<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 quarterly period ended June 30, 1998
-------------
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.
Not applicable Not applicable
- -------------------------- ---------------------------------------
(Class) (Outstanding at June 30, 1998)
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
Page
----
PART I. Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1998
and December 31, 1997 . . . . . . . . . . . . . . 1
Consolidated Statements of Operations - for the
three and six months ended June 30, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . 2-3
Consolidated Statement of Changes in Partners'
Deficit - for the six months ended
June 30, 1998 . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows - for the six
months ended June 30, 1998 and 1997 . . . . . . . 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
Signature . . . . . . . . . . . . . . . . . . . . . . . . 25
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . 26
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,134,460 $ 2,071,829
Restricted cash and cash equivalents 3,137,914 2,433,117
Accounts receivable, less allowance for doubtful accounts of
$85,059 and $86,439, respectively 1,479,245 1,317,229
Prepaid expenses 319,041 771,659
Current portion of deferred rent receivable 136,579 136,579
Inventory and other assets 60,531 70,790
------------- -------------
Total current assets 9,267,770 6,801,203
------------- -------------
Property and equipment:
Buildings and tenant improvements 123,354,192 123,255,734
Furniture and equipment 15,623,142 15,514,277
------------- -------------
138,977,334 138,770,011
Less-accumulated depreciation (61,260,913) (59,136,401)
------------- -------------
Property and equipment, net 77,716,421 79,633,610
------------- -------------
Other assets:
Deferred charges, less accumulated amortization
of $3,491,381 and $3,188,815, respectively 2,637,510 2,878,253
Deferred rent receivable, less reserve of $171,763 and $171,763, respectively 550,472 550,472
Escrows and deposits 667,516 456,470
------------- -------------
Total other assets 3,855,498 3,885,195
------------- -------------
Total assets $ 90,839,689 $ 90,320,008
============= =============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-1-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS - Continued
LIABILITIES AND PARTNERS' DEFICIT
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Current portion of first mortgage note $ 5,552,408 $ 5,748,221
Accounts payable 711,559 551,409
Accrued expenses 670,751 997,275
Due to affiliates 4,780,354 4,616,073
------------- -------------
Total current liabilities 11,715,072 11,912,978
First mortgage note 54,300,987 57,026,686
Second mortgage note 14,644,261 15,325,443
Third mortgage note 6,454,500 6,319,500
Due to guarantor of operating deficits 2,551,943 2,490,352
Deferred gain on debt forgiveness 47,457,667 54,491,976
Deferred revenue and security deposits 798,557 532,658
------------- -------------
Total liabilities 137,922,987 148,099,593
------------- -------------
Commitments and contingencies
Partners' deficit (47,083,298) (57,779,585)
------------- -------------
Total liabilities and partners' deficit $ 90,839,689 $ 90,320,008
============= =============
</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 six months ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rooms $ 4,089,304 $ 3,787,708 $ 7,565,708 $ 6,781,582
Food and beverage 1,776,351 1,765,646 3,188,565 3,051,979
Telephone 172,687 181,228 322,174 317,141
Office, retail and parking rentals 2,489,970 2,261,554 5,002,016 4,500,119
Other 49,188 25,471 76,492 46,007
------------ ------------ ------------ ------------
8,577,500 8,021,607 16,154,955 14,696,828
------------ ------------ ------------ ------------
Departmental expenses:
Rooms 845,876 772,189 1,616,086 1,456,178
Food and beverage 1,213,841 1,246,185 2,335,332 2,311,076
Telephone 93,928 101,685 180,821 202,402
------------ ------------ ------------ ------------
2,153,645 2,120,059 4,132,239 3,969,656
------------ ------------ ------------ ------------
Other operating expenses:
Administrative 454,683 493,218 1,045,068 939,611
Marketing 309,414 310,464 624,568 603,358
Energy costs 472,240 481,436 853,150 850,583
Property operations and maintenance 540,004 503,852 1,038,349 997,436
------------ ------------ ------------ ------------
1,776,341 1,788,970 3,561,135 3,390,988
------------ ------------ ------------ ------------
Operating income before other income, fixed
charges and other deductions, extraordinary
item and net income attributed to minority
interest 4,647,514 4,112,578 8,461,581 7,336,184
------------ ------------ ------------ ------------
Other income 13,145 14,976 23,854 23,586
------------ ------------ ------------ ------------
Fixed charges and other deductions:
