10-Q 1 0001.txt Capital Builders Development Properties (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS 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, 2000 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. 1130 Iron Point Road, Suite 170, Folsom, California 95630 (Address of Principal executive offices) (Zip Code) Registrant's telephone number, including area code: (916)353-0500 Former name, former address and former fiscal year, if changed since last year: 4700 Roseville Road, Suite 206, North Highlands, California 95660 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, 2000 1999 ASSETS Cash and cash equivalents $35,061 $23,679 Accounts receivable, net 70,078 58,194 Investment property, held for sale, at cost, net of accumulated depreciation and amortization of $1,470,519 at June 30, 2000 and December 31, 1999 4,537,654 4,514,466 Lease commissions, net of accumulated amortization of $107,412 at June 30, 2000, and December 31, 1999 113,227 87,948 Other assets, net of accumulated amortization of $90,919 and $71,538 at June 30, 2000, and December 31, 1999, respectively 79,865 79,518 Total assets $4,835,885 $4,763,805 LIABILITIES AND PARTNERS' DEFICIT Notes payable $4,673,768 $4,199,057 Loan payable to affiliate 109,236 104,331 Accounts payable and accrued liabilities 110,310 489,667 Tenant deposits 47,211 44,357 Total liabilities $4,940,525 $4,837,412 Commitments and contingencies Partners' Deficit: General partner (58,870) (58,560) Limited partners (45,770) (15,047) Total partners' deficit ($104,640) ($73,607) Total liabilities and partner's deficit $4,835,885 $4,763,805 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,
2000 1999 Three Six Three Six Months Months Months Months Ended Ended Ended Ended Revenues Rental and other income $247,372 $421,649 $132,887 $249,343 Interest income 690 801 375 922 Total revenues 248,062 422,450 133,262 250,265 Expenses Operating expenses 36,789 75,350 32,557 67,050 Repairs and maintenance 18,113 50,943 14,480 45,144 Property taxes 13,885 27,771 11,719 26,514 Interest 130,888 231,016 82,361 167,397 General and administrative 21,563 49,022 19,160 47,673 Depreciation and amortization 9,107 19,381 44,104 87,712 Total expenses 230,345 453,483 204,381 441,490 Net income/(loss) 17,717 (31,033) (71,119) (191,225) Allocated to general partners 177 (310) (711) (1,912) Allocated to limited partners $17,540 ($30,723) ($70,408) ($189,313) Net income/(loss) per limited partnership unit $1.27 ($2.23) ($5.11) ($13.73) 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 FOR THE SIX MONTHS ENDED JUNE 30,
2000 1999 Cash flows from operating activities: Net loss ($31,033) ($191,225) Adjustments to reconcile net loss to cash flows used in operating activities: Depreciation and amortization 19,381 87,712 Changes in assets and liabilities (Increase)/Decrease in accounts receivable (11,884) 7,812 Increase in leasing commissions (25,279) (41,874) Decrease/(Increase) in other assets 987 (1,102) (Decrease)/Increase in accounts payable and accrued liabilities (45,545) 12,508 Increase in tenant deposits 2,854 10,938 Net cash used in operating activities (90,519) (115,231) Cash flows from investing activities: Improvements to investment properties (357,000) (33,747) Net cash used in investing activities (357,000) (33,747) Cash flows from financing activities: Payments on notes & loan payables (20,355) (20,553) Proceeds from notes & loan payables 495,066 195,304 Payment of loan fees (20,715) (11,584) Proceeds on loans payable to affiliate 4,905 - - - - - Net cash provided by financing activities 458,901 163,167 Net Increase in cash 11,382 14,189 Cash, beginning of period 23,679 17,206 Cash, end of period $35,061 $31,395 Supplemental disclosure: Cash paid for interest $ 238,928 $ 167,397 Non cash investing and financing activity: Capital improvements financed through accounts payable and accrued liabilities $ 333,812 - - - - - See accompanying notes to the financial statements.
