<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended June 30, 1995
-------------
Commission file number 0-11973
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CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
- --------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Maryland 52-1321492
- ----------------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11200 Rockville Pike, Rockville, Maryland 20852
- ----------------------------------------- --------------------
(Address of principal executive officer) (Zip Code)
(301) 468-9200
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at June 30, 1995
- ---------------------------------- ----------------------------------
(Not applicable) (Not applicable)
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1995
PAGE
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Balance Sheets - June 30, 1995 and
December 31, 1994 . . . . . . . . . . . . . 1
Statements of Operations - for the three and
six months ended June 30, 1995 and 1994 . . 3
Statements of Cash Flows - for the six
months ended June 30, 1995 and 1994 . . . . 5
Notes to Financial Statements . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . 13
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . 17
Signature . . . . . . . . . . . . . . . . . . . . . . 18
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
------------ ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 7,479,576 $ 7,990,026
Cash and cash equivalents 3,104,523 2,812,577
Acquisition fees, principally paid to
related parties, net of accumulated
amortization of $390,828 and $374,162,
respectively 609,172 625,838
Property purchase costs, net of
accumulated amortization of $247,388
and $236,432, respectively 409,924 420,880
Other assets 6,006 5,306
------------ ------------
Total assets $ 11,609,201 $ 11,854,627
============ ============
</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-II LIMITED PARTNERSHIP
BALANCE SHEETS
LIABILITIES AND PARTNERS' DEFICIT
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
------------ ------------
(Unaudited)
<S> <C> <C>
Due on investments in partnerships,
net of unamortized discount on
purchase money notes of $10,025,417
and $11,433,655, respectively $ 12,395,261 $ 10,987,023
Accrued interest payable 28,118,638 26,951,287
Accounts payable and accrued expenses 77,191 70,389
------------ ------------
Total liabilities 40,591,090 38,008,699
------------ ------------
Commitments and contingencies
Partners' capital (deficit):
Capital paid-in:
General Partners 2,000 2,000
Limited Partners 50,015,000 50,015,000
------------ ------------
50,017,000 50,017,000
Less:
Accumulated distributions to partners (1,254,612) (1,254,612)
Offering costs (5,278,980) (5,278,980)
Accumulated losses (72,465,297) (69,637,480)
------------ ------------
Total partners' deficit (28,981,889) (26,154,072)
------------ ------------
Total liabilities and partners'
deficit $ 11,609,201 $ 11,854,627
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
June 30,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Share of loss from partnerships $ (60,035) $ (161,859)
------------ ------------
Other revenue and expenses:
Revenue:
Interest income 46,919 30,579
------------ ------------
Expenses:
Interest 1,364,771 1,093,479
Management fee 62,499 62,499
General and administrative 29,261 32,976
Professional fees 18,286 24,884
Amortization 13,810 13,809
------------ ------------
1,488,627 1,227,647
------------ ------------
Total other revenue and expenses (1,441,708) (1,197,068)
------------ ------------
Net loss (1,501,743) (1,358,927)
Accumulated losses, beginning of period (70,963,554) (65,163,470)
------------ ------------
Accumulated losses, end of period $(72,465,297) $(66,522,397)
============ ============
Loss allocated to General Partners (1.51%) $ (22,676) $ (20,520)
============ ============
Loss allocated to Initial and Special
Limited Partners (1.49%) $ (22,376) $ (20,248)
============ ============
Loss allocated to Additional Limited
Partners (97%) $ (1,456,691) $ (1,318,159)
============ ============
Loss per unit of Additional Limited
Partnership Interest based on 50,000
units outstanding $ (29.13) $ (26.36)
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-3-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Share of income (loss) from partnerships $ 66,795 $ (70,526)
------------ ------------
Other revenue and expenses:
Revenue:
Interest income 87,867 55,881
------------ ------------
Expenses:
Interest 2,729,542 2,208,659
Management fee 124,998 124,998
General and administrative 62,674 64,732
Professional fees 37,643 45,546
Amortization 27,622 27,621
------------ ------------
2,982,479 2,471,556
------------ ------------
Total other revenue and expenses (2,894,612) (2,415,675)
