<PAGE>
FORM 10-QSB
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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Commission file number 0-11962
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CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
--------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Maryland 52-1311532
- ----------------------------------------- -------------------
(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
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(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No [
]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Not applicable Not applicable
- -------------------------- ---------------------------------------
(Class) (Outstanding at June 30, 1998)
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
INDEX TO FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 1998
Page
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1998
and December 31, 1997 . . . . . . . . . . . . . 1
Consolidated Statements of Operations - for
the three and six months ended June 30, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Cash Flows - for
the six months ended June 30, 1998 and 1997 . . 3
Notes to Consolidated Financial Statements . . . . 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . 11
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 15
Signature . . . . . . . . . . . . . . . . . . . . . . . . 16
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . 17
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 20,861,513 $ 21,304,841
Cash and cash equivalents 11,251,466 8,268,903
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $462,952 and $450,706, respectively 499,168 519,717
Property purchase costs, net of accumulated amortization of
$423,203 and $419,846, respectively 479,876 508,863
Other assets 247,532 19,170
------------ ------------
Total assets $ 33,339,555 $ 30,621,494
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 21,576,804 $ 20,663,428
Accrued interest payable 44,678,543 43,705,679
Accounts payable and accrued expenses 110,230 102,803
Consulting fees payable to related parties 62,597 42,500
------------ ------------
Total liabilities 66,428,174 64,514,410
------------ ------------
Commitments and contingencies
Partners' capital (deficit):
Capital paid-in:
General Partners 2,000 2,000
Limited Partners 60,001,500 60,001,500
------------ ------------
60,003,500 60,003,500
Less:
Accumulated distributions to partners (3,488,481) (3,488,481)
Offering costs (6,156,933) (6,156,933)
Accumulated losses (83,446,705) (84,251,002)
------------ ------------
Total partners' deficit (33,088,619) (33,892,916)
------------ ------------
Total liabilities and partners' deficit $ 33,339,555 $ 30,621,494
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-1-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Share of income from partnerships $ 4,796,488 $ 455,166 $ 5,077,782 $ 806,253
------------ ------------ ------------ ------------
Other revenue and expenses:
Revenue:
Interest and other income 122,656 51,797 227,995 101,866
------------ ------------ ------------ ------------
Expenses:
Interest 1,983,307 1,629,961 3,936,901 3,600,371
Management fee 75,000 75,000 150,000 150,000
General and administrative 51,821 138,394 105,381 177,806
Professional fees 29,479 23,673 55,819 47,661
Amortization 15,827 16,274 31,652 32,548
------------ ------------ ------------ ------------
2,155,434 1,883,302 4,279,753 4,008,386
------------ ------------ ------------ ------------
Total other revenue and expenses (2,032,778) (1,831,505) (4,051,758) (3,906,520)
------------ ------------ ------------ ------------
Income (loss) before loss on disposition of
investment in partnership 2,763,710 (1,376,339) 1,026,024 (3,100,267)
Loss on disposition of investment in partnership (221,727) -- (221,727) --
------------ ------------ ------------ ------------
Income (loss) before extraordinary gain from
extinguishment of debt 2,541,983 (1,376,339) 804,297 (3,100,267)
Extraordinary gain from extinguishment of debt -- -- -- 5,473,855
------------ ------------ ------------ ------------
Net income (loss) 2,541,983 (1,376,339) 804,297 2,373,588
Accumulated losses, beginning of period (85,988,688) (81,634,003) (84,251,002) (85,383,930)
------------ ------------ ------------ ------------
Accumulated losses, end of period $(83,446,705) $(83,010,342) $(83,446,705) $(83,010,342)
============ ============ ============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS - Continued
