<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 September 30, 1997
------------------
Commission file number 0-14513
-------------
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
- --------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
District of Columbia 52-1420605
- ----------------------------------------- --------------------
(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
- -------------------------------------------------------------------------
(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.
[X] Yes [ ] 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 September 30, 1997
- ---------------------------------- ---------------------------------
(Not applicable) (Not applicable)
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
Page
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets - as of September 30, 1997
and December 31, 1996 . . . . . . . . . . . . . . 1
Consolidated Statements of Operations - for the
three and nine months ended September 30, 1997
and 1996 . . . . . . . . . . . . . . . . . . . . 2-3
Consolidated Statement of Partners' Deficit - for
the nine months ended September 30, 1997 . . . . 4
Consolidated Statements of Cash Flows - for the nine
months ended September 30, 1997 and 1996 . . . . 5
Notes to Consolidated Financial Statements . . . . 6-17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . 18-23
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 24
Signatures . . . . . . . . . . . . . . . . . . . . . . . . 25
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . 26
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
As of As of
September 30, December 31,
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,822,634 $ 2,015,244
Restricted cash and cash equivalents 2,037,625 1,801,023
Accounts receivable, less allowance for doubtful accounts
of $101,413 and $69,465, respectively 1,346,347 805,499
Prepaid expenses 1,018,899 800,282
Current portion of deferred rent receivable 116,606 116,606
Inventory and other 59,075 67,170
------------- -------------
Total current assets 6,401,186 5,605,824
------------- -------------
Property and equipment:
Buildings and tenant improvements 123,038,545 122,314,194
Furniture and equipment 15,492,022 15,100,621
------------- -------------
138,530,567 137,414,815
Less-accumulated depreciation (58,353,835) (54,744,643)
------------- -------------
80,176,732 82,670,172
------------- -------------
Other assets:
Deferred charges, less accumulated amortization of
$3,162,039 and $2,580,996, respectively 2,720,294 2,785,249
Deferred rent receivable, less reserve of $148,442 477,161 477,161
Escrows and deposits 454,744 405,165
------------- -------------
3,652,199 3,667,575
------------- -------------
Total assets $ 90,230,117 $ 91,943,571
============= =============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-1-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND PARTNERS' DEFICIT
<TABLE>
<CAPTION>
As of As of
September 30, December 31,
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Current portion of first mortgage note $ 5,714,823 $ 5,759,111
Accounts payable 496,898 566,918
Accrued expenses 913,004 824,142
Due to affiliates 1,670,019 1,558,144
Due to Hyatt 1,009,276 953,434
Due to Realty 972,233 972,233
Other liabilities 36,078 36,078
------------- -------------
Total current liabilities 10,812,331 10,670,060
First mortgage note 58,278,391 61,694,529
Second mortgage note 15,666,033 16,687,805
Third mortgage note 6,252,000 6,049,500
Due to guarantor of operating deficits 2,459,556 2,367,168
Deferred gain on debt forgiveness 58,459,358 69,432,396
Deferred revenue and security deposits 365,719 506,750
------------- -------------
Total liabilities 152,293,388 167,408,208
------------- -------------
Commitments and contingencies
Partners' deficit (62,063,271) (75,464,637)
------------- -------------
Total liabilities and partners' deficit $ 90,230,117 $ 91,943,571
============= =============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-2-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
----------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rooms $ 3,256,438 $ 3,038,829 $ 10,038,020 $ 9,216,646
Food and beverage 1,228,798 1,136,926 3,972,669 3,697,329
Telephone 164,761 171,163 481,902 500,029
Office, retail and parking rentals 2,289,838 2,327,789 6,789,957 6,966,858
Other 24,793 14,741 70,800 65,206
------------ ------------ ------------ ------------
6,964,628 6,689,448 21,353,348 20,446,068
------------ ------------ ------------ ------------
Departmental expenses:
Rooms 634,984 598,731 1,883,670 1,842,011
Food and beverage 893,332 885,115 2,797,423 2,794,864
Telephone 103,018 95,476 303,869 294,070
Other -- -- -- 511
------------ ------------ ------------ ------------
1,631,334 1,579,322 4,984,962 4,931,456
------------ ------------ ------------ ------------
Other operating expenses:
Administrative 451,026 420,532 1,343,180 1,282,943
Marketing 359,170 364,300 1,148,651 1,098,257
Energy costs 617,491 558,827 1,469,565 1,404,497
Property operations and maintenance 462,700 475,977 1,503,968 1,546,968
------------ ------------ ------------ ------------
1,890,387 1,819,636 5,465,364 5,332,665
------------ ------------ ------------ ------------
Operating income before other income, fixed
charges and other deductions and extraordinary item 3,442,907 3,290,490 10,903,022 10,181,947
------------ ------------ ------------ ------------
Other income 7,148 11,770 30,734 28,929
------------ ------------ ------------ ------------
Fixed charges and other deductions:
Depreciation 1,203,064 1,209,514 3,609,192 3,628,542
Amortization 130,860 197,667 392,580 593,001
Interest expense 229,833 188,842 677,158 566,835
Management fees 285,072 257,733 844,946 834,527
Real estate and personal property taxes 237,468 255,978 746,211 820,319
Ground rent 400,000 400,000 1,200,000 1,200,000
Other 163,999 134,181 506,396 437,432
------------ ------------ ------------ ------------
2,650,296 2,643,915 7,976,483 8,080,656
------------ ------------ ------------ ------------
Net income before extraordinary item 799,759 658,345 2,957,273 2,130,220
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-3-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS - Continued
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
----------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Extraordinary item-gain on debt forgiveness 3,457,215 3,516,674 10,444,093 10,570,143
------------ ------------ ------------ ------------
Net income 4,256,974 4,175,019 13,401,366 12,700,363
Total income attributed to minority interest (4,265,436) (4,183,281) (13,426,300) (12,724,598)
------------ ------------ ------------ ------------
Net loss attributed to Partnership $ (8,462) $ (8,262) $ (24,934) $ (24,235)
============ ============ ============ ============
Net loss allocated to General
Partners and affiliated Initial
Limited Partner (1.01%) $ (85) $ (84) $ (252) $ (245)
============ ============ ============ ============
Net loss allocated to Additional
Limited Partners (98.99%) $ (8,377) $ (8,178) $ (24,682) $ (23,990)