------------ ------------
Net loss (2,827,817) (2,486,201)
Accumulated losses, beginning of period (69,637,480) (64,036,196)
------------ ------------
Accumulated losses, end of period $(72,465,297) $(66,522,397)
============ ============
Loss allocated to General Partners (1.51%) $ (42,700) $ (37,542)
============ ============
Loss allocated to Initial and Special
Limited Partners (1.49%) $ (42,135) $ (37,044)
============ ============
Loss allocated to Additional Limited
Partners (97%) $ (2,742,982) $ (2,411,615)
============ ============
Loss per unit of Additional Limited
Partnership Interest based on 50,000
units outstanding $ (54.86) $ (48.23)
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-4-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,827,817) $ (2,486,201)
Adjustments to reconcile net loss to
net cash used in operating activities:
Share of (income) loss from partnerships (66,795) 70,526
Amortization of deferred costs 27,622 27,621
Amortization of discount of purchase
money notes 1,408,238 826,177
Loss on early extinguishment of debt -- (117,353)
Payment of purchase money note interest (153,954) (186,767)
Changes in assets and liabilities:
(Increase) decrease in other assets (700) 398
Increase in accrued interest payable 1,321,305 1,382,481
Increase in accounts payable and
accrued expenses 6,802 6,022
------------ ------------
Net cash used in operating
activities (285,299) (477,096)
------------ ------------
Cash flows from investing activities:
Receipt of distributions from
partnerships 577,245 576,524
------------ ------------
Cash flows from financing activities:
Pay-off of purchase money note -- (367,897)
------------ ------------
Net increase (decrease) in cash and cash
equivalents 291,946 (268,469)
Cash and cash equivalents, beginning of
period 2,812,577 3,068,063
------------ ------------
Cash and cash equivalents, end of period $ 3,104,523 $ 2,799,594
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-5-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of C.R.I., Inc. (CRI), the Managing General Partner, the
accompanying unaudited financial statements contain all adjustments of a normal
recurring nature necessary to present fairly the financial position of Capital
Realty Investors-II Limited Partnership (the Partnership) as of June 30, 1995
and December 31, 1994, and the results of its operations for the three and six
months ended June 30, 1995 and 1994 and its cash flows for the six months ended
June 30, 1995 and 1994.
These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. While the Managing General Partner believes that the dis-
closures presented are adequate to make the information not misleading, it is
suggested that these condensed financial statements be read in conjunction with
the financial statements and the notes included in the Partnership's Annual
Report filed on Form 10-K for the year ended December 31, 1994.
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
As of June 30, 1995, the Partnership's obligations with respect to its
investments in Local Partnerships, in the form of purchase money notes of
$22,420,678 (exclusive of unamortized discount on purchase money notes of
$10,025,417) plus accrued interest of $28,118,638, are payable upon the earliest
of: (1) sale or refinancing of the respective Local Partnership's rental
property; (2) payment in full of the respective Local Partnership's permanent
loan; or (3) maturity. Purchase money notes in an aggregate principal amount of
$4,660,000 are scheduled to mature in August 1995, as discussed below.
Purchase money notes in an aggregate principal amount of $2,100,000 are
scheduled to mature in 1996. The remaining purchase money notes mature in 1998
and 1999. The purchase money notes are generally secured by the Partnership's
interest in the respective Local Partnership. There is no assurance that the
underlying properties will have sufficient appreciation and equity to enable the
Partnership to pay the purchase money notes' principal and accrued interest when
due. If a purchase money note is not paid in accordance with its terms, the
Partnership will either have to renegotiate the terms of repayment or risk
losing its partnership interest in the Local Partnership. The Managing General
Partner is continuing to investigate possible alternatives to reduce the
Partnership's long-term debt obligations. These alternatives include, among
others, retaining the cash available for distribution to meet the purchase money
note requirements, buying out certain purchase money notes at a discounted
price, extending the due dates of certain purchase money notes, or refinancing
the respective properties' underlying debt and using the proceeds to pay off or
buy down certain purchase money note obligations.
