December 31, 1998
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 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
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(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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Aggregate market value of voting securities held by non-affiliates: Not
applicable, since securities are not actively traded on any exchange.
Documents incorporated by reference: None
The Exhibit Index is located on page F-21
<PAGE>
PART I
ITEM 1. BUSINESS
This form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Partnership to be materially different from any future
results, performance or achievements expressed or implied by the forward-looking
statements. Such factors include, among other things, (i) general economic and
business conditions; (ii) interest rate changes; (iii) competition; (iv)
demographic changes; (v) slow growth initiatives; (vi) governmental regulation,
including the interpretation of tax, labor and environmental laws; (vii); (viii)
required accounting changes; and (ix) other factors over which the Partnership
has little or no control.
Development Partners II (A Massachusetts Limited Partnership) (the
"Partnership"), formerly Berry and Boyle Development Partners II, was formed on
January 9, 1987. The General Partners are Stephen B. Boyle and GP L'Auberge
Communities, L.P., a California Limited Partnership (formerly Berry and Boyle
Management).
The Partnership was formed to operate and ultimately dispose of a diversified
portfolio of income-producing residential real properties directly or through
its joint venture interests in joint ventures which own such properties.
Descriptions of such properties are included below in Item 2, as well as in
Notes 5 and 6 of the Notes to the Consolidated Financial Statements included in
this report and incorporated herein by reference thereto.
As further discussed in Item 2 below and in Note 10 of the Notes to the
Consolidated Financial Statements, after taking into consideration such factors
as the price to be realized, the possible risks of continued ownership and the
anticipated advantages to be gained for the partners, the General Partners
determined during 1997 that it would be in the best interests of the Partnership
and the partners to dissolve the Partnership and liquidate its assets in 1998
(the "Dissolution"). Under the provisions of the Partnership's Partnership
Agreement, the Dissolution of the Partnership required the consent of a majority
in interest of the limited partners. In March 1998, the General Partners
requested the consent of the limited partners to the Dissolution pursuant to a
Consent Solicitation Statement first mailed to the limited partners on or about
March 20, 1998. The consent of a majority in interest of the limited partners to
the dissolution was obtained in April 1998. Two of the properties owned by the
Partnership or in which the Partnership owned an interest were sold to
purchasers unaffiliated with the General Partners. These properties were
Cheyenne Creek and Casabella, both sold in May 1998. Net proceeds from this sale
were used to retire Canyon View East's existing mortgage debt, which had been
due to mature in September 1998. Canyon View East, the sole remaining property
owned by the Partnership, is under contract to be sold to a purchaser
unaffiliated with the general Partners. Net proceeds from the sale will not be
reinvested by the Partnership or its joint ventures, but will be distributed to
the partners so that the Partnership will, in effect, be self-liquidating.
On-site management of the Partnership property is currently provided by an
affiliate of the General Partners. The terms of such property management
services between the Partnership (or joint venture) and the property manager are
embodied in a written management agreement. Property management fees equal 4% of
the gross revenues. The property manager is responsible for on-site operations
and maintenance, generation and collection of rental income, and payment of
operating expenses.
The difference between rental income and expenses related to operations,
including items such as local taxes and assessments, utilities, insurance
premiums, maintenance, repairs and improvements (and reserves therefor),
bookkeeping and payroll expenses, legal and accounting fees, property management
fees and other expenses incurred, constitute the properties' operating cash
flow. The Partnership's internal administrative expenses are paid out of the
Partnership's share of such cash flow from the various properties and from
interest income which the Partnership earns on its short-term investments.
The success of the Partnership will depend upon factors which are difficult to
predict and many of which are beyond the control of the Partnership. Such
factors include, among others, general economic and real estate market
conditions, both on a national basis and in those areas where the Partnership's
investments are located, competitive factors, the availability and cost of
borrowed funds, real estate tax rates, federal and state income tax laws,
operating expenses (including maintenance and insurance), energy costs,
government regulations, and potential liability under and changes in
environmental and other laws, as well as the successful management of the
property.
The Partnership considers itself to be engaged in only one industry segment,
real estate investment.
ITEM 2. PROPERTIES
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. The Partnership also
owned a majority interest in the Pines at Cheyenne Creek Joint Venture which
owned and operated L'Auberge Cheyenne Creek (formerly The Pines on Cheyenne
Creek) ("Cheyenne Creek'), a 108-unit multifamily rental property in Colorado
Springs, Colorado. Cheyenne Creek was sold in May 1998. The Partnership also
owned a minority interest in Casabella Associates which in turn, owned and
operated Casabella, a 154-unit multifamily, rental property in Scottsdale,
Arizona. Casabella also was sold in May 1998. 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 5 of Notes to Consolidated Financial
Statements. As further discussed below under "Pending Sales" and in Note 10 of
the Notes to Consolidated Financial Statements, Canyon View East is under
contract to be sold to a purchaser unaffiliated with the General Partners.
Canyon View East
On March 8, 1989, the Partnership acquired a majority interest in the Canyon
View East Joint Venture. The Partnership has been designated as the managing
venturer of the joint venture. In accordance with the terms of the purchase
agreement and of the joint venture agreement, through December 31, 1998, the
Partnership has contributed total capital of $4,334,180 to the joint venture
which was used to repay a portion of the construction loan from a third party
lender, to pay costs related to the permanent loan refinancing, to cover
operating deficits incurred during the lease up period and to fund certain
capital improvements. The Partnership also incurred $523,022 of property
acquisition and organization costs which were subsequently treated as a capital
contribution to the joint venture.
The property was 91% occupied as of January 15, 1999, compared to 89%
approximately one year ago. At December 1998 and 1997, the market rents for the
various unit types were as follows:
Unit Type ............................ 1998 1997
- ---------------------------------------------- ------ ------
Two bedroom two bath ......................... $1,095 $1,095
Three bedroom two bath ....................... $1,265 $1,265
Cheyenne Creek
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 net selling price was
$6,156,249 subject to certain customary adjustments net of a credit to the
purchaser of $57,600 for capital improvements. The Joint Venture repaid mortgage
financing in the approximate amount of $3,138,795 at closing utilizing a portion
of proceeds from the sale. The Partnership recorded a loss on sale of
approximately $80,778.
Mariposa
On September 30, 1997, Mariposa was sold pursuant to the terms of the Sales
Agreement dated May 6, 1997, as amended. Mariposa was sold to Mariposa
Condominium Ventures Limited Partnership, an Arizona Limited Partnership
unaffiliated with the Partnership. The net selling price for Mariposa was
$5,037,000 subject to certain customary adjustments. Proceeds from the sale were
used for the repayment of mortgage financing in the amount of $2,862,000, paid
at closing. The Partnership recorded a gain on sale of approximately $215,000.
Casabella
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 net selling price was $11,418,702, subject to certain customary
adjustments net of a credit to the purchaser of $120,000 for capital
improvements. Proceeds from sale were used to repay mortgage financing in the
approximate amount of $6,750,400 at closing. The net proceeds to Casabella
Associates from the sale of Casabella were approximately $4,570,300 of which the
Partnership's share is approximately $1,750,425.
Pending Sales
On February 19, 1998, the Partnership entered into Sales Agreement (the
"Agreement") to sell Canyon View East to Tucson Realty Holding Co. Inc., an
unaffiliated third party. The selling price for Canyon View East is
approximately $6,648,503. Under certain conditions, the sale is contingent upon
the approval of the Limited Partners. As of May 13, 1998, the Partnership had
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.
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 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 proceeding 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 the right of first refusal to require
the Partnership to sell the property to the co-venturer 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 intends to seek to expunge
the lis pendens and to defend against the claims of the co-venturer. Although
the Partnership believes that the pending lawsuit has no merit, it could
materially delay the Partnership's sale of Canyon View East. In the event of a
sale to TRH, Canyon View East would be sold together with an adjoining apartment
phase owned by Canyon View Joint Venture, an affiliated entity which is the
Managing Venturer of Development Partners, a public limited partnership.
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. The Closing Date is subject to the conclusion
of the lawsuit.
The Purchase Agreement provides that the purchaser, ("TRH"), has the right to
conduct its "due diligence" review of the property. This review includes, but is
not limited to, a physical inspection and examination of title and environmental
matters. During the due diligence period, the purchaser has the customary right
to withdraw its offer for any reason. Because the property sale is subject to
the purchaser's due diligence review of the property, there can be no assurance
that any or all proposed sale described above will actually occur.