============ ============ ============ ============
Net loss per unit of Additional Limited
Partnership interest $ (13.96) $ (13.63) $ (41.14) $ (39.98)
============ ============ ============ ============
Additional Limited Partnership units
issued and outstanding 600 600 600 600
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-4-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF PARTNERS' DEFICIT
For the nine months ended September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Losses not
General Limited Allocable
Partners Partners to Partners Total
--------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 $(529,378) $322,178 $ (75,257,437) $ (75,464,637)
Net loss attributed to Partnership (252) (24,682) -- (24,934)
Total income attributed to minority
interest -- -- 13,426,300 13,426,300
--------- -------- ------------- -------------
Balance, September 30, 1997 $(529,630) $297,496 $ (61,831,137) $ (62,063,271)
========= ======== ============= =============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-5-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
-------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 13,401,366 $ 12,700,363
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 3,609,192 3,628,542
Amortization 392,580 593,001
Extraordinary item-gain on debt forgiveness (10,444,093) (10,570,143)
Interest expense related to the amortization of financing costs 188,463 188,463
Net interest expense added to debt 294,888 294,888
Interest payments treated as a reduction in mortgage debt (4,678,636) (4,722,239)
Changes in assets and liabilities:
(Increase) decrease in restricted cash and cash equivalents (236,602) 402,439
(Increase) decrease in accounts receivable, net (540,848) 30,099
Increase in prepaid expenses (218,617) (207,230)
Decrease in inventory and other 8,095 10,567
Increase in escrows and deposits (49,579) (306,059)
(Decrease) increase in accounts payable (70,020) 107,326
Increase in accrued expenses 88,862 82,049
Increase (decrease) in due to Hyatt 55,842 (58,850)
Increase in other liabilities -- 1,500
Decrease in deferred revenue and security deposits (141,031) (92,349)
------------ ------------
Net cash provided by operating activities 1,659,862 2,082,367
------------ ------------
Cash flows from investing activities:
Purchase of building improvements (724,351) (711,748)
Purchase of furniture and equipment (391,401) (244,703)
Payment of leasing costs (516,088) (908,812)
------------ ------------
Net cash used in investing activities (1,631,840) (1,865,263)
------------ ------------
Cash flows from financing activities:
Net payment of debt (332,507) (336,120)
Proceeds from advances from affiliates 111,875 109,443
------------ ------------
Net cash used in financing activities (220,632) (226,677)
------------ ------------
Net decrease in cash and cash equivalents (192,610) (9,573)
Cash and cash equivalents, beginning of period 2,015,244 1,351,524
------------ ------------
Cash and cash equivalents, end of period $ 1,822,634 $ 1,341,951
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 4,678,636 $ 4,722,239
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-6-
<PAGE>
CAPITAL INCOME PROPERTIES-C 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 Income
Properties-C Limited Partnership (the Partnership) contain all adjustments of a
normal recurring nature necessary to present fairly the Partnership's
consolidated financial position as of September 30, 1997 and December 31, 1996
and the results of its consolidated operations for the three and nine months
ended September 30, 1997 and 1996 and its consolidated cash flows for the nine
months ended September 30, 1997 and 1996.
These unaudited consolidated 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 financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. While CRI believes that the disclosures
presented are adequate to make the information not misleading, 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, 1996.
Certain amounts in the 1996 financial statements have been reclassified to
conform to the 1997 presentation. The results for the three and nine months in
the period ended September 30, 1997 are not necessarily indicative of the
results expected for the entire year.
2. THE PARTNERSHIP
The Partnership, a District of Columbia limited partnership, was organized
as of December 15, 1984. The purpose of the Partnership is to invest in real
estate by acquiring and holding a limited partnership interest in Bethesda Metro
Center Limited Partnership (BMCLP). BMCLP owns and operates a 381-room hotel
known as the Hyatt Regency Bethesda Hotel (the Hotel) and an office building
known as Bethesda Metro Office Building (the Office Building) located in
Bethesda, Maryland, containing approximately 336,000 square feet of net rentable
office space and approximately 18,000 square feet of net rentable retail space.
In addition, attached to the structure is a parking facility for approximately
1,300 cars serving the entire development.
CRI, as Managing General Partner of the Partnership, has a 0.01% general
partner interest. Other general partner interests, which total 0.99%, are held
by three individuals affiliated (or formerly affiliated) with CRI. The total
limited partner interest of 99% is comprised of i) 0.01% owned by CRICO-Bethesda
Growth Partners Limited Partnership, the affiliated Initial Limited Partner, and
ii) 98.99% widely held by unrelated parties. On June 15, 1992, pursuant to a
debt modification with BMCLP's former first mortgage lender, C.R.C.C. of
Bethesda, Inc. (CRCC) replaced the managing general partners of BMCLP (unrelated
parties hereinafter referred to as Special Limited Partners). Since CRCC is a
wholly owned affiliate of CRI, the accompanying unaudited financial statements
as of September 30, 1997 and December 31, 1996 and for each of the three-month
and nine-month periods ended September 30, 1997 and 1996 have been consolidated
with BMCLP.
Although an entity affiliated with the Partnership has assumed
responsibility for management of BMCLP and the Partnership has consolidated its
-7-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. THE PARTNERSHIP - Continued
interest therein in the accompanying financial statements, the Partnership has
not assumed responsibility for any past or future operating deficits of BMCLP.
The deficit in partners' capital generated by activity at BMCLP remains the
obligation of the Special Limited Partners of BMCLP.
Therefore, of the total partners deficit of $62,077,574 and $75,464,637 as
of September 30, 1997 and December 31, 1996, respectively, $61,848,040 and
$75,257,437, respectively, are not attributable to the partners of the
Partnership. The amounts are comprised of cumulative BMCLP losses in excess of
the Partnership s investment in BMCLP as of June 15, 1992 of $77,472,839, and
cumulative net BMCLP income of $15,624,799, and $2,215,402 as of September 30,
1997 and December 31, 1996, respectively. BMCLP losses subsequent to June 15,
1992, have been consolidated into the operating accounts of the Partnership in
the accompanying consolidated statements of operations.
