<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, 2000
--------------
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 June 30, 2000)
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
INDEX TO FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 2000
PAGE
----
PART I. Financial Information
Item 1. Financial Statements
Balance Sheets - June 30, 2000 and
December 31, 1999.................................... 1
Statements of Operations and Accumulated Losses
- for the three and six months ended
June 30, 2000 and 1999............................... 2
Statements of Cash Flows - for the six
months ended June 30, 2000 and 1999.................. 3
Notes to Financial Statements - June 30, 2000
and 1999............................................. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 20
PART II. Other Information
Item 3. Defaults Upon Senior Securities........................ 25
Item 5. Other Information...................................... 25
Item 6. Exhibits and Reports on Form 8-K....................... 26
Signature ....................................................... 27
Exhibit Index............................................................ 28
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships ..................... $ 838,211 $ 966,378
Investment in partnership held for sale ......................... 23,362 --
Cash and cash equivalents ....................................... 7,775,980 8,936,520
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $295,233 and $408,934, respectively 234,503 348,795
Property purchase costs, net of accumulated amortization of
$240,715 and $280,099, respectively ........................... 202,538 252,283
Other assets .................................................... 1,385 --
----------- -----------
Total assets ............................................... $ 9,075,979 $10,503,976
=========== ===========
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 4,920,000 $ 7,348,747
Accrued interest payable 9,008,708 22,374,877
Distribution payable - 1,622,237
Accounts payable and accrued expenses 84,138 127,692
------------ ------------
Total liabilities 14,012,846 31,473,553
------------ ------------
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 (6,072,409) (6,072,409)
Offering costs (5,278,980) (5,278,980)
Accumulated losses (43,602,478) (59,635,188)
------------ ------------
Total partners' deficit (4,936,867) (20,969,577)
------------ ------------
Total liabilities and partners' deficit $ 9,075,979 $ 10,503,976
============ ============
</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
AND ACCUMULATED LOSSES
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30 June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C>
Share of income from partnerships $ 17,401 $ 624,779 $ 669,661 $ 2,170,430
------------ ------------ ------------ ------------
Other revenue and expenses:
Revenue:
Interest and other income 116,312 112,055 223,845 189,237
------------ ------------ ------------ ------------
Expenses:
Interest 231,649 422,357 506,715 852,660
Management fee 62,499 62,499 124,998 124,998
General and administrative 58,414 54,234 111,575 116,855
Professional fees 28,182 11,877 53,463 31,225
Amortization of deferred costs 7,832 11,444 18,582 22,888
------------ ------------ ------------ ------------
388,576 562,411 815,333 1,148,626
------------ ------------ ------------ ------------
Total other revenue and expenses (272,264) (450,356) (591,488) (959,389)
------------ ------------ ------------ ------------
Income before gain on disposition of investments
in partnerships (254,863) 174,423 78,173 1,211,041
Gain on disposition of investments in partnerships 5,879,778 - 5,879,778 -
------------ ------------ ------------ ------------
Income before extraordinary gain
from extinguishment of debt 5,624,915 174,423 5,957,951 1,211,041
Extraordinary gain from extinguishment of debt 10,074,759 -- 10,074,759 524,994
------------ ------------ ------------ ------------
Net income 15,699,674 174,423 16,032,710 1,736,035
Accumulated losses, beginning of period (59,302,152) (71,152,075) (59,635,188) (72,713,687)
------------ ------------ ------------ ------------
Accumulated losses, end of period $(43,602,478) $(70,977,652) $(43,602,478) $(70,977,652)
============ ============ ============ ============
Net income allocated to General Partners (1.51%) $ 237,065 $ 2,634 $ 242,094 $ 26,214
============ ============ ============ ============
Net income allocated to Initial and Special
Limited Partners (1.49%) $ 233,925 $ 2,599 $ 238,887 $ 25,867
============ ============ ============ ============
Net income allocated to Additional Limited
Partners (97%) $ 15,228,684 $ 169,190 $ 15,551,729 $ 1,683,954
============ ============ ============ ============
Net income per unit of Additional Limited
Partner Interest based on 50,000 units
outstanding $ 304.57 $ 3.38 $ 311.03 $ 33.68
============ ============ ============ ============
</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 six months ended
June 30,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 16,032,710 $ 1,736,035
Adjustments to reconcile net income to net cash used in operating activities:
Share of income from partnerships (669,661) (2,170,430)
Amortization of deferred costs 18,582 22,888
Gain on disposition of investment in partnerships (5,879,778) --
Extraordinary gain from extinguishment of debt (10,074,759) (524,994)
Changes in assets and liabilities:
Increase in other assets (1,385) (12,219)
Increase in accrued interest payable 506,715 852,660
Payment of purchase money note interest (175,000) (25,322)
Decrease in accounts payable and accrued expenses (43,554) (23,816)
------------ ------------
Net cash used in operating activities (286,130) (145,198)
------------ ------------
Cash flows from investing activities:
Receipt of distributions from partnerships 797,827 4,047,041
Proceeds from disposition of investments in partnerships 5,993,661 --
Advances made to local partnerships -- (120,642)
Collection of advances made to local partnerships -- 120,642
------------ ------------
Net cash provided by investing activities 6,791,488 4,047,041
------------ ------------
Cash flows from financing activities:
Payoff of purchase money notes and related interest (5,993,661) (1,085,000)
Payment of purchase money note principal and capitalized interest (50,000) (2,708,983)
Distribution to Additional Limited Partners (1,622,237) -
------------ ------------
Net cash used in financing activities (7,665,898) (3,793,983)
------------ ------------
Net (decrease) increase in cash and cash equivalents (1,160,540) 107,860
Cash and cash equivalents, beginning of period 8,936,520 7,596,031
------------ ------------
Cash and cash equivalents, end of period $ 7,775,980 $ 7,703,891
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 3,919,914 $ 2,737,814
============ ============
</TABLE>
The accompanying notes are an
integral part of these
financial statements.
-3-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2000 and 1999
(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, 2000, and the results of its operations for the three and six months
ended June 30, 2000 and 1999, and its cash flows for the six months ended June
30, 2000 and 1999. The results of operations for the interim periods ended June
30, 2000, are not necessarily indicative of the results to be expected for the
full year.
