<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 March 31, 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
- -------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at March 31, 1997
- ---------------------------------- ----------------------------------
(Not applicable) (Not applicable)
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
Page
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Balance Sheets - March 31, 1997 and
December 31, 1996 . . . . . . . . . . . . . . . 1
Statements of Operations - for the three
months ended March 31, 1997 and 1996 . . . . . 2
Statements of Cash Flows - for the three
months ended March 31, 1997 and 1996 . . . . . 3
Notes to Financial Statements . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . 10
PART II. Other Information
Item 3. Defaults Upon Senior Securities . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 15
Signature . . . . . . . . . . . . . . . . . . . . . . . . 16
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . 17
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS, LTD.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 2,151,155 $ 1,976,284
Cash and cash equivalents 1,802,364 2,243,295
Unrestricted certificate of deposit -- 189,000
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $327,580 and $321,878, respectively 584,840 590,542
Property purchase costs, net of accumulated amortization of
$85,984 and $84,505, respectively 150,583 152,062
Other assets 3,798 40,592
------------ ------------
Total assets $ 4,692,740 $ 5,191,775
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 4,478,800 $ 4,978,800
Accrued interest payable 6,370,933 6,370,958
Accounts payable and accrued expenses 46,111 52,230
------------ ------------
Total liabilities 10,895,844 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 (27,368,481) (27,375,590)
------------ ------------
Total partners' deficit (6,203,104) (6,210,213)
------------ ------------
Total liabilities and partners' deficit $ 4,692,740 $ 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
March 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Share of income from partnerships $ 173,337 $ 171,281
------------ ------------
Other revenue and expenses:
Revenue:
Interest income 24,307 28,447
------------ ------------
Expenses:
Interest 117,542 166,119
Management fee 23,802 23,802
General and administrative 25,372 21,467
Professional fees 16,638 17,599
Amortization 7,181 7,796
------------ ------------
190,535 236,783
------------ ------------
Total other revenue and expenses (166,228) (208,336)
------------ ------------
Net income (loss) 7,109 (37,055)
Accumulated losses, beginning of period (27,375,590) (29,776,833)
------------ ------------
Accumulated losses, end of period $(27,368,481) $(29,813,888)
============ ============
Income (loss) allocated to General Partners (3%) $ 213 $ (1,112)
============ ============
Income (loss) allocated to Limited Partners (97%) $ 6,896 $ (35,943)
============ ============
Income (loss) per unit of Limited Partnership Interest
based on 24,837 units outstanding $ 0.28 $ (1.45)
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS, LTD.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 7,109 $ (37,055)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Share of income from partnerships (173,337) (171,281)
Amortization of deferred costs 7,181 7,796
Increase in accrued interest receivable on
advances to partnerships (1,534) (1,534)
Changes in assets and liabilities:
Decrease in other assets 36,794 1,897
Increase in accrued interest payable 117,549 166,119
Decrease in accounts payable and accrued expenses (6,119) (17,281)
------------ ------------
Net cash used in operating activities (12,357) (51,339)
------------ ------------
Cash flows from investing activities:
Release of restricted cash equivalents -- 189,000
Maturity of unrestricted certificate of deposit 189,000 --
------------ ------------
Net cash provided by investing activities 189,000 189,000
------------ ------------
Cash flows from financing activities:
Pay-off of purchase money notes and related interest (617,574) --
------------ ------------
Net (decrease) increase in cash and cash equivalents (440,931) 137,661
Cash and cash equivalents, beginning of period 2,243,295 1,823,863
------------ ------------
Cash and cash equivalents, end of period $ 1,802,364 $ 1,961,524
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
- 3 -
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of C.R.I., Inc. (CRI), the Managing General Partner, the
accompanying unaudited financial statements contain all adjustments of a normal
recurring nature necessary to present fairly the financial position of Capital
Realty Investors, Ltd. (the Partnership) as of March 31, 1997 and December 31,
1996, and the results of its operations for the three months ended March 31,
1997 and 1996 and its cash flows for the three months ended March 31, 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 included in the Partnership's Annual
Report filed on Form 10-K for the year ended December 31, 1996.
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 $6,370,933 as of March 31, 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 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
months ended March 31, 1997 and 1996 was $117,542 and $166,119, respectively.
The accrued interest payable on the purchase money notes of $6,370,933 and
$6,370,958 as of March 31, 1997 and December 31, 1996, respectively, is due on
the respective maturity dates of the purchase money notes or earlier, in some
instances, if the pertinent Local Partnership has distributable net cash flow,
as defined in the relevant Local Partnership agreements.
