<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 September 30, 1998
------------------
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 September 30, 1998)
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
INDEX TO FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
Page
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1998
and December 31, 1997 . . . . . . . . . . . . . 1
Consolidated Statements of Operations and
Accumulated Losses - for the three and nine months
ended September 30, 1998 and 1997 . . . . . . . 2
Consolidated Statements of Cash Flows - for
the nine months ended September 30, 1998 and 1997 3
Notes to Consolidated Financial Statements -
September 30, 1998 and 1997 . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . 14
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 20
Signature . . . . . . . . . . . . . . . . . . . . . . . . 21
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . 22
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 21,214,041 $ 21,304,841
Cash and cash equivalents 11,473,945 8,268,903
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $470,970 and $450,706, respectively 491,150 519,717
Property purchase costs, net of accumulated amortization of
$430,729 and $419,846, respectively 472,350 508,863
Other assets 35,576 19,170
------------ ------------
Total assets $ 33,687,062 $ 30,621,494
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 21,032,391 $ 20,663,428
Accrued interest payable 45,560,503 43,705,679
Accounts payable and accrued expenses 122,455 102,803
Consulting fees payable to related parties -- 42,500
------------ ------------
Total liabilities 66,715,349 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 (83,386,373) (84,251,002)
------------ ------------
Total partners' deficit (33,028,287) (33,892,916)
------------ ------------
Total liabilities and partners' deficit $ 33,687,062 $ 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
AND ACCUMULATED LOSSES
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Share of income from partnerships $ 1,979,527 $ 713,267 $ 7,057,309 $ 1,519,520
------------ ------------ ------------ ------------
Other revenue and expenses:
Revenue:
Interest and other income 152,509 122,620 380,504 224,486
------------ ------------ ------------ ------------
Expenses:
Interest 1,906,547 1,794,916 5,843,448 5,395,287
Management fee 75,000 75,000 225,000 225,000
General and administrative 52,943 51,130 158,324 228,936
Professional fees 21,671 24,869 77,490 72,530
Amortization 15,543 15,826 47,195 48,374
------------ ------------ ------------ ------------
2,071,704 1,961,741 6,351,457 5,970,127
------------ ------------ ------------ ------------
Total other revenue and expenses (1,919,195) (1,839,121) (5,970,953) (5,745,641)
------------ ------------ ------------ ------------
Income (loss) before gain on disposition of
investment in partnership 60,332 (1,125,854) 1,086,356 (4,226,121)
Gain (loss) on disposition of investments in partnerships -- 1,700,168 (221,727) 1,700,168
------------ ------------ ------------ ------------
Income (loss) before extraordinary gain from
extinguishment of debt 60,332 574,314 864,629 (2,525,953)
Extraordinary gain from extinguishment of debt -- -- -- 5,473,855
------------ ------------ ------------ ------------
Net income 60,332 574,314 864,629 2,947,902
Accumulated losses, beginning of period (83,446,705) (83,010,342) (84,251,002) (85,383,930)
------------ ------------ ------------ ------------
Accumulated losses, end of period $(83,386,373) $(82,436,028) $(83,386,373) $(82,436,028)
============ ============ ============ ============
</TABLE>
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
AND ACCUMULATED LOSSES - Continued
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income allocated to General Partners (1.51%) $ 911 $ 8,672 $ 13,056 $ 44,513
============ ============ ============ ============
Net income allocated to Initial and Special
Limited Partners (1.49%) $ 899 $ 8,557 $ 12,883 $ 43,924
============ ============ ============ ============
Net income allocated to Additional Limited Partners (97%) $ 58,522 $ 557,085 $ 838,690 $ 2,859,465
============ ============ ============ ============
Net income per unit of Additional Limited
Partnership Interest based on 60,000 units outstanding $ .98 $ 9.28 $ 13.98 $ 47.66
============ ============ ============ ============
</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 nine months ended
September 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 864,629 $ 2,947,902
Adjustments to reconcile net income to net cash used in operating activities:
Share of income from partnerships (7,057,309) (1,519,520)
Amortization of deferred costs 47,195 48,374
Amortization of discount on purchase money notes 3,029,482 2,514,684
Loss (gain) on disposition of investments in partnerships 221,727 (1,700,168)
Extraordinary gain from extinguishment of debt -- (5,473,855)
Payment of purchase money note interest (447,575) (310,434)
Changes in assets and liabilities:
Increase in other assets (16,406) (26,494)
Increase in accrued interest payable 2,819,485 2,879,499
Increase in accounts payable and accrued expenses 19,652 16,548
