (13.59) (769,964) (407,290) (1,177,254) (1,177,254)
------------ ------------ ------------ ------------ ------------ ------------
Partners' equity -
January 1, 2000 (audited) ........ 131.03 7,426,335 3,928,300 11,354,635 0 11,354,635
Transfer among general partner and
limited partners ................. 0.74 41,861 22,144 64,005 (64,005) 0
Net income (unaudited) ............. 1.24 70,247 37,158 107,405 1,085 108,490
------------ ------------ ------------ ------------ ------------ ------------
Partners' equity (deficit) -
September 30, 2000 (unaudited) .. $ 133.01 $ 7,538,443 $ 3,987,602 $ 11,526,045 $ (62,920) $ 11,463,125
============ ============ ============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES
7
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND II
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
(Unaudited) (Unaudited)
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................................. $ 108,490 $ 117,967
Adjustments to reconcile net income
to cash used in operating activities:
Depreciation and amortization ........................................................ 666,602 652,328
Partnership's share of unconsolidated
joint venture income ............................................................... (132,432) (120,675)
Increase in rent receivable .......................................................... (75,738) (67,700)
Increase in interest receivable ...................................................... (362,278) (306,049)
Decrease in other receivables ........................................................ 0 7,946
(Increase) decrease in other assets .................................................. (154,053) 28,916
Decrease in accrued and other liabilities ............................................ (542,709) (225,466)
--------------- ---------------
Net cash used in operating activities ................................................ (492,118) 87,267
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan to affiliate of the general partner ............................................. (843,434) 0
Payments for property additions ...................................................... (130,748) (199,555)
--------------- ---------------
Net cash used in investing activities ................................................ (974,182) (199,555)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Funding of note payable secured by property .......................................... 0 1,500,000
Principal payments on notes payable .................................................. (36,047) (1,318,890)
Contributions to unconsolidated joint venture ........................................ (101,878) 0
Distributions from unconsolidated joint venture ...................................... 1,411,473 0
Borrowings from affiliate ............................................................ 0 306,184
--------------- ---------------
Net cash provided by financing activities ............................................ 1,273,548 487,294
--------------- ---------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS ................................................................. (192,752) 375,006
CASH AND CASH EQUIVALENTS - Beginning of period .......................................... 260,963 71,180
--------------- ---------------
CASH AND CASH EQUIVALENTS - End of period ................................................ $ 68,211 $ 446,186
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for property taxes ....................................... $ 223,178 $ 210,731
=============== ===============
Cash paid during the period for interest ............................................. $ 334,354 $ 300,206
=============== ===============
</TABLE>
SEE ACCOMPANYING NOTES
8
<PAGE>
SIERRA PACIFIC DEVELOPMENT FUND II
(A LIMITED PARTNERSHIP)
---------------------
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
------------------------------------------------------------------------
1. BASIS OF FINANCIAL STATEMENTS
In the opinion of Sierra Pacific Development Fund II's (the Partnership)
management, these unaudited financial statements reflect all adjustments
necessary for a fair presentation of financial position on September 30, 2000
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, 1999.
2. RELATED-PARTY TRANSACTIONS
Included in the financial statements for the nine months ended September 30,
2000 and 1999 are affiliate transactions as follows:
September 30
-----------------------
2000 1999
---------- ---------
Management fees $ 94,311 $ 83,323
Administrative fees 208,429 216,879
Leasing fees 60,232 29,957
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. As of September 30, 2000
the Partnership's interest in SMMP is 30.17%; the remaining 69.83% 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,
2000 and 1999 is as follows:
9
<PAGE>
Sierra Pacific Development Fund II
Notes to Financial Statements (Unaudited)
Page two
September 30
------------------------
2000 1999
----------- -----------
Rental income $ 1,608,103 $1,581,014
Total revenues 1,794,537 1,748,607
Operating expenses 692,164 546,496
Share of unconsolidated
joint venture income (loss) 116,068 (50,092)
Net income 425,648 358,835
As of September 30, 2000, SMMP held a 43.92% interest in Sorrento II Partners
(SIIP), 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 (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, 2000 and 1999 is as follows:
SCP SVP SIIP
------------------ --------------- --------------------
September 30 September 30 September 30
------------------ --------------- --------------------
2000 1999 2000 1999 2000 1999
--------- -------- ------ ------ ---------- --------
Rental income $744,330 $682,407 $ 0 $ 0 $1,013,425 $831,944
Total revenues 744,330 682,407 0 11,907 1,024,630 831,944
Operating expenses 404,520 376,008 13,735 14,577 351,062 338,169
Extraordinary loss (46,020) 0 0 0 0 0
Net (loss) income (206,327) (66,373) (13,735) (2,670) 298,569 (127,792)
10
<PAGE>
Sierra Pacific Development Fund II
Notes to Financial Statements (Unaudited)
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.
During the quarter ended March 31, 2000, an amount was transferred between the
partners' equity accounts such that 99% of cumulative operating income, gains,
losses, deductions and credits of the Partnership was allocated among the
limited partners and 1% was allocated to the general partner. Management does
not believe that the effect of this transfer is significant.
5. PENDING TRANSACTION
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 would qualify as a real estate investment trust.
Limited partners would receive shares of common stock from the acquirer, which
would be listed on a national securities exchange. This transaction is subject
to the approval of the limited partners of the Partnership and portions of the
other partnerships. CGS's management filed a Registration Statement on Form S-4
August 14, 2000 relating to the solicitation of consents with the Securities and
Exchange Commission.
6. RECENT ACCOUNTING PRONOUNCEMENT
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 will adopt the accounting provisions of SAB 101 in
the fourth quarter of 2000. Management believes that the implementation of SAB
101 will not have a significant effect on the Partnership's financial condition
or results of operations.
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
A Form 8-K was filed in April 2000 reporting a change in the Partnership's
Certifying Accountant.
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 14, 2000 /s/ THOMAS N. THURBER
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Thomas N. Thurber
President and Director
Date: NOVEMBER 14, 2000 /s/ G. ANTHONY EPPOLITO
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G. Anthony Eppolito
Chief Accountant
12
