FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 For Quarter Ended: March 31, 1996 Commission file number: 33-28988 DBSI PACIFIC INCOME & GROWTH FUND - II, A Real Estate Limited Partnership State of Organization: Idaho Employer ID #: 82-0428903 1070 N. Curtis Rd., Suite 270, Boise, Idaho 83706 Telephone number: (208) 322-5858 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 for such shorter period that the registrant was required to file such reports) Yes [X] No [ ] (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] FORM 10-Q File Number: 33-28988 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Included herein on pages 4-9 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Included herein on page 3 DBSI PACIFIC INCOME & GROWTH FUND - II A Real Estate Limited Partnership General Partners' Discussion and Analysis of Financial Condition and Results of Operations March 31, 1996 Liquidity and Capital Resources The Partnership has generated funds primarily from the operation of rental properties and to a lesser extent from interest on savings and certificates of deposit. Because of the favorable Portland market, the Partnership anticipates generating funds from the sale of one or both Portland rental properties. As the Seattle real estate market improves the Partnership anticipates selling the remaining properties. Funds are used for rental property operating expenses, distributions to partners, debt service, fixed asset replacements, capital improvements, management and professional fees. During 1995 the Partnership received an advance of $120,500 from an affiliate of the General Partner to fund cash flow short term needs. The general partners believe that the Partnership has the liquidity and capital resources to meet all of its known obligations and commitments. The cash and cash equivalents position of the Partnership at March 31, 1996 represented approximately $184,000 including approximately $144,000 available for operations and approximately $40,000 for tax, insurance and replacements reserves. The Partnership has no external sources of liquidity and no outstanding capital commitments. Cash deposits earned interest of approximately 4.0%. Cash Flow and Operations For the three months ended March 31, 1996 and 1995, the Partnership generated $233,035 and $76,200 of cash flow from operating activities. The following adjustments should be made to the 1996 annualized cash flow in order to compare the first year pro forma funds from operations as found in the supplements to the offering prospectus. First, mortgage interest payments of $19,972 for Sorrento View Apartments and $16,136 for Dakota Station should be added to cash flow since the pro forma statements anticipated no mortgage loan on these properties. Second, changes in operating assets and liabilities of $148,498 should reduce cash flow to reflect the ongoing funds generated from operations. Cash flow should also be reduced for principal payments of $11,727 and for normal fixed asset purchases of $43,323. Finally cash flow should be increased for $1,559 of partnership activity cash flow deficit. After the above adjustments, the four properties combined annualized funds from operations reached 39% of the pro forma amount. Total revenue decreased 1% from $616,851 to $614,688 for first quarter 1995 compared to 1996. Real estate operating expense decreased 1% from $675,912 to $673,535 for first quarter 1995 to first quarter 1996. Administrative costs decreased 52% from the first three months of 1995. The largest increase (64%) occurred in maintenance and repair expenses. The general partner has contracted with HSC Real Estate, Incorporated for management of Weatherstone and Talisman Apartments and J. B. McLoughlin & Company for management of Sorrento and Dakota Apartments. Because of the reduced cash flow, the Partnership borrowed $120,500 in 1995 from an affiliate of the General Partner to provide funds for short term operating cash flow needs of the Seattle area projects. The Partnership has reduced quarterly distributions until cash flow in the Seattle area returns to prior levels. The Partnership distributed $69,478 to the partners during the first three months of 1996 from current operations. The Partnership net loss after depreciation for the three months ended March 31, 1996 was $58,847. Therefore 1996 cash distributions to date have been a return of capital on a GAAP