15
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Nine Months ended September 30, 1996 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.
4700 Roseville Road, Suite 206, North Highlands, California 95660
(Address of Principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (916) 331-8080
Former name, former address and former fiscal year, if changed since
last year:
4700 Roseville Road, Suite 101, North Highlands, CA 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
1996 1995
ASSETS
Cash and cash equivalents 1,133,814 462,947
Investment securities - - - - 1,214,118
Accounts receivable, net 138,555 143,626
Due from Joint Venture 1,429,884 1,231,089
Investment property, at cost,
net of accumulated depreciation
and amortization of $1,539,593
and $1,474,003 at September 30, 1996,
and December 31, 1995, respec-
tively, and a valuation allowance
of $742,000 7,324,686 6,694,302
Lease commissions, net of accumulated
amortization of $59,003 and $55,532
at September 30, 1996, and December 31,
1995, respectively 84,640 71,477
Other assets, net of accumulated
amortization of $15,533 and
$3,885 at September 30, 1996 and
December 31, 1995, respectively 107,396 116,694
Total assets 10,218,975 9,934,253
LIABILITIES AND PARTNERS' EQUITY
Note payable 4,943,413 4,986,374
Accounts payable and accrued
liabilities 317,542 14,535
Tenant deposits 53,556 54,502
Share of Joint Venture deficit 651,801 487,968
Total liabilities 5,966,312 5,543,379
Commitments and contingencies
Partners' Equity:
General partner (53,304) (51,922)
Limited partners 4,305,967 4,442,796
Total partners' equity 4,252,663 4,390,874
Total liabilities and Partner's equity 10,218,975 9,934,253
See accompanying notes to the financial
statements
Capital Builders Development Properties II
(A California Limited Partnership)
STATEMENT OF OPERATIONS
FOR THE MONTHS ENDED SEPTEMBER 30,
1996 1996 1995 1995
Three Nine Three Nine
Months Months Months Months
Ended Ended Ended Ended
Revenues
Rental and other income $ $ $ $
310,788 852,857 258,578 792,770
Interest income 52,230 140,453 37,511 104,776
Total revenues 363,018 993,310 296,089 897,546
Expenses
Operating expenses 69,957 198,474 75,513 177,689
Repairs and maintenance 27,745 97,097 52,624 112,961
Property taxes 18,580 55,742 5,386 45,970
Interest 110,796 333,418 100,823 288,879
General administrative 32,778 110,553 30,359 96,172
Depreciation and
amortization 76,538 270,880 155,672 496,743
Total expenses 336,394 1,066,164 420,377 1,218,414
Loss before Joint Venture
26,624 (72,854) (124,288) (320,868)
Loss on investment in Joint Venture (19,109) (65,352) (40,863) (113,439)
Net income (loss) 7,515 (138,206) (165,151) (434,307)
Allocated to general partners 75 (1,382) (1,651) (4,343)
Allocated to limited partners $ $ $ $
7,440 (136,824) (163,500) (429,964)
Net income (loss) per LP unit $ $ $ $
0.32 (5.94) (7.10) (18.67)
Average units outstanding 23,030 23,030 23,030 23,030
See accompanying notes to the financial statements
STATEMENTS OF CASH FLOWS
FOR THE MONTHS ENDED SEPTEMBER 30,
1996 1996 1995 1995
Three Nine Three Nine
Months Months Months Months
Ended Ended Ended Ended
Cash flows from operating activities:
Net loss $ $ $ (165,151) $ (434,307)
7,515 (138,206)
Adjustments to reconcile net loss to
cash flow used in operating
activities:
Depreciation and amortization 76,538 270,880 155,672 496,743
Equity in losses of Joint Venture 19,109 65,352 40,862 113,439
Changes in assets and liabilities
(Increase)/Decrease in accounts (6,551) 5,071 37,778 37,910
receivable
Increase in leasing commissions (17,587) (34,575) (9,368) (26,633)
Increase in other assets (1,800) (2,352) (114,096) (116,391)
Increase in accounts payable
and accrued liabilities 300,271 303,007 19,937 27,809
(Decrease)/Increase in tenant deposits (1,266) (946) 1,217 1,260
Net cash provided by
operating 376,229 468,231 (33,149) 99,830
activities
Cash flows from investing activities:
Investment in securities 1,168,660 1,214,118 - - - - - -
Advances to Joint Venture (10,864) (198,795) (30,446) (160,339)
Improvements to investment properties (714,172) (868,206) (49,411) (70,103)
Distribution from Joint Venture 8,000 98,480 - - - 24,400
Net cash used in
investing
activities 451,624 245,597 (79,857) (206,042)
Cash flows from financing activities:
Payments of debt (14,641) (42,961) - - - (10,680)
Proceeds from refinancing - - - - - - 1,433,740 1,433,740
Net cash provided by
financing activities (14,641) (42,961) 1,433,740 1,423,060
Net increase/(decrease) in cash 813,212 670,867 1,320,734 1,316,848
Cash, beginning of period 320,602 462,947 501,206 505,092
Cash, end of period $ 1,133,814 $ 1,133,814 $ 1,821,940 $ 1,821,940
See accompanying notes to the financial
statements
Capital Builders Development Properties II
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
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 Associate General Partners are: 1) the sole
shareholder, President and Director of CB, 2) four founders of 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 or organizations (including similar partnerships, 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.