The accompanying unaudited financial statements have been prepared in
conformity with accounting principles generally accepted in the United States
and with the instructions to Form 10-QSB. Certain information and accounting
policies and footnote disclosures normally included in financial statements
prepared in conformity with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such instructions.
These condensed financial statements should be read in conjunction with the
financial statements and notes thereto included in the Partnership's annual
report on Form 10-KSB at December 31, 1999.
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
a. Due on investments in partnerships and accrued interest payable
---------------------------------------------------------------
The Partnership's obligations with respect to its investments in Local
Partnerships, in the form of purchase money notes having an aggregate principal
balance of $4,920,000 plus aggregate accrued interest of $9,008,708 as of June
30, 2000, 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 the principal amounts of $1,050,000 and $950,000 matured on December
31, 1996 and 1997, respectively, and were extended to January 5, 2001, but were
paid off, at a discount, on September 30, 1999. Purchase money notes in the
aggregate principal amount of $2,380,000 matured on January 1, 1998, and were
written off on October 5, 1999 when the related local partnership interests,
held by the Partnership, were transferred to the noteholders in full
satisfaction of the purchase money notes' principal and accrued interest. A
purchase money note in the principal amount of $3,150,000 matured on June 1,
1998, and has not been paid or extended. Purchase money notes in the original
principal amounts of $4,600,000 and $1,927,500, with maturities extended to
August 31, 2003 were paid off, at a discount, on May 31, 2000. A purchase money
note in the original principal amount of $1,450,000 matured on September 1,
1998, was partially
-4-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
paid, and has been extended to September 1, 2003. Purchase money notes in the
aggregate principal amount of $840,178 matured on January 1, 1999 and were paid
off, at a discount, on February 5, 1999. A purchase money note in the original
principal amount of $500,000 matured on January 1, 1999, and was partially
transferred to the noteholder, with the balance extended to January 1, 2004, as
discussed below.
The purchase money notes, which are nonrecourse to the Partnership, 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 respective 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 adversely impact the
Partnership's financial condition because the purchase money notes are
nonrecourse and secured solely by the Partnership's interest in the related
Local Partnerships. Therefore, should the investment in 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 the Partnership's interest in one of these Local Partnerships would not
have a material adverse impact on the financial condition of the Partnership.
See further discussion of certain purchase money notes, below.
The following chart presents information related to a purchase money
note which has matured and which remains unpaid or unextended as of August 9,
2000. Excluded from the following chart are purchase money notes which matured
through June 30, 2000, and which have been paid off, cancelled, or extended on
or before August 9, 2000.
-5-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
<TABLE>
<CAPTION>
Carrying Amount
Aggregate of Partnership's
Aggregate Accrued Investments in
Number of Principal Interest and Advances to
Purchase Underlying Balance Balance Underlying Local
Money Note Local Percentage as of June Percentage as of June Percentage Partnerships as Percentage
(PMN) Maturity Partnerships of Total 30, 2000 of Total 30, 2000 of Total of June 30, 2000 of Total
---------------- ------------ ---------- ---------- ---------- ----------- ---------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2nd Quarter 1998 1 7% $3,150,000 64% $5,792,737 64% $ -- --%
---- ----- ---------- ----- ---------- ----- ---------- -----
1 7% $3,150,000 64% $5,792,737 64% $ - --%
==== ===== ========== ===== ========== ===== ========== =====
Total, Local
Partnerships 15 100% $4,920,000 100% $9,008,708 100% $ 838,211 100%
==== ===== ========== ===== ========== ===== ========== =====
</TABLE>
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, paying off certain purchase money notes at a
discounted price, extending the due dates of certain purchase money notes,
refinancing the respective properties' underlying debt or selling the underlying
real estate and using the Partnership's share of the proceeds to pay or buy down
certain purchase money note obligations. Although the Managing General Partner
has had some success applying these strategies in the past, the Managing General
Partner cannot assure that these strategies will be successful in the future. If
the Managing General Partner is unable to negotiate an extension or discounted
payoff, upon maturity of the purchase money notes, in the event that the
purchase money notes remain unpaid, the noteholders may have the right to
foreclose on the Partnership's interest in the related Local Partnerships. In
the event of a foreclosure, the excess of the nonrecourse indebtedness over the
carrying amount of the Partnership's investment in the related Local Partnership
would be deemed cancellation of indebtedness income which would be taxable to
Limited Partners at a federal tax rate of up to 39.6%. Additionally, in the
event of a foreclosure, the Partnership would lose its investment in the Local
Partnership and, likewise, its share of any future cash flow distributed by the
Local Partnership from rental operations, mortgage debt refinancings, or the
sale of the real estate. Of the 15 Local Partnerships in which the Partnership
is invested as of June 30, 2000, the one Local Partnership with an associated
purchase money note which has matured and which remains unpaid or unextended as
of August 9, 2000, represented the following percentages of the Partnership's
total distributions received from Local Partnerships and share of income from
Local Partnerships for the immediately preceding two calendar years.
-6-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
<TABLE>
<CAPTION>
Percentage of Total Partnership's Share of
Distributions Received Income from
For the Year Ending from Local Partnerships Local Partnerships
------------------- ----------------------- ----------------------
<S> <C> <C>
December 31, 1999 0% $0
December 31, 1998 0% $0
</TABLE>
The Managing General Partner continues to address the maturity and
impending maturity of its debt obligations and to seek strategies which will
provide the most favorable outcome to the limited partners. However, there can
be no assurance that these strategies will be successful.
Interest expense on the Partnership's purchase money notes was $231,649
and $506,715 for the three and six month periods ended June 30, 2000,
respectively, and $422,357 and $852,660 for the three and six month periods
ended June 30, 1999, respectively. The accrued interest payable on the purchase
money notes of $9,008,708 and $22,374,877 as of June 30, 2000 and December 31,
1999, respectively, is due on the respective maturity dates of the purchase
money notes or earlier, in some instances, if (and to the extent of a portion
thereof) the related Local Partnership has distributable net cash flow, as
defined in the relevant Local Partnership agreements.
