2
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Three Months ended March 31, 1997 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
March 31 December 31
1997 1996
ASSETS
Cash and cash equivalents $ 325,843 $ 701,828
Accounts receivable, net 91,178 68,724
Due from Joint Venture 1,546,120 1,514,788
Investment property, at cost, net
of accumulated depreciation and
amortization of $1,489,288 and
$1,426,812 at March 31, 1997, and
December 31, 1996, respectively 7,651,077 7,485,543
Lease commissions, net of accumulated
amortization of $59,844 and $52,498
at March 31, 1997, and December 31,
1996, respectively 92,841 78,635
Other assets, net of accumulated
amortization of $23,303 and
$19,419 at March 31, 1997 and
December 31, 1996, respectively 102,276 103,815
Total assets $9,809,335 $9,953,333
LIABILITIES AND PARTNERS' EQUITY
Note payable $4,913,635 $4,928,442
Accounts payable and accrued
liabilities 120,142 158,405
Tenant deposits 46,345 48,995
Share of Joint Venture deficit 713,967 695,094
Total liabilities 5,794,089 5,830,936
Commitments and Contingencies
Partners' Equity:
General partner (55,678) (54,607)
Limited partners 4,070,924 4,177,004
Total partners' equity 4,015,246 4,122,397
Total liabilities and
partners' equity $9,809,335 $9,953,333
See accompanying notes to the financial
statements.
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
1997 1996
Revenues
Rental and other income $ 244,027 $260,963
Interest income 6,517 46,152
Total revenues 250,544 307,115
Expenses
Operating expenses 62,704 57,121
Repairs and maintenance 36,916 39,982
Property taxes 15,563 18,581
Interest 104,101 111,469
General administrative 45,827 43,064
Depreciation and
amortization 73,705 98,216
Total expenses 338,816 368,433
Loss before Joint Venture (88,272) (61,318)
Loss on investment in Joint Venture (18,873) (26,504)
Net income (loss) (107,145) (87,822)
Allocated to general partners (1,071) (878)
Allocated to limited partners $(106,074) $(86,944)
Net loss per limited partnership unit $ (4.61) $ (3.78)
Average units outstanding 23,030 23,030
See accompanying notes to the
financial statements
STATEMENTS OF CASH FLOWS
FOR THE MONTHS ENDED MARCH 31,
1997 1996
Cash flows from operating activities:
Net loss $ (107,145) $ (87,822)
Adjustments to reconcile net loss
to cash flow used in operating
activities:
Depreciation and amortization 73,705 98,216
Equity in losses of Joint Venture 18,873 26,504
Uncollected interest earned from Joint (31,333) - - - - -
Venture
Changes in assets and liabilities
(Increase)/Decrease in accounts (22,454) 8,989
receivable
Increase in leasing commissions (21,553) (16,988)
Increase in other assets (2,347) (20,262)
Decrease in accounts payable
and accrued liabilities (38,263) (1,420)
(Decrease)/Increase in tenant deposits (2,650) 2,268
Net cash (used by)/provided by
operating activities (133,167) 9,485
Cash flows from investing activities:
Investment in securities - - - - - (15,118)
Improvements to investment properties (228,011) (71,872)
Distribution from Joint Venture - - - - - 22,480
Net cash used in investing
activities (228,011) (64,510)
Cash flows from financing activities:
Payments of debt (14,807) (14,002)
Net cash provided by
financing activities (14,807) (14,002)
Net (decrease)/increase in cash (375,985) (69,027)
Cash, beginning of period 701,828 462,947
Cash, end of period $ 325,843 $ 393,920
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 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.
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. As of March 31, 1997, no impairments have been
recognized.
Investment Properties
The Partnership adopted the provisions of SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, on January 1, 1995. This Statement requires that long-
lived assets and certain identifiable intangibles be 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.
Adoption of this Statement did not have a material impact on the
Partnership's financial position, results of operations, or liquidity.
