Capital Builders Development Properties II
(A California Limited Partnership)
Notes to Financial Statements
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
For the Quarter ended September 30, 2000 Commission File
Number 33-4682
CAPITAL BUILDERS DEVELOPMENT PROPERTIES II,
A CALIFORNIA LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
California 77-0111643
State or other jurisdiction I.R.S. Employer
of organization Identification No.
1130 Iron Point Road, Suite 170, Folsom, California 95630
(Address of Principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (916) 353-0500
Former name, former address and former fiscal year, if changed since
last year:
4700 Roseville Road, Suite 206, North Highlands, California 95660
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 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 1 - FINANCIAL INFORMATION
Capital Builders Development Properties II
(A California Limited Partnership)
BALANCE SHEETS
September 30, December 31,
2000 1999
ASSETS
Cash and cash equivalents $375,751 $216,269
Accounts receivable, net 149,719 144,583
Investment property, at cost, net
of accumulated depreciation and
amortization of $2,524,093 and
$2,714,863 at September 30, 2000, and
December 31, 1999, respectively 12,000,705 12,202,875
Lease commissions, net of accumulated
amortization of $178,544 and $284,126
at September 30, 2000, and December 31,
1999, respectively 169,980 170,305
Other assets, net of accumulated
amortization of $190,864 and
$66,264 at September 30, 2000 and
December 31, 1999, respectively 81,863 74,337
Total assets $12,778,018 $12,808,369
LIABILITIES AND PARTNERS' EQUITY
Notes payable $9,337,004 $9,312,934
Accounts payable and accrued
liabilities 91,458 46,045
Tenant deposits 113,922 114,613
Total liabilities 9,542,384 9,473,592
Commitments and Contingencies
Partners' Equity:
General partner (63,474) (62,483)
Limited partners 3,299,108 3,397,260
Total partners' equity 3,235,634 3,334,777
Total liabilities and partners' equity $12,778,018 $12,808,369
See accompanying notes to the financial statements.
(A California Limited
Partnership)
STATEMENTS OF
OPERATIONS
THREE AND NINE MONTHS
ENDED SEPTEMBER 30,
2000 1999
Three Nine Three Nine
Months Months Months Months
Ended Ended Ended Ended
Revenues
Rental and other income $578,908 $1,749,899 $535,912 $1,572,95
0
Interest income 3,565 10,411 2,787 8,411
Total revenues 582,473 1,760,310 538,699 1,581,361
Expenses
Operating expenses 113,962 320,561 122,284 319,584
Repairs and maintenance 86,382 232,365 46,349 220,805
Property taxes 35,800 113,940 36,306 106,380
Interest 217,557 637,151 199,987 598,048
General and
administrative 45,295 134,589 38,533 129,348
Depreciation and
amortization 148,495 420,847 129,049 406,748
Total expenses 647,491 1,859,453 572,508 1,780,913
Net Loss (65,018) (99,143) (33,809) (199,552)
Allocated to general
partners (650) (991) (338) (1,996)
Allocated to limited
partners ($64,368) ($98,152) ($33,471) ($197,556
)
Net loss per limited
partnership unit ($2.79) ($4.26) ($1.45) ($8.58)
Average units outstanding 23,030 23,030 23,030 23,030
See accompanying notes to
the financial statements.
Capital Builders Development
Properties II
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
Cash flows from operating activities:
Net loss ($99,143) ($199,552)
Adjustments to reconcile net
loss to cash flow
provided by operating activities:
Depreciation and amortization 420,847 406,748
Changes in assets and liabilities
Increase in accounts receivable (5,136) (29,707)
Increase in leasing commissions (54,209) (60,177)
Decrease/(Increase) in other
assets 1,938 (35,206)
Increase in accounts payable
and accrued liabilities 45,413 54,095
(Decrease)/Increase in tenant
deposits (691) 18,135
Net cash provided by
operating activities 309,019 154,336
Cash flows from investing activities:
Improvements to investment (127,982) (370,683)
properties
Net cash used in
investing activities (127,982) (370,683)
Cash flows from financing activities:
Proceeds from issuance of debt 124,399 115,370
Payments of debt (100,329) (98,442)
Payment of loan fees (45,625) - - - -
Net cash (used in)/provided
by financing activities (21,555) 16,928
Net increase/(decrease) in cash 159,482 (199,419)
Cash, beginning of period 216,269 287,892
Cash, end of period $375,751 $88,473
Cash paid for Interest $ 637,151 $ 598,052
See accompanying notes to the financial statements.
