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 March 31, 2001
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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
incorporation or organization) Identification 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
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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 ___.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following financial statements are submitted in the next pages:
Page
number
------
Consolidated Balance Sheets - March 31, 2001 and December 31, 2000 5
Consolidated Statements of Operations - For the Three Months Ended
March 31, 2001 and 2000 6
Consolidated Statements of Changes in Partners' Equity - For the Year
Ended December 31, 2000 and for the Three Months Ended March 31, 2001 7
Consolidated Statements of Cash Flows - For the Three Months Ended
March 31, 2001 and 2000 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) Consolidated 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
19.68% interest in Sierra Mira Mesa Partners (SMMP).
(b) RESULTS OF OPERATIONS
Rental income for three months ended March 31, 2001 increased by approximately
$64,000, or 11%, when compared to the corresponding period in the prior year,
primarily due to an increase in occupancy and rental rates. Occupancy at Sierra
Southwest Pointe rose from 73% at March 31, 2000 to 89% at March 31, 2001. At
5850 San Felipe, occupancy decreased slightly from 100% to 97% between the same
periods. Sierra Westlakes remained 75% occupied. The increase in rental income
was also attributable to higher common area maintenance fee recovery revenue at
5850 San Felipe.
2
Interest income for the quarter ended March 31, 2001, rose by approximately
$36,000, or 32%, in comparison to the same period in 2000, due to higher loan
balances on notes receivable from affiliates.
Operating expenses for the three months ended March 31, 2001 increased by
approximately $3,000, or 1%, when compared to the same period in the prior year.
Utilities increased due to higher energy costs and property taxes rose as a
result of increases in the assessed values of the properties. Further, rents
deemed uncollectible at 5850 San Felipe and Sierra Southwest Pointe were
written-off to bad debt expense. These increases were partially offset by a
decrease in legal fees incurred during the quarter.
Depreciation and amortization expenses for the three months ended March 31, 2001
rose by approximately $6,000, or 3%, when compared to the corresponding period
in the prior year, principally due to increased depreciation on additional
tenant improvements associated with the increase in occupancy at Sierra
Southwest Pointe.
The Partnership's share of unconsolidated joint venture (loss) income was
approximately $(5,000) for the three months ended March 31, 2001, in comparison
to $55,000 for the same period in the prior year. The loss incurred by SMMP was
in large part due to an increase in utilities associated with higher energy
costs, and as a result of the write-off of rents deemed uncollectible to bad
debt expense. The loss was also 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 a decrease in income
primarily due to lower common area maintenance fees recovery revenue incurred
during the quarter.
(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 agreement
(Settlement), S-P Properties, Inc. (S-P), the general partner of the
Partnership, on or before December 31, 2000, would call and collect the two
demand notes with balances of $1,073,460 and $5,336,584, respectively, at March
31, 2001 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 would be distributed on a per-unit
basis to the limited partners and assignees of the Partnership of record as of
the Payment Date.
The Partnership also agreed to pay plaintiff's attorneys' fees of $1,000,000. In
2000, the Partnership paid scheduled plaintiff's attorneys' fees of $500,000.
The $500,000 balance was due by December 31, 2000. As of May 14, 2001, S-P has
not called and collected the notes and the Partnership has not satisfied its
remaining legal fee obligation.
3
On February 21, 2001, the Plaintiff served S-P with a Notice of Default Election
stating that the Plaintiff was declaring the Settlement null and void because of
S-P's failure to collect various loans and distribute the proceeds no later than
January 30, 2001 as required under the Settlement. The Notice of Default
Election also stated the Plaintiff's intention to ask the court to put the case
back on the active trial list. In addition, the Plaintiff filed a motion to file
a supplemental complaint alleging new violations of the Partnership Agreement.
On March 16, 2001, the court granted the Plaintiff's motion to file the
supplemental complaint. In the supplemental complaint, the Plaintiff has
included new allegations alleging that after entering into the Settlement, S-P
breached the Partnership Agreement by lending certain persons and entities over
$500,000 by transferring these funds to certain executive officers of S-P or
their alleged affiliates. The court also restored the case to the civil active
list and set a further status conference for May 23, 2001 with the intention of
setting a trial date for approximately three months thereafter.
