UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-K

[X]  Annual Report Pursuant to Section 13 or 15(d)

of the Securities and Exchange Act of 1934

 

For the fiscal year ended: **December 31, 2003**
Commission File Number:  **33-4682
 

CAPITAL BUILDERS DEVELOPMENT PROPERTIES II,

A CALIFORNIA LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

 
**California

(State or other jurisdiction of incorporation or organization)	       				
**77-0111643

(I.R.S. Employer Identification No.)
**1130 Iron Point Road, Suite 170, Folsom, California  95630

(Address of principal executive offices)		Zip Code

Registrant's telephone number, including area code: (916) 353-0500

Securities registered pursuant to Section 12(b) of the Act:  **NONE**
Securities registered pursuant to Section 12(g) of the Act:

**Limited Partnership Units**
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    X Yes  No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes   X  No

As of December 31, 2003 the aggregate Limited Partnership Units held by nonaffiliates of the registrant was 23,030.  There is no market for the Units.

 

Documents Incorporated by Reference

Limited Partnership Agreement dated February 6, 1986, filed as Exhibit 3.3, and the Amendment to the Limited Partnership Agreement dated May 22, 1986 filed as Exhibit 3.4 to Registration Statement No. 33-4682 of Capital Builders Development Properties II, A California Limited Partnership, are hereby incorporated by reference into Part IV of this Form 10K.

Forward-Looking Statements

When used in this annual report, the words "believes," "anticipates" and similar expressions are intended to identify forward-looking statements.  Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected, including, but not limited to, those set forth in the sections entitled "Potential Factors Affecting Future Operating Results" and "Qualitative and Quantitative Disclosures About Market Risks" below.  Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the case hereof.  The Partnership undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

 
**PART I

ITEM 1.	BUSINESS**(a)	General Development of Business**
Capital Builders Development Properties II (the "Partnership") is a publicly held limited partnership organized under the provisions of the California Revised Limited Partnership Act pursuant to the Limited Partnership Agreement dated February 6, 1986, as amended (the "Agreement").  The Partnership commenced on May 22, 1986 and shall continue in full force and be effective until December 31, 2021 unless dissolved sooner by certain events as described in the Agreement.  The Managing General Partner is Capital Builders, Inc., a California Corporation (CB).  The Associate General Partner is the sole shareholder, President and Director of CB.

On October 6, 1986 the Partnership sold 2,407 Limited Partnership Units for a total of $1,203,500.  From October 6, 1986, through May 21, 1988, the Partnership sold an additional 20,623 Units for a total of 23,030 Units.  On May 21, 1988, the Partnership was closed to capital raising activity with a total of $11,515,000 proceeds raised from the offering.  The General Partners have contributed capital in the amount of $1,000 to the Partnership for a 1% interest in the profits, losses, tax credits and distributions of the Partnership.
** 

(b)	Financial Information about Industry Segments**
The Partnership is in the business of real estate development and is not a significant factor in its industry.  The Partnership's investment properties are located near major urban areas and, accordingly, compete not only with similar properties in their immediate areas but with hundreds of properties throughout the urban areas.  Such competition is primarily on the basis of locations, rents, services and amenities.  In addition, the Partnership competes with significant numbers of individuals and organizations (including similar partnerships, real estate investment trusts and financial institutions) with respect to the purchase and sale of land, primarily on the basis of the prices and terms of such transactions.
**(c)	Narrative Description of the Business**
The Partnership's business objective is to complete the lease-up of its existing light industrial and office buildings and eventually sell all of its properties.  The primary investment objective of the Partnership is to realize capital appreciation from the sale of the Properties developed by it. A secondary investment objective is to generate cash from the leasing of Partnership Properties pending their sale for distribution to the Limited Partners.  Since the Partnership has not sold all of its investment properties, it has not achieved its investment goals as yet.  Although investor returns cannot be accurately determined until the investment properties are sold, due to the additional time required to lease up the investment properties, the decline in real estate values during the recession of the early 90's, and although the real estate market has shown recovery from that recession, it is anticipated that ultimate returns will be less than initially projected.  Funds obtained by the Partnership from the sale of Limited Partnership Units were used to acquire equity interest in one piece of land for development and a 40% equity interest in another for development in accordance with its investment objective.

