SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ________________
Commission File No. 0-16456
Development Partners II (A Massachusetts Limited Partnership)
(formerly Berry and Boyle Development Partners II)
(Exact name of registrant as specified in its charter)
Massachusetts 04-2946004
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S.
Employer incorporation or organization)
Identification No.)
5110 Langdale Way, Colorado Springs, CO 80906
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(719) 527-0544
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Units of Limited
Partnership Interests
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 and 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), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
<PAGE>
PART I. FINANCIAL INFORMATION
<PAGE>
DEVELOPMENT PARTNERS II
(A Massachusetts Limited Partnership)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------
<TABLE>
ASSETS
(Unaudited)
June 30, December 31,
1998 1997
---- ----
Assets held for sale/Property, at cost
<S> <C> <C>
Land $1,856,811 $3,722,346
Buildings and improvements 5,845,520 11,998,544
Equipment, furnishings and fixtures 669,655 1,875,577
-------------- ---------------
8,371,986 17,596,467
Less accumulated depreciation and impairment (1,830,623) (4,842,299)
-------------- ---------------
6,541,363 12,754,168
Cash and cash equivalents 4,513,289 469,355
Deposits and prepaid expenses 556 1,446
Accounts receivable 35,711 6,730
Investment in partnership 1,165,443
-
Deferred expenses, net of accumulated
amortization of $558,886 and $536,426 22,460
-
-------------------------------
Total assets $11,090,919 $14,419,602
============== ===============
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Mortgage notes payable $3,812,261 $6,960,055
Accounts payable 35,586 89,606
Accrued expenses 67,747 137,348
Due to affiliates (Note 8) 15,674 16,787
Rents received in advance - 850
Tenant security deposits 22,775 55,025
-------------- ---------------
Total liabilities 3,954,043 7,259,671
Minority Interest - 557,555
General Partners' deficit (390) (11,160)
Limited Partners' equity 7,137,266 6,613,536
-------------- ---------------
Total liabilities and partners' equity $11,090,918 $14,419,602
============== ===============
<PAGE>
DEVELOPMENT PARTNERS II
(A Massachusetts Limited Partnership)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
---------------
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
Revenue:
<S> <C> <C> <C> <C>
Rental income $368,809 $620,303 $811,173 $1,272,549
Interest income 14,760 2,571 20,434 5,966
Gain from sale of property (80,778)
--------------- -------------- --------------- ---------------
383,569 622,874 750,829 1,278,515
Operating Expenses 188,806 291,596 375,169 589,674
Interest 164,078 242,180 335,511 485,024
Depreciation and amortization 11,125 117,167 19,053 234,338
General and administrative 61,372 56,312 131,597 101,852
Equity in income (loss) from partnership (609,270) 6,673 (649,105) 13,216
--------------- -------------- --------------- ---------------
(183,889) 713,928 212,225 1,424,104
--------------- -------------- --------------- ---------------
Net loss before minority interest 567,458 (91,054) 538,604 (145,589)
Minority interests' equity in
subsidiary (income) loss 2,508 3,518 8,232 5,205
--------------- -------------- --------------- ---------------
Net income (loss) $569,966 ($87,536) $546,836 ($140,384)
=============== ============== =============== ===============
Net income (loss) allocated to:
General Partners $11,399 ($875) $10,070 ($1,404)
Basic and diluted per unit net loss allocated to Investor
Limited
Partner interest:
36,963 units issued $15.11 ($2.34) $14.52 ($3.76)
<PAGE>
DEVELOPMENT PARTNERS II
(A Massachusetts Limited Partnership)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
---------------
Investor Total
General Limited Partners'
Partners Partners Equity
<S> <C> <C> <C>
Balance at December 31, 1996 (86,563) 9,288,893 9,202,330
Cash distributions - (1,663,335) (1,663,335)
Net income (loss) 75,403 (1,012,022) (936,619)
--------------- -------------- ---------------
Balance at December 31, 1997 (11,160) 6,609,432 6,598,272
Cash distributions - - -
Net income 10,770 527,834 538,604
--------------- -------------- ---------------
Balance at June 30, 1998 ($390) $7,137,266 $7,136,875
=============== ============== ===============
<PAGE>
DEVELOPMENT PARTNERS II
(A Massachusetts Limited Partnership)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------
Six Months
Ended
June 30,
1998 1997
Cash flows from operating activities:
<S> <C> <C>
Interest received $20,434 $5,966
Cash received from rental income 778,073 1,267,119
General and administrative expenses (145,571) (143,226)
Operating expense (501,934) (661,023)
Interest paid (348,528) (485,024)
--------------- --------------
Net cash (used) provided by operating activities (197,526) (16,188)
Cash flows from investing activities:
Proceeds from sale of property 5,671,909
Capital Improvements (81,996) (80,545)
Distributions received from partnership 1,792,448 -
Deferred costs (874) -
--------------- --------------
Net cash provided by investing activities 7,381,488 (80,545)
Cash flows from financing activities:
Cash paid for loan refinancing
Principal payments on mortgage notes payable (3,147,794) (54,270)
Distributions paid to the minority interest 7,314 (5,532)
Cash paid for deposits 452
--------------- --------------
Net cash used by financing activities (3,140,028) (59,802)
--------------- --------------
Net increase (decrease) in cash and cash equivalents 4,043,934 (156,535)
Cash and cash equivalents at beginning of year 469,355 318,746
--------------- --------------
Cash and cash equivalents at end of year $4,513,289 $162,211
=============== ==============
<PAGE>
DEVELOPMENT PARTNERS II
