<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, 1997
------------------
Commission file number 0-11149
-------------
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 September 30, 1997
- ---------------------------------- ---------------------------------
(Not applicable) (Not applicable)
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
Page
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Balance Sheets - September 30, 1997 and
December 31, 1996 . . . . . . . . . . . . . . . . . . 1
Statements of Operations - for the three and nine
months ended September 30, 1997 and 1996 . . . . . . 2
Statements of Cash Flows - for the nine
months ended September 30, 1997 and 1996 . . . . . . 3
Notes to Financial Statements . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 12
PART II. Other Information
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 19
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . 21
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS, LTD.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 2,146,449 $ 1,976,284
Cash and cash equivalents 2,143,490 2,243,295
Unrestricted certificate of deposit -- 189,000
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $338,986 and $321,878, respectively 573,434 590,542
Property purchase costs, net of accumulated amortization of
$88,940 and $84,505, respectively 147,627 152,062
Other assets 6,887 40,592
------------ ------------
Total assets $ 5,017,887 $ 5,191,775
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 4,478,800 $ 4,978,800
Accrued interest payable 6,606,031 6,370,958
Accounts payable and accrued expenses 66,565 52,230
------------ ------------
Total liabilities 11,151,396 11,401,988
------------ ------------
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) (996,102)
Offering costs (2,689,521) (2,689,521)
Accumulated losses (27,298,886) (27,375,590)
------------ ------------
Total partners' deficit (6,133,509) (6,210,213)
------------ ------------
Total liabilities and partners' deficit $ 5,017,887 $ 5,191,775
============ ============
</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,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Share of income from partnerships $ 265,503 $ 270,603 $ 557,031 $ 606,607
------------ ------------ ------------ ------------
Other revenue and expenses:
Revenue:
Interest income 29,523 30,094 81,774 86,910
------------ ------------ ------------ ------------
Expenses:
Interest 117,549 160,472 352,640 492,710
Management fee 23,802 23,802 71,406 71,406
General and administrative 20,447 21,088 68,507 63,077
Professional fees 15,044 16,248 48,005 51,228
Amortization 7,181 7,720 21,543 23,312
------------ ------------ ------------ ------------
184,023 229,330 562,101 701,733
------------ ------------ ------------ ------------
Total other revenue and expenses (154,500) (199,236) (480,327) (614,823)
------------ ------------ ------------ ------------
Income (loss) before gain on disposition
of investment in partnership 111,003 71,367 76,704 (8,216)
Gain on disposition of investment in
partnership -- 715,549 -- 715,549
------------ ------------ ------------ ------------
Income before extraordinary gain from
extinguishment of debt 111,003 786,916 76,704 707,333
Extraordinary gain from extinguishment of debt -- 1,782,128 -- 1,782,128
------------ ------------ ------------ ------------
Net income 111,003 2,569,044 76,704 2,489,461
Accumulated losses, beginning of period (27,409,889) (29,856,416) (27,375,590) (29,776,833)
------------ ------------ ------------ ------------
Accumulated losses, end of period $(27,298,886) $(27,287,372) $(27,298,886) $(27,287,372)
============ ============ ============ ============
Income allocated to General Partners (3%) $ 3,330 $ 77,071 $ 2,301 $ 74,684
============ ============ ============ ============
Income allocated to Limited Partners (97%) $ 107,673 $ 2,491,973 $ 74,403 $ 2,414,777
============ ============ ============ ============
Income per unit of Limited Partnership Interest
based on 24,837 units outstanding $ 4.34 $ 100.33 $ 3.00 $ 97.22
============ ============ ============ ============
</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 nine months ended
September 30,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 76,704 $ 2,489,461
Adjustments to reconcile net income to net
cash used in operating activities:
Share of income from partnerships (557,031) (606,607)
Amortization of deferred costs 21,543 23,312
Increase in accrued interest receivable on
advances to partnerships (4,602) (4,602)
Gain on disposition of investment in partnership -- (715,549)
Gain on extinguishment of debt -- (1,782,128)
Changes in assets and liabilities:
Decrease (increase) in other assets 33,705 (203)
Increase in accrued interest payable 352,647 492,710
Increase in accounts payable and accrued expenses 14,335 147,072
------------ ------------
Net cash (used in) provided by operating activities (62,699) 43,466
------------ ------------
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 391,468 291,046
Maturity of unrestricted certificate of deposit 189,000 --
------------ ------------
Net cash provided by investing activities 580,468 2,834,848
------------ ------------
Cash flows from financing activities:
Pay-off of purchase money notes and related interest (617,574) (1,759,673)
------------ ------------
Net (decrease) increase in cash and cash equivalents (99,805) 1,118,641
Cash and cash equivalents, beginning of period 2,243,295 1,823,863
------------ ------------
Cash and cash equivalents, end of period $ 2,143,490 $ 2,942,504
============ ============
</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, 1997 and December
31, 1996, and the results of its operations for the three and nine months ended
September 30, 1997 and 1996 and its cash flows for the nine months ended
September 30, 1997 and 1996.