On April 10, 1987, the Partnership entered into a joint venture called Capital Builders Roseville Venture ("JV") with Capital Builders Development Properties ("CBDP"), a California limited partnership.  The Partnership and CBDP were affiliates as they had the same General Partner, but there were no direct transactions between the respective Partnerships.  The Partnership contributed $900,000 resulting in a 40% interest in the profits, losses and cash distributions of the JV.  CB, the Managing General Partner of the Partnership, had the same rights and obligations with respect to the JV's operations and management as it could exercise as Managing General Partner of the Partnership.  The JV was dissolved as of May 1, 1997 when the Partnership purchased the remaining 60% interest in the JV.

The acquisition of the real estate is consistent with the Partnership objectives which are to acquire, develop, hold, maintain, lease, sell, or otherwise dispose of real property within the Western United States (including the states of California, Oregon, Washington, Arizona, Nevada, New Mexico, Utah, Colorado, Hawaii, and Alaska), including without limitation, the acquisition of undeveloped land for development and construction of research and development, light industrial, commercial/retail, or office buildings thereon, and the acquisition of partially completed commercial real property developments for completion of development.

Although the Associate General Partners, Officers, and Directors of the Managing General Partners are experienced in real property operation and management, they also may utilize independent advisors, agents, and workers, in addition to the Partnership employees, to assist them in the operation, leasing, maintenance and improvement of the Partnership's properties.

The Partnership has no full time employees but is managed by CB, the Managing General Partner.
**(d)	Available Information**
We expect to file annual, quarterly and special reports, and other information with the SEC.  Our SEC filings will be available to the public over the Internet at the SEC's website at http://www.sec.gov.  You may also read and copy any document we file at the SEC's public reference rooms in Washington, D.C., New York, New York, and Chicago, Illinois.  Please call the SEC at 1-800-SEC-0300 for further information on the public reference rooms.

You may request a free copy of any of the above filings by writing or calling:

	Capital Builders Development Properties II

	c/o Capital Builders, Inc.

	1130 Iron Point Road, Suite 170

	Folsom, CA  95630

	(916) 353-0500
** 

ITEM 2.	PROPERTIES
The Partnership owned 100% equity interest in two properties, Highlands 80 Commerce Center ("H80") and Capital Professional Center ("CPC").  H80 is a  three-phase development located in North Highlands, California.  Phase I is a 109,083 square foot office/industrial project consisting of five multi-tenant buildings.  Phase II consists of approximately 45,777 square feet of two, one-story light industrial/office space buildings and Phase III consists of one, 27,664 square foot, two-story office building.  Phase III's building was placed into service during the first quarter of 2002.  There is currently one lease signed for this building's space.

During the third quarter of 2002, the Highlands 80 Commerce Center ("H80") was listed for sale and categorized as discontinued operations.  During the fourth quarter 2002, four out of the eight buildings listed were sold for cash amounts in excess of their book values.  After payment of commissions and closing costs, the net sale proceeds were $8,525,041.  These sales resulted in a recognized gain during 2002 of $4,240,907.

During the first quarter of 2003, the Partnership sold an additional Highlands 80 building.  The Partnership received net proceeds of $1,758,370 after sales commissions and closing costs.  The sales price exceeded the book value of the building.

The three remaining Highlands 80 buildings continue to be listed for sale.  The listed sales prices exceed the book value of the buildings.

CPC was a 40,465 square foot office project, located in Roseville, California, consisting of two multi-tenant buildings which were completely developed and had achieved a stabilized occupancy.  This project was placed under contract for sale during the fourth quarter 2002 and was classified as discontinued operations at such time.  During the first quarter of 2003, the property was sold for a cash amount in excess of its book value.  After payment of commissions and closing costs, the net sale proceeds were $7,649,350.

The sales of the Highlands 80 building and the Capital Professional Center project resulted in a recognized gain during 2003 of $4,508,980.