3. INVESTMENT IN BETHESDA METRO CENTER LIMITED PARTNERSHIP
The Partnership invested $42,500,100 in cash in BMCLP through September 30,
1997, to acquire a 92.5% limited partnership interest. BMCLP losses before June
15, 1992, were not recorded in the accompanying financial statements of the
Partnership since cumulative BMCLP losses exceeded the Partnership's investment
in 1992. Prior to June 15, 1992, the Partnership's investment in BMCLP was
accounted for under the equity method which prohibits the recognition of
investment losses in excess of the original investment. However, subsequent to
June 15, 1992, the Partnership's investment in BMCLP has been consolidated in
the accompanying financial statements (see Note 2).
Condensed financial information of the Partnership on an unconsolidated
basis is as follows:
-8-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENT IN BETHESDA METRO CENTER LIMITED PARTNERSHIP - Continued
<TABLE>
<CAPTION>
BALANCE SHEETS
--------------
As of As of
September 30, December 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Total assets $ 116 $ 116
============ ============
Total liabilities $ 232,250 $ 207,316
Partners' deficit (232,134) (207,200)
------------ ------------
Total liabilities and partners' deficit $ 116 $ 116
============ ============
</TABLE>
STATEMENTS OF OPERATIONS
------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
----------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Professional fees $ 5,250 $ 4,925 $ 18,974 $ 18,550
Other expenses 3,212 3,337 5,960 5,685
------------ ------------ ------------ ------------
Net loss $ 8,462 $ 8,262 $ 24,934 $ 24,235
============ ============ ============ ============
</TABLE>
-9-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENT IN BETHESDA METRO CENTER LIMITED PARTNERSHIP - Continued
Condensed financial information of BMCLP on an unconsolidated basis is
as follows:
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
As of As of
September 30, December 31,
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
Investment in real estate, at cost, net $ 80,176,732 $ 82,670,172
Current assets 6,401,070 5,605,708
Other assets 3,652,199 3,667,575
------------- -------------
Total assets $ 90,230,001 $ 91,943,455
============= =============
Current liabilities $ 10,580,081 $ 10,462,744
Other liabilities 141,481,057 156,738,148
Partners' deficit (61,831,137) (75,257,437)
------------- -------------
Total liabilities and partners' deficit $ 90,230,001 $ 91,943,455
============= =============
</TABLE>
STATEMENTS OF OPERATIONS
------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
----------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 6,971,776 $ 6,701,218 $ 21,384,082 $ 20,474,997
Expenses (6,163,555) (6,034,611) (18,401,875) (18,320,542)
------------ ------------ ------------ ------------
Net income before extraordinary item 808,221 666,607 2,982,207 2,154,455
Extraordinary gain - debt forgiveness 3,457,215 3,516,674 10,444,093 10,570,143
------------ ------------ ------------ ------------
Net income $ 4,265,436 $ 4,183,281 $ 13,426,300 $ 12,724,598
============ ============ ============ ============
</TABLE>
-10-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENT IN BETHESDA METRO CENTER LIMITED PARTNERSHIP - Continued
On November 16, 1994, BMCLP's lender sold its first and second mortgage
notes (collectively, the Notes) to BMC Lender Partnership (BMC), an unaffiliated
entity. BMC sold the first mortgage note to General Electric Capital
Corporation (GECC) which amended and restated the first mortgage note (the
Restated First Mortgage Note) to a principal amount of $48,000,000. BMC amended
and restated the second mortgage note (the Restated Second Mortgage Note)
(collectively, the Restated Notes) to a principal amount of $10,000,000 advanced
at closing.
The Restated First Mortgage Note requires monthly interest payments in
arrears, payable at 4.25% in excess of the GECC Composite Commercial Rate which
at September 30, 1997 and December 31, 1996 was 5.69% and 5.53%, respectively.
In addition to monthly interest payments, monthly principal payments are due in
the amount of $108,333. Furthermore, if certain major tenants of the Office
Building, as defined in the Restated First Mortgage Note agreement, do not
exercise an option to renew or cancel their leases, additional principal
payments equal to 100% of net cash flow, as defined, must be remitted to GECC.
These payments must continue until the space vacated is 93% rented and other
minimum financial conditions are met. All unpaid principal is due at the
maturity date which is November 30, 2001. Additional advances may be made by
GECC in an aggregate amount not to exceed 50% of all previously made principal
payments. Any additional advances are generally intended to fund tenant
improvements, leasing costs and other capital improvements but may be used to
fund other cash flow needs as well. During the nine months ended September 30,
1997 and 1996, GECC advanced $535,899 and $638,877, respectively, to BMCLP for
tenant improvements and leasing costs.
Additionally, under the terms of the Restated First Mortgage Note, an
interest reserve account to be used as additional collateral under the Restated
First Mortgage Note must be established. Monthly payments of $23,125 must be
made into this reserve beginning January 1, 1995 through December 1, 1998. As
of September 30, 1997 and December 31, 1996, $763,125 and $555,000,
respectively, had been deposited into the interest reserve account and is
reflected in restricted cash and cash equivalents on the accompanying
consolidated balance sheets.
The Restated Second Mortgage Note stipulates that 16% interest is payable
monthly from available cash flow, as defined, on a cumulative basis. Based on
the provisions of the Restated Second Mortgage Note, BMCLP's cash flow from
operations shall be disbursed in the following priority:
(a) Debt service and reserves on the Restated First Mortgage Note.
(b) Establishment of working capital reserves of $50,000 plus an amount
reasonably required to pay ordinary and necessary expenses of
operations.
(c) Debt service on the Restated Second Mortgage Note (to the extent of
available cash flow).
(d) Principal and interest on additional advances, as discussed below, if
any, made to BMCLP by BMC.
-11-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENT IN BETHESDA METRO CENTER LIMITED PARTNERSHIP - Continued
(e) 75% of the remaining net cash flow (as defined) to BMC and 25% of the
remaining net cash flow to BMCLP (less up to $50,000 per year to cover
management and administrative costs of the Partnership and/or CRCC),
subject to the establishment of the reserves as stipulated in the
agreement, as discussed below.
Furthermore, BMC is entitled to an Economic Value Participation Interest
(as defined) which requires BMCLP to pay the following at the sale or
refinancing of the property or the maturity date of the Restated Notes:
(a) 75% of the amount by which the Economic Value (as defined) of the
Hotel and Office Building (the Development), up to $100 million,
exceeds the unpaid principal balance and accrued interest under the
Restated Notes, and
(b) 50% of the Economic Value in excess of $100 million.