Depreciation 1,062,256 1,203,064 2,124,512 2,406,128
Amortization 88,462 130,860 176,924 261,720
Interest expense 261,026 226,423 521,624 447,325
Management fees 339,884 302,384 637,342 559,874
Real estate and personal property taxes 259,016 254,372 518,031 508,743
Ground rent 400,000 400,000 800,000 800,000
Other 99,780 113,127 194,924 218,466
------------ ------------ ------------ ------------
2,510,424 2,630,230 4,973,357 5,202,256
------------ ------------ ------------ ------------
</TABLE>
(Continued)
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 six months ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income before extraordinary item 2,150,235 1,497,324 3,512,078 2,157,514
Extraordinary item - gain on debt forgiveness 3,712,401 3,485,670 7,184,209 6,986,878
------------ ------------ ------------ ------------
Net income 5,862,636 4,982,994 10,696,287 9,144,392
Total income attributed to minority interest (5,871,868) (4,991,200) (10,713,232) (9,160,864)
------------ ------------ ------------ ------------
Net loss attributed to Partnership $ (9,232) $ (8,206) $ (16,945) $ (16,472)
============ ============ ============ ============
Net loss allocated to General
Partners and affiliated Initial
Limited Partner (1.01%) $ (93) $ (83) $ (171) $ (166)
============ ============ ============ ============
Net loss allocated to Additional
Limited Partners (98.99%) $ (9,139) $ (8,123) $ (16,774) $ (16,306)
============ ============ ============ ============
Net loss per unit of Additional
Limited Partnership interest based
on 600 units issued and outstanding $ (15.23) $ (13.54) $ (27.96) $ (27.18)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-4-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
(Unaudited)
<TABLE>
<CAPTION>
(Losses) Income
General Limited not Allocable
Partners Partners to Partners Total
--------- -------- --------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 $(529,758) $284,582 $ (57,534,409) $ (57,779,585)
Net loss attributed to Partnership (171) (16,774) -- (16,945)
Total income attributed to minority
interest -- -- 10,713,232 10,713,232
--------- -------- ------------- -------------
Balance, June 30, 1998 $(529,929) $267,808 $ (46,821,177) $ (47,083,298)
========= ======== ============= =============
</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 six months ended
June 30,
-------------------------------
1998 1997
------------ ------------
<S> <C><C>
Cash flows from operating activities:
Net income $ 10,696,287 $ 9,144,392
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 2,124,512 2,406,128
Amortization 176,924 261,720
Extraordinary item - gain on debt forgiveness (7,184,209) (6,986,878)
Interest expense related to the amortization of financing costs 125,642 125,643
Net interest expense added to debt 196,592 196,592
Interest payments treated as a reduction in mortgage debt (3,111,933) (3,101,948)
Changes in assets and liabilities:
Increase in restricted cash and cash equivalents (704,797) (790,984)
Increase in accounts receivable, net (162,016) (578,679)
Decrease in prepaid expenses 452,618 478,996
Decrease in inventory and other assets 10,259 1,486
Increase in escrows and deposits (211,046) (43,053)
Increase in accounts payable 160,150 170,812
Decrease in accrued expenses (326,524) (216,561)
Increase (decrease) in deferred revenue and security deposits 265,899 (244,800)
------------ ------------
Net cash provided by operating activities 2,508,358 822,866
------------ ------------
Cash flows from investing activities:
Purchase of building and tenant improvements (98,458) (598,165)
Purchase of furniture and equipment (108,865) (199,016)
Payment of leasing costs (61,823) (466,298)
------------ ------------
Net cash used in investing activities (269,146) (1,263,479)
------------ ------------
Cash flows from financing activities:
Proceeds from mortgage debt 309,136 367,844
Payments on mortgage debt (649,998) (649,998)
Advances from affiliates 164,281 163,428
------------ ------------
Net cash used in financing activities (176,581) (118,726)
------------ ------------
Net increase (decrease) in cash and cash equivalents 2,062,631 (559,339)
Cash and cash equivalents, beginning of period 2,071,829 2,015,244
------------ ------------
Cash and cash equivalents, end of period $ 4,134,460 $ 1,455,905
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 3,111,933 $ 3,101,948
============ ============
</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 reflect all
adjustments, consisting of normal recurring accruals necessary for a fair
presentation of the financial position of Capital Income Properties-C Limited
Partnership (the Partnership) as of June 30, 1998 and the results of its
consolidated operations for the three and six months ended June 30, 1998 and
1997 and its consolidated cash flows for the six months ended June 30, 1998 and
1997.
These unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and accounting policies and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Partnership's annual report filed on Form
10-K at December 31, 1997.
Certain reclassifications have been made to the 1997 consolidated financial
statements to conform them with the 1998 presentation.
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 the following: (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 June 30, 1998 and December 31, 1997 and for each of
the three-month and six-month periods ended June 30, 1998 and 1997 have been
consolidated with BMCLP.
-7-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. THE PARTNERSHIP - Continued
Although an entity affiliated with the Partnership has assumed
responsibility for management of BMCLP and the Partnership has consolidated its
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 $47,083,298 and $57,779,585 as
of June 30, 1998 and December 31, 1997, respectively, $46,821,177 and
$57,534,409, respectively, are not attributable to the partners of the
Partnership. The amounts not attributable to the partners of the Partnership
are comprised of the following: (i) cumulative BMCLP losses in excess of the
Partnership s investment in BMCLP as of June 15, 1992 (the date of
consolidation) of $77,472,839, plus (ii) cumulative net BMCLP income since June
15, 1992 of $30,651,662 and $19,938,430 as of June 30, 1998 and December 31,
1997, respectively. BMCLP losses/income 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 to acquire a 92.5%
limited partnership interest. No capital contributions have been made by the
Partnership since 1990 related to this investment. 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).
-8-
<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 the Partnership on an unconsolidated
basis follows.
<TABLE>
<CAPTION>
BALANCE SHEETS
--------------
June 30, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Total assets $ 116 $ 116
============ ============
Total liabilities $ 262,237 $ 245,292
Partners' deficit (262,121) (245,176)
------------ ------------
Total liabilities and partners' deficit $ 116 $ 116
============ ============
</TABLE>
STATEMENTS OF OPERATIONS
------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Professional fees $ (2,579) $ (7,183) $ (5,309) $ (13,724)
Other expenses (6,653) (1,023) (11,636) (2,748)
------------ ------------ ------------ ------------
Net loss $ (9,232) $ (8,206) $ (16,945) $ (16,472)
============ ============ ============ ============
</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 follows.
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Investment in real estate, at cost, net $ 77,716,421 $ 79,633,610
Current assets 9,267,654 6,801,087
Other assets 3,855,498 3,885,195
------------- -------------
Total assets $ 90,839,573 $ 90,319,892
============= =============
Current liabilities $ 11,452,835 $ 11,667,686
Other liabilities 126,207,915 136,186,615
Partners' deficit (46,821,177) (57,534,409)
------------- -------------
Total liabilities and partners' deficit $ 90,839,573 $ 90,319,892
============= =============
</TABLE>
STATEMENTS OF OPERATIONS
------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 8,590,645 $ 8,036,583 $ 16,178,809 $ 14,720,414
Expenses (6,431,178) (6,531,053) (12,649,786) (12,546,428)
------------ ------------ ------------ ------------
Income before extraordinary item 2,159,467 1,505,530 3,529,023 2,173,986
Extraordinary item - gain on debt forgiveness 3,712,401 3,485,670 7,184,209 6,986,878
------------ ------------ ------------ ------------
Net income $ 5,871,868 $ 4,991,200 $ 10,713,232 $ 9,160,864
============ ============ ============ ============
</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 (the First Mortgage Note and the Second Mortgage Note, 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 June 30, 1998 and December 31, 1997 was 5.65% and 5.79%, 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 if they 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 six months ended June 30, 1998
and 1997, GECC advanced $222,434 and $638,877, respectively, to BMCLP for tenant
improvements and leasing costs. Interest accrued on cumulative advances is
included in interest expense, and is also added to the balance of the Restated
First Mortgage Note.
