<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, 1998
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Commission file number 0-11973
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CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
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(Exact name of small business issuer as specified in its charter)
Maryland 52-1321492
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11200 Rockville Pike, Rockville, Maryland 20852
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(Address of principal executive offices) (Zip Code)
(301) 468-9200
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(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2) has
been subject to such filing requirements for the past 90 days.
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, 1998)
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
INDEX TO FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 1998
PAGE
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Balance Sheets - June 30, 1998 and
December 31, 1997 . . . . . . . . . . . . . 1
Statements of Operations - for the three and six
months ended June 30, 1998 and 1997 . . . . 2
Statements of Cash Flows - for the six
months ended June 30, 1998 and 1997 . . . . 3
Notes to Financial Statements . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . 15
PART II. Other Information
Item 3. Defaults Upon Senior Securities . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K . . . . . . 22
Signature . . . . . . . . . . . . . . . . . . . . . . 23
Exhibit Index . . . . . . . . . . . . . . . . . . . . . 24
<PAGE>
PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 4,110,156 $ 4,737,362
Partnership interests held in escrow 920,585 917,927
Cash and cash equivalents 12,726,539 7,969,815
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $402,506 and $388,811, respectively 419,181 432,876
Property purchase costs, net of accumulated amortization of
$262,773 and $253,580, respectively 288,829 298,022
Other assets 27,555 91,028
------------ ------------
Total assets $ 18,492,845 $ 14,447,030
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 18,103,646 $ 17,359,614
Accrued interest payable 31,050,913 30,245,542
Accounts payable and accrued expenses 120,499 80,433
------------ ------------
Total liabilities 49,275,058 47,685,589
------------ ------------
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 (2,253,712) (2,253,712)
Offering costs (5,278,980) (5,278,980)
Accumulated losses (73,266,521) (75,722,867)
------------ ------------
Total partners' deficit (30,782,213) (33,238,559)
------------ ------------
Total liabilities and partners' deficit $ 18,492,845 $ 14,447,030
============ ============
</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-II LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Share of income from partnerships $ 4,498,827 $ 245,347 $ 4,496,207 $ 326,610
------------ ------------ ------------ ------------
Other revenue and expenses:
Revenue:
Interest and other income 133,636 88,529 234,215 122,123
------------ ------------ ------------ ------------
Expenses:
Interest 963,953 1,391,001 1,927,906 2,772,942
Management fee 62,499 62,499 124,998 124,998
General and administrative 86,230 61,455 139,247 104,314
Professional fees 30,009 265,811 59,037 308,629
Amortization 10,370 12,518 22,888 25,036
------------ ------------ ------------ ------------
1,153,061 1,793,284 2,274,076 3,335,919
------------ ------------ ------------ ------------
Total other revenue and expenses (1,019,425) (1,704,755) (2,039,861) (3,213,796)
------------ ------------ ------------ ------------
Income (loss) before gain on disposition of
investments in partnerships 3,479,402 (1,459,408) 2,456,346 (2,887,186)
Gain on disposition of investments in partnerships -- 19,216 -- 4,903,873
------------ ------------ ------------ ------------
Income (loss) before extraordinary gain from
extinguishment of debt 3,479,402 (1,440,192) 2,456,346 2,016,687
Extraordinary gain from extinguishment of debt -- -- -- 1,653,096
------------ ------------ ------------ ------------
Net income (loss) 3,479,402 (1,440,192) 2,456,346 3,669,783
Accumulated losses, beginning of period (76,745,923) (74,290,832) (75,722,867) (79,400,807)
------------ ------------ ------------ ------------
Accumulated losses, end of period $(73,266,521) $(75,731,024) $(73,266,521) $(75,731,024)
============ ============ ============ ============
</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-II LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS - Continued
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income (loss) allocated to General Partners (1.51%) $ 52,539 $ (21,747) $ 37,091 $ 55,414
============ ============ ============ ============
Income (loss) allocated to Initial and Special
Limited Partners (1.49%) $ 51,843 $ (21,459) $ 36,600 $ 54,679
============ ============ ============ ============
Income (loss) allocated to Additional Limited Partners (97%) $ 3,375,020 $ (1,396,986) $ 2,382,655 $ 3,559,690
============ ============ ============ ============
Income (loss) per unit of Additional Limited Partnership
Interest based on 50,000 units outstanding $ 67.50 $ (27.94) $ 47.65 $ 71.19
============ ============ ============ ============
</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-II LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,456,346 $ 3,669,783
Adjustments to reconcile net income to net cash used in
operating activities:
Share of income from partnerships (4,496,207) (326,610)
Amortization of deferred costs 22,888 25,036
Amortization of discount on purchase money notes 744,032 1,567,813
Extraordinary gain from extinguishment of debt -- (1,653,096)
Gain on disposition of investments in partnerships -- (4,903,873)
Payment of purchase money note interest (378,503) (32,926)
Changes in assets and liabilities:
Decrease (increase) in other assets 63,473 (17,303)
Increase in accrued interest payable 1,183,874 1,205,129
Increase in accounts payable and accrued expenses 40,066 21,635
------------ ------------
Net cash used in operating activities (364,031) (444,412)
------------ ------------
Cash flows from investing activities:
Receipt of distributions from partnerships 5,270,755 344,520
Proceeds from disposition of investments in partnerships -- 5,643,131
Advances made to partnerships (789,000) (28,000)
Repayment of advances made to partnerships 639,000 --
------------ ------------
Net cash provided by investing activities 5,120,755 5,959,651
------------ ------------
Cash flows from financing activities:
Pay-off of purchase money note and related interest -- (1,385,154)
------------ ------------
Net cash used in financing activities -- (1,385,154)
------------ ------------
Net increase in cash and cash equivalents 4,756,724 4,130,085
Cash and cash equivalents, beginning of period 7,969,815 2,128,849
------------ ------------
Cash and cash equivalents, end of period $ 12,726,539 $ 6,258,934
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 378,503 $ 125,080
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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<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 reflect all adjustments, consisting
of normal recurring accruals, necessary for a fair presentation of the financial
position of Capital Realty Investors-II Limited Partnership (the Partnership) as
of June 30, 1998, and the results of its operations for the three and six months
ended June 30, 1998 and 1997, and its cash flows for the six months ended June
30, 1998 and 1997. The results of operations for the interim period ended June
30, 1998, are not necessarily indicative of the results to be expected for the
full year.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles and with the
instructions to Form 10-QSB. Certain information and accounting policies and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such instructions. These condensed financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Partnership's annual report on Form 10-K at December 31, 1997.
