29
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934
For the fiscal year ended Commission File
Number
December 31, 1998 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 incorporation or 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
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Units
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.
X Yes No
As of December 31, 1998 the aggregate Limited Partnership Units held
by nonaffiliates of the registrant was 23,030. There is no market for
the Units.
Documents Incorporated by Reference
Limited Partnership Agreement dated February 6, 1986, filed as Exhibit
3.3, and the Amendment to the Limited Partnership Agreement dated May
22, 1986 filed as Exhibit 3.4 to Registration Statement No. 33-4682 of
Capital Builders Development Properties II, A California Limited
Partnership, are hereby incorporated by reference into Part IV of this
Form 10K.
PART I
ITEM 1. BUSINESS
(a) General Development of Business
Capital Builders Development Properties II (the "Partnership") is a
publicly held limited partnership organized under the provisions of
the California Revised Limited Partnership Act pursuant to the Limited
Partnership Agreement dated February 6, 1986, as amended (the
"Agreement"). The Partnership commenced on May 22, 1986 and shall
continue in full force and be effective until December 31, 2021 unless
dissolved sooner by certain events as described in the Agreement. The
Managing General Partner is Capital Builders, Inc., a California
Corporation (CB). The Associate General Partners are the sole
shareholder, President and Director of CB, and four founders of CB.
On October 6, 1986 the Partnership sold 2,407 Limited Partnership
Units for a total of $1,203,500. From October 6, 1986, through May
21, 1988, the Partnership sold an additional 20,623 Units for a total
of 23,030 Units. On May 21, 1988, the Partnership was closed to
capital raising activity with a total of $11,515,000 proceeds raised
from the offering. The General Partners have contributed capital in
the amount of $1,000 to the Partnership for a 1% interest in the
profits, losses, tax credits and distributions of the Partnership.
(b) Financial Information about Industry Segments
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 partnerships, real estate investment trusts and financial
institutions) with respect to the purchase and sale of land, primarily
on the basis of the prices and terms of such transactions.
(c) Narrative Description of the Business
The Partnership's business objective is to complete the development of
its existing land with light industrial and office buildings for lease
and eventual sale. The primary investment objective of the
Partnership is to realize capital appreciation from the sale of the
Properties developed by it some three to five years after such
Properties have been placed in service. A secondary investment
objective is to generate cash from the leasing of Partnership
Properties pending their sale for distribution to the Limited
Partners, although it is not presently anticipated that the amount of
such cash available for distribution to the Limited Partners will be
significant. Since the Partnership has not sold its investment
properties, it has not achieved its investment goals as yet. Although
investor returns cannot be accurately determined until the investment
properties are sold, due to the additional time required to lease up
the investment properties, the decline in real estate values during
the California recession, it is anticipated that ultimate returns will
be less than initially projected. Funds obtained by the Partnership
from the sale of Limited Partnership Units were used to acquire equity
interest in one piece of land for development and a 40% equity
interest in another for development in accordance with its investment
objective.
On April 10, 1987, the Partnership entered into a joint venture called
Capital Builders Roseville Venture ("JV") with Capital Builders
Development Properties ("CBDP"), a California limited partnership.
The Partnership and CBDP are affiliates as they have the same General
Partner, but there are no direct transactions between the respective
Partnerships. The Partnership contributed $900,000 resulting in a 40%
interest in the profits, losses and cash distributions of the JV. CB,
the Managing General Partner of the Partnership, had the same rights
and obligations with respect to the JV's operations and management as
it could exercise as Managing General Partner of the Partnership. The
JV was dissolved as of May 1, 1997 when the Partnership purchased the
remaining 60% interest in the JV.
The acquisition of the real estate is consistent with the Partnership
objectives which are to acquire, develop, hold, maintain, lease, sell,
or otherwise dispose of real property within the Western United States
(including the states of California, Oregon, Washington, Arizona,
Nevada, New Mexico, Utah, Colorado, Hawaii, and Alaska), including
without limitation, the acquisition of undeveloped land for
development and construction of research and development, light
industrial, commercial/retail, or office buildings thereon, and the
acquisition of partially completed commercial real property
developments for completion of development.
Although the Associate General Partners, Officers, and Directors of
the Managing General Partners are experienced in real property
operation and management, they also may utilize independent advisors,
agents, and workers, in addition to the Partnership employees, to
assist them in the operation, leasing, maintenance and improvement of
the Partnership's properties.
The Partnership has no full time employees but is managed by CB, the
Managing General Partner.