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
paid the 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, to be applied against the notes. Cash flow
distributions of $0 and $30,694 were paid directly by Beech Hill I to the
purchase money noteholders during the years ended December 31, 1999 and 1998,
respectively. Cash flow distributions of $0 and $29,687 were paid directly by
Beech Hill II to the purchase money noteholders during the years ended December
31, 1999 and 1998, respectively. Annual cash flow distributions of $0 and $5,000
from Beech Hill I, and $0 and $2,500 from Beech Hill II, were received during
the years ended December 31, 1999 and 1998, respectively.
Under the extension agreement, documents transferring the Partnership's
interests in Beech Hill I and Beech Hill II to the
-7-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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, as extended, 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. On September 30, 1999, the
noteholders instructed the escrow agent to release to them the transfer
documents on October 5, 1999, and the escrow agent complied with those
instructions. Accordingly, the Partnership's interests in Beech Hill I and Beech
Hill II were transferred to the noteholders on October 5, 1999. As of that date,
principal and accrued interest totaling $1,480,000 and $1,891,535, respectively,
related to Beech Hill I and $900,000 and $1,185,119, respectively, related to
Beech Hill II were due.
The purchase money notes related to Beech Hill I and Beech Hill II were
nonrecourse and secured solely by the Partnership's interests in the related
Local Partnerships. The release of the Partnership's purchase money note
obligations as a result of the loss of ownership interest in the Local
Partnerships resulted in extraordinary gain from extinguishment of debt of
approximately $2.4 million and $1.5 million for Beech Hill I and Beech Hill II,
respectively, during 1999. The release of the Partnership's purchase money note
obligations resulted in cancellation of indebtedness income of approximately
$3.4 million and $2.1 million for Beech Hill I and Beech Hill II, respectively,
for federal tax purposes in 1999.
Chevy Chase
-----------
The Partnership defaulted on its two purchase money notes related to
Chevy Chase Park, Limited (Chevy Chase) on December 31, 1996 when the notes
matured and were not paid. The aggregate default amount included principal and
accrued interest of $2,100,000 and $3,553,912, respectively. The Managing
General Partner successfully negotiated an extension of one of the purchase
money notes (First Chase Note) in the principal amount of $1,050,000 effective
December 1, 1997. In connection with the extension agreement, the Partnership
made an interest payment to the noteholder. The terms of the extension agreement
extended the maturity date to January 2, 2000. On December 17, 1998, the
Partnership exercised its right, pursuant to the extension agreement, to further
extend the maturity date to January 5, 2001 by making an additional payment,
applied to accrued interest, to the noteholder.
On February 10, 1998, the Partnership was served with a complaint by
the two holders of the second purchase money note (Second Chase Note) filing
suit against the Partnership, the Managing General Partner and C.R.H.C.,
Incorporated (CRHC), an affiliate of the Managing General
-8-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Partner, for damages and seeking foreclosure on the Partnership's interest in
the Local Partnership. On July 29, 1998, the parties agreed to a settlement
which involved a discounted payoff to the holders of the Second Chase Note,
subject to the Partnership's satisfaction with the results of its due diligence.
On October 5, 1998, pursuant to such settlement agreement, the Partnership paid
the holders of the Second Chase Note a discounted amount in full settlement of
the Second Chase Note and the lawsuit. In connection with this settlement, the
local general partners withdrew from the Local Partnership, assigning their
combined one percent interests (which were converted to a limited partner
interest) in the Local Partnership to the Partnership, and the property
management agent, which is an affiliate of the local general partners, was
terminated effective April 1, 1999. CRHC is the sole remaining general partner
of the Local Partnership. Further, the Partnership received the interests of the
local general partners, the holders of the Second Chase Note, and their
respective affiliates in the First Chase Note, which interest total is
approximately 10.808%. On May 28, 1999, the Partnership filed suit against the
holder of the First Chase Note, seeking payment of the Partnership's 10.808%
share of payments made on the First Chase Note since October 1, 1997. On
September 30, 1999, as part of the settlement of the litigation, the Partnership
paid off, at a discount, the First Chase Note. The discounted payoff resulted in
extraordinary gain from extinguishment of debt of approximately $2.4 million in
1999. The discounted payoff also resulted in cancellation of indebtedness income
of approximately $2.4 million for federal tax purposes in 1999.
On December 30, 1999, the Partnership was served with a complaint by
certain alleged beneficiaries of the First Chase Note for, among other relief,
their portion of payments made to First March Realty Corporation on the First
Chase Note. The Managing General Partner is vigorously defending its position
that all such payments were made to the proper parties, and that it has no
further responsibility or liability for payments made on the First Chase Note.
As of August 9, 2000, all parties are pursuing settlement. However, there can be
no assurance that any agreement will be reached.
Four Winds West
---------------
The Partnership defaulted on its purchase money note related to Four
Winds West Company Limited (Four Winds West) on January 1, 1999 when the note
matured and was not paid. The default amount included principal and accrued
interest of $462,178 and $532,673, respectively. On February 5, 1999, the
Partnership paid off, at a discount, the purchase money note related to Four
Winds West. The discounted payoff resulted in extraordinary gain from
extinguishment of debt of approximately $305,000 in 1999. The discounted payoff
also resulted in cancellation of indebtedness income of approximately $305,000
for federal tax purposes in 1999.
-9-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - 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 amount
included principal and accrued interest of $3,150,000 and $5,071,731,
respectively. As of August 9, 2000, principal and accrued interest totaling
$3,150,000 and $5,830,606, respectively, were due. The purchase money notes were
initially due to mature on June 1, 1988, but were extended to mature on June 1,
1998. The Partnership had requested another extension of the maturity date of
the purchase money notes until May 2000, to be coterminous with the expiration
of the Local Partnership's provisional workout agreement (PWA) with HUD related
to its mortgage loan. In 1996, HUD sold the mortgage loan to a third party
lender. The local managing general partner has obtained a forbearance of the PWA
from the lender until January 31, 2001, with two 30-day extension periods
available. The forbearance agreement allows for the discounted payoff of the
mortgage loan. The purchase money noteholders initiated two separate foreclosure
proceedings. One group of plaintiffs has indicated it would be willing to stay
its action until the end of the forbearance period with the Local Partnership's
lender, so long as the plaintiff in the other lawsuit does the same, but to date
there has been no agreement with that noteholder. The Partnership intends to
defend vigorously against the foreclosure proceedings. However, there is no
assurance that the Partnership will be able to retain its interest in
Frenchman's Wharf II. In the event of a foreclosure, the Partnership would also
lose its share of any future cash flow distributed by the Local Partnership from
rental operations, mortgage debt refinancings, or the sale of the real estate.