Decrease in consulting fees payable to related parties (42,500) --
------------ ------------
Net cash used in operating activities (561,620) (623,464)
------------ ------------
Cash flows from investing activities:
Receipt of distributions from partnerships 6,778,865 950,656
Proceeds from disposition of investments in partnerships 165,402 5,113,774
------------ ------------
Net cash provided by investing activities 6,944,267 6,064,430
------------ ------------
Cash flows from financing activities:
Pay-off of purchase money notes and related interest (3,177,605) --
Payment of purchase money note principal -- (214,800)
------------ ------------
Net cash used in financing activities (3,177,605) (214,800)
------------ ------------
Net increase in cash and cash equivalents 3,205,042 5,226,166
Cash and cash equivalents, beginning of period 8,268,903 3,942,254
------------ ------------
Cash and cash equivalents, end of period $ 11,473,945 $ 9,168,420
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 964,661 $ 310,434
============ ============
</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
SEPTEMBER 30, 1998 AND 1997
(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 September 30, 1998, and the results of its operations for the three and
nine months ended September 30, 1998 and 1997, and its cash flows for the nine
months ended September 30, 1998 and 1997. The results of operations for the
interim period ended September 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.
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
The Partnership's obligations with respect to its investments in Local
Partnerships, in the form of purchase money notes having a principal balance of
$22,852,577 (exclusive of unamortized discount on purchase money notes of
$1,939,730) plus accrued interest of $45,526,527 as of September 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 noteholders foreclosed on 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 January 31, 2001. Purchase money notes in an
aggregate principal amount of $2,250,000 which originally matured on August 31,
1998 have been extended until August 31, 2003. Purchase money notes in
aggregate principal amounts of $10,354,481, $5,290,000, $850,000 and $734,500
mature January 1, 1999, February, 1999, June 30, 1999 and August 1, 1999,
respectively. The remaining purchase money notes mature later during 1999
through 2015.
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 impact the Partnership's
financial condition because the purchase money notes are nonrecourse and secured
-5-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN PARTNERSHIPS - Continued
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 each of the related Local Partnerships. Thus, even a complete
loss of one of these Local Partnerships would not have a material impact on the
financial condition of the Partnership. 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 September 30,
1998, was approximately $230,000. See further discussion of certain purchase
money notes, below.
The following chart presents information related to purchase money notes
which mature through September 30, 1999, or which have matured and remain unpaid
or unextended as of September 30, 1998.
-6-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN PARTNERSHIPS - Continued
<TABLE>
<CAPTION>
Carrying Amount of
Partnership's Investment
in and Advances to Aggregate
Number of Underlying Local Accrued Interest
Purchase Money Underlying Partnerships as of Aggregate Balance as of
Note Maturity Local Partnerships September 30, 1998 Principal Balance September 30, 1998
---------------- ------------------ ------------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
1st Quarter 1999 11 $ 13,183,184 $ 15,644,481 $ 29,230,511
2nd Quarter 1999 1 1,369,130 850,000 1,511,908
3rd Quarter 1999 1 1,226,151 734,500 1,292,338
----- --------------- ------------ -------------
13 $ 15,778,465 $ 17,228,981 $ 32,034,757
===== =============== ============ =============
</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. 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 always be successful. Based on preliminary
discussions with the holders of purchase money notes maturing through September
30, 1999, the Managing General Partner anticipates that, at least in some
instances, the noteholders may not be willing to negotiate using any of the
strategies mentioned above. In such instances, upon maturity of the purchase
money notes, the noteholders 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 result in
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 the cash flow distributed by the Local Partnership
from rental operations, future sales or refinancings. Of the 31 and 32 Local
Partnerships in which the Partnership had invested as of September 30, 1998 and
December 31, 1997, respectively, the 13 Local Partnerships with associated
purchase money notes maturing through September 30, 1999, represent the
following percentages of the Partnership's total investments in and advances to
Local Partnerships, total distributions received from Local Partnerships, and
share of income from Local Partnerships.