ITEM 2. PROPERTIES
The Partnership owns 100% equity interest in two properties, Highlands
80 Commerce Center ("H80") and Capital Professional Center ("CPC").
H80 is a three phase development. Phase I is a 109,000 square foot
office/industrial project consisting of five multi-tenant buildings.
Phase II consists of approximately 45,921 square feet of two, one-
story light industrial/office space buildings and Phase III will
consist of one 37,500 square foot office building.
CPC is a 40,400 square foot office project consisting of two multi-
tenant buildings which are completely developed and have achieved a
stabilized occupancy.
Additional information about the individual properties follows:
H80 CPC
Ownership Percentage: 100% 100%
Acquisition Date: April 30, 1987 Apr 10, 1987 -
40% Ownership
May 1, 1997 -
60% Ownership
Location: North Highlands, Roseville,
California California
Present Monthly
Effective Average
Base Rent Per Square Foot: $0.88 $1.59
Square Footage Mix:
Office 21,966 40,397
Industrial 113,259
Leased Occupancy at
December 31: 1998 68% 91%
1997 75% 100%
1996 78% 95%
1995 86% 95%
1994 84% 100%
Current Year Depreciation: $301,673 $121,415
Method of Depreciation: Straight Line Straight Line
Depreciation Life: 40 Years 40 Years
Bldg. Improvements Bldg. Improvements
Life of Lease Life of Lease
Tenant Improvements Tenant Improvements
Total cost: $9,722,827 $4,700,608
Encumbrances: $5,734,027 $3,359,490
Tenant occupying more
than 10% of square None Coldwell Banker
footage and nature of business: (Residential Real
Estate Brokerage)
First American
Title Ins. Co.
H80 and CPC are subject to encumbrances which are more fully described
under Note 5 of the Partnership's financial statements included under
Item 8 which is incorporated herein by reference.
Both properties are being leased to a wide variety of tenants in a
diversity of industries. Leases are typically three to five years in
term and provide for free rent periods, at inception, equal to
approximately one month per three years of lease term. Some leases
contain options to extend the term of the lease.
The Partnership's investment properties are located in major urban
areas and, therefore, must compete with properties of greater and
lesser quality. Such competition is based primarily on rent,
location, services and amenities. The properties are suitable for
their current and anticipated use.
ITEM 3. LEGAL PROCEEDINGS
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II
ITEM 5. MARKET FOR REGISTRANT'S LIMITED PARTNERSHIP INTERESTS AND
RELATED SECURITY HOLDER MATTERS
There is no public trading market for the Partnership's Limited
Partnership Units and it is not anticipated that a public trading
market will develop. Furthermore, the Partnership Agreement prohibits
Limited Partners from transferring Limited Partnership Interests if
such transfers would result in the dissolution of the Partnership for
tax purposes under Section 708 of the Internal Revenue Code.
As of December 31, 1998, there were 1,662 holders and 23,030 Limited
Partnership Units outstanding.
ITEM 6. SELECTED FINANCIAL DATA
The following constitutes a summary of selected financial data for the
following periods (000's omitted except net loss per Limited
Partnership Unit):
1998 1997 1996 1995 1994
Revenues $1,985 $1,728 $1,224 $1,208 $1,089
Net Loss ($323) ($217) ($268) ($583) ($697)
Net Loss per Limited
Partnership Unit($13.90) ($9.33) ($11.54) ($25.05) ($29.97)
Total Assets $12,799 $13,077 $9,953 $9,934 $8,910
Notes and Loans Payable$9,094 $8,950 $4,928 $4,986 $3,577
(See ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Year 2000 Issue
The potential impact of the Year 2000 issue on the real estate
industry could be material, as virtually every aspect of the industry
and processing of transactions will be affected. Due to the size of
the task facing the real estate industry, the Partnership may be
adversely affected by the problem, depending on whether it and the
entities with which it does business address this issue successfully.
The impact of Year 2000 issues on the Partnership will then depend not
only on corrective actions that the Partnership takes, but also on the
way in which Year 2000 issues are addressed by governmental agencies,
businesses and other third parties that provide services or data to,
or received services or data from, the Partnership, or whose financial
condition or operational capability is important to the Partnership.
The Partnership's State of Readiness
The Partnership engages the services of third-party software vendors
and service providers for substantially all of its electronic data
processing. Thus, the focus of the Partnership is to monitor the
progress of its primary software providers toward Year 2000 readiness.
