<PAGE>
FORM 10-QSB
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
--------------
Commission file number 0-11962
--------------
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
--------------------------------------------------------------------------
(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. [X] Yes [ ]
No
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Not applicable Not applicable
- -------------------------- ---------------------------------------
(Class) (Outstanding at March 31, 1998)
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
INDEX TO FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 1998
Page
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1998
and December 31, 1997 . . . . . . . . . . . . . 1
Consolidated Statements of Operations - for
the three months ended March 31, 1998 and 1997 . 2
Consolidated Statements of Cash Flows - for
the three months ended March 31, 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 3. Defaults Upon Senior Securities . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 16
Signature . . . . . . . . . . . . . . . . . . . . . . . . 17
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . 18
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
---------------------
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Investments in partnerships $ 21,158,255 $ 21,304,841
Cash and cash equivalents 8,318,997 8,268,903
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $458,792 and $450,706, respectively 511,631 519,717
Property purchase costs, net of accumulated amortization of
$427,585 and $419,846, respectively 501,124 508,863
Other assets 18,919 19,170
------------ ------------
Total assets $ 30,508,926 $ 30,621,494
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 21,664,269 $ 20,663,428
Accrued interest payable 44,383,941 43,705,679
Accounts payable and accrued expenses 91,318 102,803
Consulting fees payable to related parties -- 42,500
------------ ------------
Total liabilities 66,139,528 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 (85,988,688) (84,251,002)
------------ ------------
Total partners' deficit (35,630,602) (33,892,916)
------------ ------------
Total liabilities and partners' deficit $ 30,508,926 $ 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
March 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Share of income from partnerships $ 281,294 $ 351,087
------------ ------------
Other revenue and expenses:
Revenue:
Interest and other income 105,339 50,069
------------ ------------
Expenses:
Interest 1,953,594 1,970,410
Management fee 75,000 75,000
General and administrative 53,560 39,412
Professional fees 26,340 23,988
Amortization 15,825 16,274
------------ ------------
2,124,319 2,125,084
------------ ------------
Total other revenue and expenses (2,018,980) (2,075,015)
------------ ------------
Loss before extraordinary gain from extinguishment of debt (1,737,686) (1,723,928)
Extraordinary gain from extinguishment of debt -- 5,473,855
------------ ------------
Net (loss) income (1,737,686) 3,749,927
Accumulated losses, beginning of period (84,251,002) (85,383,930)
------------ ------------
Accumulated losses, end of period $(85,988,688) $(81,634,003)
============ ============
(Loss) income allocated to General Partners (1.51%) $ (26,239) $ 56,624
============ ============
(Loss) income allocated to Initial and Special Limited Partners (1.49%) $ (25,892) $ 55,874
============ ============
(Loss) income allocated to Additional Limited Partners (97%) $ (1,685,555) $ 3,637,429
============ ============
(Loss) income per unit of Additional Limited Partnership Interest based on
60,000 units outstanding $ (28.09) $ 60.62
============ ============
</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 CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (1,737,686) $ 3,749,927
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Share of income from partnerships (281,294) (351,087)
Amortization of deferred costs 15,825 16,274
Amortization of discount on purchase money notes 1,000,841 1,001,221
Extraordinary gain on extinguishment of debt -- (5,473,855)
Payment of purchase money note interest (274,491) (131,758)
Changes in assets and liabilities:
Decrease (increase) in other assets 251 (7,720)
Increase in accrued interest payable 952,753 969,189
Decrease in accounts payable and accrued expenses (11,485) (6,524)
Decrease in consulting and fees payable to related parties (42,500) --
------------ ------------
Net cash used in operating activities (377,786) (234,333)
------------ ------------
Cash flows from investing activities:
Receipt of distributions from partnerships 427,880 280,243
------------ ------------
Net cash provided by investing activities 427,880 280,243
------------ ------------
Net increase in cash and cash equivalents 50,094 45,910
Cash and cash equivalents, beginning of period 8,268,903 3,942,254
------------ ------------
Cash and cash equivalents, end of period $ 8,318,997 $ 3,988,164
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 274,491 $ 131,758
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-3-
<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 March 31, 1998, and the results of its operations and its cash flows for
the three months ended March 31, 1998 and 1997. The results of operations for
the interim period ended March 31, 1998, are not necessarily indicative of the
results to be expected for the full year.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles and with the
instructions to Form 10-QSB. Certain information and accounting policies and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such instructions. These condensed financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Partnership's annual report on Form 10-K at December 31, 1997.