The Partnership's remaining investment properties are located in major urban areas and, therefore, must compete with properties of greater and lesser quality.  Such competition is based primarily on rent, location, services and amenities.  The properties are suitable for their current and anticipated use.
**ITEM 3.	LEGAL PROCEEDINGS
NONE
**ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
**PART II
**ITEM 5.	MARKET FOR REGISTRANT'S LIMITED PARTNERSHIP INTERESTS AND RELATED SECURITY HOLDER MATTERS
There is no public trading market for the Partnership's Limited Partnership Units and it is not anticipated that a public trading market will develop.  Furthermore, the Partnership Agreement prohibits Limited Partners from transferring Limited Partnership Interests if such transfers would result in the dissolution of the Partnership for tax purposes under Section 708 of the Internal Revenue Code.

As of December 31, 2003, there were 1,485 holders and 23,030 Limited Partnership Units outstanding.
** 

 

ITEM 6.	SELECTED FINANCIAL DATA
The following constitutes a summary of selected financial data for the following periods (000's omitted except net income (loss) per Limited Partnership Unit):
 **2003**2002**2001**2000**1999
Revenues
$703
$2,507
$2,678
$2,414
$2,145
Gain from Sale of Buildings
$4,509
$4,241
- - -
- - -
- - -
Net Income (Loss)
$4,472
$3,990
($74)
($102)
($247)
Net Income (Loss) per Limited  Partnership Unit
$192.26
$171.51
($3.19)
($4.37)
($10.63)
Total Assets
$6,828
$11,352
$14,983
$13,626
$12,808
Notes and Loans Payable
- - -
$4,085
$11,327
$10,251
$9,313
(See ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA)
**ITEM 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the month of July 2002, the Highlands 80 project (8 individual buildings) was listed for sale, and during the month of October 2002 the CPC project (two individual buildings) was listed for sale, which resulted in all real estate assets of the Partnership being listed for sale during the year ended December 31, 2002.

In accordance with the Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144), the current year results from the operations and financial position of the entire entity have been classified as discontinued operations as the Partnership had listed all assets for sale before December 31, 2002 and the Partnership had met all of the other criteria of long-lived assets to be disposed of by sale.  Additionally, all prior periods have been stated as if the entire entity had been a discontinued operation.  Depreciation was ceased on all buildings or project when the buildings or project was listed for sale in accordance with FAS 144.

As of December 31, 2003, all buildings owned by the Partnership had been sold with the exception of three H80 buildings.  The three remaining H80 buildings continue to be listed for sale and continue to meet the held for sale criteria in FAS 144 and are classified as held for sale and as discontinued operations.  Although the unsold buildings have been held for sale in excess of one year, the delay in sale is outside of Management's control and Management remains committed to its plan to sell the buildings as evidenced by the buildings being continuously listed for sale.

Two of the three H80 buildings have had offers well in excess of their book values; however, Management had not accepted these offers as of December 31, 2003 as Management would rather sell all three buildings at once.  

The third building was originally listed for sale as an owner/user building without significant tenant improvements being constructed, as is common in the commercial office space real estate market, due to the fact that owner/users generally prefer to design or help design their tenant improvements.  In an effort to make the third building more marketable for sale, rather than reducing the sale price, the Partnership made certain tenant improvements to approximately one-half of the building and began leasing up suites.  It is Management's intention to now market the building to both owner/users and investment purchasers.  As the building continues to increase its percentage of leased space, the building is expected to become more appealing to the investment buyer.  The third building continues to be available for immediate sale in its present condition and Management's plan is to continue to offer the remaining vacant space for lease or sale.  
261:     
Management anticipates the remaining three H80 buildings will be sold by the end of the second or third quarter of 2004.
**Liquidity and Capital Resources**
The Partnership commenced operations on May 22, 1986 upon the sale of the minimum number of Limited Partnership Units.  The Partnership's initial source of cash was from the sale of Limited Partnership Units.  Through the offering of Units, the Partnership raised $11,515,000 (represented by 23,030 Limited Partnership Units).  Cash generated from the sale of Limited Partnership Units was used to acquire land and for the development of a mixed use commercial project and a 40% interest in a commercial office project.  In May 1997, the remaining 60% interest in the project was acquired.

