<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, 1999
--------------
Commission file number 0-13523
--------------
CAPITAL REALTY INVESTORS-IV LIMITED PARTNERSHIP
- --------------------------------------------------------------------------
(Exact name of small business issuer 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
- --------------------------------------------------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Not applicable Not applicable
- -------------------------- ---------------------------------------
(Class) (Outstanding at March 31, 1999)
<PAGE>
CAPITAL REALTY INVESTORS-IV LIMITED PARTNERSHIP
INDEX TO FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 1999
Page
----
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1999 and
December 31, 1998 . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations and Accumulated
Losses - for the three months ended March 31, 1999
and 1998 . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Cash Flows - for the
three months ended March 31, 1999 and 1998 . . . 3
Notes to Consolidated Financial Statements -
March 31, 1999 and 1998 . . . . . . . . . . . . . 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 . . . . . . . . . . 18
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 19
Signature . . . . . . . . . . . . . . . . . . . . . . . . . 20
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . 21
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS-IV LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 31,945,010 $ 31,835,072
Cash and cash equivalents 10,944,553 10,765,753
Restricted cash equivalents 50,400 50,400
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $395,972 and $389,111, respectively 701,222 708,083
Property purchase costs, net of accumulated amortization of
$371,615 and $365,258, respectively 645,847 652,206
Other assets 14,525 58,378
------------- -------------
Total assets $ 44,301,557 $ 44,069,892
============= =============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 38,776,545 $ 36,976,223
Accrued interest payable 99,540,191 96,821,772
Accounts payable and accrued expenses 102,933 147,537
------------- -------------
Total liabilities 138,419,669 133,945,532
------------- -------------
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 (7,654,870) (7,654,870)
Offering costs (7,562,894) (7,562,894)
Accumulated loss (152,403,848) (148,161,376)
------------- -------------
Total partners' deficit (94,118,112) (89,875,640)
------------- -------------
Total liabilities and partners' deficit $ 44,301,557 $ 44,069,892
============= =============
</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
AND ACCUMULATED LOSSES
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Share of income from partnerships $ 530,557 $ 362,314
------------- -------------
Other revenue and expenses:
Revenue:
Interest and other income 120,269 145,423
------------- -------------
Expenses:
Interest 4,696,282 4,241,791
Management fee 93,750 93,750
General and administrative 63,449 50,212
Professional fees 26,597 33,044
Amortization of deferred costs 13,220 13,364
------------- -------------
4,893,298 4,432,161
------------- -------------
Total other revenue and expenses (4,773,029) (4,286,738)
------------- -------------
Net loss (4,242,472) (3,924,424)
Accumulated losses, beginning of period (148,161,376) (133,007,163)
------------- -------------
Accumulated losses, end of period $(152,403,848) $(136,931,587)
============= =============
Net loss allocated to General Partners (1.51%) $ (64,061) $ (59,259)
============= =============
Net loss allocated to Initial and Special Limited Partners (1.49%) $ (63,213) $ (58,474)
============= =============
Net loss allocated to Additional Limited Partners (97%) $ (4,115,198) $ (3,806,691)
============= =============
Net loss per unit of Additional Limited
Partner Interest based on 73,500 units $ (55.99) $ (51.79)
============= =============
</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 three months ended
March 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,242,472) $ (3,924,424)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Share of income from partnerships (530,557) (362,314)
Amortization of discount on purchase money notes 1,800,321 1,524,830
Amortization of deferred costs 13,220 13,364
Payment of purchase money note interest (177,542) (217,929)
Changes in assets and liabilities:
Decrease in other assets 43,853 900,933
Increase in accrued interest payable 2,895,961 2,716,962
Decrease in accounts payable and accrued expenses (44,604) (118,150)
Decrease in consulting fees payable to related parties -- (8,869)
------------ ------------
Net cash (used in) provided by operating activities (241,820) 524,403
------------ ------------
Net cash provided by investing activities:
Receipt of distributions from partnerships 420,620 385,554
------------ ------------
Net cash used in financing activities:
Payment of purchase money note principal -- (36,113)
------------ ------------
Net increase in cash and cash equivalents 178,800 873,844
Cash and cash equivalents, beginning of period 10,765,753 10,197,871
------------ ------------
Cash and cash equivalents, end of period $ 10,944,553 $ 11,071,715
============ ============
Supplemental cash flow information
Cash paid during the period for interest $ 177,542 $ 217,929
============ ============
</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
MARCH 31, 1999 AND 1998
(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-IV Limited Partnership (the Partnership) as
of March 31, 1999, and the results of its operations and its cash flows for the
three months ended March 31, 1999 and 1998. The results of operations for the
interim period ended March 31, 1999, 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-KSB at December 31, 1998.
