<PAGE>
FORM 10-Q
UNITED STATES 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 September 30, 1996
------------------
Commission file number 0-11149
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CAPITAL REALTY INVESTORS, LTD.
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(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
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(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 September 30, 1996
- ---------------------------------- ----------------------------------
(Not applicable) (Not applicable)
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
Page
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Balance Sheets - September 30, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . 1
Statements of Operations - for the three and nine
months ended September 30, 1996 and 1995 . . . 2
Statements of Cash Flows - for the nine
months ended September 30, 1996 and 1995 . . . 3
Notes to Financial Statements . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . 11
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 17
Signature . . . . . . . . . . . . . . . . . . . . . . . . 18
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . 19
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS, LTD.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 2,097,273 $ 3,350,703
Cash and cash equivalents 2,942,504 1,823,863
Restricted cash equivalents -- 189,000
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $316,175 and $324,572, respectively 596,245 668,908
Property purchase costs, net of accumulated amortization of
$83,026 and $83,991, respectively 153,541 169,850
Other assets 7,588 7,385
------------ ------------
Total assets $ 5,797,151 $ 6,209,709
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 4,978,800 $ 6,422,800
Accrued interest payable 6,245,909 7,851,000
Distributions payable 484,073 --
Accounts payable and accrued expenses 138,037 63,292
Consulting fees payable to related parties 72,327 --
------------ ------------
Total liabilities 11,919,146 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 (996,102) (512,029)
Offering costs (2,689,521) (2,689,521)
Accumulated losses (27,287,372) (29,776,833)
------------ ------------
Total partners' deficit (6,121,995) (8,127,383)
------------ ------------
Total liabilities and partners' deficit $ 5,797,151 $ 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 For the nine months ended
September 30, September 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Share of income (loss) from partnerships $ 270,603 $ 18,569 $ 606,607 $ (137,381)
------------ ------------ ------------ ------------
Other revenue and expenses:
Revenue:
Interest income 30,094 29,754 86,910 83,680
------------ ------------ ------------ ------------
Expenses:
Interest 160,472 166,119 492,710 498,357
Management fee 23,802 23,802 71,406 71,406
General and administrative 21,088 17,509 63,077 68,131
Professional fees 16,248 15,545 51,228 47,628
Amortization 7,720 7,796 23,312 23,388
------------ ------------ ------------ ------------
229,330 230,771 701,733 708,910
------------ ------------ ------------ ------------
Total other revenue and expenses (199,236) (201,017) (614,823) (625,230)
------------ ------------ ------------ ------------
Income (loss) before gain on disposition of
investment in partnership 71,367 (182,448) (8,216) (762,611)
Gain on disposition of investment in
partnership 2,479,453 -- 2,479,453 --
------------ ------------ ------------ ------------
Income (loss) before extraordinary gain from
extinguishment of debt 2,550,820 (182,448) 2,471,237 (762,611)
Extraordinary gain from extinguishment of debt 18,224 -- 18,224 --
------------ ------------ ------------ ------------
Net income (loss) 2,569,044 (182,448) 2,489,461 (762,611)
Accumulated losses, beginning of period (29,856,416) (29,634,149) (29,776,833) (29,053,986)
------------ ------------ ------------ ------------
Accumulated losses, end of period $(27,287,372) $(29,816,597) $(27,287,372) $(29,816,597)
============ ============ ============ ============
Income (loss) allocated to General Partners (3%) $ 77,071 $ (5,473) $ 74,684 $ (22,878)
============ ============ ============ ============
Income (loss) allocated to Limited Partners (97%) $ 2,491,973 $ (176,975) $ 2,414,777 $ (739,733)
============ ============ ============ ============
Income (loss) per unit of Limited Partnership Interest
based on 24,837 units outstanding $ 100.33 $ (7.12) $ 97.22 $ (29.78)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS, LTD.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,489,461 $ (762,611)
Adjustments to reconcile net loss to net
cash used in operating activities:
Share of (income) loss from partnerships (606,607) 137,381
Amortization of deferred costs 23,312 23,388
Increase in accrued interest receivable on
advances to partnerships (4,602) (4,602)
Gain on disposition of investment in partnership (2,479,453) --
Gain on extinguishment of debt (18,224) --
Payment of purchase money note interest (29,021) --
Changes in assets and liabilities:
Increase in other assets (203) (1,094)
Increase in accrued interest payable 492,710 498,357
Increase in accounts payable and accrued expenses 147,072 22,417
------------ ------------
Net cash provided by (used in) operating activities 14,445 (86,764)
------------ ------------
Cash flows from investing activities:
Proceeds from disposition of investment in partnership 2,354,802 --
Release of restricted cash equivalents 189,000 --