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 thereto included in the Partnership's
Annual Report filed on Form 10-K for the year ended December 31, 1996.
Certain amounts in the 1996 financial statements have been reclassified to
conform to the 1997 presentation.
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
$4,478,800, plus accrued interest of $6,606,031 as of September 30, 1997, 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 matured on January 1, 1997, as
discussed below. The remaining purchase money notes in an aggregate principal
amount of $3,778,800 mature June 1, 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, 1997 was $117,549 and $352,640,
respectively, and $160,472 and $492,710 for the three and nine months ended
September 30, 1996, respectively. The accrued interest payable on the purchase
money notes of $6,606,031 and $6,370,958 as of September 30, 1997 and December
31, 1996, respectively, is due on the respective maturity dates of the purchase
-4-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
money notes or earlier, in some instances, if the pertinent Local Partnership
has distributable net cash flow, as defined in the relevant Local Partnership
agreement.
As of both September 30, 1997 and December 31, 1996, 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,
1997.
On August 30, 1996, the Partnership paid off one of the purchase money
notes in the principal amount of $150,000 relating to Frederick Heights Limited
Partnership (Frederick Heights) at a discount, resulting in a gain on
extinguishment of debt of $18,224. The remaining purchase money notes related
to Frederick Heights in the aggregate principal and accrued interest amount of
$500,000 and $117,574, respectively, matured and were paid-off on January 1,
1997. These notes were paid off at their carrying value, hence, the Partnership
did not recognize a gain or loss on the extinguishment of the debt.
The Partnership defaulted on its purchase money note relating to ARA
Associates-Shangri-La Ltd. (Shallowford Oaks) on January 1, 1997 when the note
matured and was not paid. The default amount included principal and accrued
interest of $700,000 and $761,389, respectively. As of October 24, 1997,
principal and accrued interest totalling $700,000 and $802,406, respectively,
were due. The Managing General Partner has proposed to extend the note until
November 2001, coterminous with the maturity of the Local Partnership's
provisional workout agreement with the U. S. Department of Housing and Urban
Development (HUD), and as of October 24, 1997, the Managing General Partner is
awaiting a response from the purchase money noteholder. There is no assurance
that any agreement will be reached with the noteholder. As such, there is no
assurance that the Partnership will be able to retain its interest in
Shallowford Oaks. The uncertainty regarding the continued ownership of the
Partnership's interest in Shallowford Oaks 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 related Local Partnership.
Therefore, should the investment in Shallowford Oaks not produce sufficient
value to satisfy the related purchase money note, the Partnership's exposure to
loss is limited, as 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.
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 $15,989 and $12,921 as of September 30,
1997 and December 31, 1996, 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 note. As the Partnership currently is in default on the
purchase money note related to Shallowford Oaks, as discussed above, it is
unlikely that the Partnership will receive any repayment of the loan. Even if
the Partnership does not lose its interest in Shallowford Oaks, there is no
assurance that the Local Partnership, upon expiration of any workout, will be
able to repay the loan in accordance with its terms.
-5-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
The Managing General Partner has been informed that the lender that
purchased the mortgage loan on Shallowford Oaks from HUD wishes to perform an
audit of the Local Partnership. The local managing general partner of
Shallowford Oaks has retained legal counsel to contest the lender's purported
audit rights.
In 1989, the Partnership funded a certificate of deposit in the amount of
$189,000, which was used to collateralize a letter of credit which served as
supplemental collateral for Sencit Baltic Associates' (Baltic Plaza) mortgage
loan. As of March 28, 1996, Baltic Plaza was no longer required to provide
supplemental collateral for its mortgage loan, and the letter of credit was
subsequently cancelled. On March 18, 1997, the certificate of deposit matured.