The Partnership's Year 2000 program has been divided into phases, all
of them common to all sections of the process: (1) inventorying date-
sensitive information technology and other business systems; (2)
assigning priorities to identified items and assessing the efforts
required for Year 2000 readiness of those determined to be material to
the Partnership; (3) upgrading or replacing material items that are
determined not to be Year 2000 compliant and testing material items;
(4) assessing the status of third party risks; and (5) designing and
implementing contingency and business continuation plans.
In the first phase, the Partnership has conducted a thorough
evaluation of current information technology systems and software.
Non-information technology systems such as climate control systems,
elevators and security equipment will also be surveyed.
In phase two of the process, results from the inventory have been
assessed to determine the Year 2000 impact and what actions are
required to achieve Year 2000 readiness. For the Partnership's
internal systems, application upgrades of software are needed. The
Partnership has opted for a course of action that will result in
upgrading or replacing all critical internal systems.
The third phase includes the upgrading, replacement and/or retirement
of systems, and testing. This stage of the Year 2000 process is
ongoing and is scheduled to be completed by the second quarter of
1999.
The fourth phase, assessing third party risks, includes the process of
identifying and prioritizing critical suppliers and customers at the
direct interface level. This evaluation includes communicating with
the third parties about their plans and progress in addressing Year
2000 issues. The Partnership's management has identified critical
third parties and developed a letter inquiring about their company's
Year 2000 program. These letters will be sent by the first quarter of
1999.
Contingency Plan
The final phase of the Partnership's Year 2000 program relates to
contingency plans. The Partnership maintains contingency plans in the
normal course of business designed to be deployed in the event of
various potential business interruptions. The Partnership's
contingency plan includes maintaining hard copies of tenant leases,
vendor contracts, and accounting records to ensure the maintenance of
its accounting system and help facilitate the collection of rental
income and payments to vendors during computer interruptions.
Costs
As the Company relies upon third-party software vendors and service
providers for substantially all of its electronic data processing, the
primary cost of the Year 2000 Project has been and will continue to be
the reallocation of internal resources and, therefore, does not
represent incremental expense to the Partnership.
Risks
Failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities
or operations. The Partnership believes that, with the implementation
of new or upgraded business systems and completion of the Year 2000
Project as scheduled, the possibility of significant interruptions of
normal operations due to the failure of those systems will be reduced.
However, the Partnership is also dependent upon the power and
telecommunications infrastructure within the United States. The most
reasonably likely worst case scenario would be that the Partnership
may experience disruption in its operations if any of these third-
party suppliers reported a system failure. Although the Partnership's
Year 2000 Project will reduce the level of uncertainty about the
readiness of its material third-party providers, due to the general
uncertainty over Year 2000 readiness of these third-party suppliers,
the Partnership is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact.
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 raised $11,515,000
(represented by 23,030 Limited Partnership Units). Cash generated
from the sale of Limited Partnership Units was used to acquire land
and for the development of a mixed use commercial project and a 40%
interest in a commercial office project.
The Partnership's primary current sources of cash are from cash
balances, property rental income and construction financing. As of
December 31, 1998, the Partnership had $287,892 in cash. 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.
During 1998, net cash provided by operations increased to $53,165.
This is primarily the result of cash provided by the Capital
Professional Center ("CPC") project. CPC's occupancy remains above
90% and is projected to continue providing positive cash flow during
1999. The Highlands 80 project is also projected to increase cash
provided by operating activities during 1999 with the lease-up of
Phase II.
During the twelve months ended December 31, 1998, net cash used in
investing activities ($163,044) was primarily the result of costs
incurred for tenant improvements at Highlands 80, Phases I and II.
Projected tenant improvement costs for 1999 are $53,760 for Phase I
and $533,674 for Phase II. The 1998 costs were primarily funded with
the existing construction loan and cash from operations. The funding
of 1999 tenant improvements will be similar, with Phase II costs
expected to be primarily funded by the construction loan.
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. Management believes the Partnership's
financial resources should be adequate to meet 1999's obligations and
no adverse change in liquidity is foreseen.
Results of Operations
1998 vs 1997
The Partnership's total revenues increased by $257,154 (14.9%) in 1998
compared to 1997. Total expenses increased by $386,294 (20.1%) in
1998 compared to 1997. In addition, the loss on the investment in
joint venture decreased by $22,806 (100%) in 1998 compared to 1997,
all resulting in an increase in net loss of $106,334 (49%).
The increase in revenues is primarily due to an increase in occupied
space at Highlands 80 and 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.