-6-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
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
and six months ended June 30, 1995 was $1,364,771 and $2,729,542, respectively,
and for the three and six months ended June 30, 1994 was $1,093,479 and
$2,208,659, respectively. Amortization of the imputed interest on purchase
money notes increased interest expense during the three and six months ended
June 30, 1995 by $704,119 and $1,408,238, respectively, and by $411,169 and
$826,177 during the three and six months ended June 30, 1994, respectively.
As of June 30, 1995 and December 31, 1994, the Partnership had advanced
funds totalling $324,410 to Local Partnerships. There were no advances funded
to the Local Partnerships during the six months ended June 30, 1995.
The local general partner of Frenchman's Wharf Apartments Associates II
(Frenchman's Wharf II), in conjunction with the Managing General Partner,
applied to the Department of Housing and Urban Development (HUD), holder of the
mortgage on the property, for a three-year extension of the previous workout
arrangement, which expired in December 1990. The local HUD office verbally
agreed to an extension expiring December 31, 1993 and recommended approval of
the extension to the HUD central office in Washington, D.C. In December 1993,
the local HUD office requested that a new workout proposal be submitted, and in
January 1994, the local general partner met with HUD to discuss the long-term
capital needs of the property in connection with a workout proposal. On March
1, 1994, the local general partner submitted a nine-year workout proposal to
HUD. As of July 14, 1995, no response had been received from the local HUD
office. There is no assurance that approval will be received. If that workout
proposal is not accepted and another alternative is not found, then HUD could
foreclose on the property. Frenchman's Wharf II was notified by HUD that HUD
plans to offer its mortgage loan for sale in September 1995. If the mortgage is
sold by HUD, a new mortgagee would service the defaulted loan and could
foreclose on the property. The uncertainty about the Local Partnership's
continued ownership of the property does not impact the Partnership's financial
condition because the related purchase money note is nonrecourse and
collateralized solely by the Partnership's interest in the Local Partnership.
Therefore, should the investment in Frenchman's Wharf II not produce sufficient
value to satisfy the purchase money note related to Frenchman's Wharf II, the
Partnership's exposure to loss is limited since the amount of the nonrecourse
indebtedness exceeds the carrying amount of the investment in and advances to
the Local Partnership. Thus, even a complete loss of this investment would not
have a material impact on the operations of the Partnership. Currently, debt-
service payments are being made from available cash flow in accordance with the
proposed workout. To cover operating deficits incurred in prior years for
Frenchman's Wharf II, the Partnership advanced funds totalling $324,410 as of
both June 30, 1995 and December 31, 1994. The last advance was made to
Frenchman's Wharf II in March 1987. The Partnership does not expect to advance
any additional funds in connection with Frenchman's Wharf II's loan workout with
HUD. These loans, together with accrued interest of $187,372 as of both June 30,
1995 and December 31, 1994, are payable from cash flow of Frenchman's Wharf II
after payment of first- mortgage debt service and after satisfaction by the
Partnership of certain other interest obligations on the purchase money notes
due from the Local Partnership. There is no assurance that the Local
Partnership, upon expiration of any workout, will be able to repay any loans in
accordance with the terms.
Palatine-Barrington Associates Limited Partnership (Deer Grove) was
notified by HUD that HUD plans to offer its mortgage loan for sale in July 1995.
-7-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
If the mortgage is sold by HUD, a new mortgagee would service the loan and Deer
Grove would no longer be subject to HUD regulatory requirements.