-7-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN PARTNERSHIPS - Continued
<TABLE>
<CAPTION>
Percentage of Total
Investments in and
Advances to
As of Local Partnerships
------------------ ------------------
<S> <C>
September 30, 1998 74%
December 31, 1997 70%
Percentage of Total Partnership's Share of
Distributions Received Income from
For Periods Ending from Local Partnerships Local Partnerships
------------------ ----------------------- ----------------------
<S> <C> <C>
September 30, 1998 6% $ 1,202,166
September 30, 1997 32% 1,519,520
</TABLE>
The Managing General Partner continues to address the impending maturity of
its debt obligations and seeks strategies which will provide the most favorable
outcome to the Additional Limited Partners. However, there can be no assurance
that these strategies will be successful.
Interest expense on the Partnership's purchase money notes was $1,906,547
and $5,843,448 for the three and nine months ended September 30, 1998,
respectively, and $1,794,916 and $5,395,287 for the three and nine months ended
September 30, 1997, respectively. Amortization of imputed interest on purchase
money notes increased interest expense by $980,587 and $3,029,482 for the three
and nine months ended September 30, 1998, respectively, and by $838,228 and
$2,514,684 for the three and nine months ended September 30, 1997, respectively.
The accrued interest on the purchase money notes of $45,526,527 and $43,671,703
as of September 30, 1998 and December 31, 1997, respectively, is due on the
respective maturity dates of the purchase money notes or earlier, in some
instances, if the pertinent Local Partnership has distributable net cash flow,
as defined in the relevant Local Partnership 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 property owned by Arboretum Village. A portion of the
refinancing proceeds was used to pay in full the Partnership's purchase money
note obligation totaling $774,325 related to this property. Additionally, the
Partnership received $2,670,000 during the second quarter of 1998 as additional
proceeds from the refinancing. The proceeds received by the Partnership
(including the proceeds paid to the noteholders) were in excess of the
Partnership's basis in Arboretum Village by approximately $3.4 million, and are
included in share of income from partnerships.
-8-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN PARTNERSHIPS - Continued
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 noteholders agreed to extend
the purchase money notes until January 1997. On January 16, 1997, the
noteholders foreclosed on the Partnership's interest in Cedar Valley. As a
result of such foreclosure, the noteholders acquired ownership of the
Partnership's interest in the Local Partnership. The Partnership's default on
the purchase money note 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 loss of its
interest in the Local Partnership did not impact the financial statements
because 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.
Heritage Estates I and Heritage Estates II
------------------------------------------
The Managing General Partner is currently exploring options to restructure
or extend the purchase money notes related to Heritage Estates Associates Phase
I (Heritage Estates I) and Heritage Estates Associates Phase II (Heritage
Estates II). The purchase money notes in aggregate principal amounts of
$2,600,000 and $1,800,000 for Heritage Estates I and Heritage Estates II,
respectively, are currently due to mature January 1, 1999. There is no
assurance that a restructuring or an extension will be obtained.
Highland Manor
--------------
Under the Mark-to-Market program (see Footnote 3), the first mortgage debt
related to the property owned by Highland Manor, Limited (Highland Manor) was
restructured on July 28, 1998. This debt was split into two pieces: a new
first mortgage loan of $619,872 and a new second mortgage loan of $797,128. The
balance of the existing first mortgage loan of approximately $841,824 was
forgiven. The debt forgiveness of $841,824 will result in taxable income to the
partners of the Partnership.
The new first mortgage loan bears interest at the rate of 7.5% per annum
and will be amortized over its term of 30 years. The new second mortgage loan
does not bear interest and requires annual principal payments of $39,856. In
addition, the second mortgage loan requires a payment of 50% of Appreciation, as
defined in the loan documents, upon sale or refinancing. As part of this
transaction, the Ginnie Mae Certificate holder sold the restructured first and
second mortgage loans to the holder of the largest of the three purchase money
notes made by the Partnership to finance a portion of the acquisition of its
interest in Highland Manor.
