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 March 31, 1999 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
<TABLE>
PART I - FINANCIAL INFORMATION
Capital Builders Development
Properties
(A California Limited Partnership)
BALANCE SHEETS
<CAPTION>
March 31, December 31,
1999 1998
<S> <C> <C>
ASSETS
Cash and cash equivalents $4,540 $17,206
Accounts receivable, net 69,303 68,742
Investment property, at cost,
net of accumulated depreciation
and amortization of $1,437,436
and $1,404,343 at March 31,
1999 and December 31, 1998,
respectively 3,694,616 3,727,709
Lease commissions, net of accumulated
amortization of $103,208 and $99,899
at March 31, 1999, and December 31,
1998, respectively 40,455 34,260
Other assets, net of accumulated
amortization of $50,575 and
$43,372 at March 31, 1999, and
December 31, 1998, respectively 47,819 53,389
Total assets $3,856,733 $3,901,306
LIABILITIES AND PARTNERS' EQUITY
Notes payable $3,564,777 $3,574,944
Loan payable to affiliate 51,892 24,000
Accounts payable and accrued
liabilities 145,163 87,929
Tenant deposits 29,617 29,043
Total liabilities $3,791,449 $3,715,916
Commitments and contingencies
Partners' Equity:
General partner (57,171) (55,970)
Limited partners 122,455 241,360
Total partners' equity $65,284 $185,390
Total liabilities and
partner's equity $ 3,856,733 $3,901,306
See accompanying notes to the financial statements.
</TABLE>
<TABLE>
Capital Builders Development
Properties
(A California Limited Partnership)
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
<CAPTION>
1999 1998
<S> <C> <C>
Revenues
Rental and other income $116,456 $172,363
Interest income 547 49
Total revenues 117,003 172,412
Expenses
Operating expenses 34,493 35,692
Repairs and maintenance 30,664 19,028
Property taxes 14,795 14,185
Interest 85,036 81,364
General and administrative 28,513 30,736
Depreciation and amortization 43,608 55,597
Total expenses 237,109 236,602
Net loss (120,106) (64,190)
Allocated to general partners (1,201) (642)
Allocated to limited partners ($118,905) ($63,548)
Net loss per limited partnership unit ($8.62) ($4.61)
Average units outstanding 13,787 13,787
See accompanying notes to the financial statements.
</TABLE>
<TABLE>
Capital Builders Development
Properties
(A California Limited Partnership)
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
<CAPTION>
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net loss ($120,106) ($64,190)
Adjustments to reconcile net loss
to cash flow (used in)/provided
by operating activities:
Depreciation and amortization 43,608 55,597
Changes in assets and liabilities
Increase in accounts receivable (561) (5,772)
Increase in leasing commissions (9,505) - - -
(Increase)/Decrease in other assets (1,635) 51
Increase in accounts
payable and accrued liabilities 57,234 28,962
Increase/(Decrease) in tenant 574 (3,064)
deposits
Net cash (used in)/provided by
operating activities (30,391) 11,584
Cash flows from investing activities:
Improvements to investment properties - - - (1,587)
Net cash used in investing - - - (1,587)
Cash flows from financing activities:
Payments on notes payable (10,167) (9,284)
Proceeds on loans payable to affiliate 27,892 - - -
Net cash provided by/(used in)
financing activities 17,725 (9,284)
Net (Decrease)/Increase in cash (12,666) 713
Cash, beginning of period 17,206 2,310
Cash, end of period $4,540 $3,023
See accompanying notes to the financial statements.
</TABLE>
Capital Builders Development Properties
(A California Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
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.
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.
During 1998, the Partnership adopted 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. The adoption of SOP
98-1 did not have a material impact on the Partnership's financial
statements.
During 1998, the Partnership adopted 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. The adoption did
not have a material impact on the Partnership's financial statements.
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.
Other Assets
Included in other assets are loan fees, which are amortized over the
life of the related note.
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 year
of 13,787 in 1999 and 1998.
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
In November 1998, one of Plaza de Oro's major office tenants,
occupying 12,052 square feet, filed Chapter 11 Bankruptcy and
vacated its suites. Although the tenant's lease does not expire
until January 31, 2001, it is unlikely that any future collections
will be received on the lease.
The loss of this tenant has had a significant negative impact on the
Partnership's cash flow. During the quarter ended March 31, 1999,
Management was successful in re-leasing 5,292 square feet of the
lost tenant's space, and 1,116 square feet of additional office
space that became vacant during 1998. Subsequent to March 31, 1999,
Management was also successful in securing a $150,000 interim loan
to fund lease-up and operating expenses for a 10 month period. It
is still necessary to obtain additional lease-up for the Partnership
to meet current year obligations.