Due from Joint Venture
The Partnership adopted the provisions of Statement of Financial
Accounting Standards No. 114 "Accounting by Creditors for Impairment of
a Loan", as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosure", on January 1,
1995. Management, considering current information and events regarding
the borrowers ability to repay their obligations, considers a note to
be impaired when it is probable that the Partnership will be unable to
collect all amounts due according to the contractual terms of the note
agreement. When a loan is considered to be impaired, the amount of the
impairment is measured based on the present value of expected future
cash flows discounted at the note's effective interest rate, the fair
market value of collateral securing the note, if any or the note's
observable market price. Impairment losses are included in the
allowance for doubtful accounts through a charge to bad debt expense.
Cash receipts on impaired notes receivable are applied to reduce the
principal amount of such notes until the principal has been recovered
and are recognized as interest income, thereafter. Prior periods have
not been restated.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
ORGANIZATION (CONTINUED)
Investment Properties
The Partnership's investment property account consists of commercial
land and buildings that are carried at the lower of cost, net of
accumulated depreciation and amortization, less valuation allowance for
possible investment losses. The valuation allowance represents the
excess carrying value of individual properties over their estimated net
realizable value. The additions to the valuation allowance for
possible investment losses are recorded after consideration of various
external factors, particularly the lack of credit available to
purchasers of real estate and overbuilt real estate markets, both of
which adversely affect real estate. A gain or loss will be recorded to
the extent that the amounts ultimately realized from property sales
differ from those currently estimated. In the event economic
conditions for real estate continue to decline, additional valuation
losses may be recognized. Net realizable value is based upon an
appraisal of the property by an independent appraiser and management's
assessment of current market conditions. 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.
Investment in Joint Venture
Partnership investments of 20% to 50% are accounted for by the equity
method. Under this method, the investments are recorded at initial
cost, and increased for partnership income and decreased for
partnership losses and distributions.
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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
ORGANIZATION (CONTINUED)
Net Loss per Limited Partnership Unit
The net loss per limited partnership unit is computed based on the
weighted average number of units outstanding during the year of 23,030
in 1996 and 1995.
Statement of Cash Flows
For purposes of 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 consist of 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 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 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.
NOTE 2 - RELATED PARTY EXPENSE REIMBURSEMENT AND FEE ARRANGEMENT
(CONTINUED)
The total management fees paid to the Managing General Partner were
$41,073 and $38,315 for the nine months ending September 30, 1996, and
1995, respectively; while total reimbursement of expenses were $131,201
and $111,962, 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 at September 30, 1996
and December 31, 1995 are as follows:
September 30, December 31,
1996 1995
Land $2,774,392 $2,774,392
Building and Improvements 5,546,895 4,744,102
Tenant Improvements 1,011,992 1,118,811
Investment property, at cost 9,333,279 8,637,305
Less: accumulated depreciation
and amortization (1,539,593) (1,474,003)
valuation allowance (469,000) (469,000)
Investment property, net $7,324,686 $6,694,302
NOTE 4 - DUE FROM JOINT VENTURE
The receivable represents funds advanced to Capital Builders Roseville
Venture (Note 5), which earned interest at 8.24% and 10.5% at September
30, 1996 and 1995, approximately the same rate paid for similar
borrowings. The receivable includes $149,402 and $121,088 of accrued
interest at September 30, 1996, and December 31, 1995. Interest income
earned on the note was $81,457 and $84,854 for the nine months ended
September 30, 1996 and 1995, respectively. The receivable is unsecured
and is due and payable on demand.
The note due from Joint Venture has been evaluated for collectability
under the provisions of this statement. Based on the evaluation
performed, no impairment has been recognized as of September 30, 1996.
NOTE 5 - INVESTMENT IN JOINT VENTURE
The investment in Joint Venture represents a 40% equity interest in a
Joint Venture with Capital Builders Development Property, a related
partnership which has the same general partner. The investment is
accounted for on the equity method.
