<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 March 31, 1998
--------------
Commission file number 0-11973
-------------
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
- --------------------------------------------------------------------------
(Exact name of small business issuer as specified in its 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 offices) (Zip Code)
(301) 468-9200
- -------------------------------------------------------------------------
(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 March 31, 1998)
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
INDEX TO FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 1998
PAGE
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Balance Sheets - March 31, 1998 and
December 31, 1997 . . . . . . . . . . . . . 1
Statements of Operations - for the three
months ended March 31, 1998 and 1997 . . . 2
Statements of Cash Flows - for the three
months ended March 31, 1998 and 1997 . . . 3
Notes to Financial Statements . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . 14
PART II. Other Information
Item 3. Defaults Upon Senior Securities . . . . . . . 18
Item 6. Exhibits and Reports on Form 8-K . . . . . . 21
Signature . . . . . . . . . . . . . . . . . . . . . . 22
Exhibit Index . . . . . . . . . . . . . . . . . . . . . 23
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 4,025,853 $ 4,737,362
Partnership interests held in escrow 918,181 917,927
Cash and cash equivalents 8,714,529 7,969,815
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $396,269 and $388,811, respectively 426,029 432,876
Property purchase costs, net of accumulated amortization of
$258,640 and $253,580, respectively 293,426 298,022
Other assets 16,374 91,028
------------ ------------
Total assets $ 14,394,392 $ 14,447,030
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 17,731,630 $ 17,359,614
Accrued interest payable 30,837,479 30,245,542
Accounts payable and accrued expenses 86,898 80,433
------------ ------------
Total liabilities 48,656,007 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 (76,745,923) (75,722,867)
------------ ------------
Total partners' deficit (34,261,615) (33,238,559)
------------ ------------
Total liabilities and partners' deficit $ 14,394,392 $ 14,447,030
============ ============
</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
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Share of (loss) income from partnerships $ (2,620) $ 81,263
------------ ------------
Other revenue and expenses:
Revenue:
Interest and other income 100,579 33,594
------------ ------------
Expenses:
Interest 963,953 1,381,941
Management fee 62,499 62,499
General and administrative 53,017 42,859
Professional fees 29,028 42,818
Amortization 12,518 12,518
------------ ------------
1,121,015 1,542,635
------------ ------------
Total other revenue and expenses (1,020,436) (1,509,041)
------------ ------------
Loss before gain on disposition of investment in partnership (1,023,056) (1,427,778)
Gain on disposition of investment in partnership -- 4,884,657
------------ ------------
(Loss) income before extraordinary gain from extinguishment of debt (1,023,056) 3,456,879
Extraordinary gain from extinguishment of debt -- 1,653,096
------------ ------------
Net (loss) income (1,023,056) 5,109,975
Accumulated losses, beginning of period (75,722,867) (79,400,807)
------------ ------------
Accumulated losses, end of period $(76,745,923) $(74,290,832)
============ ============
(Loss) income allocated to General Partners (1.51%) $ (15,448) $ 77,161
============ ============
(Loss) income allocated to Initial and Special Limited Partners (1.49%) $ (15,244) $ 76,138
============ ============
(Loss) income allocated to Additional Limited Partners (97%) $ (992,364) $ 4,956,676
============ ============
(Loss) income per unit of Additional Limited Partnership Interest
based on 50,000 units outstanding $ (19.85) $ 99.13
============ ============
</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 CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (1,023,056) $ 5,109,975
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Share of loss (income) from partnerships 2,620 (81,263)
Amortization of deferred costs 12,518 12,518
Amortization of discount on purchase money notes 372,016 768,749
Extraordinary gain on extinguishment of debt -- (1,653,096)
Gain on disposition of investment in partnership -- (4,884,657)
Changes in assets and liabilities:
Decrease (increase) in other assets 74,654 (38,318)
Increase in accrued interest payable 591,937 613,192
Increase in accounts payable and accrued expenses 6,465 17,073
------------ ------------
Net cash provided by (used in) operating activities 37,154 (135,827)
------------ ------------
Cash flows from investing activities:
Receipt of distributions from partnerships 735,560 188,952
Proceeds from disposition of investment in partnership -- 5,673,915
Advances made to local partnerships (28,000) --
------------ ------------
Net cash provided by investing activities 707,560 5,862,867
------------ ------------
Cash flows used in financing activities:
Pay-off of purchase money note and related interest -- (1,385,154)
------------ ------------
Net increase in cash and cash equivalents 744,714 4,341,886
Cash and cash equivalents, beginning of period 7,969,815 2,128,849
------------ ------------
Cash and cash equivalents, end of period $ 8,714,529 $ 6,470,735
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ -- $ 92,154
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-3-
<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 March 31, 1998, and the results of its operations and its cash flows for the
three months ended March 31, 1998 and 1997. The results of operations for the
interim period ended March 31, 1998, are not necessarily indicative of the
results to be expected for the full year.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles and with the
instructions to Form 10-QSB. Certain information and accounting policies and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such instructions. These condensed financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Partnership's annual report on Form 10-K at December 31, 1997.
