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, 1996 Commission file number 0-14276 SIERRA PACIFIC DEVELOPMENT FUND III (A LIMITED PARTNERSHIP) State of California 33-0043953 - -------------------------------------------- ------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification 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 [ ]. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The following financial statements are submitted in the next pages: Page number ------ Consolidated Balance Sheets - September 30, 1996 and December 31, 1995 ... 4 Consolidated Statements of Operations - For the Nine Months Ended September 30, 1996 and 1995 and the Three Months Ended September 30, 1996 and 1995 ........................................ 5 Consolidated Statements of Changes in Partners' Equity - From June 5, 1984 (inception of the Partnership) to December 31, 1995 and For the Nine Months Ended September 30, 1996 .................... 6 Consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 1996 and 1995 .............................................. 7 Notes to Consolidated 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 Consolidated Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q. The Partnership currently owns a 62.26% interest in the Sierra Vista Partnership which operates the Sierra Vista property. In addition, the Partnership holds a 24.94% interest in Sorrento I Partners ("SIP"), which operates the Sierra Sorrento I property. 2 (b) RESULTS OF OPERATIONS Revenues for the nine months ended September 30, 1996 increased by $49,000, or 10%, when compared to the corresponding period in the prior year, due to an increase in occupancy from 69% at September 30, 1995 to 82% at September 30, 1996 and an increase in the effective annual rent per square foot for the same period. Operating expenses for the first nine months ended September 30, 1996 decreased by $27,000, or 7%, primarily due to lower administrative costs and other expense cutting measures implemented by management. Depreciation and amortization expenses for the same period increased by $65,000, or 19%, primarily due to depreciation and amortization on additional tenant improvements associated with the increased occupancy of the Property. Interest expense for the first nine months of the year decreased $39,000, or 16%, due to the restructuring of the note in August 1995. The annual interest rate on the note was reduced from 3% above Bank of America's prime rate to a fixed rate of 8% retroactive to June 1, 1995. Included in interest expense for the three months ended September 30, 1995 is an adjustment to record May and June interest at the new lower rate. The Partnership's share of income (loss) from investment in SIP was $238,000 for the nine months ended September 30, 1996 compared to ($197,000) for the corresponding period in the prior year due to SIP's exercise of a discounted payoff option in May 1996. SIP recorded an extraordinary gain of $1,200,000 in connection with this transaction. (c) LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1996, the Partnership is in an illiquid position. Total unrestricted cash and billed receivables amount to $63,000 compared to $576,000 of accrued and other liabilities. Significant capital expenditures have been required in 1996 for tenant improvements and leasing commissions for the Sierra Vista property as the Partnership attempts to increase occupancy. The source of these funds will be net cash flow from operation of the property and advances from Sierra Mira Mesa Partners ("SMMP"). Sierra Vista Partners was formed, in part, to provide the Property with a source of cash for tenant improvements and leasing commissions. As required, the Partnership's joint venture partner (SMMP) either advances or contributes cash to meet the Partnership's requirements. SMMP has adequate resources to make the necessary advances during the foreseeable future. 3 SIERRA PACIFIC DEVELOPMENT FUND III (A Limited Partnership) CONSOLIDATED BALANCE SHEETS September 30, 1996 and December 31, 1995 September 30, December 31, 1996 1995 ---------- ---------- ASSETS Cash and cash equivalents ........................ $ 9,523 $ 16,171 Restricted certificate of deposit ................ 94,062 92,782 Receivables: Unbilled rent ................................ 89,386 59,150 Billed rent .................................. 53,523 24,654 Income-producing property - net of accumulated depreciation and valuation allowance of $4,284,744 and $3,944,100, respectively ................................... 5,841,068 5,700,014 Other assets ..................................... 133,657 167,196 ---------- ---------- Total Assets ..................................... $6,221,219 $6,059,967 ========== ========== LIABILITIES AND PARTNERS' EQUITY Accrued and other liabilities .................... $ 576,466 $ 172,263 Note payable ..................................... 