Alternatively, as is customary in similar real estate transactions, if, during
the due diligence period, the purchaser identifies conditions which are
unacceptable to it, the purchaser may seek a purchase price adjustment, which
the General Partners would consider and negotiate as they deem appropriate. The
Purchase Agreement provides that in the event that the purchaser defaults by
failing to close following the end of the due diligence period, the Partnership
will be entitled to retain the purchaser's deposit as liquidated damages.
ITEM 3. LEGAL PROCEEDINGS
There are no pending material legal proceedings to which the Partnership or any
joint venture in which it owns an interest is a party, or of which any of the
properties is subject. Although the General Partners do not believe it to be
material or with merit, for information regarding a lawsuit related to the
pending sale of Canyon View East, see the discussion under the subheading
"Pending Sales" in Item 2 above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The transfer of Units is subject to certain limitations contained in the
Partnership Agreement. There is no public market for the Units and it is not
anticipated that any such public market will develop.
The number of Unit holders as of December 31, 1998 was 1,842.
Distributions are made to the Partners on a quarterly basis based upon Net Cash
from Operations, as calculated under Section 10 of the Partnership Agreement. On
December 29, 1997, proceeds from the sale of Mariposa were distributed as return
of capital. Total cash distributions to the Limited Partners for 1998 and 1997
were paid as follows:
<TABLE>
Date of
Quarter Ended ............................................ Payment Amount
- ---------------------------------------------------------- ------------------- -----------
<S> <C> <C>
March 31, 1997 ........................................... $ -0-
June 30, 1997 ............................................ $ -0-
September 30, 1997 ....................................... $ -0-
December 31, 1997 ........................................ December 29, 1997 $ 1,663,335
March 31, 1998 ........................................... $ -0-
June 30, 1998 ............................................ $ -0-
September 30, 1998 ....................................... September 18, 1998 $ 166,334
December 31, 1998 ........................................ $ -0-
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Partnership and consolidated
subsidiaries has been derived from consolidated financial statements audited by
PricewaterhouseCoopers, LLP, whose reports for the periods ended December 31,
1998, 1997 and 1996 are included elsewhere in the Form 10K and should be read in
conjunction with the full consolidated financial statements of the Partnership
including the Notes thereto.
<TABLE>
Year Ended
-------------------------------------------------------------------------
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
<S> <C> <C> <C> <C> <C>
Rental income $1,224,171 $2,344,767 $2,497,278 $2,668,640 $2,616,008
Net income (loss) $534,828 ($936,619) ($568,209) ($105,066) ($83,198)
Net income (loss) allocated to Partners:
Limited Partners - Per Unit - basic and
diluted:
Aggregate 36,963 Units $14.21 ($27.38) ($15.22) ($2.81) ($2.23)
General Partners $9,570 ($75,403) ($5,682) ($1,051) ($832)
Cash distributions to Partners:
Limited Partners:
Aggregate 36,963 Units $4.50 $45.00 $3.75 $9.15 $13.50
General Partners - - $2,829 $6,902 $10,184
Total assets $7,144,485 $14,419,602 $20,190,066 $20,996,900 $21,434,192
Long term obligations - $6,960,055 $9,890,787 $9,991,674 $10,083,673
</TABLE>
<PAGE>
ITEM 7. 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
During its public offering in 1987 and 1988, the Partnership admitted 1,918
investors who purchased a total of 36,963 Units aggregating $18,481,500. These
offering proceeds, net of organizational and offering costs of $2,772,225,
provided $15,709,275 of net proceeds to be used for the purchase of
income-producing residential properties, including related fees and expenses,
and working capital reserves. The Partnership expended $14,689,033 to (i)
acquire its interests in the Pines on Cheyenne Creek Joint Venture, the Mariposa
Joint Venture, the Canyon View East Joint Venture and Associates, (ii) to pay
acquisition expenses, including acquisition fees to the General Partners, (iii)
pay costs associated with the refinancing of the permanent loans for Cheyenne
Creek, Mariposa and Canyon View East and (iv) to cover operating deficits
incurred during the initial lease up period. The remaining net proceeds of
$1,020,242 were used to establish working capital reserves sufficient to meet
the future needs of the Partnership, including contributions that may be
required at the various joint ventures, as determined by the General Partners.
As of December 31, 1998, $666,512 cumulatively was contributed to the joint
ventures for this purpose.
In addition to the proceeds generated from the public offering, the Partnership
has utilized external sources of financing at the joint venture level to
purchase properties. The Partnership Agreement limits the aggregate mortgage
indebtedness which may be incurred in connection with the acquisition of
Partnership properties to 80% of the purchase price of such properties.
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 December
31, 1998, the Partnership had cash and cash equivalents of $602,283 compared
with $469,355 at December 31, 1997. The aggregate net increase in working
capital reserves was $132,928. The increase resulted primarily from cash
provided by the sale of the property of $6,156,249 plus distributions of
$1,802,214 received from Casabella Associates in connection with the sale of
Casabella, offset by the payment of the mortgage in the amount of $6,960,055,
distributions to partners of $166,334, cash required for operations of $126,053,
capital improvements in the amount of $24,222 and distributions to minority
interest partners.
In the event that the remaining property of Partnership is not sold pursuant to
the Purchase Agreement, the Partnership would continue to operate the property
until a substitute sale could be negotiated and consummated. The General
Partners of the Partnership do not believe the outcome of the pending litigation
relating to the sale of the remaining property will have a material affect on
the results of operations, liquidity, or financial condition of the Partnership.
The Partnership's ability to generate cash adequate to meet its needs is
dependent primarily on the successful operations of its real estate investment.
Such ability may also be dependent upon the future availability of bank
borrowings, and upon the future refinancing and sale of the Partnership's real
estate investment and the collection of any mortgage receivable which may result
from such a sale. These sources of liquidity will be used by the Partnership for
payment of expenses related to real estate operations, debt service and
professional and management fees and expenses. Net Cash From Operations and Net
Proceeds, if any, as defined in the Partnership Agreement, will then be
available for distribution to the Partners in accordance with Section 10 of the
Partnership Agreement. The General Partners believe that the current working
capital reserves together with projected cash flows for 1999 are adequate to
meet the Partnership's operating cash needs in the coming year if the
Partnership is required to continue to own and operate its property.