The Partnership's primary current sources of cash are from cash balances, property rental income and proceeds from the partial sale of its assets.  As of December 31, 2003, the Partnership had $1,104,912 in unrestricted cash.  It is the Partnership's intention to utilize existing cash balances for continued leasing operations (tenant improvements and leasing commissions) at Highlands 80.

During the year ended December 31, 2003, the Partnership incurred $454,054 in improvements for its Highlands 80 property.  These improvements consisted of tenant improvements in Highlands 80 Phase III (a 27,664 sq. foot office building).  The Partnership funded these costs with proceeds from sales and accounts payable.  

During the year ended December 31, 2003, the Partnership received $9,407,720 of net sales proceeds from the sale of one H80 building and the Capital Professional Center project.  The net proceeds from sale were primarily used to pay $4,084,942 of the CPC loan obligation, which represented the remaining outstanding loan balances for the entire Partnership.  The remaining net proceeds were used to pay distributions to the Limited Partners in the amount of $4,999,997 for the year ended December 31, 2003, and project improvements as discussed above.

The Partnership may continue to incur improvement costs as the Highlands 80 Phase III building is leased.  The total projected tenant improvement costs that may be incurred during 2004 are estimated to be $415,000.  These costs will be funded with cash reserves.

During the year ended December 31, 2003, the Partnership paid $33,929 in management fees to its Managing General Partner.  Management fees are classified on the Statements of Operations as an Operating Expense.  The General Partner is currently charging 5% of collected revenue.

The Partnership's ability to maintain or improve cash flow is dependent upon its ability to maintain and improve the occupancy of its investment properties.  Management believes the Partnership's financial resources should be adequate to meet 2004's obligations and no adverse change in liquidity is foreseen.  The Partnership's properties' current market values are in excess of their carrying values.
**Critical Accounting Policies and Estimates**
The Partnership's discussion and analysis of its financial condition and results of operations are based upon the Partnership's financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of financial statements requires Partnership Management to make estimates and judgments that effect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, Partnership Management evaluates its estimates, including those related to long lived assets, accounts receivable, deferred revenue, and contingencies and litigation.  Additionally, on an on-going basis Partnership Management also evaluates the debt obligations of the Partnership and evaluates the Partnership's ability to satisfy these obligations.  Partnership Management bases its estimates on current information, historical experience and or various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recognition of revenue that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.  

The Partnership believes the following critical accounting policy affects its more significant judgments and estimates used in the preparation of its financial statements:

Valuation of Investment Property (Long-Lived Assets):

Investment property is evaluated for impairment on a continual basis based on the property's occupancy levels, annual cash flows, and projected cash flows based on the rental market and other factors including prospective new tenants.  

Classification as Discontinued Operations:

All real estate assets of the Partnership had been listed for sale during the years ended December 31, 2003 and 2002.

In accordance with the Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144), the current year results from the operations and financial position of the entire entity have been classified as discontinued operations as the Partnership had listed all assets for sale before December 31, 2002 and the Partnership had met all of the other criteria of long-lived assets to be disposed of by sale.  Additionally, all prior periods have been stated as if the entire entity had been a discontinued operation.  Depreciation was ceased on all buildings or project when the buildings or project was listed for sale in accordance with FAS 144.  
**Results of Operations****2003 vs 2002

All real estate assets of the Partnership had been listed for sale during the years ended December 31, 2003 and 2002.  In accordance with the Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144), the current year results from the operations and financial position of the entire entity have been classified as discontinued operations.  Additionally, all prior periods have been stated as if the entire entity had been a discontinued operation.  Depreciation was ceased on all buildings or project when the buildings or project was listed for sale in accordance with FAS 144.  

During the year ended December 31, 2003 as compared to December 31, 2002, the Partnership's total revenues decreased by $1,804,570 (72%), while its expenses decreased by $2,019,091 (73.2%), resulting in a decrease in net loss from operations by $214,521 (85.4%).

The primary reason for the decrease in revenue, expenses and operating loss is due to the Partnership selling portions of its properties.

During the fourth quarter 2002, the Partnership sold four out of the eight Highlands 80 buildings.   During the first quarter of 2003, the Partnership sold an additional Highlands 80 building and its entire Capital Professional Center project, leaving the Partnership with only three remaining Highlands 80 buildings.  These remaining buildings represent 34% (based on square footage) of the Partnership's pre-sale holdings.  These buildings are listed for sale and at their current combined occupancy of 69% as of December 31, 2003 and they are producing a positive cash flow.

