<PAGE>
FORM 10-QSB
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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Commission file number 0-23766
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CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
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(Exact name of small business issuer as specified in its charter)
Maryland 52-1388957
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11200 Rockville Pike, Rockville, Maryland 20852
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(Address of principal executive offices) (Zip Code)
(301) 468-9200
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(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
Not applicable Not applicable
-------------------------- ---------------------------------------
(Class) (Outstanding at June 30, 2000)
<PAGE>
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
INDEX TO FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 2000
Page
----
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2000 and
December 31, 1999.......................................1
Consolidated Statements of Operations and Accumulated
Losses - for the three and six months ended
June 30, 2000 and 1999 .................................2
Consolidated Statements of Cash Flows - for the
six months ended June 30, 2000 and 1999.................3
Notes to Consolidated Financial Statements -
June 30, 2000 and 1999..................................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................10
PART II. Other Information
Item 3. Defaults Upon Senior Securities...........................12
Item 5. Other Information.........................................12
Item 6. Exhibits and Reports on Form 8-K..........................13
Signature .........................................................14
Exhibit Index .....................................................15
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Investments in and advances to partnerships $ 571,298 $ 585,343
Cash and cash equivalents 8,202,410 8,086,701
Acquisition fees, principally paid to related parties, net of
accumulated amortization of $110,462 and $106,606, respectively 120,893 124,749
Property purchase costs, net of accumulated amortization of
$100,901 and $97,422, respectively 107,860 111,339
Other assets 1,445 --
------------ ------------
Total assets $ 9,003,906 $ 8,908,132
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Due on investments in partnerships $ 2,522,600 $ 2,522,600
Accrued interest payable 8,274,289 7,643,493
Accounts payable and accrued expenses 68,591 127,126
------------ ------------
Total liabilities 10,865,480 10,293,219
------------ ------------
Commitments and contingencies
Partners' capital (deficit):
Capital paid in:
General Partners 2,000 2,000
Limited Partners 21,202,500 21,202,500
------------ ------------
21,204,500 21,204,500
Less:
Accumulated distributions to partners (4,908,656) (4,908,656)
Offering costs (2,570,535) (2,570,535)
Accumulated losses (15,586,883) (15,110,396)
------------ ------------
Total partners' deficit (1,861,574) (1,385,087)
------------ ------------
Total liabilities and partners' deficit $ 9,003,906 $ 8,908,132
============ ============
</TABLE>
Theaccompanying notes are an
integral part of these
consolidated financial
statements.
- 1 -
<PAGE>
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
AND ACCUMULATED LOSSES
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Share of income from partnerships $ 64,022 $ 253,924 $ 90,565 $ 359,636
------------ ------------ ------------ ------------
Other revenue and expenses:
Revenue:
Interest 126,169 102,743 242,204 172,003
------------ ------------ ------------ ------------
Expenses:
Interest 324,284 286,445 648,567 572,890
General and administrative 37,451 40,739 73,256 81,234
Management fee 24,483 24,483 48,965 48,965
Professional fees 15,567 17,684 31,133 34,281
Amortization of deferred costs 3,668 4,155 7,335 8,309
------------ ------------ ------------ ------------
405,453 373,506 809,256 745,679
------------ ------------ ------------ ------------
Total other revenue and expenses (279,284) (270,763) (567,052) (573,676)
------------ ------------ ------------ ------------
Loss before gain on disposition
of investment in partnership (215,262) (16,839) (476,487) (214,040)
Gain on disposition of investment in partnership -- -- -- 6,123,739
------------ ------------ ------------ ------------
Net (loss) income (215,262) (16,839) (476,487) 5,909,699
Accumulated losses, beginning of period (15,371,621) (18,523,294) (15,110,396) (24,449,832)
------------ ------------ ------------ ------------
Accumulated losses, end of period $(15,586,883) $(18,540,133) $(15,586,883) $(18,540,133)
============ ============ ============ ============
Net (loss) income allocated to General
Partners (1.51%) $ (3,250) $ (254) $ (7,195) $ 89,236
============ ============ ============ ============
Net (loss) income allocated to Initial and
Special Limited Partners (2.49%) $ (5,360) $ (419) $ (11,865) $ 147,152
============ ============ ============ ============
Net (loss) income allocated to BAC Holders (96%) $ (206,652) $ (16,166) $ (457,427) $ 5,673,311
============ ============ ============ ============
Net (loss) income per BAC based on 21,158 BACs
outstanding at June 30, 2000 and 1999,
respectively $ (9.77) $ (0.76) $ (21.62) $ 268.14
============ ============ ============ ============
</TABLE>
Theaccompanying notes are an
integral part of these
consolidated financial
statements.