(A Massachusetts Limited Partnership)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------
Reconciliation of net loss to net cash (used) provided by operating activities:
Six Months Ended
June 30,
1998 1997
---- ----
<S> <C> <C>
Net loss $546,836 ($140,384)
Adjustments to reconcile net loss to net cash (used)
provided by operating activities:
Depreciation and amortization 19,053 234,338
Gain from sale of property 80,778
Equity in (income) loss from partnership (649,105) $13,216
Minority interests' equity in subsidiary income (loss) (8,232) (5,205)
Change in assets and liabilities net of effects of investing and financing
activities:
(Increase) decrease in accounts receivable (29,031) 1,730
Decrease in deposits and prepaid expenses (414)
-
(Decrease) increase in accounts payable and accrued expenses (123,612) (98,332)
(Decrease) increase in due to affiliates (1,113) (15,707)
(Decrease) increase in rents received in advance (850) (2,607)
Decrease in tenant security deposits (32,250) (2,823)
--------------- ---------------
Net cash (used) provided by operating activities ($197,526) ($16,188)
=============== ===============
</TABLE>
<PAGE>
DEVELOPMENT PARTNERS II
(A Massachusetts Limited Partnership)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization of Partnership:
Development Partners II (A Massachusetts Limited Partnership) (the
"Partnership"), formerly Berry and Boyle Development Partners II, was formed on
January 9, 1987. GP L'Auberge Communities, L.P., a California Limited
Partnership, (formerly Berry and Boyle Management) and Stephen B. Boyle are the
General Partners. In September, 1995, with the consent of Limited Partners
holding a majority of the outstanding Units, as well as the consent of the
mortgage lenders for the Partnership's three properties, Richard G. Berry
resigned as a general partner of the Partnership. Except under certain limited
circumstances upon termination of the Partnership, the General Partners are not
required to make any additional capital contributions. The General Partners or
their affiliates will receive various fees for services and reimbursement for
various organizational and selling costs incurred on behalf of the Partnership.
On February 13, 1987 the Securities and Exchange Commission declared the
Partnership's public offering of up to 60,000 units of Limited Partnership
Interests at $500 per unit (the "Units") effective and the marketing and sale of
the Units commenced shortly thereafter. The initial closing of the offering took
place on June 30, 1987 at which time the holders of 5,231 Units were admitted to
the Partnership. The Partnership continued to admit subscribers monthly
thereafter until August 10, 1988 when it terminated the offering having admitted
1,918 investors acquiring 36,963 Units totaling $18,481,500. There were 1,849
investors at June 30, 1998.
The Partnership will continue until December 31, 2010, unless earlier terminated
by the sale of all, or substantially all, of the assets of the Partnership, or
as otherwise provided in the Partnership Agreement (See Note 9.)
2. Significant Accounting Policies:
A. Basis of Presentation
The consolidated financial statements include the accounts of the
Partnership and its subsidiaries: The Pines on Cheyenne Creek Joint
Venture, Mariposa Joint Venture and Canyon View East Joint Venture. All
intercompany accounts and transactions have been eliminated in
consolidation. The Partnership accounts for its investment in Casabella
Associates utilizing the equity method of accounting. The Partnership's
investment account is adjusted to reflect its pro rata share of
profits, losses and distributions from Casabella Associates. Refer to
Notes 4 and 5 regarding the termination of the joint ventures and sale
of Mariposa.
The Partnership follows the accrual basis of accounting.
B. Cash and Cash Equivalents
The Partnership considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents. The
carrying value of cash and cash equivalents approximates fair value. It
is the Partnership's policy to invest cash in income-producing
temporary cash investments. The Partnership mitigates any potential
risk from such concentration of credit by placing investments with high
quality financial institutions.
2. Significant Accounting Policies, continued
C. Significant Risks and Uncertainties
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.
D. Depreciation
Depreciation is provided for by the use of the straight-line method
over estimated useful lives as follows:
Buildings and improvements 39-40 years
Equipment, furnishings and fixtures 5-15 years
E. Deferred Expenses
Costs of obtaining the mortgages on the properties are being amortized
over the mortgage term using the straight-line method, which
approximates the effective interest method.
F. Income Taxes
The Partnership is not liable for Federal or state income taxes because
Partnership income or loss is allocated to the Partners for income tax
purposes. If the Partnership's tax returns are examined by the Internal
Revenue Service or state taxing authority and such an examination
results in a change in Partnership taxable income (loss), such change
will be reported to the Partners.
G. Rental Income
Leases require the payment of rent in advance, however, rental income
is recorded as earned.
H. Long-Lived Assets
In 1996, the Partnership adopted Statement of Financial Accounting
Standards No. 121 (SFAS 121), "Accounting for the Impairment of
Long-Lived Assets and Assets to be Disposed of." SFAS 121 requires that
long-lived assets be reviewed for impairment whenever events or changes
in circumstances indicate that their carrying value may not be
recoverable. The adoption of SFAS 121 had no effect on reported results
in 1996. Upon determination that a permanent impairment has occurred,
rental properties are reduced to fair value.
