<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 June 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
- -------------------------------------------------------------------------
(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 June 30, 1997
- ---------------------------------- ----------------------------------
(Not applicable) (Not applicable)
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
Page
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Balance Sheets - June 30, 1997 and
December 31, 1996 . . . . . . . . . . . . . . . . . . 1
Statements of Operations - for the three and six
months ended June 30, 1997 and 1996 . . . . . . . . . 2
Statements of Cash Flows - for the six
months ended June 30, 1997 and 1996 . . . . . . . . . 3
Notes to Financial Statements . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 11
PART II. Other Information
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 17
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . 19
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS, LTD.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 1,994,802 $ 1,976,284
Cash and cash equivalents 2,056,260 2,243,295
Unrestricted certificate of deposit -- 189,000
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $333,283 and $321,878, respectively 579,137 590,542
Property purchase costs, net of accumulated amortization of
$87,462 and $84,505, respectively 149,105 152,062
Other assets 6,013 40,592
------------ ------------
Total assets $ 4,785,317 $ 5,191,775
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 4,478,800 $ 4,978,800
Accrued interest payable 6,488,482 6,370,958
Accounts payable and accrued expenses 62,547 52,230
------------ ------------
Total liabilities 11,029,829 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 (27,409,889) (27,375,590)
------------ ------------
Total partners' deficit (6,244,512) (6,210,213)
------------ ------------
Total liabilities and partners' deficit $ 4,785,317 $ 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 six months ended
June 30, June 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Share of income from partnerships $ 118,191 $ 164,723 $ 291,528 $ 336,004
------------ ------------ ------------ ------------
Other revenue and expenses:
Revenue:
Interest income 27,944 28,369 52,251 56,816
------------ ------------ ------------ ------------
Expenses:
Interest 117,549 166,119 235,091 332,238
Management fee 23,802 23,802 47,604 47,604
General and administrative 22,688 20,522 48,060 41,989
Professional fees 16,323 17,381 32,961 34,980
Amortization 7,181 7,796 14,362 15,592
------------ ------------ ------------ ------------
187,543 235,620 378,078 472,403
------------ ------------ ------------ ------------
Total other revenue and expenses (159,599) (207,251) (325,827) (415,587)
------------ ------------ ------------ ------------
Net loss (41,408) (42,528) (34,299) (79,583)
Accumulated losses, beginning of period (27,368,481) (29,813,888) (27,375,590) (29,776,833)
------------ ------------ ------------ ------------
Accumulated losses, end of period $(27,409,889) $(29,856,416) $(27,409,889) $(29,856,416)
============ ============ ============ ============
Loss allocated to General Partners (3%) $ (1,242) $ (1,275) $ (1,029) $ (2,387)
============ ============ ============ ============
Loss allocated to Limited Partners (97%) $ (40,166) $ (41,253) $ (33,270) $ (77,196)
============ ============ ============ ============
Loss per unit of Limited Partnership Interest
based on 24,837 units outstanding $ (1.62) $ (1.66) $ (1.34) $ (3.11)
============ ============ ============ ============
</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 six months ended
June 30,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (34,299) $ (79,583)
Adjustments to reconcile net loss to net
cash used in operating activities:
Share of income from partnerships (291,528) (336,004)
Amortization of deferred costs 14,362 15,592
Increase in accrued interest receivable on
advances to partnerships (3,068) (3,068)
Changes in assets and liabilities:
Decrease (increase) in other assets 34,579 (1,077)
Increase in accrued interest payable 235,098 332,238
Increase (decrease) in accounts payable and accrued expenses 10,317 (5,232)
------------ ------------
Net cash used in operating activities (34,539) (77,134)
------------ ------------
Cash flows from investing activities:
Release of restricted cash equivalents -- 189,000
Receipt of distributions from partnerships 276,078 162,026
Maturity of unrestricted certificate of deposit 189,000 --
------------ ------------
Net cash provided by investing activities 465,078 351,026
------------ ------------
Cash flows from financing activities:
Pay-off of purchase money notes and related interest (617,574) --
------------ ------------
Net (decrease) increase in cash and cash equivalents (187,035) 273,892
Cash and cash equivalents, beginning of period 2,243,295 1,823,863
------------ ------------
Cash and cash equivalents, end of period $ 2,056,260 $ 2,097,755
============ ============
</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 June 30, 1997 and December 31,
1996, and the results of its operations for the three and six months ended June
30, 1997 and 1996 and its cash flows for the six months ended June 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 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 $6,488,482 as of June 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 six months ended June 30, 1997 was $117,549 and $235,091, respectively, and
$166,119 and $332,238 for the three and six months ended June 30, 1996,
respectively. The accrued interest payable on the purchase money notes of
$6,488,482 and $6,370,958 as of June 30, 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 June 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 six months ended June 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 July 18, 1997, principal
and accrued interest totalling $700,000 and $788,919, 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 July 16, 1997, the Managing General Partner is awaiting a
response from the purchase money note holder. 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 HUD. This
loan, along with accrued interest of $15,989 and $12,921 as of June 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
-5-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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
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 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 July 16, 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 June 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 June 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.