Results of Operations
For the year ended December 31, 1998, the Partnership's operating results were
comprised of its share of the income (losses) from Cheyenne Creek, (through the
date of sale, May 28, 1998), the Canyon View East Joint Venture and the
Partnership's share of the income from Casabella Associates (through the date of
sale, May 22, 1998), 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:
<TABLE>
Cheyenne Canyon Partnership Consolidated
Creek View East Level Totals
<S> <C> <C> <C> <C>
Revenue $371,732 $853,679 $41,500 $1,266,911
Loss on Sale (80,778) (80,778)
-------------- -------------- ------------ ----------------
290,954 853,679 41,500 1,186,133
Expenses:
General and administrative - - 341,761 341,761
Operations 179,141 406,410 585,551
Depreciation and amortization 10,877 11,583 - 22,460
Interest 145,576 205,063 - 350,639
Equity in income from partnership - - (640,874) (640,874)
-------------- -------------- ------------ ----------------
335,594 623,056 (299,113) 659,537
-------------- -------------- ------------ ----------------
Net income (loss) before minority interest (44,640) 230,623 340,613 526,596
Minority Interests' share of net loss 8,232 - - 8,232
-------------- -------------- ------------ ----------------
Net income (loss) ($36,408) $230,623 $340,613 $534,828
============== ============== ============ ================
</TABLE>
For the year ended December 31, 1997, the Partnership's operating results were
comprised of its share of the income (losses) from Cheyenne Creek, Mariposa
(through the date of sale, September 30, 1997), 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:
<TABLE>
Cheyenne Canyon Partnership Consolidated
Creek Mariposa View East Level Totals
<S> <C> <C> <C> <C> <C>
Revenue $900,213 $768,652 $894,780 $39,263 $2,602,908
Expenses:
General and administrative - - - 216,339 216,339
Operating Expense 476,076 324,068 392,762 1,048 1,193,954
Depreciation and amortization 197,439 98,061 174,511 - 470,011
Impairment 861,066 861,066
Interest 316,663 232,920 378,700 - 928,283
Equity in loss from partnership - - - 45,244 45,244
-------------- --------------- -------------- ------------ -------------
1,851,244 655,049 945,973 262,631 3,714,897
-------------- --------------- -------------- ------------ -------------
Net income (loss) before minority interest (951,031) 113,603 (51,193) (223,368) (1,111,989)
-------------- --------------- -------------- ------------ -------------
Minority Interests' share of net loss 175,370 - - - 175,370
============== =============== ============== ============ =============
Net income (loss) ($775,661) $113,603 ($51,193) ($223,368) ($936,619)
============== =============== ============== ============ =============
</TABLE>
For the year ended December 31, 1996, 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:
<TABLE>
Cheyenne Canyon Partnership Consolidated
Creek Mariposa View East Level Totals
<S> <C> <C> <C> <C> <C>
Revenue $974,124 $712,602 $812,990 $15,808 $2,515,524
Expenses:
General and Administrative - 383 10 353,242 353,635
Operating Expense 428,227 363,463 404,581 10,743 1,207,014
Depreciation and amortization 183,482 118,497 166,693 - 468,672
Interest 317,456 279,524 380,305 - 977,285
Equity in loss from partnership - - - 68,837 68,837
-------------- ----------- ------------ -------------- --------------
929,165 761,867 951,589 432,822 3,075,443
-------------- ----------- ------------ -------------- --------------
Net income (loss) before minority interest 44,959 (49,265) (138,599) (417,014) (559,919)
Minority Interests' share of net income (8,290) - - - (8,290)
-------------- ----------- ------------ -------------- --------------
Net income (loss) $36,669 ($49,265) ($138,599) ($417,014) ($568,209)
============== =========== ============ ============== ==============
</TABLE>
Comparison of 1998 and 1997 Operating Results:
Partnership operations for the year ended December 31, 1998 generated net income
of $534,828, including a $80,778 loss on the sale of Cheyenne Creek compared
with a net loss of $936,619 for the corresponding period in 1997. Rental revenue
decreased by $1,120,596 or 48% 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 $608,403 or 51% primarily due to the sale of the
properties. General and administrative expenses increased by $125,422 or 58%
primarily due to the legal costs associated with the lawsuit filed regarding the
sales contract on Canyon View as discussed in Note 10.
Comparison of 1997 and 1996 Operating Results:
Partnership operations for the year ended December 31, 1997 generated net loss
of $936,619, including a $215,233 capital gain on the sale of Mariposa compared
with a net loss of $568,209 for the corresponding period in 1996. Rental revenue
decreased by $152,511 or 6% primarily due to the fact that Mariposa was sold on
September 30, 1997. Operating expenses decreased by $13,060 or 1%. Cheyenne
Creek and Canyon View's operating expenses increased by $36,030 primarily due to
one-time costs of preparing the properties for disposition, including an
increase in repairs, maintenance, advertising and promotion expense. However,
Mariposa's operating expenses decreased by $39,395 since only nine months of
cost are represented. General and administrative expenses decreased by $137,296
primarily due to the Evans Withycombe and Highland termination fees of $65,715
in 1996. A contributing factor to the additional reduction of $71,581 was due in
part to the re-stabilization of costs associated with Partnership
administrative, financial and investor services functions following the office
relocation to Colorado Springs. In addition, as discussed in Note 2 of the Notes
to Consolidated Financial Statements, the Partnership recorded an impairment of
$861,066 on Cheyenne Creek in 1997.
Projected 1999 Operating Results:
As further discussed in Item 2 above and in Note 10 of the Notes to the
Consolidated Financial Statements, the remaining property in which the
Partnership owns an interest is under contract to be sold to a purchaser
unaffiliated with the General Partners. The Closing Date is subject to the
conclusion of the lawsuit discussed in Item 2. If the sale does occur as
anticipated, the Partnership will likely be liquidated in 1999. Although there
can be no assurance the Partnership will dispose of its remaining property
during 1999 pursuant to the Purchase Agreements or otherwise, the Partnership
will continue to seek to dispose of its remaining property. In the event that
the Partnership were to dispose of its remaining property during 1999, operating
results of the Partnership would vary significantly from those achieved in prior
periods.
Year 2000 Issues
The Partnership's management has addressed the Year 2000 issue of its management
information systems and financial reporting systems.
The remaining real-estate asset of the Partnership is Canyon View East, a
96-unit multi-family residential property. Canyon View East's management
information system is AMSI and is already Year 2000 compliant.
The Partnership's only mission critical system is its financial reporting
software which is currently maintained on the Platinum accounting software
system, which has not been updated to handle the Year 2000 date change. Because
the Partnership has entered into a Purchase Agreement to sell its remaining
property, it is anticipated to be completely liquidated by the end of 1999 and
the year 2000 issue will not materially affect the results of operations or
financial condition of the Partnership. However, if any financial information
for the Partnership needs to be maintained into the year 2000, the Partnership's
management has already purchased AMSI's financial reporting system, which is
Year 2000 compliant. The financial records would be transferred to the AMSI
accounting software prior to the end of 1999.
The accounting systems are run on the Novell network, which needs to be upgraded
for compliance with the Year 2000. The Partnership's anticipated share of the
cost of this upgrade is $450. The upgrade is scheduled to take place by the end
of March 1999.
Management anticipates that all essential functions relative to maintaining the
Partnership, if any remain at that time, will be operational and the costs
associated with Year 2000 compliance will not have a material impact on the
Partnership.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Appendix A to this Report.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership is a limited partnership and, as such, has no executive
officers or directors. The General Partners of the Partnership are Stephen B.
Boyle and GP L'Auberge Communities, L.P., a California limited partnership, of
which L'Auberge Communities Inc. (formerly known as Berry and Boyle Inc.)
("L'Auberge") is the general partner.
Stephen B. Boyle
Stephen B. Boyle, age 58, is President, Executive Officer and Director of
L'Auberge and a general partner and co-founder of LP L'Auberge Communities, a
California limited partnership (formerly Berry and Boyle), a limited partnership
formed in 1983 to provide funds to various affiliated general partners of real
estate limited partnerships, one of which is GP L'Auberge Communities, L.P.
GP L'Auberge Communities, L.P.
GP L'Auberge Communities, L.P. was formed in 1983 for the purpose of
acting as a general partner in partnerships formed to invest directly or
indirectly in real property. L'Auberge is the sole general partner of GP
L'Auberge Communities, L.P. The following sets forth certain biographical
information with respect to the executive officers and directors of L'Auberge
other than Stephen B. Boyle who is discussed above. There are no familial
relationships between or among any officer or director and any other officer or
director.
Name Position
-----------------------------
Stephen B. Boyle President, Executive Officer and Director
-----------------------------
Earl C. Robertson Executive Vice President and Chief
Financial Officer
-----------------------------
Donna Popke Vice President and Secretary
Earl C. Robertson, age 51, has been Executive Vice President of L'Auberge since
April 1995 and its Chief Financial Officer since May 1996. Mr. Robertson joined
L'Auberge in April 1995 as Executive Vice President. Prior to joining L'Auberge,
Mr. Robertson had over 20 years experience as a senior development officer,
partner and consultant in several prominent real estate development companies,
including Potomac Investment Associates, a developer of planned golf course
communities nationwide, where he was employed from 1989 to June 1993. He also
served as a consultant to Potomac Sports Properties from July 1993 to April
1995. Mr. Robertson was also a key member of the management team that developed
the nationally acclaimed Inn at the Market in Seattle.
Donna Popke, age 39, has been Vice President of L'Auberge since November 1995.
Ms. Popke joined L'Auberge in June 1994 as Accounting Manager. Prior to joining
L'Auberge, Ms. Popke was Accounting Manager for David R. Sellon & Company, a
Colorado Springs land development company, from August 1989 to June 1994 and for
Intermec of the Rockies from September 1985 to July 1989.
