15
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 June 30, 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 ___
<TABLE>
PART 1 - FINANCIAL INFORMATION
Capital Builders Development Properties
II
(A California Limited Partnership)
BALANCE SHEETS
<CAPTION>
June 30 December 31
1998 1997
<S> <C> <C>
ASSETS
Cash and cash equivalents $432,255 $254,626
Accounts receivable, net 162,239 163,738
Investment property, at cost, net
of accumulated depreciation and
amortization of $2,056,188 and
$2,061,160 at June 30, 1998, and
December 31, 1997, respectively 12,235,106 12,431,881
Lease commissions, net of accumulated
amortization of $176,564 and
$179,388 at June 30, 1998, and
December 31, 1997, respectively 146,281 162,386
Other assets, net of accumulated
amortization of $27,547 and
$34,606 at June 30, 1998 and
December 31, 1997, respectively 68,993 64,587
Total assets $13,044,874 $13,077,218
LIABILITIES AND PARTNERS' EQUITY
Notes payable $9,153,512 $8,950,372
Accounts payable and accrued
liabilities 27,842 127,777
Tenant deposits 99,655 93,690
Total liabilities 9,281,009 9,171,839
Commitments and Contingencies
Partners' Equity:
General partner (58,192) (56,777)
Limited partners 3,822,057 3,962,156
Total partners' equity 3,763,865 3,905,379
Total liabilities and
partners' equity $13,044,874 $13,077,218
See accompanying notes to the financial statements.
</TABLE>
<TABLE>
Capital Builders
Development
Properties II
(A California
Limited Partnership)
STATEMENT OF
OPERATIONS
THREE AND SIX
MONTHS ENDED JUNE
30,
<CAPTION>
1998 1997
Three Six Three Six
Months Months Months Months
Ended Ended Ended Ended
<S> <C> <C> <C> <C>
Revenues
Rental and other
income $499,528 $972,818 $379,008 $623,035
Interest income 5,234 7,873 117,004 123,521
Total revenues 504,762 980,691 496,012 746,556
Expenses
Operating expenses 94,997 186,620 89,111 151,815
Repairs and
maintenance 68,504 132,975 58,677 95,593
Property taxes 30,895 65,527 21,687 37,250
Interest 202,635 382,452 157,017 261,118
General and
administrative 35,730 96,423 37,197 83,024
Depreciation and
amortization 133,696 258,208 102,229 175,934
Total expenses 566,457 1,122,205 465,918 804,734
(Loss) income
before Joint Venture
Interest (61,695) (141,514) 30,094 (58,178)
Loss on investment
in Joint Venture - - - - - - (3,933) (22,806)
Net (loss) income (61,695) (141,514) 26,161 (80,984)
Allocated to general
partners (617) (1,415) 261 (810)
Allocated to limited
partners ($61,078) ($140,099) $25,900 ($80,174)
Net (loss) income
per limited
partnership unit ($2.65) ($6.08) $1.12 ($3.48)
Average units
outstanding 23,030 23,030 23,030 23,030
See accompanying notes to the financial statements
</TABLE>
<TABLE>
Capital Builders
Development
Properties II
(A California
Limited Partnership)
STATEMENTS OF CASH
FLOWS
THREE AND SIX
MONTHS ENDED JUNE
30,
<CAPTION>
1998 1997
Three Six Three Six
Months Months Months Months
Ended Ended Ended Ended
<S> <C> <C> <C> <C>
Cash flows from
operating
activities:
Net (loss) income ($61,695) ($141,514) $26,161 ($80,984)
Adjustments to
reconcile net (loss)
income to cash flow
provided by/(used
in) operating
activities:
Depreciation and
amortization 133,696 258,208 102,229 175,934
Equity in losses
of Joint Venture - - - - - - - - 3,933 22,806
Uncollected
interest earned from
Joint Venture - - - - - - - - (82,713) (114,046)
Changes in assets
and liabilities
Decrease/
(Increase) in
accounts receivable 8,670 1,499 (3,964) (26,418)
Increase in
leasing commissions (14,778) (22,074) (35,452) (57,005)
Decrease in
other assets 3,342 3,243 14,064 11,717
Decrease in
accounts payable
and accrued
liabilities (20,345) (99,935) (54,448) (92,711)
(Decrease)/
Increase in tenant
deposits (1,983) 5,965 1,554 (1,096)
Net cash provided
by/(used in)
operating activities 46,907 5,392 (28,636) (161,803)
Cash flows from
investing
activities:
Acquisition of
remaining joint
venture interest,
net of cash acquired - - - - - - - - (14,380) (14,380)
Improvements to
investment
properties (9,884) (30,903) (171,512) (399,523)
Net cash used in
investing activities (9,884) (30,903) (185,892) (413,903)
Cash flows from
financing
activities:
Proceeds from
issuance of debt - - - - 260,085 - - - - - - - -
Payments of debt (28,525) (56,945) (23,632) (38,439)
Net cash (used
in)/provided by
financing activities (28,525) 203,140 (23,632) (38,439)
Net increase/
(decrease) in cash 8,498 177,629 (238,160) (614,145)
Cash, beginning of
period 423,757 254,626 325,843 701,828
Cash, end of period $432,255 $432,255 $87,683 $87,683
See accompanying notes to the financial statements.
</TABLE>
Capital Builders Development Properties II
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 and December 31, 1997
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
June 30 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
$47,550 and $31,972 for the six months ended June 30, 1998 and June 30,
1997, respectfully, while total reimbursement of expenses were $94,417
and $96,068 respectively.
The Managing General Partner will reduce its future participation in
proceeds from sales by an amount equal to the loss on the abandonment
of option fees in 1988 ($110,000) and interest on the amount at a rate
equal to that of the borrowed funds rate as determined by construction
or permanent funds utilized by the Partnership.