Capital Builders Development Properties (A California Limited Partnership) NOTES TO FINANCIAL STATEMENTS June 30, 2000 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. Accounting Pronouncements On December 3, 1999, the Securities Exchange Commission staff issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101). SAB 101 summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB 101 was adopted on January 1, 2000. Management believes the adoption of SAB 101 does not have a material impact on the financial statements. Investment Properties On July 1, 1999, the Partnership's investment property was reclassified as a long-lived asset to be disposed of and is currently listed for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. Subsequent revisions in estimates of fair value less cost to sell are reported as adjustments to the carrying amount, provided that the carrying amount does not exceed the initial carrying amount before an adjustment was made to reflect the decision to sell the asset. As of July 1, 1999, the fair value of the Partnership's investment property less cost to sell exceeded the carrying amount. Therefore, no adjustment was made to the carrying amount. 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. Due to the Partnership's investment property being reclassified as a long lived asset to be disposed of, depreciation expense has not been recorded subsequent to the second quarter of 1999. In accordance with Financial Account Standard No. 34, Capitalization of Interest Cost, interest associated with borrowings used to fund construction in process have been capitalized in the amount of $28,615 and $-0-, respectively, for the six months ended June 30, 2000 and 1999. Other Assets Included in other assets are loan fees, which are amortized over the life of the related note. Lease Commissions Lease commissions are no longer amortized over the related lease terms due to being an intangible directly related to the investment property, which is classified as held for sale. 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 of 13,787 during the periods ending June 30, 2000 and 1999. Statement of Cash Flows For purposes of the statements 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 Additional lease-up in Plaza de Oro's existing Phase I increased the project's overall occupancy to 90% during the second quarter of 2000. This lease-up has improved the Partnership's ability to meet current year obligations, but additional leasing is still required to fully meet its obligations. During the first quarter 2000, the Partnership obtained an additional $300,000 working capital/tenant improvement loan. The proceeds from this loan paid down the $150,000 interim loan, funded the shortfall from operations due to negative cash flow during the first quarter, and paid for a portion of building improvements during the first quarter. Due to the property approaching a stabilized occupancy, Management listed the property for sale with an independent brokerage firm on July 1, 1999. The estimated sales proceeds are projected to be in excess of current obligations. A property sale contract was entered into on March 23, 2000, which has an expected closing date of August 31, 2000. This contract offer does not represent a guaranteed sales price, and at this time, Management has not finalized a plan for the use of the proceeds from the sale of the property. If the current offer does result in a sale and if a plan to dissolve the Partnership is adopted, approximately 14% of the original invested capital would be available for distribution. 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 remaining fees (including the subordinated real estate commissions, the subordinated share of distribution and the remaining acquisition fees) would not be payable based on the current contract sale price of the assets to be disposed of. The total management fees paid to the Managing General Partner were $26,604 and $-0- for the six months ended June 30, 2000 and 1999, respectively. Total reimbursement of expenses was $37,684 and $10,522, respectively. The Partnership has accrued $49,044 of management fees and cost reimbursements as of June 30, 2000. NOTE 4 - INVESTMENT PROPERTIES The components of the investment property account are as follows: June 30, December 31, 2000 1999 Land $1,353,177 $1,353,177 Building and Improvements 4,075,029 3,281,797 Tenant Improvements 579,967 577,747 Construction in Progress - - - - 772,264 Investment properties, at cost 6,008,173 5,984,985 Less: accumulated depreciation and amortization (1,470,519) (1,470,519) Investment property, net $4,537,654 $4,514,466 NOTE 5 - LOAN PAYABLE TO AFFILIATE The loan payable at June 30, 2000 and December 31, 1999 represents funds advanced to the Partnership from Capital Builders, Inc. (General Partner). These funds were utilized to cover negative cash flow from operations. The loan bears interest at approximately the same rate charged to the Partnership by a bank for other borrowings (9.25% as of June 30, 2000) and is payable upon demand. The Partnership accrued interest of $11,934 and $7,154 for the periods ending June 30, 2000 and December 31, 1999, respectively. NOTE 6 - NOTES PAYABLE Notes Payable consist of the following: June 30, December 31, 2000 1999 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 Phase I land, buildings and improvements, and is guaranteed by the General Partner. $3,220,299 $3,242,885 Construction loan in the amount of $1,123,000, which accrues interest at Prime +1% (Prime as of June 30, 2000 is 9.5%) and is due August 19, 2000. The loan provides for a six month extension period. Interest accrues monthly on the outstanding balance of the cumulative construction loan draws. The Note provides for future draws of $159,531 for construction costs. This loan is secured by a First Deed of Trust on Phase II land and improvements, and is guaranteed by the General Partner. 