<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended March 31, 1996
--------------
Commission file number 0-11149
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CAPITAL REALTY INVESTORS, LTD.
- --------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
District of Columbia 52-1219926
- ----------------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11200 Rockville Pike, Rockville, Maryland 20852
- ----------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
(301) 468-9200
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(Registrant's telephone number, including area code)
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 and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at March 31, 1996
- ---------------------------------- ----------------------------------
(Not applicable) (Not applicable)
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1996
Page
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Balance Sheets - March 31, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . 1
Statements of Operations - for the three
months ended March 31, 1996 and 1995 . . . . . 2
Statements of Cash Flows - for the three
months ended March 31, 1996 and 1995 . . . . . 3
Notes to Financial Statements . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . 10
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 15
Signature . . . . . . . . . . . . . . . . . . . . . . . . 16
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . 17
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS, LTD.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 3,523,518 $ 3,350,703
Cash and cash equivalents 1,961,524 1,823,863
Restricted cash equivalents -- 189,000
Acquisition fees, principally paid to related
parties, net of accumulated amortization of
$330,782 and $324,572, respectively 662,698 668,908
Property purchase costs, net of accumulated
amortization of $85,577 and $83,991,
respectively 168,264 169,850
Other assets 5,488 7,385
------------- ------------
Total assets $ 6,321,492 $ 6,209,709
============= ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 6,422,800 $ 6,422,800
Accrued interest payable 8,017,119 7,851,000
Accounts payable and accrued expenses 46,011 63,292
------------- ------------
Total liabilities 14,485,930 14,337,092
------------- ------------
Commitments and contingencies
Partners' capital (deficit):
Capital paid-in:
General Partners 14,000 14,000
Limited Partners 24,837,000 24,837,000
------------- ------------
24,851,000 24,851,000
Less:
Accumulated distributions to partners (512,029) (512,029)
Offering costs (2,689,521) (2,689,521)
Accumulated losses (29,813,888) (29,776,833)
------------- ------------
Total partners' deficit (8,164,438) (8,127,383)
------------- ------------
Total liabilities and partners' deficit $ 6,321,492 $ 6,209,709
============= ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
- 1 -
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS, LTD.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Share of income (loss) from partnerships $ 171,281 $ (9,856)
------------ ------------
Other revenue and expenses:
Revenue:
Interest income 28,447 25,247
------------ ------------
Expenses:
Interest 166,119 166,119
Management fee 23,802 23,802
General and administrative 21,467 26,312
Professional fees 17,599 16,732
Amortization 7,796 7,796
------------ ------------
236,783 240,761
------------ ------------
Total other revenue and expenses (208,336) (215,514)
------------ ------------
Net loss (37,055) (225,370)
Accumulated losses, beginning of period (29,776,833) (29,053,986)
------------ ------------
Accumulated losses, end of period $(29,813,888) $(29,279,356)
============ ============
Loss allocated to General Partners (3%) $ (1,112) $ (6,761)
============ ============
Loss allocated to Limited Partners (97%) $ (35,943) $ (218,609)
============ ============
Loss per unit of Limited Partnership Interest
based on 24,837 units outstanding $ (1.45) $ (8.80)
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS, LTD.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (37,055) $ (225,370)
Adjustments to reconcile net loss to net
cash used in operating activities:
Share of (income) loss from partnerships (171,281) 9,856
Amortization of deferred costs 7,796 7,796
Increase in accrued interest receivable on
advances to partnerships (1,534) (1,534)
Changes in assets and liabilities:
Decrease in other assets 1,897 315
Increase in accrued interest payable 166,119 166,119
Decrease in accounts payable and accrued
expenses (17,281) (10,225)
------------ ------------
Net cash used in operating activities (51,339) (53,043)
------------ ------------
Cash flows from investing activities:
Release of restricted cash equivalents 189,000 --
Receipt of distributions from partnerships -- 52,525
------------ ------------
Net cash provided by investing
activities 189,000 52,525
------------ ------------
Net increase (decrease) in cash and cash
equivalents 137,661 (518)
Cash and cash equivalents, beginning of period 1,823,863 1,522,120
------------ ------------
Cash and cash equivalents, end of period $ 1,961,524 $ 1,521,602
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
- 3 -
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of C.R.I., Inc. (CRI), the Managing General Partner, the
accompanying unaudited financial statements contain all adjustments of a normal
recurring nature necessary to present fairly the financial position of Capital
Realty Investors, Ltd. (the Partnership) as of March 31, 1996 and December 31,
1995, and the results of its operations for the three months ended March 31,
1996 and 1995 and its cash flows for the three months ended March 31, 1996 and
1995.