Posada Associates Limited Partnership (Posada Vallarta Apartments) is
currently operating under a three-year workout agreement with HUD, the holder of
the mortgage. The workout provides for, among other things, a minimum monthly
debt service payment, with excess cash, if any, being applied to delinquent
interest. Currently, debt service payments are being made in accordance with the
workout. The three-year workout expires on October 1, 1995. In June 1995,
Posada Vallarta Apartments received a one-year extension, which expires October
1, 1996, on the three-year workout.
Wexford Ridge Associates (located in Madison, Wisconsin), the local general
partner, and its management agent have been named in eight sexual harassment and
discrimination complaints filed with HUD. The Managing General Partner and the
Partnership have also been named in four of the complaints. The Managing
General Partner is monitoring the situation and is investigating the
Partnership's rights with regard to the local general partner and/or the
management agent if the situation is not dealt with to the satisfaction of the
Managing General Partner. The Managing General Partner believes the claims will
have no aggregate material effect on the financial statements of the Partnership
and that legal costs associated with the claims will be borne by the management
agent.
Many of the rental properties owned by the Local Partnerships have
mortgages which were federally insured under Section 236 or Section 221(d)(3) of
the National Housing Act, as amended. These properties may be eligible for sale
or refinancing, subject to numerous requirements, under the Low Income Housing
Preservation and Resident Homeownership Act of 1990 (LIHPRHA). This program may
provide incentives to owners of qualifying multifamily housing who commit to
permanently maintain their properties as low to moderate income housing.
Incentives available under LIHPRHA include selling the property to qualified
buyers or obtaining supplemental financing for the property. As of July 14,
1995, members of Congress are recommending substantial changes to the LIHPRHA
program ranging from the elimination of the program to the redesigning of the
program. Substantial uncertainty exists as to whether any properties which have
already filed the notice of intent to participate under LIHPRHA will qualify
under a redesigned program or as to whether the program will continue at all.
-8-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Many of the rental properties owned by the Local Partnerships are dependent
on the receipt of housing assistance payments guaranteed by contract under
the HUD Section 8 program. The level of funding for the Section 8 program, and
HUD-insured multifamily housing in general, is dependent upon the continuation
of appropriations approved by Congress for subsidy payments. In the event that
the rental subsidy programs are reduced or phased out, there is no assurance
that the rental properties will be able to maintain the occupancy levels
necessary to pay debt service and operating costs or that the rents necessary to
pay debt service and operating costs will be competitive with rents for
comparable units in the rental properties' market areas. While the Managing
General Partner has no reason to believe that HUD will not honor its obligations
under the contracts, some uncertainty exists in light of the recent
Congressional scrutiny of appropriations for HUD programs.
Purchase money notes relating to Beech Hill I and Beech Hill II totaling
$2,380,000, plus accrued interest, mature in August 1995. The Managing General
Partner is currently negotiating with the noteholders to extend the purchase
money note due dates. There is no assurance that an offer to extend the
maturity date will be accepted. Should the noteholders begin foreclosure
proceedings on the Partnership's interest in the related Local Partnerships, the
Partnership intends to vigorously defend any action by the noteholders.
However, there is no assurance that the Partnership will be able to retain its
interest in the Local Partnerships. The uncertainty about the continued
ownership of the Partnership's interest in the related Local Partnerships does
not impact the Partnership's financial condition because the related purchase
money notes are nonrecourse and collateralized solely by the Partnership's
interest in the Local Partnerships. Therefore, should the investment in Beech
Hill I and II not produce sufficient value to satisfy the related purchase money
notes, the Partnership's exposure to loss is limited since the amount of the
nonrecourse indebtedness exceeds the carrying amount of the investment in and
advances to the Local Partnerships. Thus, even a complete loss of these
investments would not have a material impact on the operations of the
Partnership.