Receipt of distributions from partnerships 291,046 419,584
------------ ------------
Net cash provided by investing activities 2,834,848 419,584
------------ ------------
Cash flows from financing activities:
Pay-off of purchase money note (1,730,652) --
------------ ------------
Net increase in cash and cash equivalents 1,118,641 332,820
Cash and cash equivalents, beginning of period 1,823,863 1,522,120
------------ ------------
Cash and cash equivalents, end of period $ 2,942,504 $ 1,854,940
============ ============
</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 September 30, 1996 and December
31, 1995, and the results of its operations for the three and nine months ended
September 30, 1996 and 1995 and its cash flows for the nine months ended
September 30, 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
The Partnership's obligations with respect to its investments in Local
Partnerships in the form of purchase money notes having a principal balance of
$4,978,800, plus accrued interest of $6,245,909 as of September 30, 1996, are
payable in full 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 $1,200,000 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 the three
and nine months ended September 30, 1996 was $160,472 and $492,710,
respectively, and for the three and nine months ended September 30, 1995 was
$166,119 and $498,357, respectively. The accrued interest payable on the
purchase money notes of $6,245,909 and $7,851,000 as of September 30, 1996 and
December 31, 1995, respectively, is due on the respective maturity dates of the
purchase money notes or earlier if the pertinent Local Partnership has
distributable net cash flow, as defined in the relevant Local Partnership
agreements.
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<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
As of both September 30, 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 nine months ended September 30,
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 $500,000 and $700,000, respectively, mature on January
1, 1997. On August 30, 1996, the Partnership paid off one of the purchase money
notes relating to Frederick Heights at a discount, resulting in a gain on
extinguishment of debt of $18,224. The Managing General Partner is currently
analyzing its options with respect to the remaining Frederick Heights and
Shallowford Oaks 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 $11,386 and $6,784 as of September 30, 1996
and December 31, 1995, respectively, is payable from cash flows 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.
Accordingly, the Partnership's certificate of deposit has been reclassified as
unrestricted cash equivalents.
The local general partner of Lake Properties Limited Partnership
(Frenchman's Wharf I), in conjunction with the Managing General Partner, applied
to the U.S. Department of Housing and Urban Development (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 1995. On April 30, 1996,
the local general partner received approval from HUD for a four-year workout.
Under the workout agreement, Frenchman's Wharf I will make minimum monthly
payments to HUD, consisting of a service charge and tax escrow. Additionally,
Frenchman's Wharf I will make monthly interest payments representing
approximately 50%, 65%, 85% and 100% of the interest due on the outstanding
principal balance of the note for the periods July 1 through June 30 during the
years 1996 through 2000, respectively.
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<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
To cover operating deficits incurred in prior years for Frenchman's Wharf
I, the Partnership advanced funds totalling $305,398 as of both September 30,
1996 and December 31, 1995. No advances have been made to Frenchman's Wharf I
since March 1987, and 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 September 30, 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 the workout, will be able to repay the loans in accordance with
the terms.
The purchase money notes related to Frenchman's Wharf I in the principal
amount of $3,778,800, which were initially due to mature on June 1, 1988, have
been extended to mature on June 1, 1998. In conjunction with the four-year
workout agreement, the Partnership is currently negotiating with the purchase
money note holders to reach an extension agreement which would be coterminous
with the expiration of the HUD workout arrangement. There is no assurance that
the noteholders will consent to an extension agreement. As of October 24, 1996,
the noteholders had not given consent to an extension agreement. As such, the
Local Partnership's continued ownership of the property is uncertain. 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 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.
On May 23, 1994, the local general partners of Tanglewood Apartments
Associates I Limited Partnership (Tanglewood I) filed a notice of intent to
participate under the Low Income Housing Preservation and Resident Home
Ownership Act of 1990 (LIHPRHA). On July 11, 1996, the plan of action for the
sale of Tanglewood I under the LIHPRHA program was approved by HUD. This
program may provide incentives to owners of multifamily housing who commit to
operate their properties as low to moderate-income housing permanently and who
have participated under specific federal subsidy programs (Section 236 or
Section 221(d)(3)) for at least 18 years. Incentives available under the
LIHPRHA program include selling the property to qualified buyers.