These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. While the Managing General Partner believes that the dis-
closures presented are adequate to make the information not misleading, it is
suggested that these condensed financial statements be read in conjunction with
the financial statements and the notes included in the Partnership's Annual
Report filed on Form 10-K for the year ended December 31, 1995.
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
As of March 31, 1996, the Partnership's obligations with respect to its
investments in Local Partnerships in the form of purchase money notes of
$6,422,800, plus accrued interest of $8,017,119, are payable upon the earliest
of: (i) sale or refinancing of the respective Local Partnership's rental
property; (ii) payment in full of the respective Local Partnership's permanent
loan; or (iii) maturity. Purchase money notes in an aggregate principal amount
of $1,350,000 mature on January 1, 1997, as discussed below. The remaining
purchase money notes mature in 1998. The purchase money notes are generally
secured by the Partnership's interest in the respective Local Partnerships.
There is no assurance that the underlying properties will have sufficient
appreciation and equity to enable the Partnership to pay the purchase money
notes' principal and accrued interest when due. If a purchase money note is not
paid in accordance with its terms, the Partnership will either have to
renegotiate the terms of repayment or risk losing its partnership interest in
the Local Partnership. The Managing General Partner is continuing to
investigate possible alternatives to reduce the Partnership's long-term debt
obligations. These alternatives include, among others, retaining the cash
available for distribution to meet the purchase money note requirements, buying
out certain purchase money notes at a discounted price, extending the due dates
of certain purchase money notes, or refinancing the respective properties'
underlying debt and using the Partnership's share of the proceeds to pay off or
buy down certain purchase money note obligations.
Interest expense on the Partnership's purchase money notes for both the
three months ended March 31, 1996 and 1995 was $166,119. The accrued interest
payable on the purchase money notes of $8,017,119 and $7,851,000 as of March 31,
1996 and December 31, 1995, respectively, is due on the respective maturity
dates of the purchase money notes or earlier if the Local Partnerships have
distributable net cash flow, as defined in the relevant Local Partnership
agreements.
-4-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
As of both March 31, 1996 and December 31, 1995, the Partnership had
advanced funds totalling $377,593 to Local Partnerships. There were no funds
advanced to the Local Partnerships during the three months ended March 31, 1996.
Purchase money notes relating to Frederick Heights Limited Partnership
(Frederick Heights) and ARA Associates - Shangri-La Ltd. (Shallowford Oaks) in
the principal amounts of $650,000 and $700,000, respectively, mature on January
1, 1997. The Managing General Partner is currently analyzing its options with
respect to these purchase money notes.
On November 23, 1994, the Partnership advanced $72,195 to Shallowford Oaks
to help repay the Local Partnership's outstanding obligations to HUD. This
loan, along with accrued interest of $8,318 and $6,784 as of March 31, 1996 and
December 31, 1995, respectively, is payable from cash flow of Shallowford Oaks
after payment of first-mortgage debt service and after satisfaction by the
Partnership of certain other interest obligations on the related purchase money
notes. There is no assurance that the Local Partnership, upon expiration of any
workout, will be able to repay any loans in accordance with the terms.
In 1989, Sencit Baltic Associates (Baltic Plaza) obtained a letter of
credit in the amount of $189,000 which served as supplemental collateral to its
mortgage loan. The Partnership funded a certificate of deposit in the amount of
$189,000, which was used to collateralize the letter of credit, and as such was
classified as restricted cash equivalents on the balance sheet. As of March 28,
1996, Baltic Plaza is no longer required to provide supplemental collateral for
its mortgage loan, and the letter of credit was subsequently cancelled. As
such, the Partnership's certificate of deposit has been reclassified as
unrestricted cash equivalents.
