6
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Six Months ended June 30, 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:
N/A
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 INFORMATON
Capital Builders Development
Properties II
(A California Limited Partnership)
BALANCE SHEETS
June 30 December 31
1997 1996
ASSETS
Cash and cash equivalents $ 87,683 $ 701,828
Accounts receivable, net 129,890 68,724
Due from Joint Venture - - - - - 1,514,788
Investment property, at cost, net
of accumulated depreciation and
amortization of $1,996,903 and
$1,426,812 at June 30, 1997, and
December 31, 1996, respectively 12,069,312 7,485,543
Lease commissions, net of
accumulated amortization of $145,696
and $52, 498 at June 30, 1997, and
December 31, 1996, respectively 148,483 78,635
Other assets, net of accumulated
amortization of $45,349 and
$19,419 at June 30, 1997 and
December 31, 1996, respectively 68,069 103,815
Total assets $12,503,437 $9,953,333
LIABILITIES AND PARTNERS' EQUITY
Notes payable $8,329,960 $4,928,442
Accounts payable and accrued
liabilities 32,623 158,405
Tenant deposits 99,439 48,995
Share of Joint Venture deficit - - - - - 695,094
Total liabilities 8,462,022 5,830,936
Commitments and Contingencies
Partners' Equity:
General partner (55,416) (54,607)
Limited partners 4,096,831 4,177,004
Total partners' equity 4,041,415 4,122,397
Total liabilities and
partners' equity $12,503,437 $9,953,333
See accompanying notes to the
financial statements.
STATEMENTS OF OPERATIONS
FOR THE MONTHS ENDED JUNE 30,
1997 1996
Three Six Three Six
Months Months Months Months
Ended Ended Ended Ended
Revenues
Rental and other income $379,008 $623,035 $281,106 $542,069
Interest income 117,004 123,521 42,071 88,223
Total revenues 496,012 746,556 323,177 630,292
Expenses
Operating expenses 89,111 151,815 71,396 128,517
Repairs and maintenance 58,677 95,593 29,370 69,352
Property taxes 21,687 37,250 18,581 37,162
Interest 157,017 261,118 111,153 222,622
General administrative 37,197 83,024 34,711 77,775
Depreciation and
amortization 102,229 175,934 96,126 194,342
Total expenses 465,918 804,734 361,337 729,770
Loss before Joint Venture 30,094 (58,178) (38,160) (99,478)
Loss on investment in
Joint Venture (3,933) (22,806) (19,739) (46,243)
Net income (loss) 26,161 (80,984) (57,899) (145,721)
Allocated to general partners 261 (810) (579) (1,457)
Allocated to limited partners $25,900 ($80,174) ($57,320) ($144,264)
Net loss per limited
partnership unit $1.12 ($3.48) ($2.49) ($6.26)
Average units outstanding 23,030 23,030 23,030 23,030
See accompanying notes to the financial statements
STATEMENTS OF CASH FLOWS
FOR MONTHS ENDED JUNE 30,
Three Six Three Six
Months Months Months Months
Ended Ended Ended Ended
Cash flows from operating
activities:
Net loss $26,161 ($80,984) ($57,899) ($145,721)
Adjustments to reconcile
net loss to cash flow used
in operating activities:
Depreciation & 102,229 175,934 96,126 194,342
amortization
Equity in losses of Joint
Venture 3,933 22,806 19,739 46,243
Recognition of deferred
interest income from
affiliate loan (82,713) (114,046) - - - - - -
Changes in assets and
liabilities
(Increase)/Decrease in
A/R (3,964) (26,418) 2,633 11,622
Increase in leasing
commissions (35,452) (57,005) - - - (16,988)
Increase/(Decrease) in
other assets 14,064 11,717 19,710 (552)
(Decrease)/Increase in
accounts payable and
accrued liabilities (54,448) (92,711) 4,156 2,736
Increase/(Decrease) in
tenant deposits 1,554 (1,096) (1,948) 320
Net cash (used in
/provided by operating
activities (28,636) (161,803) 82,517 92,002
Cash flows from investing
activities:
Investment in securities - - - - - - 60,576 45,458
Acquisition of remaining
joint venture interest,
net of cash acquired (14,380) (14,380) - - - - - -
Advances to Joint Venture - - - - - - - - - - (187,931) (187,931)
Improvements to
investment properties (171,512) (399,523) (82,163) (154,034)
Distribution from Joint
Venture - - - - - - 68,000 90,480
Net cash used in
investing activities (185,892) (413,903) (141,518) (206,027)
Cash flows from financing
activities:
Payments of debt (23,632) (38,439) (14,317) (28,320)
Net cash used in
financing activities (23,632) (38,439) (14,317) (28,320)
Net decrease in cash (238,160) (614,145) (73,318) (142,345)
Cash, beginning of period 325,843 701,828 393,920 462,947
Cash, end of period $87,683 $87,683 $320,602 $320,602
Supplemental Disclosure of Acquisition of Remaining
60% of Joint Venture Interest
Fair Value of Assets
Acquiried $5,095,204 $5,095,204 - - - - - -
Fair Value of Liabilities
to outside parties (3,439,957) (3,439,957) - - - - - -
Fair Value of Affiliate 1,570,134 1,570,134 - - - - - -
Loan
Net Equity $85,113 $85,113 - - - - - -
Cash paid for 60% interest
in Joint Venture 51,068 51,068 - - - - - -
Cash Acquired (36,688) (36,688) - - - - - -
Net cash paid for
Acquisition $14,380 $14,380 - - - - - -
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.
