<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 June 30, 1999
-------------
Commission file number 0-11149
-------------
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
- ----------------------------------------- ------------------------
(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. Yes [X] 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 June 30, 1999)
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
INDEX TO FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 1999
Page
----
PART I. Financial Information
Item 1. Financial Statements
Balance Sheets - June 30, 1999 and
December 31, 1998 . . . . . . . . . . . . . . . . . . 1
Statements of Operations and Accumulated Losses
- for the three and six months ended June 30, 1999
and 1998 . . . . . . . . . . . . . . . . . . . . . . 2
Statements of Cash Flows - for the six
months ended June 30, 1999 and 1998 . . . . . . . . . 3
Notes to Financial Statements - June 30, 1999 and 1998 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 10
PART II. Other Information
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 15
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . 17
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS, LTD.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 2,997,155 $ 2,506,524
Cash and cash equivalents 2,739,832 2,318,302
Restricted cash equivalents 140,000 140,000
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $378,903 and $367,498, respectively 533,517 544,922
Property purchase costs, net of accumulated amortization of
$99,291 and $96,333, respectively 137,276 140,234
Other assets -- 1,669
------------ ------------
Total assets $ 6,547,780 $ 5,651,651
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 4,478,800 $ 4,478,800
Accrued interest payable 7,428,874 7,193,776
Accounts payable 69,478 83,805
------------ ------------
Total liabilities 11,977,152 11,756,381
------------ ------------
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 (26,594,749) (27,270,107)
------------ ------------
Total partners' deficit (5,429,372) (6,104,730)
------------ ------------
Total liabilities and partners' deficit $ 6,547,780 $ 5,651,651
============ ============
</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 six months ended
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Share of income from partnerships $ 761,054 $ 332,498 $ 1,025,367 $ 502,098
------------ ------------ ------------ ------------
Other revenue and expenses:
Revenue:
Interest income 30,309 32,956 59,224 60,130
------------ ------------ ------------ ------------
Expenses:
Interest 117,549 117,549 235,098 235,098
Management fee 23,802 23,802 47,604 47,604
General and administrative 45,262 36,466 78,121 69,537
Professional fees 17,023 62,942 34,047 83,139
Amortization of deferred costs 7,181 7,181 14,363 14,363
------------ ------------ ------------ ------------
210,817 247,940 409,233 449,741
------------ ------------ ------------ ------------
Total other revenue and expenses (180,508) (214,984) (350,009) (389,611)
------------ ------------ ------------ ------------
Net income 580,546 117,514 675,358 112,487
Accumulated losses, beginning of period (27,175,295) (27,340,213) (27,270,107) (27,335,186)
------------ ------------ ------------ ------------
Accumulated losses, end of period $(26,594,749) $(27,222,699) $(26,594,749) $(27,222,699)
============ ============ ============ ============
Net income allocated to General Partners (3%) $ 17,416 $ 3,525 $ 20,261 $ 3,375
============ ============ ============ ============
Net income allocated to Limited Partners (97%) $ 563,130 $ 113,989 $ 655,097 $ 109,112
============ ============ ============ ============
Net income per unit of Limited Partner Interest
based on 24,797 and 24,837 units outstanding
at June 30, 1999 and 1998, respectively $ 22.71 $ 4.59 $ 26.42 $ 4.39
============ ============ ============ ============
</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 six months ended
June 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 675,358 $ 112,487
Adjustments to reconcile net income to net
cash used in operating activities:
Share of income from partnerships (1,025,367) (502,098)
Amortization of deferred costs 14,363 14,363
Changes in assets and liabilities:
Increase in accrued interest receivable on
advances to partnerships (3,068) (3,068)
Decrease in other assets 1,669 359
Increase in accrued interest payable 235,098 235,098
(Decrease) increase in accounts payable (14,327) 61,335
------------ ------------
Net cash used in operating activities (116,274) (81,524)
------------ ------------
Cash flows from investing activities:
Receipt of distributions from partnerships 567,799 283,213
Advances made to local partnerships (29,995) --
------------ ------------
Net cash provided by investing activities 537,804 283,213
------------ ------------
Net increase in cash and cash equivalents 421,530 201,689
Cash and cash equivalents, beginning of period 2,318,302 2,204,552
------------ ------------
Cash and cash equivalents, end of period $ 2,739,832 $ 2,406,241
============ ============
</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
JUNE 30, 1999 AND 1998
(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 June 30,
1999, and the results of its operations for the three and six months ended June
30, 1999 and 1998, and its cash flows for the six months ended June 30, 1999 and
1998. The results of operations for the interim period ended June 30, 1999, 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-KSB at December 31, 1998.