Expenses increased in 1998, as compared to 1997, due to the net effect
of:
a) the purchase of the 60% interest in Capital Builders Roseville
Venture, resulting in an increase in project operating expenses of
$216,157.
b) $13,213 (7.8%) increase in repairs and maintenance due to higher
landscape and HVAC maintenance costs primarily at Highlands 80 due to
its Phase II completion.
c) $9,512 (12.8%) increase in property taxes due to Highlands 80
Phase II completion.
d) $69,107 (15.9%) increase in interest due to loan costs associated
with Highlands 80, Phase II completion.
e) $26,019 (17.4%) 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) $46,452 (13.7%) increase in depreciation at Highlands 80 due to the
Phase II completion.
1997 vs 1996
The Partnership's total revenues increased by $504,199 (41.2%) in
fiscal year 1997 compared to 1996. Total expenses increased by
$512,579 (36.4%) in fiscal year 1997 compared to 1996. In addition,
the loss on the investment in joint venture decreased by $59,839
(72.4%) in 1997 compared to 1996, all resulting in a decrease in net
loss of $51,459 (19.2%).
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 December 31, 1997, rental income
of $506,743 was recognized from Capital Professional Center.
While Capital Professional Center has achieved and maintained an
average stabilized occupancy of 96%, Highlands 80 has only maintained
an average 75% occupancy during 1997. It is management's opinion that
Highlands 80's lack of lease-up was due to a temporary stall in tenant
demand for space in the Sacramento sub-market in which Highlands 80 is
located. Management anticipates that demand will increase during 1998
and that substantial lease-up will occur at Highlands 80. During 1998
demand for space at Highlands 80 did not increase substantially.
During the year a net increase of 4,246 square feet of occupied space
occurred.
Expenses increased for the fiscal year 1997 compared to 1996,
primarily due to the net effect of:
a) The purchase of the 60% interest in Capital Builders Roseville
Venture, resulting in an increase in total expenses of $484,260,
representing expenses of Capital Professional Center during the
Partnership's 100% ownership for the period, May 1, 1997 through
December 31, 1997.
b) $18,376 (12.24%) 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The Partnership does not have a material market risk due to financial
instruments held by the Partnership. The Partnership's only variable
rate instrument consists of a construction loan in the amount of
$937,659.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page Number
INDEPENDENT AUDITORS' REPORT 11
FINANCIAL STATEMENTS
12
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
STATEMENTS OF OPERATIONS 13
FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997, AND 1996
STATEMENTS OF PARTNERS' EQUITY 14
FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997, AND 1996
STATEMENTS OF CASH FLOWS 15
FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997, AND 1996
NOTES TO FINANCIAL STATEMENTS 16-23
SUPPLEMENTAL SCHEDULES
SCHEDULE III 27
REAL ESTATE AND ACCUMULATED DEPRECIATION
Financial schedules not included have been omitted because of the
absence of conditions under which they are required or because the
information is included elsewhere in this report.
Independent Auditors' Report
The Partners
Capital Builders Development Properties II:
We have audited the accompanying balance sheets of Capital Builders
Development Properties II, a California Limited Partnership, as of
December 31, 1998 and 1997, and the related statements of operations,
partners' equity and cash flows for each of the years in the three-
year period ended December 31, 1998. In connection with our audits
of the financial statements, we also have audited the financial
statement schedule as listed in the accompanying index. These
financial statements and financial statement schedule are the
responsibility of the partnership's management. Our responsibility
is to express an opinion on these financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Capital
Builders Development Properties II as of December 31, 1998 and 1997,
and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 1998 in conformity
with generally accepted accounting principles. Also in our opinion,
the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
Sacramento, California KPMG LLP
February 5, 1999
PART 1 - FINANCIAL INFORMATION
Capital Builders Development Properties II
(A California Limited Partnership)
BALANCE SHEETS
December 31 December 31
1998 1997
ASSETS
Cash $287,892 $254,626
Accounts receivable, net 130,875 163,738
Investment property, at cost, net of
accumulated depreciation of $2,280,524 and
$2,061,160 at December 31, 1998 and 1997,
respectively 12,142,911 12,431,881
Lease commissions, net of accumulated
amortization of $211,911 and $179,388 at
December 31, 1998 and 1997, respectively 156,213 162,386
Other assets, net of accumulated
amortization of $26,188 and $34,606 at
December 31, 1998 and 1997, respectively 81,348 64,587
Total assets $12,799,239 $13,077,218
LIABILITIES AND PARTNERS' EQUITY
Notes payable $9,093,517 $8,950,372
Accounts payable and accrued liabilities 28,602 127,777
Tenant deposits 95,093 93,690
Total liabilities 9,217,212 9,171,839
Commitments and contingencies
Partners' Equity:
General Partners (60,010) (56,777)
Limited Partners 3,642,037 3,962,156
Total Partners' equity 3,582,027 3,905,379
Total liabilities and Partners' $12,799,239 $13,077,218
equity
See accompanying notes to the financial statements.