ITEM 11. EXECUTIVE COMPENSATION
None of the General Partners or any of their officers or directors received any
compensation from the Partnership. See Item 13 below with respect to a
description of certain transactions of the General Partners and their affiliates
with the Partnership.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 1, 1999, no person of record owned or was known by the General
Partners to own beneficially more than 5% of the Partnership's outstanding
Units.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended December 31, 1998, the Partnership paid or accrued
remuneration to the General Partners or their affiliates as set forth below. In
addition to the information provided herein, certain transactions are described
in Note 9 in the Notes to Financial Statements appearing in Appendix A, which
are included in this report and are incorporated herein by reference thereto.
<TABLE>
<S> <C> <C>
Net Cash From Operations distributed during 1998 to the General Partners $ -
Allocation of Income to the General Partners $ 9,570
Property management fees paid to an affiliate of the General Partners $48,745
Reimbursements to General Partners $67,956
</TABLE>
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1,2 See Page F-2
3 See Exhibit Index contained herein
(b) Reports on Form 8-K
None
(c) See Exhibit Index contained herein
(d) See Page F-2.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
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/ Earl C. Robertson________________
Earl C. Robertson, Executive Vice President and
Chief Financial Officer
Date: March 1, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
___/s/ Stephen B. Boyle _____ Director, President and March 1, 1999
--------------------
STEPHEN B. BOYLE Principal Executive
Officer of L'Auberge
Communities, Inc.
___/s/ Earl C. Robertson _ Executive Vice President and March 1, 1999
---------------------
EARL C. ROBERTSON Principal Financial Officer of
L'Auberge Communities, Inc.
<PAGE>
APPENDIX A
DEVELOPMENT PARTNERS II
(A Massachusetts Limited Partnership)
AND SUBSIDIARIES
---------
CONSOLIDATED FINANCIAL STATEMENTS
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
For each of the three years in the period ended December 31, 1998
<PAGE>
DEVELOPMENT PARTNERS II
(A Massachusetts Limited Partnership)
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants F-3
Consolidated Balance Sheets at December 31, 1998 and 1997 F-4
Consolidated Statements of Operations for the years ended December 31, 1998,
1997 and 1996 F-5
Consolidated Statements of Partners' Equity (Deficit) for the years ended
December 31, 1998, 1997 and 1996 F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997, and 1996 F-7 -- F-8
Notes to Consolidated Financial Statements F-9 -- F-20
All Schedules are omitted as they are not applicable, not required, or the
information is provided in the financial statements or the notes thereto.
<PAGE>
Report of Independent Accountants
To the Partners of
Development Partners II
(a Massachusetts Limited Partnership)
In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of operations, partners' equity (deficit) and cash flows
present fairly in all material respects, the financial position of Development
Partners II, a Massachusetts Limited Partnership (the "Partnership"), and its
subsidiaries as of December 31, 1998 and 1997, and the results of operations and
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the General Partners of the Partnership;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 10, the General Partners of the Partnership have entered
into a sales agreement to sell the remaining property of the Partnership. If
closing of this sale were to occur, any proceeds from sale will be distributed
in accordance with the terms of the Partnership Agreement and the Partnership
will likely be liquidated.
PricewaterhouseCoopers, LLP
Denver, Colorado
February 26, 1999
<PAGE>
DEVELOPMENT PARTNERS II
(A Massachusetts Limited Partnership)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
---------------
<TABLE>
ASSETS
1998 1997
---- ----
Assets held for sale (Note 10)
<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 (1,830,623) (4,842,299)
impairment
--------------- --------------
6,541,363 12,754,168
Cash and cash equivalents 602,283 469,355
Deposits and prepaid expenses - 1,446
Accounts receivable 839 6,730
Investment in partnership - 1,165,443
Deferred expenses, net of accumulated
amortization of $558,886 and $536,426 - 22,460
--------------- --------------
Total assets $7,144,485 $14,419,602
=============== ==============
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Mortgage notes payable $ - $6,960,055
Accounts payable 46,156 89,606
Accrued expenses 60,110 137,348
Due to affiliates (Note 9) 53,117 16,787
Rents received in advance - 850
Tenant security deposits 18,335 55,025
--------------- --------------
Total liabilities 177,718 7,259,671
Minority Interest - 557,555
General Partners' deficit (1,590) (11,160)
Limited Partners' equity 6,968,357 6,613,536
--------------- --------------
Total liabilities and partners' equity $7,144,485 $14,419,602
=============== ==============
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Revenue
<S> <C> <C> <C>
Rental income $1,224,171 $2,344,767 $2,497,278
Interest income 42,740 42,908 18,246
(Loss) gain from sale of property (80,778) 215,233 -
--------------- -------------- ---------------
1,186,133 2,602,908 2,515,524
Operating Expenses 585,551 1,193,954 1,207,014
Interest 350,639 928,283 977,285
Depreciation and amortization 22,460 470,011 468,672
Impairment - Cheyenne Creek (Note 2) - 861,066 -
General and administrative 341,761 216,339 353,635
Equity in (income) loss from partnership (640,874) 45,244 68,837
--------------- -------------- ---------------
659,537 3,714,897 3,075,443
--------------- -------------- ---------------
Net income (loss) before minority interest 526,596 (1,111,989) (559,919)
Minority interests' equity in
subsidiary loss (income) 8,232 175,370 (8,290)
--------------- -------------- ---------------
Net income (loss) $534,828 ($936,619) ($568,209)
=============== ============== ===============
Net income (loss) allocated to:
General Partners $9,570 $75,403 ($5,682)
Basic and diluted per unit net income (loss) allocated to
Investor Limited
Partner interest:
36,963 units issued $14.21 ($27.38) ($15.22)
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
for the years ended December 31, 1998, 1997 and 1996
Investor Total
General Limited Partners'
Partners Partners Equity
<S> <C> <C> <C>
Balance at December 31, 1995 ($78,052) $9,990,032 $9,911,980
Cash distributions (2,829) (138,612) (141,441)
Net loss (5,682) (562,527) (568,209)
--------------- --------------- --------------
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) 6,613,536 6,602,376
Minority interest absorbed - (4,103) (4,103)
Cash distributions - (166,334) (166,334)
Net income 9,570 525,258 534,828
--------------- --------------- --------------
Balance at December 31, 1998 ($1,590) $6,968,357 $6,966,767
=============== =============== ==============
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Interest received $42,740 $42,908 $17,516
Cash received from rental income 1,186,631 2,337,650 2,499,640
General and administrative expenses (311,429) (230,935) (339,475)
Operating expense (664,755) (1,224,522) (1,198,060)
Interest paid (379,240) (940,192) (977,699)
--------------- -------------- ---------------
Net cash (used in) provided by operating (126,053) (15,091) 1,922
activities
Cash flows from investing activities:
Proceeds from sale of property 6,156,249 5,037,417 -
Capital improvements (24,222) (240,400) (236,642)
Proceeds from maturities of short-term investments - - 200,329
Distributions received from partnership 1,802,214 - 180,311
Deferred costs - - 9,300
--------------- -------------- ---------------
Net cash provided by investing activities 7,934,241 4,797,017 153,298
Cash flows from financing activities:
Distributions to partners (166,334) (1,663,335) (141,441)
Cash paid for loan refinancing - (33,780) -
Principal payments on mortgage notes payable (6,960,055) (2,930,731) (100,887)
Distributions paid to the minority interest (549,323) (5,532) (30,795)
Contributions from the minority interest - - 6,113
Cash paid for deposits 452 2,061 (2,060)
--------------- -------------- ---------------
Net cash used in financing activities (7,675,260) (4,631,317) (269,070)
--------------- -------------- ---------------
Net increase (decrease) in cash and cash 132,928 150,609 (113,850)
equivalents
Cash and cash equivalents at beginning of 469,355 318,746 432,596
year
--------------- -------------- ---------------
Cash and cash equivalents at end of year $602,283 $469,355 $318,746
=============== ============== ===============
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1998, 1997 and 1996
Reconciliation of net income (loss) to net cash (used in) provided by operating
activities:
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $534,828 ($936,619) ($568,209)
Adjustments to reconcile net loss to net
cash (used in)
provided by operating activities:
Depreciation and amortization 22,460 470,011 468,672
Loss (gain) from sale of property 80,778 (215,233) -
Equity in (income) loss from partnership (640,874) 45,244 68,837
Minority interests' equity in subsidiary (8,232) (175,370) 8,290
income (loss)
Change in assets and liabilities net of effects of investing and financing
activities:
Decrease (increase) in accounts 5,891 (6,380) 2,217
receivable
Decrease in deposits and prepaid expenses 994 1,066 2,020
(Decrease) increase in accounts payable (120,688) (51,116) 11,981
and accrued expenses
Increase (decrease) in due to affiliates 36,330 (643) 5,752
(Decrease) increase in rents received in advance (850) (1,757) 2,607
Decrease in tenant security deposits (36,690) (5,360) (245)
--------------- -------------- ---------------
Net cash (used in) provided by operating ($126,053) ($15,091) $1,922
activities
=============== ============== ===============
</TABLE>
<PAGE>
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 1,842
investors at December 31, 1998.
