ITEM 1. BUSINESS
Community Investment Partners II, L.P. (the "Partnership") was formed to seek long-term capital appreciation by making investments in companies and other special investment situations. The Partnership will not engage in any other business or activity. The Partnership will dissolve on December 31, 2007, subject to the right of the Individual General Partners to extend the term for up to two additional two-year periods.
The Partnership has elected to be a business development company under the Investment Company Act of 1940, as amended. As a business development company, the Partnership is required to invest at least 70% of its assets in qualifying investments as specified in the Investment Company Act.
The Partnership was formed on May 8, 1992, under the Revised Uniform Limited Partnership Act of Missouri. CIP Management, L.P., LLLP, the Managing General Partner, is a Missouri limited liability limited partnership formed on October 10, 1989 as a limited partnership and registered as a limited liability limited partnership on July 23, 1997. The general partner of CIP Management, L.P., LLLP is CIP Management, Inc., an indirect subsidiary of Edward D. Jones & Co., L.P.
The Partnership participated in a public offering of its limited partnership interests in 1992. The Partnership sold 111,410 Units of limited partnership interest and 1,120 units of general partnership interest for an aggregate price of $1,406,625. After offering expenses, the Partnership received approximately $1,224,000 in proceeds available for investment. The Partnership executed a call to each partner requesting the deposit of an amount equal to the initial capital contribution on August 25, 1994.
The information set forth under the captions "Investment Objectives & Policies" and "Regulation" in the Prospectus of the Partnership dated November 4, 1992, filed with the Securities and Exchange Commission pursuant to Rule 497(b) under the Securities Act of 1933, is incorporated herein by reference.
RISKS OF UNIT OWNERSHIP
The purchase and ownership of Units involve a number of significant risks and other important factors. The portfolio company investments of the Partnership involve a high degree of business and financial risk that can result in substantial losses. Among these are the risks associated with investment in companies with little operating history, companies operating at a loss or with substantial variations in operating results from period to period, companies with the need for substantial additional capital to support expansion or achieve or maintain a competitive position, companies which may be highly leveraged, companies which may not be diversified and companies in which the Partnership may be the sole or primary lender. The Partnership intends to invest in only a few companies. Therefore, a loss or other problem with a single investment could have a material adverse effect on the Partnership.
Other risks include the Partnership's ability to find suitable investments for its funds because of competition from other entities having similar investment objectives. Risks may arise due to the significant period of time that may elapse before the Partnership has completed the selection of its portfolio company investments and the significant period of time (typically four to seven years or longer) which will elapse before portfolio company investments have reached a state of maturity such that disposition can be considered. It is unlikely that any significant distributions of the proceeds from the disposition of investments will be made until the later years of the term of the Partnership.
Portfolio companies may require additional funds. There can be no assurance that the Partnership will have sufficient funds from reserves or borrowing to make such follow-on investments which may have a substantial negative impact on a portfolio company in need of additional funds.
All decisions with respect to the management of the Partnership, including identifying and making portfolio investments, are made exclusively by the General Partners. Limited Partners must rely on the abilities of the General Partners. The key personnel of the Managing General Partner have considerable prior experience in investment banking and in structuring investments. In addition, they have prior experience in the operation of Community Investment Partners, L.P., a business development company with a similar investment strategy.
Ownership of the Units also entails risk because Limited Partners may not be able to liquidate their investment in the event of an emergency or for any other reason due to the substantial restrictions on transfers contained in the Partnership Agreement and the lack of a market for the resale of Units.
The information set forth under the captions "Risk and Other Important Factors" (including the subsections "Risks of Investment," "Size of Partnership," "Ability to Invest Funds," "Time Required to Maturity of Investments; Illiquidity of Investments," "Need for Follow-on Investments," "Use of Leverage," "Unspecified Investments," "Reliance on Management," "New Business," "No Market for Units" and "Federal Income Tax Considerations") on pages 9 through 14 of the Prospectus of Partnership dated November 4, 1992, filed with the Securities and Exchange Commission pursuant to Rule 497(b) under the Securities Act of 1933 on November 4, 1992, is incorporated herein by this reference. (This information has been restated herein pursuant to section 64(b) of the Investment Company Act of 1940).