Statement of Financial Accounting Standards No., 107, "Disclosures About
Fair Value of Financial Instruments" (SFAS 107), requires the disclosure of fair
value information about financial instruments for which it is practicable to
estimate that value. The Partnership implemented SFAS 107 in 1995. The
Partnership has determined that the carrying amount of its cash and cash
equivalents approximates fair value due to the short-term nature of the related
financial instruments. The Partnership has determined that it is not
practicable to estimate the fair value of its purchase money notes, either
individually or in the aggregate, due to: (i) the lack of an active market for
this type of financial instrument, (ii) the variable nature of purchase money
note interest payments as a result of fluctuating cash flow distributions
received from the related Local Partnerships, and (iii) the excessive costs
associated with an independent appraisal of the purchase money notes.
The local general partner of Lake Properties Limited Partnership
(Frenchman's Wharf I), in conjunction with the Managing General Partner, applied
to HUD, holder of the mortgage on the property, for a three-year extension of
the previous workout arrangement, which expired in December 1990. The local HUD
office verbally agreed to an extension expiring December 31, 1993 and
recommended approval of the extension to the HUD central office in Washington,
D.C. In December 1993, the local HUD office requested that a new workout
proposal be submitted, and in January 1994, the local general partner met with
HUD to discuss the long-term capital needs of the property in connection with a
workout proposal. On March 1, 1994, the local general partner submitted a nine-
year workout proposal to HUD. This proposal was rejected by HUD in December
-5-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
1995. As of April 17, 1996, the local general partner is continuing to work
directly with the HUD central office to submit a five-year workout proposal.
There is no assurance that approval for a workout will be received. If a
workout proposal is not accepted and another alternative is not found, then HUD
could foreclose on the property. Frenchman's Wharf I was notified by HUD that
HUD had planned to offer its mortgage loan for sale in September of 1995. HUD
later notified Frenchman's Wharf I that its loan was not included in the pool of
loans sold by HUD in September 1995. As of April 17, 1996, Frenchman's Wharf I
had not been notified as to whether HUD will offer the Frenchman's Wharf I loan
for sale at a later date. If the mortgage is eventually sold by HUD, a new
mortgagee would service the loan and could foreclose on the property. The
uncertainty about the Local Partnership's continued ownership of the property
does not impact the Partnership's financial condition because the related
purchase money note is nonrecourse and secured solely by the Partnership's
interest in the Local Partnership. Therefore, should the investment in
Frenchman's Wharf I not produce sufficient value to satisfy the related purchase
money note, the Partnership's exposure to loss is limited since the amount of
the nonrecourse indebtedness exceeds the carrying amount of the investment in
and advances to the Local Partnership. Thus, even a complete loss of this
investment would not have a material impact on the operations of the
Partnership. Currently, debt-service payments are being made from available
cash flow. To cover operating deficits incurred in prior years for Frenchman's
Wharf I, the Partnership advanced funds totalling $305,398 as of both March 31,
1996 and December 31, 1995. The last advance was made to Frenchman's Wharf I in
March 1987. The Partnership does not expect to advance any additional funds in
connection with Frenchman's Wharf I's loan workout with HUD. These loans,
together with accrued interest of $183,102 as of both March 31, 1996 and
December 31, 1995, are payable from cash flow of Frenchman's Wharf I after
payment of first-mortgage debt service and after satisfaction by the Partnership
of certain other interest obligations on the purchase money notes relating to
the Local Partnership. There is no assurance that the Local Partnership, upon
expiration of any workout, will be able to repay any loans in accordance with
the terms.
The rental property owned by Tanglewood Apartments Associates I
(Tanglewood I) has a mortgage which is federally insured under Section 221(d)(3)
of the National Housing Act, as amended. This property may be eligible for
sale, subject to numerous requirements, under the Low Income Housing
Preservation and Resident Homeownership Act of 1990 (LIHPRHA). This program may
provide incentives to owners of qualifying multifamily housing who commit to
permanently maintain their properties as low to moderate income housing.
Incentives originally available under LIHPRHA included selling the property to
qualified buyers or obtaining supplemental financing for the property. On March
28, 1996, Congress enacted the Housing Opportunity Program Extension Act of 1996
which includes revisions to the LIHPRHA program. These revisions include: (i)
severely limiting the availability of the supplemental financing option for
owners of qualifying multifamily housing, (ii) allowing owners who no longer
qualify for supplemental financing under the revised guidelines to elect to
pursue a sale of the property under the LIHPRHA program, provided that the
election to sell was made by April 15, 1996, and (iii) continuing the funding of
sale transactions under the LIHPRHA program through October 1, 1996, but only
for transactions in which the owner's plan of action is approved by HUD by
August 15, 1996. As of April 17, 1996, there can be no assurance that Congress
will extend the LIHPRHA program beyond the October 1 deadline, or that a
-6-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
modified program will be developed in place of the existing program. Also,
there is no assurance that a sale of Tanglewood I will occur.