The Partnership can continue until December 31, 2010, unless earlier terminated
by the sale of all or substantially all of the assets of the Partnership, or
otherwise provided in the Partnership Agreement (see Note 10).
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 (Cheyenne Creek), Mariposa Joint Venture (Mariposa) and Canyon
View East Joint Venture (Canyon View East). All intercompany accounts
and transactions have been eliminated in consolidation. The Partnership
accounts for its investment in Casabella Associates (Casabella)
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 5 and 6
regarding the termination of the joint ventures and sale of Mariposa,
Cheyenne Creek and Casabella.
The Partnership follows the accrual basis of accounting.
The Partnership considers itself to have been engaged in only one
industry segment, real estate.
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
As discussed further in Note 10, as of December 31, 1997, the
Partnership recorded its property as Assets Held for Sale on the
consolidated balance sheets. Accordingly, the Partnership stopped
depreciating these assets effective January 1, 1998.
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
The Partnership utilizes the provisions of SFAS No. 121, Accounting for
the Impairment of Long -Lived Assets and for Long-Lived Assets to be
Disposed Of, to review for impairment. 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 exceeds the fair value of the assets. As further discussed
in Note 10, assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
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. As
further discussed in Note 5, the Partnership sold Cheyenne Creek in May
1998 and recorded a loss on sale of $80,778.
I. Reclassification
Certain items in the financial statements for the years ended December
31, 1996 have been reclassified to conform to the 1997 and 1998
presentation.
<PAGE>
3. Assets held for
sale:
Assets held for sale consisted of the following at December 31, 1998:
<TABLE>
Initial Cost Costs Capitalized Amount at Which Carried
to Subsequent to at Close of
Partnership Acquisition Period
--------------------------------- ------------------------------- -------------------------------- ----------- ---------
Buildings Equipment, Buildings Equipment, Buildings Equipment,
Property and Furnishings and Furnishings and Furnishings Accumulated
Description Land Improvements & Fixtures Land Improvements & Fixtures Land Improvements & Fixtures Depreciation Total
- ----------- --------------------------------- ------------------------------- -------------------------------- ----------- ---------
Canyon View East, a 96-unit residential rental
complex located in Tucson, Arizona
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1,844,761 5,801,389 500,895 12,050 44,131 168,760 1,856,811 5,845,520 669,655 (1,830,623) 6,541,363
---------------------------------- ------------------------------ ------------------------------ ------------ ----------
$1,844,761 $5,801,389 $500,895 $12,050 $44,131 $168,760 $1,856,811 $5,845,520 $669,655 ($1,830,623) $6,541,363
================================== ============================== ============================== ============ ==========
The changes in total real estate assets for the The change in accumulated depreciation for the
years ended December 31, 1998, 1997, and 1996 years ended December 31, 1998, 1997, and 1996
are as follows: are as follows:
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of $17,596,467 $23,451,682 $23,215,040 Balance, beginning of year $4,842,299 $4,807,665 $4,359,624
year
Additions during the Depreciation for the period - 447,002 448,041
period:
Improvements 24,222 240,400 236,642
Impairment of Cheyenne Creek - 861,066 -
Deductions during the
period: Disposition of Mariposa - (1,273,434) -
Sale of Mariposa - (6,095,615) -
Deductions during the Disposition of Cheyenne Creek ($3,011,676) - -
period:
Sale of Cheyenne Creek (9,248,703) - -
======================================== ==================================
Balance at end of year 8,371,986 $17,596,467 $23,451,682 Balance at end of year $1,830,623 $4,842,299 $4,807,665
======================================== ==================================
</TABLE>
<PAGE>
4. Cash and Cash Equivalents:
Cash and cash equivalents at December 31, 1998 and 1997 consisted of the
following:
1998 1997
---- ----
Cash on hand $602,283 $469,355
5. Joint Venture and Property Acquisitions:
The Partnership 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. Cheyenne Creek and Casabella were
sold in May 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 comprised
of the Partnership, the Affiliated Partnership and the property developer. The
Partnership owned 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 were consolidated into the Partnership. The Affiliated
Partnership owned an 18% interest in the Pines on Cheyenne Creek.
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 December 31, 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 (4) 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.
5. Joint Venture and Property Acquisitions, continued
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 net selling price was
$6,156,249, subject to certain customary adjustments net of a credit to the
purchaser of $56,700 for capital improvements. The Joint Venture repaid mortgage
financing in the approximate amount of $3,138,795 at closing utilizing a portion
of proceeds from the sale. The Partnership recorded a loss on sale of
approximately $80,778
Mariposa
On February 3, 1989, the Partnership acquired a joint venture interest in the
Mariposa Joint Venture which owned and operated an 84-unit residential property
located in Scottsdale, Arizona known as Mariposa. Since the Partnership owned a
majority interest in the Mariposa Joint Venture, the accounts and operations of
the Mariposa Joint Venture were consolidated into those of the Partnership. The
Partnership had been designated the managing joint venture partner of the
Mariposa Joint Venture and had 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 co-venture partner was an affiliate of Evans Withycombe, Inc. ("EWI"), a
Phoenix based residential development, construction and management firm. EWI
developed the property known as Mariposa.
In accordance with the terms of the sale agreement and the joint venture
agreement, through December 31, 1998, the Partnership has contributed $3,301,020
to the Mariposa Joint Venture, 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) pay for certain capital improvements,
(4) fund $430,474 of property acquisition costs and (5) pay certain costs
associated with the refinancing of the permanent loan. 5. Joint Venture and
Property Acquisitions, continued
JANUARY 1, 1996 THROUGH MAY 13, 1996
Net cash from operations (as defined in the joint venture agreement) was 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 10.6% 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 70% to the Partnership and 30% to the other joint
venture partner.
All losses from operations and depreciation for the Mariposa Joint Venture were
allocated 99.5% to the Partnership and 0.5% to the other joint venture partner.
All profits from operations were allocated to each joint venture partner pro
rata in accordance with the distribution of net cash from operations for such
fiscal year.
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.
MAY 14, 1996 THROUGH SEPTEMBER 30, 1997
On May 14, 1996, the Partnership and certain affiliates consummated an agreement
with Evans Withycombe Management, Inc. and certain of its affiliates ("EWI")
which separated the interests of EWI and the Partnership, thus affording the
Partnership greater flexibility in the operation and disposition of the
properties. In consideration of a payment by the Partnership to EWI of $38,732
and for certain mutual releases, EWI (i) relinquished its contract to manage
certain Partnership properties and its option to exercise its rights of first
refusal with regard to the sale of those properties and (ii) assigned all of its
interest in the Mariposa Joint Venture to the Partnership (while preserving the
economic interests of the venturer in the Joint Venture), which resulting in the
dissolution of the Mariposa Joint Venture. EWI may still share in the cash flow
distributions or proceeds from sale if certain performance levels are met.
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 5. Joint Venture and Property Acquisitions, continued
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 December 31, 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 (4) 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.
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 years ended December 31, 1998, 1997 and 1996, the Canyon View East Joint
Venture had a net income of $230,623 and net losses of $51,193 and $138,599,
respectively.
6. 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 was
$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 was
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 6. Investment in Partnership, continued:
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 net selling price was
$11,418,702, subject to certain customary adjustments net of a credit to the
purchaser of $120,000 for capital improvements. Casabella Associates 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 $1,750,425.
Casabella Associates recognized a gain on sale of $2,066,086, of which the
Partnership's share was approximately $791,310 less the $186,300 difference
between the Partnership's carrying value of its investment in Casabella
Associates and the amount of equity in the underlying assets. EWI did not share
in the proceeds from sale of the properties since certain performance levels
were not satisfied.