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 has been established. Monthly payments of $23,125 must be
made into this reserve beginning January 1, 1995 through December 1, 1998. As
of June 30, 1998 and December 31, 1997, $971,250 and $832,500, 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 July 31, 1998, 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 June 30,
1998 and December 31, 1997, $273,654 was included in restricted cash related to
this escrow.
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 June 30, 1998 and December 31, 1997, accrued interest
of approximately $3,454,500 and $3,319,500, 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 six months ended June 30, 1998 or 1997.
Deferred Gain on Debt Forgiveness
---------------------------------
BMCLP's outstanding obligation under its 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 9.9% and
10.04% in effect at June 30, 1998 and December 31, 1997, 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
was $59,853,395 and $62,774,907 at June 30, 1998 and December 31, 1997,
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 $107,311,062 and $117,266,883 at June 30, 1998 and December 31, 1997,
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 based. Accordingly, the $47,457,667 and $54,491,976 difference
between the carrying value and total future obligation of the debt at June 30,
1998 and December 31, 1997, 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
six months ended June 30, 1998, $279,830 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 underlying index.
For the six months ended June 30, 1997, $287,457 was reclassified from the
-13-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. INVESTMENT IN BETHESDA METRO CENTER LIMITED PARTNERSHIP - Continued
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. The adjusted deferred gain on debt forgiveness will be amortized as an
extraordinary item over the remaining term of the Restated First Mortgage Note.
For the three and six months ended June 30, 1998, amortization of this
deferred debt forgiveness amounted to $3,777,366 and $7,314,139, respectively,
and $3,550,635 and $7,116,808 for the three and six months ended June 30, 1997,
respectively. The amortization of deferred gain is included in the
extraordinary item of $3,712,401 and $7,184,209 for the three and six months
ended June 30, 1998, respectively, and $3,485,670 and $6,986,878 for the three
and six months ended June 30, 1997, 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 $129,930, for the
three and six months ended both June 30, 1998 and 1997, 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 six months
ended both June 30, 1998 and 1997, respectively, amounted to $64,965 and
$129,930 respectively, and was added to the principal balance of the Restated
Second Mortgage Note.
4. RELATED-PARTY TRANSACTIONS
Amounts due to affiliates were as follows.