-9-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN PARTNERSHIPS - Continued
The Partnership has reached an agreement in principle with the holders of
the purchase money notes related to Highland Manor to extend the maturity
thereof from January 1, 1999 to January 1, 2004, subject to the noteholders'
right to accelerate the maturity date upon six months' notice. The purchase
money notes are in the aggregate principal amount of $1,760,000. In connection
with the terms of the extension agreement, in addition to the standard payments
required to be made to the noteholders by the Partnership from cash flow
distributions from Highland Manor, the Partnership will make annual payments to
the noteholders of $100,000 on January 15th of each calendar year commencing
January 15, 2000. On October 23, 1998, the Partnership made a $100,000
prepayment of interest, which amount is being held in escrow, along with the
purchase money note modification documents, until January 1999. The prepayment
and subsequent payments will be applied first as prepayment of interest, then to
accrued interest, and thereafter to principal.
Rolling Green - Milford
-----------------------
The Managing General Partner successfully negotiated an extension of the
maturity date of the purchase money notes related to Roberts Milford Associates
(Rolling Green) to February 28, 2001. These notes have an aggregate original
principal amount of $2,250,000; 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. This was a contingency which was outlined in
the original purchase money note modification agreement. The refinancing of the
property's mortgage loan closed on July 31, 1998. The Partnership's share of
the refinancing proceeds, which was $1,525,000, was applied against the purchase
money note principal. These proceeds were in excess of the Partnership's basis
in Rolling Green and were included in share of income from partnerships.
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 pay in full the Partnership's purchase money note
obligation related to this property. In addition, on July 1, 1998, the
Partnership received cash proceeds of $228,000 from the sale. The sale proceeds
were not sufficient to recover the Partnership's basis in the Local Partnership
and resulted in a net financial statement loss of $221,727. The federal tax
gain is estimated to be approximately $1.1 million. The Managing General
Partner and/or its affiliates earned net fees relating to this sale of $31,299.
On July 10, 1998, these fees were paid by the Partnership.
Walden Apartments
------------------
On July 2, 1997, New Fifth Lakewood Associates Limited Partnership (Walden
Apartments) sold the property. The sale of the property generated net cash
proceeds to the Partnership of approximately $4.6 million at closing.
Subsequent to closing, the Partnership received additional funds totaling
$614,841 related to the Partnership's share of the release of funds held as
-10-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN PARTNERSHIPS - Continued
security deposits, insurance accounts, real estate tax escrows and other
accounts. Also, subsequent to closing, the Partnership paid $79,073 related to
outstanding expense invoices of the Local Partnership. The sale resulted in an
estimated net financial statement gain of approximately $1.7 million. The
federal tax gain was approximately $8.8 million.
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 default 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. (C.R.H.C., 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 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 interests in
the Local Partnership for an amount equal to the outstanding principal balance
of the purchase money notes plus 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
---------------------------
The following are combined statements of operations for the 31 and 32 Local
Partnerships in which the Partnership is invested as of September 30, 1998 and
1997, respectively. The 1997 results include information on Cedar Valley
through the date of foreclosure on the Partnership's interest therein. The
statements have been compiled from information supplied by the management agents
of the projects and are unaudited.
-11-
<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 nine months ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rental revenue $ 7,223,759 $ 7,266,907 $ 22,136,359 $ 23,699,376
Other 314,772 369,157 1,097,907 1,131,610
------------ ------------ ------------ ------------
7,538,531 7,636,064 23,234,266 24,830,986
------------ ------------ ------------ ------------
Expenses:
Operating 4,129,003 4,044,474 13,160,372 14,242,800
Interest 1,782,734 1,747,360 5,347,933 5,498,698
Depreciation and amortization 1,295,839 1,268,075 3,886,353 3,994,888
------------ ------------ ------------ ------------
7,207,576 7,059,909 22,394,658 23,736,386
------------ ------------ ------------ ------------
Net income $ 330,955 $ 576,155 $ 839,608 $ 1,094,600
============ ============ ============ ============
</TABLE>
As of September 30, 1998 and December 31, 1997, the Partnership's share of
cumulative losses to date for nine of the 31 and 32, respectively, Local
Partnerships exceeded the amount of the Partnership's investments in and
advances to those Local Partnerships by $5,758,023 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 legislation allowed all Section 8 HAP
contracts with rents at less than 120% of fair market rents which expire between
October 1997 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.
-12-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. AFFORDABLE HOUSING LEGISLATION - Continued
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.