Partners should refer to the Partnership Agreement for more detailed information.
EMPLOYEES
The Partnership has no employees. The Managing General Partner performs management and administrative services for the operation of the Partnership. The Management Agreement was amended to waive the annual management fee of 1.5% of total assets, computed quarterly, to the Managing General Partner. This payment was terminated after the second quarter of 1998. The Managing General Partner is reimbursed by the Partnership for out of pocket expenses in connection with finding, evaluating, structuring, approving, monitoring and liquidating the Partnership's portfolio investments.
ITEM 2.
ITEM 2. PROPERTIES
The Partnership does not own or lease any physical properties.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Partnership is not a party to any material pending legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the period covered by this report.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Limited Partnership interests. As of March 15, 2001, the total number of holders of units is 130. The number of limited partnership units outstanding is 111,395. The number of general partnership units outstanding is 1,135 as of March 15, 2001.
The information set forth under the captions "Partnership Distributions and Allocations" and "Transferability of Units" in the Prospectus of the Partnership dated November 4, 1992, filed with the Securities and Exchange Commission pursuant to Rule 497(b) under the Securities Act of 1933 is incorporated herein by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL YEAR 2000 VERSUS 1999
Net loss for the year ended December 31, 2000 was $723,331, compared to net income of $341,238 for the year ended December 31, 1999. The 2000 net loss was primarily caused by unrealized losses on portfolio investments.
Net realized losses on investments for the year ended December 31, 2000 were $5,257, a 95% decrease from net realized losses of $106,913 for the year ended December 31, 1999. 2000 net realized losses consisted of a net realized loss of $8,550 from the sale of publicly traded investments offset by a $3,293 gain as a result of an escrow disbursement received from Houghton Acquisition Corporation. 1999 net realized losses were higher due to the write-off of the Neocrin investment in the amount of $106,000. There were no investment write-offs during the year ended December 31, 2000.
Net unrealized losses for the year ended December 31, 2000 were $711,106, compared to net unrealized gains of $464,246 for the year ended December 31, 1999. The 2000 unrealized losses were caused by a 58% decrease in the share price of Computer Motion, Inc. and an 88% decrease in the share price of Online Resources & Communications Corporation during the year.
Total expenses for the year ended December 31, 2000 were $24,768, an increase of 3% over 1999 expenses of $23,981.
There were no partnership distributions in 2000.
FISCAL YEAR 1999 VERSUS 1998
Net income for the year ended December 31, 1999, was $341,238, compared to a net loss of $139,484 for the year ended December 31, 1998. The net loss decreased primarily due to a $244,774 (417%) increase in net gains on investments offest by a $15,246 (39%) decrease in expenses, as discussed below.
Dividend and interest income decreased by $4,416 as a result of the repayment of the Houghton Acquisition Corp. note receivable in the first quarter of 1999.
There were no sales of investments during the years ended December 31, 1999 and 1998. The realized loss on investments at December 31, 1999 consists of a $106,000 write-off of the investment in Neocrin Company Series E and F Preferred stock, and a $913 loss on the repayment of the Houghton Acquisition Corp. note receivable. During 1999, Neocrin Company dissolved with no distributions made to investors, thereby causing the Partnership's investment to have a value of zero.
The net unrealized gain on securities was $464,246 for 1999, compared to a net unrealized loss of $112,559 for 1998. The increase is primarily due to increases in the market values of Online Resources & Communications (ORCC) and Computer Motion Inc. (RBOT) common stock and warrants. ORCC completed an initial public offering during the second quarter of 1999. The increase in value of RBOT is the result of recording the market value of warrants to purchase common stock, previously recorded at cost.
Within total expenses, professional fees and other expenses remained relatively constant between 1999 and 1998. Management fees were zero in 1999, compared to 1998 fees of $14,325. The Management Agreement was amended after the second quarter of 1998 to waive the management fee. Director's fees were also discontinued in 1998, explaining the $2,000 decrease in director's fees for the year ended December 31, 1999.
There were no partnership distributions in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Total capital for the Partnership as of December 31, 2000, was $1,327,318. This consisted of $1,313,926 in Limited Partner capital and $13,392 in General Partner capital.