In general, the Economic Value is defined by the Restated Second Mortgage
Note as the value of the Development as determined by the Partnership or the
average of three independent appraisals if deemed necessary by BMC.
The Restated Second Mortgage Note is due on November 30, 2001 and no
principal payments are required until then. However, any amounts remitted to
BMC with respect to its 75% net cash flow participation described above may be
re-advanced to BMCLP for payment of debt service on the Restated First Mortgage
Note, repairs, capital improvements, leasing commissions, tenant concessions and
improvements, taxes and ground lease payments. These advances are limited to
75% of the total amount required to fund these items. The remaining 25% must be
funded by BMCLP. BMC has reserved the right, but does not have the obligation,
to make up to $5,000,000 in additional advances that would be secured under its
Restated Second Mortgage Note. These additional advances would carry an
interest rate of 18% payable from available net cash flow, as defined, and would
also be due on November 30, 2001. As of November 10, 1997, no additional
advances have been made.
Additionally, under the terms of the Restated Second Mortgage Note, the
Partnership received working capital reserves as proceeds in connection with the
November 16, 1994 debt restructuring. These funds are held by BMC in an escrow
account and can be used by BMCLP to fund any operating expenses without
limitation by demonstrating the need for such funds to BMC. As of both
September 30, 1997 and December 31, 1996, balances in the escrow account
totalled $273,654.
In connection with the restructuring on November 16, 1994, the Third
Mortgage Note was amended to provide that interest is due and payable annually
only to the extent funds are available after taking into account payment of
amounts due and payable on the Restated Notes and a payment of up to $50,000 per
year to CRCC and/or the Partnership to cover costs of management and
administration. The Third Mortgage Note bears simple interest at 9%. Accrued
but unpaid interest shall be deferred without interest and be paid, together
with the outstanding principal balance of the Third Mortgage Note, upon the
earliest of: (i) sale of the assets of BMCLP; (ii) refinancing of the Restated
Notes for an amount in excess of the aggregate outstanding principal balances
-12-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENT IN BETHESDA METRO CENTER LIMITED PARTNERSHIP - Continued
due thereunder; or (iii) one day later than the later of any maturity date under
the Restated Notes. As of September 30, 1997 and December 31, 1996, accrued
interest of approximately $3,252,000 and $3,049,500, respectively, has been
added to the outstanding principal balance of $3,000,000 in accordance with the
amended Third Mortgage Note. No net cash flow as defined in the agreement was
available for repayment of this note during the nine months ended September 30,
1997 or 1996.
Deferred Gain on Debt Forgiveness
---------------------------------
BMCLP's outstanding obligation under the Restated First Mortgage Note prior
to the restructuring was $178,373,753. The carrying amount of the outstanding
principal and accrued interest that was forgiven based on the assignment and
subsequent restatement of the First Mortgage Note is presented as deferred gain
on debt forgiveness in the accompanying consolidated balance sheets. This
amount is being amortized as an extraordinary gain over the remaining term of
the Restated First Mortgage Note based on a constant effective yield as required
by Statement of Financial Accounting Standards No. 15 (SFAS 15), "Accounting by
Debtors and Creditors for Troubled Debt Restructurings".
Based on the Restated First Mortgage Note s interest rate of 9.94% and
9.78% in effect at September 30, 1997 and December 31, 1996, respectively, and
the monthly principal curtailments of $108,333 as stipulated in the Restated
First Mortgage Note, the estimated total future obligation for principal and
interest is $63,993,214 and $67,453,640 at September 30, 1997 and December 31,
1996, respectively, including additional draws subsequent to the restructuring.
Although these obligations are lower than the combined obligations of the
Restated First Mortgage Note and the deferred gain on debt forgiveness (which
totalled $122,452,572 and $136,886,036 at September 30, 1997 and December 31,
1996, respectively) SFAS 15 does not permit the entire difference to be
recognized as an extraordinary gain at the time of the restructuring as the
Restated First Mortgage Note s interest rate is variable, which makes the amount
of future debt-service payments contingent upon changes in the index upon which
the interest rate is calculated. Accordingly, the $58,459,358 and $69,432,396
difference between the carrying value and total future obligation of the debt at
September 30, 1997 and December 31, 1996, respectively, was deferred and is
being amortized as an extraordinary gain in the accompanying consolidated
statements of operations using the effective interest method over the term of
the Restated First Mortgage Note.
As a result of the fluctuations of the interest rate on the Restated First
Mortgage Note, the Partnership continues to remeasure on a quarterly basis the
total future obligation for principal and interest based upon changes in the
underlying index, as discussed above. Differences in the future obligation
resulting from interest rate changes are reflected as a reclassification between
the Restated First Mortgage Note and deferred gain on debt forgiveness. For the
nine months ended September 30, 1997, $334,050 was reclassified from the
deferred gain on debt forgiveness to the Restated First Mortgage Note resulting
from increases in the future obligation based on increases in the underlying
index. For the nine months ended September 30, 1996, $461,411 was reclassified
from the Restated First Mortgage Note to the deferred gain on debt forgiveness
resulting from decreases in the future obligation based on decreases in the
-13-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENT IN BETHESDA METRO CENTER LIMITED PARTNERSHIP - Continued
underlying index. The adjusted deferred gain on debt forgiveness will be
amortized as an extraordinary gain over the remaining term of the Restated First
Mortgage Note.
For the three and nine months ended September 30, 1997, amortization of
this deferred debt forgiveness amounted to $3,522,180 and $10,638,988,
respectively, and $3,581,639 and $10,765,038 for the three and nine months ended
September 30, 1996, respectively. The amortization of deferred gain is included
in the extraordinary item of $3,457,215 and $10,444,093 for the three and nine
months ended September 30, 1997, respectively, and $3,516,674 and $10,570,143
for the three and nine months ended September 30, 1996, respectively, in the
accompanying consolidated statements of operations, as it is shown net of the
interest expense on the Restated Second Mortgage Note of $64,965 and $194,895,
for the three and nine months ended September 30, 1997 and 1996, respectively,
as discussed below.