2. INVESTMENTS IN 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
$25,513,096 (exclusive of unamortized discount on purchase money notes of
$3,968,371) plus accrued interest of $44,349,965 as of March 31, 1998, are
payable in full upon the earliest of: (i) sale or refinancing of the respective
Local Partnership's rental property; (ii) payment in full of the respective
Local Partnership's permanent loan; or (iii) maturity. Purchase money notes in
an aggregate principal amount of $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 matured on December
31, 1997 and have not been paid or extended. Purchase money notes in an
aggregate principal amount of $2,250,000, $10,360,000 and $5,670,000 mature on
August 31, 1998, January 1, 1999 and February, 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 purchase money notes' principal and accrued interest when
due. If a purchase money note is not paid in accordance with its terms, the
Partnership will either have to renegotiate the terms of repayment or risk
losing its partnership interest in the Local Partnership. The Partnership's
inability to pay certain of the purchase money note principal and accrued
interest balances when due, and the resulting uncertainty regarding the
Partnership's continued ownership interest in the related Local Partnerships,
does not impact the Partnership's financial condition because the purchase money
notes are non-recourse 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 non-recourse
indebtedness of each of the maturing purchase money notes exceeds the carrying
-4-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN PARTNERSHIPS - Continued
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 non-recourse indebtedness related to this
Local Partnership. The Partnership's exposure to loss is limited to this
excess, which at March 31, 1998 was approximately $264,000. The following
purchase money notes mature through March 31, 1999:
<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
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 370,000 January 1, 1999
Meadowlanes 650,000 February 28, 1999
Rolling Green 2,250,000 August 31, 1998
Southmoor 380,000 February 1, 1999
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
-----------
$19,980,000
===========
</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-two Local Partnerships in which the
Partnership had invested in as of March 31, 1998 and December 31, 1997,
respectively, these fourteen Local Partnerships represented approximately 64%
and 61% of the total investment in and advances to partnerships as of March 31,
1998 and December 31, 1997, respectively. For the three months ended March 31,
1998 and 1997, distributions from these Local Partnerships represented
approximately 51% and 34%, respectively, of total distributions from Local
Partnerships. The Partnership's share of income from these Local Partnerships
was approximately $239,000 and $228,600 for the periods ended March 31, 1998 and
1997, respectively.
-5-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN PARTNERSHIPS - Continued
Interest expense on the Partnership's purchase money notes for the three
months ended March 31, 1998 and 1997 was $1,953,594 and $1,970,410,
respectively. Amortization of the imputed interest on purchase money notes
increased interest expense during the three months ended March 31, 1998 and 1997
by $1,000,841 and $1,001,221, respectively. The accrued interest on the
purchase money notes of $44,349,965 and $43,671,703 as of March 31, 1998 and
December 31, 1997, respectively, is due on the respective maturity dates of the
purchase money notes or earlier, in some instances, if the 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 Villages) refinanced the loan secured by a first
mortgage on the related property. A portion of the refinancing proceeds were
used to pay-off the Partnership's purchase money note obligation related to this
property. Additionally, the Partnership anticipates receiving approximately
$2.2 million 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 non-recourse 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.
-6-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN PARTNERSHIPS - Continued
Rolling Green
-------------
The purchase money notes related to Roberts Milford Associates (Rolling
Green), which aggregate a principal amount of $2,250,000, are due to mature on
August 31, 1998. The Managing General Partner has negotiated an agreement in
principle to extend the maturity date of the purchase money notes related to
Rolling Green for a period of thirty months, with an additional thirty month
extension if the property's mortgage is refinanced prior to the expiration of
the first extension. In connection with the proposed extension of the purchase
money notes, the Managing General Partner, the local managing general partner
and the purchase money noteholders are jointly exploring various options to
refinance the Massachusetts Housing Finance Agency (MHFA) and the U.S.