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
The Partnership'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
$1,116,048) plus accrued interest of $30,837,479 as of March 31, 1998, are
payable in full upon the earliest of: (i) sale or refinancing of the respective
Local Partnership's rental property; (ii) payment in full of the respective
Local Partnership's permanent loan; or (iii) 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 an aggregate principal amount of $1,050,000 and $1,900,000 matured on
December 31, 1996 and December 31, 1997, respectively, and have not been paid or
extended, as discussed below. Purchase money notes in an aggregate principal
amount of $2,380,000 matured on January 1, 1998 and were not paid or extended,
as discussed below. Purchase money notes in an aggregate principal amount of
$3,150,000, $6,527,500, $1,450,000 and $1,340,178 mature on June 1, 1998,
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 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 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
-4-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
loss is limited because the amount of the nonrecourse indebtedness of each of
the maturing purchase money notes exceeds the carrying amount of the investment
in and advances to the related Local Partnerships. Thus, even a complete loss
of one 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
$1,381,941 for the three months ended March 31, 1998 and 1997, respectively.
Amortization of the imputed interest on purchase money notes increased interest
expense during the three months ended March 31, 1998 and 1997 by $372,016 and
$768,749, respectively. The accrued interest on the purchase money notes of
$30,837,479 and $30,245,542 as of March 31, 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 March 31, 1998 and December 31, 1997, the Partnership had advanced
funds to Local Partnerships totaling $352,410 and $324,410, respectively.
Arrowhead and Moorings
-----------------------
The local managing general partner of Arrowhead Apartments Associates
Limited Partnership (Arrowhead) and Moorings Apartments Associates Limited
Partnership (Moorings) has submitted an application to refinance the first
mortgages of the Local Partnerships. 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 loan refinancings closed on
May 14, 1998. It is anticipated that the proceeds from these refinancings
will be used to pay purchase money note and surplus cash note obligations
of the related Local Partnerships.
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 March 31, 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
-5-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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 May 15, 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 May 15, 1998, principal and
interest totaling $1,480,000 and $1,734,289, respectively, related to Beech Hill
I and $900,000 and $1,100,518, 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 March 31, 1998, which was $524,897 and $393,284
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
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 May 15, 1998, principal and accrued interest due to the holders of
the second purchase money note (the "Second Chase Note") totaling $1,050,000 and
$1,973,205, 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. The Managing General Partner is presently negotiating a settlement
with these noteholders, however, there is no assurance that settlement will be
reached and that the Partnership will be able to retain its interest in Chevy
Chase. Pursuant to the First Chase Note extension agreement, this attempted
-6-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
exercise of remedies by the holders of the Second Chase Note is a default under
the First Chase Note. However, if the litigation is terminated or stayed, or if
the remedy of the holders of the Second Chase Note is limited to one-half of the
collateral securing the purchase money note (which is the Partnership's interest
in Chevy Chase), such action will be deemed not to be a default under the First
Chase Note. The uncertainty regarding the continued ownership of the
Partnership's interest in Chevy Chase does not impact the Partnership's
financial condition, as discussed above. Furthermore, since the purchase money
notes are nonrecourse, it is the opinion of the Managing General Partner that it
is very unlikely that the holders of the Second Chase Note would receive any
award of damages against the Partnership as a result of this suit. As noted
above, as of May 15, 1998, settlement discussions were in process which would
involve a discounted payoff to the holders of the Second Chase Note. As a
provision of this settlement, the local managing general partner would withdraw
from the Local Partnership. In the event that this proposed settlement is
reached, the new local managing general partner, which would be an affiliate of
the Managing General Partner, would continue to pursue financing alternatives to
convert the property from subsidized use to market rate, as discussed below.