-13-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. AFFORDABLE HOUSING LEGISLATION - Continued
The Section 8 HAP contracts for the following properties expired during
the government's fiscal year 1998 and have been renewed as indicated.
<TABLE>
<CAPTION>
Units Original Renewed
Authorized for Expiration of Expiration of
Number of Rental Assistance Section 8 Section 8
Property Rental Units Under Section 8 HAP Contract HAP Contract
-------- ------------ ----------------- ------------- --------------
<S> <C> <C> <C> <C>
Bartley Manor 70 69 07/31/98 08/30/99
Briar Crest I 53 53 06/30/98 06/30/99
Briar Crest II 49 49 06/30/98 06/30/99
Briar Hills 50 33 09/30/98 09/30/99
Highland Manor 111 111 02/08/98 05/12/99
Indian Hills Townhouses 40 24 09/30/98 09/30/99
Tyee Apartments 100 56 07/31/98 07/31/99
Village Green 36 36 09/30/98 09/30/99
Village Square 48 48 09/30/98 10/01/99
Winchester Gardens Apartments 206 202 08/31/98 01/31/01
Woodside Village 180 114 08/31/98 09/30/99
</TABLE>
The Section 8 HAP contracts for the following properties have expired or
will expire during the government's fiscal year 1999.
<TABLE>
<CAPTION>
Estimated
Units Original Renewed
Authorized for Expiration of Expiration of
Number of Rental Assistance Section 8 Section 8
Property Rental Units under Section 8 HAP Contract HAP Contract
-------- ------------ ------------------ ------------- -------------
<S> <C> <C> <C> <C>
Greeley Manor 128 119 11/01/98 11/01/99
Lakewood Apartments 50 50 08/01/99 (1)
</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. It is difficult to predict
the impact on the Local Partnerships and the resulting impact on the Partnership
at this time.
-14-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 $31,963 and $110,415 for the
three and nine months ended September 30, 1998, respectively and $25,198 and
$73,552 for the three and nine months ended September 30, 1997, respectively, as
direct reimbursement of expenses incurred on behalf of the Partnership. Such
expenses are included in the accompanying consolidated statements of operations
as general and administrative expenses. Additionally, 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 $75,000 and $225,000 for the three
and nine months ended September 30, 1998, respectively, and like amounts for the
three and nine months ended September 30, 1997.
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 $31,299 on June 30,
1998. On July 10, 1998, these fees were paid by the Partnership.
-15-
<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 legislation
allowed all Section 8 contracts with rents at less than 120% of fair market
rents which expire between October 1997 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
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. The newly recreated
second mortgage will accrue interest at a rate below market; the Internal
Revenue Service issued a ruling in July 1998 that the below market rate of
interest will not generate further ordinary income. Each property subject to
-16-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Mark-to-Market will be affected in a different manner, and it is very difficult
to predict the exact form of restructuring or potential tax liabilities to the
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 unrestricted cash resources of
$11,473,945 (or approximately $185.50 per Additional Limited Partner unit) and
$8,268,903 (or approximately $133.68 per Additional Limited Partner unit) as of
September 30, 1998 and December 31, 1997, respectively, along with anticipated
future cash distributions from the Local Partnerships, are 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
$22,852,577 (exclusive of unamortized discount on purchase money notes of
$1,939,730) plus accrued interest of $45,526,527 as of
September 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 noteholders foreclosed on 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 January 31, 2001.
Purchase money notes in an aggregate principal amount of $2,250,000 which
originally matured on August 31,1998 have been extended until August 31, 2003.
Purchase money notes in aggregate principal amounts of $10,354,481, $5,290,000,
$850,000 and $734,500 mature January 1, 1999, February, 1999, June 30, 1999, and
August 1, 1999, respectively. The remaining purchase money notes mature later
during 1999 through 2015. See the notes to the consolidated financial
statements for additional information pertaining to 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
-17-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
the resulting uncertainty regarding the Partnership's continued ownership
interest in the related Local Partnerships, does not impact the Partnership's
financial condition because the purchase money notes are nonrecourse and secured
solely by the Partnership's interest in the related Local Partnerships.
Therefore, should the investment in any of the Local Partnerships with maturing
purchase money notes, 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 each of the related Local Partnerships. Thus, even a complete
loss of one of these Local Partnerships would not have a material impact on the
financial condition of the Partnership. 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 September 30,
1998 was approximately $230,000. See further discussions of certain purchase
money notes, below.