On September 19, 1996, Tanglewood I sold the property, a 192-unit apartment
complex located in Westwego, Louisiana, under the LIHPRHA program to New Orleans
Affordable Housing, Inc., a District of Columbia non-profit entity. The sale of
the property generated net cash proceeds to the Partnership of approximately
$904,000. The Partnership anticipates receiving additional sales proceeds of
$96,133 from the release of the property's reserves. The proceeds received were
net of approximately $1.6 million used to retire, at a discount, the
Partnership's purchase money note obligation with respect to the property. The
sale provided proceeds to the Partnership in excess of its investment in the
Local Partnership, and resulted in a net financial statement gain of $2,479,453,
of which approximately $1.764 million resulted from the retirement of the
-6-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
purchase money note obligation with respect to the property. The tax gain is
estimated to be approximately $4,000,000. The Partnership intends to distribute
$484,073 (or approximately $19.49 per Limited Partner unit) to the Limited
Partners by October 31, 1996. The Managing General Partner intends to retain
all of the Partnership's remaining undistributed net sale proceeds for the
possible repayment, prepayment or purchase of the Partnership's outstanding
purchase money notes related to other Local Partnerships. The Managing General
Partner of the Partnership and/or its affiliates are expected to receive net
fees of $72,327 for its services relating to the sale of the property. As of
October 24, 1996 these fees have not been paid.
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 to refinance the property,
or to obtain supplemental financing. The Managing General Partner continues to
monitor 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 of the rental properties owned by the Local Partnerships are dependent
on the receipt of housing assistance payments guaranteed by contract under the
HUD Section 8 Housing Assistance Payment (HAP) program. The level of funding
for the Section 8 HAP program, and HUD-insured multifamily housing in general,
is dependent upon the continuation of appropriations approved by Congress for
subsidy payments. In March 1996, HUD released a revised version of the
Reinvention Blueprint issued one year ago. The Reinvention Blueprint contains a
proposal which has come to be known as the "Mark to Market" initiative. Per
this initiative, HUD is proposing to eliminate the Section 8 HAP contracts on
certain properties, under which the property owners directly receive monthly
subsidies for units occupied by low-income tenants. Instead, HUD would provide
voucher or certificate rental assistance directly to eligible residents. In the
event that the Section 8 HAP program is eliminated or funding of Section 8 HAP
contracts of rental properties owned by the Local Partnerships is discontinued,
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.
As of October 24, 1996 Congress, the Senate and the Clinton Administration
continue to struggle with the "Mark to Market" legislation. In the interim,
Congress has authorized a one-year extension of project-based Section 8 HAP
contracts expiring during fiscal years 1996 and 1997. In light of recent
political scrutiny of appropriations for HUD programs, continued funding of
annual renewals for Section 8 HAP contracts expiring after fiscal year 1997 is
uncertain.
On August 29, 1996, Equity Resource Bay Fund (Bay Fund), a Massachusetts
Limited Partnership and a Limited Partner in the Partnership, and affiliates of
Bay Fund initiated a tender offer to purchase 900 additional units in the
Partnership at a price of $10 per Limited Partner unit. Bay Fund, which is
unaffiliated with CRI, Inc., stated that it made the offer for the express
-7-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
purpose of holding the Limited Partner units for investment purposes and not
with a view to resale. The purchase offer was determined solely at the
discretion of Bay Fund and does not necessarily represent the fair market value
of each Limited Partner unit. The Bay Fund and affiliates' offer expired on
September 29, 1996, and as of October 24, 1996, Bay Fund and affiliates held
approximately 1.7% of the Limited Partner units of the Partnership as a result
of their tender offer.
The following are combined statements of operations for the seventeen and
eighteen Local Partnerships in which the Partnership has invested as of
September 30, 1996 and 1995, respectively. The 1996 statements contain
information on the eighteenth property, Tanglewood I, through the date of sale.
The statements are compiled from information supplied by the management agents
of the projects and are unaudited.