<TABLE>
<CAPTION>
Additions/
Balance at Accrued Balance at
Affiliate December 31, 1997 Interest June 30, 1998
------------- ----------------- --------- -------------------
<S> <C> <C> <C>
CRI $ 405,810 $ 44,226 $ 450,036
CHG 1,303,861 44,319 1,348,180
Realty 1,511,128 52,658 1,563,786
Hyatt 1,395,274 23,078 1,418,352
----------- --------- -----------
$ 4,616,073 $ 164,281 $ 4,780,354
=========== ========= ===========
</TABLE>
-14-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. RELATED-PARTY TRANSACTIONS - Continued
The $450,036 and $405,810 due to CRI as of June 30, 1998 and December 31,
1997, respectively, are partially comprised of $107,103 of advances to BMCLP to
fund Excess Payments due on its former mortgages with its 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, the
$1,348,180 and $1,303,861 due to Capitol Hotel Group (CHG), an affiliate of the
General Partners, as of June 30, 1998 and December 31, 1997, respectively, and
$1,563,786 and $1,511,128 due to Realty Management Company (Realty), a former
affiliate of one of the Special Limited Partners, as of June 30, 1998 and
December 31, 1997, respectively, represent advances, and interest accrued
thereon, made to BMCLP to fund Excess Payments on the former mortgages with its
former lender, as discussed in Note 2. The advances from CRI, CHG and Realty
accrue interest at the prime rate (8.5% as of June 30, 1998) plus 1% in
accordance with the Partnership Agreement. These advances plus any accrued
interest will be repaid subject to cash availability as defined by the BMCLP
partnership agreement and the Restated Notes, as discussed in Note 2. Finally,
the $1,418,352 and $1,395,274 due to Hyatt Corporation (Hyatt) as of June 30,
1998 and December 31, 1997, respectively, each include $1,085,429 of incentive
management fees earned under its management agreement with BMCLP which is due
subject to Hyatt meeting certain performance standards as defined in the
management agreement. Hyatt has deferred its contingent incentive management
fees in accordance with its management agreement. The remaining balance
consists of trade payables to Hyatt for various services as described in Note 6.
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 Notes, as discussed in
Note 3. CRCC received a payment of $50,000 on June 30, 1997 from remaining net
cash flow relating to 1996. Additionally, $50,000 was accrued as of December
31, 1997 for fiscal year 1997 management fees in the consolidated balance
sheets. This amount was paid on May 14, 1998.
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 was incurred or
paid for either of the six month periods ended June 30, 1998 and 1997.
Iroquois Financial Corporation (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 six months ended June 30, 1998
were approximately $239,000 and $438,000, respectively, and for the three and
six months ended June 30, 1997 were approximately $223,000 and $396,000,
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 annual 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 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 began negotiating a new Hotel Management
Agreement with a lower fee and other provisions more favorable to BMCLP than the
existing Hotel Management Agreement. For example, BMCLP desires to eliminate
the provision in the existing agreement that 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. However, during these
negotiations, Hyatt asserted for the first time that the determination of
whether or not a shortfall had occurred must be based on the portion of the
Restated First Mortgage Note allocable to the Hotel, rather than the entire debt
service, and that based on their analysis, a shortfall may not have occurred in
1996 or 1997. BMCLP vigorously disagrees with this assertion, and on April 21,
1998 sent a notice to Hyatt terminating the Hotel Management Agreement effective
July 31, 1998. At the same time, BMCLP exercised its right under the Hotel
Management Agreement to demand arbitration seeking a declaratory judgment that
BMCLP's termination of Hyatt is proper and effective, and also seeking
reimbursement of certain chain expenses for which BMCLP believes Hyatt has
overcharged. The parties have agreed to postpone the termination until October
31, 1998 and the arbitration for 90 days, to allow time potentially to resolve
their differences. Management cannot currently predict whether the parties will
be able to resolve their differences, and if not, the impact on the accompanying
consolidated financial statements of the outcome of the arbitration.
Pursuant to the management agreement, Hyatt also provides "chain services"
to the Hotel, such as promotion services, advertising, and centralized
reservation services, for which BMCLP is to pay its allocable share of Hyatt
expenses. As of June 30, 1998 and December 31, 1997 approximately $110,000 of
this related party payable is recorded as due to affiliates in the accompanying
consolidated financial statements.
-16-
<PAGE>
CAPITAL INCOME PROPERTIES-C LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. COMMITMENTS AND CONTINGENCIES - Continued
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 in the accompanying financial statements. The reserve
balances included in escrows and deposits at June 30, 1998 and December 31,
1997, were approximately $605,015 and $391,000, respectively.