basis. Current cash distributions have been 100% tax deferred. Per $1,000 invested (on the basis of a $1,000 investment made at the inception of the escrow and offering) distributions have been made in the following amounts: escrow period - $58; November 1990 through November 1994 - $18 per quarter; August 1995 through February 1996 - $7.50 per quarter. DBSI PACIFIC INCOME & GROWTH FUND - II A REAL ESTATE LIMITED PARTNERSHIP (an Idaho limited partnership) BALANCE SHEETS ASSETS March 31, 1996 December 31, 1995 ______________ _________________ Rental property: Land $1,527,400 $1,527,400 Buildings and improvements 12,472,009 12,461,311 Furniture and fixtures 1,040,417 1,007,792 _________ _________ 15,039,826 14,996,503 Less accumulated depreciation (2,493,263) (2,372,813) __________ __________ 12,546,563 12,623,690 Cash and cash equivalents 144,532 41,572 Accounts receivable 1,328 7,229 Prepaid expenses 24,629 12,166 Reserves 39,755 41,010 Tenant security deposits 60,912 84,015 Intangible costs (net) (Note 4) 111,292 118,736 __________ __________ Total assets $12,929,011 $12,928,418 LIABILITIES AND CAPITAL Accounts payable $155,894 $43,624 Interest payable 79,071 75,466 Taxes payable 35,416 10,052 Security deposits payable 56,758 50,550 Note payable affiliate (Note 3) 120,500 120,500 Mortgages payable (Note 2) 8,417,352 8,435,881 _________ _________ Total liabilities 8,864,991 8,736,073 _________ _________ Partners' capital 4,064,020 4,192,345 __________ __________ Total liabilities and capital $12,929,011 $12,928,418 <FN> The Accompanying Notes are an Integral Part of these Financial Statements DBSI PACIFIC INCOME & GROWTH FUND - II A REAL ESTATE LIMITED PARTNERSHIP (an Idaho limited partnership) STATEMENTS OF OPERATIONS Three Months Ended Three Months Ended REVENUES March 31, 1996 March 31, 1995 __________________ __________________ Tenant rent $590,981 $598,286 Interest income 1,439 109 Other income 22,268 18,456 _______ _______ 614,688 616,851 EXPENSES Interest 204,964 203,368 Depreciation 120,450 119,670 Property tax and insurance 49,513 57,709 Maintenance and repairs 99,875 64,251 Utilities 79,793 71,734 Administrative 54,194 82,486 Management fees 25,261 25,404 On-site manager 32,041 44,093 Amortization 7,444 7,197 _______ _______ 673,535 675,912 _______ _______ Net loss ($58,847) ($59,061) STATEMENTS OF PARTNERS' CAPITAL Three Months Ended Three Months Ended March 31, 1996 March 31, 1995 __________________ __________________ Beginning capital $4,192,345 $4,887,928 Distributions (69,478) (170,740) Net loss (58,847) (59,061) __________ __________ Ending capital $4,064,020 $4,658,127 <FN> The Accompanying Notes are an Integral Part of these Financial Statements DBSI PACIFIC INCOME & GROWTH FUND - II A REAL ESTATE LIMITED PARTNERSHIP (an Idaho limited partnership) STATEMENTS OF CASH FLOWS CASH FLOWS FROM Three Months Ended Three Months Ended OPERATING ACTIVITIES March 31, 1996 March 31, 1995 __________________ __________________ Net loss ($58,847) ($59,061) Adjustments to reconcile net income to cash flows from operating activities Depreciation and amortization 127,894 119,670 Changes in operating assets and liabilities Accounts receivable 5,901 7,543 Prepaid expenses (12,463) (3,694) Tenant security deposits 23,103 Accounts payable 112,270 (10,392) Interest payable 3,605 Taxes payable 25,364 25,830 Tenant security deposits payable 6,208 (3,696) ______ _______ Net cash provided by operating activities 233,035 76,200 CASH FLOWS FROM INVESTING ACTIVITIES Rental property purchases (43,323) (78,875) Decrease (increase) in reserves 1,255 (35,716) ________ _______ Net used in investing activities (42,068) (114,591) CASH FLOWS FROM FINANCING ACTIVITIES Decrease in intangible costs 17,027 Principal payments on loans (18,529) (16,768) Distributions to partners (69,478) (170,740) _________ _________ Net cash used in financing activities (88,007) (170,481) Net increase (decrease) in cash and cash equivalents 102,960 (208,872) Cash and cash equivalents at beginning of period 41,572 294,265 _______ _______ Cash and cash equivalents at end of period $144,532 $85,393 <FN> The Accompanying Notes are an Integral Part of these Financial Statements DBSI PACIFIC INCOME & GROWTH FUND - II A REAL ESTATE LIMITED PARTNERSHIP (an Idaho limited partnership) NOTES TO UNAUDITED FINANCIAL STATEMENTS For the Three Months Ended March 31, 1996 and 1995 1. SUMMARY OF PARTNERSHIP ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Partnership Organization. DBSI Pacific Income & Growth Fund - II A Real Estate Limited Partnership, was formed on May 17, 1989 with general partners DBSI Housing Inc., an Idaho corporation, and DBSI Realty Partners, an Idaho general partnership. The Partnership was in the development stage through January 9, 1990 and in the offering stage through December 31, 1991. The business purpose of the Partnership is to acquire and operate leveraged multi-family housing projects in the Western United States. The partnership agreement provides that the Partnership will be dissolved no later than December 31, 2039, unless sooner terminated as provided in the agreement. The Partnership acquired three properties during 1990: Weatherstone Apartments, an existing 138-unit project located in Silverdale, (Kitsap County) Washington; Sorrento View Apartments, an existing 80-unit project, and Dakota Station Apartments, an existing 40-unit project, both located in the Beaverton/Tigard (Portland), Oregon metropolitan area. In October 1991 the Partnership purchased a fourth property, Talisman Apartments, an existing 96-unit project located in Olympia, Washington. Operating profits and losses exclusive of losses from the sale or disposition of Partnership properties, and cash distributions, are allocated 98% to limited partners and 2% to general partners. After the limited partners have received distributions equal to a 7% annual return on their capital contributions the general partners receive additional distributions equal to 5% of total distributions. Proceeds from sale or refinancing are to be distributed, generally, 100% to the limited partners until they have received cumulative distributions equal to their capital contributions, then 85% to the limited partners and 15% to the general partners. However, the limited partners must receive cumulative distributions from operations and sale or refinancing proceeds equal to their capital contributions plus a 10% per annum return thereon before the general partners receive any sale or refinancing proceeds. Significant Accounting Policies. The balance sheets include only those assets, liabilities, and partners' capital which relate to the business of the Partnership and do not include any assets, liabilities, revenues or expenses attributable to the partners' activities. No partners receive salaries from the Partnership for services. No provision has been made for federal and state income taxes since these taxes are the personal responsibility of the partners. Rental property is recorded at cost. Depreciation is computed for all assets over their estimated useful lives as follows: buildings and structural improvements, 15 to 32 years; furniture and fixtures, 5 to 12 years. Expenditures for maintenance and repairs are charged to operating expenses as incurred. Mortgage loan fees are amortized over the estimated life of the mortgage notes. Cash and cash equivalents include cash in banks (except for security deposits and reserve bank accounts). Reserves consist of bank deposits for repairs and replacements, property taxes, insurance, and Partnership reserves. The estimated fair value of cash and cash equivalents, accounts payable and long-term debt approximates their carrying amounts. The preparation of the Partnership's 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. The Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, requires management to review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. This statement is effective for the Partnership's fiscal year end December 31, 1996. The Partnership's existing accounting policies are such that this pronouncement is not expected to have a material effect on the Company's financial position or results of operations. 