15
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 June 30, 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
June 30 December 31
1998 1997
ASSETS
Cash and cash equivalents $40,159 $2,310
Accounts receivable, net 112,245 120,152
Investment property, at cost,
net of accumulated depreciation
and amortization of $1,273,902
and $1,227,226 at June 30,
1998 and December 31, 1997,
respectively 3,858,150 3,947,695
Lease commissions, net of accumulated
amortization of $65,405 and 58,098
at June 30, 1998, and December 31,
1997, respectively 67,661 80,188
Other assets, net of accumulated
amortization of $28,964 and
$17,382 at June 30, 1998, and
December 31, 1997, respectively 68,837 68,984
Total assets $4,147,052 $4,219,329
LIABILITIES AND PARTNERS' EQUITY
Notes payable $3,594,614 $3,503,398
Accounts payable and accrued
liabilities 65,705 88,257
Tenant deposits 41,291 51,989
Total liabilities $3,701,610 $3,643,644
Commitments and contingencies
Partners' Equity:
General partner (53,369) (52,067)
Limited partners 498,811 627,752
Total partners' $445,442 $575,685
equity
Total liabilities and partners' $4,147,052 $4,219,329
equity
See accompanying notes to the financial statements.
Capital Builders
Development
Properties
(A California
Limited Partnership)
STATEMENTS OF
OPERATIONS
THREE AND SIX
MONTHS ENDED JUNE
30,
1998 1997
Three Six Three Six
Months Months Months Months
Ended Ended Ended Ended
Revenues
Rental and other
income $177,435 $349,798 $291,611 $645,802
Interest income 111 160 286 572
Total revenues 177,546 349,958 291,897 646,374
Expenses
Operating expenses 42,433 78,125 49,729 120,782
Repairs &
maintenance 22,083 41,111 27,590 71,084
Property taxes 14,113 28,298 16,144 39,561
Interest 86,353 167,717 124,328 312,251
General and
administrative 18,971 49,707 19,984 55,348
Depreciation and
amortization 59,646 115,243 74,178 180,747
Total expenses 243,599 480,201 311,953 779,773
Loss before
minority interest (66,053) (130,243) (20,056) (133,399)
Minority interest
in net loss of joint
venture - - - - - - - - 3,930 22,806
Gain from
disposition of joint
venture - - - - - - - - 1,127,913 1,127,913
Net (loss) income (66,053) (130,243) 1,111,787 1,017,320
Allocated to general
partners (660) (1,302) 11,118 10,173
Allocated to limited
partners ($65,393) ($128,941) $1,100,669 $1,007,147
Net (loss) income per
limited partnership
unit ($4.74) ($9.35) $79.83 $73.05
Average units
outstanding 13,787 13,787 13,787 13,787
See accompanying notes to the financial statements.
Capital Builders
Development
Properties
(A California
Limited
Partnership)
STATEMENTS OF
CASH FLOWS
THREE AND SIX
MONTHS ENDED JUNE
30,
1998 1997
Three Six Three Six
Months Months Months Months
Ended Ended Ended Ended
Cash flows from
operating
activities:
Net (loss) income ($66,053) ($130,243) $1,111,787 $1,017,320
Adjustments to
reconcile net
(loss) income to
cash flows used in
operating
activities:
Depreciation and
amortization 59,646 115,243 74,178 180,747
Minority interest
in joint venture - - - - - - - - (3,930) (22,806)
Gain from
Partnership
Interest - - - - - - - - (1,127,913) (1,127,913)
Unpaid interest
on loan payable
to affiliate - - - - - - - - 24,014 55,347
Changes in assets
and liabilities:
Decrease/(Increase)
in accounts
receivable 13,679 7,907 (34,986) (20,605)
Increase in
leasing commissions - - - - - - - - - - - - (15,771)
Decrease in
other assets 1,611 1,662 8,838 1,899
Decrease in
accounts payable
and accrued
liabilities (51,514) (22,552) (109,037) (92,523)
(Decrease)/
Increase in tenant
deposits (7,634) (10,698) 186 (7,266)
Net cash used in
operating
activities (50,265) (38,681) (56,863) (31,571)
Cash flows from
investing
activities:
Improvements to
investment
properties - - - - (1,587) (15,356) (15,464)
Proceeds from
sale of Partnership - - - - - - - - 14,380 14,380
Net cash used in
investing
activities - - - - (1,587) (976) (1,084)
Cash flows from
financing
activities:
Payments on notes
payable (189,500) (198,784) (12,612) (36,020)
Proceeds from
notes payable 290,000 290,000 141,583 141,583
Payment of loan
fees (13,099) (13,099) (83,275) (83,275)
Net cash provided
by financing
activities 87,401 78,117 45,696 22,288
Net Increase/
(Decrease) in cash 37,136 37,849 (12,143) (10,367)
Cash, beginning of
period 3,023 2,310 51,111 49,335
Cash, end of period $40,159 $40,159 $38,968 $38,968
See accompanying notes to the financial statements.
Capital Builders Development Properties
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 and December 31, 1997
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 (Loss) Income per Limited Partnership Unit
The net (loss) income per Limited Partnership unit is computed based
on the weighted average number of units outstanding during the three
and six months ended June 30 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
As of the six months ended June 30, 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 were 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
prospective tenants. It is Management's objective to have pre-
leasing of approximately 4,000 to 9,800 square feet in place
sometime during the 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
$7,960 and $31,058 for the six months ended June 30, 1998 and 1997,
respectively, while total reimbursement of expenses was $41,765 and
$57,756, respectively.
