<PAGE>
FORM 10-QSB
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
--------------
Commission file number 0-11149
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CAPITAL REALTY INVESTORS, LTD.
- --------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
District of Columbia 52-1219926
- ----------------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11200 Rockville Pike, Rockville, Maryland 20852
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(Address of principal executive offices) (Zip Code)
(301) 468-9200
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(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2) has
been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Not applicable Not applicable
- -------------------------- ---------------------------------------
(Class) (Outstanding at March 31, 1998)
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
INDEX TO FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 1998
Page
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Balance Sheets - March 31, 1998 and
December 31, 1997 . . . . . . . . . . . . . . . . . . 1
Statements of Operations - for the three
months ended March 31, 1998 and 1997 . . . . . . . . 2
Statements of Cash Flows - for the three
months ended March 31, 1998 and 1997 . . . . . . . . 3
Notes to Financial Statements . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 9
PART II. Other Information
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . 12
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 13
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . 15
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS, LTD.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 2,325,074 $ 2,166,362
Cash and cash equivalents 2,166,711 2,204,552
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $350,391 and $344,688, respectively 562,029 567,732
Property purchase costs, net of accumulated amortization of
$91,898 and $90,419, respectively 144,669 146,148
Other assets 5,753 6,520
------------ ------------
Total assets $ 5,204,236 $ 5,091,314
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 4,478,800 $ 4,478,800
Accrued interest payable 6,841,129 6,723,580
Accounts payable and accrued expenses 59,143 58,743
------------ ------------
Total liabilities 11,379,072 11,261,123
------------ ------------
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 (27,340,213) (27,335,186)
------------ ------------
Total partners' deficit (6,174,836) (6,169,809)
------------ ------------
Total liabilities and partners' deficit $ 5,204,236 $ 5,091,314
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS, LTD.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Share of income from partnerships $ 169,600 $ 173,337
------------ ------------
Other revenue and expenses:
Revenue:
Interest income 27,174 24,307
------------ ------------
Expenses:
Interest 117,549 117,542
Management fee 23,802 23,802
General and administrative 33,071 25,372
Professional fees 20,197 16,638
Amortization 7,182 7,181
------------ ------------
201,801 190,535
------------ ------------
Total other revenue and expenses (174,627) (166,228)
------------ ------------
Net (loss) income (5,027) 7,109
Accumulated losses, beginning of period (27,335,186) (27,375,590)
------------ ------------
Accumulated losses, end of period $(27,340,213) $(27,368,481)
============ ============
(Loss) income allocated to General Partners (3%) $ (151) $ 213
============ ============
(Loss) income allocated to Limited Partners (97%) $ (4,876) $ 6,896
============ ============
(Loss) income per unit of Limited Partnership Interest
based on 24,837 units outstanding $ (0.20) $ 0.28
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS, LTD.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (5,027) $ 7,109
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Share of income from partnerships (169,600) (173,337)
Amortization of deferred costs 7,182 7,181
Increase in accrued interest receivable on advances to partnerships -- (1,534)
Changes in assets and liabilities:
Decrease in other assets 767 36,794
Increase in accrued interest payable 117,549 117,549
Increase (decrease) in accounts payable and accrued expenses 400 (6,119)
------------ ------------
Net cash used in operating activities (48,729) (12,357)
------------ ------------
Cash flows from investing activities:
Receipt of distributions from partnerships 10,888 --
Maturity of unrestricted certificate of deposit -- 189,000
------------ ------------
Net cash provided by investing activities 10,888 189,000
------------ ------------
Cash flows from financing activities:
Pay-off of purchase money notes and related interest -- (617,574)
------------ ------------
Net decrease in cash and cash equivalents (37,841) (440,931)
Cash and cash equivalents, beginning of period 2,204,552 2,243,295
------------ ------------
Cash and cash equivalents, end of period $ 2,166,711 $ 1,802,364
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ -- $ 117,574
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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<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 reflect all adjustments, consisting
of normal recurring accruals, necessary for a fair presentation of the financial
position of Capital Realty Investors, Ltd. (the Partnership) as of March 31,
1998, and the results of its operations and its cash flows for the three months
ended March 31, 1998 and 1997. The results of operations for the interim period
ended March 31, 1998, are not necessarily indicative of the results to be
expected for the full year.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles and with the
instructions to Form 10-QSB. Certain information and accounting policies and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such instructions. These condensed financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Partnership's annual report on Form 10-K at December 31, 1997.