Capital Builders Development Properties II
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
September 30, 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
ORGANIZATION
A summary of the significant accounting policies applied in the
preparation of the accompanying financial statements follows:
Basis of Accounting
The financial statements of Capital Builders Development Properties II
(The "Partnership") are prepared on the accrual basis of accounting and
therefore revenue is recorded as earned and costs and expenses are
recorded as incurred.
Organization
Capital Builders Development Properties II, a California Limited
Partnership, is owned under the laws of the State of California. The
Managing General Partner is Capital Builders, Inc., a California
corporation (CB).
The Partnership is in the business of real estate development and is
not a significant factor in its industry. The Partnership's investment
properties are located near major urban areas and, accordingly, compete
not only with similar properties in their immediate areas but with
hundreds of properties throughout the urban areas. Such competition is
primarily on the basis of locations, rents, services and amenities. In
addition, the Partnership competes with significant numbers of
individuals and organizations (including similar companies, real estate
investment trusts and financial institutions) with respect to the
purchase and sale of land, primarily on the basis of the prices and
terms of such transactions.
Accounting Pronouncements
On December 3, 1999, the Securities Exchange Commission staff issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements (SAB 101). SAB 101 summarizes certain of the staff's views
in applying generally accepted accounting principles to revenue
recognition in financial statements. SAB 101 was adopted on January 1,
2000. Management believes the adoption of SAB 101 does not have a
material impact on the financial statements.
Investment Properties
Long-lived assets and certain identifiable intangibles are reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair
value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
The Partnership's investment property consists of commercial land,
buildings and leasehold improvements that are carried net of
accumulated depreciation. Depreciation is provided for in amounts
sufficient to relate the cost of depreciable assets to operations over
their estimated service lives of three to forty years. The straight-
line method of depreciation is followed for financial reporting
purposes.
Other Assets
Included in other assets are loan fees. Loan fees are amortized over
the life of the related note.
Lease Commissions
Lease commissions are being amortized over the related lease terms.
Income Taxes
The Partnership has no provision for income taxes since all income or
losses are reported separately on the individual Partners' tax returns.
Revenue Recognition
Rental income is recognized on a straight-line basis over the life of
the lease, which may differ from the scheduled rental payments.
Net Income/(Loss) per Limited Partnership Unit
The net income/(loss) per Limited Partnership Unit is computed based on
the weighted average number of Units outstanding of 23,030 during the
periods ending September 30, 2000 and 1999.
Statement of Cash Flows
For purposes of the statement of cash flows, the Partnership considers
all short-term investments with a maturity, at date of purchase, of
three months or less to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
NOTE 2 - RELATED PARTY EXPENSE REIMBURSEMENT AND FEE ARRANGEMENT
The Managing General Partner (Capital Builders, Inc.) and the Associate
General Partners are entitled to reimbursement of expenses incurred on
behalf of the Partnership and certain fees from the Partnership. These
fees include: a portion of the sales commissions payable by the
Partnership with respect to the sale of the Partnership Units; an
acquisition fee of up to 12.5% of gross proceeds from the sale of the
Partnership Units; a property management fee up to 6% of gross rental
revenues realized by the Partnership with respect to its properties; a
subordinated real estate commission of up to 3% of the gross sales
price of the properties; and a subordinated 25% share of the
Partnership's distributions of cash from sales or refinancing. The
property management fee currently being charged is 5% of gross rental
revenues collected.
All acquisition fees and expenses, all underwriting commissions, and
all offering and organizational expenses which can be paid are limited
to 20% of the gross proceeds from sales of Partnership Units provided
the Partnership incurs no borrowing to develop its properties.
However, these fees may increase to a maximum of 33% of the gross
offering proceeds based upon the total acquisition and development
costs, including borrowing. Since the formation of the Partnership,
27.5% of these fees were paid to the Partnership's related parties,
leaving a remaining maximum of 5.5% ($633,325) of the gross offering
proceeds. The ultimate amount of these costs will be determined once
the properties are fully developed and leveraged.