3,410,795 3,410,795 Investment in unconsolidated joint venture .................................. 517,729 755,546 ---------- ---------- Total Liabilities ................................ 4,504,990 4,338,604 ---------- ---------- Minority interest in consolidated joint venture ................................. 1,328,419 1,271,308 ---------- ---------- Partners' equity : General Partner ................................ 0 0 Limited Partners: 60,000 units authorized, 36,521 issued and outstanding ............................... 387,810 450,055 ---------- ---------- Total Partners' equity ........................... 387,810 450,055 ---------- ---------- Total Liabilities and Partners' equity .......... $6,221,219 $6,059,967 ========== ========== Unaudited See Accompanying Notes 4 SIERRA PACIFIC DEVELOPMENT FUND III (A Limited Partnership) CONSOLIDATED STATEMENTS OF OPERATIONS For the Nine Months Ended September 30, 1996 and 1995 and for the Three Months Ended September 30, 1996 and 1995 Nine Months Ended Three Months Ended September 30, September 30, -------------------------- ---------------------- 1996 1995 1996 1995 ----------- ----------- --------- --------- REVENUES: Rental income ...................... $ 523,377 $ 474,346 $ 180,168 $ 127,111 ----------- ----------- --------- --------- Total Revenues .......... 523,377 474,346 180,168 127,111 ----------- ----------- --------- --------- EXPENSES: Operating expenses ............... 388,328 415,595 138,054 144,258 Depreciation and amortization .... 412,794 348,278 145,876 117,119 Interest ......................... 204,206 243,002 67,774 41,897 ----------- ----------- --------- --------- Total costs and expenses ............. 1,005,328 1,006,875 351,704 303,274 ----------- ----------- --------- --------- LOSS BEFORE PARTNERSHIP'S SHARE OF UNCONSOLIDATED JOINT VENTURE INCOME (LOSS) ..................... (481,951) (532,529) (171,536) (176,163) ----------- ----------- --------- --------- PARTNERSHIP'S SHARE OF UNCONSOLIDATED JOINT VENTURE INCOME (LOSS) ....... 237,817 (197,374) (1,429) (53,621) ----------- ----------- --------- --------- LOSS BEFORE MINORITY INTEREST'S SHARE OF CONSOLIDATED JOINT VENTURE LOSS .............................. (244,134) (729,903) (172,965) (229,784) ----------- ----------- --------- --------- MINORITY INTEREST'S SHARE OF CONSOLIDATED JOINT VENTURE LOSS .... 181,889 131,307 64,739 43,213 ----------- ----------- --------- --------- NET LOSS ............................. $ (62,245) $ (598,596) $(108,226) $(186,571) =========== =========== ========= ========= Net loss per limited partnership unit $ (1.70) $ (16.39) $ (2.96) $ (5.11) =========== =========== ========= ========= Unaudited See Accompanying Notes 5 SIERRA PACIFIC DEVELOPMENT FUND III (A Limited Partnership) CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY From June 5, 1984 (Inception of Partnership) to December 31, 1995 and for the Nine Months Ended September 30, 1996 Limited Partners Total ----------------------- General Partners' Per Unit Total Partner Equity ------- ----------- -------- ----------- Proceeds from sale of partnership units .................. $250.00 $ 9,222,500 -- $ 9,222,500 Underwriting commissions and other organization expenses .... (37.00) (1,364,985) -- (1,364,985) Repurchase of 369 partnership units .. (0.18) (85,005) -- (85,005) Cumulative net income (loss) (to December 31, 1995) ............ (189.31) (6,913,608) $ 21,522 (6,892,086) Cumulative distributions from operations (to December 31, 1995) ............ (11.19) (408,847) (21,522) (430,369) ------- ----------- -------- ----------- Partners' equity - January 1, 1996 .. 12.32 450,055 0 450,055 Net loss - year to date .............. (1.70) (62,245) -- (62,245) ------- ----------- -------- ----------- Partners' equity - September 30, 1996 $ 10.62 $ 387,810 $ 0 $ 387,810 ======= =========== ======== =========== Unaudited See Accompanying Notes 6 SIERRA PACIFIC DEVELOPMENT FUND III (A Limited Partnership) CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 1996 and 1995 1996 1995 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ............................................ $ (62,245) $(598,596) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation and amortization ..................... 412,794 348,278 Partnership's share of unconsolidated joint venture (income) loss ..................... (237,817) 197,374 Minority interest in consolidated joint venture loss .............................. (181,889) (131,307) Increase in rent receivable ....................... (59,105) (11,803) Increase in other assets .......................... (32,020) (78,044) Increase in accrued and other liabilities ......... 404,204 6,414 --------- --------- Net cash provided by (used in) operating activities 243,922 (267,684) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments for property additions ................... (488,289) (72,168) --------- --------- Net cash used in investing activities ............. (488,289) (72,168) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Contributions from minority investor .............. 