<PAGE>
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended June 30, 1996
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Commission file number 0-13523
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CAPITAL REALTY INVESTORS-IV LIMITED PARTNERSHIP
- --------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1328767
- ----------------------------------------- --------------------
(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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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at June 30, 1996
- ---------------------------------- ----------------------------------
(Not applicable) (Not applicable)
<PAGE>
CAPITAL REALTY INVESTORS-IV LIMITED PARTNERSHIP
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
Page
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations - for the
three and six months ended June 30, 1996 and 1995 2
Consolidated Statements of Cash Flows - for the
six months ended June 30, 1996 and 1995 . . . . . 3
Notes to Consolidated Financial Statements . . . . 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . 13
PART II. Other Information
Item 3. Defaults upon Senior Securities . . . . . . . . . . 20
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 21
Signature . . . . . . . . . . . . . . . . . . . . . . . . . 22
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . 23
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS-IV LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 33,386,746 $ 33,458,291
Investment in partnerships held for sale -- 1,479,864
Cash and cash equivalents 8,149,695 6,801,118
Restricted cash 44,800 44,800
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $381,615 and $365,275, respectively 925,570 941,910
Property purchase costs, net of accumulated amortization of
$363,379 and $348,023, respectively 865,197 880,553
Other assets 18,591 14,232
------------- -------------
Total assets $ 43,390,599 $ 43,620,768
============= =============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships, net of unamortized discount
on purchase money notes of $21,289,984 and $23,472,463,
respectively $ 27,365,259 $ 27,313,495
Accrued interest payable 87,287,229 84,441,538
Accounts payable and accrued expenses 111,784 116,689
------------- -------------
Total liabilities 114,764,272 111,871,722
------------- -------------
Commitments and contingencies
Partners' capital (deficit):
Capital paid-in:
General Partners 2,000 2,000
Limited Partners 73,501,500 73,501,500
------------- -------------
73,503,500 73,503,500
Less:
Accumulated distributions to partners (3,452,583) (3,452,583)
Offering costs (7,562,894) (7,562,894)
Accumulated loss (133,861,696) (130,738,977)
------------- -------------
Total partners' deficit (71,373,673) (68,250,954)
------------- -------------
Total liabilities and partners' deficit $ 43,390,599 $ 43,620,768
============= =============
</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-IV LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
----------------------------- -----------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Share of income from partnerships $ 340,623 $ 46,773 $ 547,367 $ 272,508
------------- ------------- ------------- -------------
Other revenue and expenses:
Revenue:
Interest and other income 112,547 111,312 300,867 219,297
------------- ------------- ------------- -------------
Expenses:
Interest 3,980,014 3,634,938 7,979,328 7,297,856
Management fee 93,750 93,750 187,500 187,500
General and administrative 37,542 52,078 73,527 94,397
Professional fees 26,173 26,127 54,878 51,784
Amortization 15,848 16,497 31,696 33,189
------------- ------------- ------------- -------------
4,153,327 3,823,390 8,326,929 7,664,726
------------- ------------- ------------- -------------
Total other revenue and expenses (4,040,780) (3,712,078) (8,026,062) (7,445,429)
------------- ------------- ------------- -------------
Loss before gain on disposition of investment
in partnerships (3,700,157) (3,665,305) (7,478,695) (7,172,921)
Gain on disposition of investment in partnerships -- -- 4,355,976 3,055,176
------------- ------------- ------------- -------------
Net loss (3,700,157) (3,665,305) (3,122,719) (4,117,745)
Accumulated losses, beginning of period (130,161,539) (119,755,895) (130,738,977) (119,303,455)
------------- ------------- ------------- -------------
Accumulated losses, end of period $(133,861,696) $(123,421,200) $(133,861,696) $(123,421,200)
============= ============= ============= =============
Loss allocated to General Partners (1.51%) $ (55,872) $ (55,346) $ (47,153) $ (62,178)
============= ============= ============= =============
Loss allocated to Initial and Special
Limited Partners (1.49%) $ (55,133) $ (54,613) $ (46,529) $ (61,354)
============= ============= ============= =============
Loss allocated to Additional Limited
Partners (97%) $ (3,589,152) $ (3,555,346) $ (3,029,037) $ (3,994,213)
============= ============= ============= =============
Loss per unit of Additional Limited
Partnership Interest based on 73,500 units
outstanding $ (48.83) $ (48.37) $ (41.21) $ (54.34)
============= ============= ============= =============
</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-IV LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,122,719) $ (4,117,745)
Adjustments to reconcile net loss to net cash
used in operating activities:
Share of income from partnerships (547,367) (272,508)
(Increase) decrease in accrued interest receivable on
advances to partnerships (9,269) 53,185
Amortization of deferred costs 31,696 33,189
Amortization of discount on purchase money notes 2,182,479 1,826,498
Gain on disposition of investment in partnerships (4,355,976) (3,055,176)
Payment of purchase money note interest (273,908) (279,924)
Changes in assets and liabilities:
Increase in other assets (4,359) (20,020)
Increase in accrued interest payable 5,796,849 5,482,386
(Decrease) increase in accounts payable and accrued expenses (4,905) 18,341
------------ ------------
Net cash used in operating activities (307,479) (331,774)
------------ ------------
Cash flows from investing activities:
Receipt of distributions from partnerships 560,941 568,678
Repayment of advances to partnerships 67,239 --
Net proceeds from disposition of investment in partnerships 4,333,142 1,495,721
------------ ------------
Net cash provided by investing activities 4,961,322 2,064,399
------------ ------------
Cash flows from financing activities:
Distribution paid to additional limited partners -- (745,290)
Payment of purchase money note principal (8,865) (46,930)
Pay-off of purchase money notes (3,296,401) --
------------ ------------
Net cash used in financing activities (3,305,266) (792,220)
------------ ------------
Net increase in cash and cash equivalents 1,348,577 940,405
Cash and cash equivalents, beginning of period 6,801,118 5,435,555
------------ ------------
Cash and cash equivalents, end of period $ 8,149,695 $ 6,375,960
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-3-
<PAGE>
CAPITAL REALTY INVESTORS-IV 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 consolidated financial statements of Capital Realty
Investors-IV Limited Partnership (the Partnership) contain all adjustments of a
normal recurring nature necessary to present fairly the Partnership's
consolidated financial position as of June 30, 1996 and December 31, 1995 and
the consolidated results of its operations for the three and six months ended
June 30, 1996 and 1995 and its consolidated cash flows for the six months ended
June 30, 1996 and 1995.