If settlement discussions are not successful, the Managing General Partner
intends to vigorously defend against this action.
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
May 15, 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
purchase money notes are currently due to mature on January 1, 1999. There is
no assurance that an extension will be obtained.
-7-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Frenchman's Wharf II
--------------------
The purchase money notes related to Frenchman's Wharf Associates II Limited
Partnership (Frenchman's Wharf II) in the principal amount of $3,150,000,
initially due to mature on June 1, 1988, were extended to mature on June 1,
1998. 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 May
11, 1998, the noteholders had not consented to an extension agreement and there
is no assurance that any agreement will be reached with the noteholders. Should
the Partnership default on these notes, 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) have reached
a tentative agreement to refinance the property's mortgage loan. If successful,
this refinancing would result in a discounted payoff of the Local Partnership's
current mortgage and would also result in lower monthly debt service payments
for the property. It is anticipated that the refinancing may occur by June 30,
1998. There is, however, no assurance that a refinancing will occur. The
Partnership may loan the Local Partnership an estimated $360,000 to close on
such refinancing.
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
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
-8-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
signed a term sheet to restructure the purchase money notes, and as of May 11,
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 Managing General Partner has requested a five year extension with
respect to this purchase money note. As of May 11, 1998, the Managing General
Partner had not received a response from the noteholders. There is no assurance
that the Managing General Partner will reach an agreement of any kind with the
noteholders. 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
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,
-9-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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 May 15, 1998, principal and accrued interest due to the holder of the
second purchase money note (the "Second Wexford Note") totaling $950,000 and
$1,787,570, respectively, remain unpaid and unextended. On April 7, 1998, the
Partnership was served with a complaint by the holder of the Second Wexford 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.
The Managing General Partner is presently negotiating a settlement with this
noteholder, however, there is no assurance that settlement will be reached and
that the Partnership will be able to retain its interest in Wexford Ridge.
Pursuant to the First Wexford Note extension agreement, this attempted exercise
of remedies by the holder of the Second Wexford Note is a default under the
First Wexford Note. However, if the litigation is terminated or stayed, or if
the remedy of the holder of the Second Wexford Note is limited to approximately
one-half of the collateral securing the purchase money note (which is the
Partnership's interest in Wexford Ridge), such action will be deemed not to be
a default under the First Wexford Note. The uncertainty regarding the
continued ownership of the Partnership's interest in Wexford Ridge does not
impact the Partnership's financial condition, as discussed above. Furthermore,
since the purchase money notes are nonrecourse, it is the opinion of the
Managing General Partner that it is very unlikely that the holder of the Second
Wexford Note would receive any award of damages against the Partnership as a
result of this suit. As noted above, as of May 15, 1998, settlement discussions
were in process which would involve a discounted payoff to the holder of the
Second Wexford Note. As a provision of this settlement, the local managing
general partner would withdraw from the Local Partnership. In the event that
this proposed settlement is reached, the new local managing general partner,
which would be an affiliate of the Managing General Partner, would continue to
pursue financing alternatives to convert the property from subsidized use to
market rate, as discussed below. If settlement discussions are not successful,
the Managing General Partner intends to vigorously defend against this action.
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
May 15, 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
---------------------------
The following are combined statements of operations for the twenty Local
Partnerships in which the Partnership had invested as of both March 31, 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.