The properties sold during 2003 netted the Partnership $9,407,720 in cash proceeds after commissions and closing costs.  The sale of these buildings also resulted in gain recognition of $4,508,980 for the year ended December 31, 2003.
** 

2002 vs 2001

During the year ended December 31, 2002 as compared to December 31, 2001, the Partnership's total revenues decreased by $170,125 (6.4%), while its expenses increased by $6,655 (.2%).

The decrease in revenue was primarily due to a decrease in occupancy for Highlands 80 during the year and a loss of revenue from buildings sold during the fourth quarter of 2002.

Expenses increased for the year ended December 31, 2002, as compared to December 31, 2001, primarily due to the net effect of:

a)	$32,270 (6.2%) increase in operating expenses due to an increase in utility and insurance costs and the recognition of bad debt expense of $16,842 for uncollectible rent;

b)	$119,914 (28.6%) increase in repairs and maintenance primarily due to readying Highlands 80 for sale to a condition that would maximize the sales prices;

c)	$11,986 (7.6%) decrease in property taxes due to the partial sale of Highlands 80;

d)	$75,549 (37.4%) increase in general and administrative due to an increase in administrative costs associated with additional reporting requirements by the SEC and IRS, an increase in audit fees, and sale study fees for Highlands 80; and

e)  $206,464 (31.9%) decrease in depreciation due to both the Highlands 80 and Capital Professional Center projects being re-classified as held for sale in the third and fourth quarter, respectively, and therefore depreciation was no longer recorded on those assets.

During the fourth quarter 2002, the Partnership sold four out of the eight Highlands 80 buildings.  The Partnership received net proceeds of $8,525,041 after commissions and closing costs.  The sale of these buildings resulted in gain recognition of $4,240,907.  During the year ended December 31, 2001, no buildings were sold.
**Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS 143, which requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred.  When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset.  Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset.  Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement.  This Statement was adopted on January 1, 2003 and did not have an impact on the Financial Statements.

In November 2002, the FASB issued FIN 45, which elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued.  It also clarifies that a guarantor is required to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.  The initial recognition and initial measurement provisions of this Interpretation are applied prospectively to guarantees issued or modified after December 31, 2002.  The adoption of these recognition provisions did not have a significant impact on the Financial Statements.  The disclosure requirements of this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002.  This Interpretation did not have an impact on the Financial Statements.

 
**ITEM 7a. - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS**
The Partnership does not have a material market risk due to financial instruments held by the Partnership.

 
** 

ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	Page Number	

INDEPENDENT AUDITORS' REPORT	12

		

FINANCIAL STATEMENTS

		

	BALANCE SHEETS	13

AS OF DECEMBER 31, 2003 AND 2002

	STATEMENTS OF OPERATIONS	14

FOR THE YEARS ENDED

DECEMBER 31, 2003, 2002, AND 2001

STATEMENTS OF PARTNERS' EQUITY	15

FOR THE YEARS ENDED

DECEMBER 31, 2003, 2002, AND 2001

STATEMENTS OF CASH FLOWS	16

FOR THE YEARS ENDED

DECEMBER 31, 2003, 2002, AND 2001

	 NOTES TO FINANCIAL STATEMENTS	17-24			

SUPPLEMENTAL SCHEDULE

	SCHEDULE III	31

REAL ESTATE AND ACCUMULATED DEPRECIATION					

Financial schedules not included have been omitted because of the absence of conditions under which they are required or because the information is included elsewhere in this report. 

 
**Independent Auditors' Report

 

The Partners

Capital Builders Development Properties II:

We have audited the accompanying balance sheets of Capital Builders Development Properties II, a California Limited Partnership, as of December  31, 2003 and 2002, and the related statements of operations, partners' equity and cash flows for each of the years in the three-year period ended December 31, 2003. In connection with our audits of the financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These financial statements and financial statement schedule are the responsibility of the partnership's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Capital Builders Development Properties II as of December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

					

 

KPMG LLP

Sacramento, California********************************************