These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. While the Managing General Partner believes
that the disclosures presented are adequate to make the information not mis-
leading, it is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes included in
the Partnership's Annual Report filed on Form 10-K for the year ended December
31, 1995.
Certain amounts in the 1995 consolidated financial statements have been
reclassified to conform with the 1996 presentation.
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
As of June 30, 1996, the Partnership's obligations with respect to its
investments in Local Partnerships, in the form of purchase money notes of
$48,655,243 (exclusive of unamortized discount on purchase money notes of
$21,289,984) plus accrued interest of $87,287,229, are payable upon the earliest
of: (i) sale or refinancing of the respective Local Partnership's rental
property; (ii) payment in full of the respective Local Partnership's permanent
loan; or (iii) maturity. Purchase money notes in an aggregate principal amount
of $1,370,000 matured in 1994 but have not been paid, as discussed below. The
remaining purchase money notes mature from 1997 to 2025. 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 Managing General Partner is continuing
to investigate possible alternatives to reduce the Partnership's long-term 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 off or
buy down certain purchase money note obligations.
Interest expense on the Partnership's purchase money notes for the three
and six months ended June 30, 1996 and 1995 was $3,980,014 and $7,979,328
respectively and for the three and six months ended June 30, 1995 was $3,634,938
and $7,297,856, respectively. Amortization of the imputed interest on purchase
money notes increased interest expense during the three and six months ended
-4-
<PAGE>
CAPITAL REALTY INVESTORS-IV LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
June 30, 1996 by $1,091,239 and $2,182,479 and by $902,445 and $1,826,498 for
the three and six months ended June 30, 1995, respectively.
On May 22, 1992, Clearfield Hills I Limited Partnership (Clearfield Hills
I) filed a notice of intent to participate under the Low Income Housing
Preservation and Resident Homeownership Act of 1990 (LIHPRHA). The sale of the
property was completed on February 6, 1996. The sale price of the property of
approximately $3.2 million generated sufficient proceeds to the Partnership to
retire, at a discount, the purchase money note obligation of the Partnership
with respect to such property, which matured on October 30, 1994. The sale
provided proceeds to the Partnership in excess of its investment in the Local
Partnership, and resulted in a net financial statement gain and a net tax gain
in 1996 of approximately $1.8 million and $2.4 million, respectively. The
Managing General Partner intends to retain all of the Partnership's share of the
net sale proceeds for the repayment, prepayment or purchase of outstanding
purchase money notes related to other Local Partnerships, as discussed above.
As such, the Managing General Partner and/or its affiliates did not receive any
fees for services relating to the sale.
On March 1, 1994, New Village Apartments North (Village North) filed a
notice of intent to participate under the LIHPRHA program. The sale of the
property was completed on February 6, 1996. The sale price of the property of
approximately $2.86 million generated sufficient proceeds to the Partnership to
retire, at a discount, the purchase money note obligation of the Partnership
with respect to such property, which matured on September 27, 1994. The sale
provided proceeds to the Partnership in excess of its investment in the Local
Partnership, and resulted in a net financial statement gain and a net tax gain
in 1996 of approximately $2.6 million and $3.3 million, respectively. The
Managing General Partner intends to retain all of the Partnership's share of
the net sale proceeds for the repayment, prepayment or purchase of outstanding
purchase money notes related to other Local Partnerships, as discussed above.
As such, the Managing General Partner and/or its affiliates did not receive any
fees for services relating to the sale.
On May 11, 1992, Southgate Apartments Company (Southgate) filed a plan of
action under Title II of the Emergency Low Income Housing Preservation Act of
1987 to sell the real estate to a non-profit entity. The sale was completed on
January 31, 1995. The sale price of the property of approximately $9.3 million
generated sufficient proceeds to the Partnership to retire, at a discount, the
purchase money note obligation of the Partnership with respect to such property.
The sale provided proceeds to the Partnership in excess of its investment in the
Local Partnership, and resulted in a net financial statement gain and a net tax
gain in 1995 of $3,055,176 and $6,982,026, respectively. The Partnership
distributed $745,290 (or $10.14 per Additional Limited Partner unit) on April
28, 1995 to the Additional Limited Partners as return of capital on a Generally
Accepted Accounting Principles basis. The Managing General Partner intends to
retain all of the Partnership's remaining undistributed net sale proceeds for
the repayment, prepayment or purchase of purchase money notes of other Local
Partnerships, as discussed above. The General Partner and/or its affiliates
received net fees for services relating to the sale of $186,512 on February 2,
1995.