(Unaudited)
</TABLE>
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) allocated to General Partners (1.51%) $ 38,384 $ (20,783) $ 12,145 $ 35,841
============ ============ ============ ============
Net income (loss) allocated to Initial and Special
Limited Partners (1.49%) $ 37,876 $ (20,507) $ 11,984 $ 35,367
============ ============ ============ ============
Net income (loss) allocated to Additional Limited
Partners (97%) $ 2,465,724 $ (1,335,049) $ 780,168 $ 2,302,380
============ ============ ============ ============
Net income (loss) per unit of Additional Limited
Partnership Interest based on 60,000 units outstanding $ 41.10 $ (22.25) $ 13.00 $ 38.37
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-3-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 804,297 $ 2,373,588
Adjustments to reconcile net income to net cash used in
operating activities:
Share of income from partnerships (5,077,782) (806,253)
Amortization of deferred costs 31,652 32,548
Amortization of discount on purchase money notes 2,048,895 1,676,456
Extraordinary gain on extinguishment of debt -- (5,473,855)
Loss on disposition of investment in partnership 221,727 --
Payment of purchase money note interest (403,576) (210,433)
Changes in assets and liabilities:
Increase in other assets (228,362) (6,436)
Increase in accrued interest payable 1,893,525 1,923,915
Increase in accounts payable and accrued expenses 7,427 14,287
Increase in consulting fees payable to related parties 20,097 --
------------ ------------
Net cash used in operating activities (682,100) (476,183)
------------ ------------
Cash flows from investing activities:
Receipt of distributions from partnerships 5,151,866 898,725
Proceeds from disposition of investment in partnership 165,402 --
------------ ------------
Net cash provided by investing activities 5,317,268 898,725
------------ ------------
Cash flows from financing activities:
Pay-off of purchase money notes and related interest (1,652,605) (164,800)
------------ ------------
Net cash used in financing activities (1,652,605) (164,800)
------------ ------------
Net increase in cash and cash equivalents 2,982,563 257,742
Cash and cash equivalents, beginning of period 8,268,903 3,942,254
------------ ------------
Cash and cash equivalents, end of period $ 11,251,466 $ 4,199,996
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 920,662 $ 210,433
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-4-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED 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-III Limited Partnership (the Partnership)
as of June 30, 1998, and the results of its operations and its cash flows for
the three and six months ended June 30, 1998 and 1997. The results of
operations for the interim period ended June 30, 1998, are not necessarily
indicative of the results to be expected for the full year.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles and with the
instructions to Form 10-QSB. Certain information and accounting policies and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such instructions. These condensed financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Partnership's annual report on Form 10-K at December 31, 1997.
Certain amounts in the 1997 financial statements have been reclassified to
conform to the 1998 presentation.
2. INVESTMENTS IN 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
$24,377,577 (exclusive of unamortized discount on purchase money notes of
$2,920,317) plus accrued interest of $44,644,567 as of June 30, 1998, are
payable in full upon the earliest of: (1) sale or refinancing of the respective
Local Partnership's rental property; (2) payment in full of the respective Local
Partnership's permanent loan; or (3) maturity. Purchase money notes in an
aggregate principal amount of $2,100,000 matured on May 1, 1996 and were not
paid or extended, and the purchase money noteholders foreclosed the
Partnership's interest in the related Local Partnership during 1997. Purchase
money notes in an aggregate principal amount of $1,700,000 which originally
matured on December 31, 1997 have been extended until August 31, 2003. Purchase
money notes in an aggregate principal amount of $2,250,000, $10,354,481,
$5,290,000, and $850,000 mature August 31, 1998, January 1, 1999, February,
1999, and June 30, 1999, respectively. The remaining purchase money notes
mature later during 1999 through 2015.