Certain amounts in the 1997 financial statements have been reclassified to
conform to the 1998 presentation.
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
The Partnership's obligations with respect to its investments in Local
Partnerships, in the form of purchase money notes having a principal balance of
$18,847,678 (exclusive of unamortized discount on purchase money notes of
$744,032) plus accrued interest of $31,050,913 as of June 30, 1998, are payable
in full 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 $1,050,000 matured on December 31, 1996, and have
been extended to January 2, 2000, as discussed below. Purchase money notes in
the aggregate principal amounts of $1,050,000, $1,900,000, $2,380,000, and
$3,150,000 matured on December 31, 1996, December 31, 1997, January 1, 1998 and
June 1, 1998, respectively, and have not been paid or extended. Purchase money
notes in the aggregate principal amounts of $6,527,500, $1,450,000 and
$1,340,178 mature on August 31, 1998, September 1, 1998, and January 1, 1999,
respectively, as discussed below. The remaining purchase money notes mature in
2000.
The purchase money notes are generally secured by the Partnership's
interest in the respective Local Partnerships. There is no assurance that the
underlying properties will have sufficient appreciation and equity to enable the
Partnership to pay the outstanding principal of, and accrued interest on, the
purchase money notes. 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
Partnership's inability to pay certain of the purchase money note principal and
accrued interest balances when due, and the resulting uncertainty regarding the
Partnership's continued ownership interest in the related Local Partnerships,
does not impact the Partnership's financial condition because the purchase money
notes are nonrecourse and secured solely by the Partnership's interest in the
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<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
related Local Partnerships. Therefore, should the investment in any of the
Local Partnerships with maturing purchase money notes not produce sufficient
value to satisfy the related purchase money notes, the Partnership's exposure to
loss is limited because the amount of the nonrecourse indebtedness of each of
the maturing purchase money notes exceeds the carrying amount of the investment
in and advances to each of the related Local Partnerships. Thus, even a
complete loss of one of these Local Partnerships would not have a material
impact on the financial condition of the Partnership.
Interest expense on the Partnership's purchase money notes was $963,953 and
$1,927,906 for the three and six months ended June 30, 1998, respectively, and
$1,391,001 and $2,772,942 for the three and six months ended June 30, 1997,
respectively. Amortization of the imputed interest on purchase money notes
increased interest expense during the three and six months ended June 30, 1998
by $372,016 and $744,032, respectively, and by $799,064 and $1,567,813 for the
three and six months ended June 30, 1997, respectively. The accrued interest on
the purchase money notes of $31,050,913 and $30,245,542 as of June 30, 1998 and
December 31, 1997, respectively, is due on the respective maturity dates of the
purchase money notes or earlier, in some instances, if the pertinent Local
Partnership has distributable net cash flow, as defined in the relevant Local
Partnership agreements.
As of June 30, 1998 and December 31, 1997, the Partnership had advanced
funds to Local Partnerships totaling $474,410 and $324,410, respectively.
Arrowhead and Moorings
-----------------------
On May 7, 1998, the local managing general partner of Arrowhead Apartments
Associates Limited Partnership (Arrowhead) and Moorings Apartments Associates
Limited Partnership (Moorings) closed on refinancings of the first mortgages of
the Local Partnerships. In connection with the refinancings, on March 19, 1998,
the Partnership advanced loan application fees and deposits for refinancing
costs totaling $14,000 each for Arrowhead and Moorings. On May 7, 1998, the
Partnership advanced additional amounts for rate lock fees for Arrowhead and
Moorings of $140,000 and $166,000, respectively. The proceeds from these
refinancings were subsequently used to pay, at a discount, purchase money note
obligations of the related Local Partnerships. Additionally, the Partnership
received $1,542,691 and $3,850,304 as of July 15, 1998 from Arrowhead and
Moorings, respectively, from the proceeds of the refinancings. The refinancing
proceeds received by the Partnership during and subsequent to closing exceeded
the Partnership's remaining investments in the respective Local Partnerships by
approximately $1.3 million and $3 million as of June 30, 1998 for Arrowhead and
Moorings, respectively, and are included in share of income from partnerships in
the consolidated statements of operations.
Beech Hill I and II
-------------------
The Partnership defaulted on its purchase money notes aggregating
$2,380,000 related to Beech Hill Development Co. (Beech Hill I) and Beech Hill
Development Co. II (Beech Hill II) on August 1, 1995 when the notes matured and
were not paid. On March 29, 1996, the noteholders agreed to extend the purchase
money note due dates to January 1, 1998. Under the agreement, the Partnership
pays the purchase money noteholders of Beech Hill I and Beech Hill II all annual
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<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
cash flow distributions received from the related Local Partnerships in excess
of $5,000 and $2,500, respectively. There were no annual cash flow
distributions made to the Partnership from the related Local Partnerships during
the three months ended June 30, 1998 and 1997.
Under the extension agreement, documents transferring the Partnership's
interests in Beech Hill I and Beech Hill II to the noteholders were placed in
escrow to be released to the noteholders upon a future default by the
Partnership on the respective purchase money notes. On January 1, 1998, the
Partnership defaulted on its purchase money notes related to Beech Hill I and
Beech Hill II when the notes matured and were not paid. The default amount
included principal and accrued interest of $1,480,000 and $1,687,578,
respectively, for Beech Hill I and $900,000 and $1,072,113, respectively, for
Beech Hill II. As of August 10, 1998, the Partnership's interests in Beech Hill
I and Beech Hill II have not been transferred to the purchase money noteholders,
and the transfer documents remain in escrow. As of August 10, 1998, principal
and accrued interest totaling $1,480,000 and $1,766,038, respectively, related
to Beech Hill I and $900,000 and $1,119,825, respectively, related to Beech Hill
II were due.