The Partnership defaulted on its purchase money note relating to Holiday
Village Apartments on July 27, 1994 when the note matured and was not paid. The
defaulted amount included principal and accrued interest of $1,370,000 and
-5-
<PAGE>
CAPITAL REALTY INVESTORS-IV LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
$2,862,342, respectively. As of August 1, 1996, principal and accrued interest
totalling $1,370,000 and $3,929,972, respectively, were due. In June 1994, an
offer was made to extend the maturity date of this note to coincide with the
future sale of the property under the LIHPRHA program or refinancing of the
first mortgage. There is no assurance that a sale will take place under the
LIHPRHA program. The Managing General Partner and the noteholder continue to
negotiate remedy strategies, including the potential purchase by the noteholder
of the Partnership's interest in the Local Partnership in exchange for cash and
forgiveness of the note and the related accrued interest. The noteholder is
currently evaluating its tax position, and as of August 1, 1996, negotiations
between the Managing General Partner and the noteholder were ongoing. There is
no assurance that an agreement will be reached. Should the noteholder begin
foreclosure proceedings on the Partnership's interest in the related Local
Partnership, the Partnership intends to vigorously defend any action by the
noteholder. However, there is no assurance that the Partnership will be able to
retain its interest in the Local Partnership. The uncertainty about the
continued ownership of the Partnership's interest in the related Local
Partnership does not impact the Partnership's financial condition because the
related purchase money note is nonrecourse and secured solely by the
Partnership's interest in the Local Partnership. Therefore, should the
investment in Holiday Village Apartments not produce sufficient value to satisfy
the related purchase money note, the Partnership's exposure to loss is limited
since the amount of the nonrecourse indebtedness exceeds the carrying amount of
the investment in and advances to the Local Partnership. Thus, even a complete
loss of this investment would not have a material impact on the operations of
the Partnership.
On January 5, 1996, the Managing General Partner received $1,000 for an
option to purchase its limited partner interest in New Second Lakewood
Associates Limited Partnership (Second Lakewood). The sale was dependent on the
purchaser exercising the option by February 15, 1996 and completing the
transaction by March 15, 1996. On March 15, 1996, the option holder requested
an extension from the Managing General Partner of the February 15th and March
15th deadlines to April 15, 1996 and May 15, 1996, respectively. On March 20,
1996, the Managing General Partner agreed to this request and mailed an
amendment to the option holder for signature. On April 17, 1996, after
receiving no response from the optionholder, the Managing General Partner
notified the optionholder that the option to purchase the limited partner
interest was revoked. On May 3, 1996, the Managing General Partner agreed to
extend the February 15, 1996 and March 15, 1996 deadlines to May 15, 1996 and
June 15, 1996, respectively for another $1,000. On June 15, 1996, this option
expired, and as of July 26, 1996, the Managing General Partner is not
considering negotiations with the optionholder.
In 1989, Second Lakewood experienced rent losses due to units being taken
off the market because of roof leakage. The Partnership advanced a total of
$750,000 during 1990 to fund roof replacement in order to maintain the
marketability and income of the property. The loan bears interest at 11% and is
to be repaid from the property's cash flow. As of June 30, 1996 and December
31, 1995, the outstanding loan to Second Lakewood totalled $159,119 and
$224,543, respectively. Accrued interest on the loan was $8,070 and $617 as of
June 30, 1996 and December 31, 1995, respectively.
The letter of credit related to the tax-exempt bonds on Lakes of Northdale,
which originally matured in June 1995, had been extended to February 15, 1996.
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<PAGE>
CAPITAL REALTY INVESTORS-IV LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
The letter of credit fee increased from its previous level of 1% per annum to a
maximum of 4% per annum in October 1995. During June 1996, the Local
Partnership received a new letter of credit with a three-year term and a three-
year renewal option. In conjunction with the new letter of credit, the
Partnership is currently negotiating with the holder of the related purchase
money note to extend the term thereof to that of the letter of credit. There is
no assurance that an agreement will be reached. However, as the purchase money
note does not mature until September 1999, there is no immediate risk to the
Partnership to lose its interest in the Local Partnership.
Some of the rental properties owned by the Local Partnerships have
mortgages which are federally insured under Section 236 or Section 221(d)(3) of
the National Housing Act, as amended. These properties may be eligible for
sale, subject to numerous requirements, under the LIHPRHA program. This program
may provide incentives to owners of qualifying multifamily housing who commit to
permanently maintain their properties as low to moderate income housing.
Incentives originally available under LIHPRHA included selling the property to
qualified buyers or obtaining supplemental financing for the property. On March
28, 1996, Congress enacted the Housing Opportunity Program Extension Act of 1996
which includes revisions to the LIHPRHA program. These revisions include:
(i) severely limiting the availability of the supplemental financing option for
owners of qualifying multifamily housing, (ii) allowing owners who no longer
qualify for supplemental financing under the revised guidelines to elect to
pursue a sale of the property under the LIHPRHA program, provided that the
election to sell was made by April 15, 1996, and (iii) continuing the funding of
sale transactions under the LIHPRHA program through October 1, 1996, but only
for transactions in which the owner's plan of action is approved by HUD by
August 15, 1996. After October 1, 1996, HUD is directed not to continue LIHPRHA
processing. As of July 26, 1996, it is unknown whether there will be sufficient
funding in the LIHPRHA program to complete the sale of any properties owned by
the Local Partnerships. Further, it is unknown whether the program will be
extended or if a modified program will replace LIHPRHA. As such, the
Partnership does not anticipate sale of any of the properties owned by the Local
Partnerships, except River Run, as mentioned below, under the current LIHPRHA
program. There is no assurance that a sale of River Run or any other properties
owned by the Local Partnerships will occur.
On July 11, 1996, the local managing general partners' plan of action for
the sale of Walnut Square and Forest Park under the LIHPRHA program was approved
by HUD. As of July 26, 1996, it is unknown whether there will be sufficient
funding in the LIHPRHA program to complete the sale. Further, it is unknown
whether the program will be extended of if a modified program will replace
LIHPRHA. As such, the Partnership does not anticipate sale of Walnut Square or
Forest Park under the current LIHPRHA program.
On February 27, 1996, the local general partner's plan of action regarding
the sale of the property owned by River Run Company (River Run) under the
LIHPRHA program was approved by HUD. The local general partner is currently
seeking funding under the LIHPRHA program for the proposed sale of the property
and the Managing General Partner anticipates that such a sale will occur. There
is, however, no assurance that a sale of River Run will occur.