239,000 463,845 --------- --------- Net cash provided by financing activities ......... 239,000 463,845 --------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .............................. (5,367) 123,993 CASH AND CASH EQUIVALENTS Beginning of period ................................ 108,953 4,126 --------- --------- CASH AND CASH EQUIVALENTS End of period ...................................... $ 103,586 $ 128,119 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest ............ $ 180,000 $ 258,711 ========= ========= Unaudited See Accompanying Notes 7 SIERRA PACIFIC DEVELOPMENT FUND III (A LIMITED PARTNERSHIP) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------ 1. ORGANIZATION In April 1993, the Partnership created a general partnership (Sorrento I Partners) with Sierra Mira Mesa Partners ("SMMP") to facilitate cash contributions by SMMP for the continued development and operation of the Sierra Sorrento I property. In February 1994, the Partnership formed a joint venture with SMMP known as Sierra Vista Partners to facilitate cash contributions by SMMP for the continued development and operation of the Sierra Vista property. The Partnership Agreements of Sorrento I Partners and Sierra Vista Partners (the "Agreements") were amended effective January 1, 1995 to consider both contributions and distributions when calculating each partners' percentage interest at January 1 of each year as called for by the Agreements. As a result of this Amendment, the Partnership's percentage interest in Sierra Vista Partners increased from 61.43% to 62.26%. This Amendment had no impact on the percentage interest of Sorrento I Partners. The effect of this change on the minority interest share of consolidated joint venture loss for the three months ended March 31, 1996 was recognized in the second quarter. 2. BASIS OF FINANCIAL STATEMENTS The accompanying unaudited consolidated condensed financial statements include the accounts of the Partnership and Sierra Vista Partners, a majority owned joint venture at September 30, 1996. All significant intercompany balances and transactions have been eliminated in consolidation. 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, 1996 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, 1995. 3. RELATED PARTY TRANSACTIONS In 1994, all of the common stock of S-P Properties, Inc., the General Partner of the Partnership, was purchased by Finance Factors, Inc. from Carlsberg Management Company ("CMC"). CMC continued to manage the affairs of the Partnership through March 31, 1995. Unaudited 8 Sierra Pacific Development Fund III Notes to Consolidated Financial Statements Page two Included in the financial statements for the nine months ended September 30, 1996 and 1995 are affiliate transactions as follows: September 30 -------------------------- 1996 1995 ------------- ------------ Management fees $ 28,273 $ 15,525 Administrative fees 56,913 34,995 Leasing fees 75,938 33,620 Construction supervision fees 7,782 0 4. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE Sorrento I Partners ("SIP") was formed on April 1, 1993 between the Partnership and Sierra Mira Mesa Partners, an affiliate, to develop and operate the real property known as Sierra Sorrento I (the "Property"), an industrial building located in San Diego, California. At September 30, 1996, the Partnership has a 24.94% equity interest with its contribution of Sierra Sorrento I and the related debt. This investment is stated at cost and is adjusted for the Partnership's share in earnings or losses and cash contributions to or distributions from the joint venture (equity method). Summarized income statement information for SIP for the nine months ended September 30, 1996 and 1995 follows: September 30 --------------------------- 1996 1995 -------------- ------------ Rental income $ 118,181 $ 0 Total revenue 118,268 0 Operating expenses 127,141 142,877 Loss before extraordinary item (246,823) (476,635) Extraordinary gain 1,200,380 0 Net income (loss) 953,557 (476,635) In May 1995, the Sorrento I note payable was modified to include a discounted payoff option. This option allowed for a one time option of paying off the note for $1,500,000. In May 1996, Sorrento I exercised that option resulting in an extraordinary gain of $1,200,380. Unaudited 9 Sierra Pacific Development Fund III Notes to Consolidated Financial Statements Page three 5. 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, 36,521. Unaudited 10 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 III a Limited Partnership S-P PROPERTIES, INC. General Partner Date: NOVEMBER 11, 1996 /S/ THOMAS N. THURBER Thomas N. Thurber President and Director Date: NOVEMBER 11, 1996 /S/ MICHELE E. JOHNSON Michele E. Johnson Chief Accounting Officer 11