BMCLP entered into a management agreement dated January 31, 1985, with
Realty, a former affiliate of one of the Special Limited Partners, pursuant to
which Realty was to manage the Office Building for a term of 20 years commencing
from the date the Office Building opened. In connection with the debt
restructuring which occurred November 16, 1994, 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 of the $1,000,000 payment made by BMC (the holder of the
Restated Second Mortgage) in 1994 to terminate the original contract.
Management fees for the three and six months ended June 30, 1998, were
approximately $101,000 and $199,000, respectively, and approximately $79,000 and
$164,000 for the three and six months ended June 30, 1997, respectively.
The 1994 federal income tax return of BMCLP is being examined by the
Internal Revenue Service, primarily due to 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.
-17-
<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 1998, 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 1998 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, 1998.
At June 30, 1998 and December 31, 1997, the Registrant had $116 in
available cash.
During the six months ended June 30, 1998, the Registrant's available cash
remained constant at $116, whereas accounts payable increased $16,945. The
increase in accounts payable includes an increase of $28,515 in loan payable to
its Managing General Partner for administrative expenses and a decrease of
$11,570 in third-party payables.
Capital Resources
-----------------
BMCLP, in which the Registrant owns a 92.5% limited partnership interest,
had unrestricted cash and cash equivalents of $4,134,344 and $2,071,713 at June
30, 1998 and December 31, 1997, respectively. During the six months ended June
30, 1998, unrestricted cash and cash equivalents increased by $2,062,631;
operating activities provided $2,508,358, offset by $269,146 used in financing
activities and $176,581 used in investing activities. Unrestricted cash and
cash equivalents increased $2,062,631 even though the Registrant recorded income
of $10,696,287. The $8,633,656 difference was due largely to the non-cash gain
on debt forgiveness of $7,184,209, as well as the net debt and interest payments
of $3,761,931, fixed asset additions and payment of leasing costs of $207,323
and $61,823, respectively, and a $162,016 increase in accounts receivable, all
of which were partially offset by depreciation and amortization totaling
$2,301,436.
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
-18-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
June 30, 1998, BMCLP estimates that R&K's total operating deficit obligation has
increased to approximately $29,000,000, although R&K does not concur with this
amount. As of June 30, 1998 and December 31, 1997, R&K has provided $2,551,944
and $2,490,352, 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
$1,313,057 and $1,251,465 at June 30, 1998 and December 31, 1997, respectively,
and has been added to the original advance amount. For the six month periods
ended June 30, 1998 and 1997, 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 six months ended June 30, 1998 and
1997, GECC advanced $222,434 and $638,877, respectively, to BMCLP for tenant
improvements and leasing costs. Interest accrued on cumulative advances is
included in interest expense, and is also added to the balance of the Restated
First Mortgage Note.
Upon approval of BMC Lender Partnership (BMC), BMCLP may draw upon the
reserves that were 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. As of both June
30, 1998 and December 31, 1997, $273,654 was included in restricted cash related
to this escrow.
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 1998 or 1997.
-19-
<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 June 30, 1998 versus June 30, 1997
- -----------------------------------------------------
The Registrant recorded a net loss for the three months ended June 30, 1998
of $9,232 compared to a net loss of $8,206 for the corresponding period in 1997.
Operating expenses during the first quarter of 1998 were $1,026 higher than 1997
primarily due to an increase in other expenses, partially offset by a decrease
in professional fees.
Six months ended June 30, 1998 versus June 30,1997
- --------------------------------------------------
The Registrant recorded a net loss for the six months ended June 30, 1998
of $16,945 compared to a net loss of $16,472 for the corresponding period in
1997 primarily due to an increase in other expenses, partially offset by a
decrease in professional fees.
Bethesda Metro Center Limited Partnership
- -----------------------------------------
Three months ended June 30, 1998 versus June 30, 1997
- -----------------------------------------------------
BMCLP's net income for the second quarter 1998 increased $880,668 or 18%
from the corresponding period in 1997, primarily as a result of increases in
rooms revenue and office retail and parking rentals revenue. Contributing to the
increase in BMCLP's net income was an increase in extraordinary gain on debt
forgiveness due to fluctuations in the underlying debt interest rate and
decreased depreciation expense.