-4-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
As of both March 31, 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 three months ended March 31, 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 April 28, 1997,
principal and accrued interest totalling $700,000 and $777,657, respectively,
were due. The Managing General Partner is currently negotiating a five year
extension of the purchase money note with the 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 since the amount of the nonrecourse indebtedness exceeds the
carrying amount of the investment in and advances to the Local Partnership.
Thus, even a complete loss of this investment would not have a material impact
on the operations of the Partnership.
On November 23, 1994, the Partnership advanced $72,195 to Shallowford Oaks
to help repay the Local Partnership's outstanding obligations to the U. S.
Department of Housing and Urban Development (HUD). This loan, along with
accrued interest of $14,455 and $12,921 as of March 31, 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 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, 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 to 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
-5-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
property which expired 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 makes minimum monthly payments to HUD, consisting
of a service charge and tax escrow. Additionally, Frenchman's Wharf I makes
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 April 23, 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 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 March 31, 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 March 31, 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.
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 April 23, 1997,
the noteholders had not given consent to an extension agreement.
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
related purchase money notes are 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
respective purchase money notes, the Partnership's exposure to loss is limited
since the amount of 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.
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
-6-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
developed by these agencies or other potential buyers. 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
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. In 1995 and 1996, HUD released its
Reinvention Blueprint and a revision to its Reinvention Blueprint which
contained proposals that have come to be known as "Mark-to-Market". Congress,
HUD and the Clinton Administration continue to struggle with the Mark-to-Market
initiative. This initiative was intended to deal with HUD's increasing burden
of funding HAP contracts. Under the initiative, HUD would eliminate the
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 HAP contract, there is no assurance that
rental properties would be able to maintain the rental income and occupancy
levels necessary to pay operating costs and debt service. The initiative will
impact those properties that have HAP contracts with shorter terms than that of
the underlying property mortgage. For instance, some properties may have a 20-
year HAP contract while the underlying mortgage has a 40-year term. In the
interim, Congress has authorized one-year extensions for properties with HAP
contracts expiring during the government's fiscal year 1997, which began October
1, 1996. 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.
With the uncertainty surrounding renewals of expiring Section 8 HAP
contracts, the Managing General Partner is developing new strategies to deal
with the ever changing environment of affordable housing policy. Properties
with expiring Section 8 HAP contracts may become convertible to market-rate
apartment properties. Currently, there are a few lenders that will provide
additional financing to allow the property to convert to market rate units.
Where opportunities exist, the Managing General Partner will continue to work
with the Local Partnerships to develop a strategy that makes economic sense for
all parties involved.
The following are combined statements of operations for the seventeen and
eighteen Local Partnerships in which the Partnership has invested as of March
31, 1997 and 1996, respectively. The statements are compiled from information
supplied by the management agents of the projects and are unaudited.
-7-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenue:
Rental revenue $ 4,550,799 $ 4,618,464
Other 192,279 264,268
------------ ------------
4,743,078 4,882,732
------------ ------------
Expenses:
Operating 2,318,708 2,387,870
Interest 1,658,265 1,699,811
Depreciation and amortization 814,845 851,125
------------ ------------
4,791,818 4,938,806
------------ ------------
Net loss $ (48,740) $ (56,074)
============ ============
</TABLE>
As of March 31, 1997 and December 31, 1996, the Partnership's share of
cumulative losses to date for eleven of the seventeen Local Partnerships exceeds
the amount of the Partnership's investments in and advances to those Local
Partnerships by $7,816,881 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 $16,376 and $18,897 for the
three months ended March 31, 1997 and March 31, 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 for each of the three-month periods ended March 31,
1997 and 1996.
-8-
<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 April 23, 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.
-9-
<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 $1,802,364
(or approximately $70.39 per Limited Partner unit) and $2,243,295 (or
approximately $87.61 per Limited Partner unit) as of March 31, 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 April 23, 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 $6,370,933 as of March 31, 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 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.
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 April 28, 1997,
principal and accrued interest totalling $700,000 and $777,657, respectively,
-10-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
were due. The Managing General Partner is currently negotiating a five year
extension of the purchase money note with the 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 since the amount of the nonrecourse indebtedness exceeds the
carrying amount of the investment in and advances to the Local Partnership.
Thus, even a complete loss of this investment would not have a material impact
on the operations of the Partnership.