The local general partner of Lake Properties Limited Partnership
(Frenchman's Wharf I), in conjunction with the Managing General Partner, engaged
in extensive negotiations with HUD, holder of the mortgage on the property, to
extend the previous workout arrangement related to the mortgage loan on the
property which expired in December 1993. 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 is to make minimum monthly payments to HUD,
including a service charge and tax escrow. Additionally, Frenchman's Wharf I is
to 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. As of October 20, 1997, Frenchman's Wharf I had made all monthly
payments in accordance with the workout arrangement. There is, however, no
assurance that the Local Partnership will be able to continue to comply with the
terms of the workout arrangement.
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,
1997 and December 31, 1996. 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, 1997
and December 31, 1996, 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. No interest has been accrued since 1992 due to the
uncertainty of future collection. 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 thereof.
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 noteholders to reach an extension agreement which would be coterminous
with the expiration of the HUD workout arrangement. As of October 20, 1997, the
noteholders had not given consent to an extension agreement. There is no
assurance that any agreement will be reached with the noteholders. As such,
there is no assurance that the Partnership will be able to retain its interest
in Frenchman's Wharf I after June 1, 1998. The uncertainty regarding the
continued ownership of the Partnership's interest in Frenchman's Wharf I does
-6-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
not impact the Partnership's financial condition because the related purchase
money notes are nonrecourse and secured solely by the Partnership's interest in
the related Local Partnership. Therefore, should the investment in Frenchman's
Wharf I not produce sufficient value to satisfy the related purchase money
notes, the Partnership's exposure to loss is limited, as 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.
The report of the auditors on the financial statements of Frenchman's Wharf
I for the year ended December 31, 1996 indicated that substantial doubt exists
about the ability of the Local Partnership to continue as a going concern due to
the Local Partnership's default on its mortgage loan and the expiration of its
Section 8 Rental Housing Assistance Payments (HAP) contract with HUD on November
30, 1997. The uncertainty about the Local Partnerships' continued ownership of
the property does not impact the Partnership's financial condition because the
amount of the Partnership's nonrecourse indebtedness related to this property
exceeds the carrying value of the investment in and advances to the Local
Partnership, as discussed above.
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, which provided property owners with restricted opportunities to sell
low income housing, ended effective September 30, 1996. However, HUD received
approximately $175 million to fund sales of qualifying properties under the
LIHPRHA program during the federal government's fiscal year 1997, which began
October 1, 1996. No further funding of the LIHPRHA program is expected.
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 at closing. The proceeds received at closing 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 an estimated net financial statement gain at closing of approximately $2.479
million, of which approximately $1.764 million resulted from the retirement of
the purchase money note obligation with respect to the property. Upon
finalization of the audit of Tanglewood I's operations and additional payments
of approximately $32,000 and $335,000 to the Partnership and the purchase money
noteholder, respectively, resulting from the final release of the property's
reserves during January 1997, the sale resulted in a net financial statement
gain of approximately $2.731 million, of which approximately $1.429 million
resulted from the retirement of the purchase money note obligation with respect
to the property. The federal tax gain was approximately $4 million. The
Partnership distributed $484,073 (or $19.49 per Limited Partnership unit) to the
Limited Partners on October 31, 1996 as a result of the sale of the property.
The Managing General Partner intends to retain all of the Partnership's
remaining undistributed net sale proceeds for the possible repayment, prepayment
-7-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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 did not receive any fees for its services relating to the
sale of the property.
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 strategies to sell or refinance certain properties pursuant to programs
developed by these agencies or other potential buyers. These programs may
include opportunities to sell a property to a qualifying purchaser who would
agree to maintain the property as low to moderate income housing in perpetuity,
or to refinance a property, or to obtain supplemental financing. The Managing
General Partner continues to monitor certain state housing agency programs
and/or programs provided by certain lenders, to ascertain whether the properties
would qualify within the parameters of a given program 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 project-based rental housing assistance payments provided by
HUD pursuant to Section 8 HAP contracts. Under Section 8 HAP contracts, HUD
guaranteed rental properties a high monthly rental payment for each low and
moderate income apartment unit maintained in the complex. Over the years,
annual increases have pushed rents on many of the Section 8 HAP contracts above
the market rate for comparable neighborhoods. In an effort to deal with the
increasing burden of funding Section 8 HAP contracts, many of which are now
expiring, in 1995 HUD released its Reinvention Blueprint, and in 1996 a revision
to its Reinvention Blueprint, which contained proposals that have come to be
known as "Mark-to-Market". Under the initiative, HUD would eliminate the
Section 8 project-based subsidy and provide the residents with "sticky vouchers"
which would allow residents to move to other developments should they so choose.
