13 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 For The Quarter Ended March 31, 1998 Commission File Number 2-96042 CAPITAL BUILDERS DEVELOPMENT PROPERTIES, A CALIFORNIA LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) California 77-0049671 State or other jurisdiction of I.R.S. Employer organization Identification No. 4700 Roseville Road, Suite 206, North Highlands, California 95660 (Address of Principal executive offices) (Zip Code) Registrant's telephone number, including area code: (916)331-8080 Former name, former address and former fiscal year, if changed since last year: Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No PART 1 - FINANCIAL INFORMATION Capital Builders Development Properties (A California Limited Partnership) BALANCE SHEETS March 31 December 31 1998 1997 ASSETS Cash and cash equivalents $ 3,023 $ 2,310 Accounts receivable, net 125,924 120,152 Investment property, at cost, net of accumulated depreciation and amortization of $1,227,709 and $1,227,226 at March 31, 1998 and December 31, 1997, respectively 3,904,343 3,947,695 Lease commissions, net of accumulated amortization of $59,156 and 58,098 at March 31, 1998, and December 31, 1997, respectively 73,910 80,188 Other assets, net of accumulated amortization of $21,760 and $17,382 at March 31, 1998, and December 31, 1997, respectively 64,553 68,984 Total assets $4,171,753 $4,219,329 LIABILITIES AND PARTNERS' EQUITY Notes payable $ 3,494,114 $ 3,503,398 Accounts payable and accrued liabilities 117,219 88,257 Tenant deposits 48,925 51,989 Total liabilities $3,660,258 $3,643,644 Commitments and contingencies Partners' Equity: General partner (52,709) (52,067) Limited partners 564,204 627,752 Total partners' equity $ 511,495 $ 575,685 Total liabilities and partner's equity $4,171,753 $4,219,329 See accompanying notes to the financial statements. Capital Builders Development Properties (A California Limited Partnership) STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1998 1997 Revenues Rental and other income $ 172,363 $ 354,191 Interest income 49 286 Total revenues 172,412 354,477 Expenses Operating expenses 35,692 71,053 Repairs and maintenance 19,028 43,494 Property taxes 14,185 23,417 Interest 81,364 187,923 General and administrative 30,736 35,364 Depreciation and amortization 55,597 106,569 Total expenses 236,602 467,820 Loss before minority interest (64,190) (113,343) Minority interest in net loss of joint venture - - - - (18,876) Net loss (64,190) (94,467) Allocated to general partners (642) (945) Allocated to limited partners $ (63,548) $ (93,522) Net loss per limited partnership $ (4.61) $ (6.78) unit Average units outstanding 13,787 13,787 See accompanying notes to the financial statements. Capital Builders Development Properties (A California Limited Partnership) STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 1998 1997 Cash flows from operating activities: Net loss ($64,190) ($94,467) Adjustments to reconcile net loss to cash flow provided by/(used in) operating activities: Depreciation and amortization 55,597 106,569 Minority interest in joint venture - - - - - (18,876) Unpaid interest on loan payable to affiliate - - - - - 31,333 Changes in assets and liabilities (Increase)/Decrease in accounts (5,772) 14,381 receivable Increase in leasing commissions - - - - - (15,771) Decrease/(Increase) in other assets 51 (6,939) Increase in accounts payable and accrued liabilities 28,962 16,514 Decrease in tenant deposits (3,064) (7,452) Net cash provided by operating activities 11,584 25,292 Cash flows from investing activities: Improvements to investment properties (1,587) (108) Net cash used in investing (1,587) (108) Cash flows from financing activities: Payments on notes payable (9,284) (23,408) Net cash used in financing activities (9,284) (23,408) Net Increase in cash 713 1,776 Cash, beginning of period 2,310 49,335 Cash, end of period $3,023 $51,111 See accompanying notes to the financial statements. Capital Builders Development Properties (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS March 31, 1998 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows: Basis of Accounting The financial statements of Capital Builders Development Properties (The "Partnership") are prepared on the accrual basis and therefore revenue is recorded as earned and costs and expenses are recorded as incurred. Certain prior year amounts have been reclassified to conform to current year classifications. Principles of Presentation In May 1997 the Partnership sold its 60% interest in Capital Builders Roseville Venture to its affiliate, Capital Builders Development Properties II. Capital Builders Development Properties II, a California Limited Partnership, is an affiliate of the Partnership as they have the same General Partner, Capital Builders, Inc. The financial statements represent financial activity on a consolidated basis until the time of the disposition of the majority- owned subsidiary. All significant intercompany accounts and transactions have been eliminated. The General Partner of Capital Builders Development Properties, Capital Builders, Inc., has no direct ownership interest in the joint venture, and did not receive any compensation for the sale of the subsidiary. Organization Capital Builders Development Properties, a California Limited Partnership, is owned under the laws of the State of California. The Managing General Partner is Capital Builders, Inc., a California corporation (CB). The Partnership is in the business of real estate development and is not a significant factor in its industry. The Partnership's investment properties are located near major urban areas and, accordingly, compete not only with similar properties in their immediate areas but with hundreds of properties throughout the urban areas. Such competition is primarily on the basis of locations, rents, services and amenities. In addition, the Partnership competes with significant numbers of individuals or organizations (including similar companies, real estate investment trusts and financial institutions) with respect to the purchase and sale of land, primarily on the basis of the prices and terms of such transactions. Investment Properties Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Partnership's investment property consists of commercial land, buildings and leasehold improvements that are carried net of accumulated depreciation. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives of three to forty years. The straight-line method of depreciation is followed for financial reporting purposes. Lease Commissions Lease commissions are being amortized over the related lease terms. Income Taxes The Partnership does not provide for income taxes since all income or losses are reported separately on the individual partners' tax returns. Revenue Recognition Rental income is recognized on a straight-line basis over the life of the lease, which may differ from the scheduled rental payments. Net Income/(Loss) per Limited Partnership Unit The net income/(loss) per Limited Partnership unit is computed based on the weighted average number of units outstanding during the quarter ended March 31 of 13,787 in 1998 and 1997. Statement of Cash Flows For purposes of statement of cash flows, the Partnership considers all short-term investments with a maturity, at date of purchase, of three months or less to be cash equivalents. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2 - LIQUIDITY Subsequent to March 31, 1998, Management was successful in its plan to refinance its $180,000 land/construction loan with a 12 month, $290,000, 12.5% interest only land loan. The additional proceeds generated from this loan will be primarily used to reduce the property's accounts payable balance and increase its cash reserves. The refinancing will help stabilize the Partnership and improve its ability to generate future cash flow, but future cash flow still remains dependent upon the Partnership's ability to maintain and improve the occupancy of its investment properties. Additionally, to help improve the Partnership's future cash flow, it will be necessary for Management to obtain additional financing to complete Plaza de Oro's development of Phase II. This financing will require either a joint venture partner, or a construction loan after pre-leasing a portion of the pad building, or a combination of both. Management is currently having preliminary negotiations with potential construction lenders and prospective tenants. It is Management's objective to have financing in place sometime during the third or fourth quarter of 1998 so it can begin Phase II construction. NOTE 3 - RELATED PARTY EXPENSE REIMBURSEMENT AND FEE ARRANGEMENT The Managing General Partner (Capital Builders, Inc.) and the Associate General Partners are entitled to reimbursement of expenses incurred on behalf of the Partnership and certain fees from the Partnership. These fees include: a property management fee up to 6% of gross revenues realized by the Partnership with respect to its properties; a subordinated real estate commission of up to 3% of the gross sales price of the properties; and a subordinated 25% share of the Partnership's distributions of cash from sales or refinancing. The property management fee currently being charged is 5% of gross rental revenues collected. All acquisition fees and expenses, all underwriting commissions, and all offering and organizational expenses which can be paid are limited to 20% of the gross proceeds from sales of Partnership units provided the Partnership incurs no borrowing to develop its properties. However, these fees may increase to a maximum of 33% of the gross offering proceeds based upon the total acquisition and development costs, including borrowing. Since the formation of the Partnership, 27.5% of these fees were paid to the Partnership's related parties, leaving a remaining maximum of 5.5% ($379,143) of the gross offering proceeds. The ultimate amount of these costs will be determined once the properties are fully developed and leveraged. The total management fees paid to the Managing General Partner were $8,010 and $18,553 for the three months ended March 31, 1998 and 1997, respectively, while total reimbursement of expenses was $21,184 and $28,594, respectively. NOTE 4 - INVESTMENT PROPERTIES The components of the investment property account are as follows: March 31, 1998 December 31, 1997 Land $1,353,177 $1,353,177 Building and Improvements 3,289,420 3,287,832 Tenant Improvements 489,455 533,912 Investment properties, at cost 5,132,052 5,174,921 Less: accumulated depreciation and amortization (1,227,709) (1,227,226) Investment property, net $3,904,343 $3,947,695 NOTE 5 - NOTES PAYABLE Notes Payable consist of the following at: March 31, December 31, 1998 1997 Mini-permanent loan with a fixed interest rate of 9.25%, requiring monthly principal and interest payments of $28,689, which is sufficient to amortize the loan over 25 years. The loan is due April 1, 2002. The note is collateralized by a First Deed of Trust on the land, buildings and improvements, and is guaranteed by the General Partner. $3,314,114 $3,323,398 Land loan of $180,000 due March, 24, 1998. The note bears interest at bank prime rate plus 1.5% (10.0% at December 31, 1997 with a 9% floor). The note is secured by Plaza de Oro's separately parceled Phase II land and is guaranteed by the General Partner. This loan was refinanced with a $290,000 land loan on April 1, 1998. 