NOTE 3 - INVESTMENT PROPERTY
The components of the investment property account are as follows:
June 30, December 31,
1998 1997
Land $4,053,799 $4,053,799
Building and Improvements 9,132,132 9,111,111
Tenant Improvements 1,105,363 1,328,131
Investment property, at cost 14,291,294 14,493,041
Less: accumulated depreciation
and amortization (2,056,188) (2,061,160)
Investment property, net $12,235,106 $12,431,881
NOTE 4 - NOTES PAYABLE
Notes Payable consist of the following at:June 30, 1998December 31,
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. $4,831,760 $4,865,609
A construction loan of $2,280,000 with a
variable interest rate of prime plus 1.5%
(10% as of June 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. 937,659 677,059
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 land,
buildings and improvements. 3,384,093 3,407,704
Total Notes Payable $9,153,512 $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 ending
December 31 are as follows:
1998 $1,539,083
1999 992,648
2000 666,691
2001 438,442
2002 186,594
Total $3,823,458
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.
Notes 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:
June 30, December 31,
1998 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Assets
Cash and cash
equivalents $ 432,255 $ 432,255 $254,626 $ 254,626
Liabilities
Note payable $ 4,831,760 $ 4,831,760 $ 4,865,609 $ 4,865,609
Note payable $ 937,659 $ 937,659 $677,059 $677,059
Note payable $ 3,384,093 $ 3,384,093 $ 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.
NOTE 8 - PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
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.
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.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Year 2000
Management has evaluated all technologies and has determined that the
Partnership's systems appear to be ready. Management has established
back-up systems in order to minimize any risks that would have a
material financial impact on the Partnership.
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
June 30, 1998, the Partnership had $432,255 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 16,457 square
feet has been leased with tenant improvement and leasing commission
costs already incurred for 11,657 square feet. 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 six months ended June 30, 1998, the Partnership generated
$5,392 of net cash from operations. Management anticipates the
Partnership's cash flow from operations to continue to improve due to
Highlands 80's Phase II continued lease-up and Capital Professional
Center's stabilized occupancy.
During the six months ended June 30, 1998, financing activities
provided the Partnership with net cash proceeds of $203,140. 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 for the second quarter ended June 30,
1998 as compared to the second quarter ended June 30, 1997, increased
by $8,750 (1.7%) as the result of property income increasing by
$120,520 (31.8%) and interest income decreasing by $111,770 (95.5%).
The increase in property income occurred due to an increase in tenant
occupied space at both the Highlands 80 and Capital Professional Center
projects, resulting in an increase of property income of $54,582. The
remaining increase in property income is the result of the purchase of
Capital Builders Roseville Venture. Management anticipates future
increases in revenue due to the increase in developed space at
Highlands 80's Phase II and an improving Sacramento rental market.
The decrease in interest income is primarily due to interest relating
to the note due from the joint venture, which was being accrued and
deferred, being recognized as income on May 1, 1997 as a result of the
purchase of Capital Builders Roseville Venture.
The Partnership's total revenues increased by $234,135 (31.4%) for the
six months ended June 30, 1998, as compared to June 30, 1997. Total
expenses, also increased by $317,471 (39.5%) for the six months ended
June 30, 1998, as compared to June 30, 1997. In addition, the loss on
the investment in Joint Venture decreased by $22,806 (100%) in 1998 as
compared to 1997, all resulting in an increase in net loss of $60,530
(74.7%) for the six months ended June 30, 1998, as compared to June 30,
1997.
The year-to-date 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 for the six months ended June 30, 1998, as compared
to June 30, 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
$218,529.
b) $16,053 (20.7%) increase in repairs and maintenance at Highlands 80
due to suite turnover costs for lease renewals and additional security
services.
c) $11,734 (39.6%) increase in property taxes at Highlands 80 due to
Phase II construction.
d) $26,612 (12.4%) increase in interest due to loan costs associated
with Highlands 80, Phase II completion.
e) $12,717 (15.4%) 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) $34,332 (22.7%) increase in depreciation at Highlands 80 due to the
Phase II completion.
Expenses increased for the second quarter ended June 30, 1998 as
compared to June 30, 1997 by $100,539 (21.6%) primarily due to an
increase in repairs and maintenance of $9,827 (11%), an increase in
property taxes of $9,208 (42.4%), an increase in interest of $45,618
(29%), and an increase in depreciation of $31,467 (31%), all relating
to the additional square footage of Phase II completed at the end of
1997.
PART II - OTHER INFORMATION
Item 1 - Legal Proceeding
The Partnership is not a party to, nor is the Partnership's property
the subject of, any material pending legal proceedings.
Item 2 - Not applicable
Item 3 - Not applicable
Item 4 - Not applicable
Item 5 - Not applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has dully caused this report to be signed on its behalf
by the undersigned, hereunto dully authorized.
CAPITAL BUILDERS DEVELOPMENT PROPERTIES II
a California Limited Partnership
By: Capital Builders, Inc.
Its Corporate General Partner
Date: August 13, 1998 By:_____________________________________
Michael J. Metzger
President
Date: August 13, 1998 By:_____________________________________
Kenneth L. Buckler
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 432,255
<SECURITIES> 0
<RECEIVABLES> 162,239
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 594,494
<PP&E> 14,291,294
<DEPRECIATION> 2,056,188
<TOTAL-ASSETS> 13,044,874
<CURRENT-LIABILITIES> 27,842
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 13,044,874
<SALES> 0
<TOTAL-REVENUES> 980,691
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 739,753
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 382,452
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (141,514)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
