<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 September 30, 1998
------------------
Commission file number 0-11149
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CAPITAL REALTY INVESTORS, LTD.
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(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 September 30, 1998)
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
INDEX TO FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
Page
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Balance Sheets - September 30, 1998 and
December 31, 1997 . . . . . . . . . . . . . . . . . . 1
Statements of Operations and Accumulated Losses - for
the three and nine months ended September 30, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . . . 2
Statements of Cash Flows - for the nine
months ended September 30, 1998 and 1997 . . . . . . 3
Notes to Financial Statements - September 30, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 14
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . 16
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS, LTD.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 2,432,074 $ 2,166,362
Cash and cash equivalents 2,468,983 2,204,552
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $361,796 and $344,688, respectively 550,624 567,732
Property purchase costs, net of accumulated amortization of
$94,855 and $90,419, respectively 141,712 146,148
Other assets 5,124 6,520
------------ ------------
Total assets $ 5,598,517 $ 5,091,314
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 4,478,800 $ 4,478,800
Accrued interest payable 7,076,227 6,723,580
Accounts payable and accrued expenses 76,309 58,743
------------ ------------
Total liabilities 11,631,336 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 (27,198,196) (27,335,186)
------------ ------------
Total partners' deficit (6,032,819) (6,169,809)
------------ ------------
Total liabilities and partners' deficit $ 5,598,517 $ 5,091,314
============ ============
</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
AND ACCUMULATED LOSSES
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Share of income from partnerships $ 202,943 $ 265,503 $ 705,041 $ 557,031
------------ ------------ ------------ ------------
Other revenue and expenses:
Revenue:
Interest income 34,392 29,523 94,522 81,774
------------ ------------ ------------ ------------
Expenses:
Interest 117,549 117,549 352,647 352,640
Management fee 23,802 23,802 71,406 71,406
General and administrative 33,935 20,447 103,472 68,507
Professional fees 30,365 15,044 113,504 48,005
Amortization 7,181 7,181 21,544 21,543
------------ ------------ ------------ ------------
212,832 184,023 662,573 562,101
------------ ------------ ------------ ------------
Total other revenue and expenses (178,440) (154,500) (568,051) (480,327)
------------ ------------ ------------ ------------
Net income 24,503 111,003 136,990 76,704
Accumulated losses, beginning of period (27,222,699) (27,409,889) (27,335,186) (27,375,590)
------------ ------------ ------------ ------------
Accumulated losses, end of period $(27,198,196) $(27,298,886) $(27,198,196) $(27,298,886)
============ ============ ============ ============
Net income allocated to General Partners (3%) $ 735 $ 3,330 $ 4,110 $ 2,301
============ ============ ============ ============
Net income allocated to Limited Partners (97%) $ 23,768 $ 107,673 $ 132,880 $ 74,403
============ ============ ============ ============
Net income per unit of Limited Partnership Interest
based on 24,837 units outstanding $ .96 $ 4.34 $ 5.35 $ 3.00
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS, LTD.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 136,990 $ 76,704
Adjustments to reconcile net income to net
cash used in operating activities:
Share of income from partnerships (705,041) (557,031)
Amortization of deferred costs 21,544 21,543
Changes in assets and liabilities:
Increase in accrued interest receivable on
advances to partnerships (4,602) (4,602)
Decrease in other assets 1,396 33,705
Increase in accrued interest payable 352,647 352,647
Increase in accounts payable and accrued expenses 17,566 14,335
------------ ------------
Net cash used in operating activities (179,500) (62,699)
------------ ------------
Cash flows from investing activities:
Receipt of distributions from partnerships 456,431 391,468
Advances to partnerships (12,500) --
Maturity of unrestricted certificate of deposit -- 189,000
------------ ------------
Net cash provided by investing activities 443,931 580,468
------------ ------------
Cash flows from financing activities:
Pay-off of purchase money notes and related interest -- (617,574)
------------ ------------
Net cash used in financing activities -- (617,574)
------------ ------------
Net increase (decrease) in cash and cash equivalents 264,431 (99,805)
Cash and cash equivalents, beginning of period 2,204,552 2,243,295
------------ ------------
Cash and cash equivalents, end of period $ 2,468,983 $ 2,143,490
============ ============
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
September 30, 1998 and 1997
(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 September 30,
1998, and the results of its operations for the three and nine months ended
September 30, 1998 and 1997, and its cash flows for the nine months ended
September 30, 1998 and 1997. The results of operations for the interim period
ended September 30, 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
The Partnership is the maker of purchase money notes which have matured and
have not been paid with respect to two Local Partnerships, Lake Properties
Limited Partnership (Frenchman's Wharf I) and ARA Associates-Shangri-La Ltd.