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 a strategy to sell or refinance certain properties pursuant to programs
-7-
<PAGE>
CAPITAL REALTY INVESTORS-IV LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
developed by these agencies. These programs may include opportunities to sell
the property to a qualifying purchaser who would agree to maintain the property
as low to moderate income housing in perpetuity, or may include opportunities to
refinance the property or obtain supplemental financing. The Managing General
Partner continues to monitor these programs to ascertain whether the properties
would qualify within the parameters of the programs and whether the 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 housing assistance payments guaranteed by contract under the
HUD Section 8 program. The level of funding for the Section 8 program, and HUD-
insured multifamily housing in general, is dependent upon the continuation of
appropriations approved by Congress for subsidy payments. In March 1996, HUD
released a revised version of the Reinvention Blueprint issued one year ago.
The Reinvention Blueprint contains a proposal which has come to be known as the
"Mark to Market" initiative. Per this initiative, HUD is proposing to eliminate
the Section 8 Housing Assistance Payment (HAP) contracts on certain properties,
under which the property owners directly receive monthly subsidies for units
occupied by low-income tenants. Instead, HUD would provide voucher or
certificate rental assistance directly to eligible residents. In the event that
this initiative is enacted as originally proposed, there is no assurance that
the rental properties will be able to maintain the occupancy levels necessary to
pay debt service and operating costs or that the rents necessary to pay debt
service and operating costs will be competitive with rents for comparable units
in the rental properties' respective market areas. As of July 26, 1996
Congress, the Senate and the Clinton Administration continue to struggle with
the "Mark to Market" legislation. In the interim, Congress has authorized a
one-year extension of project-based Section 8 HAP contracts expiring during
fiscal year 1996. In light of recent political scrutiny of appropriations for
HUD programs, continued funding of annual renewals for Section 8 HAP contracts
expiring in fiscal year 1997 and thereafter is uncertain.
The Partnership has been informed by Equity Resources Group, Inc. (ERG), a
Massachusetts limited partnership and limited partner in the Partnership, that
it plans to initiate a tender offer to purchase additional units in the
Partnership, but in no case more than a 5% interest in the Partnership. ERG has
stated that it plans to make the offer for the express purpose of holding the
limited partnership units as a long-term investment and not with a view to
resale. ERG has not indicated the price per unit which it plans to offer for
the limited partnership units in the Partnership. In the event that a tender
offer is initiated, the purchase price will be determined solely at the
discretion of ERG and may not necessarily represent the fair market value of the
limited partnership units. The General Partner takes no position as to
recommending or not recommending ERG to make an offer, nor will it take a
position as to recommending or not recommending the offer to investors, in the
event that an offer is made.
Other than the potential ERG offer, it is not anticipated that there will
be any other market for resale of units in the Partnership. As a result, an
investor may be unable to sell or otherwise dispose of his or her interest in
the Partnership. There is no assurance that ERG will initiate a tender offer.
-8-
<PAGE>
CAPITAL REALTY INVESTORS-IV LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
The following are combined statements of operations for the Local
Partnerships in which the Partnership has invested. The 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 For the six months ended
June 30, June 30,
----------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rental revenue $ 9,799,585 $ 9,888,124 $ 19,559,928 $ 19,751,697
Other 509,370 426,319 1,068,751 927,839
------------ ------------ ------------ ------------
10,308,955 10,314,443 20,628,679 20,679,536
------------ ------------ ------------ ------------
Expenses:
Operating 6,319,800 6,438,745 12,754,594 12,728,418
Interest 1,991,938 2,166,830 3,984,918 4,339,863
Depreciation and amortization 2,007,456 2,033,949 4,026,497 4,082,472
------------ ------------ ------------ ------------
10,319,194 10,639,524 20,766,009 21,150,753
------------ ------------ ------------ ------------
Net loss $ (10,239) $ (325,081) $ (137,330) $ (471,217)
============ ============ ============ ============
</TABLE>
As of June 30, 1996 and December 31, 1995, the Partnership's share of
cumulative losses of ten of the Local Partnerships exceeds the amount of the
Partnership's investments in and advances to those Local Partnerships by
$15,419,293 and $14,737,878, respectively. Since 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. 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 and to pay an annual incentive management fee
(Management Fee), after all other expenses of the Partnership are paid. The
Partnership paid $23,147 and $59,325 for the three and six months ended June 30,
1996, respectively, and $33,737 and $58,413 for the three and six months ended
June 30, 1995, respectively, as direct reimbursement of expenses incurred on
behalf of the Partnership. Additionally, the Partnership paid the Managing
General Partner a Management Fee of $93,750 and $187,500 for the three and six
months ended June 30, 1996 and 1995, respectively.
-9-
<PAGE>
CAPITAL REALTY INVESTORS-IV LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. RELATED-PARTY TRANSACTIONS - Continued
The Managing General Partner and/or its affiliates may receive a fee in an
amount of not more than 2% of the sales price of the investment in a Local
Partnership or the property it owns, payable under certain conditions upon the
sale of the investment in a Local Partnership or the property its owns. The
payment of the fee is subject to certain restrictions, including achievement of
a certain level of sales proceeds and making certain minimum distributions to
limited partners. The Managing General Partner and/or its affiliates received
net fees for services relating to the sale of the Southgate property of $186,512
on February 2, 1995. No fees were paid to the Managing General Partner and/or
its affiliates for services performed in connection with the 1996 sales of
Clearfield Hills I and New Village Apartments North.
4. CONTINGENCIES
In 1990, CRI, as managing general partner of the Partnership and various
other entities, subcontracted certain property-level asset management functions
for certain properties to Capital Management Strategies, Inc. (CMS). Among
these properties were properties owned by some of the Local Partnerships in
which the Partnership invested. CMS was formed by Martin C. Schwartzberg, a
nominal general partner of the Partnership and a former stockholder of CRI, when
he retired from and cashed out of CRI and its related businesses as of January
1, 1990. Mr. Schwartzberg agreed not to act as a general partner with respect
to any of the CRI-sponsored partnerships, including this Partnership, and has
not done so since that time. In late 1995, a dispute arose between CRI and CMS
over the funding level of the 1996 contract for CMS. On November 9, 1995, CRI
filed a complaint against CMS to determine the proper amount of fees to be paid
in 1996 under the asset management agreement. CMS answered on January 10, 1996,
but asserted no counterclaims.