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
$31,972 and $26,593 for the six months ended June 30, 1997 and 1996,
respectively, while total reimbursement of expenses were $96,068 and
$85,637, 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:
June 30,1997December 31, 1996
Land $4,053,799 $2,622,014
Building and Improvements 8,580,809 5,449,418
Tenant Improvements 1,431,607 840,923
Investment property, at cost 14,066,215 8,912,355
Less: accumulated depreciation
and amortization (1,996,903) (1,426,812)
Investment property, net $12,069,312 $7,485,543
NOTE 4 - DUE FROM JOINT VENTURE
The receivable represents funds advanced to Capital Builders Roseville
Venture (Note 5). Amounts outstanding earned interest at 8.95%,
approximately the same rate paid for other borrowings. The Note
receivable was settled in connection with the purchase of Capital
Builders Development Properties' 60% joint venture interest. See Note
5 for further discussion.
NOTE 5 - INVESTMENT IN JOINT VENTURE
The investment in joint venture represents a 40% interest in a joint
venture with Capital Builders Development Properties (CBDP), a related
partnership with the same general partner. In May 1997, the
Partnership purchased the remaining 60% interest in the joint venture.
The purchase was completed after an independent valuation of the joint
venture property, Capital Professional Center.
The Partnership acquired CBDP's 60% interest for $51,068 in cash, which
was based on CBDP's 60% interest in the joint venture's net assets.
The acquisition has been accounted for using the purchase method of
accounting, and accordingly, the operating results of Capital
Professional Center have been included in the Partnership's Statement
of Operations since the May 1, 1997 acquisition. The purchase price
was allocated based on the estimated fair values of the net assets at
the date of acquisition. As the purchase price approximated the
estimated fair value of the net assets acquired, no goodwill was
recorded.
A summary of unaudited financial information of Capital Builders
Roseville Venture is as follows:
June 30, 1997December 31, 1996
Assets
Cash $ - - - - - $ 23,657
Accounts receivable - - - - - 33,437
Investment property - - - - - 3,163,465
Other assets - - - - - 102,995
Total Assets $ - - - - - $ 3,323,554
Liabilities and Equity
Accounts payable and
accrued liabilities $ - - - - - $ 37,292
Tenant security deposits - - - - - 53,611
Note payable - - - - - 3,455,591
Loan payable to affiliate 1,514,788
Capital, CBDP - - - - - (1,042,634)
Capital, CBDP II - - - - - (695,094)
Total Liabilities $ - - - - - $ 3,323,554
and Partner's Equity
Summary of unaudited financial information of Capital Builders
Roseville Venture continued:
Six Months ended
June 30, 1997 June 30, 1996
Total Revenue $ 242,630 $ 324,251
Total Expenses 299,645 439,860
Net Loss $ 57,015 $ 115,609
This transaction did not generate any sales commissions, transaction
fees, changes in management compensation, or any other direct or
indirect benefit to the General Partner.