-10-
<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
March 31,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenue:
Rental revenue $ 6,401,127 $ 7,341,095
Other 296,215 334,262
------------ ------------
6,697,342 7,675,357
------------ ------------
Expenses:
Operating 4,313,117 5,098,642
Interest 1,752,416 2,067,160
Depreciation and amortization 1,241,981 1,372,521
------------ ------------
7,307,514 8,538,323
------------ ------------
Net loss $ (610,172) $ (862,966)
============ ============
</TABLE>
As of March 31, 1998 and December 31, 1997, the Partnership's share of
cumulative losses to date for twelve of the twenty Local Partnerships exceeds
the amount of the Partnership's investments in and advances to those Local
Partnerships by $23,917,911 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 (or reduced to) less than 120% of fair market rents
which expire between now and September 1998 to be renewed for one year. 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
-11-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
3. AFFORDABLE HOUSING LEGISLATION - Continued
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.
-12-
<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 23 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 $34,612 and $29,069 for the
three months ended March 31, 1998 and 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 for each of the three-month periods ended March 31, 1998 and 1997.
-13-
<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 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 a 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 provided 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 (or reduced to) less than 120% of
fair market rents which expire between now and September 1998 to be renewed for
one year. 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
-14-
<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. Section 236 and Section
221(d)(3) properties that are in the 18th year of their mortgage may be eligible
for pre-payment of the mortgage. 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 $8,714,529
(or approximately $169.06 per Additional Limited Partner unit) and $7,969,815
(or approximately $154.61 per Additional Limited Partner unit) as of March 31,
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. The Managing General Partner anticipates that
several events, including a potential pay-off of the Chevy Chase and Wexford
purchase money notes and a potential loan to Posada Vallarta partially offset by
the excess proceeds received by the Partnership from the refinancings of
the mortgage loans related to Arrowhead and Moorings may require the net use
of approximately $3 million of unrestricted cash resources during the
second quarter of 1998.
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
$1,116,048) plus accrued interest of $30,837,479 as of March 31, 1998, are
payable in full upon the earliest of: (i) sale or refinancing of the respective
Local Partnership's rental property; (ii) payment in full of the respective
Local Partnership's permanent loan; or (iii) 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. Purchase money notes in an aggregate
principal amount of $1,050,000 and $1,900,000 matured on December 31, 1996 and
December 31, 1997, respectively, and have not been paid or extended. Purchase
money notes in an aggregate principal amount of $2,380,000 matured on January 1,
1998 and were not paid or extended. Purchase money notes in an aggregate
principal amount of $3,150,000, $6,527,500, $1,450,000 and $1,340,178 mature on
June 1, 1998, August 31, 1998, September 1, 1998, and January 1, 1999,
respectively. 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 purchase money notes' principal and accrued interest when
due. If a purchase money note is not paid in accordance with its terms, the
-15-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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 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 three months ended March 31, 1998 and 1997, receipt of distributions
from Local Partnerships were adequate to support operating cash requirements.
Results of Operations
---------------------
The Partnership incurred a net loss for the three months ended March 31,
1998 as opposed to net income during the corresponding period in 1997 primarily
due to the gain on disposition of investments related to the sales of Tanglewood
II and Deer Grove during 1997 and the extraordinary gain from extinguishment of
debt related to the Tanglewood II purchase money notes. Contributing to the
increase in the Partnership's net loss was a decrease in share of income from
partnerships due to increased maintenance and operating costs at two properties.
Partially offsetting the increase in the Partnership's net loss was a decrease
in interest expense due to the amortization of imputed interest and an increase
in interest and other income due to higher cash and cash equivalent balances.
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 months ended March
31, 1998 did not include losses of $593,697, compared to excluded losses of
$925,383 for the three months ended March 31, 1997.
No other significant changes in the Partnership's operations have taken
place during this period.
-16-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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.
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 March 31, 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 May 15, 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 May 15, 1998, principal and
interest totaling $1,480,000 and $1,734,289, respectively, related to Beech Hill
I and $900,000 and $1,100,518, respectively, related to Beech Hill II were due.
