<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 September 30, 1995
------------------
Commission file number 0-11973
-------------
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 September 30, 1995
- ---------------------------------- ----------------------------------
(Not applicable) (Not applicable)
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1995
PAGE
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Balance Sheets - September 30, 1995 and
December 31, 1994 . . . . . . . . . . . . . 1
Statements of Operations - for the three and
nine months ended September 30, 1995 and 1994 3
Statements of Cash Flows - for the nine
months ended September 30, 1995 and 1994 . 5
Notes to Financial Statements . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . 12
PART II. Other Information
Item 3. Defaults upon Senior Securities . . . . . . . 16
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>
September 30, December 31,
1995 1994
------------- ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 7,069,224 $ 7,990,026
Cash and cash equivalents 3,283,207 2,812,577
Acquisition fees, principally paid to
related parties, net of accumulated
amortization of $399,162 and $374,162,
respectively 600,838 625,838
Property purchase costs, net of
accumulated amortization of $252,866
and $236,432, respectively 404,446 420,880
Other assets 7,080 5,306
------------ ------------
Total assets $ 11,364,795 $ 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 - Continued
LIABILITIES AND PARTNERS' DEFICIT
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
(Unaudited)
<S> <C> <C>
Due on investments in partnerships,
net of unamortized discount on
purchase money notes of $9,321,298
and $11,433,655, respectively $ 13,099,380 $ 10,987,023
Accrued interest payable 28,705,521 26,951,287
Accounts payable and accrued expenses 102,372 70,389
------------ ------------
Total liabilities 41,907,273 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 (74,025,886) (69,637,480)
------------ ------------
Total partners' deficit (30,542,478) (26,154,072)
------------ ------------
Total liabilities and partners'
deficit $ 11,364,795 $ 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
September 30,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Share of (loss) income from partnerships $ (117,258) $ 1,541
------------ ------------
Other revenue and expenses:
Revenue:
Interest income 47,297 32,632
------------ ------------
Expenses:
Interest 1,364,771 1,091,853
Management fee 62,499 62,499
General and administrative 31,376 10,365
Professional fees 18,170 26,352
Amortization 13,812 13,812
------------ ------------
1,490,628 1,204,881
------------ ------------
Total other revenue and expenses (1,443,331) (1,172,249)
------------ ------------
Net loss (1,560,589) (1,170,708)
Accumulated losses, beginning of period (72,465,297) (66,522,397)
------------ ------------
Accumulated losses, end of period $(74,025,886) $(67,693,105)
============ ============
Loss allocated to General Partners (1.51%) $ (23,565) $ (17,678)
============ ============
Loss allocated to Initial and Special
Limited Partners (1.49%) $ (23,252) $ (17,444)
============ ============
Loss allocated to Additional Limited
Partners (97%) $ (1,513,772) $ (1,135,586)
============ ============
Loss per unit of Additional Limited
Partnership Interest based on 50,000
units outstanding $ (30.28) $ (22.71)
============ ============
</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 nine months ended
September 30,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Share of loss from partnerships $ (50,463) $ (68,985)
------------ ------------
Other revenue and expenses:
Revenue:
Interest income 135,164 88,513
------------ ------------
Expenses:
Interest 4,094,313 3,300,512
Management fee 187,497 187,497
General and administrative 94,050 75,097
Professional fees 55,813 71,898
Amortization 41,434 41,433
------------ ------------
4,473,107 3,676,437
------------ ------------
Total other revenue and expenses (4,337,943) (3,587,924)
------------ ------------
Net loss (4,388,406) (3,656,909)
Accumulated losses, beginning of period (69,637,480) (64,036,196)
------------ ------------
Accumulated losses, end of period $(74,025,886) $(67,693,105)
============ ============
Loss allocated to General Partners (1.51%) $ (66,265) $ (55,219)
============ ============
Loss allocated to Initial and Special
Limited Partners (1.49%) $ (65,387) $ (54,488)
============ ============
Loss allocated to Additional Limited
Partners (97%) $ (4,256,754) $ (3,547,202)
============ ============
Loss per unit of Additional Limited
Partnership Interest based on 50,000
units outstanding $ (85.14) $ (70.94)
============ ============
</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 nine months ended
September 30,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,388,406) $ (3,656,909)
Adjustments to reconcile net loss to
net cash used in operating activities:
Share of loss from partnerships 50,463 68,985
Amortization of deferred costs 41,434 41,433
Amortization of discount on purchase
money notes 2,112,357 1,236,003
Loss on early extinguishment of debt -- (117,353)