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
a. Due on 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
$42,011,391 (exclusive of unamortized discount on purchase money notes of
$3,234,846) plus accrued interest of $99,540,191 as of March 31, 1999, are
payable in full upon the earliest of: (1) sale or refinancing of the respective
Local Partnership's rental property; (2) payment in full of the respective Local
Partnership's permanent loan; or (3) maturity. Purchase money notes in the
aggregate principal amounts of $1,370,000 and $1,330,000 matured on July 27,
1994 and August 31, 1997, respectively, but have not been paid or extended, as
discussed below. Purchase money notes mature during 1999, as follows.
Aggregate
Principal Amount Maturity
---------------- ------------
$ 5,204,310 July, 1999
13,897,081 August, 1999
4,000,000 September, 1999
5,975,000 October, 1999
7,570,000 December, 1999
-----------
$36,646,391
===========
The remaining two purchase money notes mature in 2000 and 2025.
The purchase money notes, which are nonrecourse to the Partnership, are
generally secured by the Partnership's interest in the respective Local
Partnerships. There is no assurance that the underlying properties will have
sufficient appreciation and equity to enable the Partnership to pay the purchase
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<PAGE>
CAPITAL REALTY INVESTORS-IV LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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 adversely impact the Partnership's
financial condition because the purchase money notes are nonrecourse and secured
solely by the Partnership's interest in the related Local Partnerships.
Therefore, should the investment in any of the Local Partnerships with maturing
purchase money notes not produce sufficient value to satisfy the related
purchase money notes, the Partnership's exposure to loss is limited because the
amount of the nonrecourse indebtedness of each of the maturing purchase money
notes exceeds the carrying amount of the investment in and advances to each of
the related Local Partnerships. Thus, even a complete loss of one of these
Local Partnerships would not have a material adverse impact on the financial
condition of the Partnership. See further discussion of certain purchase money
notes below.
The following chart presents information related to purchase money notes
which mature through March 31, 2000, or which have matured and remain unpaid or
unextended as of May 13, 1999.
-5-
<PAGE>
CAPITAL REALTY INVESTORS-IV LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
<TABLE>
<CAPTION>
Carrying Amount
of Partnership's
Investment in Aggregate
and Advances to Principal Aggregate
Number of Underlying Local Balance Interest
Purchase Underlying Partnerships as as of Balance as of
Money Note Local Percentage of March Percentage March Percentage March Percentage
(PMN) Maturity Partnerships of Total 31, 1999 of Total 31, 1999 of Total 31, 1999 of Total
- ---------------- ------------ ---------- ---------------- ---------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3rd Quarter 1994 1 3% $ 1,278,943 4% $ 1,370,000 3% $ 5,743,480 6%
3rd Quarter 1997 1 3% 896,509 3% 1,330,000 3% 3,325,853 3%
3rd Quarter 1999 16 46% 17,182,898 54% 23,101,391 55% 46,233,569 46%
4th Quarter 1999 10 29% 7,454,785 23% 13,545,000 32% 32,452,759 33%
---- ----- ----------- ----- ----------- ----- ----------- -----
Total through
3/31/2000 28 81% $26,813,135 84% $39,346,391 93% $87,755,661 88%
==== ===== =========== ===== =========== ===== =========== =====
Total, all PMNs 35 100% $31,945,010 100% $42,011,391 100% $99,540,191 100%
==== ===== =========== ===== =========== ===== =========== =====
</TABLE>
The Managing General Partner is continuing to investigate possible
alternatives to reduce the Partnership's debt obligations. These alternatives
include, among others, retaining the cash available for distribution to meet the
purchase money note requirements, buying out certain purchase money notes at a
discounted price, extending the due dates of certain purchase money notes,
refinancing the respective properties' underlying debt, or selling the
underlying real estate and using the Partnership's share of the proceeds to pay
or buy down certain purchase money note obligations. Although the Managing
General Partner has had some success applying these strategies in the past, the
Managing General Partner cannot assure that these strategies will be acceptable
to all of the noteholders. Based on preliminary discussions with the holders of
purchase money notes maturing through March 31, 2000, the Managing General
Partner anticipates that, at least in some instances, the noteholders may not be
willing to accept anything less than payment in full on the maturity date. In
such instances, upon maturity of the purchase money notes, if the purchase money
notes remain unpaid, the noteholders have the right to foreclose on the
Partnership's interest in the related Local Partnerships. In the event of a
foreclosure, the excess of the nonrecourse indebtedness over the carrying amount
of the Partnership's investment in the related Local Partnership would be deemed
cancellation of indebtedness income which would be taxable to Limited Partners
at a federal tax rate of up to 39.6%. Additionally, in the event of a
foreclosure, the Partnership would lose its investment in the Local Partnership
and, likewise, its share of future cash flow distributed by the Local
Partnership from rental operations, sales or refinancings. Of the 35 Local
Partnerships in which the Partnership is invested as of both March 31, 1999 and
December 31, 1998, the 28 Local Partnerships with associated purchase money
notes which mature through March 31, 2000 and remain unpaid or unextended as of
May 13, 1999, represent the following percentages of the Partnership's total
-6-
<PAGE>
CAPITAL REALTY INVESTORS-IV LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
distributions received from Local Partnerships, and share of income from Local
Partnerships.