Rooms revenue for the second quarter of 1998 increased by $301,596 or 8%
from the second quarter in 1997 primarily due to increased transient revenue.
Hotel occupancy increased 1% to 88% and the average room rate increased $8 to
$132 in the second quarter of 1998 compared to the second quarter of 1997.
Rooms expense for the second quarter of 1998 increased $73,687 or 10% from the
second quarter in 1997 due to increased direct expenses, payroll and related
expenses. The increase in rooms revenue, partially offset by the increase in
rooms expense, contributed to second quarter gross operating profits for the
hotel which exceeded the same period last year by approximately $178,000 or 7%.
Office building revenue for the second quarter of 1998 increased $228,416
or 10% from the second quarter of 1997 primarily due to increases in occupancy
and average rental rates. The occupancy of the office building increased from
96% to 100% and the rental rate increased from $23 to $25 per square foot. The
retail and marketplace occupancy increased from 84% to 89%. The retail and
marketplace average rental rate increased from $31 to $33 per square foot during
the second quarter of 1998 compared to the second quarter of 1997. There is no
assurance that these occupancy levels or rental rates will be maintained.
-20-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Operating expenses of the office building for the second quarter of 1998
decreased $128,465 or 18% from the second quarter of 1997 primarily due to the
timing of various maintenance expenses and utilities.
Six months ended June 30, 1997 versus June 30, 1997
- ---------------------------------------------------
BMCLP's net income for the first six months of 1998 increased $1,552,368 or
17% from the corresponding period in 1997, primarily as a result of increases in
rooms revenue and office retail and parking rentals revenue. Contributing to the
increase in BMCLP's net income was an increase in extraordinary gain on debt
forgiveness due to fluctuations in the underlying debt interest rate and
decreased depreciation expense.
Rooms revenue for the first six months of 1998 increased by $784,126 or 12%
from the corresponding period in 1997 primarily due to increased transient
revenue. Hotel occupancy increased 4% to 85% and the average room rate increased
$7 to $128 during the first six months of 1998 compared to the corresponding
period during 1997. Rooms expense for the first six months of 1998 increased
$159,908 or 11% from the corresponding period in 1997 due to increases in
payroll costs, uniform, laundry and dry cleaning, guest relocation reservations,
travel agent commissions and contract services. The increase in room revenue,
partially offset by the increase in rooms expense, contributed to gross
operating profits for the hotel during the first six months of 1998 which
exceeded the same period last year by approximately $643,000 or 16%.
Office building revenue for the first six months of 1998 increased $501,897
or 11% from the corresponding period during 1997 primarily due to increases in
occupancy and average rental rates. The occupancy of the office building
increased from 96% to 100% and the rental rate increased from $23 to $25 per
square foot. The retail and marketplace occupancy increased from 83% to 89%.
The retail and marketplace average rental rate increased from $31 to $33 per
square foot during the first six months of 1998 compared to the corresponding
period in 1997. There is no assurance that these occupancy levels or rental
rates will be maintained.
Operating expenses of the office building for the first six months of 1998
increased $19,464 or 1% from the corresponding period in 1997 primarily due to
increased administrative expenses.
-21-
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS - Continued
-----------------------------------
Selected data regarding the operations of the hotel and office
building follow.