2. Significant Accounting Policies, continued
In the fourth quarter of 1997, the partnership recorded a charge to
operations of $861,066 related to impairment in its carrying value of
Cheyenne Creek. This impairment charge is based on the Partnership's
determination of fair market value as of the balance sheet date. The
Partnership entered into a sale agreement and sold Cheyenne Creek on
May 28, 1998. As further discussed in Note 9, effective December 31,
1997, the Partnership recorded its assets at the lower of carrying
value or net realizable value and has classified its properties as Held
for Sale.
I. New Accounting Standards
In 1997, the Partnership adopted Statement of Financial Accounting
Standards No. 128 (SFAS 128), "Earnings Per Share." This accounting
standard specifies new computation, presentation, and disclosure
requirements for earnings per share to be applied retroactively. Among
other things, SFAS 128 requires presentation of basic and diluted
earnings per share on the face of the income statement. The computation
of basic and diluted earnings per share was based on income available
to the Limited Partners divided by the weighted average number of units
outstanding during the period. The Partnership has no dilutive type
securities. The adoption of SFAS 128 had no effects on the per unit
results previously reported.
3. Cash and Cash Equivalents:
Cash and cash equivalents at June 30, 1998 and December 31, 1997 consisted of
the following:
1998 1997
---- ----
Cash on hand $4,513,289 $469,355
========== ========
4. Joint Venture and Property Acquisitions:
The Partnership has invested in three properties located in Scottsdale and
Tucson, Arizona and Colorado Springs, Colorado. The success of the Partnership
will depend upon factors which are difficult to predict including general
economic and real estate market conditions, both on a national basis and in the
areas where the Partnership's investments are located. The Partnership holds a
majority interest in these properties and controls the operations of the joint
venture. The Mariposa joint venture was effectively terminated on December 31,
1996. Mariposa was sold on September 30, 1997 and Cheyenne Creek was sold on May
28, 1998.
Cheyenne Creek
On September 26, 1988, the Partnership and a limited partnership affiliated with
the General Partners (the "Affiliated Partnership") acquired L'Auberge Cheyenne
Creek ("Cheyenne Creek"), formerly The Pines on Cheyenne Creek, a 108-unit
residential property located in Colorado Springs, Colorado and simultaneously
contributed the property to the Pines on Cheyenne Creek Joint Venture (the
"Joint Venture") comprised of the Partnership, the Affiliated Partnership and
the property developer. The Partnership owns a majority interest in the Pines on
Cheyenne Creek Joint Venture and, therefore, the accounts and operations of the
Pines on Cheyenne Creek Joint Venture have been consolidated into the
Partnership. The Affiliated Partnership owns an 18% interest in the Pines on
Cheyenne Creek. The Partnership and the Affiliated Partnership have been
designated the co-managing joint venture partners of the Pines on Cheyenne Creek
Joint Venture and will have control over all decisions affecting the joint
venture and the property.
4. Joint Venture and Property Acquisitions, continued
The co-venture partner was Highland Properties, Inc. ("Highland"), a Colorado
based residential development, construction and management firm. Highland
developed the property known as L'Auberge Cheyenne Creek.
In accordance with the terms of the purchase agreement and the joint venture
agreement, through June 30, 1998, the Partnership has contributed $4,720,041 to
the Pines on Cheyenne Creek Joint Venture which was used to: (1) repay a portion
of the construction loan from a third party lender, (2) pay certain costs
related to the refinancing of the permanent loan, (3) cover operating deficits
incurred during the lease up period, and (3) fund certain capital improvements.
In addition, the Partnership funded $470,870 of property acquisition costs which
were subsequently treated as a capital contribution to the Pines on Cheyenne
Creek Joint Venture.
Net cash from operations (as defined in the joint venture agreement) was to be
distributed as available to each joint venture partner quarterly as follows:
First, to the Partnership and the Affiliated Partnership,
proportionately, an amount equal to 11.25% per annum, noncumulative
(computed daily on a simple noncompounded basis from the date of
completion funding) of their respective capital investment (as defined
in the joint venture agreement);
Second, the balance 65.25% to the Partnership, 14.75% to the Affiliated
Partnership, and 20% to the property developer.
All losses from operations and depreciation for the Pines on Cheyenne Creek
Joint Venture were allocated 81.56% to the Partnership and 18.44% to the
Affiliated Partnership, in proportion to their respective joint venture
interest.
All profits from operations to the extent of cash distributions were first
allocated to the Partnership, the Affiliated Partnership, and the property
developer in the same proportion as the cash distributions. Any remaining
profits were allocated 65.25% to the Partnership, 14.75% to the Affiliated
Partnership, and 20% to the property developer.
In the case of certain capital transactions and distributions as defined in the
joint venture agreement, the allocation of related profits, losses and cash
distributions, if any, would be different than as described above and would be
affected by the relative balances in the individual partners' capital accounts.