Department of Housing and Urban Development (HUD) Section 236 interest rate
subsidized mortgage loan related to this property. The parties have signed a
term sheet to restructure the deal, and as of May 12, 1998, the parties are
working toward a finalized agreement. There is no assurance that a finalized
agreement will be reached or that a satisfactory refinancing will occur.
Accordingly, there is no assurance that the Partnership will be able to retain
its interest in this Local Partnership. The uncertainty about the continued
ownership of the Partnership's interest in this Local Partnership does not
impact the Partnership's financial condition, as discussed above.
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. As of May 12, 1998, principal and accrued
interest totaling $1.7 million and $3,074,118, respectively, were due. 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., and affiliate of the Managing General Partner, for damages and
seeking foreclosure on the Partnership's interest in the Local Partnership. The
Managing General Partner has retained counsel and intends to defend against this
action. As of May 12, 1998, settlement discussions were in process. However,
there is no assurance that an agreement will be reached. Due to the uncertainty
of a satisfactory resolution with the purchase money noteholders related to
Winchester Gardens, there is no assurance that the Partnership will be able to
retain its interest in this Local Partnership. The uncertainty about the
continued ownership of the Partnership's interest in this Local Partnership does
not impact the Partnership's financial condition, as discussed above.
-7-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN PARTNERSHIPS - Continued
Combined Local Partnerships
---------------------------
The following are combined statements of operations for the thirty-two and
thirty-three Local Partnerships in which the Partnership has invested as of
March 31, 1998 and 1997, respectively. The 1997 statements contain information
on the Cedar Valley property through the date of foreclosure on the
Partnership's interest therein. These statements are compiled from information
supplied by the management agents of the projects and are unaudited.
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenue:
Rental revenue $ 7,461,001 $ 8,236,346
Other 361,356 358,049
------------ ------------
7,822,357 8,594,395
------------ ------------
Expenses:
Operating 4,586,201 5,144,352
Interest 1,782,599 1,877,404
Depreciation and amortization 1,295,257 1,370,097
------------ ------------
7,664,057 8,391,853
------------ ------------
Net income $ 158,300 $ 202,542
============ ============
</TABLE>
As of March 31, 1998 and December 31, 1997, the Partnership's share of
cumulative losses to date for nine of the thirty-two Local Partnerships exceeds
the amount of the Partnership's investments in these Local Partnerships by
$5,508,362 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
contracts with rents at (or reduced to) less than 120% of fair market rents
-8-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. AFFORDABLE HOUSING LEGISLATION - Continued
which expire between now and September 1998 to be renewed for one year. At the
beginning of Fiscal Year 1999 (October 1, 1998), all expiring contracts with
rents exceeding comparable market rents and whose mortgages are insured by 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. 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 $38,327 and $24,622 for the
three months ended March 31, 1998 and 1997, respectively, as direct
reimbursement of expenses incurred on behalf of the Partnership. Such expenses
-9-
<PAGE>
CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. RELATED-PARTY TRANSACTIONS - Continued
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 for each of the three-month
periods ended March 31, 1998 and 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 these fees totaling $42,500
was paid.
-10-
<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 contains information that may be considered forward looking,
including statements regarding the effect of governmental regulations. Actual
results may differ materially from those described in the forward looking
statements and will be affected by a variety of factors including national and
local economic conditions, the general level of interest rates, terms of
governmental regulations that affect the Partnership and interpretations of
those regulations, the competitive environment in which the Partnership
operates, and the availability of working capital.
General
-------
Some of the rental properties owned by the Local Partnerships are financed
by state housing agencies. The Managing General Partner has been working to
develop strategies to sell or refinance certain properties pursuant to programs
developed by these agencies or other potential buyers. These programs may
include opportunities to sell a property to a qualifying purchaser who would
agree to maintain the property as low to moderate income housing in perpetuity,
or to refinance a property, or to obtain supplemental financing. The Managing
General Partner continues to monitor certain state housing agency programs
and/or programs provided by certain lenders, to ascertain whether the properties
would qualify within the parameters of a given program and whether these
programs would provide an appropriate economic benefit to the limited partners
of the Partnership.