The uncertainty regarding the continued ownership of the Partnership's interest
in Frenchman's Wharf II does not adversely impact the Partnership's financial
condition, as discussed above.
Princeton
---------
The Partnership defaulted on its purchase money note related to
Princeton Community Village Associates (Princeton) on January 1, 1999 when the
note matured and was not paid. The default amount included principal and accrued
interest of $500,000 and $1,422,064, respectively. On August 9, 1999, the
noteholder filed a complaint seeking declaratory judgment that the Partnership
has forfeited its interest in Princeton to the noteholders. The litigation was
settled effective January 1, 2000, when the Managing General Partner entered
into an agreement with the noteholder which granted the noteholder four options
to purchase the Partnership's 98.99% limited partnership interest in Princeton
over a three and one-half year period, in exchange for the cancellation of
pro-rata portions of the then outstanding balance of the purchase money notes.
As part of the agreement, the noteholder extended the maturity date of the
purchase money
-10-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
note to January 1, 2004, and the Partnership made a payment to the noteholder on
April 21, 2000, which was applied against accrued interest payable on the
purchase money note.
On May 31, 2000, pursuant to the option agreement, the noteholder
purchased a 26% interest in Princeton from the Partnership, the consideration
for which was a like percentage of the outstanding purchase money note principal
and accrued interest of $130,000 and $363,072, respectively, resulting in net
extraordinary gain from extinguishment of debt of $484,862 for financial
statement purposes in 2000 and in cancellation of indebtedness income of
$1,960,030 for federal tax purposes in 2000.
Due to the impending and likely transfer of the remaining 74% of the
Partnership's investment in Princeton over the next three years, the investment
in and advances to partnerships plus net unamortized amounts of acquisition fees
and property purchase costs related to Princeton, which totaled $23,362, have
been reclassified to investment in partnerships held for sale in the
accompanying balance sheet at June 30, 2000.
Rolling Green at Fall River and Rolling Green at Amherst
--------------------------------------------------------
The Partnership defaulted on its purchase money notes related to
Roberts Fall River Associates (Rolling Green at Fall River) and Roberts Amherst
Associates (Rolling Green at Amherst) on August 31, 1998 when the notes matured
and were not paid. The default amounts included principal and accrued interest
of $4,600,000 and $8,750,764, respectively, for Rolling Green at Fall River and
$1,927,500 and $3,661,147, respectively, for Rolling Green at Amherst. The
Managing General Partner and the trustees representing the noteholders agreed to
extend the maturity dates of the purchase money notes to February 28, 2001,
subject to a further extension to August 31, 2003 if the Local Partnerships
complete a refinancing of their mortgage loans, which refinancings have
occurred. However, the noteholders had the right to accelerate the maturity of
the notes upon not less than one year's prior notice. As part of the agreement,
the Partnership agreed that all refinancing mortgage loan proceeds payable to
the Partnership by the respective Local Partnerships, as well as all net cash
flow payable to the Partnership from the respective Local Partnerships in excess
of $10,000 per year, shall be applied to the balance of the respective purchase
money notes, and further agreed to waive certain rights granted in the
respective Local Partnerships' limited partnership agreements. The mortgage loan
on Rolling Green at Fall River was refinanced in March 1999; refinancing
proceeds of $2,725,257 were used to pay down purchase money note principal and
capitalized interest in March 1999. The mortgage loan on Rolling Green at
Amherst was refinanced in August 1998; refinancing proceeds of $1,503,496 were
used to pay down purchase money note principal and capitalized interest in 1998.
-11-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
On May 31, 2000, Rolling Green at Fall River sold its property. The
entire sale proceeds to the Partnership were used to pay off, at a discount, the
Partnership's purchase money note obligation related to its investment in this
local partnership. The sale resulted in gain on disposition of investment in
partnership of $3,542,933, and in extraordinary gain from extinguishment of debt
of $7,746,946, for financial statement purposes. The total federal tax gain for
the year 2000 related to Rolling Green at Fall River is estimated to be
approximately $16.8 million. The Managing General Partner of the Partnership
and/or its affiliates will not receive any fees relating to the sale.
On May 31, 2000, Rolling Green at Amherst sold its property. The entire
sale proceeds to the Partnership were used to pay off, at a discount, the
Partnership's purchase money note obligation related to its investment in this
local partnership. The sale resulted in gain on disposition of investment in
partnership of $2,336,845, and in extraordinary gain from extinguishment of debt
of $1,842,951, for financial statement purposes. The total federal tax gain for
the year 2000 related to Rolling Green at Amherst is estimated to be
approximately $6.3 million. The Managing General Partner of the Partnership
and/or its affiliate will not receive any fees relating to the sale.
Troy Manor
----------
The Partnership defaulted on its purchase money note related to Troy
Apartments Limited (Troy Manor) on January 1, 1999 when the note matured and was
not paid. The default amount included principal and accrued interest of $378,000
and $227,420, respectively. On February 5, 1999, the Partnership paid off, at a
discount, the purchase money note related to Troy Manor. The discounted payoff
resulted in extraordinary gain from extinguishment of debt of approximately
$220,000 in 1999. The discounted payoff also resulted in cancellation of
indebtedness income of approximately $220,000 for federal tax purposes in 1999.
Westgate
--------
In June, 1998, the holder of the purchase money note related to
Westgate Tower Limited Dividend Housing Associates (Westgate) accepted the
Managing General Partner's offer to extend the maturity date of the purchase
money note for five years from its scheduled maturity date of September 1, 1998.
