16
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, 1999 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,
1999 1998
<S> <C> <C>
ASSETS
Cash and cash equivalents $327,795 $287,892
Accounts receivable, net 140,174 130,875
Investment property, at cost, net
of accumulated depreciation and
amortization of $2,507,130 and
$2,280,524 at June 30, 1999, and
December 31, 1998, respectively 11,985,284 12,142,911
Lease commissions, net of accumulated
amortization of $249,388 and
$211,911
at June 30, 1999, and December 31,
1998, respectively 141,288 156,213
Other assets, net of accumulated
amortization of $39,800 and
$26,188 at June 30, 1999 and
December 31, 1998, respectively 86,683 81,348
Total assets $12,681,224 $12,799,239
LIABILITIES AND PARTNERS' EQUITY
Note payable $ 9,143,969 $ 9,093,517
Accounts payable and accrued
liabilities 18,364 28,602
Tenant deposits 102,608 95,093
Total liabilities 9,264,941 9,217,212
Commitments and Contingencies
Partners' Equity:
General partner (61,667) (60,010)
Limited partners 3,477,950 3,642,037
Total partners' equity 3,416,283 3,582,027
Total liabilities and
partners' equity $12,681,224 $12,799,239
See accompanying notes to the financial statements.
</TABLE>
<TABLE>
Capital Builders
Development Properties II
(A California Limited
Partnership)
STATEMENTS OF
OPERATIONS
THREE AND SIX MONTHS
ENDED JUNE 30,
<CAPTION>
1999 1998
Three Six Three Six
Months Months Months Months
Ended Ended Ended Ended
<S> <C> <C> <C> <C>
Revenues
Rental and other income $545,591 $1,037,038 $499,528 $972,818
Interest income 2,772 5,624 5,234 7,873
Total revenues 548,363 1,042,662 504,762 980,691
Expenses
Operating expenses 94,632 197,300 94,997 186,620
Repairs and maintenance 66,550 174,456 68,504 132,975
Property taxes 33,459 70,074 30,895 65,527
Interest 199,780 398,065 202,635 382,452
General and
administrative 37,308 90,815 35,730 96,423
Depreciation and
amortization 140,996 277,696 133,696 258,208
Total expenses 572,725 1,208,406 566,457 1,122,205
Net loss (24,362) (165,744) (61,695) (141,514)
Allocated to general
partners (244) (1,657) (617) (1,415)
Allocated to limited
partners ($24,118) ($164,087) ($61,078) ($140,099)
Net loss per limited
partnership unit ($1.05) ($7.12) ($2.65) ($6.08)
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>
1999 1998
Three Six Three Six
Months Months Months Months
Ended Ended Ended Ended
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss ($24,362) ($165,744) ($61,695) ($141,514)
Adjustments to
reconcile net loss to
cash flow provided by
operating activities:
Depreciation and
amortization 140,996 277,696 133,696 258,208
Changes in assets and
liabilities
(Increase)/Decrease
in accounts receivable (15,045) (9,299) 8,670 1,499
Increase in leasing
commissions (15,962) (22,552) (14,778) (22,074)
(Decrease)/Increase
in other assets (1,585) (18,948) 3,342 3,243
Decrease in accounts
payable and accrued
liabilities (52,772) (10,238) (20,345) (99,935)
Increase/(Decrease)
in tenant deposits 2,480 7,515 (1,983) 5,965
Net cash provided by
operating activities 33,750 58,430 46,907 5,392
Cash flows from
investing activities:
Improvements to
investment properties (24,456) (68,979) (9,884) (30,903)
Net cash used in
investing activities (24,456) (68,979) (9,884) (30,903)
Cash flows from
financing activities:
Proceeds from issuance
of debt - - - - 115,370 - - - - 260,085
Payments of debt (32,809) (64,918) (28,525) (56,945)
Net cash (used in)/
provided by
financing activities (32,809) 50,452 (28,525) 203,140
Net (decrease)/increase
in cash (23,515) 39,903 8,498 177,629
Cash, beginning of
period 351,310 287,892 423,757 254,626
Cash, end of period $327,795 $327,795 $432,255 $432,255
Cash paid for Interest $199,780 $398,065 $202,635 $382,452
See accompanying notes to the financial statements.
</TABLE>
Capital Builders Development Properties II
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
For The Six Months Ended June 30, 1999
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.
Effective January 1999, the Partnership adopted 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. The adoption
did not have a material impact on the Partnership's financial
statements.
Effective January 1999, Partnership adopted 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. The
adoption did not have a material impact on the Partnership's financial
statements.
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 1999 and 1998.