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. As of July 16, 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
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 since the amount of the
nonrecourse indebtedness exceeds the carrying amount of the investment in and
-6-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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 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. 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, a one year extension of Section 8 HAP contracts
expiring during the government's fiscal year 1998 is possible, however, such an
extension as well as continued funding of annual renewals for Section 8 HAP
contracts expiring after fiscal year 1998 is uncertain. The Section 8 HAP
contract for the following properties expires during the government's fiscal
year 1998:
-7-
<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>
With the potential elimination of the HAP contract, there is no assurance
that these rental properties would be able to maintain the rental income and
occupancy levels necessary to pay operating costs and debt service.
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 June 30,
1997 and 1996, respectively. The statements are compiled from information
supplied by the management agents of the projects and are unaudited.
-8-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rental revenue $ 4,520,649 $ 4,672,849 $ 9,071,448 $ 9,291,313
Other 176,871 267,039 369,150 531,307
------------ ------------ ------------ ------------
4,697,520 4,939,888 9,440,598 9,822,620
------------ ------------ ------------ ------------
Expenses:
Operating 2,371,119 2,429,523 4,689,827 4,817,393
Interest 1,658,262 1,699,810 3,316,527 3,399,621
Depreciation and amortization 814,838 851,127 1,629,683 1,702,252
------------ ------------ ------------ ------------
4,844,219 4,980,460 9,636,037 9,919,266
------------ ------------ ------------ ------------
Net loss $ (146,699) $ (40,572) $ (195,439) $ (96,646)
============ ============ ============ ============
</TABLE>
As of June 30, 1997 and December 31, 1996, the Partnership's share of
cumulative losses to date for ten and eleven, respectively, of the seventeen
Local Partnerships exceeds the amount of the Partnership's investments in and
advances to those Local Partnerships by $8,076,996 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 $17,396 and $33,772 for the
three and six months ended June 30, 1997, respectively, and $16,047 and $34,944
for the three and six 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 $47,604 for the three and six months,
respectively, ended June 30, 1997 and 1996.
-9-
<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 July 16, 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.
-10-
<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 $2,056,260
(or approximately $80.31 per Limited Partner unit) and $2,243,295 (or
approximately $87.61 per Limited Partner unit) as of June 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 July 16, 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 $6,488,482 as of June 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 July 18, 1997, principal
-11-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
and accrued interest totalling $700,000 and $788,919, 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 July 18, 1997, the Managing General Partner is awaiting a
response from the purchase money note holder. 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 HUD. This
loan, along with accrued interest of $15,989 and $12,921 as of June 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 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 six months ended June 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 six months ended June 30, 1997 as a result of the pay-off
of the Frederick Heights purchase money notes, as discussed above.
-12-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Results of Operations
---------------------
The Partnership's net loss for the three and six months ended June 30, 1997
decreased 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
notes, as discussed above. Partially offsetting the decrease in net loss was a
decrease in share of income from partnerships primarily due to higher operating
and maintenance costs at one property.
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 six months ended
June 30, 1997 did not include losses of $260,115 and $481,900, respectively,
compared to excluded losses of $205,988 and $435,202, for the three and six
months ended June 30, 1996, respectively.
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 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 July 16, 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 June 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 June 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.
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
-13-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
with the expiration of the HUD workout arrangement. As of July 16, 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
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 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.
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 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. 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
-14-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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, a one year extension of Section 8 HAP contracts
expiring during the government's fiscal year 1998 is possible, however, such an
extension as well as continued funding of annual renewals for Section 8 HAP
contracts expiring after fiscal year 1998 is uncertain. The Section 8 HAP
contract for the following properties expires during the government's fiscal
year 1998:
-15-
<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>
With the potential elimination of the HAP contract, there is no assurance
that these rental properties would be able to maintain the rental income and
occupancy levels necessary to pay operating costs and debt service.
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.
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
-16-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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 July 16, 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 July 18, 1997, principal
and accrued interest totalling $700,000 and $788,919, 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 July 18, 1997, the Managing General Partner is awaiting a
response from the purchase money note holder. 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
-17-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Continued
-------------------------------
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 June 30, 1997.
-18-
<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
July 18, 1997 By: /s/ Susan R. Campbell
- --------------------------- ---------------------------------
Date Susan R. Campbell
Executive Vice President and Chief
Operating Officer
Signing on behalf of the
Registrant and as Acting
Chief Accounting Officer,
Principal Financial and
Principal Accounting Officer
-19-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
-20-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SECOND QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,056,260
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,785,317
<CURRENT-LIABILITIES> 0
<BONDS> 10,967,282
0
0
<COMMON> 0
<OTHER-SE> (6,244,512)
<TOTAL-LIABILITY-AND-EQUITY> 4,785,317
<SALES> 0
<TOTAL-REVENUES> 343,779
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 142,987
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 235,091
<INCOME-PRETAX> (34,299)
<INCOME-TAX> 0
<INCOME-CONTINUING> (34,299)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,299)
<EPS-PRIMARY> (1.34)
<EPS-DILUTED> (1.34)
</TABLE>