Thereafter, Mr. Schwartzberg launched a hostile consent solicitation to be
designated as managing general partner of approximately 125 private partnerships
sponsored by CRI. On January 18, 1996, Mr. Schwartzberg and CMS filed a
complaint in the Circuit Court of Montgomery County, Maryland (the Circuit
Court), against CRI and Messrs. Dockser and Willoughby (who are general partners
of the Partnership) alleging, among other things, that CRI and Messrs. Dockser
and Willoughby breached the asset management agreement pursuant to which Mr.
Schwartzberg's company, CMS, agreed to perform limited functions related to
property-level issues for a portion of CRI's subsidized housing portfolio
(including some of the properties in which the Partnership invested), by
reducing the proposed budget for 1996. The Partnership was not named as a
defendant in this action. Messrs. Dockser and Willoughby entered an answer
denying all of Mr. Schwartzberg's claims. Messrs. Dockser and Willoughby
publicly responded that Mr. Schwartzberg's suit was motivated by his budget
dispute with CRI and personal animosity. On February 6, 1996, CRI terminated
the CMS contract for cause. Mr. Schwartzberg and CMS responded by filing a
motion for injunctive relief in the Circuit Court, asking the court to enjoin
CRI from terminating the contract. In a ruling issued on February 12, 1996, the
Circuit Court, among other things, refused to grant the injunction requested by
CMS. On February 12, 1996, the Circuit Court also issued a memorandum opinion
and order enjoining CMS and Mr. Schwartzberg from disclosing information made
confidential under the asset management agreement.
On February 1, 1996 and February 16, 1996, Mr. Schwartzberg sent letters to
the Partnership requesting investor lists and other forms of investor
information. On February 5, 1996, the Partnership, acting through its managing
-10-
<PAGE>
CAPITAL REALTY INVESTORS-IV LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. CONTINGENCIES - Continued
general partner, CRI, denied Mr. Schwartzberg's request. On February 20, 1996,
counsel for the Partnership responded to Mr. Schwartzberg's second request,
denying that Mr. Schwartzberg had standing or a proper purpose for requesting
the investor lists. On June 12, 1996, Mr. Schwartzberg and CRI entered an
agreement resolving the disputes between CRI and CMS. The Partnership was not
named in any of the litigation prior to the resolution, nor was the Partnership
a signatory of the agreement. CRI does not anticipate further litigation with
Mr. Schwartzberg.
-11-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Capital Realty Investors-IV 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. This
information contains a number of risks and uncertainties, as discussed herein
and in the Partnership's Annual Report filed on Form 10-K, that could cause
actual results to differ materially.
Financial Condition/Liquidity
----------------------------
The Partnership's liquidity, with unrestricted cash resources of $8,149,695
and $6,801,118 as of June 30, 1996 and December 31, 1995, respectively, along
with anticipated future cash distributions from the Local Partnerships, is
expected to meet its current and anticipated operating cash needs. As of June
30, 1996, $44,800 of cash resources was restricted for future interest payments
on one of the purchase money notes. As of July 26, 1996, there were no material
commitments for capital expenditures.
As of June 30, 1996, the Partnership's obligations with respect to its
investments in Local Partnerships, in the form of purchase money notes of
$48,655,243 (exclusive of unamortized discount on purchase money notes of
$21,289,984) plus accrued interest of $87,287,229, are payable upon the earliest
of: (i) sale or refinancing of the respective Local Partnership's rental
property; (ii) payment in full of the respective Local Partnership's permanent
loan; or (iii) maturity. Purchase money notes in an aggregate principal amount
of $1,370,000 matured in 1994 but have not been paid, as discussed below. The
remaining purchase money notes mature from 1997 to 2025. 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 Managing General Partner is continuing
to investigate possible alternatives to reduce the Partnership's long-term 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 off or
buy down certain purchase money note obligations.
On May 22, 1992, Clearfield Hills I Limited Partnership (Clearfield Hills
I) filed a notice of intent to participate under the Low Income Housing
Preservation and Resident Homeownership Act of 1990 (LIHPRHA). The sale of the
property was completed on February 6, 1996. The sale price of the property of
approximately $3.2 million generated sufficient proceeds to the Partnership to
retire, at a discount, the purchase money note obligation of the Partnership
with respect to such property, which matured on October 30, 1994. The sale
provided proceeds to the Partnership in excess of its investment in the Local
Partnership, and resulted in a net financial statement gain and a net tax gain
in 1996 of approximately $1.8 million and $2.4 million, respectively. The
Managing General Partner intends to retain all of the Partnership's share of the
net sale proceeds for the repayment, prepayment or purchase of outstanding
-12-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
purchase money notes related to other Local Partnerships, as discussed above.
As such, the Managing General Partner and/or its affiliates did not receive any
fees for services relating to the sale.
On March 1, 1994, New Village Apartments North (Village North) filed a
notice of intent to participate under the LIHPRHA program. The sale of the
property was completed on February 6, 1996. The sale price of the property of
approximately $2.86 million generated sufficient proceeds to the Partnership to
retire, at a discount, the purchase money note obligation of the Partnership
with respect to such property, which matured on September 27, 1994. The sale
provided proceeds to the Partnership in excess of its investment in the Local
Partnership, and resulted in a net financial statement gain and a net tax gain
in 1996 of approximately $2.6 million and $3.3 million, respectively. The
Managing General Partner intends to retain all of the Partnership's share of
the net sale proceeds for the repayment, prepayment or purchase of outstanding
purchase money notes related to other Local Partnerships, as discussed above.
As such, the Managing General Partner and/or its affiliates did not receive any
fees for services relating to the sale.
On May 11, 1992, Southgate Apartments Company (Southgate) filed a plan of
action under Title II of the Emergency Low Income Housing Preservation Act of
1987 to sell the real estate to a non-profit entity. The sale was completed on
January 31, 1995. The sale price of the property of approximately $9.3 million
generated sufficient proceeds to the Partnership to retire, at a discount, the
purchase money note obligation of the Partnership with respect to such property.