NOTE 5 - INVESTMENT IN JOINT VENTURE (CONTINUED)
The balance sheets of the Joint Venture as of September 30, 1996, and
December 31, 1995, are as follows:
September 30, December 31,
1996 1995
Assets
Cash $ 3,967 $ 67,628
Accounts receivable 40,541 69,304
Land and buildings, net 3,188,056 3,318,113
Leasing commissions, net 42,046 47,265
Other assets, net 63,175 73,331
Total assets $3,337,785 $3,575,641
Liabilities and Equity
Notes Payable $3,467,037 $3,500,000
Loan payable to affiliate 1,429,883 1,231,089
Accounts payable and accrued
liabilities 19,673 9,412
Tenant deposits 50,694 55,059
Capital, CBDP (977,701) (731,951)
Capital, CBDP II (651,801) (487,968)
Total liabilities and equity $3,337,785 $3,575,641
The Statement of Operations for Joint Venture for the years ended
September 30, are as follows:
Nine Months Ended September 30,
1996 1995
Revenues
Rental income $490,067 $455,333
Interest income 834 1,230
Total income 490,901 456,563
Expenses
Operating expenses 93,872 89,610
Repairs and maintenance 56,455 59,559
Property taxes 33,117 32,583
Interest 295,845 347,043
General and administrative 6,896 6,521
Depreciation and amortization 168,099 204,844
Total expenses 654,284 740,160
Net loss $(163,383) $(283,597)
Capital Builders Development
Properties II share of net loss $(65,352) $(113,439)
NOTE 6 - NOTE PAYABLE
The mini-permanent loan of $3,625,000 with interest at the bank's prime
rate (8.75% at September 22, 1995) plus 1.5% was refinanced with a
$5,000,000 mini-permanent fixed interest rate loan on September 22,
1995. The loan's fixed interest rate is 8.89% and 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 Phase I for land,
building and improvements.
NOTE 7 - RENTAL LEASES
The Partnership leases its properties under long term non-cancelable
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 ending
December 31 are as follows:
1996 $ 832,674
1997 543,893
1998 445,735
1999 302,851
2000 66,176
Thereafter 22,182
Total $2,213,511
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Partnership in
estimating its fair value disclosures for financial instruments.
Cash and cash equivalents, Investment securities, Accounts
receivable, net, Due from Joint Venture, and Accounts payable and
accrued liabilities
The carrying amount approximates fair value because of the short
maturity of these instruments.
Note payable
The fair value of the Partnership's Note Payable is 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 as
of September 30, 1996 are as follows:
Carrying Estimated
Amount Fair Value
Assets
Cash and cash equivalents $ 1,133,814 $ 1,133,814
Accounts receivable, net 138,555 138,555
Due from Joint Venture 1,429,884 1,429,884
Liabilities
Note payable 4,943,413 4,943,413
Accounts payable and accrued
Liabilities $ 317,542 $ 317,542
NOTE 9 - 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 operations.
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 has raised $11,515,000
(represented by 23,030 Limited Partnership Units). Cash generated from
the sale of Limited Partnership Units has been used to acquire land and
for the development of a mixed use commercial project and a 40%
interest in a commercial office project.
The Partnership's primary current sources of cash are from cash
reserves, investment income, and property rental income. As of
September 30, 1996, the Partnership had $1,133,814 in cash reserves.
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. The Partnership is currently proceeding with the
development of Phase II, consisting of approximately 45,620 square feet
of two, one-story Light Industrial/Office space buildings. The total
development cost of Phase II is estimated to be approximately
$2,800,000. Funds for these improvements will come from existing cash
reserves, property income, and additional borrowings.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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. The Partnership's financial resources appear to
be adequate to meet current year's obligations, and no adverse change
in liquidity is foreseen.
Results of Operations
The Partnership's total revenues increased by $95,764 (10.7%) for the
nine months ended September 30, 1996, as compared to September 30,
1995. Total expenses, net of depreciation, also increased by $73,613
(10.2%), while depreciation expense decreased by $225,863 (45%) for the
nine months ended September 30, 1996, as compared to September 30,
1995. In addition, the loss on the investment in Joint Venture
decreased by $48,087 in 1996 as compared to 1995, all resulting in a
decrease of net loss of $296,101 (68%) for the nine months ended
September 30, 1996, as compared to September 30, 1995.
The increase in revenues is due to an increase in rental rates, and a
$35,000 settlement for past due rent which had been written-off in
1994. Revenues also increased due to an increase in interest income.
This increase is due to interest earned on cash reserves generated by
the refinancing of the project's note payable (see Note 6 of the Notes
to Financial Statements).
Expenses, net of depreciation, increased for the nine months ended
September 30, 1996, as compared to September 30, 1995, due to the net
effect of: a) $20,785 (11.7%) increase in operating expenses primarily
due to an increase of marketing costs associated with Phase II, plus an
increase in utilities relating to an increase in occupancy of the
office building, b) $15,864 (14%) decrease in repairs and maintenance
due to the re-carpeting and repainting of the office building's common
area during the third quarter of 1995, c) $9,772 (21.2%) increase in
property taxes due to a tax refund received in 1995 for a temporary
reduction in the property's assessed value, d) $44,539 (15.4%)
increase in interest costs due to an increase in the loan balance (the
additional loan proceeds are to be used to fund additional Phase II
improvements, see Liquidity and Capital Resources for further
discussion), and e) $14,381 (15%) increase in general and
administrative costs due to an increase in investor services, and the
timing of accounting fees.
PART II - OTHER INFORMATION
Item 1 - Legal Proceeding
The Partnership is not a party to, nor is the Partnership's property
the subject of, any material pending legal proceedings.
Item 2 - Not applicable
Item 3 - Not applicable
Item 4 - Not applicable
Item 5 - Not applicable
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 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: By:_____________________________________
Michael J. Metzger
President
Date: By:______________________________________
Kenneth L. Buckler
Chief Financial Officer