The purchase money note relating to Rock Glen totaling $2,280,000, plus
accrued interest, mature in August 1995. The Managing General Partner made an
offer to the noteholder to extend the purchase money note due date to August
2000. This offer was rejected by the noteholder. The Managing General Partner
is now reviewing other proposals to present to the noteholder. There is no
assurance that a new offer to extend the maturity date will be accepted. Should
the noteholder begin foreclosure proceedings on the Partnership's interest in
the related Local Partnership, the Partnership intends to vigorously defend any
action by the noteholder. However, there is no assurance that the Partnership
will be able to retain its interest in the Local Partnership. The uncertainty
about the continued ownership of the Partnership's interest in the related Local
Partnership does not impact the Partnership's financial condition because the
related purchase money notes are nonrecourse and collateralized solely by the
Partnership's interest in the Local Partnership. Therefore, should the
investment in Rock Glen not produce sufficient value to satisfy the related
purchase money note, the Partnership's exposure to loss is limited since the
amount of the non-recourse indebtedness exceeds the carrying amount of the
investment in and advances to the Local Partnership. Thus, even a complete loss
of this investment would not have a material impact on the operations of the
Partnership.
-9-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
The following are combined statements of operations for the Local
Partnerships in which the Partnership has invested. The statements are compiled
from information supplied by the management agents of the projects and are
unaudited.
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
June 30,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Revenue:
Rental revenue $ 7,094,085 $ 6,924,949
Other 395,031 406,553
------------ ------------
7,489,116 7,331,502
------------ ------------
Expenses:
Operating 4,993,376 4,695,691
Interest 2,097,329 2,066,398
Depreciation and amortization 1,351,818 1,348,273
------------ ------------
8,442,523 8,110,362
------------ ------------
Net loss $ (953,407) $ (778,860)
============ ============
</TABLE>
-10-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
<TABLE>
<CAPTION>
For the six months ended
June 30,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Revenue:
Rental revenue $ 14,176,400 $ 13,791,312
Other 783,352 819,593
------------ ------------
14,959,752 14,610,905
------------ ------------
Expenses:
Operating 9,779,099 9,390,546
Interest 4,194,659 4,132,793
Depreciation and amortization 2,703,639 2,696,549
------------ ------------
16,677,397 16,219,888
------------ ------------
Net loss $ (1,717,645) $ (1,608,983)
============ ============
</TABLE>
As of June 30, 1995 and December 31, 1994, the Partnership's share of
cumulative losses to date for ten and nine, respectively, of the twenty-two
Local Partnerships exceeds the amount of the Partnership's investments in and
advances to those Local Partnerships by $22,923,160 and $21,176,551,
respectively. As the Partnership has no further obligation to advance funds or
provide financing to these Local Partnerships, the excess losses have not been
reflected in the accompanying financial statements.
3. RELATED PARTY TRANSACTIONS
In accordance with the terms of the Partnership Agreement, the Partnership
is obligated to reimburse the Managing General Partner for its direct expenses
in managing the Partnership and to pay an annual incentive management fee (the
Management Fee) after all other expenses of the Partnership are paid. The
Partnership paid $23,090 and $44,695 for the three and six months ended June 30,
1995, respectively, and $27,560 and $43,449 for the three and six months ended
June 30, 1994, respectively, as direct reimbursement of expenses incurred on
behalf of the Partnership. Additionally, the Partnership paid the Managing
General Partner a Management Fee of $62,499 and $124,998 for the three and six
months, respectively, ended June 30, 1995 and 1994.
From July 1990 through January 1994, CRICO Management Corporation (CRICO),
an affiliate of the Managing General Partner, provided consulting, accounting
and other services to Country Place I and II. From August 1990 through January
1994, CRICO provided these services to Rock Glen. Fees paid or accrued to CRICO
for these services amounted to $6,704, $4,231 and $5,580, respectively, for the
month ended January 31, 1994. On February 1, 1994, CRICO contributed its
consulting contracts and personnel to CAPREIT Residential Corporation
-11-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. RELATED PARTY TRANSACTIONS - Continued
(CAPREIT). CAPREIT was formed by CRI but is not currently owned or controlled
by CRI and/or its affiliates. On April 12, 1995, HUD approved CAPREIT as the
new management agent.