S-P intends to file a demurrer to the supplemental complaint and otherwise
vigorously defend the action.
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 $809,000 (30% of SMMP's note receivable balance of $2,696,350).
The Partnership is in an illiquid position as of March 31, 2001 with cash and
billed rents of approximately $471,000 and current liabilities of approximately
$806,000, which includes the remaining legal obligation of $500,000.
The Partnership's primary capital requirement is the remaining legal obligation.
Management anticipates fulfilling this obligation and settlement of the notes
receivable upon the completion of the consolidation transaction discussed in
Note 5. However, there can be no assurance such transaction will be executed.
Should the Partnership be unable to settle the notes receivable, a principal
shareholder of S-P has unconditionally guaranteed their payment. Other capital
requirements principally will be for construction of new tenant space and debt
obligations. It is anticipated that these requirements will be funded from the
operation of the properties and distributions from SMMP. During the three months
ended March 31, 2001, SMMP made net distributions of approximately $86,000 to
the Partnership.
Inflation:
The Partnership does not expect inflation to be a material factor in its
operations in 2001.
4
SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY
(A LIMITED PARTNERSHIP)
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 AND DECEMBER 31, 2000
- --------------------------------------------------------------------------------
March 31, 2001 December 31, 2000
(Unaudited)
---------------- -----------------
ASSETS
Cash and cash equivalents $ 7,140 $ 190,205
Receivables:
Note, net of deferred gain of $736,271 4,683,742 4,600,313
Unbilled rent 209,145 216,099
Billed rent 463,973 499,487
Due from affiliates 1,074,460 1,074,460
Interest 150,213 0
Income-producing properties - net of
accumulated depreciation and valuation
allowance of $4,475,581 and $4,353,177,
respectively 9,891,789 10,027,772
Investment in unconsolidated joint venture 1,560,598 1,653,025
Other assets - net of accumulated amortization
of $466,345 and $514,075, respectively 820,934 934,311
---------------- -----------------
Total Assets $ 18,861,994 $ 19,195,672
================ =================
LIABILITIES AND PARTNERS' EQUITY
Accrued and other liabilities $ 906,865 $ 1,146,320
Notes payable 6,335,465 6,350,041
---------------- -----------------
Total Liabilities 7,242,330 7,496,361
---------------- -----------------
Partners' equity (deficit):
General Partner
(61,272) (60,558)
Limited Partners:
Class A Limited Partners:
60,000 units authorized,
56,634 issued and outstanding 7,636,893 7,691,371
Class B Limited Partners:
60,000 units authorized,
29,979 issued and outstanding 4,044,043 4,068,498
---------------- -----------------
Total Partners' equity 11,619,664 11,699,311
---------------- -----------------
Total Liabilities and Partners' equity $ 18,861,994 $ 19,195,672
================ =================
SEE ACCOMPANYING NOTES
5
SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY
(A LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
- --------------------------------------------------------------------------------
2001 2000
(Unaudited) (Unaudited)
---------------- -----------------
REVENUES:
Rental income $ 631,336 $ 567,727
Interest income 150,800 114,371
---------------- -----------------
Total revenues 782,136 682,098
---------------- -----------------
EXPENSES:
Operating expenses 514,023 511,105
Depreciation and amortization 224,120 217,826
Interest 110,349 111,766
---------------- -----------------
Total costs and expenses 848,492 840,697
---------------- -----------------
LOSS BEFORE PARTNERSHIP'S SHARE
OF UNCONSOLIDATED JOINT VENTURE
(LOSS) INCOME (66,356) (158,599)
---------------- -----------------
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE (LOSS) INCOME
(5,011) 55,011
---------------- -----------------
NET LOSS $ (71,367) $ (103,588)
================ =================
Net loss per limited partnership unit $ (0.82) $ (1.18)
================ =================
SEE ACCOMPANYING NOTES
6
SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY
(A LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2000 AND