The total management fees paid to the Managing General Partner were
$86,405 and $76,960 for the nine months ended September 30, 2000 and
1999, respectively, while total reimbursement of expenses was $172,333
and $147,534, respectively.
The Managing General Partner will reduce its future participation in
proceeds from sales by an amount equal to the loss on the abandonment
of option fees in 1988 ($110,000) and interest on the amount at a rate
equal to that of the borrowed funds rate as determined by construction
or permanent funds utilized by the Partnership.
NOTE 3 - INVESTMENT PROPERTY
The components of the investment property account are as follows:
September 30, 2000 December 31, 1999
Land $ 4,053,799 $ 4,053,799
Building and Improvements 9,184,236 9,132,132
Tenant Improvements 1,286,763 1,731,807
Investment property, at cost 14,524,798 14,917,738
Less: accumulated depreciation
and amortization (2,524,093) (2,714,863)
Investment property, net $ 12,000,705 $ 12,202,875
NOTE 4 - NOTES PAYABLE
Notes Payable consist of the following:
September 30, December 31,
2000 1999
A mini-permanent loan of $5,000,000
with a fixed 8.95% interest rate.
The loan requires monthly principal
and interest payments of $41,789
which is sufficient to amortize the
loan over 25 years. The loan is due
October 1, 2002. The note is
collateralized by a First Deed Of
Trust on Highlands 80 Phase I land,
buildings and improvements. $4,665,245 $4,720,104
A construction loan of $1,930,000
with a variable interest rate of
prime plus 1.5% (11% as of September
30, 2000). The loan requires monthly
interest only payments, and its due
date was extended to June 3, 2001.
The note provides for future draws of
$515,820 for tenant improvement
construction costs and leasing
commissions for future lease-up of
Phase II. The note is collateralized
by a First Deed of Trust on Highlands
80 Phase II land, buildings and
improvements. 1,414,180 1,289,781
A mini-permanent loan with a fixed
interest rate of 8.24% and requiring
monthly principal and interest
payments of $27,541, which is
sufficient to amortize the loan over
25 years. The loan is due January 1,
2001. The note is collateralized by
a First Deed Of Trust on Capital
Professional Center's (CPC) land,
buildings and improvements.
Restrictive covenants of this loan
include maintaining a cash flow
coverage ratio related to the CPC
property. 3,257,579 3,303,049
Total Notes Payable $9,337,004 $9,312,934
Scheduled principal payments during 2000, 2001 and 2002 are $43,019,
$4,745,834, and $4,548,151, respectively.
NOTE 5 - LEASES
The Partnership leases its properties under long term noncancelable
operating leases to various tenants. The facilities are leased through
agreements for rents based on the square footage leased. Minimum
annual base rental payments under these leases for the years ended
December 31 are as follows:
2000 $ 2,114,602
2001 1,784,294
2002 1,242,091
2003 894,944
2004 543,049
Thereafter 107,895
Total $ 6,686,875
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Partnership in
estimating its fair value disclosures for financial instruments.
Notes payable
The fair value of the Partnership's Notes Payable are estimated
based on the quoted market prices for the same or similar issues
or on the current rates offered to the Partnership for debt of the
same remaining maturities.
The estimated fair values of the Partnership's financial instruments
are as follows:
September 30, 2000 December 31, 1999
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Liabilities
Note payable $4,665,245 $4,665,245 $4,720,104 $4,720,104
Note payable $1,414,180 $1,414,180 $1,289,781 $1,289,781
Note payable $3,257,579 $3,257,579 $3,303,049 $3,303,049
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Partnership is involved in litigation arising in the normal course
of its business. In the opinion of management, the Partnership's
recovery or liability if any, under any pending litigation would not
materially affect its financial condition or results of operations.
NOTE 8 - PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
Accounting for Derivative Instruments and Hedging Activity
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 as amended is
effective for all fiscal quarters of fiscal years beginning after June
15, 2000. Management believes that the adoption of SFAS No. 133 does
not have a material impact on the financial statements due to the
Partnership's inability to invest in such instruments as stated in the
Partnership agreement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Partnership commenced operations on May 22, 1986 upon the sale of
the minimum number of Limited Partnership Units. The Partnership's
initial source of cash was from the sale of Limited Partnership Units.