Due to the impending likely transfer of the Partnership's interest in the
Local Partnerships to the purchase money noteholders, the Partnership's basis in
these Local Partnerships as of June 30, 1998, which was $521,591 and $398,994
for Beech Hill I and Beech Hill II, respectively, was classified as partnership
interests held in escrow in the accompanying financial statements.
The purchase money notes related to Beech Hill I and Beech Hill II are
nonrecourse and secured solely by the Partnership's interests in the related
Local Partnerships. The release of the Partnership's purchase money note
obligation as a result of the impending likely loss of ownership interest in the
Local Partnerships will result in a net financial statement gain of
approximately $2.7 million and $1.6 million for Beech Hill I and Beech Hill II,
respectively, during 1998. The federal tax gains are estimated to be
approximately $4.7 million and $3 million for Beech Hill I and Beech Hill II,
respectively.
Chevy Chase
-----------
The Partnership defaulted on its two purchase money notes relating to Chevy
Chase Park, Limited (Chevy Chase) on December 31, 1996 when the notes matured
and were not paid. The default amount included principal and accrued interest
of $2,100,000 and $3,553,912, respectively. The Managing General Partner has
successfully negotiated an extension on one of the purchase money notes (the
"First Chase Note") in the principal amount of $1,050,000 effective December 1,
1997. In connection with the extension agreement, the Partnership made interest
payments totaling $425,000 to the purchase money noteholder. Under the terms of
the extension agreement, the maturity date will be January 2, 2000.
Additionally, the Partnership has the right and option, but not the obligation,
to extend the maturity date to January 5, 2001 by making a payment to the
purchase money noteholder in the amount of $275,000 on or before January 2,
1999. Such $275,000 payment shall be applied to accrued interest. The
Partnership, if it exercises this option to further extend the maturity date,
shall thereafter have the option to purchase the purchase money note for
$250,000 if it gives notice of such exercise by January 5, 2000.
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<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
As of August 10, 1998, principal and accrued interest due to the holders of
the second purchase money note (the "Second Chase Note") totaling $1,050,000 and
$2,008,003, respectively, remain unpaid and unextended. On February 10, 1998,
the Partnership was served with a complaint by the two holders of the Second
Chase Note filing suit against the Partnership, the Managing General Partner and
CRHC, Incorporated (CRHC), an affiliate of the Managing General Partner, for
damages and seeking foreclosure on the Partnership's interest in the Local
Partnership. As of July 29, 1998, the parties agreed to a settlement which
involves a discounted payoff to the holders of the Second Chase Note, subject to
the Partnership's satisfaction with the results of its due diligence. In
connection with this settlement, the Local General Partner would withdraw from
the Local Partnership, and the property management agent, which is an affiliate
of the Local General Partner, will terminate one hundred eighty days after the
closing, which is presently scheduled for October 5, 1998. Further, the
Partnership would receive the interests of the Local General Partner and its
affiliates in the First Chase Note, which is approximately 5%. The Partnership
has the right to terminate the agreement no later than September 28, 1998, in
which case the parties will extend the maturity date of the Second Chase Note to
January 31, 2000, and the Partnership and CRHC will grant the holders thereof
the option, effective January 1, 1999 through June 30, 1999, to purchase the
interests of the Partnership and CRHC in the Local Partnership for the
outstanding balance on the Second Chase Note. As part of the settlement
agreement, on July 29, 1998, the Partnership put in escrow $125,000 to be
applied against the principal balance of the Second Chase Note should there be a
default.
The Managing General Partner and the local managing general partner are
individually exploring various options to refinance the U. S. Department of
Housing and Urban Development (HUD) Section 236 interest rate subsidized
mortgage loan related to Chevy Chase. Additionally, the Managing General
Partner commissioned a rental market study and is evaluating the feasibility of
converting the property to market-rate. No conclusion has been reached as of
August 10, 1998. A refinancing cannot be obtained until the litigation
involving the two holders of the Second Chase Note is settled, as discussed
above. Accordingly, there is no assurance that the property will be converted,
nor is there any assurance that a refinancing of the mortgage loan will occur.
Deer Grove
----------
On March 18, 1997, the local managing general partner of Palatine-
Barrington Associates Limited Partnership (Deer Grove) sold the property, a 448-
unit apartment complex located in Palatine, Illinois. The sale of the property
generated cash proceeds to the Partnership of $3.4 million at closing. The sale
resulted in a net financial statement gain in 1997 of approximately $3.4
million. The federal tax gain was approximately $17.8 million.
Four Winds West, Princeton and Troy Manor
-----------------------------------------
The Managing General Partner anticipates initiating discussions to obtain
extensions of the maturity dates of the purchase money notes relating to Four
Winds West Company Limited (Four Winds West), Princeton Community Village
Associates (Princeton) and Troy Apartments Limited (Troy Manor) in the aggregate
principal amounts of $462,178, $500,000 and $378,000, respectively. These
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<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
purchase money notes are currently due to mature on January 1, 1999. There is
no assurance that extensions will be obtained.
Frenchman's Wharf II
--------------------
The Partnership defaulted on its purchase money notes related to
Frenchman's Wharf Associates II Limited Partnership (Frenchman's Wharf II) on
June 1, 1998 when the notes matured and were not paid. The default included
principal and accrued interest of $3,150,000 and $5,071,731, respectively. The
purchase money notes, initially due to mature on June 1, 1988, were extended to
mature on June 1, 1998. As of August 10, 1998, principal and accrued interest
totaling $3,150,000 and $5,131,537, respectively, were due. In conjunction with
the four-year workout agreement for the Local Partnership's mortgage loan, the
Partnership is currently negotiating with the purchase money noteholders to
extend the notes to be coterminous with the workout arrangement, which is
scheduled to expire on May 31, 2000. As of August 10, 1998, the noteholders had
not consented to an extension agreement and there is no assurance that any
agreement will be reached with the noteholders. There is no assurance that the
Partnership will be able to retain its interest in Frenchman's Wharf II. The
uncertainty regarding the continued ownership of the Partnership's interest in
Frenchman's Wharf II does not impact the Partnership's financial condition, as
discussed above.