The sale provided proceeds to the Partnership in excess of its investment in the
Local Partnership, and resulted in a net financial statement gain and a net tax
gain in 1995 of $3,055,176 and $6,982,026, respectively. The Partnership
distributed $745,290 (or $10.14 per Additional Limited Partner unit) on April
28, 1995 to the Additional Limited Partners as return of capital on a Generally
Accepted Accounting Principles basis. The Managing General Partner intends to
retain all of the Partnership's remaining undistributed net sale proceeds for
the repayment, prepayment or purchase of purchase money notes of other Local
Partnerships, as discussed above. The General Partner and/or its affiliates
received net fees for services relating to the sale of $186,512 on February 2,
1995.
The Partnership defaulted on its purchase money note relating to Holiday
Village Apartments on July 27, 1994 when the note matured and was not paid. The
defaulted amount included principal and accrued interest of $1,370,000 and
$2,862,342, respectively. As of August 1, 1996, principal and accrued interest
totalling $1,370,000 and $3,929,972, respectively, were due. In June 1994, an
offer was made to extend the maturity date of this note to coincide with the
future sale of the property under the LIHPRHA program or refinancing of the
first mortgage. There is no assurance that a sale will take place under the
LIHPRHA program. The Managing General Partner and the noteholder continue to
negotiate remedy strategies, including the potential purchase by the noteholder
of the Partnership's interest in the Local Partnership in exchange for cash and
forgiveness of the note and the related accrued interest. The noteholder is
currently evaluating its tax position, and as of August 1, 1996, negotiations
between the Managing General Partner and the noteholder were ongoing. There is
no assurance that an agreement will be reached. Should the noteholder begin
foreclosure proceedings on the Partnership's interest in the related Local
Partnership, the Partnership intends to vigorously defend any action by the
noteholder. However, there is no assurance that the Partnership will be able to
retain its interest in the Local Partnership. The uncertainty about the
-13-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
continued ownership of the Partnership's interest in the related Local
Partnership does not impact the Partnership's financial condition because the
related purchase money note is nonrecourse and secured solely by the
Partnership's interest in the Local Partnership. Therefore, should the
investment in Holiday Village Apartments not produce sufficient value to satisfy
the related purchase money note, the Partnership's exposure to loss is limited
since the amount of the nonrecourse indebtedness exceeds the carrying amount of
the investment in and advances to the Local Partnership. Thus, even a complete
loss of this investment would not have a material impact on the operations of
the Partnership.
The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements.
For the six months ended June 30, 1996, the receipt of distributions from Local
Partnerships and net proceeds from the sales of Clearfield Hills I and Village
North were adequate to support operating cash requirements and the pay-off of
the related purchase money notes. Cash and cash equivalents increased for the
six months ended June 30, 1996 primarily due to the receipt of the net proceeds
from the sales of Clearfield Hills I and Village North, as discussed above.
Results of Operations
---------------------
The Partnership's net loss for the three months ended June 30, 1996
increased from the corresponding period in 1995 primarily due to an increase in
interest expense as a result of the amortization of imputed interest. Partially
offsetting the increase in net loss was an increase in share of income from
partnerships primarily due to a decrease in one property's mortgage loan
interest rate. Also partially offsetting the increase in net loss was a
decrease in general and administrative expenses primarily due to decreased
payroll costs.
The Partnership's net loss for the six months ended June 30, 1996 decreased
from the corresponding period in 1995 primarily due to the gain on disposition
of Clearfield Hills I and Village North, as discussed above. Contributing to
the decrease in net loss was an increase in share of income from partnerships,
as discussed above. Also, contributing to the decrease in net loss was an
increase in interest and other income due to a final distribution from one
former Local Partnership which was sold in 1995 and higher cash balances
resulting from the Clearfield Hills I and Village North dispositions. Also
contributing to the decrease in net loss was a decrease in general and
administrative expenses, which was primarily due to decreased payroll costs.
Partially offsetting the decrease in the Partnership's net loss was an increase
in interest expense as a result of the amortization of imputed interest.
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 the Partnership has no further obligation
to advance funds or provide financing to the Local Partnerships. As a result,
the Partnership's recognized losses for the three and six months ended June 30,
1996 did not include losses of $350,456 and $681,415, respectively, compared to
excluded losses of $367,110 and $734,215 for the three and six months ended June
30, 1995, respectively.
On January 5, 1996, the Managing General Partner received $1,000 for an
option to purchase its limited partner interest in New Second Lakewood
-14-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Associates Limited Partnership (Second Lakewood). The sale was dependent on the
purchaser exercising the option by February 15, 1996 and completing the
transaction by March 15, 1996. On March 15, 1996, the option holder requested
an extension from the Managing General Partner of the February 15th and March
15th deadlines to April 15, 1996 and May 15, 1996, respectively. On March 20,
1996, the Managing General Partner agreed to this request and mailed an
amendment to the option holder for signature. On April 17, 1996, after
receiving no response from the optionholder, the Managing General Partner
notified the optionholder that the option to purchase the limited partner
interest was revoked. On May 3, 1996, the Managing General Partner agreed to
extend the February 15, 1996 and March 15, 1996 deadlines to May 15, 1996 and
June 15, 1996, respectively for another $1,000. On June 15, 1996, this option
expired, and as of July 26, 1996, the Managing General Partner is not
considering negotiations with the optionholder.
In 1989, Second Lakewood experienced rent losses due to units being taken
off the market because of roof leakage. The Partnership advanced a total of
$750,000 during 1990 to fund roof replacement in order to maintain the
marketability and income of the property. The loan bears interest at 11% and is
to be repaid from the property's cash flow. As of June 30, 1996 and December
31, 1995, the outstanding loan to Second Lakewood totalled $159,119 and
$224,543, respectively. Accrued interest on the loan was $8,070 and $617 as of
June 30, 1996 and December 31, 1995, respectively.
