13
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
For The Quarter Ended March 31, 1998 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:
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
1998 1997
ASSETS
Cash and cash equivalents $423,757 $254,626
Accounts receivable, net 170,909 163,738
Investment property, at cost, net
of accumulated depreciation and
amortization of $1,938,226 and
$2,061,160 at March 31, 1998, and
December 31, 1997, respectively 12,343,186 12,431,881
Lease commissions, net of accumulated
amortization of $157,304 and
179,388 at March 31, 1998, and
December 31, 1997, respectively 150,766 162,386
Other assets, net of accumulated
amortization of $31,075 and
$34,606 at March 31, 1998 and
December 31, 1997, respectively 68,804 64,587
Total assets $13,157,422 $13,077,218
LIABILITIES AND PARTNERS' EQUITY
Note payable $9,182,037 $8,950,372
Accounts payable and accrued
liabilities 48,187 127,777
Tenant deposits 101,638 93,690
Total liabilities $9,331,862 $9,171,839
Commitments and Contingencies
Partners' Equity:
General partner (57,575) (56,777)
Limited partners 3,883,135 3,962,156
Total partners' equity $3,825,560 $3,905,379
Total liabilities and
partners' equity $13,157,422 $13,077,218
See accompanying notes to the financial statements.
Capital Builders Development
Properties II
(A California Limited Partnership)
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
1998 1997
Revenues
Rental and other income $ 473,290 $ 244,027
Interest income 2,639 6,517
Total revenues 475,929 250,544
Expenses
Operating expenses 91,623 62,704
Repairs and maintenance 64,471 36,916
Property taxes 34,632 15,563
Interest 179,817 104,101
General and administrative 60,693 45,827
Depreciation and amortization 124,512 73,705
Total expenses 555,748 338,816
Loss before Joint Venture Interest (79,819) (88,272)
Loss on investment in Joint Venture - - - - (18,873)
Net loss (79,819) (107,145)
Allocated to general partners (798) (1,071)
Allocated to limited partners $ (79,021) $ (106,074)
Net loss per limited partnership unit $ (3.43) $ (4.61)
Average units outstanding 23,030 23,030
See accompanying notes to the financial statements
Capital Builders Development Properties II
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
FOR THE MONTHS ENDED MARCH 31,
1998 1997
Cash flows from operating activities:
Net loss ($79,819) ($107,145)
Adjustments to reconcile net loss
to cash flow used in operating
activities:
Depreciation and amortization 124,512 73,705
Equity in losses of Joint Venture - - - - - 18,873
Uncollected interest earned from Joint Venture - - - - - (31,333)
Changes in assets and liabilities
Increase in accounts receivable (7,171) (22,454)
Increase in leasing commissions (7,296) (21,553)
Increase in other assets (99) (2,347)
Decrease in accounts payable
and accrued liabilities (79,590) (38,263)
Increase/(Decrease) in tenant deposits 7,948 (2,650)
Net cash used by
operating activities (41,515) (133,167)
Cash flows from investing activities:
Improvements to investment properties (21,019) (228,011)
Net cash used in investing
activities (21,019) (228,011)
Cash flows from financing activities:
Proceeds from issuance of debt 260,085 - - - - -
Payments of debt (28,420) (14,807)
Net cash provided by/(used in)
financing activities 231,665 (14,807)
Net increase/(decrease) in cash 169,131 (375,985)
Cash, beginning of period 254,626 701,828
Cash, end of period $423,757 $325,843
See accompanying notes to the financial statements.
Capital Builders Development Properties II
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For The Three Months Ended March 31, 1998
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
Long-lived assets and certain identifiable intangibles are reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair
value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
The Partnership's investment property consists of commercial land,
buildings and leasehold improvements that are carried net of
accumulated depreciation. Depreciation is provided for in amounts
sufficient to relate the cost of depreciable assets to operations over
their estimated service lives of three to forty years. The straight-
line method of depreciation is followed for financial reporting
purposes.
Other Assets
Included in other assets are loan fees. Loan fees are amortized over
the life of the related note.
Lease Commissions
Lease commissions are being amortized over the related lease terms.
Income Taxes
The Partnership has no provision for income taxes since all income or
losses are reported separately on the individual Partners' tax returns.
Revenue Recognition
Rental income is recognized on a straight-line basis over the life of
the lease, which may differ from the scheduled rental payments.
Net 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 quarter ended
March 31 of 23,030 in 1998 and 1997.