-12-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Financial Condition/Liquidity
-----------------------------
Capital Realty Investors-II Limited Partnership's (the Partnership)
liquidity, with unrestricted cash resources of $3,104,523 and $2,812,577 as of
June 30, 1995 and December 31, 1994, respectively, along with anticipated future
cash distributions from the Local Partnerships, is expected to meet its current
and anticipated operating cash needs. As of July 14, 1995, there are no
material commitments for capital expenditures.
As of June 30, 1995, the Partnership's obligations with respect to its
investments in Local Partnerships, in the form of purchase money notes of
$22,420,678 (exclusive of unamortized discount on purchase money notes of
$10,025,417) plus accrued interest of $28,118,638, are payable upon the earliest
of: (1) sale or refinancing of the respective Local Partnership's rental
property; (2) payment in full of the respective Local Partnership's permanent
loan; or (3) maturity. Purchase money notes in an aggregate principal amount of
$4,660,000 are scheduled to mature in August 1995, as discussed below.
Purchase money notes in an aggregate principal amount of $2,100,000 are
scheduled to mature in 1996. The remaining purchase money notes mature in 1998
and 1999. The purchase money notes are generally secured by the Partnership's
interest in the respective Local Partnership. There is no assurance that the
underlying properties will have sufficient appreciation and equity to enable the
Partnership to pay the purchase money notes' principal and accrued interest when
due. If a purchase money note is not paid in accordance with its terms, the
Partnership will either have to renegotiate the terms of repayment or risk
losing its partnership interest in the Local Partnership. The Managing General
Partner is continuing to investigate possible alternatives to reduce the
Partnership's long-term debt obligations. These alternatives include, among
others, retaining the cash available for distribution to meet the purchase money
note requirements, buying out certain purchase money notes at a discounted
price, extending the due dates of certain purchase money notes, or refinancing
the respective properties' underlying debt and using the proceeds to pay off or
buy down certain purchase money note obligations.
Purchase money notes relating to Beech Hill I and Beech Hill II totaling
$2,380,000, plus accrued interest, mature in August 1995. The Managing General
Partner is currently negotiating with the noteholders to extend the purchase
money note due dates. There is no assurance that an offer to extend the
maturity date will be accepted. Should the noteholders begin foreclosure
proceedings on the Partnership's interest in the related Local Partnerships, the
Partnership intends to vigorously defend any action by the noteholders.
However, there is no assurance that the Partnership will be able to retain its
interest in the Local Partnerships. The uncertainty about the continued
ownership of the Partnership's interest in the related Local Partnerships does
not impact the Partnership's financial condition because the related purchase
money notes are nonrecourse and collateralized solely by the Partnership's
interest in the Local Partnerships. Therefore, should the investment in Beech
Hill I and II not produce sufficient value to satisfy the related purchase money
notes, the Partnership's exposure to loss is limited since the amount of the
nonrecourse indebtedness exceeds the carrying amount of the investment in and
advances to the Local Partnerships. Thus, even a complete loss of these
investments would not have a material impact on the operations of the
Partnership.
The purchase money note relating to Rock Glen totaling $2,280,000, plus
-13-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
accrued interest, mature in August 1995. The Managing General Partner made an
offer to the noteholder to extend the purchase money note due date to August
2000. This offer was rejected by the noteholder. The Managing General Partner
is now reviewing other proposals to present to the noteholder. There is no
assurance that a new offer to extend the maturity date will be accepted. Should
the noteholder begin foreclosure proceedings on the Partnership's interest in
the related Local Partnership, the Partnership intends to vigorously defend any
action by the noteholder. However, there is no assurance that the Partnership
will be able to retain its interest in the Local Partnership. The uncertainty
about the continued ownership of the Partnership's interest in the related Local
Partnership does not impact the Partnership's financial condition because the
related purchase money notes are nonrecourse and collateralized solely by the
Partnership's interest in the Local Partnership. Therefore, should the
investment in Rock Glen not produce sufficient value to satisfy the related
purchase money note, the Partnership's exposure to loss is limited since the
amount of the non-recourse indebtedness exceeds the carrying amount of the
investment in and advances to the Local Partnership. Thus, even a complete loss
of this investment would not have a material impact on the operations of the
Partnership.