180,000 180,000 Total Notes Payable $3,494,114 $3,503,398 NOTE 6 - LEASES The Partnership leases its properties under long-term noncancelable operating leases to various tenants. The facilities are leased through agreements for rents based on the square footage leased. Minimum annual base rental payments under these leases for the years ending December 31 are as follows: 1998 $582,094 1999 518,136 2000 475,095 2001 259,794 2002 104,178 Total $1,939,297 NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Partnership in estimating it's fair value disclosures for financial instruments. Cash and cash equivalents The carrying amount approximates fair value because of the liquid nature of the instrument. Note payable The fair value of the Partnership's note payable is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Partnership for debt of the same remaining maturities. The estimated fair values of the Partnership's financial instruments are as follows: March 31, 1998 December 31, 1997 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value Assets Cash and cash equivalents $3,023 $3,023 $2,310 $2,310 Liabilities Note payable $3,314,114 $3,314,114 $3,323,398 $3,323,398 Note payable $180,000 $180,000 $180,000 $180,000 NOTE 8 - COMMITMENTS AND CONTINGENCIES The Partnership is involved in litigation primarily arising in the normal course of its business. In the opinion of management, the Partnership's recovery or liability, if any, under any pending litigation would not materially affect its financial condition or operations. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources The Partnership commenced operations on September 19, 1985 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 has raised $6,893,500 (represented by 13,787 Limited Partnership Units). Cash generated from the sale of Limited Partnership Units has been used to acquire land and for the development of a mixed use commercial project and a 60% interest in a commercial office project. During the three months ending March 31, 1998, there were no significant financial transactions that occurred affecting the Partnership. Since December 31, 1997, Plaza de Oro did not recognize any additional lease-up of vacant space, and no additional leasing commissions or tenant improvement costs were incurred. Management does anticipate additional lease-up will occur during 1998 to help stabilize Plaza de Oro's occupancy, estimated to cost approximately $67,400 in tenant improvements and leasing commissions. Subsequent to March 31, 1998, Management was successful in refinancing Plaza de Oro's land loan by obtaining a $290,000, 12 month, 12.5% interest only loan, which provided approximately $90,000 in cash reserves to help meet current year obligations. The Partnership still needs to improve Plaza de Oro's current occupancy of 76% in order to further meet current year obligations. Management continues to actively market the lease-up of Plaza de Oro's existing current vacant space of 15,657 square feet, as well as the undeveloped 9,800 square foot Phase II building. The current commercial real estate market in Sacramento is improving, and potential tenant activity has increased during 1998. Results of Operations The Partnership's total revenues decreased by $182,065 (51.4%) for the three months ended March 31, 1998 as compared to March 31, 1997, while expenses also decreased by $231,218 (49.4%) for the same respective period. In addition, the minority interest in net loss has decreased by $18,876 (100%) in 1998 compared to 1997, all resulting in a decrease in net loss of $30,277 (32.0%) for months ended March 31, 1998 as compared to March 31, 1997. The decrease in revenues is due primarily to the sale of the Partnership's joint venture interest on May 1, 1997. The sale decreased reported revenues by $170,065 since the Partnership no longer owns 60% of the Roseville Joint Venture (Capital Professional Center), as it did during the three months ended March 31, 1997. The Partnership's remaining property, Plaza de Oro, experienced a decrease in revenue of $12,000 due to a decrease in occupancy to 76% from 97% as of March 31, 1998 and 1997, respectfully. The decrease in occupancy is primarily the result of two large industrial tenants, totaling 10,530 square feet, declaring bankruptcy and abandoning their suites. Management is currently in negotiations to lease approximately 3,510 square feet of this space. Total expenses decreased by $231,218 for the three months ended March 31, 1998, as compared to March 31, 1997, primarily due to the sale of its 60% interest in Capital Builders Roseville Venture on May 1, 1997. As of March 31, 1998, the Statement of Operations did not include any joint venture expenses, where as of March 31, 1997, expenses of $217,247 were included. PART II - OTHER INFORMATION Item 1 - Legal Proceeding The Partnership is not a party to, nor is the Partnership's property the subject of, any material pending legal proceedings. Item 2 - Not applicable Item 3 - Not applicable Item 4 - Not applicable Item 5 - Not applicable Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits - None (b) Reports on Form 8-K - None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has dully caused this report to be signed on its behalf by the undersigned, hereunto dully authorized. CAPITAL BUILDERS DEVELOPMENT PROPERTIES a California Limited Partnership By: Capital Builders, Inc. Its Corporate General Partner Date: May 15, 1998 By: Michael J. Metzger President Date: May 15, 1998 By: Kenneth L. Buckler Chief Financial Officer