Payment of purchase money note interest (227,722) (226,464)
Changes in assets and liabilities:
Increase in other assets (1,774) (3,156)
Increase in accrued interest payable 1,981,956 2,064,508
Increase (decrease) in accounts payable
and accrued expenses 31,983 (5,191)
------------ ------------
Net cash used in operating
activities (399,709) (598,144)
------------ ------------
Cash flows from investing activities:
Receipt of distributions from
partnerships 870,339 775,529
------------ ------------
Cash flows from financing activities:
Pay-off of purchase money note -- (367,897)
------------ ------------
Net increase (decrease) in cash and cash
equivalents 470,630 (190,512)
Cash and cash equivalents, beginning of
period 2,812,577 3,068,063
------------ ------------
Cash and cash equivalents, end of period $ 3,283,207 $ 2,877,551
============ ============
</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 September 30,
1995 and December 31, 1994, and the results of its operations for the three and
nine months ended September 30, 1995 and 1994 and its cash flows for the nine
months ended September 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 September 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
$9,321,298) plus accrued interest of $28,705,521, 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 matured 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 Partnership's share of 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 nine months ended September 30, 1995 was $1,364,771 and $4,094,313,
respectively, and for the three and nine months ended September 30, 1994 was
$1,091,853 and $3,300,512, respectively. Amortization of the imputed interest
on purchase money notes increased interest expense during the three and nine
months ended September 30, 1995 by $704,119 and $2,112,357, respectively, and by
$409,826 and $1,236,003 during the three and nine months ended September 30,
1994, respectively.
As of September 30, 1995 and December 31, 1994, the Partnership had
advanced funds totalling $324,410 to Local Partnerships. There were no funds
advanced to the Local Partnerships during the nine months ended September 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 October 10, 1995, the local general partner is continuing to work
with the local HUD office to arrange an acceptable workout agreement. There is
no assurance that approval for a workout will be received. If a 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
planned to offer its mortgage loan for sale in the Fall of 1995. If the
mortgage was sold by HUD, a new mortgagee would service the defaulted loan and
could foreclose on the property. As of October 10, 1995, Frenchman's Wharf II
had not been notified by HUD as to the status of the loan sale. 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 September 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 September 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
-7-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
able to repay any loans in accordance with the terms.
In September 1995, HUD sold the mortgage of Palatine-Barrington Associates
Limited Partnership (Deer Grove) to a new mortgagee. The new mortgagee now
services the loan and Deer Grove is no longer subject to HUD regulatory
requirements.
Posada Associates Limited Partnership (Posada Vallarta Apartments) is
currently operating under an extension of 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. In June 1995, the three-year workout which
originally expired on October 1, 1995 was extended to October 1, 1996.
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 are 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 October 10,
1995, members of Congress were 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.
The Partnership defaulted on its purchase money note relating to Beech Hill
I on August 1, 1995 when the note matured and was not paid. The default amount
included principal and accrued interest of $1,480,000 and $1,473,498,
respectively. As of October 17, 1995, principal and accrued interest totalling
$1,480,000 and $1,501,963, respectively, were due. In addition, the Partnership
defaulted on its purchase money note relating to Beech Hill II on August 1, 1995
when the note matured and was not paid. The default amount included principal
and accrued interest of $900,000 and $905,047, respectively. As of October 17,
1995, principal and accrued interest of $900,000 and $922,356, respectively,
were due. The Managing General Partner is currently negotiating with the
noteholders to extend the purchase money note due dates. There is no assurance,
however, that the offer to extend the maturity dates will be accepted.
The Partnership defaulted on its purchase money note relating to Rock Glen
on August 1, 1995 when the note matured and was not paid. The default amount
included principal and accrued interest of $2,280,000 and $1,116,256,
respectively. As of October 17, 1995, principal and accrued interest totalling
$2,280,000 and $1,160,107, respectively, were due. A standstill agreement from
the noteholder has been granted until October 31, 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 any new proposals will be accepted.