Net loss of $723,331 for 2000 was allocated in the amount of $716,098 to the Limited Partners and in the amount of $7,233 to the General Partners.
At December 31, 2000, the Partnership had $23,379 in cash and cash equivalents.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Community Investment Partners II, L.P.
We have audited the accompanying statement of financial condition of Community Investment Partners II, L.P. (a Missouri limited partnership), including the schedule of portfolio investments, as of December 31, 2000, and the related statements of operations, cash flows and changes in partnership capital for the year then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States. 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. Our procedures included confirmation of securities owned as of December 31, 2000, by correspondence with the custodian. 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 audit provides a reasonable basis for our opinion.
As discussed in Note 3, the financial statements include investment securities valued at $1,220,657 (92 percent of net assets) whose values have been estimated by the Managing General Partner in the absence of readily ascertainable market values. However, because of the inherent incertainty of valuation, the General Partner's estimated values may differ from the values that would have been used had a ready market existed for the securities and the differences could be material.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Community Investment Partners II, L.P., as of December 31, 2000, and the results of its operations, cash flows, and the changes in its partnership capital for the year then ended, in conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
St. Louis, Missouri February 16, 2001
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Community Investment Partners II, L.P.
In our opinion, the statements of financial condition, including the schedule of portfolio investments, as of December 31, 1999 and the related statements of operations, of cash flows and of changes in partnership capital for each of the two years in the period ended December 31, 1999 present fairly, in all material respects, the financial position, results of operations and cash flows of Community Investment Partners II, L.P. (the "Partnership") at December 31, 1999 and for each of the two years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the Unites States of America. These financial statements are the responsibility of the Partnership's management; 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 auditing standards generally accepted in the United States of America, 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 that our audits provide a reasonable basis for our opinion.
As explained in Note 3, the financial statements include securities valued at $1,164,530 (57 percent of net assets), whose values have been estimated by the Managing General Partner in the absence of readily ascertainable market values. Those estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and the differences could be material.
We have not audited the financial statements of Community Investment Partners II, L.P. for any period subsequent to December 31, 1999.
PricewaterhouseCoopers LLP
St. Louis, Missouri March 3, 2000
COMMUNITY INVESTMENT PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
Partnership Organization ------------------------
Community Investment Partners II, L.P. (the "Partnership") was formed on May 8, 1992, under the Revised Uniform Limited Partnership Act of Missouri. CIP Management, L.P., LLLP, the Managing General Partner, is a Missouri limited liability limited partnership formed on October 10, 1989 as a limited partnership and registered as a limited liability limited partnership on July 23, 1997. The general partner of CIP Management, L.P., LLLP is CIP Management, Inc., an indirect subsidiary of Edward D. Jones & Co., L.P.
Business --------
The Partnership elected to be a business development company under the Investment Company Act of 1940, as amended. As a business development company, the Partnership is required to invest at least 70% of its assets in qualifying investments as specified in the Investment Company Act. The Managing General Partner is responsible for making the Partnership's investment decisions.
The Partnership will seek long-term capital appreciation by making investments in companies and other special investment situations. The Partnership is not permitted to engage in any other business or activity. The Partnership will dissolve on December 31, 2007, subject to the right of the Individual General Partners to extend the term for up to two additional two-year periods.
Risk of Ownership -----------------
The purchase and ownership of Partnership Units involve a number of significant risks and other important factors. The portfolio company investments of the Partnership involve a high degree of business and financial risk that can result in substantial losses. Among these are the risks associated with investment in companies with little operating history, companies operating at a loss or with substantial variations in operating results from period to period, companies with the need for substantial additional capital to support expansion or achieve or maintain a competitive position, companies which may be highly leveraged, companies which may not be diversified and companies in which the Partnership may be the sole or primary lender. The Partnership intends to invest in only a few companies; therefore, a loss or other problem with a single investment could have a material adverse effect on the Partnership.
2. ALLOCATION OF PARTNERSHIP PROFITS AND LOSSES
Generally, profits will be allocated 99% to the Limited Partners and 1% to the General Partners until the Partners' Capital Accounts equal their undistributed Capital Contributions. Thereafter, profits will be allocated 90% to the Limited Partners and 10% to the General Partners in an amount sufficient to cause their Capital Accounts to equal an amount equal to (i) two times their Capital Contributions less (ii) cumulative distributions pursuant to paragraph 4.1 and paragraph 9.2.2 of the Partnership Agreement, at which time profits will be allocated 80% to the Limited Partners and 20% to the General Partners.