<TABLE>
<CAPTION>
Percentage of Total Partnership's Share of
For the Three Month Distributions Received Income from
Periods Ending from Local Partnerships Local Partnerships
------------------ ----------------------- ----------------------
<S> <C> <C>
March 31, 1999 70% $ 329,965
March 31, 1998 97% 162,450
</TABLE>
Interest expense on the Partnership's purchase money notes for the three
months ended March 31, 1999 and 1998 was $4,696,282 and $4,241,791,
respectively. Amortization of discount on purchase money notes increased
interest expense during the three months ended March 31, 1999 and 1998 by
$1,800,322 and $1,524,830, respectively. The accrued interest on the purchase
money notes of $99,540,191 and $96,821,772 as of March 31, 1999 and December 31,
1998, respectively, is due on the respective maturity dates of the purchase
money notes or earlier, in some instances, if the pertinent Local Partnership
has distributable net cash flow, as defined in the relevant Local Partnership
agreement.
Highland Village
----------------
The Managing General Partner is currently negotiating an extension on the
purchase money notes related to Highland Village Associates (Highland Village).
The purchase money notes, the aggregate principal amount of which is $1.1
million, mature on October 31, 1999. In connection with the proposed extension
of the purchase money notes, the Managing General Partner, the local managing
general partner and the noteholders are jointly exploring various options to
refinance the Massachusetts Housing Finance Agency (MHFA) and HUD Section 236
interest rate subsidized mortgage loan related to this property. There is no
assurance that the noteholders will agree to an extension on the purchase money
notes, or that a refinancing of the mortgage loan will be obtained.
Holiday Village
---------------
The Partnership defaulted on its purchase money note relating to Holiday
Village Apartments (Holiday Village) on July 27, 1994 when the note matured and
was not paid. The default amount included principal and accrued interest of
$1,370,000 and $2,862,342, respectively. As of May 13, 1999, principal and
accrued interest of $1,370,000 and $5,756,089, respectively, were due. The
Managing General Partner and the noteholders continue to negotiate settlement
options, and as of May 13, 1999, negotiations between the Managing General
Partner and the noteholders were ongoing. There is no assurance that any
-7-
<PAGE>
CAPITAL REALTY INVESTORS-IV LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
agreement will be reached. Should the noteholders begin foreclosure proceedings
on the Partnership's interest in the related Local Partnership, the Partnership
intends to vigorously defend against any action by the noteholders. 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 adversely
impact the Partnership's financial condition, as discussed above.
Jewish Federation
-----------------
The purchase money notes relating to Jewish Federation Apartments
Associates (Jewish Federation), the aggregate principal amount of which is
$1.350 million, are due to mature October 31, 1999. In 1997, the Managing
General Partner entered into an agreement with the noteholders to extend the
maturity date for five years, subject to the donation and transfer by the Local
Partnership of an unimproved portion of the property to an entity affiliated
with the local managing general partner. The Local Partnership had entered into
an agreement to make such donation and transfer, but the transaction was denied
by HUD in January 1998. In April 1998, the local managing general partner
indicated that it had received verbal approval from HUD and intended to reapply
for financing with HUD. There is no assurance that such financing will be
obtained. The Managing General Partner will continue to work with the local
managing general partner to attempt to work out an agreement relating the
purchase money notes. There is no assurance that such an agreement will be
reached.