2. MORTGAGES PAYABLE A mortgage payable of $3,875,000 to Pacific First Federal Savings Bank was used in the purchase of Weatherstone Apartments in March, 1990. The balance of $3,773,888 as of March 31, 1996 and $3,795,370 as of March 31, 1995 bears interest at 9.875% and requires monthly payments of $32,942 through April 1, 2000 when the remaining balance of approximately $3,660,621 is due. In October, 1991, the Partnership purchased Talisman Apartments by executing a mortgage loan in the amount of $3,000,000. The mortgage note in the current amount of $2,911,991 and a balance of $2,935,748 as of March 31, 1995 is held by the State of Washington, State Investment Board, and requires payments of $26,050 monthly with interest charged at 9.875%. The entire balance of the loan is due in ten years (November, 2001) when the approximate balance will be $2,722,795. The loan may not be prepaid during the first five years of the loan period. During the second five years of the loan period it may be prepaid subject to the greater of a yield maintenance prepayment penalty or a minimum 2% prepayment penalty. A first deed of trust loan of approximately $998,000 to Canada Life Assurance Company was renegotiated for Sorrento Apartments after a reduction of $886,000 to the principal was made from operating capital on May 11, 1993. The loan requires monthly payments of $7,996 with interest charged at 8.375%, current amount due as of March 31, 1996 is $951,185 with a balance of $966,854 as of March 31, 1995. The loan is due on June 1, 1998 and it is anticipated that the remaining balance will be refinanced. A prepayment penalty is required if the note is paid more than 30 days before its due date. An 8.25% $800,000 loan from Canada Life Assurance Co. secured by the Dakota Station Apartments was obtained on April 28, 1994 to finance six to eighteen additional units at Weatherstone Apartments. The loan is for five years with a 25 year amortization. The loan requires monthly payments of $6,308 and has a current amount due of $780,288 as of March 31, 1996 and a balance of $791,669 as of March 31, 1995. 3. LOAN PAYABLE The Partnership borrowed $120,500 in 1995 from an affiliate of the General Partner. This loan bears interest at the General Partner's bank borrowing rate of prime plus 1.5% (9.75% as of March 31, 1996). The loan proceeds provided funds for short term operating cash flow needs of the Seattle area projects and to enable the Partnership to maintain the first quarter 1995 distribution rate following the lower operating cash flow from these properties. The General Partner anticipates the loan will be repaid over approximately a twelve month period. 4. INTANGIBLE COSTS Intangible assets and cumulative amortization at March 31, 1996 amount to $248,301 of loan costs and $137,009 of accumulated amortization related to these fees. The net value of intangible costs is $111,292. 5. NET INCOME (LOSS) FROM RENTAL PROPERTIES The following schedule details separate rental property activity for the three months ended March 31, 1996: ______________________________________________________________________ Weatherstone Talisman Sorrento Dakota Apts Apts View Apts Station Apts Partnership Total ______________________________________________________________________ REVENUES Tenant rent $207,015 $166,532 $146,789 $70,645 $590,981 Interest income 240 166 517 148 $368 1,439 Other income 12,287 3,595 4,212 2,174 22,268 ______________________________________________________________________ 219,542 170,293 151,518 72,967 $368 614,688 EXPENSES Interest 93,260 71,991 19,972 16,136 3,605 204,964 Depreciation 45,000 32,580 28,770 14,100 120,450 Tax and insurance 14,400 15,294 13,185 6,634 49,513 Maintenance 49,656 26,390 16,431 7,398 99,875 Utilities 35,072 24,691 11,989 8,041 79,793 Administration 18,211 11,452 8,267 2,452 13,812 54,194 Management fees 8,391 5,922 7,318 3,630 25,261 On-site manager 11,632 10,809 7,632 1,968 32,041 Amortization 7,444 7,444 _______________________________________________________________________ 275,622 199,129 113,564 60,359 24,861 673,535 _______________________________________________________________________ Net income(loss) ($56,080) ($28,836) $37,954 $12,608 ($24,493) ($58,847) _______________________________________________________________________ _______________________________________________________________________ Pursuant to the requirements 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. DBSI PACIFIC INCOME & GROWTH FUND - II A Real Estate Limited Partnership by _________________________ Date ____________________ Douglas L. Swenson, President of DBSI Housing Inc., general partner of DBSI PACIFIC INCOME & GROWTH FUND - II A Real Estate Limited Partnership by _________________________ Date ____________________ Charles E. Hassard, Secretary-Treasurer and principal financial officer of DBSI Housing Inc., the Idaho corporation that is a general partner and principal financial officer of DBSI PACIFIC INCOME & GROWTH FUND - II A Real Estate Limited Partnership