The report of the auditors on the financial statements of Frenchman's Wharf
II for the year ended December 31, 1997 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 Rental Housing Assistance Payments (HAP) contract with HUD on November
30, 1998. The uncertainty about the Local Partnership's continued ownership of
the property does not impact the Partnership's financial condition, as discussed
above.
Posada Vallarta Apartments
--------------------------
The Managing General Partner and the local managing general partner of
Posada Associates Limited Partnership (Posada Vallarta Apartments) refinanced
the property's mortgage loan on May 26, 1998. This refinancing resulted in a
discounted payoff of the Local Partnership's current mortgage, which will result
in cancellation of debt income for the Partnership's 1998 tax year. In
connections with such refinancing, the Partnership advanced the Local
Partnership $450,000 for application and rate lock fees. As of August 10, 1998,
$300,000 of the advances had been repaid to the Partnership.
Rolling Green at Fall River and Rolling Green at Amherst
--------------------------------------------------------
The Managing General Partner and trustees representing the purchase money
noteholders related to Roberts Fall River Associates (Rolling Green at Fall
River) and Roberts Amherst Associates (Rolling Green at Amherst) are currently
negotiating to extend the purchase money notes related to these Local
Partnerships. The purchase money notes, with aggregate principal amounts of
$4,600,000 and $1,927,500 for Rolling Green at Fall River and Rolling Green at
Amherst, respectively, are currently due to mature August 31, 1998. In
-9-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
connection with the potential extension of the purchase money notes, the
Managing General Partner, the local managing general partner and the purchase
money noteholders are jointly exploring various options to refinance the
Massachusetts Housing Finance Agency (MHFA) and HUD Section 236 interest rate
subsidized mortgage loans related to these Local Partnerships. The parties have
signed a term sheet to restructure the purchase money notes, and as of August
10, 1998, the parties are working toward a final agreement. There is no
assurance that a final agreement will be reached. Accordingly, should the
Partnership default on the notes, there can be 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, as discussed
above.
Tanglewood II
-------------
On February 19, 1997, Tanglewood II, a 192-unit apartment complex located
in Westwego, Louisiana was sold. The sale of the property generated sufficient
proceeds to the Partnership to retire, at a discount, the Partnership's purchase
money note obligation with respect to the property. The sale resulted in a net
financial statement gain in 1997 of approximately $3.2 million, of which
approximately $1.7 million resulted from the retirement of the purchase money
note obligation with respect to the property. The federal tax gain was
approximately $4.9 million.
Westgate
--------
The purchase money note relating to Westgate Tower Limited Dividend Housing
Associates (Westgate) in the principal amount of $1,450,000 matures on September
1, 1998. The noteholders have accepted the Managing General Partner's request
for a five year extension with respect to this purchase money note. As of
August 10, 1998, the parties are working toward formalizing the extension.
There is no assurance that the parties will agree on the final form of the
documentation. Accordingly, there can be 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, as discussed
above.
Wexford Ridge
-------------
The Partnership defaulted on its two purchase money notes relating to
Wexford Ridge Associates (Wexford Ridge) on December 31, 1997 when the notes
matured and were not paid. The default amount included principal and accrued
interest of $1,900,000 and $3,478,549, respectively. The Managing General
Partner has successfully negotiated an extension on one of the purchase money
notes (the "First Wexford Note") in the principal amount of $950,000 effective
April 9, 1998. In connection with the extension agreement, the Partnership made
interest payments totaling $350,000 to the purchase money noteholder. Under the
terms of the extension agreement, the maturity date will be January 5, 2001.
Additionally, the Partnership has the right and option, but not the obligation,
to extend the maturity date to January 5, 2002 by making a payment to the
-10-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
purchase money noteholder in the amount of $200,000 on or before January 5,
2000. Such $200,000 payment shall be applied to accrued interest. The
Partnership, if it exercises this option to further extend the maturity date,
shall thereafter have the option to purchase the purchase money note for
$150,000 if it gives notice of such exercise by January 5, 2001.
As of August 10, 1998, principal and accrued interest due to the holder of
the second and third purchase money notes (collectively, the "Second Wexford
Notes") totaling $950,000 and $1,816,764, respectively, remain unpaid and
unextended. On April 7, 1998, the Partnership was served with a complaint by
the holder of the Second Wexford Notes filing suit against the Partnership, the
Managing General Partner and CRHC, Incorporated (CRHC), an affiliate of the
Managing General Partner, for damages and seeking foreclosure on the
Partnership's interest in the Local Partnership. As of July 29, 1998, the
parties agreed to a settlement which involves a discounted payoff to the holder
of the Second Wexford Notes, subject to the Partnership's satisfaction with the
results of its due diligence. In connection with this settlement, the Local
General Partner would withdraw from the Local Partnership, and the property
management agent, which is an affiliate of the Local General Partner, will
terminate one hundred eighty days after the closing, which is presently
scheduled for October 5, 1998. Further, the Partnership would receive the
interests of the Local General Partner and its affiliates in the First Wexford
Note, which is approximately 5%. The Partnership has the right to terminate the
agreement no later than September 28, 1998, in which case the parties will
extend the maturity date of the Second Wexford Notes to January 31, 2000, and
the Partnership and CRHC will grant the holder thereof the option, effective
January 1, 1999 through June 30, 1999, to purchase the interests of the
Partnership and CRHC in the Local Partnership for the outstanding balance on the
Second Wexford Notes. As part of the settlement agreement, on July 29, 1998,
the Partnership put in escrow $125,000 to be applied against the principal
balance of the Second Wexford Notes should there be a default.
The Managing General Partner and the local managing general partner are
individually exploring various options to refinance the U. S. Department of
Housing and Urban Development (HUD) Section 236 interest rate subsidized
mortgage loan related to Wexford Ridge. Additionally, the Managing General
Partner commissioned a rental market study and is evaluating the feasibility of
converting the property to market-rate. No conclusion has been reached as of
August 10, 1998. A refinancing cannot be obtained until the litigation
involving the holder of the Second Wexford Note is settled, as discussed above.