Redden Gardens
--------------
The Partnership defaulted on its purchase money note relating to Redden
Development Company (Redden Gardens) on August 31, 1997 when the note matured
and was not paid. The default amount included principal and accrued interest of
$1,330,000 and $2,783,593, respectively. As of May 13, 1999, principal and
accrued interest of $1,330,000 and $3,369,410, respectively, were due. The
noteholders and the Partnership have agreed in principle to an extension of the
maturity date of the purchase money note to January, 2000. The parties are
presently formalizing this agreement. There is no assurance that a final
agreement will be reached with the noteholders. Accordingly, there can be 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 adversely impact the
Partnership's financial condition, as discussed above.
-8-
<PAGE>
CAPITAL REALTY INVESTORS-IV LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
b. Advances to Local Partnerships
------------------------------
The advances made to the Local Partnerships were as follows.
<TABLE>
<CAPTION>
March 31, December 31,
Local Partnership 1999 1998
----------------- ------------ ------------
<S> <C> <C>
Lakes of Northdale:
Principal amount of funds advanced $ 54,500 $ 54,500
------------ ------------
Total $ 54,500 $ 54,500
============ ============
</TABLE>
Lakes of Northdale
------------------
To cover operating deficits incurred in prior years by Lakes of Northdale,
Limited (Lakes of Northdale), the Partnership advanced funds totaling $54,500 as
of both March 31, 1999 and December 31, 1998. No advances have been made to
Lakes of Northdale since September 1989. These non-interest bearing advances
are payable from cash flow of Lakes of Northdale after payment of first mortgage
debt service and after satisfaction by the Partnership of certain other interest
obligations on the purchase money notes relating to the Local Partnership. For
financial reporting purposes, these advances have been reduced to zero by the
Partnership as a result of losses at the Local Partnership level during prior
years.
c. Property matters
----------------
Garden Court
------------
On December 31, 1998, the local managing general partner of Garden Court
Associates Limited Partnership (Garden Court) sold the property. The net
proceeds to the Partnership of $50,000 were received on March 2, 1999.
d. Summarized financial information
--------------------------------
Combined statements of operations for the 35 and 36 Local Partnerships in
which the Partnership is invested as of March 31, 1999 and 1998, respectively,
follow. The combined statements have been compiled from information supplied by
the management agents of the projects and are unaudited.
-9-
<PAGE>
CAPITAL REALTY INVESTORS-IV LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended
March 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenue:
Rental $ 8,474,682 $ 8,624,995
Other 593,449 559,184
------------ ------------
Total revenue 9,068,131 9,184,179
------------ ------------
Expenses:
Operating 5,476,715 5,655,544
Interest 1,456,535 1,687,016
Depreciation and amortization 1,816,625 1,831,849
------------ ------------
Total expenses 8,749,875 9,174,409
------------ ------------
Net income $ 318,256 $ 9,770
============ ============
</TABLE>
As of both March 31, 1999 and December 31, 1998, the Partnership's share of
cumulative losses of nine of the 35 Local Partnerships exceeded the amount of
the Partnership's investments in and advances to those Local Partnerships by
$12,375,619 and $12,157,676, 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. AFFORDABLE HOUSING LEGISLATION
President Clinton signed the Fiscal Year 1998 HUD appropriations bill into
law, effective October 1, 1997. The legislation allowed all Section 8 HAP
contracts with rents at less than 120% of fair market rents which expired
between October 1997 and September 1998 to be renewed for one year. In the case
of Section 8 HAP contracts with rents that exceeded 120% of fair market rents,
these contracts could be renewed for one year, but these rents were reduced to
120% of fair market rents (Mark-to-Market). As of 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) were 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
-10-
<PAGE>
CAPITAL REALTY INVESTORS-IV LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(Unaudited)
3. AFFORDABLE HOUSING LEGISLATION - Continued
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 have expired or
will expire during the government's fiscal year 1998 or 1999 and have been
renewed as indicated.