</TABLE)
Capital Builders Development
Properties II
(A California Limited
Partnership)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
1998 1997 1996
Revenues
Rental and other income $1,967,779 $1,599,917 $1,101,978
Interest income 17,529 128,237 121,977
Total revenues 1,985,308 1,728,154 1,223,955
Expenses
Operating expenses 401,914 368,434 276,165
Repairs and maintenance 285,929 236,623 150,718
Property taxes 136,658 108,220 74,323
Interest 784,448 620,946 416,264
General and administrative 183,179 157,160 148,543
Depreciation and amortization 516,532 430,983 343,774
Total expenses 2,308,660 1,922,366 1,409,787
Loss before joint venture
interest (323,352) (194,212) (185,832)
Loss on investment in joint
venture - - - - (22,806) (82,645)
Net loss (323,352) (217,018) (268,477)
Allocated to General Partners (3,233) (2,170) (2,685)
Allocated to Limited Partners ($320,119) ($214,848) ($265,792)
Net loss per Limited
Partnership Unit ($13.90) ($9.33) ($11.54)
Average Units outstanding 23,030 23,030 23,030
See accompanying notes to the financial statements.
</TABLE)
Capital Builders Development Properties II
(A California Limited Partnership)
STATEMENTS OF PARTNERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
Total
General Limited Partners'
Partners Partners Equity
Balance at December 31, 1995 ($51,922) $4,442,796 $4,390,874
Net loss (2,685) (265,792) (268,477)
Balance at December 31, 1996 (54,607) 4,177,004 4,122,397
Net loss (2,170) (214,848) (217,018)
Balance at December 31, 1997 (56,777) 3,962,156 3,905,379
Net Loss (3,233) (320,119) (323,352)
Balance at December 31, 1998 ($60,010) $3,642,037 $3,582,027
See accompanying notes to the financial statements.
</TABLE)
Capital Builders Development
Properties II
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1998 1997 1996
Cash flows from operating
activities:
Net loss ($323,352) ($217,018) ($268,477)
Adjustments to reconcile net
loss to cash flow
provided by (used in)
operating activities:
Depreciation and amortization 516,532 430,983 343,774
Equity in losses of Joint
Venture - - - - 22,806 82,645
Uncollected interest earned from
Joint Venture - - - - (114,046) - - - -
Changes in operating assets and
liabilities:
Decrease (Increase) in accounts
receivable 32,863 (60,266) 74,902
Increase in leasing commissions (67,353) (88,736) (35,091)
(Increase) Decrease in other (7,753) 9,204 (2,654)
assets
(Decrease) Increase in accounts
payable and accrued liabilities (99,175) 2,444 85,171
Increase (Decrease) in tenant
deposits 1,403 (6,845) (5,507)
Net cash provided by (used
in) operating activities 53,165 (21,474) 274,763
Cash flows from investing
activities:
Proceeds from securities - - - - - - - - 1,214,118
Acquisition of remaining joint
venture interest, net of cash
acquired - - - - (14,380) - - - -
Increase in advances to joint
venture - - - - - - - - (225,000)
Improvements to investment
properties (163,044) (993,321) (1,091,548)
Distributions from joint venture - - - - - - - - 124,480
Net cash (used in) provided
by investing activities (163,044) (1,007,701) 22,050
Cash flows from financing
activities:
Proceeds from issuance of debt 260,600 677,059 - - - -
Payments of debt (117,455) (95,086) (57,932)
Net cash provided by (used
in) financing activities 143,145 581,973 (57,932)
Net increase (decrease) in cash 33,266 (447,202) 238,881
Cash, beginning of period 254,626 701,828 462,947
Cash, end of period $287,892 $254,626 $701,828
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 - - - -
Cash Paid for Interest $784,448 $584,613 $416,264
See accompanying notes to the financial statements.
</TABLE)
Capital Builders Development Properties II
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
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.