Some of the rental properties owned by the Local Partnerships are financed
by state housing agencies. The Managing General Partner has been working to
develop a strategy to sell or refinance certain properties pursuant to programs
developed by these agencies. These programs may include opportunities to sell
the property to a qualifying purchaser who would agree to maintain the property
as low to moderate income housing in perpetuity, or may include opportunities to
refinance the property or obtain supplemental financing. The Managing General
Partner continues to monitor these certain state housing agency programs to
ascertain whether the properties would qualify within the parameters of these
programs and whether these programs would provide an appropriate economic
benefit to the limited partners of the Partnership.
Some other rental properties owned by the Local Partnerships are dependent
on the receipt of housing assistance payments guaranteed by contract under the
HUD Section 8 program. The level of funding for the Section 8 program, and HUD-
insured multifamily housing in general, is dependent upon the continuation of
appropriations approved by Congress for subsidy payments. In the event that the
rental subsidy programs are reduced or phased out, there is no assurance that
the rental properties will be able to maintain the occupancy levels necessary to
pay debt service and operating costs or that the rents necessary to pay debt
service and operating costs will be competitive with rents for comparable units
in the rental properties' respective market areas. While the Managing General
Partner has no reason to believe that HUD will not honor its obligations under
the contracts, some uncertainty exists in light of the recent Congressional
scrutiny of appropriations for HUD programs.
The following are combined statements of operations for the Local
Partnerships in which the Partnership has invested. The statements are compiled
from information supplied by the management agents of the projects and are
unaudited.
-7-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
---------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenue:
Rental revenue $ 4,618,464 $ 4,488,414
Other 264,268 242,555
------------ ------------
4,882,732 4,730,969
------------ ------------
Expenses:
Operating 2,387,870 2,372,549
Interest 1,699,811 1,755,534
Depreciation and amortization 851,125 852,680
------------ ------------
4,938,806 4,980,763
------------ ------------
Net loss $ (56,074) $ (249,794)
============ ============
</TABLE>
As of March 31, 1996 and December 31, 1995, the Partnership's share of
cumulative losses to date for eleven of the eighteen Local Partnerships exceeds
the amount of the Partnership's investments in and advances to those Local
Partnerships by $7,289,514 and $7,060,300, respectively. As the Partnership has
no further obligation to advance funds or provide financing to these Local
Partnerships, the excess losses have not been reflected in the accompanying
financial statements.
3. RELATED-PARTY TRANSACTIONS
In accordance with the terms of the Partnership Agreement, the Partnership
is obligated to reimburse the Managing General Partner for its direct expenses
in managing the Partnership and to pay an annual incentive management fee (the
Management Fee) after all other expenses of the Partnership are paid. The
Partnership paid $18,897 and $15,801 for the three months ended March 31, 1996
and 1995, respectively, as direct reimbursement of expenses incurred on behalf
of the Partnership. Such expenses are included in the accompanying statements
of operations as general and administrative expenses. Additionally, the
Partnership paid the Managing General Partner a Management Fee of $23,802 for
each of the three-month periods ended March 31, 1996 and 1995.
4. CONTINGENCIES
In 1990, CRI, as managing general partner of the Partnership and various
other entities, subcontracted certain property-level asset management functions
-8-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. CONTINGENCIES - Continued
for certain properties to Capital Management Strategies, Inc. (CMS). Among
these properties were properties owned by some of the Local Partnerships in
which the Partnership invested. CMS was formed by Martin C. Schwartzberg, a
nominal general partner of the Partnership and a former stockholder of CRI, when
he retired from and cashed out of CRI and its related businesses as of January
1, 1990. Mr. Schwartzberg agreed not to act as a general partner with respect
to any of the CRI-sponsored partnerships, including this Partnership, and has
not done so since that time. In late 1995, a dispute arose between CRI and CMS
over the funding level of the 1996 contract for CMS. On November 9, 1995, CRI
filed a complaint against CMS to determine the proper amount of fees to be paid
in 1996 under the asset management agreement. CMS answered on January 10, 1996,
but asserted no counterclaims.