-11-
<PAGE>
CAPITAL REALTY INVESTORS-IV LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(Unaudited)
3. AFFORDABLE HOUSING LEGISLATION - Continued
<TABLE>
<CAPTION>
Units Original Renewed
Authorized for Expiration of Expiration of
Number of Rental Assistance Section 8 Section 8
Property Rental Units Under Section 8 HAP Contract HAP Contract
-------- ------------ ----------------- ------------- -------------
<S> <C> <C> <C> <C>
Cottonwood Park 126 6 06/30/98 06/30/99
Glenridge Gardens 120 24 05/31/99 (1)
Holiday Village 80 6 06/01/98 06/01/03
Pilgrim Tower North 258 205 10/31/98 02/29/00
Redden Gardens 150 29 09/30/98 09/30/99
Tradewinds Terrace 122 44 09/30/98 09/30/99
Westport Village 121 12 01/01/98 05/01/16
---- ---
Total 977 326
==== ===
</TABLE>
(1) The Managing General Partner expects that this Section 8 HAP Contract will
be renewed for one year upon expiration.
With the uncertainty of continued project-based Section 8 subsidies for
properties with expiring HAP contracts, there is no assurance that these rental
properties will be able to maintain the rental income and occupancy levels
necessary to pay operating costs and debt service. As a result, it is not
possible to predict the impact on the Local Partnerships 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 $38,368 and $32,138 for the
three months ended March 31, 1999 and 1998, respectively, as direct
reimbursement of expenses incurred on behalf of the Partnership. Such expenses
are included in the accompanying consolidated statements of operations as
general and administrative expenses. Additionally, in accordance with the terms
of the Partnership Agreement, the Partnership is obligated to pay the Managing
General Partner an annual incentive management fee (the Management Fee) after
all other expenses of the Partnership are paid. The Partnership paid the
Managing General Partner a Management Fee, as discussed above, of $93,750 for
each of the three month periods ended March 31, 1999 and 1998.
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
-12-
<PAGE>
CAPITAL REALTY INVESTORS-IV LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(Unaudited)
4. RELATED-PARTY TRANSACTIONS - Continued
partners. The Managing General Partner and/or its affiliates earned net fees
for services relating to the sale of River Run of $26,606 on August 27, 1996.
Of this amount, $17,737 was paid by the Partnership on December 20, 1996. On
March 24, 1998, the remaining balance of $8,869 was paid by the Partnership.
-13-
<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 section contains information that may be considered forward looking,
including statements regarding the effect of governmental regulations. Actual
results may differ materially from those described in the forward looking
statements and will be affected by a variety of factors including national and
local economic conditions, the general level of interest rates, terms of
governmental regulations that affect the Partnership and interpretations of
those regulations, the competitive environment in which the Partnership
operates, and the availability of working capital.
General
-------
Some of the rental properties owned by the Local Partnerships are financed
by state housing agencies. The Managing General Partner has been working to
develop strategies to sell or refinance certain properties pursuant to programs
developed by these agencies or other potential buyers. These programs may
include opportunities to sell the property to a qualifying purchaser who would
agree to maintain the property as low to moderate income housing in perpetuity,
or to refinance the property, or to obtain supplemental financing. The Managing
General Partner continues to monitor certain state housing agency programs
and/or programs provided by certain lenders, to ascertain whether the properties
would qualify within the parameters of a given program and whether these
programs would provide an appropriate economic benefit to the limited partners
of the Partnership.
Some of the rental properties owned by the Local Partnerships are dependent
on the receipt of project-based Section 8 Rental Housing Assistance Payments
(HAP) provided by the U.S. Department of Housing and Urban Development (HUD)
pursuant to Section 8 HAP contracts. President Clinton signed the Fiscal Year
1998 HUD appropriations bill into law, effective October 1, 1997. The
legislation allowed all Section 8 contracts with rents at less than 120% of fair
market rents which expired between October 1997 and September 1998 to be renewed
for one year. In the case of Section 8 HAP contracts with rents that exceeded
120% of fair market rents, these contracts could be renewed for one year, but
these rents were reduced to 120% of fair market rents (Mark-to-Market). 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) were 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 indebtedness income to the partners, a
taxable event, even though no actual cash is received. Additionally, the newly
created second mortgage will accrue interest at a below-market rate; however,
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<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
the Internal Revenue Service issued a ruling in July 1998 that concluded that
the below-market rate of interest will not generate additional ordinary income.
Each property subject to Mark-to-Market will be affected in a different manner,
and it is very difficult to predict the exact form of restructuring, or
potential tax liabilities to the limited partners, at this time.