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
a. Due on investments in 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 $7.429 million, respectively, as of
June 30, 1999, and $4.479 million and $7.194 million, respectively, as of
December 31, 1998. 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 adversely 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
-4-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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 adverse impact
on the financial condition of the Partnership. However, since these notes
remain unpaid, the noteholders have the right to foreclose on the Partnership's
interest in the related Local Partnerships. In the event of a foreclosure, the
excess of the nonrecourse indebtedness over the carrying amount of the
Partnership's investment in the related Local Partnership would be deemed
cancellation of indebtedness income which would be taxable to Limited Partners
at a federal tax rate of up to 39.6%. Additionally, in the event of a
foreclosure, the Partnership would lose its investment in the Local Partnership
and, likewise, its share of future cash flow distributed by the Local
Partnership from rental operations, sales or refinancings. The Partnership did
not receive any distributions from Frenchman's Wharf I or Shallowford Oaks
during the six months ended June 30, 1999 and 1998, and its aggregate share of
income from these two Local Partnerships was $0 and $0 for the three months
ended June 30, 1999 and 1998, respectively, and $0 and $0 for the six months
ended June 30, 1999 and 1998, respectively. See further discussion of these
purchase money notes, below.
Interest expense on the Partnership's purchase money notes for the three
and six months ended June 30, 1999 was $117,549 and $235,098, respectively, and
$117,549 and $235,098 for the three and six months ended June 30, 1998,
respectively. The accrued interest payable on the purchase money notes of
$7,428,874 and $7,193,776 as of June 30, 1999 and December 31, 1998,
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.
Frenchman's Wharf I
-------------------
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 July 30, 1999, principal and accrued interest
of $3,778,800 and $6,572,351, 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 July 30, 1999, 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. In the event of a
foreclosure, the Partnership would also lose its share of future cash flow
distributed by the Local Partnership from rental operations, sales or
refinancings. The uncertainty regarding the continued ownership of the
Partnership's interest in Frenchman's Wharf I does not adversely impact the
Partnership's financial condition, as discussed above.
-5-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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 July 30, 1999, principal and accrued interest of $700,000
and $891,949, 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 July 30, 1999, the Managing General Partner is awaiting a response from the
noteholders. There is no assurance that any agreement will be reached with the
noteholders.
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. The court entered an order for equitable
relief in Shallowford's favor on November 12, 1998. The lender filed a motion
for a new trial and a motion to alter or amend judgment in December 1998. The
court denied the lender's motions by order dated March 24, 1999. The lender
filed an appeal to the order for equitable relief and oral arguments are
scheduled for September 1999. During 1998, the Partnership funded 50% of the
legal costs and fees to defend the foreclosure action with the balance funded by
the local managing general partner. The Partnership expects to fund 50% of the
continuing legal costs in 1999. For the three and six months ended June 30,
1999, the Partnership advanced Shallowford Oaks $13,605 and $29,995,
respectively, for legal costs.