The purchase money notes are generally secured by the Partnership's
interest in the respective Local Partnerships. There is no assurance that the
underlying properties will have sufficient appreciation and equity to enable the
Partnership to pay the outstanding principal of and accrued interest on the
purchase money notes. If a purchase money note is not paid in accordance with
its terms, the Partnership will either have to renegotiate the terms of
repayment or risk losing its partnership interest in the Local Partnership. The
Partnership's inability to pay certain of the purchase money note principal and
accrued interest balances when due, and the resulting uncertainty regarding the
Partnership's continued ownership interest in the related Local Partnerships,
does not impact the Partnership's financial condition because the purchase money
notes are nonrecourse and secured solely by the Partnership's interest in the
related Local Partnerships. Therefore, should the investment in any of the
-5-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN PARTNERSHIPS - Continued
Local Partnerships with maturing purchase money notes, except Audubon Towers,
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. In
the case of Audubon Towers, the carrying amount of the Partnership's investment
exceeds the amount of the respective nonrecourse indebtedness related to this
Local Partnership. The Partnership's exposure to loss is limited to this
excess, which at June 30, 1998 was approximately $195,000. The following
purchase money notes mature through June 30, 1999, or have matured as of June
30, 1998:
<TABLE>
<CAPTION>
Property Principal Amount Maturity Date
- -------- ---------------- -------------
<S> <C> <C>
Audubon Towers $ 1,275,000 January 1, 1999
College Park 880,000 January 1, 1999
Congress Plaza 775,000 January 1, 1999
Glen Agnes 850,000 June 30, 1999
Heritage Estates I 2,600,000 January 1, 1999
Heritage Estates II 1,800,000 January 1, 1999
Highland Manor 1,760,000 January 1, 1999
Lakewood 364,481 January 1, 1999
Meadowlanes 650,000 February 28, 1999
Rolling Green 2,250,000 August 31, 1998
Tyee Apartments 1,305,000 February 1, 1999
Victorian Towers 900,000 January 1, 1999
Winchester Garden 1,700,000 December 31, 1997
Woodside Village 3,335,000 February 1, 1999
-----------
$20,444,481
===========
</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, 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. However, should the Managing General Partner be unsuccessful
in reaching a satisfactory strategy regarding the purchase money notes, the
Partnership may lose its interest in these Local Partnerships. If the
Partnership is unable to retain its interest in these Local Partnerships, the
investments in Local Partnerships would be reduced by the Partnership's basis in
these Local Partnerships. Of the thirty-one and thirty-two Local Partnerships
in which the Partnership had invested as of June 30, 1998 and December 31, 1997,
respectively, the above-listed fourteen Local Partnerships represented
approximately 69% and 66%, respectively, of the total investment in and advances
to partnerships. For the six months ended June 30, 1998 and 1997, distributions
from these Local Partnerships represented approximately 7% and 45%,
-6-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN PARTNERSHIPS - Continued
respectively, of total distributions from Local Partnerships. The Partnership's
share of income from these Local Partnerships was $486,301 and $701,157 for the
three and six months ended June 30, 1998, respectively, and $335,769 and
$549,469 for the three and six months ended June 30, 1997, respectively.
Interest expense on the Partnership's purchase money notes for the three
and six months ended June 30, 1998 was $1,983,307 and $3,936,901, respectively,
and $1,629,961 and $3,600,371 for the three and six months ended June 30, 1997,
respectively. Amortization of the imputed interest on purchase money notes
increased interest expense during the three and six months ended June 30, 1998
by $1,048,054 and $2,048,895, respectively and by $675,235 and $1,676,456 during
the three and six months ended June 30, 1997, respectively. The accrued
interest on the purchase money notes of $44,644,567 and $43,671,703 as of June
30, 1998 and December 31, 1997, respectively, is due on the respective maturity
dates of the purchase money notes or earlier, in some instances, if the related
Local Partnership has distributable net cash flow, as defined in the relevant
Local Partnership agreement.
Arboretum Village
-----------------
On April 30, 1998, the local managing general partner of Arboretum Villages
Limited Partnership (Arboretum Village) refinanced the loan secured by a first
mortgage on the related property. A portion of the refinancing proceeds was
used to pay-off the Partnership's purchase money note obligation related to this
property. Additionally, the Partnership received $2,670,000 during the second
quarter of 1998 as additional proceeds from the refinancing.
Cedar Valley
------------
The Partnership defaulted on its purchase money notes relating to Cedar
Valley on May 1, 1996 when the notes matured and were not paid. The default
amount included principal and accrued interest of $2,100,000 and $3,166,710,
respectively. The Managing General Partner and the purchase money noteholders
agreed to extend the purchase money notes until January 1997. On January 16,
1997, the purchase money noteholders foreclosed on the Partnership's interest in
Cedar Valley. As a result of the foreclosure on the Partnership's interest in
Cedar Valley, the purchase money noteholders assumed ownership of the
Partnership's interest in the Local Partnership. The Partnership's loss of
ownership interest in Cedar Valley did not impact the Partnership's financial
condition because the related purchase money notes were nonrecourse and secured
solely by the Partnership's interest in Cedar Valley. The Partnership's
investment in Cedar Valley had previously been reduced to zero as a result of
losses from the Local Partnership during prior years. The release of the
Partnership's purchase money note obligation as a result of the Partnership's
loss of ownership interest in Cedar Valley resulted in a net financial statement
gain of approximately $5.5 million during 1997. The federal tax gain was
approximately $5.8 million.