On July 3, 1996, the Partnership and certain affiliates consummated an agreement
with Highland Properties, Inc. ("Highland") which separated the interests of
Highland and the Partnership, thus affording the Partnership greater flexibility
in the operation and disposition of the property. In consideration of a payment
by the Partnership, to Highland totaling $8,600, and delivery of certain mutual
releases, Highland (i) relinquished its option to exercise its rights of first
refusal with regard to the sale of the property and (ii) assigned all of its
interest in the Pines on Cheyenne Creek Joint Venture to the Partnership, (while
preserving the economic interests of the venturer in these Joint Ventures).
Highland may still share in the cash flow distributions or proceeds from sale if
certain performance levels are met.
On May 28, 1998, Cheyenne Creek was sold pursuant to the terms of a Sale
Agreement and Escrow Instructions (the "Agreement") dated January 26, 1998, as
amended. Cheyenne Creek was sold to G&I Cheyenne Creek LLC, a Delaware limited
liability company unaffiliated with the Partnership. The purchase price was
$6,300,000, subject to certain customary adjustments and a $57,600 credit to the
purchaser. The Joint Venture repaid mortgage financing in the approximate amount
of $3,138,795 at closing utilizing a portion of proceeds from the sale.
4. Joint Venture and Property Acquisitions, continued
Mariposa
On February 3, 1989, the Partnership acquired a joint venture interest in the
Mariposa Joint Venture which owns and operates an 84-unit residential property
located in Scottsdale, Arizona known as Mariposa. Since the Partnership owns a
majority interest in the Mariposa Joint Venture, the accounts and operations of
the Mariposa Joint Venture have been consolidated into those of the Partnership.
The Partnership has been designated the managing joint venture partner of the
Mariposa Joint Venture and will have control over all decisions affecting the
Mariposa Joint Venture and the property. The Mariposa joint venture was
effectively terminated on December 31, 1996. The Partnership has eliminated the
minority interest related to this joint venture, as such, the Partnership owned
100% of the underlying assets as of December 31, 1996.
The Partnership sold the Mariposa property on September 30, 1997 for a net sales
price of $5,037,000 to an unaffiliated third party. A gain on sale of
approximately $215,000 was recognized in the accompanying statement of
operations. Net proceeds from the sale of $1,663,335 were distributed to the
partners based on the terms of the original Joint Venture Agreement. This
agreement provides for EWI to receive a distribution of proceeds from sale in
the event certain performance levels are met. The property did not meet these
performance levels; as such, all proceeds were distributed to existing limited
partners. The Partnership repaid first mortgage financing in the amount of
$2,862,000 at closing utilizing a portion of the proceeds of the sale.
Canyon View East
On March 8, 1989, the Partnership acquired an interest in the Canyon View East
Joint Venture which owns and operates a 96-unit residential property located in
Tucson, Arizona known as Canyon View East. Since the Partnership owns a majority
interest in the Canyon View East Joint Venture, the accounts and operations of
the joint venture have been consolidated into those of the Partnership. The
Partnership has been designated the managing joint venture partner of the Canyon
View East Joint Venture and will have control over all decisions affecting the
Canyon View East Joint Venture and the property.
In accordance with the terms of the purchase agreement and the joint venture
agreement, the Partnership has contributed $4,857,203 to the Canyon View East
Joint Venture through June 30, 1998, which was used to: (1) repay a portion of
the construction loan from a third party lender, (2) cover operating deficits
incurred during the lease up period, (3) fund $523,022 of property acquisition
costs and (5) pay certain costs associated with the permanent loan refinancing.
Net cash from operations (as defined in the joint venture agreement) is to be
distributed, as available, to each joint venture partner, not less often than
quarterly, as follows:
First, to the Partnership an amount equal to 11.25% per annum,
noncumulative (computed daily on a simple noncompounded basis from the
date of completion funding) of the Partnership's capital investment (as
defined in the joint venture agreement);
Second, the balance 75% to the Partnership and 25% to the other joint
venture partners.
All losses from operations and depreciation for the Canyon View East Joint
Venture were allocated 100% to the Partnership.
4. Joint Venture and Property Acquisitions, continued
All profits from operations were allocated to each joint venture partner in
accordance with, and to the extent of, the distribution of net cash from
operations. Any excess profits were allocated 100% to the Partnership. In the
case of certain capital transactions and distributions as defined in the joint
venture agreement, the allocation of related profits, losses and cash
distributions, if any, would be different than as described above and would be
effected by the relative balances in the individual partners' capital accounts.
For the six months ended June 30, 1998 and 1997, the Canyon View East Joint
Venture had net income of $47,204 and a net loss of $8,677, respectively.
5. Investment in Partnership:
On September 28, 1990, the Partnership contributed $1,800,000 to purchase an
approximate 38.3% interest in Casabella Associates, a general partnership among
the Partnership, Berry and Boyle Development Partners (A Massachusetts Limited
Partnership) ("DPI") and Berry and Boyle Development Partners III (A
Massachusetts Limited Partnership) ("DPIII"). In addition to its contribution
referred to above, the Partnership incurred $268,861 of acquisition costs,
including $186,300 in acquisition fees paid to the General Partners. The
difference between the partnership's carrying value of the investment in
Casabella Associates and the amount of underlying equity in net assets is
$186,300, representing a portion of the acquisition costs stated above that were
not recorded on the books of Casabella Associates.