Due to the uncertainties regarding the outcome of an extension of the
purchase money note, there is no assurance that the Partnership will be able to
retain its interest in Shallowford Oaks. In the event of a foreclosure, the
Partnership would also lose its share of future cash flow distributed by the
Local Partnership from rental operations, sales or refinancings. The
uncertainty regarding the continued ownership of the Partnership's interest in
Shallowford Oaks does not adversely impact the Partnership's financial
condition, as discussed above.
-6-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
b. Advances to Local Partnerships
------------------------------
As of June 30, 1999 and December 31, 1998, the Partnership had advanced
funds, including accrued interest, totaling $725,165 and $692,102 to Local
Partnerships. 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.
c. Property matters
----------------
Frederick Heights
-----------------
The Managing General Partner is currently exploring options to refinance
the property's first mortgage loan related to Frederick Heights Limited
Partnership (Frederick Heights). There is no assurance that a refinancing will
be obtained.
Frenchman's Wharf I
-------------------
The report of the auditors on the financial statements of Frenchman's Wharf
I for the year ended December 31, 1998 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 HAP contract with HUD on November 30, 1999. The uncertainty about the
Local Partnership's continued ownership of the property does not adversely
impact the Partnership's financial condition, as discussed above.
d. Summarized financial information
--------------------------------
Combined statements of operations for the 17 Local Partnerships in which
the Partnership has invested as of June 30, 1999 and 1998, follow. The combined
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
JUNE 30, 1999 AND 1998
(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,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rental $ 4,640,577 $ 4,564,132 $ 9,264,821 $ 9,128,335
Other 232,919 218,957 478,749 466,265
------------ ------------ ------------ ------------
Total revenue 4,873,496 4,783,089 9,743,570 9,594,600
------------ ------------ ------------ ------------
Expenses:
Operating 2,211,721 2,217,897 4,631,063 4,586,478
Interest 1,600,436 1,643,176 3,200,877 3,286,351
Depreciation and amortization 837,314 830,682 1,674,628 1,661,362
------------ ------------ ------------ ------------
Total expenses 4,649,471 4,691,755 9,506,568 9,534,191
------------ ------------ ------------ ------------
Net income $ 224,025 $ 91,334 $ 237,002 $ 60,409
============ ============ ============ ============
</TABLE>
As of June 30, 1999 and December 31, 1998, the Partnership's share of
cumulative losses to date for 11 of the 17 Local Partnerships exceeded the
amount of the Partnership's investments in and advances to those Local
Partnerships by $9,200,448 and $8,698,644, 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 10% of the
property's apartment units which expires during 1999. The Section 8 HAP
contract provides rental subsidies to the property owner for units occupied by
low income tenants. If the contract is not extended, there will likely be a
temporary 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 Local Partnerships have Section 8 HAP contracts in place for all
or substantially all of their apartment units. These Section 8 HAP contracts
-8-
<PAGE>
CAPITAL REALTY INVESTORS, LTD.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(Unaudited)
3. AFFORDABLE HOUSING LEGISLATION - Continued
begin to expire in September of 2000. Currently, the Managing General Partner
believes that the agencies will strive to preserve the units as low income, or
affordable, housing. Therefore, 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. The Managing General Partner continues to monitor the
actions of these financing agencies to assess how these agencies will deal with
expiring Section 8 HAP contracts and what impact these agencies' strategies will
have on the operations of the Local Partnerships and, consequently, the value of
these assets to the Partnership.
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 $26,539 and $55,460 for the
three and six months ended June 30, 1999, respectively, and $29,041 and $51,074
for the three and six months ended June 30, 1998, 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 the Managing General
Partner 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
ended June 30, 1999, respectively, and like amounts for the three and six months
ended June 30, 1998, respectively.
-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 develop strategies that make
sense for all parties involved. Issues that are at the forefront of the
Managing General Partner's strategic planning include: purchase money notes
which have matured, expiring Section 8 Housing Assistance Payment (HAP)
contracts, exploring options for dealing with properties with state housing
financing or Rural Economic Community Development (RECD) agency financing,
cessation of losses to the Partnership since the low-income housing accelerated
depreciation deductions are completely depleted at the property levels, and
declining mortgage interest deductions as the mortgage loans move closer to
maturity.