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
$23,648 and $12,039 for the three months ended March 31, 1998 and March
31, 1997, respectfully, while total reimbursement of expenses were
$47,940 and $46,757, 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,
1998 1997
Land $4,053,799 $4,053,799
Building and Improvements 9,132,132 9,111,111
Tenant Improvements 1,095,481 1,328,131
Investment property, at cost 14,281,412 14,493,041
Less: accumulated depreciation
and amortization (1,938,226) (2,061,160)
Investment property, net $12,343,186 $12,431,881
NOTE 4 - NOTES PAYABLE
Notes Payable consist of the following at:
March 31, December 31,
1998 1997
A mini-permanent loan of $5,000,000 with
a fixed 8.95% interest rate. The loan
requires monthly principal and interest
payments of $41,789 which is sufficient
to amortize the loan over 25 years. The
loan is due October 1, 2002. The note
is collateralized by a First Deed Of
Trust on Highlands 80 Phase I land,
buildings and improvements. $4,848,873 $4,865,609
A construction loan of $2,280,000 with a
variable interest rate of prime plus
1.5% (10% as of March 31, 1998). The
loan requires monthly interest only
payments, and is due March 1, 1999. The
note provides for future draws of
$1,342,856 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. 937,144 677,059
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. 3,396,020 3,407,704
Total Notes Payable $9,182,037 $8,950,372
NOTE 5 - LEASES
The Partnership leases its properties under long term noncancelable
operating leases to various tenants. The facilities are leased through
agreements for rents based on the square footage leased. Minimum
annual base rental payments under these leases for the years ended
December 31 are as follows:
1998 $1,548,140
1999 1,031,151
2000 706,356
2001 479,319
2002 207,186
Total $3,972,152
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Partnership in
estimating its fair value disclosures for financial instruments.
Cash and cash equivalents
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 are as follows:
March 31, December 31,
1998 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Assets
Cash and cash
equivalents $ 423,757 $ 423,757 $254,626 $ 254,626
Liabilities
Note payable $ 4,848,873 $ 4,848,873 $ 4,865,609 $ 4,865,609
Note payable $ 937,144 $ 937,144 $677,059 $677,059
Note payable $ 3,396,020 $ 3,396,020 $ 3,407,704 $ 3,407,704
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Partnership is involved in litigation arising in the normal course
of its business. In the opinion of management, the Partnership's
recovery or liability if any, under any pending litigation would not
materially affect its financial condition or 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
March 31, 1998, the Partnership had $423,757 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 for Highlands 80 Commerce Center, consisting of
approximately 45,921 square feet of two, one-story Light
Industrial/Office space buildings. The shell construction of both
Phase II buildings has been completed, and approximately 11,657 square
feet has been leased with tenant improvement and leasing commission
costs already incurred for that space. The remaining Phase II
development costs, consisting of tenant improvements and leasing
commissions, are estimated to be approximately $785,000 and will be
funded with the remaining funds available from the Phase II
construction loan.
During the three months ended March 31, 1998, the Partnership used
$41,515 of net cash used in operations. This was primarily the result
of the Partnership reducing its accounts payable by $79,590, of which
$46,466 was the result of making the final retention payment for
Highlands 80's Phase II shell construction. Management anticipates the
Partnership's cash flow from operations will continue to improve due to
Highlands 80's Phase II continued lease-up and Capital Professional
Center's stabilized occupancy.
During the three months ended March 31, 1998, financing activities
provided the Partnership with $231,665 in cash. This was primarily the
result of construction draws from its construction loan for the
Highlands 80 Phase II shell completion. The Partnership had funded the
improvement costs during 1997 with its cash reserves and accounts
payable, and was reimbursed by the construction loan once the shell was
completed.
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 $225,385 (90%) for the
three months ended March 31, 1998, as compared to March 31, 1997.
Total expenses, also increased by $216,932 (64%) for the three months
ended March 31, 1998, as compared to March 31, 1997. In addition, the
loss on the investment in Joint Venture decreased by $18,873 (100%) in
1998 as compared to 1997, all resulting in a decrease in net loss of
$27,326 (25.5%) for the three months ended March 31, 1998, as compared
to March 31, 1997.
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. During
the three months ended March 31, 1998, Capital Professional Center
produced $189,030 in total revenue. The remaining increase in revenues
of $36,355 was the result of an increase in occupied space at the
Highlands 80 project. Management anticipates this trend to continue
due to the increase in available space from Highlands 80's Phase II and
the improving Sacramento rental market.
Expenses increased for the three months ended March 31, 1998, as
compared to March 31, 1997, due to the net effect of:
a) the purchase of the 60% interest in Capital Builders Roseville
Venture, resulting in an increase in total reported expenses of
$171,853.
b) $8,267 (22.4%) increase in repairs and maintenance at Highlands 80
due to suite turnover costs for lease renewals.
c) $5,484 (35.2%) increase in property taxes at Highlands 80 due to
Phase II construction.
d) $4,634 (4.5%) increase in interest due to loan costs associated with
Highlands 80, Phase II completion.
e) $12,870 (28%) increase in general and administration at the
Partnership level due to the increase in ownership of Capital
Professional Center and the development of Highlands 80, Phase II.
f) $14,261 (19.3%) increase in depreciation at Highlands 80 due to the
Phase II completion.
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 15, 1998 By:_____________________________________
Michael J. Metzger
President
Date: May 15, 1998 By:_____________________________________
Kenneth L. Buckler
Chief Financial Officer