Financial Reporting for Segments of a Business Enterprise
During 1998, the Partnership adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for the way public business enterprises are to
report information about operating segments in annual financial
statements and requires those enterprises to report selected
information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 supersedes SFAS No. 14, Financial Reporting
for Segments of a Business Enterprise, but retains the requirement to
report information about major customers. As of December 31, 1998 and
1997, the Partnership did not have any reportable segments under the
provision of SFAS No. 131.
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.
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 (See Note 4).
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 1998, 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
$97,913, $78,045 and $52,947 for the years ended December 31, 1998,
1997, and 1996, respectively, while total reimbursement of expenses
was $190,553, $201,441 and $176,641, respectively.
The Managing General Partner will reduce its future participation in
proceeds from sales by an amount equal to the loss on the abandonment
of option fees in 1988 ($110,000) and interest on the amount at a rate
equal to that of the borrowed funds rate as determined by construction
or permanent funds utilized by the Partnership.
NOTE 3 - INVESTMENT PROPERTY
The components of the investment property account at December 31, are
as follows:
1998 1997
Land $4,053,799 $4,053,799
Building and Improvements 9,132,132 9,111,111
Tenant Improvements 1,237,504 1,328,131
Investment property, at cost 14,423,435 14,493,041
Less: accumulated depreciation
and amortization (2,280,524) (2,061,160)
Investment property, net $12,142,911 $12,431,881
NOTE 4 - INVESTMENT IN JOINT VENTURE
Through May 1997, the Partnership owned 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 operating information of Capital Builders Roseville
Venture follows:
For the Four Months For the Twelve months
Ended April 30, Ended December 31,
1997 1996
Total Revenue $ 242,630 $ 671,525
Total Expenses 299,645 878,136
Net Loss ($ 57,015) ($ 206,611)
Capital Builders Development
Properties II Share of
Net Loss ($22,806) ($82,645)
The 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
General Partner.
NOTE 5 - NOTES PAYABLE
Notes Payable consist of the following at 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. $4,796,368 $4,865,609
A construction loan of $2,280,000 with a
variable interest rate of prime plus 1.5%
(9.25% as of December 31, 1998). The
loan requires monthly interest only
payments, and is due March 1, 1999. The
note is expected to be renewed at its
current terms for an additional six
months. The note provides for future
draws of $1,342,341 for 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. 937,659 677,059
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 (CPC)
land, buildings and improvements.
Restrictive covenants of this loan
include maintaining a cash flow coverage
ratio related to the CPC property. 3,359,490 3,407,704
Total Notes Payable $9,093,517 $8,950,372
Scheduled principal payments during 1999, 2000, 2001 and 2002 are
$1,072,485, $143,348, $3,327,894, and $4,549,790, respectively.
NOTE 6 - 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:
1999 $1,336,893
2000 1,072,952
2001 728,251
2002 342,951
2003 108,006
Total $3,589,053
NOTE 7 - RECONCILIATION TO INCOME TAX METHOD OF ACCOUNTING
A reconciliation of the net loss as reflected on the accompanying
Statements of Operations to that reflected on the Federal income tax
return for the years ended December 31 is as follows:
1998 1997 1996
Net loss -
Statements of Operations ($323,352) ($217,018) ($268,477)
Adjustments
resulting from:
Difference in depreciation
and amortization 87,705 (76,317) 236,810
Net loss - tax return (235,648) (293,335) (31,667)
Partners' equity -
Statements of
Partners' Equity (Deficit) 3,582,027 3,905,379 4,122,397
Increases
resulting from:
Difference in depreciation
and amortization and
valuation allowance 2,872,549 2,784,8442,861,161
Selling expenses for
Partnership units 1,713,666 1,713,666 1,713,666
Partners' equity - tax return $8,168,242 $8,403,889 8,697,224
Taxable loss per Limited
Partnership unit after giving
effect to the taxable loss
allocated to the General
Partner ($10.13) ($12.60) ($1.36)
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.
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 December 31, are as follows:
1998 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Liabilities
Note payable $4,796,368 $4,796,368 $4,865,609 $4,865,609
Note payable $937,659 $937,659 $677,059 $677,059
Note payable $3,359,490 $3,359,490 $3,407,704 $3,407,704
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.
NOTE 10 - PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use
In March 1998, the American Society of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use.
SOP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal use. It specifies that
computer software meeting certain characteristics be designated as
internal-use software and sets forth criteria for expensing
capitalizing, and amortizing certain costs related to the development
or acquisition of internal-use software. SOP 98-1 is effective for
fiscal years beginning after December 15, 1998. Management does not
expect that adoption of SOP 98-1 will have a material impact on the
Partnership's financial statements.