Supplemental financial statements for Casabella Associates are presented in an
exhibit to this 10-K.
7. Mortgage Notes Payable:
All of the property owned by the Partnership was pledged as collateral for the
nonrecourse mortgage notes payable outstanding at December 31, 1997, which
consisted of the following:
1997
Cheyenne Creek $3,124,041
Canyon View East 3,836,014
$6,960,055
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 5, the Partnership
sold Cheyenne Creek during 1998. In connection with this sale, the outstanding
mortgage debt for the property was paid off. The Partnership incurred a
pre-payment penalty of $15,543 which amount is included in interest expense in
the Consolidated Statements of Operations for the year ended December 31, 1998.
Mariposa
The original maturity date for this note was September 15, 1997. On September
10, 1997, the lender extended the terms of this mortgage note for a period of
one year. The monthly principal and interest payments for Mariposa of $25,759
and the fixed interest rate of 9.75% remained unchanged. The terms of the
agreement provided for a prepayment penalty of .5% of the outstanding loan
balance if the notes were paid prior to 60 days before the maturity date. As
discussed in Note 5, on September 30, 1997 the Partnership sold Mariposa. In
connection with this sale, the outstanding mortgage debt for the property was
paid off. The Partnership incurred a prepayment penalty fee of $14,139, which
amount is included in interest expense in the Consolidated Statement of
Operations for the year ended December 31, 1997.
7. Mortgage Notes Payable, continued
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
utilized excess proceeds from the sale of Cheyenne Creek and Casabella to pay
off the mortgage debt of Canyon View East Joint Venture in the amount of
$3,810,302 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
December 31, 1997 consisted of the following:
1997
Cheyenne Creek $13,017
Canyon View East 15,584
$28,601
8. 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.
The allocation of the related profits, losses, and distributions, if any, would
be different than described above in the case of certain events as defined in
the Partnership Agreement, such as the sale of an investment property or an
interest in a joint venture partnership.
Proceeds and gain from the sale of properties is to be allocated as defined in
the Partnership Agreement. The Limited Partners received 100% of the excess cash
from sale. The total gain on sale of Casabella and Cheyenne Creek of $539,128
was allocated as follows. The General Partner received a gain on sale allocation
of approximately $9,631 and the Limited Partners received a gain on sale
allocation of approximately $529,497. These allocations were in accordance with
the terms of the Partnership Agreement.
In 1997, the total gain on the sale of Mariposa of $215,233 was allocated as
follows. The General Partners received a gain from sale allocation of $88,006
and the Limited Partners a gain from sale allocation of $127,227 in accordance
with the terms of the Partnership Agreement.
9. 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 December 31, 1998 and 1997 consisted of
$53,117 and $16,787, respectively, relating to reimbursable costs due to
L'Auberge Communities, Inc.
9. Related Party Transactions, continued:
In 1998, 1997 and 1996, general and administrative expenses included $67,956,
$65,240 and $83,195, respectively, of salary reimbursements paid to the General
Partners for certain administrative and accounting personnel who performed
services for the Partnership.
During the years ended December 31, 1996, property management fees of $14,590
were paid to Evans Withycombe, Inc. These fees were 5% of rental revenue.
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
December 31, 1998, 1997 and 1996, property management fees of $48,745, $92,249,
and $81,243, respectively, were paid to Residential Services - L'Auberge. These
fees were 4% of rental revenue.
10. 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. In
February 1998, the Partnership entered into a sales agreement (the "Sales
Agreement") to sell Canyon View East to Tucson Realty Holding Co., Inc. ("TRH"),
an unaffiliated third party, for approximately $6,648,503. The sale was approved
by the Limited Partners in May 1998.
Although the General Partners do not believe it to be material or with merit, a
lawsuit related to the pending sale of Canyon View East was filed in March 1998.
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
is 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 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 Sales
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 Sales 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 Sales Agreement.
In March 1998, the co-venturer filed a lawsuit claiming that it, not TRH, has
the right to acquire Canyon View East. The lawsuit seeks specific performance of
its right of first refusal 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 filed a lis pendens on the property as a means of
blocking the sale to TRH.
The Partnership is attempting to expunge the lis pendens and is defending
against the claims of the co-venturer. The Partnership 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 in an amount to be proven
at trial. In September 1998, the Partnership amended its counterclaim to allege
additional claims for unjustifiable lis pendens, declaratory judgment,
fraudulent and negligent misrepresentation, constructive fraud and fiduciary
breach and private cause of action for scheme and artifice to defraud.
10. Assets Held for Sale, continued:
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.
In July 1998, the co-venturer 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.
On January 6, 1999, the court denied each side's respective motion for summary
judgment. Discovery is still underway and the trial, which was scheduled for
January 12, 1999, was continued to May 18, 1999. Although the Partnership
believes that the co-venturer's lawsuit has no merit, it has delayed the
Partnership's sale of Canyon View East. The General Partners do not believe that
the outcome of this case will have a material affect on the results of
operations, liquidity, or financial condition of the Partnership.
As it is the intent of the General Partners to pursue the sale to TRH, the
Partnership has recorded the asset 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 effective December 31, 1997. In accordance with SFAS
121, the Partnership stopped depreciating these assets effective January 1,
1998. If closing of the sale were 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>
APPENDIX B
CASABELLA ASSOCIATES
(A Massachusetts Limited Partnership)
AND SUBSIDIARIES
---------
CONSOLIDATED FINANCIAL STATEMENTS
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
For each of the three years in the period ended December 31, 1998
<PAGE>
CASABELLA ASSOCIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
Information with respect to the years ended
December 31, 1996 and 1995 is unaudited
<TABLE>
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
1998 1997
---- ----
(unaudited)
ASSETS
Assets held for sale (Notes 9)
<S> <C> <C>
Land $ - $2,809,851
Buildings and improvements 7,648,060
Equipment, furnishings and fixtures 1,122,596
------------- -------------
11,580,507
Less accumulated depreciation (2,228,967)
------------- -------------
9,351,540
Cash and cash equivalents 82,932
Accounts and interest receivable 5,907
Real estate tax escrow and prepaid expenses 25,821
Deposits 1,950
Deferred expenses, net of accumulated
amortization of $137,841 and $123,914 13,927
------------- -------------
Total assets $ - $9,482,077
============= =============
LIABILITIES AND PARTNERS' EQUITY
Mortgage note payable $ - $6,766,437
Accounts payable and accrued expenses 144,493
Due to affiliates (Note 8) 2,195
Tenant security deposits 23,090
------------- -------------
Total liabilities 6,936,215
Partners' equity 2,545,862
------------- -------------
Total liabilities and partners' equity $ - $9,482,077
============= =============
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
(unaudited) (unaudited)
Revenue:
<S> <C> <C> <C>
Rental income $636,657 $1,507,910 $1,361,622
Interest income 26,688 8,651 30,226
Gain on sale of property 2,066,086
------------------------------------------
2,729,431 1,516,561 1,391,848
Expenses:
Operating Expenses 268,885 747,479 665,878
Interest 284,752 625,459 633,360
Depreciation and amortization 13,927 255,643 266,730
General and administrative 2,144 6,114 6,223
------------ ------------- -------------
569,708 1,634,695 1,572,191
------------ ------------- -------------
Net income (loss) $2,159,723 ($118,134) ($180,343)
============ ============= =============
Net income (loss) allocated to:
General Partners $2,159,723 ($118,134) ($180,343)
<PAGE>
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
For the years ended December 31, 1998, 1997 and 1996
Total
Partners'
Equity
<S> <C>
Balance at December 31, 1995 (unaudited) $3,315,126
Cash distributions (470,787)
Net loss (180,343)
-------------
Balance at December 31, 1996 (unaudited) 2,663,996
Cash distributions -
Net loss (118,134)
-------------
Balance at December 31, 1997 2,545,862
Cash distributions (4,705,585)
Net income 2,159,723
-------------
Balance at December 31, 1998 $ -
=============
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997 and 1996
1998 1997 1996
(unaudited) (unaudited)
Cash flows from operating activities:
<S> <C> <C> <C>