NOTE 4 - INVESTMENT PROPERTIES
The components of the investment property account are as follows:
June 30, 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 (1,273,902) (1,227,226)
Investment property, net $3,858,150 $3,947,695
NOTE 5 - NOTES PAYABLE
Notes Payable consist of the following at:
June 30, 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. $3,304,614 $3,323,398
Land loan of $180,000 due March 31, 1998
was refinanced with a land loan of
$290,000 due May 1, 1999. The note
requires interest only payments and bears
interest at 12.5%. The note is secured
by Plaza de Oro's separately parceled
Phase II land and is guaranteed by the
General Partner. 290,000 180,000
Total Notes Payable $3,594,614 $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 $571,780
1999 496,918
2000 471,539
2001 259,794
2002 104,178
Total $1,904,209
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.
Notes payable
The fair value of the Partnership's notes 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:
June 30, 1998 December 31, 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Assets
Cash and cash equivalents $40,159 $40,159 $2,310 $2,310
Liabilities
Note payable $3,304,614 $3,304,614 $3,323,398 $3,323,398
Note payable $290,000 $290,000 $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.
NOTE 9 - PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
Accounting for Derivative Instruments and Hedging Activity
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999.
Management believes that the adoption of SFAS No. 133 will not have a
material impact on the financial statements due to the Partnership's
inability to invest in such instruments as stated in the Partnership
agreement.
Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use
In March 1998, the American Society of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use.
SOP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal use. It specifies that
computer software meeting certain characteristics be designated as
internal-use software and sets forth criteria for expensing
capitalizing, and amortizing certain costs related to the development
or acquisition of internal-use software. SOP 98-1 is effective for
fiscal years beginning after December 15, 1998. Management does not
expect that adoption of SOP 98-1 will have a material impact on the
Partnership's financial statements.
Reporting on the Costs of Start-Up Activities
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of
Start-Up Activities. SOP 98-5 provides guidance on the financial
reporting of start-up costs and organization costs. It requires
costs of start-up activities and organization costs to be expensed as
incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998. Management does not expect that adoption of SOP
98-5 will have a material impact on the Partnership's financial
statements.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Year 2000
Management has evaluated all technologies and has determined that the
Partnership's systems appear to be ready. Management has established
back-up systems in order to minimize any risks that would have a
material financial impact on the Partnership.
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 six months ended June 30, 1998, no significant financial
transactions 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 to occur during 1998 which will help stabilize
Plaza de Oro's occupancy. This additional lease-up is estimated to
cost approximately $67,400 in tenant improvements and leasing
commissions, and is anticipated to be funded by cash reserves and
future rental income.
During the second quarter ended June 30, 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 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. There is a
potential risk that an additional 12,052 square feet of office space
may become vacant within the next month due to a major tenant
terminating its business in the Sacramento area. Loss of this
tenant would decrease occupancy to 61%. This tenant's lease does
not expire until January 31, 2001, but as of June 30, 1998 they are
one month past due in rent, and have filed Chapter 11 Bankruptcy.
Included in Note 6 are annual rents of $180,000 for this tenant.
Results of Operations
The Partnership's total revenues decreased by $114,351 (39.2%) for
the second quarter ended June 30, 1998 as compared to the second
quarter ended June 30, 1997, while expenses also decreased by $68,354
(21.9%) for the same respective period. In addition, the minority
interest in net loss decreased by $22,806 (100%), and a gain of
$1,127,913 was recognized during the second quarter ended June 30,
1997 for the sale of its 60% interest in Capital Builders Roseville
Venture, all resulting in a decrease in net income of $1,177,840.
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 revenue by $72,564, as the Partnership still owned
its share of the joint venture for one month during the second
quarter of 1997. The remaining decrease in revenues of $41,787 was
due to a decrease in occupancy at Plaza de Oro.
The decrease in expenses for the second quarter 1998 as compared to
1997 is also primarily due to the sale of its share in the joint
venture.
The Partnership's total revenues decreased by $296,416 (45.9%) for
the six months ended June 30, 1998 as compared to June 30, 1997,
while expenses also decreased by $299,572 (38.4%) for the same
respective period. In addition, the minority interest in net loss
decreased by $22,806 (100%) in 1998 compared to 1997, and a gain of
$1,127,913 was recognized during the quarter ended June 30, 1997 for
the sale of its 60% interest in the Capital Builders Roseville
Venture, all resulting in a decrease in net income of $1,147,563
(112.8%) for the six months ended June 30, 1998 as compared to June
30, 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 $242,630 since the Partnership no
longer owns 60% of the Roseville Joint Venture (Capital Professional
Center), as it did during the six months ended June 30, 1997. The
Partnership's remaining property, Plaza de Oro, experienced a
decrease in revenue of $53,786 due to a decrease in occupancy to 76%
from 95% as of June 30, 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 working on an aggressive
marketing program and anticipates the lease-up of the project prior
to year-end.
Total expenses decreased by $299,572 for the six months ended June
30, 1998, as compared to June 30, 1997, primarily due to the sale of
its 60% interest in Capital Builders Roseville Venture on May 1,
1997. As of June 30, 1998, the Statement of Operations did not
include any joint venture expenses, where as of June 30, 1997,
expenses of $299,645 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: August 12, 1998 By:
Michael J. Metzger
President
Date: August 12, 1998 By:
Kenneth L. Buckler
Chief Financial Officer