In May 2000, the Partnership and the noteholder signed documents extending the
maturity date of the purchase money note to September 1, 2003, in exchange for a
payment applied against the outstanding principal balance of the purchase money
note.
-12-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
Wexford Ridge
-------------
The Partnership defaulted on its three purchase money notes relating to
Wexford Ridge Associates (Wexford Ridge) on December 31, 1997 when the notes
matured and were not paid. The aggregate default amount included principal and
accrued interest of $1,900,000 and $3,478,549, respectively. The Managing
General Partner successfully negotiated an extension on one of the purchase
money notes (First Wexford Note) in the principal amount of $950,000 effective
April 9, 1998; the First Wexford Note was paid off, at a discount, on September
30, 1999. The discounted payoff resulted in extraordinary gain from
extinguishment of debt of approximately $2.4 million for financial statement
purposes in 1999. The discounted payoff also resulted in cancellation of
indebtedness income of approximately $2.4 million for federal tax purposes in
1999.
On April 7, 1998, the Partnership was served with a complaint by the
holder of the second and third purchase money notes (collectively, Second and
Third Wexford Notes) filing suit against the Partnership, the Managing General
Partner and C.R.H.C., Incorporated (CRHC), an affiliate of the Managing General
Partner, for damages and seeking foreclosure on the Partnership's interest in
the Local Partnership. On July 29, 1998, the parties agreed to a settlement
which involved a discounted payoff to the holder of the Second and Third Wexford
Notes, subject to the Partnership's satisfaction with the results of its due
diligence. On October 5, 1998, pursuant to such settlement agreement, the
Partnership paid the holder of the Second and Third Wexford Notes a discounted
amount in full settlement of the Second and Third Wexford Notes and the lawsuit.
In connection with this settlement, the local general partner withdrew from the
Local Partnership, assigning his one percent interest (which was converted to a
limited partner interest) in the Local Partnership to the Partnership, and the
property management agent, which is an affiliate of the local general partner,
agreed to a termination of the property management agreement effective April 1,
1999. CRHC is the sole remaining general partner of the Local Partnership.
Further, the Partnership received the interests of the local general partner,
the holder of the Second and Third Wexford Notes, and their respective
affiliates in the First Wexford Note, which is approximately 4.85%. On May 28,
1999, the Partnership filed suit against the holder of the First Wexford Note,
seeking payment of the Partnership's 4.85% share of payments made on the First
Wexford Note since October 1, 1997. On September 30, 1999, as part of the
settlement of the litigation, the Partnership paid off, at a discount, the First
Wexford Note (see above).
-13-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
b. Advances to Local Partnerships
------------------------------
As of both June 30, 2000 and December 31, 1999, the Partnership had
advanced funds to Local Partnerships totaling $474,410. Interest accrued on
these advances was $187,372 as of both June 30, 2000 and December 31, 1999. For
financial reporting purposes, these loans have been reduced to zero by the
Partnership as a result of losses from the related Local Partnerships.
Chevy Chase
-----------
On January 7, 1999, the Partnership advanced $120,642 to Chevy Chase to
cover required repairs and maintenance expenses pending reimbursement from a
capital improvement escrow. The advance was repaid to the Partnership on April
8, 1999.
Frenchman's Wharf II
--------------------
To cover operating deficits incurred in prior years for Frenchman's
Wharf II, the Partnership advanced funds totaling $324,410 as of both June 30,
2000 and December 31, 1999. No advances have been made to Frenchman's Wharf II
since March 1987, and the Partnership does not expect to advance any additional
funds to the Local Partnership. These loans, together with accrued interest of
$187,372 as of both June 30, 2000 and December 31, 1999, are payable from cash
flow of Frenchman's Wharf II after payment of first mortgage debt service and
after satisfaction by the Partnership of certain other interest obligations on
the purchase money notes relating to the Local Partnership. No interest has been
accrued since 1992 due to the uncertainty of future collection. The forbearance
agreement entered into with the Local Partnership's lender after expiration of
the workout of its mortgage loan prohibits any distributions to partners until
the mortgage is repaid. For financial reporting purposes, these loans have been
reduced to zero by the Partnership as a result of losses at the Local
Partnership level during prior years.
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. In connection with such
refinancing, the Partnership advanced the Local Partnership $450,000 for
application and rate lock fees. As of both June 30, 2000 and
-14-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
December 31, 1999, $300,000 of the advances had been repaid to the Partnership.
For financial reporting purposes, the remaining advance has been reduced to zero
by the Partnership as a result of losses at the Local Partnership level.
c. Property matters
----------------
Chevy Chase
-----------
The Managing General Partner and the local managing general partner
(CRHC, an affiliate of the Managing General Partner, see Note 2.b., above) are
both 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, or to enter the Mark-up-to-Market program. The local
managing general partner agreed to HUD's analysis of the property and proposal
for Mark-up-to-Market, and is awaiting signature documents which will formalize
the property's entry into the Mark-up-to-Market program. If signed, and upon the
property's entry into the Mark-up-to-Market program, HUD's analysis indicates
that gross rents should increase by $475,000 per year. The Mark-up- to-Market
proposal is for a five year term.
Frenchman's Wharf II
--------------------
The report of the auditors on the financial statements of Frenchman's
Wharf II for the year ended December 31, 1999 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 loan and the expiration
of its Section 8 Rental Housing Assistance Payments (HAP) contract with HUD. The
HAP contract subsequently was extended for another year. The uncertainty about
the Local Partnership's continued ownership of the property does not adversely
impact the Partnership's financial condition, as discussed above.
Orangewood Plaza
----------------
The 1983 construction loan related to Orangewood Plaza, a 40-unit
apartment building in Orange Cove, California, was never formally converted to a
permanent loan. It is anticipated that this loan will be restructured, and that
the restructuring may result in cancellation of indebtedness income to the
Partnership in the amount of approximately $163,000 during 2000. Additionally,
the Partnership had pledged its interest in the Local Partnership as security on
a promissory note, in the amount of $170,000, made by the Local Partnership. The
note, which matured on August 5, 1998, is currently in default. The parties are
currently negotiating a restructuring of this loan, which is anticipated to be
formalized concurrent with the restructuring of the construction loan. There is
no assurance that either restructuring will be
-15-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
consummated. Accordingly, there is no assurance that the Partnership will be
able to retain its interest in Orangewood Plaza. This uncertainty does not
adversely impact the Partnership's financial condition, as discussed above.