With regard to the Restated Second Mortgage Note, the total estimated
future obligation for payment of principal and interest based on the fixed
interest rate of 16% is $21,200,000. This amount exceeds the carrying value of
the Restated Second Mortgage Note at November 16, 1994, of $19,380,974. In
accordance with SFAS 15, this difference of $1,819,026 represents a constant
additional interest obligation based on the fixed interest rate, and is to be
amortized as a reduction of the extraordinary gain on the Restated First
Mortgage Note at $21,655 per month through maturity, using the effective
interest method, over the term of the Restated Second Mortgage Note.
Accordingly, accrual of this additional interest for the three and nine months
ended September 30, 1997 and 1996 amounted to $64,965 and $194,895,
respectively, and was added to the principal balance of the Restated Second
Mortgage Note.
4. RELATED-PARTY TRANSACTIONS
A summary of indebtedness to affiliates of $1,670,019 and $1,558,144 as of
September 30, 1997 and December 31, 1996, respectively, is presented below:
-14-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. RELATED-PARTY TRANSACTIONS - Continued
<TABLE>
<CAPTION>
Additions/
Accrued
Balance at Interest Balance at
Related-Party December 31, 1996 (Payments) September 30, 1997
------------- ----------------- --------- -------------------
<S> <C> <C> <C>
CRI $ 342,558 $ 45,398 $ 387,956
CHG 1,215,586 66,477 1,282,063
----------- --------- -----------
$ 1,558,144 $ 111,875 $ 1,670,019
=========== ========= ===========
</TABLE>
The $387,956 and $342,558 due to CRI as of September 30, 1997 and December
31, 1996, respectively, is partially comprised of $107,103 of advances to BMCLP
to fund certain payments due on its mortgages with BMCLP's former lender. The
remaining amount due to CRI is comprised of advances to the Partnership to fund
operating deficits and accrued interest on advances. In addition, $1,040,285 of
the $1,282,063 and $1,215,586 due to CHG as of September 30, 1997 and December
31, 1996, respectively, were advanced to BMCLP to fund certain payments on its
mortgage notes with its former lender. The advances from CRI and CHG accrue
interest at the prime rate plus 1% in accordance with the Partnership Agreement.
As of September 30, 1997, the prime rate was 8.5%.
CRCC and/or the Partnership may receive an annual payment of up to $50,000
to cover costs of management and administration, to the extent that funds are
available after payment of amounts due on the Restated First and Second Mortgage
Notes, as discussed in Note 3. CRCC received a payment of $50,000 on June 12,
1996 from remaining net cash flow relating to 1995. Additionally, $50,000 was
accrued as of December 31, 1996 for fiscal year 1996 management fees in the
consolidated balance sheets. This amount was paid on June 30, 1997.
CIP Management 14, Inc., an affiliate of the Managing General Partner, may
receive an incentive management fee on a noncumulative annual basis commencing
in 1987 equal to 9.08% of net cash flow after payment of certain priorities set
forth in the partnership agreement. No incentive management fee has been
incurred or paid for the nine months ended September 30, 1997 and 1996.
Iroquois, which is an affiliate of the Special Limited Partners, has
provided financing through the Third Mortgage Note.
5. ALLOCATION OF PROFITS, LOSSES AND DISTRIBUTIONS OF CASH FLOW
In accordance with the Partnership Agreement, 1% of the Allowable Net Loss
has been allocated to the general partners, and 99% of the Allowable Net Loss
has been allocated to the limited partners. Allocations of cash flow
distributions are specified in the Partnership Agreement.
-15-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. COMMITMENTS AND CONTINGENCIES
Management Agreements
- ---------------------
BMCLP entered into a management agreement with Hyatt in March 1982,
pursuant to which Hyatt is to manage the Hotel commencing from the date the
Hotel opened through December 31, 2015. Based on the management agreement,
Hyatt is to be paid a management fee consisting of a base management fee of 4%
of gross revenues, as defined, and an incentive management fee which is
calculated based on 20% of the adjusted gross operating profit, as defined.
Management fees paid to Hyatt for the three and nine months ended September 30,
1997, were $186,992 and $582,535, respectively, and for the three and nine
months ended September 30, 1996 were approximately $174,000 and $539,000,
respectively.
BMCLP can terminate the Hotel Management Agreement upon no less than 60
days written notice if, for two successive fiscal years after December 31, 1995
(referred to as the Sixth Full Year), the Owner's Remittance (as defined) is
less than the principal and interest payments paid on the first mortgage note
(presently the Restated First Mortgage Note), up to a maximum of $6,250,000.
This shortfall occurred in 1996 and Hyatt and BMCLP expect it to occur during
1997. Accordingly, BMCLP explored the possibility of engaging a different
hotel manager, but Hyatt would not agree to let the Partnership retain the
franchise unless Hyatt managed the hotel. Instead, BMCLP and Hyatt are
negotiating a new Hotel Management Agreement which is expected to have a lower
fee. Currently, BMCLP may not sell or transfer the Hotel or any portion thereof
without the prior approval of Hyatt, which may not be unreasonably withheld and
will be based upon, among other things, the ability of the prospective purchaser
or transferee to fulfill BMCLP's financial obligations under the Hotel
Management Agreement. Management cannot currently project the impact on the
accompanying consolidated financial statements for the outcome of these
negotiations.
Pursuant to the management agreement, Hyatt also provides "chain services"
to the Hotel such as promotion services, advertising, centralized reservation
services, for which BMCLP is to pay its allocable share of Hyatt expenses. As
of September 30, 1997 and December 31, 1996 approximately $189,000 and $134,000,
respectively, were recorded as due to Hyatt in the consolidated financial
statements. The remaining due to Hyatt balance as of September 30, 1997 and
December 31, 1996, consists of approximately $820,000 of incentive management
fees earned under its Management Agreement, as discussed above, with BMCLP.
The management agreement provides for the establishment of a property
improvement fund. Contributions to the property improvement fund are equal to
3% of gross Hotel revenues (as defined). Unexpended reserves are recorded as
escrows and deposits within the accompanying financial statements. The reserve
balances included in escrows and deposits at September 30, 1997 and December 31,
1996, were approximately $389,500 and $342,000, respectively.