The letter of credit related to the tax-exempt bonds on Lakes of Northdale,
which originally matured in June 1995, had been extended to February 15, 1996.
The letter of credit fee increased from its previous level of 1% per annum to a
maximum of 4% per annum in October 1995. During June 1996, the Local
Partnership received a new letter of credit with a three-year term and a three-
year renewal option. In conjunction with the new letter of credit, the
Partnership is currently negotiating with the holder of the related purchase
money note to extend the term thereof to that of the letter of credit. There is
no assurance that an agreement will be reached. However, as the purchase money
note does not mature until September 1999, there is no immediate risk to the
Partnership to lose its interest in the Local Partnership.
Some of the rental properties owned by the Local Partnerships have
mortgages which are federally insured under Section 236 or Section 221(d)(3) of
the National Housing Act, as amended. These properties may be eligible for
sale, subject to numerous requirements, under the LIHPRHA program. This program
may provide incentives to owners of qualifying multifamily housing who commit to
permanently maintain their properties as low to moderate income housing.
Incentives originally available under LIHPRHA included selling the property to
qualified buyers or obtaining supplemental financing for the property. On March
28, 1996, Congress enacted the Housing Opportunity Program Extension Act of 1996
which includes revisions to the LIHPRHA program. These revisions include:
(i) severely limiting the availability of the supplemental financing option for
owners of qualifying multifamily housing, (ii) allowing owners who no longer
qualify for supplemental financing under the revised guidelines to elect to
pursue a sale of the property under the LIHPRHA program, provided that the
election to sell was made by April 15, 1996, and (iii) continuing the funding of
sale transactions under the LIHPRHA program through October 1, 1996, but only
for transactions in which the owner's plan of action is approved by HUD by
August 15, 1996. After October 1, 1996, HUD is directed not to continue LIHPRHA
processing. As of July 26, 1996, it is unknown whether there will be sufficient
funding in the LIHPRHA program to complete the sale of any properties owned by
-15-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
the Local Partnerships. Further, it is unknown whether the program will be
extended or if a modified program will replace LIHPRHA. As such, the
Partnership does not anticipate sale of any of the properties owned by the Local
Partnerships, except River Run, as mentioned below, under the current LIHPRHA
program. There is no assurance that a sale of River Run or any other properties
owned by the Local Partnerships will occur.
On July 11, 1996, the local managing general partners' plan of action for
the sale of Walnut Square and Forest Park under the LIHPRHA program was approved
by HUD. As of July 26, 1996, it is unknown whether there will be sufficient
funding in the LIHPRHA program to complete the sale. Further, it is unknown
whether the program will be extended of if a modified program will replace
LIHPRHA. As such, the Partnership does not anticipate sale of Walnut Square or
Forest Park under the current LIHPRHA program.
On February 27, 1996, the local general partner's plan of action regarding
the sale of the property owned by River Run Company (River Run) under the
LIHPRHA program was approved by HUD. The local general partner is currently
seeking funding under the LIHPRHA program for the proposed sale of the property
and the Managing General Partner anticipates that such a sale will occur. There
is, however, no assurance that a sale of River Run will occur.
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 a strategy to sell or refinance certain properties pursuant to programs
developed by these agencies. These programs may include opportunities to sell
the property to a qualifying purchaser who would agree to maintain the property
as low to moderate income housing in perpetuity, or may include opportunities to
refinance the property or obtain supplemental financing. The Managing General
Partner continues to monitor these programs to ascertain whether the properties
would qualify within the parameters of the programs and whether the 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 housing assistance payments guaranteed by contract under the
HUD Section 8 program. The level of funding for the Section 8 program, and HUD-
insured multifamily housing in general, is dependent upon the continuation of
appropriations approved by Congress for subsidy payments. In March 1996, HUD
released a revised version of the Reinvention Blueprint issued one year ago.
The Reinvention Blueprint contains a proposal which has come to be known as the
"Mark to Market" initiative. Per this initiative, HUD is proposing to eliminate
the Section 8 Housing Assistance Payment (HAP) contracts on certain properties,
under which the property owners directly receive monthly subsidies for units
occupied by low-income tenants. Instead, HUD would provide voucher or
certificate rental assistance directly to eligible residents. In the event that
this initiative is enacted as originally proposed, there is no assurance that
the rental properties will be able to maintain the occupancy levels necessary to
pay debt service and operating costs or that the rents necessary to pay debt
service and operating costs will be competitive with rents for comparable units
in the rental properties' respective market areas. As of July 26, 1996
Congress, the Senate and the Clinton Administration continue to struggle with
the "Mark to Market" legislation. In the interim, Congress has authorized a
-16-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
one-year extension of project-based Section 8 HAP contracts expiring during
fiscal year 1996. In light of recent political scrutiny of appropriations for
HUD programs, continued funding of annual renewals for Section 8 HAP contracts
expiring in fiscal year 1997 and thereafter is uncertain.
No other significant changes in the Partnership's operations have taken
place during this period.
General
-------
In 1990, CRI, as managing general partner of the Partnership and various
other entities, subcontracted certain property-level asset management functions
for certain properties to Capital Management Strategies, Inc. (CMS). Among
these properties were properties owned by some of the Local Partnerships in
which the Partnership invested. CMS was formed by Martin C. Schwartzberg, a
nominal general partner of the Partnership and a former stockholder of CRI, when
he retired from and cashed out of CRI and its related businesses as of January
1, 1990. Mr. Schwartzberg agreed not to act as a general partner with respect
to any of the CRI-sponsored partnerships, including this Partnership, and has
not done so since that time. In late 1995, a dispute arose between CRI and CMS
over the funding level of the 1996 contract for CMS. On November 9, 1995, CRI
filed a complaint against CMS to determine the proper amount of fees to be paid
in 1996 under the asset management agreement. CMS answered on January 10, 1996,
but asserted no counterclaims.