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
Two properties, Lake Properties Limited Partnership (Frenchman's Wharf I)
and ARA Associates-Shangri-La Ltd. (Shallowford Oaks), have purchase money notes
which have matured or will mature during 1998 and have not been paid. The
purchase money notes accrue interest and require payment in full of all unpaid
accrued interest and principal upon the occurrence of certain events, such as
the sale or refinancing of the underlying apartment complex or the maturity of
the respective purchase money notes. The purchase money notes, which are non-
recourse to the Partnership, are secured by the Partnership's interest in the
respective Local Partnerships. The amount due on the purchase money notes
consists of estimated outstanding principal and accrued interest of
approximately $4.479 million and $6.841 million, respectively, as of March 31,
1998 and $4.479 million and $6.724 million, respectively, as of December 31,
1997. The Managing General Partner is hopeful that an extension of the purchase
money notes' maturity dates can be negotiated. It is possible, however, that
the noteholders could refuse to negotiate or, even if extensions are obtained,
that the underlying properties' values will be insufficient to produce a return
from a sale or refinancing sufficient to pay off the purchase money notes.
The Partnership's inability to pay these purchase money note principal and
accrued interest balances when due, and the resulting uncertainty regarding the
Partnership's continued ownership interest of the related Local Partnerships,
does not impact the Partnership's financial condition because the purchase money
notes are non-recourse and secured solely by the Partnership's interest in the
related Local Partnerships. Therefore, should the investment in Frenchman's
Wharf I and/or Shallowford Oaks not produce sufficient value to satisfy the
related purchase money notes, the Partnership's exposure to loss is limited
because the amount of the nonrecourse indebtedness of each of the maturing
purchase money notes exceeds the carrying amount of the investment in and
advances to the related Local Partnerships. Thus, even a complete loss of one
of these Local Partnerships would not have a material impact on the financial
condition of the Partnership. See further discussion on these purchase money
notes below.
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<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Interest expense on the Partnership's purchase money notes for the three
months ended March 31, 1998 and 1997 was $117,549 and $117,542, respectively.
The accrued interest payable on the purchase money notes of $6,841,129 and
$6,723,580 as of March 31, 1998 and December 31, 1997, 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 agreement.
As of both March 31, 1998 and December 31, 1997, the Partnership had
advanced funds totaling $377,593 to Local Partnerships. There were no funds
advanced to the Local Partnerships during the three months ended March 31, 1998.
Baltic Plaza
------------
In 1989, the Partnership funded a certificate of deposit in the amount of
$189,000, which was used to collateralize a letter of credit which served as
supplemental collateral for Sencit Baltic Associates' (Baltic Plaza) mortgage
loan. As of March 28, 1996, Baltic Plaza was no longer required to provide
supplemental collateral for its mortgage loan, and the letter of credit was
subsequently cancelled. On March 18, 1997, the certificate of deposit matured.
Frederick Heights
-----------------
On January 1, 1997, the Partnership paid off purchase money notes relating
to Frederick Heights Limited Partnership (Frederick Heights) in the aggregate
principal and accrued interest amount of $500,000 and $117,574, respectively.
Frenchman's Wharf
-------------------
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 on the Local Partnership's mortgage loan, the Partnership is
currently negotiating with the purchase money noteholders to reach an extension
agreement which would be coterminous with the expiration of the workout
arrangement. As of May 5, 1998, 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, as
discussed above.
The report of the auditors on the financial statements of Frenchman's Wharf
I for the years ended December 31, 1997 and 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 and the
expiration of its Section 8 Housing Assistance Payments (HAP) contract with the
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<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
U. S. Department of Housing and Urban Development (HUD) on November 30, 1998.
The uncertainty about the Local Partnership's continued ownership of the
property does not impact the Partnership's financial condition, as discussed
above.
Shallowford Oaks
----------------
The Partnership defaulted on its purchase money note relating to
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 May 5, 1998, principal and accrued interest totaling
$700,000 and $829,380, 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 on its mortgage loan,
and as of May 5, 1998, the Managing General Partner is awaiting a response from
the purchase money noteholder. There is no assurance that any agreement will be
reached with the noteholder.