Accordingly, there is no assurance that the property will be converted nor is
there any assurance that a refinancing of the mortgage loan will occur.
Combined Local Partnerships
---------------------------
Following are combined statements of operations for the twenty Local
Partnerships in which the Partnership had invested as of both June 30, 1998 and
1997. The 1997 statements of operations contain information on Tanglewood II
and Deer Grove through the respective dates of sale. The statements are
compiled from information supplied by the management agents of the projects and
are unaudited.
-11-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rental revenue $ 6,398,236 $ 6,253,627 $ 12,799,363 $ 13,594,722
Other 308,779 313,280 604,994 647,542
------------ ------------ ------------ ------------
Total revenue 6,707,015 6,566,907 13,404,357 14,242,264
------------ ------------ ------------ ------------
Expenses:
Operating 4,167,496 4,169,260 8,480,613 9,267,902
Interest 1,752,419 1,626,408 3,504,835 3,693,568
Depreciation and amortization 1,241,976 1,206,743 2,483,957 2,579,264
------------ ------------ ------------ ------------
Total expenses 7,161,891 7,002,411 14,469,405 15,540,734
------------ ------------ ------------ ------------
Net loss $ (454,876) $ (435,504) $ (1,065,048) $(1,298,470)
============ ============ ============ ============
</TABLE>
As of June 30, 1998 and December 31, 1997, the Partnership's share of
cumulative losses to date for twelve of the twenty Local Partnerships exceeded
the amount of the Partnership's investments in and advances to those Local
Partnerships by $24,511,603 and $23,324,214, 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
President Clinton signed the Fiscal Year 1998 HUD appropriations bill into
law, effective October 1, 1997. The new legislation allows all Section 8 HAP
contracts with rents at less than 120% of fair market rents which expire between
now and September 1998 to be renewed for one year. In the event that these
rents exceed 120% of fair market rents, these rents will be reduced to 120% of
fair market rents. At the beginning of Fiscal Year 1999 (October 1, 1998), all
expiring contracts with rents exceeding comparable market rents and whose
mortgages are insured by the Federal Housing Administration (FHA) will be
subject to the Mark-to-Market legislation.
Mark-to-Market implementation will reduce rental income at properties which
are currently subsidized at higher-than-market rental rates, and will therefore
lower cash flow available to meet mortgage payments and operating expenses.
Each affected property will undergo debt restructuring according to terms
determined by an individual property and operations evaluation. This will
-12-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. AFFORDABLE HOUSING LEGISLATION - Continued
involve reducing the first mortgage loan balance to an amount supportable by the
property, taking into account the property's operating expenses and reduced
income. The balance of the amount written down from the first mortgage will be
converted to a non-performing but accruing (soft) second mortgage.
The Section 8 HAP contracts for the following properties expire during the
government's Fiscal Year 1998.
-13-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. AFFORDABLE HOUSING LEGISLATION - Continued
<TABLE>
<CAPTION>
Units Authorized for
Number of Rental Assistance Under Expiration of Section 8
Property Rental Units Section 8 HAP Contract
- -------- ------------ ----------------------- -----------------------
<S> <C> <C> <C>
Beech Hill I 200 39 08/31/98 (1)
Beech Hill II 120 24 08/31/98 (1)
Chevy Chase Park 232 228 03/23/98
Four Winds West 62 62 04/14/98
Princeton Community Village 239 26 07/01/98
Wexford Ridge 246 242 09/30/98
</TABLE>
(1) As discussed previously, the Partnership's interests in these Local
Partnerships were held in escrow to be transferred to the purchase
money noteholders, at their election, due to non-payment on the
related purchase money notes.
With the uncertainty of continued project-based Section 8 subsidies for
properties with expiring HAP contracts, there is no assurance that these rental
properties will be able to maintain the rental income and occupancy levels
necessary to pay operating costs and debt service. It is difficult to predict
the impact on the Local Partnerships and the resulting impact on the Partnership
at this time.
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 $72,416 and $107,028 for the
three and six months ended June 30, 1998, respectively and $43,284 and $72,353
for the three and six months ended June 30, 1997, respectively, as direct
reimbursement of expenses incurred on behalf of the Partnership. Such expenses
are included in the statements of operations as general and administrative
expenses. Additionally, the Partnership is obligated to pay an annual incentive
management fee (the Management Fee) after all other expenses of the Partnership
are paid. The Partnership paid the Managing General Partner a Management Fee of
$62,499 and $124,998 for the three and six months ended June 30, 1998,
respectively, and like amounts for the three and six months ended June 30, 1997,
respectively.
-14-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Capital Realty Investors-II Limited Partnership'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
-------
Some of the rental properties owned by the Local Partnerships are financed
by state housing agencies. The Managing General Partner has been working to
develop strategies to sell or refinance certain properties pursuant to programs
developed by these agencies or other potential buyers. These programs may
include opportunities to sell the property to a qualifying purchaser who would
agree to maintain the property as low to moderate income housing in perpetuity,
or to refinance a property, or to obtain supplemental financing. The Managing
General Partner continues to monitor certain state housing agency programs
and/or programs sponsored by certain lenders, to ascertain whether the
properties would qualify within the parameters of a given program and whether
these programs would provide an appropriate economic benefit to the limited
partners of the Partnership.
Some of the rental properties owned by the Local Partnerships are dependent
on the receipt of project-based rental Housing Assistance Payments (HAP)
provided by the U.S. Department of Housing and Urban Development (HUD) pursuant
to Section 8 HAP contracts. President Clinton signed the Fiscal Year 1998 HUD
appropriations bill into law, effective October 1, 1997. The new legislation
allows all Section 8 contracts with rents at less than 120% of fair market rents
which expire between now and September 1998 to be renewed for one year. In the
event that these rents exceed 120% of fair market rents, the rents will be
reduced to 120% of fair market rents. At the beginning of Fiscal Year 1999
(October 1, 1998), all expiring contracts with rents exceeding comparable market
rents and whose mortgages are insured by the Federal Housing Administration
(FHA) will be subject to the Mark-to-Market legislation.