Thereafter, Mr. Schwartzberg launched a hostile consent solicitation to be
designated as managing general partner of approximately 125 private partnerships
sponsored by CRI. On January 18, 1996, Mr. Schwartzberg and CMS filed a
complaint in the Circuit Court of Montgomery County, Maryland (the Circuit
Court), against CRI and Messrs. Dockser and Willoughby (who are general partners
of the Partnership) alleging, among other things, that CRI and Messrs. Dockser
and Willoughby have breached the asset management agreement pursuant to which
Mr. Schwartzberg's company, CMS, agreed to perform limited functions related to
property-level issues for a portion of CRI's subsidized housing portfolio
(including some of the properties in which the Partnership invested), by
reducing the proposed budget for 1996. The Partnership is not named as a
defendant in this action. Messrs. Dockser and Willoughby have entered an answer
denying all of Mr. Schwartzberg's claims. Messrs. Dockser and Willoughby have
publicly responded that Mr. Schwartzberg's suit is motivated by his budget
dispute with CRI and personal animosity. On February 6, 1996, CRI terminated
the CMS contract for cause. Mr. Schwartzberg and CMS responded by filing a
motion for injunctive relief in the Circuit Court, asking the court to enjoin
CRI from terminating the contract. In a ruling issued on February 12, 1996, the
Circuit Court, among other things, refused to grant the injunction requested by
CMS. A hearing in this case is scheduled for April 29, 1996. On February 12,
1996, the Circuit Court also issued a memorandum opinion and order enjoining CMS
and Mr. Schwartzberg from disclosing information made confidential under the
asset management agreement.
On February 1, 1996 and February 16, 1996, Mr. Schwartzberg sent letters to
the Partnership requesting investor lists and other forms of investor
information. On February 5, 1996, the Partnership, acting through its managing
general partner, CRI, denied Mr. Schwartzberg's request. On February 20, 1996,
counsel for the Partnership responded to Mr. Schwartzberg's second request,
denying that Mr. Schwartzberg had standing or a proper purpose for requesting
the investor lists. In view of Mr. Schwartzberg's solicitation efforts against
other CRI-sponsored partnerships, CRI anticipates that litigation may arise from
this request.
-9-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Financial Condition/Liquidity
-----------------------------
Capital Realty Investors, Ltd.'s (the Partnership) liquidity, with
unrestricted cash resources of $1,961,524 and $1,823,863 as of March 31, 1996
and December 31, 1995, respectively, along with anticipated future cash
distributions from the Local Partnerships, is expected to meet its current and
anticipated operating cash needs. On March 28, 1996, $189,000 of previously
restricted cash resources was reclassified as unrestricted cash and cash
equivalents, as discussed below. As of April 17, 1996, there are no material
commitments for capital expenditures.
As of March 31, 1996, the Partnership's obligations with respect to its
investments in Local Partnerships in the form of purchase money notes of
$6,422,800, plus accrued interest of $8,017,119, are payable upon the earliest
of: (i) sale or refinancing of the respective Local Partnership's rental
property; (ii) payment in full of the respective Local Partnership's permanent
loan; or (iii) maturity. Purchase money notes in an aggregate principal amount
of $1,350,000 mature on January 1, 1997, as discussed below. The remaining
purchase money notes mature in 1998. The purchase money notes are generally
secured by the Partnership's interest in the respective Local Partnerships.
There is no assurance that the underlying properties will have sufficient
appreciation and equity to enable the Partnership to pay the purchase money
notes' principal and accrued interest when due. If a purchase money note is not
paid in accordance with its terms, the Partnership will either have to
renegotiate the terms of repayment or risk losing its partnership interest in
the Local Partnership. The Managing General Partner is continuing to
investigate possible alternatives to reduce the Partnership's long-term debt
obligations. These alternatives include, among others, retaining the cash
available for distribution to meet the purchase money note requirements, buying
out certain purchase money notes at a discounted price, extending the due dates
of certain purchase money notes, or refinancing the respective properties'
underlying debt and using the Partnership's share of the proceeds to pay off or
buy down certain purchase money note obligations.
Purchase money notes relating to Frederick Heights Limited Partnership
(Frederick Heights) and ARA Associates - Shangri-La Ltd. (Shallowford Oaks) in
the principal amounts of $650,000 and $700,000, respectively, mature on January
1, 1997. The Managing General Partner is currently analyzing its options with
respect to these purchase money notes.