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
$51,097 and $47,550 for the six months ended June 30, 1999 and 1998,
respectively, while total reimbursement of expenses was $102,040 and
$94,417, 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, 1999 December 31,1998
Land $ 4,053,799 $ 4,053,799
Building and Improvements 9,132,132 9,132,132
Tenant Improvements 1,306,483 1,237,504
Investment property, at cost 14,492,414 14,423,435
Less: accumulated depreciation
and amortization (2,507,130) (2,280,524)
Investment property, net $ 11,985,284 $ 12,142,911
NOTE 4 - NOTES PAYABLE
Notes Payable consist of the following at: June 30, December 31,
1999 1998
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. $4,759,086 $4,796,368
A construction loan of $2,280,000 with a
variable interest rate of prime plus 1.5%
(9.25% as of June 30, 1999). The loan
requires monthly interest only payments,
and is due September 1, 1999. The note
provides for future draws of $1,226,971
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. 1,053,029 937,659
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. 3,331,854 3,359,490
Total Notes Payable $9,143,969 $9,093,517
Scheduled principal payments during 1999, 2000, 2001 and 2002 are
$1,122,937, $143,348, $3,327,894, and $4,549,790, respectively.
NOTE 5- LEASES
The Partnership leases its properties under long term noncancelable
operating leases to various tenants. The facilities are leased through
agreements for rents based on the square footage leased. Minimum
annual base rental payments under these leases for the years ended
December 31 are as follows:
1999 $1,430,182
2000 1,212,276
2001 868,980
2002 420,240
2003 150,770
Total $4,082,448
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.
Note payable
The fair value of the Partnership's Notes Payable are estimated
based on the quoted market prices for the same or similar issues
or on the current rates offered to the Partnership for debt of the
same remaining maturities.
The estimated fair values of the Partnership's financial instruments as
of are as follows:
June 30, 1999 December 31, 1998
Carrying Estimated Carrying Estimated
Amount Fair Value AmountFair Value
Liabilities
Note payable $4,759,086$4,759,086 $4,796,368$4,796,368
Note payable $1,053,029$1,053,029 $937,659 $937,659
Note payable $3,331,854$3,331,854 $3,359,490$3,359,490
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 as amended is
effective for all fiscal quarters of fiscal years beginning after June
15, 2000. 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 2. 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 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 third 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 were sent in April, 1999. Responses
received to date indicate all parties expect to be Year 2000 ready
prior to December 31, 1999. A second letter will be sent to those
parties who did not respond to the first letter.
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 a material 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. In May 1997, the remaining 60% interest
in the project was acquired.
The Partnership's primary current sources of cash are from cash
balances, property rental income and construction financing. As of
June 30, 1999, the Partnership had $327,795 in cash and $1,226,991 in
available construction loan draws. The construction loan has an
expiration date of September 1, 1999; however, Management anticipates
renewing the loan at that time. 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 the six months ended June 30, 1999, an increase in cash of
$39,903 occurred. This was the net result of cash provided by
operations and financing activities, including proceeds from the
construction loan for improvements to the investment properties.
Management anticipates cash provided from operations to continue to
improve in future quarters with the additional lease-up of the
Highlands 80 project. The Partnership's properties' occupancy rates as
of June 30, 1999 are 75% for Highlands 80 and 100% for Capital
Professional Center.
The Partnership will continue to incur improvement costs as its
properties are leased up. The total projected tenant improvement costs
to be incurred during 1999 are estimated to be $657,000. These costs
will be funded with cash reserves, construction loan draws and income
from property operations.
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
During the six months ended June 30, 1999 as compared to June 30, 1998,
the Partnership's total revenues increased by $61,971 (6.3%), while its
expenses increased by $86,201 (7.7%), resulting in an increase in net
loss of $24,230.
The increase in revenue is primarily due to a slight increase in
occupancy for both Highlands 80 and Capital Professional Center.
Expenses increased for the six months ended June 30, 1999, as compared
to June 30, 1998, due to the net effect of:
a) $10,680 (5.7%) increase in operating expenses due to an increase in
utility and marketing costs;
b) $41,481 (31.2%) increase in repairs and maintenance due to parking
lot resurfacing, lobby repainting and recarpeting at Capital
Professional Center, plus a large amount of suite turnover costs at
Highlands 80 for space leased during the first quarter;
c) $15,613 (4%) increase in interest due to loan costs associated with
Highlands 80, Phase II completion;
d) $19,488 (7.5%) increase in depreciation at Highlands 80 due to the
Phase II completion.
During the second quarter ending June 30, 1999 as compared to June 30,
1998, revenues increased by 43,601 (8.6%), while expenses also
increased by $6,281 (1.1%). The increase in revenues is primarily due
to an increase in occupancy at Capital Professional Center from 91% to
100%. The increase in expenses is primarily due to the increase in
depreciation associated with Phase II of Highlands 80.
ITEM 3. 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
note instrument consists of a construction loan in the amount of
$1,053,029.
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 6, 1999
By:_____________________________________
Michael J. Metzger
President
Date: August 6, 1999
By:_____________________________________
Kenneth L. Buckler
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 327,795
<SECURITIES> 0
<RECEIVABLES> 140,174
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 467,969
<PP&E> 14,492,414
<DEPRECIATION> 2,507,130
<TOTAL-ASSETS> 12,681,224
<CURRENT-LIABILITIES> 18,364
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,681,224
<SALES> 0
<TOTAL-REVENUES> 1,042,662
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 810,341
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 398,065
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (165,744)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