Rolling Green
-------------
The Managing General Partner successfully negotiated an extension of the
maturity date of the purchase money notes related to Roberts Milford Associates
-7-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN PARTNERSHIPS - Continued
(Rolling Green), which aggregate a principal amount of $2,250,000, to February
28, 2001. The maturity date had been August 31, 1998. Pursuant to the
agreement, the maturity date was further extended to August 31, 2003 because the
Local Partnership refinanced its mortgage loan prior to the expiration of the
first extension. The refinancing of the property's mortgage closed on July 31,
1998. The Partnership will not receive any of the refinancing proceeds.
Southmoor
---------
On June 30, 1998, the Partnership sold its interest in K-S Apartments
(Southmoor). The sale of the Partnership's interest in Southmoor generated
sufficient cash proceeds to payoff the Partnership's purchase money note
obligation related to this property. In addition, the Partnership received cash
proceeds from the sale of $228,000 on July 1, 1998. The sale proceeds were not
sufficient to satisfy the Partnership's basis in the Local Partnership and
resulted in a net financial statement loss of $221,727. The Managing General
Partner and/or its affiliates earned net fees relating to this sale of $62,597.
On July 10, 1998, these fees were paid by the Partnership.
Winchester Gardens
------------------
The Partnership defaulted on its purchase money notes relating to
Winchester Gardens on December 31, 1997 when the notes matured and were not
paid. The defaulted amount included principal and accrued interest of $1.7
million and $2,995,648, respectively. On April 7, 1998, the Partnership was
served with a complaint by the holders of the purchase money notes suing the
Partnership, the Managing General Partner and C.R.H.C, Inc., an affiliate of the
Managing General Partner, for damages and seeking foreclosure on the
Partnership's interest in the Local Partnership. As of July 29, 1998, the
parties agreed to a settlement which extends the maturity date of the purchase
money notes to January 31, 2001. In connection with this settlement, the
Partnership granted the noteholders an option during the period January 1, 2000
through June 30, 2000 to purchase the Partnership's and C.R.H.C.'s (an affiliate
of the Managing General Partner) interests in the Local Partnership for an
amount equal to the outstanding balance of the purchase money notes and accrued
interest. The option is void if the purchase money notes and accrued interest
are retired prior to exercise of the option.
Combined Local Partnerships
---------------------------
Following are combined statements of operations for the thirty-one and
thirty-three Local Partnerships in which the Partnership has invested as of June
30, 1998 and 1997, respectively. The 1997 results include information on Cedar
Valley through the date of foreclosure on the Partnership's interest therein.
These statements have been compiled from information supplied by the management
agents of the projects and are unaudited.
-8-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN PARTNERSHIPS - Continued
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rental revenue $ 7,451,599 $ 8,196,123 $ 14,912,600 $ 16,432,469
Other 421,779 404,404 783,135 762,453
------------ ------------ ------------ ------------
7,873,378 8,600,527 15,695,735 17,194,922
------------ ------------ ------------ ------------
Expenses:
Operating 4,445,168 5,053,974 9,031,369 10,198,326
Interest 1,782,600 1,873,934 3,565,199 3,751,338
Depreciation and amortization 1,295,257 1,356,716 2,590,514 2,726,813
------------ ------------ ------------ ------------
7,523,025 8,284,624 15,187,082 16,676,477
------------ ------------ ------------ ------------
Net income $ 350,353 $ 315,903 $ 508,653 $ 518,445
============ ============ ============ ============
</TABLE>
As of June 30, 1998 and December 31, 1997, the Partnership's share of
cumulative losses to date for nine of the thirty-one and thirty-two Local
Partnerships exceeded the amount of the Partnership's investments in these Local
Partnerships by $5,631,756 and $5,384,969, 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
consolidated financial statements.
3. AFFORDABLE HOUSING LEGISLATION
President Clinton signed the Fiscal Year 1998 HUD appropriations bill into
law, effective October 1, 1997. The new legislation allows all Section 8 HAP
contracts with rents at less than 120% of fair market rents which expire between
now and September 1998 to be renewed for one year. In the event that these
rents exceed 120% of fair market rents, these rents will be reduced to 120% of
fair market rents. At the beginning of Fiscal Year 1999 (October 1, 1998), all
expiring contracts with rents exceeding comparable market rents and whose
mortgages are insured by the Federal Housing Administration (FHA) will be
subject to the Mark-to-Market legislation.