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended
June 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (476,487) $ 5,909,699
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:
Share of income from partnerships (90,565) (359,636)
Amortization of deferred costs 7,335 8,309
Gain on disposition of investment in partnership -- (6,123,739)
Changes in assets and liabilities:
Increase in accrued interest receivable on advances to
partnerships (11,988) (11,813)
(Increase) decrease in other assets (1,445) 55,663
Increase in accrued interest payable 648,567 572,890
Payment of purchase money note interest (17,771) --
(Decrease) increase in accounts payable and accrued expenses (58,535) 50,975
------------ ------------
Net cash (used in) provided by operating activities (889) 102,348
------------ ------------
Cash flows from investing activities:
Receipt of distributions from partnerships 116,598 349,222
Proceeds from disposition of investment in partnership -- 6,370,090
------------ ------------
Net cash provided by investing activities 116,598 6,719,312
------------ ------------
Cash flow used in financing activities:
Distribution to BAC Holders -- (2,496,644)
------------ ------------
Net increase in cash and cash equivalents 115,709 4,325,016
Cash and cash equivalents, beginning of period 8,086,701 2,154,057
------------ ------------
Cash and cash equivalents, end of period $ 8,202,410 $ 6,479,073
============ ============
</TABLE>
The accompanying notes are an
integral part of these
consolidated financial
statements.
- 3 -
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of C.R.I., Inc. (CRI), the Managing General Partner, the
accompanying unaudited consolidated financial statements reflect all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the financial position of Capital Realty Investors-85 Limited
Partnership (the Partnership) as of June 30, 2000, and the results of its
operations for the three and six months ended June 30, 2000 and 1999, and its
cash flows for the six months ended June 30, 2000 and 1999. The results of
operations for the interim periods ended June 30, 2000, are not necessarily
indicative of the results to be expected for the full year.
The accompanying unaudited consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States and with the instructions to Form 10-QSB. Certain information and
accounting policies and footnote disclosures normally included in financial
statements prepared in conformity with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to such
instructions. These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Partnership's annual report on Form 10-KSB at December 31, 1999.
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
a. Due on investments in partnerships and accrued interest payable
---------------------------------------------------------------
Purchase money notes
--------------------
The Partnership's obligations with respect to its investments in Local
Partnerships, in the form of purchase money notes having an aggregate principal
balance of $2,348,000 plus aggregate accrued interest of $8,198,889 as of June
30, 2000, 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. A purchase money
note in the principal amount of $230,000 matured on January 30, 1996 but has not
been paid or extended, as discussed below. The remaining purchase money notes
mature in 2001 and 2003.
Interest expense on the Partnership's purchase money notes for the
three and six month periods ended June 30, 2000 was $324,284 and $648,567,
respectively, and $286,445 and $572,890 for the three and six month periods
ended June 30, 1999, respectively. The accrued interest payable on the purchase
money notes of $8,198,889 and $7,568,093 as of June 30, 2000 and December 31,
1999, respectively, is due on the respective maturity dates of the purchase
money notes or earlier, in some instances,
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<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
if (and to the extent of a portion thereof) the related Local Partnership has
distributable net cash flow, as defined in the relevant Local Partnership
agreement.
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 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 the Partnership's
interest in 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.
Paradise Foothills
------------------
The Partnership defaulted on its purchase money note relating to
Paradise Associates, L.P. (Paradise Foothills) when the note matured on January
30, 1996 and was not paid. The default amount included principal and accrued
interest of $230,000 and $371,464, respectively. As of August 4, 2000, principal
and accrued interest totaling $230,000 and $695,209, respectively, were due. The
Managing General Partner proposed an extension of the purchase money note
maturity date until May 31, 2003, coterminous with the expiration of the related
Local Partnership's provisional workout agreement related to its mortgage loan.