-8-
<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 For the nine months ended
September 30, September 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rental revenue $ 4,663,164 $ 4,542,876 $ 13,954,477 $ 13,548,901
Other 269,797 235,753 801,104 665,407
------------ ------------ ------------ ------------
4,932,961 4,778,629 14,755,581 14,214,308
------------ ------------ ------------ ------------
Expenses:
Operating 2,325,388 2,390,644 7,142,781 7,247,977
Interest 1,699,808 1,755,530 5,099,429 5,266,600
Depreciation and amortization 851,120 852,675 2,553,372 2,558,037
------------ ------------ ------------ ------------
4,876,316 4,998,849 14,795,582 15,072,614
------------ ------------ ------------ ------------
Net income (loss) $ 56,645 $ (220,220) $ (40,001) $ (858,306)
============ ============ ============ ============
</TABLE>
As of September 30, 1996 and December 31, 1995, the Partnership's share of
cumulative losses to date for seven of the seventeen and eleven of the eighteen
Local Partnerships, respectively, exceeds the amount of the Partnership's
investments in and advances to those Local Partnerships by $7,713,104 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. The Partnership paid $13,969 and $48,913 for the
three and nine months ended September 30, 1996 and $11,687 and $45,318 for the
three and nine months ended September 30, 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 is obligated to pay an
annual incentive management fee (the Management Fee) after all other expenses of
the Partnership are paid. The Partnership paid the Managing General Partner a
Management Fee of $23,802 and $71,406 for the three and nine months,
respectively, ended September 30, 1996 and 1995.
The Managing General Partner and/or its affiliates may receive a fee in an
amount of not more than 2% of the sales price of the investment in a Local
Partnership or the property it owns, payable under certain conditions upon the
-9-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. RELATED-PARTY TRANSACTIONS - Continued
sale of the investment in a Local Partnership or the property it owns. The
payment of the fee is subject to certain restrictions, including achieving a
certain level of sales proceeds and making certain minimum distributions to
limited partners. The Managing General Partner and/or its affiliates are
expected to receive net fees of $72,327 for its services relating to the sale of
the Tanglewood I property. As of October 24, 1996, these fees have not been
paid.
4. CONTINGENCIES
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.
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 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 was not named as a defendant in
this action. Messrs. Dockser and Willoughby entered an answer denying all of
Mr. Schwartzberg's claims. Messrs. Dockser and Willoughby publicly responded
that Mr. Schwartzberg's suit was 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. 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 June 12, 1996, Mr. Schwartzberg, CRI and others entered an agreement
(which contemplates the execution of a subsequent definitive agreement) to
resolve the disputes between CRI and CMS. The Partnership was not a signatory
to the agreement. As part of the resolution, Mr. Schwartzberg withdrew any
derogatory statements he made about CRI and its principals. Upon execution of
the definitive agreement, Mr. Schwartzberg shall withdraw as a General Partner
-10-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
4. CONTINGENCIES - Continued
of this Partnership and his interest will become that of a Special Limited
Partner. As of October 24, 1996, CRI and Mr. Schwartzberg continue to finalize
the terms of the definitive agreement.
-11-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Capital Realty Investors, Ltd.'s (the Partnership) Management's Discussion
and Analysis of Financial Condition and Results of Operations contains
information that may be considered forward looking. This information contains a
number of risks and uncertainties, as discussed herein and in the Partnership's
Annual Report filed on Form 10-K, that could cause actual results to differ
materially.
Financial Condition/Liquidity
-----------------------------
The Partnership's liquidity, with unrestricted cash resources of $2,942,504
(or approximately $114.92 per Limited Partner unit) and $1,823,863 (or
approximately $71.23 per Limited Partner unit) as of September 30, 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 October 24, 1996, there are no material
commitments for capital expenditures.
The Partnership's obligations with respect to its investments in Local
Partnerships in the form of purchase money notes having a principal balance of
$4,978,800, plus accrued interest of $6,245,909 as of September 30, 1996, are
payable in full 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 $1,200,000 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 $500,000 and $700,000, respectively, mature on January
1, 1997. On August 30, 1996, the Partnership paid off one of the purchase money
notes relating to Frederick Heights at a discount, resulting in a gain on
extinguishment of debt of $18,224. The Managing General Partner is currently
analyzing its options with respect to the remaining Frederick Heights and
Shallowford Oaks 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 $11,386 and $6,784 as of September 30, 1996
-12-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
and December 31, 1995, respectively, is payable from cash flows 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.
Accordingly, the Partnership's certificate of deposit has been reclassified as
unrestricted cash equivalents.
On May 23, 1994, the local general partners of Tanglewood Apartments
Associates I Limited Partnership (Tanglewood I) filed a notice of intent to
participate under the Low Income Housing Preservation and Resident Home
Ownership Act of 1990 (LIHPRHA). On July 11, 1996, the plan of action for the
sale of Tanglewood I under the LIHPRHA program was approved by HUD. This
program may provide incentives to owners of multifamily housing who commit to
operate their properties as low to moderate-income housing permanently and who
have participated under specific federal subsidy programs (Section 236 or
Section 221(d)(3)) for at least 18 years. Incentives available under the
LIHPRHA program include selling the property to qualified buyers.