Reporting on the Costs of Start-Up Activities
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of
Start-Up Activities. SOP 98-5 provides guidance on the financial
reporting of start-up costs and organization costs. It requires costs
of start-up activities and organization costs to be expensed as
incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998. Management does not expect that adoption of SOP 98-
5 will have a material impact on the Partnership's financial
statements.
Accounting for Derivative Instruments and Hedging Activity
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999.
Management believes that the adoption of SFAS No. 133 will not have a
material impact on the financial statements due to the Partnership's
inability to invest in such instruments as stated in the Partnership
agreement.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL
DISCLOSURE
NONE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no directors. The Partnership is managed by
Capital Builders, Inc. ("CB"), the Managing General Partner. The
following are the names and other information relating to the Managing
General Partner. No expiration date has been set for the term during
which the Managing General Partner is to serve.
MANAGING GENERAL PARTNER
The Partnership is being managed by CB, the Managing General Partner.
CB is a California corporation organized in May 1978, with its
executive offices at 4700 Roseville Road, Suite 206, North Highlands,
California 95660 (telephone number 916-331-8080). To date, CB has
organized ten partnerships to engage in commercial real estate
development. As the General Partner, CB may be responsible for
certain liabilities that a partnership it manages is unable to pay.
The officers, directors, and key personnel of CB are as follows:
Name Office
Michael J. Metzger President and Director
Mark J. Leggio Director
Ellen Wilcox Director
Michael J. Metzger: Mr. Metzger is responsible for the general
management of CB. Mr. Metzger assumed responsibility for the
management of CB in December 1986. He was formerly the Executive Vice
President of The Elder-Nelson Company (EN) and its subsidiary, the
Elder-Nelson Equities Corporation - affiliated companies which
provided underwriting and administrative services to CB. Prior to
joining EN in 1977, Mr. Metzger was Partner/General Manager for two
years in his family's real estate contracting, development and
syndication business. Mr. Metzger has also had five years of
experience in manufacturing management and served as an Army Officer
for four years. Mr. Metzger holds a B.S. degree in Business and
Industrial Management as well as a license in Real Estate, and former
licenses in Securities and Insurance.
Ellen Wilcox: Ellen Wilcox is a Registered Investment Advisor in
California and the former Owner/Manager of Wilcox Financial Services.
She is licensed in General Securities and Insurance through
Linsco/Private Ledger, an NASD Registered Broker/Dealer. As an
Investment Advisor and Broker, Ms. Wilcox provides a full range of
investment products and services to individuals and small business
owners. She has been actively providing such services since 1986.
Ms. Wilcox teaches classes on retirement planning, investment
strategies, and basic money management. She is a popular speaker and
lecturer on financial topics, has authored many published articles,
and has appeared on several radio shows.
Mark J. Leggio: Mark Leggio is the Owner of Mark J. Leggio, CPA. He
provides tax accounting and business consultation services to a wide
variety of small and mid-size businesses. In addition, he is the
founding shareholder and chief financial officer of Green Planet
Juicery, Inc., located in the Sacramento area. From 1978 to 1995 he
worked for KPMG LLP and was a partner when he left. Mr. Leggio holds
a Bachelor of Science degree in Accounting from the University of
Southern California, where he graduated cum laude.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership does not have any officers or employees and,
therefore, does not pay compensation to such persons. The
Partnership's business is conducted by the Managing General Partner
which is entitled under Article IV of the Partnership Agreement to
receive underwriting commissions, acquisition fees, property
management fees, subordinated real estate commission, share of
distribution and an interest in the Partnership. The Managing General
Partner's fees totaled $97,913 in 1998 consisting entirely of property
management fees which are calculated as 5% of gross rental revenues
collected.
In addition to the fees described above, the General Partner is
entitled to reimbursement for out of pocket expenses incurred on
behalf of the Partnership. Such expenses aggregated $190,553 in 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The Managing General Partner contributed $1,000 to the Partnership
Capital accounts, however, no securities were issued in respect
thereof. No person is known to the Partnership to own beneficially
more than 5% of the Units.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Partnership agreement (see Part IV, Item 14(a)(4) Exhibits) which
was executed in 1985, authorized the compensation set forth below to
be paid to the Managing General Partner and to affiliates of the
Managing General Partner.
During the year ended December 31, 1998, the Managing General Partner
and/or its affiliate received $190,553 for reimbursement of
administrative services and $97,913 for property management and
administrative fees.