Should the noteholders of the Beech Hill I, Beech Hill II and/or Rock Glen
purchase money notes begin foreclosure proceedings on any of 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 any of 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, Beech Hill II
and Rock Glen 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 any of these
investments would not have a material impact on the operations of the
Partnership. However, should the Partnership be unable to retain its interest
in all of the Local Partnerships, the investments in and advances to Local
-9-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Partnerships would be reduced by the Partnership's basis in these Local
Partnerships, which at September 30, 1995 is approximately 17% of the total
investment in Local Partnerships.
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 For the nine months ended
September 30, September 30,
--------------------------- ---------------------------
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rental
revenue $ 6,992,515 $ 6,902,943 $ 21,168,915 $ 20,694,255
Other 444,233 426,521 1,227,585 1,246,114
------------ ------------ ------------ ------------
7,436,748 7,329,464 22,396,500 21,940,369
------------ ------------ ------------ ------------
Expenses:
Operating 4,999,332 4,741,934 14,778,431 14,132,480
Interest 2,097,325 2,066,390 6,291,984 6,199,183
Depreciation
and amorti-
zation 1,351,817 1,348,270 4,055,456 4,044,819
------------ ------------ ------------ ------------
8,448,474 8,156,594 25,125,871 24,376,482
------------ ------------ ------------ ------------
Net loss $ (1,011,726) $ (827,130) $ (2,729,371) $ (2,436,113)
============ ============ ============ ============
</TABLE>
As of September 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 $23,796,463 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 $22,729 and $67,424 for the three and nine months ended
-10-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. RELATED-PARTY TRANSACTIONS - Continued
September 30, 1995, respectively, and $23,083 and $66,533 for the three and nine
months ended September 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 $187,497 for
the three and nine months, respectively, ended September 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
(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.
-11-
<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 $3,283,207 and $2,812,577 as of
September 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 October 10, 1995, there are
no material commitments for capital expenditures.
As of September 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
$9,321,298) plus accrued interest of $28,705,521, 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 matured 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 Partnership's share of the proceeds to pay off or
buy down certain purchase money note obligations.
The Partnership defaulted on its purchase money note relating to Beech Hill
I on August 1, 1995 when the note matured and was not paid. The default amount
included principal and accrued interest of $1,480,000 and $1,473,498,
respectively. As of October 17, 1995, principal and accrued interest totalling
$1,480,000 and $1,501,963, respectively, were due. In addition, the Partnership
defaulted on its purchase money note relating to Beech Hill II on August 1, 1995
when the note matured and was not paid. The default amount included principal
and accrued interest of $900,000 and $905,047, respectively. As of October 17,
1995, principal and accrued interest of $900,000 and $922,356, respectively,
were due. The Managing General Partner is currently negotiating with the
noteholders to extend the purchase money note due dates. There is no assurance,
however, that the offer to extend the maturity dates will be accepted.
The Partnership defaulted on its purchase money note relating to Rock Glen
on August 1, 1995 when the note matured and was not paid. The default amount
included principal and accrued interest of $2,280,000 and $1,116,256,
respectively. As of October 17, 1995, principal and accrued interest totalling
$2,280,000 and $1,160,107, respectively, were due. A standstill agreement from
the noteholder has been granted until October 31, 1995. The Managing General
Partner made an offer to the noteholder to extend the purchase money note due
-12-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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 any new proposals will be accepted.
Should the noteholders of the Beech Hill I, Beech Hill II and/or Rock Glen
purchase money notes begin foreclosure proceedings on any of 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 any of 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, Beech Hill II
and Rock Glen 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 any of these
investments would not have a material impact on the operations of the
Partnership. However, should the Partnership be unable to retain its interest
in all of the Local Partnerships, the investments in and advances to Local
Partnerships would be reduced by the Partnership's basis in these Local
Partnerships, which at September 30, 1995 is approximately 17% of the total
investment in Local Partnerships.
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, 1995, the receipt of distributions from
Local Partnerships was adequate to support operating cash requirements.
Results of Operations
---------------------
The Partnership's net loss for the three months ended September 30, 1995
increased from the comparable period in 1994 primarily due to an increase in
interest expense as a result of the amortization of imputed interest.