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
$-0- and $8,010 for the three months ended March 31, 1999 and 1998,
respectively, while total reimbursement of expenses was $2,074 and
$21,184, respectively. The Partnership has accrued $47,265 of
management fees and cost reimbursements as of the period ended March
31, 1999.
NOTE 4 - INVESTMENT PROPERTIES
The components of the investment property account, are as follows:
March 31, December 31,
1999 1998
Land $1,353,177 $1,353,177
Building and Improvements 3,289,420 3,289,420
Tenant Improvements 489,455 489,455
Investment properties, at cost 5,132,052 5,132,052
Less: accumulated depreciation
and amortization (1,437,436) (1,404,343)
Investment property, net $3,694,616 $3,727,709
NOTE 5- LOAN PAYABLE TO AFFILIATE
The loan payable at March 31, 1999 represents funds advanced to the
Partnership from Capital Builders, Inc. (General Partner). These
funds were utilized to fund March 31, 1999 and December 1998
property taxes. The loan bears interest at approximately the same
rate charged to the Partnership by a bank for other borrowings
(9.25% as of March 1999) and is payable upon demand.
NOTE 6 - NOTES PAYABLE
Notes Payable consist of the following at:
March 31, December 31,
1999 1998
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. $3,274,777 $3,284,944
Land loan of $290,000 due May 1, 1999,
which has been extended to July 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. 290,000 290,000
Total Notes Payable $3,564,777 $3,574,944
Scheduled principal payments during 1999, 2000, 2001, and 2002 are
$322,000, $46,236, $50,699, and $3,145,842, respectively.
NOTE 7 - 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:
1999 $390,825
2000 345,792
2001 291,666
2002 104,178
Total $1,132,461
NOTE 8 - 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.
Notes payable
The fair value of the Partnership's notes payable are 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, 1999 December 31, 1998
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
Liabilities
Loan payable
to affiliate $51,892 $51,892 $24,000 $24,000
Note payable $3,274,777 $3,274,777 $3,284,944 $3,284,944
Note payable $290,000 $290,000 $290,000 $290,000
NOTE 9 - 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 10 - 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Year 2000 Issue
The potential impact of the Year 2000 issue on the real estate
industry could be material, as virtually every aspect of the industry
and processing of transactions will be affected. Due to the size of
the task facing the real estate industry, the Partnership may be
adversely affected by the problem, depending on whether it and the
entities with which it does business address this issue successfully.
The impact of Year 2000 issues on the Partnership will then depend
not only on corrective actions that the Partnership takes, but also
on the way in which Year 2000 issues are addressed by governmental
agencies, businesses and other third parties that provide services or
data to, or received services or data from, the Partnership, or whose
financial condition or operational capability is important to the
Partnership.
The Partnership's State of Readiness
The Partnership engages the services of third-party software vendors
and service providers for substantially all of its electronic data
processing. Thus, the focus of the Partnership is to monitor the
progress of its primary software providers toward Year 2000
readiness.
The Partnership's Year 2000 program has been divided into phases, all
of them common to all sections of the process: (1) inventorying date-
sensitive information technology and other business systems; (2)
assigning priorities to identified items and assessing the efforts
required for Year 2000 readiness of those determined to be material
to the Partnership; (3) upgrading or replacing material items that
are determined not to be Year 2000 compliant and testing material
items; (4) assessing the status of third party risks; and (5)
designing and implementing contingency and business continuation
plans.
In the first phase, the Partnership has conducted a thorough
evaluation of current information technology systems and software.
Non-information technology systems such as climate control systems,
elevators and security equipment has also been surveyed.
In phase two of the process, results from the inventory have been
assessed to determine the Year 2000 impact and what actions are
required to achieve Year 2000 readiness. For the Partnership's
internal systems, application upgrades of software are needed. The
Partnership has opted for a course of action that will result in
upgrading or replacing all critical internal systems.
The third phase includes the upgrading, replacement and/or retirement
of systems, and testing. This stage of the Year 2000 process is
ongoing and is scheduled to be completed by the third quarter of
1999.
The fourth phase, assessing third party risks, includes the process
of identifying and prioritizing critical suppliers and customers at
the direct interface level. This evaluation includes communicating
with the third parties about their plans and progress in addressing
Year 2000 issues. The Partnership's management has identified
critical third parties and developed a letter inquiring about their
company's Year 2000 program. These letters were sent in April, 1999.