NOTE 6 - NOTE PAYABLE
Notes Payable consist of the following at:June 30, 1997 Dec 31, 1996
A mini-permanent loan of $5,000,000 with
a fixed 8.95% interest rate. The loan
requires monthly principle 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,
building and improvements. $4,897,982 $4,928,442
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
land, buildings and improvements. $3,431,978 - - - - -
Total Notes Payable $8,329,960 $4,928,442
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 $1,260,088
1998 939,865
1999 434,633
2000 172,349
2001 115,361
Thereafter - 0 -
Total $2,922,296
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 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 as
of June 30, 1997 are as follows:
Carrying Estimated
Amount Fair Value
Assets
Cash and cash equivalents $ 87,683 $ 87,683
Accounts receivable, net 129,890 129,890
Liabilities
Note payable 4,897,982 4,897,982
Note payable 3,431,978 3,431,978
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 June 30, 1997, the Partnership
had $87,683 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, and the remaining 19,780 square foot building is currently
being constructed. Remaining Phase II development costs are estimated
to be approximately $1,336,000. Funds for these improvements will come
from existing cash reserves, property income, and additional
borrowings. A loan of $2,280,000 has been approved by U.S. Bank for
costs already incurred and additional construction of Phase II. This
loan should be finalized and initially funded during the month of
August 1997.
As of June 30, 1997, net cash used by operating activities amounted to
$161,803. This was primarily the result of an increase in leasing
commissions ($57,005) and a decrease in accounts payable ($92,711).
The increase in leasing commissions was mainly due to commissions paid
for the first initial lease of approximately 11,657 square feet at
Highlands 80 Phase II ($35,600), plus commissions incurred to maintain
a stabilized occupancy of 95% at Capital Professional Center ($18,400).
Management anticipates additional commissions of approximately $63,000
to be incurred during 1997 for additional leasing of Highlands 80
Phases I and II. The decrease in accounts payable was the result of
bringing accounts payable current for both Highlands 80 and Capital
Professional Center.
As of June 30, 1997, net cash used in investing activities ($413,903)
was primarily the result of costs incurred for tenant improvements for
the 11,657 square foot lease at Highlands 80 Phase II, tenant
improvement costs incurred for lease roll-over's at Highlands 80 Phase
I, and lease renewals at Capital Professional Center. Improvement
costs of approximately $68,000 were also incurred for the initial
construction of Highlands 80's 19,780 square foot Phase II building.
Management anticipates additional tenant improvement costs for
Highlands 80 and Capital Professional Center in the amount of $470,000
and additional Highlands 80 Phase II development costs of $1,336,000 to
be incurred during 1997. These costs, along with additional leasing
commissions, will be funded from existing cash reserves, property
income, and additional borrowings.
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 $116,264 (18.4%) for the
six months ended June 30, 1997, as compared to June 30, 1996. Total
expenses, also increased by $74,964 (10.3%) for the six months ended
June 30, 1997, as compared to June 30, 1996. In addition, the loss on
the investment in Joint Venture decreased by $23,437(50.7%) in 1997 as
compared to 1996, all resulting in a decrease of net loss of $64,737
(44.4%) for the six months ended June 30, 1997, as compared to June 30,
1996.
The increase in revenues is primarily due to an increase in interest
income recognized from the affiliate loan, and the increase of property
income resulting from the purchase of the 60% interest of Capital
Builders Roseville Venture. As a result of the Partnership's purchase
of the joint venture's remaining interest, the affiliate loan balance
was settled. The property income from Capital Professional Center
represents income from May 1, 1997 to June 30, 1997, the time in which
100% ownership of the property was required by the Partnership.
Expenses increased for the six months ended June 30, 1997, as compared
to June 30, 1996, due to the net effect of:
a) Due to the purchase of the 60% interest in Capital Builders
Roseville Venture, total expenses increased by $120,934, representing
expenses of Capital Professional Center during the Partnership's 100%
ownership, May 1, 1997 through June 30, 1997.
b) $7,888 (11.3%) increase in repairs and maintenance from Highlands
80 due to major landscape repairs.
c) $7,546 (20.3%) decrease in property taxes from Highlands 80 due to
a reduced assessed value during 1997.
d) $8,703 (3.9%) decrease in interest expense from Highlands 80 due to
the capitalization of interest during 1997 associated with the
construction of Phase II,
e) $4,505 (5.8%) increase in general and administrative costs due to
the construction of Highlands 80 Phase II, and the increased ownership
of Capital Professional Center.
f) $43,548 (22.4%) decrease in depreciation from Highlands 80 due to
tenant improvement costs that were amortized during the six months
ended June 30, 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: August 27, 1997 By:
_____________________________________
Michael J. Metzger
President
Date: August 27, 1997 By:
_____________________________________
Kenneth L. Buckler
Chief Financial Officer