Contributing to the increase in net loss was an increase in loss from Local
Partnerships primarily due to an increase in operating expenses at two
properties, which was partially offset by a decrease in operating expenses at
one property. Also contributing to the increase in net loss was an increase in
general and administrative expenses in 1995 due to the recognition in the third
quarter of 1994 of decreased annual report printing costs. 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 for the nine months ended September 30, 1995
increased from the comparable period in 1994 primarily due to an increase in
interest expense and general and administrative expenses, as discussed above.
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.
Also, partially offsetting the increase in net loss was a decrease in loss from
Local Partnerships primarily due to the loss incurred in 1994 relating the
payoff of Country Place I and II purchase money notes, which was partially
-13-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
offset by an increase in operating expenses at two properties in 1995, 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, 1995 did not include losses of $873,303 and $2,619,912,
respectively, compared to excluded losses of $807,943 and $2,423,834 for the
three and nine months ended September 30, 1994, respectively.
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 October 10, 1995, the local general partner is continuing to work
with the local HUD office to arrange an acceptable workout agreement. There is
no assurance that approval for a workout will be received. If a 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
planned to offer its mortgage loan for sale in the Fall of 1995. If the
mortgage was sold by HUD, a new mortgagee would service the defaulted loan and
could foreclose on the property. As of October 10, 1995, Frenchman's Wharf II
had not been notified by HUD as to the status of the loan sale. 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 September 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 September 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.
-14-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
In September 1995, HUD sold the mortgage of Palatine-Barrington Associates
Limited Partnership (Deer Grove) to a new mortgagee. The new mortgagee now
services the loan and Deer Grove is no longer subject to HUD regulatory
requirements.
Posada Associates Limited Partnership (Posada Vallarta Apartments) is
currently operating under an extension of 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. In June 1995, the three-year workout which
originally expired on October 1, 1995 was extended to October 1, 1996.
Many of the rental properties owned by the Local Partnerships have
mortgages which are 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 October 10,
1995, members of Congress were 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 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
The Partnership defaulted on its purchase money note relating to Beech Hill
I on August 1, 1995 when the note matured and was not paid. The default amount
included principal and accrued interest of $1,480,000 and $1,473,498,
respectively. As of October 17, 1995, principal and accrued interest totalling
-15-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Continued
-------------------------------
$1,480,000 and $1,501,963, respectively, were due. In addition, the Partnership
defaulted on its purchase money note relating to Beech Hill II on August 1, 1995
when the note matured and was not paid. The default amount included principal
and accrued interest of $900,000 and $905,047, respectively. As of October 17,
1995, principal and accrued interest of $900,000 and $922,356, respectively,
were due. The Managing General Partner is currently negotiating with the
noteholders to extend the purchase money note due dates. There is no assurance,
however, that the offer to extend the maturity dates will be accepted.
The Partnership defaulted on its purchase money note relating to Rock Glen
on August 1, 1995 when the note matured and was not paid. The default amount
included principal and accrued interest of $2,280,000 and $1,116,256,
respectively. As of October 17, 1995, principal and accrued interest totalling
$2,280,000 and $1,160,107, respectively, were due. A standstill agreement from
the noteholder has been granted until October 31, 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 any new proposals will be accepted.
Should the noteholders of the Beech Hill I, Beech Hill II and/or Rock Glen
purchase money notes begin foreclosure proceedings on any of 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 any of 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, Beech Hill II
and Rock Glen 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 any of these
investments would not have a material impact on the operations of the
Partnership. However, should the Partnership be unable to retain its interest
in all of the Local Partnerships, the investments in and advances to Local
Partnerships would be reduced by the Partnership's basis in these Local
Partnerships, which at September 30, 1995 is approximately 17% of the total
investment in Local Partnerships.
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 September 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
October 17, 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 THIRD QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 3,283,207
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,364,795
<CURRENT-LIABILITIES> 0
<BONDS> 41,804,901
<COMMON> 0
0
0
<OTHER-SE> (30,542,478)
<TOTAL-LIABILITY-AND-EQUITY> 11,364,795
<SALES> 0
<TOTAL-REVENUES> 84,701
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 378,794
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,094,313
<INCOME-PRETAX> (4,388,406)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,388,406)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,388,406)
<EPS-PRIMARY> (85.14)
<EPS-DILUTED> (85.14)
</TABLE>