Mark-to-Market implementation will reduce rental income at properties which
are currently subsidized at higher-than-market rental rates, and will therefore
lower cash flow available to meet mortgage payments and operating expenses.
Each affected property will undergo debt restructuring according to terms
determined by an individual property and operations evaluation. This will
-9-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. AFFORDABLE HOUSING LEGISLATION - Continued
involve reducing the first mortgage loan balance to an amount supportable by the
property, taking into account the property's operating expenses and reduced
income. The balance of the amount written down from the first mortgage will be
converted to a non-performing but accruing (soft) second mortgage.
The Section 8 HAP contracts for the following properties expire during the
government's fiscal year 1998.
<TABLE>
<CAPTION>
Units
Authorized for Expiration of
Number of Rental Assistance Section 8
Property Rental Units Under Section 8 HAP Contract
-------- ------------ ----------------- -------------
<S> <C> <C> <C>
Bartley Manor 70 69 07/31/98
Briar Crest I 53 53 06/30/98
Briar Crest II 49 49 06/30/98
Briar Hills 50 33 09/30/98
Highland Manor 111 111 02/08/98
Indian Hills Townhouses 40 24 09/30/98
Tyee Apartments 100 56 07/31/98
Village Green 36 36 09/30/98
Village Square 48 48 09/30/98
Winchester Gardens
Apartments 206 202 08/31/98
Woodside Village 180 114 08/31/98
</TABLE>
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 $40,125 and $78,452 for the
three and six months ended June 30, 1998, respectively and $23,733 and $48,355
for the three and six months ended June 30, 1997, respectively, as direct
reimbursement of expenses incurred on behalf of the Partnership. Such expenses
are included in the statement of operations as general and administrative
expenses. Additionally, 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 $75,000 and $150,000 for the three
and six months ended June 30, 1998, respectively, and like amounts for the three
and six months ended June 30, 1997, respectively.
-10-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. RELATED-PARTY TRANSACTIONS - Continued
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. The Managing General Partner and/or its affiliates earned net fees
for services relating to the sale of Park Heights of $117,028 on February 2,
1996. On March 25, 1998, the remaining balance of $42,500 was paid by the
Partnership. Also, the Managing General Partner and/or its affiliates earned
net fees for services relating to the sale of Southmoor of $62,597 on June 30,
1998. On July 10, 1998, these fees were paid by the Partnership.
-11-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Capital Realty Investors-III Limited Partnership's (the Partnership)
Management's Discussion and Analysis of Financial Condition and Results of
Operations section contains information that may be considered forward looking,
including statements regarding the effect of governmental regulations. Actual
results may differ materially from those described in the forward looking
statements and will be affected by a variety of factors including national and
local economic conditions, the general level of interest rates, terms of
governmental regulations that affect the Partnership and interpretations of
those regulations, the competitive environment in which the Partnership
operates, and the availability of working capital.
General
-------
Some of the rental properties owned by the Local Partnerships are financed
by state housing agencies. The Managing General Partner has been working to
develop strategies to sell or refinance certain properties pursuant to programs
developed by these agencies or other potential buyers. These programs may
include opportunities to sell 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 less than 120% of fair market rents
which expire between now and September 1998 to be renewed for one year. In the
event that these rents exceed 120% of fair market rents, the rents will be
reduced to 120% of fair market rents. At the beginning of Fiscal Year 1999
(October 1, 1998), all expiring contracts with rents exceeding comparable market
rents and whose mortgages are insured by the Federal Housing Administration
(FHA) will be subject to the Mark-to-Market legislation.
Mark-to-Market implementation will reduce rental income at properties which
are currently subsidized at higher-than-market rental rates, and will therefore
lower cash flow available to meet mortgage payments and operating expenses.
Each affected property will undergo debt restructuring according to terms
determined by an individual property and operations evaluation. This will
involve reducing the first mortgage loan balance to an amount supportable by the
property, taking into account the property's operating expenses and reduced
income. The balance of the amount written down from the first mortgage will be
converted to a non-performing but accruing (soft) second mortgage.