BMCLP entered into a management agreement with Realty, an affiliate prior
to July 1, 1988, of one of the Special Limited Partners, dated January 31, 1985,
pursuant to which Realty is to manage the Office Building for a term of 20 years
commencing from the date the Office Building opened. Under the terms of that
agreement, Realty received a monthly management fee equal to 4% of all income
-16-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. COMMITMENTS AND CONTINGENCIES - Continued
collected from the operation of the Office Building. Realty had agreed to allow
BMCLP to defer payments of all management fees, effective January 1, 1992,
through the date of the restructuring of the original mortgage debt. In
connection with the debt restructuring which occurred November 16, 1994, BMC
(the holder of the Restated Second Mortgage Note) paid Realty $1,000,000 to
terminate its former management contract with BMCLP. At that time BMCLP entered
into a new management contract with Realty for a term of one year which will
automatically renew for successive one year periods so long as Realty is not
then in default of the management contract. The agreement provides for a
management fee in the amount of 4% of total income collected. Of this amount,
one-half shall be paid by Realty to BMC, during the term of the Restated Second
Mortgage Note, in partial consideration for the $1,000,000 payment to terminate
the original contract. Management fees for the three and nine months ended
September 30, 1997, were approximately $98,000 and $262,000, respectively, and
approximately $83,000 and $295,000 for the three and nine months ended September
30, 1996, respectively.
Ground Lease
- ------------
BMCLP constructed its buildings on land it leases from the Washington
Metropolitan Area Transit Authority (WMATA). WMATA asserted claims against
BMCLP concerning the deterioration of the concrete slab in areas that WMATA has
used as a bus terminal and Kiss & Ride area since 1985. WMATA asserted that the
deterioration is due to construction defects, but BMCLP takes the position that
the deterioration is due to improper maintenance. The deterioration has reached
the point that BMCLP's parking garage, which underlies the concrete slab, could
be damaged. Accordingly, although BMCLP denies any legal liability for the
repair of the concrete slab, it has agreed to contribute $100,000 toward repair
of the deck in exchange for a full release of any and all claims WMATA may have
with respect to the design and construction issues. The estimated cost for
repair is approximately $1,000,000, of which WMATA will pay all but the $100,000
contributed by BMCLP. BMCLP has negotiated a release with WMATA, and in July
1996 submitted it together with the $100,000. On September 26, 1996 the release
and a settlement agreement were signed thus releasing BMCLP from any liability
over $100,000. The settlement agreement specifies work to be performed and
WMATA's use of BMCLP's parking garage space for structural shoring during its
repairs of the overhead concrete deck. The $100,000 is being held in trust by
WMATA until the work is completed or until WMATA requests payment.
WMATA held a meeting with representatives from Realty on January 31, 1997
to discuss further the details of the refurbishment program. A newly updated
repair plan was submitted to Realty in March 1997, with a schedule showing the
number of parking spaces which will be affected along with the duration of the
construction. This repair work began during July 1997 and is expected to
conclude by the end of November 1997. There can be no assurance that the work
will end on time.
Audit
- -----
The Partnership and BMCLP have been notified that the 1994 federal income
tax return is being examined by the Internal Revenue Service, primarily due to
-17-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. COMMITMENTS AND CONTINGENCIES - Continued
the refinancing of the Notes resulting in cancellation of debt income to the
Partnership. Management cannot currently project the impact on the accompanying
consolidated financial statements of the outcome of the examination.
-18-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Liquidity
---------
The Registrant does not have adequate cash reserves or any source of cash
to fund its projected cash requirements in 1997, which are principally comprised
of professional fees and administrative expenses. Additionally, based on the
projected operating performance of Bethesda Metro Center Limited Partnership
(BMCLP), it is unlikely that the Registrant will receive any cash distribution
from its investment in BMCLP in 1997 due to priorities established for
distribution of excess cash flow pursuant to the restructuring of BMCLP's
mortgage notes. However, the Managing General Partner of the Registrant has
represented a willingness to fund projected cash flow requirements of the
Registrant for the year ending December 31, 1997.
At September 30, 1997 and December 31, 1996, the Registrant had $116 in
available cash.
During the first nine months of 1997, the Registrant recorded a $24,934
increase in total liabilities. The increase in total liabilities includes an
increase of $24,659 in loan payable to its Managing General Partner for
administrative expenses and an increase of $275 in third-party payables.
Capital Resources
-----------------
BMCLP, of which the Registrant owns a 92.5% limited partnership interest,
had unrestricted cash and cash equivalents of $1,822,518 and $2,015,128 at
September 30, 1997 and December 31, 1996, respectively. BMCLP had restricted
cash and cash equivalents of $2,037,625 and $1,801,023 at September 30, 1997 and
December 31, 1996, respectively. During the first nine months of 1997,
unrestricted cash and cash equivalents decreased $192,610 despite net income of
$13,409,397. This was largely due to the non-cash gain on debt forgiveness of
$10,444,093, net debt and interest payments of $5,011,143, fixed asset additions
and payment of leasing costs of $1,115,752 and $516,088, respectively, and a
$540,848 increase in accounts receivable, which were offset by depreciation and
amortization totaling $4,001,772.
Operating Deficit Reserve
-------------------------
For operating deficits which arise, the Limited Partnership Agreement (LPA)
provides that Alan I. Kay and Allen E. Rozansky and their affiliates
(collectively, R&K) are required to loan, or cause to be loaned, all amounts
necessary to pay operating deficits (Operating Deficit Loans) up to an aggregate
principal amount of $15,600,000. R&K and the Partnership have agreed that the
former Second Mortgage Note of $10,000,000 was an Operating Deficit Loan "caused
to be" made to BMCLP by R&K. Further, R&K's Operating Deficit Loan obligation
limit of $15,600,000 was increased by (i) an amount equal to the net positive
difference between the interest due and payable under the original terms of the
First Mortgage Note and the interest due and payable under the original First
Mortgage Note as a result of the third loan modification and (ii) the amount
that interest accruing on the original Second Mortgage Note exceeded the
interest that would have accrued had the loan been made directly by R&K. At
September 30, 1997, BMCLP estimates that R&K's total operating deficit
obligation has increased to approximately $29,000,000, although R&K does not
-19-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
concur with this amount. As of September 30, 1997 and December 31, 1996, R&K
has provided $2,459,556 and $2,367,168, respectively, including accrued
interest, to BMCLP to fund operating deficits under this provision of the LPA.