Princeton
---------
Princeton Community Village Associates (Princeton) defaulted on its
project subsidy loan. The maturity date was extended five years to January 1,
2004, as part of litigation settled effective January 1, 2000, when the Managing
General Partner and the noteholder entered into an agreement extending the
maturity date of the purchase money note, as discussed above.
Rolling Green at Fall River and Rolling Green at Amherst
--------------------------------------------------------
On May 31, 2000, Rolling Green at Fall River and Rolling Green at
Amherst were sold. See Note 2.a. of the notes to financial statements for
further information concerning these sales.
d. Summarized financial information
--------------------------------
Combined statements of operations for the 15 and 20 Local Partnerships
in which the Partnership was invested as of June 30, 2000 and 1999,
respectively, follow. The combined statements have been compiled from
information supplied by the management agents of the projects and are unaudited.
The combined statements of operations for the three and six months ended June
30, 2000 include information for Rolling Green at Fall River and Rolling Green
at Amherst through the date of sale.
-16-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2000 and 1999
(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,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rental $ 5,343,986 $ 6,751,778 $ 11,275,440 $ 13,302,612
Other 208,332 330,397 421,842 667,924
------------ ------------ ------------ ------------
Total revenue 5,552,318 7,082,175 11,697,282 13,970,536
------------ ------------ ------------ ------------
Expenses:
Operating 2,944,474 4,189,631 6,653,546 8,533,596
Interest 1,680,011 1,624,341 3,360,022 3,248,677
Depreciation and amortization 1,112,015 1,213,660 2,224,031 2,427,326
------------ ------------ ------------ ------------
Total expenses 5,736,500 7,027,632 12,237,599 14,209,599
------------ ------------ ------------ ------------
Net (loss) income $ (184,182) $ 54,543 $ (540,317) $ (239,063)
============ ============ ============ ============
</TABLE>
As of June 30, 2000 and 1999, the Partnership's share of cumulative
losses to date for 9 and 12, respectively, of the 15 and 20 Local Partnerships,
respectively, exceeded the amount of the Partnership's investments in and
advances to those Local Partnerships by $25,127,919 and $24,289,656,
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
Some of the rental properties owned by the Local Partnerships are
dependent on the receipt of project-based Section 8 Rental Housing Assistance
Payments (HAP) provided by the U.S. Department of Housing and Urban Development
(HUD) pursuant to Section 8 HAP contracts. Current legislation allows all
expired Section 8 HAP contracts with rents at less than 100% of fair market
rents to be renewed for one year. Expiring Section 8 HAP contracts with rents
that exceed 100% of fair market rents could be renewed for one year, but at
rents reduced to 100% of fair market rents (Mark-to-Market). All expiring
Section 8 HAP contracts with rents exceeding comparable market rents, and
properties with mortgage loans insured by the Federal Housing Administration
(FHA), became subject to the Mark-to-Market legislation.
Mark-to-Market implementation will reduce rental income at properties
that are currently subsidized at higher-than-market rental rates, and will
therefore
-17-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2000 and 1999
(Unaudited)
3. AFFORDABLE HOUSING LEGISLATION - Continued
lower cash flow available to meet mortgage payments and operating expenses. Each
affected property may undergo debt restructuring according to terms determined
by an individual property and operations evaluation. This may 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 loan will be converted to a
non-performing but accruing (soft) second mortgage loan.
The Section 8 HAP contracts for the following properties initially
expired during the government's fiscal year 1998 or 1999 or will expire during
2000, and have been renewed as indicated.
<TABLE>
<CAPTION>
Units Authorized for Original Renewed
Number of Rental Assistance Under Expiration of Section 8 Expiration of Section 8
Property Rental Units Section 8 HAP Contract HAP Contract
-------- ------------ ----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
Chevy Chase 232 228 03/23/98 09/22/00 (1)
Country Place II 120 24 08/29/00 (1)
Four Winds West 62 62 04/14/98 10/14/00 (1)
Frenchman's Wharf II 324 31 11/30/98 11/30/00 (1)
Princeton Community Village 239 26 07/01/98 10/01/24
Troy Manor 50 50 10/29/99 10/29/00 (1)
----- ---
Total 1,027 421
===== ===
</TABLE>
(1) The Managing General Partner expects that these Section 8 HAP Contracts
will be renewed for one year upon expiration.
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. As a result, it is not
possible to predict the impact on the Local Partnerships' operations and the
resulting impact on the Partnership's investments in the Local Partnerships at
this time. As of June 30, 2000, the carrying amount of the Partnership's
investments in and advances to Local Partnerships with Section 8 HAP contracts
expiring in 2000 was $137,177.
There is a new HUD-sponsored program generally referred to as
"Mark-up-to- Market." Under this program, properties with expiring Section 8
contracts that are located in high-rent areas as defined by HUD are eligible for
rent increases which would be necessary to bring Section 8 rents in line with
market rate rents. For properties that enter the program and have subsidized FHA
loans, the rents are adjusted to take into account the benefits the property is
already receiving from the below-market interest rate by means of a HUD
determined Interest Subsidy Adjustment Factor. The purpose of this program is to
incentivize owners of properties with expiring Section 8 contracts not to
convert these properties to market rate housing.
-18-
<PAGE>
CAPITAL REALTY INVESTORS-II LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
June 30, 2000 and 1999
(Unaudited)
3. AFFORDABLE HOUSING LEGISLATION - Continued
In return for receiving market rate rents under Mark-up-to-Market, the
property owner must enter into a five year conditional Section 8 contract with
HUD, subject to the annual availability of funding by Congress. In addition,
property owners who enter into the Mark-up-to-Market program will receive a
waiver from the cash flow restriction imposed on the property by the limited
dividend limitation.