(Shallowford Oaks). 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 note. The purchase
money notes, which are nonrecourse to the Partnership, are generally secured by
the Partnership's interest in the respective Local Partnerships. The amounts
due on the purchase money notes consist of outstanding principal and accrued
interest of approximately $4.479 million and $7.076 million, respectively, as of
September 30, 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 pay
off the purchase money notes at the time of sale or refinancing.
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 in 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 each of the related Local Partnerships. Thus, even a complete loss
of one or both of these Local Partnerships would not have a material impact on
-4-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
the financial condition of the Partnership. See further discussion of these
purchase money notes, below.
Interest expense on the Partnership's purchase money notes was $117,549 and
$352,647 for the three and nine months ended September 30, 1998, respectively,
and $117,549 and $352,640 for the three and nine months ended September 30,
1997, respectively. The accrued interest payable on the purchase money notes of
$7,076,227 and $6,723,580 as of September 30, 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 September 30, 1998 and December 31, 1997, the Partnership had
advanced funds totaling $390,093 and $377,593, respectively, to Local
Partnerships. Interest accrued on these advances was $206,762 and $202,160 as
of September 30, 1998 and December 31, 1997, respectively. For financial
reporting purposes, these loans have been or will be reduced to zero by the
Partnership as a result of losses from the related Local Partnerships.
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 amounts of $500,000 and $117,574, respectively.
Frenchman's Wharf
-------------------
The Partnership defaulted on its purchase money notes related to
Frenchman's Wharf I on June 1, 1998 when the notes matured and were not paid.
The default amount included principal and accrued interest of $3,778,800 and
$6,086,253, respectively. As of November 6, 1998, principal and accrued
interest of 3,778,800 and $6,264,375, respectively, were due. The purchase
money notes were initially due to mature on June 1, 1988, but were extended to
mature on June 1, 1998. The Partnership has requested another extension of the
maturity date of the purchase money notes until May 2000, coterminous with the
expiration of the related Local Partnership's provisional workout agreement
related to its mortgage loan. As of November 6, 1998, the noteholders had not
consented 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.
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<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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 impending
expiration of its Section 8 Housing Assistance Payments (HAP) contract with the
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.
The Managing General Partner has been informed that Frenchman's Wharf I's
mortgage lender wishes to perform an operational audit of the Local Partnership.
The Managing General Partner and the local managing general partner are of the
opinion that the lender does not have the right, under the terms of the loan
documents, to perform such an audit and thus the Local Partnership has not
acquiesced.
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 November 6, 1998, principal and accrued interest totaling
$700,000 and $854,689, 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 November 6, 1998, the Managing General Partner is awaiting a response
from the noteholder. There is no assurance that any agreement will be reached
with the noteholder.
In addition, Shallowford Oaks' mortgage lender 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. Subsequently, the local managing general partner filed an action to
enjoin the attempted foreclosure and hired an independent accounting firm to
perform a compliance audit. The results of the compliance audit were presented
at hearings on April 20, 1998 and May 6, 1998. In August, 1998 the court
entered the requested interlocutary injunction pending the results of hearings
on equitable issues, which were held in September 1998. A ruling was expected
by October 31, 1998 but as of November 6, 1998, a ruling had not been made. In
June, 1998 the Partnership posted a bond of $140,000 to extend the stay of
foreclosure. Also, the court granted the lender the right to perform an
operational audit, which it has completed.
-6-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Due to the uncertainties regarding the outcome of an extension of the
purchase money note 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.
Combined Local Partnerships
---------------------------
The following are combined statements of operations for the 17 Local
Partnerships in which the Partnership is invested as of September 30, 1998 and
1997. The statements have been 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 For the nine months ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rental revenue $ 4,373,516 $ 4,469,601 $ 13,501,851 $ 13,541,049
Other 238,075 207,910 704,340 577,060
------------ ------------ ------------ ------------
4,611,591 4,677,511 14,206,191 14,118,109
------------ ------------ ------------ ------------
Expenses:
Operating 2,276,077 2,238,696 6,862,555 6,928,523
Interest 1,643,170 1,658,262 4,929,521 4,974,789
Depreciation and amortization 830,677 814,839 2,492,039 2,444,522
------------ ------------ ------------ ------------
4,749,924 4,711,797 14,284,115 14,347,834
------------ ------------ ------------ ------------
Net loss $ (138,333) $ (34,286) $ (77,924) $ (229,725)
============ ============ ============ ============
</TABLE>
As of September 30, 1998 and December 31, 1997, the Partnership's share of
cumulative losses to date for twelve of the seventeen Local Partnerships
exceeded the amount of the Partnership's investments in and advances to those
Local Partnerships by $9,152,373 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 has a Section 8 HAP contract covering 20% of the
property's apartment units which expires in 1998. The Section 8 HAP contracts
provide rental subsidies to the property owner for units occupied by low income
tenants. If the contract is not extended, there will likely be an increase in
vacancy during the 6-12 months after it expires. As residents in the low-income
units move out, the units will be made available to market-rate residents, as
market conditions allow.