In addition, the lender associated with the Shallowford Oaks mortgage loan
filed notice on November 3, 1997 accelerating the Local Partnership's mortgage
loan and demanding payment in full due to a purported nonmonetary default of the
provisional workout agreement. The local managing general partner is disputing
this foreclosure notice and has hired an independent accounting firm to perform
a compliance audit. The results of the compliance audit were to be presented at
a hearing that started on April 20, 1998; however, due to the length of
testimony a continuance was issued until May 6, 1998. In the interim, a
temporary restraining order has been granted which suspends the foreclosure
action until the conclusion of the hearing.
Due to the uncertainties regarding the outcome of an extension of the
purchase money notes and/or the foreclosure proceedings on the Local
Partnership's mortgage loan, 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, as discussed above.
The following are combined statements of operations for the seventeen Local
Partnerships in which the Partnership has invested as of March 31, 1998 and
1997, respectively. The statements are compiled from information supplied by
the management agents of the projects and are unaudited.
-6-
<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,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenue:
Rental revenue $ 4,564,203 $ 4,550,799
Other 247,308 192,279
------------ ------------
4,811,511 4,743,078
------------ ------------
Expenses:
Operating 2,368,581 2,318,708
Interest 1,643,175 1,658,265
Depreciation and amortization 830,680 814,845
------------ ------------
4,842,436 4,791,818
------------ ------------
Net loss $ (30,925) $ (48,740)
============ ============
</TABLE>
As of March 31, 1998 and December 31, 1997, the Partnership's share of
cumulative losses to date for twelve of the seventeen Local Partnerships exceeds
the amount of the Partnership's investments in and advances to those Local
Partnerships by $8,576,858 and $8,377,985, 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. AFFORDABLE HOUSING LEGISLATION
------------------------------
Frenchman's Wharf I and Shallowford Oaks each have a Section 8 HAP
contracts covering 20% of each property's apartment units which expire during
1998. The Section 8 HAP contracts provide rental subsidies to the property
owner for units occupied by low income tenants. The Managing General Partner
expects that these contracts will not be extended. The impact of the
expirations will likely be an increase in vacancy during the 6-12 months after
the contracts expire. As residents in the low-income units move out, the units
will be made available to market-rate residents, as market conditions allow.
Eight properties in the Partnership have mortgages financed by various
state housing agencies and two properties have mortgages financed by the Rural
Economic Community Development (RECD) agency. These ten properties have Section
8 HAP contracts in place for 100% of their apartment units. These Section 8 HAP
contracts begin to expire in September of 2000. It remains to be seen how the
-7-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. AFFORDABLE HOUSING LEGISLATION - Continued
financing agencies will deal with the expiration of the Section 8 HAP contracts.
The Managing General Partner believes that the agencies will strive to preserve
the units as low income, or affordable housing. This means that the agencies
probably will not allow a prepayment of the mortgage or a conversion of the
units to market rate housing.
4. 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 $22,033 and $16,376 for the
three months ended March 31, 1998 and 1997, 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 three month-period ended March 31, 1998 and
1997.
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<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, including statements
regarding the effect of governmental regulations. Actual results may differ
materially from those described in the forward looking statements and will be
affected by a variety of factors including national and local economic
conditions, the general level of interest rates, terms of governmental
regulations that affect the Partnership and interpretations of those
regulations, the competitive environment in which the Partnership operates, and
the availability of working capital.
C.R.I., Inc. (the Managing General Partner) continues to evaluate the
Partnership's underlying apartment complexes to determine a strategy for
liquidating the Partnership. Issues that are at the forefront of the Managing
General Partner's strategic planning include: maturing purchase money notes,
expiring Section 8 Housing Assistance Payment (HAP) contracts, properties with
state housing financing or Rural Economic Community Development (RECD) agency
financing, and the ending of losses to the Partnership since the low-income
housing accelerated depreciation deductions are completely depleted at the
property levels.
Lake Properties Limited Partnership (Frenchman's Wharf I) and ARA
Associates-Shangri-La Ltd. (Shallowford Oaks) each have Section 8 HAP contracts
covering 20% of each property's apartment units which expire during 1998. The
Section 8 HAP contracts provide rental subsidies to the property owner for units
occupied by low income tenants. The Managing General Partner expects that these
contracts will not be extended. The impact of the expirations will likely be an
increase in vacancy during the 6-12 months after the contracts expire. As
residents in the low-income units move out, the units will be made available to
market-rate residents, as market conditions allow.