On November 23, 1994, the Partnership advanced $72,195 to Shallowford Oaks
to help repay the Local Partnership's outstanding obligations to HUD. This
loan, along with accrued interest of $8,318 and $6,784 as of March 31, 1996 and
December 31, 1995, respectively, is payable from cash flow of Shallowford Oaks
after payment of first-mortgage debt service and after satisfaction by the
Partnership of certain other interest obligations on the related purchase money
notes. There is no assurance that the Local Partnership, upon expiration of any
workout, will be able to repay any loans in accordance with the terms.
In 1989, Sencit Baltic Associates (Baltic Plaza) obtained a letter of
credit in the amount of $189,000 which served as supplemental collateral to its
mortgage loan. The Partnership funded a certificate of deposit in the amount of
$189,000, which was used to collateralize the letter of credit, and as such was
classified as restricted cash equivalents on the balance sheet. As of March 28,
-10-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
1996, Baltic Plaza is no longer required to provide supplemental collateral for
its mortgage loan, and the letter of credit was subsequently cancelled. As
such, the Partnership's certificate of deposit has been reclassified as
unrestricted cash equivalents.
The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements.
For the three months ended March 31, 1996, release of restricted cash
equivalents supported operating cash requirements.
Statement of Financial Accounting Standards No., 107, "Disclosures About
Fair Value of Financial Instruments" (SFAS 107), requires the disclosure of fair
value information about financial instruments for which it is practicable to
estimate that value. The Partnership implemented SFAS 107 in 1995. The
Partnership has determined that the carrying amount of its cash and cash
equivalents approximates fair value due to the short-term nature of the related
financial instruments. The Partnership has determined that it is not
practicable to estimate the fair value of its purchase money notes, either
individually or in the aggregate, due to: (i) the lack of an active market for
this type of financial instrument, (ii) the variable nature of purchase money
note interest payments as a result of fluctuating cash flow distributions
received from the related Local Partnerships, and (iii) the excessive costs
associated with an independent appraisal of the purchase money notes.
Results of Operations
---------------------
The Partnership's net loss for the three months ended March 31, 1996
decreased from the comparable period in 1995 principally due to an increase in
share of income from Local Partnerships primarily as a result of a decrease in
real estate tax expense at one property. The decrease in real estate tax
expense resulted from a successful appeal for a reduction in the property's tax
assessment. The Partnership's share of income from Local Partnerships also
increased as a result of one property's accumulated losses exceeding the
Partnership's basis in the related investment in Local Partnership during the
fourth quarter of 1995. The Partnership does not record losses from the Local
Partnerships in excess of its investment, as discussed below.
For financial reporting purposes, the Partnership, as a limited partner in
the Local Partnerships, does not record losses from the Local Partnerships in
excess of its investment to the extent that the Partnership has no further
obligation to advance funds or provide financing to the Local Partnerships. As
a result, the Partnership's recognized losses for the three months ended March
31, 1996 did not include losses of $229,214, compared to excluded losses of
$233,695 for the three months ended March 31, 1995.
The local general partner of Lake Properties Limited Partnership
(Frenchman's Wharf I), in conjunction with the Managing General Partner, applied
to HUD, holder of the mortgage on the property, for a three-year extension of
the previous workout arrangement, which expired in December 1990. The local HUD
office verbally agreed to an extension expiring December 31, 1993 and
recommended approval of the extension to the HUD central office in Washington,
D.C. In December 1993, the local HUD office requested that a new workout
proposal be submitted, and in January 1994, the local general partner met with
-11-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
HUD to discuss the long-term capital needs of the property in connection with a
workout proposal. On March 1, 1994, the local general partner submitted a nine-
year workout proposal to HUD. This proposal was rejected by HUD in December
1995. As of April 17, 1996, the local general partner is continuing to work
directly with the HUD central office to submit a five-year workout proposal.