PART IV
ITEM 14. EXHIBITS FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
EXHIBIT
NUMBER EXHIBIT
(a) 1,2 See Item 8 of this Form 10-K for the Consolidated
Financial Statements of the Partnership, Notes
thereto, and Supplementary Schedules. An index to
Financial Statements and Schedules is included and
incorporated herein by reference.
4 Limited Partnership Agreement dated February 6,
1986 filed as exhibit 3.3 and the Amendment to the
Limited Partnership Agreement dated May 22, 1986, filed
as exhibit 3.4 to Registration Statement No. 2-96042 of
Capital Builders Development Properties II, a
California Limited Partnership are hereby incorporated
by reference.
11 Statement regarding computation of per Unit
earnings is not included because the computation can be
clearly determined from the material contained in this
report.
(b) Reports on Form 8-K
The Partnership filed an 8-K dated November 11,
1992.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Capital Builders Development Properties II
a California Limited Partnership
By CAPITAL BUILDERS, INC.,
The Managing General Partner,
For and On Behalf of the
Capital Builders Development Properties II
A California Limited Partnership
President
Michael J. Metzger Date
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the date indicated.
Signature Title Date
Associate General
Michael J. Metzger Partner; President and
Director of Capital Builders,
Inc. ("CB")
Chief Financial
Kenneth L. Buckler Officer of CB
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
The Partnership has not sent an annual report or proxy statements to
the Limited Partners and does not intend to send a proxy statement to
the Limited Partners. The Partnership will send the Limited Partners
an annual report and will furnish the Commission with copies of the
annual report on or before April 30, 1999.
Capital
Builders
Development
Properties II
A California
Limited
Partnership
and Subsidiary
SCHEDULE III -
REAL ESTATE
AND
ACCUMULATED
DEPRECIATION
December 31,
1998
Column A Column B Column C Column D
Cost
Capitalized
Description Encumbrances Initial Cost Subsequent to
Acquisition
Carrying
Land (1) Improvements(1) Costs
Commercial
Office Bldg.
Highlands 80 $5,734,027 $2,115,148 $7,557,454 $50,225
Roseville 3,359,490 986,715 3,624,567 89,326
Commercial $9,093,517 $3,101,863 $11,182,021 $139,551
Office Bldg.
Balance at
beginning of
period
Additions
Deletions (2)
Balance at end
of period
Column A Column E
Description Gross
Carrying
Amount at End
of Period
Buildings &
Land(1) Improvements( Total (1)
1)
Commercial
Office Bldg.
Highlands 80 $2,622,014 $7,100,813 $9,722,827
Roseville 1,431,785 3,268,823 4,700,608
Commercial $4,053,799 $10,369,636 $14,423,435
Office Bldg.
Column E
Total
1996 1997 1998
Balance at $8,168,305 $8,912,355 $14,493,041
beginning of
period
Additions 1,091,548 5,747,656 (3) 163,044
Deletions (2) (347,498) (166,970) (232,650)
Balance at end $8,912,355 $14,493,041 $14,423,435
of period
Column A Column F Column G Column H
Accumulated Date of Date
Description Depreciation Construction Acquired
Commercial
Office Bldg.
Highlands 80 $1,746,081 1987 1987
Roseville 534,443 1987 1987
Commercial $2,280,524
Office Bldg.
Column F
Total
1996 1997
Balance at $1,474,003 $1,426,812
beginning of
period
Additions 300,307 801,318 (3)
Deletions (2) (347,498) (166,970)
Balance at end $1,426,812 $2,061,160
of period
Column A Column I
Depreciation
Description Life
Commercial
Office Bldg.
Highlands 80 40 Years
(Bldg.)
Roseville 40 Years
(Bldg.)
Commercial Life of Lease
Office Bldg.
Tenant Imp.)
1998
Balance at $2,061,160
beginning of
period
Additions 452,014
Deletions (2) (232,650)
Balance at end $2,280,524
of period
1) Valuation
allowance for
possible
investment
loss of
$469,000 at
December 31,
1995 was
charged
against the
cost basis of
the land and
building and
improvements
on a pro rata
basis in
accordance
with the
provisions of
SFAS No. 121
which was
adopted on
January 1,
1996.
2) Deletions
represent the
write-off of
fully
amortized
tenant
improvement
costs.
3) On May 1,
1997 the
Partnership
purchased the
remaining 60%
interest in
the Capital
Builders
Roseville
Venture from
CBDP I. The
acquisition
has been
accounted for
using the
purchase
method of
accounting.