Lake Properties Limited Partnership (Frenchman's Wharf I) has a Section 8
HAP contract covering 10% of the property's apartment units which expires during
1999. The Section 8 HAP contract provides 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 the contract 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 Local Partnerships have Section 8 HAP contracts in place for all
or substantially all of their apartment units. These Section 8 HAP contracts
begin to expire in September of 2000. Currently, the Managing General Partner
believes that the agencies will strive to preserve the units as low income, or
affordable, housing. Therefore, 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. The Managing General Partner continues to monitor the
actions of these financing agencies to assess how these agencies will deal with
expiring Section 8 HAP contracts and what impact these agencies' strategies will
have on the operations of the Local Partnerships and, consequently, the value of
these assets to the Partnership.
Sales of properties with state agency or RECD financing will be extremely
difficult. Since the agencies are 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 unit 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
generated positive cash flow of approximately $100,000 in 1998. The Managing
General Partner is monitoring Winthrop Beach for future sale potential and
Frederick Heights for a potential refinancing.
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 $2,739,832
($107.18 per Limited Partner unit) and $2,318,302 ($90.54 per Limited Partner
unit) as of June 30, 1999 and December 31, 1998, respectively, along with
anticipated future cash distributions from the Local Partnerships, are expected
to be adequate to meet its current and anticipated operating cash needs. As of
both June 30, 1999 and December 31, 1998, $140,000 of cash equivalents were
restricted for the collateralization of a letter of credit which secured a
surety bond related to the stay of foreclosure action on Shallowford Oaks. See
the notes to the financial statements for further discussion concerning
Shallowford Oaks. As of July 30, 1999, there are 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 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 $7.429 million, respectively, as of
June 30, 1999, and $4.479 million and $7.194 million, respectively, as of
December 31, 1998. 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.
-11-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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 adversely 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 or both of these Local Partnerships would not have a material adverse impact
on the financial condition of the Partnership. However, since these notes
remain unpaid, the noteholders have the right to foreclose on the Partnership's
interest in the related Local Partnerships. In the event of a foreclosure, the
excess of the nonrecourse indebtedness over the carrying amount of the
Partnership's investment in the related Local Partnership would be deemed
cancellation of indebtedness income which would be taxable to Limited Partners
at a federal tax rate of up to 39.6%. Additionally, in the event of a
foreclosure, the Partnership would lose its investment in the Local Partnership
and, likewise, its share of future cash flow distributed by the Local
Partnership from rental operations, sales or refinancings. The Partnership did
not receive any distributions from Frenchman's Wharf I or Shallowford Oaks
during the six months ended June 30, 1999 and 1998, and its aggregate share of
income from these two Local Partnerships was $0 and $0 for the three months
ended June 30, 1999 and 1998, respectively, and $0 and $0 for the six months
ended June 30, 1999 and 1998, respectively. 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 six months ended June 30, 1999 and 1998, the receipt of distributions
from partnerships was adequate to support operating cash requirements. Cash and
cash equivalents increased during the six months ended June 30, 1999, as a
receipt of distributions from partnerships exceeded net cash used in operating
activities and cash advanced to a local partnership.
Results of Operations
---------------------
The Partnership's net income for the three and six months ended June 30,
1999 increased from the corresponding periods in 1998 principally due to an
increase in share of income from partnerships primarily due to increased rental
income and decreased operating expenses at five properties. Contributing to the
increase in the Partnership's net income was a decrease in professional fees due
to the Shallowford Oaks foreclosure litigation in 1998, partially offset by an
increase in general and administrative expenses primarily due to increased
payroll costs.