The Managing General Partner is considering new strategies to deal with the
ever changing environment of affordable housing policy. The mortgage loans on
Section 236 and Section 221(d)(3) properties that are in the 18th year of their
mortgage may be eligible for pre-payment. Properties with expiring Section 8
HAP contracts may become convertible to market-rate apartment properties.
Currently there are few lenders that will provide financing either to prepay the
existing mortgage or provide additional funds to allow a property to convert to
market-rate units. Where opportunities exist, the Managing General Partner will
continue to work with the Local Partnerships to develop strategies that make
economic sense for all parties involved.
Financial Condition/Liquidity
-----------------------------
The Partnership's liquidity, with unrestricted cash resources of
$10,944,553 (or approximately $144.44 per Additional Limited Partner unit) and
$10,765,753 (or approximately $142.08 per Additional Limited Partner unit) as of
March 31, 1999 and December 31, 1998, respectively, along with anticipated
future cash distributions from the Local Partnerships, is expected to meet its
current and anticipated operating cash needs. As of May 13, 1999, $50,400 of
cash resources were restricted for future interest payments on one of the
purchase money notes. As of May 13, 1999, there were no material commitments
for capital expenditures.
The Partnership's obligations with respect to its investments in Local
Partnerships, in the form of purchase money notes having a principal balance of
$42,011,391 (exclusive of unamortized discount on purchase money notes of
$3,234,846) plus accrued interest of $99,540,191 as of March 31, 1999, are
payable in full upon the earliest of: (1) sale or refinancing of the respective
Local Partnership's rental property; (2) payment in full of the respective Local
Partnership's permanent loan; or (3) maturity. Purchase money notes in the
aggregate principal amounts of $1,370,000 and $1,330,000 matured on July 27,
1994 and August 31, 1997, respectively, but have not been paid or extended, as
discussed below. Purchase money notes mature during 1999, as follows.
-15-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Aggregate
Principal Amount Maturity
---------------- ------------
$ 5,204,310 July, 1999
13,897,081 August, 1999
4,000,000 September, 1999
5,975,000 October, 1999
7,570,000 December, 1999
-----------
$36,646,391
===========
The remaining two purchase money notes mature in 2000 and 2025. See the notes
to the consolidated financial statements for additional information pertaining
to these purchase money notes.
The purchase money notes, which are nonrecourse to the Partnership, are
generally secured by the Partnership's interest in the respective Local
Partnerships. There is no assurance that the underlying properties will have
sufficient appreciation and equity to enable the Partnership to pay the purchase
money notes' principal and accrued interest when due. If a purchase money note
is not paid in accordance with its terms, the Partnership will either have to
renegotiate the terms of repayment or risk losing its partnership interest in
the respective Local Partnership. The Partnership's inability to pay certain of
the purchase money note principal and accrued interest balances when due, and
the resulting uncertainty regarding the Partnership's continued ownership
interest in the related Local Partnerships, does not adversely impact the
Partnership's financial condition because the purchase money notes are
nonrecourse and secured solely by the Partnership's interest in the related
Local Partnerships. Therefore, should the investment in any of the Local
Partnerships with maturing purchase money notes not produce sufficient value to
satisfy the related purchase money notes, the Partnership's exposure to loss is
limited because the amount of the nonrecourse indebtedness of each of the
maturing purchase money notes exceeds the carrying amount of the investment in
and advances to each of the related Local Partnerships. Thus, even a complete
loss of one of these Local Partnerships would not have a material adverse impact
on the financial condition of the Partnership. See further discussion of
certain purchase money notes in the notes to consolidated financial statements.
The following chart presents information related to purchase money notes
which mature through March 31, 2000, or which have matured and remain unpaid or
unextended as of May 13, 1999.