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 $44,016 and
$93,873 for the three and six month periods ended June 30, 2000, respectively,
and $38,761 and $83,117 for the three and six month periods ended June 30, 1999,
respectively, as direct reimbursement of expenses incurred on behalf of the
Partnership. Such expenses are included in the accompanying statements of
operations as general and administrative expenses.
In accordance with the terms of the Partnership Agreement, the
Partnership is obligated to pay the Managing General Partner an annual incentive
management fee (the Management Fee), after all other expenses of the Partnership
are paid. The Partnership paid the Managing General Partner a Management Fee of
$62,499 and $124,998 for each of the three and six month periods ended June 30,
2000 and 1999, respectively.
The Managing General Partner and/or its affiliates may receive a fee of
not more than 2% of the sales price of an investment in a Local Partnership or
the property it owns, payable under certain conditions upon the sale of an
investment in a Local Partnership or the property it owns. The payment of the
fee is subject to certain restrictions, including the achievement of a certain
level of sales proceeds and making certain minimum distributions to limited
partners. No such fees were earned by the Managing General Partner or its
affiliates for the three and six month periods ended June 30, 2000 or 1999.
-19-
<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, governmental
regulations affecting 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 sold or
refinanced, and will continue to sell or refinance, certain properties pursuant
to programs developed by these agencies. 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 Section 8 Rental Housing Assistance
Payments (HAP) provided by the U.S. Department of Housing and Urban Development
(HUD) pursuant to Section 8 HAP contracts. Current legislation allows all
expired Section 8 HAP contracts with rents at less than 100% of fair market
rents to be renewed for one year. Expiring Section 8 HAP contracts with rents
that exceed 100% of fair market rents could be renewed for one year, but at
rents reduced to 100% of fair market rents (Mark-to-Market). All expiring
Section 8 HAP contracts with rents exceeding comparable market rents, and
properties with mortgage loans insured by the Federal Housing Administration
(FHA), became subject to the Mark-to-Market legislation.
Mark-to-Market implementation will reduce rental income at properties
that 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 may undergo debt restructuring according to
terms determined by an individual property and operations evaluation. This may
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 loan will
be converted to a non-performing but accruing (soft) second mortgage loan.
-20-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
In many instances, the Mark-to-Market rental rate restructuring may
require the write down of an FHA-insured mortgage loan, which would trigger
cancellation of indebtedness income to the partners, a taxable event, even
though no actual cash is received. Additionally, if the existing first mortgage
loan is bifurcated into a first and second mortgage loan, the newly created
second mortgage loan will accrue interest at a below-market rate; however, the
Internal Revenue Service issued a ruling in July 1998 that concluded that the
below-market rate of interest will not generate additional ordinary income. Each
property subject to 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 limited partners, at this time.
There is a new HUD-sponsored program generally referred to as
"Mark-up-to- Market". Under this program, properties with expiring Section 8
contracts that are located in high-rent areas as defined by HUD are eligible for
rent increases which would be necessary to bring Section 8 rents in line with
market rate rents. For properties that enter the program and have subsidized FHA
loans, the rents are adjusted to take into account the benefits the property is
already receiving from the below-market interest rate by means of a HUD
determined Interest Subsidy Adjustment Factor. The purpose of this program is to
incentivize owners of properties with expiring Section 8 contracts not to
convert these properties to market rate housing.
In return for receiving market rate rents under Mark-up-to-Market, the
property owner must enter into a five year conditional Section 8 contract with
HUD, subject to the annual availability of funding by Congress. In addition,
property owners who enter into the Mark-up-to-Market program will receive a
waiver from the cash flow restriction imposed on the property by the limited
dividend limitation.
The Managing General Partner is considering new strategies to deal with
the ever changing environment of affordable housing policy. The Section 236 and
Section 221(d)(3) mortgage loans may be eligible for pre-payment in their 18th
year or later. Properties with expiring Section 8 HAP contracts may become
convertible to market rate apartment properties. Currently, there are few
lenders that will provide financing either to prepay existing mortgage loans of
these types or provide additional funds to allow a 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
$7,775,980 as of June 30, 2000, along with anticipated future cash distributions
from the Local Partnerships, is expected to be adequate to meet its current and
anticipated operating cash needs. As of August 9, 2000, there were no material
commitments for capital expenditures.
The Partnership's obligations with respect to its investments in Local
Partnerships, in the form of purchase money notes having an aggregate principal
-21-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
balance of $4,920,000 plus aggregate accrued interest of $9,008,708 as of June
30, 2000, 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 the principal amounts of $1,050,000 and $950,000 matured on December
31, 1996 and 1997, respectively, and were extended to January 5, 2001, but were
paid off, at a discount, on September 30, 1999. Purchase money notes in the
aggregate principal amount of $2,380,000 matured on January 1, 1998, and were
written off on October 5, 1999 when the related local partnership interests,
held by the Partnership, were transferred to the noteholders in full
satisfaction of the purchase money notes' principal and accrued interest. A
purchase money note in the principal amount of $3,150,000 matured on June 1,
1998, and has not been paid or extended. Purchase money notes in the original
principal amounts of $4,600,000 and $1,927,500, with maturities extended to
August 31, 2003 were paid off, at a discount, on May 31, 2000. A purchase money
note in the original principal amount of $1,450,000 matured on September 1,
1998, was partially paid and has been extended to September 1, 2003. Purchase
money notes in the aggregate principal amount of $840,178 matured on January 1,
1999 and were paid off, at a discount, on February 5, 1999. A purchase money
note in the original principal amount of $500,000 matured on January 1, 1999,
and was partially transferred to the noteholder, with the balance extended to
January 1, 2004. See the notes to the financial statements for additional
information concerning these purchase money notes.
The purchase money notes, which are nonrecourse to the Partnership, 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 respective 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 adversely impact the
Partnership's financial condition because the purchase money notes are
nonrecourse and secured solely by the Partnership's interest in the related
Local Partnerships. Therefore, should the investment in 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 the Partnership's interest in one of these Local Partnerships would not
have a material adverse impact on the financial condition of the Partnership.
-22-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
The following chart presents information related to a purchase money
note which has matured and which remains unpaid or unextended as of August 9,
2000. Excluded from the following chart are purchase money notes which matured
through June 30, 2000, and which have been paid off, cancelled, or extended on
or before August 9, 2000.