However, with the elimination of the Section 8 HAP subsidies, most rental
properties will not be able to maintain sufficient income to pay debt service.
Therefore, the Mark-to-Market initiative will allow for a part of the existing
first mortgage to become a "soft" second mortgage which will accrue interest at
a low 1% interest rate. The splitting of the existing first mortgage into a new
first and second mortgage may generate ordinary taxable income. Unfortunately,
there is no corresponding tax relief legislation at this time.
In October 1997, both the House and the Senate passed the FY 1998 HUD
spending bill which includes Mark-to-Market legislation and President Clinton is
expected to sign the appropriations bill. Between now and October 1, 1998 all
expiring Section 8 contracts with rents less than 120% of fair market rents
(FMR's) will be renewed for one-year. Properties with rents in excess of 120%
of FMR's will be subject to the terms of the current Mark-to-Market
demonstration program. Effective October 1, 1998, all properties with expiring
Section 8 contracts will be subject to Mark-to-Market. The Section 8 HAP
contracts for the following properties expire during the government's fiscal
year 1998:
-8-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
<TABLE>
<CAPTION>
Units
Authorized for Expiration of
Number of Rental Assistance Section 8
Property Rental Units Under Section 8 HAP Contract
-------- ------------ ----------------- -------------
<S> <C> <C> <C>
Frenchman's Wharf I 320 31 11/30/97
Shallowford Oaks 204 41 07/31/98
</TABLE>
The Section 8 contracts for these properties cover about 13% of the
properties' rental units. It appears likely that HUD will provide sticky
vouchers to the existing residents and the properties will not be subject to
Mark-to-Market.
The following are combined statements of operations for the seventeen Local
Partnerships in which the Partnership has invested as of September 30, 1997 and
1996, respectively. The 1996 statements contain information on Tanglewood I
through the date of sale. The statements are compiled from information supplied
by the management agents of the projects and are unaudited.
-9-
<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,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rental revenue $ 4,469,601 $ 4,663,164 $ 13,541,049 $ 13,954,477
Other 207,910 269,797 577,060 801,104
------------ ------------ ------------ ------------
4,677,511 4,932,961 14,118,109 14,755,581
------------ ------------ ------------ ------------
Expenses:
Operating 2,238,696 2,325,388 6,928,523 7,142,781
Interest 1,658,262 1,699,808 4,974,789 5,099,429
Depreciation and amortization 814,839 851,120 2,444,522 2,553,372
------------ ------------ ------------ ------------
4,711,797 4,876,316 14,347,834 14,795,582
------------ ------------ ------------ ------------
Net (loss) income $ (34,286) $ 56,645 $ (229,725) $ (40,001)
============ ============ ============ ============
</TABLE>
As of September 30, 1997 and December 31, 1996, the Partnership's share of
cumulative losses to date for twelve and eleven, respectively, of the seventeen
Local Partnerships exceeds the amount of the Partnership's investments in and
advances to those Local Partnerships by $8,371,193 and $7,595,096, 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 $13,691 and $47,463 for the
three and nine months ended September 30, 1997, respectively, and $13,969 and
$48,913 for the three and nine months ended June 30, 1996, 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, 1997 and 1996.
-10-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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 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. On February 6, 1996, CRI terminated the CMS contract
for cause. (CRI subsequently retained an independent asset management company
to perform functions previously performed by CMS.) Mr. Schwartzberg and CMS
responded to the contract termination 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.
Following subsequent litigation, none of which involved the Partnership, 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 20, 1997, CRI and Mr. Schwartzberg were unable to agree on the
language of various provisions of the definitive agreement and have agreed to
submit the open issues to arbitration. The Partnership is not a party to the
arbitration proceeding.
-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 $2,143,490
(or approximately $83.71 per Limited Partner unit) and $2,243,295 (or
approximately $87.61 per Limited Partner unit) as of September 30, 1997 and
December 31, 1996, respectively, along with anticipated future cash
distributions from the Local Partnerships, is expected to meet its current and
anticipated operating cash needs. As of October 20, 1997, 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
$4,478,800, plus accrued interest of $6,606,031 as of September 30, 1997, are
payable in full upon the earliest of: (1) sale or refinancing of the respective
Local Partnership's rental property; (2) payment in full of the respective Local
Partnership's permanent loan; or (3) maturity. Purchase money notes in an
aggregate principal amount of $1,200,000 matured on January 1, 1997, as
discussed below. The remaining purchase money notes in an aggregate principal
amount of $3,778,800 mature June 1, 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.