Interest received $26,688 $11,666 $41,626
Cash received from rents 619,474 1,502,659 1,356,103
Administrative expenses (7,129) (7,472) (11,916)
Rental operations expenses (359,040) (780,586) (577,518)
Interest paid (310,479) (625,912) (633,774)
------------ ------------- -------------
Net cash provided (used) by operating activities (30,486) 100,355 174,521
Cash flows from investing activities:
Capital improvements (1,077) (126,687) (156,015)
Proceeds from sale of property 11,418,703 - -
Cash received from short-term investments - - 581,813
------------ ------------- -------------
Net cash provided (used) by investing 11,417,626 (126,687) 425,798
activities
Cash flows from financing activities:
Distributions to partners (4,705,585) - (470,787)
Payments on mortgage note payable (6,766,437) (119,236) (108,873)
Cash paid for deposits 1,950 - (1,950)
Cash paid for loan refinancing - (25,895) -
------------ ------------- -------------
Net cash provided (used) by financing activities (11,470,072) (145,131) (581,610)
------------ ------------- -------------
Net increase (decrease) in cash and cash equivalents (82,932) (171,463) 18,709
Cash and cash equivalents at beginning of year 82,932 254,395 235,686
------------ ------------- -------------
Cash and cash equivalents at end of year $ - $82,932 $254,395
============ ============= =============
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997 and 1996
Reconciliation of net income (loss) to net cash provided by operating
activities:
1998 1997 1996
(unaudited) (unaudited)
<S> <C> <C> <C>
Net income (loss) $2,159,723 ($118,134) ($180,343)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 13,927 255,643 266,730
Gain from sale of property (2,066,086)
Change in assets and liabilities net of
effects from investing and financing activities:
Decrease (increase) in accounts and interest receivable 5,907 (2,892) 11,400
Decrease (increase) in real estate tax escrow and prepaid expenses 25,821 (1,553) (583)
(Decrease) increase in accounts
payable and accrued expenses (144,493) (29,007) 82,150
(Decrease) increase in due to affiliates (2,195) 1,549 686
(Decrease) increase in rents received in advance - (3,507) 3,507
Decrease in tenant security deposits (23,090) (1,744) (9,026)
------------ ------------- -------------
Net cash (used in) provided by operating activities ($30,486) $100,355 $174,521
============ ============= =============
</TABLE>
<PAGE>
1. Organization of Partnership
Casabella Associates, a general partnership (the "Partnership") was formed on
July 1, 1998. Development Partners (A Massachusetts Limited Partnership),
("DPI"), formerly Berry and Boyle Development Partners, and Development Partners
II (A Massachusetts Limited Partnership), ("DPII"), formerly Berry and Boyle
Development Partners II, and Development Partners III (A Massachusetts Limited
Partnership), ("DPIII"), formerly Berry and Boyle Development Partners III were
the General Partners. DPI, DPII and DPIII own an 8.5%, 38.3%, and 53.2%
interest, respectively in the Partnership.
Casabella Associates was formed to acquire a majority interest in the Casabella
Joint Venture, which owned Casabella, a 154-unit residential property, located
in Scottsdale, Arizona. Since the Partnership owned a majority interest in
Casabella Joint Venture, the accounts and operations of Casabella Joint Venture
were consolidated into the Partnership.
The co-venture partner was an affiliate of Evans Withycombe, Inc. ("EWI"), a
Phoenix based residential development, construction and management firm. EWI
also developed the property known as Casabella.
On May 22, 1998, Casabella was sold pursuant to the terms of a Sale Agreement
and Escrow Instructions (the "Agreement") dated February 4, 1998, as amended.
The net proceeds from the sale of Casabella were distributed to the General
Partners per the Partnership Agreement.
The Partnership was effectively terminated by the sale of Casabella. (See Note
9).
2. Significant Accounting Policies
A. Basis of Presentation
The consolidated financial statements include the accounts of the
Partnership and its subsidiary Casabella Joint Venture. All
intercompany accounts and transactions have been eliminated in
consolidation. The Partnership follows the accrual basis of accounting.
Refer to Note 5 regarding the termination of the Casabella Joint
Venture.
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.
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.
2. Significant Accounting Policies, continued
D. Depreciation
Depreciation is provided for by the use of the straight-line method
over the estimated useful lives as follows:
Buildings and improvements 39-40 years
Equipment, furnishings and fixtures 5-15 years
As discussed further in Note 9, as of December 31, 1997 the Partnership
recorded its property as Assets Held for Sale on the consolidated
balance sheets. Accordingly the Partnership stopped depreciating these
assets effective January 1, 1998.
E. Deferred Expenses
Costs of obtaining or extending the mortgage on Casabella 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. Reclassification
Certain items in the financial statements for the years ended December
31, 1996 have been reclassified to conform to the 1997 and 1998
presentation.
I. Long-Lived Assets
The Partnership utilizes the provisions of SFAS No. 121, Accounting for
the Impairment of Long -Lived Assets and for Long-Lived Assets to be
Disposed Of, to review for impairment. 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 exceeds 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, as further discussed in Note 9.
3. Assets held for sale:
<TABLE>
The changes in total real estate assets for the years ended The change in accumulated depreciation for the years ended
December 31, 1998, 1997 and 1996 are as follows: December 31, 1998, 1997 and 1996 are as follows:
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Balance, beginning of Balance, beginning of
<S> <C> <C> <C> <C> <C> <C>
year $11,580,507 $11,453,820 $11,297,804 year 2,228,967 $1,996,504 $1,752,197
Additions during period:
Improvements 1,077 126,687 156,016 Depreciation for the
period - 232,463 244,307
Deductions during the
period: Disposition of
Sale of Casabella (11,581,584) Casabella (2,228,967)
--------------------------------------- ------------------------------------------
Balance at end of Balance at end of
year $ - $11,580,507 $11,453,820 year $ - $2,228,967 $1,996,504
======================================= ==========================================
</TABLE>
4. Cash and cash equivalents
Cash and cash equivalents December 31, 1998 and 1997 consisted of the following:
1998 1997
---- ----
Cash on hand $ - $49,163
Money market accounts 33,769
------- -------
$ - $82,932
======= =======
5. Joint Venture and Property Acquisitions
At December 31, 1998, DPI, DPII and DPIII had contributed $400,000, $1,800,000
and $2,500,000, respectively, to the Partnership. Of the total contributions,
$3,845,154 was used to purchase the majority interest in the Casabella Joint
Venture and $500,000 was used to fund an escrow account maintained by the
permanent lender. In addition to the $4,700,000 of cash contributions referred
to above, DPI, DPII and DPIII collectively incurred $280,930 of acquisition
costs which were recorded as additional capital contributions to Casabella
Associates.
The Partnership had invested in a single property located in Scottsdale,
Arizona.
PRIOR TO MAY 13, 1996:
Net cash from operations of the Casabella Joint Venture, to the extent
available, shall be distributed not less often than quarterly with respect to
each fiscal year, as follows:
(A) First, to Associates, an amount equal to a 10.6% per annum
(computed on a simple noncompounded daily basis from the date
of the closing) of their capital investment;
(B) Second, the balance 70% to Associates and 30% to the property
developer.
All losses from operations and depreciation for the Casabella Joint Venture were
allocated 99.5% to Associates and 0.5% to the property developer.
All profits from operations of the Casabella Joint Venture were allocated in
accordance with distributions of net cash from operations; provided, however,
that if any fiscal year has no distributable net cash from operations, profits
will be allocated 99.5% to Associates and 0.5% to the property developer.
In the case of certain capital transactions and distributions as defined in the
Casabella 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 balance in the individual partners' capital
accounts.
MAY 14, 1996 THROUGH MAY 22, 1998:
On May 14, 1996, the Partnership and certain affiliates consummated an agreement
with Evans Withycombe Management, Inc. and certain of its affiliates ("EWI")
which separated the interests of EWI and the Partnership, thus affording the
Partnership greater flexibility in the operation and disposition of Casabella.
In consideration of a total
<PAGE>
5. Joint Venture and Property Acquisitions, continued
payment by DPI, DPII, and DPIII of $71,009 to EWI and delivery of certain mutual
releases, EWI (i) relinquished its contract to manage Casabella and its option
to exercise its rights to first refusal with regard to the sale of the property
and (ii) assigned all of its interest in the Casabella Joint Venture to the
Partnership (while preserving the economic interest of the venture in these
Joint Ventures), which resulted in the dissolution of the Casabella Joint
Venture. EWI may still share in the cash flow distributions or the proceeds from
sale of the properties if certain performance levels are met.