The co-venturer partner was an affiliate of Evans Withycombe, Inc. ("EWI"), a
Phoenix based residential development, construction and management firm. EWI is
also the developer of the Casabella property.
On May 22, 1998, Casabella Associates sold its only material asset, Casabella, a
154-unit multi family rental property in Scottsdale, Arizona pursuant to the
terms of a Sale Agreement and Escrow Instructions (the "Agreement") dated
February 4, 1998, as amended. Casabella was sold to Casabella Condominium
Ventures Limited Partnership, a limited partnership unaffiliated with the
Partnership. The purchase price was $11,700,000, subject to certain customary
adjustments and a $120,000 credit to the purchaser. The Partnership repaid
mortgage financing in the approximate amount of $6,750,400 at closing utilizing
a portion of proceeds from the sale. The net proceeds to Casabella Associates
from the sale of Casabella were approximately $4,570,300 of which the
Partnership's share is approximately $1,750,410.
<PAGE>
5. Investment in Partnership, continued:
The consolidated balance sheets of Casabella Associates and Casabella Joint
Venture at June 30, 1998 and December 31, 1997, are summarized as follows:
<TABLE>
Assets: 1998 1997
---- ----
<S> <C> <C>
Property, plant and equipment $ - $11,580,507
Accumulated depreciation (2,228,967)
-----------
Property, plant and equipment, net 9,351,540
Other assets 130,537
Total assets $ - $9,482,077
=========
Liabilities and partners' equity:
Mortgage note payable 6,766,437
Other liabilities 169,778
-------
Total liabilities 6,936,215
Partners' equity 2,545,862
Total liabilities and partners' equity$ - $9,482,077
=========
The elements of the consolidated net income (loss) from Casabella Associates and
Casabella Joint Venture for the six months ended June 30, 1998 and 1997 are
summarized as follows:
Income: 1998 1997
---- ----
<S> <C> <C>
Rental income $636,657 $755,277
Other income 26,688 5,620
Gain on sale of property 2,066,086 _
--------- ---------------
2,729,431 760,897
Expenses and other deductions:
General and administrative 2,144 3,908
Operations 268,855 351,749
Depreciation and amortization 13,927 133,368
Interest 284,752 313,061
------- -------
569,708 802,086
------- -------
Net income (loss) $2,159,723 ($41,189)
========== =========
</TABLE>
<PAGE>
6. Mortgage Notes Payable:
All of the property owned by the Partnership is pledged as collateral for the
nonrecourse mortgage notes payable outstanding at June 30, 1998 and December 31,
1997, which consisted of the following:
June 30, December 31,
1998 1997
Cheyenne Creek $ - $3,124,041
Canyon View East 3,812,261 3,836,014
--------- ---------
$3,812,261 $6,960,055
========= =========
The original maturity dates for these notes were September 15, 1997.
Cheyenne Creek
On September 10, 1997, the lender extended the terms of the Cheyenne Creek
mortgage note for a period of one year. Under the modification agreement,
monthly principal and interest payments of $29,076 and fixed interest rate of
10% remain unchanged. The terms of the agreement provided for a prepayment
penalty of .5% of the outstanding loan amount in the event that the note is paid
prior to 60 days before it becomes due. As discussed in Note 4, the Partnership
sold Cheyenne Creek. In connection with this sale, the outstanding mortgage debt
for the property was paid off. There was no prepayment penalty assessed since
the debt was paid within 60 days of maturity.
Canyon View East
On September 10, 1997, the lender extended the terms of the Canyon View East
mortgage note for a period of one year. Under the modification agreement,
monthly principal and interest payments of $35,047 and fixed interest rate of
9.75% remain unchanged. The terms of the agreement provided for a prepayment
penalty of .5% of the outstanding loan amount in the event that the note is paid
prior to 60 days before it becomes due.
On July 17, 1998, the Partnership loaned Canyon View East Joint Venture
$3,810,302 to pay off the mortgage that was due on September 15, 1998. There was
no prepayment penalty assessed since the debt was paid within 60 days of
maturity.
Interest included in Accrued expenses in the Consolidated Balance Sheets at June
30, 1998 and 1997 consisted of the following:
1998 1997
---- ----
Cheyenne Creek $ - $13,017
Canyon View East 15,594 15,584
------ ------
$15,594 $28,601
====== ======
The principal balance of the mortgage notes payable appearing on the
consolidated balance sheets at June 30, 1998 and December 31, 1997 approximates
the fair value of such notes.
<PAGE>
7. Partners' Equity:
Under the terms of the Partnership Agreement profits are allocated 98% to the
Limited Partners and 2% to the General Partners; losses are allocated 99% to the
Limited Partners and 1% to the General Partners.
Cash distributions to the partners are governed by the Partnership Agreement and
are made, to the extent available, 98% to the Limited Partners and 2% to the
General Partners.
Gain from the sale of properties is to be allocated as defined in the
Partnership Agreement. The net proceeds on the sale of Cheyenne Creek and
Casabella of $4.1 were allocated as follows. The Limited Partners received 100%
of the cash distribution from sale. The total gain on sale of Casabella and
Cheyenne Creek of $932,907 was allocated as follows. The General Partner
received a gain on sale allocation of approximately $50,900 and the Limited
Partners received a gain on sale allocation of approximately $882,007. These
allocations were in accordance with the terms of the Partnership Agreement.