Prior to the adoption of SFAS No. 121, the Partnership recorded a
valuation allowance for losses which represented the excess carrying
value of individual properties over their estimated net realizable
value. During 1996, this valuation allowance was allocated against the
cost basis of the land and building and improvements to be consistent
with the methodology of SFAS No. 121.
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.
Investment in Joint Venture
Equity investments of 20 to 50% are accounted for by the equity method.
Under this method, the investments are recorded at initial cost and
increased or decreased for the Partnership's share of income and
losses, and decreased for 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.
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 1997 and 1996.
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
$12,039 and $13,054 for the three months ended March 31, 1997 and 1996,
respectively, while total reimbursement of expenses were $46,757 and
$42,820, 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:
March 31, December 31,
1997 1996
Land $2,622,014 $2,622,014
Building and Improvements 5,469,609 5,449,418
Tenant Improvements 1,048,742 840,923
Investment property, at cost 9,140,365 8,912,355
Less: accumulated depreciation
and amortization (1,489,288) (1,426,812)
Investment property, net $7,651,077 $7,485,543
NOTE 4 - DUE FROM JOINT VENTURE
The receivable represents funds advanced to Capital Builders Roseville
Venture (Note 5) which earns interest at 8.95% at March 31, 1997 and
1996, approximately the same rate paid for other borrowings. The
receivable includes $90,032 of deferred interest income included in
accounts payable and accrued liabilities at March 31, 1997. Interest
income earned on the note was $31,333 and $25,291 for the years ended
March 31, 1997 and 1996, respectively. The receivable is unsecured and
is due and payable on demand.
The Partnership's management is currently evaluating the effect of
dissolving the Roseville Joint Venture through the purchase of the
Partnership's 60% ownership interest by CBDP II. This purchase would
be accomplished by converting the entire affiliate loan balance owed to
CBDP II to equity, and any remaining equity would be split
proportionately among the Partnership and CBDP II according to the
Joint Venture Agreement. Capital Professional Center was appraised on
March 14, 1997 by an independent certified appraiser for the amount of
$5,150,000.
As discussed in Note 1, 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 Disclosures", effective January 1, 1995.
The note due from joint venture has been evaluated for collectability
under the provisions of this statement. Based on management's analysis
of the fair value of the underlying net assets of the joint venture, no
impairment loss is required to be recognized.
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, an affiliated
Partnership which has the same General Partner. The investment is
accounted for on the equity method.
The balance sheets of the joint venture are as follows:
March 31, December 31,
1997 1996
Assets
Cash $24,360 $23,657
Accounts receivable 40,529 33,437
Land and buildings, net 3,128,345 3,163,465
Leasing commissions, net 51,837 42,234
Other assets, net 56,504 60,761
Total assets $3,301,575 $3,323,554
Liabilities and Equity
Note payable $3,443,905 $3,455,591
Loan payable to affiliate 1,546,120 1,514,788
Accounts payable and
accrued liabilities 47,414 37,292
Tenant deposits 49,047 53,611
Capital, CBDP (1,070,944) (1,042,634)
Capital, CBDP II (713,967) (695,094)
Total liabilities and capital$3,301,575$3,323,554
The Statements of Operations for the joint venture for the three months
ended March 31, are as follows:
Three Months Ended March 31
1997 1996
Revenues
Rental income $169,949 $155,084
Interest income 116 378
Total income 170,065 155,462
Expenses
Operating expenses 29,752 31,491
Repairs and maintenance 21,386 16,934
Property taxes 11,451 11,039
Interest 102,415 96,085
General and administrative 6,743 7,185
Depreciation and amortization 45,500 58,988
Total expenses 217,247 221,722
Net loss ($47,182) ($66,260)
Capital Builders Development
Properties II share of net loss ($18,873) ($26,504)
NOTE 6 - NOTE PAYABLE
A mini-permanent loan of $3,625,000 with interest at the bank's prime
rate (8.75% at September 22, 1995) plus 1 1/2% was refinanced with a
$5,000,000 mini-permanent fixed interest rate loan on September 22,
1995. The loan's fixed interest rate is 8.95% 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 land,
building and improvements.
