1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Nine Months ended September 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 ___
Capital Builders Development Properties II
(A California Limited Partnership)
BALANCE SHEETS
September 30 December 31
1997 1996
ASSETS
Cash and cash equivalents $485,307 $701,828
Accounts receivable, net 180,704 68,724
Due from Joint Venture - - - - - 1,514,788
Investment property, at cost, net
of accumulated depreciation and
amortization of $1,949,477 and
$1,426,812 at September 30, 1997, and
December 31, 1996, respectively 12,361,059 7,485,543
Lease commissions, net of accumulated
amortization of $161,057 and $52,498
at September 30, 1997, and December
31, 1996, respectively 172,074 78,635
Other assets, net of accumulated
amortization of $38,135 and
$19,419 at September 30, 1997 and
December 31, 1996, respectively 62,536 103,815
Total assets $13,261,680 $9,953,333
LIABILITIES AND PARTNERS' EQUITY
Notes payable $8,957,162 $4,928,442
Accounts payable and accrued
liabilities 234,384 158,405
Tenant deposits 98,037 48,995
Share of Joint Venture deficit - - - - - 695,094
Total liabilities 9,289,583 5,830,936
Commitments and Contingencies
Partners' Equity:
General partner (56,110) (54,607)
Limited partners 4,028,207 4,177,004
Total partners' equity 3,972,097 4,122,397
Total liabilities and
partners' equity $13,261,680 $9,953,333
See accompanying notes to the financial statements.
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1997 1996
Three Nine Three Nine
Months Months Months Months
Ended Ended Ended Ended
Revenues
Rental and other income $500,111 $1,123,146 $310,788 $852,857
Interest income 1,950 125,471 52,230 140,453
Total revenues 502,061 1,248,617 363,018 993,310
Expenses
Operating expenses 111,362 263,177 69,957 198,474
Repairs and maintenance 71,596 167,189 27,745 97,097
Property taxes 37,127 74,377 18,580 55,742
Interest 180,057 441,175 110,796 333,418
General administrative 42,670 125,694 32,778 110,553
Depreciation and
amortization 128,565 304,499 76,538 270,880
Total expenses 571,377 1,376,111 336,394 1,066,164
Loss before Joint
Venture (69,316) (127,494) 26,624 (72,854)
Loss on investment in
Joint Venture - - - - (22,806) (19,109) (65,352)
Net income (loss) (69,316) (150,300) 7,515 (138,206)
Allocated to general
partners (693) (1,503) 75 (1,382)
Allocated to limited
partners ($68,623) ($148,797) $7,440 ($136,824)
Net loss per limited
partnership unit ($2.98) ($6.46) $0.32 ($5.94)
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 MONTHS ENDED
SEPTEMBER 30,
Three Nine Three Nine
Months Months Months Months
Ended Ended Ended Ended
Cash flows from
operating activities:
Net (loss)/income ($69,314) ($150,298) $7,515 ($138,206)
Adjustments to
reconcile net loss to
cash flow used in
operating activities:
Depreciation and
amortization 128,565 304,499 76,538 270,880
Equity in losses of
Joint Venture - - - - 22,806 19,109 65,352
Recognition of
deferred interest income
from affiliate loan - - - - (114,046) - - - - - - - -
Changes in assets and
liabilities (Increase/
Decrease in A/R (50,814) (77,232) (6,551) 5,071
Increase in leasing
commissions (23,685) (80,690) (17,587) (34,575)
(Increase)/decrease
in other assets (3,398) 8,319 (1,800) (2,352)
Increase in accounts
payable and accrued
liabilities 201,762 109,051 300,271 303,007
Decrease in tenant
deposits (1,402) (2,498) (1,266) (946)
Net cash provided
by/(used in operating
activities 181,714 19,911 376,229 468,231
Cash flows from
investing activities:
Investment in
securities - - - - - - - - 1,168,660 1,214,118
Acquisition of
remaining joint venture
interest, net of cash
acquired - - - - (14,380) - - - - - - - -
Advances to Joint
Venture - - - - - - - - (10,864) (198,795)
Improvements to
investment properties (411,292) (810,815) (714,172) (868,206)
Distribution from
Joint Venture - - - - - - - - 8,000 98,480
Net cash used in
investing activities (411,292) (825,195) 451,624 245,597
Cash flows from
financing activities:
Payments of debt (28,180) (66,619) (14,641) (42,961)
Proceeds from notes
payable 655,382 655,382 - - - - - - - -
Net cash provided by/
(used in) financing
activities 627,202 588,763 (14,641) (42,961)
Net increase/(decrease)
in cash 397,624 (216,521) 813,212 670,867
Cash, beginning of
period 87,683 701,828 320,602 462,947
Cash, end of period $485,307 $485,307 $1,133,814 $1,133,814
Supplemental Disclosure of Acquisition of
Remaining 60% Joint Venture Interest
Fair Value of Assets
Acquired - - - - $5,095,204 - - - - - - - -
Fair Value of
Liabilities to outside
parties - - - - (3,439,957) - - - - - - - -
Fair Value of
Affiliate Loan - - - - 1,570,134 - - - - - - - -
Net Equity - - - - $85,113 - - - - - - - -
Cash paid for 60%
interest in Joint
Venture - - - - 51,068 - - - - - - - -
Cash Acquired - - - - (36,688) - - - - - - - -
Net cash paid for
Acquisition - - - - $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
$54,969 and $41,073 for the nine months ended September 30, 1997 and
1996, respectively, while total reimbursement of expenses were $158,232
and $131,201, 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 30,1997December 31, 1996
Land $4,053,799 $2,622,014