Contingency Plan
The final phase of the Partnership's Year 2000 program relates to
contingency plans. The Partnership maintains contingency plans in
the normal course of business designed to be deployed in the event of
various potential business interruptions. The Partnership's
contingency plan includes maintaining hard copies of tenant leases,
vendor contracts, and accounting records to ensure the maintenance of
its accounting system and to help facilitate the collection of rents
and payments to vendors during computer interruptions.
Costs
As the Company relies upon third-party software vendors and service
providers for substantially all of its electronic data processing,
the primary cost of the Year 2000 Project has been and will continue
to be the reallocation of internal resources and, therefore, does not
represent incremental expense to the Partnership.
Risks
Failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities
or operations. The Partnership believes that, with the
implementation of new or upgraded business systems and completion of
the Year 2000 Project as scheduled, the possibility of significant
interruptions of normal operations due to the failure of those
systems will be reduced. However, the Partnership is also dependent
upon the power and telecommunications infrastructure within the
United States. The most reasonably likely worst case scenario would
be that the Partnership may experience disruption in its operations
if any of these third-party suppliers reported a system failure.
Although the Partnership's Year 2000 Project will reduce the level of
uncertainty about the readiness of its material third-party
providers, due to the general uncertainty over Year 2000 readiness of
these third-party suppliers, the Partnership is unable to determine
at this time whether the consequences of Year 2000 failures will have
a material impact.
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 ended March 31, 1999, a net decrease in cash
of $12,666 was recognized by the Partnership. This was the result of
a negative cash flow from operations of $30,391, net of proceeds
generated by financing activities including additional affiliate loan
advances.
The negative cash flow from operations was caused from the project's
large drop in occupancy relating to the November 1998 bankruptcy of a
major office tenant. As of to March 31, 1999, Management was
successful in re-leasing 6,408 of vacant space and is currently
negotiating lease terms for an additional 8,900 square feet.
The Partnership's property will still require additional lease-up to
meet current year obligations. In order to temporarily solve the
Partnership's cash flow problem, Management obtained a 10 month,
$150,000 interim loan, subsequent to March 31, 1999. This loan
should allow the Partnership to pay for Phase I lease-up costs and
1999 operating deficits.
Management intends within the next six months to also develop the
remaining pad with a 9,860 square foot office/retail building. Lease
terms for this building have been negotiated with a tenant requiring
approximately 6,000 square feet. Once a final signature for this
lease has been obtained, a construction loan will be obtained to pay
off the existing land loan and fund the building improvements.
Management is currently negotiating terms with a construction lender
and anticipates a loan in place prior to July 1, 1999.
Once the project's Phase I has achieved a stabilized occupancy and
the Phase II building is complete, Management's intentions are to
list the entire project for sale. It is anticipated the project
could be sold within a 12 month period.
Results of Operations
During the three months ended March 31, 1999 as compared to March 31,
1998, the Partnership's total revenues decreased by $55,409 (32.1%),
while its expenses increased by $507 (0.2%), all resulting in an
increase in net loss of $55,916.
The decrease in revenues is primarily due to one of Plaza de Oro's
major office tenants, who had occupied 12,052 square feet, filing
Chapter 11 Bankruptcy during the fourth quarter of 1998. This
resulted in a decrease in occupancy from 77% to 60%.
Total expenses increased for the three months ended March 31, 1999 as
compared to March 31, 1998, due to the net effect of:
a) $11,636 (61.2%) increase in repair and maintenance for repairs to
vacant suites and common areas so the project will show better to
prospective tenants;
b) $3,672 (4.5%) increase in interest due to interest accrued on the
affiliate loan;
c) $2,223 (7.2%) decrease in general and administrative due to a
cost cutting program; and
d) $11,989 (21.6%) decrease in depreciation and amortization due to
less tenant improvements in place during 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The Partnership does not have a material market risk due to financial
instruments held by the Partnership. The Partnership's only variable
note instrument consists of a loan payable to affiliate in the amount
of $51,892.
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 10, 1999 By:
Michael J. Metzger
President
Date: May 10, 1999 By:
Kenneth L. Buckler
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,540
<SECURITIES> 0
<RECEIVABLES> 69,303
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 73,843
<PP&E> 5,132,052
<DEPRECIATION> 1,437,436
<TOTAL-ASSETS> 3,856,733
<CURRENT-LIABILITIES> 145,163
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,856,733
<SALES> 0
<TOTAL-REVENUES> 117,003
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 152,073
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 85,036
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (120,106)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