As of August 4, 2000, the Managing General Partner is awaiting a response from
the purchase money noteholder. There is no assurance that the Managing General
Partner will reach an agreement of any kind with the noteholder. Should the
noteholder begin foreclosure proceedings on the Partnership's interest in the
Local Partnership, the Managing General Partner intends to vigorously contest
such action. Due to a possible foreclosure by the noteholder, there can be no
assurance that the Partnership will be able to retain its interest in the Local
Partnership. The uncertainty regarding
-5-
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
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. 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 any future cash
flow distributed by the Local Partnership from rental operations, mortgage debt
refinancings, or the sale of the real estate. The Partnership did not receive
any distributions from Paradise Foothills during the six month periods ended
June 30, 2000 and 1999, and its aggregate share of income from this Local
Partnership was $0 for the three and six month periods ended June 30, 2000,
respectively, and $0 for the three and six month periods ended June 30, 1999,
respectively.
The amount due to a local general partner of Paradise Foothills of
$174,600, plus accrued interest of $75,400 at June 30, 2000, will be paid upon
the occurrence of specified events, as outlined in the respective Local
Partnership's partnership agreement.
b. Advances to Local Partnership
-----------------------------
The Pointe
----------
Mesa Partners Limited Partnership (The Pointe), located in El Paso,
Texas, modified its mortgage loan in 1987. In connection with the mortgage loan
modification, the Partnership advanced $262,500 to the Local Partnership in
1987. Repayment of this loan, with simple interest at 9% per annum, is expected
to occur upon sale or refinancing of the property. As of June 30, 2000 and
December 31, 1999, accrued interest was $304,876 and $293,063, respectively.
c. Property matters
----------------
Devonshire and Springfield
--------------------------
In June 1998, the local managing general partners of Devonshire
Development Limited Partnership (Devonshire) and Springfield Properties Limited
Partnership (Springfield) received offers from third parties to purchase the
respective properties. The local managing general partners of Devonshire and
Springfield entered into contracts to sell the respective properties to a real
estate investment trust (REIT) (in the case of Springfield) and the REIT's
affiliate (in the case of Devonshire)
-6-
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
on or before January 15, 1999. In September 1998, prior to the expiration of the
due diligence period, the purchaser, in accordance with its rights under the
sale contract, terminated the sale contract for Devonshire.
On January 22, 1999, pursuant to the Springfield sale contract, the
Local Partnership sold Springfield Apartments, located in Redmond, Washington,
to ASN-Washington Holdings (1) Incorporated, an affiliate of the REIT. The sale
resulted in a financial statement gain of approximately $6.1 million, an
estimated federal tax gain of approximately $10.2 million, and net cash proceeds
of approximately $6.4 million to the Partnership. As a result of the sale, CRICO
of Springfield, Inc., the managing general partner of the Local Partnership and
an affiliate of the Managing General Partner, received an additional management
fee of $636,789, pursuant to the Local Partnership Agreement, all of which was
paid in 1999.
Following the termination of the sales contract for Devonshire, on June
28, 1999, the Local Partnership entered into a contract with a different
unrelated third party to sell the property. On September 30, 1999, pursuant to
the Devonshire sale contract, the Local Partnership sold Devonshire Apartments,
located in Kirkland, Washington, to Kirkland Rrestoration LLC. The sale resulted
in a financial statement gain of approximately $3.5 million, an estimated
federal tax gain of approximately $6 million, and net cash proceeds of
approximately $3.5 million to the Partnership, which net cash proceeds were
received by the Partnership on October 1, 1999. As a result of the sale, CRICO
of Devonshire, Inc., the managing general partner of the Local Partnership and
an affiliate of the Managing General Partner, received an additional management
fee of $300,086, of which $269,485 was paid in 1999 and $30,601 was paid in
January 2000, pursuant to the Local Partnership Agreement.
d. Summarized financial information
--------------------------------
Combined statements of operations for the four and five Local
Partnerships in which the Partnership was invested as of June 30, 2000 and 1999,
respectively, follow. The combined statements have been compiled from
information supplied by the management agents of the projects and are unaudited.
The combined statements of operations for the three and six months ended June
30, 1999, include information for Springfield through the date of sale.