<TABLE>
<CAPTION>
Carrying Amount
Aggregate of Partnership's
Aggregate Accrued Investments in
Number of Principal Interest and Advances to
Purchase Underlying Balance Balance Underlying Local
Money Note Local Percentage as of June Percentage as of June Percentage Partnerships as Percentage
(PMN) Maturity Partnerships of Total 30, 2000 of Total 30, 2000 of Total of June 30, 2000 of Total
---------------- ------------ ---------- ---------- ---------- ----------- ---------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2nd Quarter 1998 1 7% $3,150,000 64% $5,792,737 64% $ -- --%
---- ----- ---------- ----- ---------- ----- ---------- -----
1 7% $3,150,000 64% $5,792,737 64% $ -- --%
==== ===== ========== ===== ========== ===== ========== =====
Total, Local
Partnerships 15 100% $4,920,000 100% $9,008,708 100% $ 838,211 100%
==== ===== ========== ===== ========== ===== ========== =====
</TABLE>
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, paying off certain purchase money notes at a
discounted price, extending the due dates of certain purchase money notes,
refinancing the respective properties' underlying debt or selling the underlying
real estate and using the Partnership's share of the proceeds to pay or buy down
certain purchase money note obligations. Although the Managing General Partner
has had some success applying these strategies in the past, the Managing General
Partner cannot assure that these strategies will be successful in the future. If
the Managing General Partner is unable to negotiate an extension or discounted
payoff, upon maturity of the purchase money notes, in the event that the
purchase money notes remain unpaid, the noteholders may have the right to
foreclose on the Partnership's interest in the related Local Partnerships. In
the event of a foreclosure, the excess of the nonrecourse indebtedness over the
carrying amount of the Partnership's investment in the related Local Partnership
would be deemed cancellation of indebtedness income which would be taxable to
Limited Partners at a federal tax rate of up to 39.6%. Additionally, in the
event of a foreclosure, the Partnership would lose its investment in the Local
Partnership and, likewise, its share of any future cash flow distributed by the
Local Partnership from rental operations, mortgage debt refinancings, or the
sale of the real estate. Of the 15 Local Partnerships in which the Partnership
is invested as of June 30, 2000, the one Local Partnership with an associated
purchase money note which has matured and which remains unpaid or unextended as
of August 9, 2000,
-23-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
represented the following percentages of the Partnership's total distributions
received from Local Partnerships and share of income from Local Partnerships for
the immediately preceding two calendar years.
<TABLE>
<CAPTION>
Percentage of Total Partnership's Share of
Distributions Received Income from
For the Year Ending from Local Partnerships Local Partnerships
------------------- ----------------------- ----------------------
<S> <C> <C>
December 31, 1999 0% $0
December 31, 1998 0% $0
</TABLE>
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 month periods ended June 30, 2000 and 1999, the
receipt of distributions from Local Partnerships was adequate to support
operating cash requirements. Cash and cash equivalents decreased during the six
month period ended June 30, 2000, as the distribution to Additional Limited
Partners, made in January 2000 out of the proceeds of the 1999 sale of Wexford
Ridge, exceeded cash flow distributions received from partnerships during the
period.
Results of Operations
---------------------
The Partnership's net income for the three month period ended June 30,
2000 increased as compared to the corresponding period in 1999 primarily due to
gain on disposition of investments in partnerships and extraordinary gain from
extinguishment of debt related to the sales of Roberts Fall River Associates
(Rolling Green at Fall River), Roberts Amherst Associates (Rolling Green at
Amherst) and the partial transfer of the Partnership's interest in Princeton
Community Village Associates (Princeton), as discussed in the notes to the
financial statements. Contributing to the increase in net income were a decrease
in interest expense due to lower purchase money note balances as a result of
payments and the extinguishment of debt and a decrease in amortization of
deferred costs associated with the sales of properties. Partially offsetting the
increase in the Partnership's net income were a decrease in share of income from
partnerships as a result of the sales of properties and higher professional fees
related to the Princeton litigation.
The Partnership's net income for the six month period ended June 30,
2000 increased as compared to the corresponding period in 1999 primarily due to
gain on disposition of investments in partnerships, extraordinary gain from
extinguishment of debt, a decrease in interest expense on purchase money notes
and a decrease in amortization of deferred costs, all as discussed above and in
the notes to the financial statements. Contributing to the increase in net
income were an increase in interest income due to higher cash and cash
equivalents balances and higher interest rates during 2000 and a decrease in
general and administrative expenses primarily due to lower reimbursed payroll
-24-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
costs. Offsetting the increase in net income were decreases in share of income
from partnerships and higher professional fees, both 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 share of income from partnerships for the three and
six month periods ended June 30, 2000 did not include losses of $272,321 and
$743,301, respectively, compared to excluded losses of $337,089 and $760,311 for
the three and six month periods ended June 30, 1999, respectively.
No other significant changes in the Partnership's operations have taken
place during this period.
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
See Note 2.a. of the notes to financial statements contained in Part I,
Item 1, hereof, for information concerning the Partnership's defaults on
purchase money notes.
ITEM 5. OTHER INFORMATION
-----------------
On April 2, 2000, Peachtree Partners (Peachtree) initiated an
unregistered tender offer to purchase approximately 2,450 of the outstanding
units of additional limited partnership interest (Units) in the Partnership at a
price of $50 per Unit; the offer expired May 19, 2000. Peachtree is unaffiliated
with the Managing General Partner. The price offered was determined solely at
the discretion of Peachtree and does not necessarily represent the fair market
value of each Unit. There is no established market for the purchase and sale of
Units in the Partnership, although various informal secondary market services
exist. Due to the limited markets, however, investors may be unable to sell or
otherwise dispose of their Units in the Partnership.
-25-
<PAGE>
PART II. OTHER INFORMATION
-----------------
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, 2000.
All other items are not applicable.
-26-
<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 9, 2000 by: /s/ Michael J. Tuszka
----------------- ---------------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
and Principal Accounting Officer)
-27-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
-28-