On August 30, 1996, the Partnership paid off one of the purchase money
notes in the principal amount of $150,000 relating to Frederick Heights Limited
Partnership (Frederick Heights) at a discount, resulting in a gain on
extinguishment of debt of $18,224. The remaining purchase money notes related
to Frederick Heights in the aggregate principal and accrued interest amount of
$500,000 and $117,574, respectively, matured and were paid-off on January 1,
1997. These notes were paid off at their carrying value, hence, the Partnership
did not recognize a gain or loss on the extinguishment of the debt.
The Partnership defaulted on its purchase money note relating to ARA
Associates-Shangri-La Ltd. (Shallowford Oaks) on January 1, 1997 when the note
matured and was not paid. The default amount included principal and accrued
interest of $700,000 and $761,389, respectively. As of October 24, 1997,
-12-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
principal and accrued interest totalling $700,000 and $802,406, respectively,
were due. The Managing General Partner has proposed to extend the note until
November 2001, coterminous with the maturity of the Local Partnership's
provisional workout agreement with the U. S. Department of Housing and Urban
Development (HUD), and as of October 24, 1997, the Managing General Partner is
awaiting a response from the purchase money noteholder. There is no assurance
that any agreement will be reached with the noteholder. As such, there is no
assurance that the Partnership will be able to retain its interest in
Shallowford Oaks. The uncertainty regarding the continued ownership of the
Partnership's interest in Shallowford Oaks 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 related Local Partnership.
Therefore, should the investment in Shallowford Oaks not produce sufficient
value to satisfy the related purchase money note, the Partnership's exposure to
loss is limited, as 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.
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 $15,989 and $12,921 as of September 30,
1997 and December 31, 1996, 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 note. As the Partnership currently is in default on the
purchase money note related to Shallowford Oaks, as discussed above, it is
unlikely that the Partnership will receive any repayment of the loan. Even if
the Partnership does not lose its interest in Shallowford Oaks, there is no
assurance that the Local Partnership, upon expiration of any workout, will be
able to repay the loan in accordance with its terms.
In 1989, the Partnership funded a certificate of deposit in the amount of
$189,000, which was used to collateralize a letter of credit which served as
supplemental collateral for Sencit Baltic Associates' (Baltic Plaza) mortgage
loan. As of March 28, 1996, Baltic Plaza was no longer required to provide
supplemental collateral for its mortgage loan, and the letter of credit was
subsequently cancelled. On March 18, 1997, the certificate of deposit matured.
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, which provided property owners with restricted opportunities to sell
low income housing, ended effective September 30, 1996. However, HUD received
approximately $175 million to fund sales of qualifying properties under the
LIHPRHA program during the federal government's fiscal year 1997, which began
October 1, 1996. No further funding of the LIHPRHA program is expected.
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
-13-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
$904,000 at closing. The proceeds received at closing 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 an estimated net financial statement gain at closing of approximately $2.479
million, of which approximately $1.764 million resulted from the retirement of
the purchase money note obligation with respect to the property. Upon
finalization of the audit of Tanglewood I's operations and additional payments
of approximately $32,000 and $335,000 to the Partnership and the purchase money
noteholder, respectively, resulting from the final release of the property's
reserves during January 1997, the sale resulted in a net financial statement
gain of approximately $2.731 million, of which approximately $1.429 million
resulted from the retirement of the purchase money note obligation with respect
to the property. The federal tax gain was approximately $4 million. The
Partnership distributed $484,073 (or $19.49 per Limited Partnership unit) to the
Limited Partners on October 31, 1996 as a result of the sale of the property.
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 did not receive any fees for its services relating to the
sale of the property.
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, 1997, receipt of distributions from
Local Partnerships and the maturity of the unrestricted certificate of deposit
were adequate to support operating cash requirements. Cash and cash
requirements decreased during the nine months ended September 30, 1997 as a
result of the pay-off of the Frederick Heights purchase money notes, as
discussed above.