The 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, 1995, the receipt of distributions from Local
Partnerships was adequate to support operating cash requirements.
Results of Operations
---------------------
The Partnership's net loss increased for the three months ended June 30,
1995 from the comparable period in 1994 primarily due to an increase in interest
expense as a result of the amortization of imputed interest. Partially
offsetting the increase in net loss was a decrease in loss from Local
Partnerships primarily due to the loss resulting from the payoff of the Country
Place I and II purchase money notes in 1994. Also partially offsetting the
increase in the Partnership's net loss was an increase in interest income
resulting from an increase in investment yields and higher cash balances as
compared to the same period in 1994, as well as a decrease in professional fees
primarily due to a reduction in legal expenses.
The Partnership's net loss increased for the six months ended June 30, 1995
from the comparable period in 1994 primarily due to an increase in interest
expense, as discussed above. Partially offsetting the increase in net loss was
an increase in income from Local Partnerships primarily due to the loss incurred
in 1994 relating the payoff of Country Place I and II purchase money notes, as
discussed above, as well as a decrease in operating expenses at one property.
Also partially offsetting the increase in the Partnership's net loss was an
increase in interest income and a decrease in professional fees, 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 six months ended
June 30, 1995 did not include losses of $873,303 and $1,746,609, respectively,
-14-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
compared to excluded losses of $714,567 and $1,615,891 for the three and six
months ended June 30, 1994.
The local general partner of Frenchman's Wharf Apartments Associates II
(Frenchman's Wharf II), in conjunction with the Managing General Partner,
applied to the Department of Housing and Urban Development (HUD), holder of the
mortgage on the property, for a three-year extension of the previous workout
arrangement, which expired in December 1990. The local HUD office verbally
agreed to an extension expiring December 31, 1993 and recommended approval of
the extension to the HUD central office in Washington, D.C. In December 1993,
the local HUD office requested that a new workout proposal be submitted, and in
January 1994, the local general partner met with HUD to discuss the long-term
capital needs of the property in connection with a workout proposal. On March
1, 1994, the local general partner submitted a nine-year workout proposal to
HUD. As of July 14, 1995, no response had been received from the local HUD
office. There is no assurance that approval will be received. If that workout
proposal is not accepted and another alternative is not found, then HUD could
foreclose on the property. Frenchman's Wharf II was notified by HUD that HUD
plans to offer its mortgage loan for sale in September 1995. If the mortgage is
sold by HUD, a new mortgagee would service the defaulted loan and could
foreclose on the property. The uncertainty about the Local Partnership's
continued ownership of the property does not impact the Partnership's financial
condition because the related purchase money note is nonrecourse and
collateralized solely by the Partnership's interest in the Local Partnership.
Therefore, should the investment in Frenchman's Wharf II not produce sufficient
value to satisfy the purchase money note related to Frenchman's Wharf II, the
Partnership's exposure to loss is limited since the amount of the nonrecourse
indebtedness exceeds the carrying amount of the investment in and advances to
the Local Partnership. Thus, even a complete loss of this investment would not
have a material impact on the operations of the Partnership. Currently, debt-
service payments are being made from available cash flow in accordance with the
proposed workout. To cover operating deficits incurred in prior years for
Frenchman's Wharf II, the Partnership advanced funds totalling $324,410 as of
both June 30, 1995 and December 31, 1994. The last advance was made to
Frenchman's Wharf II in March 1987. The Partnership does not expect to advance
any additional funds in connection with Frenchman's Wharf II's loan workout with
HUD. These loans, together with accrued interest of $187,372 as of both June 30,
1995 and December 31, 1994, are payable from cash flow of Frenchman's Wharf II
after payment of first- mortgage debt service and after satisfaction by the
Partnership of certain other interest obligations on the purchase money notes
due from the Local Partnership. There is no assurance that the Local
Partnership, upon expiration of any workout, will be able to repay any loans in
accordance with the terms.