-16-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
Carrying Amount
of Partnership's
Investment in Aggregate
and Advances to Principal Aggregate
Number of Underlying Local Balance Interest
Purchase Underlying Partnerships as as of Balance as of
Money Note Local Percentage of March Percentage March Percentage March Percentage
(PMN) Maturity Partnerships of Total 31, 1999 of Total 31, 1999 of Total 31, 1999 of Total
- ---------------- ------------ ---------- ---------------- ---------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3rd Quarter 1994 1 3% $ 1,278,943 4% $ 1,370,000 3% $ 5,743,480 6%
3rd Quarter 1997 1 3% 896,509 3% 1,330,000 3% 3,325,853 3%
3rd Quarter 1999 16 46% 17,182,898 54% 23,101,391 55% 46,233,569 46%
4th Quarter 1999 10 29% 7,454,785 23% 13,545,000 32% 32,452,759 33%
---- ----- ----------- ----- ----------- ----- ----------- -----
Total through
3/31/2000 28 81% $26,813,135 84% $39,346,391 93% $87,755,661 88%
==== ===== =========== ===== =========== ===== =========== =====
Total, all PMNs 35 100% $31,945,010 100% $42,011,391 100% $99,540,191 100%
==== ===== =========== ===== =========== ===== =========== =====
</TABLE>
The Managing General Partner is continuing to investigate possible
alternatives to reduce the Partnership's debt obligations. These alternatives
include, among others, retaining the cash available for distribution to meet the
purchase money note requirements, buying out certain purchase money notes at a
discounted price, extending the due dates of certain purchase money notes,
refinancing the respective properties' underlying debt, or selling the
underlying real estate and using the Partnership's share of the proceeds to pay
or buy down certain purchase money note obligations. Although the Managing
General Partner has had some success applying these strategies in the past, the
Managing General Partner cannot assure that these strategies will be acceptable
to all of the noteholders. Based on preliminary discussions with the holders of
purchase money notes maturing through March 31, 2000, the Managing General
Partner anticipates that, at least in some instances, the noteholders may not be
willing to accept anything less than payment in full on the maturity date. In
such instances, upon maturity of the purchase money notes, if the purchase money
notes remain unpaid, the noteholders have the right to foreclose on the
Partnership's interest in the related Local Partnerships. In the event of a
foreclosure, the excess of the nonrecourse indebtedness over the carrying amount
of the Partnership's investment in the related Local Partnership would be deemed
cancellation of indebtedness income which would be taxable to Limited Partners
at a federal tax rate of up to 39.6%. Additionally, in the event of a
foreclosure, the Partnership would lose its investment in the Local Partnership
and, likewise, its share of future cash flow distributed by the Local
Partnership from rental operations, sales or refinancings. Of the 35 Local
Partnerships in which the Partnership is invested as of both March 31, 1999 and
December 31, 1998, the 28 Local Partnerships with associated purchase money
notes which mature through March 31, 2000 and remain unpaid or unextended as May
13, 1999, represent the following percentages of the Partnership's total
distributions received from Local Partnerships, and share of income from Local
Partnerships.
-17-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
<TABLE>
<CAPTION>
Percentage of Total Partnership's Share of
For the Three Month Distributions Received Income from
Periods Ending from Local Partnerships Local Partnerships
------------------ ----------------------- ----------------------
<S> <C> <C>
March 31, 1999 70% $ 329,965
March 31, 1998 97% 162,450
</TABLE>
The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements.
For the three months ended March 31, 1999 and 1998, the receipt of distributions
from Local Partnerships was adequate to support operating cash requirements.
Results of Operations
---------------------
The Partnership's net loss for the three months ended March 31, 1999
increased from the corresponding period in 1998 primarily due to an increase in
interest expense due to amortization of discount on purchase money notes.
Contributing to the increase in the Partnership's net loss was a decrease in
interest and other income due to lower cash and cash equivalent balances in 1999
and an increase in general and administrative expense due to an increase in
payroll costs. Partially offsetting the increase in the Partnership's net loss
was an increase in share of income from partnerships generally due to decreased
operating expenses at seven properties.
For financial reporting purposes, the Partnership, as a limited partner in
the Local Partnerships, does not record losses from the Local Partnerships in
excess of its investment to the extent that the Partnership has no further
obligation to advance funds or provide financing to the Local Partnerships. As
a result, the Partnership's recognized losses for the three months ended March
31, 1999 did not include losses of $217,943, compared to excluded losses of
$340,239 for the three months ended March 31, 1998.
No other significant changes in the Partnership's operations have taken
place during this period.
Year 2000 Computer Issue
------------------------
The Year 2000 ("Y2K") computer issue refers to the inability of many
computer systems in use today to recognize "00" in the date field as the year
2000 and to recognize the year 2000 as a leap year. The Y2K problem arose
because, for many years, computer software programs, including programs embedded
in hardware, utilized only the last two digits to specify the year with the
assumption that the first two digits were "19." As a result, such programs may
not be able to recognize and process dates beyond 1999; rather they may
recognize and process "00," "01," "02,", etc., incorrectly as 1900, 1901, 1902,
instead of as 2000, 2001, 2002. In the opinion of computer experts, this could
-18-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
cause such programs to create erroneous results, malfunction, or fail completely
unless corrective measures are taken.