Some of the rental properties owned by the Local Partnerships are dependent
on the receipt of project-based rental Housing Assistance Payments (HAP)
provided by the U.S. Department of Housing and Urban Development (HUD) pursuant
to Section 8 HAP contracts. President Clinton signed the Fiscal Year 1998 HUD
appropriations bill into law, effective October 1, 1997. The new legislation
allows all Section 8 contracts with rents at (or reduced to) less than 120% of
fair market rents which expire between now and September 1998 to be renewed for
one year. At the beginning of Fiscal Year 1999 (October 1, 1998), all expiring
contracts with rents exceeding comparable market rents and whose mortgages are
insured by the Federal Housing Administration (FHA) will be subject to the Mark-
to-Market legislation.
Mark-to-Market implementation will reduce rental income at properties which
are currently subsidized at higher-than-market rental rates, and will therefore
lower cash flow available to meet mortgage payments and operating expenses.
Each affected property will undergo debt restructuring according to terms
determined by an individual property and operations evaluation. This will
involve reducing the first mortgage loan balance to an amount supportable by the
property, taking into account the property's operating expenses and reduced
income. The balance of the amount written down from the first mortgage will be
converted to a non-performing but accruing (soft) second mortgage.
Under current law, the write down of an FHA-insured mortgage under Mark-to-
Market would trigger cancellation of debt income to the 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
Internal Revenue Service (IRS) regulations at this time. Each property subject
-11-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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. Section 236 and Section
221(d)(3) properties that are in the 18th year of their mortgage may be eligible
for pre-payment of the mortgage. Properties with expiring Section 8 HAP
contracts may become convertible to market-rate apartment properties.
Currently, there are a few lenders that will provide financing either to prepay
the existing mortgage or provide additional funds to allow the property to
convert to market-rate units. Where opportunities exist, the Managing General
Partner will continue to work with the Local Partnerships to develop strategies
that make economic sense for all parties involved.
Financial Condition/Liquidity
-----------------------------
The Partnership's liquidity, with cash resources of $8,318,997 (or
approximately $134.49 per Additional Limited Partner unit) and $8,268,903 (or
approximately $133.68 per Additional Limited Partner unit) as of March 31, 1998
and December 31, 1997, respectively, along with anticipated future cash
distributions from the Local Partnerships, is expected to meet its current and
anticipated operating cash needs. 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
$25,513,096 (exclusive of unamortized discount on purchase money notes of
$3,968,371) plus accrued interest of $44,349,965 as of
March 31, 1998, are payable in full upon the earliest of: (i) sale or
refinancing of the respective Local Partnership's rental property; (ii) payment
in full of the respective Local Partnership's permanent loan; or (iii) maturity.
Purchase money notes in an aggregate principal amount of $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
matured on December 31, 1997 and have not been paid or extended. Purchase money
notes in an aggregate principal amount of $2,250,000, $10,360,000 and $5,670,000
mature on August 31, 1998, January 1, 1999 and February, 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 purchase money notes' principal and accrued interest when
due. If a purchase money note is not paid in accordance with its terms, the
Partnership will either have to renegotiate the terms of repayment or risk
losing its partnership interest in the Local Partnership. The Partnership's
inability to pay certain of the purchase money note principal and accrued
interest balances when due, and the resulting uncertainty regarding the
Partnership's continued ownership interest in the related Local Partnerships,
does not impact the Partnership's financial condition because the purchase money
notes are non-recourse and secured solely by the Partnership's interest in the
-12-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
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 non-recourse
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 non-recourse indebtedness related to this
Local Partnership. The Partnership's exposure to loss is limited to this
excess, which at March 31, 1998 was approximately $264,000. The following
purchase money notes mature through March 31, 1999:
<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
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 370,000 January 1, 1999
Meadowlanes 650,000 February 28, 1999
Rolling Green 2,250,000 August 31, 1998
Southmoor 380,000 February 1, 1999
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
-----------
$19,980,000
===========
</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-two Local Partnerships in which the
Partnership had invested as of March 31, 1998 and December 31, 1997,
respectively, these fourteen Local Partnerships represented approximately 64%
and 61% of the total investment in and advances to partnerships as of March 31,
1998 and December 31, 1997, respectively. For the three months ended March 31,
1998 and 1997, distributions from these Local Partnerships represented
-13-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
approximately 51% and 34%, respectively, of total distributions from Local
Partnerships. The Partnership's share of income from these Local Partnerships
was approximately $239,000 and $228,600 for the three-month periods ended March
31, 1998 and 1997, respectively.