Eight Local Partnerships in which the Partnership is invested have mortgage
loans financed by various state housing agencies, and two Local Partnerships
have mortgage loans financed by the Rural Economic Community Development (RECD)
agency. These ten Local Partnerships have Section 8 HAP contracts in place for
approximately 100% of their apartment units. These Section 8 HAP contracts
-8-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. AFFORDABLE HOUSING LEGISLATION - Continued
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 is of the opinion that the agencies will strive to
preserve the units as low income, or affordable, housing. At this time, it
appears unlikely that the agencies will allow a prepayment of the respective
mortgage loans 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 $23,380 and $74,454 for the
three and nine months ended September 30, 1998, respectively, and $13,691 and
$47,463 for the three and nine months ended September 30, 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, in accordance with the terms of the
Partnership Agreement, the Partnership is obligated to pay an annual incentive
management fee (the Management Fee) after all other expenses of the Partnership
are paid. The Partnership paid the Managing General Partner a Management Fee of
$23,802 and $71,406 for the three and nine months ended September 30, 1998,
respectively, and like amounts for the three and nine months ended September 30,
1997.
-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 section 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.
General
-------
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 ending 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) has Section 8 HAP
contracts covering 20% of the property's apartment units which expires during
1998. The Section 8 HAP contracts provide rental subsidies to the property
owner for units occupied by low income tenants. If the contract is not
extended, there will likely be an increase in vacancy during the 6-12 months
after it expires. 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 is of the opinion 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 lack 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.
-10-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
The Managing General Partner is considering marketing, on a state-by-state
basis, one or more of the properties in which the Partnership invested with
properties in other portfolios sponsored by the Managing General Partner. 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.
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, located in Frederick, Maryland,
has been generating cash flow of $50,000-$75,000 annually. 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 $2,468,983
(or approximately $96.43 per Limited Partner unit) and $2,204,552 (or
approximately $86.10 per Limited Partner unit) as of September 30, 1998 and
December 31, 1997, respectively, along with anticipated future cash
distributions from the Local Partnerships, are expected to meet its current and
anticipated operating cash needs. As of November 6, 1998, there were no
material commitments for capital expenditures.
The Partnership is the maker of purchase money notes which have matured and
have not been paid with respect to two Local Partnerships, Lake Properties
Limited Partnership (Frenchman's Wharf I) and ARA Associates-Shangri-La Ltd.
(Shallowford Oaks). 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 note. The purchase
money notes, which are nonrecourse to the Partnership, are secured by the
Partnership's interest in the respective Local Partnerships. The amounts due on
the purchase money notes consist of outstanding principal and accrued interest
of approximately $4.479 million and $7.076 million, respectively, as of
September 30, 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 pay
off the purchase money notes at the time of sale or refinancing.
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 in 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
-11-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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
or both 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 closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements.
For the nine months ended September 30, 1998 and 1997, the receipt of
distributions from Local Partnerships was adequate to support operating cash
requirements.
Results of Operations
---------------------
The Partnership's net income for the three months ended September 30, 1998
decreased from the corresponding period in 1997 principally due to a decrease in
share of income from partnerships, which was primarily due to increased
operating expenses at one property. Contributing to the decrease in the
Partnership's net income was an increase in professional fees due to the
Shallowford Oaks foreclosure litigation and an increase in general and
administrative expenses primarily due to an increase in payroll costs also
associated with the Shallowford foreclosure litigation. Partially offsetting
the decrease in the Partnership's net income was an increase in interest income
due to higher cash and cash equivalent balances.
The Partnership's net income for the nine months ended September 30, 1998
increased from the corresponding period in 1997 principally due to an increase
in share of income from partnerships, which was primarily due to increased
rental income and decreased operating expenses at five properties. Contributing
to the increase in the Partnership's net income was an increase in interest
income, as discussed above. Partially offsetting the increase in the
Partnership's net income was an increase in professional fees and an increase in
general and administrative expenses, also as discussed above.
For financial reporting purposes, the Partnership, as a limited partner in
the Local Partnerships, does not record losses from the Local Partnerships in
excess of its investment to the extent that the Partnership has no further
obligation to advance funds or provide financing to the Local Partnerships. As
a result, the Partnership's recognized losses for the three and nine months
ended September 30, 1998 did not include losses of $336,831 and $774,388,
respectively, compared to excluded losses of $294,197, and $776,097, for the
three and nine months ended September 30, 1997, respectively.