8. Related Party Transactions:
L'Auberge Communities, Inc. is a General Partner of L'Auberge Communities,
which owns a 99% interest in GP L'Auberge Communities, L.P. (formerly Berry and
Boyle Management). Due to affiliates at June 30, 1998 and December 31, 1997
consisted of $15,674 and $16,787, respectively, relating to reimbursable costs
due to L'Auberge Communities, Inc.
As of June 30, 1998 and 1997, general and administrative expenses included
$32,386, and $27,890, respectively, of salary reimbursements paid to the General
Partners for certain administrative and accounting personnel who performed
services for the Partnership.
Residential Services - L'Auberge, formerly Berry and Boyle Residential Services,
the property manager of Cheyenne Creek , Canyon View East and Mariposa, is an
affiliate of the General Partners of the Partnership. During the years ended
June 30, 1998, and 1997, property management fees of $32,457 and $49,981,
respectively, were paid to Residential Services - L'Auberge. These fees were 4%
of rental revenue.
9. Assets Held for Sale:
During the fourth quarter of 1997, the General Partners of the Partnership
committed to a plan to dispose of Canyon View East in Tucson, Arizona. On
January 15, 1998 the Partnership entered into Sales Agreement (the "Agreement")
to sell Canyon View East to a unaffiliated third party. The selling price Canyon
View East is approximately $6,650,000. The Agreement is subject to completion of
customary due diligence to the satisfaction of the purchaser, and the purchaser
obtaining a financing commitment on commercially reasonable terms and
conditions. The Partnership expects to consummate the sale in 1998. In addition,
the sale is contingent upon the approval of the Limited Partners. As of May 13,
1998, the Partnership has received sufficient consents from the Limited
Partners, approving the sale of the property.
Although the General Partners do not believe it to be material or with merit, a
lawsuit related to the pending sale of Canyon View has been filed.
9. Assets Held for Sale continued:
The Partnership owns a joint venture interest in Canyon View East Joint Venture
which holds fee simple title to this property. The Partnership's co-venturers
are unaffiliated with the Partnership and the General Partners. No co-venturer
will be entitled to receive any portion of the proceeds of the sale of Canyon
View East. Under the terms of the Canyon View East Joint Venture Agreement, the
Partnership's co-venturers (or any of them) were granted a right of first
refusal to purchase Canyon View East on the same terms and conditions as an
accepted third party offer to purchase the property. With respect to the
proposed sale to Tucson Realty Holding Co. Inc. ("TRH"), the co-venturers had
until the close of business on March 13, 1998 to exercise the right of first
refusal on the terms contained in the Canyon View Purchase Agreement. On March
13, 1998, one of the co-venturers purported to exercise the right of first
refusal. The Partnership believes, and has asserted, that the purported exercise
was not in conformity with the material terms and conditions of the Canyon View
Purchase Agreement and, therefore, that the right of first refusal lapsed
without exercise. Accordingly, the Partnership is attempting to close the sale
of Canyon View East to TRH pursuant to the Canyon View Purchase Agreement.
The co-venturer has filed a lawsuit claiming that it, not TRH, has the right to
acquire Canyon View East. The lawsuit seeks specific performance of its alleged
right to acquire Canyon View East or, if the court will not grant specific
performance, monetary damages in an amount to be proven at trial. In addition,
the co-venturer has filed a lis pendens on the property as a means of
prohibiting its sale to TRH.
The Partnership is attempting to expunge the lis pendens defending against the
claims of the co-venturer. The Partnership and the General Partners have filed
an answer and counterclaim in which they denied the material allegations of the
complaint and alleged their right to a declaration that the co-venturer has no
right to acquire Canyon View East, as well as monetary damages in an amount to
be proven at trial.
TRH has intervened in the lawsuit and filed an answer and counterclaim in which
it denied the material allegations of the complaint and alleged their right to a
declaration that the co-venturer has no right to acquire Canyon View East, as
well as monetary damages from the co-venturer in an amount to be proven at
trial.
The co-venturer has recently filed an amended complaint alleging claims for
breach of the covenant of good faith and fair dealing and breach of fiduciary
duty against the Partnership and General Partners. The co-venturer has stated
its intention to seek compensatory and punitive damages for such claims. The
Partnership and the General Partners believe that such claims are meritless and
will defend against them.
The Partnership and General Partners have filed a motion for partial summary
judgement, which seeks a declaration that the co-venturer does not have the
right to acquire Canyon View East. The court is scheduled to hear this motion on
October 5, 1998. As of this date, a trial date has not been scheduled.
Although the Partnership believes that the co-venturer's lawsuit has no merit,
it could materially delay the Partnership's sale of Canyon View East. Canyon
View East will be sold together with an adjacent property which is owned by a
joint venture in which a public limited partnership of which the General
Partners or their affiliates are the general partners is the managing venturer.
Accordingly, the sale of Canyon View East is also conditioned upon the consent
of the limited partners of the affiliated partnership to the dissolution of such
partnership. The $16,750,000 total purchase price for the two adjacent
properties was allocated between the two joint ventures based on gross rent
potential of the two properties.