On May 22, 1998, Casabella was sold 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 net selling price was
$11,418,702 subject to certain customary adjustments including a $120,000 credit
to the purchaser for capital improvements. 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 from the sale of Casabella were
distributed to the General Partners according to the Partnership Agreement.
6. Mortgage Note Payable
All of the property owned by the Partnership was pledged as collateral for the
nonrecourse mortgage note payable pertaining to Casabella in the original
principal amount of $7,320,000. The original maturity date for this note was
July 15, 1997. On July 10, 1997 the lender extended the terms of the mortgage
note for a period of one year. Under the modification agreement, monthly
principal and interest payments of $61,887 and a fixed interest rate of 9.125%
remain unchanged. The terms of the agreement provide for a pre-payment penalty
of 0.5% of the outstanding loan amount in the event the note is paid prior to 60
days before the note becomes due. The balance of the note was due on July 15,
1998. As discussed in Note 5, the Partnership sold Casabella and the outstanding
mortgage debt of $6,750,400 was paid. There was a prepayment penalty assessed in
the amount of $33,567 since the debt was paid more than 60 days before maturity.
Accrued interest included in accrued expenses on the Balance Sheets of the
Consolidated Financial Statements at December 31, 1997 consisted of $25,727.
There was no accrued interest as of December 31, 1998.
7. Partners' Equity
Cash distributions and allocations of income and loss from Casabella Associates
were governed by the Partnership Agreement and are generally based on the ratio
of capital contributed by each of the joint venture partners, DPI, DPII and
DPIII.
Gain from the sale of property was to be allocated as defined in the Partnership
Agreement. The net proceeds on the sale of Casabella of approximately $4,570,300
were allocated to the General Partners in accordance with the terms of the
Partnership Agreement as follows: DPI was allocated approximately $388,475, DPII
was allocated approximately $1,750,425 and DPIII was allocated approximately
$2,431,400.
<PAGE>
8. Related Party Transactions
L'Auberge Communities, Inc. (formerly Berry and Boyle, 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).
The officers and principal shareholders of Evans Withycombe, Inc., the developer
of Casabella, together hold a two and one half percent cumulative profit or
partnership voting interest in LP L'Auberge Communities, formerly Berry and
Boyle, an affiliate of the General Partners.
During the years ended December 31, 1998 and 1997, property management fees of
$25,471 and $59,244, respectively, were paid to Residential Services-L'Auberge,
an affiliate of the General Partner. This represents 4% of the rental revenues.
9. Asset Held for Sale
During the fourth quarter of 1997, the General Partners of the Partnership
committed to a plan to dispose of Casabella in Scottsdale, Arizona. On May 22,
1998, Casabella was sold 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 net selling price was
$11,418,702, subject to certain customary adjustments including a $120,000
credit to the purchaser for capital improvements. The Partnership repaid
mortgage financing in the amount of $6,750,400 at closing utilizing a portion of
proceeds from the sale.
As it was the intent of the General Partners to pursue the sale of this
property, the Partnership recorded the assets at the lower of carrying value or
net realizable value and included these amounts as Assets Held for Sale on the
Consolidated Balance Sheets at December 31, 1997. In accordance with SFAS 121,
the Partnership had stopped depreciating these assets effective January 1, 1998.
The proceeds from sale were allocated to the Partners in accordance with the
terms of the Partnership Agreement and the Partnership was liquidated in 1998.
<PAGE>
DEVELOPMENT PARTNERS II
(A Massachusetts Limited Partnership)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
EXHIBIT INDEX
Exhibit
Number
(4)(a)(1) Amended and Restated Certificate and Agreement of Limited
Partnership (included in Partnership's Registration Statement No.
33-10345, declared effective on February 13, 1987, (the
"Registration Statement") and incorporated herein by reference).
(4)(a)(2) Seventeenth Amendment to Amended and Restated Certificate of
Limited Partnership dated May 31, 1990 (included as an exhibit to
the Partnership's Form 10-K for the year ended December 31, 1990
and incorporated herein by reference).
(4)(b) Subscription Agreement (included as an exhibit in the Registration
Statement and incorporated herein by reference).
(10)(a) Agreement of Joint Venture of Casabella Associates dated September
27, 1990 (filed as Exhibit (10)(f) to the Form 10-K of Berry and
Boyle Development Partners for the year ended December 31, 1990,
and incorporated herein by reference).
(10)(b) Property Management Agreement between Canyon View East Joint
Venture and L'Auberge Communities Inc. dated May 15, 1996.
(10)(c) Property Management Agreement between Pines on Cheyenne Creek
Joint Venture and Berry and Boyle Residential Services dated
August 1, 1990 (included as an exhibit to the Partnership's Form
10-K for the year ended December 31, 1990, and incorporated herein
by reference).
(10)(d) Documents pertaining to the $3,252,000 permanent loan for The
Pines on Cheyenne Creek Joint Venture (included as an exhibit to
the Partnership's Form 10-K for the year ended December 31, 1990,
and incorporated herein by reference).
(10)(e) Documents pertaining to the $4,000,000 permanent loan for the
Canyon View East Joint Venture (included as an exhibit to the
Partnership's Form 10-K for the year ended December 31, 1990, and
incorporated herein by reference).
(10)(f) Documents pertaining to the $2,940,000 permanent loan for the
Mariposa Joint Venture (included as an exhibit to the
Partnership's Form 10-K for the year ended December 31, 1990, and
incorporated herein by reference).
(10)(g) Documents pertaining to the $7,300,000 permanent loan for the
Casabella Joint Venture filed as an exhibit to the Annual Report
on Form 10K for the year ended December 31, 1992 for Berry and
Boyle Development Partners III and incorporated herein by
reference.
(10)(h) Property Management Agreement regarding Casabella between
Casabella Associates and L'Auberge Communities Inc. dated November
1, 1996 (included as an exhibit to the Partnership's Form 10-K for
the fiscal year ended December 31, 1996 and incorporated herein by
reference).
(10)(i) Property Management Agreement regarding Mariposa between
Development Partners II and L'Auberge Communities Inc. dated
November 1, 1996(included as an exhibit to the Partnership's Form
10-K for the fiscal year ended December 31, 1996 and incorporated
herein by reference).
(10)(j) First Amendment to Joint Venture Agreement of L'Auberge Cheyenne
Creek Joint Venture and Related Assignment of Joint Venture
Interest (included as an exhibit to the Partnership's Form
10-K for the fiscal year ended December 31, 1996 and incorporated
herein by reference).
(10)(k) Agreement regarding Mariposa Joint Venture(included as an exhibit
to the Partnership's Form 10-K for the fiscal year ended December
31, 1996 and incorporated herein by reference).
(10)(l) Agreement regarding Casabella Joint Venture(included as an exhibit
to the Partnership's Form 10-K for the fiscal year ended December
31, 1996 and incorporated herein by reference).
(10)(m) Purchase and Sale Agreement and Escrow Instructions dated January
26, 1998 to sell Mariposa (filed as an exhibit to the Form 10-K of
Development Partners II for the year ended December 31, 1997, and
incorporated herein by reference).
(10)(n) Purchase and Sale Agreement and Escrow Instructions dated January
26, 1998 to sell Cheyenne Creek(filed as an exhibit to the Form
10-K of Development Partners II for the year ended December 31,
1997, and incorporated herein by reference).
(10)(o) Purchase and Sale Agreement and Escrow Instructions dated February
4, 1998 to sell Casabella (filed as an exhibit to the Form
10-K of Development Partners II for the year ended December 31,
1997, and incorporated herein by reference).
(10)(p) Purchase and Sale Agreement and Escrow Instructions dated February
19, 1998 to sell Canyon View (filed as an exhibit to the Form
10-K of Development Partners II for the year ended December 31,
1997, and incorporated herein by reference).
(27) Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 602,283
<SECURITIES> 0
<RECEIVABLES> 839
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 8,371,986
<DEPRECIATION> (1,830,623)
<TOTAL-ASSETS> 7,144,485
<CURRENT-LIABILITIES> 177,718
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,144,485
<SALES> 0
<TOTAL-REVENUES> 1,186,133
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 308,898
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 350,639
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 534,828
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