Mark-to-Market implementation will reduce rental income at properties which
are currently subsidized at higher-than-market rental rates, and will therefore
lower cash flow available to meet mortgage payments and operating expenses.
Each affected property will undergo debt restructuring according to terms
determined by an individual property and operations evaluation. This will
involve reducing the first mortgage loan balance to an amount supportable by the
property, taking into account the property's operating expenses and reduced
income. The balance of the amount written down from the first mortgage will be
converted to a non-performing but accruing (soft) second mortgage.
Under current law, the write down of an FHA-insured mortgage under Mark-to
Market would trigger cancellation of debt income to the additional limited
partners, a taxable event, even though no actual cash is received.
Additionally, the newly created second mortgage may accrue interest at a lower-
than-market rate, thereby generating further taxable "income." Proposals to
counter these tax effects have been presented; however, no form of relief has
been approved under IRS regulations at this time. Each property subject to
-15-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Mark-to-Market will be affected in a different manner, and it is very difficult
to predict the exact form of restructuring or potential tax liabilities to the
additional limited partners at this time.
The Managing General Partner is considering new strategies to deal with the
ever changing environment of affordable housing policy. The mortgage loans on
Section 236 and Section 221(d)(3) properties that are in the 18th year of their
mortgage may be eligible for pre-payment. Properties with expiring Section 8
HAP contracts may become convertible to market-rate apartment properties.
Currently, there are a few lenders that will provide financing either to prepay
the existing mortgage or provide additional funds to allow the property to
convert to market-rate units. Where opportunities exist, the Managing General
Partner will continue to work with the Local Partnerships to develop strategies
that make economic sense for all parties involved.
Financial Condition/Liquidity
-----------------------------
The Partnership's liquidity, with unrestricted cash resources of
$12,726,539 (or approximately $246.89 per Additional Limited Partner unit) and
$7,969,815 (or approximately $154.61 per Additional Limited Partner unit) as of
June 30, 1998 and December 31, 1997, respectively, along with anticipated future
cash distributions from the Local Partnerships, is expected to meet its current
and anticipated operating cash needs. However, see the discussion below
regarding the upcoming maturity of many of the Partnership's purchase money
notes.
The Partnership's obligations with respect to its investments in Local
Partnerships, in the form of purchase money notes having a principal balance of
$18,847,678 (exclusive of unamortized discount on purchase money notes of
$744,032) plus accrued interest of $31,050,913 as of June 30, 1998, are payable
in full 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 $1,050,000 matured on December 31, 1996, and have
been extended to January 2, 2000, as discussed below. Purchase money notes in
the aggregate principal amounts of $1,050,000, $1,900,000, $2,380,000, and
$3,150,000 matured on December 31, 1996, December 31, 1997, January 1, 1998 and
June 1, 1998, respectively, and have not been paid or extended. Purchase money
notes in the aggregate principal amounts of $6,527,500, $1,450,000 and
$1,340,178 mature on August 31, 1998, September 1, 1998, and January 1, 1999,
respectively, as discussed in the notes to the consolidated financial
-16-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
statements. The remaining purchase money notes mature in 2000. See the notes
to the financial statements for additional information pertaining to these
purchase money notes.
The purchase money notes are generally secured by the Partnership's
interest in the respective Local Partnerships. There is no assurance that the
underlying properties will have sufficient appreciation and equity to enable the
Partnership to pay the outstanding principal of, and accrued interest on, the
purchase money notes. 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 Partnership's inability to pay certain of the purchase money note principal
and accrued interest balances when due, and the resulting uncertainty regarding
the Partnership's continued ownership interest in the related Local
Partnerships, does not impact the Partnership's financial condition because the
purchase money notes are nonrecourse and secured solely by the Partnership's
interest in the related Local Partnerships. Therefore, should the investment in
any of the Local Partnerships with maturing purchase money notes not produce
sufficient value to satisfy the related purchase money notes, the Partnership's
exposure to loss is limited because the amount of the nonrecourse indebtedness
of each of the maturing purchase money notes exceeds the carrying amount of the
investment in and advances to each of the related Local Partnerships. Thus,
even a complete loss of one of these Local Partnerships would not have a
material impact on the financial condition of the Partnership.
The Managing General Partner is continuing to investigate possible
alternatives to reduce the Partnership's 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 or buy down certain purchase money
note obligations. See the notes to the financial statements for alternatives
relating to specific properties.
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, 1998 and 1997, receipt of distributions from
Local Partnerships were adequate to support operating cash requirements.
Results of Operations
---------------------
The Partnership recognized net income for the three months ended June 30,
1998 as opposed to net loss during the corresponding period in 1997 primarily
due to the receipt of proceeds from the refinancing of the first mortgages of
Arrowhead and Moorings during the second quarter of 1998. Contributing to the
increase in the Partnership's net income was a decrease in interest expense due
to lower amortization of imputed interest primarily due to the retirement of the
purchase money note related to the Tanglewood II sale in 1997 and a decrease in
professional fees due to legal costs incurred for litigation involving Arrowhead
and Moorings in 1997.
The Partnership's net income for the six months ended June 30, 1998
decreased over the corresponding period in 1997 primarily due to a gain on
disposition of investment in partnership and an extraordinary gain from
-17-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
extinguishment of debt related to the Tanglewood II and Deer Grove sales in
1997. Partially offsetting the decrease in the Partnership's net income was an
increase in share of income from partnerships, a decrease in interest expense
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, 1998 did not include losses of $593,692 and $1,187,389, respectively,
compared to excluded losses of $668,950 and $1,594,333, respectively, for the
three and six months ended June 30, 1997.
No other significant changes in the Partnership's operations have taken
place during this period.