-7-
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
(Unaudited)
2. INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS - Continued
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rental $ 1,468,849 $ 1,731,448 $ 2,920,727 $ 3,546,523
Other 101,975 91,370 202,904 190,070
------------ ------------ ------------ ------------
Total revenue 1,570,824 1,822,818 3,123,631 3,736,593
------------ ------------ ------------ ------------
Expenses:
Operating 731,938 893,994 1,483,537 1,840,009
Interest 513,075 628,083 1,026,149 1,307,576
Depreciation and amortization 271,231 266,684 542,462 548,871
------------ ------------ ------------ ------------
Total expenses 1,516,244 1,788,761 3,052,148 3,696,456
------------ ------------ ------------ ------------
Net income $ 54,580 $ 34,057 $ 71,483 $ 40,137
============ ============ ============ ============
</TABLE>
As of June 30, 2000 and 1999, the Partnership's share of cumulative
losses to date for three and four, respectively, of the Local Partnerships
exceeded the amount of the Partnership's investments in and advances to those
Local Partnerships by $6,687,901 and $7,184,160, respectively. As the
Partnership has no further obligation to advance funds or provide financing to
these Local Partnerships, the excess losses have not been reflected in the
accompanying consolidated financial statements.
3. 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 $22,184 and
$46,755 for the three and six month periods ended June 30, 2000, respectively,
and $29,290 and $58,834 for the three and six month periods ended June 30, 1999,
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.
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
-8-
<PAGE>
CAPITAL REALTY INVESTORS-85 LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and 1999
(Unaudited)
3. RELATED PARTY TRANSACTIONS - Continued
the Partnership are paid. The Partnership paid the Managing General Partner a
Management Fee of $24,483 and $48,965 for each of the three and six month
periods ended June 30, 2000 and 1999, respectively.
On January 22, 1999, Springfield Properties Limited Partnership, one of
the Local Partnerships in which the Partnership has invested, sold Springfield
Apartments. As a result of the successful sale, CRICO of Springfield, Inc., the
local managing general partner of the Local Partnership (an affiliate of the
Managing General Partner), earned an additional management fee of $636,789,
pursuant to the Local Partnership Agreement, all of which was paid in 1999.
On September 30, 1999, Devonshire Development Limited Partnership, one
of the Local Partnerships in which the Partnership has invested, sold Devonshire
Apartments. As a result of the successful sale, CRICO of Devonshire, Inc., the
local managing general partner of the Local Partnership (an affiliate of the
Managing General Partner), earned an additional management fee of $300,086,
pursuant to the Local Partnership Agreement; $269,485 was paid during 1999, and
the remainder was paid in 2000.
-9-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Capital Realty Investors-85 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, governmental
regulations affecting the Partnership and interpretations of those regulations,
the competitive environment in which the Partnership operates, and the
availability of working capital.
Financial Condition/Liquidity
-----------------------------
The Partnership's liquidity, with unrestricted cash resources of
$8,202,410 as of June 30, 2000, along with anticipated future cash distributions
from Local Partnerships, is expected to be adequate to meet its current and
anticipated operating cash needs. As of August 4, 2000, there are 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 an aggregate principal
balance of $2,348,000 plus aggregate accrued interest of $8,198,889 as of June
30, 2000, 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. A purchase money
note in the principal amount of $230,000 matured on January 30, 1996 and has not
been paid or extended. The remaining purchase money notes mature in 2001 and
2003. See the notes to the consolidated financial statements for additional
information concerning 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 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
-10-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
exceeds the carrying amount of the investment in, and advances to, each of the
related Local Partnerships. Thus, even a complete loss of the Partnership's
interest in one of these Local Partnerships would not have a material adverse
impact on the financial condition of the Partnership.
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, paying off 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 pay down certain purchase
money note obligations.
Included in due on investments in partnerships is $174,600 due to a
local general partner related to Paradise Associates, L.P. (Paradise Foothills)
at both June 30, 2000, and December 31, 1999; accrued interest payable thereon
was $75,400 at both June 30, 2000, and December 31, 1999. These amounts will be
paid upon the occurrence of certain specified events, as outlined in the
respective Local Partnership's partnership agreement.
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 month periods ended June 30, 2000 and 1999, the
receipt of distributions from partnerships was adequate to support operating
cash requirements. Cash and cash equivalents increased during the six months
ended June 30, 2000, primarily due to the receipt of distributions from
partnerships, which exceeded net cash used in operating activities.