-17-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Continued
-------------------------------
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 March 31, 1998, which was $524,897 and $393,284
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
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 May 15, 1998, principal and accrued interest due to the holders of
the second purchase money note (the "Second Chase Note") totaling $1,050,000 and
$1,973,205, 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. The Managing General Partner is presently negotiating a settlement
with these noteholders, however, there is no assurance that settlement will be
reached and that the Partnership will be able to retain its interest in Chevy
Chase. Pursuant to the First Chase Note extension agreement, this attempted
exercise of remedies by the holders of the Second Chase Note is a default under
the First Chase Note. However, if the litigation is terminated or stayed, or if
the remedy of the holders of the Second Chase Note is limited to one-half of the
collateral securing the purchase money note (which is the Partnership's interest
in Chevy Chase), such action will be deemed not to be a default under the First
Chase Note. The uncertainty regarding the continued ownership of the
Partnership's interest in Chevy Chase does not impact the Partnership's
financial condition, as discussed above. Furthermore, since the purchase money
notes are nonrecourse, it is the opinion of the Managing General Partner that it
is very unlikely that the holders of the Second Chase Note would receive any
award of damages against the Partnership as a result of this suit. As noted
-18-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Continued
-------------------------------
above, as of May 15, 1998, settlement discussions were in process which would
involve a discounted payoff to the holders of the Second Chase Note. As a
provision of this settlement, the local managing general partner would withdraw
from the Local Partnership. In the event that this proposed settlement is
reached, the new local managing general partner, which would be an affiliate of
the Managing General Partner, would continue to pursue financing alternatives to
convert the property from subsidized use to market rate, as discussed below. If
settlement discussions are not successful, the Managing General Partner intends
to vigorously defend against this action.
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
May 15, 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.
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 May 15, 1998, principal and accrued interest due to the holder of the
second purchase money note (the "Second Wexford Note") totaling $950,000 and
$1,787,570, respectively, remain unpaid and unextended. On April 7, 1998, the
Partnership was served with a complaint by the holder of the Second Wexford 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.
The Managing General Partner is presently negotiating a settlement with this
noteholder, however, there is no assurance that settlement will be reached and
that the Partnership will be able to retain its interest in Wexford Ridge.
Pursuant to the First Wexford Note extension agreement, this attempted exercise
of remedies by the holder of the Second Wexford Note is a default under the
First Wexford Note. However, if the litigation is terminated or stayed, or if
the remedy of the holder of the Second Wexford Note is limited to approximately
one-half of the collateral securing the purchase money note (which is the
Partnership's interest in Wexford Ridge), such action will be deemed not to be
a default under the First Wexford Note. The uncertainty regarding the
continued ownership of
-19-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Continued
-------------------------------
the Partnership's interest in Wexford Ridge does not impact the Partnership's
financial condition, as discussed above. Furthermore, since the purchase money
notes are nonrecourse, it is the opinion of the Managing General Partner that it
is very unlikely that the holder of the Second Wexford Note would receive any
award of damages against the Partnership as a result of this suit. As noted
above, as of May 15, 1998, settlement discussions were in process which would
involve a discounted payoff to the holder of the Second Wexford Note. As a
provision of this settlement, the local managing general partner would withdraw
from the Local Partnership. In the event that this proposed settlement is
reached, the new local managing general partner, which would be an affiliate of
the Managing General Partner, would continue to pursue financing alternatives to
convert the property from subsidized use to market rate, as discussed below. If
settlement discussions are not successful, the Managing General Partner intends
to vigorously defend against this action.
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
May 15, 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 March 31, 1998.
All other items are not applicable.
-20-
<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
May 15, 1998 by: /s/ Michael J. Tuszka
- ----------------- ---------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
and Principal Accounting Officer)
-21-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
-22-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FIRST QUARTER 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 8,714,529
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,394,392
<CURRENT-LIABILITIES> 0
<BONDS> 48,569,109
0
0
<COMMON> 0
<OTHER-SE> (34,261,615)
<TOTAL-LIABILITY-AND-EQUITY> 14,394,392
<SALES> 0
<TOTAL-REVENUES> 97,959
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 157,062
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 963,953
<INCOME-PRETAX> (1,023,056)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,023,056)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,023,056)
<EPS-PRIMARY> (19.85)
<EPS-DILUTED> (19.85)
</TABLE>