Generally, losses will be allocated 99% to the Limited Partners and 1% to the General Partners; provided, however, that losses will be allocated 80% to the Limited Partners and 20% to the General Partners to the extent of any prior allocation of profits which were made to the Partners on an 80%/20% basis. Next, losses will be allocated 90% to the Limited Partners and 10% to the General Partners to the extent any prior allocations of profits were made to the Partners on an 90%/10% basis. Thereafter, losses, if any, will be allocated to those Partners who bear the economic risk of loss.
Partners should refer to the partnership agreement for more specific information.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents -------------------------
All short-term investments with original maturities of three months or less are considered to be cash equivalents.
Investment Transactions -----------------------
Portfolio investments are carried at fair value as obtained from outside sources or at a value determined quarterly by the Managing General Partner under the supervision of the Independent General Partners. Until significant developments affecting an investment provide a basis for revaluation, cost approximates fair market value. Due to the inherent uncertainty of valuation for those portfolio investments with a fair value that is not readily ascertainable, the estimated values used may differ significantly from the values that would have been used had a ready market existed for the securities. Investment in securities traded on a national securities exchange are valued at the latest reported sales price on the last business day of the period. If no sale has taken place, the securities are valued at the last bid price. If no bid price has been reported, or if no exchange quotation is available, the securities are valued at the quotation obtained from an outside broker. Investment transactions are recorded on a trade date basis. Income is recorded on an accrual basis.
Use of Estimates ----------------
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of 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.
Income Taxes ------------
Income taxes have not been provided for as the Partnership is a limited partnership and each partner is liable for its own tax payments. Allocation of Partnership profits and losses for tax purposes is based upon taxable income which may differ from net income for financial reporting primarily due to differences between book and tax accounting for portfolio investments.
Distributions -------------
When excess cash, if any, becomes available, it is the Partnership's intent to make distributions. All distributions are subject to the sole discretion of the Managing General Partner and the Independent General Partners.
4. PER UNIT INFORMATION
There is no market for the limited partnership interests. Per unit information is as follows:
5. RELATED PARTY TRANSACTIONS
The Partnership is furnished with certain non-reimbursed management and accounting services by affiliates, which are not reflected in the accompanying financial statements.
The Managing General Partner performs management and administrative services for the operation of the Partnership. The Management Agreement was amended to waive the annual management fee of 1.5% of total assets, computed quarterly, to the Managing General Partner. This payment was terminated after the second quarter of 1998; fees for 1998 totaled $14,325.
The Partnership may place its General Partners on Boards of Directors of portfolio companies.
The Managing General Partner of the Partnership is also the managing general partner of Community Investment Partners, L.P. and Community Investment Partners III, L.P., LLLP, which are also business development companies, and Community Investment Partners IV, L.P., LLLP, an Employees' Securities Company.
Additionally, the Independent General Partners of the Partnership are also the independent general partners of Community Investment Partners III, L.P., LLLP.
6. INVESTMENT TRANSACTIONS
Following is a summary of portfolio investment transactions during the years ended December 31, 2000, 1999 and 1998, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There are two Independent General Partners and one Managing General Partner of the Partnership. These Independent General Partners and the Managing General Partner are responsible for the management and administration of the Partnership. The General Partners are "interested persons" of the Partnership as defined by the Investment Company Act of 1940, but the Partnership has obtained an exemptive order from the Securities and Exchange Commission permitting them to be considered disinterested persons. The Independent General Partners provide overall guidance and supervision with respect to the operation of the Partnership and perform the various duties imposed on the directors of a business development company by the Investment Company Act of 1940. In addition to general fiduciary duties, the Independent General Partners supervise the management and underwriting arrangement of the Partnership, the custody arrangement with respect to portfolio securities, the selection of accountants, fidelity bonding and transactions with affiliates.