HOTEL
---------------
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Average Occupancy 88% 87% 85% 81%
Average Room Rate $132 $124 $128 $121
Room Revenues $ 4,089,304 $ 3,787,708 $ 7,565,708 $ 6,781,582
Food & Beverage Revenues $ 1,776,351 $ 1,765,646 $ 3,188,565 $ 3,051,979
Room Profits $ 3,243,428 $ 3,015,519 $ 5,949,622 $ 5,325,404
Food & Beverage Profits $ 562,510 $ 519,461 $ 853,233 $ 740,903
Gross Operating Profits
(Before Depreciation, Management
Fees and Other Fixed Costs) $ 2,752,709 $ 2,574,654 $ 4,779,198 $ 4,136,234
</TABLE>
OFFICE BUILDING
---------------
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Leasing:
- -------
Average Space Occupied:
Office 100% 96% 100% 96%
Retail and Marketplace 89% 84% 89% 83%
Average Rental Rate:
Office $25 $23 $25 $23
Retail and Marketplace $33 $31 $33 $31
Operations:
- ----------
Total Income $ 2,489,970 $ 2,261,554 $ 5,002,016 $ 4,500,119
Operating Expenses (595,165) (723,630) (1,319,633) (1,300,169)
------------ ------------ ------------ ------------
Gross Operating Profits
(Before Depreciation, Management Fees and
Other Fixed Costs) $ 1,894,805 $ 1,537,924 $ 3,682,383 $ 3,199,950
============ ============ ============ ============
</TABLE>
-22-
<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.
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.
The Registrant has received several unsolicited inquiries and offers to
purchase the Development owned by BMCLP. The Managing General Partner has
conducted preliminary negotiations with two parties, but has reached no
agreements. Any sale would be conditional upon receiving the approval of a
majority in interest of the Partnership's limited partners. If a proposal for
sale of the Development is obtained which appears advantageous to the
Partnership's investors, consent will be sought via a proxy solicitation.
Year 2000 Computer Issue
------------------------
The Year 2000 ("Y2K") Computer Issue refers to the inability of many
computer systems in use today to recognize "00" in the date field as the year
2000 and to recognize the year 2000 as a leap year. The Y2K problem arose
because, for many years, computer software programs, including programs embedded
in hardware, utilized only the last two digits to specify the year with the
assumption that the first two digits were "19." As a result, such programs may
not be able to recognize and process dates beyond 1999; rather they may
recognize and process "00," "01," "02,", etc., incorrectly as 1900, 1901, 1902,
instead of as 2000, 2001, 2002. In the opinion of computer experts, this could
cause such programs to create erroneous results, malfunction, or fail completely
unless corrective measures are taken.
The Partnership utilizes software and related computer technologies
essential to its operations that will be affected by the Y2K issue. The
Managing General Partner is studying what actions will be necessary to make its
computer systems Year 2000 compliant; certain upgrades are already scheduled.
The expense associated with these actions cannot presently be determined, but
the Managing General Partner does not expect it to be material.
-23-
<PAGE>
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 June 30, 1998.
All other items are not applicable.
-24-
<PAGE>
SIGNATURE
Pursuant to the requirements 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: C.R.I., Inc.
Managing General Partner
August 4, 1998 by: /s/ Michael J. Tuszka
- ----------------- ---------------------------------
DATE Michael J. Tuszka
Vice President
and Chief Accounting Officer
(Principal Financial Officer
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 SECOND QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 7,272,374
<SECURITIES> 0
<RECEIVABLES> 1,564,304
<ALLOWANCES> 85,059
<INVENTORY> 60,531
<CURRENT-ASSETS> 9,267,770
<PP&E> 138,977,334
<DEPRECIATION> 61,260,913
<TOTAL-ASSETS> 90,839,689
<CURRENT-LIABILITIES> 11,715,072
<BONDS> 75,399,748
0
0
<COMMON> 0
<OTHER-SE> (47,083,298)
<TOTAL-LIABILITY-AND-EQUITY> 90,839,689
<SALES> 0
<TOTAL-REVENUES> 16,178,809
<CGS> 0
<TOTAL-COSTS> 7,693,374
<OTHER-EXPENSES> 4,451,733
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 521,624
<INCOME-PRETAX> 3,512,078
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,512,078
<DISCONTINUED> 0
<EXTRAORDINARY> 7,184,209
<CHANGES> 0
<NET-INCOME> 10,696,287
<EPS-PRIMARY> (27.96)
<EPS-DILUTED> (27.96)
</TABLE>