On September 19, 1996, Tanglewood I sold the property, a 192-unit apartment
complex located in Westwego, Louisiana, under the LIHPRHA program to New Orleans
Affordable Housing, Inc., a District of Columbia non-profit entity. The sale of
the property generated net cash proceeds to the Partnership of approximately
$904,000. The Partnership anticipates receiving additional sales proceeds of
$96,133 from the release of the property's reserves. The proceeds received were
net of approximately $1.6 million used to retire, at a discount, the
Partnership's purchase money note obligation with respect to the property. The
sale provided proceeds to the Partnership in excess of its investment in the
Local Partnership, and resulted in a net financial statement gain of $2,479,453,
of which approximately $1.764 million resulted from the retirement of the
purchase money note obligation with respect to the property. The tax gain is
estimated to be approximately $4,000,000. The Partnership intends to distribute
$484,073 (or approximately $19.49 per Limited Partner unit) to the Limited
Partners by October 31, 1996. The Managing General Partner intends to retain
all of the Partnership's remaining undistributed net sale proceeds for the
possible repayment, prepayment or purchase of the Partnership's outstanding
purchase money notes related to other Local Partnerships. The Managing General
Partner of the Partnership and/or its affiliates are expected to receive net
fees of $72,327 for its services relating to the sale of the property. As of
October 24, 1996 these fees have not been paid.
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 nine months ended September 30, 1996, the receipt of distributions from
Local Partnerships was adequate to support operating requirements. Proceeds
from the sale of Tanglewood I were adequate to support the pay-off of the
-13-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
related purchase money notes and the accrued distribution to the Limited
Partners.
Results of Operations
---------------------
The Partnership's net income for the three and nine months ended September
30, 1996 increased from the comparable periods in 1995 principally due to the
gain on disposition of Tanglewood I, as discussed above. Contributing to the
increase in the Partnership's net income was an increase in share of income from
Local Partnerships primarily as a result of one property's accumulated losses
exceeding the Partnership's basis in the related investment in that 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. The Partnership's share of income from Local Partnerships also increased
as a result of a decrease in real estate tax expense at one property resulting
from a successful appeal for a reduction in the property's tax assessment. Also
contributing to the increase in the Partnership's net income was the gain from
extinguishment of the Frederick Heights purchase money note, as discussed above.
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 and nine months
ended September 30, 1996 did not include losses of $217,602 and $652,804,
respectively, compared to excluded losses of $233,694 and $701,092, for the
three and nine months ended September 30, 1995, respectively.
The local general partner of Lake Properties Limited Partnership
(Frenchman's Wharf I), in conjunction with the Managing General Partner, applied
to the U.S. Department of Housing and Urban Development (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 1995. On April 30, 1996,
the local general partner received approval from HUD for a four-year workout.
Under the workout agreement, Frenchman's Wharf I will make minimum monthly
payments to HUD, consisting of a service charge and tax escrow. Additionally,
Frenchman's Wharf I will make monthly interest payments representing
approximately 50%, 65%, 85% and 100% of the interest due on the outstanding
principal balance of the note for the periods July 1 through June 30 during the
years 1996 through 2000, respectively.
To cover operating deficits incurred in prior years for Frenchman's Wharf
I, the Partnership advanced funds totalling $305,398 as of both September 30,
1996 and December 31, 1995. No advances have been made to Frenchman's Wharf I
since March 1987, and the Partnership does not expect to advance any additional
-14-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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 September 30, 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 the loans in accordance with
the terms.
The purchase money notes related to Frenchman's Wharf I in the principal
amount of $3,778,800, which were initially due to mature on June 1, 1988 have
been extended to mature on June 1, 1998. In conjunction with the four-year
workout agreement, the Partnership is currently negotiating with the purchase
money note holders to reach an extension agreement which would be coterminous
with the expiration of the HUD workout arrangement. There is no assurance that
the noteholders will consent to an extension agreement. As of October 24, 1996,
the noteholders had not given consent to an extension agreement. As such, the
Local Partnership's continued ownership of the property is uncertain. 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. As such, should the investment in
Frenchman's Wharf I not produce sufficient value to satisfy the related purchase
money note, the 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.