The following chart presents information related to purchase money notes
which mature through September 30, 1999, or which have matured and remain unpaid
or unextended as of September 30, 1998.
-18-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
Carrying Amount of
Partnership's Investment
in and Advances to Aggregate
Number of Underlying Local Accrued Interest
Purchase Money Underlying Partnerships as of Aggregate Balance as of
Note Maturity Local Partnerships September 30, 1998 Principal Balance September 30, 1998
---------------- ------------------ ------------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
1st Quarter 1999 11 $ 13,183,184 $ 15,644,481 $ 29,230,511
2nd Quarter 1999 1 1,369,130 850,000 1,511,908
3rd Quarter 1999 1 1,226,151 734,500 1,292,338
---- --------------- ------------ -------------
13 $ 15,778,465 $ 17,228,981 $ 32,034,757
==== =============== ============ =============
</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. 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 always be successful. Based on preliminary
discussions with the holders of purchase money notes maturing through September
30, 1999, the Managing General Partner anticipates that, at least in some
instances, the noteholders may not be willing to negotiate using any of the
strategies mentioned above. In such instances, upon maturity of the purchase
money notes, the noteholders 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 result in
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 the cash flow distributed by the Local Partnership
from rental operations, future sales or refinancings. Of the 31 and 32 Local
Partnerships in which the Partnership is invested as of September 30, 1998 and
December 31, 1997, respectively, the 13 Local Partnerships with associated
purchase money notes maturing through September 30, 1999, represent the
following percentages of the Partnership's total investments in and advances to
Local Partnerships, total distributions received from Local Partnerships, and
share of income from Local Partnerships.
-19-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
Percentage of Total
Investments in and
Advances to
As of Local Partnerships
------------------ ------------------
<S> <C>
September 30, 1998 74%
December 31, 1997 70%
Percentage of Total Partnership's Share of
Distributions Received Income from
For Periods Ending from Local Partnerships Local Partnerships
------------------ ----------------------- ----------------------
<S> <C> <C>
September 30, 1998 6% $ 1,202,166
September 30, 1997 32% 1,519,520
</TABLE>
The Managing General Partner is continuing to address the impending
maturity of its debt obligations and seeks strategies which will provide the
most favorable outcome to the Additional Limited Partners. However, there can
be no assurance that these strategies will be successful.
The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements.
For the nine months ended September 30, 1998 and 1997, the receipt of
distributions from Local Partnerships was adequate to support operating cash
requirements.
The Managing General Partner plans to distribute $600,000 (or $10 per
Additional Limited Partner Unit) to the Additional Limited Partners from the
proceeds generated from the sale of Southmoor and the refinancing of the
Arboretum mortgage loan by November 30, 1998 to the holders of record as of
September 30, 1998. The Managing General Partner intends to retain all of the
Partnership's remaining undistributed proceeds for the possible repayment,
prepayment or retirement of the Partnership's outstanding purchase money notes
related to other Local Partnerships.
Results of Operations
---------------------
The Partnership's net income for the three months ended September 30, 1998,
decreased from the corresponding period in 1997 principally due to the gain on
disposition of the Partnership's investment in Walden Apartments in 1997.
Contributing to the decrease in the Partnership's net income was an increase in
-20-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
interest expense due to an increase in the amortization of imputed interest.
Partially offsetting the decrease in the Partnership's net income was an
increase in share of income from partnerships primarily due to the receipt of
proceeds from the Rolling Green-Milford mortgage refinancing in July 1998, and
an increase in interest income due to higher cash and cash equivalent balances.
The Partnership's net income for the nine months ended September 30, 1998
decreased from the corresponding period in 1997 principally due to the
extraordinary gain from extinguishment of debt related to the Cedar Valley
foreclosure in January 1997, and the gain on disposition of the Partnership's
investment in Walden Apartments in 1997. Contributing to the decrease in the
Partnership's net income was an increase in interest expense, as discussed
above, and a loss on disposition of the Partnership's investment in Southmoor in
1998. Partially offsetting the decrease in the Partnership's net income was an
increase in share of income from partnerships due to the Arboretum and Rolling
Green-Milford mortgage refinancings in 1998, an increase in interest income due
to higher cash and cash equivalent balances, and a decrease in general and
administrative expenses due to LIHPRHA processing fees which were paid by the
Partnership in 1997 in connection with the Briar Crest I, Briar Crest II and
Briar Hills purchase money note extensions.