Eight properties in the Partnership have mortgages financed by various
state housing agencies and two properties have mortgages financed by the RECD
agency. These ten properties have Section 8 HAP contracts in place for 100% of
their apartment units. These Section 8 HAP contracts begin to expire in
September of 2000. It remains to be seen how the financing agencies will deal
with the expiration of the Section 8 HAP contracts. The Managing General
Partner believes that the agencies will strive to preserve the units as low
income, or affordable housing. This means that the agencies probably will not
allow a prepayment of the mortgage or a conversion of the units to market rate
housing.
Sales of properties with state agency or RECD financing will be extremely
difficult. Since the agency is unlikely to allow prepayment and/or sale for a
conversion to market rate housing, the buyers are limited to non-profit
organizations. Given the narrow range of interested buyers for such properties,
purchase offers received from non-profit organizations tend to be much lower per
apartment than those from profit-motivated companies.
One option the Managing General Partner is considering is to market, on a
state-by-state basis, the sale of a property in the Partnership with the sale of
other properties in the Managing General Partner's portfolio. This may enhance
the opportunity to sell these properties. Each property is different, so it is
impossible to predict if any of the Partnership's properties might be included
in such a combination sale.
-9-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Two properties in which the Partnership has invested, Winthrop Beach and
Frederick Heights, consist of market rate apartment units which have no Section
8 HAP contracts. Winthrop Beach, located in Chicago, Illinois, does not
generate positive cash flow. Frederick Heights has been generating cash flow of
$50,000-$75,000 annually. Several new properties have opened in the Frederick,
Maryland area where the property is located, which may impact its future
operations. The Managing General Partner is monitoring the operations of both
these properties for future sale potential.
The Managing General Partner is working diligently on behalf of the
Partnership to produce the best results possible under these difficult
circumstances. While the Managing General Partner cannot predict the outcome
for any particular property at this time, the Managing General Partner will
continue to work with the Local Partnerships to develop strategies that make
sense for all parties involved.
Financial Condition/Liquidity
-----------------------------
The Partnership's liquidity, with unrestricted cash resources of $2,166,711
(or approximately $84.62 per Limited Partner unit) and $2,204,552 (or
approximately $86.10 per Limited Partner unit) as of March 31, 1998 and December
31, 1997, respectively, along with anticipated future cash distributions from
the Local Partnerships, is expected to meet its current and anticipated
operating cash needs. As of May 5, 1998, there are no material commitments for
capital expenditures.
Two properties, Lake Properties Limited Partnership (Frenchman's Wharf I)
and ARA Associates-Shangri-La Ltd. (Shallowford Oaks), have purchase money notes
which have matured or will mature during 1998 and have not been paid. The
purchase money notes accrue interest and require payment in full of all unpaid
accrued interest and principal upon the occurrence of certain events, such as
the sale or refinancing of the underlying apartment complex or the maturity of
the respective purchase money notes. The purchase money notes, which are non-
recourse to the Partnership, are secured by the Partnership's interest in the
respective Local Partnerships. The amount due on the purchase money notes
consists of estimated outstanding principal and accrued interest of
approximately $4.479 million and $6.841 million, respectively, as of March 31,
1998 and $4.479 million and $6.724 million, respectively, as of December 31,
1997. The Managing General Partner is hopeful that an extension of the purchase
money notes' maturity dates can be negotiated. It is possible, however, that
the noteholders could refuse to negotiate or, even if extensions are obtained,
that the underlying properties' values will be insufficient to produce a return
from a sale or refinancing sufficient to pay off the purchase money notes.
The Partnership's inability to pay these purchase money note principal and
accrued interest balances when due, and the resulting uncertainty regarding the
Partnership's continued ownership interest of the related Local Partnerships,
does not impact the Partnership's financial condition because the purchase money
notes are nonrecourse and secured solely by the Partnership's interest in the
related Local Partnerships. Therefore, should the investment in Frenchman's
Wharf I and/or Shallowford Oaks not produce sufficient value to satisfy the
related purchase money notes, the Partnership's exposure to loss is limited
because the amount of the nonrecourse indebtedness of each of the maturing
purchase money notes exceeds the carrying amount of the investment in and
advances to the related Local Partnerships. Thus, even a complete loss of one
-10-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
of these Local Partnerships would not have a material impact on the financial
condition of the Partnership. See the notes to the financial statements for
additional information pertaining to these purchase money notes.