Results of Operations
---------------------
The Partnership's net income for the three months ended September 30, 1997
decreased from the comparable period in 1996 principally due to the
extraordinary gain from extinguishment of debt related to the Tanglewood I sale
and the Frederick Heights purchase money note pay-off during 1996. Contributing
to the decrease in the Partnership's net income was the gain on disposition
related to the Tanglewood I sale during 1996. Partially offsetting the decrease
in the Partnership's net income was a decrease in interest expense in 1997 due
to the pay-off of the Frederick Heights and Tanglewood I purchase money notes,
as discussed above.
The Partnership's net income for the nine months ended September 30, 1997
decreased from the comparable period in 1996 principally due to the
extraordinary gain from extinguishment of debt and the gain on disposition in
1996, as discussed above. Contributing to the decrease in the Partnership's net
income was a decrease in share of income from partnerships primarily due to
increased operating expenses at one property. Partially offsetting the decrease
in the Partnership's net income was a decrease in interest expense, as discussed
above.
-14-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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, 1997 did not include losses of $294,197 and $776,097,
respectively, compared to excluded losses of $217,602 and $652,804, for the
three and nine months ended September 30, 1996, respectively.
The Managing General Partner has been informed that the lender that
purchased the mortgage loan on Shallowford Oaks from HUD wishes to perform an
audit of the Local Partnership. The local managing general partner of
Shallowford Oaks has retained legal counsel to contest the lender's purported
audit rights.
The local general partner of Lake Properties Limited Partnership
(Frenchman's Wharf I), in conjunction with the Managing General Partner, engaged
in extensive negotiations with HUD, holder of the mortgage on the property, to
extend the previous workout arrangement related to the mortgage loan on the
property which expired in December 1993. 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 is to make minimum monthly payments to HUD,
including of a service charge and tax escrow. Additionally, Frenchman's Wharf I
is to 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. As of October 20, 1997, Frenchman's Wharf I had made all monthly
payments in accordance with the workout arrangement. There is, however, no
assurance that the Local Partnership will be able to continue to comply with the
terms of the workout arrangement.
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,
1997 and December 31, 1996. 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, 1997
and December 31, 1996, 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. No interest has been accrued since 1992 due to the
uncertainty of future collection. 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 thereof.
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 noteholders to reach an extension agreement which would be coterminous
with the expiration of the HUD workout arrangement. As of October 20, 1997, the
noteholders had not given consent to an extension agreement. There is no
assurance that any agreement will be reached with the noteholders. As such,
there is no assurance that the Partnership will be able to retain its interest
-15-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
in Frenchman's Wharf I after June 1, 1998. The uncertainty regarding the
continued ownership of the Partnership's interest in Frenchman's Wharf I does
not impact the Partnership's financial condition because the related purchase
money notes are nonrecourse and secured solely by the Partnership's interest in
the related Local Partnership. Therefore, should the investment in Frenchman's
Wharf I not produce sufficient value to satisfy the related purchase money
notes, the Partnership's exposure to loss is limited, as 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.
The report of the auditors on the financial statements of Frenchman's Wharf
I for the year ended December 31, 1996 indicated that substantial doubt exists
about the ability of the Local Partnership to continue as a going concern due to
the Local Partnership's default on its mortgage loan and the expiration of its
Section 8 Rental Housing Assistance Payments (HAP) contract with HUD on November
30, 1997. The uncertainty about the Local Partnerships' continued ownership of
the property does not impact the Partnership's financial condition because the
amount of the Partnership's nonrecourse indebtedness related to this property
exceeds the carrying value of the investment in and advances to the Local
Partnership, as discussed above.
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 strategies to sell a refinance certain properties pursuant to programs
developed by these agencies or other potential buyers. These programs may
include opportunities to sell a property to a qualifying purchaser who would
agree to maintain the property as low to moderate income housing in perpetuity,
or to refinance a property, or to obtain supplemental financing. The Managing
General Partner continues to monitor certain state housing agency programs
and/or programs provided by certain lenders, to ascertain whether the properties
would qualify within the parameters of a given program 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 project-based rental housing assistance payments provided by
HUD pursuant to Section 8 HAP contracts. Under Section 8 HAP contracts, HUD
guaranteed rental properties a high monthly rental payment for each low and
moderate income apartment unit maintained in the complex. Over the years,
annual increases have pushed rents on many of the Section 8 HAP contracts above
the market rate for comparable neighborhoods. In an effort to deal with the
increasing burden of funding Section 8 HAP contracts, many of which are now
expiring, in 1995 HUD released its Reinvention Blueprint, and in 1996 a revision
to its Reinvention Blueprint, which contained proposals that have come to be
known as "Mark-to-Market". Under the initiative, HUD would eliminate the
Section 8 project-based subsidy and provide the residents with "sticky vouchers"
which would allow residents to move to other developments should they so choose.