Specific Information regarding the Independent General Partners and Managing General Partner
Thomas A. Hughes, 57, is the Assistant Vice President, Associate General Counsel and Manager-Legal of The Detroit Edison Company, the utility subsidiary of DTE Energy Company. He also serves as the Associate General Counsel of DTE Energy Company. Headquartered in Detroit, Michigan, Detroit Edison is Michigan's largest electric utility serving two million customers in Southeastern Michigan. Prior to joining Detroit Edison in 1978, Mr. Hughes served as General Counsel of the Missouri Public Service Commission. Mr. Hughes has served as a Trustee of the Detroit Metropolitan Bar Association Foundation, and as a member of the Michigan State Bar Association Administrative Law Section Council and is currently serving as a member of the Board of Directors of the Michigan Chapter of the American Corporate Counsel Association. Mr. Hughes does not own any units.
Ralph G. Kelly, 43, joined Charter Communications, Inc. in 1993 as Vice President-Finance, a position he held until early 1994, when he became Chief Financial Officer of CableMaxx, Inc., a wireless cable television operator. Mr. Kelly returned as Senior Vice President-Treasurer of Charter Communications, Inc. in February 1996, and has responsibility for treasury operations, investor relations and financial reporting. Mr. Kelly has worked in the cable industry since 1984 when he joined Cencom Cable Associates, Inc. as Controller. Mr. Kelly was promoted to Treasurer of Cencom Cable Associates, Inc. in 1989 and was responsible for treasury management, loan compliance, budget administration, supervision of internal audit and SEC reporting. Mr. Kelly is a Certified Public Accountant and was in the audit division of Arthur Andersen LLP from 1979 to 1984. Mr. Kelly does not own any units.
CIP Management, L.P., LLLP (the "Managing General Partner") is the Managing General Partner of Community Investment Partners II, L.P. The Managing General Partner is also the managing general partner of Community Investment Partners, L.P. and Community Investment Partners III, L.P., LLLP, which are also business development companies, and Community Investment Partners IV, L.P., LLLP, an Employees' Securities Company. The General Partners of the Managing General Partner are CIP Management, Inc., a Missouri corporation and a wholly-owned subsidiary of Edward D. Jones & Co., L.P., and Daniel A. Burkhardt.
The Directors and Officers of CIP Management, Inc. are as follows:
Daniel A. Burkhardt, 53, President, Treasurer and Director of CIP Management, Inc. since October 1989 and general partner of CIP Management, L.P., LLLP since February 1990. He is a general partner of The Jones Financial Companies, L.L.L.P., the parent company of Edward D. Jones & Co., L.P., where he has specialized in investment banking and structuring investments since 1980. He is a director of SEMCO Energy, Inc. Mr. Burkhardt is the beneficial owner of 4,052 Units.
Ray L. Robbins, Jr., 56, Vice President and Director of CIP Management, Inc. since October 1989. He is a general partner of The Jones Financial Companies, L.L.L.P., the parent company of Edward D. Jones & Co., L.P., where he has specialized in securities analysis since 1984, and where he was responsible for municipal bond transactions from 1975 to 1983. Mr. Robbins is Co-Chairman of the Edward D. Jones & Co., L.P. Investment Policy Committee. Mr. Robbins is a beneficial owner of 3,242 Units.
Marilyn A. Gaffney, 42, Secretary of CIP Management, Inc. since October 1989. She is a Limited Partner of The Jones Financial Companies, L.L.L.P., the parent company of Edward D. Jones & Co., L.P., where she has been a senior investment adviser in investment banking since 1980. Ms. Gaffney is the beneficial owner of 405 Units.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Partnership Distributions and Allocations" in the Prospectus of the Partnership dated November 4, 1992, filed with the Securities and Exchange Commission pursuant to Rule 497(b) under the Securities Act of 1933, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning the security ownership of the Independent General Partners and the Officers and Directors of CIP Managements, Inc., described in Item 10, is herein incorporated by reference.
As of March 15, 2001, the following parties are known by the Partnership to be the beneficial owners of more than 5% of the Units.
The Partnership is not aware of any arrangement which may, at a subsequent date, result in a change of control of the Partnership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain relationships and related transactions, described in Item 10, are herein incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. The following documents are filed as part of this report:
1. Financial Statements: --------------------
See Index to Financial Statements and Supplementary Data contained in Item 8