During the periods covered by this report, on May 3, 1999, the Managing
General Partner distributed $2,496,644 (or $118 per Beneficial Assignee
Certificate (BAC)) from the proceeds generated from the sale of Springfield
Properties Limited Partnership (Springfield), to the BAC holders of record as of
January 22, 1999. The Managing General Partner currently intends to retain all
of the Partnership's remaining undistributed cash for the possible repayment,
prepayment or retirement of the Partnership's outstanding purchase money notes
related to the Local Partnerships.
Results of Operations
---------------------
The Partnership's net loss for the three month period ended June 30,
2000 increased from the corresponding period in 1999 primarily due to a decrease
in share of income from partnerships as a result of the sale of Devonshire
Development Limited Partnership (Devonshire) in the second half of 1999, and
also due to the exclusion of another property's income in 2000 because that
property had cumulative unallowable losses which were in excess of the income.
Contributing to the net loss was an increase in interest expense on purchase
money notes due to the compounding of interest. Offsetting the increase in the
Partnership's net loss were an
-11-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
increase in interest income due to higher cash and cash equivalents balances and
generally higher rates, and a decrease in general and administrative expenses
due to lower reimbursed payroll costs.
The Partnership recognized a net loss for the six month period ended
June 30, 2000 as opposed to net income during the corresponding period in 1999
primarily due to gain on disposition of investment in partnership related to the
sale of the Partnership's interest in Springfield in January 1999. Contributing
to the net loss was an increase in interest expense on purchase money notes due
to the compounding of interest and a decrease in share of income from
partnerships as a result of the sales of Springfield and Devonshire in January
and September 1999, respectively. Offsetting the net loss were an increase in
interest income due to higher cash and cash equivalents balances and generally
higher rates, and a decrease in general and administrative expenses due to lower
reimbursed payroll costs.
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 share of income from partnerships for the three and
six month periods ended June 30, 2000 did not include losses of $80,799 and
$161,595, respectively, compared to excluded losses of $99,900 and $199,796 for
the three and six month periods ended June 30, 1999, respectively.
No other significant changes in the Partnership's operations have taken
place during this period.
PART II. OTHER INFORMATION
-----------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
See Note 2.a. of the notes to consolidated financial statements
contained in Part I, Item 1, hereof, for information concerning the
Partnership's default on a purchase money note.
ITEM 5. OTHER INFORMATION
-----------------
On April 5, 2000, Peachtree Partners (Peachtree) mailed an offer letter
to Beneficial Assignee Certificate (BAC) holders of the Partnership. The offer
letter indicated that Peachtree was willing to offer to purchase outstanding BAC
units at a price of $90 per unit. Peachtree is unaffiliated with the Managing
General Partner. The price offered was determined solely at the discretion of
Peachtree and does not necessarily represent the fair market value of each BAC.
There is no established market for the purchase and sale of BACs, although
various
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<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 5. OTHER INFORMATION - Continued
-----------------
informal secondary market services exist in addition to the tender offer by
Peachtree. Due to limited markets, however, investors may be unable to sell or
otherwise dispose of their BACs.
If more than 5% of the total outstanding BAC units are transferred in
any one calendar year (not counting certain exempt transfers), the Partnership
could be taxed as a "publicly traded partnership," with potentially severe tax
implications for the Partnership and its investors. Specifically, the
Partnership would be taxed as a corporation and the income and losses from the
Partnership would no longer be considered a passive activity. From January 1,
2000 through April 28, 2000, approximately 4.9% of outstanding BAC units were
sold. Accordingly, to remain within the 5% safe harbor, effective May 5, 2000,
the General Partner of the Partnership halted recognition of any transfers that
would exceed the safe harbor limit through December 31, 2000. As a result,
transfers of BAC units due to sales transactions will not be recognized by the
Partnership between May 5 and December 31, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a. None
b. No reports on Form 8-K were filed with the Commission during
the quarter ended June 30, 2000.
All other items are not applicable.
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<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-85 LIMITED PARTNERSHIP
-----------------------------------------------
(Registrant)
by: C.R.I., Inc.
-------------------------------------------
Managing General Partner
August 4, 2000 by: /s/ Michael J. Tuszka
----------------- ---------------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
and Principal Accounting Officer)
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<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
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