This amount is net of $342,734 which is due from the Alan I. Kay Companies, an
affiliate of Alan I. Kay, for advances from BMCLP. Interest on amounts advanced
to BMCLP for operating deficits is accrued at the prime rate plus 1% and will be
repaid subject to the terms of the Restated Notes and then out of 50% of cash
flow available after payment of certain priorities as set forth in the BMCLP
partnership agreement. Cumulative interest accrued on these advances was
$1,220,669 and $1,128,281 at September 30, 1997 and December 31, 1996,
respectively, and has been added to the original advance amount. For the nine
months ended September 30, 1997 and 1996, no amounts were advanced to BMCLP for
operating deficits because R&K has represented that their net worth is not
significant, their assets are very illiquid and they do not have resources to
meet their operating deficit obligations.
In accordance with the terms of the Restated First and Second Mortgage
Notes dated November 16, 1994, BMCLP has several additional resources to fund
current operating deficits. If BMCLP requires funds to pay for capital
improvements, tenant improvements, leasing commissions, etc., and is in
compliance with the conditions stated in the Restated First Mortgage Note, GECC
shall advance for such purposes up to 50% of the amounts previously paid by
BMCLP as principal payments. During the nine months ended September 30, 1997
and 1996, GECC advanced $535,899 and $638,877, respectively, to BMCLP for tenant
improvements and leasing costs.
Upon approval of BMC Lender Partnership (BMC), BMCLP may draw upon the
$1,038,654 that was placed in an escrow account at the closing of the Restated
Second Mortgage Note. These funds may be used to pay operating expenses
including capital improvements, tenant improvements and leasing commissions of
the Development including payments under the Restated Notes. During 1995, BMCLP
withdrew $400,000 from the escrow account to help pay the interest due on the
Restated Second Mortgage Note and deposited $100,000 to replenish the reserve.
During 1996, BMCLP withdrew $715,000 from the escrow account to help pay
operating expenses including capital improvements, tenant improvements and
leasing commissions and deposited $250,000 to replenish the reserve. As of
November 10, 1997, BMCLP has made no withdrawals or deposits during 1997. As of
both September 30, 1997 and December 31, 1996, balances in the escrow account
totalled $273,654.
BMC may advance additional amounts up to $5,000,000 to BMCLP in accordance
with the Restated Second Mortgage Note. Also, BMC may re-advance funds received
from BMCLP as additional interest payments (75% net cash flow) if BMCLP pays its
25% share of net cash flow held in reserves. No advances were made by BMC to
BMCLP in 1997 or 1996.
-20-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Results of Operations
---------------------
Registrant
- ----------
Three months ended September 30, 1997 in comparison with September 30, 1996
- ---------------------------------------------------------------------------
The Registrant recorded a net loss for the three months ended September 30,
1997 of $8,462 compared to a net loss of $8,262 for the corresponding period in
1996. Operating expenses during the third quarter of 1997 were $200 higher than
1996 primarily due to an increase in professional fees.
Nine months ended September 30, 1997 in comparison with September 30, 1996
- ----------------------------------------------------------------------------
The Registrant recorded a net loss for the nine months ended September 30,
1997 of $24,934 compared to a net loss of $24,235 for the corresponding period
in 1996. Operating expenses during the first nine months ended September 30,
1997 were $699 higher than 1996 primarily due to an increase in professional
fees.
Bethesda Metro Center Limited Partnership
- -----------------------------------------
Three months ended September 30, 1997 in comparison with September 30, 1996
- ----------------------------------------------------------------------------
BMCLP's net income for the third quarter of 1997 increased $82,155 or 2%
from the corresponding period in 1996, primarily as a result of an increase in
room revenue and food and beverage revenue. Contributing to the increase in
BMCLP's net income was a decrease in amortization expense due to decreased
deferred costs. Partially offsetting the increase in BMCLP's net income was an
increase in energy costs, an increase in interest expense, a decrease in office,
retail and parking revenue, an increase in rooms expense and an increase in
administrative and other expenses. Also partially offsetting the increase in
BMCLP's net income was a decrease in extraordinary gain on debt forgiveness due
to fluctuations in the underlying debt interest rate.
Room revenue increased by $217,609 or 7% from the third quarter of 1996.
Hotel occupancy increased 1% to 80% and the average room rate increased $6 to
$115 in the third quarter of 1997 compared to the third quarter of 1996. Food
and beverage revenues increased by $91,871 or 8% from the same period last year
due to increased food and audio-visual sales. Rooms expense increased $36,253
or 6% from the same period last year due to increased laundry, dry cleaning and
reservation costs. Hotel energy expense increased $48,075 or 20% from the same
period last year due to a rate increase for water and increased fuel and gas
expenses due to increased occupancy. Hotel property operations and maintenance
expense increased $19,193 or 10% from the same period last year primarily due to
employee relocation costs. The increases in room revenue and food and beverage
revenue offset by the increases in rooms expense, energy expense and property
operations and maintenance expense resulted in third quarter gross operating
profits which exceeded the same period last year by approximately $191,096 or
12%.
-21-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Office building revenue for the third quarter of 1997 decreased $37,951 or
2% from the third quarter of 1996 primarily due to decreased occupancy,
decreased rents and reduced parking income. The occupancy of the office
building decreased from 99% to 98% while the rental rate remained at $24. The
retail and marketplace occupancy decreased from 93% to 86% primarily due to the
expiration of two major retail leases during 1997 which were not renewed. The
retail and marketplace average rental rate decreased from $33 to $31 during the
third quarter of 1997 compared to 1996 primarily due to decreased rates
throughout the market.
Operating expenses of the office building for the third quarter of 1997
increased $727 or 0.1% from the third quarter of 1996.
Nine months ended September 30, 1997 in comparison with September 30, 1996
- --------------------------------------------------------------------------
BMCLP's net income for the first nine months in 1997 increased $701,702 or
6% from the corresponding period in 1996, primarily as a result of an increase
in room revenue and food and beverage revenue. Contributing to the increase in
BMCLP's net income was a decrease in amortization expense due to decreased
deferred costs. Partially offsetting the increase in BMCLP's net income was a
decrease in office, retail and parking rental revenue, an increase in interest
expense due to interest accrued on GECC advances, a decrease in extraordinary
gain on debt forgiveness due to fluctuations in the underlying debt interest
rate and an increase in energy costs, administrative and other expenses.