The Partnership has determined that it is not practicable to estimate the
fair value of the purchase money notes, either individually or in the aggregate,
due to: (1) the lack of an active market for this type of financial instrument,
(2) the variable nature of purchase money note interest payments as a result of
fluctuating cash flow distributions received from the related Local
Partnerships, and (3) the excessive costs associated with an independent
appraisal of the purchase money notes.
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, 1998 and 1997, the receipt of distributions
from partnerships and existing cash resources were adequate to support operating
cash requirements.
Results of Operations
---------------------
The Partnership's incurred a net loss for the three months ended March 31,
1998 as opposed to net income during the corresponding period in 1997
principally due to an increase in general and administrative expense relating to
higher payroll costs and an increase in professional fees relating to higher
legal costs.
For financial reporting purposes, the Partnership, as a limited partner in
the Local Partnerships, does not record losses from the Local Partnerships in
excess of its investment to the extent that the Partnership has no further
obligation to advance funds or provide financing to the Local Partnerships. As
a result, the Partnership's recognized losses for the three months ended March
31, 1998 did not include losses of $198,873 compared to excluded losses of
$221,785, for the three months ended March 31, 1997.
No other significant changes in the Partnership's operations have taken
place during this period.
Year 2000 Computer Issue
------------------------
The Year 2000 ("Y2K") computer issue refers to the inability of many
computer systems in use today to recognize "00" in the date field as the year
2000 and to recognize the year 2000 as a leap year. The Y2K problem arose
because, for many years, computer software programs, including programs embedded
in hardware, utilized only the last two digits to specify the year with the
assumption that the first two digits were "19." As a result, such programs may
not be able to recognize and process dates beyond 1999; rather they may
recognize and process "00," "01," "02,", etc., incorrectly as 1900, 1901, 1902,
instead of as 2000, 2001, 2002. In the opinion of computer experts, this could
cause such programs to create erroneous results, malfunction, or fail completely
unless corrective measures are taken.
The Partnership utilizes software and related computer technologies
essential to its operations that will be affected by the Y2K issue. The
Managing General Partner is studying what actions will be necessary to make its
-11-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
computer systems Y2K compliant; certain upgrades are already scheduled. The
expense associated with these actions cannot presently be determined, but the
Managing General Partner does not expect it to be material.
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
The Partnership defaulted on its purchase money note relating to
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 May 5, 1998, principal and accrued interest totaling
$700,000 and $829,380, 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 on its mortgage loan,
and as of May 5, 1998, the Managing General Partner is awaiting a response from
the purchase money noteholder. There is no assurance that any agreement will be
reached with the noteholder.
In addition, the lender associated with the Shallowford Oaks mortgage loan
filed notice on November 3, 1997 accelerating the Local Partnership's mortgage
loan and demanding payment in full due to a purported nonmonetary default of the
provisional workout agreement. The local managing general partner is disputing
this foreclosure notice and has hired an independent accounting firm to perform
a compliance audit. The results of the compliance audit were to be presented at
a hearing that started on April 20, 1998, however, due to the length of
testimony a continuance was issued until May 6, 1998. In the interim, a
temporary restraining order has been granted which suspends the foreclosure
action until the conclusion of the hearing.
Due to the uncertainties regarding the outcome of an extension of the
purchase money notes and/or the foreclosure proceedings on the Local
Partnership's mortgage loan, 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, as discussed above.
-12-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a. None
b. No reports on Form 8-K were filed with the Commission during the
quarter ended March 31, 1998.
All other items are not applicable.
-13-
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act of 1934, the
registrant 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
May 6, 1998 by: /s/ Michael J. Tuszka
- ----------------- ---------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
and Principal Accounting Officer)
-14-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FIRST QUARTER 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,166,711
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,204,236
<CURRENT-LIABILITIES> 0
<BONDS> 11,319,929
0
0
<COMMON> 0
<OTHER-SE> (6,174,836)
<TOTAL-LIABILITY-AND-EQUITY> 5,204,236
<SALES> 0
<TOTAL-REVENUES> 196,774
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 84,252
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 117,549
<INCOME-PRETAX> (5,027)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,027)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,207)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