963,469 616,172 A construction loan in the amount of $190,000 due March 1, 2001. The note requires interest only payments and bears interest at 13.5%. The note is a Second Deed of Trust on Phase II land and improvements. A restricted cash reserve balance is maintained to service monthly payments until October 31, 2000. The restricted cash balance as of June 30, 2000 and December 31, 1999 was $6,703 and $19,362, respectively. 190,000 190,000 Interim tenant improvement/leasing commission loan of $150,000 due March 1, 2000, which was paid in full. The note required interest only payments and bore interest at 15%. The note was secured by a Second Deed Of Trust on Plaza de Oro's Phase I land and improvements. -0- 150,000 Interim working capital, tenant improvement/leasing commission loan of $300,000 due March 1, 2001. The Note requires interest only payments and bears interest at 15%. The Note is secured by a Second Deed of Trust on Plaza de Oro's Phase I land and improvements. 300,000 -0- Total Notes Payable $4,673,768 $4,199,057 Scheduled principal payments during 2000, 2001, and 2002 are $996,726, $531,071, and $3,145,971, 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: 2000 $ 610,613 2001 612,014 2002 358,378 2003 165,876 2004 163,335 Thereafter 33,041 Total $1,943,257 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: June 30, 2000 December 31,1999 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value Liabilities Loan payable to affiliate $109,236 $109,236 $104,331 $104,331 Note payable $3,220,299 $3,220,299 $3,242,885 $3,242,885 Note payable $963,469 $963,469 $616,172 $616,172 Note payable $190,000 $190,000 $190,000 $190,000 Note payable - - - - - - $150,000 $150,000 Note payable $300,000 $300,000 - - - - - - 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 as amended is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. 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 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, 2000, cash increased by $11,382. This was the result of net cash provided by financing in the amount of $458,901, which was offset by negative cash flow from operations of $90,519 and net cash used for Phase II building improvements of $357,000. The negative cash flow from operations is primarily the result of the project's remaining vacant space, the leasing commissions paid year- to-date to lease-up a portion of its vacant space, and the reduction of accounts payable. In order to temporarily solve the Partnership's cash flow problem, Management obtained a 12 month, $300,000 interim loan during the first quarter 2000. This loan allowed the Partnership to pay for Phase I lease-up costs, 2000 operating deficits, and Phase II cost increases. During the second quarter of 2000, the 9,424 square foot Phase II office/retail building was completed and placed into service. The building is currently partially occupied by a 6,424 square foot tenant, and lease negotiations are in process for an additional 1,500 square foot tenant. Plaza de Oro's Phase I and Phase II were listed for sale on July 1, 1999 with an independent brokerage firm. There has been an offer received, but this offer does not represent a guaranteed sales price. The project's current offering price less costs to sell is in excess of the carrying value of the property and the Partnership's current obligations. At this time, Management has not finalized a plan for the use of proceeds from the sale of the property. Results of Operations During the six months ended June 30, 2000 as compared to June 30, 1999, the Partnership's total revenues increased by $172,185 (68.8%), while its expenses also increased by $11,993 (2.7%), all resulting in a decrease in net loss of $160,192. The increase in revenues is due to the increase in Phase I's occupancy to 93% from 68% at June 30, 2000 and 1999, respectively. Additionally, Phase II began providing rental income during the second quarter of 2000. Total expenses decreased for the six months ended June 30, 2000 as compared to June 30, 1999, due to the net effect of: a) $8,300 (12.4%) increase in operating expenses due to higher utility costs incurred for the office building due to an increase in occupancy; b) $5,799 (12.8%) increase in repair and maintenance due to additional clean-up costs incurred in preparing the property for sale; c) $63,619 (38%) increase in interest due to interest incurred for additional borrowings for Phase II and the additional operating loan, plus interest accrued on the affiliate loan; and d) $68,331 (77.9%) decrease in depreciation and amortization due to depreciation no longer being taken subsequent to the second quarter 1999, as the Partnership's property had been reclassified as a long lived asset to be disposed of. During the second quarter ended June 30, 2000 as compared to June 30, 1999, revenues increased by $114,800 (86.1%), while expenses also increased by $25,964 (12.7%). The increase in revenue is due to the increase in occupancy of Phase I, as well as Phase II being placed into service in April 2000, thereby generating revenue. The increase in expenses is primarily due to the increase in interest cost for Phase II borrowings and the operating loan. 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 variable rate instruments consist of a loan payable to affiliate and a construction loan for Phase II. The total outstanding balance of the loan payable to affiliate at June 30, 2000 was $109,236, while the total outstanding balance of the construction loan was $963,469. 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 11, 2000 By: Michael J. Metzger President Date: August 11, 2000 By: Kenneth L. Buckler Chief Financial Officer