FOR THE THREE MONTHS ENDED MARCH 31, 2001
- --------------------------------------------------------------------------------
Limited Partners Total
----------------------------- General Partners'
Per Unit Class A Class B Total Partner Equity
------------- ------------ ------------- -------------- ------------- --------------
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 (loss) income
(to December 31, 1999) (20.55) (1,163,641) (616,129) (1,779,770) $ 46,674 (1,733,096)
Cumulative distributions
(to December 31, 1999) (64.80) (3,685,045) (1,947,280) (5,632,325) (46,674) (5,678,999)
------------- ------------ ------------- -------------- ------------- --------------
Partners' equity - January 1, 2000 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 3.94 223,175 118,054 341,229 3,447 344,676
------------- ------------ ------------- -------------- ------------- --------------
Partners' equity (deficit) -
December 31, 2000 (audited) 135.71 7,691,371 4,068,498 11,759,869 (60,558) 11,699,311
Repurchase of 40 partnership units (0.02) (8,280) (8,280) (8,280)
Net loss (unaudited) (0.82) (46,198) (24,455) (70,653) (714) (71,367)
------------- ------------ ------------- -------------- ------------- --------------
Partners' equity (deficit) -
March 31, 2001 (unaudited) $ 134.87 $ 7,636,893 $ 4,044,043 $ 11,680,936 $ (61,272) $ 11,619,664
============= ============ ============= ============== ============= ==============
SEE ACCOMPANYING NOTES
7
SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY
(A LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
- --------------------------------------------------------------------------------
2001 2000
(Unaudited) (Unaudited)
---------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (71,367) $ (103,588)
Adjustments to reconcile net loss
to cash used in operating activities:
Depreciation and amortization 224,120 217,826
Partnership's share of unconsolidated
joint venture loss (income) 5,011 (55,011)
Decrease in rent receivable 42,468 29,851
Increase in interest receivable (150,213) (114,176)
Decrease in other assets 73,206 44,169
Decrease in accrued and other liabilities (239,455) (594,544)
---------------- --------------
Net cash used in operating activities (116,230) (575,473)
---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan to affiliate of the general partner (83,429) (403,924)
Payments for property additions (46,746) (58,318)
---------------- --------------
Net cash used in investing activities (130,175) (462,242)
---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of partnership units (8,280) 0
Principal payments on notes payable (14,576) (11,868)
Contributions to unconsolidated joint venture (33,000) 0
Distributions from unconsolidated joint venture 119,196 811,773
---------------- --------------
Net cash provided by financing activities 63,340 799,905
---------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (183,065) (237,810)
CASH AND CASH EQUIVALENTS - Beginning of period 190,205 260,963
---------------- --------------
CASH AND CASH EQUIVALENTS - End of period $ 7,140 $ 23,153
================ ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for property taxes $ 369,787 $ 223,178
================ ==============
Cash paid during the period for interest $ 120,984 $ 111,766
================ ==============
SEE ACCOMPANYING NOTES
8
SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY
(A LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
- -------------------------------------------------------------------------------
1. BASIS OF FINANCIAL STATEMENTS
In the opinion of Sierra Pacific Development Fund II's (the Partnership)
management, these unaudited consolidated financial statements reflect all
adjustments necessary for a fair presentation of financial position on March 31,
2001 and results of operations and cash flows for the periods presented. All
adjustments included in these statements are of a normal and recurring nature.
The financial statements include the accounts of Sierra Southwest Pointe LLC, a
wholly-owned subsidiary. All significant intercompany balances are eliminated in
consolidation. The Partnership consolidates all entities in which it has a
controlling equity interest. 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, 2000.