On November 23, 1994, the Partnership advanced $72,195 to Shallowford Oaks
to help repay the Local Partnership's outstanding obligations to the U. S.
Department of Housing and Urban Development (HUD). This loan, along with
accrued interest of $14,455 and $12,921 as of March 31, 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 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, 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 to 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 Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements.
For the three months ended March 31, 1997, the maturity of the unrestricted
certificate of deposit was adequate to support operating cash requirements.
Cash and cash requirements decreased during the three months ended March 31,
1997 as a result of the pay-off of the Frederick Heights purchase money note, as
discussed above.
Results of Operations
---------------------
The Partnership's net income for the three months ended March 31, 1997
increased from the comparable period in 1996 principally due to the decrease in
interest expense due to the pay-off of the Frederick Heights purchase money
note, as discussed above. Partially offsetting the increase in net income was
an increase in general and administrative expenses due to higher payroll costs
and a decrease in interest income due to decreased cash and cash equivalent
balances during 1997.
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
-11-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
obligation to advance funds or provide financing to the Local Partnerships. As
a result, the Partnership's recognized losses for the three months ended March
31, 1997 did not include losses of $221,785, compared to excluded losses of
$229,214 for the three months ended March 31, 1996.
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 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 makes minimum monthly payments to HUD, consisting
of a service charge and tax escrow. Additionally, Frenchman's Wharf I makes
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 April 23, 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 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 March 31, 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 March 31, 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.
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 April 23, 1997,
the noteholders had not given consent to an extension agreement.
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
related purchase money notes are 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
-12-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
respective purchase money notes, the Partnership's exposure to loss is limited
since the amount of 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.
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 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
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. In 1995 and 1996, HUD released its
Reinvention Blueprint and a revision to its Reinvention Blueprint which
contained proposals that have come to be known as "Mark-to-Market". Congress,
HUD and the Clinton Administration continue to struggle with the Mark-to-Market
initiative. This initiative was intended to deal with HUD's increasing burden
of funding HAP contracts. Under the initiative, HUD would eliminate the
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 HAP contract, there is no assurance that
rental properties would be able to maintain the rental income and occupancy
levels necessary to pay operating costs and debt service. The initiative will
impact those properties that have HAP contracts with shorter terms than that of
the underlying property mortgage. For instance, some properties may have a 20-
year HAP contract while the underlying mortgage has a 40-year term. In the
interim, Congress has authorized one-year extensions for properties with HAP
contracts expiring during the government's fiscal year 1997, which began October
1, 1996. 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.
With the uncertainty surrounding renewals of expiring Section 8 HAP
contracts, the Managing General Partner is developing new strategies to deal
with the ever changing environment of affordable housing policy. Properties
with expiring Section 8 HAP contracts may become convertible to market-rate
apartment properties. Currently, there are a few lenders that will provide
additional financing to allow the property to convert to market rate units.
Where opportunities exist, the Managing General Partner will continue to work
with the Local Partnerships to develop a strategy that makes economic sense for
all parties involved.
No other significant changes in the Partnership's operations have taken
place during this period.
-13-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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
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 April 23, 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.
-14-
<PAGE>
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 April 28, 1997,
principal and accrued interest totalling $700,000 and $777,657, respectively,
were due. The Managing General Partner is currently negotiating a five year
extension of the purchase money note with the 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 since the amount of the nonrecourse indebtedness exceeds the
carrying amount of the investment in and advances to the Local Partnership.
Thus, even a complete loss of this investment would not have a material impact
on the operations of the Partnership.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
No reports on Form 8-K were filed with the Commission during the quarter
ended March 31, 1997.
-15-
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CAPITAL REALTY INVESTORS, LTD.
(Registrant)
By: C.R.I., Inc.
Managing General Partner
April 28, 1997 By: /s/ Susan R. Campbell
- --------------------------- ---------------------------------
Date Susan R. Campbell
Senior Vice President
Signing on behalf of the
Registrant and as Acting
Chief Accounting Officer,
Principal Financial and
Principal Accounting Officer
-16-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FIRST QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,802,364
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,692,740
<CURRENT-LIABILITIES> 0
<BONDS> 10,849,733
0
0
<COMMON> 0
<OTHER-SE> (6,203,104)
<TOTAL-LIABILITY-AND-EQUITY> 4,692,740
<SALES> 0
<TOTAL-REVENUES> 197,644
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 72,993
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 117,542
<INCOME-PRETAX> 7,109
<INCOME-TAX> 0
<INCOME-CONTINUING> 7,109
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,109
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