-12-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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. To address
the issue, the Managing General Partner has developed and is currently
implementing a plan (the "Y2K Project") designed to ensure that the Y2K date
change will not have an adverse impact on the Partnership's operations. The Y2K
Project is on schedule and the Managing General Partner expects completion by
the end of 1999.
The Y2K Project consists of four phases -- Planning, Assessment,
Implementation and Testing. The Planning Phase began early in 1998 and is
substantially complete. Under the Planning Phase, the Managing General Partner
conducted an inventory of all internal hardware and software systems, data
interfaces, business operations and non-information technology functions which
may be susceptible to the Y2K issue. The Managing General Partner expects final
completion of this phase by November 30, 1998. The Assessment Phase is
currently underway. Under the Assessment Phase, all applications and functions
identified in the Planning Phase are being analyzed to determine Y2K compliance
and the materiality of each identified risk is being determined. In the event
of noncompliance, for a material risk, timetables for corrective action, as well
as estimated costs to achieve compliance, are being determined. Completion of
this phase is expected by December 31, 1998. The Implementation Phase is also
underway. Renovation and replacement of existing internal hardware and software
systems has begun and completion is expected by June 1999. Additionally, the
Managing General Partner is currently working with third party vendors and
service providers to verify their Y2K compliance. Final completion of this
phase is expected by June 1999. The Testing Phase, which will include testing
of internal applications as well as third party systems, is expected to begin
during January 1999 and continue throughout 1999. Contingency planning is
scheduled to commence during the fourth quarter 1998 and be completed by year-
end 1999. Although the expense associated with the Y2K Project cannot presently
be determined, the Managing General Partner does not expect it to be material.
-13-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
Frenchman's Wharf
-------------------
The Partnership defaulted on its purchase money notes related to
Frenchman's Wharf I on June 1, 1998 when the notes matured and were not paid.
The default amount included principal and accrued interest of $3,778,800 and
$6,086,253, respectively. As of November 6, 1998, principal and accrued
interest of 3,778,800 and $6,264,375, respectively, were due. The purchase
money notes were initially due to mature on June 1, 1988, but were extended to
mature on June 1, 1998. The Partnership has requested another extension of the
maturity date of the purchase money notes until May 2000, coterminous with the
expiration of the related Local Partnership's provisional workout agreement
related to its mortgage loan. As of November 6, 1998, the noteholders had not
consented 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. 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 impending
expiration of its Section 8 Housing Assistance Payments (HAP) contract with the
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.
The Managing General Partner has been informed that Frenchman's Wharf I's
mortgage lender wishes to perform an operational audit of the Local Partnership.
The Managing General Partner and the local managing general partner are of the
opinion that the lender does not have the right, under the terms of the loan
documents, to perform such an audit and thus the Local Partnership has not
acquiesced.
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 November 6, 1998, principal and accrued interest totaling
$700,000 and $854,689, 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 November 6, 1998, the Managing General Partner is awaiting a response
from the noteholder. There is no assurance that any agreement will be reached
with the noteholder.
In addition, Shallowford Oaks' mortgage lender 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. Subsequently, the local managing general partner filed an action to
enjoin the attempted foreclosure and hired an independent accounting firm to
perform a compliance audit. The results of the compliance audit were presented
at hearings on April 20, 1998 and May 6, 1998. In August, 1998 the court
-14-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Continued
-------------------------------
entered the requested interlocutary injunction pending the results of hearings
on equitable issues, which were held in September 1998. A ruling was expected
by October 31, 1998 but as of November 6, 1998, a ruling had not been made. In
June, 1998 the Partnership posted a bond of $140,000 to extend the stay of
foreclosure. Also, the court granted the lender the right to perform an
operational audit, which it has completed.
Due to the uncertainties regarding the outcome of an extension of the
purchase money note 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.
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 September 30, 1998.
All other items are not applicable.
-15-
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, 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
November 6, 1998 by: /s/ Michael J. Tuszka
- ----------------- ------------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
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 THIRD QUARTER 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,468,983
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,598,517
<CURRENT-LIABILITIES> 0
<BONDS> 11,555,027
0
0
<COMMON> 0
<OTHER-SE> (6,032,819)
<TOTAL-LIABILITY-AND-EQUITY> 5,598,517
<SALES> 0
<TOTAL-REVENUES> 799,563
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 309,926
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 352,647
<INCOME-PRETAX> 136,990
<INCOME-TAX> 0
<INCOME-CONTINUING> 136,990
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 136,990
<EPS-PRIMARY> 5.35
<EPS-DILUTED> 5.35
</TABLE>