The Partnership utilizes software and related computer technologies
essential to its operations that will be affected by the Y2K issue. To address
the issue, the Managing General Partner has developed and is currently
implementing a plan (the "Y2K Project") designed to ensure that the Y2K date
change will not have an adverse impact on the Partnership's operations. The Y2K
Project is on schedule and the Managing General Partner expects completion by
the end of 1999. The Y2K Project consists of four phases -- Planning,
Assessment, Implementation and Testing. The Planning Phase began early in 1998
and is complete. Under the Planning Phase, the Managing General Partner
conducted an inventory of all internal hardware and software systems, data
interfaces, business operations and non-information technology functions which
may be susceptible to the Y2K issue. This phase was completed at the end of
November, 1998. Under the next phase, the Assessment Phase, all applications
and functions identified in the Planning Phase were analyzed to determine Y2K
compliance and the materiality of each identified risk. In the event of
noncompliance, for material risks, timetables for corrective action, as well as
estimated costs to achieve compliance, were determined. This phase was
completed during the first quarter of 1999. The Implementation Phase is now
underway. Renovation and replacement of existing internal hardware and software
systems has begun and completion is expected by June 1999. Additionally, the
Managing General Partner is currently working with third party vendors, service
providers, Local Partnership managing general partners, and Local Partnership
property managers to verify their Y2K compliance, with completion expected by
June 1999. The Testing Phase, which will include testing of internal
applications as well as some third party systems, began during January 1999 and
will continue throughout 1999. Contingency planning commenced during the fourth
quarter 1998 and will be completed by year-end 1999. The Managing General
Partner does not expect the expense associated with the Y2K Project to be
material.
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
Holiday Village
---------------
The Partnership defaulted on its purchase money note relating to Holiday
Village Apartments (Holiday Village) on July 27, 1994 when the note matured and
was not paid. The default amount included principal and accrued interest of
$1,370,000 and $2,862,342, respectively. As of May 13, 1999, principal and
accrued interest of $1,370,000 and $5,756,089, respectively, were due. The
Managing General Partner and the noteholders continue to negotiate settlement
options, and as of May 13, 1999, negotiations between the Managing General
Partner and the noteholders were ongoing. There is no assurance that any
agreement will be reached. Should the noteholders begin foreclosure proceedings
on the Partnership's interest in the related Local Partnership, the Partnership
intends to vigorously defend against any action by the noteholders. 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
-19-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Continued
-------------------------------
Partnership's interest in the related Local Partnership does not adversely
impact the Partnership's financial condition, as discussed above.
Redden Gardens
--------------
The Partnership defaulted on its purchase money note relating to Redden
Development Company (Redden Gardens) on August 31, 1997 when the note matured
and was not paid. The default amount included principal and accrued interest of
$1,330,000 and $2,783,593, respectively. As of May 13, 1999, principal and
accrued interest of $1,330,000 and $3,369,410, respectively, were due. The
noteholders and the Partnership have agreed in principle to an extension of the
maturity date of the purchase money note to January, 2000. The parties are
presently formalizing this agreement. There is no assurance that a final
agreement will be reached with the noteholders. Accordingly, there can be 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 adversely 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, 1999.
All other items are not applicable.
-20-
<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-IV LIMITED PARTNERSHIP
-----------------------------------------------
(Registrant)
by: C.R.I., Inc.
-------------------------------------------
Managing General Partner
May 14, 1999 by: /s/ Michael J. Tuszka
- ----------------- ---------------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
and Principal Accounting Officer)
-21-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
-22-
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 10,944,553
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 44,301,557
<CURRENT-LIABILITIES> 0
<BONDS> 138,316,736
0
0
<COMMON> 0
<OTHER-SE> (94,118,112)
<TOTAL-LIABILITY-AND-EQUITY> 44,301,557
<SALES> 0
<TOTAL-REVENUES> 650,826
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 197,016
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,696,282
<INCOME-PRETAX> (4,242,472)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,242,472)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,242,472)
<EPS-PRIMARY> (55.99)
<EPS-DILUTED> (55.99)
</TABLE>