Building and Improvements 8,955,170 5,449,418
Tenant Improvements 1,301,567 840,923
Investment property, at cost 14,310,536 8,912,355
Less: accumulated depreciation
and amortization (1,949,477) (1,426,812)
Investment property, net $12,361,059 $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:
September 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 and$ - - - - -$ 3,323,554
Partner's Equity
Summary of unaudited financial information of Capital Builders
Roseville Venture continued:
Nine Months ended
Sept 30, 1997 Sept 30, 1996
Total Revenue $ 242,630 $ 559,041
Total Expenses 299,645 594,553
Net (Loss) ($ 57,015) ($ 35,512)
September 30, 1997 Net Loss from Capital Builders Roseville Venture
represents activity prior to the May 1, 1997 purchase. The purchase
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:Sept 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. $4,881,975$4,928,442
A construction loan of $2,280,000 with
a variable interest rate of prime plus
1.5% (10% as of September 30, 1997).
The loan requires monthly interest only
payments, and is due March 1, 1999.
The note provides for future draws of
$1,624,618 for shell and 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. 655,382 - - - - -
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 land, buildings and improvements. $3,41
9,805 - - - - -
Total Notes Payable $8,957,162 $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 $1,556,694
1998 1,416,992
1999 896,578
2000 551,814
2001 442,581
Thereafter 172,825
Total $5,037,484
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 September 30, 1997 are as follows:
Carrying Estimated
Amount Fair Value
Assets
Cash and cash equivalents $ 485,307
$485,307
Accounts receivable, net 180,704 180,704
Liabilities
Note payable 4,881,975 4,881,975
Note payable 655,382 655,382
Note payable 3,419,805 3,419,805
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 and construction financing. As of
September 30, 1997, the Partnership had $485,307 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.
As of September 30, 1997, net cash used in investing activities
($825,195) was primarily the result of costs incurred for the shell
construction for Highlands 80 Phase II, tenant improvements for the
11,657 square foot lease at Highlands 80 Phase II, tenant improvement
costs incurred for lease roll-overs at Highlands 80 Phase I, and lease
renewals at Capital Professional Center. These costs were primarily
funded with a new construction loan which provided $655,382 in loan
proceeds (see Note 6 for further discussion on Notes Payable).
Management anticipates additional tenant improvement costs for
Highlands 80 Phase I in the amount of $84,000 and additional Highlands
80 Phase II development costs of $1,189,764 to be incurred within the
next 12 months. 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 $255,307 (25.7%) for the
nine months ended September 30, 1997, as compared to September 30,
1996. Total expenses, also increased by $309,947 (29.1%) for the nine
months ended September 30, 1997, as compared to September 30, 1996. In
addition, the loss on the investment in Joint Venture decreased by
$42,546 (65.1%) in 1997 as compared to 1996, all resulting in an
increase of net loss of $12,094 (8.8%) for the nine months ended
September 30, 1997, as compared to September 30, 1996.
The increase in revenues is primarily due to the Partnership's
acquisition of the remaining 60% interest of Capital Builders Roseville
Venture (Capital Professional Center). Since the purchase on May 1,
1997, property income earned by Capital Professional Center has been
fully recognized by the Partnership. Prior to the purchase, the
Partnership recognized only a 40% share of net income/(loss) from
Capital Professional Center as Income/(loss) in Joint Venture. As of
the purchase date of May 1, 1997 to September 30, 1997, rental income
of $316,155 was recognized from Capital Professional Center.
Expenses increased for the nine months ended September 30, 1997, as
compared to September 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 $294,911, representing
expenses of Capital Professional Center during the Partnership's 100%
ownership, May 1, 1997 through September 30, 1997.
b) $34,028 (35%) increase in repairs and maintenance from Highlands 80
due to major landscape and parking lot repairs of Phase I, and an
increase in landscape maintenance for the newly developed Phase II.
c) $10,343 (3%) decrease in interest expense from Highlands 80 due to
the capitalization of interest during 1997 associated with the
construction of Phase II.
d) $9,769 (8.8%) increase in general and administrative costs due to
the construction of Highlands 80 Phase II, and the increased ownership
of Capital Professional Center.
e) $22,989 (8.5%) decrease in depreciation from Highlands 80 due to
tenant improvement costs that were amortized during the nine months
ended September 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: November 17, 1997 By:
_____________________________________
Michael J. Metzger
President
Date: November 17, 1997 By:
_____________________________________
Kenneth L. Buckler
Chief Financial Officer