2. RELATED PARTY TRANSACTIONS
Included in the financial statements for the three months ended March 31, 2001
and 2000 are affiliate transactions as follows:
March 31
--------------------------------
2001 2000
--------------- ----------------
Management fees $ 33,247 $ 29,800
Administrative fees 68,045 69,864
Leasing fees 6,643 18,141
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 March 31, 2001 the
Partnership's interest in SMMP is 19.68%; the remaining 80.32% 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 three months ended March 31, 2001
and 2000 is as follows:
9
Sierra Pacific Development Fund II and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Page two
March 31
----------------------------------
2001 2000
---------------- -----------------
Rental income $ 547,511 $556,156
Total revenues 615,633 617,334
Operating expenses 358,622 219,914
Share of unconsolidated
joint venture income 2,546 45,176
Net (loss) income (34,395) 175,848
As of March 31, 2001, SMMP held a 51.51% interest in Sorrento II Partners
(SIIP), a California general partnership with Sierra Pacific Institutional
Properties V formed in 1993, a 0% interest in Sierra Creekside Partners (SCP), a
California general partnership with Sierra Pacific Development Fund formed in
1994, and a 33.55% 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 three months ended March
31, 2001 and 2000 is as follows:
SCP SVP SIIP
--------------------------- -------------------------- -----------------------------
March 31 March 31 March 31
--------------------------- -------------------------- -----------------------------
2001 2000 2001 2000 2001 2000
------------- ------------- ------------- ------------ -------------- --------------
Rental income $286,237 $229,440 $ 0 $ 0 $ 316,806 $385,844
Total revenues 286,237 229,440 0 0 316,806 397,049
Operating expenses 219,691 154,180 21,765 13,665 162,034 124,762
Extraordinary loss 0 46,020 0 0 0 0
Net (loss) income (97,191) (124,683) (30,703) (20,154) 52,078 127,660
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, 56,634 Class A
and 29,979 Class B at March 31, 2001. In February 2001, 40 Class A units were
repurchased by the Partnership.
10
Sierra Pacific Development Fund II and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Page three
During 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 was significant.
5. PENDING TRANSACTION
CGS Real Estate Company, Inc. (CGS), an affiliate of the corporate general
partner of the Partnership, 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 acquiror, American Spectrum
Realty, Inc. (ASR), would qualify in the future as a real estate investment
trust. Limited partners would receive shares of common stock in ASR, which would
be listed on a national securities exchange.
The Partnership's participation in this plan will require the consent of its
limited partners. ASR filed a registration statement on Form S-4 August 14, 2000
relating to the solicitation of consents with the Securities and Exchange
Commission (SEC). The registration statement was amended February 14, 2001 and
April 24, 2001. The plan and the benefits and risks thereof will be described in
detail in the final prospectus/consent solicitation statement included in the
registration statement filed under the Securities Act of 1933 at the time it is
declared effective by the SEC. Following effectiveness, solicitation materials
will be provided to limited partners in connection with the solicitation of the
consent of the limited partners. There can be no assurances that the plan
described above will be consummated.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
requires a company to recognize all derivative instruments (including certain
derivative instruments embedded in other contracts) as assets or liabilities in
its balance sheet and measure them at fair value. The statement requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. SFAS No. 133, as amended, is
effective for fiscal years beginning after June 15, 2000. The Partnership
adopted the accounting provisions of SFAS No. 133 in 2001. The implementation of
SFAS No. 133 did not have a significant effect on the Partnership's financial
conditions or results of operations.
11
Sierra Pacific Development Fund II and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Page four
In December 1999, the 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 adopted the accounting
provisions of SAB 101 in 2000. The implementation of SAB 101 did not have a
significant effect on the Partnership's financial condition or results of
operations.
7. SUBSEQUENT EVENT
On April 16, 2001, the combined financial statements of the parent of the
general partner and other affiliates were issued. The independent public
accountant's report on such statements contained an explanatory paragraph
relating to the ability of the combined entity to continue as a going concern.
The combined entities have experienced losses in the periods presented and have
a net capital deficiency. Certain entities in the combined financial statements
have not made debt payments when due and various lenders have placed $10,520,000
of debt in default. Certain entities also need to pay or refinance a significant
amount of debt coming due in the next twelve months. These factors raise
substantial doubt about the ability of the combined entities, including the
general partner, to continue as a going concern.
Management of the combined entities has plans related to these matters, which
include obtaining additional loans from shareholders, obtaining extensions from
lenders or refinancing all debt through the completion of the transaction
discussed in Note 5. In addition, if necessary, management believes it could
sell properties to generate cash to pay debt. The Partnership does not believe
that the affect of the ultimate outcome of the circumstances surrounding the
combined entities will have a material adverse effect on its results of
operations or financial position.
12
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(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: MAY 14, 2001 /s/ Thomas N. Thurber
------------ --------------------------------------
Thomas N. Thurber
President and Director
Date: MAY 14, 2001 /s/ G. Anthony Eppolito
------------ --------------------------------------
G. Anthony Eppolito
Chief Accountant
13