Palatine-Barrington Associates Limited Partnership (Deer Grove) was
notified by HUD that HUD plans to offer its mortgage loan for sale in July 1995.
If the mortgage is sold by HUD, a new mortgagee would service the loan and Deer
Grove would no longer be subject to HUD regulatory requirements.
Posada Associates Limited Partnership (Posada Vallarta Apartments) is
currently operating under a three-year workout agreement with HUD, the holder of
the mortgage. The workout provides for, among other things, a minimum monthly
debt service payment, with excess cash, if any, being applied to delinquent
interest. Currently, debt service payments are being made in accordance with the
workout. The three-year workout expires on October 1, 1995. In June 1995,
-15-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Posada Vallarta Apartments received a one-year extension, which expires October
1, 1996, on the three-year workout.
Many of the rental properties owned by the Local Partnerships have
mortgages which were federally insured under Section 236 or Section 221(d)(3) of
the National Housing Act, as amended. These properties may be eligible for sale
or refinancing, subject to numerous requirements, under the Low Income Housing
Preservation and Resident Homeownership Act of 1990 (LIHPRHA). This program may
provide incentives to owners of qualifying multifamily housing who commit to
permanently maintain their properties as low to moderate income housing.
Incentives available under LIHPRHA include selling the property to qualified
buyers or obtaining supplemental financing for the property. As of July 14,
1995, members of Congress are recommending substantial changes to the LIHPRHA
program ranging from the elimination of the program to the redesigning of the
program. Substantial uncertainty exists as to whether any properties which have
already filed the notice of intent to participate under LIHPRHA will qualify
under a redesigned program or as to whether the program will continue at all.
Many of the rental properties owned by the Local Partnerships are
dependent on the receipt of housing assistance payments guaranteed by contract
under the HUD Section 8 program. The level of funding for the Section 8
program, and HUD-insured multifamily housing in general, is dependent upon the
continuation of appropriations approved by Congress for subsidy payments. In
the event that the rental subsidy programs are reduced or phased out, there is
no assurance that the rental properties will be able to maintain the occupancy
levels necessary to pay debt service and operating costs or that the rents
necessary to pay debt service and operating costs will be competitive with rents
for comparable units in the rental properties' market areas. While the Managing
General Partner has no reason to believe that HUD will not honor its obligations
under the contracts, some uncertainty exists in light of the recent
Congressional scrutiny of appropriations for HUD programs.
No other significant changes in the Partnership's operations have taken
place during this period.
PART II. OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
No Reports on Form 8-K were filed with the Commission during the quarter
ended June 30, 1995.
All other items are not applicable.
-16-
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CAPITAL REALTY INVESTORS-II
LIMITED PARTNERSHIP
(Registrant)
By: C.R.I., Inc.
Managing General Partner
July 18, 1995 /s/ Richard J. Palmer
- -------------------------- ------------------------------
Date Richard J. Palmer
Senior Vice President/Finance
Signing on behalf of the
Registrant and as Principal
Accounting Officer
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE SECOND QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 3,104,523
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,609,201
<CURRENT-LIABILITIES> 0
<BONDS> 40,513,899
<COMMON> 0
0
0
<OTHER-SE> (28,981,889)
<TOTAL-LIABILITY-AND-EQUITY> 11,609,201
<SALES> 0
<TOTAL-REVENUES> 154,662
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 252,937
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,729,542
<INCOME-PRETAX> (2,827,817)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,827,817)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,827,817)
<EPS-PRIMARY> (54.86)
<EPS-DILUTED> (54.86)
</TABLE>