However, with the elimination of the Section 8 HAP subsidies, most rental
properties will not be able to maintain sufficient income to pay debt service.
Therefore, the Mark-to-Market initiative will allow for a part of the existing
first mortgage to become a "soft" second mortgage which will accrue interest at
a low 1% interest rate. The splitting of the existing first mortgage into a new
-16-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
first and second mortgage may generate ordinary taxable income. Unfortunately,
there is no corresponding tax relief legislation at this time.
In October 1997, both the House and the Senate passed the FY 1998 HUD
spending bill which includes Mark-to-Market legislation and President Clinton is
expected to sign the appropriations bill. Between now and October 1, 1998 all
expiring Section 8 contracts with rents less than 120% of fair market rents
(FMR's) will be renewed for one-year. Properties with rents in excess of 120%
of FMR's will be subject to the terms of the current Mark-to-Market
demonstration program. Effective October 1, 1998, all properties with expiring
Section 8 contracts will be subject to Mark-to-Market. The Section 8 HAP
contracts for the following properties expire during the government's fiscal
year 1998:
-17-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
Units
Authorized for Expiration of
Number of Rental Assistance Section 8
Property Rental Units Under Section 8 HAP Contract
-------- ------------ ----------------- -------------
<S> <C> <C> <C>
Frenchman's Wharf I 320 31 11/30/97
Shallowford Oaks 204 41 07/31/98
</TABLE>
The Section 8 contracts for these properties cover about 13% of the
properties' rental units. It appears likely that HUD will provide sticky
vouchers to the existing residents and the properties will not be subject to
Mark-to-Market.
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 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. On February 6, 1996, CRI terminated the CMS contract
for cause. (CRI subsequently retained an independent asset management company
-18-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
to perform functions previously performed by CMS.) Mr. Schwartzberg and CMS
responded to the contract termination 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.
Following subsequent litigation, none of which involved the Partnership, 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 20, 1997, CRI and Mr. Schwartzberg were unable to agree on the
language of various provisions of the definitive agreement and have agreed to
submit the open issues to arbitration. The Partnership is not a party to the
arbitration proceeding.
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
The Partnership defaulted on its purchase money note relating to ARA
Associates-Shangri-La Ltd. (Shallowford Oaks) on January 1, 1997 when the note
matured and was not paid. The default amount included principal and accrued
interest of $700,000 and $761,389, respectively. As of October 24, 1997,
principal and accrued interest totalling $700,000 and $802,406, respectively,
were due. The Managing General Partner has proposed to extend the note until
November 2001, coterminous with the maturity of the Local Partnership's
provisional workout agreement with the U. S. Department of Housing and Urban
Development (HUD), and as of October 24, 1997, the Managing General Partner is
awaiting a response from the purchase money noteholder. There is no assurance
that any agreement will be reached with the noteholder. As such, there is no
assurance that the Partnership will be able to retain its interest in
Shallowford Oaks. The uncertainty regarding the continued ownership of the
Partnership's interest in Shallowford Oaks 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 related Local Partnership.
Therefore, should the investment in Shallowford Oaks not produce sufficient
value to satisfy the related purchase money note, the Partnership's exposure to
loss is limited, as 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.
-19-
<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 September 30, 1997.
-20-
<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 24, 1997 By: /s/ Michael J. Tuszka
- --------------------------- ---------------------------------
Date Michael J. Tuszka
Vice President/Chief Accounting
Officer
Signing on behalf of the
Registrant and as Principal
Financial and Principal
Accounting Officer
-21-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
-22-
<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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,143,490
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,017,887
<CURRENT-LIABILITIES> 0
<BONDS> 11,084,831
0
0
<COMMON> 0
<OTHER-SE> (6,133,509)
<TOTAL-LIABILITY-AND-EQUITY> 5,017,887
<SALES> 0
<TOTAL-REVENUES> 638,805
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 209,461
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 352,640
<INCOME-PRETAX> 76,704
<INCOME-TAX> 0
<INCOME-CONTINUING> 76,704
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76,704
<EPS-PRIMARY> 3.00
<EPS-DILUTED> 3.00
</TABLE>