As it is the intent of the General Partners to pursue the sale of the property,
the Partnership has recorded the assets at the lower of carrying value or net
realizable value and has included these amounts as Assets Held for Sale on the
Consolidated Balance Sheets at December 31, 1997. In accordance with SFAS 121,
the Partnership has stopped depreciating these assets effective January 1, 1998.
If closing of the sale was to occur, any proceeds from sale will be allocated to
the Partners in accordance with the terms of the Partnership Agreement and the
Partnership will likely be liquidated.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements including those concerning the
General Partners' expectations regarding future financial performance and future
events. These forward-looking statements involve significant risk and
uncertainties, including those described herein. Actual results may differ
materially from those anticipated by such forward-looking statements.
Liquidity; Capital Resources
The working capital reserves of the Partnership consisted of cash and cash
equivalents and short-term investments. Together these amounts provide the
Partnership with the necessary liquidity to carry on its day-to-day operations
and to make necessary contributions to the various joint ventures. At June 30,
1998, the Partnership had cash and cash equivalents of $4,513,289 compared with
$469,355 at December 31, 1997. The aggregate net increase in working capital
reserves was $4,043,934. The increase resulted primarily from cash provided by
the sale of the property of $5,671,909 plus distributions of $1,792,448 received
from Casabella Associates in connection with the sale of Casabella, offset by
the payment of the mortgage in the amount of $3,147,794 and by the cash required
for operations of $197,526, fixed asset acquisitions in the amount of $81,996
and $7,314 distributions to minority interest partners.
Property Status
The Partnership owns a majority joint venture interest in the Canyon View East
Joint Venture, an Arizona joint venture that owns and operates Canyon View East,
a 96-unit multifamily rental property in Tucson, Arizona, subject to first
mortgage financing in the original principal amount of $3,847,465. The
Partnership also owns a majority interest in the Pines at Cheyenne Creek Joint
Venture which owns and operates L'Auberge Cheyenne Creek (formerly The Pines on
Cheyenne Creek) ("Cheyenne Creek'), a 108-unit multifamily rental property in
Colorado Springs, Colorado, subject to first mortgage financing in the original
principal amount of $3,133,018. The Partnership also owns a minority interest in
Casabella Associates which in turn, owns and operates Casabella, a 154-unit
multifamily, rental property in Scottsdale, Arizona, subject to first mortgage
financing in the original amount of $7,320,000. Until its sale on September 30,
1997, the Partnership owned and operated Mariposa, an 84-unit multifamily rental
property in Scottsdale, Arizona. The ownership of Mariposa was formerly
structured as a joint venture of which the Partnership owned a majority
interest. The Pines at Cheyenne Creek originally included the developer of
Cheyenne Creek as a joint venturer. With regard to the termination of the
Mariposa Joint Venture and the resignation of the developer from the Pines on
Cheyenne Creek Joint Venture, see Note 4 of Notes to Consolidated Financial
Statements. As further discussed below under "Pending Sales" and in Note 9 of
the Notes to Consolidated Financial Statements, each of the properties owned by
the Partnership or in which the Partnership owns an interest is under contract
to be sold to a purchaser unaffiliated with the General Partners.
Canyon View East
The property was 85% occupied as of June 30, 1998, compared to 95% approximately
one year ago. At June 30, 1998 and 1997, the market rents for the various unit
types were as follows:
Unit Type 1998 1997
--------- ---- ----
Two bedroom two bath $875 $865
Three bedroom two bath 1010 980
Results of Operations
The Partnership's operating results for the three months ended June 30, 1998,
consisted of interest income, administrative expenses, the Partnership's share
of the loss from Casabella Associates and its share of the income and losses
allocated from the joint ventures, as follows:
<TABLE>
Cheyenne Canyon Partnership Consolidated
Creek View East Level Totals
<S> <C> <C> <C> <C>
Revenue $146,926 $223,534 $13,109 $383,569
Expenses:
General and administrative - - 61,372 61,372
Operations 85,941 102,367 498 188,806
Depreciation and amortization 7,037 4,088 - 11,125
Interest 67,551 96,527 - 164,078
Equity in (income) loss from partnership - - (609,270) (609,270)
----------------- ----------------- -------------- ---------------
160,529 202,982 (547,400) (183,889)
----------------- ----------------- -------------- ---------------
Net income (loss) before minority interest (13,603) 20,552 560,509 567,458
Minority Interests' share of net loss 2,508 - - 2,508
----------------- ----------------- -------------- ---------------
Net income (loss) ($11,095) $20,552 $560,509 $569,966
================= ================= ============== ===============
The Partnership's operating results for the three months ended June 30, 1997
consisted of interest income, administrative expenses, the Partnership's share
of the loss from Casabella Associates and its share of the income and losses
allocated from the joint ventures, as follows:
Cheyenne Canyon Partnership Consolidated
Creek Mariposa View East Level Totals
<S> <C> <C> <C> <C> <C>
Revenue $210,397 $184,878 $225,629 $1,970 $622,874
Expenses:
General and administrative - - - 56,312 56,312
Operations 104,920 93,993 92,683 291,596
Depreciation and amortization 45,870 29,625 41,672 - 117,167