Year 2000 Computer Issue
------------------------
The Year 2000 ("Y2K") computer issue refers to the inability of many
computer systems in use today to recognize "00" in the date field as the year
2000 and to recognize the year 2000 as a leap year. The Y2K problem arose
because, for many years, computer software programs, including programs embedded
in hardware, utilized only the last two digits to specify the year with the
assumption that the first two digits were "19." As a result, such programs may
not be able to recognize and process dates beyond 1999; rather they may
recognize and process "00," "01," "02,", etc. incorrectly as 1900, 1901, 1902,
instead of as 2000, 2001, 2002. In the opinion of computer experts, this could
cause such programs to create erroneous results, malfunction, or fail completely
unless corrective measures are taken.
The Partnership utilizes software and related computer technologies
essential to its operations that will be affected by the Y2K issue. The
Managing General Partner is studying what actions will be necessary to make its
computer systems Y2K compliant; certain upgrades are already scheduled. The
expense associated with these actions cannot presently be determined, but the
Managing General Partner does not expect it to be
material.
-18-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
Beech Hill I and II
-------------------
The Partnership defaulted on its purchase money notes aggregating
$2,380,000 related to Beech Hill Development Co. (Beech Hill I) and Beech Hill
Development Co. II (Beech Hill II) on August 1, 1995 when the notes matured and
were not paid. On March 29, 1996, the noteholders agreed to extend the purchase
money note due dates to January 1, 1998. Under the agreement, the Partnership
pays the purchase money noteholders of Beech Hill I and Beech Hill II all annual
cash flow distributions received from the related Local Partnerships in excess
of $5,000 and $2,500, respectively. There were no annual cash flow
distributions made to the Partnership from the related Local Partnerships during
the three months ended June 30, 1998 and 1997.
Under the extension agreement, documents transferring the Partnership's
interests in Beech Hill I and Beech Hill II to the noteholders were placed in
escrow to be released to the noteholders upon a future default by the
Partnership on the respective purchase money notes. On January 1, 1998, the
Partnership defaulted on its purchase money notes related to Beech Hill I and
Beech Hill II when the notes matured and were not paid. The default amount
included principal and accrued interest of $1,480,000 and $1,687,578,
respectively, for Beech Hill I and $900,000 and $1,072,113, respectively, for
Beech Hill II. As of August 10, 1998, the Partnership's interests in Beech Hill
I and Beech Hill II have not been transferred to the purchase money noteholders,
and the transfer documents remain in escrow. As of August 10, 1998, principal
and accrued interest totaling $1,480,000 and $1,766,038, respectively, related
to Beech Hill I and $900,000 and $1,119,825, respectively, related to Beech Hill
II were due.
Due to the impending likely transfer of the Partnership's interest in the
Local Partnerships to the purchase money noteholders, the Partnership's basis in
these Local Partnerships as of June 30, 1998, which was $521,591 and $398,994
for Beech Hill I and Beech Hill II, respectively, was classified as partnership
interests held in escrow in the accompanying financial statements.
The purchase money notes related to Beech Hill I and Beech Hill II are
nonrecourse and secured solely by the Partnership's interests in the related
Local Partnerships. The release of the Partnership's purchase money note
obligation as a result of the impending likely loss of ownership interest in the
Local Partnerships will result in a net financial statement gain of
approximately $2.7 million and $1.6 million for Beech Hill I and Beech Hill II,
respectively, during 1998. The federal tax gains are estimated to be
approximately $4.7 million and $3.0 million for Beech Hill I and Beech Hill II,
respectively.
Chevy Chase
-----------
The Partnership defaulted on its two purchase money notes relating to Chevy
Chase Park, Limited (Chevy Chase) on December 31, 1996 when the notes matured
and were not paid. The default amount included principal and accrued interest
of $2,100,000 and $3,553,912, respectively. The Managing General Partner has
successfully negotiated an extension on one of the purchase money notes (the
"First Chase Note") in the principal amount of $1,050,000 effective December 1,
1997. In connection with the extension agreement, the Partnership made interest
payments totaling $425,000 to the purchase money noteholder. Under the terms of
the extension agreement, the maturity date will be January 2, 2000.
Additionally, the Partnership has the right and option, but not the obligation,
to extend the maturity date to January 5, 2001 by making a payment to the
-19-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Continued
-------------------------------
purchase money noteholder in the amount of $275,000 on or before January 2,
1999. Such $275,000 payment shall be applied to accrued interest. The
Partnership, if it exercises this option to further extend the maturity date,
shall thereafter have the option to purchase the purchase money note for
$250,000 if it gives notice of such exercise by January 5, 2000.
As of August 10, 1998, principal and accrued interest due to the holders of
the second purchase money note (the "Second Chase Note") totaling $1,050,000 and
$2,008,003, respectively, remain unpaid and unextended. On February 10, 1998,
the Partnership was served with a complaint by the two holders of the Second
Chase Note filing suit against the Partnership, the Managing General Partner and
CRHC, Incorporated (CRHC), an affiliate of the Managing General Partner, for
damages and seeking foreclosure on the Partnership's interest in the Local
Partnership. As of July 29, 1998, the parties agreed to a settlement which
involves a discounted payoff to the holders of the Second Chase Note, subject to
the Partnership's satisfaction with the results of its due diligence. In
connection with this settlement, the Local General Partner would withdraw from
the Local Partnership, and the property management agent, which is an affiliate
of the Local General Partner, will terminate one hundred eighty days after the
closing, which is presently scheduled for October 5, 1998. Further, the
Partnership would receive the interests of the Local General Partner and its
affiliates in the First Chase Note, which is approximately 5%. The Partnership
has the right to terminate the agreement no later than September 28, 1998, in
which case the parties will extend the maturity date of the Second Chase Note to
January 31, 2000, and the Partnership and CRHC will grant the holders thereof
the option, effective January 1, 1999 through June 30, 1999, to purchase the
interests of the Partnership and CRHC in the Local Partnership for the
outstanding balance on the Second Chase Note. As part of the settlement
agreement, on July 29, 1998, the Partnership put in escrow $125,000 to be
applied against the principal balance of the Second Chase Note should there be a
default.