-12-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
For financial reporting purposes, the Partnership, as a limited partner in
the Local Partnerships, does not record losses from the Local Partnerships in
excess of its investment to the extent that the Partnership has no further
obligation to advance funds or provide financing to the Local Partnerships. As
a result, the Partnership's recognized losses for the three and six months ended
June 30, 1999 did not include losses of $250,896 and $501,804, respectively,
compared to excluded losses of $238,684 and $437,557, for the three and six
months ended June 30, 1998, respectively.
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 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. This phase was completed at the end of
November 1998. Under the next phase, the Assessment Phase, all applications and
functions identified in the Planning Phase were analyzed to determine Y2K
compliance and the materiality of each identified risk. In the event of
noncompliance, for material risks, timetables for corrective action, as well as
estimated costs to achieve compliance, were determined. This phase was
completed during the first quarter of 1999. The Implementation Phase is now
underway. Renovation and replacement of existing internal hardware and software
systems has begun and completion is expected by July 1999. Additionally, the
Managing General Partner is currently working with third party vendors, service
providers, Local Partnership managing general partners, and Local Partnership
property managers to verify their Y2K compliance, with completion expected by
July 1999. The Testing Phase, which will include testing of internal
applications as well as some third party systems, began during January 1999 and
will continue throughout 1999. Contingency planning commenced during the fourth
quarter 1998 and will be completed by year-end 1999. The Managing General
Partner does not expect the expense associated with the Y2K Project to be
material.
-13-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
Frenchman's Wharf I
-------------------
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 July 30, 1999, principal and accrued interest
of $3,778,800 and $6,572,351, 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 July 30, 1999, 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. In the event of a
foreclosure, the Partnership would also lose its share of future cash flow
distributed by the Local Partnership from rental operations, sales or
refinancings. The uncertainty regarding the continued ownership of the
Partnership's interest in Frenchman's Wharf I does not adversely 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 year ended December 31, 1998 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 HAP contract with HUD on November 30, 1999. The uncertainty about the
Local Partnership's continued ownership of the property does not adversely
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 July 30, 1999, principal and accrued interest of $700,000
and $891,949, 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 July 30, 1999, the Managing General Partner is awaiting a response from the
noteholders. There is no assurance that any agreement will be reached with the
noteholders.
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. The court entered an order for equitable
relief in Shallowford's favor on November 12, 1998. The lender filed a motion
for a new trial and a motion to alter or amend judgment in December 1998. The
court denied the lender's motions by order dated March 24, 1999. The lender
filed an appeal to the order of equitable relief and oral arguments are
scheduled for September 1999. During 1998, the Partnership funded 50% of the
legal costs and fees to defend the foreclosure action with the balance funded by
-14-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Continued
-------------------------------
the local managing general partner. The Partnership expects to fund 50% of the
continuing legal costs in 1999. For the three and six months ended June 30,
1999, the Partnership advanced Shallowford Oaks $13,605 and $29,995,
respectively, for legal costs.
Due to the uncertainties regarding the outcome of an extension of the
purchase money note, there is no assurance that the Partnership will be able to
retain its interest in Shallowford Oaks. In the event of a foreclosure, the
Partnership would also lose its share of future cash flow distributed by the
Local Partnership from rental operations, sales or refinancings. The
uncertainty regarding the continued ownership of the Partnership's interest in
Shallowford Oaks does not adversely impact the Partnership's financial
condition, as discussed above.
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 June 30, 1999.
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
July 30, 1999 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 SECOND QUARTER 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,739,832
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,547,780
<CURRENT-LIABILITIES> 0
<BONDS> 11,907,674
0
0
<COMMON> 0
<OTHER-SE> (5,429,372)
<TOTAL-LIABILITY-AND-EQUITY> 6,547,780
<SALES> 0
<TOTAL-REVENUES> 1,084,591
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 174,135
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 235,098
<INCOME-PRETAX> 675,358
<INCOME-TAX> 0
<INCOME-CONTINUING> 675,358
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 675,358
<EPS-BASIC> 26.42
<EPS-DILUTED> 26.42
</TABLE>