NOTE 7 - 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:
1997 $619,802
1998 454,187
1999 253,715
2000 97,544
2001 39,950
Thereafter - 0 -
Total $1,465,198
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, 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 March 31, 1997 are as follows:
Carrying Estimated
Amount Fair Value
Assets
Cash and cash equivalents $ 325,843 $ 325,843
Accounts receivable, net 91,178 91,178
Due from Joint Venture 1,546,120 1,546,120
Liabilities
Note payable 4,913,635 4,913,635
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 percent
interest in a commercial office project.
The Partnership's primary current sources of cash are from cash
reserves, property rental income. As of March 31, 1997, the
Partnership had $325,843 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 45,921 square feet
of two, one-story Light Industrial/Office space buildings. One
building of Phase II, consisting of 26,141 square feet, has been
completed. The remaining 19,780 square foot building is estimated to
start construction during the second quarter of 1997. Remaining Phase
II development costs are estimated to be approximately $1,404,000.
Funds for these improvements will come from existing cash reserves,
property income, and additional borrowings.
During the three months ended March 31, 1997, the Partnership incurred
an increase in uncollected interest from the Joint Venture of $31,333,
an increase in accounts receivable of $22,454, an increase in lease
commissions of $21,553, and a decrease in accounts payable and accrued
liabilities of $38,263, which contributed towards $133,166 in cash used
by operating activities.
The increase in uncollected interest from the Joint Venture resulted
from the Roseville Joint Venture being unable to service its affiliate
loan because of leasing costs at Capital Professional Center incurred
during the first quarter. Management is currently evaluating the
effect of dissolving the Joint Venture and converting its affiliate
loan to equity in Capital Professional Center. (See Note 4 of the
Financial Statements for further discussion.)
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 decreased by $56,571 (18.4%) for the
three months ended March 31, 1997, as compared to March 31, 1996.
Total expenses, also decreased by $29,617 (8%) for the three months
ended March 31, 1997, as compared to March 31, 1996. In addition, the
loss on the investment in Joint Venture decreased by $7,631 (28.8%) in
1997 as compared to 1996, all resulting in a increase of net loss of
$19,323 (22%) for the three months ended March 31, 1997, as compared to
March 31, 1996.
The decrease in revenues is primarily due to a decrease in interest
income. The recognition of interest income declined during 1997 vs
1996, mainly due to interest accrued on the affiliate loan not being
recognized as earned income, since actual payments were not received.
(See Note 4 of the Financial Statements for further discussion.)
Additionally, interest income earned on cash reserves was lower for the
three months ended March 31, 1997 vs March 31, 1996 due to the
Partnership retaining lower cash reserves during 1997. Property rental
income also declined during the three months ended March 31, 1997 vs
March 31, 1996. This was the result of a declining occupancy at Phase
I of Highlands 80. Phase I is currently operating at 84% occupancy.
It is felt by management that the decline in occupancy is temporary,
due to the improvement of the Sacramento rental market. The increase
in vacant space at Highlands 80 was mainly the result of a major tenant
downsizing its operations and moving from the project.
Expenses decreased for the three months ended March 31, 1997, as
compared to March 1996, due to the net effect of:
a) $5,583 (9.8%) increase in operating expenses, due to higher utility
rates and larger landscaping refurbishing costs incurred during 1997,
b) $3,066 (7.7%) decrease in repairs and maintenance,
c) $7,368 (6.6%) decrease in interest expense due to the
capitalization of interest during 1997 associated with the construction
of Phase II and due to major roof repairs performed during the first
quarter of 1996,
d) $24,511 (25%) decrease in depreciation due to tenant improvement
costs that were amortized during the three months ended March 31, 1996
became fully amortized prior to 1997.
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: May 19, 1997 By:_____________________________________
Michael J. Metzger
President
Date: May 19, 1997 By:_____________________________________
Kenneth L. Buckler
Chief Financial Officer