Room revenue increased by $821,374 or 9% from the first nine months of
1996. The Hotel experienced a 2% increase in occupancy to 81% and a $7 increase
in average rate to $119 compared to the first nine months of 1996. Food and
beverage revenues increased by $275,340, or 7% from the same period last year as
a result of increased in-room dining, on-premise banquet dining, and off-premise
banquet dining. Hotel energy expense and rooms expense increased $59,095 or
10%, and $41,659 or 2%, respectively, as discussed above. Marketing expenses
increased $50,394 or 5% due to increased travel agent commissions and sales
promotions. Hotel administrative expenses increased $35,704 or 4% due to
increased payroll costs and credit card commissions. Year to date gross
operating profits exceeded last year by $864,858 or 16%.
Office building revenue decreased $176,901 or 3% during the first nine
months of 1997 compared with the first nine months of 1996 primarily due to
decreased office, retail and marketplace occupancy rates, and lower retail and
marketplace rents. The occupancy of the Office Building decreased from 97% to
96% while the rental rate remained at $24 for the first nine months of 1996 and
1997. The retail and marketplace occupancy decreased from 95% to 84% primarily
due to the expiration of two major retail leases during 1997 which were not
renewed. The retail and marketplace average rental rate decreased from $35 to
$31 primarily due to decreased rates throughout the market.
Operating expenses for the Office Building for the first nine months of
1997 decreased by $33,118, or 2% primarily due to decreased maintenance offset
by higher administrative costs.
The following tables outline pertinent unaudited data regarding the
operations of the hotel and office building:
-22-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
OFFICE BUILDING
---------------
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
----------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Leasing:
- -------
Average Space Occupied:
Office 98% 99% 96% 97%
Retail and Marketplace 86% 93% 84% 95%
Average Rental Rate:
Office $24 $24 $24 $24
Retail and Marketplace $31 $33 $31 $35
Operations:
- ----------
Total Income $ 2,289,838 $ 2,327,789 $ 6,789,957 $ 6,966,858
Operating Expenses (699,720) (698,993) (1,999,889) (2,033,007)
------------ ------------ ------------ ------------
Gross Operating Profits
(Before Depreciation, Management Fees and
Other Fixed Costs) $ 1,590,118 $ 1,628,796 $ 4,790,068 $ 4,933,851
============ ============ ============ ============
</TABLE>
HOTEL
---------------
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
----------------------------- -----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Actual Average Occupancy 80% 79% 81% 79%
Actual Average Room Rate $115 $109 $119 $112
Room Revenues $ 3,256,438 $ 3,038,829 $ 10,038,020 $ 9,216,646
Food & Beverage Revenues $ 1,228,798 $ 1,136,926 $ 3,972,669 $ 3,697,329
Room Profits $ 2,621,454 $ 2,440,098 $ 8,154,350 $ 7,374,635
Food & Beverage Profits $ 335,466 $ 251,811 $ 1,175,246 $ 902,465
Gross Operating Profits
(Before Depreciation, Management
Fees and Other Fixed Costs) $ 1,852,790 $ 1,661,694 $ 6,112,954 $ 5,248,096
</TABLE>
-23-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
It should be noted that BMCLP's investment in the Development is a
high-risk investment involving many factors beyond the control of its General
Partner. Such factors could adversely affect the operation and value of the
Development and, consequently, the value of an interest in the Partnership, to
an extent not currently ascertainable. These factors include, but are not
limited to, over building of office, hotel or commercial space; changes in the
general or local economic conditions including changes in interest rates;
adjacent land utilization; changes in demand or use with respect to the nearby
business facilities; demographic trends; increases in real estate taxes; changes
in the federal income tax laws, which could be applied retroactively; local,
state and federal environmental, energy, and other regulations (including
regulations governing the maintenance of liquor licenses); possible restrictive
changes in the uses applicable to real estate, zoning and similar land use and
environmental laws and regulations; and acts of God. Effective July 1, 1996,
the local government in Montgomery County, Maryland, where the hotel is located,
increased room taxes from 5% to 7% to fund the Montgomery County Conference
Center which was expected to be completed in 1999, but the location of this
center is now under dispute.
In addition, Hotel occupancy and room rates may be adversely affected by a
downturn in the business cycle or by shortages of gasoline or increases in the
price of gasoline, increases in airline fare rates or the curtailment of airline
service, or other constraints upon travel. Furthermore, in the event mortgage
payment and/or tax assessment obligations are not met, the Partnership may
sustain a loss of its equity investment as a result of foreclosure on the
Restated First or Second Mortgage Notes and/or a tax sale.
PART II. OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
No reports on Form 8-K were filed with the Commission during the quarter
ended September 30, 1997.
All other items are not applicable.
-24-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
(Registrant)
By: CRI, Inc.
General Partner
November 14, 1997 By: /s/ Michael J. Tuszka
- ----------------- ---------------------------------
Date Michael J. Tuszka
Vice President/Chief Accounting
Officer of CRI, Inc., and
signing on behalf of the
Registrant as Chief Accounting
Officer, Principal Financial
and Principal Accounting
Officer
-25-
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Method of Filing
- ------- -----------------------------
27 Financial Data Schedule Filed herewith electronically
-26-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE THIRD QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,860,259
<SECURITIES> 0
<RECEIVABLES> 1,447,760
<ALLOWANCES> 101,413
<INVENTORY> 59,075
<CURRENT-ASSETS> 6,401,186
<PP&E> 138,530,567
<DEPRECIATION> 58,353,835
<TOTAL-ASSETS> 90,230,117
<CURRENT-LIABILITIES> 10,812,331
<BONDS> 80,196,424
0
0
<COMMON> 0
<OTHER-SE> (62,063,271)
<TOTAL-LIABILITY-AND-EQUITY> 90,230,117
<SALES> 0
<TOTAL-REVENUES> 21,384,082
<CGS> 0
<TOTAL-COSTS> 10,450,326
<OTHER-EXPENSES> 7,299,325
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 677,158
<INCOME-PRETAX> 2,957,273
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,957,273
<DISCONTINUED> 0
<EXTRAORDINARY> 10,444,093
<CHANGES> 0
<NET-INCOME> 13,401,366
<EPS-PRIMARY> (41.14)
<EPS-DILUTED> (41.14)
</TABLE>