Interest 78,687 69,261 94,232 - 242,180
Equity in (income) loss from - - - 6,673 6,673
partnership
------------- -------------- -------------- -------------- ----------------
229,477 192,879 228,587 62,985 713,928
------------- -------------- -------------- -------------- ----------------
Net income (loss) before minority (19,080) (8,001) (2,958) (61,015) (91,054)
interest
Minority Interests' share of net loss 3,518 - - - 3,518
------------- -------------- -------------- -------------- ----------------
Net income (loss) ($15,562) ($8,001) ($2,958) ($61,015) ($87,536)
============= ============== ============== ============== ================
For the six months ended June 30, 1998, the Partnership's operating results were
comprised of its share of the income (losses) from Cheyenne Creek, the Canyon
View East Joint Venture and the Partnership's share of the income from Casabella
Associates, as well as partnership level interest income earned on its
short-term investments, reduced by administrative expenses. A summary of these
operating results (unaudited) appears below:
Cheyenne Canyon Partnership Consolidated
Creek View East Level Totals
<S> <C> <C> <C> <C>
Revenue $371,732 $440,681 $19,194 $831,607
Gain (loss) from sale of property (80,778) ($80,778)
----------------- ----------------- ---------------- ----------------
290,954 440,681 19,194 750,829
Expenses:
General and administrative - - 131,597 131,597
Operations 179,141 195,366 662 375,169
Depreciation and amortization 10,877 8,176 - 19,053
Interest 145,576 189,935 - 335,511
Equity in (income) loss from partnership - - (649,105) (649,105)
----------------- ----------------- ---------------- ----------------
335,594 393,477 (516,846) 212,225
----------------- ----------------- ---------------- ----------------
Net income (loss) before minority interest (44,640) 47,204 536,040 538,604
Minority Interests' share of net loss 8,232 - - 8,232
----------------- ----------------- ---------------- ----------------
Net income (loss) ($36,408) $47,204 $536,040 $546,836
================= ================= ================ ================
For the six months ended June 30, 1997, the Partnership's operating results were
comprised of its share of the income (losses) from the Pines on Cheyenne Creek
Joint Venture, the Canyon View East Joint Venture and the Mariposa Joint
Ventures, and the Partnership's share of the income from Casabella Associates,
as well as partnership level interest income earned on its short-term
investments, reduced by administrative expenses. A summary of these operating
results (unaudited) appears below:
Cheyenne Canyon Partnership Consolidated
Creek Mariposa View East Level Totals
<S> <C> <C> <C> <C> <C>
Revenue $441,391 $381,690 $450,849 $4,585 $1,278,515
Expenses:
General and administrative - - - 101,852 101,852
Operations 220,291 181,929 187,454 589,674
Depreciation and amortization 91,741 59,251 83,346 - 234,338
Interest 157,584 138,714 188,726 - 485,024
Equity in (income) loss from - - - 13,216 13,216
partnership
----------- ------------ --------------- ------------- -----------------
469,616 379,894 459,526 115,068 1,424,104
----------- ------------ --------------- ------------- -----------------
Net income (loss) before minority (28,225) 1,796 (8,677) (110,483) (145,589)
interest
Minority Interests' share of net loss 5,205 - - - 5,205
----------- ------------ --------------- ------------- -----------------
Net income (loss) ($23,020) $1,796 ($8,677) ($110,483) ($140,384)
=========== ============ =============== ============= =================
</TABLE>
Comparison of Operating Results for the Six Months Ended June 30, 1998 and 1997:
Partnership operations for the six months ended June 30, 1998 generated net
income of $546,836, including a $80,778 capital loss on the sale of Cheyenne
Creek compared with a net loss of $140,384 for the corresponding period in 1997.
Revenue decreased by $446,908 or 35% primarily due to the fact that Mariposa was
sold on September 30, 1997 and Cheyenne Creek was sold on May 28, 1998.
Likewise, the operating expenses decreased by $214,505 or 36% primarily due to
the sale of the properties. General and administrative expenses increased by
$29,745or 23% primarily due to the legal costs associated with the lawsuit filed
regarding the sales contract on Canyon View as discussed in Note 8.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
Response: None
ITEM 2. Changes in Securities
Response: None
ITEM 3. Defaults Upon Senior Securities
Response: None
ITEM 4. Submission of Matters to a Vote of Security Holders
Response: None
ITEM 5. Other Information
ITEM 6. Exhibits and Reports on Form 8-K
Response: The Partnership reported the sale of Cheyenne Creek
and Casabella on Form 8-K filed on June 10, 1998.
SIGNATURES
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.
DEVELOPMENT PARTNERS II
(A Massachusetts Limited Partnership)
By: GP L'Auberge Communities, L.P., A California Limited Partnership,
General Partner
By: L'Auberge Communities, Inc., its General Partner
By: ____/s/ Stephen B. Boyle________________
Stephen B. Boyle, President
Date: August 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Jun-30-1998
<CASH> 4,513,289
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 8,371,986
<DEPRECIATION> (1,830,623)
<TOTAL-ASSETS> 6,541,363
<CURRENT-LIABILITIES> 141,782
<BONDS> 3,812,261
0
0
<COMMON> 0
<OTHER-SE> 7,126,876
<TOTAL-LIABILITY-AND-EQUITY> 11,090,918
<SALES> 0
<TOTAL-REVENUES> 750,829
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 525,819
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 335,511
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 546,836
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