Thereafter, Mr. Schwartzberg launched a hostile consent solicitation to be
designated as managing general partner of approximately 125 private partnerships
sponsored by CRI. On January 18, 1996, Mr. Schwartzberg and CMS filed a
complaint in the Circuit Court of Montgomery County, Maryland (the Circuit
Court), against CRI and Messrs. Dockser and Willoughby (who are general partners
of the Partnership) alleging, among other things, that CRI and Messrs. Dockser
and Willoughby breached the asset management agreement pursuant to which Mr.
Schwartzberg's company, CMS, agreed to perform limited functions related to
property-level issues for a portion of CRI's subsidized housing portfolio
(including some of the properties in which the Partnership invested), by
reducing the proposed budget for 1996. The Partnership was not named as a
defendant in this action. Messrs. Dockser and Willoughby entered an answer
denying all of Mr. Schwartzberg's claims. Messrs. Dockser and Willoughby
publicly responded that Mr. Schwartzberg's suit was motivated by his budget
dispute with CRI and personal animosity. On February 6, 1996, CRI terminated
the CMS contract for cause. Mr. Schwartzberg and CMS responded by filing a
motion for injunctive relief in the Circuit Court, asking the court to enjoin
CRI from terminating the contract. In a ruling issued on February 12, 1996, the
Circuit Court, among other things, refused to grant the injunction requested by
CMS. On February 12, 1996, the Circuit Court also issued a memorandum opinion
and order enjoining CMS and Mr. Schwartzberg from disclosing information made
confidential under the asset management agreement.
On February 1, 1996 and February 16, 1996, Mr. Schwartzberg sent letters to
the Partnership requesting investor lists and other forms of investor
information. On February 5, 1996, the Partnership, acting through its managing
general partner, CRI, denied Mr. Schwartzberg's request. On February 20, 1996,
counsel for the Partnership responded to Mr. Schwartzberg's second request,
denying that Mr. Schwartzberg had standing or a proper purpose for requesting
the investor lists. On June 12, 1996, Mr. Schwartzberg and CRI entered an
-17-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
agreement resolving the disputes between CRI and CMS. The Partnership was not
named in any of the litigation prior to the resolution, nor was the Partnership
a signatory of the agreement. CRI does not anticipate further litigation with
Mr. Schwartzberg.
The Partnership has been informed by Equity Resources Group, Inc. (ERG), a
Massachusetts limited partnership and limited partner in the Partnership, that
it plans to initiate a tender offer to purchase additional units in the
Partnership, but in no case more than a 5% interest in the Partnership. ERG has
stated that it plans to make the offer for the express purpose of holding the
limited partnership units as a long-term investment and not with a view to
resale. ERG has not indicated the price per unit which it plans to offer for
the limited partnership units in the Partnership. In the event that a tender
offer is initiated, the purchase price will be determined solely at the
discretion of ERG and may not necessarily represent the fair market value of the
limited partnership units. The General Partner takes no position as to
recommending or not recommending ERG to make an offer, nor will it take a
position as to recommending or not recommending the offer to investors, in the
event that an offer is made.
Other than the potential ERG offer, it is not anticipated that there will
be any other market for resale of units in the Partnership. As a result, an
investor may be unable to sell or otherwise dispose of his or her interest in
the Partnership. There is no assurance that ERG will initiate a tender offer.
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
The Partnership defaulted on its purchase money note relating to Holiday
Village Apartments on July 27, 1994 when the note matured and was not paid. The
defaulted amount included principal and accrued interest of $1,370,000 and
$2,862,342, respectively. As of August 1, 1996, principal and accrued interest
totalling $1,370,000 and $3,929,972, respectively, were due. In June 1994, an
offer was made to extend the maturity date of this note to coincide with the
future sale of the property under the LIHPRHA program or refinancing of the
first mortgage. There is no assurance that a sale will take place under the
LIHPRHA program. The Managing General Partner and the noteholder continue to
negotiate remedy strategies, including the potential purchase by the noteholder
of the Partnership's interest in the Local Partnership in exchange for cash and
forgiveness of the note and the related accrued interest. The noteholder is
currently evaluating its tax position, and as of August 1, 1996, negotiations
between the Managing General Partner and the noteholder were ongoing. There is
no assurance that an agreement will be reached. Should the noteholder begin
foreclosure proceedings on the Partnership's interest in the related Local
Partnership, the Partnership intends to vigorously defend any action by the
noteholder. However, there is no assurance that the Partnership will be able to
retain its interest in the Local Partnership. The uncertainty about the
continued ownership of the Partnership's interest in the related Local
Partnership does not impact the Partnership's financial condition because the
related purchase money note is nonrecourse and secured solely by the
Partnership's interest in the Local Partnership. Therefore, should the
investment in Holiday Village Apartments not produce sufficient value to satisfy
the related purchase money note, the Partnership's exposure to loss is limited
-18-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Continued
-------------------------------
since the amount of the nonrecourse indebtedness exceeds the carrying amount of
the investment in and advances to the Local Partnership. Thus, even a complete
loss of this investment would not have a material impact on the operations of
the Partnership.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
No reports on Form 8-K were filed with the commission during the quarter
ended June 30, 1996.
All other items are not applicable.
-19-
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CAPITAL REALTY INVESTORS-IV
LIMITED PARTNERSHIP
(Registrant)
By: C.R.I., Inc.
Managing General Partner
August 1, 1996 /s/ Deborah K. Browning
- -------------------- ---------------------------------
Date Deborah K. Browning
Vice President/Chief Accounting
Officer
Signing on behalf of the Registrant and as
Principal Accounting Officer
-20-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
-21-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SECOND QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 8,194,495
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 43,390,599
<CURRENT-LIABILITIES> 0
<BONDS> 114,652,488
0
0
<COMMON> 0
<OTHER-SE> (71,373,673)
<TOTAL-LIABILITY-AND-EQUITY> 43,390,599
<SALES> 0
<TOTAL-REVENUES> 848,234
<CGS> 0
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<NET-INCOME> (3,122,719)
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</TABLE>