There is no assurance that approval for a workout will be received. If a
workout proposal is not accepted and another alternative is not found, then HUD
could foreclose on the property. Frenchman's Wharf I was notified by HUD that
HUD had planned to offer its mortgage loan for sale in September of 1995. HUD
later notified Frenchman's Wharf I that its loan was not included in the pool of
loans sold by HUD in September 1995. As of April 17, 1996, Frenchman's Wharf I
had not been notified as to whether HUD will offer the Frenchman's Wharf I loan
for sale at a later date. If the mortgage is eventually sold by HUD, a new
mortgagee would service the loan and could foreclose on the property. The
uncertainty about the Local Partnership's continued ownership of the property
does not impact the Partnership's financial condition because the related
purchase money note is nonrecourse and secured solely by the Partnership's
interest in the Local Partnership. Therefore, should the investment in
Frenchman's Wharf I not produce sufficient value to satisfy the related purchase
money note, the Partnership's exposure to loss is limited since the amount of
the nonrecourse indebtedness exceeds the carrying amount of the investment in
and advances to the Local Partnership. Thus, even a complete loss of this
investment would not have a material impact on the operations of the
Partnership. Currently, debt-service payments are being made from available
cash flow. To cover operating deficits incurred in prior years for Frenchman's
Wharf I, the Partnership advanced funds totalling $305,398 as of both March 31,
1996 and December 31, 1995. The last advance was made to Frenchman's Wharf I in
March 1987. The Partnership does not expect to advance any additional funds in
connection with Frenchman's Wharf I's loan workout with HUD. These loans,
together with accrued interest of $183,102 as of both March 31, 1996 and
December 31, 1995, are payable from cash flow of Frenchman's Wharf I after
payment of first-mortgage debt service and after satisfaction by the Partnership
of certain other interest obligations on the purchase money notes relating to
the Local Partnership. There is no assurance that the Local Partnership, upon
expiration of any workout, will be able to repay any loans in accordance with
the terms.
The rental property owned by Tanglewood Apartments Associates I
(Tanglewood I) has a mortgage which is federally insured under Section 221(d)(3)
of the National Housing Act, as amended. This property may be eligible for
sale, subject to numerous requirements, under the Low Income Housing
Preservation and Resident Homeownership Act of 1990 (LIHPRHA). This program may
provide incentives to owners of qualifying multifamily housing who commit to
permanently maintain their properties as low to moderate income housing.
Incentives originally available under LIHPRHA included selling the property to
qualified buyers or obtaining supplemental financing for the property. On March
28, 1996, Congress enacted the Housing Opportunity Program Extension Act of 1996
which includes revisions to the LIHPRHA program. These revisions include: (i)
severely limiting the availability of the supplemental financing option for
owners of qualifying multifamily housing, (ii) allowing owners who no longer
qualify for supplemental financing under the revised guidelines to elect to
pursue a sale of the property under the LIHPRHA program, provided that the
election to sell was made by April 15, 1996, and (iii) continuing the funding of
sale transactions under the LIHPRHA program through October 1, 1996, but only
-12-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
for transactions in which the owner's plan of action is approved by HUD by
August 15, 1996. As of April 17, 1996, there can be no assurance that Congress
will extend the LIHPRHA program beyond the October 1 deadline, or that a
modified program will be developed in place of the existing program. Also,
there is no assurance that a sale of Tanglewood I will occur.
Some of the rental properties owned by the Local Partnerships are financed
by state housing agencies. The Managing General Partner has been working to
develop a strategy to sell or refinance certain properties pursuant to programs
developed by these agencies. These programs may include opportunities to sell
the property to a qualifying purchaser who would agree to maintain the property
as low to moderate income housing in perpetuity, or may include opportunities to
refinance the property or obtain supplemental financing. The Managing General
Partner continues to monitor these certain state housing agency programs to
ascertain whether the properties would qualify within the parameters of these
programs and whether these programs would provide an appropriate economic
benefit to the limited partners of the Partnership.
Some other rental properties owned by the Local Partnerships are dependent
on the receipt of housing assistance payments guaranteed by contract under the
HUD Section 8 program. The level of funding for the Section 8 program, and HUD-
insured multifamily housing in general, is dependent upon the continuation of
appropriations approved by Congress for subsidy payments. In the event that the
rental subsidy programs are reduced or phased out, there is no assurance that
the rental properties will be able to maintain the occupancy levels necessary to
pay debt service and operating costs or that the rents necessary to pay debt
service and operating costs will be competitive with rents for comparable units
in the rental properties' respective market areas. While the Managing General
Partner has no reason to believe that HUD will not honor its obligations under
the contracts, some uncertainty exists in light of the recent Congressional
scrutiny of appropriations for HUD programs.