Under current law, the write down of an FHA-insured mortgage under Mark-to-
Market would trigger cancellation of debt income to the 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 imputed "income." Proposals to counter these tax
effects have been presented; however, no form of relief has been approved under
-12-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Internal Revenue Service (IRS) regulations at this time. 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.
The Managing General Partner has developed new strategies to deal with the
ever changing environment of affordable housing policy. The mortgage loans on
Section 236 and Section 221(d)(3) properties that are in the 18th year of their
mortgage may be eligible for pre-payment. Properties with expiring Section 8
HAP contracts may become convertible to market-rate apartment properties.
Currently, there are a few lenders that will provide financing either to prepay
the existing mortgage or provide additional funds to allow the property to
convert to market-rate units. Where opportunities exist, the Managing General
Partner will continue to work with the Local Partnerships to develop strategies
that make economic sense for all parties involved.
Financial Condition/Liquidity
-----------------------------
The Partnership's liquidity, with cash resources of $11,251,466 (or
approximately $181.90 per Additional Limited Partner unit) and $8,268,903 (or
approximately $133.68 per Additional Limited Partner unit) as of June 30, 1998
and December 31, 1997, respectively, along with anticipated future cash
distributions from the Local Partnerships, is expected to meet its current and
anticipated operating cash needs. However, see the discussion below regarding
the upcoming maturity of many of the Partnership's purchase money notes.
The Partnership's obligations with respect to its investments in Local
Partnerships, in the form of purchase money notes having a principal balance of
$24,377,577 (exclusive of unamortized discount on purchase money notes of
$2,920,317) plus accrued interest of $44,644,567 as of
June 30, 1998, are payable in full upon the earliest of: (1) sale or refinancing
of the respective Local Partnership's rental property; (2) payment in full of
the respective Local Partnership's permanent loan; or (3) maturity. Purchase
money notes in an aggregate principal amount of $2,100,000 matured on May 1,
1996 and were not paid or extended, and the purchase money noteholders
foreclosed the Partnership's interest in the related Local Partnership during
1997. Purchase money notes in an aggregate principal amount of $1,700,000 which
originally matured on December 31, 1997 have been extended until August 31,
2003. Purchase money notes in an aggregate principal amount of $2,250,000,
$10,354,481, $5,290,000 and $850,000 mature August 31, 1998, January 1, 1999,
February, 1999, and June 30, 1999, respectively. The remaining purchase money
notes mature later during 1999 through 2015. See the notes to the financial
statements for additional information pertaining to these purchase money notes.
The purchase money notes are generally secured by the Partnership's
interest in the respective Local Partnerships. There is no assurance that the
underlying properties will have sufficient appreciation and equity to enable the
Partnership to pay the outstanding principal of and accrued interest on the
purchase money notes. If a purchase money note is not paid in accordance with
its terms, the Partnership will either have to renegotiate the terms of
repayment or risk losing its partnership interest in the Local Partnership. The
Partnership's inability to pay certain of the purchase money note principal and
accrued interest balances when due, and the resulting uncertainty regarding the
Partnership's continued ownership interest in the related Local Partnerships,
does not impact the Partnership's financial condition because the purchase money
-13-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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, except Audubon Towers,
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. In
the case of Audubon Towers, the carrying amount of the Partnership's investment
exceeds the amount of the respective nonrecourse indebtedness related to this
Local Partnership. The Partnership's exposure to loss is limited to this
excess, which at June 30, 1998 was approximately $195,000. The following
purchase money notes mature through June 30, 1999, or have matured as of June
30, 1998:
<TABLE>
<CAPTION>
Property Principal Amount Maturity Date
- -------- ---------------- -------------
<S> <C> <C>
Audubon Towers $ 1,275,000 January 1, 1999
College Park 880,000 January 1, 1999
Congress Plaza 775,000 January 1, 1999
Glen Agnes 850,000 June 30, 1999
Heritage Estates I 2,600,000 January 1, 1999
Heritage Estates II 1,800,000 January 1, 1999
Highland Manor 1,760,000 January 1, 1999
Lakewood 364,481 January 1, 1999
Meadowlanes 650,000 February 28, 1999
Rolling Green 2,250,000 August 31, 1998
Tyee Apartments 1,305,000 February 1, 1999
Victorian Towers 900,000 January 1, 1999
Winchester Garden 1,700,000 December 31, 1997
Woodside Village 3,335,000 February 1, 1999
-----------
$20,444,481
===========
</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, 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. However, should the Managing General Partner be unsuccessful
in reaching a satisfactory strategy regarding the purchase money notes, the
Partnership may lose its interest in these Local Partnerships. If the
Partnership is unable to retain its interest in these Local Partnerships, the
investments in Local Partnerships would be reduced by the Partnership's basis in
these Local Partnerships. Of the thirty-one and thirty-two Local Partnerships
in which the Partnership had invested as of June 30, 1998 and December 31, 1997,
respectively, the above-listed fourteen Local Partnerships represented
approximately 69% and 66%, respectively, of the total investment in and advances
-14-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
to partnerships. For the six months ended June 30, 1998 and 1997, distributions
from these Local Partnerships represented approximately 7% and 45%,
respectively, of total distributions from Local Partnerships. The Partnership's
share of income from these Local Partnerships was $486,301 and $701,157 for the
three and six months ended June 30, 1998, respectively, and $335,769 and
$549,469 for the three and six months ended June 30, 1997, respectively.