The Partnership has determined that it is not practicable to estimate the
fair value of the purchase money notes, either individually or in the aggregate,
due to: (1) the lack of an active market for this type of financial instrument,
(2) the variable nature of purchase money note interest payments as a result of
fluctuating cash flow distributions received from the related Local
Partnerships, and (3) the excessive costs associated with an independent
appraisal of the purchase money notes.
The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements.
For the three months ended March 31, 1998 and 1997, the receipt of distributions
from partnerships and existing cash resources were adequate to support operating
cash requirements.
Results of Operations
---------------------
The Partnership incurred a net loss for the three months ended March 31,
1998 as opposed to net income during the corresponding period in 1997 primarily
due to an extraordinary gain from extinguishment of debt related to the Cedar
Valley foreclosure in January 1997. Contributing to the increase in the
Partnership's net loss was a decrease in share of income from partnerships due
to income recognized in 1997 related to one property which was sold in July
1997, and the receipt of proceeds for one property in 1997 which proceeds were
in excess of the Partnership's investment in the related Local Partnership.
Also contributing to the increase in the Partnership's net loss was an increase
in general and administrative expenses due to higher payroll costs. Partially
offsetting the increase in the Partnership's net loss was an increase in
interest and other income due to higher cash and cash equivalents balances and a
decrease in interest expense due to the extinguishment of the Cedar Valley debt.
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 months ended March 31, 1998 did not include losses of $123,393,
compared to excluded losses of $151,303 for the three months ended March 31,
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
-14-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
recognize and process "00," "01," "02,", etc., incorrectly as 1900, 1901, 1902,
instead of as 2000, 2001, 2002. In the opinion of computer experts, this could
cause such programs to create erroneous results, malfunction, or fail completely
unless corrective measures are taken.
The Partnership utilizes software and related computer technologies
essential to its operations that will be affected by the Y2K issue. The
Managing General Partner is studying what actions will be necessary to make its
computer systems 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 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
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. As of May 12, 1998, principal and accrued
interest totaling $1.7 million and $3,074,118, respectively, were due. 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., and affiliate of the Managing General Partner, for damages and
seeking foreclosure on the Partnership's interest in the Local Partnership. The
Managing General Partner has retained counsel and intends to defend against this
action. As of May 12, 1998, settlement discussions were in process. However,
there is no assurance that an agreement will be reached. Due to the uncertainty
of a satisfactory resolution with the purchase money noteholders related to
Winchester Gardens, there is no assurance that the Partnership will be able to
retain its interest in this Local Partnership. The uncertainty about the
continued ownership of the Partnership's interest in this Local Partnership does
not impact the Partnership's financial condition, as discussed above.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a. None
b. No Reports on Form 8-K were filed with the Commission during the
quarter ended March 31, 1998.
All other items are not applicable.
-15-
<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
May 12, 1998 by: /s/ Michael J. Tuszka
- ----------------- ---------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
and Principal Accounting Officer)
-16-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE FIRST QUARTER 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH 10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 8,318,997
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,508,926
<CURRENT-LIABILITIES> 0
<BONDS> 66,048,210
0
0
<COMMON> 0
<OTHER-SE> (35,630,602)
<TOTAL-LIABILITY-AND-EQUITY> 30,508,926
<SALES> 0
<TOTAL-REVENUES> 386,633
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 170,725
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,953,594
<INCOME-PRETAX> (1,737,686)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,737,686)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,737,686)
<EPS-PRIMARY> (28.09)
<EPS-DILUTED> (28.09)
</TABLE>