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 to refinance the property,
or to obtain supplemental financing. The Managing General Partner continues to
monitor 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 of the rental properties owned by the Local Partnerships are dependent
on the receipt of housing assistance payments guaranteed by contract under the
HUD Section 8 Housing Assistance Payment (HAP) program. The level of funding
for the Section 8 HAP program, and HUD-insured multifamily housing in general,
is dependent upon the continuation of appropriations approved by Congress for
subsidy payments. In March 1996, HUD released a revised version of the
Reinvention Blueprint issued one year ago. The Reinvention Blueprint contains a
proposal which has come to be known as the "Mark to Market" initiative. Per
this initiative, HUD is proposing to eliminate the Section 8 HAP contracts on
certain properties, under which the property owners directly receive monthly
subsidies for units occupied by low-income tenants. Instead, HUD would provide
voucher or certificate rental assistance directly to eligible residents. In the
event that the Section 8 HAP program is eliminated or funding of Section 8 HAP
contracts of rental properties owned by the Local Partnerships is discontinued,
-15-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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.
As of October 24, 1996 Congress, the Senate and the Clinton Administration
continue to struggle with the "Mark to Market" legislation. In the interim,
Congress has authorized a one-year extension of project-based Section 8 HAP
contracts expiring during fiscal years 1996 and 1997. In light of recent
political scrutiny of appropriations for HUD programs, continued funding of
annual renewals for Section 8 HAP contracts expiring after fiscal year 1997 is
uncertain.
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.
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 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 was not named as a defendant in
this action. Messrs. Dockser and Willoughby entered an answer denying all of
Mr. Schwartzberg's claims. Messrs. Dockser and Willoughby publicly responded
that Mr. Schwartzberg's suit was 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. On February 12,
-16-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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 June 12, 1996, Mr. Schwartzberg, CRI and others entered an agreement
(which contemplates the execution of a subsequent definitive agreement) to
resolve the disputes between CRI and CMS. The Partnership was not a signatory
to the agreement. As part of the resolution, Mr. Schwartzberg withdrew any
derogatory statements he made about CRI and its principals. Upon execution of
the definitive agreement, Mr. Schwartzberg shall withdraw as a General Partner
of this Partnership and his interest will become that of a Special Limited
Partner. As of October 24, 1996, CRI and Mr. Schwartzberg continue to finalize
the terms of the definitive agreement.
On August 29, 1996, Equity Resource Bay Fund (Bay Fund), a Massachusetts
Limited Partnership and a Limited Partner in the Partnership, and affiliates of
Bay Fund initiated a tender offer to purchase 900 additional units in the
Partnership at a price of $10 per Limited Partner unit. Bay Fund, which is
unaffiliated with CRI, Inc., stated that it made the offer for the express
purpose of holding the Limited Partner units for investment purposes and not
with a view to resale. The purchase offer was determined solely at the
discretion of Bay Fund and does not necessarily represent the fair market value
of each Limited Partner unit. The Bay Fund and affiliates' offer expired on
September 29, 1996, and as of October 24, 1996, Bay Fund and affiliates held
approximately 1.7% of the Limited Partner units of the Partnership as a result
of their tender offer.
PART II. OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
A report on Form 8-K was filed with the Commission on September 17, 1996
urging investors to consider cash distributions expected to be made resulting
from the sale of Tanglewood I, which was still under negotiations as of that
date, when assessing the Equity Resources Bay Fund tender offer.
Additionally, a report on Form 8-K was filed with the Commission on October
4, 1996 regarding the sale of the property relating to the Partnership's
investment in Tanglewood I.
All other items are not applicable.
-17-
<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
October 29, 1996 By: /s/ Deborah K. Browning
- --------------------------- ---------------------------------
Date Deborah K. Browning
Vice President/Chief Accounting
Officer
Signing on behalf of the
Registrant and as Principal
Accounting Officer
-18-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
-19-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE THIRD QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,942,504
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,797,151
<CURRENT-LIABILITIES> 0
<BONDS> 11,224,709
0
0
<COMMON> 0
<OTHER-SE> (6,121,995)
<TOTAL-LIABILITY-AND-EQUITY> 5,797,151
<SALES> 0
<TOTAL-REVENUES> 693,517
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 209,023
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 492,710
<INCOME-PRETAX> (8,216)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,216)
<DISCONTINUED> 0
<EXTRAORDINARY> 2,497,677
<CHANGES> 0
<NET-INCOME> 2,489,461
<EPS-PRIMARY> 97.22
<EPS-DILUTED> 97.22
</TABLE>