Through the offering of Units, the Partnership raised $11,515,000
(represented by 23,030 Limited Partnership Units). Cash generated from
the sale of Limited Partnership Units was used to acquire land and for
the development of a mixed use commercial project and a 40% interest in
a commercial office project. In May 1997, the remaining 60% interest
in the project was acquired.
The Partnership's primary current sources of cash are from cash
balances, property rental income and construction financing for Phase
II improvements. As of September 30, 2000, the Partnership had
$375,751 in cash and $515,820 in available construction loan draws for
Phase II. The construction loan was extended and now has an expiration
date of June 3, 2001. It is the Partnership's investment goal to
utilize existing capital resources for continued leasing operations
(tenant improvements and leasing commissions) and further development
of its investment properties.
During the nine months ended September 30, 2000, an increase in cash of
$159,482 occurred. This was primarily the result of cash provided by
operations as a result of the Partnership's properties maintaining an
occupancy level which now generates operating income in excess of the
Partnership's operating expenses.
Management anticipates cash provided from operations to continue to be
positive and improve in future quarters with the potential lease-up of
the Highlands 80 project. The Partnership's properties' occupancy
rates as of September 30, 2000 are 81% for Highlands 80 and 100% for
Capital Professional Center.
One of the Partnership's Notes Payable, totaling $3,257,579 as of
September 30, 2000, will become due on January 1, 2001. The
Partnership has obtained a written commitment from a new lender to
refinance the Note. The loan is expected to close in late December
2000.
The Partnership will continue to incur improvement costs as its
properties are leased up. The total projected tenant improvement costs
remaining to be incurred are estimated to be $432,000. These costs
will be funded with existing cash, construction loan draws and property
operations.
The Partnership's ability to maintain or improve cash flow is dependent
upon its ability to maintain and improve the occupancy of its
investment properties. Management believes the Partnership's financial
resources should be adequate to meet 2000's obligations and no adverse
change in liquidity is foreseen.
Results of Operations
During the nine months ended September 30, 2000 as compared to
September 30, 1999, the Partnership's total revenues increased by
$178,949 (11.3%), while its expenses also increased by $78,540 (4.4%),
resulting in a decrease in net loss of $100,409 (50.3%).
The increase in revenue is primarily due to an increase in occupancy
for Highlands 80 and rent increases at Capital Professional Center.
Expenses increased for the nine months ended September 30, 2000, as
compared to September 30, 1999, due to the net effect of:
a) $11,560 (5.2%) increase in repairs and maintenance due to a large
amount of suite turnover costs incurred for lease renewals at Highlands
80;
b) $7,560 (7.1%) increase in property taxes primarily due to the
additional buildout of Highlands 80 tenant improvements;
c) $39,103 (6.5%) increase in interest due to loan costs associated
with Highlands 80 and Phase II tenant improvement loan draws;
d) $5,241 (4.1%) increase in general and administrative due to general
cost/wage inflation; and
e) $14,099 (3.5%) increase in amortization and depreciation due to an
increase in amortized loan fees related to the Highlands 80 Phase II
loan extensions.
During the third quarter ended September 30, 2000 as compared to
September 30, 1999, revenues increased by $43,774 (8.1%), while
expenses also increased by $74,983 (13.1%). The increase in revenues
is primarily due to an increase in Highlands 80 occupancy. The
increase in expenses is primarily due to an increase in suite turnover
costs, interest costs and depreciation related to the Highlands 80
project.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The Partnership does not have a material market risk due to financial
instruments held by the Partnership. The Partnership's only variable
rate instrument consists of a construction loan in the amount of
$1,414,180 and $1,289,781 at September 30, 2000 and December 31, 1999,
respectively. The increase from 1999 to 2000 is due to additional
draws for construction.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has dully caused this report to be signed on its behalf
by the undersigned, hereunto dully authorized.
CAPITAL BUILDERS DEVELOPMENT PROPERTIES II
a California Limited Partnership
By: Capital Builders, Inc.
Its Corporate General Partner
Date: November 7, 2000 By:_____________________________________
Michael J. Metzger
President
Date: November 7, 2000 By:_____________________________________
Kenneth L. Buckler
Chief Financial Officer