The Managing General Partner and the local managing general partner are
individually exploring various options to refinance the U. S. Department of
Housing and Urban Development (HUD) Section 236 interest rate subsidized
mortgage loan related to Chevy Chase. Additionally, the Managing General
Partner commissioned a rental market study and is evaluating the feasibility of
converting the property to market-rate. No conclusion has been reached as of
August 10, 1998. A refinancing cannot be obtained until the litigation
involving the two holders of the Second Chase Note is settled, as discussed
above. Accordingly, there is no assurance that the property will be converted,
nor is there any assurance that a refinancing of the mortgage loan will occur.
-20-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Continued
-------------------------------
Frenchman's Wharf II
--------------------
The Partnership defaulted on its purchase money notes related to
Frenchman's Wharf Associates II Limited Partnership (Frenchman's Wharf II) on
June 1, 1998 when the notes matured and were not paid. The default included
principal and accrued interest of $3,150,000 and $5,071,731, respectively. The
purchase money notes, initially due to mature on June 1, 1988, were extended to
mature on June 1, 1998. As of August 10, 1998, principal and accrued interest
totaling $3,150,000 and $5,131,537, respectively, were due. In conjunction with
the four-year workout agreement for the Local Partnership's mortgage loan, the
Partnership is currently negotiating with the purchase money noteholders to
extend the notes to be coterminous with the workout arrangement, which is
scheduled to expire on May 31, 2000. As of August 10, 1998, the noteholders had
not consented to an extension agreement and there is no assurance that any
agreement will be reached with the noteholders. There is no assurance that the
Partnership will be able to retain its interest in Frenchman's Wharf II. The
uncertainty regarding the continued ownership of the Partnership's interest in
Frenchman's Wharf II does not impact the Partnership's financial condition, as
discussed above.
The report of the auditors on the financial statements of Frenchman's Wharf
II for the year ended December 31, 1997 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 Rental Housing Assistance Payments (HAP) contract with HUD on November
30, 1998. The uncertainty about the Local Partnership's continued ownership of
the property does not impact the Partnership's financial condition, as discussed
above.
Wexford Ridge
-------------
The Partnership defaulted on its two purchase money notes relating to
Wexford Ridge Associates (Wexford Ridge) on December 31, 1997 when the notes
matured and were not paid. The default amount included principal and accrued
interest of $1,900,000 and $3,478,549, respectively. The Managing General
Partner has successfully negotiated an extension on one of the purchase money
notes (the "First Wexford Note") in the principal amount of $950,000 effective
April 9, 1998. In connection with the extension agreement, the Partnership made
interest payments totaling $350,000 to the purchase money noteholder. Under the
terms of the extension agreement, the maturity date will be January 5, 2001.
Additionally, the Partnership has the right and option, but not the obligation,
to extend the maturity date to January 5, 2002 by making a payment to the
purchase money noteholder in the amount of $200,000 on or before January 5,
2000. Such $200,000 payment shall be applied to accrued interest. The
Partnership, if it exercises this option to further extend the maturity date,
shall thereafter have the option to purchase the purchase money note for
$150,000 if it gives notice of such exercise by January 5, 2001.
As of August 10, 1998, principal and accrued interest due to the holder of
the second and third purchase money notes (collectively, the "Second Wexford
Notes") totaling $950,000 and $1,816,764, respectively, remain unpaid and
unextended. On April 7, 1998, the Partnership was served with a complaint by
the holder of the Second Wexford Notes filing suit against the Partnership, the
Managing General Partner and CRHC, Incorporated (CRHC), an affiliate of the
Managing General Partner, for damages and seeking foreclosure on the
Partnership's interest in the Local Partnership. As of July 29, 1998, the
-21-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Continued
-------------------------------
parties agreed to a settlement which involves a discounted payoff to the holder
of the Second Wexford Notes, subject to the Partnership's satisfaction with the
results of its due diligence. In connection with this settlement, the Local
General Partner would withdraw from the Local Partnership, and the property
management agent, which is an affiliate of the Local General Partner, will
terminate one hundred eighty days after the closing, which is presently
scheduled for October 5, 1998. Further, the Partnership would receive the
interests of the Local General Partner and its affiliates in the First Wexford
Note, which is approximately 5%. The Partnership has the right to terminate the
agreement no later than September 28, 1998, in which case the parties will
extend the maturity date of the Second Wexford Notes to January 31, 2000, and
the Partnership and CRHC will grant the holder thereof the option, effective
January 1, 1999 through June 30, 1999, to purchase the interests of the
Partnership and CRHC in the Local Partnership for the outstanding balance on the
Second Wexford Notes. As part of the settlement agreement, on July 29, 1998,
the Partnership put in escrow $125,000 to be applied against the principal
balance of the Second Wexford Notes should there be a default.
The Managing General Partner and the local managing general partner are
individually exploring various options to refinance the U. S. Department of
Housing and Urban Development (HUD) Section 236 interest rate subsidized
mortgage loan related to Wexford Ridge. Additionally, the Managing General
Partner commissioned a rental market study and is evaluating the feasibility of
converting the property to market-rate. No conclusion has been reached as of
August 10, 1998. A refinancing cannot be obtained until the litigation
involving the holder of the Second Wexford Note is settled, as discussed above.
Accordingly, there is no assurance that the property will be converted nor is
there any assurance that a refinancing of the mortgage loan will occur.
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, 1998.
All other items are not applicable.
-22-
<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-II LIMITED PARTNERSHIP
-----------------------------------------------
(Registrant)
by: C.R.I., Inc.
-------------------------------------------
Managing General Partner
August 10, 1998 by: /s/ Michael J. Tuszka
- --------------- ---------------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
and Principal Accounting Officer)
-23-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
-24-
<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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 12,726,539
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 18,492,845
<CURRENT-LIABILITIES> 0
<BONDS> 49,154,559
0
0
<COMMON> 0
<OTHER-SE> (30,782,213)
<TOTAL-LIABILITY-AND-EQUITY> 18,492,845
<SALES> 0
<TOTAL-REVENUES> 4,730,422
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 346,170
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,927,906
<INCOME-PRETAX> 2,456,346
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,456,346
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,456,346
<EPS-PRIMARY> 47.65
<EPS-DILUTED> 47.65
</TABLE>