For financial reporting purposes, the Partnership, as a limited partner in
the Local Partnerships, does not record losses from the Local Partnerships in
excess of its investment to the extent that the Partnership has no further
obligation to advance funds or provide financing to the Local Partnerships. As
a result, the Partnership's recognized income for the three and nine months
ended September 30, 1998 did not include losses of $126,267 and $373,054,
respectively, compared to excluded losses of $144,954 and $441,208 for the three
and nine months ended September 30, 1997, respectively.
No other significant changes in the Partnership's operations have taken
place during this period.
Year 2000 Computer Issue
------------------------
The Year 2000 ("Y2K") computer issue refers to the inability of many
computer systems in use today to recognize "00" in the date field as the year
2000 and to recognize the year 2000 as a leap year. The Y2K problem arose
because, for many years, computer software programs, including programs embedded
in hardware, utilized only the last two digits to specify the year with the
assumption that the first two digits were "19." As a result, such programs may
not be able to recognize and process dates beyond 1999; rather they may
recognize and process "00," "01," "02,", etc., incorrectly as 1900, 1901, 1902,
instead of as 2000, 2001, 2002. In the opinion of computer experts, this could
cause such programs to create erroneous results, malfunction, or fail completely
unless corrective measures are taken.
The Partnership utilizes software and related computer technologies
essential to its operations that will be affected by the Y2K issue. To address
the issue, the Managing General Partner has developed and is currently
implementing a plan (the "Y2K Project") designed to ensure that the Y2K date
change will not have an adverse impact on the Partnership's operations. The Y2K
Project is on schedule and the Managing General Partner expects completion by
the end of 1999.
-21-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
The Y2K Project consists of four phases -- Planning, Assessment,
Implementation and Testing. The Planning Phase began early in 1998 and is
substantially complete. Under the Planning Phase, the Managing General Partner
conducted an inventory of all internal hardware and software systems, data
interfaces, business operations and non-information technology functions which
may be susceptible to the Y2K issue. The Managing General Partner expects final
completion of this phase by November 30, 1998. The Assessment Phase is
currently underway. Under the Assessment Phase, all applications and functions
identified in the Planning Phase are being analyzed to determine Y2K compliance
and the materiality of each identified risk is being determined. In the event
of noncompliance, for a material risk, timetables for corrective action, as well
as estimated costs to achieve compliance, are being determined. Completion of
this phase is expected by December 31, 1998. The Implementation Phase is also
underway. Renovation and replacement of existing internal hardware and software
systems has begun and completion is expected by June 1999. Additionally, the
Managing General Partner is currently working with third party vendors and
service providers to verify their Y2K compliance. Final completion of this
phase is expected by June 1999. The Testing Phase, which will include testing
of internal applications as well as third party systems, is expected to begin
during January 1999 and continue throughout 1999. Contingency planning is
scheduled to commence during the fourth quarter 1998 and be completed by year-
end 1999. Although the expense associated with the Y2K Project cannot presently
be determined, 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 September 30, 1998.
All other items are not applicable.
-22-
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
------------------------------------------------
(Registrant)
by: C.R.I., Inc.
--------------------------------------------
Managing General Partner
November 12, 1998 by: /s/ Michael J. Tuszka
- ----------------- ----------------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
and Principal Accounting Officer)
-23-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
-24-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE THIRD QUARTER 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 11,473,945
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 33,687,062
<CURRENT-LIABILITIES> 0
<BONDS> 66,592,894
0
0
<COMMON> 0
<OTHER-SE> (33,028,287)
<TOTAL-LIABILITY-AND-EQUITY> 33,687,062
<SALES> 0
<TOTAL-REVENUES> 7,437,813
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 508,009
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,843,448
<INCOME-PRETAX> 864,629
<INCOME-TAX> 0
<INCOME-CONTINUING> 864,629
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 864,629
<EPS-PRIMARY> 13.98
<EPS-DILUTED> 13.98
</TABLE>