No other significant changes in the Partnership's operations have taken
place during this period.
General
-------
In 1990, CRI, as managing general partner of the Partnership and various
other entities, subcontracted certain property-level asset management functions
for certain properties to Capital Management Strategies, Inc. (CMS). Among
these properties were properties owned by some of the Local Partnerships in
which the Partnership invested. CMS was formed by Martin C. Schwartzberg, a
nominal general partner of the Partnership and a former stockholder of CRI, when
he retired from and cashed out of CRI and its related businesses as of January
1, 1990. Mr. Schwartzberg agreed not to act as a general partner with respect
to any of the CRI-sponsored partnerships, including this Partnership, and has
not done so since that time. In late 1995, a dispute arose between CRI and CMS
over the funding level of the 1996 contract for CMS. On November 9, 1995, CRI
filed a complaint against CMS to determine the proper amount of fees to be paid
in 1996 under the asset management agreement. CMS answered on January 10, 1996,
but asserted no counterclaims.
-13-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Thereafter, Mr. Schwartzberg launched a hostile consent solicitation to be
designated as managing general partner of approximately 125 private partnerships
sponsored by CRI. On January 18, 1996, Mr. Schwartzberg and CMS filed a
complaint in the Circuit Court of Montgomery County, Maryland (the Circuit
Court), against CRI and Messrs. Dockser and Willoughby (who are general partners
of the Partnership) alleging, among other things, that CRI and Messrs. Dockser
and Willoughby have breached the asset management agreement pursuant to which
Mr. Schwartzberg's company, CMS, agreed to perform limited functions related to
property-level issues for a portion of CRI's subsidized housing portfolio
(including some of the properties in which the Partnership invested), by
reducing the proposed budget for 1996. The Partnership is not named as a
defendant in this action. Messrs. Dockser and Willoughby have entered an answer
denying all of Mr. Schwartzberg's claims. Messrs. Dockser and Willoughby have
publicly responded that Mr. Schwartzberg's suit is motivated by his budget
dispute with CRI and personal animosity. On February 6, 1996, CRI terminated
the CMS contract for cause. Mr. Schwartzberg and CMS responded by filing a
motion for injunctive relief in the Circuit Court, asking the court to enjoin
CRI from terminating the contract. In a ruling issued on February 12, 1996, the
Circuit Court, among other things, refused to grant the injunction requested by
CMS. A hearing in this case is scheduled for April 29, 1996. On February 12,
1996, the Circuit Court also issued a memorandum opinion and order enjoining CMS
and Mr. Schwartzberg from disclosing information made confidential under the
asset management agreement.
On February 1, 1996 and February 16, 1996, Mr. Schwartzberg sent letters to
the Partnership requesting investor lists and other forms of investor
information. On February 5, 1996, the Partnership, acting through its managing
general partner, CRI, denied Mr. Schwartzberg's request. On February 20, 1996,
counsel for the Partnership responded to Mr. Schwartzberg's second request,
denying that Mr. Schwartzberg had standing or a proper purpose for requesting
the investor lists. In view of Mr. Schwartzberg's solicitation efforts against
other CRI-sponsored partnerships, CRI anticipates that litigation may arise from
this request.
-14-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
No reports on Form 8-K were filed with the Commission during the quarter
ended March 31, 1996.
All other items are not applicable.
-15-
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CAPITAL REALTY INVESTORS, LTD.
(Registrant)
By: C.R.I., Inc.
Managing General Partner
April 22, 1996 /s/ Richard J. Palmer
- --------------------------- -----------------------------
Date Richard J. Palmer
Senior Vice President/Finance
Signing on behalf of the
Registrant and as Principal
Accounting Officer
-16-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FIRST QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,961,524
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,321,492
<CURRENT-LIABILITIES> 0
<BONDS> 14,439,919
0
0
<COMMON> 0
<OTHER-SE> (8,164,438)
<TOTAL-LIABILITY-AND-EQUITY> 6,321,492
<SALES> 0
<TOTAL-REVENUES> 199,728
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 70,664
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 166,119
<INCOME-PRETAX> (37,055)
<INCOME-TAX> 0
<INCOME-CONTINUING> (37,055)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (37,055)
<EPS-PRIMARY> (1.45)
<EPS-DILUTED> (1.45)
</TABLE>