The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements.
For the six months ended June 30, 1998 and 1997, the receipt of distributions
from partnerships was adequate to support operating cash requirements.
Results of Operations
---------------------
The Partnership recognized net income for the three months ended June 30,
1998 as opposed to a net loss during the corresponding period in 1997 primarily
due to an increase in share of income from partnerships principally due to the
receipt of proceeds from the refinancing of the loan secured by a first mortgage
on Arboretum Village in June 1998. Partially offsetting the increase in the
Partnership's net income was an increase in interest expense due to an increase
in the amortization of imputed interest and a loss on disposition of investment
in partnership related to the Southmoor sale.
The Partnership's net income for the six months ended June 30, 1998
decreased as compared to the corresponding period in 1997 primarily due to an
extraordinary gain from the extinguishment of debt related to the Cedar Valley
foreclosure in January 1997. Contributing to the decrease in the Partnership's
net income was an increase in interest expense, as discussed above. Partially
offsetting the decrease in the Partnership's net income was an increase in share
of income from partnerships, 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. As a result, the Partnership's recognized income for
the three and six months ended June 30, 1998 did not include losses of $123,394
and $246,787, respectively, compared to excluded losses of $144,951 and
$296,254, respectively, for the three and six months ended June 30, 1997.
No other significant changes in the Partnership's operations have taken
place during this period.
Year 2000 Computer Issue
------------------------
The Year 2000 ("Y2K") Computer Issue refers to the inability of many
computer systems in use today to recognize "00" in the date field as the year
2000 and to recognize the year 2000 as a leap year. The Y2K problem arose
because, for many years, computer software programs, including programs embedded
in hardware, utilized only the last two digits to specify the year with the
assumption that the first two digits were "19." As a result, such programs may
not be able to recognize and process dates beyond 1999; rather they may
recognize and process "00," "01," "02,", etc., incorrectly as 1900, 1901, 1902,
instead of as 2000, 2001, 2002. In the opinion of computer experts, this could
cause such programs to create erroneous results, malfunction, or fail completely
unless corrective measures are taken.
-15-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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 Year 2000 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 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a. None
b. No Reports on Form 8-K were filed with the Commission during the
quarter ended June 30, 1998.
All other items are not applicable.
-16-
<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-III LIMITED PARTNERSHIP
------------------------------------------------
(Registrant)
by: C.R.I., Inc.
Managing General Partner
August 5, 1998 by: /s/ Michael J. Tuszka
- ----------------- ---------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
and Principal Accounting Officer)
-17-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE SECOND QUARTER 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 11,251,466
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 33,339,555
<CURRENT-LIABILITIES> 0
<BONDS> 66,255,347
0
0
<COMMON> 0
<OTHER-SE> (33,088,619)
<TOTAL-LIABILITY-AND-EQUITY> 33,339,555
<SALES> 0
<TOTAL-REVENUES> 5,305,777
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 342,852
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,936,901
<INCOME-PRETAX> 1,026,024
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,026,024
<DISCONTINUED> (221,727)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 804,297
<EPS-PRIMARY> 13.00
<EPS-DILUTED> 13.00
</TABLE>
